July 30, 1998
Dear Shareholder:
Amid the deepening of the financial crisis in Asia, the Philippine stock
market again manifested extreme volatility in the second quarter of 1998. After
a stellar first quarter which saw the Philippine composite index (Phisix) gain
27.03% (in US-dollar terms), the Phisix gave it back in the second quarter by
plunging 29.26%. Thus, as of June 30, 1998, the Phisix has dropped by 10.14%
since the end of 1997 and by a record 60.67% since June 30, 1997.
The First Philippine Fund performed in line with its benchmark over these
periods. Its net asset value (NAV) also plunged significantly -- by 29.16% in
the second quarter of 1998, by 12.50% in the first half of the year, and by
60.81% for the Fund's fiscal year ending June 30, 1998. On June 30, the Fund's
NAV stood at US$6.51 per share and its price per share was US$5.75, a discount
of 11.67% to NAV.
Measured over a longer period, the Fund continues to outperform its
benchmark. Since the Fund's inception, the Fund's NAV (after adjusting for
dividends and the rights offering in 1995) has outperformed the Phisix by
23.11%.
THE REGIONAL CRISIS INTENSIFIES
The Philippine stock market was again dogged by external events as the
Asian crisis worsened. Developments in Japan and Indonesia, in particular, took
the limelight in the past quarter. The ill health of the Japanese economy sent
shivers to Asian economies. A weak Japan would only exacerbate the crisis and
prolong the region's recovery. As the yen began to slide, stock markets were
sold down on concerns of a possible depreciation of the Chinese renminbi and
another round of Asian currency devaluation.
In May, Indonesia underwent political and social upheaval when riots
escalated and led to the resignation of President Suharto. While new leaders are
in place, the political situation remains fragile. Furthermore, the government
now faces the daunting task of addressing a severely contracting economy,
hyperinflation and rapidly rising poverty levels. The Indonesian situation,
while a most extreme scenario, points to the economic and social difficulties
the Asian economies still have to face through the crisis.
Elsewhere, nuclear bomb testing in India and Pakistan, labor unrest in
South Korea, and news that the Hong Kong, Malaysian, Indonesian and Korean
economies contracted in the first quarter contributed to the gloom surrounding
the region.
AND THE DOMESTIC ECONOMY FEELS THE STRAIN
We have long maintained that the Philippines' economic fundamentals are
superior to those of its neighbors. Nevertheless, the country, too, will not
escape a marked downturn. Local stock market activity grew anemic as the crisis
manifested itself in the domestic economy. In the past quarter, the stock market
had to contend with:
o A slowing economy -- first quarter GDP slowed to 1.7% from 5.5% a year ago.
o A volatile currency -- the Philippine peso, at Php42.036 per US$ at the end
of June, depreciated by 10.0% in the second quarter and by 4.6% in the first
half of the year.
o Rising inflation -- inflation hit double digits at 10.3% year-on-year in May
and rose further to 10.7% in June.
o A deteriorating fiscal position -- the government incurred a budget deficit
of Php24 billion in the first semester of 1998 versus a Php3.9 billion
surplus a year ago.
o Generally weaker corporate results.
<PAGE>
However, there were some bright spots. Interest rates continued to inch
downwards as 91-day treasury bills dropped to a low of 13.8% in early June and
are now at just over 14%, significantly lower than the 20% levels reached in the
previous quarter. The country's trade balance also continued to improve as the
country's trade deficit narrowed to US$1.4 billion in the first four months of
the year, the lowest level since 1991. Gross international reserve levels also
rose to US$10.7 billion in May (equivalent to 2.5 months' worth of imports) from
US$8.6 billion at the end of 1997 behind a spate of borrowings by the Central
Bank and the National Government.
A POPULAR NEW LEADERSHIP HAS TAKEN CHARGE
While the presidential elections in May likewise brought about market
uncertainty, we were pleased with its peaceful conduct. Vice President Joseph
Estrada was elected President with 40% of the vote, an overwhelming mandate.
President Estrada officially took office on June 30 and has since put together a
new cabinet with familiar and respected names from the business community,
academia and non-governmental organizations. Mr. Edgardo Espiritu, a former
Director and Chairman of the Fund, has been named the new Philippine Secretary
of Finance.
The new government's task of steering the country through the crisis will
not be easy. We in the Fund agree the outlook will continue to be difficult in
the medium term as domestic and regional issues approach resolution. As such,
the Fund's stock selection has been focused towards the top Philippine blue
chips. In time, however, we are confident the value of the Philippines and its
quality corporations will re-emerge. We believe the Fund is in an excellent
position to capture that value for its shareholders.
Thank you once again for your continued faith in and support of The First
Philippine Fund.
Sincerely yours,
[SIG]
Lilia C. Clemente
President and Director
2
<PAGE>
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF INVESTMENTS
June 30, 1998
<TABLE>
<CAPTION>
Number of
Shares Value
- -----------------------------------------------------------------------------------------------------------------
PHILIPPINE SECURITIES -- (96.6%)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK (94.3%)
Banking (9.8%)
Bank of the Philippine Islands 1,273,000 $ 2,574,103
Bankard, Inc. (b) (c) 6,470,000 224,717
Far East Bank and Trust Company 200,088 166,597
Metropolitan Bank & Trust Company 593,955 3,461,770
PCI Leasing & Finance, Inc. (c) 2,320,000 56,295
Philippine Commercial International Bank, Inc. 150,000 542,392
Security Bank Corp. (c) 147,072 67,350
Union Bank of Philippines (c) 200,000 76,125
- -----------------------------------------------------------------------------------------------------------------
7,169,349
- -----------------------------------------------------------------------------------------------------------------
Conglomerates (19.8%)
Aboitiz Equity Ventures, Inc. (c) 8,300,000 252,736
Alsons Consolidated Resources, Inc. (c) 15,980,000 395,356
Ayala Corporation 32,707,865 8,364,486
Benpres Holdings Corp. (c) 24,789,700 3,715,270
First Philippine Holdings Corp. -- A (b) 4,256,998 1,316,514
Guoco Holdings (Phils), Inc. 4,360,000 73,642
Metro Pacific Corp. (c) 11,700,000 264,416
Uniwide Holdings, Inc. (c) (e) 8,687,000 179,791
- -----------------------------------------------------------------------------------------------------------------
14,562,211
- -----------------------------------------------------------------------------------------------------------------
Construction/Engineering (3.0%)
Davao Union Cement Corp. 15,266,622 559,297
DMCI Holdings, Inc. (c) 32,404,000 1,017,539
HI Cement Corp. (e) 5,430,000 335,855
Southeast Asia Cement Holdings, Inc. (c) 32,640,000 271,767
- -----------------------------------------------------------------------------------------------------------------
2,184,458
- -----------------------------------------------------------------------------------------------------------------
Electronics (1.7%)
Ionics Circuits, Inc. 150,000 47,281
Matsushita Electric Philippines Corp. (b) 6,462,528 922,427
Music Corp. (c) 1,900,000 167,238
Solid Group, Inc. (c) (e) 4,150,000 78,980
- -----------------------------------------------------------------------------------------------------------------
1,215,926
- -----------------------------------------------------------------------------------------------------------------
Food and Beverage (13.6%)
Alaska Milk Corp. (c) 10,708,000 473,805
Cosmos Bottling Corp. 2,200,000 245,980
La Tondena Distillers, Inc. 1,897,800 948,087
</TABLE>
See Accompanying Notes to Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
. Number of
COMMON STOCK (CONTINUED) Shares Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
San Miguel Corp. -- A 7,603,584 $ 7,597,072
Selecta Dairy Products, Inc. (b) 2,500,000 104,672
Universal Robina Corp. 6,162,000 623,002
- -----------------------------------------------------------------------------------------------------------------
9,992,618
- -----------------------------------------------------------------------------------------------------------------
Port Operations (2.9%)
Asian Terminals, Inc. (b) 20,474,990 681,915
International Container Terminal Services, Inc. (c) 12,577,000 1,421,181
Keppel Philippines Holdings, Inc. -- A (b) (c) 1,193,082 22,706
- -----------------------------------------------------------------------------------------------------------------
2,125,802
- -----------------------------------------------------------------------------------------------------------------
Real Estate Development (22.9%)
Ayala Land, Inc. 29,871,321 8,527,354
Belle Corporation (c) 17,900,008 451,375
C & P Homes, Inc. (c) 22,716,750 1,134,865
Empire East Land Holdings, Inc. (c) (e) 9,176,280 91,684
Filinvest Land, Inc. (c) 21,237,499 889,190
Pryce Corp. (b) (c) 35,650,000 1,085,546
Robinson's Land Corp. -- B (b) (c) 20,961,000 977,342
SM Prime Holdings, Inc. 23,050,000 3,619,041
Universal Rightfield Property Holdings, Inc. (c) 6,100,000 68,203
- -----------------------------------------------------------------------------------------------------------------
16,844,600
- -----------------------------------------------------------------------------------------------------------------
Telecommunications (12.6%)
Digital Telecommunications Phils., Inc. (c) 25,600,000 791,702
Philippine Long Distance Telephone Co. ADR (f) 371,020 8,394,328
Pilipino Telephone Corp. (c) (e) 1,217,500 95,579
- -----------------------------------------------------------------------------------------------------------------
9,281,609
- -----------------------------------------------------------------------------------------------------------------
Utilities (8.0%)
Manila Electric Co. -- A 1,940,000 3,161,338
Petron Corp. (c) 26,070,002 2,728,805
- -----------------------------------------------------------------------------------------------------------------
5,890,143
- -----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $113,669,177) 69,266,716
- -----------------------------------------------------------------------------------------------------------------
ENTITLEMENTS (0.0%)
Banking (0.0%)
Far East Bank & Trust Company (c) (g) (Cost $0) 100,044 0
- -----------------------------------------------------------------------------------------------------------------
WARRANTS (0.4%)
Real Estate (0.0%)
Belle Corporation (c) 2,993,333 4,095
Food and Beverage (0.4%)
Jollibee Foods (c) (e) 1,000,000 303,311
- -----------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $488,211) 307,406
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
Par
SCHEDULE OF INVESTMENTS (CONTINUED) Maturity (000) Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS -- (0.9%)
Bacnotan Consolidated Industries Inc. Convertible Bond 5.50%
(Cost $1,750,000) 06/21/04 $ 1,750 $ 682,500
- -----------------------------------------------------------------------------------------------------------------
CALL ACCOUNTS (1.0%)
Philippine Pesos (Cost $845,869) (d) 767,209
- -----------------------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE SECURITIES
(Cost $116,753,257) 71,023,831
- -----------------------------------------------------------------------------------------------------------------
UNITED STATES SECURITIES (3.4%)
- -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (3.4%)
American Express Credit Corp 6.02201%
(Cost $2,524,000) 07/01/98 2,524 2,524,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 2,524,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.00%)
(Cost $119,277,257) (a) $ 73,547,831
-------------
-------------
</TABLE>
(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 $ 9,000,573
Excess of tax cost over market value (54,729,999)
--------------
$ (45,729,426)
--------------
--------------
(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) Entitlements represent the right to subscribe to additional shares of the
respective company's common stock.
See Accompanying Notes to Financial Statements
5
<PAGE>
THE FIRST PHILIPPINE FUND INC.
STATEMENT OF ASSETS AND LIABILITIES June 30, 1998
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------------------
ASSETS
Investments at value (Cost $118,431,388)............................................................$ 72,780,622
Cash (including Philippine pesos of $767,209 with a cost of $845,869)............................... 768,147
Dividends receivable................................................................................ 45,991
Interest receivable................................................................................. 3,539
Receivable for investments sold..................................................................... 132,496
- -----------------------------------------------------------------------------------------------------------------
TOTAL ASSETS........................................................................................ 73,730,795
- -----------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased................................................................... 115,356
Accrued expenses payable............................................................................ 547,192
- -----------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES................................................................................... 662,548
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS
(applicable to 11,225,000 common shares outstanding)...............................................$ 73,068,247
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($73,068,247 divided by 11,225,000)................................................................$ 6.51
- -----------------------------------------------------------------------------------------------------------------
Net assets consist of:
Capital stock......................................................................................$ 112,250
Paid-in capital.................................................................................... 122,983,009
Accumulated net investment loss.................................................................... (2,359,489)
Accumulated net realized loss on investments....................................................... (1,924,667)
Accumulated net unrealized depreciation on investments, foreign currency holdings, and other assets
and liabilities denominated in foreign currency.................................................. (45,742,856)
- -----------------------------------------------------------------------------------------------------------------
NET ASSETS..........................................................................................$ 73,068,247
- -----------------------------------------------------------------------------------------------------------------
For the
Year Ended
STATEMENT OF OPERATIONS June 30, 1998
-----------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Interest (net of taxes withheld $24,803)...........................................................$ 549,210
Dividends (net of taxes withheld $241,055)......................................................... 735,221
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME............................................................................. 1,284,431
- -----------------------------------------------------------------------------------------------------------------
EXPENSES
Investment advisory fee............................................................................ 1,047,819
Custodian fees..................................................................................... 221,520
Trustee fee........................................................................................ 167,954
Administration fee................................................................................. 130,886
Transfer agent fees................................................................................ 8,462
Legal fees......................................................................................... 146,388
Directors fees..................................................................................... 68,227
Audit fees......................................................................................... 45,446
Printing........................................................................................... 37,096
Insurance.......................................................................................... 9,449
Miscellaneous...................................................................................... 118,478
- -----------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES...................................................................................... 2,001,725
- -----------------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS................................................................................. (717,294)
- -----------------------------------------------------------------------------------------------------------------
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............................................................................ 2,760,261
Foreign currency transactions.................................................................... (4,007,245)
- -----------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments...................................................................................... (111,419,301)
Foreign currency holdings and other assets and liabilities denominated in foreign currency....... (13,431)
- -----------------------------------------------------------------------------------------------------------------
Net realized and unrealized losses on investments, foreign currency holdings and other assets and
liabilities denominated in foreign currency.................................................... (112,679,716)
- -----------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS............................................... $(113,397,010)
- -----------------------------------------------------------------------------------------------------------------
</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, 1998 June 30, 1997
<S> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss....................................................... $ (717,294) $ (2,363,951)
Net realized gain (loss) on security transactions......................... 2,760,261 (4,684,928)
Net realized loss on foreign currency transactions........................ (4,007,245) (66,508)
Net change in unrealized appreciation (depreciation) on
investments, foreign currency holdings and other assets
and liabilities denominated in foreign currency......................... (111,432,732) (27,371,569)
- ---------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations......................... (113,397,010) (34,486,956)
- ---------------------------------------------------------------------------------------------------------------
Dividends and distributions to shareholders from:
Net realized long-term gains ($0.00 & $1.50 per share, respectively)......... -- (16,837,500)
- ---------------------------------------------------------------------------------------------------------------
Total decrease in net assets................................................. (113,397,010) (51,324,456)
Net assets:
Beginning of period....................................................... 186,465,257 237,789,713
- ---------------------------------------------------------------------------------------------------------------
End of period (including accumulated losses of ($2,359,489) and ($54,479),
respectively)........................................................... $ 73,068,247 $ 186,465,257
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
7
<PAGE>
THE FIRST PHILIPPINE FUND INC.
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout each year)
<TABLE>
<CAPTION>
For the Year Ended June 30,
- --------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year $ 16.61 $ 21.18 $ 20.66 $ 23.11 $ 14.84
- --------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.06) (0.21) (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 (10.04) (2.86) 1.74 1.27 9.25
- --------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from investment operations (10.10) (3.07) 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 OFFERING -- -- -- (1.42) --
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end of year $ 6.51 $ 16.61 $ 21.18 $ 20.66 $ 23.11
- --------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF YEAR $ 5.75 $ 13.75 $ 16.88 $ 16.88 $ 18.25
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Based on market value* (58.18)% (10.88)% 7.03% 7.06% 45.62%
- --------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) $ 73,068 $ 186,465 $ 237,790 $ 231,857 $ 207,498
Ratios to average net assets:
Operating expenses 1.91% 1.75% 1.77% 1.82% 1.79%
Interest expense -- -- -- 0.06% --
--------- --------- --------- --------- ---------
Total expenses 1.91% 1.75% 1.77% 1.88% 1.79%
Net investment loss (0.68)% (1.10)% (1.00)% (1.01)% (1.08)%
Portfolio turnover 23.10% 15.32% 24.20% 20.50% 39.35%
- --------------------------------------------------------------------------------------------------------------------
</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.
See Accompanying Notes to Financial Statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- JUNE 30, 1998
- ------------
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 $5,335,839 (7.3% 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 of 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, 1998, 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, 1998, the Fund utilized capital losses of
$4,217,938. In addition the Fund has a capital loss carryforward in the
amount of $466,900, which is available as a reduction of future net capital
gains realized before the year 2005.
Capital and 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, 1997
incurred and will elect to defer net foreign currency losses of $2,359,489
and net capital losses of $1,457,677 during the year ended June 30, 1998.
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.
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, 1998 (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 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.
As of June 30, 1998, 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, 1998, the Fund increased accumulated net
investment loss of $1,587,716, decreased accumulated net realized gain on
investment of $4,007,245 and decreased paid in capital of $2,419,529,
relating to such permanent book and tax differences. Net investment loss and
net assets were not affected by the change.
7. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
respect to dollar-denominated debt securities of United States issuers. The
Fund's custodian takes possession of collateral pledged for investments in
repurchase agreements. To the extent that any repurchase transaction exceeds
one business day, the value of the collateral is marked-to-market on a daily
basis to ensure the adequacy of the collateral. If the seller defaults, the
value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by
the Fund may be delayed or limited.
B. MANAGEMENT AND INVESTMENT ADVISORY SERVICES
The Fund has entered into an Investment Advisory Agreement for portfolio
management services with Clemente Capital, Inc. (the "Investment Adviser") and a
Trust Agreement with the Philippine National Bank (the "Trustee") for certain
services relating to the Philippine Trust. The Investment Advisory Agreement is
approved on an annual basis and provides for the Investment Adviser to receive a
fee computed weekly and payable monthly at the annual rate of 1% of the Fund's
average weekly net assets. For the year ended June 30, 1998, the Investment
Adviser earned $1,047,819 from the Fund, of which $97,796 was payable to the
Investment Adviser at June 30, 1998.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- JUNE 30, 1998 (CONT'D)
- ------------
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, 1998, the Philippine Advisor earned
$366,737 of which $79,729 was payable to the Philippine Advisor at June 30,
1998.
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,
1998, the Trustee earned fees of $167,954, of which $37,458 was payable to the
Trustee at June 30, 1998.
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, 1998, the Administrator earned fees of $130,886, of which $20,857
was payable to the Administrator at June 30, 1998.
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, 1998 were $11,226 which is included in accrued
expenses.
The Fund paid or accrued approximately $146,388 for the year ended June 30,
1998, 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, 1998,
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 $29,002,339 and $22,552,065, respectively, for the year ended June
30, 1998.
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, 1998, 96.6% 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 The First Philippine Fund Inc.
(the "Fund") at June 30, 1998, 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, 1998 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, PA
July 31, 1998
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, 1998) as to the U.S. Federal tax status of distributions received
by the Fund's shareholders during such fiscal year.
Because the Fund's fiscal year is not the calendar year, another
notification will be sent in respect of calendar year 1998. 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 1999. 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. IRA's 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 1998.
SUMMARY OF THE FUND'S DIVIDEND REINVESTMENT PLAN
- ------------
The following is a summary of the Fund's Dividend Reinvestment Plan (the
"Plan"). Shareholders may participate in the Plan by completing an enrollment
card available from American Stock Transfer & Trust Company (the "Plan Agent"),
and forwarding it to the address below.
The Fund intends to distribute to shareholders, at least annually, its net
investment income from dividends and interest and, to the extent necessary, its
net realized capital gains. Pursuant to the Plan, shareholders may elect to have
all cash distributions automatically reinvested by the Plan Agent in Fund shares
pursuant to the Plan.
If the directors of the Fund declare a dividend from net investment income
or a capital gains distribution payable either in the Fund's Common Stock or in
cash, participants in the Plan will receive shares of Common Stock, to be issued
by the Fund. If the market price per share on the valuation date equals or
exceeds net asset value per share on that date, the Fund will issue new shares
to participants at net asset value or, if the net asset value is less than 95%
of the market price on the valuation date, then the Fund will issue such new
shares at 95% of the market price. The valuation date will be the dividend or
distribution payment date or, if that date is not a trading day on the New York
Stock Exchange, the next preceding trading day. If the net asset value exceeds
the market price of the Fund shares at such time or if the Fund should declare a
dividend or distribution payable only in cash, participants in the Plan will be
deemed to have elected to receive shares of stock from the Fund valued at the
market price on the valuation date. The Fund may not issue shares below net
asset value. Accordingly, the Plan Agent, as agent for the participants, will
use the amount of the distribution to purchase Fund shares in the open market,
on the New York Stock Exchange or elsewhere, for the participants' accounts on,
or in any event within 30 days after, the payment date. If, before the Plan
Agent has completed its
13
<PAGE>
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 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 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 30, 1997. At the meeting, the
shareholders voted to elect three Class I directors for a three year term:
Adrian C. Cassidy, M.A.T. Caparas and Stephen J. Solarz. The shareholders also
voted to ratify the selection of Price Waterhouse LLP as the Fund's independent
accountants for the year ending June 30, 1998. The results of the voting were as
follows:
<TABLE>
<CAPTION>
ABSTENTIONS
AND BROKER
FOR AGAINST WITHHELD NON-VOTES
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Adrian C. Cassidy................................................ 6,871,569 192,863
M.A.T. Caparas................................................... 6,872,670 191,762
Stephen J. Solarz................................................ 6,874,631 189,801
Selection of Price Waterhouse LLP................................ 6,788,384 62,266 213,781
</TABLE>
14
<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]
Annual Report
June 30, 1998
<PAGE>
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
M.A.T. Caparas
Director
Adrian C. Cassidy
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
PricewaterhouseCoopers LLP
