ALLIANCE MORTGAGE SECURITIES INCOME FUND
SEMI-ANNUAL REPORT
JUNE 30, 1997
ALLIANCE CAPITAL
LETTER TO SHAREHOLDERS ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
August 6, 1997
Dear Shareholder:
The U.S. bond market posted modest gains through the first half of 1997. After
trading lower during the first quarter on fears that excessive growth would
ignite inflation, the market rebounded in the second quarter. Economic data
released during the three months ended June 30, 1997, indicated that the
economy had slowed from its unsustainable first quarter pace and inflation
remained dormant. This helped ease investor concerns and pushed the market
higher. Interest rates, which peaked in late spring following the Federal
Reserve's decision to increase short term interest rates, ended the period
lower across the maturity spectrum.
Among the investment-grade sectors of the bond market, mortgage-backed
securities were among the best performing, posting moderate gains. Performance
of mortgage-backed securities was enhanced by declining interest rate
volatility and lower mortgage prepayment expectations.
INVESTMENT RESULTS
TOTAL RETURN FOR THE PERIODS ENDED
JUNE 30, 1997
6 MONTHS 12 MONTHS
----------- -----------
ALLIANCE MORTGAGE SECURITIES INCOME FUND
Class A 3.54% 8.49%
Class B 3.16 7.68
Class C 3.16 7.68
LEHMAN BROTHERS MORTGAGE-BACKED
SECURITIES INDEX 3.92 9.10
LIPPER U.S. MORTGAGE FUNDS AVERAGE 3.21 8.08
The table at left provides the investment returns for the Alliance Mortgage
Securities Income Fund for the six- and twelve-month periods ended June 30,
1997. 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. As you can see, your Fund's
performance was slightly above that of the Lipper average and slightly below
that of the Lehman index.
MARKET REVIEW
The U.S. economy continued its strong performance in early 1997, led by
continued strength in the labor market. The unemployment rate dropped to
twenty-year lows and wages continued to climb. Overall, economic growth, which
had risen to 3.8% at the end of 1996, further accelerated to 4.9% during the
first quarter of 1997. In response to the continued economic strength and
perception of mounting inflationary pressures, the Federal Reserve Bank raised
short-term interest rates in March.
The economy slowed sharply during the second quarter to a 2.2% growth rate, led
by a decline in consumer spending. Retail sales of merchandise declined 3.8% in
the second quarter while real construction spending fell 2.0% in April-May.
However, labor market strength continued unabated in the second quarter as the
average non-farm payroll growth rose to 237,000 per month from first quarter's
average of 228,000 per month.
In spite of an increase in wage pressure, inflation remained very well behaved
during the first half of 1997. Through June, consumer prices advanced 2.3% year
over year while producer prices declined 0.1% year over year.
Mortgage-backed securities continued to perform well among the investment grade
sector, with longer-duration securities outperforming shorter-duration
securities on an absolute basis. Within the mortgage sector, 30 year
pass-throughs posted the best returns.
1
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PORTFOLIO ACTIVITY
During the period, we maintained our exposure to mortgage-related securities.
Commercial mortgage-backed securities, rated AAA, were purchased to provide
yield and call-protection. We increased our exposure to ARMs and traded up in
coupon as the market became range bound. In anticipation of an increase in
market volatility surrounding the Federal Reserve meeting in May, we
temporarily reduced holdings in mortgage-backed securities.
OUTLOOK
We expect economic activity to accelerate somewhat in the third quarter.
Consumer confidence has reached new highs, real income is growing solidly and
the labor market remains strong, with unemployment at 5.0%. We believe the
reacceleration will be moderate, keeping economic growth within the 3.0%-3.5%
range for 1997. The pace of this reacceleration, however, will be closely
monitored for inflationary pressures by the Federal Reserve with a likely bias
towards increasing rates at the first sign of overheating.
Thank you for your continued interest and investment in Alliance Mortgage
Securities Income Fund. We look forward to reporting to you again on market
activity and the Fund's investment results in coming periods.
Sincerely,
John D. Carifa
Chairman
Patricia J. Young
Senior Vice President
Jeffrey S. Phlegar
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 JUNE 30, 1997
CLASS A SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
. One Year 8.49% 3.92%
. Five Years 6.12% 5.21%
. Ten Years 8.20% 7.73%
SEC Yield** 6.02%
CLASS B SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
. One Year 7.68% 4.68%
. Five Years 5.39% 5.39%
. Since Inception* 5.58% 5.58%
SEC Yield** 5.57%
CLASS C SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
. One Year 7.68% 6.68%
. Since Inception* 4.21% 4.21%
SEC Yield** 5.58%
The average annual total returns reflect reinvestment 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); and for
Class C shares (1% year 1). Returns for Class A shares do not reflect the
imposition of the 1 year 1% contingent deferred sales charge for accounts over
$1,000,000.
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 June 30, 1997.
3
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997 (UNAUDITED) ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- -------------------------------------------------------------------------
MORTGAGE-RELATED SECURITIES-89.5%
FEDERAL HOME LOAN MORTGAGE CORP.-29.9%
7.50%, 3/01/22-2/01/26 GOLD (a) $100,813 $101,639,530
7.50%, 11/01/11-2/01/12 GOLD (b) 9,035 9,170,411
8.00%, 11/01/22-12/01/26 GOLD 80,938 82,834,026
11.50%, 10/01/10-6/01/20 3,308 3,734,424
12.00%, 10/01/09-7/01/20 28,555 32,237,862
12.25%, 8/01/13-7/01/14 642 734,043
12.50%, 6/01/19 4,140 4,814,654
12.75%, 6/01/12-2/01/14 202 234,842
13.00%, 5/01/14-12/01/18 1,643 1,932,214
13.50%, 1/01/12-10/01/16 497 592,454
14.75%, 3/01/10 61 72,557
Total Federal Home Loan Mortgage Corp.
(cost $237,839,814) 237,997,017
COLLATERALIZED MORTGAGE OBLIGATIONS-22.6%
Blackrock Capital Finance, LP.
Series 1997-R2 Cl.2A
7.879%, 6/25/27 (c)(d) 12,912 13,400,430
Series 1997-R2 Cl.2B1
7.879%, 6/25/27 (c)(d) 1,584 1,625,540
Citicorp Mortgage Securities, Inc.
Series 1987-3 Cl.A1
9.00%, 5/25/17 14,153 14,728,297
Countrywide Funding Corp.
Series 1995-2 Cl.A5
8.50%, 6/25/25 14,709 15,058,339
Federal National Mortgage Association
Series 1992-64 Cl.E
7.00%, 5/25/04 9,347 9,353,258
Series 1997-8 Cl.D
7.00%, 12/18/24 11,000 10,690,680
Series 1997-13 Cl.B
7.00%, 12/18/24 25,000 24,257,750
Series 1997-16 Cl.H
7.00%, 2/18/25 20,334 19,800,232
Series 1997-19 Cl.B
7.00%, 4/18/25 17,700 17,185,638
MLCC Mortgage Investors, Inc.
Series 1995-B Cl.B
6.938%, 10/15/20 5,000 4,407,050
Series 1996-B Cl.B
6.938%, 7/15/21 10,955 9,649,271
Norwest Asset Securities Corp.
Series 1997-2 Cl.A6
7.50%, 3/25/27 20,000 19,300,000
Salomon Brothers Mortgage
Securities VII, Inc.
Series 1997-LB3 Cl.M1
5.688%, 6/25/27 (c) 20,588 20,536,530
Total Collateralized Mortgage Obligations
(cost $178,480,882) 179,993,015
4
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- -------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-18.5%
7.44%, 11/01/26 $ 6,997 $ 7,248,336
7.50%, 2/01/17-12/01/24 50,048 50,384,005
7.58%, 6/01/25 38,565 39,143,249
7.60%, 6/01/25 39,710 40,336,310
11.00%, 7/01/16 5,602 6,218,642
11.50%, 9/01/20 3,519 3,952,205
12.00%, 7/01/00 (b) 35 37,274
Total Federal National Mortgage Association
(cost $146,977,099) 147,320,021
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-12.7%
7.00%, 1/15/23-1/15/25 95,582 94,327,670
7.50%, 6/15/26-12/15/26 3,466 3,476,148
9.00%, 12/15/19 4 4,233
10.00%, 10/15/17-6/15/20 1,084 1,195,261
11.50%, 3/15/10-11/15/15 704 802,874
12.00%, 2/15/14 270 313,084
12.50%, 3/15/11-5/15/15 221 258,677
13.00%, 11/15/99-1/15/00 (b) 22 23,120
15.00%, 2/15/12 1 582
Total Government National Mortgage
Association
(cost $97,200,038) 100,401,649
COMMERCIAL MORTGAGE BACKED SECURITIES-3.1%
Asset Securitization Corp.
Series 1996-D2 Cl.A2
7.21%, 2/14/29 (c) 9,267 9,387,322
Merrill Lynch Mortgage Investors, Inc.
Series 1996-C2 Cl.B
6.96%, 11/21/28 15,000 14,793,750
Total Commercial Mortgage Backed Securities
(cost $24,381,997) 24,181,072
STRIPPED MORTGAGE BACKED SECURITES-2.7%
Morgan Stanley Capital I
Series 1996-WF1 Cl.X I/O
8.436%, 1/15/13 (d)(e) 104,773 7,837,006
Mortgage Capital Funding, Inc.
Series 1996-MC2 Cl.X I/O
8.50%, 12/21/26 (e) 124,297 13,750,946
Total Stripped Mortgage Backed Securites
(cost $21,564,960) 21,587,952
Total Mortgage-Related Securities
(cost $706,444,790) 711,480,726
U.S. GOVERNMENT OBLIGATIONS-5.6%
U.S. TREASURY NOTES
6.25%, 6/30/02 24,200 24,056,252
6.375%, 5/15/00 15,650 15,706,183
6.625%, 5/15/07 5,000 5,041,400
Total U.S. Government Obligations
(cost $44,811,101) 44,803,835
ASSET BACKED SECURITIES-0.0%
Aircraft Lease Portfolio Securitization
Series 1996-1 Cl.B
6.638%, 6/15/06
(cost $68,561) (c)(d) 68 68,561
5
PORTFOLIO OF INVESTMENTS (CONTINUED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- -------------------------------------------------------------------------
REPURCHASE AGREEMENT-0.1%
Prudential Securities
5.95%, dated 6/30/97, due
7/01/97, collateralized by
$1,400,000 FNMA 7.835%, 11/01/25,
value $976,705
(amortized cost $957,000) $ 957 $ 957,000
TOTAL INVESTMENTS-95.2%
(cost $752,281,452) $757,310,122
Other assets less liabilities-4.8% 38,131,405
NET ASSETS-100% $795,441,527
(a) Security, or a portion thereof was loaned at June 30, 1997 with an
aggregate market value of $15,011,311 and cash collateral was received from the
counterparty of Prudential Securities in the amount of $15,567,000.
(b) 15 year mortgage.
(c) Adjustable rate mortgages; stated interest rate in effect at June 30, 1997.
(d) Security exempt from Registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from registration,
normally to qualified institutional buyers. At June 30, 1997, these securities
amounted to $22,931,537 or 2.9% of net assets.
(e) 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
JUNE 30, 1997 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $752,281,452) $ 757,310,122
Cash 249,215
Receivable for investment securities sold 96,415,946
Interest receivable 6,014,741
Receivable for capital stock sold 55,636
Prepaid expenses 38,799
Total assets 860,084,459
LIABILITIES
Deposit for securities loaned 60,589,090
Dividends payable 1,388,503
Payable for capital stock redeemed 1,196,319
Advisory fee payable 1,056,802
Distribution fee payable 101,980
Accrued expenses and other liabilities 310,278
Total liabilities 64,642,932
NET ASSETS $ 795,441,527
COMPOSITION OF NET ASSETS
Capital stock, at par $ 933,633
Additional paid-in capital 996,109,741
Distributions in excess of net investment income (1,958,496)
Accumulated net realized loss on investment transactions (204,672,021)
Net unrealized appreciation of investments 5,028,670
$ 795,441,527
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share ($380,439,392/
44,655,180 shares of capital stock issued and outstanding) $8.52
Sales charge-4.25% of public offering price .38
Maximum offering price $8.90
CLASS B SHARES
Net asset value and offering price per share ($383,923,435/
45,060,567 shares of capital stock issued and outstanding) $8.52
CLASS C SHARES
Net asset value and offering price per share ($31,078,700/
3,647,582 shares of capital stock issued and outstanding) $8.52
See notes to financial statements.
7
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
INVESTMENT INCOME
Interest $34,324,059
EXPENSES
Advisory fee $2,181,842
Distribution fee - Class A 584,931
Distribution fee - Class B 2,119,605
Distribution fee - Class C 164,249
Transfer agency 639,089
Custodian 126,921
Administrative 111,238
Printing 83,427
Audit and legal 56,465
Registration 16,824
Taxes 16,026
Directors' fees 10,790
Miscellaneous 16,191
Total expenses before interest 6,127,598
Interest expense 2,121,422
Total expenses 8,249,020
Net investment income 26,075,039
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investment transactions (3,467,742)
Net realized gain on futures transactions 1,387,552
Net change in unrealized appreciation of
investments and futures contracts 3,142,900
Net gain on investments 1,062,710
NET INCREASE IN NET ASSETS FROM OPERATIONS $27,137,749
See notes to financial statements.
8
STATEMENT OF CHANGES IN NET ASSETS
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
SIX MONTHS ENDED
JUNE 30, 1997 YEAR ENDED
(UNAUDITED) DEC. 31, 1996
------------- ---------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $26,075,039 $ 64,552,800
Net realized loss on investment and futures
transactions (2,080,190) (3,821,572)
Net change in unrealized appreciation of
investments 3,142,900 (25,285,184)
Net increase in net assets from operations 27,137,749 35,446,044
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (13,271,872) (26,983,869)
Class B (12,823,190) (31,930,957)
Class C (993,708) (2,221,782)
Tax return of capital
Class A 0 (4,092,859)
Class B 0 (4,843,223)
Class C 0 (336,996)
CAPITAL STOCK TRANSACTIONS
Net decrease (130,058,182) (325,126,441)
Total decrease (130,009,203) (360,090,083)
NET ASSETS
Beginning of year 925,450,730 1,285,540,813
End of period $795,441,527 $ 925,450,730
See notes to financial statements.
9
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
INCREASE (DECREASE) IN CASH FROM:
OPERATING ACTIVITIES:
Interest received $ 35,951,793
Interest expense paid (2,121,422)
Operating expenses paid (6,205,087)
Net increase in cash from operating activities $ 27,625,284
INVESTING ACTIVITIES:
Proceeds from disposition of long-term
portfolio investments 735,819,851
Purchase of long-term portfolio investments (577,041,143)
Purchase of short-term portfolio investments,
net (320,000)
Gain on closed futures contracts 1,387,552
Net increase in cash from investing activities 159,846,260
FINANCING ACTIVITIES*:
Decrease in securities lending (31,898,917)
Net redemptions from capital stock transactions (143,774,586)
Cash dividends paid (13,378,002)
Net decrease in cash from financing activities (189,051,505)
Net decrease in cash (1,579,961)
Cash at beginning of year 1,829,176
Cash at end of period $ 249,215
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 $ 27,137,749
ADJUSTMENTS:
Decrease in interest receivable $ 1,800,115
Net realized loss on investment and futures
transactions 2,080,190
Net change in unrealized appreciation of
investments (3,142,900)
Accretion of bond discount (172,381)
Decrease in accrued expenses (77,489)
Total adjustments 487,535
NET INCREASE IN CASH FROM OPERATING ACTIVITIES $ 27,625,284
* Non-cash financing activities not included herein consist of reinvestment of
dividends.
See notes to financial statements.
10
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 (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 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 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.
For federal income tax purposes, the Fund's distributions of income and capital
gains are subject to recharacterization, which may include a tax return of
capital, at the end of the year to reflect the final investment results for
that year.
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. Pursuant to the Advisory Agreement the
Adviser has 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 six months ended June
30, 1997.
11
NOTES TO FINANCIAL STATEMENTS (CONT.)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
Pursuant to the advisory agreement, the Fund paid $111,238 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, 1997.
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 $481,313 for the six months ended June 30, 1997.
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 $3,203 from the sales of Class A shares and $60,490
and $4,433 in contingent deferred sales charges imposed upon redemptions by
shareholders of Class B and Class C shares, respectively, for the six months
ended June 30, 1997.
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 $11,412,112 and $2,877,767 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 $138,485,818 and $156,125,356,
respectively, for the six months ended June 30, 1997. There were purchases of
$431,999,368 and sales of $639,011,164 of U.S. government and government agency
obligations for the six months ended June 30, 1997.
At June 30, 1997 the cost of investments for federal income tax purposes was
the same as the cost for financial reporting purposes. Accordingly, gross
unrealized appreciation of investments was $7,288,651 and gross unrealized
depreciation of investments was $2,259,981 resulting in net unrealized
appreciation of $5,028,670. 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.
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 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. 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.
At June 30, 1997, the Fund had entered into no exchange traded financial
futures contracts.
12
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, 1997 DECEMBER 31, JUNE 30, 1997 DECEMBER 31,
(UNAUDITED) 1996 (UNAUDITED) 1996
------------ ------------ -------------- --------------
CLASS A
Shares sold 136,052 844,591 $ 1,146,843 $ 7,205,604
Shares issued in
reinvestment of
dividends and
distributions 777,151 1,961,238 6,590,270 16,687,117
Shares converted
from Class B 1,274,003 2,085,070 10,797,385 17,622,222
Shares redeemed (6,045,849) (13,809,608) (51,210,858) (117,388,990)
Net decrease (3,858,643) (8,918,709) $(32,676,360) $ (75,874,047)
CLASS B
Shares sold 352,304 1,409,586 $ 2,983,837 $ 12,016,407
Shares issued in
reinvestment of
dividends and
distributions 710,944 1,896,252 6,029,751 16,139,845
Shares converted
to Class A (1,274,003) (2,085,070) (10,797,385) (17,622,222)
Shares redeemed (10,779,373) (29,490,473) (91,325,939) (250,814,789)
Net decrease (10,990,128) (28,269,705) $(93,109,736) $(240,280,759)
CLASS C
Shares sold 155,426 1,031,590 $ 1,318,374 $ 8,786,691
Shares issued in
reinvestment of
dividends and
distributions 76,283 134,402 647,010 1,143,334
Shares redeemed (736,526) (2,221,704) (6,237,470) (18,901,660)
Net decrease (504,817) (1,055,712) $ (4,272,086) $ (8,971,635)
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 six months ended June 30, 1997, the maximum amount of security lending
agreements outstanding was $167,403,000, the average amount outstanding was
approximately $107,684,336 and the daily weighted average interest rate was
5.49%.
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, 1997, the Fund had entered into the following security lending
agreement:
AMOUNT COUNTERPARTY INTEREST RATE MATURITY
------------- --------------------- ------------- ------------
$ 5,112,500 Prudential Securities 4.20% 7/01/97
15,567,000 Prudential Securities 6.40 7/01/97
15,806,500 Prudential Securities 5.10 7/02/97
24,079,000 Prudential Securities 5.55 7/07/97
14
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, 1997 ----------------------------------------------------------------
(UNAUDITED) 1996 1995 1994 1993 1992
--------------- ------------ ------------ ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value beginning of year $8.51 $8.75 $8.13 $9.29 $9.08 $9.21
INCOME FROM INVESTMENT OPERATIONS
Net investment income .28(a) .54(a) .57(a) .57 .67 .77
Net realized and unrealized gain (loss)
on investment and futures transactions .02 (.19) .64 (1.13) .23 (.09)
Net increase (decrease) in net asset
value from operations .30 .35 1.21 (.56) .90 .68
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.29) (.51) (.57) (.58) (.67) (.81)
Dividends in excess of net investment
income -0- -0- -0- -0- (.02) -0-
Tax return of capital -0- (.08) (.02) (.02) -0- -0-
Total dividends and distributions (.29) (.59) (.59) (.60) (.69) (.81)
Net asset value, end of period $8.52 $8.51 $8.75 $8.13 $9.29 $9.08
TOTAL RETURN
Total investment return based on net
asset value (b) 3.54% 4.23% 15.34% (6.14)% 10.14% 7.73%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $380,439 $412,899 $502,390 $553,889 $848,069 $789,898
Ratio of expenses to average net assets 1.56%(c) 1.68% 1.66% 1.29% 1.00% 1.18%
Ratio of expenses to average net assets
excluding interest expense 1.07%(c)(d) 1.03%(d) 1.03%(d) .97%(d) 1.00% 1.18%
Ratio of net investment income to
average net assets 6.55%(c) 6.38% 6.77% 6.77% 7.20% 8.56%
Portfolio turnover rate 66% 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,
SIX MONTHS 1992 (E)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30, 1997 ---------------------------------------------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994 1993 1992
--------------- ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.51 $8.75 $8.13 $9.29 $9.08 $9.16
INCOME FROM INVESTMENT OPERATIONS
Net investment income .24(a) .48(a) .51(a) .51 .61 .68
Net realized and unrealized gain (loss)
on investment and futures transactions .02 (.19) .64 (1.14) .22 (.08)
Net increase (decrease) in net asset
value from operations .26 .29 1.15 (.63) .83 .60
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.25) (.46) (.51) (.51) (.60) (.68)
Dividends in excess of net investment
income -0- -0- -0- -0- (.02) -0-
Tax return of capital -0- (.07) (.02) (.02) -0- -0-
Total dividends and distributions (.25) (.53) (.53) (.53) (.62) (.68)
Net asset value, end of period $8.52 $8.51 $8.75 $8.13 $9.29 $9.08
TOTAL RETURN
Total investment return based on net
asset value (b) 3.16% 3.46% 14.48% (6.84)% 9.38% 7.81%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $383,923 $477,196 $737,593 $921,418 $1,454,303 $1,153,957
Ratio of expenses to average net assets 2.28%(c) 2.37% 2.37% 2.00% 1.70% 1.67%(c)
Ratio of expenses to average net assets
excluding interest expense 1.77%(c)(d) 1.74%(d) 1.74%(d) 1.68%(d) 1.70% 1.67%(c)
Ratio of net investment income to
average net assets 5.83%(c) 5.66% 6.06% 6.05% 6.47% 5.92%(c)
Portfolio turnover rate 66% 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
-----------------------------------------------------------------------
SIX MONTHS MAY 3,1993(E)
ENDED YEAR ENDED DECEMBER 31, TO
JUNE 30,1997 ---------------------------------------- DECEMBER 31,
(UNAUDITED) 1996 1995 1994 1993
--------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.51 $8.75 $8.13 $9.29 $9.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income .25(a) .48(a) .51(a) .51 .40
Net realized and unrealized gain (loss)
on investment and futures transactions .01 (.19) .64 (1.14) -0-
Net increase (decrease) in net asset
value from operations .26 .29 1.15 (.63) .40
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.25) (.46) (.51) (.51) (.40)
Dividends in excess of net investment
income -0- -0- -0- -0- (.01)
Tax return of capital -0- (.07) (.02) (.02) -0-
Total dividends and distributions (.25) (.53) (.53) (.53) (.41)
Net asset value, end of period $8.52 $8.51 $8.75 $8.13 $9.29
TOTAL RETURN
Total investment return based on net
asset value (b) 3.16% 3.46% 14.46% (6.84)% 4.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $31,079 $35,355 $45,558 $58,338 $91,724
Ratio of expenses to average net assets 2.26%(c) 2.38% 2.35% 1.97% 1.67%(c)
Ratio of expenses to average net assets
excluding interest expense 1.76%(c)(d) 1.73%(d) 1.73%(d) 1.69%(d) 1.67%(c)
Ratio of net investment income to
average net assets 5.84%(c) 5.67% 6.07% 6.06% 5.92%(c)
Portfolio turnover rate 66% 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) Annualized.
(d) Net of interest expense of .49%, .65%, .63% and .32%, respectively, on
securities lending transactions (see Note F).
(e) Commencement of distribution.
17
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)
OFFICERS
WAYNE D. LYSKI, SENIOR VICE PRESIDENT
KATHLEEN H. CORBET, SENIOR VICE PRESIDENT
PATRICIA J. YOUNG, SENIOR VICE PRESIDENT
JEFFREY S. PHLEGAR, 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.
18
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 High Yield Fund
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
Alliance/Regent Sector Opportunity 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 Real Estate Investment 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
Massachusetts Portfolio
New Jersey Portfolio
New York Portfolio
Virginia Portfolio
Alliance Treasury Reserves
Alliance Money Market Fund
Prime Portfolio
Government Portfolio
General Municipal Portfolio
19
ALLIANCE MORTGAGE SECURITIES INCOME FUND
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
ALLIANCE CAPITAL
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
