[THE FIRST PHILIPPINE FUND INC. LOGO]
Annual Report
June 30, 1999
<PAGE>
August 3, 1999
Dear Fellow Shareholder:
We are pleased to report that The First Philippine Fund (Fund) continued
its strong appreciation in the second quarter of 1999. The Fund's net asset
value (NAV) grew by 29.1% in the quarter to US$109.3 million, or US$9.73 per
share. This performance beat that of the Fund's benchmark, the Philippine Stock
Exchange composite index (Phisix), which gained 22.6% in peso terms and, aided
by a 2.1% appreciation of the Philippine peso, grew by 25.2% in US dollar terms
in the same period.
For the first six months of 1999, the Fund's NAV grew by 32.7%, likewise
outperforming the benchmark's 30.1% return in US dollars. For the Fund's fiscal
year ended June 30, 1999, the Fund's NAV grew by a significant 49.5% behind a
market which grew by 56.2% in US dollar terms. With this recent performance, the
Fund has increased its lead over the benchmark since the Fund's inception. Over
its lifetime, the Fund has appreciated by 36.6% (after adjusting for all
dividends and the effect of the 1995 rights offering), while the Phisix has
grown by only 6.7% in US dollar terms.
The Fund's share price closed at $8.625 on June 30, 1999, appreciating by
36.6% in the June quarter, by 46.8% in the first six months of 1999, and by
50.0% for the 1999 fiscal year. The discount of the Fund's shares to its NAV
further narrowed to 11.4% on June 30, 1999 from 16.3% at the end of the previous
quarter.
ANOTHER SIGNIFICANT MARKET RALLY
Following a modest increase in the previous quarter, the Philippine stock
market resumed a strong upward trajectory in the June quarter of 1999. This
latest performance marks the third straight quarterly growth by the market, a
feat not experienced since 1993. The market thus appears to have found a solid
footing as it recovers from the market meltdown and subsequent wild volatility
in 1997 and 1998.
The following themes were evident in the market in this last quarter:
o EVIDENCE OF ECONOMIC RECOVERY. Due to a rebound in agriculture and the
government's pump priming activities, first quarter economic results
beat expectations. Gross domestic product grew by 1.2% and gross
national product grew by 2.0%. The peso remained generally stable and
interest rates continued to trend downwards. Inflation declined to 5.8%
in June and exports rebounded to a 19.5% growth in June from a weak 2.7%
increase in April.
o MERGERS AND ACQUISITIONS. Major deals were concluded in the banking,
telecommunications, and food and beverage sectors during the quarter.
While these concluded transactions moved the share prices of the
companies involved, speculation involving future deals moved other
stocks as well.
o RESTRUCTURING AND EARNINGS RECOVERY. Normalization and recovery of
corporate earnings began to become evident in the quarter, especially in
the consumer sector. The rise of cement prices brought new hope to a
battered cement sector. However, success was mixed among those companies
currently undergoing debt restructuring negotiations with their
creditors.
o MARKET LIQUIDITY. Market turn-over improved as interest rates declined
and foreign investors returned. Market interest broadened beyond blue
chip stocks; select second-liners -- especially restructuring stories
and take-over targets -- enjoyed robust trading activity and strong
performance. The quarter saw a preponderance of block trades, a natural
result of increased merger and acquisition activity.
<PAGE>
o BENEFICIAL EXTERNAL DEVELOPMENTS. Trends beyond the Philippines' borders
further fanned positive sentiment. Southeast Asian markets rallied on a
regional recovery theme. The US markets were buoyed by continued healthy
economic growth. Japan showed signs of stability and recovery as well.
The local market, however, was at times moved downwards by periodic
concerns of a Chinese currency devaluation and by US interest rate
policy.
o DOMESTIC RISKS. Much economic risk remains to dampen investor sentiment.
These include a growing budget deficit, lack of loan growth, and
weakness in the property sector. Politically, there remain concerns
about government interference in corporate and media affairs. The highly
speculative nature of recent trading activity also adds considerable
risk to the market.
OPTIMISM FOR THE FUTURE
The Fund was able to outperform in the quarter by being significantly
invested in the market. It was thus able to fully capture the market's ascent.
Furthermore, it benefited from its emphasis on the banking and construction
sectors and from good stock selection in the property, conglomerate and consumer
sectors. The Fund was likewise invested in some second and third-line stocks
that showed good performance.
The Philippine stock market has corrected in the third quarter to date. In
July, the market retreated by 6.8% in US dollars behind increasing concerns
about politics, the bottoming of domestic interest rates, and the possibility of
another Fed rate hike. Despite this consolidation, the Fund does not intend to
significantly alter its strategy. We believe the macroeconomy will continue to
support the market as more evidence of its recovery unfolds in the second half
of the year. Corporate restructuring, mergers, privatization and deregulation
will remain dominant themes. The Fund will be sensitive to opportunities to
rotate into more attractively priced stocks and more defensive and economically
sensitive situations. The Fund will likewise remain exposed to both blue chips
and select second-liners, staying more broadly diversified than the market.
The First Philippine Fund celebrates its milestone tenth anniversary in
October of this year. It has been a most colorful journey indeed and we are most
grateful for having you on board with us. At this auspicious juncture, we are
happy to remain optimistic about the long-term outlook of the Fund, the
Philippine stock market and the Philippine economy as we enter the next
millennium.
Very truly yours,
/s/ Lilia C. Clemente
------------------------------
Lilia C. Clemente
Director, President and Chief
Executive Officer
2
<PAGE>
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF INVESTMENTS
June 30, 1999
<TABLE>
<CAPTION>
Number of
Shares Value
- -----------------------------------------------------------------------------------------------------------------
PHILIPPINE SECURITIES -- (99.0%)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCK (93.7%)
Banking (14.4%)
Bank of the Philippine Islands 1,574,900 $ 5,633,223
Bankard, Inc. (c) 6,470,000 1,020,988
Equitable Banking Corp. 840,000 2,187,155
Far East Bank and Trust Company 330,171 460,235
Metropolitan Bank & Trust Company 527,746 5,274,406
Philippine Commercial International Bank, Inc. 180,000 1,230,866
- -----------------------------------------------------------------------------------------------------------------
15,806,873
- -----------------------------------------------------------------------------------------------------------------
Conglomerates (21.2%)
Aboitiz Equity Ventures, Inc. 8,300,000 454,053
Alsons Consolidated Resources, Inc. (b) 15,980,000 273,184
Ayala Corporation 35,249,436 11,588,500
Benpres Holdings Corp. (c) 21,339,700 5,051,215
First Philippine Holdings Corp. -- A 4,256,998 4,702,381
Guoco Holdings (Phils), Inc. (c) 4,360,000 100,910
Metro Pacific Corp. (c) 20,550,000 1,026,905
Uniwide Holdings, Inc. (c) (e) 8,687,000 75,396
- -----------------------------------------------------------------------------------------------------------------
23,272,544
- -----------------------------------------------------------------------------------------------------------------
Construction/Engineering (2.7%)
Davao Union Cement Corp. (c) 10,066,622 307,119
DMCI Holdings, Inc. (c) 25,604,000 1,508,415
HI Cement Corp. (c) (e) 16,290,000 805,460
Southeast Asia Cement Holdings, Inc. (c) 23,105,670 334,231
- -----------------------------------------------------------------------------------------------------------------
2,955,225
- -----------------------------------------------------------------------------------------------------------------
Electronics (0.5%)
Ionics Circuits, Inc. (c) 150,000 56,218
Music Corp. (c) 1,900,000 344,800
Solid Group, Inc. (c) (e) 4,150,000 133,160
- -----------------------------------------------------------------------------------------------------------------
534,178
- -----------------------------------------------------------------------------------------------------------------
Food and Beverage (12.6%)
Cosmos Bottling Corp. 6,650,000 480,972
La Tondena Distillers, Inc. (c) 1,897,800 2,246,094
RFM Corporation 1,250,000 159,447
San Miguel Corp. -- A 5,723,942 9,634,746
Universal Robina Corp. 6,162,000 1,312,719
- -----------------------------------------------------------------------------------------------------------------
13,833,978
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
3
<PAGE>
<TABLE>
<CAPTION>
Number of
COMMON STOCK (CONTINUED) Shares Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Port Operations (3.0%)
Asian Terminals, Inc. (b) (c) 40,949,980 $ 1,400,110
International Container Terminal Services, Inc. (c) 15,287,500 1,990,246
- -----------------------------------------------------------------------------------------------------------------
3,390,356
- -----------------------------------------------------------------------------------------------------------------
Real Estate Development (19.0%)
Ayala Land, Inc. 24,411,321 7,704,378
Belle Corporation (c) 23,900,008 2,545,764
C & P Homes, Inc. (c) 35,916,750 1,152,449
Filinvest Land, Inc. (c) 16,487,499 1,864,611
Pryce Corporation (c) 27,620,000 1,133,218
Robinson's Land Corp. (b) 10,480,500 882,058
SM Prime Holdings, Inc. 24,050,000 5,439,745
Universal Rightfield Property Holdings, Inc. (c) 6,100,000 99,469
- -----------------------------------------------------------------------------------------------------------------
20,821,692
- -----------------------------------------------------------------------------------------------------------------
Telecommunications (12.4%)
Digital Telecommunications Phils., Inc. (c) 37,800,000 2,326,337
Philippine Long Distance Telephone Co. ADR (f) 371,020 11,200,166
Pilipino Telephone Company (c) (e) 1,217,500 83,255
- -----------------------------------------------------------------------------------------------------------------
13,609,758
- -----------------------------------------------------------------------------------------------------------------
Utilities (7.9%)
Manila Electric Co. -- A 2,145,000 5,528,641
Petron Corp. 29,420,002 3,133,739
- -----------------------------------------------------------------------------------------------------------------
8,662,380
- -----------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $98,844,322) 102,886,984
- -----------------------------------------------------------------------------------------------------------------
WARRANTS (1.5%)
Real Estate (0.1%)
Belle Corporation 10/06/00 (c) 2,993,333 59,832
Food and Beverage (1.4%)
Jollibee Foods Corp. 03/24/03 (c) (e) 2,999,500 1,538,326
- -----------------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost $1,471,505) 1,598,158
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See Accompanying Notes to Financial Statements.
4
<PAGE>
<TABLE>
<CAPTION>
Par
SCHEDULE OF INVESTMENTS (CONTINUED) Maturity (000) Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS -- (0.6%)
Bacnotan Consolidated Industries Inc. Convertible Bond 5.5%
(Cost $1,750,000) 06/21/04 $1,750 $ 708,750
- -----------------------------------------------------------------------------------------------------------------
CALL ACCOUNTS (3.2%)
Philippine Pesos (Cost $3,474,545) (d) 3,463,784
- -----------------------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE SECURITIES
(Cost $105,540,372) 108,657,676
- -----------------------------------------------------------------------------------------------------------------
UNITED STATES SECURITIES (1.0%)
- -----------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (1.0%)
Prudential Securities Corp. 5.3516%
(Cost $1,072,000) 07/02/99 1,072 1,072,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 1,072,000
- -----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.00%)
(Cost $106,612,372) (a) $109,729,676
============
</TABLE>
(a) Aggregate cost for Federal Income tax purposes is $108,726,699. The
aggregate gross unrealized appreciation (depreciation) for all securities
is as follows:
Excess of market value over tax cost $ 27,456,008
Excess of tax cost over market value (26,453,031)
--------------
$ 1,002,977
==============
(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.
See Accompanying Notes to Financial Statements.
5
<PAGE>
<TABLE>
<CAPTION>
THE FIRST PHILIPPINE FUND INC.
STATEMENT OF ASSETS AND LIABILITIES June 30, 1999
-------------
<S> <C>
ASSETS
Investments at value (Cost $106,612,372) ....................... $ 109,729,676
Cash ........................................................... 129
Dividends receivable ........................................... 37,548
Interest receivable ............................................ 2,912
-------------
TOTAL ASSETS ................................................... 109,770,265
-------------
LIABILITIES
Accrued expenses payable ....................................... 513,773
-------------
TOTAL LIABILITIES .............................................. 513,773
-------------
NET ASSETS
(applicable to 11,225,000 common shares outstanding) .......... $ 109,256,492
-------------
NET ASSET VALUE PER SHARE
($109,256,492 divided by 11,225,000) .......................... $ 9.73
-------------
Net assets consist of:
Capital stock ................................................. $ 112,250
Paid-in capital ............................................... 122,296,805
Accumulated net investment loss ............................... (2,114,327)
Accumulated net realized loss on investments .................. (14,155,471)
Accumulated net unrealized appreciation on investments, foreign
currency holdings, and other assets and liabilities
denominated in foreign currency ............................. 3,117,235
-------------
NET ASSETS ..................................................... $ 109,256,492
-------------
</TABLE>
<TABLE>
<CAPTION>
For the
Year Ended
STATEMENT OF OPERATIONS June 30, 1999
--------------
<S> <C>
INVESTMENT INCOME
Interest (net of taxes withheld $8,256) ........................ $ 212,410
Dividends (net of taxes withheld $195,452) ..................... 611,291
------------
TOTAL INVESTMENT INCOME ......................................... 823,701
------------
EXPENSES
Investment advisory fee ........................................ 782,967
Custodian fees ................................................. 176,819
Trustee fee .................................................... 151,324
Administration fee ............................................. 124,800
Transfer agent fees ............................................ 7,780
Legal fees ..................................................... 130,237
Directors fees ................................................. 50,353
Audit fees ..................................................... 54,928
Printing ....................................................... 39,788
Insurance ...................................................... 5,481
Miscellaneous .................................................. 99,381
------------
TOTAL EXPENSES .................................................. 1,623,858
------------
NET INVESTMENT LOSS ............................................. (800,157)
------------
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 ........................................ (12,230,804)
Foreign currency transactions ................................ 359,115
------------
Net change in unrealized appreciation (depreciation) on:
Investments .................................................. 48,860,159
Foreign currency holdings and other assets and liabilities
denominated in foreign currency ............................ (68)
------------
Net realized and unrealized gains on investments, foreign
currency holdings and other assets and
liabilities denominated in foreign currency ................ 36,988,402
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............ $ 36,188,245
------------
</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, 1999 June 30, 1998
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss....................................................... $ (800,157) $ (717,294)
Net realized gain (loss) on security transactions......................... (12,230,804) 2,760,261
Net realized gain (loss) on foreign currency transactions................. 359,115 (4,007,245)
Net change in unrealized appreciation (depreciation) on
investments, foreign currency holdings and other assets
and liabilities denominated in foreign currency......................... 48,860,091 (111,432,732)
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations.............. 36,188,245 (113,397,010)
- -----------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of period....................................................... 73,068,247 186,465,257
- -----------------------------------------------------------------------------------------------------------------
End of period (including accumulated losses of ($2,114,327) and
($2,359,489), respectively)............................................. $109,256,492 $ 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 year)
<TABLE>
<CAPTION>
For the Year Ended June 30,
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
<S> <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
- -------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment (loss) (0.07) (0.06) (0.21) (0.20) (0.20)
Net realized and unrealized gains (losses) on
investments, foreign currency holdings and other
assets and liabilities denominated in foreign
currencies 3.29 (10.04) (2.86) 1.74 1.27
- -------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from investment operations 3.22 (10.10) (3.07) 1.54 1.07
- -------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income -- -- -- -- --
Distributions from net realized long-term gains -- -- (1.50) (1.02) (0.85)
Distributions from net realized short-term gains -- -- -- -- (1.25)
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS -- -- (1.50) (1.02) (2.10)
- -------------------------------------------------------------------------------------------------------------------------
DILUTIVE EFFECT OF CAPITAL SHARE OFFERING -- -- -- -- (1.42)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $ 9.73 $ 6.51 $ 16.61 $ 21.18 $ 20.66
- -------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD $ 8.63 $ 5.75 $ 13.75 $ 16.88 $ 16.88
- -------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Based on market value* 50.00% (58.18)% (10.88)% 7.03% 7.06%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) $109,256 $73,068 $186,465 $237,790 $231,857
Ratios to average net assets:
Operating expenses 2.07% 1.91% 1.75% 1.77% 1.82%
Interest expense -- -- -- -- 0.06%
-------- -------- -------- -------- --------
Total expenses 2.07% 1.91% 1.75% 1.77% 1.88%
Net investment loss (1.02)% (0.68)% (1.10)% (1.00)% (1.01)%
*Portfolio turnover 16.26% 23.10% 15.32% 24.20% 20.50%
- -------------------------------------------------------------------------------------------------------------------------
</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, 1999
- ------------
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 $2,555,352 (2% 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. Amounts realized upon sale of such securities could differ
significantly from the fair value. 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, 1999, 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.
The Fund has a capital loss carry forward in the amount of $8,361,654, of
which $466,990 and $7,894,664 are available as a reduction of future net
capital gains realized through years ended 2005 and 2007, respectively.
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, 1998
incurred and will elect to defer net capital losses of $5,793,817 during the
year ended June 30, 1999.
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, 1999 (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. 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.
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, 1999, the Fund had temporary book/tax differences primarily
attributable to post-October capital losses and passive foreign investment
company ("PFIC") mark-to-market, and permanent book/tax differences
primarily attributable to foreign currency gains and a net operating loss.
During the year ended June 30, 1999, the Fund decreased accumulated net
investment loss by $1,045,319, increased accumulated net realized loss on
investments by $359,115, with an offsetting decrease to paid-in-capital of
$686,204. 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, 1999, the Investment
Adviser earned $782,967 from the Fund, of which $68,634 was payable to the
Investment Adviser at June 30, 1999.
10
<PAGE>
NOTES TO FINANCIAL STATEMENTS -- JUNE 30, 1999 (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, 1999, the Investment Adviser paid
$274,038 to the Philippine Adviser.
Substantially all of the Fund's assets are invested through and held in the
Philippine Trust. Under the Trust Agreement, the Trustee receives a monthly fee
at the annual rate of .15% of the Fund's average weekly net assets held in the
Philippine Trust, subject to a minimum fee of $150,000 for administration of the
Philippine Trust. The Trust Agreement remains in effect for the life of the Fund
unless terminated in accordance with its terms. For the year ended June 30,
1999, the Trustee earned fees of $151,324, of which $38,721 was payable to the
Trustee at June 30, 1999.
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, 1999, the Administrator earned fees of $124,800, of which $10,258
was payable to the Administrator at June 30, 1999.
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, 1999 were $16,500 which is included in accrued
expenses.
The Fund paid or accrued approximately $130,237 for the year ended June 30,
1999, 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, 1999,
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 $12,470,389 and $14,306,726, respectively, for the year ended June
30, 1999.
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, 1999, 99.0% 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>
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, 1999, 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 the five years presented, 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, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
Philadelphia, PA
August 12, 1999
12
<PAGE>
TAX INFORMATION (UNAUDITED)
- ------------
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, 1999) 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 1999. 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 2000. 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 1999.
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 purchases, the market price exceeds the net asset value
per share, the average per share purchase
13
<PAGE>
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.
14
<PAGE>
<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
<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.
