[FIRST PHILIPPINE LOGO OMITTED]
SEMI-ANNUAL REPORT
DECEMBER 31, 2001
February 6, 2002
Dear Shareholder:
On December 31, 2001, The First Philippine Fund Inc.'s ("Fund") net assets
totaled US$33.2 million, equivalent to a per share net asset value ("NAV") of
$3.08. On this date, the Fund's share price closed at $2.57. The Fund's NAV and
share price declined by 29.2% and by 23.9%, respectively, in 2001. Over the past
six months, NAV dropped by 19.0% and the share price by 19.4%. The bulk of the
slump, however, occurred earlier in the year. In the last two months of 2001,
the Fund's NAV appreciated by 12.8% and the Fund's share price rose by 12.7%.
This strong recovery allowed the Fund's NAV to show a slight quarterly gain of
0.3% in the fourth quarter of 2001. In this period, the Fund's share price
declined by 1.2%.
The discount the Fund's shares traded to NAV stood at 16.6% on December 31,
2001, much lower than the 22.4% discount registered at the end of 2000. This
narrowing has been achieved to some degree through the Fund's share repurchase
program that began last May. By the end of 2001, the Fund bought back a total of
425,000 shares. The Fund's average discount declined from 18.3% in the first
half of 2001 to 14.5% in the second half of 2001.
THE PAST YEAR REVIEWED
The Fund's performance last year was set against a most challenging
environment for global stock markets, which reeled from a slowing world economy
and the war on terrorism. But even without these, 2001 in the Philippines was
particularly eventful. The Philippine stock market hit its high early in the
year, in the days leading to the peaceful revolution that resulted in a change
of government. The new Macapagal-Arroyo administration inherited a slowing
economy battered by a gaping fiscal deficit and weak global demand. By mid-year,
sentiment took a blow as anti-administration groups rioted in Manila and the
renegade Abu Sayyaf group took American hostages in the south. And, as with most
other global markets, the Philippine stock market plunged to its year's low a
month after the World Trade Center attack.
The Philippine composite index ("Phisix"), the Fund's benchmark, declined by
24.4% and by 16.0% in US dollar terms in the full year and in the second half of
2001, respectively. However, the direction of the Philippine stock market turned
dramatically in the last two months of the past year. After losing 12.9% of its
value in October, the Phisix gained 18.2% in November and December, resulting in
a quarterly gain of 3.0% in US-dollar terms in the fourth quarter of 2001.
While most Asian markets were also rebounding during this period - driven by
liquidity returning to the region - the Philippines was outperforming its
neighbors. This was due in part to President Gloria Macapagal-Arroyo's visit to
the United States last November wherein the President was able to secure
substantial investment commitments as well as military assistance from the US
government for use in the fight against terrorist groups. By the end of the
year, newspapers showcased headlines indicating foreign investor interest in the
food and beverage, housing and banking sectors. These also boosted sentiment in
the local stock market.
A ROBUST START FOR 2002
The market's strong rally continued in January 2002. The Phisix shot up by
17.6% in US-dollar terms, the best in the world in January. The Fund's NAV and
share price performed even better, up 18.2% and 24.9%, respectively. In addition
to the commencement in January of military training exercises between US and
Philippine armed forces, a good economic scorecard for 2001 was likely a major
catalyst for improved investor sentiment on the Philippines.
The country's gross domestic product ("GDP") in the fourth quarter of 2001
surprised on the upside, rising by 3.8% against the government's expectation of
3.7% and the consensus forecast of 3.1%. This followed a 3.3% growth in GDP in
the previous quarter and allowed full year 2001 GDP to grow by 3.4%, slightly
above government's target of 3.3% and better than most of its Asian neighbors.
While exports slowed during the year, strong growth in agriculture and services
- particularly in telecommunications - picked up the slack. On the expenditure
side, a resilient domestic demand was the main growth driver.
The government stayed close to its budget deficit target for 2001 - a major
achievement. Inflation stayed at single digits, the peso stabilized, and
interest rates eased. In January, Moody's upgraded the country's sovereign
rating, and this should help open financing opportunities for the country and
its corporations. With a recovery in the US economy by the second half of 2002,
sustained agricultural output and domestic consumption, and the government's
ability to raise offshore funds, the economic prospects in the new year appear
more upbeat. The government is targeting stronger 2002 GDP growth of between
4.0% and 4.5%.
SUSTAINING CONFIDENCE IN THE PHILIPPINES
Despite the renewed optimism on the country's economic outlook, the market's
early rally may falter if investor confidence is not sustained. The Philippines'
challenges for 2002 include reducing further a still-high level of political
risk, forcefully addressing rising criminality, and improving and broadening
corporate earnings growth, without which the market will remain more expensive
than other Asian stock markets. Structural reforms that improve the country's
long-term competitiveness must also continue to be pursued.
The Fund will continue to be significantly invested but stock selective,
preferring industry leaders and well-managed companies at attractive valuations.
This strategy has allowed the Fund to significantly capture the market's recent
gains. With global economic growth expected to pick up later in the year,
companies with healthy balance sheets and resilient income streams will be
joined in favor by restructuring stories. A more benign economic environment
will allow restructuring companies to tap financial markets, clean up balance
sheets and enhance competitiveness and profitability. The Fund looks forward to
a more rewarding year for Philippine companies in general.
As always, we thank you for your continued interest in the Philippines and
support for The First Philippine Fund.
Sincerely yours,
/S/ LILIA C. CLEMENTE
Lilia C. Clemente
DIRECTOR, PRESIDENT & CEO
/S/ JOAQUIN G. HOFILENA
Joaquin G. Hofilena
VICE PRESIDENT AND PORTFOLIO MANAGER
2
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 2001 (UNAUDITED)
Number of Shares Value
-------------------------------------------------------------------------------------------------------------
PHILIPPINE SECURITIES (99.0%)
-------------------------------------------------------------------------------------------------------------
COMMON STOCK (12.5%)
CONGLOMERATES (94.1%)
Aboitiz Equity Ventures, Inc. 17,200,000 $ 525,750
Alsons Consolidated Resources, Inc. (b)(c) 15,000,000 20,894
Ayala Corp. 36,464,323 3,042,800
Benpres Holdings Corp. (c) 29,109,700 337,896
Metro Pacific Corp. (c) 15,550,000 90,250
Pryce Corp. (c) 19,490,000 64,099
Uniwide Holdings, Inc. (c) 20,687,000 70,037
-------------------------------------------------------------------------------------------------------------
4,151,726
-------------------------------------------------------------------------------------------------------------
CONSTRUCTION/ENGINEERING (1.5%)
DMCI Holdings, Inc. (c) 25,604,000 89,161
Union Cement Corp. (c) 22,038,041 409,296
-------------------------------------------------------------------------------------------------------------
498,457
-------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES (12.4%)
Bank of the Philippine Islands 1,679,068 1,867,797
Bankard, Inc. 6,470,000 130,176
Equitable PCI Bank, Inc. (c) 836,000 396,247
Metropolitan Bank & Trust Co.(c) 439,400 1,742,639
-------------------------------------------------------------------------------------------------------------
4,136,859
-------------------------------------------------------------------------------------------------------------
FOOD AND BEVERAGE (23.4%)
Cosmos Bottling Corp. (c) 5,109,000 573,268
Del Monte Pacific Ltd. (f) 2,400,000 493,907
Jollibee Foods Corp. 3,880,545 919,649
La Tondena Distillers, Inc. 2,347,800 1,067,388
San Miguel Corp. - A 4,990,086 4,151,165
Universal Robina Corp. 6,778,200 576,980
-------------------------------------------------------------------------------------------------------------
7,782,357
-------------------------------------------------------------------------------------------------------------
MEDIA (3.7%)
ABS-CBN Broadcasting Corp. PDR (e) 2,649,900 1,217,549
-------------------------------------------------------------------------------------------------------------
1,217,549
-------------------------------------------------------------------------------------------------------------
PORT OPERATIONS (0.9%)
International Container Terminal Services, Inc. (c) 7,643,750 310,541
-------------------------------------------------------------------------------------------------------------
310,541
-------------------------------------------------------------------------------------------------------------
REAL ESTATE DEVELOPMENT (20.4%)
Ayala Land, Inc. 26,589,585 2,494,863
Belle Corp. (c) 5,900,008 63,917
Filinvest Land, Inc. (c) 40,487,499 1,300,237
SM Prime Holdings, Inc. 24,100,000 2,937,319
-------------------------------------------------------------------------------------------------------------
6,796,336
-------------------------------------------------------------------------------------------------------------
TECHNOLOGY (2.1%)
Ionics, Inc. 2,475,000 301,654
Music Corp. (c) 1,900,000 12,130
SPI Technologies, Inc.(c) 1,400,500 379,319
-------------------------------------------------------------------------------------------------------------
693,103
-------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements
3
THE FIRST PHILIPPINE FUND INC.
SCHEDULE OF INVESTMENTS (CONT'D)
DECEMBER 31, 2001 (UNAUDITED)
Number of Shares Value
---------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (14.2%)
Digital Telecommunications Philippines, Inc. (c) 20,200,000 $ 148,501
Globe Telecomunications, Inc. (c) 52,000 684,078
Philippine Long Distance Telephone Co. ADR (d) 475,020 3,914,165
---------------------------------------------------------------------------------------------------------------------------
4,746,744
---------------------------------------------------------------------------------------------------------------------------
UTILITIES (3.0%)
Manila Electric Co. - A (c) 2,257,600 993,624
---------------------------------------------------------------------------------------------------------------------------
993,624
---------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost $67,053,856) 31,327,296
---------------------------------------------------------------------------------------------------------------------------
Par
Maturity (000)
---------------------------------------------------------------------------------------------------------------------------
BONDS (1.9%)
Bacnotan Consolidated Industries, Inc., 5.50%
(Cost $1,750,000) 06/21/04 $1,750 621,250
---------------------------------------------------------------------------------------------------------------------------
CALL ACCOUNTS (3.0%)
Philippine Pesos (g)
(Cost $1,021,427) 1,014,214
---------------------------------------------------------------------------------------------------------------------------
TOTAL PHILIPPINE SECURITIES
(Cost $69,825,286) 32,962,760
---------------------------------------------------------------------------------------------------------------------------
UNITED STATES SECURITIES (1.0%)
---------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER (1.0%)
American Express Credit Corp., 1.59%
(Cost $348,000) 01/02/02 348 348,000
---------------------------------------------------------------------------------------------------------------------------
TOTAL UNITED STATES SECURITIES 348,000
---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100%)
(Cost $70,173,283) (a) $ 33,310,760
=============
(a) Aggregate cost for Federal Income tax purposes is $70,173,283.
Aggregate gross unrealized appreciation (depreciation) for all
securities is as follows:
Excess of market value over tax cost $ 1,558,246
Excess of tax cost over market value (38,420,769)
-------------
$ (36,862,523)
=============
(b) At fair value as determined by the Board of Directors.
(c) Non-income producing security.
(d) ADR-- American Depository Receipt.
(e) PDR-- Philippine Depository Receipt.
(f) Singapore security- 1.5% of total investments.
(g) Daily interest is being accrued at a rate of 4% of the outstanding balance.
See Accompanying Notes to Financial Statements
4
THE FIRST PHILIPPINE FUND INC.
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) December 31, 2001
---------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at value (Cost $70,173,283) ................................................... $33,310,760
Cash ...................................................................................... 659
Dividends receivable ...................................................................... 32,527
Interest receivable. ...................................................................... 51,173
Prepaid expenses .......................................................................... 5,476
---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS ............................................................................. 33,400,595
---------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Payable for treasury stock repurchased. .................................................. 15,125
Advisory fee payable ..................................................................... 46,112
Accrued expenses payable ................................................................. 115,268
---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES ........................................................................ 176,505
---------------------------------------------------------------------------------------------------------------------------
NET ASSETS
(applicable to 10,800,000 common shares outstanding) .................................. $33,224,090
---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE
($33,224,090/10,800,000) .............................................................. $3.08
---------------------------------------------------------------------------------------------------------------------------
Net assets consist of:
Capital Stock ......................................................................... $ 112,250
Paid-in capital ....................................................................... 119,893,558
Cost of 425,000 shares held in treasury ............................................... (1,209,718)
Accumulated net investment loss ....................................................... (501,703)
Accumulated net realized loss on investments .......................................... (48,207,774)
Net unrealized depreciation on investment, foreign currency holdings
and other assets and liabilities denominated in foreign currency .................... (36,862,523)
---------------------------------------------------------------------------------------------------------------------------
NET ASSETS ............................................................................... $33,224,090
---------------------------------------------------------------------------------------------------------------------------
For the
Six Months Ended
December 31, 2001
STATEMENT OF OPERATIONS (Unaudited)
---------------------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends (net of taxes withheld $59,049) .............................................. $ 177,147
Interest (net of taxes withheld $940) .................................................. 71,440
---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME ................................................................... 248,587
---------------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment advisory fee ................................................................ 178,483
Trustee fee ............................................................................ 75,617
Administration fee ..................................................................... 62,913
Legal fees ............................................................................. 58,977
Custodian fee .......................................................................... 37,166
Audit fee .............................................................................. 27,725
Directors fees ......................................................................... 27,475
NYSE Listing fee ....................................................................... 17,644
Printing ............................................................................... 12,602
Insurance .............................................................................. 5,448
Transfer agent fee ..................................................................... 3,550
Miscellaneous .......................................................................... 27,725
---------------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES ............................................................................ 535,325
---------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS. ...................................................................... (286,738)
---------------------------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS, FOREIGN CURRENCY
HOLDINGS, AND OTHER ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCIES:
Net realized loss on:
Security Transactions ................................................................. (296,308)
Foreign currency transactions ......................................................... (13,144)
---------------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation/depreciation on:
Investments ........................................................................... (7,612,541)
Foreign currency holding and other assets and liabilities denominated in
foreign currency .................................................................... 25,400
---------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized losses on investments, foreign currency holdings
and other assets and liabilities denominated in foreign currency ...................... (7,896,593)
---------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................................... $(8,183,331)
---------------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements
5
THE FIRST PHILIPPINE FUND INC.
For the
Six Months Ended For the
December 31, 2001 Year Ended
STATEMENT OF CHANGES IN NET ASSETS (Unaudited) June 30, 2001
-------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations:
Net investment loss .................................................. $ (286,738) $ (346,430)
Net realized loss on security transactions ........................... (296,308) (15,229,320)
Net realized loss on foreign currency transactions ................... (13,144) (627,460)
Net change in unrealized appreciation (depreciation)
on investments, foreign currency holdings and other
assets and liabilities denominated in foreign currency ............ (7,587,141) 21,840
-------------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations .................. (8,183,331) (16,181,370)
-------------------------------------------------------------------------------------------------------------------
Capital share transactions:
Shares repurchased ................................................... (919,348) (290,370)
-------------------------------------------------------------------------------------------------------------------
Total decrease in net assets .......................................... (9,102,679) (16,471,740)
-------------------------------------------------------------------------------------------------------------------
Net assets:
Beginning of period .................................................. 42,326,769 58,798,509
-------------------------------------------------------------------------------------------------------------------
End of period (including accumulated net investment loss of
($501,703) and ($214,965), respectively) .......................... $33,224,090 $ 42,326,769
-------------------------------------------------------------------------------------------------------------------
See Accompanying Notes to Financial Statements
6
THE FIRST PHILIPPINE FUND INC.
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
For the Six
Months Ended
December 31, 2001 For the Year Ended June 30,
--------------------------------------------------------
(Unaudited) 2001 2000 1999 1998 1997
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period ............... $ 3.80 $ 5.24 $ 9.73 $ 6.51 $ 16.61 $ 21.18
-------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss ............................. (0.03) (0.03) (0.06) (0.07) (0.06) (0.21)
Net realized and unrealized gains (losses) on
investments, foreign currency holdings and
other assets and liabilities denominated in
foreign currencies ............................. (0.82) (1.56) (4.43) 3.29 (10.04) (2.86)
-------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) from investment operations . (0.85) (1.59) (4.49) 3.22 (10.10) (3.07)
-------------------------------------------------------------------------------------------------------------------------------
LESS DIVIDENDS AND DISTRIBUTIONS
Distributions from net realized long-term gains . -- -- -- -- -- (1.50)
-------------------------------------------------------------------------------------------------------------------------------
TOTAL DIVIDENDS AND DISTRIBUTIONS .................. -- -- -- -- -- (1.50)
-------------------------------------------------------------------------------------------------------------------------------
SHARES REPURCHASED
Effect of shares repurchased .................... 0.13 0.15 -- -- -- --
-------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in net asset value .......... (0.72) (1.44) (4.49) 3.22 (10.10) (3.07)
-------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period .................... $ 3.08 $3.80 $5.24 $9.73 $6.51 $16.61
-------------------------------------------------------------------------------------------------------------------------------
PER SHARE MARKET VALUE, END OF PERIOD .............. $ 2.57 $3.19 $4.06 $8.63 $5.75 $13.75
-------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT RETURN
Based on market value* .......................... (19.44)%*** (21.43)% (52.90)% 50.00% (58.18)% (10.88)%
-------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) ............... $33,224 $42,327 $58,799 $109,256 $73,068 $186,465
Ratios to average net assets:
Operating expenses ............................. 3.00%** 2.38% 1.88% 2.07% 1.91% 1.75%
Net investment loss ............................ (1.61)%** (0.71)% (0.86)% (1.02)% (0.68)% (1.10)%
Portfolio turnover ................................. 1.47% 34.71% 14.37% 16.26% 23.10% 15.32%
-------------------------------------------------------------------------------------------------------------------------------
*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. Total investment return does not reflect sales charges and
brokerage commissions.
**Annualized.
***Not Annualized.
See Accompanying Notes to Financial Statements
7
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2001 (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 estimated
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 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 $20,894 (0.06% 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 period
ended December 31, 2001, 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 $43,464,865,
of which $466,990, $7,894,662, $8,691,345 and $26,411,868 are available
as a reduction of future net capital gains distributed and expire in the
years ended 2005, 2007, 2008 and 2009 respectively.
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 expense
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 fluctuation in
foreign exchange rates from the effect of fluctuations in the market
prices of securities held whether realized or unrealized.
8
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2001 (CONT'D) (UNAUDITED)
Realized gains or losses on foreign currency transactions represent net
foreign exchange gains or losses from the disposition of foreign
currencies, currency gains or losses realized between the trade and
settlement dates on securities transactions, and between amounts of
interest, dividends and foreign withholding taxes recorded on the Fund's
books and the U.S. dollar equivalent amounts actually received or paid.
The change in unrealized appreciation/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. 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.
6. 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
investment in the 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, 2001, the
Investment Adviser earned $178,483 from the Fund, of which $18,195 was payable
to the Investment Adviser at December 31, 2001.
9
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2001 (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, 2001, the Investment Adviser
paid $62,469 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, 2001, the Trustee earned fees of $75,617, of which $37,807 was
payable to the Trustee at December 31, 2001.
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, 2001, the Administrator earned fees of $62,913, of
which $20,857 was payable to the Administrator at December 31, 2001.
The Fund pays each of its Directors who is not a director, officer or
employee of the Investment Advisor, 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.
C. CAPITAL STOCK
The authorized capital stock of the Fund is 25,000,000 shares of common
stock $.01 par value. Of the 10,800,000 shares outstanding at December 31, 2001,
Clemente Capital, Inc. and PNB Investment Limited each owned 5,000 shares.
D. SHARE REPURCHASE PROGRAM
On May 4, 2001, the Fund commenced a share repurchase program for the
purpose of enhancing shareholder value and reducing the discount at which the
Fund's shares traded from their net asset value from that date through December
31, 2001, the Fund repurchased 425,000 shares or 3.8% of its common stock. The
Fund expects to continue to repurchase its outstanding shares at such time and
in such amounts as it believes will further the achievement of the foregoing
objectives subject to review by the Board of Directors.
E. PORTFOLIO ACTIVITY
Purchases and sales of securities, other than short-term obligations,
aggregated $1,086,082 and $510,265, respectively, for the six months ended
December 31, 2001.
10
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2001 (CONT'D) (UNAUDITED)
------------
F. 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.
Not withstanding 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, 2001, 99.2% 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.
G. SUBSEQUENT EVENT - TENDER OFFER
At the July 26, 2001 Board Meeting, the Board of Directors authorized an
unlimited tender offer, at NAV, in one year's time for up to all of the Fund's
outstanding shares or to otherwise allow shareholders to realize NAV for their
shares. Such action will be taken if, on July 19, 2002, the average discount to
NAV of the Fund's shares during the preceding twenty trading days equals or
exceeds 12%.
11
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 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 59 Maiden Lane, New York, NY 10007. Attention
Shareholder Services: The First Philippine Fund Inc.
12
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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
Roberto de Ocampo
DIRECTOR
John Anthony B. Espiritu
DIRECTOR
Joseph A. O'Hare, S.J.
DIRECTOR
Robert B. Oxnam
DIRECTOR
Stephen J. Solarz
DIRECTOR
Santiago S. Cua, Jr.
EXECUTIVE VICE PRESIDENT AND MANAGING DIRECTOR
Joaquin G. Hofilena
VICE PRESIDENT AND TREASURER
Imelda Singzon
VICE PRESIDENT
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 news-papers 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.