<PAGE>
TCW/DW TERM TRUST 2002 Two World Trade Center,
LETTER TO THE SHAREHOLDERS March 31, 1999 New York, New York 10048
DEAR SHAREHOLDER:
For the six-month period ended March 31, 1999, TCW/DW Term Trust 2002's net
asset value decreased from $10.66 per share to $10.29 per share. Based on this
change, and including reinvestment of dividends and distributions totaling
approximately $0.36 per share, the Trust's total return for the fiscal year was
0.21 percent. Over the same period, the market price of the Trust's shares on
the New York Stock Exchange (NYSE) decreased from $9.875 per share to $9.625
per share. Based on this change and including reinvestment of dividends and
distributions, the Trust's total return for the period was 1.09 percent.
THE MARKET
The global financial markets stabilized over the past six months as stock
markets rallied and volatility declined in many of the world's bond and
currency markets. The Federal Reserve Board's decision to lower interest rates
three times between September 29 and November 17 helped the market recover from
the summer liquidity crisis. As market tensions eased, investors began selling
U.S. Treasury securities to reinvest the proceeds in higher-yielding asset
classes such as corporate and mortgage-backed securities. This shift in
investor preference was one of the leading causes of the 80- to 100-basis-point
increase in U.S. Treasury yields over the last six months of the fiscal year.
Investor fears that the central bank would boost interest rates in response to
the strong economy also contributed to the back up in interest rates. However,
the persistent lack of inflationary pressures has recently improved market
sentiment and interest rates have declined. Equity market performance and
supply issues also played a role in determining the tone and direction of the
bond market.
The mortgage sector was a top-performing fixed-income asset class during the
second half of the Trust's fiscal year. Spreads between current-coupon GNMAs
and 10-year U.S. Treasury bonds have tightened significantly since the fall but
remain above historical averages. As expected, prepayment rates have been on
the decline since the beginning of 1999,
<PAGE>
TCW/DW TERM TRUST 2002
LETTER TO THE SHAREHOLDERS March 31, 1999, continued
due to rising rates and seasonal factors. However, the recent decline in
interest rates and continued strength in housing and consumer spending have
many analysts forecasting rising prepayments again this summer when housing
activity peaks. The MBA Refinancing Index has been on the uptick once again and
the Purchase Index has already soared back to 1998 levels. TCW Funds
Management, Inc. (TCW), the Trust's adviser, believes that as long as mortgage
rates remain close to current levels, prepayments are unlikely to return to
last year's record highs, because the size of the universe of refinanceable
mortgages has shrunk considerably. The average gross coupon on outstanding
conventional mortgages now stands at 7.53 percent, down from 8.00 percent in
January 1998.
THE PORTFOLIO
Approximately 61 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 21 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 17 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. At the end of the fiscal year, less than 1 percent of the portfolio
is invested in U.S. government agency debentures. As of March 31, 1999, the
Trust's degree of leverage (the ratio of debt to assets) was less than 7
percent of total portfolio assets.
LOOKING AHEAD
TCW's outlook for the mortgage sector remains favorable. The demand for
mortgage products is strong and is forecast to remain that way. Both FHLMC and
FNMA continue to increase their portfolio holdings in mortgage-backed
securities (MBSs). The volume of new CMO issuance has been increasing steadily
for the past four years. Economic growth appears to have slowed down from last
quarter's torrid pace of 6 percent to a fairly robust rate of approximately 3.5
percent. Employment figures have recently shown signs of weakness, and
inflationary pressures continue to be minimal in spite of the market's concern.
Although the conflict in the former Yugoslavia continues to represent a threat
to market stability, to date it has had little impact on the financial markets
other than sparking keen interest in short-term Treasuries. Today's higher
yield levels, combined with a continued focus on call protection and security
structure, allow TCW to maintain a positive outlook on the mortgage sector.
2
<PAGE>
TCW/DW TERM TRUST 2002
LETTER TO THE SHAREHOLDERS March 31, 1999, continued
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, 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 1,007,200 shares of common stock at a weighted average market
discount of 6.54 percent.
On May 1, 1999, Mitchell M. Merin was named President of the TCW/DW Funds. Mr.
Merin is also the President and Chief Operating Officer of Asset Management of
Morgan Stanley Dean Witter & Co. and President, Chief Executive Officer and
Director of Morgan Stanley Dean Witter Advisors Inc. and Morgan Stanley Dean
Witter Services Company Inc., the Trust's Manager. He also serves as Chairman,
Chief Executive Officer and Director of Morgan Stanley Dean Witter Distributors
Inc. and Morgan Stanley Dean Witter Trust FSB.
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 /s/ Mitchell M. Merin
----------------------------------- ----------------------------------
CHARLES A. FIUMEFREDDO MITCHELL M. MERIN
Chairman of the Board President
3
<PAGE>
TCW/DW TERM TRUST 2002
RESULTS OF ANNUAL MEETING (unaudited)
* * *
On December 17, 1998, an annual meeting of the Trust's shareholders was held
for the purpose of voting on four separate matters, the results of which were
as follows:
(1) Election of Trustees:
<TABLE>
<S> <C>
Richard M. DeMartini
For .................... 33,513,891
Withheld ............... 541,174
Thomas E. Larkin Jr.
For .................... 33,532,603
Withheld ............... 522,462
</TABLE>
The following Trustees were not standing for reelection at this meeting: John
C. Argue, Charles A. Fiumefreddo, John R. Haire, Dr. Manuel H. Johnson, Michael
E. Nugent, John L. Schroeder and Marc I. Stern.
(2) Approval of the continuance of the currently effective Investment
Advisory Agreement between the Trust and TCW Funds Management, Inc.:
<TABLE>
<S> <C>
For ............. 32,806,731
Against ......... 349,730
Abstain ......... 898,604
</TABLE>
(3) Ratification of the selection of PricewaterhouseCoopers LLP as
Independent Accountants:
<TABLE>
<S> <C>
For ............. 33,015,212
Against ......... 323,463
Abstain ......... 716,390
</TABLE>
(4) Shareholder proposal to amend the Trust's Declaration of Trust to require
each Trustee, within thirty days of election, to become a shareholder of
the Trust:
<TABLE>
<S> <C>
For ............. 4,601,701
Against ......... 13,845,040
Abstain ......... 1,955,324
</TABLE>
4
<PAGE>
TCW/DW TERM TRUST 2002
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ------------- ---------- ---------------
<S> <C> <C> <C> <C>
COLLATERALIZED MORTGAGE OBLIGATIONS (87.3%)
U.S. GOVERNMENT AGENCIES (46.2%)
$ 1,193 Federal Home Loan Mortgage Corp. 1389 SB .............................. 11.415+% 10/15/07 $ 1,192,777
30,000 Federal Home Loan Mortgage Corp. 1465 G (PAC)++ ....................... 7.00 12/15/07 30,792,450
15,600 Federal Home Loan Mortgage Corp. 1481 H (PAC) ......................... 6.875 08/15/21 15,813,594
1,978 Federal Home Loan Mortgage Corp. 1519 J ............................... 16.566+ 05/15/08 2,054,929
16,447 Federal Home Loan Mortgage Corp. 1606 SC .............................. 8.429+ 11/15/08 15,665,620
5,402 Federal Home Loan Mortgage Corp. 1609 LG (PAC) ........................ 6.499+ 11/15/23 4,956,692
7,968 Federal Home Loan Mortgage Corp. 1611 QB (PAC) ........................ 11.375+ 11/15/23 8,132,139
18,300 Federal Home Loan Mortgage Corp. 1633 B ............................... 6.50 09/15/23 17,879,109
18,500 Federal Home Loan Mortgage Corp. 1638 K (PAC) ......................... 6.50 03/15/23 18,449,379
350 Federal National Mortgage Assoc. 1992-138 O ........................... 7.50 07/25/22 349,818
13,993 Federal National Mortgage Assoc. 1992-150 SV (PAC) .................... 12.297+ 05/25/21 14,508,904
9,140 Federal National Mortgage Assoc. 1992-208 C (TAC) ..................... 7.50 10/25/07 9,167,670
8,333 Federal National Mortgage Assoc. 1993-139 SP (PAC) .................... 9.447+ 12/25/21 7,622,916
4,495 Federal National Mortgage Assoc. 1993-141 A ........................... 7.00 12/25/22 4,485,781
9,843 Federal National Mortgage Assoc. 1993-179 SV .......................... 8.518+ 10/25/21 9,083,606
18,193 Federal National Mortgage Assoc. 1993-190 S ........................... 6.064+ 10/25/08 16,805,407
3,460 Federal National Mortgage Assoc. 1993-190 SB (PAC) .................... 7.597+ 10/25/08 3,445,665
5,814 Federal National Mortgage Assoc. 1993-238 SA .......................... 8.233+ 07/25/08 5,379,752
3,672 Federal National Mortgage Assoc. G1992-44 SC .......................... 13.776+ 08/25/20 3,763,571
------------
TOTAL U.S. GOVERNMENT AGENCIES (Identified Cost $190,892,981) ................................ 189,549,779
------------
PRIVATE ISSUES (41.1%)
9,022 Bear Sterns Mortgage Securities, Inc. 1993-10 A7 (PAC) ................ 7.20 07/25/24 9,167,758
17,006 Citicorp Mortgage Securities, Inc. 1992-20 A5 ......................... 7.50 12/25/07 17,288,030
19,574 CMC Securities Corp. III 1994-A9 (PAC) ................................ 6.75 03/25/24 19,008,411
11,232 CountryWide Funding Corp. 1994-4 A12 .................................. 6.95 04/25/24 11,114,147
21,117 CountryWide Mortgage-Backed Securities, Inc. 1993-B A6 (PAC) .......... 6.75 11/25/23 20,637,948
33,092 General Electric Capital Mortgage Services, Inc. 1994-6 A9 ............ 6.50 09/25/22 32,528,793
6,791 NorWest Asset Securities Corp. 1996-1 A5 .............................. 7.50 08/25/26 6,765,532
13,170 Prudential Home Mortgage Securities 1993-2 A7 ......................... 7.00 02/25/08 12,889,687
3,138 Prudential Home Mortgage Securities 1993-34 A1 ........................ 7.00 08/25/23 3,126,445
20,000 Prudential Home Mortgage Securities 1993-60 A3 (PAC) .................. 6.75 12/25/23 19,191,498
16,836 Residential Funding Mortgage Securities I 1993-S40 A8 (TAC) ........... 6.75 11/25/23 16,640,414
------------
TOTAL PRIVATE ISSUES (Identified Cost $168,035,946) .......................................... 168,358,663
------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(Identified Cost $358,928,927) ............................................................... 357,908,442
------------
U.S. GOVERNMENT AGENCY MORTGAGE PASS-THROUGH SECURITY (0.7%)
2,920 Government National Mortgage Assoc. II ARM
(Identified Cost $2,958,577) .......................................... 6.875 06/20/25 2,973,459
------------
TAX-EXEMPT MUNICIPAL BONDS (16.7%)
General Obligation (3.6%)
17,500 North Slope Boro, Alaska, Ser A (MBIA) ................................ 0.00 06/30/03 14,742,875
------------
Industrial Development Revenue (5.2%)
Metropolitan Pier & Exposition Authority, Illinois,
6,610 McCormick Place (AMBAC) .............................................. 0.00 06/15/02 5,824,666
7,400 McCormick Place (AMBAC) .............................................. 0.00 12/15/02 6,392,268
10,465 Pennsylvania Convention Center Authority, Ser A (FGIC) (ETM) .......... 0.00 09/01/02 9,155,828
------------
21,372,762
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
TCW/DW TERM TRUST 2002
PORTFOLIO OF INVESTMENTS March 31, 1999 (unaudited) continued
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT IN COUPON MATURITY
THOUSANDS RATE DATE VALUE
- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Other Revenue (2.2%)
$ 10,400 Texas, 1992 Refg Ser C (FGIC) ................................ 0.00 % 04/01/03 $ 8,866,936
-------------
Tax Allocation Revenue (3.3%)
33,140 Johnson County, Kansas, (AMBAC) (ETM) ........................ 0.00 06/01/12 13,495,934
-------------
Transportation Facilities Revenue (2.4%)
12,000 Contra Costa Transportation Authority, California, Sales Tax
(FGIC) (ETM) ................................................. 0.00 03/01/04 9,895,800
-------------
TOTAL TAX-EXEMPT MUNICIPAL BONDS (Identified Cost $63,230,236) ........................... 68,374,307
-------------
SHORT-TERM INVESTMENTS (2.0%)
U.S. GOVERNMENT AGENCY (a) (1.0%)
4,000 Federal Home Loan Mortgage Corp.
(Amortized Cost $3,988,413) .................................. 4.74 04/23/99 3,988,413
-------------
REPURCHASE AGREEMENT (1.0%)
4,273 The Bank of New York (dated 03/31/99; proceeds $4,273,824) (b)
(Identified Cost $4,273,245) ................................. 4.875 04/01/99 4,273,245
-------------
TOTAL SHORT-TERM INVESTMENTS (Identified Cost $8,261,658) ................................ 8,261,658
-------------
TOTAL INVESTMENTS (Identified Cost $433,379,398) (c) ...................... 106.7 % 437,517,866
LIABILITIES IN EXCESS OF OTHER ASSETS ..................................... (6.7) (27,322,417)
------- -------------
NET ASSETS ................................................................ 100.0 % $ 410,195,449
======= =============
</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.
++ All of these securities are pledged in connection with reverse
repurchase agreements.
(a) Security was purchased on a discount basis. The interest rate shown has
been adjusted to reflect a money market equivalent yield.
(b) Collateralized by $11,784,516 U.S Treasury Principal Strip 0.00% due
08/15/25 valued at $2,496,903 and $1,784,137 U.S. Treasury Note 6.25%
due 02/15/03 valued at $1,861,806.
(c) The aggregate cost for federal income tax purposes approximates
identified cost. The aggregate gross unrealized appreciation is
$9,158,234 and the aggregate gross unrealized depreciation is
$5,019,766, resulting in net unrealized appreciation of $4,138,468.
Bond Insurance:
AMBAC AMBAC Indemnity Corporation.
FGIC Financial Guaranty Insurance Company.
MBIA Municipal Bond Investors Assurance Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
TCW/DW TERM TRUST 2002
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1999 (unaudited)
<TABLE>
<S> <C>
ASSETS:
Investments in securities, at value
(identified cost $433,379,398) ............... $437,517,866
Interest receivable ............................. 2,189,291
Prepaid expenses and other assets ............... 44,804
------------
TOTAL ASSETS ............................... 439,751,961
------------
LIABILITIES:
Reverse repurchase agreements ................... 29,007,000
Payable for:
Management fee ............................. 145,025
Interest ................................... 135,608
Shares of beneficial interest
repurchased ............................. 116,610
Investment advisory fee .................... 96,683
Accrued expenses and other payables ............. 55,586
Contingencies (Note 8) .......................... --
------------
TOTAL LIABILITIES .......................... 29,556,512
------------
NET ASSETS ................................. $410,195,449
============
COMPOSITION OF NET ASSETS:
Paid-in-capital ................................. $381,384,232
Net unrealized appreciation ..................... 4,138,468
Accumulated undistributed net investment
income ....................................... 24,672,536
Accumulated undistributed net realized gain 213
------------
NET ASSETS ................................. $410,195,449
============
NET ASSET VALUE PER SHARE,
39,876,940 shares outstanding (unlimited
shares authorized of $.01 par value) ......... $10.29
======
</TABLE>
STATEMENT OF OPERATIONS
For the six months ended March 31, 1999 (unaudited)
<TABLE>
<S> <C>
NET INVESTMENT INCOME:
INTEREST INCOME ............................... $17,575,338
-----------
EXPENSES
Management fee ................................ 816,551
Investment advisory fee ....................... 544,367
Transfer agent fees and expenses .............. 88,388
Shareholder reports and notices ............... 31,737
Insurance expenses ............................ 18,115
Registration fees ............................. 17,988
Trustees' fees and expenses ................... 17,213
Professional fees ............................. 16,919
Custodian fees ................................ 14,876
Other ......................................... 29,816
-----------
TOTAL OPERATING EXPENSES ................. 1,595,970
Interest expense .............................. 1,457,879
-----------
TOTAL EXPENSES ........................... 3,053,849
-----------
NET INVESTMENT INCOME .................... 14,521,489
-----------
NET REALIZED AND UNREALIZED GAIN (LOSS):
Net realized gain ............................. 242
Net change in unrealized appreciation ......... (15,672,943)
-----------
NET LOSS ................................. (15,672,701)
-----------
NET DECREASE .................................. $(1,151,212)
===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
TCW/DW TERM TRUST 2002
FINANCIAL STATEMENTS, continued
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
MARCH 31, 1999 SEPTEMBER 30, 1998
---------------- -------------------
(unaudited)
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
OPERATIONS:
Net investment income .................................... $ 14,521,489 $ 29,132,981
Net realized gain ........................................ 242 1,136,065
Net change in unrealized appreciation/depreciation ....... (15,672,943) 27,968,463
------------- -------------
NET INCREASE (DECREASE) ............................... (1,151,212) 58,237,509
------------- -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .................................... (13,306,521) (27,855,408)
Net realized gain ........................................ (1,136,075) --
------------- -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS ..................... (14,442,596) (27,855,408)
------------- -------------
Net decrease from transactions in shares of beneficial
interest ............................................... (9,838,002) (24,083,116)
------------- -------------
NET INCREASE (DECREASE) ............................... (25,431,810) 6,298,985
NET ASSETS:
Beginning of period ...................................... 435,627,259 429,328,274
------------- -------------
END OF PERIOD
(Including undistributed net investment income of
$24,672,536 and $23,457,568, respectively) ............ $ 410,195,449 $ 435,627,259
============= =============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
TCW/DW TERM TRUST 2002
FINANCIAL STATEMENTS, continued
STATEMENT OF CASH FLOWS
For the six months ended March 31, 1999 (unaudited)
<TABLE>
<S> <C>
INCREASE (DECREASE) IN CASH:
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net investment income .................................................. $14,521,489
Adjustments to reconcile net investment income to net cash provided by
operating activities:
Decrease in receivables and other assets related to operations ......... 239,084
Decrease in payables related to operations ............................. (69,774)
Net amortization of discount/premium ................................... (3,004,539)
--------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................... 11,686,260
--------------
CASH FLOWS PROVIDED BY INVESTING ACTIVITIES:
Purchases of investments .............................................. (1,045,541)
Principal prepayments of investments ................................... 54,268,362
Net purchases of short-term investments ............................... (4,920,489)
--------------
NET CASH PROVIDED BY INVESTING ACTIVITIES ........................... 48,302,332
--------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Net payments for shares of beneficial interest repurchased ............. (10,230,996)
Net payments for maturities of reverse repurchase agreements ........... (35,315,000)
Dividends to shareholders from net investment income .................. (13,306,521)
Distributions to shareholders from net realized gains .................. (1,136,075)
--------------
NET CASH USED FOR FINANCING ACTIVITIES .............................. (59,988,592)
--------------
NET INCREASE (DECREASE) IN CASH ........................................ --
CASH BALANCE AT BEGINNING OF PERIOD .................................... --
--------------
CASH BALANCE AT END OF PERIOD .......................................... $ --
==============
Cash paid during the period for interest ............................... $1,449,789
==============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited)
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.
10
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) 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.
2. MANAGEMENT AGREEMENT
Pursuant to a Management Agreement, the Trust pays Morgan Stanley Dean Witter
Services Company Inc. (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.
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
11
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) continued
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 six months ended March
31, 1999 were as follows:
<TABLE>
<CAPTION>
SALES/
PURCHASES PREPAYMENTS
------------- --------------
<S> <C> <C>
U.S. Government Agencies .................................. -- $41,434,175
Private Issue Collateralized Mortgage Obligations ......... $1,045,541 12,834,187
</TABLE>
Morgan Stanley Dean Witter Trust FSB, an affiliate of the Manager, is the
Trust's transfer agent. At March 31, 1999, the Trust had transfer agent fees
and expenses payable of approximately $1,500.
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, 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
Treasury shares purchased and retired (weighted average discount 6.54%)* (1,007,200) (10,072) (9,827,930)
---------- --------- -------------
Balance, March 31, 1999 ................................................. 39,876,940 $ 398,769 $ 380,985,463
========== ========= =============
</TABLE>
- ---------------
* The Trustees have voted to retire the shares purchased.
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 March
31, 1999, securities valued at $30,792,450 were pledged as collateral.
12
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) continued
At March 31, 1999, the reverse repurchase agreements outstanding were
$29,007,000 with a weighted interest rate of 4.95% maturing within 29 days. The
maximum and average daily amounts outstanding during the period were
$64,322,000 and $54,844,253, respectively. The weighted average interest rate
during the period was 5.26%.
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>
March 30, 1999 $ 0.055 April 9, 1999 April 23, 1999
April 27, 1999 $ 0.055 May 7, 1999 May 21, 1999
</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 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 judgment 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 plaintiff's motion for
class certification. The Court ruled that plaintiff's motion was "granted as to
[a California] statewide class," but was "denied as to a nationwide class." On
October 13, 1998, three separate class actions alleging similar claims on
behalf of the residents of the states of Florida, New Jersey and New York were
filed in the state courts of those states. The time of the defendants to move
or answer in the New Jersey and
13
<PAGE>
TCW/DW TERM TRUST 2002
NOTES TO FINANCIAL STATEMENTS March 31, 1999 (unaudited) continued
New York actions has been extended by agreement. The defendants removed the
Florida action to federal court and the parties are awaiting decision on the
plaintiffs' motion to remand the action to state court. 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.
14
<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 SIX
MONTHS ENDED
MARCH 31, 1999
-------------------
(unaudited)
<S> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $ 10.66
----------
Income (loss) from investment operations:
Net investment income ............................. 0.37
Net realized and unrealized gain (loss) ........... (0.40)
-----------
Total income (loss) from investment operations ..... (0.03)
-----------
Less dividends and distributions from:
Net investment income ............................. (0.33)
Net realized gain ................................. (0.03)
-----------
Total dividends and distributions .................. (0.36)
-----------
Anti-dilutive effect of acquiring treasury shares 0.02
-----------
Net asset value, end of period ..................... $ 10.29
===========
Market value, end of period ........................ $ 9.625
===========
TOTAL RETURN+ ...................................... 1.09%(1)
RATIOS TO AVERAGE NET ASSETS:
Operating expenses ................................. 0.76%(2)
Interest expense ................................... 0.70%(2)
Net expenses ....................................... 1.46%(2)
Net investment income .............................. 6.95%(2)
SUPPLEMENTAL DATA:
Net assets, end of period, in thousands ............ $ 410,195
Portfolio turnover rate ............................ --(1)++
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ----------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
SELECTED PER SHARE DATA:
Net asset value, beginning of period ............... $ 9.89 $ 9.18 $ 9.13 $ 7.86 $ 10.18
------- ------- ------- ------- --------
Income (loss) from investment operations:
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 income (loss) 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 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%.
(1) Not annualized.
(2) Annualized.
SEE NOTES TO FINANCIAL STATEMENTS
15
<PAGE>
TRUSTEES
John C. Argue
Richard M. DeMartini
Charles A. Fiumefreddo
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
Mitchell M. Merin
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.
The financial statements included herein have been taken from the records of the
Trust without examination by the independent accountants and accordingly they
do not express an opinion thereon.
TCW/DW
TERM TRUST 2002
[Graphic]
SEMIANNUAL REPORT
March 31, 1999
