<PAGE>
[LOGO]
October, 1998
Dear Valued Client:
Financial market events have been nothing short of astounding during the third
quarter of 1998. Turmoil in foreign markets, most notably those of Southeast
Asia, has persisted all year, but finally enveloped Russia during August. The
long-running bull market in U.S. equities came to an apparent end when the ruble
was devalued and Russian government debt defaulted in August, causing
consternation among investors who despise uncertainty. Meanwhile, Asia's
problems have intensified, as Japanese political infighting has kept any solid
reforms from moving forward, and other Asian nations whose fortunes are closely
tied to Japan have only grown weaker in the interim. This contagion effect then
moved on to affect other economies with fundamental problems such as Brazil and
Mexico. These events have thrown much of the world into recession while Europe
struggles toward its 1999 monetary union and appears unable to offer assistance,
leaving the U.S. with the burden of leading the effort to stabilize the global
economy.
ALLMERICA SECURITIES TRUST FACTS
At September 30, 1998
Market Value $10.813
Net Asset Value $12.124
Total Net Assets (000's) $104,169
Shares Outstanding (000's) 8,592
* Net Investment Income Per Share $0.61
* Increase/Decrease in
Per Share Value Resulting
from Investment Operations $0.93
TOTAL RETURNS AT 9/30/98
Allmerica Securities Trust
Three Months 2.92%
Twelve Months 11.51%
Lehman Brothers Corporate
Bond Index
Three Months 3.63%
Twelve Months 11.07%
* For nine months ended September 30, 1998
As nervousness throughout the world became evident in daily financial market
swings, the U.S. Treasury market grew more and more attractive as a safe haven.
No currency seemed immune from collapse except the U.S. dollar and the Fed's
role as global liquidity provider grew in importance. The result was a dramatic
fall in interest rates, with the 30 year Treasury bond ending the month of
September at 4.97%, a drop of more than 65 basis points since June 30. Interest
rates in the short-to-intermediate part of the yield curve, or 2 to 5 years,
fell even more than the long bond, declining by over 120 basis points during the
quarter. The Fed responded to the crisis by cutting the federal funds rate by 25
basis points, or 0.25%, on September 29.
The Fed's ease to 5.25% has little impact domestically but is important
symbolically, and closely follows the 25 basis point cut by Japan in early
September. What is needed next is a German rate cut, but this is unlikely in the
near term because of the threat it may pose to European Monetary Union
integration. We think it is likely the Fed will cut rates further in the near
term. These cuts will help restore confidence to international capital markets
by signaling the Fed's commitment to global liquidity, but will do little to
stimulate domestic growth in 1999. We are concerned about the prospects for
anemic U.S. growth, and possibly a recession, next year as our economy endures
lower exports, reduced capital spending, weaker job and income growth, waning
consumer confidence and volatile stock market performance. Pent-up demand for
the traditional interest-sensitive sectors of the economy, namely housing and
autos, is not very deep since we are at the tail end of one of the
longest-running postwar expansions and each sector has just experienced record
activity.
The U.S. equity market has appeared overvalued to many observers for some time
now, so the recent decline did not come as a complete surprise. The severity and
rapidity of the decline, however, did leave many wondering when the carnage
would stop. And, the declines experienced by most foreign equity markets
provided a chilling reminder of how closely linked our markets and economies
have become. Volatile market conditions can claim many victims, but the first to
go are often those participants most heavily leveraged. Accordingly, many large
hedge funds suffered serious problems during August and September, with
Long-Term Capital Management (LTCM) the most visible proof of this.
LTCM was managed by some of the brightest minds of Wall Street, including two
Nobel laureates. On September 23, the Federal Reserve Bank of New York helped
orchestrate a recapitalization by creditors to avert a failure which would have
been a devastating blow to U.S and foreign markets. When combined with their own
trading losses on foreign debt securities, these events pushed the Wall Street
dealer community into risk reduction mode. The results have been felt in
corporate bond spreads, the compensation or risk premium investors receive for
owning such bonds. During the last three months, spreads have widened sharply
and have now reached levels last seen in the throes of the 1990-91 recession.
<TABLE>
<S> <C>
First Allmerica Financial Life Insurance Company o Allmerica Financial Life Insurance and Annuity Company
(licensed in all states except NY & HI)
Allmerica Trust Company, N.A. o Allmerica Investments, Inc. o Allmerica Investment Management Company, Inc.
The Hanover Insurance Company o AMGRO, Inc. o Allmerica Financial Alliance Insurance Company
Allmerica Asset Management, Inc. o Allmerica Financial Benefit Insurance Company o Sterling Risk Management Services, Inc.
Citizens Corporation o Citizens Insurance Company of America o Citizens Management Inc.
440 Lincoln Street, Worcester, MA 01653
</TABLE>
<PAGE>
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ALLMERICA SECURITIES TRUST
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS, SEPTEMBER 30, 1998 (UNAUDITED)
MOODY'S
PAR VALUE RATINGS VALUE
CORPORATE NOTES AND BONDS - 72.81%
FINANCE - 15.88%
$ 1,150,000 BCH Cayman Islands
Yankee Subordinated Notes, Guaranteed
6.50%, 02/15/06 A $ 1,157,889
1,400,000 Capital One Financial Corp.
7.25%, 12/01/03 Ba 1,468,680
1,000,000 Chase Manhattan Corp.
6.38%, 02/15/08 A 1,035,849
1,500,000 Colonial Capital II, Series A, Guaranteed
8.92%, 01/15/27(A) (D) BB 1,701,661
975,000 Compass Trust I, Series A, Guaranteed
8.23%, 01/15/27 A 1,035,173
800,000 Conseco Financing Trust III
8.80%, 04/01/27 Ba 834,081
1,000,000 First Tennessee National Corp.
Subordinated Notes
6.75%, 11/15/05 Baa 1,062,729
1,000,000 Homeside Lending, Inc., MTN
6.88%, 05/15/00 A 1,019,402
60,547 Jennifer Holding Corp.
12.25%, 12/30/98 (B) NR 61,057
270,458 Mack Trust, Inc.
10.91%, 04/01/99 (B) NR 286,601
550,000 MBNA Corp., MTN
6.96%, 09/12/02 Baa 576,020
507,488 Midland Funding Corp., Series C
Senior Secured Lease Obligation
10.33%, 07/23/02 Ba 539,511
1,000,000 The Money Store, Inc.
8.05%, 04/15/02 A 1,086,825
1,000,000 Providian Capital, Series A, Guaranteed
9.53%, 02/01/27 (A) Ba 1,157,146
1,000,000 Riggs Capital Trust
8.63%, 12/31/26 (A) Baa 1,033,883
1,000,000 St. George Bank, Ltd., Yankee Debenture
7.15%, 10/15/05 (A) Baa 1,063,550
1,250,000 Zions Institutional Capital Trust
Series A, Guaranteed
8.54%, 12/15/26 A 1,423,472
------------
16,543,529
------------
INDUSTRIAL - 12.87%
2,000,000 Bethlehem Steel Corp., Senior Notes
10.38%, 09/01/03 Ba 2,110,000
950,000 Buckeye Cellulose Corp.
Senior Subordinated Notes
9.25%, 09/15/08 Ba 964,250
1,000,000 CSC Holdings, Inc., Debenture
7.88%, 02/15/18 Ba 980,000
1,000,000 Georgia Gulf Corp.
7.63%, 11/15/05 Ba 1,072,702
649,000 Homeside, Inc., Senior Notes, Series B
11.25%, 05/15/03 (A) A 765,820
1,000,000 Interpool, Inc.
7.35%, 08/01/07 (A) Ba 998,582
1,000,000 LTV Corp., Senior Notes, Guaranteed
8.20%, 09/15/07 (A) (D) BB 932,500
500,000 McDermott (J. Ray) SA
Senior Subordinated Notes
9.38%, 07/15/06 B 522,500
950,000 Owens-Illinois, Inc., Senior Notes
7.85%, 05/15/04 Ba 994,853
950,000 Republic Group, Inc.
9.50%, 07/15/08 (A) B 902,500
1,000,000 RPM, Inc., Senior Notes
7.00%, 06/15/05 Baa 1,080,739
1,000,000 Stone Container Corp., Senior Notes
11.88%, 12/01/98 B 997,500
1,000,000 Westinghouse Electric Corp., Debenture
8.38%, 06/15/02 Ba 1,080,626
------------
13,402,572
------------
COMMUNICATIONS - 9.26%
500,000 Clear Channel Communications, Inc. Debenture
7.25%, 10/15/27 Baa 530,769
1,000,000 Comcast Cable Communications, Inc.
8.13%, 05/01/04 (A) Baa 1,132,294
1,000,000 Continental Cablevision, Inc.
8.50%, 09/15/01 Baa 1,081,765
750,000 Continental Cablevision, Inc.
8.30%, 05/15/06 Baa 854,846
700,000 Hearst-Argyle Television, Senior Notes
7.00%, 01/15/18 Baa 693,322
200,000 Kerrville Telephone Co.
9.76%, 03/29/00 (B) NR 207,294
1,850,000 TCI Communications, Inc.
7.88%, 02/15/26 Baa 2,199,252
500,000 Viacom, Inc., Senior Notes
7.75%, 06/01/05 Ba 542,584
1,000,000 Viacom, Inc., Senior Debenture, Guaranteed
7.63%, 01/15/16 Ba 1,062,319
1,175,000 WorldCom, Inc.
7.75%, 04/01/07 Baa 1,340,114
------------
9,644,559
------------
OIL, GAS AND PETROLEUM - 9.19%
2,000,000 ANR Pipeline Co., Debenture
9.63%, 11/01/21 Baa 2,566,108
1,000,000 Clark Oil & Refining Corp., Senior Notes
9.50%, 09/15/04 Ba 990,000
1,000,000 Oryx Energy Co., Debenture
10.00%, 06/15/99 Ba 1,075,965
1,450,000 Seagull Energy Corp., Senior Notes
7.88%, 08/01/03 Ba 1,479,000
1,250,000 Texas Eastern Transmission Corp., Debenture
10.00%, 08/15/01 A 1,409,110
1,000,000 Tosco Corp.
7.00%, 07/15/00 Baa 1,024,244
900,000 Valero Management Partnership, LP
First Mortgage, Series J-12
10.02%, 03/15/07 (B) NR 1,026,567
------------
9,570,994
------------
UTILITIES - 6.44%
1,550,000 Connecticut Light & Power Co.
First Mortgage, Series 94D
7.88%, 10/01/24 Ba 1,644,055
1,162,000 North Atlantic Energy Corp.
First Mortgage, Series A
9.05%, 06/01/02 B 1,225,645
1,270,000 Sithe/Independence Funding Corp. Series A
9.00%, 12/30/13 Baa 1,593,977
1,500,000 Texas-New Mexico Power Co.
First Mortgage, Series U
9.25%, 09/15/00 Ba 1,598,037
600,000 Texas Utilities Electric Co.
First Mortgage
7.38%, 10/01/25 Baa 646,836
------------
6,708,550
------------
CONSUMER PRODUCTS - 3.77%
1,000,000 Chiquita Brands International, Inc.
9.13%, 03/01/04 B 1,000,000
1,000,000 DiMon, Inc., Senior Notes, Series B
8.88%, 06/01/06 Ba 1,090,267
1,600,000 Ralston Purina Co., Debenture
7.75%, 10/01/15 Baa 1,832,742
------------
3,923,009
------------
TRANSPORTATION - 3.35%
1,000,000 AMR Corp., Debenture
10.00%, 02/01/01 Baa 1,105,549
949,052 Delta Airlines, Inc.
9.23%, 07/02/02 (B) NR 1,010,228
659,000 U.S. Air, Inc., Equipment Trust,Series D
10.30%, 01/15/00 Ba 685,902
661,000 U.S. Air, Inc., Equipment Trust, Series F
10.30%, 01/15/00 Ba 687,983
------------
3,489,662
------------
MERCHANDISING AND RETAIL - 2.96%
950,000 Meyer (Fred), Inc.
7.38%, 03/01/05 Ba 1,003,341
1,000,000 Kroger Co., Senior Subordinated Notes
10.00%, 05/01/99 Ba 1,021,620
1,000,000 USG Corp., Senior Notes
8.50%, 08/01/05 Baa 1,058,750
------------
3,083,711
------------
SECURITIES BROKERS, DEALERS AND EXCHANGES - 2.90%
1,000,000 Donaldson Lufkin & Jenrette, Inc.
Senior Notes
6.88%, 11/01/05 A 1,040,871
888,859 Jones (Edward D.) & Co., LP
7.95%, 04/15/06 (B) NR 941,710
1,000,000 Legg Mason, Inc., Senior Notes
6.50%, 02/15/06 Baa 1,042,100
------------
3,024,681
------------
PRINTING AND PUBLISHING - 2.23%
1,000,000 Time Warner, Inc., Debenture
9.15%, 02/01/23 Baa 1,305,762
850,000 Time Warner Entertainment Co., LP
Senior Debenture
8.38%, 03/15/23 Baa 1,016,793
------------
2,322,555
------------
TECHNOLOGY - 1.98%
1,000,000 Computer Associates, International
6.25%, 04/15/03 (A) Baa 1,014,740
1,000,000 International Business Machine Corp.
6.50%, 01/15/28 A 1,049,870
------------
2,064,610
------------
HEALTH CARE - 1.98%
675,000 Allegiance Corp.
7.30%, 10/15/06 Baa 753,139
300,000 Tenet Healthcare Corp.
Senior Subordinate Notes
8.63%, 01/15/07 Ba 311,250
1,000,000 Tenet Healthcare Corp.
Senior Notes
7.63%, 06/01/08 (A) Ba 998,835
------------
2,063,224
------------
TOTAL CORPORATE NOTES AND BONDS 75,841,656
(Cost $70,739,578) ------------
U.S. GOVERNMENT OBLIGATIONS - 16.25%
U.S. TREASURY BONDS - 9.39%
5,150,000 7.25%, 05/15/16 Aaa 6,403,706
2,675,000 7.13%, 02/15/23 Aaa 3,378,859
------------
9,782,565
------------
U.S. TREASURY NOTES - 6.86%
1,000,000 5.38%, 02/15/01 Aaa 1,022,500
595,000 6.88%, 05/15/06 Aaa 687,783
4,665,000 7.00%, 07/15/06 Aaa 5,436,185
------------
7,146,468
------------
TOTAL U.S. GOVERNMENT OBLIGATIONS 16,929,033
(Cost $15,145,545) ------------
ASSET-BACKED SECURITIES - 7.64%
1,000,000 American Airlines, Inc
Pass-Through Trust , Series 1991 - C2
9.73%, 09/29/14 A 1,303,170
1,000,000 BankBoston RV Asset Backed Trust,
Series 1997 - 1, Class A8
6.54% , 02/15/09 Aaa 1,032,602
375,000 Barnett Auto Trust
Series 1997-A, A3
6.03%, 11/15/01 Aaa 378,034
124,949 Eaglemark Trust
Harley-Davidson, Series 1995 - 1
6.80%, 12/15/01 (A) Aaa 130,950
999,704 First Plus Home Loan Trust
Series 1996-2, Class A5
7.47%, 02/20/11 Aaa 1,024,156
661,110 Green Tree Recreational Equipment &
Consumer Trust
Series 1997-B, Class A-1
6.55%, 07/15/28 NR 681,158
558,486 Green Tree Financial Corp.
Series 1995-A, Class A
7.25%, 07/15/05 Baa 573,738
497,858 National Auto Finance
Series 1996-1, Class A
6.33%, 12/21/02 Aaa 504,415
650,000 Resolution Trust Corp.
Series 1995 - 1, Class A4C, CMO
6.85%, 02/25/27 Aaa 659,159
1,294,374 United Air Lines, Inc.
Pass Through Trust, Series 1991 - B1
9.30%, 03/22/08 Baa 1,521,186
148,437 Western Financial Grantor Trust
Series 1995-2, Class A2
7.10%, 07/01/00 Aaa 149,657
------------
TOTAL ASSET-BACKED SECURITIES 7,958,225
(Cost $7,155,430) ------------
FOREIGN BONDS (C) - 1.98%
950,000 Republic of Colombia, Series E, MTN
8.66%, 10/07/16 (A) Baa 747,104
1,500,000 United Mexican States
Yankee Emerging Market Notes
8.50%, 09/15/02 Ba 1,312,500
TOTAL FOREIGN BONDS 2,059,604
(Cost $2,131,580)
INVESTMENT COMPANY - 0.00%
764 SSgA Prime Money Market Fund NR $ 764
------------
TOTAL INVESTMENT COMPANY 764
(Cost $764) ------------
TOTAL INVESTMENTS - 98.68% 102,789,282
(Cost $95,172,897) ------------
NET OTHER ASSETS AND LIABILITIES - 1.32% 1,379,999
------------
NET ASSETS - 100.00% $104,169,281
============
- -----------
(A) Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold,in transactions exempt from registration,
to qualified institutional buyers. At September 30, 1998, these securities
amounted to $12,579,565 or 12.08% of net assets.
(B) Restricted Security - Represents ownership in a private placement investment
which has not been registered with the Securities and Exchange Commision
under the Securities Act of 1933. At September 30, 1998, these securities
amounted to $3,533,457 or 3.39% of net assets.
(C) U.S. currency denominated.
(D) Standard & Poor's (S&P) credit ratings are used in the absence of a rating
by Moody's Investors Service, Inc.
CMO Collateralized Mortgage Obligation
MTN Medium Term Note
MOODY'S QUALITY RATINGS(D)
Baa 30%
Ba 29%
Aaa 20%
A 12%
B & Bb 5%
Private Placements and Not Rated 4%
SECURITY DIVERSIFICATION
Corporate Notes and Bonds 73%
U.S. Government Obligations 16%
Asset-Backed Securities 8%
Foreign Bonds 2%
Other 1%
Shareholder inquires regarding account
information may be directed to: The Bank of New York
Shareholder Relations Department -11E
PO Box 11258
Church Street Station
New York, New York 10286
1-800-432-8224
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1998 (Unaudited)
ASSETS:
Investments :
Investments at cost ...................................... $ 95,172,897
Net unrealized appreciation .............................. 7,616,385
------------
Total investments at value ............................ 102,789,282
Short-term investments held as collateral for securities
loaned .................................................... 1,261,500
Interest and dividend receivables ........................... 1,850,087
------------
Total Assets .......................................... 105,900,869
------------
LIABILITIES:
Advisory fee payable ........................................ 42,185
Payable to Custodian ........................................ 329,966
Accrued expenses and other payables ......................... 97,937
Collateral for securities loaned ............................ 1,261,500
------------
Total Liabilities ..................................... 1,731,588
------------
NET ASSETS ..................................................... $104,169,281
============
NET ASSETS CONSIST OF:
Par value ................................................... $ 8,592,306
Paid-in capital ............................................. 88,551,952
Undistributed (distribution in excess of) net investment
income .................................................... (99,236)
Accumulated (distribution in excess of) net realized
(loss) on investments sold ................................ (492,126)
Net unrealized appreciation of investments .................. 7,616,385
------------
TOTAL NET ASSETS ............................................... $104,169,281
============
SHARES OF BENEFICIAL INTEREST OUTSTANDING (10,000,000
authorized shares with par value of $1.00) ................... 8,592,306
------------
NET ASSET VALUE
Per share .................................................... $ 12.124
============
MARKET VALUE (closing price on New York Stock Exchange)
Per share .................................................... $ 10.813
============
STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1998 (Unaudited)
INVESTMENT INCOME:
Interest (including income on securities loaned of $7,349) . $ 5,771,159
Dividends .................................................. 26,907
------------
Total investment income ................................. 5,798,066
------------
EXPENSES:
Investment advisory fees ................................... 375,777
Fund accounting fees ....................................... 28,255
Custodian and securities lending fees ...................... 5,280
Transfer agent fees ........................................ 63,259
Legal fees ................................................. 943
Audit fees ................................................. 13,172
Trustees' fees and expenses ................................ 12,743
Reports to shareholders .................................... 44,372
New York Stock Exchange fees ............................... 12,149
Miscellaneous .............................................. 3,115
------------
Total expenses .......................................... 559,065
------------
NET INVESTMENT INCOME ......................................... 5,239,001
------------
NET REALIZED AND UNREALIZED
GAIN ON INVESTMENTS:
Net realized gain on investments sold ...................... 700,776
Net change in unrealized appreciation of investments ....... 2,070,505
------------
NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS ............................................... 2,771,281
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................... $ 8,010,282
============
New York Federal Reserve President William McDonough effectively summed up
events in the corporate market as follows:
"The correction of stock prices was not of exceptional size or concern and,
indeed, had been anticipated by a number of astute market observers. However,
the abrupt and simultaneous widening of credit spreads globally, for both
corporate and emerging markets sovereign debt, was an extraordinary event beyond
the expectations of investors and financial intermediaries."
U.S. Treasury Yield Curves
Bond Equivalent Yield Percentage
12/31/97 9/30/98
3 Months 5.19% 4.36%
6 Months 5.35 4.55
1 Year 5.56 4.57
2 Years 5.63 4.32
3 Years 5.68 4.39
5 Years 5.71 4.35
10 Years 5.73 4.48
30 Years 5.92 4.97
Investment grade corporate bond performance lagged Treasuries during the third
quarter by nearly 350 basis points. Spreads were driven wider by mounting fears
of recession and the unwillingness of dealers to provide liquidity to investors
seeking to trade securities. Although all sectors of the corporate market
performed poorly, cable/media and telecommunications companies did fare better,
given their domestic focus and perceived resistance to recession. Conversely,
cyclical sectors such as metals and paper have suffered. Also hard hit were
broker-dealers and banks due to the effects of global financial market meltdown
on their liquidity and business prospects.
MATURITY DIVERSIFICATION
Under 3 Years 12%
3-5 Years 13%
5-10 Years 38%
10-20 Years 16%
20 and over Years 21%
High yield corporates suffered the same fate as investment grade corporates, but
the spread widening was even more pronounced. The new issue market effectively
shut down for all but a handful of borrowers whose ratings were on the cusp of
investment grade. Likewise, secondary trading has come to a standstill. As with
investment grade corporates, liquidity will remain a problem until dealers
overcome their unwillingness to use their balance sheets to position bonds.
The interest rate decline that has taken place this quarter was surprising to
most market participants. Throughout 1998 long-term interest rates have been at
or near their lowest levels in thirty years, while domestic growth was stronger
than forecast and inflation was continuing to decline. Strong growth and
declining inflation have rarely coexisted, however, and the bond market was
vacillating between a Fed ease and a Fed tightening as recently as August.
Current events defy concise explanations: global financial markets are grappling
with serious problems that will not be solved overnight. Political leadership
has been sorely tested as never before, be it in Germany, Japan, Russia or the
U.S. The rate move that has occurred has been unusual, and the dislocations
plaguing the corporate bond market have been largely a reflection of the flight
to the safety of U.S. Treasuries. Overall corporate credit quality remains
strong, although earnings growth is in doubt and recession is a possibility.
Still, we remain optimistic that a more rational spectrum of credit spreads
could result from today's tumult. The fourth quarter is not traditionally
conducive to spread contraction since many investors seek to avoid added risk as
year-end approaches, so it may require a fair amount of patience before
stability in financial markets is achieved.
Sincerely,
/s/ John F. O'Brien /s/ Richard M. Reilly
John F. O'Brien Richard M. Reilly
Chairman President
[LOGO]
ALLMERICA
FINANCIAL(R)
440 Lincoln Street, Worcester, MA 01653
Allmerica Securities Trust is a Massachusetts Business Trust under an Agreement
and Declaration of Trust dated February 26, 1986 as amended and on file with the
Secretary of the Commonwealth of Massachusetts. This document is executed by the
Trustees or Officers as such and not individually, and no obligation of the
Trust shall be binding upon any of the Trustees, Officers or Shareholders, but
shall only bind the assets and property of the Trust.
