UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-05820
THE HYPERION TOTAL RETURN FUND, INC.
(Exact name of registrant as specified in charter)
ONE LIBERTY PLAZA, 165 BROADWAY, 36TH FLOOR
NEW YORK, NEW YORK 10006-1404
(Address of principal executive offices) (Zip code)
CLIFFORD E. LAI, PRESIDENT
THE HYPERION TOTAL RETURN FUND, INC.
ONE LIBERTY PLAZA, 165 BROADWAY, 36TH FLOOR
NEW YORK, NEW YORK, 10006-1404
(Name and address of agent for service)
Registrant's telephone number, including area code: 1 (800) Hyperion
Date of fiscal year end: November 30
Date of reporting period: May 31, 2004
Item 1. Reports to Shareholders.
[GRAPHIC OMITTED]
May 31, 2004
[GRAPHIC OMITTED]
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THE HYPERION TOTAL RETURN FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2004
- -------------------------------------------------------------------------------
Dear Shareholder:
We welcome this opportunity to provide you with information about The Hyperion
Total Return Fund, Inc. (the "Fund") for the semi-annual period ended May 31,
2004. The Fund's shares are traded on the New York Stock Exchange ("NYSE") under
the symbol "HTR."
Description of the Fund
The Fund is a diversified closed-end investment company. The Fund's investment
objective is to provide shareholders with a high total return, including short
and long-term capital gains, and a high level of current income through the
management of a portfolio of securities. The Fund pursues this objective by
investing in and actively managing a portfolio consisting primarily of U.S.
Treasury, Mortgage-Backed Securities ("MBS"), Asset-Backed Securities ("ABS"),
and High Yield Corporate securities.
Performance
With the Federal Reserve Board's recent decisive change in posture regarding
interest rates, the market prices of most fixed income bond funds dropped. Over
the past six months, despite keeping the duration of the portfolio at the
shorter end of its target, the Fund's return, based on market price, was (5.83)%
for the six-month period ended May 31, 2004. The Fund's negative return, based
on market price, resulted from a decline in the premium between the market price
of the Fund's shares and the shares' net asset value. During the period, the
premium declined from 9.4% to 0.2%. Based on the NYSE closing price of $9.13 on
May 31, 2004, the Fund had a yield of 9.86%, which was 6.07% higher than the
yield of the 5-year U.S. Treasury Note, and competitive with the yields of other
multi-sector bond funds in its category.
As of May 31, 2004, the Fund, inclusive of the effect of leverage, was managed
with an average duration (duration measures a bond portfolio's price sensitivity
to interest rate changes) of 4.1 years, as measured on a net asset basis.
Market Environment
The economy is clearly performing well, such that the market's consensus view
has changed and most economists believe that the Federal Reserve Board will
raise interest rates several times in 2004 in 25 or 50 bp increments. The
catalyst for this change in monetary policy has been the strong rebound in the
employment reports, which show the pace of job growth increasing over the last
several months.
Interestingly, while the fixed income market is anticipating a 2.0% increase in
the federal funds rate within about a year, those same "forward' indicators view
the yield on the 10-year Treasury as being only about 50 bps higher in the same
time frame. So the consensus in the market is that rates will be higher in the
future, and that interest rates will rise more on shorter maturity assets than
longer maturity assets. We are in agreement with both of these outlooks.
But while the outlook is for higher interest rates, there are some headwinds
that could slow and maybe even arrest the trend. Higher oil prices, a slowing
Chinese economy, and the potential for domestic terrorism could act to dampen
the pace of economic growth. Currently, we do not believe that these threats are
significant enough to deter rising interest rates.
Portfolio Strategy
We are comfortable with the investment profile of the portfolio. At a 4-year
duration, 9.86% yield, and with more than 70% of the leverage matched against
floating rate assets, we have positioned the Fund defensively against higher
interest rates.
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THE HYPERION TOTAL RETURN FUND, INC.
Report of the Investment Advisor
For the Six Months Ended May 31, 2004
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The yield spreads for mortgage-related issues narrowed during the period,
particularly in the ABS sector. With the recent increase in interest rates, we
look for this trend to continue as the supply of ABS and MBS diminishes.
A major change in the portfolio allocation was to increase ABS on the year and
reduce agency callable debt. Weakening prices in some ABS recently gave us an
opportunity to add yield to the portfolio. Over the past three months alone,
over 5% of the portfolio was shifted toward ABS.
Another change in the Fund was an increase in holdings of below-investment-grade
securities, which currently stand at 19% of total assets, still below the 25%
total assets targeted longer-term allocation. With the strengthening of the
economy, our comfort with below-investment-grade securities is high and we look
for opportunities to increase the allocation to these securities.
We remain fully leveraged to take advantage of the steepness in the yield curve.
The Fund's duration has been running between 3.5 and 4.5 years, and we intend to
keep it in this range in the near future.
Conclusion
We remain committed to the Fund and its shareholders. As always, we will
continue to actively seek out investment opportunities in the market and act on
them in a timely fashion in an effort to achieve the Fund's objectives. We
welcome your questions and comments, and encourage you to contact our
Shareholder Services Representatives at 1-800-HYPERION.
We appreciate the opportunity to serve your investment needs.
Sincerely
/s/ Clifford E. Lai
CLIFFORD E. LAI
President,
The Hyperion Total Return Fund, Inc.
President and Chief Executive Officer,
Hyperion Capital Management, Inc.
/s/ John H. Dolan
JOHN H. DOLAN
Vice President,
The Hyperion Total Return Fund, Inc.
Chief Investment Officer,
Hyperion Capital Management, Inc.
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments-- (Unaudited) Principal
May 31, 2004 Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS -- 61.9%
U.S. Government Agency Collateralized Mortgage Obligations -- 4.5%
Federal Home Loan Mortgage Corporation
Series 1675, Class KC.................. 6.50% 10/15/10 $ 5,750@ $ 6,063,616
Series 1587, Class SK.................. 9.00+ 10/15/08 1,278# 1,324,974
Series 1604, Class MC.................. 9.00+ 11/15/08 1,898 2,028,005
Series 1604, Class SB.................. 9.00+ 11/15/08 365 390,105
----------------
9,806,700
----------------
Federal National Mortgage Association
Series 1998-W6, Class B3 7.09 10/25/28 1,850 1,776,903
Series 1993-170, Class SC 9.00+ 09/25/08 438 460,769
Series 1993-48, Class C 9.50 04/25/08 428 452,068
----------------
2,689,740
Total U.S. Government Agency Collateralized Mortgage Obligations ----------------
(Cost-- $11,560,411)................... 12,496,440
----------------
U.S. Government Agency Pass-Through Certificates--45.0%
Federal Home Loan Mortgage Corporation
A16170 6.00 12/01/33 6,092@ 6,199,396
A17112 6.00 12/01/33 19,922@ 20,272,675
A13915 7.00 09/01/33 18,051@ 18,963,445
A17331 7.00 12/01/33 692 727,146
C53494 7.50 06/01/31 52 55,762
C55470 8.00 07/01/31 81 87,085
C56878 8.00 08/01/31 1,855 2,004,062
C56879 8.00 08/01/31 406 438,709
C58516 8.00 09/01/31 736 795,152
C59641 8.00 10/01/31 1,206 1,302,406
C55166 8.50 07/01/31 253 272,755
C55167 8.50 07/01/31 696 751,826
C55168 8.50 07/01/31 670 723,109
C55169 8.50 07/01/31 546 589,663
C57010 8.50 08/01/31 268 288,916
C58521 8.50 09/01/31 61 65,562
C60422 8.50 10/01/31 216 233,126
C60423 8.50 10/01/31 1,032 1,114,086
C60424 8.50 10/01/31 335 361,676
G01466 9.50 12/01/22 4,399@ 4,933,389
555538 10.00 03/01/21 3,910@ 4,340,583
----------------
64,520,529
----------------
Federal National Mortgage Association
649881 6.00 09/01/32 4,965@ 5,051,352
650162 6.50 10/01/32 3,453 3,578,258
652870 6.50 10/01/32 3,463 3,588,578
654917 6.50 08/01/32 9,446@ 9,787,050
642102 7.00 05/01/32 5,203@ 5,470,710
645406 7.00 05/01/32 3,570@ 3,754,049
645912 7.00 06/01/32 4,383@ 4,608,731
645913 7.00 06/01/32 3,677@ 3,866,167
759505 7.00 01/01/34 11,956@ 12,571,084
- ------------------------------
See notes to financial statements.
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments-- (Unaudited) Principal
May 31, 2004 Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS (continued)
784369 7.50% 07/01/13 $ 2,221 $ 2,289,551
255053 7.50 12/01/33 2,181 2,328,758
458132 9.71+ 03/15/31 4,000 4,524,376
----------------
61,418,664
Total U.S. Government Agency Pass-Through Certificates
(Cost-- $127,097,490).......................... 125,939,193
----------------
U.S. Agency Obligations -- 12.4%
Federal Home Loan Mortgage Corporation................ 5.13 11/07/13 25,000@ 24,335,950
Federal National Mortgage Association................. 4.75 02/21/13 11,000@ 10,539,375
----------------
Total U.S. Agency Obligations
(Cost-- $35,677,293)........................... 34,875,325
----------------
Total U.S. Government & Agency Obligations
(Cost-- $174,335,194)................................... 173,310,958
----------------
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ASSET-BACKED SECURITIES -- 34.0%
Housing Related Asset-Backed Securities -- 26.5%
125 Home Loan Owner Trust
Series 1998-1A, Class M2*................... 7.75 02/15/29 1,350 1,408,309
Access Financial Manufactured Housing Contract
Trust
Series 1995-1, Class B1..................... 7.65 05/15/21 10,060 6,715,050
Aegis Asset Backed Securities Trust
Series 2004-2N, Class N1*................... 4.50 04/25/34 1,901 1,900,733
Argent NIM Trust
Series 2004-WN3, Class A*.................. 5.93 03/25/34 2,798 2,797,782
Argent Securities, Inc.
Series 2004-W3, Class M5*(c)............... 3.40+ 02/25/34 2,400 1,760,626
Asset Backed Securities Corp., NIMS Trust
Series 2003-HE6, Class A1*................. 6.75 11/27/33 964 967,811
Chase Funding Mortgage Loan Asset-Backed
Series 2000-1, Class IIM2(c)............... 1.90+ 02/25/30 1,109 1,111,509
Ditech Home Loan Owner Trust
Series 1998-1, Class M2(d)................. 7.64/8.14 06/15/29 1,076 1,084,027
First Franklin Mortgage Loan Trust
Series 2004-FFH2, Class B1*(c)............. 0.00+ 06/25/34 2,750 2,298,399
Series 2004-FF4, Class M2(c)............... 2.35+ 06/25/34 2,000 2,000,000
Series 2001-FF2, Class M3(c)............... 2.88+ 11/25/31 5,000 5,000,535
Series 2004-FFH1, Class B*(c).............. 4.60+ 03/25/34 3,050 2,607,210
Series 2004-FF2, Class B*(c)............... 4.60+ 03/25/34 1,800 1,572,224
----------------
13,478,368
----------------
Fremont NIM Trust
Series 2004-A, Class Note*................. 4.75 01/25/34 2,432 2,429,631
Green Tree Financial Corp.
Series 1998-3, Class A6.................... 6.76 03/01/30 5,047 5,062,749
Series 1998-4, Class A7.................... 6.87 02/01/30 2,275 2,336,858
Series 1998-8, Class M1.................... 6.98 09/01/30 5,000 2,400,000
Series 1997-6, Class B1.................... 7.17 01/15/29 10,000 2,000,000
Series 1997-6, Class M1.................... 7.21 01/15/29 7,000 4,634,623
- ---------------
See notes to financial statements.
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments-- (Unaudited) Principal
May 31, 2004 Interest Amount Value
Rate Maturity (000s) (Note 2)
- -----------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES -- (continued)
Series 1997-6, Class A9.................. 7.55% 01/15/29 $ 3,085 $ 3,238,669
---------------
19,672,899
---------------
Long Beach Asset Holdings Corp.
Series 2003-4, Class N1*................. 6.54 08/25/33 783 787,970
Long Beach Mortgage Loan Trust
Series 2003-4, Class M6(c)............... 5.10+ 08/25/33 2,400 2,355,408
Mid-State Trust
Series 10, Class B....................... 7.54 02/15/36 2,386 2,167,127
Option One Mortgage Loan Trust
Series 2003-4, Class M2(c)............... 2.75+ 07/25/33 2,125 2,159,659
Series 2003-1, Class M2(c)............... 3.05+ 02/25/33 3,000 3,057,552
----------------
5,217,211
----------------
Sail Net Interest Margin Notes
Series 2004-2A, Class A*................. 5.50 03/27/34 2,532 2,528,780
Structured Asset Investment Loan Trust
Series 2003-BC8, Class M2(c)............. 2.85+ 08/25/33 3,000 3,048,198
Series 2004-2, Class B*(c)............... 4.10+ 03/25/34 2,234 1,921,857
----------------
Aerco Ltd.
Series 2A, Class A3...................... 1.56+ 07/15/25 2,862 2,034,610
Series 2A, Class B2...................... 2.15+ 07/15/25 3,232 1,454,592
----------------
3,489,202
Global Rated Eligible Assets Trust
Series 1998-A, Class A1*(b).............. 7.33 03/15/06 1,587 7,936
MBNA Credit Card Master Trust
Series 2002-C7, Class C7................. 6.70 03/16/15 5,000 5,376,340
Securitized Multiple Asset Rated Trust
Series 1997-2, Class A(b)................ 8.24 03/15/06 2,300 11,499
Tobacco Settlement Financing Corp.
Series 2001-A, Class A................... 6.36 05/15/25 2,693 2,626,000
----------------
Total Non-Housing Related Asset-Backed
securities
(Cost-- $17,114,544)................ 11,510,977
----------------
Franchise Securities -- 1.6%
FFCA Secured Lending Corp.
Series 1998-1, Class A1B*................ 6.73 07/18/13 3,390 3,593,042
Franchisee Loan Receivable Trust
Series 1995-B, Class A*.................. 9.59+ 01/15/11 1,420 818,890
----------------
Total Franchise Securities
(Cost-- $4,832,412)................. 4,411,932
----------------
Collateralized Debt Obligations -- 1.8%
Anthracite CDO I Ltd.
Series 2002-CIBA, Class CFL*............. 2.35+ 05/24/37 5,000 5,039,000
----------------
Total Collateralized Debt Obligations
(Cost-- $5,000,000)................. 5,039,000
----------------
Total Asset-Backed Securities
(Cost-- $107,262,949)............... 95,175,537
----------------
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See notes to financial statements.
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments-- (Unaudited) Principal
May 31, 2004 Interest Amount Value
Rate Maturity (000s) (Note 2)
- ----------------------------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE BACKED SECURITIES -- 16.3%
Bear Stearns Commercial Mortgage Securities
Series 1999-C1, Class F*................... 5.64% 02/14/31 $ 1,394 $ 1,069,376
Series 1999-C1, Class D.................... 6.53 02/14/31 5,000 5,308,700
Series 2001-EPR, Class B *................. 6.92 02/12/11 5,000 5,256,750
----------------
11,634,826
----------------
Columbia Center Trust
Series 2000-CCT, Class D*.................. 1.86+ 12/15/09 2,720 2,694,647
Commercial Mortgage Asset Trust
Series 1999-C1, Class C.................... 7.35 01/17/32 2,000 2,281,920
Commercial Mortgage Lease-Backed Certificate
Series 2001-CMLB, Class A1*................ 6.75 06/20/31 2,707 2,897,619
First Chicago/Lennar Trust
Series 1997-CHL1, Class D*................. 7.90+ 04/29/39 3,000 3,111,090
JP Morgan Commercial Mortgage Finance Corp.
Series 1999-C8, Class C.................... 7.66+ 07/15/31 5,000 5,599,145
LB-UBS Commercial Mortgage Trust
Series 2002-C2, Class L*................... 5.68 07/15/35 5,300 4,518,754
Mortgage Capital Funding, Inc.
Series 1996-MC1, Class G*.................. 7.15 06/15/06 4,409 4,689,456
Nationslink Funding Corp.
Series 1998-2, Class F*.................... 7.11 08/20/30 4,840 4,874,412
UBS 400 Atlantic Street Mortgage Trust
Series 2002-C1A, Class B3*................. 7.19 01/11/22 3,000 3,246,930
----------------
Total Commercial Mortgage Backed Securities
(Cost-- $42,255,669).................. 45,548,799
-----------
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES -- 18.3%
Subordinated Collateralized Mortgage Obligations -- 18.3%
ABN AMRO Mortgage Corp.
Series 2002-1A, Class B3*.................. 5.63+ 06/25/32 618 618,340
Series 2002-1A, Class B4*.................. 5.63+ 06/25/32 371 359,492
Series 2002-1A, Class B5*.................. 5.63+ 06/25/32 621 481,260
----------------
1,459,092
----------------
Banc of America Alternative Loan Trust
Series 2004-3, Class 30B6.................. 5.50 04/25/34 813 205,226
Banc of America Funding Corporation
Series 2003-3, Class B4.................... 5.46+ 10/25/33 944 778,792
Series 2003-3, Class B5.................... 5.46+ 10/25/33 944 577,044
Series 2003-3 Class B6..................... 5.46+ 10/25/33 948 279,581
----------------
1,635,417
----------------
Banc of America Mortgage Securities, Inc.
Series 2001-4, Class 1B3................... 6.75 04/20/31 2,035 2,116,115
Cendant Mortgage Corp.
Series 2001-1, Class B4.................... 7.25 01/18/30 309 308,784
Series 2000-1, Class B7.................... 7.25 01/18/30 64 25,428
----------------
334,212
----------------
- ---------------
See notes to financial statements.
- -----------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments-- (Unaudited) Principal
May 31, 2004 Interest Amount Value
Rate Maturity (000s) (Note 2)
- -----------------------------------------------------------------------------------------------------------------
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES -- (continued)
Citicorp Mortgage Securities, Inc.
Series 2002-6, Class B4..........................% 5.98+ 05/25/32 $ 604 $ 556,417
Series 2002-6, Class B5.......................... 5.98+ 05/25/32 604 466,182
Series 2002-6, Class B6.......................... 5.98+ 05/25/32 604 241,449
Series 2001-16, Class B1......................... 6.39+ 11/25/31 1,419 1,417,498
Series 2001-16, Class B2......................... 6.39+ 11/25/31 851 850,006
Series 2001-16, Class B3......................... 6.39+ 11/25/31 425 424,623
Series 2001-16, Class B4......................... 6.39+ 11/25/31 425 401,908
Series 2001-16, Class B5......................... 6.39+ 11/25/31 427 266,705
Series 2001-16, Class M.......................... 6.39+ 11/25/31 3,688 3,685,241
Series 2002-7, Class B5.......................... 6.37 06/25/32 422 422,624
Series 2002-7, Class B6.......................... 6.37 06/25/32 424 260,796
--------------
8,993,449
--------------
Countrywide Alternative Loan Trust
Series 1998-2, Class B3.......................... 7.00 05/25/28 787 785,274
Countrywide Home Loans
Series 2003-57, Class B3......................... 5.50 01/25/34 498 409,235
DLJ Mortgage Acceptance Corp.
Series 1995-T10, Class C*........................ 12.30+ 09/02/23 98 82,862
First Republic Mortgage Loan Trust
Series 2000-FRB1, Class B3....................... 1.60+ 06/25/30 809 771,735
G3 Mortgage Reinsurance Ltd.
Series 1, Class E*............................... 21.10+ 05/25/08 5,698 6,124,813
GMAC Mortgage Corp. Loan Trust
Series 2003-J9 Class B1.......................... 5.50 01/25/34 895 736,328
Series 2003-J9, Class B2......................... 5.50 01/25/34 895 544,507
Series 2003-J9, Class B3......................... 5.50 01/25/34 896 268,773
Series 2002-J6, Class B2......................... 6.25 10/25/32 956 830,863
Series 2002-J6, Class B3......................... 6.25 10/25/32 1,276 765,301
----------------
3,145,772
----------------
Granite Mortgages PLC
Series 2002-1, Class 1C(c)....................... 2.45+ 04/20/42 5,000 5,078,125
PHH Mortgage Services Corp.
Series 1997-6, Class B3*......................... 7.35+ 11/18/27 547 546,342
Residential Accredit Loans, Inc.
Series 1998-QS5, Class B1*....................... 6.75 04/25/28 1,278 1,275,121
Residential Finance Limited Partnership
Series 2004-B, Class B5*......................... 2.65+ 02/10/36 3,566 3,566,000
Series 2002-A, Class B7.......................... 6.80+ 10/10/34 2,945 3,003,957
----------------
6,569,957
----------------
Residential Funding Mortgage Securities I, Inc.
Series 2004-S1, Class B1......................... 5.25 02/25/34 614 493,451
Series 2004-S1, Class B3......................... 5.25 02/25/34 307 88,979
Series 2003-S7, Class B2......................... 5.50 05/25/33 691 429,157
Series 2003-S7, Class B3(a)...................... 5.50 05/25/33 987 298,717
Series 1993-S49, Class B2........................ 6.00 12/25/08 45 45,559
Series 2002-S7, Class B1......................... 6.50 05/25/32 808 794,629
Series 2002-S7, Class B2......................... 6.50 05/25/32 606 519,058
Series 2002-S7, Class B3(a)...................... 6.50 05/25/32 606 484,948
- ---------------
See notes to financial statements.
- -----------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments-- (Unaudited) Principal
May 31, 2004 Interest Amount Value
Rate Maturity (000s) (Note 2)
- ---------------------------------------------------- --------------- ------------- ------------ ---------------------
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES -- (continued)
Series 1996-S5, Class B1.................. 6.75% 02/25/11 $ 184 $ 183,593
Series 1996-S8, Class B1.................. 6.75 03/25/11 175 179,702
Series 1996-S13, Class B2................. 7.00 05/25/11 103 103,353
Series 1996-S13, Class B3(a).............. 7.00 05/25/11 90 75,347
Series 1996-S17, Class B2................. 7.25 07/25/11 91 91,432
Series 1996-S17, Class B3(a).............. 7.25 07/25/11 91 74,985
Series 1995-S17, Class B3(a).............. 7.50 12/26/25 237 195,815
Series 1996-S23, Class B1................. 7.75 11/25/26 187 186,572
Series 1996-S23, Class B2................. 7.75 11/25/26 139 138,938
--------------
4,384,235
--------------
Resix Finance Ltd. Credit-Linked Notes
Series 2003-D, Class B7*.................. 6.85+ 12/10/35 1,986 2,079,976
Series 2004-A, Class B10*................. 2.60+ 02/10/36 873 894,128
--------------
2,974,104
--------------
Washington Mutual
Series 2002-AR7, Class B4................. 5.52+ 07/25/32 1,510 1,487,856
Series 2002-AR7, Class B5................. 5.52+ 07/25/32 1,133 1,081,015
Series 2002-AR7, Class B6................. 5.52+ 07/25/32 1,889 1,473,538
--------------
4,042,409
--------------
Wells Fargo Mortgage Backed Securities Trust
Series 2002-10, Class B6.................. 6.00 06/25/32 490 272,351
--------------
Total Subordinated Collateralized Mortgage Obligations
(Cost-- $46,643,960).................. 51,205,846
--------------
Total Non-Agency Residential Mortgage Backed Securities
(Cost-- $46,643,960).................. 51,205,846
--------------
- -----------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS -- 1.9%
Airlines -- 1.2%
American Airline............................. 7.86 10/01/11 2,500 2,482,400
United Airlines, Series 00-2................. 7.19 04/01/11 982 861,608
--------------
3,344,008
Oil & Gas -- 0.3%
El Paso Corp................................. 7.88 06/15/12 1,000 880,000
--------------
Telecommunications -- 0.4%
Motorola, Inc................................ 8.00 11/01/11 1,000 1,140,297
--------------
Total Corporate Obligations
(Cost-- $5,446,166)................... 5,364,305
--------------
- -----------------------------------------------------------------------------------------------------------------
Notional
Amount
(000s)
- -----------------------------------------------------------------------------------------------------------------
INTEREST ONLY SECURITIES -- 8.3%
Banc of America Commercial Mortgage Inc.
Series 2003-1, Class XP2*(e)................ 1.67+ 09/11/36 19,165 2,774,846
Bear Stearns Commercial Mortgage Securities
Series 2001-TOP2, Class X2*(e).............. 1.14+ 02/15/35 74,184 3,207,864
COMM
Class 2001-J2A, Class EIO*(e)............... 3.87+ 07/16/34 10,000 2,779,690
- ---------------
See notes to financial statements.
- -----------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments-- (Unaudited) Principal
May 31, 2004 Interest Amount Value
Rate Maturity (000s) (Note 2)
- -----------------------------------------------------------------------------------------------------------------
INTEREST ONLY SECURITIES -- (continued)
Commercial Capital Access One, Inc.
Series 2001-A, Class T1(e)................. 4.50% 02/15/09 $ 18,000 $ 3,591,000
GMAC Commercial Mortgage Securities, Inc.
Series 2003-C1, Class X1*(e)............... 0.11+ 05/10/36 87,529 3,370,798
GS Mortgage Securities Corp. II
Series 2001-ROCK, Class X1*(e)............. 0.41+ 05/03/18 257,846 3,754,651
Residential Funding Mortgage Securities I
Series 2002-HS1, Class A(e)................ 7.00 07/25/04 11,735 63,402
Vendee Mortgage Trust
Series 1997-2, Class IO(e)................. 0.06+ 06/15/27 80,897 182,827
Wachovia Bank Commercial Mortgage Trust
Series 2002-C2, Class IO1*(e).............. 0.25+ 11/15/34 86,041 3,430,027
----------------
Total Interest Only Securities
(Cost-- $22,198,789).................. 23,155,105
----------------
- -----------------------------------------------------------------------------------------------------------------
Shares
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES -- 6.7%
McMorgan High Yield Fund..................... 97,638 961,737
Seix High Yield Fund......................... 1,637,637 17,850,241
----------------
Total Investment Companies
(Cost-- $19,579,499).................. 18,811,978
----------------
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCK -- 0.2%
Duke Realty Corp. (REIT)
(Cost-- $288,001).......................... 11,583 374,831
----------------
- -----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK -- 0.8%
Equity Office Properties Trust Series B, 5.25%
(REIT)
(Cost-- $1,955,458)........................ 46,012 2,301,060
----------------
Total Investments -- 148.4%
(Cost-- $419,965,685)................. 415,248,419
Liabilities in Excess of Other
Assets-- (48.4)%............................. (135,325,575)
----------------
NET ASSETS-- 100.0%............................ $ 279,922,844
================
- -----------------------------------------------------------------------------------------------------------------
- ---------------
See notes to financial statements.
- -----------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments-- (Unaudited) Principal
May 31, 2004 Interest Amount Value
Rate Maturity (000s) (Note 2)
- ------------------------------------------------------------------------------- ----------------------------------
SECURITIES SOLD SHORT
U.S. Government Agency Pass-Through
Certificates
Federal National Mortgage Association
TBA (Proceeds-- $7,232,969)................ 6.50% TBA $ 7,000 $ 7,249,375
----------------
- -----------------------------------------------------------------------------------------------------------------
@ -- Portion or entire principal amount delivered as collateral for reverse repurchase agreements (Note 5).
+ -- Variable Rate Security: Interest rate is the rate in effect May 31, 2004.
* -- Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities
may only be resold in transactions exempt from registration, normally to qualified institutional buyers.
(a) -- Represents a class of subordinated mortgage backed securities (First Loss Bonds) that are the first to
receive credit losses on the underlying mortgage pools and will continue to receive the credit losses
until the subordinated class is paid off.
(b) -- These issuers are currently making only partial interest payments.
(c) -- Security is a "step up" bond where coupon increases or steps up at a predetermined date. At that date
the coupon increases to LIBOR plus a predetermined margin.
(d) -- Security is a "step up" bond where coupon increases or steps up at a predetermined date. Rates
shown are current coupon and next coupon rate when security steps up.
(e) -- Interest rate is based on the notional amount of the underlying mortgage pools.
# -- Portion or entire principal amount is held as collateral for open futures contracts (Note 7).
REIT -- Real Estate Investment Trust.
TBA -- Settlement is on a delayed delivery or when-issued basis with final maturity to be announced (TBA)
in the future.
- ---------------
See notes to financial statements.
- -------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Statement of Assets and Liabilities - (Unaudited)
May 31, 2004
- -------------------------------------------------------------------------------------------------------------------
Assets:
Investments in securities, at market (cost $419,965,685) (Note 2).............. $ 415,248,419
Cash........................................................................... 5,555,612
Receivable for investments sold................................................ 9,573,170
Interest and dividend receivable............................................... 2,431,773
Unrealized appreciation on swap contracts (Note 7)............................. 1,013,749
Principal paydowns receivable.................................................. 146,909
Prepaid expenses and other assets.............................................. 132,898
----------------
Total assets............................................................... 434,102,530
----------------
Liabilities:
Reverse repurchase agreements (Note 5)......................................... 134,598,549
Interest payable for reverse repurchase agreements (Note 5).................... 45,814
Payable for investments purchased.............................................. 11,903,046
Securities sold short, at value (proceeds $7,232,969) (Note 2)................. 7,249,375
Interest payable for securities sold short..................................... 16,431
Investment advisory fee payable (Note 3)....................................... 152,250
Administration fee payable (Note 3)............................................ 44,891
Payable for variation margin................................................... 22,969
Directors' fees payable........................................................ 14,550
Accrued expenses and other liabilities......................................... 131,811
----------------
Total liabilities.......................................................... 154,179,686
----------------
Net Assets (equivalent to $9.11 per share based on
30,726,723 shares issued and outstanding)...................................... $ 279,922,844
================
Composition of Net Assets:
Capital stock, at par value ($.01) (Note 6).................................... $ 307,267
Additional paid-in capital (Note 6)............................................ 300,057,847
Accumulated undistributed net investment income................................ 1,310,167
Accumulated net realized loss.................................................. (17,891,989)
Net unrealized depreciation.................................................... (3,860,448)
----------------
Net assets applicable to capital stock outstanding............................. $ 279,922,844
================
- ---------------
See notes to financial statements.
- -------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Statement of Operations - (Unaudited)
For the Six Months Ended May 31, 2004
- -------------------------------------------------------------------------------------------------------------------
Investment Income (Note 2):
Interest............................................................................. $ 13,793,058
Dividends............................................................................ 747,650
--------------
14,540,708
--------------
Expenses:
Investment advisory fee (Note 3)..................................................... 934,758
Administration fee (Note 3).......................................................... 287,618
Insurance............................................................................ 97,647
Custodian............................................................................ 66,361
Reports to shareholders.............................................................. 59,649
Auditing and tax services............................................................ 52,508
Directors' fees...................................................................... 32,988
Legal................................................................................ 24,769
Transfer agency...................................................................... 22,590
Registration fees.................................................................... 16,581
Miscellaneous........................................................................ 14,404
-------------
Total operating expenses......................................................... 1,609,873
Interest expense on reverse repurchase agreements (Note 5).................... 694,831
-------------
Total expenses.................................................................... 2,304,704
-------------
Net investment income................................................................ 12,236,004
-------------
Realized and Unrealized Gain (Loss) on Investments(Notes 2 and 7):
Net realized gain (loss) on:
Investment transactions.............................................................. 5,684,642
Short sales.......................................................................... 26,003
Swap contracts....................................................................... (468,961)
Futures transactions................................................................. (285,057)
------------
Net realized gain on investment transactions, short sales,
swap contracts and futures transactions.............................................. 4,956,627
-------------
Net change in unrealized appreciation/depreciation on:
Investments.......................................................................... (8,337,129)
Short sales.......................................................................... (16,406)
Swap contracts....................................................................... (287,692)
Futures.............................................................................. (289,152)
-------------
Net change in unrealized appreciation/depreciation on
investments, short sales, swap contracts and futures................................. (8,930,379)
-------------
Net realized and unrealized loss on investments, short
sales, swap contracts and futures.................................................... (3,973,752)
-------------
Net increase in net assets resulting from operations................................... $ 8,262,252
==============
- ---------------
See notes to financial statements.
- ----------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Statement of Changes in Net Assets Ended For the Year
For the Six Months May 31, 2004 Ended November
(Unaudited 30, 2003*
- ----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting from Operations:
Net investment income.............................................. $ 12,236,004 $ 25,970,693
Net realized gain (loss) on investment transactions, short
sales, swap contracts and futures transactions................... 4,956,627 5,676,653
Net change in unrealized appreciation/depreciation on
investments, short sales, swap contracts and futures............. (8,930,379) (2,491,841)
--------------- ---------------
Net increase in net assets resulting from operations............... 8,262,252 29,155,505
--------------- ---------------
Dividends to Shareholders (Note 2):
Net investment income.............................................. (13,820,671) (27,571,944)
--------------- ---------------
Capital Stock Transactions (Note 6):
Net asset value of shares issued through dividend
reinvestment (33,836 and 106,000 shares,
respectively).................................................... 332,008 997,260
--------------- ---------------
Net increase from capital stock transactions....................... 332,008 997,260
--------------- ---------------
Total increase (decrease) in net assets........................ (5,226,411) 2,580,821
Net Assets:
Beginning of period................................................ 285,149,255 282,568,434
--------------- ---------------
End of period (including undistributed net investment
income of $1,310,167 and $1,135,259, respectively)............... $ 279,922,844 $ 285,149,255
=============== ===============
- ----------
* Certain amounts have been reclassified to conform to current year presentation. See Note 2-- Swap Agreements.
- ---------------
See notes to financial statements.
- -------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Statement of Cash Flows- (Unaudited)
For the Six Months Ended May 31, 2004
- ------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash:
Cash flows provided by (used for) operating activities:
Interest and dividends received (including net amortization of $700,142)......... $ 15,410,533
Interest expense paid............................................................ (684,245)
Operating expenses paid.......................................................... (1,746,857)
Sales of short-term portfolio investments, net................................... 2,000,000
Purchases of long-term portfolio investments..................................... (280,584,881)
Proceeds from disposition of long-term portfolio
investments and principal paydowns.............................................. 250,277,326
Proceeds from securities sold short.............................................. 7,275,403
Net cash used for futures transactions........................................... (459,068)
---------------
Net cash provided by (used for) operating activities............................. (8,511,789)
---------------
Cash flows provided by (used for) financing activities:
Net cash provided by reverse repurchase agreements............................... 27,108,549
Cash dividends paid.............................................................. (13,406,297)
---------------
Net cash provided by financing activities........................................ 13,702,252
---------------
Net increase in cash............................................................... 5,190,463
Cash at beginning of period........................................................
365,149
Cash at end of period.............................................................. $ 5,555,612
===============
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............................... $ 8,262,252
---------------
Increase in investments, at cost................................................. (4,666,328)
Net realized gain on investments................................................. 5,684,642
Net amortization on investments.................................................. 700,142
Decrease in net unrealized appreciation/depreciation on investments and swaps.... 8,641,227
Decrease in interest receivable.................................................. 645,803
Decrease in variation margin receivable.......................................... 115,141
Decrease in other assets......................................................... 18,513,257
Decrease in other liabilities.................................................... (46,407,925)
---------------
Total adjustments.............................................................. (16,774,041)
---------------
Net cash used for operating activities............................................. $ (8,511,789)
===============
Noncash financing activities not included herein consist of reinvestment of
dividends of $332,008.
- ---------------
See notes to financial statements.
- -----------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Financial Highlights
For the
Six Months
Ended
May 31, For the Year Ended November 30,
2004*
(Unaudited) 2003* 2002* 2001* 2000* 1999
- ------------------------------------- ------------- ----------- ----------- ------------- ------------ -------------
Per Share Operating Performance:
Net asset value, beginning of period.... $ 9.29 $ 9.24 $ 9.17 $ 9.41 $ 9.27 $ 10.08
---------- --------- --------- --------- --------- ---------
Net investment income............. 0.40 0.85 0.89 0.88 0.79 0.80
Net realized and unrealized gains
(losses) on investments, short
sales, (0.13) 0.10 0.08 0.26 0.20 (0.90)
---------- --------- --------- --------- --------- ---------
futures and swap contracts......
Net increase (decrease) in net asset
value resulting from operations...... 0.27 0.95 0.97 1.14 0.99 (0.10)
---------- --------- --------- --------- --------- ---------
Net effect of shares repurchased....... -- -- -- -- --** 0.03
--------- -------- -------- -------- -------- ---------
Dividends from net investment income (0.45) (0.90) (0.90) (0.87) (0.85) (0.74)
Offering costs charged to additional
paid-in-capital -- -- --** (0.09) -- --
Dilutive effect of rights offering -- -- -- (0.42) -- --
--------- -------- -------- --------- --------- --------
Net asset value, end of period.... $ 9.11 $ 9.29 $ 9.24 $ 9.17 $ 9.41 $ 9.27
========== ========= ========= ========= ========== =========
Market price, end of period....... $ 9.1300 $ 10.1600 $ 9.2800 $ 8.5700 $ 8.4375 $ 7.3750
========== ========== ========== ========== ========== =========
Total Investment Return+.......... (5.83)%(1) 20.43% 19.39% 13.13%++ 26.41% (7.17)%
Ratios to Average Net Assets/
Supplementary Data:
Net assets, end of period (000's). $ 279,923 $ 285,149 $ 282,568 $ 280,106 $ 215,318 $ 212,703
Operating expenses................ 1.12%(2) 1.15% 1.05% 1.11% 1.10% 1.08%
Interest expense.................. 0.48%(2) 0.47% 0.84% 1.22% 1.82% 2.31%
Total expenses.............. 1.60%(2) 1.62% 1.89% 2.33% 2.92% 3.39%
Net investment income............. 8.51%(2) 9.10% 9.62% 9.21% 8.55% 8.20%
Portfolio turnover rate........... 55%(1) 89% 61% 43% 57% 72%
- ----------
+ Total investment return is computed based upon the New York Stock Exchange market price of the Fund's shares and excludes the
effects of brokerage commissions. Dividends and distributions are assumed to be reinvested at the prices obtained under the
Fund's dividend reinvestment plan.
++ Adjusted for assumed reinvestment of proceeds of rights offering.
* As a result of recent changes in generally accepted accounting principles, the Fund has reclassified periodic payments made
under interest rate swap agreements, previously included within net investment income, to components of realized and unrealized
gain (loss) in the statement of operations. The effect of this reclassification was to reduce the interest expense and total
expense ratios and increase the net investment income ratio by 0.12% and increase net investment income per share by $0.01 and
decrease net realized and unrealized gains (losses) on investments, short sales, futures transactions and swap contracts per
share by $0.01 for the six months ended May 31, 2004. For consistency, similar reclassifications have been made to prior year
amounts, resulting in a reduction to the interest expense and total expense ratios and an increase to the net investment income
ratio of 0.35% and an increase to net investment income per share of $0.03 and a decrease to net realized and unrealized gains
(losses) on investments, short sales, futures transactions and swap contracts per share by $0.03 for the fiscal year ended
November 30, 2003, a reduction to the interest expense and total expense ratios and an increase to the net investment income
ratio of 0.39% and an increase to net investment income per share of $0.04 and a decrease to net realized and unrealized gains
(losses) on investments, short sales, futures transactions and swap contracts per share by $0.04 for the fiscal year ended
November 30, 2002, a reduction to the interest expense and total expense ratios and an increase to the net investment income
ratio of 0.37% and an increase to net investment income per share of $0.04 and a decrease to net realized and unrealized gains
(losses) on investments, short sales, futures transactions and swap contracts per share by $0.04 for the fiscal year ended
November 30, 2001 and a reduction to the interest expense and total expense ratios and an increase to the net investment income
ratio of 0.05% and an increase to net investment income per share of $0.01 and a decrease to net realized and unrealized gains
(losses) on investments, short sales, futures transactions and swap contracts per share by $0.01 for the fiscal year ended
November 30, 2000.
** Rounds to less than $0.01.
(1) Not Annualized
(2) Annualized
- ------------------------------
See notes to financial statements.
- -------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Notes to Financial Statements - (Unaudited)
May 31, 2004
- -------------------------------------------------------------------------------
1. The Fund
The Hyperion Total Return Fund, Inc. (the "Fund"), which was incorporated under
the laws of the State of Maryland on May 26, 1989, is registered under the
Investment Company Act of 1940 (the "1940 Act") as a diversified, closed-end
management investment company.
The Fund's investment objective is to provide a high total return, including
short and long-term capital gains and a high level of current income, through
the management of a portfolio of securities. No assurance can be given that the
Fund's investment objective 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, debt
securities held by the Fund are valued based upon the current bid price. Debt
securities may be valued by independent pricing services that have been approved
by the Board of Directors. The prices provided by a pricing service take into
account broker dealer market price quotations for institutional size trading in
similar groups of securities, security quality, maturity, coupon and other
security characteristics as well as any developments related to the specific
securities. Equity securities for which market quotations are readily available
are valued at market value, as reported by independent pricing services approved
by the Board of Directors. Such pricing services generally use the security's
last sale price on the exchange or market where primarily traded or, if there is
no reported sale during the day, the closing bid price. Securities traded on the
NASDAQ National Market are valued at the NASDAQ Official Closing Price ("NOCP"),
or if lacking an NOCP, at the most recent bid quotation on the NASDAQ National
Market. The Fund values mortgage-backed securities ("MBS") and other debt
securities for which market quotations are not readily available (approximately
25% of the investments in securities held by the Fund at May 31, 2004) at their
fair value as determined in good faith, utilizing procedures approved by the
Board of Directors of the Fund, 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 Fund 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 or in the financial condition of an issuer or market.
Options Written or Purchased: The Fund may write or purchase options as a method
of hedging potential declines in similar underlying securities. When the Fund
writes or purchases an option, an amount equal to the premium received or paid
by the Fund 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 Fund 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, also is
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 Fund has realized
- -------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Notes to Financial Statements - (Unaudited)
May 31, 2004
- -------------------------------------------------------------------------------
a gain or a loss on the investment transaction.
The Fund, 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 Fund purchases or writes options to hedge against adverse market movements
or fluctuations in value caused by changes in interest rates. The Fund 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 recognized as a realized loss. The risk
associated with writing call options is that the Fund may forego the opportunity
for a profit if the market value of the underlying position increases and the
option is exercised. The Fund will only write call options on positions held in
its portfolio. The risk in writing a put option is that the Fund may incur a
loss if the market value of the underlying position decreases and the option is
exercised. In addition, the Fund 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 Fund may make short sales of securities as a method of hedging
potential declines in similar securities owned. The Fund may have to pay a fee
to borrow the particular securities and may be obligated to pay to the lender an
amount equal to any payments received on such borrowed securities. A gain,
limited to the amount at which the Fund 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 Fund records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Fund's basis in the contract.
The Fund invests in financial futures contracts to hedge against fluctuations in
the value of portfolio securities caused by changes in prevailing market
interest rates. Should interest rates move unexpectedly, the Fund 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 Fund is at risk that it may not be able to
close out a transaction because of an illiquid market.
Swap agreements: The Fund may enter into interest rate swap agreements to manage
its exposure to interest rates. Interest rate swap agreements involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. The Fund will usually
enter into interest rate swaps on a net basis, i.e., the two payment streams are
netted out, with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. Swaps are marked to market daily based upon
quotations from market makers and the change, if any, along with an accrual for
periodic payments due or owed is recorded as unrealized gain or loss in the
Statement of Operations. Net cash payments on interest rate swap agreements are
included as part of realized gain/loss in the Statement of Operations. Entering
into these agreements involves, to varying degrees, elements of credit and
market risk in excess of the amounts recognized on the Statement of Assets and
Liabilities. Such risks involve the possibility that there will be no liquid
market for these agreements, that the counterparty to the agreements may default
on its obligation to perform or that there may be unfavorable changes in the
fluctuation of interest rates. See
- -------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Notes to Financial Statements - (Unaudited)
May 31, 2004
- -------------------------------------------------------------------------------
Note 7 for a summary of all open swap agreements as of May 31, 2004.
As a result of a recent FASB Emerging Issues Task Force consensus and subsequent
related SEC staff guidance, the Fund has reclassified periodic payments made
under interest rate swap agreements, previously included within net investment
income, to components of realized and unrealized gain (loss) in the Statement of
Operations. For consistency, similar reclassifications have been made to amounts
appearing in the previous year's Statement of Changes in Net Assets and the per
share amounts in prior year financial highlights. Prior year expense and net
investment income ratios in the financial highlights have also been modified
accordingly. This reclassification increased net investment income by $357,316,
increased net realized gain on swap contracts by $94,755 and increased net
change in unrealized loss on swap contracts by $452,071 for the six months ended
May 31, 2004, and increased net investment income by $998,026, increased net
realized loss on swap contracts by $82,248 and reduced net change in unrealized
gain on swap contracts by $915,778 for the year ended November 30, 2003. Such
reclassifications had no effect on the Fund's net asset value, either in total
or per share, or its total increase/decrease in net assets from operations
during any period.
When-Issued Purchases and Forward Commitments: The Fund may purchase securities
on a "when-issued" basis and may purchase or sell securities on a "forward
commitment" basis in order to hedge against anticipated changes in interest
rates and prices and secure a favorable rate of return. When such transactions
are negotiated, the price, which is generally expressed in yield terms, is fixed
at the time the commitment is made, but delivery and payment for the securities
take place at a later date, which can be a month or more after the date of the
transaction. At the time the Fund makes the commitment to purchase securities on
a when-issued or forward commitment basis, it will record the transaction and
thereafter reflect the value of such securities in determining its net asset
value. At the time the Fund enters into a transaction on a when-issued or
forward commitment basis, the Advisor will identify collateral consisting of
cash or liquid securities equal to the value of the when-issued or forward
commitment securities and will monitor the adequacy of such collateral on a
daily basis. On the delivery date, the Fund will meet its obligations from
securities that are then maturing or sales of the securities identified as
collateral by the Advisor and/or from then available cash flow. When-issued
securities and forward commitments may be sold prior to the settlement date. If
the Fund disposes of the right to acquire a when-issued security prior to its
acquisition or disposes of its right to deliver or receive against a forward
commitment, it can incur a gain or loss due to market fluctuation. There is
always a risk that the securities may not be delivered and that the Fund may
incur a loss. Settlements in the ordinary course are not treated by the Fund as
when-issued or forward commitment transactions and, accordingly, are not subject
to the foregoing limitations even though some of the risks described above may
be present in such transactions.
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 securities are accreted
and amortized, respectively, using the effective yield to maturity method.
Taxes: It is the Fund'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 Fund declares and pays dividends monthly from
net investment income. Distributions of 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 from investment
transactions have been determined in accordance with Federal income tax
regulations and may differ from net investment income and realized gains
recorded by the Fund 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.
- -------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Notes to Financial Statements - (Unaudited)
May 31, 2004
- -------------------------------------------------------------------------------
Cash Flow Information: The Fund 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. 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 Fund, 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 Fund may be delayed or limited.
3. Investment Advisory Agreements and Affiliated Transactions
The Fund has entered into an Investment Advisory Agreement with the Advisor. The
Advisor is responsible for the management of the Fund's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of 0.65% of the Fund's average weekly net assets.
During the six months ended May 31, 2004, the Advisor earned $934,758 in
investment advisory fees.
Prior to December 30, 2003, Seix Investment Advisors Inc. ("Seix") served as the
investment adviser to the Fund, pursuant to a sub-advisory agreement between the
Advisor and Seix, with respect to the investment of the portion of the Fund's
assets constituting high-yield, fixed income securities of U.S. corporations
("High-Yield Securities"). On December 30, 2003, the investment Sub-Advisory
Agreement between the Advisor and Seix was terminated. The High-Yield Securities
that were managed by Seix were replaced in-kind with an investment in the Seix
High Yield Fund which invests in U.S. dollar denominated below investment grade,
high yielding bonds.
The Fund has entered into an Administration Agreement with Hyperion Capital
Management, Inc. (the "Administrator"). The Administrator entered into a
sub-administration agreement with State Street Bank and Trust company (the "Sub-
Administrator"). The Administrator and Sub-Administrator perform administrative
services necessary for the operation of the Fund, including maintaining certain
books and records of the Fund and preparing reports and other documents required
by federal, state, and other applicable laws and regulations, and providing the
Fund with administrative office facilities. For these services, the Fund pays to
the Administrator a monthly fee at an annual rate of 0.20% of the Fund's average
weekly net assets. During the six months ended May 31, 2004, the Administrator
earned $287,618 in administration fees. The Administrator is responsible for any
fees due the Sub-Administrator.
Certain officers and/or directors of the Fund are officers and/or directors of
the Advisor and/or the Administrator.
4. Purchases and Sales of Investments
Purchases and sales of investments, excluding short-term securities, U.S.
Government securities, short sales and reverse repurchase agreements, for the
six months ended May 31, 2004, were $77,880,041 and $79,137,005, respectively.
Purchases and sales of U.S. Government securities, for the six months ended May
31, 2004 were $156,294,291 and $153,817,474, respectively. For purposes of this
footnote, U.S. Government securities may
- -------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Notes to Financial Statements - (Unaudited)
May 31, 2004
- -------------------------------------------------------------------------------
include securities issued by the U.S. Treasury, Federal Home Loan Mortgage
Corporation, and the Federal National Mortgage Association.
5. Borrowings
The Fund may enter into reverse repurchase agreements with the same parties with
whom it may enter into repurchase agreements. Under a reverse repurchase
agreement, the Fund 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 Fund 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 Fund 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 Fund may decline below the price of
the securities the Fund 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 Fund's
obligation to repurchase the securities, and the Fund's use of the proceeds of
the reverse repurchase agreement may effectively be restricted pending such
decision.
At May 31, 2004, the Fund had the following reverse repurchase agreements
outstanding:
Maturity
Face Value Description Amount
- ----------------- ------------------------------------------------------------------ ------------
$ 5,325,000 Morgan Stanley, 1.11%, dated 5/26/04, maturity date 6/02/04 $ 5,326,149
12,236,000 Morgan Stanley, 1.11%, dated 5/26/04, maturity date 6/02/04 12,238,641
4,162,000 Morgan Stanley, 1.09%, dated 5/27/04, maturity date 6/03/04 4,162,882
4,674,000 Merrill Lynch, 1.35%, dated 4/14/04, maturity date 10/14/04 4,706,075
3,865,000 Merrill Lynch, 1.35%, dated 4/14/04, maturity date 10/14/04 3,891,524
9,427,000 Merrill Lynch, 1.11%, dated 5/13/04, maturity date 6/02/04 9,432,813
3,938,000 Merrill Lynch, 1.12%, dated 5/28/04, maturity date 6/22/04 3,941,063
5,891,000 Merrill Lynch, 1.12%, dated 5/28/04, maturity date 6/22/04 5,895,582
5,957,000 Merrill Lynch, 1.11%, dated 5/13/04, maturity date 6/02/04 5,960,673
3,748,000 Lehman Brothers, 1.09%, dated 5/11/04, maturity date 6/02/04 3,750,497
24,375,000 Lehman Brothers, 1.07%, dated 5/27/04, maturity date 6/02/04 24,379,347
4,867,000 Goldman Sachs, 1.07%, dated 5/11/04, maturity date 6/02/04 4,870,183
10,483,550 Goldman Sachs, 1.08%, dated 5/27/04, maturity date 6/02/04 10,485,437
15,799,000 Goldman Sachs, 1.09%, dated 5/27/04, maturity date 6/03/04 15,802,349
19,851,000 Goldman Sachs, 1.09%, dated 5/27/04, maturity date 6/03/04 19,855,207
- ---------------- ----------------
$ 134,598,550
Maturity Amount, Including Interest Payable $ 134,698,422
----------------
Market Value of Assets Sold Under Agreements $ 137,166,329
----------------
Weighted Average Interest Rate 1.11%
----------------
The average daily balance of reverse repurchase agreements outstanding during
the six months ended May 31, 2004, was approximately $132,284,270 at a weighted
average interest rate of 1.03%. The maximum amount of reverse repurchase
agreements outstanding at any time during the period was $146,286,632 as of
March 5, 2004, which was 33.38% of total assets.
- -------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Notes to Financial Statements - (Unaudited)
May 31, 2004
- -------------------------------------------------------------------------------
6. Capital Stock
There are 50 million shares of $0.01 par value common stock authorized. Of the
30,726,723 shares outstanding at May 31, 2004, the Advisor owned 11,112 shares.
The Fund is continuing its stock repurchase program, whereby an amount of up to
15% of the original outstanding common stock, or approximately 3.7 million of
the Fund's shares, are authorized for repurchase. The purchase price may not
exceed the then-current net asset value.
For the periods ended May 31, 2004 and November 30, 2003, no shares have been
repurchased. All shares repurchased have been retired. Since inception of the
stock repurchase program 2,089,740 shares have been repurchased pursuant to this
program at a cost of $18,605,505 and at an average discount of 13.18% from its
net asset value.
The Fund issued to its shareholders of records as of the close of business on
August 27, 2001 transferable rights to subscribe for up to an aggregate
7,644,525 shares of common stock of the Fund at a rate of one share of common
stock for 3 rights held at the subscription price $8.10 per share. During
September 2001, the Fund issued, in total, 7,644,525 shares of Common Stock on
exercise of such Rights. Rights offering costs of $515,977 and brokerage and
deal-manager commissions of $2,322,025 were charged directly against the
proceeds of the Offering. An adjustment of $16,696 related to such offering
costs was credited to paid-in capital during the year ended November 30, 2002.
7. Financial Instruments
The Fund 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,
futures contracts and swap agreements 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 Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. During the period,
the Fund had segregated sufficient cash and/or securities to cover any
commitments under these contracts.
There was no written option activity for the six months ended May 31, 2004.
<page>
- -------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Notes to Financial Statements - (Unaudited)
May 31, 2004
- -------------------------------------------------------------------------------------------------------------------
As of May 31, 2004, the following swap agreements were outstanding:
Net Unrealized
Expiration Appreciation/
Notional Amount Date Description (Depreciation)
- ------------------ ---------- ---------------------------------------------------------------------------------
$ 40,000,000 06/04/08 Agreement with Goldman Sachs Capital Markets, LP, dated 06/02/03 $ 1,416,393
to pay semi-annually the notional amount multiplied
by 2.710% and to receive quarterly the notional amount
multiplied by 3 month USD-LIBOR-BBA.
$ 40,000,000 03/05/06 Agreement with Goldman Sachs Capital Markets, LP, dated 03/03/04 358,920
to pay semi-annually the notional amount multiplied
by 2.064% and to receive quarterly the notional amount
multiplied by 3 month USD-LIBOR-BBA.
$ 40,000,000 04/27/07 Agreement with Goldman Sachs Capital Markets, LP, dated 03/03/04 (761,564)
to receive semi-annually the notional amount
multiplied by 2.710% and to pay quarterly the notional
amount multiplied by 3 month USD-LIBOR-BBA.
$ 1,013,749
=============
As of May 31, 2004, the following futures contracts were outstanding:
Long:
Unrealized
Notional Cost at Value at Appreciation/
Amount Type Expiration Date Trade Date May 31, 2004 (Depreciation)
- ------------ ---------------------- ------------------ ----------------------------------------------
$ 7,000,000 5 Yr. U.S. Treasury Note June 2004 $ 7,809,900 $ 7,669,375 $ (140,525)
8. Federal Income Tax Information
Income and capital gain distributions are determined in accordance with federal
income tax regulations, which may differ from generally accepted accounting
principles.
During the year ended November 30, 2003 the tax character of the $27,571,944 of
distributions paid was from ordinary income.
At May 31, 2004 the components of net assets (excluding paid-in-capital) on a
tax basis were as follows:
Undistributed Tax Ordinary Income......................................... $ 1,194,099
===============
Accumulated capital loss................................................ $ (18,032,514)
===============
Book unrealized appreciation/(depreciation)............................... $ (3,860,448)
Plus: Cumulative Timing Differences....................................... 256,593
---------------
Unrealized appreciation/(depreciation).................................. $ (3,603,855)
===============
The difference between book basis and tax basis undistributed income is due to
the differing treatment of investments in swap contracts and add back of
interest write offs. The difference between book basis and tax basis unrealized
appreciation/ (depreciation) is due to the differing treatment of investments in
swap contracts, add back of interest write offs and the market-to-market of
futures. The difference between book basis and tax basis accumulated gain/(loss)
is due to the market-to-market of futures.
- -------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Notes to Financial Statements - (Unaudited)
May 31, 2004
- -------------------------------------------------------------------------------
Federal Income Tax Basis: The federal income tax basis of the Fund's investments
at May 31, 2004 was $419,965,685. Net unrealized depreciation was $4,717,266
(gross unrealized appreciation -- $12,198,151; gross unrealized depreciation --
$16,915,417). During the six months ended May 31, 2004, the Fund utilized
available capital loss carryforwards amounting to $2,907,899. At May 31, 2004,
the Fund had a capital loss carryforward of $18,032,514, of which $3,112,714
expires in 2007, $3,003,624 expires in 2008, $8,349,330 expires in 2009, and
$3,566,846 expires in 2010, available to offset any future gains, to the extent
provided by regulations.
Capital Account Reclassification: For the six months ended May 31, 2004, the
Fund's undistributed net investment income was increased by $1,759,575 with an
offsetting decrease in accumulated net realized loss. These adjustment were
primarily the result of current year paydown reclassifications, the
reclassification of character of dividends received from investments in real
estate investment trusts and the reclassifications of payments related to swaps.
9. Subsequent Events
Dividend: The Fund's Board of Directors declared the following regular monthly
dividends:
Dividend Record Payable
Per Share Date Date
---------- ------------- ----------
$ 0.0750 06/15/04 06/24/04
- -------------------------------------------------------------------------------
PROXY RESULTS (Unaudited)
- -------------------------------------------------------------------------------
During the six months ended May 31, 2004, The Hyperion Total Return Fund, Inc.
shareholders voted on the following proposals at a shareholders' meeting on
April 13, 2004. The description of each proposal and number of shares voted are
as follows:
- ----------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- ----------------------------------------------------------------------------------------------------------------
1. To elect to the Fund's Board of Directors
Rodman L. Drake: 28,813,475 0 321,782
- ----------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- ----------------------------------------------------------------------------------------------------------------
2. To elect to the Fund's Board of Directors
Harry E. Petersen: 28,473,011 0 340,461
- ----------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- ----------------------------------------------------------------------------------------------------------------
3. To elect to the Fund's Board of Directors
Clifford E. Lai: 28,492,412 0 321,061
- ----------------------------------------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- -------- -------------------------------------------------------------------------------------------------------
4. To select PricewaterhouseCoopers LLP as the
independent auditors: 28,383,594 142,451 287,426
- ----------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Information Concerning Directors and Officers (Unaudited)
- -------------------------------------------------------------------------------------------------------------------
The following tables provide information concerning the directors and officers of The Hyperion Total Return Fund, Inc.
(the "Fund").
Number of
Position(s) Held with Portfolios in Fund
Fund and Term of Complex
Name, Address Office and Length of Principal Occupation(s) During Past 5 Years Overseen
and Age Time Served and Other Directorships Held by Director by Director
- -------------------------------------------------------------------------------------------------------------------
Disinterested Directors
Class II Director to serve until 2007 Annual Meeting of Stockholders or termination of the Fund:
Rodman L. Drake Chairman Chairman (since 2003) and Director and/or 3
c/o One Liberty Plaza, Trustee of several investment companies
36th floor, New York, Elected December 9, advised by Hyperion Capital Management,
New York 10006-1404 2003 Inc. (the "Advisor") (1989- Present);
Co-founder, Baringo
Director, Member of Capital LLC (2002- Present); Director,
Age 61 the Audit Committee, Animal Medical Center (2002- Present);
Chairman of Director, Hotelevision, Inc.(1999-Present);
Nominating and Director, Parsons Brinckerhoff, Inc. (1995-
Compensation Present); Director, Absolute Quality Inc.
Committees (2000-Present); Trustee of Excelsior Funds
(33) (1994-Present);
Elected for Three President, Continuation Investments Group
Year Term Inc. (1997- 2001).
Director since July
1989
Harry E. Petersen, Jr. Director, Member of Director and/or Trustee of several 3
c/o One Liberty Plaza, the Audit Committee, investment companies advised by Hyperion
36th floor, New York, Member of Capital Management, Inc. (the "Advisor")
New York 10006-1404 Compensation and (1992-Present); Senior Consultant to
Nominating Committee, Cornerstone Equity Advisors, Inc. (1998-
Member 2001).
Age 79 of Executive
Committee
Elected for Three
Year Term
Director since
October 1993
- -------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Information Concerning Directors and Officers (Unaudited)
Number of
Position(s) Held with Portfolios in Fund
Fund and Term of Complex
Name, Address Office and Length of Principal Occupation(s) During Past 5 Years Overseen
and Age Time Served and Other Directorships Held by Director by Director
- -------------------------------------------------------------------------------------------------------------------
Disinterested Director
Class I Director to serve until 2006 Annual Meeting of Stockholders:
Robert F. Birch Director, Member of Director and/or Trustee of several 5
c/o One Liberty Plaza, the Audit Committee, investment companies advised by Hyperion
36th floor, New York, Member of Capital Management, Inc. (the "Advisor")
New York 10006-1404 Nominating and (1998-Present); Chairman and President,
Compensation New America High Income Fund (1992-
Age 68 Committee, Member Present); Chairman of the Board and Co-
of Executive Founder, The China Business Group, Inc.
Committee (1996-Present); Director, Brandywine
Funds (3) (2001 to Present).
Elected for Three
Year Term
Director since
December 1998
Disinterested Director
Class III to serve until 2005 Annual Meeting of Stockholders:
Leo M. Walsh, Jr. Director, Chairman Director and/or Trustee of several 5
c/o One Liberty Plaza, of the Audit investment companies advised by Hyperion
36th floor, New York, Committee, Member Capital Management, Inc. (the "Advisor")
New York 10006-1404 of Nominating and (1989-Present); Financial Consultant for
Compensation Medco Health Solutions Inc. (1994- Present).
Committee
Age 71 Elected for Three
Year Term
Director since June
1989
Interested Director
Class III to serve until 2005 Annual Meeting of Stockholders:
Clifford E. Lai* Director President (1998-Present) and Chief 5
c/o One Liberty Plaza, Investment Officer (1993-2002) of
36th floor, New York, Elected until 2005 Hyperion Capital Management, Inc.
New York 10006-1404 Since December (the "Advisor"); Co-Chairman (2003-Present)
2003 and Board of Managers (1995-Present) of
Hyperion- GMAC Capital Advisors, LLC
Age 51 President (formerly Lend Lease Hyperion Capital,
LLC); President of several investment
Elected Annually companies advised by the Advisor (1995-
Since April 1993 Present).
- ----------
* Mr. Lai is an "interested person" as defined in the Investment Company Act of
1940, as amended (the "1940 Act"), because of affiliations with Hyperion Capital
Management, Inc., the Fund's advisor. As a result of his service with the
Advisor and certain affiliations with the Advisor as described below, the Fund
considers Mr. Lai to be an "interested person" of the Fund within the meaning of
Section 2(a)(19) of the 1940 Act.
- --------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Information Concerning Directors and Officers (Unaudited)
- --------------------------------------------------------------------------------------------------------------------
Name, Address Position(s) Term of Office and
and Age Held with Fund Length of Time Served Principal Occupation(s) During Past 5 Years
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
Clifford E. Lai President Elected Annually Please see "Information Concerning
c/o One Liberty Plaza, Since April 1993 Nominees/Directors."
36th floor, New York,
New York 10006-1404
Age 51
John Dolan Vice President Elected Annually Chief Investment Strategist (1998-
c/o One Liberty Plaza, Since March 1998 Present) and Chief Investment Officer
36th floor, New York, (2002-Present) of the Advisor.
New York 10006-1404
Age 50
Patricia A. Sloan Vice President Elected Annually Consultant of Ranieri & Co., Inc.
c/o One Liberty Plaza, Since June 2002 2000-Present); Secretary, Director
36th floor, New York, and/or Trustee of several investment
New York 10006-1404 companies advised by the Advisor or by
its affiliates (1989-2002).
Age 60
Thomas F. Doodian Treasurer Elected Annually Managing Director, Chief Operating
c/o One Liberty Plaza, Since February 1998 Officer (1998-Present) and Director of
36th floor, New York, Finance and Operations of the Advisor
New York 10006-1404 (July 1995-Present); Treasurer of
several investment companies advised by
the Advisor (February 1998-Present).
Age 45
Joseph Tropeano Secretary Elected Annually Director and Compliance Officer, Hyperion
c/o One Liberty Plaza, Since June 2002 Capital Management, Inc. (1993-Present);
36th floor, New York, Secretary and Compliance Officer of
New York 10006-1404 several investment companies advised by
Hyperion Capital Management, Inc.
Age 42 (1994-Present); Secretary and Compliance
Officer, Hyperion-GMAC Capital Advisors, LLC
(1995-Present).
The Fund's Statement of Additional Information includes additional information about the directors and is available,
without charge, upon request by calling 1-800-497-3746
- -------------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
- -------------------------------------------------------------------------------
A Dividend Reinvestment Plan (the "Plan") is available to shareholders of the
Fund pursuant to which they may elect to have all distributions of dividends and
capital gains automatically reinvested by American Stock Transfer & Trust
Company (the "Plan Agent") in additional Fund 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 Fund's Custodian, as
Dividend Disbursing Agent.
The Plan Agent serves as agent for the shareholders in administering the Plan.
After the Fund declares a dividend or determines to make a capital gain
distribution, payable in cash, if (1) the market price is lower than net asset
value, the participants in the Plan will receive the equivalent in Fund shares
valued at the market price determined as of the time of purchase (generally, the
payment date of the dividend or distribution); or if (2) the market price of the
shares on the payment date of the dividend or distribution is equal to or
exceeds their net asset value, participants will be issued Fund shares at the
higher of net asset value or 95% of the market price. This discount reflects
savings in underwriting and other costs that the Fund otherwise will be required
to incur to raise additional capital. If net asset value exceeds the market
price of the Fund shares on the payment date or the Fund declares a dividend or
other distribution payable only in cash (i.e., if the Board of Directors
precludes reinvestment in Fund shares for that purpose), the Plan Agent will, as
agent for the participants, receive the cash payment and use it to buy Fund
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 exceeds the net asset value of the Fund's shares, the average
per share purchase price paid by the Plan Agent may exceed the net asset value
of the Fund's shares, resulting in the acquisition of fewer shares than if the
dividend or distribution had been paid in shares issued by the Fund. The Fund
will not issue shares under the Plan below net asset value.
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 Fund, 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.
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 Fund. There are no brokerage commissions charged with respect to
shares issued directly by the Fund. 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.
A brochure describing the Plan is available from the Plan Agent, by calling
1-212-936-5100.
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.
INVESTMENT ADVISOR AND ADMINISTRATOR TRANSFER AGENT
HYPERION CAPITAL MANAGEMENT, INC. AMERICAN STOCK TRANSFER & TRUST
One Liberty Plaza COMPANY
165 Broadway, 36th Floor Investor Relations Department
New York, New York 10006-1404 59 Maiden Lane
For General Information about the Trust: New York, NY 10038
(800) HYPERION For Shareholder Services:
(800) 937-5449
SUB-ADVISOR INDEPENDENT AUDITORS
HYPERION GMAC CAPITAL ADVISORS, LLC PRICEWATERHOUSECOOPERS LLP
One Liberty Plaza 1177 Avenue of the Americas
165 Broadway, 36th Floor New York, New York 10036
New York, New York 10006-1404
SUB-ADMINISTRATOR LEGAL COUNSEL
STATE STREET BANK and TRUST COMPANY SULLIVAN & WORCESTER LLP
225 Franklin Street 1666 K Street, N.W.
Boston, Massachusetts 02116 Washington, D.C. 20006
CUSTODIAN AND FUND ACCOUNTING AGENT
STATE STREET BANK and TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02116
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 of
beneficial interest in the open market at prevailing market prices.
Quarterly Portfolio Schedule: No later than October 29, 2004, the Fund will file
its complete schedule of portfolio holdings with the Securities and Exchange
Commission for the third quarter of 2004 on Form N-Q. The Fund will thereafter
file Form N-Q for the first and third quarters of each fiscal year on Form N-Q.
The Fund's Forms N-Q will be available on the Securities and Exchange
Commission's website at http://www.sec.gov. The Fund's Form N-Q may be reviewed
and copied at the Securities and Exchange Commission's Public Reference Room in
Washington, D.C. and information on the operation of the Public Reference Room
may be obtained by calling 1-800-SEC-0330. Once filed, the most recent Form N-Q
will be available without charge, upon request, by calling 1-800-HYPERION or on
the Fund's website at http://www.hyperioncapital.com.
- -------------------------------------------------------------------------------
Officers & Directors
- -------------------------------------------------------------------------------
Rodman L. Drake*
Chairman
Robert F. Birch*
Director
Garth Marston
Director Emeritus
Leo M. Walsh, Jr.*
Director
Harry E. Petersen, Jr.*
Director
Clifford E. Lai
Director and President
Patricia A. Sloan
Vice President
John Dolan
Vice President
Thomas F. Doodian
Treasurer
Joseph Tropeano
Secretary
* Audit Committee Members
- -------------------------------------------------------------------
[GRAPHIC OMITTED]
The financial information included herein is taken from records of the Fund
without audit by the Fund's independent auditors, who do not express an opinion
thereon.
This report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Fund shares.
The Hyperion Total Return Fund, Inc.
One Liberty Plaza
165 Broadway, 36th Floor
New York, NY 10006-1404
Item 2. Code of Ethics.
As of the end of the period covered by this report, the Registrant had
adopted a Code of Ethics for Principal Executive and Principal Financial
Officers (the "Code"). There were no amendments to or waivers from the Code
during the period covered by this report. A copy of the Registrant's Code will
be provided upon request to any person without charge by contacting Joseph
Tropeano at 1-800-HYPERION or by writing to Mr. Tropeano at One Liberty Plaza,
165 Broadway, 36th Floor, New York, NY 10006-1404.
Item 3. Audit Committee Financial Expert.
The Registrant's Board of Directors has determined that the Registrant has
at least one audit committee financial expert serving on its audit committee,
and his name is Rodman L. Drake. Mr. Drake is independent.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
The Registrant has a separately-designated standing Audit Committee
established in accordance with Section 3(a)(58)(A) of the Securities Exchange
Act of 1934. The Registrant's Audit Committee members include Leo M. Walsh, Jr.,
Rodman L. Drake, Robert F. Birch and Harry E. Petersen, Jr.
Item 6. Schedule of Investments.
Not applicable.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
This Item is not applicable as the Registrant invested exclusively in
non-voting securities during the period covered by this report.
Item 8.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
None.
Item 10. Controls and Procedures.
(a) The Registrant's principal executive officer and principal financial
officer have concluded that the Registrant's Disclosure Controls and Procedures
are effective, based on their evaluation of such Disclosure Controls and
Procedures as of a date within 90 days of the filing of this report on Form
N-CSR.
(b) As of the date of filing this Form N-CSR, the Registrant's principal
executive officer and principal financial officer are aware of no changes in the
Registrant's internal control over financial reporting that occurred during the
Registrant's last fiscal half-year that has materially affected or is reasonably
likely to materially affect the Registrant's internal control over financial
reporting.
Item 11. Exhibits.
(a)(1) None.
(2) A separate certification for each principal executive officer and
principal financial officer of the Registrant as required by Rule 30a-2(a) under
the Investment Company Act of 1940 is attached as an exhibit to this Form N-CSR.
(3) None.
(b) A separate certification for each principal executive officer and
principal financial officer of the Registrant as required by Rule 30a-2(b)under
the Investment Company Act of 1940 is attached as an exhibit to this Form
N-CSR.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE HYPERION TOTAL RETURN FUND, INC.
By: /s/ Clifford E. Lai
__________________
Clifford E. Lai
Principal Executive Officer
Date: August 6, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
By: /s/ Clifford E. Lai
___________________
Clifford E. Lai
Principal Executive Officer
Date: August 6, 2004
By: /s/ Thomas F. Doodian
_____________________
Thomas F. Doodian
Treasurer and Principal Financial Officer
Date: August 6, 2004