<PAGE> 1
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HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR
--------------------------------------------------------------------------------
July 17, 1995
DEAR SHAREHOLDER:
We welcome this opportunity to provide you with information about the Hyperion
2002 Term Trust, Inc. (the "Trust") for its fiscal year ended May 31, 1995. As
you know, the Trust's investment objectives are to provide a high level of
current income consistent with investing only in securities of the highest
credit quality and to return $10.00 per share (the initial public offering price
per share) to investors on or shortly before November 30, 2002. The Trust
pursues these investment objectives by investing in a portfolio primarily of
mortgage-backed securities ("MBS") issued or guaranteed by the U.S. Government
or one of its agencies or rated AAA by a nationally recognized rating agency
(e.g., Standard & Poor's Corporation, Moody's Investors Service, Inc. or Fitch
Investment Services, Inc.).
MARKET ENVIRONMENT
The fixed income market has continued its remarkable recovery that was just in
the beginning stages when we reported to you last November. Interest rates have
broadly declined since the end of 1994. The Federal Reserve Board reduced short
term interest rates by .25% on July 6, 1995. While judged modest, this reduction
in interest rates confirmed the market's anticipatory move to lower rates.
After recording strong Gross Domestic Product ("GDP") growth of 5.1% during the
fourth quarter of 1994, the economy slowed to 2.7% in the first quarter of 1995.
A slowdown in retail sales, housing completions, durable goods orders and
employment growth all suggest GDP growth of about 1.0% for the second quarter,
which is slightly below the growth target of the Federal Reserve.
This recent economic data suggests that there is likely to be a "soft landing"
within the economy. This means that the level of economic activity has slowed
GDP growth to non-inflationary levels (under 2.5%). These circumstances have led
to a leveling of interest rates across varying maturities (commonly referred to
as a "flattening of the yield curve").
PORTFOLIO STRATEGY AND PERFORMANCE
These economic events have affected the Trust's earnings from leverage. Leverage
is most beneficial when short term interest rates are lower than longer maturity
interest rates. When long term interest rates are barely higher than short term
interest rates the benefit of leverage, and therefore earnings applied to the
dividend, is reduced. History supports our view that the norm for interest rates
is for higher long term interest rates and lower short term interest rates (a
positively sloped yield curve). We are optimistically anticipating an increase
in opportunities to enhance earnings for the Trust.
The Trust participated in the recent bond market rally, posting a positive total
return of 15.66% based on the net asset value for the six month period ended May
31, 1995. The net asset value increased over this period by $0.82, from $7.64 on
November 30, 1994 to $8.46 on May 31, 1995. During this period, the Trust's
investment activities have been tailored to the changing conditions in the
Treasury and MBS markets. The Trust's performance was enhanced due to several
factors. The most important major trend during 1995 was the recovery in Treasury
prices brought on by the slowing economy. We positioned the Trust by maintaining
well structured investments in securities which
<PAGE> 2
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HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONTINUED)
--------------------------------------------------------------------------------
perform best as the bond market rallies, such as Treasuries and asset-backed
securities.
Another major trend in the market for the year has been that declining yields
have increased the refinancing risks of certain mortgage products. Mortgage
rates have declined by approximately 175 basis points since the end of November
1994, with 30-year mortgage rates at approximately 7.50%. Consequently, lower
mortgage rates increase the refinancing risk of higher coupon mortgages. We have
sought to decrease the Trust's exposure to this refinancing risk by favoring
lower coupon MBS and increasing our allocation to securities that may benefit
from mortgage prepayments, such as principal-only securities. Currently, a high
percentage of the Trust's assets consist of MBS with low gross coupons,
Treasuries and asset-backed securities. We continue to seek investments with a
high degree of stability, in order to insulate the Trust from average life
variability in both rising and declining interest rate environments.
INVESTMENT OUTLOOK
We believe the involuntary increase in inventories of durable goods (i.e.,
automobiles, home appliances, etc.) and nondurable goods (i.e., retail clothing,
etc.) due to a reduction of final sales has created the economic environment
which has prompted the Federal Reserve to ease interest rates. Hyperion Capital
Management believes that at least two themes will direct the course of interest
rates for the remainder of the calendar year: 1) consumer spending patterns and
their resultant impact on increase/decrease of production and 2) Congress'
attempt to structurally change the deficit of the U.S. Government.
The fixed income markets have experienced significant volatility over the past
several years, as evidenced by a market dominated by declining interest rates in
1993, sharply rising interest rates in 1994, and again a significant decline in
interest rates in 1995. This market volatility has largely been a product of
changing domestic and worldwide conditions. Though many of these trends have
come full circle, we believe that interest rates will continue to be volatile.
In this uncertain economic environment, we continue to favor the most stable
mortgage-backed securities for the portfolio, such as collateralized mortgage
obligation ("CMO") planned amortization class ("PAC") bonds, slower prepaying
discount MBS and high quality asset-backed securities backed by retail auto
loans and home equity loans.
The chart which follows shows the allocation of the Trust's holdings by asset
category on May 31, 1995.
2
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HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONCLUDED)
--------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS AS OF MAY 31, 1995*
<TABLE>
<S> <C>
U.S. GOVERNMENT AGENCY
ASSET-BACKED SECURITY 2.4%
U.S. GOVERNMENT AGENCY
PASS-THROUGH CERTIFICATES 5.6%
U.S. GOVERNMENT AGENCY
COLLATERALIZED MORTGAGE
OBLIGATIONS 34.3%
U.S. GOVERNMENT AGENCY
STRIPPED MORTGAGE-BACKED
SECURITIES 3.0%
U.S. TREASURY OBLIGATIONS 17.1%
ASSET-BACKED SECURITY 2.3%
COLLATERALIZED MORTGAGE
OBLIGATIONS 27.2%
MUNICIPAL ZERO COUPON
SECURITIES 7.4%
REPURCHASE AGREEMENT 0.7%
</TABLE>
* As a percentage of total investments.
CONCLUSION
As always, we remain committed to serving the needs of our shareholders by
meeting the Trust's objectives. If you have any questions, please call us at
800-HYPERION. We look forward to hearing from you.
Sincerely,
/s/ KENNETH C. WEISS /s/ LOUIS C. LUCIDO
----------------------- -----------------------
KENNETH C. WEISS LOUIS C. LUCIDO
Chairman, President,
Hyperion 2002 Term Trust, Inc. Hyperion 2002 Term Trust, Inc.
President and Chief Executive Officer, Managing Director, Chief Operating
Hyperion Capital Management, Inc. Officer,
Hyperion Capital Management, Inc.
3
<PAGE> 4
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC. Principal
PORTFOLIO OF INVESTMENTS Current Amount Value
May 31, 1995 Coupon Maturity (000s) (Note 1)
<S> <C> <C>
-----------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 91.1%
U.S. GOVERNMENT AGENCY ASSET-BACKED SECURITY -- 3.5%
Federal National Mortgage Association
Series 1995-W1, Class A6
(Cost - $10,137,500) 8.10% 04/25/25 $ 10,000 $ 10,504,700
-------------
U.S. GOVERNMENT AGENCY PASS-THROUGH CERTIFICATES -- 8.3%
Federal National Mortgage Association
(Cost - $24,427,266) 8.00 11/01/22-04/01/25 24,500 25,074,280
-------------
U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS) -- 50.0%
Federal Home Loan Mortgage Corporation
Series 1669, Class G 6.50 02/15/23 50,000# 48,400,000
Series 1727, Class G 6.50 02/15/23 27,000 26,140,590
Series 1694, Class PQ 6.50 09/15/23 20,000 19,383,000
Series 1725, Class B 7.00 10/15/20 7,364 7,250,521
-------------
101,174,111
-------------
Federal National Mortgage Association
Series 1992-204, Class B 6.00 10/25/20 10,090 9,443,414
Series 1994-56, Class H 6.00 07/25/22 20,000# 18,635,800
Series 1994-79, Class B 7.00 12/25/19 23,100 22,844,514
-------------
50,923,728
-------------
TOTAL U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)
(Cost - $146,718,518) 152,097,839
-------------
U.S. GOVERNMENT AGENCY STRIPPED MORTGAGE-BACKED SECURITIES (REMICS) -- 4.4%
Interest-Only Securities
Federal National Mortgage Association
Series 1994-M1, Class IO, WAC 0.87 10/25/03 76,982 3,825,241
Series 1993-M2, Class J, WAC 2.03 11/25/03 76,089 6,705,736
Series 1994-10, Class H, PAC 6.50 08/25/22 3,000# 2,913,360
-------------
TOTAL U.S. GOVERNMENT AGENCY STRIPPED MORTGAGE-BACKED SECURITIES (REMICS)
(Cost - $15,248,356) 13,444,337
-------------
U.S. TREASURY OBLIGATIONS -- 24.9%
U.S. Treasury Notes
(Cost - $72,399,462) 7.50 02/15/05 70,000# 75,786,200
-------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost - $268,931,102) 276,907,356
-------------
-----------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC. Principal
PORTFOLIO OF INVESTMENTS (CONTINUED) Current Amount Value
May 31, 1995 Coupon Maturity (000s) (Note 1)
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------------
ASSET BACKED SECURITY -- 3.4%
Prime Credit Card Master Trust
Series 1992-2, Class A2
(Cost - $9,976,563) 7.45% 11/15/02 $ 10,000 $ 10,421,900
------------
--------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS) -- 39.7%
Countrywide Mortgage-Backed Securities, Inc.
Series 1993-C, Class A11 6.50 01/25/24 22,133 20,328,808
------------
GE Capital Mortgage Services, Inc.
Series 1994-3, Class A12 6.50 01/25/24 12,070 10,950,386
------------
Prudential Home Mortgage Securities Co., Inc.
Series 1992-42, Class A7 7.00 01/25/08 18,669 18,263,509
------------
Residential Funding Mortgage Securities, Inc.
Series 1993-S43, Class A10 6.50 11/25/23 26,287 24,146,628
Series 1994-S9, Class A8 6.50 03/25/24 29,159 26,740,293
------------
50,886,921
------------
Structured Asset Securities Corporation
Series 1992-M1, Class A2 7.05 11/25/02 20,000 20,121,800
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)
(Cost - $124,419,009) 120,551,424
------------
--------------------------------------------------------------------------------------------------------
MUNICIPAL ZERO COUPON SECURITIES -- 10.8%
MASSACHUSETTS -- 3.2%
Massachusetts State
Series B, FGIC (a) 06/01/02 5,000 3,538,150
Series B, AMBAC (a) 08/01/02 8,830@ 6,197,159
------------
9,735,309
------------
PENNSYLVANIA -- 2.6%
Pittsburgh Pennsylvania, Water & Sewer Authority
Series A, Revenue Bond, FGIC (a) 09/01/03 12,000 7,824,240
------------
TEXAS -- 3.1%
San Antonio Texas, Electric & Gas, Revenue Bonds
AMBAC (a) 02/01/03 7,500 5,040,225
Series B, FGIC (a) 02/01/04 7,000 4,429,040
------------
9,469,265
------------
UTAH -- 1.9%
Intermountain Power Agency Utah, Power Supply
Series B, Revenue Bond, AMBAC (a) 07/01/02 8,490@ 5,921,435
------------
TOTAL MUNICIPAL ZERO COUPON SECURITIES
(Cost - $30,550,133) 32,950,249
------------
--------------------------------------------------------------------------------------------------------
</TABLE>
5
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<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC. Principal
PORTFOLIO OF INVESTMENTS (CONCLUDED) Amount Value
May 31, 1995 (000s) (Note 1)
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT -- 1.0%
Dated 5/31/95 with State Street Bank and Trust Company,
5.90%, due 6/1/95; proceeds: $3,035,497; collateralized by
$3,100,000 U.S. Treasury Note, 3.875%, due 9/30/95, value:
$3,099,527
(Cost - $3,035,000) $ 3,035 $ 3,035,000
-------------
----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 146.0%
(Cost - $436,911,807) $ 443,865,929
VARIATION MARGIN RECEIVABLE ON OPEN FUTURES CONTRACTS -- 0.0%* 16,319
LIABILITIES IN EXCESS OF OTHER ASSETS -- (46.0%) (139,798,904)
-------------
NET ASSETS -- 100.0% $ 304,083,344
============
----------------------------------------------------------------------------------------------------------
</TABLE>
REMIC Real Estate Mortgage Investment Conduit
# Portion of or entire principal amount pledged as collateral for
reverse repurchase agreements (Note 4).
WAC Weighted Average Coupon.
PAC Planned Amortization Class
FGIC Financial Guaranty Insurance Company
(a) Zero Coupon Bond
AMBAC American Municipal Bond Assurance Corporation
@ Portion of or entire principal amount pledged as initial margin on
financial futures transactions.
* Open Futures Contracts as of May 31, 1995 are as follows (Note 1):
<TABLE>
<CAPTION>
UNREALIZED
NOTIONAL EXPIRATION VALUE AT VALUE AT APPRECIATION
AMOUNT TYPE DATE TRADE DATE MAY 31, 1995 (DEPRECIATION)
------------- ------------------------- ----------------- ------------- ------------- ------------
<C> <S> <C> <C> <C> <C>
Long:
-------------
$ 56,000,000 10-Yr. U.S. Treasury Note June 1995 $ 58,010,312 $ 61,687,500 $ 3,677,188
============= ============ ============
Short:
-------------
$ 88,500,000 10-Yr. U.S. Treasury Note June 1995 $ 91,968,580 $ 97,488,281 ($ 5,519,701)
198,000,000 Eurodollar Futures June 1995 46,267,650 46,505,250 (237,600)
93,000,000 Eurodollar Futures September 1995 21,678,300 21,899,175 (220,875)
92,000,000 Eurodollar Futures December 1995 21,399,200 21,666,000 (266,800)
90,000,000 Eurodollar Futures March 1996 20,917,625 21,206,250 (288,625)
89,000,000 Eurodollar Futures June 1996 20,663,575 20,952,825 (289,250)
87,000,000 Eurodollar Futures September 1996 20,187,300 20,464,575 (277,275)
71,000,000 Eurodollar Futures December 1996 16,457,800 16,669,025 (211,225)
------------- ------------- ------------
$ 259,540,030 $ 266,851,381 ($ 7,311,351)
============= ============= ============
</TABLE>
---------------
See notes to financial statements.
6
<PAGE> 7
<TABLE>
<S> <C>
--------------------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENTS OF ASSETS AND LIABILITIES
May 31, 1995
--------------------------------------------------------------------------------------------
ASSETS:
Investments, at value (cost $436,911,807) (Note 1)........................... $ 443,865,929
Cash......................................................................... 241
Interest receivable.......................................................... 3,487,524
Variation margin receivable on open futures contracts (Note 1)............... 16,319
Prepaid expenses............................................................. 196,416
Deferred organization expense (Note 1)....................................... 19,448
-------------
Total Assets....................................................... 447,585,877
-------------
LIABILITIES:
Reverse repurchase agreements (Note 4)....................................... 142,779,000
Dividend payable............................................................. 335,462
Investment advisory fee payable (Note 2)..................................... 125,618
Interest payable (Note 4).................................................... 71,339
Administration fee payable (Note 2).......................................... 37,580
Accrued expenses and other liabilities....................................... 153,534
Contingencies (Note 6).......................................................
-------------
Total Liabilities.................................................. 143,502,533
-------------
NET ASSETS (equivalent to $8.46 per share based on 35,930,339 shares
outstanding)............................................................ $ 304,083,344
=============
COMPOSITION OF NET ASSETS:
Capital stock, at par (Note 5)............................................... $ 359,303
Additional paid-in capital................................................... 337,349,621
Undistributed net investment income.......................................... 1,506,454
Accumulated net realized losses.............................................. (38,451,993)
Net unrealized appreciation.................................................. 3,319,959
-------------
Net assets applicable to capital stock outstanding........................... $ 304,083,344
=============
</TABLE>
---------------
See notes to financial statements.
7
<PAGE> 8
<TABLE>
<S> <C>
--------------------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF OPERATIONS
For the Year Ended May 31, 1995
--------------------------------------------------------------------------------------------
INVESTMENT INCOME (Note 1):
Interest................................................................... $ 33,235,524
-------------
EXPENSES:
Investment advisory fee (Note 2)........................................... 1,420,926
Administration fee (Note 2)................................................ 428,522
Legal...................................................................... 198,760
Insurance.................................................................. 160,290
Custodian.................................................................. 71,519
Transfer agent............................................................. 66,814
Audit and tax services..................................................... 64,000
Reports to shareholders.................................................... 54,215
Directors' fees and expenses............................................... 53,691
Registration............................................................... 32,340
Amortization of organization expenses (Note 1)............................. 8,030
Miscellaneous.............................................................. 19,717
-------------
Total operating expenses................................................ 2,578,824
Interest expense (Note 4)........................................ 6,496,175
-------------
Total expenses................................................... 9,074,999
-------------
Net investment income...................................................... 24,160,525
-------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS, SHORT SALES,
FUTURES AND OPTION TRANSACTIONS (Notes 1 & 3):
Net realized gains (losses) on:
Investments transactions................................................... (611,928)
Short sales transactions................................................... 127,011
Futures transactions....................................................... 4,092,888
Option transactions........................................................ (858,603)
-------------
2,749,368
-------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................ 21,525,254
Futures transactions....................................................... (11,838,327)
-------------
9,686,927
-------------
Net realized and unrealized gains on investments, short sales, futures and
option transactions........................................................ 12,436,295
-------------
Net increase in net assets resulting from operations......................... $ 36,596,820
=============
</TABLE>
---------------
See notes to financial statements.
8
<PAGE> 9
<TABLE>
<S> <C> <C>
-----------------------------------------------------------------------------------------------
For the For the
HYPERION 2002 TERM TRUST, INC. Year Ended Year Ended
STATEMENTS OF CHANGES IN NET ASSETS May 31, 1995 May 31, 1994
-----------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net investment income...................................... $ 24,160,525 $ 24,448,243
Net realized gain (loss) on investments, short sales,
futures and option transactions.......................... 2,749,368 (14,922,450)
Net change in unrealized appreciation (depreciation) on
investments and futures transactions..................... 9,686,927 (19,400,545)
------------- -------------
Net increase (decrease) in net assets resulting from
operations............................................... 36,596,820 (9,874,752)
------------- -------------
DIVIDENDS TO SHAREHOLDERS
Net investment income...................................... (22,641,238) (25,997,933)
------------- -------------
CAPITAL STOCK TRANSACTIONS
Cost of Trust shares repurchased and retired............... (1,335,267) (1,358,443)
Proceeds from over-accrual of offering costs............... -- 22,619
------------- -------------
Net decrease in net assets resulting from capital stock
transactions............................................. (1,335,267) (1,335,824)
------------- -------------
Total increase (decrease) in net assets............... 12,620,315 (37,208,509)
NET ASSETS:
Beginning of year.......................................... 291,463,029 328,671,538
------------- -------------
End of year (including undistributed net investment income
of $1,506,453 and dividends in excess of net investment
income of $12,833, respectively)......................... $ 304,083,344 $ 291,463,029
============= =============
</TABLE>
---------------
See notes to financial statements.
9
<PAGE> 10
<TABLE>
<S> <C>
---------------------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF CASH FLOWS
For the Year Ended May 31, 1995
---------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH:
Cash flows provided from operating activities:
Interest received (excluding accretion of $2,635,169)................. $ 30,327,886
Operating expenses paid............................................... (2,776,201)
Interest expense paid................................................. (6,498,268)
Purchase of short-term portfolio investments, including options,
net.................................................................. (1,292,572)
Purchase of long-term portfolio investments........................... (1,462,028,770)
Proceeds from disposition of long-term portfolio investments and
principal paydowns................................................... 1,467,685,505
Net cash used for futures transactions................................ (6,846,257)
----------------
Net cash provided from operating activities........................... 18,571,323
----------------
Cash flows used for financing activities:
Cash used to repurchase shares........................................ (1,335,267)
Net cash provided from reverse repurchase agreements.................. 6,874,500
Cash dividends paid................................................... (24,262,783)
----------------
Net cash used for financing activities................................ (18,723,550)
----------------
Net decrease in cash....................................................... (152,227)
Cash at beginning of year.................................................. 152,468
----------------
Cash at end of year........................................................ $ 241
===============
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Net increase in net assets resulting from operations....................... $ 36,596,820
----------------
Increase in investments............................................... (28,704,195)
Increase in net unrealized appreciation on investments................ (9,686,927)
Increase in interest receivable....................................... (272,469)
Decrease in variation margin receivable............................... 899,182
Decrease in other assets.............................................. 19,783,880
Increase in advisory/administration fees payable...................... 5,620
Decrease in accrued expenses and other liabilities.................... (50,588)
----------------
Total adjustments................................................ (18,025,497)
----------------
Net cash provided from operating activities................................ $ 18,571,323
===============
</TABLE>
---------------
See notes to financial statements.
10
<PAGE> 11
<TABLE>
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------
For the Period
For the Year For the Year November 2, 1992*
HYPERION 2002 TERM TRUST, INC. Ended Ended through
FINANCIAL HIGHLIGHTS May 31, 1995 May 31, 1994 May 31, 1993
--------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 8.07 9.05 9.37**
------------ ------------ ------------------
Net investment income...................... 0.67 0.68 0.44
Net effect of shares repurchased........... 0.01 0.01 --
Net realized and unrealized gain (loss) on
investments, short sales, futures and
option transactions...................... 0.34 (0.95) (0.36)
------------ ------------ ------------------
Net increase (decrease) in net asset value
resulting from operations................ 1.02 (0.26) 0.08
------------ ------------ ------------------
Dividends from net investment income....... (0.63) (0.72) (0.40)
------------ ------------ ------------------
Net asset value, end of period............. $ 8.46 $ 8.07 $ 9.05
============= ============= ===================
Market price, end of period................ $ 7.25 $ 7.25 $ 9.125
============= ============= ===================
TOTAL INVESTMENT RETURN +.................. 9.46% (13.17)% (1.18)%(1)
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTARY DATA:
Net assets, end of period (000s)........... $304,083 $291,463 $328,672
Total operating expenses................... 0.91% 0.81% 0.80%(2)
Interest expense........................... 2.29% 1.34% 1.66%(2)
Net investment income...................... 8.50% 7.90% 8.34%(2)
Portfolio turnover rate.................... 356% 628% 237%
</TABLE>
---------------
* Commencement of investment operations.
** Net of offering costs of $0.02.
+ Total investment return is computed based upon the New York Stock Exchange
market price of the Trust's shares and excludes the effects of sales loads
or brokerage commissions.
(1) Not annualized.
(2) Annualized.
See notes to financial statements.
11
<PAGE> 12
--------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Hyperion 2002 Term Trust, Inc. (the "Trust"), which was incorporated under the
laws of the State of Maryland on July 29, 1992, is registered under the
Investment Company Act of 1940 (the "1940 Act") as a diversified, closed-end
management investment company. The Trust had no transactions until October 20,
1992, when it sold 10,639 shares of common stock for $100,006 to Hyperion
Capital Management, Inc. (the "Adviser"). The Trust expects to distribute
substantially all of its net assets on or shortly before November 30, 2002 and
thereafter to terminate. The distribution and termination may require
shareholder approval. The Trust's investment objectives are to provide a high
level of current income consistent with investing only in securities of the
highest credit quality and to return at least $10.00 per share (the initial
public offering price per share) to investors on or shortly before November 30,
2002. The Trust pursues these investment objectives by investing in a portfolio
primarily of mortgage-backed securities ("MBS") issued or guaranteed by the U.S.
Government or one of its agencies or rated AAA by a nationally recognized rating
agency (e.g., Standard & Poor's Corporation or Moody's Investors Service, Inc.).
No assurance can be given that the Trust's investment objectives will be
achieved.
Valuation of Investments: Where market quotations are readily available,
portfolio securities are valued based upon the current bid price. The Trust
values mortgage-backed securities and other debt securities for which market
quotations are not readily available at their fair value as determined in good
faith, utilizing procedures approved by the Board of Directors of the Trust, on
the basis of information provided by dealers in such securities. Some of the
general factors which may be considered in determining fair value include the
fundamental analytic data relating to the investment and an evaluation of the
forces which influence the market in which these securities are purchased and
sold. Determination of fair value involves subjective judgment, as the actual
market value of a particular security can be established only by negotiations
between the parties in a sales transaction.
Debt securities having a remaining maturity of sixty days or less when purchased
and debt securities originally purchased with maturities in excess of sixty days
but which currently have maturities of sixty days or less are valued at
amortized cost.
The ability of issuers of debt securities held by the Trust to meet their
obligations may be affected by economic developments in a specific industry or
region. The values of MBS can be significantly affected by changes in interest
rates.
Options Written or Purchased: The Trust may purchase or write options as a
method of hedging potential declines in similar underlying securities. When the
Trust writes or purchases an option, the amount equal to the premium received or
paid by the Trust is recorded as a liability or an asset and is subsequently
adjusted to the current market value of the option written or purchased.
Premiums received or paid from writing or purchasing options which expire
unexercised are treated by the Trust on the expiration date as realized gains or
losses. The difference between the premium and the amount paid or received on
effecting a closing purchase or sale transaction, including brokerage
commissions, is also treated as a realized gain or loss. If an option is
exercised, the premium paid or received is added to the proceeds from the sale
or cost of the purchase in determining the realized gain or loss or the basis of
the security.
The Trust, as writer of an option, may have no control over whether the
underlying securities may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the security
underlying the written option.
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
12
<PAGE> 13
--------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
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 Trust records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Trust's basis in the contract.
The Trust invests in financial futures contracts solely for the purpose of
hedging, its existing portfolio securities or securities that the Trust intends
to purchase, against fluctuations in value caused by changes in prevailing
market interest rates. Should interest rates move unexpectedly, the Trust 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.
Short Sales: The Trust may make short sales of securities as a method of hedging
potential declines in similar securities owned. When the Trust makes a short
sale, it must borrow the security sold short and deliver it to the broker-dealer
through which it made the short sale as collateral for its obligation to deliver
the security upon conclusion of the sale. The Trust may have to pay a fee to
borrow the particular securities and may be obligated to pay over any payments
received on such borrowed securities. A gain, limited to the price at which the
Trust sold the security short, or a loss, unlimited as to dollar amount, will be
recognized upon the termination of a short sale if the market price is greater
or less than the proceeds originally received.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. Discounts and premiums on long term securities are amortized
using the effective yield to maturity method.
Taxes: It is the Trust's intention to meet the requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
substantially all of its taxable income to its shareholders. Therefore, no
federal income or excise tax provision is required.
Dividends and Distributions: The Trust declares and pays dividends monthly from
net investment income. Distributions of net realized capital gains in excess of
capital loss carryforwards are distributed at least annually. Dividends and
distributions are recorded on the ex-dividend date.
Deferred Organization Expenses: A total of $40,500 was incurred in connection
with the organization of the Trust. These costs have been deferred and are being
amortized ratably over a period of sixty months from the date the Trust
commenced investment operations.
Cash Flow Information: The Trust invests in securities and distributes dividends
and distributions which are paid in cash or are reinvested at the discretion of
shareholders. These activities are reported in the Statement of Changes in Net
Assets and additional information on cash receipts and cash payments is
presented in the Statement of Cash Flows. Cash, as used in the Statement of Cash
Flows, is the amount reported as "Cash" in the Statement of Assets and
Liabilities, and does not include short-term investments.
Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and accreting discounts on debt
obligations.
Repurchase Agreements: The Trust, through its custodian, receives delivery of
the underlying collateral, the market value of which at the time of purchase is
required to be in an amount at least equal to the resale price, including
accrued interest. The 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
Trust may be delayed or limited.
2. INVESTMENT ADVISORY AND ADMINISTRATION
AGREEMENTS:
The Trust has entered into an Investment Advisory Agreement with the Adviser.
The Adviser is responsible
13
<PAGE> 14
--------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
for the management of the Trust's portfolio and provides the necessary
personnel, facilities, equipment and certain other services necessary to the
operations of the Trust. For such services, the Trust pays a monthly fee at an
annual rate of 0.50% of the Trust's average weekly net assets.
The Trust has entered into an Administration Agreement with Hyperion Capital
Management, Inc. ("Administrator"). The Administrator performs administrative
services necessary for the operation of the Trust, including
maintaining certain books and records of the Trust and preparing reports and
other documents required by federal, state, and other applicable laws and
regulations, and provides the Trust with administrative office facilities. For
these services the Trust pays a monthly fee at an annual rate of 0.17% of the
first $100 million of the Trust's average weekly net assets, 0.145% of the next
$150 million and 0.12% of any amounts above $250 million.
The Trust has entered into a Sub-Administration Agreement with Middlesex
Administrators L.P. (the "Sub-Administrator"), an affiliate of Merrill Lynch,
Pierce, Fenner & Smith Incorporated, to whom the Administrator has delegated
certain of its administrative responsibilities. For these services, the
Administrator will pay out of its own assets the fee to be paid to the Sub-
Administrator computed at the rate of 0.12% per annum of the first $100 million
of the Trust's average weekly net assets, 0.10% of the next $150 million and
0.08% of any amounts above $250 million.
The Administrator informed the Trust that it paid $297,348 to the
Sub-Administrator during the year ended May 31, 1995.
Certain officers and/or directors of the Trust are officers and/or directors of
the Adviser.
3. PURCHASES AND SALES OF INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
year ended May 31, 1995 aggregated $1,462,028,770 and $1,445,906,320,
respectively.
Written option activity for the year ended May 31, 1995 was as follows:
<TABLE>
<CAPTION>
NUMBER
OF
CONTRACTS PREMIUM
------- -----------
<S> <C> <C>
Options outstanding at May 31,
1994......................... -- $ --
Options written................ (200) (62,500)
Options assigned............... -- --
Options closed................. 200 62,500
Options expired................ -- --
------- -----------
Options outstanding at May 31,
1995......................... -- $ --
====== ==========
</TABLE>
The federal income tax basis of the Trust's investments at May 31, 1995 was
$437,034,304 and, accordingly, net unrealized appreciation for federal income
tax purposes was $6,831,625 (gross unrealized appreciation -- $15,427,326; gross
unrealized depreciation -- $8,595,701). At May 31, 1995, the Trust had capital
losses of $38,476,254, of which $30,666,463 expires in 2002 and $7,809,791
expires in 2003, available to offset any future capital gains. However, if the
Trust terminates as expected in 2002 the capital loss carryforward must be
utilized by 2002 in order for shareholders to realize a benefit.
4. BORROWINGS:
The Trust may enter into reverse repurchase agreements and dollar roll
agreements with the same parties with whom it may enter into repurchase
agreements. A dollar roll agreement is identical to a reverse repurchase
agreement except for the fact that substantially identical securities may be
repurchased. Under a reverse repurchase agreement or a dollar roll agreement,
the Trust sells securities and agrees to repurchase them, or
substantially similar securities in the case of a dollar roll agreement, at a
mutually agreed upon date and price. Under the 1940 Act, reverse repurchase
agreements and dollar roll agreements will be regarded as a form of borrowing
by the Trust unless, at the time it enters into a reverse repurchase agreement
or a dollar roll agreement, it establishes and maintains a segregated account
with its custodian containing securities from its portfolio having a value
14
<PAGE> 15
--------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
--------------------------------------------------------------------------------
not less than the repurchase price (including accrued interest). The Trust has
established and maintained such an account for each of its reverse repurchase
agreements and dollar roll agreements. Reverse repurchase agreements and dollar
roll agreements involve the risk that the market value of the securities
retained in lieu of sale by the Trust may decline below the price of the
securities the Trust has sold but is obligated to repurchase. In the event the
buyer of securities under a reverse repurchase agreement or a dollar roll
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
Trust's obligation to repurchase the securities, and the Trust's use of the
proceeds of the reverse repurchase agreement or the dollar roll agreement may
effectively be restricted pending such decision.
At May 31, 1995, the Trust had the following reverse repurchase agreements
outstanding:
<TABLE>
<CAPTION>
MATURITY IN
ZERO TO 30 DAYS
-------------
<S> <C>
Maturity Amount................. $ 142,940,047
-------------
Market Value of Assets Sold
Under Agreements.............. $ 145,735,360
-------------
Weighted Average Interest
Rate.......................... 5.80%
</TABLE>
The average end-of-week balance of reverse repurchase agreements outstanding
during the year ended May 31, 1995, was approximately $121,743,755, at a
weighted average interest rate of 5.26%. The maximum amount of reverse
repurchase agreements outstanding at any time during the year was $142,850,339
as of May 31, 1995, which was 31.92% of total assets.
5. CAPITAL STOCK:
There are 75 million shares of $0.01 par value common stock authorized. Of the
35,930,339 shares outstanding at May 31, 1995, the Adviser owned 10,639 shares.
During the years ended May 31, 1994 and 1995 the Trust repurchased a total of
183,500 and 196,800 shares of its outstanding common stock at a cost of
$1,358,443 and $1,335,267 and an average discount of approximately 10.90% and
13.90% from its net asset value, respectively. All shares repurchased have been
retired.
6. LITIGATION:
During the months of October and November 1993, purported class action lawsuits
were instituted against the Trust and its directors, officers and underwriters
by certain shareholders of the Trust in the United States District Court,
Southern District of New York. The plaintiffs in that action generally alleged
that the defendants made inadequate and misleading disclosure in the
registration statement and prospectus for the Trust, in particular, as such
disclosure relates to the nature and risks of "interest-only mortgage strip
securities" and the Trust's investments in those instruments. A Pre-Trial Order
of Consolidation dated December 27, 1993 consolidated these and other actions
under the consolidated caption In re: Hyperion Securities Litigation Master File
No. 93-CIV-7179 (MBM). Pursuant to the terms of the Order of Consolidation, one
consolidated amended complaint was served upon the Trust and the other
defendants which superseded all other complaints previously filed. On April 8,
1994, the defendants requested that the Court dismiss the consolidated
complaint. Pursuant to an order dated October 3, 1994, the Court stayed all
discovery in the Action except for certain limited document discovery. In
November 1994, while the motion to dismiss was still pending, plaintiffs filed a
second consolidated amended complaint. The allegations in the second
consolidated amended complaint relate to the accuracy of the defendants'
representations to investors about the Trust's investment objectives, and level
and adequacy of the disclosure in the Prospectus for the Trust used in
connection with its initial public offerings. Defendants moved to dismiss the
second consolidated amended complaint in December 1994.
On July 14, 1995 the second consolidated amended complaint was dismissed without
leave to replead by Judge Michael B. Mukasey, United States District Court,
Southern District of New York. At this time, the plaintiffs have not indicated
whether they will attempt to challenge the Court's decision.
15
<PAGE> 16
--------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
--------------------------------------------------------------------------------
Pursuant to the Underwriting Agreement between the Trust and its underwriters,
the Trust and the Adviser have jointly and severally agreed to indemnify the
underwriters for their liabilities, losses and costs directly related to certain
contents of the prospectus and registration statement of the Trust. The
underwriters have provided notification to the Trust and the Adviser that they
intend to exercise their rights of indemnification in the event that they are
subject to liabilities, costs or losses that are covered by the indemnity.
During the year ended May 31, 1995 the Trust incurred and paid legal expenses in
the amount of $60,718 in connection with the indemnification of the
underwriters. In addition, pursuant to the Advisory Agreement between the Trust
and the Adviser, the Adviser is indemnified for all of its liabilities, losses
and costs in connection with any matter involving the Trust, except for actions
relating to the gross negligence, willful malfeasance or fraud of the Adviser.
At this time the Adviser has not notified the Trust of its intention to seek
indemnification. The ultimate outcome of this litigation is not presently
determinable, and no provision has been made in the Trust's financial statements
for the effect, if any, of such litigation.
7. SUBSEQUENT EVENTS:
The Trust's Board of Directors declared the following regular monthly dividends:
<TABLE>
<CAPTION>
DIVIDEND RECORD PAYABLE
PER SHARE DATE DATE
--------- --------- ---------
<S> <C> <C>
$0.05 6/19/95 6/29/95
$0.04375 7/17/95 7/27/95
</TABLE>
16
<PAGE> 17
--------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
--------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
HYPERION 2002 TERM TRUST, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
cash flows and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Hyperion 2002 Term
Trust, Inc. (the "Trust") at May 31, 1995, the results of its operations and its
cash flows for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the two years in the period then ended and for the period November 2, 1992
(commencement of operations) through May 31, 1993, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Trust's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at May 31, 1995 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
As described in Note 6 to the financial statements, the Trust was one of several
defendants in litigation. The ultimate outcome of the litigation cannot be
determined at present. No provision for any liability that may result upon
resolution of the matter has been made in the accompanying financial statements.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
July 27, 1995
--------------------------------------------------------------------------------
TAX INFORMATION
--------------------------------------------------------------------------------
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Trust's fiscal year end (May 31,
1995) as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that all distributions
paid during the fiscal year were derived from net investment income and are
taxable as ordinary income. In addition, 0.06% of the Trust's distributions
during the year ended December 31, 1994 were earned from U.S. Treasury
obligations. None of the Trust's distributions qualify for the dividends
received deduction available to corporate shareholders.
Because the Trust's fiscal year is not the calendar year, another notification
will be sent with respect to calendar year 1995. The second notification, which
will reflect the amounts to be used by calendar year taxpayers on their federal
income tax returns, will be made in conjunction with Form 1099 DIV and will be
mailed in January 1996. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Trust.
17
<PAGE> 18
--------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS
(LOSSES) ON NET INCREASE
INVESTMENTS, (DECREASE) IN NET
NET INVESTMENT SHORT SALES, FUTURES AND ASSETS RESULTING FROM
INCOME OPTION TRANSACTIONS OPERATIONS
TOTAL ---------------- ------------------ -----------------
QUARTERLY PERIOD INCOME AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE
<S> <C> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------------------------------------------
June 1, 1993
to August 31, 1993 $ 7,900,285 $ 5,891,890 $0.17 $ (7,056,496) $ (0.19) $(1,164,606) $ (0.02)
September 1, 1993
to November 30, 1993 7,647,909 6,287,067 0.17 (14,250,814) (0.40) (7,963,747) (0.23)
December 1, 1993
to February 28, 1994 7,304,356 5,779,371 0.16 (3,697,312) (0.10) 2,082,059 0.06
March 1, 1994
to May 31, 1994 8,257,401 6,489,914 0.18 (9,318,373) (0.26) (2,828,459) (0.08)
June 1, 1994
to August 31, 1994 8,111,892 6,080,085 0.17 (4,477,491) (0.12) 1,602,594 0.05
September 1, 1994
to November 30, 1994 8,953,967 6,721,015 0.19 (12,361,939) (0.34) (5,640,924) (0.15)
December 1, 1994
to February 28, 1995 8,177,423 5,855,585 0.16 11,776,995 0.32 17,632,580 0.48
March 1, 1995
to May 31, 1995 7,992,242 5,503,840 0.15 17,498,730 0.49 23,002,570 0.64
----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
DIVIDENDS AND
DISTRIBUTIONS SHARE PRICE
---------------- ---------
QUARTERLY PERIOD AMOUNT PER SHARE HIGH LOW
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------
June 1, 1993
to August 31, 1993 $7,265,759 $0.20 $9 7/8 $8 1/4
September 1, 1993
to November 30, 1993 6,655,302 0.18 9 3/8 7 1/2
December 1, 1993
to February 28, 1994 6,200,403 0.17 8 7 3/8
March 1, 1994
to May 31, 1994 5,876,469 0.17 7 5/8 7
June 1, 1994
to August 31, 1994 5,863,752 0.17 7 3/8 6 3/4
September 1, 1994
to November 30, 1994 5,848,698 0.16 7 1/8 6 1/4
December 1, 1994
to February 28, 1995 5,539,380 0.15 7 6 1/2
March 1, 1995
to May 31, 1995 5,389,408 0.15 7 3/8 6 3/4
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
INVESTMENT ADVISER AND ADMINISTRATOR TRANSFER AGENT
HYPERION CAPITAL MANAGEMENT, INC. BOSTON FINANCIAL DATA SERVICES, INC.
520 Madison Avenue 2 Heritage Drive
New York, New York 10022 North Quincy, Massachusetts 02171
FOR GENERAL INFORMATION ABOUT THE TRUST: FOR SHAREHOLDER SERVICES:
(800) HYPERION (800) 426-5523
SUB-ADMINISTRATOR INDEPENDENT ACCOUNTANTS
MIDDLESEX ADMINISTRATORS L.P. PRICE WATERHOUSE LLP
P.O. Box 9011 1177 Avenue of the Americas
Princeton, New Jersey 08543 New York, New York 10036
(800) 543-6217
CUSTODIAN LEGAL COUNSEL
STATE STREET BANK AND TRUST COMPANY GIBSON DUNN & CRUTCHER
225 Franklin Street 1050 Connecticut Avenue, N.W.
Boston, Massachusetts 02116 Washington, D.C. 20036
</TABLE>
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that periodically the Trust may purchase its shares in the
open market at prevailing market prices.
18
<PAGE> 19
--------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
--------------------------------------------------------------------------------
A Dividend Reinvestment Plan (the "Plan") is available to shareholders of the
Trust pursuant to which they may elect to have all dividends and distributions
of capital gains automatically reinvested by State Street Bank and Trust Company
(the "Plan Agent") in Trust shares. Shareholders who do not participate in the
Plan will receive all distributions in cash paid by check mailed directly to the
shareholder of record (or if the Shares are held in street or other nominee
name, then to the nominee) by the Trust's Custodian, as Dividend Disbursing
Agent.
The Plan Agent serves as agent for the shareholders in administering the Plan.
After the Trust declares a dividend or determines to make a capital gain
distribution, payable in cash, the participants in the Plan will receive the
equivalent amount in Trust shares valued at the market price determined as of
the time of purchase (generally, the payment date of the dividend or
distribution). The Plan Agent will, as agent for the participants, use the
amount otherwise payable as a dividend to participants to buy shares in the open
market, on the New York Stock Exchange or elsewhere, for the participants'
accounts. If, before the Plan Agent has completed its purchases, the market
price increases, the average per share purchase price paid by the Plan Agent may
exceed the market price of the shares at the time the dividend or other
distribution was declared. Share purchases under the Plan may have the effect of
increasing demand for the Trust's shares in the secondary market.
There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below. The
Plan Agent's fees for handling the reinvestment of dividends and distributions
are paid by the Trust. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of dividends and distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable on such dividends or
distributions.
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent. When a participant withdraws from the Plan or upon termination of
the Plan by the Trust, certificates for whole shares credited to his or her
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.
A brochure describing the Plan is available from the Plan Agent, State Street
Bank and Trust Company, by calling 1-800-426-5523.
If you wish to participate in the Plan and your shares are held in your name,
you may simply complete and mail the enrollment form in the brochure. If your
shares are held in the name of your brokerage firm, bank or other nominee, you
should ask them whether or how you can participate in the Plan. Shareholders
whose shares are held in the name of a brokerage firm, bank or other nominee and
are participating in the Plan may not be able to continue participating in the
Plan if they transfer their shares to a different brokerage firm, bank or other
nominee, since such shareholders may participate only if permitted by the
brokerage firm, bank or other nominee to which their shares are transferred.
19
<PAGE> 20
------------------------------------------------------
OFFICERS & DIRECTORS
------------------------------------------------------
Kenneth C. Weiss
Chairman
Lewis S. Ranieri
Director
Garth Marston*
Director
Rodman L. Drake*
Director
Leo M. Walsh, Jr.*
Director
Harry E. Petersen, Jr.*
Director
Patricia A. Sloan
Director & Secretary
Louis C. Lucido
President
Clifford E. Lai
Senior Vice President
L. David Ricci
Vice President
Paul Zavattoni
Treasurer
* Audit Committee Members
------------------------------------------------------
[HYPERION CAPITAL MANAGEMENT, INC. LOGO]
------------------------------------------------------
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Trust shares.
HYPERION 2002 TERM TRUST, INC.
520 Madison Avenue
New York, NY 10022
H Y P E R I O N
2002
TERMTRUST
ANNUAL REPORT
MAY 31, 1995
[ARTWORK]
