H Y P E R I O N
2002
TERM TRUST, INC.
Semi-Annual Report
November 30, 1999
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HYPERION 2002 TERM TRUST, INC.
Report of the Investment Advisor
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January 21, 2000
Dear Shareholder:
We welcome this opportunity to provide you with information about the
Hyperion 2002 Term Trust, Inc. (the "Trust") for its semi-annual period
ended November 30, 1999, and to share our outlook for the Trust's fiscal
year. The Trust's shares are traded on the New York Stock Exchange
("NYSE") under the symbol "HTB".
Description of the Trust
The Trust is a closed-end investment company whose objectives are 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 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
Interest rates rose significantly throughout 1999, spurred by three
separate quarter-point tightenings by the Federal Reserve, exceptional
U.S. economic strength, and a powerful bull market in stocks. From May
31, 1999 to November 30, 1999, the yield on the 2-year U.S. Treasury Note
increased from 5.40% to 6.01%, the yield on the 10-year U.S. Treasury
Note rose from 5.62% to 6.19%, and the Federal Reserve's target Federal
Funds rate rose from 4.75% to 5.50%. In single-family mortgages, the
Federal Home Loan Mortgage Corporation ("FHLMC") average 30-year mortgage
rate rose from 7.23% to 7.75%.
Over the short term, the environment for fixed income securities will
continue to be challenging. Consumer spending and confidence are up,
stock prices continue to rise, and labor markets are tight. We believe
that the Federal Reserve will tighten at least twice more in the next six
months, and will continue to do so until both price gains in the stock
market and consumer spending slows, even if inflation remains subdued.
Over the longer term, we believe that the Federal Reserve will ultimately
engineer a slowdown in economic activity, which should allow interest
rates to fall back toward mid-1999 levels. However, given the current
uncertainty regarding the actions of the Federal Reserve and the strength
of the economy, we expect volatility to be high over the next few months.
Portfolio Strategy
Over the past six months, our primary investment strategy has been to
maintain a defensive posture towards the fixed income market by
maintaining a relatively short duration and high degree of liquidity in
the face of high volatility and rising interest rates. We have reduced
prepayment risk over the year by shifting out of MBS and into
fixed-maturity securities such as Agency Benchmark Notes and credit card
asset-backed securities ("ABS"). Additionally, the portfolio currently
enjoys a reduction in prepayment risk through investments in MBS with low
mortgage interest rates that, as a result of their structure, deflect
prepayment risk. In order to take advantage of the relatively strong
performance by Municipal bonds, we have sold some of these securities and
reallocated the proceeds to fixed-maturity Agency securities.
The Trust's holdings are currently concentrated in well-structured
Planned Amortization Class ("PACs") Agency Collateralized Mortgage
Obligations ("CMOs"), and AAA rated ABS backed by credit card
receivables. These asset classes enjoy excellent liquidity and offer
strong protection against prepayment risk.
In the period from May 27, 1999 to November 25, 1999, interest rates
increased by 0.50%, causing the price of short term U.S. Treasuries to
fall by approximately 1.5%. During that same time period, the Net Asset
Value ("NAV") of the Trust fell by 1.0% (from $9.02 to $8.93). The
Trust's total return based on NAV for the six month period ending November
30, 1999 was 1.30%. Total return is based upon the change in NAV of the
Trust's shares, and includes reinvestment of dividends. In the five
years from November 24, 1994 to November 25, 1999, the NAV of the Trust
rose by 16.3%, from $7.68 to $8.93. Including dividends, the total
return for the five years has been 9.34%. Based on the NYSE closing
price of $8.125 on November 30, 1999, the yield on the Trust was 5.23%.
As of the end of December, the Trust, inclusive of leverage, was managed
with an average duration (duration measures a bond portfolio's price
sensitivity to interest rate changes) of 2.9 years. Over the longer
term, we will attempt to position the Trust for falling interest rates.
Over the last year, the duration of the Trust has been below that of its
November 2002 maturity. As the year unfolds, we plan to extend the
duration of the Trust back out to its maturity target, while continuing
to emphasize liquidity and stable maturity.
The Board of Directors has authorized the Trust to purchase and retire up
to 25%, approximately 9.1 million, of the Trust's original outstanding
common shares. 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. From the inception of the
Trust through and including November 30, 1999, the Trust has repurchased
5,863,800 shares, or approximately 16.15% of the Trust's original
outstanding common shares, capturing $0.1835 in additional NAV per share.
The chart that follows shows the allocation of the Trust's holdings by
asset category on November 30, 1999.
HYPERION 2002 TERM TRUST, INC.
Portfolio of Investments As Of NOVEMBER 30, 1999 *
U.S. Government Agency Collateralized Mortgage Obligations 49.2%
Asset-Backed Securities 26.8%
Collateralized Mortgage Obligations 17.3%
Municipal Zero Coupon Securities 4.4%
U.S. Government Agency Pass Through Certificates 1.9%
Repurchase Agreements 0.4%
*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
Director and Chairman of the Board,
Hyperion 2002 Term Trust, Inc.
Chairman and Chief Executive Officer,
Hyperion Capital Management, Inc.
CLIFFORD E. LAI
President,
Hyperion 2002 Term Trust, Inc.
President and Chief Investment Officer,
Hyperion Capital Management, Inc.
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HYPERION 2002 TERM TRUST, INC.
Portfolio of Investments
November 30, 1999 (unaudited) Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS - 72.5%
U.S. Government Agency Pass-Through Certificates - 2.7%
Federal National Mortgage Association
(Cost - $7,290,645) 9.00 % 08/01/14 $ 7,050 $ 7,274,446
-------------------
U.S. Government Agency Collateralized Mortgage Obligations - 69.8%
Federal Home Loan Mortgage Corporation
Series 1669, Class JB 2.66 + 07/15/20 26,029 540,735
Series 1669, Class JC 2.66 + 05/15/23 20,098 411,321
Series 2112, Class PB ** 5.50 11/15/16 12,000 11,589,960
Series 1628, Class G ** 5.85 08/15/19 5,000 4,916,350
Series 2085, Class PA ** 6.00 07/15/17 30,000 29,538,600
Series 2021, Class PN 6.00 08/15/17 10,125 10,002,852
-------------------
56,999,818
-------------------
Federal National Mortgage Association 6.63 09/15/09 30,000 @ 29,587,500
-------------------
Federal National Mortgage Association
Series 1993-136, Class SB 5.33 07/25/23 536 470,163
Series 1998-45, Class PC 6.00 11/18/15 21,510 @ 21,178,101
Series 1998-45, Class PD 6.00 04/18/18 28,717 @ 28,066,560
Series 1999-33, Class PB 6.00 08/25/22 15,000 @ 14,548,950
Series 1998-36, Class PA 6.25 07/18/13 28,376 28,213,973
Series 1993-214, Class SA 7.85 12/25/28 8,442 8,450,148
Series 1998-6, Class S 8.85 02/18/28 2,522 1,967,028
-------------------
102,894,923
-------------------
Total U.S. Government Agency Collateralized Mortgage Obligations
(Cost - $193,725,866) 189,482,241
-------------------
Total U.S. Government & Agency Obligations
(Cost - $201,016,511) 196,756,687
-------------------
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ASSET-BACKED SECURITIES - 38.0%
American Express Credit Account Master Trust
Series 1999-2, Class A 5.95 12/15/06 30,000 29,099,700
-------------------
Chase Credit Card Master Trust
Series 1997-5, Class A 6.19 08/15/05 20,000 19,775,400
-------------------
Chemical Master Credit Card Trust I
Series 1995-3, Class A 6.23 04/15/05 19,813 19,639,042
-------------------
Contimortgage Home Equity Loan Trust
Series 1999-1, Class A3 6.17 05/25/21 3,000 2,912,010
-------------------
Residential Funding Mortgage Securities II, Inc.
Series 1999-HS2, Class AI3 6.03 07/25/29 12,000 11,722,080
Series 1999-HI1, Class A3 6.31 09/25/29 10,000 9,835,800
Series 1999-HI4, Class A3 6.96 12/25/24 320 319,088
-------------------
21,876,968
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HYPERION 2002 TERM TRUST, INC.
Portfolio of Investments
November 30, 1999 (unaudited) Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
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ASSET-BACKED SECURITIES (continued)
Salomon Brothers Mortgage Securities VII
Series 1998-NC3, Class A3 6.46 % 08/25/28 $ 10,000 $ 9,899,300
-------------------
Total Asset-Backed Securities
(Cost - $105,223,829) 103,202,420
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COLLATERALIZED MORTGAGE OBLIGATIONS (REMICs) - 24.6%
Chase Mortgage Finance Corp.
Series 1999-S8, Class A1 6.35 07/25/29 20,000 19,748,140
-------------------
Countrywide Funding Corp.
Series 1994-5, Class A3A 6.50 03/25/09 14,143 13,879,940
-------------------
FFCA Secured Lending Corp. Securities
Series 1998-1, Class A1A* 6.29 07/18/03 1,426 1,401,078
-------------------
Norwest Asset Securities Corp.
Series 1999-16, Class A11 6.00 06/25/29 12,828 12,516,151
-------------------
Residential Funding Mortgage Securities I, Inc.
Series 1999-S13, Class A2 6.00 05/25/29 19,928 19,330,758
-------------------
Total Collateralized Mortgage Obligations (REMICs)
(Cost - $68,526,460) 66,876,067
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MUNICIPAL ZERO COUPON SECURITIES - 6.2%
Pennsylvania - 3.8%
Pittsburgh Pennsylvania, Water & Sewer Authority
Series A, Revenue Bonds, FGIC 4.50 (a) 09/01/03 12,000 10,173,012
-------------------
Texas - 2.4%
San Antonio Texas, Electric & Gas
Revenue Bonds, AMBAC 4.41 (a) 02/01/03 7,500 6,545,783
-------------------
Total Municipal Zero Coupon Securities
(Cost - $15,665,837) 16,718,795
-------------------
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REPURCHASE AGREEMENT - 0.5%
Dated 11/30/99, with State Street Bank and Trust Company;
proceeds: $1,312,191; collateralized by $1,330,000
Federal National Mortgage Association, 5.94%,
due 09/04/01, value: $1,330,219
(Cost - $1,312,000) 5.25 12/01/99 1,312 1,312,000
-------------------
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TOTAL INVESTMENTS - 141.8%
(Cost - $391,744,637) 384,865,969
Liabilities in Excess of Other Assets - (41.8%) (113,359,189)
-------------------
NET ASSETS - 100.0% $ 271,506,780
===================
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HYPERION 2002 TERM TRUST, INC.
Securities Sold Short
November 30, 1999 (unaudited) Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS
U.S. Treasury Obligation
U.S. Treasury Bond
(Proceeds - $39,435,703) 15.75 % 11/15/01 $ 32,250 $ 37,974,375
-------------------
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</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.
** - Securities held as collateral for security sold short
(Note 2).
@ - Portion of or entire principal amount delivered to
counterparty as collateral for reverse repurchase agreements
(Note 5).
+ - Variable Rate Security: Interest rate is rate in effect at
November 30, 1999.
(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.
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HYPERION 2002 TERM TRUST, INC.
Statement of Assets and Liabilities
November 30, 1999 (unaudited)
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Assets:
Investments, at value (cost $391,744,637) (Note 2) $ 384,865,969
Cash 9
Interest receivable 2,356,826
Principal paydowns receivable 9,242
Receivable on swap contracts 659,714
Net unrealized appreciation on swap contracts 371,035
Prepaid expenses and other assets 156,650
------------------
Total assets 388,419,445
------------------
Liabilities:
Reverse repurchase agreements (Note 5) 77,548,000
Securities sold short, at value (proceeds $39,435,703) (Note 2) 37,974,375
Interest payable for reverse repurchase agreements (Note 5) 1,009,318
Interest payable for short sale (Note 2) 223,269
Investment advisory fee payable 111,978
Administration fee payable 34,066
Accrued expenses and other liabilities 11,659
------------------
Total liabilities 116,912,665
------------------
Net Assets (equivalent to $892 per share based on 30,446,839 shares issued and outstanding) $ 271,506,780
==================
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 9,548,882
Accumulated net realized loss (28,687,397)
Net unrealized depreciation (5,046,304)
------------------
Net assets applicable to capital stock outstanding $ 271,506,780
==================
__________
See notes to financial statements
</TABLE>
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HYPERION 2002 TERM TRUST, INC.
Statement of Operations
For the Six Months Ended November 30, 1999 (unaudited)
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Investment Income (Note 2):
Interest $ 10,172,747
----------------
Expenses:
Investment advisory fee (Note 3) 681,624
Administration fee (Note 3) 207,459
Insurance 54,131
Custodian 33,525
Directors' fees 27,239
Accounting and tax services 21,853
Reports to shareholders 20,811
Registration 12,929
Transfer agency 10,441
Legal 10,304
Miscellaneous 10,807
----------------
Total operating expenses 1,091,123
Interest expense (Note 5) 2,522,510
----------------
Total expenses 3,613,633
----------------
Net investment income 6,559,114
----------------
Realized and Unrealized Gain (Loss) on Investments, Short Sales
and Swap Contracts (Note 2):
Net realized gain on investment transactions 595,456
Net change in unrealized appreciation (depreciation) on:
Investments (5,461,193)
Short sales 1,461,328
Swap contracts 371,035
----------------
Net change in unrealized depreciation on investments, short sales and swap contracts (3,628,830)
----------------
Net realized and unrealized loss on investments, short sales and swap contracts (3,033,374)
----------------
Net increase in net assets resulting from operations $ 3,525,740
================
__________
See notes to financial statements
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HYPERION 2002 TERM TRUST, INC.
Statements of Changes in Net Assets For the
Six Months Ended For the Year
November 30, 1999 Ended
(unaudited) May 31, 1999
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Increase in Net Assets Resulting from Operations:
Net investment income $ 6,559,114 $ 15,931,032
Net realized gain on investment transactions 595,456 5,714,302
Net change in unrealized depreciation on investments,
short sales and swap contracts (3,628,830) (9,706,080)
----------------------- ---------------------
Net increase in net assets resulting from operations 3,525,740 11,939,254
----------------------- ---------------------
Dividends to Shareholders (Note 2):
Net investment income (6,597,096) (14,531,118)
----------------------- ---------------------
Capital Stock Transactions (Note 6):
Cost of Trust shares repurchased and retired - (3,689,785)
----------------------- ---------------------
Total decrease in net assets (3,071,356) (6,281,649)
Net Assets:
Beginning of period 274,578,136 280,859,785
----------------------- ---------------------
End of period (including undistributed net investment income
of $9,548,882 and $9,586,864, respectively) $ 271,506,780 $ 274,578,136
======================= =====================
__________
See notes to financial statements.
</TABLE>
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HYPERION 2002 TERM TRUST, INC.
Statement of Cash Flows
For the Six Months Ended November 30, 1999 (unaudited)
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Increase (Decrease) in Cash:
Cash flows provided by operating activities:
Interest received (excluding net accretion of $928,194) $ 7,418,373
Interest expense paid (1,448,480)
Operating expenses paid (660,818)
Purchases and sales of short-term portfolio investments, net 2,498,000
Purchase of long-term portfolio investments (224,390,625)
Proceeds from disposition of long-term portfolio investments, short sales and
principal paydowns 260,882,226
----------------------------
Net cash provided by operating activities 44,298,676
----------------------------
Cash flows used for financing activities:
Cash used to repurchase and retire Trust shares -
Net cash used for reverse repurchase agreements (37,702,000)
Cash dividends paid (6,597,096)
----------------------------
Net cash used for financing activities (44,299,096)
----------------------------
Net decrease in cash (420)
Cash at beginning of period 429
----------------------------
Cash at end of period $ 9
============================
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 $ 3,525,740
----------------------------
Decrease in investments 57,973,263
Increase in net unrealized depreciation on investments 3,628,830
Increase in interest receivable (1,844,818)
Increase in other assets (303,975)
Decrease in payable for investments purchased (20,117,639)
Decrease in advisory/administration fees payable (7,465)
Increase in other liabilities 1,444,740
----------------------------
Total adjustments 40,772,936
----------------------------
Net cash provided by operating activities $ 44,298,676
============================
__________________
See notes to financial statements
</TABLE>
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HYPERION 2002 TERM TRUST, INC.
Financial Highlights
For the For the Year Ended May 31,
Six Months Ended -----------------------------------------------------------------------
November 30, 1999
(unaudited) 1999 1998 1997 1996 1995
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Per Share Operating Performance:
Net asset value
beginning of period $ 9.02 $ 9.09 $ 8.35 $ 7.98 $ 8.46 $ 8.07
-------------- -------------- -------------- ------------- ------------- -------------
Net investment income 0.22 0.52 0.56 0.60 0.58 0.67
Net realized and unrealized gain
(loss) on investments, short sales,
swaps, futures and options transactions (0.10) (0.13) 0.56 0.24 (0.54) 0.34
------------- -------------- -------------- ------------- ------------- -------------
Net increase in net asset value
resulting from operations 0.12 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 (0.22) (0.47) (0.47) (0.52) (0.53) (0.63)
-------------- -------------- -------------- ------------- ------------- -------------
Net asset value, end of period $ 8.92 $ 9.02 $ 9.09 $ 8.35 $ 7.98 $ 8.46
============== ============== ============== ============= ============= =============
Market price, end of period $ 8.125 $ 8.375 $ 8.125 $ 7.25 $ 6.875 $ 7.25
============== ============== ============== ============= ============= =============
Total Investment Return + (0.42)(1) 9.04% 18.93% 13.28% 2.11% 9.46%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of period (000s) $271,507 $274,578 $280,860 $283,354 $286,035 $304,083
Operating expenses 0.80% (2) 0.81% 0.83% 0.86% 0.93% 0.91%
Interest expense 1.86% (2) 2.31% 2.48% 2.47% 2.47% 2.29%
Total expenses 2.66% (2) 3.12% 3.31% 3.33% 3.40% 3.20%
Net investment income 4.82% (2) 5.68% 6.09% 7.16% 6.89% 8.50%
Portfolio turnover rate 57% (1) 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.
(1) Not Annualized.
(2) Annualized.
_____________
See notes to financial statements.
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HYPERION 2002 TERM TRUST, INC.
Notes to Financial Statements
November 30, 1999 (unaudited)
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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.
Short Sales: The Trust may make short sales of securities as a method of
hedging potential declines in similar securities owned. When the Trust
makes a short sale, it must borrow the security sold short and deliver it
to the broker-dealer through which it made the short sale as collateral
for its obligation to deliver the security upon conclusion of the sale.
The Trust may have to pay a fee to borrow the particular securities and
may be obligated to pay over any payments received on such borrowed
securities. A gain, limited to the price at which the Trust sold the
security short, or a loss, unlimited as to dollar amount, will be
realized upon the termination of a short sale if the market price is less
or greater than the proceeds originally received.
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.
2. Significant Accounting Policies (continued)
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 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 six months ended November
30, 1999, the Advisor received $681,624 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 six months ended November 30, 1999, the
Administrator received $207,459 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 six
months ended November 30, 1999 were $17,321,313 and $35,675,762,
respectively. Purchases and sales of U.S. Government securities, for the
six months ended November 30, 1999 were $186,951,674 and $182,852,594,
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 Federal National Mortgage Association.
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.
5. Borrowings (continued)
At November 30, 1999, the Trust had the following reverse repurchase
agreements outstanding:
Maturity in
Zero to 30 days
Maturity Amount, including Interest $79,245,814
Payable
Market Value of Assets Sold
Under Agreements........ $80,772,021
Weighted Average Interest Rate 5.81%
The average daily balance of reverse repurchase agreements outstanding
during the six months ended November 30, 1999 was approximately
$92,389,306, at a weighted average interest rate of 5.45%. The maximum
amount of reverse repurchase agreements outstanding at any time during
the six months was $93,316,500 as of October 5, 1999, which was 23.07% of
total assets.
6. Capital Stock
At November 30, 1999, there were 75 million shares of $0.01 par value
common stock authorized. Of the 30,446,839 shares outstanding at
November 30, 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 six months ended November 30, 1999, no shares have been
repurchased. During the year ended May 31, 1999, the Trust repurchased a
total of 441,600 shares of its outstanding common stock at a cost of
$3,689,785 at an average discount of approximately 10.3% from its net
asset value. 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 or written option contracts for the six months
ended November 30, 1999.
8. Swap Transactions
A swap is an agreement that obligates two parties to exchange a series of
cash flows at specified intervals based upon or calculated by reference
to changes in specified prices or rates for a specified amount of an
underlying asset. The payment flows are usually netted against each
other, with the difference being paid by one party to the other. Risks
may arise as a result of the failure of one of the parties to comply with
the terms of the swap contract. The loss incurred by the failure of a
counter-party generally is limited to the net payment to be received by
the Trust, and/or the termination value at the end of the contract.
Therefore, the Trust considers the creditworthiness of each counter-party
to a swap contract in evaluating overall potential risk.
8. Swap Transactions (continued)
Additionally, risks may arise from unanticipated movements in interest
rates or in the value of the underlying securities or indices related to
a swap contract.
The Trust entered into swap agreements to which it agrees to pay the
return based on the London Interbank Offered Rate (LIBOR) in exchange for
a fixed interest rate. The swap agreements are used for hedging
purposes, their effect is to preserve a return or spread on a particular
investment or portion of its portfolio.
The Trust records a net receivable or payable on a daily basis for the
amount expected to be received or paid in the period. Income paid is
recorded as interest expense. Income received is recorded as interest
income.
At November 30, 1999, the Trust had three outstanding swap contracts, one
with Goldman Sachs and two with Morgan Stanley Dean Witter with the
following terms:
<TABLE>
<S> <C> <C> <C> <C> <C>
Broker/ Notional Amount Termination Payments Made Payments Received
Dealer Date by the Trust by the Trust
Goldman Sachs $ 15,000,000 06/23/01 3-mos. LIBOR Fixed Rate 5.997%
---------------------
Morgan Stanley $ 15,000,000 06/23/01 3-mos. LIBOR Fixed Rate 5.998%
---------------------
Morgan Stanley $ 10,000,000 06/23/02 3-mos. LIBOR Fixed Rate 6.211%
</TABLE>
9. Subsequent Events
The Trust's Board of Directors declared the following regular monthly dividend:
Dividend Record Payable
Per Share Date Date
$0.03542 12/22/99 12/31/99
- ---------------------------------------------------------------------------
PROXY RESULTS (unaudited)
- ---------------------------------------------------------------------------
During the six months ended November 30, 1999, Hyperion 2002 Term Trust,
Inc. shareholders voted on the following proposals at a shareholders'
meeting on October 12, 1999. 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: Harry E. Petersen, Jr. 25,576,186 272,824
Leo M. Walsh, Jr. 25,607,961 241,049
Robert F. Birch 25,572,938 276,072
- --------------------------------------------------------------- ------------------------ ------------------- ---------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- --------------------------------------------------------------- ------------------------ ------------------- ---------------------
2. To select PricewaterhouseCoopers LLP as the Trust's
independent accountants: 25,616,856 67,405 164,749
- --------------------------------------------------------------- ------------------------ ------------------- ---------------------
</TABLE>
________________________________________________________________________________
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 TRANSFER AGENT
HYPERION CAPITAL MANAGEMENT, INC. BOSTON EQUISERVE L.P.
One Liberty Plaza Investor Relations Department
165 Broadway, 36th Floor P.O. Box 8200
New York, New York 10006-1404 Boston, Massachusetts 02266-8200
For General Information about the Trust: For Shareholder Services:
(800) HYPERION (800) 426-5523
SUB-ADMINISTRATOR INDEPENDENT ACCOUNTANTS
INVESTORS CAPITAL SERVICES, INC. PRICEWATERHOUSECOOPERS LLP
600 Fifth Avenue, 26th Floor 1177 Avenue of the Americas
New York, New York 10020 New York, New York 10036
CUSTODIAN AND FUND ACCOUNTING AGENT LEGAL COUNSEL
STATE STREET BANK AND TRUST COMPANY SULLIVAN & WORCESTER LLP
225 Franklin Street 1025 Connecticut Avenue, N.W.
Boston, Massachusetts 02116 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 Trust may 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
The accompanying financial statements as of November 30, 1999
were not audited and, accordingly, no opinion is expressed
on them.
This Report is for shareholder information. This is not a
prospectus intended for use in the purchase or sale of
Trust shares.
Hyperion 2002 Term Trust, Inc.
One Liberty Plaza
165 Broadway, 36th Floor
New York, NY 10006-1404
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> 6-MOS
<FISCAL-YEAR-END> MAY-31-2000
<PERIOD-START> JUN-01-1999
<PERIOD-END> NOV-30-1999
<INVESTMENTS-AT-COST> 391745
<INVESTMENTS-AT-VALUE> 384866
<RECEIVABLES> 3026
<ASSETS-OTHER> 527
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 388419
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 116912
<TOTAL-LIABILITIES> 116912
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 295691
<SHARES-COMMON-STOCK> 30447
<SHARES-COMMON-PRIOR> 30447
<ACCUMULATED-NII-CURRENT> 9549
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (28687)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (5046)
<NET-ASSETS> 271507
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 10173
<OTHER-INCOME> 0
<EXPENSES-NET> 3614
<NET-INVESTMENT-INCOME> 6559
<REALIZED-GAINS-CURRENT> 596
<APPREC-INCREASE-CURRENT> (3629)
<NET-CHANGE-FROM-OPS> 3526
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6597)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (3071)
<ACCUMULATED-NII-PRIOR> 9587
<ACCUMULATED-GAINS-PRIOR> (29283)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 682
<INTEREST-EXPENSE> 2523
<GROSS-EXPENSE> 3614
<AVERAGE-NET-ASSETS> 271904
<PER-SHARE-NAV-BEGIN> 9.02
<PER-SHARE-NII> 0.22
<PER-SHARE-GAIN-APPREC> (0.10)
<PER-SHARE-DIVIDEND> (0.22)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.92
<EXPENSE-RATIO> 0.80
[AVG-DEBT-OUTSTANDING] 46321
[AVG-DEBT-PER-SHARE] 1.52
</TABLE>
