<PAGE>
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- -----
o
- -----------------------------------------------
Dear Shareholder,
We are pleased to present the semi-annual report for The Italy Fund
Inc. for
the six months ended July 31, 1994. As of that date, the net asset value
("NAV")
of The Italy Fund was $10.82. At the end of the previous quarter,
April 30,
1994, the NAV was $12.04, and at the close of the last fiscal year, January
31,
1994, the NAV was $9.84.
When expressed in Lira terms, the Fund's NAV increased by 8.8%
during the
six-month period ending July 31, 1994, which compares favorably with a
7.2%
increase in the BCI Index over the same period.
POLITICS
After a brief honeymoon period with the Italian electorate, which
further
increased the share of the vote of Mr. Berlusconi's Forza Italia party in
the
June European elections (over 30% of the votes), the new Italian Prime
Minister
incurred his first political misjudgements. His attempt to limit
the
magistrates' power of arrest was clearly the most damaging for public
opinion
both domestically and internationally. By trying to impose a contentious
decree
curbing magistrates' powers of arrest, used notably against
prominent
politicians and businessmen suspected of corruption, Mr. Berlusconi came
close
to bringing down his three-month old government. He avoided a damaging
political
crisis only by finally withdrawing the decree. The Prime Minister's
popularity
ratings took a serious hit as many Italians are now questioning his
motives, and
those of his justice minister, Alfredo Biondi, for rushing through a
decree
apparently designed to relax the squeeze on the corrupt old guard that
Italy has
turned against. Mr. Berlusconi and his allies from the Northern League
and the
rightist National Alliance, after all, had won this year's election
partly
because of their claim to represent a new, cleaner Italy. The popular
uproar
that followed the decree, probably heightened by Italians' frustration at
losing
the football world-cup during that weekend, gave Mr. Berlusconi little
choice
but to bow out or climb down. Even if the decree was legitimately
trying to
address some of the shortcomings in magistrates' procedures, like the
common
criticism that they used arrest as a means to force the suspect to
confess to
accepting bribes or corruption, the form, a decree which was not
discussed in
parliament, and the timing, before approving the more relevant
financial
measures, made the proposed decree a public relations blunder.
Mr. Berlusconi's image was further tarnished as his brother was
arrested for
corruption linked to the family's Fininvest group. This again highlighted
the
potential conflict of interest that exists between his role as Prime
Minister
and his ownership of the second largest private Italian group.
Belatedly, he
confronted the issue and, under pressure from his own coalition
partners,
proposed an independent five person commission to monitor the management
and
strategy of Fininvest with powers of asset disposals. Even if his
proposal is
subject to further significant modification, it is evident that the
problem is
so complex that it can be solved neither quickly nor easily.
The Italian Prime Minister's first political mistakes and a
government
coalition which showed the first signs of disunity, have raised the
question
about the likelihood of a political crisis leading to early elections
in the
fall. We believe that the likelihood of early elections still remains
small. No
political party, either within the governing coalition or in the
opposition,
currently has an interest in new elections. Mr. Berlusconi's Forza Italia
party,
which may have been tempted to force new elections after their European
election
success, clearly has no interest to do so now after its leader's
loss of
credibility. The Northern League, notwithstanding Umberto Bossi's
frequent
vociferous criticisms directed at Berlusconi, is well aware that if they
were to
be seen to cause new elections, they would be severely punished by
the
electorate and would certainly not get the 20% of the seats in parliament
that
they achieved at the last elections. Even the main opposition parties,
which are
still reorganizing after their defeat in the last general elections,
notably
with the appointments of new party leaders, would not seem ready to
exploit the
government's present difficulties. The crucial test for Berlusconi's
government
<PAGE>
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o
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and credibility will come in September when the 1995 budget, containing
further
significant cuts in public spending, most notably on pensions and
healthcare,
will start to be discussed in parliament.
ECONOMICS
Turning to the economic outlook, the Italian economy has begun to move
from
a timid recovery to sustained economic growth. Industrial production
figures,
car sales, retail sales and the latest official survey of
industrialists'
opinion show the export-led recovery has begun to include a modest
element of
renewed domestic demand. These figures are in line with our expectations
of a
1.8% rise in GDP for this year after the 0.7% decline in 1993. Much of
this
year's recovery is still explained by the buoyancy of external trade,
which is
illustrated by the trade surplus that doubled in the first five months of
this
year to Lire 14,500 trillion ($9.2 billion). The trade improvement is
partly due
to the 1992/93 fall in the Lira, but also to an unprecedented degree of
wage
moderation (as of June, real wages were still falling by 1.9%). This
has
prevented the 1970s-style vicious circle between devaluation and
(imported)
inflation, which would ultimately leave Italy with unchanged market
shares
abroad and a higher price level at home.
Thanks to the above-mentioned real wage weakness, and a domestic demand
that
is not strong enough for mark-ups to be increased, especially at a
time of
structural changes in sales networks with the flourishing of
discount
mega-stores, inflation has continued to decline. Consumer prices rose in
July by
3.6%, the lowest increase since 1969 and probably the bottom for this
year.
Nineteen ninety-four average inflation should be 3.9%, and is
expected to
decline slightly further in 1995 given the substantial output gap that
still
exists with trend GDP growth.
THE ITALIAN STOCK MARKET
REVIEW
After pushing the BCI Index to a five-year high, the post-election
euphoria
softened on a wave of sell orders mostly from foreign investors who
were
disappointed with the Berlusconi government's lack of decision in
trying to
correct the structural imbalances in the Italian financial system. The
record
number of cash calls in the second quarter (bringing the total cash
calls to
date to the same amount as for the whole of 1993), dried up the strong
liquidity
existing until then, further accentuating the correction which was more
severe
than anticipated.
As a result, the BCI Index dropped by almost 15% over the last three
months,
but it still shows a positive performance of over 14% since the beginning
of the
year. This correction, and especially the drying up of liquidity, led to
the
postponement of some planned issues, like that of Mediobanca and the
initial
public offering of Cariplo. Increased skepticism towards Mr.
Berlusconi's
government is also illustrated by the sharp fall in the daily volumes
transacted
on the stock exchange, which declined from Lire 2,000 billion at the
peak of
this year to a mere Lire 500 billion in the last days of July.
In terms of relative sector performance, the best performing
sectors
continued to be the more cyclical ones like automobile and chemicals,
together
with the less cyclical food and communication sectors. While the
former
continued to benefit from the past corporate restructuring and the
expected
economic recovery, the communications sector regained investors' interest
as the
creation of a single telecom operator in August, "Telecom Italia," and
the
resulting benefits for the companies involved, is approaching.
Conversely, the banking sector (suffering from the oversupply of
shares and
the negative developments in bond markets) and the construction/cement
sector
(negatively affected by several rights issues) have underperformed. Over
this
period there was also a marked divergence in performance between large
cap
stocks and smaller cap stocks, with the smaller and mid cap stocks
being
particularly hit in the latest correction.
2
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o
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OUTLOOK
Only a few months ago, politics was seen as one of the
positives of
investing in Italian financial assets, especially equities. This
picture has
radically changed in the summer months and the optimism towards
political
developments has been replaced by skepticism and political uncertainty.
Politics
have again become the main risk when investing in Italy. The
excessive
post-electoral euphoria that had diminished the risk premium required
for
investing in Italian assets, has been replaced by political
uncertainty. The
correction in the price of Italian securities and currency has re-
established a
significant risk premium for investing in Italy, as is most clearly
illustrated
by the spread between Italian and German bonds which, at over 400 basis
points,
is at a recent historical high level.
Political developments will continue to dominate the outlook for
Italian
equities. In particular, financial markets will be awaiting the details of
the
actual measures taken to curb pension expenditure, which constitute
the key
measure for the 1995 budget. At the end of July the government
announced
ambitious budget plans for the period 1995-1997, essentially
continuing the
budgetary consolidation started by the Amato and Ciampi governments.
According
to these plans, which were tighter than expected -- so tight that some
doubt
whether they will be carried through, the debt to GDP ratio should be
stabilized
by 1996. The budget for 1995 forsees a reduction in the deficit by Lire
45,000
billion by means of Lire 15,000 billion of revenue increases and Lire
30,000
billion of spending cuts. Since most of the expenditure cuts will
involve
pension and healthcare benefits, two areas where cuts are not
particularly
popular among the electorate, financial markets are keenly awaiting
details of
these cuts and especially the coalition's cohesion and ability to get
them
approved by parliament, when facing probable trade union opposition. The
moment
of truth will come in September after the August summer recess.
The new government's disappointing performance thus far has
been
particularly damaging because it has completely overshadowed the
positive
economic developments that have emerged over the recent weeks,
like the
confirmation of the economic recovery which to date is not showing any
signs of
inflationary pressures.
Earnings growth should therefore replace interest rate declines as the
main
factor behind the expected return of the Italian market. September will
provide
an important confirmation of the health conditions of many
corporations as
semiannual results will start to be announced. We think that, in general,
the
interim results have a better chance of surprising than of
disappointing
earnings forecasters. Valuation still looks rather stretched, but
positive
earnings surprises, especially when looking at prospective earnings for
1995 and
focusing on a return to trend earnings in the next two years, could
bring
valuation back to fair value levels.
Turning to the liquidity picture, it is clear that the market has
been
exhausted by cash-call pressure (Lire 25 trillion or 7% of the present
market
capitalization have been issued so far this year). However, even if the
supply
of fresh funds to the market has slowed in recent months, it has not
dried up
altogether as shown by the net subscriptions still enjoyed by domestic
mutual
funds. This could be a sign that the process of re-allocating
households'
financial portfolios is still underway. Whether this will continue in the
future
will again depend on the political picture which affects interest rates,
the key
factor in this process.
Finally, even if the government has not been quick enough in taking
the
initiative to further reduce the Italian public finance imbalances, it has
moved
rather quickly in introducing measures favoring the corporate sector.
In a
package of measures presented in June, firms boosting investments and
listing on
the bourse would benefit from tax breaks, and taxation of dividend
payments
would be reduced to 15%, the same rate as income on
bonds.
3
<PAGE>
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o
- -----------------------------------------------
This clearly confirms the perception that the Berlusconi government
constitutes
for the first time a more equity market friendly government.
In conclusion, the outlook for Italian equities remains
dependent on
political developments. If Mr. Berlusconi's government is able to
regain
credibility in the eyes of the financial community by getting the
majority of
the proposed fiscal measures approved when parliamentary discussions
start in
September, the outlook for the Italian equity market remains very
favorable. The
resulting decline in interest rates would restore the favorable
liquidity
picture and equities should start reacting to the strong corporate
earnings
outlook, thereby pushing the BCI Index close to this year's high.
Conversely,
budget policy disappointments in September would further negatively impact
bond
markets and the Italian currency, giving the Central Bank little choice
but to
raise interest rates, thus bringing the economic recovery to a premature
end,
with its disastrous consequences for the equity market.
INVESTMENT STRATEGY
After the strong post-election rally, we reduced the Fund's
investment in
some of the blue chips which had performed particularly well, like
Montedison,
Fiat and Pirelli. We also sold the position in BCI, given the likely
negative
effect of the upcoming rights issue.
We added some smaller companies which are likely beneficiaries of
the
improving automobile cycle, like Sogefi and Gilardini. The Fund
also
participated in the privatization of the insurer INA, and the public
offering of
the publisher Mondadori.
Finally, during this period all the Fund's Italian government bond
position
was sold.
With cost-cutting and restructuring measures now starting to
show the
benefits, corporate earnings will recover strongly from last year's
depressed
levels. Balance sheets are also far stronger than they were in the
last few
years. The major concern is for companies which have been heavily
invested in
bond markets this year given the decline in global bond markets this year.
Over
the next few months, the Fund will therefore continue to focus on
those
companies which show the best earnings recovery potential over the next
cycle
rather than the more interest rate sensitive sectors in the market.
Sincerely,
Heath B. McLendon
CHAIRMAN OF THE BOARD
Mario d'Urso
PRESIDENT
Erich Stock
INVESTMENT OFFICER
August 12, 1994
4
<PAGE>
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o
- -----------------------------------------------
THE ITALY FUND'S EQUITY PORTFOLIO VERSUS THE BCI INDEX
JULY 31, 1994 (UNAUDITED)
THE ITALY FUND INC.
Sectorial Structure--July 31, 1994
SECTOR BREAKDOWN
Pie charts depicting the allocation of The Italy Fund's
investment
securities and The BCI Index held at July 31, 1994 by sector
classification. The
pies are broken in pieces representing industries in the following
percentages:
<TABLE>
<CAPTION>
SECTOR PERCENTAGE
<S> <C>
Chemicals 5.6%
Banks 12.4%
Paper & Publishing 0.9%
Textiles 3.3%
Insurance 18.9%
Property, Construction & Cement 4.4%
Financials 10.8%
Other 3.2%
Electromechanical, Engineering & Autos 14.0%
Food & Sugar 4.9%
Communications 20.9%
Pharmaceuticals 0.7%
THE BCI INDEX
Sectorial Structure--July 31, 1994
<CAPTION>
SECTOR PERCENTAGE
<S> <C>
Pharmaceuticals 0.4%
Banks 17.3%
Other 4.4%
Electromechanical, Engineering & Autos 13.9%
Paper & Publishing 1.7%
Chemicals 4.9%
Food & Sugar 2.4%
Insurance 23.5%
Textiles 2.2%
Communications 18.5%
Property, Construction & Cement 3.3%
Financials 7.5%
</TABLE>
5
<PAGE>
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o
- -----------------------------------------------
THE ITALY FUND INC.
Investment Portfolio as of July 31, 1994 (Unaudited)
- ---------------------------------------------------------------------------
- --
<TABLE>
<CAPTION>
MARKET VALUE
($)
SHARES (NOTE 1)
- ---------------------------------------------------------------------------
- ----
<S> <C> <C>
</TABLE>
<TABLE>
<C> <S> <C>
- -----------------------------------------------
STOCKS -- 91.3%
- -------------------------------------------
INSURANCE -- 17.4%
200,000 Alleanza+++..................................... $
2,109,572
100,000 Assicurazioni Generali..........................
2,651,134
90,000 Compagnia di Assicurazioni di Milano............
464,735
1,118,000 Instituto Nazionale Delle Assicurazioni.........
1,640,390
115,000 La Previdente...................................
1,116,688
152,291 Lloyd Adriatico.................................
1,322,477
61,250 Lloyd Adriatico Risp NC**.......................
424,276
160,000 RAS+++..........................................
2,594,458
390,000 SAI Risp NC**...................................
2,738,350
160,000 SAI-Societa Assicuratrice Industriale...........
2,166,247
85,000 Toro Assicurazioni Risp NC**....................
647,670
------------
- ----
17,875,997
------------
- ----
COMMUNICATIONS -- 16.8%
55,000 Ericsson........................................
1,090,995
946,000 SIP.............................................
2,680,730
1,450,000 SIP Risp NC**+++................................
3,383,029
330,000 Sirti S.p.A. ...................................
2,643,325
810,000 STET+++.........................................
2,660,044
1,740,000 STET Risp NC**+++...............................
4,810,202
------------
- ----
17,268,325
------------
- ----
BANKING -- 11.4%
1,425,000 Banca Fideuram..................................
1,682,541
624,998 Banca di Roma...................................
830,444
100,000 Banca Popolare di Bergamo.......................
1,259,446
550,000 Banco Ambrosiano Veneto.........................
1,530,856
700,000 Credito Italiano Risp*..........................
963,161
128,000 Credito Romagnolo+++............................
959,194
231,500 IMI S.p.A. .....................................
1,486,965
150,000 Istituto Bancario San Paolo di Torino...........
902,078
220,000 Mediobanca S.p.A. .............................. $
2,120,340
------------
- ----
11,735,025
------------
- ----
HOLDING COMPANIES -- 10.9%
1,330,000 Cofide..........................................
1,218,608
850,000 Europa Investimenti++#..........................
535,264
10,000 Finanziaria Italiana di Participazioni++#.......
673,804
800,000 Gaic Conv. di Risp*.............................
463,476
150,000 IFI Privilegio..................................
2,795,970
264,480 IFIL+++.........................................
1,139,196
462,500 IFIL Risp NC**..................................
1,020,820
1,500,000 Montedison S.p.A. ..............................
1,410,265
210,000 Sopaf Risp......................................
273,741
600,000 Sopaf...........................................
1,341,310
49,639 422 S.p.A. .....................................
312,588
------------
- ----
11,185,042
------------
- ----
UTILITIES -- 7.9%
2,200,000 Autostrade Privelegio...........................
2,639,169
546,500 Italgas.........................................
1,861,817
510,000 Edison..........................................
2,399,055
700,000 Sondel..........................................
1,234,257
------------
- ----
8,134,298
------------
- ----
AUTOMOBILES -- 5.7%
600,000 Fiat S.p.A......................................
2,622,166
385,000 Gilardini.......................................
1,054,628
708,000 Pirelli S.p.A. +++..............................
1,286,259
329,400 Sogefi..........................................
947,959
------------
- ----
5,911,012
------------
- ----
FOOD -- 5.5%
15,595 Eridania-Beghin-Say.............................
2,356,927
1,560,000 Parmalat Finanziaria S.p.A......................
2,102,267
490,000 SME Meridionale Finanziaria.....................
1,192,601
------------
- ----
5,651,795
------------
- ----
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
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o
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THE ITALY FUND INC.
Investment Portfolio as of July 31, 1994 (Unaudited) (Continued)
<TABLE>
<CAPTION>
MARKET VALUE
($)
SHARES (NOTE 1)
- ---------------------------------------------------------------------------
- ----
<C> <S> <C>
</TABLE>
- -----------------------------------------------
STOCKS -- (CONTINUED)
- -------------------------------------------
MECHANICAL ENGINEERING -- 3.7%
387,500 Ansaldo Trasporti............................... $
1,593,435
180,000 Danieli.........................................
1,227,582
266,750 Danieli Risp NC**+++............................
966,717
------------
- ----
3,787,734
------------
- ----
TEXTILES -- 3.0%
140,000 Benetton........................................
2,142,317
432,446 SIMINT S.p.A. -- Societa Italiana Manufatti.....
151,138
225,000 Stefanel S.p.A. +++.............................
743,860
------------
- ----
3,037,315
------------
- ----
CHEMICALS AND PHARMACEUTICALS -- 2.6%
1,070,000 Enichem Augusta S.p.A...........................
2,041,625
260,000 Recordati Risp NC**.............................
677,834
------------
- ----
2,719,459
------------
- ----
CEMENT AND CERAMICS -- 2.0%
60,000 Calcestruzzi....................................
396,725
380,000 Italcementi Risp*+++............................
1,653,526
------------
- ----
2,050,251
------------
- ----
CONSTRUCTION AND PROPERTY -- 1.8%
800,000 Cogefar Impresit Construzioni...................
1,138,539
328,000 Vianini Lavori+++...............................
704,333
------------
- ----
1,842,872
------------
- ----
RETAILING -- 1.7%
181,790 La Rinascente...................................
1,141,911
186,136 La Rinascente Risp*.............................
655,813
------------
- ----
1,797,724
------------
- ----
PUBLISHING -- 0.9%
94,000 Arnoldo Mondadori............................... $
882,286
------------
- ----
TOTAL STOCKS
(COST $85,340,593).............................
93,879,135
------------
- ----
FACE
VALUE
(MILLION
LIRE)
- -----------------------------------------------------
CONVERTIBLE BONDS -- 5.8%
- -------------------------------------------
L 8,135 Fixed Dep Lit Citln 7.300% due 08/02/94.........
5,122,796
265 Mediobanca Alleanza 4.000% due 09/03/99.........
216,707
180 Mediobanca-Banca-Di Credito 6.000% due
04/01/96......................................
109,836
500 Stefanel Finance 9.000% due 12/31/95............
327,456
225 Stefanel S.p.A. 6.000% due 01/01/00.............
110,375
------------
- ----
TOTAL
CONVERTIBLE BONDS (COST $6,015,951)............
5,887,170
------------
- ----
SHARES
- -----------------------------------------------------
RIGHTS -- 0.2%
- -------------------------------------------
120,000 Credito Romangnolo S.p.A., Rights expire
8/11/96#......................................
63,174
367,926 Risnascente (La) Pers Rights expire 4/16/99#....
66,843
See Notes to Financial Statements.
7
<PAGE>
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o
- -----------------------------------------------
THE ITALY FUND INC.
Investment Portfolio as of July 31, 1994 (Unaudited) (Continued)
- ---------------------------------------------------------------------------
- --
<TABLE>
<CAPTION>
MARKET VALUE ($)
SHARES (NOTE 1) FACE
VALUE
<C> <S> <C> <C>
<C>
- ---------------------------------------------------------------------------
- ----------------------------------------
<CAPTION>
MARKET VALUE ($)
SHARES (NOTE 1)
<C> <C>
- ----------
</TABLE>
<TABLE>
<C> <S> <C>
- -----------------------------------------------
RIGHTS -- (CONTINUED)
- ------------------------------------------
328,000 Vianini Lavori Rights expire
8/17/94#.......................... $ 119,592
----------------
TOTAL RIGHTS
(COST 260,202)..................... 249,609
----------------
- -----------------------------------------------
WARRANTS -- 0.2%
- -------------------------------------------
20,900 Alleanza Risp, Warrants, expire
02/29/96#......................... 45,406
155,000 Cogefar Impresit, Warrants, expire
03/31/97#......................... 142,506
45,000 Stefanel S.p.A., Warrants, expire
01/01/00#......................... 56,675
----------------
TOTAL WARRANTS
(COST $1,000 )..................... 244,587
----------------
FACE VALUE
- -----------------------------------------------------
REPURCHASE AGREEMENTS -- 15.2%
(COST $15,607,000)
- -------------------------------------------
$5,202,000 Agreement with Prudential
Securities, 4.200% dated 07/29/94,
to be repurchased at $5,203,820 on
08/01/1994, collateralized by
$4,200,000 U.S Treasury Bonds,
10.375% due 9/15/04............... 5,202,000
$5,203,000 Agreement with Union Bank of
Switzerland, 4.100% dated
07/29/94, to be repurchased at
$5,204,778 on 08/01/1994,
collateralized by $5,370,000 U.S.
Treasury Bills 4.400% due
10/27/94.......................... $ 5,203,000
5,202,000 Agreement with Dean Witter, 4.12%
dated 07/29/1994, to be
repurchased at $5,203,786 on
08/01/1994, collateralized by
$4,200,000 U.S. Treasury Bonds,
10.375% due 11/15/12.............. 5,202,000
----------------
15,607,000
----------------
</TABLE>
<TABLE>
<C> <S> <C> <C>
TOTAL INVESTMENTS
(COST $107,224,746+)........................... 112.7%
115,867,501
OTHER ASSETS AND
LIABILITIES (NET).............................. (12.7 )
(13,043,271 )
------- ------------
- ----
NET ASSETS....................................... 100.0 % $
102,824,230
------- ------------
- ----
------- ------------
- ----
<FN>
- --------------------------
* Risp -- Risparmio (savings shares).
** Risp NC -- Risparmio Non-Convertible
(non-convertible savings shares).
+ Aggregate cost for Federal tax purposes.
++ Security restricted as to resale (Note 5).
+++ Securities loaned at 7/31/94 have a market value of $14,897,317 (Note
6).
# Non-income producing security.
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
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o
- --------------------------------------------
THE ITALY FUND INC.
Statement of Assets and Liabilities
July 31, 1994 (Unaudited)
- ---------------------------------------------------------------------------
- --
<TABLE>
<S> <C>
<C>
ASSETS:
Investments, at value (Cost $107,224,746) (Note 1)
See accompanying schedule
Investment securities.......................................
$100,260,501
Repurchase agreements.......................................
15,607,000 $ 115,867,501
-----------
- -
Cash and foreign currency (Cost $8,739,154)...................
8,738,392
Dividends and interest receivable.............................
860,021
Prepaid expense...............................................
47,809
- -------------
Total Assets............................................
125,513,723
- -------------
LIABILITIES:
Collateral for securities loaned (Note 6)..................... $
15,578,950
Payable for investment securities purchased...................
6,878,362
Custodian fees payable (Note 2)...............................
75,000
Investment advisory fee payable (Note 2)......................
66,023
Administration fee payable (Note 2)...........................
34,575
Transfer agent fees payable (Note 2)..........................
5,083
Accrued expenses and other payables...........................
51,500
-----------
- -
Total Liabilities.......................................
22,689,493
- -------------
NET ASSETS....................................................
102,824,230
- -------------
- -------------
NET ASSETS consist of:
Undistributed net investment income...........................
754,925
Accumulated net realized loss on investments sold, forward
foreign exchange contracts and foreign currency
transactions................................................
(2,116,874)
Unrealized appreciation of securities and currencies..........
8,641,993
Par value.....................................................
95,031
Additional paid-in capital....................................
95,449,155
- -------------
Total Net Assets........................................
$ 102,824,230
- -------------
- -------------
NET ASSET VALUE PER SHARE ($102,824,230 DIVIDED BY 9,503,089
shares of common stock outstanding or subscribed) (Note
4)..........................................................
$10.82
- -----
- -----
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- ---------------------------------------------------------------------------
- -----
o
- --------------------------------------------
THE ITALY FUND INC.
Statement of Operations
For the Six Months Ended July 31, 1994 (Unaudited)
- ---------------------------------------------------------------------------
- --
<TABLE>
<S>
<C> <C>
INVESTMENT INCOME:
Dividends..................................................................
. $ 1,451,694
Interest...................................................................
. 682,181
Less taxes withheld (Note
1)................................................ (255,301)
- -----------
Total Investment
Income...............................................
1,878,574
EXPENSES:
Investment advisory fee (Note
2)............................................ $381,200
Custodian fees (Note
2)..................................................... 139,164
Administration fee (Note
2)................................................. 101,653
Legal and audit
fees........................................................ 71,201
Advisory board and Directors' fees and expenses (Note
2).................... 63,475
Transfer agent fees (Note
2)................................................ 27,667
Other......................................................................
. 81,759
- --------
Total
Expenses........................................................
866,119
- -----------
NET INVESTMENT
INCOME.......................................................
1,012,455
- -----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 3):
Net realized gain on securities
transactions................................ 2,758,326
Net realized loss on forward foreign exchange contracts and foreign
currency
transactions..............................................................
(248,948)
- -----------
Net realized gain on investments during the
period...................... 2,509,378
- -----------
Net change in unrealized appreciation/(depreciation) of:
Securities................................................................
5,784,727
Foreign currencies and net other
assets................................... (359)
- -----------
Net unrealized appreciation of investments during the
period............ 5,784,368
- -----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS............................. 8,293,746
- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS........................ $ 9,306,201
- -----------
- -----------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
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o
- --------------------------------------------
THE ITALY FUND INC.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR
7/31/94 ENDED
Statement of Changes in Net Assets
(UNAUDITED) 1/31/94
<S>
<C> <C>
--------------------------------------------------------------------------
- ------------------------------
Net investment
income....................................................... $ 1,012,455
$ 768,124
Net realized gain/(loss) from securities sold, forward foreign exchange
contracts and foreign currency transactions during the
period............. 2,509,378 (2,677,995)
Net unrealized appreciation on securities, forward foreign exchange
contracts, and foreign currencies holding and net other during the
period....................................................................
5,784,368 15,106,131
- ------------ ------------
Net increase in net assets resulting from
operations........................ 9,306,201 13,196,260
Distributions to shareholders from:
Net investment
income..................................................... --
(426,675)
Capital...................................................................
- -- (48,443)
Net increase in net assets from Fund share transactions (Note
4)............ -- 27,412,978
- ------------ ------------
Net increase in net
assets.................................................. 9,306,201
40,134,120
NET ASSETS:
Beginning of
period.........................................................
93,518,029 53,383,909
- ------------ ------------
End of period (including undistributed net investment income of $754,925
at
July 31, 1994 and accumulated net investment loss of $257,530 at January
31,
1994).................................................................
$102,824,230 $ 93,518,029
- ------------ ------------
- ------------ ------------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
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o
- --------------------------------------------
THE ITALY FUND INC.
Financial Highlights
- ---------------------------------------------------------------------------
- --
Set forth below is per share operating performance data for a
share of
common stock outstanding, total investment return, ratios to average net
assets
and other supplemental data. This information has been derived from
information
provided in the financial statements and market price data for the
Fund's
shares.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR
YEAR YEAR YEAR YEAR PERIOD
For a Fund share outstanding 7/31/94 ENDED ENDED ENDED
ENDED ENDED ENDED ENDED ENDED
throughout each period. (UNAUDITED) 1/31/94# 1/31/93 1/31/92
1/31/91 1/31/90 1/31/89 1/31/88 1/31/87*
<S> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
--------------------------------------------------------------------------
- -----------------------------------------
Operating performance:
Net asset value, beginning
of period.................. $ 9.84 $ 8.43 $11.08 $ 11.37
$ 13.24 $ 9.91 $ 9.07 $ 14.33 $ 11.16
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
Net investment income....... 0.11 0.12 0.19 0.25
0.32 0.17 0.21 0.12 0.22
Net realized and unrealized
gain/(loss) on
investments................ 0.87 1.72 (2.84) 0.03
(1.01) 3.31 0.82 (3.65) 2.95
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
Net increase/(decrease) in
net assets resulting from
investment operations...... 0.98 1.84 (2.65) 0.28
(0.69) 3.48 1.03 (3.53) 3.17
Dilution in NAV from rights
offering (Note 4).......... -- (0.32) -- --
- -- -- -- -- --
Offering expenses charged to
paid in capital............ -- (0.03) -- --
- -- -- -- -- --
Distributions:
Dividends from net
investment income.......... -- (0.07) -- (0.25)
(0.34) (0.15) (0.19) (0.36) --
Distributions from net
realized gains............. -- -- -- (0.24)
(0.58) -- -- (1.37) --
Distributions from capital
(Note 1)................... -- (0.01) -- (0.08)
(0.26) -- -- -- --
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
Total distributions......... 0.00 (0.08) 0.00 (0.57)
(1.18) (0.15) (0.19) (1.73) 0.00
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
Net asset value, end of
period..................... $ 10.82 $ 9.84 $ 8.43 $ 11.08
$ 11.37 $ 13.24 $ 9.91 $ 9.07 $ 14.33
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
Market value, end of
period..................... $ 10.625 $ 12.375 $8.875 $ 9.50
$ 10.00 $ 17.50 $ 8.00 $ 7.00 $12.125
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
Total investment return++... (14.14)% 40.54%+++ (6.58)% 1.00%
(36.14)% 121.31% 16.97% (32.16)% 1.04%
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
---------- ------------ ------- --------
- --------- -------- -------- --------- ---------
Ratios to average net
assets/supplemental data:
Net asset, end of period (in
000's)..................... $102,824 $ 93,518 $53,384 $70,186
$72,055 $83,902 $62,743 $57,445 $90,793
Ratio of net investment
income to average net
assets..................... 1.99%+ 1.30% 2.04 % 2.17%
2.28% 1.54% 2.23% 1.02% 1.83%+
Ratio of operating expenses
to average net assets...... 1.70%+ 1.69% 1.70 % 1.53%
1.80% 1.90% 1.99% 1.92% 1.96%+
Portfolio turnover rate..... 21% 46% 33 % 24%
24% 15% 15% 19% 39%
</TABLE>
- ----------------------------------
* The Fund commenced operations on February 28, 1986.
+ Annualized.
++ Total return represents aggregate total return for the periods
indicated.
+++ The total return for the year ended January 31, 1994, adjusted for the
effect of the rights offering completed in January of 1994 is 45.85%
(unaudited).
# Per share amounts have been calculated using the monthly average share
method, which more appropriately presents per share data for the period
since
the use of the undistributed method does not accord with results of
operations.
See Notes to Financial Statements.
12
<PAGE>
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o
- ----------------------------------------------
THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Italy Fund Inc. (the "Fund") is registered with the
Securities and
Exchange Commission under the Investment Company Act of 1940, as amended,
as a
diversified, closed-end management investment company for United
States and
other investors desiring to achieve international diversification
by
participating in the Italian economy. The policies described below are
followed
consistently by the Fund in the preparation of its financial
statements in
conformity with generally accepted accounting principles.
PORTFOLIO VALUATION: All securities for which market quotations are
readily
available are valued at the last sales price prior to the time of
determination,
or, if no sales price is available at that time, at the closing price
quoted for
the securities (but if bid and asked quotations are available, at the
mean
between the last current bid and asked prices, rather than the quoted
closing
price). Securities that are traded over-the-counter are valued, if bid and
asked
quotations are available, at the mean between the current bid and asked
prices.
If bid and asked quotations are not available, then over-the-counter
securities
will be valued as determined in good faith by the Board of
Directors.
Investments in securities having a maturity of 60 days or less are
valued at
cost with accrued interest or discount earned included in interest
receivable.
All other securities and assets are valued at fair value as determined in
good
faith by the Board of Directors, although the actual calculation may be
done by
others.
CURRENCY TRANSLATIONS: The books and records of the Fund are
maintained in
U.S. dollars. Italian lire amounts are translated into U.S. dollars on
the
following basis:
(a) market value of investment securities, assets and liabilities
at the
midday spot (i.e., cash) rate; and
(b) purchases and sales of investment securities, income and expenses
at the
midday spot rate on the respective dates of such transactions.
Unrealized gains and losses which result from changes in foreign
currency
exchange rates have been included in the unrealized
appreciation/(depreciation)
of investments, foreign currency holdings and net other assets. Net
realized
foreign currency gains and losses resulting from changes in exchange
rates
include foreign currency gains and losses between trade date and settlement
date
on investment securities transactions, foreign currency transactions and
the
difference between the amounts of interest and dividends recorded on the
books
of the Fund and the amount actually received. The portion of foreign
currency
gains and losses related to fluctuation in exchange rates between the
initial
purchase trade date and subsequent sale trade date is included in realized
gains
and losses on investment securities sold.
FORWARD FOREIGN CURRENCY CONTRACTS: Forward foreign currency contracts
are
valued at the forward rate and are marked-to-market daily. The change in
market
value is recorded by the Fund as an unrealized gain or loss. When the
contract
is closed, the Fund records a realized gain or loss equal to the
difference
between the value of the contract at the time it was opened and the value
at the
time it was closed.
The use of forward foreign currency contracts does not
eliminate
fluctuations in the underlying prices of the Fund's portfolio securities,
but it
does establish a rate of exchange that can be achieved
in
13
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o
- -----------------------------------------------
THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
the future. Although forward foreign currency contracts limit the risk of
loss
due to a decline in the value of the hedged currency, they also
limit any
potential gain that might result should the value of the currency
increase. In
addition, the Fund could be exposed to risks if the counterparties
to the
contracts are unable to meet the terms of their contracts.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Investment
securities
transactions are accounted for as of trade date. The Fund uses the
identified
cost method for determining the realized gain or loss on investments for
both
financial and U.S. Federal income tax reporting purposes. Dividend
income and
distributions to shareholders are recorded on the ex-dividend date except
that
certain dividends from foreign securities are recorded as soon as the
Fund is
informed of the ex-dividend date. Interest income is recorded on the
accrual
basis.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of the
Fund to
distribute all taxable net investment income at least annually. The
Fund
currently expects to distribute substantially all of its net realized
capital
gains, if any, annually. The Board of Directors will determine annually
whether
to distribute such net gains to shareholders. Income distributions and
capital
gain distributions are determined in accordance with income tax
regulations
which may differ from generally accepted accounting principles.
These
differences are primarily due to differing treatments of income and
gains on
various investment securities held by the Fund, timing differences and
differing
characterization of distributions made by the Fund as a whole.
FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a
regulated
investment company by complying with the requirements of the Internal
Revenue
Code applicable to regulated investment companies. Therefore, no Federal
income
tax provision is required. The Fund is subject to a 4% nondeductible excise
tax
measured with respect to certain undistributed amounts of net investment
income
and capital gains.
FOREIGN INCOME TAXES: Investment income received by the Fund from
Italian
corporations is subject to foreign income taxes withheld at the source.
2. INVESTMENT ADVISORY, ADMINISTRATION AND OTHER FEES
The Fund has entered into an investment advisory agreement
("Investment
Advisory Agreement") with Lehman Brothers Global Asset Management
Limited
("Global Asset Management"), a wholly owned subsidiary of Lehman Brothers
Inc.
("Lehman Brothers"). Under the Investment Advisory Agreement, the Fund
pays a
fee computed and paid monthly at an annual rate of 0.75% of the value
of its
average monthly net assets.
Prior to May 20, 1994, the Fund was party to an administration
agreement
with The Boston Company Advisors, Inc. ("Boston Advisors"), an indirect
wholly
owned subsidiary of Mellon Bank Corporation ("Mellon"). Under the
administration
agreement, the Fund paid a monthly fee at the annual rate of 0.20% of the
value
of its average monthly net assets.
As of the close of business on May 20, 1994, Smith, Barney Advisers,
Inc.
("SBA"), an affiliate of The Travelers Inc., succeeded Boston Advisors as
the
Fund's administrator. The new administration agreement contains
substantially
the same terms and conditions, including the level of fees, as the
predecessor
agreement.
As of the close of business on May 20, 1994, the Fund and SBA also
entered
into a sub-administration agreement (the "Sub-Administration Agreement")
with
Boston Advisors. Under the Sub-
14
<PAGE>
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- -----
o
- -----------------------------------------------
THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
Administration Agreement, SBA pays Boston Advisors a portion of its fee
at a
rate agreed upon from time to time between SBA and Boston Advisors.
For the six months ended July 31, 1994, the Fund incurred total
brokerage
commissions of $134,313 of which $7,252 was paid to Lehman Brothers.
No officer, director or employee of Lehman Brothers, Global
Asset
Management, SBA or Boston Advisors or of any parent or subsidiary of
those
corporations receives any compensation from the Fund for serving as a
Director
or officer of the Fund. The Fund pays each Director who is not an
officer,
director or employee of Lehman Brothers, Global Asset Management, SBA or
Boston
Advisors or any of their affiliates $7,500 per annum plus $750 per
meeting
attended and reimburses each such Director for travel and out-of-
pocket
expenses. The Fund pays each member of the Advisory Board an annual
fee of
$8,000 plus $250 per meeting attended and reimburses each Advisory Board
member
for travel and out-of-pocket expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned
subsidiary
of Mellon, serves as the Fund's custodian. The Shareholder Services Group,
Inc.
("TSSG"), a subsidiary of First Data Corporation, serves as the Fund's
transfer
agent.
3. SECURITIES TRANSACTIONS
During the six months ended July 31, 1994, cost of purchases and
proceeds
from sales of investment securites (excluding short-term investments)
when
aggregated amounted to $41,637,888 and $20,346,418 respectively.
As of July 31, 1994, the aggregate gross unrealized appreciation
for all
securities in which there was an excess of value over tax cost
amounted to
$17,174,241, and the aggregate gross unrealized depreciation for all
securities
in which there was an excess of tax cost over value amounted to $8,531,486.
4. FUND SHARES
As of July 31, 1994, 20 million shares of $.01 par value capital stock
were
authorized and 9,503,089 shares were outstanding.
- ---------------------------------------------------------------------------
- -----
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
7/31/94 1/31/94
---
- ------------ ----------------------
SHARES AMOUNT SHARES AMOUNT
---
- --- ------ --------- -----------
<S> <C>
<C> <C> <C>
Issued via rights offering*........................................... --
- -- 3,167,696 $27,408,313
Issued as reinvestment of dividends................................... --
- -- 492 4,665
-
- - --
- --------- -----------
Net increase.......................................................... --
- -- 3,168,188 $27,412,978
-
- - --
-
- - --
- --------- -----------
- --------- -----------
</TABLE>
* On January 20, 1994, the Fund received subscriptions for 3,167,696 shares
at a
subscription price of $8.74 per share pursuant to the exercise of
rights
issued to shareholders of record on December 28, 1993. Share issuance
costs,
which totaled $277,350, were charged directly against the proceeds
of the
offering.
15
<PAGE>
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- -----
o
- -----------------------------------------------
THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. RESTRICTED SECURITIES
Certain of the Fund's investments are restricted as to resale and are
valued
at the direction of the Fund's Board of Directors in good faith, at fair
value,
after taking into consideration appropriate indications of value
available. The
table below shows the number of shares held, the acquisition date, value
as of
July 31, 1994, value per unit, percentage of net assets which the
securities
comprise and aggregate cost of the securities.
- ---------------------------------------------------------------------------
- -----
<TABLE>
<CAPTION>
NUMBER OF ACQUISITION
7/31/94 VALUE PER PERCENTAGE OF
SECURITY SHARES DATE
FAIR VALUE UNIT NET ASSETS COST
- --------------------------------------------- --------- ----------- -
- --------- --------- --------------- ----------
<S> <C> <C>
<C> <C> <C> <C>
Europa Investimenti.......................... 850,000 07/02/91 $
535,264 $ 0.63 0.5% $ 623,396
Finanziaria Italiana di Participazioni....... 10,000 03/13/87
673,804 67.38 0.7 722,361
- --
-
- ---------
Total......................................
$1,209,068 1.2%
- --
- --
-
- ---------
-
- ---------
</TABLE>
- ---------------------------------------------------------------------------
- -----
6. LENDING OF PORTFOLIO SECURITIES
The Fund has the ability to lend its securities to brokers, dealers
and
other financial organizations. Loans of securities by the Fund
are
collateralized by cash, letters of credit or U.S. government securities
that are
maintained at all times in an amount at least equal to the current market
value
of the loaned securities.
At July 31, 1994, the Fund had securities on loan to certain
brokers for
which the Fund received $15,578,948 as collateral.
At July 31, 1994, the Fund's loaned securities had an aggregate market
value
of $14,897,317 which represents 14% of total net assets.
7. CAPITAL LOSS CARRYFORWARDS AND OTHER TAX INFORMATION
At January 31, 1994, the Fund had available for Federal tax purposes
unused
capital loss carryforwards of $1,736,171 and $1,962,107 to offset
future net
capital gains expiring in the year 2001 and 2002, respectively.
In accordance with tax law, the Fund has elected to defer the
recognition of
losses occurring between October 31 and January 31 until the first day of
the
following fiscal year. The amount of such deferral is $257,530 of
currency
losses and $927,974 of capital losses. These losses for tax purposes
will be
deemed to occur on February 1, 1994.
16
<PAGE>
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- -----
o
- -----------------------------------------------
THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. CONCENTRATION OF CREDIT RISKS
Because the Fund concentrates its investments in securities
issued by
Italian corporations, its portfolio may be subject to special risks
and
considerations not typically associated with investing in a broader
range of
domestic securities. In addition, the Fund is more susceptible to
factors
adversely affecting the Italian economy than a fund not concentrated in
these
issuers to the same extent.
- ---------------------------------------------------------------------------
- -----
QUARTERLY RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
NET REALIZED NET INCREASE/
GAIN/(LOSS) ON (DECREASE) IN NET
INVESTMENT NET INVESTMENT
INVESTMENTS AND ASSETS RESULTING
INCOME INCOME/(LOSS)
CURRENCY FROM OPERATIONS
------------------- ----------------------- --
- ---------------------- ------------------------
PER PER
PER PER
QUARTER ENDED TOTAL SHARE TOTAL SHARE
TOTAL SHARE TOTAL SHARE
- ------------------------ ---------- ------- ------------ -------- --
- ----------- -------- ------------- --------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
April 30, 1992.......... $ 171,205 $0.03 $ (89,143) $(0.01) $
(72,791) $(0.01) $ (3,638,243) $(0.57)
July 31, 1992........... 1,408,295 0.22 1,133,982 0.18
(145,886) (0.02) (9,861,491) (1.56)
October 31, 1992........ 264,725 0.04 45,344 0.01
(3,290,180) (0.52) (3,331,563) (0.53)
January 31, 1993........ 324,140 0.05 92,679 0.01
113,301 0.02 28,819 0.01
April 30, 1993.......... 208,399 0.03 (22,200) 0.00
(633,996) (0.10) 4,646,508 0.73
July 31, 1993........... 1,164,578 0.19 946,601 0.14
(673,685) (0.10) 2,566,981 0.41
October 31, 1993........ 231,050 0.04 (51,313) (0.01)
(330,679) (0.05) 1,139,682 0.17
January 31, 1994........ 163,184 0.03 (104,964) (0.01)
(1,350,029) (0.21) 4,843,089 0.53
April 30, 1994.......... 384,431 0.04 37,867 0.01
376,390 .04 21,276,792 2.24
July 31, 1994........... 1,494,143 0.16 974,588 0.10
2,132,988 (.22) (11,970,591) (1.26)
</TABLE>
17
<PAGE>
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o
- ----------------------------------------------
THE ITALY FUND INC.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan
(the
"Plan"), shareholders of the Fund whose shares are registered in their own
name
may elect to have all distributions automatically reinvested in
additional
shares of the Fund by TSSG, as agent under the Plan. Distributions with
respect
to shares registered in the name of shareholders, such as banks,
brokers or
nominees, which hold shares for others (that is, in "street name"),
may be
reinvested by the broker or nominee in additional shares under the Plan,
but
only if the service is provided by the broker or nominee. Investors who own
Fund
shares registered in the street name should consult their broker or
nominee for
details regarding reinvestment. Shareholders who do not participate in the
Plan
will receive all distributions in cash paid in dollars by check mailed
directly
to the shareholder by TSSG as dividend paying agent.
The number of shares of common stock participants in the Plan
receive in
lieu of a cash dividend is determined in the following manner.
Whenever the
market price of Fund shares is equal to or exceeds the net asset value of
the
Fund shares at the time such shares are valued for the purpose of
determining
the number of shares equivalent to the cash dividend or
distribution,
participants will be issued shares of the Fund at net asset value. If net
asset
value exceeds the market price of Fund shares at such time, or if the
Fund
should declare a dividend or other distribution payable only in cash, TSSG
will
buy Fund shares in the open market, on the New York Stock Exchange or
elsewhere,
beginning on the payment date of the dividend or distribution, until it
has
expended for such purchases all of the cash that would otherwise be
payable to
the participants. The number of purchased shares that will then be
credited to
the participants' accounts is based on the average per share purchase
price of
Fund shares so purchased, including brokerage commission. Shares issued by
the
Fund are not issued at a discount of more than 5 percent from the then
current
market value of the Fund's shares. If the market price exceeds the net
asset
value of the Fund shares before TSSG has completed its purchases, the
average
per share purchase price paid by TSSG may exceed the net asset value of
the
Fund's shares, resulting in the acquisition of fewer shares than if the
dividend
or distribution had been paid in shares issued by the Fund.
Participants in the Plan have the option of making additional semi-
annual
cash payments to TSSG in any amount from $100 to $3,000 for investment in
Fund
shares. TSSG uses all funds so received (as well as any dividends and
capital
gains distributions received in cash) to purchase Fund shares in the open
market
on or about February 15 and August 15 of each year.
Plan participants are not subject to any charge for reinvesting
dividends or
capital gains distributions. Each Plan participant will, however, bear a
pro
rata share of brokerage commissions incurred with respect to TSSG's open
market
purchases of Fund shares in connection with the reinvestment of
dividends or
capital gains distributions.
The automatic reinvestment of dividends and capital gains distributions
does
not relieve Plan participants of any income tax that may be payable
on the
dividends or capital gains distributions. A participant in the Plan is
treated
for federal income tax purposes as having received, on the dividend
payment
date, a dividend or distribution in an amount equal to the cash that
the
participant could have received instead of shares.
A shareholder may terminate participation in the Plan at any
time by
notifying TSSG in writing. A termination will be effective immediately if
notice
is received by TSSG not less than 10 days before
any
18
<PAGE>
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- -----
o
- ----------------------------------------------
dividend or distribution record date. Otherwise, the termination
will be
effective, with respect to any subsequent dividends or distributions, on
the
first day after the dividend or distribution has been credited to
the
participant's account in additional shares of the Fund. Upon termination
and
according to a participant's instructions, TSSG will either (i)
issue
certificates for the shares credited to a shareholder's Plan account
together
with a check representing any fractional shares or (ii) sell such shares
in the
market.
Information concerning the Plan may be obtained from TSSG at 1-800-331-
1710.
19
<PAGE>
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THE ITALY FUND INC.
<TABLE>
<S> <C>
INVESTMENT ADVISER OFFICERS
Lehman Brothers Global Asset Heath B. McLendon
Management Limited CHAIRMAN OF THE BOARD
Two Broadgate Mario d'Urso
London EC2M 7HA, PRESIDENT
United Kingdom Erich Stock
ADMINISTRATOR VICE PRESIDENT AND
Smith, Barney Advisers, Inc. INVESTMENT OFFICER
1345 Avenue of the Americas Lewis E. Daidone
New York, New York 10105 TREASURER
SUB-ADMINISTRATOR Christina T. Sydor
The Boston Company Advisors, Inc. SECRETARY
One Exchange Place DIRECTORS
Boston, Massachusetts 02108 Heath B. McLendon
ADVISORY BOARD Paolo M. Cucchi
Andrea Farace James J. Crisona
Pierre Henchoz Alessandro C. di Montezemolo
Ing. Dott. Ettore Lolli Dr. Paul Hardin
Dott. Pietro Manes George Pavia
Ambasciatore Egidio Ortona
</TABLE>
20
<PAGE>
THE ITALY FUND
INC.
This report is sent to the shareholders of The Italy
Fund Inc. for their information. It is not a Pro-
spectus, circular or representation intended for
use in the purchase or sale of shares of the Fund or
of any securities mentioned in the report.
Comparisons between changes in the Fund's net
asset value per share and changes in The Banca
Commerciale Italiana Index should be considered
in light of the Fund's investment policy and objec-
tives, the characteristics and quality of the Fund's
investments, the size of the Fund and variations
in the Lira/Dollar exchange rate. This Index
generally reflects ordinary shares (as opposed to
savings shares).
THE ITALY FUND INC.
TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 298-6263
SEMI-ANNUAL
REPORT
July 31, 1994
