-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T3URNL2I4w8jnq8Kw+9uqaDYf/e06hq5ZsfladUyp4/FkGUTMauyywJ39TYFIHGd /M3NL4GSpQVFeT4fOMYfMA== 0000091155-96-000227.txt : 19960617 0000091155-96-000227.hdr.sgml : 19960617 ACCESSION NUMBER: 0000091155-96-000227 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960430 FILED AS OF DATE: 19960614 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ITALY FUND INC CENTRAL INDEX KEY: 0000785855 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04517 FILM NUMBER: 96580896 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 6175731332 N-30D 1 DEAR SHAREHOLDER: We are pleased to present the quarterly report for The Italy Fund Inc. for the three-months ended April 30, 1996. As of that date, the Fund's net asset value (NAV) per share was $10.27 as compared to $9.56 as of January 31, 1996 and $8.89 as of October 31, 1995. The Fund's NAV increased by 7.43% during the quarter. This compares favorably with a 6.10% increase over the same period in the Banco Commerciale Index (BCI Index). Since its inception in 1986, the Italy Fund has consistently outperformed the BCI Index, a widely followed Italian index which includes all the securities listed on the Milan Stock Exchange. POLITICAL OVERVIEW After forty-nine years, Italy's once-feared Communists won power from the center-right party in the election held on April 21, 1996. Following the election of the Communists, the Italian financial markets surged. Romano Prodi, an economics professor with centrist views, was designated to become prime minister in May to form Italy's 55th post-war government. Mr. Prodi heads an eight-party center-left coalition that used an Olive Tree as an electoral symbol. Although nominally led by Mr. Prodi, the Olive Tree Coalition is in fact dominated by the Partito Democratico della Sinistrat (PDS), the recycled former Communist Party (PCI). The PDS won 21% of the popular vote in the lower and more powerful house of Italy's bicameral legislature, making it the country's largest single political group. The Olive Tree Coalition has only a relative majority in Italy's Parliament. In the Parliament's upper house, Prodi's left-center coalition controls 157 out of 315 seats, which should make it less dependent on hard-line Communists to effect political measures at that level. However, in the lower house of the Parliament, Mr. Prodi's coalition controls only 284 seats out of a total of 630, which is dominated by the hard-line Communist party. At the same time, Mr. Berlusconi's Forsa Italia (FI) and conservative National Alliance holds 246 seats in the lower house of Parliament. To make matters potentially more difficult for the Olive Tree coalition, other prominent leftist Italian politicians such as Fausto Bertinotti have made it clear that they will not participate in Mr. Prodi's government, but may only vote with it on an issue-by-issue basis. Therefore, Mr. Prodi faces quite a few challenges in creating a new government over the next few months and the process may take longer than previously anticipated. Despite these challenges and the difficulty in keeping such a broad-based political coalition together, we believe the new Prodi government has a good chance of remaining in office for a longer period of time than many other prior Italian government coalitions. ECONOMIC OVERVIEW Italy's economy poses some enormous challenges and the country's eligibility for European Monetary Union remains very much in doubt. Italy's Gross Domestic Product (GDP) contracted in the fourth quarter of 1995 due in part to fewer working days as many businesses curtailed production to reduce inventories. Much of the sharp decline in Italy's economy can be traced to a drop in export- related demand as many of Europe's economies continue to experience near- recessionary conditions. In January 1996, Italy reported its first monthly trade deficit in two years. In addition, unemployment in Italy rose during this time and the Italian economy's future outlook was clouded by high short-term interest rates. Given the current trends of lower consumer spending and slower spending on capital improvements, we forecast real Italian GDP will rise by roughly 0.9% this year and approximately 2.6% in 1997. Inflation in Italy remains a key challenge. Consumer prices have risen to an estimated annual rate of 6.7% in the fourth quarter of 1995 and rose 0.3% in March 1996. In fact, Governor Fazio of the Bank of Italy warned recently that Italy's 9.0% discount rate will not be reduced until the annual rate of increase in the country's Consumer Price Index (CPI) falls below 4.0%. In addition, Italy has changed its method of calculating consumer inflation. The new basket of goods used to calculate Italy's CPI will give greater weight to health care and education costs, and less to food, clothing and entertainment. However, despite a slowing economy, Italy is the only Western European country that has not yet reduced interest rates over the last twelve months. We therefore believe the Italian stock market, which remains undervalued versus many other European markets, could provide investors with some pleasant upside surprises over the near term. FUND'S INVESTMENT STRATEGY At April 1, 1996, the Fund's weighting in ENI (a diversified energy company that was recently privatized and is now the largest Italian-listed company) was only 2.6% versus a 15% weighting in the BCI Index. The price of ENI shares increased in April 1996 and, as a result, the Italy Fund's performance versus the BCI Index was adversely affected. During April 1996, the Fund generated cash by selling some of its bank holdings such as Banca Naz Lavoro, Mediobanca, Banca Popolare Commercio & Industria, and Banca San Paolo. Moreover, the Italy Fund sold its holdings in insurance companies such as Fondiaria, Unipol, and La Presidente. The proceeds from the sale of these stocks were reinvested in ENI. At the end of April, the Italy Fund's weighting in ENI was 11%. In addition, the Fund sold some of its smaller positions in Magneti Marelli (an auto parts and accessories company), Pagnossin (a kitchenware company), and Sopaf (an investment management company) and doubled its holdings in Mondadori (a publishing company), and Sogefi (an auto components company). Since the beginning of April, the Fund also acquired for the first time the stocks of Natuzzi (a furniture company) and Saipem (an oil drilling company). During April 1996, the Italy Fund reduced the number of its portfolio positions from 67 to 52 and plans to continue reducing the number of positions over the near term. In our view, some of Italy's New York-listed American depository receipts (ADRs) deserve a place in the Italy Fund. We believe that many of these medium-sized Italian company ADRs represent good value and represent unique investment opportunities. During the period covered by this report, the Italy Fund reduced its portfolio weighting in the insurance industry from 18.5% to 15.3%. The margins of many Italian non-life insurance companies peaked in 1995, primarily due to higher automobile tariffs. For the remainder of 1996, we expect margins to drop further for many Italian car insurers due to a revival of price competition and more claims that are usually filed during an economic recovery. Moreover, many Italian insurers are highly capitalized with a significant portion of their assets invested in low-yielding real estate. On the other hand, because some Italian insurance companies are internationally diversified and have a low exposure to potential liabilities from automobile insurance coverage, they remain, in our view, attractive investments. These are the key reasons why we have reduced the Fund's exposure only slightly in the insurance sector. During the quarter, the Fund also reduced its weighting in the banking industry from 16.6% to 12.5%. With 950 different banks, Italy's banking industry remains highly fragmented. Since 1990, despite legislation that attempted to consolidate the industry, the number of Italian banks has declined by only 4.5% while the number of branches has increased by 24%. Therefore, retail Italian banking remains extremely competitive. Moreover, due to a slowdown in general business activity, credit volume was depressed in the first half of 1996. In our view, a combination of low lending volumes with declining margins does not bode well for interest income profitability of the banking industry. Therefore, the Italy Fund reduced its holdings in this area although we continue to emphasize within the portfolio the stocks of Italian banks that are involved in the growth of 2 private pension funds and investment banks that are key players in the restructuring of many Italian industries. Since April, the Italy Fund sharply increased its weighting in the energy sector from 2.6% to 11.5%. As discussed previously, the Fund has increased its holdings in ENI because of our belief it is undervalued compared to many other European energy companies. In our view, ENI represents a very attractive core holding for the Italy Fund. With respect to the telecommunications industry, the Fund has kept its weighting at roughly 21%. A key holding of the Fund in this sector is STET, a telecommunications holding company that owns roughly 64% of Telecom Italia (the principal operator of local, long-distance and international phone services) and approximately 62% of Telecom Italia Mobile (Europe's largest cellular network provider). In 1995, STET's market value was more or less in line with its net asset value. Today, in light of STET's estimated 30% discount over its net asset value, we believe this stock has excellent upside potential over the next few years. Other key Italy Fund holdings in the telecommunications sector include Telecom Italia (the fourth largest wire line telecommunications company in Europe) and Telecom Italia Mobile (a telecommunications company that reported 280,000 new subscribers during the first quarter of 1996 and a total subscriber base of roughly 4.1 million customers). We believe that Telecom Italia Mobile's current market share of 6.9% will rise sharply during the next few years because the company remains a formidable business competitor. In addition, we believe Telecom Italia Mobile's high current valuation is justified given our positive long-term outlook for Italy's telecommunications industry. CONCLUSION While the new Prodi government will face many challenges over the coming months, we remain optimistic that much-needed fiscal and electoral reforms will ultimately be implemented in Italy. With a little bit of luck and persistence, Prodi's Olive Tree coalition may grow and bear fruit and that should prove to be ultimately positive for Italy and its financial markets. On a sadder note, we regret to announce the passing of Ambasciatore Egidio Ortona, a widely respected Italian statesman and trusted advisor to the Italy Fund. He will be sorely missed. Thank you for investing in the Italy Fund. We look forward to continuing to help you achieve your financial goals. Sincerely, /s/ Heath B. McLendon Heath B. McLendon Chairman of the Board /s/ Mario d'Urso Mario d'Urso President /s/ Rein W. van der Does Rein W. van der Does Investment Officer May 8, 1996 3 THE ITALY FUND'S SECTORIAL STRUCTURE APRIL 30, 1996 (UNAUDITED) [CHART APPEARS HERE] 15.3% Insurance 4.6% Auto 12.5% Banking 3.1% Construction 9.8% Consumers & Food Energy 11.5% Telecoms 21.3% Utilities 7.6% Engineering 3.6% Miscellaneous 10.7% BCI INDEX SECTORIAL STRUCTURE APRIL 30, 1996 (UNAUDITED) [CHART APPEARS HERE] 19.0% Insurance 8.5% Auto 16.6% Banking 2.2% Construction 4.9% Consumers & Food Energy 16.6% Telecoms 19.5% Utilities 3.5% Engineering 2.5% Miscellaneous 6.7% 0.0% ADR 0.0% Cash 4 THE ITALY FUND INC. Schedule of Investments as of April 30, 1996 (unaudited) ================================================================ Shares Security Value - ---------------------------------------------------------------- COMMON STOCKS -- 97.4% - ---------------------------------------------------------------- AUTOMOTIVE -- 4.8% 300,000 Fiat S.p.A. $ 1,018,909 330,600 IFIL Finanziaria di Partecipazioni S.p.A. 1,074,873 542,500 IFIL Finanziaria di Partecipazioni S.p.A. di Risp NC** 944,148 660,000 Sogefi S.p.A. 1,465,856 ---------- 4,503,786 ---------- BANKING -- 12.3% 1,700,000 Banca Fideuram S.p.A. 2,927,110 180,000 Banca Popolare di Bergamo/ Credito Varesino 2,928,567 1,800,000 Credito Italiano S.p.A. 2,284,779 440,000 Istituto Mobiliare Italiano S.p.A. 3,482,339 ---------- 11,622,795 ---------- CONSTRUCTION -- 3.1% 400,000 Italcementi S.p.A. di Risp NC ** 1,099,056 315,000 Unicem S.p.A. di Risp NC ** 965,365 490,000 Vianini Lavori S.p.A. 845,575 ---------- 2,909,996 ---------- CONSUMER -- 8.3% 100,000 Arnoldo Mondadori Editore S.p.A. 1,875,941 100,000 Benetton Group S.p.A. 1,199,528 25,000 Industrie Natuzzi S.p.A. 1,300,000 186,136 La Rinascente S.p.A. di Risp NC ** 564,256 260,000 Recordati S.p.A. di Risp NC ** 1,476,133 216,223 Simint S.p.A. # 349,635 950,041 SME Soc Meridionale Finanziaria S.p.A. 1,055,928 ---------- 7,821,421 ---------- ENERGY -- 11.3% 2,360,000 Ente Nazionale Idrocarburi S.p.A. # $10,164,826 150,000 Saipem S.p.A. 545,981 ---------- 10,710,807 ---------- ENGINEERING -- 4.7% 431,000 Ansaldo Trasporti S.p.A. 601,896 180,000 Danieli & Co. 1,275,841 266,750 Danieli & Co. di Risp NC ** 958,149 1,350,000 Olivetti & Co. S.p.A. 883,540 355,000 Sasib S.p.A. di Risp NC ** 691,116 ---------- 4,410,542 ---------- FOOD -- 5.3% 12,595 Eridania Beghin-Say S.A. 2,050,796 800,041 Finanziarira Autogrill S.p.A. # 852,905 220,000 La Doria S.p.A. # 951,365 1,070,000 Parmalat Finanziaria S.p.A. 1,176,264 ---------- 5,031,330 ---------- INSURANCE -- 16.1% 200,000 Alleanza Assicurazioni S.p.A. 1,880,335 140,000 Assicurazioni Generali S.p.A. 3,476,702 1,602,000 Instituto Nazionale Delle Assicurazioni 2,455,298 425,700 Riunione Adriatica di Sicurta S.p.A. 4,761,939 242,000 Societa Assicuratrice Industriale S.p.A 2,595,683 ---------- 15,169,957 ---------- MISCELLANEOUS -- 1.6% 850,000 Europa Investimenti +# 412,881 49,639 Quattrocentoduedue Cat B +# 348,986 620,000 Societa Partecipazioni Finanziare S.p.A. Ordinary 657,798 See Notes to Financial Statements. 5 THE ITALY FUND INC. Schedule of Investments as of April 30, 1996 (unaudited) (continued) ==================================================================== Shares Security Value - -------------------------------------------------------------------- MISCELLANEOUS -- 1.6% (continued) 181,500 Societa Partecipazioni Finanziare S.p.A. di Risp* $ 148,716 1,568,381 ----------- TELECOMMUNICATIONS -- 22.0% 55,000 Ericsson S.p.A. 725,476 360,000 Sirti S.p.A. 2,259,009 600,000 Stet Societa' Finanziaria Telefonica S.p.A. 2,022,095 1,902,500 Stet Societa' Finanziaria Telefonica S.p.A. di Risp NC ** 4,972,036 1,416,000 Telecom Italia S.p.A. 2,874,328 1,900,000 Telecom Italia S.p.A. di Risp * 3,163,398 1,700,000 Telecom Italia Mobile S.p.A. di Risp * # 2,390,364 1,076,000 Telecom Italia Mobile S.p.A. Ordinary # 2,356,091 ----------- 20,762,797 ----------- UTILITIES -- 7.9% 1,800,000 Autostrade Concessioni E Costruzioni 2,311,240 460,000 Edison S.p.A. 2,624,262 356,000 Italgas S.p.A. 1,223,440 756,000 SONDEL -- Societa Nordelettrica S.p.A. 1,297,354 ----------- 7,456,296 ----------- TOTAL COMMON STOCKS (Cost -- $80,940,236) 91,968,108 ----------- WARRANTS -- 0.2% BANKING -- 0.2% 650,000 Credito Italiano S.p.A. Warrants, expire 12/31/97 # (Cost -- $211,879) 169,582 Face Amount++ Security Value - ---------------------------------------------------------------- BONDS -- 2.4% BANKING -- 0.6% 900,000,000 Banca Popolare di Bergamo Convertible, 8.800% due 12/31/00 $ 619,341 MISCELLANEOUS -- 1.8% 1,050,750,000 Costa Crociere S.p.A., 6.750% due 1/1/00 608,443 1,700,000,000 Italian Certificati di Credito del Tesoro, 11.300% due 4/1/02 1,088,485 1,696,928 TOTAL BONDS (Cost -- $2,274,228) 2,316,269 TOTAL INVESTMENTS AT VALUE -- 100% (Cost -- $83,426,343)+++ $94,453,959 - --------------- * Risp -- Risparmio (savings shares). ** Risp NC -- Risparmio Non-Convertible (non-convertible savings shares). # Non-income producing security. + Security restricted as to resale (See Note 4). ++ Represents local currency. +++ Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 6 THE ITALY FUND INC. Statement of Assets and Liabilities April 30, 1996 (unaudited) ========================================================================= ASSETS: Investments, at value (Cost--$83,426,343)............. $ 94,453,959 Foreign currency (Cost--$4,012,671)................... 4,013,512 Cash.................................................. 3,912 Receivable for securities sold........................ 1,341,094 Dividends and interest receivable..................... 56,789 ------------ TOTAL ASSETS.......................................... 99,869,266 ------------ LIABILITIES: Payable for securities purchased...................... 2,058,028 Investment advisory fees payable...................... 71,872 Accrued expenses...................................... 161,786 Other liabilities..................................... 9,311 ------------ TOTAL LIABILITIES..................................... 2,300,997 ------------ TOTAL NET ASSETS........................................ $ 97,568,269 ============ NET ASSETS: Par value of capital shares........................... $ 95,031 Capital paid in excess of par value................... 94,936,689 Undistributed net investment income................... 88,807 Accumulated net realized loss from security transactions.......................................... (8,577,357) Net unrealized appreciation of investments and foreign currencies............................................ 11,025,099 ------------ TOTAL NET ASSETS (Equivalent to $10.27 a share on 9,503,089 shares of $0.01 par value outstanding; 20,000,000 shares authorized)........................................... $ 97,568,269 ============ See Notes to Financial Statements. 7 THE ITALY FUND INC. Statement of Operations For the Three Months Ended April 30, 1996 (unaudited) ================================================================================ INVESTMENT INCOME: Dividends............................................. $ 44,021 Interest.............................................. 140,918 Less: Foreign withholding tax......................... (8,825) ----------- TOTAL INVESTMENT INCOME............................... 176,114 ----------- EXPENSES: Management fees (Note 2)........................... 212,682 Audit and legal.................................... 28,000 Directors' fee..................................... 25,625 Shareholder and system serving fees................ 24,000 Custody............................................ 18,855 Shareholder communications......................... 11,000 Registration fees.................................. 7,000 Other.............................................. 37,755 ----------- NET EXPENSES....................................... 364,917 ----------- NET INVESTMENT LOSS..................................... (188,803) ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES (NOTE 3): Realized Gain (Loss) From: Security transactions (excluding short-term securities)........................................ (1,670,696) Foreign currency transactions...................... 81,612 ----------- NET REALIZED LOSS.................................. (1,589,084) ----------- Change in Net Unrealized Appreciation of Investments and Foreign Currencies: Beginning of period................................ 2,519,552 End of period...................................... 11,025,099 ----------- INCREASE IN NET UNREALIZED APPRECIATION............ 8,505,547 ----------- NET GAIN ON INVESTMENTS AND FOREIGN CURRENCIES.......... 6,916,463 ----------- INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 6,727,660 =========== See Notes to Financial Statements. 8 THE ITALY FUND INC. Statements of Changes in Net Assets OPERATIONS: Net investment income (loss).................. $(188,803) $ 1,131,274 Net realized loss............................. (1,589,084) (3,663,972) Increase in net unrealized appreciation....... 8,505,547 216,237 ------------ ------------ Increase (Decrease) in Net Assets From Operations.................................... 6,727,660 (2,316,461) ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income......................... -- (190,062) ------------ ------------ Decrease in Net Assets From Distri- butions to Shareholders..................... -- (190,062) ------------ ------------ Increase (Decrease) in Net Assets.................. 6,727,660 (2,506,523) NET ASSETS: Beginning of period........................... 90,840,609 93,347,132 ------------ ------------ End of period*................................ $97,568,269 $90,840,609 ============ ============ *Includes undistributed net investment income of:.. $ 88,807 $ 195,998 ============ ============ See Notes to Financial Statements. 9 THE ITALY FUND INC. Notes to Financial Statements (unaudited) =============================================================================== 1. Significant Accounting Policies The Italy Fund Inc. ("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. 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 prices in the primary exchange on which they are traded; securities listed or traded on certain foreign exchanges or other markets whose operations are similar to the U.S. over-the-counter market (including securities listed on exchanges where the primary market is believed to be over-the-counter) and listed securities for which no sale was reported on that date are valued at the mean between the bid and ask prices. 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) short-term investments and 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 premiums and accretion of discount, is recorded on the accrual basis; (f) dividend income is 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; (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 and 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. Reclassifications were made to the Fund's capital accounts to reflect permanent book/tax differences and income and gains available for distributions under income tax regulations. At January 31, 1996, a portion of overdistributed net investment income amounting to $512,466 has been reclassified to paid-in capital. Net investment income, net realized 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 from these amounts. 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. As of April 30, 1996, there were no open forward foreign currency contracts. 10 THE ITALY FUND INC. Notes to Financial Statements (unaudited) (continued) ================================================================================ 2. Management Agreement and Transactions with Affiliated Persons At December 15, 1995, Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith Barney Holdings, Inc. ("SBH"), acts as investment manager of the Fund. The Fund pays SBMFM 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. For the three months ended April 30, 1996, the Fund incurred total brokerage commissions of $57,322. All officers (except one) and one Director of the Fund are employees of Smith Barney Inc. 3. Securities Transactions During the three months ended April 30, 1996, the aggregate cost of purchases and proceeds from sales of investment securities (excluding short-term securities) when aggregated amounted to $13,696,130 and $16,665,942, respectively. As of April 30, 1996, aggregate gross unrealized appreciation for all securities in which there was an excess of value over tax cost amounted to approximately $17,938,698 and aggregate gross unrealized depreciation for all securities in which there was an excess of tax cost over value to approximately $6,911,082 or net unrealized appreciation of $11,027,616. 4. Restricted Securities Certain of the Fund's investments are valued at the direction of the Fund's Board of Directors; these securities are restricted as to resale and have been valued in good faith, taking into consideration the appropriate economic, financial and other pertinent available information pertaining to the restricted securities. The table below shows all securities valued by the Fund's Board of Directors:
Number of Acquisition 4/30/96 Value Per Percentage of Security Shares Date Fair Value Unit Net Assets Cost -------- ------ ---- ---------- ---- ---------- ---- Europa Investimenti........ 850,000 7/02/91 $412,881 $0.49 0.4% $623,396 Quattrocentoduedue Cat B.................... 49,639 3/21/94 348,986 7.03 0.4 295,889 -------- --- -------- Total................ $761,867 0.8% $919,285 ======== === ========
5. 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 April 30, 1996, the Fund had no securities on loan to brokers. 11 THE ITALY FUND INC. Notes to Financial Statements (unaudited) (continued) =============================================================================== 6. Capital Loss Carryforwards At January 31, 1996, the Fund had, for Federal income tax purposes, approximately $6,602,000 of capital loss carryforwards available to offset future capital gains. To the extent that these carryforward losses are used to offset capital gains, it is probable that the gains so offset will not be distributed. The amount and expiration of the carryforwards are indicated below. Expiration occurs on January 31 of the year indicated: 2004 2005 ---------- ---------- Capital Loss Carryforward........................ $1,756,000 $4,846,000 7. 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. 12 THE ITALY FUND INC. Financial Highlights ================================================================================ Set forth below is per share operating performance data for a share of common stock outstanding throughout each period; 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.
1996(1) 1996 1995 1994(2) 1993 1992 ==================================================================================================================================== Net Asset Value, Beginning of Period $9.56 $9.82 $9.84 $8.43 $11.08 $11.37 Income (Loss) From Operations: Net investment income (loss) (0.01) 0.15 0.09 0.12 0.19 0.25 Net realized and unrealized gain (loss) 0.72 (0.39) 0.06 1.72 (2.84) 0.03 Total Income (Loss) From Operations 0.71 (0.24) 0.15 1.84 (2.65) 0.28 Dilution in NAV From Rights Offering -- -- -- (0.32) -- -- Offering Expenses Charged to Paid-in Capital -- -- -- (0.03) -- -- Less Distributions From: Net investment income -- (0.02) (0.06) (0.07) -- (0.25) Overdistribution of net investment income -- -- (0.11) -- -- -- Net realized gains -- -- -- -- -- (0.24) Capital -- -- -- (0.01) -- (0.08) Total Distributions -- (0.02) (0.17) (0.08) -- (0.57) Net Asset Value, End of Period $10.27 $9.56 $9.82 $9.84 $8.43 $11.08 Market Value, End of Period $8.75 $8.25 $8.75 $12.38 $8.88 $9.50 Total Return 7.43%++ (2.43)% (27.90)% 40.54%# (6.58)% 1.00% Net Assets, End of Period (000's) $97,568 $90,841 $93,347 $93,518 $53,384 $70,186 Ratios to Average Net Assets: Net investment income (0.48)%+ 1.12% 0.85% 1.30% 2.04% 2.17% Expenses* 1.64+ 1.42 1.69 1.69 1.70 1.53 Portfolio Turnover Rate 15% 58% 42% 46% 33% 24% Average commissions paid on equity security transactions(3) $0.00** $0.00** -- -- -- --
- ---------------------- (1) For the three months ended April 30, 1996 (unaudited). (2) 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. (3) As of October 1995, the SEC instituted new guidelines requiring the disclosure of average commissions per share. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. # The total return for the year ended January 31, 1994, adjusted for the effect of the rights offering completed in January of 1994 45.85% (unaudited). * During the year ended January 31, 1996, the Fund earned credits from the custodian which reduce service fees incurred. If the credits are taken into consideration, the ratio of expenses to average net assets would have been 1.41%. ** Amount represents less than $0.01 per share. 13 THE ITALY FUND INC. Quarterly Results of Operations (unaudited) ================================================================================
Net Realized Net Increase Gain (Loss) on (Decrease) in Investment Net Investment Investments and Net Assets Income Income (Loss) Foreign Currencies From Operations Quarter Ended Total Per Share Total Per Share Total Per Share Total Per Share - ---------------------------------------------------------------------------------------------------------------------------------- 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 April 30, 1994............ 262,201 0.03 37,867 0.01 376,390 0.04 21,587,589 2.27 July 31, 1994............. 1,568,187 0.17 933,702 0.10 2,317,766 0.24 (12,011,879) (1.26) October 31, 1994.......... 275,691 0.03 19,893 0.00 578,197 0.06 (6,426,246) (0.68) January 31, 1995.......... 396,171 0.04 (152,088) (0.02) (2,089,977) (0.22) (1,682,024) (0.18) April 30, 1995............ 252,540 0.03 (74,178) (0.01) (1,556,369) (0.16) (6,441,384) (0.68) July 31, 1995............. 1,539,509 0.16 1,141,497 0.12 (1,724,100) (0.18) 4,471,408 0.47 October 31, 1995.......... 287,963 0.03 (81,879) (0.01) (172,867) (0.02) (6,926,030) (0.72) January 31, 1996.......... 282,141 0.03 145,834 0.02 (210,636) (0.02) 6,579,545 0.69 April 30, 1996............ 176,114 0.02 (188,803) (0.02) (1,589,084) (0.17) 6,727,660 0.71
14 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 First Data Investor Services Group, Inc., ("First Data"), 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 First Data 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 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, First Data will buy Fund shares in the open market, on the New York Stock Exchange or elsewhere, beginning on 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. 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 Fund shares before First Data has completed its purchases, the average per share purchase price paid by First Data 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 First Data in any amount from $100 to $3,000 for investment in Fund shares. First Data uses all funds so received (as well as any dividends and capital gains distributions received in cash) to purchase Fund shares in the open market on or about February 15 and August 15 of each year. Plan participants are not subject to any charge for reinvesting dividends or capital gains distributions. Each Plan participant will, however, bear a pro rata share of brokerage commissions incurred with respect to First Data's open market purchases of Fund shares in connection with the reinvestment of dividends or capital gains distributions. The automatic reinvestment of dividends and capital gains distributions does not relieve Plan participants of any income tax that may be payable on the dividends or capital gains distributions. A participant in the Plan is treated for federal income tax purposes as having received, on the dividend payment date, a dividend or distribution in an amount equal to the cash that the participant could have received instead of shares. 15 A shareholder may terminate participation in the Plan at any time by notifying First Data in writing. A termination will be effective immediately if notice is received by First Data not less than 10 days before any dividend or distribution record date. Otherwise, the termination will be effective, with respect to any subsequent dividends or distributions, on the first day after the dividend or distribution has been credited to the participant's account in additional shares of the Fund. Upon termination and according to a participant's instructions, First Data will either (i) issue certificates for the shares credited to a shareholder's Plan account together with a check representing any fractional shares or (ii) sell such shares in the market. Information concerning the Plan may be obtained from First Data at 1-800- 331-1710. 16 THE ITALY FUND INC. Additional Information (unaudited) =============================================================================== Change in Independent Auditor: On February 15, 1995, based upon the recommendation of the Audit Committee of the Fund, the Board of Directors determined not to retain Coopers & Lybrand L.L.P. ("Coopers & Lybrand") as the Fund's independent auditor and voted to appoint KPMG Peat Marwick LLP. During the Fund's two most recent fiscal years, Coopers & Lybrand's audit reports contained no adverse opinion or disclaimer of opinion; nor were the reports qualified or modified as to uncertainty, audit scope, or accounting principles. Further, during this same period there were no disagreements with Coopers & Lybrand on any matter of accounting principles or practices, financial statement disclosure, or auditing scope procedure, which disagreements, if not resolved to the satisfaction of Coopers & Lybrand, would have caused it to make reference to the subject matter of such disagreements in connection with its audit reports. The Fund has requested Coopers & Lybrand to provide a letter to the Securities and Exchange Commission stating whether Coopers & Lybrand agrees with the foregoing statements, and to provide the Fund with a copy of such letter. A copy of this letter is available upon request by calling the Fund at (212) 723-9218. ---------------------- 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 at market prices shares of its common stock in the open market. 17 THE ITALY FUND INC. INVESTMENT ADVISER AND ADMINISTRATOR Smith Barney Mutual Funds Management Inc. 388 Greenwich Street New York, New York 10013 ADVISORY BOARD Andrea Farace Pierre Henchoz Ing. Dott. Ettore Lolli Dott. Pietro Manes DIRECTORS Heath B. McLendon Paolo M. Cucchi Alessandro C. di Montezemolo Dr. Paul Hardin George Pavia Mario d'Urso OFFICERS Heath B. McLendon Chairman of the Board Mario d'Urso President Lewis E. Daidone Senior Vice President and Treasurer Rein W. van der Does Investment Officer Irving P. David Controller Christina T. Sydor Secretary 18 [BLANK IBC] 19 THE ITALY FUND INC. ================================================================================ This report is sent to the shareholders of The Italy Fund Inc. for their information. It is not a Prospectus, circular or representation intended for use in the purchase or sale of shares of the Fund or of any securities mentioned in this report. Comparisons between changes in the Fund's net asset value per share and changes in The Banca Commerciale Italiana Index should be considered in light of the Fund's investment policy and objectives, the characteristics and quality of the Fund's investments, the size of the Fund and variations in the Lira/Dollar exchange rate. This Index generally reflects ordinary shares (as opposed to savings shares). THE ITALY FUND INC. 388 Greenwich Street New York, New York 10013 (212) 816-4605 FD01141 6/96 QUARTERLY REPORT APRIL 30, 1996 20 -----END PRIVACY-ENHANCED MESSAGE-----