________________________________________________________________________________
________________________________________________________________________________
__________________________________________
HYPERION 2005
INVESTMENT
GRADE
OPPORTUNITY
TERM TRUST
________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Annual Report
________________________________________________________________________________
December 31, 1999
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Report of the Investment Advisor
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February 23, 2000
Dear Shareholder:
We welcome this opportunity to provide you with information about the Hyperion
2005 Investment Grade Opportunity Term Trust, Inc. (the "Trust") for its
fiscal year ended December 31, 1999. 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 objectives are 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 objectives by investing in a portfolio
primarily of mortgage-backed securities ("MBS"), issued or guaranteed by
either the U.S. Government or one of its agencies or instrumentalities, or
rated "investment grade" 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
Interest rates rose significantly throughout 1999, spurred by exceptional U.S.
economic strength, a powerful bull market in stocks, and three separate
quarter-point increases of the Federal Funds rate by the Federal Reserve.
From June 30, 1999 to December 31, 1999, the yield on the 2-year U.S. Treasury
Note increased from 5.52% to 6.23%, the yield on the 10-year U.S. Treasury
Note rose from 5.78% to 6.43%, and the Federal Funds rate rose from 5.00% to
5.50%. For single-family mortgages, the Federal Home Loan Mortgage
Corporation ("FHLMC") average 30-year mortgage rate rose from 7.63% to 8.06%.
Over the short term, the environment for fixed income securities will continue
to be challenging. Consumer spending and confidence are up, stock prices
continue to rise, and labor markets are tight. We believe that the Federal
Reserve will increase the Federal Funds rate several times in the next six
months, and will continue to do so to slow the economy.
Over the longer term, we believe that the Federal Reserve will be successful
in engineering a slowdown in economic activity, which should allow interest
rates to fall back toward mid-1999 levels. However, given the ultimate
uncertainty regarding the actions of the Federal Reserve and the strength of
the economy, we expect volatility to be high over the next few months.
Portfolio Strategy and Performance
Over the past year, our strategy has focused on building a high degree of
credit quality and liquidity into the portfolio, while maintaining relatively
short duration and limited exposure to prepayment risk. To accomplish these
goals, we have concentrated our largest holdings in low coupon,
well-structured Agency issued Planned Amortization Class ("PAC")
Collateralized Mortgage Obligations ("CMOs"). Our credit profile is extremely
strong, with 84% of the Trust's total assets either rated AAA or guaranteed by
a government-sponsored agency.
During the past six months, we shifted a small amount of funds out of Agency
and non-Agency mortgage-backed securities ("MBS"), and into housing-related
asset-backed securities ("ABS") backed by home equity loans and second
mortgages. This move allowed us to earn a relatively high yield while
maintaining moderate duration and limited exposure to prepayment risk.
Over the longer term, we will attempt to position the Trust for a falling
interest rate environment. Over the last year, the duration of the Trust has
been shorter than that of its November 2005 maturity date, and in anticipation
of moderate economic activity, we plan to extend the duration of the portfolio
back out to its maturity target, while continuing to emphasize liquidity and
limiting prepayment risk. Additionally, over the next six months, we will
attempt to enhance income by allocating a small portion of the Trust's assets
into A and AA rated securities. Though this allocation will result in a
slight extension of the Trust's duration, it will remain within range of the
scheduled November 2005 termination target.
As of the end of January, the Trust, inclusive of leverage, had an average
duration of 5.9 years; the core (non-leveraged) assets had a duration of 4.1
years.
The Trust's total return for the twelve month period ending December 31, 1999,
was (1.42%). Total return is calculated based upon the change in Net Asset
Value ("NAV") of the Trust's shares, and includes reinvestment of dividends.
The closing NAV of the Trust on December 31, 1999 was $9.04 per share. Based
on the NYSE closing price of $7.9375 on December 31, 1999, the yield of the
Trust was 6.61%.
The Board of Directors has authorized the Trust to purchase and retire up to
30% of the Trust's original outstanding common shares (approximately 4.8
million shares). Previously, the Board of Directors had authorized the Trust
to purchase and retire up to 25% of the Trust's original outstanding common
shares. From the inception of the Trust, through and including December 31,
1999, the Trust has repurchased and retired 4,674,100 shares, capturing
$0.3217 in additional NAV per share, for a total of $5,480,997 for all
shareholders.
The chart that follows shows the allocation of the Trust's holdings by asset
category as of December 31, 1999.
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Portfolio Of Investments As Of December 31, 1999*
U.S. Government Agency Collateralized Mortgage Obligations 45.0%
Asset-Backed Securities 31.9%
Commercial Mortgage-Backed Securities 12.9%
Subordinated Collateralized Mortgage Obligations 2.0%
Municipal Zero Coupon Securities 7.2%
Repurchase Agreement 1.0%
*As a percentage of total investments.
Conclusion
We appreciate the opportunity to serve your investment needs, and 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,
ANDREW M. CARTER
Director and Chairman of the Board,
Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc.
Chairman and Chief Executive Officer,
Hyperion Capital Management, Inc.
CLIFFORD E. LAI
President,
Hyperion 2005 Investment Grade
Opportunity Term Trust, Inc.
President and Chief Investment Officer,
Hyperion Capital Management, Inc.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Portfolio of Investments Principal
December 31, 1999 Interest Amount Value
Rate Maturity (000s) (Note 2)
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U.S. GOVERNMENT AGENCY COLLATERALIZED MORTGAGE OBLIGATIONS - 65.9%
Federal Home Loan Mortgage Corporation (FHLMC)
Series 2021, Class PT 6.00 % 06/15/22 $ 39,140 @ $ 37,549,351
Series 2029, Class PB 6.00 02/15/22 37,141 @ 35,768,640
Series 2050, Class PG 6.25 02/15/23 7,955 7,597,184
----------------------
80,915,175
----------------------
Federal National Mortgage Association (FNMA)
Series 1998-44, Class QE 6.00 04/18/21 5,000 4,786,700
Series 1998-36, Class PM 6.25 11/18/22 16,300 @ 15,756,444
----------------------
20,543,144
----------------------
Total U.S. Government Agency Collateralized Mortgage Obligations
(Cost - $105,784,169) 101,458,319
----------------------
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ASSET-BACKED SECURITIES - 46.7%
Green Tree Financial Corporation
Series 1999-2, Class M1 6.80 12/01/30 5,000 4,591,450
----------------------
Midland Receivables *
Series 1998-1 8.63 01/15/04 1,868 1,858,789
----------------------
The Money Store
Series 1996-B, Class A8 7.91 05/15/24 3,000 3,012,810
----------------------
Norse Ltd.*
Series 1A, Class A3 6.52 08/13/10 10,000 9,235,940
----------------------
Residential Funding Mortgage Securities II
Series 1999-HI1, Class A4 6.51 09/25/29 16,000 15,513,760
Series 1999-HS2, Class AI4 6.34 07/25/29 15,991 15,416,283
Series 1999-HS2, Class IO 2.00 07/25/29 23,065 506,623
----------------------
31,436,666
----------------------
Saxon Asset Securities Trust
Series 1999-3, Class MF1 7.75 12/25/29 10,000 9,839,880
----------------------
Standard Credit Card Master Trust
Series 1994-2, Class B 7.50 04/07/08 11,900 11,984,728
----------------------
Total Asset-Backed Securities
(Cost - $74,781,235) 71,960,263
----------------------
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PRIVATE COLLATERALIZED MORTGAGE OBLIGATIONS - 21.8%
Commercial Mortgage Backed Securities - 18.8%
DLJ Mortgage Acceptance Corp. *
Series 1997-CF2, Class CP (IO) 1.36 + 11/15/04 125,000 6,836,000
Series 1996-CF1, Class A1B 7.58 02/12/06 3,000 3,035,520
----------------------
9,871,520
----------------------
Morgan Stanley Capital I *
Series 1999-1NYP, Class A2 6.84 05/03/06 16,000 15,426,240
----------------------
Resolution Trust Corporation
Series 1992-C8, Class B 8.84 12/25/23 3,663 3,726,626
----------------------
Total Commercial Mortgage Backed Securities
(Cost - $30,024,621) 29,024,386
----------------------
PRIVATE COLLATERALIZED MORTGAGE OBLIGATIONS (continued)
Subordinated Collateralized Mortgage Obligations - 3.0%
Countrywide Funding Corporation
Series 1994-5, Class A3A 6.50 % 03/25/09 $ 1,000 $ 975,970
----------------------
Countrywide Home Loans
Series 1996-1, Class B1 7.25 05/25/26 3,758 3,590,837
----------------------
Total Subordinated Collateralized Mortgage Obligations
(Cost - $4,586,256) 4,566,807
----------------------
Total Private Collateralized Mortgage Obligations
(Cost - $34,610,877) 33,591,193
----------------------
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MUNICIPAL ZERO COUPON SECURITIES - 10.5%
Texas - 9.5%
Houston Texas Water & Sewer System
Revenue Bond, AMBAC 5.26 (a) 12/01/06 5,000 3,493,825
San Antonio Texas, Electricity & Gas
Revenue Bond, Series B, FGIC 5.01 (a) 02/01/07 10,000 7,048,210
Texas Municipal Power Agency
Revenue Bond, AMBAC 5.18 (a) 09/01/05 5,490 4,111,071
----------------------
14,653,106
----------------------
West Virginia - 1.0%
West Virginia State Parkways Economic
Development and Tourism Authority
Revenue Bond, FGIC 4.89 (a) 05/15/05 1,975 1,524,325
----------------------
Total Municipal Zero Coupon Securities
(Cost - $15,464,573) 16,177,431
----------------------
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REPURCHASE AGREEMENT - 1.5%
Dated 12/31/99, with State Street Bank and Trust Company;
proceeds: $2,267,567, collateralized by $2,320,000
Federal National Mortgage Association, 6.195%, due 12/27/00,
value: $2,321,195
(Cost - $2,267,000) 3.00 01/03/00 2,267 2,267,000
----------------------
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TOTAL INVESTMENTS - 146.4%
(Cost - $232,907,854) 225,454,206
Liabilities in Excess of Other Assets - (46.4%) (71,430,142)
----------------------
NET ASSETS - 100.0% $ 154,024,064
======================
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</TABLE>
(a) - Zero Coupon Bonds. Interest rate represents current yield to
maturity.
@ - Portion of or entire principal amount delivered as collateral to
counterparty for reverse repurchase agreements. (Note 5)
+ - Variable Rate Security - Interest rate is rate in effect as of
December 31, 1999.
* - Securities exempt from registration under rule 144A of the
Securities Act of 1933. These securities may only be resold in
transactions exempt from registration, normally to qualified
institutional buyers.
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.
__________
See notes to financial statements.
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statement of Assets and Liabilities
December 31, 1999
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Assets:
Investments, at value (cost $232,907,854) (Note 2) $ 225,454,206
Cash 797
Interest receivable 1,302,869
Principal paydowns receivable 4,035
Prepaid expenses 90,204
---------------------------
Total assets 226,852,111
---------------------------
Liabilities:
Reverse repurchase agreements (Note 5) 70,478,000
Interest payable (Note 5) 1,427,401
Distribution payable 756,936
Investment advisory fee payable (Note 3) 86,169
Administration fee payable (Note 3) 21,346
Accrued expenses and other liabilities 58,195
---------------------------
Total liabilities 72,828,047
---------------------------
Net Assets (equivalent to $9.04 per share based on
17,036,573 shares issued and outstanding) $ 154,024,064
===========================
Composition of Net Assets:
Capital stock, at par ($001) (Note 6) $ 17,037
Additional paid-in capital (Note 6) 165,364,440
Undistributed net investment income 1,678,185
Accumulated net realized loss (5,581,950)
Net unrealized depreciation (7,453,648)
---------------------------
Net assets applicable to capital stock outstanding $ 154,024,064
===========================
__________
See notes to financial statements.
</TABLE>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statement of Operations
For the Year Ended December 31, 1999
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Investment Income (Note 2):
Interest $ 14,744,516
--------------------------
Expenses:
Investment advisory fee (Note 3) 1,044,715
Administration fee (Note 3) 258,052
Insurance 118,288
Directors' fees 75,534
Custodian 61,346
Accounting and tax services 51,450
Legal 37,118
Reports to shareholders 31,090
Registration fees 24,260
Transfer agency 22,817
Miscellaneous 35,301
--------------------------
Total operating expenses 1,759,971
Interest expense (Note 5) 4,222,481
--------------------------
Total expenses 5,982,452
--------------------------
Net investment income 8,762,064
--------------------------
Realized and Unrealized Loss on Investments (Note 2):
Net realized loss on investment transactions (880,032)
Net change in unrealized appreciation on investments (10,263,138)
--------------------------
Net realized and unrealized loss on investments (11,143,170)
--------------------------
Net decrease in net assets resulting from operations $ (2,381,106)
==========================
__________
See notes to financial statements.
</TABLE>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statements of Changes in Net Assets
For the Year Ended December 31,
----------------------------------------------------
1999 1998
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Increase (Decrease) in Net Assets Resulting from Operations:
Net investment income $ 8,762,064 $ 9,704,494
Net realized gain (loss) on investments and futures transactions (880,032) 6,649,825
Net change in unrealized appreciation on investments (10,263,138) (6,000,827)
------------------------- -------------------------
Net increase (decrease) in net assets resulting from operations (2,381,106) 10,353,492
------------------------- -------------------------
Dividends to Shareholders (Note 2):
Net investment income (9,126,724) (9,481,814)
------------------------- -------------------------
Capital Stock Transactions (Note 6):
Cost of Trust shares repurchased and retired (591,685) (2,268,023)
------------------------- -------------------------
Total decrease in net assets (12,099,515) (1,396,345)
------------------------- -------------------------
Net Assets:
Beginning of year 166,123,579 167,519,924
------------------------- -------------------------
End of year (including undistributed net investment income
of $1,678,185 and $2,026,577, respectively) $ 154,024,064 $ 166,123,579
========================= =========================
__________
See notes to financial statements.
</TABLE>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Statement of Cash Flows
For the Year Ended December 31, 1999
- --------------------------------------------------------------------------------
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Increase (Decrease) in Cash:
Cash flows provided by operating activities:
Interest received (including net amortization of $330,610) $ 16,409,223
Interest expense paid (3,000,657)
Operating expenses paid (1,761,724)
Purchases and sales of short-term portfolio investments, net (1,690,000)
Purchases of long-term portfolio investments (77,392,904)
Proceeds from disposition of long-term portfolio investments
and principal paydowns 90,161,921
----------------------------
Net cash provided by operating activities 22,725,859
----------------------------
Cash flows used for financing activities:
Net cash used for reverse repurchase agreements (12,956,000)
Cash used to repurchase and retire Trust shares (591,685)
Cash dividends paid (9,178,273)
----------------------------
Net cash used for financing activities (22,725,958)
----------------------------
Net decrease in cash (99)
Cash at beginning of year 896
----------------------------
Cash at end of year $ 797
============================
Reconciliation of Net Decrease in Net Assets Resulting from Operations to
Net Cash Provided by Operating Activities:
Net decrease in net assets resulting from operations $ (2,381,106)
----------------------------
Decrease in investments 13,160,748
Decrease in net unrealized appreciation on investments 10,263,138
Decrease in interest receivable 467,043
Decrease in prepaid expenses and other assets 17,453
Increase in other liabilities 1,198,583
----------------------------
Total adjustments 25,106,965
----------------------------
Net cash provided by operating activities $ 22,725,859
============================
____________
See notes to financial statements.
</TABLE>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Financial Highlights
For the Year Ended December 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Per Share Operating Performance:
Net asset value, beginning of year $ 9.71 $ 9.65 $ 8.89 $ 9.29 $ 8.11
---------------- --------------- ---------------- ---------------- ---------------
Net investment income 0.51 0.56 0.65 0.67 0.63
Net realized and unrealized gains (losses)
on investments, short sales, futures and
options transactions (0.65) 0.03 0.47 (0.45) 1.22
---------------- --------------- ------------- ------------- ---------------
Net increase (decrease) in net asset value
resulting from operations (0.14) 0.59 1.12 0.22 1.86
---------------- --------------- ------------- ------------- ---------------
Net effect of shares repurchased 0.01 0.02 0.25 0.01 0.01
Dividends from net investment income (0.54) (0.55) (0.61) (0.63) (0.68)
---------------- --------------- ------------- ------------- ---------------
Net asset value, end of year $ 9.04 $ 9.71 $ 9.65 $ 8.89 $ 9.29
================ =============== ================ ================ ===============
Market price, end of year $ 7.9375 $ 8.6250 $ 8.4375 $ 7.5000 $ 7.6250
================ =============== ================ ================ ===============
Total Investment Return + (1.82)% 8.92% 20.69% 6.98% 19.10%
Ratios to Average Net Assets/Supplemental Data:
Net assets, end of year (000s) $154,024 $166,124 $167,520 $187,668 $198,279
Total operating expenses 1.10% 1.06% 1.05% 1.08% 1.08%
Interest expense 2.63% 2.45% 2.57% 2.37% 2.49%
Total Expenses 3.73% 3.51% 3.62% 3.45% 3.57%
Net investment income 5.45% 5.78% 6.87% 7.65% 7.14%
Portfolio turnover rate 33% 79% 90% 116% 163%
_____________
+ 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. Dividends and distributions are assumed to be reinvested at the prices
obtained under the Trust's dividend reinvestment plan.
_____________
See notes to financial statements.
</TABLE>
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HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Notes to Financial Statements
December 31, 1999
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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 ask price for short positions. The Trust values
mortgage-backed securities ("MBS") and other debt securities for which
market quotations are not readily available at their fair value as
determined in good faith, utilizing procedures approved by the Board of
Directors of the Trust, on the basis of information provided by dealers
in such securities. Some of the general factors which may be considered
in determining fair value include the fundamental analytic data relating
to the investment and an evaluation of the forces which influence the
market in which these securities are purchased and sold. Determination of
fair value involves subjective judgment, as the actual market value of a
particular security can be established only by negotiations between the
parties in a sales transaction. Debt securities having a remaining
maturity of sixty days or less when purchased and debt securities
originally purchased with maturities in excess of sixty days but which
currently have maturities of sixty days or less are valued at amortized
cost.
The ability of issuers of debt securities held by the Trust to meet their
obligations may be affected by economic developments in a specific
industry or region. The values of MBS can be significantly affected by
changes in interest rates 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
2. Significant Accounting Policies (continued)
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 realized loss. The risk associated with writing
covered 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.
2. Significant Accounting Policies (continued)
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,
1999, the Advisor earned $1,044,715 in advisory fees from the Trust.
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, 1999, the Administrator earned
$258,052 in administration fees from the Trust. 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, 1999, were
$65,973,310 and $6,743,203, respectively. Purchases and sales of U.S.
Government securities, for the year ended December 31, 1999, were
$11,419,594 and $78,794,551, 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,
1999 was substantially the same for financial reporting. At December 31,
1999, the Trust had a capital loss carryforward of approximately
$4,707,137, of which $4,704,826 expires in 2003 and $2,311 expires in
2007, available to offset any future capital gains.
Capital Account Reclassification - For the year ended December 31, 1999,
the Trust's undistributed net investment income was increased by $16,268
and accumulated net realized loss was decreased by $2,908, with an
offsetting decrease in paid-in-capital of $19,176.
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. 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
5. Borrowings (continued)
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 December 31, 1999, the Trust had the following reverse repurchase
agreements outstanding:
Maturity in
Zero to 30 days
Maturity Amount............... $72,344,955
Market Value of Assets Sold
Under Agreements........... $74,492,894
Weighted Average Interest Rate 5.87%
The average daily balance of reverse repurchase agreements outstanding
during the year ended December 31, 1999 was $79,021,337 at a weighted
average interest rate of 5.34%. The maximum amount of reverse repurchase
agreements outstanding at any time during the year was $82,572,000, as of
January 15, 1999, which was 32.81% of total assets.
6. Capital Stock
There are 75 million shares of $0.001 par value common stock authorized.
Of the 17,036,573 shares outstanding at December 31, 1999, 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, 1999, 4,674,100 shares have been repurchased pursuant
to this program at a cost of $37,279,769 and an average discount of
13.17% from its net asset value. For the year ended December 31, 1999,
69,100 shares have been repurchased at a cost of $591,685 and an average
discount of 11.14% from its net asset value. For the year ended December
31, 1998, 261,200 shares had been repurchased at a cost of $2,268,023, at
an average discount of 11.03%. 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 were no written option or futures contracts activity for the year
ended December 31, 1999.
- --------------------------------------------------------------------------------
HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
Report of the Independent Accountants
- --------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
Hyperion 2005 Investment Grade Opportunity Term Trust, Inc.
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations, of cash flows and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial
position of Hyperion 2005 Investment Grade Opportunity Term Trust, Inc.
(the "Trust") at December 31, 1999, the results of its operations and its
cash flows for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial
highlights for each of the five years in the period then ended in
conformity with accounting principles generally accepted in the United
States. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the
Trust's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards
generally accepted in the United States, which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of investments at December 31,
1999 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
1177 Avenue of the Americas
New York, New York 10036
February 23, 2000
- ---------------------------------------------------------------------------
TAX INFORMATION (unaudited)
- ---------------------------------------------------------------------------
The Trust is required by Subchapter M of the Internal Revenue Code of
1986, as amended, to advise you within 60 days of the Trust's fiscal year
end (December 31, 1999) as to the federal tax status of distributions
received by shareholders during such fiscal year. Accordingly, we are
advising you that all distributions paid during the fiscal year were
derived from net investment income and are taxable as ordinary income.
In addition, none of the Trust's distributions during the fiscal year
ended December 31, 1999 were earned from U.S. Treasury obligations. None
of the Trust's distributions qualifies for the dividends received
deduction available to corporate shareholders.
A notification sent to shareholders with respect to calendar 1999, which
reflected the amounts to be used by calendar year taxpayers on their
federal, state and local income tax returns, was made in conjunction with
Form 1099-DIV and was mailed in January 2000. Shareholders are advised
to consult their own tax advisors with respect to the tax consequences of
their investment in the Trust.
- ---------------------------------------------------------------------------
DIVIDEND REINVESTMENT PLAN
___________________________________________________________________________
A Dividend Reinvestment Plan (the "Plan") is available to shareholders of
the Trust pursuant to which they may elect to have all dividends and
distributions of capital gains automatically reinvested by State Street
Bank and Trust Company (the "Plan Agent") in Trust shares. Shareholders
who do not participate in the Plan will receive all distributions in cash
paid by check mailed directly to the shareholder of record (or if the
shares are held in street or other nominee name, then to the nominee) by
the Trust's Custodian, as Dividend Disbursing Agent.
The Plan Agent serves as agent for the shareholders in administering the
Plan. After the Trust declares a dividend or determines to make a capital
gain distribution, payable in cash, the participants in the Plan will
receive the equivalent amount in Trust shares valued at the market price
determined as of the time of purchase (generally, the payment date of the
dividend or distribution). The Plan Agent will, as agent for the
participants, use the amount otherwise payable as a dividend to
participants to buy shares in the open market, on the New York Stock
Exchange or elsewhere, for the participants' accounts. If, before the
Plan Agent has completed its purchases, the market price increases, the
average per share purchase price paid by the Plan Agent may exceed the
market price of the shares at the time the dividend or other distribution
was declared. Share purchases under the Plan may have the effect of
increasing demand for the Trust's shares in the secondary market.
There is no charge to participants for reinvesting dividends or capital
gain distributions, except for certain brokerage commissions, as
described below. The Plan Agent's fees for handling the reinvestment of
dividends and distributions are paid by the Trust. However, each
participant will pay a pro rata share of brokerage commissions incurred
with respect to the Plan Agent's open market purchases in connection with
the reinvestment of dividends and distributions.
The automatic reinvestment of dividends and distributions will not
relieve participants of any federal income tax that may be payable on
such dividends or distributions.
Participants in the Plan may withdraw from the Plan upon written notice
to the Plan Agent. When a participant withdraws from the Plan or upon
termination of the Plan by the Trust, certificates for whole shares
credited to his or her account under the Plan will be issued and a cash
payment will be made for any fraction of a share credited to such account.
A brochure describing the Plan is available from the Plan Agent, State
Street Bank and Trust Company, by calling 1-800-426-5523.
If you wish to participate in the Plan and your shares are held in your
name, you may simply complete and mail the enrollment form in the
brochure. If your shares are held in the name of your brokerage firm,
bank or other nominee, you should ask them whether or how you can
participate in the Plan. Shareholders whose shares are held in the name
of a brokerage firm, bank or other nominee and are participating in the
Plan may not be able to continue participating in the Plan if they
transfer their shares to a different brokerage firm, bank or other
nominee, since such shareholders may participate only if permitted by the
brokerage firm, bank or other nominee to which their shares are
transferred.
<TABLE>
<S> <C>
INVESTMENT ADVISOR AND ADMINISTRATOR TRANSFER AGENT
HYPERION CAPITAL MANAGEMENT, INC. BOSTON EQUISERVE L.P.
One Liberty Plaza Investor Relations Department
165 Broadway, 36th Floor P.O. Box 8200
New York, New York 10006-1404 Boston, Massachusetts 02266-8200
For General Information about the Trust: For Shareholder Services:
(800) HYPERION (800) 426-5523
SUB-ADMINISTRATOR INDEPENDENT ACCOUNTANTS
INVESTORS CAPITAL SERVICES, INC. PRICEWATERHOUSECOOPERS LLP
600 Fifth Avenue, 26th Floor 1177 Avenue of the Americas
New York, New York 10020 New York, New York 10036
CUSTODIAN AND FUND ACCOUNTING AGENT LEGAL COUNSEL
STATE STREET BANK AND TRUST COMPANY SULLIVAN & WORCESTER LLP
225 Franklin Street 1025 Connecticut Avenue, N.W.
Boston, Massachusetts 02116 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.
</TABLE>
- --------------------------------------------------------------------------------
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
John W. English*
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
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
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
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<NAME> HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
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<NUMBER> 0
<NAME> HYPERION 2005 INVESTMENT GRADE OPPORTUNITY TERM TRUST, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<INVESTMENTS-AT-COST> 232908
<INVESTMENTS-AT-VALUE> 225454
<RECEIVABLES> 1307
<ASSETS-OTHER> 91
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 226852
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 72828
<TOTAL-LIABILITIES> 72828
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 165382
<SHARES-COMMON-STOCK> 17037
<SHARES-COMMON-PRIOR> 17106
<ACCUMULATED-NII-CURRENT> 1678
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (5582)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (7454)
<NET-ASSETS> 154024
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14745
<OTHER-INCOME> 0
<EXPENSES-NET> 5983
<NET-INVESTMENT-INCOME> 8762
<REALIZED-GAINS-CURRENT> (880)
<APPREC-INCREASE-CURRENT> (10263)
<NET-CHANGE-FROM-OPS> (2381)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9127)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 69
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (12100)
<ACCUMULATED-NII-PRIOR> 2027
<ACCUMULATED-GAINS-PRIOR> (4705)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1045
<INTEREST-EXPENSE> 4222
<GROSS-EXPENSE> 5983
<AVERAGE-NET-ASSETS> 160725
<PER-SHARE-NAV-BEGIN> 9.71
<PER-SHARE-NII> 0.51
<PER-SHARE-GAIN-APPREC> (0.64)
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.04
<EXPENSE-RATIO> 1.10
[AVG-DEBT-OUTSTANDING] 79021
[AVG-DEBT-PER-SHARE] 4.63
</TABLE>
