<PAGE>
THE FIRST ISRAEL
FUND, INC.
ANNUAL REPORT
SEPTEMBER 30, 1998
[PHOTO]
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders.......................................................................1
Portfolio Summary............................................................................6
Schedule of Investments......................................................................7
Statement of Assets and Liabilities.........................................................10
Statement of Operations.....................................................................11
Statement of Changes in Net Assets..........................................................12
Financial Highlights........................................................................13
Notes to Financial Statements...............................................................14
Report of Independent Accountants...........................................................19
Results of Annual Meeting of Shareholders...................................................20
Tax Information.............................................................................20
Description of InvestLink-SM- Program.......................................................21
</TABLE>
PICTURED ON THE COVER IS A SCENIC VIEW OF ISRAEL'S THIRD LARGEST CITY, HAIFA.
- --------------------------------------------------------------------------------
<PAGE>
LETTER TO SHAREHOLDERS
October 29, 1998
DEAR SHAREHOLDER:
I am pleased to report on the activities of The First Israel Fund, Inc. (the
"Fund") for the fiscal year ended September 30, 1998.
At September 30, 1998, total net assets of the Fund were approximately $75.4
million. The Fund's investments in securities listed and trading on the Tel Aviv
Stock Exchange ("TASE") were $45.8 million, with another $16.0 million in the
Israeli and Israel-related companies listed and trading in the United States.
Combined, these totaled $61.8 million, as compared to approximately $77.1
million on September 30, 1997. The Fund also held investments valued at
approximately $7.4 million in unlisted securities, as compared to approximately
$9.6 million on September 30, 1997. In percentage terms, at September 30, 1998,
82.0% of the Fund's net assets was invested in Israeli and Israel-related
companies listed and trading on the TASE and in the United States and 9.8% in
unlisted securities.
The Fund successfully completed its initial public offering on October 29, 1992
and began operations with a net asset value ("NAV") of $13.74 per share. At
September 30, 1998, NAV per share was $15.04, as compared to $18.41 at September
30, 1997. The Fund's common stock closed on the New York Stock Exchange on
September 30, 1998 at $11.813 per share, representing a discount of 21.5% to the
Fund's NAV.
According to its charter, the Fund's investment objective is to achieve
long-term capital appreciation via investment primarily in equity securities of
Israeli companies. These securities may be listed on the TASE or elsewhere,
notably New York and NASDAQ. Up to 30% of the Fund's total assets may be
invested in illiquid equity securities, including securities of private equity
funds that invest primarily in the emerging markets.
PERFORMANCE: HELPED BY PRIVATE EQUITY, CONGLOMERATES, PHARMACEUTICALS
For the fiscal year ended September 30, 1998, the Fund's total return, based on
NAV and assuming reinvestment of dividends and distributions, was -15.3%, versus
- -15.2% for the Morgan Stanley Capital International Israel Index (the "Index").
The impact of sector allocations and stock selection on the Fund's return over
the past 12 months was both positive and negative. The most positive
contributions came from private equity, conglomerates and pharmaceuticals.
PRIVATE EQUITY. One of the portfolio's several private equity placements was
particularly strong. This was Advent Israel (Bermuda) L.P. ("Advent"), a fund
investing in Israel-related technology companies that is itself the Fund's
eighth-largest position. Advent helped performance due to upward revaluations of
some of its individual holdings, as well as our good fortune in buying more
Advent shares at favorable prices.
CONGLOMERATES. We significantly raised our exposure to Israeli conglomerates
over the course of the year. This was based on our belief that the substantial
restructuring programs undertaken by many of the largest publicly traded
conglomerates would be highly positive for shareholder value. Our instincts
proved accurate. The Fund especially benefited from positions in IDB Holding
Corp., Ltd. and several of its related companies, including IDB Development
Corp., Ltd., Discount Investment Corp. and PEC Israel Economic Corp.
- --------------------------------------------------------------------------------
1
<PAGE>
LETTER TO SHAREHOLDERS
PHARMACEUTICALS. Another boost to performance came from our decision to scale
back the Fund's shares in Teva Pharmaceutical Industries Ltd. ("Teva") to a
level below that of the Index benchmark. Teva, which is one of the most heavily
traded Israeli stocks, sold off due to concerns that one of its biggest products
was encountering increased competition from generic copies.
As was the case in the first half of the Fund's fiscal year, performance was
least effective in telecommunications and banking:
- - Two stocks in our telecommunications allocation were most harmful. These were
CIENA Corp., whose shares sold off heavily after it announced that its order
volume would fall short of expectations; and ECI Telecommunications Ltd.
("ECI"), a major component of Israeli equity indices that we underweighted at
a time when it did notably well. I will discuss ECI in greater detail later in
this report.
- - In banking, we chose to favor mortgage banks, which are not contained in most
Israeli equity indices, over the major commercial banks, which are
disproportionately represented. The Fund's return suffered from the mortgage
banks' underperformance of the commercial banks.
ISRAEL: NO LONGER A SAFE HAVEN
When analysts are asked to identify so-called "safe haven" equity markets (as
they are increasingly being called upon to do these days), their short list
usually includes that of Israel, long one of the most stable stock markets among
emerging nations. This is no longer the case.
No stock market was immune to the global panic that has plagued equities of all
flavors and nationalities over the last few months. Investors, blinded to
rationality by fears of impending worldwide recession, indiscriminately savaged
the markets of both developed and undeveloped nations. This was true of the TASE
and NASDAQ as well.
As investors contemplated the impact of a global slowdown, they began to take
profits, thereby initiating a run on Israeli equities that has yet to hit
bottom. Few stocks escaped the sell-off intact, and Israeli high-tech companies
listed on NASDAQ were particularly volatile.
While the environment for Israeli stocks is somewhat uncertain at present in
light of the many external factors affecting them, there are stabilizing
influences at work. Principal among these is the government's aggressive defense
of the shekel, which has weakened against the dollar. To keep the shekel from
weakening any further, the government took the extraordinary step of raising
interest rates by two full percentage points in October. This level-headedness
in the face of severe market turmoil is reflective of the nation's willingness
and ability to address its problems straight on and should do much to bolster
investor confidence in Israeli stocks going forward.
- --------------------------------------------------------------------------------
2
<PAGE>
LETTER TO SHAREHOLDERS
THE PORTFOLIO: STRATEGY AND STRUCTURE
TOP 10 HOLDINGS, BY ISSUER*
<TABLE>
<CAPTION>
% OF
HOLDING SECTOR NET ASSETS
-------------- ------------------ -------------
<S> <C> <C> <C>
1. PEC
Israel Conglomerates 6.2
2. Koor
Industries Conglomerates 5.1
3. Bank
Leumi Banking 4.1
4. Teva Pharmaceuticals 3.9
5. ECI Telecommunications 3.7
6. Bezeq Telecommunications 3.7
7. Israel
Discount Bank Mortgage Banking 3.6
8. Advent Israel Venture Capital 3.2
9. Bank Hapoalim Banking 3.1
10. F.I.B.I.
Holdings Financial Services 2.6
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SECTOR ALLOCATION
<S> <C>
(% of net assets)
Banking 8.07%
Building Prod. 3.79%
Conglomerates 16.94%
Electronics/Elec.
Equip. 2.64%
Fin. Svcs. 3.49%
Food & Bev. 4.26%
Insur. 3.43%
Inv. & Hold. Cos. 5.27%
Mort. Bkg. 8.38%
Pharm. 5.44%
Telecom. 12.24%
Venture Capital 5.78%
Cash & Other Assets 8.23%
Other* 12.04%
</TABLE>
- --------------
* Company names are abbreviations of those
found in the chart on page 6.
- ------------------
* Other includes sectors below 2.5% of net assets.
The current market instability is a rare opportunity, in my view. To take
advantage of it, I have pruned most of the Fund's exposure to technology and
export-intensive enterprises in favor of those that derive most, if not all, of
their revenues from domestic operations. Although valuations among technology
stocks appear to be more compelling than elsewhere, I am leery of them at this
time. Their vulnerability to negative earnings announcements brings a level of
risk that the Fund simply should not assume.
I have also raised the Fund's cash position to approximately 8%, with the aim of
exploiting opportunities created by the market's shakeout. There should be many
such opportunities in stocks that have experienced significant devaluations. I'm
especially drawn to the shares of solid, blue-chip companies with strong
franchises, good management and the potential to reclaim the rapid growth of
their recent past. Among those I'm looking at now are Koor Industries Ltd.
("Koor"), Bank Leumi Le-Israel Ltd. ("Bank Leumi") and ECI.
- - KOOR INDUSTRIES LTD. This is a conglomerate that is well-positioned in
high-growth export industries, particularly its core group of
telecommunications, defense/electronics and agricultural chemicals. An
aggressive new management team recently initiated a fundamental restructuring
program aimed at disposing of non-core, underperforming assets. However, with
export-intensive businesses hit particularly hard in the current economic
environment, Koor shares are trading at a discount to net asset value of
approximately 40%. With the discount so high, the stock is very attractive
from a longer-term investment perspective and should do well as its core
markets recover.
- - BANK LEUMI LE-ISRAEL LTD. Like Koor, Bank Leumi also benefits from having a
new management team that is keen on cost-cutting as well as reorganizing
overseas operations to improve overall profitability. The bank has addressed
asset quality problems that depressed its shares in the recent past, and
should benefit if, as I expect, interest rates continue to decline.
- --------------------------------------------------------------------------------
3
<PAGE>
LETTER TO SHAREHOLDERS
At the end of September, Bank Leumi was trading at slightly less than book
value, which is very cheap for a bank. With growth in earnings per share (in
shekels) estimated to improve to 50.0% in 1999 from 13.2% in 1998 and
management appearing to have a handle on the company's problems, I think that
even the most skeptical observer would consider this stock a major bargain.
- - ECI TELECOMMUNICATIONS LTD.I see ECI as a long-term investment candidate with
good potential. Its financial condition is very sound, as evidenced by low
leverage, lots of cash on hand and a 19% return on equity. Management has
proven itself very capable of dealing with adversity and positioning the
company for future growth. One example of the latter is the recent purchase of
Tadiran Telecommunications Ltd., a leader in wireless access and digital
cross-connect systems. This acquisition will help diversify ECI's product
line--a much-needed strategic move--as well as provide it with access to
potentially high-margin U.S. markets.
Although ECI does a meaningful portion of its business in Asia (which
accounted for 17% of 1997 sales), it has little exposure to weaker Asian
nations like Thailand and Indonesia, and is still receiving contracts from
others in the region. Investors remain infected by the Asian bug, though, and
have unfairly punished the stock as a result. At today's prices, then, ECI
shares are simply too attractive to ignore.
Beyond focusing on certain blue chips, I'm also looking to increase the Fund's
exposure to private equities via investing in venture capital groups (like
Advent) with strong histories of involvement with successful start-up companies.
Although private equities are highly illiquid, they have strong long-term
appreciation potential. They also are protected from the kind of panic-driven
sell-offs that have affected publicly traded shares. The ability to invest in
these private, emerging growth vehicles is one of the advantages of the
closed-end fund structure, and I intend to utilize it to its utmost as
opportunities present themselves.
OUTLOOK: CAUTIOUS IN NEAR-TERM, REMAIN OPTIMISTIC IN LONG-TERM
The silence from most analysts with regard to the near-term prospects for
Israeli equities has been deafening as of late. Should they speak, the words
"unprecedented volatility" would no doubt be heard frequently in their
declarations.
For my part, I can understand and empathize with their reticence. Highly
volatile world markets will likely continue to negatively impact Israeli
companies in months to come. This is particularly true for NASDAQ-listed
high-tech firms, which are seeing their major export markets evaporate. Against
this backdrop, only the very brave of heart could draw definitive conclusions
with anything approaching conviction.
However, it is prudent and, perhaps, wise to distinguish Israel from other
emerging markets. The 16% decline in the TASE for 1998 through September
compares very favorably with the 37% decline experienced by emerging markets as
a group. So, despite its losses, the TASE could still be viewed as a defensive
play in some circles.
Consider as well that, notwithstanding its stock market pullback, Israel's
economic environment is actually improving. Inflation appears to be under
control. Interest rates are falling. Israel is not a major exporter of
commodities, unlike much of Latin America, Emerging Asia and Russia. The country
has a strong central banking system, a high level of foreign exchange reserves
and relatively low foreign debt. Overall, then, Israel has much going for it
that other emerging markets do not. Thus, a recovery in equity prices in the
foreseeable future, while not a certainty, is more probable than elsewhere on
the planet.
- --------------------------------------------------------------------------------
4
<PAGE>
LETTER TO SHAREHOLDERS
Nevertheless, as noted, the prices--and valuations--of many blue-chip stocks are
likely to fall in the near-term, as the market is pummeled by forces outside its
control. In certain cases, I would expect to see valuations drop below what one
would consider even faintly reasonable levels. I fully intend to selectively
take advantage of this temporary blip in Israel's stock market in the months to
come.
Sincerely yours,
[SIG]
Richard W. Watt
President
Chief Investment Officer*
FROM BEA ASSOCIATES:
I. We wish to remind shareholders whose shares are registered in their own name
that they automatically participate in the Fund's dividend reinvestment
program which is known as the InvestLink-SM- Program (the "Program"). The
Program 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 the Fund's Transfer Agent for details about participating in the
Program. The Program also provides for additional share purchases. The
Program is described on pages 21 through 23 of this report.
II. Many services provided to the Fund and its shareholders by BEA Associates
("BEA") and the Fund's service providers rely on the functioning of their
respective computer systems. Many computer systems cannot distinguish the
year 2000 from the year 1900, with resulting potential difficulty in
performing various calculations (the "Year 2000 Issue"). The Year 2000
Issue could potentially have an adverse impact on the handling of security
trades, the payment of interest and dividends, pricing, account services
and other Fund operations.
BEA recognizes the importance of the Year 2000 Issue and is taking
appropriate steps necessary in preparation for the year 2000. At this time,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on the Fund nor can there be any assurance that the Year
2000 Issue will not have an adverse effect on the Fund's investments or on
global markets or economies, generally.
BEA anticipates that its systems will be adapted in time for the year 2000.
BEA is seeking assurances that comparable steps are being taken by the
Fund's other major service providers. BEA will be monitoring the Year 2000
Issue in an effort to ensure appropriate preparation.
- --------------------------------------------------------------------------------
* Richard W. Watt, who is a Managing Director of BEA Associates, is primarily
responsible for management of the Fund's assets. Mr. Watt has served the Fund in
such capacity since January 1, 1997. He joined BEA Associates on August 2, 1995.
Mr. Watt was formerly associated with Gartmore Investment Limited in London,
where he was head of emerging markets investments and research. In this
capacity, he led a team of four portfolio managers and was manager of a
closed-end fund focusing on smaller Latin American companies. Before joining
Gartmore Investment Limited in 1992, Mr. Watt was a director of Kleinwort Benson
International Investments in London, where he was responsible for research,
analysis and trading of equities in Latin America and other regions. Mr. Watt is
President, Chief Investment Officer and a Director of the Fund. He also is
President, Chief Investment Officer and a Director of The Brazilian Equity Fund,
Inc., 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.
- --------------------------------------------------------------------------------
5
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
PORTFOLIO SUMMARY - AS OF SEPTEMBER 30, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
AS A PERCENT OF NET ASSETS
<S> <C> <C>
9/30/98 9/30/97
Banking 8.07 9.39
Building Products 3.79 3.29
Computer Software 0.78 4.79
Conglomerates 16.94 10.19
Electronics/Electrical Equipment 2.64 2.94
Financial Services 3.49 3.39
Food & Beverages 4.26 3.12
Insurance 3.43 3.55
Investment & Holding Companies 5.27 2.10
Metal Products 2.10 1.79
Mortgage Banking 8.38 5.77
Pharmaceuticals 5.44 6.60
Semiconductor & Related Technology 0.00 4.80
Telecommunications 12.24 14.75
Venture Capital 5.78 4.56
Other 9.16 12.91
Cash & Other Assets 8.23 6.06
</TABLE>
TOP 10 HOLDINGS, BY ISSUER
<TABLE>
<CAPTION>
Percent of Net
Holding Sector Assets
<C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
1. PEC Israel Economic Corp. Conglomerates 6.2
- ---------------------------------------------------------------------------------------------------------
2. Koor Industries Ltd. Conglomerates 5.1
- ---------------------------------------------------------------------------------------------------------
3. Bank Leumi Le-Israel Ltd. Banking 4.1
- ---------------------------------------------------------------------------------------------------------
4. Teva Pharmaceutical Industries Ltd. Pharmaceuticals 3.9
- ---------------------------------------------------------------------------------------------------------
5. ECI Telecommunications Ltd. Telecommunications 3.7
- ---------------------------------------------------------------------------------------------------------
6. Bezeq Israeli Telecommunication Corp., Ltd. Telecommunications 3.7
- ---------------------------------------------------------------------------------------------------------
7. Israel Discount Bank Ltd. Mortgage Banking 3.6
- ---------------------------------------------------------------------------------------------------------
8. Advent Israel (Bermuda) L.P. Venture Capital 3.2
- ---------------------------------------------------------------------------------------------------------
9. Bank Hapoalim Ltd. Banking 3.1
- ---------------------------------------------------------------------------------------------------------
10. F.I.B.I. Holdings Ltd. Financial Services 2.6
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
SCHEDULE OF INVESTMENTS - SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
<S> <C> <C>
- --------------------------------------------------------------------
EQUITY OR EQUITY-LINKED SECURITIES-91.77%
ISRAEL-90.94%
AEROSPACE/DEFENSE EQUIPMENT-0.62%
Elbit Systems Ltd....................... 37,518 $ 466,531
-----------
AUTO PARTS-1.03%
Delek Automotive Systems Ltd............ 415,092 775,318
-----------
BANKING-8.07%
Bank Hapoalim Ltd.+..................... 955,800 2,334,767
Bank Leumi Le-Israel Ltd................ 2,111,132 3,119,426
United Mizrahi Bank Ltd................. 292,206 627,125
-----------
6,081,318
-----------
BUILDING PRODUCTS-3.79%
Industrial Buildings Corp., Ltd......... 771,896 1,064,255
Property & Building Corp., Ltd.......... 15,103 1,308,307
Wolfman Industries Ltd., (Shares 5)+.... 2,640 19,711
Ytong Industries Ltd.................... 182,302 464,286
-----------
2,856,559
-----------
CHEMICALS-1.96%
Dead Sea Bromine Ltd.................... 30,662 177,876
Israel Chemicals Ltd.+.................. 1,390,000 1,301,752
-----------
1,479,628
-----------
COMPUTER SOFTWARE-0.78%
Oshap Technologies Ltd.+................ 66,345 356,604
Tecnomatix Technologies Ltd.+........... 24,622 230,831
-----------
587,435
-----------
CONGLOMERATES-16.94%
Clal (Israel) Ltd....................... 19,780 444,581
Discount Investment Corp................ 21,000 550,669
Elron Electronic Industries Ltd......... 33,356 490,271
IDB Development Corp., Ltd.............. 36,000 819,448
IDB Holding Corp., Ltd.................. 87,245 1,947,322
Koor Industries Ltd..................... 40,166 3,354,089
<CAPTION>
Par Value
Description (000) (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
CONGLOMERATES (CONTINUED)
Koor Industries Ltd., Convertible Note,
1.75%, 01/31/99*....................... NIS 600 $ 259,414
Koor Industries Ltd., Convertible Note,
1.75%, 01/31/00*....................... 600 259,414
<CAPTION>
No. of
Shares
-------------
<S> <C> <C>
PEC Israel Economic Corp.+.............. 181,210 4,643,506
-----------
12,768,714
-----------
ELECTRONICS/ELECTRICAL EQUIPMENT-2.64%
Elco Industries Ltd..................... 39,270 342,229
Electra Consumer Products Ltd........... 132,158 849,183
Electra (Israel) Ltd.................... 17,500 765,274
Electronics Line (EL) Ltd............... 22,434 31,340
-----------
1,988,026
-----------
ENERGY SERVICES-1.20%
Delek Israel Fuel Corp., Ltd............ 16,773 434,152
Superbowl Acquisition LDC+++............ 36 467,244
-----------
901,396
-----------
FINANCIAL SERVICES-3.49%
Ampal-American Israel Corp., Class A+... 92,500 370,000
Ampal-American Israel Corp., Class A,
Warrants (expiring 01/31/99)+.......... 92,500 2,891
F.I.B.I. Holdings Ltd................... 252,960 1,954,426
Gachelet Investments Ltd................ 5,266 180,554
Taya Investment Ltd.+................... 66,500 124,902
-----------
2,632,773
-----------
FOOD & BEVERAGES-4.26%
Elite Industries Ltd., (Shares 5)+...... 28,148 750,565
Israel Salt Industries Ltd.............. 80,305 389,403
Jaf-Ora Ltd.+........................... 405,208 811,670
Mayanot Eden Ltd........................ 149,750 584,345
Osem Investment Ltd..................... 91,641 432,452
</TABLE>
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
FOOD & BEVERAGES (CONTINUED)
SuperSol Ltd., Class B.................. 84,594 $ 239,651
-----------
3,208,086
-----------
INDUSTRIAL TECHNOLOGY-1.34%
Cubital, Ltd.*+......................... 329,278 0
Orbotech Ltd.+.......................... 31,500 1,013,906
-----------
1,013,906
-----------
INSURANCE-3.43%
Clal Insurance Enterprise Holdings
Ltd.................................... 145,330 1,228,711
Harel Insurance Investments Ltd.,
(Shares 5)............................. 36,918 1,354,141
-----------
2,582,852
-----------
INVESTMENT & HOLDING COMPANIES-4.44%
Dankner Investments Ltd.+............... 84,364 425,766
Makhteshim-Agan Industries Ltd.+........ 880,990 1,913,676
Oren Semiconductor, Inc., Series K*+.... 299,513 95,844
Oren Semiconductor, Inc., Series L*+.... 308,432 98,698
Polaris Fund II LLC+++#................. 375,000 346,961
The Renaissance Fund LDC++.............. 60 466,823
-----------
3,347,768
-----------
METAL PRODUCTS-2.10%
Caniel-Israel Can Co., Ltd.............. 105,210 930,565
Cvalim-The Electric Wire & Cable Co. of
Israel Ltd............................. 113,640 347,656
Klil Industries Ltd., (Shares 5)........ 18,654 308,140
-----------
1,586,361
-----------
MORTGAGE BANKING-8.38%
Discount Mortgage Bank Ltd.+............ 17,493 1,001,147
Israel Discount Bank Ltd.+.............. 2,976,467 2,717,810
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
MORTGAGE BANKING (CONTINUED)
Mishkan-Hapoalim Mortgage Bank Ltd.+.... 8,388 $ 1,459,807
Tefahot Israel Mortgage Bank Ltd........ 2,327 1,138,060
-----------
6,316,824
-----------
PHARMACEUTICALS-5.44%
Agis Industries (1983) Ltd.+............ 131,216 757,793
Peptor Ltd.*+........................... 56,000 392,000
Teva Pharmaceutical Industries Ltd.
ADR.................................... 78,010 2,954,629
-----------
4,104,422
-----------
REAL ESTATE & CONSTRUCTION-1.01%
Azorim-Investment, Development &
Construction Co., Ltd.................. 98,130 760,729
-----------
STEEL-0.32%
Urdan Industries Ltd.+.................. 405,259 243,532
-----------
TELECOMMUNICATIONS-12.24%
Amdocs Ltd.+............................ 25,000 282,813
Bezeq Israeli Telecommunication Corp.,
Ltd.................................... 949,401 2,810,625
CIENA Corp.+............................ 38,755 554,681
ECI Telecommunications Ltd.............. 115,300 2,824,850
Geotek Communications, Inc.+............ 18,595 651
Geotek Communications, Inc., Convertible
Preferred Series M, 8.50%*............. 100 0
Geotek Communications, Inc., Convertible
Preferred Series N*(1)................. 595 0
Gilat Satellite Networks Ltd.+.......... 11,500 517,500
Nexus Telecommunication Systems Ltd.+... 68,933 310,199
NICE-Systems Ltd. ADR+.................. 9,600 141,600
Tadiran Ltd. ADR........................ 19,600 546,350
Tadiran Telecommunications Ltd.......... 49,989 681,100
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
Teledata Communications Ltd.+........... 39,500 $ 553,000
-----------
9,223,369
-----------
TEXTILES-0.57%
Lodzia-Rotex Investment Ltd., (Shares
4)..................................... 21,720 277,432
Macpell Industries Ltd.................. 116,079 154,005
-----------
431,437
-----------
TRADING COMPANIES-0.26%
Rapac Electronics Ltd................... 34,806 197,390
-----------
VENTURE CAPITAL-5.78%
ABS GE Capital Giza Fund L.P.+++#....... 313,279 313,279
Advent Israel (Bermuda) L.P.+++......... 1,682,293 2,433,912
K.T. Concord Venture Fund LP+++#........ 250,000 222,539
Star Venture Enterprises II*+........... 5 802,068
Walden-Israel Ventures, L.P.+++......... 500,000 581,516
-----------
4,353,314
-----------
WOOD & PAPER PRODUCTS-0.85%
American Israeli Paper Mills Ltd........ 19,263 638,910
-----------
TOTAL ISRAEL (Cost $68,495,672)........................ 68,546,598
-----------
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
GLOBAL-0.83%
INVESTMENT & HOLDING COMPANIES-0.83%
Emerging Markets Ventures, L.P.+++#
(Cost $711,899)........................ 711,899 $ 624,937
-----------
TOTAL INVESTMENTS-91.77%
(Cost $69,207,571) (Notes A, D)....................... 69,171,535
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES-8.23%...
6,201,364
-----------
NET ASSETS-100.00%..................................... $75,372,899
-----------
-----------
- ---------------------------------------------------------
* Not readily marketable security.
+ Security is non-income producing.
++ Restricted security, not readily marketable (See Note
F).
# As of September 30, 1998, the Fund committed to
investing an additional $937,037, $1,788,101,
$750,000 and $625,000 of capital in ABS GE Capital
Giza Fund L.P., Emerging Markets Ventures, L.P., K.T.
Concord Venture Fund LP and Polaris Fund II LLC.,
respectively.
(1) With an additional 595 warrants attached, expiring
06/20/01, with no market value.
ADR American Depositary Receipts.
NIS New Israeli Shekel.
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
9
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost $69,207,571)
(Note A)............................... $69,171,535
Cash (Note A)........................... 6,661,612
Receivables:
Dividends............................. 9,179
Interest.............................. 5,118
Note.................................. 23,563
Prepaid expenses........................ 10,443
-----------
Total Assets............................ 75,881,450
-----------
LIABILITIES
Payables:
Investment advisory fee (Note B)...... 237,823
Israeli capital gains tax (Note A).... 52,423
Administration fees (Note B).......... 18,407
Other accrued expenses................ 199,898
-----------
Total Liabilities....................... 508,551
-----------
NET ASSETS (applicable to 5,012,295
shares of common stock outstanding)
(Note C)............................... $75,372,899
-----------
-----------
NET ASSET VALUE PER SHARE ($75,372,899
DIVIDED BY 5,012,295)................. $15.04
-----------
-----------
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......................... 67,371,893
Undistributed net investment income..... 2,231,938
Accumulated net realized gain on
investments and foreign currency
related transactions................... 5,852,746
Net unrealized depreciation in value of
investments and translation of other
assets and liabilities denominated in
foreign currency....................... (88,690)
-----------
Net assets applicable to shares
outstanding............................ $75,372,899
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
10
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF OPERATIONS - FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Income (Note A):
Dividends............................. $ 2,063,530
Interest.............................. 354,289
Less: Foreign taxes withheld.......... (312,537)
------------
Total Investment Income............... 2,105,282
------------
Expenses:
Investment advisory fees (Note B)..... 1,158,823
Custodian fees........................ 220,066
Audit and legal fees.................. 108,799
Printing.............................. 108,001
Administration fees (Note B).......... 102,092
Accounting fees....................... 68,999
Directors' fees....................... 46,700
Transfer agent fees................... 32,000
Amortization of organizational costs
(Note A)............................. 18,967
Insurance............................. 18,162
NYSE listing fees..................... 16,170
Other................................. 14,879
Israeli capital gains tax (Note A).... 48,949
------------
Total Expenses........................ 1,962,607
Less: Fee waivers (Note B)............ (211,621)
------------
Net Expenses........................ 1,750,986
------------
Net Investment Income................. 354,296
------------
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS
Net realized gain/(loss) from:
Investments........................... 6,203,248
Foreign currency related
transactions......................... (80,464)
Net change in unrealized appreciation in
value of investments and translation of
other assets and liabilities
denominated in foreign currency........ (21,046,316)
------------
Net realized and unrealized loss on
investments and foreign currency
related transactions................... (14,923,532)
------------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS........................ $(14,569,236)
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
11
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Fiscal Years Ended
September 30,
----------------------------
1998 1997
<S> <C> <C>
----------------------------
INCREASE/(DECREASE) IN NET ASSETS
Operations:
Net investment income................. $ 354,296 $ 1,744,106
Net realized gain on investments and
foreign currency related
transactions......................... 6,122,784 2,115,739
Net change in unrealized
appreciation/(depreciation) in value
of investments and translation of
other assets and liabilities
denominated in foreign currency...... (21,046,316) 28,979,212
------------ -----------
Net increase/(decrease) in net
assets resulting from operations... (14,569,236) 32,839,057
------------ -----------
Distributions to shareholders:
Net realized gain on investments...... (2,355,778) (6,190,185)
------------ -----------
Total increase/(decrease) in net
assets............................. (16,925,014) 26,648,872
------------ -----------
NET ASSETS
Beginning of year....................... 92,297,913 65,649,041
------------ -----------
End of year (including undistributed net
investment income of $2,231,938 and
$1,902,985, respectively).............. $ 75,372,899 $92,297,913
------------ -----------
------------ -----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
12
<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 29,
1992*
For the Fiscal Years Ended September 30, through
------------------------------------------------------------ September
1998 1997 1996 1995 1994 30, 1993
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........... $18.41 $13.10 $13.20 $11.74 $15.83 $13.74**
-------- -------- -------- -------- -------- ------------
Net investment income/(loss)................... 0.07 0.35 (0.09) (0.10) (0.28) (0.07)
Net realized and unrealized gain/(loss) on
investments and foreign currency related
transactions.................................. (2.97) 6.20 (0.01) 1.56 (3.27) 2.16
-------- -------- -------- -------- -------- ------------
Net increase/(decrease) in net assets resulting
from operations............................... (2.90) 6.55 (0.10) 1.46 (3.55) 2.09
-------- -------- -------- -------- -------- ------------
Distributions to shareholders:
Net realized gains on investments and foreign
currency related transactions............... (0.47) (1.24) -- -- (0.43) --
In excess of net realized gains.............. -- -- -- -- (0.11) --
-------- -------- -------- -------- -------- ------------
Total distributions to shareholders............ (0.47) (1.24) -- -- (0.54) --
-------- -------- -------- -------- -------- ------------
Net asset value, end of period................. $15.04 $18.41 $13.10 $13.20 $11.74 $15.83
-------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- ------------
Market value, end of period.................... $11.813 $14.938 $11.250 $12.000 $13.250 $17.375
-------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- ------------
Total investment return(a)..................... (18.05)% 44.36% (6.25)% (9.43)% (21.26)% 24.58%
-------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- ------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)........ $75,373 $92,298 $65,649 $66,150 $58,855 $79,274
Ratio of expenses to average net assets........ 2.06%(c) 2.26%(c) 2.23% 2.57% 2.64% 2.41%(b)
Ratio of net investment income/(loss) to
average net assets............................ 0.42% 2.20% (0.68)% (0.91)% (2.08)% (0.50)%(b)
Portfolio turnover rate........................ 29.11% 16.98% 21.68% 22.17% 17.07% 34.80%
</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 program. Total investment return does not
reflect brokerage commissions or initial underwriting discounts and
has not been annualized.
(b) Annualized.
(c) Ratios reflect actual expenses incurred by the Fund. Amounts are net
of fee waivers. Ratios of expenses to average net assets would have
been 2.30% and 2.31% excluding fee waivers, for the fiscal years ended
September 30, 1997 and September 30, 1998, respectively.
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
13
<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:
MANAGEMENT ESTIMATES: The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make certain
estimates and assumptions that may affect the reported amounts and disclosures
in the financial statements. Actual results could differ from those estimates.
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. Short-term investments
having a maturity of 60 days or less are valued on the basis of amortized cost.
The Board of Directors has established general guidelines for calculating fair
value of non-publicly traded securities. At September 30, 1998, the Fund held
9.77% of its net assets in securities valued in good faith by the Board of
Directors with an aggregate cost of $8,178,252 and fair value of $7,364,649. The
net asset value per share of the Fund is calculated on each business day, with
the exception of those days on which the New York Stock Exchange is closed.
CASH: Deposits held at Brown Brothers Harriman & Co., the Fund's custodian, in a
variable rate account are classified as cash. At September 30, 1998, the
interest rate was 4.80% 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
- --------------------------------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
appreciation on unlisted Israeli debt obligations. At September 30, 1998, the
Fund had deferred $52,423 in Israeli capital gains taxes on unlisted Israeli
debt obligations.
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 or losses from valuing foreign currency denominated assets
and liabilities at period end exchange rates are reflected as a component of net
unrealized appreciation/depreciation in value of investments and translation of
other assets and liabilities denominated in foreign currency.
Net realized foreign exchange losses represent foreign exchange gains and losses
from sales and maturities of debt securities, transactions in foreign currency
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.
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.
Included in undistributed net investment income is a dividend received from one
of the Fund's investment partnerships. This dividend was received as marketable
equity securities and will be presented as undistributed net investment income
until the securities are sold.
- --------------------------------------------------------------------------------
15
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
At September 30, 1998, the Fund reclassified $25,343 of net realized losses from
foreign currency related transactions to undistributed net investment income.
OTHER: Costs incurred by the Fund in connection with its organization have been
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 unlisted equity securities of Israeli companies for which there is no
established public trading market, that in the opinion of BEA Associates,
provide opportunities for growth. Such securities are expected to be illiquid
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.
At a meeting of the Board of Directors held on December 8, 1997, the Board of
Directors unanimously approved modifications to the above policy. The Fund,
subject to local investment limitations, may invest up to 30% of its assets in
illiquid equity securities, including securities of private equity funds
(whether in corporate or partnership form) that invest primarily in the emerging
markets. In addition, the Board of Directors has approved to remove the
limitation set forth in the Fund's prospectus requiring that the portion of the
Fund's investments not invested in Israeli securities be invested in securities
of companies that are substantially involved in or with Israel ("Israeli-Related
Securities"). The Board of Directors approved these changes on the basis that
the long-term value added approach of an emerging markets private equity
strategy is well suited to the long-term capital appreciation objective of the
Fund. When investing through another investment fund, the Fund will bear its
proportionate share of the expenses incurred by that fund, including management
fees.
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 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.
BEA has agreed to waive the advisory fee previously payable to the Fund's
investment sub-adviser. For the fiscal year ended September 30, 1998, BEA earned
$1,158,823 for advisory services, of which BEA waived $211,621. BEA also
provides certain
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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, 1998, BEA was reimbursed $8,501 for administrative services
rendered to the Fund.
Analyst I.M.S. Investment Management Services, Ltd. ("Analyst I.M.S.") serves as
the Fund's investment sub-adviser. Pursuant to the sub-advisory agreement,
Analyst I.M.S. is 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., out of its advisory
fee, a reimbursement for any Israeli Value Added taxes (currently 17%) and
$12,500 annually to cover expenses incurred in the execution of sub-advisory
services. For the fiscal year ended September 30, 1998, Analyst I.M.S. earned
$211,621 for sub-advisory services.
Analyst I.M.S. has certain commercial arrangements with banks and brokers in
Israel from which they receive a portion of the commission on trades executed in
Israel. For the fiscal year ended September 30, 1998, such commissions amounted
to $23,328.
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, 1998, BSFM earned $93,591 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, 1998,
BEA owned 7,169 shares.
NOTE D. INVESTMENT IN SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at September
30, 1998 was $69,941,773. Accordingly, the net unrealized depreciation of
investments (including investments denominated in foreign currency) of $770,238,
was composed of gross appreciation of $8,832,114, for those investments having
an excess of value over cost and gross depreciation of $9,602,352, for those
investments having an excess of cost over value.
For the fiscal year ended September 30, 1998, purchases and sales of securities,
other than short-term investments, were $22,856,192 and $23,377,415,
respectively.
NOTE E. CREDIT AGREEMENT
The Fund, along with 18 other U.S. regulated investment companies for which BEA
serves as investment adviser, has a credit agreement with BankBoston, N.A. 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 19
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, 1998.
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
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, 1998, share value of the securities and
percentage of net assets which the securities comprise.
<TABLE>
<CAPTION>
PERCENT
NUMBER FAIR VALUE OF
OF ACQUISITION AT VALUE PER NET
SECURITY SHARES DATES COST 09/30/98 SHARE ASSETS
- --------------------------------------- -------- ---------- ------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
ABS GE Capital Giza Fund L.P........... 50,544 02/03/98 $50,544 $ 50,544 $ 1.00 0.07
ABS GE Capital Giza Fund L.P........... 87,203 04/22/98 87,203 87,203 1.00 0.12
ABS GE Capital Giza Fund L.P........... 175,532 05/20/98 175,532 175,532 1.00 0.23
Advent Israel (Bermuda) L.P............ 650,000 06/16/93 520,340 940,409 1.45 1.25
Advent Israel (Bermuda) L.P............ 350,000 06/10/96 344,798 506,374 1.45 0.67
Advent Israel (Bermuda) L.P............ 682,293 01/16/98 770,950 987,129 1.45 1.31
Emerging Markets Ventures, L.P......... 10,667 01/22/98 10,667 9,364 0.88 0.01
Emerging Markets Ventures, L.P......... 469,493 05/05/98 469,493 412,142 0.88 0.55
Emerging Markets Ventures, L.P......... 231,739 07/07/98 231,739 203,431 0.88 0.27
K.T. Concord Venture Fund LP........... 250,000 12/08/97 242,295 222,539 0.89 0.30
Polaris Fund II LLC.................... 250,000 10/31/96 236,352 231,307 0.93 0.31
Polaris Fund II LLC.................... 125,000 03/04/98 120,160 115,654 0.93 0.15
Superbowl Acquisition LDC.............. 36 10/10/94 332,140 467,244 12,979.00 0.62
The Renaissance Fund LDC............... 26 03/30/94 285,039 202,290 7,780.38 0.27
The Renaissance Fund LDC............... 14 02/24/95 143,408 108,925 7,780.38 0.15
The Renaissance Fund LDC............... 11 03/13/96 113,958 85,584 7,780.38 0.11
The Renaissance Fund LDC............... 7 06/13/96 68,374 54,463 7,780.38 0.07
The Renaissance Fund LDC............... 2 03/21/97 23,876 15,561 7,780.38 0.02
Walden-Israel Ventures, L.P............ 45,000 09/28/93 29,468 52,336 1.16 0.07
Walden-Israel Ventures, L.P............ 80,000 11/30/93 76,581 93,043 1.16 0.13
Walden-Israel Ventures, L.P............ 125,000 05/24/95 119,657 145,379 1.16 0.19
Walden-Israel Ventures, L.P............ 125,000 08/08/96 119,657 145,379 1.16 0.19
Walden-Israel Ventures, L.P............ 125,000 05/16/97 119,657 145,379 1.16 0.19
</TABLE>
The Fund may incur certain costs in connection with the disposition of the above
securities.
NOTE G. SUBSEQUENT EVENT
SHARE REPURCHASE PROGRAM: On October 21, 1998, the Fund announced that its Board
of Directors has authorized the repurchase by the Fund of up to 15% of the
Fund's outstanding common stock, for the purposes of enhancing shareholder
value. The Fund's Board has authorized management of the Fund to repurchase such
shares in open market transactions at prevailing market prices from time to time
and in a manner consistent with the Fund continuing to seek to achieve its
investment objectives. The Board's actions were taken in light of the
significant discounts at which the Fund's shares recently have been trading. It
is intended both to provide additional liquidity to those shareholders that
elect to sell their shares and to enhance the net asset value of the shares held
by those shareholders that maintain their investment. The repurchase program
will be subject to review by the Directors of the Fund.
- --------------------------------------------------------------------------------
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of The First Israel Fund, Inc.:
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations, changes
in net assets and financial highlights present fairly, in all material respects,
the financial position of The First Israel Fund, Inc. (the "Fund") at September
30, 1998, and the results of its operations, changes in net assets and its
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at September 30, 1998 by
correspondence with the custodian and issuers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
November 16, 1998
- --------------------------------------------------------------------------------
19
<PAGE>
RESULTS OF ANNUAL MEETING OF SHAREHOLDERS (UNAUDITED)
On January 15, 1998, 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 three directors to the Board of Directors of the Fund.
<TABLE>
<CAPTION>
NAME OF DIRECTOR FOR WITHHELD NON-VOTES
- ----------------------------------- --------- --------- ---------
<S> <C> <C> <C>
George W. Landau 3,248,582 89,988 1,673,725
William W. Priest, Jr. 3,252,754 85,816 1,673,725
Richard W. Watt 3,263,353 75,217 1,673,725
</TABLE>
In addition to the directors re-elected at the meeting, Dr. Enrique R. Arzac,
Peter A. Gordon, Jonathan W. Lubell and Steven N. Rappaport continue to serve as
directors of the Fund.
(2) To ratify the selection of PricewaterhouseCoopers LLP (formerly Coopers &
Lybrand L.L.P.) as independent public accountants for the fiscal year ending
September 30, 1998.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTES
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
3,284,179 29,634 24,757 1,673,725
</TABLE>
TAX INFORMATION (UNAUDITED)
The Fund is required by Subchapter M of the Internal Revenue Code of 1986, as
amended, to advise its shareholders within 60 days of the Fund's fiscal year end
(September 30, 1998) as to the U.S. federal tax status of distributions received
by the Fund's shareholders in respect of such fiscal year. The $0.47 per share
distribution paid in respect of such fiscal year, was derived entirely from net
realized long-term capital gains. There were no distributions which would
qualify for the dividend received deduction available to corporate shareholders.
The Fund does not intend to make an election under Section 853 to pass through
foreign taxes paid by the Fund to its shareholders. This information is given to
meet certain requirements of the Internal Revenue Code of 1986, as amended.
Shareholders should refer to their Form 1099-DIV to determine the amount
includable on their respective tax returns for 1998.
Because the Fund's fiscal year is not the calendar year, another notification
will be sent in respect of calendar year 1998. The notification will reflect the
amount, if any, that calendar year 1998 taxpayers will report on their U.S.
federal income tax returns. Such notification will be mailed with Form 1099-DIV
in January 1999.
Foreign shareholders will generally be subject to U.S. withholding tax on the
amount of their distribution. They will generally not be entitled to a foreign
tax credit or deduction for the withholding taxes paid by the Fund.
In general, distributions received by tax-exempt recipients (e.g., IRAs and
Keoghs) need not be reported as taxable income for U.S. federal income tax
purposes. However, some retirement trusts (e.g., corporate, Keogh and 403(b)(7)
plans) may need this information for their annual information reporting.
Shareholders are advised to consult their own tax advisers with respect to the
tax consequences of their investments in the Fund.
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<PAGE>
DESCRIPTION OF INVESTLINK* PROGRAM
The InvestLink Program is sponsored and administered by BankBoston, N.A., not by
The First Israel Fund, Inc. (the "Fund"). BankBoston, N.A. will act as program
administrator (the "Program Administrator") of the InvestLink Program (the
"Program"). The purpose of the Program is to provide interested investors with a
simple and convenient way to invest funds and reinvest dividends in shares of
the Fund's common stock ("Shares") at prevailing prices, with reduced brokerage
commissions and fees.
An interested investor may join the Program at any time. Purchases of Shares
with funds from a participant's cash payment or automatic account deduction will
begin on the next day on which funds are invested. If a participant selects the
dividend reinvestment option, automatic investment of dividends generally will
begin with the next dividend payable after the Program Administrator receives
his enrollment form. Once in the Program, a person will remain a participant
until he terminates his participation or sells all Shares held in his Program
account, or his account is terminated by the Program Administrator. A
participant may change his investment options at any time by requesting a new
enrollment form and returning it to the Program Administrator.
A participant will be assessed certain charges in connection with his
participation in the Program. First-time investors will be subject to an initial
service charge which will be deducted from their initial cash deposit. All
optional cash deposit investments will be subject to a service charge. Sales
processed through the Program will have a service fee deducted from the net
proceeds, after brokerage commissions. In addition to the transaction charges
outlined above, participants will be assessed per share processing fees (which
include brokerage commissions.) Participants will not be charged any fee for
reinvesting dividends.
The number of Shares to be purchased for a participant depends on the amount of
his dividends, cash payments or bank account or payroll deductions, less
applicable fees and commissions, and the purchase price of the Shares. The
Program Administrator uses dividends and funds of participants to purchase
Shares of Company Common Stock in the open market. Such purchases will be made
by participating brokers as agent for the participants using normal cash
settlement practices. All Shares purchased through the Program will be allocated
to participants as of the settlement date, which is usually three business days
from the the purchase date. In all cases, transaction processing will occur
within 30 days of the receipt of funds, except where temporary curtailment or
suspension of purchases is necessary to comply with applicable provisions of the
Federal Securities laws, or when unusual market conditions make prudent
investment impracticable. In the event the Program Administrator is unable to
purchase Shares within 30 days of the receipt of funds, such funds will be
returned to the participants.
The average price of all Shares purchased by the Program Administrator with all
funds received during the time period from two business days preceding any
investment date up to the second business day preceding the next investment date
shall be the price per share allocable to a participant in connection with the
Shares purchased for his account with his funds or dividends received by the
Program Administrator during such time period. The average price of all Shares
sold by the Program Administrator pursuant to sell orders received during such
time period shall be the price per share allocable to a participant in
connection with the Shares sold for his account pursuant to his sell orders
received by the Program Administrator during such time period.
BankBoston, N.A., as Program Administrator, administers the Program for
participants, keeps records, sends statements of account to participants
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21
<PAGE>
DESCRIPTION OF INVESTLINK* PROGRAM (CONTINUED)
and performs other duties relating to the Program. Each participant in the
Program will receive a statement of his account following each purchase of
Shares. The statements will also show the amount of dividends credited to such
participant's account (if applicable), as well as the fees paid by the
participant. In addition, each participant will receive copies of the Fund's
Annual Report to shareholders, proxy statements and, if applicable, dividend
income information for tax reporting purposes.
If the Fund is paying dividends on the Shares, a participant will receive
dividends through the Program for all Shares held on the dividend record date on
the basis of full and fractional Shares held in his account, and for all other
Shares of the Fund registered in his name. The Program Administrator will send
checks to the participants for the amounts of their dividends that are not to be
automatically reinvested at no cost to the participants.
Shares of the Fund purchased under the Program will be registered in the name of
the accounts of the respective participants. Unless requested, the Fund will not
issue to participants certificates for Shares of the Fund purchased under the
Program. The Program Administrator will hold the Shares in book-entry form until
a Program participant chooses to withdraw his Shares or terminate his
participation in the Program. The number of Shares purchased for a participant's
account under the Program will be shown on his statement of account. This
feature protects against loss, theft or destruction of stock certificates.
A participant may withdraw all or a portion of the Shares from his Program
account by notifying the Program Administrator. After receipt of a participant's
request, the Program Administrator will issue to such participant certificates
for the whole Shares of the Fund so withdrawn or, if requested by the
participant, sell the Shares for him and send him the proceeds, less applicable
brokerage commissions, fees, and transfer taxes, if any. If a participant
withdraws all full and fractional Shares in his Program account, his
participation in the Program will be terminated by the Program Administrator. In
no case will certificates for fractional Shares be issued. The Program
Administrator will convert any fractional Shares held by a participant at the
time of his withdrawal to cash.
Participation in any rights offering, dividend distribution or stock split will
be based upon both the Shares of the Fund registered in participants' names and
the Shares (including fractional Shares) credited to participants' Program
accounts. Any stock dividend or Shares resulting from stock splits with respect
to Shares of the Fund, both full and fractional, which participants hold in
their Program accounts and with respect to all Shares registered in their names
will be automatically credited to their accounts.
All Shares of the Fund (including any fractional share) credited to his account
under the Program will be voted as the participant directs. The participants
will be sent the proxy materials for the annual meetings of shareholders. When a
participant returns an executed proxy, all of such Shares will be voted as
indicated. A participant may also elect to vote his Shares in person at the
Shareholders' meeting.
A participant will receive tax information annually for his personal records and
to help him prepare his U.S. federal income tax return. The automatic
reinvestment of dividends does not relieve him of any income tax which may be
payable on dividends. For further information as to tax consequences of
participation in the Program, participants should consult with their own tax
advisors.
The Program Administrator in administering the Program will not be liable for
any act done in good faith or for any good faith omission to act. However, the
Program Administrator will be liable for loss or damage due to error caused by
its negligence, bad faith or
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22
<PAGE>
DESCRIPTION OF INVESTLINK* PROGRAM (CONTINUED)
willful misconduct. Shares held in custody by the Program Administrator are not
subject to protection under the Securities Investors Protection Act of 1970.
The participant should recognize that neither the Fund nor the Program
Administrator can provide any assurance of a profit or protection against loss
on any Shares purchased under the Program. A participant's investment in Shares
held in his Program account is no different than his investment in directly held
Shares in this regard. The participant bears the risk of loss and the benefits
of gain from market price changes with respect to all of his Shares. Neither the
Fund nor the Program Administrator can guarantee that Shares purchased under the
Program will, at any particular time, be worth more or less than their purchase
price. Each participant must make an independent investment decision based on
his own judgment and research.
While the Program Administrator hopes to continue the Program indefinitely, the
Program Administrator reserves the right to suspend or terminate the Program at
any time. It also reserves the right to make modifications to the Program.
Participants will be notified of any such suspension, termination or
modification in accordance with the terms and conditions of the Program. The
Program Administrator also reserves the right to terminate any participant's
participation in the Program at any time. Any question of interpretation arising
under the Program will be determined in good faith by the Program Administrator
and any such good faith determination will be final.
Any interested investor may participate in the Program. To participate in the
Program, an investor who is not already a registered owner of the Shares must
make an initial investment of at least $250.00. All other cash payments or bank
account deductions must be at least $100.00, up to a maximum of $100,000.00
annually. An interested investor may join the Program by reading the Program
description, completing and signing the enrollment form and returning it to the
Program Administrator. The enrollment form and information relating to the
Program (including the terms and conditions) may be obtained by calling the
Program Administrator at one of the following telephone numbers: First Time
Investors--(800) 969-3321; Current Shareholders--(800) 730-6001. All
correspondence regarding the Program should be directed to: BankBoston, N.A.,
InvestLink Program, P.O. Box 1681, Boston, MA 02105-1681.
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*InvestLink-SM- is a service mark of Boston EquiServe Limited Partnership.
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23
<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, 1998, BEA managed approximately $35.2 billion
in assets.
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."
THE BEA GROUP OF FUNDS
LITERATURE REQUEST--Call today for free descriptive information on the
closed-end funds listed below at 1-800-293-1232 or visit our website on the
Internet: http://www.beafunds.com.
CLOSED-END FUNDS
SINGLE COUNTRY
The Brazilian Equity Fund, Inc. (BZL)
The Chile Fund, Inc. (CH)
The Indonesia Fund, Inc. (IF)
The Portugal Fund, Inc. (PGF)
MULTIPLE COUNTRY
The Emerging Markets Infrastructure Fund, Inc. (EMG)
The Emerging Markets Telecommunications Fund, Inc. (ETF)
The Latin America Equity Fund, Inc. (LAQ)
The Latin America Investment Fund, Inc. (LAM)
FIXED INCOME
BEA Income Fund, Inc. (FBF)
BEA Strategic Global Income Fund, Inc. (FBI)
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<PAGE>
DIRECTORS AND CORPORATE OFFICERS
Dr. Enrique R. Arzac Director
Peter A. Gordon Director
George W. Landau Director
Jonathan W. Lubell Director
Steven N. Rappaport Director
William W. Priest, Jr. Chairman of the Board of Directors
Richard W. Watt President, Chief Investment Officer
and Director
Sam C. Wildeman Investment Officer
Michael A. Pignataro Chief Financial Officer and
Secretary
Hal Liebes Senior Vice President
Rocco A. Del Guercio Vice President
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
BankBoston, N.A.
P.O. Box 1865
Mail Stop 45-02-62
Boston, MA 02105-1865
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
2400 Eleven Penn Center
Philadelphia, PA 19103
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom LLP
919 Third Avenue
New York, NY 10022
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<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]
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3917-AR-98
