<PAGE>
[ART]
The First Israel
Fund, Inc.
- ---------------------
SEMI-ANNUAL REPORT
MARCH 31, 1998
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders........................................................................ 1
Portfolio Summary............................................................................. 8
Schedule of Investments....................................................................... 9
Statement of Assets and Liabilities........................................................... 12
Statement of Operations....................................................................... 13
Statement of Changes in Net Assets............................................................ 14
Financial Highlights.......................................................................... 15
Notes to Financial Statements................................................................. 16
Results of Annual Meeting of Shareholders..................................................... 21
Description of InvestLink-SM- Program......................................................... 22
</TABLE>
PICTURED ON THE COVER IS AN AERIAL VIEW OF THE TEL AVIV SKYLINE.
- --------------------------------------------------------------------------------
<PAGE>
LETTER TO SHAREHOLDERS
May 13, 1998
DEAR SHAREHOLDER:
I am pleased to report on the activities of The First Israel Fund, Inc. (the
"Fund") for the six months ended March 31, 1998.
At March 31, 1998, total net assets of the Fund were approximately $85.8
million. The Fund's investments in securities listed and trading on the Tel Aviv
Stock Exchange were $50.4 million, with another $24.4 million in the Israeli and
Israel-related companies listed and trading in the United States. Combined,
these totalled $74.8 million, as compared to approximately $77.1 million on
September 30, 1997. The Fund also held investments valued at approximately $7.6
million in unlisted securities, as compared to approximately $9.6 million on
September 30, 1997. In percentage terms, at March 31, 1998, 87.1% of the Fund's
net assets was invested in Israeli and Israel-related companies listed and
trading on the Tel Aviv Stock Exchange and in the United States and 8.9% in
unlisted equity or equity-linked 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
March 31, 1998, NAV per share was $17.12, as compared to $18.41 at September 30,
1997. The Fund's common stock closed on the New York Stock Exchange on March 31,
1998 at $13.938 per share, representing a discount of 18.6% 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 Tel Aviv Stock Exchange
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
For the six months ended March 31, 1998, the Fund's total return, based on NAV
and assuming reinvestment of dividends and distributions, was -3.6%, versus
- -4.4% for the Morgan Stanley Capital International Israel Index (the "Index").
The Fund's outperformance of the Index during the period was primarily due to
particularly high returns in two sectors of the portfolio. First was unlisted
securities, led by Advent Israel (Bermuda) L.P. ("Advent"), a fund invested in
privately placed equity instruments that is itself the Fund's tenth-largest
position. Advent was revalued sharply upward at period-end, based on similarly
strong revaluations of some of its individual holdings. The second sector to
boost performance was conglomerates. Over the last couple of years, many of the
largest publicly traded Israeli conglomerates have undertaken substantial
restructuring programs in order to enhance shareholder value. Several
conglomerates in which the Fund had positions (I.E., Koor Industries Ltd., IDB
Holding Corp., Ltd., Discount Investment Corp.) were engaged in such programs in
recent months and were recognized by investors accordingly.
- --------------------------------------------------------------------------------
1
<PAGE>
LETTER TO SHAREHOLDERS
Performance was least effective in banking and electronics/electrical equipment.
In banking, I split the Fund's allocation between commercial banks and mortgage
banks at a time when commercial banks, which are disproportionately represented
in the major Israeli stock indices, did especially well. I should note in this
context that the Fund is legally required to diversify in a way that prevents it
from duplicating the Index's composition without taking undue stock-specific
risk. The electronics/electrical equipment allocation was hurt by weak returns
in Ciena Corp. ("Ciena"), which makes products that widen the bandwidth of
telecommunications transmission equipment. Ciena's shares sold off heavily after
it announced that its order volume would fall short of expectations.
INVESTMENT PERSPECTIVE
Midway through the second quarter of 1998, the Israeli market has retraced its
losses since the outbreak of the "Asian Flu" sent global markets plummeting last
fall. Now, we see new highs and significant momentum.
Clearly, investors are not responding to the political environment, as the peace
process remains locked in a stalemate that neither Prime Minister Netanyahu nor
Chairman Arafat appears interested in breaking. Mr. Netanyahu also continues to
be dogged by scandal and other domestic tensions.
The market's driving force, then, is the rapidly improving macroeconomic
environment. A key factor in this respect is that inflation dropped to 7.0% in
1997, the lowest such rate in years, and continues to fall. I am projecting that
1998 inflation will be at the low end of the government's targeted range of
7-10%. This has resulted in lower interest rates, as can be seen in the
following chart.
<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
INTEREST RATES AND INFLATION TRENDING DOWN
<S> <C> <C>
% Discount
% Inflation
Inflation
Discount Rate Rate
Jan-95 17.0 13.9
Feb-95 16.9 13.4
Mar-95 15.8 12.1
Apr-95 14.7 11.0
May-95 14.0 10.8
Jun-95 13.6 9.6
Jul-95 13.6 8.8
Aug-95 13.4 8.9
Sep-95 13.3 8.8
Oct-95 13.9 8.4
Nov-95 14.2 7.8
Dec-95 14.2 8.1
Jan-96 13.8 8.8
Feb-96 14.1 9.7
Mar-96 14.1 10.8
Apr-96 14.2 11.6
May-96 14.9 12.4
Jun-96 15.6 12.9
Jul-96 17.0 12.9
Aug-96 16.3 12.0
Sep-96 15.8 11.4
Oct-96 15.5 11.1
Nov-96 15.2 11.0
Dec-96 14.7 10.6
Jan-97 14.7 10.1
Feb-97 14.2 10.4
Mar-97 13.9 10.4
Apr-97 13.9 9.4
May-97 13.9 8.1
Jun-97 12.7 8.4
Jul-97 12.7 9.2
Aug-97 13.4 9.3
Sep-97 13.4 8.7
Oct-97 13.4 9.1
Nov-97 13.4 8.2
Dec-97 13.4 7.0
Jan-98 13.4 6.9
Feb-98 12.9 5.6
Mar-98 12.6 4.4
Apr-98 12.2 4.4
May-98 11.9 4.4
Source: Merrill Lynch
</TABLE>
- --------------------------------------------------------------------------------
2
<PAGE>
LETTER TO SHAREHOLDERS
The Bank of Israel has cut rates four times thus far in the year, for a total of
150 basis points. At 11.9%, the official rate is at its lowest level since July
1994. My analysis indicates scope for another 100-150 basis points in cuts by
the end of the year.
Somewhat offsetting the good news on inflation has been a sharp slowdown in
economic growth. In 1997, the Gross Domestic Product rose a scant 1.9%, much
lower than in preceding years. In many circumstances, this might be considered
cause for concern; as I see it, however, the low-growth scenario is positive in
that it should allow interest rates and inflation to fall even further. Stock
prices should rise accordingly.
A further contributor to Israel's economic soundness is the revenue stream
generated by the government's ongoing privatization program. Equity stakes in
several companies (E.G., Bezeq Israeli Telecommunication Corp., Ltd., Bank
Hapoalim Ltd.) were already sold in the first quarter of this year, with further
meaningful sales (E.G., Bank Leumi Israel, Israel Chemicals Ltd., El Al
Airlines) projected through year-end. All told, I expect that 1998 privatization
proceeds should total 4-7 billion shekels.
PORTFOLIO STRUCTURE
TOP 10 HOLDINGS, BY ISSUER*
<TABLE>
<CAPTION>
% OF
HOLDING SECTOR NET ASSETS
<S> <C> <C> <C>
1. Teva
Pharmaceutical Pharmaceuticals 6.5
2. Bank Leumi Banking 5.5
3. Bank
Hapoalim Banking 4.4
4. Koor
Industries Conglomerates 4.2
5. ECI Telecommunications 4.1
6. Israel
Discount
Bank Mortgage Banking 4.1
7. PEC Israel
Economic
Corp. Conglomerates 3.3
8. Bezeq Telecommunications 3.0
9. F.I.B.I.
Holdings Financial Services 2.9
10. Advent Israel Venture Capital 2.7
</TABLE>
<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SECTOR ALLOCATION
<S> <C>
(as a percent of net
assets)
Banking 9.83%
Building Products 3.20%
Chemicals 4.32%
Computer Soft. 2.50%
Conglomerates 12.71%
Electronics/Elec. 2.16%
Fin. Scvs 3.71%
Food & Bev. 3.99%
Insur. 3.57%
Inv. & Hold. Cos 3.19%
Metal Prod. 2.01%
Mort. Bkg. 8.10%
Pharm. 6.98%
Telecom. 16.38%
Venture Cap. 4.84%
Other 12.51%
</TABLE>
- ------------------------------
* Company names are abbreviations of those found in the chart on page 8.
Given Israel's improving macroeconomic environment, I have chosen to shift the
majority of Fund assets away from companies operating overseas (I.E., listed on
NASDAQ) in favor of those with a more domestic focus. Valuations of domestically
oriented companies are also meaningfully lower than their overseas counterparts.
In addition, I am quite concerned about the valuation of some of the
NASDAQ-listed technology stocks, especially in the context of slowing global
growth.
- --------------------------------------------------------------------------------
3
<PAGE>
LETTER TO SHAREHOLDERS
My preference for Israel-based stocks is reflected in the Fund's broad sector
allocations as well as in its 10 largest holdings, which account for about 41%
of the portfolio. With the exception of ECI Telecommunications Ltd., all of the
top 10 do most of their business in Israel.
I would now like to more specifically discuss two of the Fund's largest
holdings.
It is essentially impossible to invest in a diversified portfolio of Israeli
equities without owning shares of BANK HAPOALIM LTD., which is the nation's
largest bank and one of its most liquid stocks. In late February, the government
sold 7.6% of the bank's equity to the public, lowering its ownership to 28.7% in
the process.
My investment rationale for Bank Hapoalim Ltd. is a combination of
company-specific and more general banking-related factors. The company has
attracted considerable attention in recent months, based on its reduction of
non-banking holdings and the government's sale of a 43% stake to an investor
group in October 1997. According to current news reports, furthermore, the
investor group is seeking to sell a 4.9% piece of this stake to a strategic
investor such as a large U.S. bank.
Bank Hapoalim Ltd.'s size and liquidity are such that the company also serves as
a kind of equity surrogate for the broad Israeli banking sector. I do not,
however, feel that its heavy Index weighting (I.E., 15%) is appropriate for the
Fund, as noted in the earlier discussion of performance. This has cost the Fund
some gains in the short-term, but better value is available elsewhere. To this
end, I have widened the banking allocation to other high-quality institutions
with top-notch managements and conservative lending policies, such as Bank Leumi
Israel. Their valuations are quite cheap when compared to those of the leading
banks in other emerging nations (particularly in Eastern Europe). I have also
invested in mortgage banks, where I feel there is even better value to be
realized as interest rates decline. Mortgage banks whose shares are currently in
the portfolio include Discount Mortgage Bank Ltd., Israel Discount Bank Ltd.,
Mishkan Hapoalim Mortgage Bank Ltd. and Tefahot Israel Mortgage Bank Ltd.
KOOR INDUSTRIES LTD. ("Koor") is one of several conglomerates publicly traded in
Israel. [Note: others in which the Fund holds positions include Clal Israel
Ltd., Discount Investment Corp., Elco Holdings Ltd., Elron Electronic Industries
Ltd., FMS Enterprises Migun Ltd., IDB Development Corp., Ltd., IDB Holding
Corp., Ltd. and PEC Israel Economic Corp.] As previously noted, most of these
are restructuring and, as a result, creating value for shareholders. Koor is
prominent in this regard.
The catalyst for Koor occurred in mid-1997, when the private investment company
Claridge Israel acquired majority ownership. With Jonathan Kolber at the helm,
Claridge Israel changed the company's basic strategy from buying unrelated
companies to a focus on three core businesses.
Koor is thus aiming to generate shareholder value both by divesting non-core
assets and raising the profitability of its remaining core operations. It has
plenty of cash on hand and very little debt. Going forward, I see substantial
upside from a combination of further divestitures and new investments, which
should boost earnings and reduce the stock's traditional holding company
discount. I also believe that Koor's unwinding of its complex corporate
structure will set an example for the other major Israeli conglomerates and
create new opportunities for equity investors in doing so.
- --------------------------------------------------------------------------------
4
<PAGE>
LETTER TO SHAREHOLDERS
<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
KOOR INDUSTRIES LTD. VS. MSCI ISRAEL INDEX
<S> <C> <C>
(Relative performance of local shares in $US)
MSCI ISRAEL INDEX KOOR INDUSTRIES LTD.
12/31/96 100.00 100.00
1/02/97 101.39 99.58
1/03/97 101.46 99.32
1/06/97 106.34 101.64
1/07/97 108.45 107.40
1/08/97 108.74 107.85
1/09/97 107.65 105.96
1/10/97 107.39 105.63
1/13/97 111.03 110.42
1/14/97 110.56 110.97
1/15/97 111.84 114.24
1/16/97 112.88 116.91
1/17/97 112.64 116.49
1/20/97 114.09 116.49
1/21/97 114.81 115.89
1/22/97 113.64 115.47
1/23/97 113.58 114.67
1/24/97 113.57 114.91
1/27/97 111.72 111.64
1/28/97 111.43 109.25
1/29/97 113.06 111.07
1/30/97 113.59 111.06
1/31/97 113.82 111.05
2/03/97 119.26 118.55
2/04/97 118.50 117.55
2/05/97 120.33 121.95
2/06/97 119.14 120.99
2/07/97 118.77 120.47
2/10/97 118.72 124.81
2/11/97 117.87 123.32
2/12/97 117.05 121.24
2/13/97 116.54 118.85
2/14/97 116.61 118.85
2/18/97 123.62 122.10
2/19/97 122.52 119.98
2/20/97 122.22 119.48
2/21/97 122.03 119.59
2/24/97 119.39 114.82
2/25/97 116.40 112.46
2/26/97 117.48 111.93
2/27/97 117.01 110.52
2/28/97 116.98 110.57
3/03/97 114.52 107.01
3/04/97 117.53 109.62
3/05/97 117.77 108.42
3/06/97 118.01 110.21
3/07/97 118.34 110.18
3/10/97 118.19 106.63
3/11/97 116.21 106.38
3/12/97 114.63 105.07
3/13/97 112.67 104.47
3/14/97 112.75 104.50
3/17/97 112.94 105.29
3/18/97 110.50 103.61
3/19/97 110.00 102.34
3/20/97 111.19 101.58
3/21/97 111.06 101.77
3/24/97 110.42 100.46
3/25/97 111.00 100.66
3/26/97 110.74 99.85
3/27/97 111.21 100.34
3/31/97 111.37 105.63
4/01/97 111.38 104.03
4/02/97 113.07 106.89
4/03/97 113.03 106.34
4/04/97 113.47 106.16
4/07/97 114.55 105.69
4/08/97 114.80 107.16
4/09/97 113.04 105.26
4/10/97 114.18 104.54
4/11/97 113.55 104.41
4/14/97 114.67 101.13
4/15/97 115.19 103.24
4/16/97 114.39 103.61
4/17/97 112.22 103.32
4/18/97 112.24 103.27
4/21/97 111.81 101.79
4/22/97 111.65 101.65
4/23/97 112.29 101.80
4/24/97 112.82 100.66
4/25/97 112.36 100.55
4/28/97 112.39 100.48
4/29/97 112.47 97.75
4/30/97 113.38 99.19
5/01/97 114.35 99.91
5/02/97 114.40 99.71
5/05/97 115.61 101.52
5/06/97 115.77 100.22
5/07/97 115.11 98.54
5/08/97 116.16 98.54
5/09/97 116.68 98.67
5/12/97 116.81 98.75
5/13/97 117.35 101.18
5/14/97 117.32 101.68
5/15/97 118.10 101.54
5/16/97 118.44 101.93
5/19/97 117.32 101.25
5/20/97 118.13 100.96
5/21/97 118.71 103.24
5/22/97 119.31 102.59
5/23/97 119.53 102.65
5/27/97 121.11 104.48
5/28/97 122.78 102.78
5/29/97 122.90 102.02
5/30/97 122.84 101.81
6/02/97 125.29 101.99
6/03/97 126.58 105.35
6/04/97 126.59 104.43
6/05/97 127.47 104.67
6/06/97 127.30 104.66
6/09/97 131.07 107.73
6/10/97 130.90 107.58
6/11/97 130.95 107.67
6/12/97 129.76 108.53
6/13/97 129.63 108.24
6/16/97 132.87 109.67
6/17/97 132.34 108.41
6/18/97 132.97 110.21
6/19/97 133.82 111.11
6/20/97 133.56 110.71
6/23/97 130.73 112.25
6/24/97 128.09 107.63
6/25/97 126.48 105.89
6/26/97 125.32 103.08
6/27/97 124.28 102.39
6/30/97 124.73 101.67
7/01/97 128.31 103.92
7/02/97 129.23 105.04
7/03/97 129.35 102.95
7/07/97 131.01 106.61
7/08/97 132.14 106.94
7/09/97 132.39 110.67
7/10/97 131.15 112.10
7/11/97 131.66 111.84
7/14/97 132.75 113.79
7/15/97 132.56 111.93
7/16/97 131.56 111.83
7/17/97 133.06 116.34
7/18/97 132.67 116.59
7/21/97 131.59 127.38
7/22/97 131.04 125.15
7/23/97 131.67 122.20
7/24/97 131.37 120.94
7/25/97 131.61 121.26
7/28/97 133.27 125.46
7/29/97 133.84 124.46
7/30/97 132.54 128.27
7/31/97 134.69 130.26
8/01/97 134.56 130.24
8/04/97 136.46 129.24
8/05/97 135.92 124.90
8/06/97 136.89 126.44
8/07/97 136.60 124.89
8/08/97 137.08 125.35
8/11/97 133.82 121.57
8/12/97 133.36 121.33
8/13/97 131.41 120.30
8/14/97 132.69 119.84
8/15/97 133.42 120.45
8/18/97 130.07 120.01
8/19/97 130.31 120.21
8/20/97 130.72 121.87
8/21/97 130.17 123.16
8/22/97 130.25 123.44
8/25/97 127.46 123.63
8/26/97 126.49 122.49
8/27/97 127.05 122.62
8/28/97 127.00 123.28
8/29/97 126.72 123.06
9/02/97 125.39 125.96
9/03/97 127.29 124.60
9/04/97 125.92 121.89
9/05/97 126.52 122.07
9/08/97 127.37 121.64
9/09/97 129.94 123.74
9/10/97 129.01 122.24
9/11/97 127.69 120.97
9/12/97 128.22 121.31
9/15/97 127.64 120.68
9/16/97 126.97 120.72
9/17/97 126.46 120.92
9/18/97 125.45 116.90
9/19/97 126.19 117.01
9/22/97 126.69 116.90
9/23/97 127.77 117.81
9/24/97 127.24 118.12
9/25/97 127.33 117.73
9/26/97 127.50 117.45
9/29/97 130.32 120.27
9/30/97 132.02 119.34
10/01/97 132.18 119.08
10/02/97 132.25 119.22
10/03/97 132.00 119.20
10/06/97 134.25 124.22
10/07/97 134.45 125.15
10/08/97 135.00 125.16
10/09/97 134.96 129.36
10/10/97 134.92 129.26
10/13/97 134.96 128.91
10/14/97 135.08 132.13
10/15/97 134.09 131.55
10/16/97 134.00 131.71
10/17/97 132.82 131.01
10/20/97 135.18 134.49
10/21/97 134.99 133.75
10/22/97 134.87 133.29
10/23/97 134.16 133.31
10/24/97 132.68 132.60
10/27/97 126.03 126.60
10/28/97 115.47 113.46
10/29/97 124.23 122.24
10/30/97 120.23 118.05
10/31/97 120.63 118.45
11/03/97 125.30 123.42
11/04/97 124.61 123.29
11/05/97 124.73 122.91
11/06/97 124.05 123.22
11/07/97 123.17 122.87
11/10/97 120.83 118.42
11/11/97 120.40 117.70
11/12/97 116.45 113.40
11/13/97 117.02 114.43
11/14/97 117.94 114.42
11/17/97 120.98 121.16
11/18/97 119.89 121.14
11/19/97 119.27 121.45
11/20/97 120.98 124.53
11/21/97 120.73 124.58
11/24/97 120.08 123.75
11/25/97 121.49 123.23
11/26/97 121.98 123.42
11/28/97 123.08 123.71
12/01/97 124.44 127.10
12/02/97 124.06 127.49
12/03/97 123.83 127.61
12/04/97 123.74 127.48
12/05/97 123.53 127.12
12/08/97 124.35 127.35
12/09/97 125.00 128.20
12/10/97 123.20 127.08
12/11/97 120.90 124.52
12/12/97 119.76 124.36
12/15/97 119.67 123.93
12/16/97 119.34 122.80
12/17/97 119.47 124.26
12/18/97 118.63 122.50
12/19/97 118.91 122.57
12/22/97 117.77 122.36
12/23/97 118.05 121.54
12/24/97 116.77 119.91
12/26/97 116.93 122.04
12/29/97 118.96 123.90
12/30/97 121.20 126.84
12/31/97 122.93 127.23
1/02/98 123.40 126.93
1/05/98 122.63 123.01
1/06/98 122.87 122.96
1/07/98 120.53 121.90
1/08/98 119.64 119.33
1/09/98 119.02 119.34
1/12/98 111.97 109.13
1/13/98 114.24 112.27
1/14/98 113.84 113.13
1/15/98 111.24 110.82
1/16/98 111.23 110.27
1/20/98 115.35 115.96
1/21/98 115.69 114.43
1/22/98 113.64 110.28
1/23/98 113.75 110.43
1/26/98 111.51 107.52
1/27/98 111.88 108.19
1/28/98 112.38 108.51
1/29/98 113.15 108.32
1/30/98 112.38 108.11
2/02/98 115.83 110.44
2/03/98 115.66 110.74
2/04/98 114.09 110.68
2/05/98 115.47 111.35
2/06/98 115.55 111.30
2/09/98 113.85 108.96
2/10/98 112.73 108.76
2/11/98 110.30 107.26
2/12/98 110.33 109.77
2/13/98 110.35 109.63
2/17/98 110.17 111.76
2/18/98 111.35 114.73
2/19/98 111.73 114.22
2/20/98 112.04 114.15
2/23/98 115.25 115.14
2/24/98 115.89 114.47
2/25/98 116.82 116.04
2/26/98 117.23 119.45
2/27/98 117.37 119.50
3/02/98 119.94 125.69
3/03/98 118.92 123.73
3/04/98 118.48 122.65
3/05/98 117.33 129.35
3/06/98 117.88 129.24
3/09/98 120.45 134.72
3/10/98 120.83 135.33
3/11/98 121.95 138.71
3/12/98 121.96 138.95
3/13/98 122.12 139.14
3/16/98 122.17 135.40
3/17/98 122.33 136.43
3/18/98 122.23 134.89
3/19/98 122.07 135.85
3/20/98 122.11 135.59
3/23/98 122.92 135.82
3/24/98 122.55 135.47
3/25/98 123.21 136.73
3/26/98 126.24 140.75
3/27/98 125.14 140.32
3/30/98 124.89 140.89
3/31/98 125.62 142.78
4/01/98 125.93 143.75
4/02/98 125.73 143.26
4/03/98 125.22 142.56
4/06/98 126.92 145.75
4/07/98 126.86 146.11
4/08/98 125.11 144.49
4/09/98 126.93 146.35
4/13/98 126.20 145.22
4/14/98 126.08 144.50
4/15/98 126.05 144.53
4/16/98 125.94 144.45
4/17/98 125.92 144.41
4/20/98 127.46 146.72
4/21/98 127.23 144.32
4/22/98 126.34 143.65
4/23/98 125.76 144.21
4/24/98 125.57 144.03
4/27/98 123.86 144.10
4/28/98 124.19 144.56
4/29/98 124.97 145.09
4/30/98 125.52 145.07
5/01/98 125.56 145.27
5/04/98 129.84 147.82
5/05/98 129.43 145.92
5/06/98 128.93 144.69
5/07/98 129.30 144.67
5/08/98 129.82 144.98
5/11/98 131.09 147.53
5/12/98 132.18 147.38
Source: Morgan Stanley
</TABLE>
In addition to Bank Hapoalim Ltd. and Koor, I have (as noted previously)
positioned the Fund increasingly away from NASDAQ-listed technology stocks to
focus on private companies. I have chosen this strategy mainly because I believe
the potential valuation upside is greater, but also since one of Israel's
greatest strengths is its entrepreneurial technology sector. In the short term,
this can result in performance lags, since private equities are not priced on a
daily basis. The longer-term picture is much more favorable, however, as the
Fund has enormously benefited from such investments since its inception.
An example of a recently added private equity holding is Kardan Technology
Ventures L.P. ("KTV"), a promising venture capital fund dedicated to the
financing of promising Israeli technology firms. KTV's appeal lies in the track
record of its managers, who have extensive experience in the Israeli
high-technology sector. Indeed, its predecessor fund was one of the most
successful of such funds to date.
Such a strategy seems highly consistent with the closed-end fund structure, and
I intend to fully exploit it to the extent that I can find value-added
opportunities.
- --------------------------------------------------------------------------------
5
<PAGE>
LETTER TO SHAREHOLDERS
OUTLOOK
My medium-term view on Israeli equities is somewhat cautious. This is based on
my outlook for equity markets worldwide rather than for Israel specifically.
Many of the world's major markets, particularly those in Europe and the U.S.,
have rallied to new highs thus far in 1998, and may well stall or correct to
some degree. In addition, worldwide investor concern that U.S. interest rates
may be raised, has had a dampening effect on market sentiment. Overall, I
anticipate that activity will become more volatile.
In addition, still high real interest rates are discouraging domestic investors
from buying equities at present, while the Asian slowdown may dampen demand for
exports. I am optimistic, however, that the long-term trend for Israeli stock
prices is decidedly upward. The favorable macroeconomic climate is enhanced both
by currently attractive valuations and the restructuring trend among the major
Israeli conglomerates. It should also be noted that interest rates are headed
down, which will aid overall market valuation and, ultimately, stimulate growth.
<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ISRAELI STOCKS ARE UNDERVALUED
<S> <C>
(P/E ratio of IFC Israel Index vs. IFC Emerging Markets
Index)
Jan-97 1.00
Feb-97 0.99
Mar-97 0.99
Apr-97 1.05
May-97 1.12
Jun-97 1.17
Jul-97 1.22
Aug-97 1.11
Sep-97 1.22
Oct-97 1.24
Nov-97 1.04
Dec-97 0.95
Jan-98 0.86
Feb-98 0.86
Mar-98 0.88
Apr-98 0.81
Source: Flemings
</TABLE>
- --------------------------------------------------------------------------------
6
<PAGE>
LETTER TO SHAREHOLDERS
In the meantime, I have adopted a more defensive investment posture. My general
preference is for quality companies with a domestic focus, notably in financial
services, consumer companies and interest-rate-sensitive sectors. I am also
participating in private-equity opportunities, while only selectively "cherry
picking" among the high-technology names listed on NASDAQ. Cash currently is at
a higher-than-usual level, but I intend to use it as real value materializes.
Respectfully,
/s/ Richard W. Watt
Richard W. Watt
President and Chief Investment Officer*
- --------------------------------------------------------------------------------
* 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.
- --------------------------------------------------------------------------------
7
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
PORTFOLIO SUMMARY - AS OF MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
SECTOR ALLOCATION
<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
AS A PERCENT OF NET ASSETS
<S> <C> <C>
March 31, 1998 September 30, 1997
Banking 9.83 9.39
Building Products 3.20 3.29
Chemicals 4.32 3.58
Computer Software 2.50 4.79
Conglomerates 12.71 10.19
Electronics/Electrical Equipment 2.16 2.94
Financial Services 3.71 3.39
Food & Beverages 3.99 3.12
Insurance 3.57 3.55
Investment & Holding Companies 3.19 2.10
Metal Products 2.01 1.79
Mortgage Banking 8.10 5.77
Pharmaceuticals 6.98 6.60
Telecommunications 16.38 14.75
Venture Capital 4.84 4.56
Other 8.53 14.13
Cash & Other Assets 3.98 6.05
</TABLE>
TOP 10 HOLDINGS, BY ISSUER
<TABLE>
<CAPTION>
Percent of Net
Holding Sector Assets
<C> <S> <C> <C>
- ---------------------------------------------------------------------------------------------------------
1. Teva Pharmaceutical Industries Ltd. Pharmaceuticals 6.5
- ---------------------------------------------------------------------------------------------------------
2. Bank Leumi Israel Banking 5.5
- ---------------------------------------------------------------------------------------------------------
3. Bank Hapoalim Ltd. Banking 4.4
- ---------------------------------------------------------------------------------------------------------
4. Koor Industries Ltd. Conglomerates 4.2
- ---------------------------------------------------------------------------------------------------------
5. ECI Telecommunications Ltd. Telecommunications 4.1
- ---------------------------------------------------------------------------------------------------------
6. Israel Discount Bank Ltd. Mortgage Banking 4.1
- ---------------------------------------------------------------------------------------------------------
7. PEC Israel Economic Corp. Conglomerates 3.3
- ---------------------------------------------------------------------------------------------------------
8. Bezeq Israeli Telecommunication Corp., Ltd. Telecommunications 3.0
- ---------------------------------------------------------------------------------------------------------
9. F.I.B.I. Holdings Ltd. Financial Services 2.9
- ---------------------------------------------------------------------------------------------------------
10. Advent Israel (Bermuda) L.P. Venture Capital 2.7
- ---------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
SCHEDULE OF INVESTMENTS - MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
<S> <C> <C>
- --------------------------------------------------------------------
EQUITY OR EQUITY-LINKED SECURITIES-96.02%
ISRAEL-95.83%
AEROSPACE/DEFENSE EQUIPMENT-0.56%
Elbit Systems Ltd....................... 37,518 $ 480,347
-----------
AUTO PARTS-0.81%
Delek Automotive Systems Ltd............ 415,092 695,144
-----------
BANKING-9.83%
Bank Hapoalim Ltd....................... 1,365,800 3,740,047
Bank Leumi Israel....................... 2,484,132 4,698,236
-----------
8,438,283
-----------
BUILDING PRODUCTS-3.20%
Industrial Buildings Corp., Ltd......... 580,807 990,406
Property & Building Corp., Ltd.......... 15,103 1,132,482
Wolfman Industries Ltd., (Shares 5)+.... 22,800 168,054
Ytong Industries Ltd.................... 182,302 454,148
-----------
2,745,090
-----------
CHEMICALS-4.32%
Agan Chemical Manufacturers Ltd......... 21,531 761,212
Dead Sea Bromine Ltd.................... 30,662 292,085
Israel Chemicals Ltd., (Shares 1)....... 1,390,000 1,667,676
Makhteshim Chemical Works Ltd.+......... 114,632 983,737
-----------
3,704,710
-----------
COMPUTER SOFTWARE-2.50%
Oshap Technologies Ltd.+................ 66,345 663,450
Sapiens International Corp. N.V.+....... 69,000 556,312
Tecnomatix Technologies Ltd.+........... 24,622 926,403
-----------
2,146,165
-----------
CONGLOMERATES-12.71%
Clal Israel Ltd., (Shares 10)........... 1,978,000 576,805
Discount Investment Corp................ 21,000 552,309
Elco Holdings Ltd....................... 2,500 14,858
Elron Electronic Industries Ltd......... 33,356 552,123
FMS Enterprises Migun Ltd............... 7,332 52,882
IDB Development Corp., Ltd.............. 36,000 789,846
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
CONGLOMERATES (CONTINUED)
IDB Holding Corp., Ltd.................. 87,245 $ 1,923,858
Koor Industries Ltd..................... 24,712 3,074,673
<CAPTION>
Par (000)
-------------
<S> <C> <C>
Koor Industries Ltd., Convertible Note,
1.75%, 01/31/99*....................... NIS 600 272,114
Koor Industries Ltd., Convertible Note,
1.75%, 01/31/00*....................... 600 272,114
<CAPTION>
No. of
Shares
-------------
<S> <C> <C>
PEC Israel Economic Corp.+.............. 123,228 2,826,542
-----------
10,908,124
-----------
ELECTRONICS/ELECTRICAL EQUIPMENT-2.16%
Elco Industries Ltd..................... 39,270 436,249
Electra Consumers Products Ltd.......... 132,158 638,639
Electra Israel Ltd...................... 17,500 748,952
Electronics Line Ltd., (Shares 1)+...... 22,434 30,218
-----------
1,854,058
-----------
ENERGY SERVICES-1.29%
Delek Israel Fuel Corp., Ltd............ 16,773 638,178
Superbowl Acquisition LDC+=/=........... 36 465,552
-----------
1,103,730
-----------
FINANCIAL SERVICES-3.71%
Ampal-American Israel, Class A+......... 92,500 526,094
Ampal-American Israel, Warrants
(expiring 02/28/99)+................... 92,500 2,891
F.I.B.I. Holdings Ltd................... 12,648 2,455,343
Gachelet Investments Ltd................ 1,050 51,819
Taya Investment Company Ltd.+........... 66,500 150,704
-----------
3,186,851
-----------
FOOD & BEVERAGES-3.99%
Blue Square Chain Investments &
Properties Ltd.+....................... 47,157 519,936
Elite Industries Ltd., (Shares 5)+...... 28,148 895,101
Israel Salt Industries Ltd.............. 109,505 556,542
Jafora Tavori Ltd....................... 247,476 536,094
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
FOOD & BEVERAGES (CONTINUED)
Mayanot Eden Ltd........................ 149,750 $ 590,566
Osem Investment Ltd..................... 40,463 180,700
SuperSol Ltd., Class B.................. 45,000 145,597
-----------
3,424,536
-----------
INDUSTRIAL TECHNOLOGY-1.31%
Cubital, Ltd.*+......................... 329,278 105,369
Orbotech Ltd.+.......................... 31,500 1,019,812
-----------
1,125,181
-----------
INSURANCE-3.57%
Clal Insurance Enterprises Holdings
Ltd., (Shares 1)....................... 145,330 1,444,945
Harel-Hamishmar Investments Ltd.,
(Shares 5)............................. 36,918 1,618,934
-----------
3,063,879
-----------
INVESTMENT & HOLDING COMPANIES-3.00%
Dankner Investments Ltd., (Shares 1)+... 319,364 1,676,336
Oren Semiconductor, Inc., Series K
Preferred*+............................ 299,513 47,922
Oren Semiconductor, Inc., Series L
Preferred*+............................ 308,432 37,012
Polaris Fund II LLC+=/=#................ 375,000 356,737
The Renaissance Fund LDC=/=............. 60 461,153
-----------
2,579,160
-----------
METAL PRODUCTS-2.01%
Caniel-Israel Can Co., Ltd., (Shares
1)..................................... 105,210 905,799
Cvalim-The Electric Wire & Cable Co. of
Israel Ltd............................. 113,640 405,553
Klil Industries Ltd., (Shares 5)........ 18,654 410,301
-----------
1,721,653
-----------
MORTGAGE BANKING-8.10%
Discount Mortgage Bank Ltd.............. 16,077 1,080,522
Israel Discount Bank Ltd................ 3,097,967 3,536,158
Mishkan Hapoalim Mortgage Bank Ltd.+.... 8,388 1,481,592
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
MORTGAGE BANKING (CONTINUED)
Tefahot Israel Mortgage Bank Ltd........ 1,552 $ 853,003
-----------
6,951,275
-----------
PHARMACEUTICALS-6.98%
Peptor Ltd.*+........................... 56,000 392,000
Teva Pharmaceutical Industries Ltd.
ADR.................................... 131,000 5,600,250
-----------
5,992,250
-----------
SEMICONDUCTOR & RELATED TECHNOLOGY-1.89%
DSP Group Inc.+......................... 22,907 438,096
M-Systems Flash Disk Pioneers Ltd.+..... 54,542 388,612
M-Systems Flash Disk Pioneers Ltd.,
Warrants (expiring 06/30/98)+.......... 35,021 126,017
Zoran Corp., Series K+=/=............... 50,000 540,000
Zoran Corp., Series K, Warrants
(expiring 07/30/98)*+.................. 73,045 131,481
-----------
1,624,206
-----------
STEEL-0.38%
Urdan Industries Ltd.+.................. 405,259 323,019
-----------
TELECOMMUNICATIONS-16.38%
Bezeq Israeli Telecommunication Corp.,
Ltd.................................... 949,401 2,562,884
Ciena Corp.+............................ 38,755 1,651,932
ECI Telecommunications Ltd.............. 115,300 3,545,475
Geotek Communications, Inc.+............ 7,221 7,672
Geotek Communications, Inc., Convertible
Preferred Series M, 8.50%*............. 100 113,711
Geotek Communications, Inc., Convertible
Preferred Series N*(1)................. 595 78,985
Gilat Satellite Networks Ltd.+.......... 58,700 2,142,550
Nexus Telecommunication Systems Ltd.+... 68,933 394,211
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
SCHEDULE OF INVESTMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
Nexus Telecommunication Systems Ltd.,
Warrants (expiring 11/28/00)+.......... 68,933 $ 2,154
NICE-Systems Ltd. ADR+.................. 23,600 1,085,600
Tadiran Ltd. ADR........................ 29,900 1,246,456
Tadiran Telecommunications Ltd.......... 67,489 1,037,643
Teledata Communication Ltd.+............ 12,550 188,250
-----------
14,057,523
-----------
TEXTILES-1.16%
Lodzia Rotex Textile Co., (Shares 4)+... 21,720 288,883
Macpell Industries Ltd.+................ 216,079 705,121
-----------
994,004
-----------
TRADING COMPANIES-0.31%
Rapac Electronics Ltd................... 34,806 267,762
-----------
VENTURE CAPITAL-4.84%
ABS GE Capital Giza Fund L.P.*+#........ 50,543 50,544
Advent Israel (Bermuda) L.P.+=/=........ 1,682,293 2,314,836
Kardan Technology Ventures L.P.*+#...... 250,000 250,000
Star Venture Enterprises II*+........... 5 967,048
Walden-Israel Ventures, L.P.+=/=........ 500,000 570,298
-----------
4,152,726
-----------
<CAPTION>
No. of Value
Description Shares (Note A)
- --------------------------------------------------------------------
<S> <C> <C>
WOOD & PAPER PRODUCTS-0.82%
American Israeli Paper Mills Ltd........ 19,263 $ 700,815
-----------
TOTAL ISRAEL
(Cost $67,616,266).................................... 82,240,491
-----------
GLOBAL-0.19%
INVESTMENT & HOLDING COMPANIES-0.19%
Emerging Markets Ventures, L.P.*+# (Cost
$165,215).............................. 181,517 165,215
-----------
TOTAL INVESTMENTS-96.02%
(Cost $67,781,481) (Notes A,D)........................ 82,405,706
CASH AND OTHER ASSETS IN EXCESS OF LIABILITIES-3.98%...
3,414,449
-----------
NET ASSETS-100.00%..................................... $85,820,155
-----------
-----------
- ---------------------------------------------------------
* Not readily marketable security.
+ Security is non-income producing.
=/= Restricted security (See Note F).
# As of March 31, 1998, the Fund committed to investing
an additional $625,000, $1,199,457, $750,000 and
$2,334,785 of capital in Polaris Fund II LLC, ABS GE
Capital Giza Fund L.P., Kardan Technology Ventures
L.P. and Emerging Markets Ventures, L.P.,
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.
11
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF ASSETS AND LIABILITIES - MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at value (Cost $67,781,481)
(Note A)............................... $82,405,706
Cash (including $158,341 of foreign
currency with a cost of $158,311) (Note
A)..................................... 3,764,372
Receivables:
Dividends............................. 82,818
Note.................................. 25,061
Interest.............................. 1,566
Prepaid expenses........................ 27,656
-----------
Total Assets............................ 86,307,179
-----------
LIABILITIES
Payables:
Investment advisory fee (Note B)...... 220,696
Administration fees (Note B).......... 17,305
Israeli capital gains tax (Note A).... 52,423
Other accrued expenses................ 196,600
-----------
Total Liabilities....................... 487,024
-----------
NET ASSETS (applicable to 5,012,295
shares of common stock outstanding)
(Note C)............................... $85,820,155
-----------
-----------
NET ASSET VALUE PER SHARE ($85,820,155
DIVIDED BY 5,012,295)................. $17.12
-----------
-----------
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..... 2,051,274
Accumulated net realized gain on
investments and foreign currency
related transactions................... 1,820,587
Net unrealized appreciation in value of
investments and translation of other
assets and liabilities denominated in
foreign currency....................... 14,571,389
-----------
Net assets applicable to shares
outstanding............................ $85,820,155
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
12
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF OPERATIONS - FOR THE SIX MONTHS ENDED MARCH 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Income (Note A):
Dividends............................. $ 881,178
Interest.............................. 158,554
Less: Foreign taxes withheld.......... (12,271)
-----------
Total Investment Income............... 1,027,461
-----------
Expenses:
Investment advisory fees (Note B)..... 568,987
Custodian fees........................ 111,757
Audit and legal fees.................. 54,251
Administration fees (Note B).......... 50,220
Printing.............................. 39,642
Accounting fees....................... 29,917
Directors' fees....................... 19,945
Amortization of organizational costs
(Note A)............................. 18,967
Transfer agent fees................... 15,956
Insurance............................. 9,056
NYSE listing fees..................... 8,063
Other................................. 7,502
Israeli capital gains taxes (Note
A)................................... 48,949
-----------
Total Expenses........................ 983,212
Less: Fee waivers (Note B)............ (104,040)
-----------
Net Expenses........................ 879,172
-----------
Net Investment Income................. 148,289
-----------
NET REALIZED AND UNREALIZED LOSS ON
INVESTMENTS AND FOREIGN CURRENCY
RELATED TRANSACTIONS
Net realized gain/(loss) from:
Investments........................... 2,150,832
Foreign currency related
transactions......................... (34,864)
Net change in unrealized appreciation in
value of investments and translation of
other assets and liabilities
denominated in foreign currency........ (6,386,237)
-----------
Net realized and unrealized loss on
investments and foreign currency
related transactions................... (4,270,269)
-----------
NET DECREASE IN NET ASSETS RESULTING
FROM OPERATIONS........................ $(4,121,980)
-----------
-----------
</TABLE>
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
13
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the
For the Six Fiscal
Months Ended Year Ended
March 31, 1998 September 30,
(unaudited) 1997
<S> <C> <C>
---------------------------------
INCREASE/(DECREASE) IN NET ASSETS
Operations:
Net investment income................. $ 148,289 $ 1,744,106
Net realized gain on investments and
foreign currency related
transactions......................... 2,115,968 2,115,739
Net change in unrealized appreciation
in value of investments and
translation of other assets and
liabilities denominated in foreign
currency............................. (6,386,237) 28,979,212
-------------- -------------
Net increase/(decrease) in net
assets resulting from operations... (4,121,980) 32,839,057
-------------- -------------
Distributions to shareholders:
Net realized gain on investments...... (2,355,778) (6,190,185)
-------------- -------------
Total increase/(decrease) in net
assets............................. (6,477,758) 26,648,872
-------------- -------------
NET ASSETS
Beginning of period..................... 92,297,913 65,649,041
-------------- -------------
End of period (including undistributed
net investment income of $2,051,274 and
$1,902,985, respectively).............. $85,820,155 $92,297,913
-------------- -------------
-------------- -------------
</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
Six
Months
Ended For the Fiscal Years For the Period
March 31, Ended September 30, October 29, 1992*
1998 ----------------------------------------- through
(unaudited) 1997 1996 1995 1994 September 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)................ 0.03 0.35 (0.09) (0.10) (0.28) (0.07)
Net realized and unrealized gain/(loss) on
investments and foreign currency related
transactions............................... (0.85) 6.20 (0.01) 1.56 (3.27) 2.16
---------- -------- -------- -------- -------- --------
Net increase/(decrease) in net assets
resulting from operations................ (0.82) 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.............. $17.12 $18.41 $13.10 $13.20 $11.74 $15.83
---------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- --------
Market value, end of period................. $13.938 $14.938 $11.250 $12.000 $13.250 $17.375
---------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- --------
Total investment return(a).................. (3.31)% 44.36% (6.25)% (9.43)% (21.26)% 24.58%
---------- -------- -------- -------- -------- --------
---------- -------- -------- -------- -------- --------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)..... $85,820 $92,298 $65,649 $66,150 $58,855 $79,274
Ratio of expenses to average net assets..... 2.10%(b)(c) 2.26%(c) 2.23% 2.57% 2.64% 2.41%(b)
Ratio of net investment income/(loss) to
average net assets......................... 0.35%(b) 2.20% (0.68)% (0.91)% (2.08)% (0.50)%(b)
Portfolio turnover rate..................... 13.98% 16.98% 21.68% 22.17% 17.07% 34.80%
Average commission rate per share(d)........ $0.0061 $0.0056 $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 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. Ratio of expenses to average net assets would have
been 2.30% and 2.35% excluding fee waivers, for the fiscal year ended
September 30, 1997 and six months ended March 31, 1998, respectively.
(d) Computed by dividing the total amount of brokerage commissions paid by
the total shares of investment securities purchased and sold during
the respective periods for which commissions were charged, as required
by the SEC for fiscal years beginning on or after September 1, 1995.
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
15
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
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 March 31, 1998, the Fund held 8.85%
of its net assets in securities valued in good faith by the Board of Directors
with an aggregate cost of $7,480,858 and fair value of $7,592,091. 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 March 31, 1998, the interest
rate was 5.125% 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.
For U.S. federal income tax purposes, realized foreign currency losses incurred
after October 31, 1996, within the fiscal year, are deemed to arise on the first
day of the following fiscal year. The Fund incurred and elected to defer such
losses of $93,113.
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
- --------------------------------------------------------------------------------
16
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 March 31, 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 on 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 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 in the form of
- --------------------------------------------------------------------------------
17
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
marketable equity securities and will be presented as undistributed net
investment income until the securities are sold.
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 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. BEA has agreed to waive the advisory fee previously payable to Giza Ltd.
("Giza") who had been employed by the Fund as investment sub-adviser through
August 10, 1997. For the six months
- --------------------------------------------------------------------------------
18
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
ended March 31, 1998, BEA earned $568,987 for advisory services, of which BEA
waived $104,040 in advisory fees previously payable to Giza. 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 six
months ended March 31, 1998, BEA was reimbursed $4,239 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 six months ended March 31, 1998, Analyst I.M.S. earned
$104,040 for sub-advisory services.
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 six months ended March
31, 1998, BSFM earned $45,981 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 March 31, 1998, BEA
owned 7,169 shares.
NOTE D. INVESTMENT IN SECURITIES
For U.S. federal income tax purposes, the cost of securities owned at March 31,
1998 was $68,033,402. Accordingly, the net unrealized appreciation of
investments (including investments denominated in foreign currency) of
$14,372,304, was composed of gross appreciation of $20,945,543 for those
investments having an excess of value over cost and gross depreciation of
$6,573,239 for those investments having an excess of cost over value.
For the six months ended March 31, 1998, purchases and sales of securities,
other than short-term investments, were $12,911,580 and $11,113,914,
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 six months ended March 31,
1998.
- --------------------------------------------------------------------------------
19
<PAGE>
- --------------------------------------------------------------------------------
THE FIRST ISRAEL FUND, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 March 31, 1998, per share value of the securities and
percentage of net assets which the securities comprise.
<TABLE>
<CAPTION>
NUMBER PERCENTAGE
OF ACQUISITION FAIR VALUE VALUE OF
SECURITY SHARES DATES COST AT 03/31/98 PER SHARE NET ASSETS
- --------------------------------------- -------- ---------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Advent Israel (Bermuda) L.P............ 650,000 06/16/93 $ 529,318 $ 894,400 $ 1.38 1.04
Advent Israel (Bermuda) L.P............ 350,000 06/10/96 349,632 481,600 1.38 0.56
Advent Israel (Bermuda) L.P............ 682,293 01/16/98 780,373 938,836 1.38 1.10
Polaris Fund II LLC.................... 250,000 10/31/96 246,031 237,825 0.95 0.28
Polaris Fund II LLC.................... 125,000 03/04/98 125,000 118,912 0.95 0.14
Superbowl Acquisition LDC.............. 36 10/10/94 316,111 465,552 12,932.00 0.54
The Renaissance Fund LDC............... 26 03/30/94 278,090 199,833 7,685.88 0.23
The Renaissance Fund LDC............... 14 02/24/95 139,668 107,602 7,685.88 0.13
The Renaissance Fund LDC............... 11 03/13/96 110,988 84,545 7,685.88 0.10
The Renaissance Fund LDC............... 7 06/13/96 66,592 53,801 7,685.88 0.06
The Renaissance Fund LDC............... 2 03/21/97 23,252 15,372 7,685.88 0.02
Walden-Israel Ventures, L.P............ 45,000 09/28/93 43,775 51,326 1.14 0.06
Walden-Israel Ventures, L.P............ 80,000 11/30/93 77,822 91,247 1.14 0.10
Walden-Israel Ventures, L.P............ 125,000 05/24/95 121,598 142,575 1.14 0.17
Walden-Israel Ventures, L.P............ 125,000 08/08/96 121,598 142,575 1.14 0.17
Walden-Israel Ventures, L.P............ 125,000 05/16/97 121,598 142,575 1.14 0.17
Zoran Corp............................. 50,000 07/31/96 75,000 540,000 10.80 0.63
</TABLE>
The Fund may incur certain costs in connection with the disposition of the above
securities.
- --------------------------------------------------------------------------------
20
<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 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>
- --------------------------------------------------------------------------------
21
<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 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
- --------------------------------------------------------------------------------
22
<PAGE>
DESCRIPTION OF INVESTLINK* PROGRAM (CONTINUED)
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 and semi-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 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
- --------------------------------------------------------------------------------
23
<PAGE>
DESCRIPTION OF INVESTLINK* PROGRAM (CONTINUED)
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-SM- Program, P.O. Box 1681, Boston, MA 02105-1681.
- ---------------------------------------------
*InvestLink-SM- is a service mark of Boston EquiServe Limited
Partnership.
- --------------------------------------------------------------------------------
24
<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 March 31, 1998, BEA managed approximately $37.6 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 or a prospectus on any of the open-end mutual funds listed
below. The prospectus contains more complete information, including fees,
charges and expenses, and should be read carefully before investing or sending
money.
<TABLE>
<S> <C>
CLOSED-END FUNDS BEA ADVISOR FUNDS
SINGLE COUNTRY OPEN-END MUTUAL FUNDS
The Brazilian Equity Fund, Inc. (BZL) BEA Emerging Markets Equity Fund
The Chile Fund, Inc. (CH) BEA Global Telecommunications Fund
The Indonesia Fund, Inc. (IF) BEA High Yield Fund
The Portugal Fund, Inc. (PGF) BEA International Equity Fund
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 For shareholder information or a copy
BEA Income Fund, Inc. (FBF) of a prospectus for any of the
BEA Strategic Global Income Fund, Inc. (FBI) open-end mutual funds please call,
1-800-401-2230.
For closed-end fund information Visit our website on the Internet:
please call, 1-800-293-1232. http://www.beafunds.com
</TABLE>
- --------------------------------------------------------------------------------
<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
Wendy S. Setnicka 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
BankBoston, N.A.
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 LLP
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.
The financial information included herein is taken from the
records of the Fund without examination by independent
accountants who do not express an opinion thereon. 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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3917-SAR-98
