<PAGE>
TCW/DW TERM TRUST 2002 Two World Trade Center, New York, New York 10048
LETTER TO THE SHAREHOLDERS September 30, 1998
DEAR SHAREHOLDER:
For the fiscal year ended September 30, 1998, TCW/DW Term Trust 2002's net
asset value increased from $9.89 per share to $10.66 per share. Based on this
change, and including reinvestment of dividends totaling $0.66 per share, the
Trust's total return for the fiscal year was 15.52 percent. Over the same
period, the market price of the Trust's shares on the New York Stock Exchange
(NYSE) increased from $9.125 per share to $9.875 per share. Based on this
change and including reinvestment of dividends, the Trust's total return for
the fiscal year was 16.04 percent.
THE MARKET
International developments and the flow of capital played prominent roles in
the movement of the U.S. fixed-income markets over the past six months. A
seemingly endless stream of bad news out of the world's emerging markets
induced investors to seek the safety of the U.S. Treasury market. As a
result, U.S. Treasury yields plummeted and in late September the yield on the
30-year U.S. Treasury bond broke through five percent for the first time
since 1967. Over the last five months, the yield on the 30-year U.S. Treasury
bond has fallen 100 basis points with the majority of the decline occurring
since the beginning of August, coinciding with the downturn in the U.S. stock
market and the increased turmoil in the global markets.
The economic collapse in Russia, threats to Latin America's stability and
Asia's persistent problems have some economists forecasting a global
recession. Indeed, the bailout of a prominent "hedge" fund, Long Term Capital
Management, was viewed by some observers as an indication of how fragile the
financial system has become. Despite the Federal Reserve Board's decision to
cut the federal-funds rate by 25 basis points
(0.25 percentage points) at the end of September, many investors remained
concerned about the condition of financial systems worldwide. However,
concerns were eased somewhat when the central bank initiated another
25 basis point cut less than a month later, suggesting a commitment to
keeping the U.S. financial system on track.
<PAGE>
TCW/DW TERM TRUST 2002
LETTER TO THE SHAREHOLDERS September 30, 1998, continued
According to the Trust's adviser, TCW Funds Management, Inc. (TCW), it is
highly unusual to see U.S. Treasury yields as far below the federal-funds
rate as they are currently. In TCW's view this scenario is an indication that
the market expects the central bank to continue cutting rates. Despite the
turmoil in many overseas economies and the very real possibility that these
problems may spill over into the United States, the domestic economy to date
has been strong. Unemployment is low, wages have been on an upswing and
consumer spending has been growing. Although some analysts feel that the
recent decline in the U.S. stock market and the uncertain political
environment in Washington, D.C. may slow the economy in the third and fourth
quarters of 1998, consumer confidence remains high. Inflation is below two
percent and the federal budget surplus is growing. In TCW's view, while this
scenario could dampen enthusiasm for further interest rate cuts, the recent
easing is justified both as a preemptive strike against both the increased
likelihood of an economic slowdown and the growing evidence of financial
distress in the United States.
THE PORTFOLIO
Approximately 62 percent of the Trust's portfolio is invested in mortgage
pass-through securities issued by agencies of the U.S. government or
AAA-rated collateralized mortgage obligations (CMOs) with durations, average
lives or expected maturity dates that correspond closely to the Trust's
termination date. An additional 24 percent of the portfolio is invested in
inverse floating rate CMOs issued by U.S. government agencies. As a reminder,
inverse floaters have coupons that reset by a multiple in a direction
opposite to that of a specified index. Approximately 14 percent of the
portfolio is invested in AAA-rated municipal bonds and short-term
investments. The municipal bond holdings play an important role as the Trust
seeks to achieve its objective of returning the original $10 per share
offering price to shareholders at maturity. As of September 30, 1998, the
Trust's degree of leverage (the ratio of debt to assets) was 12.9 percent of
total assets.
LOOKING AHEAD
The mortgage-backed sector has underperformed the fixed-income market as a
whole over the past several months. Refinancing activity has not yet
surpassed the peak levels recorded during the first quarter of 1998, but
analysts expect new records to be set in the next few weeks. Mortgage lenders
have been unable to sell mortgages in this environment and have had little
incentive to lower rates. As a result, mortgage rates have declined much
slower than U.S. Treasury yields and mortgage spreads are now wider than they
have been in several years. The combination of wider spreads and the threat
of another wave of refinancing activity have kept many investors temporarily
out of the mortgage-backed sector. Although dealer reluctance to take on
additional risk in this environment has slowed CMO issuance dramatically, new
CMO issuance year-to-date already exceeds last year's volume.
2
<PAGE>
TCW/DW TERM TRUST 2002
LETTER TO THE SHAREHOLDERS September 30, 1998, continued
Despite the possibility that mortgage spreads could widen further, TCW
believes that purchases made at current levels are poised to perform well
over the remainder of the Trust's life. Today's high yield levels, combined
with the Trust's continued focus on call protection, enables the portfolio
management team to maintain a positive outlook for the mortgage-backed sector
in general and the Trust in particular.
The Trust's net asset value and NYSE market values will continue to fluctuate
in response to changes in market conditions and interest rates. We would like
to remind you that the Trustees have approved a procedure whereby the Trust
may attempt, when appropriate, to reduce or eliminate a market value discount
from net asset value by repurchasing shares in the open market or in
privately negotiated transactions at a price not above market value or net
asset value, whichever is lower at the time of purchase. During the period
under review, the Trust purchased 2,546,600 shares of common stock at a
weighted average market discount of 6.86 percent.
We appreciate your support of TCW/DW Term Trust 2002 and look forward to
continuing to serve your investment needs and objectives.
Very truly yours,
/s/ Charles A. Fiumefreddo
CHARLES A. FIUMEFREDDO
Chairman of the Board
3
<PAGE>
TCW/DW TERM TRUST 2002
PORTFOLIO OF INVESTMENTS September 30, 1998
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (97.4%)
U.S. GOVERNMENT AGENCIES (54.7%)
$727 Federal Home Loan Mortgage Corp. 1385 SB ........................ 10.357+% 10/15/07 $797,282
2,663 Federal Home Loan Mortgage Corp. 1389 SB ........................ 9.68 + 10/15/07 2,702,687
30,000 Federal Home Loan Mortgage Corp. 1465 G (PAC) ++ ................ 7.00 12/15/07 31,210,038
15,600 Federal Home Loan Mortgage Corp. 1481 H (PAC) .................. 6.875 08/15/21 15,942,875
2,992 Federal Home Loan Mortgage Corp. 1519 J ......................... 14.98 + 05/15/08 3,224,000
16,447 Federal Home Loan Mortgage Corp. 1606 SC ........................ 7.361+ 11/15/08 16,508,521
8,133 Federal Home Loan Mortgage Corp. 1609 LG (PAC) ................. 5.145+ 11/15/23 8,326,719
15,996 Federal Home Loan Mortgage Corp. 1611 QB (PAC) ................. 8.968+ 11/15/23 15,736,389
18,300 Federal Home Loan Mortgage Corp. 1633 B ........................ 6.50 09/15/23 19,090,057
18,500 Federal Home Loan Mortgage Corp. 1638 K (PAC) ++ ................ 6.50 03/15/23 18,911,118
650 Federal National Mortgage Assoc. 1992-138 O ..................... 7.50 07/25/22 679,500
13,993 Federal National Mortgage Assoc. 1992-150 SV (PAC) .............. 11.449+ 05/25/21 15,033,641
14,768 Federal National Mortgage Assoc. 1992-208 C (TAC) ++ ............ 7.50 10/25/07 15,291,856
9,025 Federal National Mortgage Assoc. 1992-214 K ..................... 7.50 12/25/22 9,516,947
8,333 Federal National Mortgage Assoc. 1993-139 SP (PAC) ............. 7.98 + 12/25/21 8,701,750
6,730 Federal National Mortgage Assoc. 1993-141 A ..................... 7.00 12/25/22 6,753,385
9,843 Federal National Mortgage Assoc. 1993-179 SV .................... 3.859+ 10/25/21 10,011,376
18,193 Federal National Mortgage Assoc. 1993-190 S .................... 5.296+ 10/25/08 16,970,232
5,025 Federal National Mortgage Assoc. 1993-190 SB (PAC) .............. 5.347+ 10/25/08 5,131,118
5,814 Federal National Mortgage Assoc. 1993-238 SA .................... 7.19 + 07/25/08 5,646,848
11,677 Federal National Mortgage Assoc. G1992-44 SC .................... 12.867+ 08/25/20 12,355,744
--------------
TOTAL U.S. GOVERNMENT AGENCIES (Identified Cost $231,314,517) ........................ 238,542,083
--------------
PRIVATE ISSUES (42.7%)
9,022 Bear Sterns Mortgage Securities, Inc. 1993-10 A7 (PAC) .......... 7.20 07/25/24 9,404,766
19,844 Citicorp Mortgage Securities, Inc. 1992-20 A5 .................. 7.50 12/25/07 20,426,818
19,574 CMC Securities Corp. III 1994-C A9 (PAC) ........................ 6.75 03/25/24 19,731,872
11,232 CountryWide Funding Corp. 1994-4 A12 ............................ 6.95 04/25/24 11,432,807
21,117 CountryWide Mortgage-Backed Securities, Inc. 1993-B A6 (PAC) .... 6.75 11/25/23 21,303,603
32,047 General Electric Capital Mortgage Services, Inc. 1994-6 A9 ..... 6.50 09/25/22 32,363,414
10,000 NorWest Asset Securities Corp. 1996-1 A5 ....................... 7.50 08/25/26 10,393,387
13,170 Prudential Home Mortgage Securities 1993-2 A7 .................. 7.00 02/25/08 13,505,117
9,925 Prudential Home Mortgage Securities 1993-34 A1 ................. 7.00 08/25/23 9,915,869
20,000 Prudential Home Mortgage Securities 1993-60 A3 (PAC) ........... 6.75 12/25/23 20,154,544
16,836 Residential Funding Mortgage Securities I 1993-S40 A8 (TAC) .... 6.75 11/25/23 17,264,844
--------------
TOTAL PRIVATE ISSUES (Identified Cost $179,125,273) .................................. 185,897,041
--------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Identified Cost $410,439,790) ....................................................... 424,439,124
--------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH SECURITY (0.9%)
3,626 Government National Mortgage Assoc. II ARM
(Identified Cost $3,673,747) ................................... 6.875 06/20/25 3,674,531
--------------
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
TCW/DW TERM TRUST 2002
PORTFOLIO OF INVESTMENTS September 30, 1998, continued
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- -----------------------------------------------------------------------------------------------------------------
TAX-EXEMPT MUNICIPAL BONDS (15.4%)
Industrial Development Revenue (4.8%)
Metropolitan Pier & Exposition Authority, Illinois,
$6,610 McCormick Place (AMBAC) ....................................... 0.00 % 06/15/02 $5,723,731
7,400 McCormick Place (AMBAC) ....................................... 0.00 12/15/02 6,284,672
10,465 Pennsylvania Convention Center Authority, Ser A (FGIC) (ETM) .... 0.00 09/01/02 8,987,865
--------------
20,996,268
--------------
Other Revenue (8.4%)
17,500 North Slope Boro, Alaska, Ser A (MBIA) .......................... 0.00 06/30/03 14,492,275
33,140 Johnson County, Kansas, (AMBAC)(ETM) ............................ 0.00 06/01/12 13,292,123
10,400 Texas, 1992 Refg Ser C (FGIC) ................................... 0.00 04/01/03 8,716,656
--------------
36,501,054
--------------
Transportation Revenue (2.2%)
12,000 Contra Costa Transportation Authority, California, Sales Tax
(FGIC) (ETM) ................................................... 0.00 03/01/04 9,646,080
--------------
TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $61,332,109) ........................ 67,143,402
--------------
SHORT-TERM INVESTMENT (0.7%)
REPURCHASE AGREEMENT
3,231 The Bank of New York (dated 09/30/98; proceeds $3,231,752) (a)
(Identified Cost $3,231,303) .................................. 5.00 10/01/98 3,231,303
--------------
TOTAL INVESTMENTS (Identified Cost $478,676,949) (b) ....................... 114.4% 498,488,360
LIABILITIES IN EXCESS OF OTHER ASSETS ..................................... (14.4) (62,861,101)
--------------
NET ASSETS ................................................................ 100.0% $435,627,259
==============
</TABLE>
- ------------
ARM Adjustable rate mortgage.
ETM Escrowed to maturity.
PAC Planned Amortization Class.
TAC Targeted Amortization Class.
+ Inverse floater: interest rate moves inversely to a designated
index, such as LIBOR (London Inter-Bank Offered Rate) or COFI
(Cost of Funds Index), typically at a multiple of the changes of
the relevant index rate.
++ Some or all of these securities are pledged in connection with
reverse repurchase agreements.
(a) Collateralized by $3,098,091 Federal National Mortgage Assoc.
6.40% due 12/26/07 valued at $3,295,929.
(b) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$21,185,468 and the aggregate gross unrealized depreciation is
$1,374,057, resulting in net unrealized appreciation of
$19,811,411.
Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
TCW/DW TERM TRUST 2002
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $478,676,949) ............ $498,488,360
Interest receivable ........................ 2,458,349
Prepaid expenses ........................... 14,830
--------------
TOTAL ASSETS ............................. 500,961,539
--------------
LIABILITIES:
Reverse repurchase agreements .............. 64,322,000
Payable for:
Shares of beneficial interest repurchased 509,604
Management fee ........................... 152,709
Interest ................................. 127,518
Investment advisory fee .................. 101,806
Accrued expenses and other payables ....... 120,643
Contingencies (Note 8) ..................... --
--------------
TOTAL LIABILITIES ........................ 65,334,280
--------------
NET ASSETS ............................... $435,627,259
==============
COMPOSITION OF NET ASSETS:
Paid-in-capital ............................ $391,222,234
Net unrealized appreciation ................ 19,811,411
Accumulated undistributed net investment
income .................................... 23,457,568
Accumulated undistributed net realized
gain....................................... 1,136,046
--------------
NET ASSETS ............................... $435,627,259
==============
NET ASSET VALUE PER SHARE,
40,884,140 shares outstanding (unlimited
shares authorized
of $.01 par value) ........................ $ 10.66
==============
</TABLE>
STATEMENT OF OPERATIONS
For the year ended September 30, 1998
<TABLE>
<CAPTION>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ....................... $40,128,745
-------------
EXPENSES
Management fee ........................ 1,672,801
Investment advisory fee ............... 1,115,200
Professional fees ..................... 145,553
Transfer agent fees and expenses ..... 141,987
Shareholder reports and notices ...... 49,340
Registration fees ..................... 38,261
Custodian fees ........................ 37,783
Insurance expenses .................... 37,131
Trustees' fees and expenses ........... 32,355
Organizational expenses ............... 1,857
Other ................................. 47,925
-------------
TOTAL OPERATING EXPENSES ............ 3,320,193
Interest expense ...................... 7,675,571
-------------
TOTAL EXPENSES ...................... 10,995,764
-------------
NET INVESTMENT INCOME ............... 29,132,981
-------------
NET REALIZED AND UNREALIZED GAIN:
Net realized gain ..................... 1,136,065
Net change in unrealized depreciation 27,968,463
-------------
NET GAIN ............................ 29,104,528
-------------
NET INCREASE .......................... $58,237,509
=============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
TCW/DW TERM TRUST 2002
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
- ----------------------------------------------------- ------------------ ------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income ................................ $ 29,132,981 $ 31,800,732
Net realized gain (loss) ............................. 1,136,065 (19)
Net change in unrealized depreciation ................ 27,968,463 29,063,160
------------------ ------------------
NET INCREASE ....................................... 58,237,509 60,863,873
------------------ ------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................ (27,855,408) (30,604,106)
Net realized gain .................................... -- (958,955)
------------------ ------------------
TOTAL .............................................. (27,855,408) (31,563,061)
------------------ ------------------
Net decrease from transactions in shares of
beneficial interest ................................. (24,083,116) (23,067,049)
------------------ ------------------
NET INCREASE ....................................... 6,298,985 6,233,763
NET ASSETS:
Beginning of period .................................. 429,328,274 423,094,511
------------------ ------------------
END OF PERIOD
(Including undistributed net investment income of
$23,457,568 and $22,179,995, respectively) ........ $435,627,259 $429,328,274
================== ==================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
TCW/DW TERM TRUST 2002
FINANCIAL STATEMENTS, continued
STATEMENT OF CASH FLOWS
For the year ended September 30, 1998
<TABLE>
<CAPTION>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income ................................................ $ 29,132,981
Adjustments to reconcile net investment income to net cash provided
by operating activities:
Decrease in receivables and other assets related to operations ...... 711,408
Decrease in payables related to operations ........................... (199,971)
Net amortization of discount/premium ................................. (5,205,182)
---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......................... 24,439,236
---------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchases of investments ............................................. (2,001,722)
Principal prepayments/sales of investments ........................... 126,203,032
Net sales of short-term investments .................................. 5,180,549
---------------
NET CASH PROVIDED BY INVESTING ACTIVITIES .......................... 129,381,859
---------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Net payments for shares of beneficial interest repurchased .......... (23,712,687)
Net payments for maturities of reverse repurchase agreements ........ (102,253,000)
Dividends to shareholders from net investment income ................. (27,855,408)
---------------
NET CASH USED FOR FINANCING ACTIVITIES ............................. (153,821,095)
---------------
NET INCREASE (DECREASE) IN CASH ...................................... --
CASH BALANCE AT BEGINNING OF PERIOD .................................. --
---------------
CASH BALANCE AT END OF PERIOD ........................................ $ --
===============
Cash paid during the period for interest ............................. $ 7,912,719
===============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS September 30, 1998
1. ORGANIZATION AND ACCOUNTING POLICIES
TCW/DW Term Trust 2002 (the "Trust") is registered under the Investment
Company Act of 1940, as amended, as a diversified, closed-end management
investment company. The Trust's investment objective is to provide a high
level of current income and return $10 per share to shareholders on the
termination date. The Trust seeks to achieve its objective by investing in
high quality fixed-income securities. The Trust was organized as a
Massachusetts business trust on August 28, 1992 and commenced operations on
November 30, 1992. The Trust will distribute substantially all of its net
assets on or about December 31, 2002 and will then terminate.
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosures. Actual results could differ
from those estimates.
The following is a summary of significant accounting policies:
A. VALUATION OF INVESTMENTS -- (1) portfolio securities for which
over-the-counter market quotations are readily available are valued at the
latest available bid price prior to the time of valuation; (2) when market
quotations are not readily available, including circumstances under which it
is determined by TCW Funds Management, Inc. (the "Adviser") that sale and bid
prices are not reflective of a security's market value, portfolio securities
are valued at their fair value as determined in good faith under procedures
established by and under the general supervision of the Trustees; (3) certain
portfolio securities may be valued by an outside pricing service approved by
the Trustees. The pricing service may utilize a matrix system incorporating
security quality, maturity and coupon as the evaluation model parameters,
and/or research and evaluations by its staff, including review of
broker-dealer market price quotations, if available, in determining what it
believes is the fair valuation of the portfolio securities valued by such
pricing service; and (4) short-term debt securities having a maturity date of
more than sixty days at the time of purchase are valued on a mark-to-market
basis until sixty days prior to maturity and thereafter at amortized cost
based on their value on the 61st day. Short-term debt securities having a
maturity date of sixty days or less at the time of purchase are valued at
amortized cost.
B. ACCOUNTING FOR INVESTMENTS -- Security transactions are accounted for on
the trade date (date the order to buy or sell is executed). Realized gains
and losses on security transactions are determined by the identified cost
method. The Trust amortizes premiums and accretes discounts over the life of
the respective securities. Interest income is accrued daily.
9
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
C. FEDERAL INCOME TAX STATUS -- It is the Trust's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable income to its shareholders.
Accordingly, no federal income tax provision is required.
D. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS -- The Trust records dividends
and distributions to its shareholders on the record date. The amount of
dividends and distributions from net investment income and net realized
capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends
and distributions which exceed net investment income and net realized capital
gains for financial reporting purposes but not for tax purposes are reported
as dividends in excess of net investment income or distributions in excess of
net realized capital gains. To the extent they exceed net investment income
and net realized capital gains for tax purposes, they are reported as
distributions of paid-in-capital.
E. ORGANIZATIONAL EXPENSES -- Morgan Stanley Dean Witter Advisors Inc.,
formerly Dean Witter InterCapital Inc., an affiliate of Morgan Stanley Dean
Witter Services Company Inc. (the "Manager"), paid the organizational
expenses of the Trust in the amount of approximately $70,200 which have been
reimbursed for the full amount thereof. Such expenses were deferred and fully
amortized as of November 29, 1997.
2. MANAGEMENT AGREEMENT
Pursuant to a Management Agreement, the Trust pays the Manager a management
fee, accrued weekly and payable monthly, by applying the annual rate of 0.39%
to the Trust's weekly net assets.
Under the terms of the Management Agreement, the Manager maintains certain of
the Trust's books and records and furnishes, at its own expense, office
space, facilities, equipment, clerical, bookkeeping and certain legal
services and pays the salaries of all personnel, including officers of the
Trust who are employees of the Manager. The Manager also bears the cost of
telephone services, heat, light, power and other utilities provided to the
Trust.
3. INVESTMENT ADVISORY AGREEMENT
Pursuant to an Investment Advisory Agreement the Trust pays the Adviser an
advisory fee, accrued weekly and payable monthly, by applying the annual rate
of 0.26% to the Trust's weekly net assets.
10
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
Under the terms of the Investment Advisory Agreement, the Trust has retained
the Adviser to invest the Trust's assets, including placing orders for the
purchase and sale of portfolio securities. The Adviser obtains and evaluates
such information and advice relating to the economy, securities markets and
specific securities as it considers necessary or useful to continuously
manage the assets of the Trust in a manner consistent with its investment
objective. In addition, the Adviser pays the salaries of all personnel,
including officers of the Trust, who are employees of the Adviser.
4. SECURITY TRANSACTIONS AND TRANSACTIONS WITH AFFILIATES
The cost of purchases and proceeds from sales/prepayments of portfolio
securities, excluding short-term investments, for the year ended September
30, 1998 were as follows:
<TABLE>
<CAPTION>
SALES/
PURCHASES PREPAYMENTS
------------ -------------
<S> <C> <C>
U.S. Government Agencies -- $44,660,391
Private Issue Collateralized Mortgage Obligations $2,001,722 64,660,992
Municipal Bonds -- 16,881,649
</TABLE>
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Manager, is the
Trust's transfer agent. At September 30, 1998, the Trust had transfer agent
fees and expenses payable of approximately $1,200.
5. SHARES OF BENEFICIAL INTEREST
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
CAPITAL
PAID IN
PAR VALUE EXCESS OF
SHARES OF SHARES PAR VALUE
------------- ----------- --------------
<S> <C> <C> <C>
Balance, September 30, 1996 46,110,640 $461,106 $437,974,110
Treasury shares purchased and retired (weighted average discount 9.44%)* (2,679,900) (26,799) (23,040,250)
Reclassification due to permanent book/tax differences -- -- (62,817)
------------- ----------- --------------
Balance, September 30, 1997 43,430,740 434,307 414,871,043
Treasury shares purchased and retired (weighted average discount 6.86%)* (2,546,600) (25,466) (24,057,650)
------------- ----------- --------------
Balance, September 30, 1998 40,884,140 $408,841 $390,813,393
============= =========== ==============
</TABLE>
- ------------
* The Trustees have voted to retire the shares purchased.
11
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
6. REVERSE REPURCHASE AND DOLLAR ROLL AGREEMENTS
Reverse repurchase and dollar roll agreements involve the risk that the
market value of the securities the Trust is obligated to repurchase under the
agreement may decline below the repurchase price. In the event the buyer of
securities under a reverse repurchase or dollar roll agreement files for
bankruptcy or becomes insolvent, the Trust's use of proceeds may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Trust's obligation to repurchase the
securities.
Reverse repurchase agreements are collateralized by Trust securities with a
market value in excess of the Trust's obligation under the contract. At
September 30, 1998, securities valued at $65,413,012 were pledged as
collateral.
At September 30, 1998, the reverse repurchase agreements outstanding were
$64,322,000 with a weighted interest rate of 5.49% maturing within 78 days.
The maximum and average daily amounts outstanding during the period were
$167,540,000 and $133,920,674, respectively. The weighted average interest
rate during the period was 5.65%.
7. DIVIDENDS
The Trust declared the following dividends from net investment income:
<TABLE>
<CAPTION>
DECLARATION AMOUNT PER RECORD PAYABLE
DATE SHARE DATE DATE
- ------------------ ------------ ------------------ -------------------
<S> <C> <C> <C>
September 29, 1998 $0.055 October 9, 1998 October 23, 1998
October 27, 1998 $0.055 November 6, 1998 November 20, 1998
</TABLE>
8. LITIGATION
Four purported class action lawsuits have been filed in the Superior Court
for the State of California, County of Orange, against some of the Trust's
Trustees and officers, one of its underwriters, the lead representative of
its underwriters, the Adviser, the Manager and other defendants--but not
against the Trust -by certain shareholders of the Trust and other trusts
for which the defendants act in similar capacities. These plaintiffs
generally allege violations of state statutory and common law in connection
with the marketing of the Trust to customers of one of the underwriters.
Damages, including punitive damages, are sought in an unspecified amount. On
or about October 20, 1995, the plaintiffs filed an amended complaint
consolidating these four actions. The defendants thereafter filed answers and
affirmative defenses to the consolidated amended complaint. The defendants'
answers deny all of the material allegations of the plaintiffs complaint. In
1996, the plaintiffs voluntarily dismissed, without prejudice, their claims
against the two defendants who were independent Trustees of the Trust. In
12
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS September 30, 1998, continued
March 1997, all of the remaining defendants in the litigation filed motions
for judgment on the pleadings, seeking dismissal of all of the claims
asserted against them. The defendants' motions were fully briefed by all
parties and were the subject of a hearing before the Court on April 18, 1997.
In July 1997, the Court denied the motion for judgement on the pleadings. In
August, 1997, plaintiffs filed a motion for class certification. In their
motion, the plaintiffs requested certification of a "nationwide" class of
Term Trust purchasers. On June 1, 1998, the Court granted in part and denied
in part the plaintiffs' motion for class certification. The Court ruled that
plaintiffs' motion was "granted as to [a California] statewide class," but
was "denied as to a nationwide class." Certain of the defendants in these
suits have asserted their right to indemnification from the Trust. The
ultimate outcome of these matters is not presently determinable, and no
provision has been made in the Trust's financial statements for the effect,
if any, of such matters.
13
<PAGE>
TCW/DW TERM TRUST 2002
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of beneficial interest
outstanding throughout each period:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
- ------------------------------------------------- ---------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ............. $ 9.89 $ 9.18 $ 9.13 $ 7.86 $ 10.18
---------- ---------- ----------- ----------- ----------
Net investment income ............................ 0.72 0.74 0.74 0.68 0.99
Net realized and unrealized gain (loss) ......... 0.67 0.62 (0.17) 1.25 (2.45)
---------- ---------- ----------- ----------- ----------
Total from investment operations ................. 1.39 1.36 0.57 1.93 (1.46)
---------- ---------- ----------- ----------- ----------
Less dividends and distributions from:
Net investment income............................ (0.66) (0.68) (0.58) (0.68) (0.84)
Net realized gain................................ -- (0.02) (0.01) -- (0.02)
---------- ---------- ----------- ----------- ----------
Total dividends and distributions ................ (0.66) (0.70) (0.59) (0.68) (0.86)
---------- ---------- ----------- ----------- ----------
Anti-dilutive effect of acquiring treasury
shares........................................... 0.04 0.05 0.07 0.02 --
---------- ---------- ----------- ----------- ----------
Net asset value, end of period ................... $10.66 $ 9.89 $ 9.18 $ 9.13 $ 7.86
========== ========== =========== =========== ==========
Market value, end of period....................... $9.875 $9.125 $8.125 $ 7.75 $ 8.25
========== ========== =========== =========== ==========
TOTAL INVESTMENT RETURN+ ......................... 16.04% 21.81% 12.77% 2.52% (12.19)%
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ............................... 0.78% 0.78% 0.79% 0.80% 0.78 %
Interest expense.................................. 1.79% 2.19% 1.93% 2.28% 1.44 %
Net expenses...................................... 2.57% 2.97% 2.72% 3.08% 2.22 %
Net investment income ............................ 6.81% 7.51% 7.85% 8.15% 10.85 %
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ......... $435,627 $429,328 $423,095 $447,005 $392,914
Portfolio turnover rate .......................... -- ++ -- 7% -- ++ 24 %
</TABLE>
- ------------
+ Total investment return is based upon the current market value on the
first day of each period reported. Dividends and distributions are
assumed to be reinvested at the prices obtained under the Trust's
reinvestment plan. Total investment return does not reflect brokerage
commissions.
++ Less than 0.5%.
SEE NOTES TO FINANCIAL STATEMENTS
14
<PAGE>
TCW/DW TERM TRUST 2002
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND TRUSTEES
OF TCW/DW TERM TRUST 2002
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations, of changes in net assets, and of cash flows and the financial
highlights present fairly, in all material respects, the financial position
of TCW/DW Term Trust 2002 (the "Trust") at September 30, 1998, 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 generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Trust's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at September 30, 1998 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
November 6, 1998
<PAGE>
TRUSTEES
John C. Argue
Richard M. DeMartini
Charles A. Fiumefreddo
John R. Haire
Dr. Manuel H. Johnson
Thomas E. Larkin, Jr.
Michael E. Nugent
John L. Schroeder
Marc I. Stern
OFFICERS
Charles A. Fiumefreddo
Chairman and Chief Executive Officer
Thomas E. Larkin, Jr.
President
Barry Fink
Vice President, Secretary and
General Counsel
Philip A. Barach
Vice President
Jeffrey E. Gundlach
Vice President
Frederick H. Horton
Vice President
Thomas F. Caloia
Treasurer
TRANSFER AGENT
Morgan Stanley Dean Witter Trust FSB
Harborside Financial Center -- Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
MANAGER
Morgan Stanley Dean Witter Services Company Inc.
ADVISER
TCW Funds Management, Inc.
TCW/DW
TERM TRUST
2002
[GRAPHIC]
ANNUAL REPORT
SEPTEMBER 30, 1998
