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: 12/31/06
Date of reporting period: 01/01/06 - 12/31/06
Item 1 - Report to Stockholders
ALTERNATIVES BLACKROCK SOLUTIONS EQUITIES
FIXED INCOME LIQUIDITY REAL ESTATE
The Massachusetts BLACKROCK
Health & Education
Tax-Exempt Trust
ANNUAL REPORT | DECEMBER 31, 2006
NOT FDIC INSURED
MAY LOSE VALUE
NO BANK GUARANTEE
The Massachusetts Health & Education Tax-Exempt Trust
Portfolio Information as of December 31, 2006
Quality Ratings by Percent of Total
S&P/Moody's Investments
--------------------------------------------------------------------------------
AAA/Aaa .......................................................... 41.2%
AA/Aa ............................................................ 17.7
A/A .............................................................. 13.9
BBB/Baa .......................................................... 12.6
BB/Ba ............................................................ 2.7
B/B .............................................................. 2.9
NR (Not Rated) ................................................... 8.1
Other* ........................................................... 0.9
--------------------------------------------------------------------------------
* Includes portfolio holdings in variable rate demand notes.
2 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
A Letter to Shareholders
Dear Shareholder
As 2007 begins, we are able to look back on 2006 as a volatile, but ultimately,
a positive year for most major markets. Returns for the annual and semi-annual
periods ended December 31, 2006 were as follows:
Total Returns as of December 31, 2006 6-month 12-month
=================================================================================================
U.S. equities (Standard & Poor's 500 Index) +12.74% +15.79%
-------------------------------------------------------------------------------------------------
Small cap U.S. equities (Russell 2000 Index) + 9.38 +18.37
-------------------------------------------------------------------------------------------------
International equities (MSCI Europe, Australasia, Far East Index) +14.69 +26.34
-------------------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) + 5.09 + 4.33
-------------------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 4.55 + 4.84
-------------------------------------------------------------------------------------------------
High yield bonds (Credit Suisse High Yield Index) + 8.14 +11.92
-------------------------------------------------------------------------------------------------
After raising the target short-term interest rate 17 times between June 2004 and
June 2006, the Federal Reserve Board (the Fed) finally opted to pause on August
8, 2006. This left the federal funds rate at 5.25%, where it remained through
year-end. In interrupting its two-year interest rate-hiking campaign, the Fed
acknowledged that economic growth is slowing, led by a downturn in the housing
market, but has maintained a cautionary view on inflation.
Overall, it was a good 12 months for U.S. equities, despite a significant
correction in the middle of the year that was largely triggered by rising
interest rates, inflation fears, elevated oil prices and geopolitical
uncertainties. Nevertheless, strong corporate earnings, abundant liquidity and
record merger-and-acquisition activity provided a solid backdrop for stocks.
Many international equity markets (with the notable exception of Japan)
performed even better, outpacing U.S. stocks for the fifth consecutive year.
Strength was especially notable in European equities and select emerging
markets.
Bonds experienced a more modest annual return than stocks. Interest rates and
bond yields moved higher for much of the year as bond prices, which move
opposite of yields, declined. Prices began to improve in the summer as the
economy showed signs of weakening and the Fed paused. Notably, the Treasury
curve remained inverted for much of 2006. The 10-year Treasury yield ended
December at 4.71%, well below the federal funds rate.
As we begin a new year, investors are left with a few key questions: Will the
U.S. economy achieve a soft landing, will the Fed reverse its prior policy and
cut interest rates, and how might these outcomes impact the investment climate.
As you navigate the uncertainties inherent in the financial markets, we
encourage you to start the year by reviewing your investment goals with your
financial professional and making portfolio changes, as needed. For more
reflection on 2006 and our thoughts on the year ahead, please ask your financial
professional for a copy of "What's Ahead in 2007: An Investment Perspective," or
view it online at www.blackrock.com/funds. We thank you for trusting BlackRock
with your investment assets, and we look forward to continuing to serve you in
the new year and beyond.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
Vice Chairman and Director
BlackRock, Inc.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 3
A Discussion With Your Trust's Portfolio Manager
The Trust was able to provide a favorable total return for the fiscal year
within the context of low interest rates and tight credit spreads.
Describe the market environment relative to municipal bonds.
The tax-exempt bond market solidly outperformed U.S. Treasury issues during most
of 2006. Over the past 12 months, U.S. Treasury yields rose moderately (and
prices fell) while long-term municipal bond yields declined (and prices rose).
U.S. Treasury yields rose sharply in the first half of 2006 as commodity prices,
especially oil and gasoline prices, and domestic economic activity surged. By
late June, 30-year U.S. Treasury bond yields had increased almost 75 basis
points (.75%) to 5.28%. Yields began to fall, and bond prices improved, in the
summer as economic growth softened and the Federal Reserve Board (the Fed)
refrained from raising its target interest rate on August 8. This came after 17
consecutive increases since June 2004. Bond prices found additional support from
moderating oil prices, and by the end of November, 30-year U.S. Treasury bond
yields had declined to 4.56%. However, stronger-than-expected economic releases
and year-end profit taking again pushed yields higher in December. At the end of
2006, 30-year U.S. Treasury bond yields stood at 4.81%, an annual increase of 27
basis points. Ten-year U.S. Treasury note yields rose 32 basis points over the
year to 4.71%.
The tax-exempt bond market outperformed the U.S. Treasury market during the year
as investor demand for municipal product outstripped a resurgent new-issue
calendar. As reported by Municipal Market Data, yields on 30-year, AAA-rated
municipal issues declined 32 basis points during the year to 4.07%, while yields
on 10-year, AAA-rated issues declined eight basis points to 3.68%.
Investor demand for municipal product remained strong through year-end. The
latest available statistics from the Investment Company Institute note that,
through November, long-term municipal bond funds had net new cash flows of
nearly $14 billion, an increase of more than 120% versus the same 11 months of
2005. As reported by AMG Data, weekly average cash flows exceeded $400 million
throughout the fourth quarter of 2006, representing a solid increase from the
$241 million weekly average seen for the full year.
New-issue municipal volume swelled in the fourth quarter as municipalities
rushed to take advantage of low market yields and solid investor demand. More
than $121 billion in new long-term tax-exempt bonds was issued, a 23.4% increase
compared to fourth quarter 2005. Issuance in December, which totaled over $43
billion, was the highest December monthly volume level since 1985. The recent
increase in issuance has made the municipal market's outperformance even more
impressive.
Describe conditions in the Commonwealth of Massachusetts.
The Commonwealth of Massachusetts ended the year with ratings of Aa2, AA and AA
from Moody's, Standard & Poor's and Fitch, respectively, all with stable trends.
Massachusetts' fiscal year 2006 results show a $1.65 billion general fund
surplus and a $4.92 billion general fund balance, along with a $2.15 billion
stabilization fund balance. The fiscal year 2007 budget totals $25.25 billion
and assumes an estimated 3.5% increase in tax revenues. The 2007 budget has a
$550 million shortfall that legislators recommend plugging through a transfer
from the stabilization fund, a solution the governor opposes. Key credit issues
include the $14.5 billion unfunded pension liability and the ground-breaking
healthcare reform bill. The net cost of the health program to the Commonwealth
for fiscal year 2007 is approximately $274 million, which is included in the
adopted budget.
Massachusetts ranks number one in debt per capita and second in debt as a
percent of personal income, according to Moody's. Its per capita income of
$43,702 in 2005 was third in the nation, according to the U.S. Department of
Commerce. The November 2006 unemployment rate was 5%, compared to the national
rate of 4.5%.
How did the Trust perform during the fiscal year?
For the 12-month period ended December 31, 2006, the Common Shares of The
Massachusetts Health and Education Tax-Exempt Trust had net annualized yields of
4.76% and 5.05%, based on a year-end per share net asset value of $13.90 and a
per share market price of $13.10, respectively, and $0.662 per share income
dividends. Over the same period, the total investment return on the Trust's
Common Shares was +8.30%, based on a change in per share net asset value from
$13.59 to $13.90, and assuming reinvestment of all distributions.
Trust performance for the fiscal year was favorable. For some context, the
Lehman Brothers Municipal Bond Index -- a measure of the national municipal bond
market, although not
4 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
the Trust's benchmark -- returned +4.84% for the 12-month period. In the first
half of the year, our focus on longer-dated bonds benefited performance as the
curve flattened and the long end outperformed. At the same time, our somewhat
defensive duration stance, which we had adopted in an effort to manage interest
rate risk, also proved advantageous as markets weakened (i.e., prices fell and
interest rates rose). In the second half of the year, we lengthened duration as
the Fed neared the end of its interest rate-hiking campaign. This move benefited
performance as the market rallied (interest rates fell and bond prices rose).
Finally, our exposure to lower-rated paper contributed to the Trust's results,
particularly in the first half of the year as credit spreads (versus
higher-quality issues of comparable maturity) continued to contract.
For the six-month period ended December 31, 2006, the total investment return on
the Trust's Common Shares was +7.74%, based on a change in per share net asset
value from $13.29 to $13.90, 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 returns based
on changes in the Trust's net asset value.
What changes were made to the portfolio during the period?
Given the extent of the decline and the marginal improvement in the market's
value in the second half of the fiscal year, we adopted a more constructive
stance for the portfolio, reflected in a slightly longer duration. With credit
spreads having reached historically tight levels, we continued our efforts to
reduce our overweighting to lower-rated investment grade and speculation grade
(lower than BBB) bonds, ending the year with a market weighting in these
sectors.
Other portfolio activity was driven primarily by the need to reinvest the
proceeds from the sale of these bonds, as well as the proceeds from bonds that
were called by their issuers prior to maturity. However, as the portfolio's
seasoned, higher-coupon holdings are called by their issuers, our reinvestment
prospects are less and less appealing in the prevailing low-interest-rate
environment. For the most part, when interest rates rose early in the year, we
targeted higher-rated bonds in the 30-year maturity range. These issues offered
attractive yields, especially compared to the lower-rated holdings that had been
sold. Portfolio activity was fairly muted in the second half of the year, as we
were content to maintain the Trust's positioning rather than risk compromising
it by making trades in a less favorable investment environment. In keeping with
the Trust's primary investment objective, most purchases were made in the
health, education and non-profit sectors.
For the six months ended December 31, 2006, the Trust's Auction Preferred Shares
had an average yield of 2.65% for Series A and 3.07% for Series B. As noted
earlier, the Fed interrupted its interest rate-hiking campaign in August and
remained on hold throughout the remainder of 2006. As such, the Trust's
borrowing costs began to stabilize and even move slightly lower. The tax-exempt
yield curve maintained a positive slope, allowing us to borrow at a lower
interest rate than where we invest. This 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. (For a more complete explanation of the
benefits and risks of leveraging, see page 6 of this report to shareholders.)
How would you characterize the Trust's position at the close of the period?
We ended the period with a neutral outlook on interest rate risk. The Fed has
been on hold since August and the markets are pricing in the possibility of a
Fed interest rate cut in the first half of 2007.
Given the current low interest-rate environment, combined with tight credit
spreads, we expect that the Trust's performance going forward will be driven
primarily by security selection. The portfolio currently has a nominal cash
position of 1.5% of net assets, which allows us some flexibility to participate
in market opportunities should yields rise from their current lows.
Robert D. Sneeden
Vice President and Portfolio Manager
January 12, 2007
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 5
The Benefits and Risks of Leveraging
The Massachusetts Health & Education Tax-Exempt Trust utilizes leveraging 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 of December 31, 2006, the Trust's leverage amount, due to Auction Preferred
Shares, was 38.04% of total net assets, before the deduction of Preferred
Shares.
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 inverse floaters. Certain inverse floaters may be presented for
financial reporting purposes as secured borrowings by the Trust.
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.
6 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
Schedule of Investments (in Thousands)
Face
Amount Municipal Bonds Value
===============================================================================
Massachusetts--154.1%
-------------------------------------------------------------------------------
$1,000 Massachusetts Bay Transportation Authority, Special
Assessment Revenue Refunding Bonds, Series A, 5%
due 7/01/2015 (j) $ 1,092
-------------------------------------------------------------------------------
1,000 Massachusetts State College Building Authority, Project
Revenue Bonds, Series A, 5% due 5/01/2031 (b) 1,065
-------------------------------------------------------------------------------
825 Massachusetts State College Building Authority, Project
Revenue Refunding Bonds, Series B, 5.50%
due 5/01/2039 (n) 1,005
-------------------------------------------------------------------------------
Massachusetts State Development Finance Agency,
Education Revenue Bonds:
1,100 (Belmont Hill School), 5% due 9/01/2031 1,141
400 (Middlesex School Project), 5% due 9/01/2033 415
250 (Xaverian Brothers High School), 5.65%
due 7/01/2029 259
-------------------------------------------------------------------------------
1,000 Massachusetts State Development Finance Agency,
Educational Facility Revenue Bonds (Academy of the
Pacific Rim), Series A, 5.125% due 6/01/2031 (a) 1,046
-------------------------------------------------------------------------------
Massachusetts State Development Finance Agency, First
Mortgage Revenue Bond, Series A:
855 (Edgecombe Project), 6.75% due 7/01/2021 925
850 (Overlook Communities, Inc.), 6.125%
due 7/01/2024 886
-------------------------------------------------------------------------------
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 (k) 1,296
-------------------------------------------------------------------------------
500 Massachusetts State Development Finance Agency,
Human Service Provider Revenue Bonds (Seven Hills
Foundation & Affiliates), 5% due 9/01/2035 (k) 521
-------------------------------------------------------------------------------
825 Massachusetts State Development Finance Agency,
Resource Recovery Revenue Bonds (Ogden Haverhill
Associates), AMT, Series A, 6.70% due 12/01/2014 886
-------------------------------------------------------------------------------
Massachusetts State Development Finance Agency
Revenue Bonds:
1,000 (Boston University), Series T-1, 5%
due 10/01/2039 (b) 1,053
500 (College of Pharmacy and Allied Health Services),
Series D, 5% due 7/01/2027 (c) 524
500 (Curry College), Series A, 5% due 3/01/2035 (a) 513
400 (Franklin W. Olin College), Series B, 5.25%
due 7/01/2033 (n) 425
1,000 (Massachusetts College of Pharmacy and Health
Sciences), 5.75% due 7/01/2033 1,075
425 (Massachusetts Council of Human Service Providers,
Inc.), Series C, 6.60% due 8/15/2029 429
2,000 (Smith College), 5% due 7/01/2035 2,108
540 (The Wheeler School), 6.50% due 12/01/2029 570
500 (Volunteers of America--Ayer Limited Partnership),
AMT, Series A, 6.20% due 2/20/2046 (i) 567
1,000 (WGBH Educational Foundation), Series A, 5.375%
due 1/01/2012 (b)(j) 1,087
1,100 (WGBH Educational Foundation), Series A, 5.75%
due 1/01/2042 (b) 1,390
600 (Western New England College), 5.875%
due 12/01/2012 (j) 661
500 (Williston Northampton School Project), 5%
due 10/01/2025 (n) 531
-------------------------------------------------------------------------------
1,500 Massachusetts State Development Finance Agency
Revenue Refunding Bonds (Boston University), Series P,
5.45% due 5/15/2059 1,678
-------------------------------------------------------------------------------
Massachusetts State Development Finance Agency,
Revenue Refunding Bonds:
500 (Clark University), 5.125% due 10/01/2035 (n) 535
1,500 (Western New England College), Series A, 5%
due 9/01/2033 (c) 1,580
-------------------------------------------------------------------------------
1,000 Massachusetts State HFA, Housing Revenue Bonds,
AMT, Series A, 5.25% due 12/01/2048 1,033
-------------------------------------------------------------------------------
Massachusetts State Health and Educational Facilities
Authority Revenue Bonds:
1,000 (Baystate Medical Center), Series F, 5.75%
due 7/01/2033 1,063
350 (Berkshire Health System), Series E, 6.25%
due 10/01/2031 377
1,000 (Berkshire Health System), Series F, 5%
due 10/01/2019 (c) 1,067
300 (Capital Asset Program), VRDN, Series E, 3.89%
due 1/01/2035 (m) 300
1,350 (Harvard University), Series FF, 5.125%
due 7/15/2037 1,426
750 (Milford-Whitinsville Hospital), Series D, 6.35%
due 7/15/2032 811
170 (Partners Healthcare System), VRDN, Series D-6,
3.95% due 7/01/2017 (m) 170
1,000 (Simmons College), Series F, 5% due 10/01/2033 (f) 1,080
500 (University of Massachusetts Memorial Healthcare),
Series D, 5% due 7/01/2033 509
230 (University of Massachusetts), Series C, 5.125%
due 10/01/2034 (f) 243
1,210 (Wheaton College), Series D, 6% due 1/01/2018 1,255
-------------------------------------------------------------------------------
Massachusetts State Health and Educational Facilities
Authority Revenue Refunding Bonds:
885 (Bay Cove Human Services Issue), Series A, 5.90%
due 4/01/2028 902
1,000 (Boston College), Series N, 5.125% due 6/01/2037 1,051
500 (Christopher House), Series A, 6.875%
due 1/01/2029 518
800 (Covenant Health System), 6% due 7/01/2022 867
400 (Covenant Health System), 6% due 7/01/2031 434
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)
HFA Housing Finance Agency
PCR Pollution Control Revenue Bonds
VRDN Variable Rate Demand Notes
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 7
Schedule of Investments (concluded) (in Thousands)
Face
Amount Municipal Bonds Value
===============================================================================
Massachusetts (continued)
-------------------------------------------------------------------------------
Massachusetts State Health and Educational Facilities
Authority Revenue Refunding Bonds (concluded):
$ 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 560
500 (Partners Healthcare System), Series C, 5.75%
due 7/01/2032 541
395 (Valley Regional Health System), Series C, 5.75%
due 7/01/2018 (e) 396
1,500 (Wellesley College), 5% due 7/01/2033 1,579
1,000 (Youville House--Project), Series A,
6.25% due 2/15/2007 (g)(j) 1,023
-------------------------------------------------------------------------------
730 Massachusetts State Industrial Finance Agency, Health
Care Facility Revenue Bonds (Age Institute of
Massachusetts Project), 8.05% due 11/01/2025 743
-------------------------------------------------------------------------------
1,500 Massachusetts State Industrial Finance Agency, PCR
(General Motors Corporation), 5.55% due 4/01/2009 1,504
-------------------------------------------------------------------------------
400 Massachusetts State Industrial Finance Agency Revenue
Bonds (Wentworth Institute of Technology), 5.75%
due 10/01/2008 (j) 421
-------------------------------------------------------------------------------
340 Massachusetts State Industrial Finance Agency, Senior
Living Facility Revenue Bonds (Forge Hill Project), AMT,
6.75% due 4/01/2030 351
-------------------------------------------------------------------------------
2,000 Massachusetts State School Building Authority,
Dedicated Sales Tax Revenue Bonds, Series A, 5%
due 8/15/2030 (h) 2,125
-------------------------------------------------------------------------------
1,000 Massachusetts State Water Pollution Abatement Trust,
Pool Program Revenue Bonds, Series 10, 5%
due 8/01/2029 1,067
-------------------------------------------------------------------------------
1,000 Rail Connections, Inc., Massachusetts, Capital
Appreciation Revenue Bonds (Route 128 Parking
Garage), Series B, 6.53% due 7/01/2009 (a)(j)(l) 459
-------------------------------------------------------------------------------
500 University of Massachusetts Building Authority, Project
Revenue Refunding Bonds, Senior Series 04-1, 5.125%
due 11/01/2014 (b)(j) 548
===============================================================================
Puerto Rico--4.5%
-------------------------------------------------------------------------------
1,285 Puerto Rico Public Buildings Authority, Government
Facilities Revenue Refunding Bonds, Series F, 5.25%
due 7/01/2025 (d)(h) 1,481
-------------------------------------------------------------------------------
Total Investments (Cost--$49,011*)--158.6% 51,674
Other Assets Less Liabilities--2.8% 920
Preferred Shares, at Redemption Value--(61.4%) (20,013)
--------
Net Assets Applicable to Common Shares--100.0% $ 32,581
========
* The cost and unrealized appreciation (depreciation) of investments as of
December 31, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ................................................ $ 48,887
========
Gross unrealized appreciation ................................. $ 2,787
Gross unrealized depreciation ................................. --
--------
Net unrealized appreciation ................................... $ 2,787
========
(a) ACA Insured.
(b) AMBAC Insured.
(c) Assured Guaranty Insured.
(d) CIFG Insured.
(e) Connie Lee Insured.
(f) FGIC Insured.
(g) FHA Insured.
(h) FSA Insured.
(i) GNMA Collateralized.
(j) Prerefunded.
(k) Radian Insured.
(l) Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase.
(m) 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.
(n) XL Capital Insured.
o Forward interest rate swaps outstanding as of December 31, 2006 were as
follows:
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Pay a fixed rate of 3.547% and receive a
floating rate based on 1-week Bond
Market Association rate
Broker, JPMorgan Chase
Expires March 2017 $ 3,000 $ 40
--------------------------------------------------------------------------
See Notes to Financial Statements.
8 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
Statement of Net Assets
As of December 31, 2006
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value (identified cost--$49,011,130) .... $ 51,673,811
Unrealized appreciation on forward interest rate swaps ............................. 39,951
Cash ............................................................................... 476
Receivables:
Interest ........................................................................ $ 929,862
Securities sold ................................................................. 75,000 1,004,862
-------------
Prepaid expenses ................................................................... 7,611
-------------
Total assets ....................................................................... 52,726,711
-------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Payables:
Distribution to shareholders .................................................... 22,409
Investment adviser .............................................................. 16,215
Administration fees ............................................................. 6,949
Other affiliates ................................................................ 762 46,335
-------------
Accrued expenses ................................................................... 86,771
-------------
Total liabilities .................................................................. 133,106
-------------
===================================================================================================================================
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) ..................................................... 20,012,726
-------------
===================================================================================================================================
Net Assets Applicable to Common Shares
-----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Shares ............................................. $ 32,580,879
=============
===================================================================================================================================
Analysis of Net Assets Applicable to Common Shares
-----------------------------------------------------------------------------------------------------------------------------------
Common Shares, par value $.01 per share (2,344,067 shares issued and outstanding) .. $ 23,441
Paid-in capital in excess of par ................................................... 29,660,491
Undistributed investment income--net ............................................... $ 269,647
Accumulated realized capital losses--net ........................................... (75,332)
Unrealized appreciation--net ....................................................... 2,702,632
-------------
Total accumulated earnings--net .................................................... 2,896,947
-------------
Total--Equivalent to $13.90 net asset value per Common Share (market price--$13.10) $ 32,580,879
=============
* Auction Preferred Shares.
See Notes to Financial Statements.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 9
Statement of Operations
For the Year Ended December 31, 2006
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest ........................................................................... $ 2,632,799
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ........................................................... $ 181,423
Administration fees ................................................................ 77,753
Accounting services ................................................................ 51,785
Commission fees .................................................................... 50,230
Printing and shareholder reports ................................................... 45,935
Professional fees .................................................................. 31,528
Trustees' fees and expenses ........................................................ 30,000
Transfer agent fees ................................................................ 27,768
Pricing fees ....................................................................... 8,122
Custodian fees ..................................................................... 4,837
Listing fees ....................................................................... 1,023
Other .............................................................................. 13,906
-------------
Total expenses ..................................................................... 524,310
-------------
Investment income--net ............................................................. 2,108,489
-------------
===================================================================================================================================
Realized & Unrealized Gain--Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain on:
Investments--net ................................................................ 76,283
Financial futures contracts and forward interest rate swaps--net ................ 124,966 201,249
-------------
Change in unrealized appreciation on:
Investments--net ................................................................ 846,708
Forward interest rate swaps--net ................................................ 39,951 886,659
-------------------------------
Total realized and unrealized gain--net ............................................ 1,087,908
-------------
===================================================================================================================================
Dividends & Distributions to Preferred Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................................. (584,916)
Realized gain--net ................................................................. (75,604)
-------------
Total dividends and distributions to Preferred Shareholders ........................ (660,520)
-------------
Net Increase in Net Assets Resulting from Operations ............................... $ 2,535,877
=============
See Notes to Financial Statements.
10 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
Statements of Changes in Net Assets
For the Year Ended
December 31,
-------------------------------
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................................. $ 2,108,489 $ 1,938,570
Realized gain--net ................................................................. 201,249 318,444
Change in unrealized appreciation--net ............................................. 886,659 41,235
Dividends and distributions to Preferred Shareholders .............................. (660,520) (274,318)
-------------------------------
Net increase in net assets resulting from operations ............................... 2,535,877 2,023,931
-------------------------------
===================================================================================================================================
Dividends & Distributions to Common Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................................. (1,588,436) (1,823,158)
Realized gain--net ................................................................. (222,930) (304,439)
-------------------------------
Net decrease in net assets resulting from dividends and distributions to Common
Shareholders ...................................................................... (1,811,366) (2,127,597)
-------------------------------
===================================================================================================================================
Share Transactions
-----------------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Shareholders in reinvestment of dividends and
distributions ..................................................................... 64,509 64,760
Offering and underwriting costs resulting from issuance of Preferred Shares ........ -- (244,927)
-------------------------------
Net increase (decrease) in net assets derived from share transactions .............. 64,509 (180,167)
-------------------------------
===================================================================================================================================
Net Assets Applicable to Common Shares
-----------------------------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets applicable to Common Shares ................ 789,020 (283,833)
Beginning of year .................................................................. 31,791,859 32,075,692
-------------------------------
End of year* ....................................................................... $ 32,580,879 $ 31,791,859
===============================
* Undistributed investment income--net .......................................... $ 269,647 $ 334,510
===============================
See Notes to Financial Statements.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 11
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. 2006 2005 2004+ 2003 2002
===================================================================================================================================
Per Share Operating Performance
-----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ........................... $ 13.59 $ 13.74 $ 13.91 $ 13.76 $ 13.25
------------------------------------------------------------
Investment income--net** ..................................... .90 .83 .82 .93 .94
Realized and unrealized gain--net ............................ .47 .15 .08 .07 .42
Dividends and distributions to Preferred Shareholders:
Investment income--net .................................... (.25) (.11) (.03) (.03) (.05)
Realized gain--net ........................................ (.03) (.01) (.01) -- --
------------------------------------------------------------
Total from investment operations ............................. 1.09 .86 .86 .97 1.31
------------------------------------------------------------
Less dividends and distributions to Common Shareholders:
Investment income--net .................................... (.68) (.78) (.87) (.82) (.80)
Realized gain--net ........................................ (.10) (.13) (.16) -- --
------------------------------------------------------------
Total dividends and distributions to Common Shareholders ..... (.78) (.91) (1.03) (.82) (.80)
------------------------------------------------------------
Offering and underwriting costs resulting from issuance of
Preferred Shares ............................................ -- (.10) -- -- --
------------------------------------------------------------
Net asset value, end of year ................................. $ 13.90 $ 13.59 $ 13.74 $ 13.91 $ 13.76
============================================================
Market price per share, end of year .......................... $ 13.10 $ 13.60 $ 16.24 $ 15.26 $ 13.48
============================================================
===================================================================================================================================
Total Investment Return
-----------------------------------------------------------------------------------------------------------------------------------
Based on market price per share .............................. 1.99% (10.71%) 14.29% 20.11% 5.10%
============================================================
===================================================================================================================================
Ratios Based on Average Net Assets Applicable to Common Shares*
-----------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of reimbursement ......................... 1.64% 1.30% 1.45% 1.16% 1.19%
============================================================
Total expenses ............................................... 1.64% 1.30% 1.45% 1.16% 1.20%
============================================================
Total investment income--net ................................. 6.61% 6.00% 5.97% 6.74% 7.00%
============================================================
===================================================================================================================================
Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Shares, end of year
(in thousands) .............................................. $ 32,581 $ 31,792 $ 32,076 $ 32,390 $ 31,996
============================================================
Portfolio turnover ........................................... 9.07% 16.32% 20.70% 26.17% 35.56%
============================================================
* Do not reflect the effect of dividends to Preferred Shareholders.
** Based on average shares outstanding.
+ On September 1, 2004, Fund Asset Management, L.P. became the Manager.
See Notes to Financial Statements.
12 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
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. Options
traded in the OTC market are valued at 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 financial futures contracts.
Financial 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.
o Swaps -- The Trust may enter into swap agreements, which are OTC contracts
in which the Trust and a counterparty agree to make periodic net payments
on a specified notional amount. The net payments can be made for a set
period of time or may be triggered by a predetermined
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 13
Notes to Financial Statements (continued)
credit event. The net periodic payments may be based on a fixed or
variable interest rate; the change in market value of a specified
security, basket of securities, or index; or the return generated by a
security. These periodic payments received or made by the Trust are
recorded in the accompanying Statement of Operations as realized gains or
losses, respectively. Gains or losses are also realized upon termination
of the swap agreements. Swaps are marked-to-market daily and changes in
value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments, failure of
the counterparties to perform under the contracts' terms and the possible
lack of liquidity with respect to the swap agreements.
(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.
Interest income is recognized on the accrual basis. 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 Shares were charged to capital at the time of issuance.
(g) Recent accounting pronouncements -- In July 2006, the Financial Accounting
Standards Board ("FASB") issued Interpretation No. 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes -- an interpretation of FASB Statement No. 109."
FIN 48 prescribes the minimum recognition threshold a tax position must meet in
connection with accounting for uncertainties in income tax positions taken or
expected to be taken by an entity including mutual funds before being measured
and recognized in the financial statements. Adoption of FIN 48 is required for
the last net asset value calculation in the first required financial statement
reporting period for fiscal years beginning after December 15, 2006. The impact
on the Trust's financial statements, if any, is currently being assessed.
In addition, in September 2006, Statement of Financial Accounting Standards No.
157, "Fair Value Measurements" ("FAS 157"), was issued and is effective for
fiscal years beginning after November 15, 2007. FAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. Management is currently evaluating the implications of
FAS 157. At this time, its impact on the Trust's financial statements has not
been determined.
2. Investment Advisory Agreement and Transactions with Affiliates:
On September 29, 2006, BlackRock, Inc. and Merrill Lynch & Co., Inc. ("Merrill
Lynch") combined Merrill Lynch's investment management business, Merrill Lynch
Investment Managers, L.P. ("MLIM"), and its affiliates, including Fund Asset
Management, L.P. ("FAM"), with BlackRock, Inc. to create a new independent
company. Merrill Lynch has a 49.8% economic interest and a 45% voting interest
in the combined company and The PNC Financial Services Group, Inc. ("PNC"), has
approximately a 34% economic and voting interest. The new company operates under
the BlackRock name and is governed by a board of directors with a majority of
independent members.
On August 15, 2006, shareholders of the Trust approved a new Investment Advisory
Agreement with BlackRock Advisors, Inc. (the "Manager"), an indirect, wholly
owned subsidiary of BlackRock, Inc. BlackRock Advisors, Inc. was recently
reorganized into a limited liability company and renamed BlackRock Advisors,
LLC. The new Investment Advisory Agreement between the Trust and the Manager
became effective on September 29, 2006. Prior to September 29, 2006, FAM was he
Trust's Manager. The general partner of FAM is Princeton Services, Inc. ("PSI"),
an indirect, wholly owned subsidiary of Merrill Lynch, which is the limited
partner.
The Manager 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 has also entered into an Administration Agreement with Princeton
Administrators, LLC ("Princeton"). 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
14 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
Notes to Financial Statements (concluded)
administrative services (other than investment advice and related portfolio
activities) necessary for the operation of the Trust.
For the year ended December 31, 2006, the Trust reimbursed FAM and the Manager
$818 and $252, respectively, for certain accounting services.
Prior to September 29, 2006, certain officers and/or trustees of the Trust were
officers and/or directors of FAM, PSI, Princeton, and/or Merrill Lynch.
Commencing September 29, 2006, certain officers and/or trustees of the Trust are
officers and/or directors of BlackRock, Inc. or its affiliates.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended December 31, 2006 were $4,580,315 and $4,825,499, 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, 2006 and December 31, 2005 increased by 4,386 and 4,569, 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. 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 yields in effect at December 31,
2006 were: Series A, 3.25% and Series B, 3.90%.
Shares issued and outstanding during the year ended December 31, 2006 remained
constant. Shares issued and outstanding during the year ended December 31, 2005
increased by 200 from the issuance of Series B Preferred Shares on September 30,
2005.
5. Distributions to Shareholders:
The Trust paid a tax-exempt income dividend to holders of Common Shares in the
amount of $.049000 per share on February 1, 2007 to shareholders of record on
January 16, 2007.
The tax character of distributions paid during the fiscal years ended December
31, 2006 and December 31, 2005 was as follows:
--------------------------------------------------------------------------------
12/31/2006 12/31/2005
--------------------------------------------------------------------------------
Distributions paid from:
Tax-exempt income .......................... $2,173,352 $2,088,254
Ordinary income ............................ 155,676 21,136
Long-term capital gain ..................... 142,858 292,525
------------------------------
Total distributions .......................... $2,471,886 $2,401,915
==============================
As of December 31, 2006, the components of accumulated earnings on a tax basis
were as follows:
--------------------------------------------------------------------------------
Undistributed tax-exempt income -- net .......................... $ 142,966
Undistributed ordinary income -- net ............................ 2,689
Undistributed long-term capital gains -- net .................... 2,946
----------
Total undistributed earnings -- net ............................. 148,601
Capital loss carryforward ....................................... --
Unrealized gains -- net ......................................... 2,748,346*
----------
Total accumulated earnings -- net ............................... $2,896,947
==========
* The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the deferral of post-October capital losses for
tax purposes, the difference between book and tax amortization methods for
premiums and discounts on fixed income securities and other book/tax
temporary differences.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 15
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, 2006 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, 2006, 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, 2006, 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
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
February 22, 2007
16 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
Proxy Results
During the six-month period ended December 31, 2006, The Massachusetts Health &
Education Tax-Exempt Trust's Common and Preferred Shareholders voted on the
following proposal, which was approved at an annual shareholders' meeting on
August 15, 2006. A description of the proposal and number of shares voted are as
follows:
--------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
--------------------------------------------------------------------------------
To elect the Trust's Trustees: Edward M. Murphy 1,730,160 86,351
Frank Nesvet 1,730,870 85,641
Walter B. Prince 1,730,160 86,351
James M. Storey 1,731,260 85,251
--------------------------------------------------------------------------------
During the six-month period ended December 31, 2006, The Massachusetts Health &
Education Tax-Exempt Trust's Preferred Shareholders voted on the following
proposal. The proposal was approved at an annual shareholders' meeting on August
15, 2006. A description of the proposal and number of shares voted are as
follows:
--------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
--------------------------------------------------------------------------------
To elect the Trust's Trustees:
James F. Carlin, III and Thomas H. Green, III 202 3
--------------------------------------------------------------------------------
During the six-month period ended December 31, 2006, The Massachusetts Health &
Education Tax-Exempt Trust's Common and Preferred shareholders voted on the
following proposal. The proposal was approved at an annual shareholders' meeting
on August 15, 2006. A description of the proposal and number of shares voted are
as follows:
--------------------------------------------------------------------------------
Shares Voted Shares Voted Shares Voted
For Against Abstain
--------------------------------------------------------------------------------
To approve a new investment advisory
agreement with BlackRock Advisors, Inc. 1,186,280 60,248 66,192
--------------------------------------------------------------------------------
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 17
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, 2006
qualify as tax-exempt interest dividends for federal income tax purposes.
Additionally, the following table summarizes the taxable per share distributions
paid by the Trust during the year:
--------------------------------------------------------------------------------
Payable Ordinary Long-Term
Date Income Capital Gains
--------------------------------------------------------------------------------
Common Shareholders 7/28/2006 $ .009604 --
12/28/2006 $ .040892 $ .044608
--------------------------------------------------------------------------------
Preferred Shareholders Series A: 6/29/2006 $ 9.66 --
11/09/2006 $ 17.20 $ 18.76
11/16/2006 $ 17.43 $ 19.01
11/24/2006 $ 17.82 $ 19.44
11/30/2006 $ 13.76 $ 15.01
12/07/2006 $ 17.20 $ 18.76
12/14/2006 $ 0.22 $ 0.24
--------------------------------------------------------
Series B: 6/28/2006 $ 1.39 --
11/08/2006 $ 25.22 $ 27.52
11/15/2006 $ 17.20 $ 18.76
11/22/2006 $ 17.89 $ 19.51
11/29/2006 $ 17.20 $ 18.76
12/06/2006 $ 14.38 $ 15.68
--------------------------------------------------------------------------------
18 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
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.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 19
Officers and Trustees
Number of
Funds and
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: 47 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 management
III* 08543-9095 and development) since 1993; Board of Director,
Age: 43 Principal of Alpha Analytical Inc. since 2000;
Former Director of Carlin Insurance; Former Board
of Director of Chart Bank.
------------------------------------------------------------------------------------------------------------------------------------
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: 59 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 Independent
Nesvet Princeton, NJ present 1998; Managing Director, Senior Vice President, CFO Chairman of
08543-9095 and Fund Treasurer, New England Funds from 1993 to the Board of
Age: 63 1998. Trustees of
streetTRACKS
(R) Series
Trust since
2000 and
streetTRACKS
Index Shares
Funds since
2006 (two
series of 44
exchange-
traded mutual
funds
sponsored and
managed by
State Street
Global
Advisers).
20 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
Officers and Trustees (concluded)
Number of
Funds and
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, Glovsky & One None
Prince Princeton, NJ and Trustee present Tye LLP since 1988; Board of Directors, OneUnited
08543-9095 Bank.
Age: 58
------------------------------------------------------------------------------------------------------------------------------------
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: 75 Eaton Vance) and a practicing attorney; Partner Funds
of the law firm of Dechert, Price & Rhoads from (consisting
1987 to 1993. of 129
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 Managing Director of BlackRock, Inc. since 2006; Managing Director of Merrill Lynch
Burke Princeton, NJ President present Investment Managers, L.P. ("MLIM") and Fund Asset Management, L.P. ("FAM") in 2006;
08543-9011 and First Vice President of MLIM and FAM from 1997 to 2005 and Treasurer thereof from
Age: 46 Treasurer 1999 to 2006; Vice President of MLIM and FAM from 1990 to 1997.
------------------------------------------------------------------------------------------------------------------------------------
John M. P.O. Box 9011 President 2004 to Managing Director of BlackRock, Inc. since 2006; Managing Director of MLIM
Loffredo Princeton, NJ present (Municipal Tax-Exempt Fund Management) from 2000 to 2006; First Vice President of
08543-9011 MLIM from 1997 to 2000.
Age: 43
------------------------------------------------------------------------------------------------------------------------------------
Robert D. P.O. Box 9011 Vice 2004 to Director of BlackRock, Inc. since 2006; Director (Municipal Tax-Exempt Fund
Sneeden Princeton, NJ President present Management) of MLIM from 2005 to 2006; Vice President of MLIM from 1998 to 2005;
08543-9011 Assistant Vice President and Portfolio Manager of MLIM from 1994 to 1998.
Age: 54
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Fund Chief 2004 to Managing Director of BlackRock, Inc. and Fund Chief Compliance Officer since 2006;
Hiller Princeton, NJ Compliance present Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
08543-9011 Officer Chief Compliance Officer of MLIM (Americas Region) from 2004 to 2006; Chief
Age: 55 Compliance Officer of the IQ Funds since 2004; Global Director of Compliance at
Morgan Stanley 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 Securities and
Exchange 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 BlackRock, Inc. since 2006; Director (Legal Advisory)
Stewart Princeton, NJ present of MLIM from 2005 to 2006; Vice President of MLIM from 2002 to 2005; Attorney in
08543-9011 Private from 1999 to 2002.
Age: 37
------------------------------------------------------------------------------------------------------------------------
* Officers of the Trust serve at the pleasure of the Board of Trustees.
------------------------------------------------------------------------------------------------------------------------------------
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
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 21
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
Electronic copies of most financial reports and prospectuses are available on
the Fund's Web site. Shareholders can sign up for e-mail notifications of
quarterly statements, annual and semi-annual reports and prospectuses by
enrolling in the Fund's electronic delivery program.
To enroll:
Shareholders Who Hold Accounts with Investment Advisers, Banks or Brokerages:
Please contact your financial advisor. Please note that not all investment
advisers, banks or brokerages may offer this service.
22 THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006
BlackRock Privacy Principles
BlackRock is committed to maintaining the privacy of its current and former fund
investors and individual clients (collectively, "Clients") and to safeguarding
their nonpublic personal information. The following information is provided to
help you understand what personal information BlackRock collects, how we protect
that information and why in certain cases we share such information with select
parties.
If you are located in a jurisdiction where specific laws, rules or regulations
require BlackRock to provide you with additional or different privacy-related
rights beyond what is set forth below, then BlackRock will comply with those
specific laws, rules or regulations.
BlackRock obtains or verifies personal nonpublic information from and about you
from different sources, including the following: (i) information we receive from
you or, if applicable, your financial intermediary, on applications, forms or
other documents; (ii) information about your transactions with us, our
affiliates, or others; (iii) information we receive from a consumer reporting
agency; and (iv) from visits to our Web sites.
BlackRock does not sell or disclose to nonaffiliated third parties any nonpublic
personal information about its Clients, except as permitted by law or as is
necessary to service Client accounts. These nonaffiliated third parties are
required to protect the confidentiality and security of this information and to
use it only for its intended purpose.
We may share information with our affiliates to service your account or to
provide you with information about other BlackRock products or services that may
be of interest to you. In addition, BlackRock restricts access to nonpublic
personal information about its Clients to those BlackRock employees with a
legitimate business need for the information. BlackRock maintains physical,
electronic and procedural safeguards that are designed to protect the nonpublic
personal information of its Clients, including procedures relating to the proper
storage and disposal of such information.
THE MASSACHUSETTS HEALTH & EDUCATION TAX-EXEMPT TRUST DECEMBER 31, 2006 23
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 1-800-441-7762; (2) at
www.blackrock.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.blackrock.com and (2) on the Securities
and Exchange Commission's Web site at http://www.sec.gov.
The Massachusetts Health & Education Tax-Exempt Trust
P.O. Box 9011
Princeton, NJ 08543-9011
BLACKROCK
#MHET-12/06
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 at
www.blackrock.com.
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, 2006 - $22,500
Fiscal Year Ending December 31, 2005 - $22,500
(b) Audit-Related Fees - Fiscal Year Ending December 31, 2006 - $3,500
Fiscal Year Ending December 31, 2005 - $3,500
The nature of the services include agreed upon procedures related to
AMPS.
(c) Tax Fees - Fiscal Year Ending December 31, 2006 - $6,000
Fiscal Year Ending December 31, 2005 - $5,700
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending December 31, 2006 - $0
Fiscal Year Ending December 31, 2005 - $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, 2006 - $3,071,450
Fiscal Year Ending December 31, 2005 - $5,577,771
(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) - $1,739,500, 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 has delegated to the Manager authority
to vote all proxies relating to the Fund's portfolio securities. The
Manager has adopted policies and procedures (the "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
Manager'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 Manager 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
Manager considers the interests of its clients, including each Fund,
and not the interests of the Manager, when voting proxies and that real
(or perceived) material conflicts that may arise between the Manager's
interest and those of the Manager's clients are properly addressed and
resolved.
In order to implement the Proxy Voting Procedures, the Manager has
formed a Proxy Voting Committee (the "Committee"). The Committee, which
is a subcommittee of the Manager's Equity Investment Policy Oversight
Committee ("EIPOC"), is comprised of a senior member of the Manager's
equity management group who is also a member of EIPOC, one or more
other senior investment professionals appointed by EIPOC, portfolio
managers and investment analysts appointed by EIPOC and any other
personnel EIPOC deems appropriate. The Committee will also include two
non-voting representatives from the Manager's Legal Department
appointed by the Manager's General Counsel. The Committee's membership
shall be limited to full-time employees of the Manager. No person with
any investment banking, trading, retail brokerage or research
responsibilities for the Manager'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 Manager 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 Manager 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 Manager 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 Manager
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 Manager 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 Manager will
generally seek to vote proxies over which the Manager exercises voting
authority in a uniform manner for all the Manager'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 Manager 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 Manager by ISS include in-depth research,
voting recommendations (although the Manager 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 Manager's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Manager 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 Manager 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 Manager may be required to vote proxies in
respect of an issuer where an affiliate of the Manager (each, an
"Affiliate"), or a money management or other client of the Manager,
including investment companies for which the Manager provides
investment advisory, administrative and/or other services (each, a
"Client"), is involved. The Proxy Voting Procedures and the Manager'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 Manager'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 Committee may pass the voting power to a subcommittee,
appointed by EIPOC (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by EIPOC. EIPOC 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 Manager'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
Manager'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
Manager's normal voting guidelines or, on matters where the Manager'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 Manager 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
Manager's fiduciary duties.
In addition to the general principles outlined above, the Manager 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 Manager 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 Manager 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 number of other
directorships, 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, which 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.
Information about how a Fund voted proxies relating to securities held
in the Fund's portfolio during the most recent 12 month period ended
December 31 is available without charge (1) at www.blackrock.com and
(2) on the Commission's web site at http://www.sec.gov.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of December 31, 2006.
(a)(1) The Massachusetts Health & Education Tax-Exempt Trust is managed
by a team of investment professionals comprised of Robert D. Sneeden,
Director at BlackRock, Theodore R. Jaeckel, Jr., CFA, Managing Director
at BlackRock, and Walter O'Connor, Managing Director at BlackRock. Each
is a member of BlackRock's municipal tax-exempt management group. Mr.
Jaeckel and Mr. O'Connor are responsible for setting the Fund's overall
investment strategy and overseeing the management of the Fund. Mr.
Sneeden is the Fund's lead portfolio manager and is responsible for the
day-to-day management of the Fund's portfolio and the selection of its
investments. Messrs. Jaeckel and O'Connor have been members of the
Fund's management team since 2006 and Mr. Sneeden has been the Fund's
portfolio manager since 2005.
Mr. Jaeckel joined BlackRock in 2006. Prior to joining BlackRock, he
was a Managing Director (Municipal Tax-Exempt Fund Management) of
Merrill Lynch Investment Managers, L.P. (""MLIM") from 2005 to 2006 and
a Director of MLIM from 1997 to 2005. He has been a portfolio manager
with BlackRock or MLIM since 1991.
Mr. O'Connor joined BlackRock in 2006. Prior to joining BlackRock, he
was a Managing Director (Municipal Tax-Exempt Fund Management) of MLIM
from 2003 to 2006 and was a Director of MLIM from 1997 to 2002. He has
been a portfolio manager with BlackRock or MLIM since 1991.
Mr. Sneeden joined BlackRock in 2006. Prior to joining BlackRock, he
was a Director (Municipal Tax-Exempt Fund Management) of MLIM since
2006 and was a Vice President of MLIM from 1998 to 2006. Mr. Sneeden
has been a portfolio manager with BlackRock or MLIM since 1994.
(a)(2) As of December 31, 2006:
(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
Registered Other Pooled Registered Other Pooled
(i) Name of Investment Investment Other Investment Investment Other
Portfolio Manager Companies Vehicles Accounts Companies Vehicles Accounts
--------- ---------
Theodore R.
Jaeckel, Jr. 80 0 0 0 1 0
$29,621,486,904 $ 0 $ 0 $ 0 $ 24,560,023 $ 0
Walter O'Connor 80 0 0 0 0 0
$29,621,486,904 $ 0 $ 0 $ 0 $ $ 0
Robert D. Sneeden 12 0 0 0 0 0
$ 3,126,376,496 $ 0 $ 0 $ 0 $ $ 0
(iv) Potential Material Conflicts of Interest
BlackRock has built a professional working environment, firm-wide
compliance culture and compliance procedures and systems designed to
protect against potential incentives that may favor one account over
another. BlackRock has adopted policies and procedures that address the
allocation of investment opportunities, execution of portfolio
transactions, personal trading by employees and other potential
conflicts of interest that are designed to ensure that all client
accounts are treated equitably over time. Nevertheless, BlackRock
furnishes investment management and advisory services to numerous
clients in addition to the Fund, and BlackRock may, consistent with
applicable law, make investment recommendations to other clients or
accounts (including accounts which are hedge funds or have performance
or higher fees paid to BlackRock, or in which portfolio managers have a
personal interest in the receipt of such fees), which may be the same
as or different from those made to the Fund. In addition, BlackRock,
its affiliates and any officer, director, stockholder or employee may
or may not have an interest in the securities whose purchase and sale
BlackRock recommends to the Fund. BlackRock, or any of its affiliates,
or any officer, director, stockholder, employee or any member of their
families may take different actions than those recommended to the Fund
by BlackRock with respect to the same securities. Moreover, BlackRock
may refrain from rendering any advice or services concerning securities
of companies of which any of BlackRock's (or its affiliates') officers,
directors or employees are directors or officers, or companies as to
which BlackRock or any of its affiliates or the officers, directors and
employees of any of them has any substantial economic interest or
possesses material non-public information. Each portfolio manager also
may manage accounts whose investment strategies may at times be opposed
to the strategy utilized for the Fund. In this connection, it should be
noted that certain portfolio managers currently manage certain accounts
that are subject to performance fees. In addition, certain portfolio
managers assist in managing certain hedge funds and may be entitled to
receive a portion of any incentive fees earned on such funds and a
portion of such incentive fees may be voluntarily or involuntarily
deferred. Additional portfolio managers may in the future manage other
such accounts or funds and may be entitled to receive incentive fees.
As a fiduciary, BlackRock owes a duty of loyalty to its clients and
must treat each client fairly. When BlackRock purchases or sells
securities for more than one account, the trades must be allocated in a
manner consistent with its fiduciary duties. BlackRock attempts to
allocate investments in a fair and equitable manner among client
accounts, with no account receiving preferential treatment. To this
end, BlackRock has adopted a policy that is intended to ensure that
investment opportunities are allocated fairly and equitably among
client accounts over time. This policy also seeks to achieve reasonable
efficiency in client transactions and provide BlackRock with sufficient
flexibility to allocate investments in a manner that is consistent with
the particular investment discipline and client base.
(a)(3) As of December 31, 2006:
Portfolio Manager Compensation
Compensation Program
The elements of total compensation for portfolio managers on
BlackRock's municipal team include a fixed base salary, annual
performance-based cash and stock compensation (cash and stock bonus)
and other benefits. BlackRock has balanced these components of pay to
provide these portfolio managers with a powerful incentive to achieve
consistently superior investment performance. By design, compensation
levels for these portfolio managers fluctuate--both up and down--with
the relative investment performance of the portfolios that they manage.
Base compensation
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
BlackRock 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, BlackRock and its
affiliates portfolio manager incentive compensation is based on a
formulaic compensation program. BlackRock'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. All factors are considered collectively by BlackRock
management.
Long-Term Retention and Incentive Plan (LTIP)
The LTIP is a long-term incentive plan that seeks to reward
certain key employees. The plan provides for the grant of awards that
are expressed as an amount of cash that, if properly vested and subject
to the attainment of certain performance goals, will be settled in cash
and/or in BlackRock, Inc. common stock.
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 BlackRock
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
BlackRock stock price performance. As such, the stock bonus aligns each
portfolio manager's financial interests with those of the BlackRock
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 BlackRock'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
BlackRock 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
BlackRock 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 BlackRock 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, 2006,
neither of Messrs. Jaeckel, O'Connor and Sneeden 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) - As of September 29, 2006, with the conclusion of the combination of
Merrill Lynch's asset management business with BlackRock, the registrant
was migrated to BlackRock's trading and compliance monitoring systems,
and various personnel changes occurred. In conjunction with these
business improvements, there were no changes in the registrants internal
control over financial reporting (as defined in Rule 30a-3(d) under 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 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: March 9, 2007
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: March 9, 2007
By: /s/ Donald C. Burke
----------------------------------
Donald C. Burke,
Chief Financial Officer of
The Massachusetts Health and Education Tax-Exempt Trust
Date: March 9, 2007