H Y P E R I O N
2002
TERM TRUST
Annual Report
May 31, 1998
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HYPERION 2002 TERM TRUST, INC.
Report of the Investment Advisor
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July 20, 1998
Dear Shareholder:
We welcome this opportunity to provide you with information about Hyperion 2002
Term Trust, Inc. (the "Trust") for its annual period ended May 31, 1998 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 IBCA, Inc.).
Market Environment
Prices for fixed income securities have increased over the last six months with
interest rates falling an average of 25 basis points. A significant factor
contributing to the strong performance of the bond market are the current low
levels of inflation in the U.S. economy. The rise in the Consumer Price Index
("CPI") in 1997 was 2.2% versus a 3.0% to 3.5% range throughout most of the
1990s. Although the CPI has increased slightly this year, the Federal Reserve
has chosen to keep short term interest rates unchanged. Asia's economic
difficulties, and lower global inflation, continue to be key factors affecting
domestic fixed income market volatility and performance. Japan, China and Korea
are economies that impact U.S. fixed income markets. The weakness in these
economies is having an offsetting influence on the strong domestic economy and
its increased wage pressures, giving rise to the strong performance in the U.S.
fixed income markets.
Hyperion Capital Management, Inc. ("Hyperion") continues to be optimistic on the
bond market. Positive fundamentals, such as an improving fiscal policy,
declining government deficits, and an expectation of prolonged economic problems
in Asia are some of the major factors in place supporting Hyperion's outlook for
lower bond yields.
As a result of the current low interest rate environment, prepayment risk has
increased. A combination of efficient computer technology and greater media
publicity has made mortgage refinancing a potentially common occurrence.
Recently, homeowners have been made more aware of the best time to refinance
through more thorough and timely news reports, advertising and other forms of
media. Powerful search engines on the Internet and the public's increasing
comfort with this new informative tool provide further opportunity for
homeowners to refinance quicker, cheaper and without many of yesterday's
refinancing hassles. In order to reduce exposure to prepayment risk, Hyperion's
strategy has been to increase the allocation of securities in the portfolio to
those that are structured to deflect prepayment risk and whose underlying
collateral is less prepayment sensitive.
Portfolio Strategy and Performance
Over the last six months, the decline in interest rates and subsequent increase
in the market value of many of the portfolio's holdings, allowed Hyperion to
improve the overall stability of the portfolio. We increased the Trust's
allocation in securities, the maturities of which closely matched the targeted
termination date, and sold some securities that had begun to demonstrate less
maturity certainty. The portfolio's exposure to prepayment insensitive
securities was increased into primarily U.S. Treasury securities, U.S. Agency
and asset-backed securities. The Trust also increased its exposure to mortgage
securities that had a higher degree of prepayment protection because the
underlying mortgage interest rate was below the band of economic
"refinancability", or simple collateralized mortgage obligations ("CMOs")
securities with a higher than average degree of prepayment protection. Also,
given the current availability of low cost mortgage refinancing, we took steps
to reduce the Trust's potential sensitivity to this refinancing trend. Over the
last year, we increased the portfolio's allocation to securities which we
believe will be more protected from prepayment risk, such as planned
amortization class CMOs ("PAC CMOs") and asset-backed securities ("ABS"). PAC
CMOs differ from many other mortgage-backed securities because cash flows
produced by a PAC CMO have a higher degree of predictability so long as the rate
of mortgage refinancings remain in a given range. Asset-backed securities are
securities collateralized by assets that are not mortgage loans. They are
typically backed by large pools of homogeneous loans, such as automobile loans
and credit card receivables.
Because the underlying loans are less likely to "refinance" regardless of the
prevailing interest rate environment, these securities have exhibited both
greater maturity stability and greater predictability of cash flows. The
portfolio increased its asset allocation to these two sectors by 26%, as these
securities have outperformed those securities with less refinancing protection
over the last year.
The Trust's total return based on Net Asset Value for the six and twelve month
periods ending May 31, 1998 were 4.98% and 15.58% respectively. Total 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 5.85% on shares of the
Trust is based on the NYSE closing price of $8.1250 on May 29, 1998.
As of the end of July, the Trust, inclusive of leverage, had an average duration
(duration measures a bond portfolio's price sensitivity to interest rate
changes) of 5.7 years, with the core (unlevered) assets having a duration of 3.7
years.
<PAGE>
During the past twelve months, the Trust has continued its share repurchase
program. This repurchase program allows the Trust to purchase and retire shares
of the Trust in the open marketplace. Such transactions have been made when the
share price of the Trust was significantly below the Trust's NAV. By purchasing
the stock at a discount to the NAV and retiring the stock, the spread (between
stock purchase price and the NAV) is captured by the Trust and benefits all of
the Trust's remaining shareholders. During the year ended May 31,1998, the Trust
has repurchased and retired 3,051,600 shares, capturing $0.0941 in additional
NAV per share or $2,905,461 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, 1998.
HYPERION 2002 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS AS OF MAY 31, 1998 *
PIE CHART
U.S. Government Agency Collateralized Mortgage Obligations 54.3%
Collateralized Mortgage Obligations 10.7%
Asset-Backed Securities 21.1%
Municipal Zero Coupon Securities 8.4%
U.S. Treasury Obligations 5.3%
Repurchase Agreement 0.2%
*As a percentage of total investments.
Conclusion
We appreciate the opportunity to serve your investment needs and we thank you
for your continued support. As always, we welcome your questions and comments
and encourage you to contact our Shareholder Services Representatives at
1-800-HYPERION.
Sincerely,
KENNETH C. WEISS
Chairman,
Hyperion 2002 Term Trust, Inc.
President and Chief Executive Officer,
Hyperion Capital Management, Inc.
CLIFFORD E. LAI
President,
Hyperion 2002 Term Trust, Inc.
Managing Director and Chief Investment Officer,
Hyperion Capital Management, Inc.
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HYPERION 2002 TERM TRUST, INC.
Portfolio of Investments
May 31, 1998 Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS - 87.4%
U.S. Government Agency Collateralized Mortgage Obligations (REMICs) - 79.6%
Federal Home Loan Mortgage Corporation
Series 1998, Class PE 5.50% 11/18/15 $ 20,000 $ 19,649,100
Series 1628, Class G 5.85 08/15/19 14,000 13,920,690
Series 2021, Class PN 6.00 08/15/17 30,125 @ 29,971,013
Series 1628, Class KC 6.25 05/15/09 10,075 10,081,485
Series 1973, Class PD 6.50 01/15/18 26,964 @ 27,152,085
Series 1978, Class PB 6.50 07/15/18 27,420 27,785,264
Series 1725, Class B 7.00 10/15/20 7,364 7,507,532
----------------------
136,067,169
----------------------
Federal National Mortgage Association
Series 1998-4, Class PA 6.00 02/18/16 71,630 @ 71,603,876
Series 1997-58, Class PH 6.50 06/18/18 15,610 15,809,099
----------------------
87,412,975
----------------------
Total U.S. Government Agency Collateralized Mortgage Obligations (REMICs)
(Cost - $ 222,413,560 ) 223,480,144
----------------------
U.S. Treasury Obligations - 7.8%
U.S. Treasury Notes 5.75 11/30/02 5,300 @ 5,331,472
6.13 08/15/07 16,000 @ 16,520,016
----------------------
Total U.S. Treasury Obligations
(Cost - $ 22,036,446 ) 21,851,488
----------------------
Total U.S. Government & Agency Obligations
(Cost - $ 244,450,006 ) 245,331,632
----------------------
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ASSET-BACKED SECURITIES - 30.9%
Chemical Master Credit Card Trust I
Series 1995-3, Class A 6.23 04/15/05 19,813 20,099,199
----------------------
Citibank Credit Card Master Trust I
Series 1997-2, Class A 6.55 02/15/04 20,000 20,434,100
----------------------
FirstPlus Home Loan Owner
Series 1998-2, Class A 6.23 6/10/10 5,716 5,732,490
----------------------
Sears Credit Account Master Trust
Series 1996-3, 4CTF Class A 6.45 10/16/06 20,000 20,395,300
----------------------
The Money Store Home Equity Trust
Series 1992-M1, Class A2 7.05 11/25/02 19,339 20,107,264
----------------------
Total Asset-Backed Securities
(Cost - $ 83,999,509 ) 86,768,353
----------------------
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COLLATERALIZED MORTGAGE OBLIGATIONS (REMICs) - 15.6% GE Capital
Mortgage Services, Inc.
Series 1994-3, Class A12 6.50 01/25/24 15,338 15,089,072
Series 1996-4, Class A5 7.00 03/25/26 15,374 15,522,116
Series 1996-11, Class A5 7.50 07/25/26 8,051 8,307,610
----------------------
38,918,798
----------------------
Residential Funding Mortgage Securities I, Inc.
Series 1996 S9, Class A7 7.25 04/25/26 $ 4,895 $ 5,054,680
----------------------
Total Collateralized Mortgage Obligations (REMICs)
(Cost - $ 42,150,965 ) 43,973,478
----------------------
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MUNICIPAL ZERO COUPON SECURITIES - 12.3%
Massachusetts - 4.2%
Massachusetts State
Series B, FGIC (a) 06/01/02 5,000 4,236,475
Series B, AMBAC (a) 08/01/02 8,830 7,430,207
----------------------
11,666,682
----------------------
Pennsylvania - 3.4%
Pittsburgh Pennsylvania, Water & Sewer Authority
Series A, Revenue Bonds, FGIC (a) 09/01/03 12,000 9,595,680
----------------------
Texas - 2.2%
San Antonio Texas, Electric & Gas
Revenue Bonds, AMBAC (a) 02/01/03 7,500 6,139,567
----------------------
Utah - 2.5%
Intermountain Power Agency, Utah Power Supply
Series B, Revenue Bonds, AMBAC (a) 07/01/02 8,490 7,086,051
----------------------
Total Municipal Zero Coupon Securities
(Cost - $ 31,672,357 ) 34,487,980
----------------------
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REPURCHASE AGREEMENT - 0.3%
Dated 05/29/98, with State Street Bank and
Trust Company, proceeds: $946,394;
collateralized by $895,000 U.S. Treasury Note,
6.500 %, due 11/15/26, value: $970,841
(Cost - $ 946,000 ) 5.00 06/01/98 946 $ 946,000
----------------------
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TOTAL INVESTMENTS - 146.5%
(Cost - $ 403,218,837 ) $ 411,507,443
Liabilities in Excess of Other Assets - (46.5%) (130,647,658)
----------------------
NET ASSETS - 100.0% $ 280,859,785
======================
</TABLE>
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@ - Portion of or entire principal amount
delivered to counterparty as collateral
for reverse repurchase agreements (Note 5)
(a) - Zero Coupon Bonds
AMBAC - American Municipal Bond Assurance Corporation
FGIC - Financial Guaranty Insurance Company
REMIC - Real Estate Mortgage Investment Conduit See
notes to financial statements.
<TABLE>
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HYPERION 2002 TERM TRUST, INC.
Statement of Assets and Liabilities
May 31, 1998
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Assets:
Investments, at value (cost $403,218,837) ............. $ 411,507,443
Cash ................................. 11,057
Interest receivable...................... 2,424,656
Prepaid expenses and other assets............... 246,512
------------------
Total assets........................ 414,189,668
------------------
Liabilities:
Reverse repurchase agreements (Note 5)............. 132,819,750
Payable for trust shares Repurchased........................ 203,875
Interest payable for reverse repurchase agreements
(Note 5) ................ 190,293
Accrued expenses and other liabilities........................... 115,965
------------------
Total liabilities.................................. 133,329,883
------------------
Net Assets (equivalent to $ 9.09 per share based on 30,888,439
shares outstanding)........ $ 280,859,785
==================
Composition of Net Assets:
Capital stock, at par (Note 6).............................. $ 308,884
Additional paid-in capital (Note 6)........................... 299,082,216
Undistributed net investment income.................... 8,127,825
Accumulated net realized losses........................ (34,947,746)
Net unrealized appreciation.................... 8,288,606
------------------
================
Net assets applicable to capital stock outstanding..................$.....280,859,785
==================
</TABLE>
See notes to financial statements.
<TABLE>
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HYPERION 2002 TERM TRUST, INC.
Statement of Operations
For the Year Ended May 31, 1998
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Investment Income (Note 2):
Interest....................... $ 26,554,876
----------------
Expenses:
Investment advisory fee (Note 3)........................ 1,412,271
Administration fee (Note 3).................... 426,445
Insurance........... 151,874
Custodian.................. 81,344
Reports to shareholders............. 61,896
Accounting and tax services............... 64,800
Directors' fees............................. 46,000
Registration........... 32,786
Transfer agency................. 25,721
Amortization of organization expenses (Note 2)............. 3,507
Legal.................................. 16,134
Miscellaneous................................... 22,843
----------------
Total operating expenses.......................... 2,345,621
Interest expense (Note 5)............................. 6,994,599
----------------
Total expenses................................. 9,340,220
----------------
Net investment income...................................... 17,214,656
----------------
Realized and Unrealized Gains (Losses) on Investments, Futures,
and Options Transactions (Note 2):
Net realized gains (losses) on:
Investment transactions........................... 15,896,048
Futures transactions..................... 211,077
Options transactions....................... (52,674)
----------------
16,054,451
----------------
Net change in unrealized appreciation on investments.............. 3,067,190
----------------
Net realized and unrealized gain on investments, futures
and options transactions...................... 19,121,641
----------------
Net increase in net assets resulting from operations................ $ 36,336,297
================
</TABLE>
See notes to financial statements.
<TABLE>
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HYPERION 2002 TERM TRUST, INC.
Statements of Changes in Net Assets
For the Year For the Year
Ended Ended
May 31, 1998 May 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations:
Net investment income.............................. $ 17,214,656 $ 20,964,554
Net realized gains (losses) on investments, short sales, futures
and option transactions........................ 16,054,451 (4,623,471)
Net change in unrealized appreciation on investments.................. 3,067,190 13,293,713
----------------------- --------------------
Net increase in net assets resulting from operations.................. 36,336,297 29,634,796
----------------------- --------------------
Dividends to Shareholders (Note 2):
Net investment income................. (15,068,145) (18,367,468)
----------------------- --------------------
Capital Stock Transactions (Note 6):
Cost of Trust shares repurchased and retired.......................... (23,762,315) (13,948,012)
----------------------- --------------------
Total decrease in net assets...................... (2,494,163) (2,680,684)
Net Assets:
Beginning of period........................................ 283,353,948 286,034,632
----------------------- --------------------
End of period (including undistributed net investment income
of $8,127,825 and $5,981,314, respectively)............. $ 280,859,785 $ 283,353,948
======================= ====================
</TABLE>
See notes to financial statements.
<TABLE>
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HYPERION 2002 TERM TRUST, INC.
Statement of Cash Flows
For the Year Ended May 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash:
Cash flows provided by operating activities:
Interest received (excluding net accretion of $1,838,974)....................... $ 24,356,632
Interest expense paid.......................... (7,063,732)
Operating expenses paid............... (2,640,959)
Purchase of short-term portfolio investments, including options, net............ (277,674)
Purchase of long-term portfolio investments .................................... (342,622,538)
Proceeds from dispositions of long-term portfolio investments and
principal paydowns.............. 368,476,319
Net cash provided by futures transactions........................... 211,077
-------------------------
Net cash provided by operating activities................................ 40,439,125
-------------------------
Cash flows used for financing activities:
Cash used to repurchase and retire Trust shares................................. (23,812,431)
Net cash used for reverse repurchase agreements......................... (1,547,500)
Cash dividends paid................................... (15,068,145)
-------------------------
Net cash used for financing activities.................. (40,428,076)
-------------------------
Net increase in cash........................................ 11,049
Cash at beginning of period..................................................... 8
-------------------------
Cash at end of period............................. $ 11,057
=========================
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......................... $ 36,336,297
-------------------------
Decrease in investments................ 7,544,925
Increase in net unrealized appreciation on investments.......................... (3,067,190)
Increase in interest receivable.................... (10,436)
Increase in other assets...................................... (129,055)
Decrease in advisory/administration fees payable................................ (157,481)
Decrease in other liabilities............................. (77,935)
-------------------------
Total adjustments...................... 4,102,828
-------------------------
Net cash provided by operating activities............................ $ 40,439,125
=========================
</TABLE>
See notes to financial statements.
<TABLE>
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HYPERION 2002 TERM TRUST, INC.
Financial Highlights
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
May 31, 1998 May 31, 1997 May 31, 1996 May 31, 1995 May 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of period..................... 8.35 $ 7.98 $ 8.46 $ 8.07 $ 9.05
-------- ---------- --------- --------- -------------
Net investment income..........................................0.56..........0.60..........0.58...... 0.67 0.68
Net realized and unrealized gain (loss)
on investment, short sale, futures and
option transactions.................... 0.56 0.24 (0.54) 0.34 (0.95)
-------- ---------- --------- --------- -------------
Net increase (decrease) in net asset value
resulting from operations.................. 1.12 0.84 0.04 1.01 (0.27)
Net effect of shares repurchased......................... 0.09 0.05 0.01 0.01 0.01
Dividends from net investment income..................... (0.47) (0.52) (0.53) (0.63) (0.72)
-------- ---------- --------- --------- -------------
Net asset value, end of period...................... 9.09 $ 8.35 $ 7.98 $ 8.46$ 8.07
======== ========== ========= ========= =============
Market price, end of period.......................... 8.13 $ 7.25 $ 6.875 $ 7.25$ 7.25
======== ========== ========= ========= =============
Total Investment Return +................ 18.93% 13.28% 2.11% 9.46% (13.17)%
Ratios to Average Net Assets/Supplementary Data:
Net assets, end of period (000s)................ $280,860 $283,354 $286,035 $304,083 $291,463
Operating expenses............... 0.83% 0.86% 0.93% 0.91% 0.81%
Interest expense............... 2.48% 2.47% 2.47% 2.29% 1.34%
Total expenses........... 3.31% 3.33% 3.40% 3.20% 2.15%
Net investment income................ 6.09% 7.16% 6.89% 8.50% 7.90%
Portfolio turnover rate.................. 83% 35% 64% 356% 628%
</TABLE>
+ 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.
- ----------
See notes to financial statements.
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HYPERION 2002 TERM TRUST, INC.
Notes to Financial Statements
May 31, 1998
- --------------------------------------------------------------------------------
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 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 May 31, 1998, 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 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. During the year ended May 31, 1998, the Advisor received $1,412,271 in
investment advisory fees.
The Trust has entered into an Administration Agreement with Hyperion Capital
Management, Inc. (the "Administrator"). The Administrator has entered into a
sub-administration agreement with Investors Capital Services, Inc. (the
"Sub-Administrator"). The Administrator and Sub-Administrator perform certain
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. During the year ended May 31, 1998, the Administrator received $426,445
in Administration fees. The Administrator is responsible for any fees due the
Sub-Administrator.
Certain officers and/or directors of the Trust are officers and/or directors of
the Advisor, Administrator and Sub-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 year ended May
31, 1998 were $65,760,395 and $113,692,715, respectively. Purchases and sales of
U.S. Government securities, for the year ended May 31, 1998 were $276,862,143
and $247,178,625, respectively. For purposes of this note, 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 May 31, 1998 was
$403,218,837 which was the same for financial reporting and, accordingly, net
unrealized appreciation for federal income tax purposes was $8,288,606 (gross
unrealized appreciation -- $9,264,802; gross unrealized depreciation --
$976,196). At May 31, 1998, the Trust had a capital loss carryforward of
$31,460,342, of which $14,612,012 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, 1998, the Trust had the following reverse repurchase agreements
outstanding:
Maturity in
Zero to 30 days
Maturity Amount, including Interest $133,190,364
Payable
Market Value of Assets Sold
Under Agreements........ $137,284,280
Weighted Average Interest Rate 5.60%
-----
--------------------------------------
The average daily balance of reverse repurchase agreements outstanding during
the twelve months ended May 31, 1998, was approximately $123,410,975, at a
weighted average interest rate of 5.67%. The maximum amount of reverse
repurchase agreements outstanding at any time during the year was $137,334,000
as of July 1, 1997, which was 32.57% of total assets.
6. Capital Stock:
At May 31, 1998, there were 75 million shares of $0.01 par value common stock
authorized. Of the 30,888,439 shares outstanding at May 31, 1998, the Advisor
owned 10,639 shares.
The Trust has in effect a 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 year ended May 31, 1998 and year ended May 31, 1997, the Trust
repurchased totals of 3,051,600 and 1,905,800 shares of its outstanding common
stock at costs of $23,762,315 and $13,948,012 and average discounts of
approximately 11.2% 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.
There were no open futures contracts at May 31, 1998.
There was no written option activity for the year ended May 31, 1998.
8. Litigation:
No litigation is currently pending against the Trust. In 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 Advisor was later added as a
defendant. The plaintiffs' second consolidated amended complaint was dismissed
in July 1995 without leave to replead, and the dismissal was upheld by the U.S.
Court of Appeals for the Second Circuit in October 1996. In June 1997, the
United States Supreme Court denied plaintiffs' petition for a writ of
certiorari, 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. Pursuant to
these indemnification provisions, the Trust reimbursed $16,134 of litigation
expenses to the Advisor during the year ended May 31, 1998. 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.
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
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, 1998, 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 five
years in the period then ended, 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 audit. We conducted our audit 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, 1998 by correspondence with the custodian
and brokers provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
July 20, 1998
- --------------------------------------------------------------------------
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,
1998) 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, 1.74% of the Trust's distributions
during the fiscal year ended May 31, 1998 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 1997, 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 1998. Because the Trust's
fiscal year is not the calendar year, another notification will be sent
with respect to calendar year 1998. 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 1999. Shareholders are
advised to consult their own tax advisors with respect to the tax consequences
of their investment in the Trust.
- --------------------------------------------------------------------------
PROXY RESULTS (unaudited)
- --------------------------------------------------------------------------
During the fiscal period ended May 31, 1998, 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>
<S> <C> <C> <C>
- ------------------------------------------- ------------------- ------------------ ------------------------
Shares Voted Shares Voted
For Without Authority
- ------------------------------------------- ------------------- ------------------ ------------------------
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
- ------------------------------------------- ------------------- ------------------ ------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- ------------------------------------------- ------------------- ------------------ ------------------------
2. To select Price Waterhouse LLP as the
Trust's independent accountants: 24,632,603 94,595 327,700
</TABLE>
- ------------------------------------------- ------------------- --------------
- -------------------------------------------------------------------------------
YEAR 2000 CHALLENGE (unaudited)
- -------------------------------------------------------------------------------
The Trust could be adversely affected if computers used by the Trust's service
providers do not properly process information dated January 1, 2000 and after.
The Trust's service providers are taking steps to address Year 2000 risks with
respect to computer systems on which the Trust depends. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Trust.
- -------------------------------------------------------------------------------
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.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Hyperion 2002 Term Trust, Inc.
Selected Quarterly Financial Data
(unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gains (losses) Net increase
on investment, short (decrease) in net
Net investment sale, futures and options assets resulting from Dividends and
income transactions operations distributions Share price
------------------- ------------------------- -------------------- -------------- ------------
Quarter ended Total income Amount Per share Amount Per share Amount Per share* Amount Per share High Low
- ------------------------------------------------------------------------------------------------------------------------------------
November 2, 1992**
to November 30, 1992 $ 1,811,843 $ 1,533,358 $0.04 737,934 $ $0.03 $2,271,292 $ 0.07 $ - $ - $10 1/8 10
February 28, 1993 9,122,966 7,032,751 0.19 (3,681,008) (0.10) 3,351,743 0.09 7,265,759 0.20 10 1/8 9 1/2
May 31, 1993 9,872,116 7,502,266 0.21 (10,302,260) (0.29) (2,799,994) (0.08)7,265,759 0.20 10 1/8 8 7/8
August 31, 1993 7,900,285 5,891,890 0.17 (7,056,496) (0.19) (1,164,606) (0.02)7,265,759 0.20 9 7/8 8 1/4
November 30, 1993 7,647,909 6,287,067 0.17 (14,250,814) (0.40 (7,963,747) (0.23)6,655,302 0.18 9 3/8 7 1/2
February 28, 1994 7,304,356 5,779,371 0.16 (3,697,312) (0.10) 2,082,059 0.06 6,200,403 0.17 8 7 3/8
May 31, 1994 8,257,401 6,489,914 0.18 (9,318,373) (0.26) (2,828,459) (0.08)5,876,469 0.17 7 5/8 7
August 31, 1994 8,111,892 6,080,085 0.17 (4,477,491) (0.12) 1,602,594 0.05 5,863,752 0.17 7 3/8 6 3/4
November 30, 1994 8,953,967 6,721,015 0.19 (12,361,939) (0.34) (5,640,924) (0.15)5,848,698 0.16 7 1/8 6 1/4
February 28, 1995 8,177,423 5,855,585 0.16 11,776,995 0.32 17,632,580 0.48 5,539,380 0.15 7 6 1/2
May 31, 1995 7,992,242 5,503,840 0.15 17,498,730 0.49 23,002,570 0.64 5,389,408 0.15 7 3/8 6 3/4
August 31, 1995 7,720,721 5,165,495 0.15 (1,657,645) (0.05) 3,507,850 0.10 4,939,722 0.14 7 5/8 6 3/4
November 30, 1995 7,757,245 5,135,530 0.14 8,211,190 0.23 13,346,720 0.37 4,713,040 0.13 7 3/8 7
February 29, 1996 7,967,548 5,119,151 0.14 (7,838,546) (0.22) (2,719,395) (0.08)4,708,389 0.13 7 1/2 7 1/8
May 31, 1996 7,830,152 5,524,086 0.15 (18,033,989) (0.50)(12,509,903) (0.35)4,705,337 0.13 7 3/8 6 5/8
August 31, 1996 7,973,437 5,540,861 0.16 904,649 0.03 6,445,510 0.19 4,704,739 0.13 7 1/8 6 3/4
November 30, 1996 7,685,737 5,350,099 0.15 19,086,151 0.54 24,436,250 0.69 4,702,621 0.13 7 3/8 6 3/4
February 28, 1997 7,482,318 5,071,417 0.15 (10,119,650) (0.29) (5,048,233) (0.14)4,667,444 0.13 7 1/2 7
May 31, 1997 7,568,189 5,002,177 0.14 (1,200,908) (0.04) 3,801,269 0.10 4,292,664 0.13 7 1/2 7
August 31, 1997 6,978,930 4,674,227 0.14 10,347,387 0.32 15,021,614 0.46 3,928,855 0.12 8 4/5 7 1/4
November 30, 1997 6,886,541 4,431,862 0.15 4,447,462 0.13 8,879,324 0.28 3,780,768 0.13 8 7 5/8
February 28, 1998 6,334,700 4,138,632 0.13 2,882,131 0.09 7,020,763 0.22 3,685,921 0.12 8 1/8 7 7/8
May 31, 1998 6,354,705 3,969,935 0.13 1,444,661 0.05 5,414,596 0.18 3,672,601 0.12 8 1/8 8
</TABLE>
* Excludes net effect of shares repurchased.
** Commencement of investment operations.
- -------------------------------------------------------------------------------
INVESTMENT ADVISOR AND ADMINISTRATOR CUSTODIAN
HYPERION CAPITAL MANAGEMENT, INC. STATE STREET BANK AND TRUST COMPANY
One Liberty Plaza 225 Franklin Street
165 Broadway, 36th Floor Boston, Massachusetts 02116
New York, New York 10006-1404
For General Information about the Trust: INDEPENDENT ACCOUNTANTS
(800) HYPERION
PRICEWATERHOUSECOOPERS LLP
TRANSFER AGENT 1177 Avenue of the Americas
New York, New York 10036
BOSTON EQUISERVE L.P.
Investor Relations Department LEGAL COUNSEL
P.O. Box 8200
Boston, Massachusetts 02266-8200 SULLIVAN & WORCESTER LLP
For Shareholder Services: 1025 Connecticut Avenue, N.W.
(800) 426-5523 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.
- -------------------------------------------------------------------------------
Officers & Directors
- -------------------------------------------------------------------------------
Kenneth C. Weiss
Chairman
Lewis S. Ranieri
Director
Rodman L. Drake*
Director
Leo M. Walsh, Jr.*
Director
Harry E. Petersen, Jr.*
Director
Patricia A. Sloan
Director & Secretary
Garth Marston
Director Emeritus
Clifford E. Lai
President
Patricia A. Botta
Vice President
Thomas F. Doodian
Treasurer
* Audit Committee Members
- ----------------------------------------
- ----------------------------------------
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
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890337
<NAME> HYPERION 2002 TERM TRUST, INC.
<SERIES>
<NUMBER> 0
<NAME> HYPERION 2002 TERM TRUST, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 403219
<INVESTMENTS-AT-VALUE> 411507
<RECEIVABLES> 2425
<ASSETS-OTHER> 258
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 414190
<PAYABLE-FOR-SECURITIES> 204
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 133126
<TOTAL-LIABILITIES> 133330
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 299391
<SHARES-COMMON-STOCK> 30888
<SHARES-COMMON-PRIOR> 33940
<ACCUMULATED-NII-CURRENT> 8128
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (34948)
<OVERDISTRIBUTION-GAINS> 0
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<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26555
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<EXPENSES-NET> 9340
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<REALIZED-GAINS-CURRENT> 16054
<APPREC-INCREASE-CURRENT> 3067
<NET-CHANGE-FROM-OPS> 36336
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 15068
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<NUMBER-OF-SHARES-REDEEMED> 3052
<SHARES-REINVESTED> 0
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<ACCUMULATED-NII-PRIOR> 5981
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<PER-SHARE-NAV-BEGIN> 8.35
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.65
<PER-SHARE-DIVIDEND> (0.47)
<PER-SHARE-DISTRIBUTIONS> 0
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<EXPENSE-RATIO> 0.83
<AVG-DEBT-OUTSTANDING> 123411
<AVG-DEBT-PER-SHARE> 3.89
</TABLE>
