NOTES TO FINANCIAL STATEMENTS
(Unaudited) (concluded)
11. Line of Credit
The Trust has secured an uncommitted, $75,000,000 line of credit with U.S. Bank, N.A. Borrowings, if any, under this arrangement bear interest equal to the Prime Rate, minus 2%, which shall be paid monthly. The maximum loan amount outstanding should not exceed 33 1/3% of the market value of the assets of securities belonging to a Fund on any given day. This line of credit expires on June 15, 2010. At September 30, 2009, the Funds did not have any outstanding borrowings under this agreement.
12. New Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) established the FASB Accounting Standards Codification™ (ASC) as the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements in conformity with GAAP. The ASC supersedes existing non-grandfathered, non-SEC accounting and reporting standards. The ASC did not change GAAP but rather organized it into a hierarchy where all guidance within the ASC carries an equal level of authority. The ASC become effective for financial statements issued for interim and annual periods ending after September 15, 2009. The ASC did not have a material effect on the Funds’ financial statements.
13. Name Changes
Effective April 1, 2009, the Absolute Return Strategies Fund, the International Rotation Fund, the Multi-Cap Core Equity Fund and the Sector Rotation Fund, changed their Fund names to Multi-Hedge Strategies Fund, International Opportunity Fund, Global 130/30 Strategy Fund and All-Cap Opportunity Fund, respectively. The name change did not have any impact on the Funds’ investment objectives, tickers and CUSIPS.
14. Fund Conversion
Effective April 1, 2009, the investment strategy of the Multi-Cap Core Equity Fund was converted to 130/30 global equity strategy; SGI was hired as the Fund’s sub-adviser and the management fee was changed from 0.70% to 1.05% of the average daily net assets of the Fund.
15. Fund Merger
On May 29, 2009, the Multi-Hedge Strategies Fund (formerly, the Absolute Return Strategies Fund) acquired all of the net assets of Hedged Equity Fund, a separate series of the Trust, in exchange for shares of the Multi-Hedge Strategies Fund, pursuant to an agreement and plan of reorganization approved by the Board of Trustees and approved by the shareholders of the Hedged Equity Fund. The primary reason for the transaction was to combine a smaller fund into a larger fund with a similar investment objective. The acquisition was accomplished through the tax-free exchange of the outstanding shares of the Hedged Equity Fund (64,908 A-Class; 105,004 C-Class, and 580,806 H-Class) valued at $13,406,890 ($1,163,444 A-Class; $1,829,440 C-Class, and $10,414,006 H-Class) for respective shares of the Multi-Hedge Strategies Fund (57,725 A-Class; 88,368 C-Class, and 515,084 H-Class). For financial reporting purposes, the net assets received and shares issued by Multi-Hedge Strategies Fund were recorded at fair value; however, the Hedged Equity Fund’s cost of the investments and proceeds from short sales were carried forward to align ongoing reporting of Multi-Hedge Strategies Fund realized and unrealized gains and losses with amounts distributable to shareholders for tax purposes.
Hedged Equity Fund’s net assets on May 29, 2009 were $13,406,890, including $458,961 of unrealized appreciation. Hedged Equity Fund’s net assets were primarily comprised of investments with a fair value of $13,975,264, deposits with brokers related to short sales with a fair value of $3,790,427 and obligations relating to short sales with a fair value of ($4,426,820). The aggregate net assets of Multi-Hedge Strategies Fund immediately before and after the acquisition were $130,864,956 and $144,271,846, respectively.
The financial statements reflect the operations of the Multi-Hedge Strategies Fund for the period prior to the acquisition and the combined fund for the period subsequent to the fund merger. Because the combined investment portfolios have been managed as a single integrated portfolio since the acquisition was completed, it is not practicable to separate the amounts of revenue and earnings of the Hedged Equity Fund that have been included in the combined fund’s Statement of Operations since the acquisition was completed. Assuming the acquisition had been completed on April 1, 2009, Multi-Hedge Strategies Fund pro-forma net investment income, net gain on investments and net increase in net assets from operations for the six-month period ended September 30, 2009 would have been $(160,693), $2,254,308 and $2,407,885, respectively. Rydex Investments and its affiliates bore all of the expenses related to the reorganization.
16. Subsequent Events
Management has evaluated events or transactions that may have occurred since September 30, 2009, that would merit recognition or disclosure in the financial statements. This evaluation was completed through November 23, 2009, the date the financial statements were available to be issued and there were no events or transactions to be reported.
