<PAGE> 1
February 14, 1997
Dear Shareholder:
In the December quarter of 1996, The First Philippine Fund's net asset
value (NAV) stood at $18.85 per share. Adjusting for fiscal year 1996 dividends
of $1.50 per share, the Fund's NAV grew by 1.74% in the quarter, outperforming
the benchmark Philippine Stock Exchange composite index (Phisix) which declined
by 0.11% in US-dollar terms. From July 1 to December 31, 1996, both the Fund's
NAV and the Phisix have declined, by 3.83% and 3.53%, respectively. However,
from July 1, 1996 to the present, the Fund's 1997 fiscal year-to-date, the
Fund's NAV has risen by 2.24% while the Phisix has gained only 0.90%.
The Fund's share price closed at $15.125 at the end of the quarter,
representing a discount of 19.76% to NAV. Adjusting for the dividend, the Fund's
stock price provided a return of 1.53% for the quarter. Since the Fund's
inception, the Fund's NAV has continued to outperform the Phisix. The Fund has
appreciated by 164.71% (adjusted for dividends and the effect of the rights
offering in 1995) versus the Phisix's appreciation of 96.73%.
We are also pleased to inform you that Lipper Analytical Services, Inc. has
once again recognized the Fund's performance by awarding The First Philippine
Fund with the number one ranking among Pacific Region closed-end equity funds
over the five year period ending December 31, 1996.
STOCK MARKET CONSOLIDATES
The Philippine stock market showed some measure of volatility in the
quarter, dropping 6.6% (in US-dollar terms) in October, but recovering
thereafter to end the quarter nearly flat, down only 0.11%.
The October decline came on the back of a shifting out of foreign funds
from the Philippines to bull markets in Hong Kong and the United States. In
addition, concerns over the possible overvaluation of the Philippine property
sector were raised. The market bounced back in early November with good news on
economic growth, declining inflation and the re-election of US President
Clinton. For the rest of the quarter, the market drifted sideways as a lack of
additional news and foreign participation slowed trades. The Asia Pacific
Economic Cooperation (APEC) summit held in Manila and the introduction of a
revised, broader composite index failed to rouse the Philippine bourse.
The First Philippine Fund outperformed the market in the quarter by 1.86%.
The Fund was propelled by its increased positioning in the food and beverages
sector during the prior quarter. The sector, which underperformed the market all
year, staged a strong recovery, growing 29.9% in the quarter, as declining raw
materials prices were seen to boost earnings. Banks and financial services, a
sector where the Fund remains overweighted relative to the Phisix, likewise did
well, growing 6.7% in the quarter. On the other hand, the property sector, the
largest sector on the Phisix, declined 3.3%.
BULLISH OUTLOOK REMAINS FOR 1997
The country's solid economic fundamentals and favorable corporate prospects
underpin our optimistic outlook for the next semester. GDP growth will continue
to accelerate in 1997, unlike other slowing Asian nations. Market valuations
remain attractive against corporate earnings growth rates which, at around 28%,
are among the highest in Asia. Inflation has continued its decline since peaking
at 11.8% in March to a more recent 5.1% in December 1996. Interest rates are
following suit. The
<PAGE> 2
Comprehensive Tax Reform Program should be completed within the year, and there
is an excellent chance that the country's credit rating will be upgraded. While
a widening trade deficit is a concern, imports are still mainly composed of
capital items expected to enhance production. These fundamentals should help
sustain buying interest in the Philippines in 1997.
The Fund continues to favor the banking sector. The sector stands to
benefit from cuts in reserve rate requirements which will lower costs, widen
margins and boost loan demand. Construction and engineering companies should
also benefit from the commencement of large infrastructure projects, such as the
Metro Rail Transit, the Skyway project and the development of corporate cities.
A growing export sector and increased international trade provide excellent
prospects for the port services sector. However, concerns of a glut in office
space and high-rise luxury developments will continue to hound the property
sector in 1997.
On behalf of The First Philippine Fund, I wish to thank you for your
continued confidence in the Fund and for sharing our views on the favorable
investment climate in the Philippines. With your support, we have been able to
ensure that the Fund remains a broad and diverse, value-enhancing basket of only
the best companies the Philippines has to offer.
Sincerely yours,
LOGO
Lilia C. Clemente
2
<PAGE> 3
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF INVESTMENTS
December 31, 1996
(Unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
PHILIPPINE SECURITIES (97.0%)
- ------------------------------------------------------------------------------------------------
COMMON STOCK (90.2%)
Banking (17.2%)
Bankard, Inc. (c) 6,470,000 $ 2,313,087
Bank of Philippine Islands 952,000 5,756,970
Far East Bank and Trust Company 83,370 332,935
Metro Bank & Trust Company 585,413 14,472,222
Philippine Commercial International Bank 507,138 6,654,342
Philippine Savings Bank (c) 3,048,355 7,304,087
Security Bank Corp. (c) 448,560 776,232
Union Bank of Philippines (c) 1,200,000 1,255,087
PCI Leasing & Finance (b)(c) 100,000 26,433
- ------------------------------------------------------------------------------------------------
38,891,395
- ------------------------------------------------------------------------------------------------
Conglomerates (17.0%)
Aboitiz Equity Ventures, Inc. (c) 23,813,920 2,400,140
Alsons Consolidated Resources (c) 55,000,000 4,560,149
Ayala Corp. -- A 19,967,646 16,707,421
Benpres Holdings GDR (b)(c)(g) 742,491 5,568,683
First Philippine Holdings -- A 2,056,320 2,619,964
Guoco Holdings (Phils), Inc. 4,360,000 812,536
Metro Pacific Corporation 20,718,097 5,121,805
Uniwide Holdings, Inc. (c)(e) 3,587,000 709,406
- ------------------------------------------------------------------------------------------------
38,500,104
- ------------------------------------------------------------------------------------------------
Construction/Engineering (5.8%)
Bacnotan Consolidated Industries 703,199 2,300,046
Davao Union Cement -- A (b) 15,266,608 3,193,487
DMCI Holdings Inc. (c) 3,877,000 2,543,576
EEI Corp. 30,000,000 1,985,319
HI Cement Corp. (e) 930,000 307,724
Seacem Holdings (c) 25,440,000 2,951,052
- ------------------------------------------------------------------------------------------------
13,281,204
- ------------------------------------------------------------------------------------------------
Electronics (1.4%)
Ionics Circuits, Inc. (c) 120,000 85,574
Matsushita Electric Philippines (b) 5,340,935 2,880,150
Solid Group, Inc. (c) 4,150,000 852,318
- ------------------------------------------------------------------------------------------------
3,218,042
- ------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
3
<PAGE> 4
<TABLE>
<CAPTION>
Number of
COMMON STOCK (CONTINUED) Shares Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Food and Beverage (13.0%)
Alaska Milk Corp. (c) 10,708,000 $ 1,384,673
La Tondena Distillers, Inc. (e) 2,071,800 5,121,781
San Miguel Corp. -- A 9,835,351 20,760,734
Selecta Dairy Products, Inc. (c) 2,500,000 201,575
Universal Robina 3,702,000 2,076,769
- ------------------------------------------------------------------------------------------------
29,545,532
- ------------------------------------------------------------------------------------------------
Mining (0.4%)
Manila Mining Corp. -- A (c) 561,000,000 490,739
United Paragon Mining Corp. (c) 1,320,000,000 401,628
- ------------------------------------------------------------------------------------------------
892,367
- ------------------------------------------------------------------------------------------------
Oil (0.1%)
Basic Petroleum and Mining -- A (c) 361,849,988 137,622
Basic Petroleum and Mining -- B (c) 194,166,659 73,847
Philodrill Corp. -- A (c) 44,334,545 15,176
Philodrill Corp. -- B (c) 39,436,363 13,499
- ------------------------------------------------------------------------------------------------
240,144
- ------------------------------------------------------------------------------------------------
Port Operations (1.8%)
Asian Terminals, Inc. 20,474,000 3,698,760
Keppel Philippines Holdings -- A (b)(c) 6,019,785 472,210
- ------------------------------------------------------------------------------------------------
4,170,970
- ------------------------------------------------------------------------------------------------
Real Estate Development (22.6%)
Ayala Land, Inc. -- B 19,734,217 22,516,506
Belle Corporation (c) 14,100,008 3,914,732
C & P Homes, Inc. 8,616,750 4,424,224
Empire East Land Holdings (c)(e) 1,081,000 493,363
Fil-Estate Land, Inc. 2,880,000 2,519,302
Filinvest Development Corp. 2,000,000 593,314
Filinvest Land, Inc.(c) 18,187,500 5,672,137
Primetown Properties Corp. (c) 3,375,000 705,986
Pryce Properties Corp. (c) 35,000,000 2,529,190
Robinson's Land -- B (c) 19,000,000 3,251,816
SM Prime Holdings, Inc. 14,400,000 3,724,185
Universal Rightfield Property (c) 6,100,000 800,403
- ------------------------------------------------------------------------------------------------
51,145,158
- ------------------------------------------------------------------------------------------------
Telecommunications (4.1%)
Digital Telecommunications (b)(c) 11,250,000 499,182
Globe Telecom (c) 2,340,398 1,246,171
Philippine Long Distance Telephone ADR (f) 127,510 6,503,010
Pilipino Telephone Corp. (c)(e) 1,217,500 1,030,288
- ------------------------------------------------------------------------------------------------
9,278,651
- ------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE> 5
<TABLE>
<CAPTION>
Number of
COMMON STOCK (CONTINUED) Shares Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Utilities (6.8%)
Manila Electric Co. -- A 2,101,701 $ 9,991,731
Petron Corp. 15,725,000 5,322,805
- ------------------------------------------------------------------------------------------------
15,314,536
- ------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $120,690,345) 204,478,103
- ------------------------------------------------------------------------------------------------
ENTITLEMENTS (0.0%)
Banking
Far East Bank and Trust Company (h)
(Cost $0) 166,760 0
- ------------------------------------------------------------------------------------------------
<CAPTION>
Par
Maturity (000)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS (2.7%)
Bacnotan Consolidated Ind. Convertible Bond
5.50% (e) 06/21/04 $ 1,750 1,540,000
International Container Terminal Services Inc.
6.0% 02/19/00 2,500 3,375,000
JG Summit Convertible Bond "Restricted" 3.5%
(e) 12/23/03 1,500 1,282,500
- ------------------------------------------------------------------------------------------------
TOTAL BONDS
(Cost $5,880,507) 6,197,500
- ------------------------------------------------------------------------------------------------
CALL ACCOUNTS (4.1%)
Philippine Peso (d)
(Cost $9,276,662) 9,275,581
- ------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE SECURITIES 219,951,184
- ------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
5
<PAGE> 6
<TABLE>
<CAPTION>
Par
SCHEDULE OF INVESTMENTS (CONTINUED) Maturity (000) Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UNITED STATES SECURITIES (3.0%)
- ------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (3.0%)
American Express 6.75253%
(Cost $6,804,000) 01/02/97 $ 6,804 $ 6,804,000
- ------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 6,804,000
- ------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(Cost $142,651,514) (a) $226,755,184
============
</TABLE>
<TABLE>
<S> <C>
(a) Aggregate cost is the same for Federal income tax purposes. The aggregate
gross unrealized appreciation (depreciation) for all securities is as
follows:
Excess of market value over tax cost $93,458,721
Excess of tax cost over market value (9,355,051)
-----------
$84,103,670
===========
(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) Entitlements represent the right to subscribe to additional shares of the
respective company's common stock.
</TABLE>
See Accompanying Notes to Financial Statements
6
<PAGE> 7
THE FIRST PHILIPPINE FUND INC.
<TABLE>
<CAPTION>
STATEMENT OF ASSETS AND LIABILITIES (Unaudited) December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments at value (Cost $133,374,852)....................................................................... $ 217,479,603
Cash (including Philippine pesos of $9,275,581 with a cost of $9,276,662)...................................... 9,276,441
Dividends receivable........................................................................................... 324,144
Interest receivable............................................................................................ 108,695
Receivable for investments sold................................................................................ 2,954,216
Prepaid insurance.............................................................................................. 5,501
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS................................................................................................... 230,148,600
- -------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased.............................................................................. 832,790
Accrued expenses payable....................................................................................... 887,840
Dividend payable............................................................................................... 16,837,500
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES.............................................................................................. 18,558,130
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
(applicable to 11,225,000 common shares outstanding)........................................................ $ 211,590,470
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($211,590,470 / 11,225,000)................................................................................. $ 18.85
- -------------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Capital stock................................................................................................. $ 112,250
Paid-in capital............................................................................................... 127,898,826
Accumulated net investment loss............................................................................... (1,311,914)
Accumulated net realized gain on investments.................................................................. 787,425
Accumulated net unrealized appreciation on investments, foreign currency holdings, and other assets and
liabilities denominated in foreign currency................................................................. 84,103,883
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS..................................................................................................... $ 211,590,470
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For the Six
Months Ended
STATEMENT OF OPERATIONS (Unaudited) December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
Interest (net of taxes withheld $8,414)....................................................................... $ 220,729
Dividends (net of taxes withheld $166,676).................................................................... 514,537
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME........................................................................................ 735,266
- ------------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment advisory fee....................................................................................... 1,133,950
Custodian fees................................................................................................ 265,245
Trustee fee................................................................................................... 170,093
Administration fee............................................................................................ 113,395
Transfer agent fees........................................................................................... 4,298
Legal fees.................................................................................................... 81,431
Printing...................................................................................................... 24,572
Directors fees................................................................................................ 36,445
Audit fees.................................................................................................... 30,174
Insurance..................................................................................................... 5,594
Miscellaneous................................................................................................. 113,080
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES................................................................................................. 1,978,277
- ------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS............................................................................................ (1,243,011)
- ------------------------------------------------------------------------------------------------------------------------------
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....................................................................................... 866,394
Foreign currency transactions............................................................................... (31,140)
- ------------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments................................................................................................. (8,957,704)
Foreign currency holdings and other assets and liabilities denominated in foreign currency.................. 3,718
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized losses on investments, foreign currency holdings and other assets and
liabilities denominated in foreign currency............................................................... (8,118,732)
- ------------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........................................................... $(9,361,743)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
7
<PAGE> 8
<TABLE>
<CAPTION>
For the Six
Months Ended For the
December 31, 1996 Year Ended
STATEMENTS OF CHANGES IN NET ASSETS (unaudited) June 30, 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss.................................... $ (1,243,011) $ (2,215,985)
Net realized gain on security transactions............. 866,394 25,276,561
Net realized loss on foreign currency transactions..... (31,140) (77,029)
Net change in unrealized appreciation (depreciation) on
investments, foreign currency holdings and other
assets and liabilities denominated in foreign
currency............................................. (8,953,986) (5,601,353)
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................. (9,361,743) 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................... (26,199,243) 5,932,735
Net assets:
Beginning of period.................................... 237,789,713 231,856,978
- -------------------------------------------------------------------------------------------------
End of period (including accumulated loss of
($1,311,914) and ($41,339), respectively)............ $211,590,470 $ 237,789,713
=================================================================================================
</TABLE>
See Accompanying Notes to Financial Statements
8
<PAGE> 9
THE FIRST PHILIPPINE FUND INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
For the Six
Months Ended For The Year Ended June 30,
December 31, 1996 ------------------------------------------------------
(unaudited) 1996 1995 1994
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........ $21.18 $20.66 $23.11 $14.84
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss).............. (0.11) (0.20) (0.20) (0.22)
Net realized and unrealized gains (losses)
on investments, foreign currency
holdings and other assets and
liabilities denominated in foreign
currencies.............................. (0.72) 1.74 1.27 9.25
- -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from investment
operations................................ (0.83) 1.54 1.07 9.03
- -----------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income...... -- -- -- --
Distributions from net realized long-term
gains................................... (1.50) (1.02) (0.85) (0.18)
Distributions from net realized short-term
gains................................... -- -- (1.25) (0.58)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS........... (1.50) (1.02) (2.10) (0.76)
- -----------------------------------------------------------------------------------------------------------------------------
DILUTIVE EFFECT OF CAPITAL SHARE RIGHTS
OFFERING.................................. -- -- (1.42) --
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period.............. $18.85 $21.18 $20.66 $23.11
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD....... $15.13 $16.88 $16.88 $18.25
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Based on market value*.................... (1.10)%*** 7.03% 7.06% 45.62%
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)........ $211,590 $237,699 $231,857 $207,498
Ratios to average net assets:
Operating expenses........................ 1.74% 1.77% 1.82% 1.79%
Interest expense.......................... -- -- 0.06% --
-------- -------- -------- --------
Total expenses............................ 1.74%** 1.77% 1.88% 1.79%
Net investment income (loss).............. (1.10)%** (1.00)% (1.01)% (1.08)%
Portfolio turnover.......................... 16.92% 24.20% 20.50% 39.35%
Average Commission Rate (a)................. $0.00005 $0.0022 N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For The Year Ended June 30,
----------------------------
1993 1992
- ------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period........ $14.58 $10.35
- ------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss).............. (0.07) .05
Net realized and unrealized gains (losses)
on investments, foreign currency
holdings and other assets and
liabilities denominated in foreign
currencies.............................. 0.90 4.37
- ------------------------------------------------------------------------------------
Net increase (decrease) from investment
operations................................ 0.83 4.42
- ------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income...... -- (0.19)
Distributions from net realized long-term
gains................................... (0.32) --
Distributions from net realized short-term
gains................................... (0.25) --
- ------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS........... (0.57) (0.19)
- ------------------------------------------------------------------------------------
DILUTIVE EFFECT OF CAPITAL SHARE RIGHTS
OFFERING.................................. -- --
- ------------------------------------------------------------------------------------
Net asset value, end of period.............. $14.84 $14.58
- ------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD....... $13.00 $11.50
- ------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Based on market value*.................... 19.19% 56.61%
- ------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)........ $133,306 $130,955
Ratios to average net assets:
Operating expenses........................ 1.72% 1.79%
Interest expense.......................... -- --
-------- --------
Total expenses............................ 1.72% 1.79%
Net investment income (loss).............. (0.45)% .42%
Portfolio turnover.......................... 37.30% 21.61%
Average Commission Rate (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.
** Annualized
*** Non-annualized
(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
9
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1996
(Unaudited)
- ------------
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 $12,640,145 (5.97% 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.
10
<PAGE> 11
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1996 (CONT'D)
(Unaudited)
- ------------
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 classification.
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
distributions 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 elected 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 six months ended December 31, 1996, the
Investment Adviser earned $1,133,950 from the Fund, of which $161,830 was
payable to the Investment Adviser at December 31, 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
11
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1996 (CONT'D)
(Unaudited)
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annual rate of .35% of the Fund's average weekly net assets. For the six months
ended December 31, 1996, the Investment Adviser paid $396,883 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 six months ended
December 31, 1996, the Trustee earned fees of $170,093, of which $83,499 was
payable to the Trustee at December 31, 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 six
months ended December 31, 1996, the Administrator earned fees of $113,395, of
which $55,666 was payable to the Administrator at December 31, 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 $750
for each meeting of the Board or of a committee of the Board attended in person.
Director fees payable at December 31, 1996 were $12,000, which is included in
accrued expenses.
The Fund paid or accrued approximately $81,431 for the six months ended
December 31, 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 December 31, 1996,
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 $19,181,208 and $34,997,310, respectively, for the six months ended
December 31, 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 December 31, 1996, 97.0% 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.
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<PAGE> 15
DIRECTORS AND OFFICERS
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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
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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, please call
1-800-937-5449)
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INVESTMENT ADVISER
Clemente Capital, Inc.
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ADMINISTRATOR
PFPC Inc.
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TRANSFER AGENT AND REGISTRAR
American Stock Transfer & Trust Company
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CUSTODIAN
Brown Brothers Harriman & Co.
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LEGAL COUNSEL
Fulbright & Jaworski L.L.P.
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INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
<PAGE> 16
SUMMARY OF GENERAL
INFORMATION
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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.
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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 Ex- change 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 general information visit us
at our web site http://www.clementecapital.com. For shareholder account
inquiries call 1-800-937-5449.
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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.
SEMI-ANNUAL REPORT
DECEMBER 31, 1996
