ALLIANCE MORTGAGE SECURITIES INCOME FUND
ANNUAL REPORT
DECEMBER 31, 1997
ALLIANCE CAPITAL
LETTER TO SHAREHOLDERS
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
February 2, 1998
Dear Shareholder:
This annual report contains investment results and market activity for Alliance
Mortgage Securities Income Fund for the period ended December 31, 1997.
BOND MARKET REVIEW
The U.S. bond market rallied during the period under review, posting solid
returns. Data indicating a slowing U.S. economy, together with a favorable U.S.
budget deficit, fueled a rally in the U.S. Treasury market. In October,
financial market turmoil which started in Southeast Asia, created a ripple
effect that spread to other global markets and caused an increase in
volatility. Increased investor demand for "safe," liquid securities provided
additional fuel for the rally in the Treasury market. U.S. bond yields reached
their lowest levels since 1996 during the fourth quarter as the financial
crisis in Southeast Asia spread around the world.
Among the investment grade sectors, corporates and governments were the best
performing on an absolute basis. However, mortgage securities posted strong
relative returns adjusting for the lower market exposure of the sector.
INVESTMENT RESULTS
The following table provides the investment returns for Alliance Mortgage
Securities Income Fund for the six and 12 month periods ended December 31,
1997. Also shown for comparison are the returns for the domestic mortgage
securities market, represented by the unmanaged Lehman Brothers Mortgage-Backed
Securities Index, and the average return of Lipper's universe of U.S. Mortgage
Funds. These funds have similar investment objectives to your Fund, although
some funds included in the average may have somewhat different investment
policies. Your Fund's Class A shares modestly underperformed the index over the
past 12 month period due to the Fund's conservative positioning in anticipation
of increased levels of market volatility and mortgage prepayments.
INVESTMENT RESULTS*
Period Ended December 31, 1997
TOTAL RETURN
6 MONTHS 12 MONTHS
-------- ---------
ALLIANCE MORTGAGE SECURITIES
INCOME FUND
Class A 4.70% 8.40%
Class B 4.31% 7.60%
Class C 4.31% 7.60%
LEHMAN BROTHERS MORTGAGE-BACKED
SECURITIES INDEX 5.37% 9.49%
LIPPER U.S. MORTGAGE FUNDS AVERAGE 5.18% 8.58%
* 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 DECEMBER 31,
1997. 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. ALL RETURNS INCLUDE THE REINVESTMENT OF ANY
DISTRIBUTIONS PAID DURING THE PERIOD. PAST PERFORMANCE IS NO GUARANTEE OF
FUTURE RESULTS.
THE LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX REPRESENTS ALL
FIXED-RATE SECURITIES BACKED BY MORTGAGE POOLS OF THE GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION (GNMA), THE FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC)
AND THE FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA). THE LIPPER U.S. MORTGAGE
FUNDS AVERAGE FOR THE SIX AND 12 MONTH PERIODS ENDED DECEMBER 31, 1997 REFLECTS
THE PERFORMANCE OF 64 AND 59 MUTUAL FUNDS, RESPECTIVELY. THESE FUNDS HAVE
GENERALLY SIMILAR INVESTMENT OBJECTIVES TO YOUR FUND, ALTHOUGH INVESTMENT
POLICIES FOR THE VARIOUS FUNDS MAY DIFFER. AN INVESTOR CANNOT INVEST DIRECTLY
IN THE INDEX OR AVERAGE.
ADDITIONAL INVESTMENT RESULTS CAN BE FOUND ON PAGE 3.
MARKET REVIEW
U.S. economic activity remained healthy during the second half of the year,
buoyed by continued strength in the labor market and a strong rebound in
consumer spending. Gross Domestic Product (GDP) growth accelerated in the
fourth quarter to 4.3% up from 3.1% in the third quarter. Overall, 1997 GDP
growth was 3.8%. The labor market remained strong as non-farm payrolls grew by
358,000 a month during the fourth quarter, the highest three month average
since March-May 1994. The
1
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
unemployment rate dropped to 4.7% in December and hovered near 20-year lows
throughout most of the period. Despite these record employment levels,
inflation continued to abate with consumer prices advancing 1.7% and producer
prices declining 1.2% year over year through December. This yearly decline in
producer prices was the largest since 1986.
Despite U.S. economic growth above trend levels, the Federal Reserve left
interest rates unchanged. Improving inflation fundamentals and a strong dollar,
coupled with turmoil in Asia's financial markets, argued against any Federal
Reserve action.
PORTFOLIO ACTIVITY
The Fund's mortgage allocation and coupon selection were conservative
throughout the period due to concerns about rising volatility and declining
interest rates. As market prepayment estimates reach our own, mortgage
pass-throughs will be added to the Fund's portfolio.
INVESTMENT OUTLOOK
In 1998, we expect growth will be slower and inflation pressures will remain
contained as a result of the crisis in Southeast Asia. 1998 U.S. GDP growth is
expected to slow to between 2.0% and 2.5%. Economic growth will be tempered by
excess global manufacturing capacity while lower commodity and import prices
will restrain inflation pressures. Recent declines in interest rates will
provide an offsetting stimulus.
Although the direction of Asia's impact is clear, the full extent of the crisis
has yet to be determined. However, liquidity in the Asian markets will remain
low, volatility will remain high, and the U.S. Treasury market will continue to
be perceived as a "safe haven" for investors until clear policy responses are
outlined and there is a commitment to implementing them. The Federal Reserve is
unlikely to raise interest rates in the short term.
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 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.
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 RETURNS AS OF DECEMBER 31, 1997
CLASS A SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
One Year 8.40% 3.76%
Five Years 6.14% 5.23%
Ten Years 8.41% 7.94%
SEC Yield** 5.66%
CLASS B SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
One Year 7.60% 4.60%
Five Years 5.37% 5.37%
Since Inception* 5.85% 5.85%
SEC Yield** 5.19%
CLASS C SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
------------ ------------
One Year 7.60% 6.60%
Since Inception* 4.69% 4.69%
SEC Yield** 5.21%
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 on 30 days ended
December 31, 1997.
3
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ALLIANCE MORTGAGE SECURITIES INCOME FUND
GROWTH OF A $10,000 INVESTMENT
12/31/87 TO 12/31/97
$24,000
$22,000
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
$8,0000
12/31/87 12/31/88 12/31/89 12/31/90 12/31/91 12/31/92
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX: $24,345
LIPPER U.S. MORTGAGE FUNDS AVERAGE: $21,629
MORTGAGE SECURITIES INCOME FUND CLASS A: $21,473
This chart illustrates the total value of an assumed $10,000 investment in
Alliance Mortgage Securities Income Fund Class A shares (from 12/31/87 to
12/31/97) as compared to the performance of an appropriate broad-based index.
The chart reflects the deduction of the maximum 4.25% sales charge from the
initial $10,000 investment in the Fund and assumes the reinvestment of
dividends and capital gains. Performance for Class B and Class C shares will
vary from the results shown above due to differences in expenses charged to
those classes. Past performance is not indicative of future results, and is not
representative of future gain or loss in capital value or dividend income.
The Lipper U.S Mortgage Funds Average reflects performance of 17 funds (based
on the number of funds in the average from 12/31/87 to 12/31/97). These funds
have generally similar investment objectives to Alliance Mortgage Securities
Income Fund, although the investment policies of some funds included in the
average may vary.
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 index and
average shown above, you should note that no charges or expenses are reflected
in the performance of the index. Lipper results include fees and expenses.
Alliance Mortgage Securities Income Fund
Lehman Brothers Mortgage-Backed Securities Index
Lipper U.S. Mortgage Funds Average
4
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- -------------------------------------------------------------------------
MORTGAGE-RELATED SECURITIES-85.1%
FEDERAL HOME LOAN MORTGAGE CORP.-28.5%
7.00%, 3/01/27-6/01/27 $ 463 $ 471,251
7.00%, 9/01/11-8/01/12 (a) 6,799 6,905,601
7.00%, 11/01/26-5/01/27 GOLD 61,425 61,962,737
7.50%, 7/01/27-12/01/27 1,032 1,059,612
7.50%, 3/01/22-11/01/23 GOLD 94,312 96,876,316
11.50%, 10/01/10-6/01/20 2,901 3,307,262
12.00%, 10/01/09-7/01/20 25,266 28,796,494
12.25%, 8/01/13-7/01/14 541 625,871
12.50%, 6/01/19-6/15/19 3,610 4,241,530
12.75%, 6/01/12-2/01/14 182 213,753
13.00%, 5/01/14-12/15/18 1,448 1,722,229
13.50%, 1/01/12-10/01/16 389 468,732
14.75%, 3/01/10 56 67,152
Total Federal Home Loan Mortgage Corp.
(cost $204,238,582) 206,718,540
COLLATERALIZED MORTGAGE OBLIGATIONS-16.0%
Citicorp Mortgage Securities, Inc.
Series 1987-3 Cl.A1
9.00%, 5/01/17 12,606 13,071,424
Countrywide Funding Corp.
Series 1995-2 Cl.A5
8.50%, 6/25/25 14,709 14,951,110
Federal Home Loan Mortgage Corp.
Series 1997 Cl.H
7.00%, 8/15/21 18,000 18,376,920
MLCC Mortgage Investors, Inc.
Series 1995-B Cl.B
6.94%, 11/15/20 (b) 5,000 4,400,000
Series 1996-B Cl.B
6.94%, 10/15/21 (b) 10,955 9,659,569
Norwest Asset Securities Corp.
Series 1997-2 Cl.A6
7.50%, 3/25/27 20,000 19,943,800
RBMG Funding Co.
Series1997-1 Cl.A1
5.90%, 6/25/27 (b)(c) 9,000 8,997,210
Residential Accredit Loans, Inc.
Series 1997-QS8 Cl.A1
7.00%, 8/25/27 11,319 11,353,495
SMFC Trust
Series 1997-A Cl.B2
7.86%, 1/20/35 (b) 14,449 14,774,102
Total Collateralized Mortgage Obligations
(cost $115,116,877) 115,527,630
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-15.7%
7.00%, 1/15/23-1/15/25 90,428 91,276,481
7.50%, 1/15/26-11/15/27 19,896 20,380,609
9.00%, 12/15/19 3 3,632
10.00%, 6/01/15-6/15/20 937 1,045,712
11.50%, 3/15/10-11/15/15 601 694,974
12.00%, 2/15/14 236 279,019
12.50%, 3/15/11-5/15/15 183 216,865
13.00%, 11/15/99-1/15/00 (a) 18 18,884
15.00%, 2/15/12 1 568
Total Government National Mortgage Association
(cost $110,507,189) 113,916,744
5
PORTFOLIO OF INVESTMENTS (CONTINUED)
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- -------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION-12.7%
7.50%, 10/01/06-1/01/24 $71,042 $ 72,854,025
7.752%, 10/01/25 (a) 9,332 9,612,230
11.00%, 7/01/16 5,008 5,632,522
11.50%, 9/01/20 3,118 3,556,057
12.00%, 7/01/00 (a) 12 13,186
Total Federal National Mortgage Association
(cost $90,613,996) 91,668,020
COMMERCIAL MORTGAGE BACKED SECURITIES-9.4%
Asset Securitization Corp.
Series 1997-D5 Cl.A1
6.85%, 2/14/41 10,200 10,413,588
Series 1996-D2 Cl.A2
7.36%, 2/14/29 (b) 9,267 9,745,682
Credit Suisse First Boston Mortgage
Series 1997-S Cl.A
6.653%, 8/20/36 (c) 32,527 32,537,083
Merrill Lynch Mortgage Investors, Inc.
Series 1996-C2 Cl.B
6.96%, 11/21/28 15,000 15,297,600
Total Commercial Mortgage Backed Securities
(cost $67,231,715) 67,993,953
STRIPPED MORTGAGE BACKED SECURITIES-2.8%
Morgan Stanley Capital I
Series 1996-WF1 Cl.X I/O
8.44%, 11/15/28 (c)(d) 7,504 7,168,749
Mortgage Capital Funding, Inc.
Series 1996-MC2 Cl.X I/O
8.50%, 12/21/26 (d) 12,762 13,269,098
Total Stripped Mortgage Backed Securities
(cost $20,460,284) 20,437,847
Total Mortgage-Related Securities
(cost $608,168,643) 616,262,734
U.S. GOVERNMENT OBLIGATIONS-11.3%
U.S. TREASURY NOTES-11.3%
5.625%, 12/31/99 41,000 40,980,730
5.625%, 12/31/02 (e) 26,700 26,599,875
5.75%, 11/15/00 13,835 13,860,871
6.375%, 5/15/00 800 812,000
Total U.S. Government Obligations
(cost $82,273,085) 82,253,476
ASSET BACKED SECURITIES-3.8%
Aircraft Lease Portfolio Securitization
Series 1996-1 Cl.BX
6.43%, 6/15/06 (b) 62 61,725
Money Store Residential Trust
Series 1997-1 Cl.A1
6.42%, 4/15/06 15,228 15,232,605
Saxon Asset Securities Co.
Series 1997-3
6.568%, 6/25/27 (b) 11,974 11,974,000
Total Asset Backed Securities
(cost $27,256,694) 27,268,330
6
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- -------------------------------------------------------------------------
REPURCHASE AGREEMENT-0.1%
Prudential Securities
6.50%, dated 12/31/1997, due
1/02/98, (collateralized by
$614,000 FNMA 5.84%, 6/01/27,
value $581,000) (cost $581,000) $ 581 $ 581,000
TOTAL INVESTMENTS-100.3%
(cost $718,279,422) $726,365,540
Other assets less liabilities-(0.3%) (2,096,859)
NET ASSETS-100% $724,268,681
(a) 15 year mortgage.
(b) Adjustable rate mortgages; stated interest rate in effect at December 31,
1997.
(c) 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, 1997,
these securities amounted to $48,703,042 or 6.72% of net assets.
(d) Interest rate represents yield to maturity and principal amount represents
amortized cost.
(e) Security, or a portion thereof, loaned at December 31, 1997, with an
aggregate market value of $5,962,500 and cash collateral received from the
counterparty of Prudential Securities in the amount of $5,962,500.
Glossary of Terms:
FNMA - Federal National Mortgage Association
I/O - Interest Only
See notes to financial statements.
7
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $718,279,422) $ 726,365,540
Cash 388
Receivable for investment securities sold 40,059,896
Interest receivable 5,697,608
Receivable for capital stock sold 3,651,762
Total assets 775,775,194
LIABILITIES
Deposit for securities loaned 5,963,527
Payable for investment securities purchased 40,999,823
Payable for capital stock redeemed 1,817,304
Dividends payable 1,330,579
Advisory fee payable 967,836
Distribution fee payable 114,585
Accrued expenses and other liabilities 312,859
Total liabilities 51,506,513
NET ASSETS $ 724,268,681
COMPOSITION OF NET ASSETS
Capital stock, at par $ 839,690
Additional paid-in capital 912,854,649
Distributions in excess of net investment income (1,330,579)
Accumulated net realized loss on investment transactions (196,181,197)
Net unrealized appreciation of investments 8,086,118
$ 724,268,681
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share ($372,494,033/
43,186,349 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 ($323,915,529/
37,552,847 shares of capital stock issued and outstanding) $8.63
CLASS C SHARES
Net asset value and offering price per share ($27,859,119/
3,229,819 shares of capital stock issued and outstanding) $8.63
See notes to financial statements.
8
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
INVESTMENT INCOME
Interest $62,202,863
EXPENSES
Advisory fee $ 4,155,741
Distribution fee - Class A 1,154,156
Distribution fee - Class B 3,899,279
Distribution fee - Class C 309,465
Transfer agency 1,232,217
Custodian 259,321
Printing 161,012
Administrative 150,585
Audit and legal 118,419
Taxes 54,826
Registration 40,640
Directors' fees 18,318
Miscellaneous 21,096
Total expenses before interest 11,575,075
Interest expense 2,836,579
Total expenses 14,411,654
Net investment income 47,791,209
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investment transactions 5,023,082
Net realized gain on futures transactions 1,387,552
Net change in unrealized appreciation of investments
and futures transactions 6,200,348
Net gain on investments 12,610,982
NET INCREASE IN NET ASSETS FROM OPERATIONS $60,402,191
See notes to financial statements.
9
STATEMENT OF CHANGES IN NET ASSETS
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
YEAR ENDED YEAR ENDED
DEC. 31, 1997 DEC. 31, 1996
-------------- ---------------
INCREASE (DECREASE) IN NET ASSETS FROM
OPERATIONS
Net investment income $ 47,791,209 $ 64,552,800
Net realized gain (loss) on investment and
futures transactions 6,410,634 (3,821,572)
Net change in unrealized appreciation of
investments and futures transactions 6,200,348 (25,285,184)
Net increase in net assets from operations 60,402,191 35,446,044
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A (24,227,746) (26,983,869)
Class B (21,830,955) (31,930,957)
Class C (1,732,508) (2,221,782)
Distributions in excess of net
investment income
Class A (1,518,165) -0-
Class B (1,367,976) -0-
Class C (108,563) -0-
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 (210,798,327) (325,126,441)
Total decrease (201,182,049) (360,090,083)
NET ASSETS
Beginning of year 925,450,730 1,285,540,813
End of year $ 724,268,681 $ 925,450,730
See notes to financial statements.
10
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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% 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 generally
valued at the last reported sale price 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 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
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. 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 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. During the current fiscal year, permanent differences,
primarily due to distributions in excess of taxable income, resulted in a net
decrease in distributions in excess of net investment income and a
corresponding decrease in additional paid-in-capital. This reclassification had
no effect on net assets.
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. 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 year ended December
31, 1997.
Pursuant to the advisory agreement, the Fund paid $150,585 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, 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 $877,037 for the year ended December 31, 1997.
Alliance Fund Distributors, Inc., a wholly-owned subsidiary of the Adviser(the
"Distributor"), serves as the Distributor of the Fund's capital stock. The
Distributor received front-end sales charges of $8,822 from the sales of Class
A shares and $98,198 and $7,666 in contingent deferred sales charges imposed
upon redemptions by shareholders of Class B and Class C shares, respectively,
for the year ended December 31, 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 $10,423,667 and $2,946,979 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 $335,752,863 and $273,891,076,
respectively, for the year ended December 31, 1997. There were purchases of
$1,144,770,552 and sales of $1,426,919,141 of U.S. government and government
agency obligations for the year ended December 31, 1997.
At December 31, 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 $9,673,600 and gross unrealized
depreciation of investments was $1,587,482 resulting in net unrealized
appreciation of $8,086,118. 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.
12
ALLIANCE MORTGAGE SECURITIES INCOME FUND
_______________________________________________________________________________
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.
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 December 31, 1997, 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
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,
1997 1996 1997 1996
------------ ------------ -------------- --------------
CLASS A
Shares sold 1,417,930 844,591 $ 12,116,917 $ 7,205,604
Shares issued in
reinvestment of
dividends and
distributions 1,547,957 1,961,238 13,216,360 16,687,117
Shares converted
from Class B 2,567,092 2,085,070 21,940,632 17,622,222
Shares redeemed (10,860,453) (13,809,608) (92,588,666) (117,388,990)
Net decrease (5,327,474) (8,918,709) $ (45,314,757) $ (75,874,047)
CLASS B
Shares sold 675,057 1,409,586 $ 5,759,766 $ 12,016,407
Shares issued in
reinvestment of
dividends and
distributions 1,345,087 1,896,252 11,481,237 16,139,845
Shares converted
to Class A (2,567,092) (2,085,070) (21,940,632) (17,622,222)
Shares redeemed (17,950,900) (29,490,473) (152,926,277) (250,814,789)
Net decrease (18,497,848) (28,269,705) $(157,625,906) $(240,280,759)
CLASS C
Shares sold 308,895 1,031,590 $ 2,638,792 $ 8,786,691
Shares issued in
reinvestment of
dividends and
distributions 154,123 134,402 1,316,078 1,143,334
Shares redeemed (1,385,598) (2,221,704) (11,812,534) (18,901,660)
Net decrease (922,580) (1,055,712) $ (7,857,664) $ (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 year ended December 31, 1997, the maximum amount of security lending
agreements outstanding was 167,403,000, the average amount outstanding was
approximately $63,555,986 and the daily weighted average interest was 5.38%.
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 December 31, 1997, the Fund had entered into the following security
lending agreement:
AMOUNT COUNTERPARTY INTEREST RATE MATURITY
- ---------- --------------------- ------------- ---------------
$5,962,500 Prudential Securities 6.20% January 2, 1998
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,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net asset value beginning of year $8.51 $8.75 $8.13 $9.29 $9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income .54(a) .54(a) .57(a) .57 .67
Net realized and unrealized gain (loss)
on investment and futures transactions .15 (.19) .64 (1.13) .23
Net increase (decrease) in net asset
value from operations .69 .35 1.21 (.56) .90
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.54) (.51) (.57) (.58) (.67)
Distributions in excess of net
investment income (.03) -0- -0- -0- (.02)
Tax return of capital -0- (.08) (.02) (.02) -0-
Total dividends and distributions (.57) (.59) (.59) (.60) (.69)
Net asset value, end of year $8.63 $8.51 $8.75 $8.13 $9.29
TOTAL RETURN
Total investment return based on net
asset value (b) 8.40% 4.23% 15.34% (6.14)% 10.14%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $372,494 $412,899 $502,390 $553,889 $848,069
Ratio of expenses to average net assets 1.41% 1.68% 1.66% 1.29% 1.00%
Ratio of expenses to average net
assets excluding interest expense 1.07%(c) 1.03%(c) 1.03%(c) .97%(c) 1.00%
Ratio of net investment income to
average net assets 6.30% 6.38% 6.77% 6.77% 7.20%
Portfolio turnover rate 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 YEAR
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $8.51 $8.75 $8.13 $9.29 $9.08
INCOME FROM INVESTMENT OPERATIONS
Net investment income .48(a) .48(a) .51(a) .51 .61
Net realized and unrealized gain (loss)
on investment and futures transactions .15 (.19) .64 (1.14) .22
Net increase (decrease) in net asset
value from operations .63 .29 1.15 (.63) .83
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.48) (.46) (.51) (.51) (.60)
Distributions in excess of net
investment income (.03) -0- -0- -0- (.02)
Tax return of capital -0- (.07) (.02) (.02) -0-
Total dividends and distributions (.51) (.53) (.53) (.53) (.62)
Net asset value, end of year $8.63 $8.51 $8.75 $8.13 $9.29
TOTAL RETURN
Total investment return based on net
asset value (b) 7.60% 3.46% 14.48% (6.84)% 9.38%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's omitted) $323,916 $477,196 $737,593 $921,418 $1,454,303
Ratio of expenses to average net assets 2.14% 2.37% 2.37% 2.00% 1.70%
Ratio of expenses to average net
assets excluding interest expense 1.78%(c) 1.74%(c) 1.74%(c) 1.68%(c) 1.70%
Ratio of net investment income to
average net assets 5.60% 5.66% 6.06% 6.05% 6.47%
Portfolio turnover rate 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
--------------------------------------------------------------------
MAY 3,1993(D)
YEAR ENDED DECEMBER 31, TO
------------------------------------------------------ DECEMBER 31,
1997 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 .48(a) .48(a) .51(a) .51 .40
Net realized and unrealized gain (loss)
on investment and futures transactions .15 (.19) .64 (1.14) -0-
Net increase (decrease) in net asset
value from operations .63 .29 1.15 (.63) .40
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.48) (.46) (.51) (.51) (.40)
Distributions in excess of net
investment income (.03) -0- -0- -0- (.01)
Tax return of capital -0- (.07) (.02) (.02) -0-
Total dividends and distributions (.51) (.53) (.53) (.53) (.41)
Net asset value, end of period $8.63 $8.51 $8.75 $8.13 $9.29
TOTAL RETURN
Total investment return based on net
asset value (b) 7.60% 3.46% 14.46% (6.84)% 4.34%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $27,859 $35,355 $45,558 $58,338 $91,724
Ratio of expenses to average net assets 2.12% 2.38% 2.35% 1.97% 1.67%(e)
Ratio of expenses to average net assets
excluding interest expense 1.77%(c) 1.73%(c) 1.73%(c) 1.69%(c) 1.67%(e)
Ratio of net investment income to average
net assets 5.61% 5.67% 6.07% 6.06% 5.92%(e)
Portfolio turnover rate 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 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 .34%, .65%, .63% and .32%, respectively, on
securities lending transactions (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 DIRECTORS
ALLIANCE MORTGAGE SECURITIES INCOME FUND, INC.
We have audited the accompanying statement of assets and liabilities of
Alliance Mortgage Securities Income Fund, Inc. (the "Fund"), including the
portfolio of investments, as of December 31, 1997, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended and the financial highlights for
each of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, 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, 1997, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods, in conformity with generally
accepted accounting principles.
New York, New York
January 30, 1998
18
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.
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.
MORAR
