-----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, QohiG6PVvZUdBqgZZhtJr0ZO8WLZYN7Gczi1VGDhSmB5fZtIHgTpH4ppIAEkE2Ov gurIDdpmEBFLKDIn9x7Kiw== 0000091155-97-000017.txt : 19970113 0000091155-97-000017.hdr.sgml : 19970113 ACCESSION NUMBER: 0000091155-97-000017 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19961031 FILED AS OF DATE: 19970110 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: 97504050 BUSINESS ADDRESS: STREET 1: TWO WORLD TRADE CENTER CITY: NEW YORK STATE: NY ZIP: 10048 BUSINESS PHONE: 6175731332 N-30D 1 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- Dear Shareholder: We are pleased to present you with the quarterly report for The Italy Fund, Inc. for the nine months ended October 31, 1996. As of that date, the Fund's net asset value (NAV) per share was $10.14, a 12.04% increase since the beginning of 1996. This compares favorably with a 7.04% increase over the same time period in the Banco Commerciale Index (BCI Index), a widely followed Italian index which includes all the securities listed on the Milan Stock Exchange. Since its inception in 1986, the Italy Fund has consistently outperformed the BCI Index. On October 31, 1996, total net assets in the Italy Fund amounted to just over $96 million. Political Overview In our opinion, the honeymoon for Romano Prodi's coalition government is clearly over. (Prodi is an economics professor with centrist views who was elected Italy's 55th post-war prime minister in April of 1996.) Prodi currently heads an eight-party center-left coalition that uses an Olive Tree as its electoral symbol. The Prodi government's priorities continue to be job creation and making sure Italy can satisfy conditions for entry into the Economic- Monetary Union (EMU) by reducing the budget deficit. We expect that Italy's 1997 Finance Bill will have been adopted by Parliament by mid-November of 1996. However, more serious spending cuts in health care and social security spending will be required next year. Because we believe that the Communist Refoundation probably will not support these proposed social security cuts, a grand coalition between Massimo D'Alema (the leader of the largest former communist party Partito Democratico della Sinistrat within the ruling coalition) and former prime minister Silvio Berlusconi of Forza Italia (FI) could result and eventually push through the much-needed structural reforms in Italy. When D'Alema decides that the current political situation is no longer tenable, Prodi will most likely be forced out. Of course, political uncertainty is unhealthy for the Italian stock market and many investors continue to shift assets out of stock funds and into bond funds. However, despite these negative factors, we believe Italian stocks remain extremely inexpensive. For example, while the Italian stock market is selling at 4.1 times 1996 cash earnings, corporate profits are estimated to rise 15% and 18% in 1996 and 1997, respectively. In addition, the Italian stock market has already discounted many of the challenges outlined in this letter. When some of Italy's structural and constitutional problems are eventually addressed, the Italian stock market could very well become one of the more attractive markets outside the U.S. Economic Overview Italy's economy is close to entering a recession as second quarter Gross Domestic Product (GDP) declined by 0.4% compared with the previous quarter. Therefore, corporate earnings disappointments for cyclical industries seem likely for the remainder of 1996 and into 1997. We believe Italy will continue to make a serious effort to meet Round One of the EMU. (Italy must cut its deficit to meet the Maastricht limit of 3.0% of GDP by 1998, the year after the deadline for eligibility in EMU.) However, in our opinion, Italy may not succeed because there are too many potential problems in the projected 1997 deficit and too much luck required for it to work. However, although there may be some temporary disappointment in Italy and some disenchantment specifically with Italian bonds (which have performed well so far this year), we believe that convergence of a single European currency will occur sometime in 1999. The return of the lira at the E.R.M. at 990 lira versus the D-mark a week ago does prove Prodi's commitment to try to be eligible for EMU in 1999. As stock markets cannot indefinitely ignore a significant decrease in both short-and long-term rates, we believe there are significant long-term gains to be ================================================================================ [LOGO] - -------------------------------------------------------------------------------- made in both Italian stocks and bonds. Yet the question for investors in Italy continues to be "when." Investors who can tolerate short-term volatility for potential long-term gains may want to consider investing in Italy now. Fund's Investment Strategy From April to the end of October 1996, we reduced the number of positions in the Italy Fund from 67 to 39. In addition, the Fund reduced its weighting in the insurance industry from 18.50% to 11.19% primarily because we believe the margins of many non-life insurance companies peaked in 1995 due mostly to higher automobile tariffs. We also reduced our weighting in the insurance industry because we expect margins to drop further for many car insurers throughout the remainder of 1996 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. During the past seven months, the Italy Fund also reduced its weighting in the banking industry from 16.60% to 12.70%. With 950 different banks, Italy's banking industry remains highly fragmented and 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 the profitability of Italy's banking industry. From April 1996 through October 1996, the Italy Fund sharply increased its weighting in the energy sector from 2.60% to approximately 16.85%. The Fund's performance was enhanced by our significant holdings in the diversified energy company and recently privatized, Ente Nazionale Idrocarbu (ENI) as well as our holdings in the oil drilling company, Saipem. With respect to the telecommunications industry, the Italy Fund has made additions to its holdings over the past seven months and its weighting in this sector rose from 19.3% to 23.1%. A key holding of the Fund in this sector is Societa Finanziaria Telefonica per Azioni (STET), a telecommunications holding company that owns a majority stake of Telecom Italia (the principal operator of local, long-distance and international phone services) and Telecom Italia Mobile (Europe's largest cellular network provider). During the period covered by this report, the Italian government announced that it intends to merge STET with Telecom Italia as a prelude to the company's again-delayed privatization. The privatization of STET, which was first announced in the late 1980's, has been pushed back many times because of political disagreements and market-related problems. Moreover, the state holding company, Instituto per la Ricostruzione Industriale, which controls 64.3% of STET, has recently come under pressure from the European Community to reduce its debt levels in order to meet the conditions of the European Union's competition policy. The following chart shows the other changes in the Italy Fund's industry weightings from March 29, 1996 through October 31, 1996: Industry 3/29/96 10/31/96 -------- ------- -------- Automotives 6.70% 6.06% Banking 16.60 12.70 Construction 3.20 3.14 Consumer Products 3.30 4.79 Energy 2.60 16.85 Engineering 4.20 3.54 Food 4.40 4.02 Insurance 18.50 11.19 Telecommunications 19.30 23.10 Textiles 1.70 3.72 Utilities 7.30 7.89 Miscellaneous 7.50 0.66 Cash 4.70 2.34 ------ ------ Total 100.00% 100.00% ====== ======
2 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- Other factors that contributed to the Italy's Fund positive relative performance during the reporting period include: -- Participation in the initial public offering of life insurance and mutual fund distributor Mediolanum that was subsequently sold at a significant profit -- Early sales of Olivetti (a computer and telecommunications concern), Simint (a clothing company) and Eridania Beghin Say (a food and beverages company) -- Initiating new positions in the American Depository Receipts (ADRs) of Gucci (a luxury goods company), Fila (a shoes and apparel company) and Natuzzi (a furniture company) Conclusion Italy's stock market has been the worst performer among the major European markets for an extremely long time. The BCI Index is still 35.00% away from its all-time high reached in May 1986. However, the BCI Index of today is very different from the BCI Index of May 1986, because the weighting of the major stocks and sectors has changed dramatically. For example, the automotive company Fiat was Italy's largest stock with a 13.70% weighting of total market capitalization. Today, Fiat's weighting in the BCI Index has fallen to 4.80%. On the other hand, the weighting of Italy's telecommunications sector (state- controlled telecommunications company STET and its two main operating subsidiaries Telecom Italia and telecommunications giant Telecom Italia Mobile) has tripled from 7.30% at the end of 1986 to approximately 21.00% today. In fact, seven of the Italian stock market's top-fifteen stocks were not even listed in 1986. In our opinion, the underperformance of the BCI Index over the past ten years was caused in large part by the underperformance of only a few major stocks and market sectors. The performance of the BCI Index is now more closely linked to Italian companies and industries that are less prone to cyclical downturns. In closing, thank you for your investment 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 November 13, 1996 3 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- THE ITALY FUND'S SECTORIAL STRUCTURE OCTOBER 31, 1996 (unaudited) [PIE CHART] Automotives 6.1% Banking 12.7% Construction 3.1% Consumer Products 4.8% Energy 16.9% Engineering 3.5% Food 4.0% Insurance 11.3% Miscellaneous 2.8% Telecommunications 23.2% Textiles 3.7% Utilities 7.9% BCI INDEX SECTORIAL STRUCTURE OCTOBER 31, 1996 (unaudited) [PIE CHART] Automotives 7.5% Banking 20.5% Construction 2.5% Consumer Products 1.1% Energy 18.6% Engineering 2.4% Food 2.0% Insurance 17.3% Miscellaneous 1.3% Telecommunications 21.8% Textiles 2.2% Utilities 2.8% 4 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- The Italy Fund Inc. Schedule of Investments as of October 31, 1996 (unaudited) ================================================================================
Shares Security Value - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COMMON STOCKS - 97.9% - -------------------------------------------------------------------------------- Automotives - 6.1% 300,000 Fiat S.p.A............................ $ 797,309 1,500,000 Pirelli S.p.A......................... 2,664,952 1,200,000 Sogefi S.p.A.......................... 2,374,122 ----------- 5,836,383 ----------- Banking - 12.7% 1,700,000 Banca Fideuram S.p.A.................. 3,606,621 180,000 Banca Popolare di Bergamo/ Credito Varesino..................... 2,832,802 1,800,000 Credito Italiano S.p.A................ 1,841,132 500,000 Istituto Mobiliare Italiano S.p.A....................... 3,962,146 ----------- 12,242,701 ----------- Construction - 3.1% 600,000 Unicem S.p.A. di Risp NC**......................... 1,539,222 900,000 Vianini Lavori S.p.A.................. 1,483,826 ----------- 3,023,048 ----------- Consumer Products - 4.8% 225,000 Arnoldo Mondadori Editore S.p.A....... 1,659,363 25,000 Industrie Natuzzi S.p.A. ADR.................................. 1,131,250 500,000 La Rinascente S.p.A. di Risp NC**........................ 1,033,732 260,000 Recordati S.p.A. di Risp NC**........................ 797,309 ----------- 4,621,654 ----------- Energy - 16.9% 2,860,000 Ente Nazionale Idrocarburi S.p.A. #............................. 13,685,600 500,000 Saipem S.p.A.......................... 2,546,905 ----------- 16,232,505 ----------- Engineering - 3.5% 180,000 Danieli & Co.......................... 1,155,248 Engineering - 3.5% (continued) 266,750 Danieli & Co. di Risp NC**......................... $ 851,081 800,000 Sasib S.p.A. di Risp NC**......................... 1,402,315 ----------- 3,408,644 ----------- Food - 4.0% 800,041 Finanziarira Autogrill S.p.A.#.............................. 816,740 220,000 La Doria S.p.A.#...................... 811,026 1,570,000 Parmalat Finanziaria S.p.A................................ 2,245,741 ----------- 3,873,507 ----------- Insurance - 11.3% 220,000 Alleanza Assicurazioni S.p.A................................ 1,552,992 154,000 Assicurazioni Generali S.p.A................................ 2,972,855 1,602,000 Instituto Nazionale Delle Assicurazioni........................ 2,219,674 425,700 Riunione Adriatica di Sicurta S.p.A..................... 4,040,128 ----------- 10,785,649 ----------- Miscellaneous - 0.7% 850,000 Europa Investimenti+#................. 280,278 49,639 Quattrocentoduedue Cat B+#.............................. 360,094 ----------- 640,372 ----------- Telecommunications - 23.2% 1,000,000 Stet Societa' Finanziaria Telefonica S.p.A..................... 3,468,197 2,802,500 Stet Societa' Finanziaria Telefonica S.p.A. di Risp NC**......................... 7,481,465 1,416,000 Telecom Italia S.p.A.................. 3,167,522 1,000,000 Telecom Italia S.p.A. di Risp*............................. 1,894,022 1,700,000 Telecom Italia Mobile S.p.A. di Risp*#..................... 1,949,616
See Notes to Financial Statements. 5 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- The Italy Fund Inc. Schedule of Investments as of October 31, 1996 (unaudited) (continued) ================================================================================
Shares Security Value - -------------------------------------------------------------------------------- Telecommunications - 23.2% (continued) 2,076,000 Telecom Italia Mobile S.p.A. Ordinary #........................... $ 4,282,473 ------------ 22,243,295 Textiles - 3.7% 100,000 Benetton Group S.p.A.................. 1,162,397 35,000 Gucci Group N.V. -- N.Y. Registered Shares ADR................ 2,415,000 ----------- 3,577,397 ----------- Utilities - 7.9% 1,440,000 Autostrade Concessioni E Costruzioni.......................... 2,136,710 460,000 Edison S.p.A.......................... 2,741,768 356,000 Italgas S.p.A......................... 1,316,849 756,000 SONDEL -- Societa Nordelettrica S.p.A.................. 1,395,985 --------- 7,591,312 --------- TOTAL COMMON STOCKS (Cost - $81,539,780).................... 94,076,467 ----------
Face Amount++ Security Value - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TIME DEPOSITS - 2.1% - -------------------------------------------------------------------------------- 1,500,000,000 J.P. Morgan 7.500% due 11/4/96.......................... $ 989,218 1,500,000,000 J.P. Morgan 7.375% due 11/4/96.......................... 989,218 ----------- TOTAL TIME DEPOSITS (Cost - $1,971,544)................... 1,978,436 ----------- TOTAL INVESTMENTS AT VALUE - 100% (Cost - $83,511,324 +++).............. $96,054,903 ===========
- ---------- * Risp -- Risparmio (savings shares). ** Risp NC -- Risparmio Non-Convertible (non-covertible savings shares). # Non-income producing security. + Security valued by the Fund's Board of Directors (See Note 4). ++ Represents local currency. +++ Aggregate cost for Federal income tax purposes is substantially the same. See Notes to Financial Statements. 6 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- The Italy Fund Inc. Statement of Assets and Liabilities October 31, 1996 (unaudited) ================================================================================ ASSETS: Investments, at value (Cost -- $83,511,324)..................... $ 96,054,903 Foreign currency (Cost -- $1,366,381)........................... 1,367,728 Cash............................................................ 20,874 Receivable for securities sold.................................. 544,768 Dividends and interest receivable............................... 99,838 ------------ Total Assets.................................................... 98,088,111 ------------ LIABILITIES: Payable for securities purchased................................ 1,416,757 Management fees payable......................................... 79,965 Accrued expenses................................................ 246,442 Other liabilities............................................... 9,311 ------------ Total Liabilities............................................... 1,752,475 ------------ Total Net Assets................................................. $ 96,335,636 ============ NET ASSETS: Par value of capital shares..................................... $ 95,031 Capital paid in excess of par value............................. 94,936,689 Undistributed net investment income............................. 1,421,596 Accumulated net realized loss from security transactions................................................... (12,660,720) Net unrealized appreciation of investments and foreign currencies......................................... 12,543,040 ------------ Total Net Assets (Equivalent to $10.14 a share on 9,503,089 shares of $0.01 par value outstanding; 20,000,000 shares authorized)............... $ 96,335,636 ============
See Notes to Financial Statements. 7
====================================================================================== [LOGO] - -------------------------------------------------------------------------------------- The Italy Fund Inc. Statement of Operations For the Nine Months Ended October 31, 1996 (unaudited) ================================================================================= INVESTMENT INCOME: Dividends....................................................... $ 2,448,706 Interest........................................................ 294,811 Less: Foreign withholding tax................................... (566,046) ---------- Total Investment Income......................................... 2,177,471 ---------- EXPENSES: Management fees (Note 2)........................................ 677,815 Audit and legal................................................. 84,000 Directors' fees................................................. 76,800 Shareholder and system servicing fees........................... 72,000 Custody......................................................... 56,566 Shareholder communications...................................... 33,000 Registration fees............................................... 21,000 Other........................................................... 141,808 ---------- Total Expenses.................................................. 1,162,989 ---------- Net Investment Income............................................. 1,014,482 ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES (NOTE 3): Realized Gain (Loss) From: Security transactions (excluding short-term securities) ...... (5,754,059) Foreign currency transactions................................. 211,116 ---------- Net Realized Loss............................................... (5,542,943) ---------- Change in Net Unrealized Appreciation of Investments and Foreign Currencies: Beginning of period........................................... 2,519,552 End of period................................................. 12,543,040 ---------- Increase in Net Unrealized Appreciation......................... 10,023,488 ---------- Net Gain on Investments and Foreign Currencies.................... 4,480,545 ---------- Increase in Net Assets From Operations............................ $ 5,495,027 ==========
See Notes to Financial Statements. 8 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- The Italy Fund Inc.
Nine Months Ended Year 10/31/96 Ended Statements of Changes in Net Assets (unaudited) 1/31/96 ============================================================================================ OPERATIONS: Net investment income.......................................... $ 1,014,482 $ 1,131,274 Net realized loss.............................................. (5,542,943) (3,663,972) Increase in net unrealized appreciation........................ 10,023,488 216,237 ----------- ----------- Increase (Decrease) in Net Assets From Operations.............. 5,495,027 (2,316,461) ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income.......................................... -- (190,062) ----------- ----------- Decrease in Net Assets From Distributions to Shareholders...... -- (190,062) ----------- ----------- Increase (Decrease) in Net Assets............................... 5,495,027 (2,506,523) NET ASSETS: Beginning of period............................................ 90,840,609 93,347,132 ----------- ----------- End of period*................................................. $96,335,636 $90,840,609 =========== =========== *Includes undistributed net investment income of:............... $ 1,421,596 $ 195,998 =========== ===========
See Notes to Financial Statements. 9 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- 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 management investment company. The significant accounting policies followed by the Fund are: (a) security transactions are accounted for on trade date; (b) securities traded on national securities markets are valued at the closing 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) securities maturing within 60 days are valued at cost plus accreted discount, or minus amortized premium, which approximates value; (d) gains or losses on the sale of securities are calculated by using the specific identification method; (e) interest income, adjusted for amortization of premium and accretion of discount, is recorded on the accrual basis; (f) dividend income is recorded on the ex-dividend date; foreign dividends are recorded on the ex-dividend date or as soon as practical after the Fund determines the existence of a dividend declaration after exercising reasonable due diligence; (g) dividends and distributions to shareholders are recorded on the ex-dividend date; (h) the accounting records are maintained in U.S. dollars. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the rate of exchange of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, and income and expenses are translated at the rate of exchange quoted on the respective date that such transactions are recorded. Differences between income 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 was 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. 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. 10 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- 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. All officers (except one) and one Director of the Fund are employees of Smith Barney Inc. 3. Securities Transactions During the nine months ended October 31, 1996, the aggregate cost of purchases and proceeds from sales of investments (including maturities, but excluding short-term securities) were as follows: ================================================================================ Purchases $ 33,326,518 - -------------------------------------------------------------------------------- Sales 35,132,274 ================================================================================ At October 31, 1996, the aggregate gross unrealized appreciation and depreciation of investments were as follows: ================================================================================ Gross unrealized appreciation $16,819,989 * Gross unrealized depreciation (4,276,410)* - -------------------------------------------------------------------------------- Net unrealized appreciation $12,543,579 * ================================================================================ * Substantially the same for Federal income tax purposes. 4. Securities Valued by the Fund's Board of Directors 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 10/31/96 Value Per Percentage of Security Shares Date Fair Value Unit Net Assets Cost -------- --------- ----------- ---------- --------- ------------ ---- Europa Investimenti............. 850,000 7/02/91 $280,278 $ 0.33 0.3% $ 623,396 Quattrocentoduedue Cat B........................ 49,639 3/21/94 360,094 7.25 0.4 295,889 -------- --- ---------- Total.......................... $640,372 0.7% $ 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 October 31,1996, the Fund had no securities on loan to brokers. 11 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- 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 ---------- ---------- Carryforward Amounts.............................. $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 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- 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............................ 0.11 0.15 0.09 0.12 0.19 0.25 Net realized and unrealized gain (loss).......... 0.47 (0.39) 0.06 1.72 (2.84) 0.03 ------- ------- ------- ------- ------- ------- Total Income (Loss) From Operations................ 0.58 (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................... $ 10.14 $ 9.56 $ 9.82 $ 9.84 $ 8.43 $ 11.08 ======= ======= ======= ======= ======= ======== Market Value, End of Period...................... $ 8.25 $ 8.25 $ 8.75 $12.38 $ 8.88 $9.50 ======= ======= ======= ======= ======= ======== Total Return, Based on Market Value.............. 0.00%+++ (2.43)% (27.90)% 40.54%# (6.58)% 1.00% ======= ======= ======= ======= ======= ======== Net Assets, End of Period (000's)................ $96,336 $90,841 $93,347 $93,518 $53,384 $70,186 ======= ======= ======= ======= ======= ======== Ratios to Average Net Assets: Net investment income............................ 1.43%+ 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.......................... 33% 58% 42% 46% 33% 24% Average commissions per share paid on equity transactions(3).......................... $ 0.00** $ 0.00** -- -- -- --
- ---------- (1) For the nine months ended October 31, 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 September 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 is 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%. Prior year numbers have not been restated to reflect this credit. ** Amount represents less than $0.01. 13 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- The Italy Fund Inc. Quarterly Results of Operations (unaudited) ================================================================================
Net Realized and Unrealized 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 0.70 July 31, 1996................ 1,944,252 0.20 1,539,905 0.16 2,953,107 0.31 (4,012,535) (0.42) October 31, 1996............. 57,105 0.01 (336,620) (0.04) 3,116,522 0.33 2,779,902 0.29
14 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- The Italy Fund Inc. Dividend Reinvestment and Cash Purchase Plan (unaudited) ================================================================================ 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, as soon as practicable after the record date for the dividend or distribution, until it has expended for such purchases all of the cash that would otherwise be payable to the participants. The number of purchased shares that will then be credited to the participants' accounts is based on the average per share purchase price of Fund shares so purchased, including brokerage commissions. 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 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- The Italy Fund Inc. Dividend Reinvestment and Cash Purchase Plan (unaudited) (continued) ================================================================================ 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. --------------- 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. 16 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- The Italy Fund Inc. Additional Information (unaudited) ================================================================================ On May 15, 1996 the annual meeting of the shareholders of the Fund was held for the purpose, of voting on the following matters: 1. To approve or disapprove for the Fund the election of Paul R. Hardin and George M. Pavia as Directors; and 2. To approve or disapprove the selection of KPMG Peat Marwick LLP as the independent auditors for the current fiscal year of the Fund. The results of the vote on Proposal 1 were as follows:
% of Votes % of Directors Votes For Shares Votes Against Shares Voted ============================================================================== Dr. Paul R. Hardin 6,435,207.339 96.90% 205,318.151 3.10% George M. Pavia 6,422,367.531 96.71% 218,157.959 3.29% ==============================================================================
The results of the vote on Proposal 2 were as follows: % of Votes % of Votes % of Votes For Shares Votes Against Shares Voted Abstained Shares Voted ================================================================================ 6,588,854.318 99.22% 26,021.814 0.39% 25,648.358 0.39% ================================================================================
The following directors, representing the balance of the Board of Directors, continue to serve as Directors: Paolo M. Cucchi, Alesandro C. di Montezemolo, Mario d'Urso and Heath B. McLendon. 17 ================================================================================ [LOGO] - -------------------------------------------------------------------------------- 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 Alesandro C. di Montezemolo Dr. Paul R. Hardin George M. 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 The Italy Fund Inc. [LOGO] ================================================================================ 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 FD01045 12/96 Quarterly Report October 31, 1996 -----END PRIVACY-ENHANCED MESSAGE-----