SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant To Section 14(A) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party Other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it is determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing statement registration number, or the
form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(3) Filing party:
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(4) Date filed:
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THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
One Liberty Plaza, 165 Broadway, 36th Floor - New York, New York 10006-1404
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
[March __, 2005]
To the Stockholders:
The Annual Meeting of Stockholders of The Hyperion Strategic Mortgage
Income Fund, Inc. (the "Fund") will be held at The Downtown Association, 60 Pine
Street (between William and Pearl Streets), New York, New York 10005, on
Tuesday, April 19, 2005 at 11:00 a.m., for the following purposes:
1. To elect directors (Proposal 1).
2. To approve a new Investment Advisory Agreement between the Fund and
Hyperion Capital Management, Inc. (the "Advisor") (Proposal 2).
3. To approve a new Investment Sub-Advisory Agreement between the Advisor
and Hyperion GMAC Capital Advisors, LLC (the "Sub-Advisor") (Proposal
3).
4. To ratify or reject the selection of PricewaterhouseCoopers LLP as the
independent registered public accounting firm of the Fund for the
fiscal year ending November 30, 2005 (Proposal 4).
5. To transact any other business that may properly come before the
meeting.
The close of business on March 7, 2005 has been fixed as the record date
for the determination of stockholders entitled to receive notice of and to vote
at the meeting.
By Order of the Board of Directors,
Daniel S. Kim
Secretary
WE NEED YOUR PROXY VOTE IMMEDIATELY.
YOU MAY THINK YOUR VOTE IS NOT IMPORTANT, BUT IT IS VITAL. THE MEETING OF
STOCKHOLDERS OF THE FUND WILL BE UNABLE TO CONDUCT ANY BUSINESS IF LESS THAN A
MAJORITY OF THE SHARES ELIGIBLE TO VOTE IS REPRESENTED. IN THAT EVENT, THE FUND,
AT THE STOCKHOLDERS' EXPENSE, WOULD CONTINUE TO SOLICIT VOTES IN AN ATTEMPT TO
ACHIEVE A QUORUM. CLEARLY, YOUR VOTE COULD BE CRITICAL TO ENABLE THE FUND TO
HOLD THE MEETING AS SCHEDULED, SO PLEASE RETURN YOUR PROXY CARD IMMEDIATELY. YOU
AND ALL OTHER STOCKHOLDERS WILL BENEFIT FROM YOUR COOPERATION.
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to
you and avoid the time and expense to the Fund involved in validating your vote
if you fail to sign your proxy card properly.
1. Individual Accounts. Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts. Either party may sign, but the name of the party signing
should conform exactly to the name shown in the registration.
3. All Other Accounts. The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration. For
example:
REGISTRATION VALID SIGNATURE
------------ ---------------
Corporate Accounts
(1) ABC Corp. ABC Corp.
(2) ABC Corp. John Doe, Treasurer
(3) ABC Corp. c/o John Doe, Treasurer John Doe
(4) ABC Corp. Profit Sharing Plan John Doe, Trustee
Trust Accounts
(1) ABC Trust John B. Doe, Trustee
(2) Jane B. Doe, Trustee u/t/d 12/28/78 Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust. John B. Smith
f/b/o John B. Smith, Jr.
UGMA
(2) John B. Smith John B. Smith, Jr., Executor
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
One Liberty Plaza, 165 Broadway, 36th Floor - New York, New York 10006-1404
PROXY STATEMENT
This proxy statement is furnished in connection with a solicitation by the
Board of Directors of The Hyperion Strategic Mortgage Income Fund, Inc. (the
"Fund") of proxies to be used at the Annual Meeting of Stockholders (the
"Meeting") of the Fund to be held at The Downtown Association, 60 Pine Street
(between William and Pearl Streets), New York, New York 10005, at 11:00 a.m. on
Tuesday, April 19, 2005 (and at any adjournment or adjournments thereof) for the
purposes set forth in the accompanying Notice of Annual Meeting of Stockholders.
This proxy statement and the accompanying form of proxy are first being mailed
to stockholders on or about ________, 2005. THE ANNUAL REPORT AND SEMI-ANNUAL
REPORT IS AVAILABLE FREE OF CHARGE BY CALLING THE FUND AT 1-800-497-3746 OR
WRITING TO THE FUND AT ATTN: SHAREHOLDER SERVICES, THE HYPERION STRATEGIC
MORTGAGE INCOME FUND, INC., ONE LIBERTY PLAZA, 165 BROADWAY, 36TH FLOOR, NEW
YORK, NEW YORK 10006-1404. Stockholders who execute proxies retain the right to
revoke them by written notice received by the Secretary of the Fund at any time
before they are voted. Unrevoked proxies will be voted in accordance with the
specifications thereon and, unless specified to the contrary, will be voted FOR
the re-election of the two nominees for Class III Directors, FOR the approval of
the new Investment Advisory Agreement, FOR the approval of the new Investment
Sub-Advisory Agreement and FOR the ratification of the selection of
PricewaterhouseCoopers LLP ("PwC") as the independent registered public
accounting firm of the Fund for the fiscal year ending November 30, 2005. The
close of business on March 7, 2005 has been fixed as the record date (the
"Record Date") for the determination of stockholders entitled to receive notice
of and to vote at the meeting. Each stockholder is entitled to one vote for each
share held. On the Record Date there were __________ shares outstanding.
For purposes of determining the presence of a quorum for transacting
business related to Proposals 1 and 4 at the Meeting, executed proxies marked as
abstentions and broker "non-votes" (that is, proxies from brokers or nominees
indicating that such persons have not received instructions from the beneficial
owner or other persons entitled to vote shares on a particular matter with
respect to which the brokers or nominees do not have discretionary power) will
be treated as shares that are present for quorum purposes but which have not
been voted. Accordingly, abstentions and broker non-votes will have no effect on
Proposal 1 and Proposal 4, for which the required vote is a plurality of the
votes cast. For Proposal 2 and Proposal 3, abstentions will be treated as shares
that are present and entitled to vote for purposes of determining the presence
of a quorum but as unvoted for purposes of determining the approval of any
matters submitted to stockholders for a vote. Broker non-votes will not be
counted for purposes of determining the presence of a quorum but will have the
effect of a vote "against" any proposal requiring approval by a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended (the "1940 Act").
PROPOSAL 1: ELECTION OF DIRECTORS
The Fund's Articles of Incorporation provide that the Fund's Board of
Directors shall be divided into three classes: Class I, Class II and Class III.
The terms of office of the present Directors in each class expire at the Annual
Meeting in the year indicated or thereafter in each case when their respective
successors are elected and qualified: Class I, 2006; Class II, 2007; and Class
III, 2005. At each subsequent annual election, Directors chosen to succeed those
whose terms are expiring will be identified
1
as being of that same class and will be elected for a three-year term. The
effect of these staggered terms is to limit the ability of other entities or
persons to acquire control of the Fund by delaying the replacement of a majority
of the Board of Directors.
The terms of Messrs. Clifford E. Lai and Leo M. Walsh, Jr., members of
Class III, currently serving on the Board of Directors, expire at this year's
Annual Meeting. The persons named in the accompanying form of proxy intend to
vote at the Annual Meeting (unless directed not to so vote) for the re-election
of Messrs. Lai and Walsh. Each nominee has indicated that he will serve if
elected, but if he should be unable to serve, the proxy or proxies will be voted
for any other person determined by the persons named in the proxy in accordance
with their judgment.
As described above, there are two nominees for election to the Board of
Directors at this time. Proxies cannot be voted for a greater number of persons
than the nominees currently proposed to serve on the Board of Directors.
INFORMATION CONCERNING NOMINEES AND DIRECTORS
The following table provides information concerning each of the Directors
and the nominees of the Board of Directors of the Fund. The nominees are listed
first in the table under the Class III Disinterested Director nominee and Class
III Interested Director nominee. The terms of the Class I and the other Class II
Directors do not expire this year. It is the Fund's policy that Directors will
retire from the Fund's Board of Directors in the year in which a Director
reaches age 80.
NUMBER OF
PORTFOLIOS IN
POSITION(s) HELD WITH FUND PRINCIPAL OCCUPATION(s) FUND COMPLEX
NAME, ADDRESS AND TERM OF OFFICE AND DURING PAST 5 YEARS AND OVERSEEN BY
AND AGE LENGTH OF TIME SERVED OTHER DIRECTORSHIPS HELD BY DIRECTOR DIRECTOR
-------------------------- ------------------------------ --------------------------------------------------- -------------------
DISINTERESTED DIRECTOR NOMINEE
CLASS III DIRECTOR TO SERVE UNTIL 2005 ANNUAL MEETING OF STOCKHOLDERS:
Leo M. Walsh, Jr. Director, Chairman of the Director and/or Trustee of several investment 6
c/o One Liberty Plaza, Audit Committee, Member of companies advised by the Advisor or by its
165 Broadway, 36th Nominating and Compensation affiliates (1989-Present); Financial Consultant
Floor, New York, New Committee for Medco Health Solutions Inc. (1994-2003).
York 10006-1404
Elected for Three Year Term/
Age 72 Director since June 2002
INTERESTED DIRECTOR NOMINEE
CLASS III INTERESTED NOMINEE TO SERVE UNTIL 2005 ANNUAL MEETING OF STOCKHOLDERS:
Clifford E. Lai* Director President (1998-Present) and Chief Investment 6
c/o One Liberty Plaza, Officer (1993-2002) of the Advisor; Co-Chairman
165 Broadway, 36th Elected until 2005 (2003-Present) and Board of Managers
Floor, New York, New Since December 9, 2003 (1995-Present) Hyperion GMAC Capital Advisors,
York 10006-1404 LLC (formerly, Lend Lease Hyperion Capital, LLC);
President President of several investment companies advised
Age 51 by the Advisor (1995-Present).
Elected Annually
Since June 2002
2
NUMBER OF
PORTFOLIOS IN
POSITION(s) HELD WITH FUND PRINCIPAL OCCUPATION(s) FUND COMPLEX
NAME, ADDRESS AND TERM OF OFFICE AND DURING PAST 5 YEARS AND OVERSEEN BY
AND AGE LENGTH OF TIME SERVED OTHER DIRECTORSHIPS HELD BY DIRECTOR DIRECTOR
-------------------------- ------------------------------ --------------------------------------------------- -------------------
DISINTERESTED DIRECTORS
CLASS II DIRECTORS TO SERVE UNTIL 2007 ANNUAL MEETING OF STOCKHOLDERS:
Rodman L. Drake Chairman Chairman (since 2003) and Director and/or Trustee 4
c/o One Liberty Plaza, Elected December, 2003 of several investment companies advised by the
165 Broadway, 36th Advisor (1989-Present); Co-founder, Baringo
Floor, New York, New Director, Member of the Capital LLC (2002-Present); Director, Jackson
York 10006-1404 Audit Committee, Chairman of Hewitt Tax Service Inc. ("JTX") (2004-Present);
Nominating and Compensation Director, Animal Medical Center (2002-Present);
Age 62 Committee Director, Hotelevision, Inc. (1999-2003);
Director and/or Lead Director, Parsons
Elected for Two Year Term/ Brinckerhoff, Inc. (1995-Present); Director,
Director since June 2002 Absolute Quality Inc. (2000- 2004); Trustee of
Excelsior Funds (32) (1994-Present); President,
Continuation Investments Group Inc. (1997-2001).
Harry E. Petersen, Jr. Director, Member of the Director and/or Trustee of several investment 3
c/o One Liberty Plaza, Audit Committee, Member of companies advised by the Advisor or by its
165 Broadway, 36th Compensation and Nominating affiliates (1993-Present); Senior Consultant to
Floor, New York, New Committee, Member of Cornerstone Equity Advisors, Inc. (1998-2001).
York 10006-1404 Executive Committee
Age 80 Elected for Two Year Term/
Director since June 2002
CLASS I DIRECTOR 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 of companies advised by the Advisor or by its
165 Broadway, 36th Nominating and Compensation affiliates (1998-Present); President, New America
Floor, New York, New Committee, Member of High Income Fund (1992 - Present); Director,
York 10006-1404 Executive Committee Brandywine Funds (3) (2001 to Present).
Age 68 Elected for Three Year Term/
Director since June 2002
------------------
* Mr. Lai is an "interested person" as defined in 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.
OFFICERS OF THE FUND
The officers of the Fund are chosen each year at the first meeting of the
Board of Directors of the Fund following the Annual Meeting of Stockholders, to
hold office at the discretion of the Board of Directors until the meeting of the
Board following the next Annual Meeting of Stockholders and until their
successors are chosen and qualified. The Board of Directors has elected five
officers of the Fund. Except where dates of service are noted, all officers
listed below served as such throughout the 2004 fiscal year. An asterisk (*)
indicates a person is an "interested person" as defined in the 1940 Act, because
of affiliations with the Advisor. The following table sets forth information
concerning each officer of the Fund who served during all or part of the last
fiscal year of the Fund:
3
NAME, ADDRESS POSITION(s) HELD TERM OF OFFICE AND PRINCIPAL OCCUPATION(s)
AND AGE WITH FUND LENGTH OF TIME SERVED DURING PAST 5 YEARS
------------------------------ ---------------------- -------------------------- ------------------------------------------
Clifford E. Lai* President Elected Annually Please see "Information Concerning
c/o One Liberty Plaza, Since June 2002 Nominees/Directors."
165 Broadway, 36th Floor,
New York, New York 10006-1404
Age 51
John H. Dolan* Vice President Elected Annually Managing Director, Chief Investment
c/o One Liberty Plaza, Since June 2002 Strategist (1998-Present) and Chief
165 Broadway, 36th Floor, Investment Officer (2002-Present) of the
New York, New York 10006-1404 Advisor.
Age 51
Patricia A. Sloan* Vice President Elected Annually Consultant of Ranieri & Co., Inc.
c/o One Liberty Plaza, Since June 2002 (2000-Present); Secretary, Director
165 Broadway, 36th Floor, and/or Trustee of several investment
New York, New York 10006-1404 companies advised by the Advisor or by
its affiliates (1989-2002).
Age 61
Daniel S. Kim* Chief Compliance CCO Director, General Counsel and CCO
c/o One Liberty Plaza, Officer ("CCO") & Elected since September (September 2004-Present), and Secretary
165 Broadway, 36th Floor, Secretary 2004; and (January 2005-Present) of the Advisor;
New York, New York 10006-1404 General Counsel and CCO (September
Secretary 2004-Present), and Secretary (January
Age 36 Elected since January 2005-Present) of Hyperion GMAC Capital
2005 Advisors, LLC; CCO (September
2004-Present), and Secretary (January
2005-Present) of several investment
companies advised by the Advisor; Vice
President, Asst. General Counsel and CCO
(May 2001-August 2004) of Oak Hill
Capital Management, Inc.; Asst. General
Counsel (May 2001-August 2004) of Oak
Hill Advisors, LP; Lawyer (January
2001-April 2001) at Arkin Kaplan LLP;
and Law Student (January 2000-January
2001).
Thomas F. Doodian* Treasurer Elected Annually Managing Director, Chief Operating
c/o One Liberty Plaza, Since June 2002 Officer (1998-Present) and Director of
165 Broadway, 36th Floor, Finance and Operations of the Advisor
New York, New York 10006-1404 (1995-Present); Treasurer of several
investment companies advised by the
Age 45 Advisor (1996-Present); Treasurer of
Hyperion GMAC Capital Advisors, LLC
(formerly, Lend Lease Hyperion Capital
Advisors, LLC) (1996-Present).
4
SHARE OWNERSHIP
As of the Record Date, the Nominees, Directors and executive officers of
the Fund solicited by this Proxy Statement beneficially owned individually and
collectively as a group less than 1% of the outstanding shares of the Fund.
The following table sets forth the aggregate dollar range of equity
securities owned by each Director of the Fund and of all funds overseen by each
Director in the Fund Complex as of December 31, 2004. The Fund Complex was
comprised of the Fund, The Hyperion Total Return Fund, Inc., Hyperion 2005
Investment Grade Opportunity Term Trust, Inc., Hyperion Strategic Bond Fund,
Inc. and Hyperion Collateralized Securities Fund, Inc. as of December 31, 2004.
As of February 22, 2005, there were seven registered investment companies in the
Fund Complex with the addition of Quadrant Fund, Inc. and Crystal River Capital,
Inc. The information as to beneficial ownership is based on statements furnished
to the Fund by each Director.
DOLLAR RANGE OF AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN
EQUITY SECURITIES IN ALL FUNDS OVERSEEN BY DIRECTOR IN FAMILY OF
NAME OF NOMINEES/DIRECTORS THE FUND INVESTMENT COMPANIES
----------------------------------------- ---------------------- ------------------------------------------------
Disinterested Directors
Robert F. Birch $10,001-$50,000 $50,001-$100,000
Rodman L. Drake $10,001-$50,000 $50,001-$100,000
Harry E. Petersen, Jr. $0 $1-$10,000
Disinterested Director Nominees
Leo M. Walsh, Jr. Over $100,000 Over $100,000
Interested Director Nominee
Clifford E. Lai $50,001-$100,000 Over $100,000
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
No remuneration was paid by the Fund to persons who were directors,
officers or employees of the Advisor or any affiliate thereof for their services
as Directors or officers of the Fund. Each Director of the Fund, other than
those who are officers or employees of the Advisor or any affiliate thereof, is
entitled to receive a fee of $[ ] per year plus $[ ] for each Board of
Directors' meeting attended. Members of the Audit Committee receive $[ ] for
each Audit Committee meeting attended, other than meetings held on days when
there is also a Directors' meeting. The following table sets forth information
concerning the compensation received by Directors for the fiscal year ended
November 30, 2004.
TOTAL DIRECTORS' COMPENSATION
DIRECTORS' AGGREGATE COMPENSATION FROM THE FUND AND THE FUND COMPLEX
FROM THE FUND
---------------------------------------------------------------------------------------------------------
Robert F. Birch $12,688 $44,040
Rodman L. Drake $11,500 $35,250
Harry E. Petersen, Jr. $11,500 $35,250
Leo M. Walsh, Jr. $11,500 $42,750
STANDING COMMITTEES AND BOARD MEETINGS
The Fund has a standing Audit Committee which was established pursuant to
Section 3(a)(58)(A) of the Securities Exchange Act of 1934 and presently
consists of Messrs. Walsh, Birch, Drake and Petersen, all of whom are members of
the Board of Directors and are currently not "interested persons"
5
(as that term is defined in Section 2(a)(19) of the 1940 Act) of the Fund
("Disinterested Directors"). All Committee members are independent as
independence is defined in the New York Stock Exchange, Inc.'s listing
standards. The principal functions of the Fund's Audit Committee are to select
the Fund's accountants, to review with the accountants the scope and anticipated
costs of their audit and to receive and consider a report from the accountants
concerning their conduct of the audit, including any comments or recommendations
they might want to make in that connection. The Board of Directors has adopted a
written charter for the Audit Committee. The report of the Audit Committee is
presented below. During the last fiscal year of the Fund, the full Board of
Directors met 6 times, and the Audit Committee met 3 times. All of the members
of the Audit Committee attended all of the Audit Committee meetings. All of the
Directors attended at least 75% of the aggregate of the Board meetings and the
Committee meetings.
The Fund has a Nominating and Compensation Committee. The Nominating
and Compensation Committee presently consists of Messrs. Drake, Birch, Petersen
and Walsh. The Committee members are Disinterested Directors. All Committee
members are independent as independence is defined in the New York Stock
Exchange, Inc.'s listing standards. The Nominating and Compensation Committee
met one time during the last fiscal year of the Fund. The function of the
Nominating and Compensation Committee is to recommend candidates for election to
the Board as Disinterested Directors. The Nominating and Compensation Committee
evaluates candidate's qualifications for Board membership and their independence
from the Fund's managers and other principal service providers.
The Nominating and Compensation Committee will consider nominees
recommended by stockholders, who, separately or as a group, own at least one
percent of the Fund's shares. The minimum requirements for proposed nominees
include the following:
1. With respect to nominations for Disinterested Directors, nominees
shall be independent of the Fund's investment adviser and other
principal service providers. The Nominating and Compensation Committee
shall also consider the effect of any relationship beyond those
delineated in the 1940 Act that might impair independence, such as
business, financial or family relationships with the investment
adviser or its affiliates.
2. Disinterested Director nominees must qualify for service on the Fund's
Audit Committee under the rules of the New York Stock Exchange
(including financial literacy requirements) or other applicable
securities exchange.
3. With respect to all Directors, nominees must qualify under all
applicable laws and regulations.
4. The proposed nominee must agree to purchase the Fund's shares if
elected, consistent with the Fund's current policy on Director share
purchases.
5. The Nominating and Compensation Committee may also require such other
factors as it may determine to be relevant.
When identifying and evaluating prospective nominees, the Committee shall
review all recommendations in the same manner, including those received by
stockholders. The Committee shall first determine if the prospective nominee
meets the minimum qualifications set forth above. Those proposed nominees
meeting the minimum qualifications set forth above will then be considered by
the Committee with respect to any other qualifications deemed to be important by
the Committee. Those nominees meeting the minimum and other qualifications and
determined by the Committee as suitable shall be included on the Fund's proxy
card.
6
Stockholder recommendations should be addressed to the Nominating and
Compensation Committee in care of the Secretary of the Fund and sent to One
Liberty Plaza, 165 Broadway, 36th Floor, New York, New York 10006-1404.
Stockholder recommendations should include biographical information, including
business experience for the past nine years and a description of the
qualifications of the proposed nominee, along with a statement from the nominee
that he or she is willing to serve and meets the requirements to be a
Disinterested Director, if applicable. The Nominating and Compensation Committee
also determines the compensation paid to the Disinterested Directors. The Board
of Directors has adopted a written charter for the Nominating and Compensation
Committee and the charter is available on the Fund's website at
www.hyperioncapital.com.
The Fund has an Executive Committee. The Executive Committee presently
consists of Messrs. Birch and Petersen. The function of the Executive Committee
is to take any action permitted by Maryland law when the full Board of Directors
cannot meet. The Executive Committee met one time in person during the last
fiscal year of the Fund, but took action by unanimous written consents.
STOCKHOLDER COMMUNICATIONS WITH BOARD OF DIRECTORS AND BOARD ATTENDANCE AT
ANNUAL MEETINGS
The Fund's Board of Directors provides a process for stockholders to send
communications to the Board of Directors. Any stockholder who wishes to send a
communication to the Board of Directors of the Fund should send the
communication to the attention of the Fund's Secretary at One Liberty Plaza, 165
Broadway, 36th Floor, New York, New York 10006-1404. If a stockholder wishes to
send a communication directly to an individual Director or to a Committee of the
Fund's Board of Directors, then the communication should be specifically
addressed to such individual Director or Committee and sent in care of the
Fund's Secretary at the same address. All communications will be immediately
forwarded to the appropriate individual(s).
The Fund's policy with respect to Directors' attendance at annual meetings
is to encourage such attendance. There were three Directors who attended last
year's meeting.
AUDIT COMMITTEE REPORT
On January 27, 2005, the Audit Committee reviewed and discussed with
management the Fund's audited financial statements as of and for the fiscal year
ended November 30, 2004. The Audit Committee discussed with PwC the matters
required to be discussed by Statement of Auditing Standards No. 61,
Communications with Audit Committees, as amended, by the Auditing Standards
Board of the American Institute of Certified Public Accountants.
The Audit Committee received and reviewed the written disclosures and the
letter from PwC required by Independence Standard No. 1, Independence Discussion
with Audit Committees, as amended, by the Independence Standards Board, and have
discussed with PwC, the independent registered public accounting firm's
independence.
7
Based on the reviews and discussions referred to above, the Audit
Committee recommends to the Board of Directors that the financial statements
referred to above be included in the Fund's Annual Report to stockholders
required by Section 30(e) of the 1940 Act and Rule 30d-1 thereunder for the
fiscal year ended November 30, 2004.
Leo M. Walsh, Jr. - Audit Committee Chairman
Rodman L. Drake - Audit Committee Member
Harry E. Petersen, Jr. - Audit Committee Member
Robert F. Birch - Audit Committee Member
REQUIRED VOTE
Election of the listed nominees for Director requires the affirmative
vote of the holders of a majority of the shares of common stock of the Fund
present or represented by proxy at the Annual Meeting. THE BOARD OF DIRECTORS
RECOMMENDS A VOTE "FOR" APPROVAL OF THE ELECTION OF THE NOMINEES TO THE BOARD OF
DIRECTORS.
PROPOSAL 2: APPROVAL OF THE NEW INVESTMENT ADVISORY AGREEMENT
SUMMARY OF THE TRANSACTION
Hyperion Capital Management, Inc. (the "Advisor") has served as the
Fund's Advisor since 1993 and currently serves as investment adviser to the Fund
pursuant to an Investment Advisory Agreement between the Fund and Advisor dated
June 18, 2002 (the "Current Investment Advisory Agreement"). As explained in
more detail below, stockholders are being asked to separately approve a new
investment advisory agreement between the Fund and the Advisor (the "New
Investment Advisory Agreement"). THE NEW INVESTMENT ADVISORY AGREEMENT WILL
CONTAIN TERMS SUBSTANTIALLY THE SAME AS THOSE IN THE CURRENT INVESTMENT ADVISORY
AGREEMENT.
The Advisor is a wholly-owned subsidiary of HCM Holdings, Inc.
("HHI"). LSR Capital HCM LLC ("LSR") owns 61.75% of HHI, with the executive
management of the Advisor owning the portion of HHI not owned by LSR. LSR
Hyperion Corp. is the managing member of LSR. Lewis Ranieri is the sole
shareholder of LSR Hyperion Corp. LSR and the management owners of HHI have
agreed, pursuant to a Stock Purchase Agreement dated as of February 11, 2005, to
sell all of their ownership in HHI to Brascan Financial (U.S.) Corporation,
which is a wholly-owned subsidiary of Brascan Corporation (the foregoing is
referred to as the "Transaction"). The Transaction is expected to close by April
30 2005. If, for any reason, the proposed Transaction is not completed, the
Current Investment Advisory Agreement will remain in effect.
Following the Transaction, no officers or directors of the Advisor will
own any interest in the Advisor.
There is not anticipated to be any change to the management structure
of the Advisor as all current officers will retain their titles and positions.
There will be, however, changes to the Advisor's Board of Directors, as set
forth below.
8
CURRENT BOARD AND TITLE PROPOSED BOARD AND TITLE
---------------------------------------------------- ------------------------------------------------------
Clifford Lai, Director Clifford Lai, Director
John J. Feeney, Director John J. Feeney, Director
John H. Dolan, Director John H. Dolan, Director
Bruce Robertson, Director
Under the 1940 Act, a change in control of an investment adviser
results in an assignment and termination of the adviser's investment advisory
contracts.
THE CURRENT INVESTMENT ADVISORY AGREEMENT
Pursuant to the Current Investment Advisory Agreement, the Fund has
retained the Advisor to manage the investment of the Fund's assets and to
provide such investment research, advice and supervision, in conformity with the
Fund's investment objective and policies, as may be necessary for the operations
of the Fund. For more information relating to the Advisor, see "Additional
Information."
On March 9, 2004, the Board of Directors of the Fund, including those
persons identified as interested persons and a majority of the directors who are
not parties to the Current Investment Advisory Agreement or "interested persons"
(as such term is defined in the 1940 Act) of any such party (the "Disinterested
Directors"), approved an extension of the Current Investment Advisory Agreement
through May __, 2005. The Current Investment Advisory Agreement was last
submitted to a vote of the Stockholders of the Fund on June ___, 2002. The Board
of Directors will consider continuance of the Current Investment Advisory
Agreement until May __, 2006 at a meeting scheduled for March __, 2005.
The Current Investment Advisory Agreement provides that it will
continue from year to year, but only so long as such continuation is
specifically approved at least annually by both (1) the vote of a majority of
the Board of Directors or the vote of a majority of the outstanding voting
securities of the Fund (as provided in the 1940 Act) and (2) by the vote of a
majority of the Disinterested Directors cast in person at a meeting called for
the purpose of voting on such approval. The Current Investment Advisory
Agreement may be terminated at any time without the payment of any penalty, upon
the vote of a majority of the Board of Directors or a majority of the
outstanding voting securities of the Fund or by the Advisor, on 60 days' written
notice by either party to the other. The Current Investment Advisory Agreement
will terminate automatically in the event of its "assignment" (as such term is
defined in the 1940 Act and the rules thereunder). The Current Investment
Advisory Agreement also provides that the Advisor shall not be liable for any
error of judgment or mistake of law, any loss arising out of any investment, or
any act or omission taken with respect to the Fund, except for willful
misfeasance, bad faith, or gross negligence in performance of its duties, or by
reason of reckless disregard of its obligations and duties hereunder.
The Current Investment Advisory Agreement provides, among other things,
that the Advisor will bear all expenses of its employees and overhead incurred
in connection with its duties under the Current Investment Advisory Agreement,
and will pay all salaries of the Fund's directors and officers who are
"affiliated persons" (as such term is defined in the 1940 Act) of the Advisor.
The Current Investment Advisory Agreement provides that the Fund shall pay to
the Advisor a monthly fee for its services which is equal to 0.65% per annum of
the Fund's average weekly net assets, which, for purposes of determining the
Advisor's fee, shall be the average weekly value of the total assets of the
Fund, minus the sum of accrued liabilities (including accrued expenses) of the
Fund and any declared but unpaid dividends on the Common Shares. Investment
advisory fees paid by the Fund to the Advisor during the last fiscal year of the
Fund amounted to $959,213.
9
THE NEW INVESTMENT ADVISORY AGREEMENT
The New Investment Advisory Agreement is substantially the same in all
material respects as the Current Investment Advisory Agreement. Thus, the key
terms, including fees, of the New Investment Advisory Agreement are set out in
detail above, under the heading "The Current Investment Advisory Agreement." The
initial term of the New Investment Advisory Agreement will reflect the date on
which the Transaction is consummated (currently anticipated to be on or about
April 30, 2005) as its new effective date.
A form of the New Investment Advisory Agreement is attached to this
proxy statement as Exhibit A. Under the New Investment Advisory Agreement, the
Advisor will continue to provide investment advisory services to the Fund,
including making decisions regarding the acquisition, holding or disposition of
securities or other assets that the Fund may own or contemplate acquiring from
time to time. All services under the New Investment Advisory Agreement must be
provided in accordance with the provisions of the 1940 Act and any rules or
regulations thereunder, the Securities Act of 1933 and any rules or regulations
thereunder, the Internal Revenue Code, any other applicable provision of law,
the Fund's charter and by-laws, any policies adopted by the Fund's Board of
Directors, and the investment policies of the Fund as disclosed in its
registration statement on file with the SEC, as amended from time to time.
Contingent upon receipt of stockholder approval, the New Investment
Advisory Agreement will be effective upon the consummation of the Transaction,
currently expected to be on or about April 30, 2005, and will continue in effect
until _____, 2007. Thereafter, the New Investment Advisory Agreement will
continue in effect for successive annual periods, provided its continuance is
approved at least annually by (1) a majority vote, cast in person at a meeting
called for that purpose, of the Fund's directors or (2) a vote of the holders of
a majority of the outstanding voting securities (as defined by the 1940 Act) of
the Fund and (3) in either event by a majority of the Disinterested Directors.
BOARD CONSIDERATIONS RELATING TO THE NEW INVESTMENT ADVISORY AGREEMENT
On February 23, 2005, the Board of Directors held a meeting called for
the purpose of considering the New Investment Advisory Agreement and, after
careful review, determined that approving the New Investment Advisory Agreement
was in the best interests of the stockholders. At the meeting, senior officers
of the Advisor discussed the Transaction and discussed the need to approve the
New Investment Advisory Agreement due to the change of Control of the Advisor.
The Board of Directors considered a wide range of information, including
information of the type they regularly consider when determining to continue the
Fund's Current Investment Advisory Agreement. In determining that the New
Investment Advisory Agreement was in the best interests of the stockholders, the
Board of Directors considered all factors deemed to be relevant to the Fund,
including, but not limited to:
o the expectation that the operation of the Advisor and the
Fund's day-to-day management, including the Fund's portfolio
manager, will remain unchanged for the foreseeable future;
o the Advisor and its personnel (including particularly those
personnel with responsibilities for providing services to the
Fund), resources and investment process will remain unchanged;
o the Advisor will also have access to the resources and
personnel of Brascan Corporation;
10
o the financial viability of the Advisor will remain unchanged;
o the terms of the New Investment Advisory Agreement, including
the fee, will be the same as those of the Current Investment
Advisory Agreement;
o the nature, extent and quality of the services that the
Advisor has been providing to the Fund will remain unchanged;
o the investment performance of the Fund and of similar funds
managed by other advisers over various periods;
o the Advisory fee rate payable to the Advisor by the Fund and
by other client accounts managed by the Advisor, and payable
by similar funds managed by other advisers;
o the total expense ratio of the Fund and of similar funds
managed by other advisers;
o compensation payable by the Fund to affiliates of the Advisor
for other services; and
o the profitability of the Current Investment Advisory Agreement
to the Advisor and its affiliates and the extent to which
economies of scale would be realized as the Fund grows.
The Board considered the level and depth of knowledge of the Advisor.
In evaluating the quality of services provided by the Advisor, the Board took
into account its familiarity with the Advisor's management through board
meetings, conversations and reports.
The Board compared the advisory fees and total expense ratio of the
Fund with various comparative data that it had been provided with previously in
approving the Fund's Current Investment Advisory Agreement. The Board considered
the Fund's recent performance results and noted that the Board reviews on a
quarterly basis information about the Fund's performance results, portfolio
composition and investment strategies. The Board also took into consideration
the financial condition and profitability of the Advisor and Brascan Corporation
and any indirect benefits derived by the Advisor from the Advisor's relationship
with the Fund.
In considering the approval of the New Investment Advisory Agreement,
the Board, including the Disinterested Directors, did not identify any single
factor as controlling. Based on the Board's evaluation of all factors that it
deemed to be relevant, the Board, including the Disinterested Directors,
concluded that the Advisor has demonstrated that it possesses the capability and
resources necessary to perform the duties required of it under the New
Investment Advisory Agreement; performance of the Fund is reasonable in relation
to the performance of funds with similar investment objectives; and the proposed
Advisory fee is fair and reasonable, given the nature, extent and quality of the
services to be rendered by the Advisor. The Board further determined that the
change in control of the Advisor did not present any material change in the type
and quality of service it would provide to the Fund.
The directors also considered the provisions of Section 15(f) of the
1940 Act, which provides, in relevant part, that affiliated persons may receive
compensation if (1) for a period of three years after the Transaction at least
75 percent of the directors of the Fund are independent of the Advisor and (2)
an "unfair burden" is not imposed on the Fund as a result of the Transaction.
The Advisor has agreed not to seek any increase in the advisory fees for a
period of at least two years and has agreed to pay incremental
11
costs associated with the 2005 Annual Meeting of Stockholders due to the
Transaction. In addition, if the Transaction is consummated, it is expected that
at least 75 percent of the Fund's directors will continue to be Disinterested
Directors.
After carefully reviewing all of these factors, the Board, including
the Disinterested Directors, unanimously approved the New Investment Advisory
Agreement and recommended that the Fund's stockholders vote to approve the New
Investment Advisory Agreement.
REQUIRED VOTE
Approval of the New Investment Advisory Agreement requires the vote of
a majority of the Fund's outstanding voting securities, as defined in the 1940
Act. A "majority of the outstanding voting securities" of the Fund, as defined
in the 1940 Act, means the lesser of (a) 67% or more of the shares of the Fund
present at the Meeting if the owners of more than 50% of the shares of the Fund
entitled to vote at the Meeting are present in person or by proxy, or (b) more
than 50% of the outstanding shares of the Fund entitled to vote at the Meeting.
If the stockholders of the Fund do not approve the New Investment
Advisory Agreement, it is expected that the Transaction will not occur and the
Advisor will continue to provide services under the Current Investment Advisory
Agreement.
THE DIRECTORS, INCLUDING ALL OF THE DISINTERESTED DIRECTORS, UNANIMOUSLY
RECOMMEND THAT YOU VOTE FOR APPROVAL OF THE NEW INVESTMENT ADVISORY AGREEMENT.
12
PROPOSAL 3: APPROVAL OF THE NEW INVESTMENT SUB-ADVISORY AGREEMENT
The Advisor serves as investment advisor to the Fund pursuant to an
Investment Advisory Agreement between the Fund and the Advisor dated June, 2002
(the "Investment Advisory Agreement"). Pursuant to a sub-advisory agreement
dated December 9, 2003, the Advisor has engaged Hyperion GMAC Capital Advisors
LLC (the "Sub-Advisor") to provide sub-investment advisory services (the
"Current Investment Sub-Advisory Agreement") for the Fund's investments in
commercial mortgage backed secutrities ("CMBS"). By its terms, the Investment
Sub-Advisory Agreement will terminate automatically in the event of an
assignment of the Sub-Advisor. A change of control of the Sub-Advisor is
considered an assignment pursuant to the 1940 Act.
As explained in more detail below, stockholders are being asked to
approve the New Sub-Advisory Agreement between the Advisor and the Sub-Advisor.
THE NEW SUB-ADVISORY AGREEMENT WILL CONTAIN TERMS SUBSTANTIALLY THE SAME AS
THOSE IN THE INVESTMENT SUB-ADVISORY AGREEMENT.
THE SUB-ADVISOR
The Sub-Advisor, a registered investment advisor, is a Delaware limited
liability company. The Sub-Advisor was organized in 1995 as Equitable Real
Estate Hyperion Capital Advisors, LLC and changed its name in 1998 to Lend Lease
Hyperion Capital Advisors, LLC and in 2003 to Hyperion GMAC Capital Advisors,
LLC. The Sub-Advisor managed approximately $[ ] billion of assets as of [ ],
2005. The business address of Sub-Advisor is One Liberty Plaza, 165 Broadway,
36th floor, New York, New York 10006-1404. The Sub-Advisor is owned (50% each)
by the Advisor and GMAC Institutional Advisors, LLC. As previously described, on
or about April 30, 2005, Brascan Financial (U.S.) Corporation will purchase the
Advisor. As a result, the Investment Sub-Advisory Agreement will terminate
automatically by its terms due to a change of control of the Sub-Advisor. Under
the 1940 Act, the transfer of a controlling interest in an advisor is deemed to
be an assignment of the advisor's advisory contracts and results in the
automatic termination of the contract.
GMAC Commercial Mortgage Corporation is the owner of GMAC Institutional
Advisors, LLC. GMAC Commercial Holding Corporation is a controlling shareholder
of GMAC Commercial Mortgage Corporation. GMAC Mortgage Group, Inc. is a
controlling shareholder of GMAC Commercial Holding Corporation. General Motors
Acceptance Corporation ("GMAC") is a controlling shareholder of GMAC Mortgage
Group, Inc. General Motors Corporation is a controlling shareholder of GMAC.
THE CURRENT INVESTMENT SUB-ADVISORY AGREEMENT
Pursuant to the Current Investment Sub-Advisory Agreement, the Advisor,
has engaged the Sub-Advisor to provide sub-investment advisory services for
investments in CMBS. Although the Sub-Advisor will make all decisions with
respect to the Fund's investments in CMBS on behalf of the Advisor, the amount
of the Fund's assets allocated to these investments will be determined by the
Advisor. For more information about the Sub-Advisor, see "Additional
Information."
On April 15, 2003, the Board of Directors of the Fund, including a
majority of the Disinterested Directors, approved the Current Investment
Sub-Advisory Agreement. At the time of the Board's approval of the Current
Investment Advisory Agreement, Mr. Lai was an interested person of the Fund.
13
The Board of Directors considered continuance of the Current Investment
Sub-Advisory Agreement until ______________ at a meeting held on February 23,
2005.
The Current Investment Sub-Advisory Agreement was last submitted to a
vote of the Stockholders of the Fund at the Special Meeting of the Stockholders
of the Fund held on December 9, 2003. At that meeting the Stockholders approved
the Current Investment Sub-Advisory Agreement, which contains the same
provisions with respect to continuation and termination as does the Current
Investment Advisory Agreement. The Current Investment Sub-Advisory Agreement may
not be assigned without the consent of the other party thereto, and any
termination by the Advisor must be directed or approved by the vote of a
majority of the Directors of the Fund in office at the time or by the vote of
the holders of a "majority" (as defined in the 1940 Act) of the voting
securities of the Fund at the time outstanding and entitled to vote. The Current
Investment Sub-Advisory Agreement also provides that the Sub-Advisor shall not
be liable for any error of judgment or mistake of law, any loss arising out of
any investment, or any act or omission taken with respect to the Fund, except
for willful misfeasance, bad faith, or gross negligence in performance of its
duties, or by reason of reckless disregard of its obligations and duties
thereunder.
The Current Investment Sub-Advisory Agreement provides, among other
things, that the Sub-Advisor will bear all expenses of its employees and
overhead incurred in connection with its duties under the Agreement. It also
provides that the Advisor shall pay to the Sub-Advisor a monthly fee for the
Sub-Advisor's services which is equal to [ ]% per annum of the portion of the
Fund's average weekly net assets that is invested in CMBS (which shall be equal
to the average weekly value of the total assets invested in CMBS, minus the sum
of accrued liabilities (including accrued expenses) directly related thereto and
a pro rata percentage of any declared but unpaid dividends on the Common Shares
and a pro rata percentage of accrued liabilities related to the Fund in
general). The Advisor has paid and intends to continue to pay the Sub-Advisor's
fee out of the fee that the Advisor will receive from the Fund. Investment
advisory fees paid by the Advisor to the Sub-Advisor during the last fiscal year
of the Fund amounted to $106,915.
The overall portfolio management strategy undertaken by the
Sub-Advisor on behalf of the Fund is mutually determined by the Advisor and the
Sub-Advisor. The execution of the management strategy is conducted under the
general supervision and direction of [ ]. [INSERT BIO[S]] No officer, director
or employee of the Sub-Advisor, except for Clifford E. Lai, is an officer,
director or nominee for election as a director of the Fund.
THE NEW INVESTMENT SUB-ADVISORY AGREEMENT
The New Investment Sub-Advisory Agreement is substantially the same as
the Current Investment Sub-Advisory Agreement. Thus, the key terms, including
fees, of the New Investment Sub-Advisory Agreement are set out in detail above,
under the heading "The Current Investment Sub-Advisory Agreement." The initial
term of the New Investment Sub-Advisory Agreement will reflect the date on which
the Transaction is consummated (currently anticipated to be on or about April
30, 2005) as its new effective date.
A Form of the New Investment Sub-Advisory Agreement is attached to this
proxy statement as Exhibit B. Under the New Investment Sub-Advisory Agreement,
the Sub-Advisor will continue to act as investment advisor to the Advisor with
respect to the investment of that portion of the Fund's assets constituting CMBS
and to provide investment research and advice with respect to CMBS. The
Sub-Advisor also will continue to supervise and arrange the purchase of CMBS
for, and the sale of CMBS in, the investment portfolio of the Fund. All services
under the New Investment Sub-Advisory Agreement
14
must be provided in accordance with the provisions of the 1940 Act and any rules
or regulations thereunder, the Securities Act of 1933 and any rules or
regulations thereunder, the Internal Revenue Code, any other applicable
provision of law, the Fund's charter and by-laws, any policies adopted by the
Fund's Board of Directors, and the investment policies of the Fund as disclosed
in its registration statement on file with the SEC, as amended from time to
time.
Contingent upon receipt of stockholder approval, the New Investment
Sub-Advisory Agreement will be effective upon the consummation of the
Transaction, currently expected to be on or about April 30, 2005, and will
continue in effect until [ ]. Thereafter, the New Investment Sub-Advisory
Agreement will continue in effect for successive annual periods, provided its
continuance is approved at least annually by (1) a majority vote, cast in person
at a meeting called for that purpose, of the Fund's directors or (2) a vote of
the holders of a majority of the outstanding voting securities (as defined by
the 1940 Act) of the Fund and (3) in either event by a majority of the
Disinterested Directors.
BOARD CONSIDERATIONS RELATING TO THE NEW INVESTMENT SUB-ADVISORY AGREEMENT
On February 23, 2005, the Board of Directors held a meeting called for
the purpose of considering the New Investment Sub-Advisory Agreement and, after
careful review, determined that approving the New Investment Sub-Advisory
Agreement was in the best interests of the stockholders. At the meeting, senior
officers of the Advisor discussed the Transaction and discussed the need to
approve the New Investment Sub-Advisory Agreement due to the change of Control
of the Sub-Advisor. The Board of Directors considered a wide range of
information, including information of the type they regularly consider when
determining to continue the Fund's Current Investment Sub-Advisory Agreement. In
determining that the New Investment Sub-Advisory Agreement was in the best
interests of the stockholders, the Board of Directors considered all factors
deemed to be relevant to the Fund, including, but not limited to:
o the expectation that the operation of the Sub-Advisor and the
day-to-day management of the Fund's portfolio that is invested
in CMBS will remain unchanged for the foreseeable future;
o the Sub-Advisor and its personnel (including particularly
those personnel with responsibilities for providing services
to the Fund), research and credit analysis resources and
investment process will remain unchanged;
o the Sub-Advisor will also have access to the resources and
personnel of Brascan Corporation;
o the owners and financial viability of the Sub-Advisor will
remain unchanged;
o the terms of the New Investment Sub-Advisory Agreement will be
the same as those of the Current Investment Sub-Advisory
Agreement;
o the fees under the New Investment Sub-Advisory Agreement will
stay the same and the Advisor will continue to pay the fees to
the Sub-Advisor;
o the nature, extent and quality of the services that the
Sub-Advisor has been providing to the Fund will remain
unchanged;
o the profitability of the Sub-Advisor and the extent to which
economies of scale would be realized as the Fund grows will
remain unchanged; and
15
o the investment performance and level of fees of the Fund
compared with similar funds managed by other advisors over
various periods; (CMBS portion of Fund's portfolio).
The Board considered the level and depth of knowledge of the
Sub-Advisor. In evaluating the quality of services provided by the Sub-Advisor,
the Board took into account its familiarity with the Sub-Advisor's management
through board meetings, conversations and reports.
The Board compared the sub-advisory fees and total expense ratio of the
Fund with various comparative data that it had been provided with previously in
approving the Fund's Current Investment Sub-Advisory Agreement. The Board
considered the Fund's recent performance results and noted that the Board
reviews on a quarterly basis information about the Fund's performance results,
portfolio composition and investment strategies. The Board also took into
consideration the financial condition and profitability of the Sub-Advisor and
Brascan Corporation and any indirect benefits derived by the Sub-Advisor from
the Sub-Advisor's relationship with the Fund.
In considering the approval of the New Investment Sub-Advisory
Agreement, the Board, including the Disinterested Directors, did not identify
any single factor as controlling. Based on the Board's evaluation of all factors
that it deemed to be relevant, the Board, including the Disinterested Directors,
concluded that the Sub-Advisor has demonstrated that it possesses the capability
and resources necessary to perform the duties required of it under the New
Investment Sub-Advisory Agreement; performance of the Fund (CMBS portion) is
reasonable in relation to the performance of funds with similar investment
objectives; and the proposed Sub-Advisory fee to be paid by the Advisor is fair
and reasonable, given the nature, extent and quality of the services to be
rendered by the Sub-Advisor. The Board further determined that the change in
control of the Sub-Advisor did not present any material change in the type and
quality of service it would provide to the Fund.
After carefully reviewing all of these factors, the Board, including
the Disinterested Directors, unanimously approved the New Investment
Sub-Advisory Agreement and recommended that the Fund's stockholders vote to
approve the New Investment Sub-Advisory Agreement.
REQUIRED VOTE
Approval of the New Investment Sub-Advisory Agreement requires the vote
of a majority of the Fund's outstanding voting securities, as defined in the
1940 Act. A "majority of the outstanding voting securities" of the Fund, as
defined in the 1940 Act, means the lesser of (a) 67% or more of the shares of
the Fund present at the Meeting if the owners of more than 50% of the shares of
the Fund entitled to vote at the Meeting are present in person or by proxy, or
(b) more than 50% of the outstanding shares of the Fund entitled to vote at the
Meeting. If the New Investment Sub-Advisory Agreement is not approved, the
Directors will consider other alternatives in the interests of stockholders.
THE DIRECTORS, INCLUDING ALL OF THE DISINTERESTED DIRECTORS, UNANIMOUSLY
RECOMMEND THAT YOU VOTE FOR APPROVAL OF THE NEW INVESTMENT SUB-ADVISORY
AGREEMENT.
16
PROPOSAL 4: RATIFICATION OR REJECTION OF SELECTION OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
The Board of Directors of the Fund will consider, and it is expected
that will recommend, the selection of PwC as the independent registered public
accounting firm of the Fund for the fiscal year ending November 30, 2005 at a
meeting scheduled to be held on March 22, 2005. The appointment of the
independent public accounting firm is approved annually by the Audit Committee
and the Board of Directors and is subsequently submitted to the stockholders for
ratification or rejection. The Fund has been advised by PwC that as of November
30, 2004 neither that firm nor any of its partners had any direct or material
indirect financial interest in the Fund. A representative of PwC will be at the
meeting to answer questions concerning the Fund's financial statements and will
have an opportunity to make a statement if he or she chooses to do so.
AUDIT FEES
For the fiscal year ended November 30, 2004, PwC billed the Fund
aggregate fees of $65,000 for professional services rendered for the audit of
the Fund's annual financial statements and review of financial statements
included in the Fund's annual report to stockholders.
For the fiscal year ended November 30, 2003, PwC billed the Fund
aggregate fees of $59,000 for professional services rendered for the audit of
the Fund's annual financial statements and review of financial statements
included in the Fund's annual report to stockholders.
AUDIT-RELATED FEES
For the fiscal year ended November 30, 2004, PwC did not bill the Fund
any fees for assurances and related services that are reasonably related to the
performance of the audit or review of the Fund's financial statements.
For the fiscal year ended November 30, 2003, PwC did not bill the Fund
any fees for assurances and related services that are reasonably related to the
performance of the audit or review of the Fund's financial statements.
TAX FEES
For the fiscal year ended November 30, 2004, PwC billed the Fund
aggregate fees of $8,500 for professional services rendered for tax compliance,
tax advice, and tax planning. The nature of the services comprising the Tax Fees
was the review of the Fund's income tax returns and tax distribution
requirements.
For the fiscal year ended November 30, 2003, PwC billed the Fund
aggregate fees of $7,000 for professional services rendered for tax compliance,
tax advice, and tax planning. The nature of the services comprising the Tax Fees
was the review of the Fund's income tax returns and tax distribution
requirements.
17
ALL OTHER FEES
For the fiscal year ended November 30, 2004, PwC billed the Fund
aggregate fees of $32,500 for the review of the financial statements included in
the Fund's semi-annual report to stockholders.
For the fiscal year ended November 30, 2003, PwC billed the Fund
aggregate fees of $39,500 for the review of the financial statements included in
the Fund's semi-annual report to stockholders.
NON-AUDIT FEES
For the fiscal year ended November 30, 2004, PwC did not bill the Fund
for any fees for products and services other than those disclosed above.
For the fiscal year ended November 30, 2003, PwC did not bill the Fund
for any fees for products and services other than those disclosed above.
REQUIRED VOTE
Ratification of the selection of PricewaterhouseCoopers LLP as
independent registered public accounting firm of the Fund requires the
affirmative vote of the holders of a majority of the outstanding shares of
common stock of the Fund present or represented by proxy at the Annual Meeting.
GENERAL INFORMATION
MANAGEMENT AND SERVICE PROVIDERS
THE ADVISOR
The Fund has entered into an Investment Advisory Agreement with the
Advisor. The Advisor is a Delaware corporation organized in February 1989 and a
registered investment advisor under the Investment Advisers Act of 1940, as
amended. The business address of the Advisor and its officers and directors is
One Liberty Plaza, 165 Broadway, 36th Floor, New York, New York 10006-1404.
Subject to the authority of the Board of Directors, the Advisor is responsible
for the overall management of the Fund's business affairs. As of December 31,
2004, the Advisor and its affiliate had approximately $13 billion in assets
under management. The Advisor's clients include pensions, foundations and
endowments, insurance companies and closed-end mutual funds. In its investment
process, the Advisor focuses on relative value opportunities, particularly in
the mortgage-backed securities ("MBS") and asset-backed securities ("ABS")
markets.
Mr. Lewis S. Ranieri is the Chairman of the Board of the Advisor. Mr.
Andrew Carter is Vice Chairman of the Advisor, but does not serve on the
Advisor's Board of Directors. Mr. Clifford E. Lai, the President and a Nominee
for re-election as a Director of the Fund, is the President and a Director of
the Advisor, and may be entitled, in addition to receiving a salary from the
Advisor, to receive a bonus based upon a portion of the Advisor's profits. Mr.
John J. Feeney is a Director and Managing Director, Marketing of the Advisor.
Mr. John H. Dolan is a Director and Managing Director, Chief Investment Officer
of the Advisor and Vice President of the Fund. Mr. Thomas F. Doodian, Treasurer
of the Fund, and Mr. Daniel S. Kim, CCO and Secretary of the Fund, are also
employees of the Advisor.
The Advisor provides advisory services to several other registered
investment companies, all of which invest in MBS. Its management includes
several individuals with extensive experience in creating,
18
evaluating and investing in MBS, derivative MBS and ABS, and in using hedging
techniques. Mr. Lai was Managing Director and Chief Investment Strategist for
Fixed Income at First Boston Asset Management Corporation. Mr. Dolan is
primarily responsible for the day-to-day management of the Fund's portfolio. Mr.
Dolan has also served as Chief Investment Strategist of the Advisor since 1998.
Investment advisory fees paid by the Fund to the Advisor during the last fiscal
year of the Fund amounted to $959,213.
In addition to acting as advisor to the Fund, the Advisor acts as
investment advisor to the following other investment companies at the indicated
annual compensation.
APPROXIMATE NET ASSETS
NAME OF FUND INVESTMENT ADVISORY MANAGEMENT FEES AT NOVEMBER 30, 2004
------------------------------------------------- --------------------------------------------- ----------------------------------
Hyperion 2005 Investment Grade Opportunity Term 0.65% of its average weekly net assets $166,857,550
Trust, Inc.
The Hyperion Total Return Fund, Inc. 0.65% of its average weekly net assets $281,535,938
Hyperion Strategic Bond Fund, Inc. 0.65% of its average weekly net assets $145,038,480
Hyperion Collateralized Securities Fund, Inc. 0.41% of its average weekly net assets $437,663,413
THE SUB-ADVISOR
The Advisor has engaged the Sub-Advisor to provide sub-investment
advisory services for the Fund's investments in CMBS. The Sub-Advisor, a
registered investment advisor, is a Delaware limited liability company. The
Sub-Advisor was organized in 1995 as Equitable Real Estate Hyperion Capital
Advisors, LLC and changed its name in 1998 to Lend Lease Hyperion Capital
Advisors, LLC and in 2003 to Hyperion GMAC Capital Advisors, LLC. The
Sub-Advisor (formerly Lend Lease Hyperion Capital Advisors, LLC) currently
manages approximately $[ ] billion of assets. The Advisor has paid and intends
to continue to pay The Sub-Advisor's fee out of the fee that the Advisor will
receive from the Fund. Investment advisory fees paid by the Advisor to the
Sub-Advisor during the last fiscal year of the Fund amounted to $106,915.
THE ADMINISTRATOR
The Fund has entered into an Administration Agreement with Hyperion
Capital Management, Inc. (the "Administrator"). The Administrator performs
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 provides the Fund with administrative office facilities. For
these services, the Fund pays a monthly fee at an annual rate of 0.20% of its
average weekly assets. For the twelve month period ended November 30, 2004, the
Administrator earned $295,143 in administration fees. In addition, the
Administrator has entered into Administration Agreements with five other
investment companies, with the following fee structures:
19
NAME ADMINISTRATION FEE
-------------------------------------------------- ------------------------------------------------------------
Hyperion 2005 Investment Grade a monthly fee paid at an annual rate of:
Opportunity Term Trust, Inc. 0.17% of the first $100 million of its average weekly net
assets
0.145% of the next $150 million
0.12% of any amounts above $250 million
The Hyperion Total Return Fund, Inc. a monthly fee paid at an annual rate of:
0.20% of its average weekly net assets
Hyperion Strategic Bond Fund, Inc. (formerly a monthly fee paid at an annual rate of:
Lend Lease Hyperion High Yield CMBS Fund, Inc.) 0.20% of its average weekly net assets
Hyperion Collateralized Securities Fund, Inc. included in Management Fee discussion on previous page
Quadrant Fund, Inc. a monthly fee paid at an annual rate of:
0.15% of its average weekly net assets
BROKERAGE COMMISSIONS
The Fund paid an aggregate of $3,285 in brokerage commissions,
including future commissions, on its securities purchases during its last fiscal
year, all of which were paid to entities that are not affiliated with the Fund
or the Advisor. The Fund does not participate and does not in the future intend
to participate in soft dollar or directed brokerage arrangements.
The Advisor and the Sub-Advisor have discretion to select brokers and
dealers to execute portfolio transactions initiated by the Advisor and the
Sub-Advisor and to select the markets in which such transactions are to be
executed. The Investment Advisory and Sub-Advisory Agreements provide, in
substance, that in executing portfolio transactions and selecting brokers or
dealers, the primary responsibility of the Advisor and the Sub-Advisor is to
seek the best combination of net price and execution for the Fund. It is
expected that securities will ordinarily be purchased in primary markets, and
that in assessing the best net price and execution available to the Fund, the
Advisor and the Sub-Advisor will consider all factors they deem relevant,
including the price, dealer spread, the size, type and difficulty of the
transaction involved, the firm's general execution and operation facilities and
the firm's risk in positioning the securities involved. Transactions in foreign
securities markets may involve the payment of fixed brokerage commissions, which
are generally higher than those in the United States.
COMPLIANCE WITH SECTION 16 REPORTING REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934 requires the
Fund's officers and directors and persons who own more than ten percent of a
registered class of the Fund's equity securities to file reports of ownership
and changes in ownership with the SEC and the New York Stock Exchange. Officers,
directors and greater than ten percent stockholders are required by SEC
regulations to furnish the Fund with copies of all Section 16(a) forms they
file.
Based solely on its review of the copies of such forms received by the
Fund and written representations from certain reporting persons that all
applicable filing requirements for such persons had been complied with, the Fund
believes that, during the fiscal year ended November 30, 2004, all filing
requirements applicable to the Fund's officers, directors, and greater than ten
percent beneficial owners were complied with.
20
FUND SHARES OWNED BY CERTAIN BENEFICIAL OWNERS
As of the Record Date to the best of the Fund's knowledge, no person
owned beneficially more than five percent of the Fund's outstanding shares.
OTHER BUSINESS
The Board of Directors of the Fund does not know of any other matter
which may come before the meeting. If any other matter properly comes before the
meeting, it is the intention of the persons named in the proxy to vote the
proxies in accordance with their judgment on that matter.
PROPOSALS TO BE SUBMITTED BY STOCKHOLDERS
All proposals by stockholders of the Fund that are intended to be
presented at the Fund's next Annual Meeting of Stockholders to be held in 2006
must be received by the Fund for inclusion in the Fund's proxy statement and
proxy relating to that meeting no later than November 1, 2005.
EXPENSES OF PROXY SOLICITATION
The cost of preparing and assembling material in connection with this
solicitation of proxies will be equally borne by the Advisor and Brascan
Corporation. The cost of mailing material in connection with this solicitation
of proxies will be borne by the Advisor. In addition to the use of the mail,
proxies may be solicited personally by regular employees of the Fund, the
Advisor or the Altman Group, paid solicitors for the Fund, or by telephone or
telegraph. The anticipated cost of solicitation by the paid solicitors will be
approximately $5,500. The Fund's agreement with the Altman provides that such
paid solicitors will perform a broker search and deliver proxies in return for
the payment of their fee plus the expenses associated with this proxy
solicitation. Brokerage houses, banks and other fiduciaries will be requested to
forward proxy solicitation material to their principals to obtain authorization
for the execution of proxies, and they will be reimbursed by the Fund for
out-of-pocket expenses incurred in this connection.
March ____, 2005
21
EXHIBIT A
INVESTMENT ADVISORY AGREEMENT
22
EXHIBIT B
INVESTMENT SUB-ADVISORY AGREEMENT
23
ANNUAL MEETING OF STOCKHOLDERS OF
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
APRIL 19, 2005
PLEASE DATE, SIGN AND MAIL YOUR PROXY CARD IN THE ENVELOPE PROVIDED
AS SOON AS POSSIBLE.
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF
DIRECTORS AND "FOR" PROPOSAL 2.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE. [X]
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1. ELECTION OF NOMINEES OF CLASS II AND CLASS III
NOMINEE
[ ] FOR ALL NOMINEES [ ] CLIFFORD E. LAI (CLASS III)
[ ] WITHHOLD AUTHORITY FOR [ ] LEO M. WALSH (CLASS III)
ALL NOMINEES
[ ] FOR ALL EXCEPT
(SEE INSTRUCTIONS BELOW)
INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE(s), MARK
"FOR ALL EXCEPT" AND FILL IN THE CIRCLE NEXT TO EACH NOMINEE YOU WISH TO
WITHHOLD, AS SHOWN HERE: [X]
FOR AGAINST ABSTAIN
2. APPROVAL OF NEW INVESTMENT ADVISORY AGREEMENT. [ ] [ ] [ ]
FOR AGAINST ABSTAIN
3. APPROVAL OF NEW INVESTMENT SUB-ADVISORY AGREEMENT [ ] [ ] [ ]
FOR AGAINST ABSTAIN
4. RATIFICATION OR REJECTION OF THE SELECTION OF [ ] [ ] [ ]
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (A VOTE
"FOR" IS A VOTE FOR RATIFICATION).
THIS PROXY, IF PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE
STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE
RE-ELECTION OF THE TWO CLASS II AND III NOMINEES AS DIRECTORS IN PROPOSAL 1, FOR
THE APPROVAL OF THE NEW INVESTMENT ADVISORY AGREEMENT IN PROPOSAL 2, FOR THE
APPROVAL OF THE NEW INVESTMENT SUB-ADVISORY AGREEMENT IN PROPOSAL 3 AND FOR THE
RATIFICATION OF THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS THE INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM OF THE FUND IN PROPOSAL 4. PLEASE REFER TO THE
PROXY STATEMENT FOR A DISCUSSION OF THE PROPOSALS.
PLEASE VOTE, DATE AND SIGN THE REVERSE SIDE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
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TO CHANGE THE ADDRESS ON YOUR ACCOUNT, PLEASE CHECK THE BOX AT THE RIGHT AND
INDICATE YOUR NEW ADDRESS IN THE ADDRESS SPACE ABOVE. PLEASE NOTE THAT CHANGES
TO THE REGISTERED NAME(s) ON THE ACCOUNT MAY NOT BE SUBMITTED VIA THIS
METHOD. [ ]
PLEASE CHECK IF YOU PLAN ON ATTENDING THE MEETING. [ ]
SIGNATURE OF STOCKHOLDER _____________________________ DATE:____________________
SIGNATURE OF STOCKHOLDER _____________________________ DATE:____________________
NOTE: THIS PROXY MUST BE SIGNED EXACTLY AS THE NAME APPEARS HEREON. WHEN SHARES
ARE HELD JOINTLY, EACH HOLDER SHOULD SIGN. WHEN SIGNING AS EXECUTOR,
ADMINISTRATOR, ATTORNEY, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE. IF THE
SIGNER IS A CORPORATION, PLEASE SIGN FULL CORPORATE NAME BY DULY AUTHORIZED
OFFICER, GIVING FULL TITLE AS SUCH. IF SIGNER IS A PARTNERSHIP, PLEASE SIGN IN
PARTNERSHIP NAME BY AUTHORIZED PERSON.
PROXY
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
THIS PROXY SOLICITED ON BEHALF OF THE DIRECTORS
The undersigned hereby appoints DANIEL S. KIM and THOMAS F. DOODIAN each of them
attorneys and proxies for the undersigned, with full power of substitution and
revocation, to represent the undersigned and to vote on behalf of the
undersigned all shares of The Hyperion Strategic Mortgage Income Fund, Inc. (the
"Fund") which the undersigned is entitled to vote at the Annual Meeting of
Stockholders of the Fund to be held at The Downtown Association, 60 Pine Street
(between William and Pearl Streets), New York, New York 10005, on Tuesday, April
19 2005 at 11:00 a.m., and at any adjournments thereof. The undersigned hereby
acknowledges receipt of the Notice of Annual Meeting and accompanying Proxy
Statement and hereby instructs said attorneys and proxies to vote said shares as
indicated hereon. In their discretion, the proxies are authorized to vote upon
such other business as may properly come before the Meeting. A majority of the
proxies present and acting at the Meeting, in person or by substitute (or, if
only one shall be so present, then that one), shall have any may exercise all of
the power or authority of said proxies hereunder. The undersigned hereby revokes
any proxy previously given.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE)
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COMMENTS:
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14475