SECURITIES AND EXCHANGE COMMISSION
MANAGEMENT INVESTMENT COMPANIES
(Formerly HYPERION STRATEGIC BOND FUND, INC.)
NEW YORK, NEW YORK 10281-1010
(Address of principal executive offices) (Zip code)
HYPERION BROOKFIELD INCOME FUND, INC.
(Formerly HYPERION STRATEGIC BOND FUND, INC.)
THREE WORLD FINANCIAL CENTER, 200 VESEY STREET, 10TH FLOOR
NEW YORK, NEW YORK 10281-1010
(Name and address of agent for service)
Portfolio Composition (Unaudited)
The chart that follows shows the allocation of the Fund’s holdings by asset category as of July 31, 2006.
HYPERION STRATEGIC BOND FUND, INC.
* As a percentage of total investments.
1
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Portfolio of Investments | |||||||||||||||||
July 31, 2006 | Principal | ||||||||||||||||
Interest | Amount | Value | |||||||||||||||
Rate | Maturity | (000s) | (Note 2) | ||||||||||||||
ASSET-BACKED SECURITIES – 9.9% | |||||||||||||||||
First Franklin Mortgage Loan Trust | |||||||||||||||||
Series 2004-FFH2, Class B1*(b) | 8.89 | %† | 06/25/34 | $ | 3,000 | $ | 2,879,139 | ||||||||||
Series 2004-FF8, Class B4*(b) | 8.89 | † | 10/25/34 | 1,000 | 961,547 | ||||||||||||
3,840,686 | |||||||||||||||||
Green Tree Financial Corp. | |||||||||||||||||
Series 1998-04, Class M1 | 6.83 | 03/01/28 | 2,000 | 820,000 | |||||||||||||
Series 1998-3, Class M1 | 6.86 | 03/01/30 | 2,000 | 840,000 | |||||||||||||
Series 1997-7, Class B1 | 6.99 | 07/15/29 | 1,887 | 264,127 | |||||||||||||
Series 1997-3, Class M1 | 7.53 | 03/15/28 | 2,500 | 1,650,000 | |||||||||||||
Series 1996-9, Class M1 | 7.63 | 08/15/27 | 2,300 | 2,116,000 | |||||||||||||
5,690,127 | |||||||||||||||||
Long Beach Mortgage Loan Trust | |||||||||||||||||
Series 2002-5, Class M4B | 6.00 | 11/25/32 | 1,607 | 642,651 | |||||||||||||
Mid-State Trust | |||||||||||||||||
Series 2004-1, Class B | 8.90 | 08/15/37 | 2,867 | 2,926,581 | |||||||||||||
Sail Net Interest Margin Notes | |||||||||||||||||
Series 2004-BNC2, Class B* | 7.00 | 12/27/34 | 1,401 | 1,175,903 | |||||||||||||
Series 2003-5, Class A* | 7.35 | 06/27/33 | 33 | 16,316 | |||||||||||||
Series 2003-3, Class A* | 7.75 | 04/27/33 | 78 | 72,711 | |||||||||||||
1,264,930 | |||||||||||||||||
Structured Asset Investment Loan Trust | |||||||||||||||||
Series 2004-4, Class B*(c) | 5.00/5.50 | 04/25/34 | 2,858 | 2,620,500 | |||||||||||||
Series 2004-11, Class B*(c) | 5.00/5.50 | 01/25/35 | 3,999 | 3,585,353 | |||||||||||||
Series 2003-BC13, Class B*(a)(c) | 6.00/6.50 | 11/25/33 | 3,750 | 3,685,669 | |||||||||||||
Series 2004-3, Class B*(c) | 6.00/6.50 | 04/25/34 | 2,500 | 2,209,375 | |||||||||||||
12,100,897 | |||||||||||||||||
Wells Fargo Alternative Loan Trust | |||||||||||||||||
Series 2005-1, Class B5 | 5.50 | 02/25/35 | 319 | 185,263 | |||||||||||||
Series 2005-1, Class B6 | 5.50 | 02/25/35 | 425 | 95,603 | |||||||||||||
280,866 | |||||||||||||||||
Total Asset-Backed Securities | |||||||||||||||||
(Cost – $29,538,851) | 26,746,738 | ||||||||||||||||
COMMERCIAL MORTGAGE BACKED SECURITIES – 76.1% | |||||||||||||||||
Subordinated Collateralized Mortgage Obligations – 13.2% | |||||||||||||||||
Harborview Mortgage Loan Trust | |||||||||||||||||
Series 2005-14, Class B4* | 5.55 | 12/19/35 | 3,358 | 2,814,638 | |||||||||||||
Series 2005-1, Class B4*(b) | 7.12 | † | 03/19/35 | 1,167 | 1,050,049 | ||||||||||||
Series 2005-1, Class B5*(b) | 7.12 | † | 03/19/35 | 1,701 | 1,341,880 | ||||||||||||
Series 2005-1, Class B6*(b) | 7.12 | † | 03/19/35 | 2,189 | 547,263 | ||||||||||||
5,753,830 | |||||||||||||||||
Pierre Laclede Center B-Participating Loan(e) | 7.72 | † | 03/07/09 | 15,000 | 15,000,000 | ||||||||||||
Shidler B-Note Participating Loan(e) | 7.10 | † | 01/09/07 | 9,868 | 9,867,774 | ||||||||||||
Wachovia Capital Center Mezzanine Loan(e) | 8.89 | † | 02/01/08 | 5,000 | 5,000,000 | ||||||||||||
Total Subordinated Collateralized Mortgage Obligations | |||||||||||||||||
(Cost – $35,767,220) | 35,621,604 | ||||||||||||||||
See notes to financial statements.
2
HYPERION STRATEGIC BOND FUND, INC. | ||||||||||||||||
Portfolio of Investments | ||||||||||||||||
July 31, 2006 | Principal | |||||||||||||||
Interest | Amount | Value | ||||||||||||||
Rate | Maturity | (000s) | (Note 2) | |||||||||||||
COMMERCIAL MORTGAGE BACKED SECURITIES (continued) | ||||||||||||||||
Other Commercial Mortgage Backed Securities – 62.9% | ||||||||||||||||
Banc America Commercial Mortgage, Inc. | ||||||||||||||||
Series 2004-6, Class A5 | 4.81 | % | 12/10/42 | $ | 4,000 | @ | $ | 3,770,216 | ||||||||
Series 2004-6, Class F* | 5.35 | 12/10/42 | 2,500 | 2,374,073 | ||||||||||||
Series 2006-2, Class J | 5.48 | 05/10/45 | 882 | 752,574 | ||||||||||||
Series 2006-2, Class K | 5.48 | 05/10/45 | 1,386 | 1,151,505 | ||||||||||||
Series 2006-2, Class L | 5.48 | 05/10/45 | 1,591 | 1,137,799 | ||||||||||||
Series 2006-2, Class M | 5.48 | 05/10/45 | 1,040 | 692,833 | ||||||||||||
Series 2006-2, Class N | 5.48 | 05/10/45 | 2,080 | 1,293,051 | ||||||||||||
Series 2006-2, Class O | 5.48 | 05/10/45 | 2,035 | 1,165,144 | ||||||||||||
Series 2006-2, Class P | 5.48 | 05/10/45 | 11,190 | 3,895,065 | ||||||||||||
Series 2002-PB2, Class K* | 6.29 | 06/11/35 | 2,000 | 2,012,960 | ||||||||||||
18,245,220 | ||||||||||||||||
Banc America Large Loan, Inc. | ||||||||||||||||
Series 2005-BOCA, Class L* | 7.07 | † | 12/15/16 | 1,698 | 1,700,156 | |||||||||||
Bear Stearns Commercial Mortgage Securities | ||||||||||||||||
Series 2005-PWR9, Class L* | 4.66 | 09/19/42 | 5,000 | 3,672,515 | ||||||||||||
Series 2004-ESA, Class A3* | 4.74 | 05/14/16 | 3,500 | @ | 3,447,941 | |||||||||||
Series 2004-T16, Class A6 | 4.75 | 02/13/46 | 5,300 | @ | 4,985,122 | |||||||||||
Series 2005-T18, Class A4 | 4.93 | 02/13/42 | 11,000 | 10,438,472 | ||||||||||||
Series 2004-PWR5, Class F* | 5.48 | † | 07/11/42 | 3,500 | 3,343,750 | |||||||||||
Series 2004-PWR6, Class F* | 5.63 | † | 11/11/41 | 2,250 | 2,127,996 | |||||||||||
Series 2005-PWR10, Class K* | 5.63 | 12/11/40 | 6,113 | 5,517,343 | ||||||||||||
Series 1999-C1, Class J* | 5.64 | 02/14/31 | 2,390 | 131,690 | ||||||||||||
Series 1999-C1, Class K*(d) | 5.64 | 02/14/31 | 1,502 | 16,524 | ||||||||||||
Series 2004-PWR6, Class G* | 5.66 | † | 11/11/41 | 1,000 | 940,079 | |||||||||||
34,621,432 | ||||||||||||||||
Cascades Mezzanine Loan(e) | 9.84 | † | 06/03/08 | 5,500 | 5,500,000 | |||||||||||
CD 2006 CD2 Series 2006-CD2, Class J* | 5.65 | 01/11/46 | 3,300 | 3,045,930 | ||||||||||||
Citigroup/ Deutsche Bank Commercial Mortgage Trust | ||||||||||||||||
Series 2005-CD1, Class G* | 5.40 | 07/15/44 | 5,000 | 4,657,340 | ||||||||||||
Credit Suisse First Boston Mortgage Securities Corp. | ||||||||||||||||
Series 2003-C3, Class J* | 4.23 | 05/15/38 | 1,200 | 1,082,528 | ||||||||||||
Series 2004-C3, Class J* | 4.78 | 07/15/36 | 275 | 243,154 | ||||||||||||
Series 2005-C6, Class J* | 5.23 | 12/15/40 | 5,000 | 4,535,295 | ||||||||||||
Series 2006-C1, Class L* | 5.24 | 02/15/39 | 1,717 | 1,447,416 | ||||||||||||
Series 2006-C1, Class M* | 5.24 | 02/15/39 | 1,200 | 982,614 | ||||||||||||
Series 2006-C1, Class N* | 5.24 | 02/15/39 | 1,288 | 918,357 | ||||||||||||
Series 2006-C1, Class O* | 5.24 | 02/15/39 | 429 | 282,209 | ||||||||||||
Series 2006-C1, Class P* | 5.24 | 02/15/39 | 430 | 269,237 | ||||||||||||
Series 2006-C1, Class Q* | 5.24 | 02/15/39 | 858 | 495,589 | ||||||||||||
Series 2006-C1, Class S* | 5.24 | 02/15/39 | 3,861 | 1,274,130 | ||||||||||||
Series 2006-C1, Class K* | 5.74 | 02/15/39 | 2,900 | 2,693,920 | ||||||||||||
14,224,449 | ||||||||||||||||
See notes to financial statements.
3
HYPERION STRATEGIC BOND FUND, INC. | ||||||||||||||||
Portfolio of Investments | ||||||||||||||||
July 31, 2006 | Principal | |||||||||||||||
Interest | Amount | Value | ||||||||||||||
Rate | Maturity | (000s) | (Note 2) | |||||||||||||
COMMERCIAL MORTGAGE BACKED SECURITIES (continued) | ||||||||||||||||
First Horizon Mortgage Trust | ||||||||||||||||
Series 2005-FA9, Class B4 | 5.50 | % | 12/25/35 | $ | 1,065 | $ | 702,831 | |||||||||
Series 2005-FA9, Class B5 | 5.50 | 12/25/35 | 1,602 | 746,938 | ||||||||||||
Series 2005-FA9, Class B6 | 5.50 | 12/25/35 | 1,145 | 286,300 | ||||||||||||
1,736,069 | ||||||||||||||||
Greenwich Capital Commercial Funding Corp. | ||||||||||||||||
Series 2005-GG5, Class A5 | 5.22 | 04/10/37 | 11,500 | 11,115,152 | ||||||||||||
JP Morgan Commercial Mortgage Finance Corp. | ||||||||||||||||
Series 2003-C1, Class X1* | 0.53 | 01/12/37 | 57,232 | 2,114,837 | ||||||||||||
Series 2003-C1, Class K* | 5.08 | 01/12/37 | 1,625 | 1,458,429 | ||||||||||||
Series 2003-C1, Class L* | 5.08 | 01/12/37 | 1,200 | 960,916 | ||||||||||||
Series 2004-C2, Class A3 | 5.38 | 05/15/41 | 5,000 | 4,872,590 | ||||||||||||
Series 2004-PNC1, Class A4 | 5.54 | 06/12/41 | 5,000 | @ | 4,923,375 | |||||||||||
Series 2005-LDP5, Class J* | 5.50 | 12/15/44 | 4,500 | 4,185,752 | ||||||||||||
Series 1999-C7, Class F* | 6.00 | 10/15/35 | 6,000 | 5,940,612 | ||||||||||||
24,456,511 | ||||||||||||||||
LB-UBS Commercial Mortgage Trust | ||||||||||||||||
Series 2005-C1, Class G* | 5.32 | 02/15/40 | 4,286 | 4,041,719 | ||||||||||||
Series 2002-C2, Class V** | 5.68 | 07/15/32 | 0 | 0 | ||||||||||||
Series 2002-C2, Class M* | 5.68 | 07/15/35 | 900 | 860,967 | ||||||||||||
Series 2002-C2, Class N* | 5.68 | 07/15/35 | 1,450 | 1,305,618 | ||||||||||||
Series 2001-C7, Class J* | 5.87 | 11/15/33 | 3,662 | 3,609,291 | ||||||||||||
Series 2001-C7, Class L* | 5.87 | 11/15/33 | 3,299 | 3,057,523 | ||||||||||||
12,875,118 | ||||||||||||||||
Merrill Lynch Mortgage Trust | ||||||||||||||||
Series 2002-MW1, Class J* | 5.70 | 07/12/34 | 2,295 | 2,145,062 | ||||||||||||
Series 2002-MW1, Class L* | 5.70 | 07/12/34 | 512 | 403,790 | ||||||||||||
2,548,852 | ||||||||||||||||
Morgan Stanley Cap I, Inc. | ||||||||||||||||
Series 2005-HQ6, Class A4A | 4.99 | 08/13/42 | 12,000 | 11,411,820 | ||||||||||||
Series 2006-IQ11, Class J* | 5.53 | 10/15/42 | 811 | 672,841 | ||||||||||||
Series 2006-IQ11, Class K* | 5.53 | 10/15/42 | 586 | 472,801 | ||||||||||||
Series 2006-IQ11, Class L* | 5.53 | 10/15/42 | 660 | 444,593 | ||||||||||||
Series 2005-HQ6, Class J* | 5.60 | 08/13/42 | 5,000 | 4,732,745 | ||||||||||||
Series 1998-WF1, Class F* | 7.30 | 03/15/30 | 5,000 | 5,049,000 | ||||||||||||
22,783,800 | ||||||||||||||||
Wachovia Bank Commercial Mortgage Trust | ||||||||||||||||
Series 2005-C18, Class J* | 4.70 | 04/15/42 | 1,248 | 1,032,114 | ||||||||||||
Series 2005-C18, Class K* | 4.70 | 04/15/42 | 1,665 | 1,330,516 | ||||||||||||
Series 2005-C18, Class L* | 4.70 | 04/15/42 | 797 | 576,801 | ||||||||||||
Series 2005-C18, Class M* | 4.70 | 04/15/42 | 532 | 354,566 | ||||||||||||
Series 2005-C18, Class N* | 4.70 | 04/15/42 | 648 | 405,255 | ||||||||||||
Series 2002-C2, Class L* | 4.94 | 11/15/34 | 1,833 | 1,677,734 | ||||||||||||
Series 2002-C2, Class M* | 4.94 | 11/15/34 | 1,072 | 953,510 | ||||||||||||
Series 2002-C2, Class N* | 4.94 | 11/15/34 | 938 | 812,135 | ||||||||||||
Series 2002-C2, Class O* | 4.94 | 11/15/34 | 755 | 598,146 |
See notes to financial statements.
4
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Portfolio of Investments | |||||||||||||||||
July 31, 2006 | Principal | ||||||||||||||||
Interest | Amount | Value | |||||||||||||||
Rate | Maturity | (000s) | (Note 2) | ||||||||||||||
COMMERCIAL MORTGAGE BACKED SECURITIES (continued) | |||||||||||||||||
Series 2002-C2, Class P* | 4.94 | % | 11/15/34 | $ | 10,044 | $ | 2,751,051 | ||||||||||
Series 2003-C3, Class J* | 4.98 | 02/15/35 | 2,045 | 1,889,919 | |||||||||||||
12,381,747 | |||||||||||||||||
Total Other Commercial Mortgage Backed Securities | |||||||||||||||||
(Cost – $171,882,981) | 169,891,776 | ||||||||||||||||
(Cost – $207,650,201) | |||||||||||||||||
(Cost – $171,882,981) | 205,513,380 | ||||||||||||||||
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES – 12.8% | |||||||||||||||||
Subordinated Collateralized Mortgage Obligations – 12.8% | |||||||||||||||||
Citicorp Mortgage Securities, Inc. | |||||||||||||||||
Series 2003-4, Class B4 | 5.00 | 03/25/18 | 285 | 253,394 | |||||||||||||
Series 2003-4, Class B5 | 5.00 | 03/25/18 | 142 | 113,215 | |||||||||||||
Series 2003-4, Class B6 | 5.00 | 03/25/18 | 285 | 159,764 | |||||||||||||
Series 2003-5, Class B4 | 5.35 | 04/25/33 | 506 | 450,259 | |||||||||||||
Series 2003-5, Class B6 | 5.35 | 04/25/33 | 507 | 243,348 | |||||||||||||
Series 2003-5, Class B5 | 5.35 | 04/25/33 | 338 | 270,329 | |||||||||||||
Series 2002-11, Class B4* | 5.84 | 11/25/32 | 963 | 949,087 | |||||||||||||
Series 2002-11, Class B5 | 5.84 | 11/25/32 | 481 | 466,068 | |||||||||||||
Series 2002-11, Class B6* | 5.84 | 11/25/32 | 723 | 542,268 | |||||||||||||
3,447,732 | |||||||||||||||||
G3 Mortgage Reinsurance Ltd. | |||||||||||||||||
Series 1, Class EH* | 25.39 | † | 05/25/08 | 2,341 | 2,528,470 | ||||||||||||
Residential Finance Limited Partnership | |||||||||||||||||
Series 2002-A, Class B7 | 11.05 | † | 10/10/34 | 3,290 | 3,337,935 | ||||||||||||
Residential Funding Mortgage Sec I | |||||||||||||||||
Series 2003-S6, Class B1 | 5.00 | 04/25/18 | 171 | 152,240 | |||||||||||||
Series 2003-S6, Class B2 | 5.00 | 04/25/18 | 85 | 70,774 | |||||||||||||
Series 2003-S6, Class B3 | 5.00 | 04/25/18 | 171 | 68,422 | |||||||||||||
Series 2005-S9, Class B1* | 5.75 | 12/25/35 | 911 | 744,127 | |||||||||||||
Series 2005-S9, Class B2* | 5.75 | 12/25/35 | 547 | 344,242 | |||||||||||||
Series 2005-S9, Class B3* | 5.75 | 12/25/35 | 911 | 269,387 | |||||||||||||
1,649,192 | |||||||||||||||||
Resix Financial Ltd. | |||||||||||||||||
Series 2004-C, Class B7* | 8.85 | † | 09/10/36 | 1,949 | 1,965,492 | ||||||||||||
Series 2004-A, Class B8* | 10.35 | † | 02/10/36 | 845 | 891,432 | ||||||||||||
Series 2003-D, Class B7* | 11.10 | † | 12/10/35 | 2,857 | 2,922,061 | ||||||||||||
Series 2005-A, Class B9* | 11.10 | † | 03/10/37 | 1,349 | 1,360,014 | ||||||||||||
Series 2003-CB1, Class B8* | 12.10 | † | 06/10/35 | 1,107 | 1,129,720 | ||||||||||||
Series 2005-D, Class B9* | 13.37 | † | 12/15/37 | 2,967 | 3,127,582 | ||||||||||||
Series 2005-A, Class B10* | 13.85 | † | 03/10/37 | 1,052 | 1,076,064 | ||||||||||||
Series 2005-D, Class B10* | 14.87 | † | 12/15/37 | 1,483 | 1,546,733 | ||||||||||||
Series 2005-D, Class B11* | 16.87 | † | 12/15/37 | 1,978 | 2,045,699 | ||||||||||||
Series 2004-A, Class B11* | 19.85 | † | 02/10/36 | 965 | 1,031,234 | ||||||||||||
17,096,031 | |||||||||||||||||
See notes to financial statements.
5
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Portfolio of Investments | |||||||||||||||||
July 31, 2006 | Principal | ||||||||||||||||
Interest | Amount | Value | |||||||||||||||
Rate | Maturity | (000s) | (Note 2) | ||||||||||||||
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued) | |||||||||||||||||
Washington Mutual | |||||||||||||||||
Series 2003-S3, Class CB5 | 5.41 | % | 06/25/33 | $ | 1,121 | $ | 897,996 | ||||||||||
Series 2003-S3, Class CB6 | 5.41 | 06/25/33 | 1,121 | 582,744 | |||||||||||||
Series 2005-AR2, Class B11(b) | 6.17 | † | 01/25/45 | 4,770 | 3,684,933 | ||||||||||||
Series 2005-AR2, Class B12(b) | 6.17 | † | 01/25/45 | 4,069 | 915,606 | ||||||||||||
6,081,279 | |||||||||||||||||
Wells Fargo Mortgage Backed Securities Trust Series 2005-AR4, Class B6 | 4.57 | † | 04/25/35 | 1,192 | 393,359 | ||||||||||||
Total Subordinated Collateralized Mortgage Obligations | |||||||||||||||||
(Cost – $32,880,741) | 34,533,998 | ||||||||||||||||
Total Non-Agency Residential Mortgage Backed Securities | |||||||||||||||||
(Cost – $32,880,741) | 34,533,998 | ||||||||||||||||
Value | ||||||||||||||||
Shares | (Note 2) | |||||||||||||||
PREFERRED STOCKS – 5.0% | ||||||||||||||||
Brandywine Realty Trust Series C, 7.50% (REIT) | 34,931 | 870,481 | ||||||||||||||
CBL & Associates Properties, Inc. Series D, 7.38% (REIT) | 61,180 | 1,525,829 | ||||||||||||||
CBL & Associates Properties, Inc. 7.75% (REIT) | 51,628 | 1,312,900 | ||||||||||||||
Cousins Properties, Inc. Series B, 7.50% (REIT) | 43,759 | 1,124,606 | ||||||||||||||
Health Care, Inc. Series F, 7.63% (REIT) | 59,703 | 1,510,486 | ||||||||||||||
Host Marriott Corp. Class E, 8.88% (REIT) | 50,000 | 1,351,500 | ||||||||||||||
Istar Financial, Inc. Series E, 7.88% (REIT) | 100,000 | 2,542,000 | ||||||||||||||
Istar Financial, Inc. Series F, 7.80% (REIT) | 20,000 | 500,200 | ||||||||||||||
Strategic Hotel Capital, Inc. Series A, 8.50% (REIT)* | 37,154 | 943,946 | ||||||||||||||
Taubman Centers, Inc. Series G, 8.00% (REIT) | 53,666 | 1,377,606 | ||||||||||||||
Urstadt Biddle Properties, Inc. Series D, 7.50% (REIT) | 23,118 | 577,950 | ||||||||||||||
Total Preferred Stocks | ||||||||||||||||
(Cost – $13,572,560) | 13,637,504 | |||||||||||||||
Principal | ||||||||||||||||
Interest | Amount | Value | ||||||||||||||
Rate | Maturity | (000s) | (Note 2) | |||||||||||||
SHORT TERM INVESTMENTS – 1.7% | ||||||||||||||||
Shearson Lehman Repo dated 07/26/06 repurchase price $4,504,568 collateralized by a FNMA obligation. | ||||||||||||||||
(Cost – $4,500,000) | 5.22 | % | 08/01/06 | $ | 4,500 | $ | 4,500,000 | |||||||||
Total Investments – 105.5% | ||||||||||||||||
(Cost – $288,142,353) | 284,931,620 | |||||||||||||||
Liabilities in Excess of Other Assets – (5.5)% | (14,787,406 | ) | ||||||||||||||
NET ASSETS – 100.0% | $ | 270,144,214 | ||||||||||||||
See notes to financial statements.
6
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Portfolio of Investments | |||||||||||||||||
July 31, 2006 | |||||||||||||||||
@ | — | Portion or entire principal amount delivered as collateral for reverse repurchase agreements (Note 5). | ||
* | — | 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. | ||
** | — | Acquired in connection with purchase of LB-UBS Commercial Mortgage Trust Series 2002-C2 Classes Q, S, T, and U. | ||
† | — | Variable Rate Security – Interest Rate is in effect as of July 31, 2006. | ||
(a) | — | Interest rate and principal amounts are based on the notional amount of the underlying mortgage pools. | ||
(b) | — | Security is a “step up” bond where coupon increases or steps up at a predetermined date. At that date the coupon increases to LIBOR plus a predetermined margin. | ||
(c) | — | Security is a “step up” bond where coupon increases or steps up at a predetermined date. Rates shown are current coupon and next coupon rate when security steps up. | ||
(d) | — | Bond is in default. | ||
(e) | — | Investments in loans receivable. | ||
REIT | — | Real Estate Investment Trust |
See notes to financial statements.
7
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Statement of Assets and Liabilities | |||||||||||||||||
July 31, 2006 | |||||||||||||||||
Assets: | ||||||
Investments in securities, at market (cost $248,274,579) (Note 2) | $ | 245,063,846 | ||||
Investments in loans receivable (cost $35,367,774) | 35,367,774 | |||||
Repurchase agreement (cost $4,500,000) (Note 2) | 4,500,000 | |||||
Total investments (cost $288,142,353) | 284,931,620 | |||||
Cash | 420,207 | |||||
Interest and dividends receivable | 1,257,353 | |||||
Prepaid expenses and other assets | 39,477 | |||||
Total assets | 286,648,657 | |||||
Liabilities: | ||||||
Reverse repurchase agreements (Note 5) | 16,108,000 | |||||
Interest payable for reverse repurchase agreements (Note 5) | 25,569 | |||||
Net unrealized depreciation on swap contracts (Note 7) | 169,508 | |||||
Investment advisory fee payable (Note 3) | 82,227 | |||||
Administration fee payable (Note 3) | 46,080 | |||||
Accrued expenses and other liabilities | 73,059 | |||||
Total liabilities | 16,504,443 | |||||
Net Assets (equivalent to $6.90 per share based on 39,140,620 shares issued and outstanding) | $ | 270,144,214 | ||||
Composition of Net Assets: | ||||||
Capital stock, at par value ($0.001) (Note 6) | $ | 39,138 | ||||
Additional paid-in capital (Note 6) | 267,657,407 | |||||
Accumulated undistributed net investment income | 21,252 | |||||
Accumulated net realized gain | 5,806,658 | |||||
Net unrealized depreciation | (3,380,241 | ) | ||||
Net assets applicable to capital stock outstanding | $ | 270,144,214 | ||||
See notes to financial statements.
8
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Statement of Operations | |||||||||||||||||
For the Year Ended July 31, 2006 | |||||||||||||||||
Investment Income (Note 2): | |||||||
Interest | $ | 24,438,724 | |||||
Dividends | 900,742 | ||||||
25,339,466 | |||||||
Expenses: | |||||||
Investment advisory fee (Note 3) | 1,161,320 | ||||||
Administration fee (Note 3) | 361,019 | ||||||
Insurance | 100,662 | ||||||
Custodian | 72,405 | ||||||
Audit and tax service fees | 53,540 | ||||||
Legal fees | 36,425 | ||||||
Directors’ fees | 29,409 | ||||||
Reports to shareholders | 7,419 | ||||||
Transfer agency | 1,211 | ||||||
Miscellaneous | 678 | ||||||
Total operating expenses | 1,824,088 | ||||||
Interest expense on reverse repurchase agreements (Note 5) | 1,918,495 | ||||||
Total expenses | 3,742,583 | ||||||
Less expenses waived by the investment adviser (Note 3) | (82,110 | ) | |||||
Net expenses | 3,660,473 | ||||||
Net investment income | 21,678,993 | ||||||
Realized and Unrealized Gain (Loss) on Investments (Notes 2 and 8): | |||||||
Net realized gain on: | |||||||
Investment transactions | 6,554,336 | ||||||
Swap contracts | 1,200,523 | ||||||
Futures transactions | 614,205 | ||||||
Net realized gain on investment transactions, swap contracts and futures transactions | 8,369,064 | ||||||
Net change in unrealized appreciation/depreciation on: | |||||||
Investments | (8,436,393 | ) | |||||
Swap contracts | (1,060,003 | ) | |||||
Futures | 14,421 | ||||||
Net change in unrealized appreciation/depreciation on investments, swap contracts and futures | (9,481,975 | ) | |||||
Net realized and unrealized loss on investments, swap contracts and futures | (1,112,911 | ) | |||||
Net increase in net assets resulting from operations | $ | 20,566,082 | |||||
See notes to financial statements.
9
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Statement of Changes in Net Assets | |||||||||||||||||
July 31, 2006 |
For the Year | For the Year | |||||||||
Ended | Ended | |||||||||
July 31, 2006 | July 31, 2005 | |||||||||
Increase (Decrease) in Net Assets Resulting from Operations: | ||||||||||
Net investment income | $ | 21,678,993 | $ | 14,642,881 | ||||||
Net realized gain (loss) on investment transactions, swap contracts and futures | 8,369,064 | (914,749 | ) | |||||||
Net change in unrealized appreciation/depreciation on investments, swap contracts and futures | (9,481,975 | ) | 2,399,291 | |||||||
Net increase in net assets resulting from operations | 20,566,082 | 16,127,423 | ||||||||
Dividends to Shareholders (Note 2): | ||||||||||
Net investment income | (21,358,423 | ) | (15,234,447 | ) | ||||||
Net realized gains | (1,788,670 | ) | (402,488 | ) | ||||||
Total dividends | (23,147,093 | ) | (15,636,935 | ) | ||||||
Capital Stock Transactions (Note 6): | ||||||||||
Net proceeds from sales of shares (10,099,573 and 3,308,019 shares, respectively) | 71,000,000 | 25,007,991 | ||||||||
Issued to shareholders in reinvestment of distributions (3,367,230 and 2,242,519 shares, respectively) | 23,147,077 | 15,636,935 | ||||||||
Cost of Fund Shares redeemed (— and 174,263 shares, respectively) | — | (1,245,982 | ) | |||||||
Net increase from capital stock transactions | 94,147,077 | 39,398,944 | ||||||||
Total increase in net assets | 91,566,066 | 39,889,432 | ||||||||
Net Assets: | ||||||||||
Beginning of year | 178,578,148 | 138,688,716 | ||||||||
End of year | $ | 270,144,214 | $ | 178,578,148 | ||||||
Undistributed net investment income | $ | 21,252 | $ | — | ||||||
See notes to financial statements.
10
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Statement of Cash Flows | |||||||||||||||||
For the Year Ended July 31, 2006 | |||||||||||||||||
Increase (Decrease) in Cash: | |||||||
Cash flows used for operating activities: | |||||||
Net increase in net assets resulting from operations | $ | 20,566,082 | |||||
Adjustments to reconcile net increase in net assets from operations to net cash used in operating activities: | |||||||
Purchases of long-term portfolio investments | (150,135,408 | ) | |||||
Proceeds from disposition of long-term portfolio investments and principal paydowns | 117,598,662 | ||||||
Purchases of short-term portfolio investments, net | (2,559,873 | ) | |||||
Increase in interest and dividend receivable | (92,165 | ) | |||||
Decrease in receivable for investments sold and paydowns | 1,916 | ||||||
Decrease in prepaid expenses and other assets | 2,012 | ||||||
Decrease in variation margin payable | (39,374 | ) | |||||
Decrease in interest payable for reverse repurchase agreements | (115,853 | ) | |||||
Increase in investment advisory fee payable | 9,596 | ||||||
Increase in administration fee payable | 31,667 | ||||||
Increase in accrued expenses and other liabilities | 46,336 | ||||||
Net accretion and paydown gains on investments | (4,132,614 | ) | |||||
Unrealized depreciation on investments | 8,436,393 | ||||||
Unrealized appreciation/depreciation on swap contracts | 1,060,003 | ||||||
Net realized gain on investment transactions | (6,453,579 | ) | |||||
Net cash used in operating activities | (15,776,199 | ) | |||||
Cash flows provided by financing activities: | |||||||
Proceeds from shares sold | 71,000,000 | ||||||
Net cash paid on reverse repurchase agreements | (55,499,000 | ) | |||||
Dividends paid to shareholders, net of reinvestments | (16 | ) | |||||
Net cash provided by financing activities | 15,500,984 | ||||||
Net decrease in cash | (275,215 | ) | |||||
Cash at beginning of year | 695,422 | ||||||
Cash at end of year | $ | 420,207 | |||||
Supplemental Disclosure of Cash Flow Information:
Noncash financing activities not included herein consist of reinvestment of dividends of $23,147,077.
Interest payments for the year ended July 31, 2006 totaled $2,034,348.
Cash at beginning of year includes $489,000 received for margin requirements on swap contracts.
See notes to financial statements.
11
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Financial Highlights |
For the Year Ended July 31, | |||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||
Per Share Operating Performance: | |||||||||||||||||||||
Net asset value, beginning of year | $ | 6.96 | $ | 6.83 | $ | 6.84 | $ | 11.14 | $ | 10.64 | |||||||||||
Net investment income | 0.60 | 0.65 | * | 0.76 | * | 0.76 | 0.91 | ||||||||||||||
Net realized and unrealized gains (losses) on investments, short sales, futures and swap contracts | (0.02 | ) | 0.15 | (0.08 | ) | 0.28 | 0.63 | ||||||||||||||
Net increase in net asset value resulting from operations | 0.58 | 0.80 | 0.68 | 1.04 | 1.54 | ||||||||||||||||
Dividends from net investment income | (0.59 | ) | (0.65 | ) | (0.65 | ) | (1.39 | ) | (0.87 | ) | |||||||||||
Dividends from net realized gains | (0.05 | ) | (0.02 | ) | (0.04 | ) | (0.92 | ) | (0.17 | ) | |||||||||||
Dividends from returns of capital | — | — | — | (3.03 | ) | 0.00 | |||||||||||||||
Total dividends | (0.64 | ) | (0.67 | ) | (0.69 | ) | (5.34 | ) | (1.04 | ) | |||||||||||
Net asset value, end of year | $ | 6.90 | $ | 6.96 | $ | 6.83 | $ | 6.84 | $ | 11.14 | |||||||||||
Total Investment Return | 8.47% | 11.74% | 10.02% | 8.98% | 15.07% | ||||||||||||||||
Ratios to Average Net Assets/ Supplementary Data: | |||||||||||||||||||||
Net assets, end of year (000’s) | $ | 270,144 | $ | 178,578 | $ | 138,689 | $ | 98,539 | $ | 158,922 | |||||||||||
Operating expenses | 0.79% | 0.87% | 0.89% | 0.77% | 0.81% | ||||||||||||||||
Interest expense | 0.82% | 0.72% | 0.33% | 0.05% | 0.00% | ||||||||||||||||
Total expenses | 1.61% | 1.59% | 1.22% | 0.82% | 0.81% | ||||||||||||||||
Total expenses including fee waiver and excluding interest expense | 0.75% | 0.75% | 0.75% | 0.75% | 0.75% | ||||||||||||||||
Net investment income | 9.34% | 9.67% | 11.02% | 7.75% | 9.08% | ||||||||||||||||
Portfolio turnover rate | 46% | 31% | 51% | 83% | 113% |
* | Calculated based on the average shares outstanding during the year. |
See notes to financial statements.
12
HYPERION STRATEGIC BOND FUND, INC. | |||||||||||||||||
Notes to Financial Statements | |||||||||||||||||
July 31, 2006 | |||||||||||||||||
The Hyperion Strategic Bond Fund, Inc. (the “Fund”) was incorporated under the laws of the State of Maryland on September 12, 1995 and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”) as a non-diversified closed-end management investment company. The Fund has an agreement with its majority shareholder to liquidate the Fund by December 31, 2006, unless shareholders holding more than 75% of the Fund’s common stock agree to continue their investment in the Fund.
The Fund’s investment objective is to provide a high total return by investing in securities backed by interests in real estate. 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 accounting principles generally accepted in the United States of America 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: Securities held by the Fund are valued based upon the current bid price where market quotations are readily available. Securities for which quotations are not readily available are valued at their fair value as determined in good faith under consistently applied procedures approved by the Fund’s Board of Directors. As a general rule, the current fair value of a security would appear to be the amount which the Fund could expect to receive upon its current sale. Some of the general factors that are 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.
Valuation of and Basis of Accounting for Loans Receivable: Loans receivable are carried at fair value, which is considered equal to their estimated collectible amounts. Interest income on the loans receivable is accrued based upon the principal amount outstanding. Loans receivable are reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the Fund’s carrying value is greater than its fair value. Impaired loans, if any, are valued based upon the present value of the expected future cash flows discounted at the loan’s effective interest rate, or collateral value, if the loan is collateral dependent.
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 value of mortgage-backed securities can be significantly affected by changes in interest rates or in the financial conditions of an issuer or market.
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: The Fund intends to qualify and meet the requirements of the Internal Revenue Code applicable to regulated investment companies and distribute substantially all of its taxable income to its shareholders. Therefore, no federal income or excise tax provision is required.
Distributions to Shareholders: Distributions from net investment income and net realized capital gains (including net short term capital gains), if any, are declared and paid at least annually. Distributions to shareholders are recorded on the ex-dividend date.
Income dividends and capital gain distributions are determined in accordance with income tax regulations that may differ from accounting principles generally accepted in the United States of America. These differences are primarily due to differing treatment of income and gains on various investment securities held by the Fund, timing differences and differing characterization of distributions made by the fund as a whole.
13
HYPERION STRATEGIC BOND FUND, INC.
Notes to Financial Statements
July 31, 2006
Repurchase Agreements: The Fund regularly invests in repurchase agreements. A repurchase agreement is an agreement by which the Fund purchases securities from a third party with the commitment that they will be repurchased by the seller at a fixed price on an agreed future date. 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. Hyperion Brookfield Asset Management, Inc. (the “Adviser”) 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.
Swap Agreements: The Fund may enter into swap agreements to manage its exposure to various risks. An interest rate swap agreement involves 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. A total rate of return swap agreement is a derivative contract in which one party (the receiver) receives the total return of a specific index on a notional amount of principal from a second party (the seller) in return for paying a funding cost, which is usually quoted in relation to the London Inter-Bank Offer Rate (“LIBOR”). During the life of the agreement, there are periodic exchanges of cash flows in which the index receiver pays the LIBOR based interest on the notional principal amount and receives (or pays if the total return is negative or spreads widen) the index total return on the notional principal amount. A credit default swap is an agreement between a protection buyer and a protection seller whereby the buyer agrees to periodically pay the seller a premium, generally expressed in terms of interest on a notional principal amount, over a specified period in exchange for receiving compensation from the seller when an underlying reference debt obligation is subject to one or more specified adverse credit events (such as bankruptcy, failure to pay, acceleration of indebtedness, restructuring, or repudiation/moratorium). The Fund will usually enter into 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 on 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 in the Statement of Assets and Liabilities. Such risks include 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, that there may be unfavorable changes in the fluctuation of interest rates or the occurrence of adverse credit events on reference debt obligations. See Note 7 for a summary of all open swap agreements as of July 31, 2006.
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.
3. Investment Advisory Agreements and Affiliated Transactions
Pursuant to a transaction whereby Brascan Financial (U.S.) Corporation purchased all stock ownership of the holding company indirectly owning the Adviser as described in the Proxy Agreement to Stockholders dated April 6, 2005 (the “Transaction”) the Fund entered into an Investment Advisory Agreement (the “New Investment Advisory Agreement”) with the Adviser on April 28, 2005. The Adviser 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. The Advisory Agreement provides, among other things, that the Adviser will bear all expenses of its employees and overhead incurred in
14
HYPERION STRATEGIC BOND FUND, INC.
Notes to Financial Statements
July 31, 2006
connection with its duties under the New 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 Adviser. The New Investment Advisory Agreement provides that the Fund shall pay the Adviser a monthly fee for its services which are equal to 0.50% of the average weekly asset value of the Fund.
During the year ended July 31, 2006, the Adviser earned $1,161,320 in management fees, of which the Adviser has waived $82,110 of its fee.
The Adviser has contractually agreed to either waive or reimburse the ongoing expenses of the Fund to the extent that such expenses exceed 0.75% of average weekly net assets per annum.
The Fund has entered into an Administration Agreement with the Adviser. The Adviser entered into a sub-administration agreement with State Street Bank and Trust Company (the “Sub-Administrator”). The Adviser 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 Adviser a monthly fee at an annual rate of 0.15% of the Fund’s average weekly net assets. During the year ended July 31, 2006, the Adviser earned $361,019 in Administration fees. The Adviser is responsible for any fees due the Sub-Administrator, except for NQ filing fees.
Certain officers and/or directors of the Fund are officers and/or directors of the Adviser.
4. Purchases and Sales of Investments
Purchases and sales of investments, excluding short-term securities and U.S. Government securities, for the year ended July 31, 2006, were $150,135,408 and $118,270,188, respectively.
5. Borrowings
Under reverse repurchase agreements, 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 July 31, 2006, the Fund had the following reverse repurchase agreements outstanding:
Maturity | |||||||||
Face Value | Description | Amount | |||||||
$ | 4,646,000 | Bank of America, 5.42%, dated 07/17/06, maturity date 08/22/06 | $ | 4,671,181 | |||||
4,689,000 | Bear Stearns, 5.36%, dated 07/26/06, maturity date 08/01/06 | 4,693,189 | |||||||
3,229,000 | Bear Stearns, 5.36%, dated 07/26/06, maturity date 08/01/06 | 3,231,885 | |||||||
3,544,000 | Bear Stearns, 5.42%, dated 07/17/06, maturity date 08/22/06 | 3,563,208 | |||||||
$ | 16,108,000 | ||||||||
Maturity Amount, Including Interest Payable | $ | 16,159,463 | |||||||
Market Value of Assets Sold Under Agreements | $ | 17,126,654 | |||||||
Weighted Average Interest Rate | 5.39 | % | |||||||
The average daily balance of reverse repurchase agreements outstanding during the year ended July 31, 2006, was approximately $44,131,581 at a weighted average interest rate of 4.36%. The maximum amount of reverse repurchase
15
HYPERION STRATEGIC BOND FUND, INC.
Notes to Financial Statements
July 31, 2006
agreements outstanding at any time during the period was $80,101,951 as of August 2, 2005, which was 30.95% of total assets.
6. Capital Stock
There are 100 million shares of $0.001 par value common stock authorized. Of the 39,140,620 shares outstanding at July��31, 2006, the Adviser owned 7,018 shares. On October 1, 2004 the Fund purchased 174,263 shares of its common stock to provide liquidity to the Fund’s shareholders since the Fund’s shares are not sold on a secondary market. The value of the purchased shares amounted to $1,245,982.
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.
At July 31, 2006, the following swap agreements were outstanding:
Net Unrealized | ||||||||||||
Expiration | Appreciation/ | |||||||||||
Notional Amount | Date | Description | (Depreciation) | |||||||||
$ | 5,000,000 | 9/11/42 | Agreement with Bear Stearns dated 11/02/05 to receive monthly the notional amount multiplied by 2.10% and to pay in the event of a write down, failure to pay a principal payment or an interest shortfall on BSCMS 2005-PWR9K. | $ | 61,552 | |||||||
10,000,000 | 12/11/40 | Agreement with Bear Stearns dated 06/06/06 to pay monthly the notional amount multiplied by 1.15% and to receive in the event of a write down, failure to pay a principal amount or an interest shortfall on BSCMS 2005-PW10K. | (65,648 | ) | ||||||||
2,200,000 | 8/13/42 | Agreement with Bear Stearns, dated 06/09/06 to pay monthly the notional amount multiplied by 0.70% and to receive in the event of a write down, failure to pay a principal payment or an interest shortfall on MCS 2005-HQ6J. | 5,003 | |||||||||
9,000,000 | 10/15/44 | Agreement with Bear Stearns, dated 06/06/06 to pay monthly the notional amount multiplied by 1.16% and to receive in the event of a write down, failure to pay a principal payment or an interest shortfall on WBCMT 2005-C21H. | (62,011 | ) | ||||||||
9,800,000 | 12/15/40 | Agreement with Goldman Sachs Capital Markets, LP, dated 06/06/06 to pay monthly the notional amount multiplied by 1.18% and to receive in the event of a write down, failure to pay a principal payment or an interest shortfall on CSFB 2005-C6J. | (95,547 | ) | ||||||||
8,000,000 | 1/15/46 | Agreement with Goldman Sachs Capital Markets, LP, dated 06/06/06 to pay monthly the notional amount multiplied by 1.18% and to receive in the event of a write down, failure to pay a principal payment or an interest shortfall on CD 2006-CD2J. | (79,192 | ) |
16
HYPERION STRATEGIC BOND FUND, INC.
Notes to Financial Statements
July 31, 2006
Net Unrealized | ||||||||||||
Expiration | Appreciation/ | |||||||||||
Notional Amount | Date | Description | (Depreciation) | |||||||||
$ | 3,100,000 | 2/15/39 | Agreement with Greenwich Capital Markets, Inc., dated 06/06/06 to pay monthly the notional amount multiplied by 1.16% and to receive in the event of a write down, failure to pay a principal payment or an interest shortfall on CSMC 2006-C1K. | $ | (4,773 | ) | ||||||
6,000,000 | 4/15/42 | Agreement with Morgan Stanley Capital Markets, Inc., dated 11/02/05 to receive monthly the notional amount multiplied by 2.15% and to pay in the event of a write down, failure to pay a principal payment or an interest shortfall on WBCMT 2005-C18J. | 71,108 | |||||||||
$ | (169,508 | ) | ||||||||||
At July 31, 2006, the Fund had no outstanding futures contracts.
8. Federal Income Tax Information
Income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from accounting principles generally accepted in the United States of America.
The tax character of distributions paid during the years ending July 31, 2006 and 2005 was as follows:
Distributions paid from: | 2006 | 2005 | ||||||
Ordinary income | $ | 21,767,737 | $ | 15,234,447 | ||||
Long-term capital gains | 1,379,356 | 402,488 | ||||||
$ | 23,147,093 | $ | 15,636,935 | |||||
At July 31, 2006, the components of net assets (excluding paid-in capital) on a tax basis were as follows:
Undistributed long term capital gains | $ | 5,806,658 | ||
Unrealized depreciation | $ | (3,358,989 | ) | |
Federal Income Tax Basis: The federal income tax basis of the Fund’s investments at July 31, 2006 was $288,142,353. Net unrealized depreciation was $(3,210,733) (gross appreciation — $6,066,512; gross unrealized depreciation — $(9,277,245)).
Capital Account Reclassifications: At July 31, 2006, the Fund’s undistributed net investment income was decreased by $299,318, accumulated net realized gain was increased by $141,013, net unrealized depreciation was increased by $23,791 and additional paid-in capital was increased by $182,096. These adjustments were primarily the result of the reclassification of realized gain distributions to income distributions and the reclassification of swap income in order to account for permanent book/tax differences and to present undistributed net investment income and accumulated realized gains on a tax basis.
9. Contractual Obligations
The Fund enters into contracts that contain a variety of indemnifications. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
10. Change of Independent Registered Public Accounting Firm
On March 21, 2006, the Board of Directors determined not to retain Holtz Rubenstein Reminick LLP (“HRR”) as the Fund’s Independent Registered Public Accounting Firm. The Audit Committee of the Fund then submitted a recommendation to the Board of Directors to engage Briggs, Bunting & Dougherty, LLP (“BBD”) as the Fund’s Independent Registered Public Accounting Firm for the fiscal year ended July 31, 2006. HRR had served as the Fund’s Independent Registered Public Accounting Firm for the year ended July 31, 2005. For the fiscal year ended July 31, 2005, HRR’s audit report contained no adverse opinion or disclaimer of opinion; nor was their report qualified as to uncertainty, audit scope or accounting principles. Further, during the fiscal year ended July 31, 2005 there were no disagreements between the Fund and
17
HYPERION STRATEGIC BOND FUND, INC.
Notes to Financial Statements
July 31, 2006
HRR on accounting principles or practices, financial statement disclosure or audit scope, which, if not resolved to the satisfaction of HRR, would have caused them to make reference to the disagreement in their report.
During the two most recent fiscal years and through March 21, 2006, the date the Board of Directors approved BBD as the Fund’s auditor, the Fund did not consult BBD regarding either (1) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Fund’s financial statements, or (2) any matter that was either the subject of a disagreement or a reportable event, as such terms are defined in Item 304 of Regulation S-K.
The Fund provided HRR with a copy of these disclosures and has requested HRR to furnish the Fund with a letter addressed to the Commission stating whether it agrees with the statements made by the Fund herein and, if not, detailing the particular statements with which it does not agree.
11. | Subsequent Event |
On September 14, 2006, the Fund’s charter was amended to change the name of the Fund to Hyperion Brookfield Income Fund, Inc.
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Hyperion Strategic Bond Fund, Inc.
New York, New York
We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of the Hyperion Strategic Bond Fund, Inc. as of July 31, 2006, and the related statements of operations, changes in net assets, cash flows and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The statement of changes in net assets for the year ended July 31, 2005 and the financial highlights for each of the years in the four-year period ended July 31, 2005 have been audited by other auditors, whose reports dated September 15, 2005 and September 15, 2004 expressed unqualified opinions on such financial statement and financial highlights.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of July 31, 2006, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Hyperion Strategic Bond Fund, Inc. as of July 31, 2006, the results of its operations, changes in its net assets, its cash flows and its financial highlights for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Briggs, Bunting & Dougherty, LLP
Philadelphia, Pennsylvania
September 14, 2006
19
HYPERION STRATEGIC BOND FUND, INC.
Information Concerning Directors and Officers (Unaudited)
July 31, 2006
The following tables provide the information concerning the directors and officers of the Hyperion Strategic Bond Fund, Inc. (the “Fund”).
Position(s) Held with | Number of | |||||||
Fund and Term of | Principal Occupation(s) During Past 5 Years | Portfolios in Fund | ||||||
Name, Address | Office and Length of | and | Complex Overseen | |||||
and Age | Time Served | Other Directorships Held by Director | by Director | |||||
Robert F. Birch c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 70 | Director, Member of the Audit Committee Elected since April 2002 | Director of several investment companies advised by the Advisor or by its affiliates (1998- Present); President, of New America High Income Fund (1992-Present); Director of Brandywine Funds (3) (2001-Present). | 4 | |||||
Harald R. Hansen c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 75 | Director, Member of the Audit Committee Elected since December 1999 | Director of other investment company advised by the Advisor or by its affiliates; Director of Crystal River Capital, Inc. (2005-Present); Director and Chairman of Executive Committee of Georgia Commerce Bank; Director of Midtown Alliance; Chairman of the Board of U.S. Disabled Athletes Fund; Trustee and Vice Chairman of the Board of Oglethorpe University; Chairman and President of the Board of Trustees of Asheville School; Trustee of the Tull Foundation; Member of Advisory Board of Directors of Wachovia Bank, NA. | 2 | |||||
Clifford E. Lai* c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 53 | Director and Chairman of the Board Elected since September 2000 | Managing Partner of Brookfield Asset Management, Inc. (2006-Present); Managing Partner (2005-Present), President (1998-2006) and Chief Investment Officer (1993-2002) of the Advisor; President and Director of Crystal River Capital, Inc. (2005-Present); President of several investment companies advised by the Advisor (1995-Present); Co-Chairman (2003- 2006) and Board of Managers (1995-2006) of Hyperion GMAC Capital Advisors, LLC (formerly Lend Lease Hyperion Capital, LLC). | 4 | |||||
Rodman L. Drake c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 63 | Director, Member of the Audit Committee Elected since May 2005 | Chairman (since 2003) and Director of several investment companies advised by the Advisor or by its affiliates (1989-Present); Director of Crystal River Capital, Inc. (2005-Present); Director of Celgene Corporation (“CELG”) (April 2006-Present); Director of Student Loan Corporation (“STU”) (2005-Present); General Partner of Resource Capital Fund I, II & III CIP L.P. (1998-Present); Co-founder, Baringo Capital LLC (2002-Present); Director of Jackson Hewitt Tax Service Inc. (“JTX”) (2004-Present); Director of Animal Medical Center (2002-Present); Director and/or Lead Director of Parsons Brinckerhoff, Inc. (1995- Present); Trustee of Excelsior Funds 33 (1994-Present). | 4 |
* | Interested person as defined in the 1940 Act, as amended (the “1940 Act”), because of affiliations with Hyperion Brookfiled Asset Management, Inc., the Fund’s Advisor. |
20
HYPERION STRATEGIC BOND FUND, INC.
Information Concerning Directors and Officers (Unaudited)
Position(s) | Term of Office and | Principal Occupation(s) | ||||
Name, Address and Age | Held with Fund | Length of Time Served | During Past 5 Years | |||
John Dolan* c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 53 | President | Elected since September 2003 | Managing Partner (2005-Present), Chief Investment Strategist (1998-Present) and Chief Investment Officer (2002-Present) of the Advisor; Chief Investment Officer of Crystal River Capital, Inc. (2005-Present); Board of Managers of Hyperion GMAC Capital Advisors, LLC (formerly Lend Lease Hyperion Capital, LLC) (1995-2006). | |||
Thomas F. Doodian* c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 47 | Treasurer | Elected since December 1999 | Managing Director, Chief Operating Officer (1998-Present) and Chief Financial Officer (2000-Present) of the Advisor; Treasurer of several investment companies advised by the Advisor (1996-Present); Treasurer of Hyperion GMAC Capital Advisors, LLC (formerly Lend Lease Hyperion Capital, LLC) (1996-2006). | |||
Josielyne K. Pacifico* c/o Three World Financial Center, 200 Vesey Street, 10th floor, New York, New York 10281-1010 Age 34 | Interim Chief Compliance Officer (“CCO”) | Elected Interim CCO since August 2006** | Vice President, Compliance Officer (July 2005- August 2006); Assistant General Counsel (July 2006-Present) and Interim Chief Compliance Officer (August 2006-Present) of the Advisor; Interim Chief Compliance Officer of several investment companies advised by the Advisor (August 2006-Present); Compliance Manager of Marsh & McLennan Companies (2004-2005); Staff Attorney of the United States Securities and Exchange Commission (2001-2004). |
* | Interested person as defined in the 1940 Act, as amended (the “1940 Act”), because of affiliations with Hyperion Brookfield Asset Management, Inc., the Fund’s Advisor. |
** | Daniel S. Kim served as the Secretary and CCO of the Fund and the Advisor until August 2006. |
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.
21
HYPERION STRATEGIC BOND FUND, INC.
Information Concerning Directors and Officers (Unaudited)
Quarterly Portfolio Schedule: The Fund will file Form N-Q with the Securities and Exchange Commission for the first and third quarters of each fiscal year. The Fund’s Form 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.hyperionbrookfield.com.
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available without charge, upon request, by calling 1-800-497-3746 and on the Securities and Exchange Commission’s website at http://www.sec.gov.
Proxy Voting Record
The Fund has filed with the Securities and Exchange Commission its proxy voting record for the 12-month period ending June 30 on Form N-PX. Once filed, the most recent Form N-PX will be available without charge, upon request, by calling 1-800-497-3746 or on the Securities and Exchange Commission’s website at http://www.sec.gov.
22
Officers & Directors
John H. Dolan
President
Clifford E. Lai
Director and Chairman of the Board
Robert F. Birch*
Director
Harald R. Hansen*
Director
Rodman L. Drake*
Director
Thomas F. Doodian
Treasurer
Josielyne K. Pacifico
Interim CCO
Hyperion Brookfield Asset Management Inc.
Item 7. | Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. |
Item 8. | Portfolio Managers of Closed-End Management Investment Companies. |
# of Accounts | ||||||||||
Total # of Accounts | Managed with | Total Assets with | ||||||||
Name of | Managed as of July | Advisory Fee Based | Advisory Fee Based | |||||||
Portfolio Manager | Type of Accounts | 31, 2006 | Total Assets | on Performance | on Performance | |||||
Registered | ||||||||||
Investment Company | 0 | $0 | None | None | ||||||
Clifford E. Lai | Other Pooled | |||||||||
Investment Vehicles | 0 | $0 | None | None | ||||||
Other Accounts | 1 | $191 million | None | None | ||||||
Registered | ||||||||||
Investment Company | 0 | $0 | None | None | ||||||
Julie S. Madnick | Other Pooled | |||||||||
Investment Vehicles | 0 | $0 | None | None | ||||||
Other Accounts | 5 | $2.4 billion | None | None |
Dollar Range of Securities Owned | ||||
Clifford E. Lai | $ | 1 — $10,000 | ||
Julie S. Madnick | $ | 1 — $10,000 |
Item 9. | Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. |
Item 10. | Submission of Matters to a Vote of Security Holders. |
Item 11. | Controls and Procedures. |
HYPERION BROOKFIELD INCOME FUND, INC. (formerly HYPERION STRATEGIC BOND FUND, INC.) | ||||
By: | /s/ John H. Dolan | |||
John H. Dolan | ||||
Principal Executive Officer | ||||
By: | /s/ John H. Dolan | |||
John H. Dolan | ||||
Principal Executive Officer | ||||
By: | /s/ Thomas F. Doodian | ||||
Thomas F. Doodian | |||||
Treasurer and Principal Financial Officer | |||||