H Y P E R I O N
2002
TERM TRUST
Annual Report
May 31, 1999
________________________________________________________________________________
HYPERION 2002 TERM TRUST, INC.
Report of the Investment Advisor
________________________________________________________________________________
July 20, 1999
Dear Shareholder:
We welcome this opportunity to provide you with information about Hyperion
2002 Term Trust, Inc. (the "Trust") for its fiscal year ended May 31, 1999,
and to share our outlook for the Trust's coming 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 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 objectives by investing in a
portfolio consisting 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
Fueled by the continued strength of the domestic economy, a slowly recovering
global economy, and an alarmingly high consumer price index ("CPI") report in
April, fixed income markets were very volatile during the last 12 months. For
example, interest rates, driven down over 1.0% by global economic problems in
1998, increased by over 1.5% thus far in 1999. Over the last six months, the
yield on the 2-year U.S. Treasury Note increased from 4.53% to 5.40%, while
the yield on the 10-year U.S. Treasury Note increased from 4.64% to 5.62%.
All of this foretells the tightening in monetary policy by the Federal Reserve
this summer. The Federal Reserve's decision to raise interest rates marks the
first increase since February 1997. We believe increases will be limited to
50 basis points this year, however, with uncertainties surrounding the Year
2000 preventing any further move.
The next twelve months should be as volatile as the last year. Problems
associated with Year 2000 issues-whether real or perceived-could set off a
chain reaction of events affecting the markets. Given these uncertainties, we
expect certain sectors of the market to underperform in the Third and Fourth
Quarters of 1999. Therefore, until a clear trend emerges, our strategy will
be to maintain a conservative positioning of the Trust with respect to
duration, maturity, and liquidity.
Portfolio Strategy and Performance
Over the last year, the investment strategy has been twofold: to reduce the
duration of the portfolio while at the same time reducing prepayment risk. To
accomplish this, we opportunistically sold securities with durations (duration
measures a bond portfolio's price sensitivity to interest rate changes) and
projected cashflows beyond the maturity date of the Trust and reinvested the
proceeds into securities with maturities more consistent with the Trust's
November 2002 maturity. We also have attempted to reduce prepayment risk by
reinvesting into MBS with lower coupon collateral or that have structural
features that reduce prepayment risk. This strategy has reduced the
portfolio's duration from 5.2 years in July of 1998 to its current level of 3.5
years. In addition, this strategy has allowed the portfolio to take advantage
of the rally in the bond market over the last few years, while protecting it
from the dramatic rise in interest rates in 1999. In the period starting June
7, 1996, through May 31, 1999, the Net Asset Value ("NAV") of the Trust has
risen by $0.95 ($8.07 versus $9.02, respectively).
The Trust's holdings are currently concentrated in AAA rated asset-backed
securities ("ABS") and well-structured, planned amortization class ("PAC")
agency Collateralized Mortgage Obligations ("CMOs"). These asset classes
enjoy excellent liquidity and offer strong protection against prepayment
risk.
During the next six months, we expect investment opportunities in asset
classes such as residential MBS, ABS, and commercial MBS to become more
attractive. Accordingly, we plan to modestly increase the portfolio's
allocation to these types of securities in the coming months.
________________________________________________________________________________
HYPERION 2002 TERM TRUST, INC.
Report of the Investment Advisor
________________________________________________________________________________
The Trust's total return based on NAV for the six and twelve month periods
ending May 31, 1999, were 0.88% and 4.92%, respectively. Total return is
based upon the change in NAV of the Trust's shares and includes reinvestment
of dividends. Based on the NYSE closing price of $8.375 on May 31, 1999, the
Trust was yielding 5.67%.
On July 9, 1999, the Board of Directors of the Trust declared a new monthly
dividend of $0.03542 per share. This dividend represents an annualized rate
of 4.25% based on the Trust's initial offering price of $10.00 per share.
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 shares at a discount to the NAV and retiring them, the spread
(between share purchase price and the NAV) is captured by the Trust and
benefits all of the Trust's remaining shareholders. During the fiscal year
ended May 31, 1999, the Trust has repurchased and retired 441,600 shares,
capturing $0.0135 in additional NAV per share, for a total of $409,730 for all
shareholders.
The chart that follows shows the allocation of the Trust's holdings by asset
category on May 31, 1999.
HYPERION 2002 TERM TRUST, INC.
Portfolio of Investments As Of MAY 31, 1999 *
U.S. Government Agency Collateralized Mortgage Obligations 48.8%
Asset-Backed Securities 24.8%
Collateralized Mortgage Obligations 16.6%
Municipal Zero Coupon Securities 8.9%
Repurchase Agreements 0.9%
*As a percentage of total investments.
Conclusion
We appreciate the opportunity to serve your investment needs. As always, we
welcome your questions and comments, and encourage you to contact our
Shareholder Services Representatives at 1-800-HYPERION.
Sincerely,
ANDREW M. CARTER CLIFFORD E. LAI
Director and Chairman of the Board, President,
Hyperion 2002 Term Trust, Inc. Hyperion 2002Term Trust, Inc.
Chairman and Chief Executive Officer, President and Chief Investment Officer,
Hyperion Capital Management, Inc. Hyperion Capital Management, Inc.
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
Portfolio of Investments
May 31, 1999
<TABLE>
<S> <C> <C> <C> <C>
Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS (REMICS) - 72.6%
Federal Home Loan Mortgage Corporation
Series 2112, Class PB 5.50 % 11/15/16 $ 12,000 @ $ 11,631,720
Series 1628, Class G 5.85 08/15/19 14,000 13,873,720
Series 2021, Class PN 6.00 08/15/17 30,125 @ 29,966,543
Series 2085, Class PA 6.00 07/15/17 30,000 29,760,900
-------------------
85,232,883
-------------------
Federal National Mortgage Association
Series 1998-4, Class PA 6.00 02/18/16 32,199 32,192,403
Series 1998-45, Class PC 6.00 11/18/15 21,510 @ 21,346,739
Series 1998-45, Class PD 6.00 04/18/18 28,717 @ 28,305,485
Series 1998-36, Class PA 6.25 07/18/13 28,376 @ 28,462,150
Series 1998-6, Class S 10.85 02/18/28 3,883 3,776,102
-------------------
114,082,879
-------------------
Total U.S. Government & Agency Obligations
(Cost - $201,732,573) 199,315,762
-------------------
- ---------------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES - 36.8%
American Express Credit Account Master Trust
Series 1999-2, Class A 5.95 12/15/06 30,000 29,629,680
-------------------
Chase Credit Card Master Trust
Series 1997-5, Class A 6.19 08/15/05 20,000 20,031,800
-------------------
Chemical Master Credit Card Trust I
Series 1995-3, Class A 6.23 04/15/05 19,813 19,873,826
-------------------
Residential Funding Mortgage Securities II, Inc.
Series 1999-HI1, Class A3 6.31 09/25/29 10,000 9,971,900
Series 1999-HS2, Class AI3 6.03 07/25/29 12,000 11,795,628
-------------------
21,767,528
-------------------
Salomon Brothers Mortgage Securities VII
Series 1998-NC3, Class A3 6.46 08/25/28 10,000 9,859,100
-------------------
Total Asset-Backed Securities
(Cost - $101,988,141) 101,161,934
-------------------
- ---------------------------------------------------------------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS (REMICs) - 24.8%
Chase Mortgage Finance Corp.
Series 1999-S8, Class A1 6.35 06/25/29 20,000 20,012,500
-------------------
Countrywide Funding Corp.
Series 1994-5, Class A3A 6.50 03/25/09 14,143 13,996,196
-------------------
FFCA Secured Lending Corp. Securities
Series 1998-1, Class A1A* 6.29 07/18/03 1,625 1,623,282
-------------------
Norwest Asset Securities Corp.
Series 1999-16, Class A11 6.00 06/25/29 12,828 12,671,665
-------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (REMICs) (continued)
Residential Funding Mortgage Securities I, Inc.
Series 1999-S13, Class A2 6.00 % 05/25/29 $ 19,928 $ 19,660,227
--------------------
Total Collateralized Mortgage Obligations (REMICs)
(Cost - $68,726,633) 67,963,870
--------------------
- ----------------------------------------------------------------------------------------------------------------------------------
MUNICIPAL ZERO COUPON SECURITIES - 13.2%
Massachusetts - 4.4%
Massachusetts State
Series B, AMBAC 4.23 (a) 08/1/02 8,830 7,786,630
Series B, FGIC 4.22 (a) 06/1/02 5,000 4,438,390
--------------------
12,225,020
--------------------
Pennsylvania - 3.7%
Pittsburgh Pennsylvania, Water & Sewer Authority
Series A, Revenue Bonds, FGIC 4.56 (a) 09/01/03 12,000 10,053,372
--------------------
Texas - 2.4%
San Antonio Texas, Electric & Gas
Revenue Bonds, AMBAC 4.30 (a) 02/01/03 7,500 6,479,437
--------------------
Utah - 2.7%
Intermountain Power Agency Utah, Power Supply
Series B, Revenue Bonds, AMBAC 4.36 (a) 07/01/02 8,490 7,484,292
--------------------
Total Municipal Zero Coupon Securities
(Cost - $33,653,814) 36,242,121
--------------------
- ----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS - 1.4%
Dated 5/28/99, with Morgan Stanley Dean Witter;
proceeds: $3,501,847; collateralized by $3,450,000
Federal National Mortgage Association, 8.45%,
due 07/12/99, value: $3,574,061
(Cost - $3,500,000) 4.75 06/01/99 3,500 3,500,000
--------------------
Dated 5/28/99, with State Street Bank and Trust Company;
proceeds: $310,148; collateralized by $315,000
Federal Home Loan Bank, 5.56%,
due 08/24/00, value: $315,195
(Cost - $310,000) 4.30 06/01/99 310 310,000
--------------------
Total Repurchase Agreements
(Cost - $3,810,000) 3,810,000
--------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS - 148.8%
(Cost - $409,911,161) 408,493,687
Liabilities in Excess of Other Assets - (48.8%) (133,915,551)
--------------------
NET ASSETS - 100.0% $ 274,578,136
====================
</TABLE>
* - Security exempt from registration under Rule 144A of the
Securities Act of 1933. These securities may be resold in
transactions exempt from registration, normally to
qualified institutional buyers.
@ - Portion of or entire principal amount delivered to
counterparty as collateral for reverse repurchase
agreements (Note 5).
(a) - Zero Coupon Bonds. Interest rate represents yield to
maturity.
AMBAC - Insured by American Municipal Bond Assurance Corporation.
FGIC - Insured by Financial Guaranty Insurance Company.
REMIC - Real Estate Mortgage Investment Conduit.
- -------------------
See notes to financial statements.
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
Statement of Assets and Liabilities
May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets:
Investments, at value (cost $409,911,161) (Note 2) $ 408,493,687
Cash 429
Interest receivable 1,603,684
Prepaid expenses and other assets 223,710
------------------
Total assets 410,321,510
------------------
Liabilities:
Reverse repurchase agreements (Note 5) 115,250,000
Payable for investments purchased 20,117,639
Interest payable for reverse repurchase agreements (Note 5) 158,557
Accrued expenses and other liabilities 217,178
------------------
Total liabilities 135,743,374
------------------
Net Assets (equivalent to $9.02 per share based on 30,446,839
shares issued and outstanding) $ 274,578,136
==================
Composition of Net Assets:
Capital stock, at par ($.01) (Note 6) $ 304,468
Additional paid-in capital (Note 6) 295,387,131
Undistributed net investment income 9,586,864
Accumulated net realized losses (29,282,853)
Net unrealized depreciation (1,417,474)
------------------
Net assets applicable to capital stock outstanding $ 274,578,136
==================
</TABLE>
__________
See notes to financial statements.
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC
Statement of Operations
For the Year Ended May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Investment Income (Note 2):
Interest $ 24,675,951
------------------
Expenses:
Investment advisory fee (Note 3) 1,401,344
Administration fee (Note 3) 423,822
Insurance 147,599
Custodian 82,925
Directors' fees 50,312
Reports to shareholders 35,370
Registration 31,865
Accounting and tax services 29,155
Transfer agency 24,208
Legal 14,014
Miscellaneous 34,097
----------------
Total operating expenses 2,274,711
Interest expense (Note 5) 6,470,208
----------------
Total expenses 8,744,919
----------------
Net investment income 15,931,032
----------------
Realized and Unrealized Gains (Losses) on Investments (Note 2):
Net realized gains on investment transactions 5,714,302
Net change in unrealized appreciation on investments (9,706,080)
----------------
Net realized and unrealized loss on investment transactions (3,991,778)
----------------
Net increase in net assets resulting from operations $ 11,939,254
================
__________
See notes to financial statements
</TABLE>
<TABLE>
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC
Statements of Changes in Net Assets For the Year For the Year
Ended Ended
May 31, 1999 May 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations:
Net investment income $ 15,931,032 $ 17,214,656
Net realized gains on investments, futures and options transactions 5,714,302 16,054,451
Net change in unrealized appreciation on investments (9,706,080) 3,067,190
----------------------- ---------------------
Net increase in net assets resulting from operations 11,939,254 36,336,297
----------------------- ---------------------
Dividends to Shareholders (Note 2):
Net investment income (14,531,118) (15,068,145)
----------------------- ---------------------
Capital Stock Transactions (Note 6):
Cost of Trust shares repurchased and retired (3,689,785) (23,762,315)
----------------------- ---------------------
Total decrease in net assets (6,281,649) (2,494,163)
Net Assets:
Beginning of year 280,859,785 283,353,948
----------------------- ---------------------
End of year (including undistributed net investment income
of $9,586,864 and $8,127,825, respectively) $ 274,578,136 $ 280,859,785
======================= =====================
__________
See notes to financial statements
</TABLE>
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
Statement of Cash Flows
For the Year Ended May 31, 1999
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Increase (Decrease) in Cash:
Cash flows provided by operating activities:
Interest received (excluding net accretion of $2,055,854) $ 23,441,069
Interest expense paid (6,501,944)
Operating expenses paid (2,150,696)
Purchase of short-term portfolio investments, net (2,864,000)
Purchase of long-term portfolio investments (347,332,725)
Proceeds from dispositions of long-term portfolio investments and
principal paydowns 371,392,196
----------------------------
Net cash provided by operating activities 35,983,900
----------------------------
Cash flows used for financing activities:
Cash used to repurchase and retire Trust shares (3,893,660)
Net cash used for reverse repurchase agreements (17,569,750)
Cash dividends paid (14,531,118)
----------------------------
Net cash used for financing activities (35,994,528)
----------------------------
Net decrease in cash (10,628)
Cash at beginning of year 11,057
----------------------------
Cash at end of year $ 429
============================
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 $ 11,939,254
----------------------------
Increase in investments (6,692,324)
Decrease in net unrealized appreciation on investments 9,706,080
Decrease in interest receivable 820,972
Decrease in other assets 22,802
Increase in payable for investments purchased 20,117,639
Increase in other liabilities 69,477
----------------------------
Total adjustments 24,044,646
----------------------------
Net cash provided by operating activities $ 35,983,900
============================
See notes to financial statements
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
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, 1999 May 31, 1998 May 31, 1997 May 31, 1996 May 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value
beginning of year $ 9.09 $ 8.35 $ 7.98 $ 8.46 $ 8.07
--------------- ---------------- --------------- --------------- ---------------
Net investment income 0.52 0.56 0.60 0.58 0.67
Net realized and unrealized gain
(loss) on investments, short sales,
futures and options transactions (0.13) 0.56 0.24 (0.54) 0.34
--------------- ---------------- --------------- --------------- ---------------
Net increase in net asset value
resulting from operations 0.39 1.12 0.84 0.04 1.01
Net effect of shares repurchased 0.01 0.09 0.05 0.01 0.01
Dividends from net investment
income (0.47) (0.47) (0.52) (0.53) (0.63)
--------------- ---------------- --------------- --------------- ---------------
Net asset value, end of year $ 9.02 $ 9.09 $ 8.35 $ 7.98 $ 8.46
=============== ================ =============== =============== ===============
Market price, end of year $ 8.375 $ 8.13 $ 7.25 $ 6.875 $ 7.25
=============== ================ =============== =============== ===============
Total Investment Return + 9.04% 18.93% 13.28% 2.11% 9.46%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (000s) $274,578 $280,860 $283,354 $286,035 $304,083
Operating expenses 0.81% 0.83% 0.86% 0.93% 0.91%
Interest expense 2.31% 2.48% 2.47% 2.47% 2.29%
Total expenses 3.12% 3.31% 3.33% 3.40% 3.20%
Net investment income 5.68% 6.09% 7.16% 6.89% 8.50%
Portfolio turnover rate 88% 83% 35% 64% 356%
</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 brokerage
commissions Dividends and distributions are assumed to be reinvested at
the prices obtained under the Trust's dividend reinvestment plan
_____________
See notes to financial statements
________________________________________________________________________________
HYPERION 2002 TERM TRUST, INC.
Notes to Financial Statements
May 31, 1999
________________________________________________________________________________
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 Fitch IBCA, 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
2. Significant Accounting Policies (continued)
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.
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.
2. Significant Accounting Policies (continued)
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 Agreement and Affiliated Transactions
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, 1999, the Advisor received
$1,401,344 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, 1999, the Administrator received
$423,822 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, 1999 were $150,982,270 and $107,753,043, respectively. Purchases and
sales of U.S. Government securities, for the year ended May 31, 1999 were
$216,468,094 and $249,105,846, 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, 1999 was
$409,911,161 which was the same for financial reporting and, accordingly, net
unrealized depreciation for federal income tax purposes was $1,417,474 (gross
unrealized appreciation -- $2,705,208; gross unrealized depreciation --
$4,122,682). At May 31, 1999, the Trust had a capital loss carryforward of
$25,795,449, of which $8,947,119 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.
Capital Account Reclassification - For the year ended May 31, 1999, the
Trust's undistributed net investment income and accumulated net realized loss
were increased by $59,125 and $49,409, respectively, with an offsetting
decrease in paid-in capital of $9,716. This adjustment was primarily the
result of a paydown reclassification.
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).
5. Borrowings (continued)
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, 1999, the Trust had the following reverse repurchase agreements
outstanding:
Maturity in
Zero to 30 days
Maturity Amount, including Interest Payable $115,529,097
Market Value of Assets Sold
Under Agreements........ $119,215,267
Weighted Average Interest Rate 4.94%
----------------------------------------
The average daily balance of reverse repurchase agreements outstanding during
the year ended May 31, 1999 was approximately $121,343,945, at a weighted
average interest rate of 5.33%. The maximum amount of reverse repurchase
agreements outstanding at any time during the year was $135,894,000 as of
October 14, 1998, which was 32.15% of total assets.
6. Capital Stock
At May 31, 1999, there were 75 million shares of $0.01 par value common stock
authorized. Of the 30,446,839 shares outstanding at May 31, 1999, the Advisor
owned 10,639 shares.
The Trust has in effect a stock repurchase program, whereby an amount of up to
25% of the original outstanding common stock, or approximately 9.1 million of
the Trust's shares are authorized for repurchase. The purchase price may not
exceed the then-current net asset value.
During the year ended May 31, 1999 and year ended May 31, 1998, the Trust
repurchased totals of 441,600 and 3,051,600 shares of its outstanding common
stock at costs of $3,689,785 and $23,762,315 and average discounts of
approximately 10.3% and 11.2% from its net asset value, respectively. All
shares repurchased either have been or will be retired.
7. Financial Instruments
The Trust regularly trades in financial instruments with off-balance sheet
risk in the normal course of its investing activities to assist in managing
exposure to various market risks. These financial instruments include written
options and futures contracts and may involve, to a varying degree, elements
of risk in excess of the amounts recognized for financial statement purposes.
The notional or contractual amounts of these instruments represent the
investment the Trust has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
There were no open futures contracts at May 31, 1999.
There was no written option activity for the year ended May 31, 1999.
8. Subsequent Events
The Trust's Board of Directors declared the following regular monthly
dividends:
Dividend Record Payable
Per Share Date Date
$0.03958 6/15/99 6/24/99
$0.03542 7/20/99 7/29/99
----------------
- --------------------------------------------------------------------------------
HYPERION 2002 TERM TRUST, INC.
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 changes in net assets, and of cash flows and the financial
highlights present fairly, in all material respects, the financial position of
Hyperion 2002 Term Trust, Inc. (the "Trust") at May 31, 1999, 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 audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities at May 31, 1999 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, 1999
- --------------------------------------------------------------------------------
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,
1999) 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, 1.11% of the Trust's
distributions during the fiscal year ended May 31, 1999 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 1998, 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 1999. Because the Trust's fiscal year is not the
calendar year, another notification will be sent with respect to calendar year
1999. 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
2000. 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 year ended May 31, 1999, Hyperion 2002 Term Trust, Inc.
shareholders voted on the following proposals at a shareholders' meeting on
October 13, 1998. 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: Andrew M. Carter 26,849,960 439,066
Rodman L. Drake 26,880,599 408,428
- --------------------------------------------------------------- ------------------------ ------------------- ---------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- --------------------------------------------------------------- ------------------------ ------------------- ---------------------
2. To select PricewaterhouseCoopers LLP as the Trust's
independent accountants: 26,822,565 125,176 341,286
</TABLE>
- --------------------------------------------------------------------------------
YEAR 2000 CHALLENGE (unaudited)
- --------------------------------------------------------------------------------
The Trust continues to review the current status of its exposure to the Year
2000 computer issue. The Trust does not own or directly use any computers in
conducting its business. Instead, it relies on various service providers to
conduct its business and its service providers may use or depend on computers
to provide services to the Trust. As is the case with other investment
companies and financial and business organizations, the Trust could be
adversely affected if the computer systems used by the Trust's service
providers do not properly address this problem prior to January 1, 2000.
The Trust's investment adviser has collected and assessed information
regarding the Year 2000 preparations of each of the Trust's service
providers. The Trust's investment adviser has been advised by each of the
Trust's service providers that it has adopted a Year 2000 plan, completed an
internal assessment of its computer systems, and begun implementation of
procedures to bring its mission-critical systems into Year 2000 compliance.
The Trust has been informed that substantially all of its service providers
will be compliant by the end of the Third Quarter of the calendar year of
1999. Based on this information, management of the Trust does not anticipate
that the transition into the Year 2000 will have any material impact on the
Trust's operations; however, management of the Trust will continue to monitor
the situation. However, no assurance can be given that the Trust's service
providers have anticipated every step necessary to avoid any adverse effect on
the Trust attributable to the Year 2000.
________________________________________________________________________________
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>
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
</TABLE>
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that periodically the Trustmay purchase its shares in the
open market at prevailing market prices.
________________________________________________________________________________
Officers & Directors
________________________________________________________________________________
Andrew M. Carter
Chairman
Lewis S. Ranieri
Director
Robert F. Birch*
Director
Rodman L. Drake*
Director
Garth Marston
Director Emeritus
Leo M. Walsh, Jr.*
Director
Harry E. Petersen, Jr.*
Director
Kenneth C. Weiss
Director
Patricia A. Sloan
Director & Secretary
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 aprospectus 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
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<INVESTMENTS-AT-COST> 409911
<INVESTMENTS-AT-VALUE> 408494
<RECEIVABLES> 1604
<ASSETS-OTHER> 224
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 410322
<PAYABLE-FOR-SECURITIES> 20118
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 115626
<TOTAL-LIABILITIES> 135744
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 295691
<SHARES-COMMON-STOCK> 30447
<SHARES-COMMON-PRIOR> 30888
<ACCUMULATED-NII-CURRENT> 9587
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (29283)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1417)
<NET-ASSETS> 274578
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 24676
<OTHER-INCOME> 0
<EXPENSES-NET> 8745
<NET-INVESTMENT-INCOME> 15931
<REALIZED-GAINS-CURRENT> 5714
<APPREC-INCREASE-CURRENT> (9706)
<NET-CHANGE-FROM-OPS> 11939
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 14531
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 441
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (6282)
<ACCUMULATED-NII-PRIOR> 8128
<ACCUMULATED-GAINS-PRIOR> (34948)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1401
<INTEREST-EXPENSE> 6470
<GROSS-EXPENSE> 8745
<AVERAGE-NET-ASSETS> 280269
<PER-SHARE-NAV-BEGIN> 9.09
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> (0.12)
<PER-SHARE-DIVIDEND> (0.47)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.02
<EXPENSE-RATIO> 0.81
[AVG-DEBT-OUTSTANDING] 121344
[AVG-DEBT-PER-SHARE] 3.97
</TABLE>
