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Dear Shareholder:
We are pleased to present the quarterly report for The Italy Fund Inc.
("Fund") for the nine months ended October 31, 1998. As of that date, the Fund's
total net assets were approximately $153 million, and the Fund's net asset value
("NAV") per share was $16.11, down 10.6% for the quarter. This performance
compares to the 13.5% decline over the same time period in the BCI Index (Banco
Commerciale Italiana), a widely followed Italian index that includes all listed
securities on the Milan Stock Exchange. For the nine months ended October
31, 1998, the Fund returned 11.18% on NAV versus a return of 16.11% for the BCI
Index during the same period.
In an effort to reduce the Fund's discount to market value, the Board of
Directors authorized a stock repurchase program. To date, the Fund has
repurchased 82,475 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.
Political Overview
Former Premier Romano Prodi's coalition government (Italy's 55th since World
War II) was toppled when the minority Communist party withdrew their support of
the government in a dispute over the 1999 budget bill, and was replaced by left
wing Democrat Massimo D'Alema. However, as a result of the exit from the
majority of the Communist Refoundation Party, and the entry of the UDR, a party
chaired by the ex-Christian Democrat Cossiga, the newly formed D'Alema
government is moving more to the center of the political spectrum. Italy's new
government is expected to address crucial issues such as institutional reforms,
and continue the pursuit of economic turnaround, in line with the former Prodi
government.
Economic Overview
In our opinion, this has been one of the most challenging quarters (and
years) in recent memory for both money managers and investors. The sharp
deterioration of the world's financial markets, the decline of the U.S. dollar
against many European currencies and the seeming inability of many global
policy-makers to restore confidence led to a near panic in all of Europe's stock
markets in August and September of 1998. Since its all-time high on July 20,
1998, Italy's stock market was even more unpleasant and hostile for many
investors than even Wall Street was as it went down by roughly 36% during this
time.
However, after October 5,1998, Italy's stock market rebounded approximately
24% on the coattails of the Federal Reserve Board twice reducing interest rates
in the U.S. (0.25% on September 29, 1998 and October 15, 1998)(*). In addition,
we think that a good measure of short covering fueled the recent rise of Italy's
stock market. Other factors that helped to shore up investor confidence in the
Italian market during the reporting period included Japan finally passing a
banking reform program as well as interest rate cuts by Italy, Spain, Portugal,
the U.K., Sweden and Canada.
In fact, Italy's unexpectedly large, one-percentage-point, cut in its
discount rate to 4% (the lowest level in over a quarter century) has increased
speculation that the final Euro convergence level for key interest rates could
be even lower than the 3.3% benchmark set by the securities repurchase rate in
Germany and France. Italy's discount rate should continue to converge toward
German levels with a further rate cut expected by year-end.
GDP forecasts for 1998 and 1999 have been revised downwards from 2.2% to
1.7%, and from 2.5% to 2.0%, respectively. These revisions factor in a less
favorable trade balance and weaker than expected domestic private
- ----------
(*) The Fed reduced the federal-funds rate for the third time in seven weeks on
November 17, 1998, after this letter was written.
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[LOGO]ITA
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consumption. On a positive note, inflation continues to be under 2%, wage
deceleration continues and there has been no significant change in the rate of
unemployment, which is slightly above 12%.
Investment Strategies
As noted in our last shareholder letter, we employ a bottom-up approach
toward stock selection. 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, as well as the United States. For example, Italian stocks on
average are selling at 6.4 times 1999 price/cash flow, while European stocks are
selling at 9.4 times price/cash flow and U.S. stocks are selling at 15.0 times
price/cash flow. Over the medium term, we remain bullish on Italian stocks and
believe that they continue to represent good investment opportunities.
The defensive nature of the insurance and telecommunications sectors have led
us to maintain our overweighted positions because we are unsure about future
corporate earnings in 1999. Moreover, we remain underweighted in the banking
industry as we continue to believe that some major Italian banks are overpriced
due to excessive speculation over merger or restructuring possibilities.
During the reporting period, we added to our position in the auto parts
manufacturer Brembo Spa. The company received a major new contract from Mercedes
to supply the braking systems to its S class model. We also added to our stake
in Banco Popolare Commercia & Industria because of its low valuations relative
to other Popolare banks.
Moreover, a new position was established in the publishing company
L'Espresso, a company which we believe will take advantage of strong advertising
growth combined with an unsaturated advertising market relative to GDP compared
to other European countries. Additionally, the coming of the EU on January 1,
1999 should spur greater competition, which in turn should intensify advertising
spending. We also established a position in Cellular Communication International
(the owner of 14.9% in Omnitel, Olivetti's and Mannesmann's cellular vehicle)
as an indirect way of participating in the growth of the Italian mobile
telecommunication market. Olivetti is Italy's number two mobile provider.
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
Rein W. van der Does
Vice President and
Investment Officer
November 16, 1998
2
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[LOGO]ITA
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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 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 Plan and about how you can
participate, please call First Data at (800) 331-1710.
3
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THE ITALY FUND'S SECTORIAL STRUCTURE(*)
OCTOBER 31, 1998 (unaudited)
[PIE CHART]
Utilities 1.1%
Automotive 6.6%
Banking 15.7%
Broadcasting 1.7%
Construction 1.8%
Consumer Cyclical - Textiles 1.1%
Consumer Staples - Food 3.9%
Consumer Staples - Retail 2.8%
Energy Exploration 2.1%
Energy - International 11.0%
Engineering 1.5%
Insurance 18.0%
Publishing 1.8%
Miscellaneous 0.2%
Telecommunications -
Wireless 10.2%
Telecommunications -
Telephone 18.9%
BCI INDEX SECTORIAL STRUCTURE
OCTOBER 31, 1998 (unaudited)
[PIE CHART]
Utilities 0.4%
Automotive 4.6%
Banking 29.9%
Construction 1.5%
Consumer Products 2.0%
Energy 11.9%
Engineering 2.9%
Food 1.6%
Insurance 16.0%
Miscellaneous 2.9%
Telecommunications 24.6%
Textiles 1.7%
(*) As a percentage of total investments.
4
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THE ITALY FUND INC.
Schedule of Investments as of October 31, 1998 (unaudited)
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
COMMON STOCK -- 98.4%
- --------------------------------------------------------------------------------
Automotive -- 6.6%
331,250 Brembo S.p.A .................................... $ 3,527,739
1,000,000 Pirelli S.p.A.+ ................................ 2,853,044
1,525,000 Sogefi S.p.A .................................... 3,695,559
----------
10,076,342
----------
Banking -- 15.7%
800,000 Banca Fideuram S.p.A ............................ 4,602,960
40,000 Banca Popolare di
Bergamo Credito
Varesino S.p.A.+ .............................. 827,761
100,000 Banca Popolare
Commercio e Industria+ ........................ 1,843,492
150,000 Banca Popolare di
Brescia+ ...................................... 3,520,983
800,000 Banca Popolare di Milano ........................ 6,271,082
440,000 Istituto Mobiliare
Italiano S.p.A ................................. 6,760,678
----------
23,826,956
----------
Broadcasting -- 1.7%
400,000 Mediaset S.p.A.+ ............................... 2,537,586
----------
Construction -- 1.8%
600,000 Unicem S.p.A
di Risp NC (*) ................................ 2,809,461
----------
Consumer Cyclical Textiles -- 1.1%
45,000 Gucci Group N.V. --
NY Registered Shares ........................... 1,715,625
----------
Consumer Staples - Food -- 3.9%
544,027 Autogrill S.p.A ................................. 4,077,255
1,212,000 Parmalat Finanziaria
S.p.A.+ ....................................... 1,905,760
----------
5,983,015
----------
Consumer Staples - Retail -- 2.8%
40,000 Industrie Natuzzi
S.p.A. ADR ..................................... $ 727,500
500,000 La Rinascente
S.p.A. di Risp NC (*) .......................... 2,268,275
260,000 Recordati S.p.A .................................
di Risp NC (*) ................................ 1,335,510
----------
4,331,285
----------
Energy Exploration -- 2.1%
700,000 Saipem S.p.A .................................... 3,216,176
----------
Energy - International -- 11.0%
2,800,000 Ente Nazionale
Idrocarburi S.p.A.+ ........................... 16,696,597
----------
Engineering -- 1.5%
180,000 Danieli & Co.+ ................................. 1,230,691
266,750 Danieli & Co. ...................................
di Risp NC (*)+ ............................... 1,026,945
----------
2,257,636
----------
Insurance -- 18.0%
495,001 Alleanza Assicurazioni
S.p.A.+ ....................................... 6,126,742
265,000 Assicurazioni Generali
S.p.A .......................................... 9,450,548
2,500,000 Instituto Nazionale Delle
Assicurazioni+ ................................. 6,912,864
425,700 Riunione Adriatica di
Sicurta S.p.A .................................. 4,940,796
----------
27,430,950
----------
Miscellaneous -- 0.2%
850,000 Europa Investimenti #@ ......................... 233,481
----------
Publishing -- 1.8%
300,000 Gruppo Editoriale
L'Espresso ..................................... 2,665,527
----------
See Notes to Financial Statements.
5
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THE ITALY FUND INC.
Schedule of Investments as of October 31, 1998 (unaudited) (continued)
================================================================================
Shares Security Value
- --------------------------------------------------------------------------------
Telecommunications - Telephone -- 18.9%
2,064,440 Telecom Italia S.p.A.+ ......................... $14,927,732
2,724,500 Telecom Italia S.p.A
di Risp NC (*) ................................ 13,788,390
-----------
28,716,122
-----------
Telecommunications - Wireless -- 10.2%
35,000 Cellular Communications
International Inc.+# .......................... 2,175,469
1,976,000 Telecom Italia
Mobile S.p.A ................................... 11,481,486
500,000 Telecom Italia Mobile
S.p.A. di Risp NC (*) ......................... 1,773,539
-----------
15,430,494
-----------
Utilities -- 1.1%
356,000 Italgas S.p.A ................................... 1,628,484
-----------
TOTAL COMMON
STOCK
(Cost -- $95,432,523) .......................... 149,555,737
-----------
Face
Amount++ Security Value
- --------------------------------------------------------------------------------
TIME DEPOSIT -- 1.6%
- --------------------------------------------------------------------------------
4,000,000,000 Chase Manhattan,
4.625% due 11/2/98
(Cost -- $2,467,308) .......................... 2,441,630
------------
TOTAL INVESTMENTS
AT VALUE -- 100%
(Cost -- $97,899,831**) ........................ $151,997,367
============
- ----------
+ A portion of this security is on loan (See Note 7).
(*) Risp NC -- Risparmio Non-Convertible (non-convertible
savings shares).
# Non-income producing security.
@ Security restricted as to re-sale (See Note 4).
++ Represents local currency.
(**) Aggregate cost for Federal income tax purposes is substantially
the same.
See Notes to Financial Statements.
6
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THE ITALY FUND INC.
Statement of Assets and Liabilities
October 31,1998 (unaudited)
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $97,899,831) ......................... $ 151,997,367
Foreign currency (Cost -- $2,221,430) ............................... 2,193,028
Cash ................................................................ 343,460
Collateral for securities on loan (Note 7) ......................... 29,085,448
Dividends and interest receivable ................................... 221,770
-------------
Total Assets ........................................................ 183,841,073
-------------
LIABILITIES:
Payable for securities on loan (Note 7) ............................. 29,085,448
Payable for securities purchased .................................... 1,500,721
Management fees payable ............................................. 112,405
Payable for open forward foreign currency contracts (Note 8) ....... 174
Accrued expenses .................................................... 106,441
-------------
Total Liabilities ................................................... 30,805,189
-------------
Total Net Assets ...................................................... $ 153,035,884
=============
NET ASSETS:
Par value of capital shares ......................................... $ 95,031
Capital paid in excess of par value ................................. 94,826,379
Treasury Stock,at cost (Note 9) .................................... (54,151)
Undistributed net investment income ................................. 1,786,393
Accumulated net realized gain from
security transactions and foreign currency transactions ........... 2,307,646
Net unrealized appreciation of investments and foreign currencies ... 54,074,586
-------------
Total Net Assets
(Equivalent to $16.11 a share on 9,498,989 shares of $0.01 par value
outstanding; 20,000,000 shares authorized) ....................... $ 153,035,884
=============
</TABLE>
See Notes to Financial Statements.
7
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THE ITALY FUND INC.
Statement of Operations
For the Nine Months Ended October 31, 1998 (unaudited)
================================================================================
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends ........................................................... $ 3,174,121
Interest ............................................................ 304,466
Less: Foreign withholding tax ....................................... (466,352)
-------------
Total Investment Income ............................................. 3,012,235
-------------
EXPENSES:
Management fees (Note 2) ........................................... 1,129,242
Directors' fees ...................................................... 93,152
Custody ............................................................. 93,152
Audit and legal ..................................................... 52,164
Shareholder communications .......................................... 37,261
Shareholder and system servicing fees ............................... 35,398
Other ............................................................... 5,501
-------------
Total Expenses ...................................................... 1,445,870
-------------
Net Investment Income ................................................. 1,566,365
-------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain From:
Security transactions (excluding short-term securities) ........... 8,523,182
Foreign currency transactions ..................................... 530,854
-------------
Net Realized Gain ................................................... 9,054,036
-------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period ............................................... 49,316,646
End of period ..................................................... 54,074,586
-------------
Increase in Net Unrealized Appreciation ............................. 4,757,940
-------------
Net Gain on Investments and Foreign Currencies ........................ 13,811,976
-------------
Increase in Net Assets From Operations ................................ $ 15,378,341
=============
</TABLE>
See Notes to Financial Statements.
8
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THE ITALY FUND INC.
<TABLE>
<CAPTION>
Nine Months
Ended Year
10/31/98 Ended
Statements of Changes in Net Assets (unaudited) 1/31/98
=============================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income ................................................. $ 1,566,365 $ 693,769
Net realized gain ..................................................... 9,054,036 737,808
Increase in net unrealized appreciation ............................... 4,757,940 23,037,449
------------ -----------
Increase in Net Assets From Operations ................................ 15,378,341 24,469,026
------------ -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................................. -- (190,062)
------------ -----------
Decrease in Net Assets From Distributions to Shareholders ............. -- (190,062)
------------ -----------
FUND SHARE TRANSACTIONS:
Treasury stock acquired ............................................... (54,151) --
------------ -----------
Decrease in Net Assets from Fund Share Transactions ................... (54,151) --
------------ -----------
Increase in Net Assets .................................................. 15,324,190 24,278,964
NET ASSETS:
Beginning of period ................................................... 137,711,694 113,432,730
------------ -----------
End of period(*)....................................................... $153,035,884 $137,711,694
============ ============
(*)Includes undistributed (overdistributed) net investment income of: .. $ 1,786,393 $ (310,826)
============ ============
</TABLE>
See Notes to Financial Statements.
9
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[LOGO]ITA
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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.
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
Salomon Smith Barney Inc., another subsidiary of SSBH.
10
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[LOGO]ITA
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THE ITALY FUND INC.
Notes to Financial Statements (unaudited) (continued)
================================================================================
3. Investments
During the nine months ended October 31, 1998, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $21,069,277
- --------------------------------------------------------------------------------
Sales 22,054,268
================================================================================
At October 31, 1998, aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $57,277,743
Gross unrealized depreciation (3,180,207)
- --------------------------------------------------------------------------------
Net unrealized appreciation $54,097,536
================================================================================
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 10/31/98 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 $233,481 $0.27 0.15% $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:
2002 2004 2005
---- ---- ----
Carryforward Amounts . . . . . . . . . $1,011,000 $5,027,000 $178,000
========== ========== ========
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.
11
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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 October 31, 1998, the Fund loaned common stocks having a value of
$27,628,691 and holds the following collateral for loaned securities:
Security Description Value
============================================================================
Time Deposit:
Banque Bruxelles Lambert London, 5.563% due 11/2/98 $ 1,457,348
Banca Commerciale Italiano London, 5.594% due 11/2/98 1,457,348
Bank of Austria, 5.563% due 11/2/98 1,457,348
Deutsche Bank London, 5.500% due 11/2/98 1,457,348
Rabobank,London, 5.594% due 11/2/98 1,457,348
Generale Bank, 5.563% due 11/2/98 1,457,348
Den Norske Bank, 5.563% due 11/2/98 1,457,348
Credit Commerciale London, 5.625% due 11/2/98 1,457,348
Credit Local de France, 5.625% due 11/2/98 1,457,348
Dresdner Bank 5.625% due 11/2/98 1,457,348
Bayerische Landesbank, London 5.625% due 11/2/98 1,457,348
Citibank London, 5.781% due 11/2/98 1,457,348
Landesbank Hessen Thuringen 5.750% due 11/2/98 1,457,348
Credit Communal de Belgique, G.C., 5.375% due 11/2/98 75,085
Commercial Paper:
General Electric Credit, 5.693% due 11/2/98 1,456,657
Ford Motor Credit Corp., 5.692% due 11/2/98 1,456,657
Trident Capital Finance Inc., 5.803% due 11/2/98 1,456,644
New Center Asset Trust 5.723% due 11/2/98 1,456,653
Associate Corp. of North American 5.723% due 11/2/98 1,456,653
Goldman Sachs Group LP, 5.753% due 11/2/98 1,324,227
Loan Participation:
J & H March & McLennan Inc., 5.850% due 11/2/98 1,457,348
- ----------------------------------------------------------------------------
Total $29,085,448
============================================================================
12
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THE ITALY FUND INC.
Notes to Financial Statements (unaudited) (continued)
================================================================================
8. Forward Foreign Currency Contracts
At October 31, 1998, the Fund had open forward foreign currency contracts as
described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rate. The unrealized loss on the contract is reflected
as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Loss
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To Sell:
Italian Lira 2,000,000 $1,220,821 11/2/98 $(174)
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9. Capital Stock
At October 31, 1998, 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
October 31, 1998, 4, 100 shares were repurchased.
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THE ITALY FUND INC.
Financial Highlights
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Set forth below is per share operating performance data for a share of common
stock outstanding throughout each year ended January 31, except where otherwise
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>
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 . . . . . . . . . . . . . . . 0.16 0.07 0.10 0.15 0.09 0.12
Net realized and unrealized gain (loss) . . . . . . 1.46 2.50 2.52 (0.39) 0.06 1.72
-------- -------- -------- ------- ------- -------
Total Income (Loss) From Operations. . . . . . . . . 1.62 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 . . . . . . . . . . . $16.11 $14.49 $11.94 $9.56 $9.82 $9.84
======== ======== ======== ======= ======= =======
Market Value, End of Period . . . . . . . . . . . . . $13.500 $12.125 $10.000 $8.250 $8.750 $12.375
======== ======== ======== ======= ======= =======
Total Return, Based on Market Value(**) . . . . . . . 11.34%++ 21.53% 24.49% (5.51)% (27.90)% 40.54%#
======== ======== ======== ======= ======= =======
Total Return, Based on Net Asset Value(**) . . . . . 11.18%++ 21.59% 28.27% (2.43)% (3.68)% 33.04%
======== ======== ======== ======= ======= =======
Net Assets, End of Period (000's) . . . . . . . . . . $153,036 $137,712 $113,433 $90,841 $93,347 $93,518
======== ======== ======== ======= ======= =======
Ratios to Average Net Assets:
Net investment income. . . . . . . . . . . . . . . 1.31%+ 0.61% 0.97% 1.12% 0.85% 1.30%
Expenses(3). . . . . . . . . . . . . . . . . . . . 1.21+ 1.29 1.42 1.42 1.69 1.69
Portfolio Turnover Rate. . . . . . . . . . . . . . . 14% 16% 47% 58% 42% 46%
</TABLE>
- ----------
(1) For the nine months ended October 31, 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.
# 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).
(**)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.
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THE ITALY FUND INC.
Quarterly Results of Operations (unaudited)
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<TABLE>
<CAPTION>
Net Realized
and Unrealized Net Increase
Gain (Loss) on (Decrease) in
Investment Net Investment Investments and Net Assets
Income Income (Loss) Foreign Currencies From Operations
------------------- --------------------- -------------------- --------------------
Quarter Ended Total Per Share Total Per Share Total Per Share Total Per Share
- ------------- ----- --------- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
April 30, 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
July 31, 1998................... 2,658,231 0.28 2,148,071 0.23 5,682,751 0.60 7,830,822 0.82
October 31, 1998................ 207,822 0.02 (255,194) (0.03) (17,814,957) (1.87) (18,070,151) (1.90)
</TABLE>
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[LOGO]ITA
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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)
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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.
17
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THE ITALY FUND INC.
INVESTMENT MANAGER AND OFFICERS
ADMINISTRATOR Heath B. McLendon
Mutual Management Corp. 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
Vice President
DIRECTORS 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
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THE ITALY FUND INC.
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[LOGO]ITA
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QUARTERLY
REPORT
October 31, 1998
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
FD01045 12/98
