<PAGE>
2002 TARGET TERM TRUST INC. SEMIANNUAL REPORT
July 15, 1997
Dear Shareholder,
We are pleased to present you with the semiannual report for 2002 Target Term
Trust Inc. for the six months ended May 31, 1997.
GENERAL MARKET OVERVIEW
- --------------------------------------------------------------------------------
After a heady first quarter growth rate of 5.9%, the economy moderated
substantially to achieve a second quarter pace estimated at 2.0%. While
expectations of persistent above-trend growth and aggressive Federal Reserve
tightening led bond yields to initially back up to 7.17% in mid-April, signs to
the contrary amidst the continuation of low inflation generated investor
interest in bonds by early May.
Since then, the emergent view on the economy has been for some reversal in
growth. While bond market participants have, over the period, acquired a greater
confidence in the Federal Reserve's management of monetary policy, more
critically abetting the market's runup has been a widening perception that the
Greenspan Fed is likely to be pragmatic--and not driven strictly by classical
resource utilization-based economic thought that currently argues for aggressive
monetary tightening.
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
For the six months ended May 31, 1997, the Trust achieved a total return of
1.26% based on the Trust's net asset value (NAV) and 4.40% based on the Trust's
market value on May 31, 1997. During the same period, the Trust's benchmark, a
U.S. Treasury note with a coupon of 6.375% maturing on August 15, 2002, had a
total return of 0.25%. As of May 31, 1997, the Trust's net asset value per share
was $14.63, while its share price on the New York Stock Exchange was $12.75
During the six-month period ended May 31, 1997, the Trust paid dividends
totaling $0.4308 per share.
The Trust's outperformance relative to its benchmark during the period was
primarily due to its substantial allocation to mortgage-backed securities. These
securities benefited from low volatility, stable mortgage prepayments and strong
investor demand.
As of May 31, 1997, Collateralized Mortgage Obligations (CMOs) accounted
for 68.1% of the portfolio, slightly higher than their 66.4% allocation six
months ago. During the period, CMOs enjoyed strong demand while their supply,
2002 TARGET TERM
TRUST INC.
Portfolio Breakdown
(% of portfolio assets
as of May 31, 1997)
[CHART]
CMOs 68%
Mortgage Pass-
Through Securities 11%
Adjustable Rate
Morgage Securities 15%
Other 6%
1
<PAGE>
SEMIANNUAL REPORT
2002 TARGET TERM
TRUST INC.
FUND PROFILE
GOAL:
To return $15 per share to investors on or about November 30, 2002, while
providing high monthly income
PORTFOLIO MANAGER/SUB-ADVISER:
Sharmin
Mossavar-Rahmani,
Goldman Sachs Funds
Management LP
TOTAL NET ASSETS:
$114.2 million as of
May 31, 1997
DIVIDEND PAYMENT:
Monthly
though rising, remained relatively low from a historical perspective.
Investors found the CMO sector particularly compelling due to the stable pace of
mortgage prepayments, as well as its substantial yield over similar duration
Treasury and non-Treasury alternatives. The Trust focused on short-duration CMO
issues that offered more predictable cash flows.
The Trust held a 15.0% position in adjustable rate mortgage securities
(ARMs), relatively unchanged from their weighting six months earlier. Like other
mortgage subsectors, the ARM market was supported by low volatility and stable
prepayments. In addition, investor interest in the sector increased as
opportunities in similar duration alternatives diminished.
The portfolio's allocation in mortgage pass-through securities was 10.5%,
as of May 31, 1997, versus 13.3% last November. These securities contributed
incremental yield and, being highly liquid, also provided attractive trading
opportunities.
Asset-backed securities (ABS) represented 4.9% of the portfolio as of May
31, 1997, up from 3.2% six months ago. During the period, the ABS sector
experienced some selling pressure, in part due to negative credit events among
selected credit card and sub-prime auto lenders. Nonetheless, positive
fundamental and technical trends remained intact and spreads held firm.
OUTLOOK
- --------------------------------------------------------------------------------
The Trust's managers believe the uptick in the unemployment rate to 5% in May
has reassured Fed officials of the efficacy of their decision to hold interest
rates steady during the second quarter. Therefore, it now appears unlikely that
officials will tighten monetary policy again this summer. Once the data
indicates a resumption of upward momentum, however, additional tightening moves
can be expected.
Regarding specific fixed income sectors, while support for the
mortgage-backed market remains strong, the portfolio managers believe spreads
could widen should volatility increase or investor demand diminish in response
to tighter spreads. For that reason, securities with more predictable cash flows
will be emphasized. In the ABS sector, spreads have settled back into a fairly
tight trading range, as concerns regarding systematic credit deterioration have
largely subsided. Nonetheless, the portfolio managers will continue to emphasize
issues with tight underwriting standards and strong servicing capabilities.
2
<PAGE>
2002 TARGET TERM TRUST INC. SEMIANNUAL REPORT
Our ultimate objective in managing your investments is to help you
successfully meet your financial goals. We thank you for your continued support,
and welcome any comments or questions you may have.
Sincerely,
/s/ MARGO N. ALEXANDER /s/ SHARMIN MOSSAVAR-RAHMANI
- ----------------------------------- -----------------------------------
MARGO N. ALEXANDER SHARMIN MOSSAVAR-RAHMANI
President, Chief Investment Officer,
Mitchell Hutchins Domestic Fixed Income,
Asset Management Inc. Goldman Sachs Funds Management, L.P.
<PAGE>
2002 TARGET TERM TRUST INC.
PORTFOLIO OF INVESTMENTS MAY 31, 1997(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) MATURITY DATES INTEREST RATES VALUE
- ------------ -------------------- ----------------- -------------
<C> <S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--5.74%
$ 971 GNMA.......................... 10/15/22 to 11/15/22 7.000% $ 952,006
4,488 GNMA.......................... 01/15/23 to 07/15/23 7.500 4,501,725
114 GNMA.......................... 09/15/18 9.000 121,182
1,000 GNMA TBA...................... TBA 7.000 980,310
-------------
Total Government National Mortgage
Association Certificates
(cost--$6,493,345).........................
6,555,223
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES--5.17%
1,960+ FHLMC......................... 12/01/13 6.000 1,848,185
3,891+ FHLMC ARM..................... 08/01/19 7.526 4,051,398
-------------
Total Federal Home Loan Mortgage Corporation
Certificates
(cost--$5,932,526).........................
5,899,583
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--4.02%
3,457+ FNMA ARM...................... 08/01/22 7.704 3,620,841
1,000 FNMA TBA...................... TBA 7.000 974,380
-------------
Total Federal National Mortgage Association
Certificates (cost--$4,574,546)............ 4,595,221
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS--88.03%
4,100 FHLMC Series 164, Class B2, B3
& B9........................ 07/15/21 9.500 4,293,750
2,448+ FHLMC Series 1629, Class QC... 12/15/23 10.000* 2,004,112
3,942+ FHLMC Series 1645, Class B.... 01/15/08 5.500 3,625,548
6,000+ FHLMC Series 1777-A, Class
M........................... 05/15/08 6.500 5,770,320
5,000+ FHLMC Series 1784, Class PG... 09/15/23 8.000 5,183,600
1,735+ FNMA Series 1994-11, Class
B........................... 06/25/18 4.625 1,599,090
2,439+ FNMA REMIC, Series 1988-12,
Class A..................... 02/25/18 10.000 2,584,918
6,216 CMC Securities Corporation,
Series 1992-A, Class A12.... 10/25/22 7.400 6,102,687
6,084+ CMC Securities Corporation,
Series 1992-B, Class B11.... 11/25/23 7.375 5,914,561
5,254 CMC Securities Corporation,
Series 1993-C, Class C3..... 04/25/08 9.552 5,516,449
11,377+ CMC Securities Corporation,
Series 1993-E, Class S10.... 11/25/08 6.500 10,751,548
972 Citicorp Mortgage Securities,
Incorporated, Series 1994-6,
Class A4.................... 03/25/09 5.750 889,707
6,677 Collateralized Mortgage
Obligation Trust, Series 64,
Class Z..................... 11/20/20 9.000 7,227,514
6,655+ Countrywide Mortgage Backed
Securities Incorporated,
Series 1994-C, Class A9..... 03/25/24 6.500 6,268,343
10,999 First Boston Mortgage
Securities Corporation,
Series 1993-1A,
Class 1A.................... 04/25/06 7.400 11,105,205
6,308+ Housing Securities
Incorporated, Series 1994-1,
Class A13................... 03/25/09 6.500 5,806,906
1,882 Prudential Home Mortgage
Securities Corporation,
Series 1992-42, Class A2.... 01/25/08 6.250 1,872,868
4,158 Prudential Home Mortgage
Securities Corporation,
Series 1993-38, Class A4.... 09/25/23 9.550 4,385,678
3,281 Residential Funding Mortgage
Securities Incorporated,
Series 1992-S32, Class
A16......................... 09/25/22 7.750 3,260,769
3,871 Securitized Asset Sales,
Incorporated, Series 1994-5,
Class AM.................... 07/25/24 7.000 3,719,847
1,075 Structured Asset Securities
Corporation, Series 1993-C1,
Class A1A................... 10/25/24 6.600 1,066,663
1,627+ Structured Asset Securities
Corporation, Series 1995-3A,
Class 1A1................... 01/28/24 7.000 1,558,494
-------------
Total Collateralized Mortgage Obligations
(cost--$99,009,649)........................ 100,508,577
-------------
ADJUSTABLE RATE COLLATERALIZED MORTGAGE
OBLIGATIONS*--21.19%
2,771 DLJ MORTGAGE ACCEPTANCE
CORPORATION, SERIES 1996-Q6,
CLASS A1.................... 07/25/26 6.125 2,770,863
2,733 HOUSING SECURITIES
INCORPORATED, SERIES 1992-5,
CLASS A..................... 06/25/22 7.473 2,820,314
</TABLE>
4
<PAGE>
2002 TARGET TERM TRUST INC.
COLLATERALIZED MORTGAGE OBLIGATIONS--(CONCLUDED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) MATURITY DATES INTEREST RATES VALUE
- ------------ -------------------- ----------------- -------------
<C> <S> <C> <C> <C>
ADJUSTABLE RATE COLLATERALIZED MORTGAGE
OBLIGATIONS*--(CONCLUDED)
$3,421 Resolution Trust Corporation,
Series 1992-16, Class A4.... 08/25/22 7.557% $ 3,471,817
2,191 Ryland Mortgage Securities
Corporation, Series 1, Class
A2.......................... 08/25/23 7.575 2,216,621
1,296 Ryland Mortgage Securities
Corporation, Series 1991-17,
Class A1.................... 10/25/21 7.013 1,297,425
1,638 Ryland Mortgage Securities
Corporation, Series 1992-L9,
Class A2.................... 07/25/22 7.800 1,645,311
1,563 Ryland Mortgage Securities
Corporation, Series
1992-L10, Class A........... 08/25/22 7.706 1,567,515
4,509 Salomon Brothers Mortgage
Securities VII, Series
1994-20, Class A............ 08/01/24 8.058 4,638,544
3,750 Salomon Brothers Mortgage
Securities VII, Series
1996-3, Class 1A2........... 06/25/26 6.068 3,761,521
-------------
Total Adjustable Rate Collateralized Mortgage
Obligations (cost--$24,058,798)............ 24,189,931
-------------
STRIPPED COLLATERALIZED MORTGAGE OBLIGATIONS--8.36%
50 FNMA REMIC Trust, Series
1991-G-15, Class S***....... 06/25/21 27.244(1) 983,138
3,000+ FNMA REMIC Trust, Series
1991-G-35, Class N**........ 10/25/21 7.557(1) 2,216,250
19 FNMA REMIC Trust, Series
1992-G-44, Class GA***...... 05/25/03 14.600(1) 628,068
10,255+ FNMA REMIC Trust, Series
1993-101, Class A***........ 06/25/08 7.000 978,672
3,293+ FNMA REMIC, Series 151, Class
2***........................ 07/25/22 9.500 1,042,724
9 Structured Asset Securities
Corporation, Series 1992-M1,
Class A3***................. 11/25/07 11.000(1) 3,142,341
9 Structured Asset Securities
Corporation, Series 1992-M1,
Class A4***................. 11/25/07 11.000(1) 559,208
-------------
Total Stripped Collateralized Mortgage
Obligations (cost--$9,469,972)............. 9,550,401
-------------
ASSET BACKED SECURITIES--6.96%
5,550 Discover Card Master Trust I
Series 1996-4, Class A...... 10/16/13 6.063* 5,637,746
2,192 Mid-State Trust IV, Series 4,
Class A..................... 04/01/30 8.330 2,310,414
-------------
Total Asset Backed Securities
(cost--$7,859,484)......................... 7,948,160
-------------
REPURCHASE AGREEMENT--2.14%
2,449 Repurchase Agreement dated
05/30/97, with Nikko
Securities Company
International, Incorporated,
collateralized by $2,507,000
Federal Home Loan Mortgage
Corporation Certificates,
7.500% due 03/01/17;
proceeds: $2,450,139
(cost--$2,449,000).......... 06/02/97 5.580 2,449,000
-------------
161,696,096
Total Investments (cost--$159,847,321)--141.62%.........................................
(47,519,388)
Liabilities in excess of other assets--(41.62%).........................................
-------------
Net Assets--100.00%..................................................................... $ 114,176,708
-------------
-------------
</TABLE>
- -----------------
ARM-- Adjustable Rate Mortgage Security--The interest rate shown is the current
rate as of May 31, 1997.
TBA-- (To Be Assigned) Securities are purchased on a forward commitment basis
with an approximate (generally +/-1.0%) principal amount and generally
stated maturity date. The actual principal amount and maturity date will be
determined upon settlement when the specific mortgage pools are assigned.
REMIC--Real Estate Mortgage Investment Conduit
* Floating Rate Securities. The interest rate shown is the current rate as of
May 31, 1997.
** Principal Only Security. This security entitles the holder to receive
principal payments from an underlying pool of mortgages. High prepayments
return principal faster than expected and cause the yield to increase. Low
prepayments return principal more slowly than expected and cause the yield to
decrease.
*** Interest Only Security. This security entitles the holder to receive
interest payments from an underlying pool of mortgages. The risk associated
with this security is related to the speed of principal paydowns. High
prepayments would result in a smaller amount of interest being received and
cause the yield to decrease. Low prepayments would result in a greater amount
of interest being received and cause the yield to increase.
+ Entire or partial principal amount pledged as collateral for reverse
repurchase agreements (with Lehman Brothers Incorporated, maturing June 2,
1997) and/or futures transactions.
(1) Interest rate represents the annualized yield at date of purchase.
5
<PAGE>
2002 TARGET TERM TRUST INC.
FUTURES CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF APPRECIATION
CONTRACTS CONTRACTS TO DELIVER IN EXCHANGE FOR EXPIRATION DATE (DEPRECIATION)
- ------------- ------------------------------ -------------------- ---------------- -------------
<C> <S> <C> <C> <C>
125 10 year United States Treasury
Notes....................... $13,316,398 Jun 97 to Sep 97 $ (122,509)
115 30 year United States Treasury
Bonds....................... $12,877,398 Jun 97 to Sep 97 227,054
164 90 day Eurodollars............ $38,381,242 Jun 97 to Mar 99 (78,095)
-------------
26,450
-------------
<CAPTION>
CONTRACT TO RECEIVE
------------------------------
<C> <S> <C> <C> <C>
504 5 year United States Treasury
Notes....................... $53,366,857 Jun 97 (147,608)
-------------
$ (121,158)
-------------
-------------
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1997(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value
(cost--$159,847,321).................. $ 161,696,096
Receivable for investments sold......... 236,452
Interest receivable..................... 1,312,054
Variation margin receivable............. 31,499
Deferred organizational expenses........ 26,271
Other assets............................ 17,354
-------------
Total Assets............................ 163,319,726
-------------
LIABILITIES
Payable for reverse repurchase
agreements............................ 46,300,000
Payable for investments purchased....... 1,952,748
Payable to custodian.................... 534,799
Payable for interest on reverse
repurchase agreements................. 218,843
Payable to investment adviser and
administrator......................... 67,685
Accrued expenses and other
liabilities........................... 68,943
-------------
Total liabilities....................... 49,143,018
-------------
NET ASSETS
Capital Stock--$0.001 par value; total
authorized 200,000,000 shares;
7,802,867 shares issued and
outstanding........................... 113,974,139
Undistributed net investment income..... 4,383,879
Accumulated net realized losses from
investments and futures
transactions.......................... (5,908,927)
Net unrealized appreciation of
investments and futures............... 1,727,617
-------------
Net assets applicable to shares
outstanding........................... $ 114,176,708
-------------
-------------
Net asset value per share............... $14.63
-------------
-------------
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED
MAY 31, 1997
(UNAUDITED)
-------------
<S> <C>
INVESTMENT INCOME:
Interest................................ $ 6,073,552
-------------
EXPENSES:
Interest expense........................ 1,301,151
Investment advisory and
administration........................ 398,221
Reports and notices to shareholders..... 72,603
Legal and audit......................... 68,177
Excise tax expense...................... 43,150
Custody and accounting.................. 34,912
Amortization of organizational
expenses.............................. 22,500
Transfer agency and service fees........ 17,101
Directors' fees......................... 6,125
Other expenses.......................... 25,061
-------------
1,989,001
-------------
NET INVESTMENT INCOME................... 4,084,551
-------------
REALIZED AND UNREALIZED GAINS (LOSSES)
FROM INVESTMENT ACTIVITIES:
Net realized gains (losses) from:
Investment transactions............. 618,456
Futures contracts................... (63,676)
Net change in unrealized
appreciation/depreciation of:
Investments......................... (2,918,594)
Futures............................. (428,079)
-------------
NET REALIZED AND UNREALIZED LOSS FROM
INVESTMENT ACTIVITIES................. (2,791,893)
-------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS....................... $ 1,292,658
-------------
-------------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS FOR THE YEAR
ENDED ENDED
MAY 31, 1997 NOVEMBER 30,
(UNAUDITED) 1996
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income................... $ 4,084,551 $ 9,431,856
Net realized gains from investments and
futures............................... 554,780 852,767
Net change in unrealized
appreciation/depreciation of
investments and futures............... (3,346,673) (1,537,200)
------------- -------------
Net increase in net assets resulting
from operations....................... 1,292,658 8,747,423
------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income................... (3,365,281) (7,300,567)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Cost of shares repurchased.............. (1,027,037) (20,924,583)
------------- -------------
Net decrease in net assets.............. (3,099,660) (19,477,727)
NET ASSETS:
Beginning of period..................... 117,276,368 136,754,095
------------- -------------
End of period (including undistributed
net investment income of $4,383,879
and $3,664,609, respectively)......... $114,176,708 $117,276,368
------------- -------------
------------- -------------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
ENDED
MAY 31, 1997
(UNAUDITED)
-------------
<S> <C>
CASH FLOWS PROVIDED FROM OPERATING
ACTIVITIES:
Interest received....................... $ 6,759,258
Operating expenses paid................. (644,990)
Interest paid........................... (1,287,117)
Sale of short-term portfolio
investments, net...................... 1,192,000
Purchase of long-term portfolio
investments........................... (71,593,674)
Sale of long-term portfolio
investments........................... 69,553,360
Variation margin paid on futures
contracts............................. (485,491)
-------------
Net cash provided from operating
activities............................ 3,493,346
-------------
CASH FLOWS USED FOR FINANCING
ACTIVITIES:
Dividends paid to shareholders.......... (3,365,281)
Capital stock repurchased............... (1,112,864)
Increase in reverse repurchase
agreements............................ 450,000
Increase in payable to custodian........ 534,799
-------------
Net cash used for financing
activities............................ (3,493,346)
-------------
NET CHANGE IN CASH...................... 0
CASH AT BEGINNING OF PERIOD............. 0
-------------
CASH AT END OF PERIOD................... $ 0
-------------
-------------
RECONCILIATION OF NET INCREASE IN NET
ASSETS RESULTING FROM OPERATIONS TO
NET CASH PROVIDED FROM OPERATING
ACTIVITIES:
Net increase in net assets resulting
from operations....................... $ 1,292,658
-------------
Decrease in investments, at value....... 11,648,111
Decrease in receivable for investments
sold.................................. 6,942,227
Increase in interest receivable......... (82,886)
Decrease in variation margin
receivable............................ 6,264
Decrease in other assets................ 8,340
Decrease in payable for investments
purchased............................. (16,369,925)
Amortization of organizational
expenses.............................. 22,500
Increase in payable for interest on
reverse repurchase agreements......... 14,034
Increase in payable to investment
adviser and administrator............. 511
Increase in accrued expenses & other
liabilities........................... 11,512
-------------
2,200,688
-------------
Net cash provided from operating
activities............................ $ 3,493,346
-------------
-------------
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
2002 Target Term Trust Inc. (the "Trust") was incorporated in Maryland on
October 16, 1992 and is registered with the Securities and Exchange Commission
as a closed-end diversified management investment company. The Trust is expected
to terminate on or about November 30, 2002. Organizational costs have been
deferred and are being amortized on the straight line method over a period not
to exceed sixty months from the date the Trust commenced operations.
The preparation of financial statements in accordance with generally accepted
accounting principles requires Trust management to make estimates and
assumptions that affect the reported amounts and disclosures in the financial
statements. Actual results could differ from those estimates. The following is a
summary of significant accounting policies:
VALUATION OF INVESTMENTS--Investments in mortgage-backed and U.S. Treasury
obligations are valued based on yield equivalents, a pricing matrix or other
sources, under valuation procedures established by the Trust's board of
directors. Other portfolio securities for which accurate market quotations are
readily available are valued on the basis of quotations furnished by a pricing
service or provided by dealers in such securities. Portfolio securities for
which accurate market quotations are not readily available are valued in
accordance with the Trust's valuation procedures. Short-term debt obligations
maturing in sixty days or less are valued at amortized cost.
REPURCHASE AGREEMENTS--The Trust's custodian takes possession of the
collateral pledged for investments in repurchase agreements. The underlying
collateral is valued daily on a mark-to-market basis to ensure that the value,
including accrued interest, is at least equal to the repurchase price. In the
event of default of the obligation to repurchase, the Trust has the right to
liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances in the event of default or bankruptcy by
the other party to the agreement, realization and/ or retention of the
collateral may be subject to legal proceedings.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME--Investment transactions are
recorded on the trade date. Realized gains and losses from investment
transactions are calculated using the identified cost method. Interest income is
recorded on an accrual basis. Premiums are amortized and discounts are accreted
as adjustments to interest income and identified cost of investments.
FUTURES CONTRACTS--Upon entering into a financial futures contract, the Trust
is required to pledge to a broker an amount of cash and/or U.S. Government
securities equal to a certain percentage of the contract amount. This amount is
known as the "initial margin." Subsequent payments, known as "variation margin,"
are made or received by the Trust each day, depending on the daily fluctuations
in the value of the underlying financial futures contracts. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss until the financial futures contract is closed, at which
time the net gain or loss is reclassified to realized.
Using financial futures contracts involves various market risks. The maximum
amount at risk from the purchase of a futures contract is the contract value.
The Trust primarily used financial futures contracts for hedging purposes as
well as to manage the average duration of the Trust's portfolio and not for
leverage. However, imperfect correlations between futures contracts and the
portfolio securities being hedged or, market disruptions, do not normally permit
full control of these risks at all times.
REVERSE REPURCHASE AGREEMENTS--The Trust enters into reverse repurchase
agreements with qualified, third party broker-dealers as determined by, and
under the direction of, the Trust's board of directors. Interest on the value of
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
reverse repurchase agreements issued and outstanding is based upon competitive
market rates at the time of issuance. At the time the Trust enters into a
reverse repurchase agreement, it establishes and maintains a segregated account
with the Trust's custodian containing liquid securities having a value not less
than the repurchase price, including accrued interest, of the reverse repurchase
agreement.
The average monthly balance of reverse repurchase agreements outstanding
during the six months ended May 31, 1997 was $46,208,333 at a weighted average
interest rate of 5.59%. The maximum amount of reverse repurchase agreements
outstanding at any month-end during the six months ended May 31, 1997 was
$49,350,000 as of December 31, 1996.
DOLLAR ROLLS--The Trust may enter into transactions in which the Trust sells
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity) securities on
a specified future date (the "roll period"). During the roll period the Trust
forgoes principal and interest paid on the securities. The Trust is compensated
by the interest earned on the cash proceeds of the initial sale and by fee
income or a lower repurchase price.
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions are recorded on the
ex-dividend date. The amount of dividends and distributions 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.
On or about November 30, 2002, the Trust will liquidate its assets and will
declare and make a termination distribution to its shareholders in an aggregate
amount equal to the net proceeds of such liquidation after payment of the
Trust's expenses and liabilities, including amounts on any outstanding
borrowings by the Trust.
CONCENTRATION OF RISK
The ability of the issuers of the debt securities, including mortgage- and
asset-backed securities, held by the Trust to meet their obligations may be
affected by economic developments, including those particular to a specific
issuer, industry or region. Mortgage- and asset-backed securities may decrease
in value as a result of increases in interest rates and may benefit less than
other fixed-income securities from declining interest rates because of the risk
of prepayments.
INVESTMENT ADVISER AND ADMINISTRATOR
The Trust has entered into an Investment Advisory and Administration Contract
("Advisory Contract") with Mitchell Hutchins Asset Management Inc. ("Mitchell
Hutchins"). The Advisory Contract provides Mitchell Hutchins with an investment
advisory fee and an administration fee, each computed weekly and payable
monthly, at an annual rate of 0.50% and 0.20%, respectively, of the Trust's
average weekly net assets.
Under a separate contract with Mitchell Hutchins ("Sub-Advisory Contract"),
Goldman Sachs Funds Management, L.P. serves as the Trust's Sub-Adviser. Under
the Sub-Advisory Contract, Mitchell Hutchins (not the Trust) will pay the Sub-
Adviser a fee, computed weekly and payable monthly, in an amount equal to
one-half of the investment advisory fee received by Mitchell Hutchins from the
Trust.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at May 31, 1997,
was substantially the same as the cost of securities for financial statement
purposes.
At May 31, 1997, the components of net unrealized appreciation of investments
were as follows:
<TABLE>
<S> <C>
Gross appreciation (from investments having an excess of
value over cost).......................................... $2,927,736
Gross depreciation (from investments having an excess of
cost over value).......................................... (1,078,961)
----------
Net unrealized appreciation of investments.................. $1,848,775
----------
----------
</TABLE>
For the six months ended May 31, 1997, total aggregate purchases and sales of
portfolio securities excluding short-term securities, were $55,223,749 and
$62,656,031, respectively.
FEDERAL TAX STATUS
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 sufficient amounts of its taxable income to shareholders. Therefore,
no Federal income tax provision is required. As part of the Trust's investment
objective to return $15.00 per share to investors on or about November 30, 2002,
the Trust intends to retain a portion of its taxable income and will pay any
applicable federal income tax and excise tax.
At November 30, 1996, the Trust had a net capital loss carryforward of
$6,156,787. The loss carryforward is available as a reduction, to the extent
provided in the regulations, of future net realized capital gains, which will
expire between November 30, 2002 and November 30, 2003. To the extent that such
losses are used, as provided in the regulations to offset future net realized
capital gains, it is probable that these gains will not be distributed.
CAPITAL STOCK
There are 200,000,000 shares of $0.001 par value common stock authorized. Of
the 7,802,867 shares outstanding as of May 31, 1997, Mitchell Hutchins owned
7,418 shares.
For the six months ended May 31, 1997, the Trust repurchased 80,200 shares of
common stock at an average market price per share of $12.75 and a weighted
average discount from net asset value of 12.96% per share. At May 31, 1997,
paid-in-capital is net the cost of $37,317,935 of capital stock reacquired.
For the period July 10, 1995 (commencement of repurchase program) through
November 30, 1996, the Trust repurchased 2,873,600 shares of common stock at an
average market price per share of $12.57 and a weighted average discount from
net asset value of 10.88% per share.
13
<PAGE>
2002 TARGET TERM TRUST INC.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR A SHARE OF COMMON STOCK OUTSTANDING THROUGHOUT EACH PERIOD IS
PRESENTED BELOW:
<TABLE>
<CAPTION>
FOR THE PERIOD
DECEMBER 31,
FOR THE 1992
SIX MONTHS FOR THE YEARS ENDED (COMMENCEMENT OF
ENDED NOVEMBER 30, OPERATIONS) TO
MAY 31, 1997 --------------------------------- NOVEMBER 30,
(UNAUDITED) 1996 1995 1994 1993
------------ --------- --------- --------- ----------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $14.88 $ 14.37 $ 12.70 $ 14.68 $14.10
------ --------- --------- --------- ------
Net investment income................... 0.53 1.13* 1.02* 0.93 0.89
Net realized and unrealized gains
(losses) from investments.............. (0.37) (0.05)* 1.36* (1.90) 0.68
------ --------- --------- --------- ------
Net increase (decrease) in net asset
value resulting from investment
operations............................. 0.16 1.08 2.38 (0.97) 1.57
------ --------- --------- --------- ------
Dividends from net investment income.... (0.43) (0.86) (0.90) (0.96) (0.84)
Distributions from short-term capital
gains.................................. -- -- -- (0.05) (0.11)
------ --------- --------- --------- ------
Total dividends and distributions to
shareholders........................... (0.43) (0.86) (0.90) (1.01) (0.95)
------ --------- --------- --------- ------
Net increase in net asset value
resulting from repurchase of common
stock.................................. 0.02 0.29 0.19 -- --
------ --------- --------- --------- ------
Offering costs charged to capital....... -- -- -- -- (0.04)
------ --------- --------- --------- ------
Net asset value, end of period.......... $14.63 $ 14.88 $ 14.37 $ 12.70 $14.68
------ --------- --------- --------- ------
------ --------- --------- --------- ------
Per share market value, end of period... $12.75 $ 12.63 $ 12.50 $ 11.25 $14.00
------ --------- --------- --------- ------
------ --------- --------- --------- ------
Total investment return(1).............. 4.40% 8.07% 19.85% (12.79)% 5.94%
------ --------- --------- --------- ------
------ --------- --------- --------- ------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000
omitted)............................... $114,177 $117,276 $136,754 $136,562 $157,888
Expenses to average net assets+......... 3.49%** 3.13% 3.42% 2.72% 1.79%**
Net investment income to average net
assets................................. 7.18%** 7.74% 7.44% 6.82% 6.67%**
Portfolio turnover rate................. 34% 127% 103% 108% 355%
Asset coverage++........................ $3,366 $3,261 $4,013 $3,023 $3,110
</TABLE>
- -----------------
* Calculated using average daily shares outstanding for the period
** Annualized
+ These ratios include 2.29%, 1.93%, 2.50%, 1.82% and 0.91% related to interest
expense for the periods ended May 31, 1997, November 30, 1996, 1995 and 1994,
and for the period December 31, 1992 to November 30, 1993, respectively,
which represents the cost of leverage to the Trust.
++ Per $1,000 of reverse repurchase agreements and dollar roll transactions
outstanding
(1) Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day of each period reported and a sale
at the current market price on the last day of each period reported and
assuming reinvestment of dividends and distributions at prices obtained under
the Trust's Dividend Reinvestment Plan. Investment returns do not reflect
brokerage commissions and have not been annualized for periods of less than
one year.
14
<PAGE>
2002 TARGET TERM TRUST INC.
GENERAL INFORMATION
THE TRUST
2002 Target Term Trust Inc. (the "Trust") is a diversified closed-end
management investment company whose shares trade on the New York Stock Exchange
("NYSE"). The Trust's investment objective is to manage a portfolio of high
quality fixed-income and adjustable-rate securities in order to return $15 per
share (the initial public offering price) to investors on or about November 30,
2002, while providing high monthly income. The Trust's investment adviser and
administrator is Mitchell Hutchins Asset Management Inc., a wholly owned
subsidiary of PaineWebber Incorporated, which has over $44 billion in assets
under management as of June 30, 1997. Goldman Sachs Funds Management, L.P., is
sub-adviser to the Trust.
SHAREHOLDER INFORMATION
The Trust's NYSE trading symbol is "TTR." Weekly comparative net asset value
and market price information about the Trust is published each Monday in THE
WALL STREET JOURNAL, each Sunday in THE NEW YORK TIMES and each week in
BARRON'S, as well as in numerous other newspapers.
DISTRIBUTION POLICY
The Trust has established a Dividend Reinvestment Plan (the "Plan") under
which all shareholders whose shares are registered in their own names, or in the
name of PaineWebber or its nominee, will have all dividends and other
distributions on their shares automatically reinvested in additional shares,
unless such shareholders elect to receive cash. Shareholders who elect to hold
their shares in the name of another broker or nominee should contact such broker
or nominee to determine whether, or how, they may participate in the Plan.
Additional shares acquired under the Plan will be purchased in the open market,
on the NYSE, or otherwise, at prices that may be higher or lower than the net
asset value per share at the time of the purchase. The Trust will not issue any
new shares in connection with the Plan.
15
<PAGE>
- ----------------------------------------
DIRECTORS
E. Garrett Bewkes, Jr. Mary C. Farrell
CHAIRMAN Meyer Feldberg
Margo N. Alexander George W. Gowen
Richard Q. Armstrong Frederic V. Malek
Richard R. Burt Carl W. Schafer
PRINCIPAL OFFICERS
Margo N. Alexander Dianne E. O'Donnell
PRESIDENT VICE PRESIDENT AND SECRETARY
Victoria E. Schonfeld Paul H. Schubert
VICE PRESIDENT VICE PRESIDENT AND TREASURER
INVESTMENT ADVISER AND
ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(c) OF THE INVESTMENT
COMPANY ACT OF 1940 THAT FROM TIME TO TIME THE TRUST MAY PURCHASE SHARES OF ITS
COMMON STOCK IN THE OPEN MARKET AT MARKET PRICES.
THE FINANCIAL INFORMATION INCLUDED HEREIN IS TAKEN FROM THE RECORDS OF THE TRUST
WITHOUT EXAMINATION BY INDEPENDENT AUDITORS WHO DO NOT EXPRESS AN OPINION
THEREON.
THIS REPORT IS SENT TO THE SHAREHOLDERS OF THE TRUST FOR THEIR INFORMATION. IT
IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR USE IN THE PURCHASE
OR SALE OF SHARES OF THE TRUST OR OF ANY SECURITIES MENTIONED IN THE REPORT.
<PAGE>
[Logo}
- -C-1997 PaineWebber Incorporated
Member SIPC
MAY 31, 1997
- ------------------------------------
2002 TARGET
TERM TRUST INC.
SEMIANNUAL REPORT
