ALLIANCE MORTGAGE SECURITIES INCOME FUND
SEMI-ANNUAL REPORT
JUNE 30, 1998
ALLIANCE CAPITAL
LETTER TO SHAREHOLDERS
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
August 27, 1998
Dear Shareholder:
We are pleased to report to you on the performance, strategy, and outlook of
the Alliance Mortgage Securities Income Fund for the six-month period ended
June 30, 1998. The Fund is designed for investors who seek high current income,
consistent with prudent investment risk. The Fund invests primarily in a
diversified portfolio of mortgage-related securities including collateralized
mortgage obligations (CMOs). The Fund may also hold asset-backed securities and
U.S. Treasury securities.
FUND PERFORMANCE
The following table provides the investment results for the Alliance Mortgage
Securities Income Fund for the six- and 12-month periods ended June 30, 1998.
For comparison, we have included the total returns of the Lehman Brothers (LB)
Mortgage-Backed Securities Index as well as the Lipper U.S. Mortgage Funds
Average.
During the six-month period ended June 30, 1998, your Fund's Class A shares
approximated the return of the Fund's benchmark, the LB Mortgage-Backed
Securities Index and outperformed the Fund's peer group, as represented by the
Lipper U.S. Mortgage Funds Average. The relative performance of your Fund was
enhanced by its allocation to discount and current coupon mortgage-backed
securities. However, the Fund's allocation to premium and adjustable-rate
mortgages dampened performance.
INVESTMENT RESULTS*
Periods Ended June 30, 1998
TOTAL RETURNS
6 MONTHS 12 MONTHS
--------- ---------
ALLIANCE MORTGAGE SECURITIES INCOME FUND
Class A 3.32% 8.17%
Class B 2.94% 7.38%
Class C 2.94% 7.38%
LEHMAN BROTHERS MORTGAGE-BACKED
SECURITIES INDEX 3.38% 8.93%
LIPPER U.S. MORTGAGE FUNDS AVERAGE 2.99% 8.23%
* THE FUND'S INVESTMENT RESULTS ARE TOTAL RETURNS FOR THE PERIODS AND ARE
BASED ON THE NET ASSET VALUE OF EACH CLASS OF SHARES. 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. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
THE LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX IS COMPRISED OF ALL
FIXED-RATE SECURITIES BACKED BY MORTGAGE POOLS OF THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION (GNMA), FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC),
AND FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA). GRADUATED PAYMENT MORTGAGES
(GPMS) ARE INCLUDED, BUT GRADUATED EQUITY MORTGAGES (GEMS) ARE NOT. THE
UNMANAGED LIPPER U.S. MORTGAGE FUNDS AVERAGE (LIPPER AVERAGE) IS BASED ON THE
PERFORMANCE OF A UNIVERSE OF FUNDS THAT INVEST AT LEAST 65% OF THEIR ASSETS IN
MORTGAGES/SECURITIES ISSUED OR GUARANTEED AS TO PRINCIPAL AND INTEREST BY THE
U.S. GOVERNMENT AND CERTAIN FEDERAL AGENCIES. FOR THE SIX AND 12-MONTH PERIODS
ENDED JUNE 30, 1998, THE LIPPER AVERAGE CONSISTED OF 68 AND 63 FUNDS,
RESPECTIVELY. AN INVESTOR CANNOT INVEST DIRECTLY IN AN INDEX OR AN AVERAGE.
ADDITIONAL INVESTMENT RESULTS APPEAR ON PAGE 4.
ECONOMIC OVERVIEW
During the six-month period ended June 30, 1998, the U.S. economy continued its
healthy expansion coupled with low inflation. Fueled by strong domestic demand,
first quarter 1998 Gross Domestic Product (GDP), a standard measure of economic
growth, expanded at an
1
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
annualized rate of 5.5%. In the second quarter 1998, annualized GDP growth
slowed to 1.6%, as strong domestic demand was offset by weakening industrial
production caused by lower exports to Asia. The Consumer Price Index (CPI), a
measure of inflation, recorded a 1.7% increase year-over-year for the period
ended June 30, despite the tightest labor market in 28 years. With inflation
benign and growth slowing, the Federal Reserve left interest rates unchanged.
MARKET OVERVIEW
Through the six-month period, the U.S. bond market continued to climb as
investors, concerned about events in the emerging markets, sought the relative
safety of U.S. Treasuries. The U.S. Treasury market posted solid returns with
longer-term Treasuries outperforming shorter-term Treasuries. In May, renewed
volatility in Asia, weakness in the Japanese yen and fiscal problems in Russia
caused a rally in the Treasury market and pushed bond prices higher.
The mortgage sector performed well during the six-month period as interest
rates remained in a trading range. However, the sector's performance
deteriorated towards the end of the period as the decline in interest rates
renewed prepayment fears. Particularly affected were adjustable-rate mortgages
which experienced higher levels of prepayments as interest rates declined and
the yield curve flattened.
INVESTMENT STRATEGY
During the six-month period ended June 30, 1998, we adjusted the portfolio in
accordance with our changing expectations for prepayment rates versus the
market consensus. In the first quarter 1998, we increased the allocation to
mortgage-backed securities versus Treasury securities. We emphasized Government
National Mortgage Association (GNMA) 30-year and Federal National Mortgage
Association (FNMA)/Federal Home Loan Mortgage Corporation (FHLMC) 15-year
mortgage-backed securities, based on our assessment that prepayments would be
lower than expected. Specifically, GNMA borrowers are less prepayment sensitive
than conventional borrowers because of additional expenses due when refinancing
and, based on the flat yield curve, there is less incentive to refinance from a
15-year to a 30-year mortgage. In both cases, our sector allocation prepaid 35%
to 40% slower than the stated comparisons. We also used asset-backed securities
to enhance yield and returns when spreads widened and subsequently tightened.
As the period continued, we executed several swaps between agencies and coupons
to take advantage of differing prepayment expectations.
OUTLOOK
We anticipate slowing global growth and continued benign inflation as Asia
exports cheaper goods to the world and imports less from abroad. With inflation
subdued, we expect monetary policy in the U.S. to remain substantially
unchanged for most of 1998. The current slowing of growth in the U.S. is
expected to continue with 1998 GDP estimated around 3.0%. Strong domestic
demand will continue to be offset by weakening industrial production. We
anticipate that U.S. interest rates will remain low as the U.S. fixed income
markets continue to provide a safe haven for investors during periods of
volatility overseas. We continue to view mortgages favorably as their returns
remain attractive relative to prepayment expectations.
2
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
Thank you for your continued interest and investment in the Alliance Mortgage
Securities Income Fund. We look forward to reporting its progress to you in the
coming months.
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.
3
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
_______________________________________________________________________________
NAV AND SEC AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 1998
CLASS A SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
One Year 8.17% 3.56%
Five Years 5.31% 4.39%
10 Years 8.03% 7.56%
SEC Yield** 6.05%
CLASS B SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
One Year 7.38% 4.38%
Five Years 4.53% 4.53%
Since Inception* 5.91% 5.91%
SEC Yield** (a) 5.59%
CLASS C SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
One Year 7.38% 6.38%
Five Years 4.53% 4.53%
Since Inception* 4.81% 4.81%
SEC Yield** 5.60%
The Fund's investment results represent Average Annual Total Returns. The NAV
and SEC returns reflect reinvestment of dividends and/or capital gains
distributions in additional shares without (NAV) and with (SEC) 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);
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.
** SECYields are based on SEC guidelines and are calculated on 30 days ended
6/30/98.
(a) Assumes conversion of Class B shares into Class A shares after six years.
4
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- -------------------------------------------------------------------------
MORTGAGE-RELATED SECURITIES-113.4%
FEDERAL NATIONAL MORTGAGE ASSOCIATION-54.4%
6.50%, 4/01/28-6/01/28 (a) $ 94,525 $ 94,140,290
7.00%, 8/01/25-6/01/28 114,877 116,492,043
7.00%, 1/01/99 (b) 25,000 25,453,000
7.50%, 2/01/17-1/01/24 28,439 29,225,757
7.50%, 10/01/06-11/01/12 (a)(b) 32,761 33,662,192
8.00%, 6/01/26-1/01/28 48,954 50,667,413
11.00%, 7/01/16 4,292 4,825,521
11.50%, 9/01/20 (c) 2,718 3,095,833
12.00%, 7/01/00 (b) 7 8,015
Total Federal National Mortgage Association
(cost $355,001,890) 357,570,064
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-37.6%
7.00%, 1/15/23-1/15/25 84,836 86,320,653
7.50%, 2/15/23-2/15/28 154,079 158,363,965
9.00%, 12/15/19 4 3,881
10.00%, 6/01/15-6/15/20 780 858,092
11.50%, 3/15/10-11/15/15 523 594,169
12.00%, 2/15/14 234 270,600
12.50%, 3/15/11-5/15/15 162 189,062
13.00%, 11/15/99 (b) 13 14,809
15.00%, 2/15/12 1 551
Total Government National Mortgage Association
(cost $243,329,633) 246,615,782
FEDERAL HOME LOAN MORTGAGE CORP.-8.9%
7.00%, 9/01/11-8/01/12 (b) 6,255 6,372,636
7.50%, 11/01/07-1/01/13 (a)(b) 856 880,812
7.50%, 3/01/22-11/01/23 (GOLD) 17,254 17,714,905
11.50%, 10/01/10-6/01/20 2,488 2,832,788
12.00%, 10/01/09-7/01/20 (a) 21,350 24,302,886
12.25%, 8/01/13-7/01/14 513 592,880
12.50%, 6/01/19-6/15/19 (a) 3,055 3,585,352
12.75%, 6/01/12-2/01/14 139 163,343
13.00%, 5/01/14-12/15/18 1,219 1,446,865
13.50%, 1/01/12-10/01/16 376 452,807
14.75%, 3/01/10 51 61,780
Total Federal Home Loan Mortgage Corp.
(cost $57,703,380) 58,407,054
COMMERCIAL MORTGAGE BACKED SECURITY-4.3%
Credit Suisse First Boston Mortgage
Series 1997-S Cl.A
6.653%, 8/20/36 (d)
(cost $28,132,285) 28,132 28,150,008
COLLATERALIZED MORTGAGE OBLIGATIONS-4.1%
Citicorp Mortgage Securities, Inc.
Series 1987-3 Cl.A1
9.00%, 5/01/17 10,918 11,320,597
Countrywide Funding Corp.
Series 1995-2 Cl.A5
8.50%, 6/25/25 60 60,733
MLCC Mortgage Investors, Inc.
Series 1995-B Cl.B
6.94%, 11/15/20 (c) 5,000 4,500,000
Series 1996-B Cl.B
6.94%, 7/15/21 (c) 10,955 9,900,916
RBMG Funding Co.
Series1997-1 Cl.A1
5.90%, 6/25/27 (c)(d) 155 154,362
Residential Accredit Loans, Inc.
Series 1997-QS8 Cl.A1
7.00%, 8/25/27 1,161 1,159,330
5
PORTFOLIO OF INVESTMENTS (CONTINUED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
AMOUNT
(000) VALUE
- -------------------------------------------------------------------------
Total Collateralized Mortgage Obligations
(cost $26,968,404) $ 27,095,938
STRIPPED MORTGAGE BACKED SECURITIES-4.1%
Bear Stearns
1997 Cl. 2-X I/O
12.35%, 8/25/36 (d) (e) $104,954 6,875,563
Morgan Stanley Capital I
Series 1996-WF1 Cl.X I/O
8.44%, 11/15/28 (d)(e) 101,970 6,723,918
Mortgage Capital Funding, Inc.
Series 1996-MC2 Cl.X I/O
8.50%, 12/21/26 (e) 133,395 13,298,166
Total Stripped Mortgage Backed Securities
(cost $27,390,798) 26,897,647
Total Mortgage-Related Securities
(cost $738,526,390) 744,736,493
U.S. GOVERNMENT OBLIGATION-4.8%
U. S. Treasury Note
5.50%, 3/31/00 (a)
(cost $31,683,540) 31,700 31,690,173
ASSET BACKED SECURITY-0.0%
Aircraft Lease Portfolio Securitization
Series 1996-1 Cl.BX
6.43%, 6/15/06 (c)
(cost $61,736) 62 62,294
REPURCHASE AGREEMENT-0.1%
Prudential Securities
5.95%, dated 6/30/98, due
07/01/98, collateralized by
$700,000 FNMA 6.50%, 6/01/28, $700,000
(cost $700,000) 700 700,000
TOTAL INVESTMENTS-118.3%
(cost $770,971,666) 777,188,960
Other assets less liabilities-(18.3%) (120,131,661)
NET ASSETS-100% $657,057,299
(a) Securities, or a portion thereof, loaned at June 30, 1998, with an
aggregate market value of $147,508,499 and cash collateral received from the
counterparty of Prudential Securities in the amount of $149,803,625.
(b) 15 year mortgage.
(c) Adjustable rate mortgages; stated interest in effect at June 30, 1998.
(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 institutional buyers. At June 30, 1998,
these securities amounted to $41,903,851 or 6.38% 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, 1998 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $770,971,666) $ 777,188,960
Receivable for investment securities sold 50,986,831
Interest receivable 7,249,926
Receivable for capital stock sold 317,623
Prepaid expenses 25,789
Total assets 835,769,129
LIABILITIES
Due to custodian 59,600
Deposit for securities loaned 149,853,289
Payable for investment securities purchased 25,600,174
Dividends payable 1,141,032
Advisory fee payable 883,858
Payable for capital stock redeemed 774,959
Distribution fee payable 76,872
Accrued expenses and other liabilities 322,046
Total liabilities 178,711,830
NET ASSETS $ 657,057,299
COMPOSITION OF NET ASSETS
Capital stock, at par $ 761,662
Additional paid-in capital 845,516,737
Distributions in excess of net investment income (2,725,852)
Accumulated net realized loss on investment transactions (192,712,542)
Net unrealized appreciation of investments 6,217,294
$ 657,057,299
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share ($367,230,319/
42,573,151 shares of capital stock issued and outstanding) $8.63
Sales charge--4.25% of public offering price .38
Maximum offering price $9.01
CLASS B SHARES
Net asset value and offering price per share ($263,782,678/
30,574,473 shares of capital stock issued and outstanding) $8.63
CLASS C SHARES
Net asset value and offering price per share ($26,044,302/
3,018,578 shares of capital stock issued and outstanding) $8.63
See notes to financial statements.
7
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
INVESTMENT INCOME
Interest $27,612,705
EXPENSES
Advisory fee $1,805,474
Distribution fee - Class A 544,102
Distribution fee - Class B 1,478,074
Distribution fee - Class C 131,856
Transfer agency 584,992
Custodian 133,923
Administrative 74,844
Printing 64,746
Audit and legal 46,979
Registration 27,786
Taxes 13,736
Directors' fees 11,854
Miscellaneous 10,373
Total expenses before interest 4,928,739
Interest expense 2,685,871
Total expenses 7,614,610
Net investment income 19,998,095
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investment transactions 2,979,129
Net realized gain on futures transactions 489,526
Net change in unrealized appreciation of
investments and futures transactions (1,868,824)
Net gain on investments 1,599,831
NET INCREASE IN NET ASSETS FROM OPERATIONS $21,597,926
See notes to financial statements.
8
STATEMENT OF CHANGES IN NET ASSETS
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
SIX MONTHS ENDED
JUNE 30,1998 YEAR ENDED
(UNAUDITED) DEC. 31,1997
------------- --------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 19,998,095 $ 47,791,209
Net realized gain on investment and futures
transactions 3,468,655 6,410,634
Net change in unrealized appreciation of
investments and futures transactions (1,868,824) 6,200,348
Net increase in net assets from operations 21,597,926 60,402,191
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (11,976,420) (24,227,746)
Class B (8,644,908) (21,830,955)
Class C (772,040) (1,732,508)
Distributions in excess of net investment income
Class A -0- (1,518,165)
Class B -0- (1,367,976)
Class C -0- (108,563)
CAPITAL STOCK TRANSACTIONS
Net decrease (67,415,940) (210,798,327)
Total decrease (67,211,382) (201,182,049)
NET ASSETS
Beginning of year 724,268,681 925,450,730
End of period $657,057,299 $ 724,268,681
See notes to financial statements.
9
STATEMENT OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
INCREASE (DECREASE) IN CASH FROM:
OPERATING ACTIVITIES:
Interest received $ 25,968,211
Interest paid (2,685,871)
Operating expenses paid (5,041,243)
Net increase in cash from operating activities $ 18,241,097
INVESTING ACTIVITIES:
Proceeds from disposition of long-term
portfolio investments 772,422,211
Purchase of long-term portfolio investments (848,276,523)
Purchase of short-term portfolio
investments, net (119,000)
Gain on closed futures contracts 489,526
Net decrease in cash from investing activities (75,483,786)
FINANCING ACTIVITIES*:
Decrease in securities lending 143,889,762
Redemptions of capital stock, net (76,805,625)
Cash dividends paid (9,901,436)
Net increase in cash from financing activities 57,182,701
Net decrease in cash (59,988)
Cash at beginning of year 388
Due to custodian at end of period $ (59,600)
RECONCILIATION OF NET INCREASE IN NET ASSETS
FROM OPERATIONS TO NET INCREASE IN CASH
FROM OPERATING ACTIVITIES:
Net increase in net assets from operations $ 21,597,926
ADJUSTMENTS:
Increase in interest receivable $(1,552,318)
Net realized gain on investment transactions (3,468,655)
Net change in unrealized appreciation 1,868,824
Accretion of bond discount (92,177)
Decrease in accrued expenses (112,503)
(3,356,829)
Net increase in cash from operating activities $ 18,241,097
* Non-cash financing activities not included herein consist of reinvestment
of dividends.
See notes to financial statements.
10
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (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 currently sold with
a contingent deferred sales charge which declines from 3% 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 financial statements have
been prepared in conformity with generally accepted accounting principles which
require management to make certain estimates and assumptions that affect the
reported amounts of assets and liabilities in the financial statements and
amounts of income and expenses during the reporting period. Actual results
could differ from those estimates. The following is a summary of significant
accounting policies followed by the Fund.
1. SECURITY VALUATION
Portfolio securities traded on a national securities exchange are valued at the
last sale price on such exchange on the day of valuation or, if there was no
sale on such day, the last bid price quoted on such day. If no bid prices are
quoted, then the security is valued at the mean of the bid and asked prices as
obtained on that day from one or more dealers regularly making a market in that
security. Securities traded on the over-the-counter market are valued at the
mean of the closing bid and asked prices provided by two or more dealers
regularly making a market in such securities. U.S. government securities and
other debt securities which mature in 60 days or less are valued at amortized
cost unless this method does not represent fair value. Securities for which
market quotations are not readily available are valued at fair value as
determined in good faith by, or in accordance with procedures approved by, the
Board of Directors. Fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities.
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 any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
3. INVESTMENT INCOME AND INVESTMENT TRANSACTIONS
Interest income is accrued daily. Investment transactions are accounted for on
the date 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. INCOME AND EXPENSES
All income earned and expenses incurred by the Fund are borne on a pro-rata
basis by each settled class of shares, based on the proportionate interest in
the Fund represented by the net assets of such class, except that the Fund's
Class B and Class C shares bear higher distribution and transfer agent fees
than Class A shares.
5. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date.
Income dividends and capital gains distributions are determined in accordance
with federal tax regulations and may differ from those determined in accordance
with generally accepted accounting principles. To the extent these differences
are permanent, such amounts are reclassified within the capital accounts based
on their federal tax basis treatment; temporary differences, do not require
such reclassification.
11
NOTES TO FINANCIAL STATEMENTS (CONT.)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
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 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, 1998.
Pursuant to the advisory agreement, the Fund paid $74,844 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, 1998.
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 $409,225 for the six months ended June 30, 1998.
Alliance Fund Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary
of the Adviser, serves as the Distributor of the Fund's shares. The Distributor
received $33,477 and $2,389 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, 1998.
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 both
Class B and Class C shares. The fees are 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 $9,654,241 and $3,037,099 for Class B
and C shares, respectively; such costs may be recovered from the Fund in future
periods as 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 $24,753,594 and $130,397,865,
respectively, for the six months ended June 30, 1998. There were purchases of
$808,123,280 and sales of $568,626,927 of U.S. government and government agency
obligations for the six months ended June 30, 1998.
At June 30, 1998 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 $7,608,798 and gross unrealized
depreciation of investments was $1,391,504 resulting in net unrealized
appreciation of $6,217,294.
For federal income tax purposes, the Fund had a capital loss carryforward at
December 31, 1997 of $196,181,197, of which $193,003,251 expires in the year
2002 and $3,177,946 expires in the year 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.
The Fund bears the market risk that arises from changes in the value of these
financial instruments.
12
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
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, 1998, the Fund had no outstanding futures
contracts.
NOTE E: CAPITAL STOCK
There are 1,800,000,000 shares of $.01 par value capital stock authorized,
divided into three classes, 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, 1998 DECEMBER 31, JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997 (UNAUDITED) 1997
------------- ------------ -------------- --------------
CLASS A
Shares sold 912,517 1,417,930 $ 7,862,478 $ 12,116,917
Shares issued in
reinvestment of
dividends and
distributions 775,597 1,547,957 6,699,959 13,216,360
Shares converted
from Class B 4,690,425 2,567,092 40,520,733 21,940,632
Shares redeemed (6,991,737) (10,860,453) (60,374,034) (92,588,666)
Net decrease (613,198) (5,327,474) $ (5,290,864) $ (45,314,757)
CLASS B
Shares sold 441,004 675,057 $ 3,810,300 $ 5,759,766
Shares issued in
reinvestment of
dividends and
distributions 515,662 1,345,087 4,455,234 11,481,237
Shares converted
to Class A (4,690,425) (2,567,092) (40,520,733) (21,940,632)
Shares redeemed (3,244,615) (17,950,900) (28,040,487) (152,926,277)
Net decrease (6,978,374) (18,497,848) $(60,295,686) $(157,625,906)
CLASS C
Shares sold 256,481 308,895 $ 2,214,800 $ 2,638,792
Shares issued in
reinvestment of
dividends and
distributions 60,917 154,123 526,286 1,316,078
Shares redeemed (528,639) (1,385,598) (4,570,476) (11,812,534)
Net decrease (211,241) (922,580) $ (1,829,390) $ (7,857,664)
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, 1998, the maximum amount of security lending
agreements outstanding was $212,060,750, the average amount outstanding was
approximately $110,268,000 and the daily weighted average interest was 5.63%.
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 Adviser 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 or 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, 1998, the Fund had entered into the following security lending
agreement:
AMOUNT COUNTERPARTY INTEREST RATE MATURITY
------------ --------------------- ------------- ------------
$117,747,000 Prudential Securities 6.20% July 1, 1998
32,056,625 Prudential Securities 5.50 July 2, 1998
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, 1998 ------------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
--------------- ------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $8.63 $8.51 $8.75 $8.13 $9.29 $9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income .26(a) .54(a) .54(a) .57(a) .57 .67
Net realized and unrealized gain (loss)
on investment and futures transactions .02 .15 (.19) .64 (1.13) .23
Net increase (decrease) in net asset
value from operations .28 .69 .35 1.21 (.56) .90
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.28) (.54) (.51) (.57) (.58) (.67)
Distributions in excess of net
investment income -0- (.03) -0- -0- -0- (.02)
Tax return of capital -0- -0- (.08) (.02) (.02) -0-
Total dividends and distributions (.28) (.57) (.59) (.59) (.60) (.69)
Net asset value, end of period $8.63 $8.63 $8.51 $8.75 $8.13 $9.29
TOTAL RETURN
Total investment return based on net
asset value (b) 3.32% 8.40% 4.23% 15.34% (6.14)% 10.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $367,230 $372,494 $412,899 $502,390 $553,889 $848,069
Ratio of expenses to average net assets 1.90%(c) 1.41% 1.68% 1.66% 1.29% 1.00%
Ratio of expenses to average net assets
excluding interest expense 1.11%(c)(d) 1.07%(d) 1.03%(d) 1.03%(d) .97%(d) 1.00%
Ratio of net investment income to
average net assets 6.18%(c) 6.30% 6.38% 6.77% 6.77% 7.20%
Portfolio turnover rate 86% 184% 208% 285% 438% 622%
</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
-------------------------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 1998 --------------------------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994 1993
--------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $8.63 $8.51 $8.75 $8.13 $9.29 $9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income .23(a) .48(a) .48(a) .51(a) .51 .61
Net realized and unrealized gain (loss)
on investment and futures transactions .02 .15 (.19) .64 (1.14) .22
Net increase (decrease) in net asset
value from operations .25 .63 .29 1.15 (.63) .83
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.25) (.48) (.46) (.51) (.51) (.60)
Distributions in excess of net
investment income -0- (.03) -0- -0- -0- (.02)
Tax return of capital -0- -0- (.07) (.02) (.02) -0-
Total dividends and distributions (.25) (.51) (.53) (.53) (.53) (.62)
Net asset value, end of period $8.63 $8.63 $8.51 $8.75 $8.13 $9.29
TOTAL RETURN
Total investment return based on net
asset value (b) 2.94% 7.60% 3.46% 14.48% (6.84)% 9.38%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $263,783 $323,916 $477,196 $737,593 $921,418 $1,454,303
Ratio of expenses to average net assets 2.59%(c) 2.14% 2.37% 2.37% 2.00% 1.70%
Ratio of expenses to average net assets
excluding interest expense 1.82%(c)(d) 1.78%(d) 1.74%(d) 1.74%(d) 1.68%(d) 1.70%
Ratio of net investment income to
average net assets 5.45%(c) 5.60% 5.66% 6.06% 6.05% 6.47%
Portfolio turnover rate 86% 184% 208% 285% 438% 622%
</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, 1998 -------------------------------------------------- DECEMBER 31,
(UNAUDITED) 1997 1996 1995 1994 1993
--------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $8.63 $8.51 $8.75 $8.13 $9.29 $9.30
INCOME FROM INVESTMENT OPERATIONS
Net investment income .23(a) .48(a) .48(a) .51(a) .51 .40
Net realized and unrealized gain (loss)
on investment and futures transactions .02 .15 (.19) .64 (1.14) -0-
Net increase (decrease) in net asset
value from operations .25 .63 .29 1.15 (.63) .40
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.25) (.48) (.46) (.51) (.51) (.40)
Distributions in excess of net
investment income -0- (.03) -0- -0- -0- (.01)
Tax return of capital -0- -0- (.07) (.02) (.02) -0-
Total dividends and distributions (.25) (.51) (.53) (.53) (.53) (.41)
Net asset value, end of period $8.63 $8.63 $8.51 $8.75 $8.13 $9.29
TOTAL RETURN
Total investment return based on net
asset value (b) 2.94% 7.60% 3.46% 14.46% (6.84)% 4.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $26,044 $27,859 $35,355 $45,558 $58,338 $91,724
Ratio of expenses to average net assets 2.59%(c) 2.12% 2.38% 2.35% 1.97% 1.67%(c)
Ratio of expenses to average net assets
excluding interest expense 1.80%(c)(d) 1.77%(d) 1.73%(d) 1.73%(d) 1.69%(d) 1.67%(c)
Ratio of net investment income to
average net assets 5.47%(c) 5.61% 5.67% 6.07% 6.06% 5.92%(c)
Portfolio turnover rate 86% 184% 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 charges or contingent
deferred sales charges are 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 .79%, .34%, .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)
JOHN H. DOBKIN (1)
WILLIAM H. FOULK, JR. (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 Environment 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 Global Small Cap Fund
Alliance Quasar Fund
Alliance Technology Fund
INTERNATIONAL
Alliance All-Asia Investment Fund
Alliance Greater China '97 Fund
Alliance International Fund
Alliance International Premier Growth Fund
Alliance New Europe Fund
Alliance Worldwide Privatization Fund
CLOSED-END FUNDS
Alliance All-Market Advantage 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
