ALLIANCE MORTGAGE SECURITIES INCOME FUND
ANNUAL REPORT
DECEMBER 31, 1996
LETTER TO SHAREHOLDERS ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
February 11, 1997
Dear Shareholder:
U.S. bond market returns were subdued throughout 1996. Stronger-than-expected
job growth and uncertainty about whether the Federal Reserve would raise
interest rates to slow economic growth kept bond market returns negative for
much of the year. The fixed-income market rallied towards the end of 1996,
pushing market returns into positive territory for the first time since
January, as the fear of accelerating inflation diminished. Across all major
sectors of the bond market, interest rates for all maturities increased,
causing shorter-duration securities to outperform longer-duration securities.
Mortgage-backed securities were the best performing sector of the domestic,
investment grade bond market as higher interest rates slowed mortgage
prepayment expectations.
The following table shows the Alliance Mortgage Securities Income Fund's
investment results over the 6- and 12-month periods ended December 31, 1996.
Also shown for comparison is the return for the domestic mortgage securities
market, represented by the Lehman Brothers Mortgage-Backed Securities Index,
and the average return of Lipper's universe of U.S. mortgage funds, which
reflects the performance of 63 funds with investment objectives that are
generally similar to that of your Fund.
INVESTMENT RESULTS*
TOTAL RETURNS AS OF DECEMBER 31, 1996
6-MONTHS 12-MONTHS
---------- -----------
ALLIANCE MORTGAGE SECURITIES INCOME FUND
Class A 4.78% 4.23%
Class C 4.39 3.46
Class B 4.39 3.46
LEHMAN BROTHERS MORTGAGE-BACKED
SECURITIES INDEX 4.98 5.35
LIPPER U.S. MORTGAGE FUNDS AVERAGE 4.73 3.87
* 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 12/31/96.
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.
ECONOMIC REVIEW
The U.S. economy finished 1996 on a strong note. After moderating in the third
quarter, the economy picked up speed in the fourth quarter, led by a rebound in
consumer spending. The annualized gain in retail sales of merchandise jumped to
4.8% in the fourth quarter, up from only 0.9% in the third quarter. Exports
surged by an annualized 32.7% in October and November, unexpectedly adding to
year-end growth. The production side of the economy also showed strength.
Industrial production grew at an annualized pace of 6.0% and monthly payroll
growth increased to 217,000, up from third quarter's average of 171,000. In
all, growth in aggregate output (gross domestic product or GDP), which dipped
to 2.1% in the third quarter, accelerated to 4.7% during the final three months
of 1996.
Broad inflation measures were slightly higher at the end of 1996 as consumer
prices increased 3.3% year-over-year and producer prices were up 2.8%. However,
excluding the volatile food and energy sectors, inflation remained very
well-behaved with year-over-year consumer and producer prices up only 2.6% and
0.6%, respectively.
MORTGAGE MARKET REVIEW
The mortgage-backed security sector was the strongest performing
investment-grade sector of the U.S. bond market during 1996, performing well
during both the decline of the broader U.S. bond market in the first half of
the year as well as during its subsequent rally at the end of 1996. Early in
the year, as the market traded lower, higher interest rates provided a more
stable prepayment environment as the refinancing opportunity for a large
portion of the market disappeared.
Mortgages continued to perform well on both an absolute and duration-adjusted
basis when the market slide halted in the summer. With the market settled in a
range-bound trading environment, investor demand for yield-oriented securities
increased.
PORTFOLIO ACTIVITY
Since our last report to you, portfolio allocations have remained relatively
stable. Expecting no sustained movement in interest rates, we maintained the
portfolio's
1
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
yield-oriented position and reduced exposure to discount and premium
mortgage-backed securities in favor of current coupon mortgages. To enhance the
Fund's yield, we added to the portfolio's allocation of commercial
mortgage-backed securities. This sector has continued to grow as investors have
come to understand the creditworthiness of commercial issuers and the call
protection features of these securities.
CURRENT OUTLOOK
Our outlook for the U.S. economy assumes that while economic growth accelerated
at the end of 1996, it will moderate again during the first half of 1997. As
this occurs, current upward pressures on inflation should dissipate. Until
clear signs of a slowing economy emerge, concerns about inflation will keep
U.S. interest rates within their recent ranges. The Fed remains on hold with
its neutral-to-slightly-restrictive policy. Given justified concerns about the
economic outlook, further near-term weakness in bond prices and higher bond
yields cannot be ruled out. However, such developments would only facilitate
the economic slowing we see later in 1997. As always, we appreciate your
continued interest and investment in Alliance Mortgage Securities Income Fund
and look forward to continuing to serve your investment needs.
Sincerely,
John D. Carifa
Chairman
Patricia J. Young
Senior Vice President
Paul A. Ullman
Vice President
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
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 DECEMBER 31, 1996
CLASS A SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
. One Year 4.23% -0.21%
. Five Years 6.01% 5.09%
. Ten Years 7.91% 7.44%
SEC Yield** 6.13%
CLASS B SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
. One Year 3.46% 0.54%
. Since Inception* 5.50% 5.50%
SEC Yield** 5.68%
CLASS C SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
. One Year 3.46% 2.49%
. Since Inception* 3.91% 3.91%
SEC Yield** 5.70%
Average annual total returns reflect reinvestment 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 A (1%-Year 1 for purchases exceeding
$1,000,000); for Class B (3%-Year 1; 2%-Year 2; 1%-Year 3; 0%-Year 4); Class C
(1%-Year 1).
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.
** SEC yields are based on SEC guidelines and are calculated for the 30 days
ended December 31, 1996.
3
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ALLIANCE MORTGAGE SECURITIES INCOME FUND
GROWTH OF A $10,000 INVESTMENT:
12/31/86 TO 12/31/96
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX:
$23,187
$23,500
$21,500
$19,500
$17,500
$15,500
$13,500
$11,500
$9,500
MORTGAGE SECURITIES INCOME FUND CLASS A: $20,503
LIPPER U.S. MORTGAGE FUNDS AVERAGE: $20,343
12/31/86
12/87
12/88
12/89
12/90
12/91
12/92
12/93
12/94
12/95
12/31/96
This chart illustrates the total value of a hypothetical $10,000 investment in
Class A shares as compared to the performance of appropriate broad-based
indices. The chart reflects the deduction of the maximum 4.25% sales charge and
assumes the reinvestment of dividends and capital gains. Performance for Class
B and 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 gains or losses.
The Lipper U.S. Mortgage Funds Average reflects performance of 63 funds with
investment objectives similar to that of your Fund. The Lehman Brothers
Mortgage-Backed Securities Index tracks the performance of 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).
When comparing Alliance Mortgage Securities Income Fund to the Lehman Brothers
Index, keep in mind that the Fund's performance reflects the maximum sales
charge and expenses while no such costs are reflected in the performance of the
index. Sales charges, where applicable, have been deducted from the funds
included in the Lipper Average.
Mortgage Securities Income Fund
Lipper U.S. Mortgage Funds Average
Lehman Brothers Mortgage-Backed Securities Index
4
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996 ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- ------------------------------------------------------------------------
MORTGAGE-RELATED SECURITIES-110.1%
FEDERAL HOME LOAN MORTGAGE CORP.-44.8%
7.00%, 8/01/09-1/01/11 GOLD (a) (b) $171,180 $171,071,805
7.50%, 3/01/22-2/01/26 GOLD (a) 105,096 105,556,375
8.00%, 11/01/22-12/01/26 GOLD 85,676 87,336,012
11.50%, 10/01/10-6/01/20 3,686 4,166,264
12.00%, 10/01/09-7/01/20 32,272 36,497,105
12.25%, 8/01/13-7/01/14 650 745,608
12.50%, 6/01/19-6/15/19 4,926 5,736,991
12.75%, 6/01/12-2/01/14 228 265,426
13.00%, 5/01/14-12/15/18 1,885 2,221,733
13.50%, 1/01/12-10/01/16 505 603,009
14.75%, 3/01/10 68 81,250
Total Federal Home Loan Mortgage Corp.
(cost $417,377,202) 414,281,578
FEDERAL NATIONAL MORTGAGE ASSOCIATION-25.6%
7.00%, 10/01/25-11/01/26 45,183 44,180,136
7.00%, 5/01/03-8/01/03 (c) 128,444 128,965,891
7.50%, 2/01/17-12/01/24 52,270 52,416,406
11.00%, 7/01/16 6,343 7,096,088
11.50%, 9/01/20 4,025 4,582,642
12.00%, 7/01/00 (b) 45 48,091
Total Federal National Mortgage Association
(cost $235,246,016) 237,289,254
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-22.0%
7.00%, 1/15/23-1/15/25 100,130 98,221,461
7.50%, 6/15/26-12/15/26 3,503 3,503,803
8.00%, 4/15/17-11/15/26 97,176 99,126,802
9.00%, 12/15/19 4 4,592
10.00%, 10/15/17-6/15/20 1,217 1,338,261
11.00%, 1/20/01 14 14,222
11.50%, 3/15/10-11/15/15 827 948,522
12.00%, 2/15/14 305 356,186
12.50%, 3/15/11-5/15/15 284 334,917
13.00%, 11/15/99-1/15/00 (b) 26 27,029
15.00%, 2/15/12 1 606
Total Government National Mortgage Association
(cost $201,532,699) 203,876,401
COMMERCIAL MORTGAGE BACKED SECURITIES-10.4%
Asset Securitization Corp.
Series 1996-D2 Cl.A1
6.92%, 2/14/29 22,785 22,742,345
Series 1996-D2 Cl.A2
7.36%, 2/14/29 (d) 16,767 16,939,996
Donaldson, Lufkin & Jenrette
Series 1995-CF2 Cl.A1B
6.85%, 12/17/27 (e) 26,300 25,987,819
Merrill Lynch Mortgage Investors, Inc.
Series 1996-C2 Cl.B
6.96%, 11/21/28 15,000 14,784,450
Series 1996-C1 Cl.A3
7.42%, 4/25/28 15,000 15,398,400
Total Commercial Mortgage Backed Securities
(cost $95,859,874) 95,853,010
COLLATERALIZED MORTGAGE OBLIGATIONS-6.4%
Countrywide Funding Corp.
Series 1995-2 Cl.A4
8.50%, 6/25/25 15,809 16,102,889
Option One CTS Arm Trust
Series 1996-1 Cl.A2
6.03%, 4/25/26 (d) 9,295 9,294,526
5
PORTFOLIO OF INVESTMENTS(CONTINUED) ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- ------------------------------------------------------------------------
Resolution Trust Corp.
Series 1991-M4 Cl.A1
6.34%, 2/25/20 (d) $18,602 $ 18,322,572
Westam Mortgage Financial Corp.
Series 9 Cl.B
7.35%, 8/25/21 (d) 15,165 15,321,351
Total Collateralized Mortgage Obligations
(cost $59,165,305) 59,041,338
STRIPPED MORTGAGE BACKED SECURITES-0.9%
Morgan Stanley Capital I
Series 1996-WF1 Cl.X I/O
8.436%, 1/15/13 (e)(f)
(amortized cost $8,383,880) 8,384 8,430,652
Total Mortgage-Related Securities
(cost $1,017,564,976) 1,018,772,233
ASSET BACKED SECURITIES-0.0%
Aircraft Lease Portfolio Securitization
Series 1996-1 Cl.B
6.57%, 6/15/06 (d)(e)
(cost $68,561) 69 68,668
REPURCHASE AGREEMENT-0.1%
Goldman Sachs & Co.
6.50%, dated 12/31/96, due 1/02/97
collateralized by $655,000 FNMA 8.00%,
6/01/26, value $650,953)
(amortized cost $637,000) 637 637,000
TOTAL INVESTMENTS-110.2%
(cost $1,018,270,537) 1,019,477,901
Other assets less liabilities-(10.2%) (94,027,171)
NET ASSETS-100% $925,450,730
(a) Securities, or a portion thereof, loaned at December 31, 1996 with an
aggregate market value of $90,656,682 and cash collateral received from the
counterparty of Prudential Securities in the amount of $92,469,000 .
(b) 15 year mortgage.
(c) 7 year balloon.
(d) Adjustable rate mortgages; stated interest rate in effect at December 31,
1996.
(e) 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 institutional buyers. At December 31, 1996,
these securities amounted to $34,487,139 or 3.73% of net assets.
(f) Interest rate represents yield to maturity and principal amount represents
amortized cost.
Glossary of Terms:
FNMA - Federal National Mortgage Association
I/O - Interest Only
See notes to financial statements.
6
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996 ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $1,018,270,537) $1,019,477,901
Cash 1,829,176
Interest receivable 7,814,856
Receivable for capital stock sold 1,123,082
Total assets 1,030,245,015
LIABILITIES
Deposit for securities loaned 92,488,007
Payable for investment securities purchased 7,140,664
Payable for capital stock redeemed 2,713,138
Advisory fee payable 1,219,313
Dividends payable 944,766
Distribution fee payable 228,051
Accrued expenses and other liabilities 60,346
Total liabilities 104,794,285
NET ASSETS $ 925,450,730
COMPOSITION OF NET ASSETS
Capital stock, at par $ 1,087,169
Additional paid-in capital 1,126,014,387
Distributions in excess of net investment income (944,765)
Accumulated net realized loss on investments (202,591,831)
Net unrealized appreciation of investments and futures
contracts 1,885,770
$ 925,450,730
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share ($412,899,382/
48,513,823 shares of capital stock issued and outstanding) $8.51
Sales charge--4.25% of public offering price .38
Maximum offering price $8.89
CLASS B SHARES
Net asset value and offering price per share ($477,196,141/
56,050,695 shares of capital stock issued and outstanding) $8.51
CLASS C SHARES
Net asset value and offering price per share ($35,355,207/
4,152,399 shares of capital stock issued and outstanding) $8.51
See notes to financial statements.
7
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
INVESTMENT INCOME
Interest $ 87,168,929
EXPENSES
Advisory fee $5,441,943
Distribution fee - Class A 1,343,462
Distribution fee - Class B 5,945,473
Distribution fee - Class C 413,462
Transfer agency 1,560,873
Custodian 277,073
Administrative 254,410
Printing 161,083
Audit and legal 135,122
Taxes 64,350
Registration 30,789
Directors' fees 26,286
Miscellaneous 43,882
Total expenses before interest 15,698,208
Interest expense 6,917,921
Total expenses 22,616,129
Net investment income 64,552,800
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments (3,821,572)
Net change in unrealized appreciation of investments (25,285,184)
Net loss on investments (29,106,756)
NET INCREASE IN NET ASSETS FROM OPERATIONS $35,446,044
See notes to financial statements.
8
STATEMENT OF CHANGES IN NET ASSETS ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
YEAR ENDED YEAR ENDED
DEC. 31, 1996 DEC. 31, 1995
-------------- ---------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 64,552,800 $ 89,652,907
Net realized gain (loss) on investments (3,821,572) 16,064,347
Net change in unrealized appreciation
(depreciation) of investments (25,285,184) 92,126,997
Net increase in net assets from operations 35,446,044 197,844,251
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (26,983,869) (35,713,261)
Class B (31,930,957) (50,484,743)
Class C (2,221,782) (3,099,100)
Tax return of capital
Class A (4,092,859) (1,057,774)
Class B (4,843,223) (1,495,283)
Class C (336,996) (91,791)
CAPITAL STOCK TRANSACTIONS
Net decrease (325,126,441) (354,006,980)
Total decrease (360,090,083) (248,104,681)
NET ASSETS
Beginning of year 1,285,540,813 1,533,645,494
End of year $ 925,450,730 $1,285,540,813
See notes to financial statements.
9
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
INCREASE (DECREASE) IN CASH FROM:
OPERATING ACTIVITIES:
Interest received $ 88,526,057
Interest paid (6,917,921)
Operating expenses paid (16,340,476)
Net increase in cash from operating activities $ 65,267,660
INVESTING ACTIVITIES:
Proceeds from disposition of long-term
portfolio investments 2,756,819,436
Purchase of long-term portfolio investments (2,419,868,094)
Purchase of short-term portfolio
investments, net 64,389,000
Collateral deposits on open futures contracts 678,406
Loss on closed futures contracts (2,198,320)
Net increase in cash from investing activities 399,820,428
FINANCING ACTIVITIES*:
Decrease in securities lending (64,850,880)
Net redemption from capital stock transactions (360,210,325)
Cash dividends paid (39,855,581)
Net decrease in cash from financing activities (464,916,786)
Net increase in cash 171,302
Cash at beginning of year 1,657,874
Cash at end of period $ 1,829,176
RECONCILIATION OF NET INCREASE IN NET ASSETS
FROM OPERATIONS TO NET INCREASE IN CASH FROM
OPERATING ACTIVITIES:
Net increase in net assets resulting from operations $ 35,446,044
ADJUSTMENTS:
Decrease in interest receivable $ 1,699,753
Net realized loss on investments 3,821,572
Net change in unrealized appreciation 25,285,184
Aceration of bond discount (342,625)
Decrease in deferred and other assets 15,326
Decrease in accrued expenses (657,594)
Total adjustments 29,821,616
NET INCREASE IN CASH FROM OPERATING ACTIVITIES $ 65,267,660
* Non-cash financing activities not included herein consist of reinvestment
of dividends.
See notes to financial statements.
10
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
Alliance Mortgage Securities Income Fund (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified open-end management 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% for purchases not
exceeding $1,000,000. With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase will be subject to a contingent
deferred sales charge of 1%. 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. Securities which mature in 60 days or
less are valued at amortized cost, which approximates market value, unless this
method does not represent fair value. Securities for which quotations are not
readily available or restricted 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, operating and other financial data.
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 INVESTMENT TRANSACTIONS
Investment transactions are accounted for on the date the securities are
purchased or sold. The Fund amortizes premium and accretes discounts as
adjustments to interest income. Investment 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
As of December 31, 1996, the Fund reclassified certain components of net
assets. The reclassification was the result of a tax return of capital which
resulted in a net decrease to distributions in excess of net investment income
and a corresponding decrease to additional paid-in capital of $9,273,078. 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 voluntarily agreed 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, 1996.
11
NOTES TO FINANCIAL STATEMENTS(CONT.) ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
Pursuant to the advisory agreement, the Fund paid $254,410 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, 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 Fund. Such compensation
amounted to $1,104,736 for the year ended December 31, 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 $10,808 from the sales of Class A shares and
$385,449 and $2,401 in contingent deferred sales charges imposed upon
redemptions by shareholders of Class B and Class C shares, respectively, for
the year ended December 31, 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 $12,491,371 and $2,688,747 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 $240,349,026 and $225,196,600,
respectively, for the year ended December 31, 1996. There were purchases of
$2,180,000,737 and sales of $2,401,687,580 of U.S. Government and government
agency obligations for the year ended December 31, 1996.
At December 31, 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 $6,906,782 and
gross unrealized depreciation of investments was $5,699,418 resulting in net
unrealized appreciation of $1,207,364. For federal income tax purposes, the
Fund had a capital loss carryforward at December 31, 1996 of $201,913,425 of
which $198,735,479 expires in 2002 and $3,177,946 expires in 2004.
1. FINANCIAL FUTURES CONTRACTS
The Fund may buy or sell financial futures contracts for the purpose of hedging
its portfolio against adverse affects of anticipated movements in the market.
At December 31, 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 December 31, 1996 was $679,700.
Pursuant to the contract, the Fund
12
ALLIANCE MORTGAGE SECURITIES INCOME 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.
UNREALIZED
NUMBER OF EXPIRATION APPRECIATION
TYPE CONTRACTS POSITION MONTH DEC. 31, 1996
------------- ------------- ------------- ------------- -------------
U.S. T-Note 685 Short March 1997 $678,406
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,
1996 1995 1996 1995
------------ ------------ -------------- --------------
Shares sold 844,591 2,304,239 $7,205,604 $19,703,528
Shares issued in
reinvestment
of dividends 1,961,238 2,406,345 16,687,117 20,433,219
Shares converted
from Class B 2,085,070 -0- 17,622,222 -0-
Shares redeemed (13,809,608) (15,434,077) (117,388,990) (131,032,865)
Net decrease (8,918,709) (10,723,493) $(75,874,047) $(90,896,118)
CLASS B
Shares sold 1,409,586 2,932,891 $12,016,407 $24,859,068
Shares issued
in reinvestment
of dividends 1,896,252 2,762,632 16,139,845 23,430,516
Shares converted
to Class A (2,085,070) -0- (17,622,222) -0-
Shares redeemed (29,490,473) (34,701,182) (250,814,789) (294,722,980)
Net decrease (28,269,705) (29,005,659) $(240,280,759) $(246,433,396)
CLASS C
Shares sold 1,031,590 946,878 $8,786,691 $8,056,839
Shares issued
in reinvestment
of dividends 134,402 195,729 1,143,334 1,654,570
Shares redeemed (2,221,704) (3,110,655) (18,901,660) (26,388,875)
Net decrease (1,055,712) (1,968,048) $(8,971,635) $(16,677,466)
13
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 year ended December 31, 1996, the maximum amount of security lending
agreements outstanding was $341,798,588, the average amount outstanding was
approximately $110,163,664 and the daily weighted average interest rate was
5.19%.
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 December 31, 1996, the Fund had entered into the following security
lending agreement:
AMOUNT COUNTERPARTY INTEREST RATE MATURITY
------------- --------------------- ------------- -------------
$92,469,000 Prudential Securities 7.40% 1/2/97
14
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,
--------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $8.75 $8.13 $9.29 $9.08 $9.21
INCOME FROM INVESTMENT OPERATIONS
Net investment income .54(a) .57(a) .57 .67 .77
Net realized and unrealized gain (loss)
on investments (.19) .64 (1.13) .23 (.09)
Net increase (decrease) in net asset
value from operations .35 1.21 (.56) .90 .68
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.51) (.57) (.58) (.67) (.81)
Dividends in excess of net
investment income -0- -0- -0- (.02) -0-
Tax return of capital (.08) (.02) (.02) -0- -0-
Total dividends and distributions (.59) (.59) (.60) (.69) (.81)
Net asset value, end of year $8.51 $8.75 $8.13 $9.29 $9.08
TOTAL RETURN
Total investment return based on net
asset value (b) 4.23% 15.34% (6.14)% 10.14% 7.73%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $412,899 $502,390 $553,889 $848,069 $789,898
Ratio of expenses to average net assets 1.68% 1.66% 1.29% 1.00% 1.18%
Ratio of expenses to average net assets
excluding interest expense (c) 1.03% 1.03% .97% 1.00% 1.18%
Ratio of net investment income to
average net assets 6.38% 6.77% 6.77% 7.20% 8.56%
Portfolio turnover rate 208% 285% 438% 622% 555%
</TABLE>
See footnotes page 17.
15
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 (d)
YEAR ENDED DECEMBER 31, TO
-------------------------------------------------- DECEMBER 31,
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.75 $8.13 $9.29 $9.08 $9.16
INCOME FROM INVESTMENT OPERATIONS
Net investment income .48(a) .51(a) .51 .61 .68
Net realized and unrealized gain (loss)
on investments (.19) .64 (1.14) .22 (.08)
Net increase (decrease) in net asset
value from operations .29 1.15 (.63) .83 .60
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.51) (.51) (.60) (.68)
Dividends in excess of net investment
income -0- -0- -0- (.02) -0-
Tax return of capital (.07) (.02) (.02) -0- -0-
Total dividends and distributions (.53) (.53) (.53) (.62) (.68)
Net asset value, end of period $8.51 $8.75 $8.13 $9.29 $9.08
TOTAL RETURN
Total investment return based on net
asset value (b) 3.46% 14.48% (6.84)% 9.38% 7.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period(000's omitted) $477,196 $737,593 $921,418 $1,454,303 $1,153,957
Ratio of expenses to average net assets 2.37% 2.37% 2.00% 1.70% 1.67%(e)
Ratio of expenses to average net assets
excluding interest expense (c) 1.74% 1.74% 1.68% 1.70% 1.67%(e)
Ratio of net investment income to
average net assets 5.66% 6.06% 6.05% 6.47% 5.92%(e)
Portfolio turnover rate 208% 285% 438% 622% 555%
</TABLE>
See footnotes page 17.
16
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------
MAY 3, 1993(d)
YEAR ENDED DECEMBER 31, TO
------------------------------------- DECEMBER 31,
1996 1995 1994 1993
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $8.75 $8.13 $9.29 $9.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income .48(a) .51(a) .51 .40
Net realized and unrealized gain (loss)
on investments (.19) .64 (1.14) -0-
Net increase (decrease) in net asset
value from operations .29 1.15 (.63) .40
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.46) (.51) (.51) (.40)
Dividends in excess of net investment
income -0- -0- -0- (.01)
Tax return of capital (.07) (.02) (.02) -0-
Total dividends and distributions (.53) (.53) (.53) (.41)
Net asset value, end of period $8.51 $8.75 $8.13 $9.29
TOTAL RETURN
Total investment return based on net
asset value (b) 3.46% 14.46% (6.84)% 4.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period(000's omitted) $35,355 $45,558 $58,338 $91,724
Ratio of expenses to average net assets 2.38% 2.35% 1.97% 1.67%(e)
Ratio of expenses to average net assets
excluding interest expense (c) 1.73% 1.73% 1.69% 1.67%(e)
Ratio of net investment income to
average net assets 5.67% 6.07% 6.06% 5.92%(e)
Portfolio turnover rate 208% 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) Net of interest expense of .65% (see Note F).
(d) Commencement of distribution.
(e) Annualized.
17
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
TO THE SHAREHOLDERS AND BOARD OF DIRECTORSALLIANCE 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, 1996, and the related statements
of operations and cash flows 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, 1996, 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, 1996, the
results of its operations and its cash flows 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.
New York, New York
January 27, 1997
18
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)
DONALD J. ROBINSON (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.
19
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.
MORAR
