<PAGE>
LETTER TO SHAREHOLDERS ACM Government Income Fund
================================================================================
August 27, 1998
Dear Shareholder:
We are pleased to report to you on our strategy, performance and outlook of the
ACM Government Income Fund. The Fund is designed to provide high current income
consistent with preservation of capital. The Fund invests principally in U.S.
government obligations. The Fund may also invest up to 35% of its assets in
other fixed-income securities, including those issued by foreign governments.
Additionally, the Fund may utilize other investment instruments, including
options and futures.
MARKET OVERVIEW
Over the six-month period that ended June 30, 1998, the U.S. economy continued
its healthy expansion coupled with low inflation. Fueled by strong domestic
demand, first quarter Gross Domestic Product (GDP), a standard measure of
economic growth, expanded at an annualized rate of 5.5%. In the second quarter,
annualized growth slowed to 1.6%, as strong domestic demand was offset by
weakening industrial production caused by lower exports to economically weakened
Asia. The Consumer Price Index (CPI), a measure of inflation, recorded a
relatively low 1.7% increase year-over-year for the period ended June 30, 1998,
despite the tightest labor market in 28 years. With inflation benign and growth
slowing, the Federal Reserve left interest rates unchanged. Helped by strong
economic fundamentals and uncertainty overseas, the U.S. dollar continued to
strengthen against the major currencies.
During the six-month period under review, U.S. bond prices generally rose in
value as investors, concerned about events in the emerging markets and Japan,
sought the relative safety of U.S. Treasuries. The U.S. Treasury market posted
solid returns with longer term Treasuries outperforming shorter term Treasuries.
When overseas markets stabilized at the beginning of the year following the
volatility in the fourth quarter of 1997, investor focus shifted to short term
expectations of U.S. monetary policy. In May, renewed volatility in Asia,
weakness in the yen, and fiscal problems in Russia, caused a rally in the
Treasury market and pushed bond prices higher.
Most developed countries outside of the U.S. continued to experience strong
domestic demand, but weaker manufacturing activity, due to the continued
instability and general economic weakness in Asia. Economic growth remained
positive and inflation remained low. Japan was the critical exception as slowing
growth and rising unemployment pushed the economy into an official recession.
While interest rates generally declined, all developed bond markets, except
Japan, outperformed the U.S. in local currency terms as investors sought the
liquidity of U.S. Treasuries. In hedged U.S. dollar terms, all developed
countries outperformed the U.S.
In the emerging markets, debt prices fell over the six-month period ended June
30, 1998. Strong gains made in the first quarter were erased in the second
quarter when continued economic weakness was reported from Asia. Though not
affected as negatively as debt prices in emerging Asia, Latin American debt
suffered when investors fled to the safety of developed country debt. In Eastern
Europe, Russia's fiscal problems caused its debt to post the lowest returns
among all the emerging markets.
INVESTMENT STRATEGY
Over the six-month period ended June 30, 1998, we maintained a modestly
barbelled duration structure among our U.S. Treasury holdings, using a
combination of long and short maturity securities. In addition, we
opportunistically employed securities issued in foreign countries to enhance
portfolio yield.
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ACM Government Income Fund
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For example, during the period we added holdings in Venezuela as underlying
fundamentals became more favorable and we decreased our holdings in Russia as
the government's fiscal situation deteriorated.
INVESTMENT PERFORMANCE
The following table shows how your Fund performed over the past six- and
12-month periods ended June 30, 1998. For comparison, we have included the
Lehman Brothers Aggregate Bond Index, a standard measure of the performance of a
basket of unmanaged debt securities. Over the six-month period under review,
your Fund underperformed the benchmark. Although the Fund's U.S. Treasury
allocation posted strong gains, the portfolio's exposure to emerging market
debt, including Russia, more than offset those gains, dampening overall
performance.
INVESTMENT RESULTS*
Periods Ended June 30, 1998
Total Returns
6 Months 12 Months
-------- ---------
ACM Government
Income Fund -1.54% 7.81%
Lehman Brothers
Aggregate Bond Index 3.93% 10.54%
* The Fund's investment results are total returns for the period and are
based on the net asset value of the Fund as of June 30, 1998. All fees and
expenses related to the operation of the Fund have been deducted. Returns
for the Fund include the reinvestment of any distributions paid during the
period. Past performance is no guarantee of future results.
The Lehman Brothers (LB) Aggregate Bond Index is composed of the Mortgage
Backed and Asset Backed Securities Indices and the Government/Corporate
Bond Index. It includes Treasury, agency and corporate bond issues, as
well as mortgage-backed securities. The index is unmanaged and does not
reflect fees and expenses. An investor cannot invest directly in the
index.
ECONOMIC OUTLOOK
We anticipate slowing global growth and continued benign inflation as Asia
exports cheaper goods to the world and imports less from abroad. With inflation
subdued, we expect monetary policy in the U.S. to remain substantially unchanged
for most of 1998. The current slowing of growth in the U.S. is expected to
continue with 1998 GDP estimated around 3.0%. Strong domestic demand should
continue to be offset by weakening industrial production. U.S. interest rates
will remain low as the U.S. fixed income markets continue to provide a safe
haven for investors during periods of volatility overseas.
Without substantial government spending, the Japanese economy is expected to
shrink by 1% this year. Japan's financial and economic difficulties require
structural reforms that will take time in a political context that is currently
without strong leadership. In Europe, growth is expected to slow to 2.5% in 1998
and inflation should remain subdued. Modest rate increases are possible prior to
the January 1999 launch of European Monetary Union.
The emerging markets face challenging problems that require time and economic
growth for resolution. We expect emerging market debt price volatility to remain
elevated, as renewed turmoil in Asia, fiscal and structural problems in Russia,
and a weakened Japan continue to heighten investor concern about all higher
yielding asset classes. Growth in Japan, the world's second largest economy, is
critical if the emerging countries are to resume their process of global
integration. Russia, in particular, will continue to add uncertainty to the
emerging markets as it struggles with the devaluation of the ruble and the
repayment requirements of existing Russian debt obligations. Although Russia is
not critically important to the world's economic prospects, it will continue to
have
2
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ACM Government Income Fund
================================================================================
a significant influence on other emerging debt countries. We are currently
evaluating the political and economic events as they unfold in order to assess
the prospects for Russian debt to rebound. Presently, we are maintaining the
Fund's Russian debt positions, which currently comprise 4.55% of the Fund's
portfolio, with little change.
Thank you for your continued interest and investment in the ACM Government
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/ Wayne D. Lyski
Wayne D. Lyski
President
3
<PAGE>
PORTFOLIO OF INVESTMENTS
June 30, 1998 ACM Government Income Fund
================================================================================
Principal
Amount
(000) U.S.$ Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS--102.8%
U.S. TREASURY BONDS--81.5%
6.125%, 11/15/27 ......................... $231,595 $248,167,938
6.375%, 8/15/27 .......................... 19,000 20,864,280
12.375%, 5/15/04 ......................... 46,380 62,040,671
14.00%, 11/15/11 ......................... 91,030 141,224,852
------------
472,297,741
------------
U.S. TREASURY STRIPS--21.3%
Zero coupon, 2/15/10 ..................... 83,620 43,557,658
Zero coupon, 5/15/10 ..................... 74,340 38,189,202
Zero coupon, 2/15/19 ..................... 54,000 16,689,780
Zero coupon, 5/15/20 ..................... 87,000 24,965,520
------------
123,402,160
------------
Total U.S. Government Obligations
(cost $584,955,491) ...................... 595,699,901
------------
SOVEREIGN DEBT OBLIGATIONS--28.0%
BRAZIL--7.2%
Republic of Brazil
C-Bond
8.00%, 4/15/14 (a) ....................... 26,105 19,252,235
Global Bond
9.375%, 4/07/08 .......................... 25,250 22,699,750
------------
Total Brazilian Securities ................. 41,951,985
------------
PERU--3.1%
Republic of Peru
FLIRB
3.25%, 3/07/17 (b) ....................... $ 23,300 $ 12,931,500
PDI
4.00%, 3/07/17 (b) ....................... 7,750 4,776,325
------------
Total Peruvian Securities .................. 17,707,825
------------
RUSSIA--8.0%
Russian Principal Loans FRN
6.625%, 12/15/20 (c) ..................... 69,950 32,589,705
Russian IAN FRN
6.625%, 12/15/15 ......................... 25,020 13,909,644
------------
Total Russian Securities ................... 46,499,349
------------
VENEZUELA--9.7%
Republic of Venezuela
9.25%, 9/15/27 ........................... 72,750 56,199,375
------------
Total Sovereign Debt Obligations
(cost $189,964,130) ...................... 162,358,534
------------
YANKEE--5.2%
Fuji JGB Investment LLC
9.87%, 12/31/49 (b)(d)
(cost $31,541,703) ....................... 34,000 29,931,050
------------
TOTAL INVESTMENTS--136.0%
(cost $806,461,324) ...................... 787,989,485
Other assets less
liabilities--(36.0%) ..................... (208,781,768)
------------
NET ASSETS--100.0% ......................... $579,207,717
============
- --------------------------------------------------------------------------------
(a) Coupon consists of 5.00% cash payment and 3.00% paid-in kind.
(b) Coupon increases periodically based upon a predetermined schedule. Stated
interest rate in effect at June 30, 1998.
(c) Coupon consists of 3.3125% cash payment and 3.3125% paid-in-kind of
Russian IAN's.
(d) Security exempt from registration under Rule 144A of the Securities Act of
1933. This security may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At June 30,
1998, this security amounted to $29,931,050 or 5.2% of net assets.
Glossary of Terms:
FLIRB--Front Loaded Interest Reduction Bond
FRN--Floating Rate Note
IAN--Interest Arrears Note
PDI--Past Due Interest
See notes to financial statements.
4
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998 (unaudited) ACM Government Income Fund
================================================================================
<TABLE>
<S> <C>
ASSETS
Investments in securities, at value (cost $806,461,324) ......................... $ 787,989,485
Cash ............................................................................ 3,060,959
Interest receivable ............................................................. 8,548,047
Prepaid expenses ................................................................ 57,925
-------------
Total assets .................................................................... 799,656,416
-------------
LIABILITIES
Loan payable .................................................................... 90,000,000
Payable for investment securities purchased ..................................... 119,327,743
Unrealized depreciation on swap contracts ....................................... 9,596,034
Loan interest payable ........................................................... 750,344
Advisory fee payable ............................................................ 314,497
Administrative fee payable ...................................................... 73,283
Accrued expenses ................................................................ 386,798
-------------
Total liabilities ............................................................... 220,448,699
-------------
NET ASSETS ....................................................................... $ 579,207,717
=============
COMPOSITION OF NET ASSETS
Capital stock, at par ........................................................... $ 580,047
Additional paid-in capital ...................................................... 620,974,358
Undistributed net investment income ............................................. 5,837,527
Accumulated net realized loss on investments, swap contracts and foreign currency
transactions ................................................................... (20,112,850)
Net unrealized depreciation of investments and swap contracts ................... (28,071,365)
-------------
$ 579,207,717
=============
NET ASSET VALUE PER SHARE (based on 58,004,726 shares outstanding) .............. $9.99
======
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
5
<PAGE>
STATEMENT OF OPERATIONS
Six Months Ended June 30, 1998 (unaudited) ACM Government Income Fund
================================================================================
<TABLE>
<S> <C> <C>
INVESTMENT INCOME
Interest .......................................................................... $ 32,716,069
EXPENSES
Advisory fee ...................................................................... $2,317,627
Administrative fee ................................................................ 513,276
Transfer agency ................................................................... 107,154
Custodian ......................................................................... 94,364
Reports and notices to shareholders ............................................... 54,737
Audit and legal ................................................................... 47,119
Registration fee .................................................................. 20,478
Taxes ............................................................................. 17,055
Directors' fees ................................................................... 15,928
Miscellaneous ..................................................................... 74,465
----------
Total expenses before interest .................................................... 3,262,203
Interest expense .................................................................. 2,689,250
----------
Total expenses .................................................................... 5,951,453
------------
Net investment income ............................................................. 26,764,616
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, OPTIONS WRITTEN AND SWAPS
Net realized gain on investment transactions ...................................... 1,818,887
Net realized loss on options written .............................................. (5,915,610)
Net realized loss on swap contracts ............................................... (5,454,098)
Net change in unrealized depreciation of investment transactions and swap contracts (25,964,217)
------------
Net loss on investment transactions ............................................... (35,515,038)
------------
NET DECREASE IN NET ASSETS FROM OPERATIONS ......................................... $ (8,750,422)
============
</TABLE>
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998 Year Ended
(unaudited) December 31, 1997
---------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
Net investment income ...................................................... $ 26,764,616 $ 54,151,294
Net realized gain (loss) on investments, options written, swap contracts and
foreign currency transactions ............................................. (9,550,821) 54,405,673
Net change in unrealized appreciation (depreciation) of investments, swap
contracts and foreign currency denominated assets and liabilities ......... (25,964,217) (23,004,929)
------------- -------------
Net increase (decrease) in net assets from operations ...................... (8,750,422) 85,552,038
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ....................................... (21,709,994) (52,987,633)
Distributions from net realized gains ...................................... -0- (19,745,091)
COMMON STOCK TRANSACTIONS
Reinvestment of dividends resulting in issuance of Common Stock ............ 4,004,515 2,671,689
------------- -------------
Total increase (decrease) .................................................. (26,455,901) 15,491,003
NET ASSETS
Beginning of year .......................................................... 605,663,618 590,172,615
------------- -------------
End of period (including undistributed net investment income of $5,837,527
and $782,905, respectively) ............................................... $ 579,207,717 $ 605,663,618
============= =============
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
6
<PAGE>
STATEMENT OF CASH FLOWS
Six Months Ended June 30, 1998 (unaudited) ACM Government Income Fund
================================================================================
<TABLE>
<S> <C> <C>
INCREASE (DECREASE) IN CASH FROM OPERATING ACTIVITIES:
Interest received ....................................... $ 29,186,735
Interest expense paid ................................... (2,695,344)
Operating expenses paid ................................. (3,334,609)
---------------
Net increase in cash from operating activities .......... $ 23,156,782
INVESTING ACTIVITIES:
Purchases of long-term investments ...................... (1,291,676,562)
Proceeds from disposition of long-term investments ...... 1,254,980,334
Proceeds from disposition of short-term investments - net 59,583,485
---------------
Net increase in cash from investing activities .......... 22,887,257
FINANCING ACTIVITIES*:
Cash dividends paid ..................................... (42,983,345)
------------
Net increase in cash .................................... 3,060,694
Cash at beginning of year ............................... 265
------------
Cash at end of period ................................... $ 3,060,959
============
- --------------------------------------------------------------------------------------------
RECONCILIATION OF NET DECREASE IN NET ASSETS FROM
OPERATIONS TO NET INCREASE IN CASH FROM OPERATING
ACTIVITIES:
Net decrease in net assets from operations .............. $ (8,750,422)
ADJUSTMENTS:
Decrease in interest receivable ......................... $ 652,194
Accretion of bond discount .............................. (4,181,528)
Decrease in accrued expenses ............................ (78,500)
Net loss on investments ................................. 35,515,038
---------------
Total adjustments ....................................... 31,907,204
------------
NET INCREASE IN CASH FROM OPERATING ACTIVITIES ........... $ 23,156,782
============
</TABLE>
- --------------------------------------------------------------------------------
* Non-cash financing activities not included herein consist of reinvestment
of dividends.
See notes to financial statements.
7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
June 30, 1998 (unaudited) ACM Government Income Fund
================================================================================
NOTE A: Significant Accounting Policies
ACM Government Income Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company. 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 or on a foreign
securities exchange (other than foreign securities exchanges whose operations
are similiar to those of the United States over-the-counter market) are
generally valued at the last reported sale price 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, securities listed on a foreign
securities exchange whose operations are similiar to the United States
over-the-counter market and securities listed on a national securities exchange
whose primary market is believed to be over-the-counter are valued at the mean
of the closing bid and asked price 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. Listed put and call options purchased by the Fund are
valued at the last sale price. If there has been no sale on that day, such
securities will be valued at the closing bid prices on that day.
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. Dividend income is recorded on the ex-dividend
date. Investment transactions are accounted for on the date securities are
purchased or sold. Investment gains and losses are determined on the identified
cost basis. The Fund accretes discounts as adjustments to interest income.
4. Currency Translation
Assets and liabilities denominated in foreign currencies and commitments under
forward exchange currency contracts are translated into U.S. dollars at the mean
of the quoted bid and asked prices of such currencies against the U.S. dollar.
Purchases and sales of portfolio securities are translated into U.S. dollars at
the rates of exchange prevailing when such securities were acquired or sold.
Income and expenses are translated into U.S. dollars at the rates of exchange
prevailing when accrued. Net realized gain or loss on foreign currency
transactions represents foreign exchange gains and losses from sales and
maturities of foreign securities, holding of foreign currencies, options on
foreign currencies, closed forward exchange currency contracts, exchange gains
and losses realized between the trade and settlement dates on foreign security
transactions, and the difference between the amounts of interest and foreign
withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of
the amounts actually received or paid. Net foreign currency gains and losses
from valuing foreign currency denominated assets and
8
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ACM Government Income Fund
================================================================================
liabilities at period end exchange rates are reflected as a component of net
unrealized depreciation of investments and swap contracts.
5. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the ex-dividend
date. Income and capital gains distributions are determined in accordance with
federal tax regulations and may differ from those determined in accordance with
generally accepted 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.
- --------------------------------------------------------------------------------
NOTE B: Advisory, Administrative Fees and Other Transactions with Affiliates
Under the terms of an Investment Advisory Agreement, the Fund pays its Adviser a
monthly advisory fee in an amount equal to the sum of 1/12th of .30% of the
Fund's average weekly net assets up to $250 million, 1/12th of .25% of the
Fund's average weekly net assets in excess of $250 million, and 5.25% of the
daily gross income (i.e., income other than gains from the sale of securities
and foreign currency transactions or gains realized from options and futures
contracts less interest on money borrowed by the Fund) accrued by the Fund
during the month. However, such monthly advisory fee shall not exceed in the
aggregate 1/12th of 1% of the Fund's average weekly net assets during the month
(approximately 1% on an annual basis).
Under the terms of a Shareholder Inquiry Agency Agreement with Alliance Fund
Services, Inc. ("AFS"), an affiliate of the Adviser, the Fund reimburses AFS for
costs relating to servicing phone inquiries on behalf of the Fund. During the
six months ended June 30, 1998, the Fund reimbursed AFS $2,580.
Under the terms of an Administrative Agreement, the Fund pays its Administrator,
Mitchell Hutchins Asset Management Inc., a monthly fee equal to the annualized
rate of .20 of 1% of the Fund's average weekly net assets up to $100 million,
.18 of 1% of the Fund's next $200 million of average weekly net assets, and .16
of 1% of the Fund's average weekly net assets in excess of $300 million. The
Administrator prepares financial and regulatory reports for the Fund and
provides other clerical services.
- --------------------------------------------------------------------------------
NOTE C: Investment Transactions
Purchases and sales of investment securities (excluding short-term investments
and U.S. government securities) aggregated $542,749,177 and $495,857,617,
respectively, for the six months ended June 30, 1998. There were purchases of
$722,081,794 and sales of $759,262,370 of U.S. government and government agency
obligations for the six months ended June 30, 1998.
At June 30, 1998, the cost of investments for federal income tax purposes was
$817,557,374. Accordingly, gross unrealized appreciation of investments was
$10,131,082 and gross unrealized depreciation was $39,698,971, resulting in net
unrealized depreciation of $29,567,889.
1. Forward Exchange Currency Contracts
The Fund enters into forward exchange currency contracts to hedge its exposure
to changes in foreign currency exchange rates on its foreign portfolio holdings,
to hedge certain firm purchase and sale commitments denominated in foreign
currencies and for investment purposes. A forward exchange currency contract is
a commitment to purchase or sell a foreign currency at a future date at a
negotiated forward rate. The gain or loss arising from the difference between
the original contract and the closing of such contract is included in net
realized gain or loss on foreign currency transactions.
Fluctuations in the value of open forward exchange currency contracts are
reflected for financial reporting
9
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NOTES TO FINANCIAL STATEMENTS (cont'd) ACM Government Income Fund
================================================================================
purposes as a component of net unrealized depreciation of investments and swap
contracts.
The Fund's custodian will place and maintain liquid assets in a separate account
of the Fund having a value equal to the aggregate amount of the Fund's
commitments under forward exchange currency contracts entered into with respect
to position hedges.
Risks may arise from the potential inability of a counterparty to meet the terms
of a contract and from unanticipated movements in the value of a foreign
currency relative to the U.S. dollar.
At June 30, 1998, the Fund had no outstanding forward exchange currency
contracts.
2. Option Transactions
For hedging purposes, the Fund purchases and writes (sells) put and call options
on U.S. and foreign government securities and foreign currencies 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 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 paid. The proceeds from
securities sold through the exercise of put options are decreased by the
premiums paid.
When the Fund writes an option, the premium received by the Fund is recorded as
a liability and is subsequently adjusted to the current market value of the
option written. Premiums received from written options which expire unexercised
are recorded by the Fund on the expiration date as realized gain from options
written. 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 is less than the amount paid
for the closing purchase transaction, as a realized loss. If a call option is
exercised, the premium is added to the proceeds from the sale of the underlying
security or currency in determining whether the Fund has a realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security or currency purchased by the Fund. In writing an option, the Fund bears
the market risk of an unfavorable change in the price of the security or
currency underlying the option written. Exercise of an option written by the
Fund could result in the Fund selling or buying a security or currency at a
price different from the current market value.
Transactions in options written for the six months ended June 30, 1998 were as
follows:
Number of
Contracts Premiums
--------- --------
Options outstanding at
beginning of year ...................... -0- $ -0-
Options written .......................... 67,500 819,492
Options exercised ........................ (67,500) (819,492)
-------- --------
Options outstanding
at end of period ....................... -0- $ -0-
======== ========
3. Swap Agreements
The Fund enters into swaps on sovereign debt obligations to protect itself from
interest rate fluctuations on the underlying debt instruments and for investment
purposes. 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
10
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ACM Government Income Fund
================================================================================
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 during 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 swap
contracts are recorded for financial statement purposes as a component of net
change in unrealized appreciation (depreciation) of investments and swaps.
At June 30, 1998, the Fund had the following total return swap agreements
outstanding: (1) notional amount of $34,800,000 Russian IAN bonds obligating the
Fund to pay Morgan Guaranty Trust Company ("Morgan Guaranty"), the swap
counterparty, interest based on the London Interbank Offered Rate ("LIBOR") less
a spread on the principal amount of $97,406, and obligating the swap
counterparty to pay the Fund any appreciation in the value of the underlying
bond. At June 30, 1998, unrealized depreciation on this total return swap
amounted to $4,008,034. (2) notional amount of $55,000,000 Russian Principle
Loans obligating the Fund to pay Morgan Guaranty, the swap counterparty,
interest based on LIBOR less a spread on the principle amount of $44,305, and
obligating the counterparty to pay the Fund any appreciation in the value of the
underlying bond. At June 30, 1998, unrealized depreciation on this total return
swap amounted to $5,588,000.
- --------------------------------------------------------------------------------
NOTE D: Capital Stock
There are 300,000,000 shares of $0.01 par value common stock authorized, of
which 58,004,726 shares were outstanding at June 30, 1998. During the six months
ended June 30, 1998 and the year ended December 31, 1997, the Fund issued
371,653 and 259,568 shares, respectively, in connection with the Fund's dividend
reinvestment plan.
- --------------------------------------------------------------------------------
NOTE E: Bank Borrowing
The Fund has a Revolving Credit Agreement with Morgan Guaranty. The maximum
credit available is $90,000,000 and such amount was outstanding for the entire
six months ended June 30, 1998.
The renewable credit facility of $90,000,000 will mature on August 12, 1998 and
requires no collateralization. The facility may be renewed by the Fund annually
for an additional one-year term.
Interest payments on current borrowings are based on the London Interbank
Offered Rate plus a premium. The weighted average interest rate for the six
months ended June 30, 1998 was 6.03%. The interest rate at June 30, 1998 was
5.9375%. The Fund is also obligated to pay Morgan Guaranty a commitment fee
computed at the rate of .075 of 1% per annum on the average daily unused portion
of the revolving credit.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont'd) ACM Government Income Fund
================================================================================
NOTE F: Year 2000
Many computer software systems in use today cannot properly process data-related
information from and after January 1, 2000. Should any of the computer systems
employed by the Fund's major service providers fail to process this type of
information properly, that could have a negative impact on the Fund's operations
and the services that are provided to the Fund's shareholders. The Adviser, as
well as Alliance Fund Services, have advised the Fund that they are reviewing
all of their computer systems with the goal of modifying or replacing such
systems prior to January 1, 2000, to the extent necessary to foreclose any such
negative impact. In addition, the Adviser has been advised by the Fund's
custodian that it is also in the process of reviewing its systems with the same
goal. As of the date of this report, the Fund and the Adviser have no reason to
believe that these goals will not be achieved. Similarly, the values of certain
of the portfolio securities held by the Fund may be adversely affected by the
inability of the securities' issuers or of third parties to process this type of
information properly.
12
<PAGE>
FINANCIAL HIGHLIGHTS ACM Government Income Fund
================================================================================
Selected Data For a Share of Common Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Six Months
Ended Year Ended December 31,
June 30, 1998 ------------------------------------------------------------
(unaudited) 1997 1996 1995 1994 1993
----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............. $ 10.51 $ 10.29 $ 9.77 $ 8.45 $ 11.05 $ 10.51
-------- -------- -------- -------- -------- --------
Income From Investment Operations
- ---------------------------------
Net investment income (a) ...................... .46 .94 .94 .99 .91 1.14
Net realized and unrealized gain (loss) on
investments, swap contracts, options written
and foreign currency transactions ............ (.60) .54 .55 1.30 (2.51) 1.32
-------- -------- -------- -------- -------- --------
Net increase (decrease) in net asset
value from operations ........................ (.14) 1.48 1.49 2.29 (1.60) 2.46
-------- -------- -------- -------- -------- --------
Less: Dividends and Distributions
- ---------------------------------
Dividends from net investment income ........... (.38) (.92) (.94) (.97) (.76) (1.15)
Distributions in excess of net investment income -0- -0- (.03) -0- -0- -0-
Distributions from net realized gains .......... -0- (.34) -0- -0- -0- (.53)
Tax return of capital distribution ............. -0- -0- -0- -0- (.24) -0-
-------- -------- -------- -------- -------- --------
Total dividends and distributions .............. (.38) (1.26) (.97) (.97) (1.00) (1.68)
-------- -------- -------- -------- -------- --------
Capital Share Transactions
- --------------------------
Dilutive effect of rights offering ............. -0- -0- -0- -0- -0- (.23)
Offering costs charged to additional
paid-in capital .............................. -0- -0- -0- -0- -0- (.01)
-------- -------- -------- -------- -------- --------
Total capital share transactions ............... -0- -0- -0- -0- -0- (.24)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ................. $ 9.99 $ 10.51 $ 10.29 $ 9.77 $ 8.45 $ 11.05
======== ======== ======== ======== ======== ========
Market value, end of period .................... $11.0625 $ 11.00 $ 10.25 $ 9.125 $ 9.125 $ 12.25
======== ======== ======== ======== ======== ========
Total Investment Return
- -----------------------
Total investment return based on: (b)
Market value ................................. 4.18% 20.73% 24.15% 11.37% (17.67)% 28.89%
Net asset value .............................. (1.54)% 15.08% 16.40% 28.73% (15.48)% 21.47%
Ratios/Supplemental Data
- ------------------------
Net assets, end of period (000's omitted) ...... $579,208 $605,664 $590,173 $557,525 $478,511 $616,081
Ratio of expenses to average net assets ........ 1.98%(c) 2.03% 2.17% 2.08% 1.60% 1.48%
Ratio of expenses to average net assets
excluding interest expense (d) ............... 1.08%(c) 1.11% 1.18% 1.29% 1.18% 1.17%
Ratio of net investment income to average
net assets ................................... 8.89%(c) 9.02% 9.78% 11.10% 9.56% 10.06%
Portfolio turnover rate ........................ 154% 304% 349% 380% 298% 424%
</TABLE>
- --------------------------------------------------------------------------------
(a) Based on average shares outstanding.
(b) Total investment return is calculated assuming a purchase of common stock
on the opening of the first day and a sale on the closing of the last day
of each period reported. Dividends and distributions, if any, are assumed
for purposes of this calculation, to be reinvested at prices obtained
under the Fund's Dividend Reinvestment Plan. Generally, total investment
return based on net asset value will be higher than total investment
return based on market value in periods where there is an increase in the
discount or a decrease in the premium of the market value to the net asset
value from the beginning to the end of such periods. Conversely, total
investment return based on net asset value will be lower than total
investment return based on market value in periods where there is a
decrease in the discount or an increase in the premium of the market value
to the net asset value from the beginning to the end of such periods.
Total investment return for a period of less than one year is not
annualized.
(c) Annualized.
(d) Net of interest expense of .90%, .92%, .99%, .79%, .42% and .31%,
respectively, on borrowings (see Note E).
13
<PAGE>
ADDITIONAL INFORMATION ACM Government Income Fund
================================================================================
Supplemental Proxy Information
The Annual Meeting of the Shareholders of the ACM Government Income Fund was
held on Thursday, May 28, 1998. The description of each proposal and number of
shares voted at the meeting are as follows:
Shares Shares Voted
Voted For Without Authority
- --------------------------------------------------------------------------------
1. To elect directors: Class One Directors
(term expires in 2001)
John H. Dobkin 46,129,753 752,463
Clifford L. Michel 46,198,006 684,211
Donald J. Robinson 46,188,183 694,033
Class Two Director
(term expires in 1999)
Willliam H. Foulk, Jr. 46,237,856 644,361
Shares Shares Voted Shares Voted
Voted For Against Abstain
- --------------------------------------------------------------------------------
2. To ratify the selection of 1
Ernst & Young LLP as the Fund's
independent auditors for the fiscal
year ending December 31, 1998. 46,180,666 193,119 508,431
14
<PAGE>
ACM Government Income Fund
================================================================================
BOARD OF DIRECTORS
John D. Carifa, Chairman
Ruth Block (1)
David H. Dievler (1)
James H. Dobkin (1)
William H. Foulk, Jr. (1)
Dr. James M. Hester (1)
Clifford L. Michel (1)
Donald J. Robinson (1)
Robert C. White (1)
OFFICERS
Wayne D. Lyski, President
Kathleen A. Corbet, Senior Vice President
Paul J. DeNoon, Vice President
Christian G. Wilson, Vice President
Edmund P. Bergan, Jr., Secretary
Mark D. Gersten, Treasurer & Chief Financial Officer
Juan J. Rodriguez, Controller
ADMINISTRATOR
Mitchell Hutchins Asset Management Inc.
1285 Avenue of the Americas
New York, NY 10019
CUSTODIAN, DIVIDEND PAYING AGENT, TRANSFER AGENT AND REGISTRAR
State Street Bank and Trust Company
225 Franklin Street
Boston, MA 02110
INDEPENDENT AUDITORS
Ernst & Young LLP
787 Seventh Avenue
New York, NY 10019
LEGAL COUNSEL
Seward & Kissel
One Battery Park Plaza
New York, NY 10004
- --------------------------------------------------------------------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase from time to time at market
prices shares of its Common Stock in the open market.
This report, including the financial statements herein, is transmitted to the
shareholders of ACM Government Income Fund for their information. This financial
information included herein is taken from the records of the Fund. This is not a
prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in this report.
(1) Member of the Audit Committee.
15
<PAGE>
ACM Government Income Fund
Summary of General Information
The Fund
ACM Government Income Fund is a closed-end investment company whose shares trade
on the New York Stock Exchange. The Fund seeks to provide high current income
consistent with preservation of capital. The Fund invests principally in U.S.
government obligations. The Fund may also invest up to 35% of its assets in
other fixed-income securities, including those issued by stable foreign
governments. Additionally, the Fund may utilize other investment techniques,
including options and futures. The investment adviser of the Fund is Alliance
Capital Management L.P.
Shareholder Information
Daily market prices for the Fund's shares are published in the New York Stock
Exchange Composite Transaction Section of newspapers under the designation
"ACMIn". The Fund's NYSE trading symbol is "ACG". Weekly comparative net asset
value (NAV) and market price information about the Fund is published each Monday
in The Wall Street Journal, each Sunday in The New York Times and each Saturday
in Barron's and other newspapers in a table called "Closed-End Bond Funds."
Dividend Reinvestment Plan
A Dividend Reinvestment Plan is available to shareholders in the Fund, which
provides automatic reinvestment of dividends and capital gain distributions in
additional Fund shares. The Plan also allows you to make optional cash
investments in Fund shares through the Plan Agent. If you wish to participate in
the Plan and your shares are held in your name, simply complete and mail the
enrollment form in the brochure. If your shares are held in the name of your
brokerage firm, bank or other nominee, you should ask them whether or how you
can participate in the Plan.
For questions concerning shareholder account information, or if you would like a
brochure describing the Dividend Reinvestment Plan, please call State Street
Bank and Trust Company at 1-800-219-4218.
ACM Government Income Fund
1345 Avenue of the Americas
New York, New York 10105
AllianceCapital [LOGO](R)
(R)These registered service marks used under license from the owner, Alliance
Capital Management L.P.
INCSAR
- --------------------------------------------------------------------------------
ACM
-------------------
GOVERNMENT
-------------------
INCOME FUND
-------------------
Semi-Annual
Report
June 30, 1998
Alliance(R)
- --------------------------------------------------------------------------------
