-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, nxHxRWIo5Be7Rgwj8/6umba8jHPBiDWPk3bpDSa+i4/e4NKrM6eaNdGp8qQG5k4i YZ8PBppOJYmabUQF9+5gvw== 0000053798-94-000162.txt : 19940404 0000053798-94-000162.hdr.sgml : 19940404 ACCESSION NUMBER: 0000053798-94-000162 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940131 FILED AS OF DATE: 19940331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITALY FUND INC CENTRAL INDEX KEY: 0000785855 STANDARD INDUSTRIAL CLASSIFICATION: 0000 STATE OF INCORPORATION: MA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 40 SEC FILE NUMBER: 811-04517 FILM NUMBER: 94519664 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 6175731332 N-30B-2 1 ITALY ANNUAL - -------------------------------------------------------------------------------- o - --------------------------------------------------- Dear Shareholder, We are pleased to present the Annual Report for The Italy Fund Inc. for the fiscal year ended January 31, 1994. As of that date, the Fund's net asset value (NAV), including the costs and dilution associated with the rights offering, was $9.84 per share. At the end of the previous quarter, October 31, 1993, the NAV was $9.75 per share and at the close of the previous fiscal year, January 31, 1993, the NAV was $8.43 per share. In considering the NAV, please bear in mind the dividend of $0.075 per share paid in December 1993. When expressed in Lira terms, the Fund's NAV, when adjusted for the dividend and rights offering, increased by 38.3% during this fiscal year, which compares with a 36% increase in the Banca Commerciale Italiana Index (BCI Index) over the same period. Expressed in U.S. dollars, the Fund has continued to outperform the BCI Index since inception. POLITICS Given the political and economic revolution that Italy is currently undergoing, political developments have continued to set the scene over the last three months. In local elections held in November and December, the former communist party (PDS) led coalitions which won most of the contests, with the Northern League suffering their first major setback. The wave of protest which had been clearly perceived in the June local elections was further strengthened as shown by the demise of the present coalition parties and the strong performance of the MSI (extreme right party) in both Naples and Rome. The major winner of these elections was the PDS, which was able to take advantage of the new majority electoral system in building alliances both to the right and left. The new electoral system enabled it to win a majority without being the single largest party in the contest. It was also very skillful in dispelling possible apprehensions about its victory between the two rounds of elections, when several key PDS figures reassured the electorate about the party's economic policies. Finally, after months of political maneuvering including last-minute efforts by elements in the security services to force President Scalfaro's resignation, the date of early elections was fixed. With the final approval of the 1994 budget and of the new electoral constituencies, Parliament was dissolved in January, with early elections called for the 27th and 28th of March. With just under two months to go until the elections, it is still not clear which political aggregations will contest the seats in the various constituencies, which will be largely decided by a majority electoral system for the first time in the history of the Italian Republic. Following last fall's local elections four political groupings seem to be taking shape. 1. The progressive pole (center), led by the PDS and potentially consisting of the Green Party, Communist Refoundation (a left-wing breakaway group from the PDS), some former Socialists and Republicans from the old governing majority ("Alleanza Democratica") and the anti-mafia party "La Rete." This grouping has currently been credited with 40% of the votes. 2. The Northern League (which has recently toned down its federalist stance), "Forza Italia" (group founded by media magnate Silvio Berlusconi) plus the former Liberal party. This group is credited with 27% of the votes, according to an opinion poll. 3. The Partito Popolare (former Christian Democrats) in possible alliance with Mario Segni and his "Pact for Italy." An opinion poll taken in January gave this aggregation 23% of the votes. 4. Alleanza Nazionale, i.e. the right under the leadership of MSI. The same poll gives this grouping 10% of the votes. Given the new majority electoral system, it has become crucial to be able to forge alliances and present a single candidate representing the alliance. So far, the "progressive pole" has demonstrated its skills in building alliances and this was the key to their success in the last local elections. Together the three center-right groupings should win more support than the "progressive pole" in the next elections. They are, however, subject to severe internal strains; and among the center-right groupings there is still not a well defined alliance to confront the left. Unless there are last minute agreements among the center-right forces, the progressive pole has an excellent chance to take the majority in the new parliament. - -------------------------------------------------------------------------------- o - --------------------------------------------------- While at this point few will hazard a bet on the likely winner or winners, at least one result from the election can be predicted. Italy will introduce a system that encourages parties to alternate in power, and this is a turning point in political culture. The lack of a genuine alternative to the parties in government until now has been a crucial ingredient behind the spread of corruption that has provoked the collapse of the old political system. THE ECONOMY Turning to the economic outlook, little has changed in Italy's economic scenario over the last few months. One has to recognize that a growing dualism between the domestic and the export sectors has emerged. While real domestic demand has been falling for four consecutive quarters, real net exports have improved significantly since late 1992, helping to turn the trade balance from a Lit 15.3 trillion deficit in the first 11 months of 1992 into a Lit 27 trillion surplus for the same period in 1993. Trade flows continue to improve Italy's balance of payments which recorded a Lit 2.1 trillion surplus in 1993 after a deficit of Lit 32.5 trillion in 1992. The trade improvement reflects the unusual combination (for Italy) of an almost 20% depreciation in the Lira and falling real wages. The vicious circle of high inflation and wage/price growth has been broken with consequent gains for Italy's market share abroad. At the same time, this largely explains why domestic demand is showing a negative growth for the first time since the Second World War. Consumer spending was traditionally underpinned by the fact that wage growth was exceeding inflation (through the automatic wage indexation mechanism), thus representing robust, real income growth despite occasional falls in employment. With the abolition of wage indexation last summer, wage growth has fallen below inflation. In addition, tax increases, resulting from the last two years' rigorous budgets, along with rising unemployment have dented the average household's income. Industrial output data to November 1993 shows activity stabilizing at around the same levels as last year. Steel production, car sales and business surveys all suggest that the economy has stopped deteriorating. While the economy has bottomed out and a decrease of 0.4% in Italy's gross domestic product (GDP) is expected for 1993, no strong recovery can occur without a turn-around in domestic demand, which is unlikely to occur before the end of 1994. Net exports will again constitute the driving force for the Italian economy in 1994, when GDP is expected to grow by around 1.5%. Economic weakness and falling real wages have on the other hand, favored a decline in inflation, in spite of the significant depreciation and widespread fears of importing inflation. Inflation, as represented by the consumer price index (CPI) averaged 4.2% in 1993, down from 5.4% in 1992, and was running at 4% in December 1993. Even if the trend in inflation will be temporarily interrupted in January 1994 because of the initial effects of the year-end budget measures (higher gasoline taxes and motorway tolls) it should subsequently resume its downward trend, which could last until the end of the year. THE STOCK MARKET PERSPECTIVE The year under review has been gratifying and not only in terms of performance. The BCI index grew by 36% over the twelve month period ended January 31, 1994, while the daily volume jumped to nearly Lit 400 billion, up by almost 300% from the previous year. In the last days of January, the daily volume on the Milan Exchange reached Lit 1,500 billion, a record volume. This growth was mainly due to the decline in interest rates and the expansion of the screen-based trading system (telematico). The performance of the market was also aided by the long awaited start of the privatization program. Among the four privatizations that have taken place, the most important was that of Italy's seventh largest bank, Credito Italiano, which successfully raised Lit 1,830 billion ($1.08 billion), despite the fact that the market had to deal with a substantially larger amount of capital increases as compared to the previous year. The other major unfavourable development in the Italian market was represented by the financial difficulties that some industrial groups were confronted with, the Ferruzzi collapse being the most noteworthy. In terms of sector performance, the best performing sectors over the last twelve months were the telecom sector (pulled by Stet and Sip and their 2 - -------------------------------------------------------------------------------- o - --------------------------------------------------- reorganization and privatization talks), the textile sector (a key beneficiary of the Lira devaluation) and the auto and mechanical engineering sector (beneficiary of corporate restructuring and competitive gains from lower currency and lower wage costs). The underperforming sectors were essentially the construction/property sector (negatively affected by the virtual freeze in infrastructure spending resulting from the corruption investigations) and the banking sector (suffering from the provisions to be made for increased bad loans, as illustrated by the well published Ferruzzi collapse). OUTLOOK Given the political development discussed earlier, and the upcoming general elections in particular, it is rather evident that the political variable will be the most important one with regard to the prospects for the Italian financial markets. We expect, therefore, the equity market to remain quite volatile over the next two months as the electoral campaign begins in earnest and political alliances may be created or undone. Paradoxically, we believe that it is likely that economic policy will not change in the medium term whatever the result of the elections. The crucial point is that all of the political forces are willing, in general terms, to follow the course outlined by the Amato and Ciampi governments in terms of the issues which are vitally important to the financial markets, i.e., the reduction of the public deficit, continued wage moderation, the decline of interest rates and privatizations. Therefore, whatever the electoral verdict, the virtuous cycle (lower budget deficit, wage freeze, lower interest rates, lower budget deficit) should remain intact. Even the former communist party, the PDS, has clearly expressed itself in favor of market solutions. But can the PDS be trusted or is it just political maneuvering? One has to understand that the PDS is backing Ciampi's economic policy for the usual combination of altruistic and selfish reasons: the PDS leadership would like to govern Italy over the longer term. Continuation as a ruling party will probably continue to be difficult for the PDS, as it would for other parties in a West European democracy, without votes from potentially uncommitted voters in the center. The PDS will therefore probably find itself, whether it likes it or not, following the shift of the Spanish and French Socialist parties or the earlier move of the West German SPD, to become a mass center-left party with policies mostly acceptable to financial markets. Furthermore, ill-judged policies on the budget deficit or wages would lead to massive foreign selling of Italian securities and a resulting collapse of the Lira, which would be most unwelcome to the PDS at a time when it is trying hard to win international confidence. In terms of valuation, even if the market looks overvalued in price/earnings terms (P/E of 27x 1994 earnings), it is one of the cheapest in terms of price/ cash flow (P/CF of 5x 1994 earnings) and in terms of price/book value (P/BV of 1.4x 1994 earnings). Considering that 1993 will probably represent the bottom of earnings expected over the next three years, valuation is not excessive compared to the present economic cycle. A shift in liquidity from money market instruments to shares will continue to play a major role when assessing the outlook for Italian equities. The shift follows the collapse in nominal short-term yields that has already taken place, and will continue over the next year as further declines are expected in 1994 given the encouraging inflation outlook. The record net inflows in Italian mutual funds in the last months and the highly successful privatization of Credito Italiano and IMI (which were four times oversubscribed, thus indicating that Italian savers are favourably inclined towards equities when opportunities are well presented and explained), clearly illustrates this changing pattern in Italian savings. In this context, it is important to consider the fact that the capitalization of the Italian bond and money market is around eight times higher than that of the stock market, and that it is at least 13-14 times the float of the Milan Stock Exchange, while in the US the bond and stock markets are of similar dimensions. Also, in the present slow economic growth environment demand for credit is growing more slowly than deposits. Italian banks will therefore find liquidity being freed up, most of which could end up on the domestic market, both in stocks and bonds. In the final analysis, the outlook for the Italian equity market will depend on the continuation of the economic policies introduced by the Amato and Ciampi governments. The key to the Italian equity 3 - -------------------------------------------------------------------------------- o - --------------------------------------------------- market is an understanding of the causal relationship between economics and policies, and from this perspective it is important to recognize that the new political order, whether it be on the right or the left, is committed to the policies of economic and financial stability. This is in marked contrast to the old political considerations. In the past it was less the endless rounds of elections and governments that undermined Italian assets than the failure of the old political establishment to control the twin problems of inflation and a budget deficit. The conclusion must be that once the political uncertainty has been removed, the significantly improved economic fundamentals will be there for all to focus on (primary budget and trade surplus, low wages and inflation, lower interest rates). Indeed it would not be excessive to argue that the Italian political and economic "revolution" has had a greater positive impact on the economic fortunes of Italy than German unification has had on the economic fortunes of Germany. INVESTMENT STRATEGY After the anticipated fall in share prices in September and October 1993, the Fund reinvested its cash mostly in equities. Investments were added to the banking, chemical, mechanical engineering and textile sectors. In the banking sector the Fund bought positions in Credito Italiano, Banca Comerciale Italiana after the recent underperformance, and Banca Fideuram, which is among the major beneficiaries of the booming Italian mutual fund industry. In the chemical sector, the Fund's investment in Enichem Augusta was further increased and we started a position in Montedison, as we believe that its prospects have significantly improved after the recent restructuring and joint-venture with Royal Dutch. After its massive capital increase in November, we also started an investment in vehicle producer Fiat, whose prospects have significantly improved after the recent rights offering and the launch of the highly successful new car model, the Punto. Valuation grounds led us to increase the exposure to the textile sector in investing in Stefanel. Finally, two of the Fund's convertible bonds, Italgas and Banca di Roma, were converted into the underlying shares, as their conversion period expired. In terms of sector allocation, the Fund remains overweighted in the food/ sugar, textiles and communications sectors and continues to underweight the banking sector. We would like to take this opportunity to extend our thanks to all shareholders who participated in the recently completed rights offering. The shares available through the offering were oversubscribed, and as a result, the Fund's assets were increased by over $27 million. We are particularly pleased with the results as we believe there are several attractive investment opportunities currently available in Italy which the Fund will be able to take advantage of more fully as a result of the offering's success. We will be reporting to you on such opportunities in upcoming quarters. We appreciate the opportunity to serve your investment needs and thank you for your continued confidence and support. Sincerely, Heath B. McLendon CHAIRMAN OF THE BOARD Mario d'Urso PRESIDENT Erich Stock INVESTMENT OFFICER February 16, 1994 4 - -------------------------------------------------------------------------------- o - --------------------------------------------------- THE ITALY FUND'S EQUITY PORTFOLIO VERSUS THE BCI INDEX JANUARY 31, 1994 (UNAUDITED) Pie charts depicting the allocation of The Italy Fund's investment securities and The BCI Index held at January 31, 1994 by sector classification. The pies are broken in pieces representing industries in the following percentages:
SECTOR PERCENTAGE Communications 22.7% Financials 8.9% Food & Sugar 8.9% Electromechanical, Engineering & Autos 9.7% Banks 10.5% Textiles 5.5% Property, Construction & Cement 3.3% Chemicals 5.6% Pharmaceuticals 1.0% Other 1.7% Insurance 22.2% SECTOR PERCENTAGE Communications 20.4% Financials 6.6% Food & Sugar 3.0% Electromechanical, Engineering & Autos 11.6% Banks 16.7% Textiles 2.8% Property, Construction & Cement 2.9% Chemicals 4.7% Pharmaceuticals 0.4% Paper & Publishing 1.8% Other 4.7% Insurance 24.4%
5 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC. Investment Portfolio as of January 31, 1994 - -----------------------------------------------------------------------------
MARKET VALUE ($) SHARES (NOTE 1) ----------------------------------------------------- ----------------------------------------------------- STOCKS -- 66.1% ------------------------------------------- INSURANCE -- 14.8% 218,750 Alleanza...................... $ 2,248,784 110,000 Assicurazioni Generali........ 2,647,591 90,000 Compagnia di Assicurazioni di Milano...................... 400,501 112,291 Lloyd Adriatico............... 1,023,832 61,250 Lloyd Adriatico Risp NC**..... 378,771 105,000 RAS........................... 1,748,617 230,000 SAI Risp NC**................. 1,306,069 130,000 SAI-Societa Assicuratrice Industriale................. 1,516,449 110,000 Toro Assicurazioni+++......... 2,013,347 85,000 Toro Assicurazioni Risp NC**........................ 592,167 ----------- 13,876,128 ----------- COMMUNICATIONS -- 12.5% 45,000 Ericsson...................... 714,161 786,000 SIP........................... 2,017,964 1,200,000 SIP Risp NC**+++.............. 2,627,190 203,000 Sirti S.p.A................... 1,200,520 670,000 STET+++....................... 1,865,568 1,190,000 STET Risp NC**+++............. 2,685,308 110,000 Teleco Cavi S.p.A............. 582,861 ----------- 11,693,572 ----------- HOLDING COMPANIES -- 6.8% 850,000 Europa Investimenti++#........ 501,327 10,000 Finanziaria Italiana di Participazioni++#........... 631,082 800,000 Gaic Conv. di Risp*........... 380,159 150,000 IFI Privilegio................ 1,684,813 264,480 IFIL+++....................... 959,023 270,000 IFIL Risp NC**................ 560,702 1,500,000 Montedison S.p.A.............. 1,035,978 280,000 Sopaf......................... 421,115 210,000 Sopaf Risp*................... 220,466 ----------- 6,394,665 ----------- ----------------------------------------------- STOCKS -- (CONTINUED) ------------------------------------------- BANKING -- 6.7% 280,000 Banca Comerciale Italiana Risp*....................... $ 743,474 425,000 Banca Fideuram................ 430,640 124,998 Banca di Roma................. 141,844 450,000 Banco Ambrosiano Veneto....... 1,300,501 228,000 Credito Fondiario............. 725,216 560,000 Credito Italiano Risp*........ 714,409 50,000 Credito Romagnolo............. 405,485 75,000 Istituto Bancario San Paolo di Torino+++................... 471,896 140,000 Mediobanca S.p.A.............. 1,340,136 ----------- 6,273,601 ----------- UTILITIES -- 5.8% 2,000,000 Autostrade Privelegio......... 2,194,043 366,500 Italgas....................... 1,234,276 460,000 Edison........................ 2,027,473 ----------- 5,455,792 ----------- FOOD -- 5.7% 15,595 Eridania-Beghin-Say........... 2,805,352 1,760,000 Parmalat Finanziaria S.p.A.... 2,570,192 ----------- 5,375,544 ----------- TEXTILES -- 3.7% 140,000 Benetton...................... 2,312,167 144,310 SIMINT S.p.A., Privilegio..... 118,308 432,446 SIMINT S.p.A. -- Societa Italiana Manufatti.......... 487,920 150,000 Stefanel S.p.A................ 501,003 ----------- 3,419,398 ----------- AUTOMOBILES -- 2.4% 390,000 Fiat S.p.A.................... 1,113,990 808,000 Pirelli S.p.A................. 1,119,429 ----------- 2,233,419 ----------- CHEMICALS AND PHARMACEUTICALS -- 2.0% 870,000 Enichem Augusta S.p.A......... $ 1,246,889 260,000 Recordati Risp NC**........... 628,723 ----------- 1,875,612 -----------
See Notes to Financial Statements. 6 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC. Investment Portfolio as of January 31, 1994 (Continued) - -----------------------------------------------------------------------------
MARKET VALUE ($) SHARES (NOTE 1) ---------------------------------------------------- ----------------------------------------------- STOCKS -- (CONTINUED) ------------------------------------------- MECHANICAL ENGINEERING -- 2.0% 180,000 Danieli....................... 1,167,797 191,750 Danieli Risp NC**............. 684,216 ----------- 1,852,013 ----------- CEMENT AND CERAMICS -- 1.8% 60,000 Calcestruzzi.................. 417,965 310,000 Italcementi Risp*............. 1,231,589 ----------- 1,649,554 ----------- RETAILING -- 1.4% 81,790 La Rinascente................. 442,018 186,136 La Rinascente Risp*........... 638,933 90,000 SME........................... 205,798 ----------- 1,286,749 ----------- CONSTRUCTION AND PROPERTY -- 0.5% 208,000 Vianini Lavori................ 453,294 ----------- TOTAL STOCKS (COST $59,509,161)........... 61,839,341 ----------- ----------------------------------------------- WARRANTS -- 0.8% ------------------------------------------- 20,900 Alleanza Risp, Warrants, expire 02/29/96#............ $ 24,247 8,816 IFIL, Warrants to Purchase ordinary shares, expire 07/01/94#................... 7,009 27,200 IFIL Risp, Warrants to Purchase savings shares, expire 07/01/94#............ 11,870 220,000 Parmalat Finanziaria, Warrants, expire 01/02/99#................... 215,263 3,580 Raggio di Sole, Warrants, expire 05/30/94............. 0 3,580 Raggio di Sole di Risp, Warrants, expire 05/30/94... 0 15,000 RAS Risp, Warrants, expire 12/31/95#................... 28,124 12,500 STET, Warrants, expire 09/30/96#................... 186,840 25,000 STET di Risp, Warrants, expire 09/30/94#................... 258,980 ----------- TOTAL WARRANTS (COST $112,682).............. 732,333 -----------
See Notes to Financial Statements. 7 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC. Investment Portfolio as of January 31, 1994 (Continued) - -----------------------------------------------------------------------------
FACE VALUE MARKET (MILLION VALUE ($) LIRE) (NOTE 1) ----------------------------------------------------- ----------------------------------------------------- FIXED-INCOME INVESTMENTS -- 2.8% ------------------------------------------- L 2,000 Italy, Government of, 11.500% due 03/01/03................ $1,379,062 2,000 Italy, Republic of, 9.000% due 10/01/98.................... 1,219,109 ----------- TOTAL FIXED-INCOME INVESTMENTS (COST $2,578,777).................. 2,598,171 ----------- ----------------------------------------------- CONVERTIBLE BONDS -- 0.7% ------------------------------------------- 1 IFIL, 8.500% due 07/01/94..... 388 2,265 Mediobanca/Alleanza, 4.000% due 09/03/99................ 206,176 180 Mediobanca - Italmobiliare, 6.000% due 04/01/96......... 102,129 500 Stefanel Finance, 9.000% due 12/31/95.................... 308,169 ----------- TOTAL CONVERTIBLE BONDS (COST $728,059).................... 616,862 ----------- FACE VALUE ----------------------------------------------------- COMMERCIAL PAPER -- 3.7% (COST $3,494,000) ------------------------------------------- $3,494,000 Ford Motor Credit Corporation, 3.100% due 02/01/94......... 3,494,000 ----------- ----------------------------------------------- REPURCHASE AGREEMENT -- 3.7% (COST $3,500,000) ------------------------------------------- $3,500,000 Agreement with Morgan Stanley & Company, 3.100% dated 01/30/94, to be repurchased at $3,500,603 on 02/01/94, collateralized by $2,635,000 U.S Treasury Bonds, 9.375% due 02/15/06................ $3,500,000 -----------
TOTAL INVESTMENTS (COST $69,922,679+)........ 77.8 % 72,780,707 OTHER ASSETS AND LIABILITIES (NET)........................ 22.2 20,737,322 ------ ----------- NET ASSETS.................... 100.0 % $93,518,029 ------ ----------- ------ ----------- - -------------------------- * Risp -- Risparmio (savings shares). ** Risp NC -- Risparmio Non-Convertible (non-convertible savings shares). + Aggregate cost for Federal tax purposes. ++ Security restricted as to resale (Note 5). +++ A portion of security loaned at 01/31/94. Total market value of all securities loaned is $6,753,685 (Note 6). # Non-income producing security.
See Notes to Financial Statements. 8 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC. Statement of Assets and Liabilities January 31, 1994 - ----------------------------------------------------------------------------- ASSETS: Investments, at value (Cost $69,922,679) (Note 1) See accompanying schedule....................... $ 72,780,707 Cash and foreign currency (Cost $1,569,750)....... 1,573,478 Receivable for Fund shares sold (Note 4).......... 27,685,663 Receivable for investment securities sold......... 91,711 Interest and dividends receivable................. 42,177 Other assets...................................... 5,326 ------------ Total Assets................................ 102,179,062 LIABILITIES: Collateral for securities loaned (Note 6)......... $6,950,375 Payable for investment securities purchased....... 1,281,869 Investment advisory fee payable (Note 2).......... 39,171 Custodian fees payable (Note 2)................... 39,000 Administration fee payable (Note 2)............... 20,626 Transfer agent fees payable (Note 2).............. 3,183 Accrued expenses and other payables............... 326,809 ---------- Total Liabilities........................... 8,661,033 ------------ NET ASSETS........................................ 93,518,029 ------------ ------------ NET ASSETS consist of: Accumulated net investment loss................... (257,530) Accumulated net realized loss on securities sold, forward foreign exchange contracts and foreign currency transactions........................... (4,626,252) Net unrealized appreciation of securities and currencies...................................... 2,857,625 Par value......................................... 95,031 Additional paid-in capital........................ 95,449,155 ------------ Total Net Assets............................ $ 93,518,029 ------------ ------------ NET ASSET VALUE PER SHARE ($93,518,029 DIVIDED BY 9,503,089 shares of common stock outstanding or subscribed) (Note 4)............. $9.84 ---- ----
See Notes to Financial Statements. 9 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC. Statement of Operations For the Year Ended January 31, 1994 - ----------------------------------------------------------------------------- INVESTMENT INCOME: Dividends......................................... $ 1,229,247 Interest.......................................... 802,248 Less taxes withheld (Note 1)...................... (264,284) ------------ Total Investment Income..................... 1,767,211 EXPENSES: Investment advisory fee (Note 2).................. $444,604 Custodian fees (Note 2)........................... 144,403 Administration fee (Note 2)....................... 118,537 Advisory board and Directors' fees and expenses (Note 2)........................................ 97,580 Legal and audit fees.............................. 96,295 Transfer agent fees (Note 2)...................... 33,383 Other............................................. 64,285 -------- Total Expenses.............................. 999,087 ------------ NET INVESTMENT INCOME............................. 768,124 ------------ REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 3): Net realized loss on securities transactions...... (3,009,611) Net realized gain on forward foreign exchange contracts and foreign currency transactions..... 331,616 ------------ Net realized loss on investments during the year......................................... (2,677,995) ------------ Net change in unrealized appreciation/(depreciation) of: Securities...................................... 15,462,628 Forward foreign exchange contracts.............. (372,895) Foreign currency and net other assets........... 16,398 ------------ Net unrealized appreciation of investments during the year.............................. 15,106,131 ------------ NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS... 12,428,136 ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS...................................... $ 13,196,260 ------------ ------------
See Notes to Financial Statements. 10 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC.
YEAR YEAR ENDED ENDED Statement of Changes in Net Assets 01/31/94 01/31/93 ------------------------------------------------------------------- Net investment income................... $ 768,124 $ 1,182,862 Net realized loss from securities sold, forward foreign exchange contracts and foreign currency transactions during the year.............................. (2,677,995) (3,395,556) Net unrealized appreciation/(depreciation) on securities, forward foreign exchange contracts, foreign currencies and net other assets during the year.......... 15,106,131 (14,589,784) ----------- ------------ Net increase/(decrease) in net assets resulting from operations............. 13,196,260 (16,802,478) Distributions to shareholders from: Net investment income................. (426,675) -- Capital............................... (48,443) -- Net increase in net assets from Fund share transactions (Note 4)........... 27,412,978 -- ----------- ------------ Net increase/(decrease) in net assets... 40,134,120 (16,802,478) NET ASSETS: Beginning of year....................... 53,383,909 70,186,387 ----------- ------------ End of year (including accumulated net investment loss of $257,530 at January 31, 1994)............................. $93,518,029 $ 53,383,909 ----------- ------------ ----------- ------------
See Notes to Financial Statements. 11 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC. Financial Highlights - ----------------------------------------------------------------------------- Set forth below is per share operating performance data for a share of common stock outstanding, total investment return, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements and market price data for the Fund's shares.
YEAR YEAR YEAR YEAR YEAR YEAR YEAR YEAR For a Fund share outstanding ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED throughout each year. 01/31/94# 01/31/93 01/31/92 01/31/91 01/31/90 01/31/89 01/31/88 01/31/87* ------------------------------------------------------------------------------------------------------------------- Operating performance: Net asset value, beginning of year............................ $8.43 $ 11.08 $ 11.37 $ 13.24 $ 9.91 $ 9.07 $ 14.33 $ 11.16 ---------- --------- ------- --------- --------- --------- --------- --------- Net investment income............ 0.12 0.19 0.25 0.32 0.17 0.21 0.12 0.22 Net realized and unrealized gain/(loss) on investments...... 1.72 (2.84) 0.03 (1.01) 3.31 0.82 (3.65) 2.95 ---------- --------- ------- --------- --------- --------- --------- --------- Net increase/(decrease) in net assets resulting from investment operations...................... 1.84 (2.65) 0.28 (0.69) 3.48 1.03 (3.53) 3.17 Dilution in NAV from rights offering (Note 4)............... (0.32) -- -- -- -- -- -- -- Offering expenses charged to paid in capital...................... (0.03) -- -- -- -- -- -- -- Distributions: Dividends from net investment income.......................... (0.07) -- (0.25) (0.34) (0.15) (0.19) (0.36) -- Distributions from net realized gains........................... -- -- (0.24) (0.58) -- -- (1.37) -- Distributions from capital (Note 1).............................. (0.01) -- (0.08) (0.26) -- -- -- -- ---------- --------- ------- --------- --------- --------- --------- --------- Total distributions.............. (0.08) 0.00 (0.57) (1.18) (0.15) (0.19) (1.73) 0.00 ---------- --------- ------- --------- --------- --------- --------- --------- Net asset value, end of year..... $9.84 $ 8.43 $ 11.08 $ 11.37 $ 13.24 $ 9.91 $ 9.07 $ 14.33 ---------- --------- ------- --------- --------- --------- --------- --------- ---------- --------- ------- --------- --------- --------- --------- --------- Market value, end of year........ $12.375 $ 8.875 $ 9.50 $ 10.00 $ 17.50 $ 8.00 $ 7.00 $ 12.125 ---------- --------- ------- --------- --------- --------- --------- --------- ---------- --------- ------- --------- --------- --------- --------- --------- Total investment return++........ 40.54%+++ (6.58)% 1.00% (36.14)% 121.31% 16.97% (32.16)% 1.04% ---------- --------- ------- --------- --------- --------- --------- --------- ---------- --------- ------- --------- --------- --------- --------- --------- Ratios to average net assets/ supplemental data: Net assets, end of year (in 000's).......................... $93,518 $ 53,384 $70,186 $ 72,055 $ 83,902 $ 62,743 $ 57,445 $ 90,793 Ratio of net investment income to average net assets.............. 1.30% 2.04% 2.17% 2.28% 1.54% 2.23% 1.02% 1.83%+ Ratio of operating expenses to average net assets.............. 1.69% 1.70% 1.53% 1.80% 1.90% 1.99% 1.92% 1.96%+ Portfolio turnover rate.......... 46% 33% 24% 24% 15% 15% 19% 39% - ------------------------ * The Fund commenced operations on February 28, 1986. + Annualized. ++ Total return represents aggregate total return for the periods indicated. +++ The total return for the year ended January 31, 1994, adjusted for the effect of the rights offering completed in January of 1994 is 45.85% (unaudited). # Per share amounts have been calculated using the monthly average share method, which more appropriately presents per share data for the period since the use of the undistributed method does not accord with results of operations.
See Notes to Financial Statements. 12 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC. NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES The Italy Fund Inc. (the "Fund") is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, as a diversified, closed-end investment company for United States and other investors desiring to achieve international diversification by participating in the Italian economy. The policies described below are followed consistently by the Fund in the preparation of its financial statements in conformity with generally accepted accounting principles. PORTFOLIO VALUATION: All securities for which market quotations are readily available are valued at the last sales price prior to the time of determination, or, if no sales price is available at that time, at the closing price quoted for the securities (but if bid and asked quotations are available, at the mean between the last current bid and asked prices, rather than the quoted closing price). Securities that are traded over-the-counter are valued, if bid and asked quotations are available, at the mean between the current bid and asked prices. If bid and asked quotations are not available, then over-the-counter securities will be valued as determined in good faith by the Board of Directors. Investments in securities having a maturity of 60 days or less are valued at cost with accrued interest or discount earned included in interest receivable. All other securities and assets are valued at fair value as determined in good faith by the Board of Directors, although the actual calculation may be done by others. CURRENCY TRANSLATIONS: The books and records of the Fund are maintained in U.S. dollars. Italian lire amounts are translated into U.S. dollars on the following basis: (a) market value of investment securities, assets and liabilities at the midday spot (i.e., cash) rate; and (b) purchases and sales of investment securities, income and expenses at the midday spot rate on the respective dates of such transactions. Unrealized gains and losses which result from changes in foreign currency exchange rates have been included in the unrealized appreciation/(depreciation) of investments, foreign currency holdings and net other assets. Net realized foreign currency gains and losses resulting from changes in exchange rates include foreign currency gains and losses between trade date and settlement date on investment securities transactions, foreign currency transactions and the difference between the amounts of interest and dividends recorded on the books of the Fund and the amount actually received. The portion of foreign currency gains and losses related to fluctuation in exchange rates between the initial purchase trade date and subsequent sale trade date is included in realized gains and losses on investment securities sold. FORWARD FOREIGN CURRENCY CONTRACTS: Forward foreign currency contracts are valued at the forward rate and are marked-to-market daily. The change in market value is recorded by the Fund as an unrealized gain or loss. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of forward foreign currency contracts does not eliminate fluctuations in the underlying prices of the Fund's portfolio securities, but it does establish a rate of exchange that can be achieved in the future. Although forward foreign currency contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Fund could 13 - -------------------------------------------------------------------------------- o - ---------------------------------------------------- THE ITALY FUND INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Investment securities transactions are accounted for as of trade date. The Fund uses the identified cost method for determining the realized gain or loss on investments for both financial and U.S. Federal income tax reporting purposes. Dividend income and distributions to shareholders are recorded on the ex-dividend date except that certain dividends from foreign securities are recorded as soon as the Fund is informed of the ex-dividend date. Interest income is recorded on the accrual basis. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of the Fund to distribute all taxable net investment income at least annually. The Fund currently expects to distribute substantially all of its net realized capital gains, if any, annually. The Board of Directors will determine annually whether to distribute such net gains to shareholders. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to differing treatments of income and gains on various investment securities held by the Fund, timing differences and differing characterization of distributions made by the Fund as a whole. FEDERAL INCOME TAXES: It is the policy of the Fund to qualify as a regulated investment company by complying with the requirements of the Internal Revenue Code applicable to regulated investment companies. Therefore, no Federal income tax provision is required. The Fund is subject to a 4% nondeductible excise tax measured with respect to certain undistributed amounts of net investment income and capital gains. FOREIGN INCOME TAXES: Investment income received by the Fund from Italian corporations is subject to foreign income taxes withheld at the source. RECLASSIFICATIONS: During the current year, the Fund adopted Statement of Position 93-2 "Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies." Accordingly, certain reclassifications have been made to the components of capital in the Statement of Net Assets to conform with the accounting and reporting guidelines of this statement. Distributions in excess of book basis accumulated realized gains or undistributed net investment income that were the result of permanent book and tax accounting differences have been reclassified to paid-in capital. Accordingly, amounts as of January 31, 1993 have been restated to reflect a decrease in paid-in capital, a decrease in undistributed net investment income and a decrease in accumulated realized loss of $355,393, $1,182,862 and $1,538,255, respectively. The Financial Highlights have not been restated to reflect this change in presentation. Net investment income, net realized gains, and net assets were not affected by this change. 2. INVESTMENT ADVISORY, ADMINISTRATION AND OTHER FEES The Fund has entered into an investment advisory agreement ("Investment Advisory Agreement") with Lehman Brothers Global Asset Management Limited ("Global Asset Management"), a wholly owned subsidiary of Lehman Brothers Holdings Inc. ("Holdings"). American Express Company ("American Express") owns 100% of Holdings' issued and outstanding common stock, which represents approximately 92% of Holdings' issued and outstanding voting stock. The remainder of Holdings' voting stock is owned by Nippon Life Insurance Company. Under the Investment Advi- 14 - -------------------------------------------------------------------------------- o - ---------------------------------------------------- THE ITALY FUND INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) sory Agreement, the Fund pays a fee computed and paid monthly at an annual rate of 0.75% of the value of its average monthly net assets. The Fund also has entered into an administration agreement with The Boston Company Advisors, Inc. ("Boston Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation ("Mellon"), which provides that Boston Advisors will be paid a fee computed and paid monthly at the annual rate of 0.20% of the value of its average monthly net assets. For the year ended January 31, 1994, the Fund incurred total brokerage commissions of $58,678 of which $1,717 was paid to Lehman Brothers. No officer, director or employee of Lehman Brothers, Global Asset Management or Boston Advisors or of any parent or subsidiary of those corporations receives any compensation from the Fund for serving as a Director or officer of the Fund. The Fund pays each Director who is not an officer, director or employee of Lehman Brothers, Global Asset Management or Boston Advisors or any of their affiliates $7,500 per annum plus $750 per meeting attended and reimburses each such Director for travel and out-of-pocket expenses. The Fund pays each member of the Advisory Board an annual fee of $8,000 plus $250 per meeting attended and reimburses each Advisory Board member for travel and out-of-pocket expenses. Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data Corporation, serves as the Fund's transfer agent. American Express retains 21.5% interest in FDC. 3. SECURITIES TRANSACTIONS During the year ended January 31, 1994, cost of purchases and proceeds from sales of invest- ment securities (excluding short-term investments) when aggregated amounted to $27,250,663 and $26,328,603, respectively. As of January 31, 1994, the aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost amounted to $13,060,784, and the aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value amounted to $10,202,756. 4. FUND SHARES As of January 31, 1994, 20 million shares of $.01 par value capital stock were authorized and 6,335,393 shares were outstanding and 3,167,696 shares were subscribed.
Year Ended 01/31/94 ------------------------- Shares Amount --------- ----------- Issued via rights offering*........ 3,167,696 $27,408,313 Issued as reinvestment of dividends......................... 492 4,665 --------- ----------- Net increase....................... 3,168,188 27,412,978 --------- ----------- --------- ----------- * On January 20, 1994, the Fund received sub- scriptions for 3,167,696 shares at a subscription price of $8.74 per share pursuant to the exercise of rights issued to shareholders of record on December 28, 1993. Share issuance costs, which totaled $277,350, were charged directly against the proceeds of the offering.
5. RESTRICTED SECURITIES Certain of the Fund's investments are restricted as to resale and are valued at the direction of the Fund's Board of Directors in good faith, at fair value, after taking into consideration appropriate indications of value available. The table below shows the number of shares held, the acquisition date, value as of January 31, 1994, value per unit, percentage of net assets which the securities comprise and aggregate cost of the securities. 15 - -------------------------------------------------------------------------------- o - ---------------------------------------------------- THE ITALY FUND INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
NUMBER OF ACQUISITION 01/31/94 VALUE PER PERCENTAGE OF NET SECURITY SHARES DATE FAIR VALUE UNIT ASSETS COST - -------------------------------------- ----------- ----------- ------------ ----------- ----------------- ---------- Europa Investmenti.................... 850,000 07/02/91 $ 501,327 $ 0.59 0.5% $ 623,396 Finanziaria Italiana di Participazioni....................... 10,000 03/13/87 631,082 63.11 0.7 772,361 -- ------------ Total............................. $ 1,132,409 1.2% -- -- ------------ ------------
6. LENDING OF PORTFOLIO SECURITIES The Fund has the ability to lend its securities to brokers, dealers and other financial organizations. Loans of securities by the Fund are collateralized by cash, letters of credit or U.S. government securities that are maintained at all times in an amount at least equal to the current market value of the loaned securities. At January 31, 1994, the Fund had securities on loan to certain brokers for which the Fund received $6,950,375 as collateral. At January 31, 1994, the Fund's loaned securities had an aggregate market value of $6,753,685 which represented 7.2% of total net assets. 7. CAPITAL LOSS CARRYFORWARDS AND OTHER TAX INFORMATION At January 31, 1994, the Fund had available for Federal tax purposes unused capital loss carryforwards of $1,736,171 and $1,962,107 to offset future net capital gains expiring in the year 2001 and 2002, respectively. In accordance with tax law, the Fund has elected to defer the recognition of losses occurring between October 31 and January 31 until the first day of the following fiscal year. The amount of such deferral is $257,530 of currency losses and $927,974 of capital losses. These losses for tax purposes will be deemed to occur on February 1, 1994. For the fiscal year ended January 31, 1994, the total amount of income received by the Fund from sources within foreign countries and possessions of the United States was $0.2138 per share (representing a total of $2,031,495). The total amount of taxes paid by the Fund to such countries was $0.0278 per share (representing a total of $264,284). 8. CONCENTRATION OF CREDIT RISKS 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. 16 THE ITALY FUND INC. ----------------------------------------------------------------------- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
NET REALIZED NET INCREASE/ (DECREASE) GAIN/(LOSS) ON INVESTMENT NET INVESTMENT INVESTMENTS AND IN NET ASSETS RESULTING INCOME INCOME/(LOSS) CURRENCY FROM OPERATIONS QUARTER ---------------------- ----------------------- -------------------------- -------------------------- END TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE TOTAL PER SHARE -------------------- ---------- ---------- ---------- ----------- ------------ ----------- ------------ ----------- April 30, 1992...... $ 171,205 $ 0.03 $ (89,143) $ (0.01) $ (72,791) $ (0.01) $ (3,638,243) $ (0.57) July 31, 1992....... 1,408,295 0.22 1,133,982 0.18 (145,886) (0.02) (9,861,491) (1.56) October 31, 1992.... 264,725 0.04 45,344 0.01 (3,290,180) (0.52) (3,331,563) (0.53) January 31, 1993.... 324,140 0.05 92,679 0.01 113,301 0.02 28,819 0.01 April 30, 1993...... 208,399 0.03 (22,200) 0.00 (633,996) (0.10) 4,646,508 0.73 July 31, 1993....... 1,164,578 0.19 946,601 0.14 (673,685) (0.10) 2,566,981 0.41 October 31, 1993.... 231,050 0.04 (51,313) (0.01) (330,679) (0.05) 1,139,682 0.17 January 31, 1994.... 163,184 0.03 (104,964) (0.01) (1,350,029) (0.21) 4,843,089 0.53
17 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC. REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of The Italy Fund Inc.: We have audited the accompanying statement of assets and liabilities of The Italy Fund Inc., including the schedule of portfolio investments, as of January 31, 1994, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the seven years in the period then ended and for the period February 28, 1986 (Commencement of Operations) to January 31, 1987. 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, 1994 by correspondence with custodians and brokers. 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, 1994, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the seven years in the period then ended and for the period February 28, 1986 (Commencement of Operations) to January 31, 1987, in conformity with generally accepted accounting principles. COOPERS & LYBRAND Boston, Massachusetts March 17, 1994 18 - -------------------------------------------------------------------------------- o - ---------------------------------------------- THE ITALY FUND INC. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN Pursuant to the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"), shareholders of the Fund whose shares are registered in their own name may elect to have all distributions automatically reinvested in additional shares of the Fund by TSSG, as agent under the Plan. Distributions with respect to shares registered in the name of shareholders, such as banks, brokers or nominees, which hold shares for others (that is, in "street name"), may be reinvested by the broker or nominee in additional shares under the Plan, but only if the service is provided by the broker or nominee. Investors who own Fund shares registered in the street name should consult their broker or 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 TSSG as dividend paying agent. The number of shares of common stock participants in the Plan 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 the 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 net asset 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, TSSG will buy Fund shares in the open market, on the New York Stock Exchange or elsewhere, beginning on the payment date of 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 commission. Shares issued by the Fund are not issued at a discount of more than 5 percent from the then current market value of the Fund's shares. If the market price exceeds the net asset value of the Fund shares before TSSG has completed its purchases, the average per share purchase price paid by TSSG may exceed the net asset value of the Fund's shares, resulting in the acquisition of fewer shares than if the dividend or distribution had been paid in shares issued by the Fund. Participants in the Plan have the option of making additional semi-annual cash payments to TSSG in any amount from $100 to $3,000 for investment in Fund shares. TSSG uses all funds so received (as well as any dividends and capital gains distributions received in cash) to purchase Fund shares in the open market on or about February 15 and August 15 of each year. Plan participants are not subject to any charge for reinvesting dividends or capital gains distributions. Each Plan participant will, however, bear a pro rata share of brokerage commissions incurred with respect to TSSG'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 TSSG in writing. A termination will be effective immediately if notice is received by TSSG not less than 10 days before any 19 - -------------------------------------------------------------------------------- o - ---------------------------------------------- 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, TSSG 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 TSSG at 1-800-331-1710. 20 - -------------------------------------------------------------------------------- o - ---------------------------------------------------- THE ITALY FUND INC. INVESTMENT ADVISER OFFICERS Lehman Brothers Global Asset Management Limited Heath B. McLendon Two Broadgate CHAIRMAN OF THE BOARD London EC2M 7HA, Mario d'Urso United Kingdom PRESIDENT Erich Stock ADMINISTRATOR VICE PRESIDENT AND The Boston Company Advisors, Inc. INVESTMENT OFFICER One Boston Place Boston, Massachusetts 02108 Christina Haage TREASURER ADVISORY BOARD Francis J. McNamara, III Andrea Farace SECRETARY Pierre Henchoz Ing. Dott. Ettore Lolli Dott. Pietro Manes Ambasciatore Egidio Ortona DIRECTORS Heath B. McLendon Paolo M. Cucchi James J. Crisona Alessandro C. di Montezemolo Dr. Paul Hardin George Pavia
THE ITALY FUND INC. This report is sent to the shareholders of The Italy Fund Inc. for their information. It is not a Pro- spectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in the 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 objec- tives, the characteristics and quality of the Fund's investments, the size of the Fund and variations in the Lira/Dollar exchange rate. This Index generally reflects ordinary shares (as opposed to savings shares). THE ITALY FUND INC. TWO WORLD TRADE CENTER NEW YORK, NEW YORK 10048 (212) 298-6263 Annual Report January 31, 1994 -----END PRIVACY-ENHANCED MESSAGE-----