<PAGE>
================================================================================
2002 TARGET
TERM TRUST INC.
SEMIANNUAL REPORT
MAY 31, 2000
<PAGE>
2002 TARGET TERM TRUST INC. SEMIANNUAL REPORT
July 15, 2000
Dear Shareholder,
We are pleased to present you with the semiannual report for 2002 Target Term
Trust Inc. for the six-month period ended May 31, 2000.
MARKET REVIEW
================================================================================
Despite repeated attempts by the Federal Reserve Board (the "Fed") to slow
economic growth, the U.S. economy continued to expand at a rapid pace during the
reporting period. The economy grew 5.5% during the first quarter of 2000, and
the economic expansion hit a record nine years in February. However, the Fed was
not in a celebratory mood, and it vowed to remain steadfast in its resolve to
cool the economy and preempt inflation.
Another major factor affecting the bond market was the U.S. Treasury
Department's decision to buy back long maturity debt. The reduction in supply is
aimed at reducing the average maturity and interest cost of Treasury debt. This
led to a sharp increase in demand for 30-year bonds, resulting in a sharp rally
and an inverted yield curve, whereby 10-year notes yielded more than 30-year
bonds.
Together, the sizzling economy and uncertainty associated with the U.S. Treasury
buyback program resulted in a highly volatile fixed income market causing severe
spread widening among sectors such as corporates, emerging markets, and
mortgage-backed securities. (The spread is the difference in yield or income
that securities must pay for their greater risk relative to U.S. Treasurys.)
Toward the end of the reporting period, the Fed raised the Federal Funds rate
and the Discount rate by 50 basis points each, to 6 1/2% and 6%, respectively
(bps: a basis point, equals one one-hundredth of one percent). Although this was
the sixth Fed hike since last June, all of the previous increases were in 25-bps
increments. In fact, this was the first 50-bps increase since February 1995.
By the end of May, it appeared that the Fed's tight monetary policy was
beginning to take hold. The month closed with the release of weak employment
data, with private-sector payrolls falling and unemployment rising. Resulting
confidence that the Fed might be done raising rates resulted in a bond market
rally at month-end.
--------------------------------------------------------------------------------
2002 TARGET TERM TRUST INC.
Investment Goal:
Return $15 per share to investors on or about 11/30/02, while providing high
monthly income
Portfolio Manager/Subadviser:
Sharmin Mossavar-Rahmani,
Goldman Sachs Funds Management, L.P.
Commencement:
December 31, 1992
NYSE Symbol:
TTR
Dividend Payments:
Monthly
--------------------------------------------------------------------------------
1
<PAGE>
SEMIANNUAL REPORT 2002 TARGET TERM TRUST INC.
PORTFOLIO REVIEW
================================================================================
AVERAGE ANNUAL TOTAL RETURNS, PERIODS ENDED 5/31/00
Lipper
Net Asset Value Returns+ Trust Benchmark(1) Median(2)
--------------------------------------------------------------------------------
6 Months 0.78% 1.75% 0.94%
1 Year 2.04 3.51 1.43
5 Years 6.53 6.07 6.61
Since Inception 12/31/92 6.51 N/A 5.61
--------------------------------------------------------------------------------
Lipper
Market Price Returns+ Trust Benchmark(1) Median(2)
--------------------------------------------------------------------------------
6 Months 1.84% 1.75% 0.61%
1 Year 0.03 3.51 -1.29
5 Years 9.05 6.07 7.82
Since Inception 12/31/92 6.37 N/A 4.57
--------------------------------------------------------------------------------
(1) Benchmark: a U.S. Treasury note maturing on August 15, 2002, with a coupon
of 6.375%.
(2) Lipper U.S. Mortgage Term Trust Median. Lipper Peer Group data calculated
by Lipper Inc.; used with permission. Lipper total return methodology
compares a fund's NAV (or market price in the case of market price
returns) at the beginning and end of a period, with the result being
expressed as a percent change of the beginning net asset value (or market
price). The new net asset value (or market price) is adjusted to reflect
the compounding effect of reinvesting income dividends as well as capital
gains distributions, if any. Distributions are reinvested on the
ex-dividend date at the ex-dividend NAV (or market price on the pay date).
Lipper total returns do not reflect any commissions. The Lipper Median is
the return of the fund that places in the middle of the peer group.
+ Past performance is no guarantee of future results. The Trust's share
price and investment return will vary so that an investor's shares may be
worth more or less than their original cost. NAV and market price returns
for periods of one year or less are cumulative. NAV return assumes, for
illustration only, that dividends were reinvested at the net asset value
on the payable dates. Market price return assumes dividends were
reinvested under the Dividend Reinvestment Plan. Returns do not reflect
any commissions and are not representative of the performance of an
individual investment.
Share Price, Dividend and Yield 5/31/00
--------------------------------------------------------------------------------
Market Price $13.38
Net Asset Value $14.12
12-Month Dividend $0.8616
Current Month Dividend* $0.0718
Market Yield 6.44%
NAV Yield 6.10%
IPO Yield 5.74%
--------------------------------------------------------------------------------
Market yield is calculated by multiplying the current month's distribution by 12
and dividing by the month-end market price. NAV yield is calculated by
multiplying the current month's distribution by 12 and dividing by the month-end
net asset value. IPO yield is calculated by multiplying the current month's
distribution by 12 and dividing by the initial public offering price. Prices and
yields will vary.
* The monthly dividend was reduced to $0.065 as of June, 2000.
PORTFOLIO HIGHLIGHTS
The Trust seeks to add incremental return through sector allocation and security
selection primarily within the mortgage market. The Trust will seek to liquidate
its assets and distribute the net proceeds to shareholders on or about November
30, 2002. While the portfolio is being managed in an effort to return the
initial offering price of $15.00 per share, this is not guaranteed.
2
<PAGE>
2002 TARGET TERM TRUST INC. SEMIANNUAL REPORT
During the period, within the mortgage sector, the Trust focused on
collateralized mortgage obligations (CMOs) and pass-throughs, because of the
attractive technicals within these sub-sectors. Given recent spread widening, we
continue to see attractive buying opportunities within the mortgage sector.
PERFORMANCE ATTRIBUTION
The Trust outperformed its benchmark on a market-price basis, though it lagged
on a net-asset-value basis. The primary reason for the Trust's performance was
that the portfolio was underweighted in short-duration U.S. Treasurys, which
underperformed due to the rising interest rate environment. (Duration is a
measure of a bond portfolio's sensitivity to interest rate changes.) The
outperformance was also attributable to security selection, concentrated in the
pass-through and CMO sub-sectors. The positive impact of security selection
offset the negative impact of the portfolio's allocation to mortgages as spreads
widened. The portfolio's adjustable-rate mortgage securities (ARMs) also added
to performance, as rising interest rates and greater rate volatility increased
demand for low duration, floating-rate securities.
PORTFOLIO STATISTICS
Characteristics* 5/31/00 11/30/99
--------------------------------------------------------------------------------
Net Assets ($mm) $110.2 $112.7
Weighted Avg Maturity 5.84 years 6.49 years
Weighted Avg Duration 2.01 years 2.60 years
Weighted Avg Coupon 6.99% 7.23%
Net Leverage 1.78% 0.85%
Average Credit Quality AAA AAA
--------------------------------------------------------------------------------
Sector Allocation* 5/31/00 11/30/99
--------------------------------------------------------------------------------
Collateralized Mortgage Obligations 57.0% 69.7%
Mortgage Pass-Throughs 43.7 37.4
Adjustable Rate Mortgages 1.5 1.8
Asset-Backed Securities 5.0 9.8
Repurchase Agreements 0.6 1.7
Liabilities in excess of other assets -7.8 -20.4
--------------------------------------------------------------------------------
Total 100.0 100.0
* Weightings represent percentages of net assets as of the dates indicated.
The Trust's portfolio is actively managed and its composition will vary
over time.
3
<PAGE>
SEMIANNUAL REPORT 2002 TARGET TERM TRUST INC.
OUTLOOK
================================================================================
In general, our outlook for the market is positive. Recent economic data
provided evidence of a slowdown in the U.S. economy. There is little on the
immediate horizon likely to threaten the recent bond market rally. But we are
wary of shorter-maturity credits, as we believe that the underlying trend of
economic activity in the U.S. will remain robust and that short rates eventually
will move higher than the market currently expects. Given the Trust's
underweighted allocation to shorter duration U.S. Treasurys, we believe it is
well positioned to benefit in the environment we foresee.
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
MARGO ALEXANDER
Chairman and Chief Executive Officer
Mitchell Hutchins Asset Management Inc.
/s/ Brian M. Storms
BRIAN M. STORMS
President and Chief Operating Officer
Mitchell Hutchins Asset Management Inc.
/s/ Sharmin Mossavar-Rahmani
SHARMIN MOSSAVAR-RAHMANI
Chief Investment Officer--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, 2000, 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.
4
<PAGE>
2002 TARGET TERM TRUST INC.
PORTFOLIO OF INVESTMENTS MAY 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
----------- -------- -------- -----
<S> <C> <C> <C> <C>
Government National Mortgage Association Certificates--15.29%
$9,989 GNMA ............................................................. 06/15/23 to 08/15/27 6.500% $ 9,377,984
7,078 GNMA ............................................................. 10/15/22 to 12/15/23 7.000 6,824,549
639 GNMA ............................................................. 01/15/10 to 07/15/12 8.500 650,270
------------
Total Government National Mortgage Association Certificates
(cost--$17,668,584) ........................................................ 16,852,803
------------
Federal Home Loan Mortgage Corporation Certificates--8.08%
1,245 FHLMC ............................................................ 12/01/13 6.000 1,150,423
921 FHLMC ............................................................ 06/01/14 6.000 858,564
3,956+ FHLMC ............................................................ 06/01/22 8.500 4,018,272
1,845 FHLMC ARM ........................................................ 08/01/19 7.120 1,886,269
1,000 FHLMC TBA ........................................................ TBA 8.000 993,125
------------
Total Federal Home Loan Mortgage Corporation Certificates
(cost--$9,078,546) ......................................................... 8,906,653
Federal National Mortgage Association Certificates--20.27%
1,489 FNMA ............................................................. 12/01/28 to 01/01/29 6.000 1,337,900
5,181 FNMA ............................................................. 12/01/28 to 08/01/29 6.500 4,797,417
4,254 FNMA ............................................................. 09/01/27 to 02/01/30 7.000 4,040,304
2,153 FNMA ARM ......................................................... 01/01/25 6.997 2,143,702
1,414 FNMA ARM ......................................................... 08/01/22 7.450 1,468,913
2,658 FNMA ARM ......................................................... 01/01/21 7.242 2,723,435
2,000 FNMA TBA ......................................................... TBA 6.500 1,849,376
4,000 FNMA TBA ......................................................... TBA 8.000 3,972,500
------------
Total Federal National Mortgage Association Certificates
(cost--$22,580,029) ........................................................ 22,333,547
------------
Collateralized Mortgage Obligations--54.53%
1,450 FHLMC Series 164, Class B2, B3, B9 & B11 ......................... 07/15/21 9.500 1,535,892
3,607 FHLMC Series 1693, Class Z ....................................... 03/15/09 6.000 3,110,143
1,223 FNMA REMIC, Series 1988-12, Class A .............................. 02/25/18 10.000 1,271,256
462 FNMA Series 1993-138, Class SM ................................... 12/25/21 8.905* 442,567
279 FNMA Series 1994-11, Class B ..................................... 06/25/18 4.625 274,066
3,020 FNMA Series 1997-67,Class VX ..................................... 02/25/23 7.000 2,987,999
904 Citicorp Mortgage Securities Incorporated, Series 1994-6,
Class A4 ....................................................... 03/01/09 5.750 842,804
1,892 CMC Securities Corporation, Series 1992-B, Class B11 ............. 11/25/23 7.375 1,822,921
1,643 CMC Securities Corporation, Series 1993-C, Class C3 .............. 04/25/08 9.552 1,649,046
9,171 CMC Securities Corporation, Series 1993-E, Class S10 ............. 11/25/08 6.500 8,650,409
4,931 Countrywide Funding Corporation, Series 1993-10, Class A9 ........ 01/25/24 7.125* 4,963,085
5,781 Countrywide Funding Corporation, Series 1993-2, Class A5A ........ 10/25/08 6.500 5,491,778
4,679 Countrywide Mortgage Backed Securities Incorporated, Series
1994-B, Class A7 ............................................... 02/25/09 7.025* 4,724,705
4,781 First Boston Mortgage Securities Corporation, Series
1993-1A, Class 1A .............................................. 04/25/06 7.405* 4,284,072
842 Housing Securities Incorporated, Series 1992-5, Class A .......... 06/15/22 6.759* 842,278
6,308 Housing Securities Incorporated, Series 1994-1, Class A13 ........ 03/25/09 6.500 5,755,815
2,748 Residential Asset Securtization Trust, Series 1996-A8, Class A4 .. 12/25/26 8.000 2,752,892
3,878 Residential Funding Mortgage Securities Incorporated Mortgage,
Series 1994-S1, Class A13 ...................................... 01/25/24 7.388* 3,933,165
3,570 Securitized Asset Sales Incorporated, Series 1994-5, Class AM .... 07/25/24 7.000 3,355,736
1,458 Structured Asset Securities Corporation, Series 1995-3A,
Class 1A1 ...................................................... 01/28/24 7.000 1,398,142
------------
Total Collateralized Mortgage Obligations (cost--$61,733,133) ................ 60,088,771
------------
</TABLE>
5
<PAGE>
2002 TARGET TERM TRUST INC.
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
--------- -------- -------- -----
<S> <C> <C> <C> <C>
Adjustable Rate Collateralized Mortgage Obligations--1.45%
$1,557 Salomon Brothers Mortgage Securities VII, Series 1994-20, Class A
(cost--$1,574,566) ...................................................... 08/01/24 7.874% 1,591,926
-------------
Stripped Collateralized Mortgage Obligations--2.51%
1,047 FNMA REMIC Trust, Series 1991-G-35, Class N** ............................. 10/25/21 7.557(1) 790,674
1,240 FNMA REMIC Trust, Series 151, Class 2*** .................................. 07/01/22 9.500 365,369
8 FNMA REMIC Trust, Series 1992-G-44, Class GA*** ........................... 05/25/03 14.600(1) 23,910
1,003 FNMA REMIC Trust, Series 1993-101, Class A*** ............................. 06/25/08 7.000 43,623
7 Structured Asset Securities Corporation, Series 1992-M1, Class A4*** ...... 11/25/07 11.000(1) 235,165
7 Structured Asset Securities Corporation, Series 1992-M1, Class A3*** ...... 11/25/02 11.000(1) 1,308,091
-------------
Total Stripped Collateralized Mortgage Obligations (cost--$3,431,427) .................. 2,766,832
-------------
Asset Backed Securities--4.99%
4,000 ABFS Equipment Contract Trust, Series 1999-A, Class A3 .................... 12/15/03 6.650 3,941,600
157 Fasco Grantor Trust ....................................................... 11/15/01 6.650 156,047
1,444 Mid-State Trust IV, Series 4, Class A ..................................... 04/01/30 8.330 1,404,300
-------------
Total Asset Backed Securities (cost--$5,672,786) ....................................... 5,501,947
-------------
Repurchase Agreement--0.63%
697 Repurchase Agreement dated 05/31/00 with State Street Bank & Trust
Company, collateralized by $730,000 Federal National Mortgage
Association Notes, 6.500% due 08/15/04 (value-$719,963)
Proceeds: $697,125 (cost--$697,000) 06/01/00 6.450 697,000
Total Investments (cost--$122,436,071)--107.75% ........................................ 118,739,479
Liabilities in excess of other assets--(7.75)% ......................................... (8,540,255)
-------------
Net Assets--100.00% .................................................................... $ 110,199,224
=============
</TABLE>
----------
ARM Adjustable Rate Mortgage Security--The interest rate shown is the current
rate as of May 31, 2000.
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, 2000.
** 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,
2000) and/or futures transactions.
(1) Interest rate represents the annualized yield at date of purchase.
6
<PAGE>
2002 TARGET TERM TRUST INC.
Futures Contracts MAY 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Unrealized
Number of Appreciation
Contracts In Exchange For Expiration Date (Depreciation)
--------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
26 Contracts to Deliver--10 year United States Treasury Notes $ 2,520,781 June 00 $ (48,474)
8 Contracts to Deliver--10 year United States Treasury Notes 774,250 Sept 00 (165)
7 Contracts to Deliver--30 year United States Treasury Bonds 669,813 June 00 (6,871)
107 Contracts to Deliver--30 year United States Treasury Bonds 10,231,875 Sept 00 (255,758)
18 Contracts to Receive--5 year United States Treasury Notes 1,756,688 Sept 00 10,176
7 Contracts to Receive--30 year United States Treasury Bonds 669,813 June 00 11,340
---------
$(289,752)
=========
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2000 (unaudited)
<TABLE>
<S> <C>
Assets
Investments in securities, at value (cost--$122,436,071) .............. $ 118,739,479
Cash .................................................................. 242
Receivable for investments sold ....................................... 919,613
Interest receivable ................................................... 737,450
Other assets .......................................................... 28,172
-------------
Total assets .......................................................... 120,424,956
-------------
Liabilities
Payable for investments purchased ..................................... 7,716,584
Payable for reverse repurchase agreements ............................. 2,000,000
Payable for variation margin .......................................... 111,853
Payable to investment adviser and administrator ....................... 65,602
Accrued expenses and other liabilities ................................ 331,693
-------------
Total liabilities ..................................................... 10,225,732
-------------
Net Assets
Capital Stock--$0.001 par value; total authorized 200,000,000 shares;
7,802,867 shares issued and outstanding ............................. 113,526,527
Undistributed net investment income ................................... 7,958,398
Accumulated net realized loss from investments and futures transactions (7,299,357)
Net unrealized depreciation of investments and futures ................ (3,986,344)
-------------
Net assets ............................................................ $ 110,199,224
=============
Net asset value per share ............................................. $ 14.12
-------------
</TABLE>
See accompanying notes to financial statements
8
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF OPERATIONS
For the
Six Months Ended
May 31, 2000
(unaudited)
----------------
Investment income:
Interest ......................................................... $ 4,250,178
Expenses:
Investment advisory and administration ........................... 390,219
Interest expense ................................................. 275,185
Excise tax ....................................................... 127,500
Legal and audit .................................................. 40,750
Custody and accounting ........................................... 33,447
Reports and notices to shareholders .............................. 31,960
Transfer agency .................................................. 10,830
Directors' fees .................................................. 5,250
Other expenses ................................................... 24,814
-----------
939,955
-----------
Net investment income ............................................ 3,310,223
-----------
Realized and unrealized gains (losses) from investment activities:
Net realized losses from:
Investment transactions ...................................... (662,652)
Futures transactions ......................................... (119,062)
Net change in unrealized appreciation/depreciation of:
Investments .................................................. (1,284,026)
Futures ...................................................... (387,012)
-----------
Net realized and unrealized loss from investment activities ...... (2,452,752)
-----------
Net increase in net assets resulting from operations ............. $ 857,471
===========
See accompanying notes to financial statements
9
<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
2000 November 30,
(unaudited) 1999
---------------- -------------
<S> <C> <C>
From operations:
Net investment income ....................................................... $ 3,310,223 $ 7,691,267
Net realized losses from investments and futures transactions ............... (781,714) (1,674,711)
Net change in unrealized appreciation/depreciation of investments and futures (1,671,038) (5,153,379)
------------- -------------
Net increase in net assets resulting from operations ........................ 857,471 863,177
------------- -------------
Dividends to shareholders from:
Net investment income ....................................................... (3,361,475) (6,722,950)
------------- -------------
Net decrease in net assets .................................................. (2,504,004) (5,859,773)
Net assets:
Beginning of period ......................................................... 112,703,228 118,563,001
------------- -------------
End of period (including undistributed net investment income of $7,958,398
and $8,009,650, respectively) ............................................. 110,199,224 $ 112,703,228
============= =============
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
For the
Six Months Ended
May 31, 2000
(unaudited)
----------------
<S> <C>
Cash flows provided from operating activities:
Interest received ............................................... $ 4,821,441
Operating expenses paid ......................................... (801,757)
Interest paid ................................................... (314,005)
Sale of short-term portfolio investments, net ................... 1,228,000
Purchase of long-term portfolio investments ..................... (42,481,723)
Sale of long-term portfolio investments ......................... 54,966,199
Variation margin paid on futures contracts ...................... (416,221)
------------
Net cash provided from operating activities ..................... 17,001,934
------------
Cash flows used for financing activities:
Dividends paid to shareholders .................................. (3,361,475)
Decrease in reverse repurchase agreements ....................... (13,881,000)
------------
Net cash used for financing activities .......................... (17,242,475)
------------
Net change in cash .............................................. (240,541)
Cash at begining of year ........................................ 240,783
------------
Cash at end of year ............................................. $ 242
============
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 ............ $ 857,471
------------
Decrease in investments, at value ............................... 16,959,057
Decrease in deposits with broker for securities sold short ...... 904,494
Increase in receivable for investments sold ..................... (796,273)
Decrease in interest receivable ................................. 115,427
Increase in other assets ........................................ (16,276)
Decrease in payable for investments purchased ................... (52,235)
Decrease in security sold short, at value ....................... (900,054)
Decrease in payable for interest on reverse repurchase agreements (38,820)
Increase in payable to investment adviser and administrator ..... 508
Increase in variation margin payable ............................ 89,854
Decrease in accrued expenses and other liabilities .............. (121,219)
------------
16,144,463
------------
Net cash provided from operating activities ..................... $ 17,001,934
============
</TABLE>
See accompanying notes to financial statements
11
<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--The Trust calculates its net asset value based
on the current market value for its portfolio securities. The Trust normally
obtains market values for its securities from independent pricing sources.
Independent pricing sources may use reported last sale prices, current market
quotations or valuations from computerized "matrix" systems that derive values
based on comparable securities. Securities traded in the over-the-counter
("OTC") market and listed on The Nasdaq Stock Market, Inc. ("Nasdaq") normally
are valued at the last sale price on Nasdaq prior to valuation. Other OTC
securities are valued at the last bid price available prior to valuation.
Securities which are listed on U.S. and foreign stock exchanges normally are
valued at the last sale price on the day the securities are valued or, lacking
any sales on such day, at the last available bid price. In cases where
securities are traded on more than one exchange, the securities are valued on
the exchange designated as the primary market by Mitchell Hutchins Asset
Management Inc. ("Mitchell Hutchins"), the adviser and a wholly-owned subsidiary
of PaineWebber Incorporated, or by Goldman Sachs Funds Management, L.P.
("Goldman Sachs"), a limited partnership indirectly controlled by Goldman Sachs
Group L.P. and sub-advisor of the Trust. If a market value is not available from
an independent pricing source for a particular security, that security is valued
at fair value as determined in good faith by or under the direction of the
Trust's board of directors (the "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. All
investments quoted in foreign currencies will be valued in U.S. dollars on the
basis of the foreign currency exchange rates prevailing at the time such
valuation is determined by the Trust's custodian.
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 the 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
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
"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 uses 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 Trust's board of directors. Interest on the value of
reverse repurchase agreements issued and outstanding is based upon competitive
market rates at the time of issuance. At the time the Trust enters into a
reverse repurchase agreement, it establishes and maintains a segregated account
with the Trust's custodian containing liquid securities having a value not less
than the repurchase price, including accrued interest, of the reverse repurchase
agreement.
The average monthly balance of reverse repurchase agreements outstanding
during the six months ended May 31, 2000 was $8,912,873 at a weighted average
interest rate of 6.01%.
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
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
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. 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,
2000, was substantially the same as the cost of securities for financial
statement purposes.
At May 31, 2000, 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) ....... $ 300,282
Gross depreciation (from investments having an excess of cost over value) ....... (3,996,874)
-----------
Net unrealized depreciation of investments ...................................... $(3,696,592)
===========
</TABLE>
For the six months ended May 31, 2000, total aggregate purchases and sales
of portfolio securities, excluding short-term securities, were $42,384,024 and
$55,924,529, 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.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS (unaudited)
At November 30, 1999, the Trust had a net capital loss carry forward of
$6,420,409. The loss carry forward 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 the 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, 2000, Mitchell Hutchins owned
8,944 shares.
The Trust did not repurchase any shares of its common stock for the six
months ended May 31, 2000.
For the period July 10, 1995 (commencement of repurchase program) through
May 31, 2000, the Trust repurchased 2,953,800 shares of its common stock at an
average market price per share of $12.57 and a weighted average discount from
net asset value of 11.71%. At May 31, 2000, paid-in-capital is net the cost of
$37,318,731 of capital stock reacquired.
15
<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 For the Years Ended November 30,
May 31, 2000 ---------------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
---------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 14.44 $ 15.19 $ 15.02 $ 14.88 $ 14.37 $ 12.70
-------- -------- -------- -------- -------- --------
Net investment income ......................... 0.42 0.99 1.02 1.06 1.13* 1.02*
Net realized and unrealized gains (losses)
from investments and futures ................ (0.31) (0.88) 0.01 (0.08) (0.05)* 1.36*
-------- -------- -------- -------- -------- --------
Net increase in net asset value resulting from
investment operations ....................... 0.11 0.11 1.03 0.98 1.08 2.38
-------- -------- -------- -------- -------- --------
Dividends from net investment income .......... (0.43) (0.86) (0.86) (0.86) (0.86) (0.90)
-------- -------- -------- -------- -------- --------
Net increase in net asset value resulting from
repurchase of common stock .................. -- -- -- 0.02 0.29 0.19
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................ $ 14.12 $ 14.44 $ 15.19 $ 15.02 $ 14.88 $ 14.37
======== ======== ======== ======== ======== ========
Market value, end of period ................... $ 13.38 $ 13.56 $ 14.13 $ 13.63 $ 12.63 $ 12.50
======== ======== ======== ======== ======== ========
Total investment return(1) .................... 1.84% 2.07% 10.23% 15.23% 8.07% 19.85%
======== ======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of period (000's) ............. $110,199 $112,703 $118,563 $117,213 $117,276 $136,754
Expenses to average net assets, including
interest expense ............................ 1.69%** 2.30% 2.97% 3.36% 3.13% 3.42%
Expenses to average net assets, excluding
interest expense ............................ 1.20%** 1.24% 1.18% 1.11% 1.20% 0.92%
Net investment income to average net assets ... 5.94%** 6.67% 6.68% 7.13% 7.74% 7.44%
Portfolio turnover rate ....................... 35% 63% 86% 64% 127% 103%
Asset coverage++ .............................. $ 15,089 $ 8,097 $ 4,334 $ 3,521 $ 3,261 $ 4,013
</TABLE>
----------
* Calculated using average daily shares outstanding for the period.
** Annualized
++ Per $1,000 of reverse repurchase agreements and dollar roll transactions
outstanding.
(1) Total investment return is calculated assuming a purchase of common stock
at the current market price on the first day of each period reported and a
sale at the current market price on the last day of each period reported
and assuming reinvestment of dividends at prices obtained under the
Trust's Dividend Reinvestment Plan. Investment returns do not reflect
brokerage commissions.
Total investment return for periods less than one year has not been
annualized.
16
<PAGE>
2002 TARGET TERM TRUST INC.
GENERAL INFORMATION (unaudited)
THE TRUST
2002 Target Term Trust Inc. (the "Trust") is a diversified closed-end
management investment company whose shares trade on the New York Stock Exchange
("NYSE"). The Trust's investment objective is to manage a portfolio of high
quality fixed-income and adjustable-rate securities in order to return $15 per
share (the initial public offering price) to investors on or about November 30,
2002, while providing high monthly income. The Trust's investment adviser and
administrator is Mitchell Hutchins Asset Management Inc., a wholly owned asset
management subsidiary of PaineWebber Incorporated, which has over $68.5 billion
in assets under management as of June 30, 2000. Goldman Sachs Funds Management,
L.P., is sub-adviser to the Trust.
SHAREHOLDER INFORMATION
The Trust's NYSE trading symbol is "TTR." Weekly comparative net asset
value and market price information about the Trust is published each Monday in
The Wall Street Journal, each Sunday in The New York Times and each week in
Barron's, as well as in numerous other newspapers.
DISTRIBUTION POLICY
The Trust'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.
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
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<PAGE>
DIRECTORS
E. Garrett Bewkes, Jr.
Chairman
Margo N. Alexander
Richard Q. Armstrong
Richard R. Burt
Mary C. Farrell
PRINCIPAL OFFICERS
Margo N. Alexander
President
Dianne E. O'Donnell
Vice President and Secretary
INVESTMENT ADVISER AND ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
51 West 52nd Street
New York, New York 10019
Meyer Feldberg
George W. Gowen
Frederic V. Malek
Carl W. Schafer
Brian M. Storms
Paul H. Schubert
Vice President and Treasurer
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.
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<PAGE>
PaineWebber
(Copyright)2000 PaineWebber Incorporated
All rights reserved
Member SIPC
