LETTER TO SHAREHOLDERS Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
January 5, 1995
Dear Shareholder:
For the twelve months ended November 30, 1994, Alliance Mortgage Strategy
Trust provided good relative performance for its shareholders versus the
average of its Lipper universe and the benchmark Merrill Lynch 1-3 Year U.S.
Treasury Index. Total returns for the period were +1.03% (Class A) and
+0.42% (Class B and Class C), based on the net asset value. This compares
with returns of +0.71% for the unmanaged Merrill Lynch 1-3 Year U.S. Treasury
Index and -1.18% for the Lipper Adjustable Rate Mortgage Funds average over
the same period. For the six-month period since we last reported, your Fund
returned +0.69% (Class A) and +0.43% (Class B and Class C) versus +1.06% for
the Index and -0.83% for the Lipper average. Additional investment results
appear on page 3.
We are pleased to announce that effective January 1, 1995, the dividend rate
for Alliance Mortgage Strategy Trust was increased. New per-share monthly
dividend rates are $.0448 (Class A), $.0392 (Class B) and $.0393 (Class C).
HIGHER INTEREST RATES IMPACT MORTGAGE MARKET
Rising interest rates have been the principal factor influencing the
performance of mortgages and other fixed-income securities over the past
twelve months. Throughout the year, the Federal Reserve has tightened
monetary policy to reflect its view that inflation is a serious concern. By
the end of November, the Federal Reserve had raised short-term interest rates
six times in an attempt to slow U.S. economic expansion and quell
inflationary pressures. During the twelve-month period ended November 30,
two-year U.S. Treasury yields rose from 4.22% to 7.40% and ten-year U.S.
Treasury yields rose from 5.82% to 7.91%.
While rising interest rates have put downward pressure on prices, the lack of
mortgage supply and the recent decline in interest rate volatility have had a
favorable impact on performance in the mortgage sector. Within the mortgage
market, relative performance has been largely driven by duration (price
sensitivity to changes in interest rates) and the probability that
prepayments will continue to slow down as a result of higher interest rates.
PORTFOLIO ALLOCATION
Over the past six months we have significantly altered the allocation of the
Fund's assets in an effort to protect the portfolio from increases in
interest rates. Most notably we increased asset-backed securities to 39% of
the portfolio from 5% and CMT (Constant Maturity Treasury) ARMs to 30% from
3%. In addition, the percentage of assets allocated to LIBOR ARMs was
increased to 20% from 14%. These positions reflect our view that there is
considerable value in the ARM sector and that ARMs will outperform comparable
Treasury securities even in an environment of higher short-term rates. As a
result of these increases, cash and Treasury positions were largely reduced.
INVESTMENT OUTLOOK
We are forecasting a healthy but less robust U.S. economy in 1995. Our
estimate for annual GDP growth is 2.5%, with inflation, as measured by the
Consumer Price Index, to crest at 4.0% during the second half of 1995. The
Federal Reserve has repeatedly shown its willingness to raise short-term
interest rates to combat inflationary pressures and expectations. The
Federal Reserve's objective is to bring the rate of economic expansion down
to non-inflationary levels, generally estimated to be GDP growth of 2.5%.
In this economic environment, mortgage assets should continue to perform well
compared with Treasury securities. Prepayments should decline over the next
several months due to seasonal declines and the impact of higher mortgage
rates. Origination activity for both refinancings and purchases should
decline, further reducing the available supply of mortgages. Combined with
lower volatility, all these factors brighten our 1995 outlook for the
mortgage market.
1
<PAGE>
Alliance Mortgage Strategy Trust
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Alliance Mortgage Strategy Trust outperformed its benchmark over the past
twelve months by investing in securities of the highest quality and with
superior total return potential. As economic and market conditions change in
1995, we believe that this investment strategy should continue to benefit
shareholders.
We appreciate your investment in Alliance Mortgage Strategy Trust and look
forward to reporting its progress to you later in the year.
Sincerely,
[SIGNATURE]
John D. Carifa
Chairman and President
[SIGNATURE]
Patricia J. Young
Senior Vice President
[SIGNATURE]
Paul A. Ullman
Senior Vice President
2
<PAGE>
INVESTMENT RESULTS Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
Average Annual Total Return as of November 30, 1994
<TABLE>
<CAPTION>
CLASS A SHARES
Without With
Sales Charge Sales Charge
<S> <C> <C>
* One Year +1.03% -3.26%
* Since Inception* +3.93 +2.15
* SEC Yield 4.72%
</TABLE>
<TABLE>
<CAPTION>
CLASS B SHARES
Without With
Sales Charge Sales Charge
<S> <C> <C>
* One Year +0.42% -2.46%
* Since Inception* +3.24 +2.88
* SEC Yield 4.22%
</TABLE>
<TABLE>
<CAPTION>
CLASS C SHARES
<S> <C>
* One Year +0.42%
* Since Inception* +1.77%
* SEC Yield 4.22%
</TABLE>
The average annual total returns reflect investment of dividends and/or
capital gains distributions in additional shares--with and without the effect
of the 4.25% maximum sales charge (Class A) or 3% contingent deferred sales
charge (Class B); Class C shares are not subject to front-end or contingent
deferred sales charges. 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.
Yields are for the 30 days ended November 30, 1994.
- -------------------------------------------------------------------------------
*Inception: 6/1/92, Class A and Class B; 4/30/93, Class C.
3
<PAGE>
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
ALLIANCE MORTGAGE STRATEGY TRUST
$10,000 INVESTMENT OVER LIFE OF FUND:
6/1/92 TO 11/30/94
[TABULAR REPRESENTATION OF MOUNTAIN CHART]
<TABLE>
<CAPTION>
5/31/92 9/30/92 12/31/92 3/31/93 6/30/93 9/30/93 12/31/93 3/31/94 6/30/94 9/30/94 11/30/94
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage Strategy Trust
Class A: 10,000 9,760 9,850 10,080 10,280 10,410 10,460 10,510 10,470 10,560 10,540
ML 1-3 Year Treasury 10,000 10,594 10,613 10,625 10,859 10,976 11,134 11,200 11,211 11,155 11,164
Lipper Adjustable Rate
Mortgage Average 10,000 10,009 10,067 10,227 10,316 10,460 10,487 10,557 10,445 10,485 10,306
</TABLE>
This chart illustrates the total value of an assumed investment in Alliance
Mortgage Strategy Trust Class A shares (since inception) after deducting the
maximum 4.25% sales charge, and with dividends and capital gains reinvested.
Performance for Class B and Class C shares will vary from the results shown
above due to differences in expenses charged to those classes. Results should
not be considered representative of future gain or loss in capital value or
dividend income.
The Merrill Lynch 1-3 Year Treasury Bond Index is composed of U.s. Treasury
securities with maturities between one and three years.
The Lipper Adjustable Rate Mortgage Funds Average reflects performance of
69 funds. These funds have generally similar investment objectives to Alliance
Mortgage Strategy Trust, although some funds in the index may have somewhat
different investment policies.
When comparing Alliance Mortgage Strategy Trust to the index shown above,
you should note that the Fund's performance reflects the maximum sales charge of
4.25% while no such charges are reflected in the performance of the index.
Alliance Mortgage Strategy Trust
ML 1-3 Year Treasury
Lipper Adjustable Rate Mortgage Average
4
<PAGE>
PORTFOLIO OF INVESTMENTS
November 30, 1994 Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Value
<S> <C> <C>
MORTGAGE-RELATED SECURITIES-81.3%
COLLATERALIZED MORTGAGE
OBLIGATIONS-36.0%
ADJUSTABLE RATE-23.2%
Donaldson, Lufkin & Jenrette
Series 1993-20 A1
6.23%, 11/25/23 ............... 7,836 $ 7,744,980
Series 1994-QE1 A1
6.45%, 4/25/24 ................ 14,683 14,573,096
Guardian Savings & Loan
Assn. Series 1990-3
6.820%, 3/01/20 ............... 7,251 6,872,898
Resolution Trust Corp.
Series 1992-CHF A-2
6.65%, 12/25/20 ............... 27,342 27,590,508
Series 1992-5 A-4
9.24%, 5/25/26 ................ 17,621 17,797,210
------------
74,578,692
------------
FIXED RATE-12.8%
American Southwest Financial
Corp. Series 56C
8.25%, 4/25/16 ................ $ 5,371 5,360,116
Chase Mortgage Finance Corp.
Series 1993-D2 2A4
7.75%, 3/25/25 ................ 2,394 2,348,956
Federal Home Loan Mortgage Corp.
Series 1108 H
8.00%, 4/15/05+ ................ 10,530 10,509,939
Series 1016-Y
9.35%, 11/15/20+ ............... 7,475 7,605,684
Federal National Mortgage
Association
Series 1992-28A
6.25%, 12/25/16+ ............... 5,552 5,468,983
Series 1991-27J
8.20%, 4/25/01+ ................ 8,742 8,721,339
Residential Funding Corp.
Series 1993-S14
7.50%, 4/25/23 ................ 1,185 1,175,281
------------
41,190,298
------------
Total Collateralized Mortgage
Obligations (cost $118,638,250) 115,768,990
------------
FEDERAL HOME LOAN
MORTGAGE CORP-23.5%
5.31%, 8/01/24* ............... $ 2,123 $ 2,059,487
5.44%, 7/01/24* ............... 2,602 2,550,351
5.47%, 9/01/24* ............... 1,827 1,790,463
5.50%, (d)* ................... 10,000 9,863,000
5.50%, 7/01/24-9/01/24* ....... 1,547 1,516,395
5.55%, 9/01/24* ............... 3,354 3,282,681
5.58%, 9/01/24* ............... 538 527,050
5.63%, 9/01/24* ............... 3,759 3,663,718
5.64%, 8/01/24-10/01/24* ...... 517 506,699
5.65%, 10/26/24* .............. 15,008 14,803,762
5.67%, 4/01/22*+ ............... 14,147 14,090,622
5.68%, 8/01/24* ............... 4,714 4,675,484
5.70%, 9/01/24-11/01/24* ...... 1,489 1,459,485
5.76%, 9/01/24* ............... 829 811,974
5.94%, 10/01/24* .............. 1,675 1,649,928
5.98%,10/01/24* ............... 5,853 5,786,682
6.02%, 9/01/24* ............... 1,835 1,814,038
6.11%, 10/01/24* .............. 1,637 1,620,630
11.00%, 1/01/11-9/01/20 ....... 3,045 3,220,636
------------
Total Federal Home Loan
Mortgage Corp.
(cost $77,592,724) ............ 75,693,085
------------
FEDERAL NATIONAL
MORTGAGE ASSOCIATION-21.0%
5.50%, (d) .................... 16,000 15,640,000
5.55%, (d) .................... 8,000 7,830,000
5.70%, (d) .................... 7,000 6,860,000
5.71%, 10/01/24*+ .............. 6,480 6,399,375
5.75%, 9/01/24*+ ............... 14,827 14,705,333
5.75%, (d) .................... 6,000 5,887,500
5.86%, (d) .................... 7,000 6,860,000
7.50%, 4/01/08(c)* ............ 2 1,708
11.25%, 2/01/16 ............... 2,495 2,663,837
14.00%, 9/01/14 ............... 551 626,374
------------
Total Federal National
Mortgage Association
(cost $68,290,344) ............ 67,474,127
------------
</TABLE>
5
<PAGE>
PORTFOLIO OF INVESTMENTS (continued)
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Value
<S> <C> <C>
GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION-0.8%
6.75%, 5/20/23* ............... $ 72 $ 71,768
11.25%, 7/15/13-1/15/16 (GPM) 1,625 1,738,551
11.50%, 4/15/13 ............... 78 84,139
11.50%, 2/15/13-6/15/13 (GPM) . 536 579,702
11.75%, 1/20/16 (GPM) ......... 62 66,603
------------
Total Government National
Mortgage Association
(cost $2,614,300) ............. 2,540,763
------------
Total Mortgage-Related
Securities
(cost $267,135,618) ........... 261,476,965
--------------
ASSET BACKED SECURITIES-44.5%
Choice Credit Card
Master Trust Ser. 1992-2A
6.11%, 4/15/99 ................ 31,700 31,814,120
ITT Floorplan Receivables
Master Trust Ser. 1994-1A
5.58%, 2/15/01 ................ 27,000 26,983,800
Lehman Home Equity
Loan Trust Ser. 1994-2
5.79%, 6/15/24 ................ 23,218 23,185,407
LINCS Series 1994-2
7.29%, 8/10/95 ................ 25,000 24,937,500
MBNA Master Credit
Card Trust Ser. 1994-CA
5.62%, 3/15/04 ................ 18,000 17,987,400
World Omni Wholesale
Master Trust Ser. 1994-1-A
5.825%, 10/25/01 .............. $18,250 $ 18,242,700
------------
Total Asset Backed Securities
(cost $143,322,990) ........... 143,150,927
------------
FEDERAL AGENCY
SECURITIES-3.6%
Small Business
Administration-3.6%
RMO-F06 (I/O)
10.00%, 12/25/18*(a)(b) ....... 3,408 4,178,468
RMO-F07 (I/O)
10.00%, 12/25/18*(a)(b) ....... 4,725 4,223,214
RMO-F08 (I/O)
10.00%, 12/25/18*(a)(b) ....... 4,793 3,073,637
------------
Total Federal Agency
Securities
(cost $12,925,551) ............ 11,475,319
------------
COMMERCIAL PAPER-7.7%
Bankers Trust Co.
Peso Linked
zero coupon, 1/05/95
(cost $24,812,794) ............ 25,000 24,807,500
------------
TOTAL INVESTMENTS-137.1%
(cost $448,196,953) ........... 440,910,711
Other assets less liabilities-
(37.1)% (119,441,858)
------------
NET ASSETS-100% ............... $ 321,468,853
=============
</TABLE>
* Adjustable rate mortgages stated interest rate in effect at November 30,
1994.
+ Securities segregated to collateralize reverse repurchase agreements
with an aggregate market value of approximately $67,500,000.
(a) Illiquid security, valued at fair value (see Notes A&E).
(b) Interest rate represents yield to maturity.
(c) 15 year mortgage.
(d) Securities to be announced at a future date.
Glossary of terms:
GPM - Graduated payment mortgage.
I/O - Interest only.
LINCS - Linked certificates.
See notes to financial statements.
6
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994 Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments in securities, at value (cost $448,196,953) $440,910,711
Cash .................................................. 2,049,985
Interest receivable ................................... 2,295,172
Receivable for investment securities sold ............. 1,037,697
Receivable for capital stock sold ..................... 445,601
Deferred organization expenses ........................ 152,110
Other assets .......................................... 12,022
------------
Total assets .......................................... 446,903,298
------------
LIABILITIES
Reverse repuchase agreement ........................... 65,866,000
Payable for investment securities purchased ........... 53,202,656
Payable for capital stock redeemed .................... 5,017,971
Dividends payable ..................................... 688,812
Distribution fee payable .............................. 251,362
Advisory fee payable .................................. 181,943
Accrued expenses ...................................... 225,701
------------
Total liabilities ..................................... 125,434,445
------------
NET ASSETS .............................................. $321,468,853
============
COMPOSITION OF NET ASSETS
Capital stock, at par ................................. $ 33,783
Additional paid-in capital ............................ 341,656,226
Distributions in excess of net investment income ...... (674,950)
Accumulated net realized loss ......................... (12,259,964)
Net unrealized depreciation of investments ............ (7,286,242)
------------
$321,468,853
============
CALCULATION OF MAXIMUM OFFERING PRICE
Class A Shares
Net asset value and redemption price per share
($43,172,980/4,538,655 shares of capital stock
issued and outstanding) ............................. $9.51
Sales charge-4.25% of public offering price ........... .42
-----
Maximum offering price ................................ $9.93
=====
Class B Shares
Net asset value and offering price per share
($136,458,147/14,339,255 shares of capital stock
issued and outstanding) ............................. $9.52
=====
Class C Shares
Net asset value, redemption and offering price
per share ($141,837,726/14,904,916 shares of
capital stock issued and outstanding) ............... $9.52
=====
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF OPERATIONS
Year Ended November 30, 1994 Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
INVESTMENT INCOME
Interest ................................ $27,927,070
Fee income .............................. 565,857 $28,492,927
-----------
EXPENSES
Advisory fee ............................ 3,005,558
Distribution fee-Class A ................ 233,954
Distribution fee-Class B ................ 1,659,349
Distribution fee-Class C ................ 2,184,741
Transfer agency ......................... 432,483
Administrative .......................... 159,362
Registration ............................ 122,188
Printing ................................ 108,351
Audit and legal ......................... 104,800
Custodian ............................... 95,100
Amortization of organization expenses ... 55,302
Directors' fees ......................... 24,787
Miscellaneous ........................... 47,617
-----------
Total expenses before interest .......... 8,233,592
Interest expense ........................ 729,234
-----------
Total expenses .......................... 8,962,826
------------
Net investment income ................... 19,530,101
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments ........ (11,827,131)
Net change in unrealized depreciation
of investments ........................ (5,594,513)
------------
Net loss on investments ................. (17,421,644)
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 2,108,457
============
</TABLE>
See notes to financial statements.
8
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, November 30,
1994 1993
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
FROM OPERATIONS
Net investment income ............... $ 19,530,101 $ 12,771,877
Net realized gain (loss) on
investments ....................... (11,827,131) 692,217
Net change in unrealized appreciation
(depreciation) of investments ..... (5,594,513) 151,858
------------ ------------
Net increase in net assets from
operations ........................ 2,108,457 13,615,952
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income
Class A ........................... (3,836,051) (2,219,657)
Class B ........................... (7,086,010) (8,517,206)
Class C ........................... (9,332,006) (2,478,311)
Return of capital
Class A ........................... (320,880) -0-
Class B ........................... (592,734) -0-
Class C ........................... (780,607) -0-
Net realized gain on investments
Class A ........................... (74,284) -0-
Class B ........................... (184,922) -0-
Class C ........................... (274,605) -0-
CAPITAL STOCK TRANSACTIONS
Net increase (decrease) ............. (114,232,551) 282,299,912
------------ ------------
Total increase (decrease) ........... (134,606,193) 282,700,690
NET ASSETS
Beginning of year ................... 456,075,046 173,374,356
------------ ------------
End of year ......................... $321,468,853 $456,075,046
============ ============
</TABLE>
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS
November 30, 1994 Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
NOTE A: Significant Accounting Policies
Alliance Mortgage Strategy Trust, Inc. (the "Fund"), was incorporated in
the state of Maryland on April 8, 1992 as a diversified, open-end management
investment company. The Fund had no operations until April 28, 1992, when it
sold 5,000 shares of common stock Class A and 5,000 shares of common stock Class
B for $100,000 to Alliance Capital Management, L.P. (the "Adviser"). Investment
operations commenced on June 1, 1992. On February 23, 1993, the Board of
Directors of the Fund approved the creation of a third class of shares, Class C
shares. The Fund currently offers three classes of shares. Class A shares are
sold with a front-end sales charge of up to 4.25%. Class B shares are sold with
a contingent deferred sales charge which declines from 3.0% 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 sold without an initial or contingent deferred
sales charge. All three classes of shares have identical voting, dividend,
liquidation and other rights and the same terms and conditions, except that each
class bears different distribution expenses and has exclusive voting rights with
respect to its distribution plan. Distribution of Class C shares commenced on
May 3, 1993. The following is a summary of significant accounting policies
followed by the Fund.
1. Security Valuation
Fixed-income securities are valued on the basis of prices provided by a
pricing service and brokers. However, securities which are traded
over-the-counter and on a national securities exchange may be valued
according to the broadest and most representative market. It is expected
that, for the fixed-income securities and options in which the Fund invests,
this ordinarily will be the over-the-counter market. Securities not priced in
this manner are valued at the latest quoted bid price, or when exchange valuat
ions are used, at the latest quoted sale price on the day of valuation. If
there is no such reported sale, the latest quoted bid price will be used.
Other securities for which quotations are not readily available or illiquid
securities are valued in good faith at fair value using methods determined by
the Board of Directors. In determining fair value, consideration is given to
cost, operations and other financial data. Securities which mature in 60
days or less are valued at amortized cost, which approximates market value.
2. Organization Expenses
Organization expenses of approximately $276,500 have been deferred and are
being amortized on a straight-line basis through August, 1997.
3. 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 applicable, to
shareholders. Therefore, no provisions for federal income or excise taxes are
required.
4. Investment Income and Security Transactions
Interest income is accrued daily. Fee income is generated by participating in
forward commitments, in which the Fund agrees to the delayed settlement of
securities. By agreeing to the delayed settlement of securities, the Fund
receives a fee from the seller. The fee is accrued from the settlement date
of the associated sale transaction to the purchase settlement date. Security
transactions are accounted for on the date the securities are purchased or
sold. The Fund accretes original issue discount as adjustments to interest
income. Security gains or losses are determined on the identified cost basis.
5. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Distributions in excess of net investment income represent
distributions recognized in accordance with generally accepted accounting
principles but recognized in future periods for tax purposes.
6. Changes in Accounting for Distributions to Shareholders
Effective December 1, 1993, the Fund adopted Statement of Position 93-2
(SOP): Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. The effect of the adoption of this SOP was a
10
<PAGE>
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
decrease to distributions in excess of net investment income of $2,065,998
and a corresponding increase to accumulated net realized loss of $371,777 and
a decrease to additional paid-in capital of $1,694,221. The reclasses were
the result of permanent book to tax differences in the classification of
paydown losses, as well as reclassification of a tax return of capital to
additional paid-in capital. Net assets were not affected by the change.
- -------------------------------------------------------------------------------
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 an annual rate of
.65 of 1% of the average daily net assets of the Fund. Such fee is accrued
daily and paid monthly.
The Adviser has agreed, under the terms of the investment advisory agreement,
to reimburse the Fund to the extent that its aggregate annual expenses
(exclusive of interest, taxes, brokerage, distribution fee, and extraordinary
expenses) in any year exceed 2.5% of the first $30 million of its average
daily net assets, 2.0% of the next $70 million of its average daily net
assets and 1.5% of its average daily net assets in excess of $100 million.
No such reimbursement was required for the year ended November 30, 1994.
Pursuant to the advisory agreement, the Fund paid $161,833 to the Adviser
representing the cost of certain legal and accounting services provided to
the Fund by the Adviser.
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 $268,150 for the year ended November 30, 1994.
Alliance Fund Distributors, Inc. (a wholly-owned subsidiary of the Adviser)
serves as the Distributor of the Fund's shares. The Distributor received
front-end sales charges of $28,083 from the sale of Class A shares and
$590,655 in contingent deferred sales charge imposed upon redemptions by
shareholders of Class B shares for the year ended November 30, 1994.
- -------------------------------------------------------------------------------
NOTE C: Distribution Services Agreement
The Fund has adopted a Distribution Services Agreement (the "Agreement")
pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under the
Agreement, the Fund pays a distribution fee to the Distributor at an annual
rate of up to .30 of 1% of the average daily net assets attributable to the
Class A shares and 1% of the average daily net assets attributable to the
Class B and Class C shares. Such fee is accrued daily and paid monthly. The
Agreement provides that the Distributor will use such payments in their
entirety for distribution assistance and promotional activities. The
Distributor has incurred expenses in excess of the distribution costs
reimbursed by the Fund in the amount of $1,042,848 and $1,875,176 for Class B
and C shares, respectively; such costs may be recovered from the Fund in
future periods so long as the Agreement is in effect. In accordance with the
Agreement, there is no provision for recovery of unreimbursed distribution
costs, incurred by the Distributor, beyond the current fiscal year for Class
A shares. The Agreement also provides that the Adviser may use its own
resources to finance the distribution of the Fund's shares.
- -------------------------------------------------------------------------------
NOTE D: Investment Transactions
Purchases and sales of investment securities (excluding short-term
investments) aggregated $1,495,237,851 and $1,537,483,830, respectively, for
the year ended November 30, 1994.
At November 30, 1994, the cost of securities for federal income tax purposes
was the same as for financial reporting purposes. Accordingly, gross
unrealized appreciation of investments was $1,134 and gross unrealized
depreciation of investments was $7,287,376 resulting in net unrealized
depreciation of $7,286,242.
At November 30, 1994, for federal income tax purposes the Fund had a capital
loss carryforward totaling $12,259,964 of which $219,463 expires in the year
2000; $177,358 expires in the year 2001 and $11,863,143 expires in the year
2002.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (continued) Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOTE E: Illiquid Securities Date
Security Acquired Cost
<S> <C> <C>
SMALL BUSINESS ADMINISTRATION
RMO--F06 (I/O)
10.00%, 12/25/18 .............................. 12/28/93 $ 4,793,303
RMO--F07 (1/O)
10.00%, 12/25/18 .............................. 12/28/93 4,724,603
RMO--F08 (1/O)
10.00%, 12/25/18 .............................. 12/28/93 3,407,645
-----------
$12,925,551
===========
</TABLE>
The securities shown are illiquid and have been valued at fair value in
accordance with the procedures described in Note A. The value of these
securities at November 30, 1994 was $11,475,319 representing 3.6% of net assets.
- -------------------------------------------------------------------------------
NOTE F: Capital Stock
There are 9,000,000,000 shares of $.001 par value capital stock authorized,
divided into three classes, designated Class A, Class B and Class C shares.
Each class consists of 3,000,000,000 authorized shares. Transactions in
capital stock were as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
Year Ended Year Ended Year Ended Year Ended
November 30, November 30, November 30, November 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Class A
Shares sold ...................... 10,402,991 6,553,153 $102,403,447 $65,411,296
Shares issued in reinvestment of
dividends and distributions .... 196,834 144,129 1,920,619 1,437,002
Shares redeemed .................. (12,019,791) (3,197,123) (116,943,609) (31,861,489)
------------- ------------- ------------ -----------
Net increase (decrease) .......... (1,419,966) 3,500,159 $(12,619,543) $34,986,809
============= ============= ============ ===========
Class B
Shares sold ...................... 8,985,316 8,953,304 $ 87,892,802 $89,128,009
Shares issued in reinvestment of
dividends and distributions .... 517,255 508,652 5,040,145 5,068,394
Shares redeemed .................. (12,081,682) (7,703,221) (117,377,470) (76,811,539)
------------- ------------- ------------ -----------
Net increase (decrease) .......... (2,579,111) 1,758,735 $(24,444,523) $17,384,864
============= ============= ============ ===========
</TABLE>
12
<PAGE>
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES AMOUNT
Year Ended May 3, 1993* Year Ended May 3, 1993*
November 30, to November 30, November 30, to November 30,
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Class C
Shares sold ...................... 28,575,040 29,051,561 $281,368,499 $290,249,572
Shares issued in reinvestment
of dividends and distributions 796,235 121,830 7,769,566 1,217,899
Shares redeemed .................. (37,474,348) (6,165,402) (366,306,550) (61,539,232)
------------- ------------- ------------ ------------
Net increase (decrease) .......... (8,103,073) 23,007,989 $(77,168,485) $229,928,239
============= ============= ============ ============
</TABLE>
- -------------------------------------------------------------------------------
NOTE G: Reverse Repurchase Agreements
Under a reverse repurchase agreement, the Fund sells securities and agrees
to repurchase them at a mutually agreed upon date and price. At the time the
Fund enters into a reverse repurchase agreement, it may establish a segregated
account with the custodian containing cash, cash equivalents or liquid
high-grade debt securities having a value at least equal to the repurchase
price. As of November 30, 1994, the Fund had entered into a reverse repurchase
agreement in the amount of $65,866,000 with Prudential Securities with an
interest rate of 5.62% maturing on December 7, 1994. For the year ended November
30, 1994, the maximum amount of reverse repurchase agreements outstanding was
$82,585,000, the average amount outstanding was approximately $32,422,000, and
the daily weighted average interest rate was 4.51%.
* Commencement of distribution.
13
<PAGE>
FINANCIAL HIGHLIGHTS Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Class A
Year Ended Year Ended June 1, 1992*
November 30, November 30, to
1994 1993 November 30, 1992
<S>
<C> <C> <C>
Net asset value, beginning of period .. $9.94 $9.84 $10.00
----- ----- ------
Income From Investment Operations
Net investment income ................. .42 .57 .35(a)
Net realized and unrealized gain (loss)
on investments ...................... (.32) .11 (.17)
----- ----- ------
Net increase in net asset value
from operations ..................... .10 .68 .18
----- ----- ------
Less: Distributions
Dividends from net investment income .. (.48) (.58) (.34)
Return of capital ..................... (.04) -0- -0-
Distributions from net realized gains . (.01) -0- -0-
----- ----- ------
Total dividends and distributions ..... (.53) (.58) (.34)
----- ----- ------
Net asset value, end of period ........ $9.51 $9.94 $9.84
===== ===== ======
Total Return
Total investment return
based on net asset value (1) ........ 1.03% 7.02% 1.84%
===== ===== ======
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) ..................... $43,173 $59,215 $24,186
Ratio of expenses to
average net assets .................. 1.34% 1.54% 1.44%(b)(d)
Ratio of expenses to average net assets
excluding interest expense (c) ...... 1.20% 1.33% 1.42%(b)
Ratio of net investment
income to average net assets ...... 4.78% 5.66% 6.58%(b)(d)
Portfolio turnover rate ............... 375% 499% 101%
</TABLE>
See footnote summary on page 16.
14
<PAGE>
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Class B
Year Ended Year Ended June 1, 1992*
November 30, November 30, to
1994 1993 November 30, 1992
<S> <C> <C> <C>
Net asset value, beginning of period .. $9.94 $9.84 $10.00
----- ----- ------
Income From Investment Operations
Net investment income ................. .39 .49 .31(a)
Net realized and unrealized gain (loss)
on investments ...................... (.35) .12 (.17)
----- ----- ------
Net increase in net asset value
from operations ..................... .04 .61 .14
----- ----- ------
Less: Distributions
Dividends from net investment income .. (.42) (.51) (.30)
Return of capital ..................... (.03) -0- -0-
Distributions from net realized gains . (.01) -0- -0-
----- ----- ------
Total dividends and distributions ..... (.46) (.51) (.30)
----- ----- ------
Net asset value, end of period ........ $9.52 $9.94 $ 9.84
===== ===== ======
Total Return
Total investment return
based on net asset value (1) ........ .42% 6.27% 1.50%
===== ===== ======
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) .....................$136,458 $168,157 $149,188
Ratio of expenses to
average net assets .................. 2.08% 2.26% 2.13%(b)(d)
Ratio of expenses to average net assets
excluding interest expense (c) ...... 1.91% 2.07% 2.10%(b)
Ratio of net investment
income to average net assets ........ 4.12% 4.98% 6.01%(b)(d)
Portfolio turnover rate ............... 375% 499% 101%
</TABLE>
See footnote summary on page 16.
15
<PAGE>
FINANCIAL HIGHLIGHTS (continued) Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Class C
Year Ended May 3, 1993**
November 30, to November 30,
1994 1993
<S> <C> <C>
Net asset value, beginning of period .. $9.94 $9.98
----- -----
Income From Investment Operations
Net investment income ................. .37 .27
Net realized and unrealized gain (loss)
on investments ...................... (.33) (.03)
----- -----
Net increase in net asset value
from operations ..................... .04 .24
----- -----
Less: Distributions
Dividends from net investment income .. (.42) (.28)
Return of capital ..................... (.03) -0-
Distributions from net realized gains . (.01) -0-
----- -----
Total dividends and distributions ..... (.46) (.28)
----- -----
Net asset value, end of period ........ $9.52 $9.94
===== =====
Total Return
Total investment return
based on net asset value (1) ........ .42% 2.40%
Ratios/Supplemental Data
Net assets, end of period
(000's omitted) .....................$141,838 $228,703
Ratio of expenses to
average net assets .................. 2.04% 1.58%(b)
Ratio of expenses to average net assets
excluding interest expense (c) ...... 1.89% 1.74%(b)
Ratio of net investment
income to average net assets ........ 4.10% 3.70%(b)
Portfolio turnover rate ............... 375% 499%
</TABLE>
* Commencement of operations.
** Commencement of distribution.
(a) Net of expenses waived by the Adviser.
(b) Annualized.
(c) Net of interest expenses on reverse repurchase agreements (see
Note G).
(d) If the Fund had borne all expenses, the expense ratios would have been
1.55% for Class A shares and 2.28% for Class B shares. The net investment
income ratios would have been 6.47% for Class A shares and 5.86% for
Class B shares.
(1) 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.
16
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
To the Shareholders and Board of Directors
Alliance Mortgage Strategy Trust, Inc.
We have audited the accompanying statement of assets and liabilities of
Alliance Mortgage Strategy Trust, Inc., including the portfolio of
investments, as of November 30, 1994, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of
the two years in the period then ended and the financial highlights for each
of the periods indicated therein. These financial statements and financial
highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of November 30, 1994, 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 Strategy Trust, Inc. at November 30, 1994, the results of
its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights
for each of the indicated periods, in conformity with generally accepted
accounting principles.
[SIGNATURE]
New York, New York
January 13, 1995
17
<PAGE>
Alliance Mortgage Strategy Trust
- -------------------------------------------------------------------------------
BOARD OF DIRECTORS
John D. Carifa, Chairman and President
Ruth Block (1)
David H. Dievler
John H. Dobkin (1)
William H. Foulk, Jr. (1)
Dr. James M. Hester (1)
Clifford L. Michel (1)
Robert C. White (1)
OFFICERS
Paul A. Ullman, Senior Vice President
Patricia J. Young, Senior Vice President
Edmund P. Bergan, Jr., Secretary
Mark D. Gersten, Treasurer & Chief Financial Officer
Joseph J. Mantineo, Controller
CUSTODIAN
State Street Bank and 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
LEGAL COUNSEL
Seward & Kissel
One Battery Park Plaza
New York, NY 10004
INDEPENDENT AUDITORS
Ernst & Young LLP
787 Seventh Avenue
New York, NY 10019
(1) Member of the Audit Committee.
18
<PAGE>
(This page left intentionally blank.)
<PAGE>
Alliance Mortgage Strategy Trust
Annual Report
November 30, 1994
[LOGO]
Mutual funds without the Mystery.SM
Alliance Mortgage Strategy Trust
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
[LOGO]
Mutual funds without the MysterySM
This report is distributed solely to shareholders of the Fund
and is not to be used as sales literature.
Registration Mark
These registered service marks used under license from the
owner, Alliance Capital Management L.P.
MSTAR
