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Dear Shareholder:
We are pleased to present the quarterly report for The Italy Fund Inc.
("Fund") for the three months ended April 30, 1998. As of that date, the Fund's
net asset value ("NAV") per share was $17.19, which represented an 18.63%
increase during the Fund's fiscal first quarter. This performance compares
unfavorably versus the 22.4% rise over the same time period in the BCI Index
(Banco Commerciale Italiana), a widely followed Italian index that includes all
the securities listed on the Milan Stock Exchange. As of April 30, 1998 the
Fund's total net assets were approximately $163 million.
In addition to nominating auditors and directors, the Fund's Board of
Directors recently recommended that shareholders approve changing the Fund's
sub-classification under the Investment Company Act of 1940 ("1940 Act") in
order to give the portfolio manager maximum flexibility in managing the
portfolio. We are pleased to report that at the shareholder meeting held on May
13, 1998, the proposal passed. The Fund, under the 1940 Act, has been converted
to a non-diversified fund.
Political Overview
Italian officials and Premier Romano Prodi's coalition government deserve
credit for tackling Italy's massive public debt, lowering interest rates and
trimming the deficit. These and other actions resulted in Italy formally joining
the 11-country European Monetary Union ("EMU") this April. As late as 1997, many
investment professionals doubted that Italy would be admitted into the EMU.
However, Prodi made good on his pledge to either get Italy into the EMU or
resign. In addition, Prodi's coalition government is the third longest lasting
in Italy since World War II, a much welcome sign of political stability in
Italy.
At the same time, significant challenges remain for the Prodi government
and long-term structural reforms continue to be elusive. Italy's debt ratio of
roughly 121% of Gross Domestic Product ("GDP") is twice the level mandated by
the single currency treaty while unemployment in Italy remains at a stubborn
12%.
Prodi's government maintains it can continue to demonstrate fiscal
responsibility despite the significant challenges that Italy faces after the
public euphoria over EMU admission fades away. Yet Prodi's dependence on the
minority Communist party as the swing vote for the government on major issues
may be a challenge that even Prodi may not be able to overcome.
Economic Overview
Our analysts in Europe expect that easier monetary policy in Italy should
lift GDP growth well above consensus estimates. At the same time, strong
economic growth and low interest rates should help to lower the Italian deficit
in the early years of the EMU.
- --------------------------------------------------------------------------------
Four Reasons Why We're Still Bullish on Italian Stocks...
1. The successes of recent privatizations have created a real shareholder
culture in Italy.
2. Our analysts in Europe believe that short-term rates in Italy will
converge gradually with those of core Europe over the coming months, making
Italian bonds less attractive than Italian stocks.
3. The Italian Government has responded well to pressure from other
European central banks to reduce its high debt ratios and maintain a long-term
commitment to fiscal responsibility. At a recent EU finance ministers (ECOFIN)
meeting, Italian Treasury and Finance Minister Carlo Azeglio Ciampi reportedly
pledged to reduce Italy's debt ratio to 100% of GDP from the current 121.6% of
GDP within six years.
4. Despite the record climb in Italy's stock market recently, many foreign
investors still don't have any meaningful exposure in Italian stocks. Any
increased interest could exert a positive influence on Italian stock prices over
the long term.
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However, it remains to be seen whether the Prodi government will commit to using
any revenue windfalls in the coming years to reduce the public deficit if
Italy's economic growth remains strong.
Yet our analysts think that the current degree of fiscal pressure appears
to be manageable in Italy. Fiscal restraint over the past decade has boosted
Italy's primary surplus well above the EMU-11 1997 average of 2.6% of GDP.
Moreover, Italy's decline in real funding costs within the euro zone is a major
advantage in further consolidating debt. However, pledges to reduce debt faster
than planned in order to reach the 60% milestone within the 10-year time period
under consideration by the Bundesbank and the European Monetary Institution
("EMI") might not be attainable. New fiscally responsible initiatives in Italy
may be stalled due to the fragility of the Prodi coalition, high taxes and the
significant fiscal tightening since the early 1990s.
Aggressive privatization in Italy could accelerate debt reduction. In 1997,
privatization proceeds reached 35 trillion lire (i.e. 1 3/4% of GDP). While the
scope of privatizations in Italy has been impressive, the large state presence
in its economy means there is still room for significant additional
privatization.
Investment Strategies
As noted in our previous shareholder reports, the Fund significantly
outperformed the major Italian indices in 1996, but lagged in 1997. We believe
that the Fund's underperformance during that period was caused in part because
of the Fund's status as a diversified investment company under the 1940 Act. As
a diversified investment company, no more than 25% of the Fund's total assets
may be invested in the securities of single issuers which exceed 5% of the
Fund's total assets. The diversification rule limited the Fund's ability to
invest in stocks that outperformed the major indices. In fact, a significant
number of country-specific funds are non-diversified because they, like the
Fund, invest in highly concentrated stock markets.
The Italian stock market pushed into record territory in the first quarter
of 1998 fueled by a more favorable outlook for interest rates, continued healthy
inflows into Italian mutual funds and an outbreak of merger mania in the banking
industry. After the major Italian stock indices reached record highs in early
April, the market retreated by 10%. The Fund gave back a bit more than the 10%
decline of the indices during the last three weeks of April due to a sharp drop
in savings shares (which made up roughly 14% of the Fund's portfolio versus
approximately 6% in the BCI Index.) Another reason for the Fund's relative
underperformance was the relative outperformance of Telecom Italia Mobile
(Europe's largest cellular network provider) versus the BCI Index during this
period (i.e., the Fund owned a lower ratio of Telecom Italia Mobile as compared
to its coincident weight in the major indices during this time).
During the reporting period, the Fund slightly increased its weighting in
the insurance industry (15.8% to 18.0%) while reducing its weighting in the
banking industry (18.2% to 15.8%). While merger mania has swept Italy's banking
industry and has caused this sector to soar to new heights, we don't think the
condition of Italy's banking industry justifies current valuations. As we stated
in our last report, just because one bad bank combines with another bad bank,
there are no guarantees that the new enterprise will be healthy and ultimately
successful.
2
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In closing, thank you for your continued confidence in our investment
management approach. We look forward to serving your investment needs for many
years to come.
Sincerely,
/s/ HEATH B. MCLENDON /s/ MARIO D'URSO
Heath B. McLendon Mario d'Urso
Chairman President
/s/ REIN W. VAN DER DOES
Rein W. van der Does
Vice President and
Investment Officer
May 28, 1998
3
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Take Advantage of the Fund's Dividend Reinvestment Policy!
Did you know that Fund investors who reinvest their dividends are taking
advantage of one of the most effective wealth-building tools available today?
Systematic investing puts time to work for you through the strength of
compounding.
As an investor in the Fund, you can participate in its Dividend Reinvestment
Plan ("Plan"), a convenient, simple and efficient way to reinvest your dividends
and capital gains, if any, in additional shares of the Fund. A complete
description of the Fund's Plan begins on page 16. Below is a short summary of
how the Plan works.
Plan Summary
If you are a Plan participant who has not elected to receive your dividends in
the form of a cash payment, then your dividend and capital gain distributions
will be reinvested automatically in additional shares of the Fund.
The number of common stock shares in the Fund you will receive in lieu of a cash
dividend is determined in the following manner. If the market price of the
common stock is equal to or exceeds the net asset value ("NAV") per share on the
date of valuation, you will be issued shares for the equivalent of the most
recently determined NAV per share or 95% of the market price, whichever is
greater.
If the NAV per share at the time of valuation is greater than the market price
of the common stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, First Data Investment Services Group, Inc.
("First Data"), dividend paying agent under the Plan, will buy common stock for
your account in the open market or on the New York Stock Exchange.
If First Data begins to purchase additional shares in the open market and the
market price of the shares subsequently rises above the NAV before the purchases
are completed, the Fund will attempt to cancel any remaining orders and issue
the remaining dividend or distribution in shares at the greater of the Fund's
NAV per share or 95% of the then current market price. In that case, the number
of Fund shares you receive will be based on the weighted average of prices paid
for shares purchased in the open market and the price at which the Fund issues
the remaining shares.
To find out more detailed information about the Dividend Reinvestment Plan and
about how you can participate, please call First Data at (800) 331-1710.
- --------------------------------------------------------------------------------
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THE ITALY FUND'S SECTORIAL STRUCTURE*
APRIL 30, 1998 (unaudited)
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Automotive 7.1%
Banking 15.8%
Broadcasting 1.6%
Construction 1.9%
Consumer Cyclical - Textiles 2.5%
Consumer Staples - Food 5.3%
Consumer Staples - Retail 3.4%
Energy - Exploration 2.5%
Energy - International 9.4%
Engineering 2.0%
Holding Companies 1.4%
Insurance 18.0%
Miscellaneous 1.9%
Telecommunications - Wireless 7.0%
Telecommunications - Telephone 18.3%
Time Deposit 0.9%
Utilities 1.0%
</TABLE>
BCI INDEX SECTORIAL STRUCTURE
APRIL 30, 1998 (unaudited)
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
<TABLE>
<S> <C>
Automotive 6.2%
Banking 27.4%
Construction 2.0%
Consumer Products 1.6%
Energy 13.3%
Engineering 2.4%
Food 2.0%
Insurance 16.0%
Miscellaneous 2.1%
Telecommunications 24.3%
Textiles 2.2%
Utilities 0.5%
</TABLE>
*As a percentage of total investments.
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THE ITALY FUND INC.
Schedule of Investments as of April 30, 1998 (unaudited)
================================================================================
<TABLE>
<CAPTION>
Shares Security Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCK -- 99.1%
- --------------------------------------------------------------------------------
<S> <C> <C>
Automotive -- 7.1%
181,250 Brembo S.p.A. $ 2,443,057
1,000,000 Pirelli S.p.A. @ 3,302,011
1,525,000 Sogefi S.p.A. 5,853,170
-----------
11,598,238
-----------
Banking -- 15.8%
1,100,000 Banca Fideuram S.p.A. 7,039,081
150,000 Banca Popolare di
Brescia @ 2,298,400
900,000 Banca Popolare di Milano 8,236,349
500,000 Istituto Mobiliare
Italiano S.p.A. @ 8,142,159
-----------
25,715,989
-----------
Broadcasting -- 1.6%
400,000 Mediaset S.p.A. 2,616,552
-----------
Construction -- 1.9%
600,000 Unicem S.p.A.
di Risp NC * @ 3,115,212
-----------
Consumer Cyclical - Textiles -- 2.5%
20,000 Fila Holding S.p.A.
ADR @ 475,000
45,000 Gucci Group N.V. -- NY
Registered Shares 2,095,312
400,000 Ittierre Holding S.p.A. 1,578,148
-----------
4,148,460
-----------
Consumer Staples - Food -- 5.3%
544,027 Autogrill S.p.A. 3,762,857
2,212,000 Parmalat Finanziaria
S.p.A. @ 4,960,911
-----------
8,723,768
-----------
Consumer Staples - Retail -- 3.4%
50,000 Industrie Natuzzi
S.p.A. ADR 1,284,375
500,000 La Rinascente S.p.A.
di Risp NC * 2,582,465
260,000 Recordati S.p.A.
di Risp NC * 1,615,068
-----------
5,481,908
-----------
Energy Exploration -- 2.5%
700,000 Saipem S.p.A. @ 4,010,496
-----------
Energy - International -- 9.4%
2,300,000 Ente Nazionale
Idrocarburi S.p.A. @ 15,407,319
-----------
Engineering -- 2.0%
180,000 Danieli & Co. 1,792,939
266,750 Danieli & Co. di Risp NC * 1,419,144
446,750 Danielli & Co. Rights,
Expire 5/19/98 # 117,741
-----------
3,329,824
-----------
Holding Companies -- 1.4%
2,700,000 Holding Di Partecipazioni
Industriali S.p.A. @ 2,334,377
-----------
Insurance -- 18.0%
450,000 Alleanza Assicurazioni
S.p.A. @ 5,674,680
240,000 Assicurazioni Generali
S.p.A. 7,185,846
3,300,000 Instituto Nazionale Delle
Assicurazioni @ 9,840,683
425,700 Riunione Adriatica
di Sicurta S.p.A. @ 6,742,682
-----------
29,443,891
-----------
</TABLE>
See Notes to Financial Statements.
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THE ITALY FUND INC.
Schedule of Investments as of April 30, 1998 (unaudited) (continued)
================================================================================
<TABLE>
<CAPTION>
Shares Security Value
- --------------------------------------------------------------------------------
<S> <C> <C>
Miscellaneous -- 1.9%
200,000 Aeroporti di Roma S.p.A. $2,807,415
850,000 Europa Investimenti #+ 215,863
----------
3,023,278
-----------
Telecommunications - Telephone -- 18.3%
2,064,440 Telecom Italia S.p.A. @ 15,547,815
2,724,500 Telecom Italia S.p.A.
di Risp NC * 14,359,381
-----------
29,907,196
-----------
Telecommunications - Wireless -- 7.0%
1,976,000 Telecom Italia Mobile
S.p.A. @ 11,316,613
-----------
Utilities -- 1.0%
356,000 Italgas S.p.A. @ 1,647,852
-----------
TOTAL COMMON
STOCK
(Cost -- $89,236,361) 161,820,973
===========
<CAPTION>
Face Amount ++ Security Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TIME DEPOSIT -- 0.9%
- --------------------------------------------------------------------------------
<S> <C> <C>
2,500,000,000 Chase Manhattan 5.25%
due 5/4/98
(Cost-- $1,405,718) $ 1,410,876
-----------
TOTAL INVESTMENTS
AT VALUE -- 100%
(Cost -- $90,642,079**) $163,231,849
===========
</TABLE>
- ----------
@ A portion of this security is on loan (See Note 7).
* Risp NC -- Risparmio Non-Convertible (non-convertible savings shares).
# Non-income producing security.
+ Restricted security (See Note 4).
++ Represents local currency.
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
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THE ITALY FUND INC.
Statement of Assets and Liabilities
April 30, 1998 (unaudited)
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost--$90,642,079) .......................... $ 163,231,849
Foreign currency (Cost--$69,301) ................................... 69,399
Cash ............................................................... 42,581
Collateral for securities loaned (Note 7) .......................... 72,465,145
Dividends and interest receivable .................................. 204,386
-------------
Total Assets ....................................................... 236,013,360
-------------
LIABILITIES:
Payable for securities loaned (Note 7) ............................. 72,465,145
Management fees payable ............................................ 136,121
Accrued expenses ................................................... 82,730
-------------
Total Liabilities .................................................. 72,683,996
-------------
Total Net Assets ...................................................... $ 163,329,364
=============
NET ASSETS:
Par value of capital shares ........................................ $ 95,031
Capital paid in excess of par value ................................ 94,826,379
Overdistributed net investment income .............................. (619,829)
Accumulated net realized loss from security transactions ........... (3,539,509)
Net unrealized appreciation of investments and foreign currencies .. 72,567,292
-------------
Total Net Assets
(Equivalent to $17.19 a share on 9,503,089 shares of $0.01 par value
outstanding; 20,000,000 shares authorized) ....................... $ 163,329,364
=============
</TABLE>
See Notes to Financial Statements.
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THE ITALY FUND INC.
Statement of Operations
For the Three Months Ended April 30, 1998 (unaudited)
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends .................................................. $ 80,249
Interest ................................................... 77,970
Less: Foreign withholding tax .............................. (12,037)
------------
Total Investment Income .................................... 146,182
------------
EXPENSES:
Management fees (Note 2) ................................... 369,091
Directors' fees ............................................ 30,480
Custody .................................................... 30,480
Audit and legal ............................................ 17,068
Shareholder communications ................................. 12,192
Shareholder and system servicing fees ...................... 11,582
Other ...................................................... 1,801
------------
Total Expenses ............................................. 472,694
------------
Net Investment Loss ........................................... (326,512)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain From:
Security transactions (excluding short-term securities) .. 2,676,027
Foreign currency transactions ............................ 17,509
------------
Net Realized Gain .......................................... 2,693,536
------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period ...................................... 49,316,646
End of period ............................................ 72,567,292
------------
Increase in Net Unrealized Appreciation .................... 23,250,646
------------
Net Gain on Investments and Foreign Currencies ................ 25,944,182
------------
Increase in Net Assets From Operations ........................ $ 25,617,670
============
</TABLE>
See Notes to Financial Statements.
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THE ITALY FUND INC.
<TABLE>
<CAPTION>
Three Months
Ended Year
4/30/98 Ended
Statements of Changes in Net Assets (unaudited) 1/31/98
=============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ............................ $ (326,512) $ 693,769
Net realized gain ....................................... 2,693,536 737,808
Increase in net unrealized appreciation ................. 23,250,646 23,037,449
------------- -------------
Increase in Net Assets From Operations .................. 25,617,670 24,469,026
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................... -- (190,062)
------------- -------------
Decrease in Net Assets From Distributions to Shareholders -- (190,062)
------------- -------------
Increase in Net Assets ..................................... 25,617,670 24,278,964
NET ASSETS:
Beginning of period ..................................... 137,711,694 113,432,730
------------- -------------
End of period* .......................................... $ 163,329,364 $ 137,711,694
============= =============
*Includes overdistributed net investment income of: ........ $ (619,829) $ (310,826)
============= =============
</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 non-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 ask 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 or 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. Accordingly, overdistributed net investment income of $110,310 has
been reclassified to paid-in capital at January 31, 1998. Net investment income,
net realized gains and net assets were not affected by this adjustment; 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.
At April 30, 1998, there were no open forward foreign currency contracts.
2. Management Agreement and Transactions with Affiliated Persons
Mutual Management Corp. ("MMC"), a subsidiary of Salomon Smith Barney
Holdings, Inc. ("SSBH"), acts as investment manager of the Fund. The Fund pays
MMC 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., another subsidiary of SSBH.
11
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THE ITALY FUND INC.
Notes to Financial Statements (unaudited) (continued)
================================================================================
3. Securities Transactions
During the three months ended April 30, 1998, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $5,269,891
- --------------------------------------------------------------------------------
Sales 6,963,889
================================================================================
</TABLE>
At April 30, 1998, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
<TABLE>
===============================================================================
<S> <C>
Gross unrealized appreciation $ 74,738,993
Gross unrealized depreciation (2,149,223)
- -------------------------------------------------------------------------------
Net unrealized appreciation $ 72,589,770
===============================================================================
</TABLE>
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 the security valued by the Fund's Board of
Directors:
<TABLE>
<CAPTION>
Number of Acquisition 4/30/98 Value Per Percentage of
Security Shares Date Fair Value Unit Net Assets Cost
-------- -------- ----------- ---------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Europa Investimenti 850,000 7/2/91 $215,863 $0.25 0.13% $623,396
</TABLE>
5. Capital Loss Carryforwards
At January 31, 1998, the Fund had, for Federal income tax purposes,
approximately $6,216,000 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:
<TABLE>
<CAPTION>
2002 2004 2005
---------- ---------- --------
<S> <C> <C> <C>
Carryforward Amounts ................. $1,011,000 $5,027,000 $178,000
========== ========== ========
</TABLE>
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.
Notes to Financial Statements (unaudited) (continued)
================================================================================
7. Lending of Portfolio Securities
The Fund has an agreement with its custodian whereby the custodian may lend
securities owned by the Fund to brokers, dealers and other financial
organizations. Fees earned by the Fund on securities lending are recorded as
interest income. Loans of securities by the Fund are collaterized by cash, U.S.
government securities or high quality money market instruments that are
maintained at all times in an amount at least equal to the current market value
of the loaned securities, plus a margin which may vary depending on the type of
securities loaned. The custodian establishes and maintains the collateral in a
segregated account. The Fund maintains exposure for the risk of any losses in
the investment of amounts received as collateral.
At April 30, 1998, the Fund loaned common stocks having a value of
approximately $70,862,964 and holds the following collateral for loaned
securities:
<TABLE>
<CAPTION>
Securities Description Value
================================================================================
<S> <C>
Time Deposits:
UBS Grand Cayman, 5.625% due 5/1/98 $ 3,395,527
Svenska Grand Cayman, 5.625% due 5/1/98 3,395,527
Deutsche Bank G.C., 5.625% due 5/1/98 3,395,527
Commerzbank AG, Frankfurt, 5.59375% due 5/1/98 3,395,527
Bank of Montreal, 5.625% due 5/1/98 3,395,527
Repurchase Agreements:
CS First Boston, 5.570% due 5/1/98 14,336,671
Merrill Lynch, 5.625% due 5/1/98 4,904,651
J.P. Morgan Securities, 5.580% due 5/1/98 10,440,180
NationsBanc Montgomery Securities Inc., 5.6125% due 5/1/98 11,469,337
Bear Stearns, 5.600% due 5/1/98 14,336,671
- --------------------------------------------------------------------------------
Total $72,465,145
================================================================================
</TABLE>
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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>
1998(1) 1998 1997 1996 1995 1994(2)
==========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ....... $14.49 $11.94 $9.56 $9.82 $9.84 $8.43
-------- -------- -------- -------- -------- --------
Income (Loss) From Operations:
Net investment income (loss) ............ (0.03) 0.07 0.10 0.15 0.09 0.12
Net realized and unrealized gain (loss) . 2.73 2.50 2.52 (0.39) 0.06 1.72
-------- -------- -------- -------- -------- --------
Total Income (Loss) From Operations ........ 2.70 2.57 2.62 (0.24) 0.15 1.84
-------- -------- -------- -------- -------- --------
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) (0.24) (0.02) (0.17) (0.07)
Capital ................................. -- -- -- -- -- (0.01)
-------- -------- -------- -------- -------- --------
Total Distributions ........................ -- (0.02) (0.24) (0.02) (0.17) (0.08)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ............. $17.19 $14.49 $11.94 $9.56 $9.82 $9.84
======== ======== ======== ======== ======== ========
Market Value, End of Period ................ $14.563 $12.125 $10.000 $8.250 $8.750 $12.375
======== ======== ======== ======== ======== ========
Total Return, Based on Market Value ........ 20.08%++ 21.53% 24.49% (5.51)% (27.90)% 40.54%#
======== ======== ======== ======== ======== ========
Total Return, Based on Net Asset Value** ... 18.63%++ 21.59% 28.27% (2.43)% (3.68)% 33.04%
======== ======== ======== ======== ======== ========
Net Assets, End of Period (000's) .......... $163,329 $137,712 $113,433 $90,841 $93,347 $93,518
======== ======== ======== ======== ======== ========
Ratios to Average Net Assets:
Net investment income ................... (0.82)%+ 0.61% 0.97% 1.12% 0.85% 1.30%
Expenses(3) ............................. 1.18+ 1.29 1.42 1.42 1.69 1.69
Portfolio Turnover Rate .................... 3% 16% 47% 58% 42% 46%
Average commissions per share paid on
equity transactions(4) .................. $0.01 $0.01 $0.01 $0.00* -- --
</TABLE>
- ----------
(1) For the three months ended April 30, 1998 (unaudited).
(2) Per share amounts have been calculated using the monthly average shares
method, rather than the undistributed net investment income method, because
it more accurately reflects the per share data for the period.
(3) 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 ratios 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.
(4) As of September 1995, the SEC instituted new guidelines requiring the
disclosure of average commissions per share.
# 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).
* Amount represents less than $0.01.
** The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
14
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THE ITALY FUND INC.
Quarterly Results of Operations (unaudited)
================================================================================
<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)
July 31, 1997 ..... 1,945,510 0.20 1,591,023 0.17 8,346,576 0.88 9,937,599 1.05
October 31, 1997 .. 18,406 0.00 (364,305) (0.04) 5,549,880 0.59 5,185,575 0.55
January 31, 1998 .. 79,657 0.01 (294,155) (0.03) 21,348,352 2.24 21,054,197 2.21
April 30, 1998 .... 146,182 0.02 (326,512) (0.03) 25,944,182 2.73 25,617,670 2.70
</TABLE>
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THE ITALY FUND INC.
Dividend Reinvestment and Cash Purchase Plan (unaudited)
================================================================================
Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan
("Plan"), a shareholder of the Fund whose shares are registered in his own name
will automatically be a participant in the Plan and will have all distributions
automatically reinvested in additional shares of the Fund by First Data Investor
Services Group, Inc., ("First Data"), as dividend-paying agent under the Plan,
unless the shareholder informs First Data that he elects to receive
distributions in cash. Distributions with respect to shares registered in the
name of a broker-dealer or nominee ("Nominee"), which holds shares for others
(that is, in "street name"), may be reinvested by the Nominee in additional
shares under the Plan, but only if the service is provided by the Nominee and
the Nominee makes an election on behalf of the shareholder to participate in the
Plan. Investors who own Fund shares registered in street name should consult
their 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 receive in
lieu of a cash dividend is determined in the following manner. Whenever the
market price of Fund shares is equal to or exceeds the net asset value of 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 the greater of (i) net asset value per
share or (ii) 95% of the then current market 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. Additionally, if
the market price exceeds the net asset value of Fund shares before First Data
has completed its purchases, First Data is permitted to cease purchasing shares
and the Fund may issue the remaining shares at the greater of (a) net asset
value or (b) 95% of the then current market price.
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.
16
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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 no 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.
----------
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 MANAGER AND OFFICERS
ADMINISTRATOR Heath B. McLendon
Chairman of the Board
Mutual Management Corp.
388 Greenwich Street Mario d'Urso
New York, New York 10013 President
ADVISORY BOARD Lewis E. Daidone
Senior Vice President
Andrea Farace and Treasurer
Pierre Henchoz
Dott. Pietro Manes Rein W. van der Does
Vice President
DIRECTORS and Investment Officer
Heath B. McLendon Irving P. David
Paolo M. Cucchi Controller
Alessandro C. di Montezemolo
Dr. Paul R. Hardin Christina T. Sydor
George M. Pavia Secretary
Mario d'Urso
James J. Crisona, Emeritus
- --------------------------------------------------------------------------------
18
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THE ITALY FUND INC.
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- --------------------------------------------------------------------------------
This report is intended only for the shareholders of The Italy Fund Inc. 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) 816-6082
FD01141 6/98
Quarterly
Report
April 30, 1998
