<PAGE>
Quarterly Report
April 30, 2000
[LOGO OF ITALY FUND INC.]
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Dear Fellow Shareholder:
We are pleased to present the quarterly report for The Italy Fund Inc. ("Fund")
for the three months ended April 30, 2000. In this report, we summarize the
period's prevailing economic and market conditions and outline our portfolio
strategy. A detailed summary of the Fund's performance can be found in the
sections that follow. We hope you find this report useful and informative.
Special Shareholder Notices
This is to inform you that Phillip Goldstein and Glenn Goodstein were elected to
the Fund's Board of Directors at the Fund's annual meeting of shareholders on
May 10, 2000. They join Dr. Paul Hardin, Mr. George Pavia and Mr. Heath B.
McLendon as members of the Board of Directors. Messrs. Goldstein and Goodstein
were elected to serve a three-year term. The selection of KPMG LLP as
independent accountants for the fiscal year ending January 31, 2001 was
ratified. Also approved by shareholders was a non-binding shareholder proposal
that the Board of Directors take steps to convert the Fund to an open-end
structure. The actual vote results will be presented in the next shareholder
report, the semi-annual report for the six months ended July 31, 2000.
On May 22, 2000, The Italy Fund announced a long-term capital gain distribution
of $1.2944 per share and $0.2297 per share in ordinary income. As of May 17,
2000, net assets of the Fund were $168,624,780 and its NAV per share was $20.94
based on 8,051,514 shares outstanding.
Andamento -- Performance/1/
For the three-month period ended April 30, 2000, the Fund returned 8.52% based
on net asset value. In comparison, the Morgan Stanley Capital International
Italy Index ("MSCI Italy"),/2/ the Milan MIBtel 30 Index ("MIBtel Index")/3/ and
BCI General Index/4/ returned a negative 2.02%, a positive 1.80% and a positive
2.66%, respectively, for the same time period.
After a strong rally in January and February, the MIBtel Index declined
approximately 15% in mid-March, as many investors began to favor "New
--------------
1 Please note that the Fund's holdings are subject to change and any discussion
of holdings is as of April 30, 2000. Please refer to pages 7 and 8 for a
complete list and percentage breakdown of the Fund's holdings.
2 The Morgan Stanley Capital International Italy Index is comprised of 50
companies traded on the Milan Stock Exchange.
3 The Milan MIBtel 30 Index is comprised of 30 of the most liquid and highly
capitalized stocks listed on the Milan Stock Exchange, which account for 70%
of the exchange's total market cap.
4 The BCI General Index is comprised of 296 companies traded on the Milan Stock
Exchange.
1
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Economy" stocks over "Old Economy"stocks. (The "New Economy" refers to
technology, media and telecommunications ("TMT") companies. The "Old Economy"
refers to those well-established, blue-chip companies.)
During the period, however, the performance of many long-neglected value stocks
began to improve, and shares of several TMT companies declined during the
period. (Value stocks are shares of those companies that are believed to be
undervalued relative to the overall market but have good longer-term business
prospects.)
La Borsa e l'Economia Italiano -- The Stock Market and the Italian Economy
The growth of Italy's Gross Domestic Product ("GDP") in 1999 remained weak in
comparison to the rest of the European Union countries - Austria, Germany, the
Netherlands, Belgium, Greece, Portugal, Denmark, Ireland, Spain, Finland,
Sweden, France, Luxembourg and the United Kingdom. We are confident, however,
that Italy's economy is beginning to demonstrate signs of a turnaround, as
witnessed by the recent increase in export growth.
Inflation, as represented by the Consumer Price Index ("CPI"), recently has
increased, reaching a 2.5% year-on-year in March, a three-year high, driven
mainly by the increase in oil prices. However, due to liberalization measures
implemented in many industries such as telecommunications and utilities in
addition to a stabilization in wages, we anticipate that prices may remain
stable, generally in line with the euro average. (The euro is the single
currency of the European Monetary Union that was adopted by 11 member states on
January 1, 1999. These are Belgium, Germany, Spain, France, Ireland, Italy,
Luxembourg, the Netherlands, Austria, Portugal and Finland.)
Italy's monetary policy has been driven by the decisions of the European Central
Bank ("ECB"). During the past three years, the decline of interest rates in
Italy has been significant, reflecting both lower inflation and the elimination
of the lira's exchange-rate risk, as this currency is now irrevocably tied to
the other EMU currencies. While the fall in real short-term interest rates has
been noteworthy since the end of 1998, we believe that, despite recent rate
increases by the ECB, the positive effect on Italy's economy due to these
interest rate cuts has not yet become pronounced.
We anticipate a further decline in Italy's deficit as a percentage of GDP in
2000 (from 1.9% in 1999 to about 1.3%). Our expectations for a decline in the
deficit may be due entirely to current spending cuts and lower interest
payments, according to official projections. (Of course, there are no guarantees
that our expectations will be realized.)
2
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La Nostra Strategia -- Our Strategy
We utilize a 'bottom-up' approach to stock selection in The Italy Fund, meaning
that we look for solid companies with strong growth prospects rather than trying
to define specific economic or market trends. Our belief is that good companies
come in many different shapes and sizes, and should thrive over the long term
regardless of the latest financial trend.
Earnings growth forecasts for most of Europe are higher, with the exception of
Italy. We believe Italy remains in a period of recovery. However, investors have
recently viewed the TMT industries positively due to a succession of profitable
mergers and acquisitions. In Italy's bond market, with the exchange rate fixed,
in our view, Italian long-term rates, should maintain only a small spread over
comparable German rates (of 20 to 30 basis points/5/). We also believe that
there may only be a small residual risk of default in select Italian bonds.
During the period, the following companies were added to the Fund's portfolio:
. Mediaset, a news organization that has benefited from strong advertising
revenues
. BayerischeVita, a life insurance company
. Gucci, a fashion company that recently purchased the fashion house of Yves
Saint Laurent
. Buzzi Unicem Risp, a construction company
. San Paolo-IMI, a financial services company that continues to increase sales
by implementing a strategy aiming to improve efficiency through technological
advances
The Fund also participated in the initial public offering of e-Biscom, Italy's
high-speed data and wire communications company. We then subsequently eliminated
our holding in e-Biscom, locking in a 37.5% profit.
We reduced the Fund's holdings in banking companies BIPOP and Banca Fideuram, as
both positions in our view, became too large despite excellent fundamentals.
Additionally, the following companies were eliminated from the Fund's portfolio
during the period:
. Despite strong subscriber growth, we eliminated telecommunications company
Tiscali after the stock had reached a high of 1,197 Euros versus its IPO
price of 43 Euros in October 1999.
. We tendered Buffetti into Seat Pagine Gialle, the "yellow pages"telephone
directory company, which is acquiring Telecom Italia's Internet business.
-----------
5 A basis point is 0.01% or one one-hundredth of a percent.
3
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We also reduced the Fund's holdings in Telecom Italia. We reduced the Fund's
position in Telecom Italia ("TI") in order to participate in Olivetti and
increase the Fund's holding in Tecnost. It is widely believed that Mr.
Colaninno, CEO of TI, will shorten the command and control chain by acquiring
the 27% of Tecnost that Olivetti does not own. Olivetti currently owns 73% of
Tecnost, which in turn owns 55% of TI (and TI owns 60% of TIM). Bell Group, a
Luxembourg investment vehicle led by Mr. Colaninno, controls Olivetti with a 29%
stake. A merger between Olivetti and Tecnost would dilute Bell Group's holding
to an estimated 20%, which could make Olivetti an easier takeover target.
The Fund's holdings of TI, TIM, Fideuram, BiPop, L'Espresso and Buffetti had
doubled in price during the November 1999 through January 2000 period. However,
during the last three-month period, these stocks declined. In addition, the
Fund's holdings in ENI and Generali offered competitive returns during the
period.
Uno Sguardo al Futuro -- A Look at the Future
Stock price valuations in Italy continue to be less expensive than the rest of
Europe. Italy is selling at 10.9 times 2000 price-to-cash flow,/6/ while Europe
is at 12.7 times price-to-cash flow and the U.S. at 17.1 times price-to-cash
flow. Based on price-to-book/7/ valuations, Italy is also more inexpensive, 3.1
times vs. 3.5 times for Europe. Due to restructuring and a lower tax rate (IRAP
effect), we anticipate corporate profits may grow by about 28% and 15% in 2000
and 2001, respectively.
Due to the many changes currently taking place in Italian corporations, we
maintain a positive outlook on the stocks of select Italian companies. The
management of many Italian corporations has demonstrated, in our view, a
commitment to implementing strategies that look to proactively expand their
respective businesses, recognizing the importance of enhancing shareholder value
and the increasing relevance of compensation through stock options. We believe
that the shares of many Italian companies, presently undervalued relative to
their European counterparts, represent compelling investment opportunities.
Moreover, in our opinion, the euro is substantially undervalued. We also believe
that the Italian stock market may move higher in the future, largely due to a
continuing switch by individual investors from bond mutual funds to stock mutual
funds./8/
------------
6 The price-to-cash flow is the current share price divided by cash flow per
share for the past twelve months. Cash flow is a measure of a company's
financial health. It equals cash receipts minus cash payments over a given
period of time.
7 The price-to-book ratio is the price of a stock compared to the difference
between a company's assets and liabilities.
8 Of course, no guarantees can be made that this will come to pass.
4
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In closing, thank you for your investment in The Italy Fund Inc. We look forward
to diligently serving your investment needs in this new millennium as we did in
the old.
Sincerely,
/s/ Heath B. McLendon /s/ Mario d'Urso
Heath B. McLendon Mario d'Urso
Chairman President
/s/ Rein W. van der Does
Rein W. van der Does
Vice President and Investment Officer
May 23, 2000
5
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The Italy Fund's Sectorial Structure*
--------------------------------------------------------------------------------
April 30, 2000 (unaudited)
[GRAPH]
Utilities** 0%
Automotive 4%
Banking 24%
Construction 3%
Consumer Cyclical Textiles 4%
Consumer Staples - Food 3%
Consumer Staples - Retail 2%
Energy Exploration 2%
Energy - International 5%
Engineering 1%
Insurance 11%
Miscellaneous 0%**
Media Group 12%
Telecommunications - Telephone 20%
Telecommunications - Wireless 9%
BCI Index Sectorial Structure
--------------------------------------------------------------------------------
April 30, 2000 (unaudited)
[GRAPH]
Automotive 3%
Textiles 1%
Banking 24%
Construction 1%
Energy 6%
Food 2%
Insurance 10%
Paper & Printing 8%
Telecommunications 39%
Miscellaneous 6%
* As a percentage of total investments.
** Represents less than 0.1%.
6
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The Italy Fund Inc.
Schedule of Investments
April 30, 2000 (unaudited)
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Shares Security Value
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COMMON STOCK -- 100%
Automotive -- 3.9%
331,250 Brembo S.p.A ....................................... $ 4,143,153
800,000 Ducati Motor Holding S.p.A.* ....................... 2,114,222
-----------
6,257,375
-----------
Banking -- 24.5%
1,000,000 Banca Fideuram S.p.A ............................... 14,921,673
100,000 Banca Popolare Commercio e Industria+ .............. 2,514,284
700,000 Banca Popolare di Milano+ .......................... 4,199,374
120,000 BIPOP - Carire S.p.A ............................... 10,932,353
500,000 San Paolo - IMI S.p.A............................... 7,035,258
-----------
39,602,942
-----------
Construction -- 2.7%
1,000,000 Buzzi Unicem S.p.A.di Risp NC** .................... 4,428,932
-----------
Consumer Cyclical Textiles -- 3.8%
70,000 Gucci Group N.V.-- NY Registered Shares+ ........... 6,133,750
-----------
Consumer Staples - Food -- 3.2%
544,027 Autogrill S.p.A.+ .................................. 5,198,183
-----------
Consumer Staples - Retail -- 1.7%
140,000 Industrie Natuzzi S.p.A. ADR+ ...................... 1,540,000
260,000 Recordati S.p.A. di Risp NC** ...................... 1,239,900
-----------
2,779,900
-----------
Energy Exploration -- 2.5%
800,000 Saipem S.p.A. ...................................... 3,957,970
-----------
Energy - International -- 4.9%
1,600,000 ENI S.p.A. ......................................... 7,943,645
-----------
Engineering -- 0.8%
180,000 Danieli & Co........................................ 781,624
266,750 Danieli & Co. di Risp NC** ......................... 554,974
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1,336,598
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See Notes to Financial Statements.
7
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The Italy Fund Inc.
Schedule of Investments
April 30, 2000 (unaudited) (continued)
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Shares Security Value
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Insurance -- 11.1%
494,999 Alleanza Assicurazioni S.p.A.+ ..................... $ 5,084,293
300,000 Assicurazioni Generali S.p.A.+ ..................... 8,532,528
600,000 Bayerische Vita S.p.A.+............................. 4,346,914
------------
17,963,735
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Miscellaneous -- 0.1%
4,220 ETF Group# ......................................... 135,351
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Media Group -- 12.1%
403,316 Gruppo Editoriale L'Espresso+ ...................... 5,718,974
400,000 Mediaset S.p.A.+.................................... 6,616,058
1,641,000 Seat - Pagine Gialle S.p.A. ........................ 7,223,014
------------
19,558,046
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Telecommunications - Telephone -- 19.5%
1,500,000 Olivetti S.p.A. .................................... 4,948,374
2,000,000 Tecnost S.p.A. ..................................... 7,095,405
900,000 Telecom Italia S.p.A.+ ............................. 12,620,815
1,100,000 Telecom Italia S.p.A. di Risp NC**+ ................ 6,901,752
------------
31,566,346
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Telecommunications - Wireless -- 8.9%
1,100,000 Telecom Italia Mobile S.p.A.+....................... 10,530,560
1,000,000 Telecom Italia Mobile S.p.A. di Risp NC**+.......... 3,894,908
------------
14,425,468
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Utilities -- 0.3%
25,000 ACEA S.p.A.......................................... 407,809
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TOTAL INVESTMENTS
AT VALUE -- 100%
(Cost -- $104,506,610++)............................ $161,696,050
============
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* Non-income producing security.
** Risp NC - Risparmio Non-Convertible (non-covertible savings shares).
+ All or a portion of this security is on loan (See Note 6).
# 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.
8
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The Italy Fund Inc.
Statement of Assets and Liabilities
April 30, 2000 (unaudited)
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ASSETS:
Investments, at value (Cost -- $104,506,610) ..................... $161,696,050
Foreign currency, at value (Cost -- $4,341,698) .................. 4,143,366
Cash ............................................................. 803,577
Collateral for securities on loan (Note 6) ....................... 37,822,883
Receivable for securities sold ................................... 2,532,795
Dividends and interest receivable ................................ 682,579
------------
Total Assets ..................................................... 207,681,250
------------
LIABILITIES:
Payable for securities on loan (Note 6) .......................... 37,822,883
Payable for securities purchased ................................. 413,409
Management fees payable .......................................... 234,942
Accrued expenses ................................................. 89,976
------------
Total Liabilities ................................................ 38,561,210
------------
Total Net Assets ................................................. $169,120,040
============
NET ASSETS:
Par value of capital shares ...................................... $ 80,999
Capital paid in excess of par value .............................. 72,805,009
Undistributed net investment income .............................. 1,356,990
Accumulated net realized gain from investments ................... 37,980,137
Net unrealized appreciation of investments and foreign currencies. 56,896,905
------------
Total Net Assets
(Equivalent to $20.88 a share on 8,099,914 shares of $0.01
par value outstanding;20,000,000 shares authorized) .............. $169,120,040
============
See Notes to Financial Statements.
9
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The Italy Fund Inc.
Statement of Operations
For the Three Months Ended April 30, 2000 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends ...................................................... $ 809,496
Interest ....................................................... 64,864
Less: Foreign withholding tax .................................. (117,246)
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Total Investment Income......................................... 757,114
--------------
EXPENSES:
Management fees (Note 2) ....................................... 430,480
Custody ........................................................ 29,574
Audit and legal ................................................ 21,399
Trustees' fees ................................................. 20,990
Shareholder communications ..................................... 13,585
Shareholder and system servicing fees .......................... 11,541
Other .......................................................... 3,854
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Total Expenses ................................................. 531,423
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Net Investment Income .......................................... 225,691
--------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities)....... 27,558,996
Foreign currency transactions................................. (537,083)
--------------
Net Realized Gain............................................... 27,021,913
--------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period .......................................... 70,793,392
End of period................................................. 56,896,905
--------------
Decrease in Net Unrealized Appreciation......................... (13,896,487)
--------------
Net Gain on Investments and Foreign Currencies.................. 13,125,426
--------------
Increase in Net Assets From Operations.......................... $ 13,351,117
==============
See Notes to Financial Statements.
10
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The Italy Fund Inc.
Statements of Changes in Net Assets
For the Three Months Ended April 30, 2000 (unaudited)
and the Year Ended January 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
April 30 January 31
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income ................................. $ 225,691 $ 1,049,168
Net realized gains .................................... 27,021,913 31,648,704
Increase (decrease) in net unrealized appreciation .... (13,896,487) 948,607
------------- -------------
Increase in Net Assets From Operations ................ 13,351,117 33,646,479
------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................. -- (2,060,542)
Net realized gains .................................... -- (24,858,556)
------------- -------------
Decrease in Net Assets From
Distributions to Shareholders ....................... -- (26,919,098)
------------- -------------
FUND SHARE TRANSACTIONS (NOTE 7)
Treasury stock acquired ............................... (4,961,943) (13,678,215)
------------- -------------
Decrease in Net Assets From
Fund Share Transactions ............................. (4,961,943) (13,678,215)
------------- -------------
Increase (Decrease) in Net Assets ..................... 8,389,174 (6,950,834)
NET ASSETS:
Beginning of period ................................... 160,730,866 167,681,700
------------- -------------
End of period* ........................................ $ 169,120,040 $ 160,730,866
============= =============
* Includes undistributed net investment
income of ........................................... $ 1,356,990 $ 1,668,382
============= =============
</TABLE>
See Notes to Financial Statements.
11
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The Italy Fund Inc.
Notes to Financial Statements (unaudited)
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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
12
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The Italy Fund Inc.
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
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
SSB Citi Fund Management LLC ("SSBC"), a subsidiary of Salomon Smith Barney
Holdings, Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc., 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.
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, 2000, SSB received no brokerage
commissions.
3. Investments
During the three months ended April 30, 2000, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
Purchases ...................................................... $ 33,935,241
============
Sales .......................................................... $ 35,206,530
============
At April 30,2000, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation .................................. $ 62,220,974
Gross unrealized depreciation .................................. (5,031,534)
------------
Net unrealized appreciation .................................... $ 57,189,440
============
13
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The Italy Fund Inc.
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
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 4/30/00 Value Per Percentage of
Security Shares Date Fair Value Unit Net Assets Cost
--------- --------- ----------- ---------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
ETF Group 4,220 3/13/2000 $135,351 $32.07 0.08% $297,774
</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.
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, 2000, the Fund had loaned common stocks which were collateralized
by cash and securities. The market value for the securities on loan for the Fund
was $37,919,920.
14
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The Italy Fund Inc.
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
At April 30, 2000, the cash collateral received for these securities on loan was
invested as follows:
Security Description Value
================================================================================
Time Deposits:
Abbey National, London, 6.080% due 5/2/00 $ 1,908,646
ABN AMRO Bank, London, 6.080% due 5/2/00 1,908,646
Allied Irish, London, 6.080% due 5/2/00 1,908,646
Banco Bilbao Viz Aregentaria, Milan, 6.080% due 5/2/00 1,908,646
Banco Santander Ch Sa, London, 6.063% due 5/1/00 1,908,646
Bayerische Hypo-Und Vereinsbk, 6.063% due 5/1/00 1,908,646
Bayerische Landesbank, London, 6.080% due 5/2/00 1,908,646
Caisse de Depots et Consign, Paris, 6.063% due 5/1/00 1,908,646
Commerzbank AG, Frankfurt, 6.080% due 5/2/00 1,908,646
Credit Commerciale, London, 6.120% due 5/2/00 1,908,646
Credit Communal de Belgique, 6.063% due 5/1/00 1,908,646
Dresdner Bank, 6.080% due 5/l/00 1,908,646
Fortis Bank, London, 6.080% due 5/2/00 1,908,646
Halifax PLC, 6.080% due 5/2/00 1,908,646
National Bank of Australia, London, 6.080% due 5/2/00 1,908,646
Rabobank, London, 6.080% due 5/2/00 1,908,646
Societe Generale, 6.094% due 5/2/00 1,908,646
Toronto Dominion, London, 6.080% due 5/2/00 1,908,646
Unibank G.C., 6.063% due 5/1/00 989,964
Union Bank of Switzerland, G.C., 6.063% due 5/1/00 568,645
Westdeutsche Landesbank, London, 6.063% due 5/l/00 1,908,646
--------------------------------------------------------------------------------
Total $37,822,883
================================================================================
In addition to the above noted cash collateral, the Fund received securities
collateral with a market value of $1,126,761.
Income earned by the Fund from securities loaned for the three months ended
April 30, 2000 was $45,386.
7. Capital Stock
At April 30, 2000, the Fund had authority to issue 20,000,000 shares of common
stock with a par value of $0.01 per share.
On October 27, 1998, the Fund commenced a share repurchase plan. As of April 30,
2000, repurchased shares totalled 1,403,175.
15
<PAGE>
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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>
2000(1) 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period ........................ $ 19.24 $ 18.09 $ 14.49 $ 11.94 $ 9.56 $ 9.82
---------- --------- --------- ---------- --------- ---------
Income (Loss) From Operations:
Net investment income ...................... 0.03 0.12 0.17 0.07 0.10 0.15
Net realized and unrealized gain (loss) .... 1.50 3.94 3.82 2.50 2.52 (0.39)
---------- --------- --------- ---------- --------- ---------
Total Income (Loss) From Operations .......... 1.53 4.06 3.99 2.57 2.62 (0.24)
---------- --------- --------- ---------- --------- ---------
Gain (Loss) From Repurchase of
Treasury Stock ........................... 0.11 0.27 0.07 -- -- --
---------- --------- --------- ---------- --------- ---------
Less Distributions From:
Net investment income ...................... -- (0.24) (0.20) (0.02) (0.24) (0.02)
Net realized gains ......................... -- (2.94) (0.26) -- -- --
---------- --------- --------- ---------- --------- ---------
Total Distributions .......................... -- (3.18) (0.46) (0.02) (0.24) (0.02)
---------- --------- --------- ---------- --------- ---------
Net Asset Value, End of Period ............... $ 20.88 $ 19.24 $ 18.09 $ 14.49 $ 11.94 $ 9.56
========== ========= ========= ========== ========= =========
Market Value, End of Period .................. $ 18.125 $ 16.688 $ 14.938 $ 12.125 $ 10.000 $ 8.250
========== ========= ========= ========== ========= =========
Total Return, Based on
Market Value (2) ........................... 8.61%++ 35.61% 26.96% 21.53% 24.49% (5.51)%
========== ========= ========= ========== ========= =========
Total Return, Based on
Net Asset Value (2) ........................ 8.52%++ 29.10% 28.66% 21.59% 28.27% (2.43)%
========== ========= ========= ========== ========= =========
Net Assets, End of Period (000's) ............ $ 169,120 $ 160,731 $ 167,682 $ 137,712 $ 113,433 $ 90,841
========== ========= ========= ========== ========= =========
Ratios to Average Net Assets:
Net investment income ...................... 0.50%+ 0.68% 0.58% 0.61% 0.97% 1.12%
Expenses (3) ............................... 1.18+ 1.23 1.22 1.29 1.42 1.42
Portfolio Turnover Rate ...................... 20% 28% 22% 16% 47% 58%
</TABLE>
------------
(1) For the three months ended April 30, 2000 (unaudited).
(2) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
(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.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
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
------------------- ------------------- ------------------- -------------------
Per Per Per Per
Quarter Ended Total Share Total Share Total Share Total Share
----------- ----- ---------- ------ ----------- ----- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)
July 31, 1999.......... 2,483,951 0.29 2,020,175 0.23 (3,929,497) (0.46) (1,909,322) (0.22)
October 31, 1999....... 59,189 0.01 (392,546) (0.05) (373,073) (0.04) (765,619) (0.09)
January 31, 2000....... 203,844 0.02 (288,563) (0.03) 39,792,076 4.76 39,503,513 4.73
April 30, 2000......... 757,114 0.09 225,691 0.03 13,125,426 1.62 13,351,117 1.65
</TABLE>
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 PFPC Global Fund
Services ("PFPC"), as dividend-paying agent under the Plan, unless the
shareholder informs PFPC 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 PFPC 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, PFPC 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 PFPC has
completed its purchases, PFPC 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 PFPC in any amount from $100 to $3,000 for investment in Fund
shares. PFPC 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.
18
<PAGE>
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The Italy Fund Inc.
Dividend Reinvestment and Cash Purchase Plan (unaudited) (continued)
--------------------------------------------------------------------------------
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 PFPC'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.
A shareholder may terminate participation in the Plan at any time by notifying
PFPC in writing. A termination will be effective immediately if notice is
received by PFPC 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,
PFPC 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 PFPC Global Fund Services
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
SSB Citi Fund Management LLC
388 Greenwich Street
New York, New York 10013
ADVISORY BOARD
Pierre Henchoz
Dott. Pietro Manes
DIRECTORS
Paolo M. Cucchi
Dr. Paul R. Hardin
Heath B. McLendon
George M. Pavia
Mario d'Urso
James J. Crisona, Emeritus
Alessandro C. di Montezemolo, Emeritus
OFFICERS
Heath B. McLendon
Chairman
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
<PAGE>
--------------------------------------------------------------------------------
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 Euro/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 6/00
