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 30
Date of reporting period: May 31, 2004
Item 1. Reports to Shareholders.
[GRAPHIC OMITTED]
May 31, 2004
[GRAPHIC OMITTED]
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2004
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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, 2004. 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"), Asset-Backed Securities ("ABS"), 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.
Performance
With the Federal Reserve Board's recent decisive change in posture regarding
interest rates, the market prices of most fixed income bond funds dropped. Over
the past six months, despite keeping the duration of the portfolio at the
shorter end of its target, the Fund's return, based on market price, was (5.25)%
for the six-month period ended May 31, 2004. The Fund's negative return, based
on market price, resulted from the elimination of the premium between the market
price of the Fund's shares and the shares' net asset value and the subsequent
opening of a discount between the shares' market price and net asset value. At
the beginning of the period, the Fund's shares traded at a premium of 1.8% over
net asset value and at the end of the period the Fund's shares traded at a
discount of 7.3% below net asset value. Based on the NYSE closing price of
$13.28 on May 31, 2004, the Fund had a yield of 9.76%.
As of May 31, 2004, 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 3.9 years, as measured on a net asset basis.
Market Environment
The economy is clearly performing well, such that the market's consensus view
has changed and most economists believe that the Federal Reserve Board will
raise interest rates several times in 2004 in 25 or 50 bps increments. The
catalyst for this change in monetary policy has been the strong rebound in the
employment reports, which shows the pace of job growth increasing over the last
several months.
Interestingly, while the fixed income market is anticipating a 2.0% increase in
the federal funds rate within about a year, those same "forward" indicators view
the yield on the 10-year Treasury as being only about 50 bps higher in the same
time frame. So the consensus in the market is that rates will be higher in the
future, and that interest rates will rise more on shorter maturity assets than
longer maturity assets. We are in agreement with both of these outlooks.
But while the outlook is for higher interest rates, there are some headwinds
that could slow and maybe even arrest the trend. Higher oil prices, a slowing
Chinese economy, and the potential for domestic terrorism could act to dampen
the pace of economic growth. Currently, we do not believe that these threats are
significant enough to deter rising interest rates.
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2004
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Portfolio Strategy
The yield spreads for mortgage-related issues narrowed during the period,
particularly in the ABS sector. With the recent increase in interest rates, we
look for this trend to continue as the supply of ABS and MBS diminishes.
The Fund's allocation changed modestly over the period. On balance, the paydowns
were reinvested into RMBS and mortgage-related ABS, in such a way as to maintain
those exposures from an asset allocation point of view. The CMBS portfolio
declined slightly, mostly due to their market value changes as interest rates
increased. On a relative-value basis, CMBS yield spreads relative to other
securities in the market appear overvalued; therefore we are cautious in adding
to this sector.
The Fund continues to be managed very conservatively from a credit risk point of
view. The AAA-rated exposure increased from 51% to 54% of total assets, versus a
longer-term target of 40% of total assets. With the credit environment improving
along with the strengthening economy, we expect to increase the allocation to
lower rated issues over the next few months.
We remain fully leveraged to take advantage of the steepness in the yield curve,
with much of the leverage being offset by floating rate assets. The Fund's
duration has been running between 3.5 to 4.0 years, and we expect to maintain
this duration range until longer-term interest rates appear attractive.
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 at 1-800-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.
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments -- (Unaudited)
May 31, 2004 Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
-----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 59.1%
U.S. Government Agency Pass -Through Certificates -- 59.1%
Federal Home Loan Mortgage Corporation
Pool C68878....................................................... 7.00% 06/01/32 $ 721# $ 759,302
Pool C69047....................................................... 7.00 06/01/32 1,630 1,712,552
Pool G01466....................................................... 9.50 12/01/22 2,274@ 2,549,668
Pool 555538....................................................... 10.00 03/01/21 1,998@ 2,218,151
----------------
7,239,673
Federal National Mortgage Association
Pool 694391....................................................... 5.50 03/01/33 5,226@ 5,184,591
Pool 753914....................................................... 5.50 12/01/33 20,331@ 20,171,077
Pool 761836....................................................... 6.00 06/01/33 8,261@ 8,404,890
Pool 754355....................................................... 6.00 12/01/33 10,344@ 10,521,545
Pool 763643....................................................... 6.00 01/01/34 9,751@ 9,918,738
Pool 323982....................................................... 6.50 10/01/06 883 907,849
Pool 641575....................................................... 7.00 04/01/32 781 823,117
Pool 645399....................................................... 7.00 05/01/32 3,918@ 4,119,453
Pool 645466....................................................... 7.00 05/01/32 3,939@ 4,141,701
Pool 626299....................................................... 7.00 06/01/32 1,160 1,220,076
Pool 635095....................................................... 7.00 06/01/32 1,587 1,668,429
Pool 650131....................................................... 7.00 07/01/32 2,190 2,307,816
Pool 636449....................................................... 8.50 04/01/32 6,455@ 6,961,004
Pool 458132....................................................... 9.71 03/15/31 2,000 2,262,188
----------------
78,612,474
----------------
Total U.S. Government Agency Pass -Through Certificates
(Cost-- $86,446,356)......................................... 85,852,147
----------------
Total U.S. Government & Agency Obligations
(Cost-- $86,446,356)......................................... 85,852,147
----------------
ASSET-BACKED SECURITIES -- 22.3%
Housing Related Asset-Backed Securities -- 22.3%
Argent Securities, Inc.
Series 2004-W3, Class M5*(a)...................................... 3.40+ 02/25/34 1,200 880,313
Asset Backed Funding Corp.
Series 2003-OPT1, Class M4(a)..................................... 3.90+ 07/25/32 3,000 3,083,793
Equity One ABS, Inc.
Series 2003-4, Class B2........................................... 5.85+ 11/25/33 1,000 1,013,463
First Franklin Mortgage Loan Asset Backed Certificates
Series 2004-FFH2C, Class B1*(a)................................... 0.00+ 06/25/34 1,250 1,044,727
Series 2004-FF4, Class M2(a)...................................... 2.35+ 06/25/34 2,000 2,000,000
Series 2003-FF4, Class M4(a)...................................... 4.00+ 10/25/33 3,000 3,097,947
Series 2003-FF1, Class M4(a)...................................... 4.10+ 03/25/33 2,000 2,042,976
Series 2003-FFH1, Class M4(a)..................................... 4.60+ 09/25/33 4,740 4,946,564
Series 2004-FFH1, Class B*(a)..................................... 4.60+ 03/25/34 1,550 1,324,976
Series 2004-FF2, Class B*(a)...................................... 4.60+ 03/25/34 900 786,112
----------------
15,243,302
Green Tree Financial Corp. ----------------
Series 1997-6, Class B1........................................... 7.17 01/15/29 5,000 1,000,000
Long Beach Mortgage Loan Trust
Series 2002-5, Class M3(a)........................................ 4.35+ 11/25/32 2,500 2,549,345
Series 2004-1, Class M9(a)........................................ 4.60+ 02/25/34 4,500 4,596,192
----------------
7,145,537
----------------
---------
See notes to financial statements.
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments -- (Unaudited)
May 31, 2004 Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
-----------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (continued)
Structured Asset Investment Loan Trust
Series 2003-BC8, Class M2(a)........................................ 2.85+% 08/25/33 $ 3,000 $ 3,048,198
Series 2004-2, Class B*(a).......................................... 4.10+ 03/25/34 1,074 923,713
----------------
3,971,911
Total Housing Related Asset-Backed Securities ----------------
(Cost-- $32,041,251)........................................... 32,338,319
----------------
Total Asset-Backed Securities
(Cost-- $32,041,251)........................................... 32,338,319
----------------
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COMMERCIAL MORTGAGE BACKED SECURITIES -- 26.7%
Bear Stearns Commercial Mortgage Securities
Series 1999-C1, Class G*............................................. 5.64 02/14/31 2,390 1,555,664
Series 1999-C1, Class D.............................................. 6.53 02/14/31 2,500 2,654,350
Series 2000-WF1, Class E............................................. 8.14+ 02/15/32 2,000 2,257,560
----------------
6,467,574
GE Capital Commercial Mortgage Corp. ----------------
Series 2002-2A, Class G*............................................. 6.04 08/11/36 3,000 3,086,262
Series 2000-1, Class G*.............................................. 6.13 01/15/33 1,000 714,800
Series 2002-2A, Class H*............................................. 6.31 08/11/36 2,000 2,042,780
Series 2000-1, Class E............................................... 7.44+ 01/15/33 1,000 1,060,260
----------------
6,904,102
Government Lease Trust ----------------
Series 1999-C1A, Class B3*........................................... 4.00 05/18/11 2,500 2,225,565
JP Morgan Chase Commercial Mortgage Securities
Series 2003-LN1, Class G*............................................ 5.65+ 10/15/37 1,600 1,559,045
JP Morgan Commercial Mortgage Finance Corp.
Series 1999-C7, Class F*............................................. 6.00 10/15/35 2,000 1,867,830
Morgan Stanley Capital I
Series 1999-WF1, Class E............................................. 7.19+ 11/15/31 5,500 6,076,625
Series 1999-FNV1, Class E............................................ 7.71+ 03/15/31 2,000 2,199,200
----------------
8,275,825
Morgan Stanley Dean Witter Capital I ----------------
Series 2001-TOP1, Class A4........................................... 6.66 02/15/33 4,500 4,943,147
Nationslink Funding Corp.
Series 1998-2, Class E............................................... 7.11 08/20/30 4,000 4,354,588
UBS 400 Atlantic Street Mortgage Trust
Series 2002-C1A, Class B3*........................................... 7.19 01/11/22 2,000 2,164,620
----------------
Total Commercial Mortgage Backed Securities
(Cost-- $38,769,806)............................................ 38,762,296
----------------
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES-- 42.8%
Subordinated Collateralized Mortgage Obligations-- 42.8%
ABN AMRO Mortgage Corp.
Series 2002-7, Class B2.............................................. 6.20+ 09/25/32 1,058 1,072,050
Banc of America Alternative Loan Trust
Series 2004-3, Class 30B4............................................ 5.50 04/25/34 1,015 783,819
Series 2004-3, Class 30B5............................................ 5.50 04/25/34 711 385,947
----------------
1,169,766
----------------
---------
See notes to financial statements.
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments -- (Unaudited)
May 31, 2004 Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
-----------------------------------------------------------------------------------------------------------------------------
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued)
Banc of America Mortgage Securities, Inc
Series 2004-A, Class B4............................................ 3.96+% 02/25/34 $ 2,071 $ 1,723,126
Series 2002-H, Class B4............................................ 4.70+ 08/25/32 320 307,530
Series 2002-H, Class B5............................................ 4.70+ 08/25/32 214 192,243
Series 2002-H, Class B6............................................ 4.70+ 08/25/32 535 406,392
Series 2002-I, Class B4............................................ 4.74+ 08/25/32 538 532,284
Series 2002-10, Class 1B3.......................................... 6.00 11/25/32 1,473 1,494,984
Series 2002-8, Class 1B1........................................... 6.25 08/25/32 7,284 7,328,852
Series 2002-8, Class 1B4*.......................................... 6.25 08/25/32 1,079 1,072,316
Series 2002-8, Class 1B5*.......................................... 6.25 08/25/32 809 660,529
Series 2002-8, Class 1B6*.......................................... 6.25 08/25/32 810 485,844
Series 2002-9, Class 1B3........................................... 6.25 10/25/32 1,766 1,785,325
Series 2002-9, Class 1B4........................................... 6.25 10/25/32 1,178 1,145,741
----------------
17,135,166
Banc of America Mortgage Securities, Inc. ----------------
Series 2003-10, Class 1B4.......................................... 5.50 01/25/34 569 469,507
Cendant Mortgage Corp.
Series 2002-4, Class B1............................................ 6.50 07/25/32 2,642 2,697,501
Series 2002-4, Class B2............................................ 6.50 07/25/32 1,057 1,050,242
Series 2002-4, Class B3............................................ 6.50 07/25/32 616 608,770
Series 2002-4, Class B4............................................ 6.50 07/25/32 352 332,495
Series 2002-4, Class B5............................................ 6.50 07/25/32 264 214,532
Series 2002-4, Class B6*........................................... 6.50 07/25/32 352 211,371
----------------
5,114,911
Citicorp Mortgage Securities, Inc. ----------------
Series 2002-8, Class B1............................................ 6.07+ 07/25/32 3,563 3,560,052
Series 2002-8, Class B2............................................ 6.07+ 07/25/32 1,550 1,548,964
Series 2002-8, Class B3............................................ 6.07+ 07/25/32 774 773,503
----------------
5,882,519
G3 Mortgage Reinsurance Ltd. ----------------
Series 1, Class E*................................................. 21.10+ 05/25/08 4,275 4,595,651
Master Asset Securitization Trus
Series 2002-3, Class B6............................................ 6.25+ 07/25/32 757 605,744
Residential Finance Limited Partnership
Series 2002-A, Class B5*........................................... 3.45+ 10/10/34 1,963 1,991,676
Series 2002-A, Class B7............................................ 6.80+ 10/10/34 1,976 2,015,655
----------------
4,007,331
Residential Funding Mortgage Securities I, Inc. ----------------
Series 2004-S1, Class B2........................................... 5.25 02/25/34 460 268,264
Series 2003-S7, Class B3........................................... 5.50 05/25/33 326 202,562
Series 2003-S7, Class B2........................................... 5.50 05/25/33 539 163,023
Series 2002-S10, Class B1*......................................... 6.50 07/25/32 705 686,434
Series 2002-S10, Class B2*......................................... 6.50 07/25/32 528 421,919
Series 2002-S10, Class B3*......................................... 6.50 07/25/32 529 264,275
----------------
2,006,477
Resix Finance Limited Credit-Linked Note ----------------
Series 2004-B, Class B8*........................................... 5.85+ 02/10/36 816 816,000
Series 2004-B, Class B9*........................................... 9.35+ 02/10/36 1,250 1,250,000
Series 2004-A, Class B10*.......................................... 12.60+ 02/10/36 499 510,930
----------------
2,576,930
----------------
---------
See notes to financial statements.
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Portfolio of Investments -- (Unaudited)
May 31, 2004 Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
-----------------------------------------------------------------------------------------------------------------------------
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued)
Structured Asset Mortgage Investments, Inc.
Series 2002-AR1, Class B4........................................... 4.29+%...03/25/32 $ 1,097 $ 998,593
Washington Mutual Mortgage Securities Corp.
Series 2002-AR12, Class B4.......................................... 4.72+ 10/25/32 1,397 1,333,308
Series 2002-AR12, Class B5.......................................... 4.72+ 10/25/32 1,048 952,650
Series 2002-AR12, Class B6.......................................... 4.72+ 10/25/32 1,748 1,188,589
Series 2002-AR10, Class B4*......................................... 5.01+ 10/25/32 1,662 1,598,409
Series 2002-AR10, Class B5*......................................... 5.01+ 10/25/32 1,246 1,142,103
Series 2002-AR10, Class B6*......................................... 5.01+ 10/25/32 2,080 1,414,415
Series 2002-AR11, Class B5.......................................... 5.16+ 10/25/32 954 869,316
Series 2002-AR11, Class B6.......................................... 5.16+ 10/25/32 1,590 1,049,950
----------------
9,548,740
----------------
Wells Fargo Mortgage Backed Securities Trust
Series 2002, Class B5............................................... 6.00 06/25/32 367 313,521
Series 2002-15, Class B1............................................ 6.50 08/25/32 5,112 5,127,887
Series 2002-15, Class B4............................................ 6.50 08/25/32 590 588,684
Series 2002-15, Class B5............................................ 6.50 08/25/32 786 783,603
Series 2002-15, Class B6............................................ 6.50 08/25/32 590 245,209
----------------
7,058,904
----------------
Total Subordinated Collateralized Mortgage Obligations
(Cost-- $59,228,734)........................................... 62,242,289
----------------
Total Non-Agency Residential Mortgage Backed Securities
(Cost-- $59,228,734)........................................... 62,242,289
----------------
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SHORT TERM INVESTMENTS -- 0.7%
Short Term Investments -- 0.7%
Federal National Mortgage Association Discount Notes(b)
(Cost-- $1,000,000)................................................ 0.84 06/01/04 1,000 1,000,000
----------------
Total Investments -- 151.6%
(Cost-- $217,486,147)......................................... 220,195,051
Liabilities in Excess of Other Assets-- (51.6)%........................ (74,954,760)
----------------
NET ASSETS-- 100.0%.................................................... 145,240,291
==============
SECURITIES SOLD SHORT
U.S. Government Agency Pass -Through Certificates
Federal National Mortgage Association TBA
(Proceeds-- $4,967,641)............................................ 6.00 TBA 4,900 $ 4,978,106
----------------
@ -- 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, 2004.
* -- 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).
(a) -- Security is a "step up" bond where coupon increases or steps up at a predetermined date. At that date these
coupons increase to LIBOR plus a predetermined margin.
(b) -- Zero Coupon Note-- Interest rate represents current yield to maturity.
TBA -- Settlement is on a delayed delivery or when-issued basis with a
final maturity to be announced (TBA) in the future.
----------
See notes to financial statements.
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Statement of Assets and Liabilities -- (Unaudited)
May 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Assets:
Investments in securities, at market (cost $217,486,147) (Note 2)............................. $ 220,195,051
Cash.......................................................................................... 804,986
Receivable for investments sold............................................................... 4,978,257
Interest receivable........................................................................... 1,087,676
Principal paydowns receivable................................................................. 275,922
Unrealized appreciation on swap contracts (Note 7)............................................ 42,138
Receivable for variation margin............................................................... 5,250
Prepaid expenses and other assets............................................................. 90,063
----------------
Total assets.............................................................................. 227,479,343
----------------
Liabilities:
Reverse repurchase agreements (Note 5)........................................................ 66,101,000
Interest payable for reverse repurchase agreements (Note 5)................................... 24,733
Payable for investments purchased............................................................. 10,921,071
Securities sold short, at value (proceeds $4,967,641) (Note 2)................................ 4,978,106
Interest payable for securities sold short.................................................... 10,617
Investment advisory fee payable (Note 3)...................................................... 78,945
Administration fee payable (Note 3)........................................................... 24,290
Directors' fees payable....................................................................... 11,300
Accrued expenses and other liabilities........................................................ 88,990
----------------
Total liabilities......................................................................... 82,239,052
----------------
Net Assets (equivalent to $14.32 per share based on 10,142,600 shares issued and outstanding)... $ 145,240,291
================
Composition of Net Assets:
Capital stock, at par value ($.01) (Note 6)................................................... $ 101,426
Additional paid-in capital (Note 6)........................................................... 144,128,441
Accumulated undistributed net investment income............................................... 799,405
Accumulated net realized loss................................................................. (2,596,938)
Net unrealized appreciation................................................................... 2,807,957
----------------
Net assets applicable to capital stock outstanding............................................ $ 145,240,291
================
----------
See notes to financial statements.
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Statement of Operations -- (Unaudited)
For the Six Months Ended May 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Investment Income (Note 2):
Interest........................................................................................ $ 7,050,178
-------------
Expenses:
Investment advisory fee (Note 3)................................................................ 480,214
Administration fee (Note 3)..................................................................... 147,758
Insurance....................................................................................... 78,025
Auditing and tax services....................................................................... 46,508
Reports to shareholders......................................................................... 45,263
Custodian....................................................................................... 38,292
Directors' fees................................................................................. 29,738
Legal........................................................................................... 21,733
Registration fees............................................................................... 17,482
Transfer agency................................................................................. 15,147
Miscellaneous................................................................................... 11,999
-------------
Total operating expenses.................................................................... 932,159
Interest expense on reverse repurchase agreements (Note 5)............................... 317,736
-------------
Total expenses.............................................................................. 1,249,895
-------------
Net investment income........................................................................... 5,800,283
-------------
Realized and Unrealized Gain (Loss) on Investments (Notes 2 and 7):
Net realized gain (loss) on:
Investment transactions......................................................................... 712,013
Short sales..................................................................................... 5,219
Futures transactions............................................................................ 189,185
Swap contracts (loss)........................................................................... (471,777)
-------------
Net realized gain on investment transactions, short sales, futures transactions
and swap contracts 434,640 Net change in unrealized appreciation/depreciation
on:
Investments..................................................................................... (910,489)
Short sales..................................................................................... (10,465)
Futures......................................................................................... 145,549
Swap contracts.................................................................................. 152,630
-------------
Net change in unrealized appreciation/depreciation on investments, short sales, futures and swap
..contracts........................................................................................ (622,775)
-------------
Net realized and unrealized loss on investments, short sales, futures and swap contracts.......... (188,135)
-------------
Net increase in net assets resulting from operations.............................................. $ 5,612,148
=============
----------
See notes to financial statements.
---------------------------------------------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Statements of Changes in Net Assets
For the Six Months
Ended For the Year
May 31, 2004 Ended
(Unaudited) November 30, 2003*
----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting from
Operations:
Net investment income....................................................... $ 5,800,283 $ 12,393,550
Net realized gain(loss) on investment transactions, short sales, futures.... 434,640 93,417
Net change in unrealized appreciation/depreciation on investments, short.... (622,775) 3,869,837
--------------- ---------------
Net increase in net assets resulting from operations........................ 5,612,148 16,356,804
--------------- ---------------
Dividends to Shareholders (Note 2):
Net investment income....................................................... (6,571,961) (13,140,962)
--------------- ---------------
Capital Stock Transactions (Note 6):
Net asset value of shares issued through dividend reinvestment (1,380 and.... 20,259 42,722
--------------- ---------------
Net increase from capital stock transactions................................ 20,259 42,722
--------------- ---------------
Total increase (decrease) in net assets................................. (939,554) 3,258,564
Net Assets:
Beginning of period......................................................... 146,179,845 142,921,281
--------------- ---------------
End of period (including undistributed net investment income of $799,405 $ 145,240,291 $ 146,179,845
=============== ===============
----------
* Certain amounts have been reclassified to conform to current year presentation. See Note 2-- Swap Agreements.
----------
See notes to financial statements.
------------------------------------------------------------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Statement of Cash Flows -- (Unaudited)
For the Six Months Ended May 31, 2004
------------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash:
Cash flows provided by (used for) operating activities:
Interest received (including net accretion of $158,119)................................ $ 6,263,671
Interest expense paid.................................................................. (295,076)
Operating expenses paid................................................................ (1,041,492)
Sales of short-term portfolio investments, net......................................... 300,000
Purchases of long-term portfolio investments........................................... (132,713,396)
Proceeds from disposition of long-term portfolio investments and principal paydowns.... 76,825,831
Proceeds from securities sold short.................................................... 4,983,476
Net cash provided by futures transactions.............................................. 274,484
---------------------
Net cash used for operating activities............................................. (45,402,502)
---------------------
Cash flows provided by (used for) financing activities:
Net cash provided by reverse repurchase agreements..................................... 52,613,000
Cash dividends paid.................................................................... (6,551,702)
---------------------
Net cash provided by financing activities.......................................... 46,061,298
---------------------
Net increase in cash..................................................................... 658,796
Cash at beginning of period.............................................................. 146,190
---------------------
Cash at end of period.................................................................... $ 804,986
=====================
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..................................... $ 5,612,148
---------------------
Increase in investments, at cost....................................................... (9,458,777)
Net realized gain on investments....................................................... 712,013
Net accretion on investments........................................................... (158,119)
Decrease in net unrealized appreciation/depreciation on investments and swaps.......... 768,324
Increase in interest receivable........................................................ (175,711)
Increase in variation margin receivable................................................ (60,250)
Increase in other assets............................................................... (5,117,183)
Decrease in payables and other liabilities............................................. (37,524,947)
---------------------
Total adjustments.................................................................. (51,014,650)
---------------------
Net cash used for operating activities................................................... $ (45,402,502)
=====================
Noncash financing activities not included herein consist of reinvestment of dividends and distributions of $20,259.
----------
See notes to financial statements.
------------------------------------------------------------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Financial Highlights
For the
Six Months For the Year For the Period
Ended Ended Ended
May 31, 2004* November 30, November 30,
(Unaudited) 2003* 2002*@
---------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period...................... $ 14.41 $ 14.10 $ 14.25**
-------------- ------------- --------------
Net investment income..................................... 0.57 1.22 0.37
Net realized and unrealized gain (loss) on investments,
short sales, futures transactions and swap contracts.... (0.01) 0.39 (0.17)
-------------- ------------- --------------
Net increase in net asset value resulting from operations. 0.56 1.61 0.20
-------------- ------------- --------------
Dividends from net investment income...................... (0.65) (1.30) (0.32)
Offering costs charged to additional paid-in-capital...... -- -- (0.03)
------------- ------------ --------------
Net asset value, end of period............................ $ 14.32 $ 14.41 $ 14.10
============== ============= ==============
Market price, end of period............................... $ 13.2800 $ 14.6700 $ 13.6800
============== ============= ==============
Total Investment Return+.................................. (5.25)%(1) 17.55% (6.66)%(1)
Ratios to Average Net Assets/Supplementary Data:
Net assets, end of period (000's)......................... $ 145,240 $ 146,180 $ 142,921
Operating expenses........................................ 1.26%(2) 1.28% 1.23%(2)
Interest expense.......................................... 0.43%(2) 0.51% 0.99%(2)
Total expenses.......................................... 1.69%(2) 1.79% 2.22%(2)
Net expenses.............................................. 1.69%(2) 1.79% 2.19%(2)
Net investment income..................................... 7.85%(2) 8.54% 7.48%(2)
Portfolio turnover rate................................... 38%(1) 78% 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
* As a result of recent changes in generally accepted accounting principles, the Fund has reclassified
periodic payments made under interest rate swap agreements, previously included within net investment
income, to components of realized and unrealized gain (loss) in the statement of operations. The effect of
this reclassification was to reduce the interest expense and total expense ratios and increase the net
investment income ratio by 0.08% and increase net investment income per share by $0.01 and decrease net
realized and unrealized gains (losses) on investments, short sales, futures transactions and swap contracts
per share by $0.01 for the six months ended May 31, 2004. For consistency, similar reclassifications have
been made to prior year amounts, resulting in a reduction to the interest expense and total expense ratios
and an increase to the net investment income ratio of 0.36% and an increase to net investment income per
share and a decrease to net realized and unrealized gains (losses) on investments, short sales, futures
transactions and swap contracts per share by $0.05 for the fiscal year ended November 30, 2003, a reduction
to the interest expense, total and net expense ratios and an increase to the net investment income ratio of
0.10% and an increase to net investment income per share of $0.01 and a decrease to net realized and
unrealized gains (losses) on investments, short sales, futures transactions and swap contracts per share by
$0.01 for the period ended November 30, 2002.
** Initial public offering of $15.00 per share less underwriting discount of $0.75 per share.
----------
See notes to financial statements.
-------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements -- (Unaudited)
May 31, 2004
-------------------------------------------------------------------------------
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 22% of the
investments in securities held by the Fund at May 31, 2004) 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 HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements -- (Unaudited)
May 31, 2004
-------------------------------------------------------------------------------
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 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. The Fund will usually
enter into interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. Swaps are marked to market based upon quotations
from market makers and the change, if any, along with an accrual for periodic
payments due or owed 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 realized gain/loss in the Statement of Operations. 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, 2004.
-------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements -- (Unaudited)
May 31, 2004
-------------------------------------------------------------------------------
As a result of a recent FASB Emerging Issues Task Force consensus and subsequent
related SEC staff guidance, the Fund has reclassified periodic payments made
under interest rate swap agreements, previously included within net investment
income, to components of realized and unrealized gain (loss) in the Statement of
Operations. For consistency, similar reclassifications have been made to amounts
appearing in the previous year's Statement of Changes in Net Assets and the per
share amounts in prior year financial highlights. Prior year expense and net
investment income ratios in the financial highlights have also been modified
accordingly. This reclassification increased net investment income by $112,592,
increased net realized loss on swap contracts by $53,965 and reduced net change
in unrealized gain on swap contracts by $58,627 for the six months ended May 31,
2004, and increased net investment income by $522,260, increased net realized
loss on swap contracts by $154,861 and increased change in net unrealized loss
on swap contracts by $367,399 for the year ended November 30, 2003. Such
reclassifications had no effect on the Fund's net asset value, either in total
or per share, or its total increase in net assets from operations during any
period.
When-Issued Purchases and Forward Commitments: The Fund may purchase securities
on a "when-issued" basis and may purchase or sell securities on a "forward
commitment" basis in order to hedge against anticipated changes in interest
rates and prices and secure a favorable rate of return. When such transactions
are negotiated, the price, which is generally expressed in yield terms, is fixed
at the time the commitment is made, but delivery and payment for the securities
take place at a later date, which can be a month or more after the date of the
transaction. At the time the Fund makes the commitment to purchase securities on
a when-issued or forward commitment basis it will record the transaction and
thereafter reflect the value of such securities in determining its net asset
value. At the time the Fund enters into a transaction on a when-issued or
forward commitment basis, the Advisor will identify collateral consisting of
cash or liquid securities equal to the value of the when-issued or forward
commitment securities and will monitor the adequacy of such collateral on a
daily basis. On the delivery date, the Fund will meet its obligations from
securities that are then maturing or sales of the securities identified as
collateral by the Advisor and/or from then available cash flow. When-issued
securities and forward commitments may be sold prior to the settlement date. If
the Fund disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it can incur a gain or loss due to market fluctuation. There is
always a risk that the securities may not be delivered and that the Fund may
incur a loss. Settlements in the ordinary course are not treated by the Fund as
when-issued or forward commitment transactions and, accordingly, are not subject
to the foregoing limitations even though some of the risks described above may
be present in such transactions.
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 continue 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.
-------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements -- (Unaudited)
May 31, 2004
-------------------------------------------------------------------------------
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, 2004, the Advisor earned $480,214 in
investment advisory fees.
The Advisor had entered into a Sub-Advisory Agreement with Lend Lease Hyperion
Capital Advisors, LLC ("Lend Lease Hyperion"). Lend Lease Hyperion was owned
equally by Lend Lease Real Estate Investments, Inc. ("LLREI") and the Advisor
and was formed for the purpose of managing portfolios of commercial
mortgage-backed securities ("CMBS"). On August 12, 2003, GMAC Commercial
Mortgage Corporation purchased the assets of LLREI. As a result, the
Sub-Advisory Agreement terminated automatically by its terms due to a change of
control of Lend Lease Hyperion. In addition, Lend Lease Hyperion changed its
name to Hyperion/GMAC Capital Advisors, LLC ("Hyperion/GMAC"). At a special
meeting held on April 15, 2003, the Board of Directors, in anticipation of Lend
Lease Hyperion's change of control and the resulting automatic termination of
the Sub-Advisory Agreement, approved (1) an Interim Sub-Advisory Agreement (the
"Interim Agreement") with Hyperion/GMAC effective when the Lend Lease Hyperion
change of control was completed, and (2) a new Sub-Advisory Agreement (the "New
Sub-Advisory Agreement") with Hyperion/GMAC. The Interim Agreement terminated on
December 9, 2003, the date on which the Fund's stockholders approved the New
Sub-Advisory Agreement. Under the terms of the New Sub-Advisory Agreement,
Hyperion/GMAC 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. The same fee paid under the Sub-Advisory
Agreement was paid by the Advisor, out of its advisory fee, to Hyperion/ GMAC
under the Interim Agreement and will continue to be paid by the Advisor under
the new Sub-Advisory Agreement. The monthly fee is equally 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 Bank and Trust Company (the
"Sub-Administrator"). 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, 2004 the
-------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements -- (Unaudited)
May 31, 2004
-------------------------------------------------------------------------------
Administrator earned $147,758 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 and /or 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, 2004, were $24,541,960 and $14,255,628, respectively. Purchases
and sales of U.S. Government securities, for the six months ended May 31, 2004,
were $70,649,813 and $68,564,817, 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, 2004 the Fund had the following reverse repurchase agreements
outstanding:
Maturity
Face Value Description Amount
---------------- ------------------------------------------------------------------- ------------
$ 2,302,000 Merrill Lynch, 1.11%, dated 05/13/04, maturity date06/23/04................ $ 2,304,910
1,678,000 Merrill Lynch, 1.11%, dated 05/13/04, maturity date 06/23/04............... 1,680,121
9,532,000 Merrill Lynch 1.11%, dated 05/13/04, maturity date 06/23/04................ 9,544,050
3,096,000 Lehman Brothers 1.12%, dated 05/27/04, maturity date 06/08/04.............. 3,097,156
1,816,000 Lehman Brothers 1.12%, dated 05/27/04, maturity date 06/08/04.............. 1,816,678
4,954,000 Lehman Brothers 1.10%, dated 05/28/04, maturity date 06/15/04.............. 4,956,725
2,700,000 Morgan Stanley 1.08%, dated 05/21/04, maturity date 06/23/04............... 2,702,673
19,600,000 Morgan Stanley 1.12%, dated 05/27/04, maturity date 06/02/04............... 19,603,659
2,127,000 Morgan Stanley 1.09%, dated 05/27/04, maturity date 06/08/04............... 2,127,773
8,124,000 Goldman Sachs 1.10%, dated 05/12/04, maturity date 06/23/04................ 8,134,426
10,172,000 Goldman Sachs 1.10%, dated 05/12/04, maturity date 06/23/04................ 10,185,054
-------------- --------------
$ 66,101,000
==============
Maturity Amount, Including Interest Payable............................. $ 66,153,225
--------------
Market Value of Assets Sold Under Agreements............................ $ 68,370,744
--------------
Weighted Average Interest Rate.......................................... 1.11%
--------------
-------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements -- (Unaudited)
May 31, 2004
-------------------------------------------------------------------------------
The average daily balance of reverse repurchase agreements outstanding during
the six months ended May 31, 2004, was approximately $57,502,781 at a weighted
average interest rate of 1.09%. The maximum amount of reverse repurchase
agreements outstanding at any time during the period was $75,036,958 as of
February 11, 2004, which was 33.62% of total assets.
6. Capital Stock
There are 50 million shares of $0.01 par value common stock authorized. Of the
10,142,600 shares outstanding at May 31, 2004, 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, 2004.
As of May 31, 2004, the following swap agreements were outstanding:
Expiration Net Unrealized
Notional Amount Date Description Appreciation
--------------- --------- ------------------------------------------------------------------ ---------------
$ 10,000,000 01/23/06 Agreement with Goldman Sachs Capital Markets, LP, dated 01/21/04 to $ 42,138
pay semi-annually the notional amount multiplied by 2.005% and to
receive quarterly the notional amount multiplied by 3 month USD-
LIBOR-BBA.
-------------
$ 42,138
==============
As of May 31, 2004, the following futures contract was outstanding:
Short:
Net Unrealized
Notional Cost at Value at Appreciation/
Amount Type Expiration Date Trade Date May 31, 2004 (Depreciation)
------------ ---------------------- ------------------ ------------------------------------------------
$ 1,600,000 5 Yr. U.S. Treasury Note June 2004 $ 1,820,380 $ 1,753,000 $ 67,380
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.
-------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Notes to Financial Statements -- (Unaudited)
May 31, 2004
-------------------------------------------------------------------------------
During the year ended November 30, 2003 the tax character of the $13,140,962 of
distributions paid was from ordinary income.
At May 31, 2004 the components of net assets (excluding paid-in-capital) on a
tax basis were as follows:
Undistributed Tax ordinary income.................................. $ 741,058
--------------
Accumulated capital loss......................................... $ (2,529,558)
==============
Book basis unrealized appreciation/(depreciation).................. $ 2,807,957
Plus: Cumulative timing differences................................ $ (9,033)
--------------
Unrealized appreciation/(depreciation)........................... $ 2,798,924
==============
The difference between book basis and tax basis undistributed income is due to
the differing treatment of investments in swap contracts. The difference between
book basis and tax basis unrealized appreciation/(depreciation) is due to the
differing treatment of investments in swap contracts and the market-to-market of
futures. The difference between book basis and tax basis accumulated gain/(loss)
is due to the market-to-market of futures.
Federal Income Tax Basis: The federal income tax basis of the Fund's investments
at May 31, 2004 was $217,486,147. Net unrealized appreciation was $2,708,904
(gross unrealized appreciation -- $4,672,611; gross unrealized depreciation --
$1,963,707). During the six months ended May 31, 2004, the Fund utilized
available capital loss carryforwards amounting to $168,218. At May 31, 2004, the
Fund had a capital loss carryforward of $2,529,558, which $746,090 expires in
2010 and $1,783,468 expires in 2011, available to offset any future gains, to
the extent provided by regulations.
Capital Account Reclassification: For the six months ended May 31, 2004, the
Fund's undistributed net investment income was increased by $411,971 with an
offsetting decrease in accumulated net realized loss. These adjustments were
primarily the result of current year paydown reclassifications and the
reclassifications of payments related to swaps.
9. Subsequent Events
Dividend: The Fund's Board of Directors declared the following regular monthly
dividends:
Dividend Record Payable
Per Share Date Date
---------- -------- ---------
$ 0.1080 06/15/04 06/24/04
-------------------------------------------------------------------------------
PROXY RESULTS (Unaudited)
-------------------------------------------------------------------------------
During the six months ended May 31, 2004, The Hyperion Strategic Mortgage Income
Fund, Inc. shareholders voted on the following proposals at shareholders'
meetings on December 9, 2003 and April 13, 2004. The description of each
proposal and number of shares voted are as follows:
December 9, 2003 Meeting:
---------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
---------------------------------------------------------------------------------------------------------------------
1. Approval of New Investment Sub-Advisory Agreement: 9,528,731 108,960 115,752
April 13, 2004 Meeting:
---------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
---------------------------------------------------------------------------------------------------------------------
1. To elect to the Fund's Board of Directors 9,979,003 0 48,982
Rodman L. Drake:
---------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
----------------------------------------------------------------------------------------------------------------------
2. To elect to the Fund's Board of Directors 9,979,003 0 48,982
Harry E. Petersen:
---------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
---------------------------------------------------------------------------------------------------------------------
3. To elect to the Fund's Board of Directors 9,979,003 0 48,982
Clifford E. Lai:
---------------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
---------------------------------------------------------------------------------------------------------------------
4. To select PricewaterhouseCoopers LLP as the independent auditors: 9,924,233 23,482 80,270
---------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
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").
Position(s) Held with Number of
Fund and Term of Portfolios in Fund
Name, Address Office and Length of Principal Occupation(s) During Past 5 Years and Complex Overseen
and Age Time Served Other Directorships Held by Director by Director
----------------------------------------------------------------------------------------------------------------------
Disinterested Director
Class I to serve until 2006 Annual Meeting of Stockholders:
--------------------------
Robert F. Birch Director, Member of The Director and/or Trustee of several investment 5
c/o One Liberty Plaza Audit Committee, Member companies advised by Hyperion Capital
36th Floor of Nominating and Management, Inc. (the "Advisor")
New York, NY Compensation Committee (1989-Present); Chairman and President, New
10006-1404 and Member of Executive America High Income Fund (1992-Present);
Committee Chairman of the Board and Co-Founder, The China
Business Group, Inc.(1996-Present); Director,
Brandywine Funds (3) (2001 to Present).
Age 68 Elected for Three-Year
Term
Director since June
2002
Disinterested Directors
Class II to serve until 2007 Annual Meeting of Stockholders:
Rodman L. Drake Chairman Chairman (since 2003) and Director and/or 3
c/o One Liberty Plaza Elected December 9, Trustee of several investment companies (3)
36th Floor 2003 advised by Hyperion Capital Management, Inc.
New York, NY (the "Advisor") (1989- Present); Co-Founder,
10006-1404 Baringo Capital LLC (2002- Present); Director,
Director, Member of the Animal Medical Center (2002-Present);
Audit Committee, Director, Hotelevision, Inc. (1999-Present);
Age 61 Chairman of Nominating Director, Parsons Brinckerhoff, Inc.
and Compensation (1995-Present); Director, Absolute Quality
Committee Inc.(2000-Present); Trustee of Excelsior
Funds (33) (1994-Present); President,
Continuation Investments Group Inc.
Elected for Three-Year (1997-2001).
Term
Director since June
2002
Harry E. Petersen, Jr. Director, Member of the Director and/or Trustee of several investment 3
c/o One Liberty Plaza Audit Committee, Member companies (3) advised by Hyperion Capital
36th Floor of Nominating and Management, Inc. (the "Advisor")
New York, NY Compensation Committee, (1992-Present); Senior Consultant to
10006-1404 Member of Executive Cornerstone Equity Advisors, Inc. (1998-2001).
Committee
Age 79
Elected for Three-Year
Term
Director since June
2002
------------------------------------------------------------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Information Concerning Directors and Officers (Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
Position(s) Held with Number of
Fund and Term of Portfolios in Fund
Name, Address Office and Length of Principal Occupation(s) During Past 5 Years and Complex Overseen
and Age Time Served Other Directorships Held by Director by Director
----------------------------------------------------------------------------------------------------------------------
Disinterested Director
--------------------------
Class III to serve until 2005 Annual Meeting of Stockholders:
Leo M. Walsh, Jr. Director, Chairman of Director and/or Trustee of several investment 5
c/o One Liberty Plaza the Audit Committee, companies (3) advised by Hyperion Capital
36th Floor Member of Nominating Management, Inc. (the "Advisor") (1989-Present);
New York, NY and Compensation Financial Consultant for Medco Health Solutions, Inc.
10006-1404 Committee (formerly, Merck-Medco Managed Care LLC) (1994-Present).
Age 71
Elected for Three-Year
Term
Director since June
2002
Interested Director
Class III to serve until 2005 Annual Meeting of Stockholders:
Clifford E. Lai(1) Director, President (November 1998-Present) and Chief 5
c/o One Liberty Plaza Investment Officer (1993-2002) of Hyperion
36th Floor Elected until 2005 Capital Management, Inc. (the "Investment
New York, NY Since December 2003 Advisor"); Co- Chairman (2003-Present) and
10006-1404 Board of Managers (1995-Present) of
Hyperion-GMAC Capital Advisors, LLC (formerly
President Lend Lease Hyperion Capital Advisors, LLC);
Elected Annually President of several investment companies
Age 51 Since June 2002 advised by the Advisor (1995-Present).
----------
(1) Mr. Lai is an "interested person" as defined in the Investment Company Act
of 1940, as amended, (the "1940 Act") because of affiliations with Hyperion
Capital Management, Inc., the Fund's advisor. As a result of his service
with the Advisor and certain affiliations with the Advisor as described
below, the Fund considers Mr. Lai to be an "interested person" of the Fund
within the meaning of Section 2(a)(19) of the 1940 Act.
----------------------------------------------------------------------------------------------------------------------------------
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
Information Concerning Directors and Officers (Unaudited)
----------------------------------------------------------------------------------------------------------------------------------
Officers of the Fund
Position(s) Term of Office and Principal Occupation(s)
Name, Address and Age Held with Fund Length of Time Served During Past 5 Years
----------------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------------
Clifford E. Lai President Elected Annually Please see "Information Concerning Directors."
c/o One Liberty Plaza Since June 2002
36th Floor
New York, NY
10006-1404
Age 51
John Dolan Vice President Elected Annually Chief Investment Strategist (1998-Present) and Chief
c/o One Liberty Plaza Since June 2002 Investment Officer (since 2002)of Hyperion Capital
36th Floor Management.
New York, NY
10006-1404
New York, NY
10006-1404
Age 50
Patricia A. Sloan Vice President Elected Annually Consultant of Ranieri & Co., Inc. (2000-Present).Formerly
c/o One Liberty Plaza Since June 2002 Secretary, Director and/or Trustee of severalinvestment
36th Floor companies advised by Hyperion Capital Management,Inc.
New York, NY (1989-2002).
10006-1404
Age 60
Thomas F. Doodian Treasurer Elected Annually Managing Director, Chief Operating Officer (1998-
c/o One Liberty Plaza Since June 2002 Present) and Director of Finance and Operations,Hyperion
36th Floor Capital Management, Inc. (July 1995-Present);Treasurer of
New York, NY several investment companies advised by Hyperion
10006-1404 Capital Management, Inc. (February 1998-Present).
Age 45
Joseph Tropeano Secretary Elected Annually Director and Compliance Officer, Hyperion Capital
c/o One Liberty Plaza Since June 2002 Management,Inc. (1993-Present); Secretary and Compliance
36th Floor Officer of several investment companies advised by
New York, NY Hyperion Capital Management, Inc. (1994- Present);
10006-1404 Secretary and Compliance Officer,Hyperion- GMAC Capital
Advisors, LLC (1995-Present).
Age 42
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.
-------------------------------------------------------------------------------
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 TRANSFER AGENT
HYPERION CAPITAL MANAGEMENT, INC. AMERICAN STOCK TRANSFER & TRUST
One Liberty Plaza COMPANY
165 Broadway, 36th Floor Investor Relations Department
New York, New York 10006-1404 59 Maiden Lane
For General Information about the Trust: New York, NY 10038
(800) HYPERION For Shareholder Services:
(800) 937-5449
SUB-ADVISOR INDEPENDENT AUDITORS
HYPERION GMAC CAPITAL ADVISORS, LLC PRICEWATERHOUSECOOPERS LLP
One Liberty Plaza 1177 Avenue of the Americas
165 Broadway, 36th Floor New York, New York 10036
New York, New York 10006-1404
SUB-ADMINISTRATOR LEGAL COUNSEL
STATE STREET BANK and TRUST COMPANY SULLIVAN & WORCESTER LLP
225 Franklin Street 1666 K Street, N.W.
Boston, Massachusetts 02116 Washington, D.C. 20006
CUSTODIAN AND FUND ACCOUNTING AGENT
STATE STREET BANK and TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02116
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.
Quarterly Portfolio Schedule: No later than October 29, 2004, the Fund will file
its complete schedule of portfolio holdings with the Securities and Exchange
Commission for the third quarter of 2004 on Form N-Q. The Fund will thereafter
file Form N-Q for the first and third quarters of each fiscal year on Form N-Q.
The Fund's Forms N-Q will be available on the Securities and Exchange
Commission's website at http://www.sec.gov. The Fund's Form N-Q may be reviewed
and copied at the Securities and Exchange Commission'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. Once filed, the most recent Form N-Q
will be available without charge, upon request, by calling 1-800-HYPERION or on
the Fund's website at http://www.hyperioncapital.com.
-------------------------------------------------------------------------------
Officers & Directors
-------------------------------------------------------------------------------
Rodman L. Drake*
Chairman
Robert F. Birch*
Director
Leo M. Walsh, Jr.*
Director
Harry E. Petersen, Jr.*
Director
Clifford E. Lai
Director and President
Patricia A. Sloan
Vice President
John Dolan
Vice President
Thomas F. Doodian
Treasurer
Joseph Tropeano
Secretary
----------
* Audit Committee Members
-------------------------------------------------
[GRAPHIC OMITTED]
The financial information included herein is taken from 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.
As of the end of the period covered by this report, the Registrant had
adopted a Code of Ethics for Principal Executive and Principal Financial
Officers (the "Code"). There were no amendments to or waivers from the Code
during the period covered by this report. A copy of the Registrant's Code will
be provided upon request to any person without charge by contacting Joseph
Tropeano at 1-800-HYPERION or by writing to Mr. Tropeano at One Liberty Plaza,
165 Broadway, 36th Floor, New York, NY 10006-1404.
Item 3. Audit Committee Financial Expert.
The Registrant's Board of Directors has determined that the Registrant has
at least one audit committee financial expert serving on its audit committee,
and his name is Rodman L. Drake. Mr. Drake is independent.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
The Registrant has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934. The Registrant's Audit Committee members include Leo M. Walsh, Jr.,
Rodman L. Drake, Robert F. Birch and Harry E. Petersen, Jr.
Item 6. Schedule of Investments
Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
This Item is not applicable as the Registrant invested exclusively in
non-voting securities during the period covered by this report.
Item 8.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. Controls and Procedures.
(a) The Registrant's principal executive 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 changes in the
Registrant's internal control over financial reporting that occurred during the
Registrant's last fiscal half-year that has materially affected or is reasonably
likely to materially affect the Registrant's internal control over financial
reporting.
Item 11. Exhibits.
(a)(1) None.
(2) A separate certification for each principal executive officer and
principal financial officer of the Registrant as required by Rule 30a-2(a) under
the Investment Company Act of 1940 is attached as an exhibit to this Form N-CSR.
(3) None.
(b) A separate certification for each principal executive officer and
principal financial officer of the Registrant as required by Rule 30a-2(b) 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
Principal Executive Officer
Date: August 6, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Clifford E. Lai
___________________
Clifford E. Lai
Principal Executive Officer
Date: August 6, 2004
By: /s/ Thomas F. Doodian
_____________________
Thomas F. Doodian
Treasurer and Principal Financial Officer
Date: August 6, 2004