HYPERION 2002 TERM TRUST INC, DEF 14A, 1996-07-26

HYPERION 2002 TERM TRUST INC
DEF 14A, 1996-07-26

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<PAGE>

SCHEDULE 14A INFORMATION

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. __)

Filed by the Registrant /X/

Filed by a Party other than the Registrant / /

Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12

HYPERION 2002 TERM TRUST, INC.
------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)

------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
/ / $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or Item
22(a)(2) of Schedule 14A
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3)
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11

(1) Title of each class of securities to which transaction applies:

(2) Aggregate number of securities to which transaction applies:

(3) Per unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):

(4) Proposed maximum aggregate value of transaction:

(5) Total fee paid:

/ / Fee paid previously with preliminary materials.

/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.

(1) Amount Previously Paid:

(2) Form, Schedule or Registration Statement No.:

(3) Filing Party:

(4) Date Filed:

<PAGE>

HYPERION 2002 TERM TRUST, INC.

520 Madison Avenue o New York, New York 10022

------------------------

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

------------------------

July 29, 1996

To the Stockholders:

The Annual Meeting of Stockholders of Hyperion 2002 Term Trust, Inc. (the
'Trust') will be held at The Drake Hotel, 440 Park Avenue at 56th Street, New
York, New York 10022, on Tuesday, October 15, 1996, at 9:45 a.m., for the
following purposes:

1. To elect directors (Proposal 1).

2. To ratify or reject the selection of Price Waterhouse LLP as the
independent accountants of the Trust for the fiscal year ending May 31,
1997 (Proposal 2).

3. To transact any other business that may properly come before the
meeting.

The close of business on July 19, 1996 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
meeting.

By Order of the Board of Directors,

Patricia A. Sloan
Secretary

WE NEED YOUR PROXY VOTE IMMEDIATELY.

YOU MAY THINK YOUR VOTE IS NOT IMPORTANT, BUT IT IS VITAL. THE MEETING OF
STOCKHOLDERS OF THE TRUST WILL BE UNABLE TO CONDUCT ANY BUSINESS IF LESS THAN A
MAJORITY OF THE SHARES ELIGIBLE TO VOTE IS REPRESENTED. IN THAT EVENT, THE
TRUST, AT STOCKHOLDERS' EXPENSE, WOULD CONTINUE TO SOLICIT VOTES IN AN ATTEMPT
TO ACHIEVE A QUORUM. CLEARLY, YOUR VOTE COULD BE CRITICAL TO ENABLE THE TRUST TO
HOLD THE MEETING AS SCHEDULED, SO PLEASE RETURN YOUR PROXY CARD IMMEDIATELY. YOU
AND ALL OTHER STOCKHOLDERS WILL BENEFIT FROM YOUR COOPERATION.

<PAGE>

INSTRUCTIONS FOR SIGNING PROXY CARDS

The following general rules for signing proxy cards may be of assistance to
you and avoid the time and expense to the Trust involved in validating your vote
if you fail to sign your proxy card properly.

1. Individual Accounts. Sign your name exactly as it appears in the
registration on the proxy card.

2. Joint Accounts. Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration.

3. All Other Accounts. The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of registration. For
example:

<TABLE>
<CAPTION>
REGISTRATION VALID SIGNATURE
<S> <C>
Corporate Accounts
(1) ABC Corp................................................................ ABC Corp.
(2) ABC Corp................................................................ John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer.................................................. John Doe
(4) ABC Corp. Profit Sharing Plan........................................... John Doe, Trustee
Trust Accounts
(1) ABC Trust............................................................... John B. Doe, Trustee
(2) Jane B. Doe, Trustee u/t/d 12/28/78..................................... Jane B. Doe
Custodial or Estate Accounts
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr.
UGMA..................................................................... John B. Smith
(2) John B. Smith........................................................... John B. Smith, Jr., Executor
</TABLE>

<PAGE>

HYPERION 2002 TERM TRUST, INC.

520 Madison Avenue New York, New York 10022

------------------------

PROXY STATEMENT

------------------------

This proxy statement is furnished in connection with a solicitation by the
Board of Directors of Hyperion 2002 Term Trust, Inc. (the 'Trust') of proxies to
be used at the Annual Meeting of Stockholders of the Trust to be held at The
Drake Hotel, 440 Park Avenue at 56th Street, New York, New York 10022, at 9:45
a.m. on Tuesday, October 15, 1996 (and at any adjournment or adjournments
thereof) for the purposes set forth in the accompanying Notice of Annual Meeting
of Stockholders. This proxy statement and the accompanying form of proxy are
first being mailed to stockholders on or about July 29, 1996. Stockholders who
execute proxies retain the right to revoke them by written notice received by
the Secretary of the Trust at any time before they are voted. Unrevoked proxies
will be voted in accordance with the specifications thereon and, unless
specified to the contrary, will be voted FOR the election of the two nominees
for director, and FOR the ratification of the selection of Price Waterhouse LLP
as the independent accountants of the Trust for the fiscal year ending May 31,
1997. The close of business on July 19, 1996 has been fixed as the record date
for the determination of stockholders entitled to notice of and to vote at the
meeting. Each stockholder is entitled to one vote for each share held.
Abstentions will be treated as shares that are present and entitled to vote for
purposes of determining the presence of a quorum but as unvoted for purposes of
determining the approval of any matters submitted to stockholders for a vote.
Broker non-votes will not be counted for purposes of determining the presence of
a quorum or determining whether a proposal has been approved. On the record date
there were 35,845,839 shares outstanding.

PROPOSAL 1: ELECTION OF DIRECTORS

The Trust's Articles of Incorporation provide that the Trust's Board of
Directors shall be divided into three classes: Class I, Class II and Class III.
The terms of office of the present directors in each class expire at the Annual
Meeting in the year indicated or thereafter in each case when their respective
successors are elected and qualified: Class I, 1997; Class II, 1998; and Class
III, 1996. At each subsequent annual election, Directors chosen to succeed those
whose terms are expiring will be identified as being of that same class and will
be elected for a three-year term. The effect of these staggered terms is to
limit the ability of other entities or persons to acquire control of the Trust
by delaying the replacement of a majority of the Board of Directors.

The terms of Harry E. Petersen, Jr. and Leo M. Walsh, Jr., the members of
Class III, currently serving on the Board of Directors, expire at this year's
Annual Meeting. The persons named in the accompanying form of proxy intend to
vote at the Annual Meeting (unless directed not to so vote) for the re-election
of Messrs. Petersen and Walsh. Each nominee has indicated that he will serve if

elected, but if either nominee should be unable to serve, the proxy or proxies
will be voted for any other person or persons, as the case may be, determined by
the persons named in the proxy in accordance with their judgment.

As described above, there are two nominees for election to the Board of
Directors at this time. Proxies cannot be voted for a greater number of persons
than the two nominees currently proposed to serve on the Board of Directors.

<PAGE>

The following table provides information concerning each of the seven
members and nominees of the Board of Directors of the Trust:

<TABLE>
<CAPTION>
SHARES OF
COMMON
STOCK
BENEFICIALLY
OWNED
DIRECTLY
OR
PRINCIPAL OCCUPATION INDIRECTLY,
NAME AND OFFICE DURING PAST FIVE YEARS, DIRECTOR ON MAY 31,
WITH THE TRUST OTHER DIRECTORSHIPS AND AGE SINCE 1996(**)
- -------------------- ------------------------------ --------- ---------
CLASS III NOMINEES TO SERVE UNTIL 1999 ANNUAL MEETING OF STOCKHOLDERS:
<S> <C> <C> <C>
Harry E. Petersen, Jr. Director and/or Trustee of July 1992 200
Director, Member several investment companies
of the Audit advised by Hyperion Capital
Committee Management, Inc. or by its
affiliates (1992-Present).
Director of Equitable Real
Estate Hyperion Mortgage
Opportunity Fund, Inc. and
Equitable Real Estate
Hyperion High Yield
Commercial Mortgage Fund,
Inc. (1995-Present). Senior
Advisor to Potomac Babson
Inc. (1995-Present).
Consultant to Advisers
Capital Management, Inc.
(1992-Present). Formerly
Director of Lexington
Corporate Properties, Inc.
(1993-1995); Consultant on
public and private pension
funds (1991-1993); President
of Lepercq Realty Advisors
(1988-1990). Member of
Advisory Council of
Polytechnic University. Age
71.

Leo M. Walsh, Jr. Director and/or Trustee of July 1992 7,000
Director, Chairman several investment companies
of the Audit advised by Hyperion Capital
Committee Management, Inc. or by its
affiliates (1989-Present).
Director of Equitable Real

Estate Hyperion Mortgage
Opportunity Fund, Inc. and
Equitable Real Estate
Hyperion High Yield
Commercial Mortgage Fund,
Inc. (1995-Present).
Financial Consultant for
Merck-Medco Managed Care
Inc. (formerly Medco
Containment Services Inc.)
(1994-Present). Financial
Consultant for Synetic Inc.,
a manufacturer of porous
plastic materials for health
care uses (1989-1994).
Formerly President, WW
Acquisition Corp.
(1989-1990); Senior
Executive Vice President and
Chief Operating Officer of
The Equitable Life Assurance
Society of the United States
('The Equitable')
(1986-1988); Director of The
Equitable and Chairman of
Equitable Investment
Corporation, a holding
company for The Equitable's
investment oriented
subsidiaries (1983-1988);
Chairman and Chief Executive
Officer of EQUICOR-Equitable
HCA Corporation (1987-1988).
Age 63.
</TABLE>

<PAGE>

<S> <C> <C> <C>
Kenneth C. Weiss* President and Chief Executive July 1992 13,798
Director, Chairman Officer of Hyperion Capital
of the Board of Management, Inc. (February
Directors 1992-Present). Chairman of
the Board, Director/ Trustee
and/or officer of several
investment companies advised
by Hyperion Capital
Management, Inc. or by its
affiliates (February
1992-Present). Director and
President of Equitable Real
Estate Hyperion Mortgage
Opportunity Fund, Inc. and
Equitable Real Estate
Hyperion High Yield
Commercial Mortgage Funds,
Inc. and their Investment
Advisors (1995-Present).
Formerly Director of First
Boston Asset Management
(1988-February 1992);
Director of The First Boston
Corporation (until 1988).
Age 44.

Lewis S. Ranieri* Chairman and Chief Executive July 1992 6,250
Director Officer of Ranieri & Co., Inc.
(since 1988); in addition,
President of LSR Hyperion
Corp., a general partner of
the limited partnership that
is the general partner of
Hyperion Partners L.P.
('Hyperion Partners') (since
1988). Director and Chairman
of the Board of Hyperion
Capital Management, Inc.
(since 1989). Chairman of
the Board and/or Director of
several investment companies
advised by Hyperion Capital
Management, Inc. or by its
affiliates (since 1989).
Chairman of Bank United of
Texas FSB (since 1988) and
Hyperion Credit Services
Corp. (since 1992). Director
and President of Hyperion
Funding 1993 Corp., the
general partner of the
limited partnership that is
the general partnership that

is the general partner of
Hyperion 1993 Fund L.P.; and
also Chairman and President
of various other direct and
indirect subsidiaries of
Hyperion Partners (since
1989). Director of Equitable
Real Estate Hyperion
Mortgage Opportunity Fund,
Inc. and Equitable Real
Estate Hyperion High Yield
Commercial Mortgage Fund,
Inc. (since 1995). Formerly
Vice Chairman of Salomon
Brothers Inc. (until 1987).
Age 49.
</TABLE>

<PAGE>

<CAPTION>
CLASS II DIRECTORS TO SERVE UNTIL 1998 ANNUAL MEETING OF STOCKHOLDERS:
<S> <C> <C> <C>

Rodman L. Drake .... President, R.L. Drake & Co. July 1992 317
Director, Member Inc. (1993-Present). Director
of the Audit and/or Trustee of several
Committee investment companies advised
by Hyperion Capital
Management, Inc.
(1989-Present). Consultant
to Rockefeller & Co. Inc.
(1990-1996). Co-Chairman of
KMR Power Corporation
(1993-Present). Formerly
Managing Director and Chief
Executive Officer of Cresap
(1980-1990). Trustee of
Excelsior Funds. Member,
Investment Advisory Board,
Argentina Private Equity
Fund Inc. and Garantia L.P.
(Brazil). Director, Parsons
Brinkerhoff, Inc. and Latin
American Growth Fund Inc.
Age 53.

Garth Marston ...... Managing Director of M.E. July 1992 0
Director, Member Associates, a financial
of the Audit consulting group
Committee (1986-Present). Director
and/or Trustee of several
investment companies advised
by Hyperion Capital
Management, Inc.
(1989-Present). Currently a
member of the Board of
Managers of the Sun Life
Assurance Company of Canada
(U.S.) Formerly Director and
interim Chief Executive
Officer of Florida Federal
Savings (1986-1988);
Chairman of the Board and
Chief Executive Officer of
The Provident Institution
for Savings (1979-1986);
Special Assignment regarding
partially call protected
Mortgage-Backed Securities
for Salomon Brothers Inc.
(1987). Age 70.
</TABLE>

- ------------------
* Interested persons as defined in the Investment Company Act of 1940, as
amended (the '1940 Act'), because of affiliations with Hyperion Capital
Management, Inc., the Trust's Investment Advisor.

** The holdings of no director or nominee represented more than 1% of the
outstanding shares of the Trust.

<PAGE>

OFFICERS OF THE TRUST. The officers of the Trust are chosen each year at
the first meeting of the Board of Directors of the Trust following the Annual
Meeting of Stockholders, to hold office at the discretion of the Board of
Directors until the meeting of the Board following the next Annual Meeting of
Stockholders and until their successors are chosen and qualified. The Board of
Directors has elected six officers of the Trust. Except where dates of service
are noted, all officers listed below served as such throughout the 1996 fiscal
year. The following sets forth information concerning each officer of the Trust
who served during all or part of the last fiscal year of the Trust:

<TABLE>
<CAPTION>
NAME AND
PRINCIPAL OCCUPATION OFFICE AGE OFFICER SINCE
- ------------------------------------------- ------------ --- --------------
<S> <C> <C> <C>
Kenneth C. Weiss Chairman 44 July 1992
President and Chief Executive Officer of
Hyperion Capital Management, Inc.; See
information under 'ELECTION OF
DIRECTORS.'

Louis C. Lucido President 47 July 1992
Managing Director and Chief Operating
Officer of Hyperion Capital
Management, Inc. (February
1992-Present). President and/or Senior
Vice President of several investment
companies advised by Hyperion Capital
Management, Inc. or by its affiliates
(1992-Present). Formerly Senior Vice
President and Director, Progressive
Capital Management Inc. (1991-February
1992); Senior Vice President and
Manager, Donaldson Lufkin & Jenrette
(1988-1991); Vice President, Smith
Barney, Harris Upham & Co. Inc.
(1987-1988); Vice President, Merrill
Lynch, Pierce, Fenner & Smith
(1981-1987).

Clifford E. Lai Senior Vice 42 April 1993
President
Managing Director and Chief Investment
Officer, Hyperion Capital Management,
Inc. (March 1993-Present). President

and/or Senior Vice President of
several investment companies advised
by Hyperion Capital Management, Inc.
or by its affiliates (1993-Present).
Formerly Managing Director and Chief
Investment Strategist for Fixed
Income, First Boston Asset Management
(1989-1993); Vice President, Morgan
Stanley & Co. (1987-1989).
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
NAME AND
PRINCIPAL OCCUPATION OFFICE AGE OFFICER SINCE
- ------------------------------------------- ------------ --- --------------
<S> <C> <C> <C>
L. David Ricci Vice 32 September 1994
Vice President of Hyperion Capital President
Management, Inc. (1992-Present). Formerly
Senior Securities Analyst of Teachers
Insurance and Annuity Association
(1988-1991).

Patricia A. Sloan Secretary 52 July 1992
Managing Director of Ranieri & Co., Inc.
(1988-Present); See information under
'ELECTION OF DIRECTORS.'

Paul Zavattoni Treasurer 33 March 1995
Vice President of Hyperion Capital (resigned July
Management, Inc. 1995)
(1992-July 1995). Treasurer (March
1995-July 1995). Formerly Assistant
Vice President of PaineWebber/ Mitchell
Hutchins Asset Management (1988-1992).
Fund Supervisor with Smith Barney
Harris Upham & Co. (1985-1988).

Joseph W. Sullivan Treasurer 39 September 1995
Vice President of Hyperion Capital
Management, Inc. (August
1995-Present). Treasurer of several
investment companies advised by
Hyperion Capital Management, Inc. or
by its affiliates (September
1995-Present.) Formerly Vice President
in Merrill Lynch & Co.'s Investment
Banking Division; Treasurer and Chief
Financial Officer of several Merrill

Lynch subsidiaries, responsible for
all financial reporting, accounting,
ministerial and administrative
services (1990-1995); Assistant Vice
President of Standard & Poor's Debt
Rating Group (1988-1990); Assistant
Vice President and Operations
Controller of Shearson Lehman Hutton,
Inc., engaged in the identification,
analysis and financial administration
of public and private real estate
investment programs (1983-1987). A
Licensed Certified Public Accountant
since 1981.
</TABLE>

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AT MAY 31, 1996

<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF PERCENT
TITLE OF NAME AND ADDRESS OF BENEFICIAL OF
CLASS BENEFICIAL OWNER OWNERSHIP CLASS SOURCE
- ------------- ---------------------------------------------- ------------------- ------- ------
<S> <C> <C> <C> <C>
Common Stock Lowe, Brockenbrough & Tattersall, Inc. 7,024,800 shares 19.55% 13G
6620 West Broad Street
Suite 300
Richmond, Virginia 23230
</TABLE>

<PAGE>

At May 31, 1996, directors and officers of the Trust as a group owned
beneficially less than 1% of the outstanding shares of the Trust. The business
address of the Trust and its officers and directors is 520 Madison Avenue, New
York, New York 10022.

INTERESTED PERSONS. Mr. Ranieri serves as a Director and Chairman of the
Board of the Advisor and Mr. Weiss serves as a Director, President and Chief
Executive Officer of the Advisor. Ms. Sloan is a special limited partner of
Hyperion Ventures, the sole general partner of Hyperion Partners L.P., of which
the Advisor is a wholly-owned subsidiary. As a result of their service with the
Advisor and certain affiliations with the Advisor as described below, the Trust
considers Messrs. Ranieri and Weiss and Ms. Sloan to be 'interested persons' of
the Trust within the meaning of Section 2(a)(19) of the 1940 Act.

COMMITTEES AND BOARD OF DIRECTORS' MEETINGS. The Trust has a standing
Audit Committee presently consisting of Messrs. Walsh, Drake, Petersen and
Marston, all of whom are members of the Board of Directors and are currently
non-interested persons of the Trust. The principal functions of the Trust's

Audit Committee are to recommend to the Board the appointment of the Trust's
accountants, to review with the accountants the scope and anticipated costs of
their audit and to receive and consider a report from the accountants concerning
their conduct of the audit, including any comments or recommendations they might
want to make in that connection. During the last fiscal year of the Trust, the
full Board of Directors met four times, and the Audit Committee met one time.
All of the directors attended the Audit Committee meeting and all of the
directors attended at least 75% of the aggregate of the Board meetings and the
Audit Committee meeting. The Trust has no nominating, compensation or similar
committees.

COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS. No remuneration was paid
by the Trust to persons who were directors, officers or employees of Hyperion
Capital Management, Inc. or any affiliate thereof for their services as
directors or officers of the Trust. Each director of the Trust, other than those
who are officers or employees of Hyperion Capital Management, Inc. or any
affiliate thereof, is entitled to receive a fee of $7,500 per year plus $1,000
for each Board of Directors' meeting attended. Members of the Audit Committee
receive $750 for each Audit Committee meeting attended, other than meetings held
on days when there is also a directors' meeting.

DIRECTORS' COMPENSATION TABLE
FOR THE TWELVE MONTH PERIOD ENDED 5/31/96

<TABLE>
<CAPTION>
TOTAL DIRECTORS'
DIRECTORS' COMPENSATION
COMPENSATION FROM THE TRUST
FROM THE AND THE FUND
TRUST COMPLEX
------------ ----------------
<S> <C> <C>
Rodman Drake.................. $ 11,500 $ 60,375
Garth Marston................. 11,500 60,375
Harry E. Petersen, Jr......... 12,500 65,375
Leo M. Walsh, Jr.............. 12,500 65,375
------------ ----------------
$ 48,000 $251,500
------------ ----------------
------------ ----------------
</TABLE>

REQUIRED VOTE

Election of the listed nominees for director requires the affirmative vote
of the holders of a majority of the shares of Common Stock of the Trust present
or represented by proxy at the Annual Meeting.

<PAGE>

PROPOSAL 2: RATIFICATION OR REJECTION OF

SELECTION OF INDEPENDENT ACCOUNTANTS

The Board of Directors of the Trust will consider, and it is expected that
they will recommend, the selection of Price Waterhouse LLP as independent
accountants of the Trust for the fiscal year ending May 31, 1997 at a meeting to
be held on September 17, 1996. The appointment of accountants is approved
annually by the Audit Committee of the Board of Directors and is subsequently
submitted to the stockholders for ratification or rejection. The Trust has been
advised by Price Waterhouse LLP that at May 31, 1996 neither that firm nor any
of its partners had any direct or material indirect financial interest in the
Trust. A representative of Price Waterhouse LLP will be at the meeting to answer
questions concerning the Trust's financial statements and will have an
opportunity to make a statement if he or she chooses to do so.

REQUIRED VOTE

Ratification of the selection of Price Waterhouse LLP as independent
accountants of the Trust requires the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock of the Trust present or
represented by proxy at the Annual Meeting.

ADDITIONAL INFORMATION

INVESTMENT ADVISOR

The Trust has engaged Hyperion Capital Management, Inc., the Advisor, to
provide professional investment management for the Trust pursuant to an Advisory
Agreement dated September 29, 1993. The Advisor is a Delaware corporation which
was organized in February 1989. The Advisor is a registered investment advisor
under the Investment Advisers Act of 1940, as amended. The business address of
the Advisor and its officers and directors is 520 Madison Avenue, New York, New
York 10022. The Trust has also engaged Hyperion Capital Management, Inc. as the
Trust's administrator. The administrator's address is the same as that of the
Advisor.

The Advisor is an indirect, wholly-owned subsidiary of Hyperion Partners
L.P., a Delaware limited partnership ('Hyperion Partners'). Hyperion Partners
acquired all of the shares of the Advisor held by Hyperion Holdings, Inc. in
exchange for a $20,000,000 note on January 15, 1993. The sole general partner of
Hyperion Partners is Hyperion Ventures L.P., a Delaware limited partnership
('Hyperion Ventures'). Corporations owned principally by Lewis S. Ranieri,
Salvatore A. Ranieri and Scott A. Shay are the general partners of Hyperion
Ventures. Lewis S. Ranieri, a former Vice Chairman of Salomon Brothers Inc.
('Salomon Brothers'), is the Chairman of the Board of the Advisor and a Director
of the Trust. Messrs. Salvatore Ranieri and Shay are directors of the Advisor,
but have no other positions with either the Advisor or the Trust. Messrs.
Salvatore Ranieri and Shay are principally engaged in the management of the
affairs of Hyperion Ventures and its affiliated entities. Since January 1, 1990,
Patricia A. Sloan, Secretary of the Trust, has been a special limited partner of
Hyperion Ventures and since July 1993 she has been a limited partner of Hyperion
Partners. Mr. Weiss, Chairman of the Board, Mr. Lucido, President of the Trust,
and Mr. Lai, Senior Vice President of the Trust, are employees of the Advisor,
and each may be entitled, in addition to receiving a salary from the Advisor, to
receive a bonus based upon a portion of the Advisor's profits, including any

profit from a sale of the Advisor. Mr. Ricci, Vice President of the Trust, and
Mr. Sullivan, Treasurer of the Trust, are also employees of the Advisor. The
business address of Hyperion

<PAGE>

Partners and Hyperion Ventures is 50 Charles Lindbergh Boulevard, Suite 500,
Uniondale, New York 11553.

The Advisor provides advisory services to several other registered
investment companies and one offshore fund, all of which invest in
mortgage-backed securities. Its management includes several individuals with
extensive experience in creating, evaluating and investing in Mortgage-Backed
Securities, Derivative Mortgage-Backed Securities and Asset-Backed Securities,
and in using hedging techniques. Lewis S. Ranieri, Chairman of the Advisor and a
Director of the Trust, was instrumental in the development of the secondary
mortgage-backed securities market and the creation and development of secondary
markets for conventional mortgage loans, CMOs and other mortgage-related
securities. While at Salomon Brothers, Mr. Ranieri directed that firm's
activities in the mortgage, real estate and government guaranteed areas. Kenneth
C. Weiss, President and Chief Executive Officer of the Advisor and Chairman of
the Board of the Trust, was a Director of First Boston Asset Management
Corporation and was a Director of The First Boston Corporation. Louis C. Lucido,
Managing Director and Chief Operating Officer of the Advisor and President of
the Trust, was Senior Vice President and Director of Progressive Capital
Management. Clifford E. Lai, Chief Investment Manager of the Advisor and Senior
Vice President of the Trust, was Managing Director and Chief Investment
Strategist for Fixed Income for First Boston Asset Management Corporation.

INVESTMENT ADVISORY AGREEMENT

On September 19, 1995, the Board of Directors of the Trust, including those
persons identified as interested persons and a majority of the directors who are
not parties to the Advisory Agreement or interested persons (as such term is
defined in the 1940 Act) of any such party (the 'Disinterested Directors'),
approved extension of the revised Advisory Agreement through September 30, 1996.
At the time of the Board's approval of the latest extension of the Advisory
Agreement, Messrs. Lewis Ranieri, Weiss and Ms. Sloan were interested persons of
the Trust. The Advisory Agreement was last submitted to a vote of the
Stockholders of the Trust at the Annual Meeting of the Stockholders of the Trust
held on September 29, 1993. At that meeting, the Stockholders approved the
continuance of the revised Advisory Agreement. The Advisory Agreement provides
that it will continue from year to year, but only so long as such continuation
is specifically approved at least annually by both (1) the vote of a majority of
the Board of Directors or the vote of a majority of the outstanding voting
securities of the Trust (as provided in the 1940 Act) and (2) by the vote of a
majority of the Disinterested Directors cast in person at a meeting called for
the purpose of voting on such approval. The Advisory Agreement may be terminated
at any time without the payment of any penalty, upon the vote of a majority of
the Board of Directors or a majority of the outstanding voting securities of the
Trust or by the Advisor, on 60 days' written notice by either party to the
other. The Agreement will terminate automatically in the event of its assignment

(as such term is defined in the 1940 Act and the rules thereunder). The Board of
Directors will consider continuance of the Advisory Agreement until September
30, 1997 at a meeting scheduled for September 17, 1996.

Pursuant to the Advisory Agreement, the Trust has retained the Advisor to
manage the investment of the Trust's assets and to provide such investment
research, advice and supervision, in conformity with the Trust's investment
objective and policies, as may be necessary for the operations of the Trust.

The Advisory Agreement provides, among other things, that the Advisor will
bear all expenses of its employees and overhead incurred in connection with its
duties under the Advisory Agreement, and will pay all salaries of the Trust's
directors and officers who are affiliated persons (as such term is defined in
the 1940 Act) of the Advisor. The Advisory Agreement provides that the Trust
shall pay to the Advisor a monthly fee for its services which is equal to .50%
per annum of the Trust's average weekly net assets, which, for purposes of
determining the Advisor's fee, shall be the average weekly value of the total
assets

<PAGE>

of the Trust, minus the sum of accrued liabilities (including accrued expenses)
of the Trust and any declared but unpaid dividends on the Common Shares and any
Preferred Shares (if such shares are issued in the future) and any accumulated
dividends on any Preferred Shares (but without deducting the aggregate
liquidation value of any Preferred Shares). Investment advisory fees earned by
the Advisor from the Trust during the last fiscal year of the Trust amounted to
$1,520,482.

ADMINISTRATION AGREEMENT

The Trust has entered into an Administration Agreement with Hyperion
Capital Management, Inc. (the '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. For the twelve month
period ended May 31, 1996, the Administrator earned $452,416 in Administration
fees. The Trust 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 paid 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 incurred fees amounting to $313,272 to the
Sub-Administrator for the year ended May 31, 1996. On March 29, 1996, the Trust
notified the Sub-Administrator that it was terminating its Sub-Administration
Agreement with the Sub-Administrator effective May 31, 1996. The Administrator
then assumed all responsibilities previously performed by the Sub-Administrator.

INVESTMENT COMPANIES MANAGED BY HYPERION CAPITAL MANAGEMENT, INC.

In addition to acting as advisor to the Trust, Hyperion Capital Management,
Inc. acts as investment advisor to the following other investment companies at
the indicated annual compensation.

<TABLE>
<CAPTION>
APPROXIMATE NET
ASSETS AT
MAY 31,
NAME OF FUND INVESTMENT ADVISORY FEE 1996
- ------------------------------------- ---------------------------------------------- ---------------
(IN MILLIONS)
<S> <C> <C>
The Hyperion Total Return Fund, Inc.* 0.65% of the Fund's average weekly net assets $246.8
Hyperion 1997 Term Trust, Inc. 0.50% of the Trust's average weekly net assets $438.2
Hyperion 1999 Term Trust, Inc. 0.50% of the Trust's average weekly net assets $442.2
Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc. 0.65% of the Trust's average weekly net assets $179.1
</TABLE>

- ------------------
* The Advisor and The Hyperion Total Return Fund, Inc. (the 'Fund') have entered
into a sub-advisory agreement with Pacholder Associates, Inc., an Ohio
corporation organized in 1983, to serve as an investment advisor with respect
to a portion of this Fund's assets.

<PAGE>

BROKERAGE COMMISSIONS

Because it buys its portfolio securities in dealer markets, the Trust did
not pay any brokerage commissions on its securities purchases during its last
fiscal year. The Trust paid an aggregate of $90,987 in futures and Swap
commissions during the last fiscal year, all of which were paid to entities that
are not affiliated with the Trust or the Advisor.

The Advisor has discretion to select brokers and dealers to execute
portfolio transactions initiated by the Advisor and to select the markets in
which such transactions are to be executed. The Advisory Agreement provides, in
substance, that in executing portfolio transactions and selecting brokers or
dealers, the primary responsibility of the Advisor is to seek the best
combination of net price and execution for the Trust. It is expected that
securities will ordinarily be purchased in primary markets, and that in
assessing the best net price and execution available to the Trust, the Advisor
will consider all factors they deem relevant, including the price, dealer
spread, the size, type and difficulty of the transaction involved, the firm's
general execution and operation facilities and the firm's risk in positioning
the securities involved. Transactions in foreign securities markets may involve
the payment of fixed brokerage commissions, which are generally higher than

those in the United States.

In selecting brokers or dealers to execute particular transactions and in
evaluating the best net price and execution available, the Advisor is authorized
to consider 'brokerage and research services' (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934). The Advisor is also
authorized to cause the Trust to pay to a broker or dealer who provides such
brokerage and research services a commission for executing a portfolio
transaction which is in excess of the amount of commission another broker or
dealer would have charged for effecting that transaction. The Advisor must
determine in good faith, however, that such commission was reasonable in
relation to the value of the brokerage and research services provided, viewed in
terms of that particular transaction or in terms of all the accounts over which
the Advisor exercises investment discretion. Research services furnished by
brokers through whom the Trust effects securities transactions may be used by
the Advisor in servicing all of the accounts for which investment discretion is
exercised by the Advisor, and not all such services may be used by the Advisor
in connection with the Trust.

COMPLIANCE WITH SECTION 16 REPORTING REQUIREMENTS

Section 16(a) of the Securities Exchange Act of 1934 requires the Trust's
officers and directors, and persons who own more than ten percent of a
registered class of the Trust's equity securities to file reports of ownership
and changes in ownership with the Securities and Exchange Commission and the New
York Stock Exchange. Officers, directors and greater than ten-percent
shareholders are required by SEC regulations to furnish the Trust with copies of
all Section 16(a) forms they file.

Based solely on its review of the copies of such forms received by the
Trust and written representations from certain reporting persons that all
applicable filing requirements for such persons had been complied with, the
Trust believes that, during the fiscal year ended May 31, 1996, all filing
requirements applicable to the Trust's officers, directors, and greater than
ten-percent beneficial owners were complied with.

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 those actions generally
alleged

<PAGE>

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 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. The Adviser
was added as a defendant in that complaint. On April 8, 1994, the defendants
moved to 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 offering. Defendants moved to
dismiss the second consolidated amended complaint in December 1994. Judge
Michael B. Mukasey issued an opinion and order dated July 12, 1995 dismissing
the second consolidated amended complaint without leave to replead (granted 93
CIV 7179; July 18, 1995). The plaintiffs filed a motion to reargue on July 27,
1995 and Judge Mukasey denied the motion to reargue on September 6, 1995.
Plaintiffs filed a notice of appeal to the Second Circuit Court of Appeals on
August 17, 1995. The appeal has been fully briefed and oral argument of the
appeal took place on March 27, 1996. A decision on the appeal is expected to be
issued in the summer of 1996.

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. 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.
In addition, the Trust's Articles of Incorporation provide for the
indemnification of its Directors. The Trust's Directors and Adviser have also
notified the Trust of their intention to seek indemnification. The Trust has
incurred litigation expenses for the twelve month period ending May 31, 1996 to
the indemnified parties noted above, based upon amounts which are deemed
reimbursable in accordance with the indemnification provisions. Pursuant to
these indemnification provisions, the Trust reimbursed $260,688 of litigation
expenses to the Advisor during the twelve month period ending May 31, 1996. This
amount was previously advanced by the Advisor on behalf of the Trust, its
directors, certain of its officers and underwriters. The Trust has included
these amounts in legal fees. The ultimate outcome of this litigation is not
presently determinable.

OTHER BUSINESS

The Board of Directors of the Trust does not know of any other matter which
may come before the meeting. If any other matter properly comes before the
meeting, it is the intention of the persons named in the proxy to vote the
proxies in accordance with their judgment on that matter.

<PAGE>

PROPOSALS TO BE SUBMITTED BY STOCKHOLDERS

All proposals by stockholders of the Trust that are intended to be
presented at the Trust's next Annual Meeting of Stockholders to be held in 1997
must be received by the Trust for inclusion in the Trust's proxy statement and
proxy relating to that meeting no later than April 30, 1997.

EXPENSES OF PROXY SOLICITATION

The cost of preparing, assembling and mailing material in connection with
this solicitation of proxies will be borne by the Trust. In addition to the use
of the mails, proxies may be solicited personally by regular employees of the
Trust, Hyperion Capital Management, Inc., or Corporate Investor Communications,
Inc., paid solicitors for the Trust, or by telephone or telegraph. The
anticipated cost of solicitation by the paid solicitors will be nominal. The
Trust's agreement with Corporate Investor Communications, Inc. provides that
such paid solicitors will perform a broker search and deliver proxies in return
for the payment of their fee plus the expenses associated with this proxy
solicitation. Brokerage houses, banks and other fiduciaries will be requested to
forward proxy solicitation material to their principals to obtain authorization
for the execution of proxies, and they will be reimbursed by the Trust for
out-of-pocket expenses incurred in this connection.

July 29, 1996