<PAGE>
EDGAR REPRESENTATION OF PRINTED GRAPHIC
The First Israel Fund, Inc.
- -----------------------------------------
ANNUAL REPORT
SEPTEMBER 30, 1996
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders................................................ 1
Portfolio Summary..................................................... 7
Schedule of Investments............................................... 8
Statement of Assets and Liabilities................................... 11
Statement of Operations............................................... 12
Statement of Changes in Net Assets.................................... 13
Statement of Cash Flows............................................... 14
Financial Highlights.................................................. 15
Notes to Financial Statements......................................... 16
Report of Independent Accountants..................................... 20
Results of Annual Meeting of Shareholders............................. 21
Description of Dividend Reinvestment Plan............................. 22
</TABLE>
PICTURED ON THE COVER IS AN AERIAL VIEW OF THE TEL AVIV SKYLINE.
- --------------------------------------------------------------------------------
<PAGE>
LETTER TO SHAREHOLDERS
November 14, 1996
DEAR SHAREHOLDERS:
We are pleased to report on the activities of The First Israel Fund, Inc. (the
"Fund") for the fiscal year ended September 30, 1996.
PERFORMANCE
At September 30, 1996, total net assets of the Fund were approximately $65.6
million. Net asset value ("NAV") per share was $13.10, as compared to $13.20 at
September 30, 1995.
For the fiscal year ended September 30, 1996, the Fund's total return, based on
NAV declined by 0.8%, versus a decline of 17.3% for the Tel Aviv Stock Exchange
("TASE") Index. From the Fund's commencement of investment operations on October
29, 1992 through September 30, 1996, the Fund's total return, based on NAV and
assuming reinvestment of dividends and distributions, was down 1.5%, while total
return for the TASE Index was down 28.3%.
At September 30, 1996, the Fund's investments in securities listed and trading
on the TASE and the Israeli and Israel-related companies listed and trading in
the United States totaled approximately $51.9 million as compared to
approximately $52.7 million on September 30, 1995. The Fund also held
investments valued at approximately $8.6 million in unlisted securities of
Israeli and Israel-related companies, as compared to approximately $9.2 million
on September 30, 1995. In percentage terms, at September 30, 1996, 92.2% of the
Fund's net assets were invested in listed and unlisted Israeli and
Israel-related equity or equity-linked securities.
POLITICAL COMMENTARY
Over the past year, Israel has experienced tremendous change. We consider the
most important developments to have been the tragic and shocking assassination
of Prime Minister Yitzhak Rabin (November 1995); the unprecedented outbursts of
Islamic terrorism within Israel's borders (late February-early March 1996);
increased shelling of northern Israel by Hezbollah and Israel's retaliatory
strike into Lebanon (April 1996); the election of Benjamin Netanyahu as Prime
Minister (May 1996); and the rioting by Palestinians following the reopening of
a long-sealed entrance to Jerusalem's Hasmonean Tunnel (September 1996).
The net effect has been that the peace process, which is so integral to Israel's
investment prospects, has slowed. Whereas Rabin and his immediate successor,
Shimon Peres, maintained an ironclad commitment to seeing the process through,
Netanyahu's approach has been markedly different. He has insisted on a higher
level of accountability from the Palestinians and has been willing to risk and,
in some cases, reverse, the previous Labor government's achievements on the
peace front in return for greater security arrangements for Israelis.
While deep divisions in national sentiment about the peace process remain,
recent public opinion polls indicate that the majority of the Israeli populace
favor continuing negotiations with the Palestinians and Syrians.
- --------------------------------------------------------------------------------
1
<PAGE>
LETTER TO SHAREHOLDERS
Thus far in his young administration, Netanyahu has been criticized as failing
to set forth a clear vision of Israel's political future and how he plans to
achieve it. We note in this context that it is not unusual for new governments
(particularly coalitions, like Israel's) to take some time to craft and clearly
express their policies. With this in mind, we are hopeful that a more defined
program will materialize in the coming months and that Netanyahu's stated
commitment to the peace process will result in progress.
THE ECONOMY
The macroeconomic environment in Israel has somewhat moderated since our last
report, showing signs of deteriorating fundamentals.
- - Lower growth in Gross Domestic Product ("GDP") is expected for 1996 and 1997
compared to the robust levels experienced over the past five years.
- - The government budget deficit is running at 3.5% of GDP, compared to a target
of no more than 2.5%.
- - Inflation ran at an annualized rate of 13.0% in the first seven months of
1996, compared to 8.1% for 1995. [Note: it has slowed in the last six months
to an expected 1996 rate of 10-12%.]
- - The trade deficit is up over its 1995 level.
The government's top economic priorities continue to be lowering inflation and
reducing the fiscal (I.E., budget) deficit as a percentage of GDP. To address
these priorities, the government must curtail budgetary spending in coordination
with a looser monetary policy so as to avoid creating a recession.
Netanyahu has expressed strong support for economic liberalization. He pledged
to aggressively privatize the large government-controlled corporate sector,
liberalize trade and deregulate the capital markets. His ability to achieve
these goals is dependent, to a large extent, on coalition politics, political
will and progress both on fiscal restraint and the control of inflation.
Ideally, Netanyahu would succeed on the economic front while moving the peace
process forward. This combination should help to revive the "peace dividend"
(E.G., large increases in foreign investment, exports, trade, consumer activity,
tourism and capital markets activity) that powered the Israeli economy
throughout much of 1994 and 1995.
PORTFOLIO STRATEGY
Our focus, of course, is on what all of this means for Israeli and
Israel-related equities.
The TASE has been depressed for over a year as uncertainty about the peace
process, rising interest rates and massive selling by the provident funds
(Israeli pension and life insurance plans designed to encourage long-term
savings) have compelled investors to move much of their savings from equities
into liquid assets and longer-term government bonds. As a result, equity
valuations currently are very low relative both to those of other emerging
markets and Israel's own historical levels.
- --------------------------------------------------------------------------------
2
<PAGE>
LETTER TO SHAREHOLDERS
The Fund has managed to remain stable in the last year as virtually all major
indices of TASE-listed stocks have plummeted. We attribute this outperformance
to the Fund's ability to take equity positions in private Israeli and
Israel-related companies as well as the investment of a substantial portion
(roughly one-third) of assets in the growing number of Israeli and
Israel-related companies listed on U.S. exchanges. The earnings and market
performance of these companies are generally not affected by political or
economic developments within Israel.
While we made no substantive changes in the portfolio over the past few months,
the Fund's cash position has modestly increased, largely due to the sale of
Scorpio Communications Ltd. in August (see discussion below).
FOCUS ON HIGH-TECHNOLOGY
We find the Israeli high-technology sector especially attractive, given both the
worldwide growth in technology applications and Israel's unique competitive
advantages regarding technology.
Israel is gaining widespread recognition as the world's third major
high-technology center, after Silicon Valley and the metropolitan Boston area.
Why?
- - Israel has one of the best-educated workforces in the world, enhanced in
recent years by the large-scale influx of emigres from the former Soviet Union
and Eastern Europe with strong scientific/engineering backgrounds.
- - The government offers substantial financial support via economic incentives
such as subsidies, grants and tax advantages.
- - A declining emphasis on military spending has resulted in the redirection of
money, manpower and military-derived expertise to the private sector.
- - A growing and well-financed venture capital industry has emerged.
- - Israeli companies have focused on the development of leading-edge technologies
within growing niche markets.
- - Many multinational corporations which have had long-standing activities in
Israel (E.G., Intel, Motorola and IBM) have recently been expanding
operations.
- - There is a strong entrepreneurial, risk-taking culture.
To better illustrate our investment strategy, we would like to briefly discuss a
few of the Fund's specific holdings.
TEVA PHARMACEUTICAL INDUSTRIES LTD.
Our largest position is in Teva Pharmaceutical Industries Ltd. ("Teva"), the
largest pharmaceutical company in Israel. Its shares rose about 28% in the
Fund's fiscal year.
- - Teva has grown via acquisitions to become the world's third-largest producer
of generic drugs. It also produces ethical (I.E., non-generic) drugs under
license for the Israeli market and bulk chemicals. Recently, Teva entered into
the development of its own ethical drugs.
- --------------------------------------------------------------------------------
3
<PAGE>
LETTER TO SHAREHOLDERS
- - Its first ethical drug, a multiple sclerosis treatment called Copaxone,
received a unanimous recommendation in September for approval by the U.S. Food
and Drug Administration. Assuming approval is granted late this year or in
early 1997, world-wide sales of Copaxone could reach $300-400 million within
the next three years.
- - In addition to Copaxone, strong earnings growth over the next few years should
be driven by the impact of recent acquisitions and the ongoing success of
existing operations.
- - In Israel, Teva should benefit from the aging of the population as well as
rising GDP.
- - With about 70% of sales outside Israel (primarily in the U.S. and Europe),
Teva is partially insulated against weakness in the Israeli economy.
TADIRAN TELECOMMUNICATIONS LTD.
Tadiran Telecommunications Ltd. ("TT") develops, manufactures, sells and
supports advanced telecommunications equipment and systems worldwide. Its
initial public offering ("IPO") this past March raised approximately $70
million. At September 30, 1996, the stock had appreciated about 33% since the
IPO.
- - 80%-owned by the Israeli communications and electronics company Tadiran Ltd.,
TT has a long history of technological innovation and has achieved wide
recognition in global telecommunications markets. Certain of its products
(most specifically, wireless local loop and digital access products) should
experience rapid revenue growth over the next few years.
- - With a strong base of domestic revenues, TT is raising its exports, whose
proportion of total sales is projected to rise to about 50% in 1998 from about
30% in 1995. In particular, TT is targeting less-developed nations, which are
heavily investing in the establishment of telecommunications infrastructure.
- - Global deregulation of the telecommunications industry will help TT, which is
already highly competitive, to expand its overseas operations.
- - TT's balance sheet is strong: it used about $25 million of its IPO proceeds to
reduce its debt-to-equity ratio to 11.2% as of September 30, 1996, from 40.1%
at year-end 1995.
- - While TT enjoys exclusive supply contracts with Bezeq, Israeli
Telecommunication Corp., Ltd. ("Bezeq"), the Israeli telephone company,
through the year 2000, a reduction in orders from Bezeq is anticipated. We
expect this to be more than offset by international growth.
- - TT's expertise and products are enhanced by numerous strategic alliances and
marketing partnerships with companies such as Hewlett-Packard, Newbridge
Networks, Siemens, Novell and Alcatel.
SCORPIO COMMUNICATIONS LTD.
Scorpio Communications Ltd. ("Scorpio") designs, develops and markets
telecommunications equipment based on the asynchronous transfer mode concept.
Although the Fund no longer owns Scorpio, we include it both to illustrate our
approach to private equity investments and as an example of one of our
successes.
- --------------------------------------------------------------------------------
4
<PAGE>
LETTER TO SHAREHOLDERS
Our role in Scorpio's growth was substantial. The Fund and other BEA-managed
funds were its first institutional investors at its origination in 1993 and
helped to attract other investors. We sat on the board of directors, in which
capacity we provided important advice and perspective and generally assisted in
the company's development.
Two factors were most responsible for the success of Scorpio. First, we
identified and supported a first-class management team. The company's two
founders have distinguished technological, scientific and marketing backgrounds
and have demonstrated both complete dedication to the business and exceptional
integrity. Second, it was clear that their proposed products had tremendous
commercial potential.
Our belief in the success of Scorpio was confirmed when the company was acquired
by U.S. Robotics for $72 million in cash in August, a mere three years after its
founding. The Fund's portion of the sale proceeds was nearly 6 times the Fund's
total investment and almost 14.5 times Scorpio's own $5 million forecast for
1996 revenues.
Scorpio is an excellent example of how the Fund seeks to enhance shareholder
value through investments in unlisted Israeli companies. Our unusual access to
private equity transactions offers investors exposure to an additional source of
potential appreciation.
OUTLOOK
In the near term, investors clearly are concerned about the state of the peace
process. Our feeling is somewhat more optimistic, based on several factors:
- - We think that Netanyahu will adopt a more flexible approach to the peace
process.
- - We feel that stock prices already reflect a great deal of pessimism and,
therefore, are attractively valued.
- - It appears that the provident funds have finished the bulk of their movement
away from equities.
- - Many high-quality international companies, with substantial investments at
stake, are essentially unaffected by domestic events.
Looking further ahead, we are hopeful both that necessary fiscal reductions will
be achieved and that there will be a better balance between fiscal and monetary
policy, thus allowing for lower interest rates. The perception among investors
that these goals are within reach would be very favorable for the market.
In closing, we would like to remind our readers that there remain compelling
fundamental reasons to invest in Israeli and Israel-related equities, including
Israel's singular combination of emerging market-like growth rates and the
infrastructure, social characteristics and income level of developed-market
nations; its emergence as a major world-class high-technology center; and its
workforce is one of the best-educated in the world.
On balance, then, we continue to believe that substantial opportunities for
capital appreciation in Israeli and Israel-related securities currently exist.
- --------------------------------------------------------------------------------
5
<PAGE>
LETTER TO SHAREHOLDERS
We wish to remind shareholders whose shares are registered in their own names
that they automatically participate in the Fund's dividend reinvestment program.
The automatic Dividend Reinvestment Plan (the "Plan") can be of value to
shareholders in maintaining their proportional ownership interest in the Fund in
an easy and convenient way. A shareholder whose shares are held in the name of a
broker/dealer or nominee should contact that party for details about
participating in the Plan. The Plan is described on pages 22 and 23 of this
report.
We appreciate your interest in the Fund, and would be pleased to respond to your
questions or comments.
Respectfully,
[SIGNATURE]
Emilio Bassini
President
Chief Investment Officer*
- --------------------------------------------------------------------------------
* Emilio Bassini, who is a member of the Executive Committee and is an Executive
Director of BEA Associates, is primarily responsible for management of the
Fund's assets. He has served in such capacity since the commencement of the
Fund's operations. Mr. Bassini joined BEA Associates (formerly Basic Appraisals,
Inc. and BEA Associates, Inc.) in 1984. Mr. Bassini is a Director, Chairman of
the Board, President and Chief Investment Officer of the Fund and is also a
Director, Chairman of the Board, President and Chief Investment Officer of The
Chile Fund, Inc., The Emerging Markets Infrastructure Fund, Inc., The Emerging
Markets Telecommunications Fund, Inc., The Latin America Equity Fund, Inc., The
Latin America Investment Fund, Inc. and The Portugal Fund, Inc. He is the
President and Secretary of The Indonesia Fund, Inc. and Director, Chairman of
the Board, President and Investment Officer of The Brazilian Equity Fund, Inc.
He is also the managing principal of Bassini, Playfair + Associates LLC.
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
PORTFOLIO SUMMARY - AS OF SEPTEMBER 30, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SEPT. 30, 1996 SEPT. 30, 1995
<S> <C> <C>
Banking 10.98 9.97
Building Products 3.16 1.85
Computer Networking 2.72 2.57
Computer Software 3.26 2.29
Conglomerates 4.89 4.77
Diversified Technology 3.42 6.1
Food & Beverages 3.19 2.69
Industrial Technology 4.46 4.11
Investment & Holding Companies 3.71 3.44
Metal Products 1.88 3.93
Mortgage Banking 3.01 2.69
Pharmaceuticals 7.96 5.82
Real Estate & Construction 1.88 5.58
Semiconductor & Related Technology 8.47 5.35
Telecommunications 13.15 12.62
Venture Capital 3.5 3.3
Other 12.59 16.38
Cash & Other Assets 7.77 6.54
</TABLE>
TOP 10 HOLDINGS, BY ISSUER
<TABLE>
<CAPTION>
Percent of
Holding Sector Net Assets
<C> <S> <C> <C>
- ------------------------------------------------------------------------------------------------
1. Teva Pharmaceutical Industries
Ltd. Pharmaceuticals 6.7
- ------------------------------------------------------------------------------------------------
2. Geotek Communications, Inc. Telecommunications 5.0
- ------------------------------------------------------------------------------------------------
3. Zoran Corp. Semiconductor & Related Technology 4.9
- ------------------------------------------------------------------------------------------------
4. Koor Industries Ltd. Conglomerates 4.2
- ------------------------------------------------------------------------------------------------
5. Bank Hapoalim Ltd. Banking 4.2
- ------------------------------------------------------------------------------------------------
6. Tadiran Ltd. Telecommunications 3.2
- ------------------------------------------------------------------------------------------------
7. Scitex Corp., Ltd. Industrial Technology 3.0
- ------------------------------------------------------------------------------------------------
8. Bank Leumi of Israel Ltd. Banking 2.3
- ------------------------------------------------------------------------------------------------
9. IDB Holdings Ltd. Banking 2.3
- ------------------------------------------------------------------------------------------------
10. FIBI Holdings Ltd. Banking 2.2
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
SCHEDULE OF INVESTMENTS - SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
<S> <C> <C>
- ---------------------------------------------------------------------------------
EQUITY OR EQUITY-LINKED SECURITIES-92.23%
BANKING-10.98%
Bank Hapoalim Ltd................................. 1,995,800 $ 2,738,918
Bank Leumi of Israel Ltd.......................... 1,362,903 1,526,050
FIBI Holdings Ltd................................. 12,648 1,449,617
IDB Holdings Ltd.+................................ 436,224 1,495,260
-------------
7,209,845
-------------
BUILDING PRODUCTS-3.16%
Ackerstein Ltd., (Shares 1)+...................... 9,000 25,039
Ackerstein Ltd., (Shares 5)+...................... 77,120 210,467
Industrial Buildings Corp., Ltd................... 568,200 480,264
Property & Building Corp., Ltd.................... 15,103 758,573
Wolfman Industries Ltd.,
(Shares 5)+...................................... 114,000 212,270
Ytong Ltd......................................... 182,302 391,191
-------------
2,077,804
-------------
CHEMICALS-1.72%
Dead Sea Bromine Ltd.............................. 30,662 138,765
Israel Chemicals Ltd., (Shares 1)+................ 790,000 608,602
Makhteshim Chemical Works Ltd..................... 42,000 242,474
Sano Brunos Enterprises Ltd., (Shares 5).......... 54,857 142,010
-------------
1,131,851
-------------
COMPUTER NETWORKING-2.72%
Gilat Satellite Networks Ltd.@+................... 38,000 669,750
IIS Intelligent Information Systems Ltd.@+........ 32,700 61,312
Madge Networks N.V.@+............................. 40,590 512,449
Nice Systems Ltd. ADR@+........................... 23,600 540,587
-------------
1,784,098
-------------
COMPUTER SOFTWARE-3.26%
Magic Software
Enterprises Ltd.@+............................... 92,800 1,032,400
Sapiens International Corp. N.V.@+................ 69,000 185,437
Tecnomatix Technologies Ltd.@+.................... 52,900 919,138
-------------
2,136,975
-------------
<CAPTION>
No. of Value
Description Shares (Note A)
- ---------------------------------------------------------------------------------
<S> <C> <C>
CONGLOMERATES-4.89%
Clal (Israel) Ltd., (Shares 10)................... 19,780 $ 437,773
Koor Industries Ltd............................... 18,762 1,665,068
<CAPTION>
Par (000)
-------------
<S> <C> <C>
Koor Industries Ltd., Convertible Note, 1.75%,
01/31/97*........................................ NIS 600 276,892
Koor Industries Ltd., Convertible Note, 1.75%,
01/31/98*........................................ 600 276,892
Koor Industries Ltd., Convertible Note, 1.75%,
01/31/99*........................................ 600 276,892
Koor Industries Ltd., Convertible Note, 1.75%,
01/31/00*........................................ 600 276,892
-------------
3,210,409
-------------
DIVERSIFIED FINANCIAL-0.12%
<CAPTION>
No. of
Shares
-------------
<S> <C> <C>
Nesuah Trading and Investment in Securities
Ltd.+............................................ 72,468 78,205
-------------
DIVERSIFIED TECHNOLOGY-3.42%
Clal Electronic Industries Ltd.................... 3,404 275,414
Elbit Ltd......................................... 7,257 300,891
Electra Consumers Products Ltd.................... 18,658 153,223
Electra Ltd....................................... 17,500 478,409
Electronics Line Ltd., (Shares 1)+................ 28,154 36,530
Elron Electronic Industries Ltd................... 19,007 660,456
Rada Electronic Industries Ltd.@+................. 87,942 340,775
-------------
2,245,698
-------------
ENERGY SERVICES-1.79%
Delek - The Israel Fuel Co., Ltd.................. 16,773 377,445
Granite Hacarmel
Investments Ltd.................................. 299,660 418,713
Paz Oil Co., Ltd.*+............................... 36 378,648
-------------
1,174,806
-------------
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
- ---------------------------------------------------------------------------------
<S> <C> <C>
FOOD & BEVERAGES-3.19%
Blue Square Chain Stores Properties &
Investments+..................................... 38,701 $ 278,350
Elite Industries Ltd.............................. 140,742 547,393
Israel Cold Storage & Supply Ltd., (Shares 5)..... 62,620 208,981
Israel Salt Industries Ltd.+...................... 207,217 389,073
Mayanot Eden Ltd., (Shares 1)..................... 95,590 417,696
Shemen Industries Ltd.,
(Shares A4)+..................................... 8,213 255,595
-------------
2,097,088
-------------
INDUSTRIAL TECHNOLOGY-4.46%
Cubital Ltd.*+.................................... 329,278 105,639
Orbotech Ltd.@+................................... 70,200 833,625
Scitex Corp., Ltd.@............................... 160,900 1,991,138
-------------
2,930,402
-------------
INSURANCE-2.13%
Clal Insurance Enterprises Holding Ltd., (Shares
1)............................................... 145,330 805,022
Harel Hamishmar
Investments Ltd., (Shares 5)..................... 114,483 591,305
-------------
1,396,327
-------------
INVESTMENT & HOLDING COMPANIES-3.71%
Ampal American Israel, Class A@................... 92,500 439,375
Ampal American Israel,
Warrants (expiring 02/28/99)@+................... 92,500 17,344
Arad Investment & Industrial Development Ltd.+.... 3,039 33,300
Discount Investment Corp., Ltd.................... 7,000 387,006
Elco Holdings Ltd................................. 5,900 163,813
GC Holdings Corp., Series K Preferred*+........... 299,513 47,922
GC Holdings Corp., Series L Preferred*+........... 308,432 37,012
Israel Land Development Ltd.+..................... 125,173 347,074
PEC Israel Economic Corporation+.................. 23,000 393,875
The Renaissance Fund*++#.......................... 58 568,624
-------------
2,435,345
-------------
<CAPTION>
No. of Value
Description Shares (Note A)
- ---------------------------------------------------------------------------------
<S> <C> <C>
MEDICAL EQUIPMENT-2.36%
Elscint Ltd.@+.................................... 50,600 $ 436,425
Laser Industries Ltd.@+........................... 81,000 1,113,750
-------------
1,550,175
-------------
METAL PRODUCTS-1.88%
Caniel-Israel Can Co., Ltd., (Shares 1)........... 105,210 614,616
Cvalim - The Electric Wire & Cable Co. of Israel
Ltd.............................................. 73,640 243,231
Klil Industries Ltd., (Shares 1).................. 36,250 149,694
Klil Industries Ltd., (Shares 5).................. 57,018 223,719
-------------
1,231,260
-------------
MORTGAGE BANKING-3.01%
Discount Mortgage Bank Ltd.+...................... 11,198 509,292
Israel Discount Bank Ltd.......................... 5,981 56,243
Mishkan Hapoalim Mortgage Bank Ltd.+.............. 8,288 725,995
Tefahot Israel Mortgage Bank Ltd.+................ 1,456 684,523
-------------
1,976,053
-------------
PHARMACEUTICALS-7.96%
Peptor Ltd.*+..................................... 56,000 392,000
Taro Pharmaceutical Industries Ltd. ADR@+......... 64,210 465,523
Teva Pharmaceutical Industries Ltd. ADR@.......... 94,200 4,368,525
-------------
5,226,048
-------------
REAL ESTATE & CONSTRUCTION-1.88%
Africa Israel Investments Ltd., (Shares 1)+....... 550 596,660
C Holdings Ltd., (Shares 5)+...................... 41,625 84,518
Dankner Investment Ltd.,
(Shares 1)....................................... 115,247 424,871
Kardan Investments Ltd.,
(Shares 5)+...................................... 174,251 128,805
-------------
1,234,854
-------------
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
- ---------------------------------------------------------------------------------
<S> <C> <C>
SEMICONDUCTOR & RELATED TECHNOLOGY-8.47%
DSP Group Inc.*+.................................. 91,607 $ 755,758
M-Systems Flash Disk Pioneers Ltd.+............... 63,842 566,598
M-Systems Flash Disk Pioneers Ltd., Warrants
(expiring 06/30/98)+............................. 35,021 185,605
Oshap Technologies@+.............................. 177,345 695,525
P.C.B. Ltd........................................ 93,572 150,885
Zoran Corp., Series K+............................ 99,837 1,697,229
Zoran Corp., Series K*+=/=........................ 86,144 1,171,558
Zoran Corp., Series K,
Warrants (expiring 07/31/98)*+................... 73,044 336,002
-------------
5,559,160
-------------
TELECOMMUNICATIONS-13.15%
Bezeq, Israeli Telecommunication Corp., Ltd....... 285,665 684,270
ECI Telecom Ltd.@................................. 63,400 1,331,400
Geotek Communications, Inc.@+..................... 223,100 1,868,463
Geotek Communications, Inc., Convertible Preferred
Series M, 8.50%*................................. 100 939,000
Geotek Communications, Inc., Convertible Preferred
Series N, (units)*+(1)........................... 595 460,881
Nexus Telecommunication Systems Ltd.,
(units)@+(2)..................................... 68,933 379,132
Tadiran Telecommunications Ltd.@+................. 67,000 1,340,000
Tadiran Ltd. ADR@................................. 29,900 758,713
Teledata Communication Ltd.@+..................... 47,300 869,138
-------------
8,630,997
-------------
TEXTILES-1.21%
Fibrotec F.M.S. Ltd., (Shares 1).................. 13,538 48,345
Lodzia Rotex Textile Ltd., (Shares 4)+............ 86,881 205,401
Polgat Industries Ltd., (Shares B4)+.............. 309,171 124,394
Zikit Textile Dyeing Works Ltd.+.................. 60,000 413,761
-------------
791,901
-------------
<CAPTION>
No. of Value
Description Shares (Note A)
- ---------------------------------------------------------------------------------
<S> <C> <C>
TRADING COMPANIES-1.49%
Rapac Electronics Ltd............................. 34,806 $ 152,960
Super-Sol Ltd., Class B, (Shares 0.01)............ 36,273 827,906
-------------
980,866
-------------
TRANSPORTATION-0.74%
Delek Automotive Systems Ltd.+.................... 291,790 247,542
Maman Cargo Terminal & Handling Ltd............... 160,400 237,133
-------------
484,675
-------------
VENTURE CAPITAL-3.50%
Advent Israel Bermuda Ltd.*+=/=................... 1,000,000 1,005,000
Star Venture Enterprises II*...................... 5 923,637
Walden Israel Ventures, L.P.*+=/=#................ 375,000 367,048
-------------
2,295,685
-------------
WOOD & PAPER PRODUCTS-1.03%
American Israel Paper Mills Ltd................... 19,263 679,382
-------------
TOTAL INVESTMENTS-92.23%
(Cost $68,481,017) (Notes A,D).................................. 60,549,909
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES-7.77%.............
5,099,132
-------------
NET ASSETS-100.00%............................................... $ 65,649,041
-------------
-------------
- ---------------------------------------------------------
@ These securities are traded on a U.S. stock exchange.
* Not readily marketable security.
+ Security is non-income producing.
=/= Restricted security (See Note F).
# As of September 30, 1996, the Fund committed to
investing additional capital in The Renaissance
Fund-$23,252 and Walden Israel Ventures,
L.P.-$125,000.
(1) With an additional 595 warrants attached, expiring
06/20/01, with no market value.
(2) With an additional 68,933 warrants attached, expiring
11/28/97, with no market value.
ADR American Depositary Receipts.
NIS New Israeli Shekel.
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost $68,481,017)
(Note A)............................... $60,549,909
Cash (including $66,600 of foreign
currency with a cost of $66,669) (Note
A)..................................... 5,822,435
Receivables:
Note.................................. 652,342
Dividends............................. 30,887
Interest.............................. 13,468
Investments sold...................... 9,000
Prepaid expenses........................ 9,453
Unamortized organizational costs (Note
A)..................................... 82,506
-----------
Total Assets............................ 67,170,000
-----------
LIABILITIES
Payables:
Investments purchased................. 94,023
Advisory fees (Note B)................ 223,150
Administration fees (Note B).......... 7,126
Israeli capital gains taxes (Note
A)................................... 964,184
Other accrued expenses................ 232,476
-----------
Total Liabilities....................... 1,520,959
-----------
NET ASSETS (applicable to 5,012,295
shares of common stock outstanding)
(Note C)............................... $65,649,041
-----------
-----------
NET ASSET VALUE PER SHARE ($65,649,041
DIVIDED BY 5,012,295)................. $13.10
-----------
-----------
NET ASSETS CONSIST OF
Capital stock, $0.001 par value;
5,012,295 shares issued and outstanding
(100,000,000 shares authorized)........ $ 5,012
Paid-in capital......................... 67,477,576
Accumulated net realized gain on
investments and foreign currency
related transactions................... 6,188,039
Net unrealized depreciation in value of
investments and translation of other
assets and liabilities denominated in
foreign currency....................... (8,021,586)
-----------
Net assets applicable to shares
outstanding............................ $65,649,041
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF OPERATIONS - FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Income (Note A):
Dividends............................. $ 874,397
Interest.............................. 282,138
Less: Foreign taxes withheld.......... (130,254)
-----------
Total Investment Income............... 1,026,281
-----------
Expenses:
Investment advisory fees (Note B)..... 926,652
Custodian fees........................ 101,096
Audit and legal fees.................. 95,390
Administration fees (Note B).......... 77,300
Amortization of organizational costs
(Note A)............................. 63,713
Accounting fees....................... 61,292
Printing.............................. 60,300
Directors' fees....................... 34,023
Transfer agent fees................... 21,535
NYSE listing fees..................... 16,186
Insurance............................. 10,141
Other................................. 9,322
-----------
Total Expenses........................ 1,476,950
-----------
Net Investment Loss................... (450,669)
-----------
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS
Net realized gain/(loss) from:
Investments (net of Israeli capital
gains taxes of $893,624)(Note A)..... 6,959,571
Foreign currency related
transactions......................... (35,955)
Net change in unrealized depreciation in
value of investments and translation of
other assets and liabilities
denominated in foreign currency........ (6,974,241)
-----------
Net realized and unrealized loss on
investments and foreign currency
related transactions................... (50,625)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS........................ $ (501,294)
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Fiscal Years Ended
September 30,
---------------------------
1996 1995
<S> <C> <C>
---------------------------
INCREASE/(DECREASE) IN NET ASSETS
Operations:
Net investment loss................... $ (450,669) $ (520,453)
Net realized gain on investments and
foreign currency related
transactions......................... 6,923,616 1,655,141
Net change in unrealized depreciation
in value of investments and
translation of other assets and
liabilities denominated in foreign
currency............................. (6,974,241) 6,160,580
----------- -----------
Net increase/(decrease) in net
assets resulting from operations... (501,294) 7,295,268
----------- -----------
NET ASSETS
Beginning of year....................... 66,150,335 58,855,067
----------- -----------
End of year............................. $65,649,041 $66,150,335
----------- -----------
----------- -----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
13
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF CASH FLOWS - FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
INCREASE IN CASH FROM
Operating Activities
Investment income received.......... $ 1,045,281
Operating expenses paid............. (1,453,621)
------------
Net decrease in cash from operating
activities............................. $ (408,340)
Investing Activities
Purchases of long-term portfolio
investments........................ (13,409,724)
Proceeds from disposition of
short-term portfolio investments... 1,986,463
Proceeds from disposition of
long-term portfolio investments.... 15,899,662
------------
Net increase in cash from investing
activities............................. 4,476,401
Financing Activities
Notes receivable.................... (563,783)
------------
Net decrease in cash from financing
activities............................. (563,783)
----------
Net increase in cash.................... 3,504,278
Cash at beginning of year............... 2,318,157
----------
Cash at end of year (Note A)............ $5,822,435
----------
----------
RECONCILIATION OF NET DECREASE IN NET
ASSETS RESULTING FROM OPERATIONS TO NET
DECREASE IN CASH FROM OPERATING
ACTIVITIES
Net decrease in net assets resulting
from operations........................ $ (501,294)
Adjustments:
Decrease in dividend and interest
receivable......................... $ 19,000
Decrease in accrued expenses........ (35,012)
Decrease in prepaid expenses........ 58,341
Net realized and unrealized loss on
investments and foreign currency
related transactions................... 50,625
------------
Net increase in cash from operating
activities............................. 92,954
----------
NET DECREASE IN CASH FROM OPERATING
ACTIVITIES............................. $ (408,340)
----------
----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
14
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
Contained 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 for each period indicated. This information has been
derived from information provided in the financial statements and market price
data for the Fund's shares.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
Period
October
For the Fiscal Years Ended 29, 1992*
September 30, through
----------------------------------- September
1996 1995 1994 30, 1993
<S> <C> <C> <C> <C>
-------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................. $13.20 $11.74 $15.83 $13.74**
--------- --------- --------- ----------
Net investment loss................................... (0.09) (0.10) (0.28) (0.07)
Net realized and unrealized gain/(loss) on investments
and foreign currency related transactions............ (0.01) 1.56 (3.27) 2.16
--------- --------- --------- ----------
Net increase/(decrease) in net assets resulting
from operations.................................. (0.10) 1.46 (3.55) 2.09
--------- --------- --------- ----------
Distributions to shareholders:
Net realized gains on investments and foreign
currency related transactions.................... -- -- (0.43) --
In excess of net realized gains................... -- -- (0.11) --
--------- --------- --------- ----------
Total distributions to shareholders............... -- -- (0.54) --
--------- --------- --------- ----------
Net asset value, end of period........................ $13.10 $13.20 $11.74 $15.83
--------- --------- --------- ----------
--------- --------- --------- ----------
Market value, end of period........................... $11.25 $12.00 $13.25 $17.38
--------- --------- --------- ----------
--------- --------- --------- ----------
Total investment return(a)............................ (6.25)% (9.43)% (21.26)% 24.58%
--------- --------- --------- ----------
--------- --------- --------- ----------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)............... $65,649 $66,150 $58,855 $79,274
Ratio of expenses to average net assets............... 2.23% 2.57% 2.64% 2.41%(b)
Ratio of net investment loss to average net assets.... (0.68)% (0.91)% (2.08)% (0.50)%(b)
Portfolio turnover rate............................... 21.68% 22.17% 17.07% 34.80%(c)
Average commission rate per share(d).................. $0.0073 -- -- --
</TABLE>
- ---------------------------------------------------------------------------
* Commencement of investment operations.
** Initial public offering price of $15.00 per share less underwriting
discount of $1.05 per share and offering expenses of $0.21 per share.
(a) Total investment return at market value is based on the changes in
market price of a share during the period and assumes reinvestment of
dividends and distributions, if any, at actual prices pursuant to the
Fund's Dividend Reinvestment Plan. Total investment return does not
reflect brokerage commissions or initial underwriting discounts and
has not been annualized.
(b) Annualized.
(c) Not annualized.
(d) Disclosure is required for fiscal years beginning on or after
September 1, 1995. Represents average commission rate per share
charged to the Fund on purchases and sales of investments during the
period.
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
15
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE A. SIGNIFICANT ACCOUNTING POLICIES
The First Israel Fund, Inc. (the "Fund") was incorporated in Maryland on March
6, 1990 and commenced investment operations on October 29, 1992. The Fund is
registered under the Investment Company Act of 1940, as amended, as a
closed-end, non-diversified management investment company. Significant
accounting policies are as follows:
PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. All securities for which market quotations are readily
available are valued at the last sales price or lacking any sales, at the
closing price last quoted for the securities (but if bid and asked quotations
are available, at the mean between the current bid and asked prices). Securities
that are traded over-the-counter are valued at the mean between the current bid
and the asked prices. All other securities and assets are valued at fair value
as determined in good faith by the Board of Directors. The preparation of
financial statements requires the use of estimates by management, principally
the valuation of non-publicly traded securities. Accordingly, the Board of
Directors has established general guidelines for calculating fair value of
non-publicly traded securities. At September 30, 1996, the Fund held 13.09% of
its net assets in securities valued in good faith by the Board of Directors with
an aggregate cost of $7,772,581 and fair value of $8,596,297. Short-term
investments having a maturity of 60 days or less are valued on the basis of
amortized cost. The net asset value per share of the Fund is calculated weekly,
at the end of each month and at any other times determined by the Board of
Directors.
CASH: Deposits held at Brown Brothers Harriman & Co., the Fund's custodian, in a
variable rate account are classified as cash. At September 30, 1996, the
interest rate was 5.3125% which resets on a daily basis. Amounts on deposit are
generally available on the same business day.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: Investment transactions are
accounted for on the trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on an accrual basis; dividend
income is recorded on the ex-dividend date.
TAXES: No provision is made for U.S. federal income or excise taxes as it is the
Fund's intention to continue to qualify as a regulated investment company and to
make the requisite distributions to its shareholders which will be sufficient to
relieve it from all or substantially all U.S. federal income and excise taxes.
Pursuant to a ruling the Fund received from the Israeli tax authorities, the
Fund, subject to certain conditions, will not be subject to Israeli tax on
capital gains derived from the sale of securities listed on the Tel Aviv Stock
Exchange ("TASE"). Gains derived from securities not listed on TASE ("unlisted
securities") will be subject to a 25% Israeli tax provided the security is an
approved investment. Generally, stock of corporations that produce a product or
provide a service that support the infrastructure of Israel, are considered
approved investments. Any gain sourced to unlisted unapproved securities are
subject to a 40% Israeli tax and an inflationary tax. Dividends derived from
listed or approved securities are subject to 15% withholding tax, while
dividends from unlisted unapproved securities are subject to a 25% withholding
tax. Interest on debt obligations (whether listed or not) is subject to
withholding tax of 25% to 35%. The Fund records deferred Israeli capital gains
taxes on the net unrealized appreciation on unlisted Israeli debt obligations.
At September 30, 1996, the Fund had deferred $90,194 in Israeli capital gains
taxes on unlisted Israeli debt obligations.
Currently the Fund is reviewing with the Israeli tax authorities the conditions
of its original tax ruling, to determine whether that ruling has been preempted
by
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
the recent treaty between the U.S. and Israel. If it is determined that the U.S.
- -Israel treaty does preempt the original tax ruling, then certain Israeli taxes
payable by the Fund will no longer apply.
FOREIGN CURRENCY TRANSLATIONS: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(I) market value of investment securities, assets and liabilities at the
current rate of exchange; and
(II) purchases and sales of investment securities, income and expenses at
the relevant rates of exchange prevailing on the respective dates of
such transactions.
The Fund does not isolate that portion of gains and losses in investments in
equity securities which is due to changes in the foreign exchange rates from
that which is due to changes in market prices of equity securities. Accordingly,
realized and unrealized foreign currency gains and losses with respect to such
securities are included in the reported net realized and unrealized gains and
losses on investment transactions balances. However, the Fund does isolate the
effect of fluctuations in foreign exchange rates when determining the gain or
loss upon the sale or maturity of foreign currency denominated debt obligations
pursuant to U.S. federal income tax regulations, with such amount categorized as
foreign exchange gain or loss for both financial reporting and U.S. federal
income tax reporting purposes.
Net currency gains from valuing foreign currency denominated assets and
liabilities at period end exchange rates are reflected as a component of net
unrealized appreciation/depreciation on investments, foreign currency holdings,
and other assets and liabilities denominated in foreign currencies.
Net realized foreign exchange losses represent foreign exchange gains and losses
from sales and maturities of debt securities, transactions in foreign currencies
and forward foreign currency contracts, exchange gains or losses realized
between the trade date and settlement dates on security transactions, and the
difference between the amounts of interest and dividends recorded on the Fund's
books and the U.S. dollar equivalent of the amounts actually received.
The Fund reports certain foreign currency related transactions as components of
realized gains for financial reporting purposes, whereas such components are
treated as ordinary income for U.S. federal income tax purposes.
DISTRIBUTIONS OF INCOME AND GAINS: The Fund distributes at least annually to
shareholders substantially all of its net investment income and net realized
short-term capital gains, if any. The Fund determines annually whether to
distribute any net realized long-term capital gains in excess of net realized
short-term capital losses, including capital loss carryovers, if any. An
additional distribution may be made to the extent necessary to avoid the payment
of a 4% U.S. federal excise tax. Dividends and distributions to shareholders are
recorded by the Fund on the ex-dividend date.
The character of distributions made during the year from net investment income
or net realized gains may differ from their ultimate characterization for U.S.
federal income tax purposes due to U.S. generally accepted accounting
principles/tax differences in the character of income and expense recognition.
At September 30, 1996, the Fund reclassified $450,669 of accumulated net
investment loss to accumulated net realized gain on investments and foreign
currency related transactions.
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
OTHER: Costs incurred by the Fund in connection with its organization are being
amortized on a straight-line basis over a five-year period beginning at the
commencement of operations of the Fund.
Securities denominated in currencies other than U.S. dollars are subject to
changes in value due to fluctuations in exchange rates.
Investments in Israel may involve certain considerations and risks not typically
associated with investments in the U.S., including the possibility of future
political and economic developments and the level of Israeli governmental
supervision and regulation of its securities markets. The Israeli securities
markets are substantially smaller, less liquid and more volatile than the major
securities markets in the United States. Consequently, acquisition and
disposition of securities by the Fund may be inhibited.
The Fund, subject to local investment limitations, may invest up to 30% of its
assets in non-publicly traded equity securities which may involve a high degree
of business and financial risk and may result in substantial losses. Because of
the current absence of any liquid trading market for these investments, the Fund
may take longer to liquidate these positions than would be the case for publicly
traded securities. Although these securities may be resold in privately
negotiated transactions, the prices realized on such sales could be less than
those originally paid by the Fund. Further, companies whose securities are not
publicly traded may not be subject to the disclosures and other investor
protection requirements applicable to companies whose securities are publicly
traded.
NOTE B. AGREEMENTS
BEA Associates ("BEA") serves as the Fund's investment adviser with respect to
all investments. As compensation for its advisory services, BEA receives from
the Fund an annual fee, calculated weekly and paid quarterly, equal to 1.30% of
the Fund's average weekly net assets invested in listed securities (including
securities traded over-the-counter in the United States) and 2.00% of the Fund's
average weekly net assets invested in unlisted Israeli securities. The aggregate
fee may not exceed an annual rate of 1.40% of the Fund's average weekly net
assets. For the fiscal year ended September 30, 1996, BEA earned $926,652 for
advisory services. BEA also provides certain administrative services to the Fund
and is reimbursed by the Fund for costs incurred on behalf of the Fund (up to
$20,000 per annum). For the fiscal year ended September 30, 1996, BEA was
reimbursed $4,500 for administrative services rendered to the Fund.
Analyst I.M.S. and Giza Group serve as the Fund's investment sub-advisers.
Pursuant to the sub-advisory agreement, Analyst I.M.S. and Giza Group are each
paid a fee, out of the advisory fee payable to BEA, computed weekly and paid
quarterly at an annual rate of 0.20% of the Fund's average weekly net assets. In
addition, BEA pays Analyst I.M.S. and Giza Group, out of its advisory fee, a
reimbursement for any Israeli Value Added taxes (currently 17%) and $12,500 to
each annually to cover expenses incurred in the execution of sub-advisory
services. For the fiscal year ended September 30, 1996, the fees earned by
Analyst I.M.S. and Giza Group amounted to $167,498 each.
Bear Stearns Funds Management Inc. ("BSFM") serves as the Fund's administrator.
The Fund pays BSFM a monthly fee that is computed weekly at an annual rate of
0.11% of the Fund's average weekly net assets. For the fiscal year ended
September 30, 1996, BSFM earned $72,800 for administrative services.
NOTE C. CAPITAL STOCK
The authorized capital stock of the Fund is 100,000,000 shares of common stock,
$0.001, par value. Of the 5,012,295 shares outstanding at September 30, 1996,
BEA owned 7,169 shares.
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
NOTE D. INVESTMENT TRANSACTIONS
For U.S. federal income tax purposes, the cost of securities owned at September
30, 1996 was $68,481,415. Accordingly, the net unrealized depreciation of
investments (including investments denominated in foreign currency) of
$7,931,506, was composed of gross appreciation of $9,104,990 for those
investments having an excess of value over cost and gross depreciation of
$17,036,496 for those investments having an excess of cost over value.
For the fiscal year ended September 30, 1996, purchases and sales of securities,
other than short-term obligations, were $13,503,747 and $15,702,253,
respectively.
NOTE E. CREDIT AGREEMENT
The Fund, along with 17 other U.S. regulated investment companies for which BEA
serves as investment adviser, has a credit agreement with The First National
Bank of Boston. The agreement provides that each fund is permitted to borrow an
amount equal to the lesser of $50,000,000 or 25% of the net assets of the fund.
However, at no time shall the aggregate outstanding principal amount of all
loans to any of the 18 funds exceed $50,000,000. The line of credit will bear
interest at (i) the greater of the bank's prime rate or the Federal Funds
Effective Rate plus 0.50% or (ii) the Adjusted Eurodollar Rate plus 1.50%. The
Fund had no amounts outstanding under the credit agreement during the fiscal
year ended September 30, 1996.
NOTE F. 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. The table
below shows the number of shares held, the acquisition dates, aggregate costs,
fair value as of September 30, 1996, share value of the securities and
percentage of net assets which the securities comprise.
<TABLE>
<CAPTION>
FAIR VALUE
NUMBER OF ACQUISITION AT VALUE PER PERCENT OF
SECURITY SHARES DATES COST 09/30/96 SHARE NET ASSETS
- --------------------------------------------- ----------- ----------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Advent Israel Bermuda Ltd.................... 650,000 06/18/93 $ 530,000 $ 653,250 $ 1.01 1.00
Advent Israel Bermuda Ltd.................... 350,000 06/10/96 350,000 351,750 1.01 0.53
The Renaissance Fund......................... 26 03/30/94 259,500 254,900 9,803.86 0.39
The Renaissance Fund......................... 14 02/24/95 139,668 137,254 9,803.86 0.21
The Renaissance Fund......................... 11 03/13/96 110,988 107,843 9,803.86 0.16
The Renaissance Fund......................... 7 06/13/96 66,592 68,627 9,803.86 0.11
Walden Israel Ventures, L.P.................. 125,000 10/01/93 125,000 122,349 0.98 0.19
Walden Israel Ventures, L.P.................. 125,000 05/27/95 125,000 122,349 0.98 0.19
Walden Israel Ventures, L.P.................. 125,000 08/08/96 125,000 122,350 0.98 0.19
Zoran Corp................................... 36,144 12/20/95 253,325 491,558 13.60 0.75
Zoran Corp................................... 50,000 07/31/96 75,000 680,000 13.60 1.03
</TABLE>
- --------------------------------------------------------------------------------
19
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of The First Israel Fund, Inc.:
We have audited the accompanying statement of assets and liabilities of The
First Israel Fund, Inc., including the schedule of investments, as of September
30, 1996, and the related statement of operations and cash flows for the year
then ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the periods
presented. 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 investments held by the
custodians as of September 30, 1996. 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
First Israel Fund, Inc. as of September 30, 1996, the results of its operations
and cash flows for the year then ended, the changes in net assets for each of
the two years in the period then ended, and its financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 15, 1996
- --------------------------------------------------------------------------------
20
<PAGE>
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
On January 16, 1996, the annual meeting of shareholders of The First Israel
Fund, Inc. (the "Fund") was held and the following matters were voted upon:
(1) To re-elect two directors to the Board of Directors of the Fund.
<TABLE>
<CAPTION>
NAME OF DIRECTOR FOR WITHHELD NON-VOTES
- -------------------------------------------------------------------------- ---------- ----------- ----------
<S> <C> <C> <C>
Jonathan W. Lubell 3,602,595 52,861 1,356,839
Steven N. Rappaport 3,605,884 49,572 1,356,839
</TABLE>
In addition to the directors re-elected at the meeting, Emilio Bassini, Peter A.
Gordon, Daniel Sigg, Zeev Holtzman and George W. Landau continue to serve as
directors of the Fund.
(2) To ratify the selection of Coopers & Lybrand L.L.P. as independent public
accountants for the fiscal year ending September 30, 1996.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTES
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
3,588,465 37,327 29,664 1,356,839
</TABLE>
- --------------------------------------------------------------------------------
21
<PAGE>
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN
Pursuant to The First Israel Fund, Inc.'s (the "Fund") Dividend Reinvestment
Plan (the "Plan"), each shareholder will be deemed to have elected, unless The
First National Bank of Boston, the Fund's transfer agent, as the Plan Agent (the
"Plan Agent"), is otherwise instructed by the shareholder in writing, to have
all dividends and distributions, net of any applicable U.S. withholding tax,
automatically reinvested in additional shares of the Fund. Shareholders who do
not participate in the Plan will receive all dividends and distributions in
cash, net of any applicable U.S. withholding tax, paid in dollars by check
mailed directly to the shareholder by the Plan Agent, as dividend-paying agent.
Shareholders who do not wish to have dividends and distributions automatically
reinvested should notify the Plan Agent for the Fund, at the address set forth
below. Dividends and distributions with respect to shares registered in the name
of a broker-dealer or other nominee (i.e., in "street name") will be reinvested
under the Plan unless such service is not provided by the broker or nominee or
the shareholder elects to receive dividends and distributions in cash. A
shareholder whose shares are held by a broker or nominee that does not provide a
dividend reinvestment program may be required to have his shares registered in
his own name to participate in the Plan. Investors who own shares of the Fund's
common stock registered in street name should contact the broker or nominee for
details concerning participation in the Plan.
Certain distributions of cash attributable to (a) some of the dividends and
interest amounts paid to the Fund and (b) certain capital gains earned by the
Fund that are derived from securities of certain foreign issuers are subject to
taxes payable by the Fund at the time amounts are remitted. Such taxes, if any,
will be borne by the Fund and allocated to all shareholders in proportion to
their interests in the Fund.
The Plan Agent serves as agent for the shareholders in administering the Plan.
If the Board of Directors of the Fund declares an income dividend or a capital
gains distribution payable either in the Fund's common stock or in cash, as
shareholders may have elected, nonparticipants in the Plan will receive cash and
participants in the Plan will receive common stock to be issued by the Fund. If
the market price per share on the valuation date equals or exceeds net asset
value per share on that date, the Fund will issue new shares to participants
valued at net asset value or, if the net asset value is less than 95% of the
market price on the valuation date, then valued at 95% of the market price. If
net asset value per share on the valuation date exceeds the market price per
share on that date, the Plan Agent will make open market purchases on the New
York Stock Exchange or elsewhere, and participants will pay the average price
paid plus a pro rata portion of commissions. If, before the Plan Agent has
completed its purchases, the market price exceeds the net asset value of shares,
the average per share purchase price paid by the Plan Agent may exceed the net
asset value of shares, resulting in the acquisition of fewer shares than if the
dividend or distribution had been paid in shares issued by the Fund at net asset
value. Additionally, if the market price exceeds the net asset value of shares
before the Plan Agent has completed its purchases, the Plan Agent is permitted
to cease purchasing shares and the Fund may issue the remaining shares at a
price equal to the greater of (a) net asset value or (b) 95% of the then current
market price. In a case where the Plan Agent has terminated open market
purchases and the Fund has issued the remaining shares, the number of shares
received by the participant in respect of the cash dividend or distribution will
be based on the weighted average of prices paid for shares purchased in the open
market and the price at which the Fund issues the remaining shares.
The valuation date is the dividend or distribution payment date or, if that date
is not a New York Stock Exchange trading day, the next preceding trading day. If
the Fund should declare an income dividend or capital gains distribution payable
only in cash, the Plan Agent will, as agent for the participants, buy Fund
shares in
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22
<PAGE>
DESCRIPTION OF DIVIDEND REINVESTMENT PLAN (CONTINUED)
the open market, on the New York Stock Exchange or elsewhere, for the
participants' accounts on, or shortly after, the payment date.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
needed by shareholders for personal and tax records. Shares in the account of
each Plan participant will be held by the Plan Agent in the name of the
participant and each shareholder's proxy will include those shares purchased
pursuant to the Plan.
In the case of a shareholder, such as a bank, broker or nominee, that holds
shares for others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by the
shareholder as representing the total amount registered in the shareholder's
name and held for the account of beneficial owners who are to participate in the
Plan.
There is no charge to participants for reinvesting dividends or capital gains
distributions payable in either stock or cash. The Plan Agent's fees for the
handling of reinvestment of such dividends and capital gains distributions will
be paid by the Fund. There will be no brokerage charges with respect to shares
issued directly by the Fund as a result of dividends and capital gains
distributions payable either in stock or in cash. However, each participant will
be charged by the Plan Agent a pro rata share of brokerage commissions incurred
with respect to the Plan Agent's open market purchases in connection with
voluntary cash payments made by the participant or the reinvestment of dividends
or capital gains distributions payable only in cash. Brokerage charges for
purchasing small amounts of stock for individual accounts through the Plan are
expected to be less than the usual brokerage charges for such transactions
because the Plan Agent will be purchasing stock for all participants in blocks
and prorating the lower commission thus obtainable. Brokerage commissions will
vary based on, among other things, the broker selected to effect a particular
purchase and the number of participants on whose behalf such purchase is being
made. The Fund cannot predict, therefore, whether the cost to a participant who
makes a voluntary cash payment will be less than if a participant were to make
an open market purchase on the Fund's common stock on his own behalf.
The receipt of dividends and distributions in stock under the Plan will not
relieve participants of any income tax (including withholding tax) that may be
payable on such dividends or distributions.
Experience under the Plan may indicate that changes in the Plan are desirable.
Accordingly the Fund and the Plan Agent reserve the right to terminate the Plan
as applied to any dividend or distribution paid subsequent to notice of the
termination sent to the members of the Plan at the record date for dividends or
distributions. The Plan also may be amended by the Fund or the Plan Agent, but
(except when necessary or appropriate to comply with applicable law, rules or
policies of a regulatory authority) only by at least 30 days' written notice to
members of the Plan. All correspondence concerning the Plan should be directed
to the Plan Agent, The First National Bank of Boston, Investor Relations
Department, P.O. Box 644, Mail Stop 45-02-09, Boston, Massachusetts 02102-0644
or by telephone at 1-800-730-6001.
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23
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<PAGE>
SUMMARY OF GENERAL INFORMATION
The Fund--The First Israel Fund, Inc.--is a closed-end, non-diversified
management investment company whose shares trade on the New York Stock Exchange.
Its investment objective is long-term capital appreciation through investments
primarily in equity securities of Israeli companies. The Fund is managed and
advised by BEA Associates ("BEA"). BEA is a diversified asset manager, handling
equity, balanced, fixed income, international and derivative based accounts.
Portfolios include international and emerging market investments, common stocks,
taxable and non-taxable bonds, options, futures and venture capital. BEA manages
money for corporate pension and profit-sharing funds, public pension funds,
union funds, endowments and other charitable institutions and private
individuals. As of September 30, 1996, BEA managed approximately $31.3 billion
in assets. BEA also advises eight other international closed-end funds: The
Brazilian Equity Fund, Inc., The Chile Fund, Inc., The Emerging Markets
Infrastructure Fund, Inc., The Emerging Markets Telecommunications Fund, Inc.,
The Indonesia Fund, Inc., The Latin America Equity Fund, Inc., The Latin America
Investment Fund, Inc. and The Portugal Fund, Inc.
SHAREHOLDER INFORMATION
The market price is published in: THE NEW YORK TIMES (daily) under the
designation "FtIsrl" and THE WALL STREET JOURNAL (daily), and BARRON'S (each
Monday) under the designation "FstIsrael". The Fund's New York Stock Exchange
trading symbol is ISL. Weekly comparative net asset value (NAV) and market price
information about The First Israel Fund, Inc.'s shares are published each Sunday
in THE NEW YORK TIMES and each Monday in THE WALL STREET JOURNAL and BARRON'S,
as well as other newspapers, in a table called "Closed End Funds."
To request an annual report, or to be placed on the Fund's mailing list,
shareholders should call 1-800-293-1232.
DIVIDEND REINVESTMENT PLAN--SUMMARY
An automatic Dividend Reinvestment Plan (the "Plan") is available to provide
shareholders with automatic reinvestment of their dividend income and capital
gain distributions in additional shares of the Fund's common stock.
As per the Plan, each shareholder will be automatically reinvested in additional
shares of the Fund by The First National Bank of Boston, unless otherwise
instructed by the shareholder in writing. Shareholders who do not participate in
the Plan will receive all dividends and distributions in cash paid by check in
U.S. dollars. Shares registered in street name will be reinvested under the
Plan, unless the broker-dealer or other nominee does not provide a dividend
reinvestment plan or the shareholder elects to receive their dividends in cash.
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<PAGE>
DIRECTORS AND CORPORATE OFFICERS
Emilio Bassini Chairman of the Board of Directors,
President and Chief Investment
Officer
Enrique R. Arzac Director
Peter A. Gordon Director
Zeev Holtzman Director
George W. Landau Director
Jonathan W. Lubell Director
Steven N. Rappaport Director
Daniel Sigg Director and
Senior Vice President
Paul P. Stamler Senior Vice President
Michael A. Pignataro Chief Financial Officer and
Secretary
Rachel D. Manney Vice President and Treasurer
INVESTMENT ADVISER
BEA Associates
One Citicorp Center
153 East 53rd Street
New York, NY 10022
ADMINISTRATOR
Bear Stearns Funds Management Inc.
245 Park Avenue
New York, NY 10167
CUSTODIAN
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
SHAREHOLDER SERVICING AGENT
The First National Bank of Boston
P.O. Box 1865
Mail Stop 45-02-62
Boston, MA 02105-1865
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, NY 10022
<TABLE>
<S> <C>
This report, including the financial statements herein, is sent to the shareholders of
the Fund 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. [LOGO]
</TABLE>
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