- ------------------------------------------------------------------------
HYPERION 1999 TERM TRUST, INC.
Report of the Investment Advisor
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July 20, 1998
Dear Shareholder:
We welcome this opportunity to provide you with information about Hyperion 1999
Term Trust, Inc. (the "Trust") for its semi-annual period ended May 31, 1998 and
to share our outlook for the Trust's fiscal year. The Trust's shares are traded
on the New York Stock Exchange ("NYSE") under the symbol "HTT".
Description Of The Trust
The Trust is a closed-end investment company whose investment objectives are to
attempt to provide a high level of current income consistent with investing only
in securities of the highest credit quality and to return $10.00 per share (the
initial public offering price per share) to investors on or shortly before
November 30, 1999. There is no assurance that this investment objective can be
met; you may recall in our last three shareholder letters we noted that it would
be extremely difficult for the Trust to return $10.00 per share on its scheduled
termination date. Unfortunately, it still remains extremely difficult for the
Trust to achieve its $10.00 per share objective. The Trust continues to invest
in a portfolio primarily of mortgage-backed securities ("MBS") issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
or other MBS rated AAA by a nationally recognized rating agency (e.g., Standard
& Poor's Corporation or Fitch IBCA, Inc.).
<PAGE>
Market Environment
Prices for fixed income securities have increased over the last six months with
interest rates falling an average of 25 basis points. A significant factor
contributing to the strong performance of the bond market are the current low
levels of inflation in the U.S. economy. The rise in the Consumer Price Index
("CPI") in 1997 was 2.2% versus a 3.0% to 3.5% range throughout most of the
1990s. Although the CPI has increased slightly this year, the Federal Reserve
has chosen to keep short term interest rates unchanged. Asia's economic
difficulties, and lower global inflation, continue to be key factors affecting
domestic fixed income market volatility and performance. Japan, China and Korea
are all economies that impact U.S. fixed income markets. The weakness in these
economies is having an offsetting influence on the strong domestic economy and
its increased wage pressures, giving rise to the strong performance in the U.S.
fixed income markets.
Hyperion Capital Management, Inc. ("Hyperion") continues to be optimistic on the
bond market. Positive fundamentals, such as an improving fiscal policy,
declining government deficits, and an expectation of prolonged economic problems
in Asia are some of the major factors in place supporting Hyperion's outlook for
lower bond yields.
As a result of the current low interest rate environment, prepayment risk has
increased. A combination of efficient computer technology and greater media
publicity has made mortgage refinancing a potentially common occurrence.
Recently, homeowners have been made more aware of the best time to refinance
through more thorough and timely news reports, advertising and other forms of
media. Powerful search engines on the Internet and the public's increasing
comfort with this new informative tool provide further opportunity for
homeowners to refinance quicker, cheaper and without many of yesterday's
refinancing hassles. In order to reduce exposure to prepayment risk, Hyperion's
strategy has been to increase the allocation of securities in the portfolio to
those that are structured to deflect prepayment risk and whose underlying
collateral is less prepayment sensitive.
Portfolio Strategy and Performance
In light of the current interest rate environment, Hyperion has actively managed
the Trust's assets to take advantage of lower interest rates, while minimizing
the impact that homeowner refinancings might have on the Trust. The portfolio's
exposure to prepayment insensitive securities was increased; primarily U.S.
Treasury securities, U.S. Agency and asset-backed securities. The Trust also
increased its exposure to mortgage securities that had a higher degree of
prepayment protection because the underlying mortgage interest rate was below
the band of economic "refinancability", or simple collateralized mortgage
obligations("CMOs") securities with a higher than average degree of prepayment
protection.
The Trust's total return based on Net Asset Value for the six month period
ending May 31, 1998 was 4.09%. Total return is based upon the change in Net
Asset Value of the Trust's shares and includes reinvestment of dividends. The
current monthly dividend the Trust pays its shareholder is $0.03542 per share.
The current yield of 6.07% on shares of the Trust is based on the NYSE closing
price of $7.00 on May 29, 1998. This yield was 55 basis points above the yield
on the 2-Year Treasury Note.
As of the end of July, the Trust, inclusive of leverage, had a duration
(duration measures a bond portfolio's price sensitivity to interest rate
changes) of 3.3 years, with the core (non-levered) assets having a duration of
2.4 years.
During the past six months, the Trust has continued its share repurchase
program. This repurchase program allows the Trust to purchase and retire shares
of the Trust in the open marketplace. Such transactions were made when the share
price of the Trust was significantly below the Trust's NAV. By purchasing the
stock at a discount to the NAV and retiring the stock, the spread (between stock
purchase price and the NAV) is captured by the Trust and benefits all of the
Trust's remaining shareholders. From December 1, 1997 through and including May
31,1998, the Trust has repurchased and retired 186,000 shares, capturing $0.0009
in additional NAV per share or $53,305 in an actual dollar amount for
shareholders.
The chart that follows shows the allocation of the Trust's holdings by asset
category on May 31, 1998.
HYPERION 1999 TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS AS OF MAY 31, 1998 *
PIE CHART
U.S. Government Agency Pass-Through Certificates 25.4%
U.S. Government Agency Collateralized Mortgage Obligations 39.4%
U.S. Treasury Obligations 13.6%
Asset-Backed Securities 9.9%
Collateralized Mortgage Obligations 11.4%
Municipal Zero Coupon Securities 0.1%
Repurchase Agreement 0.2%
*As a percentage of total investments.
Conclusion
We appreciate the opportunity to serve your investment needs and we thank you
for your continued support. As always, we welcome your questions and comments
and encourage you to contact our Shareholder Services Representatives at
1-800-HYPERION.
Sincerely,
KENNETH C. WEISS
Chairman,
Hyperion 1999 Term Trust, Inc.
President and Chief Executive Officer,
Hyperion Capital Management, Inc.
CLIFFORD E. LAI
President,
Hyperion 1999 Term Trust, Inc.
Managing Director and Chief Investment Officer,
Hyperion Capital Management, Inc.
<TABLE>
<S> <C> <C> <C> <C>
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HYPERION 1999 TERM TRUST, INC.
Portfolio of Investments
May 31, 1998 (unaudited) Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS - 111.9%
U.S. Government Agency Pass-Through Certificates - 36.2%
Federal Home Loan Mortgage Corporation 6.50% 06/01/08-05/01/09 $51,217 $ 51,688,833
8.00 08/01/24 2,405 2,512,617
----------------------
54,201,450
----------------------
Federal National Mortgage Association 6.00 11/01/01-08/01/02 35,115 35,089,010
6.50 08/01/02-10/01/10 36,616 36,886,722
7.00 06/01/01-06/01/11 32,079 32,585,358
----------------------
104,561,090
----------------------
Government National Mortgage Association 8.00 10/15/24-01/15/26 4,616 4,805,670
----------------------
Total U.S. Government Agency Pass-Through Certificates
(Cost - $ 159,669,575 ) 163,568,210
----------------------
U.S. Government Agency Collateralized Mortgage Obligations - 56.3%
Federal Home Loan Mortgage Corporation
Series 1684, Class D 5.35 11/15/14 17,692 17,659,624
Series 1490, Class PE 5.75 07/15/06 6,265 6,255,732
Series 1634, Class PE 5.75 06/15/18 8,380 8,347,795
Series 1610, Class PE 6.00 04/15/17 35,016 @ 35,041,278
Series 1517, Class E 6.00 04/15/18 1,765 1,766,347
Series 1478, Class F 6.50 05/15/06 8,156 8,247,585
Series 1456, Class G 6.50 12/15/18 10,000 10,054,250
Series 1722, Class PG 6.50 12/15/19 10,000 10,123,158
Series 1453, Class S 6.80+ 01/15/00 4,091 4,130,022
Series 55, Class D 9.00 11/15/14 140 140,076
----------------------
101,765,867
----------------------
Federal National Mortgage Association
Series 1994-30, Class E 5.75 11/25/17 28,000 27,878,620
Series 1993-135, Class PZ 5.85 08/25/03 39,950 @ 39,878,249
Series 1994-50, Class PD 5.85 09/25/17 48,000 @ 47,828,880
Series 1996-53, Class PD 6.50 06/18/10 31,100 @ 31,404,786
Series 1997-24, Class PJ 7.00 08/18/26 5,351 5,510,909
----------------------
152,501,444
----------------------
Total U.S. Government Agency Collateralized Mortgage Obligations
( Cost - $ 249,548,551 ) 254,267,311
----------------------
U.S. Treasury Obligations - 19.4%
U.S. Treasury Notes 5.88 10/31/98 8,000 @ 8,012,504
5.88 11/15/99 5,700 @ 5,726,722
6.13 08/15/07 13,500 @ 13,938,763
6.25 05/31/00 8,000 @ 8,105,008
7.75 12/31/99 25,000 @ 25,820,325
7.75 01/31/00 25,000 @ 25,859,400
----------------------
Total U.S. Treasury Obligations
( Cost - $ 87,144,102 ) 87,462,722
----------------------
Total U.S. Government & Agency Obligations
( Cost - $ 496,362,228 ) 505,298,243
----------------------
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ASSET-BACKED SECURITIES - 14.1%
Chase Manhattan Credit Card Master Trust
Series 1996-4, Class A 6.73+ 02/15/03 $ 5,625 $ 5,669,522
----------------------
FirstPlus Home Loan Owner
Series 1998-2, Class A2 6.23 06/10/10 10,000 10,028,850
----------------------
Green Tree Financial Corporation
Series 1998-A, Class A1 6.00 06/15/29 8,762 8,752,648
Series 1998-B, Class A 6.13 11/15/29 4,424 4,426,983
Series 1996-5, Class A4 7.15 07/15/27 4,500 4,620,623
----------------------
----------------------
17,800,254
----------------------
IMC Home Equity Loan Trust
Series 1997-3, CTF Class 7.14 09/20/23 5,000 5,144,625
----------------------
MBNA Master Credit Card Trust
Series 1996-M, CTF Class 5.82+ 04/15/09 5,000 5,001,175
----------------------
The Money Store Home Equity Trust
Series 1998-A, Class A 6.36 07/15/07 4,510 4,513,359
----------------------
Neiman Marcus Group Credit Card Master Trust
Series 1995-1, CTF Class A 7.60 06/15/03 15,000 15,465,844
----------------------
Total Asset-Backed Securities
( Cost - $ 62,877,876 ) 63,623,629
----------------------
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COLLATERALIZED MORTGAGE OBLIGATIONS - 16.3%
Commercial Mortgage Acceptance Corporation
Series 1996-C1, Class A 7.10+ 12/25/20 6,232 6,223,362
----------------------
DLJ Mortgage Acceptance Corporation
Series 1995-CF2, Class A1A 6.65 12/17/27 9,890 10,008,436
Series 1993-MF10, Class A2 7.20 07/15/03 8,712 9,028,066
----------------------
19,036,502
----------------------
First Boston Mortgage Securities Corporation
Series 1993-M1, Class 1A 6.75 09/25/06 24,143 24,809,972
----------------------
GMAC Commercial Mortgage Securities, Inc.
Series 1997-C2, Class A3 6.57 11/15/07 16,000 16,356,720
----------------------
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C1, Class A 7.10+ 05/25/15 5,314 5,451,806
----------------------
Prudential Home Mortgage Securities Co., Inc.
Series 1993-61, Class A5, PAC-2 6.50 12/26/07 1,863 1,868,871
----------------------
Total Collateralized Mortgage Obligations
( Cost - $ 72,999,544 ) 73,747,233
----------------------
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MUNICIPAL ZERO COUPON SECURITY - 0.2%
Kansas
Kansas City, Kansas, Utility System
Revenue Bonds, AMBAC
( Cost - $ 901,669 ) (a) 03/01/00 985 917,576
----------------------
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REPURCHASE AGREEMENT - 0.3%
Dated 05/29/98, with State Street Bank and Trust Company;
proceeds: $1,160,483; collateralized by $1,095,000
U.S. Treasury Note, 6.500%, due 11/15/26, value: $1,187,800
( Cost - $ 1,160,000 ) 5.00 06/01/98 $1,160 $1,160,000
----------------------
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TOTAL INVESTMENTS - 142.8%
( Cost - $ 634,301,317 ) 644,746,681
----------------------
Liabilities in Excess of Other Assets - (42.8%) (193,182,533)
----------------------
NET ASSETS - 100.0% $ 451,564,148
======================
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</TABLE>
@ - Portion of or entire principal amount delivered as collateral for
reverse repurchase agreements (Note 5)
+ - Variable Rate Security: Coupon rate is rate in effect at May 31, 1998
(a) - Zero Coupon Bond. Interest rate represents yield to maturity.
AMBAC - American Municipal Bond Assurance Corporation
--------
See notes to financial statements.
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HYPERION 1999 TERM TRUST, INC.
Statement of Assets and Liabilities
May 31, 1998 (unaudited)
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<TABLE>
<S> <C>
Assets:
Investments, at value (cost $634,301,317) (Note 2).......................$........644,746,681
Interest receivable.................................................................4,991,491
Prepaid expenses .....................................................................367,694
---------------------
Total assets........................................................650,105,866
---------------------
Liabilities:
Reverse repurchase agreements (Note 5)............................................198,043,250
Interest payable for reverse repurchase agreements (Note 5)...........................285,357
Bank overdraft................................................................. 137,590
Accrued expenses and other liabilities ................................................75,521
---------------------
Total liabilities.....................................................198,541,718
---------------------
Net Assets (equivalent to $7.36 per share based on 61,358,339 shares
outstanding)................. $ 451,564,148
=====================
Composition of Net Assets:
Capital stock, at par (Note 6)........... ...............................$............613,583
Additional paid-in capital (Note 6)...............................................580,123,157
Undistributed net investment income................................................13,799,989
Accumulated net realized losses..................................................(153,417,945)
Net unrealized appreciation........................................................10,445,364
---------------------
===================
Net assets applicable to capital stock outstanding.......................$........451,564,148
===================
</TABLE>
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See notes to financial statements.
<TABLE>
<S> <C>
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Hyperion 1999 Term Trust, Inc.
Statement of Operations
For the Six Months Ended May 31, 1998 (unaudited)
- -----------------------------------------------------------------------------------------------
Investment Income (Note 2):
Interest...........................................................$......21,554,796
------------------
Expenses:
Investment advisory fee (Note 3)...........................................1,124,022
Administration fee (Note 3)..................................................313,395
Insurance....................................................................111,460
Custodian.....................................................................57,584
Reports to shareholders.......................................................40,598
Transfer agency...............................................................29,683
Accounting and tax services...................................................28,800
Registration..................................................................26,827
Legal..........................................................................7,424
Directors' fees...............................................................23,505
Miscellaneous.................................................................23,128
------------------
Total operating expenses..........................................1,786,426
Interest expense (Note 5)..................................................6,133,670
------------------
Total expenses....................................................7,920,096
------------------
Net investment income.....................................................13,634,700
------------------
Realized and Unrealized Gains (Losses) on Investments, Futures and Short Sale
Transactions (Notes 2 and 4):
Net realized gains (losses) on:
Investment and short sale transactions ....................................6,315,656
Futures transactions........................................................(139,017)
----------------
6,176,639
----------------
Net change in unrealized appreciation on investments.......................... (2,225,306)
----------------
Net realized and unrealized gain on investments, futures and
short sale transactions............................................. 3,951,333
------------------
Net increase in net assets resulting from operations.........................$......17,586,033.
==================
- ----------
See notes to financial statements.
</TABLE>
<TABLE>
<S> <C> <C>
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Hyperion 1999 Term Trust, Inc.
Statements of Changes in Net Assets For the Six Months
Ended For the Year
May 31, Ended
1998 November 30,
(unaudited) 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Increase in Net Assets Resulting from Operations:
Net investment income...................................................$...........13,634,700......$..........29,200,850
Net realized gain on investment, written options, futures and short
sale transactions................................................................6,176,639..................1,236,567
and short sales................................................................(2,225,306) (1,692,419)
----------------------- ------------------------
Net increase in net assets resulting from operations................................17,586,033.................28,744,998
----------------------- ------------------------
Dividends to Shareholders:
Net investment income..............................................................(13,052,887)........ (27,436,642)
----------------------- ------------------------
Capital Stock Transactions (Note 6):
Cost of Trust shares repurchased and retired........................................(1,315,955)................(8,477,023)
----------------------- ------------------------
Total increase/(decrease) in net assets....................................3,217,191.................(7,168,667)
Net Assets:
Beginning of period................................................................448,346,957................455,515,624
----------------------- ------------------------
End of period (including undistributed net investment income
of $13,799,989 and $13,218,176, respectively)......................$..........451,564,148 $ 448,346,957
======================= ========================
- ----------
See notes to financial statements.
</TABLE>
<TABLE>
<S> <C>
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HYPERION 1999 TERM TRUST, INC.
Statement of Cash Flows
For the Six Months Ended May 31, 1998 (unaudited)
- --------------------------------------------------------------------------------
Increase (Decrease) in Cash:
Cash flows provided by operating activities:
Interest received (excluding net amortization of $ 1,099,970).................$.........21,239,406
Interest expense paid...................................................................(6,349,726)
Operating expenses paid.................................................................(2,392,683)
Proceeds from sale of short-term portfolio investments, including options,
net...................... 650,242
Purchases and short covers of long-term portfolio investments.........................(210,343,550)
Proceeds from disposition of long-term portfolio investments, short sales
and principal paydowns...........................................................224,683,134
Net cash used for futures transactions............................................ (139,017)
-------------------
Net cash provided by operating activities................................................27,347,806
-------------------
Cash flows used for financing activities:
Net cash used for reverse repurchase agreements........................................(13,117,126)
Cash dividends paid....................................................................(13,052,887)
Cash used to repurchase and retire Trust shares................................... (1,315,955)
-------------------
Net cash used for financing activities.................................................(27,485,968)
-------------------
Net decrease in cash..........................................................................(138,162)
Cash at beginning of year..........................................................................572
-------------------
Cash at end of year...............................................................$...........(137,590)
===================
Reconciliation of Net Increase in Net Assets Resulting from Operations to Net
Cash Provided by Operating Activities:
Net increase in net assets resulting from operations..............................$.........17,586,033..
-------------------
Increase in investments................................................................(17,537,089)
Decrease in net unrealized appreciation on investments...................................2,225,306
Increase in interest receivable............................................................(24,209)
Decrease in other assets................................................................25,562,481
Decrease in other liabilities................................................. (464,716)
-------------------
Total adjustments..................................................................9,761,773
-------------------
Net cash used for operating activities............................................$.........27,347,806
===================
See notes to financial statements.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------- -------------------------------------------------------
Hyperion 1999 Term Trust, Inc. For the Six
Financial Highlights Months Ended For the Year For the Year For the Year For the Year
May 31, Ended Ended Ended Ended
1998 November 30, November 30, November 30, November 30,
(unaudited) 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of the period........... $ 7.28 $ 7.25 $ 7.61 $ 7.72 $ 7.02
--------------- ------------ ----------- -------------- ------------
Net investment income.................................. 0.22 0.47 0.52 0.51 0.68
Net realized and unrealized gain (loss)
on investment, written option, futures
and short sale transactions... 0.07 (0.01) (0.40) (0.10) 0.58
--------------- ------------ ----------- -------------- ------------
Net increase in net asset value resulting from
operations............ 0.29 0.46 0.12 0.41 1.26
--------------- ------------ ----------- -------------- ------------
Net effect of shares repurchased........ - 0.01 - - -
Dividends from net investment income..... (0.21) (0.44) (0.48) (0.52) (0.56)
--------------- ------------ ----------- -------------- ------------
Net asset value, end of period............... $ 7.36 $ 7.28 $ 7.25 $ 7.61 $ 7.72
=============== ============ =========== ============== ============
Market price, end of period.......... $ 7.000 $ 6.875 $ 6.50 $ 6.50 $ 6.875
=============== ============ =========== ============== ============
Total Investment Return +........ 4.91(1) 12.90% 7.53% 1.91% 10.29%
Ratios to Average Net Assets/Supplementary Data:
Net assets, end of period (000s)................... $451,564 $448,347 $455,516 $480,080 $487,264
Operating expenses................. 0.79%(2) 0.81% 0.83% 0.96% 0.83%
Interest expense................................. 2.73%(2) 2.27% 2.27% 2.50% 1.69%
Total expenses....................... 3.52%(2) 2.98% 3.10% 3.46% 2.52%
Net investment income.............................. 6.06%(2) 6.57% 7.05% 6.55% 9.07%
Portfolio turnover rate............................ 21% 50% 135% 473% 745%
- ----------------
+ Total investment return is computed based upon the New York Stock Exchange
market price of the Trust's shares and excludes the effects of sales loads
or
brokerage commissions.
(1) Not Annualized.
(2) Annualized.
</TABLE>
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HYPERION 1999 TERM TRUST, INC.
Notes to Financial Statements
May 31, 1998 (unaudited)
- --------------------------------------------------------------------------------
1. The Trust:
Hyperion 1999 Term Trust, Inc. (the "Trust"), which was incorporated under the
laws of the State of Maryland on November 22, 1991, is registered under the
Investment Company Act of 1940 (the "1940 Act") as a diversified, closed-end
management investment company. The Trust expects to distribute substantially all
of its net assets on or shortly before November 30, 1999 and thereafter to
terminate.
The Trust's investment objectives are to provide a high level of current income
consistent with investing only in securities of the highest credit quality and
to return at least $10.00 per share (the initial public offering price per
share) to investors on or shortly before November 30, 1999. The Advisor
presently intends to manage the portfolio for the remaining term of the Trust in
a manner that attempts to achieve the Trust's objectives, but there is no
assurance that these investment objectives can be achieved; indeed, under
current market conditions it will be extremely difficult for the Trust to
achieve its objective to return $10.00 per share by its scheduled termination
date, November 30, 1999.
2. Significant Accounting Policies:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Valuation of Investments: Where market quotations are readily available, Trust
securities are valued based upon the current bid price for long positions and
the current ask price for short positions. The Trust values mortgage-backed
securities ("MBS") and other debt securities for which market quotations are not
readily available at their fair value as determined in good faith, utilizing
procedures approved by the Board of Directors of the Trust, on the basis of
information provided by dealers in such securities. Some of the general factors
which may be considered in determining fair value include the fundamental
analytic data relating to the investment and an evaluation of the forces which
influence the market in which these securities are purchased and sold.
Determination of fair value involves subjective judgment, as the actual market
value of a particular security can be established only by negotiations between
the parties in a sales transaction. Debt securities having a remaining maturity
of sixty days or less when purchased and debt securities originally purchased
with maturities in excess of sixty days but which currently have maturities of
sixty days or less are valued at amortized cost.
The ability of issuers of debt securities held by the Trust to meet their
obligations may be affected by economic developments in a specific industry or
region. The values of MBS can be significantly affected by changes in interest
rates.
Options Written or Purchased: The Trust may write or purchase options as a
method of hedging potential declines in similar underlying securities. When the
Trust writes or purchases an option, an amount equal to the premium received or
paid by the Trust is recorded as a liability or an asset and is subsequently
adjusted to the current market value of the option written or purchased.
Premiums received or paid from writing or purchasing options which expire
unexercised are treated by the Trust on the expiration date as realized gains or
losses. The difference between the premium and the amount paid or received on
effecting a closing purchase or sale transaction, including brokerage
commissions, is also treated as a realized gain or loss. If an option is
exercised, the premium paid or received is added to the proceeds from the sale
or cost of the purchase in determining whether the Trust has realized a gain or
a loss on the investment transaction.
The Trust, as writer of an option, may have no control over whether the
underlying securities may be sold (call) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the security
underlying the written option.
The Trust purchases or writes options to hedge against adverse market movements
or fluctuations in value caused by changes in interest rates. The Trust bears
the risk in purchasing an option, to the extent of the premium paid, that it
will expire without being exercised. If this occurs, the option expires
worthless and the premium paid for the option is recognized as a loss. The risk
associated with writing call options is that the Trust may forego the
opportunity for a profit if the market value of the underlying position
increases and the option is exercised. The Trust will only write call options on
positions held in its portfolio. The risk in writing a put option is that the
Trust may incur a loss if the market value of the underlying position decreases
and the option is exercised. In addition, the Trust bears the risk of not being
able to enter into a closing transaction for written options as a result of an
illiquid market.
Short Sales: The Trust may make short sales of securities as a method of hedging
potential declines in similar securities owned. When the Trust makes a short
sale, it must borrow the security sold short and deliver it to the broker-dealer
through which it made the short sale as collateral for its obligation to deliver
the security upon conclusion of the sale. The Trust may have to pay a fee to
borrow the particular securities and may be obligated to pay over any payments
received on such borrowed securities. A gain, limited to the price at which the
Trust sold the security short, or a loss, unlimited as to dollar amount, will be
recognized upon the termination of a short sale if the market price is less or
greater than the proceeds originally received.
Financial Futures Contracts: A futures contract is an agreement between two
parties to buy and sell a financial instrument for a set price on a future date.
Initial margin deposits are made upon entering into futures contracts and can be
either cash or securities. During the period the futures contract is open,
changes in the value of the contract are recognized as unrealized gains or
losses by "marking-to-market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received, depending upon whether unrealized gains or losses are
incurred. When the contract is closed, the Trust records a realized gain or loss
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Trust's basis in the contract.
The Trust invests in financial futures contracts to adjust the portfolio for
fluctuations in value caused by changes in prevailing market interest rates.
Should interest rates move unexpectedly, the Trust may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets. The Trust is at risk that it may not be able to close out a
transaction because of an illiquid secondary market.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses from securities
transactions are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. Discounts and premiums on certain securities are
accreted and amortized using the effective yield to maturity method.
Taxes: It is the Trust's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income or excise tax provision is required.
Dividends and Distributions: The Trust declares and pays dividends monthly from
net investment income. Distributions of net realized capital gains in excess of
capital loss carryforwards are distributed at least annually. Dividends and
distributions are recorded on the ex-dividend date. Dividends from net
investment income and distributions from realized gains 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 Trust for financial reporting purposes. These differences, which
could be temporary or permanent in nature, may result in reclassification of
distributions; however, net investment income, net realized gains and net assets
are not affected.
Cash Flow Information: The Trust invests in securities and distributes dividends
and distributions which are paid in cash or are reinvested at the discretion of
shareholders. These activities are reported in the Statement of Changes in Net
Assets and additional information on cash receipts and cash payments is
presented in the Statement of Cash Flows. Cash, as used in the Statement of Cash
Flows, is the amount reported as "Cash" in the Statement of Assets and
Liabilities, and does not include short-term investments.
Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and accreting discounts and amortizing
premiums on debt obligations.
Repurchase Agreements: The Trust, through its custodian, receives delivery of
the underlying collateral, the market value of which at the time of purchase is
required to be in an amount at least equal to the resale price, including
accrued interest. Hyperion Capital Management, Inc. (the "Advisor") is
responsible for determining that the value of these underlying securities is
sufficient at all times. If the seller defaults and the value of the collateral
declines or if bankruptcy proceedings commence with respect to the seller of the
security, realization of the collateral by the Trust may be delayed or limited.
3. Investment Advisory and Administration Agreements:
The Trust has entered into an Investment Advisory Agreement with the Advisor.
The Advisor is responsible for the management of the Trust's portfolio and
provides the necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Trust. For such services, the Trust
pays a monthly fee at an annual rate of 0.50% of the Trust's average weekly net
assets.
The Trust has entered into an Administration Agreement with Hyperion Capital
Management, Inc. (the "Administrator"). The Administrator has entered into a
sub-administration agreement with Investors Capital Services, Inc. (the
"Sub-Administrator"). The Administrator and Sub-Adminstrator perform
administrative services necessary for the operation of the Trust, including
maintaining certain books and records of the Trust, and preparing reports and
other documents required by federal, state, and other applicable laws and
regulations, and provides the Trust with administrative office facilities. For
these services, the Trust pays to the administrator a monthly fee at an annual
rate of 0.17% of the first $100 million of the Trust's average weekly net
assets, 0.145% of the next $150 million and 0.12% of any amounts above $250
million. During the six months ended May 31, 1998, the Administrator received
$313,395 in Administration fees. The Administrator is responsible for any fees
due the Sub-Administrator.
Certain officers and/or directors of the Trust are officers and/or directors of
the Advisor, Administrator and Sub-Administrator.
4. Purchases and Sales of Investments:
Purchases and sales of investments, excluding short-term securities, U.S.
Government securities and reverse repurchase agreements, for the six months
ended May 31, 1998 were $55,754,201 and $6,015,720, respectively. Purchases and
sales of U.S. Government securities, for the six months ended May 31, 1998 were
$102,690,910 and $128,419,214, respectively. For purposes of this footnote, U.S.
Government securities include securities issued by the U.S. Treasury, the
Federal Home Loan Mortgage Corporation and the Government National Mortgage
Association.
5. Borrowings:
The Trust may enter into reverse repurchase agreements with the same parties
with whom it may enter into repurchase agreements. Under a reverse repurchase
agreement, the Trust sells securities and agrees to repurchase them at a
mutually agreed upon date and price. Under the 1940 Act, reverse repurchase
agreements will be regarded as a form of borrowing by the Trust unless, at the
time it enters into a reverse repurchase agreement, it establishes and maintains
a segregated account with its custodian containing securities from its portfolio
having a value not less than the repurchase price (including accrued interest).
The Trust has established and maintained such an account for each of its reverse
repurchase agreements. Reverse repurchase agreements involve the risk that the
market value of the securities retained in lieu of sale by the Trust may decline
below the price of the securities the Trust has sold but is obligated to
repurchase. In the event the buyer of securities under a reverse repurchase
agreement files for bankruptcy or becomes insolvent, such buyer or its trustee
or receiver may receive an extension of time to determine whether to enforce the
Trust's obligation to repurchase the securities, and the Trust's use of the
proceeds of the reverse repurchase agreement may effectively be restricted
pending such decision.
At May 31, 1998, the Trust had the following reverse repurchase agreements
outstanding:
<TABLE>
<S> <C>
Maturity in
Zero to 30 days
Maturity Amount, Including Interest Payable $198,625,404
Market Value of Assets Sold Under
Agreements............................... 193,173,641
Weighted Average Interest Rate............. 5.57%
--------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------
The average daily balance of reverse repurchase agreements outstanding during
the six months ended May 31, 1998, was $217,502,380 at a weighted average
interest rate of 5.66%. The maximum amount of reverse repurchase agreements
outstanding at any time during the six months was $234,500,375, as of February
10, 1998, which was 33.2% of total assets.
6. Capital Stock:
There are 75 million shares of $.01 par value common stock authorized. Of the
61,358,339 shares outstanding at May 31, 1998, the Advisor owned 25,639 shares.
The Trust is continuing its stock repurchase program, whereby an amount of up to
15% of the original outstanding common stock, or approximately 9.5 million
shares, are authorized for repurchase. The purchase price may not exceed the
then-current net asset value.
As of May 31, 1998, 1,902,300 shares have been repurchased pursuant to this
program at a cost of $12,812,926 and an average discount of 6.6% from its net
asset value. For the six months ended May 31, 1998, 186,000 shares have been
repurchased at a cost of $1,315,955 and an average discount of 4.30% from its
net asset value. For the year ended November 30, 1997, 1,265,500 shares had been
repurchased at a cost of $8,477,023, at an average discount of 6.23%. All shares
repurchased have been retired.
7. Financial Instruments:
The Trust regularly trades in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing exposure
to various market risks. These financial instruments include written options and
futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes.
The notional or contractual amounts of these instruments represent the
investment the Trust has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
There was no written option activity for the year ended May 31, 1998.
There were no open futures contracts at May 31, 1998.
8. Litigation:
No litigation is currently pending against the Trust. In 1993, purported class
action lawsuits were instituted against the Trust and its directors, officers
and underwriters by certain shareholders of the Trust in the United States
District Court, Southern district of New York. The Advisor was later added as a
defendant. The plaintiffs' second consolidated amended complaint was dismissed
in July 1995 without leave to replead, and the dismissal was upheld by the U.S.
Court of Appeals for the Second Circuit in October 1996. In June 1997, the
United States Supreme Court denied plaintiffs' petition for a writ of
certiorari, and no further appeals are possible.
- --------------------------------------------------------------------------
PROXY RESULTS (unaudited)
- --------------------------------------------------------------------------
During the six months ended May 31, 1998, Hyperion 1999 Term Trust, Inc.
shareholders voted on the following proposals at a shareholders meeting
on April 21, 1998. The description of each proposal and number of
shares voted are as follows:
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------ --------------------- ----------------- -------------------
Shares Voted Shares Voted
For Without Authority
- ------------------------------------------ --------------------- ----------------- -------------------
1. To elect the members to the Trust's Board of Directors:
Harry E. Petersen Jr. 45,673,281 979,825
Leo M. Walsh Jr. 45,689,950 963,156
- ------------------------------------------ --------------------- ----------------- -------------------
</TABLE>
- --------------------------------------------------------------------------
YEAR 2000 CHALLENGE (unaudited)
- --------------------------------------------------------------------------
The Trust could be adversely affected if computers used by the Trust's service
providers do not properly process information dated January 1, 2000 and after.
The Trust's service providers are taking steps to address Year 2000 risks with
respect to computer systems on which the Trust depends. At this time, however,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Trust.
- --------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
- --------------------------------------------------------------------------
A Dividend Reinvestment Plan (the "Plan") is available to shareholders of the
Trust pursuant to which they may elect to have all dividends and distributions
of capital gains automatically reinvested by State Street Bank and Trust Company
(the "Plan Agent") in Trust shares. Shareholders who do not participate in the
Plan will receive all distributions in cash paid by check mailed directly to the
shareholder of record (or if the shares are held in street or other nominee
name, then to the nominee) by the Trust's Custodian, as Dividend Disbursing
Agent.
The Plan Agent serves as agent for the shareholders in administering the Plan.
After the Trust declares a dividend or determines to make a capital gain
distribution, payable in cash, the participants in the Plan will receive the
equivalent amount in Trust shares valued at the market price determined as of
the time of purchase (generally, the payment date of the dividend or
distribution). The Plan Agent will, as agent for the participants, use the
amount otherwise payable as a dividend to participants to buy shares in the open
market, on the New York Stock Exchange or elsewhere, for the participants'
accounts. If, before the Plan Agent has completed its purchases, the market
price increases, the average per share purchase price paid by the Plan Agent may
exceed the market price of the shares at the time the dividend or other
distribution was declared. Share purchases under the Plan may have the effect of
increasing demand for the Trust's shares in the secondary market.
There is no charge to participants for reinvesting dividends or capital gain
distributions, except for certain brokerage commissions, as described below. The
Plan Agent's fees for handling the reinvestment of dividends and distributions
are paid by the Trust. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of dividends and distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal income tax that may be payable on such dividends or
distributions.
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent. When a participant withdraws from the Plan or upon termination of
the Plan by the Trust, certificates for whole shares credited to his or her
account under the Plan will be issued and a cash payment will be made for any
fraction of a share credited to such account.
A brochure describing the Plan is available from the Plan Agent, State Street
Bank and Trust Company, by calling 1-800-426-5523.
If you wish to participate in the Plan and your shares are held in your name,
you may simply complete and mail the enrollment form in the brochure. If your
shares are held in the name of your brokerage firm, bank or other nominee, you
should ask them whether or how you can participate in the Plan. Shareholders
whose shares are held in the name of a brokerage firm, bank or other nominee and
are participating in the Plan may not be able to continue participating in the
Plan if they transfer their shares to a different brokerage firm, bank or other
nominee, since such shareholders may participate only if permitted by the
brokerage firm, bank or other nominee to which their shares are transferred.
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Hyperion 1999 Term Trust, Inc.
Selected Quarterly Financial Data
(unaudited)
- -------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gains (losseNet increase
on investment, writ(decrease) in net
Net investment option, futures and assets resulting from Dividends and
income sale transactions operations distributions Share price
---------------- ------------------ ------------------- ------------------ -------------
Total Per Per Per Per
Quarter ended income Amount share Amount share Amount share* Amount share High Low
- -------------------------------------------------------------------------------------------------------------------------
June 26, 1992**
to August 31, 1992$ 8,539,531 7,129,13$ $0.11 (19,306,33$) (0.30) (12,177,195$ (0.19) 4,219,485 $0.07 10 3/8 $10
November 30, 1992 16,580,93 12,842,733 0.21 (22,483,352) (0.36) (9,640,619) (0.15) 12,658,452 0.20 10 3/4 8 7/8
February 28, 1993 14,278,32 10,642,860 0.17 (31,400,517) (0.50) (20,757,657) (0.33) 12,658,452 0.20 10 9
May 31, 1993 13,647,04 10,562,767 0.17 (5,780,313) (0.09) 4,782,454 0.08 12,658,452 0.20 9 3/4 8 3/4
August 31, 1993 11,325,31 8,412,983 0.13 (27,675,828) (0.44) (19,262,845) (0.31) 11,861,350 0.19 8 7/8 7 1/2
November 30, 1993 18,307,26 15,895,853 0.25 (44,953,480) (0.70) (29,057,627) (0.45) 9,356,249 0.15 8 1/4 6 3/8
February 28, 1994 14,880,60 12,231,574 0.19 12,367,705 0.20 24,599,279 0.39 8,299,440 0.13 7 6 1/4
May 31, 1994 15,469,46 12,626,698 0.20 17,800,528 0.28 30,427,226 0.48 8,296,179 0.13 7 3/8 6 3/4
August 31, 1994 7,142,378 9,904,737 0.16 (36,250,648) (0.57) (26,345,911) (0.41) 9,082,485 0.15 7 1/4 6 1/2
November 30, 1994 17,379,62 8,190,924 0.13 42,523,788 0.67 50,714,712 0.80 9,472,210 0.15 7 6 3/8
February 28, 1995 12,898,23 9,029,349 0.14 6,995,260 0.11 16,024,609 0.25 8,940,494 0.14 7 6 1/2
May 31, 1995 12,240,73 7,744,298 0.12 14,747,914 0.24 22,492,212 0.36 8,677,288 0.14 7 3/8 6 5/8
August 31, 1995 12,848,38 8,727,012 0.14 (12,253,807) (0.19) (3,526,795) (0.05) 7,888,401 0.12 7 1/2 6 3/4
November 30, 1995 11,433,97 6,825,146 0.11 (15,999,089) (0.26) (9,173,943) (0.15) 7,493,924 0.12 7 1/8 6 1/2
February 29, 1996 12,730,20 8,716,948 0.14 (13,968,641) (0.22) (5,251,693) (0.08) 7,493,976 0.12 6 7/8 6 3/8
May 31, 1996 12,153,47 8,523,188 0.13 (26,191,953) (0.41) (17,668,765) (0.28) 7,493,890 0.12 6 5/8 6
August 31, 1996 10,994,97 7,631,546 0.12 9,748 0.00 7,641,294 (0.12) 7,493,949 0.12 6 1/2 6 1/8
November 30, 1996 10,505,72 7,350,161 0.13 15,350,953 0.23 22,701,114 0.36 7,489,268 0.12 6 5/8 6 1/4
February 28, 1997 10,831,59 7,618,503 0.12 (8,866,675) (0.14) (1,248,172) (0.02) 7,430,297 0.12 6 5/8 6 3/8
May 31, 1997 10,465,87 7,325,626 0.12 (3,545,553) (0.06) 3,780,073 0.06 6,863,056 0.11 6 1/2 6 3/8
August 31, 1997 10,378,73 7,001,939 0.11 7,787,460 0.12 14,789,399 0.23 6,574,399 0.11 6 13/166 1/2
November 30, 1997 10,770,77 7,254,782 0.12 4,168,916 0.07 11,423,698 0.19 6,568,890 0.10 6 7/8 6 11/16
February 28, 1998 11,078,60 7,043,407 0.11 (4,206,980) (0.07) 2,836,427 0.04 6,533,033 0.11 7 1/16 6 7/8
May 31, 1998 10,476,19 6,591,293 0.11 8,158,313 0.13 14,749,606 0.24 6,519,854 0.11 7 1/8 6 15/16
</TABLE>
* Excludes net effect of shares repurchased.
** Commencement of investment operations.
- -------------------------------------------------------------------------------
INVESTMENT ADVISOR AND ADMINISTRATOR CUSTODIAN
HYPERION CAPITAL MANAGEMENT, INC. STATE STREET BANK AND TRUST COMPANY
One Liberty Plaza 225 Franklin Street
165 Broadway, 36th Floor Boston, Massachusetts 02116
New York, New York 10006-1404
For General Information about the Trust: INDEPENDENT ACCOUNTANTS
(800) HYPERION
PRICEWATERHOUSECOOPERS LLP
TRANSFER AGENT 1177 Avenue of the Americas
New York, New York 10036
BOSTON EQUISERVE, L.P.
Investor Relations Department LEGAL COUNSEL
P.O. Box 8200
Boston, Massachusetts 02266-8200 SULLIVAN & WORCESTER LLP
For Shareholder Services: 1025 Connecticut Avenue, N.W.
(800) 426-5523 Washington, D.C. 20036
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that periodically the Trust may purchase its shares in
the open market at prevailing market prices.
- -------------------------------------------------------------------------------
Officers & Directors
- -------------------------------------------------------------------------------
Kenneth C. Weiss
Chairman
Lewis S. Ranieri
Director
Rodman L. Drake*
Director
Leo M. Walsh, Jr.*
Director
Harry E. Petersen, Jr.*
Director
Patricia A. Sloan
Director & Secretary
Garth Marston
Director Emeritus
Clifford E. Lai
President
Patricia A. Botta
Vice President
Thomas F. Doodian
Treasurer
* Audit Committee Members
- ------------------------------------
- ------------------------------------
The accompanying financial statements as of May 31, 1998 were not audited and,
accordingly, no opinion is expressed on them.
This Report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Trust shares.
Hyperion 1999 Term Trust, Inc.
One Liberty Plaza
165 Broadway, 36th Floor
New York, NY 10006-1404
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000881413
<NAME> HYPERION 1999 TERM TRUST, INC.
<SERIES>
<NUMBER> 0
<NAME> HYPERION 1999 TERM TRUST, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-START> DEC-01-1997
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 634301
<INVESTMENTS-AT-VALUE> 644747
<RECEIVABLES> 4991
<ASSETS-OTHER> 368
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 650106
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 198542
<TOTAL-LIABILITIES> 198542
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 580737
<SHARES-COMMON-STOCK> 61358
<SHARES-COMMON-PRIOR> 61544
<ACCUMULATED-NII-CURRENT> 13800
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (153418)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10445
<NET-ASSETS> 451564
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 21555
<OTHER-INCOME> 0
<EXPENSES-NET> 7920
<NET-INVESTMENT-INCOME> 13635
<REALIZED-GAINS-CURRENT> 6176
<APPREC-INCREASE-CURRENT> (2225)
<NET-CHANGE-FROM-OPS> 17586
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 13053
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 186
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3217
<ACCUMULATED-NII-PRIOR> 13218
<ACCUMULATED-GAINS-PRIOR> (159594)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1124
<INTEREST-EXPENSE> 6134
<GROSS-EXPENSE> 7920
<AVERAGE-NET-ASSETS> 450856
<PER-SHARE-NAV-BEGIN> 7.28
<PER-SHARE-NII> 0.22
<PER-SHARE-GAIN-APPREC> 0.07
<PER-SHARE-DIVIDEND> (0.21)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.36
<EXPENSE-RATIO> 0.79
<AVG-DEBT-OUTSTANDING> 217502
<AVG-DEBT-PER-SHARE> 3.54
</TABLE>
