<PAGE>
ALLMERICA FUNDS
INVESTMENT GRADE INCOME FUND
Annual Report to Shareholders
Year Ended December 31, 1996
[LOGO OF ALLMERICA FINANCIAL APPEARS HERE]
<PAGE>
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Investment Grade Income Fund
- --------------------------------------------------------------------------------
INVESTMENT SUB-ADVISER:
Allmerica Asset Management, Inc.
ABOUT THE FUND: 002
The Fund's objective is to generate a high level of total return, as is
consistent with prudent investment management.
PORTFOLIO COMPOSITION:
As of December 31, 1996, the sector allocation of net assets was:
[PIE CHART APPEARS HERE]
Corporate Notes & Bonds 36.68%
U.S. Government & Agency Obligations 45.93%
Asset-Backed Securities 14.62%
Cash Equivalents & Other 3.05%
Net Other Assets & Liabilities (0.28%)
The Investment Grade Income Fund is a porfolio of the Allmerica Funds.
Past performance is no guarantee of future results. 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.
Performance numbers for the fund are net of all fund operating expenses. The
Lehman Brothers Aggregate Bond Index is an unmanaged index of average yield U.S.
investment grade bonds.
Reflecting the general mood of the 1996 bond market, the Investment Grade
Income Fund turned in a 2.32% total return, which is less than its benchmark,
the Lehman Brothers Aggregate Bond Index.
The Fund's total return was negatively impacted by its sensitivity to interest
rate risk, as was the entire bond market. However, the Fund's management was
able to stymie further losses by continuing to emphasize certain niches of the
fixed income market. Specifically, management favored corporate, mortgage-backed
and asset-backed securities, increasing total exposure in these sectors from 64%
to 80% throughout the year.
The decision to overweight the Fund in corporate issues proved to be a
particularly sound strategy, as this segment of the bond market was one of
1996's few stellar performers. Among the top-returning corporate sectors were
Energy, driven by stabilizing oil prices, and Airlines, benefiting from the
first industry profits since 1979. The Fund was heavily invested in both of
these sectors.
The Fund moved from an underweighted to an overweighted position in mortgage-
backed securities in the first half of the year. This sector of the market
outperformed comparable Treasury securities by nearly one percentage point and
careful selection of seasoned discount passthrough securities allowed the Fund
to capture some of these incremental returns. The Fund also added to its
holdings in asset-backed issues, which served as higher yielding alternatives to
shorter maturity corporate bonds.
In the fourth quarter, the Fund added a new type of corporate fixed income
security to its holdings - the bank trust Preferred. For the issuer, these
securities combine the tax treatment of debt securities with the accounting
treatment of equities. While believing most of these new issues to be fully
valued, the management did purchase one bank trust Preferred from Zions Bancorp.
As the Investment Grade Income Fund moves into 1997, the Fund's managers will
continue to seek opportunities for high total return while minimizing risk.
[LINE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Growth of a $10,000 Investment since 1992
9/92 12/96
<S> <C> <C>
Investment Grade Income Fund $9,000 $12,354
Lehman Brothers Aggregate Bond Index $10,000 $14,102
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns
Years ended December 31, 1996 1 year 5 year Life of Fund
<S> <C> <C> <C>
Investment Grade Income Fund 2.32% - 4.96%
Lehman Brothers Aggregate Bond Index 3.61% 7.03% 6.75%
</TABLE>
<PAGE>
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Allmerica Investment Grade Income Fund
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PORTFOLIO OF INVESTMENTS . DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Ratings Value
Par Value (Unaudited) (Note 2)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 45.93%
Federal National Mortgage Association - 15.69%
$ 73,579 7.37%, 08/17/03, Class A, Series 1996-M6 CMO,
REMIC (B) Aaa $ 75,649
47,503 9.50%, 11/01/04, Pool # 070452 (B) Aaa 49,922
38,813 9.00%, 02/01/10, Pool # 303165 (B) Aaa 40,631
73,405 6.50%, 09/01/10, Pool # 327824 (B) Aaa 72,168
30,342 8.00%, 04/01/22, Pool # 124267 (B) Aaa 31,117
58,968 8.00%, 01/01/23, Pool # 125178 (B) Aaa 60,405
49,243 8.00%, 04/01/23, Pool # 124834 (B) Aaa 50,443
36,825 6.50%, 11/01/23, Pool # 050929 (B) Aaa 35,318
117,251 7.00%, 11/01/23, Pool # 050930 (B) Aaa 115,125
45,042 7.00%, 11/01/23, Pool # 249703 (B) Aaa 44,225
133,970 6.50%, 01/01/24, Pool # 050965 (B) Aaa 128,485
23,481 7.00%, 02/01/24, Pool # 050993 (B) Aaa 23,056
67,687 7.50%, 10/01/25, Pool # 321152 (B) Aaa 67,739
120,000 7.50%, 12/01/26, Pool # 362034 (B) Aaa 119,924
55,000 7.50%, 12/01/26 (C) Aaa 54,965
--------------
969,172
--------------
Federal Home Loan Mortgage Corporation (B) - 10.62%
31,132 9.50%, 03/01/01, Pool # 200029 Aaa 32,485
12,833 6.50%, 06/01/04, Pool # 548801 Aaa 12,754
16,099 6.50%, 08/01/04, Pool # 181863 Aaa 16,024
68,503 7.50%, 01/01/07, Pool # E00071 Aaa 69,718
37,190 8.00%, 04/01/07, Pool # 170014 Aaa 38,250
186,182 7.00%, 08/01/10, Pool # E20187 Aaa 186,337
111,324 7.00%, 08/01/11, Pool # E65030 Aaa 111,254
49,608 7.90%, 07/01/16, Pool # W30001 Aaa 51,980
63,498 8.75%, 05/01/17, Pool # A00870 Aaa 66,685
65,410 9.50%, 08/01/19, Pool # 555229 Aaa 70,356
--------------
655,843
--------------
U.S. Treasury Bonds - 9.80%
110,000 7.25%, 05/15/16 Aaa 116,145
469,000 7.13%, 02/15/23 Aaa 489,664
--------------
605,809
--------------
Government National Mortgage Association - 4.71%
74,783 9.50%, 02/15/06, Pool # 780238 Aaa 79,582
20,675 6.50%, 06/15/09, Pool # 376548 Aaa 20,475
42,744 9.00%, 10/15/08, Pool # 025495 (B) Aaa 45,655
17,427 8.00%, 08/15/22, Pool # 323199 (B) Aaa 17,906
124,747 8.00%, 09/15/26, Pool # 431329 (B) Aaa 127,242
--------------
290,860
--------------
U.S. Treasury Notes - 4.28%
110,000 5.88%, 03/31/99 Aaa 109,897
10,000 7.50%, 10/31/99 Aaa 10,372
20,000 7.75%, 01/31/00 Aaa 20,928
25,000 7.50%, 05/15/02 Aaa 26,434
100,000 5.75%, 08/15/03 Aaa 97,000
--------------
264,631
--------------
Federal Home Loan Bank - 0.83%
50,000 7.89%, 12/23/97 Aaa 50,992
--------------
Total U.S. Government
and Agency Obligations 2,837,307
(Cost $2,762,691) --------------
CORPORATE NOTES AND BONDS - 36.68%
Finance - 9.89%
30,000 Advanta Corp., Series A, MTN
7.16%, 03/01/98 Baa 30,299
100,000 BCH Cayman Islands
Yankee Subordinated Note, Guaranteed
6.50%, 02/15/06 A 94,785
80,223 Bear Stearns Mortgage Securities, Inc.
Class 1A, Series 1995-1, CMO
6.48%, 05/25/10 Aaa 78,719
100,000 Ford Capital BV, Yankee Debenture
9.38%, 01/01/98 A 103,291
50,000 General Motors Acceptance Corp.
7.00%, 03/01/00 A 50,628
50,000 Heller Financial, Inc.
7.75%, 05/15/97 A 50,319
50,000 Merita Bank, Ltd., Yankee Subordinated Note
6.50%, 01/15/06 A 47,635
50,000 RHG Finance Corp., Guaranteed
8.88%, 10/01/05 Ba 52,856
50,000 Salomon, Inc., Senior Note
7.25%, 05/01/01 Baa 50,473
50,000 Santander Financial Issuances, Ltd.
Yankee Subordinated Note, Guaranteed
7.75%, 05/15/05 A 52,041
--------------
611,046
--------------
Oil, Gas, and Petroleum - 4.34%
50,000 Coastal Corp., Senior Debenture
9.75%, 08/01/03 Baa 56,828
50,000 Parker & Parsley Petroleum Co., Senior Note
8.88%, 04/15/05 Baa 55,335
30,000 Texas Utilities Electric Co.
First Mortgage
7.38%, 10/01/25 Baa 28,238
50,000 Tosco Corp.
First Mortgage, Series A
9.00%, 03/15/97 Baa 50,750
75,000 Valero Energy Corp., MTN
7.50%, 05/31/01 Ba 77,180
--------------
268,331
--------------
Utilities - 3.72%
75,000 Connecticut Light & Power Co.
First Mortgage, Series 94D
7.88%, 10/01/24 Baa 77,197
50,000 Empresa Electrica Pehuenche S.A.
Yankee Note
7.30%, 05/01/03 Baa 50,546
50,000 PECO Energy Co.
First Mortgage, Series 1992
7.50%, 01/15/99 Baa 51,093
50,000 Sithe/Independence Funding Corp.
Guaranteed, Series A
9.00%, 12/30/13 Baa 50,748
--------------
229,584
--------------
</TABLE>
See Notes to Financial Statements.
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1
<PAGE>
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Allmerica Investment Grade Income Fund
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PORTFOLIO OF INVESTMENTS, Continued . DECEMBER 31, 1996
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<TABLE>
<CAPTION>
Moody's Ratings Value
Par Value (Unaudited) (Note 2)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Transportation - 2.71%
$ 50,000 AMR Corp., Debenture
9.50%, 05/15/01 Baa $ 54,777
50,000 Consolidated Freightways, Inc.
9.13%, 08/15/99 Baa 52,560
55,000 United Air Lines, Inc.
9.00%, 12/15/03 Baa 59,840
--------------
167,177
--------------
Industrial - 3.53%
50,000 Amax, Inc., Debenture
9.88%, 06/13/01 Baa 55,780
50,000 Georgia Gulf Corp.
7.63%, 11/15/05 Ba 49,215
50,000 USX-Marathon Group, Inc., Debenture
8.88%, 09/15/97 Baa 50,911
--------------
155,906
--------------
Manufacturing - 3.43%
50,000 Black & Decker Corp.
6.63%, 11/15/00 Baa 49,938
50,000 Boise Cascade Corp., Series A, MTN
6.40%, 04/01/98 Baa 50,124
50,000 Chesapeake Corp., Debenture
7.20%, 03/15/05 Baa 49,170
--------------
149,232
--------------
Telephone and Telecommunications - 2.22%
50,000 GTE Corp., Debenture
8.85%, 03/01/98 A 51,551
35,000 GTE Corp., Debenture
8.75%, 11/01/21 A 40,600
50,000 TCI Communications, Inc., Senior Debenture
7.88%, 02/15/26 Ba 44,723
--------------
136,874
--------------
Processed Foods - 3.18%
50,000 Ralcorp Holdings, Inc.
8.75%, 09/15/04 Ba 54,638
75,000 Ralston Purina Co., Debenture
7.75%, 10/01/15 Baa 76,910
--------------
131,548
--------------
Printing and Publishing - 1.78%
50,000 News America Holdings, Inc.
Senior Note, Guaranteed
9.13%, 10/15/99 Baa 53,352
25,000 Time Warner, Inc., Debenture
9.15%, 02/01/23 Ba 27,100
30,000 Time Warner, Inc., Debenture
8.05%, 01/15/16 Ba 29,903
--------------
110,355
--------------
Securities Brokers, Dealers and Exchanges - 1.68%
$ 50,000 Donaldson Lufkin & Jenrette, Inc., Senior Note
6.88%, 11/01/05 Baa 48,717
50,000 Paine Webber Group, Inc., Debenture
9.25%, 12/15/01 Baa 54,804
--------------
103,521
--------------
Health Products - 1.22%
75,000 Allegiance Corp.
7.30%, 10/15/06 Baa 75,497
--------------
Foreign - 0.84%
50,000 Republic of Colombia, Series E, MTN
8.66%, 10/07/16 (A) Ba 52,188
--------------
Engineering and Construction - 0.80%
50,000 Pulte Corp., Senior Note
7.00%, 12/15/03 Baa 49,306
--------------
Consumer Products - 0.41%
25,000 Time Warner Entertainment Co., LP
Senior Debenture
8.38%, 03/15/23 Baa 25,347
--------------
Total Corporate Notes and Bonds 2,265,912
(Cost - $2,265,153) --------------
ASSET-BACKED SECURITIES (B) - 14.62%
75,000 Associates Manufactured Housing
Class A2, Series 1996-1
6.70%, 03/15/27 Aaa 75,715
59,490 Contimortgage Home Equity Loan Trust
Class A1, Series 1994-3
7.63%, 05/15/09 Aaa 59,694
49,985 First Plus Home Loan Trust
Class A5, Series 1996-2
7.47%, 02/20/11 Aaa 50,907
30,000 First Plus Home Loan Trust
Class A3, Series 1996-3
7.05%, 11/20/08 Aaa 30,263
99,845 General Motors Acceptance Corp.
Commercial Securites, Inc.
Class A2A, Series 1996-C1, CMO
6.79%, 09/15/03 Aaa 99,564
100,000 Green Tree Financial Corp.
Class A3, Series 1994-1
6.90%, 04/15/19 Aa 101,141
50,000 Green Tree Financial Corp.
Class A3, Series 1994-8
8.25%, 04/15/20 Aa 51,598
34,138 Green Tree Recreational Equipment &
Consumer Trust
Class A1, Series 1996-A
5.55%, 02/15/18 Aaa 33,232
</TABLE>
See Notes to Financial Statements.
---------------------------------------------------------
3
<PAGE>
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Allmerica Investment Grade Income Fund
- --------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS, Continued . DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Ratings Value
Par Value (Unaudited) (Note 2)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED SECURITIES (continued)
$ 27,848 NationsBank Auto Grantor Trust
Class B, Series 1995-A
6.00%, 06/15/02 A $ 27,787
50,000 Olympic Automobile Receivables Trust
Class A4, Series 1996-A
5.85%, 07/15/01 Aaa 49,609
50,000 Premier Auto Trust
Class A4, Series 1995-4
6.00%, 05/06/00 Aaa 50,000
50,000 Premier Auto Trust
Class A3, Series 1996-2
6.35%, 01/06/00 Aaa 50,234
50,000 Resolution Trust Corp.
Class A4C, Series 1995-C1, CMO
6.85%, 02/25/27 Aaa 49,734
60,000 Residential Asset Securitization Trust
Class A3, Series 1996-A10, CMO
7.50%, 11/25/11 Aaa 60,525
50,000 Residential Asset Securitization Trust
Class A5, Series 1996-A5. CMO
7.75%, 09/25/26 Aaa 50,922
32,685 Structured Asset Securities Corp.
Class A1B, Series 1996-CFL, CMO
5.75%, 02/25/28 NR 32,562
18,263 Western Financial Grantor Trust
Class A2, Series 1994-2
6.38%, 09/01/99 Aaa 18,411
11,646 Western Financial Grantor Trust
Class A2, Series 1995-2
7.10%, 07/01/00 Aaa 11,581
--------------
Total Asset-Backed Securities 903,479
(Cost $902,410) --------------
<CAPTION>
Shares
------
INVESTMENT COMPANY - 3.05%
<S> <C>
188,513 Goldman Sachs Financial Square Prime
Obligation Portfolio Fund 188,513
--------------
Total Investment Company 188,513
(Cost $188,513) --------------
Total Investments - 100.28% 6,195,211
(Cost $6,118,767) --------------
Net Other Assets and Liabilities - (0.28)% (17,131)
--------------
Net Assets - 100.00% $ 6,178,080
==============
</TABLE>
- --------------------------------------------
(A) Securities exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold, in transactions exempt from
registration, to qualified institutions buyers. At December 31, 1996,
these securities amounted to $52,188 or 0.84% of net assets.
(B) Pass Through Certificates
(C) Forward Commitment.
CMO Collateralized Mortgage Obligations
MTN Medium Term Notes
REMIC Real Estate Mortgate Investment Conduit
FEDERAL INCOME TAX INFORMATION (SEE NOTE 2)
At December 31, 1996, the aggregate cost of investment securities for tax
purposes was $6,119,358. Net realized appreciation (depreciation) aggregated
$75,853, of which $132,185 related to appreciated investment securities and
$(56,332) related to depreciated investment securities.
As of December 31, 1996, the portfolio had capital loss carryforwards which
expire as follows: $11,905 in 2000; $629,070 in 2002; $306,802 in 2003; and
28,284 in 2004.
For the year ended December 31, 1996, the Portfolio has elected to defer to 1997
$1,125 attributable to Post October Capital Losses.
OTHER INFORMATION
For the year ended December 31, 1996, the aggregated cost of purchases and the
proceeds of sales, other than from short-term investments, included $1,734,779
and $829,347 from non-governmental issuers, respectively, and $4,984,791 and
$5,201,944 from U.S. Government and Agency issuers, respectively.
The composition of ratings of both long-term and short-term debt holdings as a
percentage of total value of investments in securities, is as follows:
<TABLE>
<CAPTION>
Moody's Ratings (unaudited)
<S> <C>
Aaa 60.04%
Aa 2.54
A 8.63
Baa 21.79
Ba 6.46
NR (not rated) 0.54
-----
100.00%
</TABLE>
See Notes to Financial Statements.
---------------------------------------------------------
3
<PAGE>
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Allmerica Investment Grade Income Fund
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES . December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments (Note 2):
Investments at cost ..................................................................... $ 6,118,767
Net unrealized appreciation(depreciation)................................................ 76,444
-------------
Total investments at value ............................................................ 6,195,211
Receivable for investments sold ............................................................... 82,246
Interest and dividends receivable.............................................................. 81,751
-------------
Total Assets 6,359,208
-------------
LIABILITIES:
Advisory fee payable (Note 3) ................................................................. 2,917
Payable for investments purchased ............................................................. 134,573
Payable to custodian........................................................................... 2,403
Accrued expenses and other payables .......................................................... 41,235
-------------
Total Liabilities...................................................................... 181,128
-------------
NET ASSETS............................................................................................. $ 6,178,080
=============
NET ASSETS consist of:
Par value (Note 4)............................................................................. $ 637
Paid-in capital ............................................................................... 7,086,077
Undistributed net investment income ........................................................... 7,905
Accumulated (distribution in excess of) net
realized gain (loss) on investments sold ................................................... (992,983)
Net unrealized appreciation(depreciation) of investments....................................... 76,444
-------------
TOTAL NET ASSETS ...................................................................................... $ 6,178,080
=============
Shares of beneficial interest outstanding (unlimited shares with par value of $0.001).................. 636,538
NET ASSET VALUE, redemption price per share (Net Assets / Shares Outstanding) $ 9.71
=============
MAXIMUM offering price per share (100 / 95.50 of NAV) ................................................. $ 10.17
=============
</TABLE>
See Notes to Financial Statements.
- ---------------------------------------------------------
4
<PAGE>
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Allmerica Investment Grade Income Fund
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS . For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest (Note 2) ................................... $ 424,476
Dividends (Note 2)................................... 8,276
------------
Total investment income ........................ 432,752
------------
EXPENSES:
Investment advisory fees (Note 3).................... 35,948
Custodian fees....................................... 10,962
Fund accounting fees (Note 3)........................ 34,964
Audit fees .......................................... 7,838
Trustees' fees and expenses (Note 3)................. 68
Amortization of organization costs (Note 2).......... 2,262
Reports to shareholders ............................. 1,842
Insurance............................................ 259
Miscellaneous expense................................ 7,486
------------
Total expenses.................................. 101,629
------------
NET INVESTMENT INCOME ...................................... 331,123
------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (Note 2):
Net realized gain (loss) on investments sold......... 868
Net change in unrealized appreciation
(depreciation) of investments................... (191,710)
------------
NET GAIN(LOSS) ON INVESTMENTS (190,842)
------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS............................ $ 140,281
============
</TABLE>
See Notes to Financial Statements
--------------------------------------------------------
5
<PAGE>
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Allmerica Investment Grade Income Fund
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS at beginning of year.......................................... $ 6,037,799 $ 5,259,967
------------ -----------
Increase (Decrease) in net assets resulting from operations:
Net investment income............................................. 331,123 247,300
Net realized gain (loss) on investments sold...................... 868 93,844
Net change in unrealized appreciation
(depreciation) of investments.................................... (191,710) 436,688
------------ -----------
Net increase (decrease) in net assets resulting
from operations ............................................. 140,281 777,832
------------ -----------
Distributions to shareholders from:
Net investment income............................................. (331,123) (247,300)
------------ -----------
Capital Share Transactions:
Net proceeds from sales of shares................................ -- --
Issued to shareholders in reinvestment of dividends............... 331,123 247,300
Cost of shares repurchased....................................... -- --
------------ -----------
Net increase (decrease) from capital share transactions....... 331,123 247,300
------------ -----------
Total increase (decrease) in net assets...................... 140,281 777,832
------------ -----------
NET ASSETS at end of year (including A).................................. $ 6,178,080 $ 6,037,799
============ ===========
(A) Undistributed net investment income.................................. $ 7,905 $ 5,468
============ ===========
OTHER INFORMATION:
Share Transactions:
Sold.............................................................. -- --
Issued to shareholders in reinvestment of dividends............... 34,334 25,622
Repurchased...................................................... -- --
------------ -----------
Net increase (decrease) in shares outstanding................. 34,334 25,622
============ ===========
</TABLE>
See Notes to Financial Statements
---------------------------------------------------------
6
<PAGE>
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Allmerica Investment Grade Income Fund
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1996 1995 1994 1993 1992(A)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of year............. $ 10.03 $ 9.12 $ 10.10 $ 9.69 $ 10.00
-------- -------- -------- -------- --------
Income from Investment Operations:
Net investment income (B).................. 0.54 0.42 0.54 0.63 0.22
Net realized and unrealized gain (loss)
on investments........................... (0.32) 0.91 (0.98) 0.41 (0.31)
-------- -------- -------- -------- --------
Total from Investment Operations:...... 0.22 1.33 (0.44) 1.04 (0.09)
-------- -------- -------- -------- --------
Less Distributions:
Dividends from net investment income ...... (0.54) (0.42) (0.54) (0.63) (0.22)
-------- -------- -------- -------- --------
Net increase (decrease) in net asset value..... (0.32) 0.91 (0.98) 0.41 (0.31)
-------- -------- -------- -------- --------
Net Asset Value, end of year................... $ 9.71 $ 10.03 $ 9.12 $ 10.10 $ 9.69
======== ======== ======== ======== ========
Total Return (C)............................... 2.32% 14.82% (4.46)% 10.86% (0.72)%**(D)
Ratios/Supplemental Data:
Net Assets, end of year(000's) ................ $ 6,178 $ 6,038 $ 5,260 $ 12,245 $ 5,458
Ratios to average net assets:
Net investment income (B).................. 5.53% 4.38% 5.69% 6.11% 6.70%*
Operating expenses (B)..................... 1.70% 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 ....................... 104% 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
See Notes to Financial Statements
- --------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
Allmerica Investment Grade Income Fund
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS . December 31, 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, discounts earned on zero coupon bonds, original issue discount
bonds, stepped-coupon bonds and payment in kind bonds, are accreted. Dividend
income is recorded on the ex-dividend date.
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,
1996.
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" 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.
Expenses: Most expenses of the Trust can be directly attributable to the
Trust. Expenses which can not be directly attributable to the Trust are
allocated based upon relative net assets among the Trust and two other
investment companies within First Allmerica Financial Life Insurance Company.
Forward Commitments: The Portfolio may from time to time purchase securities
on a forward commitment basis. Debt securities are often issued on this basis.
The yield of such securities is fixed at the time a commitment to purchase is
made, with actual payment and delivery of the security generally taking place 15
to 45 days later. During the period between purchase and settlement, typically
no payment is made by a Portfolio and no interest accrues to the Portfolio. The
market value of forward commitments may be more or less than the purchase price
payable at settlement date.
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Allmerica Investment Grade Income Fund
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NOTES TO FINANCIAL STATEMENTS . (Continued)
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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 assets.
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 December 31, 1996
and throughout the period, Allmerica Investments, Inc., a wholly-owned
subsidiary of First Allmerica, owned 100% of the Portfolio's shares outstanding.
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9
<PAGE>
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Allmerica Investment Grade Income Fund
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GENERAL INFORMATION
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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
PO Box 5108
Boston, MA 02110
Administrator
First Data Investor Services Group
4400 Computer Drive
Westborough, 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
John P. Kavanaugh
Bruce E. Langton
Attiat F. Ott
Richard M. Reilly
Ranne P. Warner
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10
<PAGE>
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Allmerica Investment Grade Income Fund
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REGULATORY DISCLOSURE
- --------------------------------------------------------------------------------
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 Investment Grade Income Fund unless accompanied or preceded by an
effective prospectus which includes information related to charges and expenses.
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11
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REPORT OF INDEPENDENT ACCOUNTANTS
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To the Trustees and Shareholder
of the Allmerica Investment Grade Income Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments (except for Moody's Ratings), 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
the Allmerica Investment Grade Income Fund, (hereafter referred to as the
"Fund") at December 31, 1996, 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 statements 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 securities at December 31, 1996 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 14, 1997
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