ALLIANCE
MORTGAGE
SECURITIES
INCOME FUND
SEMI-ANNUAL
REPORT
JUNE 30, 1995
LETTER TO SHAREHOLDERS
ALLIANCE MORTGAGE SECURITIES INCOME FUND
August 4, 1995
Dear Shareholder:
The U.S. bond market rebounded sharply over the past six months, staging an
impressive rally across nearly all fixed income sectors. The rally was sparked,
in large part, by evidence of a slowing U.S. economy, moderating inflationary
pressures and a shift in Federal Reserve monetary policy. Treasury securities
outperformed mortgage securities during this period, though both sectors of the
market gained.
INVESTMENT RESULTS
Listed below is Alliance Mortgage Securities Income Fund's performance through
its semi-annual reporting period ended June 30, 1995. The table shows your
Fund's total returns compared with its benchmark, represented by the unmanaged
Lehman Brothers (LB) Mortgage-Backed Securities Index, and versus the average
of its Lipper universe of U.S. mortgage funds, which reflects performance of 65
funds. These funds have generally similar investment objectives to your Fund,
though some funds included in the average may have somewhat different
investment policies.
Six Months Ended June 30, 1995
Total Return Ending NAV
ALLIANCE MORTGAGE SECURITIES INCOME FUND
Class A +9.54% $8.60
Class B +9.26% $8.61
Class C +9.26% $8.61
LB MORTGAGE-BACKED
SECURITIES INDEX +10.73%
LIPPER MORTGAGE
FUNDS AVERAGE +9.80%
The Fund's total returns are based on the net asset values of each class of
shares as of June 30; additional investment results appear on page 3.
A SOFT LANDING FOR THE U.S. ECONOMY?
The pronounced economic slowdown in the first six months of the year challenged
the notion of a 'soft landing' for the U.S. economy. In the second quarter,
gross domestic product growth fell to 0.5%, reflecting declines in industrial
production and lower final sales growth. Economic growth will likely slow
further without a resurgence in consumer spending, which represents two-thirds
of the nation's economic activity. In the first four months of the year,
consumer expenditures remained weak. However, more recent personal income and
consumer confidence data suggest that higher consumer spending may lead to
stronger economic growth in the second half of the year. Concerns regarding
inflation have largely subsided with the decline in economic growth. Broad
price indices such as the consumer price index and producer price index have
shown only moderate acceleration and labor costs remain under control.
MORTGAGE MARKET REVIEW
Largely in anticipation of a shift in Federal Reserve monetary policy, interest
and mortgage rates declined. Thirty-year mortgage rates fell to 7.50% in July,
from 9.25% in late November. The decline in mortgage rates prompted concern
over an acceleration of prepayment activity and placed pressure on
mortgage-backed security (MBS) prices. Volatility also increased with
uncertainty over the direction of interest rates. Throughout the period,
however, the lack of supply of new loans in the market favorably influenced
mortgage prices. Within the mortgage market, relative performance was driven
largely by duration (price sensitivity to changes in interest rates), with
discount coupons outperforming current and premium coupon MBS.
PORTFOLIO ACTIVITY
Over the past six months, we adjusted the allocation of the Fund's assets as
the U.S. economy slowed and interest rates declined. Currently the Fund is
invested in a combination of fixed rate mortgage securities, adjustable rate
mortgage (ARM) securities and Treasury securities. In particular, the portfolio
holds an overweighted position in the premium coupon sector of the mortgage
market. In our view, these securities are attractively priced. We believe the
mortgage market undervalued these premium securities due to exaggerated fears
of prepayment rates equaling those seen in late 1993. As prepayments peak, and
subsequently decline, these premium coupons will enhance the income-earning
capacity of the Fund. Since we believe that prepayment rates will
1
ALLIANCE MORTGAGE SECURITIES INCOME FUND
increase, the Fund is also invested in Treasury securities to balance the
Fund's exposure to prepayments.
INVESTMENT OUTLOOK
After a tremendous rally in the first two quarters of the year, the outlook for
U.S. bond markets continues to be favorable. It is our view that the U.S.
economic expansion should moderate to an annual growth rate of 2.0% in the
second half of the year. Slower economic growth would be positive for inflation
and inflationary expectations. We believe that inflationary pressures have
crested and project that CPI inflation will peak near 3.5% in 1995. In tacit
acknowledgment of the weakening U.S. economy, the Federal Reserve cut interest
rates 0.25% in early July.
Volatility is central to the relative performance of mortgage-backed securities
versus comparable duration Treasury securities. It also affects relative
performance among fixed rate MBS coupons on a duration-adjusted basis and
versus comparable duration ARMs. If volatility declines, MBS should perform
well relative to comparable duration Treasury securities and ARMs should
outperform premium fixed rate MBS coupons.
Alliance Mortgage Securities Income Fund continues to provide high current
income and as economic and market conditions change throughout the year, we
believe that our consistent investment approach will further benefit
shareholders.
Thank you for your continued interest and investment in Alliance Mortgage
Securities Income Fund. We look forward to reporting its progress to you at
year end.
Sincerely,
John D. Carifa
Chairman and President
Patricia J. Young
Senior Vice President
Paul A. Ullman
Vice President
2
INVESTMENT RESULTS
ALLIANCE MORTGAGE SECURITIES INCOME FUND
AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1995
CLASS A SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
One Year +9.22% +4.51%
Five Years +8.68 +7.74
Ten Years +8.79 +8.31
SEC Yield 6.65%
CLASS B SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
One Year +8.51% +5.51%
Since Inception* +5.48 +5.48
SEC Yield 6.21%
CLASS C SHARES
One Year +8.64%
Since Inception* +2.82
SEC Yield 6.23%
The average annual total returns reflect investment of dividends and/or capital
gains distributions in additional shares-with and without the effect of the
4.25% maximum front-end sales charge for Class A or applicable contingent
deferred sales charge for Class B (3% year 1, 2% year 2, 1% year 3, 0% year 4);
Class C shares are not subject to front-end or contingent deferred sales
charges. Past performance does not guarantee future results. Investment return
and principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Yields are for the 30 days
ended June 30, 1995.
* Inception: 1/30/92, Class B; 5/3/93, Class C.
3
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
PRINCIPAL
AMOUNT
(000) VALUE
MORTGAGE RELATED SECURITIES-92.9%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-45.7%
6.50%, 5/15/08-
11/15/09(b) $ 66,165 $65,420,300
8.00%, 4/15/17-10/15/24 45,114 46,188,962
8.50%, 5/15/16-12/15/24 215,970 224,205,204
9.00%, 12/15/08-5/15/25 300,551 315,671,859
10.00%, 10/15/17-6/15/20 1,976 2,150,728
11.00%, 1/20/01(b) 17 18,290
11.50%, 3/15/10-11/15/15 1,416 1,586,519
12.00%, 2/15/14-12/15/15 418 470,635
12.50%, 3/15/11-5/15/15 378 428,471
13.00%, 11/15/99-1/15/00(b) 37 39,594
15.00%, 2/15/12 1 594
Total Government National
Mortgage Association
(cost $633,230,894) 656,181,156
FEDERAL NATIONAL MORTGAGE
ASSOCIATION-20.0%
8.00%, 4/01/24-1/01/99 208,386 212,226,881
8.50%, 6/01/24-3/01/25 72,819 75,094,825
12.00%, 2/01/98-7/01/00(b) 78 83,596
Total Federal National
Mortgage Association
(cost $282,269,917) 287,405,302
COLLATERALIZED MORTGAGE
OBLIGATIONS-14.0%
Donaldson, Lufkin & Jenrette
Series 1994-Q12 Cl.A
7.281%, 9/25/24 (a) 57,394 58,736,845
Series 1994-QE1 Cl.A
7.449%, 4/25/24 (a) 15,915 16,003,755
Series 1994-QE2 Cl.A
7.568%, 6/25/24 (a) 26,616 26,831,955
Federal Home Loan
Mortgage Corp.
Series 1346 Cl.PL
8.00%, 8/15/02 $ 8,000 $ 8,240,000
Series 1664 Cl.A
12/15/23 (P/O) 18,858 17,437,724
INMC
Series 1995-E Cl.A
7.474%, 4/25/25 73,050 74,123,704
Total Collateralized
Mortgage Obligations
(cost $201,337,983) 201,373,983
FEDERAL HOME LOAN MORTGAGE
CORP.-13.1%
8.00%, 10/01/21-6/01/25 166,713 169,825,475
11.50%, 10/01/10-6/01/20 5,372 5,829,766
12.25%, 8/01/13-7/01/14 1,100 1,193,888
12.50%, 6/01/19-6/15/19 6,802 7,569,312
12.75%, 6/01/12-2/01/14 376 417,356
13.00%, 5/01/14-12/15/18 2,655 2,964,964
13.50%, 1/01/12-10/01/16 701 789,174
14.75%, 3/01/10 94 105,878
Total Federal Home Loan
Mortgage Corp.
(cost $187,505,890) 188,695,813
STRIPPED MORTGAGE BACKED
SECURITIES-0.1%
FNMA
Series 1990-145B
1004.961%, 12/25/20 (Ioette)(c)(e)
(cost $1,621,982) 66 1,736,286
Total Mortgage Related
Securities
(cost $1,305,966,666) 1,335,392,540
4
ALLIANCE MORTGAGE SECURITIES INCOME FUND
PRINCIPAL
AMOUNT
(000) VALUE
U.S. TREASURY SECURITIES-15.1%
U.S. Treasury Note
7.50%, 2/15/05 (d)
(cost $206,864,625) $200,050 $217,836,446
ASSET BACKED SECURITIES-0.8%
MBNA Master Credit
Card Trust
Series 1994-CA
6.3125%, 3/15/04
(cost $11,293,448) 11,300 11,309,040
SHORT TERM INVESTMENTS-1.1%
REPURCHASE
AGREEMENTS-1.1%
Prudential Securities
6.12%, 7/03/95
(cost $15,414,000) 15,414 15,414,000
CALL OPTIONS PURCHASED
ON FUTURES-0.3%
Euro call on U.S. Treasury
Note
6.5%, 5/10/05 expiring
11/17/95 @ strike 103.25
(cost $5,058,594) $370,000 $ 3,815,625
TOTAL INVESTMENTS-110.2%
(cost $1,544,597,333) 1,583,767,651
Other assets less liabilities- (10.2%) (146,340,105)
NET ASSETS-100% $1,437,427,546
(a) Adjustable rate mortgages stated interest rate in effect at 6/30/95.
(b) 15 year mortgage.
(c) Illiquid security (see Notes A & E).
(d) Securities, or a portion thereof, loaned at June 30, 1995 with an aggregate
market value of $217,782,000 and a cash collateral received from the
counterparty of Bear Stearns in the amount of $224,000,000.
(e) Yield to maturity at 6/30/95.
Glossary of Terms:
Ioette - Interest Only.
P/O - Principal Only.
See notes to financial statements.
6
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1995 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
ASSETS
Investments in securities, at value (cost $1,544,597,333*)$ 1,583,767,651
Receivable for investment securities sold 93,349,585
Interest receivable 15,936,772
Receivable for capital stock sold 181,916
Deferred organization expenses 124,200
Miscellaneous receivable 80,248
Other assets 24,311
Total assets 1,693,464,683
LIABILITIES
Deposit for security loaned 224,144,853
Payable for investment securities purchased 18,435,250
Dividends payable 6,412,017
Payable for capital stock redeemed 2,163,532
Advisory fee payable 1,860,666
Distribution fee payable 117,078
Accrued expenses and other liabilities 2,903,741
Total liabilities 256,037,137
NET ASSETS $ 1,437,427,546
COMPOSITION OF NET ASSETS
Capital stock, at par $ 1,669,781
Additional paid-in capital 1,635,183,216
Distributions in excess of net investment income (6,318,034)
Accumulated net realized loss (232,277,735)
Net unrealized appreciation of investments and futures contracts 39,170,318
$ 1,437,427,546
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share
($535,190,804/62,200,448 shares of
capital stock issued and outstanding) $8.60
Sales charge-4.25% of public offering price .38
Maximum offering price $8.98
CLASS B SHARES
Net asset value and offering price per share
($850,245,786/98,739,440 shares of
capital stock issued and outstanding) $8.61
CLASS C SHARES
Net asset value, redemption and offering price per share
($51,990,956/6,038,236 shares of
capital stock issued and outstanding) $8.61
* Includes repurchase agreements of $15,414,000.
See notes to financial statements.
6
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
INVESTMENT INCOME
Interest $61,275,094
EXPENSES
Advisory fee $3,762,418
Distribution fee - Class A 809,962
Distribution fee - Class B 4,383,456
Distribution fee - Class C 273,835
Transfer agency 1,060,646
Custodian 276,965
Administrative 158,021
Registration 107,252
Printing 67,999
Audit and legal 66,022
Directors' fees 9,163
Miscellaneous 6,900
Total expenses before interest 10,982,639
Interest expense (see Note H) 3,127,064 14,109,703
Net investment income 47,165,391
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized loss on investments (17,443,129)
Net change in unrealized depreciation of investments and
futures contracts 104,126,361
Net gain on investments 86,683,232
NET INCREASE IN NET ASSETS FROM OPERATIONS $133,848,623
See notes to financial statements.
7
STATEMENT OF CHANGES IN NET ASSETS
ALLIANCE MORTGAGE SECURITIES INCOME FUND
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 DECEMBER 31,
(UNAUDITED) 1994
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $47,165,391 $125,266,296
Net realized loss on investments (17,443,129) (211,057,813)
Net change in unrealized appreciation
(depreciation) of investments
and futures contracts 104,126,361 (66,518,327)
Net increase (decrease) in net assets from
operations 133,848,623 (152,309,844)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (19,203,424) (47,603,015)
Class B (27,823,283) (71,792,708)
Class C (1,739,958) (5,089,134)
Tax return of capital distribution
Class A -0- (1,891,214)
Class B -0- (2,852,244)
Class C -0- (202,186)
CAPITAL STOCK TRANSACTIONS
Net decrease (181,299,906) (578,709,664)
Total decrease (96,217,948) (860,450,009)
NET ASSETS
Beginning of period 1,533,645,494 2,394,095,503
End of period $1,437,427,546 $1,533,645,494
See notes to financial statements.
8
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1995 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance Mortgage Securities Income Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified open-end investment
company. The Fund offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 4.25%. Class B shares are sold
with a contingent deferred sales charge which declines from 3.00% to zero
depending on the period of time the shares are held. Class B shares will
automatically convert to Class A shares six years after the end of the calendar
month of purchase. Class C shares are sold without an initial or contingent
deferred sales charge. All three classes of shares have identical voting,
dividend, liquidation and other rights, except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan. The following is a summary of significant accounting
policies followed by the Fund.
1. SECURITY VALUATION
Fixed-income securities are valued on the basis of prices provided by a pricing
service and brokers. However, securities which are traded over-the-counter and
on a national securities exchange may be valued according to the broadest and
most representative market. It is expected that, for the fixed-income
securities and options in which the Fund invests, this ordinarily will be the
over-the-counter market. Securities not priced in this manner are valued at the
latest quoted bid price, or when exchange valuations are used, at the latest
quoted sale price on the day of valuation.
If there is no such reported sale, the latest quoted bid price will be used.
Other securities for which quotations are not readily available or illiquid
securities will be valued in good faith at fair value using methods determined
by the Board of Directors. In determining fair value, consideration is given to
cost, operations and other financial data. Securities which mature in 60 days
or less are valued at amortized cost, which approximates market value.
2. TAXES
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if applicable, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
3. INVESTMENT INCOME AND SECURITY TRANSACTIONS
Interest income is accrued daily. Fee income is generated by participating in
forward commitments, in which the Fund agrees to the delayed settlement of
securities. By agreeing to the delayed settlement of securities, the Fund
receives a fee from the seller. The fee is accrued from the settlement date of
the associated sale transaction to the purchase settlement date. Security
transactions are accounted for on the date the securities are purchased or
sold. The Fund accretes original issue discount as adjustments to interest
income. Security gains or losses are determined on the identified cost basis.
4. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income dividends and capital gains distributions are determined in
accordance with income tax regulations. Such amounts may differ from income and
capital gains recorded in accordance with generally accepted accounting
principles.
5. FINANCIAL FUTURES CONTRACTS
The Fund may buy or sell interest rate futures contracts for the purpose of
hedging its portfolio against adverse effects of anticipated movements in the
market. Upon entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
the value of the contract. Such receipts or payments are known as variation
margin and are recorded by the Fund as unrealized gains or losses. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the value of the contract at the time it was opened and the
time it was closed.
9
NOTES TO FINANCIAL STATEMENTS (CONT.)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
NOTE B: ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of an investment advisory agreement, the Fund pays Alliance
Capital Management L.P., (the "Adviser") an advisory fee at a quarterly rate
equal to .1375 of 1% (approximately .55 of 1% on an annual basis) of the first
$500 million of the Fund's net assets and .125 of 1% (approximately .50 of 1%
on an annual basis) of its net assets over $500 million, valued on the last
business day of the previous quarter. The Adviser has agreed, under the terms
of the investment advisory agreement, to reimburse the Fund to the extent that
its aggregate expenses (exclusive of interest, taxes, brokerage, distribution
fee, and extraordinary expenses) in any year exceed 1% of its average daily net
assets for such year. No such reimbursement was required for the six months
ended June 30, 1995. Pursuant to the advisory agreement, the Fund paid $158,021
to the Adviser representing the cost of certain legal and accounting services
provided to the Fund by the Adviser for the six months ended June 30, 1995.
The Fund compensates Alliance Fund Services, Inc. (a wholly-owned subsidiary of
the Adviser) under a Transfer Agency Agreement for providing personnel and
facilities to perform transfer agency services for the Fund. Such compensation
amounted to $674,814 for the six months ended June 30, 1995.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's capital stock. The Distributor received
front-end sales charges of $19,446 from the sales of Class A shares and
$3,216,962 in contingent deferred sales charge imposed upon redemptions by
shareholders of Class B shares for the six months ended June 30, 1995.
NOTE C: DISTRIBUTION SERVICES AGREEMENT
The Fund has adopted a Distribution Services Agreement (the 'Agreement')
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Agreement, the Fund pays a distribution fee to the Distributor at an annual
rate of up to .30 of 1% of the Fund's average daily net assets attributable to
Class A shares and 1% of the average daily net assets attributable to Class B
and Class C shares. Such fee is accrued daily and paid monthly. The Agreement
provides that the Distributor will use such payments in their entirety for
distribution assistance and promotional activities. The Distributor has
incurred expenses in excess of the distribution costs reimbursed by the Fund in
the amount of $18,548,574 and $1,889,183 for Class B and C shares,
respectively; such costs may be recovered from the Fund in future periods so
long as the Agreement is in effect. In accordance with the Agreement, there is
no provision for recovery of unreimbursed distribution costs, incurred by the
Distributor, beyond the current fiscal year for Class A shares. The Agreement
also provides that the Adviser may use its own resources to finance the
distribution of the Fund's shares.
NOTE D: INVESTMENT TRANSACTIONS
Purchases and sales of investment securities (excluding short-term investments)
aggregated $2,603,488,168 and $2,859,424,372, respectively, for the six months
ended June 30, 1995.
At June 30, 1995 the cost of securities for federal income tax purposes was the
same as the cost for financial reporting purposes. Accordingly, gross
unrealized appreciation of investments was $40,932,620 and gross unrealized
depreciation of investments and financial futures contracts was 1,762,302
resulting in net unrealized appreciation of $39,170,318. For federal income tax
purposes, the Fund had a capital loss carryforward at December 31, 1994 of
$215,166,300 of which $3,776,793 expires in 1998 and $211,389,507 expires in
2002. As of June 30, 1995, there were no outstanding written options.
10
ALLIANCE MORTGAGE SECURITIES INCOME FUND
NOTE E: ILLIQUID SECURITY
DATE
ACQUIRED COST VALUE
FNMA Series 1990-145B. 10/29/90 $1,621,982 $1,736,286
The security shown above is illiquid and has been valued at fair value in
accordance with the procedures described in Note A.
The value of the security at June 30, 1995 represents 0.1% of net assets.
NOTE F: CAPITAL STOCK
There are 1,800,000,000 shares of $.01 par value capital stock authorized
designated Class A, Class B and Class C shares.
Each class consists of 600,000,000 authorized shares. Transactions in capital
stock were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 DECEMBER 31, JUNE 30, 1995 DECEMBER 31,
(UNAUDITED) 1994 (UNAUDITED) 1994
<S> <C> <C> <C> <C>
CLASS A
Shares sold 781,106 4,590,689 $6,542,759 $40,889,085
Shares issued in reinvestment of
dividends 1,183,370 3,056,141 9,894,853 26,209,764
Shares redeemed (7,920,053) (30,797,504) (66,246,676) (261,551,480)
Net decrease (5,955,577) (23,150,674) $(49,809,064) $(194,452,631)
CLASS B
Shares sold 1,749,102 10,395,450 $14,645,337 $93,124,118
Shares issued in reinvestment of
dividends 1,445,997 4,486,737 12,073,499 38,565,381
Shares redeemed (17,781,718) (58,134,672) (148,687,723) (495,029,365)
Net decrease (14,586,619) (43,252,485) $(121,968,887) $(363,339,866)
CLASS C
Shares sold 488,259 6,008,369 $4,096,919 $53,836,318
Shares issued in reinvestment of
dividends 113,760 433,318 947,498 3,731,183
Shares redeemed (1,739,942) (9,142,915) (14,566,372) (78,484,668)
Net decrease (1,137,923) (2,701,228) $(9,521,955) $(20,917,167)
</TABLE>
* Commencement of distribution.
11
NOTES TO FINANCIAL STATEMENTS (CONT.)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
NOTE G: REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, pertaining to the types of
securities in which it invests with member banks of the Federal Reserve System
and with broker dealers who are recognized as primary dealers in U.S.
government securities by the Federal Reserve Bank of New York. The Fund's Board
of Directors has established procedures which are periodically reviewed by the
Board to monitor the creditworthiness of the dealers with which the Fund enters
into repurchase agreement transactions. The Fund always requires continual
maintenance by its custodian for its account in the Federal Reserve Treasury
Book Entry System of collateral in an amount equal or in excess of the resale
price in each agreement.
In the event a vendor defaults on its repurchase obligation, the Fund might
suffer a loss to the extent that the proceeds from the sale of the collateral
were less than the repurchase price.
NOTE H: SECURITY LENDING
A Fund may make secured loans of portfolio securities to brokers, dealers and
financial institutions, provided that cash, liquid high-grade debt securities
or bank letters of credit equal to at least 100% of the market value of the
securities loaned is deposited and maintained by the borrower with the Fund.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible loss of rights in the collateral should the borrower fail
financially. In determining whether to lend securities to a particular
borrower, Alliance will consider all relevant facts and circumstances,
including the creditworthiness of the borrower. While securities are on loan,
the borrower will pay the Fund any income earned thereon and the Fund may
invest any cash collateral in portfolio securities, thereby earning additional
income, or receive an agreed upon amount of income from a borrower who has
delivered equivalent collateral. When such securities are borrowed against cash
the Fund agrees to pay the borrower of such securities a 'rebate rate' for the
use of the cash the borrower has pledged as collateral. The rebate rate is the
spread between the interest rate received and interest rate paid in the
repurchase agreement market by the securities borrower.
12
FINANCIAL HIGHLIGHTS
ALLIANCE MORTGAGE SECURITIES INCOME FUND
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS A
SIX MONTHS
ENDED
JUNE 30, 1995 YEAR ENDED DECEMBER 31,
(UNAUDITED) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of year $8.13 $9.29 $9.08 $9.21 $8.79 $8.76
Income From Investment Operations
Net investment income .28 .57 .67 .77 .88 .87
Net realized and unrealized gain (loss)
on investments .49 (1.13) .23 (.09) .41 .03
Net increase (decrease) in net asset
value from operations .77 (.56) .90 .68 1.29 .90
Less: Distributions
Dividends from net investment income(.30) (.58) (.67) (.81) (.87) (.87)
Dividends in excess of net investment
income -0- -0- (.02) -0- -0- -0-
Tax return of capital distribution -0- (.02) -0- -0- -0- -0-
Net asset value, end of year $8.60 $ 8.13 $ 9.29 $ 9.08 $ 9.21 $ 8.79
Total Return
Total investment return based on
net asset value (a) 9.54% (6.14)% 10.14% 7.73% 15.44% 11.01%
Ratios/Supplemental Data
Net assets, end of year
(000's omitted) $535,191 $553,889 $848,069 $789,898 $544,171 $495,353
Ratio of expenses to average net
assets 1.47%* 1.29% 1.00% 1.18% 1.16% 1.12%
Ratio of expenses to average net assets
excluding interest expense 1.04%* .97% -0- -0- -0- -0-
Ratio of net investment income to
average net assets 6.86%* 6.77% 7.20% 8.56% 9.92% 10.09%
Portfolio turnover rate 158% 438% 622% 555% 439% 393%
</TABLE>
See footnotes page 15.
13
FINANCIAL HIGHLIGHTS (CONTINUED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS B
JANUARY 30,
SIX MONTHS 1992**
ENDED TO
JUNE 30, 1995 YEAR ENDED DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1994 1993 1992
<S> <C> <C> <C> <C>
Net asset value, beginning of period $8.13 $ 9.29 $ 9.08 $ 9.16
Income From Investment Operations
Net investment income .28 .51 .61 .68
Net realized and unrealized gain (loss)
on investments .46 (1.14) .22 (.08)
Net increase (decrease) in net asset
value from operations .74 (.63) .83 .60
Less: Distributions
Dividends from net investment income (.26) (.51) (.60) (.68)
Dividends in excess of net investment
income -0- -0- (.02) -0-
Tax return of capital distribution -0- (.02) -0- -0-
Net asset value, end of period $8.61 $8.13 $ 9.29 $ 9.08
Total Return
Total investment return based on
net asset value (a) 9.26% (6.84)% 9.38% 7.81%
Ratios/Supplemental Data
Net assets, end of period (000's omitted) $850,246 $921,418$ 1,454,303 $1,153,957
Ratio of expenses to average net assets 2.18%* 2.00% 1.70% 1.67%*
Ratio expense to average net assets
excluding interest expense 1.75%* 1.68% -0- -0-
Ratio of net investment income to
average net assets 6.15%* 6.05% 6.47% 5.92%*
Portfolio turnover rate 158% 438% 622% 555%
</TABLE>
See footnotes page 15.
14
ALLIANCE MORTGAGE SECURITIES INCOME FUND
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS C
SIX MONTHS MAY 3, 1993**
ENDED YEAR ENDED TO
JUNE 30, 1995 DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1994 1993
<S> <C> <C> <C>
Net asset value, beginning of period $8.13 $ 9.29 $ 9.30
Income From Investment Operations
Net investment income .29 .51 .40
Net realized and unrealized gain (loss)
on investments .45 (1.14) -0-
Net increase (decrease) in net asset
value from operations .74 (.63) .40
Less: Distributions
Dividends from net investment income (.26) (.51) (.40)
Dividends in excess of net investment
income -0- -0- (.01)
Tax return of capital distribution -0- (.02) -0-
Net asset value, end of period $8.61 $ 8.13 $9.29
Total Return
Total investment return based on
net asset value (a) 9.26% (6.84)% 4.34%
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) $51,991 $58,338 $91,724
Ratio of expenses to average net assets 2.17%* 1.97% 1.67%*
Ratio expense to average net assets
excluding interest expense 1.74%* 1.69% -0-
Ratio of net investment income to
average net assets 6.16%* 6.06% 5.92%*
Portfolio turnover rate 158% 438% 622%
</TABLE>
(a) Total investment return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value during the period, and
redemption on the last day of the period. Initial sales charge or contingent
deferred sales charge is not reflected in the calculation of total investment
return. Total investment return calculated for a period of less than one year
is not annualized.
* Annualized.
** Commencement of distribution.
15
ALLIANCE MORTGAGE SECURITIES INCOME FUND
BOARD OF DIRECTORS
JOHN D. CARIFA, CHAIRMAN AND PRESIDENT
RUTH BLOCK (1)
DAVID H. DIEVLER (1)
JAMES R. GREENE (1)
DR. JAMES M. HESTER (1)
CLIFFORD L. MICHEL (1)
EUGENE F. O'NEIL (1)
ROBERT C. WHITE (1)
OFFICERS
KATHLEEN H. CORBET, SENIOR VICE PRESIDENT
WAYNE D. LYSKI, SENIOR VICE PRESIDENT
PATRICIA J. YOUNG, SENIOR VICE PRESIDENT
PAUL A. ULLMAN, VICE PRESIDENT
EDMUND P. BERGAN, JR., SECRETARY
MARK D. GERSTEN, TREASURER & CHIEF FINANCIAL OFFICER
PATRICK J. FARRELL, CONTROLLER
CUSTODIAN
STATE STREET BANK & TRUST COMPANY
225 Franklin Street
Boston, MA 02110
PRINCIPAL UNDERWRITER
ALLIANCE FUND DISTRIBUTORS, INC.
1345 Avenue of the Americas
New York, NY 10105
TRANSFER AGENT
ALLIANCE FUND SERVICES, INC.
P.O. Box 1520
Secaucus, NJ 07096-1520
Toll-free 1-(800)221-5672
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
787 Seventh Avenue
New York, NY 10019
LEGAL COUNSEL
SEWARD & KISSEL
One Battery Park Plaza
New York, NY 10004
(1) Member of the Audit Committee.
16
ALLIANCE MORTGAGE SECURITIES INCOME FUND
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
AllianceCapital
Mutual funds without the Mystery
THIS REPORT IS INTENDED SOLELY FOR DISTRIBUTION TO CURRENT SHAREHOLDERS
OF THE FUND.
R THESE REGISTERED SERVICE MARKS USED UNDER LICENSE FROM THE OWNER,
ALLIANCE CAPITAL MANAGEMENT L.P.
MORSR
