<PAGE>
2002 TARGET TERM TRUST INC. ANNUAL REPORT
January 15, 1998
Dear Shareholder,
We are pleased to present you with the annual report for 2002 Target Term Trust
Inc. for the year ended November 30, 1997.
- --------------------------------------------------------------------------------
2002 TARGET TERM TRUST INC.
FUND PROFILE
[GRAPHIC] GOAL: To return $15 per share to investors on or about 11/30/02,
while providing high monthly income
[GRAPHIC] PORTFOLIO MANAGER/SUB-ADVISER: Sharmin Mossavar-Rahmani, Goldman
Sachs Asset Management LP
[GRAPHIC] TOTAL NET ASSETS:
$117 million
(as of 11/30/97)
[GRAPHIC] DIVIDEND PAYMENTS:
Monthly
- --------------------------------------------------------------------------------
GENERAL MARKET OVERVIEW
- --------------------------------------------------------------------------------
[GRAPHIC] 1997 was a particularly good year for bond investors. Defying the
experts who worried about the economy's high utilization rates and the possible
effect on inflation, economic growth rose at a robust 3.5% rate, unemployment
fell to 4.7%, wages rose only slightly and the annual inflation rate closed out
the year at 1.7%. Fixed income investors shrugged off inflation warnings and
bought bonds; the Lehman Brothers Aggregate Bond Index returned 7.6% in the year
ended November 30, 1997. The benchmark 30-year Treasury bond's yield fell from
over 6.4% to just over 6.0% during the same time frame.
While stable inflation created market conditions ripe for a bond rally,
several technical factors also helped support prices. U.S. stock investors
experienced the first stall in a two and a half year bull run that started in
1995--money began trickling back into bond funds last year at about three times
the rate of the year before. And, overshadowing all these events, the economic
crisis in Asia prompted many individuals to buy Treasury bonds.
Most of the bond market advances were in longer-term bonds. Due to
expectations for Asia-related interest rate volatility, short-term rates did not
fall to the same degree as long-term rates (the yield curve FLATTENED, in market
parlance).
PORTFOLIO REVIEW
- --------------------------------------------------------------------------------
[GRAPHIC] PERFORMANCE -- For the 12 months ended November 30, 1997, the Trust
achieved a total return of 6.99% based on its net asset value (NAV) and 15.23%
based on the market value on November 30, 1997. As of November 30, 1997, the
Trust's net asset value per share was $15.02, while its share price on the New
York Stock Exchange was $13.63. During the 12-month period ended November 30,
1997, the Trust paid dividends totaling $0.86 per share.
During the 12-month period covered by this report, 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 5.68%.
PORTFOLIO HIGHLIGHTS -- As of November 30, 1997, Collateralized Mortgage
Obligations (CMOs) accounted for 62.1% of the portfolio, slightly less than
the 66.4% allocated to these securities 12 months ago. The modest reduction in
1
<PAGE>
ANNUAL REPORT
exposure to the sector reflects, in part, the richening of CMOs over the
period. (Mortgage spreads--the difference between mortgage and Treasury
yields--tightened during 1997 in response to low interest rate volatility and
broad investor sponsorship.) Holdings in the CMO sector were concentrated in
floaters and short-intermediate bonds, which we believe offer attractive cash
flow stability.
The Trust held a 15.8% position in adjustable rate collateralized mortgage
securities (ARMs), an increase in the portfolio's allocation of 14.9% on
November 30, 1996. As mentioned above, the ARM market benefited from favorable
interest rate dynamics throughout most of the year. As a result, the pace of
mortgage refinancing remained subdued, and there appeared to be little risk that
these securities would be constrained by their periodic or lifetime rate caps.
(Periodic rate caps are the maximum rate to which ARMs can reset during a
specified period. Lifetime caps establish the maximum rate to which a security
can reset during its entire lifetime.) These ARM-friendly conditions drew a wide
range of investors to the sector, who viewed such securities as yield-enhanced
alternatives to Treasuries.
During the period, we continued to emphasize those ARM securities that we
believed would fare well relative to the overall ARMs market, regardless of the
direction of interest rate movements. These included fully indexed ARMs, as
these securities provide stable current income, and "seasoned" ARMs, which have
lower prepayment risks than recently issued ARMs. "Seasoned" issues are
securities that have been in existence for several years; it is assumed that
homeowners who did not refinance during earlier periods of lower rates are less
likely to refinance in the future.
The portfolio's allocation of agency mortgage pass-through securities was
12.7% as of November 30, 1997, versus 13.3% on November 30, 1996. Pass-through
securities were the beneficiary of substantial investor interest throughout the
period and performed particularly well relative to other sectors of the mortgage
market: as a result of their price appreciation, we have modestly reduced the
portfolio's allocation to the sector in favor of alternatives that are currently
more attractively valued.
Asset-backed securities (ABS) represented 7.4% of the portfolio as of
November 30, 1997. ABS performed well during the period, but heavy issuance
during the second half of the period caused yield spreads to widen and
restrained the sector's relative performance. The portfolio's ABS holdings were
concentrated in credit card, auto receivable and home equity structures offering
attractive spreads and favorable convexity characteristics.
2
<PAGE>
2002 TARGET TERM TRUST INC. ANNUAL REPORT
OUTLOOK
- --------------------------------------------------------------------------------
[GRAPHIC] In general, the Trust's managers believe that the U.S. interest rate
outlook will revolve around a "tug of war" between the "Asian effect" and the
strong domestic economy. In the near term, Asian economic turmoil should help
sustain the benign interest rate environment by dampening growth and restraining
inflation. Longer term, however, we believe the U.S. economy will reaccelerate
and the Federal Reserve will raise interest rates.
With regard to specific sectors in which the Trust invests, our strategy in
the CMO sector should remain constant during 1998: we will look to enhance
portfolio returns through the identification of attractively priced securities
with relatively low sensitivities to prepayment uncertainty. Within the ARM
sector, we will continue to emphasize seasoned ARMs, which are attractive
because of their greater prepayment stability and reduced cap risk. Mortgage
pass-through spreads will likely remain directional, widening in market rallies
and tightening in market sell-offs. However, we believe the risk is asymmetrical
given that mortgage spreads will probably not revert to their previously tight
levels as long as prepayment risk remains an issue, volatility remains high and
swap spreads remain wide. Finally, we are constructive on the ABS sector over
the next several months given that valuations are at their most attractive
levels in the past three years. We will focus on those issues offering strong
credit protection and cash flow stability.
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 Asset Management L.P.
This letter is intended to help shareowners understand how the Trust performed
during the past year, and reflects our 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.
3
<PAGE>
2002 TARGET TERM TRUST INC.
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1997
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY
(000) DATES INTEREST RATES VALUE
- ------------- -------------------- -------- -------------
<C> <S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--7.89%
$ 4,850 GNMA.......................... 10/15/22 to 10/15/23 7.000% $ 4,877,157
4,185 GNMA.......................... 01/15/23 to 07/15/23 7.500 4,279,560
81 GNMA.......................... 09/15/18 9.000 86,955
-------------
Total Government National Mortgage Association
Certificates (cost--$9,020,787)............. 9,243,672
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES--4.65%
1,874+ FHLMC......................... 12/01/13 6.000 1,829,064
3,497+ FHLMC ARM..................... 08/01/19 7.656 3,619,544
-------------
Total Federal Home Loan Mortgage Corporation
Certificates (cost--$5,439,004)............. 5,448,608
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--5.18%
2,844+ FNMA ARM...................... 11/01/26 6.009 2,835,505
3,122+ FNMA ARM...................... 08/01/22 7.680 3,242,508
-------------
Total Federal National Mortgage Association
Certificates (cost--$6,073,879)............. 6,078,013
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS--79.26%
5,750 FHLMC Series 164, Classes B2,
B3, B9 & B11................ 07/15/21 9.500 6,205,499
2,448+ FHLMC Series 1629, Class QC... 12/15/23 10.000* 2,259,610
3,942+ FHLMC Series 1645, Class B.... 01/15/08 5.500 3,725,323
1,000 FNMA Series 1993-138, Class
FM.......................... 12/25/21 5.330* 986,660
462 FNMA Series 1993-138, Class
SM.......................... 12/25/21 9.035* 457,302
3,398+ FNMA Series 1993-226, Class
A........................... 07/25/23 6.000 3,222,791
2,547+ FNMA Series 1994-11, Class
B........................... 06/25/18 4.625 2,430,855
2,240+ FNMA REMIC, Series 1988-12,
Class A..................... 02/25/18 10.000 2,374,461
5,955 CMC Securities Corporation,
Series 1992-A, Class A12.... 10/25/22 7.400 5,971,016
6,084 CMC Securities Corporation,
Series 1992-B, Class B11.... 11/25/23 7.375 6,071,650
4,771+ CMC Securities Corporation,
Series 1993-C, Class C3..... 04/25/08 9.552 5,011,187
11,377+ CMC Securities Corporation,
Series 1993-E, Class S10.... 11/25/08 6.500 11,195,945
967 Citicorp Mortgage Securities
Incorporated, Series 1994-6,
Class A4.................... 03/25/09 5.750 915,933
6,983 Collateralized Mortgage
Obligation Trust, Series 64,
Class Z..................... 11/20/20 9.000 7,615,682
6,439+ Countrywide Mortgage Backed
Securities Incorporated,
Series 1994-C, Class A9..... 03/25/24 6.500 6,222,284
10,964 First Boston Mortgage
Securities Corporation,
Series 1993-1A, Class 1A.... 04/25/06 7.400 11,073,178
6,308+ Housing Securities
Incorporated, Series 1994-1,
Class A13................... 03/25/09 6.500 6,149,846
1,056 Prudential Home Mortgage
Securities Corporation,
Series 1992-42, Class A2.... 01/25/08 6.250 1,052,949
3,896 Prudential Home Mortgage
Securities Corporation,
Series 1993-38, Class A4.... 09/25/23 9.550 4,149,071
3,846 Securitized Asset Sales
Incorporated, Series 1994-5,
Class AM.................... 07/25/24 7.000 3,833,529
360 Structured Asset Securities
Corporation, Series 1993-C1,
Class A1A................... 10/25/24 6.600 358,150
1,627 Structured Asset Securities
Corporation, Series 1995-3A,
Class 1A1................... 01/28/24 7.000 1,623,886
-------------
Total Collateralized Mortgage Obligations
(cost--$89,794,806)......................... 92,906,807
-------------
ADJUSTABLE RATE COLLATERALIZED MORTGAGE OBLIGATIONS*--22.04%
4,931 Countrywide Funding
Corporation, Series 1993-10,
Class A9.................... 01/25/24 6.688 4,983,401
4,679 Countrywide Mortgage Backed
Securities Incorporated,
Series 1994-B, Class A7..... 02/25/09 6.588 4,728,424
2,377 Housing Securities
Incorporated, Series 1992-5,
Class A..................... 06/15/22 7.652 2,444,172
3,878 Residential Funding Mortgage
Securities Incorporated,
Series 1994-S1, Class A13... 01/25/21 6.888 3,974,733
2,900 Resolution Trust Corporation,
Series 1992-16, Class A4.... 08/25/22 6.472 2,929,122
1,833 Ryland Mortgage Securities
Corporation, Series 1, Class
A2.......................... 08/25/23 7.716 1,849,211
949 Ryland Mortgage Securities
Corporation, Series 1991-17,
Class A1.................... 10/25/21 7.080 948,219
</TABLE>
4
<PAGE>
2002 TARGET TERM TRUST INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY
(000) DATES INTEREST RATES VALUE
- ------------- -------------------- -------- -------------
<C> <S> <C> <C> <C>
ADJUSTABLE RATE COLLATERALIZED MORTGAGE OBLIGATIONS* (CONCLUDED)
$ 3,858 Salomon Brothers Mortgage
Securities VII, Series
1994-20, Class A............ 08/01/24 8.152% $ 3,973,563
-------------
Total Adjustable Rate Collateralized Mortgage
Obligations (cost--$25,703,857)............. 25,830,845
-------------
STRIPPED COLLATERALIZED MORTGAGE OBLIGATIONS--7.19%
44 FNMA REMIC Trust, Series
1991-G-15, Class S***....... 06/25/21 27.244(1) 840,965
2,664 FNMA REMIC Trust, Series
1991-G-35, Class N**........ 10/25/21 7.557(1) 2,104,864
18 FNMA REMIC Trust, Series
1992-G-44, Class GA***...... 05/25/03 14.600(1) 478,361
8,273 FNMA REMIC Trust, Series
1993-101, Class A***........ 06/25/08 7.000 734,219
2,932+ FNMA REMIC, Series 151, Class
2***........................ 07/25/22 9.500 813,738
9 Structured Asset Securities
Corporation, Series 1992-M1,
Class A3***................. 11/25/07 11.000(1) 2,929,385
9 Structured Asset Securities
Corporation, Series 1992-M1,
Class A4***................. 11/25/07 11.000(1) 521,856
-------------
Total Stripped Collateralized Mortgage
Obligations (cost--$8,471,280).............. 8,423,388
-------------
ASSET BACKED SECURITIES--10.26%
5,550 Discover Card Master Trust I,
Series 1996-4, Class A...... 10/16/13 6.000* 5,622,871
1,205 Fasco Grantor Trust........... 11/15/01 6.650 1,210,588
2,108 Mid-State Trust IV, Series 4,
Class A..................... 04/01/30 8.330 2,277,067
2,916 Salomon Brothers Mortgage
Securities VII, Series
1996-3, Class 1A2........... 06/25/26 5.688 2,922,580
-------------
Total Asset Backed Securities
(cost--$11,892,719)......................... 12,033,106
-------------
REPURCHASE AGREEMENT--2.63%
3,080 Repurchase Agreement dated
11/28/97, with Lehman
Brothers Incorporated,
collateralized by $3,039,033
Government National Mortgage
Association Certificates,
8.000% due 10/20/25
(value-$3,141,600),
proceeds: $3,081,463
(cost--$3,080,000).......... 12/01/97 5.700 3,080,000
-------------
Total Investments (cost--$159,476,332)--139.10%........................................ 163,044,439
Liabilities in excess of other assets--(39.10)%........................................ (45,831,372)
-------------
Net Assets--100.00%.................................................................... $ 117,213,067
-------------
-------------
</TABLE>
- -----------------
ARM Adjustable Rate Mortgage Security--The interest rate shown is the current
rate as of November 30, 1997.
REMIC Real Estate Mortgage Investment Conduit
* Floating Rate Securities. The interest rate shown is the current rate as
of November 30, 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 December
1, 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 IN EXCHANGE APPRECIATION
CONTRACTS CONTRACTS TO DELIVER FOR EXPIRATION DATE (DEPRECIATION)
- ------------- ------------------------------ ------------ ----------------- -------------
<C> <S> <C> <C> <C>
115 10 year United States Treasury
Notes....................... $12,823,461 Mar 98 $ 15,336
121 30 year United States Treasury
Bonds....................... $14,352,860 Mar 98 (49,921)
106 90 day Eurodollars............ $24,821,168 Dec 97 to Mar 99 (104,395)
-------------
(138,980)
-------------
<CAPTION>
CONTRACT TO RECEIVE
------------------------------
<C> <S> <C> <C> <C>
706 5 year United States Treasury
Notes....................... $76,451,571 Mar 98 (137,383)
-------------
$ (276,363)
-------------
-------------
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value
(cost--$159,476,332).................. $163,044,439
Receivable for investments sold......... 4,314
Interest receivable..................... 1,147,268
Deferred organizational expenses........ 3,771
Other assets............................ 8,568
------------
Total assets............................ 164,208,360
------------
LIABILITIES
Payable for reverse repurchase
agreements............................ 46,500,000
Payable for interest on reverse
repurchase agreements................. 194,936
Payable to investment adviser and
administrator......................... 67,776
Variation margin payable................ 62,683
Payable to custodian.................... 30,197
Accrued expenses and other
liabilities........................... 139,701
------------
Total liabilities....................... 46,995,293
------------
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..... 5,252,965
Accumulated net realized losses from
investments and futures
transactions.......................... (5,219,243)
Net unrealized appreciation of
investments and futures............... 3,291,744
------------
Net assets.............................. $117,213,067
------------
------------
Net asset value per share............... $15.02
------------
------------
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
NOVEMBER 30,
1997
------------
<S> <C>
INVESTMENT INCOME:
Interest................................ $12,100,958
------------
EXPENSES:
Interest expense........................ 2,599,240
Investment advisory and
administration........................ 807,235
Legal and audit......................... 96,637
Reports and notices to shareholders..... 88,324
Excise tax.............................. 86,538
Custody and accounting.................. 70,902
Amortization of organizational
expenses.............................. 45,000
Transfer agency and service fees........ 24,715
Directors' fees......................... 10,500
Other expenses.......................... 43,293
------------
3,872,384
------------
Net investment income................... 8,228,574
------------
REALIZED AND UNREALIZED GAINS (LOSSES)
FROM INVESTMENT ACTIVITIES:
Net realized gains (losses) from:
Investment transactions............. 1,651,775
Futures transactions................ (407,311)
Net change in unrealized
appreciation/depreciation of:
Investments......................... (1,199,262)
Futures............................. (583,284)
------------
NET REALIZED AND UNREALIZED LOSS FROM
INVESTMENT ACTIVITIES................. (538,082)
------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS....................... $ 7,690,492
------------
------------
</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,
------------------------------
1997 1996
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income................... $ 8,228,574 $ 9,431,856
Net realized gains from investments and
futures............................... 1,244,464 852,767
Net change in unrealized
appreciation/depreciation of
investments and futures............... (1,782,546) (1,537,200)
------------- -------------
Net increase in net assets resulting
from operations....................... 7,690,492 8,747,423
------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income................... (6,726,756) (7,300,567)
------------- -------------
CAPITAL STOCK TRANSACTIONS:
Cost of shares repurchased.............. (1,027,037) (20,924,583)
------------- -------------
Net decrease in net assets.............. (63,301) (19,477,727)
NET ASSETS:
Beginning of year....................... 117,276,368 136,754,095
------------- -------------
End of year (including undistributed net
investment income of $5,252,965 and
$3,664,609, respectively)............. $117,213,067 $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 YEAR
ENDED
NOVEMBER 30,
1997
--------------
<S> <C>
CASH FLOWS PROVIDED FROM OPERATING
ACTIVITIES:
Interest received....................... $ 13,603,055
Operating expenses paid................. (1,097,949)
Interest paid........................... (2,609,113)
Sale of short-term portfolio
investments, net...................... 561,000
Purchase of long-term portfolio
investments........................... (121,464,508)
Sale of long-term portfolio
investments........................... 119,087,284
Variation margin paid on futures
contracts............................. (890,149)
--------------
Net cash provided from operating
activities............................ 7,189,620
--------------
CASH FLOWS USED FOR FINANCING
ACTIVITIES:
Dividends paid to shareholders.......... (6,726,756)
Capital stock repurchased............... (1,112,864)
Increase in reverse repurchase
agreements............................ 650,000
--------------
Net cash used for financing
activities............................ (7,189,620)
--------------
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....................... $ 7,690,492
--------------
Decrease in investments, at value....... 10,299,768
Decrease in receivable for investments
sold.................................. 7,174,365
Decrease in interest receivable......... 81,900
Decrease in variation margin
receivable............................ 37,763
Decrease in other assets................ 17,126
Decrease in payable for investments
purchased............................. (18,322,673)
Amortization of organizational
expenses.............................. 45,000
Decrease in payable for interest on
reverse repurchase agreements......... (9,873)
Increase in payable to investment
adviser and administrator............. 602
Increase in variation margin payable.... 62,683
Increase in accrued expenses & other
liabilities........................... 112,467
--------------
(500,872)
--------------
Net cash provided from operating
activities............................ $ 7,189,620
--------------
--------------
</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 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
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, 1997 was $44,962,500 at a weighted average
interest rate of 5.65%. The maximum amount of reverse repurchase agreements
outstanding at any month-end during the year ended November 30, 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 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
INVESTMENTS IN SECURITIES
For federal income tax purposes, the cost of securities owned at November 30,
1997, was substantially the same as the cost of securities for financial
statement purposes.
At November 30, 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).......................................... $4,160,175
Gross depreciation (from investments having an excess of
cost over value).......................................... (592,068)
----------
Net unrealized appreciation of investments.................. $3,568,107
----------
----------
</TABLE>
For the year ended November 30, 1997, total aggregate purchases and sales of
portfolio securities excluding short-term securities, were $103,141,835 and
$111,912,919, 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.
To reflect reclassifications arising from permanent "book/tax" differences for
the year ended November 30, 1997, undistributed net investment income was
increased by $86,538 and capital stock was decreased by $86,538.
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 November 30, 1997, Mitchell Hutchins
owned 7,661 shares.
For the year ended November 30, 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.
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% per share. At November 30, 1997, 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
31, 1992
(COMMENCEMENT
OF
FOR THE YEARS ENDED OPERATIONS)
NOVEMBER 30, TO
-------------------------------------------- NOVEMBER
1997 1996 1995 1994 30, 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................... 1.06 1.13* 1.02* 0.93 0.89
Net realized and unrealized gains
(losses) from investments and
futures................................ (0.08) (0.05)* 1.36* (1.90) 0.68
-------- --------- --------- --------- ---------
Net increase (decrease) in net asset
value resulting from
investment operations.................. 0.98 1.08 2.38 (0.97) 1.57
-------- --------- --------- --------- ---------
Dividends from net investment income.... (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........................... (0.86) (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.......... $ 15.02 $ 14.88 $ 14.37 $ 12.70 $ 14.68
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Market value, end of period............. $ 13.63 $ 12.63 $ 12.50 $ 11.25 $ 14.00
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Total investment return(1).............. 15.23% 8.07% 19.85% (12.79)% 5.94%
-------- --------- --------- --------- ---------
-------- --------- --------- --------- ---------
Ratios/Supplemental data:
Net assets, end of period (000's)....... $117,213 $117,276 $136,754 $136,562 $157,888
Expenses to average net assets+......... 3.36% 3.13% 3.42% 2.72% 1.79%**
Net investment income to average net
assets................................. 7.13% 7.74% 7.44% 6.82% 6.67%**
Portfolio turnover rate................. 64% 127% 103% 108% 355%
Asset coverage++........................ $3,521 $3,261 $4,013 $3,023 $3,110
</TABLE>
- -----------------
* Calculated using average daily shares outstanding for the period
** Annualized
+ These ratios include 2.25%, 1.93%, 2.50%, 1.82% and 0.91% related to interest
expense for the periods ended November 30, 1997, 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.
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, 1997, 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 and financial highlights. Our procedures included confirmation of
securities owned as of November 30, 1997, 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, 1997, 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.
[ERNST & YOUNG SIGNATURE]
New York, New York
January 23, 1998
15
<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, 1997), 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 1997. 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 1998. Shareholders are advised to consult their own tax
advisers with respect to the tax consequences of their investment in the Trust.
16
<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 asset
management subsidiary of PaineWebber Incorporated, which has over $47 billion in
assets under management as of December 31, 1997. 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 27, 1997. 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, 1997.
PROPOSAL 1
<TABLE>
<CAPTION>
SHARES FOR SHARES WITHHOLD
VOTED AUTHORITY
--------------- ------------------------
<S> <C> <C>
1. To vote for or against the election of:
Margo N. Alexander 7,247,050 104,072
Richard Q. Armstrong 7,269,564 81,558
E. Garrett Bewkes, Jr. 7,261,008 90,114
Richard Burt 7,253,144 97,978
Mary C. Farrell 7,265,754 85,368
Meyer Feldberg 7,267,437 83,685
George W. Gowen 7,247,683 103,439
Frederic V. Malek 7,269,560 81,562
Carl W. Schafer 7,260,867 90,255
</TABLE>
PROPOSAL 2
<TABLE>
<CAPTION>
SHARES FOR
VOTED SHARES WITHHOLD AUTHORITY SHARES AGAINST
--------------- ------------------------- ---------------
<S> <C> <C> <C>
2. Ratification of the selection of Ernst & Young LLP
as independent auditors for the fiscal year ending
November 30, 1997. 7,266,754 70,405 13,964
</TABLE>
(BROKER NON-VOTES AND ABSTENTIONS ARE INCLUDED WITHIN THE "SHARES WITHHOLD
AUTHORITY" TOTALS.)
17
<PAGE>
2002 TARGET TERM TRUST INC.
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 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.
18
<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.
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, 1997
----------------------------------------
2002 TARGET
TERM TRUST INC.
ANNUAL REPORT
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- -C-1998 PaineWebber Incorporated
Member SIPC
