UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-07660
Name of Fund: The Massachusetts Health and Education Tax-Exempt Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: John M. Loffredo, Chief Executive
Officer, The Massachusetts Health and Education Tax-Exempt Trust, 800
Scudders Mill Road, Plainsboro, NJ 08536. Mailing address: P.O. Box 9011,
Princeton, NJ 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 12/31/05
Date of reporting period: 01/01/05 - 12/31/05
Item 1 - Report to Stockholders
The Massachusetts Health &
Education Tax-Exempt Trust
Annual Report
December 31, 2005
The Massachusetts Health & Education Tax-Exempt Trust
The Benefits and Risks of Leveraging
The Massachusetts Health & Education Tax-Exempt Trust utilizes leverage to seek
to enhance the yield and net asset value of its Common Shares. However, these
objectives cannot be achieved in all interest rate environments. To leverage,
the Trust issues Preferred Shares, which pay dividends at prevailing short-term
interest rates, and invests the proceeds in long-term municipal bonds. The
interest earned on these investments, net of dividends to Preferred Shares, is
paid to Common Shareholders in the form of dividends, and the value of these
portfolio holdings is reflected in the per share net asset value of the Trust's
Common Shares. However, in order to benefit Common Shareholders, the yield curve
must be positively sloped; that is, short-term interest rates must be lower than
long-term interest rates. At the same time, a period of generally declining
interest rates will benefit Common Shareholders. If either of these conditions
change, then the risks of leveraging will begin to outweigh the benefits.
To illustrate these concepts, assume a fund's Common Share capitalization of
$100 million and the issuance of Preferred Shares for an additional $50 million,
creating a total value of $150 million available for investment in long-term
municipal bonds. If prevailing short-term interest rates are approximately 3%
and long-term interest rates are approximately 6%, the yield curve has a
strongly positive slope. The fund pays dividends on the $50 million of Preferred
Shares based on the lower short-term interest rates. At the same time, the
fund's total portfolio of $150 million earns the income based on long-term
interest rates. Of course, increases in short- term interest rates would reduce
(and even eliminate) the dividends on the Common Shares.
In this case, the dividends paid to Preferred Shareholders are significantly
lower than the income earned on the fund's long-term investments, and therefore
the Common Shareholders are the beneficiaries of the incremental yield. However,
if short-term interest rates rise, narrowing the differential between short-term
and long-term interest rates, the incremental yield pickup on the Common Shares
will be reduced or eliminated completely. At the same time, the market value of
the fund's Common Shares (that is, its price as listed on the American Stock
Exchange) may, as a result, decline. Furthermore, if long-term interest rates
rise, the Common Shares' net asset value will reflect the full decline in the
price of the portfolio's investments, since the value of the fund's Preferred
Shares does not fluctuate. In addition to the decline in net asset value, the
market value of the fund's Common Shares may also decline.
As a part of its investment strategy, the Trust may invest in certain securities
whose potential income return is inversely related to changes in a floating
interest rate ("inverse floaters"). In general, income on inverse floaters will
decrease when short-term interest rates increase and increase when short-term
interest rates decrease. Investments in inverse floaters may be characterized as
derivative securities and may subject the Trust to the risks of reduced or
eliminated interest payments and losses of invested principal. In addition,
inverse floaters have the effect of providing investment leverage and, as a
result, the market value of such securities will generally be more volatile than
that of fixed-rate, tax-exempt securities. To the extent the Trust invests in
inverse floaters, the market value of the Trust's portfolio and the net asset
value of the Trust's shares may also be more volatile than if the Trust did not
invest in these securities. As of December 31, 2005, the Trust did not invest in
inverse floaters.
Swap Agreements
The Trust may invest in swap agreements, which are over-the-counter contracts in
which one party agrees to make periodic payments based on the change in market
value of a specified bond, basket of bonds, or index in return for periodic
payments based on a fixed or variable interest rate or the change in market
value of a different bond, basket of bonds or index. Swap agreements may be used
to obtain or reduce exposure to a bond or market without owning or taking
physical custody of securities. Swap agreements involve the risk that the party
with whom the Trust has entered into the swap will default on its obligation to
pay the Trust and the risk that the Trust will not be able to meet its
obligations to pay the other party to the agreement.
2 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005
A Letter From the President
Dear Shareholder
On balance, 2005 was a year of "muddling through" for the U.S. financial
markets, as oil prices reached new record highs, the Federal Reserve Board (the
Fed) increased the target federal funds rate from 2.25% to 4.25%, the housing
market and the consumer finally showed some signs of slowing, and Hurricanes
Katrina and Rita ravaged the Gulf Coast, causing yet untold economic damage.
Although they struggled, stocks managed to post their third straight year of
positive performance. The year was equally uncertain for fixed income markets,
which were bemused by a flattening yield curve and a number of significant
credit events that brought a slowdown in high yield market returns. Notably, the
one-year results for the major asset classes -- stocks, bonds and cash -- were
the closest they have been in more than 100 years. For the 12- and six-month
periods ended December 31, 2005, most of the major market indexes managed to
land in positive territory:
Total Returns as of December 31, 2005 6-month 12-month
===========================================================================================
U.S. equities (Standard & Poor's 500 Index) + 5.77% + 4.91%
-------------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) + 5.88 + 4.55
-------------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) +14.88 +13.54
-------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.08 + 2.43
-------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.60 + 3.51
-------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) + 1.48 + 2.26
-------------------------------------------------------------------------------------------
In hindsight, these numbers are reasonably good given the headwinds facing the
markets in 2005. U.S. equities found support in strong corporate earnings, low
core inflation and healthy company balance sheets. Strength in the global
economy and non-U.S. equity markets helped, as did robust dividend-distribution,
share-buyback and merger-and-acquisition activity. International stocks had an
excellent year, with many markets benefiting from strong economic statistics,
trade surpluses and solid finances. In the U.S. bond market, long-term yields
remained low and, at year-end, the Treasury curve appeared ready to invert.
As 2006 begins, the largest question marks center on the Fed's future moves, the
U.S. consumer's ability (or inability) to continue spending, the direction of
the U.S. dollar following a year of appreciation and the potential for continued
strong economic and corporate earnings growth. As you turn the calendar and
consider how these factors might impact your investments, remember that the new
year is a good time to meet with your financial advisor to review your financial
goals, and to make portfolio changes where necessary. For investing insights and
timely "food for thought" for investors, we also invite you to visit Shareholder
magazine at www.mlim.ml.com/shareholdermagazine.
As always, we thank you for trusting Merrill Lynch Investment Managers with your
investment assets, and we look forward to serving you in the new year and
beyond.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005 3
A Discussion With Your Trust's Portfolio Managers
We increased the Trust's use of leverage during the period and, with the
proceeds, invested in high-quality, longer-dated bonds that we found to be
attractively valued.
Describe the market environment relative to municipal bonds.
Over the past year, long-term bond yields declined moderately as shorter-term
yields increased. Early in the period, U.S. Treasury prices rallied strongly
while their yields, which move in the opposite direction, fell. By the end of
June 2005, 30-year U.S. Treasury bond yields had declined by nearly 70 basis
points (.70%) to 4.19%. A number of factors were responsible for the improvement
in bond prices, including moderating U.S. economic growth for much of the
period, slowing growth in foreign economies and strong demand from Asian
governments for U.S. Treasury securities. In recent months, however, investor
focus shifted to the potential for rising inflation as commodity prices --
especially oil and gold prices -- remained elevated. Faster economic growth,
coupled with the possibility of further price increases, pushed bond yields
higher. By the end of December 2005, 30-year U.S. Treasury bond yields stood at
4.54%, down 33 basis points compared to a year earlier.
The Federal Reserve Board (the Fed) continued to raise short-term interest rates
at each of its meetings during the period, lifting the federal funds target rate
to 4.25%. Investors did not expect the current interest rate tightening cycle to
be curtailed in early 2006. Accordingly, the yield curve continued to flatten,
indicating that short-term interest rates were rising more than longer-term
rates. During the past year, 10-year Treasury note yields rose 15 basis points
to 4.39%.
Tax-exempt bond yields exhibited a similar pattern during most of the period.
According to Municipal Market Data, the yield on AAA-rated issues maturing in 30
years declined 22 basis points to 4.39%, while the yield on AAA-rated issues
maturing in 10 years rose 22 basis points to 3.76%.
Municipalities issued more than $408 billion in new tax-exempt debt in 2005,
nearly 14% greater than the prior year's issuance and representing a new annual
record. Meanwhile, the volume of refunding issues increased by more than 47% on
a year-over-year basis as issuers took advantage of declining long-term bond
yields and a flattening yield curve to refinance outstanding higher-coupon debt.
Investor demand for municipal product remained positive for most of the period.
The most current statistics from the Investment Company Institute indicate that,
year-to-date through November 2005, net new cash flows into long-term municipal
bond funds exceeded $6.25 billion -- a sharp reversal from the $12.7 billion
outflow seen during the same period in 2004. In December, however, surging
equity prices and holiday seasonal factors led to reduced investor interest in
long-term tax-exempt bond funds.
Looking ahead, the fundamentals for the tax-exempt bond market appear favorable,
and positive cash flows are anticipated. With municipal bonds currently yielding
up to 98% of comparable U.S. Treasury bond yields, and given the prospects for
reduced annual issuance in 2006, we believe the municipal bond market could
enjoy solid results in the coming months.
Describe conditions in the Commonwealth of Massachusetts.
Through November 2005, Massachusetts' tax revenue collections for fiscal year
2006 were up 7% compared to fiscal year 2005. Of this increase, a nearly 13%
rise in corporate excise tax revenues led the way, with sales-and-use tax (that
is, generally taxes levied on purchased goods and by public and private
facilities, such as public transportation and hotel lodging) and personal income
tax revenues rising 4.3% and 5.6%, respectively. These positive numbers add to
the likelihood of Massachusetts seeing a larger-than-anticipated revenue surplus
by the end of the current fiscal year on June 30, 2006. Massachusetts'
unemployment rate rose to 4.9% in November 2005, slightly below the national
average of 5.0%. During the calendar year ended December 31, 2005, the
commonwealth issued $13.4 billion in debt, roughly 13.5% more than the previous
year -- matching the national increase in a record year for new municipal
supply.
How did the Trust perform during the fiscal year?
For the 12-month period ended December 31, 2005, the Common Shares of
Massachusetts Health and Education Tax-Exempt Trust had net annualized yields of
5.80% and 5.80%, based on a year-end per share net asset value of $13.59 and a
per share market price of $13.60, respectively, and $.789 per share income
dividends. Over the same period, the total investment return on the Trust's
Common Shares was +5.46%, based on a change in per share net asset value from
$13.74 to $13.59, and assuming reinvestment of all distributions.
4 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005
The Trust's performance was helped by our continued overweighting of lower
investment grade bonds and, to a lesser extent, below investment grade bonds.
Lower-rated bonds continued to enjoy strong performance during the past 12
months as investors appeared willing to assume credit risk in exchange for
declining amounts of additional yield. The Trust benefited from this phenomenon
of narrowing credit spreads as well as from the generally higher income that
lower-rated securities provide.
For the first three quarters of the year, the portfolio's leverage ratio was
lower than that of its peers. This initially detracted from performance as
long-term interest rates fell somewhat unexpectedly. In late September, however,
we issued an additional $10 million in Auction Preferred Shares (APS). Besides
bringing our leverage ratio more in line with our peers, this move allowed us to
take advantage of a positively sloped yield curve. Essentially, we were able to
borrow more money at low short-term interest rates (that is, rates lower than
long-term rates) and reinvest the proceeds in higher-yielding, longer-dated
bonds.
For the six-month period ended December 31, 2005, the total investment return on
the Trust's Common Shares was -.15%, based on a change in per share net asset
value from $14.12 to $13.59, and assuming reinvestment of all distributions.
For a description of the Trust's total investment return based on a change in
the per share market value of the Trust's Common Shares (as measured by the
trading price of the Trust's shares on the American Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial Highlights
section of this report. As a closed-end fund, the Trust's shares may trade in
the secondary market at a premium or discount to the Trust's net asset value. As
a result, total investment returns based on changes in the market value of the
Trust's Common Shares can vary significantly from total investment return based
on changes in the Trust's net asset value.
What changes were made to the portfolio during the period?
Most of our portfolio activity took place in the final quarter of the year as we
sought to invest the proceeds of our APS issuance. We generally favored
high-quality, long-dated bonds that we believed were attractively valued.
Consistent with our investment mandate, a majority of our purchases were of
bonds issued on behalf of Massachusetts nonprofit health-related and
education-related entities.
Throughout the period, we also looked for opportunities to reduce our exposure
to lower-quality bonds. Although these issues performed well during the year, we
viewed their strong price performance as an opportunity to accomplish several
goals at once -- bringing our weighting in those securities more in line with
our peers, locking in recent gains and reducing our exposure to certain bonds
whose credit quality had weakened.
For the six months ended December 31, 2005, the Trust's APS had an average yield
of 2.44% for Series A and 2.85% for Series B. The Fed's interest rate hikes are
clearly having an impact on the Fund's borrowing costs. The Fed raised the
short-term interest rate target 200 basis points during the 12-month period.
Still, the tax-exempt yield curve remained relatively steep and continued to
generate an income benefit to the holders of Common Shares from the leveraging
of Preferred Shares. However, should the spread between short-term and long-term
interest rates narrow, the benefits of leveraging will decline and, as a result,
reduce the yield on the Trust's Common Shares. At the end of the period, the
Trust's leverage amount, due to APS, was 38.61% of total net assets, before the
deduction of Preferred Shares. (For a more complete explanation of the benefits
and risks of leveraging, see page 2 of this report to shareholders.)
How would you characterize the Trust's position at the close of the period?
As a result of our recent APS issuance, the Trust emerged with a higher
leverage-adjusted duration that is more in line with that of its benchmark.
Accordingly, the portfolio has become more sensitive to changes in interest
rates and has the potential for increased volatility. This development was
expected, however, and we remain confident that we can take steps to mute that
volatility, in part through hedging strategies such as futures and interest rate
swaps.
Also at period end, we continued our efforts to return the portfolio's weighting
in lower-rated bonds to a more neutral stance. In the coming months, we expect
this process to continue if credit spreads tighten further -- enabling us to
lock in gains while reducing the Trust's exposure to credit risk.
Theodore R. Jaeckel Jr., CFA
Vice President and Portfolio Manager
Robert D. Sneeden
Vice President and Portfolio Manager
January 10, 2006
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005 5
Schedule of Investments (in Thousands)
Face
Amount Municipal Bonds Value
================================================================================
Massachusetts--151.9%
--------------------------------------------------------------------------------
$ 1,000 Massachusetts Bay Transportation Authority, Special
Assessment Revenue Refunding Bonds, Series A, 5%
due 7/01/2031 $ 1,048
--------------------------------------------------------------------------------
825 Massachusetts State College Building Authority, Project
Revenue Refunding Bonds, Series B, 5.50%
due 5/01/2039 (i) 974
--------------------------------------------------------------------------------
Massachusetts State Development Finance Agency,
Education Revenue Bonds:
1,100 (Belmont Hill School), 5% due 9/01/2031 1,131
400 (Middlesex School Project), 5% due 9/01/2033 410
250 (Xaverian Brothers High School), 5.65% due 7/01/2029 259
--------------------------------------------------------------------------------
Massachusetts State Development Finance Agency,
First Mortgage Revenue Bonds, Series A:
855 (Edgecombe Project), 6.75% due 7/01/2021 913
850 (Overlook Communities Inc.), 6.125% due 7/01/2024 871
--------------------------------------------------------------------------------
1,250 Massachusetts State Development Finance Agency,
First Mortgage Revenue Refunding Bonds (Symmes Life
Care, Inc.--Brookhaven at Lexington), Series A, 5%
due 3/01/2035 (l) 1,283
--------------------------------------------------------------------------------
500 Massachusetts State Development Finance Agency,
Human Service Provider Revenue Bonds (Seven Hills
Foundation & Affiliates), 5% due 9/01/2035 (l) 511
--------------------------------------------------------------------------------
825 Massachusetts State Development Finance Agency,
Resource Recovery Revenue Bonds (Ogden Haverhill
Associates), AMT, Series A, 6.70% due 12/01/2014 889
--------------------------------------------------------------------------------
Massachusetts State Development Finance Agency
Revenue Bonds:
1,000 (Boston University), Series T-1, 5% due 10/01/2039 (a) 1,037
500 (College of Pharmacy and Allied Health Services),
Series D, 5% due 7/01/2027 516
500 (Curry College), Series A, 5% due 3/01/2035 (j) 507
400 (Franklin W. Olin College), Series B, 5.25%
due 7/01/2033 (i) 423
1,000 (Massachusetts College of Pharmacy and Health
Sciences), 5.75% due 7/01/2033 1,059
425 (Massachusetts Council of Human Service Providers,
Inc.), Series C, 6.60% due 8/15/2029 432
2,000 (Smith College), 5% due 7/01/2035 2,091
500 (Volunteers of America--Ayer Limited Partnership),
AMT, Series A, 6.20% due 2/20/2046 (k) 558
1,000 (WGBH Educational Foundation), Series A, 5.375%
due 1/01/2042 (a) 1,073
1,100 (WGBH Educational Foundation), Series A, 5.75%
due 1/01/2042 (a) 1,349
600 (Western New England College), 5.875%
due 12/01/2012 (g) 669
540 (The Wheeler School), 6.50% due 12/01/2029 573
500 (Williston Northampton School Project), 5%
due 10/01/2025 (i) 524
--------------------------------------------------------------------------------
Massachusetts State Development Finance Agency,
Revenue Refunding Bonds:
1,500 (Boston University), Series P, 5.45% due 5/15/2059 1,609
500 (Clark University), 5.125% due 10/01/2035 (i) 529
1,500 (Western New England College), Series A, 5%
due 9/01/2033 1,550
--------------------------------------------------------------------------------
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
800 (Baystate Medical Center), Series E, 6%
due 7/01/2006 (e)(g) 827
1,000 (Baystate Medical Center), Series F, 5.75%
due 7/01/2033 1,059
350 (Berkshire Health System), Series E, 6.25%
due 10/01/2031 371
200 (Capital Asset Program), VRDN, Series E, 3.50%
due 1/01/2035 (h) 200
1,500 (Daughters of Charity-Carney), Series D, 6.10%
due 7/01/2006 (g) 1,515
1,350 (Harvard University), Series FF, 5.125%
due 7/15/2037 1,414
750 (Milford-Whitinsville Hospital), Series D, 6.35%
due 7/15/2032 797
1,000 (Simmons College), Series F, 5% due 10/01/2033 (c) 1,040
230 (University of Massachusetts), Series C, 5.125%
due 10/01/2034 (c) 240
1,000 (University of Massachusetts Memorial Healthcare),
Series D, 5% due 7/01/2033 996
1,285 (Wheaton College), Series D, 6% due 1/01/2018 1,349
--------------------------------------------------------------------------------
Massachusetts State Health and Educational Facilities
Authority, Revenue Refunding Bonds:
885 (Bay Cove Human Services Issue), Series A, 5.90%
due 4/01/2028 893
1,000 (Boston College), Series N, 5.125% due 6/01/2037 1,042
500 (Christopher House), Series A, 6.875%
due 1/01/2029 503
800 (Covenant Health System), 6% due 7/01/2022 865
400 (Covenant Health System), 6% due 7/01/2031 428
495 (Learning Center For Deaf Children), Series C,
6.125% due 7/01/2029 502
500 (Massachusetts Institute of Technology), Series L,
5% due 7/01/2023 555
100 (Partners Healthcare System), Series A, 5.375%
due 7/01/2024 (f) 103
500 (Partners Healthcare System), Series C, 5.75%
due 7/01/2032 544
395 (Valley Regional Health System), Series C, 5.75%
due 7/01/2018 (b) 399
1,500 (Wellesley College), 5% due 7/01/2033 1,558
1,000 (Youville House--FHA Insured Project), Series A,
6.25% due 2/15/2007 (d)(g) 1,050
--------------------------------------------------------------------------------
Portfolio Abbreviations
To simplify the listings of The Massachusetts Health & Education Tax-Exempt
Trust's portfolio holdings in the Schedule of Investments, we have abbreviated
the names of many of the securities according to the list at right.
AMT Alternative Minimum Tax (subject to)
PCR Pollution Control Revenue Bonds
VRDN Variable Rate Demand Notes
6 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005
Schedule of Investments (concluded) (in Thousands)
Face
Amount Municipal Bonds Value
===============================================================================
Massachusetts (continued)
-------------------------------------------------------------------------------
$ 750 Massachusetts State Industrial Finance Agency, Health
Care Facility Revenue Bonds (Age Institute of
Massachusetts Project), 8.05% due 11/01/2025 $ 764
-------------------------------------------------------------------------------
1,500 Massachusetts State Industrial Finance Agency, PCR
(General Motors Corporation), 5.55% due 4/01/2009 1,348
-------------------------------------------------------------------------------
400 Massachusetts State Industrial Finance Agency Revenue
Bonds (Wentworth Institute of Technology), 5.75%
due 10/01/2008 (g) 417
-------------------------------------------------------------------------------
340 Massachusetts State Industrial Finance Agency, Senior
Living Facility Revenue Bonds (Forge Hill Project), AMT,
6.75% due 4/01/2030 343
-------------------------------------------------------------------------------
2,000 Massachusetts State School Building Authority,
Dedicated Sales Tax Revenue Bonds, Series A, 5%
due 8/15/2030 (e) 2,103
-------------------------------------------------------------------------------
1,000 Massachusetts State Water Pollution Abatement Trust,
Pool Program Revenue Bonds, Series 10, 5%
due 8/01/2029 1,051
-------------------------------------------------------------------------------
1,000 Rail Connections, Inc., Massachusetts, Capital
Appreciation Revenue Bonds (Route 128 Parking
Garage), Series B, 6.53%** due 7/01/2009 (g)(j) 444
-------------------------------------------------------------------------------
750 University of Massachusetts Building Authority, Project
Revenue Refunding Bonds, Senior Series 04-1, 5.125%
due 11/01/2034 (a) 790
===============================================================================
Puerto Rico--7.7%
-------------------------------------------------------------------------------
1,000 Puerto Rico Commonwealth Highway and
Transportation Authority, Transportation Revenue
Refunding Bonds, Series K, 5% due 7/01/2040 998
-------------------------------------------------------------------------------
1,285 Puerto Rico Public Buildings Authority, Government
Facilities Revenue Refunding Bonds, Series F, 5.25%
due 7/01/2025 1,452
-------------------------------------------------------------------------------
Total Investments (Cost--$48,932*)--159.6% 50,748
Other Assets Less Liabilities--3.3% 1,055
Preferred Shares, at Redemption Value--(62.9%) (20,011)
--------
Net Assets Applicable to Common Shares--100.0% $ 31,792
========
* The cost and unrealized appreciation (depreciation) of investments as of
December 31, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost ................................................. $48,823
=======
Gross unrealized appreciation .................................. $ 1,975
Gross unrealized depreciation .................................. (50)
-------
Net unrealized appreciation .................................... $ 1,925
=======
** Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase.
(a) AMBAC Insured.
(b) Connie Lee Insured.
(c) FGIC Insured.
(d) FHA Insured.
(e) FSA Insured.
(f) MBIA Insured.
(g) Prerefunded.
(h) Security may have a maturity of more than one year at time of issuance,
but has variable rate and demand features that qualify it as a short-term
security. The rate disclosed is that currently in effect. This rate
changes periodically based upon prevailing market rates.
(i) XL Capital Insured.
(j) ACA Insured.
(k) GNMA Collateralized.
(l) Radian Insured.
o Investments in companies considered to be an affiliate of the Trust, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
CMA Massachusetts Municipal Money Fund --+ --
--------------------------------------------------------------------------
+ Amount is less than $(1,000).
See Notes to Financial Statements.
Portfolio Information as of December 31, 2005 (unaudited)
Quality Ratings by Percent of Total
S&P/Moody's Investments
--------------------------------------------------------------------------------
AAA/Aaa ................................................................. 42.4%
AA/Aa ................................................................... 15.9
A/A ..................................................................... 9.6
BBB/Baa ................................................................. 15.6
BB/Ba ................................................................... 2.8
B/B ..................................................................... 2.7
NR (Not Rated) .......................................................... 10.6
Other* .................................................................. 0.4
--------------------------------------------------------------------------------
* Includes portfolio holdings in variable rate demand notes.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005 7
Statement of Net Assets
As of December 31, 2005
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$48,931,684) ... $ 50,747,657
Cash .............................................................................. 153,692
Receivables:
Interest ....................................................................... $ 984,154
Securities sold ................................................................ 70,000 1,054,154
------------
Prepaid expenses .................................................................. 4,399
------------
Total assets ...................................................................... 51,959,902
------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Payables:
Offering costs ................................................................. 57,512
Distributions to shareholders .................................................. 16,758
Investment adviser ............................................................. 14,339
Administration fees ............................................................ 6,145 94,754
------------
Accrued expenses .................................................................. 62,769
------------
Total liabilities ................................................................. 157,523
------------
===================================================================================================================================
Preferred Shares
-----------------------------------------------------------------------------------------------------------------------------------
Preferred Shares, at redemption value, par value $.01 per share (200 Series A
Shares and 200 Series B Shares of APS* authorized, issued and outstanding at
$50,000 per share liquidation preference) ......................................... 20,010,520
------------
===================================================================================================================================
Net Assets Applicable to Common Shares
-----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Shares ............................................ $ 31,791,859
============
===================================================================================================================================
Analysis of Net Assets Applicable to Common Shares
-----------------------------------------------------------------------------------------------------------------------------------
Common Shares, par value $.01 per share (2,339,681 shares issued and outstanding) . $ 23,397
Paid-in capital in excess of par .................................................. 29,596,026
Undistributed investment income--net .............................................. $ 334,510
Undistributed realized capital gains--net ......................................... 21,953
Unrealized appreciation--net ...................................................... 1,815,973
------------
Total accumulated earnings--net ................................................... 2,172,436
------------
Total--Equivalent to $13.59 net asset value per Common Share (market price--$13.60) $ 31,791,859
============
* Auction Preferred Shares.
See Notes to Financial Statements.
8 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005
Statement of Operations
For the Year Ended December 31, 2005
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest ................................................................... $ 2,357,818
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ................................................... $ 156,860
Administration fees ........................................................ 67,226
Professional fees .......................................................... 39,276
Commission fees ............................................................ 30,790
Trustees' fees and expenses ................................................ 30,000
Printing and shareholder reports ........................................... 29,268
Transfer agent fees ........................................................ 28,068
Accounting services ........................................................ 14,192
Pricing fees ............................................................... 6,450
Custodian fees ............................................................. 5,516
Listing fees ............................................................... 1,026
Other ...................................................................... 10,576
------------
Total expenses ............................................................. 419,248
------------
Investment income--net ..................................................... 1,938,570
------------
===================================================================================================================================
Realized & Unrealized Gain--Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net .......................................... 318,444
Change in unrealized appreciation on investments--net ...................... 41,235
------------
Total realized and unrealized gain--net .................................... 359,679
------------
===================================================================================================================================
Dividends & Distributions to Preferred Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ..................................................... (245,598)
Realized gain--net ......................................................... (28,720)
------------
Total dividends and distributions to Preferred Shareholders ................ (274,318)
------------
Net Increase in Net Assets Resulting from Operations ....................... $ 2,023,931
============
See Notes to Financial Statements.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005 9
Statements of Changes in Net Assets
For the Year Ended
December 31,
----------------------------
Increase (Decrease) in Net Assets: 2005 2004
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................................ $ 1,938,570 $ 1,920,663
Realized gain--net ................................................................ 318,444 619,944
Change in unrealized appreciation--net ............................................ 41,235 (459,444)
Dividends and distributions to Preferred Shareholders ............................. (274,318) (95,286)
----------------------------
Net increase in net assets resulting from operations .............................. 2,023,931 1,985,877
----------------------------
===================================================================================================================================
Dividends & Distributions to Common Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................................ (1,823,158) (2,022,704)
Realized gain--net ................................................................ (304,439) (367,233)
----------------------------
Net decrease in net assets resulting from dividends and distributions to
Common Shareholders ............................................................... (2,127,597) (2,389,937)
----------------------------
===================================================================================================================================
Share Transactions
-----------------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Shareholders in reinvestment of dividends and
distributions ..................................................................... 64,760 89,668
Offering and underwriting costs resulting from issuance of Preferred Shares ....... (244,927) --
----------------------------
Net increase (decrease) in net assets derived from share transactions ............. (180,167) 89,668
----------------------------
===================================================================================================================================
Net Assets Applicable to Common Shares
-----------------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets applicable to Common Shares .......................... (283,833) (314,392)
Beginning of year ................................................................. 32,075,692 32,390,084
----------------------------
End of year* ...................................................................... $ 31,791,859 $ 32,075,692
============================
* Undistributed investment income--net .......................................... $ 334,510 $ 492,966
============================
See Notes to Financial Statements.
10 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005
Financial Highlights
For the Year Ended December 31,
The following per share data and ratios have been derived -----------------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ....................... $ 13.74 $ 13.91 $ 13.76 $ 13.25 $ 13.17
-----------------------------------------------------------
Investment income--net* .................................. .83 .82 .93 .94 .94
Realized and unrealized gain--net ........................ .15 .08 .07 .42 .03
Dividends and distributions to Preferred Shareholders:
Investment income--net ................................ (.11) (.03) (.03) (.05) (.11)
Realized gain--net .................................... (.01) (.01) -- -- --
-----------------------------------------------------------
Total from investment operations ......................... .86 .86 .97 1.31 .86
-----------------------------------------------------------
Less dividends and distributions to Common Shareholders:
Investment income--net ................................ (.78) (.87) (.82) (.80) (.78)
Realized gain--net .................................... (.13) (.16) -- -- --
-----------------------------------------------------------
Total dividends and distributions to Common Shareholders . (.91) (1.03) (.82) (.80) (.78)
-----------------------------------------------------------
Offering and underwriting costs resulting from issuance of
Preferred Shares ........................................ (.10) -- -- -- --
-----------------------------------------------------------
Net asset value, end of year ............................. $ 13.59 $ 13.74 $ 13.91 $ 13.76 $ 13.25
===========================================================
Market price per share, end of year ...................... $ 13.60 $ 16.24 $ 15.26 $ 13.48 $ 13.60
===========================================================
==================================================================================================================================
Total Investment Return
----------------------------------------------------------------------------------------------------------------------------------
Based on market price per share .......................... (10.71%) 14.29% 20.11% 5.10% 13.01%
===========================================================
==================================================================================================================================
Ratios Based on Average Net Assets of Common Shares**
----------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement ..................... 1.30% 1.45% 1.16% 1.19% 1.18%
===========================================================
Total expenses ........................................... 1.30% 1.45% 1.16% 1.20% 1.20%
===========================================================
Total investment income--net ............................. 6.00% 5.97% 6.74% 7.00% 7.02%
===========================================================
==================================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Shares, end of year
(in thousands) ........................................... $ 31,792 $ 32,076 $ 32,390 $ 31,996 $ 30,727
===========================================================
Portfolio turnover ....................................... 16.32% 20.70% 26.17% 35.56% 12.69%
===========================================================
* Based on average shares outstanding.
** Do not reflect the effect of dividends to Preferred Shareholders.
See Notes to Financial Statements.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005 11
Notes to Financial Statements
1. Significant Accounting Policies:
The Massachusetts Health & Education Tax-Exempt Trust (the "Trust") is
registered under the Investment Company Act of 1940, as amended, as a
non-diversified, closed-end management investment company. The Trust's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. The Trust determines and makes
available for publication the net asset value of its Common Shares on a daily
basis. The Trust's Common Shares are listed on the American Stock Exchange under
the symbol MHE. The following is a summary of significant accounting policies
followed by the Trust.
(a) Valuation of investments -- Municipal bonds are traded primarily in the
over-the-counter ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Trust under the general direction
of the Board of Trustees. Such valuations and procedures are reviewed
periodically by the Board of Trustees of the Trust. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their closing
prices as of the close of such exchanges. Options written or purchased are
valued at the last sale price in the case of exchange-traded options. In the
case of options traded in the OTC market, valuation is the last asked price
(options written) or the last bid price (options purchased). Swap agreements are
valued by quoted fair values received daily by the Trust's pricing service.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost, which approximates market value, under which method the
investment is valued at cost and any premium or discount is amortized on a
straight line basis to maturity. Investments in open-end investment companies
are valued at their net asset value each business day. Securities and other
assets for which market quotations are not readily available are valued at fair
value as determined in good faith by or under the direction of the Board of
Trustees of the Trust.
(b) Derivative financial instruments -- The Trust may engage in various
portfolio investment strategies both to increase the return of the Trust and to
hedge, or protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the contract
or if the counterparty does not perform under the contract.
o Financial futures contracts -- The Trust may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Trust
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Trust agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Trust as unrealized gains or losses. When the contract is closed, the
Trust records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the time
it was closed.
o Options -- The Trust may write covered call options and purchase put
options. When the Trust writes an option, an amount equal to the premium
received by the Trust is reflected as an asset and an equivalent
liability. The amount of the liability is subsequently marked-to-market to
reflect the current market value of the option written. When a security is
purchased or sold through an exercise of an option, the related premium
paid (or received) is added to (or deducted from) the basis of the
security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Trust enters into a closing
transaction), the Trust realizes a gain or loss on the option to the
extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
o Forward interest rate swaps -- The Trust may enter into forward interest
rate swaps. In a forward interest rate swap, the Trust and the
counterparty agree to make periodic net payments on a specified notional
contract amount, commencing on a specified future effective date, unless
terminated earlier. When the agreement is closed, the Trust records a
realized gain or loss in an amount equal to the value of the agreement.
(c) Income taxes -- It is the Trust's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
12 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005
Notes to Financial Statements (continued)
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates. The
Trust amortizes all premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(f) Offering expenses -- Direct expenses relating to the public offering of the
Trust's Preferred Stock were charged to capital at the time of issuance of the
shares.
(g) Reclassifications -- U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the current
year, $28,313 has been reclassified between undistributed net investment income
and accumulated distributions in excess of net realized capital gains and $45
has been reclassified between paid-in capital in excess of par and undistributed
net investment income as a result of permanent differences attributable to
reclassification of distributions and non-deductible expenses. These
reclassifications have no effect on net assets or net asset values per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an advisory agreement with Fund Asset Management,
L.P. ("FAM") and an administrative agreement with Princeton Administrators, L.P.
("Princeton"). The general partner of FAM is Princeton Services, Inc. ("PSI"),
an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."),
which is the limited partner. FAM and Princeton are owned and controlled by ML &
Co.
FAM is responsible for the management of the Trust's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Trust. For such services, the Trust pays a monthly fee
at an annual rate of .35% of the Trust's average daily net assets, including
proceeds from the issuance of Preferred Shares.
The Trust pays Princeton a monthly fee at an annual rate of .15% of the Trust's
average daily net assets, including proceeds from the issuance of Preferred
Shares, for the performance of administrative services (other than investment
advice and related portfolio activities) necessary for the operation of the
Trust.
For the year ended December 31, 2005, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, an affiliate of FAM, received underwriting fees of $100,000 in
connection with the issuance of the Fund's Preferred Shares.
Certain officers and/or trustees of the Trust are officers and/or directors of
FAM, PSI, Princeton, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 2005 were $16,710,403 and $7,158,485, respectively.
4. Share Transactions:
Common Shares
The Trust is authorized to issue an unlimited number of Common Shares, par value
$.01 per share. Shares issued and outstanding during the years ended December
31, 2005 and December 31, 2004 increased by 4,569 and 6,200, respectively, as a
result of reinvestment of dividends and distributions.
Preferred Shares
The Trust is authorized to issue an unlimited number of Preferred Shares, par
value $.01 per share. In addition, the Trust has authorized 400 shares of
Auction Preferred Shares, par value $.01 per share. Auction Preferred Shares are
redeemable shares of Preferred Shares of the Trust, with a par value of $.01 per
share and a liquidation preference of $50,000 per share, plus accrued and unpaid
dividends, that entitle their holders to receive cash dividends at an annual
rate that may vary for the successive dividend periods. The yield in effect at
December 31, 2005 was 2.85% for Series A and 3.45% for Series B.
Shares issued and outstanding during the year ended December 31, 2005 increased
by 200 from the issuance of an additional series of Preferred Shares on
September 30, 2005. Shares issued and outstanding during the year ended December
31, 2004 remained constant.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005 13
Notes to Financial Statements (concluded)
5. Distributions to Shareholders:
The Trust paid a tax-exempt income dividend to holders of Common Shares in the
amount of $.065000 per share on January 30, 2006 to shareholders of record on
January 18, 2006.
The tax character of distributions paid during the fiscal years ended December
31, 2005 and December 31, 2004 was as follows:
--------------------------------------------------------------------------------
12/31/2005 12/31/2004
--------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income ...................... $2,088,254 $2,100,825
Ordinary income ........................ 21,136 2,132
Long-term capital gain ................. 292,525 382,266
-----------------------------
Total distributions ...................... $2,401,915 $2,485,223
=============================
As of December 31, 2005, the components of accumulated earnings on a tax basis
were as follows:
-------------------------------------------------------------------------------
Undistributed tax-exempt income--net ...................... $ 222,885
Undistributed ordinary income--net ........................ 24,721
Undistributed long-term capital gains--net ................ --
----------
Total undistributed earnings--net ......................... 247,606
Capital loss carryforward ................................. --
Unrealized gains--net ..................................... 1,924,830*
----------
Total accumulated earnings--net ........................... $2,172,436
==========
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the difference between book and tax amortization
methods for premiums and discounts on fixed income securities and other
book/tax temporary differences.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Trustees of The Massachusetts Health &
Education Tax-Exempt Trust:
We have audited the accompanying statement of net assets, including the schedule
of investments, of The Massachusetts Health & Education Tax-Exempt Trust (the
"Trust"), as of December 31, 2005 and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. 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 the standards of the Public Company
Accounting Oversight Board (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. The Trust
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Trust's internal control over
financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. Our procedures included confirmation
of securities owned as of December 31, 2005, by correspondence with the
custodian. 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 The
Massachusetts Health & Education Tax-Exempt Trust as of December 31, 2005, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and its financial highlights
for each of the five years in the period then ended, in conformity with U.S.
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
February 17, 2006
14 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005
Important Tax Information
All of the net investment income distributions paid by The Massachusetts Health
& Education Tax-Exempt Trust during the taxable year ended December 31, 2005
qualify as tax-exempt interest dividends for federal income tax purposes.
Additionally, the following table summarizes the taxable distributions paid by
the Trust during the year:
--------------------------------------------------------------------------------
Payable Ordinary Long-Term
Date Income Capital Gains
--------------------------------------------------------------------------------
Common Shareholders 9/29/2005 $.008683 --
12/29/2005 -- $ .113853
--------------------------------------------------------------------------------
Preferred Shareholders Series A: 9/15/2005 $ 4.16 --
11/17/2005 -- $ 38.11
11/25/2005 -- $ 43.55
12/01/2005 -- $ 16.44
12/08/2005 -- $ 16.20
--------------------------------------------------------
Series B: 12/21/2005 -- $ 16.43
--------------------------------------------------------------------------------
Proxy Results
During the six-month period ended December 31, 2005, The Massachusetts Health &
Education Tax-Exempt Trust's Common Shareholders voted on the following
proposal. The proposal was approved at a shareholders' meeting on September 13,
2005. A description of the proposal and number of shares voted are as follows:
----------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
----------------------------------------------------------------------------------------------
1. To elect the Trust's Trustees: Edward M. Murphy 1,940,888 11,650
Frank Nesvet 1,940,498 12,040
Walter B. Prince 1,940,888 11,650
James M. Storey 1,940,888 11,650
----------------------------------------------------------------------------------------------
During the six-month period ended December 31, 2005, The Massachusetts Health &
Education Tax-Exempt Trust's Preferred Shareholders voted on the following
proposal. The proposal was approved at a shareholders' meeting on September 13,
2005. A description of the proposal and number of shares voted are as follows:
----------------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
----------------------------------------------------------------------------------------------
1. To elect the Trust's Trustees: James F. Carlin, III,
Thomas H. Green, III, Edward M. Murphy, Frank Nesvet,
Walter B. Prince and James M. Storey 191 0
----------------------------------------------------------------------------------------------
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005 15
Dividend Reinvestment Plan
The Trust offers a dividend reinvestment plan (the "Plan") pursuant to which
Common Shareholders may elect to have dividends and capital gains distributions
reinvested in Common Shares of the Trust. The Trust declares dividends out of
net investment income, and will distribute annually net realized capital gains,
if any. Common Shareholders may join or withdraw from the Plan at any time.
If you decide to participate in the Plan, The Bank of New York, as your Plan
Agent, will automatically invest your dividends and capital gains distributions
in Common Shares of the Trust in your account.
Under the Plan, participants in the Plan will have their dividends reinvested in
Common Shares of the Trust on valuation date. If the market price per Common
Share on valuation date equals or exceeds net asset value per Common Share on
that date, the Trust will issue new Common Shares to participants at the higher
of net asset value or 95% of the market price. If net asset value per Common
Share on valuation date exceeds the market price per Common Share on that date,
or if the Board of Trustees should declare a dividend or capital gains
distribution payable to the Common Shareholders only in cash, the agent will buy
Common Shares in the open market on the American Stock Exchange, or elsewhere.
If, before the Plan Agent has completed its purchases, the market price exceeds
the net asset value per Common Share, the average per share purchase price paid
by the Plan Agent may exceed the net asset value of the Trust's Common Shares,
resulting in the acquisition of fewer Common Shares than if the dividend or
distribution had been paid in Common Shares by the Trust.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including information
needed by shareholders for tax records. Common Shares in the account of each
Plan participant will be held by the Plan Agent in noncertificated form in the
name of the participant, and each shareholder's proxy will include those shares
received pursuant to the Plan. Holders of Common Shares who do not elect to
participate in the Plan will receive all such amounts in cash paid by check
mailed directly to the record shareholder by The Bank of New York, as dividend
paying agent.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Trust reserves the right to amend or terminate the Plan.
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. Each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open
market purchases in connection with the reinvestment of dividends or capital
gains distributions.
Plan participants will receive tax information annually for personal records and
to help prepare federal income tax returns. The automatic reinvestment of
dividends and capital gains distributions does not relieve plan participants of
any income tax which may be payable on dividends or distributions.
Plan participants may withdraw from the Plan at any time by writing to the Plan
Agent at the address noted below. If you withdraw, you will receive a share
certificate in your name for all full Common Shares credited to your account
under the Plan and a cash payment for any fraction of a share credited to your
account. If you desire, the Plan Agent will sell your shares in the Plan and
send you the proceeds of the sale, less brokerage commissions.
If your shares are held in the name of a brokerage firm, bank, or other nominee,
you should contact your nominee to see if it will participate in the Plan on
your behalf. If you wish to participate in the Plan, but your brokerage firm,
bank or nominee is unable to participate on your behalf, you should request that
your shares be re-registered in your own name, which will enable your
participation in the Plan.
Any correspondence concerning the Plan should be directed to the Plan Agent at
The Bank of New York, Church Street Station, P.O. Box 11258, New York, NY
10286-1258, Telephone: 800-432-8224.
Other Information
From time to time in the future, the Trust may effect redemptions and/or
repurchases of its Auction Preferred Shares as provided in the applicable
constituent instruments or as agreed upon by the Trust and holders of Auction
Preferred Shares. The Trust would generally effect such redemptions and/or
repurchases to the extent necessary to maintain applicable asset coverage
requirements.
16 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005
Officers and Trustees
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Interested Trustee
------------------------------------------------------------------------------------------------------------------------------------
Thomas H. P.O. Box 9095 Trustee 1993 to Managing Director, Citigroup Global Markets Inc. One None
Green, Princeton, NJ present since 2002; Director in SSB, Public Finance
III* 08543-9095 Department from 1998 to 2001; First Assistant
Age: 46 Attorney General for The Commonwealth of
Massachusetts from 1992 to 1998; Vice President,
Public Finance, First Boston Corporation.
Mr. Green is an interested person of the Trust
because of his affiliation with a brokerage firm.
====================================================================================================================================
Independent Trustees
------------------------------------------------------------------------------------------------------------------------------------
James F. P.O. Box 9095 Trustee 2003 to Executive Vice President, Managing Partner, One None
Carlin, Princeton, NJ present Crosspoint Associates, Inc. (real estate
III* 08543-9095 management and development) since 1993;
Age: 42 Board of Directors, Chart Bank since 1996;
Principal of Alpha Analytical Inc. since 2000;
Former Director of Carlin Insurance.
------------------------------------------------------------------------------------------------------------------------------------
Edward M. P.O. Box 9095 Trustee 1993 to President of the Mentor Network since 2004; One None
Murphy Princeton, NJ present President and Chief Executive Officer of Alliance
08543-9095 Health Incorporated from 1998 to 2004; Formerly,
Age: 58 President and Chief Operating Officer of Olympus
Healthcare Group, Inc.; Senior Vice President of
Tucker Anthony Inc. from 1995 to 1997; Executive
Director of the Massachusetts Health and
Educational Facilities Authority from 1989 to 1995;
Previously, Commissioner of the Massachusetts
Department of Mental Health.
------------------------------------------------------------------------------------------------------------------------------------
Frank P.O. Box 9095 Trustee 2004 to Chief Executive Officer, Libra Group, Inc. since One Director of
Nesvet Princeton, NJ present 1998; Managing Director, Senior Vice President, Jefferson
08543-9095 CFO and Fund Treasurer, New England Funds Pilot
Age: 62 from 1993 to 1998. Variable
Fund (a
series of 14
mutual funds
sponsored
and managed
by Jefferson
Pilot
Investment
Advisory
Corporation
since
October
2003);
Trustee and
Chairman of
the Audit
Committee of
StreetTRACKS(R)
Series Trust
(a series of
10 exchange-
traded
mutual funds
sponsored
and managed
by State
Street
Global
Advisers)
since 2000.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005 17
Officers and Trustees (concluded)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name Address & Age Trust Served Principal Occupation(s) During Past 5 Years Trustee Trustee
====================================================================================================================================
Independent Trustees (concluded)
------------------------------------------------------------------------------------------------------------------------------------
Walter B. P.O. Box 9095 Chairman 1993 to Partner of the law firm of Prince, Lobel, One None
Prince Princeton, NJ and Trustee present Glovsky & Tye LLP since 1988; Board of Directors,
08543-9095 OneUnited Bank.
Age: 57
------------------------------------------------------------------------------------------------------------------------------------
James M. P.O. Box 9095 Trustee 1993 to Corporate Trustee/Director of various organizations One Trustee of
Storey Princeton, NJ present and corporations, including The U.S. Charitable the SEI
08543-9095 Gift Trust (a charitable organization sponsored by Investment
Age: 74 Eaton Vance) and a practicing attorney; Partner Funds
of the law firm of Dechert, Price & Rhoads from (consisting
1987 to 1993. of 128
portfolios).
------------------------------------------------------------------------------------------------------------------------
* Auction Preferred Shares Trustee.
------------------------------------------------------------------------------------------------------------------------------------
Position(s) Length of
Held with Time
Name Address & Age Trust Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Trust Officers*
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2004 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
08543-9011 and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999 and
Age: 45 Treasurer Director since 2004; Vice President of MLIM and FAM from 1990 to 1997; Director of
Taxation of MLIM from 1990 to 2001; Vice President, Treasurer and Secretary of the
IQ Funds since 2004.
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 President 2004 to Managing Director of MLIM since 2000; Director (Municipal Tax-Exempt Fund
Loffredo Princeton, NJ present Management) of MLIM from 1997 to 2000.
08543-9011
Age: 42
------------------------------------------------------------------------------------------------------------------------------------
Theodore R. P.O. Box 9011 Vice 2004 to Managing Director of MLIM since 2005; Director (Municipal Tax-Exempt Fund
Jaeckel Jr. Princeton, NJ President present Management) of MLIM from 1997 to 2005; Vice President of MLIM from 1991 to 1997.
08543-9011
Age: 46
------------------------------------------------------------------------------------------------------------------------------------
Robert D. P.O. Box 9011 Vice 2004 to Vice President (Municipal Tax-Exempt Fund Management) of MLIM since 1998;
Sneeden Princeton, NJ President present Assistant Vice President and Portfolio Manager of MLIM from 1994 to 1998.
08543-9011
Age: 53
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
08543-9011 Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Age: 54 Investment Management from 2002 to 2004; Managing Director and Global Director of
Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Commission's Division of
Enforcement in Washington, D.C. from 1990 to 1995.
------------------------------------------------------------------------------------------------------------------------------------
Brian D. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2005; Vice President of MLIM from 2002 to
Stewart Princeton, NJ present 2005; Secretary, The Massachusetts Health & Education Tax-Exempt Trust since 2004:
08543-9011 Attorney Private Practice from 1999 to 2002.
Age: 36
------------------------------------------------------------------------------------------------------------------------
* Officers of the Trust serve at the pleasure of the Board of Trustees.
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Custodian
State Street Bank and
Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agents
Common Shares:
The Bank of New York
101 Barclay Street -- 11 East
New York, NY 10286
Preferred Shares:
Deutsche Bank Trust Company
280 Park Avenue, 9th Floor
New York, NY 10018
Amex Symbol
MHE
18 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005
Availability of Quarterly Schedule of Investments
The Trust files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Trust's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Trust's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Trust offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2005 19
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
--------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
The Massachusetts Health & Education Tax-Exempt Trust seeks to provide
shareholders with as high a level of current income exempt from both regular
federal income taxes and Massachusetts personal income taxes as is consistent
with the preservation of shareholders' capital. The Trust seeks to achieve its
investment objective by investing primarily in Massachusetts tax-exempt
obligations issued on behalf of participating not-for-profit institutions. The
Trust will continue to invest primarily in "investment grade" obligations. The
Trust is intended to be a long-term investment and not a short-term trading
vehicle.
This report, including the financial information herein, is transmitted to
shareholders of The Massachusetts Health & Education Tax-Exempt Trust for their
information. It is not a prospectus. Past performance results shown in this
report should not be considered a representation of future performance. The
Trust has leveraged its Common Shares and intends to remain leveraged by issuing
Preferred Shares to provide the Common Shareholders with a potentially higher
rate of return. Leverage creates risks for Common Shareholders, including the
likelihood of greater volatility of net asset value and market price of shares
of the Common Shares, and the risk that fluctuations in the short-term dividend
rates of the Preferred Shares may affect the yield to Common Shareholders.
Statements and other information herein are as dated and are subject to change.
A description of the policies and procedures that the Trust uses to determine
how to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Trust voted proxies
relating to securities held in the Trust's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
The Massachusetts Health & Education Tax-Exempt Trust
Box 9011
Princeton, NJ 08543-9011
#MHET -- 12/05
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of trustees
has determined that (i) the registrant has the following audit
committee financial expert serving on its audit committee and (ii) each
audit committee financial expert is independent: Frank Nesvet.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending December 31, 2005 - $22,500
Fiscal Year Ending December 31, 2004 - $25,200
(b) Audit-Related Fees - Fiscal Year Ending December 31, 2005 - $0
Fiscal Year Ending December 31, 2004 - $0
(c) Tax Fees - Fiscal Year Ending December 31, 2005 - $5,700
Fiscal Year Ending December 31, 2004 - $5,200
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending December 31, 2005 - $0
Fiscal Year Ending December 31, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant. Any
proposed services exceeding the pre-approved cost levels will require
specific pre-approval by the Committee, as will any other services not
subject to general pre-approval (e.g., unanticipated but permissible
services). The Committee is informed of each service approved subject
to general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending December 31, 2005 - $5,577,771
Fiscal Year Ending December 31, 2004 - $11,926,355
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $1,227,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
James F. Carlin, III
Thomas H. Green, III
Walter B. Prince
Edward M. Murphy
James M. Storey
Frank Nesvet
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the
account of one or more of its clients, including a Fund. Pursuant to
these Proxy Voting Procedures, the Investment Adviser's primary
objective when voting proxies is to make proxy voting decisions solely
in the best interests of each Fund and its shareholders, and to act in
a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers
the interests of its clients, including the Funds, and not the
interests of the Investment Adviser, when voting proxies and that real
(or perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a
member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present
information to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser might
be asked to do so). The Committee determines how to vote the proxies of
all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes
are consistent with the best interests of those clients and are free
from unwarranted and inappropriate influences. The Committee
establishes general proxy voting policies for the Investment Adviser
and is responsible for determining how those policies are applied to
specific proxy votes, in light of each issuer's unique structure,
management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so
doing, the Committee may determine to vote a particular proxy in a
manner contrary to its generally stated policies. In addition, the
Committee will be responsible for ensuring that all reporting and
recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The
Investment Adviser believes that certain proxy voting issues require
investment analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may elect
to adopt a common position for the Investment Adviser on certain proxy
votes that are akin to investment decisions, or determine to permit the
portfolio manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that
the Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in conjunction
with a Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Investment Adviser will vote proxies related to
securities of foreign issuers only on a best efforts basis and may
elect not to vote at all in certain countries where the Committee
determines that the costs associated with voting generally outweigh the
benefits. The Committee may at any time override these general policies
if it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons
whose job responsibilities do not include contact with the Client and
whose job evaluations would not be affected by the Investment Adviser's
relationship with the Client (or failure to retain such relationship).
The subcommittee shall determine whether and how to vote all proxies on
behalf of the Investment Adviser's clients or, if the proxy matter is,
in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser's policy is case-by-case,
does not follow the voting recommendation of any proxy voting service
or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating
to the Client may be voted unless the Secretary, or in the Secretary's
absence, the Assistant Secretary of the Committee concurs that the
subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Investment Adviser may
elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any
time upon the request of a Committee member and may be amended or
deleted upon the vote of a majority of Committee members present at a
Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation, but
believes that compensation matters are normally best determined by an
issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not be
supported.
o Proposals related to requests, principally from management, for approval
of amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders)
is best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by
shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions "micromanaging" corporate conduct or requesting
release of information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the Committee
is generally supportive of proposals to require corporate disclosure of
matters that seem relevant and material to the economic interests of
shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of December 31, 2005.
(a)(1) Mr. Theodore R. Jaeckel, Jr. is primarily responsible for the
day-to-day management of the registrant's portfolio ("Portfolio
Manager"). Mr. Jaeckel has been a Managing Director of MLIM
since 2005. He was a Director of MLIM from 1997 to 2005. Mr.
Jaeckel has been a portfolio manager with the Investment Adviser
and MLIM since 1991 and has been a Vice President and portfolio
manager of the Fund since 2004.
(a)(2) As of December 31, 2005:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
-------------- --------------
Theodore R
Jaeckel, Jr 7 1 0 0 1 0
$2,643,353,381 $ 21,567,585 $ 0 $ 0 $ 21,567,585 $ 0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the Investment. Adviser and its affiliates, including other
client accounts managed by the Fund's portfolio management team. Investment
decisions for the Fund and other clients are made with a view to achieving their
respective investment objectives and after consideration of such factors as
their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, because clients of the Investment
Adviser and its affiliates may have differing investment strategies, a
particular security may be bought for one or more clients when one or more other
clients are selling the security. The investment results for the Fund may differ
from the results achieved by other clients of the Investment Adviser and its
affiliates and results among clients may differ. In addition, purchases or sales
of the same security may be made for two or more clients on the same day. In
such event, such transactions will be allocated among the clients in a manner
believed by the Investment Adviser and its affiliates to be equitable to each.
The Investment Adviser will not determine allocations based on whether it
receives a performance based fee from the client. In some cases, the allocation
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Investment Adviser and its
affiliates in the interest of achieving the most favorable net results to the
Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a portfolio
manager will need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise where
(i) the Investment Adviser may have an incentive, such as a performance based
fee, in managing one account and not with respect to other accounts it manages
or (ii) where a member of the Fund's portfolio management team owns an interest
in one fund or account he or she manages and not another.
(a)(3) As of December 31, 2005:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates,
including the Investment Adviser, is critical to MLIM's ability to attract and
retain the most talented asset management professionals. This program ensures
that compensation is aligned with maximizing investment returns and it provides
a competitive pay opportunity for competitive performance.
Compensation Program
The elements of total compensation for MLIM and its affiliates portfolio
managers are a fixed base salary, annual performance-based cash and stock
compensation (cash and stock bonus) and other benefits. MLIM has balanced these
components of pay to provide portfolio managers with a powerful incentive to
achieve consistently superior investment performance. By design, portfolio
manager compensation levels fluctuate -- both up and down -- with the relative
investment performance of the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries represent a relatively small portion of a portfolio manager's total
compensation. This approach serves to enhance the motivational value of the
performance-based (and therefore variable) compensation elements of the
compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent. To
that end, MLIM and its affiliates portfolio manager incentive compensation is
based on a formulaic compensation program. MLIM's formulaic portfolio manager
compensation program includes: investment performance relative to a subset of
single-state closed-end, municipal debt funds over 1-, 3- and 5-year performance
periods and a measure of operational efficiency. Portfolio managers are
compensated based on the pre-tax performance of the products they manage. If a
portfolio manager's tenure is less than 5 years, performance periods will
reflect time in position. Portfolio managers are compensated based on products
they manage. A discretionary element of portfolio manager compensation may
include consideration of: financial results, expense control, profit margins,
strategic planning and implementation, quality of client service, market share,
corporate reputation, capital allocation, compliance and risk control,
leadership, workforce diversity, supervision, technology and innovation. MLIM
and its affiliates also consider the extent to which individuals exemplify and
foster ML & Co.'s principles of client focus, respect for the individual,
teamwork, responsible citizenship and integrity. All factors are considered
collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in a
combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based bonus
is paid in restricted shares of ML & Co. stock. Paying a portion of annual
bonuses in stock puts compensation earned by a portfolio manager for a given
year "at risk" based on the company's ability to sustain and improve its
performance over future periods. The ultimate value of stock bonuses is
dependent on future ML & Co. stock price performance. As such, the stock bonus
aligns each portfolio manager's financial interests with those of the ML & Co.
shareholders and encourages a balance between short-term goals and long-term
strategic objectives. Management strongly believes that providing a significant
portion of competitive performance-based compensation in stock is in the best
interests of investors and shareholders. This approach ensures that portfolio
managers participate as shareholders in both the "downside risk" and "upside
opportunity" of the company's performance. Portfolio managers therefore have a
direct incentive to protect ML & Co.'s reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and financial
management objectives during a performance year are eligible to participate in a
deferred cash program. Awards under this program are in the form of deferred
cash that may be benchmarked to a menu of MLIM mutual funds (including their own
fund) during a five-year vesting period. The deferred cash program aligns the
interests of participating portfolio managers with the investment results of
MLIM products and promotes continuity of successful portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based plans
offered generally to employees of ML & Co. and its affiliates, including
broad-based retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of December 31, 2005,
Jaeckel does not beneficially own any stock issued by the Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the second fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
The Massachusetts Health and Education Tax-Exempt Trust
By: /s/ John M. Loffredo
-------------------------------
John M. Loffredo,
Chief Executive Officer of
The Massachusetts Health and Education Tax-Exempt Trust
Date: February 21, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ John M. Loffredo
-------------------------------
John M. Loffredo,
Chief Executive Officer of
The Massachusetts Health and Education Tax-Exempt Trust
Date: February 21, 2006
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
The Massachusetts Health and Education Tax-Exempt Trust
Date: February 21, 2006