<PAGE>
ALLMERICA FUNDS
INVESTMENT GRADE INCOME FUND
Semi-Annual Report to Shareholders
Period Ended June 30, 1996
[LOGO OF ALLMERICA FINANCIAL APPEARS HERE]
<PAGE>
- --------------------------------------------------------------------------------
Investment Grade Income Fund
- --------------------------------------------------------------------------------
Echoing the unsettled mood of the overall bond market, the Investment Grade
Income Fund's total return for the first half of the year was -1.74%. This
return underperformed the Lehman Brothers Aggregate Bond Index for the period.
Throughout the first half of the year, the Fund's total return was negatively
impacted by its sensitivity to interest rate risk. When the economy gathered
steam and rates increased, the Fund lost slightly more ground than the
benchmark.
However, the Fund also benefited from strategic allocations in top-performing
sectors of the corporate bond market. For example, the Fund benefited from
owning airline issues - an industry which forecasted profits for the first time
since 1979. The Fund also invested in cable/media issues, whose value was
spurred by continuing consolidations as well as the resolution of credit-related
issues for several industry leaders.
During the second quarter, the Fund's management did adjust the portfolio mix
to capitalize on emerging trends. It took profits on Delta Air Lines, thereby
reducing its long-standing airline holdings. Some of these profits were funneled
into mortgage-backed securities - reflecting management's confidence that this
sector will perform well as interest rates remain relatively stable. Management
also boosted the Fund's holdings in the cable/media industry with the purchase
of 30-year Telecommunications, Inc. (TCI) bonds.
For the remainder of the year, the Fund's management expects the corporate
sector to continue benefiting from a strengthening economy and brisk demand. At
mid year, over one-third of the Fund's assets were allocated to corporate bonds
- - with a heavy concentration in BBB - and split-rated securities. The Fund is
now also heavily weighted toward mortgage-backed securities, although management
would only look to increase holdings selectively during period of temporary
spread widening.
INVESTMENT SUB-ADVISER:
Allmerica Asset Management, Inc.
ABOUT THE FUND:
The Fund's objective is to generate high level of total return, while preserving
shareholder capital.
PERFORMANCE:
Net total return for the six month period ending June 30, 1996:
Investment Grade Income Fund -1.74%
Lehman Brothers Aggregate
Bond Index -1.21%
PORTFOLIO COMPOSITION:
As of June 30, 1996, the sector allocation of net assets was:
[PIE CHART APPEARS HERE]
<TABLE>
<CAPTION>
<S> <C>
US Government
& Agency
Obligations 50.97%
Corporate
Notes & Bonds 34.41%
Asset-Backed
Securities 10.13%
Cash Equivalents
& Other 5.42%
Net Assets &
Liabilities = (0.93%)
</TABLE>
- --------------------------------------------------------------------------------
Growth of a $10,000 Investment since 1992
- --------------------------------------------------------------------------------
9/92 6/96
Investment Grade Income Fund $10,000 $11,863
Lehman Brothers Aggregate
Bond Index $10,000 $13,940
================================================================================
A GUIDE TO REVIEWING PERFORMANCE The chart above compares the growth in value
of a $10,000 investment in the Investment Grade Income Fund, since its
inception on August 21, 1992, to a similar group of investments: the Lehman
Brothers Aggregate Bond Index. Performance benchmarking allows investors to
objectively measure their fund's performance.
================================================================================
The Lehman Brothers Aggregate Bond Index is an unmanaged index of average yield
U.S. investment grade bonds. Performance numbers are net of all fund operating
expenses.
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS
June 30, 1996 (Unaudited)
Value
Par Value (Note 2)
- --------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 50.97%
Federal National Mortgage
Association (C) - 11.76%
<C> <S> <C>
$ 56,057 9.50%, 11/01/04 $ 58,912
44,123 9.00%, 02/01/10 46,035
75,630 6.50%, 09/01/10 73,248
31,720 8.00%, 04/01/22 32,165
38,227 6.50%, 11/01/23 35,993
122,234 7.00%, 11/01/23 118,030
139,142 6.50%, 01/01/24 130,576
24,428 7.00%, 02/01/24 23,543
69,107 7.50%, 10/01/25 68,220
110,000 8.00%, 06/13/26 110,825
----------
697,547
==========
Federal Home Loan
Mortgage Corporation (C) - 10.12%
37,300 9.50%, 03/01/01 39,022
18,434 6.50%, 06/01/04 18,315
20,105 6.50%, 08/01/04 20,071
75,053 7.50%, 01/01/07 75,704
41,468 8.00%, 04/01/07 42,354
195,892 7.00%, 08/01/10 193,545
67,312 8.75%, 05/01/17 69,811
74,288 9.50%, 08/01/19 79,198
60,573 8.50%, 06/01/25 62,200
----------
600,220
==========
U.S. Treasury Bonds - 10.06%
95,000 7.25%, 05/15/16 97,215
494,000 7.13%, 02/15/23 499,325
----------
596,540
==========
Government National
Mortgage Association (C) - 9.25%
86,441 9.50%, 02/15/06 91,427
48,707 9.00%, 10/15/08 51,720
22,176 6.50%, 06/15/09 21,601
19,512 8.00%, 08/15/22 19,756
127,202 6.50%, 11/15/23 119,134
177,402 7.50%, 01/15/26 174,851
70,729 7.50%, 04/15/26 69,668
----------
548,157
==========
U.S. Treasury Notes - 8.92%
100,000 5.38%, 05/31/98 98,672
225,000 7.50%, 10/31/99 232,349
55,000 7.75%, 01/31/00 57,329
25,000 7.50%, 05/15/02 26,172
120,000 5.75%, 08/15/03 114,281
----------
528,803
==========
Federal Home Loan Bank - 0.86%
50,000 7.89%, 12/23/97 51,235
----------
Total U.S. Government and
Agency Obligations 3,022,502
(Cost $2,998,690) ----------
CORPORATE NOTES AND BONDS - 34.41%
Banking and Finance - 9.61%
30,000 Advanta Corp., MTN
7.16%, 03/01/98 30,236
100,000 BCH Cayman Islands, Ltd.
Yankee Subordinated Notes, Guaranteed
6.50%, 02/15/06 92,208
50,000 Black & Decker Corp.
6.63%, 11/15/00 48,970
</TABLE>
1
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS, Continued
June 30, 1996 (Unaudited)
Value
Par Value (Note 2)
- --------------------------------------------------------------------------------
<C> <S> <C>
Banking and Finance (continued)
$ 50,000 FHP International Corp.
Senior Notes
7.00%, 09/15/03 $ 46,348
100,000 Ford Capital BV
9.38%, 01/01/98 104,193
50,000 General Motors Acceptance Corp.
7.00%, 03/01/00 50,255
50,000 Heller Financial, Inc.
7.75%, 05/15/97 50,639
50,000 Merita Bank, Ltd.
Yankee Subordinated Notes
6.50%, 01/15/06 46,482
50,000 Salomon, Inc.
7.25%, 05/01/01 49,876
50,000 Santander Financial Issuances, Ltd.
Guaranteed Subordinated Notes
7.75%, 05/15/05 50,767
----------
569,974
==========
Oil, Gas, and Petroleum - 6.90%
45,000 Cincinnati Gas & Electric Co.
7.20%, 10/01/23 40,990
50,000 Coastal Corp., Senior Debenture
9.75%, 08/01/03 56,366
50,000 Parker & Parsley Petroleum Co.
Senior Notes
8.88%, 04/15/05 53,796
50,000 Saga Petroleum
(Yankee Bonds - Norway)
8.40%, 07/15/04 (A) 52,403
30,000 Texas Utilities Electric Co.,
First Mortgage
7.38%, 10/01/25 27,644
50,000 Tosco Corp., First Mortgage, Series A
9.00%, 03/15/97 50,375
50,000 USX-Marathon Group, Inc.
8.88%, 09/15/97 51,338
75,000 Valero Energy Corp., MTN
7.50%, 05/31/01 76,439
----------
409,351
==========
Communications - 4.49%
50,000 GTE Corp., Debenture
8.85%, 03/01/98 51,839
35,000 GTE Corp., Debenture
8.75%, 11/01/21 38,684
50,000 News America Holdings, Inc.,
Guaranteed Senior Notes
9.13%, 10/15/99 53,216
50,000 TCI Communications, Inc.
7.88%, 02/15/26 44,037
25,000 Time Warner Entertainment Co., LP
Senior Debenture
8.38%, 03/15/23 24,341
30,000 Time Warner, Inc.
8.05%, 01/15/16 28,515
25,000 Time Warner, Inc., Debenture
9.15%, 02/01/23 25,849
----------
266,481
==========
Transportation - 2.79%
50,000 AMR Corp.
9.50%, 05/15/01 54,518
50,000 Consolidated Freightways, Inc.
9.13%, 08/15/99 52,487
55,000 United Air Lines, Inc.
9.00%, 12/15/03 58,297
----------
165,302
==========
Utilities - 2.57%
50,000 Empresa Electrica Pehuenche S.A.
(Yankee Note)
7.30%, 05/01/03 (A) 49,725
50,000 Peco Energy Corp.
7.50%, 01/15/99 50,864
50,000 Sithe/Independence Funding Corp.
9.00%, 12/30/13 (B) 51,412
----------
152,001
==========
</TABLE>
2
See Notes to Financial Statements.
----------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS, Continued
June 30, 1996 (Unaudited)
Value
Par Value (Note 2)
- --------------------------------------------------------------------------------
<C> <S> <C>
Industrials - 2.56%
$ 50,000 Cyprus Amax Minerals, Inc.
Senior Notes
9.88%, 06/13/01 $ 55,443
50,000 Chesapeake Corp., Debenture
7.20%, 03/15/05 48,227
50,000 Georgia Gulf Corp.
7.63%, 11/15/05 48,250
----------
151,920
==========
Processed Foods - 2.12%
50,000 Ralcorp Holdings, Inc.
8.75%, 09/15/04 51,405
75,000 Ralston Purina Co.
7.75%, 10/01/15 74,131
----------
125,536
==========
Securities Brokers,
Dealers, Exchanges - 1.72%
50,000 Donaldson Lufkin & Jenrette, Inc.
6.88%, 11/01/05 47,385
50,000 Paine Webber Group, Inc.
9.25%, 12/15/01 54,304
==========
101,689
----------
Manufacturing - 0.84%
50,000 Boise Cascade Corp., MTN
6.40%, 04/01/98 49,594
----------
Engineering and Construction - 0.81%
50,000 Pulte Corp.
7.00%, 12/15/03 48,274
----------
Corporate Notes and Bonds 2,040,122
(Cost $2,069,091) ----------
ASSET-BACKED SECURITIES - 10.13%
85,093 Contimortgage Home Equity Loan Trust
Series 1994-3, Mortgage Pass Through
Class A-1 REIT
7.63%, 05/15/09 85,465
50,000 First Plus Home Loan Trust
Series 1996-2
7.47%, 02/20/11 50,531
50,000 Green Tree Financial Corp.
Class A-3, Series 94-8
8.25%, 04/15/20 52,269
43,130 Green Tree Recreational
Equipment & Consumer Trust
5.55%, 02/15/18 42,389
37,373 NationsBank Auto Grantor Trust
Series 1995-A, Class B
6.00%, 06/15/02 37,175
50,000 Olympic Automobile Receivables Trust
Series 1996-A
5.85%, 07/15/01 49,328
50,000 Premier Auto Trust., Series 1995-4
Class A-4
6.00%, 05/06/00 49,703
50,000 Premier Auto Trust., Series 1996-2
Class A-3
6.35%, 01/06/00 50,000
50,000 Residential Asset Securitization Trust
7.75%, 07/25/26 49,391
50,000 Resolution Trust Corp., Series 1995-C1
Class A4C4
6.85%, 02/25/27 48,500
50,000 Structured Asset Securities Corp.
Series 1996-CFL
5.75%, 02/25/28 48,922
21,466 Western Financial 1994-2 Grantor Trust,
Class A2
6.38%, 09/01/99 21,554
15,438 Western Financial 1995-2 Grantor Trust,
Class A2
7.10%, 07/01/00 15,674
==========
Total Asset-Backed Securities 600,901
(Cost $602,317) ----------
</TABLE>
3
See Notes to Financial Statements.
- --------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, Continued
June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
Value
Par Value (Note 2)
- --------------------------------------------------------------------------------
BRADY BOND - 0.77%
<C> <S> <C>
$ 50,000 Republic of Colombia
7.25%, 02/23/04 $ 45,500
----------
Total Brady Bond 45,500
(Cost $49,598) ==========
Shares
INVESTMENT COMPANY - 4.65%
275,423 Goldman Sachs Financial Square Prime
Obligations Portfolio Fund 275,423
==========
Total Investment Company 275,423
(Cost $275,423) ----------
Total Investments - 100.93% 5,984,448
(Cost $5,995,119) ----------
Net Other Assets and Liabilities - (0.93)% (54,990)
----------
Net Assets - 100.00% $5,929,458
==========
</TABLE>
- --------------------------------------------------------------------------------
(A) U.S. Currency denominated
(B) Securites exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold, in transactions exempt from
registration, to qualified institutional buyers. At June 30, 1996, these
securities amounted to $51,412 or 0.87% of net assets.
(C) Pass Through Certificates
MTN Medium Term Notes
REIT Real Estate Investment Trust
4
See Notes to Financial Statements
---------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1996 (Unaudited)
ASSETS:
<S> <C>
Investments (Note 2):
Investments at cost.................................... $5,995,119
Net unrealized appreciation (depreciation)............. (10,671)
----------
Total investments at value............................ 5,984,448
Cash...................................................... 4,601
Receivable for investments sold........................... 115,788
Interest and dividends receivable......................... 82,135
----------
Total Assets......................................... 6,186,972
==========
LIABILITIES:
Advisory fee payable (Note 3)............................. 2,632
Payable for investments purchased......................... 209,900
Accrued expenses and other payables....................... 44,982
----------
Total Liabilities.................................... 257,514
----------
NET ASSETS................................................... $5,929,458
==========
NET ASSETS consist of:
Par value (Note 4)........................................ $ 620
Paid-in capital........................................... 6,926,055
Undistributed net investment income....................... 5,468
Accumulated (distribution in excess of) net
realized gain (loss) on investments sold............... (992,014)
Net unrealized appreciation (depreciation) of investments. (10,671)
----------
TOTAL NET ASSETS............................................. $5,929,458
==========
Shares of beneficial interest outstanding (unlimited shares
with par value of $0.001)................................... 619,879
NET ASSET VALUE, redemption price per share (Net Assets
/Shares Outstanding)........................................ $ 9.57
==========
MAXIMUM offering price per share (100 / 95.50 of NAV)........ $ 10.02
==========
</TABLE>
5
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1996 (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest (Note 2).......................................... $ 211,443
Dividends (Note 2)......................................... 2,982
----------
Total investment income.................................. 214,425
----------
EXPENSES:
Investment advisory fees (Note 3).......................... 17,757
Custodian fees............................................. 4,391
Fund accounting fees (Note 3).............................. 12,894
Audit fees................................................. 3,839
Trustees' fees and expenses (Note 3)....................... 68
Amortization of organization costs (Note 2)................ 2,262
Reports to shareholders.................................... 697
Insurance.................................................. 173
Miscellaneous expense...................................... 1,260
----------
Total expenses........................................... 43,341
----------
NET INVESTMENT INCOME......................................... 171,084
----------
NET REALIZED AND UNREALIZED
GAIN(LOSS) ON INVESTMENTS (Note 2):
Net realized gain (loss) on investments sold............... (600)
Net change in unrealized appreciation
(depreciation) of investments............................ (278,825)
----------
NET GAIN(LOSS) ON INVESTMENTS................................. (279,425)
----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS.............................. $ (108,341)
==========
</TABLE>
6
See Notes to Financial Statements.
---------------------------------------------------
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- ----------------------------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, Year Ended
1996 December 31,
(Unaudited) 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS at beginning of period............................. $ 6,037,799 $ 5,259,967
------------- -----------
Increase (Decrease) in net assets
resulting from operations:
Net investment income...................................... 171,084 247,300
Net realized gain (loss) on investments sold............... (600) 93,844
Net change in unrealized appreciation
(depreciation) of investments.............................. (278,825) 436,688
------------- -----------
Net increase (decrease) in net assets resulting
from operations.......................................... (108,341) 777,832
------------- -----------
Distributions to shareholders from:
Net investment income...................................... (171,084) (247,300)
------------- -----------
Total Distributions...................................... (171,084) (247,300)
------------- -----------
Capital Share Transactions:
Net proceeds from sales of shares.......................... -- --
Issued to shareholders in reinvestment of dividends........ 171,084 247,300
Cost of shares repurchased................................. -- --
------------- -----------
Net increase (decrease) from capital share transactions.. 171,084 247,300
------------- -----------
Total increase (decrease) in net assets.................. (108,341) 777,832
------------- -----------
NET ASSETS at end of period(including line A)................. $ 5,929,458 $ 6,037,799
============= ===========
(A) Undistributed net investment income....................... $ 5,468 $ 5,468
============= ===========
OTHER INFORMATION:
Share Transactions:
Sold....................................................... -- --
Issued to shareholders in reinvestment of dividends........ 17,675 25,622
Repurchased................................................ -- --
------------- -----------
Net increase (decrease) in shares outstanding............ 17,675 25,622
============= ===========
</TABLE>
7
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For a Share Outstanding Throughout Each Period
- -------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, Year Ended December 31,
(Unaudited)
1996 1995 1994 1993 1992(A)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period......... $ 10.03 $ 9.12 $ 10.10 $ 9.69 $ 10.00
------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income (B)................ 0.28 0.42 0.54 0.63 0.22
Net realized and unrealized gain (loss)
on investments........................ (0.46) 0.91 (0.98) 0.41 (0.31)
------- ------ ------- ------- -------
Total from Investment Operations:.... (0.18) 1.33 (0.44) 1.04 (0.09)
------- ------ ------- ------- -------
Less Distributions:
Dividends from net investment income..... (0.28) (0.42) (0.54) (0.63) (0.22)
------- ------ ------- ------- -------
Net increase (decrease) in net asset value... (0.46) 0.91 (0.98) 0.41 (0.31)
------- ------ ------- ------- -------
Net Asset Value, end of period............... $ 9.57 $ 10.03 $ 9.12 $ 10.10 $ 9.69
======= ======= ======= ======= =======
Total Return (C)............................. (1.74)%** 14.82% (4.46)% 10.86% (0.72)%* *(D)
Ratios/Supplemental Data:
Net Assets, end of period(000's)............. $ 5,929 $ 6,038 $ 5,260 $ 12,245 $ 5,458
Ratios to average net assets:
Net investment income (B)................... 5.78%* 4.38% 5.69% 6.11% 6.70%*
Operating expenses (B)...................... 1.46%* 3.04% 1.29% 1.20% 1.20%*
Gross management fee........................ 0.60%* 0.60% 0.60% 0.60% N/A
Net management fee.......................... 0.60%* 0.60% 0.00% 0.00% N/A
Portfolio Turnover Rate...................... 48% 135% 129% 102% 130%
</TABLE>
- -----------------------------------------------
* Annualized
** Not annualized
(A) The Fund commenced operations on August 21, 1992.
(B) Net investment income per share and the operating expense ratios before
reimbursement of fees by the investment adviser for the years ended
December 31, 1994, 1993 and 1992 were $0.47 and 1.97%, $0.53 and 2.16% and
$0.17 and 2.70% (annualized), respectively.
(C) Total returns do not include the one time sales charge.
(D) Unaudited
8
See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 1996
1. ORGANIZATION
Allmerica Funds (the "Trust") was organized as a Massachusetts business trust
on June 4, 1990 and is registered under the Investment Company Act of 1940, as
amended, as an open-end, diversified management investment company. The Trust
offers one managed investment portfolio, the Investment Grade Income Fund (the
"Portfolio"). The Declaration of Trust permits the Trustees to create additional
series each of which may issue one or more classes of shares. The accompanying
financial statements and financial highlights are those of the Investment Grade
Income Fund.
2. SIGNIFICANT ACCOUNTING POLICIES
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. The following is a summary of
significant accounting policies which are in conformity with generally accepted
accounting principles consistently followed by the Portfolio in the preparation
of its financial statements.
Security Valuation: Corporate debt securities and debt securities of the U.S.
Government and its agencies (other than short-term investments) are valued by an
independent pricing service approved by the Board of Trustees which utilizes
market quotations and transactions, quotations from dealers and various
relationships among securities in determining value. If not valued by a pricing
service, such securities are valued at prices obtained from independent brokers.
Investments with prices that cannot be readily obtained are carried at fair
value as determined in good faith under consistently applied procedures
established by and under the supervision of the Board of Trustees. Short-term
investments that mature in 60 days or less are valued at amortized cost.
Security Transactions and Investment Income: Security transactions are
recorded on the trade date. Net realized gains and losses from security
transactions are recorded on the basis of identified cost. Interest income is
recorded on the accrual basis and consists of interest accrued and, if
applicable, discount earned less premiums amortized. Dividend income is recorded
on the ex-dividend date.
9
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
Federal Income Taxes: The Portfolio intends to continue to qualify as a
"regulated investment company" under Subchapter M of the Internal Revenue Code
of 1986, as amended. By so qualifying, the Portfolio will not be subject to
Federal income taxes to the extent it distributes all of its taxable income and
net realized gain for the tax year ending December 31. In addition, by
distributing during each calendar year substantially all of its net investment
income, capital gains and certain other amounts, if any, the Portfolio will not
be subject to Federal excise tax. Therefore, no Federal income tax provision is
required.
Paid-in capital, undistributed net investment income and accumulated net
realized gain (loss) have been adjusted in the Statement of Assets and
Liabilities for permanent book-tax differences for the year ended December 31,
1995.
Distributions to Shareholders: Dividends from net investment income are
declared daily and paid monthly by the Portfolio. Net realized capital gains, if
any, are declared and paid at least annually. The distributions are recorded on
the ex-dividend date. 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 book and
tax treatments in the timing of the recognition of gains or losses on
securities, including "Post October Losses" (Note 7) and permanent differences
due to differing treatment for paydown gains/losses on certain securities,
market discounts and losses deferred due to wash sales. Any taxable income or
gain remaining at fiscal year end will be distributed in the following year.
Permanent book-tax differences, if any, are not included in ending
undistributed net investment income for the purpose of calculating net
investment income per share in the Financial Highlights.
Organization Costs: The Portfolio bears all costs in connection with its
organization, including the fees and expenses of registering and qualifying its
shares for distribution under Federal and state securities regulations. All such
costs are being amortized using the straight-line method over a period of five
years beginning with the commencement of the Portfolio's operation.
3. INVESTMENT ADVISORY, ADMINISTRATION
AND OTHER RELATED PARTY TRANSACTIONS
Allmerica Investment Management Company, Inc. (the "Manager"), a wholly-owned
subsidiary of First Allmerica Financial Life Insurance Company ("First
Allmerica"), is the Investment Adviser of the Portfolio. The Manager
administers all aspects of the Portfolio's day-to-day operations, subject to the
supervision of the Board of Trustees. Under the terms of the management
agreement, the Portfolio pays management fees, calculated daily and payable
monthly, at an annual rate of 0.60% of the Portfolio's average daily net asset
value.
10
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
Under the terms of the sub-advisory agreement with the Manager, Allmerica
Asset Management, Inc. ("AAM") manages the investment portfolio for the
Portfolio. Fees related to these services are borne directly by the Manager.
The Manager has entered into an Administrative Services Agreement with First
Data Investor Services Group, Inc. ("FDISG"), a wholly-owned subsidiary of First
Data Corporation, whereby FDISG performs administrative services for the
Portfolio and is entitled to receive an administrative fee and certain out-of-
pocket expenses. The Manager is solely responsible for the payment of the
administrative fee to FDISG. In a separate agreement, FDISG receives separate
fees from the Portfolio for certain fund accounting services provided in its
capacity as pricing and bookkeeping agent.
The Portfolio pays no salaries or compensation to any of its officers.
Trustees who are not directors, officers, or employees of the Trust or the
Investment Adviser are reimbursed for their travel expenses in attending
meetings of the Trustees, and receive quarterly meeting and retainer fees for
their services. Such amounts are paid by the Trust.
4. SHARES OF BENEFICIAL INTEREST
The Trust's Declaration of Trust authorizes the Trustees to issue an unlimited
number of shares of beneficial interest for the Portfolio, with a par value of
$0.001. It allows for one or more classes of shares within the series, which,
regardless of class designation represent an equal proportionate interest in the
Portfolio with each other share of that series. As of June 30, 1996 and
throughout the period, Allmerica Investments, Inc., a wholly-owned subsidiary of
First Allmerica, owned 100% of the Portfolio's shares outstanding.
11
- ---------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (Continued)
5. PURCHASES AND SALES OF SECURITIES
The cost of purchases and proceeds from sales of investment securities,
excluding short-term investments, for the Portfolio, for the six months ended
June 30, 1996 were as follows:
Purchases Sales
Other Government Other Government
- --------------------------------------------------------------------------------
$800,431 $2,407,920 $340,442 $2,396,072
At six months ended June 30, 1996, aggregate gross unrealized appreciation for
all securities of the Portfolio in which there was an excess of value over tax
cost and aggregate gross unrealized depreciation for all securities in which
there was an excess of tax cost over value were as follows:
Tax Basis
Net Unrealized
Unrealized Unrealized Appreciation
Appreciation Depreciation (Depreciation) Cost
- --------------------------------------------------------------------------------
$ 97,580 $ (108,251) $ (10,671) $5,995,119
6. CAPITAL LOSS CARRYFORWARD
As of December 31, 1995, the Portfolio had available for Federal tax purposes
capital loss carryforwards of $11,905, $629,070 and $306,802, expiring December
31, 2000, December 31, 2002 and December 31, 2003, respectively.
7. POST OCTOBER LOSSES.
Under current tax law, certain capital and net foreign exchange losses realized
after October 31 may be deferred and treated as occurring on the first day of
the following fiscal year. For the fiscal year ended December 31, 1995, the
Portfolio elected to defer capital losses occurring between November 1, 1995 and
December 31, 1995 in the amount of $18,240.
12
--------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
Investment Manager
Allmerica Investment Management Co., Inc.
440 Lincoln Street
Worcester, MA 01653
Independent Accountant
Price Waterhouse LLP
160 Federal Street
Boston, MA 02110
Custodian
Bankers Trust Company
16 Wall Street
New York, NY 10005
Legal Counsel
Ropes & Gray
One International Place
POBox 5108
Boston, MA 02110
Administrator
First Data Investor Services Group
4400 Computer Drive
Westboro, MA 01581
Officers of Allmerica Funds
Richard M. Reilly, President
Thomas P. Cunningham, Treasurer
General Distributor
Allmerica Investments, Inc.
440 Lincoln Street
Worcester, MA 01653
Investment Sub-Adviser
Allmerica Asset Management, Inc.
440 Lincoln Street
Worcester, MA 01653
Board of Trustees of Allmerica Funds
John F. O'Brien, Chairman
Russell E. Fuller
Gordon Holmes, CPA
Bruce E. Langton
John P. Kavanaugh
Attiat F. Ott
Richard M. Reilly
Ranne P. Warner
Thomas S. Zocco
13
- -------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
ALLMERICA INVESTMENT GRADE INCOME FUND
- --------------------------------------------------------------------------------
REGULATORY DISCLOSURES
- --------------------------------------------------------------------------------
The performance data quoted represents past performance and the investment
return and principal value of an investment will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
This report is not authorized for distribution to prospective purchasers of
Allmerica Funds Investment Grade Income Fund which includes information related
to charges and expenses.
14
See Notes to Financial Statements
---------------------------------------------------------
