<PAGE>
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Dear Shareholder,
We are pleased to present the Annual Report for The Italy Fund Inc. for the
fiscal year ended January 31, 1994. As of that date, the Fund's net asset value
(NAV), including the costs and dilution associated with the rights offering, was
$9.84 per share. At the end of the previous quarter, October 31, 1993, the NAV
was $9.75 per share and at the close of the previous fiscal year, January 31,
1993, the NAV was $8.43 per share. In considering the NAV, please bear in mind
the dividend of $0.075 per share paid in December 1993.
When expressed in Lira terms, the Fund's NAV, when adjusted for the dividend
and rights offering, increased by 38.3% during this fiscal year, which compares
with a 36% increase in the Banca Commerciale Italiana Index (BCI Index) over the
same period. Expressed in U.S. dollars, the Fund has continued to outperform the
BCI Index since inception.
POLITICS
Given the political and economic revolution that Italy is currently
undergoing, political developments have continued to set the scene over the last
three months. In local elections held in November and December, the former
communist party (PDS) led coalitions which won most of the contests, with the
Northern League suffering their first major setback. The wave of protest which
had been clearly perceived in the June local elections was further strengthened
as shown by the demise of the present coalition parties and the strong
performance of the MSI (extreme right party) in both Naples and Rome. The major
winner of these elections was the PDS, which was able to take advantage of the
new majority electoral system in building alliances both to the right and left.
The new electoral system enabled it to win a majority without being the single
largest party in the contest. It was also very skillful in dispelling possible
apprehensions about its victory between the two rounds of elections, when
several key PDS figures reassured the electorate about the party's economic
policies.
Finally, after months of political maneuvering including last-minute efforts
by elements in the security services to force President Scalfaro's resignation,
the date of early elections was fixed. With the final approval of the 1994
budget and of the new electoral constituencies, Parliament was dissolved in
January, with early elections called for the 27th and 28th of March. With just
under two months to go until the elections, it is still not clear which
political aggregations will contest the seats in the various constituencies,
which will be largely decided by a majority electoral system for the first time
in the history of the Italian Republic.
Following last fall's local elections four political groupings seem to be
taking shape.
1. The progressive pole (center), led by the PDS
and potentially consisting of the Green Party, Communist Refoundation (a
left-wing breakaway group from the PDS), some former Socialists and
Republicans from the old governing majority ("Alleanza Democratica") and the
anti-mafia party "La Rete." This grouping has currently been credited with
40% of the votes.
2. The Northern League (which has recently
toned down its federalist stance), "Forza Italia" (group founded by media
magnate Silvio Berlusconi) plus the former Liberal party. This group is
credited with 27% of the votes, according to an opinion poll.
3. The Partito Popolare (former Christian
Democrats) in possible alliance with Mario Segni and his "Pact for Italy." An
opinion poll taken in January gave this aggregation 23% of the votes.
4. Alleanza Nazionale, i.e. the right under the
leadership of MSI. The same poll gives this grouping 10% of the votes.
Given the new majority electoral system, it has become crucial to be able to
forge alliances and present a single candidate representing the alliance. So
far, the "progressive pole" has demonstrated its skills in building alliances
and this was the key to their success in the last local elections. Together the
three center-right groupings should win more support than the "progressive pole"
in the next elections. They are, however, subject to severe internal strains;
and among the center-right groupings there is still not a well defined alliance
to confront the left. Unless there are last minute agreements among the
center-right forces, the progressive pole has an excellent chance to take the
majority in the new parliament.
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While at this point few will hazard a bet on the likely winner or winners,
at least one result from the election can be predicted. Italy will introduce a
system that encourages parties to alternate in power, and this is a turning
point in political culture. The lack of a genuine alternative to the parties in
government until now has been a crucial ingredient behind the spread of
corruption that has provoked the collapse of the old political system.
THE ECONOMY
Turning to the economic outlook, little has changed in Italy's economic
scenario over the last few months. One has to recognize that a growing dualism
between the domestic and the export sectors has emerged. While real domestic
demand has been falling for four consecutive quarters, real net exports have
improved significantly since late 1992, helping to turn the trade balance from a
Lit 15.3 trillion deficit in the first 11 months of 1992 into a Lit 27 trillion
surplus for the same period in 1993. Trade flows continue to improve Italy's
balance of payments which recorded a Lit 2.1 trillion surplus in 1993 after a
deficit of Lit 32.5 trillion in 1992. The trade improvement reflects the unusual
combination (for Italy) of an almost 20% depreciation in the Lira and falling
real wages. The vicious circle of high inflation and wage/price growth has been
broken with consequent gains for Italy's market share abroad. At the same time,
this largely explains why domestic demand is showing a negative growth for the
first time since the Second World War. Consumer spending was traditionally
underpinned by the fact that wage growth was exceeding inflation (through the
automatic wage indexation mechanism), thus representing robust, real income
growth despite occasional falls in employment. With the abolition of wage
indexation last summer, wage growth has fallen below inflation. In addition, tax
increases, resulting from the last two years' rigorous budgets, along with
rising unemployment have dented the average household's income.
Industrial output data to November 1993 shows activity stabilizing at around
the same levels as last year. Steel production, car sales and business surveys
all suggest that the economy has stopped deteriorating.
While the economy has bottomed out and a decrease of 0.4% in Italy's gross
domestic product (GDP) is expected for 1993, no strong recovery can occur
without a turn-around in domestic demand, which is unlikely to occur before the
end of 1994. Net exports will again constitute the driving force for the Italian
economy in 1994, when GDP is expected to grow by around 1.5%.
Economic weakness and falling real wages have on the other hand, favored a
decline in inflation, in spite of the significant depreciation and widespread
fears of importing inflation. Inflation, as represented by the consumer price
index (CPI) averaged 4.2% in 1993, down from 5.4% in 1992, and was running at 4%
in December 1993. Even if the trend in inflation will be temporarily interrupted
in January 1994 because of the initial effects of the year-end budget measures
(higher gasoline taxes and motorway tolls) it should subsequently resume its
downward trend, which could last until the end of the year.
THE STOCK MARKET
PERSPECTIVE
The year under review has been gratifying and not only in terms of
performance. The BCI index grew by 36% over the twelve month period ended
January 31, 1994, while the daily volume jumped to nearly Lit 400 billion, up by
almost 300% from the previous year. In the last days of January, the daily
volume on the Milan Exchange reached Lit 1,500 billion, a record volume. This
growth was mainly due to the decline in interest rates and the expansion of the
screen-based trading system (telematico). The performance of the market was also
aided by the long awaited start of the privatization program. Among the four
privatizations that have taken place, the most important was that of Italy's
seventh largest bank, Credito Italiano, which successfully raised Lit 1,830
billion ($1.08 billion), despite the fact that the market had to deal with a
substantially larger amount of capital increases as compared to the previous
year. The other major unfavourable development in the Italian market was
represented by the financial difficulties that some industrial groups were
confronted with, the Ferruzzi collapse being the most noteworthy.
In terms of sector performance, the best performing sectors over the last
twelve months were the telecom sector (pulled by Stet and Sip and their
2
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o
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reorganization and privatization talks), the textile sector (a key beneficiary
of the Lira devaluation) and the auto and mechanical engineering sector
(beneficiary of corporate restructuring and competitive gains from lower
currency and lower wage costs). The underperforming sectors were essentially the
construction/property sector (negatively affected by the virtual freeze in
infrastructure spending resulting from the corruption investigations) and the
banking sector (suffering from the provisions to be made for increased bad
loans, as illustrated by the well published Ferruzzi collapse).
OUTLOOK
Given the political development discussed earlier, and the upcoming general
elections in particular, it is rather evident that the political variable will
be the most important one with regard to the prospects for the Italian financial
markets. We expect, therefore, the equity market to remain quite volatile over
the next two months as the electoral campaign begins in earnest and political
alliances may be created or undone. Paradoxically, we believe that it is likely
that economic policy will not change in the medium term whatever the result of
the elections. The crucial point is that all of the political forces are
willing, in general terms, to follow the course outlined by the Amato and Ciampi
governments in terms of the issues which are vitally important to the financial
markets, i.e., the reduction of the public deficit, continued wage moderation,
the decline of interest rates and privatizations. Therefore, whatever the
electoral verdict, the virtuous cycle (lower budget deficit, wage freeze, lower
interest rates, lower budget deficit) should remain intact. Even the former
communist party, the PDS, has clearly expressed itself in favor of market
solutions. But can the PDS be trusted or is it just political maneuvering? One
has to understand that the PDS is backing Ciampi's economic policy for the usual
combination of altruistic and selfish reasons: the PDS leadership would like to
govern Italy over the longer term. Continuation as a ruling party will probably
continue to be difficult for the PDS, as it would for other parties in a West
European democracy, without votes from potentially uncommitted voters in the
center. The PDS will therefore probably find itself, whether it likes it or not,
following the shift of the Spanish and French Socialist parties or the earlier
move of the West German SPD, to become a mass center-left party with policies
mostly acceptable to financial markets. Furthermore, ill-judged policies on the
budget deficit or wages would lead to massive foreign selling of Italian
securities and a resulting collapse of the Lira, which would be most unwelcome
to the PDS at a time when it is trying hard to win international confidence.
In terms of valuation, even if the market looks overvalued in price/earnings
terms (P/E of 27x 1994 earnings), it is one of the cheapest in terms of price/
cash flow (P/CF of 5x 1994 earnings) and in terms of price/book value (P/BV of
1.4x 1994 earnings). Considering that 1993 will probably represent the bottom of
earnings expected over the next three years, valuation is not excessive compared
to the present economic cycle.
A shift in liquidity from money market instruments to shares will continue
to play a major role when assessing the outlook for Italian equities. The shift
follows the collapse in nominal short-term yields that has already taken place,
and will continue over the next year as further declines are expected in 1994
given the encouraging inflation outlook. The record net inflows in Italian
mutual funds in the last months and the highly successful privatization of
Credito Italiano and IMI (which were four times oversubscribed, thus indicating
that Italian savers are favourably inclined towards equities when opportunities
are well presented and explained), clearly illustrates this changing pattern in
Italian savings. In this context, it is important to consider the fact that the
capitalization of the Italian bond and money market is around eight times higher
than that of the stock market, and that it is at least 13-14 times the float of
the Milan Stock Exchange, while in the US the bond and stock markets are of
similar dimensions. Also, in the present slow economic growth environment demand
for credit is growing more slowly than deposits. Italian banks will therefore
find liquidity being freed up, most of which could end up on the domestic
market, both in stocks and bonds.
In the final analysis, the outlook for the Italian equity market will depend
on the continuation of the economic policies introduced by the Amato and Ciampi
governments. The key to the Italian equity
3
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market is an understanding of the causal relationship between economics and
policies, and from this perspective it is important to recognize that the new
political order, whether it be on the right or the left, is committed to the
policies of economic and financial stability. This is in marked contrast to the
old political considerations. In the past it was less the endless rounds of
elections and governments that undermined Italian assets than the failure of the
old political establishment to control the twin problems of inflation and a
budget deficit.
The conclusion must be that once the political uncertainty has been removed,
the significantly improved economic fundamentals will be there for all to focus
on (primary budget and trade surplus, low wages and inflation, lower interest
rates). Indeed it would not be excessive to argue that the Italian political and
economic "revolution" has had a greater positive impact on the economic fortunes
of Italy than German unification has had on the economic fortunes of Germany.
INVESTMENT STRATEGY
After the anticipated fall in share prices in September and October 1993,
the Fund reinvested its cash mostly in equities. Investments were added to the
banking, chemical, mechanical engineering and textile sectors. In the banking
sector the Fund bought positions in Credito Italiano, Banca Comerciale Italiana
after the recent underperformance, and Banca Fideuram, which is among the major
beneficiaries of the booming Italian mutual fund industry. In the chemical
sector, the Fund's investment in Enichem Augusta was further increased and we
started a position in Montedison, as we believe that its prospects have
significantly improved after the recent restructuring and joint-venture with
Royal Dutch. After its massive capital increase in November, we also started an
investment in vehicle producer Fiat, whose prospects have significantly improved
after the recent rights offering and the launch of the highly successful new car
model, the Punto. Valuation grounds led us to increase the exposure to the
textile sector in investing in Stefanel. Finally, two of the Fund's convertible
bonds, Italgas and Banca di Roma, were converted into the underlying shares, as
their conversion period expired. In terms of sector allocation, the Fund remains
overweighted in the food/ sugar, textiles and communications sectors and
continues to underweight the banking sector.
We would like to take this opportunity to extend our thanks to all
shareholders who participated in the recently completed rights offering. The
shares available through the offering were oversubscribed, and as a result, the
Fund's assets were increased by over $27 million. We are particularly pleased
with the results as we believe there are several attractive investment
opportunities currently available in Italy which the Fund will be able to take
advantage of more fully as a result of the offering's success. We will be
reporting to you on such opportunities in upcoming quarters.
We appreciate the opportunity to serve your investment needs and thank you
for your continued confidence and support.
Sincerely,
Heath B. McLendon
CHAIRMAN OF THE BOARD
Mario d'Urso
PRESIDENT
Erich Stock
INVESTMENT OFFICER
February 16, 1994
4
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THE ITALY FUND'S EQUITY PORTFOLIO VERSUS THE BCI INDEX
JANUARY 31, 1994 (UNAUDITED)
Pie charts depicting the allocation of The Italy Fund's investment securities
and The BCI Index held at January 31, 1994 by sector classification. The pies
are broken in pieces representing industries in the following percentages:
<TABLE>
<CAPTION>
SECTOR PERCENTAGE
<S> <C>
Communications 22.7%
Financials 8.9%
Food & Sugar 8.9%
Electromechanical, Engineering & Autos 9.7%
Banks 10.5%
Textiles 5.5%
Property, Construction & Cement 3.3%
Chemicals 5.6%
Pharmaceuticals 1.0%
Other 1.7%
Insurance 22.2%
<CAPTION>
SECTOR PERCENTAGE
<S> <C>
Communications 20.4%
Financials 6.6%
Food & Sugar 3.0%
Electromechanical, Engineering & Autos 11.6%
Banks 16.7%
Textiles 2.8%
Property, Construction & Cement 2.9%
Chemicals 4.7%
Pharmaceuticals 0.4%
Paper & Publishing 1.8%
Other 4.7%
Insurance 24.4%
</TABLE>
5
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THE ITALY FUND INC.
Investment Portfolio as of January 31, 1994
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE ($)
SHARES (NOTE 1)
<C> <S> <C>
-----------------------------------------------------
-----------------------------------------------------
STOCKS -- 66.1%
-------------------------------------------
INSURANCE -- 14.8%
218,750 Alleanza...................... $ 2,248,784
110,000 Assicurazioni Generali........ 2,647,591
90,000 Compagnia di Assicurazioni di
Milano...................... 400,501
112,291 Lloyd Adriatico............... 1,023,832
61,250 Lloyd Adriatico Risp NC**..... 378,771
105,000 RAS........................... 1,748,617
230,000 SAI Risp NC**................. 1,306,069
130,000 SAI-Societa Assicuratrice
Industriale................. 1,516,449
110,000 Toro Assicurazioni+++......... 2,013,347
85,000 Toro Assicurazioni Risp
NC**........................ 592,167
-----------
13,876,128
-----------
COMMUNICATIONS -- 12.5%
45,000 Ericsson...................... 714,161
786,000 SIP........................... 2,017,964
1,200,000 SIP Risp NC**+++.............. 2,627,190
203,000 Sirti S.p.A................... 1,200,520
670,000 STET+++....................... 1,865,568
1,190,000 STET Risp NC**+++............. 2,685,308
110,000 Teleco Cavi S.p.A............. 582,861
-----------
11,693,572
-----------
HOLDING COMPANIES -- 6.8%
850,000 Europa Investimenti++#........ 501,327
10,000 Finanziaria Italiana di
Participazioni++#........... 631,082
800,000 Gaic Conv. di Risp*........... 380,159
150,000 IFI Privilegio................ 1,684,813
264,480 IFIL+++....................... 959,023
270,000 IFIL Risp NC**................ 560,702
1,500,000 Montedison S.p.A.............. 1,035,978
280,000 Sopaf......................... 421,115
210,000 Sopaf Risp*................... 220,466
-----------
6,394,665
-----------
-----------------------------------------------
STOCKS -- (CONTINUED)
-------------------------------------------
BANKING -- 6.7%
280,000 Banca Comerciale Italiana
Risp*....................... $ 743,474
425,000 Banca Fideuram................ 430,640
124,998 Banca di Roma................. 141,844
450,000 Banco Ambrosiano Veneto....... 1,300,501
228,000 Credito Fondiario............. 725,216
560,000 Credito Italiano Risp*........ 714,409
50,000 Credito Romagnolo............. 405,485
75,000 Istituto Bancario San Paolo di
Torino+++................... 471,896
140,000 Mediobanca S.p.A.............. 1,340,136
-----------
6,273,601
-----------
UTILITIES -- 5.8%
2,000,000 Autostrade Privelegio......... 2,194,043
366,500 Italgas....................... 1,234,276
460,000 Edison........................ 2,027,473
-----------
5,455,792
-----------
FOOD -- 5.7%
15,595 Eridania-Beghin-Say........... 2,805,352
1,760,000 Parmalat Finanziaria S.p.A.... 2,570,192
-----------
5,375,544
-----------
TEXTILES -- 3.7%
140,000 Benetton...................... 2,312,167
144,310 SIMINT S.p.A., Privilegio..... 118,308
432,446 SIMINT S.p.A. -- Societa
Italiana Manufatti.......... 487,920
150,000 Stefanel S.p.A................ 501,003
-----------
3,419,398
-----------
AUTOMOBILES -- 2.4%
390,000 Fiat S.p.A.................... 1,113,990
808,000 Pirelli S.p.A................. 1,119,429
-----------
2,233,419
-----------
CHEMICALS AND PHARMACEUTICALS -- 2.0%
870,000 Enichem Augusta S.p.A......... $ 1,246,889
260,000 Recordati Risp NC**........... 628,723
-----------
1,875,612
-----------
</TABLE>
See Notes to Financial Statements.
6
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THE ITALY FUND INC.
Investment Portfolio as of January 31, 1994 (Continued)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE ($)
SHARES (NOTE 1)
<C> <S> <C>
----------------------------------------------------
-----------------------------------------------
STOCKS -- (CONTINUED)
-------------------------------------------
MECHANICAL ENGINEERING -- 2.0%
180,000 Danieli....................... 1,167,797
191,750 Danieli Risp NC**............. 684,216
-----------
1,852,013
-----------
CEMENT AND CERAMICS -- 1.8%
60,000 Calcestruzzi.................. 417,965
310,000 Italcementi Risp*............. 1,231,589
-----------
1,649,554
-----------
RETAILING -- 1.4%
81,790 La Rinascente................. 442,018
186,136 La Rinascente Risp*........... 638,933
90,000 SME........................... 205,798
-----------
1,286,749
-----------
CONSTRUCTION AND PROPERTY -- 0.5%
208,000 Vianini Lavori................ 453,294
-----------
TOTAL STOCKS
(COST $59,509,161)........... 61,839,341
-----------
-----------------------------------------------
WARRANTS -- 0.8%
-------------------------------------------
20,900 Alleanza Risp, Warrants,
expire 02/29/96#............ $ 24,247
8,816 IFIL, Warrants to Purchase
ordinary shares, expire
07/01/94#................... 7,009
27,200 IFIL Risp, Warrants to
Purchase savings shares,
expire 07/01/94#............ 11,870
220,000 Parmalat Finanziaria,
Warrants, expire
01/02/99#................... 215,263
3,580 Raggio di Sole, Warrants,
expire 05/30/94............. 0
3,580 Raggio di Sole di Risp,
Warrants, expire 05/30/94... 0
15,000 RAS Risp, Warrants, expire
12/31/95#................... 28,124
12,500 STET, Warrants, expire
09/30/96#................... 186,840
25,000 STET di Risp, Warrants, expire
09/30/94#................... 258,980
-----------
TOTAL WARRANTS
(COST $112,682).............. 732,333
-----------
</TABLE>
See Notes to Financial Statements.
7
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THE ITALY FUND INC.
Investment Portfolio as of January 31, 1994 (Continued)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE VALUE MARKET
(MILLION VALUE ($)
LIRE) (NOTE 1)
<C> <S> <C>
-----------------------------------------------------
-----------------------------------------------------
FIXED-INCOME INVESTMENTS -- 2.8%
-------------------------------------------
L 2,000 Italy, Government of, 11.500%
due 03/01/03................ $1,379,062
2,000 Italy, Republic of, 9.000% due
10/01/98.................... 1,219,109
-----------
TOTAL FIXED-INCOME
INVESTMENTS (COST
$2,578,777).................. 2,598,171
-----------
-----------------------------------------------
CONVERTIBLE BONDS -- 0.7%
-------------------------------------------
1 IFIL, 8.500% due 07/01/94..... 388
2,265 Mediobanca/Alleanza, 4.000%
due 09/03/99................ 206,176
180 Mediobanca - Italmobiliare,
6.000% due 04/01/96......... 102,129
500 Stefanel Finance, 9.000% due
12/31/95.................... 308,169
-----------
TOTAL CONVERTIBLE BONDS (COST
$728,059).................... 616,862
-----------
FACE VALUE
-----------------------------------------------------
COMMERCIAL PAPER -- 3.7%
(COST $3,494,000)
-------------------------------------------
$3,494,000 Ford Motor Credit Corporation,
3.100% due 02/01/94......... 3,494,000
-----------
-----------------------------------------------
REPURCHASE AGREEMENT -- 3.7%
(COST $3,500,000)
-------------------------------------------
$3,500,000 Agreement with Morgan Stanley
& Company, 3.100% dated
01/30/94, to be repurchased
at $3,500,603 on 02/01/94,
collateralized by $2,635,000
U.S Treasury Bonds, 9.375%
due 02/15/06................ $3,500,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $69,922,679+)........ 77.8 % 72,780,707
OTHER ASSETS AND LIABILITIES
(NET)........................ 22.2 20,737,322
------ -----------
NET ASSETS.................... 100.0 % $93,518,029
------ -----------
------ -----------
<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).
+++ A portion of security loaned at 01/31/94. Total market value of all
securities loaned is $6,753,685 (Note 6).
# Non-income producing security.
</TABLE>
See Notes to Financial Statements.
8
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THE ITALY FUND INC.
Statement of Assets and Liabilities
January 31, 1994
- -----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $69,922,679) (Note 1)
See accompanying schedule....................... $ 72,780,707
Cash and foreign currency (Cost $1,569,750)....... 1,573,478
Receivable for Fund shares sold (Note 4).......... 27,685,663
Receivable for investment securities sold......... 91,711
Interest and dividends receivable................. 42,177
Other assets...................................... 5,326
------------
Total Assets................................ 102,179,062
LIABILITIES:
Collateral for securities loaned (Note 6)......... $6,950,375
Payable for investment securities purchased....... 1,281,869
Investment advisory fee payable (Note 2).......... 39,171
Custodian fees payable (Note 2)................... 39,000
Administration fee payable (Note 2)............... 20,626
Transfer agent fees payable (Note 2).............. 3,183
Accrued expenses and other payables............... 326,809
----------
Total Liabilities........................... 8,661,033
------------
NET ASSETS........................................ 93,518,029
------------
------------
NET ASSETS consist of:
Accumulated net investment loss................... (257,530)
Accumulated net realized loss on securities sold,
forward foreign exchange contracts and foreign
currency transactions........................... (4,626,252)
Net unrealized appreciation of securities and
currencies...................................... 2,857,625
Par value......................................... 95,031
Additional paid-in capital........................ 95,449,155
------------
Total Net Assets............................ $ 93,518,029
------------
------------
NET ASSET VALUE PER SHARE ($93,518,029
DIVIDED BY 9,503,089 shares of common stock
outstanding or subscribed) (Note 4)............. $9.84
----
----
</TABLE>
See Notes to Financial Statements.
9
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THE ITALY FUND INC.
Statement of Operations
For the Year Ended January 31, 1994
- -----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends......................................... $ 1,229,247
Interest.......................................... 802,248
Less taxes withheld (Note 1)...................... (264,284)
------------
Total Investment Income..................... 1,767,211
EXPENSES:
Investment advisory fee (Note 2).................. $444,604
Custodian fees (Note 2)........................... 144,403
Administration fee (Note 2)....................... 118,537
Advisory board and Directors' fees and expenses
(Note 2)........................................ 97,580
Legal and audit fees.............................. 96,295
Transfer agent fees (Note 2)...................... 33,383
Other............................................. 64,285
--------
Total Expenses.............................. 999,087
------------
NET INVESTMENT INCOME............................. 768,124
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 3):
Net realized loss on securities transactions...... (3,009,611)
Net realized gain on forward foreign exchange
contracts and foreign currency transactions..... 331,616
------------
Net realized loss on investments during the
year......................................... (2,677,995)
------------
Net change in unrealized
appreciation/(depreciation) of:
Securities...................................... 15,462,628
Forward foreign exchange contracts.............. (372,895)
Foreign currency and net other assets........... 16,398
------------
Net unrealized appreciation of investments
during the year.............................. 15,106,131
------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS... 12,428,136
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS...................................... $ 13,196,260
------------
------------
</TABLE>
See Notes to Financial Statements.
10
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THE ITALY FUND INC.
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
Statement of Changes in Net Assets 01/31/94 01/31/93
<S> <C> <C>
-------------------------------------------------------------------
Net investment income................... $ 768,124 $ 1,182,862
Net realized loss from securities sold,
forward foreign exchange contracts and
foreign currency transactions during
the year.............................. (2,677,995) (3,395,556)
Net unrealized
appreciation/(depreciation) on
securities, forward foreign exchange
contracts, foreign currencies and net
other assets during the year.......... 15,106,131 (14,589,784)
----------- ------------
Net increase/(decrease) in net assets
resulting from operations............. 13,196,260 (16,802,478)
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/(decrease) in net assets... 40,134,120 (16,802,478)
NET ASSETS:
Beginning of year....................... 53,383,909 70,186,387
----------- ------------
End of year (including accumulated net
investment loss of $257,530 at January
31, 1994)............................. $93,518,029 $ 53,383,909
----------- ------------
----------- ------------
</TABLE>
See Notes to Financial Statements.
11
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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>
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR
For a Fund share outstanding ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
throughout each year. 01/31/94# 01/31/93 01/31/92 01/31/91 01/31/90 01/31/89 01/31/88 01/31/87*
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
Operating performance:
Net asset value, beginning of
year............................ $8.43 $ 11.08 $ 11.37 $ 13.24 $ 9.91 $ 9.07 $ 14.33 $ 11.16
---------- --------- ------- --------- --------- --------- --------- ---------
Net investment income............ 0.12 0.19 0.25 0.32 0.17 0.21 0.12 0.22
Net realized and unrealized
gain/(loss) on investments...... 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...................... 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.............. (0.08) 0.00 (0.57) (1.18) (0.15) (0.19) (1.73) 0.00
---------- --------- ------- --------- --------- --------- --------- ---------
Net asset value, end of year..... $9.84 $ 8.43 $ 11.08 $ 11.37 $ 13.24 $ 9.91 $ 9.07 $ 14.33
---------- --------- ------- --------- --------- --------- --------- ---------
---------- --------- ------- --------- --------- --------- --------- ---------
Market value, end of year........ $12.375 $ 8.875 $ 9.50 $ 10.00 $ 17.50 $ 8.00 $ 7.00 $ 12.125
---------- --------- ------- --------- --------- --------- --------- ---------
---------- --------- ------- --------- --------- --------- --------- ---------
Total investment return++........ 40.54%+++ (6.58)% 1.00% (36.14)% 121.31% 16.97% (32.16)% 1.04%
---------- --------- ------- --------- --------- --------- --------- ---------
---------- --------- ------- --------- --------- --------- --------- ---------
Ratios to average net assets/
supplemental data:
Net assets, end of year (in
000's).......................... $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.............. 1.30% 2.04% 2.17% 2.28% 1.54% 2.23% 1.02% 1.83%+
Ratio of operating expenses to
average net assets.............. 1.69% 1.70% 1.53% 1.80% 1.90% 1.99% 1.92% 1.96%+
Portfolio turnover rate.......... 46% 33% 24% 24% 15% 15% 19% 39%
<FN>
- ------------------------
* 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.
</TABLE>
See Notes to Financial Statements.
12
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THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS
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 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 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
13
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o
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THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
RECLASSIFICATIONS: During the current year, the Fund adopted Statement
of Position 93-2 "Determination, Disclosure, and Financial Statement
Presentation of Income, Capital Gain, and Return of Capital Distributions by
Investment Companies." Accordingly, certain reclassifications have been made
to the components of capital in the Statement of Net Assets to conform with
the accounting and reporting guidelines of this statement. Distributions in
excess of book basis accumulated realized gains or undistributed net
investment income that were the result of permanent book and tax accounting
differences have been reclassified to paid-in capital. Accordingly, amounts
as of January 31, 1993 have been restated to reflect a decrease in paid-in
capital, a decrease in undistributed net investment income and a decrease in
accumulated realized loss of $355,393, $1,182,862 and $1,538,255,
respectively. The Financial Highlights have not been restated to reflect
this change in presentation. Net investment income, net realized gains, and
net assets were not affected by this change.
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
Holdings Inc. ("Holdings"). American Express Company ("American Express") owns
100% of Holdings' issued and outstanding common stock, which represents
approximately 92% of Holdings' issued and outstanding voting stock. The
remainder of Holdings' voting stock is owned by Nippon Life Insurance Company.
Under the Investment Advi-
14
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o
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THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
sory 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.
The Fund also has entered into an administration agreement with The Boston
Company Advisors, Inc. ("Boston Advisors"), an indirect wholly owned subsidiary
of Mellon Bank Corporation ("Mellon"), which provides that Boston Advisors will
be paid a fee computed and paid monthly at the annual rate of 0.20% of the value
of its average monthly net assets.
For the year ended January 31, 1994, the Fund incurred total brokerage
commissions of $58,678 of which $1,717 was paid to Lehman Brothers.
No officer, director or employee of Lehman Brothers, Global Asset Management
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 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. American Express retains 21.5% interest in FDC.
3. SECURITIES TRANSACTIONS
During the year ended January 31, 1994, cost of purchases and proceeds from
sales of invest-
ment securities (excluding short-term investments)
when aggregated amounted to $27,250,663 and $26,328,603, respectively.
As of January 31, 1994, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost amounted to
$13,060,784, and the aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value amounted to $10,202,756.
4. FUND SHARES
As of January 31, 1994, 20 million shares of $.01 par value capital stock
were authorized and 6,335,393 shares were outstanding and 3,167,696 shares were
subscribed.
<TABLE>
<CAPTION>
Year Ended
01/31/94
-------------------------
Shares Amount
--------- -----------
<S> <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
--------- -----------
--------- -----------
* On January 20, 1994, the Fund received sub-
scriptions 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.
</TABLE>
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
January 31, 1994, value per unit, percentage of net assets which the securities
comprise and aggregate cost of the securities.
15
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o
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THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF ACQUISITION 01/31/94 VALUE PER PERCENTAGE OF NET
SECURITY SHARES DATE FAIR VALUE UNIT ASSETS COST
- -------------------------------------- ----------- ----------- ------------ ----------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Europa Investmenti.................... 850,000 07/02/91 $ 501,327 $ 0.59 0.5% $ 623,396
Finanziaria Italiana di
Participazioni....................... 10,000 03/13/87 631,082 63.11 0.7 772,361
--
------------
Total............................. $ 1,132,409 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 January 31, 1994, the Fund had securities on loan to certain brokers for
which the Fund received $6,950,375 as collateral.
At January 31, 1994, the Fund's loaned securities had an aggregate market
value of $6,753,685 which represented 7.2% 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.
For the fiscal year ended January 31, 1994, the total amount of income
received by the Fund from sources within foreign countries and possessions of
the United States was $0.2138 per share (representing a total of $2,031,495).
The total amount of taxes paid by the Fund to such countries was $0.0278 per
share (representing a total of $264,284).
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.
16
<PAGE>
THE ITALY FUND INC.
-----------------------------------------------------------------------
QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
NET REALIZED NET INCREASE/ (DECREASE)
GAIN/(LOSS) ON
INVESTMENT NET INVESTMENT INVESTMENTS AND IN NET ASSETS RESULTING
INCOME INCOME/(LOSS) CURRENCY FROM OPERATIONS
QUARTER ---------------------- ----------------------- -------------------------- --------------------------
END TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER 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
</TABLE>
17
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THE ITALY FUND INC.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of The Italy Fund Inc.:
We have audited the accompanying statement of assets and liabilities of The
Italy Fund Inc., including the schedule of portfolio investments, as of January
31, 1994, and the related statement of operations 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 seven years in the period
then ended and for the period February 28, 1986 (Commencement of Operations) to
January 31, 1987. 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
January 31, 1994 by correspondence with custodians 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 The
Italy Fund Inc. as of January 31, 1994, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the seven years in
the period then ended and for the period February 28, 1986 (Commencement of
Operations) to January 31, 1987, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
March 17, 1994
18
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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 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
19
<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.
20
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o
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THE ITALY FUND INC.
<TABLE>
<S> <C>
INVESTMENT ADVISER OFFICERS
Lehman Brothers Global Asset
Management Limited Heath B. McLendon
Two Broadgate CHAIRMAN OF THE BOARD
London EC2M 7HA, Mario d'Urso
United Kingdom PRESIDENT
Erich Stock
ADMINISTRATOR VICE PRESIDENT AND
The Boston Company Advisors, Inc. INVESTMENT OFFICER
One Boston Place
Boston, Massachusetts 02108 Christina Haage
TREASURER
ADVISORY BOARD
Francis J. McNamara, III
Andrea Farace SECRETARY
Pierre Henchoz
Ing. Dott. Ettore Lolli
Dott. Pietro Manes
Ambasciatore Egidio Ortona
DIRECTORS
Heath B. McLendon
Paolo M. Cucchi
James J. Crisona
Alessandro C. di Montezemolo
Dr. Paul Hardin
George Pavia
</TABLE>
<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
Annual
Report
January 31, 1994
