<PAGE>
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o
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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, 1995. As of that date, the net asset value per
share ("NAV") of the Italy Fund was $9.82. At the end of the previous quarter,
October 31, 1994, the net asset value was $10.14, and at the close of the
previous fiscal year, January 31, 1994, the NAV was $9.84 per share. In
considering the NAV, please bear in mind the dividend of $0.1724 per share paid
in December 1994.
When expressed in Lira terms, the Fund's NAV, when adjusted for the dividend
payment, declined by 3.5% during this fiscal year, which compares with a 0.2%
decline over the same period in the Banca Commerciale Index ("BCI Index"). (The
BCI Index is the most widely followed Italian index and includes all the
securities listed on the Milan Stock Exchange.) Since inception, the Fund has
cumulatively outperformed the BCI Index.
POLITICS
The Italian political scene persisted in dominating financial markets during
1994. Political tensions continued to shake investors' confidence with the
inherent instability of the coalition eventually leading to the downfall of Mr.
Berlusconi's government. Late in December, after the approval of the 1995 budget
law, the Northern League, the largest party in the ruling coalition, presented a
no-confidence motion, thereby forcing Mr. Berlusconi's resignation. Two rounds
of consultations between the Italian President and the leaders of major poli-
tical parties failed to break the deadlock. Mr. Berlusconi's allies reiterated
their demand for an early election unless Mr. Berlusconi was reinstated. The
Northern League and the opposition parties support a new government open to all
political forces and opposed to new elections. In the end, President Scalfaro,
the head of state, named Mr. Dini, the outgoing Treasury Minister, to form the
54th Italian government. By choosing the next Prime Minister from among Mr.
Berlusconi's supporters, President Scalfaro skillfully resolved the latest
political crisis. Consequently, Mr. Berlusconi found it difficult to oppose the
President's choice in spite of it running counter to his desire for early
elections. Mr. Dini has in turn been very skillful in choosing all his ministers
from the ranks of the so-called "technocrats," chosen for their competence
rather than political affiliation.
Paradoxically, Mr. Dini's cabinet of technocrats received parliamentary
support in the confidence vote from the former opposition parties, including the
left-wing PDS, whereas the rightist National Alliance and Berlusconi's Forza
Italia abstained. The spectacle of Mr. Dini heading a government supported by
the center-left parties and opposed by his former allies is a curious one and it
raises questions about his ability to carry out the four-point agenda he has
set: the approval of a supplementary interim budget, pension reform, regional
electoral reform and the creation of a level playing field for the media. The
Dini government, therefore, lacks clear support in parliament, and there is
uncertainty as to whether it will hold office for some time or just a few
months, ahead of new elections in the summer or fall. On the other hand, the
lack of political affiliation might help the Dini government take some unpopular
measures that neither the left nor the right are willing to sponsor directly,
for fear of losing votes.
The recent political turbulence is accelerating the political polarization.
Mr. Fini, the leader of the neo-fascist MSI, has successfully merged the MSI
into the National Alliance ("NA"), the party he created last year as a vehicle
for the electoral ambitions for the right. NA has now staked a claim to bring
the Italian right into the mainstream of national politics by abandoning fascist
nostalgics and moving more towards the center of the political spectrum. Within
the Popular Party ("PPI"), the former Christian Democratic party, a major split
seems to be taking place. The party's secretary, Mr. Buttigilone, appears to be
leaning towards joining forces with the right in order to form a center-right
coalition, but part of his party is favoring a link with the left to form a
center-left coalition. The entry into politics of the well-known economist and
former IRI (state holding) president, Mr. Prodi, to lead a center-left
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coalition, could find a strong following within the PPI. These developments help
to delineate the political scenario for the next elections with two poles: a
center-left pole under the leadership of Mr. Prodi; and a center-right pole
under the leadership of Mr. Berlusconi.
ECONOMICS
Recent statistics clearly signal that economic conditions are improving
faster than expected and that exports no longer are the only engine for growth,
as stronger domestic demand begins to kick in. Third quarter gross domestic
product ("GDP") growth in 1994 was up 1% quarter-on-quarter or 3.7%
year-on-year, the highest level in six years. This was significantly above
market expectations, and 1994 growth is likely to be among the highest in the
European Union. Even if last autumn's floods hampered growth in the fourth
quarter, 1994 GDP growth should exceed the previous forecasts and should be up
by around 2.5%, followed by a similar growth figure for 1995.
More interesting has been the rebalancing in the components of the Italian
economy in 1994. After the decline of the Lira in 1992 and 1993, exports surged
while domestic demand was negatively affected by the undermining of investment
plans caused by the corruption scandals and weak consumption due to tax rises
and real wage declines. During 1993, net trade contributed 4.6% to a negative
growth of 0.7%. Thus, excluding net trade, GDP would have fallen by 5.3% in
1993. However, during 1994 there was a significant shift in the components of
economic growth from net exports to domestic demand. In the third quarter, for
example, all of the 3.7% GDP growth came from domestic components and rebuilding
of inventories, with net trade actually reducing growth. The reduction in net
trade contribution to GDP growth should not be too alarming, since it is not
explained by a fall in export growth -- it actually continues to be quite strong
- -- but rather is due to rising imports, as domestic demand has now started to
grow. Also, Italy, like most other European economies, has a relatively high
import content compared to its exports (raw materials, for example), thus its
strong exports have proven to lead to higher imports.
Despite the slowdown in the further improvement of the trade balance in the
second half of 1994 due to increased imports, the trade balance showed a surplus
of Lit 32.4 trillion ($20.1 billion) in the first eleven months of 1994,
compared with a trade surplus of Lit 27.7 trillion ($17.2 billion) over the same
period in 1993.
Although most inflation forecasts remain encouraging by the standard of
previous economic recoveries, there are a few elements, such as higher
agricultural prices and the probable increase in indirect tax rates in the
coming mini-budget that suggest that inflation forecasts may be understated. The
Consumer Price Index ("CPI") averaged 3.9% in 1994 (down from 14.2% in 1993),
its lowest level in 25 years. The latest CPI figures for January indicate a
stable 3.8% growth, but it appears that the rate of inflation hit its lowest
point last summer and we believe is bound to rise, albeit not very rapidly, up
to an average of 4.25% or more this year.
THE ITALIAN STOCK MARKET
REVIEW
In the fiscal year 1994 (from February 1, 1994 to January 31, 1995), the BCI
Index was essentially flat, falling by 0.2%. It outperformed the Morgan Stanley
Capital International European Index and recorded the best performance after
Norway and Finland among equity markets of developed countries in Europe.
Average daily volumes doubled to around Lit 800 billion ($500 million). These
summary data, however, do not accurately reflect the market behavior during the
last twelve months, which has been characterized by two opposite trends. In the
first five months of 1994, the market rose by 37%, peaking in early May, and
outperforming all major equity markets.
This performance was driven by a series of favorable factors, both economic
and political. From the economic viewpoint, the economy was
2
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showing the first signs of recovery, and Italian companies, having benefitted
from the devaluation of the Lira, had increased their foreign market share. On
the political front, the elections won by the rightist "Freedom Alliance" under
Berlusconi's leadership made investors hope for a solution to Italy's perennial
economic problem, that of a large budget deficit which, in the past, has
resulted in lower interest rates. These hopes were further supported by the
implementation of the government's privatization program, with four state-owned
banks and insurance companies being privatized (Credito Italiano, BCI, IMI and
INA).
From the end of May until the end of November, the market trend changed
radically, with the Italian Index falling by almost 30%. This dramatic
turnaround was again the result of the Italian political arena's major impact on
the financial markets. Internal struggles within the Berlusconi coalition and
its reluctance to tackle the mounting budget deficit led to investors' loss of
confidence and their subsequent abandoning of the market. Then, in January, the
Italian financial markets, the equity market in particular, reacted very
positively to the resignation of Berlusconi's unstable government and the
appointment of Mr. Dini's "technocratic" government, and the BCI Index rising by
3.9%, recorded the best performance in Europe.
Further development of the Italian equity market was taken in November, when
a new futures contract, the FIB 30, began trading on the Milan Stock Exchange,
facilitating investors' hedging strategies.
In terms of relative sector performance during the 1994 fiscal year, the
best performing sectors were the automobile sector (led by the sharp earnings
turnaround at Fiat) followed by the telecommunication and financial holdings
sectors (benefitting from the cyclical recovery of their industrial holdings).
Conversely, the textiles (suffering from the depressed state of consumer
spending in Italy), the paper/publishing (suffering from falls in advertising
spending) and the construction (still affected by the consequences of the
corruption scandals and reduced public spending) sectors have underperformed.
OUTLOOK
Evaluating the outlook for the Italian equity market has become a
particularly arduous task, as the political factor retains a pre-eminent role
and forecasts on political scenarios, is especially difficult.
The equity market has already positively reacted to the appointment of a
non-political government under Mr. Dini's leadership. The continued support of
the market will depend on how long Mr. Dini's government will stay in place and
especially on whether his government will receive the necessary parliamentary
support to implement his four-point agenda (successful pension reform and
approval of a supplementary budget being the two crucial points for financial
markets).
In terms of valuation, corporate profitability continues to improve, driven
by a strong economic recovery and by the sharp turnaround in the industrial
sector. Earnings per share ("EPS") growth has been so good, particularly among
the exporters, that EPS forecasts are turning out to be conservative. After
growth of around 100% in 1994, EPS should continue to rise by another 50% in
1995. We believe profit margins will continue to expand in 1996 but are unlikely
to reach previous peak levels before 1998. This puts the market on a 21 times
price-earnings multiple for 1995, slightly lower than its five-year average. On
a price to cash flow and price to book value basis, the Italian market still
shows some of the lowest valuations in Europe. Valuation is less attractive when
comparing equities with bonds given the recent performance of equities against
bonds. We believe stabilization in global bond markets is therefore a
prerequisite for a further uptrend in the equity market.
The liquidity picture, which was one of the key factors explaining the sharp
increase in equity prices in the first part of last year, looks reasonable for
the first time since last summer. Except for the planned
3
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privatizations, whose timing still remains uncertain, new supply of equities
should be limited, as only a few convertible bond and warrant issues are
scheduled to be offered over the next three months. In terms of demand, net
inflows into domestic equity mutual funds significantly declined over the last
six months, but were still recording a small net inflow in January. The fact
that domestic equity funds are still showing positive inflows, contrary to the
general mutual fund industry, confirms our belief that there is still a
structural shift towards equity holdings by the individual investor and that
this is a medium- to long-term trend that will continue and will be reinforced
by the creation of private pension funds in the upcoming years. Clearly,
political stability will be needed for this trend to continue. But foreign
demand is essential in order to successfully implement future privatizations and
continue the appreciation of Italian equities. A more certain political
environment will be required to attract long-term foreign investments.
From previous analysis it becomes clear that the major risk continues to be
politics. We believe political uncertainties persist as the main cause of
equities' increased volatility, and overshadow any consideration attributable to
the fundamentals of the market or of individual companies. With the latest
rally, the stock market has recovered from its earlier oversold position. In our
opinion, this makes the market vulnerable to negative political developments.
The importance of politics derives from the fact that it is the driving factor
influencing the large public debt. We believe a competent and authoritative
government could restart a downward cycle in interest rates.
Therefore, determining the outlook for Italian financial markets inevitably
leads to the forecasting of the possible political scenarios. The Dini
government's top priorities will almost certainly be the introduction of
additional fiscal measures and the start in the discussion of pension reform
with the trade unions. Financial markets would most likely be encouraged by
this; however, it will not be known for quite some time whether the rest of Mr.
Dini's four-points program will be stopped by Mr. Berlusconi's opposition. Also,
it remains to be seen whether the PDS, one of Mr. Dini's supporting parties in
parliament, will approve a politically unpopular pension reform that it opposed
in the fall when presented by the previous government. Early elections would not
necessarily have a negative effect on the equity market if they occur after the
approval of the emergency fiscal package and the 1996 budget. Whether foreign
investors would welcome the most likely outcome of the vote and a possible
return of Mr. Berlusconi is another question. But the recent entry into politics
of Mr. Prodi at the head of a moderate center-left coalition could reduce the
probabilities of a center-right victory.
We believe the worst case scenario would be the return of political
bickering resulting in Mr. Dini's inability to implement his program with
dramatic consequences for interest rates, the Italian currency and consequently
the Italian market.
A more positive scenario would be if Mr. Dini's shaky coalition lasted until
the beginning of next year and it was able to complete his program. We believe
this could get the cycle for the Italian economy rolling again (lower deficit,
lower interest rates, higher economic growth, stabilization of debt/GDP ratio).
INVESTMENT STRATEGY
Over the last three months, we reduced the Fund's relatively high cash
position from 15% to below 2% by investing equally in equities and Italian
bonds. At the end of the year, Italian government bonds started to show very
attractive yields (almost 7% real yields) and in our view were also discounting
most of the negative political scenario.
Regarding the investments in equities, we started reducing the Fund's
underweighting in the more interest rate sensitive sectors by adding to our
investments in the banking and insurance sectors. In the banking sector, the
Fund's investment in Credito Italiano, Banca Popolare di Bergamo and IMI was
increased. In the insurance sector, we invested
4
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again in RAS during its rights offering and after the sharp fall following its
acquisition in Switzerland, in buying and taking up the rights during its rights
issue. Furthermore, we started to invest in Fondiaria, an interesting
restructuring story in the insurance sector, and added to the Fund's holding in
INA. We also added to some of the Fund's core investments like Fiat, Telecom
Italia and Ifil. Finally, we increased the Fund's investment in a smaller cap
stock, which should benefit from the turnaround in the European car sector
(Sogefi).
Presently, the Fund is still underweighted (compared to the BCI Index) in
the banking sector, and continues to emphasize the telecommunications and the
electromechanical/engineering and auto sectors.
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 15, 1995
5
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THE ITALY FUND'S SECTORIAL STRUCTURE
JANUARY 31, 1995 (UNAUDITED)
Pie charts depicting the allocation of The Italy Fund investment securities
and The BCI Index held at January 31, 1995 by sector classification. The pies
are broken in pieces representing sector in the following percentages:
<TABLE>
<CAPTION>
SECTOR PERCENTAGE
<S> <C>
Insurance 22.4%
Electromechanical, Engineering & Autos 16.0%
Financials 10.3%
Banks 12.3%
Chemicals 4.2%
Food & Sugar 5.8%
Property, Construction & Cement 3.1%
Textiles 0.8%
Paper & Publishing 0.9%
Pharmaceuticals 0.9%
Other 1.9%
Communications 21.4%
</TABLE>
BCI INDEX SECTORIAL STRUCTURE
JANUARY 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
BCI INDEX PERCENTAGE
<S> <C>
Insurance 23.0%
Electromechanical, Engineering & Autos 13.3%
Financials 6.2%
Banks 19.5%
Chemicals 4.7%
Food & Sugar 1.4%
Property, Construction & Cement 3.1%
Textiles 1.6%
Paper & Publishing 1.6%
Pharmaceuticals 0.4%
Other 4.1%
Communications 21.1%
</TABLE>
6
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THE ITALY FUND INC.
Investment Portfolio as of January 31, 1995
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE ($)
SHARES (NOTE 1)
<S> <C> <C>
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S> <C>
-----------------------------------------------------
STOCKS -- 90.4%
-------------------------------------------
INSURANCE -- 19.9%
200,000 Alleanza........................................ $ 2,042,540
110,000 Assicurazioni Generali.......................... 2,647,104
90,000 Compagnia di Assicurazioni di Milano............ 395,436
250,000 Fondiaria#...................................... 1,727,993
1,318,000 INA............................................. 1,784,344
115,000 La Previdente................................... 962,351
152,291 Lloyd Adriatico................................. 1,842,813
61,250 Lloyd Adriatico Risp NC**....................... 520,069
300,000 RAS+++.......................................... 3,246,390
353,000 SAI Risp NC**................................... 1,863,375
131,000 SAI-Societa Assicuratrice Industriale........... 1,541,655
-----------
18,574,070
-----------
COMMUNICATIONS -- 16.7%
55,000 Ericsson........................................ 754,852
330,000 Sirti S.p.A..................................... 2,393,666
810,000 STET............................................ 2,535,258
1,400,000 STET Risp NC**.................................. 3,538,581
946,000 Telecom Italia S.p.A.+++........................ 2,620,189
1,700,000 Telecom Italia Risp NC**........................ 3,774,259
-----------
15,616,805
-----------
BANKING -- 11.2%
1,425,000 Banca Fideuram.................................. 1,717,699
624,998 Banca di Roma................................... 704,469
100,000 Banca Popolare di Bergamo....................... 1,319,671
1,780,000 Credito Italiano+++............................. 2,210,837
260,000 IMI S.p.A....................................... 1,679,242
190,000 Istituto Bancario San Paolo di Torino........... 1,179,941
190,000 Mediobanca S.p.A................................ 1,654,867
-----------
10,466,726
-----------
HOLDING COMPANIES -- 9.4%
1,330,000 Cofide#......................................... $ 881,298
850,000 Europa Investimenti++#.......................... 527,868
10,000 Finanziaria Italiana di Partecipazion++#........ 664,493
-----------------------------------------------
STOCKS -- (CONTINUED)
-------------------------------------------
HOLDING COMPANIES -- (CONTINUED)
800,000 Gaic S.p.A. Risp*#.............................. 337,836
150,000 IFI Privilegio.................................. 2,268,281
330,600 IFIL............................................ 1,313,982
542,500 IFIL Risp NC**.................................. 1,103,361
690,000 Sopaf........................................... 1,024,127
241,500 Sopaf Risp*..................................... 275,957
49,639 422 S.p.A.++#................................... 339,096
-----------
8,736,299
-----------
UTILITIES -- 7.8%
1,800,000 Autostrade Privelegio........................... 2,408,943
510,000 Edison.......................................... 2,375,408
546,500 Italgas......................................... 1,505,187
700,000 Sondel.......................................... 1,043,316
-----------
7,332,854
-----------
AUTOMOBILES -- 6.7%
1,000,000 Fiat S.p.A.#.................................... 4,086,322
385,000 Gilardini#...................................... 980,283
460,000 Sogefi#......................................... 1,156,963
-----------
6,223,568
-----------
FOOD -- 5.3%
15,595 Eridania-Beghin-Say#............................ 2,033,815
1,560,000 Parmalat Finanziaria S.p.A...................... 1,680,857
490,000 SME Meridionale Finanziaria..................... 1,186,772
-----------
4,901,444
-----------
MECHANICAL ENGINEERING -- 4.2%
437,500 Ansaldo Transporti.............................. 1,537,805
180,000 Danieli......................................... 1,218,444
266,750 Danieli Risp NC**............................... 977,379
150,000 Fochi Filippo#.................................. 235,212
-----------
3,968,840
-----------
</TABLE>
See Notes to Financial Statements.
7
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THE ITALY FUND INC.
Investment Portfolio as of January 31, 1995 (Continued)
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE ($)
SHARES (NOTE 1)
<S> <C> <C>
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
-------------------------------------------
CHEMICALS AND PHARMACEUTICALS -- 3.1%
1,070,000 Enichem Augusta S.p.A.#......................... $ 2,056,606
260,000 Recordati Risp NC**............................. 807,328
-----------
2,863,934
-----------
CEMENT AND CERAMICS -- 1.8%
37,000 Calcestruzzi#................................... 184,971
380,000 Italcementi Risp*............................... 1,459,587
-----------
1,644,558
-----------
RETAILING -- 1.8%
181,790 La Rinascente................................... 1,049,928
186,136 La Rinascente Risp*............................. 574,505
-----------
1,624,433
-----------
CONSTRUCTION AND PROPERTY -- 1.1%
490,000 Vianini Lavori.................................. 988,977
-----------
PUBLISHING -- 0.8%
100,000 Arnoldo Mondadori............................... 776,277
-----------
TEXTILES -- 0.6%
432,446 SIMINT S.p.A. -- Societa Italiana Manufatti#.... 73,854
225,000 Stefanel S.p.A.................................. 530,973
-----------
604,827
-----------
OTHER -- 0.0%
6,210 Marangoni#...................................... 18,319
-----------
TOTAL STOCKS
(COST $82,088,709)............................. 84,341,931
-----------
-----------------------------------------------
CONVERTIBLE BONDS -- 1.1%
-------------------------------------------
L 1,653,750,000 Costa Crociere, 6.750% due 01/01/00............. $ 792,342
265,430,000 Mediobanca Alleanza, 4.000% due 09/03/99........ 211,817
-----------
TOTAL CONVERTIBLE BONDS (COST $964,647)......... 1,004,159
-----------
-----------------------------------------------
FIXED INCOME INVESTMENTS -- 6.2%
(COST $5,904,969)
-------------------------------------------
L 10,000,000,000 Italy, Government of,
8.500% due 08/01/97........................... 5,814,470
-----------
SHARES
-----------------------------------------------------
WARRANTS -- 0.9%
-------------------------------------------
20,900 Alleanza Risp, Warrants, expire 02/29/96#....... 30,177
735,000 Costa Crociere, Warrants, expire 11/30/99#...... 214,532
140,000 Credito Italiano S.p.A., Warrants, expire
12/31/97#..................................... 49,992
120,000 RAS, Warrants, expire 12/31/97#................. 525,384
121,500 Sopaf, Warrants,
expire 2/1/97#................................ 75
45,000 Stefanel S.p.A., Warrants, expire 01/01/00#..... 39,250
-----------
TOTAL WARRANTS
(COST $754,839)................................ 859,410
-----------
</TABLE>
See Notes to Financial Statements.
8
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THE ITALY FUND INC.
Investment Portfolio as of January 31, 1995 (Continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
VALUE ($)
FACE VALUE (NOTE 1)
<S> <C> <C>
------------------------------------------------------------------------------
</TABLE>
<TABLE>
<C> <S> <C>
-----------------------------------------------------
REPURCHASE AGREEMENT -- 7.0%
(COST $6,568,000)
-------------------------------------------
$ 6,568,000 Agreement with Dean Witter, 5.750% dated
01/31/95, to be repurchased at $6,569,049 on
02/01/95, collateralized by $6,560,000 U.S.
Treasury Bonds, 7.625% due 02/15/07........... $ 6,568,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS
(COST $96,281,164+).......... 105.6% $98,587,970
OTHER ASSETS AND LIABILITIES
(NET)........................ (5.6) (5,240,838 )
------ -----------
NET ASSETS.................... 100.0% $93,347,132
------ -----------
------ -----------
<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 securities loaned at 01/31/95. Total
market value of all securities loaned is
+++ $5,272,166.
# Non-income producing security.
</TABLE>
See Notes to Financial Statements.
9
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THE ITALY FUND INC.
Statement of Assets and Liabilities
January 31, 1995
- -----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $96,281,164) (Note 1)
See accompanying schedule....................... $ 98,587,970
Receivable for investment securities sold......... 1,354,694
Interest receivable............................... 195,605
Dividends receivable.............................. 71,473
------------
Total Assets................................ 100,209,742
LIABILITIES:
Collateral for securities loaned (Note 6)......... $6,571,711
Payable for investment securities purchased....... 65,896
Investment advisory fee payable (Note 2).......... 58,497
Custodian fees payable (Note 2)................... 37,500
Due to custodian.................................. 24,185
Administration fee payable (Note 2)............... 15,599
Transfer agent fees payable (Note 2).............. 3,500
Accrued expenses and other payables............... 85,722
----------
Total Liabilities........................... 6,862,610
------------
NET ASSETS........................................ $ 93,347,132
------------
------------
NET ASSETS consist of:
Distributions in excess of net investment
income.......................................... $ (1,010,697)
Accumulated net realized loss on securities sold,
forward foreign exchange contracts and foreign
currency transactions........................... (3,397,316)
Net unrealized appreciation on securities and
foreign currency transactions................... 2,303,315
Par value......................................... 95,031
Additional paid-in capital in excess of par
value........................................... 95,356,799
------------
Total Net Assets............................ $ 93,347,132
------------
------------
NET ASSET VALUE PER SHARE
($93,347,132 DIVIDED BY 9,503,089 shares of
common stock outstanding) (Note 4).............. $9.82
----
----
</TABLE>
See Notes to Financial Statements.
10
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THE ITALY FUND INC.
Statement of Operations
For the Year Ended January 31, 1995
- -----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends......................................... $ 1,770,825
Interest.......................................... 1,008,027
Less taxes withheld (Note 1)...................... (276,602)
-----------
Total Investment Income..................... 2,502,250
EXPENSES:
Investment advisory fee (Note 2).................. $738,029
Custodian fees (Note 2)........................... 244,613
Administration fee (Note 2)....................... 196,808
Legal and audit fees.............................. 142,715
Advisory board and Directors' fees and expenses
(Note 2)........................................ 128,270
Transfer agent fees (Note 2)...................... 41,307
Other............................................. 171,134
--------
Total Expenses.............................. 1,662,876
-----------
NET INVESTMENT INCOME............................. 839,374
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(NOTES 1 AND 3):
Net realized gain/(loss) on:
Securities transactions......................... 1,228,000
Forward foreign exchange contracts and foreign
currency transactions.......................... (45,624)
-----------
Net realized gain on investments during the
year............................................ 1,182,376
-----------
Net change in unrealized depreciation of:
Securities...................................... (551,222)
Foreign currencies and net other assets......... (3,088)
-----------
Net unrealized depreciation of investments during
the year........................................ (554,310)
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS... 628,066
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS...................................... $ 1,467,440
-----------
-----------
</TABLE>
See Notes to Financial Statements.
11
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THE ITALY FUND INC.
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
Statement of Changes in Net Assets 01/31/95 01/31/94
<S> <C> <C>
------------------------------------------------------------------
Net investment income................... $ 839,374 $ 768,124
Net realized gain/(loss) on securities
sold, forward foreign exchange
contracts and foreign currency
transactions during the year.......... 1,182,376 (2,677,995)
Net unrealized
appreciation/(depreciation) on
securities sold, forward foreign
exchange contracts and foreign
currencies and net other assets during
the year.............................. (554,310) 15,106,131
----------- -----------
Net increase in net assets resulting
from operations....................... 1,467,440 13,196,260
Distributions to shareholders from:
Net investment income................. (581,844) (426,675)
Excess of net investment income....... (1,056,493) --
Capital............................... -- (48,443)
Net increase in net assets from Fund
share transactions (Note 4)........... -- 27,412,978
----------- -----------
Net increase/(decrease) in net assets... (170,897) 40,134,120
NET ASSETS:
Beginning of year....................... 93,518,029 53,383,909
----------- -----------
End of year (including distributions in
excess of net investment income and
accumulated net investment loss of
$1,010,697 and $257,530,
respectively)......................... $93,347,132 $93,518,029
----------- -----------
----------- -----------
</TABLE>
See Notes to Financial Statements.
12
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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. 01/31/95 01/31/94# 01/31/93 01/31/92 01/31/91 01/31/90 01/31/89 01/31/88
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
Operating performance:
Net asset value, beginning of
year............................ $ 9.84 $ 8.43 $ 11.08 $ 11.37 $ 13.24 $ 9.91 $ 9.07 $ 14.33
--------- ------------ --------- ------- --------- --------- --------- ---------
Net investment income............ 0.09 0.12 0.19 0.25 0.32 0.17 0.21 0.12
Net realized and unrealized
gain/(loss) on investments...... 0.06 1.72 (2.84) 0.03 (1.01) 3.31 0.82 (3.65)
--------- ------------ --------- ------- --------- --------- --------- ---------
Net increase/(decrease) in net
assets resulting from investment
operations...................... 0.15 1.84 (2.65) 0.28 (0.69) 3.48 1.03 (3.53)
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.......................... (0.06) (0.07) -- (0.25) (0.34) (0.15) (0.19) (0.36)
Distributions in excess of net
investment income............... (0.11) -- -- -- -- -- -- --
Distributions from net realized
gains........................... -- -- -- (0.24) (0.58) -- -- (1.37)
Distributions from capital (Note
1).............................. -- (0.01) -- (0.08) (0.26) -- -- --
--------- ------------ --------- ------- --------- --------- --------- ---------
Total distributions.............. (0.17) (0.08) 0.00 (0.57) (1.18) (0.15) (0.19) (1.73)
--------- ------------ --------- ------- --------- --------- --------- ---------
Net asset value, end of year..... $ 9.82 $ 9.84 $ 8.43 $ 11.08 $ 11.37 $ 13.24 $ 9.91 $ 9.07
--------- ------------ --------- ------- --------- --------- --------- ---------
--------- ------------ --------- ------- --------- --------- --------- ---------
Market value, end of year........ $ 8.750 $12.375 $ 8.875 $ 9.50 $ 10.00 $ 17.50 $ 8.00 $ 7.00
--------- ------------ --------- ------- --------- --------- --------- ---------
--------- ------------ --------- ------- --------- --------- --------- ---------
Total investment return++........ (27.90)% 40.54%+++ (6.58)% 1.00% (36.14)% 121.31% 16.97% (32.16)%
--------- ------------ --------- ------- --------- --------- --------- ---------
--------- ------------ --------- ------- --------- --------- --------- ---------
Ratios to average net
assets/supplemental data:
Net assets, end of year (in
000's).......................... $ 93,347 $93,518 $ 53,384 $70,186 $ 72,055 $ 83,902 $ 62,743 $ 57,445
Ratio of net investment income to
average net assets.............. 0.85% 1.30% 2.04% 2.17% 2.28% 1.54% 2.23% 1.02%
Ratio of operating expenses to
average net assets.............. 1.69% 1.69% 1.70% 1.53% 1.80% 1.90% 1.99% 1.92%
Portfolio turnover rate.......... 42% 46% 33% 24% 24% 15% 15% 19%
<CAPTION>
PERIOD
For a Fund share outstanding ENDED
throughout each year. 01/31/87*
<S> <C>
---------------------------------
Operating performance:
Net asset value, beginning of
year............................ $ 11.16
---------
Net investment income............ 0.22
Net realized and unrealized
gain/(loss) on investments...... 2.95
---------
Net increase/(decrease) in net
assets resulting from investment
operations...................... 3.17
Dilution in NAV from rights
offering (Note 4)............... --
Offering expenses charged to paid
in capital...................... --
Distributions:
Dividends from net investment
income.......................... --
Distributions in excess of net
investment income............... --
Distributions from net realized
gains........................... --
Distributions from capital (Note
1).............................. --
---------
Total distributions.............. 0.00
---------
Net asset value, end of year..... $ 14.33
---------
---------
Market value, end of year........ $12.125
---------
---------
Total investment return++........ 1.04%
---------
---------
Ratios to average net
assets/supplemental data:
Net assets, end of year (in
000's).......................... $90,793
Ratio of net investment income to
average net assets.............. 1.83%+
Ratio of operating expenses to
average net assets.............. 1.96%+
Portfolio turnover rate.......... 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.
13
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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
14
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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 report-
ing 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. Permanent differences incurred during the Fund's fiscal
year resulting from different book and tax accounting for certain securities
have been reclassified to paid-in capital at year-end.
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 of 1986, as amended, 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 Mutual Fund
Management Inc., ("SBMFM"), 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 SBMFM also entered
into a sub-administration agreement (the "Sub-Administration Agreement") with
Boston Advisors. Under the Sub-Administration Agreement, SBMFM pays Boston
15
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THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Advisors a portion of its fee at a rate agreed upon from time to time between
SBMFM and Boston Advisors.
For the year ended January 31, 1995, the Fund incurred total brokerage
commissions of $193,112, of which $9,734 was paid to Lehman Brothers.
No officer, director or employee of Lehman Brothers, Global Asset
Management, SBMFM 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, SBMFM or
Boston Advisors or any of their affiliates $7,500 per annum plus $750 per
meeting attended and each Director emeritus who is not an officer, director or
employee of Lehman Brothers Global Asset Management, SBMFM or Boston Advisors or
any of their affiliates $3,750 per annum plus $375 per meeting attended. The
Fund also 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 year ended January 31, 1995, cost of purchases and proceeds from
sales of investment securities (excluding short-term investments) when
aggregated amounted to $63,543,713 and $37,819,285, respectively.
As of January 31, 1995, the aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost amounted to
$12,583,700, and the aggregate gross unrealized depreciation for all securities
in which there was an excess of tax cost over value amounted to $10,276,894.
4. FUND SHARES
As of January 31, 1995, 20 million shares of $.01 par value capital stock
were authorized and 9,503,089 shares were outstanding. For the year
ended January 31, 1995, there was no capital
stock activity.
<TABLE>
<CAPTION>
YEAR ENDED
01/31/95
-------------------------
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, 1995, value per unit, percentage of net assets which the securities
comprise and aggregate cost of the securities.
16
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THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF ACQUISITION 01/31/95 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 $ 527,868 $ 0.62 0.6% $ 623,396
Finanziaria Italiana di
Partecipazion........................ 10,000 03/13/87 664,493 66.45 0.7 772,361
422 S.p.A............................. 49,639 03/21/94 339,096 6.83 0.4 295,889
--
------------
Total............................. $ 1,531,457 1.7%
--
--
------------
------------
</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, 1995, the Fund had securities on loan to certain brokers for
which the Fund received $6,571,711 as collateral.
At January, 31, 1995, the Fund's loaned securities had an aggregate market
value of $5,272,166 which represents 5.6% of total net assets.
7. CAPITAL LOSS CARRYFORWARDS AND OTHER TAX INFORMATION
At January 31, 1995, the Fund had available for Federal tax purposes an
unused capital loss carryforward of $1,755,627 to offset future net capital
gains expiring in the year 2002.
In accordance with tax laws, 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 $498,231 of currency
losses and $1,641,690 of capital losses. These losses for tax purposes will be
deemed to occur on February 1, 1995.
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.
9. SUBSEQUENT EVENT
As of February 15, 1995, Morgan Guaranty Trust Company of New York became
the Fund's custodian.
17
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THE ITALY FUND INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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 ---------------------- ----------------------- -------------------------- --------------------------
ENDED TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE
-------------------- ---------- ---------- ---------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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...... 262,201 0.03 37,867 0.01 376,390 0.04 21,587,589 2.27
July 31, 1994....... 1,568,187 0.17 933,702 0.10 2,317,766 0.24 (12,011,879) (1.26)
October 31, 1994.... 275,691 0.03 19,893 0.00 578,197 0.06 (6,426,246) (0.68)
January 31, 1995.... 396,171 0.04 (152,088) (0.02) (2,089,977) (0.22) (1,682,024) (0.18)
</TABLE>
18
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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, 1995, 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 eight 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, 1995 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, 1995, 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 eight 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 L.L.P.
Boston, Massachusetts
March 10, 1995
19
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THE ITALY FUND INC.
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED JANUARY 31, 1995
The following tax information represents fiscal year end disclosures of
various tax benefits passed through to shareholders at calendar year end.
For the fiscal year ended January 31, 1995, the total amount of income
received by the Fund from sources within foreign countries and possessions of
the United States was $0.29 per share (representing a total of $2,778,852). The
total amount of taxes paid by the Fund to such countries was $0.03 per share
(representing a total of $276,602).
The above figures may differ from those cited elsewhere in this report due
to differences in the calculations of income and capital gains for Securities
and Exchange Commission (book) purposes and Internal Revenue Service (tax)
purposes.
20
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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 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 record
date for 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 commissions. 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 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
21
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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.
PORTFOLIO MANAGEMENT
Erich Stock, who is Vice President and Investment Officer of the Fund, is
primarily responsible for management of the Fund's assets. Mr. Stock has served
the Fund in these capacities since the commencement of the Fund's operations.
22
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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
Smith Barney Mutual Funds INVESTMENT OFFICER
Management Inc.
388 Greenwich Street
New York, New York 10013 Lewis E. Daidone
SENIOR VICE PRESIDENT
ADVISORY BOARD AND TREASURER
Andrea Farace
Pierre Henchoz Christina T. Sydor
Ing. Dott. Ettore Lolli SECRETARY
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
*Emeritus
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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.
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
(212) 816-4605
Annual
Report
January 31, 1995
