- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER: January 22, 1997
We welcome this opportunity to provide you with information about Hyperion 2002
Term Trust, Inc. (the 'Trust') for its semi-annual period ended November 30,
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 ('NYSE') under the
symbol 'HTB'.
DESCRIPTION OF THE TRUST
The Trust is a closed-end investment company whose investment objectives are to
attempt 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
The fixed income market continues to be volatile in reaction to short-term
changes in economic activity. In September, the market began a decline in
interest rates which resulted in a 100 basis point decrease, only to increase by
50 basis points in December. The cause of the volatility in interest rates is
the large variable swings in quarter to quarter economic activity. Economic
growth, recorded at 4.7% in the second quarter, fell to 2.1% in the third
quarter, only to rebound back to a projected 4.0% in the fourth quarter. The
market's perception of the correlation of economic growth and its impact on
inflation and monetary policy is the primary cause of the large swings in
interest rates.
Over the long-term, we foresee a stable to lower interest rate environment in
the fixed income securities market. Our outlook includes continued improvements
in fiscal policy in reducing the budget deficit, favorable demographic trends
that should lead to increased savings and a reduction in economic activity, and
favorable global inflationary trends especially in Europe where monetary union
should keep inflation in check. The fixed income market should do reasonably
well under the slow economic growth and low inflation conditions we see ahead.
PORTFOLIO STRATEGY
The Trust continues to be managed toward its objectives with a focus on
optimizing cash flow stability and minimizing prepayment risk in MBS. The
portfolio remains invested in discount MBS and well-structured collateralized
mortgage obligations. Price volatility for these mortgage securities is partly a
function of their prepayment exposure. This exposure is minimized through the
structural protection of prepayment lockouts, which are periods in which the
borrower will typically find it uneconomical to refinance based upon pre-agreed
penalties for refinancing.
Given the strong performance of Planned Amortization Class Interest Only
Securities ('PAC IOs') over the first half of 1996 and due to our concerns for
their continued positive performance we eliminated the PAC
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONTINUED)
- --------------------------------------------------------------------------------
IO position in the portfolio over the summer. Proceeds were reinvested into AAA
commercial MBS.
The Trust's total return for the six month period ending November 30, 1996 was
11.63%. Total investment return is computed based upon the change in Net Asset
Value of the Trust's shares and includes reinvestment of dividends. The current
monthly dividend the Trust pays its shareholders is $0.04375 per share. The
current yield of 7.24% on shares of the Trust is based on the NYSE closing price
of $7.25 on November 29, 1996.
The Trust, inclusive of leverage, is currently managed with an average duration
(duration measures a bond portfolio's price sensitivity to interest rate
changes) of approximately 8 years with the core assets having a duration of 5.7
years. The dollar weighted average maturity of the securities in the portfolio
is approximately 9 years.
The chart that follows shows the allocation of the Trust's holdings by asset
category on November 30, 1996.
2
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONCLUDED)
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS AS OF NOVEMBER 30, 1996*
[PASTE UP PIE CHART]
Collateralized Mortgage Obligations 34.9%
U.S. Government Agency Collateralized
Mortgage Obligations 32.4%
U.S. Government Agency Pass-Through Certificates 14.7%
Municipal Zero Coupon Securities 8.2%
U.S. Treasury Obligations 7.3%
Asset-Backed Securities 2.3%
Repurchase Agreement 0.2%
*As a percentage of total investments.
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,
KENNETH C. WEISS
Chairman,
Hyperion 2002 Term Trust, Inc.
President and Chief Executive Officer,
Hyperion Capital Management, Inc.
LOUIS C. LUCIDO
President,
Hyperion 2002 Term Trust, Inc.
Managing Director and Chief Operating Officer,
Hyperion Capital Management, Inc.
3
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
November 30, 1996 (unaudited)
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS--79.1%
U.S. GOVERNMENT AGENCY PASS-THROUGH
CERTIFICATES--21.4%
Federal Home Loan Mortgage
Corporation 6.50% 01/01/24 $ 39,923 $ 38,763,084
6.78 11/01/03 6,000 6,136,650
------------
44,899,734
------------
Federal National Mortgage
Association 6.50 08/01/25 9,433 9,144,393
8.00 11/01/24 11,257 11,569,544
------------
20,713,937
------------
TOTAL U.S. GOVERNMENT AGENCY PASS-THROUGH CERTIFICATES
(Cost - $64,491,405 ) 65,613,671
------------
U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS
(REMICS)--47.1%
Federal Home Loan Mortgage
Corporation
Series 1628, Class KC 6.25 05/15/09 10,075 9,679,793
Series 1727, Class G,
PAC 6.50 02/15/23 27,000@ 26,542,485
Series 1694, Class PQ,
PAC 6.50 09/15/23 20,000@ 19,701,480
Series 1725, Class B 7.00 10/15/20 7,364 7,311,318
Series 32, Class C, PAC 9.50 03/15/20 9,805@ 10,717,345
Series 158, Class E, PAC 9.50 05/15/21 14,800@ 16,760,393
------------
90,712,814
------------
Federal National Mortgage
Association
Series 1994-56, Class H,
PAC 6.00 07/25/22 20,000@ 19,006,140
Series 1994-10, Class H,
PAC 6.50 08/25/22 3,000 2,945,169
Series 1989-20, Class A,
PAC 6.75 04/25/18 8,535 8,465,925
Series 1994-79, Class B 7.00 12/25/19 23,100@ 22,904,435
------------
53,321,669
------------
TOTAL U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS
(REMICS)
(Cost - $136,646,487) 144,034,483
------------
U.S. TREASURY OBLIGATIONS--10.6%
U.S. Treasury Notes 6.00 08/15/99 3,904 3,932,062
6.25 10/31/01 4,494 4,563,518
6.50 05/31/01 18,000@ 18,452,808
6.50 10/15/06 1,110 1,143,300
7.50 02/15/05 4,000@ 4,366,876
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost - $31,439,801) 32,458,564
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost - $232,577,693) 242,106,718
------------
- -------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
November 30, 1996 (unaudited)
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET BACKED SECURITY--3.4%
Prime Credit Card Master Trust
Series 1992-2, Class A2
(Cost - $9,976,562) 7.45% 11/15/02 $ 10,000 $ 10,367,970
------------
- -------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)--50.7%
DLJ Mortgage Acceptance
Corporation
Series 1996-CF2, Class
A1B 7.29 11/12/21 3,000(a) 3,095,976
Series 1996-CF1, Class
A1B 7.58 03/13/28 6,000(a) 6,252,186
------------
9,348,162
------------
GE Capital Mortgage
Services, Inc.
Series 1994-3, Class A12 6.50 01/25/24 15,719 15,009,078
Series 1996-4, Class A5 7.00 03/25/26 15,621 15,344,347
Series 1996-8, Class 1A6 7.25 05/25/26 15,400 15,384,837
Series 1996-11, Class A5 7.50 07/25/26 8,183 8,308,285
------------
54,046,547
------------
Merrill Lynch Mortgage
Investors, Inc.
Series 1996-C2, Class A2 6.82 11/21/28 5,587 5,674,325
Series 1995-C3, Class A3 7.09+ 12/26/25 7,500 7,597,268
------------
13,271,593
------------
Residential Funding
Mortgage Securities I,
Inc.
Series 1994-S9, Class A8 6.50 03/25/24 28,660 27,233,919
Series 1996-S7, Class
A12 7.00 03/25/26 16,184 15,878,930
Series 1996-S9, Class A7 7.25 04/25/26 4,975 4,969,939
Series 1996-S14, Class
A4 7.50 05/25/26 10,083 10,244,450
------------
58,327,238
------------
Structured Asset
Securities Corporation
Series 1992-M1, Class A2 7.05 11/25/07 20,000 20,345,320
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)
(Cost - $151,850,419) 155,338,860
------------
- -------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
November 30, 1996 (unaudited)
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL ZERO COUPON SECURITIES--12.0%
MASSACHUSETTS--3.5%
Massachusetts State
Series B, FGIC (b) 06/01/02 $ 5,000 $ 3,913,505
Series B, AMBAC (b) 08/01/02 8,830 6,860,186
------------
10,773,691
------------
PENNSYLVANIA--2.9%
Pittsburgh Pennsylvania, Water & Sewer Authority
Series A, Revenue
Bond, FGIC (b) 09/01/03 12,000 8,738,772
------------
TEXAS--3.5%
San Antonio Texas,
Electric & Gas
Revenue Bonds, AMBAC (b) 02/01/03 7,500 5,613,360
Series B, Revenue
Bonds, FGIC (b) 02/01/04 7,000 4,963,980
------------
10,577,340
------------
UTAH--2.1%
Intermountain Power
Agency Utah, Power
Supply Series B,
Revenue Bonds, AMBAC (b) 07/01/02 8,490 6,566,498
------------
TOTAL MUNICIPAL ZERO
COUPON SECURITIES
(Cost - $33,405,085) 36,656,301
------------
- -------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONCLUDED)
<TABLE>
<CAPTION>
November 30, 1996 (unaudited)
Principal Market
Amount Value
(000s) (Note 2)
- ---------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT--0.2%
Dated 11/29/96, with State Street Bank and Trust
Company, 5.00%, due 12/2/96; proceeds: $648,270;
collateralized by $650,000 U.S. Treasury Note,
6.125%, due 3/31/98, value: $661,437
(Cost - $648,000) $ 648 $ 648,000
------------
- ---------------------------------------------------------------------------------
TOTAL INVESTMENTS--145.4%
(Cost - $428,457,759) $445,117,849
LIABILITIES IN EXCESS OF OTHER ASSETS--(45.4%) (138,923,903)
------------
NET ASSETS--100.0% $306,193,946
------------
------------
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
REMIC Real Estate Mortgage Investment Conduit
PAC Planned Amortization Class--Security principal payments are within a predetermined range
@ Portion of or entire principal amount delivered as collateral for reverse repurchase agreements (Note 5)
(a) Private Placement
+ Variable Rate Security: Coupon rate was rate in effect at November 30, 1996
FGIC Financial Guaranty Insurance Company
(b) Zero Coupon Bonds
AMBAC American Municipal Bond Assurance Corporation
</TABLE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
SECURITIES SOLD SHORT
November 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATION
U.S. GOVERNMENT AGENCY PASS-THROUGH CERTIFICATES
Federal National Mortgage
Association 8.00 % 12/01/26 $ 10,000 $ 10,278,100
------------
- -------------------------------------------------------------------------------
TOTAL SECURITIES SOLD SHORT
(PROCEEDS--$10,180,469) $ 10,278,100
------------
- -------------------------------------------------------------------------------
</TABLE>
- ------------------
See notes to financial statements.
7
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $428,457,759) (Note 2)............. $445,117,849
Cash........................................................... 458
Receivable for investments sold................................ 10,202,691
Interest receivable............................................ 3,335,562
Prepaid expenses and other assets.............................. 19,474
Deferred organization expenses (Note 2)........................ 7,370
------------
Total assets......................................... 458,683,404
------------
LIABILITIES:
Reverse repurchase agreements (Note 5)......................... 131,792,000
Securities sold short, at value (proceeds $10,180,469)
(Note 2)..................................................... 10,278,100
Payable for investments purchased.............................. 9,651,404
Dividend payable............................................... 206,633
Payable for Trust shares repurchased........................... 193,842
Investment advisory fee payable (Note 3)....................... 124,535
Accrued expenses and other liabilities......................... 96,306
Interest payable for reverse repurchase agreements (Note 5).... 87,335
Administration fee payable (Note 3)............................ 37,081
Interest payable for short sale................................ 22,222
Contingencies (Notes 8 and 9)..................................
------------
Total liabilities.................................... 152,489,458
------------
NET ASSETS (equivalent to $8.59 per share based on 35,665,039
shares
outstanding)................................................. $306,193,946
------------
------------
COMPOSITION OF NET ASSETS:
Capital stock, at par (Note 6)................................. $ 356,650
Additional paid-in capital..................................... 335,429,691
Undistributed net investment income............................ 4,867,828
Accumulated net realized losses................................ (51,022,682)
Net unrealized appreciation.................................... 16,562,459
------------
Net assets applicable to capital stock outstanding............. $306,193,946
------------
------------
</TABLE>
- ------------------
See notes to financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended November 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME (Note 2):
Interest....................................................... $15,659,174
-----------
EXPENSES:
Investment advisory fee (Note 3)............................... 732,790
Administration fee (Note 3).................................... 219,739
Insurance...................................................... 96,011
Reports to shareholders........................................ 44,078
Custodian...................................................... 40,432
Audit and tax services......................................... 29,770
Legal.......................................................... 27,948
Directors' fees................................................ 22,894
Registration................................................... 16,561
Transfer agency................................................ 13,575
Amortization of organization expenses (Note 2)................. 4,026
Miscellaneous.................................................. 16,960
-----------
Total operating expenses.................................... 1,264,784
Interest expense (Note 5).............................. 3,503,430
-----------
Total expenses......................................... 4,768,214
-----------
Net investment income.......................................... 10,890,960
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENT TRANSACTIONS
(Note 2):
Net realized loss on:
Investment transactions........................................ (4,643,956)
-----------
Net change in unrealized appreciation on:
Investments.................................................... 24,634,756
-----------
Net realized and unrealized gain on investment transactions...... 19,990,800
-----------
Net increase in net assets resulting from operations............. $30,881,760
-----------
-----------
</TABLE>
- ---------------
See notes to financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HYPERION 2002 TERM TRUST, INC.
STATEMENTS OF CHANGES IN NET ASSETS
For the
Six Months
Ended For the Year
November 30, Ended
1996 May 31,
(unaudited) 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS:
Net investment income........................... $ 10,890,960 $ 20,944,262
Net realized losses on investment, short sale,
futures and written option transactions...... (4,643,956) (7,926,733)
Net change in unrealized appreciation
(depreciation) on investment and futures
transactions................................. 24,634,756 (11,392,256)
---------------- ------------
Net increase in net assets resulting from
operations................................... 30,881,760 1,625,273
---------------- ------------
DIVIDENDS TO SHAREHOLDERS (Note 2):
Net investment income........................... (9,407,360) (19,066,488)
---------------- ------------
CAPITAL STOCK TRANSACTIONS (Note 6):
Cost of Trust shares repurchased and retired.... (1,315,086) (607,497)
---------------- ------------
Total increase (decrease) in net
assets................................ 20,159,314 (18,048,712)
NET ASSETS:
Beginning of period............................... 286,034,632 304,083,344
---------------- ------------
End of period (including undistributed net
investment income of $4,867,828 and $3,384,228,
respectively)................................... $ 306,193,946 $286,034,632
---------------- ------------
---------------- ------------
</TABLE>
- ---------------
See notes to financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF CASH FLOWS
For the Six Months Ended November 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
Cash flows provided by operating activities:
Interest received (excluding accretion of $996,060).......... $ 14,067,274
Interest expense paid........................................ (3,446,860)
Operating expenses paid...................................... (1,141,468)
Purchase of short-term portfolio investments, including
options, net.............................................. (794,563)
Purchase of long-term portfolio investments.................. (71,580,253)
Proceeds from dispositions of long-term portfolio
investments, short sales and principal paydowns........... 69,407,771
------------
Net cash provided by operating activities.................... 6,511,901
------------
Cash flows used for financing activities:
Cash used to repurchase and retire Trust shares.............. (1,121,244)
Net cash provided by reverse repurchase agreements........... 3,810,250
Cash dividends paid.......................................... (9,200,727)
------------
Net cash used for financing activities....................... (6,511,721)
------------
Net increase in cash........................................... 180
Cash at beginning of period.................................... 278
------------
Cash at end of period.......................................... $ 458
------------
------------
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........... $ 30,881,760
------------
Decrease in investments...................................... 1,256,865
Increase in net unrealized appreciation on investments....... (24,634,756)
Increase in receivable for investments sold.................. (10,202,691)
Increase in interest receivable.............................. (620,567)
Decrease in other assets..................................... 104,748
Increase in payable for investments purchased................ 9,651,404
Increase in advisory/administration fees payable............. 2,563
Increase in accrued expenses and other liabilities........... 72,575
------------
Total adjustments.................................... (24,369,859)
------------
Net cash provided by operating activities...................... $ 6,511,901
------------
------------
</TABLE>
- ------------------
See notes to financial statements.
11
<PAGE>
- ------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION> For the
Six Months For the For the For the For the Period
Ended Year Year Year November 2,
November 30, Ended Ended Ended 1992*
1996 May 31, May 31, May 31, through
(unaudited) 1996 1995 1994 May 31, 1993
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period.......................... $ 7.98 $ 8.46 $ 8.07 $ 9.05 $ 9.37**
---------------- ----------- ----------- ----------- ----------------
Net investment income............. 0.31 0.58 0.67 0.68 0.44
Net effect of shares
repurchased..................... 0.00 0.01 0.01 0.01 0.00
Net realized and unrealized
gain (loss) on investment,
futures and written
option transactions............. 0.56 (0.54) 0.34 (0.95) (0.36)
---------------- ----------- ----------- ----------- ----------------
Net increase (decrease) in net
asset value resulting from
operations...................... 0.87 0.05 1.02 (0.26) 0.08
---------------- ----------- ----------- ----------- ----------------
Dividends from net investment
income.......................... (0.26) (0.53) (0.63) (0.72) (0.40)
---------------- ----------- ----------- ----------- ----------------
Net asset value, end of period.... $ 8.59 $ 7.98 $ 8.46 $ 8.07 $ 9.05
---------------- ----------- ----------- ----------- ----------------
---------------- ----------- ----------- ----------- ----------------
Market price, end of period....... $ 7.25 $ 6.875 $ 7.25 $ 7.25 $ 9.125
---------------- ----------- ----------- ----------- ----------------
---------------- ----------- ----------- ----------- ----------------
TOTAL INVESTMENT RETURN+.......... 9.41% 2.11% 9.46% (13.17)% (1.18)%(1)
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTARY DATA:
Net assets, end of period (000s).... $ 306,194 $ 286,035 $ 304,083 $ 291,463 $ 328,672
Total operating expenses............ 0.86%(2) 0.93% 0.91% 0.81% 0.80%(2)
Interest expense.................... 2.39%(2) 2.47% 2.29% 1.34% 1.66%(2)
Net investment income............... 7.43%(2) 6.89% 8.50% 7.90% 8.34%(2)
Portfolio turnover rate............. 18% 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 excludes the effects of
sales loads or brokerage commissions.
(1) Not annualized.
(2) Annualized.
- ------------------
See notes to financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
November 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
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.
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
13
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
November 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
potential declines in similar underlying securities. When the Trust writes or
purchases an option, an amount equal to the premium received or paid by the
Trust is recorded as a liability or an asset and is subsequently adjusted to the
current market value of the option written or purchased. Premiums received or
paid from writing or purchasing options which expire unexercised are treated by
the Trust on the expiration date as realized gains or losses. The difference
between the premium and the amount paid or received on effecting a closing
purchase or sale transaction, including brokerage commissions, is also treated
as a realized gain or loss. If an option is exercised, the premium paid or
received is added to the proceeds from the sale or cost of the purchase in
determining whether the Trust has realized a gain or a loss on investment
transactions.
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 certain securities are
accreted and 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 the amount
14
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
November 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
reported as 'Cash' in the Statement of Assets and Liabilities, and does not
include short-term investments.
Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and accreting discounts 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.
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 six months ended November 30, 1996, the Advisor earned $732,790
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 six months ended November 30, 1996, the Administrator earned
$219,739 in Administration Fees.
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, U.S.
Government securities and reverse repurchase agreements, for the six months
ended November 30, 1996 were $27,437,413 and $45,987,158, respectively.
Purchases and sales of U.S. Government securities, for the six months ended
November 30, 1996 were $53,794,244 and $20,356,250, respectively. For purposes
of this footnote, U.S. Government securities includes securities issued by the
U.S. Treasury, the Federal Home Loan Mortgage Corporation and the Government
National Mortgage Association.
The federal income tax basis of the Trust's investments at November 30, 1996 was
substantially the same for financial reporting and, accordingly, net unrealized
appreciation for federal income tax purposes was $16,562,459 (gross unrealized
appreciation-- $17,033,810; gross unrealized depreciation-- $471,351). 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
15
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
November 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
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.
At November 30, 1996, the Trust had the following reverse repurchase agreements
outstanding:
<TABLE>
<CAPTION>
MATURITY IN
ZERO TO 30 DAYS
---------------
<S> <C>
Maturity Amount..................... $ 131,936,095
---------------
Market Value of Assets Sold
Under Agreements.................. $ 135,496,741
---------------
Weighted Average Interest
Rate.............................. 5.42%
---------------
</TABLE>
The average daily balance of reverse repurchase agreements outstanding during
the six months ended November 30, 1996, was approximately $128,848,466, at a
weighted average interest rate of 5.42%. The maximum amount of reverse
repurchase agreements outstanding at any time during the year was $147,283,250
as of June 14, 1996, which was 35.67% of total assets.
6. CAPITAL STOCK:
There are 75 million shares of $0.01 par value common stock authorized. Of the
35,665,039 shares outstanding at November 30, 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 six months ended November 30, 1996 and the year ended May 31, 1996,
the Trust repurchased totals of 180,800 and 84,500 shares of its outstanding
common stock at costs of $1,315,087 and $607,497 and average discounts of
approximately 14.4% and 16.2% from its net asset value, respectively. All shares
repurchased either have been or will be 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 November 30, 1996.
There was no written option activity for the six months ended November 30, 1996.
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 and other actions
under the consolidated caption In re: Hyperion
16
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
November 30, 1996 (unaudited)
- --------------------------------------------------------------------------------
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 which superseded the first 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 U.S. Court of Appeals for the Second
Circuit on August 17, 1995. On October 15, 1996, a three judge panel of the
Court of Appeals for the Second Circuit in a two to one vote upheld Judge
Michael B. Mukasey's July 12, 1995 opinion and order dismissing with prejudice
plaintiffs' second consolidated amended complaint for failure to identify any
misrepresentations or misleading omissions in the registration statement and
prospectus for the Trust. Appellants filed a petition for rehearing and
suggestion for rehearing in banc by the entire appellate court on October 29,
1996. Please refer to Note 9 for further information.
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 Investment 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 Investment 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 six month period ended November 30,
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 $8,094 of litigation
expenses to the Advisor during the six month period ended November 30, 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. Please refer to Note 9 for further information.
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 12/16/96 12/26/96
$0.04375 01/20/97 01/30/97
</TABLE>
On January 7, 1997, the Court of Appeals for the Second Circuit denied the
appellants' petition for rehearing in banc and suggestion for rehearing. Please
refer to Note 8 for further information.
17
<PAGE>
- --------------------------------------------------------------------------------
PROXY RESULTS
- --------------------------------------------------------------------------------
During the six month period ended November 30, 1996, Hyperion 2002 Term Trust,
Inc. shareholders voted on the following proposals at a shareholders' meeting on
October 15, 1996. The description of each proposal and number of shares voted
are as follows:
<TABLE>
<CAPTION>
SHARES VOTED SHARES VOTED
FOR WITHOUT AUTHORITY
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. To elect to the Trust's Board of
Directors: Harry E. Petersen, Jr. 33,698,973 774,423
Leo M. Walsh, Jr. 33,719,850 753,546
- ----------------------------------------------------------------------------------------------------------
<CAPTION>
SHARES VOTED SHARES VOTED
SHARES VOTED FOR AGAINST ABSTAIN
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2. To select Price Waterhouse LLP as the
Trust's independent accountants: 33,471,005 363,282 639,109
2.
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS (LOSSES)
NET INVESTMENT ON INVESTMENTS, SHORT
INCOME SALES, FUTURES AND
----------------- WRITTEN OPTION TRANSACTIONS
TOTAL PER -----------------------
QUARTERLY PERIOD INCOME AMOUNT SHARE AMOUNT PER SHARE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
November 2, 1992*
to November 30, 1992 $1,811,843 $1,533,358 $0.04 $ 737,934 $ 0.03
December 1, 1992
to February 28, 1993 9,122,966 7,032,751 0.19 (3,681,008) (0.10)
March 1, 1993
to May 31, 1993 9,872,116 7,502,266 0.21 (10,302,260) (0.29)
June 1, 1993
to August 31, 1993 7,900,285 5,891,890 0.17 (7,056,496) (0.19)
September 1, 1993
to November 30, 1993 7,647,909 6,287,067 0.17 (14,250,814) (0.40)
December 1, 1993
to February 28, 1994 7,304,356 5,779,371 0.16 (3,697,312) (0.10)
March 1, 1994
to May 31, 1994 8,257,401 6,489,914 0.18 (9,318,373) (0.26)
June 1, 1994
to August 31, 1994 8,111,892 6,080,085 0.17 (4,477,491) (0.12)
September 1, 1994
to November 30, 1994 8,953,967 6,721,015 0.19 (12,361,939) (0.34)
December 1, 1994
to February 28, 1995 8,177,423 5,855,585 0.16 11,776,995 0.32
March 1, 1995
to May 31, 1995 7,992,242 5,503,840 0.15 17,498,730 0.49
June 1, 1995
to August 31, 1995 7,720,721 5,165,495 0.15 (1,657,645) (0.05)
September 1, 1995
to November 30, 1995 7,757,245 5,135,530 0.14 8,211,190 0.23
December 1, 1995
to February 29, 1996 7,967,548 5,119,151 0.14 (7,838,546) (0.22)
March 1, 1996
to May 31, 1996 7,830,152 5,524,086 0.15 (18,033,989) (0.50)
June 1, 1996
to August 31, 1996 7,973,437 5,540,861 0.15 904,649 0.03
September 1, 1996
to November 30, 1996 7,685,737 5,350,099 0.16 19,086,151 0.53
* Commencement of investment operations.
<CAPTION>
NET INCREASE
(DECREASE) IN NET
ASSETS RESULTING DIVIDENDS AND
FROM OPERATIONS DISTRIBUTIONS
-------------------- ------------------- SHARE PRICE
PER PER ------------
QUARTERLY PERIOD AMOUNT SHARE AMOUNT SHARE HIGH LOW
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
November 2, 1992*
to November 30, 1992 $ 2,271,292 $ 0.07 $ -- $ -- $10 1/8 $10
December 1, 1992
to February 28, 1993 3,351,743 0.09 7,265,759 0.20 10 1/8 9 1/2
March 1, 1993
to May 31, 1993 (2,799,994) (0.08) 7,265,759 0.20 10 1/8 8 7/8
June 1, 1993
to August 31, 1993 (1,164,606) (0.02) 7,265,759 0.20 9 7/8 8 1/4
September 1, 1993
to November 30, 1993 (7,963,747) (0.23) 6,655,302 0.18 9 3/8 7 1/2
December 1, 1993
to February 28, 1994 2,082,059 0.06 6,200,403 0.17 8 7 3/8
March 1, 1994
to May 31, 1994 (2,828,459) (0.08) 5,876,469 0.17 7 5/8 7
June 1, 1994
to August 31, 1994 1,602,594 0.05 5,863,752 0.17 7 3/8 6 3/4
September 1, 1994
to November 30, 1994 (5,640,924) (0.15) 5,848,698 0.16 7 1/8 6 1/4
December 1, 1994
to February 28, 1995 17,632,580 0.48 5,539,380 0.15 7 6 1/2
March 1, 1995
to May 31, 1995 23,002,570 0.64 5,389,408 0.15 7 3/8 6 3/4
June 1, 1995
to August 31, 1995 3,507,850 0.10 4,939,722 0.14 7 5/8 6 3/4
September 1, 1995
to November 30, 1995 13,346,720 0.37 4,713,040 0.13 7 3/8 7
December 1, 1995
to February 29, 1996 (2,719,395) (0.08) 4,708,389 0.13 7 1/2 7 1/8
March 1, 1996
to May 31, 1996 (12,509,903) (0.34) 4,705,337 0.13 7 3/8 6 5/8
June 1, 1996
to August 31, 1996 6,445,510 0.18 4,704,739 0.13 7 1/8 6 3/4
September 1, 1996
to November 30, 1996 24,436,250 0.69 4,702,621 0.13 7 3/8 6 3/4
</TABLE>
* Commencement of investment operations.
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR AND ADMINISTRATOR
HYPERION CAPITAL MANAGEMENT, INC.
520 Madison Avenue
New York, New York 10022-4213
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.
19
<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.
20
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<PAGE>
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<PAGE>
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<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.
- ------------------------------------------------------
The accompanying financial statements as of November 30, 1996 were not audited
and, accordingly, no opinion is expressed on them.
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
SEMI-ANNUAL REPORT
NOVEMBER 30, 1996
