August 7, 1997
Dear Fellow Shareholder:
PHILIPPINE STOCK MARKET PERFORMANCE: The Philippine stock market composite
index (Phisix) retreated by 12.9% in U.S. dollar terms in the second quarter of
1997. For the Fund's fiscal year ended June 30, 1997, the Phisix declined by
14.8%. The market is undergoing an extended correction after peaking at an
all-time high in February.
FUND'S NAV PERFORMANCE: The First Philippine Fund's net asset value (NAV)
per share stood at $16.61 on June 30, 1997 -- declining by 14.3% in the June
quarter of 1997 and down by 15.3% for the fiscal year ended June 30, 1997 (after
adjusting for the 1996 dividend of $1.50 per share). Since the Fund's inception,
however, the Fund's NAV has appreciated by 133.3% (adjusted for all dividends
and the effect of the rights offering in 1995) -- still significantly
outperforming the Phisix which has appreciated by only 73.1% in U.S. dollar
terms over this period.
FUND'S SHARE PRICE PERFORMANCE: The Fund's share price closed at $13.75 on
June 30, 1997 -- a 12.70% decrease in the June quarter of 1997. The share
price's discount to NAV narrowed slightly to 17.2% from 18.7% at the end of the
March quarter.
WHAT HAS CAUSED THE CORRECTION IN THE STOCK MARKET? The decline in the
Phisix in the second quarter of 1997 has been attributed to the following:
o Weaker-than-expected results with utilities and some blue chip companies
showing slowing profit growth.
o Slowdown on high-end projects pointed to weakness in the property sector.
o Speculative attack on the Philippine peso and other Asian currencies as
questions about the competitiveness of the region arose.
o Concerns about the impact of a peso depreciation on banks' asset quality and
the economy in general.
o Unjustified comparison with Thailand which is experiencing problems with its
property and banking sectors plus weak export growth and a high current
account deficit.
Market sentiment weakened despite proof of healthy fundamentals --
o Lower-than-expected inflation numbers in recent months.
o First quarter GNP growth of 6.1%, in line with sustainable growth targets.
o Upgrades of the country's bonds and notes by Moody's, S&P, and other rating
agencies.
o Continued strong export growth and a narrowing trade deficit in the first
four months of the year.
o Absence of any signs of a property bubble.
o A manageable current account deficit.
o Strongly capitalized banking industry which should be able to weather any
weakening of the economy and any potential increase in non-performing loans.
WHAT HAS HAPPENED SINCE THE END OF JUNE? The Thai baht was floated on July
2 resulting in a 19% depreciation of that currency. Currency speculators next
focused on the Philippine peso and other Asian currencies. The Bangko Sentral ng
Pilipinas defended the currency at the expense of interest rates and foreign
reserves. On July 11, the peso was floated, leading to an immediate depreciation
of 11.6%. The Phisix has declined by an additional 4.96% in peso terms since the
end of June, and by a more substantial 11.99% in U.S. dollar terms.
WHAT IS THE IMPACT OF THE PESO DEPRECIATION ON THE ECONOMY? In the
short-term, depreciation will lead to higher inflation which will be met by
higher interest rates. This will slow economic growth. This may be offset,
however, by stronger growth in the export and tourism industries. Foreign debt
will be revised upwards in peso terms, but customs collection should improve,
resulting in a minimal effect on the fiscal balance. Depreciation also creates a
price disincentive for importers, helping the country's trade and current
account positions. The peso's volatility will remain for some time, but
longer-term, the economy will gain from having a more realistic and
market-determined exchange rate.
<PAGE>
As for the corporate sector, the depreciation will negatively affect heavy
importers and companies with large amounts of unhedged dollar debt. The obvious
beneficiaries are the export-oriented companies and international
telecommunications firms as both, for the most part, have U.S.-dollar revenues
and peso costs. Port operators will benefit from stimulated exports. Banks may
also benefit as high interest rates and long dollar positions should offset any
decline in asset quality caused by the depreciation.
WHAT IS THE IMPACT OF THE PESO DEPRECIATION ON THE FUND? As a majority of
the Fund's holdings are in pesos, the depreciation has negatively affected the
Fund's NAV. However, seeing the pressure being put on the peso, the Fund
converted its peso cash holdings into U.S. dollars just before the depreciation,
thus preserving its value. At present, about 15% of the Fund is in U.S. dollars
or dollar-based securities. This provides a hedge against the volatility of the
peso.
WHAT IS THE OUTLOOK FOR THE PHILIPPINE STOCK MARKET? The short-term
outlook for the stock market will continue to be weak despite attractive
valuations. Any upside will be limited by uncertainty on the peso and other
regional currencies, high interest rates, weak interim results, and political
noise ahead of the elections. Earnings growth momentum is expected to slow as
competition intensifies and government begins to address overheating concerns.
However, we firmly believe that the economy and its corporations continue
to be fundamentally attractive for the longer-term. After the bears have their
day, too-lofty growth expectations should be replaced by more realistic and
sustainable scenarios. The fundamentals for both the economy (e.g., economic
liberalization, export growth, market-oriented reforms) and the corporate sector
(e.g., low gearing levels, net cash positions, new capacity) remain sound.
Although short-term volatility will remain, for long-term investors like
the Fund, bargains abound. We intend to remain selective, however, and focus now
on companies that have the fundamental strengths, competitive advantages, and
industry leadership to anchor this long-term growth.
On behalf of The First Philippine Fund, thank you for your continued
support.
Sincerely yours,
/s/ Lilia C. Clemente
-------------------------------------
Lilia C. Clemente
President and Director
2
<PAGE>
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF INVESTMENTS
June 30, 1997
<TABLE>
<CAPTION>
Number of
Shares Value
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
PHILIPPINE SECURITIES -- (98.7%)
- -----------------------------------------------------------------------------------------------------------------
COMMON STOCK (96.0%)
Banking -- (14.6%)
Bankard, Inc. (c) 6,470,000 $ 1,017,681
Bank of the Philippine Islands 778,000 4,953,911
Far East Bank and Trust Company 100,044 250,262
Metro Bank & Trust Company 557,464 11,832,165
Philippine Commercial International Bank 507,138 4,901,463
Philippine Savings Bank (c) 2,621,055 3,973,704
Security Bank Corp. (c) 147,072 175,590
Union Bank of Philippines (c) 200,000 187,614
- -----------------------------------------------------------------------------------------------------------------
27,292,390
- -----------------------------------------------------------------------------------------------------------------
Conglomerates (17.9%)
Alsons Consolidated Resources (c) 28,205,000 1,389,725
Ayala Corp. -- A 24,959,556 17,737,708
Benpres Holdings GDR (c) (g) 742,491 5,308,811
First Philippine Holdings -- A 2,570,400 2,313,789
Guoco Holdings (Phils), Inc. 4,360,000 512,280
Metro Pacific Corporation 20,682,156 4,468,173
Uniwide Holdings, Inc. (c) (e) 8,687,000 1,712,113
- -----------------------------------------------------------------------------------------------------------------
33,442,599
- -----------------------------------------------------------------------------------------------------------------
Construction/Engineering (4.4%)
Bacnotan Consolidated Industries 242,299 358,159
Davao Union Cement -- A (b) 15,266,622 1,735,895
DMCI Holdings Inc. (c) 10,354,000 3,414,183
HI Cement Corp. (e) 5,430,000 1,029,033
Seacem Holdings (c) 32,640,000 1,583,505
- -----------------------------------------------------------------------------------------------------------------
8,120,775
- -----------------------------------------------------------------------------------------------------------------
Electronics (1.6%)
Ionics Circuits, Inc. 150,000 82,436
Matsushita Electric Philippines (b) 5,875,026 2,282,407
Solid Group, Inc. (e) 4,150,000 676,357
- -----------------------------------------------------------------------------------------------------------------
3,041,200
- -----------------------------------------------------------------------------------------------------------------
Food and Beverage (13.3%)
Alaska Milk Corp. (c) 10,708,000 1,034,923
La Tondena Distillers, Inc. 1,897,800 4,567,552
San Miguel Corp. -- A 10,818,885 17,632,355
Selecta Dairy Products, Inc. 2,500,000 236,886
Universal Robina 3,702,000 1,346,998
- -----------------------------------------------------------------------------------------------------------------
24,818,714
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
Number of
COMMON STOCK (CONTINUED) Shares Value
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
Oil (0.0%)
Philodrill Corp. -- A (c) 44,334,545 $ 13,443
Philodrill Corp. -- B (c) 39,436,363 12,705
- -----------------------------------------------------------------------------------------------------------------
26,148
- -----------------------------------------------------------------------------------------------------------------
Port Operations (4.0%)
Asian Terminals, Inc. (c) 20,474,990 3,724,983
International Container Terminal Services, Inc. (c) 6,928,000 3,544,876
Keppel Philippines Holdings -- A (c) 1,152,463 109,201
- -----------------------------------------------------------------------------------------------------------------
7,379,060
- -----------------------------------------------------------------------------------------------------------------
Real Estate Development (27.4%)
Ayala Land, Inc. -- B 26,292,770 24,166,149
Belle Corporation (c) 19,400,008 5,661,767
C & P Homes, Inc. 8,616,750 3,233,241
Empire East Land Holdings (c) (e) 4,881,000 739,994
Filinvest Land, Inc. 18,187,499 4,549,632
Pryce Properties Corp. (c) 40,250,000 2,745,982
Robinson's Land -- B (c) 19,000,000 2,448,454
SM Prime Holdings, Inc. 23,700,000 7,006,519
Universal Rightfield Property (c) 6,100,000 635,802
- -----------------------------------------------------------------------------------------------------------------
51,187,540
- -----------------------------------------------------------------------------------------------------------------
Telecommunications (5.4%)
Digital Telecommunications (b) (c) (h) 11,250,000 497,460
Globe Telecom (c) 1,517,417 575,128
Philippine Long Distance Telephone ADR (f) 130,510 8,385,268
Pilipino Telephone Company (c) (e) 1,217,500 611,426
- -----------------------------------------------------------------------------------------------------------------
10,069,282
- -----------------------------------------------------------------------------------------------------------------
Utilities (7.4%)
Manila Electric Co. -- A 2,732,210 9,009,334
Petron Corp. 18,870,001 4,791,882
- -----------------------------------------------------------------------------------------------------------------
13,801,216
- -----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $113,045,969) 179,178,924
- -----------------------------------------------------------------------------------------------------------------
ENTITLEMENTS (0.0%)
Banking
Far East Bank and Trust Company (i) (Cost $0) 200,088 0
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
Par
SCHEDULE OF INVESTMENTS (CONTINUED) Maturity (000) Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
BONDS -- (0.7%)
Bacnotan Consolidated Ind. Convertible Bond 5.50% 06/21/04 $1,750 $ 1,312,500
(Cost $1,750,000)
- --------------------------------------------------------------------------------------------------------------------
CALL ACCOUNTS -- (2.0%)
Philippine Peso (d)
(Cost $3,707,930) 3,706,486
- --------------------------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE SECURITIES 184,197,910
- --------------------------------------------------------------------------------------------------------------------
UNITED STATES SECURITIES -- (1.3%)
- --------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- (1.3%)
American Express
6.1521%
(Cost $2,377,000) 07/01/97 2,377 2,377,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 2,377,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- (100%)
(Cost $120,880,899) (a) $ 186,574,910
==============
</TABLE>
(a) Aggregate cost is the same for Federal income tax purposes. The
aggregate gross unrealized appreciation (depreciation) for all
securities is as follows:
<TABLE>
<S> <C>
Excess of market value over tax cost $ 77,719,280
Excess of tax cost over market value (12,025,269)
--------------
$ 65,694,011
--------------
--------------
</TABLE>
<TABLE>
<S> <C>
(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) Securities restricted for resale until November 1997.
</TABLE>
<TABLE>
<CAPTION>
Fair Value
at
Date of Average Percentage of June 30,
Description Acquisition Shares Cost Net Assets 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Digital Telecommunications 1/15/93 11,250,000 $0.0442 0.26% $497,460
(i) Entitlements represent the right to subscribe to additional shares of the
respective company's common stock.
</TABLE>
See Accompanying Notes to Financial Statements
5
<PAGE>
<TABLE>
THE FIRST PHILIPPINE FUND INC.
STATEMENT OF ASSETS AND LIABIILITIES June 30, 1997
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Investments at value (Cost $117,172,969)............................................................ $182,868,424
Cash (including Philippine pesos of $3,706,486 with a cost of $3,707,930)........................... 3,751,573
Dividends receivable................................................................................ 210,670
Interest receivable................................................................................. 41,310
Receivable for investments sold..................................................................... 946,219
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS........................................................................................ 187,818,196
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased................................................................... 526,720
Accrued expenses payable............................................................................ 826,219
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 1,352,939
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS
(applicable to 11,225,000 common shares outstanding)............................................... $186,465,257
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($186,465,257 divided by 11,225,000)............................................................... $ 16.61
- -----------------------------------------------------------------------------------------------------------------
Net assets consist of:
Capital stock...................................................................................... $ 112,250
Paid-in capital.................................................................................... 125,402,538
Accumulated net investment loss.................................................................... (54,479)
Accumulated net realized loss on investments....................................................... (4,684,928)
Accumulated net unrealized appreciation on investments, foreign currency
holdings, and other assets and liabilities denominated in foreign currency....................... 65,689,876
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS.......................................................................................... $186,465,257
- -----------------------------------------------------------------------------------------------------------------
For the
Year Ended
STATEMENT OF OPERATIONS June 30, 1997
- -----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest (net of taxes withheld $19,006)........................................................... $ 395,308
Dividends (net of taxes withheld $327,685)......................................................... 1,023,871
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME............................................................................. 1,419,179
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
Investment advisory fee............................................................................ 2,156,485
Custodian fees..................................................................................... 505,066
Trustee fee........................................................................................ 323,476
Administration fee................................................................................. 215,648
Transfer agent fees................................................................................ 6,000
Legal fees......................................................................................... 160,000
Printing........................................................................................... 44,999
Directors fees..................................................................................... 70,000
Audit fees......................................................................................... 65,361
Insurance.......................................................................................... 11,096
Miscellaneous...................................................................................... 224,999
- -----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES...................................................................................... 3,783,130
- -----------------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS................................................................................. (2,363,951)
- -----------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS, FOREIGN CURRENCY
HOLDINGS, AND OTHER ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES:
Net realized loss on:
Security transactions............................................................................ (4,684,928)
Foreign currency transactions.................................................................... (66,508)
- -----------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments...................................................................................... (27,367,363)
Foreign currency holdings and other assets and liabilities denominated in foreign currency....... (4,206)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized losses on investments, foreign currency holdings and other assets and
liabilities denominated in foreign currency...................................................... (32,123,005)
- -----------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS................................................ $(34,486,956)
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
6
<PAGE>
<TABLE>
<CAPTION>
For the For the
Year Ended Year Ended
STATEMENTS OF CHANGES IN NET ASSETS June 30, 1997 June 30, 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss....................................................... $ (2,363,951) $ (2,215,985)
Net realized gain (loss) on security transactions......................... (4,684,928) 25,276,561
Net realized loss on foreign currency transactions........................ (66,508) (77,029)
Net change in unrealized appreciation (depreciation) on investments,
foreign currency holdings and other assets
and liabilities denominated in foreign currency......................... (27,371,569) (5,601,312)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations.............. (34,486,956) 17,382,235
- ---------------------------------------------------------------------------------------------------------------
Dividends and distributions to shareholders from:
Net realized long-term gains ($1.50 & $1.02 per share, respectively)......... (16,837,500) (11,449,500)
- ---------------------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets...................................... (51,324,456) 5,932,735
Net assets:
Beginning of period....................................................... 237,789,713 231,856,978
- ---------------------------------------------------------------------------------------------------------------
End of period (including accumulated loss of ($54,479) and ($41,339),
respectively)........................................................... $ 186,465,257 $ 237,789,713
===============================================================================================================
</TABLE>
See Accompanying Notes to Financial Statements
7
<PAGE>
THE FIRST PHILIPPINE FUND INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Year Ended June 30,
- --------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 21.18 $ 20.66 $ 23.11 $ 14.84 $ 14.58
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.21) (0.20) (0.20) (0.22) (0.07)
Net realized and unrealized gains (losses) on investments,
foreign currency holdings and other assets and
liabilities denominated in foreign currencies (2.86) 1.74 1.27 9.25 0.90
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from investment operations (3.07) 1.54 1.07 9.03 0.83
- --------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income -- -- -- -- --
Distributions from net realized long-term gains (1.50) (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 (1.50) (1.02) (2.10) (0.76) (0.57)
- --------------------------------------------------------------------------------------------------------------------
DILUTIVE EFFECT OF CAPITAL SHARE OFFERING -- -- (1.42) -- --
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 16.61 $ 21.18 $ 20.66 $ 23.11 $ 14.84
- --------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD $ 13.75 $ 16.88 $ 16.88 $ 18.25 $ 13.00
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Based on market value* (10.88)% 7.03% 7.06% 45.62% 19.19%
- --------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $ 186,465 $ 237,790 $ 231,857 $ 207,498 $ 133,306
Ratios to average net assets:
Operating expenses 1.75% 1.77% 1.82% 1.79% 1.72%
Interest expense -- -- 0.06% -- --
--------- --------- --------- --------- ---------
Total expenses 1.75% 1.77% 1.88% 1.79% 1.72%
Net investment loss (1.10)% (1.00)% (1.01)% (1.08)% (0.45)%
Portfolio turnover 15.32% 24.20% 20.50% 39.35% 37.30%
Average Commission Rate (a) $ 0.0001 $ 0.0022 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>
NOTES TO FINANCIAL STATEMENTS -- JUNE 30, 1997
- ------------
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 $4,515,762 (2.42% 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. 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, 1997, 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.
During the year ended June 30, 1997, the Fund realized capital losses of
$4,684,928 which are available as a reduction of future net capital gains
realized before the year 2005.
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.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- JUNE 30, 1997 (CONT'D)
- ------------
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.
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 after October 31, 1996 incurred and will
elect to defer net foreign currency losses of $54,479 during the year ended
June 30, 1997. As of June 30, 1997, 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, 1997, the Fund credited
accumulated net investment loss of $2,350,811, credited accumulated net
realized gain on investment of $145,477 and debited paid in capital of
$2,496,288, 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
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- JUNE 30, 1997 (CONT'D)
- ------------
payable monthly at the annual rate of 1% of the Fund's average weekly net
assets. For the year ended June 30, 1997, the Investment Adviser earned
$2,156,485 from the Fund, of which $214,172 was payable to the Investment
Adviser at June 30, 1997.
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, 1997, the Investment Adviser paid
$754,770 to the Philippine Adviser.
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,
1997, the Trustee earned fees of $323,476, of which $157,888 was payable to the
Trustee at June 30, 1997.
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, 1997, the Administrator earned fees of $215,648, of which $15,549
was payable to the Administrator at June 30, 1997.
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 an
annual fee of $8,000 plus $750 for each meeting of the Board or of a committee
of the Board attended in person plus certain out-of-pocket expenses. Director
fees payable at June 30, 1997 were $54,750 which is included in accrued
expenses.
The Fund paid or accrued approximately $160,000 for the year ended June 30,
1997, 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, 1997,
Clemente Capital, Inc. and PNB Investments Limited each owned 5,000 shares.
D. PORTFOLIO ACTIVITY
Purchases and sales of securities, other than short-term obligations,
aggregated $33,137,151 and $55,927,876, respectively, for the year ended June
30, 1997.
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, 1997, 98.7% 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>
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, 1997, 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. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at June
30, 1997 by correspondence with the custodian and the application of alternative
auditing procedures for unsettled security transactions, provide a reasonable
basis for the opinion expressed above.
Price Waterhouse LLP
Thirty South Seventeenth Street
Philadelphia, PA
August 12, 1997
12
<PAGE>
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, 1997) as to the U.S. Federal tax status of distributions received
by the Fund's shareholders during such fiscal year. Of the $1.50 per share total
dividends paid during such fiscal year all $1.50 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 1997. 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 1998. 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 1997.
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
13
<PAGE>
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 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 31, 1996. At the meeting, the
shareholders voted to elect four Class III directors for a three year term:
Lilia C. Clemente, Edgardo B. Espiritu, Joseph A. O'Hare, S.J. and Robert B.
Oxnam. The shareholders also voted to ratify the selection of Price Waterhouse
LLP as the Fund's independent accountants for the year ending June 30, 1997. The
results of the voting were as follows:
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
FOR AGAINST WITHHELD NON-VOTES
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Lilia C. Clemente..................................... 7,283,309 184,820
Edgardo B. Espiritu................................... 7,279,303 188,826
Joseph A. O'Hare, S.J................................. 7,276,999 191,130
Robert B. Oxnam....................................... 7,279,873 188,256
Selection of Price Waterhouse LLP..................... 7,399,999 23,727 44,403
</TABLE>
14
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
Joaquin G. Hofilena
Vice President
Imelda Singzon
Vice President
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 or access
http://www.clementecapital.com.
For shareholder account inquiries, 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 L.L.P.
<PAGE>
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, The New
York Times and in other newspapers. For general information visit us at our web
site http://www.clementecapital.com. 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.
[LOGO]
The First Philippine Fund Inc.
Annual Report
June 30, 1997
