ALLIANCE
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MORTGAGE
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SECURITIES
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INCOME FUND
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Annual Report
December 31, 1999
Alliance Capital [LOGO](R)
<PAGE>
Letter To Shareholders Alliance Mortgage Securities Income Fund
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February 15, 2000
Dear Shareholder:
This report provides the performance, investment strategy and outlook for the
Alliance Mortgage Securities Income Fund (the "Fund") over the annual reporting
period ended December 31, 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.
INVESTMENT RESULTS
The following table provides the investment results for the Alliance Mortgage
Securities Income Fund for the six- and twelve-month periods ended December 31,
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- and twelve-month periods, your Fund outperformed the average
performance of its peers in the Lipper U.S. Mortgage Funds Average but
underperformed the Lehman Brothers Mortgage-Backed Securities Index. While the
Fund was correctly positioned for higher interest rates throughout the year,
wider spreads in the high-grade markets in the summer caused by Y2K concerns
contributed negatively to performance in 1999. Due to the Fund's slightly
leveraged position, underperformance during that period was exacerbated by wider
spread levels. Most of this underperformance was recaptured by late in the year,
and we are confident that this strategy will, over the long run, prove
beneficial to long-term performance.
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INVESTMENT RESULTS*
Periods Ended December 31, 1999
Total Returns
6 months 12 months
=============== ===============
Alliance Mortgage
Securities Income
Fund
Class A 1.27% 0.79%
Class B 0.87% 0.02%
Class C 1.00% 0.14%
Lehman Brothers
Mortgage-Backed
Securities Index 1.32% 1.86%
Lipper U.S. Mortgage
Funds Average 0.85% 0.65%
* 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 Securites 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 assests 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 December 31, 1999, the Lipper Average consisted
of 63 and 62 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 U.S. economy continued its robust expansion with a 5.8% growth rate in the
fourth quarter of 1999 and 4% overall for the calendar year. Two-and-a-half
million new jobs were created during 1999, and unemployment remains at 4.1%, a
thirty-year low. U.S. consumer confidence in the economy led to a spending rate
in excess of 5% during the period. The rise in commodity prices, led
1
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Alliance Mortgage Securities Income Fund
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by oil, has started to flow through to U.S. inflation as the consumer price
index (CPI) moved above 2.5% on a year-over-year basis during the fourth quarter
versus 2% during the first nine-months of 1999. These developments, together
with continuing economic strength, have sparked inflation concerns in the United
States, pushed-up bond yields and triggered three 25 basis-point (bp) interest
rate hikes by the U.S. Federal Reserve during 1999. The weakness in U.S. bond
prices spread throughout much of the industrialized world this year, although
not always with the same inflationary justification. During the six-month
period, the yield curve flattened with two-year Treasury yields increasing 71
basis points from 5.52% to 6.23% and thirty-year Treasury yields increasing 51
basis points from 5.97% to 6.48%.
With the notable exception of emerging-market debt, 1999 was a poor year for
U.S. dollar-denominated fixed-income. Among the traditional sectors,
mortgage-backed securities (MBS), commercial mortgage-backed securities(CMBS),
and asset-backed securities (ABS) posted the best returns during the six-month
period and the year. The prepayment risk embedded in many of these securities,
as well as their generally shorter durations, helped cushion their price
declines in the rising interest rate environment. Mortgage-backed securities
benefited from both dramatically lower economic refinancings which limit supply,
and strong housing turnover, which prevents discount MBS from extending. U.S.
government bonds posted the worst returns during the six-month period and the
year.
INVESTMENT STRATEGY
During the past year, mortgages benefited from stable prepayment fundamentals
and declining supply. The lessening in refinancing activity resulted in a large
decline in new pass-through security supply. Higher interest rates predictably
decreased the incentive for homeowners to refinance their mortgages. However,
turnover prepayment rates remained high as a strong economy and home equity
build-up boosted home sales.
During the six-month period ended December 31, 1999, we maintained our strategy
of adding value to the portfolio by making small, incremental adjustments to our
holdings as we see relative value. We continued to hold commercial
mortgage-backed securities, which benefit from lower prepayment risk and a
diversified portfolio of interest-only MBS and CMBS, which benefit from rising
interest rates. As interest rates rise, these securities tend to appreciate in
price, thus providing a buffer to our overall portfolio. We were also active in
agency passthroughs.
OUTLOOK
Our near-term outlook for financial markets assumes that the U.S. economy will
stay relatively strong and that the global economy will continue to recover.
Higher bond yields are cooling overheated U.S. domestic demand, and we believe
further increases will help to restore a more balanced domestic/foreign mix over
the next six months. While the Federal Reserve left the Federal Funds Rate
target 5.50% and monetary policy bias unchanged in December, its accompanying
statement stressing "inflationary imbalances" and the possibility that
"increases in demand will continue to exceed the growth in potential supply,"
was hardly conciliatory. An additional interest rate increase was announced on
February 2, 2000, after the close of the Fund's reporting period. Improving
conditions outside the United States should eventually ease the pressure on our
external accounts.
With economic growth strong and temporary upward pressure on inflation, we
expect long-term interest rates will trend up modestly from current levels in
this environment. After widening dramatically during the third quarter of 1999,
yield premiums in non-Treasury sectors have narrowed, although not to the levels
seen in mid-1997. We expect these premiums to narrow somewhat from current
levels, but not to return to the previous tight levels of early 1997. As we have
stated previously, corporate security selection will become increasingly
important.
Relative to both 1998 and 1999, we believe that on balance 2000 should be one of
relatively lower volatility once the Fed finishes its tightening moves. Supply,
after the first quarter bubble, should be fairly light for real estate-related
securities, such as residential MBS and CMBS, which are feeling the pinch of
higher interest rates. The CMBS market, for example, exhibits some of the same
rate sensitivity as residential MBS in terms of supply dynamics. After CMBS
supply fell 20% year-on-year in 1999, we expect a 5%-10% year-on-year drop in
2000. Unlike CMBS, ABS supply should be stronger,
2
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Alliance Mortgage Securities Income Fund
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with growth anticipated at 10%-20%. Agency debenture issuance will also grow,
and we anticipate that it will continue to underperform MBS and CMBS. The
collateralized bond obligation and collateralized loan obligation markets will
continue to mature, and we expect strong supply in these sectors. One wild card
in the market is the degree to which the U.S. Treasury will be active in their
anticipated note and bond buyback program.
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 December 31, 1999
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CLASS A SHARES
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Without With
Sales Charge Sales Charge
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One Year 0.79% -3.49%
Five Years 6.81% 5.89%
Ten Years 7.09% 6.62%
SEC Yield** 7.23%
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CLASS B SHARES
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Without With
Sales Charge Sales Charge
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One Year 0.02% -2.81%
Five Years 6.01% 6.01%
Since Inception*(a) 5.18% 5.18%
SEC Yield** 6.78%
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CLASS C SHARES
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Without With
Sales Charge Sales Charge
===============================
One Year 0.14% -0.81%
Five Years 6.03% 6.03%
Since Inception* 4.05% 4.05%
SEC Yield** 6.81%
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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* Since Inception: 1/30/92 Class B; 5/3/93 Class C.
** SEC Yields are based on SEC guidelines and are calculated on 30 days ended
December 31, 1999.
(a) Assumes conversion of Class B shares into Class A shares after six years.
4
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Alliance Mortgage Securities Income Fund
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Alliance Mortgage Securities Income Fund
Growth of a $10,000 Investment
12/31/89 to 12/31/99
[The following information was depicted in a line graph]
ALLIANCE MORTGAGE SECURITIES INCOME FUND
GROWTH OF A $10,000 INVESTMENT
12/31/89 TO 12/31/99
Lehman Brothers Mortgage-Backed Securities Index: $ 21,146
Lipper U.S. Mortgage Funds Average: $ 19,470
Alliance Mortgage Securities Income Fund Class A: $ 18,991
This chart illustrates the total value of an assumed $10,000 investment in
Alliance Mortgage Securities Income Fund Class A shares (from 12/31/89 to
12/31/99) as compared to the performance of appropriate broad-based indices. The
chart reflects the deduction of the maximum 4.25% sales charge from the initial
$10,000 investment in the Fund and assumes the reinvestment of dividends and
capital gains. Performance for Class B and Class C shares will vary from the
results shown above due to differences in expenses charged to those classes.
Past performance is not indicative of future results, and is not representative
of future gain or loss in capital value or dividend income.
The Lipper U.S. Mortgage Funds Average reflects performance of 14 funds
(based on the number of funds in the average from 12/31/89 to 12/31/99). These
funds have generally similar investment objectives to Alliance Mortgage
Securities Income Fund, although the investment policies of some funds included
in the average may vary.
The Lehman Brothers Mortgage-Backed Securities Index tracks the
performance of bonds backed by mortgage pools of the Government National
Mortgage Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC),
and the Federal National Mortgage Association (FNMA).
When comparing Alliance Mortgage Securities Income Fund to the index and
average shown above, you should note that no charges or expenses are reflected
in the performance of the index. Lipper results include fees and expenses. An
investor cannot invest directly in an index or average.
[GRAPHIC]
5
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PORTFOLIO OF INVESTMENTS
December 31, 1999 Alliance Mortgage Securities Income Fund
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Principal
Amount
(000) Value
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MORTGAGE-RELATED
SECURITIES-116.1%
FEDERAL NATIONAL
MORTGAGE
ASSOCIATION-62.9%
6.00%, 2/01/29 (a) ......... $ 18,065 $ 16,523,912
6.50%, 4/01/11-
10/01/29 (a) ............ 86,964 83,338,918
7.00%, 3/01/28-11/01/29 .... 29,246 28,277,480
7.50%, 12/01/28-12/01/29 ... 88,315 87,321,020
8.00%, 5/01/29-
11/01/29 (a) ............ 58,053 58,524,377
8.50%, 8/01/11 (a)(b) ...... 17,373 17,720,475
9.00%, 8/01/21 (a) ......... 3,110 3,244,856
10.00%, 10/01/14 (a)(b) .... 9,909 10,383,404
11.00%, 7/15/16 ............ 2,626 2,862,191
11.50%, 9/15/20 ............ 1,691 1,851,619
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Total Federal National
Mortgage Association
(cost $316,219,607)......... 310,048,252
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GOVERNMENT NATIONAL
MORTGAGE
ASSOCIATION-18.5%
7.00%, 1/15/23-
8/15/28 (a) ............. 53,767 51,968,760
7.50%, 9/15/28-10/15/29 .... 39,782 39,334,667
9.00%, 12/15/19 ............ 2 2,111
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Total Government National
Mortgage Association
(cost $94,971,546).......... 91,305,538
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FEDERAL HOME LOAN
MORTGAGE CORP.-13.4%
6.50%, 2/01/26-
6/01/29 (a) ............. 44,726 42,167,745
8.00%, 9/01/09 (b) ......... 3,954 4,019,184
9.50%, 9/01/20 ............. 2,751 2,894,977
11.50%, 10/01/10-6/01/20 ... 1,553 1,699,576
12.00%, 8/01/15-
7/01/20 (a) ............. 11,492 12,535,131
12.25%, 8/01/13 ......... 16 17,596
12.50%, 6/01/19 ............ 1,805 2,016,863
13.00%, 5/01/14-12/01/18 ... 628 711,743
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Total Federal Home Loan
Mortgage Corp.
(cost $68,266,535).......... 66,062,815
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COLLATERALIZED
MORTGAGE
OBLIGATIONS-12.0%
Citicorp Mortgage
Securities, Inc.
Series 1987-3 Cl.A1
9.00%, 5/01/17 ............. 6,565 6,630,971
MLCC Mortgage
Investors, Inc.
Series 1995-B Cl.B
6.94%, 11/15/20 (c) ........ 4,544 3,859,958
Series 1996-B Cl.B
6.94%, 10/15/21 (c) ........ 9,871 8,507,445
Morgan Stanley Capital I
Series 1998-XL2 Cl.A2
6.17%, 10/01/35 ............ 21,000 19,218,360
Residential Accredit Loans,
Inc.
Series 1998 Cl.A4
8.00%, 10/25/28 ............ 11,957 11,989,267
Salomon Brothers
Mortgage
Securities Inc.
Series 1999-5
2.80%, 6/25/29 ............. 82,152 4,723,718
Structured Asset
Securitization Corp.
Series 1998-4 Cl.M2
7.22%, 6/25/28 ............. 4,454 4,431,730
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Total Collateralized
Mortgage Obligations
(cost $60,841,079).......... 59,361,449
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6
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Alliance Mortgage Securities Income Fund
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Principal
Amount
(000) Value
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COMMERCIAL MORTGAGE
BACKED SECURITIES-4.7%
Credit Suisse First Boston
Mortgage
Series 1997 Cl.B
7.28%, 6/20/07 ............. $ 10,000 $ 9,709,400
Forum Finance Corp. ...........
5.75%, 5/04/04 ............. 5,000 4,926,950
Sasco Floating Rate
Commercial
Mortgage
6.01%, 10/21/13 ............ 8,498 8,500,245
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Total Commercial Mortgage
Backed Securities
(cost $23,613,377).......... 23,136,595
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STRIPPED MORTGAGE
BACKED SECURITIES-4.6%
Bear Stearns
Series 1997 Cl.2-X I/O
12.35%, 8/25/36 (d)(e) .... 6,081 3,010,481
LB Commercial Conduit
Mortgage Trust
Series 1998-C4 Cl.X I/O
9.52%, 9/15/23 (e) ......... 7,858 6,968,096
Series 1999-C2 Cl.X I/O
9.91%, 10/15/32 (e) ........ 2,632 2,509,802
Mortgage Capital
Funding, Inc.
Series 1996-MC2
Cl.X I/O
8.50%, 12/21/26 (e) ........ 11,494 10,084,791
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Total Stripped Mortgage
Backed Securities
(cost $27,670,689).......... 22,573,170
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Total Mortgage-Related
Securities
(cost $591,582,833)......... 572,487,819
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ASSET BACKED SECURITIES-4.4%
Green Tree Home
Improvement Loan Trust
Series 1998-D Cl.HEA4
6.25%, 8/15/29 ............. 20,000 19,681,200
Option One Mortgage
Securities Corp. ...........
Series 1999-2
9.66%, 6/26/29 (d) ......... 1,893 1,847,588
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Total Asset Backed
Securities
(cost $21,882,077).......... 21,528,788
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CORPORATE
OBLIGATION-4.3%
Beverly Finance
8.36%, 7/15/04 (d)
(cost $22,681,680) ......... 21,000 21,254,100
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U.S. GOVERNMENT
OBLIGATION-3.1%
U.S. Treasury Notes
6.00%, 8/15/09
(cost $15,528,437) ......... 16,000 15,500,000
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REPURCHASE
AGREEMENT-0.4%
Lehman Brothers, Inc. .........
3.70%, dated 12/30/99,
due 1/03/00, collateralized by
$2,875,560 FHLMC,
6.00%, 05/01/03
(amortized cost
$2,000,000) ................ 2,000 2,000,000
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TOTAL INVESTMENTS-128.3%
(cost $653,675,027)......... 632,770,707
Other assets less
liabilities-(28.3%)......... (139,515,321)
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NET ASSETS-100%................ $493,255,386
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7
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PORTFOLIO OF INVESTMENTS (continued) Alliance Mortgage Securities Income Fund
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(a) Securities, or a portion thereof, loaned at December 31, 1999, with an
aggregate market value of $122,978,937 and cash collateral received from
the counterparty of Bear Stearns in the amount of $124,622,000.
(b) 15 year mortgage.
(c) Adjustable rate mortgages; stated interest in effect at December 31, 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 December 31,
1999, these securities amounted to $26,112,169 or 5.3% of net assets.
(e) Interest rate represents annualized yield to maturity on date of purchase
and principal amount represents amortized cost.
Glossary of Terms:
FHLMC - Federal Home Loan Mortgage Corp.
I/O - Interest Only
See notes to financial statements.
8
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STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999 Alliance Mortgage Securities Income Fund
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<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $653,675,027) ...................... $ 632,770,707
Interest receivable .......................................................... 5,101,243
Receivable for capital stock sold ............................................ 3,488,607
Receivable for investment securities sold .................................... 1,987,724
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Total assets ................................................................. 643,348,281
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LIABILITIES
Due to custodian ............................................................. 955,119
Deposit for securities loaned ................................................ 125,095,736
Payable for investment securities purchased .................................. 17,892,622
Payable for capital stock redeemed ........................................ 4,018,880
Dividends payable ............................................................ 954,908
Advisory fee payable ......................................................... 681,560
Distribution fee payable ..................................................... 170,615
Accrued expenses and other liabilities ....................................... 323,455
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Total liabilities ............................................................ 150,092,895
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NET ASSETS ...................................................................... $ 493,255,386
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COMPOSITION OF NET ASSETS
Capital stock, at par ........................................................ $ 610,718
Additional paid-in capital ................................................... 715,649,732
Undistributed net investment income .......................................... 26,366
Accumulated net realized loss on investments, options and futures transactions (202,127,110)
Net unrealized depreciation of investments ................................... (20,904,320)
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$ 493,255,386
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CALCULATION OF MAXIMUM OFFERING PRICE
Class A Shares
Net asset value and redemption price per share
($429,626,767 / 53,201,898 shares of capital stock issued and outstanding) ..... $ 8.08
Sales charge--4.25% of public offering price ...................................... .36
------
Maximum offering price ............................................................ $ 8.44
======
Class B Shares
Net asset value and offering price per share
($44,409,656 / 5,493,965 shares of capital stock issued and outstanding) ....... $ 8.08
======
Class C Shares
Net asset value and offering price per share
($19,218,963 / 2,375,980 shares of capital stock issued and outstanding) ....... $ 8.09
======
</TABLE>
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See notes to financial statements.
9
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STATEMENT OF OPERATIONS
Year Ended December 31, 1999 Alliance Mortgage Securities Income Fund
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<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest ................................................. $47,609,995
EXPENSES
Advisory fee ............................................. $ 2,985,322
Distribution fee - Class A ............................... 1,376,150
Distribution fee - Class B ............................... 836,620
Distribution fee - Class C ............................... 214,620
Transfer agency .......................................... 1,052,765
Custodian ................................................ 292,249
Printing ................................................. 184,914
Administrative ........................................... 140,731
Audit and legal .......................................... 122,284
Registration ............................................. 52,050
Directors' fees .......................................... 29,476
Miscellaneous ............................................ 23,359
-----------
Total expenses before interest ........................... 7,310,540
Interest expense ......................................... 4,296,419
-----------
Total expenses ........................................... 11,606,959
-----------
Net investment income .................................... 36,003,036
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investment transactions ............. (15,917,100)
Net realized loss on options transactions ................ (160,626)
Net realized gain on futures transactions ................ 299,860
Net change in unrealized depreciation of:
Investments ............................................ (16,868,294)
Futures transactions ................................... (39,812)
-----------
Net loss on investments .................................. (32,685,972)
-----------
NET INCREASE IN NET ASSETS FROM OPERATIONS .................. $ 3,317,064
===========
</TABLE>
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See notes to financial statements.
10
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS Alliance Mortgage Securities Income Fund
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income .............................................. $ 36,003,036 $ 38,364,402
Net realized gain (loss) on investment, options, and futures
transactions .................................................... (15,777,866) 9,950,849
Net change in unrealized depreciation of investments and futures
transactions ................................................. (16,908,106) (12,082,332)
------------- -------------
Net increase in net assets from operations ......................... 3,317,064 36,232,919
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A ......................................................... (30,117,241) (24,150,391)
Class B ......................................................... (4,750,787) (12,817,547)
Class C ......................................................... (1,227,538) (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 ....................................................... (94,323,536) (98,968,113)
------------- -------------
Total decrease ..................................................... (127,102,038) (103,911,257)
NET ASSETS
Beginning of year .................................................. 620,357,424 724,268,681
------------- -------------
End of year (including undistributed net investment income of
$26,366) for the year ended December 31, 1999 ................... $ 493,255,386 $ 620,357,424
============= =============
</TABLE>
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See notes to financial statements.
11
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STATEMENT OF CASH FLOWS
Year Ended December 31, 1999 Alliance Mortgage Securities Income Fund
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<TABLE>
INCREASE (DECREASE) IN CASH FROM
OPERATING ACTIVITIES:
<S> <C> <C>
Interest received ............................................ $47,063,978
Interest expense paid ........................................ (4,296,419)
Operating expenses paid ...................................... (7,368,094)
-------------
Net increase in cash from operating activities ............... $35,399,465
INVESTING ACTIVITIES:
Proceeds from disposition of long-term portfolio investments.. 1,631,619,338
Purchase of long-term portfolio investments .................. (1,642,004,645)
Sales of short-term portfolio investments, net ............... 11,928,374
Gain on closed futures contracts ............................. 299,860
-------------
Net increase in cash from investing activities ............... 1,842,927
FINANCING ACTIVITIES*:
Decrease in securities lending ............................... 91,964,165
Redemptions of capital stock, net ............................ (113,351,902)
Cash dividends paid .......................................... (16,814,855)
Cash overdraft ............................................... 955,119
-------------
Net decrease in cash from financing activities ............... (37,247,473)
------------
Net decrease in cash ......................................... (5,081)
Cash at beginning of year .................................... 5,081
------------
Cash at end of year .......................................... $ -0-
============
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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 ......... $ 3,317,064
ADJUSTMENTS:
Increase in interest receivable .............................. $ (307,641)
Net realized loss on investment transactions ................. 15,777,866
Net change in unrealized depreciation ........................ 16,908,106
Accretion of bond discount ................................ (238,376)
Decrease in accrued expenses ................................. (57,554)
-------------
Total adjustments ............................................ 32,082,401
------------
Net increase in cash from operating activities ............... $35,399,465
============
</TABLE>
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* Non-cash financing activities not included herein consist of reinvestment
of dividends.
See notes to financial statements.
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1999 Alliance Mortgage Securities Income Fund
================================================================================
NOTE A: Significant Accounting Policies
Alliance Mortgage Securities Income Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The Fund offers Class A, Class B and Class C shares. Class A
shares are sold with a front-end sales charge of up to 4.25% for purchases not
exceeding $1,000,000. With respect to purchases of $1,000,000 or more, Class A
shares redeemed within one year of purchase may be subject to a contingent
deferred sales charge of 1%. Class B shares are currently sold with a contingent
deferred sales charge which declines from 3% to zero depending on the period of
time the shares are held. Class B shares will automatically convert to Class A
shares six years after the end of the calendar month of purchase. Class C shares
are subject to a contingent deferred sales charge of 1% on redemptions made
within the first year after purchase. All three classes of shares have identical
voting, dividend, liquidation and other rights, except that each class bears
different distribution expenses and has exclusive voting rights with respect to
its distribution plan. The financial statements have been prepared in conformity
with generally accepted accounting principles which require management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and amounts of income and expenses
during the reporting period. Actual results could differ from those estimates.
The following is a summary of significant accounting policies followed by the
Fund.
1. Security Valuation
Portfolio securities traded on a national securities exchange are generally
valued at the last sale price on such exchange on the day of valuation or, if
there was no sale on such day, the last bid price quoted on such day. If no bid
prices are quoted, then the security is valued at the mean of the bid and asked
prices as obtained on that day from one or more dealers regularly making a
market in that security. Securities traded on the over-the-counter market are
valued at the mean of the closing bid and asked prices provided by two or more
dealers regularly making a market in such securities. U.S. government securities
and other debt securities which mature in 60 days or less are valued at
amortized cost unless this method does not represent fair value. Securities for
which market quotations are not readily available are valued at fair value as
determined in good faith by, or in accordance with procedures approved by, the
Board of Directors. Fixed income securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities. 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.
2. Taxes
It is the Fund's policy to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its
investment company taxable income and net realized gains, if any, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
3. Investment Income and Investment Transactions
Interest income is accrued daily. Investment transactions are accounted for on
the date securities are purchased or sold. The Fund amortizes premium and
accretes discounts as adjustments to interest income. Investment gains and
losses are determined on the identified cost basis.
4. Income and Expenses
All income earned and expenses incurred by the Fund are borne on a pro-rata
basis by each settled class of shares, based on the proportionate interest in
the Fund represented by the net assets of such class, except that the Fund's
Class B and Class C shares bear higher distribution and transfer agent fees than
Class A shares.
5. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income dividends and capital gains distributions are determined in
accordance with federal tax regulations and may differ from those determined in
accordance with generally accepted accounting principles. To the extent these
differences are permanent, such amounts are reclassified within the capital
accounts based on their federal tax basis treatment; temporary differences do
not require such reclassification. During the
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.) Alliance Mortgage Securities Income Fund
================================================================================
current fiscal year, permanent differences, primarily due to tax
reclassification of paydown losses, resulted in a net increase in undistributed
net investment income and a corresponding increase in accumulated net realized
losses on investments, options and futures transactions. This reclassification
had no effect on net assets.
- --------------------------------------------------------------------------------
NOTE B: Advisory Fee and Other Transactions with Affiliates
Under the terms of an investment advisory agreement, the Fund pays Alliance
Capital Management L.P. (the "Adviser") an advisory fee at a quarterly rate
equal to .1375 of 1% (approximately .55 of 1% on an annual basis) of the first
$500 million of the Fund's net assets and .125 of 1% (approximately .50 of 1% on
an annual basis) of its net assets over $500 million, valued on the last
business day of the previous quarter. The Adviser has agreed to reimburse the
Fund to the extent that its aggregate expenses (exclusive of interest, taxes,
brokerage, distribution fees, and extraordinary expenses) in any year exceed 1%
of its average daily net assets for such year. No such reimbursement was
required for the year ended December 31, 1999.
Pursuant to the advisory agreement, the Fund paid $140,731 to the Adviser
representing the cost of certain legal and accounting services provided to the
Fund by the Adviser for the year ended December 31, 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 $741,640 for the year ended December 31, 1999.
For the year ended December 31, 1999, the Fund's expenses were reduced by
$52,980 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 front-end sales charges of $11,561
from the sales of Class A shares and $1,428, $43,654 and $6,792 in contingent
deferred sales charges imposed upon redemptions by shareholders of Class A,
Class B and Class C shares, respectively, for the year ended December 31, 1999.
Brokerage commissions paid on investment transactions for the year ended
December 31, 1999 amounted to $6,570, none of which was paid to brokers
utilizing the services of the Pershing Division of Donaldson, Lufkin & Jenrette
Securities Corp. ("DLJ"), an affiliate of the adviser, nor to DLJ directly.
- --------------------------------------------------------------------------------
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 $9,119,504 and
$3,207,862 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 $148,756,412 and $61,662,657,
respectively, for the year ended December 31, 1999. There were purchases of
$1,364,832,347 and sales of $1,452,892,339 of
14
<PAGE>
Alliance Mortgage Securities Income Fund
================================================================================
U.S. government and government agency obligations for the year ended December
31, 1999.
At December 31, 1999, the cost of investments for federal income tax purposes
was $653,732,146. Accordingly, gross unrealized appreciation of investments was
$695,860 and gross unrealized depreciation of investments was $21,657,299
resulting in net unrealized depreciation of $20,961,439.
For federal income tax purposes, the Fund had a capital loss carryforward at
December 31, 1999 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.
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 December 31, 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 December 31, 1999.
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
premium 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
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.) Alliance Mortgage Securities Income Fund
================================================================================
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 year ended December 31, 1999 were as
follows:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
============ ==========
<S> <C> <C>
Options oustanding at beginning of year................... -0- $ -0-
Options written........................................... 171 233,843
Options terminated in closing purchase transactions....... (171) (233,843)
---- --------
Options outstanding at December 31, 1999.................. -0- $ -0-
==== ========
</TABLE>
- --------------------------------------------------------------------------------
NOTE E: Capital Stock
There are 1,800,000,000 shares of $.01 par value capital stock authorized,
divided into three classes, designated Class A, Class B and Class C shares.
Each class consists of 600,000,000 authorized shares. Transactions in capital
stock were as follows:
<TABLE>
<CAPTION>
----------------------------------------- -----------------------------------------
SHARES AMOUNT
----------------------------------------- -----------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
=================== =================== =================== ===================
<S> <C> <C> <C> <C>
Class A
Shares sold .................... 13,519,603 6,135,759 $ 113,288,362 $ 52,962,095
Shares issued in reinvestment of
dividends and distributions . 1,794,846 1,659,539 14,896,816 14,298,768
Shares converted from Class B .. 7,547,577 16,276,489 62,867,029 140,421,587
Shares redeemed ................ (24,560,559) (12,357,705) (204,443,082) (106,540,434)
----------------- ----------------- ----------------- -----------------
Net increase (decrease) ........ (1,698,533) 11,714,082 $ (13,390,875) $ 101,142,016
================= ================= ================= =================
Class B
Shares sold .................... 946,406 1,129,782 $ 7,898,909 $ 9,742,600
Shares issued in reinvestment of
dividends and distributions . 316,833 847,302 2,639,932 7,308,487
Shares converted to Class A .... (7,545,598) (16,274,788) (62,867,029) (140,421,587)
Shares redeemed ................ (3,045,799) (8,433,020) (25,322,308) (72,791,687)
----------------- ----------------- ----------------- -----------------
Net decrease ................... (9,328,158) (22,730,724) $ (77,650,496) $ (196,162,187)
================= ================= ================= =================
</TABLE>
16
<PAGE>
Alliance Mortgage Securities Income Fund
================================================================================
<TABLE>
<CAPTION>
----------------------------------------- -----------------------------------------
SHARES AMOUNT
----------------------------------------- -----------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, 1999 December 31, 1998 December 31, 1999 December 31, 1998
=================== =================== =================== ===================
<S> <C> <C> <C> <C>
Class C
Shares sold .................... 327,458 493,383 $ 2,726,308 $ 4,254,625
Shares issued in reinvestment of
dividends and distributions . 100,759 119,962 837,243 1,034,204
Shares redeemed ................ (823,583) (1,071,818) (6,845,716) (9,236,771)
----------------- ----------------- ----------------- -----------------
Net decrease ................... (395,366) (458,473) $ (3,282,165) $ (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 year ended December 31, 1999, the maximum amount of security lending
agreements outstanding was $178,651,000, the average amount outstanding was
approximately $82,163,048 and the daily weighted average interest rate was
5.16%.
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 December 31, 1999, the Fund had entered into the following security
lending agreement:
Amount Counterparty Interest Rate Maturity
============== ============== =============== ================
$124,622,000 Bear Stearns 5.95% January 11, 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 year ended December 31, 1999.
17
<PAGE>
FINANCIAL HIGHLIGHTS Alliance Mortgage Securities Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
----------------------------------------------------------------
CLASS A
----------------------------------------------------------------
Year Ended December 31,
================================================================
1999 1998 1997 1996 1995
========== ========== =========== ========== ===========
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ..................... $ 8.56 $ 8.63 $ 8.51 $ 8.75 $ 8.13
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income (a) .............................. .55 .52 .54 .54 .57
Net realized and unrealized gain (loss) on
investments futures transactions .................... (.49) (.03) (.15) (.19) .64
-------- -------- -------- -------- --------
Net increase in net asset value from operations ........ .06 .49 .69 .35 1.21
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income ................ (.54) (.52) (.54) (.51) (.57)
Distributions in excess of net investment income ....... -0- (.04) (.03) -0- -0-
Tax return of capital .................................. -0- -0- -0- (.08) (.02)
-------- -------- -------- -------- --------
Total dividends and distributions ...................... (.54) (.56) (.57) (.59) (.59)
-------- -------- -------- -------- --------
Net asset value, end of year ........................... $ 8.08 $ 8.56 $ 8.63 $ 8.51 $ 8.75
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (b) ... .79% 5.82% 8.40% 4.23% 15.34%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) ................ $429,627 $469,750 $372,494 $412,899 $502,390
Ratio of expenses to average net assets ................ 1.93% 1.99% 1.41% 1.68% 1.66%
Ratio of expenses to average net assets excluding
interest expense ....................................... 1.16% 1.14% 1.07% 1.03% 1.03%
Ratio of net investment income to average net assets ... 6.54% 6.06% 6.30% 6.38% 6.77%
Portfolio turnover rate ................................ 229% 202% 184% 208% 285%
</TABLE>
- --------------------------------------------------------------------------------
See footnotes page 20.
18
<PAGE>
Alliance Mortgage Securities Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
----------------------------------------------------------------
CLASS B
----------------------------------------------------------------
Year Ended December 31,
================================================================
1999 1998 1997 1996 1995
========== ========== =========== ========== ===========
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ...................... $ 8.56 $ 8.63 $ 8.51 $ 8.75 $ 8.13
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income (a) ............................... .46 .45 .48 .48 .51
Net realized and unrealized gain (loss) on investments
and futures transactions ............................. (.46) (.02) (.15) (.19) .64
-------- -------- -------- -------- --------
Net increase in net asset value from operations ......... -0- .43 .63 .29 1.15
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income .................... (.48) (.45) (.48) (.46) (.51)
Distributions in excess of net investment income ........ -0- (.05) (.03) -0- -0-
Tax return of capital ................................... -0- -0- -0- (.07) (.02)
-------- -------- -------- -------- --------
Total dividends and distributions ....................... (.48) (.50) (.51) (.53) (.53)
-------- -------- -------- -------- --------
Net asset value, end of year ............................ $ 8.08 $ 8.56 $ 8.63 $ 8.51 $ 8.75
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (b) .... .02% 5.04% 7.60% 3.46% 14.48%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) ................. $ 44,410 $126,879 $323,916 $477,196 $737,593
Ratio of expenses to average net assets ................. 2.59% 2.68% 2.14% 2.37% 2.37%
Ratio of expenses to average net assets excluding
interest expense ..................................... 1.89% 1.85% 1.78% 1.74% 1.74%
Ratio of net investment income to average net assets .... 5.68% 5.33% 5.60% 5.66% 6.06%
Portfolio turnover rate ................................. 229% 202% 184% 208% 285%
</TABLE>
- --------------------------------------------------------------------------------
See footnotes page 20.
19
<PAGE>
FINANCIAL HIGHLIGHTS (Continued) Alliance Mortgage Securities Income Fund
================================================================================
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
----------------------------------------------------------------
CLASS C
----------------------------------------------------------------
Year Ended December 31,
================================================================
1999 1998 1997 1996 1995
========== ========== =========== ========== ===========
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ...................... $ 8.56 $ 8.63 $ 8.51 $ 8.75 $ 8.13
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income (a) ............................... .48 .46 .48 .48 .51
Net realized and unrealized gain (loss) on investments
and futures transactions ................................ (.47) (.03) .15 (.19) .64
-------- -------- -------- -------- --------
Net increase in net asset value from operations ......... .01 .43 .63 .29 1.15
-------- -------- -------- -------- --------
Less: Dividends and Distributions
Dividends from net investment income .................... (.48) (.46) (.48) (.46) (.51)
Distributions in excess of net investment income ........ -0- (.04) (.03) -0- -0-
Tax return of capital ................................... -0- -0- -0- (.07) (.02)
-------- -------- -------- -------- --------
Total dividends and distributions ....................... (.48) (.50) (.51) (.53) (.53)
-------- -------- -------- -------- --------
Net asset value, end of year ............................ $ 8.09 $ 8.56 $ 8.63 $ 8.51 $ 8.75
======== ======== ======== ======== ========
Total Return
Total investment return based on net asset value (b) .... .14% 5.04% 7.60% 3.46% 14.46%
Ratios/Supplemental Data
Net assets, end of year (000's omitted) ................. $ 19,219 $ 23,728 $ 27,859 $ 35,355 $ 45,558
Ratio of expenses to average net assets ................. 2.64% 2.69% 2.12% 2.38% 2.35%
Ratio of expenses to average net assets excluding
interest expense ........................................ 1.87% 1.84% 1.77% 1.73% 1.73%
Ratio of net investment income to average net assets .... 5.80% 5.35% 5.61% 5.67% 6.07%
Portfolio turnover rate ................................. 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.
20
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS Alliance Mortgage Securities Income Fund
================================================================================
To the Shareholders and Board of Directors
Alliance Mortgage Securities Income Fund, Inc.
We have audited the accompanying statement of assets and liabilities of Alliance
Mortgage Securities Income Fund, Inc. (the "Fund"), including the portfolio of
investments, as of December 31, 1999, and the related statements of operations
and cash flows for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended and the financial highlights
for each of the periods indicated therein. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1999, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Alliance Mortgage Securities Income Fund, Inc. at December 31, 1999, the results
of its operations and its cash flows for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the financial
highlights for each of the indicated periods, in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
New York, New York
February 22, 2000
21
<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 Audit Committee.
22
<PAGE>
THE ALLIANCE FAMILY OF MUTUAL FUNDS
================================================================================
Fixed Income
Alliance Bond Fund
U.S. Government Portfolio
Corporate Bond Portfolio
Quality Bond Portfolio
Alliance Global Dollar
Government Fund
Alliance Global Strategic Income
Trust
Alliance High Yield Fund
Alliance Limited Maturity
Government Fund
Alliance Mortgage Securities
Income Fund
Alliance Multi-Market Strategy Trust
Alliance North American
Government Income Trust
Alliance Short-Term U.S.
Government Fund
Tax-Free Income
Alliance Municipal Income Fund
California Portfolio
Insured California Portfolio
Insured National Portfolio
National Portfolio
New York Portfolio
Alliance Municipal Income Fund II
Arizona Portfolio
Florida Portfolio
Massachusetts Portfolio
Michigan Portfolio
Minnesota Portfolio
New Jersey Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Virginia Portfolio
Money Market
AFD Exchange Reserves
Growth
The Alliance Fund
Alliance Global Environment Fund
Alliance Growth Fund
Alliance Premier Growth Fund
Select Investors Series - Premier
Portfolio
Growth & Income
Alliance Balanced Shares
Alliance Conservative Investors Fund
Alliance Growth & Income Fund
Alliance Growth Investors Fund
Alliance Real Estate Investment Fund
Alliance Utility Income Fund
Aggressive Growth
Alliance Global Small Cap Fund
Alliance Health Care Fund
Alliance Quasar Fund
Alliance Technology Fund
International
Alliance All-Asia Investment Fund
Alliance Greater China '97 Fund
Alliance International Fund
Alliance International Premier
Growth Fund
Alliance New Europe Fund
Alliance Worldwide Privatization
Fund
Institutional
Premier Growth
Quasar
Real Estate Investment
Closed-End Funds
Alliance All-Market Advantage Fund
ACM Government Income Fund
ACM Government Opportunity Fund
ACM Government Securities Fund
ACM Government Spectrum Fund
ACM Managed Dollar Income Fund
ACM Managed Income Fund
ACM Municipal Securities Income
Fund
Alliance World Dollar Government Fund
Alliance World Dollar Government
Fund II
The Austria Fund
The Korean Investment Fund
The Spain Fund
The Southern Africa Fund
Cash Management Services
Alliance Capital Reserves
Alliance Government Reserves
Alliance Institutional Reserves
Prime Portfolio
Government Portfolio
Tax-Free Portfolio
Treasury Portfolio
Trust Portfolio
Alliance Insured Account
Alliance Money Reserves
Alliance Municipal Trust
California Portfolio
Connecticut Portfolio
Florida Portfolio
General Portfolio
Massachusetts Portfolio
New Jersey Portfolio
New York Portfolio
Virginia Portfolio
Alliance Treasury Reserves
Alliance Money Market Fund
Prime Portfolio
General Municipal Portfolio
Government Portfolio
23
<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.
MORAR1299
