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 811-21467
LMP Capital and Income Fund Inc.
(Exact name of registrant as specified in charter)
620 Eighth Avenue, 49th Floor, New York, NY 10018
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Legg Mason & Co., LLC
100 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant’s telephone number, including area code: (888)777-0102
Date of fiscal year end: November 30
Date of reporting period: November 30, 2014
| ITEM 1. | REPORT TO STOCKHOLDERS. |
The Annual Report to Stockholders is filed herewith.
| Annual Report | November 30, 2014 |
LMP
CAPITAL AND INCOME FUND INC. (SCD)
| INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE |
Fund objective
The Fund’s investment objective is total return with an emphasis on income.
Dear Shareholder,
We are pleased to provide the annual report of LMP Capital and Income Fund Inc. for the twelve-month reporting period ended November 30, 2014. Please read on for a detailed look at prevailing economic and market conditions during the Fund’s reporting period and to learn how those conditions have affected Fund performance.
As always, we remain committed to providing you with excellent service and a full spectrum of investment choices. We also remain committed to supplementing the support you receive from your financial advisor. One way we accomplish this is through our website, www.lmcef.com. Here you can gain immediate access to market and investment information, including:
| Ÿ | Fund prices and performance, |
| Ÿ | Market insights and commentaries from our portfolio managers, and |
| Ÿ | A host of educational resources. |
We look forward to helping you meet your financial goals.
Sincerely,
Kenneth D. Fuller
Chairman, President and Chief Executive Officer
December 26, 2014
| II | LMP Capital and Income Fund Inc. |
Economic review
Despite weakness in early 2014, the U.S. economy expanded at a strong pace during the twelve months ended November 30, 2014 (the “reporting period”). The U.S. Department of Commerce reported that in the fourth quarter of 2013, U.S. gross domestic product (“GDP”)i growth was 3.5%. Severe winter weather then played a key role in a sharp reversal in the economy, a 2.1% contraction during the first quarter of 2014; this was the first negative GDP report in three years. Negative contributions were widespread: private inventory investment, exports, state and local government spending and nonresidential and residential fixed investment. Thankfully, this setback was very brief, as second quarter GDP growth was 4.6%. The rebound in GDP growth was driven by several factors, including an acceleration in personal consumption expenditures (“PCE”), increased private inventory investment and exports, as well as an upturn in state and local government spending. After the reporting period ended, the Department of Commerce reported that third quarter GDP growth was 5.0%, driven by contributions from PCE, exports, nonresidential fixed investment and government spending and the strongest reading for GDP growth since the third quarter of 2003.
The U.S. manufacturing sector was another tailwind for the economy. Based on figures for the Institute for Supply Management’s Purchasing Managers’ Index (“PMI”)ii, U.S. manufacturing expanded during all twelve months of the reporting period (a reading below 50 indicates a contraction, whereas a reading above 50 indicates an expansion). After a reading of 56.5 in December 2013, the PMI fell to 51.3 in January 2014, but generally rose over the next several months, reaching a high of 59.0 in August, its best reading since March 2011. While PMI dipped to 56.6 in September, it rose back to 59.0 in October and was 58.7 in November.
The improving U.S. job market was one of the factors supporting the overall economy during the reporting period. When the period began, unemployment, as reported by the U.S. Department of Labor, was 6.7%. Unemployment generally declined throughout the reporting period and reached a low of 5.8% in October and November 2014, the lowest level since July 2008.
The Federal Reserve Board (“Fed”)iii took a number of actions as it sought to meet its dual mandate of fostering maximum employment and price stability. As it has since December 2008, the Fed kept the federal funds rateiv at a historically low range between zero and 0.25%. The Fed also ended its asset purchase program that was announced in December 2012. At that time, the Fed said it would continue purchasing $40 billion per month of agency mortgage-backed securities (“MBS”), as well as $45 billion per month of longer-term Treasuries. Following the meeting that concluded on December 18, 2013, the Fed announced that it would begin reducing its monthly asset purchases, saying “Beginning in January 2014, the Committee will add to its holdings of agency MBS at a pace of $35 billion per month rather than $40 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $40 billion per month rather than $45 billion per month.” At each of the Fed’s next six meetings (January, March, April, June, July and September 2014), it announced further $10 billion tapering of its asset purchases. At its meeting that ended on October 29, 2014, the Fed announced that its asset purchase pro-
| LMP Capital and Income Fund Inc. | III |
Investment commentary (cont’d)
gram had concluded. Finally, on December 17, 2014, after the reporting period ended, the Fed said that “Based on its current assessment, the Committee judges that it can be patient... to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time...”
As always, thank you for your confidence in our stewardship of your assets.
Sincerely,
Kenneth D. Fuller
Chairman, President and Chief Executive Officer
December 26, 2014
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results.
| i | Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time. |
| ii | The Institute for Supply Management’s PMI is based on a survey of purchasing executives who buy the raw materials for manufacturing at more than 350 companies. It offers an early reading on the health of the U.S. manufacturing sector. |
| iii | The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments. |
| iv | The federal funds rate is the rate charged by one depository institution on an overnight sale of immediately available funds (balances at the Federal Reserve) to another depository institution; the rate may vary from depository institution to depository institution and from day to day. |
| IV | LMP Capital and Income Fund Inc. |
Q. What is the Fund’s investment strategy?
A. The Fund’s investment objective is total return with an emphasis on income. The Fund invests in a broad range of equity and fixed-income securities of both U.S. and foreign issuers. Effective October 16, 2014, the Fund may invest without limit in both energy and non-energy master limited partnerships (“MLPs”), so long as no more than 25% of the Fund’s total assets are invested in MLPs that are treated as qualified publicly traded partnerships (“QPTPs”). The Fund will vary its allocation between equity and fixed-income securities depending on the investment manager’s view of economic, market or political conditions, fiscal and monetary policy and security valuation. Depending on the investment manager’s view of these factors, which may vary from time to time, the investment manager may allocate substantially all of the investments in the portfolio to equity securities or fixed-income securities.
The Fund’s investment manager applies a rigorous, “bottom-up” research process to identify companies with strong fundamentals, skilled and committed management teams and a clear market advantage. Through patient management, the Fund seeks to capture earnings growth from companies offering new or innovative technologies, products and services.
Peter Vanderlee, CFA of ClearBridge Investments, LLC, one of the Fund’s subadvisers, oversees the Fund’s allocation between equity and fixed-income securities, as well as the Fund’s equity investments in general, with a focus on dividend-paying securities. The ClearBridge portfolio management team also includes Mark McAllister, CFA, Tim Daubenspeck and Tatiana Thibodeau, who are focused on their respective areas of expertise: Mr. McAllister on real estate investment trusts (“REITs”)i, Mr. Daubenspeck on Telecommunications, and Ms. Thibodeau on Utilities. They manage the equity side of the Fund with a “bottom-up” approach focused on the risk and reward of each investment opportunity.
A portfolio management team at Western Asset Management Company (“Western Asset”) manages the fixed-income portion of the Fund. The fixed-income portfolio management team includes portfolio managers S. Kenneth Leech, Keith J. Gardner, Mark Lindbloom, Michael C. Buchanan and Ryan Brist. Their focus is on portfolio structure, including sector allocation, duration weighting and term-structure decisions. Effective on March 31, 2014, Mr. Leech joined the Fund’s portfolio management team. Mr. Leech has been employed by Western Asset as an investment professional for more than 20 years. Chia-Liang (CL) Lian will join the Fund’s portfolio management team on January 31, 2015. He has been employed by Western Asset as an investment professional since 2011, and also serves as Co-Head of the Emerging Markets Debt Team alongside Mr. Gardner. Prior to joining Western Asset, Mr. Lian spent approximately six years with Pacific Investment Management Company (PIMCO), where he served as Head of Emerging Asia Portfolio Management. It is anticipated that Mr. Gardner will step down as a member of the Fund’s portfolio management team on or about April 30, 2015, and that Mr. Lian will become Head of the Emerging Markets Debt Team at that time.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 1 |
Fund overview (cont’d)
Q. What were the overall market conditions during the Fund’s reporting period?
A. U.S. equities posted strong gains over the one year period ending November 30, 2014, with the NASDAQ Composite Indexii, S&P 500 Indexiii and Dow Jones Industrial Average (“DJIA”)iv returning 18.02%, 16.86% and 13.42%, respectively. Within the S&P 500 Index, Health care, Information Technology and Utilities1 paced the gains, up more than 20% each, while Energy and Telecommunication services lagged the Index, advancing roughly 5% each. Small caps lagged their larger peers as the Russell 2000 Indexv returned only 3.99% over the period due to severe declines in the second and third quarters of the year. Strong economic reports and corporate earnings results, and elevated mergers & acquisitions (“M&A”) activity in the U.S. outweighed dour headlines abroad, namely sluggish global growth and geopolitical tensions in Europe and the Middle East.
Other than the first quarter of 2014, when harsh weather conditions drove a 2.1% contraction, U.S. gross domestic product (“GDP”)vi has expanded healthily at an annualized pace between 3.5% and 5.0% each quarter since last summer. Meanwhile, the unemployment rate declined steadily throughout the year to 5.8% as of the end of November, down from 6.7% a year ago. The Conference Board’s consumer confidence index increased more than 30% over the period as well, hitting the highest readings since 2007. Multiples on stocks expanded in aggregate as, quarter after quarter, the majority of companies reported bottom-line results above Street expectations as sales grew and margins expanded. Calendar year 2014 opened with many economists and analysts calling for higher interest rates, but this did not play out as the ten-year Treasury note yield subsided from the 2013 year-end level of 3.0% to a low of 2.1% in mid-October. Low borrowing costs, compounded by increased confidence permeating board rooms, drove a surge in acquisition announcements to record levels. The Health Care and Information Technology sectors saw the lion’s share of M&A activity, with many companies acting to lower their tax bills by pursuing companies domiciled outside the U.S. The Federal Reserve Board (“Fed”)vii stood squarely in the spotlight all year long as Janet Yellen replaced Ben Bernanke as Chairman. The Fed reduced its monthly bond purchases by $10 billion each month, ultimately bringing the quantitative easing program to a close in October. However, despite improving economic conditions, the Fed committed to low target interest rates for a “considerable time” in order to drive inflation above its 2% target. Other central banks around the world initiated stimulus plans in recent months to counter fears of a global slowdown, namely the European Central Bank (“ECB”)viii and the Bank of Japan.
The Chicago Board Options Exchange Volatility Index (“VIX”)ix, also known as the “fear gauge,” oscillated substantially throughout the year, largely due to continuing violent clashes between Ukrainian forces and pro-Russian insurgents in Eastern Ukraine. The conflict began after protests in Ukraine led to the ouster of President Viktor Yanukovych, followed by a stealth “invasion” by Russian armed forces. This was followed by a snap referendum in which Crimean voters
| 1 | Utilities consists of the following industries: Electric, Natural Gas and Other Utility. |
| 2 | LMP Capital and Income Fund Inc. 2014 Annual Report |
elected to secede from Ukraine in hopes of joining the Russian Federation; this election result has not been recognized as legitimate by western nations. However, Russian President Vladimir Putin officially approved this annexation in the face of denunciations from U.S. President Barack Obama and European heads of state, and despite a slew of travel and financial sanctions issued against his political and business allies. Additionally, Brent oil prices soared to touch $115 per barrel during June as the Sunni militant group Islamic State in Iraq and Syria (ISIS) started an insurgency against the predominantly Shia Iraqi government, capturing several cities in northern Iraq. Reversing direction, however, crude prices tumbled in the second half of 2014 on supply concerns, breaching $70 per barrel and sending the VIX to its highest level since mid-2012.
Q. How did we respond to these changing market conditions?
A. During the year, our allocation to common stocks & related equity increased to 61%, slightly above what it was last November. We remain positive on the long-term outlook for the U.S. equity market. Our investment case is underpinned by a strong need for income (i.e. strong demand) coupled with the ability of corporate America to satisfy this need in the form of higher dividends as a result of strong balance sheets, solid free cash flow generation, low pay-out ratios and a favorable economic backdrop. The U.S. economy continues on its growth path and we expect the Fed to be cautious in making changes to its interest rate policy so as to sustain the economic recovery. We continue to expect solid corporate earnings growth for the foreseeable future in a low interest rate environment. Therefore U.S. stocks, especially those with good dividend yields and growth prospects, remain attractive in our view.
After being range-bound for the second half of 2013, the Alerian MLP Indexx showed solid appreciation through the first 11 months of 2014, returning 11.05%. MLPs were up around 20% through September but then sold off in October and November on the back of lower crude prices and a weaker outlook for activity in the energy patch. On the whole, the fundamentals driving the investment case for MLPs remain intact despite recent weakness in sympathy with oil prices. We continue to have a constructive stance on energy MLPs, with the weighting at the end of the period at 22%, down slightly from the year before. We expect continued growth in 2015 as new projects come on line and cash flows are poised to increase. Longer term, if oil prices remain at depressed levels, it is likely that exploration and production capital expenditures will slow which can result in a lower growth rate for many MLPs than we previously would have forecast. We continue to believe that the resurgence in U.S. energy production is a long-term growth story which necessitates further build-out of our energy infrastructure to facilitate the transport and processing of hydrocarbons from the wellhead to the end-user. However, given the precipitous decline in the price of crude oil in the second half of 2014, some of this growth has the potential to be stretched out over a longer time horizon. With this in mind, we believe the group is attractive with respect to current yield, as well as the potential for distribution growth over time.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 3 |
Fund overview (cont’d)
With regard to REITs, our allocation of 15% is roughly in line with year-end 2013. The MSCI U.S. REIT Indexxi gained nearly 30% over the reporting period. Despite the strong recent appreciation, we believe REIT share prices are moderately attractive. The continuing recovery in the U.S. economy, combined with the controlled pace of new development, is leading to rising occupancy and rental rates in U.S. commercial real estate markets. Further, U.S. real estate capital markets remain extremely liquid. These factors provide strong underpinnings for commercial real estate values. In addition, Standard & Poor’s has recently announced that starting after August 31, 2016, Real Estate will become a new Global Industry Classification Standard (GICS) sector, the first since the classification scheme was introduced, and equity REITs will be moved from Financials into this category; mortgage REITs will remain as part of Financials. This change should increase investor demand for equity REIT shares over time.
During the first half of the reporting period, the fixed-income portion of the Fund continued to represent approximately 0.04% of its total assets. To a great extent, this allocation was held in non-agency mortgage-backed securities (“MBS”). Toward the middle of the reporting period, the Fund sold its fixed-income and non-agency MBS positions to increase the portfolio’s equity allocation.
Performance review
For the twelve months ended November 30, 2014, LMP Capital and Income Fund Inc. returned 17.43% based on its net asset value (“NAV”)xii and 16.04% based on its New York Stock Exchange (“NYSE”) market price per share. The Fund’s unmanaged benchmarks, the Barclays U.S. Aggregate Indexxiii and the S&P 500 Index, returned 5.26% and 16.86%, respectively. The Lipper Income and Preferred Stock Closed-End Funds Category Averagexiv returned 15.47% over the same time frame. Please note that Lipper performance returns are based on each fund’s NAV.
During the twelve-month period, the Fund made distributions to shareholders totaling $1.12 per share.* The performance table shows the Fund’s twelve-month total return based on its NAV and market price as of November 30, 2014. Past performance is no guarantee of future results.
| Performance Snapshot
as of November 30, 2014 (unaudited) |
||||
| Price Per Share | 12-Month Total Return** |
|||
| $19.37 (NAV) |
17.43 | %† | ||
| $17.27 (Market Price) |
16.04 | %‡ | ||
All figures represent past performance and are not a guarantee of future results.
** Total returns are based on changes in NAV or market price, respectively. Returns reflect the deduction of all Fund expenses, including management fees, operating expenses, and other Fund expenses. Returns do not reflect the deduction of brokerage commissions or taxes that investors may pay on distributions or the sale of shares.
† Total return assumes the reinvestment of all distributions at NAV.
‡ Total return assumes the reinvestment of all distributions in additional shares in accordance with the Fund’s Dividend Reinvestment Plan.
| * | For the tax character of distributions paid during the fiscal year ended November 30, 2014, please refer to page 29 of this report. |
| 4 | LMP Capital and Income Fund Inc. 2014 Annual Report |
Q. What were the leading contributors to performance?
A. With respect to the equity portion of the portfolio, on an absolute basis the Fund had positive returns in each economic sector other than Materials during the reporting period, with the greatest contributions to returns coming from the Energy, Financials, and Utilities sectors.
Relative to the S&P 500 Index, overall security selection contributed positively to performance, with significant positive selection effects within the Energy sector. Meanwhile, an overweight to Utilities and an underweight in the Consumer Discretionary sector contributed positively as the former outperformed the benchmark while the latter lagged.
In terms of individual Fund holdings, leading contributors to performance for the period included Energy Transfer Equity LP, Seagate Technology PLC, Lockheed Martin Corp., Enterprise Products Partners LP and NextEra Energy Inc. 5.889% convertible preferred shares.
In the fixed-income portion of the Fund, relative to the Barclays U.S. Aggregate Index, the Fund’s non-agency MBS exposure contributed to results. They performed well during the period they were held by the Fund given overall strong demand, limited supply and improvements in the housing market.
Q. What were the leading detractors from performance?
A. With respect to the equity portion of the portfolio, relative to the S&P 500 Index, overall sector allocation detracted from performance for the period. This was largely due to the Fund’s overweight in Energy, which underperformed the benchmark, and its underweights in Information Technology and Health Care, which each outperformed the S&P 500 Index. Meanwhile, stock selection in the Industrials and Financials sectors detracted meaningfully from relative performance.
In terms of individual Fund holdings, leading detractors from performance for the period included Seadrill Ltd., TAL International, North Atlantic Drilling, Hoegh LNG Partners LP and Freeport-McMoRan Inc.
In the fixed-income portion of the portfolio, there were no detractors from the Fund’s relative performance.
Q. Were there any significant changes to the Fund during the reporting period?
A. Among the largest additions to the Fund’s portfolio during the period were Exelon 6.5% mandatory convertible preferred shares and common stock in TCP Capital Corp., Microsoft Corp., Plains GP Holdings LP and FS Investment Corp.
Some of the largest existing holdings that were sold over the course of the period were Seadrill Ltd., Medley Capital Corp., Eaton Corp., AstraZeneca and Plains All American Pipeline LP.
Looking for additional information?
The Fund is traded under the symbol “SCD” and its closing market price is available in most newspapers under the NYSE listings. The daily NAV is available on-line under the symbol “XSCDX” on most financial websites. Barron’s and the Wall Street Journal’s Monday edition both carry closed-end fund tables that provide additional information. In addition, the Fund issues a quarterly press release that can be found on most major financial websites as well as www.lmcef.com.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 5 |
Fund overview (cont’d)
In a continuing effort to provide information concerning the Fund, shareholders may call 1-888-777-0102 (toll free), Monday through Friday from 8:00 a.m. to 5:30 p.m. Eastern Time, for the Fund’s current NAV, market price and other information.
Thank you for your investment in LMP Capital and Income Fund Inc. As always, we appreciate that you have chosen us to manage your assets and we remain focused on achieving the Fund’s investment goals.
Sincerely,
Tim Daubenspeck
Portfolio Manager
ClearBridge Investments, LLC
Mark McAllister
Portfolio Manager
ClearBridge Investments, LLC
Tatiana Thibodeau
Portfolio Manager
ClearBridge Investments, LLC
Peter Vanderlee, CFA
Portfolio Manager
ClearBridge Investments, LLC
Western Asset Management Company
(Fixed-Income Portion)
December 16, 2014
RISKS: Stock and bond prices are subject to fluctuation. As interest rates rise, bond prices fall, reducing the value of the fixed-income securities held by the Fund. Investing in foreign securities is subject to certain risks not associated with domestic investing, such as currency fluctuations and changes in political and economic conditions. These risks are magnified in emerging or developing markets. The Fund may invest in lower-rated high yield bonds or “junk bonds”, which are subject to greater liquidity and credit risk (risk of default) than higher-rated obligations. The repositioning of the Fund’s portfolio may increase a shareholder’s risk of loss associated with an investment in the Fund’s shares. The Fund’s investments in MLPs subjects it to the risks of investing in MLPs and the energy sector, including the risks of declines in energy and commodity prices, decreases in energy demand, adverse weather conditions, natural or other disasters, changes in government regulation, and changes in tax laws. Funds that invest in securities related to the real estate industry are subject to the risks of real estate markets, including fluctuating property values, changes in interest rates and other mortgage-related risks. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. Leverage may magnify gains and increase losses in the Fund’s portfolio.
Portfolio holdings and breakdowns are as of November 30, 2014 and are subject to change and may not be representative of the portfolio managers’ current or future investments. The Fund’s top ten holdings (as a percentage of net assets) as of November 30, 2014 were: Energy Transfer Equity LP (5.1%), United Technologies Corp.7.500% (5.1%), Enterprise Products Partners LP (4.5%), Och-Ziff Capital Management Group LLC (3.8%), Seagate Technology PLC (3.6%), NextEra Energy Inc.5.889% (3.3%), Ares Capital Corp. (3.2%), TAL International Group Inc. (3.2%),
| 6 | LMP Capital and Income Fund Inc. 2014 Annual Report |
Lockheed Martin Corp. (3.2%) and Verizon Communications Inc. (3.2%). Please refer to pages 10 through 15 for a list and percentage breakdown of the Fund’s holdings.
The mention of sector breakdowns is for informational purposes only and should not be construed as a recommendation to purchase or sell any securities. The information provided regarding such sectors is not a sufficient basis upon which to make an investment decision. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies discussed should consult their financial professional. The Fund’s top five sector holdings (as a percentage of net assets) as of November 30, 2014 were: Master Limited Partnerships (35.0%), Financials (33.3%), Utilities (17.9%), Industrials (13.0%) and Information Technology (7.6%). The Fund’s portfolio composition is subject to change at any time.
All investments are subject to risk including the possible loss of principal. Past performance is no guarantee of future results. All index performance reflects no deduction for fees, expenses or taxes. Please note that an investor cannot invest directly in an index.
The information provided is not intended to be a forecast of future events, a guarantee of future results or investment advice. Views expressed may differ from those of the firm as a whole.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 7 |
Fund overview (cont’d)
| i | Real estate investment trusts (“REITs”) invest in real estate or loans secured by real estate and issue shares in such investments, which can be illiquid. |
| ii | The NASDAQ Composite Index is a market-value weighted index, which measures all securities listed on the NASDAQ stock market. |
| iii | The S&P 500 Index is an unmanaged index of 500 stocks and is generally representative of the performance of larger companies in the U.S. |
| iv | The Dow Jones Industrial Average (“DJIA”) is a widely followed measurement of the stock market. The average is comprised of thirty stocks that represent leading companies in major industries. These stocks, widely held by both individual and institutional investors, are considered to be all blue-chip companies. |
| v | The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 3000 Index measures the performance of the 3,000 largest U.S. companies based on total market capitalization, which represents approximately 98% of the U.S. equity market. |
| vi | Gross domestic product (“GDP”) is the market value of all final goods and services produced within a country in a given period of time. |
| vii | The Federal Reserve Board (“Fed”) is responsible for the formulation of policies designed to promote economic growth, full employment, stable prices and a sustainable pattern of international trade and payments. |
| viii | The European Central Bank (“ECB”) is responsible for the monetary system of the European Union and the euro currency. |
| ix | VIX is a volatility index for the Chicago Board Options Exchange, known by its ticker symbol, VIX. It is calculated by taking a weighted average of the implied volatility from eight calls and puts on the S&P 100 Index. |
| x | The Alerian MLP Index is a composite of the fifty most prominent energy master limited partnerships (“MLPs”) and is calculated using a float-adjusted, capitalization-weighted methodology. |
| xi | The MSCI U.S. REIT Index is a free float-adjusted market capitalization weighted index that is comprised of equity Real Estate Investment Trusts (“REITs”) that are included in the MSCI U.S. Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations. The Index represents approximately 85% of the U.S. REIT universe. |
| xii | Net asset value (“NAV”) is calculated by subtracting total liabilities, including liabilities associated with financial leverage (if any) from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the common shares outstanding. The NAV fluctuates with changes in the market prices of securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is the Fund’s market price as determined by supply of and demand for the Fund’s shares. |
| xiii | The Barclays U.S. Aggregate Index is a broad-based bond index comprised of government, corporate, mortgage- and asset-backed issues, rated investment grade or higher, and having at least one year to maturity. |
| xiv | Lipper, Inc., a wholly-owned subsidiary of Reuters, provides independent insight on global collective investments. Returns are based on the twelve-month period ended November 30, 2014, including the reinvestment of all distributions, including returns of capital, if any, calculated among the 26 funds in the Fund’s Lipper category. |
| 8 | LMP Capital and Income Fund Inc. 2014 Annual Report |
Investment breakdown (%) as a percent of total investments
| † | The bar graph above represents the composition of the Fund’s investments as of November 30, 2014 and November 30, 2013. The Fund is actively managed. As a result, the composition of the Fund’s investments is subject to change at any time. |
| LMP Capital and Income Fund Inc. 2014 Annual Report | 9 |
November 30, 2014
LMP Capital and Income Fund Inc.
| Security | Shares | Value | ||||||||||
| Common Stocks — 60.4% | ||||||||||||
| Consumer Discretionary — 2.5% | ||||||||||||
| Media — 2.5% |
||||||||||||
| Regal Entertainment Group, Class A Shares |
374,000 | $ | 8,635,660 | (a) | ||||||||
| Consumer Staples — 1.8% | ||||||||||||
| Household Products — 1.8% |
||||||||||||
| Kimberly-Clark Corp. |
53,000 | 6,179,270 | (a) | |||||||||
| Energy — 1.2% | ||||||||||||
| Oil, Gas & Consumable Fuels — 1.2% |
||||||||||||
| Enlink Midstream LLC |
60,000 | 2,170,200 | ||||||||||
| Kinder Morgan Inc. |
48,980 | 2,034,384 | * | |||||||||
| Total Energy |
4,204,584 | |||||||||||
| Financials — 17.7% | ||||||||||||
| Capital Markets — 0.7% |
||||||||||||
| Apollo Global Management LLC, Class A Shares |
100,000 | 2,444,000 | ||||||||||
| Insurance — 1.3% |
||||||||||||
| MetLife Inc. |
82,000 | 4,560,020 | ||||||||||
| Real Estate Investment Trusts (REITs) — 15.7% |
||||||||||||
| American Capital Agency Corp. |
168,000 | 3,876,600 | (a) | |||||||||
| Annaly Capital Management Inc. |
400,000 | 4,608,000 | (a) | |||||||||
| DCT Industrial Trust Inc. |
37,500 | 1,279,875 | ||||||||||
| EPR Properties |
76,700 | 4,294,433 | (a) | |||||||||
| Equity Residential |
19,300 | 1,367,212 | ||||||||||
| Excel Trust Inc. |
170,000 | 2,228,700 | (a) | |||||||||
| HCP Inc. |
41,000 | 1,836,800 | (a) | |||||||||
| Health Care REIT Inc. |
27,000 | 1,988,820 | (a) | |||||||||
| Highwoods Properties Inc. |
26,000 | 1,122,160 | (a) | |||||||||
| Hospitality Properties Trust |
119,000 | 3,641,400 | (a) | |||||||||
| Inland Real Estate Corp. |
185,000 | 1,996,150 | (a) | |||||||||
| Kilroy Realty Corp. |
24,000 | 1,648,320 | (a) | |||||||||
| Liberty Property Trust |
49,000 | 1,733,620 | (a) | |||||||||
| Ramco-Gershenson Properties Trust |
132,000 | 2,362,800 | (a) | |||||||||
| Regency Centers Corp. |
22,000 | 1,352,560 | (a) | |||||||||
| Retail Properties of America Inc., Class A Shares |
155,000 | 2,490,850 | ||||||||||
| Senior Housing Properties Trust |
91,000 | 2,050,230 | (a) | |||||||||
| Simon Property Group Inc. |
6,600 | 1,193,280 | ||||||||||
| Spirit Realty Capital Inc. |
272,386 | 3,189,640 | (a) | |||||||||
| Starwood Property Trust Inc. |
250,000 | 6,015,000 | (a) | |||||||||
| STORE Capital Corp. |
52,500 | 1,095,150 | * | |||||||||
See Notes to Financial Statements.
| 10 | LMP Capital and Income Fund Inc. 2014 Annual Report |
LMP Capital and Income Fund Inc.
| Security | Shares | Value | ||||||||||
| Real Estate Investment Trusts (REITs) — continued |
||||||||||||
| Urstadt Biddle Properties, Class A Shares |
85,000 | $ | 1,885,300 | (a) | ||||||||
| Westfield Corp. |
202,000 | 1,424,900 | ||||||||||
| Total Real Estate Investment Trusts (REITs) |
54,681,800 | |||||||||||
| Total Financials |
61,685,820 | |||||||||||
| Health Care — 5.2% | ||||||||||||
| Pharmaceuticals — 5.2% |
||||||||||||
| Bristol-Myers Squibb Co. |
123,950 | 7,319,248 | (a) | |||||||||
| GlaxoSmithKline PLC, ADR |
76,000 | 3,530,200 | (a) | |||||||||
| Merck & Co. Inc. |
58,000 | 3,503,200 | (a) | |||||||||
| Pfizer Inc. |
126,000 | 3,924,900 | (a) | |||||||||
| Total Health Care |
18,277,548 | |||||||||||
| Industrials — 7.3% | ||||||||||||
| Aerospace & Defense — 3.2% |
||||||||||||
| Lockheed Martin Corp. |
57,650 | 11,043,434 | (a) | |||||||||
| Industrial Conglomerates — 0.3% |
||||||||||||
| General Electric Co. |
35,000 | 927,150 | ||||||||||
| Trading Companies & Distributors — 3.2% |
||||||||||||
| TAL International Group Inc. |
250,000 | 11,047,500 | (a) | |||||||||
| Transportation Infrastructure — 0.6% |
||||||||||||
| Macquarie Infrastructure Co. LLC |
32,000 | 2,249,600 | ||||||||||
| Total Industrials |
25,267,684 | |||||||||||
| Information Technology — 7.6% | ||||||||||||
| IT Services — 0.3% |
||||||||||||
| Paychex Inc. |
20,000 | 948,200 | ||||||||||
| Semiconductors & Semiconductor Equipment — 2.4% |
||||||||||||
| Intel Corp. |
192,000 | 7,152,000 (a) | ||||||||||
| Maxim Integrated Products Inc. |
36,000 | 1,064,520 | ||||||||||
| Total Semiconductors & Semiconductor Equipment |
8,216,520 | |||||||||||
| Software — 1.4% |
||||||||||||
| Microsoft Corp. |
105,000 | 5,020,050 | (a) | |||||||||
| Technology Hardware, Storage & Peripherals — 3.5% |
||||||||||||
| Seagate Technology PLC |
187,360 | 12,386,370 | (a) | |||||||||
| Total Information Technology |
26,571,140 | |||||||||||
| Materials — 1.4% | ||||||||||||
| Metals & Mining — 0.6% |
||||||||||||
| Freeport-McMoRan Inc. |
78,000 | 2,094,300 | (a) | |||||||||
| Paper & Forest Products — 0.8% |
||||||||||||
| International Paper Co. |
50,000 | 2,691,000 | (a) | |||||||||
| Total Materials |
4,785,300 | |||||||||||
See Notes to Financial Statements.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 11 |
Schedule of investments (cont’d)
November 30, 2014
LMP Capital and Income Fund Inc.
| Security | Shares | Value | ||||||||||||
| Telecommunication Services — 7.2% | ||||||||||||||
| Diversified Telecommunication Services — 5.1% |
||||||||||||||
| AT&T Inc. |
189,000 | $ | 6,686,820 (a) | |||||||||||
| Verizon Communications Inc. |
217,666 | 11,011,723 (a) | ||||||||||||
| Total Diversified Telecommunication Services |
17,698,543 | |||||||||||||
| Wireless Telecommunication Services — 2.1% |
||||||||||||||
| Vodafone Group PLC, Sponsored ADR |
200,481 | 7,327,581 | ||||||||||||
| Total Telecommunication Services |
25,026,124 | |||||||||||||
| Utilities — 8.5% | ||||||||||||||
| Electric Utilities — 6.3% |
||||||||||||||
| Great Plains Energy Inc. |
334,000 | 8,740,780 (a) | ||||||||||||
| NRG Yield Inc., Class A Shares |
56,960 | 2,699,334 (a) | ||||||||||||
| PPL Corp. |
261,000 | 9,273,330 | ||||||||||||
| Southern Co. |
24,000 | 1,138,320 | (a) | |||||||||||
| Total Electric Utilities |
21,851,764 | |||||||||||||
| Independent Power and Renewable Electricity Producers — 0.5% |
||||||||||||||
| Abengoa Yield PLC |
36,900 | 1,040,580 | ||||||||||||
| TerraForm Power Inc., Class A |
27,000 | 895,050 | * | |||||||||||
| Total Independent Power and Renewable Electricity Producers |
1,935,630 | |||||||||||||
| Multi-Utilities — 1.7% |
||||||||||||||
| National Grid PLC |
397,000 | 5,767,059 | ||||||||||||
| Total Utilities |
29,554,453 | |||||||||||||
| Total Common Stocks (Cost — $157,209,201) |
210,187,583 | |||||||||||||
| Rate | ||||||||||||||
| Convertible Preferred Stocks — 20.9% | ||||||||||||||
| Financials — 5.8% | ||||||||||||||
| Real Estate Investment Trusts (REITs) — 5.8% |
||||||||||||||
| American Tower Corp. |
5.250 | % | 32,000 | 3,725,120 | ||||||||||
| Health Care REIT Inc. |
6.500 | % | 117,800 | 7,695,874 | (a) | |||||||||
| Weyerhaeuser Co. |
6.375 | % | 151,000 | 8,863,700 | ||||||||||
| Total Financials |
20,284,694 | |||||||||||||
| Industrials — 5.7% | ||||||||||||||
| Industrial Conglomerates — 5.1% |
||||||||||||||
| United Technologies Corp. |
7.500 | % | 294,000 | 17,642,940 | ||||||||||
| Machinery — 0.6% |
||||||||||||||
| Stanley Black & Decker Inc. |
6.250 | % | 20,000 | 2,307,800 | ||||||||||
| Total Industrials |
19,950,740 | |||||||||||||
| Utilities — 9.4% | ||||||||||||||
| Electric Utilities — 7.1% |
||||||||||||||
| Exelon Corp. |
6.500 | % | 134,000 | 6,993,460 | ||||||||||
See Notes to Financial Statements.
| 12 | LMP Capital and Income Fund Inc. 2014 Annual Report |
LMP Capital and Income Fund Inc.
| Security | Rate | Shares | Value | |||||||||||
| Electric Utilities — continued |
||||||||||||||
| NextEra Energy Inc. |
5.799 | % | 110,000 | $ | 6,187,500 | |||||||||
| NextEra Energy Inc. |
5.889 | % | 175,000 | 11,518,500 | ||||||||||
| Total Electric Utilities |
24,699,460 | |||||||||||||
| Multi-Utilities — 2.3% |
||||||||||||||
| Dominion Resources Inc. |
6.125 | % | 139,000 | 8,109,260 | ||||||||||
| Total Utilities |
32,808,720 | |||||||||||||
| Total Convertible Preferred Stocks (Cost — $65,469,566) |
73,044,154 | |||||||||||||
| Investments in Underlying Funds — 8.5% | ||||||||||||||
| Financials — 8.5% | ||||||||||||||
| Capital Markets — 8.5% |
||||||||||||||
| Ares Capital Corp. |
682,000 | 11,218,900 | (a)(b) | |||||||||||
| FS Investment Corp. |
400,000 | 4,164,000 | (b) | |||||||||||
| Golub Capital BDC Inc. |
287,000 | 5,097,120 | (a)(b) | |||||||||||
| TCP Capital Corp. |
331,000 | 5,646,860 | (b) | |||||||||||
| TriplePoint Venture Growth BDC Corp. |
240,000 | 3,472,800 | (a)(b) | |||||||||||
| Total Investments in Underlying Funds (Cost — $30,765,761) |
29,599,680 | |||||||||||||
| Shares/Units | ||||||||||||||
| Master Limited Partnerships — 35.0% | ||||||||||||||
| Diversified Energy Infrastructure — 14.6% |
||||||||||||||
| Energy Transfer Equity LP |
300,000 | 17,817,000 | (a) | |||||||||||
| Energy Transfer Partners LP |
67,000 | 4,366,390 | (a) | |||||||||||
| Enterprise Products Partners LP |
424,320 | 15,844,109 | (a) | |||||||||||
| Genesis Energy LP |
95,000 | 4,182,850 | (a) | |||||||||||
| Plains GP Holdings LP, Class A Shares |
166,700 | 4,330,866 | ||||||||||||
| Regency Energy Partners LP |
45,000 | 1,282,050 | ||||||||||||
| Williams Partners LP |
62,000 | 3,207,880 | (a) | |||||||||||
| Total Diversified Energy Infrastructure |
51,031,145 | |||||||||||||
| Financials — 6.0% |
||||||||||||||
| Ares Management LP |
72,260 | 1,170,612 | ||||||||||||
| Blackstone Group LP |
190,000 | 6,368,800 | (a) | |||||||||||
| Och-Ziff Capital Management Group LLC |
1,119,000 | 13,260,150 | (a) | |||||||||||
| Total Financials |
20,799,562 | |||||||||||||
| Gathering/Processing — 5.5% |
||||||||||||||
| Access Midstream Partners LP |
35,000 | 2,193,800 | (a) | |||||||||||
| Crestwood Midstream Partners LP |
53,500 | 1,074,280 | (a) | |||||||||||
| DCP Midstream Partners LP |
110,000 | 5,270,100 | (a) | |||||||||||
| Enable Midstream Partners LP |
90,000 | 1,810,800 | ||||||||||||
| MarkWest Energy Partners LP |
29,000 | 2,060,740 | (a) | |||||||||||
| QEP Midstream Partners LP |
47,000 | 754,350 | ||||||||||||
| Summit Midstream Partners LP |
101,640 | 4,614,456 | (a) | |||||||||||
See Notes to Financial Statements.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 13 |
Schedule of investments (cont’d)
November 30, 2014
LMP Capital and Income Fund Inc.
| Security | Shares/Units | Value | ||||||||||||
| Gathering/Processing — continued |
||||||||||||||
| Targa Resources Partners LP |
25,000 | $ | 1,370,750 | |||||||||||
| Total Gathering/Processing |
19,149,276 | |||||||||||||
| General Partner — 0.1% |
||||||||||||||
| Crestwood Equity Partners LP |
19,360 | 174,240 | ||||||||||||
| Global Infrastructure — 0.6% |
||||||||||||||
| Brookfield Infrastructure Partners LP |
55,000 | 2,282,500 | ||||||||||||
| Liquids Transportation & Storage — 1.9% |
||||||||||||||
| Buckeye Partners LP |
14,500 | 1,114,615 | ||||||||||||
| Magellan Midstream Partners LP |
30,000 | 2,486,700 | (a) | |||||||||||
| PBF Logistics LP |
98,820 | 2,256,060 | ||||||||||||
| World Point Terminals LP |
47,000 | 891,590 | ||||||||||||
| Total Liquids Transportation & Storage |
6,748,965 | |||||||||||||
| Natural Gas Transportation & Storage — 1.8% |
||||||||||||||
| Hoegh LNG Partners LP |
220,000 | 4,048,000 | * | |||||||||||
| TC Pipelines LP |
30,000 | 2,159,700 | ||||||||||||
| Total Natural Gas Transportation & Storage |
6,207,700 | |||||||||||||
| Offshore — 0.6% |
||||||||||||||
| Dynagas LNG Partners LP |
110,000 | 1,970,100 | (a) | |||||||||||
| Oil & Gas Drilling — 0.2% |
||||||||||||||
| Transocean Partners LLC |
39,000 | 611,520 | ||||||||||||
| Oil/Refined Products — 2.4% |
||||||||||||||
| CrossAmerica Partners LP |
25,000 | 825,250 | ||||||||||||
| JP Energy Partners LP |
128,000 | 1,868,800 | * | |||||||||||
| Sunoco Logistics Partners LP |
120,000 | 5,635,200 | (a) | |||||||||||
| Total Oil/Refined Products |
8,329,250 | |||||||||||||
| Petrochemicals — 0.1% |
||||||||||||||
| Westlake Chemical Partners LP |
17,700 | 500,733 | ||||||||||||
| Refining — 0.3% |
||||||||||||||
| Western Refining Logistics LP |
32,960 | 1,025,056 | ||||||||||||
| Shipping — 0.9% |
||||||||||||||
| Golar LNG Partners LP |
98,000 | 3,224,200 | (a) | |||||||||||
| Total Master Limited Partnerships (Cost — $84,180,810) |
122,054,247 | |||||||||||||
| Rate | Shares | |||||||||||||
| Preferred Stocks — 1.3% | ||||||||||||||
| Financials — 1.3% | ||||||||||||||
| Real Estate Investment Trusts (REITs) — 1.3% |
||||||||||||||
| Ashford Hospitality Trust, Series E |
9.000 | % | 33,661 | 902,115 | (a) | |||||||||
See Notes to Financial Statements.
| 14 | LMP Capital and Income Fund Inc. 2014 Annual Report |
LMP Capital and Income Fund Inc.
| Security | Rate | Shares | Value | |||||||||||||
| Real Estate Investment Trusts (REITs) — continued |
||||||||||||||||
| Glimcher Realty Trust, Series H |
7.500 | % | 34,000 | $ | 885,360 | |||||||||||
| Pebblebrook Hotel Trust, Series A |
7.875 | % | 47,512 | 1,237,212 | (a) | |||||||||||
| Retail Properties of America Inc., Cumulative |
7.000 | % | 50,000 | 1,286,500 | ||||||||||||
| Total Preferred Stocks (Cost — $3,742,981) |
4,311,187 | |||||||||||||||
| Total Investments before Short-Term Investments (Cost — $341,368,319) |
|
439,196,851 | ||||||||||||||
| Maturity Date |
Face Amount |
|||||||||||||||
| Short-Term Investments — 0.8% | ||||||||||||||||
| Repurchase Agreements — 0.8% |
||||||||||||||||
| Interest in $500,000,000 joint tri-party repurchase agreement dated 11/28/14 with RBS Securities Inc.; Proceeds at
maturity — $2,781,268; (Fully collateralized by various U.S. government obligations, 0.625% to 3.625% due 1/15/25 to 2/15/44; Market value — $2,836,896) |
0.070 | % | 12/1/14 | $ | 2,781,252 | 2,781,252 | ||||||||||
| Total Investments — 126.9% (Cost — $344,149,571#) |
441,978,103 | |||||||||||||||
| Liabilities in Excess of Other Assets — (26.9)% |
(93,725,383 | ) | ||||||||||||||
| Total Net Assets — 100.0% |
$ | 348,252,720 | ||||||||||||||
| * | Non-income producing security. |
| (a) | All or a portion of this security is pledged as collateral pursuant to the loan agreement (See Note 5). |
| (b) | Security is a business development company (See Note 1). |
| # | Aggregate cost for federal income tax purposes is $336,707,877. |
| Abbreviations used in this schedule: | ||
| ADR | — American Depositary Receipts | |
| REIT | — Real Estate Investment Trust | |
See Notes to Financial Statements.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 15 |
Statement of assets and liabilities
November 30, 2014
| Assets: | ||||
| Investments, at value (Cost — $344,149,571) |
$ | 441,978,103 | ||
| Cash |
8,231,065 | |||
| Dividends and interest receivable |
1,243,151 | |||
| Receivable for securities sold |
2,424,296 | |||
| Prepaid expenses |
9,952 | |||
| Total Assets |
453,886,567 | |||
| Liabilities: | ||||
| Loan payable (Note 5) |
100,000,000 | |||
| Payable for securities purchased |
5,075,954 | |||
| Investment management fee payable |
311,925 | |||
| Interest payable (Note 5) |
22,753 | |||
| Directors’ fees payable |
2,115 | |||
| Accrued expenses |
221,100 | |||
| Total Liabilities |
105,633,847 | |||
| Total Net Assets | $ | 348,252,720 | ||
| Net Assets: | ||||
| Par value ($0.001 par value; 17,983,331 shares issued and outstanding; 100,000,000 shares authorized) |
$ | 17,983 | ||
| Paid-in capital in excess of par value |
385,156,750 | |||
| Undistributed net investment income |
1,403,833 | |||
| Accumulated net realized loss on investments and foreign currency transactions |
(136,153,890) | |||
| Net unrealized appreciation on investments and foreign currencies |
97,828,044 | |||
| Total Net Assets | $ | 348,252,720 | ||
| Shares Outstanding | 17,983,331 | |||
| Net Asset Value | $19.37 | |||
See Notes to Financial Statements.
| 16 | LMP Capital and Income Fund Inc. 2014 Annual Report |
For the Year Ended November 30, 2014
| Investment Income: | ||||
| Dividends and distributions |
$ | 30,252,172 | ||
| Return of capital (Note 1(f)) |
(5,254,353) | |||
| Net dividends and distributions |
24,997,819 | |||
| Interest |
23,425 | |||
| Less: Foreign taxes withheld |
(19,375) | |||
| Total Investment Income |
25,001,869 | |||
| Expenses: | ||||
| Investment management fee (Note 2) |
3,626,794 | |||
| Interest expense (Note 5) |
762,775 | |||
| Audit and tax fees |
84,861 | |||
| Transfer agent fees |
73,513 | |||
| Directors’ fees |
53,570 | |||
| Shareholder reports |
38,059 | |||
| Legal fees |
36,269 | |||
| Fund accounting fees |
33,019 | |||
| Franchise tax |
27,000 | |||
| Stock exchange listing fees |
24,801 | |||
| Insurance |
6,853 | |||
| Custody fees |
4,675 | |||
| Miscellaneous expenses |
11,627 | |||
| Total Expenses |
4,783,816 | |||
| Net Investment Income | 20,218,053 | |||
| Realized and Unrealized Gain (Loss) on Investments and Foreign Currency Transactions (Notes 1 and 3): |
||||
| Net Realized Gain From: |
||||
| Investment transactions |
16,928,264 | |||
| REIT distributions |
924,806 | |||
| Foreign currency transactions |
2,456 | |||
| Net Realized Gain |
17,855,526 | |||
| Change in Net Unrealized Appreciation (Depreciation) From: |
||||
| Investments |
15,082,484 | |||
| Foreign currencies |
(6,315) | |||
| Change in Net Unrealized Appreciation (Depreciation) |
15,076,169 | |||
| Net Gain on Investments and Foreign Currency Transactions | 32,931,695 | |||
| Increase in Net Assets from Operations | $ | 53,149,748 | ||
See Notes to Financial Statements.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 17 |
Statements of changes in net assets
| For the Years Ended November 30, | 2014 | 2013 | ||||||
| Operations: | ||||||||
| Net investment income |
$ | 20,218,053 | $ | 12,899,601 | ||||
| Net realized gain |
17,855,526 | 2,047,760 | ||||||
| Change in net unrealized appreciation (depreciation) |
15,076,169 | 60,946,927 | ||||||
| Increase in Net Assets From Operations |
53,149,748 | 75,894,288 | ||||||
| Distributions to Shareholders From (Note 1): | ||||||||
| Net investment income |
(20,141,330) | (10,988,352) | ||||||
| Return of capital |
— | (9,152,978) | ||||||
| Decrease in Net Assets From Distributions to Shareholders |
(20,141,330) | (20,141,330) | ||||||
| Increase in Net Assets |
33,008,418 | 55,752,958 | ||||||
| Net Assets: | ||||||||
| Beginning of year |
315,244,302 | 259,491,344 | ||||||
| End of year* |
$ | 348,252,720 | $ | 315,244,302 | ||||
| *Includesundistributed net investment income of: |
$1,403,833 | $1,919,028 | ||||||
See Notes to Financial Statements.
| 18 | LMP Capital and Income Fund Inc. 2014 Annual Report |
For the Year Ended November 30, 2014
| Increase (Decrease) in Cash: | ||||
| Cash Provided (Used) by Operating Activities: | ||||
| Net increase in net assets resulting from operations |
$ | 53,149,748 | ||
| Adjustments to reconcile net increase in net assets resulting from operations to net cash provided (used) by operating activities: |
||||
| Purchases of portfolio securities |
(141,081,534) | |||
| Sales of portfolio securities |
112,065,753 | |||
| Net purchases, sales and maturities of short-term investments |
3,051,748 | |||
| Return of capital |
5,254,353 | |||
| Net amortization of premium (accretion of discount) |
682,813 | |||
| Decrease in receivable for securities sold |
10,051 | |||
| Increase in dividends and interest receivable |
(127,809) | |||
| Decrease in prepaid expenses |
3,716 | |||
| Decrease in receivable from principal paydown |
5,881 | |||
| Increase in payable for securities purchased |
4,203,673 | |||
| Increase in investment management fee payable |
40,329 | |||
| Increase in Directors’ fees payable |
2,115 | |||
| Increase in interest payable |
3,995 | |||
| Increase in accrued expenses |
8,969 | |||
| Net realized gain on investments |
(16,928,264) | |||
| Change in unrealized appreciation of investments |
(15,082,484) | |||
| Net Cash Provided by Operating Activities* |
5,263,053 | |||
| Cash Flows from Financing Activities: | ||||
| Distributions paid on common stock |
(20,141,330) | |||
| Increase in loan payable |
23,000,000 | |||
| Net Cash Provided by Financing Activities |
2,858,670 | |||
| Net Increase in Cash | 8,121,723 | |||
| Cash at Beginning of Year |
109,342 | |||
| Cash at End of Year |
$ | 8,231,065 | ||
| * | Included in operating expenses is cash of $758,780 paid for interest on borrowings. |
See Notes to Financial Statements.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 19 |
| For a share of capital stock outstanding throughout each year ended November 30, unless otherwise noted: | ||||||||||||||||||||||||
| 20141 | 20131 | 20121 | 20112 | 20103 | 20093 | |||||||||||||||||||
| Net asset value, beginning of year | $17.53 | $14.43 | $13.36 | $13.70 | $12.44 | $10.07 | ||||||||||||||||||
| Income (loss) from operations: | ||||||||||||||||||||||||
| Net investment income |
1.12 | 0.72 | 0.75 | 0.86 | 0.54 | 0.43 | ||||||||||||||||||
| Net realized and unrealized gain (loss) |
1.84 | 3.50 | 1.41 | (0.73) | 1.26 | 2.46 | ||||||||||||||||||
| Total income from operations |
2.96 | 4.22 | 2.16 | 0.13 | 1.80 | 2.89 | ||||||||||||||||||
| Less distributions from: | ||||||||||||||||||||||||
| Net investment income |
(1.12) | (0.61) | (1.12) | (0.58) | (0.54) | (0.52) | ||||||||||||||||||
| Return of capital |
— | (0.51) | — | — | — | — | ||||||||||||||||||
| Total distributions |
(1.12) | (1.12) | (1.12) | (0.58) | (0.54) | (0.52) | ||||||||||||||||||
| Increase in net asset value due to shares repurchased in tender offer |
— | — | 0.03 | 0.11 | — | — | ||||||||||||||||||
| Net asset value, end of year | $19.37 | $17.53 | $14.43 | $13.36 | $13.70 | $12.44 | ||||||||||||||||||
| Market price, end of year | $17.27 | $15.91 | $13.90 | $12.23 | $12.45 | $10.35 | ||||||||||||||||||
| Total return, based on NAV4,5 |
17.43 | % | 30.37 | % | 17.02 | %6 | 1.84 | %6 | 14.83 | % | 29.52 | % | ||||||||||||
| Total return, based on Market Price7 |
16.04 | % | 23.50 | % | 23.69 | % | 2.80 | % | 26.18 | % | 42.02 | % | ||||||||||||
| Net assets, end of year (000s) | $348,253 | $315,244 | $259,491 | $266,273 | $410,458 | $372,888 | ||||||||||||||||||
| Ratios to average net assets: | ||||||||||||||||||||||||
| Gross expenses |
1.44 | % | 1.41 | % | 1.61 | % | 1.53 | %8 | 1.49 | % | 1.59 | % | ||||||||||||
| Net expenses9 |
1.44 | 1.41 | 1.61 | 1.53 | 8 | 1.49 | 1.59 | |||||||||||||||||
| Net investment income |
6.07 | 4.41 | 5.28 | 5.94 | 8 | 4.29 | 3.90 | |||||||||||||||||
| Portfolio turnover rate | 27 | % | 38 | % | 51 | % | 79 | %10 | 49 | %10 | 135 | %10 | ||||||||||||
| Supplemental data: | ||||||||||||||||||||||||
| Loans Outstanding, End of Year (000s) |
$100,000 | $77,000 | $77,000 | $73,000 | $100,000 | $60,000 | ||||||||||||||||||
| Asset Coverage for Loan Outstanding |
448 | % | 509 | % | 437 | % | 465 | % | 511 | % | 721 | % | ||||||||||||
| Weighted Average Loan (000s) |
$93,614 | $77,000 | $75,686 | $92,757 | $73,589 | $66,192 | ||||||||||||||||||
| Weighted Average Interest Rate on Loans |
0.81 | % | 0.84 | % | 0.91 | % | 0.91 | % | 1.62 | % | 1.44 | % | ||||||||||||
| 1 | Per share amounts have been calculated using the average shares method. |
| 2 | For the period January 1, 2011 to November 30, 2011. |
| 3 | For the year ended December 31. |
| 4 | Performance figures may reflect compensating balance arrangements, fee waivers and/or expense reimbursements. In the absence of compensating balance arrangements, fee waivers and/or expense reimbursements, the total return would have been lower. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 5 | The total return calculation assumes that distributions are reinvested at NAV. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 6 | The total return reflects an increase in net asset value due to shares repurchased in tender offers. Absent these tender offers, the total return would have been 16.78% for the year ended November 30, 2012 and 1.00% for the period ended November 30, 2011. |
| 7 | The total return calculation assumes that distributions are reinvested in accordance with the Fund’s dividend reinvestment plan. Past performance is no guarantee of future results. Total returns for periods of less than one year are not annualized. |
| 8 | Annualized. |
| 9 | The impact of compensating balance arrangements, if any, was less than 0.01%. |
| 10 | Excluding mortgage dollar roll transactions. If mortgage dollar roll transactions had been included, the portfolio turnover rate would have been 115% for the period ended November 30, 2011, 111% and 185% for the years ended December 31, 2010 and 2009, respectively. |
See Notes to Financial Statements.
| 20 | LMP Capital and Income Fund Inc. 2014 Annual Report |
1. Organization and significant accounting policies
LMP Capital and Income Fund Inc. (the “Fund”) was incorporated in Maryland on November 12, 2003 and is registered as a non-diversified, closed-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). The Board of Directors authorized 100 million shares of $0.001 par value common stock. The Fund’s investment objective is total return with an emphasis on income. The Fund pursues its investment objective by investing 80% of its assets in a broad range of equity and fixed income securities of both U.S. and foreign issuers.
The following are significant accounting policies consistently followed by the Fund and are in conformity with U.S. generally accepted accounting principles (“GAAP”). Estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. Subsequent events have been evaluated through the date the financial statements were issued.
(a) Investment valuation. Equity securities for which market quotations are available are valued at the last reported sales price or official closing price on the primary market or exchange on which they trade. The valuations for fixed income securities (which may include, but are not limited to, corporate, government, municipal, mortgage-backed, collateralized mortgage obligations and asset-backed securities) and certain derivative instruments are typically the prices supplied by independent third party pricing services, which may use market prices or broker/dealer quotations or a variety of valuation techniques and methodologies. The independent third party pricing services use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar securities. Short-term fixed income securities that will mature in 60 days or less are valued at amortized cost, unless it is determined that using this method would not reflect an investment’s fair value. When the Fund holds securities or other assets that are denominated in a foreign currency, the Fund will normally use the currency exchange rates as of 4:00 p.m. (Eastern Time). If independent third party pricing services are unable to supply prices for a portfolio investment, or if the prices supplied are deemed by the manager to be unreliable, the market price may be determined by the manager using quotations from one or more broker/dealers or at the transaction price if the security has recently been purchased and no value has yet been obtained from a pricing service or pricing broker. When reliable prices are not readily available, such as when the value of a security has been significantly affected by events after the close of the exchange or market on which the security is principally traded, but before the Fund calculates its net asset value, the Fund values these securities as determined in accordance with procedures approved by the Fund’s Board of Directors.
The Board of Directors is responsible for the valuation process and has delegated the supervision of the daily valuation process to the Legg Mason North American Fund Valuation Committee (the “Valuation Committee”). The Valuation Committee, pursuant to the policies
| LMP Capital and Income Fund Inc. 2014 Annual Report | 21 |
Notes to financial statements (cont’d)
adopted by the Board of Directors, is responsible for making fair value determinations, evaluating the effectiveness of the Fund’s pricing policies, and reporting to the Board of Directors. When determining the reliability of third party pricing information for investments owned by the Fund, the Valuation Committee, among other things, conducts due diligence reviews of pricing vendors, monitors the daily change in prices and reviews transactions among market participants.
The Valuation Committee will consider pricing methodologies it deems relevant and appropriate when making fair value determinations. Examples of possible methodologies include, but are not limited to, multiple of earnings; discount from market of a similar freely traded security; discounted cash-flow analysis; book value or a multiple thereof; risk premium/yield analysis; yield to maturity; and/or fundamental investment analysis. The Valuation Committee will also consider factors it deems relevant and appropriate in light of the facts and circumstances. Examples of possible factors include, but are not limited to, the type of security; the issuer’s financial statements; the purchase price of the security; the discount from market value of unrestricted securities of the same class at the time of purchase; analysts’ research and observations from financial institutions; information regarding any transactions or offers with respect to the security; the existence of merger proposals or tender offers affecting the security; the price and extent of public trading in similar securities of the issuer or comparable companies; and the existence of a shelf registration for restricted securities.
For each portfolio security that has been fair valued pursuant to the policies adopted by the Board of Directors, the fair value price is compared against the last available and next available market quotations. The Valuation Committee reviews the results of such back testing monthly and fair valuation occurrences are reported to the Board of Directors quarterly.
The Fund uses valuation techniques to measure fair value that are consistent with the market approach and/or income approach, depending on the type of security and the particular circumstance. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable securities. The income approach uses valuation techniques to discount estimated future cash flows to present value.
GAAP establishes a disclosure hierarchy that categorizes the inputs to valuation techniques used to value assets and liabilities at measurement date. These inputs are summarized in the three broad levels listed below:
| Ÿ | Level 1 — quoted prices in active markets for identical investments |
| Ÿ | Level 2 — other significant observable inputs (including quoted prices for similar investments, interest rates, prepayment speeds, credit risk, etc.) |
| Ÿ | Level 3 — significant unobservable inputs (including the Fund’s own assumptions in determining the fair value of investments) |
| 22 | LMP Capital and Income Fund Inc. 2014 Annual Report |
The inputs or methodologies used to value securities are not necessarily an indication of the risk associated with investing in those securities.
The following is a summary of the inputs used in valuing the Fund’s assets carried at fair value:
| ASSETS | ||||||||||||||||
| Description | Quoted Prices (Level 1) |
Other Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | ||||||||||||
| Long-term investments†: | ||||||||||||||||
| Common stocks |
$ | 210,187,583 | — | — | $ | 210,187,583 | ||||||||||
| Convertible preferred stocks |
73,044,154 | — | — | 73,044,154 | ||||||||||||
| Investments in underlying funds |
29,599,680 | — | — | 29,599,680 | ||||||||||||
| Master limited partnerships |
122,054,247 | — | — | 122,054,247 | ||||||||||||
| Preferred stocks |
4,311,187 | — | — | 4,311,187 | ||||||||||||
| Total long-term investments | $ | 439,196,851 | — | — | $ | 439,196,851 | ||||||||||
| Short-term investments† | — | $ | 2,781,252 | — | 2,781,252 | |||||||||||
| Total investments | $ | 439,196,851 | $ | 2,781,252 | — | $ | 441,978,103 | |||||||||
| † | See Schedule of Investments for additional detailed categorizations. |
The Fund’s policy is to recognize transfers between levels as of the end of the reporting period. At November 30, 2014, securities valued at $8,863,700 were transferred from Level 2 to Level 1 within the fair value hierarchy because of the availability of a quoted price in an active market for an identical investment.
(b) Business development companies. The Fund may invest in securities of closed-end investment companies that have elected to be treated as a business development company under the 1940 Act. A business development company operates similar to an exchange-traded fund and represents a portfolio of securities. The Fund may purchase a business development company to gain exposure to the securities in the underlying portfolio. The risks of owning a business development company generally reflect the risks of owning the underlying securities. Business development companies have expenses that reduce their value.
(c) Repurchase agreements. The Fund may enter into repurchase agreements with institutions that its investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. Under the terms of a typical repurchase agreement, the Fund acquires a debt security subject to an obligation of the seller to repurchase, and of the Fund to resell, the security at an agreed-upon price and time, thereby determining the yield during the Fund’s holding period. When entering into repurchase agreements, it is the Fund’s policy that its custodian or a third party custodian, acting on the Fund’s behalf, take possession of the underlying collateral securities, the market value of which, at all times, at least equals the principal amount of the repurchase transaction, including accrued interest. To the extent that any repurchase transaction maturity exceeds one business day, the value of the collateral is marked-to-market and measured against the value of the agreement in an effort to ensure the adequacy of the collateral. If the counterparty defaults, the Fund generally has
| LMP Capital and Income Fund Inc. 2014 Annual Report | 23 |
Notes to financial statements (cont’d)
the right to use the collateral to satisfy the terms of the repurchase transaction. However, if the market value of the collateral declines during the period in which the Fund seeks to assert its rights or if bankruptcy proceedings are commenced with respect to the seller of the security, realization of the collateral by the Fund may be delayed or limited.
(d) Foreign currency translation. Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts based upon prevailing exchange rates on the respective dates of such transactions.
The Fund does not isolate that portion of the results of operations resulting from fluctuations in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Such fluctuations are included with the net realized and unrealized gain or loss on investments.
Net realized foreign exchange gains or losses arise from sales of foreign currencies, including gains and losses on forward foreign currency contracts, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, other than investments in securities, on the date of valuation, resulting from changes in exchange rates.
Foreign security and currency transactions may involve certain considerations and risks not typically associated with those of U.S. dollar denominated transactions as a result of, among other factors, the possibility of lower levels of governmental supervision and regulation of foreign securities markets and the possibility of political or economic instability.
(e) Master limited partnerships. The Fund may invest up to 25% of its total assets in the securities of Master Limited Partnerships (“MLPs”) that are treated for U.S. federal tax purposes as qualified publicly traded partnerships. This 25% limitation applies generally to MLPs that focus on commodity and energy-related industries. Entities commonly referred to as “MLPs” are generally organized under state law as limited partnerships or limited liability companies. To be treated as a partnership for U.S. federal income tax purposes, an MLP whose units are traded on a securities exchange must receive at least 90% of its income from qualifying sources such as interest, dividends, real estate rents, gain from the sale or disposition of real property, income and gain from mineral or natural resources activities, income and gain from the transportation or storage of certain fuels, and, in certain circumstances, income and gain from commodities or futures, forwards and options with respect to commodities. Mineral or natural resources activities include exploration, development, production, processing, mining, refining, marketing and transportation (including pipelines) of oil and gas, minerals, geothermal energy, fertilizer, timber or industrial source carbon dioxide. An MLP consists of a general partner and limited partners (or in the case of MLPs organized as limited liability companies, a managing member and
| 24 | LMP Capital and Income Fund Inc. 2014 Annual Report |
members). The general partner or managing member typically controls the operations and management of the MLP and has an ownership stake in the partnership. The limited partners or members, through their ownership of limited partner or member interests, provide capital to the entity, are intended to have no role in the operation and management of the entity and receive cash distributions. The MLPs themselves generally do not pay U.S. federal income taxes. Thus, unlike investors in corporate securities, direct MLP investors are generally not subject to double taxation (i.e., corporate level tax and tax on corporate dividends). Currently, most MLPs operate in the energy and/or natural resources sector.
(f) Partnership accounting policy. The Fund records its pro rata share of the income (loss) and capital gains (losses), to the extent of distributions it has received, allocated from the underlying partnerships and accordingly adjusts the cost basis of the underlying partnerships for return of capital. These amounts are included in the Fund’s Statement of Operations.
(g) Return of capital estimates. Distributions received from the Fund’s investments in MLPs generally are comprised of income and return of capital and the Fund’s investments in REITs generally are comprised of income, realized capital gains and return of capital. The Fund records investment income, realized capital gains and return of capital based on estimates made at the time such distributions are received. Such estimates are based on historical information available from each MLP or REIT and other industry sources. These estimates may subsequently be revised based on information received from the MLPs and REITs after their tax reporting periods are concluded. For the year ended November 30, 2014, the Fund estimated that approximately 48.26% of the MLP and REIT distributions received would be treated as a return of capital or long term capital gains.
(h) Foreign investment risks. The Fund’s investments in foreign securities may involve risks not present in domestic investments. Since securities may be denominated in foreign currencies, may require settlement in foreign currencies or pay interest or dividends in foreign currencies, changes in the relationship of these foreign currencies to the U.S. dollar can significantly affect the value of the investments and earnings of the Fund. Foreign investments may also subject the Fund to foreign government exchange restrictions, expropriation, taxation or other political, social or economic developments, all of which affect the market and/or credit risk of the investments.
(i) Security transactions and investment income. Security transactions are accounted for on a trade date basis. Interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis. Dividend income is recorded on the ex-dividend date. Foreign dividend income is recorded on the ex-dividend date or as soon as practicable after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence. The cost of investments sold is determined by use of the specific identification method. To the extent any issuer defaults or a credit event occurs that impacts the issuer, the Fund may halt any additional interest income accruals and consider the realizability of interest accrued up to the date of default or credit event.
(j) Distributions to shareholders. Distributions from net investment income by the Fund, if any, are declared and paid on a quarterly basis. The Fund intends to distribute all of
| LMP Capital and Income Fund Inc. 2014 Annual Report | 25 |
Notes to financial statements (cont’d)
its net investment income earned each quarter and any cash received during the quarter from its investments in MLPs and REITs. The Fund intends to distribute the cash received from MLPs and REITs even if all or a portion of that cash may represent a return of capital to the Fund. The Fund may distribute additional amounts if required under the income tax regulations. Distributions of net realized gains, if any, are declared at least annually. Pursuant to its Managed Distribution Policy, the Fund intends to make regular quarterly distributions to shareholders at a fixed rate per common share, which rate may be adjusted from time to time by the Fund’s Board of Directors. Under the Fund’s Managed Distribution Policy, if, for any quarterly distribution, the value of the Fund’s net investment income and net realized capital gain is less than the amount of the distribution, the difference will be distributed from the Fund’s net assets (and may constitute a “return of capital”). The Board of Directors may modify, terminate or suspend the Managed Distribution Policy at any time, including when certain events would make part of the return of capital taxable to shareholders. Any such modification, termination or suspension could have an adverse effect on the market price of the Fund’s shares. Distributions to shareholders of the Fund are recorded on the ex-dividend date and are determined in accordance with income tax regulations, which may differ from GAAP.
(k) Cash flow information. The Fund invests in securities and distributes dividends from net investment income and net realized gains, which are paid in cash and may be reinvested at the discretion of shareholders. These activities are reported in the Statement of Changes in Net Assets and additional information on cash receipts and cash payments are presented in the Statement of Cash Flows.
(l) Compensating balance arrangements. The Fund has an arrangement with its custodian bank whereby a portion of the custodian’s fees is paid indirectly by credits earned on the Fund’s cash on deposit with the bank.
(m) Federal and other taxes. It is the Fund’s policy to comply with the federal income and excise tax requirements of the Internal Revenue Code of 1986 (the “Code”), as amended, applicable to regulated investment companies. Accordingly, the Fund intends to distribute its taxable income and net realized gains, if any, to shareholders in accordance with timing requirements imposed by the Code. Therefore, no federal or state income tax provision is required in the Fund’s financial statements.
The Fund may invest in up to 25% of its total assets in MLPs that are treated as qualified publicly traded partnerships for federal income tax purposes. As a limited partner in the MLPs, the Fund reports its allocable share of the MLP’s taxable income in computing its own taxable income. The distributions paid by the MLPs generally do not constitute income for tax purposes. Each MLP may allocate losses to the Fund which are generally not deductible in computing the Fund’s taxable income until such time as that particular MLP either generates income to offset those losses or the Fund disposes of units in that MLP. This may result in the Fund’s taxable income being substantially different than its book income in any given year. As a result, the Fund may have insufficient taxable income to support its distributions paid resulting in a return of capital to shareholders. A return of capital dis-
| 26 | LMP Capital and Income Fund Inc. 2014 Annual Report |
tribution is generally not treated as taxable income to shareholders and instead reduces a shareholder’s basis in their shares of the Fund.
Management has analyzed the Fund’s tax positions taken on income tax returns for all open tax years and has concluded that as of November 30, 2014, no provision for income tax is required in the Fund’s financial statements. The Fund’s federal and state income and federal excise tax returns for tax years for which the applicable statutes of limitations have not expired are subject to examination by the Internal Revenue Service and state departments of revenue.
Under the applicable foreign tax laws, a withholding tax may be imposed on interest, dividends and capital gains at various rates.
(n) Reclassification. GAAP requires that certain components of net assets be reclassified to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or net asset value per share. During the current year, the following reclassifications have been made:
| Undistributed Net Investment Income |
Accumulated Net Realized Loss |
Paid-in Capital |
||||||||||
| (a) | $ | (586,452) | — | $ | 586,452 | |||||||
| (b) | (5,466) | $ | 5,466 | — | ||||||||
| (a) | Reclassifications are due to a prior year taxable overdistribution. |
| (b) | Reclassifications are due to foreign currency transactions treated as ordinary income for tax purposes and book/tax differences in the treatment of limited partnership investments. |
2. Investment management agreement and other transactions with affiliates
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) is the Fund’s investment manager. ClearBridge Investments, LLC (“ClearBridge”), Western Asset Management Company (“Western Asset”) and Western Asset Management Company Limited (“Western Asset Limited”) are the Fund’s subadvisers. LMPFA, ClearBridge, Western Asset and Western Asset Limited are wholly-owned subsidiaries of Legg Mason, Inc. (“Legg Mason”).
LMPFA provides administrative and certain oversight services to the Fund. The Fund pays LMPFA an investment management fee, calculated daily and paid monthly, at an annual rate of 0.85% of the Fund’s average daily net assets plus the proceeds of any outstanding borrowings used for leverage.
LMPFA delegates to the subadvisers the day-to-day portfolio management of the Fund. ClearBridge provides investment advisory services to the Fund by both determining the allocation of the Fund’s assets between equity and fixed-income investments and performing the day-to-day management of the Fund’s investments in equity securities. Western Asset provides advisory services to the Fund by performing the day-to-day management of the Fund’s fixed-income investments. For its services, LMPFA pays the subadvisers 70% of the net management fee it receives from the Fund. This fee will be divided on a pro rata basis, based on assets allocated to each subadviser, from time to time.
| LMP Capital and Income Fund Inc. 2014 Annual Report | 27 |
Notes to financial statements (cont’d)
Western Asset Limited provides certain advisory services to the Fund relating to currency transactions and investments in non-U.S. dollar denominated securities. Western Asset Limited does not receive any compensation from the Fund. In turn, Western Asset pays Western Asset Limited a subadvisory fee of 0.30% on the assets managed by Western Asset Limited.
During periods in which the Fund utilizes financial leverage, the fees which are payable to the investment manager as a percentage of the Fund’s assets will be higher than if the Fund did not utilize leverage because the fees are calculated as a percentage of the Fund’s assets, including those investments purchased with leverage.
All officers and one Director of the Fund are employees of Legg Mason or its affiliates and do not receive compensation from the Fund.
3. Investments
During the year ended November 30, 2014, the aggregate cost of purchases and proceeds from sales of investments (excluding short-term investments) were as follows:
| Purchases | $ | 141,081,534 | ||
| Sales | 112,065,753 |
At November 30, 2014, the aggregate gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
| Gross unrealized appreciation | $ | 112,580,216 | ||
| Gross unrealized depreciation | (7,309,990) | |||
| Net unrealized appreciation | $ | 105,270,226 |
4. Derivative instruments and hedging activities
During the year ended November 30, 2014, the Fund did not invest in any derivative instruments.
5. Loan
The Fund has a 364-day revolving credit agreement with a Pershing LLC, which allows the Fund to borrow up to an aggregate amount of $125,000,000. Unless renewed, this agreement terminates on December 9, 2014. The interest on the loan is calculated at a variable rate based on the one-month LIBOR, plus any applicable margin. To the extent of the borrowing outstanding, the Fund is required to maintain collateral in a special custody account at the Fund’s custodian on the behalf of Pershing, LLC. The Fund’s credit agreement contains customary covenants that, among other things, may limit the Fund’s ability to pay distributions in certain circumstances, incur additional debt, change its fundamental investment policies and engage in certain transactions, including mergers and consolidations, and require asset coverage ratios in addition to those required by the 1940 Act. In addition, the credit agreement may be subject to early termination under certain conditions and may contain other provisions that could limit the Fund’s ability to utilize borrowing under the agreement. Interest expense related to the loan for the year ended November 30, 2014 was $762,775. For the year ended November 30, 2014, the Fund
| 28 | LMP Capital and Income Fund Inc. 2014 Annual Report |
incurred no commitment fee. For the year ended November 30, 2014, the Fund had an average daily loan balance outstanding of $93,613,699 and the weighted average interest rate was 0.81%. At November 30, 2014, the Fund had $100,000,000 of borrowings outstanding per this credit agreement.
Subsequent to period end, the agreement was renewed as a revolving credit agreement that allows the Fund to borrow up to an aggregate amount of $110,000,000 and renews daily for a 180-day term unless notice to the contrary is given to the Fund.
6. Distributions subsequent to November 30, 2014
The following distributions have been declared by the Fund’s Board of Directors and are payable subsequent to the period end of this report:
| Record Date | Payable Date | Amount | ||||||
| 12/19/14 | 12/26/14 | $ | 0.2800 | |||||
7. Income tax information and distributions to shareholders
The tax character of distributions paid during the fiscal years ended November 30, was as follows:
| 2014 | 2013 | |||||||
| Distributions paid from: | ||||||||
| Ordinary income | $ | 20,141,330 | $ | 11,574,804 | ||||
| Tax return of capital | — | 8,566,526 | ||||||
| Total distributions paid | $ | 20,141,330 | $ | 20,141,330 | ||||
As of November 30, 2014, the components of accumulated earnings on a tax basis were as follows:
| Capital loss carryforward* | $ | (135,181,214) | ||
| Other book/tax temporary differences(a) | (7,010,537) | |||
| Unrealized appreciation (depreciation)(b) | 105,269,738 | |||
| Total accumulated earnings (losses) — net | $ | (36,922,013) |
| * | During the taxable year ended November 30, 2014, the Fund utilized $ 5,912,670 of its capital loss carryforward available from prior years. As of November 30, 2014, the Fund had the following net capital loss carryforwards remaining: |
| Year of Expiration | Amount | |||
| 11/30/2016 | $ | (10,249,973 | ) | |
| 11/30/2017 | (121,685,830 | ) | ||
| 11/30/2018 | (3,245,411 | ) | ||
| $ | (135,181,214 | ) | ||
These amounts will be available to offset any future taxable capital gains.
| (a) | Other book/tax temporary differences are attributable to passive activity losses disallowed for tax purposes on partnership interests and book/tax differences in the timing of the deductibility of various expenses. |
| (b) | The difference between book-basis and tax-basis unrealized appreciation (depreciation) is attributable to the tax deferral of losses on wash sales, the realization for tax purposes of unrealized gains on investments in passive foreign investment companies and the difference between the book and tax cost basis in limited partnership investments. |
| LMP Capital and Income Fund Inc. 2014 Annual Report | 29 |
Report of independent registered public accounting firm
The Board of Directors and Shareholders
LMP Capital and Income Fund Inc.:
We have audited the accompanying statement of assets and liabilities of LMP Capital and Income Fund Inc. (the “Fund”), including the schedule of investments, as of November 30, 2014, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the three-year period then ended, the period from January 1, 2011 to November 30, 2011 and each of the years in the two-year period ended December 31, 2010. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of November 30, 2014, by correspondence with the custodian and brokers or by 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of LMP Capital and Income Fund Inc. as of November 30, 2014, and the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the years in the two-year period then ended, and the financial highlights for each of the years in the three-year period then ended, the period from January 1, 2011 to November 30, 2011 and each of the years in the two-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
New York, New York
January 21, 2015
| 30 | LMP Capital and Income Fund Inc. 2014 Annual Report |
Board approval of management and subadvisory agreements (unaudited)
Background
The Investment Company Act of 1940, as amended (the “1940 Act”), requires that the Board of Directors (the “Board”) of LMP Capital and Income Fund, Inc. (the “Fund”), including a majority of its members that are not considered to be “interested persons” under the 1940 Act (the “Independent Directors”) voting separately, approve on an annual basis the continuation of the investment management contract (the “Management Agreement”) with the Fund’s manager, Legg Mason Partners Fund Advisor, LLC (the “Manager”), and the sub-advisory agreements (individually, a “Sub-Advisory Agreement,” and collectively, the “Sub-Advisory Agreements”) with the Manager’s affiliates, ClearBridge Investments, LLC (formerly ClearBridge Advisors, LLC) (“ClearBridge”), Western Asset Management Company (“Western Asset”) and Western Asset Management Company Limited in London (“Western Asset London,” and with ClearBridge and Western Asset, collectively, the “Sub-Advisers”). At a meeting (the “Contract Renewal Meeting”) held in-person on November 12 and 13, 2014, the Board, including the Independent Directors, considered and approved the continuation of each of the Management Agreement and the Sub-Advisory Agreements for an additional one-year term. To assist in its consideration of the renewals of the Management Agreement and the Sub-Advisory Agreements, the Board received and considered a variety of information (together with the information provided at the Contract Renewal Meeting, the “Contract Renewal Information”) about the Manager and the Sub-Advisers, as well as the management and sub-advisory arrangements for the Fund and the other closed-end funds in the same complex under the Board’s supervision (collectively, the “Legg Mason Closed-end Funds”), certain portions of which are discussed below. A presentation made by the Manager and Western Asset to the Board at the Contract Renewal Meeting in connection with its evaluations of the Management Agreement and the Sub-Advisory Agreements encompassed the Fund and other Legg Mason Closed-end Funds. ClearBridge also made a presentation to the Board at the Contract Renewal Meeting regarding its subadvisory services to the Fund. In addition to the Contract Renewal Information, the Board received performance and other information throughout the year related to the respective services rendered by the Manager and the Sub-Advisers to the Fund. The Board’s evaluation took into account the information received throughout the year and also reflected the knowledge and familiarity gained as members of the Boards of the Fund and other Legg Mason Closed-end Funds with respect to the services provided to the Fund by the Manager and the Sub-Advisers.
The Manager provides the Fund with investment advisory and administrative services pursuant to the Management Agreement and the Sub-Advisers together provide the Fund with certain investment sub-advisory services pursuant to the Sub-Advisory Agreements. The discussion below covers both the advisory and administrative functions being rendered by the Manager, each such function being encompassed by the Management Agreement, and the investment sub-advisory functions being rendered by the Sub-Advisers.
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Board approval of management and subadvisory agreements (unaudited) (cont’d)
Board Approval of Management Agreement and Sub-Advisory Agreements
In its deliberations regarding renewal of the Management Agreement and the Sub-Advisory Agreements, the Board, including the Independent Directors, considered the factors below.
Nature, Extent and Quality of the Services under the Management Agreement and Sub-Advisory Agreements
The Board received and considered Contract Renewal Information regarding the nature, extent and quality of services provided to the Fund by the Manager and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, during the past year. The Board also reviewed Contract Renewal Information regarding the Fund’s compliance policies and procedures established pursuant to the 1940 Act.
The Board considered the qualifications, backgrounds and responsibilities of the Fund’s senior personnel and the portfolio management team primarily responsible for the day-to-day portfolio management of the Fund. The Board also considered, based on its knowledge of the Manager and its affiliates, the Contract Renewal Information and the Board’s discussions with the Manager, ClearBridge and Western Asset at the Contract Renewal Meeting, the general reputation and investment performance records of the Manager, ClearBridge and Western Asset and their affiliates and the financial resources available to the corporate parent of the Manager and the Sub-Advisers, Legg Mason, Inc. (“Legg Mason”), to support their activities in respect of the Fund and the other Legg Mason Closed-end Funds.
The Board considered the responsibilities of the Manager and the Sub-Advisers under the Management Agreement and the Sub-Advisory Agreements, respectively, including the Manager’s coordination and oversight of the services provided to the Fund by ClearBridge, Western Asset and others and Western Asset’s coordination and oversight of the services provided to the Fund by Western Asset London. The Management Agreement permits the Manager to delegate certain of its responsibilities, including its investment advisory duties thereunder, provided that the Manager, in each case, will supervise the activities of the delegee. Pursuant to this provision of the Management Agreement, the Manager does not provide day-to-day portfolio management services to the Fund. Rather, portfolio management services for the Fund are provided by Western Asset pursuant to the Sub-Advisory Agreement (the “Western Asset Sub-Advisory Agreement”) between the Manager and Western Asset and by ClearBridge pursuant to the Sub-Advisory Agreement between the Manager and ClearBridge. The Western Asset Sub-Advisory Agreement permits Western Asset to delegate certain of its responsibilities, including its investment sub-advisory duties thereunder, provided that Western Asset, in each case, will supervise the activities of the delegee. Pursuant to this provision of the Western Asset Sub-Advisory Agreement, Western Asset London helps Western Asset to provide portfolio management services to the Fund pursuant to a separate Sub-Advisory Agreement between Western Asset and Western Asset London. The Board also considered the brokerage policies and practices of the Manager and ClearBridge, the standards applied in seeking best execution, the policies and
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practices of the Manager and ClearBridge regarding soft dollars, the use of a broker affiliated with the Manager or ClearBridge, and the existence of quality controls applicable to brokerage allocation procedures.
In reaching its determinations regarding continuation of the Management Agreement and the Sub-Advisory Agreements, the Board took into account that Fund shareholders, in pursuing their investment goals and objectives, likely purchased their shares based upon the reputation and the particular investment style, philosophy and strategy of the Manager, ClearBridge and Western Asset, as well as the resources available to the Manager and the Sub-Advisers.
The Board concluded that, overall, the nature, extent and quality of the management and other services provided to the Fund under the Management Agreement and the Sub-Advisory Agreements have been satisfactory under the circumstances.
Fund Performance
The Board received and considered performance information and analyses (the “Lipper Performance Information”) for the Fund, as well as for a group of funds (the “Performance Universe”) selected by Lipper, Inc. (“Lipper”), an independent provider of investment company data. The Board was provided with a description of the methodology Lipper used to determine the similarity of the Fund with the funds included in the Performance Universe. The Performance Universe included the Fund and all leveraged income and preferred stock closed-end funds, as classified by Lipper, regardless of asset size. The Performance Universe ranged from a low of seventeen funds, including the Fund, for the 10-year period ended June 30, 2014 to a high of twenty-three funds, including the Fund, for the 1-year period ended such date. The Board noted that it had received and discussed with the Manager, ClearBridge and Western Asset information throughout the year at periodic intervals comparing the Fund’s performance against its benchmark and its peer funds as selected by Lipper.
The Lipper Performance Information comparing the Fund’s performance to that of the Performance Universe based on net asset value per share showed, among other things, that the Fund’s performance for each of the 1- and 3-year periods ended June 30, 2014 was ranked in the first quintile among the funds in the Performance Universe for that period. The Fund’s performance was ranked in the third quintile among the funds in the Performance Universe for the 5-year period ended June 30, 2014 and was ranked in the second quintile in its Performance Universe for the 10-year period ended such date. In these performance rankings, the first quintile represents funds with the best performance among the funds in the Performance Universe and the fifth quintile represents funds with poorest performance among the funds in the Performance Universe. The Fund’s performance was better than the Performance Universe median for each such period. In addition to the Fund’s performance relative to the Performance Universe, the Board considered the Fund’s performance in absolute terms and relative to its benchmark. On a net asset value basis, the Fund outperformed its benchmark in each of the 1-, 3-, 5- and 10-year periods ended June 30, 2014.
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Board approval of management and subadvisory agreements (unaudited) (cont’d)
Based on the reviews and discussions of Fund performance and considering other relevant factors, including those noted above, the Board concluded that, under the circumstances, continuation of the Management Agreement and the Sub-Advisory Agreements for an additional one-year period would be consistent with the interests of the Fund and its shareholders.
Management Fees and Expense Ratios
The Board reviewed and considered the management fee (the “Management Fee”) payable by the Fund to the Manager under the Management Agreement and the sub-advisory fees (the “Sub-Advisory Fees”) payable to the Sub-Advisers under the Sub-Advisory Agreements in light of the nature, extent and overall quality of the management, investment advisory and other services provided by the Manager and the Sub-Advisers. The Board noted that the Sub-Advisory Fees payable to ClearBridge and Western Asset under their Sub-Advisory Agreements with the Manager are paid by the Manager, not the Fund, and, accordingly, that the retention of ClearBridge and Western Asset does not increase the fees or expenses otherwise incurred by the Fund’s shareholders. Similarly, the Board noted that the Sub-Advisory Fees payable to Western Asset London under its Sub-Advisory Agreement with Western Asset are paid by Western Asset, not the Fund, and, accordingly, that the retention of Western Asset London does not increase the fees or expenses otherwise incurred by the Fund’s shareholders.
Additionally, the Board received and considered information and analyses prepared by Lipper (the “Lipper Expense Information”) comparing the Management Fee and the Fund’s overall expenses with those of funds in an expense group (the “Expense Group”) selected and provided by Lipper. The comparison was based upon the constituent funds’ latest fiscal years. The Expense Group consisted of the Fund and seven other leveraged income and preferred stock closed-end funds, as classified by Lipper. The nine funds in the Expense Group had average net common share assets ranging from $91.5 million to $566.8 million. Three of the other funds in the Expense Group were larger than the Fund and four were smaller.
The Lipper Expense Information, comparing the Management Fee as well as the Fund’s actual total expenses to the Fund’s Expense Group, showed, among other things, that the Fund’s contractual Management Fee was ranked sixth among the funds in the Expense Group (first being lowest and, therefore, best in these expense component rankings) and was worse (i.e., higher) than the Expense Group median for that expense component. The Fund’s actual Management Fee (i.e., giving effect to any voluntary fee waivers implemented by the Manager with respect to the Fund and by the managers of the other Expense Group funds) was ranked fifth among the funds in the Expense Group compared on the basis of common share assets only and was at the Expense Group median for that expense component. The Fund’s actual Management Fee was ranked sixth among the funds in the Expense Group compared on the basis of common share and leveraged assets and was worse than the Expense Group median for that expense component. The Fund’s actual total expenses
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ranked second among the funds in the Expense Group on the basis of common share assets only, and ranked fifth among the funds in the Expense Group on the basis of common share and leveraged assets. In each case, the Fund’s actual total expenses were better than the Expense Group median for that expense component. The Board noted that the small number of funds in the Expense Group made meaningful expense comparisons difficult.
The Board also reviewed Contract Renewal Information regarding fees charged by the Manager to other U.S. clients investing primarily in an asset class similar to that of the Fund, including, where applicable, institutional and separate accounts. The Board was advised that the fees paid by such institutional, separate account and other clients (collectively, “institutional clients”) generally are lower, and may be significantly lower, than the Management Fee. The Contract Renewal Information discussed the significant differences in scope of services provided to the Fund and to institutional clients. Among other things, institutional clients have fewer compliance, administration and other needs than the Fund and the Fund is subject not only to heightened regulatory requirements relative to institutional clients but also to requirements for listing on the New York Stock Exchange. The Contract Renewal Information noted further that the Fund is provided with administrative services, office facilities, Fund officers (including the Fund’s chief executive, chief financial and chief compliance officers), and that the Manager coordinates and oversees the provision of services to the Fund by other fund service providers. The Contract Renewal Information included information regarding management fees paid by open-end mutual funds in the same complex (the “Legg Mason Open-end Funds”) and such information indicated that the management fees paid by the Legg Mason Closed-end Funds generally were higher than those paid by the Legg Mason Open-end Funds. The Manager, in response to an inquiry from the Board as to the reasons for the fee differential, provided information as to differences between the services provided to the Fund and the other Legg Mason Closed-end Funds and the services provided to the Legg Mason Open-end Funds. The Board considered the fee comparisons in light of the different services provided in managing these other types of clients and funds.
Taking all of the above into consideration, the Board determined that the Management Fee and the Sub-Advisory Fees were reasonable in light of the nature, extent and overall quality of the management, investment advisory and other services provided to the Fund under the Management Agreement and the Sub-Advisory Agreements.
Manager Profitability
The Board, as part of the Contract Renewal Information, received an analysis of the profitability to the Manager and its affiliates in providing services to the Fund for the Manager’s fiscal years ended March 31, 2014 and March 31, 2013. The Board also received profitability information with respect to the Legg Mason fund complex as a whole. In addition, the Board received Contract Renewal Information with respect to the Manager’s revenue and cost allocation methodologies used in preparing such profitability data. The Board received a report from an outside consultant engaged by the Manager that had reviewed
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Board approval of management and subadvisory agreements (unaudited) (cont’d)
the Manager’s revenue and cost allocation methodologies. The profitability to each of the Sub-Advisers was not considered to be a material factor in the Board’s considerations since the Sub-Advisers’ fees are paid by the Manager in the case of ClearBridge and Western Asset and by Western Asset in the case of Western Asset London. The profitability analysis presented to the Board as part of the Contract Renewal Information indicated that profitability to the Manager had increased by 15 percent during the period covered by the analysis but remained at a level that was not considered to be excessive by the Board in light of judicial guidance and the nature, extent and overall quality of the investment advisory and other services provided to the Fund by the Manager and the Sub-Advisers.
Economies of Scale
The Board received and discussed Contract Renewal Information concerning whether the Manager realizes economies of scale if the Fund’s assets grow. The Board noted that because the Fund is a closed-end fund with no current plans to seek additional assets beyond maintaining its dividend reinvestment plan, any significant growth in its assets generally will occur through appreciation in the value of the Fund’s investment portfolio, rather than sales of additional shares in the Fund. The Board determined that the Management Fee structure, which incorporates no breakpoints reducing the Management Fee at specified increased asset levels, was appropriate under present circumstances.
Other Benefits to the Manager and the Sub-Advisers
The Board considered other benefits received by the Manager, the Sub-Advisers and their affiliates as a result of their relationship with the Fund, including the opportunity to obtain research services from brokers who effect Fund portfolio transactions, and did not regard such benefits as excessive.
* * * * * *
In light of all of the foregoing and other relevant factors, the Board determined that, under the circumstances, continuation of the Management Agreement and the Sub-Advisory Agreements would be consistent with the interests of the Fund and its shareholders and unanimously voted to continue each Agreement for a period of one additional year. No single factor reviewed by the Board was identified by the Board as the principal factor in determining whether to approve continuation of the Management Agreement and the Sub-Advisory Agreements, and each Board member attributed different weights to the various factors. The Independent Directors were advised by separate independent legal counsel throughout the process. Prior to the Contract Renewal Meeting, the Board received a memorandum prepared by the Manager discussing its responsibilities in connection with the proposed continuation of the Management Agreement and the Sub-Advisory Agreements as part of the Contract Renewal Information and the Independent Directors separately received a memorandum discussing such responsibilities from their independent counsel. Prior to voting, the Independent Directors also discussed the proposed continuation of the Management Agreement and the Sub-Advisory Agreements in private sessions with their independent legal counsel at which no representatives of the Manager or any Sub-Adviser were present.
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Additional information (unaudited)
Information about Directors and Officers
The business and affairs of LMP Capital and Income Fund Inc. (the “Fund”) are conducted by management under the supervision and subject to the direction of its Board of Directors. The business address of each Director is c/o Kenneth D. Fuller, Legg Mason, 100 International Drive, 11th Floor, Baltimore, Maryland 21202. Information pertaining to the Directors and officers of the Fund is set forth below.
| Independent Directors†: | ||
| Robert D. Agdern1 | ||
| Year of birth | 1950 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class III | |
| Term of office2 and length of time served | Since 2015 | |
| Principal occupation(s) during past five years | Member of the Advisory Committee of the Dispute Resolution Research Center at the Kellogg Graduate School of Business, Northwestern University (since 2002); Deputy General Counsel responsible for western hemisphere matters for BP PLC (1999 to 2001); Associate General Counsel at Amoco Corporation responsible for corporate, chemical, and refining and marketing matters and special assignments (1993 to 1998) (Amoco merged with British Petroleum in 1998 forming BP PLC) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
| Carol L. Colman | ||
| Year of birth | 1946 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class I | |
| Term of office2 and length of time served | Since 2003 | |
| Principal occupation(s) during past five years | President, Colman Consulting Company (consulting) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
| Daniel P. Cronin | ||
| Year of birth | 1946 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class I | |
| Term of office2 and length of time served | Since 2003 | |
| Principal occupation(s) during past five years | Retired; formerly, Associate General Counsel, Pfizer Inc. (prior to and including 2004) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
| LMP Capital and Income Fund Inc. | 37 |
Additional information (unaudited) (cont’d)
Information about Directors and Officers
| Independent Directors cont’d | ||
| Paolo M. Cucchi | ||
| Year of birth | 1941 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class I | |
| Term of office2 and length of time served | Since 2007 | |
| Principal occupation(s) during past five years | Emeritus Professor of French and Italian (since 2014) and formerly, Professor of French and Italian (2009 to 2014) at Drew University; formerly, Vice President and Dean of College of Liberal Arts at Drew University (1984 to 2009) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
| Leslie H. Gelb | ||
| Year of birth | 1937 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class II | |
| Term of office2 and length of time served | Since 2003 | |
| Principal occupation(s) during past five years | President Emeritus and Senior Board Fellow (since 2003), The Council on Foreign Relations; formerly, President, (prior to 2003), the Council on Foreign Relations; formerly, Columnist, Deputy Editorial Page Editor and Editor, Op-Ed Page, The New York Times | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | Director of two registered investment companies advised by Aberdeen Asset Management Asia Limited (since 1994) | |
| William R. Hutchinson | ||
| Year of birth | 1942 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class II | |
| Term of office2 and length of time served | Since 2003 | |
| Principal occupation(s) during past five years | President, W.R. Hutchinson & Associates Inc. (Consulting) (since 2001) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | Director (Non-Executive Chairman of the Board (since December 1, 2009)), Associated Banc Corp. (banking) (since 1994) | |
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| Independent Directors cont’d | ||
| Eileen A. Kamerick | ||
| Year of birth | 1958 | |
| Position(s) held with Fund2 | Director and Member of Nominating and Audit Committees, Class III | |
| Term of office2 and length of time served | Since 2013 | |
| Principal occupation(s) during past five years | Adjunct Professor, Washington University in St. Louis and University of Iowa law schools and Consultant, corporate governance matters (since 2014); formerly CFO, Press Ganey Associates (health care informatics company) (2012-2014); Managing Director and CFO, Houlihan Lokey (international investment bank and advisory firm) (2010 to 2012); Senior Vice President, CFO & CLO, Tecta America Corp (commercial roofing company) (2008 to 2010); Executive Vice President and CFO, Bearing Point Inc. (management and technology consulting firm) (2008); Executive Vice President, CFO and CAO Heidrick & Struggles (international executive search and leadership consulting firm) (2004 to 2008) | |
| Number of portfolios in fund complex everseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | Director of Associated Banc-Corp (financial services company) (since 2007); Westell Technologies, Inc. (technology company) (since 2003) | |
| Riordan Roett | ||
| Year of birth | 1938 | |
| Position(s) held with Fund2 | Director and Member of the Nominating and Audit Committees, Class III | |
| Term of office2 and length of time served | Since 2003 | |
| Principal occupation(s) during past five years | The Sarita and Don Johnston Professor of Political Science and Director of Western Hemisphere Studies, Paul H. Nitze School of Advanced International Studies, The John Hopkins University (since 1973) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 31 | |
| Other board memberships held by Director during past five years | None | |
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Additional information (unaudited) (cont’d)
Information about Directors and Officers
| Interested Director and Officer: | ||
| Kenneth D. Fuller3 | ||
| Year of birth | 1958 | |
| Position(s) held with Fund2 | Director, Chairman, President and Chief Executive Officer, Class II | |
| Term of office2 and length of time served | Since 2013 | |
| Principal occupation(s) during past five years | Managing Director of Legg Mason & Co., LLC (“Legg Mason & Co.”) (since 2013); Officer and/or Trustee/Director of 173 funds associated with Legg Mason Partners Fund Advisor, LLC (“LMPFA”) or its affiliates (since 2013); President and Chief Executive Officer of LM Asset Services, LLC (“LMAS”) and Legg Mason Fund Asset Management, Inc. (“LMFAM”) (formerly registered investment advisers) (since 2013); formerly, Senior Vice President of LMPFA (2012 to 2013); formerly, Director of Legg Mason & Co. (2012 to 2013); formerly, Vice President of Legg Mason & Co. (2009 to 2012); formerly, Vice President — Equity Division of T. Rowe Price Associates (1993 to 2009), as well as Investment Analyst and Portfolio Manager for certain asset allocation accounts (2004 to 2009) | |
| Number of portfolios in fund complex overseen by Director (including the Fund) | 161 | |
| Other board memberships held by Director during past five years | None | |
| Additional Officers: | ||
| Ted P. Becker 620 Eighth Avenue, 49th Floor, New York, NY 10018 |
||
| Year of birth | 1951 | |
| Position(s) held with Fund2 | Chief Compliance Officer | |
| Term of office2 and length of time served | Since 2006 | |
| Principal occupation(s) during past five years | Director of Global Compliance at Legg Mason (since 2006); Chief Compliance Officer of LMPFA (since 2006); Managing Director of Compliance of Legg Mason & Co. (since 2005); Chief Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) |
| 40 | LMP Capital and Income Fund Inc. |
| Additional Officers cont’d | ||
| Vanessa A. Williams 100 First Stamford Place, 6th Floor, Stamford, CT 06902 |
||
| Year of birth | 1979 | |
| Position(s) with Fund2 | Identity Theft Prevention Officer | |
| Term of office2 and length of time served | Since 2011 | |
| Principal occupation(s) during past five years | Vice President of Legg Mason & Co. (since 2012); Identity Theft Prevention Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011); formerly, Chief Anti-Money Laundering Compliance Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (2011 to 2013); formerly, Senior Compliance Officer of Legg Mason & Co. (2008 to 2011); formerly, Compliance Analyst of Legg Mason & Co. (2006 to 2008) and Legg Mason & Co. predecessors (prior to 2006) | |
| Robert I. Frenkel 100 First Stamford Place, 6th Floor, Stamford, CT 06902 |
||
| Year of birth | 1954 | |
| Position(s) held with Fund2 | Secretary and Chief Legal Officer | |
| Term of office2 and length of time served | Since 2003 | |
| Principal occupation(s) during past five years | Vice President and Deputy General Counsel of Legg Mason (since 2006); Managing Director and General Counsel of Global Mutual Funds for Legg Mason & Co. (since 2006) and Legg Mason & Co. predecessors (since 1994); Secretary and Chief Legal Officer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006) | |
| Thomas C. Mandia 100 First Stamford Place, 6th Floor, Stamford, CT 06902 |
||
| Year of birth | 1962 | |
| Position(s) held with Fund2 | Assistant Secretary | |
| Term of office2 and length of time served | Since 2006 | |
| Principal occupation(s) during past five years | Managing Director and Deputy General Counsel of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005); Secretary of LMPFA (since 2006); Assistant Secretary of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2006) and Legg Mason & Co. predecessors (prior to 2006); Secretary of SBFM (since 2002) and LMFAM (since 2013) | |
| LMP Capital and Income Fund Inc. | 41 |
Additional information (unaudited) (cont’d)
Information about Directors and Officers
| Additional Officers cont’d | ||
| Richard F. Sennett 100 International Drive, 7th Floor, Baltimore, MD 21202 |
||
| Year of birth | 1970 | |
| Position(s) held with Fund2 | Principal Financial Officer | |
| Term of office2 and length of time served | Since 2011 | |
| Principal occupation(s) during past five years | Principal Financial Officer and Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2011 and 2013); Managing Director of Legg Mason & Co. and Senior Manager of the Treasury Policy group for Legg Mason & Co.’s Global Fiduciary Platform (since 2011); formerly, Chief Accountant within the SEC’s Division of Investment Management (2007 to 2011); formerly, Assistant Chief Accountant within the SEC’s Division of Investment Management (2002 to 2007) | |
| Steven Frank 620 Eighth Avenue, 49th Floor, New York, NY 10018 |
||
| Year of birth | 1967 | |
| Position(s) held with Fund2 | Treasurer | |
| Term of office2 and length of time served | Since 2010 | |
| Principal occupation(s) during past five years | Vice President of Legg Mason & Co. and Legg Mason & Co. predecessors (since 2002); Treasurer of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2010); formerly, Controller of certain mutual funds associated with Legg Mason & Co. or its affiliates (prior to 2010) | |
| Jeanne M. Kelly 620 Eighth Avenue, 49th Floor, New York, NY 10018 |
||
| Year of birth | 1951 | |
| Position(s) with Fund2 | Senior Vice President | |
| Term of office2 and length of time served | Since 2007 | |
| Principal occupation(s) during past five years | Senior Vice President of certain mutual funds associated with Legg Mason & Co. or its affiliates (since 2007); Senior Vice President of LMPFA (since 2006) and LMFAM (since 2013); Managing Director of Legg Mason & Co. (since 2005) and Legg Mason & Co. predecessors (prior to 2005) | |
| † | Directors who are not “interested persons” of the Fund within the meaning of Section 2(a)(19) of the 1940 Act. |
| 1 | Effective January 1, 2015, Mr. Agdern became a Director. |
| 2 | The Fund’s Board of Directors is divided into three classes: Class I, Class II and Class III. The terms of office of the Class I, II and III Directors expire at the Annual Meetings of Stockholders in the year 2015, year 2016 and year 2017, respectively, or thereafter in each case when their respective successors are duly elected and qualified. The Fund’s executive officers are chosen each year at the first meeting of the Fund’s Board of Directors following the Annual Meeting of Stockholders, to hold office until the meeting of the Board following the next Annual Meeting of Stockholders and until their successors are duly elected and qualified. |
| 3 | Mr. Fuller is an “interested person” of the Fund as defined in the 1940 Act because Mr. Fuller is an officer of LMPFA and certain of its affiliates. |
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Annual chief executive officer and
principal financial officer certifications (unaudited)
The Fund’s Chief Executive Officer (“CEO”) has submitted to the NYSE the required annual certification and the Fund also has included the certifications of the Fund’s CEO and Principal Financial Officer required by Section 302 of the Sarbanes-Oxley Act in the Fund’s Form N-CSR filed with the SEC for the period of this report.
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Other shareholder communications regarding accounting
matters (unaudited)
The Fund’s Audit Committee has established guidelines and procedures regarding the receipt, retention and treatment of complaints regarding accounting, internal accounting controls or auditing matters (collectively, “Accounting Matters”). Persons with complaints or concerns regarding Accounting Matters may submit their complaints to the Chief Compliance Officer (“CCO”). Persons who are uncomfortable submitting complaints to the CCO, including complaints involving the CCO, may submit complaints directly to the Fund’s Audit Committee Chair. Complaints may be submitted on an anonymous basis.
The CCO may be contacted at:
Legg Mason & Co., LLC
Compliance Department
620 Eighth Avenue, 49th Floor
New York, New York 10018
Complaints may also be submitted by telephone at 1-800-742-5274. Complaints submitted through this number will be received by the CCO.
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Dividend reinvestment plan (unaudited)
Unless you elect to receive distributions in cash, all distributions, on your Common Shares will be automatically reinvested by American Stock Transfer & Trust Company, as agent for the Common Shareholders (the “Plan Agent”), in additional Common Shares under the Dividend Reinvestment Plan (the “Plan”). You may elect not to participate in the Plan by contacting the Plan Agent. If you do not participate, you will receive all cash distributions paid by check mailed directly to you by American Stock Transfer & Trust Company as dividend paying agent.
If you participate in the Plan, the number of Common Shares you will receive will be determined as follows:
(1) If the market price of the Common Shares on the record date (or, if the record date is not a New York Stock Exchange trading day, the immediately preceding trading day) for determining shareholders eligible to receive the relevant distribution (the “determination date”) is equal to or exceeds the net asset value per share of the Common Shares, the Fund will issue new Common Shares at a price equal to the greater of (a) the net asset value per share at the close of trading on the Exchange on the determination date or (b) 95% of the market price per share of the Common Shares on the determination date.
(2) If the net asset value per share of the Common Shares exceeds the market price of the Common Shares on the determination date, the Plan Agent will receive the distribution in cash and will buy Common Shares in the open market, on the Exchange or elsewhere, for your account as soon as practicable commencing on the trading day following the determination date and terminating no later than the earlier of (a) 30 days after the distribution payment date, or (b) the record date for the next succeeding distribution to be made to the Common Shareholders; except when necessary to comply with applicable provisions of the federal securities laws. If during this period: (i) the market price rises so that it equals or exceeds the net asset value per share of the Common Shares at the close of trading on the Exchange on the determination date before the Plan Agent has completed the open market purchases or (ii) if the Plan Agent is unable to invest the full amount eligible to be reinvested in open market purchases, the Plan Agent will cease purchasing Common Shares in the open market and the Fund shall issue the remaining Common Shares at a price per share equal to the greater of (a) the net asset value per share at the close of trading on the Exchange on the determination date or (b) 95% of the then current market price per share.
The Plan Agent maintains all participants’ accounts in the Plan and gives written confirmation of all transactions in the accounts, including information you may need for tax records. Common Shares in your account will be held by the Plan Agent in non-certified form. Any proxy you receive will include all Common Shares you have received under the Plan.
| LMP Capital and Income Fund Inc. | 45 |
Dividend reinvestment plan (unaudited) (cont’d)
You may withdraw from the Plan by notifying the Plan Agent in writing at 6201 15th Avenue, Brooklyn, New York 11219. Such withdrawal will be effective immediately if notice is received by the Plan Agent not less than ten business days prior to any dividend or distribution record date; otherwise such withdrawal will be effective as soon as practicable after the Plan Agent’s investment of the most recently declared dividend or distribution on the Common Shares. The Plan may be terminated by the Fund upon notice in writing mailed to Common Shareholders at least 30 days prior to the record date for the payment of any dividend or distribution by the Fund for which the termination is to be effective. Upon any termination, you will be sent a certificate or certificates for the full Common Shares held for you under the Plan and cash for any fractional Common Shares. You may elect to notify the Plan Agent in advance of such termination to have the Plan Agent sell part or all of your shares on your behalf. The Plan Agent is authorized to deduct brokerage charges actually incurred for this transaction from the proceeds.
There is no service charge for reinvestment of your dividends or distributions in Common Shares. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. Because all dividends and distributions will be automatically reinvested in additional Common Shares, this allows you to add to your investment through dollar cost averaging, which may lower the average cost of your Common Shares over time.
Automatically reinvesting dividends and distributions does not mean that you do not have to pay income taxes due upon receiving dividends and distributions.
The Fund reserves the right to amend or terminate the Plan if, in the judgment of the Board of Directors, the change is warranted. There is no direct service charge to participants in the Plan; however, the Fund reserves the right to amend the Plan to include a service charge payable by the participants. Additional information about the Plan and your account may be obtained from the Plan Agent at 1-888-888-0151.
| 46 | LMP Capital and Income Fund Inc. |
Important tax information (unaudited)
The following information is provided with respect to the distributions paid during the taxable year ended November 30, 2014:
| Record date: | 12/20/2013 | 3/21/2014 | 6/20/2014 | 9/19/2014 | ||||||||||||
| Payable date: | 12/27/2013 | 3/28/2014 | 6/27/2014 | 9/26/2014 | ||||||||||||
| Ordinary income: | ||||||||||||||||
| Qualified dividend income for individuals |
14.92 | % | 47.37 | % | 47.37 | % | 47.37 | % | ||||||||
| Dividends qualifying for the dividends |
||||||||||||||||
| received deduction for corporations |
21.99 | % | 38.02 | % | 38.02 | % | 38.02 | % |
Please retain this information for your records.
| LMP Capital and Income Fund Inc. | 47 |
LMP
Capital and Income Fund Inc.
Directors
Robert D. Agdern*
Carol L. Colman
Daniel P. Cronin
Paolo M. Cucchi
Kenneth D. Fuller
Chairman
Leslie H. Gelb
William R. Hutchinson
Eileen A. Kamerick
Riordan Roett
Officers
Kenneth D. Fuller
President and Chief Executive Officer
Richard F. Sennett
Principal Financial Officer
Ted P. Becker
Chief Compliance Officer
Vanessa A. Williams
Identity Theft Prevention Officer
Robert I. Frenkel
Secretary and Chief Legal Officer
Thomas C. Mandia
Assistant Secretary
Steven Frank
Treasurer
Jeanne M. Kelly
Senior Vice President
| * | Effective January 1, 2015, Mr. Agdern became a Director. |
LMP Capital and Income Fund Inc.
620 Eighth Avenue
49th Floor
New York, NY 10018
Investment manager
Legg Mason Partners Fund Advisor, LLC
Subadvisers
ClearBridge Investments, LLC
Western Asset Management Company
Western Asset Management Company Limited
Custodian
State Street Bank and Trust Company
1 Lincoln Street
Boston, MA 02111
Transfer agent
American Stock Transfer & Trust Company 6201 15th Avenue
Brooklyn, NY 11219
Independent registered public accounting firm
KPMG LLP
345 Park Avenue
New York, NY 10154
Legal counsel
Simpson Thacher & Bartlett LLP
425 Lexington Avenue
New York, NY 10017
New York Stock Exchange Symbol
SCD
Legg Mason Funds Privacy and Security Notice
Your Privacy and the Security of Your Personal Information is Very Important to the Legg Mason Funds
This Privacy and Security Notice (the “Privacy Notice”) addresses the Legg Mason Funds’ privacy and data protection practices with respect to nonpublic personal information the Funds receive. The Legg Mason Funds include any funds sold by the Funds’ distributor, Legg Mason Investor Services, LLC, as well as Legg Mason-sponsored closed-end funds and certain closed-end funds managed or sub-advised by Legg Mason or its affiliates. The provisions of this Privacy Notice apply to your information both while you are a shareholder and after you are no longer invested with the Funds.
The Type of Nonpublic Personal Information the Funds Collect About You
The Funds collect and maintain nonpublic personal information about you in connection with your shareholder account. Such information may include, but is not limited to:
| Ÿ | Personal information included on applications or other forms; |
| Ÿ | Account balances, transactions, and mutual fund holdings and positions; |
| Ÿ | Online account access user IDs, passwords, security challenge question responses; and |
| Ÿ | Information received from consumer reporting agencies regarding credit history and creditworthiness (such as the amount of an individual’s total debt, payment history, etc.). |
How the Funds Use Nonpublic Personal Information About You
The Funds do not sell or share your nonpublic personal information with third parties or with affiliates for their marketing purposes, or with other financial institutions or affiliates for joint marketing purposes, unless you have authorized the Funds to do so. The Funds do not disclose any nonpublic personal information about you except as may be required to perform transactions or services you have authorized or as permitted or required by law. The Funds may disclose information about you to:
| Ÿ | Employees, agents, and affiliates on a “need to know” basis to enable the Funds to conduct ordinary business or comply with obligations to government regulators; |
| Ÿ | Service providers, including the Funds’ affiliates, who assist the Funds as part of the ordinary course of business (such as printing, mailing services, or processing or servicing your account with us) or otherwise perform services on the Funds’ behalf, including companies that may perform marketing services solely for the Funds; |
| Ÿ | The Funds’ representatives such as legal counsel, accountants and auditors; and |
| Ÿ | Fiduciaries or representatives acting on your behalf, such as an IRA custodian or trustee of a grantor trust. |
| NOT PART OF THE ANNUAL REPORT |
Legg Mason Funds Privacy and Security Notice (cont’d)
Except as otherwise permitted by applicable law, companies acting on the Funds’ behalf are contractually obligated to keep nonpublic personal information the Funds provide to them confidential and to use the information the Funds share only to provide the services the Funds ask them to perform.
The Funds may disclose nonpublic personal information about you when necessary to enforce their rights or protect against fraud, or as permitted or required by applicable law, such as in connection with a law enforcement or regulatory request, subpoena, or similar legal process. In the event of a corporate action or in the event a Fund service provider changes, the Funds may be required to disclose your nonpublic personal information to third parties. While it is the Funds’ practice to obtain protections for disclosed information in these types of transactions, the Funds cannot guarantee their privacy policy will remain unchanged.
Keeping You Informed of the Funds’ Privacy and Security Practices
The Funds will notify you annually of their privacy policy as required by federal law. While the Funds reserve the right to modify this policy at any time they will notify you promptly if this privacy policy changes.
The Funds’ Security Practices
The Funds maintain appropriate physical, electronic and procedural safeguards designed to guard your nonpublic personal information. The Funds’ internal data security policies restrict access to your nonpublic personal information to authorized employees, who may use your nonpublic personal information for Fund business purposes only.
Although the Funds strive to protect your nonpublic personal information, they cannot ensure or warrant the security of any information you provide or transmit to them, and you do so at your own risk. In the event of a breach of the confidentiality or security of your nonpublic personal information, the Funds will attempt to notify you as necessary so you can take appropriate protective steps. If you have consented to the Funds using electronic communications or electronic delivery of statements, they may notify you under such circumstances using the most current email address you have on record with them.
In order for the Funds to provide effective service to you, keeping your account information accurate is very important. If you believe that your account information is incomplete, not accurate or not current, or if you have questions about the Funds’ privacy practices, write the Funds using the contact information on your account statements, email the Funds by clicking on the Contact Us section of the Funds’ website at www.leggmason.com, or contact the Fund at 1-888-777-0102.
Revised April 2011
| NOT PART OF THE ANNUAL REPORT |
LMP Capital and Income Fund Inc.
LMP Capital and Income Fund Inc.
620 Eighth Avenue
49th Floor
New York, NY 10018
Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market prices, shares of its common stock in the open market.
The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission (“SEC”) for the first and third quarters of each fiscal year on Form N-Q. The Fund’s Forms N-Q are available on the SEC’s website at www.sec.gov. The Fund’s Forms N-Q may be reviewed and copied at the SEC’s Public Reference Room in Washington D.C., and information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. To obtain information on Form N-Q from the Fund, shareholders can call 1-888-777-0102.
Information on how the Fund voted proxies relating to portfolio securities during the prior 12-month period ended June 30th of each year and a description of the policies and procedures that the Fund uses to determine how to vote proxies related to portfolio transactions are available (1) without charge, upon request, by calling 1-888-777-0102, (2) on the Fund’s website at www.lmcef.com and (3) on the SEC’s website at www.sec.gov.
This report is transmitted to the shareholders of LMP Capital and Income Fund Inc. for their information. This is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report.
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, NY 11219
FD03548 1/15 SR15-2387
| ITEM 2. | CODE OF ETHICS. |
The registrant has adopted a code of ethics that applies to the registrant’s principal executive officer, principal financial officer, principal accounting officer or controller.
| ITEM 3. | AUDIT COMMITTEE FINANCIAL EXPERT. |
The Board of Directors of the registrant has determine that Eileen A. Kamerick, a member of the Board’s Audit Committee, possesses the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an “audit committee financial expert” and that she is independent for purposes of this item.
| ITEM 4. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
a) Audit Fees. The aggregate fees billed in the last fiscal year ending November 30, 2013 and the fiscal period ending on November 30, 2014 (the “Reporting Periods”) for professional services rendered by the Registrant’s principal accountant (the “Auditor”) for the audit of the Registrant’s annual financial statements, or services that are normally provided by the Auditor in connection with the statutory and regulatory filings or engagements for the Reporting Periods, were $74,100 in 2013 and $74,800 in 2014.
b) Audit-Related Fees. The aggregate fees billed in the Reporting Period for assurance and related services by the Auditor that are reasonably related to the performance of the Registrant’s financial statements were $4,806 in 2013 and $4,089 in 2014. These services consisted of procedures performed in connection with the Re-domiciliation of the various reviews of Prospectus supplements, and consent issuances related to the N-1A filings for LMP Capital and Income Fund Inc.
(c) Tax Fees. The aggregate fees billed in the Reporting Periods for professional services rendered by the Auditor for tax compliance, tax advice and tax planning (“Tax Services”) were $7,100 in 2013 and $3,840 in 2014. These services consisted of (i) review or preparation of U.S. federal, state, local and excise tax returns; (ii) U.S. federal, state and local tax planning, advice and assistance regarding statutory, regulatory or administrative developments, and (iii) tax advice regarding tax qualification matters and/or treatment of various financial instruments held or proposed to be acquired or held.
There were no fees billed for tax services by the Auditors to service affiliates during the Reporting Periods that required pre-approval by the Audit Committee.
d) All Other Fees. There were no other fees billed in the Reporting Periods for products and services provided by the Auditor, other than the services reported in paragraphs (a) through (c) of this Item 4 for the LMP Capital and Income Fund Inc.
All Other Fees. There were no other non-audit services rendered by the Auditor to Legg Mason Partners Fund Advisors, LLC (“LMPFA”), and any entity controlling, controlled by or under common control with LMPFA that provided ongoing services to LMP Capital and Income Fund Inc. requiring pre-approval by the Audit Committee in the Reporting Period.
(e) Audit Committee’s pre-approval policies and procedures described in paragraph (c) (7) of Rule 2-01 of Regulation S-X.
(1) The Charter for the Audit Committee (the “Committee”) of the Board of each registered investment company (the “Fund”) advised by LMPFA or one of their affiliates (each, an “Adviser”) requires that the Committee shall approve (a) all
audit and permissible non-audit services to be provided to the Fund and (b) all permissible non-audit services to be provided by the Fund’s independent auditors to the Adviser and any Covered Service Providers if the engagement relates directly to the operations and financial reporting of the Fund. The Committee may implement policies and procedures by which such services are approved other than by the full Committee.
The Committee shall not approve non-audit services that the Committee believes may impair the independence of the auditors. As of the date of the approval of this Audit Committee Charter, permissible non-audit services include any professional services (including tax services), that are not prohibited services as described below, provided to the Fund by the independent auditors, other than those provided to the Fund in connection with an audit or a review of the financial statements of the Fund. Permissible non-audit services may not include: (i) bookkeeping or other services related to the accounting records or financial statements of the Fund; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service the Public Company Accounting Oversight Board determines, by regulation, is impermissible.
Pre-approval by the Committee of any permissible non-audit services is not required so long as: (i) the aggregate amount of all such permissible non-audit services provided to the Fund, the Adviser and any service providers controlling, controlled by or under common control with the Adviser that provide ongoing services to the Fund (“Covered Service Providers”) constitutes not more than 5% of the total amount of revenues paid to the independent auditors during the fiscal year in which the permissible non-audit services are provided to (a) the Fund, (b) the Adviser and (c) any entity controlling, controlled by or under common control with the Adviser that provides ongoing services to the Fund during the fiscal year in which the services are provided that would have to be approved by the Committee; (ii) the permissible non-audit services were not recognized by the Fund at the time of the engagement to be non-audit services; and (iii) such services are promptly brought to the attention of the Committee and approved by the Committee (or its delegate(s)) prior to the completion of the audit.
(2) For the LMP Capital and Income Fund Inc., the percentage of fees that were approved by the audit committee, with respect to: Audit-Related Fees were 100% and 100% for 2013 and 2014; Tax Fees were 100% and 100% for 2013 and 2014; and Other Fees were 100% and 100% for 2013 and 2014.
(f) N/A
(g) Non-audit fees billed by the Auditor for services rendered to LMP Capital and Income Fund Inc., LMPFA and any entity controlling, controlled by, or under common control with LMPFA that provides ongoing services to LMP Capital and Income Fund Inc. during the reporting period were $0 in 2014.
(h) Yes. LMP Capital and Income Fund Inc.’s Audit Committee has considered whether the provision of non-audit services that were rendered to Service Affiliates, which were not pre-approved (not requiring pre-approval), is compatible with maintaining the Accountant’s independence. All services provided by the Auditor to the LMP Capital and Income Fund Inc. or to Service Affiliates, which were required to be pre-approved, were pre-approved as required.
| ITEM 5. | AUDIT COMMITTEE OF LISTED REGISTRANTS. |
a) Registrant has a separately-designated standing Audit Committee established in accordance with Section 3(a)58(A) of the Exchange Act. The Audit Committee consists of the following Board members:
Robert D. Agdern (Effective January 1, 2015, Mr. Agdern became a member of the Audit Committee and the Board of Directors.)
William R. Hutchinson
Paolo M. Cucchi
Daniel P. Cronin
Carol L. Colman
Leslie H. Gelb
Eileen A. Kamerick
Dr. Riordan Roett
Jeswald W. Salacuse (Effective June 30, 2014, Mr. Salacuse retired from the Audit Committee and the Board of Directors.)
b) Not applicable
| ITEM 6. | SCHEDULE OF INVESTMENTS. |
Included herein under Item 1.
| ITEM 7. | DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
Proxy Voting Guidelines and Procedures
Legg Mason Partners Fund Advisor, LLC (“LMPFA”) delegates the responsibility for voting proxies for the fund to the subadviser through its contracts with the subadviser. The subadviser will use its own proxy voting policies and procedures to vote proxies. Accordingly, LMPFA does not expect to have proxy-voting responsibility for the fund. Should LMPFA become responsible for voting proxies for any reason, such as the inability of the subadviser to provide investment advisory services, LMPFA shall utilize the proxy voting guidelines established by the most recent subadviser to vote proxies until a new subadviser is retained.
The subadviser’s Proxy Voting Policies and Procedures govern in determining how proxies relating to the fund’s portfolio securities are voted and are provided below. Information regarding how each fund voted proxies (if any) relating to portfolio securities during the most recent 12-month period ended June 30 is available without charge (1) by calling 888-777-0102, (2) on the fund’s website at http://www.lmcef.com and (3) on the SEC’s website at http://www.sec.gov.
PROXY VOTING GUIDELINES & PROCEDURES SUMMARY
Concerning ClearBridge Investments, LLC
(formerly known as ClearBridge Advisors, LLC)
(“ClearBridge”)
Proxy Voting Policies and Procedures
ClearBridge is subject to the Proxy Voting Policies and Procedures that it has adopted to seek to ensure that it votes proxies relating to equity securities in the best interest of client accounts. The following is a brief overview of the policies.
ClearBridge votes proxies for each client account with respect to which it has been authorized or is required by law to vote proxies. In voting proxies, ClearBridge is guided by general fiduciary principles and seeks to act prudently and solely in the best interest of the beneficial owners of the accounts it manages. ClearBridge attempts to consider all factors that could affect the value of the investment and will vote proxies in the manner that it believes will be consistent with efforts to maximize shareholder values. ClearBridge may utilize an external service provider to provide it with information and/or a recommendation with regard to proxy votes. However, such recommendations do not relieve ClearBridge of its responsibility for the proxy vote.
In the case of a proxy issue for which there is a stated position in the policies, ClearBridge generally votes in accordance with such stated position. In the case of a proxy issue for which there is a list of factors set forth in the policies that ClearBridge considers in voting on such issue, ClearBridge considers those factors and votes on a case-by-case basis in accordance with the general principles set forth above. In the case of a proxy issue for which there is no stated position or list of factors that ClearBridge considers in voting on such issue, ClearBridge votes on a case-by-case basis in accordance with the general principles set forth above. Issues for which there is a stated position set forth in the policies or for which there is a list of factors set forth in the policies that ClearBridge considers in voting on such issues fall into a variety of categories, including election of directors, ratification of auditors, proxy and tender offer defenses, capital structure issues, executive and director compensation, mergers and corporate restructuring, and social and environmental issues. The stated position on an issue set forth in the policies can always be superseded, subject to the duty to act solely in the best interest of the beneficial owners of accounts, by the investment management professionals responsible for the account whose shares are being voted. There may be occasions when different investment teams vote differently on the same issue. An investment team (e.g., ClearBridge SAI investment team) may adopt proxy voting policies that supplement ClearBridge’s Proxy Voting Policies and Procedures. In addition, in the case of Taft-Hartley clients, ClearBridge will comply with a client direction to vote proxies in accordance with Institutional Shareholder Services’ (ISS) PVS Voting guidelines, which ISS represents to be fully consistent with AFL-CIO guidelines.
In furtherance of ClearBridge’s goal to vote proxies in the best interest of clients, ClearBridge follows procedures designed to identify and address material conflicts that may arise between ClearBridge’s interests and those of its clients before voting proxies on behalf of such clients. To seek to identify conflicts of interest, ClearBridge periodically notifies ClearBridge employees in writing that they are under an obligation (i) to be aware of the potential for conflicts of interest on the part of ClearBridge with respect to voting proxies on behalf of client accounts both as a result of their personal relationships and due to special circumstances that may arise during the conduct of ClearBridge’s business, and (ii) to bring conflicts of interest of which they become aware to the attention of ClearBridge’s compliance personnel. ClearBridge also maintains and considers a list of significant ClearBridge relationships that could present a conflict of interest for ClearBridge in voting proxies.ClearBridge is also sensitive to the fact that a significant, publicized relationship between an issuer and a non-ClearBridge Legg Mason affiliate might appear to the public to influence the manner in which ClearBridge decides to vote a proxy with respect to such issuer.
Absent special circumstances or a significant, publicized non-ClearBridge Legg Mason affiliate relationship that ClearBridge for prudential reasons treats as a potential conflict of interest because such relationship might appear to the public to influence the manner in which ClearBridge decides to vote a proxy, ClearBridge generally takes the position that non-ClearBridge relationships between a Legg Mason affiliate and an issuer do not present a conflict of interest for ClearBridge in voting proxies with respect to such issuer. Such position is based on the fact that ClearBridge is operated as an independent business unit from other Legg Mason business units as well as on the existence of information barriers between ClearBridge and certain other Legg Mason business units.
ClearBridge maintains a Proxy Committee to review and address conflicts of interest brought to its attention by ClearBridge compliance personnel. A proxy issue that will be voted in accordance with a stated ClearBridge position on such issue or in accordance with the recommendation of an independent third party is not brought to the attention of the Proxy Committee for a conflict of interest review because ClearBridge’s position is that to the extent a conflict of interest issue exists, it is resolved by voting in accordance with a pre-determined policy or in accordance with the recommendation of an independent third party. With respect to a conflict of interest brought to its attention, the Proxy Committee first determines whether such conflict of interest is material. A conflict of interest is considered material to the extent that it is determined that such conflict is likely to influence, or appear to influence, ClearBridge’s decision-making in voting proxies. If it is determined by the Proxy Committee that a conflict of interest is not material, ClearBridge may vote proxies notwithstanding the existence of the conflict.
If it is determined by the Proxy Committee that a conflict of interest is material, the Proxy Committee is responsible for determining an appropriate method to resolve such conflict of interest before the proxy affected by the conflict of interest is voted. Such determination is based on the particular facts and circumstances, including the importance of the proxy issue and the nature of the conflict of interest.
Western Asset Management Company and Western Asset Management
Company Limited (together, “Western Asset” or the “Firm”) Proxy Voting
Policy
Policy
As a fixed income only manager, the occasion to vote proxies is very rare. However, Western Asset Management Company (“WA” or “Western Asset”) have adopted and implemented policies and procedures that we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and SEC Rule 206(4)-6 under the Investment Advisers Act of 1940 (“Advisers Act”). Our authority to vote the proxies of our clients is established through investment management agreements or comparable documents, and our proxy voting guidelines have been tailored to reflect these specific contractual obligations. In addition to SEC requirements governing advisers, our proxy voting policies reflect the long-standing fiduciary standards and responsibilities for ERISA accounts. Unless a manager of ERISA assets has been expressly precluded from voting proxies, the Department of Labor has determined that the responsibility for these votes lies with the Investment Manager.
In exercising its voting authority, Western Asset will not consult or enter into agreements with officers, directors or employees of Legg Mason Inc. or any of its affiliates (except that WA may so consult and agree with each other) regarding the voting of any securities owned by its clients.
Western Asset’s proxy voting procedures are designed and implemented in a way that is reasonably expected to ensure that proxy matters are handled in the best interest of our clients. While the guidelines included in the procedures are intended to provide a benchmark for voting standards, each vote is ultimately cast on a case-by-case basis, taking into consideration Western Asset’s contractual obligations to our clients and all other relevant facts and circumstances at the time of the vote (such that these guidelines may be overridden to the extent Western Asset deems appropriate).
Procedures
Responsibility and Oversight
The Western Asset Legal and Compliance Department (“Legal and Compliance Department”) is responsible for administering and overseeing the proxy voting process. The gathering of proxies is coordinated through the Corporate Actions area of Investment Support (“Corporate Actions”). Research analysts and portfolio managers are responsible for determining appropriate voting positions on each proxy utilizing any applicable guidelines contained in these procedures.
Client Authority
The Investment Management Agreement for each client is reviewed at account start-up for proxy voting instructions. If an agreement is silent on proxy voting, but contains an overall delegation of discretionary authority or if the account represents assets of an ERISA plan, Western Asset will assume responsibility for proxy voting. The Legal and Compliance Department maintains a matrix of proxy voting authority.
Proxy Gathering
Registered owners of record, client custodians, client banks and trustees (“Proxy Recipients”) that receive proxy materials on behalf of clients should forward them to Corporate Actions. Proxy Recipients for new clients (or, if Western Asset becomes aware that the applicable Proxy Recipient for an existing client has changed, the Proxy Recipient for the existing client) are notified at start-up of appropriate routing to Corporate Actions of proxy materials received and reminded of their responsibility to forward all proxy materials on a timely basis. If Western Asset personnel other than Corporate Actions receive proxy materials, they should promptly forward the materials to Corporate Actions.
Proxy Voting
Once proxy materials are received by Corporate Actions, they are forwarded to the Legal and Compliance Department for coordination and the following actions:
| a. | Proxies are reviewed to determine accounts impacted. |
| b. | Impacted accounts are checked to confirm Western Asset voting authority. |
| c. | Legal and Compliance Department staff reviews proxy issues to determine any material conflicts of interest. (See conflicts of interest section of these procedures for further information on determining material conflicts of interest.) |
| d. | If a material conflict of interest exists, (i) to the extent reasonably practicable and permitted by applicable law, the client is promptly notified, the conflict is disclosed and Western Asset obtains the client’s proxy voting instructions, and (ii) to the extent that it is not reasonably practicable or permitted by applicable law to notify the client and obtain such instructions (e.g., the client is a mutual fund or other commingled vehicle or is an ERISA plan client), Western Asset seeks voting instructions from an independent third party. |
| e. | Legal and Compliance Department staff provides proxy material to the appropriate research analyst or portfolio manager to obtain their recommended vote. Research analysts and portfolio managers determine votes on a case-by-case basis taking into account the voting guidelines contained in these procedures. For avoidance of doubt, depending on the best interest of each individual client, Western Asset may vote the same proxy differently for different clients. The analyst’s or portfolio manager’s basis for their decision is documented and maintained by the Legal and Compliance Department. |
| f. | Legal and Compliance Department staff votes the proxy pursuant to the instructions received in (d) or (e) and returns the voted proxy as indicated in the proxy materials. |
Timing
Western Asset personnel act in such a manner to ensure that, absent special circumstances, the proxy gathering and proxy voting steps noted above can be completed before the applicable deadline for returning proxy votes.
Recordkeeping
Western Asset maintains records of proxies voted pursuant to Section 204-2 of the Advisers Act and ERISA DOL Bulletin 94-2. These records include:
| a. | A copy of Western Asset’s policies and procedures. |
| b. | Copies of proxy statements received regarding client securities. |
| c. | A copy of any document created by Western Asset that was material to making a decision how to vote proxies. |
| d. | Each written client request for proxy voting records and Western Asset’s written response to both verbal and written client requests. |
| e. | A proxy log including: |
| 1. | Issuer name; |
| 2. | Exchange ticker symbol of the issuer’s shares to be voted; |
| 3. | Committee on Uniform Securities Identification Procedures (“CUSIP”) number for the shares to be voted; |
| 4. | A brief identification of the matter voted on; |
| 5. | Whether the matter was proposed by the issuer or by a shareholder of the issuer; |
| 6. | Whether a vote was cast on the matter; |
| 7. | A record of how the vote was cast; and |
| 8. | Whether the vote was cast for or against the recommendation of the issuer’s management team. |
Records are maintained in an easily accessible place for five years, the first two in Western Asset’s offices.
Disclosure
Part II of the WA Form ADV and the WAML Form ADV, each, contain a description of Western Asset’s proxy policies. Clients will be provided a copy of these policies and procedures upon request. In addition, upon request, clients may receive reports on how their proxies have been voted.
Conflicts of Interest
All proxies are reviewed by the Legal and Compliance Department for material conflicts of interest. Issues to be reviewed include, but are not limited to:
| 1. | Whether Western Asset (or, to the extent required to be considered by applicable law, its affiliates) manages assets for the company or an employee group of the company or otherwise has an interest in the company; |
| 2. | Whether Western Asset or an officer or director of Western Asset or the applicable portfolio manager or analyst responsible for recommending the proxy vote (together, “Voting Persons”) is a close relative of or has a personal or business relationship with an executive, director or person who is a candidate for director of the company or is a participant in a proxy contest; and |
| 3. | Whether there is any other business or personal relationship where a Voting Person has a personal interest in the outcome of the matter before shareholders. |
Voting Guidelines
Western Asset’s substantive voting decisions turn on the particular facts and circumstances of each proxy vote and are evaluated by the designated research analyst or portfolio manager. The examples outlined below are meant as guidelines to aid in the decision making process.
Guidelines are grouped according to the types of proposals generally presented to shareholders. Part I deals with proposals which have been approved and are recommended by a company’s board of directors; Part II deals with proposals submitted by shareholders for inclusion in proxy statements; Part III addresses issues relating to voting shares of investment companies; and Part IV addresses unique considerations pertaining to foreign issuers.
I. Board Approved Proposals
The vast majority of matters presented to shareholders for a vote involve proposals made by a company itself that have been approved and recommended by its board of directors. In view of the enhanced corporate governance practices currently being implemented in public companies, Western Asset generally votes in support of decisions reached by independent boards of directors. More specific guidelines related to certain board-approved proposals are as follows:
1. Matters relating to the Board of Directors
Western Asset votes proxies for the election of the company’s nominees for directors and for board-approved proposals on other matters relating to the board of directors with the following exceptions:
| a. | Votes are withheld for the entire board of directors if the board does not have a majority of independent directors or the board does not have nominating, audit and compensation committees composed solely of independent directors. |
| b. | Votes are withheld for any nominee for director who is considered an independent director by the company and who has received compensation from the company other than for service as a director. |
| c. | Votes are withheld for any nominee for director who attends less than 75% of board and committee meetings without valid reasons for absences. |
| d. | Votes are cast on a case-by-case basis in contested elections of directors. |
2. Matters relating to Executive Compensation
Western Asset generally favors compensation programs that relate executive compensation to a company’s long-term performance. Votes are cast on a case-by-case basis on board-approved proposals relating to executive compensation, except as follows:
| a. | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for stock option plans that will result in a minimal annual dilution. |
| b. | Western Asset votes against stock option plans or proposals that permit replacing or repricing of underwater options. |
| c. | Western Asset votes against stock option plans that permit issuance of options with an exercise price below the stock’s current market price. |
| d. | Except where the firm is otherwise withholding votes for the entire board of directors, Western Asset votes for employee stock purchase plans that limit the discount for shares purchased under the plan to no more than 15% of their market value, have an offering period of 27 months or less and result in dilution of 10% or less. |
3. Matters relating to Capitalization
The management of a company’s capital structure involves a number of important issues, including cash flows, financing needs and market conditions that are unique to the circumstances of each company. As a result, Western Asset votes on a case-by-case basis on board-approved proposals involving changes to a company’s capitalization except where Western Asset is otherwise withholding votes for the entire board of directors.
| a. | Western Asset votes for proposals relating to the authorization of additional common stock. |
| b. | Western Asset votes for proposals to effect stock splits (excluding reverse stock splits). |
| c. | Western Asset votes for proposals authorizing share repurchase programs. |
4. Matters relating to Acquisitions, Mergers, Reorganizations and Other Transactions
Western Asset votes these issues on a case-by-case basis on board-approved transactions.
5. Matters relating to Anti-Takeover Measures
Western Asset votes against board-approved proposals to adopt anti-takeover measures except as follows:
| a. | Western Asset votes on a case-by-case basis on proposals to ratify or approve shareholder rights plans. |
| b. | Western Asset votes on a case-by-case basis on proposals to adopt fair price provisions. |
6. Other Business Matters
Western Asset votes for board-approved proposals approving such routine business matters such as changing the company’s name, ratifying the appointment of auditors and procedural matters relating to the shareholder meeting.
| a. | Western Asset votes on a case-by-case basis on proposals to amend a company’s charter or bylaws. |
| b. | Western Asset votes against authorization to transact other unidentified, substantive business at the meeting. |
II. Shareholder Proposals
SEC regulations permit shareholders to submit proposals for inclusion in a company’s proxy statement. These proposals generally seek to change some aspect of a company’s corporate governance structure or to change some aspect of its business operations. Western Asset votes in accordance with the recommendation of the company’s board of directors on all shareholder proposals, except as follows:
1. Western Asset votes for shareholder proposals to require shareholder approval of shareholder rights plans.
2. Western Asset votes for shareholder proposals that are consistent with Western Asset’s proxy voting guidelines for board-approved proposals.
3. Western Asset votes on a case-by-case basis on other shareholder proposals where the firm is otherwise withholding votes for the entire board of directors.
III. Voting Shares of Investment Companies
Western Asset may utilize shares of open or closed-end investment companies to implement its investment strategies. Shareholder votes for investment companies that fall within the categories listed in Parts I and II above are voted in accordance with those guidelines.
1. Western Asset votes on a case-by-case basis on proposals relating to changes in the investment objectives of an investment company taking into account the original intent of the fund and the role the fund plays in the clients’ portfolios.
2. Western Asset votes on a case-by-case basis all proposals that would result in increases in expenses (e.g., proposals to adopt 12b-1 plans, alter investment advisory arrangements or approve fund mergers) taking into account comparable expenses for similar funds and the services to be provided.
IV. Voting Shares of Foreign Issuers
In the event Western Asset is required to vote on securities held in non-U.S. issuers – i.e. issuers that are incorporated under the laws of a foreign jurisdiction and that are not listed on a U.S. securities exchange or the NASDAQ stock market, the following guidelines are used, which are premised on the existence of a sound corporate governance and disclosure framework. These guidelines, however, may not be appropriate under some circumstances for foreign issuers and therefore apply only where applicable.
1. Western Asset votes for shareholder proposals calling for a majority of the directors to be independent of management.
2. Western Asset votes for shareholder proposals seeking to increase the independence of board nominating, audit and compensation committees.
3. Western Asset votes for shareholder proposals that implement corporate governance standards similar to those established under U.S. federal law and the listing requirements of U.S. stock exchanges, and that do not otherwise violate the laws of the jurisdiction under which the company is incorporated.
4. Western Asset votes on a case-by-case basis on proposals relating to (1) the issuance of common stock in excess of 20% of a company’s outstanding common stock where shareholders do not have preemptive rights, or (2) the issuance of common stock in excess of 100% of a company’s outstanding common stock where shareholders have preemptive rights.
Retirement Accounts
For accounts subject to ERISA, as well as other Retirement Accounts, Western Asset is presumed to have the responsibility to vote proxies for the client. The Department of Labor (“DOL”) has issued a bulletin that states that investment managers have the responsibility to vote proxies on behalf of Retirement Accounts unless the authority to vote proxies has been specifically reserved to another named fiduciary. Furthermore, unless Western Asset is expressly precluded from voting the proxies, the DOL has determined that the responsibility remains with the investment manager.
In order to comply with the DOL’s position, Western Asset will be presumed to have the obligation to vote proxies for its Retirement Accounts unless Western Asset has obtained a specific written instruction indicating that: (a) the right to vote proxies has been reserved to a named fiduciary of the client, and (b) Western Asset is precluded from voting proxies on behalf of the client. If Western Asset does not receive such an instruction, Western Asset will be responsible for voting proxies in the best interests of the Retirement Account client and in accordance with any proxy voting guidelines provided by the client.
| ITEM 8. | PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. |
(a)(1):
| NAME AND ADDRESS |
LENGTH OF TIME SERVED |
PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS | ||
| S. Kenneth Leech
Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Since March 31, 2014 |
Responsible for the day-to-day management with other members of the Fund’s portfolio management team; Chief Investment Officer of Western Asset from 1998 to 2008 and since 2014; Senior Advisor/Chief Investment Officer Emeritus of Western Asset from 2008-2013; Co- Chief Investment Officer of Western Asset from 2013-2014. | ||
| Keith J. Gardner
Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Since 2007 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; portfolio manager and research analyst at Western Asset since 1994. | ||
| Michael C. Buchanan
Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Since 2010 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; employed by Western Asset Management as an investment professional for at least the past five years; Managing Director and head of U.S. Credit Products from 2003-2005 at Credit Suisse Asset Management | ||
| Ryan Brist
Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Since 2010 | Responsible for the day-to-day management with other members of the Fund’s portfolio management team; Head of U.S. Investment Grade Credit of Western Asset since 2009; Chief Investment Officer and Portfolio Manager at Logan Circle Partners, L.P. from 2007-2009; Co-Chief Investment Officer and Senior Portfolio Manager at Delaware Investment Advisors from 2000-2007 | ||
| Mark Lindbloom
Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Since 2010 | Co-portfolio manager of the fund; Portfolio Manager with Western Asset since 2006. Formerly, a Managing Director of Citigroup Asset Management and its predecessors from 1986-2006. | ||
| Mark McAllister Clearbridge 620 Eighth Avenue New York, NY 10018 |
Since 2011 | Co-portfolio manager of the fund; Managing Director and Senior Portfolio Manager with ClearBridge; Mr. McAllister has 24 years of investment industry experience. | ||
| Peter Vanderlee Clearbridge 620 Eighth Avenue New York, NY 10018 |
Since 2009 | Co-portfolio manager of the fund; Managing Director and Portfolio Manager with ClearBridge Advisors. Mr. Vanderlee has eleven years of investment management experience and thirteen years of related investment experience. | ||
| Tim Daubenspeck Clearbridge 620 Eighth Avenue New York, NY 10018 |
Since 2011 | Co-portfolio manager of the fund; Director and Portfolio Manager with ClearBridge Advisors. Mr. Daubenspeck has twelve years of investment management experience. | ||
| Tatiana Thibodeau Clearbridge 620 Eighth Avenue New York, NY 10018 |
Since 2011 | Co-portfolio manager of the fund; Director and Portfolio Manager with ClearBridge Advisors. Ms. Thibodeau has twelve years of investment management experience. | ||
| Chia-Liang Lian
Western Asset 385 East Colorado Blvd. Pasadena, CA 91101 |
Effective January 31, 2015 |
Responsible for the day-to-day management with other members of the Fund’s portfolio management team; employed by Western Asset Management as an investment professional since 2011; Prior to joining Western Asset, Mr. Lian spent approximately six years with the Pacific Investment Management Company (PIMCO), where he served as Head of Emerging Asia Portfolio Management. | ||
(a)(2): DATA TO BE PROVIDED BY FINANCIAL CONTROL
The following tables set forth certain additional information with respect to the fund’s portfolio managers for the fund. Unless noted otherwise, all information is provided as of November 30, 2014.
Other Accounts Managed by Portfolio Managers
The table below identifies the number of accounts (other than the fund) for which the fund’s portfolio managers have day-to-day management responsibilities and the total assets in such accounts, within each of the following categories: registered investment companies, other pooled investment vehicles, and other accounts. For each category, the number of accounts and total assets in the accounts where fees are based on performance is also indicated.
| Name of PM |
Type of Account |
Number of Accounts Managed |
Total Assets Managed |
Number of Accounts Managed for which Advisory Fee is Performance- Based |
Assets Managed for which Advisory Fee is Performance- Based | |||||
| S. Kenneth Leech‡ | Other Registered Investment Companies | 107 | $198.5 billion | None | None | |||||
| Other Pooled Vehicles | 244 | $86.8 billion | 9 | $2.1 billion | ||||||
| Other Accounts | 676 | $177.2 billion | 56 | $17.8 billion | ||||||
| Ryan Brist‡ | Other Registered Investment Companies | 9 | $2.2 billion | None | None | |||||
| Other Pooled Vehicles | 16 | 11.8 billion | None | None | ||||||
| Other Accounts | 47 | $18.1 billion | 3 | $670 million | ||||||
| Michael C. Buchanan ‡ | Other Registered Investment Companies | 42 | $38.7 billion | None | None | |||||
| Other Pooled Vehicles | 59 | $32.3 billion | 4 | $1.3 billion | ||||||
| Other Accounts | 188 | $53.2 billion | 21 | $8.1 billion | ||||||
| Mark Lindbloom‡ | Other Registered Investment Companies | 15 | $30.7 billion | None | None | |||||
| Other Pooled Vehicles | 10 | $7.2 billion | None | None | ||||||
| Other Accounts | 152 | $42.3 billion | 23 | $8.2 billion | ||||||
| Keith Gardner‡ |
Other Registered Investment Companies | 25 | $29.0 billion | None | None | |||||
| Other Pooled Vehicles | 26 | $12.2 billion | 1 | $138 million | ||||||
| Other Accounts | 147 | $35.8 billion | 19 | $7.9 billion | ||||||
| Chia-Liang Lian‡* | Other Registered Investment Companies | 4 | $766 million | None | None | |||||
| Other Pooled Vehicles | 34 | $13.0 billion | 1 | $138 million | ||||||
| Other Accounts | 168 | $38.4 billion | 27 | $9.4 billion | ||||||
| Mark McAllister | Other Registered Investment Companies | 2 | $1.3 billion | None | None | |||||
| Other Pooled Vehicles | 4 | $1.4 billion | None | None | ||||||
| Other Accounts | None | None | None | None | ||||||
| Tim Daubenspeck | Other Registered Investment Companies | None | None | None | None | |||||
| Other Pooled Vehicles | None | None | None | None | ||||||
| Other Accounts | None | None | None | None | ||||||
| Tatiana Thibodeau | Other Registered Investment Companies | None | None | None | None | |||||
| Other Pooled Vehicles | None | None | None | None | ||||||
| Other Accounts | None | None | None | None | ||||||
| Peter Vanderlee | Other Registered Investment Companies | 8 | $15.6 billion | None | None | |||||
| Other Pooled Vehicles | 7 | $2.6 billion | None | None | ||||||
| Other Accounts | 39,289 | $6.9 billion | None | None |
| ‡ | The numbers above reflect the overall number of portfolios managed by employees of Western Asset Management Company (“Western Asset”). Mr.Leech is involved in the management of all the Firm’s portfolios, but they are not solely responsible for particular portfolios. Western Asset’s investment discipline emphasizes a team approach that combines the efforts of groups of specialists working in different market sectors. They are responsible for overseeing implementation of Western Asset’s overall investment ideas and coordinating the work of the various sector teams. This structure ensures that client portfolios benefit from a consensus that draws on the expertise of all team members. |
| * | Mr. Lian will join the Fund’s portfolio management team on January 31, 2015. |
(a)(3): Investment Professional Compensation (Western Asset)
With respect to the compensation of the investment professionals, Western Asset’s compensation system assigns each employee a total compensation range, which is derived from annual market surveys that benchmark each role with its job function and peer universe. This method is designed to reward employees with total compensation reflective of the external market value of their skills, experience, and ability to produce desired results. Standard compensation includes competitive base salaries, generous employee benefits, and a retirement plan.
In addition, the subadviser’s employees are eligible for bonuses. These are structured to closely align the interests of employees with those of the subadviser, and are determined by the professional’s job function and pre-tax performance as measured by a formal review process. All bonuses are completely discretionary. The principal factor considered is an investment professional’s investment performance versus appropriate peer groups and benchmarks (e.g., a securities index and with respect to a fund, the benchmark set forth in the fund’s Prospectus to which the fund’s average annual total returns are compared or, if none, the benchmark set forth in the fund’s annual report). Performance is reviewed on a 1, 3 and 5 year basis for compensation—with 3 years having the most emphasis. The subadviser may also measure an investment professional’s pre-tax investment performance against other benchmarks, as it determines appropriate. Because investment professionals are generally responsible for multiple accounts (including the funds) with similar investment strategies, they are generally compensated on the performance of the aggregate group of similar accounts, rather than a specific account. Other factors that may be considered when making bonus decisions include client service, business development, length of service to the subadviser, management or supervisory responsibilities, contributions to developing business strategy and overall contributions to the subadviser’s business.
Finally, in order to attract and retain top talent, all professionals are eligible for additional incentives in recognition of outstanding performance. These are determined based upon the factors described above and include Legg Mason stock options and long-term incentives that vest over a set period of time past the award date.
Potential Conflicts of Interest
Conflicts of Interest
The manager, the subadviser and investment professionals have interests which conflict with the interests of the fund. There is no guarantee that the policies and procedures adopted by the manager, the subadviser and the fund will be able to identify or mitigate these conflicts of interest.
Some examples of material conflicts of interest include:
Allocation of Limited Time and Attention. An investment professional who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. An investment professional may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those funds and accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. Such an investment professional may make general determinations across multiple funds, rather than tailoring a unique approach for each fund. The effects of this conflict may be more pronounced where funds and/or accounts overseen by a particular investment professional have different investment strategies.
Allocation of Limited Investment Opportunities; Aggregation of Orders. If an investment professional identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit the fund’s ability to take full advantage of the investment opportunity. Additionally, the subadviser may aggregate transaction orders for multiple accounts for purpose of execution. Such aggregation may cause the price or brokerage costs to be less favorable to a particular client than if similar transactions were not being executed concurrently for other accounts. In addition, the subadviser’s trade allocation policies may result in the fund’s orders not being fully executed or being delayed in execution.
Pursuit of Differing Strategies. At times, an investment professional may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the investment professional may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts. For example, an investment professional may determine that it would be in the interest of another account to sell a security that the fund holds long, potentially resulting in a decrease in the market value of the security held by the fund.
Cross Trades. Investment professionals may manage funds that engage in cross trades, where one of the manager’s funds or accounts sells a particular security to another fund or account managed by the same manager. Cross trades may pose conflicts of interest because of, for example, the possibility that one account sells a security to another account at a higher price than an independent third party would pay or otherwise enters into a transaction that it would not enter into with an independent party, such as the sale of a difficult-to-obtain security.
Selection of Broker/Dealers. Investment professionals may select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide the subadviser with brokerage and research services, These services may be taken into account in the selection of brokers and dealers whether a broker is being selected to effect a trade on an agency basis for a commission or (as is normally the case for the funds) whether a dealer is being selected to effect a trade on a principal basis. This may result in the payment of higher brokerage fees and/or execution at a less favorable price than might have otherwise been available. The services obtained may ultimately be more beneficial to certain of the manager’s funds or accounts than to others (but not necessarily to the funds that pay the increased commission or incur the less favorable execution). A decision as to the selection of brokers and dealers could therefore yield disproportionate costs and benefits among the funds and/or accounts managed.
Variation in Financial and Other Benefits. A conflict of interest arises where the financial or other benefits available to an investment professional differ among the funds and/or accounts that he or she manages. If the amount or structure of the investment manager’s management fee and/or an investment
professional’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the investment professional might be motivated to help certain funds and/or accounts over others. Similarly, the desire to maintain assets under management or to enhance the investment professional’s performance record or to derive other rewards, financial or otherwise, could influence the investment professional in affording preferential treatment to those funds and/or accounts that could most significantly benefit the investment professional. An investment professional may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor such funds and/or accounts. Also, an investment professional’s or the manager’s or the subadviser’s desire to increase assets under management could influence the investment professional to keep a fund open for new investors without regard to potential benefits of closing the fund to new investors. Additionally, the investment professional might be motivated to favor funds and/or accounts in which he or she has an ownership interest or in which the investment manager and/or its affiliates have ownership interests. Conversely, if an investment professional does not personally hold an investment in the fund, the investment professional’s conflicts of interest with respect to the fund may be more acute.
Related Business Opportunities. The investment manager or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, an investment professional may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the investment manager and its affiliates.
Portfolio Manager Compensation (ClearBridge)
ClearBridge’s portfolio managers participate in a competitive compensation program that is designed to attract and retain outstanding investment professionals and closely align the interests of its investment professionals with those of its clients and overall firm results. The total compensation program includes a significant incentive component that rewards high performance standards, integrity, and collaboration consistent with the firm’s values. Portfolio manager compensation is reviewed and modified each year as appropriate to reflect changes in the market and to ensure the continued alignment with the goals stated above. ClearBridges’s portfolio managers and other investment professionals receive a combination of base compensation and discretionary compensation, comprising a cash incentive award and deferred incentive plans described below.
Base salary compensation. Base salary is fixed and primarily determined based on market factors and the experience and responsibilities of the investment professional within the firm.
Discretionary compensation. In addition to base compensation managers may receive discretionary compensation.
Discretionary compensation can include:
| • | Cash Incentive Award |
| • | ClearBridge’s Deferred Incentive Plan (CDIP)—a mandatory program that typically defers 15% of discretionary year-end compensation into ClearBridge managed products. For portfolio managers, one-third of this deferral tracks the performance of their primary managed product, one-third tracks the performance of a composite portfolio of the firm’s new products and one-third can be elected to track the performance of one or more of ClearBridge managed funds. Consequently, portfolio managers can have two-thirds of their CDIP award tracking the performance of their primary managed product. |
For centralized research analysts, two-thirds of their deferral is elected to track the performance of one of more of ClearBridge managed funds, while one-third tracks the performance of the new product composite.
ClearBridge then makes a company investment in the proprietary managed funds equal to the deferral amounts by fund. This investment is a company asset held on the balance sheet and paid out to the employees in shares subject to vesting requirements.
| • | Legg Mason Restricted Stock Deferral—a mandatory program that typically defers 5% of discretionary year-end compensation into Legg Mason restricted stock. The award is paid out to employees in shares subject to vesting requirements. |
| • | Legg Mason Restricted Stock and Stock Option Grants—a discretionary program that may be utilized as part of the total compensation program. These special grants reward and recognize significant contributions to our clients, shareholders and the firm and aid in retaining key talent. |
Several factors are considered by ClearBridge Senior Management when determining discretionary compensation for portfolio managers. These include but are not limited to:
| • | Investment performance. A portfolio manager’s compensation is linked to the pre-tax investment performance of the fund/accounts managed by the portfolio manager. Investment performance is calculated for 1-, 3-, and 5-year periods measured against the applicable product benchmark (e.g., a securities index and, with respect to a fund, the benchmark set forth in the fund’s Prospectus) and relative to applicable industry peer groups. The greatest weight is generally placed on 3- and 5-year performance. |
| • | Appropriate risk positioning that is consistent with ClearBridge’s investment philosophy and the Investment Committee/CIO approach to generation of alpha; |
| • | Overall firm profitability and performance; |
| • | Amount and nature of assets managed by the portfolio manager; |
| • | Contributions for asset retention, gathering and client satisfaction; |
| • | Contribution to mentoring, coaching and/or supervising; |
| • | Contribution and communication of investment ideas in ClearBridge’s Investment Committee meetings and on a day to day basis; |
| • | Market compensation survey research by independent third parties |
Potential Conflicts of Interest
Potential conflicts of interest may arise when the fund’s portfolio manager also has day-to-day management responsibilities with respect to one or more other funds or other accounts, as is the case for the fund’s portfolio manager.
The manager, the subadviser and the fund have adopted compliance polices and procedures that are designed to address various conflicts of interest that may arise for the manager or the subadviser and the individuals that each employs. For example, the manager and the subadviser each seek to minimize the effects of competing interests for the time and attention of the portfolio manager by assigning the portfolio manager to manage funds and accounts that share a similar investment style. The manager and the subadviser have also adopted trade allocation procedures that are designed to facilitate the fair allocation of limited investment opportunities among multiple funds and accounts. There is no guarantee, however, that the policies and procedures adopted by the manager, the subadviser and the fund will be able to detect and/or prevent every situation in which an actual or potential conflict may appear. These potential conflicts include:
Allocation of Limited Time and Attention. A portfolio manager who is responsible for managing multiple funds and/or accounts may devote unequal time and attention to the management of those funds and/or accounts. As a result, the portfolio manager may not be able to formulate as complete a strategy or identify equally attractive investment opportunities for each of those accounts as might be the case if he or she were to devote substantially more attention to the management of a single fund. The effects of this potential conflict may be more pronounced where funds and/or accounts overseen by a particular portfolio manager have different investment strategies.
Allocation of Limited Investment Opportunities. If a portfolio manager identifies a limited investment opportunity that may be suitable for multiple funds and/or accounts, the opportunity may be allocated among these several funds or accounts, which may limit a fund’s ability to take full advantage of the investment opportunity.
Pursuit of Differing Strategies. At times, a portfolio manager may determine that an investment opportunity may be appropriate for only some of the funds and/or accounts for which he or she exercises investment responsibility, or may decide that certain of the funds and/or accounts should take differing positions with respect to a particular security. In these cases, the portfolio manager may place separate transactions for one or more funds or accounts which may affect the market price of the security or the execution of the transaction, or both, to the detriment or benefit of one or more other funds and/or accounts.
Selection of Broker/Dealers. Portfolio managers may be able to select or influence the selection of the brokers and dealers that are used to execute securities transactions for the funds and/or accounts that they supervise. In addition to executing trades, some brokers and dealers provide brokerage and research services (as those terms are defined in Section 28(e) of the 1934 Act), which may result in the payment of higher brokerage fees than might have otherwise been available. These services may be more beneficial to certain funds or accounts than to others. Although the payment of brokerage commissions is subject to the requirement that the sub-adviser determines in good faith that the commissions are reasonable in relation to the value of the brokerage and research services provided to the fund, a decision as to the selection of brokers and dealers could yield disproportionate costs and benefits among the funds and/or accounts managed. For this reason, the subadviser has formed a brokerage committee that reviews, among other things, the allocation of brokerage to broker/dealers, best execution and soft dollar usage.
Variation in Compensation. A conflict of interest may arise where the financial or other benefits available to a portfolio manager differ among the funds and/or accounts that he or she manages. If the structure of the manager’s management fee and/or the portfolio manager’s compensation differs among funds and/or accounts (such as where certain funds or accounts pay higher management fees or performance-based management fees), the portfolio manager might be motivated to help certain funds and/ or accounts over others. The portfolio manager might be motivated to favor funds and/or accounts in which he or she has an interest or in which the manager and/or its affiliates have interests. Similarly, the desire to maintain assets under management or to enhance the portfolio manager’s performance record or to derive other rewards, financial or otherwise, could influence the portfolio manager in affording preferential treatment to those funds and/or accounts that could most significantly benefit the portfolio manager.
Related Business Opportunities. The manager or its affiliates may provide more services (such as distribution or recordkeeping) for some types of funds or accounts than for others. In such cases, a portfolio manager may benefit, either directly or indirectly, by devoting disproportionate attention to the management of funds and/or accounts that provide greater overall returns to the manager and its affiliates.
(a)(4): Portfolio Manager Securities Ownership
The table below identifies the dollar range of securities beneficially owned by each portfolio managers as of November 30, 2014.
| Portfolio Manager(s) |
Dollar Range of Portfolio Securities Beneficially Owned | |
| S. Kenneth Leech | A | |
| Ryan Brist | A | |
| Michael Lindbloom | A | |
| Keith J. Gardner | A | |
| Michael Buchanan | A | |
| Michael McAllister | C | |
| Tim Daubenspeck | A | |
| Peter Vanderlee | E | |
| Tatiana Thibodeau | A | |
| Chia-Liang Lian* | A |
| * | Mr. Lian will join the Fund’s portfolio management team on January 31, 2015. |
Dollar Range ownership is as follows:
A: none
B: $1 - $10,000
C: 10,001 - $50,000
D: $50,001 - $100,000
E: $100,001 - $500,000
F: $500,001 - $1 million
G: over $1 million
| ITEM 9. | PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. |
None.
| ITEM 10. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. |
None.
| ITEM 11. | CONTROLS AND PROCEDURES. |
| (a) | The registrant’s principal executive officer and principal financial officer 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”)) are effective as of a date within 90 days of the filing date of this report that includes the disclosure required by this paragraph, based on their evaluation of the disclosure controls and procedures required by Rule 30a-3(b) under the 1940 Act and 15d-15(b) under the Securities Exchange Act of 1934. |
| (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) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are likely to materially affect the registrant’s internal control over financial reporting. |
| ITEM 12. | EXHIBITS. |
(a) (1) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(a) (2) Certifications pursuant to section 302 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.CERT
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 attached hereto.
Exhibit 99.906CERT
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, there unto duly authorized.
| LMP Capital and Income Fund Inc. | ||
| By: | /s/ Kenneth D. Fuller | |
| Kenneth D. Fuller | ||
| Chief Executive Officer | ||
| Date: | January 27, 2015 | |
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: | /s/ Kenneth D. Fuller | |
| Kenneth D. Fuller | ||
| Chief Executive Officer | ||
| Date: | January 27, 2015 | |
| By: | /s/ Richard F. Sennett | |
| Richard F. Sennett | ||
| Principal Financial Officer | ||
| Date: | January 27, 2015 | |