<PAGE>
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HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER: January 23, 1998
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,
1997 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 MBS 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 markets had a mixed year ending November 30, 1997. On the one
hand, the strong economy and low level of unemployment kept the Federal Reserve
Board's monetary policy with a bias towards raising interest rates. On the other
hand, the low inflation environment, in which prices on most consumer goods
increased slightly above 2.0%, caused interest rates on longer maturity assets
to fall relative to shorter maturity securities. The economic problems in Asia
will be the wild card going into 1998. The depth of Asia's problems will have
global implications that will impact monetary policy over the near term.
We are generally positive on interest rates and feel that there are a number of
fundamental factors that support a lower interest rate range than has been
experienced over the last few years. These factors include improving fiscal
policy, declining government deficits, and a low level of global inflation.
The decline in interest rates over the last few months has sent refinancing
applications on residential mortgages dramatically higher. We believe, however,
that because of the volume of refinancing that occurred in 1993, the refinancing
activity anticipated in 1998 will be lower than that of 1993.
PORTFOLIO STRATEGY AND PERFORMANCE
The overall strategy with respect to the Trust has been twofold; first, manage
the Trust's investment prepayment risk and, second, increase the Trust's
allocation to securities that closely match the Trust's targeted termination
date.
To reduce the exposure to prepayment risk we have increased our allocation to
commercial mortgage-backed securities and asset-backed securities collateralized
by credit card receivables and manufactured housing loans. By incorporating
these types of securities into the portfolio, prepayment protection is provided
through loans on the underlying collateral. These securities have historically
performed well in environments where prepayment rates on residential
mortgage-backed securities increase as the underlying borrower's incentive to
prepay the loans are much lower than with residential mortgage-
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONTINUED)
- --------------------------------------------------------------------------------
backed securities. Over the year, the portfolio has increased its allocation to
these sectors by 16%.
Collateralized mortgage obligations ('CMOs') are another source of securities by
which prepayment activity can be mitigated and as such are currently held by the
Trust for their prepayment stability.
The more conservative classes of a CMO are called planned amortization class
('PAC CMOs'). The portfolio's allocation to these classes is currently 52%.
Certain portions of the Trust's portfolio were restructured to hold securities
with a greater degree of maturity certainty, oriented toward the Trust's
expected maturity in late 2002. Examples of securities with more cash flow
certainty are asset-backed securities and planned amortization classes of agency
collateralized mortgage obligations where the principal return period can range
from 1 day to 2 years. Over the year, approximately 25% of the portfolio was
restructured into securities with maturities centered around the fourth quarter
of 2002, and these restructurings contributed 20 cents to the NAV. If interest
rates continue to fall, we expect that there will be more opportunities to
restructure the portfolio.
The Trust's total return for the six month period ending November 30, 1997 was
13.73%. Total investment return is 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 shareholder is $0.03958 per share. The current yield
of 5.94% on shares of the Trust is based on the NYSE closing price of $8.0000 on
November 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 7.3 years, with the core assets having a duration of 5.1 years.
The Trust is continuing its share repurchase program. In October, the Board of
Directors authorized the Trust to purchase and retire up to 25% of the Trust's
original outstanding common shares. Previously, the Board of Directors had
authorized the Trust to purchase and retire up to 15% of the Trust's original
outstanding common shares. 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
November 30,1997, the Trust has repurchased and retired 2,711,700 shares,
capturing $.0824 in additional NAV per share or $2,576,740 in an actual dollar
amount for shareholders.
The chart that follows shows the allocation of the Trust's holdings by asset
category on November 30, 1997.
2
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISOR (CONCLUDED)
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HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS AS OF NOVEMBER 30, 1997*
Repurchase Agreement U.S. Government Agency
0.5% Pass-Through Certificates
11.5%
Muncipal Zero Coupon
Securities U.S. Government Agency
9.5% Collateralized Mortgage
Obligations
Asset-Backed Securities 28.4%
17.2%
Subordinated (AAA)
Collateralized Mortgage
Obligations
32.9%
* 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>
<TABLE>
<CAPTION>
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HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS Principal
November 30, 1997 Interest Amount Value
(Unaudited) Rate Maturity (000s) (Note 2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS--58.3%
U.S. GOVERNMENT AGENCY PASS-THROUGH
CERTIFICATES--16.8%
Federal Home Loan Mortgage
Corporation 6.50 % 01/01/24 $ 36,977@ $ 36,329,844
------------
Federal National Mortgage
Association 8.00 11/01/24 10,083@ 10,442,001
------------
TOTAL U.S. GOVERNMENT AGENCY PASS-THROUGH CERTIFICATES
(Cost - $45,406,242) 46,771,845
------------
U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS
(REMICS)--41.5%
Federal Home Loan Mortgage
Corporation
Series 1628, Class KC 6.25 05/15/09 10,075@ 9,809,637
Series 1978, Class PB,
PAC 6.50 07/15/18 27,420@ 27,518,548
Series 1973, Class PD,
PAC 6.50 01/15/18 26,964@ 27,057,403
Series 1725, Class B 7.00 10/15/20 7,364@ 7,383,478
------------
71,769,066
------------
Federal National Mortgage
Association
Series 1997-58, Class
PH, PAC 6.50 06/18/18 15,610 15,663,667
Series 1989-20, Class A,
PAC 6.75 04/25/18 8,275 8,236,923
Series G93-15, Class G,
PAC 7.00 06/25/22 20,000@ 20,137,980
------------
44,038,570
------------
TOTAL U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS
(REMICS)
(Cost - $113,677,776) 115,807,636
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost - $159,084,018) 162,579,481
------------
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ASSET-BACKED SECURITIES--25.2%
Chemical Master Credit
Card Trust I
Series 1995-3, Class A 6.23 04/15/05 19,813 19,766,558
------------
Citibank Credit Card
Master Trust I
Series 1997-2, Class A 6.55 02/15/04 20,000 20,143,760
------------
Prime Credit Card Master
Trust
Series 1992-2, Class A2 7.45 11/15/02 5,000 5,114,845
------------
Sears Credit Account
Master Trust
Series 1996-4, Class A 6.45 10/16/06 20,000 20,106,260
------------
The Money Store Home
Equity Trust
Series 1996-D, Class A9 7.00 04/15/28 5,000 5,079,690
------------
TOTAL ASSET-BACKED SECURITIES
(Cost - $70,031,579) 70,211,113
------------
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</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
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HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS
(CONTINUED) Principal
November 30, 1997 Interest Amount Value
(Unaudited) Rate Maturity (000s) (Note 2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)--48.0%
DLJ Mortgage Acceptance
Corporation
Series 1996-CF2, Class
A1B 7.29 % 11/12/21 $ 3,000(a) $ 3,144,954
------------
GE Capital Mortgage
Services, Inc.
Series 1994-3, Class A12 6.50 01/25/24 15,477 15,011,518
Series 1996-4, Class A5 7.00 03/25/26 15,467 15,453,275
Series 1996-8, Class 1A6 7.25 05/25/26 15,232 15,439,594
Series 1996-11, Class A5 7.50 07/25/26 8,105 8,307,467
------------
54,211,854
------------
Merrill Lynch Mortgage
Investors, Inc.
Series 1995-C3, Class A3 7.09 + 12/26/25 7,500 7,720,733
------------
Residential Funding
Mortgage Securities I,
Inc.
Series 1994-S9, Class A8 6.50 03/24/24 28,256 27,386,601
Series 1996-S7, Class
A12 7.00 03/25/26 16,020 16,005,617
Series 1996-S9, Class A7 7.25 04/25/26 4,926 4,993,284
------------
48,385,502
------------
Structured Asset
Securities Corporation
Series 1992-M1, Class A2 7.05 11/25/07 20,000 20,527,640
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS)
(Cost - $129,104,524) 133,990,683
------------
- -------------------------------------------------------------------------------
MUNICIPAL ZERO COUPON SECURITIES--13.9%
MASSACHUSETTS--4.1%
Massachusetts State
Series B, FGIC (b) 06/01/02 5,000 4,118,245
Series B, AMBAC (b) 08/01/02 8,830 7,220,847
------------
11,339,092
------------
PENNSYLVANIA--3.3%
Pittsburgh Pennsylvania,
Water & Sewer Authority
Series A, Revenue Bond,
FGIC (b) 09/01/03 12,000 9,235,212
------------
TEXAS--4.0%
San Antonio Texas,
Electric & Gas
Revenue Bonds, AMBAC (b) 02/01/03 7,500 5,927,183
Series B, Revenue Bonds,
FGIC (b) 02/01/04 7,000 5,254,277
------------
11,181,460
------------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
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HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS
(CONCLUDED) Principal
November 30, 1997 Interest Amount Value
(Unaudited) Rate Maturity (000s) (Note 2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL ZERO COUPON SECURITIES--13.9% (CONCLUDED)
UTAH--2.5%
Intermountain Power Agency, Utah
Power Supply
Series B, Revenue Bonds,
AMBAC (b ) 07/01/02 $ 8,490 $ 6,920,955
------------
TOTAL MUNICIPAL ZERO
COUPON SECURITIES
(Cost - $35,477,520) 38,676,719
------------
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REPURCHASE AGREEMENT--0.8%
Dated 11/28/97, with State Street Bank and Trust
Company, 5.00%, due 12/01/97; proceeds: $2,122,884;
collateralized by $2,155,000 U.S. Treasury Note,
5.875%, due 10/31/98, value:
$2,157,358
(Cost - $2,122,000) 2,122 2,122,000
------------
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TOTAL INVESTMENTS--146.2%
(Cost - $395,819,641) $407,579,996
LIABILITIES IN EXCESS OF OTHER ASSETS--(46.2%) (128,779,303)
------------
NET ASSETS--100.0% $278,800,693
------------
------------
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</TABLE>
<TABLE>
<S> <C>
@ Portion of or entire principal amount delivered as collateral for reverse repurchase agreements. (Note
5)
+ Variable Rate Security: Coupon rate is rate in effect at November 30, 1997
(a) Private Placement
(b) Zero Coupon Bonds
AMBAC American Municipal Bond Assurance Corporation
FGIC Financial Guaranty Insurance Company
PAC Planned Amortization Class--Security principal payments are within a predetermined range
REMIC Real Estate Mortgage Investment Conduit
</TABLE>
- ------------------
See notes to financial statements.
6
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $395,819,641) (Note 2).............................................. $407,579,996
Cash............................................................................................ 495
Interest receivable............................................................................. 2,214,585
Prepaid expenses and other assets............................................................... 16,721
------------
Total assets.......................................................................... 409,811,797
------------
LIABILITIES:
Reverse repurchase agreements (Note 5).......................................................... 130,396,000
Interest payable for reverse repurchase agreements (Note 5)..................................... 394,902
Accrued expenses and other liabilities.......................................................... 69,886
Investment advisory fee payable (Note 3)........................................................ 115,423
Administration fee payable (Note 3)............................................................. 34,893
------------
Total liabilities..................................................................... 131,011,104
------------
NET ASSETS (equivalent to $8.92 per share based on
31,262,639 shares outstanding)................................................................ $278,800,693
------------
------------
COMPOSITION OF NET ASSETS:
Capital stock, at par (Note 6).................................................................. $ 312,626
Additional paid-in capital (Note 6)............................................................. 302,096,219
Undistributed net investment income............................................................. 7,377,780
Accumulated net realized losses................................................................. (42,746,287)
Net unrealized appreciation..................................................................... 11,760,355
------------
Net assets applicable to capital stock outstanding.............................................. $278,800,693
------------
------------
</TABLE>
- ------------------
See notes to financial statements.
7
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
STATEMENT OF OPERATIONS
For the Six Months Ended November 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME (Note 2):
Interest....................................................... $13,865,471
-----------
EXPENSES:
Investment advisory fee (Note 3)............................... 712,401
Administration fee (Note 3).................................... 214,846
Insurance...................................................... 77,316
Custodian...................................................... 41,683
Reports to shareholders........................................ 33,862
Audit and tax services......................................... 30,715
Directors' fees................................................ 23,055
Registration................................................... 16,408
Transfer agency................................................ 12,560
Amortization of organization expenses (Note 2)................. 3,507
Legal.......................................................... 2,874
Miscellaneous.................................................. 19,514
-----------
Total operating expenses.................................... 1,188,741
Interest expense (Note 5)........................................ 3,570,641
-----------
Total expenses.............................................. 4,759,382
-----------
Net investment income.......................................... 9,106,089
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENT, FUTURES,
AND OPTIONS TRANSACTIONS (Note 2):
Net realized gains (losses) on:
Investment transactions........................................ 8,272,598
Futures transactions........................................... 35,986
Options transactions........................................... (52,674)
-----------
8,255,910
-----------
Net unrealized appreciation on investments....................... 6,538,939
-----------
Net realized and unrealized gain on investment, futures and
options transactions........................................... 14,794,849
-----------
Net increase in net assets resulting from operations............. $23,900,938
-----------
-----------
</TABLE>
- ------------------
See notes to financial statements.
8
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Six Months Ended For the Year
November 30, 1997 Ended
(unaudited) May 31, 1997
------------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS:
Net investment income........................... $ 9,106,089 $ 20,964,554
Net realized gains (losses) on investment, short
sale, futures and option transactions........ 8,255,910 (4,623,471)
Net unrealized appreciation on investments and
futures transactions ........................ 6,538,939 13,293,713
----------------- -------------
Net increase in net assets resulting from
operations................................... 23,900,938 29,634,796
----------------- -------------
DIVIDENDS TO SHAREHOLDERS:
Net investment income........................... (7,709,623) (18,367,468)
----------------- -------------
CAPITAL STOCK TRANSACTIONS (Note 6):
Cost of Trust shares repurchased and retired.... (20,744,570) (13,948,012)
----------------- -------------
Total decrease in net assets............... (4,553,255) (2,680,684)
NET ASSETS:
Beginning of period............................. 283,353,948 286,034,632
----------------- -------------
End of period (including undistributed net
investment income of $7,377,780 and
$5,981,314, respectively).................... $ 278,800,693 $ 283,353,948
----------------- -------------
----------------- -------------
</TABLE>
- ------------------
See notes to financial statements.
9
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
STATEMENT OF CASH FLOWS
For the Six Months Ended November 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
Cash flows provided by operating activities:
Interest received (excluding net accretion of $950,314)...................................... $ 12,905,448
Interest expense paid........................................................................ (3,435,165)
Operating expenses paid...................................................................... (1,144,423)
Purchase of short-term portfolio investments, including options, net......................... (1,453,674)
Purchase of long-term portfolio investments and short covers................................. (176,693,651)
Proceeds from dispositions of long-term portfolio investments,
short sales and principal paydowns........................................................ 202,471,027
Net cash used for futures transactions....................................................... 35,986
-------------
Net cash provided by operating activities.................................................... 32,685,548
-------------
Cash flows used for financing activities:
Cash used to repurchase and retire Trust shares.............................................. (20,998,561)
Net cash used for reverse repurchase agreements.............................................. (3,971,250)
Cash dividends paid.......................................................................... (7,715,250)
-------------
Net cash used for financing activities....................................................... (32,685,061)
-------------
Net decrease in cash........................................................................... 487
Cash at beginning of period.................................................................... 8
-------------
Cash at end of period.......................................................................... $ 495
-------------
-------------
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........................................... $ 23,900,938
-------------
Decrease in investments...................................................................... 14,944,121
Net unrealized appreciation on investments................................................... (6,538,939)
Decrease in interest receivable.............................................................. 199,634
Decrease in other assets..................................................................... 100,736
Decrease in advisory/administration fees payable............................................. (7,165)
Increase in other liabilities................................................................ 86,223
-------------
Total adjustments.................................................................... 8,784,610
-------------
Net cash provided by operating activities...................................................... $32,685,548
-------------
-------------
</TABLE>
- ------------------
See notes to financial statements.
10
<PAGE>
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HYPERION 2002 TERM TRUST, INC.
FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
For the Six For the Period
Months Ended For the Year For the Year For the Year For the Year November 2, 1992*
November 30, 1997 Ended Ended Ended Ended through
(unaudited) May 31, 1997 May 31, 1996 May 31, 1995 May 31, 1994 May 31, 1993
----------------- ------------ ------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period....................... $ 8.35 $ 7.98 $ 8.46 $ 8.07 $ 9.05 $ 9.37**
----------------- ------------ ------------ ------------ ------------ -----------------
Net investment income.......... 0.29 0.60 0.58 0.67 0.68 0.44
Net realized and unrealized
gain (loss) on investment,
short sale, futures and
written option
transactions................. 0.45 0.24 (0.54) 0.34 (0.95) (0.36)
----------------- ------------ ------------ ------------ ------------ -----------------
Net increase (decrease) in net
asset value resulting from
operations................... 0.74 0.84 0.04 1.01 (0.27) 0.08
----------------- ------------ ------------ ------------ ------------ -----------------
Net effect of shares
repurchased.................. 0.07 0.05 0.01 0.01 0.01 --
Dividends from net investment
income....................... (0.24) (0.52) (0.53) (0.63) (0.72) (0.40)
----------------- ------------ ------------ ------------ ------------ -----------------
Net asset value, end of
period....................... $ 8.92 $ 8.35 $ 7.98 $ 8.46 $ 8.07 $ 9.05
----------------- ------------ ------------ ------------ ------------ -----------------
----------------- ------------ ------------ ------------ ------------ -----------------
Market price, end of period.... $ 8.00 $ 7.25 $ 6.875 $ 7.25 $ 7.25 $ 9.125
----------------- ------------ ------------ ------------ ------------ -----------------
----------------- ------------ ------------ ------------ ------------ -----------------
TOTAL INVESTMENT RETURN+....... 13.73%(1) 13.28% 2.11% 9.46% (13.17)% (1.18)%(1)
RATIOS TO AVERAGE NET ASSETS/SUPPLEMENTARY DATA:
Net assets, end of period
(000s)....................... $ 278,801 $283,354 $286,035 $304,083 $291,463 $ 328,672
Operating expenses............. 0.83%(2) 0.86% 0.93% 0.91% 0.81% 0.80%(2)
Interest expense............... 2.51%(2) 2.47% 2.47% 2.29% 1.34% 1.66%(2)
Total expenses................. 3.34%(2) 3.33% 3.40% 3.20% 2.15% 2.46%(2)
Net investment income.......... 6.39%(2) 7.16% 6.89% 8.50% 7.90% 8.34%(2)
Portfolio turnover rate........ 43% 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>
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HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
November 30, 1997 (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 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.
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.
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
12
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
November 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
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.
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.
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 continue 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. Dividends from net
investment income and distributions from realized gains have been determined in
accordance with income tax regulations and may differ from net investment income
and realized gains recorded by the Trust for financial reporting purposes. 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 were deferred and amortized
ratably over a period of sixty months from the date the Trust commenced
investment operations. As of November 30, 1997, all deferred organization
expenses have been completely amortized.
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
13
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
November 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
price, including accrued interest. Hyperion Capital Management, Inc. (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
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.
Certain officers and/or directors of the Trust are officers and/or directors of
the Advisor and Administrator.
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, 1997 were $75,647,107 and $75,688,934, respectively.
Purchases and sales of U.S. Government securities, for the six months ended
November 30, 1997 were $101,046,543 and $123,561,738 respectively. For purposes
of this footnote, U.S. Government securities include 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, 1997 was
$395,819,641 which was the same for financial reporting and, accordingly, net
unrealized appreciation for federal income tax purposes was $11,760,355 (gross
unrealized appreciation--$11,802,532; gross unrealized depreciation--$47,177).
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.
14
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
November 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
At November 30, 1997, the Trust had the following reverse repurchase agreements
outstanding:
<TABLE>
<CAPTION>
MATURITY IN
ZERO TO 30 DAYS
---------------
<S> <C>
Maturity Amount, including Interest
Payable........................... $ 130,967,076
---------------
Market Value of Assets Sold
Under Agreements.................. $ 134,474,219
---------------
Weighted Average Interest Rate...... 5.62%
---------------
</TABLE>
The average daily balance of reverse repurchase agreements outstanding during
the six months ended November 30, 1997, was approximately $126,212,686, at a
weighted average interest rate of 5.64%. The maximum amount of reverse
repurchase agreements outstanding at any time during the six months was
$137,334,000 as of July 1, 1997, which was 32.79% of total assets.
6. CAPITAL STOCK:
There are 75 million shares of $0.01 par value common stock authorized. Of the
31,262,639 shares outstanding at November 30, 1997, the Advisor owned 10,639
shares.
The Trust is continuing its stock repurchase program. On September 23, 1997, the
Board of Directors authorized the Trust to purchase and retire up to 25%
(changed from 15%) of its then outstanding common shares, or approximately 9.1
million (changed from 5.4 million) of the Trust's shares, in the open market.
The purchase price may not exceed the then-current net asset value.
During the six months ended November 30, 1997 and year ended May 31, 1997, the
Trust repurchased totals of 2,677,400 and 1,905,800 shares of its outstanding
common stock at costs of $20,744,570 and $13,948,012 and average discounts of
approximately 11.3% and 11.7% 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.
During the period, the Trust had segregated sufficient cash and/or securities to
cover any commitments unders these contracts.
There were no open futures contracts at November 30, 1997.
There was no written option activity for the six months ended November 30, 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
15
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
November 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
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 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. 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.
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 six months ended November 30, 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 $14,441 of litigation
expenses to the Advisor during the six months ended November 30, 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 EVENT:
The Trust's Board of Directors declared the following regular monthly dividend:
<TABLE>
<CAPTION>
DIVIDEND RECORD PAYABLE
PER SHARE DATE DATE
- ---------- -------- --------
<S> <C> <C>
$0.03958 12/22/97 12/31/97
</TABLE>
16
<PAGE>
- --------------------------------------------------------------------------------
PROXY RESULTS
- --------------------------------------------------------------------------------
During the six month period ended November 30, 1997, Hyperion 2002 Term Trust,
Inc. shareholders voted on the following proposals at a shareholders' meeting on
October 14, 1997. 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>
1. To elect to the Trust's Board of Directors: Kenneth C. Weiss 24,236,217 818,681
Lewis S. Ranieri 24,228,574 826,324
Patricia A. Sloan 24,223,398 831,500
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VOTED SHARES VOTED SHARES VOTED
FOR AGAINST ABSTAIN
----------------- ------------ -----------------
<S> <C> <C> <C>
2. To select Price Waterhouse LLP as the
Trust's independent accountants: 24,632,603 94,595 327,700
</TABLE>
- --------------------------------------------------------------------------------
17
<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.
18
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS
(LOSSES) NET INCREASE
ON INVESTMENT, SHORT (DECREASE) IN NET
NET INVESTMENT SALE, FUTURES AND ASSETS RESULTING
INCOME OPTIONS TRANSACTIONS FROM OPERATIONS
TOTAL ---------------------- ----------------------- ------------------------
QUARTER ENDED 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
February 28, 1993.............. 9,122,966 7,032,751 0.19 (3,681,008) (0.10) 3,351,743 0.09
May 31, 1993................... 9,872,116 7,502,266 0.21 (10,302,260) (0.29) (2,799,994) (0.08)
August 31, 1993................ 7,900,285 5,891,890 0.17 (7,056,496) (0.19) (1,164,606) (0.02)
November 30, 1993.............. 7,647,909 6,287,067 0.17 (14,250,814) (0.40) (7,963,747) (0.23)
February 28, 1994.............. 7,304,356 5,779,371 0.16 (3,697,312) (0.10) 2,082,059 0.06
May 31, 1994................... 8,257,401 6,489,914 0.18 (9,318,373) (0.26) (2,828,459) (0.08)
August 31, 1994................ 8,111,892 6,080,085 0.17 (4,477,491) (0.12) 1,602,594 0.05
November 30, 1994.............. 8,953,967 6,721,015 0.19 (12,361,939) (0.34) (5,640,924) (0.15)
February 28, 1995.............. 8,177,423 5,855,585 0.16 11,776,995 0.32 17,632,580 0.48
May 31, 1995................... 7,992,242 5,503,840 0.15 17,498,730 0.49 23,002,570 0.64
August 31, 1995................ 7,720,721 5,165,495 0.15 (1,657,645) (0.05) 3,507,850 0.10
November 30, 1995.............. 7,757,245 5,135,530 0.14 8,211,190 0.23 13,346,720 0.37
February 29, 1996.............. 7,967,548 5,119,151 0.14 (7,838,546) (0.22) (2,719,395) (0.08)
May 31, 1996................... 7,830,152 5,524,086 0.15 (18,033,989) (0.50) (12,509,903) (0.35)
August 31, 1996................ 7,973,437 5,540,861 0.16 904,649 0.03 6,445,510 0.19
November 30, 1996.............. 7,685,737 5,350,099 0.15 19,086,151 0.54 24,436,250 0.69
February 28, 1997.............. 7,482,318 5,071,417 0.15 (10,119,650) (0.29) (5,048,233) (0.14)
May 31, 1997................... 7,568,189 5,002,177 0.14 (1,200,908) (0.04) 3,801,269 0.10
August 31, 1997................ 6,978,930 4,674,227 0.14 10,347,387 0.32 15,021,614 0.46
November 30, 1997.............. 6,886,541 4,431,862 0.15 4,447,462 0.13 8,879,324 0.28
<CAPTION>
DIVIDENDS AND
DISTRIBUTIONS SHARE PRICE
--------------------- ------------
QUARTER ENDED AMOUNT PER SHARE HIGH LOW
<S> <C> <C> <C> <C>
- -------------------------------
November 2, 1992**
to November 30, 1992.......... $ -- $ -- $10 1/8 $10
February 28, 1993.............. 7,265,759 0.20 10 1/8 9 1/2
May 31, 1993................... 7,265,759 0.20 10 1/8 8
August 31, 1993................ 7,265,759 0.20 9 7/8 8 1/4
November 30, 1993.............. 6,635,302 0.18 9 3/8 7
February 28, 1994.............. 6,200,403 0.17 8 7 3/8
May 31, 1994................... 5,876,469 0.17 7 5/8 7
August 31, 1994................ 5,863,752 0.17 7 3/8 6 3/4
November 30, 1994.............. 5,848,698 0.16 7 1/8 6
February 28, 1995.............. 5,539,380 0.15 7 6 1/2
May 31, 1995................... 5,389,408 0.15 7 3/8 6 3/4
August 31, 1995................ 4,939,722 0.14 7 5/8 6 3/4
November 30, 1995.............. 4,713,040 0.13 7 3/8 7
February 29, 1996.............. 4,708,389 0.13 7 1/2 7 1/8
May 31, 1996................... 4,705,337 0.13 7 3/8 6
August 31, 1996................ 4,704,739 0.13 7 1/8 6 3/4
November 30, 1996.............. 4,702,621 0.13 7 3/8 6 3/4
February 28, 1997.............. 4,667,444 0.13 7 1/2 7
May 31, 1997................... 4,292,664 0.13 7 1/2 7
August 31, 1997................ 3,928,855 0.12 8 13/16 7
November 30, 1997.............. 3,780,768 0.13 7 15/16 7 5/8
</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
SULLIVAN & WORCESTER LLP
1025 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>
- ------------------------------------------------------
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
* Audit Committee Members
- ------------------------------------------------------
[LOGO]
- ------------------------------------------------------
The accompanying financial statements as of November 30, 1997 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.
One Liberty Plaza
165 Broadway, 36th Floor
New York, NY 10006-1404
HYPERION 2002
TERM TRUST
SEMI-ANNUAL REPORT
NOVEMBER 30, 1997
[ART]
<TABLE> <S> <C>
<ARTICLE> 6
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> NOV-30-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 395819641
<INVESTMENTS-AT-VALUE> 407579996
<RECEIVABLES> 2214585
<ASSETS-OTHER> 16721
<OTHER-ITEMS-ASSETS> 495
<TOTAL-ASSETS> 409811797
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 130790902
<OTHER-ITEMS-LIABILITIES> 220202
<TOTAL-LIABILITIES> 131011104
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 302408845
<SHARES-COMMON-STOCK> 31262639
<SHARES-COMMON-PRIOR> 33940039
<ACCUMULATED-NII-CURRENT> 7377780
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (42746287)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11760355
<NET-ASSETS> 278800693
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13865471
<OTHER-INCOME> 0
<EXPENSES-NET> 4759382
<NET-INVESTMENT-INCOME> 9106089
<REALIZED-GAINS-CURRENT> 8255910
<APPREC-INCREASE-CURRENT> 6538939
<NET-CHANGE-FROM-OPS> 23900938
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (7709623)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 2677400
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (4553255)
<ACCUMULATED-NII-PRIOR> 5981314
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