<PAGE>
2002 TARGET TERM TRUST INC. SEMIANNUAL REPORT
July 15, 1999
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, 1999.
MARKET REVIEW
- -------------------------------------------------------------------------------
[GRAPHIC]
The bond markets went through a two-phase sell-off during the six-month
period ended May 31, 1999. In January, Brazil was forced to devalue its
currency. This devaluation, while bad news for Brazil, did not cause
worldwide problems, as did Russia's devaluation in August 1998. The highly
leveraged investments that destabilized the markets last August were gone by
January 1999 and the sell-off was confined largely to Brazil. The contained
response suggested that other countries' economies and financial markets had
bottomed and might start to recover. At the same time, the consensus forecast
of 1999 U.S. economic growth rose significantly, from 2% at year-end 1998 to
3.5% in January 1999, a portent of higher interest rates. Taking these events
together, investors became bearish on bonds, leading to phase one of the
sell-off in February.
Phase two came in late April, when the markets began operating in post-crisis
mode. Oil prices filtered through the consumer price index to remind
investors that global economic improvement could have inflationary
consequences for commodities. The commodity deflation and U.S. dollar
strength that resulted from the Asian crisis had moderated wage increases in
the United States, even though labor was in short supply. Investors had come
to fear that low unemployment without the offsetting commodity deflation
would result in higher wage increases.
The dominant theme driving bond yields changed from deflation contagion to a
reassessment of inflation risk. The Federal Reserve announced a bias toward
raising short-term interest rates, citing the rapid growth of domestic
demand, reduced global risk and few apparent offsets to inflation. Investors
took this to mean that the Federal Reserve might raise rates at its June
29-30 Open Market Committee, and bond yields rose in response. The yield on
the 30-year U.S. Treasury bond rose from 5.07% at the beginning of the period
to 5.82% at period-end. The Federal Reserve did in fact raise interest rates
by a quarter-point on June 30, 1999 and adopted a neutral stance on
short-term interest rates. Investors reacted positively, as they interpreted
this announcement to mean the Fed was not planning to raise rates at its
meeting in August.
As the period commenced, yield premiums to Treasurys stood historically high
among the "spread sectors"--corporate, asset-backed and mortgage-backed
securities that pay higher yields to compensate for their higher risk. The
spread sectors rebounded strongly in the period despite near-record levels of
issuance. Toward the end of the period spreads widened again in response to:
- - Profit-taking in the corporate and mortgage sectors.
- - Heavy net issuance of corporates, asset-backed securities, commercial
mortgage-backed securities and high-yield bonds.
- - Fears that an aggressive series of Fed rate increases would disrupt the
stock market and cause a "hard landing" of the economy.
[SIDBAR]
2002 Target Term
Trust Inc.
TRUST PROFILE
[GRAPHIC] GOAL: Return $15 per share to investors on or about 11/30/02, while
providing high monthly income
[GRAPHIC] PORTFOLIO MANAGER/SUBADVISER: Sharmin Mossavar-Rahmani, Goldman
Sachs Funds Management, L.P.
[GRAPHIC] TOTAL NET ASSETS: $114.6 million as of May 31, 1999
[GRAPHIC] DIVIDEND PAYMENTS: Monthly
1
<PAGE>
SEMIANNUAL REPORT
[SIDEBAR]
2002 TARGET
TERM TRUST, INC.
Sector Allocation*
[PIE CHART]
CMOs 58.1%
ARMs 10.4%
Mortgage Pass-Throughs 23.3%
ABS 3.0%
Repurchase Agreements 5.2%
OUTLOOK
Outside the United States, most countries must solve structural economic
problems before they can hit their full stride. Until they can do so, the
global economy is likely to improve but grow below trend. That said, global
growth and rising commodity prices represent risks to the bond markets. If
inflation rises, then current historically low inflation-risk premiums could
also rise. Productivity growth in the U.S. has reduced inflation for the last
few years, but may not be able to counter rising wage pressures in the
future.
In light of our view, we expect the following over the next six months:
- - Market rates to stay in a trading range, with the long bond yielding
5.75-6.25%.
- - The Federal Reserve to raise the short-term interest rate a total of 50
basis points (a basis point equals 1/100th of one percent)--this increase
appears to be discounted in the market already.
- - Corporate bond spreads to tighten, based on the strong economy and
improved corporate profits.
- - Spread sectors to outperform Treasurys in a range-bound interest-rate
environment.
PORTFOLIO REVIEW
- -------------------------------------------------------------------------------
[GRAPHIC]
PERFORMANCE
For the six-month period ended May 31, 1999, the Trust (NYSE: TTR) lost 0.48%
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 gained 3.93% based on changes in its share price on the New York
Stock Exchange (assuming dividends were reinvested under the Dividend
Reinvestment Plan). The benchmark (a U.S. Treasury note maturing on August
15, 2002, with a coupon of 6.375%) lost 0.34% for the same period.
On May 31, 1999, the Trust's net asset value per share was $14.69, while its
share price on the New York Stock Exchange was $14.25. During the six-month
period the Trust paid dividends from net investment income totaling $0.43 per
share. Based on the dividend paid in May and the Fund's market price on May
31, 1999, the Trust's six-month market yield was 3.93%.
HIGHLIGHTS
The Trust seeks to add incremental return through sector allocation and
security selection primarily within the mortgage market. During the reporting
period, mortgage-backed securities performed well, rebounding strongly in the
wake of last year's liquidity crisis. The recovery in mortgages followed
gradual stabilization of the global markets and a decline in prepayment risks
as Treasury yields rose.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) -- CMOs represented 58.1% of the
portfolio as of May 31, 1999,* versus 59.2% of the portfolio as of November
30, 1998. Because of their structural advantages and incremental yields,
these securities continued to make up the largest portion of the Trust's
holdings.
MORTGAGE PASS-THROUGH SECURITIES -- The Trust's position in mortgage
pass-through securities increased during the six-month reporting period.
Pass-through holdings accounted for 23.3% of the portfolio as of May 31,
1999, versus 21.6% on November 30, 1998.
ADJUSTABLE RATE MORTGAGE SECURITIES (ARMs) -- The Trust's allocation to ARMs
decreased slightly during the reporting period. As of May 31, 1999, 10.4% of
the Trust was invested in ARM securities, compared to 13.4% on November 30,
1998.
*Weightings represent percentages of portfolio assets as of May 31, 1999. The
Trust's portfolio is actively managed and its composition will vary over time.
2
<PAGE>
2002 TARGET TERM TRUST INC. SEMIANNUAL REPORT
GOING FORWARD
CMOs -- Although spreads across the mortgage market widened toward the end of
the reporting period, the CMO sector performed relatively better than many of
its counterparts. Given recent cheapening, we are currently optimistic
regarding this sector's prospects for spread tightening over the next two to
three months.
MORTGAGE PASS-THROUGHS -- In general, mortgage pass-throughs ended the
reporting period on a down note. Discount coupon issues underperformed in
response to over-lengthening durations. Premium-coupon issues benefited from
slower prepayments and diminished supply. Performance was not as strong as
expected, however, given the magnitude of the sell-off in the Treasury
market. We continue to have a positive outlook for this sector.
ARMs -- We anticipate maintaining our emphasis on fully indexed, seasoned
issues within the ARM market. The relatively stable cash flow profile of
these securities could become increasingly valuable as interest rates rise.
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
REVIEW on 2002 Target Term Trust Inc. or a fund in the PaineWebber Family of
Funds,(1) please contact your Financial Advisor.
Sincerely,
/s/ Margo Alexander /s/ Brian M. Storms
MARGO ALEXANDER BRIAN M. STORMS
Chairman and Chief Executive Officer President and Chief Operating Officer
Mitchell Hutchins Mitchell Hutchins
Asset Management Inc. Asset Management Inc.
/s/ Sharmin Mossavar-Rahmani
SHARMIN MOSSAVAR-RAHMANI
Chief Investment Officer,
Domestic Fixed Income
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, 1999, and reflects our
views at the time of its writing. Of course, these views may change in
response to changing circumstances. We encourage you to consult your
Financial Advisor 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, 1999(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
- ------------- -------------------- ----------------- -------------
<C> <S> <C> <C> <C>
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--21.30%
$ 15,846+ GNMA.............................................. 01/15/24 to 02/15/29 6.500% $ 15,472,834
8,056+ GNMA.............................................. 10/15/22 to 12/15/23 7.000 8,085,874
799 GNMA.............................................. 01/15/10 to 07/15/12 8.500 837,294
7 GNMA.............................................. 09/15/18 9.000 7,196
-------------
Total Government National Mortgage Association Certificates
(cost--$24,825,571).............................................. 24,403,198
-------------
FEDERAL HOME LOAN MORTGAGE CORPORATION CERTIFICATES--10.29%
1,483+ FHLMC............................................. 12/01/13 6.000 1,428,608
2,794 FHLMC............................................. 09/01/28 to 04/01/29 7.000 2,801,855
316 FHLMC............................................. 08/01/27 7.500 322,777
2,315+ FHLMC ARM......................................... 08/01/19 6.924 2,360,205
5,000 FHLMC TBA......................................... TBA 6.000 4,882,031
-------------
Total Federal Home Loan Mortgage Corporation Certificates
(cost--$11,931,289).............................................. 11,795,476
-------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION CERTIFICATES--8.94%
2,252+ FNMA ARM.......................................... 11/01/26 5.905 2,245,399
2,566+ FNMA ARM.......................................... 01/01/25 6.160 2,610,683
1,870+ FNMA ARM.......................................... 08/01/22 7.060 1,923,705
3,355+ FNMA ARM.......................................... 01/01/21 7.115 3,464,995
-------------
Total Federal National Mortgage Association Certificates
(cost--$10,335,391).............................................. 10,244,782
-------------
COLLATERALIZED MORTGAGE OBLIGATIONS--69.81%
2,100 FHLMC Series 164, Class B2, B3, B9 & B11.......... 07/15/21 9.500 2,322,950
1,528 FNMA REMIC, Series 1988-12, Class A............... 02/25/18 10.000 1,650,080
462 FNMA Series 1993-138, Class SM.................... 12/25/21 10.942* 478,761
716+ FNMA Series 1994-11, Class B...................... 06/25/18 4.625 705,401
3,390 FNMA Series 1997-67, Class VX..................... 02/25/23 7.000 3,403,657
946 Citicorp Mortgage Securities Incorporated, Series
1994-6, Class A4................................ 03/01/09 5.750 905,948
2,287 CMC Securities Corporation, Series 1992-A, Class
A12............................................. 10/25/22 7.400 2,309,044
2,554 CMC Securities Corporation, Series 1992-B, Class
B11............................................. 11/25/23 7.375 2,543,448
2,311 CMC Securities Corporation, Series 1993-C, Class
C3.............................................. 04/25/08 9.552 2,377,543
10,958 CMC Securities Corporation, Series 1993-E, Class
S10............................................. 11/25/08 6.500 10,762,317
5,991 Collateralized Mortgage Obligation Trust, Series
64, Class Z..................................... 11/20/20 9.000 6,177,284
5,781 Countrywide Funding Corporation, Series 1993-2,
Class A5A....................................... 10/25/08 6.500 5,689,645
4,931 Countrywide Funding Corporation, Series 1993-10,
Class A9........................................ 01/25/24 5.938* 4,955,393
4,679 Countrywide Mortgage Backed Securities
Incorporated, Series 1994-B, Class A7........... 02/25/09 5.838* 4,707,136
10,849 First Boston Mortgage Securities Corporation,
Series 1993-1A, Class 1A........................ 04/25/06 7.402* 10,886,466
1,185 Housing Securities Incorporated, Series 1992-5,
Class A......................................... 06/15/22 6.870* 1,191,437
6,308 Housing Securities Incorporated, Series 1994-1,
Class A13....................................... 03/25/09 6.500 5,889,534
1,000 Residential Accredit Loans Incorporated........... 09/25/26 8.000 1,025,424
2,748 Residential Asset Securitization Trust, Series
1996-A8, Class A4............................... 12/25/26 8.000 2,794,974
3,878 Residential Funding Mortgage Securities
Incorporated Mortgage, Series 1994-S1, Class
A13............................................. 01/25/21 6.138* 3,928,040
3,763 Securitized Asset Sales Incorporated, Series
1994-5, Class AM................................ 07/25/24 7.000 3,735,872
1,561 Structured Asset Securities Corporation, Series
1995-3A, Class 1A1.............................. 01/28/24 7.000 1,552,550
-------------
Total Collateralized Mortgage Obligations (cost--$79,542,792)...... 79,992,904
-------------
</TABLE>
4
<PAGE>
2002 TARGET TERM TRUST INC.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT MATURITY INTEREST
(000) DATES RATES VALUE
- ------------- -------------------- ----------------- -------------
<C> <S> <C> <C> <C>
ADJUSTABLE RATE COLLATERALIZED MORTGAGE OBLIGATIONS*--2.23%
$ 575 Ryland Mortgage Securities Corporation, Series 1,
Class A2........................................ 08/25/23 7.065% $ 573,011
1,973 Salomon Brothers Mortgage Securities VII, Series
1994-20, Class A................................ 08/01/24 7.957 1,988,164
-------------
Total Adjustable Rate Collateralized Mortgage Obligations
(cost--$2,592,046)............................................... 2,561,175
-------------
STRIPPED COLLATERALIZED MORTGAGE OBLIGATIONS--3.91%
24 FNMA REMIC Trust, Series 1991-G-15, Class S***.... 06/25/21 27.244(1) 413,867
1,429 FNMA REMIC Trust, Series 1991-G-35, Class N**..... 10/25/21 7.557(1) 1,152,674
14 FNMA REMIC Trust, Series 1992-G-44, Class GA***... 05/25/03 14.600(1) 157,265
3,301 FNMA REMIC Trust, Series 1993-101, Class A***..... 06/25/08 7.000 175,781
1,664 FNMA REMIC Trust, Series 151, Class 2***.......... 07/25/22 9.500 463,207
8 Structured Asset Securities Corporation, Series
1992-M1, Class A3***............................ 11/25/07 11.000(1) 1,791,985
8 Structured Asset Securities Corporation, Series
1992-M1, Class A4***............................ 11/25/07 11.000(1) 323,003
-------------
Total Stripped Collateralized Mortgage Obligations
(cost--$5,933,570)............................................... 4,477,782
-------------
ASSET BACKED SECURITIES--3.86%
453 Fasco Grantor Trust............................... 11/15/01 6.650 455,319
1,539 Mid-State Trust IV, Series 4, Class A............. 04/01/30 8.330 1,620,690
2,370 Union Acceptance Corporation, Series 1999-A, Class
A5.............................................. 09/08/06 5.870 2,342,911
-------------
Total Asset Backed Securities (cost--$4,440,055)................... 4,418,920
-------------
REPURCHASE AGREEMENT--6.57%
7,530 Repurchase Agreement dated 5/28/99 with State
Street Bank & Trust Company, collateralized by
$7,690,000 Federal Home Loan Mortgage
Corporation Notes, 5.250% due 2/16/01
(value--$7,757,303) proceeds: $7,534,058
(cost--$7,530,000).............................. 06/01/99 4.850 7,530,000
-------------
Total Investments (cost--$147,130,714)--126.91%.................... 145,424,237
Liabilities in excess of other assets--(26.91)%................... (30,834,229)
-------------
Net Assets--100.00%............................................... $ 114,590,008
-------------
-------------
</TABLE>
- -----------------
ARM Adjustable Rate Mortgage Security--The interest rate shown is the current
rate as of May 31, 1999.
TBA (To Be Assigned) Securities are purchased on a forward commitment basis
with an approximate principal amount (generally +/- 1.0%) and generally
stated maturity date. The actual principal amount and maturity date will be
determined upon settlement when specific mortgage pools are assigned.
REMIC Real Estate Mortgage Investment Conduit.
* Floating Rate Securities. The interest rate shown is the current rate as
of May 31, 1999.
** 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 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 Morgan Stanley Incorporated, maturing June 1,
1999) and/or futures transactions.
(1) Interest rate represents the annualized yield at date of purchase.
See accompanying notes to financial statements
5
<PAGE>
2002 TARGET TERM TRUST INC.
FUTURES CONTRACTS
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION UNREALIZED
CONTRACTS CONTRACT TO RECEIVE IN EXCHANGE FOR DATE DEPRECIATION
- ------------- ------------------------------ --------------- -------------- -------------
<C> <S> <C> <C> <C>
77 5 year United States Treasury
Notes....................... $ 8,391,797 Sept 99 $ (59,441)
-------------
-------------
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1999(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost--$147,130,714).... $145,424,237
Receivable for investments sold............................. 2,324,900
Interest receivable......................................... 1,079,859
Variation margin receivable................................. 4,016
Other assets................................................ 7,469
------------
Total assets................................................ 148,840,481
------------
LIABILITIES
Payable for reverse repurchase agreements................... 26,468,230
Payable for investments purchased........................... 6,924,349
Payable to custodian........................................ 441,975
Payable for interest on reverse repurchase agreements....... 90,670
Payable to investment adviser and administrator............. 68,758
Accrued expenses and other liabilities...................... 256,491
------------
Total liabilities........................................... 34,250,473
------------
NET ASSETS
Capital Stock--$0.001 par value; total authorized
200,000,000 shares; 7,802,867 shares issued and
outstanding............................................... 113,737,358
Undistributed net investment income......................... 7,506,322
Accumulated net realized loss from investments and futures
transactions.............................................. (4,887,754)
Net unrealized appreciation of investments, and futures..... (1,765,918)
------------
Net assets.................................................. $114,590,008
------------
------------
Net asset value per share................................... $14.69
------------
------------
</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, 1999
(UNAUDITED)
------------
<S> <C>
INVESTMENT INCOME:
Interest.................................................... $ 5,566,075
------------
EXPENSES:
Interest expense............................................ 657,264
Investment advisory and administration...................... 409,379
Excise tax.................................................. 99,880
Legal and audit............................................. 49,292
Reports and notices to shareholders......................... 44,220
Custody and accounting...................................... 45,094
Transfer agency............................................. 11,306
Directors' fees............................................. 5,250
Other expenses.............................................. 80,313
------------
1,401,998
------------
Net investment income....................................... 4,164,077
------------
REALIZED AND UNREALIZED GAINS (LOSSES) FROM INVESTMENT
ACTIVITIES:
Net realized gains (losses) from:
Investment transactions................................. 1,373,086
Futures transactions.................................... (1,544,690)
Net change in unrealized appreciation/depreciation of:
Investments............................................. (4,249,895)
Futures................................................. (354,096)
------------
NET REALIZED AND UNREALIZED LOSS FROM INVESTMENT
ACTIVITIES................................................ (4,775,595)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (611,518)
------------
------------
</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
ENDED FOR THE
MAY 31, YEAR ENDED
1999 NOVEMBER 30,
(UNAUDITED) 1998
------------- -------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income................... $ 4,164,077 $ 7,951,914
Net realized gains (losses) from
investments and futures
transactions.......................... (171,604) 574,640
Net change in unrealized
appreciation/(depreciation) of
investments and futures............... (4,603,991) (453,671)
------------- -------------
Net increase (decrease) in net assets
resulting from operations............. (611,518) 8,072,883
------------- -------------
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income................... (3,361,475) (6,722,949)
------------- -------------
Net increase (decrease) in net assets... (3,972,993) 1,349,934
NET ASSETS:
Beginning of period..................... 118,563,001 117,213,067
------------- -------------
End of period (including undistributed
net investment income of $7,506,322
and $6,703,720, respectively)......... $114,590,008 $ 118,563,001
------------- -------------
------------- -------------
</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, 1999
(UNAUDITED)
--------------
<S> <C>
CASH FLOWS PROVIDED FROM OPERATING ACTIVITIES:
Interest received........................................... $ 5,625,789
Operating expenses paid..................................... (727,784)
Interest paid............................................... (697,995)
Sales of short-term portfolio investments, net.............. (3,913,000)
Purchase of long-term portfolio investments, net............ (38,529,951)
Sale of long-term portfolio investments..................... 51,269,916
Variation margin paid on futures contracts.................. (1,590,730)
--------------
Net cash provided from operating activities................. 11,436,245
--------------
CASH FLOWS USED FOR FINANCING ACTIVITIES:
Dividends paid to shareholders.............................. (3,361,475)
Decrease in reverse repurchase agreements................... (8,074,770)
--------------
Net cash used for financing activities...................... (11,436,245)
--------------
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 decrease in net assets resulting from operations........ $ (611,518)
--------------
Decrease in investments, at value........................... 10,872,719
Decrease in receivable for investments sold................. 1,045,042
Decrease in interest receivable............................. 94,262
Decrease in variation margin receivable..................... 308,057
Increase in other assets.................................... (947)
Increase in payable for investments purchased............... 2,833,964
Decrease in security sold short, at value................... (3,082,500)
Decrease in payable for interest on reverse repurchase
agreements................................................ (40,731)
Increase in payable to investment adviser and
administrator............................................. 360
Increase in accrued expenses and other liabilities.......... 17,537
--------------
12,047,763
--------------
Net cash provided from operating activities................. $ 11,436,245
--------------
--------------
</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
under the Investment Company Act of 1940, as amended, as a closed-end
diversified management investment company. The Trust's investment objective is
to manage a portfolio of high quality fixed-income and adjustable-rate
securities in order to return $15.00 per share (the initial public offering
price) to investors on or about November 30, 2002, while providing high monthly
income. The Trust is expected to terminate on or about November 30, 2002.
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, or Goldman Sachs Funds Management, L.P.
("Goldman Sachs"), a limited partnership which is an affiliate of Goldman Sachs
Group, Inc., and sub-advisor 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.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
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, normally do not 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 board. 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, 1999 was $25,970,372 at a weighted average
interest rate of 5.00%.
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.
SHORT SALES "AGAINST THE BOX"--The Trust may engage in short sales of
securities it owns (short sales "against the box"). To make delivery to the
purchaser in a short sale, the executing broker borrows the securities being
sold short on behalf of the Trust, and the Trust is obligated to replace the
securities borrowed at a date in the future. When the Trust sells short, it
establishes a margin account with the broker effecting the short sale, and
deposits collateral with the broker. In addition, the Trust maintains with its
custodian, in a segregated account, the securities that could be used to cover
the short sale. The Trust will incur transaction costs, including interest
expense, in connection with opening, maintaining and closing short sales
"against the box".
The Trust might make a short sale "against the box" in order to hedge against
market risks when Mitchell Hutchins or Goldman Sachs believes that the price of
a security may decline, thereby causing a decline in the value of a security
owned by the Trust. In such case, any loss in the Trust's long position during
the short sale should be reduced by a corresponding gain in the short position.
Conversely, any gain in the long position during the short sale should be
reduced by a corresponding loss in the short position. The extent to which gains
or losses in the long position are reduced will depend upon the amount of the
securities sold short relative to the amount of securities the Trust owns either
directly or indirectly.
DIVIDENDS AND DISTRIBUTIONS--Dividends and distributions are recorded on the
ex-dividend date. The amount of dividends and distributions is 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.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
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. 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 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, 1999,
was substantially the same as the cost of securities for financial statement
purposes.
At May 31, 1999, the components of net unrealized depreciation of investments
were as follows:
<TABLE>
<S> <C>
Gross appreciation (from investments having an excess of
value over cost).......................................... $1,084,050
Gross depreciation (from investments having an excess of
cost over value).......................................... (2,790,527)
----------
Net unrealized depreciation of investments.................. $(1,706,477)
----------
----------
</TABLE>
For the six months ended May 31, 1999, total aggregate purchases and sales of
portfolio securities excluding short-term securities, were $41,363,915 and
$53,601,052, 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.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS(UNAUDITED)
At November 30, 1998, the Trust had a net capital loss carryforward of
$4,421,495. 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 to offset future net realized capital gains as
provided in the regulations, 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, 1999, Mitchell Hutchins owned
8,148 shares.
The Trust did not repurchase any shares of common stock for the six months
ended May 31, 1999.
For the period July 10, 1995 (commencement of repurchase program) through May
31, 1999, 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, 1999, paid-in-capital is net the cost of $37,317,935
of capital stock reacquired.
14
<PAGE>
2002 TARGET TERM TRUST INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each period is
presented below:
<TABLE>
<CAPTION>
FOR THE
SIX
MONTHS
ENDED
MAY 31, FOR THE YEARS ENDED NOVEMBER 30,
1999 ------------------------------------------------------
(UNAUDITED) 1998 1997 1996 1995 1994
-------- -------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 15.19 $ 15.02 $ 14.88 $ 14.37 $ 12.70 $ 14.68
-------- -------- -------- -------- --------- ---------
Net investment income................... 0.53 1.02 1.06 1.13* 1.02* 0.93
Net realized and unrealized gains
(losses) from investments and
futures................................ (0.60) 0.01 (0.08) (0.05)* 1.36* (1.90)
-------- -------- -------- -------- --------- ---------
Net increase (decrease) in net asset
value resulting from investment
operations............................. (0.07) 1.03 0.98 1.08 2.38 (0.97)
-------- -------- -------- -------- --------- ---------
Dividends from net investment income.... (0.43) (0.86) (0.86) (0.86) (0.90) (0.96)
Distributions from short-term capital
gains.................................. -- -- -- -- -- (0.05)
-------- -------- -------- -------- --------- ---------
Total dividends and distributions to
shareholders........................... (0.43) (0.86) (0.86) (0.86) (0.90) (1.01)
-------- -------- -------- -------- --------- ---------
Net increase in net asset value
resulting from repurchase of common
stock.................................. -- -- 0.02 0.29 0.19 --
-------- -------- -------- -------- --------- ---------
Net asset value, end of period.......... $ 14.69 $ 15.19 $ 15.02 $ 14.88 $ 14.37 $ 12.70
-------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- --------- ---------
Market value, end of period............. $ 14.25 $ 14.13 $ 13.63 $ 12.63 $ 12.50 $ 11.25
-------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- --------- ---------
Total investment return(1).............. 3.93% 10.23% 15.23% 8.07% 19.85% (12.79)%
-------- -------- -------- -------- --------- ---------
-------- -------- -------- -------- --------- ---------
Ratios/Supplemental data:
Net assets, end of period (000's)....... $114,590 $118,563 $117,213 $117,276 $136,754 $136,562
Expenses to average net assets+......... 2.40%** 2.97% 3.36% 3.13% 3.42% 2.72%
Net investment income to average net
assets................................. 7.12%** 6.68% 7.13% 7.74% 7.44% 6.82%
Portfolio turnover rate................. 29% 86% 64% 127% 103% 108%
Asset coverage++........................ $5,329 $4,334 $3,521 $3,261 $4,013 $3,023
</TABLE>
- -----------------
* Calculated using average daily shares outstanding for the period.
** Annualized.
+ These ratios include 1.12**, 1.79%, 2.25%, 1.93%, 2.50%, and 1.82% related to
interest expense for the six months ended May 31, 1999 and for the years
ended November 30, 1998, 1997, 1996, 1995 and 1994, respectively, which
represents the cost of leverage to the Trust.
++ Per $1,000 of reverse repurchase agreements and/or 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. Total investment return for periods of less than one
year has not been annualized.
15
<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 $15.00
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 $58
billion in assets under management as of June 30, 1999. Goldman Sachs Funds
Management, L.P., is sub-adviser to the Trust.
SHAREHOLDER INFORMATION
The Trust's NYSE trading symbol is "TTR." Weekly comparative net asset value
and market price information about the Trust is published each Monday in THE
WALL STREET JOURNAL, each Sunday in THE NEW YORK TIMES and each week in
BARRON'S, as well as in numerous other newspapers.
An annual meeting of shareholders of the Trust was held on March 19, 1999. 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, 1999.
PROPOSAL 1
<TABLE>
<CAPTION>
SHARES SHARES
VOTED WITHHOLD
FOR AUTHORITY
-------- --------
<S> <C> <C>
1. To vote for or against the election of:
Margo N. Alexander...................................................................... 6,869,818 57,038
Richard Q. Armstrong.................................................................... 6,864,195 62,661
E. Garrett Bewkes, Jr................................................................... 6,867,865 59,171
Richard R. Burt......................................................................... 6,854,390 72,466
Mary C. Farrell......................................................................... 6,869,042 57,814
Meyer Feldberg.......................................................................... 6,863,590 63,266
George W. Gowen......................................................................... 6,864,410 62,446
Frederic V. Malek....................................................................... 6,856,870 69,586
Carl W. Schafer......................................................................... 6,853,249 73,607
</TABLE>
16
<PAGE>
2002 TARGET TERM TRUST INC.
GENERAL INFORMATION (UNAUDITED) (CONCLUDED)
PROPOSAL 2
<TABLE>
<CAPTION>
SHARES SHARES SHARES
VOTED WITHHOLD VOTED
FOR AUTHORITY AGAINST
-------- -------- --------
<S> <C> <C> <C>
2. Ratification of the selection of Ernst & Young LLP as
independent auditors for the fiscal year ending November 30,
1999. 6,884,734 29,071 13,051
</TABLE>
(BROKER NON-VOTES AND ABSTENTIONS ARE INCLUDED WITHIN THE "SHARES WITHHOLD
AUTHORITY" TOTALS.)
YEAR 2000 RISKS
Like other funds and financial and business organizations around the world,
the Trust could be adversely affected if the computer systems used by its
investment adviser, other service providers and entities with computer systems
that are linked to the Trust's records do not properly process and calculate
date-related information and data from and after January 1, 2000. This is
commonly known as the "Year 2000 Issue."
Mitchell Hutchins is taking steps that it believes are reasonably designed to
address the Year 2000 Issue with respect to the computer systems that it uses,
and to obtain satisfactory assurances that each of the Trust's other major
service providers is taking comparable steps. However, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Trust.
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. 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.
17
<PAGE>
DIRECTORS
E. Garrett Bewkes, Jr.
CHAIRMAN
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
Brian M. Storms
PRINCIPAL OFFICERS
Margo N. Alexander
PRESIDENT
Victoria E. Schonfeld
VICE PRESIDENT
Dianne E. O'Donnell
VICE PRESIDENT AND SECRETARY
Paul H. Schubert
VICE PRESIDENT AND TREASURER
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, New York 10019
NOTICE IS HEREBY GIVEN IN ACCORDANCE WITH SECTION 23(c) OF THE INVESTMENT
COMPANY ACT OF 1940 THAT FROM TIME TO TIME THE TRUST MAY PURCHASE SHARES OF
ITS COMMON STOCK IN THE OPEN MARKET AT MARKET PRICES.
THE FINANCIAL INFORMATION INCLUDED HEREIN IS TAKEN FROM THE RECORDS OF THE
TRUST WITHOUT EXAMINATION BY INDEPENDENT AUDITORS WHO DO NOT EXPRESS AN
OPINION THEREON.
THIS REPORT IS SENT TO THE SHAREHOLDERS OF THE TRUST FOR THEIR INFORMATION.
IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR THE USE IN
THE PURCHASE OR SALE OF SHARES OF THE TRUST OR OF ANY SECURITIES MENTIONED IN
THIS REPORT.
<PAGE>
[LOGO]
- -C-1999 PAINEWEBBER INCORPORATED
MEMBER SIPC
2002 TARGET
TERM TRUST INC.
MAY 31, 1999
SEMIANNUAL REPORT
