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 811-21102
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
(Exact name of registrant as specified in charter)
ONE LIBERTY PLAZA, 165 BROADWAY, 36TH FLOOR
NEW YORK, NEW YORK 10006-1404
(Address of principal executive offices) (Zip code)
CLIFFORD E. LAI, PRESIDENT
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
ONE LIBERTY PLAZA, 165 BROADWAY, 36TH FLOOR
NEW YORK, NEW YORK, 10006-1404
(Name and address of agent for service)
Registrant's telephone number, including area code: 1 (800) Hyperion
Date of fiscal year end: November 30th
Date of reporting period: May 31, 2003
Item 1. Reports to Stockholders.
THE HYPERION
STRATEGIC
MORTGAGE
INCOME
FUND, INC.
Semi-Annual Report
May 31, 2003
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2003
Dear Shareholder:
We welcome this opportunity to provide you with information about The Hyperion
Strategic Mortgage Income Fund, Inc. (the "Fund") for the semi-annual period
ended May 31, 2003. The Fund is a closed-end bond fund whose shares are traded
on the New York Stock Exchange ("NYSE") under the symbol "HSM".
Description of the Fund
The Fund is a diversified closed-end management investment company. The Fund's
primary investment objective is to provide a high level of current income by
investing primarily in mortgage-backed securities that offer an attractive
combination of credit quality, yield and maturity. The Fund's secondary
investment objective is to provide capital appreciation. Under normal market
conditions, the Fund will invest at least 80% of its total assets in
investment-grade mortgage-backed securities ("MBS") including Agency MBS,
non-Agency Residential MBS ("RMBS"), and Commercial MBS ("CMBS"), and may invest
up to 20% of its total assets in U.S. Government securities, cash or other short
term instruments.
The Fund's total return, based on market price, was 13.92% for the six months
ended May 31, 2003. Based on the NYSE closing price of $14.89 on May 31, 2003,
the Fund had a yield of 8.70%.
As of May 31, 2003, the Fund, inclusive of the effect of leverage, was managed
with an average duration (duration measures a bond portfolio's price sensitivity
to interest rate changes) of 3.6 years, as measured on a net asset basis.
Market Environment
The economy has continued to weaken since the Fund's last reporting date of
November 30, 2002. The consumer sector, which has held up the best in the
recession thus far, suffered as unemployment escalated to an 8-year high of 6.1%
in May. During the period, retail sales and car purchases slowed and consumer
confidence dropped to 10-year lows. The war in Iraq also dampened economic
activity.
While interest rates had been falling lower, the pace of their decline
accelerated during the period. Federal Reserve comments about deflation and its
potentially negative impact on the already weak economy drove interest rates to
the lowest levels since the 1950s.
One bright spot in the market has been the increased demand for corporate bonds.
This demand led to a narrowing of corporate bond spreads, reducing the cost of
debt and making the credit markets accessible to some corporations that have had
difficulty issuing debt in the past. The high yield corporate bond market
rallied strongly, supported by apparent efforts by many corporations to improve
their balance sheets. All of these factors could help improve corporate
profitability going forward and set the foundation for an economic recovery in
the future.
While signs point to economic recovery, there are factors that lead us to
believe difficulty lies ahead. Although the Federal Reserve is doing everything
in its power to resuscitate the economy by lowering interest rates, we believe
that continued economic restructuring from the excesses of the late 1990s,
rising unemployment at the state and local municipality levels in reaction to
their budget deficits and a weak global economy will keep a damper on the
economy. Time will be the critical medicine that will cure the economy. As a
result, we expect interest rates to remain low at least for the remainder of
2003, with no move on the part of the Federal Reserve to raise interest rates
until 2004.
Portfolio Strategy
The Fund's assets continued to be allocated primarily among the Agency MBS,
non-Agency residential MBS (RMBS) and commercial MBS (CMBS) sectors. However, in
light of the weakening economy, an increase in commercial real estate
delinquencies and narrowing yield spreads on CMBS, we have slightly reduced the
CMBS exposure to approximately 19% of the Fund's total assets. As our economic
outlook above suggests, we believe that a continued slow economy and potential
for higher unemployment will extend the slight downturn we are experiencing in
the commercial real estate market. We will continue to monitor the situation and
seek opportunities to move back into CMBS at an opportune time. The decline in
the CMBS allocation has been balanced by an increased allocation to the U.S.
Treasury and Agency MBS sectors.
Due to the dramatic decline in interest rates, mortgage prepayment activity has
been at record high levels. At inception, the Fund had been structured to
achieve a balance against prepayment risk. On the one hand, prepayments on
premium priced Agency MBS have resulted in additional cash flow being reinvested
at lower yields, which has the effect of putting downward pressure on the
dividend. However, the portfolio has a large percentage in discount priced
non-Agency MBS. Higher prepayments on these have the effect of increasing income
available for the dividend. Thus far, this balance has mitigated any need to
change the dividend payout of the Fund. We will continue to manage prepayment
risk in the portfolio. However, low interest rates over an extended period of
time could eventually cause the dividend to drop.
While most of our RMBS exposure is in 30-year fixed rate mortgages, we have a
moderate exposure to Hybrid Adjustable-Rates Mortgages (ARMs), where the
mortgage rates are fixed for 3 to 7 years before resetting at a floating rate. A
large supply of Hybrid ARMs has made that sector attractive, allowing us to add
marginally to our exposure.
We continue to manage the portfolio at full leverage, to take advantage of
historically low borrowing rates.
Of the Fund's total assets, 36.7% and 1.8% are invested in securities issued by
Fannie Mae and Freddie Mac, respectively. These securities are collateralized by
residential mortgage loans and are structured as either pass-throughs or
collateralized mortgage obligations. We have monitored the recent developments
at Freddie Mac and Fannie Mae and we remain confident that the creditworthiness
of these securities has not and will not be impacted in the future.
Conclusion
We remain committed to the Fund and its shareholders. As always, we will
continue to actively seek out investment opportunities in the market and act on
them in a timely fashion in an effort to achieve the Fund's objectives. We
welcome your questions and comments, and encourage you to contact our
Shareholder Services Representatives at1-800-HYPERION.
We appreciate the opportunity to serve your investment needs.
Sincerely,
/s/ CLIFFORD E. LAI
CLIFFORD E. LAI
President,
The Hyperion Strategic Mortgage Income Fund, Inc.
President and Chief Executive Officer,
Hyperion Capital Management, Inc.
/s/ JOHN H. DOLAN
JOHN H. DOLAN
Vice President,
The Hyperion Strategic Mortgage Income Fund, Inc.
Chief Investment Officer,
Hyperion Capital Management, Inc.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments - (Unaudited) Interest Maturity Value
May 31, 2003 Rate Principal (Note 2)
Amount
(000s)
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 76.4%
U.S. Government Agency Pass-Through Certificates - 58.0%
Federal Home Loan Mortgage Corporation
Pool C68878 7.00% 06/01/32 $ 1,097# $ 1,151,067
Pool C69047 7.00 06/01/32 2,681 2,812,802
--------
3,963,869
--------
Federal National Mortgage Association
Pool 694391 5.50 03/01/33 5,482 5,692,901
Pool 617729 6.00 07/01/32 2,944 3,059,034
Pool 650718 6.00 07/01/32 13,730@ 14,267,261
Pool 650133 6.00 07/01/32 16,306@ 16,944,641
Pool 626299 7.00 06/01/32 2,094 2,205,848
Pool 635095 7.00 06/01/32 2,947 3,103,979
Pool 641575 7.00 04/01/32 1,210 1,274,524
Pool 645399 7.00 05/01/32 7,773 8,188,210
Pool 645466 7.00 05/01/32 6,727 7,085,974
Pool 650131 7.00 07/01/32 3,449 3,632,943
Pool 636449 8.50 04/01/32 15,602@ 16,795,393
--------
82,250,708
--------
Total U.S. Government Agency Pass-Through Certificates
(Cost - $85,002,633) 86,214,577
--------
U.S. Treasury Obligations - 18.4%
United States Treasury Notes
3.63 05/15/13 5,500 5,625,466
3.88 02/15/13 9,200@ 9,608,250
4.00 11/15/12 11,500@ 12,139,688
--------
Total U.S. Treasury Obligations
(Cost - $26,454,368) 27,373,404
--------
Total U.S. Government & Agency Obligations
(Cost - $111,457,001) 113,587,981
--------
--------
ASSET-BACKED SECURITIES - 2.7%
Housing Related Asset-Backed Securities - 2.7%
Long Beach Mortgage Loan Trust
Series 2002-5, Class M2
(Cost - $4,000,000) 3.32+ 11/25/32 4,000 3,999,996
--------
--------
COMMERCIAL MORTGAGE BACKED SECURITIES - 29.4%
Bear Stearns Commercial Mortgage Securities
Series 1999-C1, Class G* 5.64 02/14/31 2,390 2,085,594
Series 1999-C1, Class D 6.53 10/14/13 2,500 2,866,955
Series 2000-WF1, Class E 8.14+ 02/15/32 2,000 2,460,306
--------
7,412,855
--------
GE Capital Commercial Mortgage Corp.
Series 2002-2A, Class G* 6.04 08/11/36 3,000 3,320,682
Series 2000-1, Class G* 6.13 01/15/33 2,000 1,896,790
Series 2002-2A, Class H* 6.31 08/11/36 2,000 2,176,162
Series 2000-1, Class E 7.44+ 01/15/33 1,000 1,178,045
--------
8,571,679
--------
Government Lease Trust
Series 1999-C1A, Class B3 4.00 05/18/11 2,500 2,416,937
JP Morgan Commercial Mortgage Finance Corp.
Series 1999-C7, Class F* 6.00 10/15/35 2,000 1,935,702
---See notes to financial statements.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments - (Unaudited) Interest Maturity Value
May 31, 2003 Rate Principal (Note 2)
Amount
(000s)
COMMERCIAL MORTGAGE BACKED SECURITIES (continued)
Morgan Stanley Capital I
Series 1999-FNV1, Class A2 6.53% 03/15/31 $ 2,000 $ 2,328,540
Series 1999-WF1, Class E 7.16+ 11/15/31 5,500 6,410,756
Series 1999-FNV1, Class E 7.47+ 03/15/31 2,000 2,359,496
--------
11,098,792
--------
Morgan Stanley Dean Witter Capital I
Series 2001-TOP1, Class A4 6.66 02/15/33 4,500 5,353,425
Nationslink Funding Corp.
Series 1998-2, Class E 7.11 08/20/30 4,000 4,497,160
UBS 400 Atlantic Street Mortgage Trust
Series 2002-C1A, Class B3 7.19 01/11/22 2,000 2,325,940
--------
Total Commercial Mortgage Backed Securities
(Cost - $40,425,547) 43,612,490
--------
--------
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES - 40.4%
Subordinated collateralized Mortgage Obligations -
40.4%
ABN AMRO Mortgage Corp.
Series 2002-7, Class B2 6.20+ 09/25/32 1,074 1,133,543
Bank of America Mortgage Securities, Inc.
Series 2002-H, Class B5 4.68+ 08/25/32 376 316,929
Series 2002-H, Class B6 4.68+ 08/25/32 939 369,594
Series 2002-H, Class B4 4.68+ 08/25/32 563 546,811
Series 2002-I, Class B4 4.74+ 08/25/32 1,020 990,053
Series 2002-10, Class 1B3 6.00 11/25/32 1,491 1,511,869
Series 2002-8, Class 1B1 6.25 09/25/32 7,369 8,072,210
Series 2002-8, Class 1B4* 6.25 09/25/32 1,092 1,063,980
Series 2002-8, Class 1B5* 6.25 09/25/32 818 585,090
Series 2002-8, Class 1B6* 6.25 09/25/32 819 225,932
Series 2002-9, Class 1B3 6.25 10/25/32 1,788 1,885,145
Series 2002-9, Class 1B4 6.25 10/25/32 1,192 1,158,737
--------
16,726,350
--------
Cendant Mortgage Corp.
Series 2002-4, Class B1 6.50 07/25/32 2,674 2,799,084
Series 2002, Class B2 6.50 07/25/32 1,069 1,106,961
Series 2002-4, Class B3 6.50 07/25/32 624 629,502
Series 2002-4, Class B4 6.50 07/25/32 356 326,549
Series 2002-4, Class B5 6.50 07/25/32 267 180,272
Series 2002-4, Class B6* 6.50 07/25/32 356 89,117
--------
5,131,485
--------
Citicorp Mortgage Securities, Inc.
Series 2002-8, Class B1 6.02+ 07/25/32 3,640 3,768,461
Series 2002-8, Class B2 6.02+ 07/25/32 1,584 1,630,398
Series 2002-8, Class B3 6.02+ 07/25/32 791 807,756
--------
6,206,615
Countrywide Home Loans
Series 2001-12, Class B4 6.50 07/25/31 899 764,597
Series 2001-12, Class B5 6.50 07/25/31 1,130 341,975
--------
1,106,572
--------
G3 Mortgage Reinsurance Ltd.
Series 1, Class E* 21.32+ 05/25/08 4,623 5,085,441
Residential Finance Ltd. Partnership
Series 2002-A, Class B5* 3.66+ 10/10/34 1,990 1,994,246
Series 2002-A, Class B7 6.81+ 10/10/34 2,003 2,021,653
--------
4,015,899
--------
---
See notes to financial statements.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments - (Unaudited) Interest Maturity Value
May 31, 2003 Rate Principal (Note 2)
Amount
(000s)
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued)
Residential Funding Mortgage Security I
Series 2003-S7, Class B3 5.50% 05/25/33 $ 330 $ 203,506
Series 2003-S7, Class B2 5.50 05/25/33 546 146,330
Series 2002-S10, Class B1* 6.50 07/25/32 717 666,649
Series 2002-S10, Class B2* 6.50 07/25/32 538 349,972
Series 2002-S10, Class B3* 6.50 07/25/32 538 152,106
--------
1,518,563
--------
Structured Asset Mortgage Investments, Inc.
Series 2002-AR1, Class B4* 5.09+ 03/25/32 1,503 1,432,639
Washington Mutual Mortgage Securities Corp.
Series 2002-AR12, Class B4 4.77+ 10/25/32 1,993 1,749,357
Series 2002-AR12, Class B5* 4.77+ 10/25/32 1,495 1,010,006
Series 2002-AR12, Class B6* 4.77+ 10/25/32 2,493 599,174
Series 2002-AR10, Class B4* 5.08+ 10/25/32 2,594 2,391,853
Series 2002-AR10, Class B5* 5.08+ 10/25/32 1,945 1,448,210
Series 2002-AR10, Class B6* 5.08+ 10/25/32 3,245 829,606
Series 2002-AR11, Class B5* 5.21+ 10/25/32 1,489 1,302,584
Series 2002-AR11, Class B6* 5.21+ 10/25/32 2,482 1,240,856
--------
10,571,646
--------
Wells Fargo Mortgage Backed Securities Trust
Series 2002-10, Class B5* 6.00 06/25/32 372 306,626
Series 2002-15, Class B1 6.50 08/25/32 5,166 5,371,805
Series 2002-15, Class B4 6.50 08/25/32 596 598,687
Series 2002-15, Class B5* 6.50 08/25/32 795 694,809
Series 2002-15, Class B6* 6.50 08/25/32 596 174,470
--------
7,146,397
--------
Total Subordinated collateralized Mortgage Obligations
(Cost - $58,210,669) 60,075,150
--------
Total Non-Agency Residential Mortgage Backed Securities
(Cost - $58,210,669) 60,075,150
--------
--------
REPURCHASE AGREEMENTS - 0.8%
Dated 5/30/03, with State Street Corp.; proceeds:
$1,223,051; collateralized by $1,115,000 USTB, 5.25%,
due 11/15/28, value $1,250,194
(Cost - $1,223,000) 0.50 06/02/03 1,223 1,223,000
--------
--------
Total Investments - 149.7%
(Cost - $215,316,217) 222,498,617
Liabilities in Excess of Other Assets - (49.7)% (73,842,058)
--------
NET ASSETS - 100.0% $ 148,656,559
=========
@ - Portion or entire principal amount delivered as collateral for reverse
repurchase agreements. (Note 5)
+ - Variable Rate Security: Interest rate is the rate in effect May 31, 2003.
* - Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may only be resold in transactions exempt from
registration, normally to qualified institutional buyers.
# - Portion or entire principal amount is held as collateral for open futures
contracts. (Note 7)
USTB - United States Treasury Bonds.
---
See notes to financial statements.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Statement of Assets and Liabilities - (Unaudited)
May 31, 2003
Assets:
Investments in securities, at market (cost $215,316,217) (Note 2) $ 222,498,617
Cash 22,513
Interest receivable 1,200,442
Receivable due from transfer agent 21,046
Principal paydowns receivable 9,815
Prepaid expenses and other assets 134,790
--------
Total assets 223,887,223
--------
Liabilities:
Reverse repurchase agreements (Note 5) 68,200,350
Interest payable for reverse repurchase agreements (Note 5) 28,997
Payable for investments purchased 5,614,596
Unrealized depreciation on swap contracts (Note 7) 834,254
Payable on open swap contracts 381,376
Investment advisory fee payable (Note 3) 81,229
Administration fee payable (Note 3) 24,993
Payable for variation margin 24,909
Accrued expenses and other liabilities 39,960
--------
Total liabilities 75,230,664
--------
Net Assets (equivalent to $14.66 per share based on 10,139,728 shares issued and outstanding) $ 148,656,559
=========
Composition of Net Assets:
Capital stock, at par value ($.01) (Note 6) $ 101,397
Additional paid-in capital (Note 6) 144,086,535
Accumulated distributions in excess of net investment income (237,667)
Accumulated net realized loss (1,337,479)
Net unrealized appreciation 6,043,773
--------
Net assets applicable to capital stock outstanding $ 148,656,559
=========
---
See notes to financial statements.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Statement of Operations - (Unaudited)
For the Six Months Ended May 31, 2003
Investment Income (Note 2):
Interest $ 7,343,449
--------
Expenses:
Investment advisory fee (Note 3) 470,813
Administration fee (Note 3) 144,866
Insurance 53,390
Custodian 40,015
Accounting and tax services 29,939
Directors' fees 28,006
Reports to shareholders 19,144
Legal 17,452
Registration fees 15,987
Transfer agency 12,465
Miscellaneous 7,480
--------
Total operating expenses 839,557
--------
Interest expense on reverse repurchase agreements (Note 5) 452,405
Interest expense on swaps (Note 2) 259,626
--------
Total expenses 1,551,588
--------
Net investment income 5,791,861
--------
Realized and Unrealized Gain (Loss) on Invesments (Notes 2 and 7):
Net realized gain (loss) on:
Investments 121,336
Futures 25,465
Swap contracts (505,091)
--------
Net realized loss on investments, futures and swap contracts (358,290)
--------
Net change in unrealized appreciation/depreciation on:
Investments 8,022,610
Futures (182,476)
Swap contracts (989,857)
--------
Net change in unrealized appreciation/depreciation on investments, futures and swap contracts 6,850,277
--------
Net realized and unrealized loss on investments, futures and swap contracts 6,491,987
--------
Net increase in net assets resulting from operations $ 12,283,848
=========
---
See notes to financial statements.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Statements of Changes in Net Assets
For the Six Months For the Period
Ended Ended
May 31, 2003 November 30,
(Unaudited) 2002*
--------
Increase (Decrease) in Net Assets Resulting from Operations:
Net investment income $ 5,791,861 $ 3,692,691
Net realized loss on investments, futures and swap contracts (358,290) (847,122)
Net change in unrealized appreciation/depreciation on investments, futures and swap 6,850,277 (806,504)
contracts
-------- --------
Net increase in net assets resulting from operations 12,283,848 2,039,065
-------- --------
Dividends to Shareholders (Note 2):
Net investment income (6,569,616) (3,284,670)
-------- --------
Capital Stock Transactions (Note 6):
Net proceeds from sale of shares (10,130,000 shares; net of offering costs of $304,111) -- 144,048,389
Net asset value of shares issued through dividend reinvestment (1,432 and 1,278 21,046 18,497
shares, respectively)
-------- --------
Net increase from capital stock transactions 21,046 144,066,886
-------- --------
Total increase in net assets 5,735,278 142,821,281
Net Assets:
Beginning of period 142,921,281 100,000
-------- --------
End of period (including distributions in excess of and undistributed net investment $ 148,656,559 $ 142,921,281
income of $(237,667) and $540,088, respectively)
========= =========
---
* Commenced operations on July 26, 2002 See notes to financial statements.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Statement of Cash Flows - (Unaudited)
For the Six Months Ended May 31, 2003
Increase (Decrease) in Cash:
Cash flows provided by (used for) operating activities:
Interest received (including net accretion of $1,094,944) $ 7,299,387
Interest expense paid (407,782)
Operating expenses paid (965,124)
Purchases of short-term portfolio investments, net (1,223,000)
Purchases of long-term portfolio investments (59,795,431)
Proceeds from disposition of long-term portfolio investments and principal paydowns 61,523,471
Net cash used for futures transactions (113,196)
--------
Net cash provided by operating activities 6,318,325
--------
Cash flows used for financing activities:
Net cash used for reverse repurchase agreements (63,650)
Cash dividends paid (6,569,616)
--------
Net cash used for financing activities (6,633,266)
--------
Net decrease in cash (314,941)
Cash at beginning of period 337,454
--------
Cash at end of period $ 22,513
=========
Reconciliation of Net Increase in Net Assets Resulting from Operations to Net
Cash Provided by Operating Activities:
Net increase in net assets resulting from operations $ 12,283,848
--------
Increase in investments, at cost (4,980,219)
Increase in net unrealized appreciation/depreciation on investments and swaps (7,032,753)
Decrease in interest receivable 197,941
Decrease in variation margin receivable 43,815
Increase in other assets (116,863)
Increase in payables and other liabilities 5,922,556
--------
Total adjustments (5,965,523)
--------
Net cash provided by operating activities $ 6,318,325
=========
---
See notes to financial statements.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Financial Highlights
For the Six For the
Months Period Ended
Ended November 30, 2002*
May 31, 2003
(Unaudited)
--------
Per Share Operating Performance:
Net asset value, beginning of period $ 14.10 $ 14.25**
-------- --------
Net investment income 0.57 0.36
Net realized and unrealized loss on investments, futures transactions, swap contracts 0.64 (0.16)
and short sales
-------- --------
Net increase in net asset value resulting from operations 1.21 0.20
-------- --------
Dividends from net investment income (0.65) (0.32)
Offering costs charged to additional paid-in-capital -- (0.03)
-------- --------
Net asset value, end of period $ 14.66 $ 14.10
========= =========
Market price, end of period $ 14.8900 $ 13.6800
========= =========
Total Investment Return + 13.92% (1) (6.66)% (1)
Ratios to Average Net Assets/Supplementary Data: $ 148,657 $ 142,921
Net assets, end of period (000's)
Operating expenses 1.16% (2) 1.23% (2)
Interest expense 0.98% (2) 1.09% (2)
Total expenses 2.14% (2) 2.32% (2)
Net expenses 2.14% (2) 2.29% (2)
Net investment income 8.00% (2) 7.38% (2)
Portfolio turnover rate 29% (1) 70% (1)
---
+ Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market price
on the last day of the period reported. For the period ended November 30, 2002,
total investment return is based on a beginning period price of $15.00 (initial
offering price). Total investment return for subsequent periods is computed
based upon the New York Stock Exchange market price of the Fund's shares.
Dividends and distributions, if any, are assumed for purposes of this
calculation, to be reinvested at the prices obtained under the Fund's dividend
reinvestment plan. Total investment return does not reflect brokerage
commissions and is not annualized.
(1) Not Annualized
(2) Annualized
* Commenced operations on July 26, 2002
** Initial public offering price of $15.00 per share less underwriting
discount of $0.75 per share.
---
See notes to financial statements.
1. The Fund
The Hyperion Strategic Mortgage Income Fund, Inc. (the "Fund"), which was
incorporated under the laws of the State of Maryland on May 17, 2002, is
registered under the Investment Company Act of 1940 (the "1940 Act") as a
diversified, closed-end management investment company. The Fund commenced
operations on July 26, 2002. Prior to July 26, 2002, the Fund had no operations
other than the sale of 7,018 shares for $100,000 to Hyperion Capital Management,
Inc. (the "Advisor").
The Fund's investment objective is to provide a high level of current income by
investing primarily in mortgage-backed securities. No assurance can be given
that the Fund's investment objective will be achieved.
2. Significant Accounting Policies
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Valuation of Investments: Where market quotations are readily available,
securities held by the Fund are valued based upon the current bid price, except
preferred stocks, which are valued based upon the closing price. Securities may
be valued by independent pricing services that have been approved by the Board
of Directors. The prices provided by a pricing service take into account broker
dealer market price quotations for institutional size trading in similar groups
of securities, security quality, maturity, coupon and other security
characteristics as well as any developments related to the specific securities.
The Fund values mortgage-backed securities ("MBS") and other debt securities for
which market quotations are not readily available (approximately 21% of the
investments in securities held by the Fund at May 31, 2003) at their fair value
as determined in good faith, utilizing procedures approved by the Board of
Directors of the Fund, on the basis of information provided by dealers in such
securities. Some of the general factors which may be considered in determining
fair value include the fundamental analytic data relating to the investment and
an evaluation of the forces which influence the market in which these securities
are purchased and sold. Determination of fair value involves subjective
judgment, as the actual market value of a particular security can be established
only by negotiations between the parties in a sales transaction. Debt securities
having a remaining maturity of sixty days or less when purchased and debt
securities originally purchased with maturities in excess of sixty days but
which currently have maturities of sixty days or less are valued at amortized
cost.
The ability of issuers of debt securities held by the Fund to meet their
obligations may be affected by economic developments in a specific industry or
region. The values of MBS can be significantly affected by changes in interest
rates or in the financial condition of an issuer or market.
Options Written or Purchased: The Fund may write or purchase options as a method
of hedging potential declines in similar underlying securities. When the Fund
writes or purchases an option, an amount equal to the premium received or paid
by the Fund is recorded as a liability or an asset and is subsequently adjusted
to the current market value of the option written or purchased. Premiums
received or paid from writing or purchasing options which expire unexercised are
treated by the Fund on the expiration date as realized gains or losses. The
difference between the premium and the amount paid or received on effecting a
closing purchase or sale transaction, including brokerage commissions, also is
treated as a realized gain or loss. If an option is exercised, the premium paid
or received is added to the proceeds from the sale or cost of the purchase in
determining whether the Fund has realized a gain or a loss on the investment
transaction.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the security
underlying the written option.
The Fund purchases or writes options to hedge against adverse market movements
or fluctuations in value caused by changes in interest rates. The Fund bears the
risk in purchasing an option, to the extent of the premium paid, that it will
expire without being exercised. If this occurs, the option expires worthless and
the premium paid for the option is recognized as a realized loss. The risk
associated with writing call options is that the Fund may forego the opportunity
for a profit if the market value of the underlying position increases and the
option is exercised. The Fund will only write call options on positions held in
its portfolio. The risk in writing a put option is that the Fund may incur a
loss if the market value of the underlying position decreases and the option is
exercised. In addition, the Fund bears the risk of not being able to enter into
a closing transaction for written options as a result of an illiquid market.
Short Sales: The Fund may make short sales of securities as a method of hedging
potential declines in similar securities owned. The Fund may have to pay a fee
to borrow the particular securities and may be obligated to pay to the lender an
amount equal to any payments received on such borrowed securities. A gain,
limited to the amount at which the Fund sold the security short, or a loss,
unlimited as to dollar amount, will be realized upon the termination of a short
sale if the market price is less or greater than the proceeds originally
received.
Financial Futures Contracts: A futures contract is an agreement between two
parties to buy and sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Fund records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Fund's basis in the contract.
The Fund invests in financial futures contracts to hedge against fluctuations in
the value of portfolio securities caused by changes in prevailing market
interest rates. Should interest rates move unexpectedly, the Fund may not
achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts, interest rates and
the underlying hedged assets. The Fund is at risk that it may not be able to
close out a transaction because of an illiquid market.
Swap agreements: The Fund may invest in swap agreements. The Fund may enter into
interest rate swap agreements to manage its exposure to interest rates. Interest
rate swap agreements involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. Swaps are marked to market daily based upon quotations from market
makers and the change, if any, is recorded as unrealized gain or loss in the
Statement of Operations. Net payments of interest on interest rate swap
agreements are included as part of interest expense. For the six months ended
May 31, 2003, such net payments made by the Fund amounted to $259,626. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets and
Liabilities. Such risks involve the possibility that there will be no liquid
market for these agreements, that the counterparty to the agreements may default
on its obligation to perform or that there may be unfavorable changes in the
fluctuation of interest rates. See Note 7 for a summary of all open swap
agreements as of May 31, 2003.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses from securities
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. Discounts and premiums on securities are accreted
and amortized, respectively, using the effective yield to maturity method.
Taxes: It is the Fund's intention to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders. Therefore, no
federal income or excise tax provision is required.
Dividends and Distributions: The Fund declares and pays dividends monthly from
net investment income. Distributions of realized capital gains in excess of
capital loss carryforwards are distributed at least annually. Dividends and
distributions are recorded on the ex-dividend date. Dividends from net
investment income and distributions from realized gains from investment
transactions have been determined in accordance with Federal income tax
regulations and may differ from net investment income and realized gains
recorded by the Fund for financial reporting purposes. These differences, which
could be temporary or permanent in nature, may result in reclassification of
distributions; however, net investment income, net realized gains and net assets
are not affected.
Cash Flow Information: The Fund invests in securities and distributes dividends
and distributions which are paid in cash or are reinvested at the discretion of
shareholders. These activities are reported in the Statement of Changes in Net
Assets. Additional information on cash receipts and cash payments is presented
in the Statement of Cash Flows. Cash, as used in the Statement of Cash Flows, is
the amount reported as "Cash" in the Statement of Assets and Liabilities, and
does not include short-term investments.
Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and accreting discounts and amortizing
premiums on debt obligations.
Repurchase Agreements: The Fund, through its custodian, receives delivery of the
underlying collateral, the market value of which at the time of purchase is
required to be in an amount at least equal to the resale price, including
accrued interest. The Advisor is responsible for determining that the value of
these underlying securities is sufficient at all times. If the seller defaults
and the value of the collateral declines or if bankruptcy proceedings commence
with respect to the seller of the security, realization of the collateral by the
Fund may be delayed or limited.
3. Investment Advisory Agreements and Affiliated Transactions
The Fund has entered into an Investment Advisory Agreement with the Advisor. The
Advisor is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.65% of the Fund's average weekly net assets.
During the six months ended May 31, 2003, the Advisor earned $470,813 in
investment advisory fees.
The Advisor has entered into a Sub-Advisory Agreement with Lend Lease Hyperion
Capital Advisors, LLC (the "Sub-advisor"). The Sub-advisor is owned equally by
Lend Lease Real Estate Investments, Inc. and the Advisor and was formed for the
purpose of managing portfolios of commercial mortgage-backed securities
("CMBS"). Under the terms of the agreement, the Sub-advisor is to assist in
managing the Fund's investments in CMBS and to provide such investment research
and advice regarding CMBS as may be necessary for the operation of the Fund. For
such services, the Advisor pays, out of its advisory fee, a monthly fee equal to
a percentage of the portion of the Fund's average weekly net assets that are
invested in CMBS. The fee is determined by the credit rating of the CMBS at the
time of purchase, and ranges from 1.00% for unrated CMBS to 0.13% for AAA/Aaa
rated CMBS.
The Fund has entered into an Administration Agreement with Hyperion Capital
Management, Inc. (the "Administrator"). The Administrator entered into a
sub-administration agreement with State Street Corp. (the "Sub-Administrator"),
an affiliate of the Fund's Custodian. The Administrator and Sub-Administrator
perform administrative services necessary for the operation of the Fund,
including maintaining certain books and records of the Fund and preparing
reports and other documents required by federal, state, and other applicable
laws and regulations, and providing the Fund with administrative office
facilities. For these services, the Fund pays to the Administrator a monthly fee
at an annual rate of 0.20% of the Fund's average weekly net assets. During the
six months ended May 31, 2003 the Administrator earned $144,866 in
administration fees. The Administrator is responsible for any fees due the
Sub-Administrator.
Certain officers and/or directors of the Fund are officers and/or directors of
the Advisor/Administrator.
4. Purchases and Sales of Investments
Purchases and sales of investments, excluding short-term securities, U.S.
Government securities and reverse repurchase agreements, for the six months
ended May 31, 2003, were $8,666,711 and $10,277,381, respectively. Purchases and
sales of U.S. Government securities, for the six months ended May 31, 2003, were
$56,743,315 and $51,955,216, respectively. For purposes of this footnote, U.S.
Government securities may include securities issued by the U.S. Treasury,
Federal Home Loan Mortgage Corporation, and the Federal National Mortgage
Association.
5. Borrowings
The Fund may enter into reverse repurchase agreements with the same parties with
whom it may enter into repurchase agreements. Under a reverse repurchase
agreement, the Fund sells securities and agrees to repurchase them at a mutually
agreed upon date and price. Under the 1940 Act, reverse repurchase agreements
will be regarded as a form of borrowing by the Fund unless, at the time it
enters into a reverse repurchase agreement, it establishes and maintains a
segregated account with its custodian containing securities from its portfolio
having a value not less than the repurchase price (including accrued interest).
The Fund has established and maintained such an account for each of its reverse
repurchase agreements.
Reverse repurchase agreements involve the risk that the market value of the
securities retained in lieu of sale by the Fund may decline below the price of
the securities the Fund has sold but is obligated to repurchase. In the event
the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, such buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
At May 31, 2003 the Fund had the following reverse repurchase agreements
outstanding:
Face Value Description Maturity Amount
-------- -------- --------
$17,835,000 Lehman Brothers, 1.32%, dated 05/14/03, maturity date 06/06/03 $ 17,850,041
13,867,000 Lehman Brothers, 1.31%, dated 05/28/03, maturity date 06/18/03 13,877,597
14,822,000 Merrill Lynch, 1.29%, dated 05/08/03, maturity date 06/05/03 14,836,871
9,568,000 Morgan Stanley 1.10%, dated 05/28/03, maturity date 06/04/03 9,570,046
12,108,350 Morgan Stanley 1.28%, dated 05/29/03, maturity date 06/09/03 12,113,086
--------
--------
$ 68,200,350
=========
Maturity Amount, Including Interest Payable $ 68,247,641
--------
Market Value of Assets Sold Under Agreements $ 68,060,768
--------
Weighted Average Interest Rate 1.27%
--------
The average daily balance of reverse repurchase agreements outstanding during
the six months ended May 31, 2003, was approximately $69,605,686 at a weighted
average interest rate of 1.29%. The maximum amount of reverse repurchase
agreements outstanding at any time during the period was $75,802,346 as of April
15, 2003, which was 34.39% of total assets.
6. Capital Stock
There are 50 million shares of $0.01 par value common stock authorized. Of the
10,139,728 shares outstanding at May 31, 2003, the Advisor owned 7,018 shares.
In connection with the initial public offering of the Fund's Shares, the Advisor
made an undertaking to pay any offering costs in excess of $0.03 per common
share. The Advisor has advised the Fund that such excess amounted to $482,964.
7. Financial Instruments
The Fund regularly trades in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing exposure
to various market risks. These financial instruments include written options,
futures contracts and swap agreements and may involve, to a varying degree,
elements of risk in excess of the amounts recognized for financial statement
purposes. The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. During the period,
the Fund had segregated sufficient cash and/or securities to cover any
commitments under these contracts.
There was no written option activity for the six months ended May 31, 2003.
As of May 31, 2003, the following swap agreements were outstanding:
Notional Amount Expiration Description Net Unrealized
Date Appreciation/
(Depreciation)
-------- -------- -------- --------
$18,800,000 01/02/06 Agreement with Goldman Sachs Capital Markets, LP, $ (351,934)
dated 12/30/02 to pay semi-annually the notional
amount multiplied by 2.458% and to
receive quarterly the notional
amount multiplied by 3 month
LIBOR.
$25,800,000 01/02/06 Agreement with Morgan Stanley Capital Services Inc., (482,320)
dated
12/30/02 to pay semi-annually the notional amount
multiplied by 2.457% and to receive quarterly the
notional amount multiplied by 3 month LIBOR.
--------
$ (834,254)
As of May 31,
2003, the
following futures
contracts were
outstanding:
Short:
Notional Type Expiration Date Cost at Value at Net Unrealized
Ammount Trade Date May 31, 2003 Appreciation/
(Depreciation)
$ 6,200,000 10 Yr. U.S. Treasury Note June 2003 $7,103,379 $7,381,875 $ (278,496)
6,500,000 10 Yr. U.S. Treasury Note September 2003 7,673,047 7,698,924 (25,877)
--------
$ (304,373)
=========
8. Federal Income Tax Information
Income and capital gain distributions are determined in accordance with federal
income tax regulations, which may differ from generally accepted accounting
principles.
During the period ended November 30, 2002 the tax character of the $3,284,670 of
distributions paid was from ordinary income.
At November 30, 2002 the components of net assets (excluding paid-in-capital) on
a tax basis were as follows:
Undistributed Tax ordinary income $540,088
=========
Tax basis capital loss carryover $(914,308)
Less: Cumulative timing differences (186,778)
=========
Accumulated capital loss $(1,101,086)
=========
Book basis unrealized appreciation/(depreciation) $(806,504)
Plus: Cumulative timing differences 121,897
=========
Unrealized appreciation/(depreciation) $(684,607)
=========
The cumulative timing differences under tax basis capital loss carryover are due
to post-October losses. The differences between book and tax basis unrealized
appreciation/(depreciation) is primarily attributable to the mark-to-market of
futures.
Federal Income Tax Basis: The federal income tax basis of the Fund's investments
at May 31, 2003 was $215,316,217. Net unrealized appreciation was $7,182,400
(gross unrealized appreciation - $8,152,409; gross unrealized depreciation -
$970,009). At November 30, 2002, the Fund had a capital loss carryforward of
$914,308, which expires in 2010, available to offset any future gains, to the
extent provided by regulations.
9. Subsequent Events
Dividend: The Fund's Board of Directors declared the following regular monthly
dividends:
Dividend Record Date Payable
Per Share Date
-------- -------- --------
$0.1080 06/17/03 06/26/03
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Information Concerning Directors and Officers (Unaudited)
The following tables provide information concerning the directors and officers
of The Hyperion Strategic Mortgage Income Fund, Inc. (the "Fund").
Name, Address Position(s) Held Principal Occupation(s) Number of
and Age with Fund and During Past 5 Years and Portfolios in
Term of Office Other Directorships Held by Director Fund Complex
and Length of Overseen
Time Served by Director
Class I Nominee/Directors to serve until 2006 Annual Meeting of Stockholders:
Robert F. Birch Director, Member of Chairman and President, New America High 4
c/o One Liberty Plaza, New The Audit Income Fund (1992-Present); Chairman of the
York, New York 10006-1404 Committee, Member Board and Co-Founder, The China Business
of Nominating and Group, Inc. (1996-Present); Director,
Age 67 Compensation Brandywine Funds (2) (2001 to Present).
Committee and
Member of Executive Formerly, Director and Strategic Planning
Committee Consultant, Dewe Rogerson, Ltd. (1994-1998)
Elected for One
Year Term/Director
since June 2002
Class II Director to serve until 2004 Annual Meeting of Stockholders:
Rodman L. Drake Director, Member of Director and/or Trustee of several 3
c/o One Liberty Plaza, New the Audit investment companies (3) advised by Hyperion
York, New York 10006-1404 Committee, Chairman Capital Management, Inc. (1989-Present);
of Nominating and Co-founder, Baringo Capital LLC
Age 60 Compensation (2002-Present); Director, Animal Medical
Committees Center (2002-Present); Director,
Hotelevision, Inc. (1999-Present); Chairman,
Elected for Two Metro Cash Card International
Year Term/Director (1999-Present). Director, Parsons
since June 2002 Brinckerhoff, Inc. (1995-Present); Director,
Absolute Quality Inc. (2000- Present);
Trustee of Excelsior Funds (3)
(1994-Present). Formerly, President,
Continuation Investments Group Inc.
(1997-2001); Director, Alliance Group
Services, Inc. (1998-2001).
Harry E. Petersen, Jr. Director, Member of Director and/or Trustee of several 3
c/o One Liberty Plaza, New the Audit investment companies (3) advised by Hyperion
York, New York 10006-1404 Committee, Member Capital Management, Inc. or by its
of Nominating and affiliates (1992-Present).
Age 78 Compensation
Committees, Member Formerly, Senior Consultant to Cornerstone
of Executive Equity Advisors, Inc. (1998-2001); Senior
Committee Consultant to Potomac Babson Inc.
(1995-1998).
Elected for Two
Year Term/Director
since June 2002
Name, Address Position(s) Held Principal Occupation(s) Number of
and Age with Fund and During Past 5 Years and Portfolios in
Term of Office Other Directorships Held by Director Fund Complex
and Length of Overseen
Time Served by Director
--------
Class III Director to serve until 2005 Annual Meeting of Stockholders:
Lewis S. Ranieri* Chairman, Elected Chairman and Chief Executive Officer of 3
c/o One Liberty Plaza, New annually since June Ranieri & Co., Inc. (since 1988); President
York, New York 10006-1404 2002 of LSR Hyperion Corp., a general partner of
the limited partnership that is the general
Age 56 Director, Member of partner of Hyperion Partners L.P. ("Hyperion
Executive Committee Partners") (since 1988); Director and
Chairman of the Board of Hyperion Capital
Elected for Three Management, Inc. (since June 2002); Director
Year Term/Director and Vice Chairman of the Board of Hyperion
since June 2002 Capital Management, Inc. (from November 1998
through June 2002) Director and Chairman of
the Board of Hyperion Capital Management,
Inc. (1989-November 1998); Director and
President of Hyperion Funding II Corp., the
general partnership that is the general
partner of Hyperion Partners II, L.P.
(Hyperion Partners II); Chairman and
President of various other direct and
indirect subsidiaries of Hyperion Partners
(since 1989) and Hyperion Partners II (since
1995); Chairman of the Board (1989-December
1998 and June 2002 through present) and/or
Director (since 1989) of several investment
companies (3) advised by Hyperion Capital
Management, Inc. or by its affiliates.
Formerly, Director and Chairman of Bank
United Corp., and Director of Bank United
(1988-2001); Director of Lend Lease Hyperion
Mortgage Opportunity Fund, Inc. (formerly,
Equitable Real Estate Hyperion Mortgage
Opportunity Fund, Inc.) and Lend Lease
Hyperion High Yield Commercial Mortgage
Fund, Inc. (formerly, Equitable Real Estate
Hyperion High Yield Commercial Mortgage
Fund, Inc.) (1995-1999).
Leo M. Walsh, Jr. Director, Chairman Director and/or Trustee of several 4
c/o One Liberty Plaza, New of the Audit investment companies (3) advised by Hyperion
York, New York 10006-1404 Committee, Member Capital Management, Inc. or by its
of Nominating and affiliates (1989-Present); Financial
Age 70 Compensation Consultant for Medco Health Solutions, Inc.
Committees (formerly, Merck-Medco Managed Care LLC)
(1994-Present); Director of Lend Lease
Elected for Three Hyperion Mortgage Opportunity Fund, Inc.
Year Term/Director (formerly, Equitable Real Estate Hyperion
since June 2002 Mortgage Opportunity Fund, Inc.) and Lend
Lease Hyperion High Yield CMBS Fund, Inc.
(formerly, Equitable Real Estate Hyperion
High Yield Commercial Mortgage Fund, Inc.)
(1999-Present).
* Interested persons as defined in the 1940 Act, because of affiliations with
Hyperion Capital Management, Inc., the Fund's Advisor.
Officers of the Fund
Name, Address Position(s) Term of Office and Principal Occupation(s)
and Age Held Length of Time During Past 5 Years
with Fund Served
--------
Lewis S. Ranieri* Chairman Elected Annually Please see "Information Concerning
c/o One Liberty Plaza, Since June 2002 Directors."
New York, New York
10006-1404
Age 56
Clifford E. Lai* President Elected Annually President (since November 1998) of Hyperion
c/o One Liberty Plaza, Since June 2002 Capital Management, Inc. (March
New York, New York 1993-Present); President (since June 1997)
10006-1404 of Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc. (Senior Vice
Age 50 President from April 1993 to June 1997);
President (since October 1995) of The
Hyperion Total Return Fund, Inc.; Director
and Chairman of the Board (since October
2000) of the Lend Lease Hyperion High-Yield
CMBS Fund, Inc. Formerly, President
(December
1999-October
2000) of
the Lend
Lease
Hyperion
High-Yield
CMBS
Fund,
Inc.;
Senior Vice President (November
1998-December 1999) of the Lend Lease
Hyperion High-Yield Commercial Mortgage
Fund, Inc; Senior Vice President (September
1995-November 1998) of the Equitable Real
Estate Hyperion High-Yield Commercial
Mortgage Fund, Inc.
John Dolan* Vice President Elected Annually Chief Investment Strategist
(1998-Present) c/o One Liberty Plaza, Since June 2002 and Chief Investment
Officer (since 2002) of New York, New York Hyperion Capital Management.
10006-1404
Age 49
Patricia A. Sloan* Vice President Elected Annually Consultant of Ranieri & Co.,
c/o One Liberty Plaza, Since June 2002 Inc.(2000-Present). Formerly Secretary,
New York, New York Director and/or Trustee of several
10006-1404 investment companies advised by Hyperion
Capital Management, Inc. or by its
Age 59 affiliates (1989-2002).
Thomas F. Doodian* Treasurer Elected Annually Managing Director, Chief Operating Officer
c/o One Liberty Plaza, Since June 2002 (1998-Present) and Director of Finance and
New York, New York Operations, Hyperion Capital Management,
10006-1404 Inc. (July 1995-Present). Treasurer of
several investment companies advised by
Age 44 Hyperion Capital Management, Inc. (February
1998-Present).
Joseph Tropeano Secretary Elected Annually Director and Compliance Officer, Hyperion
c/o One Liberty Plaza, Since June 2002 Capital Management, Inc. (1993-Present);
New York, New York Secretary and Compliance Officer of several
10006-1404 investment companies advised by Hyperion
Capital Management, Inc. (1994-Present);
Age 41 Secretary and Compliance Officer, Lend Lease
Hyperion Capital Advisors, LLC
(1995-Present); Secretary and Compliance
Officer of Lend Lease Hyperion High-Yield
CMBS Fund, Inc. (1998-Present). Formerly,
Assistant Secretary and Compliance Officer,
AIG Hyperion Inc. (1994-2002); Vice
President and Compliance Officer, Hyperion
Distributors, Inc. (1994-1998).
The Fund's Statement of Additional Information includes additional information
about the directors and is available, without charge, upon request by calling
1-800-497-3746.
* Interested persons as defined in the 1940 Act, because of affiliations with
Hyperion Capital Management, Inc., the Fund's Advisor.
DIVIDEND REINVESTMENT PLAN
A Dividend Reinvestment Plan (the "Plan") is available to shareholders of the
Fund pursuant to which they may elect to have all distributions of dividends and
capital gains automatically reinvested by American Stock Transfer & Trust
Company (the "Plan Agent") in additional Fund shares. Shareholders who do not
participate in the Plan will receive all distributions in cash paid by check
mailed directly to the shareholder of record (or if the shares are held in
street or other nominee name, then to the nominee) by the Fund's Custodian, as
Dividend Disbursing Agent.
The Plan Agent serves as agent for the shareholders in administering the Plan.
After the Fund declares a dividend or determines to make a capital gain
distribution, payable in cash, if (1) the market price is lower than net asset
value, the participants in the Plan will receive the equivalent in Fund shares
valued at the market price determined as of the time of purchase (generally, the
payment date of the dividend or distribution); or if (2) the market price of the
shares on the payment date of the dividend or distribution is equal to or
exceeds their net asset value, participants will be issued Fund shares at the
higher of net asset value or 95% of the market price. This discount reflects
savings in underwriting and other costs that the Fund otherwise will be required
to incur to raise additional capital. If net asset value exceeds the market
price of the Fund shares on the payment date or the Fund declares a dividend or
other distribution payable only in cash (i.e., if the Board of Directors
precludes reinvestment in Fund shares for that purpose), the Plan Agent will, as
agent for the participants, receive the cash payment and use it to buy Fund
shares in the open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts. If, before the Plan Agent has completed its purchases,
the market price exceeds the net asset value of the Fund's shares, the average
per share purchase price paid by the Plan Agent may exceed the net asset value
of the Fund's shares, resulting in the acquisition of fewer shares than if the
dividend or distribution had been paid in shares issued by the Fund. The Fund
will not issue shares under the Plan below net asset value.
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent. When a participant withdraws from the Plan or upon termination of
the Plan by the Fund, certificates for whole shares credited to his or her
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.
There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below. The
Plan Agent's fees for handling the reinvestment of dividends and distributions
are paid by the Fund. There are no brokerage commissions charged with respect to
shares issued directly by the Fund. However, each participant will pay a pro
rata share of brokerage commissions incurred with respect to the Plan Agent's
open market purchases in connection with the reinvestment of dividends and
distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable on such dividends or
distributions.
A brochure describing the Plan is available from the Plan Agent, by calling
1-212-936-5100.
If you wish to participate in the Plan and your shares are held in your name,
you may simply complete and mail the enrollment form in the brochure. If your
shares are held in the name of your brokerage firm, bank or other nominee, you
should ask them whether or how you can participate in the Plan. Shareholders
whose shares are held in the name of a brokerage firm, bank or other nominee and
are participating in the Plan may not be able to continue participating in the
Plan if they transfer their shares to a different brokerage firm, bank or other
nominee, since such shareholders may participate only if permitted by the
brokerage firm, bank or other nominee to which their shares are transferred.
INVESTMENT ADVISOR AND ADMINISTRATOR
HYPERION CAPITAL MANAGEMENT, INC.
One Liberty Plaza
165 Broadway, 36th Floor
New York, New York 10006-1404
For General Information about the Trust:
(800) HYPERION
SUB-ADVISOR
LEND LEASE HYPERION CAPITAL ADVISORS, LLC One Liberty Plaza 165 Broadway, 36th
Floor New York, New York 10006-1404
SUB-ADMINISTRATOR
STATE STREET CORP.
225 Franklin Street
Boston, Massachusetts 02116
CUSTODIAN AND FUND ACCOUNTING AGENT
STATE STREET CORP.
225 Franklin Street
Boston, Massachusetts 02116
TRANSFER AGENT
AMERICAN STOCK TRANSFER & TRUST COMPANY
Investor Relations Department
59 Maiden Lane
New York, NY 10038
For Shareholder Services:
(800) 937-5449
INDEPENDENT AUDITORS
PRICEWATERHOUSECOOPERS LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
SULLIVAN & WORCESTER LLP
1666 K Street, North West
Washington, D.C. 20036
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that periodically the Fund may purchase its shares in the
open market at prevailing market prices.
Officers & Directors
Lewis S. Ranieri
Chairman
Robert F. Birch*
Director
Rodman L. Drake*
Director
Leo M. Walsh, Jr.*
Director
Harry E. Petersen, Jr.*
Director
Clifford E. Lai
President
Patricia A. Sloan
Vice President
John Dolan
Vice President
Thomas F. Doodian
Treasurer
Joseph Tropeano
Secretary
* Audit Committee Members
The financial information included herein is taken from the records of the Fund
without audit by the Fund's independent auditors, who do not express an opinion
thereon.
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Fund shares.
The Hyperion Strategic Mortgage
Income Fund, Inc.
One Liberty Plaza
165 Broadway, 36th Floor
New York, NY 10006-1404
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. [Reserved]
Item 6. [Reserved]
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. [Reserved]
Item 9. Controls and Procedures.
(a) The registrant's principal executive officer and principal financial officer
have concluded that the registrant's Disclosure Controls and Procedures are
effective, based on their evaluation of such Disclosure Controls and Procedures
as of a date within 90 days of the filing of this report on Form N-CSR.
(b) As of the date of filing this Form N-CSR, the registrant's principal
executive officer and principal financial officer are aware of no significant
changes in the registrant's internal controls or in other factors that could
significantly affect such controls subsequent to the date of their evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10. Exhibits.
(a) Not applicable.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant as required by Rule 30a-2 under the
Investment Company Act of 1940 is attached as an exhibit to this Form N-CSR.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
By: /s/ Clifford E. Lai
Clifford E. Lai
President and Principal Executive Officer
Date: August 7, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Clifford E. Lai
Clifford E. Lai
President and Principal Executive Officer
Date: August 7, 2003
By: /s/ Thomas F. Doodian
Thomas F. Doodian
Treasurer and Principal Financial Officer
Date: August 7, 2003