<PAGE>
LETTER TO SHAREHOLDERS ACM Government Income Fund
================================================================================
February 20, 1998
Dear Shareholder:
This annual report provides investment results and market activity for ACM
Government Income Fund for the period ended December 31, 1997.
BOND MARKET REVIEW
The U.S. bond market posted solid returns in the second half of 1997. Early in
the period, interest rates remained relatively stable and investor demand for
yield oriented securities was high. In spite of strong U.S. economic growth,
inflation remained almost nonexistent, further increasing demand in the bond
market. Toward year-end, financial turmoil, which began in Southeast Asia,
spilled over into other global bond markets, including the U.S. The resulting
"flight to quality" spurred a year-end rally in U.S. Treasury securities while
negatively impacting returns in the corporate, mortgage and non-U.S. bond
sectors.
Interest rates on most maturities fell dramatically over the past six months.
The decreasing likelihood that the Federal Reserve would have to raise rates to
slow economic growth, coupled with the year-end rally in the Treasury market,
helped push interest rates to new lows. Overall, the 30-year Treasury bond,
which was yielding 6.78% at the beginning of the period, fell to 5.92% at
year-end; 5-year note yields fell from 6.37% to 5.71%.
In most developed markets outside of the U.S., growth remained positive while
inflation troughed or declined. All developed bond markets posted solid positive
returns on a hedged basis. In most emerging markets, however, the long run of
strong positive bond market performance was interrupted in the fourth quarter as
the financial crisis in Southeast Asia spilled over into other financial
markets.
INVESTMENT RESULTS
Over the six month period ended December 31, 1997, we are pleased to report that
ACM Government Income Fund returned 9.67% at net asset value (NAV) versus 6.36%
for the Lehman Brothers Aggregate Bond Index. This strong performance versus the
Fund's benchmark can be attributed primarily to the performance of the Fund's
U.S. holdings. As our view of the economic situation in Southeast Asia
deteriorated, we reduced the Fund's holdings in those securities most likely to
be negatively impacted, primarily emerging market debt, and increased the Fund's
allocation to U.S. Treasuries. When the Treasury market rallied in the fourth
quarter, your Fund's overweight position in this sector helped drive up returns.
For the 12 months ended December 31, 1997, your Fund also performed well,
returning 15.08% at NAV versus 9.65% for its benchmark.
INVESTMENT RESULTS*
Period Ended December 31, 1997
Total Return
6 Months 12 Months
-------- ---------
ACM Government
Income Fund 9.67% 15.08%
Lehman Brothers Aggregate
Bond Index 6.36% 9.65%
* The Fund's investment results are cumulative total returns for the period and
are based on the net asset value of the Fund as of December 31, 1997. 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.
1
<PAGE>
ACM Government Income Fund
================================================================================
ECONOMIC REVIEW
The U.S. economy continues to be fundamentally strong and grew at a solid pace
in the second half of 1997. Total growth, as measured by the Gross Domestic
Product (GDP), accelerated to 4.3% in the fourth quarter, following the third
quarter's 3.1% pace. As it has all year, the labor market remained tight and
fueled economic growth. The unemployment rate dropped to 4.7% in December and
hovered near 20-year lows throughout most of the period. For the year, the U.S.
economy created 3.2 million new jobs with over one million jobs added in the
fourth quarter alone. Inflation remained remarkably absent for this late in an
expansion period. Through December, producer prices were down 1.2% from year
earlier levels while consumer prices posted a modest 1.7% gain for the same time
frame.
In Europe, attention centered on which countries will qualify for European
Monetary Union and at what currency level. Growth was moderate and dominated by
exports, while inflation dropped from the peak levels it reached during the
summer. Spain and Italy lowered short term rates, bringing them closer to other
European levels.
In Canada, growth remained strong, inflation was stable and the Central Bank
raised rates to support the weakening Canadian dollar. Meanwhile, the precarious
recovery in Japan was further jeopardized by the deepening economic and
financial turmoil in Asia.
The emerging market economies were roiled by developments in Southeast Asia.
Economic problems, which began in Thailand, quickly spread to Malaysia,
Indonesia, the Philippines and South Korea. Fast growth, fueled by strong
capital inflows, and overvalued currencies, combined to produce large external
trade deficits, property and stock market bubbles, and overextended banking
systems. The sharp currency devaluations that occurred in these countries
ignited fears that other developing economies with managed currency regimes
would suffer similar consequences. Hong Kong, Argentina, Brazil, Russia and
Korea subsequently came under increased scrutiny and pressure. Korea was
particularly hard hit with its large current account deficit and its private
sectors' heavy reliance on short term external debt financings. Policy responses
in the affected countries were often inadequate and/or poorly articulated. This
resulted in additional volatility which spread to other markets in the region
and created a ripple effect felt from Japan to the U.S. and Europe. In many
cases, fundamental analysis temporarily took a back seat to market psychology.
However, as appropriate policy responses are implemented, we believe economic
fundamentals will eventually reassert themselves.
INVESTMENT OUTLOOK
Our outlook for the U.S. remains optimistic. We expect domestic growth to slow
from its 1997 pace to a more sustainable 2.5% rate in 1998. The economic slowing
in Southeast Asia will further temper U.S. growth in the upcoming year as
exports to that region curtail. Meanwhile, the recent decline in interest rates
should moderate the anticipated slowing and provide stimulus to the economy to
ensure continued growth. The Federal Reserve is unlikely to raise interest rates
in the short term in light of the likelihood of slowing growth and the desire to
keep global liquidity at high levels. Until the repercussions of events in
Southeast Asia are fully understood, we expect interest rate volatility to
remain elevated.
Outside of the U.S., global growth should be slower and inflation pressures
should be reduced as Asia exports cheaper goods to the world and imports less
from abroad. Among the major economic blocs, the greatest impact will be felt in
Japan where weaker domestic demand will only be partially offset by a
2
<PAGE>
ACM Government Income Fund
================================================================================
widening trade surplus. Economic activity in Australia and New Zealand should
also be dramatically lower because of these countries' substantial trading
relationships with Asia.
In Europe, the primary theme will continue to be European Monetary Union and the
convergence of interest rates across the continent. With high unemployment, low
inflation and weak domestic demand, short term rates should converge around
4.0%. This is lower than previously expected and should enable Italy and Spain
to trim rates further.
In the emerging markets, we expect volatility to remain elevated and liquidity
to remain low. Although the direction of Asia's impact is clear, the full extent
of the crisis has yet to be determined. At this juncture, stabilizing Korea is
key, and multinational efforts are clearly focused on this goal. We expect the
U.S. Treasury market to continue to be perceived as a "safe haven" for investors
until clear policy responses are outlined and there is a commitment to
implementing them. As adjustments are made, we believe markets will stabilize
and significant investment opportunities will be found in many bond markets
around the world.
Thank you for your continued interest and investment in 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
December 31, 1997 ACM Government Income Fund
================================================================================
Principal
Amount
(000) U.S. $ Value
- --------------------------------------------------------------
U.S. GOVERNMENT
OBLIGATIONS--102.0%
U.S. TREASURY BONDS--95.5%
Zero coupon, 5/15/09............. $ 6,250 $ 3,209,438
Zero coupon, 2/15/10............. 83,620 40,966,274
Zero coupon, 5/15/10............. 112,340 54,173,718
Zero coupon, 2/15/11............. 42,700 19,635,168
6.125%, 11/15/27................. 104,800 107,698,768
6.375%, 8/15/27.................. 141,045 148,758,751
12.375%, 5/15/04................. 46,380 62,511,428
14.00%, 11/15/11................. 91,030 141,452,427
-------------
578,405,972
-------------
U.S. TREASURY NOTES--6.5%
6.125%, 8/15/07.................. 32,750 33,655,865
7.00%, 7/15/06................... 5,250 5,666,693
-------------
39,322,558
-------------
Total U.S. Government Obligations
(cost $604,971,042).............. 617,728,530
-------------
SOVEREIGN DEBT OBLIGATIONS--30.0%
BRAZIL--5.2%
Republic of Brazil
10.125%, 5/15/27................. 33,750 31,682,812
-------------
ECUADOR--3.1%
Republic of Ecuador (Par)
Collateralized
3.50%, 2/28/25 (a)............... 33,750 18,604,688
-------------
PANAMA--1.5%
Republic of Panama
IRB
3.75%, 7/17/14................... 5,750 4,398,750
PDI
6.6875%, 7/17/16 (b)............. 5,649 4,604,110
-------------
Total Panamanian
Securities....................... 9,002,860
-------------
PERU--2.5%
Republic of Peru
PDI
4.00%, 3/07/17 (a)............... 22,500 14,793,750
-------------
RUSSIA--17.7%
Russia Principal Loan FRN
6.71875%, 12/15/20 (c)........... 149,700 93,001,125
Russian IAN FRN
6.71875%, 12/02/15 (d)........... 20,250 14,377,500
-------------
Total Russian Securities.......... 107,378,625
-------------
Total Sovereign Debt
Obligations
(cost $196,655,886).............. 181,462,735
-------------
TIME DEPOSIT--5.8%
State Street Bank & Trust Co.
Cayman Islands
5.25%, 1/02/98
(cost $35,204,000)............... 35,204 35,204,000
-------------
TOTAL INVESTMENTS--137.8%
(cost $836,830,928).............. 834,395,265
Other assets less
liabilities--(37.8%)............. (228,731,647)
-------------
NET ASSETS--100.0%................ $ 605,663,618
=============
4
<PAGE>
PORTFOLIO OF INVESTMENTS (continued) ACM Government Income Fund
================================================================================
(a) Coupon increases periodically based upon a predetermined schedule.
Stated interest rate in effect at December 31, 1997.
(b) Coupon consists of 4.00% cash payment and 2.6875% paid-in-kind.
(c) Coupon consists of 4.00% cash payment and 2.71875% paid-in-kind.
(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 December 31, 1997, this
security amounted to $14,377,500 or 2.4% of net assets.
Glossary of Terms:
FRN--Floating Rate Note. Coupon will fluctuate based upon an interest rate
index. Stated interest rate in effect at December 31, 1997.
IAN--Interest Arrears Note
IRB--Interest Reduction Bond
PDI--Past Due Interest
See notes to financial statements.
5
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997 ACM Government Income Fund
================================================================================
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments in securities, at value (cost $836,830,928) ...................... $ 834,395,265
Cash ......................................................................... 265
Interest receivable .......................................................... 9,639,067
Unrealized appreciation on swap contract ..................................... 328,515
-------------
Total assets ................................................................. 844,363,112
-------------
LIABILITIES
Loan payable ................................................................. 90,000,000
Payable for investment securities purchased .................................. 121,793,850
Distributions payable ........................................................ 25,277,866
Loan interest payable ........................................................ 756,438
Advisory fee payable ......................................................... 395,172
Administrative fee payable ................................................... 88,537
Swap interest payable ........................................................ 82,281
Accrued expenses ............................................................. 305,350
-------------
Total liabilities ............................................................ 238,699,494
-------------
NET ASSETS .................................................................... $ 605,663,618
=============
COMPOSITION OF NET ASSETS
Capital stock, at par ........................................................ $ 576,331
Additional paid-in capital ................................................... 616,973,559
Undistributed net investment income .......................................... 782,905
Accumulated net realized loss on investments
and foreign currency transactions............................................ (10,562,029)
Net unrealized depreciation of investments and swap contract ................. (2,107,148)
-------------
$ 605,663,618
=============
NET ASSET VALUE PER SHARE (based on 57,633,073 shares outstanding) ............ $10.51
======
- -----------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
6
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1997 ACM Government Income Fund
================================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C> <C>
Interest ........................................................................ $ 66,311,633
EXPENSES
Advisory fee .................................................................... $4,828,660
Administrative fee .............................................................. 1,040,518
Transfer agency ................................................................. 232,123
Custodian ....................................................................... 155,863
Reports and notices to shareholders ............................................. 119,162
Audit and legal ................................................................. 102,512
Registration fee ................................................................ 50,240
Taxes ........................................................................... 41,550
Directors' fees ................................................................. 32,120
Miscellaneous ................................................................... 41,029
----------
Total expenses before interest .................................................. 6,643,777
Interest expense ................................................................ 5,516,562
----------
Total expenses .................................................................. 12,160,339
------------
Net investment income ........................................................... 54,151,294
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS, SWAPS
AND FOREIGN CURRENCY TRANSACTIONS
Net realized gain on investment transactions .................................... 54,325,242
Net realized gain on foreign currency transactions .............................. 80,431
Net change in unrealized appreciation of:
Investments and swaps .......................................................... (21,935,829)
Foreign currency denominated assets and liabilities ............................ (1,069,100)
------------
Net realized and unrealized gain on investments and foreign currency transactions 31,400,744
------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ...................................... $ 85,552,038
============
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
==========================================================================================================================
Year Ended Year Ended
December 31, 1997 December 31, 1996
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S> <C> <C>
Net investment income .......................................................... $ 54,151,294 $ 54,051,986
Net realized gain on investments and foreign currency transactions ............. 54,405,673 19,178,729
Net change in unrealized appreciation of investments, swaps and foreign currency
denominated assets and liabilities ........................................ (23,004,929) 12,618,010
------------- -------------
Net increase in net assets from operations ..................................... 85,552,038 85,848,725
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ........................................... (52,987,633) (54,051,986)
Distributions in excess of net investment income ............................... -0- (1,772,419)
Distributions from net realized gains .......................................... (19,745,091) -0-
COMMON STOCK TRANSACTIONS
Reinvestment of dividends resulting in issuance of Common Stock ................ 2,671,689 2,623,620
------------- -------------
Total increase ................................................................. 15,491,003 32,647,940
NET ASSETS
Beginning of year .............................................................. 590,172,615 557,524,675
------------- -------------
End of year (including undistributed net investment income of $782,905
and $1,440,066, respectively) ............................................ $ 605,663,618 $ 590,172,615
============= =============
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements.
7
<PAGE>
STATEMENT OF CASH FLOWS
Year Ended December 31, 1997 ACM Government Income Fund
================================================================================
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH FROM OPERATING ACTIVITIES:
<S> <C> <C>
Interest received ....................................... $ 62,216,123
Interest paid ........................................... (5,381,343)
Operating expenses paid ................................. (6,678,206)
---------------
Net increase in cash from operating activities .......... $ 50,156,574
INVESTING ACTIVITIES:
Purchases of long-term investments ...................... (2,343,879,697)
Proceeds from disposition of long-term investments ...... 2,246,551,410
Proceeds from disposition of short-term investments - net 98,552,111
---------------
Net increase in cash from investing activities .......... 1,223,824
FINANCING ACTIVITIES*:
Cash dividends paid ..................................... (51,381,122)
---------------
Net decrease in cash .................................... (724)
Cash at beginning of year ............................... 989
---------------
Cash at end of year ..................................... $ 265
===============
<CAPTION>
- -------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM
OPERATIONS TO NET INCREASE IN CASH FROM OPERATING
ACTIVITIES:
<S> <C> <C>
Net increase in net assets from operations .............. $ 85,552,038
ADJUSTMENTS:
Decrease in interest receivable ......................... $ 3,911,707
Accretion of bond discount .............................. (8,007,216)
Increase in accrued expenses ............................ 100,789
Net gain on investments ................................. (31,400,744)
---------------
Total adjustments ....................................... (35,395,464)
---------------
NET INCREASE IN CASH FROM OPERATING ACTIVITIES .......... $ 50,156,574
===============
- -------------------------------------------------------------------------------------------------------
</TABLE>
* Non-cash financing activities not included herein consist of reinvestment of
dividends.
See notes to financial statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 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 similar 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, and securities listed on a
foreign securities market whose operations are similar 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 value of
such securities. Listed put and call options purchased by the Fund are valued at
the latest 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. 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 rates of exchange
prevailing when earned or accrued. Net realized gain 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 liabilities at year end
exchange rates are reflected as a component of net unrealized
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont'd) ACM Government Income Fund
================================================================================
appreciation of investments and foreign currency denominated assets and
liabilities.
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 accounting principles. To the extent these differences are
permanent, such amounts are reclassified within the capital accounts based on
their federal tax basis treatment; temporary differences do not require such
reclassification. During the current fiscal year, permanent differences,
primarily due to foreign currency transactions, resulted in a net increase in
accumulated net realized loss on investments and foreign currency transactions
and a corresponding decrease in undistributed net investment income. This
reclassification had no effect on net assets.
- --------------------------------------------------------------------------------
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 year ended December 31, 1997, $5,292 was
reimbursed to AFS.
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 $905,374,552 and $902,027,682,
respectively, for the year ended December 31, 1997. There were purchases of
$1,331,036,913 and sales of $1,319,373,249 of U.S. government and government
agency obligations for the year ended December 31, 1997.
At December 31, 1997, the cost of investments for federal income tax purposes
was $848,868,277. Accordingly, gross unrealized appreciation of investments was
$16,433,382 and gross unrealized depreciation of investments was $30,906,394,
resulting in net unrealized depreciation of $14,473,012, (excluding foreign
currency transactions).
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
10
<PAGE>
ACM Government Income Fund
================================================================================
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 purposes as a component of net unrealized
depreciation of investments and foreign currency denominated assets and
liabilities.
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 December 31, 1997, 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 the 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 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 realized a 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.
For the year ended December 31, 1997, the Fund did not have any written option
transactions.
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
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont'd) ACM Government Income Fund
================================================================================
the termination value at the end of the contract. Therefore, the Fund considers
the creditworthiness of each counterparty to a swap contract in evaluating
potential credit risk. Additionally, risks may arise from unanticipated
movements in interest rates or in the value of the underlying securities.
The Fund records a net receivable or payable on a daily basis for the net
interest income or expense expected to be received or paid in the interest
period. Net interest received or paid on these contracts is recorded as interest
income (or as an offset to interest income). Fluctuations in the value of swap
contracts are recorded for financial statement purposes as a component of net
change in unrealized appreciation (depreciation) of investments.
At December 31, 1997, the Fund had a total return swap agreement outstanding.
The swap is based on a notional amount of $34,800,000 Russian IAN bonds and
obligates the Fund to pay to Morgan Guaranty Trust Company, the swap
counterparty, interest based on Libor less a spread on the principal amount of
$24,379,484, and obligates the swap counterparty to pay the Fund any
appreciation in the value of the underlying bond. At December 31, 1997,
unrealized appreciation on the total return swap amounted to $328,515.
- --------------------------------------------------------------------------------
NOTE D: Capital Stock
There are 300,000,000 shares of $0.01 par value common stock authorized, of
which 57,633,073 shares were outstanding at December 31, 1997.
During the years ended December 31, 1997 and 1996, the Fund issued 259,568 and
280,075 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 Trust Company of
New York ("Morgan Guaranty"). The maximum credit available is $90,000,000 and
such amount was outstanding for the entire year ended December 31, 1997
The renewable credit facility of $90,000,000 will expire 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 year
ended December 31, 1997 was 6.13%. The interest rate at December 31, 1997 was
6.175%. 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.
12
<PAGE>
FINANCIAL HIGHLIGHTS ACM Government Income Fund
================================================================================
Selected Data For a Share of Common Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year............ $10.29 $ 9.77 $ 8.45 $11.05 $10.51
------ ------ ------ ------ ------
Income From Investment Operations
- ---------------------------------
Net investment income (a)..................... .94 .94 .99 .91 1.14
Net realized and unrealized gain (loss) on
investments, swaps, options written and
foreign currency transactions............... .54 .55 1.30 (2.51) 1.32
------ ------ ------ ------ ------
Net increase (decrease) in net asset
value from operations....................... 1.48 1.49 2.29 (1.60) 2.46
------ ------ ------ ------ ------
Less: Dividends and Distributions
- ---------------------------------
Dividends from net investment income.......... (.92) (.94) (.97) (.76) (1.15)
Distributions in excess of net investment
income...................................... -0- (.03) -0- -0- -0-
Distributions from net realized gains......... (.34) -0- -0- -0- (.53)
Tax return of capital distribution............ -0- -0- -0- (.24) -0-
------ ------ ------ ------ ------
Total dividends and distributions............. (1.26) (.97) (.97) (1.00) (1.68)
------ ------ ------ ------ ------
Capital Share Transactions
- --------------------------
Dilutive effect of rights offering............ -0- -0- -0- -0- (.23)
Offering costs charged to additional
paid-in capital............................. -0- -0- -0- -0- (.01)
------ ------ ------ ------ ------
Total capital share transactions.............. -0- -0- -0- -0- (.24)
------ ------ ------ ------ ------
Net asset value, end of year.................. $10.51 $10.29 $ 9.77 $ 8.45 $11.05
====== ====== ====== ====== ======
Market value, end of year..................... $11.00 $10.25 $9.125 $9.125 $12.25
====== ====== ====== ====== ======
Total Investment Return
- -----------------------
Total investment return based on: (b)
Market value................................ 20.73% 24.15% 11.37% (17.67)% 28.89%
Net asset value............................. 15.08% 16.40% 28.73% (15.48)% 21.47%
Ratios/Supplemental Data
- ------------------------
Net assets, end of year (000's omitted)....... $605,664 $590,173 $557,525 $478,511 $616,081
Ratio of expenses to average net assets....... 2.03% 2.17% 2.08% 1.60% 1.48%
Ratio of expenses to average net assets
excluding interest expense (c).............. 1.11% 1.18% 1.29% 1.18% 1.17%
Ratio of net investment income to average
net assets.................................. 9.02% 9.78% 11.10% 9.56% 10.06%
Portfolio turnover rate....................... 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 year 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 years 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 years. Conversely, total investment return
based on net asset value will be lower than total investment return based on
market value in years 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 years.
(c) Net of interest expense of .92%, .99%, .79%, .42% and .31%, respectively,
on borrowings (see Note E).
13
<PAGE>
REPORT OF ERNST & YOUNG LLP
INDEPENDENT AUDITORS ACM Government Income Fund
================================================================================
To the Shareholders and Board of Directors
ACM Government Income Fund, Inc.
We have audited the accompanying statement of assets and liabilities of ACM
Government Income Fund, Inc., including the portfolio of investments, as of
December 31, 1997, 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
December 31, 1997, 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 ACM
Government Income Fund, Inc. at December 31, 1997, 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 periods in the period then ended, and the financial highlights
for each of the indicated periods, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
New York, New York
January 30, 1998
14
<PAGE>
ADDITIONAL INFORMATION ACM Government Income Fund
================================================================================
Shareholders whose shares are registered in their own names may elect to be
participants in the Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
pursuant to which dividends and capital gain distributions to shareholders will
be reinvested in additional shares of the Fund. State Street Bank and Trust
Company (the "Agent") will act as agent for participants under the Plan.
Shareholders whose shares are held in the name of a broker or nominee should
contact such broker or nominee to determine whether or how they may participate
in the Plan.
If the Board declares an income distribution or determines to make a capital
gain distribution payable either in shares or in cash, as holders of the Common
Stock may have elected, non-participants in the Plan will receive cash and
participants in the Plan will receive the equivalent in shares of Common Stock
of the Fund valued as follows:
(i) If the shares of Common Stock are trading at net asset value or at a
premium above net asset value at the time of valuation, the Fund will issue
new shares at the greater of net asset value or 95% of the then current
market price.
(ii) If the shares of Common Stock are trading at a discount from net asset
value at the time of valuation, the Agent will receive the dividend or
distribution in cash and apply it to the purchase of the Fund's shares of
Common Stock in the open market on the New York Stock Exchange or elsewhere,
for the participants' accounts. Such purchases will be made on or shortly
after the payment date for such dividend or distribution and in no event more
than 30 days after such date except where temporary curtailment or suspension
of purchase is necessary to comply with Federal securities laws. If, before
the Agent has completed its purchases, the market price exceeds the net asset
value of a share of Common Stock, the average purchase price per share paid
by the Agent may exceed the net asset value of the Fund's shares of Common
Stock, resulting in the acquisition of fewer shares than if the dividend or
distribution had been paid in shares issued by the Fund.
The Agent will maintain all shareholders' accounts in the Plan and furnish
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Agent in non-certificate form in the name of the
participant, and each shareholder's proxy will include those shares purchased or
received pursuant to the Plan.
There will be no charges with respect to shares issued directly by the Fund to
satisfy the dividend reinvestment requirements. However, each participant will
pay a pro rata share of brokerage commissions incurred with respect to the
Agent's open market purchases of shares. In each case, the cost per share of
shares purchased for each shareholder's account will be the average cost,
including brokerage commissions, of any shares purchased in the open market plus
the cost of any shares issued by the Fund.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income taxes that may be payable (or required to be
withheld) on dividends and distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan as applied to any
voluntary cash payments made and any dividend or distribution paid subsequent to
written notice of the change sent to participants in the Plan at least 90 days
before the record date for such dividend or distribution. The Plan may also be
amended or terminated by the Agent on at least 90 days' written notice to
participants in the Plan. All correspondence concerning the Plan should be
directed to the Agent at State Street Bank and Trust Company, P.O. Box 8200,
Boston, Massachusetts 02266-8200.
Since the filing of the most recent amendment to the Fund's registration
statement with the Securities and Exchange Commission, there have been (i) no
material changes in the Fund's investment objective or policies, (ii) no changes
to the Fund's charter or by-laws that would delay or prevent a change of control
of the Fund, (iii) no material changes in the principal risk factors associated
with investment in the Fund, and (iv) no change in the person primarily
responsible for the day-to-day management of the Fund's portfolio, who is Wayne
D. Lyski, the President of the Fund.
15
<PAGE>
ACM Government Income Fund
================================================================================
Board Of Directors
John D. Carifa, Chairman
Ruth Block (1)
David H. Dievler (1)
James R. Greene (1)
Dr. James M. Hester (1)
Clifford L. Michel (1)
Donald J. Robinson
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
Joseph J. Mantineo, 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.
16
<PAGE>
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<PAGE>
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<PAGE>
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<PAGE>
- --------------------------------------------------------------------------------
ACM
-----------------------
Government
-----------------------
Income Fund
-----------------------
Annual Report
December 31, 1997
Alliance(R)
- --------------------------------------------------------------------------------
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
[LOGO OF ALLIANCE CAPITAL APPEARS HERE]
(R)These registered service marks used under license from the owner, Alliance
Capital Management L.P.
INCAR
