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: November 30, 2004
Item 1. Reports to Shareholders.
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November 30, 2004
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio Composition
The chart that follows shows the allocation of the Fund's holdings by asset
category as of November 30, 2004.
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments As of November 30, 2004*
[GRAPHIC OMITTED]
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* As a percentage of total investments.
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THE HYPERION TOTAL RETURN FUND, INC.
Report of the Investment Advisor
For the Year Ended November 30, 2004
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Dear Shareholder:
We welcome this opportunity to provide you with information about The Hyperion
Total Return Fund, Inc. (the "Fund") for the fiscal year ended November 30,
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 and actively managing a portfolio consisting primarily of U.S.
Treasury securities, mortgage-backed securities ("MBS"), asset-backed securities
("ABS"), and high yield corporate securities.
Performance
For the fiscal year ending November 30, 2004, shareholders realized a total
investment return of 11.31%, which assumes the reinvestment of dividends and is
exclusive of brokerage commissions. Based on the NYSE closing price of $10.29 on
November 30, 2004, the Fund's shares had a current yield of 8.75%, which was
4.94% 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 November 30, 2004, the Fund, inclusive of the effect of leverage, was
managed with an average duration (a bond's duration is the weighted average
number of years until maturity of all its cash flows, including coupon payments
and principal) of 2.4 years, as measured on a net asset basis.
Market Environment
The economy picked up in the fourth quarter. Employment growth surged as
measured by a sharp rise in the October Non-Farm Payroll report. The improved
employment picture led to a rise in consumer confidence, strong Christmas sales
and higher corporate profits. Continued low, longer-term fixed mortgage rates
kept home sales strong, but car sales tapered. The spike in oil prices peaked in
late October and is now no longer viewed as a restraint on further economic
expansion. The rise in consumer spending continued to exacerbate the trade
deficit. Fiscal policies, including funding the Iraq war effort drove the
capital budget further into deficit. While the latter resulted in an increase in
Treasury issuance, the primary impact on the markets was a continuation of the
four-year decline in the US dollar.
The more robust economic outlook, the decline in the US dollar, and the relief
from lower oil prices, all allowed the Fed to continue to raise Federal Reserve
funds at the "moderate" pace that they first outlined during the summer. The
Federal Reserve raised interest rates by 25 basis points at both the November 10
and December 14 meetings, and they have made clear their intention to raise them
another 25 basis points in February.
Our long-term concern about the markets is the twin budget and trade deficits,
which are both growing to record levels. While this may lead to longer-term,
higher interest rates as the government finances the deficit, it is immediately
resulting in a weaker US dollar, as non-US investors, who generally buy a large
portion of Treasury securities, demand higher interest rates. Our view is that
the US dollar will weaken further through the middle of 2005. This will have at
least two immediate impacts on sectors to which the Fund has exposure. First, a
weaker US dollar will lead to a rise in the cost of imported goods. This may
decrease consumer spending (with corporate profit implications) and may impact
the level of retail sales, which is of issue to our commercial MBS positions.
Second, a further weakening of the US dollar will result in commercial office
space being even more attractive to the European investors that invest so much
in that sector. Generally, we believe that short term interest rates will
continue to rise with Federal Reserve funds reaching 3% during 2005, however,
longer term interest rates may very well stabilize around current levels.
Portfolio Strategy
The performance of investment-grade commercial and residential MBS were
relatively stable, but stronger performance in manufactured housing (MH) and
sub-prime residential MBS was realized. Yield spreads on BB rated issues
tightened dramatically across the board boosting the return of the Fund. The
yield spread tightening at the BB rated level was the primary source of excess
return during the last few months.
FN Commercial MBS Residential Subs HY-BB -Sal MH Home Equity
---------------- ------------------- --------- --------------- --------------
Month 10-yr Swaps 6.5 AA A BBB BB AA A BBB BB BB AA A BBB AA A BBB
- ----- ------- ------ ----- --- -- --- --- --- -- ---- -- ---- ---- ---- --- --- --- ---
10/31/2003...... 4.30 43 42 81 90 136 441 145 165 245 420 275 292 417 542 188 233 392
8/31/2004....... 4.13 45 45 81 90 130 374 135 155 210 375 235 215 295 420 170 211 232
10/31/2004...... 4.03 43 44 81 88 129 350 136 156 210 365 225 185 250 375 158 186 227
Oct '04-Oct '03... (0.27) (1) 2 0 (2) (7) (91) (9) (9) (35) (55) (50) (107) (167) (167) (31) (47) (165)
Oct '04-Aug '04... (0.10) (3) (2) 0 (2) (1) (24) 1 1 0 (10) (10) (30) (45) (45) (13) (25) (5)
The sector allocations within the Fund were relatively unchanged. Low interest
rates resulted in prepayments to the residential MBS sector to the point where
several issues were called. This resulted in a reduction to the Fund's
residential MBS allocation. To offset this reduction, we increased our exposure
to Treasury and Agency securities. With the paydowns to the residential MBS
sector and the reinvestment in Treasury securities, the AAA rated allocation
increased for the fiscal year.
While the sector allocations were relatively stable, we added to the BB rated
exposures at the expense of BBB and higher rated bonds. This had the impact of
increasing the BB rated exposure from 20.2% to 21.5%. Within the BB rated
allocation, the sector weightings to structured securities (residential MBS,
commercial MBS, corporate high yield and ABS) remained relatively unchanged.
Over time, we hope to add to the commercial MBS sector via an allocation to
rated B Notes.
We remain nearly fully leveraged to take advantage of the steepness in the yield
curve, but we are maintaining greater than 70% of the leveraged portion of the
Fund in floating-rate securities or securities hedged to a 2.5 year duration
using interest rate swaps.
The duration of the Fund has been running between 3.5 and 4.0 years. Should
interest rates increase and mortgage prepayments slow, we expect the duration to
extend slightly However, we are comfortable that the duration will not extend
dramatically.
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
November 30, 2004
Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS - 64.2%
U.S. Government Agency Collateralized Mortgage Obligations - 3.4%
Federal Home Loan Mortgage Corporation
Series 1675, Class KC.................................. 6.50% 10/15/10 $ 5,591@ $ 5,810,052
Series 1587, Class SK.................................. 9.00+ 10/15/08 1,257# 1,333,253
Series 1604, Class MC.................................. 9.00+ 11/15/08 1,482 1,548,748
Series 1604, Class SB.................................. 9.00+ 11/15/08 285 297,929
----------------
8,989,982
Federal National Mortgage Association ----------------
Series 1993-170, Class SC.............................. 9.00+ 09/25/08 272 282,537
Series 1993-48, Class C................................ 9.50 04/25/08 304 317,355
----------------
599,892
Total U.S. Government Agency Collateralized Mortgage Obligations ----------------
(Cost - $9,104,903)............................... 9,589,874
----------------
U.S. Government Agency Pass-Through Certificates - 46.7%
Federal Home Loan Mortgage Corporation
Pool A16170............................................ 6.00 12/01/33 5,640@ 5,824,386
Pool A17112............................................ 6.00 12/01/33 18,094@ 18,685,232
Pool A13915............................................ 7.00 09/01/33 12,203@ 12,946,108
Pool A17331............................................ 7.00 12/01/33 126 133,633
Pool C53494............................................ 7.50 06/01/31 52 55,447
Pool C56878............................................ 8.00 08/01/31 988 1,071,384
Pool C56879............................................ 8.00 08/01/31 214 231,695
Pool C58516............................................ 8.00 09/01/31 613 664,887
Pool C59641............................................ 8.00 10/01/31 678 735,687
Pool C55166............................................ 8.50 07/01/31 222 241,869
Pool C55167............................................ 8.50 07/01/31 694 754,725
Pool C55168............................................ 8.50 07/01/31 415 451,068
Pool C55169............................................ 8.50 07/01/31 544 591,896
Pool C58521............................................ 8.50 09/01/31 60 65,768
Pool C60422............................................ 8.50 10/01/31 64 70,009
Pool C60423............................................ 8.50 10/01/31 691 751,923
Pool C60424............................................ 8.50 10/01/31 334 363,128
Pool G01466............................................ 9.50 12/01/22 3,671 4,134,632
Pool 555538............................................ 10.00 03/01/21 3,301@ 3,637,710
----------------
51,411,187
Federal National Mortgage Association ----------------
Pool 649881............................................ 6.00 09/01/32 4,044@ 4,175,948
Pool TBA............................................... 6.50 TBA 8,000 8,393,752
Pool 650162............................................ 6.50 10/01/32 3,160@ 3,317,976
Pool 652870............................................ 6.50 10/01/32 3,173@ 3,331,533
Pool 654917............................................ 6.50 08/01/32 8,053@ 8,456,139
Pool 642102............................................ 7.00 05/01/32 4,539@ 4,814,474
Pool 645406............................................ 7.00 05/01/32 3,109@ 3,297,701
Pool 645912............................................ 7.00 06/01/32 3,568@ 3,784,596
Pool 645913............................................ 7.00 06/01/32 3,053 3,238,296
Pool 651588............................................ 7.00 07/01/32 934 990,503
Pool 660181............................................ 7.00 10/01/32 825 874,999
Pool 661116............................................ 7.00 10/01/32 1,806 1,915,489
Pool 663372............................................ 7.00 10/01/32 496 525,849
Pool 663874............................................ 7.00 10/01/32 1,523 1,615,028
Pool 669474............................................ 7.00 11/01/32 1,369 1,451,737
Pool 678012............................................ 7.00 08/01/32 4,101@ 4,351,566
Pool 759505............................................ 7.00 01/01/34 7,799@ 8,276,045
U.S. GOVERMNENT & AGENCY OBLIGATIONS (continued)
Pool 255053............................................ 7.50% 12/01/33 $ 1,458 $ 1,561,058
Pool 784369............................................ 7.50 07/01/13 1,458 1,495,883
Pool 789284............................................ 7.50 05/01/17 2,240 2,381,507
- ------------
See notes to financial statements.
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments
November 30, 2004
Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
- -------------------------------------------------------------------------------------------------------------------
Pool 398800............................................ 8.00 06/01/12 1,857 1,978,564
Pool 545436............................................ 9.00 10/01/31 3,159 3,471,867
Pool 458132............................................ 9.41 03/15/31 5,737@ 6,460,917
----------------
80,161,427
Total U.S. Government Agency Pass-Through Certificates ----------------
(Cost - $131,437,184)............................. 131,572,614
----------------
U.S. Treasury Obligations - 9.3%
United States Treasury Notes
............................................................ 3.50 08/15/09 6,300@ 6,253,979
............................................................ 4.25 08/15/14 1,000 990,938
............................................................ 4.25 11/15/14 19,000@ 18,836,714
----------------
Total U.S. Treasury Obligations
(Cost - $26,411,724).............................. 26,081,631
----------------
U.S. Agency Obligations - 4.8%
Federal Home Loan Mortgage Corporation
(Cost - $13,535,082).............................. 5.13 11/07/13 13,600@ 13,595,757
----------------
Total U.S. Government & Agency Obligations
(Cost - $180,488,893)............................. 180,839,876
----------------
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ASSET-BACKED SECURITIES - 35.5%
Housing Related Asset-Backed Securities - 28.1%
125 Home Loan Owner Trust
Series 1998-1A, Class M2*.............................. 7.75 02/15/29 1,016 1,016,330
Access Financial Manufactured Housing Contract Trust
Series 1995-1, Class B1................................ 7.65 05/15/21 10,060 6,438,400
Aegis Asset Backed Securities Trust
Series 2004-2N, Class N1*.............................. 4.50 04/25/34 1,233 1,226,893
Argent NIM Trust
Series 2004-WN3, Class A*.............................. 5.93 03/25/34 1,669 1,668,752
Argent Securities, Inc.
Series 2004-W3, Class M5*(c)........................... 4.48+ 02/25/34 2,400 1,861,183
Asset Backed Securities Corp., NIMS Trust
Series 2003-HE6, Class A1*............................. 6.75 11/27/33 477 478,550
Chase Funding Mortgage Loan Asset-Backed
Series 2000-1, Class IIM2(c)........................... 2.98+ 02/25/30 893 893,647
First Franklin Mortgage Loan Trust
Series 2004-FF4, Class M2 (c).......................... 3.43+ 06/25/34 2,000 1,999,842
Series 2001-FF2, Class M3(c)........................... 3.96+ 11/25/31 5,000 5,006,775
Series 2004-FFH1, Class B*(c).......................... 5.68+ 03/25/34 3,050 2,655,809
Series 2004-FF2, Class B*(c)........................... 5.68+ 03/25/34 1,800 1,569,283
Series 2004-FFH2, Class B1*(c)......................... 5.68+ 06/25/34 2,750 2,320,502
----------------
13,552,211
Fremont NIM Trust ----------------
Series 2004-A, Class Note*............................. 4.75 01/25/34 1,299 1,295,585
Green Tree Financial Corp.
Series 1998-3, Class A6................................ 6.76 03/01/30 4,675 4,841,450
Series 1998-4, Class A7................................ 6.87 02/01/30 2,114 2,138,034
Series 1998-8, Class M1................................ 6.98 09/01/30 5,000 2,150,000
- ------------
See notes to financial statements.
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments
November 30, 2004
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ASSET-BACKED SECURITIES (continued)
Series 1997-6, Class B1................................ 7.17% 01/15/29 $ 10,000 $ 2,012,500
Series 1997-6, Class M1................................ 7.21 01/15/29 7,000 4,830,000
Series 1997-3, Class M1................................ 7.53 03/15/28 4,500 2,880,000
Series 1997-6, Class A9................................ 7.55 01/15/29 2,897 3,134,928
----------------
21,986,912
Long Beach Asset Holdings Corp. ----------------
Series 2003-4, Class N1*............................... 6.54 08/25/33 165 165,625
Long Beach Mortgage Loan Trust
Series 2003-4, Class M6(c)............................. 6.18+ 08/25/33 2,400 2,430,636
Mid-State Trust
Series 10, Class B..................................... 7.54 02/15/36 2,243 2,204,189
Series 2004-1, Class M2................................ 8.11 08/15/37 3,744 3,787,760
----------------
5,991,949
Option One Mortgage Loan Trust ----------------
Series 2003-4, Class M2(c)............................. 3.83+ 07/25/33 2,125 2,150,732
Series 2003-1, Class M2(c)............................. 4.13+ 02/25/33 3,000 3,047,889
----------------
5,198,621
Sail Net Interest Margin Notes ----------------
Series 2004-2A, Class A*............................... 5.50 03/27/34 1,542 1,536,305
Structured Asset Investment Loan Trust
Series 2003-BC8, Class M2(c)........................... 3.93+ 08/25/33 3,000 3,038,541
Series 2004-7, Class B(c).............................. 4.68+ 08/25/34 4,321 3,705,601
Series 2004-8, Class B1(c)............................. 4.68+ 09/25/34 2,000 1,903,672
Series 2004-2, Class B*(c)............................. 5.18+ 03/25/34 2,234 2,023,658
----------------
10,671,472
Vanderbilt Mortgage Finance, Inc. ----------------
Series 2001-B, Class A5................................ 6.96 09/07/31 2,000 2,080,454
Westgate Resorts
Series 1998-AA, Class A2*.............................. 8.26 07/15/13 735 668,723
----------------
Total Housing Related Asset-Backed Securities
(Cost - $86,451,739).............................. 79,162,248
----------------
Non-Housing Related Asset-Backed Securities - 3.6%
Aerco Ltd.
Series 2A, Class A3.................................... 2.55+ 07/15/25 2,862 2,060,681
Airlines Pass Through Trust
Series 1R, Class A8.................................... 2.46+ 03/15/19 2,850 2,479,882
Global Rated Eligible Assets Trust
Series 1998-A, Class A1*............................... 7.33 09/15/07 1,587 7,936
MBNA Credit Card Master Trust
Series 2002-C7, Class C7............................... 6.70 03/16/15 5,000 5,517,875
Securitized Multiple Asset Rated Trust
Series 1997-2, Class A(b).............................. 8.24 03/15/06 2,300 11,499
----------------
Total Non-Housing Related Asset-Backed Securities
(Cost - $13,565,962).............................. 10,077,873
----------------
Franchise Securities - 1.3%
FFCA Secured Lending Corp.
Series 1998-1, Class A1B*(e)........................... 6.73 07/18/13 2,681 2,801,409
Franchisee Loan Receivable Trust
Series 1995-B, Class A*................................ 1.00+ 01/15/11 1,355 757,619
----------------
Total Franchise Securities
(Cost - $4,045,143)............................... 3,559,028
----------------
- ------------
See notes to financial statements.
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments
November 30, 2004
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ASSET-BACKED SECURITIES (continued)
Collateralized Debt Obligations - 2.5%
Anthracite CDO I Ltd.
Series 2002-CIBA, Class CFL*........................... 3.41 05/24/37 $ 5,000 $ 5,055,500
Porter Square CDO I Limited
Series 1A, Class C*.................................... 5.62+ 08/15/38 2,000 2,000,000
----------------
Total Collateralized Debt Obligations
(Cost - $6,992,724)............................... 7,055,500
----------------
Total Asset-Backed Securities
(Cost - $111,055,568)............................. 99,854,649
----------------
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COMMERCIAL MORTGAGE BACKED SECURITIES - 18.2%
Bear Stearns Commercial Mortgage Securities
Series 1999-C1, Class F*............................... 5.64 02/14/31 1,394 1,234,409
Series 1999-C1, Class D................................ 6.53 02/14/31 5,000 5,441,500
Series 2001-EPR, Class B*.............................. 6.92 02/12/11 5,000 5,218,700
----------------
11,894,609
Chase Commercial Mortgage Securities Corp. ----------------
Series 2000-2, Class I*................................ 6.65 07/15/32 1,971 1,402,997
Columbia Center Trust
Series 2000-CCT, Class D*.............................. 2.86+ 12/15/09 2,720 2,716,600
Commercial Mortgage Asset Trust
Series 1999-C1, Class C................................ 7.35 01/17/32 2,000 2,330,600
Commercial Mortgage Lease-Backed Certificate
Series 2001-CMLB, Class A1*............................ 6.75 06/20/31 2,655 2,902,966
First Chicago/Lennar Trust
Series 1997-CHL1, Class D*............................. 7.81+ 04/29/39 3,000 3,064,689
JP Morgan Commercial Mortgage Finance Corp.
Series 1999-C8, Class C................................ 7.65+ 07/15/31 5,000 5,635,305
LB-UBS Commercial Mortgage Trust
Series 2004-C8, Class G*............................... 5.09 12/15/39 2,300 2,311,426
Series 2002-C2, Class L*............................... 5.68 07/15/35 5,300 4,907,005
----------------
7,218,431
Mortgage Capital Funding, Inc. ----------------
Series 1996-MC1, Class G*(e)........................... 7.15 06/15/06 4,409 4,623,277
Nationslink Funding Corp.
Series 1998-2, Class F*................................ 7.11 08/20/30 4,840 4,851,810
UBS 400 Atlantic Street Mortgage Trust
Series 2002-C1A, Class B3*............................. 7.19 01/11/22 3,000 3,313,530
Wachovia Bank Commercial Mortgage Trust
Series 2004-WL4A, Class H*............................. 2.95+ 10/15/15 1,300 1,298,876
----------------
Total Commercial Mortgage Backed Securities
(Cost - $47,118,041).............................. 51,253,690
----------------
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NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES - 12.8%
Subordinated Collateralized Mortgage Obligations - 12.8%
ABN AMRO Mortgage Corp.
Series 2002-1A, Class B3*.............................. 5.64+ 06/25/32 508 508,467
Series 2002-1A, Class B4*.............................. 5.64+ 06/25/32 304 294,581
Series 2002-1A, Class B5*.............................. 5.64+ 06/25/32 510 397,639
----------------
1,200,687
----------------
- ------------
See notes to financial statements.
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THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments
November 30, 2004
- -------------------------------------------------------------------------------------------------------------------
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued)
Bank of America Alternative Loan Trust
Series 2004-3, Class 30B6.............................. 5.50% 04/25/34 $ 808 $ 203,954
Bank of America Funding Corporation
Series 2003-3, Class B4................................ 5.46+ 10/25/33 937 809,988
Series 2003-3, Class B5................................ 5.46+ 10/25/33 937 600,215
Series 2003-3, Class B6................................ 5.46+ 10/25/33 940 291,474
----------------
1,701,677
Bank of America Mortgage Securities, Inc. ----------------
Series 2001-4, Class 1B3............................... 6.75 04/25/31 2,011 2,042,538
Citicorp Mortgage Securities, Inc.
Series 2002-6, Class B4................................ 6.39+ 05/25/32 598 597,665
Series 2002-6, Class B5................................ 6.39+ 05/25/32 598 567,782
Series 2002-6, Class B6................................ 6.40+ 05/25/32 349 139,751
----------------
1,305,198
Countrywide Home Loans ----------------
Series 2003-57, Class B3............................... 5.50 01/25/34 495 424,894
Federal National Mortgage Association
Series 1998-W6, Class B3............................... 7.09 10/25/28 1,697 1,638,846
First Republic Mortgage Loan Trust
Series 2000-FRB1, Class B3............................. 2.68+ 06/25/30 704 672,647
G3 Mortgage Reinsurance Ltd.
Series 1, Class E*..................................... 22.18+ 05/25/08 5,542 5,957,866
GMAC Mortgage Corp. Loan Trust
Series 2003-J9, Class B1............................... 5.50 01/25/34 889 759,963
Series 2003-J9, Class B2............................... 5.50 01/25/34 889 567,586
Series 2003-J9, Class B3............................... 5.50 01/25/34 890 271,432
Series 2002-J6, Class B2............................... 6.25 10/25/32 950 877,731
Series 2002-J6, Class B3............................... 6.25 10/25/32 1,267 823,699
----------------
3,300,411
JP Morgan Mortgage Trust ----------------
Series 2003-A2, Class B4............................... 4.47+ 11/25/33 548 415,621
Residential Accredit Loans, Inc.
Series 1998-QS5, Class B1*............................. 6.75 04/25/28 1,158 1,135,489
Residential Finance Limited Partnership
Series 2004-B, Class B5*............................... 3.64+ 02/10/36 3,541 3,540,723
Series 2002-A, Class B7................................ 7.79+ 10/10/34 2,920 2,974,371
----------------
6,515,094
Residential Funding Mortgage Securities I, Inc. ----------------
Series 2004-S1, Class B1............................... 5.25 02/25/34 610 513,674
Series 2004-S1, Class B3............................... 5.25 02/25/34 305 103,666
Series 2003-S7, Class B2............................... 5.50 05/25/33 686 464,695
Series 2003-S7, Class B3(a)............................ 5.50 05/25/33 979 352,547
----------------
1,434,582
Resix Finance Ltd. Credit-Linked Notes ----------------
Series 2004-C, Class B7*............................... 5.59+ 09/10/36 1,497 1,496,692
Series 2003-D, Class B7*............................... 7.84+ 12/10/35 1,970 2,054,793
Series 2004-A, Class B10*.............................. 13.80+ 02/10/36 867 887,435
----------------
4,438,920
----------------
- ------------
See notes to financial statements.
- -------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments
November 30, 2004
- -------------------------------------------------------------------------------------------------------------------
NON-AGENCY RESIDENTIAL MORTGAGE BACKED SECURITIES (continued)
Washington Mutual
Series 2002-AR7, Class B4............................... 5.52%+ 07/25/32 $ 1,178 $ 1,155,845
Series 2002-AR7, Class B5............................... 5.52+ 07/25/32 884 843,214
Series 2002-AR7, Class B6............................... 5.52+ 07/25/32 1,474 1,164,695
----------------
3,163,754
Wells Fargo Mortgage Backed Securities Trust ----------------
Series 2002-10, Class B6................................ 6.00 06/25/32 486 334,293
----------------
Total Subordinated Collateralized Mortgage Obligations
(Cost - $32,758,839)............................... 35,886,471
----------------
Total Non-Agency Residential Mortgage Backed Securities
(Cost - $32,758,839)............................... 35,886,471
----------------
- -------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS - 1.2%
Airlines - 1.2%
American Airline........................................... 7.86 10/01/11 2,500 2,575,758
United Airlines, Series 00-2............................... 7.19 04/01/11 982 851,272
----------------
3,427,030
Total Corporate Obligations ----------------
(Cost - $3,435,681)................................. 3,427,030
----------------
- -------------------------------------------------------------------------------------------------------------------
INTEREST ONLY SECURITIES - 7.9%
Bank of America Commercial Mortgage Inc.
Series 2003-1, Class XP2*(d)............................. 1.48%+ 09/11/36 $ 19,165 $ 2,702,900
Bear Stearns Commercial Mortgage Securities
Series 2001-TOP2, Class X2*(d)........................... 1.36+ 02/15/35 74,184 2,804,599
COMM
Class 2001-J2A, Class EIO*(d)............................ 3.87+ 07/16/34 10,000 2,759,000
Commercial Capital Access One, Inc.
Series 2001-A, Class T1(d)............................... 4.50 02/15/09 18,000 3,234,600
GMAC Commercial Mortgage Securities, Inc.
Series 2003-C1, Class X1*(d)............................. 0.15+ 05/10/36 86,953 3,533,764
GS Mortgage Securities Corp. II
Series 2001-ROCK, Class X1*(d)........................... 0.22+ 05/03/18 256,515 3,501,689
Vendee Mortgage Trust
Series 1997-2, Class IO(d)............................... 0.06+ 06/15/27 65,771 128,122
Wachovia Bank Commercial Mortgage Trust
Series 2002-C2, Class IO1*(d)............................ 0.35+ 11/15/34 85,060 3,530,091
--------------
Total Interest Only Securities
(Cost - $21,096,053)................................ 22,194,765
--------------
- ------------
See notes to financial statements.
- -------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Portfolio of Investments
November 30, 2004
- -------------------------------------------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------------------------------------------------
COMMON STOCK - 0.1%
Duke Realty Corp. (REIT)
(Cost - $287,997)..................................................... 11,583 $ 400,193
--------------
- -------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS - 0.8%
Equity Office Properties Trust Series B, 5.25% (REIT)
(Cost - $1,955,458)................................................... 46,012 2,351,213
---------------
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - 7.4%
McMorgan High Yield Fund..................................................... 101,330 1,061,938
Seix High Yield Fund......................................................... 1,727,889 19,680,661
---------------
Total Investment Companies
(Cost - $20,616,935).................................................. 20,742,599
---------------
- -------------------------------------------------------------------------------------------------------------------
Total Investments - 148.1%
(Cost - $418,813,465)................................................. 416,950,486
Liabilities in Excess of Other Assets - (48.1)%................................ (135,415,548)
---------------
NET ASSETS - 100.0%............................................................ $ 281,534,938
===============
- -------------------------------------------------------------------------------------------------------------------
+ -- Variable Rate Security -- Interest rate is the rate in effect November 30, 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) -- Interest rate is based on the notional amount of the underlying mortgage pools.
(e) -- Private Placement.
@ -- Portion or entire principal amount delivered as collateral for reverse repurchase agreements
(Note 5).
# -- 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 a 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
November 30, 2004
- --------------------------------------------------------------------------------------------------------------------------
Assets:
Investments in securities, at market (cost $418,813,465) (Note 2)............................ $ 416,950,486
Cash......................................................................................... 1,233,765
Interest and dividend receivable............................................................. 2,263,229
Receivable for investments sold.............................................................. 1,996,913
Unrealized appreciation on swap contracts (Note 7)........................................... 831,922
Principal paydowns receivable................................................................ 114,005
Receivable for variation margin.............................................................. 1,595
Receivable from transfer agent............................................................... 65,582
Prepaid expenses and other assets............................................................ 18,743
----------------
Total assets............................................................................... 423,476,240
----------------
Liabilities:
Reverse repurchase agreements (Note 5)........................................................ 128,275,700
Interest payable for reverse repurchase agreements (Note 5)................................... 79,779
Payable for investments purchased............................................................. 13,215,780
Investment advisory fee payable (Note 3)...................................................... 148,281
Administration fee payable (Note 3)........................................................... 48,330
Directors' fees payable....................................................................... 23,250
Accrued expenses and other liabilities........................................................ 150,182
----------------
Total liabilities........................................................................... 141,941,302
----------------
Net Assets (equivalent to $9.15 per share based on 30,764,213 shares issued and outstanding).... $ 281,534,938
================
Composition of Net Assets:
Capital stock, at par value ($.01) (Note 6)................................................... $ 307,642
Additional paid-in capital (Note 6)........................................................... 300,412,850
Accumulated undistributed net investment income............................................... 1,306,448
Accumulated net realized loss................................................................. (19,544,419)
Net unrealized depreciation................................................................... (947,583)
----------------
Net assets applicable to capital stock outstanding............................................ $ 281,534,938
================
- ------------
See notes to financial statements.
- --------------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Statement of Operations
For the Year Ended November 30, 2004
- --------------------------------------------------------------------------------------------------------------------------
Investment Income (Note 2):
Interest...................................................................................... $ 27,776,166
Dividends..................................................................................... 1,474,805
--------------
29,250,971
Expenses: --------------
Investment advisory fee (Note 3).............................................................. 1,852,897
Administration fee (Note 3)................................................................... 574,782
Insurance..................................................................................... 200,310
Custodian..................................................................................... 77,013
Reports to shareholders....................................................................... 131,428
Accounting and tax services................................................................... 107,316
Transfer agency............................................................................... 41,487
Directors' fees............................................................................... 69,688
Legal......................................................................................... 35,326
Registration fees............................................................................. 28,224
Miscellaneous................................................................................. 17,013
--------------
Total operating expenses.................................................................... 3,135,484
--------------
Interest expense on reverse repurchase agreements (Note 5)................................ 1,728,710
--------------
Total expenses.............................................................................. 4,864,194
--------------
Net investment income......................................................................... 24,386,777
--------------
Realized and Unrealized Gain (Loss) on Investments
(Notes 2 and 7):
Net realized gain (loss) on:
Investment transactions....................................................................... 5,530,223
Short sales................................................................................... (52,777)
Swap contracts................................................................................ (662,403)
Futures transactions.......................................................................... 167,724
--------------
Net realized gain on investment transactions, short sales, swap contracts and futures
transactions.................................................................................. 4,982,767
--------------
Net change in unrealized appreciation/depreciation on:
Investments................................................................................... (5,482,842)
Swap contracts................................................................................ (469,518)
Futures....................................................................................... (65,154)
--------------
Net change in unrealized appreciation/depreciation on investments, swap contracts and futures... (6,017,514)
--------------
Net realized and unrealized loss on investments, short sales, swap contracts and futures........ (1,034,747)
--------------
Net increase in net assets resulting from operations............................................ $ 23,352,030
==============
- ------------
See notes to financial statements.
- ----------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Statements of Changes in Net Assets
For the Year For the Year
Ended Ended
November 30, 2004 November 30, 2003*
- ----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets Resulting from
Operations:
Net investment income.................................................. $ 24,386,777 $ 25,970,693
Net realized gain on investment transactions, short sales, swap contracts
and futures transactions.............................................. 4,982,767 5,676,653
Net change in unrealized appreciation/depreciation on investments, swap
contracts and futures................................................. (6,017,514) (2,491,841)
--------------- ---------------
Net increase in net assets resulting from operations................... 23,352,030 29,155,505
--------------- ---------------
Dividends to Shareholders (Note 2):
Net investment income.................................................. (27,653,733) (27,571,944)
--------------- ---------------
Capital Stock Transactions (Note 6):
Net asset value of shares issued through dividend reinvestment (71,326
and 106,000 shares, respectively)..................................... 687,386 997,260
--------------- ---------------
Net increase from capital stock transactions........................... 687,386 997,260
--------------- ---------------
Total increase (decrease) in net assets.............................. (3,614,317) 2,580,821
Net Assets:
Beginning of period.................................................... 285,149,255 282,568,434
--------------- ---------------
End of year (including undistributed net investment income (loss) of
$1,306,448 and $1,135,259, respectively).............................. $ 281,534,938 $ 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.
Statements of Cash Flows
For the Year Ended November 30, 2004
- ----------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash:
Cash flows provided by (used for) operating activities:
Net increase in net assets resulting from operations......................................... $ 23,352,030
Adjustments to reconcile net increase in net assets from
operations to net cash provided by operating activities:
Purchases of long-term portfolio investments and to cover securities sold short............ (385,748,838)
Proceeds from disposition of long-term portfolio investments, principal paydowns, and
securities sold short..................................................................... 385,285,803
Sales of short-term portfolio investments, net............................................. 2,000,000
Decrease in interest receivable............................................................ 814,347
Decrease in receivable for investments sold and paydowns................................... 26,235,009
Decrease in prepaid expenses and other assets.............................................. 1,564
Decrease in variation margin receivable.................................................... 90,577
Increase in interest payable for reverse repurchase agreements............................. 44,551
Decrease in payable for investments purchased.............................................. (45,097,815)
Decrease in investment advisory fee payable................................................ (4,306)
Increase in administration fee payable..................................................... 1,380
Increase in accrued expenses and other liabilities......................................... 5,074
Net accretion on investments............................................................... (486,965)
Unrealized appreciation on investments..................................................... 6,017,514
Net realized gain on investment transactions............................................... (5,530,223)
Net realized loss on short sales........................................................... 52,777
-----------------
Net cash provided by operating activities.................................................... 7,032,479
-----------------
Cash flows provided by (used for) financing activities:
Net cash provided by reverse repurchase agreements........................................... 20,785,700
Dividends paid to shareholders, net of reinvestments......................................... (26,949,563)
-----------------
Net cash used for financing activities....................................................... (6,163,863)
-----------------
Net increase in cash........................................................................... 868,616
Cash at beginning of year...................................................................... 365,149
-----------------
Cash at end of year............................................................................ $ 1,233,765
=================
Noncash financing activities not included herein consist of reinvestment of dividends of $687,386.
Interest payments for the year ended November 30, 2004, totaled $1,728,710.
* The format of the statement of cash flows has changed from the direct method to the indirect method.
- ------------
See notes to financial statements.
- --------------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Financial Highlights
For the Year Ended November 30,
-------------------------------------------------------------------
2004* 2003* 2002* 2001* 2000*
- ----------------------------------------------- ------------ ------------ ------------ --------------- ------------
Per Share Operating Performance:
Net asset value, beginning of period........ $ 9.29 $ 9.24 $ 9.17 $ 9.41 $ 9.27
--------- --------- --------- --------- ---------
Net investment income....................... 0.79 0.85 0.89 0.88 0.79
Net realized and unrealized gains (losses) on
investments, short sales, futures and swap
contracts................................. (0.03) 0.10 0.08 0.26 0.20
--------- --------- --------- --------- ---------
Net increase (decrease) in net asset value
resulting from operations................... 0.76 0.95 0.97 1.14 0.99
--------- --------- --------- --------- ---------
Net effect of shares repurchased............ -- -- -- -- --**
---------- ---------- ---------- ---------- ----------
Dividends from net investment income........ (0.90) (0.90) (0.90) (0.87) (0.85)
Offering costs charged to additional
paid-in-capital........................... -- -- --** (0.09) --
Dilutive effect of rights offering.......... -- -- -- (0.42) --
----------- ----------- ----------- --------- -----------
Net asset value, end of period.............. $ 9.15 $ 9.29 $ 9.24 $ 9.17 $ 9.41
========== ========== ========== ========== ==========
Market price, end of period................. $ 10.2900 $ 10.1600 $ 9.2800 $ 8.5700 $ 8.4375
========== ========== ========== ========== ==========
Total Investment Return+.................... 11.31% 20.43% 19.39% 13.13%++ 26.41%
Ratios to Average Net Assets/
Supplementary Data:
Net assets, end of period (000's)........... $ 281,535 $ 285,149 $ 282,568 $ 280,106 $ 215,318
Operating expenses.......................... 1.10% 1.15% 1.05% 1.11% 1.10%
Interest expense............................ 0.61% 0.47% 0.84% 1.22% 1.82%
Total expenses.......................... 1.71% 1.62% 1.89% 2.33% 2.92%
Net investment income....................... 8.55% 9.10% 9.62% 9.21% 8.55%
Portfolio turnover rate..................... 80% 89% 61% 43% 57%
- ----------
+ 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 0.16% 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 fiscal year ended November 30, 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.
- ------------
See notes to financial statements.
- -------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Notes to Financial Statements
November 30, 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, liabilities, 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 these estimates.
Valuation of Investments: Where market quotations are readily available,
securities held by the Fund are valued based upon the current bid price, except
preferred stocks, which are valued based upon the closing price. 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.
The Fund values mortgage-backed securities ("MBS") and other debt securities for
which market quotations are not readily available (approximately 26% of the
investments in securities held by the Fund at November 30, 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. General factors that 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 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. Also, 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 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. See Note 7 for a summary of
all open futures contracts as of November 30, 2004.
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 a
quotation from the market maker (which is typically the counterparty to the swap
agreement) 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 Note 7 for a summary of all open swap
agreements as of November 30, 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 $460,194,
increased net realized loss on swap contracts by $98,688 and increased net
change in unrealized loss on swap contracts by $361,506 for the year ended
November 30, 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 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.
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.
For the year ended November 30, 2004, the Advisor earned $1,852,897 in
investment advisory fees. Prior to December 30, 2003, Seix Investment Advisors
Inc. ("Seix") served as an 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. Seix earned
$7,339 in sub-advisory fees for the one month period ending 12/30/03.
The Fund has entered into an administration agreement with Hyperion Capital
Management, Inc. (the "Administrator"). The Administrator has 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. For the year ended
November 30, 2004, the Administrator earned $574,782 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
year ended November 30, 2004, were $102,519,523 and $100,527,630, respectively.
Purchases and sales of U.S. Government securities, for the year ended November
30, 2004 were $232,437,549 and $234,183,895 respectively. For purposes of this
footnote, U.S. Government securities 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 November 30, 2004, the Fund had the following reverse repurchase agreements
outstanding:
Maturity
Face Value Description Amount
- ----------------- --------------------------------------------------------------------------- ------------------
$ 6,347,250 Goldman Sachs, 1.95%, dated 11/22/04, maturity date 12/06/04............... $ 6,352,063
3,240,000 Goldman Sachs, 2.07%, dated 11/08/04, maturity date 12/08/04............... 3,245,589
4,070,000 Goldman Sachs, 2.07%, dated 11/08/04, maturity date 12/08/04............... 4,077,021
4,674,000 Goldman Sachs, 2.13%, dated 11/22/04, maturity date 12/17/04............... 4,680,914
10,690,000 Goldman Sachs, 2.14%, dated 11/23/04, maturity date 12/23/04............... 10,709,064
18,150,000 Goldman Sachs, 2.14%, dated 11/23/04, maturity date 12/23/04............... 18,182,368
13,650,000 Lehman Brothers, 2.05%, dated 11/22/04, maturity date 12/06/04............. 13,660,882
5,600,000 Lehman Brothers, 2.16%, dated 11/17/04, maturity date 12/22/04............. 5,611,760
5,900,000 Lehman Brothers, 2.26%, dated 11/30/04, maturity date 12/28/04............. 5,910,371
3,667,000 Merrill Lynch, 2.12%, dated 11/10/04, maturity date 12/08/04............... 3,673,046
3,216,000 Merrill Lynch, 2.16%, dated 11/29/04, maturity date 12/17/04............... 3,219,473
8,058,000 Merrill Lynch, 2.18%, dated 11/17/04, maturity date 12/23/04............... 8,075,566
5,640,000 Merrill Lynch, 2.24%, dated 11/30/04, maturity date 12/28/04............... 5,649,826
3,139,200 Morgan Stanley, 2.10%, dated 11/10/04, maturity date 12/02/04.............. 3,143,229
16,375,250 Morgan Stanley, 1.45%, dated 11/29/04, maturity date 12/06/04.............. 16,379,867
4,200,000 Morgan Stanley, 1.97%, dated 10/21/04, maturity date 12/13/04.............. 4,212,181
3,600,000 Morgan Stanley, 1.97%, dated 10/21/04, maturity date 12/13/04.............. 3,610,441
8,059,000 Morgan Stanley, 2.22%, dated 11/23/04, maturity date 01/13/05.............. 8,084,346
- ---------------- ----------------
$ 128,275,700
================ Maturity Amount, Including Interest Payable................................ $ 128,478,007
----------------
Market Value of Assets Sold Under Agreements............................... $ 131,140,165
----------------
Weighted Average Interest Rate............................................. 2.04%
----------------
The average daily balance of reverse repurchase agreements outstanding for the
year ended November 30, 2004, was approximately $131,874,945 at a weighted
average interest rate of 1.31%. 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.
6. Capital Stock
There are 50 million shares of $0.01 par value common stock authorized. Of the
30,764,213 shares outstanding at November 30, 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 years ended November 30, 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 record 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 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 year ended November 30, 2004. As of
November 30, 2004, the following swap agreements were outstanding:
Net Unrealized
Expiration Appreciation/
Notional Amount Date Description (Depreciation)
--------------- ---------- ---------------------------------------------------------------- --------------
$ 40,000,000 03/05/06 Agreement with Goldman Sachs Capital Markets, LP, dated $ 474,894
03/03/04 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 (688,022)
03/03/04 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.
$ 40,000,000 06/04/08 Agreement with Goldman Sachs Capital Markets, LP, dated 1,045,050
06/02/03 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.
$ 831,922
As of November 30, 2004, the following futures contracts were outstanding:
Long:
Net Unrealized
Notional Cost at Value at Appreciation/
Amount Type Expiration Date Trade Date November 30, 2004 (Depreciation)
- ------------- -------------------------- ----------------------------- -----------------------------------
$ 10,800,000 10 Yr. U.S. Treasury Note December 2004 $ 12,118,815 $ 12,036,938 $ 81,877
2,900,000 10 Yr. U.S. Treasury Note March 2005 $ 3,213,345 $ 3,211,750 $ 1,595
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, 2004 the tax character of the $27,653,733 of
distributions paid was from ordinary income.
At November 30, 2004 the components of net assets (excluding paid-in-capital) on
a tax basis were as follows:
Undistributed Tax Ordinary Income....................... $ 944,942
===============
Accumulated capital loss.............................. $ (19,460,946)
===============
Book unrealized appreciation/(depreciation)............. $ (947,583)
Minus: Cumulative Timing Differences.................... (278,033)
---------------
Unrealized appreciation/(depreciation)................ $ (669,550)
===============
The differences between book and tax basis unrealized appreciation/
(depreciation) is primarily attributable to the mark-to-market of
futures and swap interest income (expense).
Federal Income Tax Basis: The federal income tax basis of the Fund's investments
at November 30, 2004 was $418,813,465. Net unrealized depreciation was
$1,862,979 (gross unrealized appreciation -- $12,231,794; gross unrealized
depreciation -- $14,094,773). At November 30, 2004, the Fund had a capital loss
carryforward of $19,460,946, of which $4,541,146 expires in 2007, $3,003,624
expires in 2008, $8,349,330 expires in 2009, $3,566,846 expires in 2010,
available to offset any future gains, to the extent provided by regulations.
Capital Account Reclassification: For the year ended November 30, 2004, the
Fund's undistributed net investment income was increased by $3,438,145 with an
offsetting decrease in accumulated net realized loss. These adjustments were
primarily the result of current year paydown reclassifications, swap interest
income (expense) and REIT dividend reclassifications.
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 12/21/04 12/31/04
0.0750 12/31/04 01/28/05
10. Contractual Obligations
The Fund enters into contracts that contain a variety of indemnifications. The
Fund's maximum exposure under these arrangements is unknown. However, the Fund
has not had prior claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
- -------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
The Hyperion Total Return Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of cash
flows and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of The Hyperion Total Return
Fund, Inc. (The "Fund") at November 30, 2004, the results of its operations and
its cash flows for the year then ended, the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at November 30, 2004 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion.
PricewaterhouseCoopers LLP
New York, N.Y.
January 26, 2005
- -------------------------------------------------------------------------------
TAX INFORMATION (Unaudited)
- -------------------------------------------------------------------------------
The Fund is required by subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Fund's fiscal year end (November
30, 2004) as to the federal tax status of distributions received by shareholders
during such fiscal year. Accordingly, we are advising you that all distributions
paid during the fiscal year were derived from net investment income and are
taxable as ordinary income. In addition, 0.89% of the Fund's distributions
during the fiscal year ended November 30, 2004 were earned from U.S. Treasury
obligations. None of the Fund's distributions qualify for the dividends received
deduction available to corporate shareholders.
For the fiscal year ended November 30, 2004, certain dividends paid by the Fund
may not be subject to a maximum tax rate of 15%, as provided for by the Jobs and
General Growth Tax Relief Reconciliation Act of 2003. The Fund designates a
maximum amount of 4.37% as qualified dividend income, which is taxed at a
maximum rate of 15%.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent with respect to calendar 2004. The second notification, which will
reflect the amount to be used by calendar year taxpayers on their federal, state
and local income tax returns, will be made in conjunction with Form 1099-DIV and
will be mailed in January 2005. Shareholders are advised to consult their own
tax advisors with respect to the tax consequences of their investment in the
Fund.
- -----------------------------------------------------------------------------------------------------------------
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").
Position(s) Held with Number of
Fund and Term of Portfolios in Fund
Name, Address Office and Length of Principal Occupation(s) During Past 5 Years Complex Overseen
and Age Time Served and Other Directorships Held by Director by Director
- -----------------------------------------------------------------------------------------------------------------
Disinterested Director Nominee
Class III Director to serve until 2005 Annual Meeting of Stockholders:
Leo M. Walsh, Jr. Director since June Director of several investment companies 6
c/o One Liberty 1989, Chairman of advised by the Advisor or by its affiliates
Plaza, 36th floor, the Audit Committee, (1989-Present); Financial Consultant for
New York, New York Member of Nominating Medco Health Solutions Inc. (1994- 2003).
10006-1404 and Compensation
Committee
Age 72
[09-05-32] Elected for Three Year
Term
Interested Director Nominee
Class III Interested Nominee to serve until 2005 Annual Meeting of Stockholders:
Clifford E. Lai* Director since President (1998-Present) and Chief 5
c/o One Liberty December 2003 Investment Officer (1993-2002) of the
Plaza, 36th floor, Advisor; Co-Chairman (2003- Present) and
New York, New York Elected until 2005 Board of Managers (1995-Present) Hyperion
10006-1404 Member of Executive GMAC Capital Advisors, LLC (formerly, Lend
Committee Lease Hyperion Capital, LLC); President and
Age 51 Director of several investment companies advised
[05-16-53] by the Advisor (1993-Present).
Disinterested Directors
Class II Directors to serve until 2007 Annual Meeting of Stockholders:
Rodman L. Drake Chairman Elected Chairman (since 2003) and Director and/or 3
c/o One Liberty December 9, 2003 Trustee of several investment companies
Plaza, 36th floor, advised by Hyperion Capital Management,
New York, New York Director since July Inc. (the "Advisor") (1989- Present);
10006-1404 1989, Member of the Co-founder, Baringo Capital LLC (2002-
Audit Committee, Present); Director, Jackson Hewitt Tax
Age 61 Chairman of Service Inc. ("JTX") (2004-Present);
[02-02-43] Nominating and Director, Animal Medical Center
Compensation (2002-Present); Director, Hotelvision, Inc.
Committee (1999-2003); Director and/or Lead Director,
Parsons Brinckerhoff, Inc. (1995-Present);
Elected for Three Director, Absolute Quality Inc.
Year Term (2000-2004); Trustee of Excelsior Funds(32)
(1994-Present); President, Continuation
Investments Group Inc. (1997-2001).
- ----------
* 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.
- -----------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Information Concerning Directors and Officers (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
Position(s) Held with Number of
Fund and Term of Portfolios in Fund
Name, Address Office and Length of Principal Occupation(s) During Past 5 Years Complex Overseen
and Age Time Served and Other Directorships Held by Director by Director
- -----------------------------------------------------------------------------------------------------------------
Harry E. Petersen, Jr. Director since Director and/or Trustee of several investment 3
c/o One Liberty October 1993, Member companies advised by the Advisor or by its
Plaza, 36th floor, of the Audit affiliates (1993-Present); Senior Consultant
New York, New York Committee, Member of to Cornerstone Equity Advisors, Inc.
10006-1404 Nominating and (1998-2001).
Compensation
Age 79 Committee, Member
[02-03-25] of Executive Committee
Elected for Three Year
Term
Class I Director to serve until 2006 Annual Meeting of Stockholders:
Robert F. Birch Director since Director of several investment companies 5
c/o One Liberty December 1998, Member advised by the Advisor or by its affiliates
Plaza, 36th floor, of the Audit (1998-Present); Chairman and President, New
New York, New York Committee, Member of America High Income Fund (1992- Present);
10006-1404 Nominating and Director, Brandywine Funds (3) (2001 to
Compensation Present).
Age 68 Committee, Member of
[03-12-36] Executive Committee
Elected for Three Year
Term
- -----------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Information Concerning Directors and Officers (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
Officers of the Trust
- -----------------------------------------------------------------------------------------------------------------
Position(s) Term of Office and Principal Occupation(s)
Name, Address and Age Held with Fund Length of Time Served During Past 5 Years
----------------------------------------------------------------------------------------------------------------
Clifford E. Lai* President Elected Annually Since Please see "Information Concerning
c/o One Liberty April 1993 Nominees/Directors."
Plaza, 36th floor,
New York, New York
10006-1404
Age 51
[05-16-53]
John Dolan* Vice President Elected Annually Since Chief Investment Strategist (1998-Present)
c/o One Liberty Plaza, March 1998 and Chief Investment Officer (2002-Present)
36th floor, New York, of the Advisor.
New York 10006-1404
Age 51
[08-19-53]
Patricia A. Sloan* Vice President Elected Annually Since Consultant of Ranieri & Co., Inc.
c/o One Liberty Plaza, June 2002 (2000-Present); Secretary, Director and/or
36th floor, New York, Trustee of several investment companies
New York 10006-1404 advised by the Advisor or by its affiliates
(1989- 2002).
Age 61
[10-02-43]
Daniel S. Kim* ^ CCO & Elected Chief Director and Chief Compliance Officer
c/o One Liberty Plaza, Secretary Compliance Officer ("CCO") (September 2004-Present), and
36th floor, New York, September 2004 and Secretary (since January 2005) of the
New York 10006-1404 Secretary January 2005 Advisor; Secretary (since January 2005) and
CCO (September 2004-Present) of several
Age 36 investment companies advised by the Advisor;
[3-13-68] Secretary (since January 2005) and CCO
(September 2004-Present) Hyperion GMAC Capital
Advisors, LLC. Assistant General Counsel and
CCO (May 2001 -- August 2004) Oak Hill Capital
Management; Assistant General Counsel (May
2001 -- August 2004) Oak Hill Advisors, LP,
Lawyer (January 2001 -- April 2001) Arkin,
Kaplan & Cohen. Law student preparing for the
New York State Bar (January 2000 to January
2001).
----------
* 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.
^ Joseph Tropeano served as the Fund's secretary until January 2005.
- -----------------------------------------------------------------------------------------------------------------
THE HYPERION TOTAL RETURN FUND, INC.
Information Concerning Directors and Officers (Unaudited)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Position(s) Term of Office and Principal Occupation(s)
Name, Address and Age Held with Fund Length of Time Served During Past 5 Years
----------------------------------------------------------------------------------------------------------------
Thomas F. Doodian* Treasurer Elected Annually Since Managing Director, Chief Operating Officer
c/o One Liberty February 1998 (1998- Present) and Director of Finance and
Plaza, 36th floor, Operations of the Advisor (1995-Present);
New York, New York Treasurer of several investment companies
10006-1404 advised by the Advisor (1998-Present);
Treasurer of Hyperion GMAC Capital Advisors,
Age 45 LLC (formerly, Lend Lease Hyperion Capital
[05-22-59] Advisors, LLC) (1996-Present)
----------
* 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.
^ Joseph Tropeano served as the Fund's secretary until January 2005.
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
- -------------------------------------------------------------------------------
CHANGE TO INVESTMENT POLICY
- -------------------------------------------------------------------------------
On December 14, 2004 the Fund's Board of Directors voted to approve a change to
the Fund's investment policy to allow the Fund to purchase shares of open-end
registered investment companies.
- -------------------------------------------------------------------------------
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,
State Street Bank and Trust Company, 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 Fund: New York, NY 10038
(800) HYPERION For Shareholder Services:
(800) 937-5449
SUB-ADMINISTRATOR
STATE STREET BANK and TRUST COMPANY INDEPENDENT REGISTERED PUBLIC
225 Franklin Street ACCOUNTING FIRM
Boston, Massachusetts 02116
PRICEWATERHOUSECOOPERS LLP
CUSTODIAN AND FUND ACCOUNTING AGENT 300 Madison Avenue
STATE STREET BANK and TRUST COMPANY New York, New York 10017
225 Franklin Street
Boston, Massachusetts 02116 LEGAL COUNSEL
SULLIVAN & WORCESTER LLP
1666 K Street, Northwest
Washington, D.C. 20006
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: The Fund will file Form N-Q with the Securities
and Exchange Commission for the first and third quarters of each fiscal year.
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 Forms 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.
Proxy Voting Policies and Procedures
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available without charge,
upon request, by calling 1-800-497-3746 and on the Securities and Exchange
Commission's website at http://www.sec.gov.
Proxy Voting Record
The Fund has filed with the Securities and Exchange Commission its proxy voting
record for the 12-month period ending June 30 on Form N-PX. Once filed, the most
recent Form N-PX will be available without charge, upon request, by calling
1-800-497-3746 or on the Securities and Exchange Commission's website at
http://www.sec.gov.
- -------------------------------------------------------------------------------
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
Daniel Kim**
Secretary
* Audit Committee Members
** Elected January 2005
- -----------------------------------------------------
[GRAPHIC OMITTED]
- -----------------------------------------------------
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 Daniel Kim
at 1-800-HYPERION or by writing to Mr. Kim 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.
Audit Fees
For the fiscal year ended November 30, 2004, PriceWaterhouseCoopers LLP
("PwC") billed the Registrant aggregate fees of $74,000 for professional
services rendered for the audit of the Registrant's annual financial statements
and review of financial statements included in the Registrant's annual report to
shareholders.
For the fiscal year ended November 30, 2003, PwC billed the Registrant
aggregate fees of $67,000 for professional services rendered for the audit of
the Registrant's annual financial statements and review of financial statements
included in the Registrant's annual report to shareholders.
Tax Fees
For the fiscal year ended November 30, 2004, PwC billed the Registrant
aggregate fees of $10,000 for professional services rendered for tax compliance,
tax advice and tax planning. The nature of the services comprising the Tax Fees
was the review of the Registrant's income tax returns and tax distribution
requirements.
For the fiscal year ended November 30, 2003, PwC billed the Registrant
aggregate fees of $7,000 for professional services rendered for tax compliance,
tax advice and tax planning. The nature of the services comprising the Tax Fees
was the review of the Registrant's income tax returns and tax distribution
requirements.
All Other Fees
For the fiscal year ended November 30, 2004, PwC billed the Registrant
aggregate fees of $37,000 for professional services rendered for the review of
financial statements included in the Registrant's semi-annual report to
shareholders.
For the fiscal year ended November 30, 2003, PwC billed the Registrant
aggregate fees of $43,500 for professional services rendered for the review of
financial statements included in the Registrant's semi-annual report to
shareholders.
Audit-Related and Non-Audit Fees for 2004 and 2003
None.
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.
Please refer to Item 1. Reports to Shareholders.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
THE HYPERION TOTAL RETURN FUND, INC.
THE HYPERION STRATEGIC MORTGAGE INCOME FUND, INC.
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
POLICIES AND PROCEDURES FOR VOTING PROXIES
1. Purpose. The purpose of this document is to describe the policies and
procedures for voting proxies received from issuers whose securities are held by
the Funds. These policies and procedures are to be implemented by the investment
adviser or sub-adviser, if any, (the "Adviser") to the Funds.
2. Definition of Proxy. A proxy permits a shareholder to vote without being
present at annual or special meetings. A proxy is the form whereby a person who
is eligible to vote on corporate matters transmits written instructions for
voting or transfers the right to vote to another person in place of the eligible
voter.
3. Policy for Voting Proxies.
(a) Fiduciary Considerations. Proxies are voted solely in the
interests of the shareholders of the Funds. Any conflict of interest must
be resolved in the way that will most benefit the shareholders.
(b) Management Recommendations. Because the quality and depth of
management is a primary factor considered when investing in a company, the
recommendation of management on any issue should normally be given
substantial weight.
The vote with respect to most routine issues presented in proxy statements
should be cast in accordance with the position of the company's management,
unless it is determined that supporting management's position would adversely
affect the investment merits of owning the stock. However, each issue should be
considered on its own merits, and the position of the company's management
should not be supported in any situation where it is found not to be in the best
interests of the Funds' shareholders.
4. Conflicts of Interest. The Funds recognize that under certain
circumstances their Adviser may have a conflict of interest in voting proxies on
behalf of the Funds. Such circumstances may include, but are not limited to,
situations where the Adviser or one or more of its affiliates, including
officers, directors and employees, has or is seeking a client relationship with
the issuer of the security that is the subject of the proxy vote. The Adviser
shall periodically inform its employees that they are under an obligation to be
aware of the potential for conflicts of interest on the part of the Adviser with
respect to voting proxies on behalf of Funds, both as a result of the employee's
personal relationships and due to circumstances that may arise during the
conduct of the Adviser's business, and to bring conflicts of interest of which
they become aware to the attention of the proxy manager (see below). The Adviser
shall not vote proxies relating to such issuers on behalf of its client accounts
until it has determined that the conflict of interest is not material or a
method of resolving such conflict of interest has been agreed upon by the Board
of Directors for the Fund. A conflict of interest will be considered material to
the extent that it is determined that such conflict has the potential to
influence the Adviser's decision-making in voting a proxy. Materiality
determinations will be based upon an assessment of the particular facts and
circumstances. If the proxy manager determines that a conflict of interest is
not material, the Adviser may vote proxies notwithstanding the existence of a
conflict. If the conflict of interest is determined to be material, the conflict
shall be disclosed to the Board of Directors and the Adviser shall follow the
instructions of the Board of Directors. The proxy manager shall keep a record of
all materiality decisions and report them to the Board of Directors on a
quarterly basis.
5. Routine Proposals. Proxies for routine proposals (such as election of
directors, selection of independent public accountants, stock splits and
increases in capital stock) should generally be voted in favor of management.
6. Non-routine Proposals.
(a) Guidelines on Anti-takeover Issues. Because anti-takeover
proposals generally reduce shareholders' rights, the vote with respect to
these proposals should generally be "against." During review of the
proposal, if it is concluded that the proposal is beneficial to
shareholders, a vote for the proposal should be cast.
(b) Guidelines on Social and Political Issues. Social and political
issues should be reviewed on a case by case basis. Votes should generally
be cast with management on social or political issues, subject to review by
the proxy manager.
7. Proxy Manager Approval. Votes on non-routine matters (including the
matters in paragraph 6 and mergers, stock option and other compensation plans)
and votes against a management's recommendations are subject to approval by the
proxy manager. The chief investment officer or his delegatee shall be the proxy
manager.
8. Proxy Voting Procedures. Proxy voting will be conducted in compliance
with the policies and practices described in this memorandum and is subject to
the proxy manager's supervision. A reasonable effort should be made to obtain
proxy material and to vote in a timely fashion. Records should be maintained
regarding the voting of proxies under these policies and procedures.
9. Report to the Board. On a quarterly basis, the proxy manager or his
designee will report in writing to the Boards of Directors on the general manner
in which proxy proposals relating to anti-takeover, social and political issues
were voted, as well as proposals that were voted in opposition to management's
recommendations.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers
None.
Item 10. Submission of Matters to a Vote of Security Holders.
None.
Item 11. Controls and Procedures.
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.
Item 12. 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: February 9, 2005
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: February 9, 2005
By: /s/ Thomas F. Doodian
_____________________
Thomas F. Doodian
Principal Financial Officer
Date: February 9, 2005