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HYPERION 2005
INVESTMENT
GRADE
OPPORTUNITY
TERM TRUST
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Annual Report
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December 31, 1998
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Report of the Investment Advisor
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Report of the Investment Advisor
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February 19, 1999
Dear Shareholder:
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, 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 Investors Service, L.P.) at the
time of the investment. No assurance can be given that the Trust's investment
objectives will be achieved.
Market Environment
This past year was a very challenging period for the markets. The problems in
the global economy caused volatility in both the fixed income and equity
markets. Prices on U.S. Treasuries increased, but other sectors of the market
did not fare as well. Prices on mortgage-backed securities ("MBS") increased in
general, but to a lesser amount than anticipated as prepayment risk increased.
Credit related securities like corporate bonds also lagged, due to credit
concerns and fear of an economic recession.
Two seemingly contradictory events needed to take place before any semblance of
order could be restored to the markets. First, there had to be a significant
deleveraging of portfolios; and, second, there had to be a reassertion of
economic leadership on the part of both the U.S. and foreign governments.
Surprisingly, both of these occurred in the fourth quarter. The deleveraging of
portfolios occurred as a result of the implementation of stricter lending
standards for all types of companies and portfolios. This forced these
institutions to sell securities into the market and reduce market risk.
Similarly, the lowering of administered interest rates by both the U.S. Federal
Reserve Bank and its European counterparts clearly demonstrated a commitment to
maintain the positive forward movement of these respective economies. Over the
period, the Federal Funds rate dropped by 75 basis points.
By the end of the year, the fixed income markets appeared to be more sound. The
"flight-to-quality" subsided, interest rates reversed some of their decline but,
more importantly, corporate bonds and MBS began to recover their performance.
Below is a chart showing the changes in interest rates and yield spreads for
various sectors of the fixed income market.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Report of the Investment Advisor
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Graph: The Graph depicts the differences in yield spreads between the GNMA
current coupon, 10 year Treasury, 2 year Treasury, and AAA Corporates
for the period between September 30, 1998 and December 30, 1998.
We believe that the fixed income market will reverse course in 1999. We expect
interest rates to increase slightly during the year. This is primarily due to
the continued strength of the U.S. economy. For the last 18 months, the U.S.
economy has been an oasis of prosperity in the global community. The problems in
Asia, Russia and Latin America have failed to slow the U.S. economy. Weakness in
manufacturing and other export-dependent companies has been more than
compensated for in other areas, such as high-technology, bio-technology and
internet-oriented companies.
We target a 5.5% to 6.0% yield level on 30-year U.S. Treasury Bonds in 1999.
This interest rate environment should be favorable for MBS, as higher interest
rates should reduce prepayment risk. The market environment should also be
supportive of credit-related securities, as the strength of the economy should
keep credit problems at a minimum.
Portfolio Strategy and Performance
The securities in the portfolio have been affected by two opposing forces in the
past several months. On the one hand, interest rates on U.S. Treasury securities
have fallen, which is generally positive for bond prices. On the other hand,
prepayment and credit risk premiums increased. The resulting impact on the
portfolio is that the prices on the portfolio holdings increased, but lagged the
price increase of U.S. Treasuries.
The changes to the portfolio over the last six months represent moderate
responses to market conditions. As interest rates moved lower, we sought to
enhance the performance of the portfolio by shifting approximately one-fifth of
the core agency mortgage holdings into similar securities with lower coupons and
structural prepayment protection. In addition, we took advantage of wider yield
spreads by making small increases in our allocations to credit-sensitive
sectors.
Overall, the portfolio's allocation to subordinated residential MBS and
commercial MBS increased slightly during the period. Currently, over 77% of the
holdings are targeted to the stated maturity of the Trust. As of the end of
December, the Trust, inclusive of leverage, had an average duration (duration
measures a bond portfolio's price sensitivity to interest rates) of 6.9 years;
the core (non-levered) assets had a duration of 4.8 years.
The Trust's total return for the twelve month period ending December 31, 1998
was 6.76%. 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 6.38% on shares of the Trust is based on the NYSE closing
price of $8.6250 on December 31, 1998.
During the year ended December 31, 1998 the Trust 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 January 1, 1998
through and including December 31, 1998, the Trust has repurchased and retired
261,200 shares, capturing $0.0159 in additional NAV per share, or $271,848 in an
actual dollar amount for shareholders. From the inception of the Trust through
and including December 31, 1998, the Trust has repurchased 4,605,000 shares, or
approximately 21.21% of the Trust's original outstanding common shares capturing
$0.3170 in additional NAV per share.
The chart that follows shows the allocation of the Trust's holdings by asset
category on December 31, 1998.
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM
TRUST, INC.
Portfolio Of Investments As Of December 31, 1998*
continued support. As always, we welcome your
questions and comments, and encourage you to
contact our Shareholder Services Representatives at
1-800-HYPERION.
Sincerely,
ANDREW M. CARTER CLIFFORD E. LAI
Director and Chairman of the Board President
Hyperion 2005 Investment Grade Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc. Opportunity Term Trust, Inc.
Chairman and Chief Executive Officer, President and Chief Investment Officer,
Hyperion Capital Management, Inc. Hyperion Capital Management, Inc.
<TABLE>
<S> <C> <C> <C> <C>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Portfolio of Investments Principal
December 31, 1998 Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT & AGENCY OBLIGATIONS - 104.3%
U.S. Government Agency Collateralized Mortgage Obligations (REMICs) - 104.3%
Federal Home Loan Mortgage Corporation (FHLMC)
Series 2018, Class PB 6.00 % 05/15/20 $ 10,000 @ $ 10,000,700
Series 2029, Class PB 6.00 02/15/22 37,141 @ 37,093,831
Series 2021, Class PT 6.00 06/15/22 39,140 @ 39,152,329
Series 2052, Class PG 6.25 02/15/23 17,955 18,036,516
Series 2064, Class PM 6.25 10/15/22 17,000 17,055,590
Series 1676, Class H 6.50 10/15/22 12,389 12,633,035
Series 1671, Class G 6.50 08/15/23 8,000 8,158,527
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142,130,528
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Federal National Mortgage Association (FNMA)
Series 1998-44, Class QE 6.00 04/18/21 5,000 4,869,400
Series 1998-27, Class PC 6.00 12/18/20 10,000 9,936,800
Series 1998-36, Class PM 6.25 11/18/22 16,300 16,383,582
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31,189,782
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Total U.S. Government Agency Collateralized Mortgage Obligations (REMICs)
( Cost$-173,161,856) 173,320,310
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ASSET-BACKED SECURITIES - 12.8%
Midland Receivables*
Series 1998-1 8.63 12/15/03 3,000 3,000,000
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The Money Store
Series 1996-B, Class A8 7.91 05/15/24 3,000 3,161,893
Series 1998-A, Class AH1 6.36 07/15/07 2,281 2,284,252
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5,446,145
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Standard Credit Card Master Trust
Series 1994-2, Class B 7.50 04/07/08 11,900 12,843,982
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Total Asset-Backed Securities
( Cost$-20,812,076 ) 21,290,127
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PRIVATE COLLATERALIZED MORTGAGE OBLIGATIONS - 22.5%
Commercial Mortgage Backed Securities - 15.4%
DLJ Mortgage Acceptance Corp. *
Series 1997-CF2, Class CP (IO) 1.36 + 11/15/04 125,000 8,339,875
Series 1996-CF1, Class A1B 7.58 02/12/06 3,000 3,317,010
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11,656,885
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Norse Ltd.*
Series 1A, Class A3 6.52 08/13/10 10,000 10,125,000
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Resolution Trust Corporation
Series 1992-C8, Class B 8.84 12/25/23 3,663 3,715,023
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Total Commercial Mortgage Backed Securities
( Cost$-25,463,967 ) 25,496,908
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Subordinated Collateralized Mortgage Obligations - 7.1%
Countrywide Home Loans
Series 1996-1, Class B1 7.25 05/25/26 3,819 3,912,442
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Subordinated Collateralized Mortgage Obligations - (continued)
Salomon Brothers Mortgage Securities VII
Series 1997-HUD1, Class B1 7.75 % 12/25/30 $ 5,550 $ 5,577,707
Series 1997-HUD1, Class B2 7.75 12/25/30 2,294 2,240,502
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7,818,209
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Total Subordinated Collateralized Mortgage Obligations
( Cost$-11,410,221 ) 11,730,651
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Total Private Collateralized Mortgage Obligations
( Cost$-36,874,188 ) 37,227,559
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MUNICIPAL ZERO COUPON SECURITIES - 9.9%
Texas - 9.0%
Houston Texas Water & Sewer System
Revenue Bond, AMBAC 4.16 (a) 12/01/06 5,000 3,611,990
San Antonio Texas, Electricity & Gas
Revenue Bond, Series B, FGIC 4.21 (a) 02/01/07 10,000 7,146,340
Texas Municipal Power Agency
Revenue Bond, AMBAC 4.09 (a) 09/01/05 5,490 4,194,047
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14,952,377
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West Virginia - 0.9%
West Virginia State Parkways Economic
Development and Tourism Authority
Revenue Bond, FGIC 4.26 (a) 05/15/05 1,975 1,510,719
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Total Municipal Zero Coupon Securities
( Cost$-14,643,482 ) 16,463,096
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REPURCHASE AGREEMENT - 0.3%
Dated 12/31/98, with State Street Bank and Trust Company, 4.50%,
due 1/4/99; proceeds: $577,289, collateralized by $590,000
Federal Home Loan Mortgage Corporation, 4.950%, due 12/04/00, value: $593,064
( Cost - $ 577,000 ) 577 577,000
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TOTAL INVESTMENTS - 149.8%
( Cost$-246,068,602) 248,878,092
Liabilities in Excess of Other Assets - (49.8%) (82,754,513)
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NET ASSETS - 100.0% $ 166,123,579
====================
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</TABLE>
(a)Zero Coupon Bonds. Interest rate represents yield to maturity.
@ - Portion of or entire principal amount delivered as collateral to
counterparty for reverse repurchase agreements. (Note 5)
+ - Variable Rate Security - Coupon rate is rate in effect as of
December 31, 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 -Insured by American Municipal Bond Assurance Corporation
FGIC - Insured by 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
December 31, 1998
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<TABLE>
<S> <C>
Assets:
Investments, at value (cost $246,068,602) (Note 2) $ 248,878,092
Cash 896
Interest receivable 1,769,912
Prepaid insurance 111,692
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Total assets 250,760,592
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Liabilities:
Reverse repurchase agreements (Note 5) 83,434,000
Distribution payable 808,486
Interest payable (Note 5) 205,577
Investment advisory fee payable (Note 3) 92,706
Administration fee payable (Note 3) 22,804
Accrued expenses and other liabilities 73,440
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Total liabilities 84,637,013
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Net Assets (equivalent to $9.71 per share based on
17,105,673 shares issued and outstanding) $ 166,123,579
===========================
Composition of Net Assets:
Capital stock, at par ($.001) (Note 6) $ 17,106
Additional paid-in capital (Note 6) 165,975,232
Undistributed net investment income 2,026,577
Accumulated net realized loss (4,704,826)
Net unrealized appreciation 2,809,490
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=========================
Net assets applicable to capital stock outstanding $ 166,123,579
===========================
</TABLE>
See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statement of Operations
For the Year Ended December 31, 1998
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<TABLE>
<S> <C>
Investment Income (Note 2):
Interest $ 15,587,636
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Expenses:
Investment advisory fee (Note 3) 1,091,963
Administration fee (Note 3) 268,592
Insurance 119,643
Custodian 60,733
Reports to shareholders 50,414
Directors' fees 45,216
Accounting and tax services 54,291
Registration fees 24,010
Transfer agency 27,238
Legal 11,938
Miscellaneous 20,841
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Total operating expenses 1,774,879
Interest expense (Note 5) 4,108,263
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Total expenses 5,883,142
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Net investment income 9,704,494
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Realized and Unrealized Gain on Investment and Futures
Transactions (Note 2 and 4)
Net realized gain on:
Investment transactions 6,474,733
Futures transactions 175,092
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--------------------------
6,649,825
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Net change in unrealized appreciation on investments (6,000,827)
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Net realized and unrealized gain on investment and
futures transactions 648,998
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Net increase in net assets resulting from operations $ 10,353,492
==========================
</TABLE>
See notes to financial statements.
<TABLE>
<S> <C> <C>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statements of Changes in Net Assets For the Year For the Year
Ended Ended
December 31, 1998 December 31, 1997
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Increase (Decrease) in Net Assets Resulting from Operations:
Net investment income $ 9,704,494 $ 12,156,802
Net realized gain on investment and futures transactions 6,649,825 4,484,582
Net change in unrealized appreciation on investment transactions (6,000,827) 4,737,235
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Net increase in net assets resulting from operations 10,353,492 21,378,619
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Dividends to Shareholders (Note 2):
Net investment income (9,481,814) (11,719,724)
------------------------- ----------------------
Capital Stock Transactions (Note 6):
Cost of Trust shares repurchased and retired (2,268,023) (29,807,365)
------------------------- -------------------------
Total decrease in net assets (1,396,345) (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 $2,026,577 and $1,803,897, respectively) $ 166,123,579 $ 167,519,924
========================= ======================
</TABLE>
See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statement of Cash Flows
For the Year Ended December 31, 1998
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<TABLE>
<S> <C>
Increase (Decrease) in Cash:
Cash flows provided by operating activities:
Interest received (excluding net accretion of $753,933) $ 14,850,413
Interest expense paid (4,004,800)
Operating expenses paid (1,661,585)
Sale of short-term portfolio investments, net 153,000
Purchase of long-term portfolio investments (198,532,783)
Proceeds from disposition of long-term portfolio
investments and principal paydowns 194,533,993
Net cash provided by futures transactions 175,092
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Net cash provided by operating activities 5,513,330
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Cash flows used for financing activities:
Net cash provided by reverse repurchase agreements 6,160,000
Cash used to repurchase and retire Trust shares (2,268,023)
Cash dividends paid (9,510,295)
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Net cash used for financing activities (5,618,318)
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Net decrease in cash (104,988)
Cash at beginning of period 105,884
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Cash at end of period $ 896
============================
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 $ 10,353,492
----------------------------
Increase in investments (11,083,199)
Decrease in net unrealized appreciation on investments 6,000,827
Decrease in interest and principal paydowns receivable 25,451
Decrease in prepaid expenses and other assets 120,330
Decrease in liabilities 96,429
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Total adjustments (4,840,162)
----------------------------
Net cash provided by operating activities $ 5,513,330
============================
</TABLE>
See notes to financial statements.
<TABLE>
<S> <C> <C> <C> <C> <C>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Financial Highlights For the Year Ended
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December 31, December 31, December 31, December 31, December 31,
1998 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 0.56 0.65 0.67 0.63 0.80
Net realized and unrealized gains (losses)
on investment, short sale, futures and
option transactions 0.03 0.47 (0.45) 1.22 (1.36)
---------------- ------------- ------------- ---------------- -------------
Net increase (decrease) in net asset value
value resulting from operations 0.59 1.12 0.22 1.86 (0.55)
---------------- ------------- ------------- ---------------- -------------
Net effect of shares repurchased 0.02 0.25 0.01 0.01 0.01
Dividends from net investment income (0.55) (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 $ 8.6250 $ 8.4375 $ 7.5000 $ 7.6250 $ 7.0000
================ ================ ================ ================ ================
Total Investment Return + 8.92% 20.69% 6.98% 19.10% (10.63)%
Ratios to Average Net Assets/Supplementary Data:
Net assets, end of period (000s) $166,124 $167,520 $187,668 $198,279 $173,504
Total operating expenses 1.06% 1.05% 1.08% 1.08% 1.08%
Interest expense 2.45% 2.57% 2.37% 2.49% 1.90%
Total Expenses 3.51% 3.62% 3.45% 3.57% 2.98%
Net investment income 5.78% 6.87% 7.65% 7.14% 9.10%
Portfolio turnover rate 79% 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 brokerage
commissions.
See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Notes to Financial Statements
December 31, 1998
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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 or in the financial condition of the issuer.
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 against
fluctuations in the value of portfolio securities 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.
2. Significant Accounting Policies (continued)
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 realized 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. 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 Agreements and Affiliated Transactions
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 year ended December 31, 1998, the Advisor accrued $1,091,963
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, preparing reports and other
documents required by federal, state, and other applicable laws and regulations,
and providing 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
year ended December 31, 1998, the Administrator accrued $268,592 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 year ended December 31, 1998 were $31,654,512 and
$48,406,255, respectively. Purchases and sales of U.S. Government securities,
for the year ended December 31, 1998, were $166,878,271 and $142,975,692,
respectively. For purposes of this footnote, U.S. Government securities include
securities issued by the U.S. Treasury, the Federal Home Loan Mortgage
Corporation, the Federal National Mortgage Association, and the Government
National Mortgage Association.
The federal income tax basis of the Trust's investments at December 31, 1998 was
substantially the same for financial reporting. At December 31, 1998, the Trust
had a capital loss carryforward of approximately $4,704,826, all of which
expires in 2003, available to offset any future capital gains. During the year
ended 1998, the Trust utilized $6,649,825 of capital loss carry forwards.
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.
5. Borrowings (continued)
At December 31, 1998, the Trust had the following reverse repurchase agreements
outstanding:
Maturity in
Zero to 30
days
Maturity Amount............... $83,724,700
--------------------------------
Market Value of Assets Sold
--------------------------------
Under Agreements............ $86,106,816
--------------------------------
Weighted Average Interest Rate 5.57%
--------------------------------
- --------------------------------------------------------------------------------
The average daily balance of reverse repurchase agreements outstanding during
the year ended December 31, 1998 was $73,199,381 at a weighted average interest
rate of 5.61%. The maximum amount of reverse repurchase agreements outstanding
at any time during the year was $79,897,000, as of November 10, 1998, which was
31.38% of total assets.
6. Capital Stock
There are 75 million shares of $0.001 par value common stock authorized. Of the
17,105,673 shares outstanding at December 31, 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 December 31, 1998, 4,605,000 shares have been repurchased pursuant to this
program at a cost of $36,688,084 and an average discount of 13.20% from its net
asset value. For the year ended December 31, 1998, 261,200 shares have been
repurchased at a cost of $2,268,023 and an average discount of 11.03% 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 year ended December 31, 1998.
There were no open futures contracts at December 31, 1998.
- -------------------------------------------------------------------------------
PROXY RESULTS (unaudited)
- --------------------------------------------------------------------------------
During the year ended December 31, 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 Trusts'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 PricewaterhouseCoopers 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.
- -------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Selected Quarterly Financial Data
(unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Selected Quarterly Financial Data
(unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gains
(losses) on Net increase
investment, short (decrease) in net
Net investment sale, futures and assets resulting 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, 1999 $91,098,287 $ 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 8 5/16
September 30, 1998 3,882,244 2,289,557 0.13 4,602,359 0.27 6,891,916 0.40 (2,370,194) (0.14) 8 7/16 8 13/16
December 31, 1998 4,182,947 2,584,761 0.10 (4,092,298) (0.24) (1,507,537) (0.14) (3,144,213) (0.14) 8 15/16 8 9/16
</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 LLP
For Shareholder Services: 1025 Connecticut Avenue, N.W.
(800) 426-5523 Washington, D.C. 20036
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that periodically the Trust may purchase its shares in the
open market at prevailing market prices.
- -------------------------------------------------------------------------------
Officers & Directors
- -------------------------------------------------------------------------------
Andrew M. Carter
Chairman
Lewis S. Ranieri
Director
Robert F. Birch*
Director
Rodman L. Drake*
Director
Harry E. Petersen, Jr.*
Director
Leo M. Walsh, Jr.*
Director
Kenneth C. Weiss
Director
Garth Marston
Director Emeritus
Patricia A. Sloan
Director & Secretary
Clifford E. Lai
President
John H. Dolan
Vice President
Patricia A. Botta
Vice President
Thomas F. Doodian
Treasurer
* Audit Committee Members
- --------------------------------
HYPERION
- --------------------------------
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>
<NUMBER> 0
<NAME> HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<INVESTMENTS-AT-COST> 246069
<INVESTMENTS-AT-VALUE> 248878
<RECEIVABLES> 1770
<ASSETS-OTHER> 113
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 250761
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 84637
<TOTAL-LIABILITIES> 84637
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 165992
<SHARES-COMMON-STOCK> 17105
<SHARES-COMMON-PRIOR> 17366
<ACCUMULATED-NII-CURRENT> 2027
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (4705)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2809
<NET-ASSETS> 166124
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15588
<OTHER-INCOME> 0
<EXPENSES-NET> 5884
<NET-INVESTMENT-INCOME> 9704
<REALIZED-GAINS-CURRENT> 6650
<APPREC-INCREASE-CURRENT> (6001)
<NET-CHANGE-FROM-OPS> 10353
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9482)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 261
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1396)
<ACCUMULATED-NII-PRIOR> 1803
<ACCUMULATED-GAINS-PRIOR> (11354)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1092
<INTEREST-EXPENSE> 4108
<GROSS-EXPENSE> 5884
<AVERAGE-NET-ASSETS> 167984
<PER-SHARE-NAV-BEGIN> 9.65
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> .05
<PER-SHARE-DIVIDEND> (0.55)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.71
<EXPENSE-RATIO> 1.06
<AVG-DEBT-OUTSTANDING> 73199
<AVG-DEBT-PER-SHARE> 3.75
</TABLE>
