WELLS S&P REIT INDEX FUND
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
BOARD OF TRUSTEES Wells
Leo F. Wells III S&P
John L. Bell REIT INDEX FUND
Richard W. Carpenter
Bud Carter
Donald S. Moss
Walter W. Sessoms
INVESTMENT ADVISER
Wells Asset Management, Inc. Annual Report
6200 The Corners Parkway, Suite 250 December 31, 1999
Atlanta, Georgia 30092
SUB-ADVISER
Gateway Investment Advisers, L.P.
400 TechneCenter Drive
Milford, Ohio 45150
UNDERWRITER [LOGO]
Wells Investment Securities, Inc. WELLS
6200 The Corners Parkway, Suite 250 Real Estate Funds
Atlanta, Georgia 30092
INDEPENDENT AUDITORS
Arthur Andersen LLP
425 Walnut Street
Cincinnati, Ohio 45202
TRANSFER AGENT
Countrywide Fund Services, Inc.
P.O. Box 5354
Cincinnati, Ohio 45201-5354
SHAREHOLDER SERVICE
Nationwide: (Toll-Free) 800-282-1581
<PAGE>
LETTER TO SHAREHOLDERS February 2000
================================================================================
Dear Shareholder,
As we reflect on 1999, the Wells S&P REIT Index Fund continues to yield quite
impressive dividends which are currently averaging more than six times higher
than that of the S&P 500. Even better news is that real estate fundamentals
remain strong, and since December, struggling REIT share prices appear to be on
the road to recovery. Industry experts and observers attribute the lackluster
interest in REITs in 1999 to the overwhelming net investments in high-tech
stocks and everything-dot-com. However, most experts predict a bright 2000 for
REITs.
The recent success of e-commerce companies creates a demand for more office and
warehouse/distribution space. Simply put, that means more real estate to
accommodate a growing e-commerce economy. Nevertheless, because stock market
volatility remains a concern, investors and advisors will likely revisit the
topic of portfolio allocation and will look to REITs as the traditional
portfolio stabilizers they have historically proven to be. For existing REIT
investors, this means rallying prices for the tremendously undervalued REIT
share.
The Wells S&P REIT Index Fund continues to offer its investors broad
diversification, liquidity, growth opportunities, and cash dividends.
Additionally, Wells is the only company to offer a mutual fund that tracks
Standard and Poor's REIT Composite Index. The Fund characteristically invests at
least 95% of assets in stocks included in the index, in approximately the same
proportion. The remaining 5% is invested in cash to maintain liquidity.
In 1999, the Fund's portfolio reflected approximately 80% of the total US Public
REIT market capitalization and represented all REIT sectors and property types.
These investments include 101 REITs, 99 of which are on the New York Stock
Exchange, one on the American Stock Exchange, and one on The Nasdaq Stock
Market.
The long-term outlook for the REIT market: Understanding the REIT market in 1999
is important in projecting the future of REITs. We anticipate that strong real
estate fundamentals will be maintained. And, with REITs once again getting the
endorsements they deserve from high-profile investors like Warren Buffett, we
can look forward to a potential rebound of the REIT market. Meanwhile, REITs
continue to be attractive investments because they distribute nearly all of
their income to shareholders and they receive uniquely favorable tax treatment.
All things considered, long-term growth is to be expected while REITs should
continue to yield the cash flow that makes them a major income-producing
investment option.
We are proud of the Wells S&P REIT Index Fund and are grateful to our loyal
investors who have helped us to grow. We look forward to meeting your real
estate investment needs with many more distinctive products. Your questions and
comments are always welcome. Please do not hesitate to call us at (800)
282-1581.
Yours truly,
/s/ Leo F. Wells III
Leo F. Wells III
2
<PAGE>
PERFORMANCE INFORMATION
================================================================================
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THE WELLS S&P REIT INDEX FUND AND THE S&P REIT INDEX
[GRAPHIC OMITTED]
12/31/99
--------
Wells S&P REIT Index Fund $7,235
S&P REIT Index $7,752
Past performance is not predictive of future performance.
-----------------------------------------------
Wells S&P REIT Index Fund
Average Annual Total Return
1 Year Since Inception*
Class A (10.00%) (16.21%)
Class B N/A (12.73%)**
Class C N/A (12.06%)**
-----------------------------------------------
*The chart above represents performance of Class A shares only, which will vary
from the performance of Class B and Class C shares based on the difference in
loads and fees paid by shareholders in the different classes. The initial public
offering of Class A shares commenced on March 2, 1998, the initial public
offering of Class B shares commenced on May 7, 1999 and the initial public
offering of Class C shares commenced on May 5, 1999.
**Represents the total return for each class from its respective initial public
offering to December 31, 1999.
3
<PAGE>
WELLS S&P REIT INDEX FUND
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1999
================================================================================
ASSETS
Investment securities:
At acquisition cost ........................................ $ 24,568,368
============
At market value (Note 1) ................................... $ 21,607,646
Dividends receivable .......................................... 144,120
Receivable from Adviser (Note 3) .............................. 9,460
Receivable for capital shares sold ............................ 133,941
Receivable for securities sold ................................ 65,566
Organization expenses, net (Note 1) ........................... 23,984
Other assets .................................................. 45,512
------------
TOTAL ASSETS ............................................... 22,030,229
------------
LIABILITIES
Payable for capital shares redeemed ........................... 10,721
Payable for securities purchased .............................. 128,883
Payable to Administrator (Note 3) ............................. 11,190
Other accrued expenses and liabilities ........................ 17,076
------------
TOTAL LIABILITIES .......................................... 167,870
------------
NET ASSETS .................................................... $ 21,862,359
============
NET ASSETS CONSIST OF:
Paid-in capital ............................................... $ 26,019,014
Accumulated net realized losses from security transactions .... (1,195,933)
Net unrealized depreciation on investments .................... (2,960,722)
------------
Net assets .................................................... $ 21,862,359
============
PRICING OF CLASS A SHARES
Net assets applicable to Class A shares ....................... $ 19,280,655
============
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) ......... 2,834,007
============
Net asset value and redemption price per share (Note 1) ....... $ 6.80
============
Maximum offering price per share (Note 1) ..................... $ 7.08
============
PRICING OF CLASS B SHARES
Net assets applicable to Class B shares ....................... $ 1,306,303
============
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) ......... 189,763
============
Net asset value, offering price and
redemption price per share (Note 1) ........................... $ 6.88
============
PRICING OF CLASS C SHARES
Net assets applicable to Class C shares ....................... $ 1,275,401
============
Shares of beneficial interest outstanding
(unlimited number of shares authorized, no par value) ......... 185,835
============
Net asset value, offering price and
redemption price per share (Note 1) ........................... $ 6.86
============
See accompanying notes to financial statements.
4
<PAGE>
WELLS S&P REIT INDEX FUND
STATEMENT OF OPERATIONS
For the Year Ended December 31, 1999
================================================================================
INVESTMENT INCOME
Dividends .................................................. $ 1,149,485
------------
EXPENSES
Investment advisory fees (Note 3) .......................... 86,810
Custodian fees ............................................. 54,030
Transfer agent fees, Class A (Note 3) ...................... 23,418
Transfer agent fees, Class B (Note 3) ...................... 9,600
Transfer agent fees, Class C (Note 3) ...................... 9,600
Accounting services fees (Note 3) .......................... 40,000
Insurance expense .......................................... 36,811
Registration fees, Common .................................. 27,203
Registration fees, Class A ................................. 527
Registration fees, Class B ................................. 2,988
Registration fees, Class C ................................. 2,998
Administrative services fees (Note 3) ...................... 26,009
Professional fees .......................................... 23,028
Postage and supplies ....................................... 18,001
Amortization of organization expenses (Note 1) ............. 7,574
Reports to shareholders .................................... 5,098
Pricing expenses ........................................... 2,196
Trustees' fees and expenses ................................ 1,250
Distribution expenses, Class A (Note 3) .................... 331
Distribution expenses, Class B (Note 3) .................... 4
------------
TOTAL EXPENSES .......................................... 377,476
Fees waived and expenses reimbursed by the Adviser (Note 3) (198,373)
------------
NET EXPENSES ............................................ 179,103
------------
NET INVESTMENT INCOME ......................................... 970,382
------------
REALIZED AND UNREALIZED LOSSES ON INVESTMENTS
Net realized losses from security transactions ............. (1,010,275)
Net change in unrealized appreciation/
depreciation on investments ............................. (1,502,786)
------------
NET REALIZED AND UNREALIZED LOSSES ON INVESTMENTS ............. (2,513,061)
------------
NET DECREASE IN NET ASSETS FROM OPERATIONS .................... $ (1,542,679)
============
See accompanying notes to financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
WELLS S&P REIT INDEX FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the Periods Ended December 31, 1999 and 1998
===========================================================================================
Year Period
Ended Ended
December 31, December 31,
1999 1998(A)
- -------------------------------------------------------------------------------------------
FROM OPERATIONS:
<S> <C> <C>
Net investment income ................................. $ 970,382 $ 283,229
Net realized losses from security transactions ........ (1,010,275) (185,658)
Net change in unrealized appreciation/
depreciation on investments ........................ (1,502,786) (1,457,936)
------------ ------------
Net decrease in net assets from operations ............... (1,542,679) (1,360,365)
------------ ------------
FROM DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income, Class A ......... (914,054) (283,229)
Dividends from net investment income, Class B ......... (27,091) --
Dividends from net investment income, Class C ......... (29,237) --
Return of capital, Class A ............................ (232,688) (61,104)
Return of capital, Class B ............................ (11,705) --
Return of capital, Class C ............................ (8,711) --
------------ ------------
Decrease in net assets from distributions to shareholders (1,223,486) (344,333)
------------ ------------
FROM CAPITAL SHARE TRANSACTIONS (Note 4):
CLASS A
Proceeds from shares sold ............................. 11,937,533 13,598,352
Net asset value of shares issued in reinvestment
of distributions to shareholders ................... 1,010,353 318,441
Payments for shares redeemed .......................... (3,137,252) (326,417)
------------ ------------
Net increase in net assets from Class A share transactions 9,810,634 13,590,376
------------ ------------
CLASS B
Proceeds from shares sold ............................. 1,398,817 --
Net asset value of shares issued in reinvestment
of distributions to shareholders ................... 27,124 --
Payments for shares redeemed .......................... (7,741) --
------------ ------------
Net increase in net assets from Class B share transactions 1,418,200 --
------------ ------------
CLASS C
Proceeds from shares sold ............................. 1,692,064 --
Net asset value of shares issued in reinvestment
of distributions to shareholders ................... 29,453 --
Payments for shares redeemed .......................... (307,505) --
------------ ------------
Net increase in net assets from Class C share transactions 1,414,012 --
------------ ------------
TOTAL INCREASE IN NET ASSETS ............................. 9,876,681 11,885,678
NET ASSETS:
Beginning of period (Note 1) .......................... 11,985,678 100,000
------------ ------------
End of period ......................................... $ 21,862,359 $ 11,985,678
============ ============
</TABLE>
(A) Represents the period from the commencement of operations (March 2, 1998)
through December 31, 1998.
See accompanying notes to financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
WELLS S&P REIT INDEX FUND-- CLASS A
FINANCIAL HIGHLIGHTS
==================================================================================
Per Share Data for a Share Outstanding Throughout Each Period
- ----------------------------------------------------------------------------------
Year Period
Ended Ended
December 31, December 31,
1999 1998 (A)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Net asset value at beginning of period ............. $ 7.75 $ 10.00
---------- ----------
Income (loss) from investment operations:
Net investment income ........................... 0.38 0.26
Net realized and unrealized losses on investments (0.85) (2.20)
---------- ----------
Total from investment operations ................... (0.47) (1.94)
---------- ----------
Less distributions:
Dividends from net investment income ............ (0.38) (0.26)
Return of capital ............................... (0.10) (0.05)
---------- ----------
Total distributions ................................ (0.48) (0.31)
---------- ----------
Net asset value at end of period ................... $ 6.80 $ 7.75
========== ==========
Total return(B) .................................... (6.24%) (19.62%)(D)
========== ==========
Net assets at end of period (000's) ................ $ 19,281 $ 11,986
========== ==========
Ratio of net expenses to average net assets(C) ..... 0.99% 0.99%(E)
Ratio of net investment income to average net assets 5.58% 5.33%(E)
Portfolio turnover rate ............................ 17% 9%(E)
</TABLE>
(A) Represents the period from the initial public offering of Class A shares
(March 2, 1998) through December 31, 1998.
(B) Total returns shown exclude the effect of applicable sales loads.
(C) Absent fee waivers and expense reimbursements by the Adviser, the ratio of
expenses to average net assets would have been 2.11% and 3.30%(E) for the
periods ended December 31, 1999 and 1998, respectively (Note 3).
(D) Not annualized.
(E) Annualized.
See accompanying notes to financial statements.
7
<PAGE>
WELLS S&P REIT INDEX FUND-- CLASS B
FINANCIAL HIGHLIGHTS
================================================================================
Per Share Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
Period
Ended
December 31,
1999(A)
- --------------------------------------------------------------------------------
Net asset value at beginning of period ...................... $ 8.16
----------
Income (loss) from investment operations:
Net investment income .................................... 0.17
Net realized and unrealized losses on investments ........ (1.20)
----------
Total from investment operations ............................ (1.03)
----------
Less distributions:
Dividends from net investment income ..................... (0.17)
Return of capital ........................................ (0.08)
----------
Total distributions ......................................... (0.25)
----------
Net asset value at end of period ............................ $ 6.88
==========
Total return(B) ............................................. (12.73%)(D)
==========
Net assets at end of period (000's) ......................... $ 1,306
==========
Ratio of net expenses to average net assets(C) .............. 1.72%(E)
Ratio of net investment income to average net assets ........ 5.77%(E)
Portfolio turnover rate ..................................... 17%
(A) Represents the period from the initial public offering of Class B shares
(May 7, 1999) through December 31, 1999.
(B) Total return shown excludes the effect of applicable sales loads.
(C) Absent fee waivers and expense reimbursements by the Adviser, the ratio of
expenses to average net assets would have been 3.28%(E) for the period
ended December 31, 1999 (Note 3).
(D) Not annualized.
(E) Annualized.
See accompanying notes to financial statements.
8
<PAGE>
WELLS S&P REIT INDEX FUND-- CLASS C
FINANCIAL HIGHLIGHTS
================================================================================
Per Share Data for a Share Outstanding Throughout Each Period
- --------------------------------------------------------------------------------
Period
Ended
December 31,
1999(A)
- --------------------------------------------------------------------------------
Net asset value at beginning of period ...................... $ 8.09
----------
Income (loss) from investment operations:
Net investment income .................................... 0.20
Net realized and unrealized losses on investments ........ (1.17)
----------
Total from investment operations ............................ (0.97)
----------
Less distributions:
Dividends from net investment income ..................... (0.20)
Return of capital ........................................ (0.06)
----------
Total distributions ......................................... (0.26)
----------
Net asset value at end of period ............................ $ 6.86
==========
Total return(B) ............................................. (12.06%)(D)
==========
Net assets at end of period (000's) ......................... $ 1,275
==========
Ratio of net expenses to average net assets(C) .............. 1.73%(E)
Ratio of net investment income to average net assets ........ 5.59%(E)
Portfolio turnover rate ..................................... 17%
(A) Represents the period from the initial public offering of Class C shares
(May 5, 1999) through December 31, 1999.
(B) Total return shown excludes the effect of applicable sales loads.
(C) Absent fee waivers and expense reimbursements by the Adviser, the ratio of
expenses to average net assets would have been 3.01%(E) for the period
ended December 31, 1999 (Note 3).
(D) Not annualized.
(E) Annualized.
See accompanying notes to financial statements.
9
<PAGE>
WELLS S&P REIT INDEX FUND
PORTFOLIO OF INVESTMENTS
December 31, 1999
================================================================================
Market
COMMON STOCKS -- 97.2% Shares Value
- --------------------------------------------------------------------------------
APARTMENT/RESIDENTIAL-- 23.3%
Apartment Investment & Management Company - Class A 13,700 $ 545,431
Archstone Communities Trust ........................ 28,600 586,300
Associated Estates Realty Corp. .................... 4,400 34,375
Avalon Bay Communities, Inc. ....................... 13,474 462,327
BRE Properties, Inc. - Class A ..................... 9,200 208,725
Camden Property Trust .............................. 8,275 226,528
Chateau Communities, Inc. .......................... 5,800 150,437
Colonial Properties Trust .......................... 4,700 108,981
Cornerstone Realty Income Trust, Inc. .............. 8,000 78,000
Equity Residential Properties Trust ................ 25,955 1,107,954
Essex Property Trust, Inc. ......................... 3,700 125,800
Gables Residential Trust ........................... 5,200 124,800
Home Properties of NY, Inc. ........................ 4,000 109,750
Manufactured Home Communities, Inc. ................ 4,900 119,131
Mid-America Apartment Communities, Inc. ............ 3,800 85,975
Pennsylvania Real Estate Investment Trust .......... 2,700 39,319
Post Properties, Inc. .............................. 7,900 302,175
Smith (Charles E.) Residential Realty, Inc. ........ 4,100 145,038
Summit Properties, Inc. ............................ 5,900 105,463
Sun Communities, Inc. .............................. 3,600 115,875
United Dominion Realty Trust, Inc. ................. 21,100 208,363
Walden Residential Properties, Inc. ................ 5,200 112,450
------------
5,103,197
------------
DIVERSIFIED-- 9.4%
Duke-Weeks Realty Corp. ............................ 25,640 499,980
Franchise Finance Corp. of America ................. 11,500 275,281
Glenborough Realty Trust, Inc. ..................... 6,400 85,600
Liberty Property Trust ............................. 13,700 332,225
National Golf Properties, Inc. ..................... 2,500 49,375
Pacific Gulf Properties, Inc. ...................... 4,200 85,050
Prison Realty Trust, Inc. .......................... 20,300 102,769
Spieker Properties, Inc. ........................... 13,300 484,619
U.S. Restaurant Properties, Inc. ................... 3,100 44,369
Washington Real Estate Investment Trust ............ 7,300 109,500
------------
2,068,768
------------
HEALTH CARE-- 5.4%
Health Care Property Investors, Inc. ............... 10,578 252,550
Health Care REIT, Inc. ............................. 5,800 87,725
Healthcare Realty Trust, Inc. ...................... 8,233 128,641
HRPT Properties Trust .............................. 27,000 243,000
LTC Properties, Inc. ............................... 5,600 47,250
Meditrust Corp. .................................... 29,200 160,600
10
<PAGE>
WELLS S&P REIT INDEX FUND
PORTFOLIO OF INVESTMENTS (Continued)
================================================================================
Market
COMMON STOCKS -- 97.2% (Continued) Shares Value
- --------------------------------------------------------------------------------
HEALTH CARE-- 5.4% (Continued)
National Health Investors, Inc. .................... 5,000 $ 74,375
Nationwide Health Properties, Inc. ................. 9,500 130,625
OMEGA Healthcare Investors, Inc. ................... 4,100 52,018
------------
1,176,784
------------
HOTEL-- 5.2%
Equity Inns, Inc. .................................. 7,600 51,300
FelCor Lodging Trust, Inc. ......................... 13,500 236,250
Hospitality Properties Trust ....................... 11,600 221,125
Host Marriott Corp. ................................ 46,900 386,925
MeriStar Hospitality Corp. ......................... 9,800 156,800
RFS Hotel Investors, Inc. .......................... 5,100 53,231
Winston Hotels, Inc. ............................... 3,400 27,625
------------
1,133,256
------------
INDUSTRIAL/OFFICE-- 28.9%
AMB Property Corp. ................................. 17,700 352,894
Arden Realty, Inc. ................................. 13,000 260,812
Bedford Property Investors, Inc. ................... 4,600 78,487
Boston Properties, Inc. ............................ 13,900 432,637
Brandywine Realty Trust ............................ 7,700 126,087
CarrAmerica Realty Corp. ........................... 13,700 289,413
CenterPoint Properties Corp. ....................... 4,200 150,675
Cornerstone Properties, Inc. ....................... 26,600 389,025
Cousins Properties, Inc. ........................... 6,600 223,987
Crescent Real Estate Equities Co. .................. 24,700 453,863
EastGroup Properties, Inc. ......................... 3,300 61,050
Equity Office Properties Trust ..................... 51,700 1,273,113
First Industrial Realty Trust, Inc. ................ 7,800 214,013
Highwoods Properties, Inc. ......................... 12,700 295,275
Kilroy Realty Corp. ................................ 5,700 125,400
Koger Equity, Inc. ................................. 5,500 92,813
Mack-Cali Realty Corp. ............................. 12,000 312,750
Parkway Properties, Inc. ........................... 2,100 60,506
Prentiss Properties Trust .......................... 7,700 161,700
ProLogis Trust ..................................... 33,090 636,983
Reckson Associates Realty Corp. .................... 10,400 213,200
SL Green Realty Corp. .............................. 5,000 108,750
------------
6,313,433
------------
MORTGAGE-- 1.0%
Dynex Capital, Inc.* ............................... 2,325 14,967
Indymac Mortgage Holdings, Inc. .................... 15,700 200,175
------------
215,142
------------
11
<PAGE>
WELLS S&P REIT INDEX FUND
PORTFOLIO OF INVESTMENTS (Continued)
================================================================================
Market
COMMON STOCKS -- 97.2% (Continued) Shares Value
- --------------------------------------------------------------------------------
RETAIL CENTERS-- 19.5%
Bradley Real Estate, Inc. .......................... 4,900 $ 85,443
Burnham Pacific Properties, Inc. ................... 6,600 61,875
CBL & Associates Properties, Inc. .................. 5,100 105,187
Chelsea GCA Realty, Inc. ........................... 3,300 98,175
Commercial Net Lease Realty ........................ 6,200 61,612
Developers Diversified Realty Corp. ................ 12,300 158,363
Federal Realty Investment Trust .................... 8,300 156,144
General Growth Properties, Inc. .................... 10,600 296,800
Glimcher Realty Trust .............................. 4,900 63,087
IRT Property Co. ................................... 6,800 53,125
JDN Realty Corp. ................................... 6,900 111,262
JP Realty, Inc. .................................... 3,600 56,250
Kimco Realty Corp. ................................. 12,500 423,438
Kranzco Realty Trust ............................... 2,200 19,387
Macerich Co. (The) ................................. 7,000 145,688
Mills Corp. ........................................ 4,900 87,588
New Plan Excel Realty Trust ........................ 18,160 287,155
Prime Retail, Inc. ................................. 8,877 49,933
Realty Income Corp. ................................ 5,500 113,438
Simon Property Group, Inc. ......................... 35,600 816,575
Taubman Centers, Inc. .............................. 10,900 117,175
Urban Shopping Centers, Inc. ....................... 3,700 100,363
Vornado Realty Trust ............................... 17,600 572,000
Weingarten Realty Investors ........................ 5,500 214,156
------------
4,254,219
------------
SELF STORAGE-- 4.5%
Public Storage, Inc. ............................... 27,934 633,753
Shurgard Storage Centers, Inc. - Class A ........... 6,000 139,125
Sovran Self Storage, Inc. .......................... 2,600 49,237
Storage USA, Inc. .................................. 5,700 172,425
------------
994,540
------------
TOTAL COMMON STOCKS (Cost $24,220,061) ............. $ 21,259,339
------------
CASH EQUIVALENTS-- 1.6% (Cost $348,307)
Firstar Stellar Treasury Fund ...................... 348,307 $ 348,307
------------
TOTAL INVESTMENT SECURITIES-- 98.8% (Cost $24,568,368) $ 21,607,646
OTHER ASSETS IN EXCESS OF LIABILITIES-- 1.2% ....... 254,713
------------
NET ASSETS-- 100.0% ................................ $ 21,862,359
============
* Non-income producing security.
See accompanying notes to financial statements.
12
<PAGE>
WELLS S&P REIT INDEX FUND
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
The Wells S&P REIT Index Fund (the Fund) is a diversified series of the Wells
Family of Real Estate Funds (the Trust), an open-end management investment
company registered under the Investment Company Act of 1940. The Trust was
organized as an Ohio business trust on June 4, 1997. The Fund was capitalized on
December 22, 1997, when Leo F. Wells III, the President of the Fund's investment
adviser, Wells Asset Management, Inc. (the Adviser), purchased the initial
10,000 shares of the Fund at $10 per share. The public offering of Class A
shares of the Fund commenced on March 2, 1998. The Fund had no operations prior
to the public offering of Class A shares except for the initial issuance of
shares. The public offering of Class B shares and Class C shares commenced on
May 7, 1999 and May 5, 1999, respectively.
The Fund seeks to provide investment results corresponding to the performance of
the S&P Real Estate Investment Trust Composite Index (the Index) by investing in
the stocks included in the Index.
The Fund offers three classes of shares: Class A shares (sold subject to a
maximum front-end sales load of 4% and a distribution fee of up to 0.25% of the
average daily net assets attributable to Class A shares), Class B shares (sold
subject to a maximum 5% contingent deferred sales load if redeemed within six
years of purchase and an annual distribution fee of up to 1% of the average
daily net assets attributable to Class B shares) and Class C shares (sold
subject to a 1% contingent deferred sales load if redeemed within one year of
purchase and an annual distribution fee of up to 1% of the average daily net
assets attributable to Class C shares). Each class of shares represents an
interest in the same assets of the Fund, has the same rights and is identical in
all material respects except that (1) Class B shares and Class C shares bear the
expenses of higher distribution fees; (2) Class B shares automatically convert
to Class A shares after approximately eight years, resulting in lower annual
expenses; (3) certain other class specific expenses will be borne solely by the
class to which such expenses are attributable; and (4) each class has exclusive
voting rights with respect to matters relating to its own distribution
arrangements.
The following is a summary of the Fund's significant accounting policies:
Securities valuation -- The Fund's portfolio securities are valued as of the
close of the regular session of trading on the New York Stock Exchange (normally
4:00 p.m., Eastern time). Securities traded on stock exchanges or quoted by
NASDAQ are valued at their last sales price on the principal exchange where the
security is traded or, if not traded on a particular day, at the closing bid
price. Securities traded in the over-the-counter market, and which are not
quoted by NASDAQ, are valued at their last sales price or, if not available, at
their last quoted bid price.
Share valuation -- The net asset value per share of each class of shares of the
Fund is calculated daily by dividing the total value of the Fund's assets
attributable to that class, less liabilities attributable to that class, by the
number of shares of that class outstanding, rounded to the nearest cent. The
maximum offering price per share of Class A shares of the Fund is equal to the
net asset value per share plus a sales load equal to 4.17% of the net asset
value (or 4% of the offering price). The offering price of Class B shares and
Class C shares is equal to the net asset value per share.
The redemption price per share of each class of shares of the Fund is equal to
the net asset value per share. However, Class B shares are subject to a maximum
contingent deferred sales load of 5% on amounts redeemed within one year of
purchase, incrementally reduced to 0% over a six year period from the date of
purchase. Class C shares are subject to a contingent deferred sales load of 1%
on amounts redeemed within one year of purchase.
Investment income -- Dividend income is recorded on the ex-dividend date.
Interest income is accrued as earned.
13
<PAGE>
Distributions to shareholders -- Distributions to shareholders arising from net
investment income are declared and paid quarterly. Net realized short-term
capital gains, if any, may be distributed throughout the year and net realized
long-term capital gains, if any, are distributed at least once each year. Income
dividends and capital gain distributions are determined in accordance with
income tax regulations.
Allocations between classes -- Investment income earned, realized capital gains
and losses, and unrealized appreciation and depreciation are allocated daily to
each class of shares based upon its proportionate share of total net assets of
the Fund. Class specific expenses are charged directly to the class incurring
the expense. Common expenses which are not attributable to a specific class are
allocated daily to each class of shares based upon its proportionate share of
total net assets of the Fund.
Security transactions -- Security transactions are accounted for on the trade
date. Securities sold are determined on a specific identification basis.
Organization expenses -- Expenses of organization, net of certain expenses paid
by the Adviser, have been capitalized and are being amortized on a straight-line
basis over five years.
Estimates -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Federal income tax -- It is the Fund's policy to comply with the special
provisions of the Internal Revenue Code available to regulated investment
companies. As provided therein, in any fiscal year in which the Fund so
qualifies and distributes at least 90% of its taxable net income, the Fund (but
not the shareholders) will be relieved of federal income tax on the income
distributed. Accordingly, no provision for income taxes has been made.
In order to avoid imposition of the excise tax applicable to regulated
investment companies, it is also the Fund's intention to declare as dividends in
each calendar year at least 98% of its net investment income (earned during the
calendar year) and 98% of its net realized capital gains (earned during the
twelve months ended October 31) plus undistributed amounts from prior years.
As of December 31, 1999, the Fund had capital loss carryforwards for federal
income tax purposes of $357,546, which expire on December 31, 2007. In addition,
the Fund elected to defer until its subsequent tax year $141,835 of capital
losses incurred after October 31, 1999. These capital loss carryforwards and
"post-October" losses may be utilized in future years to offset net realized
capital gains, if any, prior to distribution to shareholders.
As of December 31, 1999, net unrealized depreciation on investments was
$3,657,274 for federal income tax purposes, of which $195,421 related to
appreciated securities and $3,852,695 related to depreciated securities based on
a federal income tax cost basis of $25,264,920. The difference between the
federal income tax cost of portfolio investments and the acquisition cost is due
to certain timing differences in the recognition of capital losses under income
tax regulations and generally accepted accounting principles.
Reclassification of capital accounts -- On December 31, 1999, the Fund
reclassified $253,104 of overdistributed net investment income against paid-in
capital. This reclassification has no effect on the Fund's net assets or net
asset value per share.
2. INVESTMENT TRANSACTIONS
During the year ended December 31, 1999, cost of purchases and proceeds from
sales of portfolio securities, other than short-term investments, amounted to
$15,178,264 and $2,861,405, respectively.
14
<PAGE>
3. TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Trust are also officers of the Adviser or
of Countrywide Fund Services, Inc. (CFS), the administrative services agent,
shareholder servicing and transfer agent, and accounting services agent for the
Trust.
ADVISORY AGREEMENT
The Adviser provides general investment supervisory services to the Fund and
manages the Fund's business affairs pursuant to the terms of an Advisory
Agreement between the Adviser and the Trust. The Fund pays the Adviser an
investment advisory fee, computed and accrued daily and paid monthly, at an
annual rate of 0.50% of the average daily net assets of the Fund.
In order to reduce the operating expenses of the Fund, the Adviser voluntarily
waived its investment advisory fees of $86,810 and reimbursed the Fund for
$111,563 of other operating expenses during the year ended December 31, 1999.
SUB-ADVISORY AGREEMENT
Gateway Investment Advisers, L.P. (the Sub-Adviser) has been retained by the
Adviser to manage the Fund's investments pursuant to the terms of a Sub-Advisory
Agreement between the Sub-Adviser, the Adviser and the Trust. The Adviser (not
the Fund) pays the Sub-Adviser a fee, computed and accrued daily and paid
monthly, at an annual rate of 0.15% of the Fund's average daily net assets up to
$100 million; 0.10% of such net assets from $100 million to $200 million; and
0.07% of such net assets in excess of $200 million, subject to a $3,000 minimum
monthly fee.
ADMINISTRATION AGREEMENT
Under the terms of an Administration Agreement, CFS supplies non-investment
related administrative and compliance services for the Fund. CFS supervises the
preparation of tax returns, reports to shareholders, reports to and filings with
the Securities and Exchange Commission and state securities commissions, and
materials for meetings of the Board of Trustees. For these services, CFS
receives a monthly fee from the Fund at an annual rate of 0.15% of the Fund's
average daily net assets up to $50 million; 0.125% of such net assets from $50
million to $100 million; and 0.10% of such net assets in excess of $100 million,
subject to a $1,000 minimum monthly fee.
TRANSFER AGENT AND SHAREHOLDER SERVICING AGREEMENT
Under the terms of a Transfer, Dividend Disbursing, Shareholder Service and Plan
Agency Agreement, CFS maintains the records of each shareholder's account,
answers shareholders' inquiries concerning their accounts, processes purchases
and redemptions of the Fund's shares, acts as dividend and distribution
disbursing agent and performs other shareholder service functions. For these
services, CFS receives a monthly fee from the Fund at an annual rate of $20 per
shareholder account, subject to a $1,200 minimum monthly fee for each class of
shares. In addition, the Fund pays CFS out-of-pocket expenses including, but not
limited to, postage and supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of an Accounting Services Agreement, CFS calculates the daily
net asset value per share and maintains the financial books and records of the
Fund. For these services, CFS receives a monthly fee from the Fund, based on
current net assets and the number of classes of shares, of $4,000. In addition,
the Fund pays CFS certain out-of-pocket expenses incurred by CFS in obtaining
valuations of the Fund's portfolio securities.
UNDERWRITING AGREEMENT
Under the terms of an Underwriting Agreement, Wells Investment Securities, Inc.
(the Underwriter) serves as the exclusive agent for the distribution of shares
of the Fund. For these services, the Underwriter earned $47,237, $1,017 and $53
from underwriting and broker commissions on the sale of Class A, Class B and
Class C shares of the Fund, respectively, during the year ended December 31,
1999. The Underwriter is an affiliate of the Adviser.
15
<PAGE>
PLANS OF DISTRIBUTION
The Trust has adopted three separate plans of distribution under which each
class of shares of the Fund may directly incur or reimburse the Underwriter for
certain expenses related to the distribution of its shares. The annual
limitation for payment of expenses pursuant to the Class A Plan is 0.25% of the
Fund's average daily net assets attributable to Class A shares. The annual
limitation for payment of expenses pursuant to the Class B Plan and the Class C
Plan is 1.00% of the Fund's average daily net assets attributable to Class B
shares and Class C shares, respectively. For the year ended December 31, 1999,
the Fund paid Class A and Class B distribution expenses of $331 and $4,
respectively.
4. CAPITAL SHARE TRANSACTIONS
Proceeds and payments on capital shares as shown in the Statements of Changes in
Net Assets are the result of the following capital share transactions for the
periods shown:
- --------------------------------------------------------------------------------
Period Period
Ended Ended
Dec. 31, Dec. 31,
1999 1998
- --------------------------------------------------------------------------------
CLASS A
Shares sold ...................................... 1,582,826 1,537,513
Shares issued in reinvestment of
distributions to shareholders ................. 141,650 39,308
Shares redeemed .................................. (437,158) (40,132)
---------- ----------
Net increase in shares outstanding ............... 1,287,318 1,536,689
Shares outstanding, beginning of period (Note 1) . 1,546,689 10,000
---------- ----------
Shares outstanding, end of period ................ 2,834,007 1,546,689
========== ==========
CLASS B
Shares sold ...................................... 186,532 --
Shares issued in reinvestment of
distributions to shareholders ................. 3,888 --
Shares redeemed .................................. (657) --
---------- ----------
Net increase in shares outstanding ............... 189,763 --
Shares outstanding, beginning of period .......... -- --
---------- ----------
Shares outstanding, end of period ................ 189,763 --
========== ==========
CLASS C
Shares sold ...................................... 225,698 --
Shares issued in reinvestment of
distributions to shareholders ................. 4,226 --
Shares redeemed .................................. (44,089) --
---------- ----------
Net increase in shares outstanding ............... 185,835 --
Shares outstanding, beginning of period .......... -- --
---------- ----------
Shares outstanding, end of period ................ 185,835 --
========== ==========
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
================================================================================
[LOGO]
Arthur Andersen
To the Shareholders and Board of Trustees of the Wells S&P REIT Index Fund:
We have audited the accompanying statement of assets and liabilities of the
Wells S&P REIT Index Fund of the Wells Family of Real Estate Funds, including
the portfolio of investments, as of December 31, 1999, and the related statement
of operations, the statements of changes in net assets, and the financial
highlights for the periods indicated thereon. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of December 31, 1999, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Wells S&P REIT Index Fund of the Wells Family of Real Estate Funds as of
December 31, 1999, the results of its operations, the changes in its net assets,
and the financial highlights for the periods indicated thereon, in conformity
with accounting principles generally accepted in the United States.
/s/ Arthur Andersen
Cincinnati, Ohio,
February 4, 2000
