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Dear Shareholder:
We are pleased to present the quarterly report for The Italy Fund, Inc. for
the three-months ended April 30, 1997. As of that date, the Fund's net asset
value (NAV) per share was $10.70, which represented a 10.39% decline in the
first quarter. This performance compares unfavorably with the 7.25% decline over
the same time period in the Banco Commerciale Index (BCI Index), a widely
followed Italian index which includes all the securities listed on the Milan
Stock Exchange. In addition, for the three months ended April 30, 1997, the
Funds return on market value was 11.25%. However, since its inception in 1986,
the Italy Fund has consistently outperformed the BCI Index. On April 30, 1997,
total net assets in the Italy Fund amounted to just over $101 million.
Political Overview
Italian Premier Romano Prodi's coalition government's ability to institute
significant structural reforms and deficit-reduction measures is strictly
limited by the fragility and contradictions of the political coalition allegedly
supporting Italy's government. (Prodi is an economics professor with centrist
views who was elected Italy's 55th post-war prime minister in April of 1996.) In
fact, Italy's current coalition government does not have a parliamentary
majority.
Prodi's coalition government is a loose-knit group of small centrist
parties (which are the residue of once powerful post-war parties destroyed by
the anti-corruption campaigns of the last few years) and the Party of the
Democratic Left known as the PDS (Partito Democratico della Sinistrat), the
former Italian Communist Party and now the country's largest single party. The
PDS, which controls or influences Italy's organized labor movement, has also
been encouraging Prodi to undertake serious reforms, while at the same time also
unofficially supporting union strikes and demonstrations that effectively
sabotage the reforms.
Prodi has been forced therefore to rely on the votes of the Rifondazione
Communista (Communist Refounding), an unrepentantly Marxist party not in the
coalition. Even though the Rifondazione won less than 9 percent of the vote in
national elections held last year, its members of Parliament -- who number 34
out of 630 in the lower chamber -- are the swing vote for the government on
major issues. Moreover, the Rifondazione has consistently blocked major
structural reforms of social security, welfare and pensions.
In April of 1997, the Rifondazione threatened to pull the plug on the
coalition in a vote on the government's decision to send 6,000 troops to Albania
in a joint European humanitarian relief effort. (Italy, the destination for some
13,000 Albanian refugees, pushed hard to win U.N. approval for the mission.) The
hard-line Communists feared soldiers' lives would be at risk due to anti-Italian
sentiment in Albania fueled by the sinking of an Albanian refugee ship in March
of 1997 in a confrontation with an Italian naval vessel.
Unable to line up support from the right-wing opposition without making
major concessions to former prime minister Silvio Berlusconi Forza, Italia's
movement and the recycled neo-fascist national Alliance party, Premier Prodi
threatened to quit. At the last minute on Wednesday, April 9, 1997, the
Rifondazione, apparently afraid of triggering early elections in which it might
lose seats, caved in and voted for the government, thereby sparing Prodi from
having to quit and run the risk of new elections. This quid pro quo is likely to
be costly, however, since Prodi's next project is to begin reform of the welfare
system, which the Rifondazione is determined to protect.
In addition, in scattered municipal elections held in late April of 1997
throughout Italy, center-left candidates from Prodi's Olive Tree coalition
trailed their rivals on the right, and will probably only be able to win the
runoffs scheduled for May 11, 1997 by courting the votes of the Communist
Refounding.
In light of the Prodi government's increasing dependence on the minority
Communist party and recent municipal election setbacks, reform of Italy's
generous social spending programs (mainly health care and pensions) will be much
more difficult to
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achieve. Moreover, failure to implement reforms casts doubt on Italy's ability
to be among the first countries to introduce the euro in 1999 and satisfy
conditions for entry into the Economic-Monetary Union (EMU).
We do not believe, however, that the process of unification will be delayed
or shelved. Yet if Italy is to participate in the first phase of EMU, pension
reforms and changes in health and social benefits will probably need to be
instituted. Of course, political uncertainty is unhealthy for the Italian stock
market. And while we expect political events to dominate the market in the
coming months, political uncertainty is certainly not a new phenomenon for
investors in Italian equities.
Despite these negative factors, we continue to believe Italian stocks look
relatively attractive. The Italian stock market is selling at 5.2 times 1997
cash earnings, while corporate profits are estimated to rise 14 percent and 13
percent in 1997 and 1998, respectively. These valuations are well below the
averages for the U.S. and most other European markets.
Economic Overview
While we remain positive on Italian equities, recent economic news from
Italy has not been very encouraging. Treasury Minister Carlo Azeglio Ciampi
confirmed on April 4, 1997 the government's forecast that Gross Domestic Product
(GDP) growth will only be 1.2 percent in 1997 versus the 2 percent forecast last
September. Inflation may slow further as the private consumption deflator is
predicted to be 2.5 percent versus the 4.4 percent rise recorded in 1996.
We believe the government's economic forecast is overly optimistic. The 1.2
percent increase in GDP this year depends on long-term interest rates' remaining
low (despite the generalized rise in long-term interest rates since it became
clear the Federal Reserve Board would tighten U.S. monetary policy); 2.5 percent
real growth in the Organization of Economic Cooperation and Development ("OECD")
area; and world trade volumes expanding 7 percent this year. Italian private
consumption is forecast to rise only 0.8 percent this year versus 0.7 percent in
1996. This is not a surprise after the large increases in taxes, notably the
Eurotassia. (The Eurotassia, or the so-called euro-tax, is a one-year measure to
meet the European budget deficit guidelines.) The government also expects
employment to rise 0.3 percent in 1997. (Employment rose 0.2 percent in 1996.)
We expect GDP in Italy to rise only 0.8 percent this year, virtually
unchanged from 1996. As we doubt the government will collect the full Eurotassia
and consumers should have more spending power, we forecast private consumption
will rise at an annual rate of about 1 percent this year, assuming a catch-up
from last year's 0.6 percent annual rate.
Fund's Investment Strategy
The Italy Fund's underperformance versus the BCI Index during the last
fiscal quarter was due in large part to the diversification rule. As a
diversified investment company, no more than 25 percent of the Italy Fund's
portfolio can be invested in positions which comprise 5 percent or more of the
portfolio. At the end of December of 1996, we were required to reduce and/or
eliminate our positions because of the diversification requirement in Societa
Finanziaria Telefonica per Azioni (STET) risp, a telecommunications holding
company that owns a majority stake of Telecom Italia (the principal operator of
local, long-distance and international phone services), the diversified energy
company and now privatized Ente Nazionale Idrocarburi SpA (ENI) and Telecom
Italia Mobile risp (Europe's largest cellular network provider).
The underperformance of the Italy Fund versus the major Italian stock
market indices during the period under review was also caused by the poor
performance of apparel and footware retailer Fila. The company's stock declined
from a 12-month high of $107 per share on September 9, 1996 to a low of $39 per
share on April 21, 1997. (The Italy Fund's average cost per share was $68.)
While Fila's U.S. footware market share advanced from 5.8 percent in 1995 to
nearly 8
2
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percent in 1996, the company recently reported earnings-per-share of $4.34,
while the consensus estimate was around $4.75 per share for 1997. While growth
has been particularly strong in Europe, Korea and Southeast Asia, Fila's growth
in the U.S. market (which represents roughly 50% of its sales) has been weak due
to greater competition. However, because Fila's valuation is well below that of
other competitors such as Nike, Reebok, Adidas and Puma, we still believe the
stock has excellent long-term upside potential.
We continue to be negative towards financial stocks. With 950 different
banks, we believe Italy's banking industry remains highly fragmented and faces
redundancy costs. Italian insurers are squeezed between rising competition in
the non-life insurance sector and declining bond yields. Moreover, many Italian
insurers are highly capitalized with a significant portion of their assets
invested in low-yielding real estate.
With respect to the telecommunications industry, the Italy Fund currently
has a neutral weighting but we would like to a to our holdings in this area.
Italian oil giant ENI, which is widely recognized as one of the best-run
companies in Italy, remains at the core of the Fund's portfolio and we plan on
increasing our position in ENI in the coming months.
During the period under review, we continue to favor Italian industrial
blue-chip companies such as Saipem (an oil drilling company), Pirelli (51%
cables and 49% tires) and Danieli (an engineering company). In our opinion,
proposed changes in Italy's car inspection system (i.e., new cars will be
required to be inspected after four years and thereafter after every two years
as opposed to current rules requiring inspections every ten years and every four
years) have increased the attractiveness of the American depository receipts
(ADRs) of Sogefi (an automotive company) and Brembo (an automotive company). In
addition, we continue to be positive on Gucci (a luxury goods company) and
Natuzzi (a furniture company) because of their attractive fundamentals.
Finally, we would like to bring to your attention that we have prepared a
"Fund Profile" which will be available on a monthly basis. Please call (212)
816-6082 in order to receive your copy of the Italy Fund Profile.
In closing, thank you for your investment in the Italy Fund. We look
forward to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Mario d'Urso
Heath B. McLendon Mario d'Urso
Chairman of the Board President
/s/ Rein W. van der Does
Rein W. van der Does
Investment Officer
May 14, 1997
3
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THE ITALY FUND'S SECTORIAL STRUCTURE*
APRIL 30, 1997 (unaudited)
[GRAPHIC]
Utilities 4.9%
Automotive 6.6%
Banking 11.7%
Construction 3.3%
Consumer Products 6.0%
Energy 14.9%
Engineering 3.6%
Food 4.2%
Insurance 8.6%
Time Deposit 2.1%
Holding Companies 1.5%
Miscellaneous 0.6%
Telecommunications 25.4%
Textiles 6.6%
BCI INDEX SECTORIAL STRUCTURE
APRIL 30, 1997 (unaudited)
[GRAPHIC]
Textiles 2.1%
Utilities 0.5%
Automotive 7.4%
Banking 18.8%
Construction 2.1%
Consumer Products 1.5%
Energy 18.2%
Engineering 2.2%
Food 1.8%
Insurance 13.8%
Miscellaneous 1.2%
Telecommunications 30.4%
*As a percentage of total investments.
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The Italy Fund Inc.
Schedule of Investments as of April 30, 1997 (unaudited)
================================================================================
Shares Security Value
================================================================================
COMMON STOCKS -- 97.9%
================================================================================
Automotive -- 6.6%
145,000 Brembo S.p.A ......................... $ 1,563,692
750,000 Pirelli S.p.A ........................ 1,639,869
1,525,000 Sogefi S.p.A ......................... 3,486,732
------------
6,690,293
------------
Banking -- 11.7%
1,700,000 Banca Fideuram S.p.A ................. 4,293,012
700,000 Banca Popolare di Milano ............. 3,445,462
500,000 Istituto Mobiliare
Italiano S.p.A ....................... 4,250,894
------------
11,989,368
------------
Construction -- 3.3%
600,000 Unicem S.p.A. di
Risp NC * ............................ 1,822,563
900,000 Vianini Lavori S.p.A ................. 1,597,196
------------
3,419,759
------------
Consumer Products -- 6.0%
325,000 Arnoldo Mondadori
Editore S.p.A ........................ 1,893,377
50,000 Industrie Natuzzi
S.p.A. ADR ........................... 1,112,500
500,000 La Rinascente S.p.A. di
Risp NC * ............................ 1,299,452
260,000 Recordati S.p.A. di
Risp NC * ............................ 1,017,598
1,000,000 Seat S.p.A. # ........................ 308,551
2,702,500 Seat S.p.A. di
Risp NC * # .......................... 536,119
------------
6,167,597
------------
Energy -- 14.9%
2,300,000 Ente Nazionale
Idrocarburi S.p.A .................... 11,710,434
750,000 Saipem S.p.A ......................... 3,558,817
------------
15,269,251
------------
Engineering -- 3.6%
180,000 Danieli & Co. ........................ $ 1,270,291
266,750 Danieli & Co. di
Risp NC * ............................ 961,741
800,000 Sasib S.p.A. di Risp NC * ............ 1,482,351
------------
3,714,383
------------
Food -- 4.2%
800,041 Finanziaria Autogrill
S.p.A. # ............................. 1,121,635
2,212,000 Parmalat Finanziaria S.p.A ........... 3,210,994
------------
4,332,629
------------
Holding Companies -- 1.5%
300,000 Gemina S.p.A. # ...................... 120,745
2,700,000 Holding Di
Partecipazioni S.p.A. # .............. 1,472,018
------------
1,592,763
------------
Insurance -- 8.6%
220,000 Alleanza Assicurazioni .
S.p.A ................................ 1,495,775
154,000 Assicurazioni Generali
S.p.A................................. 2,586,435
1,000,000 Instituto Nazionale
Delle Assicurazioni................... 1,326,031
425,700 Riunione Adriatica di
Sicurta S.p.A......................... 3,465,531
------------
8,873,772
------------
Miscellaneous -- 0.6%
850,000 Europa Investimenti #+ ............... 248,266
49,639 Quattrocentoduedue
Cat B #+ ............................. 318,965
------------
567,231
------------
Telecommunications -- 25.4%
1,000,000 Stet Societa' Finanziaria
Telefonica S.p.A...................... 4,746,842
2,724,500 Stet Societa' Finanziaria
Telefonica S.p.A. di
Risp NC *............................. 10,088,707
See Notes to Financial Statements.
5
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The Italy Fund Inc.
Schedule of Investments as of April 30, 1997 (unaudited) (continued)
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
Telecommunications -- 25.4% (continued)
1,916,000 Telecom Italia S.p.A ................. $ 5,073,518
1,976,000 Telecom Italia
Mobile S.p.A ......................... 6,199,691
------------
26,108,758
------------
Textiles -- 6.6%
100,000 Benetton Group S.p.A ................. 1,305,703
55,000 Fila Holding S.p.A. ADR .............. 2,378,750
45,000 Gucci Group N.V.--NY
Registered Shares ADR ................ 3,121,875
------------
6,806,328
------------
Utilities -- 4.9%
460,000 Edison S.p.A ......................... 2,437,479
356,000 Italgas S.p.A ........................ 1,223,423
756,000 SONDEL--Societa
Nordelettrica S.p.A .................. 1,414,072
------------
5,074,974
------------
TOTAL COMMON
STOCKS
(Cost -- $86,117,827) 100,607,106
------------
================================================================================
Face
Amount++ Security Value
- --------------------------------------------------------------------------------
TIME DEPOSIT -- 2.1%
- --------------------------------------------------------------------------------
3,700,000,000 Chase Manhattan Bank
6.75% due 5/2/97
(Cost -- $2,157,749).................. $ 2,161,373
------------
TOTAL INVESTMENTS
AT VALUE -- 100%
(Cost -- $88,275,576+++)............... $102,768,479
============
-------------------------------
* Risp NC -- Risparmio Non-Convertible (non-convertible savings shares).
# Non-income producing security.
+ Restricted security (See Note 4).
++ Respresents local currency.
+++ Aggregate cost for Federal income tax purposes is
substantially the same.
See Notes to Financial Statements.
6
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THE ITALY FUND INC.
Statement of Assets and Liabilities
April 30, 1997 (unaudited)
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost--$88,275,576) .................................................... $102,768,479
Foreign currency (Cost--$6,290) .............................................................. 6,278
Cash ......................................................................................... 55,018
Dividends and interest receivable ............................................................ 140,030
------------
Total Assets ................................................................................. 102,969,805
------------
LIABILITIES:
Payable for securities purchased ............................................................. 1,015,065
Management fees payable ...................................................................... 79,331
Accrued expenses ............................................................................. 151,024
------------
Total Liabilities ............................................................................ 1,245,420
------------
Total Net Assets ............................................................................... $101,724,385
============
NET ASSETS:
Par value of capital shares .................................................................. $ 95,031
Capital paid in excess of par value .......................................................... 94,936,689
Accumulated net investment loss .............................................................. (1,349,789)
Accumulated net realized loss from security transactions ..................................... (6,436,347)
Net unrealized appreciation of investments and foreign currencies ............................ 14,478,801
------------
Total Net Assets
(Equivalent to $10.70 a share on 9,503,089 shares of $0.01 par value
outstanding; 20,000,000 shares authorized) .......................................... $101,724,385
============
</TABLE>
See Notes to Financial Statements.
7
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The Italy Fund Inc.
Statement of Operations
For the Three Months Ended April 30, 1997 (unaudited)
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends .................................................................................... $ 60,177
Interest ..................................................................................... 55,795
Less: Foreign withholding tax ................................................................ (9,027)
------------
Total Investment Income ...................................................................... 106,945
------------
EXPENSES:
Management fees (Note 2) ..................................................................... 242,136
Directors' fees .............................................................................. 30,480
Custody ...................................................................................... 30,480
Audit and legal .............................................................................. 17,068
Shareholder communications ................................................................... 12,193
Shareholder and system servicing fees ........................................................ 11,582
Other ........................................................................................ 1,800
------------
Total Expenses ............................................................................... 345,739
------------
Net Investment Loss ............................................................................. (238,794)
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) .................................. 524,126
Foreign currency transactions ............................................................ (193,281)
------------
Net Realized Gain ............................................................................ 330,845
------------
Change in Net Unrealized Appreciation of Investments and Foreign Currencies:
Beginning of period ...................................................................... 26,279,197
End of period ............................................................................ 14,478,801
------------
Decrease in Net Unrealized Appreciation ...................................................... (11,800,396)
------------
Net Loss on Investments and Foreign Currencies .................................................. (11,469,551)
------------
Decrease in Net Assets From Operations .......................................................... $(11,708,345)
============
</TABLE>
See Notes to Financial Statements.
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THE ITALY FUND INC.
<TABLE>
<CAPTION>
Three Months
Ended Year
4/30/97 Ended
Statements of Changes in Net Assets (unaudited) 1/31/97
==================================================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................................... $ (238,794) $ 944,515
Net realized gain .......................................................... 330,845 168,703
Increase (decrease) in net unrealized appreciation ......................... (11,800,396) 23,759,645
------------ ----------
Increase (Decrease) in Net Assets From Operations .......................... (11,708,345) 24,872,863
------------ ----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ...................................................... -- (2,280,742)
------------ ----------
Decrease in Net Assets From Distributions to Shareholders .................. -- (2,280,742)
------------ ----------
Increase (Decrease) in Net Assets ............................................. (11,708,345) 22,592,121
NET ASSETS:
Beginning of period ........................................................ 113,432,730 90,840,609
------------ ----------
End of period* ............................................................. $101,724,385 $113,432,730
============ ============
*Includes accumulated net investment loss of: ................................. $ (1,349,789) $ (917,714)
============ ============
</TABLE>
See Notes to Financial Statements.
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THE ITALY FUND INC.
Notes to Financial Statements (unaudited)
===============================================================================
1. Significant Accounting Policies
The Italy Fund Inc. ("Fund"), a Maryland corporation, is registered with
the Securities and Exchange Commission under the Investment Company Act of 1940,
as amended, as a diversified, closed-end management investment company.
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 price in the primary exchange on
which they are traded; securities for which no sales price was reported on that
date are valued at the mean between the bid and asked price. 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) 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 premium and accretion of discount, is recorded on an accrual basis; (f)
dividend income is recorded on the ex-dividend date; foreign dividends are
recorded on the ex-dividend date or as soon as practical after the Fund
determines the existence of a dividend declaration after exercising reasonable
due diligence; (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. At January 31, 1997, 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; 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.
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, 1997, there were no
open forward foreign currency contracts.
2. Management Agreement
and Transactions with Affiliated Persons
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.
All officers (except one) and one Director of the Fund are employees of
Smith Barney Inc.
10
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THE ITALY FUND INC.
Notes to Financial Statements (unaudited) (continued)
================================================================================
3. Securities Transactions
During the three months ended April 30, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $7,158,526
- --------------------------------------------------------------------------------
Sales 4,222,290
================================================================================
At April 30, 1997, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 18,571,134
- --------------------------------------------------------------------------------
Gross unrealized depreciation (4,078,231)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 14,492,903
================================================================================
4. Securities Valued by the Fund's Board of Directors
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 4/30/97 Value Per Percentage of
Security Shares Date Fair Value Unit Net Assets Cost
-------- --------- ----------- ---------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Europa Investimenti ................... 850,000 7/2/91 $248,266 $ 0.29 0.2% $623,396
Quattrocentoduedue
Cat B ........................ 49,639 3/21/94 318,965 6.43 0.3 295,889
-------- --- --------
Total...................... $567,231 0.5% $919,285
======== === ========
</TABLE>
5. Capital Loss Carryforwards
At January 31, 1997, the Fund had, for Federal income tax purposes,
approximately $6,960,000 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:
2002 2004 2005
---- ---- ----
Carryforward Amounts ............. $1,755,000 $5,027,000 $178,000
========== ========== ========
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THE ITALY FUND INC.
Notes to Financial Statements (unaudited) (continued)
================================================================================
6. 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
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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 throughout each year; 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>
1997(1) 1997 1996 1995 1994(2) 1993
==================================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............... $11.94 $9.56 $9.82 $9.84 $8.43 $11.08
--------- -------- -------- -------- -------- ---------
Income (Loss) From Operations:
Net investment income (loss) .............. (0.03) 0.10 0.15 0.09 0.12 0.19
Net realized and unrealized gain (loss) ... (1.21) 2.52 (0.39) 0.06 1.72 (2.84)
--------- -------- -------- -------- -------- ---------
Total Income (Loss) From Operations ............... (1.24) 2.62 (0.24) 0.15 1.84 (2.65)
--------- -------- -------- -------- -------- ---------
Dilution in NAV From Rights Offering .............. -- -- -- -- (0.32) --
--------- -------- -------- -------- -------- ---------
Offering Expenses Charged to Paid-in Capital....... -- -- -- -- (0.03) --
--------- -------- -------- -------- -------- ---------
Less Distributions From:
Net investment income .................... -- (0.24) (0.02) (0.17) (0.07) --
Capital................................... -- -- -- -- (0.01) --
--------- -------- -------- -------- -------- ---------
Total Distributions................................ -- (0.24) (0.02) (0.17) (0.08) --
--------- -------- -------- -------- -------- ---------
Net Asset Value, End of Period .................... $10.70 $11.94 $9.56 $9.82 $9.84 $8.43
========= ======== ======== ========= ======== =========
Market Value, End of Period ....................... $8.875 $10.000 $8.250 $8.750 $12.375 $8.875
========= ======== ======== ========= ======== =========
Total Return, Based on Market Value ............... (11.25)%++ 24.49% (5.51)% (27.90)% 40.54%# (6.58)%
========= ======== ======== ========= ======== =========
Total Return, Based on Net Asset Value (10.39)%++ 28.27% (2.43)% (3.68)% 33.04% (24.64)%
========= ======== ======== ========= ======== =========
Net Assets, End of Period (000's).................. $101,724 $113,433 $90,841 $93,347 $93,518 $53,384
========= ======== ======== ========= ======== =========
Ratios to Average Net Assets:
Net investment income (loss).............. (0.91)%+ 0.97% 1.12% 0.85% 1.30% 2.04%
Expenses*................................. 1.32+ 1.42 1.42 1.69 1.69 1.70
Portfolio Turnover Rate............................ 4% 47% 58% 42% 46% 33%
Average commissions per share paid on
equity transactions(3).................... $0.01 $0.01 $0.00** -- -- --
</TABLE>
(1) For the three months ended April 30, 1997 (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 September 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 is 45.85%
(unaudited).
* During the years ended January 31, 1997 and January 31, 1996, the Fund
earned credits from the custodian which reduced service fees incurred. If
the credits are taken into consideration, the ratio of expenses to average
net assets would have been 1.42% and 1.41%, respectively. Prior year
numbers have not been restated to reflect this credit.
** Amount represents less than $0.01.
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THE ITALY FUND INC.
Quarterly Results of Operations (unaudited)
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<TABLE>
<CAPTION>
Net Realized
and Unrealized 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) (0.16) (1,777,887) (0.18)
July 31, 1996 .............. 1,944,252 0.20 1,539,905 0.16 2,953,107 0.31 4,493,012 0.47
October 31, 1996 ........... 57,105 0.01 (336,620) (0.04) 3,116,522 0.33 2,779,902 0.29
January 31, 1997 ........... 144,366 0.02 (69,967) (0.01) 19,447,803 2.05 19,377,836 2.04
April 30, 1997 ............. 106,945 0.01 (238,794) (0.03) (11,469,551) (1.21) (11,708,345) (1.24)
</TABLE>
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THE ITALY FUND INC.
Dividend Reinvestment and Cash Purchase Plan (unaudited)
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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, as soon as practicable
after 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
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THE ITALY FUND INC.
Dividend Reinvestment and Cash Purchase Plan (unaudited) (continued)
================================================================================
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 a
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.
----------------------------------
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
shares of its common stock in the open market.
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THE ITALY FUND INC.
INVESTMENT ADVISER AND OFFICERS
ADMINISTRATOR
Heath B. McLendon
Smith Barney Mutual Funds Management Inc. Chairman of the Board
388 Greenwich Street
New York, New York 10013 Mario d'Urso
President
ADVISORY BOARD
Lewis E. Daidone
Andrea Farace Senior Vice President
Pierre Henchoz and Treasurer
Ing. Dott. Ettore Lolli
Dott. Pietro Manes Rein W. van der Does
Investment Officer
DIRECTORS
Irving P. David
Heath B. McLendon Controller
Paolo M. Cucchi
Alesandro C. di Montezemolo Christina T. Sydor
Dr. Paul R. Hardin Secretary
George M. Pavia
Mario d'Urso
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THE ITALY FUND INC.
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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 6/97
QUARTERLY
REPORT
April 30, 1997
