<PAGE> 1
August 5, 1996
Dear Shareholder:
Bolstered by improving economic fundamentals and healthy corporate profits,
the Philippine stock market turned in the best performance among Asia/Pacific
markets for the first half of the year. During this period, The First Philippine
Fund performed strongly. The Fund's net asset value (NAV) per share rose 10.89%
in the second quarter to $21.18. Its stock price was up 7.14% to close at $16.88
on June 30, 1996, and the discount of stock price to NAV stood at 20.33%. Over
the first half of the year, the Fund's NAV increased 22.93% and its stock price
appreciated by 21.62%. Compared with other closed-end Asian country funds, The
First Philippine Fund has been the best performer year-to-date.
SUSTAINED GROWTH MOMENTUM
The Fund's and the market's performances spring from a strong economic
momentum that the Philippines has sustained. Real GNP grew by a hefty 6.24% in
the first quarter. Industry and services continued to spur this growth as
utilities, construction, manufacturing and financial services led the way.
Agriculture, though posting a more moderate growth, showed improvement in rice
and poultry output. With a first quarter output exceeding expectations, the
government is confident that it can attain the 6.5-7.5% GNP growth rate for
1996. The Philippines remains one of the few Asian countries that will exhibit
accelerating economic growth in forecasts for the next two years.
Improvements in other fundamentals have provided a solid basis to support
this growth. Inflation, last quarter's concern, is abating. After reaching a
high of 11.8%, inflation returned to single digits in June at 9.8%, decreasing
further to 8.9% in July. In tandem, interest rates are falling. The government's
first semester budget surplus of 9.7 billion Pesos shows a healthy fiscal
position, as do a shrinking current account deficit and a balance of payments
surplus of $2.5 billion. The country's gross international reserves, supported
by strong foreign funds flows in the equities market, increased exports, higher
remittances by overseas contract workers, and aggressive dollar purchases by the
Bangko Sentral, have reached a record high at $10.22 billion by end-June, equal
to more than three months worth of imports. The picture will improve even
further once the comprehensive tax reform package is finally passed by Congress
this year.
MARKET REACHES A RECORD HIGH
These favorable factors have led to a record breaking performance with the
Phisix reaching an all-time high of 3,374.40 on July 5, 1996. Further rises can
be supported by the following factors: (1) corporate profit growth for the next
two years is the best in Asia at better than 25%; (2) interest by foreign funds
has increased and now accounts for roughly 65% of daily turnover; (3) the
on-going development of local mutual funds and unit trusts should broaden
domestic participation; and (4) the recomposition of the Phisix in November will
accommodate a broader mix of larger capitalized stocks with strong fundamentals.
The property index, up 16%, once again led the market's second quarter
rally. The huge supply shortage of low and medium cost housing units as well as
the continued strong demand for commercial/residential condominiums and
resort/golf clubs have propelled the sector. The broad
<PAGE> 2
commercial-industrial index likewise gained by a significant 14% on the back of
strong growth from banks, cement and construction companies, and conglomerates.
The Philippines, as with other developing markets, remains largely buoyed
by the flows of foreign funds. Hence, it remains vulnerable to such factors as
US interest rate policy and global benchmark re-weightings which affect these
flows. However, we expect market and corporate fundamentals to remain intact. We
continue to be bullish on banking, construction and engineering, low and medium
cost housing development, and telecommunications as these industries are the
main beneficiaries of an expanding economy and the Government's infrastructure
spending programs.
Once again, we thank you for your continued support as we look forward to
responding to the challenges of the second half of the year.
Sincerely yours,
/s/ LILIA C. CLEMENTE
Lilia C. Clemente
2
<PAGE> 3
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF INVESTMENTS
June 30, 1996
<TABLE>
<CAPTION>
Number of
Shares Value
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
PHILIPPINE SECURITIES (99.4%)
- -----------------------------------------------------------------------------------------------
COMMON STOCK (94.4%)
Banking (17.1%)
Bankard Inc. (c) 6,470,000 $ 2,716,101
Citytrust Banking Corp. 30,000 1,431,134
Far East Bank and Trust Company 141,750 4,976,911
Metro Bank & Trust Company 468,330 13,136,761
PDCP Development Bank (c) 1,009,500 982,416
Philippine Commercial International Bank 657,138 8,213,285
Philippine Savings Bank (c) 3,048,355 7,561,847
Security Bank Corp. (c) 320,400 862,046
Union Bank of Philippines (c) 1,000,000 1,431,134
- -----------------------------------------------------------------------------------------------
41,311,635
- -----------------------------------------------------------------------------------------------
Conglomerates (16.3%)
Aboitiz Equity Ventures, Inc. (c) 18,318,400 3,425,568
Alsons Consolidated (c) 55,000,000 4,575,812
Ayala Corp. -- A 11,711,764 11,621,030
Benpres Holdings GDR (c)(e)(g) 742,491 5,939,928
First Philippine Holdings -- A 4,880,998 6,519,671
Guoco Holdings Co. (c) 4,360,000 1,031,638
Metro Pacific Corporation 20,718,097 6,167,277
- -----------------------------------------------------------------------------------------------
39,280,924
- -----------------------------------------------------------------------------------------------
Construction/Engineering (6.6%)
Bacnotan Consolidated Industries 876,899 4,116,268
Davao Union Cement -- A 10,030,000 2,832,576
DMCI Holdings Inc. (c) 3,877,000 2,774,253
Engineering Equipment, Inc. 30,000,000 2,633,286
Hi-Cement Corp. (c) 930,000 351,372
Seacem Holdings (c) 24,000,000 3,114,147
- -----------------------------------------------------------------------------------------------
15,821,902
- -----------------------------------------------------------------------------------------------
Electronics (1.0%)
Ionics Circuits Inc (c) 60,000 112,201
Matsushita Electric Philippines (b) 5,340,935 2,369,513
- -----------------------------------------------------------------------------------------------
2,481,714
- -----------------------------------------------------------------------------------------------
Food and Beverage (12.1%)
Alaska Milk Corp. (c) 13,372,000 1,633,034
La Tondena Distillers, Inc.(e) 2,487,800 5,126,940
RFM Corp. 18,462,375 3,734,328
San Miguel Corp. -- A 7,820,351 13,131,910
Selecta Dairy Products, Inc. 12,500,000 639,240
Universal Robina 9,928,800 4,968,255
- -----------------------------------------------------------------------------------------------
29,233,707
- -----------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
3
<PAGE> 4
<TABLE>
<CAPTION>
Number of
COMMON STOCK (CONTINUED) Shares Value
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
Mining (1.2%)
Manila Mining Corp. -- A(b)(c) 1,000,300,000 $ 954,375
Manila Mining Corp. -- B(c) 80,850,000 80,224
United Paragon Mining Corp. (b)(c) 6,960,000,000 1,992,138
- -----------------------------------------------------------------------------------------------
3,026,737
- -----------------------------------------------------------------------------------------------
Oil (0.1%)
Basic Petroleum and Mining -- A (c) 361,849,988 151,904
Basic Petroleum and Mining -- B (c) 194,166,659 81,511
Philodrill Corp. -- A (c) 44,334,545 16,920
Philodrill Corp. -- B (c) 39,436,363 14,298
- -----------------------------------------------------------------------------------------------
264,633
- -----------------------------------------------------------------------------------------------
Packaging (0.4%)
Steniel Manufacturing Corp. 7,259,997 845,056
- -----------------------------------------------------------------------------------------------
Real Estate Development (21.8%)
Ayala Land, Inc. -- B 10,622,811 19,054,006
Belle Corporation (c) 14,100,008 3,390,072
Cebu Holding Inc. (c) 6,960,000 573,736
C & P Homes Inc. 5,744,500 4,987,497
Empire East Land Holdings (c)(f) 1,081,000 660,077
Fil-Estate Land Inc. 2,880,000 3,682,021
Filinvest Development Corp. (c) 2,000,000 1,049,498
Filinvest Land Inc.(c) 18,187,500 7,461,574
Pryce Properties Corp. 35,000,000 2,217,303
Robinson's Land -- B (c) 19,000,000 4,713,201
SM Prime Holdings Inc. 14,400,000 3,736,977
Universal Rightfield Property (c) 6,100,000 1,163,989
- -----------------------------------------------------------------------------------------------
52,689,951
- -----------------------------------------------------------------------------------------------
Shipping/Ship Repair (4.0%)
Asian Terminals Inc. (b)(h) 30,000,000 7,899,859
Keppel Philippines Holdings -- A (b)(c) 6,657,321 1,651,436
- -----------------------------------------------------------------------------------------------
9,551,295
- -----------------------------------------------------------------------------------------------
Telecommunications (6.0%)
Digital Telecommunications (b)(c) 11,250,000 500,897
Globe Telecom (c) 2,340,398 1,518,405
Philippine Long Distance Telephone ADR (f) 183,510 10,666,519
Pilipino Telephone Corp. (c)(e) 1,217,500 1,858,566
- -----------------------------------------------------------------------------------------------
14,544,387
- -----------------------------------------------------------------------------------------------
Utilities (7.8%)
Manila Electric Co. -- A 1,947,462 11,519,926
Petron Corp. 15,725,000 7,201,465
- -----------------------------------------------------------------------------------------------
18,721,391
- -----------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $134,779,160) 227,773,332
- -----------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE> 5
<TABLE>
<CAPTION>
Number of
SCHEDULE OF INVESTMENTS (CONTINUED) Maturity Shares Value
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
WARRANTS (0.0%)
Grand Plaza Hotel Corp. (b) 12/05/97 1,136,300 $ 91,067
- ------------------------------------------------------------------------------------------------
<CAPTION>
Par
(000)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
BONDS (3.0%)
Bacnotan Consolidated Ind. Convertible Bond 5.5%
(e) 06/21/04 $ 1,750 1,697,500
International Container Terminal Services Inc. 6.0% 02/19/00 2,500 3,125,000
JG Summit Convertible Bond 3.5% (e) 12/23/03 3,000 2,565,000
- ------------------------------------------------------------------------------------------------
TOTAL BONDS
(Cost $7,402,073) 7,387,500
- ------------------------------------------------------------------------------------------------
CALL ACCOUNTS (2.0%)
Philippine Peso (d)
(Cost $4,771,631) 4,762,339
- ------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE INVESTMENTS 240,014,238
- ------------------------------------------------------------------------------------------------
UNITED STATES SECURITIES (0.6%)
- ------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (0.6%)
Prudential Funding Co. 5.42244%
(Cost $1,433,000) 07/01/96 1,433 1,433,000
- ------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 1,433,000
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $148,385,864)(a) $241,447,238
------------
</TABLE>
<TABLE>
<CAPTION>
(a) Aggregate cost is the same for Federal income tax purposes. The aggregate
gross unrealized appreciation (depreciation) for all securities is as
follows:
<S> <C>
Excess of market value over tax cost $104,030,834
Excess of tax cost over market value (10,969,460)
------------
$ 93,061,374
============
</TABLE>
(b) At fair value as determined by the Board of Directors.
(c) Non-income producing security.
(d) Daily interest is being accrued at a rate of 4% of the outstanding balance.
(e) Pursuant to Rule 144A under the Securities Act of 1933, all or a portion
of these securities can only be sold to qualified institutional investors.
(f) ADR -- American Depository Receipt.
(g) GDR -- Global Depository Receipt.
(h) Security restricted for resale until July 23, 1996.
See Accompanying Notes to Financial Statements
5
<PAGE> 6
THE FIRST PHILIPPINE FUND INC.
STATEMENT OF ASSETS AND LIABILITIES June 30, 1996
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at value (Cost $143,614,233)......................................................................... $236,684,899
Cash (including Philippine pesos of $4,762,339 with a cost of $4,771,631)........................................ 4,763,126
Dividends receivable............................................................................................. 470,129
Interest receivable.............................................................................................. 112,828
Receivable for investments sold.................................................................................. 2,687,291
Prepaid insurance................................................................................................ 11,094
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS..................................................................................................... 244,729,367
- ---------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased................................................................................ 6,072,031
Accrued expenses payable......................................................................................... 867,623
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES................................................................................................ 6,939,654
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
(applicable to 11,225,000 common shares outstanding).......................................................... $237,789,713
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($237,789,713 / 11,225,000)................................................................................... $ 21.18
- ---------------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Capital stock................................................................................................... $ 112,250
Paid-in capital................................................................................................. 127,898,826
Accumulated net investment loss................................................................................. (41,339)
Accumulated net realized gain on investments.................................................................... 16,758,531
Accumulated net unrealized appreciation on investments, foreign currency holdings, and other assets and
liabilities denominated in foreign currency................................................................... 93,061,445
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS....................................................................................................... $237,789,713
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the
Year Ended
STATEMENT OF OPERATIONS June 30, 1996
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest (net of taxes withheld $12,068)........................................................................ $ 458,656
Dividends (net of taxes withheld $393,546)...................................................................... 1,234,886
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME.......................................................................................... 1,693,542
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment advisory fee......................................................................................... 2,206,285
Custodian fees.................................................................................................. 501,936
Trustee fee..................................................................................................... 330,943
Administration fee.............................................................................................. 220,629
Transfer agent fees............................................................................................. 35,000
Legal fees...................................................................................................... 165,000
Printing........................................................................................................ 75,841
Directors fees.................................................................................................. 80,000
Audit fees...................................................................................................... 55,689
Insurance....................................................................................................... 13,204
Miscellaneous................................................................................................... 225,000
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES................................................................................................... 3,909,527
- ---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS.............................................................................................. (2,215,985)
- ---------------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS, FOREIGN CURRENCY HOLDINGS, AND OTHER ASSETS AND
LIABILITIES DENOMINATED IN FOREIGN CURRENCIES:
Net realized gain (loss) on:
Security transactions......................................................................................... 25,276,561
Foreign currency transactions................................................................................. (77,029)
- ---------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................................... (5,601,353)
Foreign currency holdings and other assets and liabilities denominated in foreign currency.................... 41
- ---------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gains on investments, foreign currency holdings and other assets and liabilities
denominated in foreign currency............................................................................. 19,598,220
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................................. $17,382,235
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
6
<PAGE> 7
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
June 30, June 30,
STATEMENTS OF CHANGES IN NET ASSETS 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss....................................... $ (2,215,985) $ (2,237,561)
Net realized gain on security transactions................ 25,276,561 3,999,098
Net realized loss on foreign currency transactions........ (77,029) (71,720)
Net change in unrealized appreciation (depreciation) on
investments, foreign currency holdings and other assets
and liabilities denominated in foreign currency......... (5,601,312) 8,925,378
- -----------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations......... 17,382,235 10,615,195
- -----------------------------------------------------------------------------------------------
Dividends and distributions to shareholders from:
Net realized long-term gains ($1.02 & $0.85 per share,
respectively)............................................. (11,449,500) (7,633,000)
Net realized short-term gains ($0.00 & $1.25 per share,
respectively)............................................. 0 (11,225,000)
- -----------------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS DECLARED..................... (11,449,500) (18,858,000)
- -----------------------------------------------------------------------------------------------
Capital share transactions:
Proceeds from issuance of 2,245,000 shares sold in
connection with rights offering (net of sales
commissions of $1,289,752 and offering costs of
$502,106)............................................... 0 32,601,542
- -----------------------------------------------------------------------------------------------
Total increase in net assets................................. 5,932,735 24,358,737
Net assets:
Beginning of period....................................... 231,856,978 207,498,241
- -----------------------------------------------------------------------------------------------
End of period (including accumulated loss of ($41,339) and
($209,579), respectively)............................... $237,789,713 $231,856,978
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
7
<PAGE> 8
THE FIRST PHILIPPINE FUND INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For The Year Ended June 30,
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $20.66 $23.11 $14.84 $14.58 $10.35
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.20) (0.20) (0.22) (0.07) 0.05
Net realized and unrealized gains on investments, foreign
currency holdings and other assets and liabilities
denominated in foreign currencies 1.74 1.27 9.25 0.90 4.37
- ----------------------------------------------------------------------------------------------------------------------------
Net increase from investment operations 1.54 1.07 9.03 0.83 4.42
- ----------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income -- -- -- -- (0.19)
Distributions from net realized long-term gains (1.02) (0.85) (0.18) (0.32) --
Distributions from net realized short-term gains -- (1.25) (0.58) (0.25) --
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS (1.02) (2.10) (0.76) (0.57) (0.19)
- ----------------------------------------------------------------------------------------------------------------------------
DILUTIVE EFFECT OF CAPITAL SHARE RIGHTS OFFERING -- (1.42) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $21.18 $20.66 $23.11 $14.84 $14.58
- ----------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD $16.88 $16.88 $18.25 $13.00 $11.50
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Based on market value* 7.03% 7.06% 45.62% 19.19% 56.61%
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $237,790 $231,857 $207,498 $133,306 $130,955
Ratios to average net assets:
Operating expenses 1.77% 1.82% 1.79% 1.72% 1.79%
Interest expense -- 0.06% -- -- --
-------- -------- -------- -------- --------
Total expense 1.77% 1.88% 1.79% 1.72% 1.79%
Net investment income (loss) (1.00)% (1.01)% (1.08)% (0.45)% .42%
Portfolio turnover 24.20% 20.50% 39.35% 37.30% 21.61%
Average Commission Rate (a) $0.0022 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment return is calculated assuming a purchase of common stock
at the current market price on the first day and a sale at the current
market price on the last day of each period reported. Dividends and
distributions, if any, are assumed, for purposes of this calculation, to
be reinvested at prices obtained under the Fund's dividend reinvestment
plan. The rights offering in the year ended June 30, 1995, was fully
subscribed under the terms of the rights offering. Total investment return
does not reflect sales charges and brokerage commissions.
(a) Computed by dividing the total amount of brokerage commissions paid by the
total number of shares of investment securities purchased and sold during
the period for which commissions were charged as required by the SEC for
fiscal years beginning after September 1, 1995.
See Accompanying Notes to Financial Statements
8
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS -- JUNE 30, 1996
- ------------
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The First Philippine Fund Inc. (the "Fund") was incorporated in the State of
Maryland on September 11, 1989. The Fund is registered under the Investment
Company Act of 1940, as amended, as a non-diversified, closed-end investment
management company. The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts and disclosures in the
financial statements. Actual results could differ from those estimates.
1. PORTFOLIO VALUATION: Investments are stated at value in the accompanying
financial statements. All equity securities for which market quotations are
readily available are valued at the last sales price or lacking any sales,
at the mean between the last current bid and asked prices. Securities that
are traded over-the-counter are valued at the mean between the current bid
and asked prices. Securities totaling $15,459,285 (6.50% of net assets), for
which market values are not readily available or average trading volume is
small relative to the Fund's holdings, are carried at fair value as
determined in good faith by or under the supervision of the Board of
Directors. Short-term investments having a maturity 60 days or less are
valued on the basis of amortized cost.
2. 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 or when known. The
collectibility of income receivable from foreign securities is evaluated
periodically, and any resulting allowances for uncollectible amounts are
reflected currently in the determination of investment income.
3. TAX STATUS: 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 the year ended
June 30, 1996, no U.S. Federal income or excise tax provision was required.
Dividends and interest income are subject to withholding tax at various
rates not exceeding 25% and such tax is recorded on the accrual basis at the
time when the related income is recorded.
4. FOREIGN CURRENCY: 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, and other assets and liabilities
at the Philippine peso exchange rate at the end of the period; and
(II) purchases and sales of investment securities, income and expenses at
the Philippine peso rate of exchange prevailing on the respective dates
of such transactions. Exchange gains or losses are realized upon
ultimate receipt or disbursement.
The Fund does not generally isolate the effect of fluctuations in foreign
exchange rates from the effect of fluctuations in the market prices of
securities held whether realized or unrealized. However, the Fund does
isolate the effect of fluctuations in foreign currency 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; such amounts are categorized as foreign exchange gain or loss
for both financial reporting and income tax reporting purposes.
Realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from the disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and between amounts of interest, dividends and
foreign withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid.
The change in unrealized appreciation or depreciation of foreign currency
holdings and other assets and liabilities denominated in foreign currencies
represents the change in the value of the foreign currencies and other
assets and liabilities arising as a result of changes in foreign exchange
rates.
Foreign security and currency transactions may involve certain conditions
and risks not typically associated with those of domestic origin as a result
of, among other factors, the level of government supervision and regulation
of foreign securities markets and the possibilities of political or economic
instability.
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS -- JUNE 30, 1996 (CONT'D)
- ------------
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward currency contracts in several circumstances. When the Fund enters
into a contract for the purchase or sale of securities denominated in a
foreign currency, or when the Fund anticipates the receipt in a foreign
currency of interest or dividend payments, the Fund may desire to "lock-in"
the U.S. dollar price of the security or the U.S. dollar equivalent of such
interest or dividend payment, as the case may be. Risks may arise upon
entering these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar.
6. DISTRIBUTION OF INCOME AND GAINS: The Fund intends to distribute to
shareholders, at least annually, substantially all of its net investment
income and expects to distribute annually any net long-term capital gains in
excess of net capital losses. An additional distribution may be made to the
extent necessary to avoid the payment of a 4% Federal excise tax.
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the capital accounts based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net
realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distribution in excess of net realized capital gains. To the extent they
exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of paid-in capital.
Foreign currency losses incurred after October 31 ("post-October losses")
within the taxable year are deemed to arise on the first business day of the
Fund's next taxable year. The Fund incurred and will elect to defer net
capital foreign currency losses of $41,339 during the year ended June 30,
1996. As of June 30, 1996, the Fund had temporary book/tax differences
primarily attributable to post-October losses and permanent book/tax
differences primarily attributable to foreign currency losses and net
operating loss. During the year ended June 30, 1996, the Fund credited
accumulated net investment loss $2,384,225, credited accumulated net
realized gain on investment $77,029 and debited paid in capital $2,461,254,
relating to such permanent book and tax differences. Net investment loss and
net assets were not affected by the change.
7. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
respect to dollar-denominated debt securities of United States issuers. The
Fund's custodian takes possession of collateral pledged for investments in
repurchase agreements. To the extent that any repurchase transaction exceeds
one business day, the value of the collateral is marked-to-market on a daily
basis to ensure the adequacy of the collateral. If the seller defaults, the
value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by
the Fund may be delayed or limited.
B. MANAGEMENT AND INVESTMENT ADVISORY SERVICES
The Fund has entered into an Investment Advisory Agreement for portfolio
management services with Clemente Capital, Inc. (the "Investment Adviser") and a
Trust Agreement with the Philippine National Bank (the "Trustee") for certain
services relating to the Philippine Trust. The Investment Advisory Agreement is
approved on an annual basis and provides for the Investment Adviser to receive a
fee computed weekly and payable monthly at the annual rate of 1% of the Fund's
average weekly net assets. For the year ended June 30, 1996, the Investment
Adviser earned $2,206,285 from the Fund, of which $173,389 was payable to the
Investment Adviser at June 30, 1996.
PNB Investments Limited (the "Philippine Adviser"), a wholly-owned
subsidiary of the Trustee, provides the Investment Adviser with investment
advice, research and assistance pursuant to a Research Agreement with the
Investment Adviser. For its services, the Philippine Adviser receives from the
Investment Adviser a fee at an annual rate of .35% of the Fund's average weekly
net assets. For the year ended June 30, 1996, the Investment Adviser paid
$772,199 to the Philippine Adviser.
10
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS -- JUNE 30, 1996 (CONT'D)
- ------------
Substantially all of the Fund's assets are invested through and held in the
Philippine Trust. Under the Trust Agreement, the Trustee receives a monthly fee
at the annual rate of .15% of the Fund's average weekly net assets held in the
Philippine Trust, subject to a minimum fee of $150,000 for administration of the
Philippine Trust. The Trust Agreement remains in effect for the life of the Fund
unless terminated in accordance with its terms. For the year ended June 30,
1996, the Trustee earned fees of $330,943, of which $86,167 was payable to the
Trustee at June 30, 1996.
PFPC Inc. (the "Administrator") provides administrative and accounting
assistance to the Fund. Under the Administration Agreement, the Administrator
receives a fee payable monthly at an annual rate of .10% of the Fund's average
weekly net assets, subject to a minimum annual fee of $124,800. For the year
ended June 30, 1996, the Administrator earned fees of $220,629, of which $57,444
was payable to the Administrator at June 30, 1996.
The Fund pays each of its Directors who is not a director, officer or
employee of the Investment Adviser, the Philippine Adviser or the Trustee, in
addition to certain out-of-pocket expenses, an annual fee of $8,000 plus $500
for each meeting of the Board or of a committee of the Board attended in person.
Director fees payable at June 30, 1996 were $12,000, which is included in
accrued expenses.
The Fund accrued $165,000 for the year ended June 30, 1996, for legal
services to a law firm of which the Fund's secretary is a partner.
C. CAPITAL STOCK
The authorized capital stock of the Fund is 25,000,000 shares of common
stock $.01 par value. Of the 11,225,000 shares outstanding at June 30, 1996,
Clemente Capital, Inc. and PNB Investments Limited each owned 5,000 shares.
During the year ended June 30, 1995, the Fund issued 2,245,000 shares of
common stock in connection with a rights offering of the Fund's shares, at a
subscription price of $15.32; this represented 90% of average reported sales
prices for the week prior to the exercise date. Shareholders of record on
January 3, 1995 were issued one non-transferable right for each whole share of
common stock owned. The rights entitled the shareholders the opportunity to
subscribe for one share of common stock for every five rights held. Shareholders
who fully exercised all rights issued to them in the primary subscription were
entitled to subscribe for additional shares pursuant to an oversubscription
privilege. The Fund paid $1,289,752 for sales commissions and $502,106 in other
offering costs which were charged to additional paid-in capital. Included in
offering costs is approximately $229,000 paid to Fund's legal counsel in
connection with the rights offering to a law firm in which the Fund's secretary
is a partner.
D. PORTFOLIO ACTIVITY
Purchases and sales of securities, other than short-term obligations,
aggregated $52,597,713 and $64,367,230, respectively, for the year ended June
30, 1996.
E. OTHER
The Fund has obtained the approval of the Central Bank for the registration
and conversion into pesos of all proceeds of the initial offering to be invested
in the Philippine securities markets, which by its terms ensures repatriation of
such investment and the remittance of profits and dividends accruing thereon.
Notwithstanding the foregoing, the right of the Fund to repatriate its
investments in Philippine securities and to receive profits, capital gains and
dividends in foreign exchange is subject to the power of the Central Bank, with
the approval of the President of the Philippines, to restrict the availability
of foreign exchange in the imminence of or during an exchange crisis or in times
of national emergency.
There are nationality restrictions on the ownership of certain equity
securities of Philippine companies. Based on confirmations which the Fund
received from Philippine governmental authorities, the Fund believes that it is
permitted to make certain investments through the Philippine Trust that are
otherwise available only to Philippine nationals.
At June 30, 1996, 99.4% of the Fund was invested in Philippine securities.
Future economic and political developments in that country could adversely
affect the liquidity and/or value of the Philippine securities in which the Fund
is invested.
11
<PAGE> 12
REPORT OF INDEPENDENT ACCOUNTANTS
- ------------
To the Board of Directors and
Shareholders of
The First Philippine Fund Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly in all
material respects, the financial position of The First Philippine Fund Inc. (the
"Fund") at June 30, 1996, the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the five years in the period then
ended, in conformity with generally accepted accounting principles. The
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 June
30, 1996 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
1177 Avenue of the Americas
New York, New York
August 8, 1996
12
<PAGE> 13
TAX INFORMATION
- ------------
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 (June 30, 1996) as to the U.S. Federal tax status of distributions received
by the Fund's shareholders during such fiscal year. Of the $1.02 per share total
dividends paid during such fiscal year all $1.02 was derived from net realized
long-term capital gains.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1996. The second
notification, which will reflect the amount to be used by calendar year
taxpayers on their Federal income tax returns, will be made in conjunction with
Form 1099 DIV and will be mailed in January 1997. Shareholders are advised to
consult their own tax advisers with respect to the tax consequences of their
investment in the Fund.
Foreign shareholders will generally be subject to U.S. withholding tax on
the amount of their dividend.
Dividends 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.
This information is given to meet certain requirements of the Internal
Revenue Code. Shareholders should refer to their Form 1099-DIV to determine the
amounts includable on their respective tax returns for 1996.
SUMMARY OF THE FUND'S DIVIDEND REINVESTMENT PLAN
- ------------
The following is a summary of the Fund's Dividend Reinvestment Plan (the
"Plan"). Shareholders may participate in the Plan by completing an enrollment
card available from American Stock Transfer & Trust Company (the "Plan Agent"),
and forwarding it to the address below.
The Fund intends to distribute to shareholders, at least annually, its net
investment income from dividends and interest and, to the extent necessary, its
net realized capital gains. Pursuant to the Plan, shareholders may elect to have
all cash distributions automatically reinvested by the Plan Agent in Fund shares
pursuant to the Plan.
If the directors of the Fund declare a dividend from net investment income
or a capital gains distribution payable either in the Fund's Common Stock or in
cash, participants in the Plan will receive shares of Common Stock, to be issued
by the Fund. If the market price per share on the valuation date equals or
exceeds net asset value per share on that date, the Fund will issue new shares
to participants at net asset value or, if the net asset value is less than 95%
of the market price on the valuation date, then the Fund will issue such new
shares at 95% of the market price. The valuation date will be the dividend or
distribution payment date or, if that date is not a trading day on the New York
Stock Exchange, the next preceding trading day. If the net asset value exceeds
the market price of the Fund shares at such time or if the Fund should declare a
dividend or distribution payable only in cash, participants in the Plan will be
deemed to have elected to receive shares of stock from the Fund valued at the
market price on the valuation date. The Fund may not issue shares below net
asset value. Accordingly, the Plan Agent, as agent for the participants, will
use the amount of the distribution to purchase Fund shares in the open market,
on the New York Stock Exchange or elsewhere, for the participants' accounts on,
or in any event within 30 days after, the payment date. If, before the Plan
13
<PAGE> 14
Agent has completed its purchases, the market price exceeds the net asset value
per share, the average per share purchase price paid by the Plan Agent may
exceed net asset value per share, resulting in the acquisition of fewer shares
than if the dividend or distribution had been paid in shares issued by the Fund.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in the account, including information
for personal tax records. In the case of shareholders, such as banks, brokers or
nominees, which hold shares for others who are the beneficial owners, the Plan
Agent will administer the Plan on the basis of the number of shares certified
from time to time by the shareholder as representing the total amount of shares
registered in the shareholder's name and held for the account of beneficial
owners who are participating in the Plan.
There is no charge to participants for reinvesting dividends or
distributions. The Plan Agent's fees for the handling of the reinvestment of
dividends and distributions will be paid by the Fund. However, each
participant's account will be charged a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open market purchases in connection
with the reinvestment of dividends or distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any income tax which may be payable or required to be withheld
on such dividends or distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan as
applied to any dividend or distribution paid subsequent to notice of the change
sent to all shareholders at least 90 days before the record date for such
dividend or distribution. The Plan also may be amended or terminated by the Plan
Agent upon at least 30 days written notice to all shareholders. Participants may
terminate participation in the Plan at any time upon giving written notice 30
days prior to the applicable dividend or distribution payment date. Additional
information about the Plan may be obtained by writing American Stock Transfer &
Trust Company (the Plan Agent) at 40 Wall Street, 46th Floor, New York, NY 10005
Attention: Shareholder Services The First Philippine Fund Inc.
REPORT OF THE FUND'S ANNUAL MEETING
- ------------
The Fund held its annual meeting on October 26, 1995. At the meeting, the
shareholders voted to elect three Class II directors for a three year term:
Stephen Bosworth, Leopoldo M. Clemente, Jr. and Peter Favila. The shareholders
also voted to ratify the selection of Price Waterhouse LLP as the Fund's
independent accountants for year ending June 30, 1996. The results on the voting
were as follows:
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
FOR AGAINST WITHHELD NON-VOTES
--------- ------ ------- -----------
<S> <C> <C> <C> <C>
Stephen Bosworth........................ 6,655,910 133,406
Leopoldo M. Clemente, Jr................ 6,650,118 139,198
Peter Favila............................ 6,627,013 162,303
Selection of Price Waterhouse LLP....... 6,593,775 32,810 162,731
</TABLE>
14
<PAGE> 15
DIRECTORS AND OFFICERS
- ------------
Peter Favila
Director and Chairman
Lilia C. Clemente
Director and President
Leopoldo M. Clemente, Jr.
Director, Executive Vice President and Managing Director
Stephen Bosworth
Director
M.A.T. Caparas
Director
Adrian C. Cassidy
Director
Edgardo B. Espiritu
Director
Joseph A. O'Hare, S.J.
Director
Robert B. Oxnam
Director
Stephen J. Solarz
Director
Valentin A. Araneta
Executive Vice President and Managing Director
Thomas J. Prapas
Treasurer
William H. Bohnett
Secretary
Angelito C. Imperio
Assistant Secretary
Maria Distefano
Assistant Secretary
EXECUTIVE OFFICES
- ------------
152 West 57th Street, New York, NY 10019
(For latest net asset value and market
data, please call 212-765-0700; regarding
shareholder account inquiries, please call
1-800-937-5449)
- ------------
INVESTMENT ADVISER
Clemente Capital, Inc.
- ------------
ADMINISTRATOR
PFPC Inc.
- ------------
TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
- ------------
CUSTODIAN
Brown Brothers Harriman & Co.
- ------------
LEGAL COUNSEL
Fulbright & Jaworski L.L.P.
- ------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
<PAGE> 16
SUMMARY OF GENERAL
INFORMATION
- ------------
THE FUND
The First Philippine Fund Inc. is a closed-end investment company whose
shares trade on the New York Stock Exchange. The Fund seeks long-term capital
appreciation primarily through investment in equity securities of Philippine
companies. The Fund is managed by Clemente Capital, Inc.
- ------------
SHAREHOLDER INFORMATION
Daily market prices for the Fund's shares are published in the New York
Stock Exchange Composite Transactions section of most newspapers under the
designation "FtPhil". The Fund's New York Stock Exchange trading symbol is FPF.
Net asset value (NAV) and market price information about The First Philippine
Fund Inc. shares are published each Monday in The Wall Street Journal and The
New York Times and in other newspapers. For shareholder account inquiries call
1-800-937-5449.
- ------------
DIVIDEND REINVESTMENT PLAN
Through its voluntary Dividend Reinvestment Plan, shareholders of The First
Philippine Fund Inc. may elect to receive dividends and capital gains
distributions in the form of additional shares of the Fund.
This report, including the financial information herein, is transmitted to the
shareholders of The First Philippine Fund Inc. for their information. This is
not a prospectus, circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in this report.
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940 that the Fund may purchase at market prices from time to
time shares of its common stock in the open market.
[THE FIRST PHILIPPINE FUND INC. LOGO]
ANNUAL REPORT
JUNE 30, 1996
