ALLIANCE
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MORTGAGE
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SECURITIES
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INCOME FUND
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Semi-Annual
Report
June 30, 1999
Alliance Capital [LOGO](R)
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LETTER TO SHAREHOLDERS Alliance Mortgage Securities Income Fund
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August 16, 1999
Dear Shareholder:
This report provides the performance, investment strategy and outlook for the
Alliance Mortgage Securities Income Fund (the "Fund") over the six-month period
ended June 30, 1999. The Fund is designed for investors who seek high current
income, consistent with safety of principal. To achieve its objective, the Fund
invests primarily in a diversified portfolio of mortgage-related securities.
FUND PERFORMANCE
The following table provides the investment results for the Alliance Mortgage
Securities Income Fund for the six- and twelve-month periods ended June 30,
1999. For comparison, we have included the total returns for the Fund's
benchmark index, the Lehman Brothers Mortgage-Backed Securities Index, and the
Lipper U.S. Mortgage Funds Average.
During the six-month period, your Fund underperformed the Lehman Brothers
Mortgage-Backed Securities Index and was generally in-line with the Lipper U.S.
Mortgage Funds Average. We remained cautious during the past six months, holding
a greater weighting in lower-coupon securities versus the benchmark index. This
cautious stance was, we believe, prudent in this volatile market environment.
However, in February, the Treasury market sold off significantly, which raised
mortgage rates and reduced investor concerns regarding prepayments. This change
resulted in higher coupons outperforming lower coupons and, consequently, the
Fund underperformed the Lehman Index. In addition, the Fund was leveraged during
the period, which further affected price movement within the portfolio.
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INVESTMENT RESULTS*
Periods Ended June 30, 1999
Total Returns
6 Months 12 Months
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Alliance Mortgage
Securities Income
Fund
Class A -0.48% 1.94%
Class B -0.85% 1.18%
Class C -0.85% 1.18%
Lehman Brothers
Mortgage-Backed
Securities Index 0.53% 4.01%
Lipper U.S. Mortgage
Funds Average -0.43% 2.60%
* 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 unmanaged Lehman Brothers Mortgage-Backed Securities Index is
comprised of all fixed-rate securities backed by mortgage pools of the
Government National Mortgage Association, Federal Home Loan Mortgage
Corporation, and Federal National Mortgage Association. Graduated Payment
Mortgages are included, but Graduated Equity Mortgages 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 twelve-month periods ended June 30, 1999, the Lipper Average
consisted of 68 and 66 funds, respectively. An investor cannot invest
directly in an index or an average.
Additional investment results appear on page 4.
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MARKET OVERVIEW
The outlook for the global economy continued to brighten during the first six
months of 1999. Signs of a strong recovery in East Asia, better-than-expected
growth in Japan, and a quick drop in Brazilian interest rates bolstered investor
confidence. In the United States, private demand growth has downshifted but
remains
1
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Alliance Mortgage Securities Income Fund
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exceptionally strong, while inflation and unemployment have remained low. With
economic activity remaining strong and global liquidity concerns abating, the
U.S. Federal Reserve adopted a monetary policy tightening bias in May and
increased the Federal Funds rate by 25 basis points, to 5.00%, in June. For the
six months ended June 30, 1999, the U.S. yield curve flattened as short- and
intermediate-term rates rose more than long-term rates. Two-year U.S. Treasury
yields rose from 4.53%, to 5.52%, while thirty-year U.S. Treasury yields rose
from 5.09%, to 5.97%.
During the six-month period ended June 30, 1999, the U.S. bond market, as
represented by the Lehman Brothers Aggregate Bond Index, declined 1.4% as
economic growth strengthened and the U.S. Federal Reserve raised interest rates.
Among the traditional sectors of the U.S. bond market, the mortgage sector
recorded the strongest performance while the U.S. Treasury market recorded the
weakest performance. As credit markets continued to stabilize from the turmoil
in 1998, and the threat of higher interest rates surfaced, investors moved out
of U.S. Treasuries and back into higher-yielding sectors in search of higher
returns. The mortgage sector was the main beneficiary of this change in
interest-rate expectations. When interest rates rose, mortgage refinancing
slowed and mortgage prepayments fell, making mortgage-backed securities ("MBS")
more attractive.
INVESTMENT STRATEGY
The main technical issue supporting the MBS market is reduced new issue supply.
As mortgage rates to consumers have climbed dramatically over the first half of
1999, homeowner opportunities to refinance have disappeared. During the
six-month period ended June 30, 1999, we adjusted the Fund's portfolio in
accordance with changes in our expectations for prepayment rates. We added
commercial mortgage-backed securities ("CMBS"), which have less prepayment
uncertainty than most of the Fund's MBS allocation. All of these investments are
rated AA or higher and carry yields similar to agency MBS. We also added a
diversified portfolio of interest-only MBS and CMBS, which benefit from rising
interest rates. These securities tend to appreciate in price as interest rates
rise, providing a buffer to the Fund's overall portfolio.
We were also active in agency pass-through securities such as Government
National Mortgage Association ("GNMA") and Federal National Mortgage Association
("FNMA") securities. Regarding all portfolio holdings, our strategy is to add
value by making small, incremental adjustments as we see relative value
opportunities. For example, in the first quarter of 1999, a market participant
liquidated a large portfolio of GNMAs. This liquidation caused GNMAs to
underperform other agency MBS. We expect this relationship to revert back to its
historic average, therefore, we sold FNMA MBS and purchased GNMA MBS.
OUTLOOK
Globally, growth prospects are improving and inflation pressures remain subdued.
While the U.S. economy appears to be moderating somewhat from the robust level
of the first quarter, we still estimate that growth for calendar 1999 will be
close to the 3.9% pace of 1998. We believe the risks remain toward somewhat
tighter monetary policy and higher interest rates. While the non-Treasury
sectors of the market appear to be cheap by historical standards, the upward
pressure on rates, and liquidity concerns related to this year-end are likely to
keep yield premiums wide in the near term. In this environment, security
selection will remain focused on longer-term fundamentals, recognizing that
near-term liquidity will be limited. With yields on agency MBS around 7.75%, we
believe a prudent investment strategy is to keep the Fund fully invested in the
mortgage market. New issue supply has dried up, and higher interest rates should
slow the housing market, limiting new home sales. These factors lower prepayment
uncertainty, making the mortgage market much more stable. Coupled with our view
towards an upward bias to interest rates, most of our return should therefore be
in the form of coupon income.
We are cautious in our outlook for high-grade securities at this point. This
view is based primarily on the amount of new issue supply that we see coming to
market over the next quarter. Furthermore, concerns about liquidity caused by
the effects of Y2K are playing an increasing role in determining investor
psychology. However, we believe the mortgage market has already priced in a
sufficient risk premium for this uncertainty, and the high
2
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Alliance Mortgage Securities Income Fund
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credit quality of the Fund's portfolio should limit unforeseen problems.
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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3
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INVESTMENT OBJECTIVE AND POLICIES Alliance Mortgage Securities Income Fund
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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
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NAV and SEC Average Annual Total Returns as of June 30, 1999
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CLASS A SHARES
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Without With
Sales Charge Sales Charge
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One Year 1.94% -2.36%
Five Years 6.47% 5.54%
10 Years 7.47% 7.01%
SEC Yield** 5.90%
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CLASS B SHARES
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Without With
Sales Charge Sales Charge
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One Year 1.18% -1.69%
Five Years 5.69% 5.69%
Since Inception*(a) 5.36% 5.36%
SEC Yield** 5.42%
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CLASS C SHARES
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Without With
Sales Charge Sales Charge
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One Year 1.18% 0.22%
Five Years 5.70% 5.70%
Since Inception* 4.22% 4.22%
SEC Yield** 5.44%
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
June 30, 1999.
(a) Assumes conversion of Class B shares into Class A shares after six years.
4
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PORTFOLIO OF INVESTMENTS
June 30, 1999 (unaudited) Alliance Mortgage Securities Income Fund
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Principal
Amount
(000) Value
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MORTGAGE-RELATED
SECURITIES-104.1%
FEDERAL NATIONAL
MORTGAGE
ASSOCIATION-46.4%
6.00%, 8/25/07-5/01/29....................... $ 31,548 $ 31,179,381
6.50%, 2/01/11-
12/01/99 (a).............................. 101,435 99,919,037
7.00%, 11/01/02-
5/01/29 (a)............................... 122,958 122,444,392
9.00%, 8/01/21............................... 3,717 3,936,338
11.00%, 7/15/16.............................. 3,031 3,308,051
11.50%, 9/15/20.............................. 2,018 2,260,136
12.00%, 7/01/00 (b).......................... 3 3,302
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Total Federal National
Mortgage Association
(cost $269,213,483).......................... 263,050,637
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GOVERNMENT NATIONAL
MORTGAGE
ASSOCIATION-23.0%
6.50%, 3/15/28-4/15/29....................... 38,666 37,179,689
7.00%, 1/15/23-9/15/28 (a) .................. 94,124 92,888,939
9.00%, 12/15/19.............................. 2 2,434
13.00%, 11/15/99-
1/15/00 (b)............................... 4 3,982
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Total Government National
Mortgage Association
(cost $135,097,155).......................... 130,075,044
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FEDERAL HOME LOAN
MORTGAGE CORP.-14.7%
Zero coupon, 6/15/21......................... 1,398 1,466,262
6.50%, 4/01/29 (a)........................... 35,169 33,949,188
7.00%, 9/01/11-8/01/12 (b) .................. 4,449 4,467,212
8.00%, 9/01/09-8/15/21....................... 18,499 19,008,839
9.50%, 9/01/20 (a)........................... 3,500 3,740,625
11.50%, 10/01/10-6/01/20 .................... 1,827 2,002,662
12.00%, 8/01/15-
7/01/20 (a)............................... 13,753 15,110,282
12.25%, 8/01/13.............................. 16 18,167
12.50%, 6/01/19.............................. 2,153 2,417,174
13.00%, 5/01/14-12/01/18 .................... 806 914,026
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Total Federal Home Loan
Mortgage Corp.
(cost $84,790,577)........................... 83,094,437
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COLLATERALIZED
MORTGAGE
OBLIGATIONS-12.3%
Citicorp Mortgage
Securities, Inc.
Series 1987-3 Cl.A1
9.00%, 5/25/17............................... 7,351 7,479,867
MLCC Mortgage
Investors, Inc.
Series 1995-B Cl.B
6.94%, 10/15/20 (c).......................... 4,932 4,093,230
Series 1996-B Cl.B
6.94%, 7/15/21 (c)........................... 10,955 9,202,511
Morgan Stanley Capital I
Series 1998-XL2 Cl.A2
6.17%, 10/01/35.............................. 26,000 24,554,660
Residential Accredit Loans,
Inc.
Series 1998 Cl.A4
8.00%, 10/25/28.............................. 14,636 14,617,329
Salomon Brothers Mortgage
Securities Inc.
Series 1999-5
2.80%, 6/25/29............................... 5,240 5,219,235
Structured Asset
Securitization Corp.
Series 1998-4 Cl.M2
5.66%, 6/25/28............................... 4,454 4,455,381
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Total Collateralized
Mortgage Obligations
(cost $71,829,165)........................... 69,622,213
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STRIPPED MORTGAGE
BACKED SECURITIES-5.9%
Bear Stearns
Series 1997 Cl.2-X I/O
12.35%, 8/25/36 (d)(e)....................... 6,333 3,754,374
5
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PORTFOLIO OF INVESTMENTS (continued) Alliance Mortgage Securities Income Fund
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Principal
Amount
(000) Value
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LB Commercial Conduit
Mortgage Trust
Series 1998-C4 Cl.X I/O
9.25%, 9/15/23 (e)........................... $ 7,782 $ 7,709,991
Series 1999 Cl.A2
6.78%, 4/15/09............................... 11,000 10,910,680
Mortgage Capital
Funding, Inc.
Series 1996-MC2 Cl.X I/O
8.50%, 12/21/26 (e).......................... 12,314 11,230,523
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Total Stripped Mortgage
Backed Securities
(cost $37,534,856)........................... 33,605,568
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COMMERCIAL MORTGAGE
BACKED SECURITY-1.8%
Credit Suisse First Boston
Mortgage
Series 1997 Cl.B
7.28%, 6/20/07
(cost $10,187,891)........................... 10,000 9,981,400
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Total Mortgage-Related
Securities
(cost $608,653,127).......................... 589,429,299
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CORPORATE
OBLIGATION-3.9%
Beverly Finance
8.36%, 7/15/04 (d)
(cost $22,681,680)........................... 21,000 21,826,560
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ASSET BACKED
SECURITIES-3.8%
Green Tree Home
Improvement Loan Trust
Series 1998-D Cl.HEA4
6.25%, 8/15/29............................... 20,000 19,768,800
Option One Mortgage
Securities Corp.
Series 1999-2
9.66%, 6/25/29 (d)........................... 1,991 1,987,035
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Total Asset Backed
Securities
(cost $21,980,759)........................... 21,755,835
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REPURCHASE
AGREEMENT-0.3%
State Street Bank & Trust Co.
4.90%, dated 6/30/99,
due 7/01/99, collateralized by
$1,510,000, FFCB,
5.125%, 4/02/01
(amortized cost
$1,475,000).................................. 1,475 1,475,000
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TOTAL INVESTMENTS-112.1%
(cost $654,790,566).......................... 634,486,694
Other assets less
liabilities-(12.1%).......................... (68,446,129)
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NET ASSETS-100%................................. $ 566,040,565
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(a) Securities, or a portion thereof, loaned at June 30, 1999, with an
aggregate market value of $66,633,355 and cash collateral received from
the counterparty of Prudential Securities in the amount of $70,860,000.
(b) 15 year mortgage.
(c) Adjustable rate mortgages; stated interest rate in effect at June 30,
1999.
(d) Securities exempt from Registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At June 30,
1999, these securities amounted to $27,567,969 or 4.9% of net assets.
(e) Interest rate represents yield to maturity and principal amount represents
amortized cost.
Glossary of Terms:
FFCB - Federal Farm Credit Bank.
I/O - Interest Only.
See notes to financial statements.
6
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STATEMENT OF ASSETS AND LIABILITIES
June 30, 1999 (unaudited) Alliance Mortgage Securities Income Fund
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<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $654,790,566) ...................... $ 634,486,694
Cash ......................................................................... 611,428
Receivable for investment securities sold .................................... 204,796,524
Interest receivable .......................................................... 4,372,161
Receivable for capital stock sold ............................................ 18,655
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Total assets ................................................................. 844,285,462
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LIABILITIES
Deposit for securities loaned ................................................ 70,887,659
Payable for investment securities purchased .................................. 204,759,196
Dividends payable ............................................................ 950,969
Advisory fee payable ......................................................... 769,046
Payable for capital stock redeemed ........................................... 534,552
Distribution fee payable ..................................................... 46,566
Accrued expenses and other liabilities ....................................... 296,909
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Total liabilities ............................................................ 278,244,897
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NET ASSETS ...................................................................... $ 566,040,565
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COMPOSITION OF NET ASSETS
Capital stock, at par ........................................................ $ 686,433
Additional paid-in capital ................................................... 777,370,147
Distributions in excess of net investment income ............................. (443,832)
Accumulated net realized loss on investments, options and futures transactions (191,268,311)
Net unrealized depreciation of investments ................................... (20,303,872)
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$ 566,040,565
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CALCULATION OF MAXIMUM OFFERING PRICE
Class A Shares
Net asset value and redemption price per share
($460,809,645 / 55,887,091 shares of capital stock issued and outstanding) $8.25
Sales charge -- 4.25% of public offering price ............................... .37
-----
Maximum offering price ....................................................... $8.62
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Class B Shares
Net asset value and offering price per share
($83,557,627 / 10,129,887 shares of capital stock issued and outstanding) . $8.25
=====
Class C Shares
Net asset value and offering price per share
($21,673,293 / 2,626,342 shares of capital stock issued and outstanding) .. $8.25
=====
</TABLE>
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See notes to financial statements.
7
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STATEMENT OF OPERATIONS
Six Months Ended June 30, 1999
(unaudited) Alliance Mortgage Securities Income Fund
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<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest ............................................... $ 23,708,531
EXPENSES
Advisory fee ........................................... $ 1,573,497
Distribution fee - Class A ............................. 697,725
Distribution fee - Class B ............................. 514,467
Distribution fee - Class C ............................. 111,941
Transfer agency ........................................ 531,741
Custodian .............................................. 145,233
Printing ............................................... 92,730
Administrative ......................................... 66,395
Audit and legal ........................................ 43,652
Registration ........................................... 26,658
Directors' fees ........................................ 15,946
Miscellaneous .......................................... 13,056
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Total expenses before interest ......................... 3,833,041
Interest expense ....................................... 1,672,626
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Total expenses ......................................... 5,505,667
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Net investment income .................................. 18,202,864
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investment transactions ........... (5,050,822)
Net realized loss on options transactions .............. (141,568)
Net realized gain on futures transactions .............. 154,427
Net change in unrealized appreciation (depreciation) of:
Investments ......................................... (16,267,846)
Futures transactions ................................ (39,812)
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Net loss on investments ................................ (21,345,621)
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NET DECREASE IN NET ASSETS FROM OPERATIONS ................ $ (3,142,757)
============
</TABLE>
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See notes to financial statements.
8
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STATEMENT OF CHANGES IN NET ASSETS Alliance Mortgage Securities Income Fund
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<TABLE>
<CAPTION>
Six Months Ended
June 30, 1999 Year Ended
(unaudited) December 31, 1998
---------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income ................................................... $ 18,202,864 $ 38,364,402
Net realized gain (loss) on investment, options, and futures transactions (5,037,963) 9,950,849
Net change in unrealized appreciation (depreciation) of investments and
futures transactions ................................................. (16,307,658) (12,082,332)
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Net increase (decrease) in net assets from operations ................... (3,142,757) 36,232,919
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A .............................................................. (15,098,448) (24,150,391)
Class B .............................................................. (2,910,339) (12,817,547)
Class C .............................................................. (637,909) (1,396,464)
Distributions in excess of net investment income
Class A .............................................................. -0- (1,771,630)
Class B .............................................................. -0- (939,565)
Class C .............................................................. -0- (100,466)
CAPITAL STOCK TRANSACTIONS
Net decrease ............................................................ (32,527,406) (98,968,113)
------------- -------------
Total decrease .......................................................... (54,316,859) (103,911,257)
NET ASSETS
Beginning of year ....................................................... 620,357,424 724,268,681
------------- -------------
End of period ........................................................... $ 566,040,565 $ 620,357,424
============= =============
</TABLE>
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See notes to financial statements.
9
<PAGE>
STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1999
(unaudited) Alliance Mortgage Securities Income Fund
================================================================================
<TABLE>
<S> <C> <C>
INCREASE (DECREASE) IN CASH FROM:
OPERATING ACTIVITIES:
Interest received .......................................... $ 24,065,624
Interest paid .............................................. (1,672,626)
Operating expenses paid .................................... (3,953,704)
-------------
Net increase in cash from operating activities ............. $ 18,439,294
INVESTING ACTIVITIES:
Proceeds from disposition of long-term portfolio investments 812,079,085
Purchase of long-term portfolio investments ................ (829,544,663)
Sales of short-term portfolio investments, net ............. 12,614,000
Gain on closed futures contracts ........................... 154,427
-------------
Net decrease in cash from investing activities ............. (4,697,151)
FINANCING ACTIVITIES*:
Decrease in securities lending ............................. 37,756,088
Redemptions of capital stock, net .......................... (42,643,922)
Cash dividends paid ........................................ (8,247,962)
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Net decrease in cash from financing activities ............. (13,135,796)
-------------
Net increase in cash ....................................... 606,347
Cash at beginning of year .................................. 5,081
-------------
Cash at end of period ...................................... $ 611,428
=============
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RECONCILIATION OF NET INCREASE IN NET ASSETS
FROM OPERATIONS TO NET INCREASE IN CASH
FROM OPERATING ACTIVITIES:
Net decrease in net assets resulting from operations ....... $ (3,142,757)
ADJUSTMENTS:
Decrease in interest receivable ............................ $ 421,441
Net realized loss on investment transactions ............... 5,037,963
Net change in unrealized appreciation ...................... 16,307,658
Accretion of bond discount ................................. (64,348)
Decrease in accrued expenses ............................... (120,663)
-------------
Total adjustments .......................................... 21,582,051
-------------
Net increase in cash from operating activities ............. $ 18,439,294
=============
</TABLE>
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* Non-cash financing activities not included herein consist of reinvestment
of dividends.
See notes to financial statements.
10
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NOTES TO FINANCIAL STATEMENTS
June 30, 1999 (unaudited) Alliance Mortgage Securities Income Fund
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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.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.) Alliance Mortgage Securities Income Fund
================================================================================
NOTE B: Advisory Fee and Other Transactions with Affiliates
Under the terms of an investment advisory agreement, the Fund pays Alliance
Capital Management L.P. (the "Adviser") an advisory fee at a quarterly rate
equal to .1375 of 1% (approximately .55 of 1% on an annual basis) of the first
$500 million of the Fund's net assets and .125 of 1% (approximately .50 of 1% on
an annual basis) of its net assets over $500 million, valued on the last
business day of the previous quarter. The Adviser has agreed to reimburse the
Fund to the extent that its aggregate expenses (exclusive of interest, taxes,
brokerage, distribution fees, and extraordinary expenses) in any year exceed 1%
of its average daily net assets for such year. No such reimbursement was
required for the six months ended June 30, 1999.
Pursuant to the advisory agreement, the Fund paid $66,395 to the Adviser
representing the cost of certain legal and accounting services provided to the
Fund by the Adviser for the six months ended June 30, 1999.
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 $378,924 for the six months ended June 30, 1999.
For the period ended June 30, 1999, the Fund's expenses were reduced by $33,072
under an expense offset arrangement with Alliance Fund Services.
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 $16,145 from the sales of Class A shares and
$386, $21,551 and $2,703 in contingent deferred sales charges imposed upon
redemptions by shareholders of Class A, Class B and Class C shares,
respectively, for the six months ended June 30, 1999.
Brokerage commissions paid on investment transactions for the six months ended
June 30, 1999 amounted to $5,663, none of which was paid to Donaldson, Lufkin &
Jenrette Securities Corp., an affiliate of the adviser.
- --------------------------------------------------------------------------------
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 $9,171,504 and $3,160,725 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 $111,280,376 and $35,647,206,
respectively, for the six months ended June 30, 1999. There were purchases of
$776,714,975 and sales of $803,794,384 of U.S. government and government agency
obligations for the six months ended June 30, 1999.
At June 30, 1999, the cost of investments for federal income tax purposes was
substantially the same as the cost for financial reporting purposes.
Accordingly, gross unrealized appreciation of investments was $440,310 and gross
unrealized depreciation of investments was $20,744,182 resulting in net
unrealized depreciation of $20,303,872.
12
<PAGE>
Alliance Mortgage Securities Income Fund
================================================================================
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.
At the time the Fund enters into a futures contract, the Fund deposits and
maintains as collateral an initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund agrees to
receive from or pay to the broker an amount of cash equal to the daily
fluctuation in the value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the time it was closed. At June 30, 1999, the Fund had no outstanding futures
contracts.
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 June 30, 1999.
- --------------------------------------------------------------------------------
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
----------------------------------------- -----------------------------------------
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, 1999 December 31, June 30, 1999 December 31,
(unaudited) 1998 (unaudited) 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Class A
Shares sold............................. 10,991,612 6,135,759 $ 92,595,457 $ 52,962,095
Shares issued in reinvestment of
dividends and distributions.......... 888,389 1,659,539 7,492,597 14,298,768
Shares converted from Class B........... 4,422,488 16,276,489 37,428,383 140,421,587
Shares redeemed......................... (15,315,829) (12,357,705) (128,997,778) (106,540,434)
----------------- ----------------- ----------------- -----------------
Net increase............................ 986,660 11,714,082 $ 8,518,659 $ 101,142,016
================= ================= ================= =================
</TABLE>
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.) Alliance Mortgage Securities Income Fund
================================================================================
<TABLE>
<CAPTION>
----------------------------------------- -----------------------------------------
SHARES AMOUNT
----------------------------------------- -----------------------------------------
Six Months Ended Year Ended Six Months Ended Year Ended
June 30, 1999 December 31, June 30, 1999 December 31,
(unaudited) 1998 (unaudited) 1998
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Class B
Shares sold............................. 616,072 1,129,782 $ 5,205,075 $ 9,742,600
Shares issued in reinvestment of
dividends and distributions.......... 181,736 847,302 1,534,921 7,308,487
Shares converted to Class A............. (4,422,488) (16,274,788) (37,428,383) (140,421,587)
Shares redeemed......................... (1,067,556) (8,433,020) (9,125,040) (72,791,687)
----------------- ----------------- ----------------- -----------------
Net decrease............................ (4,692,236) (22,730,724) $ (39,813,427) $ (196,162,187)
================= ================= ================= =================
Class C
Shares sold............................. 185,630 493,383 $ 1,568,035 $ 4,254,625
Shares issued in reinvestment of
dividends and distributions.......... 49,786 119,962 420,247 1,034,204
Shares redeemed......................... (380,420) (1,071,818) (3,220,920) (9,236,771)
----------------- ----------------- ----------------- -----------------
Net decrease............................ (145,004) (458,473) $ (1,232,638) $ (3,947,942)
================= ================= ================= =================
</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 six months ended June 30, 1999, the maximum amount of security lending
agreements outstanding was $119,416,000, the average amount outstanding was
approximately $68,583,832 and the daily weighted average interest rate was
4.85%.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible loss of rights in the collateral should the borrower fail
financially. In determining whether to lend securities to a particular borrower,
the Adviser will consider all relevant facts and circumstances, including the
creditworthiness of the borrower. While securities are on loan, the borrower
will pay the Fund any income earned thereon and the Fund may invest any cash
collateral in portfolio securities, thereby earning additional income, or
receive an agreed upon amount or income from a borrower who has delivered
equivalent collateral. When such securities are borrowed against cash, the Fund
agrees to pay the borrower of such securities a "rebate rate" for the use of the
cash the borrower has pledged as collateral. The rebate rate is the spread
between the interest rate received and interest rate paid in the repurchase
agreement market by the securities borrower.
As of June 30, 1999, the Fund had entered into the following security lending
agreements:
Amount Counterparty Interest Rate Maturity
----------- ---------------- ------------- ------------
$17,385,000 Prudential Securities 5.00% July 1, 1999
43,678,000 Prudential Securities 5.30% July 1, 1999
9,797,000 Prudential Securities 5.30% July 6, 1999
14
<PAGE>
Alliance Mortgage Securities Income Fund
================================================================================
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 six months ended June 30, 1999.
15
<PAGE>
FINANCIAL HIGHLIGHTS Alliance Mortgage Securities Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, 1999 ---------------------------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ...... $ 8.56 $ 8.63 $ 8.51 $ 8.75 $ 8.13 $ 9.29
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net investment income ................... .27(a) .52(a) .54(a) .54(a) .57(a) .57
Net realized and unrealized gain (loss)
on investments and futures
transactions ......................... (.32) (.03) .15 (.19) .64 (1.13)
------ ------ ------ ------ ------ ------
Net increase (decrease) in net asset
value from operations ................ (.05) .49 .69 .35 1.21 (.56)
------ ------ ------ ------ ------ ------
Less: Dividends and Distributions
Dividends from net investment income .... (.26) (.52) (.54) (.51) (.57) (.58)
Distributions in excess of net
investment income .................... -0- (.04) (.03) -0- -0- -0-
Tax return of capital ................... -0- -0- -0- (.08) (.02) (.02)
------ ------ ------ ------ ------ ------
Total dividends and distributions ....... (.26) (.56) (.57) (.59) (.59) (.60)
------ ------ ------ ------ ------ ------
Net asset value, end of period .......... $ 8.25 $ 8.56 $ 8.63 $ 8.51 $ 8.75 $ 8.13
====== ====== ====== ====== ====== ======
Total Return
Total investment return based on net
asset value (b) ...................... (.48)% 5.82% 8.40% 4.23% 15.34% (6.14)%
Ratios/Supplemental Data
Net assets, end of period (000's omitted) $460,810 $469,750 $372,494 $412,899 $502,390 $553,889
Ratio of expenses to average net assets . 1.71%(c) 1.99% 1.41% 1.68% 1.66% 1.29%
Ratio of expenses to average net assets
excluding interest expense ........... 1.15%(c) 1.14% 1.07% 1.03% 1.03% .97%
Ratio of net investment income to
average net assets ................... 6.33%(c) 6.06% 6.30% 6.38% 6.77% 6.77%
Portfolio turnover rate ................. 125% 202% 184% 208% 285% 438%
</TABLE>
- --------------------------------------------------------------------------------
See footnotes page 18.
16
<PAGE>
Alliance Mortgage Securities Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
CLASS B
--------------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, 1999 ----------------------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ...... $ 8.56 $ 8.63 $ 8.51 $ 8.75 $ 8.13 $ 9.29
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net investment income ................... .23(a) .45(a) .48(a) .48(a) .51(a) .51
Net realized and unrealized gain (loss)
on investments and futures
transactions ......................... (.31) (.02) .15 (.19) .64 (1.14)
------ ------ ------ ------ ------ ------
Net increase (decrease) in net asset
value from operations ................ (.08) .43 .63 .29 1.15 (.63)
------ ------ ------ ------ ------ ------
Less: Dividends and Distributions
Dividends from net investment income .... (.23) (.45) (.48) (.46) (.51) (.51)
Distributions in excess of net
investment income .................... -0- (.05) (.03) -0- -0- -0-
Tax return of capital ................... -0- -0- -0- (.07) (.02) (.02)
------ ------ ------ ------ ------ ------
Total dividends and distributions ....... (.23) (.50) (.51) (.53) (.53) (.53)
------ ------ ------ ------ ------ ------
Net asset value, end of period .......... $ 8.25 $ 8.56 $ 8.63 $ 8.51 $ 8.75 $ 8.13
====== ====== ====== ====== ====== ======
Total Return
Total investment return based on net
asset value (b) ...................... (.85)% 5.04% 7.60% 3.46% 14.48% (6.84)%
Ratios/Supplemental Data
Net assets, end of period (000's omitted) $83,558 $126,879 $323,916 $477,196 $737,593 $921,418
Ratio of expenses to average net assets . 2.43%(c) 2.68% 2.14% 2.37% 2.37% 2.00%
Ratio of expenses to average net assets
excluding interest expense ........... 1.87%(c) 1.85% 1.78% 1.74% 1.74% 1.68%
Ratio of net investment income to
average net assets ................... 5.53%(c) 5.33% 5.60% 5.66% 6.06% 6.05%
Portfolio turnover rate ................. 125% 202% 184% 208% 285% 438%
</TABLE>
- --------------------------------------------------------------------------------
See footnotes page 18.
17
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance Mortgage Securities Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
CLASS C
----------------------------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, 1999 ----------------------------------------------------------
(unaudited) 1998 1997 1996 1995 1994
------------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ...... $ 8.56 $ 8.63 $ 8.51 $ 8.75 $ 8.13 $ 9.29
------ ------ ------ ------ ------ ------
Income From Investment Operations
Net investment income ................... .23(a) .46(a) .48(a) .48(a) .51(a) .51
Net realized and unrealized gain (loss)
on investments and futures
transactions ......................... (.31) (.03) .15 (.19) .64 (1.14)
------ ------ ------ ------ ------ ------
Net increase (decrease) in net asset
value from operations ................ (.08) .43 .63 .29 1.15 (.63)
------ ------ ------ ------ ------ ------
Less: Dividends and Distributions
Dividends from net investment income .... (.23) (.46) (.48) (.46) (.51) (.51)
Distributions in excess of net
investment income .................... -0- (.04) (.03) -0- -0- -0-
Tax return of capital ................... -0- -0- -0- (.07) (.02) (.02)
------ ------ ------ ------ ------ ------
Total dividends and distributions ....... (.23) (.50) (.51) (.53) (.53) (.53)
------ ------ ------ ------ ------ ------
Net asset value, end of period .......... $ 8.25 $ 8.56 $ 8.63 $ 8.51 $ 8.75 $ 8.13
====== ====== ====== ====== ====== ======
Total Return
Total investment return based on net
asset value (b) ...................... (.85)% 5.04% 7.60% 3.46% 14.46% (6.84)%
Ratios/Supplemental Data
Net assets, end of period (000's omitted) $21,673 $23,728 $27,859 $35,355 $45,558 $58,338
Ratio of expenses to average net assets . 2.42%(c) 2.69% 2.12% 2.38% 2.35% 1.97%
Ratio of expenses to average net assets
excluding interest expense ........... 1.85%(c) 1.84% 1.77% 1.73% 1.73% 1.69%
Ratio of net investment income to
average net assets ................... 5.60%(c) 5.35% 5.61% 5.67% 6.07% 6.06%
Portfolio turnover rate ................. 125% 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. Total investment return calculated for a period
of less than one year is not annualized.
(c) Annualized.
18
<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 LLP
One Battery Park Plaza
New York, NY 10004
- --------------------------------------------------------------------------------
(1) Member of the Audit Committee.
19
<PAGE>
ALLIANCE MORTGAGE SECURITIES INCOME FUND
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
Alliance Capital [LOGO](R)
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.
MORSR699
