<PAGE>
DEAR SHAREHOLDER:
We are pleased to present the quarterly report for The Italy Fund Inc. for the
three-months ended April 30, 1996. As of that date, the Fund's net asset value
(NAV) per share was $10.27 as compared to $9.56 as of January 31, 1996 and $8.89
as of October 31, 1995.
The Fund's NAV increased by 7.43% during the quarter. This compares favorably
with a 6.10% increase over the same period in the Banco Commerciale Index (BCI
Index). Since its inception in 1986, the Italy Fund has consistently
outperformed the BCI Index, a widely followed Italian index which includes all
the securities listed on the Milan Stock Exchange.
POLITICAL OVERVIEW
After forty-nine years, Italy's once-feared Communists won power from the
center-right party in the election held on April 21, 1996. Following the
election of the Communists, the Italian financial markets surged. Romano Prodi,
an economics professor with centrist views, was designated to become prime
minister in May to form Italy's 55th post-war government. Mr. Prodi heads an
eight-party center-left coalition that used an Olive Tree as an electoral
symbol.
Although nominally led by Mr. Prodi, the Olive Tree Coalition is in fact
dominated by the Partito Democratico della Sinistrat (PDS), the recycled former
Communist Party (PCI). The PDS won 21% of the popular vote in the lower and more
powerful house of Italy's bicameral legislature, making it the country's largest
single political group. The Olive Tree Coalition has only a relative majority in
Italy's Parliament. In the Parliament's upper house, Prodi's left-center
coalition controls 157 out of 315 seats, which should make it less dependent on
hard-line Communists to effect political measures at that level. However, in the
lower house of the Parliament, Mr. Prodi's coalition controls only 284 seats out
of a total of 630, which is dominated by the hard-line Communist party.
At the same time, Mr. Berlusconi's Forsa Italia (FI) and conservative National
Alliance holds 246 seats in the lower house of Parliament. To make matters
potentially more difficult for the Olive Tree coalition, other prominent leftist
Italian politicians such as Fausto Bertinotti have made it clear that they will
not participate in Mr. Prodi's government, but may only vote with it on an
issue-by-issue basis. Therefore, Mr. Prodi faces quite a few challenges in
creating a new government over the next few months and the process may take
longer than previously anticipated.
Despite these challenges and the difficulty in keeping such a broad-based
political coalition together, we believe the new Prodi government has a good
chance of remaining in office for a longer period of time than many
other prior Italian government coalitions.
ECONOMIC OVERVIEW
Italy's economy poses some enormous challenges and the country's eligibility for
European Monetary Union remains very much in doubt. Italy's Gross Domestic
Product (GDP) contracted in the fourth quarter of 1995 due in part to fewer
working days as many businesses curtailed production to reduce inventories. Much
of the sharp decline in Italy's economy can be traced to a drop in export-
related demand as many of Europe's economies continue to experience near-
recessionary conditions. In January 1996, Italy reported its first monthly trade
deficit in two years. In addition, unemployment in Italy rose during this time
and the Italian economy's future outlook was clouded by high short-term interest
rates.
Given the current trends of lower consumer spending and slower spending on
capital improvements, we forecast real Italian GDP will rise by roughly 0.9%
this year and approximately 2.6% in 1997. Inflation in Italy remains a key
challenge. Consumer prices have risen to an estimated annual rate of 6.7% in the
fourth quarter of 1995 and rose 0.3% in March 1996. In fact, Governor Fazio of
the Bank of Italy warned recently that Italy's 9.0% discount rate will not be
reduced until the annual rate of increase in
<PAGE>
the country's Consumer Price Index (CPI) falls below 4.0%. In addition, Italy
has changed its method of calculating consumer inflation. The new basket of
goods used to calculate Italy's CPI will give greater weight to health care and
education costs, and less to food, clothing and entertainment.
However, despite a slowing economy, Italy is the only Western European country
that has not yet reduced interest rates over the last twelve months. We
therefore believe the Italian stock market, which remains undervalued versus
many other European markets, could provide investors with some pleasant upside
surprises over the near term.
FUND'S INVESTMENT STRATEGY
At April 1, 1996, the Fund's weighting in ENI (a diversified energy company that
was recently privatized and is now the largest Italian-listed company) was only
2.6% versus a 15% weighting in the BCI Index. The price of ENI shares increased
in April 1996 and, as a result, the Italy Fund's performance versus the BCI
Index was adversely affected. During April 1996, the Fund generated cash by
selling some of its bank holdings such as Banca Naz Lavoro, Mediobanca, Banca
Popolare Commercio & Industria, and Banca San Paolo. Moreover, the Italy Fund
sold its holdings in insurance companies such as Fondiaria, Unipol, and La
Presidente. The proceeds from the sale of these stocks were reinvested in ENI.
At the end of April, the Italy Fund's weighting in ENI was 11%. In addition,
the Fund sold some of its smaller positions in Magneti Marelli (an auto parts
and accessories company), Pagnossin (a kitchenware company), and Sopaf (an
investment management company) and doubled its holdings in Mondadori (a
publishing company), and Sogefi (an auto components company). Since the
beginning of April, the Fund also acquired for the first time the stocks of
Natuzzi (a furniture company) and Saipem (an oil drilling company).
During April 1996, the Italy Fund reduced the number of its portfolio positions
from 67 to 52 and plans to continue reducing the number of positions over the
near term. In our view, some of Italy's New York-listed American depository
receipts (ADRs) deserve a place in the Italy Fund. We believe that many of these
medium-sized Italian company ADRs represent good value and represent unique
investment opportunities.
During the period covered by this report, the Italy Fund reduced its portfolio
weighting in the insurance industry from 18.5% to 15.3%. The margins of many
Italian non-life insurance companies peaked in 1995, primarily due to higher
automobile tariffs. For the remainder of 1996, we expect margins to drop further
for many Italian car insurers due to a revival of price competition and more
claims that are usually filed during an economic recovery. Moreover, many
Italian insurers are highly capitalized with a significant portion of their
assets invested in low-yielding real estate. On the other hand, because some
Italian insurance companies are internationally diversified and have a low
exposure to potential liabilities from automobile insurance coverage, they
remain, in our view, attractive investments. These are the key reasons why we
have reduced the Fund's exposure only slightly in the insurance sector.
During the quarter, the Fund also reduced its weighting in the banking industry
from 16.6% to 12.5%. With 950 different banks, Italy's banking industry remains
highly fragmented. Since 1990, despite legislation that attempted to
consolidate the industry, the number of Italian banks has declined by only 4.5%
while the number of branches has increased by 24%. Therefore, retail Italian
banking remains extremely competitive. Moreover, due to a slowdown in general
business activity, credit volume was depressed in the first half of 1996. In our
view, a combination of low lending volumes with declining margins does not bode
well for interest income profitability of the banking industry. Therefore, the
Italy Fund reduced its holdings in this area although we continue to emphasize
within the portfolio the stocks of Italian banks that are involved in the growth
of
2
<PAGE>
private pension funds and investment banks that are key players in the
restructuring of many Italian industries.
Since April, the Italy Fund sharply increased its weighting in the energy sector
from 2.6% to 11.5%. As discussed previously, the Fund has increased its holdings
in ENI because of our belief it is undervalued compared to many other European
energy companies. In our view, ENI represents a very attractive core holding for
the Italy Fund.
With respect to the telecommunications industry, the Fund has kept its weighting
at roughly 21%. A key holding of the Fund in this sector is STET, a
telecommunications holding company that owns roughly 64% of Telecom Italia (the
principal operator of local, long-distance and international phone services) and
approximately 62% of Telecom Italia Mobile (Europe's largest cellular network
provider). In 1995, STET's market value was more or less in line with its net
asset value. Today, in light of STET's estimated 30% discount over its net asset
value, we believe this stock has excellent upside potential over the next few
years. Other key Italy Fund holdings in the telecommunications sector include
Telecom Italia (the fourth largest wire line telecommunications company in
Europe) and Telecom Italia Mobile (a telecommunications company that reported
280,000 new subscribers during the first quarter of 1996 and a total subscriber
base of roughly 4.1 million customers). We believe that Telecom Italia Mobile's
current market share of 6.9% will rise sharply during the next few years because
the company remains a formidable business competitor. In addition, we believe
Telecom Italia Mobile's high current valuation is justified given our positive
long-term outlook for Italy's telecommunications industry.
CONCLUSION
While the new Prodi government will face many challenges over the coming months,
we remain optimistic that much-needed fiscal and electoral reforms will
ultimately be implemented in Italy. With a little bit of luck and persistence,
Prodi's Olive Tree coalition may grow and bear fruit and that should prove to be
ultimately positive for Italy and its financial markets.
On a sadder note, we regret to announce the passing of Ambasciatore Egidio
Ortona, a widely respected Italian statesman and trusted advisor to the Italy
Fund. He will be sorely missed.
Thank you for investing in the Italy Fund. We look forward to continuing to help
you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
/s/ Mario d'Urso
Mario d'Urso
President
/s/ Rein W. van der Does
Rein W. van der Does
Investment Officer
May 8, 1996
3
<PAGE>
THE ITALY FUND'S SECTORIAL STRUCTURE
APRIL 30, 1996 (UNAUDITED)
[CHART APPEARS HERE]
15.3% Insurance
4.6% Auto
12.5% Banking
3.1% Construction
9.8% Consumers & Food
Energy 11.5%
Telecoms 21.3%
Utilities 7.6%
Engineering 3.6%
Miscellaneous 10.7%
BCI INDEX SECTORIAL STRUCTURE
APRIL 30, 1996 (UNAUDITED)
[CHART APPEARS HERE]
19.0% Insurance
8.5% Auto
16.6% Banking
2.2% Construction
4.9% Consumers & Food
Energy 16.6%
Telecoms 19.5%
Utilities 3.5%
Engineering 2.5%
Miscellaneous 6.7%
0.0% ADR
0.0% Cash
4
<PAGE>
THE ITALY FUND INC.
Schedule of Investments as of April 30, 1996 (unaudited)
================================================================
Shares Security Value
- ----------------------------------------------------------------
COMMON STOCKS -- 97.4%
- ----------------------------------------------------------------
AUTOMOTIVE -- 4.8%
300,000 Fiat S.p.A. $ 1,018,909
330,600 IFIL Finanziaria di
Partecipazioni S.p.A. 1,074,873
542,500 IFIL Finanziaria di
Partecipazioni
S.p.A. di Risp NC** 944,148
660,000 Sogefi S.p.A. 1,465,856
----------
4,503,786
----------
BANKING -- 12.3%
1,700,000 Banca Fideuram S.p.A. 2,927,110
180,000 Banca Popolare di Bergamo/
Credito Varesino 2,928,567
1,800,000 Credito Italiano S.p.A. 2,284,779
440,000 Istituto Mobiliare Italiano
S.p.A. 3,482,339
----------
11,622,795
----------
CONSTRUCTION -- 3.1%
400,000 Italcementi S.p.A. di
Risp NC ** 1,099,056
315,000 Unicem S.p.A. di
Risp NC ** 965,365
490,000 Vianini Lavori S.p.A. 845,575
----------
2,909,996
----------
CONSUMER -- 8.3%
100,000 Arnoldo Mondadori
Editore S.p.A. 1,875,941
100,000 Benetton Group S.p.A. 1,199,528
25,000 Industrie Natuzzi S.p.A. 1,300,000
186,136 La Rinascente S.p.A.
di Risp NC ** 564,256
260,000 Recordati S.p.A.
di Risp NC ** 1,476,133
216,223 Simint S.p.A. # 349,635
950,041 SME Soc Meridionale
Finanziaria S.p.A. 1,055,928
----------
7,821,421
----------
ENERGY -- 11.3%
2,360,000 Ente Nazionale Idrocarburi
S.p.A. # $10,164,826
150,000 Saipem S.p.A. 545,981
----------
10,710,807
----------
ENGINEERING -- 4.7%
431,000 Ansaldo Trasporti S.p.A. 601,896
180,000 Danieli & Co. 1,275,841
266,750 Danieli & Co.
di Risp NC ** 958,149
1,350,000 Olivetti & Co. S.p.A. 883,540
355,000 Sasib S.p.A. di Risp NC ** 691,116
----------
4,410,542
----------
FOOD -- 5.3%
12,595 Eridania Beghin-Say S.A. 2,050,796
800,041 Finanziarira
Autogrill S.p.A. # 852,905
220,000 La Doria S.p.A. # 951,365
1,070,000 Parmalat Finanziaria S.p.A. 1,176,264
----------
5,031,330
----------
INSURANCE -- 16.1%
200,000 Alleanza Assicurazioni
S.p.A. 1,880,335
140,000 Assicurazioni Generali
S.p.A. 3,476,702
1,602,000 Instituto Nazionale Delle
Assicurazioni 2,455,298
425,700 Riunione Adriatica
di Sicurta S.p.A. 4,761,939
242,000 Societa Assicuratrice
Industriale S.p.A 2,595,683
----------
15,169,957
----------
MISCELLANEOUS -- 1.6%
850,000 Europa Investimenti +# 412,881
49,639 Quattrocentoduedue
Cat B +# 348,986
620,000 Societa Partecipazioni
Finanziare S.p.A. Ordinary 657,798
See Notes to Financial Statements.
5
<PAGE>
THE ITALY FUND INC.
Schedule of Investments as of April 30, 1996 (unaudited) (continued)
====================================================================
Shares Security Value
- --------------------------------------------------------------------
MISCELLANEOUS -- 1.6% (continued)
181,500 Societa Partecipazioni
Finanziare S.p.A. di Risp* $ 148,716
1,568,381
-----------
TELECOMMUNICATIONS -- 22.0%
55,000 Ericsson S.p.A. 725,476
360,000 Sirti S.p.A. 2,259,009
600,000 Stet Societa' Finanziaria
Telefonica S.p.A. 2,022,095
1,902,500 Stet Societa' Finanziaria
Telefonica S.p.A.
di Risp NC ** 4,972,036
1,416,000 Telecom Italia S.p.A. 2,874,328
1,900,000 Telecom Italia S.p.A.
di Risp * 3,163,398
1,700,000 Telecom Italia Mobile
S.p.A. di Risp * # 2,390,364
1,076,000 Telecom Italia Mobile
S.p.A. Ordinary # 2,356,091
-----------
20,762,797
-----------
UTILITIES -- 7.9%
1,800,000 Autostrade Concessioni
E Costruzioni 2,311,240
460,000 Edison S.p.A. 2,624,262
356,000 Italgas S.p.A. 1,223,440
756,000 SONDEL -- Societa
Nordelettrica S.p.A. 1,297,354
-----------
7,456,296
-----------
TOTAL COMMON
STOCKS
(Cost -- $80,940,236) 91,968,108
-----------
WARRANTS -- 0.2%
BANKING -- 0.2%
650,000 Credito Italiano S.p.A.
Warrants, expire 12/31/97 #
(Cost -- $211,879) 169,582
Face
Amount++ Security Value
- ----------------------------------------------------------------
BONDS -- 2.4%
BANKING -- 0.6%
900,000,000 Banca Popolare di Bergamo
Convertible, 8.800%
due 12/31/00 $ 619,341
MISCELLANEOUS -- 1.8%
1,050,750,000 Costa Crociere S.p.A.,
6.750% due 1/1/00 608,443
1,700,000,000 Italian Certificati di Credito
del Tesoro, 11.300%
due 4/1/02 1,088,485
1,696,928
TOTAL BONDS
(Cost -- $2,274,228) 2,316,269
TOTAL INVESTMENTS
AT VALUE -- 100%
(Cost -- $83,426,343)+++ $94,453,959
- ---------------
* Risp -- Risparmio (savings shares).
** Risp NC -- Risparmio Non-Convertible
(non-convertible savings shares).
# Non-income producing security.
+ Security restricted as to resale (See Note 4).
++ Represents local currency.
+++ Aggregate cost for Federal income tax purposes is substantially the
same.
See Notes to Financial Statements.
6
<PAGE>
THE ITALY FUND INC.
Statement of Assets and Liabilities
April 30, 1996 (unaudited)
=========================================================================
ASSETS:
Investments, at value (Cost--$83,426,343)............. $ 94,453,959
Foreign currency (Cost--$4,012,671)................... 4,013,512
Cash.................................................. 3,912
Receivable for securities sold........................ 1,341,094
Dividends and interest receivable..................... 56,789
------------
TOTAL ASSETS.......................................... 99,869,266
------------
LIABILITIES:
Payable for securities purchased...................... 2,058,028
Investment advisory fees payable...................... 71,872
Accrued expenses...................................... 161,786
Other liabilities..................................... 9,311
------------
TOTAL LIABILITIES..................................... 2,300,997
------------
TOTAL NET ASSETS........................................ $ 97,568,269
============
NET ASSETS:
Par value of capital shares........................... $ 95,031
Capital paid in excess of par value................... 94,936,689
Undistributed net investment income................... 88,807
Accumulated net realized loss from security
transactions.......................................... (8,577,357)
Net unrealized appreciation of investments and foreign
currencies............................................ 11,025,099
------------
TOTAL NET ASSETS
(Equivalent to $10.27 a share on 9,503,089 shares
of $0.01 par value outstanding; 20,000,000 shares
authorized)........................................... $ 97,568,269
============
See Notes to Financial Statements.
7
<PAGE>
THE ITALY FUND INC.
Statement of Operations
For the Three Months Ended April 30, 1996 (unaudited)
================================================================================
INVESTMENT INCOME:
Dividends............................................. $ 44,021
Interest.............................................. 140,918
Less: Foreign withholding tax......................... (8,825)
-----------
TOTAL INVESTMENT INCOME............................... 176,114
-----------
EXPENSES:
Management fees (Note 2)........................... 212,682
Audit and legal.................................... 28,000
Directors' fee..................................... 25,625
Shareholder and system serving fees................ 24,000
Custody............................................ 18,855
Shareholder communications......................... 11,000
Registration fees.................................. 7,000
Other.............................................. 37,755
-----------
NET EXPENSES....................................... 364,917
-----------
NET INVESTMENT LOSS..................................... (188,803)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term
securities)........................................ (1,670,696)
Foreign currency transactions...................... 81,612
-----------
NET REALIZED LOSS.................................. (1,589,084)
-----------
Change in Net Unrealized Appreciation of
Investments
and Foreign Currencies:
Beginning of period................................ 2,519,552
End of period...................................... 11,025,099
-----------
INCREASE IN NET UNREALIZED APPRECIATION............ 8,505,547
-----------
NET GAIN ON INVESTMENTS AND FOREIGN CURRENCIES.......... 6,916,463
-----------
INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 6,727,660
===========
See Notes to Financial Statements.
8
<PAGE>
THE ITALY FUND INC.
Statements of Changes in Net Assets
OPERATIONS:
Net investment income (loss).................. $(188,803) $ 1,131,274
Net realized loss............................. (1,589,084) (3,663,972)
Increase in net unrealized appreciation....... 8,505,547 216,237
------------ ------------
Increase (Decrease) in Net Assets From
Operations.................................... 6,727,660 (2,316,461)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income......................... -- (190,062)
------------ ------------
Decrease in Net Assets From Distri-
butions to Shareholders..................... -- (190,062)
------------ ------------
Increase (Decrease) in Net Assets.................. 6,727,660 (2,506,523)
NET ASSETS:
Beginning of period........................... 90,840,609 93,347,132
------------ ------------
End of period*................................ $97,568,269 $90,840,609
============ ============
*Includes undistributed net investment income of:.. $ 88,807 $ 195,998
============ ============
See Notes to Financial Statements.
9
<PAGE>
THE ITALY FUND INC.
Notes to Financial Statements (unaudited)
===============================================================================
1. Significant Accounting Policies
The Italy Fund Inc. ("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.
The significant accounting policies followed by the Fund are: (a) security
transactions are accounted for on trade date; (b) securities traded on national
securities markets are valued at the closing prices in the primary exchange on
which they are traded; securities listed or traded on certain foreign exchanges
or other markets whose operations are similar to the U.S. over-the-counter
market (including securities listed on exchanges where the primary market is
believed to be over-the-counter) and listed securities for which no sale was
reported on that date are valued at the mean between the bid and ask prices.
Securities which are listed or traded on more than one exchange or market are
valued at the quotations on the exchange or market determined to be the primary
market for such securities. If bid and ask quotations are not available, then
over-the-counter securities will be valued as determined in good faith by the
Board of Directors; (c) short-term investments and securities maturing within 60
days are valued at cost plus accreted discount, or minus amortized premium,
which approximates value; (d) gains or losses on the sale of securities are
calculated by using the specific identification method; (e) interest income,
adjusted for amortization of premiums and accretion of discount, is recorded on
the accrual basis; (f) dividend income is 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; (g) dividends and distributions to
shareholders are recorded on the ex-dividend date; (h) the accounting records
are maintained in U.S. dollars. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars based on the rate of
exchange of such currencies against U.S. dollars on the date of valuation.
Purchases and sales of securities, and income and expenses are translated at the
rate of exchange quoted on the respective date that such transactions are
recorded. Differences between income and expense amounts recorded and collected
or paid are adjusted when reported by the custodian bank; (i) the Fund intends
to comply with the applicable provisions of the Internal Revenue Code of 1986,
as amended, pertaining to regulated investment companies and to make
distributions of taxable income sufficient to relieve it from substantially all
Federal income and excise taxes; (j) the character of income and gains to be
distributed are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles. Reclassifications were
made to the Fund's capital accounts to reflect permanent book/tax differences
and income and gains available for distributions under income tax regulations.
At January 31, 1996, a portion of overdistributed net investment income
amounting to $512,466 has been reclassified to paid-in capital. Net investment
income, net realized gains and net assets were not affected by this change; and
(k) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ from these amounts.
In addition, the Fund may enter into forward exchange contracts in order to
hedge against foreign currency risk. These contracts are marked to market daily,
by recognizing the difference between the contract exchange rate and the current
market rate as an unrealized gain or loss. Realized gains or losses are
recognized when the contracts are settled.
As of April 30, 1996, there were no open forward foreign currency
contracts.
10
<PAGE>
THE ITALY FUND INC.
Notes to Financial Statements (unaudited) (continued)
================================================================================
2. Management Agreement and Transactions with Affiliated Persons
At December 15, 1995, Smith Barney Mutual Funds Management Inc. ("SBMFM"),
a subsidiary of Smith Barney Holdings, Inc. ("SBH"), acts as investment manager
of the Fund. The Fund pays SBMFM a fee calculated at an annual rate of 0.95% of
the average daily net assets for all management and administrative services.
This fee is calculated daily and paid monthly.
For the three months ended April 30, 1996, the Fund incurred total
brokerage commissions of $57,322.
All officers (except one) and one Director of the Fund are employees of
Smith Barney Inc.
3. Securities Transactions
During the three months ended April 30, 1996, the aggregate cost of
purchases and proceeds from sales of investment securities (excluding short-term
securities) when aggregated amounted to $13,696,130 and $16,665,942,
respectively.
As of April 30, 1996, aggregate gross unrealized appreciation for all
securities in which there was an excess of value over tax cost amounted to
approximately $17,938,698 and aggregate gross unrealized depreciation for all
securities in which there was an excess of tax cost over value to approximately
$6,911,082 or net unrealized appreciation of $11,027,616.
4. Restricted Securities
Certain of the Fund's investments are valued at the direction of the Fund's
Board of Directors; these securities are restricted as to resale and have been
valued in good faith, taking into consideration the appropriate economic,
financial and other pertinent available information pertaining to the restricted
securities. The table below shows all securities valued by the Fund's Board of
Directors:
<TABLE>
<CAPTION>
Number of Acquisition 4/30/96 Value Per Percentage of
Security Shares Date Fair Value Unit Net Assets Cost
-------- ------ ---- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C> <C>
Europa Investimenti........ 850,000 7/02/91 $412,881 $0.49 0.4% $623,396
Quattrocentoduedue
Cat B.................... 49,639 3/21/94 348,986 7.03 0.4 295,889
-------- --- --------
Total................ $761,867 0.8% $919,285
======== === ========
</TABLE>
5. 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 April 30, 1996, the Fund had no securities on loan to brokers.
11
<PAGE>
THE ITALY FUND INC.
Notes to Financial Statements (unaudited) (continued)
===============================================================================
6. Capital Loss Carryforwards
At January 31, 1996, the Fund had, for Federal income tax purposes,
approximately $6,602,000 of capital loss carryforwards available to offset
future capital gains. To the extent that these carryforward losses are used to
offset capital gains, it is probable that the gains so offset will not be
distributed. The amount and expiration of the carryforwards are indicated below.
Expiration occurs on January 31 of the year indicated:
2004 2005
---------- ----------
Capital Loss Carryforward........................ $1,756,000 $4,846,000
7. Concentration of Risk
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.
12
<PAGE>
THE ITALY FUND INC.
Financial Highlights
================================================================================
Set forth below is per share operating performance data for a share of common
stock outstanding throughout each period; total return and ratios to average net
assets are also provided. This information has been derived from information
provided in the financial statements and market price data for the Fund's
shares.
<TABLE>
<CAPTION>
1996(1) 1996 1995 1994(2) 1993 1992
====================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $9.56 $9.82 $9.84 $8.43 $11.08 $11.37
Income (Loss) From Operations:
Net investment income (loss) (0.01) 0.15 0.09 0.12 0.19 0.25
Net realized and unrealized gain (loss) 0.72 (0.39) 0.06 1.72 (2.84) 0.03
Total Income (Loss) From Operations 0.71 (0.24) 0.15 1.84 (2.65) 0.28
Dilution in NAV From Rights Offering -- -- -- (0.32) -- --
Offering Expenses Charged to Paid-in Capital -- -- -- (0.03) -- --
Less Distributions From:
Net investment income -- (0.02) (0.06) (0.07) -- (0.25)
Overdistribution of net investment income -- -- (0.11) -- -- --
Net realized gains -- -- -- -- -- (0.24)
Capital -- -- -- (0.01) -- (0.08)
Total Distributions -- (0.02) (0.17) (0.08) -- (0.57)
Net Asset Value, End of Period $10.27 $9.56 $9.82 $9.84 $8.43 $11.08
Market Value, End of Period $8.75 $8.25 $8.75 $12.38 $8.88 $9.50
Total Return 7.43%++ (2.43)% (27.90)% 40.54%# (6.58)% 1.00%
Net Assets, End of Period (000's) $97,568 $90,841 $93,347 $93,518 $53,384 $70,186
Ratios to Average Net Assets:
Net investment income (0.48)%+ 1.12% 0.85% 1.30% 2.04% 2.17%
Expenses* 1.64+ 1.42 1.69 1.69 1.70 1.53
Portfolio Turnover Rate 15% 58% 42% 46% 33% 24%
Average commissions paid on
equity security transactions(3) $0.00** $0.00** -- -- -- --
</TABLE>
- ----------------------
(1) For the three months ended April 30, 1996 (unaudited).
(2) 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.
(3) As of October 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
# The total return for the year ended January 31, 1994, adjusted for the
effect of the rights offering completed in January of 1994 45.85%
(unaudited).
* During the year ended January 31, 1996, the Fund earned credits from the
custodian which reduce service fees incurred. If the credits are taken
into consideration, the ratio of expenses to average net assets would
have been 1.41%.
** Amount represents less than $0.01 per share.
13
<PAGE>
THE ITALY FUND INC.
Quarterly Results of Operations (unaudited)
================================================================================
<TABLE>
<CAPTION>
Net Realized Net Increase
Gain (Loss) on (Decrease) in
Investment Net Investment Investments and Net Assets
Income Income (Loss) Foreign Currencies 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)
April 30, 1995............ 252,540 0.03 (74,178) (0.01) (1,556,369) (0.16) (6,441,384) (0.68)
July 31, 1995............. 1,539,509 0.16 1,141,497 0.12 (1,724,100) (0.18) 4,471,408 0.47
October 31, 1995.......... 287,963 0.03 (81,879) (0.01) (172,867) (0.02) (6,926,030) (0.72)
January 31, 1996.......... 282,141 0.03 145,834 0.02 (210,636) (0.02) 6,579,545 0.69
April 30, 1996............ 176,114 0.02 (188,803) (0.02) (1,589,084) (0.17) 6,727,660 0.71
</TABLE>
14
<PAGE>
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 First Data Investor Services Group, Inc., ("First Data"),
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 First
Data 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, First Data 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 First Data has completed its purchases, the average per share
purchase price paid by First Data 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 First Data in any amount from $100 to $3,000 for investment in
Fund shares. First Data 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 First Data'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.
15
<PAGE>
A shareholder may terminate participation in the Plan at any time by
notifying First Data in writing. A termination will be effective immediately if
notice is received by First Data not less than 10 days before any 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, First Data 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 First Data at 1-800-
331-1710.
16
<PAGE>
THE ITALY FUND INC.
Additional Information (unaudited)
===============================================================================
Change in Independent Auditor: On February 15, 1995, based upon the
recommendation of the Audit Committee of the Fund, the Board of Directors
determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the
Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During
the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports
contained no adverse opinion or disclaimer of opinion; nor were the reports
qualified or modified as to uncertainty, audit scope, or accounting principles.
Further, during this same period there were no disagreements with Coopers &
Lybrand on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope procedure, which disagreements, if not resolved to
the satisfaction of Coopers & Lybrand, would have caused it to make reference to
the subject matter of such disagreements in connection with its audit reports.
The Fund has requested Coopers & Lybrand to provide a letter to the Securities
and Exchange Commission stating whether Coopers & Lybrand agrees with the
foregoing statements, and to provide the Fund with a copy of such letter. A copy
of this letter is available upon request by calling the Fund at (212) 723-9218.
----------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase at
market prices shares of its common stock in the open market.
17
<PAGE>
THE ITALY FUND INC.
INVESTMENT ADVISER AND
ADMINISTRATOR
Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
ADVISORY BOARD
Andrea Farace
Pierre Henchoz
Ing. Dott. Ettore Lolli
Dott. Pietro Manes
DIRECTORS
Heath B. McLendon
Paolo M. Cucchi
Alessandro C. di Montezemolo
Dr. Paul Hardin
George Pavia
Mario d'Urso
OFFICERS
Heath B. McLendon
Chairman of the Board
Mario d'Urso
President
Lewis E. Daidone
Senior Vice President
and Treasurer
Rein W. van der Does
Investment Officer
Irving P. David
Controller
Christina T. Sydor
Secretary
18
<PAGE>
[BLANK IBC]
19
<PAGE>
THE ITALY FUND INC.
================================================================================
This report is sent to the shareholders of The Italy Fund Inc. for their
information. It is not a Prospectus, circular or representation intended for use
in the purchase or sale of shares of the Fund or of any securities mentioned in
this 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 objectives, 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
FD01141 6/96
QUARTERLY
REPORT
APRIL 30, 1996
20
