NORTHEAST INVESTORS TRUST
A NO LOAD INCOME FUND
PROSPECTUS
FEBRUARY 1, 2014
NORTHEAST
INVESTORS TRUST (NTHEX)
125 High Street
Boston, Massachusetts 02110
(800)
225-6704
www.northeastinvestors.com
SHARES OF BENEFICIAL INTEREST
PROSPECTUS
February 1, 2014
This prospectus explains the investment objective, policies, strategies and risks associated with the fund. Please read it carefully
before you invest. We suggest that you keep this prospectus for future reference.
Like securities of all mutual funds, neither the
Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
TABLE OF CONTEN
TS
i
SUMMA
RY SECTION
You can find the Trusts prospectus and other information about the Trust, including the Statement of Additional Information and the most recent reports
to shareholders online at www.northeastinvestors.com. You can also get this information at no cost by calling
800-225-6704
or by sending an email to website@northeastinvestors.com.
Investment Objectives
Northeast
Investors Trust (the Trust) is a no-load high-yield bond fund whose primary objective is the production of income.
Fees
and Expenses
These tables describe the fees and expenses that you may pay if you buy and hold shares of the Trust.
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Shareholder Fees
(Fees Paid Directly From Your Investment)
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Maximum Sales Charge (Load) Imposed on Purchases
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None
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Maximum Deferred Sales Charge (Load)
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None
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Maximum Sales Charge (Load) Imposed on Reinvested Dividends
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None
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Redemption Fee
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None
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Annual Trust Operating Expenses
(Expenses Deducted From Fund Assets)
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Trustees Fees
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0.50
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%
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Distribution (12b-1 Fees)
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None
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Other Expenses
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0.46
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%
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Including:
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Interest Expense
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0.03
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%
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Operating Expense
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0.43
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%
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Total Annual Trust Operating Expenses
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0.96
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%
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Example
This example is
intended to help you compare the cost of investing in the Trust with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Trust for the time periods indicated and redeem at the end of the period. The
example also assumes that your investment has a 5% return each year, including reinvested dividends and distributions, and that the Trusts operating expenses remain the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
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1 year
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3 years
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5 years
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10 years
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$98
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$
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306
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$
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531
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$
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1,178
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Portfolio Turnover
The Trust pays transaction costs, such as commissions, when it buys or sells securities (or turns over its portfolio). A higher
portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Trust shares are held in a taxable account. These costs, which are not reflected in annual Trust operating expenses or in the example, affect the
Trusts performance. During the most recent fiscal year, the Trusts portfolio turnover rate was 20.88% of the average value of its portfolio.
Primary Investment Strategies
The Trust
invests primarily in marketable securities of established companies which the Trustees believe provide reasonable income and which, where consistent with the objective, may have potential for capital appreciation. The Trusts portfolio
emphasizes high yield corporate bonds which are rated as lower than investment grade by either of the two principal rating services or unrated securities having similar characteristics (sometimes referred to as junk bonds).
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Principal Risks
Risk of Lower Rated Debt Securities:
Lower rated debt securities may be subject to increased market volatility based on factors such as:
the ability of an issuer to make current interest payments, the potential for principal loss if an issuer declares bankruptcy, and the potential difficulty in disposing of certain securities and therefore can present an increased risk of investment
loss.
Income Risk:
The chance that falling interest rates and/or defaults will cause the Trusts income to decline.
Shareholders should expect the Trusts quarterly income to fluctuate.
Interest Rate Risk:
The chance that the value of bonds
tends to fall as interest rates rise. Longer-term debt securities are more sensitive to interest rate changes than those with shorter maturities.
Performance Information
The following performance related information provides some indication of the risks of investing in the
Trust. The bar chart shows how the Trusts performance (including operating expenses) varied from one calendar year to another over the past ten years. The table shows the average annual returns (including operating expenses) compared with
those of a relevant market index over set periods of time. The table also presents the impact of taxes on the Trusts returns. To calculate these figures, we used the highest individual federal marginal income and capital gains tax rates in
effect at the time of each distribution, but we do not take into consideration state or local income taxes. Return after taxes on distributions and sale of Trust shares may be higher than other returns for the same period due to the tax benefit of
realizing a capital loss on the sale of Trust shares. Actual after-tax returns depend on the individual investors tax situation and may differ from those shown.
Please note that if you own the Trust in a tax-deferred account, such as an individual retirement account (IRA) or a 401(k) plan, this after-tax information
does not apply to your investment, because such accounts are subject to taxes only upon distribution. Keep in mind that past performance whether before taxes or after taxes does not guarantee future results.
The Trust may experience short-term swings of performance as suggested by the best and worst calendar quarter returns.
Average Annual Total Returns for the Periods Ended December 31, 2013
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1 Year
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5 Years
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10 Years
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Northeast Investors Trust
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Return before taxes
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13.01
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%
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17.71
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%
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6.41
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%
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Return after taxes on distributions
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10.24
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%
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14.74
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%
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3.62
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%
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Return after taxes on distributions and sale of Trust shares
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7.30
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%
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12.94
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%
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3.81
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%
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Bank of America Merrill Lynch High Yield Index
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7.42
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%
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18.64
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%
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8.45
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%
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1 The Bank of America Merrill Lynch High Yield Index is an unmanaged market value-weighted index comprised of over 2,200
domestic and yankee high-yield bonds, including deferred interest bonds and payment-in-kind securities. Issues included in the index have maturities of one year or more and have a credit rating lower than BBB-/Baa3, but are not in default. It is
shown for comparative purposes only and reflects no deductions for fees, expenses or taxes.
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Annual Total Returns:
The following bar chart shows the change in value of the Trusts shares over the past 10 years. It illustrates how the returns can differ
from one year to the next.
Best quarter: 2
nd
quarter 2009, up 31.46%
Worst quarter: 4
th
quarter 2008, down 28.22%
Fund Management
The Trustees principally
responsible for the day-to-day management of the Trusts portfolio are Ernest E. Monrad and Bruce H. Monrad. Ernest E. Monrad has served as Trustee since 1960 and served as its Chairman from 1969 to 2000. Bruce H. Monrad has been associated
with the Trust since 1989 and was appointed Chairman in 2000.
Purchasing and Redeeming Shares
You may purchase or redeem shares of the Trust on any business day by mail (125 High Street, Boston, MA 02110) or fax (617) 742-5666. You
may also purchase additional shares for an established account by telephone at 800-225-6704. Shares may be purchased by scheduled electronic bank transfers, by check or by wire. All redemption requests must be in writing and must include a medallion
signature guarantee if the redemption is in excess of $10,000. You will receive redemption proceeds by check or by scheduled electronic bank transfer. You generally buy and redeem shares at the Trusts next-determined net asset value (NAV)
after the Trust receives your request in good order. The NAV is determined only on days when the New York Stock Exchange (NYSE) is open for regular trading. The minimum initial purchase is $1,000 ($500 for IRAs). There is no minimum for subsequent
investments.
Tax Information
The
Trusts distributions are generally taxable to you as ordinary income, capital gains, or a combination of the two, unless you are investing through a tax-deferred arrangement, such as a 401(k) or an individual retirement account (IRA).
Payments to Broker-Dealers or Other Financial Intermediaries
The Trust does not pay broker-dealers or financial intermediaries for the sale of Trust shares.
FUN
D PROFILE
Objecti
ves
The
Trusts primary objective is the production of income. Capital appreciation is also an objective of the Trust, but its achievement must be compatible with the primary objective.
Principal
Strategies
The Trustees invest primarily in marketable securities of established companies which the Trustees believe provide reasonable income and which,
where consistent with this objective, may have potential for capital appreciation. This would include bonds which may be purchased at a discount or premium, preferred stocks, common stocks, securities convertible into common stocks and securities
with warrants attached. The proportion of the Trusts assets invested in each type of security will vary from time to time depending on market and economic conditions. The Trust emphasizes fixed income securities and generally more than 80% of
its assets have been held in bonds or other debt securities. The Trust does not impose any particular rating standards or maturity guidelines which must be applied in making investment decisions. High-yield fixed income securities are typically
issued with maturities of less than ten years; and the Trusts holdings are generally within this range.
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The Trusts portfolio emphasizes high yield corporate bonds which are rated as lower than
investment grade by either of the two principal rating services or unrated securities having similar characteristics (sometimes referred to as junk bonds). The Trustees have usually relied upon their own credit analysis in making
decisions concerning the Trusts portfolio. For equity investments the Trustees consider their potential for appreciation based upon growth and value analysis.
From time to time the Trust will make use of borrowed funds in order to raise additional funds for investment or to avoid liquidating
securities for cash needs such as redemptions. Leverage is limited to one quarter of the Trusts total assets. Leverage may be increased temporarily up to a maximum of 30% for extraordinary or emergency purposes. The amount of leverage
outstanding at any one time cannot be determined in advance. The Trustees may vary the amount of borrowings from time to time within the authorized limits, including having no borrowings at all.
In response to adverse market or economic conditions the Trust may invest for relatively short periods of time in short-term, highly liquid
securities with maturities of 180 days or less. These securities may include commercial paper or securities issued or guaranteed by the U.S. Government. This would be likely to happen when the Trustees believe that liquidity is highly desirable in
response to adverse market or economic conditions and that therefore the Trust should adopt a temporary defensive policy. When so invested the Trust may not achieve its investment objectives.
Events in the financial markets have resulted in, and may continue to cause, increased volatility. In addition, investments which were
traditionally liquid may experience periods of diminished liquidity. Due to the interdependence among markets, events in one market may adversely impact other markets or issuers in unforeseen ways. In addition, governmental and regulatory responses
to market events may impair the Trusts ability to pursue certain investment techniques or strategies or may have unexpected consequences on particular markets or issuers.
Princi
pal Risks
Risks of Lower Rated Debt Securities.
Lower rated debt securities (sometimes referred to as junk bonds) may be subject to
increased market volatility and can present an increased risk of investment loss. These risks include:
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The creditworthiness of an issuer affecting its ability to make current interest payments on debt;
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Potential for loss of principal of debt securities if an issuer goes into default or bankruptcy;
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Liquidity/Marketability of investments; i.e. potential difficulty in disposing of securities under adverse market conditions;
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The prices of lower rated debt securities are sometimes more sensitive to changes in economic conditions.
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Lower rated securities are subject to greater sensitivity to these risks than higher rated securities. Bonds which are rated as less than
investment grade may be more susceptible than higher rated securities to real or perceived adverse economic conditions, such as a projected recession, which may cause a lessening of confidence in the ability of highly leveraged issuers to service
outstanding debt.
You should consider the relative risk of investing in these types of securities, which are generally not meant as
short-term investments.
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Equity Risk
To the extent the Trust invests in equity securities, it runs the risk that
deterioration in general market conditions or adverse changes in an issuers revenues or profitability can result in loss.
Financial Markets Risk
Movements in financial markets, both domestic and foreign, may adversely affect the price of the Trusts
investments, irrespective of the performance of the companies in which the Trust invests. The market as a whole may not favor the types of investments the Trust makes.
Foreign Investing Risk
Foreign markets, particularly emerging markets, can be more volatile than the U.S. markets due to increased
risks of adverse issuer, political, regulatory, market or economic developments and can perform differently than the U.S. markets.
Income Risk
There is the chance that falling interest rates and / or defaults will cause the Trusts income to decline.
Shareholders should expect the Trusts quarterly income to fluctuate.
Interest Rate Risk
In addition to credit risk, the
value of some fixed income investments such as bonds tends to fall as interest rates rise. Longer-term debt securities are more sensitive to changes in interest rates than those with shorter maturities.
Leverage
Borrowed funds can cause net asset value to decrease faster in a falling market. If, for example, the Trust makes a $1,000
investment for which it had borrowed $200 (20%) of the purchase price and the investment lost 20% of its value, to $800, the Trust would have a loss of $200 on an $800 investment, or 25% of the amount invested and be obligated to repay the
borrowed $200 with interest. Leverage can, therefore, involve additional risk.
Manager Risk
There is the chance that poor security
selection will cause the Trust to underperform other funds with similar investment objectives.
Prepayment Risk
The ability of an
issuer of a debt security to repay principal prior to a securitys maturity can cause greater price volatility if interest rates change.
Suitabil
ity
The Trust may be appropriate for investors who seek one or more of the following:
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production of income over the long-term;
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a fund emphasizing fixed income investments in companies issuing higher yielding, lower rated securities.
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You should also consider the following:
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an investment in the Trust involves risk and should be part of a balanced investment program;
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the Trust is generally for investors with longer-term investment horizons, and should not be used for short term trading purposes;
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there is a risk that you could lose money by investing in the Trust, and there is no assurance that it will achieve its investment objectives;
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Trust shares are not bank deposits and are not guaranteed, endorsed or insured by any financial institution, government entity or the FDIC.
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FUND MAN
AGEMENT
The Trustees principally responsible for the day-to-day management of the Trusts portfolio are Ernest E. Monrad and Bruce H. Monrad.
Ernest E. Monrad has served as a Trustee of the Trust since 1960 and served as its Chairman from 1969 to 2000. Bruce H. Monrad has been associated with the Trust since July, 1989 as co-portfolio manager and was appointed a Trustee in May, 1993 and
Chairman in May, 2000. Further information relating to the compensation, share ownership and portfolio management responsibilities of the portfolio managers may be found in the Statement of Additional Information.
From time to time a Trustee or an employee of Northeast Investors Trust may express views regarding a particular company, security, industry
or market sector. The views expressed by any such person are the views of only that individual as of the time expressed and do not necessarily represent the views of the Trust or any other person in the Northeast Investors Trust organization. Any
such views are subject to change at any time based upon market or other conditions, and Northeast Investors Trust disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment
decisions for Northeast Investors Trust are based on numerous factors, may not be relied on as an indication of trading intent on behalf of the Trust.
Northeast Investors Trust personnel may invest in securities for their own investment accounts, including securities that may be purchased or
held by the Trust, pursuant to a Code of Ethics that establishes procedures for personal investing and restricts certain transactions.
EXP
ENSES
Trustees compensation has been computed at the rate of 1/8 of 1% of the net assets (before the deduction of accrued
Trustees compensation) at the close of each quarter, from which the Trustees have paid certain expenses specified in the Declaration of Trust. Other than the fee to the Trustees, the Trust pays no compensation to any person other than in the
ordinary course of business. There are other expenses of the Trust which are paid by it directly. These include expenses such as taxes, custodians fees and expenses, legal and auditing fees and expenses, bookkeeping expenses, and the expense
of qualifying shares for sale under federal and state laws. The Trust also acts as its own transfer agent and, as such, carries out all functions relating to the maintenance of its shareholder accounts, subscriptions, transfers and redemptions of
shares, and mailings to shareholders. It pays the expenses relating thereto, including the compensation of persons performing these functions and data processing expenses.
SALES WITHOUT
SALES CHARGE
The Trust offers investors an opportunity to share in the benefits of a mutual fund without requiring that they pay a sales commission or
distribution expense. It has no sales charge, load charge or 12b-1 fee. The purchase of shares of numerous other mutual funds requires the investor to pay amounts for a selling commission and related expenses.
This reduces the net amount invested which these funds actually receive.
SHAREHOLDER IN
FORMATION
General Informa
tion
For account, product and service information, please use the following website, telephone number or address:
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For information over the Internet including on-line access to your account visit the Trusts website at
www.northeastinvestors.com
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For information over the telephone call 1-800-225-6704;
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For information by mail use
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Northeast Investors Trust
125 High Street
Boston, MA
02110
Backup withholdingBy law Northeast Investors Trust must withhold 28% of any taxable distributions or redemptions from your account if you do
not:
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Provide us with your correct taxpayer identification number;
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Certify that the taxpayer identification is correct; and
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Confirm that you are not subject to backup withholding.
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Similarly, Northeast Investors Trust must withhold
taxes from your account if the IRS instructs us to do so.
Foreign investorsNortheast Investors Trust is not sold outside the United States, except
under limited circumstances to certain qualifying investors at the discretion of the Trust. Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in the Trust.
Invalid addressesIf a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Northeast Investors
Trust will automatically reinvest all future distributions until you provide us with a valid mailing address.
Tax consequencesThis prospectus
provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax adviser for detailed information about the Trusts tax consequences for you.
Account Registrations
Some of the different ways to register your account with the Trust are listed below. For certain accounts, beneficiary designation forms and
agreements are available permitting the designated beneficiary(ies) to own the account after the death of the original owner(s) without probate or similar legal steps. These materials are available from the Trust.
Individual or Joint Tenant
For your
general investment needs
Transfer on Death (TOD)/ Pay on Death (POD)
Beneficiary designation on account (special application required)
Retirement
For tax-advantaged retirement
savings
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Traditional Individual Retirement Accounts (IRAs)
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Coverdell Education Savings Plan (formerly Educational IRAs)
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Simplified Employee Pension Plans (SEP-IRAs)
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Uniform Gifts or Transfers to a Minor Account (UGMA, UTMA)
To invest for a childs education or other future needs
Trust
For money being invested by a
trust
Business or Organization
For
investment needs of corporations, associations, partnerships or other groups
Buying Shares
Your initial investment must be accompanied by a completed application. The form can be obtained from our website. You may purchase shares of
the Trust at the per share net asset value (NAV) next determined after the Trust or an authorized broker or agent receives your purchase order. There is no sales charge or commission. The Trust computes net asset value per share by
dividing the market value of all securities plus other assets, less liabilities, by the total number of shares outstanding. NAV is determined as of the close of the New York Stock Exchange on each day when it is open.
Securities for which market quotations are readily available are valued at market values determined on the basis of the last quoted sale
prices prior to the close of the New York Stock Exchange (or the last quoted bid prices in the event there are no sales reported on that day) in the principal market in which such securities normally are traded, as publicly reported, or are
furnished by recognized dealers in such securities. Fixed income securities may also be valued on the basis of valuations furnished by independent pricing services that use both dealer supplied valuations and evaluations based on expert analysis of
market data and other factors if such valuations are believed to reflect more accurately the fair value of such securities. Such services may use various pricing techniques which take into account both transaction data and market information such as
yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data as well as broker quotes. When pricing service or reliable market quotations for certain securities are not readily available, such securities are
priced at their fair value as determined in good faith under consistently applied procedures approved by the Board of Trustees. Methodologies used to fair value securities may include, but are not limited to, the analysis of current debt to cash
flow, information of any recent sales, the analysis of the companys financial statements, quotations or evaluated prices from broker-dealers, information obtained from the issuer or analysts and the nature of the existing market for securities
with characteristics similar to such obligations. The Trust may use fair value pricing for foreign securities if a material event occurs that may affect the price of a security after the close of the foreign market or exchange (or on days the
foreign market is closed) but before the Trust prices its portfolio, generally at 4:00 p.m. ET. Fair value pricing may also be used for securities acquired as a result of corporate restructurings or reorganizations as reliable market quotations for
such issues may not be readily available. Brokers or dealers may accept purchase and sale orders for shares of the Trust and may impose a transaction charge for this service. Any investor may, however, purchase or redeem shares without such
additional charge by dealing directly with the Trust.
Short-term or excessive trading into and out of the Trust may harm performance by
disrupting portfolio management strategies and by increasing expenses. Excessive trading can increase costs as it may cause the Trust to utilize lines of credit or initiate portfolio transactions during unfavorable periods in markets in which the
Trust
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trades. Excessive trading can also cause the Trust to maintain higher cash balances than it otherwise would, which may lower the Trusts performance in times of rising markets. The costs
incurred from short-term traders are borne by all investors. While the Trust cannot assure that it can detect and prevent all excessive and short-term trading, especially as it relates to the activity occurring in omnibus accounts maintained with
intermediaries where the Trust does not receive the underlying individual trading activity, the Trusts Board of Trustees has adopted policies and procedures designed to help identify such short-term trading activity, and the Trust has entered
into agreements with intermediaries to improve the information it receives concerning omnibus accounts. The Trust reserves the right, based either on the size or frequency of the transaction, but does not have the obligation, to reject any purchase
request that it regards as potentially disruptive to efficient portfolio management. Depending on the availability of transaction information, purchase and sale transactions of Trust shares are monitored daily. In general, whenever such monitoring
discloses that a shareholder has made two or more purchases and sales of Trust shares within a 90 day period, further reviews are made to determine if the trading activity was excessive and, if so, whether the effect upon the Trust could be harmful.
If it is determined that there could be such an effect, the shareholder will be either warned or notified that further purchases of shares of the Trust will not be accepted. The Trust may reply to inquiries concerning its policies, but does not
enter into arrangements with any person to permit frequent purchases and redemptions of Trust shares. The Trust does not consider transactions from automatic purchase or redemption plans in this category.
How to buy shares:
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By Check:
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Mail your check and a completed account registration form to the Trust. When adding to an existing account, send your check with an Invest-By-Mail form detached from your last statement. Make your check payable to: Northeast
Investors Trust, and mail to 125 High Street, Boston, MA, 02110.
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By Telephone:
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You may make purchases to your already existing account via the telephone. The trade will be processed on the same day if received prior to the close of the New York Stock Exchange. A trade confirmation is generated and mailed the
following business day. Your payment must be received within 14 days of the transaction.
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Note: If you place an order to purchase shares and your payment is not received within 14 calendar days, your
transaction will be canceled and you may be prohibited from placing orders in the future unless such orders are accompanied with payment. You may also be responsible for any losses or fees the Trust may have incurred as a result. Telephone purchases
may dilute the future appreciation of the NAV if payment is not made promptly.
Your purchase price:
You buy shares at the Trusts next determined NAV after Northeast Investors Trust receives your purchase request. As long as your request
is received before the close of regular trading on the New York Stock Exchange (NYSE), generally 4 p.m., Eastern time (ET), you will buy your shares at that days NAV. This is known as trade date.
When you place an order to buy shares, note the following:
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The minimum initial investment in the Trust for each account is $1,000 ($500 for IRAs). There is no minimum for subsequent investments either by mail or telephone. The Trust, in its discretion, may waive or lower
purchase minimums in certain circumstances (
e.g.
accounts opened with the proceeds of distributions from existing retirements accounts, accounts utilizing the Automated Investment Plan (AIP) feature, etc.);
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Checks must be drawn on U.S. banks and must be in U.S. dollars. Third party checks are not acceptable;
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The Trust does not accept cash, money orders, starter checks or post dated checks for payment of share purchases;
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There is a $50,000 maximum for telephone purchases for individual investors. Net account payables resulting from telephone purchases outstanding at any one time cannot exceed this limit. This limit may not pertain to
institutional accounts;
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No cancellations. The Trust will not cancel any transaction at the request of an investor once it has been processed;
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Future purchases. The Trust reserves the right to stop selling shares at any time, or reject specific purchase requests;
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The Trust may reject initial investments if certain required information is not supplied on the new account application.
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Under applicable anti-money laundering regulations and other federal regulations, purchase orders may be suspended, restricted or canceled and the monies withheld.
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You may participate in an automatic investment plan (AIP) by completing the appropriate section of the application. Under the
Trusts automatic investment plan, regularly scheduled purchases (minimum $50) will be funded directly from your bank checking or savings account.
No specific election is required on the application to obtain telephone purchase privileges. The Trust will employ reasonable procedures,
including requiring personal identification, prior to acting on telephone instructions to confirm that such instructions are genuine. If the Trust does not follow such procedures it may be liable for losses due to unauthorized or fraudulent
instructions. Otherwise it will not be liable for following instructions communicated by telephone that it reasonably believes to be genuine.
Selling Shares
You are entitled to redeem all or any portion of the shares credited to your account by submitting a written
request for redemption to the Trust. Within seven days after the receipt of such a request in good order as described below, a check will be sent to you in an amount equal to the NAV of the redeemed shares. This will be the NAV next
determined at the close of the New York Stock Exchange (NYSE) after the redemption request has been received. Redemptions may be suspended or payment dates delayed on days when the NYSE is closed other than weekends or holidays. The Trust does not
wire redemption proceeds to individual shareholders. You will not receive interest on amounts represented by uncashed redemption checks.
A redemption request will be considered to be in good order if it meets the following requirements:
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The request is in writing, indicates the number of shares or dollars to be redeemed and identifies your account. The letter must be signed by all registered owners. The letter can be mailed or can be faxed to
(617) 742-5666 before the close of the NYSE;
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The request includes any certificates issued representing the shares, endorsed for transfer (or accompanied by a stock power in customary form) exactly as the shares are registered;
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For redemptions in excess of $10,000
, your signature has been guaranteed by a U.S. bank or trust company, member of a national securities exchange or other eligible guarantor institution. Mere witnessing of a
signature is not sufficient; a specific signature guarantee must be made with respect to all signatures. Signature guarantees are designed to protect you and the Trust from fraudulent activity. A notary public is
not
an acceptable guarantor;
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10
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In the case of corporations, executors, administrators, trustees or other organizations you must enclose evidence of authority to sell (i.e. a corporate resolution);
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If shares to be redeemed represent an investment made by check, the Trust reserves the right to delay payment until the check has been cleared up to a maximum of 10 days;
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Redemption checks will only be made payable to the registered shareholder(s);
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A signature guarantee as described above is required on all redemptions when the check is mailed to an address other than the address of record or if an address change occurred in the past 30 days;
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Telephone redemptions will not be made;
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The Trust reserves the right not to process redemption requests from shareholders who on consecutive days request redemptions of less than $10,000 without a signature guarantee;
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Under the applicable anti-money laundering regulations and other federal regulations, redemption orders may be suspended, restricted or canceled and the monies withheld.
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You may participate in a periodic withdrawal plan (PWP) by completing the appropriate section of the application. Under the
Trusts periodic withdrawal plan, proceeds from regularly scheduled redemptions (minimum $50) will be funded directly to your bank checking or savings account.
The Trust reserves the right to deliver assets in whole or in part in kind in lieu of cash. The Trust is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1 percent of the net asset value of the Fund during any 90 day period for any one shareholder. Shareholders receiving redemptions in kind will incur brokerage costs in converting securities received to cash.
If you are an investor in a tax-advantaged retirement plan you should consider specific taxpayer restrictions, penalties and procedures that
may be associated with redemptions from your retirement plan in order to qualify under the provisions of the Internal Revenue Code. The Trust assumes no responsibility for determining whether any specific redemption satisfies the conditions of
federal tax laws. That determination is your responsibility. Penalties, if any, apply to withdrawals from the plan, not to redemptions from the Trust, and are governed by federal tax law alone.
Dividends and Distributions
The Trust has paid dividends in each quarter since its organization. The Trust earns dividends, interest and other income from its investments,
and distributes this income (less expenses) to shareholders as dividends. These payments are generally made around the end of February, May, August and November. The Trust may also realize net capital gains from its investments, and would distribute
these gains (net of any losses) to shareholders as capital gain distributions. Such distributions, if any, would occur between October 31 and December 31. The Trust has made only one such distribution since 1999.
11
When you open an account, specify on your application how you want to receive your distributions.
The following options are available for the Trusts distributions:
(1) Reinvestment Option. Your dividends and capital gains
distributions will be automatically invested in additional shares of the Trust. If you do not indicate a choice on your application, you will be assigned this option;
(2) Cash/Reinvest Option. Your dividends will be paid in cash. Your capital gains distributions will be automatically reinvested in additional
shares of the Trust;
(3) Cash Option. Your dividends and capital gains distributions will be paid in cash.
Note: For quicker access to your cash distributions the Trust recommends direct deposit for shareholders electing Option 2 or 3.
If you elect to receive your distributions paid by check and your check remains uncashed for a period of six months, your distribution option
may be converted to the Reinvestment Option. You will not receive interest on amounts represented by uncashed distribution checks.
Tax Consequences
As with any investment, your investment in the Trust could have tax consequences for you. This prospectus
provides only general tax information. If you are investing through a tax-advantaged retirement account, such as an IRA, special tax rules may apply. Otherwise you should consider these tax consequences.
Taxes on Distributions
. Distributions you receive from the Trust are subject to federal income tax, and may also be subject to state or
local taxes.
For federal tax purposes, the Trusts dividends made from income and distributions of short-term capital gains are
taxable to you as ordinary income. The Trusts distributions of long-term capital gains are taxable to you generally as capital gains.
If you buy shares when the Trust has realized but not yet distributed income or capital gains, you will be buying a dividend by
paying the full price for the shares and then receiving a portion of the price back in the form of a taxable distribution.
Any taxable
distributions you receive from the Trust will normally be taxable to you when you receive them, regardless of your distribution option.
Taxes on transactions
. Your redemptions may result in a capital gain or loss for federal tax purposes. A capital gain or loss on your
investment in the Trust is the difference between the cost of your shares and price you receive when you sell them. Reinvested distributions add to the cost basis of your investment.
A 3.8% medicare contribution tax may also be imposed on net investment income, including dividends and capital gains.
Trust Policies
The Trust will make available the following statements and reports:
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Confirmation of each purchase and sale;
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Confirmation of dividend / capital gains payments;
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Financial reports (every six months);
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12
When you sign your account application, you will be asked to certify that your social security or
taxpayer identification number is correct, that you are a U.S. person (including a U.S. resident alien) and that you are not subject to 28% backup withholding for failing to report income to the IRS. If you violate IRS regulations, the IRS can
require the Trust to withhold 28% of your taxable distributions and redemptions.
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Trusts financial performance for the past 5 years. Certain
information reflects financial results for a single Trust share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the Trust (assuming reinvestment of all dividends and distributions).
The information has been audited by Ernst & Young LLP, independent registered public accounting firm, whose report on the financial
statements and financial highlights for the year ended September 30, 2013 is included in the Statement of Additional Information, which is available upon request and without charge.
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Year Ended September 30,
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2013
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2012
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2011
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2010
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2009
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Per Share Data^
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Net Asset Value:
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Beginning of Period
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$
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6.03
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$
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5.52
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$
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6.03
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$
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5.74
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$
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5.94
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Income From Investment Operations:
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Net investment income
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0.40
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0.40
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0.40
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0.47
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0.39
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Net realized and unrealized gain (loss) on investment
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0.38
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0.52
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-0.47
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0.26
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-0.15
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Total from investment operations
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0.78
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0.92
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-0.07
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0.73
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0.24
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Less Distributions:
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Net investment income
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-0.37
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-0.41
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-0.44
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-0.44
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-0.44
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Capital Gain Net Asset Value:
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End of Period
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$
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6.44
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$
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6.03
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$
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5.52
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$
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6.03
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$
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5.74
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Total Return #
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13.17
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%
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17.17
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%
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-1.60
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%
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13.14
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%
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6.65
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%
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Ratios & Supplemental Data
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Net assets end of period (in thousands)
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$
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875,172
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$
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601,338
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$
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468,926
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$
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723,592
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$
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885,807
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Ratio of operating expenses to average net assets*
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0.96
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%
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1.05
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%
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0.92
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%
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0.84
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%
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1.00
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%
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Ratio of interest expense to average net assets
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0.03
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%
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0.05
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%
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0.10
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%
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0.07
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%
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0.09
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%
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Ratio of net investment income to average net assets
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6.26
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%
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6.83
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%
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6.45
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%
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7.84
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%
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8.52
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%
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Portfolio turnover rate
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20.88
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%
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25.36
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%
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33.34
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%
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27.88
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%
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25.68
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%
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*
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Includes Interest Expense when applicable
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^
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Per Share Data calculated using the Average Share Method
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#
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Total Return reflects the rate that an investor would have earned on an investment in the Trust during each period, assuming reinvestment of all distributions.
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13
DESCRIPTION OF S&P CORPORATE BOND RATINGS
Set forth below is description of the rating categories. The ratings of S&P represent their opinion as to the quality of the securities that they
undertake to rate. It should be emphasized, however, that ratings are relative and subjective and are not absolute standards of quality.
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AAA
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Highest quality. Ability to pay interest and principal very strong.
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AA
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High quality. Ability to pay interest and principal strong.
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A
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Medium to high quality. Ability to pay interest and principal, but more susceptible to changes in circumstances and the economy.
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BBB
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Medium quality. Adequate ability to pay, but highly susceptible to adverse circumstances.
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BB
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Speculative. Less near-term likelihood of default relative to other speculative issues.
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B
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Current capacity to pay interest and principal, but highly susceptible to changes in circumstances.
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CCC
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Likely to default, where payment of interest and principal is dependent on favorable circumstances.
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CC
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Debt subordinate to senior debt rated CCC.
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C
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Debt subordinate to senior debt rated CCC-
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D
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Currently in default, where interest or principal has not been made as promised.
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14
ADDITIONAL INFORMATION
You can find additional information about the Trust in the following documents:
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI contains more detailed information about the Trust and its investment limitations and
policies. A current SAI has been filed with the Securities and Exchange Commission and is incorporated by reference into this Prospectus (The SAI is legally part of this prospectus).
ANNUAL AND SEMIANNUAL REPORTS. Additional information about the Trusts investments is available in the Trusts Annual and
Semiannual reports to shareholders. In the Annual Report, you will find a discussion of the market conditions and investment strategy that significantly affected the Trusts performance during its last fiscal year.
QUARTERLY FUND HOLDINGS. The Trust has adopted policies and procedures relating to disclosure of the Trusts portfolio holdings, a full
description of which in available in the SAI. The portfolio holdings are included in the Trusts Annual and Semiannual reports to shareholders. The portfolio holdings for the first and third quarters of the fiscal year are filed with the
Securities and Exchange Commission (SEC) and may be accessed on our website or the SECs website free of charge.
You may
obtain a free copy of the Trusts current Annual/Semiannual report, Quarterly Holdings Report or SAI or make any other shareholder inquiry by writing or calling the Trust at:
Northeast Investors Trust
125
High Street Street
Boston, MA 02110
(800) 225-6704
www.northeastinvestors.com
You
can also review and copy information about the Trust at the SECs Public Reference Room in Washington, D.C. You can call the SEC at 1-202-942-8090 for information about the operation of the Public Reference Room. Reports and other information
about the Trust are available on the SECs internet site at http://www.sec.gov and copies may be obtained for a duplicating fee by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Center
of the Securities and Exchange Commission, Washington, D.C. 20549-0102.
The Trusts reference number as a registrant under the
Investment Company Act of 1940 is 811-576.
15
NORTHEAST INVESTORS TRUST
125 High Street
Boston,
Massachusetts 02110
(800) 225-6704
Shares of Beneficial Interest
STATEMENT OF ADDITIONAL INFORMATION
February 1, 2014
This Statement of
Additional Information supplements the Prospectus for the Trust dated February 1, 2014 and should be read in conjunction with the Prospectus. A copy of the Prospectus may be obtained from the Trust at the above address. This Statement of
Additional Information is not a prospectus.
TABLE OF CONTENTS
THE TRUST
Northeast Investors Trust, herein called the Trust, is a diversified open-end management investment company organized March 1, 1950 by an
Agreement and Declaration of Trust executed under the laws of The Commonwealth of Massachusetts.
INVESTMENT OBJECTIVES,
POLICIES AND RESTRICTIONS; GENERAL
As explained in the Prospectus, the purpose of the Trust is to provide investors with a vehicle for
investment under the management of the Trustees. Through this Trust, the Trustees will seek to provide a managed, diversified investment program, the primary objective of which shall be the production of income. Capital appreciation is also an
objective of the Trust, but its achievement must be compatible with the primary objective.
In addition to the investment objectives and policies described in the Prospectus, the Trust has
adopted certain investment restrictions. So long as these restrictions remain in effect, the Trustees may not: (1) Purchase any securities which would cause more than 5% of the Trusts total assets at the time of such purchase to be
invested in the securities of any issuer, except the United States Government. (2) Purchase any securities which would cause the Trust at the time of such purchase to own more than 10% of any class of any issuer. (3) Purchase the
securities of any issuer that together with any predecessor thereof have been engaged in continuous operation for less than three years, for which purpose the Trustees consider an issuer resulting from an acquisition or reorganization to be engaged
in the same business as any party to the acquistion or reorganization transaction. (4) Purchase real estate or commodities or commodities contracts; however, this limitation does not preclude an investment in the securities of organizations
which deal in real estate or commodities or commodities contracts or in securities secured by interests in real estate. (5) Purchase the securities of any investment company, except in connection with a merger, consolidation or acquisition or
by purchase of securities of closed-end investment companies in regular transactions in the open market. (6) Purchase securities on margin or effect short sales of securities. (7) Make loans, except that the Trust may acquire publicly
distributed bonds, debentures, notes and other debt securities, for which purposes the Trustees consider securities which are covered by Rule 144A under the Securities Act of 1933 or offered to a class of security holders of an issuer to be publicly
distributed. (8) Act as an underwriter of securities except insofar as the Trust might technically be deemed to be an underwriter for purposes of the Securities Act of 1933 upon the disposition of certain securities. (9) Invest in
companies for the purpose of exercising management or control. (10) Invest in puts, calls, straddles, spreads or any combinations thereof. (11) Purchase or retain the securities of any issuer if all Trustees together own more than
1
⁄
2
of 1% of the securities of such issuer. (12) Deal as principal with the Trust in the purchase or sale of portfolio securities. (13) Deal as agent
with the Trust in the purchase or sale of portfolio securities. (14) Invest in securities for which there is no readily available market, if at the time of acquisition more than 15% of the Trusts assets would be invested in such
securities. (15) Purchase participation or other direct interests in oil, gas or other mineral exploration or development programs. (16) Invest in warrants if at the time of acquisition more than 2% of the Trusts assets would be
invested in warrants. (17) Invest in securities of foreign issuers if at the time of acquisition more than 10% of the Trusts assets would be invested in such securities. (18) Purchase any security if, after giving effect to such
purchase, more than 25% of the Trusts assets would be invested in any one industry. (19) Issue senior securities or borrow money, except that the Trust may borrow funds up to a maximum amount equal to 25% of the Trusts total assets
and may pledge assets as security for such borrowings.
For the purposes of the above, issuer refers to a consolidated corporate entity
based on its most recent financials. Classes of securities are similarly determined based on most recent financials and thus may, for example, include debt at a subsidiary level, or debt representing different issuances. The purchase of securities
does not encompass participation in exchange offers in or out of formal reorganization proceedings.
The above policies preclude only
direct loans, not the acquisition of debt instruments in a secondary market, including participation in financings, including but not limited to debtor-in-possession financings, arising out of the acquisition of debt securities and do not preclude
the lending of portfolio securities to broker-dealers. The Trust is not currently engaged in securities lending.
The Trust does not
intend to engage in trading for short-term profits, and portfolio turnover will be limited in accordance with the Trusts objective of producing income. This does not, however, preclude an occasional investment for the purpose of short-term
capital appreciation. During the fiscal years ended September 30, 2013 and 2012 the rates of total portfolio turnover were 20.88% and 25.36% respectively. Although investment policy or changed circumstances may require, in the opinion of the
Trustees, an increased rate of such portfolio turnover, the Trustees do not anticipate that such turnover will be substantially in excess of that experienced by the Trust in recent years.
B-2
The Trust has adopted policies and procedures with respect to the disclosure of portfolio
securities. The Trust will file a complete portfolio schedule with the SEC on form N-CSR within ten (10) days of the transmission to shareholders of any annual or semiannual report; these are generally transmitted within sixty (60) days
after the close of the fiscal period covered by the report. The Trust will also file a complete portfolio schedule with the SEC on form N-Q not later than sixty (60) days after the close of the first and third fiscal quarters. The Trust will
not make available any other schedule of portfolio holdings to any person or institution other than in the ordinary course of business, such as to our auditors or custodian. The Trust may make quarterly portfolio holdings available to ranking or
ratings agencies, but only after the information has been filed with the SEC or posted on our website. Certain agencies may contract with the Trust to receive the portfolio holdings monthly, but may not make the information available to the public
until 60 days after the calendar quarter or until posted on our website.
The compensation of Bruce H. Monrad and Ernest E. Monrad as
portfolio managers for the Trust is set forth in this Statement of Additional Information under the caption Compensation of Trustees, and information about their share ownership in the Trust is set forth under the caption Trustees
and Officers. Neither of them has portfolio management responsibilities for any other investment company or pooled fund, but as of the end of the Trusts most recent fiscal year, Ernest E. Monrad provided portfolio management services for
approximately 17 Sippican Capital Advisors LLC accounts having assets of approximately $22.5 million. None of such accounts pay a performance based advisory fee. Bruce H. Monrad is not primarily responsible for the day to day portfolio management
for any accounts other than the Trust.
TRUSTEES & OFFICERS
The Trustees of Northeast Investors Trust are Ernest E. Monrad, Bruce H. Monrad, Peter J. Blampied, Marshall I. Goldman, George P. Beal, Charles R. Daugherty
and the Hon. Maurice H. Richardson. Under Massachusetts Law, the Trustees are generally responsible for protecting the interests of the shareholders by overseeing the operation and management of the Trust. The table below provides certain
information about the Trusts Trustees and Officers. The mailing address for the Trustees and Officers of the Trust is 125 High Street, Boston, MA 02110.
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Name/Age/Service *
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|
Position
|
|
Principal Occupation(s) During the Past Five
Years / and Other Directorships
|
|
Affiliated Trustees and Trust Officers
|
|
|
|
Ernest E. Monrad#
|
|
Trustee
|
|
Trustee of Northeast Investors Trust;
|
Age: 83
|
|
|
|
Director of New America
|
Years of Service: 53
|
|
|
|
High Income Fund, Inc. (until Jan. 2013): Chairman of Sippican Capital Advisors LLC
|
|
|
|
Bruce H. Monrad#
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|
Trustee and
|
|
Trustee and Chairman of Northeast Investors Trust
|
Age: 51
|
|
Chairman
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|
|
Years of Service: 20
|
|
|
|
|
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|
|
Gordon C. Barrett
|
|
Executive Vice
|
|
Chief Financial Officer of Northeast Investors Trust; Chief
|
Age: 56
|
|
President, Chief
|
|
Financial Officer of Northeast Investors Growth Fund (until Aug 2011);
|
Years of Service: 25
|
|
Financial Officer
|
|
Officer of Northeast Investment Management, Inc. (until Nov. 2010);
President of Sippican Capital Advisors LLC.
|
|
|
|
Robert B. Minturn
|
|
Vice
|
|
Officer of Northeast Investors Trust;
|
Age: 74
|
|
President
|
|
Officer of Northeast Investors Growth Fund; Officer of Northeast
|
Years of Service: 33
|
|
|
|
Investment Management, Inc.
|
|
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|
David A. Randall
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|
Chief Compliance
|
|
Officer of Northeast Investors Trust; Officer of Northeast
|
Age: 46
|
|
Officer
|
|
Investors Growth Fund (until Aug. 2011)
|
Years of Service: 13
|
|
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|
B-3
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|
|
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|
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Independent Trustees
|
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Peter J. Blampied
Age: 71
Years of Service: 13
|
|
Trustee
|
|
Director of A.W. Perry, Inc.;
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|
|
|
Marshall I. Goldman
Age: 83
Years of Service: 9
|
|
Trustee
|
|
Kathryn Wasserman Davis Professor of Russian Economics (Emeritus) at Wellesley College; Senior Scholar and Former Associate Director of the Davis
Center for Russian and Eurasian Studies at Harvard University; Director of Century Bank & Trust Co.
|
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|
George P. Beal
Age: 60
Years of Service: 9
|
|
Trustee
|
|
Managing Partner, Boston Family Office LLC Member of the Board of Advisors of Breckinridge Capital Advisors
|
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|
|
Charles R. Daugherty
Age: 60
Years of Service: 9
|
|
Trustee
|
|
Managing Partner, Stanwich Advisors, LLC
|
|
|
|
Hon. Maurice H. Richardson
Age: 85
Years of Service: 9
|
|
Trustee
|
|
Assistant Professor, Law & Psychiatry Program, Department of Psychiatry, University of Massachusetts Medical School (until 2011); Director of the Advisors Charitable Gift Fund.
|
*
|
The Trustees serve until their resignation or either the appointment or election of a successor, and the Officers serve at the pleasure of the Trustees.
|
#
|
Ernest E. Monrad and Bruce H. Monrad are father and son respectively.
|
The following is additional information
about the background of each of the Trustees:
Interested Trustees
Mr. E. Monrad
Ernest E. Monrad became a
trustee of Northeast Investors Trust in 1960. Mr. Monrad is a member and former director of the Boston Security Analysts Society and a member of the Massachusetts Bar. He is a former director of New America High Income Fund, Inc., former
director of Furman Lumber and former trustee of Century Shares Trust.
Mr. B. Monrad
Bruce H. Monrad is trustee and portfolio manager of Northeast Investors Trust, specializing in high-yield, leveraged securities. Previously he
worked for Prudential-Bache Securities as a financial analyst.
Independent Trustees
Mr. Blampied
Peter J. Blampied was
President of Corcoran Management Co. Inc, one of the regions leading residential management firms, from 1998-2008. He was previously Chairman, President and CEO of Boston Five Bancorp and Vice Chairman of Citizens Bank of Massachusetts. He is
a former director of Access Capital Strategies, LLC. He is a director of A.W. Perry, Inc., a privately owned real estate developer, owner and manager.
B-4
Mr. Goldman
Marshall I. Goldman is a professor emeritus in the Wellesley College Department of Economics. He joined the Wellesley faculty in 1958 and is
considered an expert on the Russian economy and economics of high technology. Mr. Goldman is also Senior Scholar and former Associate Director of the Davis Center for Russian Studies at Harvard University. He has authored over a dozen books on
the former Soviet Union. He is a director of Century Bank & Trust Co.
Mr. Beal
George P. Beal is one of the founders of The Boston Family Office LLC, a registered investment adviser, and now is its Managing Partner as well
as a portfolio manager. He is a member of the Board of Advisors of Breckinridge Capital Advisors. Previously, Mr. Beal was employed at Cambridge Trust Co. and Bank of New England handling various duties ranging from commercial loans, branch
management, operations and retail banking.
Mr. Daugherty
Charles R. Daugherty founded Stanwich Advisors, LLC, a leading independent boutique investment bank that provides advisory and fundraising
services. Mr. Daugherty spent 26 years at Deutsche Bank/BT Alex Brown where he founded the Private Equity Group and served as Managing Director and Global Group Head.
Hon. M.H. Richardson
Hon. Maurice H. Richardson
served 24 years as a Massachusetts District Court Judge. He is a former Assistant Professor of Psychology and was affiliated with the Law and Psychiatry Program at the University of Massachusetts Medical School. His interests relate to the
interaction of community courts and the mentally ill, and he is presently researching court and jail diversification programs for the mentally ill. Judge Richardson is a director of the Advisors Charitable Gift Fund.
The majority of the Trusts Board of Trustees (the Board) are Independent Trustees. The Board has overall responsibility for
overseeing the investment program of the Trust and its management and operations. The Board exercises the same powers, authority and responsibilities on behalf of the Trust as are customarily exercised by the directors of an investment company
registered under the 1940 Act organized as a corporation and has authority to oversee and establish policies regarding the management, conduct and operation of the Trusts business. The Board has designated Bruce H. Monrad, an Interested
Trustee, to serve as Chairman. The Independent Trustees have not designated a lead Trustee.
The Board has two standing committees: the
Audit Committee, and the Nominating and Governance Committee, each of which consists of Messrs. Blampied, Daugherty, Goldman, Beal and Richardson. These committees are therefore composed entirely of Independent Trustees, and all of the Independent
Trustees serve on each committee. The Audit Committee assists the Board in fulfilling its responsibilities for accounting and financial reporting practices and provides a channel of communication between the Board and the Trusts independent
accountants. The provision of audit and non-audit services by the Trusts independent accountants is subject to prior approval by the Audit Committee. The Nominating and Governance Committee considers candidates for Trustee and reviews matters
relating to Board governance. The Nominating and Governance Committee will consider the experience, qualifications, attributes and skills of Trustee nominees and Trustees when looking to fill vacant Board or committee seats and will consider the
benefits of a diverse Board in enhancing its oversight of management performance, particularly in todays global investment environment. The Committee has not established a procedure for shareholders to nominate Trustees.
B-5
The Trust believes that its leadership structure is appropriate because it provides for the
effective, independent oversight of management on behalf of the Trusts shareholders by having the independent Trustees as a majority of the Board and through their exclusive service on all committees. The Board conducts a self-evaluation
annually, which includes an evaluation of the effectiveness of the Board and its committee structure. In addition, the Independent Trustees have engaged their own independent counsel to advise them on matters relating to their responsibilities in
connection with the Trust.
Senior management, on a regular basis, undertakes risk assessments aimed at identifying key risks that the
Trust may face, as described in the Trusts prospectus, the probability of occurrence of those risks and the potential impact. The Board and senior management have active discussions regarding the risks to which the Trust is subject. The Board
reviews the Trusts portfolio and regular reports provided to it that integrate strategy and operational and investment initiatives with risk exposures.
As part of its oversight, the Board assesses the quality of information it is receiving, how well this information provides a basis for
evaluating the risk factors affecting the Trust, as described in the Trusts prospectus, how management evaluates risk, and the quality of the risk management oversight structure. The Board engages in open discussions with management on how
economic factors affect or may affect the Trusts performance. It reviews the Trusts periodic and current reports and prospectuses, with a particular focus on risk disclosures. In addition, as deemed appropriate, the Board or the
Independent Trustees engage counsel or other parties to advise them on matters relating to risks associated with the Trusts operations.
The following table shows the dollar range of shares of the Trust beneficially owned by each Trustee.
|
|
|
Name of Trustee
|
|
Dollar Range of Equity Securities in the Trust
|
Trustees Who Are Interested Persons of the Trust
|
Ernest E. Monrad
|
|
Over $2,000,000
|
Bruce H. Monrad
|
|
Over $2,000,000
|
|
|
Trustees Who Are Not Interested Persons of the Trust
|
|
|
|
|
Hon. Maurice H. Richardson
|
|
Over $100,000
|
Peter J. Blampied
George P. Beal
|
|
Over $100,000
Over $100,000
|
Marshall I. Goldman
Charles R.
Daugherty
|
|
None
None
|
The total number of shares owned beneficially by the Trustees, officers and members of their immediate families on
September 30, 2013 was 4,720,169 shares (3.47%).
The Trust has adopted a Code of Ethics governing personal securities transactions by persons
(access persons) associated with the Trust who have access to information about its investment operations. The Code does permit investments by Trust personnel for their own accounts, but requires systematic reporting of transactions and holdings as
required by law. The Code of Ethics of the Trust is on file as an exhibit to this registration statement and may be obtained through the Securities and Exchange Commission.
COMPENSATION OF TRUSTEES
Under the Declaration of Trust, the Trustees are entitled to receive an annual fee equal to
1
⁄
2
of 1% of the principal of the Trust, computed at the end of each quarter year at the rate of 1/8 of 1% of the principal at the close of such quarter. The
principal of the Trust for this purpose is taken as a total of the value of the portfolio and other assets less all liabilities, except accrued Trustees fees, valued set forth below under Price and Net Asset Value. The total
Trustee fee paid to the Trustees and Vice Presidents for each of the fiscal years ended September 30, 2011, 2012 and 2013 was $3,168,077, $2,956,910 and 3,323,996 respectively.
B-6
The following table shows the aggregate compensation paid during the fiscal year ended
September 30, 2013 to the Trustees, former Trustees, President and Officers of the Trust from the Trustees fee or otherwise.
|
|
|
|
|
Name and Position
|
|
Aggregate Compensation Paid
|
|
Ernest E. Monrad, Trustee
|
|
$
|
945,051
|
|
Bruce H. Monrad, Trustee, Chairman and President
|
|
$
|
1,693,945
|
|
William A. Oates, Jr.~
|
|
$
|
200,000
|
|
Gordon C. Barrett, Executive Vice President, and CFO*
|
|
$
|
316,710
|
|
Robert B. Minturn, Vice President and Clerk
|
|
$
|
270,000
|
|
Fred L. Glimp, former Trustee^
|
|
$
|
5,000
|
|
Peter J. Blampied, Trustee
|
|
$
|
40,000
|
|
Marshall I. Goldman, Trustee
|
|
$
|
40,000
|
|
George P. Beal, Trustee
|
|
$
|
40,000
|
|
Charles R. Daugherty, Trustee
|
|
$
|
40,000
|
|
Hon. Maurice H. Richardson, Trustee
|
|
$
|
40,000
|
|
Hope Daley#
|
|
$
|
10,000
|
|
~
|
Mr. Oates was paid this compensation as retirement benefits.
|
*
|
Paid directly by the Trust; all other amounts shown are paid from the Trustees fee.
|
^
|
Mr. Glimp was paid a portion of this compensation as retirement benefits.
|
#
|
Ms. Daley received this amount as a beneficiary of retirement benefits of a deceased former Trustee.
|
Under the Declaration of Trust, the Trustees are required to furnish the Trust, financial and statistical services for the Trust and such office space
as the Trust may require. Except as shown above, during the fiscal year ended September 30, 2013, no retirement benefits were paid to any Trustee or former Trustee.
CUSTODIAN AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The custodian for the Trust is State Street Bank and Trust Company, 200 Clarendon Street, Boston, Massachusetts. The custodian maintains custody of the
Trusts assets. The Trust acts as its own Transfer and Shareholder Servicing Agent.
The independent registered public accounting firm for the Trust
is Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts. Ernst & Young LLP audits the Trusts annual financial statements included in the annual report to shareholders, reviews the Trusts filings with the
Securities and Exchange Commission on Forms N-lA and N-SAR and prepares the Trusts federal income and excise tax returns.
B-7
BROKERAGE
Decisions to buy and sell securities for the Trust and as to assignment of its portfolio business and negotiation of its commission rates are made by the
Trustees. It is the Trustees policy to obtain best execution when processing transactions, in doing so, the Trustees assign portfolio executions and negotiate commission rates in accordance with the reliability and quality of a
broker/dealers services and their value and expected contribution to the performance of the Trust. Such portfolio transactions may be carried out with broker-dealers that have provided the Trustees or the Trust with research and other
investment related services. Such services may include furnishing advice as to the value of securities, the advisability of investing in, purchasing or selling securities, and the availability of securities or purchasers or sellers of securities;
furnishing portfolio analyses and reports concerning issuers, industries, securities, economic factors and trends; and effecting securities transactions and performing functions incidental thereto (such as clearance and settlement). During the
fiscal year ended September 30, 2013, the Trust engaged in portfolio transactions involving principal trades totaling $229,806,512 with market makers and other dealers. The Trust paid broker commissions of $12,795 for the year ended
September 30, 2013. During the fiscal years ended September 30, 2011 and 2012 brokerage commissions paid totaled $37,719 and $1,874 respectively. All such portfolio transactions completed by the Trust during the year ended
September
30, 2013 were carried out with broker-dealers that have provided the Trust with research, and other investment related services.
PRICE
AND NET ASSET VALUE
It is the current policy of the Trust that the public offering price of shares of the Trust equal their net asset value, the Trust
receiving the full amount paid by the investor. The net asset value is determined as of the close of the New York Stock Exchange on each day that the Exchange is open. It is the only price available to investors whose orders are received prior to
the close of the Exchange on that day. The price to investors whose applications for purchase are received after the close of the New York Stock Exchange or on a non-business day will be the net asset
B-8
value next determined. The net asset value of the Trusts shares is determined by dividing the market value of the Trusts securities, plus any cash and other assets (including income
accrued) less all liabilities by the number of shares outstanding. Securities for which market quotations are readily available are valued at market values determined on the basis of the last quoted sale prices prior to the close of the New York
Stock Exchange (or the last quoted bid prices in the event there are no sales reported on that day) in the principal market in which such securities normally are traded, as publicly reported, or are furnished by recognized dealers in such
securities. Fixed income securities may also be valued on the basis of valuations furnished by independent pricing services that use both dealer supplied valuations and evaluations based on expert analysis of market data and other factors if such
valuations are believed to reflect more accurately the fair value of such securities. Such services may use various pricing techniques which take into account both transaction data and market information such as yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data as well as broker quotes. Securities and other assets for which pricing service or market quotations are not readily available are valued at their fair value as determined in
good faith under consistently applied procedures approved by the Board of Trustees. For a further description of the Trusts fair value pricing methodologies, see the Prospectus under Buying Shares. An adjustment will be made to the
Trusts price for fractions of a cent to the next highest cent. The Trust makes no payments to third parties for the daily computation of its net asset value.
As indicated in the Prospectus, purchase and redemption orders may be received on behalf of the Trust by brokers. In certain such cases, where
the Trust has authorized such transactions (i) such broker may be authorized to designate other intermediaries to receive purchase and redemption orders for the Trust; (ii) the Trust will be deemed to have received a purchase or redemption
order when an authorized broker or, if applicable, a brokers authorized designee, receives the order; and (iii) customer orders will be priced at the Trusts net asset value next computed after they are received by an authorized
broker or the brokers authorized designee.
SHAREHOLDER PLANS
Open Accounts
Upon making an initial investment (minimum amount
$1,000), a shareholder will automatically have an Open Account established for him on the books of the Trust. Once any account is opened there is no limitation to the size or frequency of investment, subject to the policies and procedures described
in the prospectus under the caption Buying Shares. The shareholder will receive a confirmation from the Trust of this and each subsequent transaction in his Account showing the current transaction and the current number of shares held. A
shareholder may make additional investments in shares of the Trust at any time by ordering the Trust shares at the then applicable public offering price. Share certificates which have been issued to a shareholder may be returned to the Trust at any
time for credit to the shareholders Open Account. Shares held in an Open Account may be redeemed as described in the Prospectus under Selling Shares. Income dividends and capital gains distributions are credited in shares on the
payment date (which may be different than the record date) at the applicable record date closing net asset value, unless a shareholder has elected to receive all income dividends and/or capital gains distributions in cash.
Automatic Investment and Withdrawal Plans
These Plans have been
developed to accommodate those who wish to make purchases or sales of shares of the Trust on a continuing basis without the imposition of any fee or service charge. Subject to the initial investment minimum of $1,000, any shareholder maintaining an
Open Account may request in his application or otherwise in writing that investments be made through automatic deductions (minimum $50) from his bank checking or savings account or that withdrawals be made automatically with the redemption price
paid by check or electronic funds transfer. The shareholder may cancel his participation in either Plan at any time, and the Trust may modify or terminate either Plan at any time.
An investor should understand that he is investing in a security, the price of which fluctuates, and that under the Plans he will purchase or sell shares
regardless of their price level and that if he terminates the Plan and sells his accumulated shares at a time when their market value is less than his cost, he will incur a loss. In the case of the Automatic Investment Plan, he should also take into
account his financial ability to continue the Plan through periods of low prices and understand that the Plan cannot protect him against loss in declining markets.
B-9
TAX-ADVANTAGED RETIREMENT PLANS
In addition to regular accounts, the Trust offers tax-advantaged retirement plans which are described briefly below. Contributions to these plans are invested
in shares of the Trust; dividends and other distributions are reinvested in shares of the Trust.
Contributions to these retirement plans, within the
limits and circumstances specified in applicable provisions of the Internal Revenue Code, are excludable or deductible from the participants income for federal income tax purposes. In addition, non-deductible or after-tax contributions may be
made to these retirement plans to the extent permitted by the Internal Revenue Code. Reinvested dividends and other distributions accumulate free from federal income tax while the shares of the Trust are held in the plan. Distributions from these
plans are generally included in income when received; however, after-tax or non-deductible contributions may be recovered without additional federal income tax. Premature distributions, insufficient distributions after age 70 1/2 or excess
contributions may result in penalty taxes.
State Street Bank and Trust Company serves as custodian of each of the following plans. It is entitled to
receive specified fees for its services. Detailed information concerning each of the following plans (including schedules of custodial fees) and copies of the plan documents are available upon request to the Trust at its offices.
An individual investor or employer considering any of these retirement plans should read the detailed information for the plan carefully and should consider
consulting an attorney or other competent advisor with respect to the requirements and tax aspects of the plan.
Traditional IRA , Roth IRA and Education
Savings Account
An individual may open his own Individual Retirement Account (IRA), Roth IRA, or Education Savings Account using a
custodial account form approved for this purpose by the IRS. An individual may have an IRA even though he is also an active participant in a pension or profit-sharing plan or certain other plans. However, depending on the individuals adjusted
gross income and tax return filing status, contributions for an individual who is an active participant in another plan may be partially or entirely non-deductible. Contributions to a Roth IRA are non-deductible, but income and gains accumulate free
of income tax and distributions after age 59 1/2 are generally not taxable. An Education Savings Account can be established only for a Designated Beneficiary who is under age 18 as a method of saving for education expenses. Contributions to an
Education Savings Account are non-deductible, but income and gains accumulate free of income tax and distributions are not taxable as long as the amount withdrawn is used for qualified educational expenses.
DIVIDENDS, DISTRIBUTIONS & FEDERAL TAXES
It is the Trusts policy to distribute net investment income and net realized capital gains on sales of investments (less any available capital loss
carryforwards) annually. Dividends and distributions are credited in shares of the Trust unless the shareholder elects to receive cash.
Any dividends or
distributions paid shortly after a purchase of shares by an investor will have the effect of reducing the per share net asset value of his shares by the per share amount of the dividends or distributions. Furthermore, such dividends or
distributions, although in effect a return of capital, may be subject to income taxes, including the 3.8% Medicare contribution tax.
B-10
It is the policy of the Trust to distribute its net investment income and net realized gains for each year in
taxable dividends and capital gain distributions so as to qualify as a regulated investment company under the Internal Revenue Code. The Trust did so qualify during its last taxable year.
A regulated investment company which meets the diversification of assets and source of income requirements prescribed by the Internal Revenue Code is accorded
conduit or pass through treatment if it distributes to its shareholders at least 90% of its taxable income exclusive of net capital gains, i.e., it will be taxed only on the portion of such income which it retains.
To the extent that a regulated investment company distributes the excess of its net long-term capital gain over its net short-term capital loss (including any
capital loss carryforward from prior years), such capital gain is not taxable to the company but it is taxable to the shareholder.
Income dividends and
capital gain distributions are taxable as described, whether received in cash or additional shares. Shareholders who have not supplied the Trust with appropriate information with respect to their tax identification or social security number or who
are otherwise subject to back-up withholding may have 28% of distributions withheld by the Trust.
The foregoing discussion relates to federal income
taxation. Dividends and capital gain distributions may also be subject to state and local taxes, and shareholders should consult with a qualified tax advisor.
CAPITAL SHARES
The Trust has only
one class of securitiesshares of beneficial interest without par valueof which an unlimited number are authorized. Each share has one vote and when issued, is fully paid and nonassessable. Fractional shares may be issued and when issued,
have the same rights proportionately as full shares. The shares are transferable by endorsement or stock power in the customary manner, but the Trust is not bound to recognize any transfer until it is recorded on the books of the Trust. Each share
is entitled to participate equally in any dividends or distributions declared by the Trustees. In the event of liquidation of the Trust, the holders of shares are entitled to all assets remaining for distribution after satisfaction of all
outstanding liabilities. Distributions would be in proportion to the number of shares held. No shares carry any conversion, subscription, or other preemptive rights.
Under Massachusetts law, shareholders could, under certain circumstances, be held personally liable for the obligations of the Trust. However,
the Declaration of Trust provides that the Trustees shall have no power to bind the shareholders personally and requires that all contracts and other instruments shall recite that the same are executed by the Trustees as Trustees and not
individually and are soley binding upon the Trusts assets. The Trust is advised by counsel (Mintz. Levin, Cohn, Ferris, Glovsky and Popeo, P.C.) that under the applicable Massachusetts decisions, no personal liability can attach to the
shareholders under contracts of the Trust containing this recital. Moreover, the Declaration of Trust provides that any shareholder of the Trust shall be indemnified by the Trust for all loss and expense incurred by reason of his being or having
been a shareholder of the Trust. Thus the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Trust itself would be unable to meet its obligations.
PROXY VOTING GUIDELINES
Written guidelines have been established for proxy voting by the Board of Trustees of the Trust. The purpose of these guidelines is to promote
the accountability of a companys management and board of directors to its shareholders; to align the interests of management with those of shareholders; and to increase disclosure of a companys business and operations.
The proxy voting guidelines generally address proposals submitted to shareholders of six types:
|
1)
|
Proposals for the election of directors
|
|
2)
|
Proposals for the approval of independent auditors
|
B-11
|
3)
|
Proposals relating to compensation matters, including equity-based compensation and executive compensation
|
|
4)
|
Proposals relating to changes in corporate control
|
|
5)
|
Proposals that affect shareholder rights, including voting rights
|
|
6)
|
Proposals relating to other matters such as social and corporate responsibility issues
|
Election of the board
of directors
The Trust generally supports managements recommendations in selecting director nominees as the Trust
believes the company is in the best position to recommend and evaluate a qualified board. Directors should be competent, qualified individuals and should be accountable, responsive to shareholders and should exercise reasonable judgment. The Trust
generally supports a board of directors comprised of a majority of independent directors and prefers committees such as audit and nominating committees to also be comprised of independent members.
Approval of independent registered public accounting firm
The Trust generally will rely on the audit committees recommendation in selecting independent auditors who will provide
the best service to the company. The Trust believes the relationship between the company and its auditors should be independent and will vote against proposed auditors whose independence may be compromised.
Compensation Matters
In general, the Trust will
vote for stock-related compensation plans that are reasonably designed and that align the interest of management with those of shareholders by providing officers and employees with an incentive to maximize shareholder value. It will consider the
dilutive effects, pricing and re-pricing issues, and other factors in voting on specific proposals. The Trust will generally vote against advisory votes on executive compensation when such compensation is not deemed problematic or appears aligned
with shareholder interests.
Corporate Control
The Trust generally opposes measures that are designed to prevent or obstruct corporate takeovers. Such measures tend to entrench current
management, discourage other offers for the company and depress shareholder value. In most cases, the acquisition or takeover of a companyhostile or otherwise will increase shareholder value and therefore must be permitted to occur.
Shareholder Rights Plans or Poison Pills are instigated by an unwanted takeover attempt and can ultimately make the company appear financially less attractive to potential suitors. The Trust will generally vote against all forms of poison pills
unless backed by sound business strategy that will likely result in a greater benefit to the shareholders. The Trust will generally approve of increases in authorized shares, provided that the increase is not excessive and is sought for appropriate
corporate purposes. The Trust will generally vote against blank check preferred stock proposals unless the proposal discloses that the stock is specifically required to be issued for valid corporate financing objectives. We favor
non-classified boards of directors.
Shareholder Rights
The Trust views the exercise of shareholders rights including the rights to act by written consent, to call special meetings and
to remove directors to be fundamental to corporate governance. We generally favor cumulative voting and confidential voting and oppose supermajority voting and dual class capitalizations.
Other Matters such as social and corporate responsibility issues
The Trust will generally vote with managements recommendations on proposals pertaining to social, moral, ethical or
corporate matters. The effect on shareholder value of such proposals is often unclear, and therefore the Trust will rely on managements assessment of the economic effect of such proposals.
B-12
Potential Conflicts of Interest
In the event that any matter for which a proxy is solicited creates a potential conflict of interest between interests of the shareholders of
the Trust, on the one hand, and any affiliated person of the Trust, on the other, the voting of such proxy will be referred to the Trustees of the Trust who are not interested persons of the Trust as such term is defined under the
Investment Company Act of 1940 (the independent Trustees); if the potential conflict is with an independent Trustee, such Trustee will abstain from voting on the matter.
The foregoing is a summary. A copy of the complete Proxy Voting Guidelines and the Trusts voting record may be obtained by calling the
toll free number in the address set forth on the cover page of this Statement of Additional Information and at the website of the Securities and Exchange Commission (www.sec.gov) or at the website of the Trust (www.northeastinvestors.com).
HISTORICAL PERFORMANCE INFORMATION
From time to time, the Trust may advertise average annual total return. Average annual total return quotations will be computed by finding the
average annual compounded rates of return over 1, 5 and 10 year periods that would equate the initial amount invested to the ending redeemable value, according to the following formula:
Where:
P = a hypothetical
initial payment of $1,000
N = number of years
ERV = ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the 1, 5 and 10 year periods at the end of the 1,5 or 10 year periods (or fractional portion thereof)
The calculation of average annual total return assumes the reinvestment of all dividends and distributions. The Trust may also advertise total return (a
nonstandardized quotation) which is calculated differently from average annual total return. A nonstandardized quotation of the total return may be a cumulative return which measures the percentage change in the value of an account
between the beginning and end of a period, assuming no activity in the account other than reinvestment of dividends and capital gains distributions. A nonstandardized quotation may also indicate average annual compounded rates of return over periods
other than those specified for average annual total return. A nonstandardized quotation of total return will always be accompanied by the Trusts average annual total return as described above. The Trusts total return for the one, five
and ten year periods ended December 31, 2013 are set forth in the Prospectus.
From time to time, the Trust may also advertise its yield. A yield
quotation is based on a 30-day (or one month) period and is computed by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula:
Yield = 2[((a-b)/cd + 1)
6
- 1]
Where:
|
a =
|
dividends and interest earned during the period
|
|
b =
|
expenses accrued for the period (net of reimbursements)
|
|
c =
|
the average daily number of shares outstanding during the period that were entitled to receive dividends.
|
|
d =
|
the maximum offering price per share on the last day of the period
|
Solely for the purpose of computing yield,
dividend income is recognized by accruing 1/360 of the stated dividend rate of the security each day that the Trust owns the security. Generally, interest earned (for the purpose of a above) on debt obligations is computed by reference
to the yield to maturity of each obligation held based on the market value of the obligation (including actual accrued interest) at the close of business on the last business day
B-13
prior to the start of the 30-day (or one month) period for which yield is being calculated, or, with respect to obligations purchased during the month, the purchase price (plus actual accrued
interest). With respect to the treatment of discount and premium on mortgage or other receivables-backed obligations which are expected to be subject to monthly paydowns of principal and interest, gain or loss attributable to actual monthly paydowns
is accounted for as an increase or decrease to interest income during the period and discount or premium on the remaining security is not amortized.
The
performance quotations described above are based on historical experience and are not intended to indicate future performance.
To help investors better
evaluate how an investment in the Trust might satisfy their investment objective, advertisements regarding the Trust, as well as other publications, may discuss various measures of Trust performance, including current performance ratings and/or
rankings appearing in financial magazines, newspapers and publications which track mutual fund performance or other information prepared by recognized mutual fund statistical services. Advertisements and other publications may also compare Northeast
Investors Trusts performance to performance as reported by other indices and averages or other investments for which reliable performance information is available. The Trusts Annual Report contains additional performance information and
will be made available to investors upon request and without charge.
FINANCIAL STATEMENTS
The following financial statements are included in this Statement of Additional Information:
1.
|
Schedule of Investments as of September 30, 2013
|
2.
|
Statement of Assets and Liabilities as of September 30, 2013
|
3.
|
Statement of Operations for the Year Ended September 30, 2013
|
4.
|
Statements of Changes in Net Assets for each of the two years in the period ended September 30, 2013
|
5.
|
Notes to Financial Statements for the year ended September 30, 2013
|
6.
|
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm.
|
B-14
Schedule of Investments (a)
September 30, 2013
Convertible
Bonds 1.57%
|
|
|
|
|
|
|
|
|
Name of Issuer
|
|
Principal
|
|
|
Value
|
|
Food Processing 1.57%
|
|
|
|
|
|
|
|
|
Chiquita Brands International, 4.25%, 8/15/16
|
|
$
|
14,004,000
|
|
|
$
|
13,725,208
|
|
|
|
|
|
|
|
|
|
|
Total Convertible Bonds
(cost$11,948,469)
|
|
|
|
|
|
$
|
13,725,208
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate Bonds, Notes & Preferred
Securities 68.34%
|
|
|
|
|
|
|
|
|
|
|
|
Name of Issuer
|
|
Principal
|
|
|
Value
|
|
Aerospace/Defense 0.36%
|
|
|
|
|
|
|
|
|
Spirit Aerosystems, Inc., 7.5%. 10/01/17
|
|
$
|
3,000,000
|
|
|
$
|
3,120,000
|
|
Airlines 3.44%
|
|
|
|
|
|
|
|
|
American Airlines, Inc., 10.5%, 10/15/12 (b) (c)
|
|
|
10,000,000
|
|
|
|
12,312,500
|
|
American Airlines, Inc., 7.5%, 3/15/16 (b) (d)
|
|
|
15,000,000
|
|
|
|
17,775,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,087,500
|
|
Automobile & Truck 0.12%
|
|
|
|
|
|
|
|
|
Delphi Corp., 6.55%, 6/15/06 (b) (c)
|
|
|
36,950,000
|
|
|
|
1,016,125
|
|
Building Products 1.26%
|
|
|
|
|
|
|
|
|
Builders Firstsource, Inc., 7.625%, 6/01/21 (d)
|
|
|
11,000,000
|
|
|
|
11,000,000
|
|
Chemicals 4.03%
|
|
|
|
|
|
|
|
|
Cornerstone Chemical Co., 9.375%, 3/15/18 (d)
|
|
|
12,750,000
|
|
|
|
13,355,625
|
|
Polyone Corp., 7.375%, 9/15/20
|
|
|
10,500,000
|
|
|
|
11,550,000
|
|
Reichhold Industries, Inc., PIK, 9%, 5/08/17 (d)
|
|
|
14,169,677
|
|
|
|
10,379,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,284,913
|
|
Coal 3.73%
|
|
|
|
|
|
|
|
|
Cloud Peak Energy, 8.25%, 12/15/17
|
|
|
10,850,000
|
|
|
|
11,392,500
|
|
Westmoreland Coal Co., 10.75%, 2/01/18
|
|
|
19,750,000
|
|
|
|
21,231,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,623,750
|
|
Construction & Farming 1.44%
|
|
|
|
|
|
|
|
|
Southern States Co-op, Inc., 10%, 8/15/21 (d)
|
|
|
13,000,000
|
|
|
|
12,610,000
|
|
Drug Stores 0.06%
|
|
|
|
|
|
|
|
|
Rite Aid Corp., 10.25%, 10/15/19
|
|
|
500,000
|
|
|
|
562,500
|
|
Electrical Utility 2.01%
|
|
|
|
|
|
|
|
|
Homer City Funding LLC, PIK 8.137%, 10/01/19
|
|
|
17,041,740
|
|
|
|
17,552,992
|
|
Electrical Components & Equipment 0.93%
|
|
|
|
|
|
|
|
|
Advanced Lighting Technologies, 10.5%, 6/01/19 (d)
|
|
|
10,000,000
|
|
|
|
8,100,000
|
|
Corporate Bonds, Notes & Preferred
Securities
(continued)
|
|
|
|
|
|
|
|
|
Name of Issuer
|
|
Principal
|
|
|
Value
|
|
Energy/Natural Resources 13.56%
|
|
|
|
|
|
|
|
|
Clayton Williams Energy, 7.75%, 4/01/19
|
|
$
|
18,000,000
|
|
|
$
|
17,910,000
|
|
Clayton Williams Energy, 7.75%, 4/01/19 (d)
|
|
|
15,000,000
|
|
|
|
14,925,000
|
|
Comstock Resources, Inc., 8.375%, 10/15/17
|
|
|
18,000,000
|
|
|
|
18,790,200
|
|
Comstock Resources, Inc., 7.75%, 4/01/19
|
|
|
10,000,000
|
|
|
|
10,350,000
|
|
RAAM Global Energy Co., 12.5%, 10/01/15 (d)
|
|
|
3,000,000
|
|
|
|
3,105,000
|
|
RAAM Global Energy Co., 12.5%, 10/01/15
|
|
|
15,000,000
|
|
|
|
15,525,000
|
|
Stone Energy Corp., 8.625%, 2/01/17
|
|
|
10,000,000
|
|
|
|
10,575,000
|
|
Swift Energy Co., 7.125%, 6/01/17
|
|
|
19,800,000
|
|
|
|
20,097,000
|
|
W & T Offshore, Inc., 8.5%, 6/15/19
|
|
|
7,000,000
|
|
|
|
7,420,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118,697,200
|
|
Financial Services 8.23%
|
|
|
|
|
|
|
|
|
Bank of America Corp. PFD, 8%
|
|
|
30,000,000
|
|
|
|
32,625,000
|
|
Bank of America Corp. PFD, 8.125%
|
|
|
3,000,000
|
|
|
|
3,292,500
|
|
Wells Fargo & Co. PFD, 7.98%
|
|
|
32,818,000
|
|
|
|
36,099,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,017,300
|
|
Food Processing 6.43%
|
|
|
|
|
|
|
|
|
Mrs. Fields Brands, PIK, 10%, 10/24/14 (e)
|
|
|
1,169,878
|
|
|
|
935,902
|
|
Pilgrims Pride Corp., 7.875%, 12/15/18
|
|
|
21,478,000
|
|
|
|
23,357,325
|
|
Simmons Food, Inc., 10.5%, 11/01/17 (d)
|
|
|
17,889,000
|
|
|
|
18,738,728
|
|
Viskase Cos, Inc., 9.875%, 1/15/18 (d)
|
|
|
12,500,000
|
|
|
|
13,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,281,955
|
|
Gaming 2.64%
|
|
|
|
|
|
|
|
|
Isle Of Capri Casinos, 8.875%, 6/15/20
|
|
|
8,000,000
|
|
|
|
8,320,000
|
|
Isle Of Capri Casinos, 5.875%, 3/15/21
|
|
|
10,000,000
|
|
|
|
9,375,000
|
|
Marina District Finance, 9.875%, 8/15/18
|
|
|
5,000,000
|
|
|
|
5,425,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,120,000
|
|
Homebuilders 0.33%
|
|
|
|
|
|
|
|
|
Tousa, Inc., 9%, 7/01/10 (b) (c)
|
|
|
14,111,000
|
|
|
|
1,463,551
|
|
Tousa, Inc., 8.25%, 4/1/11 (b) (c)
|
|
|
12,250,000
|
|
|
|
1,422,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,886,315
|
|
Machine/Tools 2.05%
|
|
|
|
|
|
|
|
|
Thermadyne Holdings Corp., 9%, 12/15/17
|
|
|
16,655,000
|
|
|
|
17,945,762
|
|
Metals & Mining 2.76%
|
|
|
|
|
|
|
|
|
Plains Exploration & Production, 6.50%, 11/15/20
|
|
|
20,000,000
|
|
|
|
21,458,460
|
|
Horsehead Holding Corp, 10.5%, 6/01/17 (d)
|
|
|
2,500,000
|
|
|
|
2,681,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,139,710
|
|
Office Electronics 2.62%
|
|
|
|
|
|
|
|
|
Pitney Bowes International Holdings PFD, 6.125%, 10/30/16 (d)
|
|
|
23,065
|
|
|
|
22,928,052
|
|
Corporate Bonds, Notes & Preferred
Securities
(continued)
|
|
|
|
|
|
|
|
|
Name of Issuer
|
|
Principal
|
|
|
Value
|
|
Oil & Gas Drilling 1.10%
|
|
|
|
|
|
|
|
|
Key Energy Services, Inc., 6.75%, 3/01/21
|
|
$
|
250,000
|
|
|
$
|
247,500
|
|
Parker Drilling Co., 9.125%, 4/01/18
|
|
|
2,000,000
|
|
|
|
2,140,000
|
|
Parker Drilling Co., 7.5%, 8/01/20 (d)
|
|
|
7,250,000
|
|
|
|
7,250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,637,500
|
|
Packaging & Container 0.51%
|
|
|
|
|
|
|
|
|
Constar, Inc. PFD (b) (e)
|
|
|
9,432
|
|
|
|
94
|
|
Constar, Inc., FRN 8.202%, 5/31/15 (e)
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
Constar, Inc., PIK,11%, 12/31/17 (e)
|
|
|
8,090,588
|
|
|
|
2,892,385
|
|
Jefferson Smurfit Corp., 8.25%, 10/01/12 (b) (c)
|
|
|
15,250,000
|
|
|
|
22,875
|
|
Jefferson Smurfit Corp., 7.5%, 6/01/13 (b) (c)
|
|
|
15,405,000
|
|
|
|
23,108
|
|
Smurfit-Stone Container, 8%, 3/15/17 (b)
|
|
|
8,780,000
|
|
|
|
13,170
|
|
Stone Container, 8.375%, 7/01/12 (b) (c)
|
|
|
8,000,000
|
|
|
|
12,000
|
|
Stone Container, 7.375%, 7/15/14 (b)
|
|
|
5,000,000
|
|
|
|
7,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,471,132
|
|
Paper/Forest Products 2.59%
|
|
|
|
|
|
|
|
|
American Tissue, Inc., 12.5%, 7/15/06 (b) (c) (e)
|
|
|
14,061,292
|
|
|
|
29,979
|
|
Cenveo Corp., 8.875%, 2/01/18
|
|
|
22,705,000
|
|
|
|
22,591,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,621,454
|
|
Publishing 2.16%
|
|
|
|
|
|
|
|
|
AMO Escrow Corp., 11.5%, 12/15/17
|
|
|
18,193,250
|
|
|
|
18,920,980
|
|
Systems Software 1.00%
|
|
|
|
|
|
|
|
|
Interface Sec. Systems Holdings, 9.25%, 1/15/18 (d)
|
|
|
8,500,000
|
|
|
|
8,776,250
|
|
Telecom Equipment 3.15%
|
|
|
|
|
|
|
|
|
Nortel Networks LTD, 10.75%, 7/15/16 (b)
|
|
|
23,850,000
|
|
|
|
27,606,375
|
|
Transportation 1.83%
|
|
|
|
|
|
|
|
|
Jack Cooper Holdings Corp., 9.25%, 6/01/20 (d)
|
|
|
15,000,000
|
|
|
|
16,050,000
|
|
|
|
|
|
|
|
|
|
|
Total Corporate Bonds, Notes, & Preferred Securities
(cost$629,282,790)
|
|
|
|
|
|
$
|
598,057,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Bonds
|
|
|
|
|
|
|
|
|
|
|
|
Name of issuer
|
|
Principal
|
|
|
Value
|
|
Foreign Bonds 0.32%
|
|
|
|
|
|
|
|
|
Republic of Argentina GDP Linked Security, FRN, 12/15/35
|
|
$
|
34,386,574
|
|
|
$
|
2,836,892
|
|
|
|
|
|
|
|
|
|
|
Total Foreign Bonds
(cost$1,423,421)
|
|
|
|
|
|
$
|
2,836,892
|
|
|
|
|
|
|
|
|
|
|
Common & Preferred Stock 11.04%
|
|
|
|
|
|
|
|
|
Name of issuer
|
|
Number
of Shares
|
|
|
Value
|
|
Banks/Money Centers 5.09%
|
|
|
|
|
|
|
|
|
Citigroup, Inc.
|
|
|
916,930
|
|
|
$
|
44,480,274
|
|
Diversified Chemicals 0.66%
|
|
|
|
|
|
|
|
|
NL Industries
|
|
|
510,200
|
|
|
|
5,790,770
|
|
Food Processing 1.39%
|
|
|
|
|
|
|
|
|
Viskase Cos., Inc. (b)
|
|
|
2,096,128
|
|
|
|
12,157,542
|
|
Gaming 0.10%
|
|
|
|
|
|
|
|
|
Trump Entertainment Resorts (b)
|
|
|
910,628
|
|
|
|
910,628
|
|
Grocery Stores 2.10%
|
|
|
|
|
|
|
|
|
Core-Mark Holding Co., Inc.
|
|
|
277,602
|
|
|
|
18,443,877
|
|
Industrial Service 0.00%
|
|
|
|
|
|
|
|
|
Safelite Realty Corp. (e) (f)
|
|
|
7,403
|
|
|
|
11,105
|
|
Marketing/Sales 0.89%
|
|
|
|
|
|
|
|
|
Harry and David (b)
|
|
|
59,819
|
|
|
|
7,776,470
|
|
Metals & Mining 0.00%
|
|
|
|
|
|
|
|
|
Ormet Corp. (b)
|
|
|
372,638
|
|
|
|
1,863
|
|
Manufacturing 0.40%
|
|
|
|
|
|
|
|
|
Amtrol, Inc. (b) (e)
|
|
|
640,565
|
|
|
|
2,062,619
|
|
Amtrol, Inc. PFD (b) (e)
|
|
|
1,068
|
|
|
|
1,430,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,493,226
|
|
Packaging & Container 0.00%
|
|
|
|
|
|
|
|
|
Constar, Inc. (b) (e)
|
|
|
93,512
|
|
|
|
935
|
|
Rock-Tenn Co.
|
|
|
78
|
|
|
|
7,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,834
|
|
Paper Product 0.07%
|
|
|
|
|
|
|
|
|
MAXXAM, Inc. (b)
|
|
|
800
|
|
|
|
560,000
|
|
Retail Food Chain 0.33%
|
|
|
|
|
|
|
|
|
Romacorp, Inc. (b) (e) (f)
|
|
|
82,220
|
|
|
|
2,877,700
|
|
Transportation 0.01%
|
|
|
|
|
|
|
|
|
Groupe Eurotunnel SA
|
|
|
5,424
|
|
|
|
49,413
|
|
Groupe Eurotunnel SA
|
|
|
1,925
|
|
|
|
17,537
|
|
International Airline Support Group (b)
|
|
|
219,540
|
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,412
|
|
|
|
|
|
|
|
|
|
|
Total Common & Preferred Stock
(cost$124,618,981)
|
|
|
|
|
|
$
|
96,579,701
|
|
|
|
|
|
|
|
|
|
|
Repurchase Agreement
|
|
|
|
|
Name of issuer
|
|
Value
|
|
Repurchase Agreement 19.35%
|
|
|
|
|
State Street Bank & Trust Co. 0.00% dated 9/30/13, to be repurchased at $169,323,840 on 10/1/13 (b) (g)
|
|
|
|
|
Total Repurchase Agreement
(cost$169,323,840)
|
|
$
|
169,323,840
|
|
|
|
|
|
|
Total Investments 100.62%
(cost$936,597,501)
|
|
|
880,523,406
|
|
|
|
|
|
|
Net Other Assets and Liabilities (0.62%)
|
|
|
(5,351,594
|
)
|
|
|
|
|
|
Net Assets 100%
|
|
$
|
875,171,812
|
|
|
|
|
|
|
(a)
|
Portions of portfolio are pledged to collateralize short tem borrowings.
|
(b)
|
Non-income producing security.
|
(c)
|
Security is in principal default. As of date of this report, the bond holders are in discussion with the issuer to negotiate repayment terms of principal.
|
(d)
|
Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers. At the period end,
the value of these securities amounted to $180,924,193 or 20.67% of total net assets.
|
(e)
|
Security is valued at fair value as determined in good faith under consistently applied procedures approved by the Board of Trustees.
|
(f)
|
All or a portion of security is restricted. The aggregate market value of restricted securities as of September 30, 2013 is $2,888,805 which represents 0.33% of total net assets. Additional information on each
holding is as follows:
|
|
|
|
|
|
|
|
|
|
Security
|
|
Acquisition Date
|
|
|
Acquisition Cost
|
|
Romacorp, Inc.
|
|
|
11/15/06
|
|
|
$
|
4,118,756
|
|
Safelite Realty Corp.
|
|
|
09/29/00
|
|
|
$
|
965,195
|
|
(g)
|
Collateralized by $23,205,741 of US Treasury Notes 0.875% due 2/28/2017; $6,901,192, of US Treasury Notes 0.25% due 3/31/2014; and $142,605,260 of US Treasury Notes 1.25% due 2/29/2020 totaling $172,712,193. The
maturity value is $169,323,840.
|
Statement of Assets
and Liabilities
|
|
|
|
|
September 30, 2013
|
|
|
|
|
|
|
Assets
|
|
|
|
|
Investmentsat value (cost $767,273,661)
|
|
$
|
711,199,566
|
|
Repurchase agreement at value (cost $169,323,840)
|
|
|
169,323,840
|
|
Receivable for interest
|
|
|
11,950,156
|
|
Receivable for shares sold
|
|
|
119,350
|
|
Miscellaneous receivable
|
|
|
1,181,926
|
|
|
|
|
|
|
Total Assets
|
|
|
893,774,838
|
|
Liabilities
|
|
|
|
|
Payable for investments purchased
|
|
|
15,000,000
|
|
Payable for trustee fees
|
|
|
1,097,203
|
|
Payable for shares repurchased
|
|
|
2,308,448
|
|
Accrued expenses
|
|
|
197,375
|
|
|
|
|
|
|
Total Liabilities
|
|
|
18,603,026
|
|
Net Assets
|
|
$
|
875,171,812
|
|
|
|
|
|
|
Net Assets Consist of:
|
|
|
|
|
Capital, at a $1.00 par value
|
|
$
|
135,886,143
|
|
Paid in surplus
|
|
|
1,293,341,490
|
|
Undistributed net investment income
|
|
|
2,264,645
|
|
Accumulated net realized loss on investments
|
|
|
(500,246,371
|
)
|
Net unrealized depreciation of investments
|
|
|
(56,074,095
|
)
|
|
|
|
|
|
Net Assets
|
|
$
|
875,171,812
|
|
|
|
|
|
|
Net Asset Value,
offering price and redemption price per share ($875,171,812/135,886,143 shares)
|
|
$
|
6.44
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
Statement of Operations
|
|
|
|
|
Year Ended September 30, 2013
|
|
|
|
|
Investment Income
|
|
|
|
|
Interest
|
|
$
|
45,419,555
|
|
Dividends
|
|
|
2,856,509
|
|
Other Income
|
|
|
19,653
|
|
|
|
|
|
|
Total Income
|
|
|
48,295,717
|
|
Expenses
|
|
|
|
|
Trustee fees
|
|
$
|
3,323,996
|
|
Administrative expenses and salaries
|
|
|
1,635,079
|
|
Computer and related expenses
|
|
|
260,100
|
|
Interest expense
|
|
|
217,653
|
|
Auditing fees
|
|
|
193,450
|
|
Legal fees
|
|
|
175,716
|
|
Commitment fees
|
|
|
138,923
|
|
Printing, postage and stationery fees
|
|
|
136,900
|
|
Custodian fees
|
|
|
117,500
|
|
Insurance
|
|
|
77,730
|
|
Registration and filing fees
|
|
|
43,800
|
|
Telephone
|
|
|
14,915
|
|
Other expenses
|
|
|
80,125
|
|
|
|
|
|
|
Total Expenses
|
|
|
6,415,887
|
|
|
|
|
|
|
Net Investment Income
|
|
|
41,879,830
|
|
|
|
|
|
|
Realized and Unrealized Gain (Loss) on Investments:
|
|
|
|
|
Net realized gain (loss) from investment transactions
|
|
|
(912,052
|
)
|
Change in unrealized appreciation (depreciation) of investments
|
|
|
35,466,900
|
|
|
|
|
|
|
Net Increase (Decrease) in Net Assets Resulting from Operations
|
|
$
|
76,434,678
|
|
|
|
|
|
|
The accompanying notes are an integral part of the financial statements.
Statements of Changes
in Net Assets
|
|
|
|
|
|
|
|
|
|
|
Year Ended
September 30,
2013
|
|
|
Year Ended
September 30,
2012
|
|
Increase (Decrease) in Net Assets
|
|
|
|
|
|
|
|
|
From Operations:
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
41,879,830
|
|
|
$
|
39,983,214
|
|
Net realized gain (loss) from investment transactions
|
|
|
(912,052
|
)
|
|
|
(27,509,609
|
)
|
Net realized gain (loss) from foreign currency transactions
|
|
|
|
|
|
|
(2,036,939
|
)
|
Change in unrealized appreciation (depreciation) of investments
|
|
|
35,466,900
|
|
|
|
76,579,486
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Net Assets Resulting from Operations
|
|
|
76,434,678
|
|
|
|
87,016,152
|
|
|
|
|
|
|
|
|
|
|
Distributions to Shareholders from Net Investment Income
|
|
|
(39,327,782
|
)
|
|
|
(41,747,282
|
)
|
Fair Fund Settlement
|
|
|
|
|
|
|
1,229,257
|
|
From Net Trust Share Transactions
|
|
|
236,726,786
|
|
|
|
85,914,288
|
|
|
|
|
|
|
|
|
|
|
Total Increase (Decrease) in Net Assets
|
|
|
273,833,682
|
|
|
|
132,412,415
|
|
Net Assets:
|
|
|
|
|
|
|
|
|
Beginning of Period
|
|
|
601,338,130
|
|
|
|
468,925,715
|
|
|
|
|
|
|
|
|
|
|
End of Period
|
|
$
|
875,171,812
|
|
|
$
|
601,338,130
|
|
|
|
|
|
|
|
|
|
|
Undistributed Net Investment Income/Distribution in Excess of Net Investment Income
|
|
$
|
2,264,645
|
|
|
$
|
(630,048
|
)
|
The accompanying notes are an integral part of the financial statements.
Notes to Financial Statements
Note AOrganization
Northeast
Investors Trust (the Trust), a diversified open-end management investment company (a Massachusetts Trust), is registered under the Investment Company Act of 1940, as amended.
Note BSignificant Accounting Policies
Valuation of Investments:
Securities for which market quotations are readily available are valued at market values determined
on the basis of the last quoted sale prices prior to the close of the New York Stock Exchange (or the last quoted bid prices in the event there are no sales reported on that day) in the principal market in which such securities normally are traded,
as publicly reported, or are furnished by recognized dealers in such securities. Securities may also be valued on the basis of valuations furnished by independent pricing services that use both dealer supplied valuations and evaluations based on
expert analysis of market data and other factors if such valuations are believed to reflect more accurately the fair value of such securities. Such services may use various pricing techniques which take into account both transaction data and market
information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data as well as broker quotes.
Securities for which market quotations are not readily available (including restricted securities and private placements, if any) are valued
at their fair value as determined in good faith under consistently applied procedures approved by the Board of Trustees. Methodologies and factors used to fair value securities may include, but are not limited to, the analysis of current debt to
cash flow, information of any recent sales, the analysis of the companys financial statements, quotations or evaluated prices from broker-dealers, information obtained from the issuer or analysts and the nature of the existing market for
securities with characteristics similar to such obligations. The Trust may use fair value pricing for foreign securities if a material event occurs that may effect the price of a security after the close of the foreign market or exchange (or on days
the foreign market is closed) but before the Trust prices its portfolio, generally at 4:00 p.m. ET. Fair value pricing may also be used for securities acquired as a result of corporate restructurings or reorganizations as reliable market quotations
for such issues may not be readily available. When fair valuation is used, the value of an investment used to determine the Trusts net asset value may differ from published or quoted prices for the same investment. The valuations for these
good faith securities are monitored and reviewed by the Trusts Pricing Committee on an ongoing basis as information becomes available, but are evaluated at least quarterly. The good faith security valuations and fair value methodologies are
reviewed and approved by the Trusts Board of Trustees on a quarterly basis. There can be no assurance that the Trust could obtain the fair value assigned to an investment if it were to sell the investment at the same time which the Trust
determines its net asset value per share. The market value of securities fair valued on September 30, 2013 was $11,741,326, which represents 1.34% of net assets.
Federal Income Taxes:
It is the Trusts policy to comply with the requirements of the Internal Revenue Code applicable
to regulated investment companies and to distribute each year substantially all of its investment company taxable income and capital gains to its shareholders. Accordingly, no federal tax provisions are required. Income distributions, if any, are
declared and paid quarterly for the Trust. Capital gains distributions, if any, are declared and paid annually.
The Trust has reviewed
the tax positions for the open tax years as of September 30, 2013 and has determined that no provision for income tax is required in the Trusts financial statements. The Trusts federal tax returns for the prior three fiscal years
remain subject to examination by the Internal Revenue Service. The Trust recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense on the Statement of Operations.
Notes to Financial Statements
continued
The characterization of distributions to shareholders for financial reporting purposes is
determined in accordance with income tax rules. Therefore, the source of the Trusts distributions may be shown in the accompanying financial statements as either from net investment income or net realized gain on investment transactions, or
from paid in capital, depending on the type of book/ tax differences that may exist.
State Income Taxes:
Because the
Trust has been organized by an Agreement and Declaration of Trust executed under the laws of the Commonwealth of Massachusetts, it is not subject to state income or excise taxes.
Net Asset Value:
In determining the net asset value per share, rounding adjustments are made for fractions of a cent to the
next higher cent.
Distributions and Income:
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting principles in the United States of America. These differences are primarily due to differing treatments for capital loss carryforwards. Permanent book and tax differences
relating to shareholder distributions will result in reclassifications to paid in surplus. The Trusts distributions and dividend income are recorded on the ex-dividend date. Interest income, which includes accretion of market discount and
amortization of premium, is accrued as earned. Certain securities held by the Trust pay interest in the form of cash or additional securities (known as Payment-in-kind or PIK); interest on such securities is recorded on the accrual basis.
Security Transactions:
Security transactions are accounted for as of trade date. Gains and losses on securities sold are
determined on the basis of identified cost.
Use of Estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Credit Risk:
Investments in high-yield securities involve greater degrees of credit and market risks than investments in
higher-rated securities. Bonds which are rated as less than investment grade tend to be more susceptible to real or perceived adverse economic conditions.
Fair Funds Settlement:
The Securities and Exchange Commission (SEC) had investigated several companies suspected
of short-term or excessive trading of certain mutual funds, known as market timing, through deceptive means. Through an SEC order, a fund was established for the benefit of shareholders who may have been affected by this trading activity and the
companies found to be market timing were required to pay compensation for their market timing activity. Amounts received as a result of the SEC order are noted on the Statements of Changes in Net Assets.
Note CTrustees Compensation
Trustees compensation has been computed at the rate of 1/8 of 1% of the net assets (before deduction of accrued Trustees
compensation) at the close of each quarter, from which the Trustees have paid certain expenses specified in the Declaration of Trust. For the year ended September 30, 2013 the current Independent Trustees were aggregately paid $200,000 from the
Trustee fees.
Notes to Financial Statements
continued
The total number of shares owned beneficially by the Trustees, officers and members of their
immediate families on September 30, 2013 was 4,720,169 shares (3.47%).
Other Expenses:
All non-asset based fees
and expenses are accrued based on methodologies approved by the Board of Trustees.
Administrative Expenses &
Salaries:
Northeast Investors Trust incurs salary and administrative expenses for personnel performing transfer agent and dividend disbursement related functions.
Note DShares of Beneficial Interest
At September 30, 2013, there were unlimited shares of beneficial interest authorized with a par value of $1. Transactions in shares of
beneficial interest were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended September 30, 2013
|
|
|
Year Ended September 30, 2012
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Shares Sold
|
|
|
99,363,248
|
|
|
$
|
640,422,168
|
|
|
|
57,383,448
|
|
|
$
|
334,647,699
|
|
Shares issued to shareholders in reinvestment of distributions from net investment income
|
|
|
4,030,763
|
|
|
|
25,330,642
|
|
|
|
4,487,398
|
|
|
|
26,021,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,394,011
|
|
|
|
665,752,810
|
|
|
|
61,870,846
|
|
|
|
360,668,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased
|
|
|
(67,243,455
|
)
|
|
|
(429,026,024
|
)
|
|
|
(47,085,981
|
)
|
|
|
(274,754,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease)
|
|
|
36,150,556
|
|
|
$
|
236,726,786
|
|
|
|
14,784,865
|
|
|
$
|
85,914,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note EPurchases and Sales of Investments
The cost of purchases and the proceeds from sales and maturities of securities, other than short-term and government securities, aggregated
$218,703,232 and $133,785,584 respectively, for the year ended September 30, 2013.
Note FShort-term Borrowings
Short-term bank borrowings, which do not require maintenance of compensating balances, are generally on a demand basis and are at rates equal
to adjusted money market interest rates in effect during the period in which such loans are outstanding. At September 30, 2013 the Trust has unused lines of credit amounting to $200,000,000. The lines of credit may be terminated at the
banks option at their annual renewal dates.
The following information relates to aggregate short-term borrowings during the year
ended September 30, 2013:
|
|
|
|
|
Average amount outstanding (total of daily outstanding principal balances divided by the number of days with debt outstanding during
the period)
|
|
$
|
22,054,470
|
|
Weighted average interest rate
|
|
|
1.40
|
%
|
Notes to Financial Statements
continued
Note GRepurchase Agreement
On a daily basis, the Trust invests cash balances into repurchase agreements secured by U.S. Government obligations. Securities pledged as
collateral for repurchase agreements are held by the Trusts custodian bank until maturity of the repurchase agreement. Provisions of the agreement ensure that the market value of the collateral is sufficient in the event of default. However,
in the event of default or bankruptcy by the other party to the agreement, realization and/ or retention of the collateral may be subject to legal proceedings.
Note HAdditional Tax Information
The amount of distributions paid during the years ended September 30, 2012 and 2013 were $41,747,282 and $39,327,782, respectively, and
were classified as ordinary income.
On December 22, 2010, The Regulated Investment Company Modernization Act of 2010 (the RIC Mod
Act) was enacted to update some of the federal income and excise tax rules related to regulated investment companies. The RIC Mod Act allows new capital losses to be carried forward indefinitely rather than for a maximum of eight years. The
capital losses also now retain the character of the original loss rather than be carried forward as all short-term as under previous law. The provisions of the RIC Mod Act are effective for taxable years beginning after December 22, 2010.
Losses incurred during these years (Post-RIC Mod Act) will be required to be utilized prior to the losses incurred in the pre-enactment taxable years. As a result the Pre-RIC Mod Act capital loss carryforwards may expire unused.
As of September 30, 2013 the components of accumulated earnings (losses) on a tax basis were as follows:
|
|
|
|
|
Undistributed ordinary income
|
|
|
2,264,645
|
|
Capital Loss Carryforward Pre-RIC Mod Act:
|
|
|
|
|
2014
|
|
|
(56,723,408
|
)
|
2015
|
|
|
(53,488,548
|
)
|
2016
|
|
|
(35,052,024
|
)
|
2017
|
|
|
(100,070,501
|
)
|
2018
|
|
|
(15,862,511
|
)
|
2019
|
|
|
(159,796,299
|
)
|
|
|
|
|
|
Total Capital Loss Carryforward Pre-RIC Mod Act:
|
|
|
(420,993,291
|
)
|
Capital Loss Carryforward Post-RIC Mod Act:
|
|
|
(78,563,460
|
)
|
Unrealized gains (losses)net
|
|
|
(56,763,715
|
)
|
Total distributable earnings (losses)net
|
|
|
(554,055,821
|
)
|
At September 30, 2013 the Trusts aggregate security unrealized gains and losses based on cost for
U.S. federal income tax purposes was as follows:
|
|
|
|
|
Tax cost
|
|
|
937,287,121
|
|
Gross unrealized gain
|
|
|
69,895,341
|
|
Gross unrealized loss
|
|
|
(126,659,056
|
)
|
|
|
|
|
|
Net unrealized security gain (loss)
|
|
|
(56,763,715
|
)
|
|
|
|
|
|
Notes to Financial Statements
continued
Note IFair Value Measurements
Accounting Standards Codification ASC 820, Fair Value Measurements and Disclosures (ASC 820) defines fair value as the price that
would be received to sell an investment in an orderly transaction between two market participants at the measurement date. ASC 820 establishes a fair value hierarchy that distinguishes between market data obtained from independent sources
(observable inputs) and the Trusts own market assumptions (unobservable inputs). The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities and the
determination of the significance of certain inputs to the fair value measurement requires judgments and considers factors that may be specific to each security. The various inputs that may be used to determine the value of the Trusts
investments are summarized in the following fair value hierarchy:
Level 1 Unadjusted quoted prices in active markets for identical
securities.
Level 2 Other significant observable inputs based on data obtained from various pricing sources (including quoted
prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 Significant unobservable inputs
including the Trusts own assumptions used to determine the fair value of investments. Factors considered in making such determinations may include, but are not limited to, information obtained directly from the company or analysts and the
analysis of the companys financial statements or other documents.
The following table summarized the Trusts investment as of
September 30, 2013, based on the inputs used to value them.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Corporate Bonds, Notes & Preferred Securities
|
|
$
|
0
|
|
|
$
|
592,699,405
|
|
|
$
|
5,358,360
|
|
|
$
|
598,057,765
|
|
Common & Preferred Stock
|
|
$
|
89,219,157
|
|
|
$
|
977,578
|
|
|
$
|
6,382,966
|
|
|
$
|
96,579,701
|
|
Foreign Bonds
|
|
$
|
0
|
|
|
$
|
2,836,892
|
|
|
$
|
0
|
|
|
$
|
2,836,892
|
|
Convertible Bonds
|
|
$
|
0
|
|
|
$
|
13,725,208
|
|
|
$
|
0
|
|
|
$
|
13,725,208
|
|
Repurchase Agreement
|
|
$
|
0
|
|
|
$
|
169,323,840
|
|
|
$
|
0
|
|
|
$
|
169,323,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
89,219,157
|
|
|
$
|
779,562,923
|
|
|
$
|
11,741,326
|
|
|
$
|
880,523,406
|
|
Transfers between hierarchy levels may occur due to market fluctuation, changes in valuation techniques and/or
changes in the availability of market data used in the determination of an investments valuation. The Trust recognizes transfers between the levels at the end of each period. As of September 30, 2013, there has been one transfer between
Level 2 and Level 1 as a result of an increase of observable market activity. There were no transfers between Level 2 and Level 3 for the period.
Notes to Financial Statements
continued
At September 30, 2013, the reconciliation of assets in which significant unobservable
inputs (Level 3) were used in determining fair value, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Bonds, Notes
& Preferred
Securities
|
|
|
Common &
Preferred
Stock
|
|
|
Totals
|
|
Beginning Balance @ 9/30/12
|
|
$
|
11,924,117
|
|
|
$
|
5,156,895
|
|
|
$
|
17,081,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
$
|
791,070
|
|
|
$
|
1,068,000
|
|
|
$
|
1,859,070
|
|
Sales
|
|
$
|
(222,305
|
)
|
|
$
|
|
|
|
$
|
(222,305
|
)
|
Realized Gain (Loss)
|
|
$
|
86,444
|
|
|
$
|
|
|
|
$
|
86,444
|
|
Net Change in Unrealized Appreciation/(Depreciation)
|
|
$
|
(7,220,966
|
)
|
|
$
|
158,071
|
|
|
$
|
(7,062,895
|
)
|
Transfers into Level 3
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Transfers out of Level 3
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance @ 9/30/13
|
|
$
|
5,358,360
|
|
|
$
|
6,382,966
|
|
|
$
|
11,741,326
|
|
|
|
|
|
|
|
|
Change in
Unrealized
Gain / (Loss) for
Positions Still
Held at
September 30, 2013
|
|
Corporate Bonds, Notes & Preferred Securities
|
|
$
|
(7,282,437
|
)
|
Common & Preferred Stock
|
|
|
158,071
|
|
|
|
|
|
|
Totals
|
|
$
|
(7,124,366
|
)
|
|
|
|
|
|
The Financial Accounting Standard Board (FASB) issued guidance that a reporting entity should
disclose quantitative information about the unobservable inputs used in the fair value determinations that are categorized in the Level 3 hierarchy. The guidance also required additional disclosure regarding the valuation process used and the
sensitivity of the fair value measurements to changes in unobservable inputs and the interrelationships between those unobservable inputs within Level 3. The following table presents a summary of valuation techniques, inputs and quantitative
information used in determining the fair value of the Trusts Level 3 securities as of September 30, 2013:
Notes to Financial Statements
continued
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment Type
|
|
Fair Value
|
|
|
Valuation
Technique
|
|
Significant
Unobservable
Inputs
|
|
Range
|
|
Increase to
Valuation
from an
Increase in
Input
(1)
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Packaging & Container
|
|
$
|
4,392,479
|
|
|
Market Comparables
(2)
|
|
EBITDA Multiple
|
|
5.6x - 9.4x
|
|
Increase
|
|
|
|
|
|
|
|
|
Private Company Discount
|
|
35%
|
|
Decrease
|
Food Processing
|
|
$
|
935,902
|
|
|
Market Approach
(3)
|
|
Private Company Discount
|
|
20%
|
|
Decrease
|
Paper/Forest Products
|
|
$
|
29,979
|
|
|
Market Approach
(3)
|
|
Recovery Rate
|
|
not applicable
|
|
Increase
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
$
|
3,493,226
|
|
|
Market Comparables
(2)(3)
|
|
EBITDA Multiple
|
|
6.0x - 13.6x
|
|
Increase
|
|
|
|
|
|
|
|
|
Private Company Discount
|
|
30%
|
|
Decrease
|
Retail Food Chains
|
|
$
|
2,877,700
|
|
|
Recent Transaction
Price
(4)
|
|
not applicable
|
|
not applicable
|
|
|
Industrial Services
|
|
$
|
11,105
|
|
|
Recent Transaction
Price
(4)
|
|
not applicable
|
|
not applicable
|
|
|
Packaging & Container
|
|
$
|
935
|
|
|
Market Approach
(3)
|
|
Recovery Rate
|
|
not applicable
|
|
Increase
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
11,741,326
|
|
|
|
|
|
|
|
|
|
(1)
|
This column represents the directional change in the fair value of the Level 3 securities that would result from an increase to the corresponding unobservable input. A decrease to the unobservable inputs would have the
opposite effect. Significant increases and decreases of these inputs could result in significantly higher or lower fair value determinations.
|
(2)
|
Earnings multiples are based on comparable companies and transactions of comparable companies.
|
(3)
|
A market approach using the value of the underlying assets of a company.
|
(4)
|
Certain securities are valued based on recent transactions (generally within six months of valuation date). In some cases, the fair value may be based on a pending transaction expected to occur after the valuation date.
|
Note JSubsequent Events
Management has evaluated whether any other events or transactions occurred subsequent to September 30, 2013 and through the date of issuance of
the Trusts financial statements and determined that there were no material events or transactions that would require recognition or disclosure in the Trusts financial statements.
Report of Independent Registered Public Accounting Firm
The Board of Trustees and Shareholders of Northeast Investors Trust:
We have audited the accompanying statement of assets and liabilities of Northeast Investors Trust (the Trust), including the schedule of
investments, as of September 30, 2013, 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 Trusts 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. We were not engaged to perform an audit of the Trusts
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 Trusts 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 and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as
of September 30, 2013, by correspondence with the custodian and others. 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 Northeast Investors Trust at September 30, 2013, 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 the financial highlights for each of the five years in the period then ended, in conformity with U.S. generally accepted accounting principles.
Boston, Massachusetts
November 22, 2013
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