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Dear Shareholder:
We are pleased to present the annual report for The Italy Fund Inc.
("Fund") for the year ended January 31, 1999. As of January 31, 1999, the Fund's
total net assets were approximately $168 million, and the Fund's net asset value
("NAV") per share was $18.09. This represented a 14.1% increase for the quarter,
and a 28.7% increase for the year based on NAV. For the fourth quarter, the Fund
outperformed two of its benchmarks, the MSCI Italy Index, and the Mibtel 30 (up
12.8% and 13.5%, respectively), while slightly underperforming the BCI Index (a
widely followed Italian index which includes all the securities listed on the
Milan Stock Exchange), which was up 14.56%. For the full year, the BCI Index
(Banco Commerciale Italiana) rose 33.44%.
In an effort to reduce the Fund's discount to net asset value, the Board of
Directors authorized a stock repurchase program. To date the Fund has
repurchased 234,975 shares in the open market. The Fund intends to repurchase
shares of its stock at such times and prices and in such amounts as is deemed
advisable. There can be no assurance that the Board of Directors will continue
this program.
We are pleased to report that The Italy Fund was rated number one by
Lipper, Inc. in the international closed-end fund category for the two years
ended December 31, 1998.* (Lipper Inc. is a major U.S. fund-tracking
organization.)
The EMU Era
As of January 4th 1999, 11 European countries entered the era of the euro.
(The euro is the new, single currency of eleven European Union countries that
began on January 1, 1999.) This should give Euroland critical mass compared with
the U.S. and Japan, and become an increasingly important issue, as it will
increase fund flow towards and within Euroland, from investors attracted by the
clearer accounting standards and liquidity of these markets. The single monetary
policy will aim at price stability, and Europe should be in a better position to
impose a more balanced economic policy.
In the new environment created by the EMU, companies are encouraged to look
beyond their respective national borders and to establish alliances. Many
European companies are beginning to streamline operations to increase
productivity, enhance shareholder value, and become genuine competitors on the
global scene.
Even domestically, we are beginning to see corporate raiders. Olivetti's
hostile takeover attempt of Telecom Italia is a prime example. We believe that
such unfriendly takeover attempts are just beginning. As a result, corporate
managements, as a defense mechanism, must begin to unlock shareholder value,
which could ultimately have a positive affect on Italian equities.
Economic Overview
Italy's economy continues to recover. Strong domestic demand and higher
exports were the major factors behind Italy's Gross Domestic Product ("GDP")
growth in 1998. With respect to inflation, Italy met all the requirements for
EMU entry which is quite an achievement considering Italy's historically high
level of inflation.
The Italian government's role in the economy has declined as an ambitious
privatization program started in 1992 has begun to bear fruit. According to the
U.S. Department of Commerce, Italian privatizations to date have raised 117.8
trillion lire (in U.S. dollars, $69.3 billion).
Our research analysts report that Europe's mutual fund revolution reached
new heights in 1998. In December 1998, approximately 14 trillion Lire flowed
into the market, almost twice the level of 1997.
- ----------
* Lipper rankings show a Fund's 1-, 5- and 10-year annualized returns (at
NAV) of a particular period. Lipper also compares a fund's returns to the
average of its peer group. The rankings are subject to change every month.
Past performance is not a guarantee of future results. For the 1-, 5- and
10-year periods, ended December 31, 1998, there were 15, 15 and 6 funds,
respectively, in the Lipper peer group category. Different classes share a
common portfolio of securities.
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In the past, mutual fund inflows were going into bond funds. However, low
inflation has allowed the average level of euro-area short-term rates to fall to
their lowest level in decades. The search for yield is attracting households
into the equity market. The shift has been notable, with 46.5 trillion Lire
flowing into equity funds in 1998, versus 30 trillion Lire in 1997, and an
equity outflow of 4 trillion Lire in 1996.
In the United States, strong mutual fund inflows played a sizeable role in
propelling the equity markets to historically high valuations, and the same
effect was seen with respect to European bonds and equities last year. If
euro-area inflows stay high in the next year or two, which seems likely, then
this should create a favorable backdrop for Italian financial assets versus
external benchmarks.
Investment Strategy
We use a bottom-up approach to stock selection in The Italy Fund. That is,
we look for solid companies with strong growth prospects rather than try to
define specific economic or market trends. Our belief is that good companies
will thrive over the long term, regardless of the financial trend of the moment.
In our view, Italian stock price valuations are inexpensive compared to the
rest of Europe. For example, Italian stocks on average are selling at 7.5 times
1999 price/cash flow, while European stocks are selling at 10.9 times price/cash
flow and U.S. stocks are selling at 16.7 times price/cash flow. Italy's
price/earnings ratio is around 21.0 times versus 22.4 times in Europe. Based on
price/book valuations, Italy is also much less expensive than Europe (2.7 times
price/book versus 3.1 times.)
Due to restructuring and lower taxes, we anticipate that corporate profits
in Italy will grow by about 14% for the rest of 1999 as well as in 2000, a rate
that should be higher than the rest of Europe. Therefore, we continue to remain
positive about select Italian investment opportunities over the medium term.
During the Fund's fiscal fourth quarter, we increased our position in
Cellular Communications (the main asset being a 14.9% stake in Omnitel --
Olivetti and Mannesmann's cellular vehicle) after an initial bid for the company
at $65 was considered below fair value by core shareholders. After this initial
$65 bid failed, Olivetti and Mannesmann eventually raised it to $80 per share.
Because of its Internet business, L'Espresso (owner of major Italian
newspapers) advanced roughly 35% in January and we reduced our position by half.
INA recently completed a one-for-one spin-off of its property company Unione
Immobilaire. Because of aggressive new management, and the belief that the
Italian property market is at the bottom of the cycle, we have maintained this
holding in the portfolio. New positions were established in Banca Nazionale del
Lavoro (a company undergoing restructuring) and Aeroporti di Roma. The
government has indicated it will sell its stake in one tranche of Aeroporti di
Roma, with three companies already expressing a potential interest.
We reduced our positions in ENI and Saipem, as the energy industry
continues to look rather unexciting over the short-term. Due to the fact we were
substantially overweighted in Telecom Italia versus the benchmark coupled with
its recent strong performance, we switched about 1 million shares of Telecom
Italia savers into Telecom Italia Mobile (TIM) savers, as management has
indicated that they will buy-back TIM savers with excess generated cash over the
next few years.
Outlook
Nothing has changed during the Fund's fiscal year to alter our positive
medium- and long-term outlook for Italian stocks. On the next page are some of
the key reasons why we remain bullish:
2
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. As noted, Italian mutual fund inflows remain encouraging.
. With the new tax system (IRAP) combined with increased economic activity,
corporate profits in Italy remain healthy. We therefore think Italian
stocks remain relatively inexpensive compared to the U.S. and the rest of
Europe.
. Many foreign investors today are still underweighted in Italian stocks
today. Therefore, any renewed interest in the Italian stock market from
foreign investors could also have a very positive impact on Italian stock
prices over the long term.
Thank you for investing in The Italy Fund and your continued confidence in
our 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
March 2, 1999
3
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Take Advantage of the Fund's Dividend Reinvestment Plan!
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 18. 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 Plan and about how you can
participate, please call First Data Investor Services Group, Inc. at (800)
331-1710.
4
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THE ITALY FUND'S SECTORIAL STRUCTURE*
JANUARY 31, 1999 (unaudited)
[GRAPHIC]
Utilities 1.4%
Automotive 6.2%
Banking 16.9%
Broadcasting 1.8%
Constuction 1.8%
Consumer Cyclical - Textiles 1.8%
Consumer Staples - Food 4.1%
Consumer Staples - Retail 3.1%
Energy - Exploration 0.9%
Energy - International 7.3%
Engineering 1.1%
Insurance 16.1%
Publishing 1.4%
Miscellaneous 3.0%
Telecommunications - Telephone 18.4%
Telecommunications - Wireless 14.7%
BCI INDEX SECTORIAL STRUCTURE
JANUARY 31, 1999 (unaudited)
[GRAPHIC]
Textiles 1.4%
Utilities 0.3%
Automotive 4.3%
Banking 28.7%
Constuction 1.3%
Consumer Products 2.5%
Energy 10.5%
Engineering 3.5%
Food 1.6%
Insurance 15.1%
Miscellaneous 4.2%
Telecommunications 26.6%
*As a percentage of total investments.
5
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THE ITALY FUND INC.
Schedule of Investments as of January 31, 1999
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCK -- 100.0%
- --------------------------------------------------------------------------------
Automotive -- 6.2%
331,250 Brembo S.p.A .............................. $ 3,789,863
1,000,000 Pirelli S.p.A.+ ........................... 2,647,329
1,525,000 Sogefi S.p.A .............................. 3,955,776
------------
10,392,968
------------
Banking -- 16.9%
800,000 Banca Fideuram S.p.A ...................... 5,447,752
800,000 Banca Nazionale del
Lavoro# ................................. 2,425,867
100,000 Banca Popolare
Commercio e Industria ................... 2,291,854
40,000 Banca Popolare di
Bergamo Credito
Varesino S.p.A.+ ........................ 999,875
150,000 Banca Popolare di Brescia ................. 4,781,888
700,000 Banca Popolare di Milano .................. 5,916,344
409,800 Istituto Bancario San
Paolo di Torino S.p.A.+ ................. 6,618,160
------------
28,481,740
------------
Broadcasting -- 1.8%
300,000 Mediaset S.p.A.+ .......................... 2,978,842
------------
Construction -- 1.8%
600,000 Unicem S.p.A.
di Risp NC* ............................. 2,969,643
------------
Consumer Cyclical - Textiles -- 1.8%
45,000 Gucci Group N.V. --
NY Registered Shares+ ................... 3,096,563
------------
Consumer Staples - Food -- 4.1%
544,027 Finanziaria Autogrill
S.p.A ................................... 5,050,960
1,212,000 Parmalat Finanziaria
S.p.A.+ ................................. 1,922,936
------------
6,973,896
------------
Consumer Staples - Retail -- 3.1%
40,000 Industrie Natuzzi
S.p.A. ADR .............................. 850,000
500,000 La Rinascente S.p.A .......................
di Risp NC* ............................. 2,933,527
260,000 Recordati S.p.A ...........................
di Risp NC* ............................. 1,383,993
------------
5,167,520
------------
Energy - Exploration -- 0.9%
400,000 Saipem S.p.A .............................. 1,481,414
------------
Energy - International -- 7.3%
2,072,000 Ente Nazionale
Idrocarburi S.p.A.+ ..................... 12,281,255
------------
Engineering -- 1.1%
180,000 Danieli & Co.+ ............................ 1,019,477
266,750 Danieli & Co. .............................
di Risp NC*+ ............................ 823,114
------------
1,842,591
------------
Insurance -- 16.1%
495,001 Alleanza Assicurazioni
S.p.A.+ ................................. 6,146,263
265,000 Assicurazioni Generali
S.p.A ................................... 11,222,871
2,500,000 Istituto Nazionale
Delle Assicurazioni+ .................... 5,951,097
325,700 Riunione Adriatica
di Sicurta S.p.A ........................ 3,801,825
------------
27,122,056
------------
Miscellaneous -- 3.0%
400,000 Aeroporti di Roma S.p.A.+ ................. 3,301,269
850,000 Europa Investimenti#++ .................... 224,352
2,500,000 Unione Immobiliare
S.p.A.+ ................................. 1,523,265
------------
5,048,886
------------
See Notes to Financial Statements.
6
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THE ITALY FUND INC.
Schedule of Investments as of January 31, 1999 (continued)
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
Publishing -- 1.4%
200,000 Gruppo Editoriale
L'Espresso ............................. $ 2,369,536
------------
Telecommunications - Telephone -- 18.4%
2,064,440 Telecom Italia S.p.A.+ .................... 19,176,449
1,724,500 Telecom Italia S.p.A.
di Risp NC* ............................. 11,725,682
------------
30,902,131
------------
Telecommunications - Wireless -- 14.7%
65,000 Cellular Communications
International, Inc.# .................... 5,195,937
1,976,000 Telecom Italia Mobile
S.p.A ................................... 13,321,297
1,500,000 Telecom Italia Mobile
S.p.A. di Risp NC* ....................... 6,253,762
------------
24,770,996
------------
Utilities -- 1.4%
356,000 Italgas S.p.A. ............................ 2,269,398
------------
TOTAL INVESTMENTS
AT VALUE -- 100%
(Cost -- $98,308,872**) ................... $168,149,435
============
- ----------
+ All or a portion of this security is on loan (See Note 6).
* Risp NC--Risparmio Non-Convertible (non-covertible savings shares).
# Non-income producing security.
++ Security restricted as to re-sale (See Note 4).
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
7
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THE ITALY FUND INC.
Statement of Assets and Liabilities
January 31, 1999
================================================================================
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost -- $98,308,872) ......................... $168,149,435
Collateral for securities on loan (Note 6) .......................... 28,305,572
Receivable for securities sold ...................................... 800,000
------------
Total Assets ........................................................ 197,255,007
------------
LIABILITIES:
Payable for securities on loan (Note 6) ............................. 28,305,572
Payable to bank ..................................................... 1,003,133
Management fees payable ............................................. 125,720
Accrued expenses .................................................... 138,882
------------
Total Liabilities ................................................... 29,573,307
------------
Total Net Assets ...................................................... $167,681,700
============
NET ASSETS:
Par value of capital shares ......................................... $ 92,681
Capital paid in excess of par value ................................. 94,828,729
Treasury stock, at cost (Note 7) .................................... (3,395,244)
Overdistributed net investment income ............................... (119,297)
Accumulated net realized gain from
security transactions and foreign currency transactions ........... 6,430,046
Net unrealized appreciation of investments and foreign currencies ... 69,844,785
------------
Total Net Assets
(Equivalent to $18.09 a share on 9,268,114 shares of $0.01 par value
outstanding; 20,000,000 shares authorized) ........................ $167,681,700
============
</TABLE>
See Notes to Financial Statements
8
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THE ITALY FUND INC.
Statement of Operations
For the Year Ended January 31, 1999
================================================================================
INVESTMENT INCOME:
Dividends .................................................... $ 3,151,401
Interest ..................................................... 210,856
Less: Foreign withholding tax ................................ (452,931)
-----------
Total Investment Income ...................................... 2,909,326
-----------
EXPENSES:
Management fees (Note 2) ..................................... 1,520,016
Custody ...................................................... 124,499
Audit and legal .............................................. 101,210
Directors' fees .............................................. 85,250
Shareholder and system servicing fees ........................ 57,363
Shareholder communications ................................... 49,709
Other ........................................................ 33,469
-----------
Total Expenses ............................................... 1,971,516
-----------
Net Investment Income .......................................... 937,810
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain From:
Security transactions (excluding short-term securities) .... 15,602,387
Foreign currency transactions .............................. 569,874
-----------
Net Realized Gain ............................................ 16,172,261
-----------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of year .......................................... 49,316,646
End of year ................................................ 69,844,785
-----------
Increase in Net Unrealized Appreciation ...................... 20,528,139
-----------
Net Gain on Investments and Foreign Currencies ................. 36,700,400
-----------
Increase in Net Assets From Operations ......................... $37,638,210
===========
See Notes to Financial Statements.
9
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THE ITALY FUND INC.
<TABLE>
<CAPTION>
Year Year
Ended Ended
Statements of Changes in Net Assets 1/31/99 1/31/98
========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income ................................... $ 937,810 $ 693,769
Net realized gain ....................................... 16,172,261 737,808
Increase in net unrealized appreciation ................. 20,528,139 23,037,449
------------ ------------
Increase in Net Assets From Operations .................. 37,638,210 24,469,026
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................... (1,902,135) (190,062)
Net realized gains ...................................... (2,370,825) --
------------ ------------
Decrease in Net Assets From Distributions to Shareholders (4,272,960) (190,062)
------------ ------------
FUND SHARE TRANSACTIONS (NOTE 7):
Treasury stock acquired ................................. (3,395,244) --
------------ ------------
Decrease in Net Assets From Fund Share Transactions ..... (3,395,244) --
------------ ------------
Increase in Net Assets .................................... 29,970,006 24,278,964
NET ASSETS:
Beginning of year ....................................... 137,711,694 113,432,730
------------ ------------
End of year* ............................................ $167,681,700 $137,711,694
============ ============
*Includes overdistributed net investment income of: ....... $ (119,297) $ (310,826)
============ ============
</TABLE>
See Notes to Financial Statements.
10
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THE ITALY FUND INC.
Notes to Financial Statements
================================================================================
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. At January 31, 1999, reclassifications were made to the capital
accounts of the Fund to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations. 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.
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.
2. Management Agreement and Transactions with Affiliated Persons
SSBC Fund Management Inc. ("SSBC"), formally known as Mutual Management
Corp., a subsidiary of Salomon Smith Barney Holdings, Inc. ("SSBH"), acts as
investment manager of the Fund. The Fund pays SSBC 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.
11
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THE ITALY FUND INC.
Notes to Financial Statements (continued)
================================================================================
All officers (except one) and one Director of the Fund are employees of
Salomon Smith Barney Inc. ("SSB"), another subsidiary of SSBH.
For the year ended January 31, 1999, SSB received brokerage commissions of
$1,549.
3. Investments
During the year ended January 31, 1999, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $34,585,441
- --------------------------------------------------------------------------------
Sales 39,401,665
================================================================================
At January 31, 1999, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $71,489,625
Gross unrealized depreciation (1,649,062)
- --------------------------------------------------------------------------------
Net unrealized appreciation $69,840,563
================================================================================
4. Securities Valued by the Fund's Board of Directors
One of the Fund's investments is valued at the direction of the Fund's
Board of Directors; this security is restricted as to resale and has been valued
in good faith, taking into consideration the appropriate economic, financial and
other pertinent available information pertaining to the restricted security. The
table below shows the security valued by the Fund's Board of Directors:
<TABLE>
<CAPTION>
Number of Acquisition 1/31/99 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 $224,352 $0.26 0.13% $623,396
</TABLE>
5. 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 (continued)
================================================================================
6. 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 January 31, 1999, the Fund loaned common stocks having a value of
$26,528,307 and holds the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposits:
Banco Bilbao Nassau, 4.875% due 2/1/99 $ 1,372,431
Bank of America, G.C., 4.875% due 2/1/99 1,372,431
Banque National de Paris, 4.875% due 2/1/99 1,372,431
Bayerische Hypo-Und Vereinsbk, G.C., 4.8438% due 2/1/99 1,372,431
Caisse de Depots et Consign., Paris, 4.8438% due 2/1/99 1,372,432
ING Tokyo, 4.9375% due 2/1/99 1,372,432
Rabobank, Grand Cayman, 4.875% due 2/1/99 1,372,432
Societe Generale, G.C., 4.875% due 2/1/99 1,372,432
Repurchase Agreement:
Merrill Lynch Pierce Fenner Securities, 4.8925% due 2/1/99 4,879,757
Morgan Stanley Dean Witter & Co., 4.8125% due 2/1/99 174,986
NationsBanc Montgomery Securities Inc., 4.8625% due 2/1/99 1,372,432
Commercial Paper:
Concord Minutemen Capital, 4.9534% due 2/2/99 1,371,488
Ford Motor Credit Corp., 4.842% due 2/1/99 1,371,878
General Electric Credit Corp., 4.902% due 2/1/99 1,371,871
Lehman Brothers Holdings, Inc., 5.0151% due 2/1/99 1,295,644
New Center Asset Trust, 4.8319% due 2/1/99 1,371,879
Sheffield Receivable Corp., 4.882% due 2/1/99 1,371,873
Variable Funding Capital Corp., 4.8219% due 2/1/99 1,371,880
Money Market Fund:
Janus Institutional Money Market Fund, 4.9177% due 2/1/99 1,372,432
- --------------------------------------------------------------------------------
Total $28,305,572
================================================================================
Interest income earned by the Fund from securities loaned for the year
ended January 31,1999 was $255,016.
13
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THE ITALY FUND INC.
Notes to Financial Statements (continued)
================================================================================
7. Capital Stock
At January 31, 1999, the Fund had 20,000,000 shares of common stock
authorized with a par value of $0.01 per share.
On October 27, 1998, the Fund commenced a share repurchase plan. As of
January 31, 1999, repurchased shares totalled 234,975.
14
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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 ended January 31. 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>
1999 1998 1997 1996 1995
=======================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year ........... $ 14.49 $ 11.94 $ 9.56 $ 9.82 $ 9.84
-------- -------- -------- ------- -------
Income (Loss) From Operations:
Net investment income ...................... 0.17 0.07 0.10 0.15 0.09
Net realized and unrealized gain (loss) .... 3.89 2.50 2.52 (0.39) 0.06
-------- -------- -------- ------- -------
Total Income (Loss) From Operations .......... 4.06 2.57 2.62 (0.24) 0.15
-------- -------- -------- ------- -------
Less Distributions From:
Net investment income ...................... (0.20) (0.02) (0.24) (0.02) (0.17)
Net realized gains ......................... (0.26) -- -- -- --
-------- -------- -------- ------- -------
Total Distributions .......................... (0.46) (0.02) (0.24) (0.02) (0.17)
-------- -------- -------- ------- -------
Net Asset Value, End of Year ................. $ 18.09 $ 14.49 $ 11.94 $ 9.56 $ 9.82
======== ======== ======== ======= =======
Market Value, End of Year .................... $ 14.938 $ 12.125 $ 10.000 $ 8.250 $ 8.750
======== ======== ======== ======= =======
Total Return, Based on Market Value (1) ...... 26.96% 21.53% 24.49% (5.51)% (27.90)%
======== ======== ======== ======= =======
Total Return, Based on Net Asset Value (1) ... 28.66% 21.59% 28.27% (2.43)% (3.68)%
======== ======== ======== ======= =======
Net Assets, End of Year (000's) .............. $167,682 $137,712 $113,433 $90,841 $93,347
======== ======== ======== ======= =======
Ratios to Average Net Assets:
Net investment income ...................... 0.58% 0.61% 0.97% 1.12% 0.85%
Expenses (2) ............................... 1.22 1.29 1.42 1.42 1.69
Portfolio Turnover Rate ...................... 22% 16% 47% 58% 42%
</TABLE>
- ----------
(1) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
(2) 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.
15
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THE ITALY FUND INC.
Independent Auditors' Report
================================================================================
The Shareholders and Board of Directors
of The Italy Fund Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of The Italy Fund Inc. as of January 31,
1999, the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year period
then ended, and the financial highlights for each of the years in the four-year
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the year ended January 31, 1995 were
audited by other auditors whose report thereon, dated March 10, 1995, expressed
an unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 1999, by correspondence with the custodian. As to securities sold
but not yet delivered, we performed other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Italy Fund Inc. as of January 31, 1999, the results of its operations for the
year then ended, the changes in its net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the four-year period then ended, in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
March 8, 1999
16
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THE ITALY FUND INC.
Quarterly Results of Operations (unaudited)
================================================================================
<TABLE>
<CAPTION>
Net Increase
Net Realized (Decrease) in
Investment Net Investment and Unrealized Net Assets
Income (Loss) Income (Loss) Gain (Loss) 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, 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
July 31, 1998 ........ 2,658,231 0.28 2,148,071 0.23 5,682,751 0.60 7,830,822 0.83
October 31, 1998 ..... 207,822 0.02 (255,194) (0.03) (17,814,957) (1.87) (18,070,151) (1.90)
January 31, 1999 ..... (102,909) (0.01) (628,555) (0.07) 22,888,424 2.47 22,259,869 2.40
</TABLE>
Tax Information (unaudited)
================================================================================
For Federal tax purposes the Fund hereby designates for the fiscal year
ended January 31, 1999:
o Total long-term capital gain distributions paid of $2,370,825.
The total amount of income received by the Fund from sources within foreign
countries and possessions of the United States was $0.3628 per share
(representing a total of $3,362,257). The total amount of taxes paid by the Fund
to such countries was $0.0489 per share (representing a total of $452,931).
The above figures may differ from those cited elsewhere in this report due
to differences in the calculations of income and capital gains for Securities
and Exchange Commission (book) purposes and Internal Revenue Service (tax)
purposes.
17
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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.
18
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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.
19
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THE ITALY FUND INC.
- --------------------------------------------------------------------------------
INVESTMENT MANAGER AND
ADMINISTRATOR
SSBC Fund Management Inc.
388 Greenwich Street
New York, New York 10013
ADVISORY BOARD
Andrea Farace
Pierre Henchoz
Dott. Pietro Manes
DIRECTORS
Heath B. McLendon
Paolo M. Cucchi
Alessandro C. di Montezemolo
Dr. Paul R. Hardin
George M. Pavia
Mario d'Urso
James J. Crisona, Emeritus
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
Vice President and Investment Officer
Irving P. David
Controller
Christina T. Sydor
Secretary
- --------------------------------------------------------------------------------
20
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<PAGE>
THE ITALY FUND INC.
==========================================================================[LOGO]
- --------------------------------------------------------------------------------
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
FD01090 3/99
ANNUAL
REPORT
January 31, 1999
