<PAGE>
LETTER TO SHAREHOLDERS ACM Government Income Fund
================================================================================
February 26, 1999
Dear Shareholder:
This report provides an overview of our strategy, performance and outlook for
the ACM Government Income Fund for the annual reporting period ended December
31, 1998. The Fund is designed to provide high current income consistent with
the 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.
INVESTMENT RESULTS
The following table shows how your Fund performed over the past six- and
12-month periods ended December 31, 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. Your Fund underperformed the benchmark for
both the six- and 12-month periods under review. Although the Fund's U.S.
Treasury allocation posted strong gains, the portfolio's exposure to emerging
market debt, which performed poorly during the period, hurt overall performance.
INVESTMENT RESULTS*
Periods Ended December 31, 1998
Total Returns
6 Months 12 Months
ACM Government
Income Fund -6.94% -8.38%
Lehman Brothers
Aggregate Bond Index 4.58% 8.69%
* The Fund's investment results are total returns for the period
and are based on the net asset value of the Fund as of
December 31, 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 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.
MARKET OVERVIEW
During the six-month period ended December 31, 1998, global markets experienced
volatility as financial and economic turmoil, spreading from Asia to Russia,
then to Latin America, elevated concerns about recession and a global economic
slowdown. However, decisive stimulative policies by the Federal Reserve and the
Central Banks in Europe to cut interest rates stemmed the downward trend and
ended the year with cautious optimism.
Despite global turmoil, the United States continued on a path of robust growth
driven by domestic consumer demand. Manufacturing, however, remained weak as
world export markets declined. Inflation continued to be benign and employment
strong throughout the period. The Federal Reserve, as a hedge against a slowing
global economy, lowered interest rates three times by a quarter of a percentage
point from 5.50% to 4.75%.
The U.S. bond market, which posted solid gains, provided a safe haven for
investors seeking liquidity during periods of global volatility. As investors
became more risk averse, U.S. Treasuries outperformed all other U.S. fixed
income sectors during the six-month period. Treasury yields (which move in the
opposite direction of price) reached record lows prior to rebounding at the end
of the period.
1
<PAGE>
ACM Government Income Fund
================================================================================
In the developed markets outside of the U.S., government bond returns were
augmented by investors' aversion to risk. Traditional safe haven markets
benefited from both the flight to quality and the increased probability of
monetary easing, while non-safe haven countries suffered from low liquidity. On
an individual country basis, all developed government bond markets posted strong
returns with the exception of Japan.
In the emerging markets, debt prices fell over the six-month period when renewed
global volatility, caused by fiscal problems in Russia, heightened investor
concerns about all higher yielding asset classes. Investor confidence was
briefly restored in July, when the International Monetary Fund (IMF) approved an
emergency loan package for the Russian government. However, the downward fall of
emerging market debt prices resumed and accelerated in August after the Russian
government devalued the ruble and defaulted on its domestic debt. This move by
the Russian government led to a general sell-off of emerging market assets as
investors moved to lower their portfolios' risk exposure. In September, investor
concern shifted to Brazil, which, like Russia, has a semi-fixed currency regime
and deficits in both its fiscal and current accounts. After reaching a low in
September, emerging market debt prices rebounded as the U.S. and other
industrial countries began easing monetary policy.
INVESTMENT STRATEGY
During the six-month period under review, we maintained a longer interest rate
duration than the market, generally employing U.S. Treasury holdings with
maturities of 10 years or more. We opportunistically employed securities issued
in foreign countries to enhance portfolio yield. Government debt was held in
Venezuela, Brazil, Argentina and Peru. In addition, we held a preferred security
in the developed market.
ECONOMIC OUTLOOK
We believe the risk of global recession has diminished after the recent wave of
official interest rate cuts around the world. However, global growth should
continue to slow and inflation should remain subdued as the consequences of
excess productive capacity are felt around the world. U.S. economic activity is
expected to moderate from the robust rate of the fourth quarter with growth
estimates centered around 3.0% for 1999. Further interest rate reductions by the
Federal Reserve are not imminent, however, we believe the Federal Reserve will
respond quickly to accommodate liquidity needs, if, and as, they arise. U.S.
interest rates, as well as inflation, should remain low and the U.S. Treasury
market will continue to provide a safe haven during times of volatility.
In Europe, we expect growth to slow to 2% in 1999 from 2.6% in 1998. Inflation
is expected to remain low. Additional rate cuts by the European Central Bank are
likely. The new Euro will provide interesting investment opportunities as it
stimulates the development of a European bond market exhibiting similar
characteristics to the U.S. bond market. Longer term, it is expected to rival
the U.S. dollar in strength. Japanese growth is expected to decline by 1% in
1999 after having shrunk an estimated 2.9% in 1998. A deflationary cycle has
taken hold in Japan and is negatively impacting the world economic outlook. We
remain pessimistic on the outlook for Japanese growth until meaningful financial
and real-sector reforms are implemented.
In the emerging market arena, increased uncertainty has been generated by the
change in Brazil's exchange rate policy. Spreads on emerging market debt have
widened considerably as a result, weakening growth prospects for Latin America.
Furthermore, we remain concerned about the effects that slower global growth and
low commodity prices will have on
2
<PAGE>
ACM Government Income Fund
================================================================================
emerging markets. In this environment, we expect emerging market debt prices to
remain volatile. They should contain periods of improved sentiment, triggered by
stimulative policies in developed countries, interspersed with episodes of
weakness, as investors lose confidence in the pace of reforms in emerging
countries and Japan.
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
December 31, 1998 ACM Government Income Fund
================================================================================
Principal
Amount
(000) U.S. $ Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT
OBLIGATIONS--108.4%
U.S. TREASURY BONDS--59.0%
5.25%, 11/15/28................ $ 23,500 $ 24,058,125
6.125%, 11/15/27............... 82,100 91,900,277
6.375%, 8/15/27................ 19,000 21,838,030
12.375%, 5/15/04............... 46,380 62,960,850
14.00%, 11/15/11............... 64,000 101,390,080
------------
302,147,362
------------
U.S. TREASURY STRIPS--46.0%
Zero coupon, 2/15/10........... 83,620 47,519,574
Zero coupon, 5/15/10........... 100,000 55,962,000
Zero coupon, 5/15/12........... 183,750 90,513,412
Zero coupon, 8/15/12........... 35,000 16,978,150
Zero coupon, 5/15/13........... 53,000 24,518,860
------------
235,491,996
------------
U.S. TREASURY NOTES--3.4%
5.625%, 5/15/08................ 16,500 17,605,995
------------
Total U.S. Government
Obligations
(cost $548,955,645).......... 555,245,353
------------
SOVEREIGN DEBT
OBLIGATIONS--21.4%
ARGENTINA--1.8%
Republic of Argentina, FRN
6.1875%, 3/31/05............... 10,575 8,988,750
------------
BRAZIL--4.6%
Federal Republic of Brazil
C Bonds 8.00%, 4/15/14 (a)..... 39,745 23,648,082
------------
PERU--4.0%
Republic of Peru
FLIRB
3.25%, 3/07/17 (b)(c).......... 27,800 15,707,000
PDI
4.00%, 3/07/17 (b)............. 7,750 4,863,125
------------
20,570,125
------------
Shares or
Principal
Amount
(000) U.S. $ Value
- --------------------------------------------------------------------------------
RUSSIA--0.4%
Russian Principal Loans FRN
5.969%, 12/15/20 (d)........... $44,500 $ 2,058,125
Russian IAN FRN
5.969%, 12/15/15............... 1,675 175,920
------------
2,234,045
------------
VENEZUELA--10.6%
Republic of Venezuela
9.25%, 9/15/27................. 52,500 32,025,000
13.625%, 8/15/18............... 28,750 22,137,500
------------
54,162,500
------------
Total Sovereign Debt
Obligations
(cost $151,330,928)............ 109,603,502
------------
YANKEE--4.8%
Fuji JGB Investment LLC
9.87%, 12/31/49 (b)(c)
(cost $31,545,711)............. 34,000 24,860,086
------------
PREFERRED STOCK--4.5%
Centaur Funding Corp.,
Series B (c)
(cost $22,500,000)............. 22,500 23,244,075
------------
U.S. CORPORATE
BONDS--2.2%
Time Warner Entertainment Co.
8.375%, 7/15/33
(cost $11,063,430)............. 9,000 11,160,036
------------
TOTAL INVESTMENTS--141.3%
(cost $765,395,714)............ 724,113,052
Other assets less
liabilities--(41.3%)........... (211,817,264)
------------
NET ASSETS--100.0%.............. $512,295,788
============
4
<PAGE>
PORTFOLIO OF INVESTMENTS
December 31, 1998 (Cont.) ACM Government Income Fund
================================================================================
- --------------------------------------------------------------------------------
(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 December 31, 1998.
(c) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At December 31,
1998, these securities amounted to $63,811,161 or 12.5% of net assets.
(d) Paid-in-kind in Russian IAN's.
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.
5
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998 ACM Government Income Fund
================================================================================
ASSETS
Investments in securities, at value (cost $765,395,714).......... $724,113,052
Cash............................................................. 11,951,754
Receivable for investment securities sold........................ 23,561,359
Interest receivable.............................................. 9,607,062
------------
Total assets..................................................... 769,233,227
------------
LIABILITIES
Loan payable..................................................... 90,000,000
Payable for investment securities purchased...................... 160,774,950
Distributions payable............................................ 3,494,370
Loan interest payable............................................ 2,147,750
Administrative fee payable....................................... 83,316
Unrealized depreciation on swap contracts........................ 75,404
Accrued expenses................................................. 361,649
------------
Total liabilities................................................ 256,937,439
------------
NET ASSETS........................................................ $512,295,788
============
COMPOSITION OF NET ASSETS
Capital stock, at par............................................ $ 582,395
Additional paid-in capital....................................... 623,161,648
Undistributed net investment income.............................. 2,034,428
Accumulated net realized loss on investments, swap contracts
and foreign currency transactions.............................. (72,119,138)
Net unrealized depreciation of investments and swap contracts.... (41,363,545)
------------
$512,295,788
============
NET ASSET VALUE PER SHARE (based on 58,239,505 shares outstanding) $8.80
============
- -------------------------------------------------------------------------------
See notes to financial statements.
6
<PAGE>
STATEMENT OF OPERATIONS
Year Ended December 31, 1998 ACM Government Income Fund
================================================================================
INVESTMENT INCOME
Interest............................................ $62,752,706
EXPENSES
Advisory fee........................................ $4,517,809
Administrative fee.................................. 982,489
Transfer agency..................................... 238,934
Custodian........................................... 186,472
Reports and notices to shareholders................. 128,351
Audit and legal..................................... 90,897
Registration fee.................................... 50,383
Taxes............................................... 45,075
Directors' fees..................................... 32,620
Miscellaneous....................................... 30,647
----------
Total expenses before interest...................... 6,303,677
Interest expense.................................... 5,460,438
----------
Total expenses...................................... 11,764,115
------------
Net investment income............................... 50,988,591
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS,
OPTIONS WRITTEN AND SWAPS
Net realized loss on investment transactions........ (2,445,227)
Net realized loss on options written................ (5,555,610)
Net realized loss on swap contracts................. (51,945,143)
Net change in unrealized depreciation of investment
transactions and swap contracts................... (39,256,397)
------------
Net loss on investment transactions................. (99,202,377)
------------
NET DECREASE IN NET ASSETS FROM OPERATIONS............. $(48,213,786)
============
STATEMENT OF CHANGES IN NET ASSETS
================================================================================
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS
<S> <C> <C>
Net investment income...................................................... $ 50,988,591 $ 54,151,294
Net realized gain (loss) on investments, options written, swap contracts,
and foreign currency transactions........................................ (59,945,980) 54,405,673
Net change in unrealized appreciation (depreciation) of investments,
swap contracts and foreign currency denominated assets and liabilities... (39,256,397) (23,004,929)
----------- -----------
Net increase (decrease) in net assets from operations...................... (48,213,786) 85,552,038
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income....................................... (51,348,197) (52,987,633)
Distributions from net realized gains...................................... -0- (19,745,091)
COMMON STOCK TRANSACTIONS
Reinvestment of dividends resulting in issuance of Common Stock............ 6,194,153 2,671,689
----------- -----------
Total increase (decrease).................................................. (93,367,830) 15,491,003
NET ASSETS
Beginning of year.......................................................... 605,663,618 590,172,615
----------- -----------
End of year (including undistributed net investment income of $423,299
and $782,905, respectively).............................................. $512,295,788 $605,663,618
=========== ===========
</TABLE>
- --------------------------------------------------------------------------------
See notes to financial statements.
7
<PAGE>
STATEMENT OF CASH FLOWS
Year Ended December 31, 1998 ACM Government Income Fund
================================================================================
<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH FROM OPERATING ACTIVITIES:
<S> <C> <C>
Interest received............................................. $ 52,814,282
Interest expense paid......................................... (4,069,126)
Operating expenses paid....................................... (6,647,771)
-------------
Net increase in cash from operating activities................ $42,097,385
INVESTING ACTIVITIES:
Purchases of long-term investments............................ (3,175,655,580)
Proceeds from disposition of long-term investments............ 3,210,364,492
Proceeds from disposition of short-term investments - net..... 2,082,732
-------------
Net increase in cash from investing activities................ 36,791,644
FINANCING ACTIVITIES(*):
Cash dividends paid........................................... (66,937,540)
-----------
Net increase in cash............................................ 11,951,489
Cash at beginning of year..................................... 265
-----------
Cash at end of year........................................... $11,951,754
===========
RECONCILIATION OF NET DECREASE IN NET ASSETS FROM
OPERATIONS TO NET INCREASE IN CASH FROM OPERATING
ACTIVITIES:
Net decrease in net assets from operations.................... $(48,213,786)
ADJUSTMENTS:
Increase in interest receivable............................... $ (50,274)
Accretion of bond discount.................................... (9,888,150)
Increase in accrued expenses.................................. 1,047,218
Net loss on investments....................................... 99,202,377
----------
Total adjustments............................................... 90,311,169
-----------
NET INCREASE IN CASH FROM OPERATING ACTIVITIES.................. $42,097,385
===========
</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, 1998 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, securities listed on a foreign
securities exchange 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 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
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS(Cont.) ACM Government Income Fund
================================================================================
and losses from valuing foreign currency denominated assets and liabilities at
year 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. During the current fiscal year, permanent differences,
primarily due to tax characterization of distribution paid during the year,
resulted in a net decrease to accumulated net realized loss on investments, swap
contracts and foreign currency transactions and a corresponding increase 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, 1/12 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, 1998, the Fund reimbursed AFS $5,605.
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 $799,216,979 and $704,048,462,
respectively, for the year ended December 31, 1998. There were purchases of
$2,441,040,217 and sales of $2,519,166,812 of U.S. government and government
agency obligations for the year ended December 31, 1998.
At December 31, 1998, the cost of investments for federal income tax purposes
was $793,623,306. Accordingly, gross unrealized appreciation of investments was
$10,314,060, and gross unrealized depreciation was $79,824,314, resulting in net
unrealized depreciation of $69,510,254.
At December 31, 1998, the Fund had a capital loss carryforward of $43,891,547
which expires in the year 2006.
10
<PAGE>
ACM Government Income Fund
================================================================================
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 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 December 31, 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 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 a 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 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.
Transactions in options written for the year ended December 31, 1998, were as
follows:
Number of
Contracts Premiums
--------- --------
Options outstanding at
beginning of year........... -0- $ -0-
Options written............... 107,500 1,291,492
Options exercised............. (67,500) (819,492)
Options terminated in
closing purchase
transactions................ (40,000) (472,000)
------- -------
Options outstanding at
end of year................. -0- $ -0-
====== =======
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS(Cont.) ACM Government Income Fund
================================================================================
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 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 swap
contracts.
At December 31, 1998, the Fund had the following total return swap agreements
outstanding: (1) notional amount of $34,758,019 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 $147,808 and obligating the swap
counterparty to pay the Fund any appreciation in the value of the underlying
bond. At December 31, 1998, unrealized appreciation on this total return swap
amounted to $955,846. (2) notional amount of $55,000,000 Russian Principal Loans
obligating the Fund to pay Morgan Guaranty, the swap counterparty, interest
based on LIBOR less a spread on the principal amount of $888,873 and obligating
the counterparty to pay the Fund any appreciation in the value of the underlying
bond. At December 31, 1998, unrealized depreciation on this total return swap
amounted to $1,031,250.
- --------------------------------------------------------------------------------
NOTE D: Capital Stock
There are 300,000,000 shares of $0.01 par value common stock authorized, of
which 58,239,505 shares were outstanding at December 31, 1998. During the years
ended December 31, 1998 and December 31, 1997, the Fund issued 606,432 and
259,568 shares, respectively, in connection with the Fund's dividend
reinvestment plan.
- --------------------------------------------------------------------------------
NOTE E: Concentration of Risk
Investing in securities of foreign governments involves special risks which
include changes in foreign exchange rates and the possibility of future adverse
political and economic development which could adversely affect the value of
such securities. Moreover, securities of many foreign governments and their
markets may be less liquid and their prices more volatile than those of the
United States government.
12
<PAGE>
ACM Government Income Fund
================================================================================
NOTE F: 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
year ended December 31, 1998.
The renewable credit facility of $90,000,000 will mature on August 11, 1999 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, 1998 was 6.07%. The interest rate at December 31, 1998 was
6.05%. 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.
13
<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,
----------------------------------------------
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year.................... $10.51 $10.29 $9.77 $8.45 $11.05
------ ------ ------ ------ ------
Income From Investment Operations
- ---------------------------------
Net investment income (a)............................. .88 .94 .94 .99 .91
Net realized and unrealized gain (loss) on
investments, options written, swap contracts
and foreign currency transactions................... (1.71) .54 .55 1.30 (2.51)
------ ------ ------ ------ ------
Net increase (decrease) in net asset value
from operations..................................... (.83) 1.48 1.49 2.29 (1.60)
------ ------ ------ ------ ------
Less: Dividends and Distributions
- ---------------------------------
Dividends from net investment income.................. (.88) (.92) (.94) (.97) (.76)
Distributions in excess of net investment income...... -0- -0- (.03) -0- -0-
Distributions from net realized gains................. -0- (.34) -0- -0- -0-
Tax return of capital distribution.................... -0- -0- -0- -0- (.24)
------ ------ ------ ------ ------
Total dividends and distributions..................... (.88) (1.26) (.97) (.97) (1.00)
------ ------ ------ ------ ------
Net asset value, end of year.......................... $8.80 $10.51 $10.29 $9.77 $8.45
------ ------ ------ ------ ------
Market value, end of year............................. $9.125 $11.00 $10.25 $9.125 $9.125
------ ------ ------ ------ ------
Total Investment Return
- -----------------------
Total investment return based on: (b)
Market value........................................ (9.25)% 20.73% 24.15% 11.37% (17.67)%
Net asset value..................................... (8.38)% 15.08% 16.40% 28.73% (15.48)%
Ratios/Supplemental Data
- ------------------------
Net assets, end of year (000's omitted)............... $512,296 $605,664 $590,173 $557,525 $478,511
Ratio of expenses to average net assets............... 2.09% 2.03% 2.17% 2.08% 1.60%
Ratio of expenses to average net assets
excluding interest expense (c)...................... 1.12% 1.11% 1.18% 1.29% 1.18%
Ratio of net investment income to average
net assets.......................................... 9.04% 9.02% 9.78% 11.10% 9.56%
Portfolio turnover rate............................... 409% 304% 349% 380% 298%
</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 .97%, .92%, .99%, .79% and .42%, respectively, on
borrowings (see Note F).
14
<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, 1998, 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, 1998, 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, 1998, 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
February 3, 1999
- --------------------------------------------------------------------------------
Tax Information (unaudited)
In order to meet certain requirements of the Internal Revenue Code we are
advising you that $3,201,802 of the capital gain distributions paid by the fund
during the year ended December 31, 1998 are subject to maximum tax rate of 20%.
Shareholders should not use the above information to prepare their tax returns.
The information necessary to complete your income tax returns is included with
your Form 1099 DIV which should have been sent to you separately in January
1999.
15
<PAGE>
ADDITIONAL INFORMATION (unaudited) 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.
16
<PAGE>
ADDITIONAL INFORMATION(unaudited) (Cont.) ACM Government Income Fund
- --------------------------------------------------------------------------------
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.
Year 2000
Many computer systems and applications in use today process transactions using
two-digit date fields for the year of the transaction, rather than the full four
digits. If these systems are not modified or replaced, transactions occurring
after 1999 could be processed as year "1900," which could result in processing
inaccuracies and computer systems failures. This is commonly known as the year
2000 problem. Should any of the computer systems employed by the Fund's major
service providers fail to process Year 2000 related information properly, that
could have a significant negative impact on the Fund's operations and the
services that are provided to the Fund's shareholders. In addition, to the
extent that the operations of issuers of securities held by the Fund are
impaired by the Year 2000 problem, or prices of securities held by the Fund
decline as a result of real or perceived problems relating to the Year 2000, the
value of the Fund's shares may be materially affected.
With respect to the Year 2000, the Fund has been advised that Alliance, the
Fund's investment adviser, Alliance Fund Distributors, Inc. ("AFD"), the Fund's
principal underwriter, and Alliance Fund Services, Inc. ("AFS"), the Fund's
registrar transfer agent and dividend disbursing agent (collectively,
"Alliance"), began to address the Year 2000 issue several years ago in
connection with the replacement or upgrading of certain computer systems and
applications. During 1997, Alliance began a formal Year 2000 initiative, which
established a structured and coordinated process to deal with the Year 2000
issues. Alliance reports that it has completed its assessment of the Year 2000
issues on its domestic and international computer systems and applications.
Currently, management of Alliance expects that the required modifications for
the majority of its significant systems and applications that will be in use on
January 1, 2000, will be completed and tested in early 1999. Full integration
testing of these systems and testing of interfaces with third-party suppliers
will continue through 1999. At this time, management of Alliance believes that
the costs associated with resolving this issue will not have a material adverse
effect on its operations or on its ability to provide the level of services it
currently provides to the Fund.
The Fund and Alliance have been advised by the Fund's Custodian that they are
also in the process of reviewing their systems with the same goals. As of the
date of this report, the Fund and Alliance have no reason to believe that the
Custodian will be unable to achieve these goals.
17
<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.
18
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
19
<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 normally invests at least 65% of assets
in securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, and repurchase agreements pertaining to U.S. Government
securities. The Fund may also invest up to 35% of its assets in other
fixed-income securities, including those issued by non-governmental issuers in
the United States and those issued by foreign governments. The Fund may also use
certain other investment techniques, including options and futures. The Fund may
invest up to 35% of its net assets in below investment-grade securities. 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
Alliance Capital [LOGO](R)
(R) These registered service marks used under license from the owner, Alliance
Capital Management L.P.
INCAR
- --------------------------------------------------------------------------------
ACM
----------------------
GOVERNMENT
----------------------
INCOME FUND
----------------------
Annual Report
December 31, 1998
Alliance [LOGO](R)
- --------------------------------------------------------------------------------
