ALLIANCE MORTGAGE SECURITIES INCOME FUND
SEMI-ANNUAL REPORT
JUNE 30, 1996
LETTER TO SHAREHOLDERS ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
August 19, 1996
Dear Shareholder:
Throughout 1995, the U.S. bond market enjoyed a sustained, broad-based rally
that lasted into January 1996. However, since February, domestic bond market
returns have generally been negative. The market has been reacting to
stronger-than-expected data on the U.S. economy and the belief that the Federal
Reserve may raise interest rates to reduce inflationary pressures. U.S.
Treasury securities posted negative returns, but as prepayment expectations
stabilized, spreads on mortgage-backed bonds tightened, and, as a result, were
able to produce positive returns. Across all major sectors of the U.S.
fixed-income market, shorter-duration securities outperformed longer-duration
securities as interest rates for all maturities increased.
INVESTMENT RESULTS
The following table shows the Alliance Mortgage Securities Income Fund's
investment results over the six- and twelve-month periods ended June 30, 1996.
Also shown for comparison are the return for the domestic mortgage-securities
market, represented by the Lehman Brothers (LB) Mortgage-Backed Securities
Index, and the average return of Lipper's universe of U.S. mortgage funds,
which reflects the performance of 60 funds. These funds have similar investment
objectives to your Fund, although their investment policies may differ.
INVESTMENT RESULTS*
PERIODS ENDING JUNE 30, 1996
CUMULATIVE TOTAL RETURN
6 MONTHS 12 MONTHS
-------- ---------
ALLIANCE MORTGAGE SECURITIES INCOME FUND
Class A -.52% 4.74%
Class B -.89% 3.86%
Class C -.90% 3.82%
SEC 30-DAY YIELD
Class A 6.46%
Class B 6.04%
Class C 6.05%
LB MORTGAGE-BACKED SECURITIES INDEX .35% 5.86%
LIPPER MORTGAGE FUNDS AVG. -.80% 4.60%
* THE FUND'S INVESTMENT RESULTS ARE CUMULATIVE TOTAL RETURNS FOR THE PERIOD
AND ARE BASED ON THE NET ASSET VALUE OF EACH CLASS OF SHARES AS OF 6/30/96. ALL
FEES AND EXPENSES RELATED TO THE OPERATION OF THE FUND HAVE BEEN DEDUCTED, BUT
NO ADJUSTMENT HAS BEEN MADE FOR SALES CHARGES THAT MAY APPLY WHEN SHARES ARE
PURCHASED OR REDEEMED. RETURNS FOR THE FUND AND ITS COMPARATIVE BENCHMARKS
INCLUDE THE REINVESTMENT OF ANY DISTRIBUTIONS PAID DURING THE PERIOD.
THE LEHMAN BROTHERS (LB) MORTGAGE-BACKED SECURITIES INDEX IS UNMANAGED AND
REFLECTS NO FEES OR EXPENSES. THE LIPPER MORTGAGE FUNDS AVERAGE REFLECTS THE
PERFORMANCE OF 60 MUTUAL FUNDS. THE AVERAGE INCLUDES FEES AND EXPENSES, BUT NO
SALES CHARGE.
SEC YIELDS ARE BASED ON SEC GUIDELINES AND ARE CALCULATED ON THE 30 DAYS
ENDED JUNE 30, 1996.
FOR ADDITIONAL PERFORMANCE INFORMATION, SEE PAGE 3.
Over the past six- and twelve-month periods, the Fund surpassed the average
return of its Lipper universe due in large part to its concentration in
short-duration securities that performed well when interest rates rose. In
addition, overweighting the moderate-discount sector of the market had a
positive impact on the Fund's results.
1
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ECONOMIC REVIEW
The U.S. economy has rebounded from an inventory-related slowdown during the
second half of 1995. Real growth accelerated to 2.2% during the first quarter
of 1996, while final demand increased by a healthy 3.3%. The re-strengthening
continued in the second quarter, led by a rapidly improving labor market.
Employment gains averaged 265,000 per month during the second quarter, and
total hours worked climbed by an annualized 5.6%. Consumer confidence remained
elevated and real household spending continued to grow at a healthy clip. These
factors combined will produce overall growth in gross domestic product of 4.2%
during the quarter.
Inflation was boosted this past spring by rising food and energy prices.
However, the less volatile "core" rate of inflation, estimated at 2.7%, hovered
near a 30-year low. More recently, Federal Reserve policy makers left
short-term interest rates unchanged, betting that a slowdown in the economy
later this year will keep inflation in check.
MORTGAGE MARKET REVIEW
The mortgage-backed securities sector performed well during both the market
rally and the subsequent market decline. During the rally, which ended in early
1996, mortgage-backed securities outperformed other sectors when interest rates
on long-term bonds rose more sharply than those on short-term obligations. At
this point, prepayment expectations had reached their highest levels since
early 1994.
When the market reversed direction in February, mortgages did well given their
shorter durations. Due to continuing demand and a lack of supply, shorter
duration mortgage-backed securities did particularly well despite their higher
volatility. As the market continued to trade lower, higher interest rates
provided mortgages with a more stable prepayment environment since the
refinancing opportunity for a large portion of the market disappeared.
Additionally, volatility declined, which added support to mortgage-backed
securities. Toward the end of the Fund's fiscal semi-annual period, securities
linked to mortgages with extension risk performed poorly, while those with less
convexity performed well.
PORTFOLIO ACTIVITY
Over the last year, the portfolio remained heavily invested in
fixed-rate-mortgage pass-through securities. As the year progressed, we swapped
30-year, fixed-maturity mortgage securities into 15-year, fixed-maturity
mortgage securities. In addition, the Fund sold current-coupon pass-through
issues to buy lower dollar-price and premium dollar-price securities. Both
asset-allocation decisions were implemented to improve the convexity
characteristics of the Fund.
INVESTMENT OUTLOOK
We believe the U.S. economy will slow during the second half of 1996 following
fairly robust second-quarter growth. Our forecast calls for
gross-domestic-product growth of 2.0% to 2.5% in the second half of the year.
In our view, such growth would not prompt an increase in interest rates by the
Federal Reserve. However, if the economy does not show consistent signs of the
expected slowdown, the Federal Reserve is likely to pursue a more restrictive
monetary policy. Until a clear picture of the U.S. economy emerges, we expect
the fixed-income market to remain unsettled.
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 OBJECTIVE AND POLICIES ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
Alliance Mortgage Securities Income Fund is a diversified investment company
that seeks a high level of current income to the extent consistent with prudent
investment risk. The Fund invests primarily in mortgage-related securities,
including collateralized mortgage obligations, and, as a matter of fundamental
policy, maintains at least 65% of its total assets in mortgage-related
securities.
INVESTMENT RESULTS
_______________________________________________________________________________
AVERAGE ANNUAL TOTAL RETURN AS OF JUNE 30, 1996
CLASS A SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
. One Year 4.74% .32%
. Five Years 7.08% 6.16%
. Ten Years 8.15% 7.69%
SEC Yield 6.46%
CLASS B SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
. One Year 3.86% .93%
. Since Inception* 5.11% 5.11%
SEC Yield 6.04%
CLASS C SHARES
. One Year 3.82%
. Since Inception* 3.13%
SEC Yield 6.05%
Average annual total returns reflect investment of dividends and/or capital
gain 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 purchased prior to July 1, 1996, are not subject to front-end or
contingent deferred sales charges. Class C shares purchased on or after July 1,
1996, are subject to a contingent deferred sales charge of 1% on redemptions
made within the first year after purchase. SEC yields are based on SEC
guidelines and are calculated on 30 days ended June 30, 1996.
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.
* Inception: 1/30/92, Class B; 5/3/93, Class C.
3
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996 (UNAUDITED) ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- ------------------------------------------------------------------------
MORTGAGE-RELATED SECURITIES-119.6%
FEDERAL NATIONAL MORTGAGE ASSOCIATION-44.5%
6.50%, 6/01/10-4/01/11 $ 65,614 $ 63,460,912
7.00%, 1/01/99 130,000 129,593,100
7.50%, 2/01/17-12/01/24 54,836 54,235,754
8.50%, 11/01/24-7/01/26 110,547 113,448,885
9.00%, 11/01/24-6/01/26 103,805 108,313,640
11.50%, 9/01/20 4,472 5,028,598
12.00%, 2/01/98-7/01/00 (a) 57 60,182
Total Federal National Mortgage Association
(cost $475,744,622) 474,141,071
FEDERAL HOME LOAN MORTGAGE CORP.-38.0%
7.00%, 8/01/09-2/01/26 (GOLD) (b) 225,961 221,824,894
7.50%, 3/01/22-2/01/26 (GOLD) (b) 110,183 108,805,820
7.812%, 5/01/24 (c) 17,471 17,924,551
11.50%, 10/01/10-6/01/20 4,193 4,717,601
12.00%, 10/01/09-7/01/20 36,547 41,432,877
12.25%, 8/01/13-7/01/14 834 951,042
12.50%, 6/01/19-6/15/19 5,532 6,411,351
12.75%, 6/01/12-2/01/14 253 292,632
13.00%, 5/01/14-12/15/18 2,084 2,445,238
13.50%, 1/01/12-10/01/16 586 697,202
14.75%, 3/01/10 77 91,874
Total Federal Home Loan Mortgage Corp.
(cost $413,835,592) 405,595,082
COLLATERALIZED MORTGAGE OBLIGATIONS-23.4%
Aircraft Lease Portfolio Securitization
Series 1996-1 Trust Certificate Cl.B
6.43%, 7/15/02, (c) (d) 7,069 7,068,750
Asset Securitization Corp.
Commercial Mortgage
Series 1996-D2 Cl.A1
6.92%, 2/14/29 22,975 22,026,869
Commercial Mortgage Series 1996-D2 Cl.A2
7.361%, 2/14/29 (c) 16,767 16,133,162
Countrywide Funding Corp.
Series 1995-2 Cl.A4
8.50%, 6/25/25 15,809 16,046,135
Donaldson, Lufkin & Jenrette
Series 1995-CF2 Cl.A1B
6.85%, 12/17/27, (a)(d) 26,300 25,223,278
Series 1994-QE2 Cl.A1
7.748%, 7/25/24, (c) (d) 17,218 17,438,428
Series 1994-QE1 Cl.A1
7.76%, 4/25/24, (d) 9,967 10,048,182
Series 1994-Q12
8.108%, 9/25/24, (c) 34,955 35,708,650
Independent National Mortgage Corp.
Series 1995-E Cl.A
7.61%, 4/25/25, (c) 32,002 32,456,716
Merrill Lynch Mortgage Investors, Inc.
Series 1996-C1 Cl.A3
7.42%, 4/25/28 15,000 14,852,400
Option One Centers Mortgage Loan Trust
Series 1996 Certificate Cl.A2
5.798%, 4/25/26, (c) 10,986 10,971,867
Prudential Home Mortgage Securities Co.
Mortgage Certificate Series 1993-46 Cl.A2
8.028%, 11/25/23, (c) 8,236 8,408,692
Mortgage Certificate Series 1993-56 Cl.A1
8.028%, 1/25/24, (c) 7,563 7,709,656
4
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- ------------------------------------------------------------------------
Residential Asset Securitization Trust
Series 1996-A3 Cl.K
9.00%, 9/25/26 $ 25,378 $ 25,774,658
Total Collateralized Mortgage Obligations
(cost $252,759,166) 249,867,443
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-13.7%
7.00%, 1/15/23-8/15/25 107,787 103,340,847
8.00%, 4/15/17-10/15/24 39,138 39,485,047
9.00%, 12/15/19 5 5,220
10.00%, 10/15/17-6/15/20 1,395 1,519,893
11.00%, 1/20/01 (a) 15 15,524
11.50%, 3/15/10-11/15/15 1,080 1,217,224
12.00%, 2/15/14 333 383,360
12.50%, 3/15/11-5/15/15 316 367,232
13.00%, 11/15/99-1/15/00 (a) 29 30,620
15.00%, 2/15/12 1 609
Total Government National Mortgage Association
(cost $146,809,465) 146,365,576
Total Mortgage-Related Securities
(cost $1,289,148,845) 1,275,969,172
ASSET BACKED SECURITIES-1.6%
Brazos Student Finance Corp.
Series 1995-A4
5.708%, 12/01/25 (c)
(cost $16,900,000) 16,900 16,937,011
TOTAL INVESTMENTS-121.2%
(cost $1,306,048,845) 1,292,906,183
Other assets less liabilities-(21.2%) (225,726,160)
NET ASSETS-100% $1,067,180,023
(a) 15 year mortgage.
(b) Securities, or a portion thereof, loaned at June 30, 1996 with an
aggregate market value of $179,884,679 and a cash collateral received from the
counterparty of Bear Stearns in the amount of $183,470,247.
(c) Adjustable rate mortgages stated interest rate in effect at June 30, 1996.
(d) Securities 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 buyers. At June 30, 1996, the aggregate
market value of these securities amounted to $59,778,638 representing 5.6% of
net assets.
See notes to financial statements.
5
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996 (UNAUDITED) ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $1,306,048,845) $1,292,906,183
Cash 85,068
Receivable for investment securities sold 82,295,882
Interest receivable 9,846,993
Margin deposits, at value 585,000
Receivable for capital stock sold 53,056
Prepaid expenses 40,549
Total assets 1,385,812,731
LIABILITIES
Deposit for securities loaned 183,470,247
Payable for investment securities purchased 129,446,736
Dividends payable 1,953,896
Payable for capital stock redeemed 1,521,783
Advisory fee payable 1,392,477
Payable on variation margin 335,156
Distribution fee payable 123,878
Accrued expenses and other liabilities 388,535
Total liabilities 318,632,708
NET ASSETS $1,067,180,023
COMPOSITION OF NET ASSETS
Capital stock, at par $ 1,268,724
Additional paid-in capital 1,288,751,913
Distributions in excess of net investment income (8,127,614)
Accumulated net realized loss on investments (200,751,744)
Net unrealized depreciation of investments and futures
contracts (13,961,256)
$1,067,180,023
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share ($441,071,093/
52,440,985 shares of
capital stock issued and outstanding) $8.41
Sales charge-4.25% of public offering price .37
Maximum offering price $8.78
CLASS B SHARES
Net asset value and offering price per share ($584,494,042/
69,484,668 shares of
capital stock issued and outstanding) $8.41
CLASS C SHARES
Net asset value, redemption and offering price per share($41,614,888
/4,946,772 shares of capital stock issued and outstanding) $8.41
See notes to financial statements.
6
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
INVESTMENT INCOME
Interest $44,988,781
EXPENSES
Advisory fee $2,912,473
Distribution fee - Class A 699,768
Distribution fee - Class B 3,282,636
Distribution fee - Class C 216,746
Transfer agency 841,098
Custodian 157,489
Administrative 146,986
Audit and legal 67,449
Printing 33,001
Taxes 23,801
Registration 17,700
Directors' fees 11,106
Miscellaneous 33,930
Total expenses before interest 8,444,183
Interest expense 2,588,866
Total expenses 11,033,049
Net investment income 33,955,732
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments and futures contracts (1,981,485)
Net change in unrealized appreciation of investments
and futures contracts (41,132,210)
Net loss on investments (43,113,695)
NET DECREASE IN NET ASSETS FROM OPERATIONS $(9,157,963)
See notes to financial statements.
7
STATEMENTS OF CHANGES IN NET ASSETS ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
SIX MONTHS ENDED
JUNE 30,1996 YEAR ENDED
(UNAUDITED) DEC. 31,1995
------------- ---------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 33,955,732 $ 89,652,907
Net realized gain (loss) on investments,
options and futures contracts (1,981,485) 16,064,347
Net change in unrealized appreciation
(depreciation) of investments and futures
contracts (41,132,210) 92,126,997
Net increase (decrease) in net assets from
operations (9,157,963) 197,844,251
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (16,141,288) (35,713,261)
Class B (20,243,132) (50,484,743)
Class C (1,337,969) (3,099,100)
Tax return of capital
Class A -0- (1,057,774)
Class B -0- (1,495,283)
Class C -0- (91,791)
CAPITAL STOCK TRANSACTIONS
Net decrease (171,480,438) (354,006,980)
Total decrease (218,360,790) (248,104,681)
NET ASSETS
Beginning of year 1,285,540,813 1,533,645,494
End of period $1,067,180,023 $1,285,540,813
See notes to financial statements.
8
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996 (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 were sold without an initial or contingent
deferred sales charge. However, Class C shares purchased on or after July 1,
1996, are subject to a contingent deferred sales charge of 1% on redemptions
made within the first year after purchase. 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 as an adjustment 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.
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 six months
ended June 30, 1996. Pursuant to the advisory agreement, the Fund paid $146,986
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, 1996.
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
9
NOTES TO FINANCIAL STATEMENTS (CONT.)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
Fund. Such compensation amounted to $537,375 for the six months ended June 30,
1996.
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 $14,520 from the sales of Class A shares and
$655,155 in contingent deferred sales charges imposed upon redemptions by
shareholders of Class B shares for the six months ended June 30, 1996.
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 $13,902,219 and $2,367,238 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
and U.S. Government Securities) aggregated $1,811,107,583 and $1,700,512,398,
respectively, for the six months ended June 30, 1996.
At June 30, 1996 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 $3,727,862 and
gross unrealized depreciation of investments was $16,870,524 resulting in net
unrealized depreciation of $13,142,662. 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
At June 30, 1996, 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, the Fund deposits and
maintains as collateral an initial margin as required by the exchange on which
the transaction is effected. The aggregate value of cash pledged to cover
margin requirements for open positions at June 30, 1996 was $585,000. 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.
NUMBER OF EXPIRATION UNREALIZED DEPRECIATION
TYPE CONTRACTS POSITION MONTH JUNE 30, 1996
- ----------- --------- -------- -------------- -----------------------
U.S. T-Note 650 Long September,1996 ($335,156)
10
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
--------------------------- ------------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
JUNE 30,1996 DECEMBER 31, JUNE 30,1996 DECEMBER 31,
(UNAUDITED) 1995 (UNAUDITED) 1995
------------ ------------ -------------- --------------
CLASS A
Shares sold 325,641 2,304,239 $ 1,610,969 $ 19,703,528
Shares issued in
reinvestment of
dividends 1,010,536 2,406,345 8,630,224 20,433,219
Shares converted from
Class B to Class A 937,065 -0- 9,112,098 -0-
Shares redeemed (7,264,789) (15,434,077) (62,010,568) (131,032,865)
Net decrease (4,991,547) (10,723,493) $ (42,657,277) $ (90,896,118)
CLASS B
Shares sold 750,357 2,932,891 $ 6,440,946 $ 24,859,068
Shares issued in
reinvestment of
dividends 1,015,315 2,762,632 8,674,455 23,430,516
Shares converted from
Class B to Class A (936,958) -0- (9,112,098) -0-
Shares redeemed (15,664,446) (34,701,182) (132,611,358) (294,722,980)
Net decrease (14,835,732) (29,005,659) $(126,608,055) $(246,433,396)
CLASS C
Shares sold 682,194 946,878 $ 5,829,897 $ 8,056,839
Shares issued in
reinvestment of
dividends 69,050 195,729 589,592 1,654,570
Shares redeemed (1,012,583) (3,110,655) (8,634,595) (26,388,875)
Net decrease (261,339) (1,968,048) $(2,215,106) $(16,677,466)
11
NOTES TO FINANCIAL STATEMENTS (CONT.)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
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.
For the six months ended June 30, 1996, the maximum amount of security lending
agreements outstanding was $341,798,588, the average amount outstanding was
approximately $131,959,436 and the daily weighted average interest rate was
4.69%.
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, the Advisor 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.
As of June 30, 1996, the Fund had entered into the following security lending
agreements:
AMOUNT BROKER INTEREST RATE MATURITY
------------ ------------ ------------- ------------
$150,728,000 Bear Stearns 5.53% July 1, 1996
22,769,000 Bear Stearns 5.58% July 1, 1996
9,794,000 Bear Stearns 5.85% July 1, 1996
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 YEAR ENDED DECEMBER 31,
JUNE 30, 1996 --------------------------------------------------------------
(UNAUDITED) 1995 1994 1993 1992 1991
------------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of year $8.75 $8.13 $9.29 $9.08 $9.21 $8.79
INCOME FROM INVESTMENT OPERATIONS
Net investment income .26 .57(a) .57 .67 .77 .88
Net realized and unrealized gain (loss)
on investments (.31) .64 (1.13) .23 (.09) .41
Net increase (decrease) in net asset
value from operations (.05) 1.21 (.56) .90 .68 1.29
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.29) (.57) (.58) (.67) (.81) (.87)
Dividends in excess of net investment income -0- -0- -0- (.02) -0- -0-
Tax return of capital -0- (.02) (.02) -0- -0- -0-
Total dividends and distributions (.29) (.59) (.60) (.69) (.81) (.87)
Net asset value, end of period $8.41 $8.75 $8.13 $9.29 $9.08 $9.21
TOTAL RETURN
Total investment return based on net
asset value (b) (.52)% 15.34% (6.14)% 10.14% 7.73% 15.44%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $441,071 $502,390 $553,889 $848,069 $789,898 $544,171
Ratio of expenses to average net assets 1.47%(c) 1.66% 1.29% 1.00% 1.18% 1.16%
Ratio of expenses to average net assets
excluding interest expense 1.02%(c) 1.03% .97% 1.00% 1.18% 1.16%
Ratio of net investment income to
average net assets 6.25%(c) 6.77% 6.77% 7.20% 8.56% 9.92%
Portfolio turnover rate 140% 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,
SIX MONTHS 1992 (D)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30,1996 ------------------------------------- DECEMBER 31,
(UNAUDITED) 1995 1994 1993 1992
------------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $8.75 $8.13 $9.29 $9.08 $9.16
INCOME FROM INVESTMENT OPERATIONS
Net investment income .23 .51(a) .51 .61 .68
Net realized and unrealized gain (loss)
on investments (.31) .64 (1.14) .22 (.08)
Net increase (decrease) in net asset
value from operations (.08) 1.15 (.63) .83 .60
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.26) (.51) (.51) (.60) (.68)
Dividends in excess of net investment income -0- -0- -0- (.02) -0-
Tax return of capital -0- (.02) (.02) -0- -0-
Total dividends and distributions (.26) (.53) (.53) (.62) (.68)
Net asset value, end of period $8.41 $8.75 $8.13 $9.29 $9.08
TOTAL RETURN
Total investment return based on net
asset value (b) (.89)% 14.48% (6.84)% 9.38% 7.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $584,494 $737,593 $921,418 $1,454,303 $1,153,957
Ratio of expenses to average net assets 2.17%(c) 2.37% 2.00% 1.70% 1.67%(c)
Ratio expenses to average net assets
excluding interest expense 1.73%(c) 1.74% 1.68% 1.70% 1.67%(c)
Ratio of net investment income to
average net assets 5.54%(c) 6.06% 6.05% 6.47% 5.92%(c)
Portfolio turnover rate 140% 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
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------------
SIX MONTHS MAY 3,1993(D)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30,1996 ------------------------ DECEMBER 31,
(UNAUDITED) 1995 1994 1993
------------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of year $8.75 $8.13 $9.29 $9.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income .23 .51(a) .51 .40
Net realized and unrealized gain (loss)
on investments (.31) .64 (1.14) -0-
Net increase (decrease) in net asset
value from operations (.08) 1.15 (.63) .40
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.26) (.51) (.51) (.40)
Dividends in excess of net investment income -0- -0- -0- (.01)
Tax return of capital -0- (.02) (.02) -0-
Total dividends and distributions (.26) (.53) (.53) (.41)
Net asset value, end of period $8.41 $8.75 $8.13 $9.29
TOTAL RETURN
Total investment return based on net
asset value (b) (.90)% 14.46% (6.84)% 4.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $41,615 $45,558 $58,338 $91,724
Ratio of expenses to average net assets 2.17%(c) 2.35% 1.97% 1.67%(c)
Ratio expense to average net assets
excluding interest expense 1.72%(c) 1.73% 1.69% 1.67%(c)
Ratio of net investment income to
average net assets 5.55%(c) 6.07% 6.06% 5.92%(c)
Portfolio turnover rate 140% 285% 438% 622%
</TABLE>
(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) Annualized.
(d) 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
WAYNE D. LYSKI, SENIOR VICE PRESIDENT
KATHLEEN H. CORBET, 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
JUAN J. RODRIGUEZ, 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
THE ALLIANCE FAMILY OF MUTUAL FUNDS
_______________________________________________________________________________
FIXED INCOME
Alliance Bond Fund
U.S. Government Portfolio
Corporate Bond Portfolio
Alliance Global Dollar Government Fund
Alliance Global Strategic Income Trust
Alliance Mortgage Securities Income Fund
Alliance Limited Maturity Government Fund
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
MONEY MARKET
AFD Exchange Reserves
GROWTH
The Alliance 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
Florida Portfolio
General Portfolio
New Jersey Portfolio
New York Portfolio
Virginia Portfolio
Alliance Treasury Reserves
Alliance Money Market Fund
Prime Portfolio
Government Portfolio
General Municipal Portfolio
17
ALLIANCE MORTGAGE SECURITIES INCOME FUND
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
ALLIANCE CAPITAL
INVESTING 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
