<PAGE>
FARRELL ALPHA STRATEGIES
780 Third Avenue
38th Floor
New York, New York 10017
THE JAPAN ALPHA FUND
SEMI-ANNUAL REPORT
September 30, 1995
INVESTMENT ADVISOR
Farrell-Wako Global Investment Management, Inc.
780 Third Avenue, 38th Floor
New York, New York 10017
(212) 319-3944
UNDERWRITER
Fund/Plan Broker Services, Inc.
2 W. Elm Street
Conshohocken, Pennsylvania 19428
(800) 262-7751
(610) 834-3694
SHAREHOLDER SERVICES
Fund/Plan Services, Inc.
2 W. Elm Street
Conshohocken, Pennsylvania 19428
(800) 262-7751
(610) 834-3694
CUSTODIAN
Sumitomo Bank of New York Trust Company
277 Park Avenue
New York, New York 10172
LEGAL COUNSEL
Whitman Breed Abbott & Morgan
200 Park Avenue
New York, New York 10166
AUDITORS
Coopers & Lybrand, L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
For Additional Information about The Japan Alpha Fund call:
(800) 262-7751
(610) 834-3694
<PAGE>
To our shareholders:
We are pleased to report for the third quarter of 1995, and the second financial
report since inception in April, 1995.
After hitting a low of 14,296 on July 3, the Nikkei 225 has shown a strong
advance. For the third quarter, the Nikkei 225 shows appreciation of 23.4% in
terms of local currency. Because the yen was weak over the period, the gains to
U.S. investors was lower than for Japanese investors. The yen weakened
considerably, depreciating by 15.1%. The dollar adjusted gain on the Nikkei 225
was 4.71% for the quarter. Our performance was also positive, but less than that
of Nikkei for the period.
The financial situation in Japan showed significant improvement in the 3rd
quarter of 1995. First, there was another cut in the discount rate of 0.5% that
leaves the rate currently at only 0.5%. With low short-term rates and a
positively sloped yield curve, banks are positioned to generate higher profits
and rebuild capital positions. Along with the rate cut, the Bank of Japan has
been increasing the money supply to further bolster liquidity. With increased
liquidity and active support of the dollar, the exchange rate has responded
significantly with an appreciation of the dollar of approximately 25% since the
second quarter lows. This exchange rate change has alleviated a significant
deflationary depressant on the economy. Finally, some initial positive steps
have been taken toward a resolution of the bank loan problems. We expect further
tangible steps toward resolving the banking situation as we move through fiscal
1995.
Looking ahead, we continue to think that the outlook for the stock market is
favorable. First, the improved picture for the credit and currency market should
help propel the Japanese economy toward a more sustained recovery along with an
improved profit outlook. Second, the Japanese market is still significantly
below its all time high, despite the rise from the lows in July. The Japanese
market has essentially moved sideways since the bottoming around the 14,000
level in 1992, with a re-test of those lows in July of this year. Third, for the
first time we are now beginning to see active discussion of share repurchase
programs by industrial corporations. As has been the case in the U.S., we think
that the emergence of such share repurchase programs will have a sustained
favorable impact on the market in Japan.
The Fund's portfolio consists of 50 select Japanese equities that meet the
parameters of the advisor's proprietary valuation methodology and strict
diversification guidelines. Industries that appear especially attractive within
the portfolio include: Food and Beverages, Automobiles, Electrical Power,
Pharmaceuticals, Electrical Equipment and Electronics.
We look forward to participating in the recovery and long-term growth of the
market in Japan.
Sincerely,
/s/ James L. Farrell, Jr.
James L. Farrell, Jr.
Chairman and Portfolio Manager
Farrell-Wako Global Investment Management, Inc.
<PAGE>
JAPAN ALPHA FUND
SCHEDULE OF INVESTMENTS (unaudited) September 30, 1995
================================================================================
<TABLE>
<CAPTION>
Market
Shares Value
---------- ----------
<S> <C> <C>
Equities - Japan 94.61%
Ashikaga Bank, Ltd. (The)....................... 5,000 $ 31,427
Bridgestone Corp. .............................. 6,000 89,416
Chubu Electric Power Co., Ltd. ................. 3,434 83,552
Daishowa Paper Mfg. Co., Ltd./1/ ............... 19,000 130,789
Ezaki Glico Co., Ltd. .......................... 10,000 85,969
Fuji Fire & Marine Ins. ........................ 17,000 86,344
Gunze Ltd. ..................................... 15,000 83,790
Haseko ......................................... 9,000 40,420
Hitachi Cable .................................. 12,000 86,618
Hitachi Koki.................................... 9,000 78,741
Hokkaido Bank................................... 23,000 72,283
Hokkaido Electric Power......................... 3,570 86,138
Inax............................................ 5,000 50,132
Japan Energy Corp. ............................. 11,000 32,340
Keiyo Bank...................................... 13,000 65,896
Komatsu Forklift Co., Ltd. ..................... 14,000 90,835
Kyodo Shiryo.................................... 16,000 54,339
Lion Corp. ..................................... 11,000 61,557
Maruetsu ....................................... 10,000 83,029
Matsushita Refrigeration........................ 11,000 76,054
Matsushita Seiko................................ 13,000 89,223
Mikuni Coca-Cola Bottling....................... 4,000 45,823
Mitsubishi Motors Corp. ........................ 5,000 42,224
Mitsubishi Plastic Inc. ........................ 23,000 88,605
Mizuno Corp. ................................... 10,000 93,775
NHK Spring Co., Ltd. ........................... 19,000 88,605
Nichiei (Fudosan)............................... 21,000 80,900
Nichii Co., Ltd. ............................... 8,000 101,379
Nichimen Corp. ................................. 10,000 39,031
Nintendo Corp., Ltd. ........................... 1,300 95,549
Nippon Oil Co., Ltd. ........................... 12,000 64,964
Nippon Television Network....................... 400 99,757
Nishi-Nippon Railroad........................... 10,000 39,031
Nisson Electric Co., Ltd. ...................... 13,000 89,355
NKK Corp./1/ ................................... 18,000 48,358
Okamura......................................... 11,000 81,407
Orient Corp. ................................... 17,000 81,346
Pokka Corp. .................................... 4,000 40,957
Q.P. Corp. - Japan.............................. 9,000 76,460
Rinnai.......................................... 3,700 81,772
Sekisui House Ltd. ............................. 4,000 49,878
Shiseido Co., Ltd. ............................. 8,000 83,536
</TABLE>
See accompanying notes to financial statements.
<PAGE>
JAPAN ALPHA FUND
SCHEDULE OF INVESTMENTS (unaudited) September 30, 1995
================================================================================
<TABLE>
<CAPTION>
Market
Shares Value
--------- -----------
<S> <C> <C>
Equities (continued)
Showa Aluminum Corp. ........................... 10,000 $ 41,667
Sogo/1/ ........................................ 9,000 32,391
Sun Wave Industrial............................. 6,000 81,509
Taisho Pharmaceutical........................... 4,000 75,426
Takara Standard................................. 8,000 84,347
Tanabe Seiyaku.................................. 11,000 79,177
Toho Gas........................................ 24,000 77,616
Tohoku Electric Power........................... 1,717 42,124
Tokyo Gas Co., Ltd. ............................ 10,000 36,800
Tokyo Hotel Chain Co., Ltd. .................... 11,000 72,486
Toshoku......................................... 8,000 38,686
Totoku Electric................................. 15,000 86,679
Toyo Suisan Kaisha.............................. 7,000 73,804
Toyoda Machine Works............................ 13,000 90,278
Unisia Jecs Corp. .............................. 8,000 42,985
Yamamura Glass.................................. 14,000 86,861
Yasuda Trust & Banking.......................... 14,000 82,178
Zexel Corp. .................................... 13,000 82,370
Total Equities - Japan -----------
(Cost $4,682,294)............................. 4,278,988
-----------
<CAPTION>
Face
Amount
----------
<S> <C> <C>
Short Term Investments - 0.92%
Time Deposit 3.00%, due 10/04/95
(Cost $41,741).............................. $ 41,741 41,741
-----------
Total Investments - 95.53%
(Cost $4,724,035*).......................... 4,320,729
-----------
Cash and other assets,
less liabilities - 4.47%................... 201,947
-----------
Net Assets - 100%............................... $ 4,522,676
===========
</TABLE>
/1/ Non-income producing security
* Cost for Federal income tax purposes is $4,724,035 and net unrealized
depreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation................ $ 2,059,856
Gross unrealized depreciation................ (2,463,162)
-----------
Net unrealized depreciation.................. $ (403,306)
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
JAPAN ALPHA FUND
STATEMENT OF ASSETS AND LIABILITIES (unaudited) September 30, 1995
================================================================================
<TABLE>
<S> <C>
ASSETS:
Investments, at market value (Cost $4,724,035) (Note 1) ...................................... $ 4,320,729
Foreign currency, at market value (Cost $45,969) ............................................. 46,603
Dividends and interest receivable ............................................................ 12,801
Receivable for capital stock sold ............................................................ 5,000
Deferred organization costs (Note 1) ......................................................... 45,271
Receivable from Advisor ...................................................................... 75,585
Other assets ................................................................................. 29,905
-------------
TOTAL ASSETS ........................................................................... 4,535,894
-------------
LIABILITIES:
Payables:
Accrued expenses ........................................................................... 13,218
-------------
TOTAL LIABILITIES ...................................................................... 13,218
-------------
NET ASSETS: $ 4,522,676
=============
Class A Shares:
Net assets (Applicable to 502,541 shares; unlimited number of shares
of beneficial interest authorized without par value) ......................................... $ 4,377,410
=============
Net asset value and redemption price per Class A share ($4,377,410 / 502,541 shares) .......... $ 8.71
=============
Offering price per share ($8.71 / 97.25) ...................................................... $ 8.96
=============
Class D Shares:
Net assets (Applicable to 16,643 shares; unlimited number of shares
of beneficial interest authorized without par value) ......................................... $ 145,266
=============
Net asset value, offering and redemption price per Class D share
($145,266 / 16,643 shares) ................................................................... $ 8.73
=============
NET ASSETS CONSIST OF:
Paid-in capital ............................................................................... 5,175,143
Accumulated net investment loss ............................................................... (36,615)
Accumulated realized loss on investments and foreign currency related transactions............. (213,239)
Net unrealized depreciation on investments and foreign currency related transactions........... (402,613)
-------------
NET ASSETS ............................................................................. $ 4,522,676
=============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
JAPAN ALPHA FUND
STATEMENT OF OPERATIONS (unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Period
April 9, 1995*
through
September 30,
1995
---------------
<S> <C>
INVESTMENT INCOME
Dividends................................................................................... $ 14,300
Interest.................................................................................... 294
---------------
TOTAL INCOME......................................................................... 14,594
---------------
EXPENSES:
Administration fees......................................................................... 52,429
Investment advisory fees (Note 2)........................................................... 17,632
Transfer agent fees......................................................................... 13,440
Legal fees.................................................................................. 8,053
Accounting fees............................................................................. 7,967
Registration fees........................................................................... 6,478
Printing.................................................................................... 5,749
Distribution expense Class A (Note 2)....................................................... 5,036
Custodian fees.............................................................................. 2,576
Amortization of organization costs (Note 1)................................................. 1,829
Insurance expense........................................................................... 240
Directors' fees............................................................................. 129
Miscellaneous............................................................................... 4,004
---------------
TOTAL EXPENSES....................................................................... 125,562
Expenses reimbursed and waived by Advisor (Note 2)................................... (74,353)
---------------
NET EXPENSES......................................................................... 51,209
---------------
NET INVESTMENT LOSS.......................................................................... (36,615)
---------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS AND
FOREIGN CURRENCY:
Net realized loss on investments............................................................ (70,744)
Net realized loss on foreign currency related transactions.................................. (142,495)
Net change in unrealized depreciation on investments and foreign
currency related transactions............................................................. (402,613)
---------------
Net realized and unrealized loss on investments and foreign currency related transactions... (615,852)
---------------
Decrease in Net Assets from operations....................................................... $ (652,467)
===============
</TABLE>
* Commencement of operations
See accompanying notes to financial statements.
<PAGE>
JAPAN ALPHA FUND
STATEMENT OF CHANGES IN NET ASSETS (unaudited)
================================================================================
<TABLE>
<CAPTION>
For the Period
April 9, 1995*
through
September 30,
1995
---------------
<S> <C>
OPERATIONS:
Net investment loss.................................................................... $ (36,615)
Net realized loss on investments and foreign currency related transactions............. (213,239)
Net change in unrealized depreciation on investments and foreign
currency related transactions........................................................ (402,613)
---------------
Net decrease in net assets resulting from operations................................... (652,467)
---------------
CAPITAL SHARE TRANSACTIONS (NOTE H):
Proceeds from sale of shares........................................................... 5,176,010
Reinvested dividends................................................................... 0
Cost of shares repurchased............................................................. (967)
---------------
Increase in net assets derived from capital share transactions......................... 5,175,043
---------------
TOTAL INCREASE IN NET ASSETS....................................................... 4,522,576
---------------
NET ASSETS:
Beginning of period.................................................................... 100
---------------
End of period (including undistributed net investment loss of $36,615)................. $ 4,522,676
===============
</TABLE>
* Commencement of operations
See accompanying notes to financial statements.
<PAGE>
JAPAN ALPHA FUND
FINANCIAL HIGHLIGHTS (unaudited)
================================================================================
<TABLE>
<CAPTION>
Class A Shares Class D Shares
-------------- --------------
For the Period For the Period
The table below sets forth financial data for one share of capital stock April 9, 1995* April 9, 1995*
outstanding throughout the period presented. through through
September 30, September 30,
1995 1995
--------------- ---------------
<S> <C> <C>
Net asset value, beginning of period................................................ $ 10.00 $ 10.00
--------------- ---------------
Loss from investment operations:
Net investment loss.............................................................. (0.14)/1/ (0.05)/1/
Net realized and unrealized loss on investments and foreign
currency related transactions................................................. (1.15)/1/ (1.22)/1/
--------------- ---------------
Total loss from investment operations......................................... (1.29) (1.27)
--------------- ---------------
Net asset value, end of period...................................................... $ 8.71 $ 8.73
=============== ===============
Total return........................................................................ (12.90%)/2/ (12.70%)
Ratios/Supplemental Data
Net assets, end of period (in 000s).............................................. $ 4,377 $ 145
Ratio of expenses to average net assets:
Before expense reimbursement and waiver....................................... 6.09%/3/ 5.59%/3/
After expense reimbursement and waiver........................................ 2.50%/3/ 2.25%/3/
Ratio of net investment income to average net assets:
Before expense reimbursement and waiver....................................... (5.38%)/3/ (4.41%)/3/
After expense reimbursement and waiver........................................ (1.79%)/3/ (1.07%)/3/
Portfolio turnover rate.......................................................... 62.86% 62.86%
</TABLE>
* Commencement of operations
/1/ Calculated using the average shares method
/2/ Total return calculation does not reflect sales load
/3/ Annualized
See accompanying notes to financial statements.
<PAGE>
JAPAN ALPHA FUND
NOTES TO FINANCIAL STATEMENTS (unaudited) September 30, 1995
================================================================================
1. Significant Accounting Policies
Farrell Alpha Strategies (the "Trust") is organized as a Delaware business trust
pursuant to a Trust Agreement dated April 6, 1995. The Trust is registered
under the Investment Company Act of 1940 (the "Act") as an open-end management
investment company. The Trust consists of a separate investment fund called The
Japan Alpha Fund (the "Fund"). The Trust, through the Fund, offers two separate
classes of shares (Class A Shares and Class D Shares) which vary with respect to
sales charges, distribution costs, voting rights and dividends. Shares of Class
A are offered at net asset value per share plus a maximum sales charge at the
time of purchase of 2.75%, which will remain in place until the assets of the
Fund reach $10 million or more. Shareholders who purchase Class D Shares are not
subject to a sales charge or distribution fees. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
A. Security Valuation: Securities listed on any national securities exchange
are valued at their last sale price on the exchange where the securities are
principally traded or, if there has been no sale on that date, at the mean
between the last reported bid and asked prices. Securities traded over-the-
counter are priced at the mean of the last bid and asked prices. Securities
are valued through valuations obtained from a commercial pricing service or at
the most recent mean of the bid and asked prices provided by investment
dealers in accordance with procedures established by the Board of Trustees.
Short-term investments having a maturity of 60 days or less are valued at
amortized cost, which the Board of Trustees believes represents fair value.
The books and records of the Fund are maintained in U.S. dollars. Transactions
denominated in foreign currencies are recorded at the current prevailing
exchange rates. All assets and liabilities denominated in foreign currencies
are translated into U.S. dollars at the current exchange rate. Translation
gains or losses resulting from changes in the exchange rate during the
reporting period and realized gains and losses on the settlement of foreign
currency transactions are reported in the results of operations for the
current period. The Fund does not isolate that portion of gains and losses on
investments in equity securities which is due to changes in the foreign
exchange rate from that which is due to changes in market prices of equity
securities.
Portfolio securities traded on a foreign exchange are generally valued at the
respective current prevailing exchange rates. The securities' values are
translated into U.S. dollars using these rates. If a rate has been determined
to have materially changed subsequently to the time it was established, the
fair value of those securities (considering the changing conditions) will be
determined by (or under the direction of) the Fund's Board of Trustees.
B. Risks Associated with Foreign Securities: There are certain risks
connected with investing in foreign securities. These include risks of adverse
political and economic developments (including possible government seizure or
nationalization of assets), the possible imposition of exchange controls or
other governmental restrictions, less uniformity in accounting and reporting
requirements, the possibility that there will be less information regarding
such securities and their issuers available to the public, the difficulty of
obtaining or enforcing court judgements abroad, restrictions on foreign
investments in other jurisdictions, difficulties in effecting repatriation of
capital invested abroad, and difficulties in transaction settlements and the
effect of delay on shareholder equity.
<PAGE>
JAPAN ALPHA FUND
NOTES TO FINANCIAL STATEMENTS (unaudited) September 30, 1995
================================================================================
B. Risks Associated with Foreign Securities (continued): Foreign securities
may be subject to foreign taxes, and may be less marketable than comparable
U.S. securities. The value of the Fund's investments denominated in foreign
currencies will depend on the relative strengths of those currencies and the
U.S. dollar, and the Fund may be affected favorably or unfavorably by changes
in the exchange rates or exchange control regulations between foreign
currencies and the U.S. dollar. Changes in foreign currency exchange rates
also may affect the value of dividends and interest earned, gains and losses
realized on the sale of securities and net investment income and gains, if any
to be distributed to shareholders of the Fund.
C. Federal Income Taxes: It is the policy of the Fund to comply with all
requirements of the Internal Revenue Code (the "Code") applicable to regulated
investment companies and to distribute substantially all of its taxable income
to its shareholders. The Fund has met the requirements of the Code applicable
to regulated investment companies for the period ended September 30, 1995.
Therefore, no federal income tax provision is required.
D. Determination Of Gains Or Losses On Sales Of Securities: Gains or losses
on the sale of securities are determined on the identified cost basis.
E. Organization Costs: Organization costs are being amortized on a straight-
line basis over five years from the Fund's commencement of operations.
F. Distributions To Shareholders: The Fund will distribute its net investment
income annually in December. Any net gains realized from the sale of portfolio
securities and net gains realized from foreign currency transactions are
distributed at least once each year unless they are used to offset losses
carried forward from prior years. Distributions to shareholders will be
recorded on the ex-dividend date. Income and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. The dividends on Class A Shares will
normally be lower than those on Class D Shares because of additional
distribution expenses charged to Class A Shares.
G. Other: Securities transactions are accounted for on the date the securities
are purchased or sold. Interest income is recorded on the accrual basis and
dividend income on the ex-dividend date. Income, expenses (excluding class-
specific expenses) and realized/unrealized gains/losses are allocated
proportionately to each class of shares based upon the relative net assets
(inclusive of capital stock activity) of each class of shares.
H. Capital Share Transactions: The Fund is authorized to issue an unlimited
number of shares of beneficial interest without par value. Transactions in
shares of beneficial interest from April 9, 1995 (commencement of investment
operations) through September 30, 1995 were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS D SHARES
-------------- --------------
Shares Amount Shares Amount
------- ---------- ------- ------
<S> <C> <C> <C> <C>
Shares sold................... 502,541 $5,023,210 16,743 $152,800
Shares issued through
reinvestment of dividends... 0 0 0 0
Shares redeemed............... (5) (45) (105) (922)
------- ---------- ------ --------
Net Increase.................. 502,536 $5,023,165 16,638 $151,878
======= ========== ====== ========
</TABLE>
<PAGE>
JAPAN ALPHA FUND
NOTES TO FINANCIAL STATEMENTS (unaudited) September 30, 1995
================================================================================
2. Advisory, Administration and Distribution Agreements:
Farrell-Wako Global Investment Management, Inc. (the "Advisor"), a registered
investment advisor, provides the Fund with investment management services. As
compensation for these services, the Fund pays the Advisor a monthly fee which
is calculated daily by applying an annual rate of 0.98% to the average daily
net assets of the Fund. The Advisor has voluntarily agreed to waive its fees
and reimburse the Fund to the extent total annualized expenses exceed 2.50%
(Class A Shares) and 2.25% (Class D Shares) of the Fund's average daily net
assets. For the period ended September 30, 1995, the Advisor agreed to waive
fees totaling $74,353. Certain officers and trustees of the Fund are also
officers and directors of the Advisor. All officers serve without direct
compensation from the Fund.
Under its Administrative Services Agreement (the "Agreement") with the Fund,
Fund/Plan Services, Inc., the Fund's Administrator, provides certain
administrative services for which the Fund pays a fee computed at the annual
rate of 0.15% of the first $75 million of total average net assets, 0.10% of the
next $75 million of total average net assets and 0.05% of total net assets in
excess of $150 million. As stated in the Agreement, aggregate administration
fees will not be less than $95,000 for both Class A and Class D Shares.
Pursuant to Rule 12b-1 under the Act, the Fund has adopted a Plan of
Distribution (the "Plan") for the Fund's Class A Shares. As provided in the
Plan, the Class A Shares will pay an annual fee of 0.25% of the Fund's average
daily net assets attributable to Class A Shares to Fund/Plan Broker Services,
Inc., the Fund's distributor, as compensation for its services.
3. Investment Transactions
Investment transactions for the period ended September 30, 1995, excluding
temporary short-term investments, are as follows:
Purchases Proceeds from sales
--------- -------------------
$7,538,878 $2,785,840
