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Annual Report
January 31, 2000
[PICTURE]
[LOGO OF ITALY FUND, INC.]
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[LOGO]
Dear Fellow Shareholder:
Un anno buono! -- A good year! -- summarizes the operating results and stock
performance of The Italy Fund Inc. ("Fund") during the fiscal year ended January
31, 2000. So it is with great pleasure that we provide you with this annual
report and review of operations as well as the portfolio of holdings for the
Fund for the fiscal year ended January 31, 2000.
Andamento -- Performance
The Fund provided stockholders with another year of strong performance returns,
handsomely outdistancing the returns of the major market indices representing
the Italian stock market. For the fiscal year ended January 31, 2000, the Fund
provided stockholders with a return of 35.61% on their investment (based on
market value). The Fund's market price rose to $16.69 per share on January
31, 2000 from $14.94 on January 31, 1999 and the Fund paid $3.18 per share in
total distributions.
This strong performance was earned in a stock market that did not readily offer
high returns. For example, during this same twelve-month period, the BCI General
Index, composed of 296 companies trading on the Milan Stock Exchange, had a
total return of 2.92%. In comparison, the Milan MIBtel 30 Index* returned
3.05% and the widely followed Morgan Stanley Capital International Italy Index
("MSCI Italy")** returned a negative 0.16% for the same time period. Later on in
this letter we review some of the reasons for the Fund's extraordinary
performance in comparison to the overall Italian market and also walk through
some of the factors affecting the Italian economy and its borsa (stock market).
First, however, we want to take a moment to review the longer-term performance
of the Fund. For the three and five-year periods ended January 31, 2000, the
Fund has provided investors with similarly strong results. The average annual
returns for the three- and five-year periods ended January 31, 2000 were 27.89%
and 20.07%, respectively (based on market value). In comparison, the MSCI Italy
returned 20.91% and 15.81%,respectively, for the same time periods.
- ----------
* 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.
** The MSCI Italy is comprised of 50 companies traded on the Milan Stock
Exchange.
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We are also pleased to report that the Fund has earned an overall four-star
rating from Morningstar, Inc. It earned a four-star rating for the three-year
period, a four-star rating for the five-year period and a three-star rating for
the ten-year period ended January 31, 2000.***
During the past fiscal year the Fund continued to repurchase shares of its
common stock on the New York Stock Exchange and subsequently retire them. This
repurchase program has added liquidity to the market for the benefit of
investors who wish to sell their shares, while also benefiting long-term
shareholders by substantially increasing the Fund's net asset value ("NAV").
Since the repurchase plan began in October 1998, the Fund has repurchased and
retired 1,150,375 shares at a cost of over $17 million. This represents 12.1% of
the shares originally issued, and has increased the portfolio's NAV by 34.0
cents per share. In an effort to substantially decrease the discount to NAV, it
is the Fund's Board of Directors and management's current intention to continue
its active share repurchase program. While these things are difficult to
measure, we believe that the share buy back program has had, to date, a
measurable impact on reducing the discount. There can be no assurance that the
Board of Directors will continue this program.
La Borsa e l'Economia Italiano -- The Stock Market and the Italian Economy
In 1999, Italy underperformed most other European stock markets. Its performance
was like that of the Italian economy -- sluggish and hobbled by depressed
consumption and capital spending. The primary reason for this unremarkable
performance is that the Italian stock market is more sensitive to interest rates
than other European bourses. The rise in interest rates during the last 13
months negatively affected the financial stocks and led them to underperform.
Financial stocks, unfortunately, account for more than 40% of the total
capitalization of the Italian stock market. Disappointment over the Bank of
Italy's decision to block several corporate deals caused the banking sector to
also perform poorly. Finally, the cyclical industrial sector -- which performed
nicely in other European markets -- failed to rally in Italy.
- ----------
*** Morningstar, Inc. proprietary ratings reflect historical risk adjusted
performance as of January 31, 2000. Ratings are load-adjusted,updated
monthly and subject to change. Morningstar ratings are calculated from each
fund's three, five and ten-year average annual returns (if applicable) in
excess of 90-day Treasury bill returns with appropriate fee adjustment and
a risk factor that reflects fund performance below 90-day T-bill returns.
The highest Morningstar rating is five stars; the lowest is one star. The
top 10% of the funds in a broad asset class receive five stars; the next
22.5% receive four stars, the next 35% receive three stars, the next 22.5%
receive two stars and the next 10% receive one star.For the three-, five-
and ten-year period, there were 70, 68 and 25 funds respectively, in the
International Equity class.
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La Nostra Strategia -- Our Strategy
Given this rather disappointing review of the Italian stock market and the
returns of the major Italian stock indices, investors may very well wonder if we
as portfolio managers resorted to alchemy or won the favor of Mercury, the Roman
god of merchants as well as messenger to the gods, to produce a total return on
NAV of 29.10% for the 12 months ended January 31, 2000. The answer is neither.
We attribute the superb performance for investors to two factors: our stock
selection process and the closed-end structure of the fund that supports it.
We take a 'bottom-up' approach to stock selection, 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. The closed-end structure of the Fund allows us to
purchase smaller companies ("small capitalization") and private placements that
are generally less liquid than larger companies but offer greater long-term
growth potential. Of the 27 stocks in the portfolio, 11 are small cap names --or
at least started out that way.
Three small-cap stocks that contributed positively to the Fund's recent
performance are Tiscali, Autogrill, and Buffetti:
. Tiscali is Italy's first Internet service provider. We purchased 10,000
shares during the initial public offering (IPO) at a price of 46 euros per
share and bought another 15,000 shares in the aftermarket. After taking
some partial profits during the past year when the stock reached 140 euros
per share, the price of our remaining 15,000 shares has soared to 870
euros per share.
. Autogrill is a familiar name to anyone who has driven on the roads of
Italy. It is Europe's largest modern retail catering group and operator
of quick-service restaurants, including mid-priced Autogrill, high-end
Ciao, and Spizzico (pizza) eateries. Its original cost was 1.7 euros per
share, and it recently traded at 10.53 euros per share.
. Buffetti, the Italian market leader in office products and services, has
doubled in price during the last three months.
Since we reported to you last quarter, we reduced our positions in Telecom
Italia, TIM and ENI. Telecom Italia (TI) provides fixed and mobile telephone
telecommunication services while TIM offers a complete range of cellular
services; ENI is an integrated energy company. The prices of TI and TIM doubled
during the last three months,and despite the reductions in TI and TIM, the Fund
remains well positioned with 33.40% of the portfolio invested in the
telecommunications sector. We also switched 400,000 shares of TI into one
million shares of Tecnost, which owns 55% of TI, as this holding company has
more financial leverage and is selling at a discount to its TI holdings.
The Fund also has a large allocation of its portfolio in the banking industry.
We added 500,000 shares to the position in Banca Fideuram and sold BNL, Banco
Popolari di
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[LOGO]
Bergamo, Banco Popolari di Lodi, San Paolo--IMI, and Monte Dei Paschi di Siena.
After its stock price advanced by 75% during this fiscal quarter, Banco Fideuram
represented 8% of the portfolio. Although we eliminated many banks from the
portfolio, we believe that Banco Fideuram has some superior characteristics. It
is a pure play on Italy's increasing demand for personal financial services; its
funds under management are projected to double by 2001; and it has a sharper
focus on equities, which is important in Italy's declining bond market.
Uno Sguardo al Futuro -- A Look at the Future
While we remain very optimistic about the opportunities in the Italian stock
market we do not consider the past year to be a predictor of its future.
However, Italian stock valuations continue to be less expensive than in the rest
of Europe; Italy is currently selling at 10.2 times year 2000 price/cash flow,
while Europe is at 12.8 times and the U.S. at 16.4 times times 2000 price/cash
flow. Based on price/book valuations, Italy is also much cheaper, at 3.1 times
versus 3.5 times in Europe. Also, due to restructuring and a lower tax rate
(IRAP effect), we anticipate corporate profits to grow by about 25% and 17% in
2000 and 2001, respectively. This is well above the corporate profits of other
European countries.
In addition to the relative undervaluation and underperformance of its stock
market versus the European markets during the last ten years, there are many
changes currently taking place in Italy that cause us to remain bullish on
investing in Italy. We believe that the Italian equity market is in a secular
bull trend, further propelled by the switch by private investors from fixed
income to equity mutual funds.
In conclusion, we look forward to what we believe will be another year of
positive performance returns from The Italy Fund Inc. and we thank you for your
continued confidence. We look forward to serving your investment needs in the
new millennium.
Sincerely,
/s/ Heath B. McLendon /s/ Mario d' Urso
- ---------------------- ------------------
Heath B. McLendon Mario d'Urso
Chairman President
/s/ Rein W. van der Does
- -------------------------
Rein W. van der Does
Vice President and Investment Officer
March 15,2000
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The Italy Fund's Sectorial Structure*
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January 31, 2000 (unaudited)
Telecommunications -
Wireless 14.7%
Utilities 0.3%
Automotive 3.4%
Banking 21.4%
Telecommunications -
Telephone 18.7%
Retail 4.9%
Miscellaneous 0.1%
Publishing 4.9%
Insurance 11.4%
Broadcasting 3.1%
Construction 1.6%
Consumer Cyclical Textiles 2.7%
Consumer Staples - Food 3.6%
Consumer Staples - Retail 1.7%
Energy Exploration 1.8%
Energy - International 4.8%
Engineering 0.9%
BCI Index Sectorial Structure
- --------------------------------------------------------------------------------
January 31, 2000 (unaudited)
Miscellaneous 1.4%
Textiles 1.4%
Automotive 3.1%
Banking 22.6%
Telecommunications 42.7%
Paper & Printing 6.4%
Insurance 9.7%
Construction 1.1%
Consumer Products 5.8%
Energy 4.8%
Engineering 0.5%
Food 1.8%
* As a percentage of total investments.
5
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The Italy Fund Inc.
Schedule of Investments as of January 31, 2000
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Shares Security Value
- --------------------------------------------------------------------------------
COMMON STOCK -- 100%
Automotive -- 3.4%
331,250 Brembo S.p.A. ............................... $ 3,237,699
800,000 Ducati Motor Holding S.p.A.# ................ 2,030,369
-----------
5,268,068
-----------
Banking -- 21.4%
1,300,000 Banca Fideuram S.p.A.@ ...................... 12,862,887
150,000 BIPOP - Carire S.p.A.@ ...................... 12,706,442
100,000 Banca Popolare Commercio e Industria@ ....... 2,928,342
700,000 Banca Popolare di Milano .................... 4,925,642
-----------
33,423,313
-----------
Broadcasting -- 3.1%
300,000 Mediaset S.p.A.@ ............................ 4,747,085
-----------
Construction -- 1.6%
600,000 Buzzi Unicem S.p.A.di Risp NC++ ............. 2,547,746
-----------
Consumer Cyclical Textiles -- 2.7%
40,000 Gucci Group N.V.-- NY Registered Shares ..... 4,272,500
-----------
Consumer Staples - Food -- 3.6%
544,027 Autogrill S.p.A.@ ........................... 5,605,914
-----------
Consumer Staples - Retail -- 1.7%
140,000 Industrie Natuzzi S.p.A.ADR ................. 1,557,500
260,000 Recordati S.p.A.di Risp NC++ ................ 1,098,936
-----------
2,656,436
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Energy Exploration -- 1.8%
800,000 Saipem S.p.A. ............................... 2,738,729
-----------
Energy - International -- 4.8%
1,600,000 ENI S.p.A.@. ................................ 7,546,963
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Engineering -- 0.9%
180,000 Danieli & Co. ............................... 809,760
266,750 Danieli & Co.di Risp NC++. .................. 573,650
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1,383,410
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See Notes to Financial Statements.
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The Italy Fund Inc.
Schedule of Investments as of January 31, 2000 (continued)
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Shares Security Value
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Insurance -- 11.4%
494,999 Alleanza Assicurazioni S.p.A.@ ..............$ 4,724,884
350,000 Assicurazioni Generali S.p.A.@ .............. 9,851,969
500,000 Bayerische Vita S.p.A. ...................... 3,267,846
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17,844,699
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Miscellaneous -- 0.1%
850,000 Europa Investimenti#+ ....................... 193,277
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Publishing -- 4.9%
593,316 Gruppo Editoriale L'Espresso ................ 7,623,783
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Retail -- 4.9%
500,000 Buffetti S.p.A. ............................. 7,602,145
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Telecommunications - Telephone -- 18.7%
1,100,000 Telecom Italia S.p.A.@ ...................... 17,915,036
1,100,000 Telecom Italia S.p.A.di Risp NC@++ .......... 7,499,217
1,000,000 Tecnost S.p.A.# ............................. 3,684,643
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29,098,896
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Telecommunications - Wireless -- 14.7%
1,100,000 Telecom Italia Mobile S.p.A. ................ 12,162,551
1,000,000 Telecom Italia Mobile S.p.A.di Risp NC++ .... 3,985,011
15,000 Tiscali S.p.A.@# ............................ 6,816,541
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22,964,103
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Utilities -- 0.3%
25,000 ACEA S.p.A.# ................................ 420,711
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TOTAL INVESTMENTS
AT VALUE -- 100%
(Cost-- $85,075,041*) .......................$155,937,778
============
@ All or a portion of this security is on loan (See Note 6).
# Non-income producing security.
++ Risp NC - Risparmio Non-Convertible (non-covertible 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.
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The Italy Fund Inc.
Statement of Assets and Liabilities
For the Year Ended January 31, 2000
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ASSETS:
Investments,at value (Cost-- $85,075,041) ........................ $155,937,778
Foreign currency,at value (Cost-- $1,988,948) .................... 1,940,839
Cash ............................................................. 132,229
Collateral for securities on loan (Note 6) ....................... 39,058,441
Receivable for securities sold ................................... 2,945,206
Dividends and interest receivable ................................ 12,076
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Total Assets ..................................................... 200,026,569
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LIABILITIES:
Payable for securities on loan (Note 6) .......................... 39,058,441
Management fees payable .......................................... 129,520
Accrued expenses ................................................. 107,742
------------
Total Liabilities ................................................ 39,295,703
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Total Net Assets ................................................. $160,730,866
============
NET ASSETS:
Par value of capital shares ...................................... $ 83,527
Capital paid in excess of par value .............................. 94,837,883
Treasury stock,at cost (Note 7) .................................. (17,073,459)
Undistributed net investment income .............................. 1,668,382
Accumulated net realized gain from security transactions ......... 10,421,141
Net unrealized appreciation of investments and foreign currencies. 70,793,392
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Total Net Assets
(Equivalent to $19.24 a share on 8,352,714 shares of $0.01
par value outstanding; 20,000,000 shares authorized) ............. $160,730,866
============
See Notes to Financial Statements.
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The Italy Fund Inc.
Statement of Operations
For the Year Ended January 31, 2000
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INVESTMENT INCOME:
Dividends ........................................................ $ 3,135,978
Interest ......................................................... 261,902
Less:Foreign withholding tax ..................................... (456,543)
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Total Investment Income .......................................... 2,941,337
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EXPENSES:
Management fees (Note 2) ......................................... 1,472,338
Custody .......................................................... 123,001
Audit and legal .................................................. 89,000
Directors'fees ................................................... 87,301
Shareholder communications ....................................... 56,500
Shareholder and system servicing fees ............................ 48,000
Other ............................................................ 16,029
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Total Expenses ................................................... 1,892,169
-----------
Net Investment Income ............................................ 1,049,168
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REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) ....... 31,997,072
Foreign currency transactions ................................. (348,368)
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Net Realized Gain ................................................ 31,648,704
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Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of year ............................................. 69,844,785
End of year ................................................... 70,793,392
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Increase in Net Unrealized Appreciation .......................... 948,607
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Net Gain on Investments and Foreign Currencies ................... 32,597,311
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Increase in Net Assets From Operations ........................... $33,646,479
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See Notes to Financial Statements.
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The Italy Fund Inc.
Statements of Changes in Net Assets
For the Years Ended January 31,
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2000 1999
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OPERATIONS:
Net investment income ........................ $ 1,049,168 $ 937,810
Net realized gains ........................... 31,648,704 16,172,261
Increase in net unrealized appreciation ...... 948,607 20,528,139
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Increase in Net Assets From Operations ....... 33,646,479 37,638,210
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DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ........................ (2,060,542) (1,902,135)
Net realized gains ........................... (24,858,556) (2,370,825)
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Decrease in Net Assets From
Distributions to Shareholders ............. (26,919,098) (4,272,960)
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FUND SHARE TRANSACTIONS:
Treasury stock acquired ...................... (13,678,215) (3,395,244)
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Decrease in Net Assets
From Fund Share Transactions .............. (13,678,215) (3,395,244)
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Increase (Decrease) in Net Assets ............ (6,950,834) 29,970,006
NET ASSETS:
Beginning of year ............................ 167,681,700 137,711,694
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End of year* ................................. $ 160,730,866 $ 167,681,700
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* Includes undistributed (overdistributed) net
investment income of: ...................... $ 1,668,382 $ (119,297)
============= =============
See Notes to Financial Statements.
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The Italy Fund Inc.
Notes to Financial Statements
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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
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The Italy Fund Inc.
Notes to Financial Statements (continued)
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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"), formerly known as SSBC Fund Management
Inc., a subsidiary of Salomon Smith Barney Holdings, Inc. ("SSBH"), which, in
turn, is a subsidiary of Citigroup Inc. ("Citigroup"), 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 year ended January 31, 2000, SSB received no brokerage commissions.
3. Investments
During the year ended January 31, 2000, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
Purchases ........................................................ $42,381,948
===========
Sales ............................................................ $87,610,409
===========
At January 31, 2000, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation .................................... $75,476,833
Gross unrealized depreciation .................................... (4,614,096)
-----------
Net unrealized appreciation ...................................... $70,862,737
===========
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The Italy Fund Inc.
Notes to Financial Statements (continued)
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4. Securities Valued by the Fund's Board of Directors
One of the Fund's investments is valued at the direction of the Fund's Board of
Directors; this security is restricted as to resale and has been valued in good
faith, taking into consideration the appropriate economic, financial and other
pertinent available information pertaining to the restricted security. The table
below shows the security valued by the Fund's Board of Directors:
<TABLE>
<CAPTION>
Number of Acquisition 1/31/00 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 $193,277 $0.23 0.12% $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.
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.
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The Italy Fund Inc.
Notes to Financial Statements (continued)
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At January 31, 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 $44,083,834.
At January 31, 2000, the cash collateral received for these securities on loan
was invested as follows:
Security Description Value
- ------------------------------------------------------------------------------
Time Deposits:
Banque Bruxelles Lambert London, 5.88% due 2/1/00 $ 1,803,801
Canadian Imperial Bank, G.C., 5.84% due 2/1/00 1,803,801
Credit Agricole Indozuez, G.C., 5.88% due 2/1/00 1,803,800
Norwest Bank, Grand Cayman, 5.88% due 2/1/00 1,803,800
Sun Trust Bank, Atlanta, 5.88% due 2/1/00 1,803,800
Commercial Paper:
Market Street Funding, 5.87% due 2/1/00 1,803,506
Repurchase Agreements:
Bear Stearns, 5.84% due 2/1/00 6,313,302
CS First Boston, 5.82% due 2/1/00 6,229,567
J.P. Morgan Securities, 5.87% due 2/1/00 7,846,532
Morgan Stanley, 5.81% due 2/1/00 7,846,532
- --------------------------------------------------------------------------------
Total $39,058,441
================================================================================
In addition to the above noted cash collateral, the Fund received securities
collateral with a market value of $8,486,250.
Income earned by the Fund from securities loaned for the year ended January 31,
2000 was $256,200.
7. Capital Stock
At January 31, 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 January
31, 2000, repurchased shares totalled 1,150,375.
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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 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 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------
Net Asset Value,
<S> <C> <C> <C> <C> <C>
Beginning of Year ............ $ 18.09 $ 14.49 $ 11.94 $ 9.56 $ 9.82
-------- -------- -------- -------- -------
Income (Loss) From Operations:
Net investment income ........ 0.12 0.17 0.07 0.10 0.15
Net realized and unrealized
gain (loss) .................. 3.94 3.82 2.50 2.52 (0.39)
-------- -------- -------- -------- -------
Total Income (Loss) From
Operations ................... 4.06 3.99 2.57 2.62 (0.24)
-------- -------- -------- -------- -------
Gains From Repurchase of
Treasury Stock ............... 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 Year .. $ 19.24 $ 18.09 $ 14.49 $ 11.94 $ 9.56
======== ======== ======== ======== =======
Market Value, End of Year ..... $ 16.688 $ 14.938 $ 12.125 $ 10.000 $ 8.250
======== ======== ======== ======== =======
Total Return, Based on
Market Value* ................ 35.61% 26.96% 21.53% 24.49% (5.51)%
======== ======== ======== ======== =======
Total Return, Based on
Net Asset Value* ............. 29.10% 28.66% 21.59% 28.27% (2.43)%
======== ======== ======== ======== =======
Net Assets, End of Year (000's) $160,731 $167,682 $137,712 $113,433 $90,841
======== ======== ======== ======== =======
Ratios to Average Net Assets:
Net investment income ........ 0.68% 0.58% 0.61% 0.97% 1.12%
Expenses (1) ................. 1.23 1.22 1.29 1.42 1.42
Portfolio Turnover Rate ...... 28% 22% 16% 47% 58%
</TABLE>
- ----------
(1) 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.
* The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
15
<PAGE>
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The Italy Fund Inc.
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors
of The Italy Fund Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of The Italy Fund Inc. as of January 31, 2000, the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the years in the two-year period then ended,
and the financial highlights for each of the years in the five-year period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
January 31, 2000, by correspondence with the custodian. As to securities sold
but not yet delivered, we performed other appropriate auditing procedures. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Italy Fund Inc. as of January 31, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the years in the two-
year period then ended and the financial highlights for each of the years in the
five-year period then ended, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
New York, New York
March 8, 2000
16
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The Italy Fund Inc.
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
January 31, 2000:
. Total long-term capital gain distributions paid of $24,858,556.
The total amount of income received by the Fund from sources within foreign
countries and possessions of the United States was $0.4068 per share
(representing a total of $3,397,880). The total amount of taxes paid by the Fund
to such countries was $0.0547 per share (representing a total of $456,543).
The above figures may differ from those cited elsewhere in this report due to
differences in the calculations of income and capital gains for Securities and
Exchange Commission (book) purposes and Internal Revenue Service (tax) purposes.
17
<PAGE>
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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
Quarter Ended Total Share Total Share Total Share Total 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)
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
</TABLE>
18
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The Italy Fund Inc.
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On May 19, 1999, the annual meeting of the shareholders of the Fund was held for
the purpose of voting on the following matters:
1. The election of Paul Hardin and George M.Pavia as Directors of the Fund for
a three-year period;and
2. Ratification of the selection of KPMG LLP as the independent auditors of
the Fund for the current fiscal year.
The results of the vote on Proposal 1 were as follows:
Shares % of Shares
Directors* Votes For Voted For
- --------------------------------------------------------------------------------
Paul Hardin 5,643,266.098 96.86%
George M. Pavia 5,634,551.882 96.71
- --------------------------------------------------------------------------------
* The following Directors,representing the balance of the Board of Directors,
continue to serve as Directors: Paolo M. Cucchi, Mario d'Urso and Heath B.
McLendon.
The results of the vote on Proposal 2 were as follows:
<TABLE>
<CAPTION>
Shares % of Shares % of Shares % of
Votes For Shares Voted Against Shares Voted Abstained Shares Abstained
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5,727,852.975 98.31% 77,983.764 1.34% 20,458.493 0.35%
- -----------------------------------------------------------------------------------------
</TABLE>
19
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[LOGO]
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"), formerly known as First Data Investor Services Group, Inc.,
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.
20
<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.
21
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The Italy Fund Inc.
- --------------------------------------------------------------------------------
INVESTMENT MANAGER AND OFFICERS
ADMINISTRATOR
Heath B. McLendon
SSB Citi Fund Management LLC Chairman
388 Greenwich Street
New York, New York 10013 Mario d'Urso
President
ADVISORY BOARD Lewis E. Daidone
Senior Vice President and Treasurer
Pierre Henchoz
Dott. Pietro Manes Rein W. van der Does
Vice President and Investment Officer
DIRECTORS Irving P. David
Controller
Paolo M. Cucchi
Dr. Paul R. Hardin Christina T. Sydor
Heath B. McLendon Secretary
George M. Pavia
Mario d'Urso
James J. Crisona, Emeritus
Alessandro C. di Montezemolo, Emeritus
22
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<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
FD01090 3/00
