[THE FIRST PHILIPPINE FUND, INC. LOGO]
Semi-Annual Report
December 31, 1998
<PAGE>
February 15, 1999
Dear Shareholder:
We are pleased to report that The First Philippine Fund Inc. (Fund) grew by
a record 69.28% in the fourth quarter of 1998. This represents the Fund's best
quarterly performance since its inception in 1989. The Fund's net asset value
(NAV) reached US$82.2 million at the end of December 1998, for an NAV per share
of US$7.33. This stands as a substantial improvement over total net assets of
US$48.6 million and an NAV per share of US$4.33 at the end of September 1998.
Indeed, the fourth quarter delivered a sharp and welcome recovery for the Fund
after it had plunged to record lows in mid-September.
For the full year 1998, the Fund's NAV declined by a slight 1.48%, again in
sharp contrast to 1997's 60.53% contraction. The Fund's share price closed at
US$5.875 at the end of 1998, likewise appreciating significantly by 49.21% in
the fourth quarter but declining by 13.76% in 1998. The Fund's shares traded at
a 19.85% discount to NAV on December 31, 1998.
The Fund's performance comes on the back of a phenomenal fourth quarter
bounce in the Philippine stock market. The Philippine composite index (Phisix)
appreciated by 75.79% in US$ terms in that period, allowing the market to show a
slight positive gain of 7.94% in US$ terms for 1998. The Fund's performance was
likewise aided by a 12.5% appreciation of the Philippine peso against the US
dollar in the fourth quarter of 1998.
After adjusting for distributions to shareholders and the effect of the
rights offering in 1995, the Fund continues to outperform the Phisix by 20.88%
over its lifetime.
LOOKING BACK AT 1998
The Philippine stock market was quite a roller coaster ride in 1998, with
spectacular rallies flanking two successive quarters of sharp drops. The
market's direction was buffeted as much by external events as local
developments. A strong rally in the first quarter gave way to renewed pessimism
in the second quarter as the extent of Japan's and the rest of Asia's problems
became apparent. The Phisix nose-dived in the middle of the year and bottomed in
September behind fears of a worldwide recession and the uncertainties caused by
a change in political leadership. In the fourth quarter, however, successive
rate cuts by the US Federal Reserve, as well as the expectation that the worst
was behind crisis-hit Asian economies, fanned a liquidity push toward Asian
markets. Domestically, management changes and merger and acquisition activity in
the Philippine corporate scene, the peso's appreciation and declining treasury
bill rates pushed the stock market toward a spectacular recovery.
Despite its relative fundamental strengths, the Philippine economy was not
immune to the global financial turmoil. The country's gross domestic product
contracted by 0.5% in 1998, in large part due to poor agricultural output
(declining by 6.6% in a year which brought El Nino and other severe weather
disturbances.) Corporate earnings weakened considerably, especially in the
property and construction sectors. Foreign direct investment, manufacturing
output and bank lending all slowed. Nonetheless, domestic demand remained
resilient with consumption still managing to grow by 3.5%, ironically aided by
the peso depreciation which boosted the purchasing power of overseas
remittances. And toward the end of the year, real interest rates trended
downwards, the peso stabilized, and capacity utilization improved.
While a recession was not avoided in the Philippines in 1998, it was,
however, a most benign one when compared to the massive declines in the
economies of its neighbors. Furthermore, we believe the building blocks are in
place and the signals are strong for the Philippines to emerge first out of the
crisis.
<PAGE>
LOOKING FORWARD TO 1999
A modest recovery in economic growth is expected in 1999 in the range of
2-3%. Growth will be driven by the recovery in agricultural output and the
fiscal stimulus program of the Estrada administration which will support rural
infrastructure activities and social spending. The economy will be further
underpinned by the consumption sector where strong demand will remain for basic
and low-priced goods. Inflation is expected to trend down from the 1998 average
of 9.7% as peso volatility ebbs and food prices stabilize with improved
agricultural output. The government will ease monetary policy when able in order
to further lower interest rates. Imports will recover as the economy improves.
However, exports are expected to slow slightly but will remain at healthy growth
levels of over 10%.
From this vantage point at the beginning of 1999, the prospects for this
economic recovery bolster our optimistic outlook for the Philippine stock
market. Corporate earnings should show marked improvement this year and next.
The on-going corporate restructuring that began as a result of the crisis will
result in stronger companies. Consolidation in various key industries, such as
telecommunications, and improvements in the regulatory environment are
compelling investment themes. Should the external environment remain stable,
with contagion contained and a global recession avoided, and confidence in the
domestic economy and government does not falter, the Philippines should have no
difficulty distinguishing itself as a favored investment destination this year.
The year 1999 marks the tenth year of the Fund's existence. Surely, it has
been a most rich and volatile decade in Philippine economic and political
history. We look forward to continuing our mandate of providing a quality
Philippine investment vehicle for shareholders and for harnessing the value that
we find in the country and its people.
Thank you once again for your continued support.
Sincerely yours,
/s/ Lilia C. Clemente
-----------------------------
Lilia C. Clemente
President, Director and Chief
Executive Officer
2
<PAGE>
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF INVESTMENTS
December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
Number of
Shares Value
<S> <C> <C>
- ------------------------------------------------------------------------------------------
PHILIPPINE SECURITIES -- (98.0%)
- ------------------------------------------------------------------------------------------
COMMON STOCK (93.0%)
Banking (11.1%)
Bank of the Philippine Islands 1,854,900 $ 3,909,292
Bankard, Inc. (c) 6,470,000 228,091
Equitable Bank 1,100,000 1,643,888
Far East Bank and Trust Company 300,156 302,878
Metropolitan Bank & Trust Company (c) 427,746 3,059,622
Security Bank Corp. (c) 20,222 7,103
- ------------------------------------------------------------------------------------------
9,150,874
- ------------------------------------------------------------------------------------------
Conglomerates (21.5%)
Aboitiz Equity Ventures, Inc. (c) 8,300,000 296,845
Alsons Consolidated Resources (b) (c) 15,980,000 322,498
Ayala Corporation 32,707,864 11,488,904
Benpres Holdings Corp (c) 17,089,700 2,750,418
First Philippine Holdings Corp. -- A (b) 4,256,998 1,848,741
Guoco Holdings (Phils), Inc. 4,360,000 102,470
Metro Pacific Corp. (c) 20,550,000 745,459
Uniwide Holdings, Inc. (c) (e) 8,687,000 117,617
- ------------------------------------------------------------------------------------------
17,672,952
- ------------------------------------------------------------------------------------------
Construction/Engineering (2.3%)
Davao Union Cement Corp. (c) 10,066,622 303,452
DMCI Holdings Inc. (c) 25,604,000 1,072,693
HI Cement Corp. (e) 5,430,000 246,913
Southeast Asia Cement Holdings, Inc. (c) 23,320,000 285,952
- ------------------------------------------------------------------------------------------
1,909,010
- ------------------------------------------------------------------------------------------
Electronics (1.8%)
Ionics Circuits, Inc. 150,000 36,403
Matsushita Electric Philippines Corp. (b) 6,462,528 1,248,096
Music Corp. (c) 1,900,000 155,320
Solid Group, Inc. (c) (e) 4,150,000 57,249
- ------------------------------------------------------------------------------------------
1,497,068
- ------------------------------------------------------------------------------------------
Food and Beverage (11.2%)
Alaska Milk Corp. (c) 5,708,000 332,462
Cosmos Bottling Corp. 6,650,000 620,067
La Tondena Distillers, Inc. (c) 1,897,800 1,502,920
RFM Corp. 1,250,000 191,595
San Miguel Corp. -- A 4,203,584 5,906,172
Universal Robina Corp. 6,162,000 684,754
- ------------------------------------------------------------------------------------------
9,237,970
- ------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
3
<PAGE>
<TABLE>
<CAPTION>
Number of
COMMON STOCK (Continued) Shares Value
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Port Operations (2.6%)
Asian Terminals, Inc. (b) (c) 20,474,990 $ 575,360
International Container Terminal Services, Inc. (c) 18,865,500 1,566,302
Keppel Philippines Holdings, Inc. -- A (b) (c) 1,152,390 21,196
- ------------------------------------------------------------------------------------------
2,162,858
- ------------------------------------------------------------------------------------------
Real Estate Development (21.4%)
Ayala Land, Inc. 29,871,321 8,394,036
Belle Corporation (c) 23,900,008 1,306,578
C & P Homes, Inc. (c) 35,916,750 614,746
Filinvest Land, Inc. (c) 16,487,499 926,619
Pryce Corp. (c) 35,520,000 907,396
Robinson's Land Corp. -- B (c) 10,480,500 567,599
SM Prime Holdings, Inc. 25,950,000 4,905,607
Universal Rightfield Property Holdings, Inc. (c) 6,100,000 51,424
- ------------------------------------------------------------------------------------------
17,674,005
- ------------------------------------------------------------------------------------------
Telecommunications (12.9%)
Digital Telecommunications Phils., Inc. (c) 37,800,000 917,359
Philippine Long Distance Telephone Co. ADR (f) 371,020 9,623,331
Pilipino Telephone Company (c) (e) 1,217,500 111,968
- ------------------------------------------------------------------------------------------
10,652,658
- ------------------------------------------------------------------------------------------
Utilities (8.2%)
Manila Electric Co. -- A 1,940,000 3,915,187
Petron Corp. (c) 26,070,002 2,830,438
- ------------------------------------------------------------------------------------------
6,745,625
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $106,085,004) 76,703,020
- ------------------------------------------------------------------------------------------
WARRANTS (1.1%)
Real Estate (0.0%)
Belle Corporation (c) 2,993,333 6,500
Food and Beverage (1.1%)
Jollibee Foods (c) (e) 1,799,500 873,432
- ------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $897,466) 879,932
- ------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
4
<PAGE>
<TABLE>
<CAPTION>
Par
SCHEDULE OF INVESTMENTS (Continued) Maturity (000) Value
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
BONDS (0.8%)
Bacnotan Consolidated Industries Inc.
Convertible Bond 5.50% (Cost $1,750,000) 06/21/04 $ 1,750 $ 630,000
- --------------------------------------------------------------------------------------------------
CALL ACCOUNTS (3.1%)
Philippine Pesos
(Cost $2,561,771) (d) 2,597,732
- --------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE SECURITIES
(Cost $111,294,242) 80,810,684
- --------------------------------------------------------------------------------------------------
UNITED STATES SECURITIES -- 2.0%
- --------------------------------------------------------------------------------------------------
COMMERCIAL PAPER -- 2.0%
General Electric Capital Corp.
4.7025%
(Cost $1,689,000) 01/04/99 1,689 1,689,000
- --------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 1,689,000
- --------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- (100.00%)
(Cost $112,983,241) (a) $ 82,499,684
------------
</TABLE>
<TABLE>
<S> <C>
(a) Aggregate cost is the same for Federal income tax purposes.
The aggregate gross unrealized appreciation (depreciation)
for all securities is as follows:
</TABLE>
<TABLE>
<S> <C>
Excess of market value over tax cost $ 14,103,747
Excess of tax cost over market value (44,587,304)
------------
$(30,483,557)
============
</TABLE>
<TABLE>
<S> <C>
(b) At fair value as determined by the Board of Directors.
(c) Non-income producing security.
(d) Daily interest is being accrued at a rate of 4% of the
outstanding balance.
(e) Pursuant to Rule 144A under the Securities Act of 1933, all
or a portion of these securities can only be sold to
qualified institutional investors.
(f) ADR -- American Depository Receipt.
</TABLE>
See Accompanying Notes to Financial Statements
5
<PAGE>
THE FIRST PHILIPPINE FUND INC.
STATEMENT OF ASSETS AND LIABIILITIES (UNAUDITED) December 31, 1998
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
ASSETS
Investments at value (Cost $110,421,470).................... $ 79,901,952
Cash (including Philippine pesos of $2,597,732 with a cost
of $2,561,771)............................................. 2,638,718
Dividends receivable........................................ 117,656
Interest receivable......................................... 51,502
Receivable for investments sold............................. 506
Prepaid insurance........................................... 2,794
- --------------------------------------------------------------------------
TOTAL ASSETS................................................ 82,713,128
- --------------------------------------------------------------------------
LIABILITIES
Accrued expenses payable.................................... 466,833
- --------------------------------------------------------------------------
TOTAL LIABILITIES 466,833
- --------------------------------------------------------------------------
NET ASSETS
(applicable to 11,225,000 common shares outstanding)....... $ 82,246,295
- --------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($82,246,295 divided by 11,225,000)........................ $ 7.33
- --------------------------------------------------------------------------
Net assets consist of:
Capital stock.............................................. $ 112,250
Paid-in capital............................................ 122,983,009
Accumulated net investment loss............................ (2,471,092)
Accumulated net realized loss on investments............... (7,894,256)
Accumulated net unrealized appreciation on investments,
foreign currency holdings, and other assets and
liabilities denominated in foreign currency.............. (30,483,616)
- --------------------------------------------------------------------------
NET ASSETS.................................................. $ 82,246,295
- --------------------------------------------------------------------------
</TABLE>
For the Six
Months Ended
STATEMENT OF OPERATIONS (UNAUDITED) December 31, 1998
<TABLE>
<S> <C>
- --------------------------------------------------------------------------
INVESTMENT INCOME
Interest (net of taxes withheld $2,739).................... $ 114,882
Dividends (net of taxes withheld $74,676).................. 238,957
- --------------------------------------------------------------------------
TOTAL INVESTMENT INCOME..................................... 353,839
- --------------------------------------------------------------------------
EXPENSES
Investment advisory fee.................................... 325,485
Custodian fees............................................. 81,061
Trustee fee................................................ 75,617
Administration fee......................................... 62,914
Transfer agent fees........................................ 4,165
Legal fees................................................. 73,522
Directors fees............................................. 26,958
Audit fees................................................. 29,407
Printing................................................... 18,624
Insurance.................................................. 2,687
Miscellaneous.............................................. 68,621
- --------------------------------------------------------------------------
TOTAL EXPENSES.............................................. 769,061
- --------------------------------------------------------------------------
NET INVESTMENT LOSS......................................... (415,222)
- --------------------------------------------------------------------------
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.................................... (5,969,589)
Foreign currency transactions............................ 303,619
- --------------------------------------------------------------------------
Net change in unrealized appreciation (depreciation) on:
Investments.............................................. 15,259,299
Foreign currency holdings and other assets and
liabilities denominated in foreign currency............ (59)
- --------------------------------------------------------------------------
Net realized and unrealized gains investments, foreign
currency holdings and other assets and liabilities
denominated in foreign currency.......................... 9,593,270
- --------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ 9,178,048
- --------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements
6
<PAGE>
<TABLE>
<CAPTION>
For the Six
Months Ended For the
December 31, 1998 Year Ended
STATEMENTS OF CHANGES IN NET ASSETS (Unaudited) June 30, 1998
<S> <C> <C>
- --------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss.................................... $ (415,222) $ (717,294)
Net realized gain (loss) on security transactions...... (5,969,589) 2,760,261
Net realized gain (loss) on foreign currency
transactions......................................... 303,619 (4,007,245)
Net change in unrealized appreciation (depreciation) on
investments, foreign currency holdings and other
assets and liabilities denominated in
foreign currency..................................... 15,259,240 (111,432,732)
- --------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations............................................. 9,178,048 (113,397,010)
- --------------------------------------------------------------------------------------------------
Total increase (decrease) in net assets................... 9,178,048 (113,397,010)
Net assets:
Beginning of period.................................... 73,068,247 186,465,257
- --------------------------------------------------------------------------------------------------
End of period (including accumulated losses of
($2,471,092) and ($2,359,489), respectively)......... $ 82,246,295 $ 73,068,247
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</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,
1998 ---------------------------------------------------------------
(Unaudited) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period $ 6.51 $ 16.61 $ 21.18 $ 20.66 $ 23.11 $ 14.84
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.04) (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 0.86 (10.04) (2.86) 1.74 1.27 9.25
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from investment
operations 0.82 (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 period $ 7.33 $ 6.51 $ 16.61 $ 21.18 $ 20.66 $ 23.11
- ---------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD $ 5.875 $ 5.75 $ 13.75 $ 16.88 $ 16.88 $ 18.25
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Based on market value* 2.17 %*** (58.18)% (10.88)% 7.03 % 7.06 % 45.62 %
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $82,246 $73,068 $186,465 $237,790 $231,857 $207,498
Ratios to average net assets:
Operating expenses 2.36 %** 1.91 % 1.75 % 1.77 % 1.82 % 1.79 %
Interest expense -- -- -- -- 0.06 % --
------- ------- -------- -------- -------- --------
Total expenses 2.36 %** 1.91 % 1.75 % 1.77 % 1.88 % 1.79 %
Net investment loss (1.28)%** (0.68)% (1.10)% (1.00)% (1.01)% (1.08)%
*Portfolio turnover 16.24 % 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.
** Annualized.
*** Non-annualized
See Accompanying Notes to Financial Statements.
8
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1998
(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 $4,015,891 (4.9% 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 -- DECEMBER 31, 1998 (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 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 six months ended December 31, 1998, the
Investment Adviser earned $325,485 from the Fund, of which $6,733 was payable to
the Investment Adviser at December 31, 1998.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 1998 (CONT'D)
(UNAUDITED)
- ----------
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, 1998, the Investment Adviser
paid $113,920 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, 1998, the Trustee earned fees of $75,617, of which $37,808 was
payable to the Trustee at December 31, 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 six
months ended December 31, 1998, the Administrator earned fees of $62,914, of
which $10,600 was payable to the Administrator at December 31, 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 December 31, 1998 were $13,750 which is included in accrued
expenses.
The Fund paid or accrued approximately $73,522 for the six months ended
December 31, 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 December 31, 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 $5,213,908 and $6,644,816, respectively, for the six months ended
December 31, 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 December 31, 1998, 98.0% of the Fund was invested in Philippine
securities. Future economic and political developments in that country could
adversely affect the liquidity and/or value of the Philippine securities in
which the Fund is invested.
11
<PAGE>
Directors and Officers
- ------------
Benjamin P. Palma Gil
Director and Chairman
- ------------
Lilia C. Clemente
Director, President and Chief Executive Officer
Leopoldo M. Clemente, Jr.
Director, Executive Vice President and Managing Director
M.A.T. Caparas
Director
Adrian C. Cassidy
Director
Roberto de Ocampo
Director
John Anthony B. Espiritu
Director
Joseph A. O'Hare, S.J.
Director
Robert B. Oxnam
Director
Stephen J. Solarz
Director
William H. Bohnett
Secretary
Joaquin G. Hofilena
Vice President and Treasurer
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
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.
