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Alliance
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Mortgage
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Securities
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Income Fund
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Annual Report
December 31, 1998
Alliance Capital [LOGO]
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<PAGE>
LETTER TO SHAREHOLDERS Alliance Mortgage Securities Income Fund
================================================================================
February 24, 1999
Dear Shareholder:
We are pleased to report to you on our performance, investment strategy, and
outlook for the Alliance Mortgage Securities Income Fund, for the annual
reporting period ended December 31, 1998. The Fund is designed for investors who
seek high current income, consistent with prudent investment risk. To achieve
its objective, the Fund invests primarily in a diversified portfolio of
mortgage-related securities. The Fund may also hold asset-backed securities,
U.S. government securities, qualifying bank deposits, commercial paper and debt
securities secured by commercial real estate.
INVESTMENT RESULTS
The following table provides the investment results for the Alliance Mortgage
Securities Income Fund for the six-and 12-month periods ended December 31, 1998.
For comparison, we have included the total returns for the Fund's benchmark, the
Lehman Brothers Mortgage-Backed Securities Index, as well as for the Lipper U.S.
Mortgage Funds Average (the Lipper Average).
Your Fund underperformed its benchmark and the Lipper Average for the six- and
12-month periods ended December 31, 1998. Our use of asset-backed securities in
the third quarter dampened performance somewhat as investors, seeking safety
from financial market turmoil, were heavy sellers of non-U.S. Treasury
securities.
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INVESTMENT RESULTS*
Periods Ended December 31, 1998
Total Returns
6 Months 12 Months
------------- -------------
Alliance Mortgage
Securities Income
Fund
Class A 2.42% 5.82%
Class B 2.04% 5.04%
Class C 2.04% 5.04%
Lehman Brothers
Mortgage-Backed
Securities Index 3.46% 6.96%
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Total Returns
6 Months 12 Months
------------- -------------
Lipper U.S. Mortgage
Funds Average 2.93% 6.08%
* 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 December 31, 1998, the
Lipper Average consisted of 74 and 73 funds, respectively. An investor
cannot invest directly in an index or an average.
Additional investment results appear on page 3.
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MARKET OVERVIEW
Despite an unprecedented wave of financial shocks both at home and abroad during
the six-month period ended December 31, 1998, overall U.S. economic growth
remained strong, while inflation, interest rates and unemployment remained at
historic lows. Strong consumer demand continued to be the driving force behind
the economic expansion. However, the manufacturing sector continued to be
negatively affected by weaker exports, as economies outside the U.S. slowed. The
Federal Reserve cut interest rates toward the end of the period as the risk of
an economic slowdown outweighed the risk of inflation.
During the six-month period ended December 31, 1998, the U.S. bond market
continued to climb as investors sought safety from global financial market
turmoil. At the beginning of the period, global markets suffered from multiple
concerns about recession and a liquidity crisis throughout non-government bond
markets. The currency devaluation and debt default in Russia, the extreme
1
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Alliance Mortgage Securities Income Fund
================================================================================
weakness in the Japanese yen, and the well-publicized bailout of Long Term
Capital Management's hedge fund all added to investors' risk aversion. The
resulting "flight to quality" spurred a rally in the U.S. Treasury market and
other "safe haven" government bond markets outside the U.S., and negatively
impacted returns in the corporate, high yield and mortgage bond sectors. The
U.S. Federal Reserve and other world central banks reacted by reducing official
interest rates. The combined effect of monetary policy ease, with the release of
stronger than expected U.S. economic growth data, reduced market aversion and
investors cautiously moved back into higher-yielding securities toward the end
of the period. The U.S. Treasury sector outperformed all other U.S. bond market
sectors over the six-month period ended December 31, 1998.
INVESTMENT STRATEGY
During the six-month period ended December 31, 1998, we adjusted the portfolio
with changes in our expectations for prepayment rates versus the market
consensus. In the third quarter of 1998, as interest rates fell and prepayment
expectations rose, we increased the Fund's allocation to Treasury securities
versus mortgage-backed securities (MBS). In the fourth quarter, as interest
rates stabilized and mortgage valuation became more attractive, we increased our
mortgage exposure by adding 30-year MBS. We also opportunistically employed
asset-backed securities to enhance yield and returns when spreads widened and
subsequently tightened. At the end of the period, we executed several swaps
between agencies and coupons to take advantage of differing prepayment
expectations.
OUTLOOK
We believe the risk of global recession has diminished after the recent wave of
official interest rate cuts around the world. However, global growth will
continue to slow and inflation will remain subdued as the consequences of excess
productive capacity are felt around the world. U.S. economic activity is
expected to moderate from the robust rate of the fourth quarter with growth
estimates centered around 3.0% for 1999. Further interest rate reductions by the
Federal Reserve are likely, but not imminent. U.S. interest rates, as well as
inflation, will remain low.
In the U.S. fixed-income markets, spread sectors (non-U.S. Treasury sectors)
will provide opportunities as economic and financial markets stabilize in
response to the Federal Reserve's pre-emptive attempts to sustain the economic
expansion. We expect the safe-haven premium on Treasuries to diminish somewhat,
but Treasuries will continue to perform well given their attractiveness to
foreign investors, a low inflationary environment and investor sentiment to
constrain risk. We expect the mortgage-backed sector will provide benefits due
to their attractive valuations and slower prepayment levels as mortgage rates
have risen slightly and we enter a period of slower refinancing.
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,
/s/ John D. Carifa
John D. Carifa
Chairman
/s/ Jeffrey S. Phlegar
Jeffrey S. Phlegar
Vice President
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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.
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2
<PAGE>
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 December 31, 1998
-----------------------------
CLASS A SHARES
-----------------------------
Without With
Sales Charge Sales Charge
------------------------------
One Year 5.82% 1.36%
5 Years 5.29% 4.39%
10 Years 8.13% 7.66%
SEC Yield** 5.98%
-----------------------------
CLASS B SHARES
-----------------------------
Without With
Sales Charge Sales Charge
------------------------------
One Year 5.04% 2.07%
5 Years 4.52% 4.52%
Since Inception* (a) 5.84% 5.84%
SEC Yield** 5.51%
-----------------------------
CLASS C SHARES
-----------------------------
Without With
Sales Charge Sales Charge
------------------------------
One Year 5.04% 4.05%
5 Years 4.51% 4.51%
Since Inception* 4.75% 4.75%
SEC Yield** 5.54%
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.
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* 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, 1998.
(a) Assumes conversion of Class B shares into Class A shares after six years.
3
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Alliance Mortgage Securities Income Fund
================================================================================
ALLIANCE MORTGAGE SECURITIES INCOME FUND
GROWTH OF A $10,000 INVESTMENT
12/31/88 TO 12/31/98
[GRAPHIC OMITTED]
This chart illustrates the total value of an assumed $10,000 investment in
Alliance Mortgage Securities Income Fund Class A shares (from 12/31/88 to
12/31/98) 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 12/31/88 to 12/31/98). 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. An
investor cannot invest directly in an index or average.
4
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1998 Alliance Mortgage Securities Income Fund
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Principal
Amount
(000) Value
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MORTGAGE-RELATED
SECURITIES-108.2%
FEDERAL NATIONAL
MORTGAGE
ASSOCIATION-49.1%
6.00%, 2/01/28-11/01/28 ................. $ 32,280 $ 31,856,245
6.50%, 4/01/09-12/01/13 ................. 97,811 99,176,593
7.00%, 1/01/07-6/01/28 ................. 115,818 118,196,996
7.50%, 9/01/26-7/01/28 ................. 17,597 18,075,058
8.00%, 1/01/28-10/01/28 ................. 28,566 29,583,692
11.00%, 7/15/16 ......................... 3,625 3,969,379
11.50%, 9/15/20 ......................... 2,299 2,623,508
12.00%, 3/01/13-5/01/15 ................. 857 976,494
12.00%, 7/01/00 (a) ..................... 4 4,948
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Total Federal National
Mortgage Association
(cost $304,237,512) ..................... 304,462,913
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GOVERNMENT
NATIONAL MORTGAGE
ASSOCIATION-26.5%
7.00%, 1/15/23-9/15/28 ................. 95,734 97,947,332
7.50%, 6/15/24-2/15/28 ................. 63,032 64,981,397
9.00%, 12/15/19 ......................... 3 3,329
10.00%, 10/15/17-6/15/20 ................ 634 688,416
11.50%, 3/15/10-11/15/15 ................ 444 498,823
12.00%, 2/15/14 ......................... 172 193,768
12.50%, 3/15/11-5/15/15 ................. 153 174,779
13.00%, 11/15/99 (a) .................... 9 9,545
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Total Government National
Mortgage Association
(cost $164,835,325) ..................... 164,497,389
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FEDERAL HOME LOAN
MORTGAGE CORP.-23.4%
6.50%, 1/01/29 .......................... 112,000 112,804,160
7.00%, 9/01/11-8/01/12 (a) .............. 5,382 5,496,490
11.50%, 10/01/10-6/01/20 ................ 2,120 2,393,546
12.00%, 5/01/10-7/01/20 ................. 16,938 19,121,932
12.25%, 8/01/13-7/01/14 ................. 386 440,837
12.50%, 6/01/19 ......................... 2,616 3,034,282
12.75%, 6/01/12-2/01/14 ................. 107 124,057
13.00%, 5/01/14-12/01/18 ................ 954 1,118,394
13.50%, 1/01/12-10/01/16 ................ 290 344,178
14.75%, 3/01/10 ......................... 44 52,080
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Total Federal Home
Loan Mortgage Corp. .....................
(cost $144,937,018) ..................... 144,929,956
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COLLATERALIZED
MORTGAGE
OBLIGATIONS-5.3%
Citicorp Mortgage
Securities, Inc. ........................
Series 1987-3 Cl. A1
9.00%, 5/25/17 .......................... 8,981 9,188,593
MLCC Mortgage
Investors, Inc. .........................
Series 1995-B Cl.B
6.78%, 10/15/20 (b) ..................... 4,932 4,110,935
Series 1996-B Cl.B
6.78%, 7/15/21 (b) ...................... 10,955 9,190,570
Morgan Stanley Capital I
Series 1998-XL2 Cl.A2
6.17%, 10/03/08 ......................... 10,000 10,118,800
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Total Collateralized
Mortgage Obligations
(cost $33,449,261) ...................... 32,608,898
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STRIPPED MORTGAGE
BACKED SECURITIES-3.9%
Bear Stearns
1997 Cl.2-X I/O (c) (d)
12.35%, 8/25/36 ......................... 6,571 4,113,986
LB Commercial Conduit
Mortgage Trust
Series 1998-C4 Cl.X I/O
9.25%, 9/15/23 (d) ...................... 8,053 8,066,056
5
<PAGE>
PORTFOLIO OF INVESTMENTS (continued) Alliance Mortgage Securities Income Fund
================================================================================
Principal
Amount
(000) Value
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Mortgage Capital
Funding, Inc. ..........................
Series 1996-MC2 Cl.X I/O
8.50%, 12/21/26 (d) .................... $ 13,044 $ 12,325,879
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Total Stripped Mortgage
Backed Securities
(cost $27,667,570) ..................... 24,505,921
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Total Mortgage-Related
Securities
(cost $675,126,686) .................... 671,005,077
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U.S. GOVERNMENT
OBLIGATION-8.2%
United States Treasury Note
4.63%, 11/30/00 (e)
(cost $51,094,449) ..................... 51,000 51,031,620
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ASSET BACKED
SECURITY-3.2%
Green Tree Home
Improvement Loan Trust
Series 1998-D Cl.HEA4
6.25%, 8/15/29
(cost $19,989,188) ..................... 20,000 20,137,600
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REPURCHASE AGREEMENT-2.3%
State Street Bank and
Trust Co. ..............................
5.15%, dated 12/31/98,
due 1/04/99 in the
amount of $14,097,062
(collateralized by $13,920,000
U.S. Treasury Note,
6.00%, 8/15/99,
value $14,346,320)
(amortized cost
$14,089,000) ........................... 14,089 14,089,000
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TOTAL INVESTMENTS-121.9%
(cost $760,299,323) .................... 756,263,297
Other assets less
liabilities-(21.9%) .................... (135,905,873)
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NET ASSETS-100% ........................... $ 620,357,424
=============
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(a) 15 year mortgage.
(b) Adjustable rate mortgages; stated interest in effect at December 31, 1998.
(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,
1998, these securities amounted to $4,113,986 or 0.7% 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, 1998, with an
aggregate market value of $33,020,460 and cash collateral received from the
counterparty of Prudential Securities in the amount of $33,123,750.
Glossary:
I/O - Interest Only
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998 Alliance Mortgage Securities Income Fund
================================================================================
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at value (cost $760,299,323) ............... $ 756,263,297
Cash .................................................................. 5,081
Receivable for investment securities sold ............................. 41,041,311
Receivable for capital stock sold ..................................... 7,302,934
Interest receivable ................................................... 4,793,602
Receivable for initial margin deposit on futures contracts ............ 109,200
Variation margin receivable on futures contracts ...................... 2,844
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Total assets .......................................................... 809,518,269
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LIABILITIES
Deposit for securities loaned ......................................... 33,131,571
Payable for investment securities purchased ........................... 146,308,508
Payable for capital stock redeemed .................................... 8,487,582
Advisory fee payable .................................................. 838,325
Distribution fee payable .............................................. 32,531
Accrued expenses and other liabilities ................................ 362,328
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Total liabilities ..................................................... 189,160,845
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NET ASSETS ............................................................... $ 620,357,424
=============
COMPOSITION OF NET ASSETS
Capital stock, at par ................................................. $ 724,939
Additional paid-in capital ............................................ 809,859,047
Accumulated net realized loss on investments and futures transactions . (186,230,348)
Net unrealized depreciation of investments and futures transactions ... (3,996,214)
-------------
$ 620,357,424
CALCULATION OF MAXIMUM OFFERING PRICE
Class A Shares
Net asset value and redemption price per share
($469,750,032 / 54,900,431 shares of capital stock issued and outstanding) .. $8.56
Sales charge--4.25% of public offering price .................................. .38
-----
Maximum offering price ........................................................ $8.94
=====
Class B Shares
Net asset value and offering price per share
($126,878,986 / 14,822,123 shares of capital stock issued and outstanding) .. $8.56
-----
Class C Shares
Net asset value and offering price per share
($23,728,406 / 2,771,346 shares of capital stock issued and outstanding) .... $8.56
=====
</TABLE>
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See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998 Alliance Mortgage Securities Income Fund
================================================================================
INVESTMENT INCOME
Interest......................................... $ 53,458,953
EXPENSES
Advisory fee..................................... $3,521,003
Distribution fee - Class A....................... 1,198,487
Distribution fee - Class B....................... 2,398,760
Distribution fee - Class C....................... 261,313
Transfer agency.................................. 1,193,580
Custodian........................................ 280,079
Printing......................................... 183,960
Administrative................................... 163,026
Audit and legal.................................. 106,901
Registration..................................... 67,796
Taxes............................................ 39,525
Directors' fees.................................. 27,182
Miscellaneous.................................... 31,162
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Total expenses before interest................... 9,472,774
Interest expense................................. 5,621,777
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Total expenses................................... 15,094,551
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Net investment income............................ 38,364,402
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investment transactions..... 9,662,841
Net realized gain on futures transactions........ 288,008
Net change in unrealized appreciation of:
Investments.................................... (12,122,144)
Futures transactions........................... 39,812
------------
Net loss on investments.......................... (2,131,483)
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS.......... $ 36,232,919
============
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See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS Alliance Mortgage Securities Income Fund
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income............................................ $ 38,364,402 $ 47,791,209
Net realized gain on investment and futures transactions......... 9,950,849 6,410,634
Net change in unrealized appreciation of investments and futures
transactions................................................... (12,082,332) 6,200,348
------------- -------------
Net increase in net assets from operations....................... 36,232,919 60,402,191
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A........................................................ (24,150,391) (24,227,746)
Class B........................................................ (12,817,547) (21,830,955)
Class C........................................................ (1,396,464) (1,732,508)
Distributions in excess of net investment income
Class A........................................................ (1,771,630) (1,518,165)
Class B........................................................ (939,565) (1,367,976)
Class C........................................................ (100,466) (108,563)
CAPITAL STOCK TRANSACTIONS
Net decrease..................................................... (98,968,113) (210,798,327)
------------- -------------
Total decrease................................................... (103,911,257) (201,182,049)
NET ASSETS
Beginning of year................................................ 724,268,681 925,450,730
------------- -------------
End of year...................................................... $ 620,357,424 $ 724,268,681
============= =============
</TABLE>
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See notes to financial statements.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 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 may 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 generally
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. 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.
10
<PAGE>
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 year ended December 31, 1998.
Pursuant to the advisory agreement, the Fund paid $163,026 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, 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 $826,158 for the year ended December 31, 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 front-end sales charges of $51,696 from the sales of Class A shares and
$149, $51,824 and $3,970 in contingent deferred sales charges imposed upon
redemptions by shareholders of Class A, Class B and Class C shares,
respectively, for the year ended December 31, 1998.
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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 $9,302,057 and $3,103,709 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 $59,484,844 and $174,073,147,
respectively, for the year ended December 31, 1998. There were purchases of
$1,706,224,992 and sales of $1,409,088,749 of U.S. government and government
agency obligations for the year ended December 31, 1998.
At December 31, 1998, the cost of investments for federal income tax purposes
was $760,367,647. Accordingly, gross unrealized appreciation of investments was
$2,205,752 and gross unrealized depreciation of investments was $6,310,102
resulting in net unrealized depreciation of $4,104,350.
For federal income tax purposes, the Fund had a capital loss carryforward at
December 31, 1998 of $186,122,212, of which $182,944,266 expires in the year
2002 and $3,177,946 expires in the year 2004.
1. Financial Futures Contracts
The Fund may buy or sell financial futures contracts for the purpose of hedging
its portfolio against adverse affects of anticipated movements in the market.
The Fund bears the market risk that arises from changes in the value of these
financial instruments.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.) 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 December 31, 1998, the Fund had outstanding futures
contracts, as follows:
<TABLE>
<CAPTION>
Value at Unrealized
Number of Expiration Original December 31, Appreciation
Type Contracts Position Month Value 1998 December 31, 1998
- ------------- ----------- ---------- ------------ ------------- -------------- -------------------
United States
<S> <C> <C> <C> <C> <C> <C>
Treasury Note 91 Short March 1999 $10,883,031 $10,843,219 $39,812
</TABLE>
2. Interest Rate Swap Agreements
The Fund enters into interest rate swaps to protect itself from interest rate
fluctuations on the underlying debt instruments. A swap is an agreement that
obligates two parties to exchange a series of cash flows at specified intervals
based upon or calculated by reference to changes in specified prices or rates
for a specified amount of an underlying asset. The payment flows are usually
netted against each other, with the difference being paid by one party to the
other.
Risks may arise as a result of the failure of the counterparty to the swap
contract to comply with the terms of the swap contract. The loss incurred by the
failure of a counterparty is generally limited to the net interest payment to be
received by the Fund, and/or the termination value at the end of the contract.
Therefore, the Fund considers the creditworthiness of each counterparty to a
swap contract in evaluating potential credit risk. Additionally, risks may arise
from unanticipated movements in interest rates or in the value of the underlying
securities.
The Fund records a net receivable or payable on a daily basis for the net
interest income or expense expected to be received or paid in the interest
period. Net interest received or paid on these contracts is recorded as interest
income (or as an offset to interest income). Fluctuations in the value of
investments are recorded for financial statement purposes as unrealized
appreciation or depreciation of investments. Realized gains and losses from
terminated swaps are included in net realized gains on investment transactions.
There were no outstanding interest rate swap contracts at December 31, 1998.
- --------------------------------------------------------------------------------
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:
<TABLE>
<CAPTION>
------------------------------ -------------------------------
SHARES AMOUNT
------------------------------ -------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Class A
Shares sold....................... 6,135,759 1,417,930 $ 52,962,095 $ 12,116,917
Shares issued in reinvestment of
dividends and distributions.... 1,659,539 1,547,957 14,298,768 13,216,360
Shares converted from Class B..... 16,276,489 2,567,092 140,421,587 21,940,632
Shares redeemed................... (12,357,705) (10,860,453) (106,540,434) (92,588,666)
------------- ------------- ------------- -------------
Net increase (decrease)........... 11,714,082 (5,327,474) $ 101,142,016 $ (45,314,757)
============= ============= ============= =============
</TABLE>
12
<PAGE>
Alliance Mortgage Securities Income Fund
================================================================================
<TABLE>
<CAPTION>
------------------------------ -------------------------------
SHARES AMOUNT
------------------------------ -------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31,
1998 1997 1998 1997
-------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Class B
Shares sold....................... 1,129,782 675,057 $ 9,742,600 $ 5,759,766
Shares issued in reinvestment of
dividends and distributions.... 847,302 1,345,087 7,308,487 11,481,237
Shares converted to Class A....... (16,274,788) (2,567,092) (140,421,587) (21,940,632)
Shares redeemed................... (8,433,020) (17,950,900) (72,791,687) (152,926,277)
------------- ------------- ------------- -------------
Net decrease...................... (22,730,724) (18,497,848) $(196,162,187) $(157,625,906)
============= ============= ============= =============
Class C
Shares sold....................... 493,383 308,895 $ 4,254,625 $ 2,638,792
Shares issued in reinvestment of
dividends and distributions.... 119,962 154,123 1,034,204 1,316,078
Shares redeemed................... (1,071,818) (1,385,598) (9,236,771) (11,812,534)
------------- ------------- ------------- -------------
Net decrease...................... (458,473) (922,580) $ (3,947,942) $ (7,857,664)
============= ============= ============= =============
</TABLE>
- --------------------------------------------------------------------------------
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, 1998, the maximum amount of security lending
agreements outstanding was $212,060,750, the average amount outstanding was
approximately $27,162,374 and the daily weighted average interest rate was
5.43%.
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, 1998, the Fund had entered into the following security
lending agreement:
Amount Counterparty Interest Rate Maturity
------------- -------------- --------------- ---------------
$33,123,750 Prudential Securities 4.25% January 6, 1999
- --------------------------------------------------------------------------------
NOTE G: Bank Borrowing
A number of open-end mutual funds managed by the Adviser, including the Fund,
participate in a $750 million revolving credit facility (the "Facility")
intended to provide short-term financing if necessary, subject to certain
restrictions, in connection with abnormal redemption activity. Commitment fees
related to the Facility are paid by the participating funds and are included in
the miscellaneous expenses in the statement of operations. The Fund did not
utilize the Facility during the year ended December 31, 1998.
13
<PAGE>
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,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............. $ 8.63 $ 8.51 $ 8.75 $8.13 $ 9.29
------ ------ ------ ----- ------
Income From Investment Operations
Net investment income.......................... .52(a) .54(a) .54(a) .57(a) .57
Net realized and unrealized gain (loss) on
investments and futures transactions......... (.03) .15 (.19) .64 (1.13)
------ ------ ------ ----- ------
Net increase (decrease) in net asset value
from operations.............................. .49 .69 .35 1.21 (.56)
------ ------ ------ ----- ------
Less: Dividends and Distributions
Dividends from net investment income........... (.52) (.54) (.51) (.57) (.58)
Distributions in excess of net investment
income ...................................... (.04) (.03) -0- -0- -0-
Tax return of capital.......................... -0- -0- (.08) (.02) (.02)
------ ------ ------ ----- ------
Total dividends and distributions.............. (.56) (.57) (.59) (.59) (.60)
------ ------ ------ ----- ------
Net asset value, end of year................... $ 8.56 $ 8.63 $ 8.51 $8.75 $ 8.13
====== ====== ====== ===== ======
Total Return
Total investment return based on net asset
value (b) ................................... 5.82% 8.40% 4.23% 15.34% (6.14)%
Ratios/Supplemental Data
Net assets, end of year (000's omitted)........ $469,750 $372,494 $412,899 $502,390 $553,889
Ratio of expenses to average net assets........ 1.99% 1.41% 1.68% 1.66% 1.29%
Ratio of expenses to average net assets
excluding interest expense................... 1.14% 1.07% 1.03% 1.03% .97%
Ratio of net investment income to average
net assets .................................. 6.06% 6.30% 6.38% 6.77% 6.77%
Portfolio turnover rate........................ 202% 184% 208% 285% 438%
</TABLE>
- --------------------------------------------------------------------------------
See footnotes page 16.
14
<PAGE>
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,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............. $ 8.63 $ 8.51 $ 8.75 $8.13 $ 9.29
------ ------ ------ ----- ------
Income From Investment Operations
Net investment income.......................... .45(a) .48(a) .48(a) .51(a) .51
Net realized and unrealized gain (loss) on
investments and futures transactions......... (.02) .15 (.19) .64 (1.14)
------ ------ ------ ----- ------
Net increase (decrease) in net asset value
from operations.............................. .43 .63 .29 1.15 (.63)
------ ------ ------ ----- ------
Less: Dividends and Distributions
Dividends from net investment income........... (.45) (.48) (.46) (.51) (.51)
Distributions in excess of net investment
income ...................................... (.05) (.03) -0- -0- -0-
Tax return of capital.......................... -0- -0- (.07) (.02) (.02)
------ ------ ------ ----- ------
Total dividends and distributions.............. (.50) (.51) (.53) (.53) (.53)
------ ------ ------ ----- ------
Net asset value, end of year................... $ 8.56 $ 8.63 $ 8.51 $8.75 $ 8.13
====== ====== ====== ===== ======
Total Return
Total investment return based on net asset
value (b) ................................... 5.04% 7.60% 3.46% 14.48% (6.84)%
Ratios/Supplemental Data
Net assets, end of year (000's omitted)........ $126,879 $323,916 $477,196 $737,593 $921,418
Ratio of expenses to average net assets........ 2.68% 2.14% 2.37% 2.37% 2.00%
Ratio of expenses to average net assets
excluding interest expense................... 1.85% 1.78% 1.74% 1.74% 1.68%
Ratio of net investment income to average
net assets .................................. 5.33% 5.60% 5.66% 6.06% 6.05%
Portfolio turnover rate........................ 202% 184% 208% 285% 438%
</TABLE>
- --------------------------------------------------------------------------------
See footnotes page 16.
15
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance Mortgage Securities Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
-----------------------------------------------------------
CLASS C
-----------------------------------------------------------
Year Ended December 31,
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............. $ 8.63 $ 8.51 $ 8.75 $8.13 $ 9.29
------ ------ ------ ----- ------
Income From Investment Operations
Net investment income.......................... .46(a) .48(a) .48(a) .51(a) .51
Net realized and unrealized gain (loss) on
investments and futures transactions......... (.03) .15 (.19) .64 (1.14)
------ ------ ------ ----- ------
Net increase (decrease) in net asset value
from operations.............................. .43 .63 .29 1.15 (.63)
------ ------ ------ ----- ------
Less: Dividends and Distributions
Dividends from net investment income........... (.46) (.48) (.46) (.51) (.51)
Distributions in excess of net investment
income ...................................... (.04) (.03) -0- -0- -0-
Tax return of capital.......................... -0- -0- (.07) (.02) (.02)
------ ------ ------ ----- ------
Total dividends and distributions.............. (.50) (.51) (.53) (.53) (.53)
------ ------ ------ ----- ------
Net asset value, end of year................... $ 8.56 $ 8.63 $ 8.51 $8.75 $ 8.13
====== ====== ====== ===== ======
Total Return
Total investment return based on net asset
value (b) ................................... 5.04% 7.60% 3.46% 14.46% (6.84)%
Ratios/Supplemental Data
Net assets, end of year (000's omitted)........ $23,728 $27,859 $35,355 $45,558 $58,338
Ratio of expenses to average net assets........ 2.69% 2.12% 2.38% 2.35% 1.97%
Ratio of expenses to average net assets
excluding interest expense................... 1.84% 1.77% 1.73% 1.73% 1.69%
Ratio of net investment income to average
net assets .................................. 5.35% 5.61% 5.67% 6.07% 6.06%
Portfolio turnover rate........................ 202% 184% 208% 285% 438%
</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.
16
<PAGE>
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, 1998, 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, 1998, 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, 1998, 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.
/s/ Ernst & Young LLP
New York, New York
February 3, 1999
17
<PAGE>
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
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
<PAGE>
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 U.S. Government Fund
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
Select Investors Series - Premier Portfolio
Growth & Income
Alliance Balanced Shares
Alliance Conservative Investors Fund
Alliance Growth & Income Fund
Alliance Growth Investors 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
Institutional
Premier Growth
Quasar
Real Estate Investment
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
Alliance Capital Reserves
Alliance Government Reserves
Alliance Institutional Reserves
Prime Portfolio
Government Portfolio
Tax-Free Portfolio
Trust Portfolio
Treasury Portfolio
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
<PAGE>
ALLIANCE MORTGAGE SECURITIES INCOME FUND
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
Alliance Capital [LOGO]
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
<PAGE>
