<PAGE>
2002 TARGET TERM TRUST INC. SEMIANNUAL REPORT
July 15, 1998
Dear Shareholder,
We are pleased to present you with the semiannual report for 2002 Target Term
Trust Inc. (the "Trust") for the six-month period ended May 31, 1998.
GENERAL MARKET OVERVIEW
Aided by low inflation, a budget surplus and a strong dollar, interest rates
fell across the yield curve through the six-month period ended May 31, 1998.
The 30-year U.S. Treasury bond began the period yielding slightly over 6.00%
and ended at 5.80%. The main themes driving the market were the contained
inflation environment and the Asian crisis, which continued to drive
"flight-to-quality" demand for U.S. Treasury debt.
Through most of last year -- as above-trend economic growth persisted -- the
Federal Reserve monitored the economy with a "tightening bias," i.e., a
predisposition to raise interest rates if the risk of inflation appeared to
increase. In December the Fed adopted a neutral stance, a sign that it did
not consider inflation an imminent threat. The Fed perceived that the Asian
crisis would slow the U.S. economy by reducing demand for U.S. exports.
During the spring of 1998, strong domestic demand persisted despite the
slowing effect of Asia, and in March the Fed reverted to its tightening bias.
PORTFOLIO REVIEW
PERFORMANCE--For the six months ended May 31, 1998, the Trust (NYSE: TTR)
returned 3.97% based on changes in its net asset value (assuming, for
illustration only, that dividends were reinvested at the net asset value on
the payable dates). The Trust outperformed the 2.48% total return of its
benchmark (a U.S. Treasury note maturing on August 15, 2002, with a coupon of
6.375%).
During the period the Trust returned 5.49% based on changes in its share
price on the New York Stock Exchange (assuming dividends were reinvested
under the Dividend Reinvestment Plan).
On May 31, 1998 the Trust's net asset value per share was $15.18, while its
share price on the New York Stock Exchange was $13.94. During the six-month
period ended May 31, 1998, the Fund paid dividends from net investment income
totaling $0.43 per share, or approximately 7.2 cents per share per month.
PORTFOLIO HIGHLIGHTS--Collateralized mortgage obligations (CMOs) represented
66.6% of the portfolio as of May 31, 1998, down from 71.8% on
2002 TARGET TERM TRUST INC.
FUND PROFILE
-- GOAL: Return $15 per
share to investors on or
about 11/30/02, while
providing high monthly
income
-- PORTFOLIO MANAGER/SUB-
ADVISER: Sharmin
Mossavar-Rahmani,
Goldman Sachs Funds
Management, L.P.
-- TOTAL NET ASSETS:
$118.5 million
as of May 31, 1998
-- DIVIDEND PAYMENTS:
Monthly
1
<PAGE>
SEMIANNUAL REPORT
2002 TARGET
TERM TRUST INC.
Sector allocation as percent
of portfolio assets,
May 31, 1998*
CMOs 66.6%
ARMs 16.1%
Mortgage pass-throughs 11.2%
ABS 6.1%
*Allocations subject to change
November 30, 1997. We lowered the allocation to CMOs because selected
segments of the pass-through and adjustable-rate sectors became more
attractive (see below). CMO holdings remain concentrated in sequentials and
support bonds.
Adjustable rate mortgage securities (ARMs) comprised 16.1% of the Fund's
portfolio as of May 31, 1998, up from 13.6% on November 30, 1997. As
prepayment risks mounted during the period, we continued to emphasize
seasoned ARMs issued before 1993. Seasoned issues offer a greater degree of
prepayment protection than issues of newer origination: seasoned borrowers
typically have lower loan balances and stand to gain less from refinancing.
Mortgage pass-through securities (excluding ARMs) rose from 6.9% of portfolio
assets on November 30, 1997 to 11.2% on May 31, 1998. The increase in the
Fund's position is due to the addition of 15-year collateral, which is less
prepayment sensitive than 30-year collateral.
Asset-backed securities (ABS) decreased, falling from 7.4% of portfolio
assets on November 30, 1997 to 6.1% on May 31, 1998. After a spate of spread
widening at year-end 1997, ABS performed well in 1998 as investors returned
to the sector. The Fund's holdings were divided about evenly among auto,
credit card and home equity collateral.
GENERAL OUTLOOK
The tug of war between the "Asian effect" and the strong domestic economy
continues to dictate interest rate movements. In the near term, Asian
economic turmoil should help sustain low interest rates by dampening growth
and restraining inflation. Longer term however, we believe the U.S. economy
will reaccelerate and the Federal Reserve will raise rates.
We are cautious regarding the sectors in which the Trust invests. Our
strategy in the CMO sector should remain constant: attempt to enhance
portfolio return by identifying attractively priced securities with
relatively low sensitivity to prepayment risk. We expect to continue
emphasizing seasoned ARMs within the agency and nonagency sectors. Finally,
we remain neutral on ABS and intend to maintain our allocation to this sector.
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.
For a quarterly FUND PROFILE on any of the funds in the PaineWebber Family of
Funds,(1) please contact your investment executive.
Sincerely,
/s/ Margo Alexander /s/ Sharmin Mossavar-Rahmani
MARGO ALEXANDER SHARMIN MOSSAVAR-RAHMANI
President Chief Investment Officer
Mitchell Hutchins Domestic Fixed Income
Asset Management Inc. Goldman Sachs Funds Management, L.P.
This letter is intended to assist shareholders in understanding how the Trust
performed during the six-month period ended May 31, 1998, and reflects the
portfolio manager's views at the time we are writing this report. Of course,
these views may change in response to changing circumstances. We encourage
you to consult your investment executive regarding your personal investment
program.
(1) Mutual funds are sold by prospectus only. The prospectuses for the funds
contain more complete information regarding risks, charges and expenses, and
should be read carefully before investing.
3
<PAGE>
2002 TARGET TERM TRUST INC.
PORTFOLIO OF INVESTMENTS MAY 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) MATURITY DATES INTEREST RATES VALUE
- ------------- -------------------- ----------------- -------------
<C> <S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--13.61%
$ 4,551 GNMA.......................... 10/15/22 to 10/15/23 7.000% $ 4,632,578
3,758 GNMA.......................... 01/15/23 to 07/15/23 7.500 3,880,393
1,519 GNMA.......................... 01/15/10 to 07/15/12 8.500 1,589,879
44 GNMA.......................... 09/15/18 9.000 47,139
6,000 GNMA TBA...................... TBA 6.500 5,971,878
-------------
Total Government National Mortgage Association
Certificates (cost--$15,811,002)............. 16,121,867
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES--4.17%
1,759+ FHLMC......................... 12/01/13 6.000 1,733,576
3,084+ FHLMC ARM..................... 08/01/19 7.572 3,202,997
-------------
Total Federal Home Loan Mortgage Corporation
Certificates (cost--$4,898,263).............. 4,936,573
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--11.47%
2,610+ FNMA ARM...................... 11/01/26 6.213 2,624,955
3,053+ FNMA ARM...................... 01/01/25 6.891 3,133,646
2,716+ FNMA ARM...................... 08/01/22 7.550 2,838,484
4,769+ FNMA ARM...................... 01/01/21 7.771 4,986,551
-------------
Total Federal National Mortgage Association
Certificates (cost--$13,555,336)............. 13,583,636
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS--83.08%
4,450 FHLMC Series 164, Classes B2,
B3, B9 & B11................ 07/15/21 9.500 4,983,927
2,448+ FHLMC Series 1629, Class QC... 12/15/23 10.000* 2,555,556
3,942+ FHLMC Series 1645, Class B.... 01/15/08 5.500 3,751,499
462 FNMA Series 1993-138, Class
SM.......................... 12/25/21 10.010* 509,717
2,445+ FNMA Series 1994-11, Class
B........................... 06/25/18 4.625 2,370,027
2,004+ FNMA REMIC, Series 1988-12,
Class A..................... 02/25/18 10.000 2,204,887
4,657 CMC Securities Corporation,
Series 1992-A, Class A12.... 10/25/22 7.400 4,750,101
5,151 CMC Securities Corporation,
Series 1992-B, Class B11.... 11/25/23 7.375 5,211,258
4,066+ CMC Securities Corporation,
Series 1993-C, Class C3..... 04/25/08 9.552 4,245,603
11,377+ CMC Securities Corporation,
Series 1993-E, Class S10.... 11/25/08 6.500 11,284,120
963 Citicorp Mortgage Securities
Incorporated, Series 1994-6,
Class A4.................... 03/25/09 5.750 924,374
7,303 Collateralized Mortgage
Obligation Trust, Series 64,
Class Z..................... 11/20/20 9.000 7,629,883
5,781 Countrywide Funding
Corporation, Series 1993-2,
Class A5A................... 10/25/08 6.500 5,788,608
4,931 Countrywide Funding
Corporation, Series 1993-10,
Class A9.................... 01/25/24 6.750* 4,947,158
4,679 Countrywide Mortgage Backed
Securities Incorporated,
Series 1994-B, Class A7..... 02/25/09 6.650* 4,721,937
5,943 Countrywide Mortgage Backed
Securities Incorporated,
Series 1994-C, Class A9..... 03/25/24 6.500 5,888,959
10,927 First Boston Mortgage
Securities Corporation,
Series 1993-1A, Class 1A.... 04/25/06 7.400 10,988,445
6,308 Housing Securities
Incorporated, Series 1994-1,
Class A13................... 03/25/09 6.500 6,217,400
3,878 Residential Funding Mortgage
Securities Incorporated,
Series 1994-S1, Class A13... 01/25/21 6.950* 3,945,691
3,820 Securitized Asset Sales
Incorporated, Series 1994-5,
Class AM.................... 07/25/24 7.000 3,860,681
1,627 Structured Asset Securitiess
Corporation, Series 1995-3A,
Class 1A1................... 01/28/24 7.000 1,637,019
-------------
Total Collateralized Mortgage Obligations
(cost--$94,642,233).......................... 98,416,850
-------------
</TABLE>
4
<PAGE>
2002 TARGET TERM TRUST INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) MATURITY DATES INTEREST RATES VALUE
- ------------- -------------------- ----------------- -------------
<C> <S> <C> <C> <C>
ADJUSTABLE RATE COLLATERALIZED MORTGAGE OBLIGATIONS*--7.38%
$ 1,969+ Housing Securities
Incorporated, Series 1992-5,
Class A..................... 06/15/22 7.540% $ 1,991,369
2,245 Resolution Trust Corporation,
Series 1992-16, Class A4.... 08/25/22 7.633 2,248,282
1,379 Ryland Mortgage Securities
Corporation, Series 1, Class
A2.......................... 08/25/23 7.656 1,386,523
3,020 Salomon Brothers Mortgage
Securitiess VII, Series
1994-20, Class A............ 08/01/24 8.177 3,117,400
-------------
Total Adjustable Rate Collateralized Mortgage
Obligations (cost--$8,701,149)............... 8,743,574
-------------
STRIPPED COLLATERALIZED MORTGAGE OBLIGATIONS--6.05%
37 FNMA REMIC Trust, Series
1991-G-15, Class S***....... 06/25/21 27.244(1) 772,706
2,233 FNMA REMIC Trust, Series
1991-G-35, Class N**........ 10/25/21 7.557(1) 1,806,065
17 FNMA REMIC Trust, Series
1992-G-44, Class GA***...... 05/25/03 14.600(1) 353,550
6,379 FNMA REMIC Trust, Series
1993-101, Class A***........ 06/25/08 7.000 481,064
2,511+ FNMA REMIC, Series 151, Class
2***........................ 07/25/22 9.500 670,772
9 Structured Asset Securities
Corporation, Series 1992-M1,
Class A3***................. 11/25/07 11.000(1) 2,611,259
9 Structured Asset Securities
Corporation, Series 1992-M1,
Class A4***................. 11/25/07 11.000(1) 465,770
-------------
Total Stripped Collateralized Mortgage
Obligations (cost--$7,466,711)............... 7,161,186
-------------
ASSET BACKED SECURITIES--8.26%
2,550 Discover Card Master Trust I,
Series 1996-4, Class A...... 10/16/13 6.031* 2,581,059
919 Fasco Grantor Trust........... 11/15/01 6.650 923,755
2,017 Mid-State Trust IV, Series 4,
Class A..................... 04/01/30 8.330 2,191,373
2,052 Salomon Brothers Mortgage
Securities VII, Series
1996-3, Class 1A2........... 06/25/26 5.758* 2,065,720
2,000 The Money Store Home Equity
Trust....................... 01/15/39 6.945 2,023,740
-------------
Total Asset Backed Securities
(cost--$9,648,158)........................... 9,785,647
-------------
REPURCHASE AGREEMENT--3.23%
3,829 Repurchase Agreement dated
05/29/98 with Nomura
Securities International
Incorporated, collateralized
by $3,774,288 Federal Home
Loan Mortgage Corporation
Certificates, 8.423% due
12/01/25 (value--$3,909,408)
proceeds: $3,830,793
(cost--$3,829,000).......... 06/01/98 5.620 3,829,000
-------------
Total Investments
(cost--$158,551,852)--137.25%................ 162,578,333
Liabilities in excess of other
assets--(37.25)%.............................. (44,127,411)
-------------
Net Assets--100.00%........................... $ 118,450,922
-------------
-------------
</TABLE>
- -----------------
ARM Adjustable Rate Mortgage Security--The interest rate shown is the current
rate as of May 31, 1998.
REMIC Real Estate Mortgage Investment Conduit
* Floating Rate Securities. The interest rate shown is the current rate as
of May 31, 1998.
** 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 Nomura Securities International Incorporated,
maturing June 1, 1998) 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>
NUMBER OF UNREALIZED
CONTRACTS CONTRACTS TO DELIVER IN EXCHANGE FOR EXPIRATION DATE DEPRECIATION
- ------------- ------------------------------ --------------- ---------------- -----------
<C> <S> <C> <C> <C>
74 10 year United States Treasury
Notes....................... $ 8,310,975 Jun 98 $ (48,712)
148 30 year United States Treasury
Bonds....................... $ 17,801,966 Sep 98 (180,034)
56 90 day Eurodollars............ $ 13,097,884 Jun 98 to Mar 99 (100,766)
-----------
(329,512)
-----------
<CAPTION>
CONTRACTS TO RECEIVE
------------------------------
<C> <S> <C> <C> <C>
736 5 year United States Treasury
Notes....................... $ 80,527,135 Jun 98 (142,134)
-----------
$(471,646)
-----------
-----------
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1998 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost--$158,551,852).... $162,578,333
Receivable for investments sold............................. 35,844
Interest receivable......................................... 1,291,910
Variation margin receivable................................. 19,805
Other assets................................................ 8,096
------------
Total assets................................................ 163,933,988
------------
LIABILITIES
Payable for reverse repurchase agreements................... 39,100,000
Payable for investments purchased........................... 5,970,135
Payable for interest on reverse repurchase agreements....... 186,062
Payable to custodian........................................ 121,908
Payable to investment adviser and administrator............. 70,134
Accrued expenses and other liabilities...................... 34,827
------------
Total liabilities........................................... 45,483,066
------------
NET ASSETS
Capital Stock--$0.001 par value; total authorized
200,000,000 shares; 7,802,867 shares issued and
outstanding............................................... 113,887,601
Undistributed net investment income......................... 5,917,046
Accumulated net realized loss from investments and futures
transactions.............................................. (4,908,560)
Net unrealized appreciation of investments and futures...... 3,554,835
------------
Net assets.................................................. $118,450,922
------------
------------
Net asset value per share................................... $15.18
------------
------------
</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, 1998
(UNAUDITED)
------------
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 5,911,958
------------
EXPENSES:
Interest expense............................................ 1,255,177
Investment advisory and administration...................... 413,595
Excise tax.................................................. 75,086
Legal and audit............................................. 38,665
Custody and accounting...................................... 36,552
Reports and notices to shareholders......................... 32,761
Transfer agency............................................. 12,515
Directors' fees............................................. 5,250
Amortization of organizational expenses..................... 3,771
Other expenses.............................................. 13,030
------------
1,886,402
------------
Net investment income....................................... 4,025,556
------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT
ACTIVITIES:
Net realized gains from:
Investment transactions................................. 61,403
Futures transactions.................................... 249,280
Net change in unrealized appreciation/depreciation of:
Investments............................................. 458,374
Futures................................................. (195,283)
------------
NET REALIZED AND UNREALIZED GAIN FROM INVESTMENT
ACTIVITIES................................................ 573,774
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 4,599,330
------------
------------
</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, 1998 NOVEMBER 30,
(UNAUDITED) 1997
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income................... $ 4,025,556 $ 8,228,574
Net realized gains from investments and
futures transactions.................. 310,683 1,244,464
Net change in unrealized
appreciation/depreciation of
investments and futures............... 263,091 (1,782,546)
------------- -------------
Net increase in net assets resulting
from operations....................... 4,599,330 7,690,492
------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income................... (3,361,475) (6,726,756)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Cost of shares repurchased.............. -- (1,027,037)
------------- -------------
Net increase (decrease) in net assets... 1,237,855 (63,301)
NET ASSETS:
Beginning of period..................... 117,213,067 117,276,368
------------- -------------
End of period (including undistributed
net investment income of $5,917,046
and $5,252,965, respectively)......... $ 118,450,922 $117,213,067
------------- -------------
------------- -------------
</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, 1998
(UNAUDITED)
--------------
<S> <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Interest received........................................... $ 6,399,985
Expenses paid............................................... (1,901,838)
Purchase of short-term portfolio investments, net........... (749,000)
Purchase of long-term portfolio investments................. (47,471,764)
Sale of long-term portfolio investments..................... 54,512,583
Variation margin paid on futures contracts.................. (28,491)
--------------
Net cash provided from operating activities................. 10,761,475
--------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Dividends paid to shareholders.............................. (3,361,475)
Decrease in reverse repurchase agreements................... (7,400,000)
--------------
Net cash used for financing activities...................... (10,761,475)
--------------
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........ $ 4,599,330
--------------
Decrease in investments, at value........................... 466,106
Increase in receivable for investments sold................. (31,530)
Increase in interest receivable............................. (144,642)
Increase in variation margin receivable..................... (19,805)
Decrease in other assets.................................... 472
Increase in payable for investments purchased............... 5,970,135
Amortization of organizational expenses..................... 3,771
Decrease in payable for interest on reverse repurchase
agreements................................................ (8,874)
Increase in payable to investment adviser and
administrator............................................. 2,358
Decrease in variation margin payable........................ (62,683)
Decrease in accrued expenses & other liabilities............ (13,163)
--------------
6,162,145
--------------
Net cash provided from operating activities................. $ 10,761,475
--------------
--------------
</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--Where market quotations are readily available,
portfolio securities are valued thereon, provided such quotations adequately
reflect the fair value of the securities, in the judgment of Mitchell Hutchins
Asset Management Inc. ("Mitchell Hutchins"), a wholly owned asset management
subsidiary of PaineWebber Incorporated ("PaineWebber") and investment adviser
and administrator of the Trust. When market quotations are not readily
available, securities are valued based upon appraisals derived from information
concerning those securities or similar securities received from recognized
dealers in those securities. All other securities are valued at fair value as
determined in good faith by or under the direction of the Trust's board of
trustees ("board"). The amortized cost method of valuation, which approximates
market value, generally is used to value short-term debt instruments with sixty
days or less remaining to maturity, unless the board determines that this does
not represent fair value.
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
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 six months ended May 31, 1998 was $43,050,000 at a weighted average
interest rate of 5.82%. The maximum amount of reverse repurchase agreements
outstanding at any month-end during the six months ended May 31, 1998 was
$46,000,000 as of January 31, 1998.
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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Under a separate contract with Mitchell Hutchins ("Sub-Advisory Contract"),
Goldman Sachs Asset 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 May 31, 1998,
was substantially the same as the cost of securities for financial statement
purposes.
At May 31, 1998, 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).......................................... $4,829,953
Gross depreciation (from investments having an excess of
cost over value).......................................... (803,472)
---------
Net unrealized appreciation of investments.................. $4,026,481
---------
---------
</TABLE>
For the six months ended May 31, 1998, total aggregate purchases and sales of
portfolio securities excluding short-term securities, were $53,441,899 and
$54,544,113, 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 excise tax.
At November 30, 1997, the Trust had a net capital loss carryforward of
$5,495,606. The loss carryforward is available as a reduction, to the extent
provided in the regulations, of future net realized capital gains, and will
expire on or about November 30, 2002 or the liquidation of the Fund. 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, 1998, Mitchell Hutchins owned
7,903 shares.
The Trust has not repurchased any shares of common stock for the six months
ended May 31, 1998.
For the period July 10, 1995 (commencement of repurchase program) through
November 30, 1997, 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%. At May 31, 1998, paid-in-capital is net the cost of
$37,317,935 of capital stock reacquired.
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
FOR THE 31, 1992
SIX (COMMENCEMENT
MONTHS OF
ENDED FOR THE YEARS ENDED OPERATIONS)
MAY 31, NOVEMBER 30, THROUGH
1998 -------------------------------------------- NOVEMBER
(UNAUDITED) 1997 1996 1995 1994 30, 1993
-------- -------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 15.02 $ 14.88 $ 14.37 $ 12.70 $ 14.68 $ 14.10
-------- -------- --------- --------- --------- ---------
Net investment income................... 0.52 1.06 1.13* 1.02* 0.93 0.89
Net realized and unrealized gains
(losses) from investments and
futures................................ 0.07 (0.08) (0.05)* 1.36* (1.90) 0.68
-------- -------- --------- --------- --------- ---------
Net increase (decrease) in net asset
value resulting from investment
operations............................. 0.59 0.98 1.08 2.38 (0.97) 1.57
-------- -------- --------- --------- --------- ---------
Dividends from net investment income.... (0.43) (0.86) (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) (0.86) (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.......... $ 15.18 $ 15.02 $ 14.88 $ 14.37 $ 12.70 $ 14.68
-------- -------- --------- --------- --------- ---------
-------- -------- --------- --------- --------- ---------
Market value, end of period............. $ 13.94 $ 13.63 $ 12.63 $ 12.50 $ 11.25 $ 14.00
-------- -------- --------- --------- --------- ---------
-------- -------- --------- --------- --------- ---------
Total investment return(1).............. 5.49% 15.23% 8.07% 19.85% (12.79)% 5.94%
-------- -------- --------- --------- --------- ---------
-------- -------- --------- --------- --------- ---------
Ratios/Supplemental data:
Net assets, end of period (000's)....... $118,451 $117,213 $117,276 $136,754 $136,562 $157,888
Expenses to average net assets+......... 3.19%** 3.36% 3.13% 3.42% 2.72% 1.79%**
Net investment income to average net
assets................................. 6.81%** 7.13% 7.74% 7.44% 6.82% 6.67%**
Portfolio turnover rate................. 33% 64% 127% 103% 108% 355%
Asset coverage++........................ $3,629 $3,521 $3,261 $4,013 $3,023 $3,110
</TABLE>
- -----------------
* Calculated using average daily shares outstanding for the period
+ These ratios include 2.12%**, 2.25%, 1.93%, 2.50%, 1.82% and 0.91%** related
to interest expense for the periods ended May 31, 1998, November 30, 1997,
1996, 1995 and 1994, and for the period December 31, 1992 through November
30, 1993, respectively, which represents the cost of leverage to the Trust.
** Annualized
++ 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 (UNAUDITED)
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 asset
management subsidiary of PaineWebber Incorporated, which has over $53 billion in
assets under management as of June 30, 1998. Goldman Sachs Asset 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.
An annual meeting of shareholders of the Trust was held on March 19, 1998. At
the meeting, Margo N. Alexander, Richard Q. Armstrong, E. Garrett Bewkes, Jr.,
Richard R. Burt, Mary C. Farrell, Meyer Feldberg, George W. Gowen, Frederic V.
Malek and Carl W. Schafer, were elected to serve as directors until the next
annual meeting of shareholders, or until their successors are elected and
qualified; and Ernst & Young LLP was ratified as independent auditors for the
Trust for the fiscal year ended November 30, 1998.
PROPOSAL 1
<TABLE>
<CAPTION>
SHARES VOTED
FOR SHARES WITHHOLD AUTHORITY
--------------- -------------------------
<S> <C> <C>
1. To vote for or against the election of:
Margo N. Alexander..................................................................... 7,065,701 66,683
Richard Q. Armstrong................................................................... 7,065,711 66,672
E. Garrett Bewkes, Jr.................................................................. 7,065,837 66,546
Richard R. Burt........................................................................ 7,067,537 64,846
Mary C. Farrell........................................................................ 7,065,837 66,546
Meyer Feldberg......................................................................... 7,065,711 66,672
George W. Gowen........................................................................ 7,067,537 64,846
Frederic V. Malek...................................................................... 7,067,401 64,983
Carl W. Schafer........................................................................ 7,065,711 66,672
</TABLE>
PROPOSAL 2
<TABLE>
<CAPTION>
SHARES VOTED
FOR SHARES WITHHOLD AUTHORITY SHARES VOTED AGAINST
--------------- ------------------------- ---------------------
<S> <C> <C> <C>
2. Ratification of the selection of Ernst & Young LLP as
independent auditors for the fiscal year ending November 30,
1998. 7,060,884 39,299 32,201
</TABLE>
(BROKER NON-VOTES AND ABSTENTIONS ARE INCLUDED WITHIN THE "SHARES WITHHOLD
AUTHORITY" TOTALS.)
DISTRIBUTION POLICY
The Trust's Board of Directors has established a Dividend Reinvestment Plan
(the "Plan") under which all common stockholders 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 of common stock automatically
reinvested in additional shares of common stock, unless such common stockholders
elect to receive cash. Common stockholders who elect to hold their
15
<PAGE>
2002 TARGET TERM TRUST INC.
GENERAL INFORMATION (CONCLUDED) (UNAUDITED)
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. The
ability of such stockholders to participate in the Plan may change if their
shares are transferred into the name of another broker or nominee.
A stockholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and stockholders who have
previously terminated participation in the Plan may rejoin it at any time.
Changes in elections must be made in writing to the Trust's transfer agent and
should include the stockholder's name and address as they appear on that share
certificate or in the transfer agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed an
election by a stockholder to take all subsequent distributions in cash. An
election will be effective only for distributions declared and having a record
date at least ten days after the date on which the election is received.
Additional shares of common stock acquired under the Plan will be purchased in
the open market, on the NYSE, at prices that may be higher or lower than the net
asset value per share of the common stock at the time of the purchase. The
number of shares of common stock purchased with each dividend will be equal to
the result obtained by dividing the amount of the dividend payable to a
particular stockholder by the average price per share (including applicable
brokerage commissions) that the transfer agent was able to obtain in the open
market. The Trust will not issue any new shares of common stock in connection
with the Plan. There is no charge to participants for reinvesting dividends or
other distributions. The transfer agent's fees for handling the reinvestment of
distributions will be paid by the Trust. However, each participant pays a pro
rata share of brokerage commissions incurred with respect to the transfer
agent's open market purchases of common stock in connection with the
reinvestment of distributions. The automatic reinvestment of dividends and other
distributions in shares of common stock does not relieve participants of any
income tax that may be payable on such distributions. See "Tax Information."
Additional information regarding the Plan may be obtained from, and all
correspondence concerning the Plan should be directed to, the transfer agent at
PNC Bank, National Association, c/o PFPC Inc., P.O. Box 8950, Wilmington,
Delaware 19899.
16
<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 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 THE USE IN
THE PURCHASE OR SALE OF SHARES OF THE TRUST OR OF ANY SECURITIES MENTIONED IN
THIS REPORT.
<PAGE>
SEMIANNUAL REPORT
PAINEWEBBER
- -copyright- 1998 PaineWebber Incorporated
Member SIPC
2002 TARGET
TERM TRUST INC.
MAY 31, 1998
