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Dear Shareholder:
We are pleased to present the quarterly report for the Italy Fund Inc.
("Fund") for the period ended April 30, 1999. As of April 30, 1999, the Fund's
total net assets were approximately $157 million, and the Fund's net asset value
("NAV") was $17.91. This represented a 1.00% decrease for the Fund's fiscal
quarter. In comparison, the BCI Index (a widely followed Italian index that
includes all the securities listed on the Milan Stock Exchange) declined 1.28%
during this period. The Mibtel 30 and MSCI Italy Index (an index made up of 55
Italian companies) were also down 1.29% and 1.00% respectively, in U.S. dollar
terms.
In an effort to reduce the Fund's discount to net asset value, the Board
of Directors authorized a stock repurchase program. As of April 30, 1999 the
Fund has repurchased 734,475 shares in the open market. The Fund intends to
repurchase shares of its stock at such times, prices and amounts deemed
advisable. There can be no assurance that the Board of Directors will continue
this program.
A Disappointing Italian Stock Market
Despite merger and acquisition activity in Italy's banking and
telecommunications industries and notwithstanding the 0.5% cut in interest rates
by Europe's central bank in April, Italy's stock market (as well as most other
European stock markets) turned in a disappointing performance the past few
months. Moreover, Italian stocks have been negatively affected by a sluggish
Italian economy and the war in Kosovo. The Euro has been another casualty of the
war and is down about 10% since the beginning of the year. Between January 1 and
May 17, 1999 the major Italian indices are down about 10% in U.S. dollar terms,
but flat in Italian lira terms.
Yet while the equity market posted a weak performance, there have been
some positive developments. One example is Olivetti's hostile takeover of
Telecom Italia. The inability of Mr. Bernabe, the CEO of Telecom Italia to
propose an inviting alternative solution to Olivetti's offer resulted in a
changing of the guard. The successful Olivetti bid should also benefit the
market as a whole, as its part cash offer should flow back into the Italian
equity market.
Economic Overview
Estimated Italian GDP growth of 1.5% in 1999 is disappointing. Yet with a
fiscal stance turning neutral, there is a more accommodating environment for
growth. Estimates point to economic growth stabilizing around current levels on
the back of recovering consumer spending. Also fueling growth is the
government's tax rate reduction to European levels, as corporations were
threatening relocation to relatively low tax-base countries.
Italian bond yields rose 20 basis points over the quarter, on higher
inflation expectations stemming from evidence of a global economic recovery and
OPEC cuts in oil production. Disinflationary pressures will continue to offset
this, with manufacturing/cyclical industries suffering further margin pressures.
With 70% of the Italian market (by market capitalization) oriented toward
defensive-, long-term interest rate-securities, lower interest rates should
benefit such sectors in the short term. The risk, which does not appear likely,
is an inflationary/cyclical boom.
Market Drivers
Pension reform should be a major market driver going forward, as personal
savings are switched from bond and cash holdings into the equity market.
Catalysts to this pension reform include the following: 1) Italians live to an
average age of 78, with a dependency ratio of those over 65 expected to rise to
47% in 2030 from 21.6% in 1990. 2) Far less generous pension benefits are
expected from the state pension system over this time period. 3) Supplemental
pensions are meager, with pension funds totaling a mere $57 billion, or 2.7% of
gross financial assets in 1997. Of this, less than 3% was invested in the equity
market.
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Investment Strategy
We are bottom-up investors who seek solid companies with strong growth
prospects rather than try to define specific economic or market trends. In our
opinion, Italian stock price valuations remain inexpensive (and compelling) when
compared to Europe. For example, Italian stocks on average are selling 8.5 times
1999 price/cash flow, while European stocks and U.S. stocks are selling 11.9
times and 17.7 times 1999 price/cash flow respectively. Moreover, Italy's
price/earnings ratio is around 22.6 versus 23.4 in Europe. Due to corporate
restructuring and lower taxes, we believe that Italian corporate profits should
grow about 14% in 1999 and roughly 16% in 2000, rates of profitability well
above the rest of Europe. Over the medium term, we are bullish on select Italian
securities.
During the Fund's fiscal first quarter, we increased our position in Banca
Popalare di Bergamo and established a new position in Banca Popalare di Lodi
since we believe that with further consolidation of the banking industry, the
shareholder structure of the "popolare" banks might be changed. The reduction of
our San Paolo-IMI position also reflects this trend of a heavier weighting in
these "popolare" banks (which also trade at more reasonable multiples). With
passenger traffic expected to decline more than expected due to Alitalia's
decision to move international flights from Rome to Milan Malpensa, we sold our
position in Aeroporti di Roma. We accepted the $80 tender offer from Cellular
Communications, took some profits in Gucci and L'Espresso and initiated
positions in Buffetti (a supplier of office products) and Ducati (a manufacturer
of sport motorcycles). We continue to overweight the insurance sector because of
a change in pension fund reform led by the government's decision to increase the
tax credit for annual contributions to life insurance policies. We remain
underweight in core industrial stocks as well as the banking industry as many of
the large banks on a valuation basis, appear to be expensive.
In closing, we remain positive on the opportunities presented by Italy's
stock market in the coming years as long as the crisis in Kosovo does not
escalate. Driven by a very accommodating monetary policy, we believe that
Italy's stock market is in a bull phase that has also been propelled mostly by
the switch of Italian investors from bond funds to stock funds.
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
May 27, 1999
2
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THE ITALY FUND'S SECTORIAL STRUCTURE*
APRIL 30, 1999 (unaudited)
[PIE CHART]
Automotive 7.8%
Banking 20.2%
Broadcasting 1.7%
Construction 1.8%
Consumer Cyclical - Textiles 1.5%
Consumer Staples - Food 4.3%
Consumer Staples - Retail 4.0%
Energy - Exploration 1.1%
Energy - International 8.7%
Engineering 1.3%
Insurance 15.8%
Publishing 1.8%
Miscellaneous 1.0%
Retail 0.8%
Telecommunications - Telephone 19.8%
Telecommunications - Wireless 7.4%
Utilities 1.0%
BCI INDEX SECTORIAL STRUCTURE
APRIL 30, 1999 (unaudited)
[PIE CHART]
Automotive 4.3%
Banking 29.9%
Construction 1.4%
Consumer Products 2.2%
Energy 10.5%
Engineering 3.1%
Food 1.4%
Insurance 15.4%
Miscellaneous 3.9%
Telecommunications 26.2%
Textiles 1.4%
Utilities 0.3%
* As a percentage of total investments.
3
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THE ITALY FUND INC.
Schedule of Investments as of April 30, 1999 (unaudited)
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
COMMON STOCK -- 100.0%
- --------------------------------------------------------------------------------
Automotive -- 7.8%
331,250 Brembo S.p.A. ................................. $ 4,030,317
300,000 Ducati Motor
Holding S.p.A.# ............................. 894,115
1,000,000 Pirelli S.p.A.+ ............................... 3,058,677
1,525,000 Sogefi S.p.A. ................................. 4,196,582
-----------
12,179,691
-----------
Banking -- 20.2%
800,000 Banca Fideuram S.p.A.+ ........................ 4,535,009
800,000 Banca Nazionale del
Lavoro# ..................................... 2,733,871
100,000 Banca Popolare
Commercio e Industria+ ...................... 2,321,251
140,000 Banca Popolare di
Bergamo Credito
Varesino S.p.A.+ ............................ 3,526,736
150,000 Banca Popolare di
Brescia+ .................................... 5,167,270
200,000 Banca Popolare di
Lodi ........................................ 2,539,199
700,000 Banca Popolare di
Milano+ ..................................... 5,945,534
329,800 Istituto Bancario San
Paolo di Torino S.p.A.+ ..................... 4,965,249
-----------
31,734,119
-----------
Broadcasting -- 1.7%
300,000 Mediaset S.p.A.+ .............................. 2,600,774
-----------
Construction -- 1.8%
600,000 Unicem S.p.A.
di Risp NC* ................................. 2,862,947
-----------
Consumer Cyclical Textiles -- 1.5%
30,000 Gucci Group N.V.--
NY Registered Shares ........................ 2,263,125
-----------
Consumer Staples - Food -- 4.3%
544,027 Finanziaria Autogrill
S.p.A.+ ..................................... 4,985,101
1,212,000 Parmalat Finanziaria
S.p.A.+ ..................................... 1,749,051
-----------
6,734,152
-----------
Consumer Staples - Retail -- 4.0%
140,000 Industrie Natuzzi
S.p.A. ADR.+ ................................ 2,677,500
500,000 La Rinascente S.p.A.
di Risp NC* ................................. 2,186,356
260,000 Recordati S.p.A.
di Risp NC* ................................. 1,334,137
-----------
6,197,993
-----------
Energy - Exploration -- 1.1%
400,000 Saipem S.p.A. ................................. 1,751,201
-----------
Energy - International -- 8.7%
2,072,000 Ente Nazionale
Idrocarburi S.p.A.+ ......................... 13,639,713
-----------
Engineering -- 1.3%
180,000 Danieli & Co.+ ................................ 1,179,775
266,750 Danieli & Co. di
Risp NC* .................................... 807,435
-----------
1,987,210
-----------
Insurance -- 15.8.%
494,999 Alleanza Assicurazioni
S.p.A.+ ..................................... 5,929,954
315,000 Assicurazioni Generali
S.p.A.+ ..................................... 12,274,329
2,500,000 Instituto Nazionale
Delle Assicurazioni+ ........................ 6,609,852
-----------
24,814,135
-----------
Miscellaneous -- 1.0%
850,000 Europa Investimenti#++ ........................ 209,002
2,500,000 Unione Immobiliare
S.p.A.+ ..................................... 1,428,299
-----------
1,637,301
-----------
See Notes to Financial Statements.
4
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THE ITALY FUND INC.
Schedule of Investments as of April 30, 1999 (unaudited) (continued)
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
Publishing -- 1.8%
200,000 Gruppo Editoriale
L'Espresso+ ................................ $ 2,886,858
------------
Retail -- 0.8%
300,000 Buffetti S.p.A. .............................. 1,386,403
------------
Telecommunications - Telephone -- 19.8%
2,064,440 Telecom Italia S.p.A. ........................ 21,874,528
1,724,500 Telecom Italia S.p.A.
di Risp NC* ................................ 9,270,387
------------
31,144,915
------------
Telecommunications - Wireless -- 7.4%
1,100,000 Telecom Italia Mobile
S.p.A.+ .................................... 6,631,329
1,500,000 Telecom Italia Mobile
S.p.A. di Risp NC* ......................... 4,994,287
------------
11,625,616
------------
Utilities -- 1.0%
356,000 Italgas S.p.A+. .............................. 1,602,637
------------
TOTAL INVESTMENTS
AT VALUE -- 100%
(Cost -- $95,468,421**) ...................... $157,048,790
============
- ----------
# Non-income producing security.
+ All or a portion of this security is on loan (See Note 6).
* Risp NC--Risparmio Non-Convertible (non-convertible savings shares).
++ 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.
5
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THE ITALY FUND INC.
Statement of Assets and Liabilities
April 30, 1999 (unaudited)
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $95,468,421) ........................ $157,048,790
Foreign currency (Cost -- $11,915) ................................. 11,800
Cash ............................................................... 243,778
Collateral for securities on loan (Note 6) ......................... 48,573,662
------------
Total Assets ....................................................... 205,878,030
------------
LIABILITIES:
Payable for securities on loan (Note 6) ............................ 48,573,662
Management fees payable ............................................ 120,363
Accrued expenses ................................................... 169,144
------------
Total Liabilities .................................................. 48,863,169
------------
Total Net Assets ...................................................... $157,014,861
============
NET ASSETS:
Par value of capital shares ........................................ $ 87,686
Capital paid in excess of par value ................................ 94,833,724
Treasury stock, at cost (Note 7) ................................... (10,879,990)
Overdistributed net investment income .............................. (522,229)
Accumulated net realized gain from security transactions
and foreign currency transactions ................................ 11,915,335
Net unrealized appreciation of investments and foreign currencies .. 61,580,335
------------
Total Net Assets
(Equivalent to $17.91 a share on 8,768,614 shares of $0.01 par value
outstanding; 20,000,000 shares authorized) ....................... $157,014,861
============
</TABLE>
See Notes to Financial Statements.
6
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THE ITALY FUND INC.
Statement of Operations
For the Three Months Ended April 30, 1999 (unaudited)
================================================================================
INVESTMENT INCOME:
Dividends .................................................... $ 185,503
Interest ..................................................... 36,676
Less: Foreign withholding tax ................................ (27,826)
-----------
Total Investment Income ...................................... 194,353
-----------
EXPENSES:
Management fees (Note 2) ..................................... 380,621
Custody ...................................................... 33,005
Audit and legal .............................................. 24,282
Directors' fees .............................................. 20,381
Shareholder communications ................................... 12,280
Shareholder and system servicing fees ........................ 8,021
Other ........................................................ 5,661
-----------
Total Expenses ............................................... 484,251
-----------
Net Investment Loss ............................................. (289,898)
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) .... 5,485,289
Foreign currency transactions .............................. (113,034)
-----------
Net Realized Gain ............................................ 5,372,255
-----------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period ........................................ 69,844,785
End of period .............................................. 61,580,335
-----------
Decrease in Net Unrealized Appreciation ...................... (8,264,450)
-----------
Net Loss on Investments and Foreign Currencies .................. (2,892,195)
-----------
Decrease in Net Assets From Operations .......................... $(3,182,093)
===========
See Notes to Financial Statements.
7
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THE ITALY FUND INC.
<TABLE>
<CAPTION>
Three Months
Ended Year
4/30/99 Ended
Statements of Changes in Net Assets (unaudited) 1/31/99
===============================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income (loss) ................................ $ (289,898) $ 937,810
Net realized gain ........................................... 5,372,255 16,172,261
Increase (decrease) in net unrealized appreciation .......... (8,264,450) 20,528,139
------------ ------------
Increase (Decrease) in Net Assets From Operations ........... (3,182,093) 37,638,210
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ....................................... -- (1,902,135)
Net realized gains .......................................... -- (2,370,825)
------------ ------------
Decrease in Net Assets From Distributions to Shareholders ... -- (4,272,960)
------------ ------------
FUND SHARE TRANSACTIONS (NOTE 7):
Treasury stock acquired ..................................... (7,484,746) (3,395,244)
------------ ------------
Decrease in Net Assets From Fund Share Transactions ......... (7,484,746) (3,395,244
------------ ------------
Increase (Decrease) in Net Assets .............................. (10,666,839) 29,970,006
NET ASSETS:
Beginning of period ......................................... 167,681,700 137,711,694
------------ ------------
End of period* .............................................. $157,014,861 $167,681,700
============ ============
*Includes overdistributed net investment income of: ............ $(522,229) $(119,297)
============ ============
</TABLE>
See Notes to Financial Statements.
8
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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. 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"), 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.
9
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THE ITALY FUND INC.
Notes to Financial Statements (unaudited) (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 three months ended April 30, 1999, SSB received no brokerage
commissions.
3. Investments
During the three months ended April 30, 1999, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $11,355,142
- --------------------------------------------------------------------------------
Sales 19,679,672
================================================================================
At April 30, 1999, aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $63,561,913
Gross unrealized depreciation (1,981,544)
- --------------------------------------------------------------------------------
Net unrealized appreciation $61,580,369
================================================================================
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 4/30/99 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 $209,002 $0.25 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.
10
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THE ITALY FUND INC.
Notes to Financial Statements (unaudited) (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 April 30, 1999, the Fund loaned common stocks having a value of
$46,369,859 and holds the following collateral for loaned securities:
Security Description Value
================================================================================
Time Deposit:
National Australia Bank, 4.875% due 5/3/99 $2,378,412
Caisse de Depots et Consign., Paris, 4.875% due 5/3/99 2,378,412
Argentaria Caja Postal Banco Hipote, 4.875% due 5/3/99 2,378,412
Dresdner Bank Grand Cayman, 4.968% due 5/3/99 2,378,412
Caisse National de Credit Agricole, 4.937% due 5/3/99 2,378,412
CommerzBank AG, Frankfurt, 5.125% due 5/3/99 2,378,412
Southtrust Bank of Alabama, G.C., 5.000% due 5/3/99 1,877,693
Repurchase Agreement:
Merrill Lynch Sec./MLPFS, 4.987% due 5/3/99 8,887,748
NationsBanc Montgomery Sec. Inc., 4.987% due 5/3/99 9,701,415
Commercial Paper:
General Electric Credit, 4.952% due 5/3/99 2,377,430
General Motors Acc. Corp., 4.942% due 5/3/99 2,324,084
Associates First Capital, 4.942% due 5/3/99 2,377,432
Wood Street Funding Corp., 5.052% due 5/3/99 1,251,832
BP Capital PLC, 5.102% due 5/3/99 2,377,400
Barton Capital Corp., 5.102% due 5/3/99 1,564,078
Market Street Funding, 5.102% due 5/3/99 1,564,078
- --------------------------------------------------------------------------------
Total $48,573,662
================================================================================
Interest income earned by the Fund from securities loaned for the three
months ended April 30, 1999 was $45,465.
7. Capital Stock
At April 30, 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
April 30, 1999, repurchased shares totalled 734,475.
11
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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, except where
noted. 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(1) 1999 1998 1997 1996 1995
============================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ......... $18.09 $14.49 $11.94 $9.56 $9.82 $9.84
-------- -------- -------- -------- -------- --------
Income (Loss) From Operations:
Net investment income (loss) .............. (0.03) 0.17 0.07 0.10 0.15 0.09
Net realized and unrealized gain (loss) (2) (0.33) 3.82 2.50 2.52 (0.39) 0.06
-------- -------- -------- -------- -------- --------
Total Income (Loss) From Operations .......... (0.36) 3.99 2.57 2.62 (0.24) 0.15
-------- -------- -------- -------- -------- --------
Gains from repurchase of treasury stock (2) .. 0.18 0.07 -- -- -- --
-------- -------- -------- -------- -------- --------
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 Period ............... $17.91 $18.09 $14.49 $11.94 $9.56 $9.82
======== ======== ======== ======== ======== ========
Market Value, End of Period .................. $15.000 $14.938 $12.125 $10.000 $8.250 $8.750
======== ======== ======== ======== ======== ========
Total Return, Based on Market Value* ......... 0.42%++ 26.96% 21.53% 24.49% (5.51)% (27.90)%
======== ======== ======== ======== ======== ========
Total Return, Based on Net Asset Value* ...... (1.00)%++ 28.66% 21.59% 28.27% (2.43)% (3.68)%
======== ======== ======== ======== ======== ========
Net Assets, End of Period (000's) ............ $157,015 $167,682 $137,712 $113,433 $90,841 $93,347
======== ======== ======== ======== ======== ========
Ratios to Average Net Assets:
Net investment income (loss) .............. (0.72)%+ 0.58% 0.61% 0.97% 1.12% 0.85%
Expenses (3) .............................. 1.21+ 1.22 1.29 1.42 1.42 1.69
Portfolio Turnover Rate ...................... 7% 22% 16% 47% 58% 42%
</TABLE>
- ----------
(1) For the three months ended April 30, 1999 (unaudited).
(2) Net realized and unrealized gain (loss) from prior year has been
reclassified to conform with current period presentation. The reallocation
of gain (loss) between operation and treasury stock transactions for the
year ended January 31, 1999 has not been audited by the Fund's external
auditors.
(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.
* 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.
12
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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
April 30, 1999 ...... 194,353 0.02 (289,898) (0.03) (2,892,195) (0.33) (3,182,093) (0.36)
</TABLE>
13
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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.
14
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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.
15
<PAGE>
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THE ITALY FUND INC.
- --------------------------------------------------------------------------------
INVESTMENT MANAGER AND OFFICERS
ADMINISTRATOR
Heath B. McLendon
SSBC Fund 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
Dott. Pietro Manes
Rein W. van der Does
DIRECTORS Vice President
and Investment Officer
Heath B. McLendon
Paolo M. Cucchi Irving P. David
Alessandro C. di Montezemolo Controller
Dr. Paul R. Hardin
George M. Pavia Christina T. Sydor
Mario d'Urso Secretary
James J. Crisona, Emeritus
- --------------------------------------------------------------------------------
16
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- --------------------------------------------------------------------------------
THE ITALY FUND INC.
==========================================================================[LOGO]
Quarterly
Report
April 30, 1999
- --------------------------------------------------------------------------------
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 6/99
