Contents
The views expressed and any forward-looking
statements are as of October 31, 2012, unless otherwise noted, and are those of the Fund managers and/or Wells Fargo Funds Management, LLC. Discussions of individual securities, or the markets generally, or any Wells Fargo Advantage Fund are not
intended as individual recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances in the
market. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.
NOT FDIC INSURED
¡
NO BANK
GUARANTEE
¡
MAY LOSE VALUE
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2
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Wells Fargo Advantage Income Opportunities Fund
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Letter to shareholders (unaudited)
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Karla M. Rabusch
President
Wells Fargo Advantage Funds
During the period, high-yield corporate bonds performed well compared with U.S. Treasuries, as continued monetary accommodation from the Federal Reserve
(Fed) strengthened the demand for securities with higher yields.
Dear Valued Shareholder:
We are pleased to provide you with this semi-annual report for
the
Wells Fargo Advantage Income Opportunities Fund
for the six-month period that ended
October 31, 2012. During the period, high-yield corporate bonds performed well compared with U.S. Treasuries, as continued monetary accommodation
from the Federal Reserve (Fed) seemed to strengthen the demand for securities with higher yields. Volatility rippled through the markets on and off throughout the period as deteriorating credit conditions in Europe routinely counteracted burgeoning
trends of economic improvement in the U.S. Nonetheless, these periods of uncertainty strengthened the resolve of the Fed to keep monetary policy highly accommodative, which had a positive effect on the valuations of high-yield bonds. The lower-rated
credit tiers and longest-maturity segments of the fixed-income market outperformed the higher-quality and shorter-maturity segments during the period.
Global credit markets were roiled by the European debt crisis.
The first months of 2012 saw strengthening investor confidence in the U.S. economy despite indications of a recession in Europe. The improving conditions in the
U.S. led to greater confidence in the U.S. credit markets, which began to show some resistance to the credit problems of Europe. These leading events set the tone for the six-month period that began in May 2012. During those early months of 2012,
the lowest-rated credit tiers of the U.S. domestic fixed-income markets generally performed the best, while the highest-quality credit tiers and U.S. Treasuries generally declined in value as their yields began to shift higher on expectations for a
strengthening economy.
Unfortunately, the trends of improving credit confidence would not last and would be undermined by the woes of Europe. As Greece
neared default on its sovereign debt again in May 2012, politicians began to hint at the possibility of Greece exiting the euro. Early that month, the default crisis in Europe had escalated to a debate over the viability of the euro, amplifying the
crisis to an unprecedented level of worst-case consideration. Consequently, global investors once again rallied to the U.S. Treasury market, driving long-term Treasury yields to some of their lowest levels on record. That same month, U.S. Treasuries
and the highest-rated credit tiers were the best performers, while the lower-rated credit tiers of the fixed-income markets underperformed.
High-yield corporate bonds rebounded convincingly in June 2012 and rallied throughout the
remainder of the period.
It appeared that investors would continue to prefer higher-quality over riskier asset classes as long as the
problems in Europe persisted. The crisis continued to deepen into July, prompting the International Monetary Fund to warn European policymakers of a significant risk of deflation. Running counter to the woes in Europe, U.S. credit markets began to
improve in June, benefiting from consistent policy commitment by the Fed to maintain highly accommodative monetary conditions. In the U.S., the second half of June 2012 and the entire month of July 2012 saw strong performance in the high-yield and
longer-maturity segments of the fixed-income markets as U.S. credit markets tried to remain isolated from the crisis in Europe.
European markets
finally followed suit in August 2012 and into September and October 2012 as the European Central Bank (ECB) calmed market fears by announcing a program of unlimited bond-buying support and declaring to do
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Letter to shareholders (unaudited)
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Wells Fargo Advantage Income Opportunities Fund
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3
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whatever it takes to preserve the euro. Perhaps the most convincing statement of all for investors was Mario Draghi, the president of the ECB, declaring that the euro is
irreversible. Global credit markets responded strongly through the final months of the period, with the lowest-rated securities performing best. Thus, despite intermittent spikes in risk aversion and profound concerns in Europe, the six-month
period finished with a continued rally in the lower-rated areas of the fixed-income markets with notably strong performance from high-yield corporate bonds.
Recent events have not altered our message to shareholders. The heightened volatility of the past six months has often left many investors questioning their resolveand their investments. Yet, it is precisely
at such times that the market may present opportunitiesas well as challengesfor prudent investors. For many investors, simply building and maintaining a well-diversified
1
investment plan focused on clear financial objectives is the best long-term strategy.
Thank you for choosing to invest with
Wells Fargo Advantage Funds
. We appreciate your confidence in us and remain committed to helping you meet your
financial needs. For current information about your fund investments, contact your investment professional, visit our website at
wellsfargo
advantagefunds
.com
, or call us directly at
1-800-222-8222
. We are available 24
hours a day, 7 days a week.
Sincerely,
Karla M. Rabusch
President
Wells Fargo Advantage Funds
1.
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Diversification does not assure or guarantee better performance and cannot eliminate the risk of investment losses.
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Despite intermittent spikes in risk aversion and profound concerns in Europe, the six-month period finished with a continued rally in the lower-rated
areas of the fixed-income markets with notably strong performance from high-yield corporate bonds.
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4
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Wells Fargo Advantage Income Opportunities Fund
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Performance highlights (unaudited)
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Investment objective
The Fund seeks a high level of current income. Capital appreciation
is a secondary objective.
Adviser
Wells Fargo Funds Management, LLC
Subadviser
Wells Capital Management Incorporated
Portfolio managers
Niklas Nordenfelt, CFA
Phillip Susser
Average annual total returns
1
(%) as of October 31, 2012
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1 year
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5 year
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Since
inception
2-26-03
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Based on market value
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17.71
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9.37
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8.31
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Based on net asset value (NAV) per share
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15.36
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6.53
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8.29
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Figures quoted represent past performance, which is no
guarantee of future results and do not reflect the deduction of taxes that a shareholder may pay on fund distributions or the sales of fund shares.
Investment return and principal
value of an investment will fluctuate so that an investors shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted and assumes the reinvestment of
dividends and capital gains. To obtain performance information current to the most recent month-end, please call 1-800-222-8222.
The Adviser has
committed through May 31, 2013, to waive fees and/or reimburse expenses to the extent necessary to limit the Funds borrowing expenses to an amount that is 5 basis points lower than what the borrowing expenses would have been if the Fund had
not redeemed its Auction Market Preferred Shares. The Funds gross and net expense ratios for the six months ended October 31, 2012, are 1.29% and 1.04%, respectively. Without these reductions, the Funds returns would have been lower.
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Comparison of NAV vs. market value
since
inception
2
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The Fund is leveraged through a secured debt borrowing facility and may issue preferred shares. The use of leverage
results in certain risks including, among others, the likelihood of greater volatility of net asset value and the market price of common shares. Derivatives involve additional risks including interest rate risk, credit risk, the risk of improper
valuation, and the risk of non-correlation to the relevant instruments they are designed to hedge or to closely track. Bond values fluctuate in response to the financial condition of individual issuers, general market and economic conditions, and
changes in interest rates. In general, when interest rates rise, bond fund values fall and investors may lose principal value. High-yield securities have a greater risk of default and tend to be more volatile than higher-rated debt securities.
1.
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Total returns based on market value are calculated assuming a purchase of common stock on the first day and a sale on the last day of the period reported. Total returns based on
NAV are calculated based on the NAV at the beginning of the period and end of period. Dividends and distributions, if any, are assumed for the purposes of these calculations to be reinvested at prices obtained under the Funds Automatic
Dividend Reinvestment Plan. Total returns do not reflect brokerage commissions or sales charges. If these charges were included, the returns would be lower.
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2.
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This chart does not reflect any brokerage commissions or sales charges.
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Performance highlights (unaudited)
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Wells Fargo Advantage Income Opportunities Fund
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5
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Investment
income
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Interest
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$
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35,666,098
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Dividends
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53,828
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Income from affiliated securities
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26,285
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Total investment income
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35,746,211
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Expenses
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Advisory fee
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2,788,166
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Administration fee
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232,347
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Custody and accounting fees
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29,893
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Professional fees
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36,351
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Shareholder report expenses
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84,511
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Trustees fees and expenses
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7,446
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Transfer agent fees
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14,367
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Interest expense
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273,005
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Secured borrowing fees
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1,022,062
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Other fees and expenses
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23,593
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Total expenses
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4,511,741
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Less: Fee waivers and/or expense reimbursements
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(884,859
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)
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Net expenses
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3,626,882
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Net investment income
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32,119,329
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REALIZED AND
UNREALIZED GAINS (LOSSES) ON INVESTMENTS
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Net realized gains on investments
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5,563,299
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Net change in unrealized gains (losses) on investments
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15,360,574
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Net realized and unrealized gains (losses) on investments
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20,923,873
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Net increase
in net assets resulting from operations
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$
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53,043,202
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The accompanying notes are an integral part of these financial statements.
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20
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Wells Fargo Advantage Income Opportunities Fund
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Statement of changes in net assets
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Six months ended
October 31, 2012
(unaudited)
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Year ended
April 30, 2012
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Operations
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Net investment income
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$
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32,119,329
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$
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66,995,541
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Net realized gains on investments
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5,563,299
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7,371,101
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Net change in unrealized gains (losses) on investments
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15,360,574
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(33,221,928
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)
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Net increase in net assets resulting from operations
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53,043,202
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41,144,714
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Distributions to shareholders
from
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Net investment income
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(33,278,040
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)
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(71,940,314
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)
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Capital
share transactions
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Net asset value of common shares issued under the Automatic Dividend Reinvestment Plan
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1,292,787
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4,753,429
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Total increase (decrease) in net assets
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21,057,949
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(26,042,171
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)
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Net assets
applicable to common shareholders
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Beginning of
period
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683,807,487
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709,849,658
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End of
period
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$
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704,865,436
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$
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683,807,487
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Overdistributed net investment
income
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$
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(13,739,294
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)
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$
|
(6,076,636
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)
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The accompanying notes are an integral part of these financial statements.
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Statement of cash flowssix months ended October 31, 2012 (unaudited)
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Wells Fargo Advantage Income Opportunities Fund
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21
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Cash flows
from operating activities:
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Net increase in net assets resulting from operations
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$
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53,043,202
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Adjustments
to reconcile net increase in net assets from operations to net cash provided by operating activities:
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Purchase of investment securities
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(243,730,634
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)
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Proceeds from disposition of investment securities
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210,361,861
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Amortization
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(1,589,596
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)
|
Purchase of short-term investment securities, net
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22,612,289
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Decrease in interest and dividends receivable
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|
568,476
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Decrease in receivable for securities sold
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|
1,475,206
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Increase in principal paydown receivable
|
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|
(64,100
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)
|
Decrease in prepaid expenses and other assets
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|
55,047
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Increase in payable for investments purchased
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|
10,634,775
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Increase in advisory fee payable
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|
77,504
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Increase in due to other related parties
|
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|
2,467
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|
Decrease in accrued expenses and other liabilities
|
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|
(141,355
|
)
|
Unrealized appreciation on investments
|
|
|
(15,360,574
|
)
|
Net realized gains on investments
|
|
|
(5,563,299
|
)
|
|
|
|
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|
Net cash provided by operating activities
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|
32,381,269
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|
|
|
|
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Cash flows
from financing activities:
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|
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Cash distributions paid on common shares
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|
(32,541,031
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)
|
Increase in secured borrowing
|
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|
159,762
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|
|
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Net cash used in financing activities
|
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|
(32,381,269
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)
|
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Net decrease in cash
|
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|
0
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|
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|
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|
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Cash:
|
|
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|
Beginning of period
|
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$
|
0
|
|
|
|
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End of period
|
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$
|
0
|
|
|
|
|
|
|
|
|
Supplemental
cash disclosure:
|
|
|
|
|
Cash paid for interest
|
|
$
|
59,194
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|
|
|
|
|
|
|
|
Supplemental
non-cash financing disclosure:
|
|
|
|
|
Reinvestment of dividends
|
|
$
|
1,292,787
|
|
|
|
|
|
|
The accompanying notes are an integral part of these financial statements.
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22
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Wells Fargo Advantage Income Opportunities Fund
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Financial highlights
|
(For a share outstanding throughout each period)
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Six months ended
October 31, 2012
(unaudited)
|
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|
Year ended April 30
|
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|
2012
|
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|
2011
|
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|
2010
|
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|
2009
|
|
|
2008
|
|
Net asset value, beginning of period
|
|
$
|
9.67
|
|
|
$
|
10.11
|
|
|
$
|
9.69
|
|
|
$
|
7.37
|
|
|
$
|
12.32
|
|
|
$
|
14.26
|
|
Net investment income
|
|
|
0.45
|
1
|
|
|
0.95
|
1
|
|
|
1.02
|
1
|
|
|
1.06
|
1
|
|
|
1.35
|
1
|
|
|
1.64
|
1
|
Net realized and unrealized gains (losses) on investments
|
|
|
0.30
|
|
|
|
(0.37
|
)
|
|
|
0.42
|
|
|
|
2.41
|
|
|
|
(4.91
|
)
|
|
|
(1.85
|
)
|
Distributions to preferred shareholders from net
investment income
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.00
|
)
1
|
|
|
(0.01
|
)
1
|
|
|
(0.08
|
)
1
|
|
|
(0.37
|
)
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from investment operations
|
|
|
0.75
|
|
|
|
0.58
|
|
|
|
1.44
|
|
|
|
3.46
|
|
|
|
(3.64
|
)
|
|
|
(0.58
|
)
|
Distributions
to common shareholders from
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
(0.47
|
)
|
|
|
(1.02
|
)
|
|
|
(1.02
|
)
|
|
|
(1.08
|
)
|
|
|
(1.31
|
)
|
|
|
(1.36
|
)
|
Tax basis return of capital
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
(0.06
|
)
1
|
|
|
0.00
|
|
|
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total distributions to common shareholders
|
|
|
(0.47
|
)
|
|
|
(1.02
|
)
|
|
|
(1.02
|
)
|
|
|
(1.14
|
)
|
|
|
(1.31
|
)
|
|
|
(1.36
|
)
|
Net asset value, end of period
|
|
$
|
9.95
|
|
|
$
|
9.67
|
|
|
$
|
10.11
|
|
|
$
|
9.69
|
|
|
$
|
7.37
|
|
|
$
|
12.32
|
|
Market value, end of period
|
|
$
|
10.43
|
|
|
$
|
10.29
|
|
|
$
|
10.38
|
|
|
$
|
9.63
|
|
|
$
|
7.30
|
|
|
$
|
11.71
|
|
Total return based on market value
2
|
|
|
6.25
|
%
|
|
|
10.03
|
%
|
|
|
19.68
|
%
|
|
|
49.84
|
%
|
|
|
(25.48
|
)%
|
|
|
(11.07
|
)%
|
Ratios to
average net assets (annualized)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross expenses
|
|
|
1.29
|
%
|
|
|
1.35
|
%
|
|
|
1.44
|
%
|
|
|
1.79
|
%
|
|
|
3.09
|
%
|
|
|
1.21
|
%
|
Net expenses
|
|
|
1.04
|
%
|
|
|
1.03
|
%
|
|
|
1.09
|
%
|
|
|
1.13
|
%
|
|
|
2.30
|
%
|
|
|
1.21
|
%
|
Interest
expense
3
|
|
|
0.08
|
%
|
|
|
0.08
|
%
|
|
|
0.11
|
%
|
|
|
0.02
|
%
|
|
|
0.79
|
%
|
|
|
0.00
|
%
|
Net investment
income
|
|
|
9.21
|
%
|
|
|
9.89
|
%
|
|
|
10.55
|
%
4
|
|
|
11.81
|
%
4
|
|
|
14.35
|
%
4
|
|
|
9.81
|
%
4
|
Supplemental
data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate
|
|
|
14
|
%
|
|
|
25
|
%
|
|
|
42
|
%
|
|
|
108
|
%
|
|
|
88
|
%
|
|
|
102
|
%
|
Net assets of common shareholders, end of period
(000s omitted)
|
|
|
$704,865
|
|
|
|
$683,807
|
|
|
|
$709,850
|
|
|
|
$676,144
|
|
|
|
$508,602
|
|
|
|
$849,573
|
|
|
|
|
|
|
|
|
Borrowings outstanding, end of period (000s omitted)
|
|
|
$230,000
|
|
|
|
$230,000
|
|
|
|
$230,000
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Asset coverage per $1,000 of borrowing, end of period
|
|
|
$4,066
|
|
|
|
$3,973
|
|
|
|
$4,088
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
Liquidation value of Preferred Shares, end of
period (thousands)
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
$196,000
|
|
|
|
$196,000
|
|
|
|
$490,000
|
|
Asset coverage ratio for Preferred Shares, end of period
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
394
|
%
|
|
|
315
|
%
|
|
|
272
|
%
|
1.
|
Calculated based upon average common shares outstanding
|
2.
|
Total return is calculated assuming a purchase of common stock on the first day and a sale on the last day of the period reported. Dividends and distributions, if any, are
assumed for purposes of these calculations to be reinvested at prices obtained under the Funds Automatic Dividend Reinvestment Plan. Total return does not reflect brokerage commissions or sales charges.
|
3.
|
Interest expense ratio relates to interest associated with borrowings and/or leverage transactions.
|
4.
|
The net investment income ratio reflects any distributions paid to preferred shareholders.
|
The accompanying notes are an integral part of these financial statements.
|
|
|
|
|
|
|
Notes to financial statements (unaudited)
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
23
|
|
1. ORGANIZATION
Wells Fargo Advantage Income Opportunities Fund (the Fund) was organized as a statutory trust under the laws of the state of Delaware on December 3, 2002, and is registered as a diversified
closed-end management investment company under the Investment Company Act of 1940, as amended. The primary investment objective of the Fund is to seek a high level of current income. The Fund may, as a secondary objective, also seek capital
appreciation to the extent consistent with its investment objective.
2. SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies, which
are consistently followed in the preparation of the financial statements of the Fund, are in conformity with U.S. generally accepted accounting principles which require management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Securities valuation
All investments are valued each business day as of the close of regular trading on the New York Stock Exchange (normally 4 p.m. Eastern
Time).
Fixed income securities acquired with maturities exceeding 60 days are valued based on evaluated bid prices received from an
independent pricing service which may utilize both transaction data and market information such as yield, prices of securities of comparable quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. If valuations
are not available from the independent pricing service or values received are deemed not representative of market value, values will be obtained from a broker-dealer or otherwise determined based on the Funds Valuation Procedures.
Debt securities of sufficient credit quality acquired with maturities of 60 days or less generally are valued at amortized cost which approximates fair value. The
amortized cost method involves valuing a security at its cost, plus accretion of discount or minus amortization of premium over the period until maturity.
Equity securities that are listed on a foreign or domestic exchange, except for The Nasdaq Stock Market, Inc. (Nasdaq), are valued at the official
closing price or, if none, the last sales price. Securities listed on Nasdaq are valued at the Nasdaq Official Closing Price (NOCP). If no NOCP is available, securities are valued at the last prior sales price. If no sales price is shown
on the Nasdaq, the bid price will be used. If no sale occurs on the primary exchange or market for the security that day or if no sale occurs and no bid price is shown on Nasdaq, the prior days price will be deemed stale and fair
values will be determined in accordance with the Funds Valuation Procedures.
Investments in registered open-end investment companies are valued at
net asset value.
Investments which are not valued using any of the methods discussed above are valued at their fair value, as determined by procedures
established in good faith and approved by the Board of Trustees. The Board of Trustees has established a Valuation Committee comprised of the Trustees and has delegated to it the authority to take any actions regarding the valuation of portfolio
securities that the Valuation Committee deems necessary or appropriate, including determining the fair value of portfolio securities, unless the determination has been delegated to the Management Valuation Team of Wells Fargo Funds Management, LLC
(Funds Management). The Board of Trustees retains the authority to make or ratify any valuation decisions or approve any changes to the Valuation Procedures as it deems appropriate. On a quarterly basis, the Board of Trustees receives
reports on any valuation actions taken by the Valuation Committee or the Management Valuation Team which may include items for ratification.
Valuations
of fair valued securities are compared to the next actual sales price when available, or other appropriate market information to assess the continued appropriateness of the fair valuation methodology used. These securities are fair valued on a
day-to-day basis, taking into consideration changes to appropriate market information and any significant changes to the input factors considered in the valuation process until there is a readily available price provided on the exchange or by an
independent pricing service. Valuations received from an independent pricing service or broker quotes are periodically validated by comparisons to most recent trades and valuations provided by other independent pricing services in addition to the
review of prices by the adviser and/or subadviser. Unobservable inputs used in determining fair valuations are identified based on the type of security, taking into consideration factors utilized by market participants in valuing the investment,
knowledge about the issuer and the current market environment.
|
|
|
|
|
24
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
Notes to financial statements (unaudited)
|
When-issued transactions
The Fund may purchase securities on a forward commitment or
when-issued basis. The Fund records a when-issued transaction on the trade date and will segregate assets in an amount at least equal in value to the Funds commitment to purchase when-issued securities. Securities purchased on a
when-issued basis are marked-to-market daily and the Fund begins earning interest on the settlement date. Losses may arise due to changes in the market value of the underlying securities or if the counterparty does not perform under the contract.
Term loans
The Fund may invest in term loans. The Fund begins earning interest when the loans are funded. The loans pay interest at rates which are
periodically reset by reference to a base lending rate plus a spread. The Fund assumes the credit risk of the borrower and there could be potential loss to the Fund in the event of default by the borrower.
Security transactions and income
recognition
Securities transactions are recorded on a trade date basis. Realized gains or losses are reported on the basis of identified cost
of securities delivered.
Interest income is accrued daily and bond discounts are accreted and premiums are amortized daily based on the effective
interest method. To the extent debt obligations are placed on non-accrual status, any related interest income may be reduced by writing off interest receivables when the collection of all or a portion of interest has become doubtful based on
consistently applied procedures. If the issuer subsequently resumes interest payments or when the collectability of interest is reasonably assured, the debt obligation is removed from non-accrual status.
Dividend income is recognized on the ex-dividend date.
Distributions to shareholders
Distributions to shareholders from net investment income and net realized gains, if any, are recorded on the ex-dividend date. Such distributions
are determined in conformity with federal income tax regulations, which may differ in amount or character from net investment income and realized gains recognized for purposes of U.S. generally accepted accounting principles.
Federal and other taxes
The Fund intends to continue to qualify as a regulated investment company by distributing substantially all of its investment company taxable
income and any net realized capital gains (after reduction for capital loss carryforwards) sufficient to relieve it from all, or substantially all, federal income taxes. Accordingly, no provision for federal income taxes was required.
The Funds income and federal excise tax returns and all financial records supporting those returns for the prior three fiscal years are subject to examination
by the federal and Delaware revenue authorities. Management has analyzed the Funds tax positions taken on federal, state, and foreign tax returns for all open tax years and does not believe that there are any uncertain tax positions that
require recognition of a tax liability.
At April 30, 2012, net capital loss carryforwards, which are available to offset future
net realized capital gains, were as follows:
|
|
|
|
|
|
|
Pre-enactment capital loss
expiration
|
2015
|
|
2016
|
|
2017
|
|
2018
|
$6,603,920
|
|
$15,525,027
|
|
$130,598,584
|
|
$155,329,141
|
3. FAIR
VALUATION MEASUREMENTS
Fair value measurements of investments are determined within a framework that has established a fair value hierarchy
based upon the various data inputs utilized in determining the value of the Funds investments. The three-level hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and
the lowest priority to significant unobservable inputs (Level 3). The Funds investments are classified within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement. The inputs are
summarized into three broad levels as follows:
n
|
|
Level 1 quoted prices in active markets for identical securities
|
n
|
|
Level 2 other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
|
|
|
|
|
|
|
|
Notes to financial statements (unaudited)
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
25
|
|
n
|
|
Level 3 significant unobservable inputs (including the Funds own assumptions in determining the fair value of investments)
|
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in
those securities.
As of October 31, 2012, the inputs used in valuing investments in securities, which are carried at fair value, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in securities
|
|
Quoted prices
(Level 1)
|
|
|
Significant other
observable inputs
(Level 2)
|
|
|
Significant
unobservable inputs
(Level 3)
|
|
|
Total
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
986,320
|
|
|
$
|
0
|
|
|
$
|
4,298
|
|
|
$
|
990,618
|
|
Preferred stocks
|
|
|
1,385,420
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,385,420
|
|
Corporate bonds and notes
|
|
|
0
|
|
|
|
792,780,916
|
|
|
|
0
|
|
|
|
792,780,916
|
|
Term loans
|
|
|
0
|
|
|
|
65,452,017
|
|
|
|
13,944,508
|
|
|
|
79,396,525
|
|
Yankee corporate bonds and notes
|
|
|
0
|
|
|
|
40,544,632
|
|
|
|
0
|
|
|
|
40,544,632
|
|
Short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment companies
|
|
|
21,956,846
|
|
|
|
0
|
|
|
|
0
|
|
|
|
21,956,846
|
|
|
|
$
|
24,328,586
|
|
|
|
898,777,565
|
|
|
|
13,948,806
|
|
|
$
|
937,054,957
|
|
Further details on the major security types listed above can be found in the Portfolio of Investments.
Transfers in and transfers out are recognized at the end of the reporting period. For the six months ended October 31, 2012, the Fund did not have
any transfers into/out of Level 1 or Level 2.
The following is a reconciliation of assets in which significant unobservable inputs (Level 3) were used
in determining fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks
|
|
|
Term loans
|
|
|
Total
|
|
Balance as of April 30, 2012
|
|
$
|
9,671
|
|
|
$
|
5,611,506
|
|
|
$
|
5,621,177
|
|
Accrued discounts (premiums)
|
|
|
0
|
|
|
|
5,934
|
|
|
|
5,934
|
|
Realized gains (losses)
|
|
|
0
|
|
|
|
27,213
|
|
|
|
27,213
|
|
Change in unrealized gains (losses)
|
|
|
(5,373
|
)
|
|
|
(18,311
|
)
|
|
|
(23,684
|
)
|
Purchases
|
|
|
0
|
|
|
|
4,683,268
|
|
|
|
4,683,268
|
|
Sales
|
|
|
0
|
|
|
|
(2,650,037
|
)
|
|
|
(2,650,037
|
)
|
Transfers into Level 3
|
|
|
0
|
|
|
|
6,284,935
|
|
|
|
6,284,935
|
|
Transfers out of Level 3
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Balance as of October 31, 2012
|
|
$
|
4,298
|
|
|
$
|
13,944,508
|
|
|
$
|
13,948,806
|
|
Change in unrealized gains (losses) relating to securities still held at October 31,
2012
|
|
$
|
(5,373
|
)
|
|
$
|
31,342
|
|
|
$
|
25,969
|
|
The investments types categorized above were valued using indicative broker quotes and are therefore considered Level 3 inputs.
4. TRANSACTIONS WITH
AFFILIATES
Advisory Fee
Funds Management, an indirect wholly owned subsidiary of Wells Fargo & Company (Wells Fargo), is the adviser to the Fund and is entitled to
receive a fee at an annual rate of 0.60% of the Funds average daily total assets. Total assets consist of the net assets of the Fund plus borrowings or other leverage for investment purposes to the extent excluded in calculating net assets.
Funds Management has committed through May 31, 2013, to waive fees and/or reimburse expenses to the extent necessary to limit the Funds borrowing expenses to an amount that is 5 basis points lower than what the borrowing expenses would
have been if the Fund had not redeemed its Auction Market Preferred Shares (Preferred Shares). Funds Management contractually waived its advisory fee in the amount of $884,859 for the six months ended October 31, 2012.
Funds Management has retained the services of a subadviser to provide daily portfolio management to the Fund. The fee for subadvisory services is borne by Funds
Management. Wells Capital Management Incorporated, an affiliate of Funds Management, is the subadviser to the Fund and is entitled to receive a fee from Funds Management at an annual rate of 0.40% of the Funds average daily total assets.
|
|
|
|
|
26
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
Notes to financial statements (unaudited)
|
Administration fee
Funds Management also serves as the administrator to the Fund providing
the Fund with facilities, equipment and personnel. Funds Management is entitled to receive an annual administration fee from the Fund equal to 0.05% of the Funds average daily total assets.
5. CAPITAL SHARE TRANSACTIONS
The Fund has authorized capital of 100,000,000 shares with no par value. For the six months ended October 31, 2012 and the year ended
April 30, 2012, the Fund issued 130,500 and 487,572 shares, respectively.
The Fund no longer has any Preferred Shares outstanding.
6. BORROWINGS
The Fund has borrowed $230 million through a secured debt financing agreement administered by a major financial institution (the Facility). The Facility
has a commitment amount of $230 million which expires on February 25, 2013, at which point it may be renegotiated and potentially renewed for another one-year term. At October 31, 2012, the Fund had secured borrowings outstanding in the
amount of $230,213,811 (including accrued interest and usage and commitment fees payable).
The Funds borrowings under the Facility are generally
charged interest at a rate based on the rates of the commercial paper notes issued to fund the Funds borrowings or at the London Interbank Offered Rate (LIBOR) plus 1.0%. During the six months ended October 31, 2012, an effective interest
rate of 0.23% was incurred on the borrowings. Interest expense of $273,005, representing 0.08 % of the Funds average daily net assets, was incurred during the six months ended October 31, 2012.
The Fund has pledged all of its assets to secure the borrowings and currently pays, on a monthly basis, a usage fee at an annual rate of 0.40% of the daily average
outstanding principal amount of borrowings and commitment fee at an annual rate of 0.40% of the product of (i) the daily average outstanding principal amount of borrowings and (ii) 1.02. Prior to February 27, 2012, both the usage fee
and commitment fee were charged at an annual rate of 0.50%. The secured borrowing fee on the Statement of Operations of $1,022,062 represents the usage fee, commitment fee, and structuring fees. For the six months ended October 31, 2012, the
Fund paid structuring fees in the amount of $67,660.
7. INVESTMENT PORTFOLIO TRANSACTIONS
Purchases and sales of investments, excluding U.S.
government obligations (if any) and short-term securities, for the six months ended October 31, 2012 were $225,492,425 and $124,915,344, respectively.
As of October 31, 2012, the Fund had unfunded term loan commitments of $7,611,164.
8. INDEMNIFICATION
Under the
Funds organizational documents, the officers and directors are indemnified against certain liabilities that may arise out of performance of their duties to the Fund. Additionally, in the normal course of business, the Fund may enter into
contracts with service providers that contain a variety of indemnification clauses. The Funds maximum exposure under these arrangements is dependent on future claims that may be made against the Fund and, therefore, cannot be estimated.
9. NEW ACCOUNTING
PRONOUNCEMENT
In December 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update
(ASU) No. 2011-11,
Disclosures about Offsetting Assets and Liabilities
. ASU 2011-11, which amends FASB ASC Topic 210,
Balance Sheet
, creates new disclosure requirements which require entities to disclose both gross and
net information for derivatives and other financial instruments that are either offset in the Statement of Assets and Liabilities or subject to an enforceable master netting arrangement or similar agreement. The disclosure requirements are effective
for interim and annual reporting periods beginning on or after January 1, 2013. Management is currently assessing the potential impact, in addition to expanded financial statement disclosure, that may result from adopting this ASU.
10. SUBSEQUENT DISTRIBUTIONS
The Fund declared the following distributions to common shareholders:
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payable Date
|
|
Per Share Amount
|
October 26, 2012
|
|
November 15, 2012
|
|
December 3, 2012
|
|
$0.077
|
November 7, 2012
|
|
December 17, 2012
|
|
January 2, 2013
|
|
$0.077
|
December 28, 2012
|
|
January 15, 2013
|
|
February 1, 2013
|
|
$0.077
|
These distributions are not reflected in the accompanying financial statements.
|
|
|
|
|
|
|
Other information (unaudited)
|
|
Wells Fargo Advantage Income Opportunities Fund
|
|
|
27
|
|
TAX INFORMATION
Current tax law generally provides for a maximum tax rate for individual taxpayers of 15% on long-term capital gains and qualifying dividends on corporate stocks. This rate is scheduled to expire at the end of
2012. In the absence of further Congressional action, the maximum tax rate on long-term capital gains for individual taxpayers would increase to 20% and income from dividends would be taxed at the rates applicable to ordinary income.
In addition, for taxable years beginning after December 31, 2012, absent further Congressional action, an additional 3.8% Medicare tax will be imposed on certain
net investment income (including ordinary dividends and capital gain distributions received from a Fund and net gains from redemptions or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such
persons modified adjusted gross income (in the case of an individual) or adjusted gross income (in the case of an estate or trust) exceed certain threshold amounts.
PROXY VOTING INFORMATION
A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is
available without charge, upon request, by calling
1-800-222-8222
, visiting our website at
wellsfargoadvantagefunds.com
, or visiting the SEC website at sec.gov. Information regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available without charge on the Funds website at
wellsfargoadvantagefunds.com
or by visiting the SEC website at sec.gov.