<PAGE>
2002 TARGET TERM TRUST INC.
January 14, 1997
Dear Shareholder,
We are pleased to present you with the annual report for 2002 Target Term Trust
Inc. (the "Trust") for the year ended November 30, 1996.
GENERAL MARKET OVERVIEW
- --------------------------------------------------------------------------------
After exceptional performance during most of 1995, 1996 was, for the most
part, a difficult year for fixed income investors. Early in the year,
accelerating economic growth, reflected in strong employment, retail sales
and investment spending numbers, as well as a surprisingly robust housing
sector, combined to convince the market that, contrary to initial
expectations, the Federal Reserve Board (the "Fed") might move to raise
interest rates. This sentiment prevailed throughout most of the year,
persistently unsettling a jittery bond market. Toward the end of the fiscal
year, however, a moderating economy fueled investors' perception that the Fed
would maintain a neutral stance. This in turn helped bolster the bond market
for a short period of time, as evidenced by the decline of the yield on the
30-year Treasury bond, a benchmark of bond market performance, by 56 basis
points, ending at 6.36% on November 30, 1996 versus 6.92% on September 30,
1996 (when bond yields decrease, prices generally increase). Long term, we
believe 1997 will be a year of continued slow economic growth and moderate
inflation, both of which are fundamentally positive for the bond markets.
Shorter term, with the subsequent correction in yields in December 1996 and
January 1997 from late summer's brief rally, we will be focusing on early
signs of first quarter economic growth to potentially identify a buying
opportunity.
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
For the 12-month period ended November 30, 1996, the Trust achieved a
total return of 10.11% based on the Trust's net asset value (NAV) and 8.07%
based on the Trust's market value on November 30, 1996. 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 4.83%. As of November 30,
1996, the Trust's net asset value per share was $14.88, while its share price
on the New York Stock Exchange was $12.63. During the year ended November 30,
1996, the Trust paid dividends totaling $.8616 per share.
The Trust's substantial outperformance relative to its benchmark during the
[GRAPH]
1
<PAGE>
ANNUAL REPORT
FUND PROFILE
GOAL:
To return $15 per
share to investor on or
about November 30,
2002, while providing
high monthly income
PORTFOLIO MANAGER:
Sharmin
Mossavar-Rahmani,
Goldman Sachs Funds
Management LP
TOTAL NET ASSETS:
$117 million as of
November 30, 1996
DIVIDEND PAYMENT:
Monthly
period reflects investors' preference for yield-enhanced products, such as
mortgage-backed and asset-backed securities. This trend has resulted in higher
total returns for these sectors, which the Trust emphasizes, compared with U.S.
Treasuries. The Trust's collateralized mortgage obligation (CMO) investments
performed particularly well relative to other sectors.
The Trust's largest allocation as of November 30, 1996 was in CMOs, which
accounted for 66.4% of the portfolio, up from 63.4% a year ago. CMOs are
mortgage-backed securities that are created by segregating the cash flows from a
pool of mortgages into a variety of maturity classes. Although the broad CMO
market was fairly valued relative to equal-duration Treasuries during most of
the year, the Trust's sub-advisor, Goldman Sachs Funds Management, L.P.
("Goldman Sachs"), used its extensive research to identify specific securities
that presented attractive investment opportunities. Specifically, the Trust
emphasized sequential-pay (34.0%) and mezzanine (13.2%) CMOs, which generally
offer relatively stable cash flows compared with other mortgage-backed security
sectors.
Adjustable rate mortgage securities (ARMs) represented 14.9% of the
portfolio as of November 30, 1996, up from 12.9% a year ago. The Trust focused
on AAA-rated, non-agency, single-family issues, which offered income stability
and low relative prepayment risk. A high level of mortgage refinancing adversely
impacted the sector as yields on long-term bonds dipped below 6%, but ARMs
subsequently strengthened when yield started to rise during the first quarter of
1996 and mortgage prepayment fears faded. For the period as a whole, the Trust
benefited from its ARM investments.
Agency pass-throughs, an 13.3% position as of November 30, 1996, offered
more attractive yields than most of the other high-quality fixed income sectors.
The portfolio emphasized "seasoned" (older) mortgages because they typically
have lower prepayment risk than recently issued mortgages. (Homeowners who did
not refinance their mortgages in prior periods of lower rates are less likely to
refinance in the future.) Similar to ARMs, agency pass-throughs also suffered
from a high level of mortgage prepayment activity, but improved when long-
term rates rose sharply early in the year. Over the course of the year, these
securities contributed to the Trust's positive performance.
The portfolio also included a small allocation in mortgage derivative
securities (2.7% as of November 30, 1996) in order to benefit from their yield
enhancement and potential incremental price return relative to Treasuries. These
included a "combo" of interest-only (IO) and principal-only (PO) CMOs. When IOs
are held in combination with POs, they can produce a position with a similar
risk profile as fixed-rate pass-through securities, but with a higher yield. In
addition, the portfolio held small positions in planned amortization (PAC) IO
and inverse floaters (3.3%), which performed well.
During the period the Trust also added an asset-
2
<PAGE>
2002 TARGET TERM TRUST INC. ANNUAL REPORT
backed security (ABS), which represented 3.2% of the portfolio as of November
30, 1996. The ABS sector consists of short-term, high credit quality issues
primarily backed by credit card debt, automobile loans and other receivables.
Many of these issues, including the Trust's ABS position, are AAA-rated, and we
believe offer attractive incremental yields over Treasuries.
One final note: as of November 30, 1996, the Trust bought back 26.7% of its
outstanding shares under its continuing share repurchase program, which was
initiated on July 10, 1995.
OUTLOOK
- --------------------------------------------------------------------------------
In general, the Trust's managers maintain a cautiously optimistic view of
the mortgage-backed securities market in the near term. Management will continue
to identify specific areas within the CMO market that present attractive
relative value opportunities, which it expects to exploit through its extensive
research. Within the ARM sector, spreads are expected to remain stable due to
declining prepayment fears. In addition, within the agency pass-through market,
management will continue to use its proprietary Tactical Trading Model to seek
out interesting intra-sector investments. Finally, as always, the Trust's
managers will actively reallocate the portfolio's assets among the various fixed
income sectors as their relative value changes throughout the coming year.
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 Asset Management Inc. Domestic Fixed Income,
Goldman Sachs Funds
Management, L.P.
3
<PAGE>
2002 TARGET TERM TRUST INC.
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1996
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT INTEREST
(000) MATURITY DATES RATES VALUE
- --------- -------------------- ---------- ------------
<C> <S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION
CERTIIFICATES - 11.22%
$ 4,736 GNMA.................................... 01/15/23 to 07/15/23 7.500 % $ 4,825,940
156 GNMA.................................... 09/15/18 9.000 167,318
4,000 GNMA TBA................................ TBA 7.000 4,069,530
2,000 GNMA TBA................................ TBA 7.500 2,030,000
2,000 GNMA TBA................................ TBA 8.000 2,063,760
------------
Total Government National Mortgage Association
Certificates
(cost--$12,977,680)................................
13,156,548
------------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIIFICATES
- - 1.73%
2,000 FHLMC TBA (cost--$2,022,656)............ TBA 7.500 2,026,260
------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIIFICATES -
6.78%
995 FNMA.................................... 03/01/26 6.500 966,357
1,974 FNMA.................................... 02/01/26 7.000 1,961,525
3,825 FNMA ARM................................ 08/01/22 7.565 3,996,807
1,000 FNMA TBA................................ TBA 7.500 1,021,560
------------
Total Federal National Mortgage Association
Certificates
(cost--$7,861,355).................................
7,946,249
------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 89.19%
5,400 FHLMC Series 164, Class B2, B3 & B9..... 07/15/21 9.500 5,712,999
8,336+ FHLMC Series 174, Class Z............... 08/15/21 10.000 9,337,673
2,448+ FHLMC Series 1629, Class QC............. 12/15/23 10.000 * 2,033,950
3,942+ FHLMC Series 1645, Class B.............. 01/15/08 5.500 3,665,639
6,000+ FHLMC Series 1777-A, Class M............ 05/15/08 6.500 5,850,000
5,000+ FHLMC Series 1784, Class PG............. 09/15/23 8.000 5,222,200
1,771+ FNMA Series 1994-11, Class B............ 06/25/18 4.625 1,661,702
2,628+ FNMA REMIC, Series 1988-12, Class A..... 02/25/18 10.000 2,784,323
6,520 CMC Securities Corporation, Series
1992-A, Class A12..................... 10/25/22 7.400 6,511,832
6,084+ CMC Securities Corporation, Series
1992-B, Class B11..................... 11/25/23 7.375 6,079,985
5,753 CMC Securities Corporation, Series
1993-C, Class C3...................... 04/25/08 9.552 6,080,234
8,752 CMC Securities Corporation, Series
1993-E, Class S10..................... 11/25/08 6.500 8,468,386
6,384 Collateralized Mortgage Obligation
Trust, Series 64, Class Z............. 11/20/20 9.000 7,104,655
37 Countrywide Mortgage Trust, Series
1993-1, Class 3....................... 04/25/23 7.600 37,332
6,896 Countrywide Mortgage Backed Securities
Incorporated, Series 1994-C, Class
A9.................................... 03/25/24 6.500 6,617,018
11,032 First Boston Mortgage Securities
Corporation, Series 1993-1A, Class
1A.................................... 04/25/06 7.400 11,408,056
6,308+ Housing Securities Incorporated, Series
1994-1, Class A13..................... 03/25/09 6.500 6,018,587
2,668 Prudential Home Mortgage Securities
Corporation, Series 1992-42, Class
A2.................................... 01/25/08 6.250 2,663,932
3,562+ Residential Funding Mortgage Securities
Incorporated, Series 1992-S32, Class
A16................................... 09/25/22 7.750 3,612,960
2,138+ Structured Asset Securities Corporation,
Series 1993-C1, Class A1A............. 10/25/24 6.600 2,138,570
1,627 Structured Asset Securities Corporation,
Series 1995-3A, Class 1A1............. 01/28/24 7.000 1,586,242
------------
Total Collateralized Mortgage Obligations
(cost--$100,557,100)................................. 104,596,275
------------
</TABLE>
4
<PAGE>
2002 TARGET TERM TRUST INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT INTEREST
(000) MATURITY DATES RATES VALUE
- --------- -------------------- ---------- ------------
<C> <S> <C> <C> <C>
ADJUSTABLE RATE COLLATERALIZED MORTGAGE OBLIGATIONS*
- - 22.08%
$ 4,354 DLJ Mortgage Acceptance Corporation,
Series 1996-Q5, Class A1.............. 06/25/26 6.000 % $ 4,350,836
3,270 DLJ Mortgage Acceptance Corporation,
Series 1996-Q6, Class A1.............. 07/25/26 6.000 3,267,915
3,040 Housing Securities Incorporated, Series
1992-5, Class A....................... 06/25/22 7.358 3,093,693
3,785 Resolution Trust Corporation, Series
1992-16 Class A4...................... 08/25/22 7.513 3,851,145
1,569 Ryland Mortgage Securities Corporation,
Series 1991-17, Class A1.............. 10/25/21 6.801 1,575,111
2,282 Ryland Mortgage Securities Corporation,
Series 1992-L9, Class A2.............. 07/25/22 7.486 2,306,409
2,015+ Ryland Mortgage Securities Corporation,
Series 1992-L10, Class A.............. 08/25/22 7.499 2,031,624
2,660 Salomon Brothers Mortgage Securities
VII, Series 1996-3, Class 1A2......... 06/25/26 5.943 2,662,022
2,731+ Saxon Mortgage Securities Corporation,
Series 1993-1, Class A1............... 02/25/23 7.577 2,760,042
------------
Total Adjustable Rate Collateralized Mortgage
Obligations
(cost--$25,746,346)................................
25,898,797
------------
STRIPPED COLLATERALIZED MORTGAGE OBLIGATIONS - 8.93%
57 FNMA REMIC Trust, Series 1991-G-15,
Class S***............................ 06/25/21 27.244 (1) 1,188,340
3,000+ FNMA REMIC Trust, Series 1991-G-35,
Class N**............................. 10/25/21 7.557 (1) 2,340,000
20 FNMA REMIC Trust, Series 1992-G-44,
Class GA***........................... 05/25/03 14.600 (1) 670,000
12,824+ FNMA REMIC Trust, Series, 1993-101,
Class A***............................ 06/25/08 7.000 1,346,545
3,652+ FNMA REMIC, Series 151, Class 2***...... 07/25/22 9.500 1,031,731
9 Structured Asset Securities Corporation,
Series 1992-M1, Class A3***........... 11/25/07 11.000 (1) 3,300,012
9 Structured Asset Securities Corporation,
Series 1992-M1, Class A4***........... 11/25/07 11.000 (1) 600,002
------------
Total Stripped Collateralized Mortgage Obligations
(cost--$10,219,863).................................. 10,476,630
------------
ASSET-BACKED SECURITIES - 4.78%
5,550 Discover Card Master Trust I Series
1996-4, Class A
(cost $5,550,838)..................... 10/16/13 5.758 * 5,602,448
------------
</TABLE>
5
<PAGE>
2002 TARGET TERM TRUST INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT INTEREST
(000) MATURITY DATE RATE VALUE
- --------- -------------------- ---------- ------------
<C> <S> <C> <C> <C>
REPURCHASE AGREEMENT - 3.10%
$ 3,641 Repurchase Agreement dated 11/29/96,
with Morgan Stanley Group
Incorporated, collateralized by
$3,325,000 U.S. Treasury Notes, 7.875%
due 11/15/04; proceeds: $3,642,690
(cost-- $3,641,000)................... 12/02/96 5.570 % $ 3,641,000
------------
TOTAL INVESTMENTS
(cost--$168,576,838)--147.81%...................... 173,344,207
Liabilities in excess of other assets--(47.81)%...... (56,067,839)
------------
NET ASSETS--100.00%.................................. $117,276,368
------------
------------
</TABLE>
- ------------------------------
ARM -- Adjustable Rate Mortgage Security--The interest rate shown is the current
rate as of November 30, 1996.
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
** 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, maturing December 2, 1996)
and/or futures transactions.
(1) Interest rate represents the annualized yield at date of purchase.
FUTURES CONTRACTS
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF IN APPRECIATION
CONTRACTS CONTRACTS TO DELIVER EXCHANGE FOR EXPIRATION DATE (DEPRECIATION)
- ------------- ---------------------------------------- ------------ ---------------- ------------
117 30 year United States Treasury Bond..... $13,454,261 Mar 97 $ (103,114)
<C> <S> <C> <C> <C>
179 90 day Eurodollar....................... $41,907,040 Dec 96 to Dec 98 (315,160)
------------
(418,274)
------------
<CAPTION>
CONTRACTS TO RECEIVE
----------------------------------------
<C> <S> <C> <C> <C>
355 5 year United States Treasury Note...... $37,789,244 Dec 96 to Mar 97 672,475
74 10 year United States Treasury Note..... $8,200,593 Mar 97 52,720
------------
725,195
------------
$ 306,921
------------
------------
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost--$168,576,838)............................................ $173,344,207
Receivable for investments sold..................................................................... 7,178,679
Interest receivable................................................................................. 1,229,168
Variation margin receivable......................................................................... 37,763
Deferred organizational expenses.................................................................... 48,771
Other assets........................................................................................ 25,694
------------
Total assets........................................................................................ 181,864,282
------------
LIABILITIES
Payable for reverse repurchase agreements........................................................... 45,850,000
Payable for investments purchased................................................................... 18,322,673
Payable for interest on reverse repurchase agreements............................................... 204,809
Payable for fund shares repurchased................................................................. 85,827
Payable to investment adviser and administrator..................................................... 67,174
Accrued expenses and other liabilities.............................................................. 57,431
------------
Total liabilities................................................................................... 64,587,914
------------
NET ASSETS
Capital Stock--$0.001 par value; total authorized 200,000,000 shares; 7,883,067 shares issued and
outstanding....................................................................................... 115,001,176
Undistributed net investment income................................................................. 3,664,609
Accumulated net realized losses from investments and futures transactions........................... (6,463,707)
Net unrealized appreciation of investments and futures transactions................................. 5,074,290
------------
Net assets applicable to shares outstanding......................................................... $117,276,368
------------
------------
Net asset value per share........................................................................... $14.88
------------
------------
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF OPERATIONS FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest............................................................................................ $13,247,285
-----------
EXPENSES:
Interest expense.................................................................................... 2,356,890
Investment advisory and administration.............................................................. 853,256
Legal and audit..................................................................................... 208,137
Reports and notices to shareholders................................................................. 156,771
Custody and accounting.............................................................................. 102,587
Amortization of organizational expenses............................................................. 45,000
Transfer agency and service fees.................................................................... 36,699
Directors' fees..................................................................................... 12,250
Other expenses...................................................................................... 43,839
-----------
3,815,429
-----------
NET INVESTMENT INCOME............................................................................... 9,431,856
-----------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT ACTIVITIES:
Net realized gains (losses) from:
Investment transactions........................................................................... 3,158,514
Futures transactions.............................................................................. (2,305,747)
Net change in unrealized appreciation/depreciation of:
Investments....................................................................................... (1,339,485)
Futures contracts................................................................................. (197,715)
-----------
NET REALIZED AND UNREALIZED LOSS FROM INVESTMENT ACTIVITIES......................................... (684,433)
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................ $ 8,747,423
-----------
-----------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED NOVEMBER 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income........................................................... $ 9,431,856 $ 10,617,663
Net realized gains (losses) from investments.................................... 852,767 (2,367,754)
Net change in unrealized appreciation/depreciation of investments............... (1,537,200) 16,774,353
------------ ------------
Net increase in net assets resulting from operations............................ 8,747,423 25,024,262
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income........................................................... (7,300,567) (9,465,902)
------------ ------------
CAPITAL STOCK TRANSACTIONS:
Cost of fund shares repurchased................................................. (20,924,583) (15,366,315)
------------ ------------
Net increase (decrease) in net assets........................................... (19,477,727) 192,045
NET ASSETS:
Beginning of year............................................................... 136,754,095 136,562,050
------------ ------------
End of year (including undistributed net investment income of $3,664,609 and
$1,533,147, respectively)..................................................... $117,276,368 $136,754,095
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to financial statements
9
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED NOVEMBER 30, 1996
<TABLE>
<S> <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Interest received................................................................................... $ 15,745,738
Operating expenses paid............................................................................. (1,494,178)
Interest paid....................................................................................... (2,232,683)
Purchase of short-term portfolio investments, net................................................... (2,617,000)
Purchase of long-term portfolio investments......................................................... (213,095,198)
Sale of long-term portfolio investments............................................................. 234,417,087
Variation margin paid on futures contracts.......................................................... (2,510,059)
------------
Net cash provided from operating activities......................................................... 28,213,707
------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Dividends and distributions paid to shareholders.................................................... (7,300,567)
Capital stock repurchased........................................................................... (21,380,140)
Increase in reverse repurchase agreements........................................................... 467,000
------------
Net cash used for financing activities.............................................................. (28,213,707)
------------
NET CHANGE IN CASH.................................................................................. 0
CASH AT BEGINNING OF YEAR........................................................................... 0
------------
CASH AT END OF YEAR................................................................................. $ 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................................................ $ 8,747,423
------------
Decrease in investments, at value................................................................... 21,228,042
Increase in receivable for investments sold......................................................... (6,129,530)
Decrease in interest receivable..................................................................... 1,397,928
Increase in variation margin receivable............................................................. (6,597)
Decrease in other assets............................................................................ 4,900
Increase in payable for investments purchased....................................................... 2,887,873
Amortization of organizational expenses............................................................. 45,000
Decrease in payable to investment adviser and administrator......................................... (12,313)
Increase in payable for interest on reverse repurchase agreements................................... 124,207
Decrease in accrued expenses and other liabilities.................................................. (73,226)
------------
19,466,284
------------
Net cash provided from operating activities......................................................... $ 28,213,707
------------
------------
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
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 60 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
11
<PAGE>
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 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 year ended November 30, 1996 was $40,529,250
at a weighted average interest rate of 5.51%. The maximum amount of
reverse repurchase agreements outstanding at any month-end during
the year ended November 30, 1996 was $57,000,000.
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.
12
<PAGE>
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.
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at
November 30, 1996, was substantially the same as the cost of
securities for financial statement purposes.
At November 30, 1996, 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)....................... $5,027,337
Gross depreciation (from investments having an
excess of cost over value)....................... (259,968)
---------
Net unrealized appreciation of investments........ $4,767,369
---------
---------
</TABLE>
For the year ended November 30, 1996, total aggregate purchases and
sales of portfolio securities excluding short-term securities, were
$215,983,071 and $240,546,617, 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.
13
<PAGE>
CAPITAL STOCK
There are 200,000,000 shares of $0.001 par value common stock
authorized. Of the 7,883,067 shares outstanding as of November 30,
1996, Mitchell Hutchins owned 7,173 shares.
For the year ended November 30, 1996, the Trust repurchased
1,632,800 shares of common stock at an average market price per
share of $12.76 and a weighted average discount from net asset
value of 10.58% per share. At November 30, 1996, paid-in-capital is
net the cost of $36,290,898 of capital stock reacquired.
For the period July 10, 1995, through November 30, 1995, the Trust
repurchased 1,240,800 shares of common stock at an average market
price per share of $12.32 and a weighted average discount from net
asset value of 11.72% per share.
14
<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
FOR THE YEARS ENDED DECEMBER 31, 1992
NOVEMBER 30, (COMMENCEMENT OF
------------------------------- OPERATIONS) TO
1996 1995 1994 NOVEMBER 30, 1993
--------- --------- --------- -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period.................................. $ 14.37 $ 12.70 $ 14.68 $ 14.10
--------- --------- --------- --------
Net investment income................................................. 1.13* 1.02* 0.93 0.89
Net realized and unrealized gains (losses) from investments........... (0.05)* 1.36* (1.90) 0.68
--------- --------- --------- --------
Net increase (decrease) in net asset value resulting from investment
operations.......................................................... 1.08 2.38 (0.97) 1.57
--------- --------- --------- --------
Dividends from net investment income.................................. (0.86) (0.90) (0.96) (0.84)
Distributions from short-term capital gains........................... -- -- (0.05) (0.11)
--------- --------- --------- --------
Total dividends and distributions to shareholders..................... (0.86) (0.90) (1.01) (0.95)
--------- --------- --------- --------
Net increase in net asset value resulting from repurchase of common
stock............................................................... 0.29 0.19 -- --
--------- --------- --------- --------
Offering costs charged to capital..................................... -- -- -- (0.04)
--------- --------- --------- --------
Net asset value, end of period........................................ $ 14.88 $ 14.37 $ 12.70 $ 14.68
--------- --------- --------- --------
--------- --------- --------- --------
Per share market value, end of period................................. $ 12.63 $ 12.50 $ 11.25 $ 14.00
--------- --------- --------- --------
--------- --------- --------- --------
Total investment return(1)............................................ 8.07% 19.85% (12.79)% 5.94%
--------- --------- --------- --------
--------- --------- --------- --------
Ratios/Supplemental Data:
Net assets, end of period (000 omitted)............................. $ 117,276 $ 136,754 $ 136,562 $ 157,888
Expenses to average net assets+..................................... 3.13% 3.42% 2.72% 1.79%**
Net investment income to average net assets......................... 7.74% 7.44% 6.82% 6.67%**
Portfolio turnover rate............................................. 127% 103% 108% 355%
Asset coverage++.................................................... $ 3,261 $ 4,013 $ 3,023 $ 3,110
</TABLE>
- ------------------------------
* Calculated using average daily shares outstanding for the year
** Annualized
+ This ratio includes 1.93%, 2.50%, 1.82% and 0.91% related to interest expense
for the years ended 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 Fund's Dividend Reinvestment Plan. Investment returns do not
reflect brokerage commissions and have not been annualized for periods of
less than one year.
15
<PAGE>
2002 TARGET TERM TRUST INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
2002 Target Term Trust Inc.
We have audited the accompanying statement of assets and
liabilities, including the portfolio of investments, of 2002 Target
Term Trust Inc. (the "Trust") as of November 30, 1996, and the
related statements of operations and cash flows for the year then
ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements
and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities
owned as of November 30, 1996, by correspondence with the custodian
and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of 2002 Target Term Trust Inc. at November 30,
1996, and 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 indicated periods, in conformity with generally
accepted accounting principles.
[SIG]
New York, New York
January 22, 1997
16
<PAGE>
2002 TARGET TERM TRUST INC.
TAX INFORMATION
We are required by Subchapter M of the Internal Revenue Code of
1986, as amended, to advise you within 60 days of the Trust's
fiscal year end (November 30, 1996), as to the federal tax status
of distributions received by stockholders during such fiscal year.
Accordingly, we are advising you that all distributions paid during
the period by the Trust were derived from net investment income and
are taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs)
need not be reported as taxable income. Some retirement trusts
(e.g., corporate, Keogh and 403(b)(7) plans) may need this
information for their annual information reporting.
Because the Trust's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1996. The
second notification, which reflects the amount to be used by
calendar year taxpayers on their federal income tax returns, will
be made in conjunction with Form 1099 DIV and will be mailed in
January 1997. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment
in the Trust.
17
<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 $43 billion in assets under management
as of December 31, 1996. 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.
18
<PAGE>
DIRECTORS
E. Garrett Bewkes, Jr. Meyer Feldberg
CHAIRMAN George W. Gowen
Margo N. Alexander Frederic V. Malek
Richard Q. Armstrong Carl W. Schafer
Richard Burt John R. Torell III
Mary C. Farrell
PRINCIPAL OFFICERS
Margo N. Alexander Dianne E. O'Donnell
PRESIDENT VICE PRESIDENT AND SECRETARY
Victoria E. Schonfeld Julian F. Sluyters
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 FUND MAY PURCHASE SHARES OF ITS
COMMON STOCK IN THE OPEN MARKET AT MARKET PRICES.
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>
NOVEMBER 30, 1996
2002 TARGET
TERM TRUST INC.
ANNUAL REPORT
PAINEWEBBER
1996 PaineWebber Incorporated
Member SIPC
