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New York, NY.
Permit No. 8048
Alliance
Mortgage
Securities
Income Fund
Annual Report
December 31, 1994
Alliance Mortgage Securities Income Fund
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
(Alliance Capital Logo)
Mutual funds without Mystery(R)
This report is distributed solely to shareholders of the Fund
and is not to be used as sales literature.
(R)These registered service marks used under license from the owner,
Alliance Capital Management L.P.
MORAR
<PAGE>
Letter To Shareholders
Alliance Mortgage Securities Income Fund
February 6, 1995
Dear Shareholder:
This past year was one of the most disappointing years on record for investors
in taxable bond funds. Alliance Mortgage Securities Income Fund, after 10
consecutive years of positive total return performance must, regrettably, report
a negative total return for the year. For the twelve months ended December 31,
1994, total returns for Alliance Mortgage Securities Income Fund were -6.14%
(Class A) and -6.84% (Class B and Class C), based on the net asset values. This
compares with a return of -1.61% for the unmanaged Lehman Brothers Mortgage-
Backed Securities Index over the same period. Over the last six months, your
Fund returned +0.61% (Class A) and +0.25% (Class B and Class C), based on the
net asset values, versus +0.51% for the index. Additional investment results
for your Fund appear on page 3.
HIGHER INTEREST RATES IMPACT
MORTGAGE MARKET
Throughout the year, the Federal Reserve has tightened monetary policy to
reflect its view that inflation is a serious concern. By the end of December,
the Federal Reserve had raised short-term interest rates six times. During
1994, two- year Treasury yields rose from 4.23% to 7.77% and 10-year Treasury
yields rose from 5.79% to 7.82%. Relative performance has been largely driven
by duration (price sensitivity to changes in interest rates) and within the
mortgage market, the probability that prepayments will continue to slow as a
result of higher interest rates. Funds with longer durations, such as
Alliance Mortgage Securities Income Fund, have generally been negatively
affected by these market trends. The Fund ended the period with a duration of
4.7 years.
PORTFOLIO ALLOCATION
Over the past six months the Fund was repositioned to reduce its exposure to
the impact of rising interest rates. Most notably we increased the percentage
of asset-backed floating rate securities and adjustable rate mortgages
(ARMs), while trimming fixed-rate mortgage and Treasury positions. These
changes reflect our view that ARMs will outperform comparable maturity
Treasury securities, even in an environment of higher short-term rates.
Finally, discount GNMA pass-through mortgages continue to represent a
significant portion of the Fund. It is our expectation that the demand for
these securities will outpace supply, which should lead to meaningful price
appreciation.
INVESTMENT OUTLOOK
We expect the Federal Reserve will maintain its focus on containing
inflationary pressures. Consequently, it likely will continue raising
interest rates until GDP growth is reduced to a non-inflationary level,
estimated to be 2.5% or less on an annual basis. As higher interest rates
work their way through the economy, growth should moderate from the pace of
1994. Prices at the early stages of the production cycle have increased, and
it is likely that overall inflation indices will experience some cyclical
pressures in 1995. However, we expect domestic inflation to peak at 4%, which
implies that bonds offer attractive real returns at current prices.
In this economic environment, mortgage assets should continue to perform well
compared with Treasury securities. Prepayments should continue to decline
over the next several months due to seasonal declines and the impact of
higher mortgage rates. Origination activity for both refinancings and
purchases should continue to decline, further reducing the available supply
of mortgages. Combined with lower volatility, these factors brighten our
outlook for the mortgage market in 1995.
We believe Alliance Mortgage Securities Income Fund represents an attractive
opportunity for investors seeking a high level of current income. The Fund
has outperformed a majority of its competitor funds over the last 10 years by
investing in securities of the highest quality and which we believe offer
superior total return potential. We
believe that this investment strategy will continue to benefit shareholders
<PAGE>
over the next year.
We appreciate your investment in Alliance Mortgage Securities Income Fund and
look forward to reporting its progress to you in the coming months.
Sincerely,
[Signature of John D. Carifa]
John D. Carifa
Chairman and President
[Signature of Patricia J. Young]
Patricia J. Young
Senior Vice President
[Signature of Paul A. Ullman]
Paul A. Ullman
Vice President
<PAGE>
Investment Results
Alliance Mortgage Securities Income Fund
Average Annual Total Return as of December 31, 1994
--------------------
CLASS A SHARES
--------------------
<TABLE>
<CAPTION>
Without With
Sales Charge Sales Charge
<S> <C> <C>
[bullet] One Year -6.14% -10.11%
[bullet] Five
Years +7.37 +6.44
[bullet] Ten Years +8.89 +8.42
[bullet] SEC Yield 6.78%
</TABLE>
--------------------
CLASS B SHARES
--------------------
<TABLE>
<CAPTION>
Without With
Sales Charge Sales Charge
<S> <C> <C>
[bullet] One Year -6.84% -9.46%
[bullet] Since Inception* +3.27 +2.98
[bullet] SEC Yield 6.45%
</TABLE>
--------------------
CLASS C SHARES
--------------------
<TABLE>
<CAPTION>
<S> <C>
[bullet] One Year -6.84%
[bullet] Since Inception* -1.68
[bullet] SEC Yield 6.45%
</TABLE>
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 sales charge (Class A) or 3% contingent deferred sales
charge (Class B); 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 December 31, 1994.
*Inception: 1/8/93, Class B; 5/3/93, Class C.
<PAGE>
<TABLE>
<CAPTION>
1 2 3 4
1 Mort Sec ML 7-10 Yr Lipper Avg
<S> <C> <C> <C> <C>
2 12/31/84 9578 11422 10000
3 12/31/85 11336 14519 11546
4 12/31/86 12604 17224 12868
5 12/31/87 13044 17096 13199
6 12/31/88 14171 18332 14172
7 12/31/89 15726 21303 15938
8 12/31/90 17457 23067 17479
9 12/31/91 20153 27106 20041
10 12/31/92 21711 29205 21232
11 12/31/93 23914 32929 22770
12 12/31/94 22446 31071 22034
</TABLE>
<PAGE>
Portfolio of Investments
December 31, 1994
<TABLE>
<CAPTION>
Principal
Amount
(000) Value
<S> <C> <C>
MORTGAGE RELATED SECURITIES--98.3%
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION--69.8%
6.50%, 6/15/08-7/15/09 (a) $ 97,892 $ 89,448,870
7.00%, 12/15/22-8/15/24 242,648 217,776,833
7.00% *(c) 140,000 137,410,000
7.50%, 4/15/17-2/15/24 381,432 353,896,286
8.00%, 4/15/17-10/15/24 46,692 44,634,592
8.50%, 5/15/16-12/15/24 223,915 219,996,015
9.00%, 4/15/16 6 6,101
10.00%, 10/01/17-6/01/20 2,111 2,176,801
11.00%, 1/01/01(a) 19 19,418
11.50%, 3/15/10-11/01/15 1,639 1,768,343
12.00%, 2/15/14-12/01/15 461 502,841
12.50%, 3/15/11-5/15/15 438 482,322
13.00%, 1/01/11-11/01/14 949 1,069,770
13.00%, 11/15/99-1/15/00 41 43,229
13.50%, 5/15/10-10/15/14 899 1,022,548
Total Government National
Mortgage Association
(cost $1,128,351,632) 1,070,253,969
COLLATERALIZED MORTGAGE
OBLIGATIONS--14.3%
Donaldson, Luftkin & Jenrette
Series 1994-10 1A
5.755%, 5/25/24(c) 43,670 43,097,882
Series 1994-QE1
6.462%, 4/25/24(c) 18,369 18,196,783
Series 1994-Q12 Cl.A 6.467%,
9/25/24(c) 63,908 64,425,741
Series 1994-QE2 Cl.A 6.587%,
7/25/24(c) 29,668 29,353,248
FNMA Series 1993-196SC 2.891%,
10/25/08 11,763 6,499,159
Saxon Mortgage Securities Corp.
Series 1993-7A
5.972%, 8/25/23(c) 58,919 57,775,557
Total Collateralized Mortgage
Obligations
(cost $223,559,899) 219,348,370
FEDERAL HOME LOAN
MORTGAGE CORP.--7.9%
5.69%, 10/01/24(c)(e) $ 54,463 $ 53,934,690
5.71%, 12/01/24(c)(e) 46,902 46,066,972
11.50%, 10/01/10-6/01/20 5,919 6,246,332
12.25%, 8/01/13-7/01/14 1,242 1,315,946
12.50%, 6/01/19-6/15/19 7,790 8,724,362
12.75%, 6/01/12-2/01/14 393 439,670
13.00%, 5/01/14-12/01/18 3,044 3,439,551
13.50%, 1/01/12-10/01/16 822 934,783
14.75%, 3/01/10 102 116,493
Total Federal Home Loan
Mortgage Corp.
(cost $120,782,367) 121,218,799
FEDERAL NATIONAL MORTGAGE ASSOCIATION--6.2%
5.71%, 12/01/24(e) 86,748 85,438,141
5.87%* 6,300 6,192,703
6.25%* 2,500 2,483,500
12.00%, 2/01/98-7/01/00(a) 87 94,467
Total Federal National
Mortgage Association
(cost $94,228,141) 94,208,811
STRIPPED MORTGAGE BACKED SECURITIES--0.1%
FNMA Series 1990-145B 10.00%,
12/25/20 (Ioette)(b)(d)
(cost $1,874,360) 1,874 1,814,660
Total Mortgage-Related
Securities
(cost $1,568,796,399) 1,506,844,609
<PAGE>
ASSET BACKED SECURITIES--13.2%
Lehman Card Account Trust
Series 1994-1A2
6.353%, 12/31/00 $85,550 $ 85,353,235
LINCS Series 1994-2 7.292%,
8/10/95 89,100 85,981,500
MBNA Master Credit Card Trust
Series 1994-CA 6.375%,
3/15/03 11,300 11,287,640
World Omni Wholesale Master
Trust Series 1994-1A 5.825%,
10/25/01 $20,600 $ 20,575,280
Total Asset Backed Securities
(cost $206,533,601) 203,197,655
TOTAL INVESTMENTS--111.5%
(cost $1,775,330,000) 1,710,042,264
Other assets less liabilities--(11.5%) (176,396,770)
NET ASSETS--100% $1,533,645,494
</TABLE>
- -------------------------------------------------------------------------------
* Securities to be announced at a future date.
(a) 15 year mortgage.
(b) Yield to maturity at 12/31/94.
(c) Adjustable rate mortgages stated interest rate in effect at 12/31/94.
(d) Illiquid Security (See Notes A&E)
(e) Securities, or a portion thereof, segregated to collaterize reverse
repurchase agreements with an aggregate market value of approximately
$141,788,000.
Glossary of Terms:
Ioette--Interest only.
LINCS--Linked Certificates.
See notes to financial statements.
<PAGE>
Statement Of Assets And Liabilities
December 31, 1994
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at value (cost $1,775,330,000) $1,710,042,264
Cash 2,681,722
Receivable for investment securities sold 109,914,888
Interest receivable 11,433,486
Margin deposits, at value 526,376
Receivable for capital stock sold 428,170
Miscellaneous receivable 1,488,418
Other assets 59,950
Total assets 1,836,575,274
LIABILITIES
Payable for investment securities purchased 146,167,172
Reverse repurchase agreement 141,787,997
Payable for capital stock redeemed 8,410,880
Dividends payable 4,716,760
Payable to advisor 1,329,557
Distribution fee payable 126,025
Accrued expenses 391,389
Total liabilities 302,929,780
NET ASSETS $1,533,645,494
COMPOSITION OF NET ASSETS
Capital stock, at par $ 1,886,582
Additional paid-in capital 1,816,266,321
Distributions in excess of net investment income (4,716,760)
Accumulated net realized loss (214,834,606)
Net unrealized depreciation of investments and futures contracts (64,956,043)
$1,533,645,494
CALCULATION OF MAXIMUM OFFERING PRICE
Class A Shares
Net asset value and redemption price per share
($553,888,826/68,156,025 shares of capital stock issued and
outstanding) $8.13
Sales charge--4.25% of public offering price .36
Maximum offering price $8.49
Class B Shares
Net asset value and offering price per share
($921,418,434/113,326,059 shares of capital stock issued and
outstanding) $8.13
Class C Shares
Net asset value, redemption and offering price per share
($58,338,234/7,176,159 shares of capital stock issued and outstanding) $8.13
</TABLE>
- -------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
Statement Of Operations
Year Ended December 31, 1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest $135,681,863
Fee income 24,200,952 $ 159,882,815
EXPENSES
Advisory fee 9,602,296
Distribution fee-Class A 2,121,503
Distribution fee-Class B 11,940,916
Distribution fee-Class C 847,425
Transfer agency 2,360,033
Custodian 541,652
Administrative 312,246
Printing 226,353
Registration 145,758
Audit and legal 104,090
Taxes 101,822
Directors' fees 23,008
Miscellaneous 58,620
Total expenses before interest 28,385,722
Interest expense 6,230,797 34,616,519
Net investment income 125,266,296
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments (211,057,813)
Net change in unrealized appreciation of investments and futures contracts (66,518,327)
Net loss on investments (277,576,140)
NET DECREASE IN NET ASSETS FROM OPERATIONS $(152,309,844)
</TABLE>
Statement Of Changes In Net Assets
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31
1994 1993
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 125,266,296 $ 151,036,842
Net realized gain (loss) on investments (211,057,813) 63,117,975
Net change in unrealized appreciation of investments (66,518,327) (12,977,674)
Net increase (decrease) in net assets from operations (152,309,844) 201,177,143
DIVIDENDS TO SHAREHOLDERS FROM:
Net investment income
Class A (47,603,015) (60,839,106)
Class B (71,792,708) (88,476,279)
Class C (5,089,134) (1,721,457)
Dividends in excess of net investment income
Class A -0- (1,801,767)
Class B -0- (2,620,249)
Class C -0- (50,981)
Tax return of capital distribution
Class A (1,891,214) -0-
Class B (2,852,244) -0-
Class C (202,186) -0-
CAPITAL STOCK TRANSACTIONS
Net increase (decrease) (578,709,664) 404,573,446
Total increase (decrease) (860,450,009) 450,240,750
NET ASSETS
Beginning of year 2,394,095,503 1,943,854,753
End of year $1,533,645,494 $2,394,095,503
</TABLE>
- -------------------------------------------------------------------------------
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1994
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. As a result of a tax return of capital distribution a
reclassification was made to decrease additional paid in capital by
$4,945,644.
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.
<PAGE>
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 year ended December 31, 1994. Pursuant to the advisory agreement, the
Fund paid $312,246 to the Adviser representing the cost of certain legal and
accounting services provided to the Fund by the Adviser for the year ended
December 31, 1994.
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 $1,571,545 for the year ended December 31, 1994.
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 $68,298 from the sales of Class A shares
and $3,792,887 in contingent deferred sales charge imposed upon redemptions
by shareholders of Class B shares for the year ended December 31, 1994.
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 $16,372,116 and $1,459,018 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 $9,169,227,083 and $10,513,982,423, respectively, for
the year ended December 31, 1994.
At December 31, 1994 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 $80,374,903 and gross unrealized
depreciation of investments and financial futures was $145,330,946 resulting in
net unrealized depreciation of $64,956,043. 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.
<PAGE>
NOTE E: Illiquid Security
<TABLE>
<CAPTION>
Date
Acquired Cost Value
<S> <C> <C> <C>
FNMA Series 1990-145B. 10/29/90 $1,874,360 $1,814,660
</TABLE>
The security shown above is illiquid and has been valued at fair value in
accordance with the procedures discribed in Note A.
The value of the security at December 31, 1994 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
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
Class A 1994 1993 1994 1993
<S> <C> <C> <C> <C>
Shares sold 4,590,689 19,997,415 $ 40,889,085 $ 185,928,556
Shares issued in
reinvestment of
dividends 3,056,141 4,174,239 26,209,764 38,845,054
Shares redeemed (30,797,504) (19,892,875) (261,551,480) (185,308,234)
Net increase
(decrease) (23,150,674) 4,278,779 $(194,452,631) $ 39,465,376
Class B
Shares sold 10,395,450 52,539,225 $ 93,124,118 $ 488,077,762
Shares issued in
reinvestment of
dividends 4,486,737 5,427,008 38,565,381 50,489,944
Shares redeemed (58,134,672) (28,527,598) (495,029,365) (265,857,531)
Net increase
(decrease) (43,252,485) 29,438,635 $(363,339,866) $ 272,710,175
</TABLE>
<TABLE>
<CAPTION>
Year Ended May 3, 1993* Year Ended May 3, 1993*
December 31, to December 31, December 31, to December
Class C 1994 1993 1994 31, 1993
<S> <C> <C> <C> <C>
Shares sold 6,008,369 12,511,499 $ 53,836,318 $116,937,320
Shares issued in
reinvestment of
dividends 433,318 119,876 3,731,183 1,118,470
Shares redeemed (9,142,915) (2,753,988) (78,484,668) (25,657,895)
Net increase
(decrease) (2,701,228) 9,877,387 $(20,917,167) $ 92,397,895
</TABLE>
- -------------------------------------------------------------------------------
* Commencement of distribution.
<PAGE>
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: Reverse Repurchase Agreements
Under a reverse repurchase agreement, the Fund sells securities and agrees to
repurchase them at a mutually agreed upon date and price.
As of December 31, 1994, the Fund had entered into reverse repurchase
agreements in the amount of $141,787,997 with Lehman Brothers, Inc.
with an interest rate of 6.45-6.55% maturing on January 3, 1995. For the year
ended December 31, 1994, the maximum amount or reverse repurchase agreements
outstanding was $463,325,000, the average amount outstanding was approximately
$194,112,000, and the daily weighted average interest rate was 3.89%.
NOTE I: Futures Contracts
At December 31, 1994, the Fund had entered into exchange traded financial
futures contracts as described below. The Fund bears the market risk that
arises from changes in the value of these financial instruments. At the time
the Fund enters into a futures contract, it is required to make a margin
deposit with its custodian of a specified amount of cash or eligible
securities. Subsequently, gain or loss is recognized and payments are made on
a daily basis between the Fund and the broker as the market price of the
futures contract fluctuates. The aggregate value of cash pledged to cover
margin requirements for open positions at December 31, 1994 was $526,376.
<TABLE>
<CAPTION>
Number of Expiration Unrealized
Type Contracts Position Month Depreciation
<S> <C> <C> <C> <C>
U.S. T-Note 268 Short March, 1995 $ 64,094
Euro $ 105 Short March, 1995 18,375
Euro $ 95 Short June, 1995 49,875
Euro $ 94 Short September, 1995 51,700
Euro $ 92 Short December, 1995 49,550
Euro $ 91 Short March, 1996 40,950
Euro $ 88 Short June, 1996 33,000
Euro $ 69 Short September, 1996 24,150
$331,694
</TABLE>
<PAGE>
Financial Highlights
- --Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Class A
Year Ended December 31,
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $ 9.29 $ 9.08 $9.21 $ 8.79 $ 8.76
Income From Investment Operations
Net investment income .57 .67 .77 .88 .87
Net realized and unrealized gain
(loss) on investments (1.13) .23 (.09) .41 .03
Net increase (decrease) in net asset
value from operations (.56) .90 .68 1.29 .90
Less: Distributions
Dividends from net investment income (.58) (.67) (.81) (.87) (.87)
Dividends in excess of net
investment income -0- (.02) -0- -0- -0-
Tax return of capital distribution (.02) -0- -0- -0- -0-
Net asset value, end of year $ 8.13 $ 9.29 $9.08 $ 9.21 $ 8.79
Total Return
Total investment return based on net
asset value (a) (6.14)% 10.14% 7.73% 15.44% 11.01%
Ratios/Supplemental Data
Net assets, end of year (000's
omitted) $553,889 $848,069 $789,898 $544,171 $495,353
Ratio of expenses to average net
assets 1.29% 1.00% 1.18% 1.16% 1.12%
Ratio of expenses to average net
assets excluding interest expense .97% -0- -0- -0- -0-
Ratio of net investment income to
average net assets 6.77% 7.20% 8.56% 9.92% 10.09%
Portfolio turnover rate 438% 622% 555% 439 393%
</TABLE>
- -------------------------------------------------------------------------------
See footnotes page 14.
<PAGE>
Financial Highlights (cont.)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
January 30, 1992** Year Ended May 3, 1993**
Year Ended December 31, to December 31, to
1994 1993 December 31, 1992 1994 December 31, 1993
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 9.29 $9.08 $9.16 $ 9.29 $9.30
Income From Investment
Operations
Net investment income .51 .61 .68 .51 .40
Net realized and unrealized gain
(loss) on investments (1.14) .22 (.08) (1.14) -0-
Net increase (decrease) in net asset
value from operations (.63) .83 .60 (.63) .40
Less: Distributions
Dividends from net investment income (.51) (.60) (.68) (.51) (.40)
Dividends in excess of net
investment income -0- (.02) -0- -0- (.01)
Tax return of capital distribution (.02) -0- -0- (.02) -0-
Net asset value, end of period $8.13 $9.29 $9.08 $ 8.13 $9.29
Total Return
Total investment return based on net
asset value (a) (6.84)% 9.38% 7.81% (6.84)% 4.34%
Ratios/Supplemental Data
Net assets, end of period (000's
omitted) $921,418 $1,454,303 $1,153,957 $58,338 $91,724
Ratio of expenses to average net
assets 2.00% 1.70% 1.67%* 1.97% 1.67%*
Ratio expense to average net assets
excluding interest expense 1.68% -0- -0- 1.69% -0-
Ratio of net investment income to
average net assets 6.05% 6.47% 5.92%* 6.06% 5.92%*
Portfolio turnover rate 438% 613% 555% 438% 622%
- ----------------------------------------------------------------------------------------------------------
<FN>
(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.
</FN>
</TABLE>
<PAGE>
Report of Ernest & Young LLP
Independent Auditors
To the Shareholders and Board of Directors
Alliance Mortgage Securities Income Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Alliance Mortgage Securities Income Fund, Inc., including the portfolio of
investments, as of December 31, 1994, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of
the two years in the period then ended and the financial highlights for each
of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of December 31, 1994, by correspondence with the
custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Alliance Mortgage Securities Income Fund, Inc. at December 31, 1994, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods, in conformity with generally
accepted accounting principles.
[Signature of Ernst & Young LLP]
New York, New York
February 13, 1995
<PAGE>
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
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.
