<PAGE>
Semi-AnnualReport
July 31, 2000
[LOGO OF THE ITALY FUND INC.]
<PAGE>
Dear Shareholder:
We are pleased to report that The Italy Fund Inc. ("Fund") continued to provide
investors with strong market and portfolio performance during the period. Based
on market value, the Fund returned 9.84% and 19.30% for the past quarter and
first six months of the current fiscal year ending January 31, 2001, and 62.50%
for the one-year period ended July 31, 2000. Performance was also quite
competitive versus the Italian stock indices. The Morgan Stanley Capital
International Italy Index ("MSCI Italy")1 reported a return of 6.38%, Milan
MIBtel 30 Index ("MIBtel Index")2 rose 3.37% and the BCI General Index ("BCI
Index")3 rose 3.82% for the latest fiscal quarter. The table below summarises
the performance of the Fund for these and longer periods:
The Italy Fund Inc.
Total Returns Through July 31, 20004
Market Price NAV
------------ -----
Three Months 9.84% 7.32%
Six Months 19.30 16.47
One Year 62.50 52.51
Three Years 37.37 33.71
Five Years 26.27 24.62
Ten Years 8.47 8.54
Since Inception
(February 28, 1986) 8.79 10.24
Sentiment among investors turned negative early in the spring as oil prices
moved higher than anticipated and as fears that higher U.S. interest rates may
have a broader, global effect and also dampen the impressive growth experienced
by Europe and parts of Asia. This was a marked reversal in attitude exhibited by
the majority of investors during most of 1999 and the first weeks of 2000, when
investors appeared to pay scant attention to either macroeconomic factors or
valuations ratios. Instead, emotional considerations appeared to overrule reason
in the rush to participate in either the latest Internet company or
consolidation and restructuring target.
------------
1 The MSCI Italy is comprised of 50 companies traded on the Milan Stock
Exchange. An investor cannot invest directly in an index.
2 MIBtel Index is comprised on 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. An investor cannot invest directly in an
index.
3 The BCI Index is comprised of 296 companies traded on the Milan Stock
Exchange. An investor cannot invest directly in an index.
4 The returns cited in the chart above are average annual total returns.
Average annual total returns assume the reinvestment of income dividends
and capital gain distributions at the market price or NAV of the Fund.
Please note the returns cited in this report represent past performance and
are not indicative of future results.
1
<PAGE>
After leading four consecutive years of double-digit gains for Euroland5 stock
markets, "New Economy"6 stocks encountered a sharp sell-off over the past four
months. The sharp fall in TMT (telecommunications, media, and technology) stocks
seen during the spring and the turbulence in some of the broader stock indices
dampened investor confidence. Higher interest rates, yields and inflation
worries drove concerns over the stock valuations of "New Economy" sectors and
made investors more cautious in their investment choices. Investors lightened
their exposure to TMTs and sought a haven in some of the more traditional, "Old
Economy"7 sectors of the Euroland stock markets.
However, we think these more defensive sectors are unlikely to remain in the
spotlight for too long, especially as increasingly global competitive pressures
and deregulated markets should continue to exert a drag on "Old Economy" stocks.
We anticipate that inflation and interest rate concerns should subside and that
the world economy may continue to show sustainable growth, though perhaps at
less impressive rates than previously seen.
The Italian economy is kicking into high gear and starting to close the gap
between its Gross Domestic Product ("GDP")8 growth and that of other European
countries. GDP forecasts for Italy recently were revised upward to 3.0% for 2000
and 2.9% for 2001, based primarily on stronger-than-expected domestic
consumption during the spring that followed an earlier export-led rise.
Year 2000 inflation forecasts have been trimmed to 2.4% and are unlikely to move
lower due to the rebound in oil costs. Corporate earning momentum also
accelerated during recent months, resulting in some impressive interim earnings
results for Italian listed companies, particularly those companies in the
energy, banking, industrial and consumer sectors.
Italian stock indices reached their highs in March and fell during the
subsequent period of market volatility. The TMT sectors had traded closely in
line with one another during the rally that lasted up to March 2000, but the
correlation disappeared during the sharp sell-off of the last four months. Pure
Internet stocks such as e-Biscom and Tiscali took the brunt of the malaise, but
no `safe-havens' existed within the TMT sector. Media companies Seat-Pagine
Gialle S.p.A., L'Espresso and Mediaset tumbled to varying degrees, as did
Telecom Italia, a telecommunications company.
------------
5 Euroland refers to those countries which make up the European Monetary
Union ("EMU"). The EMU members include Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain.
6 The New Economy represents those companies in the technology,
telecommunications and Internet sectors.
7 The Old Economy represents more established, "blue-chip" companies.
8 GDP is the market value of the goods and services produced by labor and
property. GDP is comprised on consumer and government purchases, private
domestic investments and net exports of goods and services.
2
<PAGE>
Positive performers during this period were "Old Economy" stocks such as banking
company San Paolo-IMI (+18%), retail company Recordati (+82%), food service
company Autogrill (+21%), life insurance company Bayerische Vita (+25%),
insurance company Alleanza Assicurazioni (+20%) and financial services company
Banca Popular di Milano (+17%).9
Not surprisingly, lower inflows into Italian stock mutual funds followed the
turmoil in the Italian stock market, as many investors became more risk averse.
We are at the tail end of the peak Initial Public Offering (IPO) season, and we
anticipate that market liquidity may be more favourable during the next several
months. However, on the whole, ownership of Italian stocks has increased while
ownership of foreign stocks has slowed.
In our opinion, one reason for this increased interest in Italian stocks is that
valuations in Italy continue to be less expensive than the rest of Europe. Italy
is selling at 6.7x 2000 price/cash flow, while Europe is at 11.3x and the U.S.
stocks are selling at 15.8x their cash flows. Due to restructuring and a lower
tax rate (IRAP effect), we anticipate corporate profits may grow by about 27%
and 15% in 2000 and 2001, respectively, which is well above other European
companies.
The Italy Fund announced in July a tender offer for up to 2,012,879 shares of
common stock, which represents 25% of its issued and outstanding shares of
stock. Termination date for the tender offer was September 5,2000, which was
for cash at a price of $20.03 per share. In order to make cash available for
this tender offer, we began reducing some less liquid positions in Recordati
(consumer staples), Buzzi Unicem (construction), Danieli (engineering),
Bayerische Vita (insurance) and Brembo (automotive). We did not eliminate these
positions as we consider the fundamentals of these medium-sized companies to be
excellent and they have been instrumental in helping the Fund achieve its strong
returns.
We executed a number of other portfolio transactions during the past fiscal
quarter:
Banca Fideuram, despite excellent fundamentals, was further reduced by 300,000
shares, as this position once again became too large at an 8.8% weighting of the
total portfolio. We had also reduced Banca Fideuram's position by 300,000 shares
during the first fiscal quarter. After merger rumors failed to come to fruition,
we took profits in Banca Popular Commercial and Industrial.
------------
9 Source: SSB Citi Fund Management LLC.
3
<PAGE>
A number of factors continue to buoy our enthusiasm for the Italian stock
market. Many companies are working hard to enhance shareholder value, issue
stock options, and buy-in shares, and the Italian stock market itself is
undervalued versus other European bourses and still offers the potential for
increased returns. Moreover, the Italian market is in a bull market, propelled
by private investors switching from bonds/money markets ownership to the
ownership of stocks and stock mutual funds. Finally, the euro10 is, in our
opinion, substantially undervalued, providing further opportunities for
investment returns over time.
We look forward to reporting to you at the end of the next fiscal quarter.
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
September 12, 2000
------------
10 The euro is the single currency of the European Monetary Union that was
adopted by Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the
Netherlands, Austria, Portugal and Finland on January 1, 1999.
4
<PAGE>
The Italy Fund's Sectorial Structure*
--------------------------------------------------------------------------------
July 31, 2000 (unaudited)
[GRAPH]
Automotive 4%
Banking 21%
Construction 3%
Consumer Cyclical Textiles 4%
Consumer Staples - Food 4%
Consumer Staples - Retail 2%
Energy Exploration 3%
Energy - International 5%
Engineering 1%
Insurance 13%
Miscellaneous 0%**
Media Group 11%
Telecommunications Telephone 19%
Telecommunications Wireless 10%
BCI General Index Sectorial Structure
--------------------------------------------------------------------------------
July 31, 2000 (unaudited)
[GRAPH]
Utilities 10%
Automotive 3%
Banking 24%
Energy 8%
Insurance 8%
Paper & Printing 4%
Telecommunications 35%
Miscellaneous 6%
Textiles 2%
* As a percentage of total investments.
** Represents less than 0.1% of total investments.
5
<PAGE>
The Italy Fund Inc.
Schedule of Investments
July 31, 2000 (unaudited)
--------------------------------------------------------------------------------
Shares Security Value
--------------------------------------------------------------------------------
COMMON STOCK -- 100%
Automotive -- 3.8%
408,062 Brembo S.p.A. .................................... $ 4,174,737
800,000 Ducati Motor Holding S.p.A.* ..................... 1,992,568
-------------
6,167,305
-------------
Banking -- 21.2%
700,000 Banca Fideuram S.p.A.+ ........................... 11,039,556
1,200,000 BIPOP - Carire S.p.A. ............................ 9,751,577
700,000 Banca Popolare di Milano ......................... 5,000,880
500,000 San Paolo - IMI S.p.A. ........................... 8,422,827
-------------
34,214,840
-------------
Construction -- 2.8%
954,250 Buzzi Unicem S.p.A. di Risp NC++ ................. 4,553,689
-------------
Consumer Cyclical Textiles -- 4.1%
70,000 Gucci Group N.V. - NY Registered Shares+ ......... 6,698,125
-------------
Consumer Staples - Food -- 4.0%
544,027 Autogrill S.p.A.+ ................................ 6,402,037
-------------
Consumer Staples - Retail -- 1.7%
140,000 Industrie Natuzzi S.p.A. ADR ..................... 1,461,250
143,000 Recordati S.p.A. di Risp NC++ .................... 1,261,971
-------------
2,723,221
-------------
Energy Exploration -- 2.8%
800,000 Saipem S.p.A. .................................... 4,573,715
-------------
Energy - International -- 5.5.%
1,600,000 ENI S.p.A.+ ...................................... 8,910,221
-------------
Engineering -- 0.9%
175,000 Danieli & Co. .................................... 784,833
251,250 Danieli & Co. di Risp NC++ ....................... 604,838
-------------
1,389,671
-------------
See Notes to Financial Statements.
6
<PAGE>
The Italy Fund Inc.
Schedule of Investments
July 31, 2000 (unaudited) (continued)
--------------------------------------------------------------------------------
Shares Security Value
--------------------------------------------------------------------------------
Insurance -- 13.3%
494,999 Alleanza Assicurazioni S.p.A.+ ................. $ 6,146,150
300,000 Assicurazioni Generali S.p.A.+ ................. 9,771,036
596,500 Bayerische Vita S.p.A.+ ........................ 5,521,663
--------------
21,438,849
--------------
Media Group -- 10.7%
403,316 Gruppo Editoriale L'Espresso ................... 5,119,887
400,000 Mediaset S.p.A.+ ............................... 6,356,501
1,641,000 Seat - Pagine Gialle S.p.A.+ ................... 5,717,293
--------------
17,193,681
--------------
Miscellaneous -- 0.1%
4,220 ETF Group# ..................................... 135,350
--------------
Telecommunications - Telephone -- 19.2%
1,500,000 Olivetti S.p.A.+ ............................... 5,073,155
2,000,000 Tecnost S.p.A. ................................. 7,283,105
900,000 Telecom Italia S.p.A.+ ......................... 11,625,170
1,100,000 Telecom Italia S.p.A. di Risp NC+++ ............ 6,937,111
--------------
30,918,541
--------------
Telecommunications - Wireless -- 9.9%
1,100,000 Telecom Italia Mobile S.p.A.+ .................. 10,457,649
1,000,000 Telecom Italia Mobile S.p.A. di Risp NC++ ...... 5,494,772
--------------
15,952,421
--------------
TOTAL INVESTMENTS -- 100%
(Cost -- $100,966,526**) ....................... $161,271,666
==============
------------
* Non-income producing security.
+ All or a portion of this security is on loan (See Note 6).
++ Risp NC - Risparmio Non-Convertible (non-covertible savings shares).
# Security is valued by the Fund's Board of Directors and is restricted as to
re-sale (See Note 4).
** Aggregate cost for Federal income tax purposes is substantially the same.
See Notes to Financial Statements.
7
<PAGE>
The Italy Fund Inc.
Statement of Assets and Liabilities
July 31, 2000 (unaudited)
--------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost -- $100,966,526) ....................... $161,271,666
Foreign currency, at value (Cost -- $2,385,612) .................... 2,311,076
Cash ............................................................... 826,393
Collateral for securities on loan (Note 6) ......................... 43,910,565
Receivable for securities sold ..................................... 966,638
Dividends and interest receivable .................................. 684,613
-------------
Total Assets ....................................................... 209,970,951
-------------
LIABILITIES:
Payable for securities on loan (Note 6) ............................ 43,910,565
Management fees payable ............................................ 132,752
Accrued expenses ................................................... 19,400
-------------
Total Liabilities .................................................. 44,062,717
-------------
Total Net Assets ................................................... $165,908,234
=============
NET ASSETS:
Par value of capital shares ........................................ $ 80,515
Capital paid in excess of par value ................................ 71,921,506
Undistributed net investment income ................................ 646,496
Accumulated net realized gain from security transactions ........... 33,051,000
Net unrealized appreciation of investments and foreign currencies .. 60,208,717
-------------
Total Net Assets
(Equivalent to $20.61 a share on 8,051,514 shares of $0.01
par value outstanding; 20,000,000 shares authorized) ............... $165,908,234
=============
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
The Italy Fund Inc.
Statement of Operations
For the Six Months Ended July 31, 2000 (unaudited)
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends .................................................... $ 2,808,972
Interest ..................................................... 196,197
Less: Foreign withholding tax ................................ (377,090)
-------------
Total Investment Income ...................................... 2,628,079
-------------
EXPENSES:
Management fees (Note 2) ..................................... 839,949
Custody ...................................................... 61,165
Audit and legal .............................................. 44,257
Directors' fees .............................................. 43,411
Shareholder communications ................................... 28,095
Shareholder and system servicing fees ........................ 23,869
Pricing service fees ......................................... 149
Other ........................................................ 7,819
-------------
Total Expenses ............................................... 1,048,714
-------------
Net Investment Income ........................................ 1,579,365
-------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) ... 32,922,392
Foreign currency transactions ............................. (622,471)
-------------
Net Realized Gain ............................................ 32,299,921
-------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period ....................................... 70,793,392
End of period ............................................. 60,208,717
-------------
Decrease in Net Unrealized Appreciation ...................... (10,584,675)
-------------
Net Gain on Investments and Foreign Currencies ............... 21,715,246
-------------
Increase in Net Assets From Operations ....................... $ 23,294,611
=============
See Notes to Financial Statements.
9
<PAGE>
The Italy Fund Inc.
Statements of Changes in Net Assets
For the Six Months Ended July 31, 2000 (unaudited)
and the Year Ended January 31, 2000
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
July 31 January 31
-------------- --------------
<S> <C> <C>
OPERATIONS:
Net investment income .................................... $ 1,579,365 $ 1,049,168
Net realized gain ........................................ 32,299,921 31,648,704
Increase (decrease) in net unrealized appreciation ....... (10,584,675) 948,607
-------------- --------------
Increase in Net Assets From Operations ................... 23,294,611 33,646,479
-------------- --------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income .................................... (1,849,433) (2,060,542)
Net realized gains ....................................... (10,421,880) (24,858,556)
-------------- --------------
Decrease in Net Assets From
Distributions to Shareholders ......................... (12,271,313) (26,919,098)
-------------- --------------
FUND SHARE TRANSACTIONS (NOTE7):
Treasury stock acquired .................................. (5,845,930) (13,678,215)
-------------- --------------
Decrease in Net Assets From
Fund Share Transactions ............................... (5,845,930) (13,678,215)
-------------- --------------
Increase (Decrease) in Net Assets ........................ 5,177,368 (6,950,834)
NET ASSETS:
Beginning of period ...................................... 160,730,866 167,681,700
-------------- --------------
End of period* ........................................... $ 165,908,234 $ 160,730,866
============== ==============
* Includes undistributed net investment
income of: ............................................. $ 646,496 $ 1,668,382
============== ==============
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
The Italy Fund Inc.
Notes to Financial Statements (unaudited)
--------------------------------------------------------------------------------
1. Significant Accounting Policies
The Italy Fund Inc. ("Fund"), a Maryland corporation, is registered with the
Securities and Exchange Commission under the Investment Company Act of 1940, as
amended, as a non-diversified, closed-end management investment company.
The significant accounting policies followed by the Fund are: (a) security
transactions are accounted for on trade date; (b) securities traded on national
securities markets are valued at the closing price in the primary exchange on
which they are traded; securities for which no sales price was reported on that
date are valued at the mean between the bid and ask price. Securities which are
listed or traded on more than one exchange or market are valued at the
quotations on the exchange or market determined to be the primary market for
such securities. If bid and ask quotations are not available, then
over-the-counter securities will be valued as determined in good faith by the
Board of Directors; (c) securities maturing within 60 days are valued at cost
plus accreted discount, or minus amortized premium, which approximates value;
(d) gains or losses on the sale of securities are calculated by using the
specific identification method; (e) interest income, adjusted for amortization
of premium and accretion of discount, is recorded on an accrual basis; (f)
dividend income is recorded on the ex-dividend date; foreign dividends are
recorded on the ex-dividend date or as soon as practical after the Fund
determines the existence of a dividend declaration after exercising reasonable
due diligence; (g) dividends and distributions to shareholders are recorded on
the ex-dividend date; (h) the accounting records are maintained in U.S. dollars.
All assets and liabilities denominated in foreign currencies are translated into
U.S. dollars based on the rate of exchange of such currencies against U.S.
dollars on the date of valuation. Purchases and sales of securities, and income
and expenses are translated at the rate of exchange quoted on the respective
date that such transactions are recorded. Differences between income or expense
amounts recorded and collected or paid are adjusted when reported by the
custodian bank; (i) the Fund intends to comply with the applicable provisions of
the Internal Revenue Code of 1986, as amended, pertaining to regulated
investment companies and to make distributions of taxable income sufficient to
relieve it from substantially all Federal income and excise taxes; (j) the
character of income and gains to be distributed are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles. At January 31, 2000, 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
11
<PAGE>
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 six months ended July 31, 2000, SSB received no brokerage commissions.
3. Investments
During the six months ended July 31, 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 ....................................................... $50,966,148
===========
At July 31, 2000, aggregate gross unrealized appreciation and depreciation of
investments for Federal income tax purposes were substantially as follows:
Gross unrealized appreciation ............................... $63,895,897
Gross unrealized depreciation (3,590,757)
-----------
Net unrealized appreciation ................................. $60,305,140
===========
12
<PAGE>
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:
Number of Acquisition 7/31/00 Value Per Percentage of
Security Shares Date Fair Value Unit Net Assets Cost
-------- --------- ----------- ---------- --------- ------------- --------
ETF Group 4,220 3/13/2000 $135,350 $32.07 0.08% $297,774
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 July 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 $41,868,880.
13
<PAGE>
The Italy Fund Inc.
Notes to Financial Statements (unaudited) (continued)
--------------------------------------------------------------------------------
At July 31, 2000, the cash collateral received for these securities on loan was
invested as follows:
Security Description Value
================================================================================
Time Deposits:
Allied Irish, 6.688% due 8/1/00 $ 2,148,334
Banque Bruxelles Lambert, London, 6.688% due 8/1/00 2,148,334
Bayerische Landesbank, 6.688% due 8/1/00 2,148,334
Deutsche Bank, London, 6.688% due 8/1/00 2,148,334
Rabobank, London, 6.688% due 8/1/00 2,148,334
Toronto Dominion-London, 6.688% due 8/1/00 2,148,334
Westdeutsche Landesbank, London, 6.688% due 8/l/00 2,148,334
Repurchase Agreements:
Bear Stearns, 6.670% due 8/1/00 8,016,172
CS First Boston Corp., 6.680% due 8/1/00 6,412,938
J.P. Morgan Securities, 6.700% due 8/1/00 1,923,881
Morgan Stanley Dean Witter & Co., 6.625% due 8/1/00 4,055,721
Commercial Paper:
General Electric Credit, 6.641% due 8/1/00 2,115,879
General Motors Acceptance Corp., 6.661% due 8/1/00 2,115,878
Koch Industries Inc., 6.641% due 8/1/00 2,115,879
UBS Finance (Delaware) Inc., 6.641% due 8/1/00 2,115,879
--------------------------------------------------------------------------------
Total $43,910,565
================================================================================
Income earned by the Fund from securities loaned for the six months ended July
31, 2000 was $157,576.
7. Capital Stock
At July 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. Since inception
of the share repurchase plan, the Fund has repurchased 1,451,575 with the total
cost of $22,919,389. For the six months ended July 31, 2000, the Fund has
repurchased 301,200 shares with a total cost of $5,845,930.
14
<PAGE>
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 ............ 0.20 0.12 0.17 0.07 0.10 0.15
Net realized and unrealized
gain (loss) .................... 2.56 3.94 3.82 2.50 2.52 (0.39)
--------- --------- --------- --------- --------- ---------
Total Income (Loss) From
Operations ....................... 2.76 4.06 3.99 2.57 2.62 (0.24)
--------- --------- --------- --------- --------- ---------
Gain From Repurchase of
Treasury Stock ................... 0.13 0.27 0.07 -- -- --
--------- --------- --------- --------- --------- ---------
Less Distributions From:
Net investment income ............ (0.23) (0.24) (0.20) (0.02) (0.24) (0.02)
Net realized gains ............... (1.29) (2.94) (0.26) -- -- --
--------- --------- --------- --------- --------- ---------
Total Distributions ................. (1.52) (3.18) (0.46) (0.02) (0.24) (0.02)
--------- --------- --------- --------- --------- ---------
Net Asset Value, End of Period ...... $ 20.61 $ 19.24 $ 18.09 $ 14.49 $ 11.94 $ 9.56
========= ========= ========= ========= ========= =========
Market Value, End of Period ......... $ 18.313 $ 16.688 $ 14.938 $ 12.125 $ 10.000 $ 8.250
========= ========= ========= ========= ========= =========
Total Return, Based on
Market Value (2) ................. 19.30%++ 35.61% 26.96% 21.53% 24.49% (5.51)%
========= ========= ========= ========= ========= =========
Total Return, Based on
Net Asset Value (2) .............. 16.47%++ 29.10% 28.66% 21.59% 28.27% (2.43)%
========= ========= ========= ========= ========= =========
Net Assets, End of Period (000's) ... $ 165,908 $ 160,731 $ 167,682 $ 137,712 $ 113,433 $ 90,841
========= ========= ========= ========= ========= =========
Ratios to Average Net Assets:
Net investment income ............ 1.79%+ 0.68% 0.58% 0.61% 0.97% 1.12%
Expenses (3) ..................... 1.19+ 1.23 1.22 1.29 1.42 1.42
Portfolio Turnover Rate ............. 20% 28% 22% 16% 47% 58%
</TABLE>
---------------
(1) For the six months ended July 31, 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.
15
<PAGE>
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
July 31, 2000 ..... 1,870,965 0.23 1,353,674 0.17 8,589,820 1.07 9,943,494 1.23
</TABLE>
16
<PAGE>
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.
17
<PAGE>
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.
18
<PAGE>
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
Lewis E. Daidone
ADVISORY BOARD Senior Vice President and Treasurer
Pierre Henchoz Rein W. van der Does
Vice President and Investment Officer
Irving P. David
DIRECTORS Controller
Phillip Goldstein Christina T. Sydor
Glenn Goodstein Secretary
Dr. Paul R. Hardin
Heath B. McLendon
George M. Pavia
James J. Crisona, Emeritus
Alessandro C. di Montezemolo, Emeritus
19
<PAGE>
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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
FD01012 9/00
1
