<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER: July 21, 1997
We welcome this opportunity to provide you with information about Hyperion 2002
Term Trust, Inc. (the 'Trust') for its annual period ended May 31, 1997 and to
share our outlook for the Trust's current 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 MBS rated
AAA by a nationally recognized rating agency (e.g., Standard & Poor's
Corporation or Fitch Investors Service, L.P.).
MARKET ENVIRONMENT
The economic growth in the second quarter has slowed from the torrid first
quarter pace, leaving intact expectations for low inflation and a steady Federal
Reserve interest-rate policy in the third and fourth quarters of 1997.
Over the long term, our outlook for the fixed income market continues to include
lower interest rates. Positive fundamentals, such as a reduction in fiscal
spending, a decline in global inflationary pressures, increasing productivity,
technological advancements and higher savings and investment rates due to the
aging of the 'baby boomer' segment of the population are major factors that
should result in a decline in interest rates. The fixed income markets usually
do reasonably well under these conditions.
PORTFOLIO STRATEGY AND PERFORMANCE
The Trust continues to be managed with a focus on investing in securities with
good cash flow stability, high yield and high credit quality. Towards that end,
the portfolio's investments are concentrated in MBS, including an 11.5%
allocation to U.S. Government Agency Pass-Through Certificates, 39.0% allocation
to U.S. Government Agency Collateralized Mortgage Obligations, and 36.2% to
non-agency Collateralized Mortgage Obligations. The weighted average coupon of
these securities is 6.9%, which places a low level of prepayment risk on the
portfolio at current interest rate levels. This high allocation to MBS reflects
our confidence in the performance of these securities over the near term.
The Trust's total return for the six and twelve month periods ending May 31,
1997 were 0.68% and 12.39%, respectively. Total investment return is computed
based upon the change in Net Asset Value ('NAV') of the Trust's shares and
includes reinvestment of dividends. The current monthly dividend the Trust pays
its shareholders is $0.03958 per share. The current yield of 6.55% on shares of
the Trust is based on the NYSE closing price of $7.25 on May 30, 1997.
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
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONTINUED)
- --------------------------------------------------------------------------------
8 years, with the core assets having a duration of 5.7 years.
The Trust is continuing its share repurchase program. This repurchase program
allows the Trust to purchase and retire shares of the Trust in the open
marketplace. Such transactions are made when the share price of the Trust is
significantly below the Trust's NAV. By purchasing the stock at a discount to
the NAV and retiring the stock, the benefit of that spread (between stock
purchase price and the NAV) is captured and returned to all of the Trust's
remaining shareholders. During the year ended May 31, 1997, the Trust has
repurchased and retired 1,905,800 shares, capturing $.0527 in additional NAV per
share or $1,787,984 in an actual dollar amount for shareholders.
The chart that follows shows the allocation of the Trust's holdings by asset
category on May 31, 1997.
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 MAY 31, 1997*
U.S. Government Agency Pass-Through Certificates 11.50%
U.S. Government Agency Collateralized Mortgage Obligations 39.00%
U.S. Treasury Obligations 0.70%
Asset-Backed Securities 3.60%
Collateralized Mortgage Obligations 36.20%
Municipal Zero Coupon Securities 8.80%
Repurchase Agreement 0.20%
* 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.
CLIFFORD E. LAI
President,
Hyperion 2002 Term Trust, Inc.
Managing Director and Chief Investment Officer,
Hyperion Capital Management, Inc.
3
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
May 31, 1997
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS--75.1%
U.S. GOVERNMENT AGENCY PASS-THROUGH CERTIFICATES--16.8%
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation 6.50% 01/01/24 $ 38,647 $ 36,714,909
------------
Federal National Mortgage
Association 8.00 11/01/24 10,816 11,012,408
------------
<CAPTION>
TOTAL U.S. GOVERNMENT AGENCY PASS-THROUGH CERTIFICATES
<S> <C> <C> <C> <C>
(Cost - $47,734,613) 47,727,317
------------
<CAPTION>
U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)--57.2%
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage
Corporation
Series 1628, Class KC 6.25 05/15/09 10,075 9,357,561
Series 1727, Class G,
PAC 6.50 02/15/23 27,000@ 25,762,887
Series 1694, Class PQ,
PAC 6.50 09/15/23 20,000@ 19,129,080
Series 1725, Class B 7.00 10/15/20 7,364 7,185,511
Series 32, Class C 9.50 03/15/20 9,805@ 10,441,707
Series 158, Class E 9.50 05/15/21 14,800@ 16,296,739
------------
88,173,485
------------
Federal National Mortgage
Association
Series 1994-56, Class H,
PAC 6.00 07/25/22 20,000@ 18,489,780
Series 1989-20, Class A 6.75 04/25/18 8,407@ 8,008,540
Series G93-15, Class G,
PAC 7.00 06/25/22 20,000@ 19,205,180
Series 1994-79, Class B 7.00 12/25/19 23,100@ 22,521,414
Series 1996-45, Class K 7.00 09/25/21 6,000 5,726,250
------------
73,951,164
------------
<CAPTION>
TOTAL U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)
<S> <C> <C> <C> <C>
(Cost - $158,620,741) 162,124,649
------------
<CAPTION>
U.S. TREASURY OBLIGATIONS--1.1%
<S> <C> <C> <C> <C>
U.S. Treasury Inflation
Indexed Notes
(Cost - $3,058,396) 3.38 01/15/07 3,029@ 2,976,356
------------
<CAPTION>
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
<S> <C> <C> <C> <C>
(Cost - $209,413,750) 212,828,322
------------
<CAPTION>
- -------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--5.3%
<S> <C> <C> <C> <C>
Prime Credit Card Master
Trust
Series 1992-2, Class A2 7.45 11/15/02 10,000 10,163,670
------------
The Money Store Home
Equity Trust
Series 1996-D, Class A9 7.00 04/15/28 5,000 4,908,985
------------
<CAPTION>
TOTAL ASSET-BACKED SECURITIES
<S> <C> <C> <C> <C>
(Cost - $14,975,436) 15,072,655
------------
</TABLE>
- -------------------------------------------------------------------------------
4
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
May 31, 1997
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- --------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)--53.1%
<S> <C> <C> <C> <C>
DLJ Mortgage Acceptance
Corporation
Series 1996-CF2, Class
A1B 7.29% 11/12/21 $ 3,000(a) $ 3,010,665
Series 1996-CF1, Class
A1B 7.58 03/13/28 6,000(a) 6,130,974
------------
9,141,639
------------
GE Capital Mortgage
Services, Inc.
Series 1994-3, Class A12 6.50 01/25/24 15,610 14,510,707
Series 1996-4, Class A5 7.00 03/25/26 15,546 14,813,475
Series 1996-8, Class 1A6 7.25 05/25/26 15,327 14,875,527
Series 1996-11, Class A5 7.50 07/25/26 8,142 8,048,207
------------
52,247,916
------------
Merrill Lynch Mortgage
Investors, Inc.
Series 1996-C2, Class A2 6.82 11/21/28 5,587 5,473,159
Series 1995-C3, Class A3 7.09+ 12/26/25 7,500 7,346,715
------------
12,819,874
------------
Residential Funding
Mortgage Securities I,
Inc.
Series 1994-S9, Class A8 6.50 03/25/24 28,465 26,348,991
Series 1996-S7, Class
A12 7.00 03/25/26 16,108 15,348,170
Series 1996-S9, Class A7 7.25 04/25/26 4,951 4,805,072
Series 1996-S14, Class
A4 7.50 05/25/26 10,031 9,916,531
------------
56,418,764
------------
Structured Asset
Securities Corporation
Series 1992-M1, Class A2 7.05 11/25/07 20,000 19,906,560
------------
<CAPTION>
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)
<S> <C> <C> <C> <C>
(Cost - $151,230,186) 150,534,753
------------
<CAPTION>
- -------------------------------------------------------------------------------
MUNICIPAL ZERO COUPON SECURITIES--13.0%
MASSACHUSETTS--3.8%
<S> <C> <C> <C> <C>
Massachusetts State
Series B, FGIC (b) 06/01/02 5,000 3,924,570
Series B, AMBAC (b) 08/01/02 8,830 6,875,091
------------
10,799,661
------------
PENNSYLVANIA--3.1%
Pittsburgh Pennsylvania,
Water & Sewer Authority
Series A, Revenue Bond,
FGIC (b) 09/01/03 12,000 8,785,140
------------
TEXAS--3.8%
San Antonio Texas,
Electric & Gas
Revenue Bonds, AMBAC (b) 02/01/03 7,500 5,652,803
Series B, Revenue Bonds,
FGIC (b) 02/01/04 7,000 5,002,977
------------
10,655,780
------------
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONCLUDED)
<TABLE>
<CAPTION>
May 31, 1997
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 2)
- --------------------------------------------------------------------------------
MUNICIPAL ZERO COUPON SECURITIES--13.0% (CONCLUDED)
<S> <C> <C> <C> <C>
UTAH--2.3%
Intermountain Power Agency, Utah
Power Supply
Series B, Revenue Bonds,
AMBAC (b) 07/01/02 $ 8,490 $ 6,587,867
------------
TOTAL MUNICIPAL ZERO
COUPON SECURITIES
(Cost - $34,423,390) 36,828,448
------------
<CAPTION>
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENT--0.3%
Dated 5/30/97, with State Street Bank and Trust
Company, 5.15%,
due 6/02/97; proceeds: $721,309; collateralized by
$610,000
U.S. Treasury Note, 9.00%, due 11/15/18, value:
$741,386
(Cost - $721,000) 721 721,000
------------
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS--146.8%
(Cost - $410,763,762) $415,985,178
LIABILITIES IN EXCESS OF OTHER ASSETS--(46.8%) (132,631,230)
------------
NET ASSETS--100.0% $283,353,948
------------
------------
</TABLE>
- -------------------------------------------------------------------------------
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 May 31, 1997
FGIC Financial Guaranty Insurance Company
(b) Zero Coupon Bonds
AMBAC American Municipal Bond Assurance Corporation
- ------------------
See notes to financial statements.
6
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
May 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $410,763,762) (Note 2).............................................. $415,985,178
Cash............................................................................................ 8
Interest receivable............................................................................. 2,414,219
Prepaid expenses and other assets............................................................... 114,183
Deferred organization expenses (Note 2)......................................................... 3,274
------------
Total assets.......................................................................... 418,516,862
------------
LIABILITIES:
Reverse repurchase agreements (Note 5).......................................................... 134,367,250
Interest payable for reverse repurchase agreements (Note 5)..................................... 259,426
Payable for Trust shares repurchased............................................................ 253,991
Accrued expenses and other liabilities.......................................................... 124,766
Investment advisory fee payable (Note 3)........................................................ 121,008
Administration fee payable (Note 3)............................................................. 36,473
Contingencies (Notes 8 and 9)...................................................................
------------
Total liabilities..................................................................... 135,162,914
------------
NET ASSETS (equivalent to $8.35 per share based on
33,940,039 shares outstanding)................................................................ $283,353,948
------------
------------
COMPOSITION OF NET ASSETS:
Capital stock, at par (Note 6).................................................................. $ 339,400
Additional paid-in capital...................................................................... 322,814,015
Undistributed net investment income............................................................. 5,981,314
Accumulated net realized losses................................................................. (51,002,197)
Net unrealized appreciation..................................................................... 5,221,416
------------
Net assets applicable to capital stock outstanding.............................................. $283,353,948
------------
------------
</TABLE>
- ------------------
See notes to financial statements.
7
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF OPERATIONS
For the Year Ended May 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME (Note 2):
Interest....................................................... $ 30,709,681
-------------
EXPENSES:
Investment advisory fee (Note 3)............................... 1,464,036
Administration fee (Note 3).................................... 438,869
Insurance...................................................... 175,196
Custodian...................................................... 84,686
Reports to shareholders........................................ 81,422
Audit and tax services......................................... 63,500
Legal.......................................................... 59,107
Directors' fees................................................ 45,000
Registration................................................... 33,094
Transfer agency................................................ 25,225
Amortization of organization expenses (Note 2)................. 8,122
Miscellaneous.................................................. 36,724
-------------
Total operating expenses.................................... 2,514,981
Interest expense (Note 5).............................. 7,230,146
-------------
Total expenses.............................................. 9,745,127
-------------
Net investment income.......................................... 20,964,554
-------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENT AND SHORT SALE TRANSACTIONS (Note 2):
Net realized losses on:
Investment transactions........................................ (4,571,127)
Short sale transactions........................................ (52,344)
-------------
(4,623,471)
-------------
Net change in unrealized appreciation on investments............. 13,293,713
-------------
Net realized and unrealized gain on investment and short sale
transactions................................................... 8,670,242
-------------
Net increase in net assets resulting from operations............. $ 29,634,796
-------------
-------------
</TABLE>
- ------------------
See notes to financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended
May 31, 1997 May 31, 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS:
Net investment income........................... $ 20,964,554 $ 20,944,262
Net realized losses on investment, short sale,
futures and written option transactions...... (4,623,471) (7,926,733)
Net change in unrealized appreciation
(depreciation) on investment and futures
transactions................................. 13,293,713 (11,392,256)
------------ -------------
Net increase in net assets resulting from
operations................................... 29,634,796 1,625,273
------------ -------------
DIVIDENDS TO SHAREHOLDERS (Note 2):
Net investment income........................... (18,367,468) (19,066,488)
------------ -------------
CAPITAL STOCK TRANSACTIONS (Note 6):
Cost of Trust shares repurchased and retired.... (13,948,012) (607,497)
------------ -------------
Total decrease in net assets............... (2,680,684) (18,048,712)
NET ASSETS:
Beginning of year............................... 286,034,632 304,083,344
------------ -------------
End of year (including undistributed net
investment income of $5,981,314 and
$3,384,228, respectively).................... $283,353,948 $ 286,034,632
------------ -------------
------------ -------------
</TABLE>
- ------------------
See notes to financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
STATEMENT OF CASH FLOWS
For the Year Ended May 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
Cash flows provided by operating activities:
Interest received (excluding net accretion of $2,204,820).................................... $ 28,805,637
Interest expense paid........................................................................ (7,023,707)
Operating expenses paid...................................................................... (2,457,953)
Purchase of short-term portfolio investments, including options, net......................... (867,563)
Purchase of long-term portfolio investments and short covers................................. (148,939,671)
Proceeds from dispositions of long-term portfolio investments,
short sales and principal paydowns........................................................ 156,158,976
-------------
Net cash provided by operating activities.................................................... 25,675,719
-------------
Cash flows used for financing activities:
Cash used to repurchase and retire Trust shares.............................................. (13,694,021)
Net cash provided by reverse repurchase agreements........................................... 6,385,500
Cash dividends paid.......................................................................... (18,367,468)
-------------
Net cash used for financing activities....................................................... (25,675,989)
-------------
Net decrease in cash........................................................................... (270)
Cash at beginning of year...................................................................... 278
-------------
Cash at end of year............................................................................ $ 8
-------------
-------------
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........................................... $ 29,634,796
-------------
Decrease in investments...................................................................... 8,770,393
Increase in net unrealized appreciation on investments....................................... (13,293,713)
Decrease in interest receivable.............................................................. 300,776
Decrease in other assets..................................................................... 14,135
Decrease in advisory/administration fees payable............................................. (1,572)
Increase in accrued expenses and other liabilities........................................... 250,904
-------------
Total adjustments.................................................................... (3,959,077)
-------------
Net cash provided by operating activities...................................................... $ 25,675,719
-------------
-------------
</TABLE>
- ------------------
See notes to financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
For the Period
For the Year For the Year For the Year For the Year November 2, 1992*
Ended Ended Ended Ended through
May 31, 1997 May 31, 1996 May 31, 1995 May 31, 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.................... 0.60 0.58 0.67 0.68 0.44
Net effect of shares repurchased......... 0.05 0.01 0.01 0.01 --
Net realized and unrealized gain (loss)
on investment, short sale, futures and
written option transactions............ 0.24 (0.54) 0.34 (0.95) (0.36)
------------ ------------ ------------ ------------ -----------------
Net increase (decrease) in net asset
value resulting from operations........ 0.89 0.05 1.02 (0.26) 0.08
------------ ------------ ------------ ------------ -----------------
Dividends from net investment
income................................. (0.52) (0.53) (0.63) (0.72) (0.40)
------------ ------------ ------------ ------------ -----------------
Net asset value, end of period........... $ 8.35 $ 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+................. 13.28% 2.11% 9.46% (13.17)% (1.18)%(1)
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTARY DATA:
Net assets, end of period (000s)......... $283,354 $286,035 $304,083 $291,463 $ 328,672
Total operating expenses................. 0.86% 0.93% 0.91% 0.81% 0.80%(2)
Interest expense......................... 2.47% 2.47% 2.29% 1.34% 1.66%(2)
Net investment income.................... 7.16% 6.89% 8.50% 7.90% 8.34%(2)
Portfolio turnover rate.................. 35% 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, 1997
- --------------------------------------------------------------------------------
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 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, Trust
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, 1997, 7% 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.
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, 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 the investment 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.
12
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1997
- --------------------------------------------------------------------------------
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 less or greater 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 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.
13
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1997
- --------------------------------------------------------------------------------
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, 1997, the Advisor earned $1,464,036 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, 1997, the Administrator earned $438,869 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 year ended May
31, 1997 were $67,626,285 and $67,815,582, respectively. Purchases and sales of
U.S. Government securities, for the year ended May 31, 1997 were $81,313,387 and
$82,639,426, 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 May 31, 1997 was
$410,763,762 which was substantially the same for financial reporting and,
accordingly, net unrealized appreciation for federal income tax purposes was
$5,221,416 (gross unrealized appreciation--$9,587,464; gross unrealized
depreciation--$4,366,048). At May 31, 1997, the Trust had a capital loss
carryforward of $47,514,793, of which $30,666,463 expires in 2002, $7,809,791
expires in 2003, $4,415,068 expires in 2004 and $4,623,471 expires in 2005,
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 with the same parties
with whom it may enter into repurchase agreements. Under a reverse repurchase
agreement, the Trust sells securities and agrees to repurchase them at a
mutually agreed upon date and price. Under the 1940 Act, reverse repurchase
agreements will be regarded as a form of borrowing by the Trust unless, at the
time it enters into a reverse repurchase agreement it establishes and maintains
a segregated account with its custodian containing securities from its portfolio
having a value not less than the repurchase price (including accrued interest).
The Trust has established and maintained such an account for each of its reverse
repurchase agreements. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale by the 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 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 may effectively be restricted
pending such decision.
At May 31, 1997, the Trust had the following reverse repurchase agreements
outstanding:
<TABLE>
<CAPTION>
MATURITY IN
ZERO TO 30 DAYS
---------------
<S> <C>
Maturity Amount..................... $ 134,722,598
---------------
Market Value of Assets Sold
Under Agreements.................. $ 139,518,632
---------------
Weighted Average Interest Rate...... 5.60%
---------------
</TABLE>
14
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 31, 1997
- --------------------------------------------------------------------------------
The average daily balance of reverse repurchase agreements outstanding during
the year ended May 31, 1997, was approximately $132,130,137, at a weighted
average interest rate of 5.47%. The maximum amount of reverse repurchase
agreements outstanding at any time during the year was $158,867,000 as of
February 12, 1997, which was 36.79% of total assets.
6. CAPITAL STOCK:
There are 75 million shares of $0.01 par value common stock authorized. Of the
33,940,039 shares outstanding at May 31, 1997, the Advisor owned 10,639 shares.
The Trust is continuing its stock repurchase program, whereby an amount of up to
15% of the original 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, 1997 and 1996, the Trust repurchased totals of
1,905,800 and 84,500 shares of its outstanding common stock at costs of
$13,948,012 and $607,497 and average discounts of approximately 11.7% 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 May 31, 1997.
There was no written option activity for the year ended May 31, 1997.
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 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. 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 affirmed Judge
15
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
May 31, 1997
- --------------------------------------------------------------------------------
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. On January 7, 1997, the appellate court denied the appellants' petition
for rehearing in banc. On April 7, 1997, plaintiffs filed a petition for a writ
of certiorari in the Supreme Court of the United States. On May 8, 1997, the
defendants filed briefs in opposition to the petition for a writ of certiorari
in the Supreme Court of the United States. 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 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 year ended May 31, 1997 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 $20,840 of litigation expenses
to the Advisor during the year ended May 31, 1997. 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.
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>
$0.03958 06/16/97 06/26/97
$0.03958 07/21/97 07/31/97
</TABLE>
On June 9, 1997, the Supreme Court of the United States denied the petition for
a writ of certiorari in Hyperion Securities Litigation, (under the name Marilyn
Okley, et al v. Hyperion 1999 Term Trust, Inc., et al), and no further appeals
are possible. Please refer to Note 8 for further information.
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, 1997, the results of its operations and its cash
flows for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the four
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, 1997 by correspondence with the custodian
and brokers and the application of alternative auditing procedures where
confirmation from brokers was not received, provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
July 17, 1997
- --------------------------------------------------------------------------------
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,
1997) 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, 4.21% of the Trust's distributions
during the fiscal year ended May 31, 1997 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 1996, 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 1997. Because the Trust's fiscal year is not the
calendar year, another notification will be sent with respect to calendar year
1997. 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
1998. 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 INVESTMENT, SHORT NET INCREASE
SALE, FUTURES AND (DECREASE) IN NET
NET INVESTMENT WRITTEN ASSETS RESULTING
INCOME OPTION TRANSACTIONS FROM OPERATIONS
TOTAL ---------------------- ----------------------- ------------------------
QUARTERLY PERIOD 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) (0.35)
June 1, 1996
to August 31, 1996............ 7,973,437 5,540,861 0.16 904,649 0.03 6,445,510 0.19
September 1, 1996
to November 30, 1996.......... 7,685,737 5,350,099 0.15 19,086,151 0.54 24,436,250 0.69
December 1, 1996
to February 28, 1997.......... 7,482,318 5,071,417 0.15 (10,119,650) (0.29) (5,048,233) (0.14)
March 1, 1997
to May 31, 1997............... 7,568,189 5,002,177 0.14 (1,200,908) (0.04) 3,801,269 0.10
<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 7/8
June 1, 1993
to August 31, 1993............ 7,265,759 0.20 9 7/8 8 1/4
September 1, 1993
to November 30, 1993.......... 6,655,302 0.18 9 3/8 7 1/2
December 1, 1993
to February 28, 1994.......... 6,200,403 0.17 8 7 3/8
March 1, 1994
to May 31, 1994............... 5,876,469 0.17 7 5/8 7
June 1, 1994
to August 31, 1994............ 5,863,752 0.17 7 3/8 6 3/4
September 1, 1994
to November 30, 1994.......... 5,848,698 0.16 7 1/8 6 1/4
December 1, 1994
to February 28, 1995.......... 5,539,380 0.15 7 6 1/2
March 1, 1995
to May 31, 1995............... 5,389,408 0.15 7 3/8 6 3/4
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
June 1, 1996
to August 31, 1996............ 4,704,739 0.13 7 1/8 6 3/4
September 1, 1996
to November 30, 1996.......... 4,702,621 0.13 7 3/8 6 3/4
December 1, 1996
to February 28, 1997.......... 4,667,444 0.13 7 1/2 7
March 1, 1997
to May 31, 1997............... 4,292,664 0.13 7 1/2 7
</TABLE>
* Excludes net effect of shares repurchased.
** Commencement of investment operations.
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR AND ADMINISTRATOR
HYPERION CAPITAL MANAGEMENT, INC.
One Liberty Plaza
165 Broadway, 36th Floor
New York, New York 10006-1404
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., 9th Floor
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
Clifford E. Lai
President
Patricia A. Botta
Vice President
Joseph W. Sullivan
Treasurer
* Audit Committee Members
- ------------------------------------------------------
[LOGO]
- ------------------------------------------------------
This Report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Trust shares.
HYPERION 2002 TERM TRUST, INC.
One Liberty Plaza
165 Broadway, 36th Floor
New York, NY 10006-1404
Annual Report
May 31, 1997
