ALLIANCE MORTGAGE STRATEGY TRUST
ANNUAL REPORT
NOVEMBER 30, 1995
LETTER TO SHAREHOLDERS ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
January 17, 1996
Dear Shareholder:
The U.S. bond market posted impressive gains over the past twelve and six month
periods. Despite stronger economic growth over the past six months, the rally
strengthened, as restrained inflationary pressures and a more accommodative
monetary policy buoyed investor confidence. Treasury and mortgage obligations
both performed well, though mortgage returns were tempered by higher prepayment
expectations. Across all major sectors of the U.S. fixed income market,
longer-duration securities outperformed shorter-duration securities as interest
rates for all maturities declined.
INVESTMENT RESULTS
Listed below is Alliance Mortgage Strategy Trust's performance through the
fiscal year ended November 30, 1995. Also shown are returns for the overall
short-term U.S. Government bond market, represented by the Merrill Lynch (ML)
1-3 Year U.S. Treasury Index, and the average return of Lipper's universe of 80
Adjustable Rate Mortgage (ARM) funds (complete descriptions of these unmanaged
benchmarks appear on page 4):
Total Return as of November 30, 1995
12 Months 6 Months
--------- --------
ALLIANCE MORTGAGE STRATEGY TRUST
Class A +5.91% +3.18%
Class B +5.05% +2.71%
Class C +5.06% +2.72%
ML 1-3 YEAR U.S. TREASURY INDEX +10.40% +3.82%
LIPPER ARM FUNDS +3.76% +3.11%
The Fund's total returns are based on the net asset values of each class of
shares as of November 30; additional investment results appear on page 3. Also
provided on page 4 is a chart that shows the performance of a hypothetical
$10,000 initial investment in Alliance Mortgage Strategy Trust Class A shares
from inception through the end of November.
ECONOMIC REVIEW
While the U.S. economy slowed in the first half of 1995, growth reaccelerated
in the third quarter due to larger than expected increases in residential
housing, government spending and business inventories. Fourth quarter economic
growth was less robust, however. Retail sales remained weak despite significant
discounting during the holiday season. Gains in real disposable income slowed
and personal debt levels continued to escalate. Growth also remained sluggish
in the manufacturing sector. The National Association of Purchasing Management
(NAPM) Index rose modestly to 47.3% in November but remained below 50% for five
consecutive months. (A reading below 50% signals a slowdown in manufacturing
output.)
Inflation data remain very favorable for the bond market. Broad price indices
such as the Consumer Price Index and Producer Price Index have risen very
modestly and labor costs remain under control. The benign inflation outlook and
the chance of a significant federal government deficit reduction package may
allow the Federal Reserve to cut interest rates further in the months ahead.
MORTGAGE MARKET REVIEW
During 1995, mortgage rates continued to decline. However, the incentive to
refinance in 1995 differed from the 1993 experience because Treasury bill rates
ended the period higher than they were in 1993. This made adjustable rate
mortgages and other mortgages tied to the front end of the yield curve less
attractive refinancing alternatives than they were in the last rally.
Therefore, in spite of the low level of rates, prepayments for fixed rate
mortgages did not reach the levels experienced in 1993.
During the reporting period overall, mortgages outperformed Treasury securities
on a duration adjusted basis. During the first and third fiscal quarters, the
mortgage market performed well. Second quarter was the most difficult because
the continuing rally was combined with rising volatility which had a negative
impact on mortgage-backed securities. While the adjustable rate mortgage market
posted lower returns on an absolute basis than the other sectors, this was
consistent with its much lower duration or market exposure.
1
ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
PORTFOLIO ACTIVITY
During the period the portfolio was invested predominantly in mortgage- and
asset-backed securities with a small allocation to Treasury securities. The
percentage invested in fixed rate mortgages varied with our outlook for
prepayments and the level of market volatility. For example, in the first part
of the period, we held premium mortgages which increased in yield, and bought
options so the portfolio would benefit in a declining rate environment. The
core of the portfolio was invested in very seasoned higher coupon adjustable
rate mortgages. We emphasized the importance of seasoning because these
mortgages have already experienced several refinancing opportunities, therefore
the balance outstanding is less sensitive to changes in interest rates. The
portfolio remains neutrally constructed with respect to interest rate changes.
INVESTMENT OUTLOOK
It is our view that U.S. economic growth will remain modest in the period
ahead. Our forecast calls for a fixed based year GDP growth rate of 2.0% in the
first six months of the year ('fixed based year' refers to the government's
traditional GDP measure versus the new 'chain-weighted' measure). With few
inflationary pressures on the horizon, we expect the Federal Reserve to cut
interest rates further to stimulate consumer expenditures and investment. If
our forecast proves correct, the result should be further gains in U.S. bond
prices.
PROPOSED CHANGES TO INVESTMENT POLICIES
Though we continue to believe that Alliance Mortgage Strategy Trust remains
attractive to investors seeking low share price fluctuation and relatively high
current income, Alliance has recommended to the Fund's Board of Directors
changes to the Fund's investment policies that we expect will help the Fund
generate superior investment performance in all market environments by
broadening the universe of investments available to the Fund. A Special Meeting
of Stockholders has been called for the purpose of considering the changes. If
the stockholders approve the changes, the Fund's investment orientation will
shift from investing primarily in mortgage-related securities to investing
primarily in U.S. Government securities, the scope of investments available to
the Fund will be broadened and the Fund's name will change to 'Alliance Limited
Maturity Government Fund, Inc.' Proxy materials describing the proposed changes
in detail have been mailed to stockholders of record as of January 10, 1996.
Thank you for your continued interest and investment in Alliance Mortgage
Strategy Trust. We look forward to reporting its progress to you in the coming
months.
Sincerely,
John D. Carifa
Chairman and President
Paul A. Ullman
Senior Vice President
Patricia J. Young
Senior Vice President
2
INVESTMENT RESULTS ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
AVERAGE ANNUAL TOTAL RETURN AS OF NOVEMBER 30, 1995
CLASS A SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
---------------------------
. One Year +5.91% +1.43%
. Since Inception* +4.49% +3.21%
SEC Yield 5.35%
CLASS B SHARES
WITHOUT WITH
SALES CHARGE SALES CHARGE
---------------------------
. One Year +5.05% +2.05%
. Since Inception* +3.76% +3.76%
SEC Yield 4.88%
CLASS C SHARES
. One Year +5.06%
. Since Inception* +3.03%
SEC Yield 4.89%
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 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);
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, 1995.
* Inception: 6/1/92, Class A and Class B; 5/3/93, Class C.
3
ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
ALLIANCE MORTGAGE STRATEGY TRUST
$10,000 INVESTMENT OVER LIFE OF FUND:
6/1/92 TO 11/30/95
$12,500
$11,500
$10,500
$9,500
ML 1-3 YEAR
MORTGAGE STRATEGY TRUST
CLASS A: $11,170
6/1/92 11/30/95
This chart illustrates the total value of an assumed $10,000 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 80
funds. These funds have generally similar investment objectives to Alliance
Mortgage Strategy Trust, though some funds in the average 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 ARMFunds Average
4
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1995 ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- ----------------------------------------------------------------------
MORTGAGE-RELATED SECURITIES-88.9%
COLLATERALIZED MORTGAGE OBLIGATIONS-50.1%
ADJUSTABLE RATE-33.8%
Donaldson, Lufkin & Jenrette
Series 1994-QE1
7.916%, 4/25/24 (a) $ 9,664 $ 9,721,433
Federal Home Loan Mortgage Corp.
Series 1325 Cl. C
6.534%, 7/15/97 (b) 5,442 5,482,765
Federal National Mortgage Association
Series 1993-89 Cl. F
6.244%, 9/25/21 11,841 11,856,209
Housing Security, Inc.
Series 1995-RFCI-A1
7.285%, 10/30/18 (a) 2,717 2,756,009
Series 1995-B
7.285%, 11/25/28 9,000 9,073,170
Resolution Trust Corp.
Series 1992-CHF Cl. A-2
6.905%, 12/25/20 14,423 14,684,545
Sears Mortgage Secs Corp.
Series 1992-18A Cl. A1
7.945%, 9/25/22 7,309 7,430,232
-----------
61,004,363
FIXED RATE-16.3%
Federal Home Loan Mortgage Corp.
Series 1302-PE
7.50%, 12/15/15 7,838 7,874,416
Series 1016-Y
9.35%, 9/15/05 4,941 4,972,156
Federal National Mortgage Association
Trust 1993-16
Cl.A 6.50%, 12/25/17 4,280 4,276,624
Residential Funding Mortgage Secs I
Series 1993-S37 Cl. A1
7.00%, 10/25/23 4,024 4,020,523
Structured Asset Securities Corp.
Series 1989-I Cl. C
9.50%, 5/01/18 8,387 8,379,694
-----------
29,523,413
Total Collateralized Mortgage Obligations
(cost $90,650,790) 90,527,776
FEDERAL HOME LOAN MORTGAGE CORP.-19.7%
7.50%, 6/01/24-11/01/25
(GOLD) 22,602 23,004,859
8.034%, 7/01/21* 9,640 9,877,917
11.00%, 1/01/11-9/01/20 2,412 2,677,909
Total Federal Home Loan Mortgage Corp.
(cost $35,393,380) 35,560,685
FEDERAL NATIONAL MORTGAGE ASSOCIATION-11.5%
7.50%, 4/01/08 2 1,626
7.60%, 2/01/25 11,281 11,576,950
7.63%, 10/01/19* 6,701 6,885,044
11.25%, 2/01/16 2,045 2,283,652
Total Federal National Mortgage Association
(cost $20,763,881) 20,747,272
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION-7.6%
11.00%, 11/15/09-9/15/15 10,542 11,859,392
11.25%, 7/15/13-1/15/16 (GPM) 1,262 1,387,750
11.50%, 2/15/13-6/15/13 (GPM) 387 435,071
5
PORTFOLIO OF INVESTMENTS (CONTINUED) ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
PRINCIPAL
AMOUNT
(000) VALUE
- ----------------------------------------------------------------------
11.50%, 4/15/13 (BD) $ 27 $ 30,188
11.75%, 1/20/16 (GPM) 34 37,966
Total Government National Mortgage Association
(cost $13,705,897) 13,750,367
Total Mortgage-Related Securities
(cost $160,513,948) 160,586,100
ASSET BACKED SECURITIES-12.6%
Advanta Mortgage Loan Trust
Series 1995-1 Cl. A2
7.82%, 2/25/04 5,000 5,004,700
Series 1995-1 Cl. A1
7.86%, 10/25/00 460 458,742
Excel Credit Corp. FRN
Series 1994-1 Cl. A
6.432%, 3/01/04 8,143 8,147,999
Student Loan Funding Corp., Inc. FRN
Series 1993-A Cl. A1
6.238%, 1/01/99 9,205 9,205,000
Total Asset Backed Securities
(cost $22,849,517) 22,816,441
U.S. GOVERNMENT OBLIGATIONS-3.4%
U.S. TREASURY NOTES-3.4%
U.S. Treasury Notes
5.875%, 11/15/05+
(cost $6,176,795) 6,200 6,254,250
REPURCHASE AGREEMENT-0.3%
Prudential-Bache Securities, Inc.
5.87%, dated 11/30/95, due 12/01/95,
collateralized by $535,000 FHLMC 1617DA,
7.075%, 11/15/23 (cost $522,000) 522 522,000
TOTAL INVESTMENTS-105.2%
(cost $190,062,260) 190,178,791
Other assets less liabilities-(5.2)% (9,470,951)
NETASSETS-100% $180,707,840
* Adjustable rate mortgages; stated interest rate in effect at November 30,
1995.
+ Securities segregated to collateralize reverse repurchase agreements with
an aggregate market value of $6,239,758.
(a) Securities are 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 November 30,1995,
these securities amounted to $12,477,442 or 6.9% of net assets.
(b) Inverse floater security. Interest rate varies inversely with the London
Interbank Offered Rate (LIBOR).
Glossary of Terms:
BD-Builder by down.
FHLMC-Federal Home Loan Mortgage Corp.
FRN-Floating rate note.
GPM-Graduated payment mortgage.
See notes to financial statements.
6
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1995 ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
ASSETS
Investments in securities, at value (cost $190,062,260) $190,178,791
Cash 1,576
Interest receivable 1,915,344
Receivable for investment securities sold 539,387
Receivable for capital stock sold 25,995
Deferred organization expenses 96,809
Total assets 192,757,902
LIABILITIES
Reverse repurchase agreement 6,239,758
Payable for investment securities purchased 4,279,719
Payable for capital stock redeemed 804,993
Dividends payable 253,828
Distribution fee payable 135,245
Advisory fee payable 98,460
Accrued expenses and other liabilities 238,059
Total liabilities 12,050,062
NET ASSETS $180,707,840
COMPOSITION OF NET ASSETS
Capital stock, at par $ 18,989
Additional paid-in capital 200,834,383
Distributions in excess of net investment income (253,828)
Accumulated net realized loss on investments (20,008,235)
Net unrealized appreciation of investments 116,531
-------------
$180,707,840
CALCULATION OF MAXIMUM OFFERING PRICE
CLASS A SHARES
Net asset value and redemption price per share ($27,887,265/
2,930,390 shares of capital stock issued and outstanding) $9.52
Sales charge-4.25% of public offering price .42
Maximum offering price $9.94
CLASS B SHARES
Net asset value and offering price per share ($84,361,939/
8,864,743 shares of capital stock issued and outstanding) $9.52
CLASS C SHARES
Net asset value, redemption and offering price per share($68,458,636
/7,193,623 shares of capital stock issued and outstanding) $9.52
See notes to financial statements.
7
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1995 ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
INVESTMENT INCOME
Interest $18,489,968
EXPENSES
Advisory fee $1,563,474
Distribution fee - Class A 105,660
Distribution fee - Class B 1,102,072
Distribution fee - Class C 951,071
Transfer agency 425,155
Administrative 167,590
Audit and legal 124,470
Custodian 85,738
Registration 81,796
Printing 80,069
Amortization of organization expenses 55,301
Taxes 46,164
Directors' fees 21,191
Miscellaneous 17,716
Total expenses before interest 4,827,467
Interest expense 1,783,170
Total expenses 6,610,637
Net investment income 11,879,331
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (7,748,271)
Net change in unrealized depreciation of investments 7,402,773
Net loss on investments (345,498)
NET INCREASE IN NET ASSETS FROM OPERATIONS $11,533,833
See notes to financial statements.
8
STATEMENT OF CHANGES IN NET ASSETS ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30,
1995 1994
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income $ 11,879,331 $ 19,530,101
Net realized loss on investments (7,748,271) (11,827,131)
Net change in unrealized depreciation of
investments 7,402,773 (5,594,513)
Net increase in net assets from operations 11,533,833 2,108,457
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income
Class A (1,884,462) (3,836,051)
Class B (5,150,507) (7,086,010)
Class C (4,464,679) (9,332,006)
Tax return of capital
Class A (109,742) (320,880)
Class B (299,940) (592,734)
Class C (260,000) (780,607)
Net realized gain on investments
Class A -0- (74,284)
Class B -0- (184,922)
Class C -0- (274,605)
CAPITAL STOCK TRANSACTIONS
Net decrease (140,125,516) (114,232,551)
Total decrease (140,761,013) (134,606,193)
NET ASSETS
Beginning of year 321,468,853 456,075,046
End of year $180,707,840 $321,468,853
See notes to financial statements.
9
STATEMENT OF CASH FLOWS
YEAR ENDED NOVEMBER 30, 1995 ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
INCREASE (DECREASE) IN CASH FROM:
OPERATING ACTIVITIES:
Interest received $ 18,846,398
Interest expense paid (1,783,170)
Operating expenses paid (4,947,386)
Net increase in cash from operating activities $ 12,115,842
INVESTING ACTIVITIES:
Purchase of long-term portfolio investments (818,638,650)
Proceeds from disposition of long-term
portfolio investments 998,022,949
Proceeds of short-term portfolio investments,net 24,705,157
Loss on closed futures contracts (2,104,263)
Net increase in cash from investing activities 201,985,193
FINANCING ACTIVITIES*:
Decrease in reverse repurchase agreements, net (59,626,242)
Net redemptions from capital stock transactions (149,705,297)
Cash dividends paid (6,817,905)
Net decrease in cash from financing activities (216,149,444)
Net decrease in cash (2,048,409)
Cash at beginning of year 2,049,985
Cash at end of year $ 1,576
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 $ 11,533,833
ADJUSTMENTS:
Decrease in interest receivable $ 379,828
Net realized loss on investments 7,748,271
Net change in unrealized depreciation (7,402,773)
Accretion of bond discount (23,398)
Decrease in deferred and other assets 67,323
Decrease in accrued expenses (187,242)
Total adjustments 582,009
NET INCREASE IN CASH FROM OPERATING ACTIVITIES $ 12,115,842
* Non-cash financing activities not included herein consist of reinvestment of
dividends.
See notes to financial statements.
10
NOTES TO FINANCIAL STATEMENTS
NOVEMBER 30, 1995 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 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. 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 valuations 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. 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 discounts and premiums as adjustments to interest
income. Security gains and losses are determined on the identified cost basis.
5. DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-dividend
date and are determined in accordance with income tax regulations.
6. RECLASSIFICATION OF COMPONENTS OF NET ASSETS
During the year, the Fund reclassified certain components of net assets. The
reclassifications were the result of a tax return of capital. The
reclassifications resulted in a net decrease to distributions in excess of net
investment income and a corresponding decrease to additional paid-in capital of
$711,121. 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 fees, 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
11
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
average daily net assets in excess of $100 million. No such reimbursement was
required for the year ended November 30, 1995. Pursuant to the advisory
agreement, the Fund paid $167,590 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 $218,090 for the year ended November 30, 1995.
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 $7,584 from the sale of Class A shares and $470,467
in contingent deferred sales charges imposed upon redemptions by shareholders
of Class B shares for the year ended November 30, 1995.
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 $785,406 and $2,304,343 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 $769,715,713 and $997,448,708, respectively, for the year ended
November30, 1995.
At November 30, 1995, the cost of securities for federal income tax purposes
was $190,081,603. Accordingly, gross unrealized appreciation of investments was
$699,024 and gross unrealized depreciation of investments was $601,836
resulting in net unrealized appreciation of $97,188.
At November 30, 1995, for federal income tax purposes the Fund had a capital
loss carryforward of $19,988,892 of which $219,463 expires in the year 2000;
$177,358 expires in the year 2001, $11,863,143 expires in the year 2002 and
$7,728,928 expires in the year 2003.
1. OPTION TRANSACTIONS
For hedging purposes, the Fund purchases put and call options on U.S.
securities that are traded on U.S. exchanges and over-the-counter markets.
The risk associated with purchasing an option is that the Fund pays a premium
whether or not the option is exercised. Additionally, the Fund 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
12
ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
paid. The proceeds from securities sold through the exercise of put options are
decreased by the premiums paid.
2. FINANCIAL FUTURES CONTRACTS
The Fund may buy or sell interest rate futures contracts for the purpose of
hedging its portfolio against adverse effects of anticipated movements in the
market. Upon entering into a contract, the Fund deposits and maintains as
collateral such 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.
NOTE E: 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:
SHARES AMOUNT
------------------------- -----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1995 1994 1995 1994
----------- ------------ ------------- --------------
CLASS A
Shares sold 854,241 10,402,991 $ 8,085,552 $ 102,403,447
Shares issued in
reinvestment of
dividends and
distributions 97,452 196,834 922,047 1,920,619
Shares redeemed (2,559,958) (12,019,791) (24,225,739) (116,943,609)
Net decrease (1,608,265) (1,419,966) $(15,218,140) $ (12,619,543)
CLASS B
Shares sold 2,656,458 8,985,316 $ 25,126,058 $ 87,892,802
Shares issued in
reinvestment of
dividends and
distributions 262,019 517,255 2,480,720 5,040,145
Shares redeemed (8,392,989) (12,081,682) (79,485,822) (117,377,470)
Net decrease (5,474,512) (2,579,111) $(51,879,044) $ (24,444,523)
CLASS C
Shares sold 2,193,838 28,575,040 $ 20,770,913 $ 281,368,499
Shares issued in
reinvestment of
dividends and
distributions 251,819 796,235 2,383,642 7,769,566
Shares redeemed (10,156,950) (37,474,348) (96,182,887) (366,306,550)
Net decrease (7,711,293) (8,103,073) $(73,028,332) $ (77,168,485)
13
NOTES TO FINANCIAL STATEMENTS (CONTINUED) ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
NOTE F: 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 will 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, 1995, the Fund had entered into the following reverse
repurchase agreement:
AMOUNT BROKER INTEREST RATE MATURITY
---------- ----------- ------------- ----------------
$6,239,758 J.P. Morgan 5.80% December 7, 1995
For the year ended November 30, 1995, the maximum amount of reverse repurchase
agreements outstanding was $91,661,915, the average amount outstanding was
approximately $31,521,000, and the daily weighted average interest rate was
5.66%.
14
FINANCIAL HIGHLIGHTS ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------
YEAR ENDED NOVEMBER 30, JUNE 1,1992*
------------------------------ TO
1995 1994 1993 NOV. 30,1992
---------- -------- -------- --------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.51 $9.94 $9.84 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .52(e) .42 .57 .35(a)
Net realized and unrealized gain (loss)
on investments .02 (.32) .11 (.17)
Net increase in net asset value from
operations .54 .10 .68 .18
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.50) (.48) (.58) (.34)
Tax return of capital (.03) (.04) -0- -0-
Distributions from net realized gains -0- (.01) -0- -0-
Total dividends and distributions (.53) (.53) (.58) (.34)
Net asset value, end of period $9.52 $9.51 $9.94 $ 9.84
TOTAL RETURN
Total investment return based on net
asset value (1) 5.91% 1.03% 7.02% 1.84%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $27,887 $43,173 $59,215 $24,186
Ratio of expenses to average net assets 2.14% 1.34% 1.54% 1.44%(b)(d)
Ratio of expenses to average net assets
excluding interest expense (c) 1.41% 1.20% 1.33% 1.42%(b)
Ratio of net investment income to average
net assets 5.53% 4.78% 5.66% 6.58%(b)
Portfolio turnover rate 293% 375% 499% 101%
</TABLE>
See footnote summary on page 17.
15
FINANCIAL HIGHLIGHTS (CONTINUED) ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------
YEAR ENDED NOVEMBER 30, JUNE 1,1992*
-------------------------------- TO
1995 1994 1993 NOV. 30,1992
---------- --------- --------- ---------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $9.52 $9.94 $9.84 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income .46(e) .39 .49 .31(a)
Net realized and unrealized gain (loss)
on investments .01 (.35) .12 (.17)
Net increase in net asset value from
operations .47 .04 .61 .14
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.44) (.42) (.51) (.30)
Tax return of capital (.03) (.03) -0- -0-
Distributions from net realized gains -0- (.01) -0- -0-
Total dividends and distributions (.47) (.46) (.51) (.30)
Net asset value, end of period $9.52 $9.52 $9.94 $ 9.84
TOTAL RETURN
Total investment return based on net
asset value (1) 5.05% .42% 6.27% 1.50%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's omitted) $84,362 $136,458 $168,157 $149,188
Ratio of expenses to average net assets 2.85% 2.08% 2.26% 2.13%(b)(d)
Ratio of expenses to average net assets
excluding interest expense (c) 2.11% 1.91% 2.07% 2.10%(b)
Ratio of net investment income to average
net assets 4.83% 4.12% 4.98% 6.01%(b)
Portfolio turnover rate 293% 375% 499% 101%
</TABLE>
See footnote summary on page 17.
16
ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
SELECTED DATA FOR A SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD
CLASS C
------------------------------------
YEAR ENDED NOVEMBER 30, MAY 3,1993**
--------------------- TO
1995 1994 NOV. 30,1993
---------- --------- -------------
Net asset value, beginning of period $9.52 $9.94 $9.98
INCOME FROM INVESTMENT OPERATIONS
Net investment income .46(e) .37 .27
Net realized and unrealized gain (loss)
on investments .01 (.33) (.03)
Net increase in net asset value from
operations .47 .04 .24
LESS: DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income (.44) (.42) (.28)
Tax return of capital (.03) (.03) -0-
Distributions from net realized gains -0- (.01) -0-
Total dividends and distributions (.47) (.46) (.28)
Net asset value, end of period $9.52 $9.52 $9.94
TOTAL RETURN
Total investment return based on net
asset value (1) 5.06% .42% 2.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period(000's omitted) $68,459 $141,838 $228,703
Ratio of expenses to average net assets 2.85% 2.04% 1.74%(b)
Ratio of expenses to average net assets
excluding interest expense (c) 2.10% 1.89% 1.58%(b)
Ratio of net investment income to
average net assets 4.84% 4.10% 3.70%(b)
Portfolio turnover rate 293% 375% 499%
* 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 F).
(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.
(e) Based on average shares outstanding.
(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.
17
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, 1995, 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 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, 1995 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, 1995, 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 generally
accepted accounting principles.
New York, New York
January 15, 1996
18
ALLIANCE MORTGAGE STRATEGY TRUST
_______________________________________________________________________________
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)
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
PATRICK J. FARRELL, 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
LEGAL COUNSEL
SEWARD & KISSEL
One Battery Park Plaza
New York, NY 10004
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
(1) Member of the Audit Committee.
19
ALLIANCE MORTGAGE STRATEGY TRUST
1345 Avenue of the Americas
New York, NY 10105
(800) 221-5672
ALLIANCECAPITAL A
MUTUAL FUNDS WITHOUT THE MYSTERY.SM
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.
MSTAR
