Northeast Investors Trust
Dear Shareholders:
We submit herewith our 49th Annual Report for the year ended September 30,
1998. Net assets per share were $10.42, compared with $11.79 at the end of
fiscal 1997. Net assets were $2,046,655,613, compared to $2,074,181,767
at 1997 year end. Dividends of $0.96 a share from investment income were
paid during the current year. In addition, we are paying a capital gains
distribution along with the regular November dividend distribution, in
the first such gains payment since 1969. Our trailing one, five and ten year
average annual total return figures are (4.13)%, 10.59%, and 10.18%.
Fiscal 1998 was naturally disappointing to us all, despite the
continued high productivity of our interest and dividend portfolio.
The euphoria of the marketplace abruptly ended on July 20, 1998. While
The Dow Jones Average was virtually unchanged during the calendar year to
September 30, commentators referred to the Crash of 1998 and the
performance of individual price actions confirmed this to at least the
respective holders thereof.
Of note in our portfolio is, given the problems of Asia and Russia, the
virtual absence of any securities, with one exception, in these areas.
Fewer than 4% of our list are under foreign. Further, all our securities,
again with one exception, a British security, are U.S.pay, on the
thesis that for most of us we pay our bills in U.S. Dollars.
Foreign-issued securities entail monetary, political and legal risks along
with normal vicissitudes of the marketplace.
On Saturday, September 26th, we initiated a test run on our computer
process in connection with the year 2000. I am pleased to report that we
were satisfied with the results. August and September saw a pronounced
decline in the prices of high-yield bonds. Unlike most prior declines we
have seen 1962, 1968-9, 1979-82, 1987 and 1989, this one was unaccompanied
by rising interest rates in fact, U.S. Treasury bonds rose in price and,
more importantly, was not marked by any increase in defaults. Supply and
demand Wall Street s tendency to produce supply as long as it can find
buyers finally tipped prices downward, causing momentum investors,if one
can use these words together to redeem, since prices were no longer going up,
followed by sales of portfolio holdings to meet withdrawals and concomitant
declines in prices.
We used this period to use our previously mentioned shorter-term
securities and yield-to-call paper to buy higher yielding, longer-term
items in an effort to shore up our dividend-paying ability that
previously had been under pressure due to the narrow yield spread between
the categories of bond ratings.
We believe that this sets the stage for better performance in the future
built on the cornerstone of the productivity of our securities.
Respectfully submitted,
Ernest E. Monrad
Chairman of the Trustees
October 14, 1998
<PAGE>
<TABLE>
Distribution Per Share
Fiscal At End of Fiscal Year During Fiscal Year Average
- -------------------------------------------------------------------------------------------
Year Approximate FullNet Asset Total From From Monthly
Ended Number of Shares Value Net Net RealizedNet Asset
Sept. 30Shareholders OutstandingPer Share Assets Income Gain Value
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1950(a) 67 27,685 $10.12 $ 280,172 $0.22 $0.0000 $ 9.86
1951 113 51,070 11.09 566,238 0.60 0.2709 10.71
1952 159 78,519 11.33 889,359 0.61 0.2597 11.28
1953 193 96,413 10.83 1,044,115 0.65 0.1046 11.57
1954 290 131,031 14.17 1,855,734 0.61 0.2269 12.75
1955 366 159,278 16.93 2,695,322 0.675 0.3886 16.30
1956 417 168,256 16.87 2,837,437 0.745 0.3185 17.65
1957 437 180,360 14.57 2,626,103 0.76 1.2450 16.72
1958 505 210,929 16.55 3,489,777 0.76 0.6658 15.75
1959 694 259,709 16.77 4,354,809 0.76 1.6951 18.36
1960 884 316,915 15.73 4,986,360 0.79 0.5663 16.58
1961 1,156 391,126 17.23 6,739,320 0.80 0.8179 17.33
1962 1,508 492,454 16.48 8,111,024 0.80 0.4345 17.45
1963 2,142 676,976 17.80 12,046,866 0.80 0.4134 17.70
1964 2,800 981,037 18.48 18,122,167 0.83 0.4899 18.36
1965 3,380 1,238,570 18.46 22,855,525 0.84 0.4642 18.80
1966 3,678 1,445,424 16.03 23,163,540 0.86 0.4346 18.08
1967 3,773 1,644,607 17.31 28,454,561 0.90 0.3157 17.08
1968 3,932 1,954,413 17.74 34,657,130 0.94 0.4357 17.31
1969 4,396 2,225,423 15.30 34,032,661 0.99 0.4378 17.07
1970 5,066 2,618,638 14.15 37,049,008 1.035 0.0000 14.57
1971 5,574 3,174,649 15.23 48,329,677 1.10 0.0000 15.04
1972 6,276 3,924,201 15.75 61,787,749 1.15 0.0000 15.74
1973 7,269 4,541,622 15.18 68,896,938 1.14 0.0000 15.62
1974 7,380 4,735,497 12.35 58,446,955 1.16 0.0000 13.95
1975 8,354 5,995,696 13.04 78,126,666 1.21 0.0000 13.10
1976 10,023 8,067,930 14.57 117,514,100 1.25 0.0000 14.02
1977 12,871 10,781,998 14.93 160,882,937 1.28 0.0000 14.96
1978 13,717 11,838,531 14.03 166,015,297 1.28 0.0000 14.34
1979 13,924 12,463,013 13.01 162,045,583 1.285 0.0000 13.89
1980 13,086 12,405,590 11.26 139,586,138 1.34 0.0000 11.78
1981 11,828 12,249,619 9.38 114,852,760 1.395 0.0000 10.35
1982 12,792 13,360,184 10.88 145,243,484 1.41 0.0000 10.01
1983 13,027 14,361,773 11.83 169,821,605 1.44 0.0000 11.96
1984 11,634 15,324,746 10.98 168,229,381 1.46 0.0000 10.34
1985 11,991 17,887,582 12.19 217,989,344 1.46 0.0000 11.77
1986 14,431 23,037,102 13.60 313,197,229 1.46 0.0000 13.17
1987 17,532 26,987,069 12.89 347,841,198 1.46 0.0000 13.63
1988 19,107 33,268,240 12.16 404,218,905 1.94 0.0000 12.13
1989 18,749 34,498,332 11.18 385,389,718 1.54 0.0000 11.64
1990 16,895 31,459,941 8.81 277,133,819 1.43 0.0000 9.78
1991 15,747 35,220,038 8.83 310,667,350 1.34 0.0000 8.36
1992 15,918 47,684,814 9.50 452,773,909 1.15 0.0000 9.22
1993 16,209 47,797,167 9.94 474,975,825 1.02 0.0000 9.68
1994 17,460 58,148,389 10.02 582,093,443 0.99 0.0000 10.27
1995 20,644 77,209,155 10.33 797,559,000 0.96 0.0000 10.01
1996 24,631 110,229,375 10.90 1,200,483,907 0.99 0.0000 10.46
1997 34,213 175,955,357 11.79 2,074,181,767 1.00 0.0000 11.32
1998 38,781 196,523,494 10.42 2,046,655,613 0.96 0.0000 11.58
(a)From March 1, 1950, date of organization of the Trust. The shares were
initially sold on March 1,1950 at a net asset value of $10.00 per share.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
AVERAGE ANNUAL TOTAL RETURN
One year ended September 30, 1998.................................- 4.13%
Five years ended September 30, 1998................................10.59%
Ten years ended September 30, 1998.................................10.18%
SEC YIELD
Yield calculated as of September 30, 1998 (unaudited): 10.12%
</TABLE>
<TABLE>
<S> <C> <C>
Corporate Bonds
Advertising $7,175,000 .35%
Apparel 24,789,290 1.21%
Automobile &Truck 1,462,500 .07%
Building &Construction 20,545,073 1.00%
Chemicals 133,258,000 6.51%
Computer Software & Services 13,173,110 .64%
Conglomerate 23,550,863 1.15%
Energy/Natural Resources 155,888,475 7.62%
Entertainment 21,750,000 1.06%
Fast Food Service 393,125 .02%
Food &Beverage 80,369,350 3.93%
Food Processing 36,498,356 1.78%
Food Service 9,400,000 .46%
Furniture 21,450,000 1.05%
Gaming 394,931,160 19.30%
Grocery Stores 132,237,063 6.46%
Manufacturing/Service Industry 32,550,000 1.59%
Metals & Mining 174,565,086 8.53%
Miscellaneous Manufacturing 19,896,300 .97%
Office Equipment 17,662,050 .86%
Paper &Forest Products 159,184,340 7.78%
Publishing & Printing 14,302,750 .70%
Real Estate 56,862,860 2.78%
Recreation 34,020,000 1.66%
Retail 14,356,608 .70%
Retail Food Chains 105,337,374 5.15%
Transportation 4,390,000 .21%
Miscellaneous 38,415,915 1.88%
- ------------------------------------------------------------------------------------------
Total Corporate Bonds 1,748,414,648 85.43%
Total Foreign Bonds 100,318,698 4.90%
Total Common Stocks 227,840,646 11.13%
Total Preferred Stocks 3,500,000 .17%
Total Warrants and Units 1,609,367 .08%
- -----------------------------------------------------------------------------------------
Total Investments 2,081,683,359 101.71%
Cash &Receivables 63,583,353 3.11%
- ------------------------------------------------------------------------------------------
Total Assets 2,145,266,712 104.82%
Less Liabilities (98,611,099) (4.82%)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Net Assets 2,046,655,613 100.00%
</TABLE>
<PAGE>
The following graph compares the cumulative total shareholder return on
Northeast Investors Trust shares over the ten preceding fiscal years to the
cumulative total share return on the First Boston High Yield Index, assuming
an investment of $10,000 in both at their closing prices on September 30, 1998
and reinvestment of dividends and capital gains. For management's discussion of
the Trust's fiscal year 1998 performance, see the Chairman's letter to
shareholders.
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Northeast Investors
Trust $10,000 $10,487 $9,557 $11,242 $13,698 $15,924 $17,669 $20,044 $23,247 $27,469 $26,334
First Boston High
Yield $10,000 $10,554 $9,617 $13,169 $15,866 $18,355 $18,988 $21,660 $23,992 $27,762 $27,617
</TABLE>
<PAGE>
<TABLE>
Corporate Bonds
<CAPTION>
Market Value
Name of Issuer Principal (Note B)
<S> <C> <C>
- -----------------------------------------------------------------------------------------
Advertising- .35%
- ------------------------------------------------------------------------------------------
Outdoor Communications Sen. Sub. Notes, 9.25%, 8/15/07... 7,000,000 $ 7,175,000
Apparel-1.21%
- ------------------------------------------------------------------------------------------
Ann Taylor, Inc. Sub Notes, 8.75%, 6/15/00^.............. 2,000,000 2,037,500
Polymer Group Senior. Sub.Notes, 9%, 7/01/07^............ 5,100,000 4,870,500
Polymer Group Senior. Sub. Notes, 8.75%, 3/01/08^........ 18,922,000 17,881,290
- --------------------------------------------------------------------------------------------
24,789,290
Automobile & Truck - .07%
- -----------------------------------------------------------------------------------------------------
Speedy Muffler King, Inc. Senior Notes, 10.875%, 10/01/06 1,500,000 1,462,500
Building & Construction - 1.00%
- -----------------------------------------------------------------------------------------------------
Aluma Enterprises, Inc., 7.50%, 12/31/01................. 4,511,305 3,067,687
Associated Materials Senior Sub. Deb. Notes,9.125%,3/01/08 4,000,000 3,840,000
Henry Company Senior Notes, 10%, 4/15/08................. 2,500,000 2,375,000
Nortek, Inc. Senior Sub. Notes, 9.875%, 3/01/04.......... 5,950,000 5,801,250
Nualt Enterprises, Inc., 0/6%,12/31/04#.................. 8,031,082 5,461,136
- -----------------------------------------------------------------------------------------------------
20,545,073
Chemicals- 6.51%
- ------------------------------------------------------------------------------------------------------
Huntsman Corp. Sen. Sub. Floating Rate Notes, 7/01/07^... 39,500,000 37,525,000
Huntsman Packaging Corp.Sen. Sub. Notes, 9.125%,10/01/07^ 4,500,000 4,365,000
Huntsman Polymer Corp. Senior Notes, 11.75%, 12/01/04.... 14,000,000 14,770,000
LaRoche Ind. Sen. Sub. Notes Ser. B, 9.5%, 9/15/07^...... 18,000,000 15,660,000
PCI(Pioneer)Canada, Inc. Sen. Notes, 9.25%,10/15/07...... 4,000,000 3,200,000
Pioneer Americas Acq. Senior Notes, 9.25%, 6/15/07....... 17,500,000 14,175,000
Sterling Chemical, Inc. Sen. Sub. Notes, 11.75%, 8/15/06. 12,500,000 10,750,000
Sterling Chemical Sen. Sub. Notes Series A,11.25%,4/01/07 30,025,000 25,221,000
Sterling Chemical Holding Sen. Disc. Notes,0/12%,8/15/08# 18,980,000 7,592,000
- ---------------------------------------------------------------------------------------------------
133,258,000
Computer Software & Services - .64%
- ---------------------------------------------------------------------------------------------------
Unisys Corporation Senior Debentures, 9.75%, 9/15/16..... 4,211,000 4,253,110
Unisys Corporation Senior Notes Series B, 12%, 4/15/03^.. 8,000,000 8,920,000
- ---------------------------------------------------------------------------------------------------
13,173,110
Conglomerate - 1.15%
- ----------------------------------------------------------------------------------------------------
Jordan Industries Sen. Sub. Disc. Notes,0/11.75%,4/01/09# 21,616,713 14,050,863
Jordan Industries Senior Notes, 10.375%, 8/01/07......... 10,000,000 9,500,000
- -----------------------------------------------------------------------------------------------------
23,550,863
<PAGE>
Corporate Bonds-continued Market Value
Name of Issuer Principal (Note B)
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
Giant Industries Sen. Sub. Notes, 9.75%, 11/15/03^...... 3,190,000$ 3,190,000
Hacor Energy Senior Notes, 14.875%, 7/15/02............. 4,982,000 5,729,300
Husky Oil Bonds, 8.9/11.1875%, 8/15/28#................. 20,000,000 19,550,000
Kelley Oil Senior Subordinated Notes, 10.375%, 10/15/06. 7,500,000 6,075,000
NuevoEnergy Senior Sub. Notes Series B, 8.875%, 6/01/08. 9,500,000 9,500,000
Ocean Energy, Inc.Senior Sub. Notes, 8.875%, 7/15/07.... 20,000,000 20,000,000
P & L Coal Senior Subordinated Notes, 9.625%, 5/15/08^.. 25,000,000 25,000,000
Parker Drilling Co. Senior Sub. Notes, 9.75%, 11/15/06.. 17,745,000 16,236,675
Santa Fe Energy Resource Senior Sub. Deb.11%, 5/15/04^ . 10,000,000 10,200,000
TesoroPetroleum Corp. Senior Sub. Notes, 9%, 7/01/08.... 25,000,000 24,125,000
Universal Compression Sen. Disc. Notes,0/9.875%,2/15/08#^22,500,000 13,162,500
Wiser Oil Co. Sen. Sub. Notes, 9.5%, 5/15/07............ 4,000,000 3,120,000
- ----------------------------------------------------------------------------------------------------
155,888,475
Entertainment - 1.06%
- --------------------------------------------------------------------------------------------------
Marvel Holdings Senior Notes, 0%, 4/15/98~.............. 5,000,000 50,000
Premier Parks Senior Notes, 12%, 8/15/03................ 20,000,000 21,700,000
- ---------------------------------------------------------------------------------------------------
21,750,000
Fast Food Service - .02%
- --------------------------------------------------------------------------------------------------
Boston Chicken Convertible Notes, 0%, 6/01/15............ 18,500,000 393,125
Food & Beverage - 3.93%
- -----------------------------------------------------------------------------------------------
Envirodyne Industries, Inc. Senior Notes,10.25%,12/01/01^ 20,395,000 18,967,350
Mrs. Fields Original Cookies Senior Notes,10.125%,12/01/04 3,500,000 3,290,000
Specialty Foods Corp.Senior Notes, 10.25%, 8/15/01....... 49,600,000 39,680,000
Specialty Foods Corp. Sen.Notes Series B,11.125%,10/01/02 23,040,000 18,432,000
- ---------------------------------------------------------------------------------------------
80,369,350
Food Processing - 1.78%
- ---------------------------------------------------------------------------------------------
Del Monte Foods Corp. Senior Disc. Nts. Ser.B,0%,12/15/07#24,000,000 13,680,000
Premium Standard Farms, Inc.Sen.Nts., 11%, 9/17/03....... 10,652,470 11,238,356
SC International Service Senior Sub. Notes, 9.25%, 9/01/07 12,000,000
11,580,000
- ---------------------------------------------------------------------------------------------
36,498,356
Food Service - .46%
- ----------------------------------------------------------------------------------------------
B&GFoods Senior Sub. Notes, 9.625%, 8/01/07^............. 10,000,000 9,400,000
Furniture - 1.05%
- ----------------------------------------------------------------------------------------------
Lifestyle Furn. Intl.Ltd.Sen.Sub.Notes,10.875%,8/01/06 20,000,000 21,450,000
Gaming - 19.30%
- ----------------------------------------------------------------------------------------------
Aztar Corp. Senior Sub. Notes, 11%, 10/01/02............. 1,652,000 1,639,610
Aztar Corp. Senior Sub. Notes, 13.75%, 10/01/04^......... 35,548,000 38,391,840
Boyd Gaming Senior Sub. Notes, 9.5%, 7/15/07............. 45,000,000 44,550,000
Coast Hotels &CasinoFirst Mortgage Notes, 13%, 12/15/02.. 10,000,000 11,200,000
Eldorado Resorts Senior Sub. Notes, 10.5%, 8/15/06....... 1,500,000 1,545,000
<PAGE>
Corporate Bonds-continued Market Value
Name of Issuer Principal (Note B)
- -----------------------------------------------------------------------------------------------
Gaming (continued) - 19.30%
- -----------------------------------------------------------------------------------------------
Fitzgeralds Gaming Corp. Senior Sec. Nts, 12.25%,12/15/04 5,000,000 $ 3,400,000
GBProperty Funding Corp. Mort. Notes, 10.875%, 1/15/04... 17,350,000 13,012,500
Grand Casinos, Inc. First Mortgage Nts,10.125%,12/01/03 41,786,000 44,293,160
MGMGrand, Inc. Senior Collateralized Nts,6.875%,2/06/08 27,700,000 25,484,000
Players International, Inc. Senior Nts,10.875%,4/15/05 15,000,000 15,825,000
Rio Hotel & Casino, Inc. Senior Sub. Nts,10.625%,7/15/05 2,000,000 2,180,000
Rio Hotel &Casino, Inc. Senior Sub. Notes, 9.5%, 4/15/07. 20,500,000 22,652,500
Riviera Holdings Corp. First Mortgage Notes, 10%, 8/15/04 17,000,000 15,045,000
Station Casinos, Inc.Sen.Sub.Nts Series A,9.625%,6/01/03 20,000,000 19,500,000
Station Casinos, Inc. Sen. Sub. Nts Ser.B,9.625%,6/01/03 15,000,000 14,700,000
Station Casinos, Inc. Senior Sub. Notes, 10.125%, 3/15/06 5,100,000 5,100,000
Station Casinos, Inc. Senior Sub. Notes, 9.75%, 4/15/07.. 1,000,000 970,000
Trump Atlantic City First Mortgage Notes, 11.25%, 5/01/06 90,530,000 75,592,550
Las Vegas Sands/Venetian Mortgage Notes, 12.25%, 11/15/04 34,000,000 30,600,000
Las Vegas Sands/Ven Sen. Sub. Nts., 10/14.25%, 11/15/05# 12,500,000 9,250,000
- ------------------------------------------------------------------------------------------------
394,931,160
Grocery Stores - 6.46%
- --------------------------------------------------------------------------------------------------
Fleming Co., Inc. Med Term Notes, 9.24%, 2/28/00^..... 5,000,000 4,950,000
Fleming Co., Inc. Med Term Notes Series B, 8.74%, 9/19/02 10,000,000 9,600,000
Fleming Co., Inc. Med Term Notes Series C, 6.04%, 7/19/00^ 5,000,000 4,692,500
Fleming Co., Inc. Senior Sub. Notes, 10.5%, 12/01/04^.... 20,000,000 19,150,000
Fleming Co., Inc. Sen. Sub. Nts.Ser B,10.625%,7/31/07 18,000,000 17,010,000
P&C Food Market Senior Notes, 11.5%, 10/15/01............ 11,590,000 7,301,700
Pathmark Stores Senior Sub. Notes, 9.625%, 5/01/03....... 23,000,000 21,850,000
Penn Traffic Co. Senior Notes, 10.25%, 2/15/02^.......... 32,518,000 19,510,800
Penn Traffic Co. Senior Notes, 11.50%, 4/15/06^.......... 29,395,000 17,269,563
Star Markets Senior Sub. Notes, 13%, 11/01/04............ 10,000,000 10,900,000
Victory Markets, Inc. Sub. Notes, 12.5%, 3/15/00~........ 2,000,000 2,500
- -------------------------------------------------------------------------------------------------
132,237,063
Manufacturing/Service Industry - 1.59%
- ---------------------------------------------------------------------------------------------------
Axia, Inc. Senior Sub. Notes, 10.75%, 7/15/08............ 10,000,000 9,625,000
Carson Term Loan, 9%, 11/30/98........................... 5,000,000 4,850,000
HaynesInternational Senior Notes, 11.625%, 9/01/04....... 10,000,000 10,950,000
Key Components LLCSenior Notes, 10.5%, 6/01/08........... 7,500,000 7,125,000
- ------------------------------------------------------------------------------------------------
32,550,000
Metals & Mining - 8.53%
- ------------------------------------------------------------------------------------------------
AKSteel Corporation Senior Notes, 10.75%, 4/01/04^....... 35,500,000 36,920,000
Acme Metal, Inc. Senior Notes, 10.875%, 12/15/07~........ 20,000,000 4,000,000
Armco, Inc. Senior Notes, 9.375%, 11/01/00............... 21,115,000 20,903,850
CF&IAcquisition Term Loan, 9.5%, 3/31/03................. 9,137,781 8,498,136
Inland Steel Corp.First Mortgage Nts.Ser. R,7.9%,1/15/07 6,500,000 6,532,500
Kaiser Aluminum Chemical Corp. Sub. Notes,12.75%,2/01/03. 46,230,000 44,843,100
<PAGE>
Corporate Bonds-continued Market Value
Name of Issuer Principal (Note B)
- -----------------------------------------------------------------------------------------------
Metals & Mining (continued) - 8.53%
- -----------------------------------------------------------------------------------------------
Kaiser Aluminum Chemical Corp Series B, 10.875%, 10/15/06 13,500,000$ 13,095,000
LTVSteel Co., Inc. Senior Notes, 8.2%, 9/15/07........... 14,000,000 13,160,000
National Steel Corp. First Mortgage Notes,8.375%,8/01/06 7,500,000 7,312,500
Ormet Corp. Senior Notes, 11%, 8/15/08^.................. 10,000,000 9,400,000
Weirton Steel Corp. Senior Notes, 10.875%, 10/15/99^..... 10,000,000 9,900,000
- -------------------------------------------------------------------------------------------------
174,565,086
Miscellaneous Manufacturing - .97%
- --------------------------------------------------------------------------------------------------
Amtrol, Inc. Senior Sub. Notes, 10.625%, 12/31/06........ 6,645,000 6,246,300
Evenflo Company, Inc. Senior Notes, 11.75%, 8/15/06...... 7,000,000 6,860,000
Great Lakes Corp. Senior Sub. Notes, 11.25%, 8/15/08..... 7,000,000 6,790,000
- --------------------------------------------------------------------------------------------------
19,896,300
Office Equipment - .86%
- ---------------------------------------------------------------------------------------------------
Dictaphone Corp. Senior Sub. Notes, 11.75%, 8/01/05...... 19,845,000 17,662,050
Paper/Forest Products - 7.78%
- ---------------------------------------------------------------------------------------------------
Container Corp. Senior Notes, 11.25%, 5/01/04............ 10,500,000 10,815,000
Florida Coast Paper Co. First Mortgage Nts.,12.75%,6/01/03 7,000,000 6,650,000
Four M Corporation Senior Notes, Series B, 12%, 6/01/06.. 1,500,000 1,425,000
Gaylord Container Corp. Senior Notes, 9.75%, 6/15/07..... 19,000,000 15,437,500
Gaylord Container Corp. Senior Notes, 9.375%, 6/15/07.... 15,000,000 12,000,000
Gaylord Container Corp. Senior Sub. Nts., 9.875%,2/15/08^ 30,000,000 15,000,000
Maxxam Group Holdings, Inc. Senior Notes, 12%, 8/01/03... 7,000,000 7,630,000
Packaging Resources, Inc. Senior Notes, 11.625%, 5/01/03^ 8,800,000 8,448,000
Stone Container Corp. Senior Sub. Notes, 11.5%, 10/01/04 12,580,000 12,076,800
Stone Container Corp. Senior Notes, 12.58%, 8/01/16^..... 43,100,000 42,022,500
Stone Container Corp. Senior Sub. Notes, 12.25%, 4/01/02. 10,000,000 9,275,000
Stone Container Corp. Senior Notes, 11.5%, 8/15/06^...... 20,000,000 18,200,000
WTDIndustries Senior Sub. Notes, 8%, 6/30/05............. 340,900 204,540
- ---------------------------------------------------------------------------------------------------
159,184,340
Publishing & Printing - .70%
- --------------------------------------------------------------------------------------------------
American Pad &Paper Senior Sub. Notes, 13%, 11/15/05..... 26,005,000 14,302,750
Real Estate - 2.78%
- --------------------------------------------------------------------------------------------------
Jamboree LLC Class A Senior SecuredNotes, 8.18%, 3/27/02. 5,136,000 4,930,560
Jamboree LLC Class B Senior Sub. Notes,8.93%,3/27/02 PIK 1,340,000 1,286,400
Olympia & York Maiden Lane Sec. Notes, 10.375%, 12/31/95~ 19,535,000 14,455,900
Rockefeller Center Properties Conv. Deb., 0%, 12/31/00... 47,000,000 36,190,000
- -----------------------------------------------------------------------------------------------------
56,862,860
Recreation - 1.66%
- -----------------------------------------------------------------------------------------------------
Genmar Holdings, Inc. Senior Sub. Notes, 13.5%, 7/15/01.. 18,000,000 18,000,000
Outboard Marine Corp. Debentures, 9.125%, 4/15/17^....... 9,750,000 8,580,000
Outboard Marine Corp. Senior Notes, 10.75%, 6/01/08...... 8,000,000 7,440,000
- ---------------------------------------------------------------------------------------------------
34,020,000
<PAGE>
Corporate Bonds-continued Market Value
Name of Issuer Principal (Note B)
- -------------------------------------------------------------------------------------------------
Retail - .70%
- --------------------------------------------------------------------------------------------------
Bradlees, Inc. Senior Sub. Notes, 11%, 8/01/02~.......... 2,000,000$ 20,000
Bradlees, Inc. Senior Sub. Notes, 9.25%, 3/01/03~........ 15,455,000 154,550
Eyecare Centers of America,Inc.Sen.Nts., 9.125%, 10/01/03 5,000,000 4,200,000
Eye Care Centers Sub. Ntes. FRN, 6mth.Libor +.398%,5/01/08 5,000,000 4,275,000
Orion Stores Secured Notes, 12.75%, 10/01/98............. 4,591,816 4,591,816
Town & Country Corp. Senior Sub. Notes, 13%, 5/31/98~.... 7,434,949 1,115,242
- -------------------------------------------------------------------------------------------------
14,356,608
Retail Food Chains - 5.15%
- -------------------------------------------------------------------------------------------------
Advantica Restaurant Group Senior Notes, 11.25%, 1/15/08. 58,768,700 56,564,874
American Restaurant Group Senior Notes, 11.5%, 2/15/03... 15,500,000 14,647,500
FRD Acquisition Senior Notes, 12.5%, 7/15/04^............ 10,000,000 9,800,000
Family Restaurants Senior Notes, 9.75%, 2/01/02.......... 18,000,000 9,900,000
Planet Hollywood Senior Sub. Notes, 12%, 4/01/05......... 12,500,000 7,000,000
Romacorp, Inc. Senior Notes, 12%, 7/01/06................ 7,500,000 7,425,000
- ---------------------------------------------------------------------------------------------------
105,337,374
Transportation - .21%
- -------------------------------------------------------------------------------------------------
Moran Transportation Co. Mortgage Notes, 11.75%, 7/15/04^ 4,000,000 4,390,000
Miscellaneous - 1.88%
- -----------------------------------------------------------------------------------------------
Hines Horticulture Senior Sub. Notes, 11.75%, 10/15/05... 1,951,000 2,019,285
Iron Mountain, Inc. Senior Sub. Notes, 10.125%, 10/01/06. 2,500,000 2,625,000
Mosler, Inc. Senior Notes, 11%, 4/15/03.................. 10,340,000 8,272,000
Precise Technology Sen. Sub. Notes, 11.125%, 6/15/07..... 7,500,000 7,275,000
Specialty Equipment Senior Sub. Notes, 11.375%, 12/01/03. 14,620,000 15,460,650
Tokheim Corporation Senior Sub. Notes, 11.5%, 8/01/06.... 2,446,000 2,763,980
- ---------------------------------------------------------------------------------------------------
38,415,915
- --------------------------------------------------------------------------------------------------
Total Corporate Bonds-85.43% (cost-$1,965,930,138) 1,748,414,648
- ---------------------------------------------------------------------------------------------------
Foreign Bonds-
Foreign Bonds - 4.90%
- ------------------------------------------------------------------------------------------------------
Greycoat PLC Finsbury Circus, 12.50%, 4/01/02 GBP 10,000,000 14,615,000
Argentina GlobalBonds, 9.75%, 9/19/27.................... 32,751,000 26,937,698
Republic of Brazil Disc Ser Z-L,FRN,Libor +.8125%,4/15/24 38,000,000 22,063,750
Republic of Korea Unsub., 8.875%, 4/15/08................ 35,000,000 30,121,000
Venezuela Par, 6.75%, 3/31/20 ........................... 10,000,000 6,581,250
- ------------------------------------------------------------------------------------------------------
Total Foreign Bonds-4.90% (cost-$112,291,697) 100,318,698
- ------------------------------------------------------------------------------------------------------
Number ofMarket Value
Stocks - Shares (Note B)
- -------------------------------------------------------------------------------------------------------
Common Stock - 11.13%
Advantica Restaurant Group+.............................. 1,217,762 5,784,369
Bankers Trust NY^........................................ 350,000 20,650,000
Chase Manhattan Corp..................................... 450,000 19,518,750
<PAGE>
Common Stock-continued Market Value
Shares (Note B)
- --------------------------------------------------------------------------------------------------------
Chubb Corp^........................................... 500,000$ 31,500,000
Citicorp.............................................. 100,000 9,293,750
Crompton &Knowles Corp................................ 93,024 1,354,662
Darling International, Inc.+.......................... 745,530 2,609,355
Gaylord Container Corp.+.............................. 1,243,799 4,042,347
Grand Union Co.+...................................... 932,146 7,690,204
International Airline Support Group+.................. 224,540 1,305,139
Jamboree Office REIT.................................. 50,307 4,276,095
JPSCapital+........................................... 1,038,823 5,453,821
J P Morgan & Co.^..................................... 200,000 16,925,000
Leucadia National Corp................................ 242,608 7,111,447
Little Switzerland, Inc.+............................. 273,659 889,392
MAXXAM, Inc.+......................................... 200,000 10,925,000
Marvel Entertainment Group+........................... 460,000 66,700
NL Industries......................................... 1,000,000 19,375,000
Specialty Equipment Co.+.............................. 400,000 7,950,000
StoneContainer Corp.+ ................................ 259,740 2,240,257
USLeather, Inc+....................................... 490,000 6,094,375
WestPoint Stevens, Inc.+^............................. 1,270,000 38,735,000
- ----------------------------------------------------------------------------------------------------------
Total Common Stocks-11.13% (cost-$215,127,617)....... 227,840,646
Preferred Stocks - .17%
- ----------------------------------------------------------------------------------------------------------
American Restaurant Group, PIK 12%.................... 3,500 3,500,000
- ----------------------------------------------------------------------------------------------------------
Total Preferred Stocks-.17% (cost-$3,500,000)......... 3,500,000
- -----------------------------------------------------------------------------------------------------------
Warrants and Units Number of Market
Value
Name of Issuer.............................. Shares or Units (Note B)
- -----------------------------------------------------------------------------------------------------------
Warrants and Units - .08%+
- -----------------------------------------------------------------------------------------------------------
Cookies USA,Inc. Warrants............................. 630 1
Federated Dept. Stores C Warrants..................... 10,000 122,500
Federated Dept. Stores D Warrants..................... 25,000 312,500
Homeland Holding Corp. Warrants....................... 6,687 66
Wherehouse Entertainment A Warrants................... 81,164 969,910
Wherehouse Entertainment B Warrants................... 14,091 109,093
Wherehouse Entertainment C Warrants................... 14,091 95,297
- ------------------------------------------------------------------------------------------------------------
Total Warrants and Units-.08% (cost-$1,097,193)...... 1,609,367
- ------------------------------------------------------------------------------------------------------------
...........Total Investments-101.71% (cost-$2,297,946,665) $2,081,683,359
==============================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
~ Non-income producing security due to default or bankruptcy filing
+ Non-income producing security
# Represents a zero coupon bond that converts to a fixed rate at a
designated future date.The date shown on the schedule of investments
represents the maturity date of the security and not the date of coupon
conversion.
^ Pledged to collateralize short-term borrowings (See Note F)
PIK Payment in Kind
GBP Principal denoted in British Pounds Sterling
Federal Tax Information:
At September 30, 1998, the aggregate cost of investment securities fo
income tax purposes was $2,298,045,395. Net unrealized depreciation aggregated
$216,362,036 of which $77,694,895 related to appreciated investment securities
and $294,056,931 related to depreciated investment securities. The Form 1099
you receive in January 1999 will show the tax status of all distributions paid
to your account in calendar 1998.
<PAGE>
Capital Gains Distribution:
Pursuant to section 852 of the Internal Revenue Code, the fund hereby
designates $36,664,245 as capital gain for its taxable year ended September 30,
1998.
Dividends Received Deductions for Corporations:
The fund has designated 7.145% of the distributions from net investment income
as qualifying for dividends received deduction for corporations.
<PAGE>
<TABLE>
<CAPTION>
The accompanying notes are an integral part of the financial statements.
=========================================================================================================================
September 30, 1998
- ---------------------------------------------------------------------------------------------------------------------------
Assets
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C>
Investments-at market value (cost $2,297,946,665)-Note B $2,081,683,359
Interest receivable 58,313,795
Receivable for securities sold 800,359
Receivable for shares of beneficial interest sold 3,744,199
Receivable for dividends 725,000
- ----------------------------------------------------------------------------------------------------------------------------
Total Assets 2,145,266,712
Liabilities
- ---------------------------------------------------------------------------------------------------------------------------
Notes payable 90,826,838
Payable for shares of beneficial interest repurchased 3,778,602
Trustee fees payable-Note C 2,576,345
Accrued expenses 1,418,284
IRAfees payable 11,030
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities 98,611,099
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets $2,046,655,613
============================================================================================================================
Net Assets Consist of (Note B):
Capital, at a $1.00 par value $ 196,523,494
Paid in surplus 2,019,936,840
Accumulated net investment income 9,892,802
Accumulated net realized gain on investments 36,565,505
Net unrealized depreciation of investments (216,263,028)
- ---------------------------------------------------------------------------------------------------------------------------
Net Assets, for 196,523,494 shares outstanding $2,046,655,613
===========================================================================================================================
Net Asset Value, offering price and redemption
price per share ($2,046,655,613/196,523,494 shares) $10.42
===========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The accompanying notes are an integral part of the financial statements
September 30, 1998
- -------------------------------------------------------------------------------------------------------------------------
Investment Income
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Interest $198,114,280
Dividends 13,897,782
Other Income 5,724,029
- ---------------------------------------------------------------------------------------------------------------------------
Total Income 217,736,091
Expenses
- ----------------------------------------------------------------------------------------------------------------------------
Trustee fees-Note C $11,565,681
Interest-Note F 2,004,261
Administrative expenses and salaries 933,994
Printing, postage and stationary 388,586
Registration and filing fees 360,893
Computer and related expenses 304,802
Custodian fees 135,389
Legal fees 119,324
Auditing fees 72,834
Telephone 72,330
Other expenses 32,951
Insurance 21,960
- --------------------------------------------------------------------------------------------------------------------------
Total Expenses 16,013,005
- --------------------------------------------------------------------------------------------------------------------------
Net Investment Income 201,723,086
Realized and Unrealized Gain (Loss) on Investments-Note B:
Net realized gain from investment transactions 37,473,557
Change in unrealized appreciation/depreciation of investments
and assets and liabilities in foreign currencies (339,027,495)
- -------------------------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets Resulting from Operations $(99,830,852)
=========================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended September 30 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets
From Operations:
Net investment income $201,723,086 $138,186,031
Net realized gain from investment transactions 37,473,557 13,597,710
- --------------------------------------------------------------------------------------------------------------------------
Change in unrealized appreciation of investments (339,027,495) 118,703,536
- -------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations (99,830,852) 270,487,277
Distributions to Shareholders from Net Investment Income(191,510,245) (140,252,504)
($.96 and $1.00 per share, respectively)
- -------------------------------------------------------------------------------------------------------------------------
From Net Trust Share Transactions-Note D 263,814,943 743,463,087
- --------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) in Net Assets (27,526,154) 873,697,860
- --------------------------------------------------------------------------------------------------------------------------
Beginning of Period 2,074,181,767 1,200,483,907
- ---------------------------------------------------------------------------------------------------------------------------
End of Period (including undistributed net investment
income of $9,892,802 and $861,454, respectively) $2,046,655,613 $2,074,181,767
===========================================================================================================================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
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 B-Significant Accounting Policies
Significant accounting policies of the Trust are as follows:
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 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. Securities may also be valued
on the basis of valuations furnished by a pricing service that uses 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.
Federal Income Taxes: The Trust does not provide for federal income
taxes as it is the policy of the Trust to distribute its taxable income
for each year in taxable dividends so as to qualify as a regulated investment
company under the Internal Revenue Code.
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. These differences are primarily
due to differing treatments for capital loss carryforwards and losses deferred
due to wash sales. Permanent book and tax differences relating to shareholder
distributions will result in reclassifications to paid-in surplus. The
Trust s distributions and dividend income are recorded on the ex-dividend
date. Interest income, which includes accretion of market discount, is accrued
as earned. Original issue discount on bonds and step-up bonds is accreted
according to the effective-yield method. 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 by means of the effective-yield method.
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 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.
Note C-Trustees 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.
Note D-Shares of Beneficial Interest
At September 30, 1998, there were unlimited shares of beneficial interest
authorized with a par value of $1. Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1998 September 30, 1997
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Shares sold 112,631,489 $1,326,752,223 118,017,888 $1,336,261,827
Shares issued to shareholders
in reinvestment of distributions from
net investment income 11,128,921 129,960,243 8,383,229 94,018,470
123,732,799 1,456,712,466 126,401,117 1,430,280,297
Shares repurchased (103,164,662) (1,192,897,523)(60,675,135) (686,817,210)
Net Increase 20,595,748 $263,814,943 65,725,982 $743,463,087
</TABLE>
Note E-Purchases and Sales of Investments
Purchases and sales of securities, other than short-term and government
securities, aggregated $1,875,893,801 and $1,426,188,269,respectively,
for the period ended September 30, 1998.
Note F-Short-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 30,1998 the Trust has unused lines
of credit amounting to $129,609,233 and used line of credit amounting to
$85,390,767. The committed lines of credit may be terminated at the banks
option at their annual renewal dates. The following information relates to
aggregate short-term borrowings for the year ended September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Maximum amount outstanding at any month end $186,852,123
Average amount outstanding (total of daily outstanding principal balances
divided by number of days with debt outstanding during the period) $78,314,493
Average annualized interest rate 6.625%
</TABLE>
Interest expense includes commitment fees of $55,077. Under the most
restrictive arrangement, the Trust must pledge to the banks securities having
a market value equal to or greater than 200% of the total bank borrowings.
Securities with principal amounts and market values aggregating $445,123,000
and $437,612,713, respectively, have been pledged to collateralize short-term
borrowings.
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
Per Share Data 1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value:
Beginning of
Period......... $11.79 $10.90 $10.33$10.02 $9.94 $9.50 $8.83 $8.81 $11.18 $12.16
Income From
Investment
Operations:
Net investment
income......... 1.01 .98 .98 .98 .98 1.04 1.15 1.32 1.45 1.50
Net realized and
unrealized gain
loss) on
investment..... (1.42) .91 .58 .29 .09 .42 .67 .04 (2.39) (.94)
Total from
investment
operations..... (.41) 1.89 1.56 1.27 1.07 1.46 1.82 1.36 (.94) .56
Less Distributions:
Net investment
income........ (.96) (1.00) (.99) (.96) (.99) (1.02) (1.15) (1.34)(1.43) (1.54)
Net Asset Value:
End ofPeriod... $10.42 $11.79 $10.90 $10.33$10.02 $9.94 $9.50 $8.83 $8.81 $11.18
Total Return..... (4.13)%18.16% 15.98% 13.44% 10.96% 16.25% 21.85% 17.63%(8.87)% 4.87%
Ratios & Supplemental Data
Net assets end of
period (in
millions).....$2,046.7 $2,074.2 $1,200.5 $797.6 $582.1$475.0 $452.8 $310.7 $277.1 $385.4
Ratio of operating
expenses to
average
net assets.... .61% .64% .66% .67% .70% .73% .79% .88% .78% .72%
Ratio of interest
expense to average
net assets..... .09% .01% .03% .35% .36% .48% .65% 1.01% .69% .61%
Ratio of net investment
income to average
net assets .... 8.73% 8.65% 9.41% 9.77% 9.37% 10.53% 12.36% 15.38%14.35% 12.68%
Portfolio turnover
rate........... 63.80% 33.44% 32.01% 40.58% 73.36% 75.72% 59.41% 33.77%21.23% 33.61%
</TABLE>
<PAGE>
To the Shareholders and Trustees of
Northeast Investors Trust
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments owned, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Northeast Investors
Trust(the fund) at September 30, 1998, and the results of its operations,
the changes in its net assets and the financial highlights for the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
financial statements) are the responsibility of the fund s management; our
responsibility is to express an opinion on these financial highlights based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of investments owned at September 30, 1998 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Boston, Massachusetts
November 5, 1998
Trustees
Ernest E. Monrad C. Earl Russell
Robert B. Minturn, Jr. Fred L. Glimp
Bruce H. Monrad J. Murray Howe
Office
Ernest E. Monrad, Chairman
William A. Oates, Jr., President
Gordon C. Barrett, Executive Vice President & Treasurer
Bruce H. Monrad, Executive Vice President
Robert B. Minturn, Jr., Vice President & Clerk
Kelly A. Beatty, Asst. Vice President
Lisa A. Hislop, Asst. Vice President
Lynn A. Manton, Asst. Vice President
Nancy Holler, Asst. Vice President
Custodian
- -------------------------------------------------------------------------------
200 Clarendon Street
Boston, MA 02116
Legal Counsel
- --------------------------------------------------------------------------------
Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C.
One Financial Center
Boston, Massachusetts 02111
Transfer Agent
- -------------------------------------------------------------------------------
Northeast Investors Trust
50 Congress Street
Boston, Massachusetts 02109
Independent Accountants
One Post Office Square
Boston, Massachusetts 02109
This report is prepared for the information of the shareholders of Northeast
Investors Trust and must not be given to others unless preceded or
accompanied by a copy of the current Prospectus by which all offerings of
the Trust s shares are made. It should be noted in reading this report and
the letter to shareholders that the record of past performance is not a
representation as to the Trust s future performance, and that the Trust s
investments are subject to market risks.
Shares of the Fund are sold to investors at net asset value by
Northeast Investors Trust
50 Congress Street
Boston, Massachusetts 02109
800-225-6704
617-523-3588
The share price for Northeast Investors Trust is quoted daily in the Mutual
Funds section of most major newspapers under several abbreviations including:
NE Investors, NE Inv Tr.
