UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-07660
Name of Fund: The Massachusetts Health & Education Tax-Exempt Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: John M. Loffredo, President, The
Massachusetts Health & 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 - 06/30/05
Item 1 - Report to Stockholders
The Massachusetts Health &
Education Tax-Exempt Trust
Semi-Annual Report
June 30, 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 June 30, 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 JUNE 30, 2005
A Letter From the President
Dear Shareholder
The financial markets continued to face a number of crosscurrents over the past
several months. On June 30, 2005, the Federal Reserve Board (the Fed) increased
the federal funds rate for the ninth consecutive time since June 2004, bringing
the target short-term interest rate to 3.25%. During the same week, first
quarter 2005 U.S. gross domestic product growth was revised upward to 3.8% --
behind the 4.4% annualized growth rate recorded for all of 2004 but ahead of
many economists' expectations. Signs of a slowing economy, coupled with easing
inflationary fears, have prompted some observers to believe that the Fed may
soon end its monetary tightening campaign.
After ending 2004 in a strong rally, U.S. equity markets have struggled to
record meaningful gains in 2005. Continued high oil prices and Fed interest rate
hikes have exerted downward pressure on stocks. Offsetting this somewhat have
been surprisingly strong corporate earnings and lower long-term bond yields.
Outside U.S. borders, results have been mixed. Several European markets have
been performing well despite ongoing economic problems. In Asia, many markets
have benefited from higher economic growth rates and relatively attractive
valuations, although Japanese stocks have struggled as a result of slowing
exports and high oil prices.
In the bond markets, the yield curve flattening "conundrum" continued. As
short-term yields increased in concert with Fed interest rate hikes, yields on
longer-term bonds declined (as their prices, which move opposite yields,
increased). Over the past year, the two-year Treasury yield rose 96 basis points
(.96%) while the 10-year Treasury yield declined 68 basis points. At period-end,
the spread between the two-year and 10-year Treasury yields was just 28 basis
points.
Amid these conditions, the major market benchmarks posted six-month and 12-month
returns as follows:
Total Returns as of June 30, 2005 6-month 12-month
===============================================================================================
U.S. equities (Standard & Poor's 500 Index) -0.81% + 6.32%
- -----------------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) -1.25% + 9.45%
- -----------------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) -1.17% +13.65%
- -----------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) +2.51% + 6.80%
- -----------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +2.89% + 8.24%
- -----------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) +0.77% +10.10%
- -----------------------------------------------------------------------------------------------
Entering the second half of 2005, we expect more of the same type of "muddle
through" environment that has befallen financial markets in the first half of
the year. Nevertheless, opportunities do exist and we encourage you to work with
your financial advisor to diversify your portfolio among a variety of asset
types. This can help to diffuse risk while also tapping into the potential
benefits of a broader range of investment alternatives. We thank you for
trusting Merrill Lynch Investment Managers with your investment assets, and we
look forward to serving you in the months and years ahead.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President
Merrill Lynch Investment Managers
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005 3
A Discussion With Your Trust's Portfolio Managers
As the period progressed and lower-rated bonds outperformed, we
increasingly saw better value from higher-grade credits and began to focus our
investment there.
Describe the market environment relative to municipal bonds.
Over the past six months, long-term bond yields declined as their prices, which
move in the opposite direction, increased. In the meantime, 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 to 3.25% on June
30. As longer-term bond yields declined and short-term yields moved upward in
unison with the Fed interest rate hikes, the yield curve continued to flatten.
Over the six months ended June 30, 2005, 30-year U.S. Treasury bond yields
declined 67 basis points to 4.16% and yields on the 10-year Treasury note fell
30 basis points to 3.94%.
In the tax-exempt market, yields on 30-year revenue bonds, as measured by the
Bond Buyer Revenue Bond Index, fell 27 basis points to 4.77%. According to
Municipal Market Data, yields on AAA-rated issues maturing in 30 years declined
35 basis points to 4.26%, while AAA-rated bonds maturing in 10 years saw their
yields decline 7 basis points to 3.45%.
The declining tax-exempt bond yields have prompted municipalities to both issue
new debt and refund outstanding, higher-couponed issues. During the six-month
period, more than $206 billion in new municipal bonds was underwritten, an
increase of 8.6% versus the same six months in 2004. The new issuance was
boosted by a greater than 55% increase in refunding issues, which have been
heavily weighted in the 10-year - 20-year maturity range to lower the overall
interest cost of the refunding issue. This concentration has put pressure on
intermediate tax-exempt bond yields while supporting longer-term bond prices.
Investor demand for municipal product generally has remained positive. According
to statistics from the Investment Company Institute, through May 31, 2005,
year-to-date net new cash flows into long-term municipal bond funds have
exceeded $1.35 billion. This represents a significant improvement from the $7.86
billion net outflow seen during the same period in 2004. Recent June weekly
figures from AMG Data Service have also shown continued positive flows.
Throughout much of the past six months, high yield tax-exempt bond funds have
been the principal target for these new cash inflows. During June, these
lower-rated/non-rated bond funds received an average of $150 million per week.
The need to invest these cash flows has led to very strong demand for
lower-rated issues and a consequent narrowing of credit spreads. Additionally,
thus far in 2005, the percentage of new issues bearing an insurer's guarantee
has risen to nearly 60%, up from 53.6% during the same period a year ago. The
increasing percentage of insured issuance has further reduced the availability
of lower-rated municipal securities, lending more support to higher prices for
these issues.
Describe conditions in the Commonwealth of Massachusetts.
The Massachusetts economy continued to improve, with rising revenue collections
and a May 2005 unemployment rate of 4.9%, below the national average of 5.1%.
The commonwealth's budget for the 2005 fiscal year projected financial reserves
of just over $800 million, but as a result of strong revenue performance, the
most recent estimates were approaching $1.8 billion at period-end. For the first
half of the 2005 fiscal year, tax collections were 10% higher than during the
same period a year earlier.
Massachusetts's budget adopted for fiscal year 2006 assumes a $600 million
drawdown of the commonwealth's budget stabilization funds, though this drawdown
conservatively assumes flat revenue growth. The commonwealth's debt levels,
however, remain the second-highest in the United States, due in part to the
costs of the Central Artery/Tunnel project (the "Big Dig"). The project's
completion considerably reduces the financial risk to the commonwealth, although
some uncertainty exists around construction-related problems associated with
tunnel leakage. Also, the School Building Assistance program, which changes how
school construction is financed in the commonwealth, is authorized to issue $10
billion of debt and will continue to add to current debt levels.
How did the Trust perform during the period?
For the six-month period ended June 30, 2005, the Common Shares of Massachusetts
Health and Education Tax-Exempt Trust had net annualized yields of 5.57% and
5.35%, based on a period-end per share net asset value of $14.12 and a per share
market price of $14.70, respectively, and $.390 per share income dividends. Over
the same period, the total investment return on the Trust's Common Shares was
+5.62%, based on a change in per share net asset value from $13.74 to $14.12,
and assuming reinvestment of all distributions.
4 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005
The Trust's performance benefited from a relatively large position in lower
investment grade and, to a lesser extent, non-investment grade bonds. Besides
adding to the Trust's income stream, returns from these lower-rated issues
increased as credit spreads -- the amount of additional income investors receive
for taking on credit risk -- continued to tighten during the period.
Detracting from performance was the Trust's relatively low leverage ratio -- at
just over 23% of portfolio assets at period-end. When interest rates are
falling, portfolios with a higher degree of leverage tend to outperform those
with less leverage, and vice versa. During the past six months, long-term
interest rates fell more than we expected, and being relatively underleveraged
detracted from performance.
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?
We generally looked to invest in longer-dated bonds, as we did not believe that
long-term interest rates were likely to rise in line with short-term interest
rates during the period. Based on our expectations, we sold selected shorter
bonds when appropriate and reinvested the proceeds in longer-dated holdings. In
fact, longer-bond yields fell during the period as short-term interest rates
increased. Because bond prices move in the opposite direction of yields, this
meant that longer-term bonds significantly outperformed short-term bonds, and
our focus further out on the curve paid off.
Although the portfolio had an above-market weighting in lower-rated bonds, most
of our new purchases during the period consisted of bonds with credit ratings of
A or higher. As the period progressed and lower-rated bonds outperformed, we
increasingly saw better relative value in higher-grade credits. By period-end,
approximately 83% of the Trust's assets were rated investment grade (BBB or
better).
Otherwise, our primary focus throughout the period was on following the Trust's
mandate of investing in Massachusetts not-for-profit health care and education
bonds. We had little trouble finding suitable securities for investment and, at
period-end, 91% of the portfolio was held in these sectors, up from 86% six
months earlier.
For the six months ended June 30, 2005, the Trust's Auction Preferred Shares
(APS) had an average yield of 1.59%. The Trust's borrowing costs moved somewhat
higher during the period, predominantly as a result of the Fed's continued
interest rate hikes, but also reflecting seasonal (tax-time) factors as
investors redeemed monies from their short-term tax-exempt investments to pay
their tax liabilities. 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 Fund's Common
Shares. At the end of the period, the Trust's leverage amount, due to APS, was
22.66% 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 of period-end, the Trust remained fully invested and reflected our generally
neutral view on interest rates. We would expect dividends on the Trust's
Preferred Shares to rise in line with further "measured" Fed interest rate
increases. However, we do not expect long-term yields on Massachusetts municipal
bonds to rise significantly. We remain relatively comfortable with the
portfolio's positioning -- specifically, its increased emphasis on high-quality
assets and longer-term bonds. Although we think the Trust is well structured, we
will continue to monitor conditions in the municipal market and will not
hesitate to make portfolio changes when we believe they are warranted.
Theodore R. Jaeckel Jr., CFA
Vice President and Portfolio Manager
Robert D. Sneeden
Vice President and Portfolio Manager
July 8, 2005
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005 5
Portfolio Information as of June 30, 2005
- --------------------------------------------------------------------------------
Percent of
Quality Ratings by Total
S&P/Moody's Investments
- --------------------------------------------------------------------------------
AAA/Aaa .............................................................. 34.7%
AA/Aa ................................................................ 16.6
A/A .................................................................. 11.6
BBB/Baa .............................................................. 20.0
BB/Ba ................................................................ 3.2
NR (Not Rated) ....................................................... 13.2
Other* ............................................................... 0.7
- --------------------------------------------------------------------------------
* Includes portfolio holdings in variable rate demand notes.
Officers and Trustees
Walter B. Prince, Chairman and Trustee
James F. Carlin, III, Trustee
Thomas H. Green, III, Trustee
Edward M. Murphy, Trustee
Frank Nesvet, Trustee
James M. Storey, Trustee
John M. Loffredo, President
Theodore R. Jaeckel Jr., Vice President
Robert D. Sneeden, Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Brian D. Stewart, Secretary
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
6 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005
Schedule of Investments (in Thousands)
Face
Amount Municipal Bonds Value
===================================================================================================================================
Massachusetts--131.0%
- -----------------------------------------------------------------------------------------------------------------------------------
$ 825 Massachusetts State College Building Authority, Project Revenue Refunding
Bonds, Series B, 5.50% due 5/01/2039 (i) $ 1,007
-----------------------------------------------------------------------------------------------------
Massachusetts State Development Finance Agency, Education Revenue Bonds:
1,100 (Belmont Hill School), 5% due 9/01/2031 1,151
400 (Middlesex School Project), 5% due 9/01/2033 419
250 (Xaverian Brothers High School), 5.65% due 7/01/2029 261
-----------------------------------------------------------------------------------------------------
Massachusetts State Development Finance Agency, First Mortgage Revenue
Bonds, Series A:
855 (Edgecombe Project), 6.75% due 7/01/2021 909
850 (Overlook Communities Inc.), 6.125% due 7/01/2024 865
-----------------------------------------------------------------------------------------------------
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) 1,288
-----------------------------------------------------------------------------------------------------
500 Massachusetts State Development Finance Agency, Human Service Provider
Revenue Bonds (Seven Hills Foundation & Affiliates), 5% due 9/01/2035 (l) 520
-----------------------------------------------------------------------------------------------------
825 Massachusetts State Development Finance Agency, Resource Recovery Revenue
Bonds (Ogden Haverhill Associates), AMT, Series A, 6.70% due 12/01/2014 897
-----------------------------------------------------------------------------------------------------
Massachusetts State Development Finance Agency Revenue Bonds:
500 (College of Pharmacy and Allied Health Services), Series D, 5% due
7/01/2027 526
500 (Curry College), Series A, 5% due 3/01/2035 (j) 512
400 (Franklin W. Olin College), Series B, 5.25% due 7/01/2033 (i) 431
1,000 (Massachusetts College of Pharmacy and Health Sciences), 5.75% due
7/01/2033 1,071
425 (Massachusetts Council of Human Service Providers, Inc.), Series C,
6.60% due 8/15/2029 416
500 (Smith College), 5% due 7/01/2035 533
400 (Suffolk University), 5.75% due 7/01/2019 420
500 (Volunteers of America--Ayer Limited Partnership), AMT, Series A,
6.20% due 2/20/2046 (k) 566
700 (WGBH Educational Foundation), Series A, 5.375% due 1/01/2042 (a) 764
1,100 (WGBH Educational Foundation), Series A, 5.75% due 1/01/2042 (a) 1,399
600 (Western New England College), 5.875% due 12/01/2022 644
540 (The Wheeler School), 6.50% due 12/01/2029 571
500 (Williston Northampton School Project), 5% due 10/01/2025 (i) 534
-----------------------------------------------------------------------------------------------------
Massachusetts State Development Finance Agency, Revenue Refunding Bonds:
1,500 (Boston University), Series P, 5.45% due 5/15/2059 1,698
225 (Odd Fellows Home of Massachusetts), 6.25% due 1/01/2015 212
-----------------------------------------------------------------------------------------------------
Massachusetts State Health and Educational Facilities Authority Revenue
Bonds:
800 (Baystate Medical Center), Series E, 6% due 7/01/2026 (e) 838
1,000 (Baystate Medical Center), Series F, 5.75% due 7/01/2033 1,075
350 (Berkshire Health System), Series E, 6.25% due 10/01/2031 376
300 (Capital Asset Program), VRDN, Series E, 2.45% due 1/01/2035 (h) 300
1,500 (Daughters of Charity-Carney), Series D, 6.10% due 7/01/2006 (g) 1,535
1,350 (Harvard University), Series FF, 5.125% due 7/15/2037 1,434
1,000 (Milford-Whitinsville Hospital), Series D, 6.35% due 7/15/2032 1,074
1,000 (Simmons College), Series F, 5% due 10/01/2033 (c) 1,059
230 (University of Massachusetts), Series C, 5.125% due 10/01/2034 (c) 244
1,355 (Wheaton College), Series D, 6% due 1/01/2018 1,441
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
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005 7
Schedule of Investments (concluded) (in Thousands)
Face
Amount Municipal Bonds Value
===================================================================================================================================
Massachusetts (concluded)
- -----------------------------------------------------------------------------------------------------------------------------------
Massachusetts State Health and Educational Facilities Authority, Revenue
Refunding Bonds:
$ 885 (Bay Cove Human Services Issue), Series A, 5.90% due 4/01/2028 $ 887
1,000 (Berkshire Health System), Series D, 6% due 10/01/2019 (f) 1,027
1,000 (Boston College), Series N, 5.125% due 6/01/2037 1,062
500 (Christopher House), Series A, 6.875% due 1/01/2029 502
800 (Covenant Health System), 6% due 7/01/2022 873
400 (Covenant Health System), 6% due 7/01/2031 433
495 (Learning Center for Deaf Children), Series C, 6.125% due 7/01/2029 507
500 (Massachusetts Institute of Technology), Series L, 5% due 7/01/2023 567
500 (Milton Hospital), Series, 5.50% due 7/01/2016 510
100 (Partners Healthcare System), Series A, 5.375% due 7/01/2024 (f) 105
1,000 (Partners Healthcare System), Series C, 5.75% due 7/01/2032 1,115
395 (Valley Regional Health System), Series C, 5.75% due 7/01/2018 (b) 400
1,500 (Wellesley College), 5% due 7/01/2033 1,588
1,000 (Youville House--FHA Insured Project), Series A, 6.25% due
2/15/2007 (d)(g) 1,075
-----------------------------------------------------------------------------------------------------
750 Massachusetts State Industrial Finance Agency, Health Care Facility Revenue
Bonds (Age Institute of Massachusetts Project), 8.05% due 11/01/2025 753
-----------------------------------------------------------------------------------------------------
1,500 Massachusetts State Industrial Finance Agency, PCR (General Motors
Corporation), 5.55% due 4/01/2009 1,498
-----------------------------------------------------------------------------------------------------
400 Massachusetts State Industrial Finance Agency Revenue Bonds (Wentworth
Institute of Technology), 5.75% due 10/01/2028 420
-----------------------------------------------------------------------------------------------------
340 Massachusetts State Industrial Finance Agency, Senior Living Facility
Revenue Bonds (Forge Hill Project), AMT, 6.75% due 4/01/2030 342
-----------------------------------------------------------------------------------------------------
1,000 Massachusetts State Water Pollution Abatement Trust, Pool Program Revenue
Bonds, Series 10, 5% due 8/01/2029 1,069
-----------------------------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------------------------
1,000 University of Massachusetts Building Authority, Project Revenue Refunding
Bonds, Senior Series 04-1, 5.125% due 11/01/2034 (a) 1,077
-----------------------------------------------------------------------------------------------------
Total Investments (Cost--$40,671**)--131.0% 43,244
Liabilities in Excess of Other Assets--(0.7%) (243)
Preferred Shares, at Redemption Value--(30.3%) (10,000)
--------
Net Assets Applicable to Common Shares--100.0% $ 33,001
========
(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.
* Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase by the Trust.
** The cost and unrealized appreciation (depreciation) of investments as of
June 30, 2005, as computed for federal income tax purposes, were as
follows:
(in Thousands)
--------------------------------------------------------------------------
Aggregate cost ................................................. $40,570
=======
Gross unrealized appreciation .................................. $ 2,699
Gross unrealized depreciation .................................. (25)
-------
Net unrealized appreciation .................................... $ 2,674
=======
Investments in companies considered to be an affiliate of the Trust (such
companies are defined as "Affiliated Companies" in Section 2(a)(3) of the
Investment Company Act of 1940) were as follows:
(in Thousands)
--------------------------------------------------------------------------
Net Dividend
Affiliate Activity Income
--------------------------------------------------------------------------
CMA Massachusetts Municipal Money Fund --+ --
--------------------------------------------------------------------------
+ Amount is less than $(1,000).
See Notes to Financial Statements.
8 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005
Statement of Net Assets
As of June 30, 2005
===========================================================================================================================
Assets
- ---------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value
(identified cost--$40,671,099) ................................ $ 43,244,267
Cash ........................................................... 66,664
Interest receivable ............................................ 813,653
Prepaid expenses ............................................... 2,000
------------
Total assets ................................................... 44,126,584
------------
===========================================================================================================================
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Payables:
Securities purchased ....................................... $ 1,051,968
Investment adviser ......................................... 10,263
Administration fees ........................................ 4,399 1,066,630
------------
Accrued expenses ............................................... 58,769
------------
Total liabilities .............................................. 1,125,399
------------
===========================================================================================================================
Preferred Shares
- ---------------------------------------------------------------------------------------------------------------------------
Preferred Shares, at redemption value, par value $.01
per share (400 shares authorized, 200 shares of APS*
issued and outstanding at $50,000 per share liquidation
preference) ................................................... 10,000,000
------------
===========================================================================================================================
Net Assets Applicable to Common Shares
- ---------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Shares ......................... $ 33,001,185
============
===========================================================================================================================
Analysis of Net Assets Applicable to Common Shares
- ---------------------------------------------------------------------------------------------------------------------------
Common Shares, par value $.01 per share (2,337,586 shares
issued and outstanding) ....................................... $ 23,376
Paid-in capital in excess of par ............................... 29,811,437
Undistributed investment income--net ........................... $ 408,481
Undistributed realized capital gains--net ...................... 184,723
Unrealized appreciation--net ................................... 2,573,168
------------
Total accumulated earnings--net ................................ 3,166,372
------------
Total--Equivalent to $14.12 net asset value per Common Share
(market price--$14.70) ........................................ $ 33,001,185
============
* Auction Preferred Shares.
See Notes to Financial Statements.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005 9
Statement of Operations
For the Six Months Ended June 30, 2005
===========================================================================================================================
Investment Income
- ---------------------------------------------------------------------------------------------------------------------------
Interest ....................................................... $ 1,113,044
===========================================================================================================================
Expenses
- ---------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ....................................... $ 72,797
Administration fees ............................................ 31,199
Printing and shareholder reports ............................... 21,690
Professional fees .............................................. 20,109
Directors' fees and expenses ................................... 14,871
Transfer agent fees ............................................ 13,560
Commission fees ................................................ 12,373
Accounting services ............................................ 6,988
Pricing fees ................................................... 2,987
Custodian fees ................................................. 2,192
Listing fees ................................................... 508
Other .......................................................... 8,977
------------
Total expenses ................................................. 208,251
------------
Investment income--net ......................................... 904,793
------------
===========================================================================================================================
Realized & Unrealized Gain--Net
- ---------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net .............................. 176,370
Change in unrealized appreciation on investments--net .......... 798,430
------------
Total realized and unrealized gain--net ........................ 974,800
------------
===========================================================================================================================
Dividends to Preferred Shareholders
- ---------------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................... (78,182)
------------
Net Increase in Net Assets Resulting from Operations ........... $ 1,801,411
============
See Notes to Financial Statements.
10 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
June 30, December 31,
Increase (Decrease) in Net Assets: 2005 2004
===========================================================================================================================
Operations
- ---------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ $ 904,793 $ 1,920,663
Realized gain--net ................................................ 176,370 619,944
Change in unrealized appreciation--net ............................ 798,430 (459,444)
Dividends and distributions to Preferred Shareholders ............. (78,182) (95,286)
-----------------------------
Net increase in net assets resulting from operations .............. 1,801,411 1,985,877
-----------------------------
===========================================================================================================================
Dividends & Distributions to Common Shareholders
- ---------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ (911,096) (2,022,704)
Realized gain--net ................................................ -- (367,233)
-----------------------------
Net decrease in net assets resulting from dividends and
distributions to Common Shareholders ............................. (911,096) (2,389,937)
-----------------------------
===========================================================================================================================
Common Share Transactions
- ---------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Shareholders in reinvestment of
dividends and distributions ...................................... 35,178 89,668
-----------------------------
===========================================================================================================================
Net Assets Applicable to Common Shares
- ---------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets applicable to Common Shares 925,493 (314,392)
Beginning of period ............................................... 32,075,692 32,390,084
-----------------------------
End of period* .................................................... $ 33,001,185 $ 32,075,692
=============================
* Undistributed investment income--net ......................... $ 408,481 $ 492,966
=============================
See Notes to Financial Statements.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005 11
Financial Highlights
For the Six
Months Ended For the Year Ended December 31,
The following per share data and ratios have been derived June 30, -------------------------------------------------------
from information provided in the financial statements. 2005 2004 2003 2002 2001
===================================================================================================================================
Per Share Operating Performance
- -----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ....... $ 13.74 $ 13.91 $ 13.76 $ 13.25 $ 13.17
------------------------------------------------------------------------
Investment income--net*** .................. .39 .82 .93 .94 .94
Realized and unrealized gain--net .......... .41 .08 .07 .42 .03
Dividends and distributions to Preferred
Shareholders:
Investment income--net .................. (.03) (.03) (.03) (.05) (.11)
Realized gain--net ...................... -- (.01) -- -- --
------------------------------------------------------------------------
Total from investment operations ........... .77 .86 .97 1.31 .86
------------------------------------------------------------------------
Less dividends and distributions to Common
Shareholders:
Investment income--net .................. (.39) (.87) (.82) (.80) (.78)
Realized gain--net ...................... -- (.16) -- -- --
------------------------------------------------------------------------
Total dividends and distributions to Common
Shareholders .............................. (.39) (1.03) (.82) (.80) (.78)
------------------------------------------------------------------------
Net asset value, end of period ............. $ 14.12 $ 13.74 $ 13.91 $ 13.76 $ 13.25
========================================================================
Market price per share, end of period ...... $ 14.70 $ 16.24 $ 15.26 $ 13.48 $ 13.60
========================================================================
===================================================================================================================================
Total Investment Return
- -----------------------------------------------------------------------------------------------------------------------------------
Based on market price per share ............ (6.97%)+ 14.29% 20.11% 5.10% 13.01%
========================================================================
===================================================================================================================================
Ratios Based on Average Net Assets of Common Shares**
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement ....... 1.31%* 1.45% 1.16% 1.19% 1.18%
========================================================================
Total expenses ............................. 1.31%* 1.45% 1.16% 1.20% 1.20%
========================================================================
Total investment income--net ............... 5.69%* 5.97% 6.74% 7.00% 7.02%
========================================================================
===================================================================================================================================
Supplemental Data
- -----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Shares, end
of period (in thousands) .................. $33,001 $32,076 $32,390 $31,996 $30,727
========================================================================
Portfolio turnover ......................... 6.05% 20.70% 26.17% 35.56% 12.69%
========================================================================
* Annualized.
** Do not reflect the effect of dividends to Preferred Shareholders.
*** Based on average shares outstanding.
+ Aggregate total investment return.
See Notes to Financial Statements.
12 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005
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. These unaudited financial
statements reflect all adjustments, which are, in the opinion of management,
necessary to present a fair statement of the results for the interim period. All
such adjustments are of a normal, recurring nature. 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.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 2005 13
Notes to Financial Statements (concluded)
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.
(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 daily and paid monthly. Distributions of capital gains are recorded on
the ex-dividend dates.
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.
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 six
months ended June 30, 2005 were $3,848,803 and $2,515,160, 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 six months ended June
30, 2005 and the year ended December 31, 2004 increased by 2,474 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
June 30, 2005 was 2.10%.
5. Subsequent Event:
The Trust paid a tax-exempt income dividend to holders of Common Shares in the
amount of $.065000 per share on July 28, 2005 to shareholders of record on July
14, 2005.
14 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST JUNE 30, 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 JUNE 30, 2005 15
[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 -- 6/05
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable to this semi-annual report
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 last 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 - Not Applicable to this semi-annual report
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 & Education Tax-Exempt Trust
By: /s/ John M. Loffredo
-----------------------
John M. Loffredo,
President of
The Massachusetts Health & Education Tax-Exempt Trust
Date: August 19, 2005
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,
President of
The Massachusetts Health & Education Tax-Exempt Trust
Date: August 19, 2005
By: /s/ Donald C. Burke
-----------------------
Donald C. Burke,
Treasurer of
The Massachusetts Health & Education Tax-Exempt Trust
Date: August 19, 2005