February 18, 1998
Dear Shareholder,
The year 1997 witnessed dramatic and historical transformations in Asia
with its economic crisis. Some leaders like Singapore's Prime Minister Goh Chok
Tong call it Asia's worst crisis since the Second World War. Instability spread
from currency to currency and no one escaped the damages inflicted by the
financial crisis that gripped Asia's markets. Not a single Asian market produced
positive dollar returns in the fourth quarter and only the markets of South Asia
produced positive results in 1997, namely, India (+8.46%) and Sri Lanka
(+7.72%). The Southeast Asian markets, whose woes began in the third quarter,
declined by more than 60% in U.S. dollar terms over the year, with the exception
of Singapore, which was down 42.6%. These include Thailand (-75.5%), Indonesia
(-72.4%), South Korea (- 69.7%), and Malaysia (- 68.7%). The Philippine equity
market was among the region's hardest hit. The year started well. However, by
the end of December 1997, the market was down by 22.3% in U.S. dollar terms in
the fourth quarter and by 61.4% for the year, ranking it as the fifth worst
performer in the region for the year.
The Fund's net asset value (NAV) per share stood at $7.44 on December 31,
1997 -- declining by 20.6% in the last quarter of 1997, by 60.5% in 1997, and by
55.2% in the first half of the Fund's current June 30 fiscal year. These figures
already incorporate the significant effect of the devaluation of the Philippine
peso which, at Php40.116 per US$1 at the end of 1997, lost 14.5% of its value in
the fourth quarter and 34.5% in 1997. While the past year was down in terms of
absolute performance, we are pleased that the Fund continues to produce
relatively good performance versus its benchmark, the Philippine composite index
(Phisix). FPF has outperformed the Phisix (in U.S. dollar terms) by 1.7% over
the last quarter and by 0.8% for 1997.
Over its lifetime, the Fund continues to significantly lead the Phisix. The
Phisix has declined by 24.0% in U.S. dollar terms from the Fund's inception in
October 1989 to the end of 1997, while the Fund has still managed a gain of 4.5%
(adjusted for all dividends and the effect of the rights offering in 1995) -- an
outperformance of 28.5%.
The Fund's share price closed at $6.8125 on December 31, 1997 -- a 31.5%
decrease in the fourth quarter of 1997, a 55.0% decline in 1997, and a 50.5%
drop in the first half of the Fund's current fiscal year. The share price's
discount to NAV stood at 8.4% at the end of the quarter.
WHAT MAKES THE PHILIPPINES DIFFERENT FROM ITS NEIGHBORS
o THE PHILIPPINES IS FUNDAMENTALLY HEALTHIER THAN ITS NEIGHBORS. While
Thailand, Malaysia and Indonesia are in a mature phase of their development,
the Philippine economy is still in a growth phase. World economic growth has
been forecast at 3.5% by the International Monetary Fund (IMF) for 1998.
Philippine growth at 3.8% in 1998 is forecast to be the best among fellow
currency-ravaged ASEAN economies (Indonesia, 2%, Malaysia, 2.5%, Thailand,
0%).
The country's GDP growth rate of 5.1% in 1997 surpassed dire predictions of
below 4% forecasts. Despite a difficult year, the growth is in line with the
past three years (5.7% in 1996, 4.8% in 1995, and 4.4% in 1994).
Inflation remains in the single digits and was better than expected at 6.1%
in 1997.
o THE PHILIPPINES' TRADE POSITION IS THE BEST IN THE REGION BY FAR. While the
Thai economy faced weak export growth and a high current account deficit,
Philippine export growth averaged 23% in 1997.
<PAGE>
o PHILIPPINE CORPORATIONS ARE NOT AS HIGHLY LEVERAGED. To date, only one small
Philippine bank has closed while a spate of closures of banks and financial
institutions have occurred in the region. Among property developers, the debt
to equity ratio stands at just 0.4% in the Philippines, compared with 1.6% in
Thailand. Philippine banks are limited to 20% of total loans in their lending
to the real estate sector to avoid the excessive lending to property that
occurred in Thailand.
o THE PHILIPPINES ENJOYS SOUND FISCAL AND MONETARY DISCIPLINE. The country has
enjoyed a fiscal surplus for three years now. A fiscal surplus of Php1.5
billion exceeded the expectations of a large deficit in 1997. Unlike
Thailand, Indonesia, and South Korea, who have sought bail out loan
assistance from the IMF, the Philippines is poised to exit from over three
decades of IMF programs.
These differences arise largely from the fact that the Philippines had
learned its lesson earlier -- from its own debt crisis in the early-1980's. That
experience prompted the country to undertake comprehensive reforms over the past
years to fashion an economy based on market disciplines, reforms that have only
been initiated in other Asian nations. The Philippines, a latecomer to the so-
called Asian miracle, now has the best chance of an early recovery.
THE PHILIPPINES IS POISED TO RECOVER IN 1998
Despite the sound fundamentals already in place, 1998 will nevertheless
prove to be a challenging year for the economy. Both the Philippine government
and its corporations recognize policy initiatives and efficient execution will
be closely monitored and will be crucial to restoring investor confidence. The
government has made plans to further strengthen the Philippine financial system
- -- its capital markets and financial institutions. A tight but prudent monetary
policy will remain to sustain low inflation. Fiscal austerity will be necessary
to offset reduced government revenues this year and to avoid a deficit.
Corporations are likewise tightening belt straps by reducing costs and capital
expenditures.
The new year will also usher in a change of political leadership. Elections
for a new President, a new legislature, and a new set of local government
officials will take place this May. We are confident that the country will once
again demonstrate its capacity for peaceful transition, a capacity rooted in a
valued tradition of democracy. We believe basic policies governing the economy
will continue regardless of which new leaders will be elected. There is policy
consensus among the major parties and candidates of a commitment to free market
economy and a strengthening of the Philippines' global competitiveness.
The First Philippine Fund welcomes the challenges of the new year. There
should be little doubt that Philippine valuations will rebound from the slowdown
and we aim to enhance the Fund's value through judicious investment in only the
best and the strongest Philippine companies.
On behalf of The First Philippine Fund, thank you once again for your
steadfast support.
Sincerely yours,
/s/ Lilia C. Clemente
---------------------------
Lilia C. Clemente
President and Director
2
<PAGE>
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF INVESTMENTS
December 31, 1997
(unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
<S> <C> <C>
- ------------------------------------------------------------------------------------------
PHILIPPINE SECURITIES -- (97.7%)
- ------------------------------------------------------------------------------------------
COMMON STOCK (84.3%)
Banking (9.7%)
Bankard, Inc. (c) 6,470,000 $ 245,148
Bank of the Philippine Islands 1,273,000 2,824,235
Far East Bank and Trust Company 200,088 244,399
Metro Bank & Trust Company 593,955 4,034,618
Philippine Savings Bank (c) 1,901,318 851,688
Security Bank Corp. (c) 147,072 62,325
Union Bank of Philippines (c) 200,000 87,247
- ------------------------------------------------------------------------------------------
8,149,660
- ------------------------------------------------------------------------------------------
Conglomerates (17.9%)
Alsons Consolidated Resources (c) 15,980,000 454,113
Ayala Corp 27,256,554 10,701,235
Benpres Holdings GDR (c) (g) 899,486 2,541,048
First Philippine Holdings -- A 2,570,399 1,121,298
Guoco Holdings (Phils), Inc. 4,360,000 83,687
Uniwide Holdings, Inc. (c) (e) 8,687,000 129,928
- ------------------------------------------------------------------------------------------
15,031,309
- ------------------------------------------------------------------------------------------
Construction/Engineering (2.3%)
Davao Union Cement (b) 15,266,622 479,508
DMCI Holdings Inc. (c) 19,104,000 571,463
HI Cement Corp. (e) 5,430,000 412,840
Seacem Holdings (c) 32,640,000 431,229
- ------------------------------------------------------------------------------------------
1,895,040
- ------------------------------------------------------------------------------------------
Electronics (1.8%)
Ionics Circuits, Inc. 150,000 61,696
Matsushita Electric Philippines (b) 5,875,026 1,318,058
Solid Group, Inc. (e) 4,150,000 165,520
- ------------------------------------------------------------------------------------------
1,545,274
- ------------------------------------------------------------------------------------------
Food and Beverage (12.2%)
Alaska Milk Corp. (c) 10,708,000 416,404
La Tondena Distillers, Inc. 1,897,800 875,194
San Miguel Corp. -- A 8,603,584 8,364,238
Selecta Dairy Products, Inc. (b) 2,500,000 99,711
Universal Robina 3,702,000 456,798
- ------------------------------------------------------------------------------------------
10,212,345
- ------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
Number of
COMMON STOCK (Continued) Shares Value
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Oil (0.00%)
Philodrill Corp. -- B (b) (c) 39,436,363 $ 3,637
- ------------------------------------------------------------------------------------------
3,637
- ------------------------------------------------------------------------------------------
Port Operations (3.1%)
Asian Terminals, Inc. (b) 20,474,990 1,275,987
International Container Terminal Services, Inc. (c) 10,392,000 1,295,244
Keppel Philippines Holdings -- A (b) (c) 1,193,082 33,905
- ------------------------------------------------------------------------------------------
2,605,136
- ------------------------------------------------------------------------------------------
Real Estate Development (18.9%)
Ayala Land, Inc. 20,992,768 8,372,826
Belle Corporation (c) 17,900,008 696,082
C & P Homes, Inc. 15,616,750 918,724
Empire East Land Holdings (c) (e) 9,176,280 134,959
Filinvest Land, Inc. (c) 13,537,499 539,934
Pryce Properties Corp. (c) 35,650,000 977,540
Robinson's Land -- B (c) 19,000,000 653,605
SM Prime Holdings, Inc. 23,050,000 3,447,502
Universal Rightfield Property (c) 6,100,000 100,359
- ------------------------------------------------------------------------------------------
15,841,531
- ------------------------------------------------------------------------------------------
Telecommunications (11.0%)
Digital Telecommunications (c) 17,000,000 618,706
Globe Telecom (c) 925,417 91,121
Philippine Long Distance Telephone ADR (f) 371,020 8,347,950
Pilipino Telephone Company (c) (e) 1,217,500 136,573
- ------------------------------------------------------------------------------------------
9,194,350
- ------------------------------------------------------------------------------------------
Utilities (7.4%)
Manila Electric Co. -- A 2,231,410 4,588,975
Petron Corp. 18,870,002 1,575,793
- ------------------------------------------------------------------------------------------
6,164,768
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $106,940,237) 70,643,050
- ------------------------------------------------------------------------------------------
ENTITLEMENTS (0.0%)
Banking
Far East Bank & Trust Company (c) (h) (Cost $0) 100,044 0
- ------------------------------------------------------------------------------------------
WARRANTS (0.0%)
Real Estate
Belle Corporation (c) (Cost $0) 2,993,333 4,664
- ------------------------------------------------------------------------------------------
</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 Ind. Convertible Bond
5.50%
(Cost $1,750,000) 06/21/04 $ 1,750 $ 752,500
- --------------------------------------------------------------------------------------------------
<CAPTION>
Par
(000)*
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
PHILIPPINE TREASURY BILLS (5.2%)
Philippine Treasury Bill 16.625% 03/11/98 31,941 886,416
Philippine Treasury Bill 16% 01/21/98 120,000 3,478,425
- --------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE TREASURY BILLS
(Cost $4,364,841) 4,364,841
- --------------------------------------------------------------------------------------------------
CALL ACCOUNTS (7.3%)
Philippine Peso (d)
(Cost $7,271,254) 6,128,318
- --------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE SECURITIES
(Cost $1,921,000) 81,893,373
- --------------------------------------------------------------------------------------------------
<CAPTION>
Par
(000)
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
UNITED STATES SECURITIES -- 2.3%
- --------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 2.3%
American Express Credit Corp
6.65245%
(Cost $1,921,000) 01/02/98 $ 1,921 1,921,000
- --------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 1,921,000
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost $122,247,334) (a) $ 83,814,373
------------
</TABLE>
* Denominated in Philippine Pesos.
(a) Aggregate cost is the same for Federal income tax purposes.
The aggregate gross unrealized appreciation (depreciation)
for all securities is as follows:
<TABLE>
<S> <C>
Excess of market value over tax cost $ 13,728,912
Excess of tax cost over market value (52,161,873)
------------
$(38,432,961)
============
</TABLE>
(b) At fair value as determined by the Board of Directors.
(c) Non-income producing security.
(d) Daily interest is being accrued at a rate of 4% of the
outstanding balance.
(e) Pursuant to Rule 144A under the Securities Act of 1933, all
or a portion of these securities can only be sold to
qualified institutional investors.
(f) ADR -- American Depository Receipt.
(g) GDR -- Global Depository Receipt.
(h) 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 LIABIILITIES (UNAUDITED) December 31, 1997
- --------------------------------------------------------------------------
ASSETS
Investments at value (Cost $114,976,080).................... $ 77,686,055
Cash (including Philippine pesos of $6,128,318 with a cost
of $7,271,254)............................................. 6,179,213
Dividends receivable........................................ 169,112
Interest receivable......................................... 118,945
Receivable for investments sold............................. 138,838
Prepaid insurance........................................... 4,410
- --------------------------------------------------------------------------
TOTAL ASSETS................................................ 84,295,573
- --------------------------------------------------------------------------
LIABILITIES
Payable for investments purchased........................... 230,559
Accrued expenses payable.................................... 592,602
- --------------------------------------------------------------------------
TOTAL LIABILITIES 823,161
- --------------------------------------------------------------------------
NET ASSETS
(applicable to 11,225,000 common shares outstanding)....... $ 83,473,412
- --------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($83,473,412 divided by 11,225,000)........................ $ 7.44
- --------------------------------------------------------------------------
Net assets consist of:
Capital stock.............................................. $ 112,250
Paid-in capital............................................ 125,402,538
Accumulated net investment loss............................ (2,975,274)
Accumulated net realized loss on investments............... (654,151)
Accumulated net unrealized appreciation on investments,
foreign currency holdings, and other assets and
liabilities denominated in foreign currency.............. (38,411,951)
- --------------------------------------------------------------------------
NET ASSETS.................................................. $ 83,473,412
- --------------------------------------------------------------------------
For the Six
Months Ended
STATEMENT OF OPERATIONS (UNAUDITED) December 31, 1997
- --------------------------------------------------------------------------
INVESTMENT INCOME
Interest (net of taxes withheld $19,006)................... $ 325,147
Dividends (net of taxes withheld $327,685)................. 460,290
- --------------------------------------------------------------------------
TOTAL INVESTMENT INCOME..................................... 785,437
- --------------------------------------------------------------------------
EXPENSES
Investment advisory fee.................................... 606,198
Custodian fees............................................. 142,254
Trustee fee................................................ 93,257
Administration fee......................................... 68,998
Transfer agent fees........................................ 6,107
Legal fees................................................. 77,159
Printing................................................... 19,700
Directors fees............................................. 35,080
Audit fees................................................. 39,165
Insurance.................................................. 5,039
Miscellaneous.............................................. 90,685
- --------------------------------------------------------------------------
TOTAL EXPENSES.............................................. 1,183,642
- --------------------------------------------------------------------------
NET INVESTMENT LOSS......................................... (398,205)
- --------------------------------------------------------------------------
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.................................... 4,030,777
Foreign currency transactions............................ (2,522,590)
- --------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments.............................................. (104,080,817)
Foreign currency holdings and other assets and
liabilities denominated in foreign currency............ (21,010)
- --------------------------------------------------------------------------
Net realized and unrealized losses on investments, foreign
currency holdings and other assets and liabilities
denominated in foreign currency.......................... (102,593,640)
- --------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(102,991,845)
- --------------------------------------------------------------------------
See Accompanying Notes to Financial Statements
6
<PAGE>
<TABLE>
<CAPTION>
For the Six
Months Ended For the
December 31, 1997 Year Ended
STATEMENTS OF CHANGES IN NET ASSETS (Unaudited) June 30, 1997
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss.................................... $ (398,205) $ (2,363,951)
Net realized gain (loss) on security transactions...... 4,030,777 (4,684,928)
Net realized loss on foreign currency transactions..... (2,522,590) (66,508)
Net change in unrealized appreciation (depreciation) on
investments, foreign currency holdings and other
assets and liabilities denominated in
foreign currency...... .............................. (104,101,827) (27,371,569)
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................. (102,991,845) (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 increase (decrease) in net assets................... (102,991,845) (51,324,456)
Net assets:
Beginning of period.................................... 186,465,257 237,789,713
- --------------------------------------------------------------------------------------------------
End of period (including accumulated loss of
($2,975,274) and ($54,479), respectively)............ $ 83,473,412 $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 period)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
For the Six
Months
Ended
December 31, For the Year Ended June 30,
1997 ----------------------------------------------------
(Unaudited) 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 16.61 $ 21.18 $ 20.66 $ 23.11 $ 14.84 $ 14.58
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.04) (0.21) (0.20) (0.20) (0.22) (0.07)
Net realized and unrealized gains (losses) on
investments, foreign currency holdings and other
assets and liabilities denominated in foreign
currencies (9.13) (2.86) 1.74 1.27 9.25 0.90
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from investment operations (9.17) (3.07) 1.54 1.07 9.03 0.83
- --------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income -- -- -- -- -- --
Distributions from net realized long-term gains -- (1.50) (1.02) (0.85) (0.18) (0.32)
Distributions from net realized short-term gains -- -- -- (1.25) (0.58) (0.25)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS -- (1.50) (1.02) (2.10) (0.76) (0.57)
- --------------------------------------------------------------------------------------------------------------------------
DILUTIVE EFFECT OF CAPITAL SHARE OFFERING -- -- -- (1.42) -- --
- --------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.44 $ 16.61 $ 21.18 $ 20.66 $ 23.11 $ 14.84
- --------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD $ 6.81 $ 13.75 $ 16.88 $ 16.88 $ 18.25 $ 13.00
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Based on market value* (50.46)%*** (10.88)% 7.03 % 7.06 % 45.62 % 19.19 %
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $ 83,473 $186,465 $237,790 $231,857 $207,498 $133,306
Ratios to average net assets:
Operating expenses 1.96 % 1.75 % 1.77 % 1.82 % 1.79 % 1.72 %
Interest expense -- -- -- 0.06 % -- --
-------- -------- -------- -------- -------- --------
Total expenses 1.96 %** 1.75 % 1.77 % 1.88 % 1.79 % 1.72 %
Net investment loss (0.66)%** (1.10)% (1.00)% (1.01)% (1.08)% (0.45)%
Portfolio turnover 28.42 % 15.32 % 24.20 % 20.50 % 39.35 % 37.30 %
Average Commission Rate (a) $ 0.0011 $ 0.0001 $ 0.0022 N/A N/A N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Total investment return is calculated assuming a purchase of common stock at
the current market price on the first day and a sale at the current market
price on the last day of each period reported. Dividends and distributions,
if any, are assumed, for purposes of this calculation, to be reinvested at
prices obtained under the Fund's dividend reinvestment plan. The rights
offering in the year ended June 30, 1995, was fully subscribed under the
terms of the rights offering. Total investment return does not reflect sales
charges and brokerage commissions.
** 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.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1997
(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 $3,210,806 (3.8% 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, 1997, no U.S. Federal
income or excise tax provision was required. Dividends and interest income
are subject to withholding tax at various rates not exceeding 25% and such
tax is recorded on the accrual basis at the time when the related income is
recorded.
During the year ended June 30, 1997, the Fund realized capital losses of
$4,684,928 which are available as a reduction of future net capital gains
realized before the year 2005.
4. FOREIGN CURRENCY: The books and records of the Fund are maintained in U.S.
dollars. Foreign currency amounts are translated into U.S. dollars on the
following basis:
(I) market value of investment securities, and other assets and liabilities
at the Philippine peso exchange rate at the end of the period; and
(II) purchases and sales of investment securities, income and expenses at the
Philippine peso rate of exchange prevailing on the respective dates of
such transactions. Exchange gains or losses are realized upon ultimate
receipt or disbursement.
The Fund does not generally isolate the effect of fluctuations in foreign
exchange rates from the effect of fluctuations in the market prices of
securities held whether realized or unrealized. However, the Fund does
isolate the effect of fluctuations in foreign currency rates when determining
the gain or loss upon the sale or maturity of foreign currency denominated
debt obligations pursuant to U.S. Federal income tax regulations; such
amounts are categorized as foreign exchange gain or loss for both financial
reporting and income tax reporting purposes.
Realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from the disposition of foreign currencies,
currency gains or losses realized between the trade and settlement dates on
securities transactions, and between amounts of interest, dividends and
foreign withholding taxes recorded on the Fund's books and the U.S. dollar
equivalent amounts actually received or paid.
9
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1997 (CONT'D)
(UNAUDITED)
- ------------
The change in unrealized appreciation or depreciation of foreign currency
holdings and other assets and liabilities denominated in foreign currencies
represents the change in the value of the foreign currencies and other assets
and liabilities arising as a result of changes in foreign exchange rates.
Foreign security and currency transactions may involve certain conditions and
risks not typically associated with those of domestic origin as a result of,
among other factors, the level of government supervision and regulation of
foreign securities markets and the possibilities of political or economic
instability.
5. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward currency contracts in several circumstances. When the Fund enters
into a contract for the purchase or sale of securities denominated in a
foreign currency, or when the Fund anticipates the receipt in a foreign
currency of interest or dividend payments, the Fund may desire to "lock-in"
the U.S. dollar price of the security or the U.S. dollar equivalent of such
interest or dividend payment, as the case may be. Risks may arise upon
entering these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar.
6. DISTRIBUTION OF INCOME AND GAINS: The Fund intends to distribute to
shareholders, at least annually, substantially all of its net investment
income and expects to distribute annually any net long-term capital gains in
excess of net capital losses. An additional distribution may be made to the
extent necessary to avoid the payment of a 4% Federal excise tax.
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the capital accounts based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net
realized capital gains for financial reporting purposes but not for tax
purposes are reported as dividends in excess of net investment income or
distribution in excess of net realized capital gains. To the extent they
exceed net investment income and net realized capital gains for tax
purposes, they are reported as distributions of paid-in capital.
Foreign currency losses incurred after October 31 ("post-October losses")
within the taxable year are deemed to arise on the first business day of the
Fund's next taxable year. The Fund after October 31, 1996 incurred and will
elect to defer net capital foreign currency losses of $54,479 during the
year ended June 30, 1997. As of June 30, 1997, the Fund had temporary
book/tax differences primarily attributable to post-October losses and
permanent book/tax differences primarily attributable to foreign currency
losses and net operating loss. During the year ended June 30, 1997, the Fund
credited accumulated net investment loss of $2,350,811, credited accumulated
net realized gain on investment of $145,477 and debited paid in capital of
$2,496,288, relating to such permanent book and tax differences. Net
investment loss and net assets were not affected by the change.
7. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements with
respect to dollar-denominated debt securities of United States issuers. The
Fund's custodian takes possession of collateral pledged for investments in
repurchase agreements. To the extent that any repurchase transaction exceeds
one business day, the value of the collateral is marked-to-market on a daily
basis to ensure the adequacy of the collateral. If the seller defaults, the
value of the collateral declines or if bankruptcy proceedings are commenced
with respect to the seller of the security, realization of the collateral by
the Fund may be delayed or limited.
B. MANAGEMENT AND INVESTMENT ADVISORY SERVICES
The Fund has entered into an Investment Advisory Agreement for portfolio
management services with Clemente Capital, Inc. (the "Investment Adviser") and a
Trust Agreement with the Philippine National Bank (the "Trustee") for certain
services relating to the Philippine Trust. The Investment Advisory Agreement is
approved on an annual basis and provides for the Investment Adviser to receive a
fee computed weekly and
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1997 (CONT'D)
(UNAUDITED)
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payable monthly at the annual rate of 1% of the Fund's average weekly net
assets. For the six months ended December 31, 1997, the Investment Adviser
earned $606,198 from the Fund, of which $80,044 was payable to the Investment
Adviser at December 31, 1997.
PNB Investments Limited (the "Philippine Adviser"), a wholly-owned
subsidiary of the Trustee, provides the Investment Adviser with investment
advice, research and assistance pursuant to a Research Agreement with the
Investment Adviser. For its services, the Philippine Adviser receives from the
Investment Adviser a fee at an annual rate of .35% of the Fund's average weekly
net assets. For the six months ended December 31, 1997, the Investment Adviser
paid $212,169 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, 1997, the Trustee earned fees of $93,257, of which $13,561 was
payable to the Trustee at December 31, 1997.
PFPC Inc. (the "Administrator") provides administrative and accounting
assistance to the Fund. Under the Administration Agreement, the Administrator
receives a fee payable monthly at an annual rate of .10% of the Fund's average
weekly net assets, subject to a minimum annual fee of $124,800. For the six
months ended December 31, 1997, the Administrator earned fees of $68,998, of
which $11,283 was payable to the Administrator at December 31, 1997.
The Fund pays each of its Directors who is not a director, officer or
employee of the Investment Adviser, the Philippine Adviser or the Trustee an
annual fee of $8,000 plus $750 for each meeting of the Board or of a committee
of the Board attended in person plus certain out-of-pocket expenses. Director
fees payable at December 31, 1997 were $6,434 which is included in accrued
expenses.
The Fund paid or accrued approximately $77,159 for the six months ended
December 31, 1997, for legal services to a law firm of which the Fund's
secretary is a partner.
C. CAPITAL STOCK
The authorized capital stock of the Fund is 25,000,000 shares of common
stock $.01 par value. Of the 11,225,000 shares outstanding at December 31, 1997,
Clemente Capital, Inc. and PNB Investments Limited each owned 5,000 shares.
D. PORTFOLIO ACTIVITY
Purchases and sales of securities, other than short-term obligations,
aggregated $15,228,344 and $20,155,651, respectively, for the six months ended
December 31, 1997.
E. OTHER
The Fund has obtained the approval of the Central Bank for the registration
and conversion into pesos of all proceeds of the initial offering to be invested
in the Philippine securities markets, which by its terms ensures repatriation of
such investment and the remittance of profits and dividends accruing thereon.
Notwithstanding the foregoing, the right of the Fund to repatriate its
investments in Philippine securities and to receive profits, capital gains and
dividends in foreign exchange is subject to the power of the Central Bank, with
the approval of the President of the Philippines, to restrict the availability
of foreign exchange in the imminence of or during an exchange crisis or in times
of national emergency.
There are nationality restrictions on the ownership of certain equity
securities of Philippine companies. Based on confirmations which the Fund
received from Philippine governmental authorities, the Fund believes that it is
permitted to make certain investments through the Philippine Trust that are
otherwise available only to Philippine nationals.
At December 31, 1997, 97.7% of the Fund was invested in Philippine
securities. Future economic and political developments in that country could
adversely affect the liquidity and/or value of the Philippine securities in
which the Fund is invested.
11
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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.
- ----------------
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.
[FIRST PHILIPPINE FUND INC. LOGO OMITTED]
Semi-Annual Report
December 31, 1997
<PAGE>
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
M.A.T. Caparas
Director
Adrian C. Cassidy
Director
Edgardo B. Espiritu
Director
Joseph A. O'Hare, S.J.
Director
Robert B. Oxnam
Director
Stephen J. Solarz
Director
Valentin A. Araneta
Executive Vice President and Managing Director
Thomas J. Prapas
Treasurer
William H. Bohnett
Secretary
Joaquin G. Hofilena
Vice President
Imelda Singzon
Vice President
Angelito C. Imperio
Assistant Secretary
Maria Distefano
Assistant Secretary
Executive Offices
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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, call 1-800-937-5449.)
- ----------------
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
- ----------------
Custodian
Brown Brothers Harriman & Co.
- ----------------
Legal Counsel
Fulbright & Jaworski L.L.P.
- ----------------
Independent Accountants
Price Waterhouse LLP
