ALLIANCE MORTGAGE SECURITIES INCOME FUND
ANNUAL REPORT
DECEMBER 31, 1995
LETTER TO SHAREHOLDERS ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
February 8, 1996
Dear Shareholder:
The U.S. bond market continued its impressive, broad-based rally over the past
six months. Despite stronger economic growth, the rally strengthened, as
restrained inflationary pressures and a more accommodative monetary policy
buoyed investor confidence. Treasury and mortgage obligations both performed
well, though mortgage returns were tempered by higher prepayment expectations.
Across all major sectors of the U.S. fixed income market, longer-duration
securities outperformed shorter-duration securities as interest rates for all
maturities declined.
INVESTMENT RESULTS
Listed below is Alliance Mortgage Securities Income Fund's performance through
the fiscal year ended December 31, 1995. Also shown is the return for the
overall domestic mortgage securities market, represented by the Lehman Brothers
(LB) Mortgage-Backed Securities Index, and the average return for Lipper's
universe of U.S. mortgage funds, which reflects performance of 58 funds
(complete descriptions of these unmanaged benchmarks appear on page 4):
Twelve Months Ended December 31, 1995
Total Return Ending NAV
------------ ----------
ALLIANCE MORTGAGE SECURITIES INCOME FUND
Class A +15.34% $8.75
Class B +14.48% $8.75
Class C +14.46% $8.75
LB MORTGAGE-BACKED SECURITIES INDEX +16.80%
LIPPER MORTGAGE FUNDS AVERAGE +16.23%
The Fund's total returns are based on the net asset values of each class of
shares as of December 31; additional investment results appear on page 3. Also
provided on page 4 is a chart that shows the performance of a hypothetical
$10,000 initial investment in Alliance Mortgage Securities Income Fund Class A
shares over a 10-year period through the end of December.
ECONOMIC REVIEW
While the U.S. economy slowed in the first half of 1995, growth reaccelerated
in the third quarter due to larger than expected increases in residential
housing, government spending and business inventories. Fourth quarter economic
growth was less robust, however. Retail sales remained weak despite significant
discounting during the holiday season. Gains in real disposable income slowed
and personal debt levels continued to escalate. Growth also remained sluggish
in the manufacturing sector. The National Association of Purchasing Management
(NAPM) Index rose modestly to 47.3% in November but remained below 50% for five
consecutive months. (A reading below 50% signals a slowdown in manufacturing
output.)
Inflation data remain very favorable for the bond market. Broad price indices
such as the Consumer Price Index and Producer Price Index have risen very
modestly and labor costs remain under control. The benign inflation outlook and
the chance of a significant federal government deficit reduction package may
allow the Federal Reserve to cut interest rates further in the months ahead.
MORTGAGE MARKET REVIEW
During 1995, mortgage rates continued to decline. However, the incentive to
refinance in 1995 differed from the 1993 experience because Treasury bill rates
ended the period higher than they were in 1993. This made adjustable rate
mortgages and other mortgages tied to the front end of the yield curve less
attractive refinancing alternatives than they were in the last rally.
Therefore, in spite of the low level of rates, prepayments for fixed rate
mortgages did not reach the levels experienced in 1993.
During the reporting period, mortgages outperformed Treasury securities on a
duration adjusted basis. During the first and third fiscal quarters, the
mortgage market performed well. Second quarter was the most difficult because
the continuing rally was combined with rising volatility which had a negative
impact on mortgage-backed securities.
PORTFOLIO ACTIVITY
During the period the portfolio was invested predominantly in mortgage-backed
securities (MBS) with a small allocation to Treasury securities. The MBS
fixed-rate coupons held in the portfolio varied with our outlook for
1
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
prepayments and the level of market volatility. For example, in the first part
of the period, we held premium mortgages (which increased the portfolio's
yield) and bought options so the portfolio would benefit in a declining rate
environment. In the second half of the year, we reduced the positions in
premium mortgages and added lower dollar-price MBS to increase the convexity of
the portfolio. The Fund's holdings remain neutrally constructed with respect to
interest rate changes.
INVESTMENT OUTLOOK
It is our view that U.S. economic growth will remain modest in the period
ahead. Our forecast calls for a fixed based year GDP growth rate of 2.0% in the
first six months of the year ('fixed based year' refers to the government's
traditional GDP measure versus the new 'chain-weighted' measure). With few
inflationary pressures on the horizon, the Federal Reserve recently authorized
a minor, 25-basis point reduction in interest rates, and may cut further to
stimulate consumer expenditures and investment. If our forecast proves correct,
the result should be further gains in U.S. bond prices.
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 strategy 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 in the
coming months.
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 DECEMBER 31, 1995
CLASS A SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
---------------------------
. One Year +15.34% +10.45%
. Five Years +8.20% +7.26%
. Ten Years +8.61% +8.14%
SEC Yield 5.96%
CLASS B SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
---------------------------
. One Year +14.48% +11.48%
. Since Inception* +6.02% +6.02%
SEC Yield 5.52%
CLASS C SHARES
. One Year +14.46%
. Since Inception* +4.08%
SEC Yield 5.52%
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 December 31, 1995.
* Inception: 1/30/92, Class B; 5/3/93, Class C.
3
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ALLIANCE MORTGAGE SECURITIES INCOME FUND
GROWTH OF A $10,000 INVESTMENT:
12/31/85 TO 12/31/95
$27,000
$24,000
$21,000
$18,000
$15000
$12,000
$9,000
12/31/85 12/31/95
LB MORTGAGE-BACKED SECURITIES INDEX
LIPPER U.S. MORTGAGE FUNDS AVERAGE
MORTGAGE SECURITIES INCOME FUND CLASS A: $21,871
This chart illustrates the total value of an assumed $10,000 investment in
Alliance Mortgage Securities Income Fund Class A shares over a 10-year period
after deducting the maximum 4.25% sales charge, and with dividends and capital
gains reinvested. Performance for Class B and Class C shares will vary from the
results shown above due to differences in expenses charged to those classes.
Results should not be considered representative of future gain or loss in
capital value or dividend income.
The Lehman Brothers Mortgage-Backed Securities Index is composed of all fixed
rate bonds backed by mortgage pools of the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC) and the
Federal National Mortgage Association (FNMA).
The Lipper U.S. Mortgage Funds Average reflects performance of 58 funds. These
funds have generally similar investment objectives to Alliance Mortgage
Securities Income Fund, although some funds included in the average may have
somewhat different investment policies.
When comparing Alliance Mortgage Securities Income Fund to the index and
average shown above, you should note that the Fund's performance reflects the
maximum sales charge of 4.25% while no such charges are reflected in the
performance of the index. Sales charges, where applicable, have been deducted
from the funds included in the average.
Mortgage Securities Income Fund
LB Mortgage-Backed Securities Index
Lipper U.S. Mortgage Funds Average
4
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995 ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- ---------------------------------------------------------------------------
MORTGAGE-RELATED SECURITIES-93.4%
FEDERAL HOME LOAN MORTGAGE CORP.-44.1%
7.00%, 8/01/09-1/01/11 (GOLD) $188,861 $192,460,332
7.50%, 2/01/23-8/01/25 (GOLD) 165,496 169,685,137
8.00%, 11/01/22-10/01/25 (GOLD) 169,984 176,145,943
10.50%, 9/01/19-10/01/20 9,084 10,031,951
11.50%, 10/01/10-6/01/20 4,830 5,446,259
12.25%, 8/01/13-7/01/14 993 1,132,352
12.50%, 6/01/19-6/15/19 6,061 7,015,289
12.75%, 6/01/12-2/01/14 341 394,070
13.00%, 5/01/14-12/15/18 2,416 2,827,658
13.50%, 1/01/12-10/01/16 597 707,269
14.75%, 3/01/10 85 101,237
Total Federal Home Loan Mortgage Corp.
(cost $557,978,233) 565,947,497
FEDERAL NATIONAL MORTGAGE ASSOCIATION-17.0%
8.00%, 3/01/23-11/01/25 102,326 105,971,046
8.50%, 6/01/24-9/01/25 102,383 106,862,462
11.50%, 1/01/99 5,093 5,806,144
12.00%, 2/01/98-7/01/00 70 73,977
Total Federal National Mortgage Association
(cost $214,166,513) 218,713,629
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-15.2%
7.00%, 7/20/25-8/20/25 (a) 47,751 48,765,708
8.00%, 4/15/17-10/15/24 (a) 42,543 44,328,366
8.50%, 9/15/24-12/15/24 93,767 98,455,407
9.00%, 12/15/19 5 5,737
10.00%, 10/15/17-6/15/20 1,694 1,864,916
11.00%, 1/20/01 16 16,853
11.50%, 3/15/10-11/15/15 1,217 1,392,624
12.00%, 2/15/14 336 390,063
12.50%, 3/15/11-5/15/15 343 404,565
13.00%, 11/15/99-1/15/00 34 35,764
15.00%, 2/15/12 1 620
Total Government National Mortgage Association
(cost $186,051,378) 195,660,623
COLLATERALIZED MORTGAGE OBLIGATIONS-14.5%
Countrywide Funding Corp.
Series 1995-2 Cl.A4
8.50%, 6/25/25 15,809 16,191,894
Donaldson, Lufkin & Jenrette
Series 1994-Q12
7.787%, 9/25/24 (c) 46,072 47,252,905
Series 1994-QE1 Cl.A1
7.907%, 4/25/24 (c)(d) 12,019 12,101,720
Series 1994-QE2 Cl.A1
8.017%, 7/25/24 (c)(d) 21,101 21,299,215
Federal Home Loan Mortgage Corp.
Series 1664 Cl.A (P/O)
Zero coupon, 12/15/23 13,893 13,146,440
Independent National Mortgage Corp.
Series 1995-E Cl.A1
7.744%, 4/25/25 (b) 40,104 40,630,501
Merrill Lynch Mortgage Investors, Inc.
Series 1995-C3 Cl.A3
7.089%, 12/26/25 35,598 36,737,137
Total Collateralized Mortgage Obligations
(cost $186,261,047) 187,359,812
5
PORTFOLIO OF INVESTMENTS (CONTINUED) ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- ---------------------------------------------------------------------------
COMMERCIAL MORTGAGE BACKED SECURITIES-2.6%
Donaldson, Lufkin & Jenrette
Series 1995-CF2 Cl.A3
6.85%, 11/17/05(d) $ 26,300 $ 26,891,750
Federal Home Loan Bank
Series 20-1
7.61%, 4/25/02 6,547 6,647,932
Total Commercial Mortgage Backed Securities
(cost $33,342,424) 33,539,682
Total Mortgage-Related Securities
(cost $1,177,799,595) 1,201,221,243
U.S. TREASURY SECURITIES-12.3%
U.S. Treasury Note
5.875%, 11/15/05 (e)
(cost $154,037,909) 154,310 157,781,975
ASSET BACKED SECURITIES-1.3%
Brazos Student Finance Corporation
Series 1995-A4 FRN 6.20%, 12/01/25
(cost $16,900,000) 16,900 16,905,240
SHORT TERM INVESTMENTS-5.1%
REPURCHASE AGREEMENT-5.1%
Prudential Securities
5.95%, dated 12/29/95, due 1/02/96,
collateralized by $50,000,000 FHLMC 1008F
6.95% (c), 10/15/20 and $28,756,000 FNMA
1991-34F 6.74% (c), 4/25/21
(amortized cost $65,026,000) $ 65,026 $ 65,026,000
TOTAL INVESTMENTS-112.1%
(cost $1,413,763,504) 1,440,934,458
Other assets less liabilities-(12.1%) (155,393,645)
NET ASSETS-100% $1,285,540,813
(a) Adjustable rate mortgages; stated interest rate in effect at December 31,
1995.
(b) Interest rate is indexed to a one year constant maturity treasury plus a
premium; stated interest rate in effect at December 31, 1995.
(c) Interest rate is indexed to London Interbank Offered Rate plus a premium;
stated interest rate in effect at December 31, 1995.
(d) Securities are exempt from registration under Rule 144A of the Securities
Act of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At December 31, 1995,
these securities amounted to $60,292,685 or 4.7% of net assets.
(e) Securities, or a portion thereof, loaned at December 31, 1995 with an
aggregate market value of $157,781,975 and cash collateral received from the
counterparty of Bear Stearns in the amount of $157,203,313.
Glossary of Terms:
FHLMC - Federal Home Loan Mortgage Corp.
FNMA - Federal National Mortgage Association.
FRN - Floating Rate Note.
P/O - Principal Only.
See notes to financial statements.
6
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995 ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $1,413,763,504) $1,440,934,458
Cash 1,657,874
Interest receivable 9,514,609
Receivable for investment securities sold 6,646,333
Receivable for capital stock sold 205,326
Other assets 15,326
Total assets 1,458,973,926
LIABILITIES
Deposit for securities loaned 157,338,887
Payable for investment securities purchased 6,658,995
Dividends payable 4,360,957
Payable for capital stock redeemed 2,908,970
Advisory fee payable 1,669,816
Distribution fee payable 152,004
Accrued expenses and other liabilities 343,484
Total liabilities 173,433,113
NET ASSETS $1,285,540,813
COMPOSITION OF NET ASSETS
Capital stock, at par $ 1,469,610
Additional paid-in capital 1,460,031,465
Distributions in excess of net investment income (4,360,957)
Accumulated net realized loss on investments (198,770,259)
Net unrealized appreciation of investments 27,170,954
$1,285,540,813
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share($502,390,341/
57,432,532 shares of capital stock issued and outstanding) $8.75
Sales charge-4.25% of public offering price .39
Maximum offering price $9.14
CLASS B SHARES
Net asset value and offering price per share($737,592,512/
84,320,400 shares of capital stock issued and outstanding) $8.75
CLASS C SHARES
Net asset value, redemption and offering price per share($45,557,960/
5,208,111 shares of capital stock issued and outstanding) $8.75
See notes to financial statements.
7
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995 ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
INVESTMENT INCOME
Interest $119,489,457
EXPENSES
Advisory fee $ 7,177,437
Distribution fee - Class A 1,586,741
Distribution fee - Class B 8,376,517
Distribution fee - Class C 513,701
Transfer agency 1,942,545
Custodian 362,869
Administrative 290,012
Printing 206,144
Audit and legal 170,003
Registration 131,488
Taxes 124,200
Directors' fees 23,530
Miscellaneous 50,802
Total expenses before interest 20,955,989
Interest expense 8,880,561
Total expenses 29,836,550
Net investment income 89,652,907
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 16,064,347
Net change in unrealized appreciation of investments 92,126,997
Net gain on investments 108,191,344
NET INCREASE IN NET ASSETS FROM OPERATIONS $197,844,251
See notes to financial statements.
8
STATEMENT OF CHANGES IN NET ASSETS ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
YEAR ENDED YEAR ENDED
DEC. 31,1995 DEC. 31,1994
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 89,652,907 $ 125,266,296
Net realized gain (loss) on investments 16,064,347 (211,057,813)
Net change in unrealized appreciation
(depreciation) of investments 92,126,997 (66,518,327)
Net increase (decrease) in net assets from
operations 197,844,251 (152,309,844)
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (35,713,261) (47,603,015)
Class B (50,484,743) (71,792,708)
Class C (3,099,100) (5,089,134)
Tax return of capital
Class A (1,057,774) (1,891,214)
Class B (1,495,283) (2,852,244)
Class C (91,791) (202,186)
CAPITAL STOCK TRANSACTIONS
Net decrease (354,006,980) (578,709,664)
Total decrease (248,104,681) (860,450,009)
NET ASSETS
Beginning of year 1,533,645,494 2,394,095,503
End of year $1,285,540,813 $1,533,645,494
See notes to financial statements.
9
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 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
Security transactions are accounted for on the date the securities are
purchased or sold. The Fund accretes discounts and premiums as adjustments to
interest income. Security gains and losses are determined on the identified
cost basis.
4. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date and are determined in accordance with income tax regulations.
5. RECLASSIFICATION OF COMPONENTS OF NET ASSETS
During the year, the Fund reclassified certain components of net assets. The
reclassification was the result of a tax return of capital. The
reclassification resulted in a net decrease to distributions in excess of net
investment income and a corresponding decrease to additional paid-in capital of
$2,644,848. Net assets were not affected by the reclassification.
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
fees, 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, 1995. Pursuant to the advisory agreement, the Fund paid $290,012
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, 1995.
10
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
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 $1,210,760 for the year ended December 31, 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 $15,075 from the sales of Class A shares and
$1,596,882 in contingent deferred sales charges imposed upon redemptions by
shareholders of Class B shares for the year ended December 31, 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 $15,837,781 and $2,076,306 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 $4,361,691,189 and $4,798,480,399, respectively, for the year ended
December 31, 1995.
At December 31, 1995 the cost of securities for federal income tax purposes was
substantially the same as the cost for financial reporting purposes.
Accordingly, gross unrealized appreciation of investments was $27,759,927 and
gross unrealized depreciation of investments was $588,973 resulting in net
unrealized appreciation of $27,170,954. For federal income tax purposes, the
Fund had a capital loss carryforward at December 31, 1995 of $198,735,479 which
expires in 2002.
1. 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 an 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.
11
NOTES TO FINANCIAL STATEMENTS (CONT.)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
NOTE E: 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:
SHARES AMOUNT
-------------------------- ------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1995 1994
------------ ------------ -------------- --------------
CLASS A
Shares sold 2,304,239 4,590,689 $ 19,703,528 $ 40,889,085
Shares issued in
reinvestment of
dividends 2,406,345 3,056,141 20,433,219 26,209,764
Shares redeemed (15,434,077) (30,797,504) (131,032,865) (261,551,480)
Net decrease (10,723,493) (23,150,674) $ (90,896,118) $(194,452,631)
CLASS B
Shares sold 2,932,891 10,395,450 $ 24,859,068 $ 93,124,118
Shares issued in
reinvestment of
dividends 2,762,632 4,486,737 23,430,516 38,565,381
Shares redeemed (34,701,182) (58,134,672) (294,722,980) (495,029,365)
Net decrease (29,005,659) (43,252,485) $(246,433,396) $(363,339,866)
CLASS C
Shares sold 946,878 6,008,369 $ 8,056,839 $ 53,836,318
Shares issued in
reinvestment of
dividends 195,729 433,318 1,654,570 3,731,183
Shares redeemed (3,110,655) (9,142,915) (26,388,875) (78,484,668)
Net decrease (1,968,048) (2,701,228) $(16,677,466) $(20,917,167)
NOTE F: SECURITY LENDING
The 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. As
of December 31, 1995 the Fund had entered into security lending agreements in
the amounts of $135,990,770 with J.P. Morgan, with an interest rate of 5.3%
maturing on January 2, 1996 and $21,338,887 with Bear Sterns & Co., with an
interest rate of 5.2% maturing on January 3, 1996. For the year ended December
31, 1995, the maximum amount of security lending agreements outstanding was
$405,958,875, the average amount outstanding was $172,756,497, and the daily
weighted average interest rate was 5.14%. 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 YEAR
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
----------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $8.13 $9.29 $9.08 $9.21 $8.79
INCOME FROM INVESTMENT OPERATIONS
Net investment income .57(a) .57 .67 .77 .88
Net realized and unrealized gain (loss)
on investments .64 (1.13) .23 (.09) .41
Net increase (decrease) in net asset
value from operations 1.21 (.56) .90 .68 1.29
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.57) (.58) (.67) (.81) (.87)
Dividends in excess of net investment
income -0- -0- (.02) -0- -0-
Tax return of capital (.02) (.02) -0- -0- -0-
Total dividends and distributions (.59) (.60) (.69) (.81) (.87)
Net asset value, end of year $8.75 $8.13 $9.29 $9.08 $9.21
TOTAL RETURN
Total investment return based on net
asset value (b) 15.34% (6.14)% 10.14% 7.73% 15.44%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(000's omitted) $502,390 $553,889 $848,069 $789,898 $544,171
Ratio of expenses to average net assets 1.66% 1.29% 1.00% 1.18% 1.16%
Ratio of expenses to average net assets
excluding interest expense 1.03% .97% 1.00% 1.18% 1.16%
Ratio of net investment income to
average net assets 6.77% 6.77% 7.20% 8.56% 9.92%
Portfolio turnover rate 285% 438% 622% 555% 439%
</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,
1992 (C)
YEAR ENDED DECEMBER 31, TO
------------------------------------ DECEMBER 31,
1995 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 .51(a) .51 .61 .68
Net realized and unrealized gain (loss)
on investments .64 (1.14) .22 (.08)
Net increase (decrease) in net asset
value from operations 1.15 (.63) .83 .60
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.51) (.60) (.68)
Dividends in excess of net investment
income -0- -0- (.02) -0-
Tax return of capital (.02) (.02) -0- -0-
Total dividends and distributions (.53) (.53) (.62) (.68)
Net asset value, end of period $8.75 $8.13 $ 9.29 $ 9.08
TOTAL RETURN
Total investment return based on net
asset value (b) 14.48% (6.84)% 9.38% 7.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period(000's omitted) $737,593 $921,418 $1,454,303 $1,153,957
Ratio of expenses to average net assets 2.37% 2.00% 1.70% 1.67%(d)
Ratio expenses to average net assets
excluding interest expense 1.74% 1.68% 1.70% 1.67%(d)
Ratio of net investment income to
average net assets 6.06% 6.05% 6.47% 5.92%(d)
Portfolio turnover rate 285% 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
CLASS C
------------------------------------
MAY 3,1993(C)
YEAR ENDED DECEMBER 31, TO
---------------------- DECEMBER 31,
1995 1994 1993
----------- --------- ------------
Net asset value, beginning of period $8.13 $ 9.29 $ 9.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income .51(a) .51 .40
Net realized and unrealized gain(loss)
on investments .64 (1.14) -0-
Net increase (decrease) in net asset
value from operations 1.15 (.63) .40
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.51) (.40)
Dividends in excess of net investment
income -0- -0- (.01)
Tax return of capital (.02) (.02) -0-
Total dividends and distributions (.53) (.53) (.41)
Net asset value, end of period $8.75 $ 8.13 $ 9.29
TOTAL RETURN
Total investment return based on net
asset value (b) 14.46% (6.84)% 4.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period(000's omitted) $45,558 $58,338 $91,724
Ratio of expenses to average net assets 2.35% 1.97% 1.67%(d)
Ratio expense to average net assets
excluding interest expense 1.73% 1.69% 1.67%(d)
Ratio of net investment income to
average net assets 6.07% 6.06% 5.92%(d)
Portfolio turnover rate 285% 438% 622%
(a) Based on average shares outstanding.
(b) 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.
(c) Commencement of distribution.
(d) Annualized.
15
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
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. (the 'Fund'), including the
portfolio of investments, as of December 31, 1995, 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, 1995, 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, 1995, 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.
Ernst & Young LLP
New York, New York
January 31, 1996
16
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.
17
THE ALLIANCE FAMILY OF MUTUAL FUNDS
_______________________________________________________________________________
FIXED INCOME
Alliance Bond Fund
U.S. Government Portfolio
Corporate Bond Portfolio
Alliance Global Dollar Government Fund
Alliance Mortgage Securities Income Fund
Alliance Mortgage Strategy Trust
Alliance Multi-Market Strategy Trust
Alliance North American Government Income Trust
Alliance Short-Term Multi-Market Trust
Alliance Short-Term U.S. Government Fund
Alliance World Income Trust
TAX-FREE INCOME
Alliance Municipal Income Fund
California Portfolio
Insured California Portfolio
Insured National Portfolio
National Portfolio
New York Portfolio
Alliance Municipal Income Fund II
Arizona Portfolio
Florida Portfolio
Massachusetts Portfolio
Michigan Portfolio
Minnesota Portfolio
New Jersey Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
GROWTH
The Alliance Fund
Alliance Counterpoint Fund
Alliance Global Small Cap Fund
Alliance Growth Fund
Alliance Premier Growth Fund
GROWTH & INCOME
Alliance Strategic Balanced Fund
Alliance Balanced Shares
Alliance Conservative Investors Fund
Alliance Growth & Income Fund
Alliance Growth Investors Fund
Alliance Income Builder Fund
Alliance Utility Income Fund
AGGRESSIVE GROWTH
Alliance Quasar Fund
Alliance Technology Fund
INTERNATIONAL
Alliance All-Asia Investment Fund
Alliance International Fund
Alliance New Europe Fund
Alliance Worldwide Privatization Fund
CLOSED-END FUNDS
Alliance All-Market Advantage Fund
Alliance Global Environment Fund
ACM Government Income Fund
ACM Government Opportunity Fund
ACM Government Securities Fund
ACM Government Spectrum Fund
ACM Managed Dollar Income Fund
ACM Managed Income Fund
ACM Municipal Securities Income Fund
Alliance World Dollar Government Fund
Alliance World Dollar Government Fund II
The Austria Fund
The Korean Investment Fund
The Spain Fund
The Southern Africa Fund
CASH MANAGEMENT SERVICES
ACM Institutional Reserves
Government Portfolio
Prime Portfolio
Tax-Free Portfolio
Trust Portfolio
Alliance Capital Reserves
Alliance Government Reserves
Alliance Insured Account
Alliance Money Reserves
Alliance Municipal Trust
California Portfolio
Connecticut Portfolio
General Portfolio
New Jersey Portfolio
New York Portfolio
Virginia Portfolio
Alliance Treasury Reserves
18
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.
MORAR
