--------------------------------------------------------------------------------
FIXED INCOME
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Alliance Mortgage
Securities Income
Fund
Semi-Annual Report
June 30, 2000
[GRAPHIC OMITTED]
AllianceCapital [LOGO](R)
The Investment Professional's Choice
<PAGE>
Investment Products Offered
---------------------------
o Are Not FDIC Insured
o May Lose Value
o Are Not Bank Guaranteed
---------------------------
This shareholder report must be preceded or accompanied by the Fund's prospectus
for individuals who are not current shareholders of the Fund.
<PAGE>
----------------------
LETTER TO SHAREHOLDERS
----------------------
LETTER TO SHAREHOLDERS
August 15, 2000
Dear Shareholder:
This report provides you with the performance, investment strategy, and outlook
of Alliance Mortgage Securities Income Fund (the "Fund") for the semi-annual
reporting period ended June 30, 2000.
Investment Objectives and Policies
This open-end Fund is designed for investors who seek high current income,
consistent with prudent investment risk. The Fund invests primarily in a
diversified portfolio of mortgage-related securities including collateralized
mortgage obligations (CMOs). As a matter of fundamental policy, the Fund
maintains at least 65% of its total assets in mortgage-related securities
including CMOs.
Investment Results
The following table provides the investment results for Alliance Mortgage
Securities Income Fund for the six- and 12-month periods ended June 30, 2000.
For comparison, we have included the total returns of the Lehman Brothers (LB)
Mortgage-Backed Securities Index as well as the Lipper U.S. Mortgage Funds
Average.
During the six-month period ended June 30, 2000, the Fund's Class A shares
outperformed its benchmark, the Lehman Brothers Mortgage-Backed Securities
Index, as well as its peer group, represented by the Lipper U.S. Mortgage Funds
Average.
INVESTMENT RESULTS*
Periods Ended June 30, 2000
---------------------
Total Returns
---------------------
6 Months 12 Months
-------------------------------------
Alliance
Mortgage
Securities
Income Fund
Class A 3.68% 5.00%
-------------------------------------
Class B 3.27% 4.18%
-------------------------------------
Class C 3.27% 4.30%
-------------------------------------
LB Mortgage-
Backed
Securities
Index 3.67% 5.03%
-------------------------------------
Lipper U.S.
Mortgage
Funds Average 3.39% 4.28%
-------------------------------------
* The Fund's investment results are total returns for the periods shown and
are based on the net asset value of each class of shares as of June 30,
2000. 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. Returns for the Fund include the
reinvestment of any distributions paid during each period. 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 (GNMA), Federal Home Loan
Mortgage Corporation (FHLMC), and the Federal National Mortgage
Association (FNMA). Graduated Payment Mortgages (GPMs) are included, but
Graduated Equity Mortgages (GEMs) are not. The
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 1
<PAGE>
----------------------
LETTER TO SHAREHOLDERS
----------------------
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 mortgage securities issued or guaranteed as to principal and
interest by the U.S. government and certain federal agencies. For both the
six- and 12-month periods ended June 30, 2000, the Lipper Average
consisted of 60 funds. An investor cannot invest directly in an index or
an average, and its results are not indicative of any particular
investment, including Alliance Mortgage Securities Income Fund.
Additional investment results appear on pages 5-8.
Investment Strategy
During the six-month period, the Fund was positioned to take advantage of
relative value opportunities in the mortgage-backed securities (MBS) and
asset-backed securities (ABS) markets. We opportunistically bought and sold
agency MBS as well as traded coupons and agency debentures. We reduced the
Fund's exposure to fixed rate commercial mortgage-backed securities when spreads
tightened. With interest rates moderately stable, we kept a comparatively large
exposure to higher coupons, adding to the current yield of the portfolio.
Finally, we maintained the overall portfolio duration slightly below our index
target to protect the portfolio against the risk of higher interest rates.
Market Overview
The global macroeconomic outlook continued to improve during the first six
months of 2000. The U.S. economy remained strong, growing 4.8% in the first
quarter of 2000 and 5.2% during the second quarter. Inflation and unemployment
remained low, however, the rise in commodity prices--led by oil--along with low
unemployment have put upward pressure on U.S. inflation. Consumer Price Index
(CPI) has risen from 2.7% (year-over-year) at the beginning of the year to 3.7%
in June. Strong U.S. economic activity has prompted the Federal Reserve to
increase short-term interest rates from 5.50% to 6.50% in the first six months
of 2000.
The U.S. bond market, as represented by the Lehman Brothers Aggregate Bond
Index, posted a return of 3.99% during the six-month period. Among the sectors
of the U.S. bond market, the U.S. government sector recorded the strongest
performance at 4.97%, followed by the mortgage-backed securities sector at 3.67%
and the corporate sector at 2.68%. Meanwhile, the high yield sector recorded the
weakest performance at -1.21%. The U.S. government sector posted the strongest
return as a result of the Treasury buy-back program. Faced with a growing budget
surplus, the Treasury began a long-term project to reduce the supply of
outstanding government debt. The
--------------------------------------------------------------------------------
2 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
----------------------
LETTER TO SHAREHOLDERS
----------------------
yield curve inverted during the period as investors focused on the Treasury
buy-back program. Two-year Treasury yields rose from 6.24% to 6.36%, while
30-year Treasury yields fell from 6.48% to 5.90%.
In spite of strong mortgage fundamentals, the performance of the mortgage-backed
sector was dampened by events in Washington, DC. From a fundamental perspective,
mortgage securities benefited from a strong underlying housing sector that
increased turnover-related prepayments, which ultimately will result in a more
stable cash flow for holders of mortgage securities. However, relative
performance was dampened by the Treasury buy-back program, which affected all
non-Treasury sectors negatively, as well as the proposal to reduce the
government credit support currently enjoyed by the Federal Home Loan
Mortgage Corporation (FHLMC) and the Federal National Mortgage Association
(FNMA). In the event that the government follows through with this proposal, it
would limit commercial banks' demand for mortgages.
Outlook
For the remainder of 2000, we expect the U.S. economy to remain strong and
inflation to remain relatively low. Despite rising mortgage rates, the housing
market remains strong. Although we believe that a re-acceleration in growth
later this year will force the U.S. Federal Reserve to raise interest rates
again, the odds seem to favor no further action until after the U.S. elections
in November. We expect the Treasury buy-back program will cause further
inversion of the yield curve, depressing yields in maturities beyond 10 years,
while the tightening of monetary policy by the U.S. Federal Reserve should cause
short-term interest to rise. In addition, the debate raised by the Treasury
Secretary over the continuation of effective government subsidies to FNMA and
FHLMC could flare up again, causing another flight to quality by investors. In
this scenario, spread products could easily lag Treasury securities as swap
spreads widen. Consequently, we believe that a cautious approach to the market
is warranted.
Fund Update
On July 20, 2000, the Board of Directors of Alliance Mortgage Securities Fund
approved the acquisition of the assets and liabilities of the Fund by the
Alliance Bond Fund U.S. Government Portfolio. The acquisition is subject to
approval by the shareholders of Alliance Mortgage Securities Fund. A meeting is
scheduled for November 9, 2000. The acquisition is expected to be tax-free.
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 3
<PAGE>
----------------------
LETTER TO SHAREHOLDERS
----------------------
[PHOTO OMITTED] John D. Carifa
[PHOTO OMITTED] Jeffrey S. Phlegar
Portfolio Manager, Jeffrey S. Phlegar, has over 14 years of investment
experience.
Thank you for your interest and investment in Alliance Mortgage Securities
Income Fund.
Sincerely,
/s/ John D. Carifa
John D. Carifa
Chairman and President
/s/ Jeffrey S. Phlegar
Jeffrey S. Phlegar
Vice President
--------------------------------------------------------------------------------
4 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
------------------
PERFORMANCE UPDATE
------------------
PERFORMANCE UPDATE
ALLIANCE MORTGAGE SECURITIES INCOME FUND
GROWTH OF A $10,000 INVESTMENT
6/30/90 TO 6/30/00
[The following was represented by a mountain chart in the printed material.]
<PLOT POINTS TO COME>
Lehman Brothers Mortgage-Backed Securities Index: $21,095
Lipper U.S. Mortgage Funds Average: $19,666
Alliance Mortgage Securities Income Fund Class A: $19,114
This chart illustrates the total value of an assumed $10,000 investment in
Alliance Mortgage Securities Income Fund Class A shares (from 6/30/90 to
6/30/00) as compared to the performance of an appropriate broad-based index and
the Lipper U.S. Mortgage Funds Average. 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 these 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 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.
The unmanaged Lipper U.S. Mortgage Funds Average reflects performance of 13
funds (based on the number of funds in the average from 6/30/90 to 6/30/00). It
is based on the performance of a universe of funds that invest at least 65% of
their assets in mortgage securities issued or guaranteed as to principal and
interest by the U.S. government and certain federal agencies. 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.
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 an average and its results are not
indicative of any specific investment, including Alliance Mortgage Securities
Income Fund.
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 5
<PAGE>
------------------
PERFORMANCE UPDATE
------------------
PERFORMANCE UPDATE
ALLIANCE MORTGAGE SECURITIES INCOME FUND
HISTORY OF RETURNS
YEARLY PERIODS ENDED 6/30
[BAR CHART OMITTED]
Alliance Mortgage Securities Income Fund - Yearly Periods Ended 6/30
--------------------------------------------------------------------------------
Alliance Mortgage Securities Lehman Brothers Mortgage-
Income Fund Backed Securities Index
--------------------------------------------------------------------------------
6/30/91 12.86% 11.91%
6/30/92 13.50% 13.61%
6/30/93 12.41% 8.78%
6/30/94 -3.53% -1.05%
6/30/95 9.21% 12.17%
6/30/96 4.74% 5.85%
6/30/97 8.49% 9.10%
6/30/98 8.17% 8.93%
6/30/99 1.94% 4.01%
6/30/00 5.00% 5.03%
Past performance is no guarantee of future results. The Fund's investment
results represent total returns for Class A shares and are based on the net
asset value (NAV). All fees and expenses related to the operation of the Fund
have been deducted. Returns for the Fund include the reinvestment of any
distributions paid during the period.
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 (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), and
the Federal National Mortgage Association (FNMA). An investor cannot invest
directly in an index, and its results are not indicative of any specific
investment, including Alliance Mortgage Securities Income Fund.
--------------------------------------------------------------------------------
6 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
-----------------
PORTFOLIO SUMMARY
-----------------
PORTFOLIO SUMMARY
June 30, 2000
INCEPTION DATE PORTFOLIO STATISTICS
(Class A Shares) Net Assets ($mil): $436.4
2/29/84
SECURITY TYPE
45.43% FNMA
24.24% GNMA
13.01% FHLMC
8.55% CMO/ABS [PIE CHART OMITTED]
4.85% Stripped MBS
0.11% Treasury
Corporate
3.81% Financial
All data as of June 30, 2000. The Fund's security type breakdown may vary over
time. This breakdown is expressed as a percentage of total investments.
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 7
<PAGE>
------------------
INVESTMENT RESULTS
------------------
INVESTMENT RESULTS
AVERAGE ANNUAL TOTAL RETURNS AS OF JUNE 30, 2000
Class A Shares
--------------------------------------------------------------------------------
Without Sales Charge With Sales Charge
1 Year 5.00% 0.50%
5 Years 5.64% 4.73%
10 Years 7.16% 6.69%
SEC Yield** 6.60%
Class B Shares
--------------------------------------------------------------------------------
Without Sales Charge With Sales Charge
1 Year 4.18% 1.23%
5 Years 4.83% 4.83%
Since Inception*(a) 5.32% 5.32%
SEC Yield** 6.08%
Class C Shares
--------------------------------------------------------------------------------
Without Sales Charge With Sales Charge
1 Year 4.30% 3.32%
5 Years 4.85% 4.85%
Since Inception* 4.23% 4.23%
SEC Yield** 6.16%
The Fund's investment results represent average annual total returns. The
returns reflect reinvestment of dividends and/or capital gains distributions in
additional shares without and with the effect of the 4.25% maximum front-end
sales charge for Class A or applicable contingent deferred sales charge for
Class B (3% year 1, 2% year 2, 1% year 3, 0% year 4); and for Class C shares (1%
year 1). Returns for Class A shares do not reflect the imposition of the 1-year,
1% contingent deferred sales charge for accounts over $1,000,000.
Past performance does not guarantee future results. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed, may
be worth more or less than their original cost.
* Inception: 1/30/92 Class B; 5/3/93 Class C.
** SEC Yields are based on SEC guidelines and are calculated on 30 days ended
June 30, 2000.
(a) Assumes conversion of Class B shares into Class A shares after six years.
--------------------------------------------------------------------------------
8 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
------------------------
PORTFOLIO OF INVESTMENTS
------------------------
PORTFOLIO OF INVESTMENTS
June 30, 2000 (unaudited)
Principal
Amount
(000) Value
--------------------------------------------------------------------------------
Mortgage-Related Securities-118.0%
Federal National Mortgage
Association-58.1%
6.00%, 1/01/29-12/31/99(a)....................... $39,184 $ 35,851,647
6.50%, 4/01/11-6/01/29(b)........................ 34,902 33,479,159
7.00%, 9/01/14-12/31/99(b)....................... 74,797 72,984,293
7.50%, 2/01/15-12/31/99(b)....................... 54,571 54,239,178
8.00%, 8/01/28-6/01/30(a)........................ 24,652 24,752,247
8.50%, 8/01/11(a)(b)............................. 15,009 15,266,583
9.00%, 8/01/21................................... 2,896 2,982,745
10.00%, 10/01/14(b).............................. 8,973 9,629,397
11.00%, 7/15/16.................................. 2,401 2,571,601
11.50%, 9/15/20.................................. 1,486 1,597,777
-------------
Total Federal National Mortgage Association
(cost $253,345,030).............................. 253,354,627
-------------
Government National Mortgage
Association-31.0%
6.50%, 12/15/27-2/15/30.......................... 45,993 43,650,477
7.00%, 1/15/23-8/15/28........................... 50,744 49,342,239
8.00%, 12/31/99.................................. 41,705 42,148,324
9.00%, 12/15/19.................................. 2 1,929
-------------
Total Government National Mortgage Association
(cost $136,875,092).............................. 135,142,969
-------------
Federal Home Loan Mortgage Corp.-16.6%
6.50%, 2/01/26-12/01/28.......................... 12,071 11,392,422
7.50%, 9/01/29-4/01/30........................... 40,768 40,158,063
8.00%, 9/01/09(a)(b)............................. 3,568 3,597,575
9.50%, 9/01/20................................... 2,425 2,522,147
11.50%, 10/01/10-6/01/20......................... 1,394 1,531,881
12.00%, 8/01/15-7/01/20(a)....................... 10,021 10,936,214
12.25%, 8/01/13.................................. 16 17,199
12.50%, 6/01/19.................................. 1,616 1,811,784
13.00%, 5/01/14-12/01/18......................... 511 578,784
-------------
Total Federal Home Loan Mortgage Corp.
(cost $73,369,004)............................... 72,546,069
-------------
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 9
<PAGE>
------------------------
PORTFOLIO OF INVESTMENTS
------------------------
Principal
Amount
(000) Value
--------------------------------------------------------------------------------
Stripped Mortgage Backed Securities-6.2%
Bear Stearns
Series 1997 Cl.2-X I/O
1.52%, 8/25/36(d)(e)............................. $ 5,893 $ 2,918,163
First Union National Bank Commercial Mortgage
Series 2000-C1 Cl.I/O
0.776%, 9/15/29.................................. 1,493 1,490,001
LB Commercial Conduit Mortgage Trust
Series 1998-C4 Cl.X I/O
0.561%, 9/15/23(e)............................... 7,134 6,865,281
Series 1999-C2 Cl.X I/O
0.665%, 10/15/32(e).............................. 2,542 2,444,431
Mortgage Capital Funding, Inc.
Series 1996-MC2 Cl.X I/O
1.973%, 12/21/26(e).............................. 10,793 9,088,507
Salomon Brothers Mortgage Securities Inc.
Series 1999-5
3.128%, 6/25/28(e)............................... 3,213 4,236,661
-------------
Total Stripped Mortgage Backed Securities
(cost $31,067,606)............................... 27,043,044
-------------
Collateralized Mortgage Obligations-6.1%
Citicorp Mortgage Securities, Inc.
Series 1987-3 Cl.A1
9.00%, 5/01/17................................... 5,685 5,706,456
MLCC Mortgage Investors, Inc.
Series 1995-B Cl.B
6.94%, 11/15/20(c)............................... 4,544 3,879,817
Series 1996-B Cl.B
6.94%, 7/15/21(c)................................ 9,274 8,021,730
Prudential Home Mortgage Securities
Series 1994-29 Cl.A7
7.00%, 10/25/24.................................. 10,000 9,178,100
-------------
Total Collateralized Mortgage Obligations
(cost $27,483,143)............................... 26,786,103
-------------
Total Mortgage-Related Securities
(cost $522,139,875).............................. 514,872,812
-------------
Corporate Obligation-4.9%
Beverly Finance
8.36%, 7/15/04(d)
(cost $22,681,680)............................... 21,000 21,243,810
-------------
--------------------------------------------------------------------------------
10 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
------------------------
PORTFOLIO OF INVESTMENTS
------------------------
Principal
Amount
(000) Value
--------------------------------------------------------------------------------
Asset Backed Securities-4.8%
Green Tree Home Improvement Loan Trust
Series 1998-D Cl.HEA4
6.25%, 8/15/29................................... $20,000 $ 19,406,200
Option One Mortgage Securities Corp.
Series 1999-2
9.66%, 6/25/29(d)................................ 1,537 1,503,942
-------------
Total Asset Backed Securities
(cost $21,526,311)............................... 20,910,142
-------------
U.S. Government Obligation-0.1%
U.S. Treasury Bill
Zero coupon, 7/06/00
(cost $589,536)............................... 590 589,536
-------------
Total Investments-127.8%
(cost $566,937,402).............................. 557,616,300
Other assets less liabilities-(27.8%)............... (121,194,271)
-------------
Net Assets-100%..................................... $ 436,422,029
=============
(a) Securities, or a portion thereof, loaned at June 30, 2000, with an
aggregate market value of $50,669,247 and cash collateral received from
the counterparty of Bear Stearns in the amount of $52,186,000.
(b) 15 year mortgage.
(c) Adjustable rate mortgages; stated interest in effect at June 30, 2000.
(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,
2000, these securities amounted to $25,665,915 or 5.9% of net assets.
(e) Interest rate represents yield to maturity and principal amount represents
amortized cost.
Glossary:
I/O - Interest Only
See notes to financial statements.
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 11
<PAGE>
---------------------------------
STATEMENT OF ASSETS & LIABILITIES
---------------------------------
STATEMENT OF ASSETS & LIABILITIES
June 30, 2000 (unaudited)
Assets
Investments in securities, at value (cost $566,937,402) ..... $ 557,616,300
Cash ........................................................ 139,741
Receivable for investment securities sold ................... 7,296,958
Interest receivable ......................................... 4,713,120
Receivable for capital stock sold ........................... 2,819
-------------
Total assets ................................................ 569,768,938
-------------
Liabilities
Payable for investment securities purchased ................. 78,616,380
Deposit for securities loaned ............................... 52,315,344
Dividends payable ........................................... 725,434
Advisory fee payable ........................................ 625,618
Payable for capital stock redeemed .......................... 372,830
Distribution fee payable .................................... 130,884
Accrued expenses and other liabilities ...................... 560,419
-------------
Total liabilities ........................................... 133,346,909
-------------
Net Assets .................................................. $ 436,422,029
=============
Composition of Net Assets
Capital stock, at par ....................................... $ 539,043
Additional paid-in capital .................................. 658,099,453
Undistributed net investment income ......................... 565,156
Accumulated net realized loss on investments,
options and futures transactions ......................... (213,460,521)
Net unrealized depreciation of investments .................. (9,321,102)
-------------
$ 436,422,029
=============
Calculation of Maximum Offering Price
Class A Shares
Net asset value and redemption price per share
($396,426,497 / 48,970,216 shares of
capital stock issued and outstanding) .................... $8.10
Sales charge--4.25% of public offering price ................ .36
-----
Maximum offering price ...................................... $8.46
=====
Class B Shares
Net asset value and offering price per share
($23,471,075 / 2,896,463 shares of
capital stock issued and outstanding) .................... $8.10
=====
Class C Shares
Net asset value and offering price per share
($16,524,457 / 2,037,636 shares of
capital stock issued and outstanding) .................... $8.11
=====
See notes to financial statements.
--------------------------------------------------------------------------------
12 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
-----------------------
STATEMENT OF OPERATIONS
-----------------------
STATEMENT OF OPERATIONS
Six Months Ended June 30, 2000 (unaudited)
Investment Income
Interest....................................... $ 21,732,099
Expenses
Advisory fee................................... $ 1,266,402
Distribution fee - Class A..................... 612,014
Distribution fee - Class B..................... 162,604
Distribution fee - Class C..................... 87,317
Transfer agency................................ 520,916
Custodian...................................... 143,906
Printing....................................... 91,098
Administrative................................. 73,516
Audit and legal................................ 67,686
Registration................................... 25,268
Directors' fees................................ 13,266
Miscellaneous.................................. 10,177
------------
Total expenses before interest................. 3,074,170
Interest expense............................... 2,764,008
------------
Total expenses................................. 5,838,178
------------
Net investment income.......................... 15,893,921
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized loss on investment transactions... (10,703,816)
Net realized gain on options transactions...... 18,062
Net realized loss on futures transactions...... (647,657)
Net change in unrealized
appreciation/depreciation of
investments................................. 11,583,218
------------
Net gain on investments........................ 249,807
------------
Net Increase in Net Assets
from Operations............................. $ 16,143,728
============
See notes to financial statements.
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 13
<PAGE>
----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Six Months Ended Year Ended
June 30, 2000 December 31,
(unaudited) 1999
================ =============
Increase (Decrease) in Net Assets
from Operations
Net investment income ........................ $ 15,893,921 $ 36,003,036
Net realized loss on investment, options
and futures transactions .................. (11,333,411) (15,777,866)
Net change in unrealized
appreciation/depreciation of
investments ............................... 11,583,218 (16,908,106)
------------- -------------
Net increase in net assets from operations ... 16,143,728 3,317,064
Dividends to Shareholders from:
Net investment income
Class A ................................... (13,866,963) (30,117,241)
Class B ................................... (964,742) (4,750,787)
Class C ................................... (523,426) (1,227,538)
Capital Stock Transactions
Net decrease ................................. (57,621,954) (94,323,536)
------------- -------------
Total decrease ............................... (56,833,357) (127,102,038)
Net Assets
Beginning of period .......................... 493,255,386 620,357,424
------------- -------------
End of period ................................ $ 436,422,029 $ 493,255,386
============= =============
See notes to financial statements.
--------------------------------------------------------------------------------
14 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
-----------------------
STATEMENT OF CASH FLOWS
-----------------------
STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2000 (unaudited)
Increase (Decrease) In Cash From:
Operating Activities:
Interest received.............................. 21,905,870
Interest expense paid.......................... (2,764,008)
Operating expenses paid........................ (2,932,879)
------------
Net increase in cash from operating
activities.................................. 16,208,983
Investing Activities:
Proceeds from disposition of long-term
portfolio investments....................... 982,489,494
Purchase of long-term
portfolio investments....................... (852,826,809)
Sales of short-term
portfolio investments, net.................. 2,018,062
Gain on closed futures contracts............... (647,657)
------------
Net increase in cash from investing
activities.................................. 131,033,090
Financing Activities*:
Decrease in securities lending................. (72,780,392)
Redemptions of capital stock, net.............. (65,751,384)
Cash dividends paid............................ (7,615,437)
Cash overdraft from prior period............... (955,119)
Net decrease in cash from financing
activities.................................. (147,102,332)
------------
Net increase in cash........................... 139,741
Cash at beginning of period.................... -0-
------------
Cash at end of period.......................... 139,741
============
Reconciliation of Net Increase in Net Assets
from Operations to Net Increase in Cash
from Operating Activities:
Net increase in net assets
resulting from operations................... 16,143,728
Adjustments:
Increase in interest receivable................ 388,123
Net realized loss on investment
transactions................................ 11,333,411
Net change in unrealized
appreciation/depreciation................... (11,583,218)
Accretion of bond discount..................... (214,352)
Decrease in accrued expenses................... 141,291
------------
Total adjustments.............................. 65,255
------------
Net increase in cash from operating
activities.................................. 16,208,983
============
* Non-cash financing activities not included herein consist of reinvestment
of dividends.
See notes to financial statements.
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 15
<PAGE>
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTES TO FINANCIAL STATEMENTS
June 30, 2000 (unaudited)
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 accounting principles generally accepted in the United States, 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. Mortgage backed and asset backed securities may
be valued at prices obtained from a bond pricing service or at a price obtained
from one or more of the major broker/dealers in such securities. In cases where
broker/dealer quotes are obtained, the Adviser may establish procedures whereby
changes in market yields or spreads are used to adjust, on a daily basis, a
recently obtained quoted bid price on a security.
--------------------------------------------------------------------------------
16 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
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 accounting principles generally accepted in the United States. 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.
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, 2000.
Pursuant to the advisory agreement, the Fund paid $73,516 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, 2000.
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
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 17
<PAGE>
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
compensation amounted to $382,702 for the six months ended June 30, 2000.
For the six months ended June 30, 2000, the Fund's expenses were reduced by
$20,112 under an expense offset arrangement with Alliance Fund Services, Inc.
Alliance Fund Distributors, Inc. (the "Distributor"), a wholly-owned subsidiary
of the Adviser, serves as the Distributor of the Fund's shares. The Distributor
has advised the Fund that it has received $4,438, $34,521 and $139 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,
2000.
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 distribution and servicing fees 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 advised the Fund that it has incurred expenses in excess of the
distribution costs reimbursed by the Fund in the amount of $9,059,234 and
$3,240,991 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 $11,631,250 and $58,890,423,
respectively, for the six months ended June 30, 2000. There were purchases of
$895,569,754 and sales of $897,990,943 of U.S. government and government agency
obligations for the six months ended June 30, 2000.
At June 30, 2000, 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 $4,416,050 and
gross unrealized depreciation of investments was $13,737,152 resulting in net
unrealized depreciation of $9,321,102.
For federal income tax purposes, the Fund had a capital loss carryforward at
June 30, 2000 of $200,190,858, of which $182,944,266 expires in the year 2002,
$3,177,946 expires in the year 2004 and $14,068,646 expires in the year 2007.
--------------------------------------------------------------------------------
18 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
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, 2000, 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, 2000.
3. Options Transactions
For hedging and investment purposes, the Portfolio purchases and writes (sells)
put and call options on debt securities that are traded on U.S. and foreign
securities exchanges and over-the-counter markets.
The risk associated with purchasing an option is that the Portfolio pays a
pre-
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 19
<PAGE>
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
mium whether or not the option is exercised. Additionally, the Portfolio
bears the risk of loss of premium and change in market value should the
counterparty not perform under the contract. Put and call options purchased are
accounted for in the same manner as portfolio securities. The cost of securities
acquired through the exercise of call options is increased by premiums paid. The
proceeds from securities sold through the exercise of put options are decreased
by the premiums paid.
When the Portfolio writes an option, the premium received by the Portfolio is
recorded as a liability and is subsequently adjusted to the current market value
of the option written. Premiums received from writing options which expire
unexercised are recorded by the Portfolio on the expiration date as realized
gains from option transactions. The difference between the premium received and
the amount paid on effecting a closing purchase transaction, including brokerage
commissions, is also treated as a realized gain, or if the premium received is
less than the amount paid for the closing purchase transaction, as a realized
loss. If a call option is exercised, the premium received is added to the
proceeds from the sale of the underlying security in determining whether the
Portfolio has realized a gain or loss. If a put option is exercised, the premium
received reduces the cost basis of the security purchased by the Portfolio. The
risk involved in writing an option is that, if the option was exercised the
underlying security could then be purchased or sold by the Portfolio at a
disadvantageous price.
Transactions in written options for the six months ended June 30, 2000 were as
follows:
Number
of Contracts Premiums
============ ============
Options outstanding at beginning of
period ................................ -0- $ -0-
Options written .......................... 8,500 23,242
Options terminated in closing purchase
transactions .......................... (8,500) (23,242)
------------ ------------
Options outstanding at June 30, 2000 ..... -0- $ -0-
------------ ------------
--------------------------------------------------------------------------------
20 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
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, 2000 December 31, June 30, 2000 December 31,
(unaudited) 1999 (unaudited) 1999
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A
Shares sold 4,581,007 13,519,603 $ 36,676,454 $ 113,288,362
---------------------------------------------------------------------------------------------
Shares issued in
reinvestment of
dividends 870,650 1,794,846 6,988,862 14,896,816
---------------------------------------------------------------------------------------------
Shares converted
from Class B 2,216,975 7,547,577 17,808,287 62,867,029
---------------------------------------------------------------------------------------------
Shares redeemed (11,900,314) (24,560,559) (95,509,324) (204,443,082)
---------------------------------------------------------------------------------------------
Net decrease (4,231,682) (1,698,533) $ (34,035,721) $ (13,390,875)
=============================================================================================
Class B
Shares sold 320,623 946,406 $ 2,578,051 $ 7,898,909
---------------------------------------------------------------------------------------------
Shares issued in
reinvestment of
dividends 75,680 316,833 608,058 2,639,932
---------------------------------------------------------------------------------------------
Shares converted
to Class A (2,214,949) (7,545,598) (17,808,287) (62,867,029)
---------------------------------------------------------------------------------------------
Shares redeemed (778,856) (3,045,799) (6,244,174) (25,322,308)
---------------------------------------------------------------------------------------------
Net decrease (2,597,502) (9,328,158) $ (20,866,352) $ (77,650,496)
=============================================================================================
Class C
Shares sold 60,434 327,458 $ 484,965 $ 2,726,308
---------------------------------------------------------------------------------------------
Shares issued in
reinvestment of
dividends 46,301 100,759 372,248 837,243
---------------------------------------------------------------------------------------------
Shares redeemed (445,079) (823,583) (3,577,094) (6,845,716)
---------------------------------------------------------------------------------------------
Net decrease (338,344) (395,366) $ (2,719,881) $ (3,282,165)
=============================================================================================
</TABLE>
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 21
<PAGE>
-----------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
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, 2000, the maximum amount of security lending
agreements outstanding was $172,313,750, the average amount outstanding was
approximately $92,481,573 and the daily weighted average interest rate was
5.91%.
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 of income from a borrower who has delivered
equivalent collateral. When such securities are borrowed against cash, the Fund
agrees to pay the borrower of such securities a "rebate rate" for the use of the
cash the borrower has pledged as collateral. The rebate rate is the spread
between the interest rate received and interest rate paid in the repurchase
agreement market by the securities borrower.
As of June 30, 2000, the Fund had entered into the following security lending
agreements:
Amount Counterparty Interest Rate Maturity
=============== ================== =============== ===================
$48,258,000 Bear Stearns 6.58% July 3, 2000
3,812,000 Bear Stearns 6.75% July 5, 2000
116,000 Bear Stearns 6.85% July 7, 2000
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, 2000.
NOTE H
Subsequent Event
On July 20, 2000, the Board of Directors of Alliance Mortgage Securities Income
Fund approved the acquisition of the assets and liabilities of the Fund by the
Alliance Bond Fund U.S. Government Portfolio. The acquisition is subject to
approval by the shareholders of Alliance Mortgage Securities Income Fund. A
meeting is currently scheduled for November 9, 2000. The acquisition is expected
to be a tax-free transaction.
--------------------------------------------------------------------------------
22 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
--------------------
FINANCIAL HIGHLIGHTS
--------------------
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Class A
--------------------------------------------------------------------------------
Six
Months
Ended
June 30, Year Ended December 31,
2000 -------------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .......... $8.08 $8.56 $8.63 $8.51 $8.75 $8.13
--------------------------------------------------------------------------------
Income From Investment
Operations
Net investment income(a) ....... .28 .55 .52 .54 .54 .57
Net realized and unrealized
gain (loss) on investments
and futures transactions ..... .01 (.49) (.03) .15 (.19) .64
--------------------------------------------------------------------------------
Net increase in net asset value
from operations .............. .29 .06 .49 .69 .35 1.21
--------------------------------------------------------------------------------
Less: Dividends and
Distributions
Dividends from net
investment income ............ (.27) (.54) (.52) (.54) (.51) (.57)
Distributions in excess of
net investment income ........ -0- -0- (.04) (.03) -0- -0-
Tax return of capital .......... -0- -0- -0- -0- (.08) (.02)
--------------------------------------------------------------------------------
Total dividends and
distributions ................ (.27) (.54) (.56) (.57) (.59) (.59)
--------------------------------------------------------------------------------
Net asset value, end of period . $8.10 $8.08 $8.56 $8.63 $8.51 $8.75
================================================================================
Total Return
Total investment return based on
net asset value(b) ........... 3.68% .79% 5.82% 8.40% 4.23% 15.34%
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) .............. $396,426 $429,627 $469,750 $372,494 $412,899 $502,390
Ratio of expenses to
average net assets ........... 2.47%(c) 1.93% 1.99% 1.41% 1.68% 1.66%
Ratio of expenses to
average net assets
excluding interest expense ... 1.26%(c) 1.16% 1.14% 1.07% 1.03% 1.03%
Ratio of net investment income
to average net assets ..... 7.03%(c) 6.54% 6.06% 6.30% 6.38% 6.77%
Portfolio turnover rate ........ 161% 229% 202% 184% 208% 285%
</TABLE>
See footnote summary on page 25.
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 23
<PAGE>
--------------------
FINANCIAL HIGHLIGHTS
--------------------
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Class B
--------------------------------------------------------------------------------
Six
Months
Ended
June 30, Year Ended December 31,
2000 ------------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .......... $8.08 $8.56 $8.63 $8.51 $8.75 $8.13
--------------------------------------------------------------------------------
Income From Investment
Operations
Net investment income(a) ....... .24 .46 .45 .48 .48 .51
Net realized and unrealized
gain (loss) on investments
and futures transactions ..... .02 (.46) (.02) .15 (.19) .64
--------------------------------------------------------------------------------
Net increase in net asset value
from operations .............. .26 -0- .43 .63 .29 1.15
--------------------------------------------------------------------------------
Less: Dividends and
Distributions
Dividends from net
investment income ............ (.24) (.48) (.45) (.48) (.46) (.51)
Distributions in excess of
net investment income ........ -0- -0- (.05) (.03) -0- -0-
Tax return of capital .......... -0- -0- -0- -0- (.07) (.02)
--------------------------------------------------------------------------------
Total dividends and
distributions ................ (.24) (.48) (.50) (.51) (.53) (.53)
--------------------------------------------------------------------------------
Net asset value, end of period . $8.10 $8.08 $8.56 $8.63 $8.51 $8.75
================================================================================
Total Return
Total investment return based on
net asset value(b) ........... 3.27% .02% 5.04% 7.60% 3.46% 14.48%
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) .............. $23,471 $44,410 $126,879 $323,916 $477,196 $737,593
Ratio of expenses to
average net assets ........... 3.26%(c) 2.59% 2.68% 2.14% 2.37% 2.37%
Ratio of expenses to
average net assets
excluding interest expense ... 2.03%(c) 1.89% 1.85% 1.78% 1.74% 1.74%
Ratio of net investment income
to average net assets ........ 6.17%(c) 5.68% 5.33% 5.60% 5.66% 6.06%
Portfolio turnover rate ........ 161% 229% 202% 184% 208% 285%
</TABLE>
See footnote summary on page 25.
--------------------------------------------------------------------------------
24 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
--------------------
FINANCIAL HIGHLIGHTS
--------------------
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Class C
---------------------------------------------------------------------------
Six
Months
Ended
June 30, Year Ended December 31,
2000 --------------------------------------------------------
(unaudited) 1999 1998 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period .......... $8.09 $8.56 $8.63 $8.51 $8.75 $8.13
---------------------------------------------------------------------------
Income From Investment
Operations
Net investment income(a) ....... .25 .48 .46 .48 .48 .51
Net realized and unrealized
gain (loss) on investments
and futures transactions ..... .01 (.47) (.03) .15 (.19) .64
---------------------------------------------------------------------------
Net increase in net asset value
from operations .............. .26 .01 .43 .63 .29 1.15
---------------------------------------------------------------------------
Less: Dividends and
Distributions
Dividends from net
investment income ............ (.24) (.48) (.46) (.48) (.46) (.51)
Distributions in excess of
net investment income ........ -0- -0- (.04) (.03) -0- -0-
Tax return of capital .......... -0- -0- -0- -0- (.07) (.02)
---------------------------------------------------------------------------
Total dividends and
distributions ................ (.24) (.48) (.50) (.51) (.53) (.53)
---------------------------------------------------------------------------
Net asset value, end of period . $8.11 $8.09 $8.56 $8.63 $8.51 $8.75
===========================================================================
Total Return
Total investment return based on
net asset value(b) ........... 3.27% .14% 5.04% 7.60% 3.46% 14.46%
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) .............. $16,524 $19,219 $23,728 $27,859 $35,355 $45,558
Ratio of expenses to
average net assets ........... 3.19%(c) 2.64% 2.69% 2.12% 2.38% 2.35%
Ratio of expenses to
average net assets
excluding interest expense ... 1.98%(c) 1.87% 1.84% 1.77% 1.73% 1.73%
Ratio of net investment income
to average net assets ........ 6.30%(c) 5.80% 5.35% 5.61% 5.67% 6.07%
Portfolio turnover rate ........ 161% 229% 202% 184% 208% 285%
</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.
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 25
<PAGE>
----------------------------
GLOSSARY OF INVESTMENT TERMS
----------------------------
GLOSSARY OF INVESTMENT TERMS
asset-backed securities (ABS)
Bonds or notes backed by loan paper or accounts receivable originated by banks,
credit card companies or other providers of credit and often enhanced by a bank
letter of credit or by insurance coverage provided by an institution other than
the issuer.
basis point (bp)
One basis point equals 0.01%.
benchmark
A standard by which a fund's performance can be measured. A benchmark is usually
an unmanaged index, such as the Standard & Poor's 500 Stock Index or the Lehman
Brothers Aggregate Bond Index.
commercial mortgage-backed securities (CMBS)
Similar to mortgage-backed securities in that they are securities or
certificates backed by mortgages, except that investors receive payments out of
the interest and principal of commercially-owned real estate, rather than
residential real estate.
Consumer Price Index (CPI)
An index that measures the cost of living. The CPI is published by the U.S.
Bureau of Labor Statistics.
Federal Reserve Board
The seven-member board that oversees Federal Reserve Banks, establishes monetary
policy and monitors the country's economic state.
government bond
A bond that is issued by the U.S. government or its agencies.
index
A compilation of securities of similar types of companies that is used to
measure the investment performance of securities within that specific market. An
index is often used as a benchmark for a mutual fund. An investor cannot invest
directly in an index.
investment-grade bond
A bond that is rated BBB or higher by a credit agency.
mortgage-backed securities (MBS)
Securities or certificates backed by mortgages. Typically issued by institutions
such as the Federal National Mortgage Association (FNMA), Government National
Mortgage Association (GNMA) and the Federal Home Loan Mortgage Corporation
(FHLMC). Investors receive payments out of the interest and principal of the
underlying mortgages.
Treasuries
Negotiable U.S. government debt obligations, backed by the full faith and credit
of the U.S. government. Treasuries are issued either as bills, notes or bonds
depending on the maturity. Treasuries are exempt from state and local taxes.
--------------------------------------------------------------------------------
26 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
<PAGE>
----------------
ALLIANCE CAPITAL
----------------
Alliance Capital
The Investment Professional's Choice
Alliance Capital is a leading global investment management firm with nearly $388
billion in assets under management. In recognition of our far-reaching
investment capabilities, Alliance Capital has been selected by employee benefit
plans for 29 of the FORTUNE 100 companies and public retirement funds in 33
states as well as by hundreds of foundations, endowments and foreign
institutions. By sharing this institutional money management experience with
millions of mutual fund investors as well, Alliance stands out as a "manager of
choice" for thousands of investment professionals around the world.
At Alliance Capital, we place a premium on investment research. We carefully
select securities based on our proprietary research, conducted by over 282
investment professionals in 22 investment offices worldwide. Our commitment to
this process means that our mutual fund shareholders have their portfolios
managed by the same experienced analysts and portfolio managers who manage the
pension funds of some of America's largest institutional investors.
All information on Alliance Capital is as of 6/30/00.
--------------------------------------------------------------------------------
ALLIANCE MORTGAGE SECURITIES INCOME FUND o 27
<PAGE>
--------------------------------
ALLIANCE CAPITAL AT YOUR SERVICE
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Alliance Capital At Your Service
At Alliance Capital, shareholder satisfaction is among our top priorities.
That's why we provide our shareholders with a wide variety of products and
time-saving services to meet their needs.
o Low Minimum Investments
You can begin investing in Alliance Capital funds with as little as $250
(except for Alliance Select Investor Series Premier Portfolio, Alliance
Select Investor Series Technology Portfolio, and Alliance Select Investor
Series Biotechnology Portfolio, which generally have a $10,000 minimum
initial investment) and may make subsequent investments of $50 or more.
o Automatic Reinvestment
You may choose to reinvest fund dividend and capital-gains distributions
automatically at no charge.
o Automatic Investment Program
Build your investment account by having money automatically transferred
from your bank account on a regular basis.
o Dividend Direction Plans
You may cross-invest dividends from one fund into the same class of shares
in any other fund without incurring a sales charge. This can be a good way
to diversify your assets.
o The Alliance Advance
A quarterly newsletter discussing investment strategies, economic news and
other matters that could affect your mutual fund investment.
o Auto Exchange
You may choose to automatically exchange money from one Alliance Capital
fund to another on a regular basis. This can be a good way to dollar cost
average*, helping you to invest with discipline.
o Systematic Withdrawals
Regular checks for specified amounts can be sent to you or to your
brokerage or bank account.
o A Choice of Purchase Plans
Most funds are available in A, B, and C Class shares. Many funds are also
available in Advisor Class shares.
o Telephone Transaction
Purchases, transfers and redemptions can be made by calling (800)
221-5672. Our knowledgeable representatives are available to assist you
Monday through Friday from 8:30 a.m. to 8:00 p.m. Eastern Standard Time.
o Alliance Answer: 24-Hour Information
For your convenience, our computerized audio response system is available
to you 24-hours a day by calling (800) 251-0539. Using any touch tone
phone, you can hear share prices, get account balances, review details of
your last transaction, obtain dividend information, order
statements/checkbooks, review fund objectives, literature and Watchlist
information, order additional copies of statements and request additional
year-end tax forms (available from February 1 to May 31).
o Alliance Capital on the World Wide Web at www.alliancecapital.com. Here,
you can access updated account information, make additional investments,
request more information, exchange between Alliance funds and view fund
performance, press releases and articles.
* Dollar cost averaging does not assure a profit nor protect against loss in
a declining market. Since this strategy involves continuous investments in
securities, regardless of fluctuating prices, investors should consider
their financial ability to invest during periods of low price levels.
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28 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
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BOARD OF DIRECTORS
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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
Kathleen H. Corbet, Senior Vice President
Wayne D. Lyski, Senior Vice President
Sean Kelleher, 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 (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.
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ALLIANCE MORTGAGE SECURITIES INCOME FUND o 29
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ALLIANCE CAPITAL FAMILY OF FUNDS
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ALLIANCE CAPITAL FAMILY OF FUNDS
Domestic Equity Funds
Balanced Shares
Conservative Investors Fund
Disciplined Value Fund
Growth & Income Fund
Growth Fund
Growth Investors Fund
Health Care Fund
Premier Growth Fund
Quasar Fund
Real Estate Investment Fund
Technology Fund
The Alliance Fund
Utility Income Fund
Global & International Equity Funds
All-Asia Investment Fund
Global Small Cap Fund
Greater China '97 Fund
International Fund
International Premier Growth Fund
New Europe Fund
Worldwide Privatization Fund
Select Investor Series
Biotechnology Portfolio
Premier Portfolio
Technology Portfolio
Fixed Income Funds
Corporate Bond Portfolio
Global Dollar Government Fund
Global Strategic Income Trust
High Yield Fund
Multi-Market Strategy Trust
North American Government Income Trust
Quality Bond Portfolio
U.S. Government Portfolio
Municipal Income Funds
National
Insured National
Arizona
California
Insured California
Florida
Massachusetts
Michigan
Minnesota
New Jersey
New York
Ohio
Pennsylvania
Virginia
Closed-End Funds
The Spain Fund
ACM Municipal Securities Income Fund
Alliance All-Market Advantage Fund
ACM Government Income Fund
ACM Government Securities Fund
ACM Government Spectrum Fund
ACM Government Opportunity Fund
ACM Managed Income Fund
The Southern Africa Fund
The Austria Fund
Alliance World Dollar Government Fund
ACM Managed Dollar Income Fund
The Korean Investment Fund
Alliance World Dollar Government Fund II
Alliance also offers AFD Exchange Reserves, which serves as the money market
fund exchange vehicle for the Alliance mutual funds.
To obtain a prospectus for any Alliance Capital fund, call your investment
professional, or call Alliance at (800) 227-4618.
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30 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
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NOTES
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ALLIANCE MORTGAGE SECURITIES INCOME FUND o 31
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NOTES
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32 o ALLIANCE MORTGAGE SECURITIES INCOME FUND
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Alliance Mortgage Securities Income Fund ---------------
1345 Avenue of the Americas BULK RATE
New York, NY 10105 U.S. POSTAGE
(800) 221-5672 PAID
New York, NY
Permit No. 7131
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AllianceCapital [LOGO](R)
The Investment Professional's Choice
(R) These registered service marks used under license from the owner, Alliance
Capital Management L.P.
MORSR600
