HYPERION 2005
INVESTMENT
GRADE
OPPORTUNITY
TERM TRUST
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Semi-Annual Report
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June 30, 1998
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Report of the Investment Advisor
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August 25, 1998
Dear Shareholder:
We welcome this opportunity to provide you with information about Hyperion 2005
Investment Grade Opportunity Term Trust, Inc. (the "Trust") for its semi-annual
period ended June 30, 1998 and to share our outlook for the rest of the Trust's
fiscal year. The Trust's shares are traded on the New York Stock Exchange
("NYSE") under the symbol "HTO".
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 investment grade securities and to attempt to return $10.00 per share (the
initial public offering price per share) to investors on or shortly before
November 30, 2005. The Trust pursues these investment objectives by investing in
a portfolio primarily of mortgage-backed securities issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities, or rated in one of
the four highest rating categories by a nationally recognized rating agency
(e.g., Standard & Poor's Corporation or Fitch IBCA, Inc.) at the time of the
investment. No assurance can be given that the Trust's investment objectives
will be achieved.
Market Environment
Prices for fixed income securities have increased over the last six months with
mortgage rates falling an average of 25 basis points. A significant factor
contributing to the strong performance of the bond market is 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. Some of the major factors that could support Hyperion's outlook for
lower bond yields include positive fundamentals such as an improving fiscal
policy, declining government deficits, and an expectation of prolonged economic
problems in Asia.
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 more quickly, and without many of yesterday's
refinancing hassles. In an attempt to reduce exposure to prepayment risk,
Hyperion's strategy has been to increase the allocation of securities in the
portfolio to those that are intended to deflect prepayment risk and whose
underlying collateral is believed to be less prepayment sensitive.
Portfolio Strategy and Performance
Hyperion's strategy with regard to the Trust has been both opportunistic and
defensive. Over the last six months, the decline in interest rates and
subsequent increase in the market value of many of the portfolio's holdings
allowed Hyperion to improve the overall stability of the portfolio. We increased
the Trust's allocation in securities whose maturities closely match the targeted
termination date, and sold some securities that had begun to demonstrate less
maturity certainty. Given the expected termination date for the Trust of
November 30, 2005, Hyperion carefully analyzed the structure of these
replacement securities to find ones that it believes should fulfill the
investment objectives of the Trust. Hyperion also chose over the last year to
raise the overall credit profile of the Trust. This move has largely been
predicated upon the gradual narrowing of credit spreads to levels where Hyperion
felt that shareholders were not being rewarded enough for owning lower credit
securities. The portfolio's exposure to prepayment insensitive securities was
increased primarily into U.S. Treasury securities, U.S. Agency and asset-backed
securities ("ABS"). 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". The
Trust also increased the portfolio's allocation to securities which we believe
will be more protected from prepayment risk, such as planned amortization class
Collateralized Mortgage Obligations ("PAC CMOs") and ABS. PAC CMOs differ from
many other mortgage-backed securities because cash flows produced by a PAC CMO
have a higher degree of predictability so long as the rate of mortgage
refinancings remains in a given range. ABS are securities collateralized by
assets that are not mortgage loans. They are typically backed by large pools of
homogeneous loans, such as automobile loans and credit card receivables. Because
the underlying loans are less likely to "refinance" regardless of the prevailing
interest rate environment, these securities have exhibited both longer maturity
and greater predictability of cash flows. The portfolio increased its asset
allocation to these two sectors by 26%.
The Trust's total return for the six month period ending June 30, 1998 was
3.49%. Total return is computed based upon the change in net asset value ("NAV")
of the Trust's shares and includes reinvestment of dividends. The current
monthly dividend the Trust pays its shareholders is $0.04583 per share. The
current yield of 6.47% on shares of the Trust is based on the NYSE closing price
of $8.5000 on June 30, 1998.
At the end of August, the Trust, inclusive of leverage, had an average duration
(duration measures a bond portfolio's price sensitivity to interest rate
changes) of approximately 7.4 years, with the core assets having a duration of
5.0 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 are made when the share
price of the Trust is significantly below the Trust's NAV. From December 31,
1997 through and including June 30, 1998 the Trust has repurchased and retired
126,400 shares, capturing $0.0081 in additional NAV per share or $139,370 in an
actual dollar amount for shareholders.
The portfolio continues to enjoy the benefit of high credit quality and
maintains its AA rating from Fitch IBCA, Inc. As of June 30, 1998, 86.10% of the
portfolio was rated AAA, 5.50% was rated AA, and 6.30% was rated A by Standard &
Poor's Corporation or Fitch IBCA, Inc.
The chart that follows shows the allocation of the Trust's holdings by asset
category on June 30, 1998.
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HYPERION 2005 INVESTMENT GRADE
OPPORTUNITY TERM TRUST, INC.
Portfolio Of Investments As Of June 30, 1998*
U.S. Government Agency Collateralized Mortgage Obligations 70.0%
U.S. Treasury Obligations 4.9%
Asset-Backed Securities 8.3%
Commercial/Collateralized Mortgage Obligations 3.3%
Subordinated Collateralized Mortgage Obligations 7.0%
Municipal Zero Coupon Securities 6.5%
*As a percentage of total investments.
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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 2005 Investment Grade
Opportunity Term Trust, Inc.
President and Chief Executive Officer,
Hyperion Capital Management, Inc.
CLIFFORD E. LAI
President,
Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc.
Managing Director and Chief Investment Officer,
Hyperion Capital Management, Inc.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Portfolio of Investments
June 30, 1998 (unaudited) Principal
Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS - 108.7%
U.S. Government Agency Collateralized Mortgage Obligations (REMICs) - 101.6%
Federal Home Loan Mortgage Corporation (FHLMC)
Series 1934, Class B 6.25% 08/15/11 $ 20,000 $ 20,052,794
Series 2018, Class PB 6.00 05/15/20 10,000 9,953,450
Series 1998-27, Class PC 6.00 12/18/20 10,000 9,929,900
Series 2029, Class PB 6.00 02/15/22 37,141 @ 36,966,994
Series 2021, Class PT 6.00 06/15/22 39,140 @ 38,828,860
Series 1676, Class H 6.50 10/15/22 12,389 12,583,387
Series 1732, Class H 6.50 11/15/22 16,350 16,600,700
Series 1671, Class G 6.50 08/15/23 8,000 8,124,826
Series 2064, Class PM 8.00 05/25/25 17,000 17,074,375
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Total U.S. Government Agency Collateralized Mortgage Obligations (REMICs)
(Cost - $ 169,551,278 ) 170,115,286
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U.S. Treasury Obligations - 7.1%
U. S. Treasury Notes 7.75 01/31/00 10,000 @ 10,331,260
6.63 05/15/07 1,500 @ 1,612,502
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Total U.S. Treasury Obligations
(Cost - $ 11,630,810 ) 11,943,762
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Total U.S. Government & Agency Obligations
(Cost - $ 181,182,088 ) 182,059,048
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ASSET-BACKED SECURITIES - 12.0%
The Money Store
Series 1998-A, Class AH 6.36 07/15/07 4,182 4,187,692
Series 1996-B, Class A8 7.91 05/15/24 3,000 3,163,573
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7,351,265
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Standard Credit Card Master Trust
Series 1994-2, Class B 7.50 04/07/08 11,900 12,778,127
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Total Asset-Backed Securities
(Cost - $ 19,713,146 ) 20,129,392
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PRIVATE COLLATERALIZED MORTGAGE OBLIGATIONS - 15.0%
Commercial Mortgage Backed Securities - 4.8%
Asset Securitization Corp.
Series 1997-D5, Class PS1 (IO) 1.57 + 02/14/41 8,931 970,360
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DLJ Mortgage Acceptance Corp. *
Series 1996-CF1, Class A1B 7.58 02/12/06 3,000 3,242,655
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Resolution Trust Corporation
Series 1992-C8, Class B 8.84 12/25/23 3,663 3,761,545
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Total Commercial Mortgage Backed Securities
(Cost - $ 7,775,945 ) 7,974,560
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Subordinated Collateralized Mortgage Obligations (REMICs) - 10.2%
Countrywide Home Loans
Series 1996-1, Class B1 7.25 05/25/26 3,845 3,940,049
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G3 Mortgage Reinsurance Ltd.
Mortgage Default Recourse* 6.66 05/25/08 5,000 5,006,250
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Salomon Brothers Mortgage Securities VII
Series 1997-HUD1, Class B1 7.75 % 12/25/30 $ 5,606 $ 5,778,298
Series 1997-HUD1, Class B2 7.75 12/25/30 2,317 2,380,626
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8,158,924
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Total Subordinated Collateralized Mortgage Obligations (REMICs)
(Cost - $ 16,516,139 ) 17,105,223
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Total Private Collateralized Mortgage Obligations
(Cost - $ 24,292,084 ) 25,079,783
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MUNICIPAL ZERO COUPON SECURITIES - 9.4%
Texas - 8.5%
Houston Texas Water & Sewer System
Revenue Bond, AMBAC (b) 12/01/06 5,000 3,434,735
San Antonio Texas, Electricity & Gas
Series B, Revenue Bond, FGIC (b) 02/01/07 10,000 6,790,030
Texas Municipal Power Agency
Revenue Bond, AMBAC (b) 09/01/05 5,490 4,001,557
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14,226,322
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West Virginia - 0.9%
West Virginia State Parkways Economic
Development and Tourism Authority
Revenue Bond, FGIC (b) 05/15/05 1,975 1,442,575
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Total Municipal Zero Coupon Securities
(Cost - $ 14,250,923 ) 15,668,897
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TOTAL INVESTMENTS - 145.1%
(Cost - $ 239,438,241 ) 242,937,120
Liabilities in Excess of Other Assets - (45.1%) (75,493,657)
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NET ASSETS - 100.0% $ 167,443,463
====================
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(b) - Zero Coupon Bonds
@ - Portion of or entire principal amount delivered as collateral to
counter party for reverse repurchase agreements. (Note 5)
+ - Variable Rate Security - Coupon rate is rate in effect as of
June 30, 1998.
* - Security exempt from registration under rule 144A of the
Securities Act of 1933. These securities may be
resold in transactions exempt from registration, normally to
qualified buyers.
AMBAC - American Municipal Bond Assurance Corporation
FGIC - Financial Guaranty Insurance Company
IO - Interest Only Security-Interest rate and principal amount are
based on the notional amount of the underlying mortgage pools.
REMIC - Real Estate Mortgage Investment Conduit
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See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statement of Assets and Liabilities
June 30, 1998 (unaudited)
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Assets:
Investments, at value (cost $239,438,241) (Note 2)................$.....242,937,120
Cash.........................................................................56,619
Interest receivable.......................................................1,747,232
Prepaid expenses............................................................183,792
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Total assets..................................................244,924,763
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Liabilities:
Reverse repurchase agreements (Note 5)...................................77,400,625
Interest payable (Note 5)....................................................38,523
Accrued expenses and other liabilities.......................................42,152
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Total liabilities..............................................77,481,300
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Net Assets (equivalent to $9.71 per share based on 17,240,473
shares outstanding)................... $ 167,443,463
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Composition of Net Assets:
Capital stock, at par (Note 6)....................................$..........17,240
Additional paid-in capital..............................................167,164,954
Undistributed net investment income.......................................2,666,666
Accumulated net realized losses..........................................(5,904,276)
Net unrealized appreciation...............................................3,498,879
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Net assets applicable to capital stock outstanding................$.....167,443,463
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See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statement of Operations
For the Six Months Ended June 30, 1998 (unaudited)
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Investment Income (Note 2):
Interest ............................................................$........7,522,445
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Expenses:
Investment advisory fee (Note 3)................................................540,212
Administration fee (Note 3).....................................................132,906
Insurance........................................................................55,362
Custodian........................................................................28,181
Reports to shareholders..........................................................26,337
Directors' fees..................................................................22,938
Accounting and tax services......................................................22,210
Registration fees................................................................13,191
Transfer agency..................................................................10,652
Legal ............................................................................4,693
Amortization of organization expenses (Note 2)....................................1,530
Miscellaneous.....................................................................1,399
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Total operating expenses...............................................859,611
Interest expense (Note 5).....................................................1,832,658
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Total expenses.......................................................2,692,269
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Net investment income.........................................................4,830,176
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Realized and Unrealized Gains (Losses) on Investments and Futures
Transactions (Note 2 and 4)
Net realized gains on:
Investment transactions.......................................................5,275,283
Futures transactions............................................................175,092
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5,450,375
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Net change in unrealized appreciation on investments..................................(5,311,438)
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Net realized and unrealized gain on investments and futures transactions.................138,937
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Net increase in net assets resulting from operations..........................$........4,969,113
===================
</TABLE>
See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statements of Changes in Net Assets For the Six
Months Ended For the Year
June 30, Ended
1998 December 31,
(unaudited) 1997
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Increase (Decrease) in Net Assets Resulting from Operations:
Net investment income..................................................$........4,830,176...$.......12,156,802
Net realized gain on investments and futures transactions............. .........5,450,375............4,484,582
Net change in unrealized appreciation on investment transactions ..............(5,311,438) 4,737,235
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Net increase in net assets resulting from operations............................4,969,113...........21,378,619
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Dividends to Shareholders (Note 2):
Net investment income..........................................................(3,967,407).........(11,719,724)
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Capital Stock Transactions (Note 6):
Cost of Trust shares repurchased and retired..................................(1,078,167).........(29,807,365)
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Total decrease in net assets............................................(76,461).........(20,148,470)
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Net Assets:
Beginning of period...........................................................167,519,924..........187,668,394
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End of period (including undistributed net investment income
of $2,666,666 and $1,803,897, respectively)......................$......167,443,463...$......167,519,924
=================== ================
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See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statement of Cash Flows
For the Six Months Ended June 30, 1998 (unaudited)
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Increase (Decrease) in Cash:
Cash flows provided by operating activities:
Interest received (excluding net accretion of $363,615)..........................$...........7,198,220
Interest expense paid.......................................................................(1,896,249)
Operating expenses paid.......................................................................(965,213)
Sale of short-term portfolio investments, net..................................................730,000
Purchase of long-term portfolio investments...............................................(137,319,679)
Proceeds from disposition of long-term portfolio
investments and principal paydowns......................................................137,784,480
Net cash provided by futures transactions......................................................175,092
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Net cash provided by operating activities....................................................5,706,651
----------------------
Cash flows used for financing activities:
Net cash provided by reverse repurchase agreements........................................ 126,625
Cash used to repurchase and retire Trust shares.............................................(1,078,167)
Cash dividends paid.........................................................................(4,804,374)
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Net cash used for financing activities......................................................(5,755,916)
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Net decrease in cash.................................................................................(49,265)
Cash at beginning of period..........................................................................105,884
----------------------
Cash at end of period..................................................................$..............56,619
======================
Reconciliation of Net Increase in Net Assets Resulting from Operations to
Net Cash Provided by Operating Activities:
Net increase in net assets resulting from operations...................................$...........4,969,113
----------------------
Increase in investments.....................................................................(4,452,838)
Decrease in net unrealized appreciation on investments.......................................5,311,438
Decrease in interest and principal paydowns receivable..........................................48,131
Decrease in prepaid expenses and other assets...................................................48,230
Decrease in liabilities.......................................................................(217,423)
----------------------
Total adjustments.....................................................................737,538
----------------------
Net cash provided by operating activities..............................................$...........5,706,651
======================
</TABLE>
See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Financial Highlights
For the Six
Months Ended For the Year For the Year For the Year For the Year
June 30, Ended Ended Ended Ended
1998 December 31, December 31, December 31, December 31,
(unaudited) 1997 1996 1995 1994
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Per Share Operating Performance:
Net asset value, beginning of period...............$ 9.65 $ 8.89 $ 9.29 $ 8.11 $ 9.41
-------------------------------- -------- ---------- ------------
Net investment income............................... 0.33 0.65 0.67 0.63 0.80
Net realized and unrealized gains (losses)
on investment, short
sale, futures and option transactions......... - * 0.47 (0.45) 1.22 (1.36)
----------------- ---------- ------ ---------- ------------
Net increase (decrease) in net asset value
resulting from operations........................ 0.33 1.12 0.22 1.86 (0.55)
----------------- ---------- ------ ---------- ------------
Net effect of shares repurchased.................. - * 0.25 0.01 0.01 0.01
Dividends from net investment income............. (0.27) (0.61) (0.63) (0.68) (0.75)
------------ ---------- ------ ---------- ------------
Net asset value, end of period.....................$ 9.71 $ 9.65 $ 8.89 $ 9.29 $ 8.11
============ ============ ======== ========== ==============
Market price, end of period........................$ 8.50 $ 8.4375 $ 7.50 $ 7.625 $ 7.00
============ ============ ======== ========== ==============
Total Investment Return +............................. 4.03%(1)+ 20.69% 6.98% 19.10% (10.63)%
Ratios to Average Net Assets/Supplementary Data:
Net assets, end of period (000s)....................$167,443 $167,520 $187,668 $198,279 $173,504
Total operating expenses............................. 1.03%(2) 1.05% 1.08% 1.08% 1.08%
Interest expense..................................... 2.21%(2) 2.57% 2.37% 2.49% 1.90%
Total Expenses........................................ 3.24%(2) 3.62% 3.45% 3.57% 2.98%
Net investment income...................................5.81%(2) 6.87% 7.65% 7.14% 9.10%
Portfolio turnover rate...................................57% 90% 116% 163% 171%
</TABLE>
+ Total investment return is computed based upon the New York Stock Exchange
market price of the Trust's shares and excludes the effects of sales loads
or brokerage commissions.
* Rounds to less than 0.01.
(1) Not Annualized.
(2) Annualized.
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See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Notes to Financial Statements
June 30, 1998 (unaudited)
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1. The Trust:
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 "Advisor"). 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 IBCA, Inc. 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.
No assurance can be given that the Trust's investment objectives will be
achieved.
2. Significant Accounting Policies:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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 offer 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.
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 hedge 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.
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, also is treated as a realized gain or loss. If an option is
exercised, the premium paid or received is added to the proceeds from the sale
or cost of the purchase in determining whether the 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 only will 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.
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. Income and capital gain
distributions are determined in accordance with income tax regulations which 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 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 an amount at least equal to the resale price, including accrued
interest. 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 0.65% of the Trust's average weekly net
assets. During the six months ended June 30, 1998, the Advisor received $540,212
in Advisory fees.
The Trust has entered into an Administration Agreement with Hyperion Capital
Management, Inc. (the "Administrator"). The Administrator has entered into a
Sub-Administration agreement with Investors Capital Services, Inc. (the
"Sub-Administrator"). The Administrator and Sub-Administrator perform
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 June 30, 1998, the Administrator received
$132,906 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, the Administrator and/or the Sub-Administrator.
4. Purchases and Sales of Investments:
Purchases and sales of investments, excluding short-term securities and U.S.
Government securities, for the six months ended June 30, 1998 were $10,002,169
and $42,584,267, respectively. Purchases and sales of U.S. Government
securities, for the six months ended June 30, 1998 were $127,317,510 and
$94,061,682, 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 June 30, 1998, the Trust had the following reverse repurchase agreements
outstanding:
Maturity in
Zero to 30
days
Maturity Amount............... $77,515,157
------------------------------
Market Value of Assets Sold
------------------------------
Under Agreements............ $79,027,960
------------------------------
Weighted Average Interest 5.87%
Rate..........................
------------------------------
- --------------------------------------------------------------------------------
The average daily balance of reverse repurchase agreements outstanding during
the six months ended June 30, 1998 was $64,863,184 at a weighted average
interest rate of 5.70%. The maximum amount of reverse repurchase agreements
outstanding at any time during the six months was $80,353,625, as of June 4,
1998, which was 31.7% of total assets.
6. Capital Stock:
There are 75 million shares of $0.001 par value common stock authorized. Of the
17,240,473 shares outstanding at June 30, 1998, the Advisor owned 10,673 shares.
The Trust is continuing its stock repurchase program, whereby an amount of up to
30% of the outstanding common stock as of March 1998, or approximately 4.8
million shares, are authorized for repurchase. The purchase price may not exceed
the then-current net asset value.
As of June 30, 1998, 4,470,200 shares have been repurchased pursuant to this
program at a cost of $35,498,227 and an average discount of 13.29% from its net
asset value. For the six months ended June 30, 1998, 126,400 shares have been
repurchased at a cost of $1,078,167 and an average discount of 11.8% from its
net asset value. For the year ended December 31, 1997, 3,748,600 shares had been
repurchased at a cost of $29,807,365, at an average discount of 13.22%. All
shares repurchased have been, or will be, retired.
7. Financial Instruments:
The Trust regularly trades in financial instruments with off-balance sheet risk
in the normal course of its investing activities to assist in managing exposure
to various market risks. These financial instruments include written options and
futures contracts and may involve, to a varying degree, elements of risk in
excess of the amounts recognized for financial statement purposes. The notional
or contractual amounts of these instruments represent the investment the Trust
has in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
There was no written option activity for the six months ended June 30, 1998.
There were no open futures contracts at June 30, 1998.
- --------------------------------------------------------------------------
PROXY RESULTS (unaudited)
- --------------------------------------------------------------------------
During the six months ended June 30, 1998, Hyperion 2005 Investment Grade
Opportunity 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: Rodman L. Drake 15,816,186 175,949
Patricia A. Sloan 15,816,186 175,949
- ------------------------------------------ --------------------- ------------------ ------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
- ------------------------------------------ --------------------- ------------------ ------------------
2. To select Price Waterhouse LLP as
the Trust's independent accountants: 15,731,565 75,929 184,640
- ------------------------------------------ --------------------- ------------------ ------------------
</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.
- -------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Selected Quarterly Financial Data
(unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------
Net realized and
unrealized gains
(losses) on Net increase
investment, short (decrease) in net
Net investment sale,assetseresulting from Dividends and
income option transactions operations distributions Share price
--------------- ---------------------- ------------------- ------------------ -------------
Total
Quarter ended income Amount Per share Amount Per share Amount Per share Amount Per share High Low
- ---------------------------------------------------------------------------------------------------------------------------
March 1, 1993*
to March 31, 1993 $1,098,287 $937,481 $0.04 $309,743 $.0.01 $ 1,247,224 $ 0.05 $ 0 $ 0.00 $10 1/8 9 7/8
June 30, 1993 4,763,551 3,832,812 0.18 2,686,112 0.12 6,518,924 0.30 (4,344,306) (0.20) 10 8 7/8
September 30, 1993 5,272,115 4,111,430 0.19 2,755,490 0.13 6,866,920 0.32 (4,342,104) (0.20) 9 3/8 9
December 31, 1993 5,832,414 4,539,300 0.21 (4,723,850) (0.22) (184,550) (0.01) (4,068,685) (0.19) 9 1/4 8 3/8
March 31, 1994 5,795,794 4,558,085 0.21 (6,888,543) (0.32) (2,330,458) (0.11) (4,058,269) (0.19) 8 7/8 8
June 30, 1994 5,902,772 4,616,386 0.22 (9,012,124) (0.40) (4,395,738) (0.18) (4,042,754) (0.19) 8 1/4 7 5/8
September 30, 1994 5,406,620 3,968,134 0.18 (5,830,890) (0.28) (1,862,756) (0.09) (4,029,318) (0.19) 8 7 1/4
December 31, 1994 5,679,863 4,021,909 0.19 (7,726,469) (0.36) (3,704,560) (0.17) (4,005,735) (0.18) 7 3/8 6 3/4
March 31, 1995 4,717,982 3,413,100 0.16 (7,036,248) (0.33) (3,623,148) (0.17) (3,745,737) (0.17) 7 3/8 7
June 30, 1995 4,968,099 3,310,058 0.15 25,633,344 1.20 28,943,402 1.35 (3,745,744) (0.18) 8 7 1/8
September 30, 1995 5,181,587 3,333,022 0.16 211,662 0.01 3,544,684 0.17 (3,476,446) (0.17) 7 7/8 7 1/8
December 31, 1995 5,193,154 3,310,034 0.16 7,524,854 0.35 10,834,888 0.51 (3,471,766) (0.16) 7 7/8 7 1/2
March 31, 1996 5,275,950 3,476,418 0.16 (11,839,891) (0.55) (8,363,473) (0.39) (3,463,398) (0.16) 8 1/8 7 1/2
June 30, 1996 5,518,159 4,034,887 0.19 (5,449,440) (0.26) (1,414,553) (0.07) (3,461,523) (0.16) 7 5/8 7
September 30, 1996 5,009,905 3,498,254 0.17 1,735,438 0.08 5,233,692 0.25 (3,372,722) (0.16) 7 1/2 7
December 31, 1996 4,837,691 3,223,188 0.15 5,884,661 0.28 9,107,849 0.43 (3,189,172) (0.15) 7 5/8 7 1/8
March 31, 1997 4,907,167 3,352,714 0.16 (5,602,253) (0.27) (2,249,539) (0.09) (3,148,487) (0.15) 7 5/8 7 1/4
June 30, 1997 4,763,200 3,189,643 0.17 6,820,791 0.33 10,010,434 0.50 (2,741,237) (0.14) 7 7/8 7 3/8
September 30, 1997 4,580,480 2,930,078 0.17 4,744,476 0.24 7,674,554 0.41 (2,598,475) (0.14) 8 1/4 7 3/4
December 31, 1997 4,313,961 2,684,367 0.15 3,258,803 0.17 5,943,170 0.32 (3,231,525) (0.18) 8 9/16 8 1/8
March 31, 1998 3,728,657 2,473,861 0.16 (1,597,782) (0.09) 876,079 0.07 (1,588,639) (0.11) 8 7/8 8 3/8
June 30, 1998 3,793,788 2,356,315 0.17 1,736,719 0.09 4,093,034 0.26 (2,378,768) (0.16) 8 9/16 85/16
</TABLE>
* 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
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.
- --------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
Officers & Directors
- --------------------------------------------------------------------------------
Kenneth C. Weiss
Chairman
Lewis S. Ranieri
Director
Rodman L. Drake*
Director
Leo M. Walsh, Jr.*
Director Semi-Annual Report
June 30, 1998
Harry E. Petersen, Jr.*
Director
Andrew M. Carter*
Director
Garth Marston
Director Emeritus
Patricia A. Sloan
Director & Secretary
Clifford E. Lai
President
Patricia A. Botta
Vice President
Thomas F. Doodian
Treasurer
* Audit Committee Members
- ----------------------------------------
- --------------------------------
The accompanying financial statements as of June 30, 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 2005 Investment Grade Opportunity
Term Trust, Inc.
One Liberty Plaza
165 Broadway, 36th Floor
New York, NY 10006-1404
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000895415
<NAME> HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
<SERIES>
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<NAME> HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<INVESTMENTS-AT-COST> 239438
<INVESTMENTS-AT-VALUE> 242937
<RECEIVABLES> 1747
<ASSETS-OTHER> 240
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 244925
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 77482
<TOTAL-LIABILITIES> 77482
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 167182
<SHARES-COMMON-STOCK> 17240
<SHARES-COMMON-PRIOR> 17366
<ACCUMULATED-NII-CURRENT> 2667
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5904)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3499
<NET-ASSETS> 167443
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7522
<OTHER-INCOME> 0
<EXPENSES-NET> 2692
<NET-INVESTMENT-INCOME> 4830
<REALIZED-GAINS-CURRENT> 5450
<APPREC-INCREASE-CURRENT> (5311)
<NET-CHANGE-FROM-OPS> 4969
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3967)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 126
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (76)
<ACCUMULATED-NII-PRIOR> 1803
<ACCUMULATED-GAINS-PRIOR> (11354)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 540
<INTEREST-EXPENSE> 1833
<GROSS-EXPENSE> 2692
<AVERAGE-NET-ASSETS> 167604
<PER-SHARE-NAV-BEGIN> 9.65
<PER-SHARE-NII> 0.33
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.27)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.71
<EXPENSE-RATIO> 1.03
<AVG-DEBT-OUTSTANDING> 64863
<AVG-DEBT-PER-SHARE> 3.32
</TABLE>
