<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER: July 18, 1996
We welcome this opportunity to provide you with information about Hyperion 2002
Term Trust, Inc. (the 'Trust') for its annual period ended May 31, 1996 and to
share our outlook for the rest of the Trust's fiscal year. The Trust's shares
are traded on the New York Stock Exchange under the symbol 'HTB'.
DESCRIPTION OF THE TRUST
The Trust is a closed-end investment company whose 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 instrumentalities or rated AAA
by a nationally recognized rating agency (e.g., Standard & Poor's Corporation or
Fitch Investors Service, L.P.).
MARKET ENVIRONMENT
Since our last report, interest rates have moved in a volatile fashion. Year-end
expectations of further Federal Reserve easing were realized with a 25 basis
point reduction in the Federal Funds rate to 5.25% in January. However, a
dramatic shift in market psychology occurred. Led by strong auto and housing
markets, economic growth for 1996 is stronger than anticipated earlier in the
year. With stronger economic growth, interest rates increased on fears of
surging inflation and a resulting shift in the future course of monetary policy
towards higher interest rates. Although economic growth has been higher than
anticipated by the Federal Reserve, inflationary pressures have yet to surface.
Nonetheless, interest rate volatility has been high.
The dramatic change in yields between November 30, 1995, February 13, 1996 and
May 31, 1996 is outlined below.
<TABLE>
<CAPTION>
11/30/95 2/13/96 5/31/96
-------- ------- -------
<S> <C> <C> <C>
Fed Funds................... 5.75% 5.25% 5.25%
1-Year Treasury Bill........ 5.35% 4.78% 5.74%
2-Year Treasury Note........ 5.35% 4.79% 6.24%
5-Year Treasury Note........ 5.52% 5.13% 6.63%
10-Year Treasury Note....... 5.75% 5.58% 6.85%
</TABLE>
PORTFOLIO STRATEGY AND PERFORMANCE
Our investment outlook as stated in our last report was cautiously optimistic as
we expected a more stable and constructive interest rate environment.
Unfortunately, the decline in market prices of all fixed income securities has
adversely impacted the Trust's net asset value ('NAV'). However, we remain
optimistic on the market over the long term and believe that interest rates will
eventually decline, which should result in a recovery of the NAV.
Since the last semi-annual report dated November 30, 1995, a reallocation of the
portfolio has taken place to take advantage of opportunities in the
Collateralized Mortgage Obligation ('CMO') market resulting in a reduction in
allocation of 14% and 10% out of U.S. Treasuries and MBS passthroughs,
respectively. This was offset by an increase in allocation into AAA rated and
agency CMOs which was made over the period. The CMOs purchased are backed by low
coupon mortgages which, together with the structural
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONTINUED)
- --------------------------------------------------------------------------------
features of the CMO, provide the securities with a protection against prepayment
risk and will support the core position of the portfolio under a wide range of
interest rate environments.
The portfolio's composition is approximately 70% allocated to Agency CMOs,
AAA-rated non-agency subordinated CMOs, and AAA-rated Commercial-backed MBS. The
characteristics of these securities are that they have high yield with features
imbedded in their structure that insulate them from prepayment risk. Over the
last six months, the subordinated CMO and Commercial-backed MBS market have been
among the best performers on a relative basis.
The chart below shows the allocation of the Trust's holdings by asset category
on May 31, 1996.
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS AS OF MAY 31, 1996*
[CHART]
Collateralized Mortgage Obligations 37.0%
U.S. Government Agency Collateralized Mortgage Obligations 33.2%
U.S. Government Agency Pass-Through Certificates 14.4%
Municipal Zero Coupon Securities 8.5%
U.S. Treasury Obligations 1.0%
U.S. Government Agency Stripped Mortgage-Backed Securities 3.3%
Asset Backed Security 2.5%
Repurchase Agreement 0.1%
* As a percentage of total investments.
2
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONCLUDED)
- --------------------------------------------------------------------------------
CONCLUSION
We appreciate the opportunity to serve your investment needs and we thank you
for your continued support. As always, we welcome your questions and comments
and encourage you to contact our Shareholder Services Representatives at
1-800-HYPERION.
Sincerely,
/s/ Kenneth C. Weiss
KENNETH C. WEISS
Chairman,
Hyperion 2002 Term Trust, Inc.
President and Chief Executive Officer,
Hyperion Capital Management, Inc.
/s/ Louis C. Lucido
LOUIS C. LUCIDO
President,
Hyperion 2002 Term Trust, Inc.
Managing Director and Chief Operating Officer
Hyperion Capital Management, Inc.
3
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
May 31, 1996
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS--74.8%
U.S. GOVERNMENT AGENCY PASS-THROUGH CERTIFICATES--20.8%
Federal Home Loan Mortgage Corporation 6.50% 01/01/24 $ 41,581 $ 38,657,833
------------
Federal National Mortgage Association
6.50 08/01/25 9,765@ 9,066,224
8.00 11/01/22-11/01/24 11,624 11,667,600
------------
20,733,824
------------
TOTAL U.S. GOVERNMENT AGENCY PASS-THROUGH CERTIFICATES
(Cost - $60,640,305) 59,391,657
------------
U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE
OBLIGATIONS (REMICS)--47.8%
Federal Home Loan Mortgage Corporation
Series 1628, Class KC 6.25 05/15/09 10,075@ 9,134,203
Series 1727, Class G 6.50 02/15/23 27,000@ 25,212,330
Series 1694, Class PQ 6.50 09/15/23 20,000@ 18,726,200
Series 1725, Class B 7.00 10/15/20 7,364 6,970,615
Series 32, Class C 9.50 03/15/20 9,805@ 10,189,356
Series 158, Class E 9.50 05/15/21 14,800@ 15,668,464
------------
85,901,168
------------
Federal National Mortgage Association
Series 1994-56, Class H 6.00 07/25/22 20,000@ 18,026,200
Series 1994-10, Class H, PAC 6.50 08/25/22 3,000 2,801,430
Series 1989-20, Class A 6.75 04/25/18 8,659 8,122,201
Series 1994-79, Class B 7.00 12/25/19 23,100@ 21,978,957
------------
50,928,788
------------
TOTAL U.S. GOVERNMENT AGENCY COLLATERALIZED
MORTGAGE OBLIGATIONS (REMICS)
(Cost - $136,767,249) 136,829,956
------------
U.S. GOVERNMENT AGENCY STRIPPED MORTGAGE-BACKED
SECURITIES--4.8%
PLANNED AMORTIZATION CLASS INTEREST-ONLY SECURITIES:
Federal National Mortgage Association
Series 1994-20, Class PN, PAC 6.50 02/25/09 3,613 885,072
Series 1996-7, Class PH, PAC 6.50 04/25/11 5,303 1,625,257
Series 1993-183, Class GA, PAC 6.50 03/25/22 7,152 1,709,347
Series 1993-198, Class M, PAC 6.50 10/25/23 2,415 928,447
------------
5,148,123
------------
INTEREST-ONLY SECURITIES:
Federal National Mortgage Association
Series 1994-M1, Class IO, WAC 0.87+ 10/25/03 76,146 3,307,786
Series 1993-M2, Class J, WAC 2.04+ 11/25/03 72,777 5,128,564
------------
8,436,350
------------
TOTAL U.S. GOVERNMENT AGENCY STRIPPED
MORTGAGE-BACKED SECURITIES
(Cost - $17,563,339) 13,584,473
------------
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
May 31, 1996
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS (CONCLUDED)
U.S. TREASURY OBLIGATIONS--1.4%
U.S. Treasury Notes
(Cost - $4,107,782) 7.50% 02/15/05 $ 4,000@ $ 4,106,250
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost - $219,078,675) 213,912,336
------------
- -----------------------------------------------------------------------------------------------------------------
ASSET BACKED SECURITY--3.6%
Prime Credit Card Master Trust
Series 1992-2, Class A2
(Cost - $9,976,563) 7.45 11/15/02 10,000 10,178,125
------------
- -----------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)--53.2%
DLJ Mortgage Acceptance Corporation
Series 1996-CF1, Class A1B 7.58 03/13/28 6,000(a) 5,946,540
------------
GE Capital Mortgage Services, Inc.
Series 1994-3, Class A12 6.50 01/25/24 11,926 10,623,880
Series 1996-4, Class A5 7.00 03/25/26 15,692 14,414,099
Series 1996-8, Class 1A6 7.25 05/25/26 15,468 14,414,320
------------
39,452,299
------------
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C3, Class A3 7.09+ 12/26/25 7,500 7,121,475
------------
Prudential Home Mortgage Securities Co., Inc.
Series 1992-42, Class A7 7.00 01/25/08 18,669 17,733,123
------------
Residential Funding Mortgage Securities I, Inc.
Series 1994-S9, Class A8 6.50 03/24/24 28,835 25,779,889
Series 1996-S7, Class A12 7.00 03/25/26 16,265 14,937,474
Series 1996-S9, Class A7 7.25 04/25/26 4,997 4,670,180
Series 1996-S9, Class A10 7.25 04/25/26 8,001 7,566,127
Series 1996-S14, Class A4 7.50 05/25/26 10,133 9,632,839
------------
62,586,509
------------
Structured Asset Securities Corporation
Series 1992-M1, Class A2 7.05 11/25/07 20,000 19,531,200
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)
(Cost - $157,846,307) 152,371,146
------------
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONCLUDED)
<TABLE>
<CAPTION>
May 31, 1996
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL ZERO COUPON SECURITIES--12.2%
MASSACHUSETTS--3.6%
Massachusetts State
Series B, FGIC (b) 06/01/02 $ 5,000 $ 3,728,150
Series B, AMBAC (b) 08/01/02 8,830 6,530,491
------------
10,258,641
------------
PENNSYLVANIA--2.9%
Pittsburgh Pennsylvania, Water & Sewer Authority
Series A, Revenue Bond, FGIC (b) 09/01/03 12,000 8,269,560
------------
TEXAS--3.5%
San Antonio Texas, Electric & Gas
Revenue Bonds, AMBAC (b) 02/01/03 7,500 5,325,600
Series B, Revenue Bonds, FGIC (b) 02/01/04 7,000 4,686,640
------------
10,012,240
------------
UTAH--2.2%
Intermountain Power Agency Utah, Power Supply
Series B, Revenue Bonds, AMBAC (b) 07/01/02 8,490 6,248,810
------------
TOTAL MUNICIPAL ZERO COUPON SECURITIES
(Cost - $32,421,610) 34,789,251
------------
- ------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT--0.1%
Dated 5/31/96, with State Street Bank and Trust Company, 4.90%,
due 6/03/96; proceeds: $211,086; collateralized by $215,000
U.S Treasury Note, 6.25%, due 8/31/00, value: $216,176
(Cost - $211,000) 211 211,000
------------
- ------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--143.9%
(Cost - $419,534,155) $411,461,858
LIABILITIES IN EXCESS OF OTHER ASSETS--(43.9%) (125,427,226)
------------
NET ASSETS--100.0% $286,034,632
------------
------------
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
@ Portion of or entire principal amount delivered as collateral for reverse
repurchase agreements (Note 5)
REMIC Real Estate Mortgage Investment Conduit
PAC Planned Amortization Class: Security principal payments are within a
predetermined range
WAC Weighted Average Coupon
+ Variable Rate Security: Coupon rate is rate in effect at May 31, 1996
(a) Private Placement
FGIC Financial Guaranty Insurance Company
(b) Zero Coupon Bonds
AMBAC American Municipal Bond Assurance Corporation
</TABLE>
- ------------------
See notes to financial statements.
6
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $419,534,155) (Note 2).............. $411,461,858
Cash............................................................ 278
Interest receivable............................................. 2,714,995
Prepaid expenses and other assets............................... 120,196
Deferred organization expenses (Note 2)......................... 11,396
------------
Total assets............................................... 414,308,723
------------
LIABILITIES:
Reverse repurchase agreements (Note 5).......................... 127,981,750
Investment advisory fee payable (Note 3)........................ 122,292
Interest payable (Note 5)....................................... 52,987
Administration fee payable (Note 3)............................. 36,761
Accrued expenses and other liabilities.......................... 80,301
Contingencies (Note 8)..........................................
------------
Total liabilities.......................................... 128,274,091
------------
NET ASSETS (equivalent to $7.98 per share based on
35,845,839 shares outstanding)................................ $286,034,632
------------
------------
COMPOSITION OF NET ASSETS:
Capital stock, at par (Note 6).................................. $ 358,458
Additional paid-in capital...................................... 336,742,969
Undistributed net investment income............................. 3,384,228
Accumulated net realized losses................................. (46,378,726)
Net unrealized depreciation..................................... (8,072,297)
------------
Net assets applicable to capital stock outstanding.............. $286,034,632
------------
------------
</TABLE>
- ------------------
See notes to financial statements.
7
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF OPERATIONS
For the Year Ended May 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME (Note 2):
Interest...................................................... $31,275,666
-----------
EXPENSES:
Investment advisory fee (Note 3).............................. 1,520,482
Administration fee (Note 3)................................... 452,416
Legal......................................................... 265,885
Insurance..................................................... 248,020
Custodian..................................................... 76,358
Reports to shareholders....................................... 68,006
Audit and tax services........................................ 60,200
Directors' fees and expenses.................................. 48,000
Registration.................................................. 32,880
Transfer Agent................................................ 24,054
Amortization of organization expenses (Note 2)................ 8,052
Miscellaneous................................................. 30,248
-----------
Total operating expenses................................... 2,834,601
Interest expense (Note 5)................................ 7,496,803
-----------
Total expenses........................................... 10,331,404
-----------
Net investment income......................................... 20,944,262
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS, SHORT
SALES, FUTURES AND OPTION TRANSACTIONS (Note 2):
Net realized gains (losses) on:
Investments transactions...................................... 537,873
Short sales transactions...................................... (8,686)
Futures transactions.......................................... (8,493,654)
Written option transactions................................... 37,734
-----------
(7,926,733)
-----------
Net change in unrealized appreciation (depreciation) on:
Investments................................................... (15,026,419)
Futures transactions.......................................... 3,634,163
-----------
(11,392,256)
-----------
Net realized and unrealized losses on investments, short sales,
futures and option transactions............................... (19,318,989)
-----------
Net increase in net assets resulting from operations............ $ 1,625,273
-----------
-----------
</TABLE>
- ---------------
See notes to financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year For the Year
Ended Ended
May 31, May 31,
1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS:
Net investment income......................... $ 20,944,262 $ 24,160,525
Net realized gains (losses) on investments,
short sales, futures and written option
transactions............................... (7,926,733) 2,749,368
Net change in unrealized appreciation
(depreciation) on investments and futures
transactions............................... (11,392,256) 9,686,927
------------ ------------
Net increase in net assets resulting from
operations................................. 1,625,273 36,596,820
------------ ------------
DIVIDENDS TO SHAREHOLDERS (Note 2):
Net investment income......................... (19,066,488) (22,641,238)
------------ ------------
CAPITAL STOCK TRANSACTIONS (Note 6):
Cost of Trust shares repurchased and
retired.................................... (607,497) (1,335,267)
------------ ------------
Total increase (decrease) in net assets.... (18,048,712) 12,620,315
NET ASSETS:
Beginning of year............................... 304,083,344 291,463,029
------------ ------------
End of year (including undistributed net
investment income of $3,384,228 and
$1,506,454, respectively)..................... $286,034,632 $304,083,344
------------ ------------
------------ ------------
</TABLE>
- ------------------
See notes to financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF CASH FLOWS
For the Year Ended May 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
Cash flows provided by operating activities:
Interest received (excluding accretion of $1,745,904)..... $ 30,485,604
Interest expense paid..................................... (7,515,155)
Operating expenses paid................................... (2,827,707)
Sale of short-term portfolio investments, including
options, net........................................... 3,082,578
Purchase of long-term portfolio investments and short
covers................................................. (277,200,120)
Proceeds from dispositions of long-term portfolio
investments, short sales and principal paydowns........ 293,835,707
Net cash used for futures transactions.................... (4,843,173)
---------------
Net cash provided by operating activities................. 35,017,734
---------------
Cash flows used for financing activities:
Net cash used for reverse repurchase agreements........... (14,797,250)
Cash used to repurchase and retire Trust shares........... (607,497)
Cash dividends paid....................................... (19,401,950)
---------------
Net cash used for financing activities.................... (34,806,697)
---------------
Net increase in cash........................................ 211,037
Cash at beginning of year................................... 241
---------------
Cash at end of year......................................... $ 211,278
---------------
---------------
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net increase in net assets resulting from operations........ $ 1,625,273
---------------
Decrease in investments................................... 21,011,815
Increase in net unrealized depreciation................... 11,392,256
Decrease in interest receivable........................... 772,529
Decrease in other assets.................................. 84,272
Decrease in variation margin receivable................... 16,319
Decrease in advisory/administration fees payable.......... (4,145)
Decrease in accrued expenses and other liabilities........ (91,585)
---------------
Total adjustments...................................... 33,181,461
---------------
Net cash provided by operating activities................... $ 34,806,734
---------------
---------------
</TABLE>
- ------------------
See notes to financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For the Year For the Year For the Year For the Period
Ended Ended Ended November 2, 1992*
May 31, May 31, May 31, through
1996 1995 1994 May 31, 1993
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 8.46 $ 8.07 $ 9.05 $ 9.37**
------------ ------------ ------------ -----------------
Net investment income.................................... 0.58 0.67 0.68 0.44
Net effect of shares repurchased......................... 0.01 0.01 0.01 --
Net realized and unrealized gain (loss) on investments,
futures and written option transactions................ (0.54) 0.34 (0.95) (0.36)
------------ ------------ ------------ -----------------
Net increase (decrease) in net asset value resulting from
operations............................................. 0.05 1.02 (0.26) 0.08
------------ ------------ ------------ -----------------
Dividends from net investment income..................... (0.53) (0.63) (0.72) (0.40)
------------ ------------ ------------ -----------------
Net asset value, end of period........................... $ 7.98 $ 8.46 $ 8.07 $ 9.05
------------ ------------ ------------ -----------------
------------ ------------ ------------ -----------------
Market price, end of period.............................. $ 6.875 $ 7.25 $ 7.25 $ 9.125
------------ ------------ ------------ -----------------
------------ ------------ ------------ -----------------
TOTAL INVESTMENT RETURN+................................. 2.11% 9.46% (13.17)% (1.18)%(1)
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTARY DATA:
Net assets, end of period (000s)....................... $286,035 $304,083 $291,463 $ 328,672
Total operating expenses............................... 0.93% 0.91% 0.81% 0.80%(2)
Interest expense....................................... 2.47% 2.29% 1.34% 1.66%(2)
Net investment income.................................. 6.89% 8.50% 7.90% 8.34%(2)
Portfolio turnover rate................................ 64% 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>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
May 31, 1996
- --------------------------------------------------------------------------------
1. THE TRUST:
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 'Advisor'). 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.
2. SIGNIFICANT ACCOUNTING POLICIES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Valuation of Investments: Where market quotations are readily available,
portfolio securities are valued based upon the current bid price for long
positions, and the current ask price for short positions. The Trust values
mortgage-backed securities ('MBS') 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.
At May 31, 1996, 4.39% of the investments in securities held by the Trust were
valued on the basis of bid prices provided by one principal market maker. These
prices may differ from the value that would have been used had a broader market
for these securities existed.
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.
Financial Futures Contracts: A futures contract is an agreement between two
parties to buy and sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by 'marking-to-market' on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the 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 to adjust the portfolio for
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. The Trust is at risk that it may not be able to close out a
transaction because of an illiquid secondary market.
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
12
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1996
- --------------------------------------------------------------------------------
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 whether the Trust has realized a
gain or a loss on the transaction. 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.
The Trust purchases or writes options to hedge against adverse market movements
or fluctuations in value caused by changes in interest rates. The Trust bears
the risk in purchasing an option, to the extent of the premium paid, that it
will expire without being exercised. If this occurs, the option expires
worthless and the premium paid for the option is a loss. The risk associated
with writing call options is that the Trust may forego the opportunity for a
profit if the market value of the underlying position increases and the option
is exercised. The Trust will only write call options on positions held in its
portfolio. The risk in writing a put option is that the Trust may incur a loss
if the market value of the underlying position decreases and the option is
exercised. In addition, the Trust bears the risk of not being able to enter into
a closing transaction for written options as a result of an illiquid market.
Short Sales: The 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 gains and losses from securities
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. Discounts and premiums on zero-coupon 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. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. These differences, which
could be temporary or permanent in nature, may result in reclassification of
distributions; however, net investment income, net realized gains and net assets
are not affected.
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 defined as 'Cash' in the Statement of Assets and Liabilities, and does
not include short-term investments.
Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and accreting discounts and amortizing
premiums on debt obligations.
Repurchase Agreements: The 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 Advisor is responsible for determining that the value of
these underlying securities is sufficient at all times. If the seller defaults
and the value of the collateral declines or if bankruptcy proceedings commence
with respect to the seller of the security, realization of the collateral by the
Trust may be delayed or limited.
13
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1996
- --------------------------------------------------------------------------------
3. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS:
The Trust has entered into an Investment Advisory Agreement with the Advisor.
The Advisor is responsible 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. For the year ended May 31, 1996, the Advisor earned $1,520,482 in
Investment Advisory fees.
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 to the administrator 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 year ended May 31, 1996, the Administrator earned $452,416 in
Administration Fees.
The Administrator 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 paid out of its own assets the fee 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. For the year ended May 31, 1996, the
Sub-Administrator earned $313,272 in Sub-Administration Fees.
On March 29, 1996, the Administrator notified the Sub-Administrator that it was
terminating its Sub-Administration Agreement with the Sub-Administrator
effective May 31, 1996. The Administrator has assumed all responsibilities
previously performed by the Sub-Administrator.
Certain officers and/or directors of the Trust are officers and/or directors of
the Advisor.
4. PURCHASES AND SALES OF INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
year ended May 31, 1996 aggregated $277,200,121 and $284,353,222, respectively.
The federal income tax basis of the Trust's investments at May 31, 1996 was
substantially the same for financial reporting and, accordingly, net unrealized
depreciation for federal income tax purposes was $8,072,297 (gross unrealized
appreciation-- $6,209,011; gross unrealized depreciation-- $14,281,308). At May
31, 1996, the Trust had capital losses of $42,891,322, of which $30,666,463
expires in 2002, $7,809,791 expires in 2003 and $4,415,068 expires in 2004,
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.
5. 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 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.
14
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1996
- --------------------------------------------------------------------------------
At May 31, 1996, the Trust had the following reverse repurchase agreements
outstanding:
<TABLE>
<CAPTION>
MATURITY IN
ZERO TO 30 DAYS
---------------
<S> <C>
Maturity Amount........................................ $ 128,105,645
---------------
Market Value of Assets Sold Under Agreements........... $ 131,068,986
---------------
Weighted Average Interest Rate......................... 5.39%
---------------
</TABLE>
The average daily balance of reverse repurchase agreements outstanding during
the year ended May 31, 1996, was approximately $133,588,557, at a weighted
average interest rate of 5.61%. The maximum amount of reverse repurchase
agreements outstanding at any time during the year was $156,349,000 as of
February 7, 1996, which was 33.77% of total assets.
6. CAPITAL STOCK:
There are 75 million shares of $0.01 par value common stock authorized. Of the
35,845,839 shares outstanding at May 31, 1996, the Advisor owned 10,639 shares.
The Trust is continuing its stock repurchase program, whereby an amount of up to
15% of the total outstanding common stock, or approximately 5.4 million shares,
are authorized for repurchase. The purchase price may not exceed the
then-current net asset value.
During the years ended May 31, 1996 and 1995, the Trust repurchased a total of
84,500 and 196,800 shares of its outstanding common stock at a cost of $607,497
and $1,335,267 and an average discount of approximately 16.2% and 13.9% from its
net asset value, respectively. All shares repurchased have been retired.
7. FINANCIAL INSTRUMENTS:
The Trust regularly trades in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing exposure
to various market risks. These financial instruments include written options and
futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes.
The notional or contractual amounts of these instruments represent the
investment the Trust has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
There were no open futures contracts at May 31, 1996.
Written option activity for the year ended May 31, 1996 was as follows:
<TABLE>
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
--------- ---------
<S> <C> <C>
Options outstanding at May
31, 1995................... -- $ --
Options written.............. (21) (98,438)
Options closed............... 21 98,438
--------- ---------
Options outstanding at May
31, 1996................... -- $ --
--------- ---------
--------- ---------
</TABLE>
8. 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
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 Advisor
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
15
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
May 31, 1996
- --------------------------------------------------------------------------------
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 Advisor 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 Advisor 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 Advisor,
the Advisor 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 Advisor. In addition,
the Trust's Articles of Incorporation provide for the indemnification of its
Directors. The Trust's Directors and Advisor have also notified the Trust of
their intention to seek indemnification. The Trust has incurred litigation
expenses for the twelve month period ended 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 ended 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.
9. 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>
$0.04375 06/17/96 06/27/96
$0.04375 07/22/96 07/31/96
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
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, 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, 1996, 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 the three 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 investments at May 31, 1996 by correspondence with the custodian
and brokers, provide a reasonable basis for the opinion expressed above.
As described in Note 8 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 18, 1996
- --------------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
- --------------------------------------------------------------------------------
The Trust is 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,
1996) 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, 18.96% of the Trust's distributions
during the fiscal year ended May 31, 1996 were earned from U.S. Treasury
obligations. None of the Trust's distributions qualify for the dividends
received deduction available to corporate shareholders.
A notification sent to shareholders with respect to calendar 1995, which
reflected the amounts to be used by calendar year taxpayers on their federal,
state and local income tax returns, was made in conjunction with Form 1099 DIV
and was mailed in January 1996. Because the Trust's fiscal year is not the
calendar year, another notification will be sent with respect to calendar year
1996. The second notification, which will reflect the amounts to be used by
calendar year taxpayers on their federal, state and local income tax returns,
will be made in conjunction with Form 1099 DIV and will be mailed in January
1997. Shareholders are advised to consult their own tax advisors with respect to
the tax consequences of their investment in the Trust.
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS
(LOSSES)
ON INVESTMENTS, SHORT
SALES, FUTURES AND NET INCREASE (DECREASE)
WRITTEN OPTION IN NET ASSETS RESULTING
NET INVESTMENT INCOME TRANSACTIONS FROM OPERATIONS
---------------------- ----------------------- -----------------------
QUARTERLY PERIOD TOTAL INCOME AMOUNT PER SHARE AMOUNT PER SHARE AMOUNT PER SHARE
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
November 2, 1992*
to November 30, 1992 $ 1,811,843 $ 1,533,358 $0.04 $ 737,934 $ 0.03 $ 2,271,292 $ 0.07
December 1, 1992
to February 28, 1993 9,122,966 7,032,751 0.19 (3,681,008) (0.10) 3,351,743 0.09
March 1, 1993
to May 31, 1993 9,872,116 7,502,266 0.21 (10,302,260) (0.29) (2,799,994) (0.08)
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
June 1, 1995
to August 31, 1995 7,720,721 5,165,495 0.15 (1,657,645) (0.05) 3,507,850 0.10
September 1, 1995
to November 30, 1995 7,757,245 5,135,530 0.14 8,211,190 0.23 13,346,720 0.37
December 1, 1995
to February 29, 1996 7,967,548 5,119,151 0.14 (7,838,546) (0.22) (2,719,395) (0.08)
March 1, 1996
to May 31, 1996 7,830,152 5,524,086 0.15 (18,033,989) (0.50) (12,509,903) (0.34)
<CAPTION>
DIVIDENDS AND
DISTRIBUTIONS SHARE PRICE
--------------------- ------------
QUARTERLY PERIOD AMOUNT PER SHARE HIGH LOW
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
November 2, 1992*
to November 30, 1992 $ -- $ -- $10 1/8 $10
December 1, 1992
to February 28, 1993 7,265,759 0.20 10 1/8 9 1/2
March 1, 1993
to May 31, 1993 7,265,759 0.20 10 1/8 8 3/4
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 3/4
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
June 1, 1995
to August 31, 1995 (4,939,722) (0.14) 7 5/8 6 3/4
September 1, 1995
to November 30, 1995 (4,713,040) (0.13) 7 3/8 7
December 1, 1995
to February 29, 1996 (4,708,389) (0.13) 7 1/2 7 1/8
March 1, 1996
to May 31, 1996 (4,705,337) (0.13) 7 3/8 6 5/8
</TABLE>
* Commencement of Investment Operations
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR AND ADMINISTRATOR
HYPERION CAPITAL MANAGEMENT, INC.
520 Madison Avenue
New York, New York 10022
FOR GENERAL INFORMATION ABOUT THE TRUST:
(800) HYPERION
TRANSFER AGENT
BOSTON EQUISERVE L.P.
Investor Relations Department
P.O. Box 8200
Boston, Massachusetts 02266-8200
FOR SHAREHOLDER SERVICES:
(800) 426-5523
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02116
INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
GIBSON, DUNN & CRUTCHER LLP
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
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>
- --------------------------------------------------------------------------------
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>
- ------------------------------------------------------
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
Joseph W. Sullivan
Treasurer
* Audit Committee Members
- ------------------------------------------------------
HYPERION
Capital Management, Inc.
- ------------------------------------------------------
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
TERM TRUST
ANNUAL REPORT
MAY 31, 1996
[ARTWORK]
