<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISER
- --------------------------------------------------------------------------------
DEAR SHAREHOLDER: February 23, 1996
We welcome this opportunity to provide you with information about Hyperion 2005
Investment Grade Opportunity Term Trust, Inc. (the 'Trust') for its fiscal year
ended December 31, 1995. The Trust's shares are traded on the New York Stock
Exchange under the symbol 'HTO.'
DESCRIPTION OF THE TRUST
The Trust is a closed-end investment company whose investment objectives are to
provide a high level of current income and to return $10.00 per share (the
initial public offering price per share) to investors on or shortly before
November 30, 2005, consistent with investing in investment grade securities.
Investment grade securities are securities that are either (i) at the time of
investment, rated in one of the four highest rating categories of a nationally
recognized rating agency (e.g., between AAA and BBB by Standard & Poor's
Corporation and Fitch or between Aaa and Baa by Moody's Investors Service, Inc.)
or (ii) issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities.
MARKET ENVIRONMENT
For the most part, over the past six months, the recovery in the fixed income
markets has continued. Interest rates, which have broadly declined since late
1994, continued their downward path since May, declining by roughly 50 basis
points over the period. Since this rally began, the market has been
anticipatory, rallying sharply based upon expectations of future interest rate
cuts by the Federal Reserve Board (the 'Fed'). More recently, there have been
some modest increases in interest rates believed to be largely the result of
several factors: 1) Federal Reserve Chairman Greenspan's recent testimony before
Congress left the market a little less certain that the Fed would continue to
lower interest rates, 2) The lack of any substantive agreement on a budget
package compromise between President Clinton and Congress, and 3) A few limited
indicators that the economy might not be as weak as earlier envisioned. The Fed
has cut the Federal Funds rate by 75 basis points since May, reducing the rate
in 25 basis point increments in July, December 1995 and January 1996.
The economy continues to grow at a moderate pace. Preliminary estimates for
fourth quarter economic activity were dampened by evidence of weak holiday sales
for retailers. The third quarter Gross Domestic Product ('GDP') growth rebounded
to 3.6% after posting a 1.3% growth rate in the second quarter of 1995. During
the Trust's fiscal year ended December 31, 1995, many economic aggregates,
including the employment rate and consumer confidence, were significantly
stronger than they were during the bond market rally of 1993.
Bond market rallies are never easy for mortgages. Since December 1994, there has
been more than a 200 basis point decline in interest rates, which once again put
mortgages to the test. The decline in interest rates resulted in a rise of
prepayment fears and actual prepayments. However, after seasonal summer peaks,
the actual dollar volume of prepayments declined in the last months of 1995
despite continued Fed interest rate cuts. The 30 year fixed rate mortgages
declined by approximately 200 basis points (i.e., from approximately 9.2% to
approximately 7.1%). During this period, the Lehman Mortgage Index returned
16.33%, 60
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISER (CONTINUED)
- --------------------------------------------------------------------------------
basis points below the returns on the Merrill 5-Year Treasury Index.
PORTFOLIO STRATEGY AND PERFORMANCE
The Trust enjoyed excellent net asset value ('NAV') performance, posting a
positive total return of 25.34% for the year ended December 31, 1995. Total
investment return is computed based upon the change in NAV of the Trust's shares
and reinvestment of dividends at market value. The NAV increased over this
period by $1.18, from $8.11 on December 31, 1994 to $9.29 on December 31, 1995.
The Trust's core portfolio had been well positioned for the decline in interest
rates, which had occurred over this period. We have sought to improve the
convexity characteristics of the portfolio and this strategy succeeded in
protecting the portfolio from heightened fears of residential refinancing
activity.
During 1995, Mortgage-Backed Securities have not kept pace with Treasury market
total returns because lower interest rates have increased the risk of mortgage
refinancings. Over the period, mortgage rates have declined almost as much as
Treasury yields, which significantly increases the proportion of outstanding
mortgages that can be favorably refinanced. The Trust's portfolio, however, has
excellent protection against refinancing risk due to its weighing in
subordinated Collateralized Mortgage Obligations (27.7%) and Commercial
Mortgage-Backed Securities (11.2%) which both enjoy structural prepayment
lockouts that significantly reduces the likelihood that these securities will
experience unscheduled prepayments during a period of declining interest rates.
In addition, a large portion of the remaining portfolio including Treasuries,
Agency PAC Bonds, and Asset-Backed Securities are also largely free of
prepayment risk.
INVESTMENT OUTLOOK
We are cautiously optimistic about the bond market. Inflation continues to be
subdued, and although nominal interest rates appear low relative to historical
standards, real interest rates (the difference between interest rates and
inflation) are above long-term averages. As a result, unless there is
significant improvement in the economy, we anticipate that there will be further
interest rate decreases by the Fed during 1996.
The overall mortgage market faces challenges as declining interest rates enable
more mortgages to become favorably refinanced. The Trust continues to be
positioned to avoid many of the risks associated with a mortgage refinancing
boom by investing in the call-protected sectors described above. The maintenance
of relative principal stability and predictability is an ongoing task, as
mortgage securities require active management in an effort to achieve this goal.
The chart that follows shows the allocation of the Trust's holdings by asset
category on December 31, 1995.
2
<PAGE>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
REPORT OF THE INVESTMENT ADVISER (CONCLUDED)
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS AS OF DECEMBER 31, 1995*
U.S. Government Agency Collateralized Mortgage Obligations 42.8%
U.S. Treasury Obligations 6.0%
Asset-Backed Securities 7.5%
Commercial/Mortgage-Backed Securities 11.2%
Subordinated Collateralized Mortgage Obligations 27.2%
Municipal Zero Coupon Securities 4.6%
Repurchase Agreements 0.2%
* As a percentage of total investments.
CONCLUSION
We will continue to do our best to manage the Trust in an attempt to achieve its
objectives. 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 2005 Investment Grade
Opportunity Term Trust, Inc.
President and Chief Executive Officer,
Hyperion Capital Management, Inc.
LOUIS C. LUCIDO
President,
Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc.
Managing Director and Chief Operating Officer,
Hyperion Capital Management, Inc.
JOHN N. DUNLEVY
Vice President,
Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc.
Director and Senior Portfolio Manager,
Hyperion Capital Management, Inc.
3
<PAGE>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS
<TABLE>
<CAPTION>
December 31, 1995
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT & AGENCY OBLIGATIONS--69.8%
U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS
(REMICS)--61.2%
Federal Home Loan Mortgage
Corporation
Series 1637, Class G,
PAC 6.00% 06/15/23 $ 14,213 $ 14,042,234
Series 1614, Class J,
PAC 6.25 11/15/22 10,000# 10,001,560
Series 1694, Class PH,
PAC 6.35 09/15/23 5,000 5,064,060
Series 1489, Class K,
PAC, I/O 6.50 10/15/07 6,225 1,325,732
Series 1101, Class M,
PAC 6.95 07/15/21 5,000 4,996,875
------------
35,430,461
------------
Federal National Mortgage
Association
Series 1993-207, Class
E, PAC 5.00 08/25/20 15,000 14,193,750
Series 1994-15, Class G,
PAC 5.50 08/25/21 20,000# 19,315,620
Series 1993-221, Class
JB, PAC, I/O 6.00 09/25/07 4,579 1,271,318
Series 1991-56, Class M,
PAC 6.75 06/25/21 16,250# 16,181,442
Series 1994-92, Class B 7.50 01/25/21 32,067# 33,334,681
Series 1993-186, Class
SA 9.25 09/25/08 1,695 1,663,561
------------
85,960,372
------------
TOTAL U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS
(REMICS)
(Cost - $112,150,832) 121,390,833
------------
U.S. TREASURY OBLIGATIONS--8.6%
U.S. Treasury Notes
6.88 03/31/00 2,000# 2,111,876
7.50 01/31/97 4,000# 4,094,376
7.75 01/31/00 10,000# 10,853,130
------------
TOTAL U.S. TREASURY OBLIGATIONS
(Cost - $16,091,617) 17,059,382
------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(Cost - $128,242,449) 138,450,215
------------
- -------------------------------------------------------------------------------
ASSET-BACKED SECURITIES--10.8%
First Bank Auto
Receivables Grantor
Trust Series 1995-A,
Class A 8.00 01/15/00 3,404 3,489,630
------------
First International
Petroleum Transport
Corporation, Ltd.
First Preferred
Mortgage Note 7.88 03/31/08 5,000 5,057,030
------------
Neiman Marcus Group
Credit Card Master
Trust
Series 1995-1, Class A 7.60 06/15/03 3,000 3,194,532
------------
Standard Credit Card
Master Trust
Series 1994-4, Class A 8.25 11/07/03 3,500 3,894,296
Series 1995-1, Class A 8.25 01/07/07 5,000 5,695,315
------------
9,589,611
------------
TOTAL ASSET-BACKED
SECURITIES
(Cost - $20,361,189) 21,330,803
------------
- -------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1995
Principal Market
Current Amount Value
Coupon Maturity (000s) (Note 1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL / MORTGAGE BACKED SECURITIES--16.1%
Greenwich Capital
Acceptance Inc.
Series 1991-4, Class
S, I/O, REMIC 0.39% 04/25/21 $ 63,054(a) $ 778,336
Series 1991-1, Class
S, I/O, REMIC 0.66 02/25/21 144,511(a) 3,928,968
-----------
4,707,304
-----------
SKW II Real Estate
Limited Partnership
Class C 7.45 04/15/03 3,000(a) 3,018,282
-----------
Structured Asset
Securities Corporation
Series 1993-C1, Class
C, REMIC 6.60 10/25/24 26,583 24,140,706
-----------
TOTAL COMMERCIAL/MORTGAGE BACKED SECURITIES
(Cost - $29,670,067) 31,866,292
-----------
- -------------------------------------------------------------------------------
SUBORDINATED COLLATERALIZED MORTGAGE OBLIGATIONS--39.7%
CSFB Finance Company,
Ltd.
Series 1995-A, Class A 6.69 11/15/05 19,000(a) 19,760,000
-----------
Countrywide Independent
National Mortgage
Corporation Series
1995-L, Class B1 7.50 8/25/25 6,986 7,059,323
-----------
Prudential Home Mortgage
Securities Co., Inc.
Series 1993-E, Class
3B, REMIC 7.39 07/28/23 5,425(a) 5,300,338
Series 1992-25, Class
B1, REMIC 8.00 08/25/22 2,248(a) 2,336,943
-----------
7,637,281
-----------
Residential Funding
Mortgage Securities,
Inc.
Series 1993-S40, Class
M2, REMIC 6.75 11/25/23 6,343 6,003,834
Series 1995-S11, Class
M1, REMIC 7.50 09/25/25 11,326 11,619,458
Series 1992-J9, Class
B2, REMIC 8.02 04/28/22 11,737(a) 12,069,058
-----------
29,692,350
-----------
Ryland Mortgage
Securities Corporation
Series 1993-A1, Class
A 7.45 01/28/23 14,372 14,628,158
-----------
TOTAL SUBORDINATED COLLATERALIZED MORTGAGE OBLIGATIONS
(Cost - $75,151,617) 78,777,112
-----------
- -------------------------------------------------------------------------------
MUNICIPAL ZERO COUPON SECURITIES--6.6%
Texas
Houston Texas, Water &
Sewer System
Revenue Bond, AMBAC (b) 12/01/06 5,000 2,838,905
San Antonio Texas,
Electricity & Gas
Series B, Revenue
Bond, FGIC (b) 02/01/07 10,000@ 5,568,500
Texas, Municipal Power
Agency
Revenue Bond, AMBAC (b) 09/01/05 5,490 3,373,089
-----------
11,780,494
-----------
West Virginia
West Virginia, State Parkways
Economic Development
and Tourism Authority Revenue
Bond, FGIC (b) 05/15/05 1,975@ 1,231,581
-----------
TOTAL MUNICIPAL ZERO COUPON SECURITIES
(Cost - $12,488,405) 13,012,075
-----------
- -------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
PORTFOLIO OF INVESTMENTS (CONCLUDED)
<TABLE>
<CAPTION>
December 31, 1995
Principal Market
Amount Value
(000s) (Note 1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
REPURCHASE AGREEMENT--0.3%
Dated 12/29/95, with State Street Bank and Trust Company, 5.25%,
due 1/2/96; proceeds: $643,375, collateralized by $645,000
U.S. Treasury Note, 5.75%, due 9/30/97, value: $659,758
(Cost - $643,000) $ 643 $ 643,000
------------
- ---------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS--143.3%
(Cost - $266,556,727) $284,079,497
VARIATION MARGIN PAYABLE ON OPEN FUTURES CONTRACTS*--(0.0%) (50,625)
LIABILITIES IN EXCESS OF OTHER ASSETS--(43.3%) (85,749,926)
------------
NET ASSETS--100.0% $198,278,946
------------
------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
REMIC Real Estate Mortgage Investment Conduit
PAC Planned Amortization Class -- security principal payments are within a
predetermined range.
# Portion of or entire principal amount delivered as collateral for
reverse repurchase agreements.
I/O Interest Only -- security pays coupon proceeds based on a notional
principal amount.
(a) Private Placements
(b) Zero Coupon Bonds
AMBAC American Municipal Bond Assurance Corporation
FGIC Financial Guaranty Insurance Company
@ Portion of or entire principal amount pledged as initial margin on
financial futures transactions.
* Open Futures Contracts as of December 31, 1995 are as follows (Note
1):
OPEN FUTURES CONTRACTS
</TABLE>
<TABLE>
<CAPTION>
EXPIRATION VALUE AT VALUE AT UNREALIZED
NOTIONAL AMOUNT TYPE DATE TRADE DATE DECEMBER 31, 1995 DEPRECIATION
- ------------------- ------------------------- ---------- ----------- ----------------- ------------
<S> <C> <C> <C> <C> <C>
Short:
$16,200,000 30 Yr. U.S. Treasury Note March 1996 $19,090,687 $19,672,875 ($582,188)
----------- -------------- -----------
----------- -------------- -----------
</TABLE>
- ---------------
See notes to financial statements.
6
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost--$266,556,727) (Note 1)............. $284,079,497
Cash............................................................ 279,413
Interest receivable............................................. 3,081,889
Deferred organization expenses (Note 1)......................... 14,803
------------
Total assets.......................................... 287,455,602
------------
LIABILITIES:
Reverse repurchase agreements (Note 4).......................... 88,483,000
Interest payable (Note 4)....................................... 190,401
Accrued expenses................................................ 139,184
Investment advisory fee payable (Note 2)........................ 107,533
Dividends payable............................................... 104,246
Payable for Trust shares purchased.............................. 75,300
Variation margin payable on open futures contracts (Note 1)..... 50,625
Administration fee payable (Note 2)............................. 26,367
------------
Total liabilities..................................... 89,176,656
------------
NET ASSETS (equivalent to $9.29 per share based on 21,341,373
shares
outstanding).................................................. $198,278,946
------------
------------
COMPOSITION OF NET ASSETS:
Capital stock, at par (Note 5).................................. $ 21,341
Additional paid-in capital...................................... 199,733,637
Undistributed net investment income............................. 620,887
Accumulated net realized losses................................. (19,037,501)
Net unrealized appreciation..................................... 16,940,582
------------
Net assets applicable to capital stock outstanding.............. $198,278,946
------------
------------
</TABLE>
- ------------------
See notes to financial statements.
7
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME (Note 1):
Interest...................................................... $20,060,822
-----------
EXPENSES:
Investment advisory fee (Note 2).............................. 1,217,170
Administration fee (Note 2)................................... 296,521
Reports to shareholders....................................... 114,000
Custodian..................................................... 83,000
Audit and tax services........................................ 67,000
Directors' fees............................................... 50,000
Legal......................................................... 9,995
New York Stock Exchange listing fee........................... 35,000
Transfer agency............................................... 24,999
Insurance..................................................... 34,280
Amortization of organization expenses (Note 1)................ 6,763
Miscellaneous................................................. 86,007
-----------
Total operating expenses................................... 2,024,735
Interest expense (Note 4)................................ 4,669,873
-----------
Total expenses........................................... 6,694,608
-----------
Net investment income......................................... 13,366,214
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS, SHORT
SALES, FUTURES AND OPTION TRANSACTIONS (Notes 1 & 3):
Net realized losses on:
Investment transactions....................................... (2,636,140)
Short sales transactions...................................... (113,623)
Futures transactions.......................................... (1,940,827)
Option transactions........................................... (211,450)
-----------
(4,902,040)
-----------
Net change in unrealized appreciation (depreciation) on:
Investments................................................... 32,523,902
Futures transactions.......................................... (1,288,250)
-----------
31,235,652
-----------
Net realized and unrealized gains on investments, short sales,
futures and option transactions............................... 26,333,612
-----------
Net increase in net assets resulting from operations............ $39,699,826
-----------
-----------
</TABLE>
- ---------------
See notes to financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
For the Year For the Year
Ended Ended
December 31, December 31,
1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING
FROM OPERATIONS:
Net investment income........................ $ 13,366,214 $ 17,164,514
Net realized losses on investments, short
sales, futures and option transactions.... (4,902,040) (7,187,035)
Net change in unrealized appreciation
(depreciation) on investments and futures
transactions.............................. 31,235,652 (22,270,991)
------------ ------------
Net increase (decrease) in net assets
resulting from operations................. 39,699,826 (12,293,512)
------------ ------------
DIVIDENDS TO SHAREHOLDERS (Note 1):
Net investment income........................ (14,439,693) (16,136,076)
------------ ------------
CAPITAL STOCK TRANSACTIONS (Note 5):
Cost of Trust shares repurchased and
retired................................... (485,673) (2,211,426)
------------ ------------
Total increase (decrease) in net
assets............................. 24,774,460 (30,641,014)
NET ASSETS:
Beginning of year.............................. 173,504,486 204,145,500
------------ ------------
End of year (including undistributed net
investment income of $620,887 and $1,694,366,
respectively)................................ $198,278,946 $173,504,486
------------ ------------
------------ ------------
</TABLE>
- ---------------
See notes to financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
STATEMENT OF CASH FLOWS
For the Year Ended December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
Cash flows used for operating activities:
Interest received (excluding discount accretion of
$616,222).............................................. $ 18,738,201
Interest expense paid..................................... (4,766,424)
Operating expenses paid................................... (1,959,606)
Sale of short-term portfolio investments, including
options, net........................................... 1,130,550
Purchase of long-term portfolio investments............... (449,821,446)
Proceeds from disposition of long-term portfolio
investments and principal paydowns..................... 438,547,880
Net cash used for futures transactions.................... (3,189,514)
---------------
Net cash used for operating activities.................... (1,320,359)
---------------
Cash flows provided by financing activities:
Cash provided by reverse repurchase agreements............ 17,854,352
Cash used to repurchase and retire Trust shares........... (410,373)
Cash dividends paid....................................... (15,670,050)
---------------
Net cash provided by financing activities................. 1,773,929
---------------
Net increase in cash........................................ 453,570
Cash at beginning of year................................... (174,157)
---------------
Cash at end of year......................................... $ 279,413
---------------
---------------
RECONCILIATION OF NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS TO NET CASH USED FOR OPERATING ACTIVITIES:
Net increase in net assets resulting from operations........ $ 39,699,826
---------------
Decrease in investments................................... 2,283,653
Increase in net unrealized appreciation................... (32,523,902)
Decrease in payable for investments purchased............. (10,223,785)
Increase in interest receivable........................... (564,292)
Decrease in other assets.................................. 6,763
Increase in variation margin payable...................... 39,563
Increase in advisory/administration fees payable.......... 13,592
Decrease in accrued expenses and other liabilities........ (51,777)
---------------
Total adjustments................................. (41,020,185)
---------------
Net cash used for operating activities...................... $ (1,320,359)
---------------
---------------
</TABLE>
- ------------------
See notes to financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For the Period
For the Year For the Year March 1, 1993*
Ended Ended through
December 31, December 31, December 31,
1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period ............................. $ 8.11 $ 9.41 $ 9.34**
------------ ------------ -----------
Net investment income ................ 0.63 0.80 0.62
Net effect of shares repurchased ..... 0.01 0.01 --
Net realized and unrealized gains
(losses) on investments, short
sales, futures and option
transactions ....................... 1.22 (1.36) 0.04
------------ ------------ -----------
Net increase (decrease) in net asset
value resulting from operations .... 1.86 (0.55) 0.66
------------ ------------ -----------
Dividends from net investment
income ............................. (0.68) (0.75) (0.59)
Net asset value, end of period ....... $ 9.29 $ 8.11 $ 9.41
------------ ------------ -----------
------------ ------------ -----------
Market price, end of period .......... $ 7.625 $ 7.00 $ 8.63
------------ ------------ -----------
------------ ------------ -----------
TOTAL INVESTMENT RETURN+ ............. 19.10% (10.63)% (1.81)%(1)
RATIOS TO AVERAGE NET
ASSETS/SUPPLEMENTARY DATA:
Net assets, end of period (000s) ....... $198,279 $173,504 $204,146
Total operating expenses ............... 1.08% 1.08% 0.99%(2)
Interest expense ....................... 2.49% 1.90% 1.08%(2)
Net investment income .................. 7.14% 9.10% 7.85%(2)
Portfolio turnover rate ................ 163% 171% 287%
</TABLE>
<TABLE>
<S> <C>
- ------------
* Commencement of investment operations.
** Net of offering costs of $0.03.
+ 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>
See notes to financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1995
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES:
Hyperion 2005 Investment Grade Opportunity Term Trust, Inc. (the 'Trust'), which
was incorporated under the laws of the State of Maryland on December 14, 1992,
is registered under the Investment Company Act of 1940 (the '1940 Act') as a
diversified, closed-end management investment company. The Trust had no
transactions until February 17, 1993, when it sold 10,673 shares of common stock
for $100,006 to Hyperion Capital Management, Inc. (the 'Adviser'). The Trust
expects to distribute substantially all of its net assets on or shortly before
November 30, 2005 and thereafter to terminate. The distribution and termination
may require shareholder approval. The Trust's investment objectives are to
provide a high level of current income consistent with investing only in
investment grade securities and to return at least $10.00 per share (the initial
public offering price per share) to investors on or shortly before November 30,
2005. Investment grade securities are securities that are either (i) at the time
of investment rated in one of the four highest rating categories of a nationally
recognized rating agency (e.g., between AAA and BBB by Standard & Poor's
Corporation and Fitch Investors Service, L.P. or between Aaa and Baa by Moody's
Investors Services, Inc.) or (ii) issued or guaranteed by the U.S. Government or
one of its agencies or instrumentalities. No assurance can be given that the
Trust's investment objectives will be achieved.
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,
portfolio securities are valued based upon the current bid price. 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.
At December 31, 1995, 21% of the investments in securities held by the Trust
were valued on the basis of bid prices provided by one principal market maker.
These prices may differ from the value that would have been used had a broader
market for these securities existed.
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.
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 solely for the purpose of
hedging its existing portfolio securities or securities the Trust intends to
purchase against 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.
12
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
Options Written or Purchased -- The Trust may purchase or write options as a
method of hedging potential declines in similar underlying securities. When the
Trust writes or purchases an option, an amount equal to the premium received or
paid by the Trust is recorded as a liability or an asset and is subsequently
adjusted to the current market value of the option written or purchased.
Premiums received or paid from writing or purchasing options which expire
unexercised are treated by the Trust on the expiration date as realized gains or
losses. The difference between the premium and the amount paid or received on
effecting a closing purchase or sale transaction, including brokerage
commissions, is also treated as a realized gain or loss. If an option is
exercised, the premium paid or received is added to the proceeds from the sale
or cost of the purchase in determining whether the Trust has realized a gain or
a loss on the 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 that it will expire without being exercised. If
this occurs, the option expires worthless and the premium paid for the option is
a loss. The risk associated with writing call options is that the Trust may
forego the opportunity for a profit if the market value of the underlying
position 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.
Interest Rate Swap -- The Trust may enter into interest rate swap transactions
with approved counterparties for purposes of hedging against potential interest
rate fluctuations. An interest rate swap is an agreement between two parties in
which each party commits to make periodic interest payments to the other based
on a notional principal amount for a specified time period (e.g., an exchange of
floating rate payments for fixed rate payments). Interest rate swaps involve
only the accrual and exchange of interest payments between the parties and do
not involve the exchange or payment of the contracted notional principal amount.
During the term of the swap, changes in the value of the swap are recognized as
unrealized gains or losses by 'marking-to-market' to reflect the market value of
the swap. When the swap is terminated, the Trust will record a realized gain or
loss equal to the difference, if any, between the proceeds from (or cost of) the
closing transaction and the Trust's basis in the contract. The Trust is exposed
to credit loss in the event of non-performance by the other party to the
interest rate swap. However, the Trust does not anticipate non-performance by
any counterparty.
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 greater or less than the proceeds originally received.
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 long-term securities
are amortized using the effective yield to maturity method.
Taxes -- It is the Trust's intention 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 realized capital gains in excess of
capital loss carryforwards are distributed at least annually. Dividends and
distributions are recorded on the ex-dividend date.
Deferred Organization Expenses -- A total of $34,000 was incurred in connection
with the organization of the Trust. These costs have been deferred and are
13
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1995
- --------------------------------------------------------------------------------
being amortized ratably over a period of sixty months from the date the Trust
commenced investment operations.
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 defined 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. The Adviser 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.
2. INVESTMENT ADVISORY AND ADMINISTRATION AGREEMENTS:
The Trust has entered into an Investment Advisory Agreement with the Adviser.
The Adviser 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 0.65% of the Trust's average weekly net
assets. For the year ended December 31, 1995, the Adviser earned $1,217,170 in
Investment Advisory Fees.
The Trust has entered into an Administration Agreement with Hyperion Capital
Management, Inc. (the 'Administrator'). The Administrator performs
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. For the year ended December 31, 1995, the Administrator earned $296,521
in Administration Fees.
The Administrator entered into a Sub-Administration Agreement with Prudential
Mutual Fund Management, Inc. ('PMF') (the 'Sub-Administrator'), an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America, to whom
the Administrator delegated certain of its administrative responsibilities. For
these services, the Administrator paid out of its own assets the fee paid to the
Sub-Administrator computed at the rate of 0.12% per annum of the first $100
million of the Trust's average weekly net assets, 0.10% of the next $150 million
and 0.08% of any amounts above $250 million. The Administrator paid $188,832 to
the Sub-Administrator during the year ended December 31, 1995.
On September 22, 1995, the Administrator notified PMF that it was terminating
its Sub-Administration Agreement with them effective November 30, 1995. The
Administrator has assumed all responsibilities previously performed by PMF.
Certain officers and/or directors of the Trust are officers and/or directors of
the Adviser.
3. PURCHASES AND SALES OF INVESTMENTS:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 1995 aggregated $439,597,660 and $433,168,029,
respectively.
The federal income tax basis of the Trust's investments at December 31, 1995
was $266,556,727 and accordingly, net unrealized appreciation for federal
income tax purposes was $17,522,770 (gross unrealized appreciation--
$17,632,220; gross unrealized depreciation--$109,450). At December 31,
1995, the Trust had a capital loss carryforward of approximately
$19,160,154, of which $6,572,792 expires in 2001, $6,856,606 expires in 2002
and $5,730,756 expires in 2003.
4. BORROWINGS:
The Trust may enter into reverse repurchase agreements and dollar roll
agreements with the same parties with whom it may enter into repurchase
agreements. A dollar roll agreement is identical to a
14
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
December 31, 1995
- --------------------------------------------------------------------------------
reverse repurchase agreement except for the fact that substantially identical
securities may be repurchased. Under a reverse repurchase agreement or a dollar
roll agreement, the Trust sells securities and agrees to repurchase them, or
substantially similar securities in the case of a dollar roll agreement, at a
mutually agreed upon date and price. Under the 1940 Act, reverse repurchase
agreements and dollar roll agreements will be regarded as a form of borrowing by
the Trust unless, at the time it enters into a reverse repurchase agreement or a
dollar roll 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 and dollar roll agreements. Reverse repurchase agreements and dollar
roll 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 or a dollar roll
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 or the dollar roll agreement may
effectively be restricted pending such decision.
At December 31, 1995, the Trust had the following reverse repurchase agreements
outstanding:
<TABLE>
<CAPTION>
MATURITY IN
ZERO TO 30 DAYS
---------------
<S> <C>
Maturity Amount..................... $88,701,513
---------------
Market Value of Assets Sold Under
Agreements........................ $91,696,745
---------------
Weighted Average Interest Rate...... 6.06%
</TABLE>
The average daily balance of reverse repurchase agreements outstanding during
the year ended December 31, 1995 was approximately $78,647,673 at a weighted
average interest rate of 5.89%. The maximum amount of reverse repurchase
agreements outstanding on any day that net asset value was calculated during the
period was $95,096,484 as of July 3, 1995, which was 33.1% of total assets.
5. CAPITAL STOCK:
There are 75 million shares of $0.001 par value common stock authorized. Of the
21,341,373 shares outstanding at December 31, 1995, the Adviser owned 10,673
shares.
The Trust is continuing its stock repurchase program, whereby an amount of up to
15% of the total outstanding common stock, or approximately 3.2 million shares,
are authorized for repurchase. The purchase price may not exceed the
then-current net asset value.
During the years ended December 31, 1995 and 1994, the Trust repurchased a total
of 64,100 and 279,200 shares of its outstanding common stock at a cost of
$485,673 and $2,211,426 and an average discount of approximately 16.56% and
12.03% from its net asset value, respectively. All shares repurchased have been
retired.
6. 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.
Open futures contracts at December 31, 1995 are included in the portfolio of
investments.
7. SUBSEQUENT EVENTS:
The Trust's Board of Directors declared the following regular monthly dividends:
<TABLE>
<CAPTION>
DIVIDEND RECORD PAYABLE
PER SHARE DATE DATE
- --------- -------- --------
<S> <C> <C>
$0.05416 01/22/96 01/31/96
$0.05416 02/20/96 02/29/96
</TABLE>
15
<PAGE>
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
SELECTED QUARTERLY FINANCIAL DATA
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NET REALIZED AND
UNREALIZED GAINS NET INCREASE
(LOSSES) ON (DECREASE)
INVESTMENTS, SHORT IN NET ASSETS
NET INVESTMENT SALES, FUTURES AND RESULTING FROM
INCOME OPTION TRANSACTIONS OPERATIONS
------------------ ---------------------- -------------------
TOTAL PER PER PER
QUARTERLY PERIOD INCOME AMOUNT SHARE AMOUNT SHARE AMOUNT SHARE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
March 1, 1993* through
March 31, 1993 $1,098,287 $ 937,481 $0.04 $ 309,743 $ 0.01 $1,247,224 $ 0.05
April 1, 1993 through
June 30, 1993 4,763,551 3,832,812 0.18 2,686,112 0.12 6,518,924 0.30
July 1, 1993 through
September 30, 1993 5,272,115 4,111,430 0.19 2,755,490 0.13 6,866,920 0.32
October 1, 1993 through
December 31, 1993 5,832,414 4,539,300 0.21 (4,723,850) (0.22) (184,550) (0.01)
January 1, 1994 through
March 31, 1994 5,795,794 4,558,085 0.21 (6,888,543) (0.32) (2,330,458) (0.11)
April 1, 1994 through
June 30, 1994 5,902,772 4,616,386 0.22 (9,012,124) (0.40) (4,395,738) (0.18)
July 1, 1994 through
September 30, 1994 5,406,620 3,968,134 0.18 (5,830,890) (0.28) (1,862,756) (0.09)
October 1, 1994 through
December 31, 1994 5,679,863 4,021,909 0.19 (7,726,469) (0.36) (3,704,560) (0.17)
January 1, 1995 through
March 31, 1995 4,717,982 3,413,100 0.16 (7,036,248) (0.33) (3,623,148) (0.17)
April 1, 1995 through
June 30, 1995 4,968,099 3,310,058 0.15 25,633,344 1.20 28,943,402 1.35
July 1, 1995 through
September 30, 1995 5,181,587 3,333,022 0.16 211,662 0.01 3,544,684 0.17
October 1, 1995 through
December 31, 1995 5,193,154 3,310,034 0.16 7,524,854 0.35 10,834,888 0.51
<CAPTION>
DIVIDENDS AND
DISTRIBUTIONS SHARE
-------------------- PRICE
PER ----------
QUARTERLY PERIOD AMOUNT SHARE HIGH LOW
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
March 1, 1993* through
March 31, 1993 $ 0 $ 0.00 $10 1/8 $9 7/8
April 1, 1993 through
June 30, 1993 (4,344,306) (0.20) 10 8 7/8
July 1, 1993 through
September 30, 1993 (4,342,104) (0.20) 9 3/8 9
October 1, 1993 through
December 31, 1993 (4,068,685) (0.19) 9 1/4 8 3/8
January 1, 1994 through
March 31, 1994 (4,058,269) (0.19) 8 7/8 8
April 1, 1994 through
June 30, 1994 (4,042,754) (0.19) 8 1/4 7 5/8
July 1, 1994 through
September 30, 1994 (4,029,318) (0.19) 8 7 1/4
October 1, 1994 through
December 31, 1994 (4,005,735) (0.18) 7 3/8 6 3/4
January 1, 1995 through
March 31, 1995 (3,745,737) (0.17) 7 3/8 7
April 1, 1995 through
June 30, 1995 (3,745,744) (0.18) 8 7 1/8
July 1, 1995 through
September 30, 1995 (3,476,446) (0.17) 7 7/8 7 1/8
October 1, 1995 through
December 31, 1995 (3,471,766) (0.16) 7 7/8 7 1/2
</TABLE>
* Commencement of investment operations
- --------------------------------------------------------------------------------
INVESTMENT ADVISER AND ADMINISTRATOR
HYPERION CAPITAL MANAGEMENT, INC.
520 Madison Avenue
New York, New York 10022
FOR GENERAL INFORMATION ABOUT THE TRUST:
(800) HYPERION
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02116
TRANSFER AGENT
BOSTON EQUISERV L.P.
2 Heritage Drive
North Quincy, Massachusetts 01271
FOR SHAREHOLDER SERVICES:
(800) 426-5523
INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
LEGAL COUNSEL
GIBSON DUNN & CRUTCHER
1050 Connecticut Avenue, N.W.
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.
16
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of
changes in net assets and of cash flows and the financial highlights present
fairly, in all material respects, the financial position of Hyperion 2005
Investment Grade Opportunity Term Trust, Inc. (the 'Trust') at December 31,
1995, 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 two years in the period then ended
and for the period March 1, 1993 (commencement of operations) through December
31, 1993, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1995 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
February 23, 1996
- --------------------------------------------------------------------------------
TAX INFORMATION--(UNAUDITED)
- --------------------------------------------------------------------------------
The Trust is required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Trust's fiscal year end (December
31, 1995) 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, 7.84% of the Trust's distributions were
earned from U.S. Treasury obligations. None of the Trust's distributions
qualifies for the dividends received deduction available to corporate
shareholders.
A notification sent to shareholders with respect to calendar 1995, which
reflected the amounts to be used by calendar year taxpayers on their federal,
state and local income tax returns, was made in conjunction with Form 1099 DIV
and was mailed in January 1996. Shareholders are advised to consult their own
tax advisers with respect to the tax consequences of their investment in the
Trust.
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
PROXY RESULTS--(UNAUDITED)
- --------------------------------------------------------------------------------
During the fiscal year ended December 31, 1995, Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc. shareholders voted on the following proposals at a
shareholders meeting on May 23, 1995. The description of each proposal and
number of shares voted are as follows:
<TABLE>
<CAPTION>
SHARES VOTED
SHARES VOTED WITHHELD
FOR AUTHORITY
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
1. To elect the Trust's Patricia A.
Board of Directors: Sloan 18,671,166 281,639
Rodman L. Drake 18,664,395 288,410
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SHARES VOTED SHARES VOTED
SHARES VOTED FOR AGAINST ABSTAIN
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
2. To select Price
Waterhouse LLP as the
Trust's independent
accountants: 18,618,323 121,050 213,431
- ------------------------------------------------------------------------------
3. To approve or
disapprove the
Investment Advisory
Agreement between
the Trust and
Hyperion Capital
Management, Inc.,
including the
proposed revision
thereof 18,193,218 371,510 388,077
- ------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
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.
19
<PAGE>
- ------------------------------------------------------
OFFICERS & DIRECTORS
- ------------------------------------------------------
Kenneth C. Weiss
Chairman
Rodman L. Drake*
Director
Garth Marston*
Director
Harry E. Petersen, Jr.*
Director
Lewis S. Ranieri
Director
Patricia A. Sloan
Director & Secretary
Leo M. Walsh, Jr.*
Director
Louis C. Lucido
President
Clifford E. Lai
Senior Vice President
John N. Dunlevy
Vice President
Joseph W. Sullivan
Treasurer
* Audit Committee Members
- ------------------------------------------------------
HYPERION
Capital Management, Inc.
- ------------------------------------------------------
This Report is for shareholder information. This is not a prospectus intended
for use in the purchase or sale of Trust shares.
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY
TERM TRUST, INC.
520 Madison Avenue
New York, NY 10022
--------------------------------------
--------------------------------------
HYPERION 2005
INVESTMENT
GRADE
OPPORTUNITY
TERM TRUST
--------------------------------------
--------------------------------------
Annual Report
--------------------------------------
December 31, 1995
--------------------------------------
--------------------------------------
