<PAGE>
================================================================================
2002 TARGET
TERM TRUST INC.
ANNUAL REPORT
NOVEMBER 30, 1999
<PAGE>
2002 TARGET TERM TRUST INC. ANNUAL REPORT
January 15, 2000
Dear Shareholder,
We are pleased to present you with the annual report for 2002 Target Term Trust
Inc. for the fiscal year ended November 30, 1999.
MARKET OVERVIEW
================================================================================
The Trust's fiscal year was a challenging period for bond investments. Interest
rates rose as the economy continued to expand more briskly than anticipated. The
Federal Reserve (the Fed) raised the Federal Funds rate three times during the
fiscal year, by 25 basis points each time (bps: a basis point equals one
one-hundredth of one percent). These increases reversed the 75 bps reduction
engineered in late 1998 to stave off the global financial crisis.
The 30-year Treasury bond's yield increased from 5.07% on November 30, 1998 to
6.29% on November 30, 1999, one of its worst performances ever. At the same
time, short-term rates rose significantly, with 90-day T-bills moving from a
yield equivalent of 4.49% at the beginning of the fiscal year, to a yield of
5.30% at its close. Mortgage "spreads" to Treasurys narrowed for most of the
year, benefiting portfolios with mortgage exposure. (The spread is the
difference in yield or income securities must pay to compensate for their
greater risk relative to U.S. Treasurys.)
OUTLOOK
In the first half of 2000, we expect an active Federal Reserve and rising rates
across the yield curve. We look for moderating economic growth in the second
half of the year, and believe interest rates will recede in response to slowing
growth and the absence of real inflationary pressure. In this environment, we
think the mortgage market could see further spread narrowing in certain
sub-sectors.
[LINE GRAPH]
U.S. Treasury Yield Curves: 11/30/98 to 11/30/99
[PLOT POINTS TO COME]
2002 TARGET TERM TRUST INC.
PROFILES
Investment Goal:
Return $15 per share to investors on or about 11/30/02, while providing high
monthly income
Portfolio Managers/Subadviser:
Sharmin Mossavar-Rahmani, Goldman Sachs Funds Management, L.P.
Commencement:
December 31, 1992
NYSE Symbol:
TTR
Dividend Payments:
Monthly
<PAGE>
2002 TARGET TERM TRUST INC.
PORTFOLIO REVIEW
================================================================================
AVERAGE ANNUAL TOTAL RETURNS(%), PERIODS ENDED 11/30/99
Since
1 Yr. 5 Yrs. Inception
12/31/92
- --------------------------------------------------------------------------------
Net Asset Value Return(1) 0.77% 8.93% 6.88%
Market Price Return(2) 2.07 10.96 6.56
Benchmark Return(3) 1.41 8.15 6.62
- --------------------------------------------------------------------------------
Returns do not reflect any commissions and are not representative of the
performance of an individual investment. 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. Past performance is no guarantee of future results.
Share Price, Dividend and Yield, 11/30/99
- --------------------------------------------------------------------------------
Net Asset Value $14.44
Market Price $13.56
12-Mo. Dividend $0.8616
Market Yield(4) 6.35%
IPO Yield(5) 5.74%
- --------------------------------------------------------------------------------
PERFORMANCE ATTRIBUTION
The Trust underperformed its benchmark for the fiscal year ended November 30,
1999, primarily because of the Trust's higher level of interest-rate risk
compared to its benchmark. To help protect the Trust against rising interest
rates during the second half of the fiscal year, we reduced the Trust's weighted
average duration from 2.7 years to 2.6 years. (Duration is a measure of a bond
portfolio's sensitivity to interest rate changes.) We kept portfolio credit
quality high throughout the fiscal year.
Characteristics* 11/30/99 5/31/99
- --------------------------------------------------------------------------------
Weighted Average Duration 2.6 yrs 2.7 yrs
Average Quality AAA AAA
Net Assets ($mm) $112.7 $114.6
- --------------------------------------------------------------------------------
* Weightings represent percentages of portfolio assets as of November 30,
1999, unless indicated otherwise. The Trust's portfolio is actively
managed and its composition will vary over time.
(1) NAV return assumes dividends were reinvested at the net asset value on the
payable dates.
(2) Market price return assumes dividends were reinvested under the Dividend
Reinvestment Plan.
(3) The benchmark is a U.S. Treasury note maturing on August 15, 2002, with a
coupon of 6.375%.
(4) Market yield is calculated by multiplying the November distribution by 12
and dividing by the Trust's closing price on November 30, 1999.
(5) IPO yield is calculated by multiplying the November distribution by 12 and
dividing by the initial public offering price.
2
<PAGE>
ANNUAL REPORT
The Trust seeks to add incremental return through sector allocation and security
selection primarily within the mortgage market. Sector allocation and security
selection both contributed to performance for the fiscal year. Following the
gradual stabilization of the global markets, mortgage-backed securities
performed well, rebounding strongly in the wake of last year's liquidity crisis.
Concerns over excessive supply diminished and the prepayment environment turned
favorable.
Most sectors traded above historical average spreads during the fiscal year.
With this in mind, we maintained the Trust's sector weightings. Spread
tightenings from current levels would cause the Trust's holdings to gain value.
(The spread is the difference in yield or income over Treasurys that
non-Treasury securities must pay to compensate for their greater risk.)
Mortgage-sector spreads did continue to tighten, and the Trust benefited.
Sector Allocation* 11/30/99 5/31/99 11/30/98
- --------------------------------------------------------------------------------
Collateralized Mortgage
Obligations 57.9% 58.1% 59.2%
Mortgage Pass-Throughs 24.3 23.3 21.6
Adjustable Rate Mortgages 8.2 10.4 13.4
Asset Backed Securities 8.2 3.0 3.5
Repurchase Agreements 1.4 5.2 2.3
- --------------------------------------------------------------------------------
Total 100.0 100.0 100.0
OUTLOOK
================================================================================
In general, our outlook remains positive. Although mortgage spreads to Treasurys
have recovered from their historical widest levels, declining supply and a
benign prepayment environment provide a favorable backdrop leading into the year
2000. More specifically, we favor seasoned GNMAs among mortgage pass-through
securities and collateralized mortgage obli- gations. Although GNMAs have been
difficult to find, their liquidity has recently improved, and we have begun to
take advantage of this buying opportunity.
At current spreads to Treasurys, we believe many asset-backed securities are
fairly valued relative to other fixed income sectors. Market liquidity continues
to improve due to a more normal supply outlook and solid demand from investors.
Finally, the adjustable-rate mortgage sector closed the year on a strong note
due to investor demand for floating-rate and short-duration securities. Going
forward, we are constructive on the sector, which should be responsive to any
potential Fed tightening.
* Weightings represent percentages of portfolio assets as of November 30,
1999, unless indicated otherwise. The Trust's portfolio is actively
managed and its composition will vary over time.
3
<PAGE>
2002 TARGET TERM TRUST INC. ANNUAL REPORT
Our ultimate objective in managing your investments is to help you successfully
meet your financial goals. We thank you for your continued support and welcome
any comments or questions you may have. For a Quarterly Review on 2002 Target
Term Trust Inc. or a fund in the PaineWebber Family of Funds,(6) please contact
your Financial Advisor.
Sincerely,
/s/ Margo Alexander /s/ Sharmin Mossavar-Rahmani
MARGO ALEXANDER SHARMIN MOSSAVAR-RAHMANI
Chairman and Chief Executive Officer Chief Investment Officer Fixed Income
Mitchell Hutchins Asset Management Inc. Goldman Sachs Funds Management, L.P.
/s/ Brian M. Storms
BRIAN M. STORMS
President and Chief Operating Officer
Mitchell Hutchins Asset Management Inc.
This letter is intended to assist shareholders in understanding how the
Trust performed during the fiscal year ended November 30, 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.
(6) 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 NOVEMBER 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------------- -------------------- ------------ -------------
<S> <C> <C> <C> <C>
Government National Mortgage Association Certificates--18.95%
$13,049+ GNMA .................................................... 01/15/24 to 02/15/29 6.500% $ 12,424,189
7,437+ GNMA .................................................... 10/15/22 to 12/15/23 7.000 7,308,830
705 GNMA .................................................... 01/15/10 to 07/15/12 8.500 731,677
942 GNMA TBA ................................................ TBA 6.500 895,553
-------------
Total Government National Mortgage Association Certificates
(cost--$22,201,924) ................................................. 21,360,249
-------------
Federal Home Loan Mortgage Corporation Certificates--10.48%
1,372 FHLMC ................................................... 12/01/13 6.000 1,305,640
764 FHLMC ................................................... 04/01/29 7.000 747,119
957 FHLMC ................................................... 06/01/14 6.000 916,508
2,023+ FHLMC ARM ............................................... 08/01/19 6.714 2,048,395
3,882 FHLMC TBA ............................................... TBA 7.000 3,795,039
3,000 FHLMC TBA ............................................... TBA 7.500 2,994,375
-------------
Total Federal Home Loan Mortgage Corporation Certificates
(cost--$11,987,253) ................................................. 11,807,076
-------------
Federal National Mortgage Association Certificates--7.95%
2,000 FNMA .................................................... 04/01/29 to 10/01/29 6.500 1,906,830
2,335+ FNMA ARM ................................................ 01/01/25 6.298 2,356,252
2,987+ FNMA ARM ................................................ 01/01/21 6.886 3,076,273
1,580+ FNMA ARM ................................................ 08/01/22 6.914 1,626,181
-------------
Total Federal National Mortgage Association Certificates
(cost--$9,086,693) .................................................. 8,965,536
-------------
Collateralized Mortgage Obligations--66.72%
1,450 FHLMC Series 164, Class B2, B3, B9 & B11 ................ 07/15/21 9.500 1,564,216
3,501 FHLMC Series 1693, Class Z .............................. 03/15/09 6.000 3,135,089
1,343 FNMA REMIC, Series 1988-12, Class A ..................... 02/25/18 10.000 1,450,534
462 FNMA Series 1993-138, Class SM .......................... 12/25/21 9.620* 460,878
352 FNMA Series 1994-11, Class B ............................ 06/25/18 4.625 345,047
3,510 FNMA, Series 1997-67,Class VX ........................... 02/25/23 7.000 3,480,116
930 Citicorp Mortgage Securities Incorporated,
Series 1994-6, Class A4 ............................... 03/01/09 5.750 879,969
2,067+ CMC Securities Corporation, Series 1992-B, Class B11 .... 11/25/23 7.375 2,018,746
1,830 CMC Securities Corporation, Series 1993-C, Class C3 ..... 04/25/08 9.552 1,859,837
9,666 CMC Securities Corporation, Series 1993-E, Class S10 .... 11/25/08 6.500 9,324,310
5,100 Collateralized Mortgage Obligation Trust, Series 64,
Class Z ............................................... 11/20/20 9.000 5,250,447
4,931 Countrywide Funding Corporation, Series 1993-10,
Class A9 .............................................. 01/25/24 6.375* 4,950,511
5,781 Countrywide Funding Corporation, Series 1993-2,
Class A5A ............................................. 10/25/08 6.500 5,601,781
4,679 Countrywide Mortgage Backed Securities Incorporated,
Series 1994-B, Class A7 ............................... 02/25/09 6.275* 4,701,708
2,748 Countrywide Mortgage Backed Securities Incorporated,
Series 1996-A8, Class A4 .............................. 12/25/26 8.000 2,768,637
10,808 First Boston Mortgage Securities Corporation, Series
1993-1A, Class 1A ..................................... 04/25/06 7.402* 10,686,208
953 Housing Securities Incorporated, Series 1992-5,
Class A ............................................... 06/15/22 6.603* 962,566
6,308 Housing Securities Incorporated, Series 1994-1,
Class A13 ............................................. 03/25/09 6.500 5,900,573
1,000 Residential Accredit Loans Incorporated ................. 09/25/26 8.000 1,009,322
3,878 Residential Funding Mortgage Securities Incorporated
Mortgage, Series 1994-S1, Class A13 ................... 01/25/24 6.388* 3,923,452
3,650 Securitized Asset Sales Incorporated, Series 1994-5,
Class AM .............................................. 07/25/24 7.000 3,497,376
1,467 Structured Asset Securities Corporation, Series 1995-3A,
Class 1A1 ............................................. 01/28/24 7.000 1,431,136
-------------
Total Collateralized Mortgage Obligations (cost--$75,741,895) .......... 75,202,459
-------------
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
2002 TARGET TERM TRUST INC.
PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1999
<TABLE>
<CAPTION>
Principal
Amount Maturity Interest
(000) Dates Rates Value
- --------------- -------------------- ------------ -------------
<S> <C> <C> <C> <C>
Adjustable Rate Collateralized Mortgage Obligations--1.78%
$ 279 Ryland Mortgage Securities Corporation, Series 1,
Class A2 .............................................. 08/25/23 12.625% $ 277,181
1,705 Salomon Brothers Mortgage Securities VII, Series
1994-20, Class A ...................................... 08/01/24 7.478 1,725,124
-------------
Total Adjustable Rate Collateralized Mortgage Obligations
(cost--$2,014,188) ................................................... 2,002,305
-------------
Stripped Collateralized Mortgage Obligations--2.98%
1,187 FNMA REMIC Trust, Series 1991-G-35, Class N** ........... 10/25/21 7.557(1) 954,968
12 FNMA REMIC Trust, Series 1992-G-44, Class GA*** ......... 05/25/03 14.60(1) 85,764
2,047 FNMA REMIC Trust, Series 1993-101, Class A*** ........... 06/25/08 7.000 93,772
1,396 FNMA REMIC Trust, Series 151, Class 2*** ................ 07/01/22 9.500 408,678
7 Structured Asset Securities Corporation, Series
1992-M1, Class A4*** .................................. 11/25/07 11.000(1) 273,366
7 Structured Asset Securities Corporation, Series
1992-M1, Class A3*** .................................. 11/25/07 11.000(1) 1,540,497
-------------
Total Stripped Collateralized Mortgage Obligations (cost--$3,944,045) .. 3,357,045
-------------
Asset Backed Securities--9.83%
4,000 ABFS Equipment Contract Trust, Series 1999-A, Class A3 .. 12/15/03 6.650 3,984,600
3,000 Arcadia Automobile Receivables Trust, Series 1999-B,
Class A4 .............................................. 09/15/04 6.510 2,976,660
287 Fasco Grantor Trust ..................................... 11/15/01 6.650 286,980
1,484 Mid-State Trust IV, Series 4, Class A ................... 04/01/30 8.330 1,516,914
2,370 Union Acceptance Corporation, Series 1999-A, Class A5 ... 09/08/06 5.870 2,313,712
-------------
Total Asset Backed Securities (cost--$11,214,544) ...................... 11,078,866
-------------
Repurchase Agreement--1.71%
1,925 Repurchase Agreement dated 11/30/99 with State Street
Bank & Trust Company, collateralized by $2,005,000
Federal National Mortgage Association Zero Coupon Note,
due 1/26/00 (value--$1,987,456) proceeds:
$1,925,303 (cost--$1,925,000) ........................... 12/01/99 5.670 1,925,000
-------------
Total Investments (cost--$138,115,542)--120.40% ........................ 135,698,536
Liabilities in excess of other assets (20.40)% ......................... (22,995,308)
-------------
Net Assets--100.00% .................................................... $ 112,703,228
=============
</TABLE>
- ----------
ARM Adjustable Rate Mortgage Security--The interest rate shown is the current
rate as of November 30, 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 November 30, 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 December
1, 1999) and/or futures transactions.
(1) Interest rate represents the annualized yield at date of purchase.
See accompanying notes to financial statements
6
<PAGE>
2002 TARGET TERM TRUST INC.
FUTURES CONTRACTS NOVEMBER 30, 1999
<TABLE>
<CAPTION>
Unrealized
Number of Appreciation
Contracts In Exchange For Expiration Date (Depreciation)
- ------------ --------------- --------------- --------------
<C> <S> <C> <C> <C>
110 Contracts to Deliver--5 year United States Treasury Notes ... $10,888,281 March 2000 $ (41,806)
114 Contracts to Receive--30 year United States Treasury Bonds .. 10,609,125 March 2000 139,066
$ 97,260
============
<CAPTION>
Security Sold Short "Against the Box"
Principal
Amount
(000) Value
- ------------ --------------
<C> <S> <C>
$ 942 GNMA TBA 6.500% (proceeds--$904,494) .......................................................... $ 900,054
============
</TABLE>
See accompanying notes to financial statements
7
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1999
Assets
Investments in securities, at value (cost--$138,115,542) ..... $ 135,698,536
Cash ......................................................... 240,783
Deposits with broker for securities sold short ............... 904,494
Receivable for investments sold .............................. 123,340
Interest receivable .......................................... 852,877
Other assets ................................................. 11,896
-------------
Total assets ................................................. 137,831,926
-------------
Liabilities
Security sold short, at value (proceeds--$904,494) ........... 900,054
Payable for reverse repurchase agreements .................... 15,881,000
Payable for investments purchased ............................ 7,768,819
Payable to investment adviser and administrator .............. 65,094
Payable for interest on reverse repurchase agreements ........ 38,820
Payable for variation margin ................................. 21,999
Accrued expenses and other liabilities ....................... 452,912
-------------
Total liabilities ............................................ 25,128,698
-------------
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 .......................... 8,009,650
Accumulated net realized loss from investments and futures
transactions ................................................. (6,517,643)
Net unrealized depreciation of investments, security sold
short and futures ............................................ (2,315,306)
-------------
Net assets ................................................... $ 112,703,228
=============
Net asset value per share .................................... $ 14.44
=============
See accompanying notes to financial statements
8
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF OPERATIONS
For the
Year Ended
November 30, 1999
-----------------
Investment income:
Interest ...................................................... $ 10,343,726
------------
Expenses:
Interest expense .............................................. 1,224,077
Investment advisory and administration ........................ 807,186
Excise tax .................................................... 250,792
Legal and audit ............................................... 100,698
Reports and notices to shareholders ........................... 79,595
Custody and accounting ........................................ 69,187
Transfer agency ............................................... 23,029
Directors' fees ............................................... 10,500
Other expenses ................................................ 87,395
------------
2,652,459
------------
Net investment income ......................................... 7,691,267
------------
Realized and unrealized gains (losses) from investment activities:
Net realized gains (losses) from:
Investment transactions .................................... 179,653
Futures transactions ....................................... (1,854,364)
Net change in unrealized appreciation/depreciation of:
Investments ................................................ (4,955,984)
Futures .................................................... (197,395)
------------
Net realized and unrealized loss from investment activities ... (6,828,090)
------------
Net increase in net assets resulting from operations .......... $ 863,117
============
See accompanying notes to financial statements
9
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
For the Years Ended
November 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
From operations:
Net investment income ....................................... $ 7,691,267 $ 7,951,914
Net realized gains (losses) from investments and futures
transactions ................................................ (1,674,711) 574,640
Net change in unrealized appreciation/depreciation of
investments and futures ..................................... (5,153,379) (453,671)
------------- -------------
Net increase in net assets resulting from operations ........ 863,177 8,072,883
------------- -------------
Dividends to shareholders from:
Net investment income ....................................... (6,722,950) (6,722,949)
------------- -------------
Net increase (decrease) in net assets ....................... (5,859,773) 1,349,934
Net assets:
Beginning of year ........................................... 118,563,001 117,213,067
------------- -------------
End of year (including undistributed net investment income of
$8,009,650 and $6,703,720, respectively) .................... $ 112,703,228 $ 118,563,001
============= =============
</TABLE>
See accompanying notes to financial statements
10
<PAGE>
2002 TARGET TERM TRUST INC.
STATEMENT OF CASH FLOWS
For the
Year Ended
November 30, 1999
-----------------
Cash flows provided from operating activities:
Interest received ............................................ $ 11,042,632
Operating expenses paid ...................................... (1,785,168)
Interest paid ................................................ (1,316,658)
Sale of short-term portfolio investments, net ................ 1,692,000
Purchase of long-term portfolio investments .................. (83,372,368)
Sale of long-term portfolio investments ...................... 101,082,982
Variation margin received on futures contracts ............... (1,717,687)
-------------
Net cash provided from operating activities .................. 25,625,733
-------------
Cash flows used for financing activities:
Dividends paid to shareholders ............................... (6,722,950)
Decrease in reverse repurchase agreements .................... (18,662,000)
-------------
Net cash used for financing activities ....................... (25,384,950)
-------------
Net change in cash ........................................... 240,783
Cash at begining of year ..................................... 0
-------------
Cash at end of year .......................................... $ 240,783
=============
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 ......... $ 863,177
-------------
Decrease in investments, at value ............................ 20,598,420
Decrease in receivable for investments sold .................. 2,462,199
Decrease in interest receivable .............................. 321,244
Decrease in variation margin receivable ...................... 312,073
Increase in other assets ..................................... (125,465)
Increase in payable for investments purchased ................ 3,678,434
Decrease in security sold short, at value .................... (2,182,446)
Decrease in payable for interest on reverse repurchase
agreements ................................................. (92,581)
Decrease in payable to investment adviser and administrator .. (3,304)
Increase in variation margin payable ......................... 21,999
Decrease in accrued expenses and other liabilities ........... (228,017)
-------------
24,762,556
-------------
Net cash provided from operating activities .................. $ 25,625,733
=============
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
2002 Target Term Trust Inc. (the "Trust") was incorporated in Maryland on
October 16, 1992 and is registered with the Securities and Exchange Commission
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 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
"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 year ended November 30, 1999 was $23,347,864 at a weighted average
interest rate of 5.18%.
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
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 November
30, 1999, was substantially the same as the cost of securities for financial
statement purposes.
At November 30, 1999, the components of net unrealized depreciation of
investments were as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross appreciation (from investments having an excess of value over cost) ....................... $ 457,904
Gross depreciation (from investments having an excess of cost over value) ....................... (2,874,910)
-----------
Net unrealized depreciation of investments ...................................................... $(2,417,006)
===========
</TABLE>
For the year ended November 30, 1999, total aggregate purchases and sales
of portfolio securities, excluding short-term securities, were $87,050,802 and
$101,473,131, 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
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.
To reflect reclassifications, arising from permanent "book/tax"
differences for the year ended November 30, 1999, undistributed net investment
income was increased by $337,613, accumulated net realized gains/losses from
investments and futures transaction was decreased by $126,782, and capital stock
decreased by $210,831.
CAPITAL STOCK
There are 200,000,000 shares of $0.001 par value common stock authorized.
Of the 7,802,867 shares outstanding as of November 30, 1999, Mitchell Hutchins
owned 8,662 shares.
The Trust did not repurchase any shares of its common stock for the year
ended November 30, 1999.
For the period July 10, 1995 (commencement of repurchase program) through
November 30, 1999, the Trust repurchased 2,873,600 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 10.88%. At November 30, 1999, paid-in-capital is net the cost
of $37,317,935 of capital stock reacquired.
15
<PAGE>
2002 TARGET TERM TRUST INC.
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout each year is
presented below:
<TABLE>
<CAPTION>
For the Years Ended November 30,
----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ......................... $ 15.19 $ 15.02 $ 14.88 $ 14.37 $ 12.70
-------- -------- -------- -------- --------
Net investment income ...................................... 0.99 1.02 1.06 1.13* 1.02*
Net realized and unrealized gains (losses) from investments
and futures ............................................. (0.88) 0.01 (0.08) (0.05)* 1.36*
-------- -------- -------- -------- --------
Net increase in net asset value resulting from
investment operations ................................... 0.11 1.03 0.98 1.08 2.38
-------- -------- -------- -------- --------
Dividends from net investment income ....................... (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 year ............................... $ 14.44 $ 15.19 $ 15.02 $ 14.88 $ 14.37
======== ======== ======== ======== ========
Market value, end of year .................................. $ 13.56 $ 14.13 $ 13.63 $ 12.63 $ 12.50
======== ======== ======== ======== ========
Total investment return(1) ................................. 2.07% 10.23% 15.23% 8.07% 19.85%
======== ======== ======== ======== ========
Ratios/Supplemental Data:
Net assets, end of year (000's) ............................ $112,703 $118,563 $117,213 $117,276 $136,754
Expenses to average net assets+ ............................ 2.30% 2.97% 3.36% 3.13% 3.42%
Net investment income to average net assets ................ 6.67% 6.68% 7.13% 7.74% 7.44%
Portfolio turnover rate .................................... 63% 86% 64% 127% 103%
Asset coverage++ ........................................... $ 8,097 $ 4,334 $ 3,521 $ 3,261 $ 4,013
</TABLE>
- ----------
* Calculated using average daily shares outstanding for the year.
+ These ratios include 1.06%, 1.79%, 2.25%, 1.93%, and 2.50% related to
interest expense for the years ended November 30, 1999, 1998, 1997, 1996,
and 1995, respectively, which represents the cost of leverage to the
Trust.
++ Per $1,000 of reverse repurchase agreements and dollar roll transactions
outstanding.
(1) Total investment return is calculated assuming a purchase of common stock
at the current market price on the first day of each year reported and a
sale at the current market price on the last day of each year reported and
assuming reinvestment of dividends at prices obtained under the Trust's
Dividend Reinvestment Plan. Investment returns do not reflect brokerage
commissions.
16
<PAGE>
2002 TARGET TERM TRUST INC.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
2002 Target Term Trust Inc.
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of 2002 Target Term Trust Inc. (the
"Trust") as of November 30, 1999, and the related statements of operations and
cash flows for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of November 30, 1999, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
2002 Target Term Trust Inc. at November 30, 1999, and the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods, in conformity with generally
accepted accounting principles.
/s/ Ernst + Young LLP
New York, New York
January 14, 2000
17
<PAGE>
2002 TARGET TERM TRUST, INC.
TAX INFORMATION (unaudited)
We are required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise you within 60 days of the Trust's fiscal year end (November
30, 1999), as to the federal tax status of distributions received by
stockholders during such fiscal year. Accordingly, we are advising you that all
distributions paid during the period by the Trust were derived from net
investment income and are taxable as ordinary income.
Dividends received by tax-exempt recipients (e.g., IRAs and Keoghs) need
not be reported as taxable income. Some retirement trusts (e.g., corporate,
Keogh and 403(b)(7) plans) may need this information for their annual
information reporting.
Because the Trust's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1999. The second
notification, which reflects the amount to be used by calendar year taxpayers on
their federal income tax returns, will be made in conjunction with Form 1099 DIV
and will be mailed in January 2000. Shareholders are advised to consult their
own tax advisers with respect to the tax consequences of their investment in the
Trust.
18
<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 $67 billion in
assets under management as of December 31, 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.
At a meeting held on December 17, 1999, the Trust's board of directors
adopted several amendments to the Trust's bylaws. The bylaws were amended to
specify that, under normal circumstances, a Trustee or officer of the Trust will
serve as Chairman of stockholder meetings. The Chairman has the power to decide
the order of business at stockholder meetings and is able to adopt and enforce
procedures that govern action by meeting participants. The amendments clarify
that the Chairman has the power to adjourn stockholder meetings. The amendments
also increase the percentage of outstanding shares necessary for stockholders to
call a special stockholders meeting from 25% to a majority of the shares that
would be entitled to vote at the meeting.
YEAR 2000 RISK
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
19
<PAGE>
2002 TARGET TERM TRUST INC.
GENERAL INFORMATION (unaudited) (concluded)
shares of common stock, unless such common stockholders elect to receive cash.
Common stockholders who elect to hold their shares in the name of another broker
or nominee should contact such broker or nominee to determine whether, or how,
they may participate in the Plan. The ability of such stockholders to
participate in the Plan may change if their shares are transferred into the name
of another broker or nominee.
A stockholder may elect not to participate in the Plan or may terminate
participation in the Plan at any time without penalty, and stockholders who have
previously terminated participation in the Plan may rejoin it at any time.
Changes in elections must be made in writing to the Trust's transfer agent and
should include the stockholder's name and address as they appear on that share
certificate or in the transfer agent's records. An election to terminate
participation in the Plan, until such election is changed, will be deemed an
election by a stockholder to take all subsequent distributions in cash. An
election will be effective only for distributions declared and having a record
date at least ten days after the date on which the election is received.
Additional shares of common stock acquired under the Plan will be
purchased in the open market, on the NYSE, at prices that may be higher or lower
than the net asset value per share of the common stock at the time of the
purchase. The number of shares of common stock purchased with each dividend will
be equal to the result obtained by dividing the amount of the dividend payable
to a particular stockholder by the average price per share (including applicable
brokerage commissions) that the transfer agent was able to obtain in the open
market. The Trust will not issue any new shares of common stock in connection
with the Plan. There is no charge to participants for reinvesting dividends or
other distributions. The transfer agent's fees for handling the reinvestment of
distributions will be paid by the Trust. However, each participant pays a pro
rata share of brokerage commissions incurred with respect to the transfer
agent's open market purchases of common stock in connection with the
reinvestment of distributions. The automatic reinvestment of dividends and other
distributions in shares of common stock does not relieve participants of any
income tax that may be payable on such distributions. See "Tax Information."
Additional information regarding the Plan may be obtained from, and all
correspondence concerning the Plan should be directed to, the transfer agent at
PNC Bank, National Association, c/o PFPC Inc., P.O. Box 8950, Wilmington,
Delaware 19899.
20
<PAGE>
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<PAGE>
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<PAGE>
BOARD OF TRUSTEES
- --------------------------------------------------------------------------------
DIRECTORS
E. Garrett Bewkes, Jr. Meyer Feldberg
Chairman
George W. Gowen
Margo N. Alexander
Frederic V. Malek
Richard Q. Armstrong
Carl W. Schafer
Richard R. Burt
Brian M. Storms
Mary C. Farrell
PRINCIPAL OFFICERS
Margo N. Alexander Dianne E. O'Donnell
President Vice President and Secretary
Victoria E. Schonfeld Paul H. Schubert
Vice President Vice President and Treasurer
INVESTMENT ADVISER, AND
ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
51 West 52nd Street
New York, New York 10019
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that from time to time the Trust may purchase shares of its
common stock in the open market at market prices.
This report is sent to the shareholders of the Trust for their information. It
is not a prospectus, circular or representation intended for the use in the
purchase or sale of shares of the Trust or of any securities mentioned in this
report.
<PAGE>
PaineWebber
(Copyright)2000 PaineWebber Incorporated
Member SIPC
All rights reserved
