Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended November 30, 2003

Or

For the transition period from              to             

Commission File No. 817-00807

Access Capital Strategies Community Investment Fund, Inc.

(Exact name of registrant as specified in its charter)

617-576-5858

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant has been required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Exchange Act):    Yes  x    No  ¨

The registrant had 95 shareholders and 29,087,879 shares of common stock outstanding as of November 30, 2003.

Table of Contents

Access Capital Strategies Community Investment Fund, Inc.

November 30, 2003 Form 10-Q Quarterly Report

TABLE OF CONTENTS

2

Table of Contents

Access Capital Strategies Community Investment Fund, Inc.

CONDENSED STATEMENTS OF ASSETS AND LIABILITIES

See Notes to Condensed Financial Statements.

3

Table of Contents

Access Capital Strategies Community Investment Fund, Inc.

FINANCIAL INFORMATION (continued)

CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)

See Notes to Condensed Financial Statements.

4

Table of Contents

Access Capital Strategies Community Investment Fund, Inc.

CONDENSED STATEMENTS OF CHANGES IN NET ASSETS (UNAUDITED)

See Notes to Condensed Financial Statements.

5

Table of Contents

Access Capital Strategies Community Investment Fund, Inc.

CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)

See Notes to Condensed Financial Statements.

6

Table of Contents

Access Capital Strategies Community Investment Fund, Inc.

FINANCIAL HIGHLIGHTS (UNAUDITED)

The following per share data and ratios have been derived from information provided in the financial statements.

See Notes to Condensed Financial Statements.

7

Table of Contents

Access Capital Strategies Community Investment Fund, Inc.

Schedule of Investments

November 30, 2003 (UNAUDITED)

8

Table of Contents

9

Table of Contents

See Notes to Condensed Financial Statements.

10

Table of Contents

Access Capital Strategies Community Investment Fund, Inc.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Presentation

The accompanying unaudited condensed interim financial statements and financial highlights reflect the results of operations for Access Capital Strategies Community Investment Fund, Inc. (the “Fund”) and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. The results of operations and other data for the six months and quarter ended November 30, 2003 are not necessarily indicative of the results that may be expected for any other future interim period or the fiscal year ending May 31, 2004. The information in this report should be read in conjunction with the financial statements and accompanying notes included in the May 31, 2003 Annual Report on Form 10-K/A. The Fund has not changed its accounting and reporting policies from those disclosed in its May 31, 2003 financial statements.

In preparing the condensed interim financial statements and financial highlights, management is required to make estimates and assumptions that effect the reported amounts of assets and liabilities as of the date of the statement of assets and liabilities, and revenue and expenses for the period. Actual results could differ from those estimates; any such differences are expected to be immaterial to the net assets of the Fund.

These condensed financial statements and financial highlights cover the activity from June 1, 2003 to November 30, 2003.

2. Fees and Expenses

During the fiscal year ended May 31, 2003, the Fund was charged for custody services portfolio accounting services and operating expenses. To the extent such expenses exceeded six basis points (0.06%) of the Fund’s monthly average net assets, they were reimbursed by Access Capital Strategies LLC (“Access”), the Fund’s Manager, and Merrill Lynch Investment Managers, L.P. (“MLIM”). During the fiscal year ended May 31, 2003, the Fund also continued to be charged two basis points (0.02%) of the Fund’s total assets, including assets purchased with borrowed funds, to reimburse Access for unreimbursed expenses relating to the Fund paid by Access prior to March 2001.

11

Table of Contents

Effective as of June 1, 2003, the six basis point and two basis point expense reimbursement caps referred to above have been replaced with and superceded by a 25 basis point expense reimbursement cap. To the extent that the Fund’s operating expenses (exclusive of management fees and interest expense) in a given fiscal year are less than .25% of the Fund’s monthly average net assets, the Fund will repay Access and MLIM for operating expenses previously borne or reimbursed by Access and MLIM (provided that in no circumstance will the Fund pay or reimburse more than 25 basis points of the Fund’s monthly average assets for operating expenses and expense reimbursement collectively in any fiscal year). Total unreimbursed expenses as of November 30, 2003 amount to $597,329. The replacement of the previous expense reimbursement cap and its retroactive impact resulted in a return of previously received expense reimbursements during the three and six month periods ended November 30, 2003.

3. Reclassification

Certain financial statement items have been reclassified in the preceding fiscal year’s condensed interim financial statements to conform with the current interim period’s presentation. These reclassifications had no effect on previously reported net investment income, net increase in net assets resulting from operations, net assets or net asset value per share.

12

Table of Contents

Item 2:

Management’s Discussion and Analysis of Financial Condition and

Results of Operations

This quarterly report contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. The Fund’s actual results could differ materially from those projected in the forward-looking statements as a result of, among other factors, changes in interest rates, fluctuations in assets under management and other sources of fee income, and changes in assumptions used in making such forward-looking statements. The Fund’s investment objective is to invest in geographically specific private placement debt securities located in portions of the United States designated by Fund investors.

Overview

The Fund is a non-diversified, closed-end management investment company electing status as a business development company. The Fund’s investment objective is to invest in geographically specific private placement debt securities located in portions of the United States designated by Fund investors. The Fund invests primarily in private placement debt securities specifically designed to support underlying community development activities targeted to low- and moderate-income individuals such as affordable housing, education, small business lending, and job-creating activities in areas of the United States designated by Fund investors.

Investors in the Fund must designate a particular geographic area or region within the United States as part of their agreement to purchase Fund shares. The Fund invests only in areas where Fund shareholders have made targeted designations.

In addition to their geographic specificity, Fund investments must carry a AAA credit rating or carry credit enhancement from a AAA-rated credit enhancer or be issued or guaranteed by the U.S. Government, government agencies or government-sponsored enterprises. The Fund expects (but cannot guarantee) that all investments made by the Fund will be considered eligible for regulatory credit under the Community Reinvestment Act (“CRA”).

Compliance

To qualify as a Regulated Investment Company (“RIC”), the Fund must, among other things, satisfy a diversification standard under the Internal Revenue Code (the “Code”) such that, at the close of each quarter of the Fund’s taxable year, (i) not more than 25% of the value of its total assets is invested in the securities (other than government securities (including its agencies and instrumentalities) or securities of other RICs) of a single issuer, or two or more issuers which the Fund controls (under a 20% test) and which are engaged in the same or similar trades or business or related trades or businesses, and (ii) at least 50% of the market value of its total assets is represented by cash, cash items, government securities, securities of other RICs and other securities (with each investment in such other securities limited so that not more than 5% of the value of the Fund’s total assets is invested in the securities of a single issuer and the Fund does not own more than 10% of the outstanding voting securities of a single issuer).

Management believes the Fund was in compliance with the above requirements for the quarter ended November 30, 2003.

13

Table of Contents

Fund Operations

Investment Activity

Purchases

During the quarter ended November 30, 2003, the Fund purchased $89.7 million aggregate amount of new community development securities. During the quarter ended November 30, 2002, the Fund had purchased $52.3 million aggregate amount of new community development securities.

During the six months ended November 30, 2003, the Fund purchased $153.4 million aggregate amount of new community development securities. During the six months ended November 30, 2002, the Fund had purchased $143.0 million aggregate amount of new community development securities.

Sales

During the quarter ended November 30, 2003, the Fund sold $48.9 million aggregate amount of securities (including principal paydowns but excluding securities sold short in connection with hedging activities in respect of new investments in the Fund and sales of short-term securities). During the quarter ended November 30, 2002, the Fund had sold $30.0 million aggregate amount of securities (including principal paydowns but excluding securities sold short in connection with hedging activities in respect of new investments in the Fund and sales of short-term securities).

During the six months ended November 30, 2003, the Fund sold $94.7 million aggregate amount of securities (including principal paydowns but excluding securities sold short in connection with hedging activities in respect of new investments in the Fund and sales of short-term securities). During the six months ended November 30, 2002, the Fund had sold $82.6 million aggregate amount of securities (including principal paydowns but excluding securities sold short in connection with hedging activities in respect of new investments in the Fund and sales of short-term securities).

Borrowings

The Fund is permitted to use leverage in its investment program, subject to certain restrictions set forth in its Private Offering Memorandum and the Investment Company Act of 1940 (the “1940 Act”).

For the quarter ended November 30, 2003, the Fund averaged approximately $67.7 million in borrowings at an average rate of approximately 1.14% compared to the quarter ended November 30, 2002 when the Fund averaged approximately $38.7 million in borrowings at an average rate of approximately 1.78%.

For the six month period ended November 30, 2003, the Fund averaged approximately $66.4 million in borrowings at an average rate of approximately 1.15% compared to the six month period ended November 30, 2002 when the Fund averaged approximately $33.2 million in borrowings at an average rate of approximately 1.82%.

In each of the above referenced periods, the total proceeds from borrowings were primarily used to support additional investments in the Fund’s Designated Target Regions.

14

Table of Contents

Net Assets and Fund Holdings at November 30, 2003

At November 30, 2003, the Fund’s Net Asset Value was $285.8 million, or $9.83 per share. At the end of the prior fiscal quarter, August 31, 2003, the Fund’s Net Asset Value was $268.2 million, or $9.78 per share. At the end of the most recent fiscal year, May 31, 2003, the Net Asset Value was $247.0 million, or $10.21 per share. A year ago at November 30, 2002, the Fund’s Net Asset Value was $228.7 million, or $10.22 per share.

The $17.6 million, or 6.56%, quarter-to-quarter increase in net assets from $268.2 million to $285.8 million was primarily attributable to the sale of new shares in the Fund. The $57.1 million, or 24.97%, year-to-year increase in net assets was also primarily attributable to the sale of new shares in the Fund.

The Fund’s primary investments are listed on the Schedule of Investments included with this report.

Investment Income

The Fund had investment income net of all fees and expenses (as discussed below) of $3.86 million for the quarter ended November 30, 2003, an increase of approximately $0.23 million, or 6.34%, from net investment income of $3.63 million for the prior fiscal quarter, which ended August 31, 2003, and an increase of approximately $0.52 million, or 15.57%, from net investment income of $3.34 million for the fiscal quarter ended November 30, 2002. The increases were each largely due to an increase in the average net assets of the Fund.

The Fund had investment income net of all fees and expenses (as discussed below) of $7.49 million for the six month period ended November 30, 2003, an increase of approximately $1.05 million, or 16.30%, from net investment income of $6.44 million for the six month period ended November 30, 2002. The increase is largely due to an increase in average net assets of the Fund.

Management Fees & Expenses

Access Capital Strategies LLC (“Access”), the Fund’s Manager, is paid an annual management fee, paid quarterly, of fifty basis points (0.50%) of the Fund’s average monthly gross assets less accrued liabilities, other than indebtedness for borrowing. Merrill Lynch Investment Managers, L.P. (“MLIM”) receives from Access an annual sub-management fee, paid monthly, of twenty-five basis points (0.25%) of the Fund’s average gross monthly assets less accrued liabilities, other than indebtedness for borrowings.

For the quarter ended November 30, 2003, the management fee paid by the Fund was $429,171. For the prior quarter ended August 31, 2003, the management fee paid by the Fund was $399,810. For the year ago fiscal quarter ended November 30, 2002, the management fee paid by the Fund was $318,440. The increases were primarily due to increases in the net assets of the Fund.

During the fiscal year ended May 31, 2003, the Fund was charged for custody and portfolio accounting services and operating expenses. To the extent such expenses exceeded six basis points (0.06%) of the Fund’s monthly average net assets, they were reimbursed by Access and MLIM. During the fiscal year ended May 31, 2003, the Fund also continued to be charged two basis points (0.02%) of the Fund’s total assets, including assets purchased with borrowed funds, to reimburse Access for unreimbursed expenses relating to the Fund paid by Access prior to March 2001.

15

Table of Contents

Effective as of June 1, 2003, the six basis point and two basis point expense reimbursement caps referred to above were replaced with and superceded by a 25 basis point expense reimbursement cap. To the extent that the Fund’s operating expenses (exclusive of management fees and interest expense) in a given fiscal year are less than .25% of the Fund’s monthly average net assets, the Fund will repay Access and MLIM for operating expenses previously borne or reimbursed by Access and MLIM (provided that in no circumstance will the Fund pay or reimburse more than 25 basis points of the Fund’s monthly average assets for operating expenses and expense reimbursement collectively in any fiscal year). Total unreimbursed expenses as of November 30, 2003 amount to $597,328. The replacement of the previous expense reimbursement cap and its retroactive impact resulted in a return of previously received expense reimbursements during the three months ended November 30, 2003.

Yield

At the quarter ended November 30, 2003, the SEC current yield was 5.61%, compared to 5.08% for the quarter ended August 31, 2003 and 5.90% for the year ago quarter ended November 30, 2002.

For the quarter ended November 30, 2003, the ratio of net investment income to average net assets was 5.59% compared to 5.70% for the prior quarter, which ended August 31, 2003, and 6.17% for the quarter ended November 30, 2002.

Although interest rates have been unusually volatile, the Fund has consistently maintained a comparatively high current yield. The high yield is primarily due to the Fund’s use of leverage during a time of a steep yield curve.

Realized Gain/Loss

For the quarter ended November 30, 2003, the realized gain was $1,349,643 compared to a realized loss of $1,425,325 for the prior quarter, which ended August 31, 2003, and a realized loss of $609,931 for the quarter ended November 30, 2002. The gain in the current period was primarily attributable to sales of portfolio investments. The loss in the prior periods was primarily attributable to the Fund’s hedging activities. The Fund experiences a realized gain or loss on its hedges when the positions are closed or when they are rolled from one expiration cycle to the next.

For the six months ended November 30, 2003, the net realized loss on investments was $75,682 compared to a net realized loss of $3,952,298 for the six months ended November 30, 2002. In the current period gains on portfolio sales were offset by losses on the Fund’s hedging activities. The loss in the prior period was primarily attributable to the Fund’s hedging activities.

Dividends Paid

The Fund distributes to shareholders substantially all of its net investment income and net realized capital gains, if any, as determined for income tax purposes. Applicable law, including provisions of the 1940 Act, may limit the amount of dividends and other distributions payable by the Fund. Substantially all of the Fund’s net capital gain (the excess of net long-term capital gain over net short-term capital loss) and the excess of net short-term capital gain over net long-term capital loss, if any, are distributed annually with the Fund’s dividend distribution in December.

The Fund declares and distributes dividends on a monthly basis. Prior to June 1, 2003, the Fund declared and distributed dividends on a calendar quarterly basis. The Fund paid total monthly dividends of $0.1376 during the quarter ended November 30, 2003. The dividends were paid as follows:

16

Table of Contents

During the previous quarter ended August 31, 2003, the Fund paid total monthly dividends of $0.1412. A year ago, the Fund paid a quarterly dividend of $0.1512 per share on October 7, 2002 to shareholders of record as of September 30, 2002. While the Fund’s dividend was lower than in the year earlier period, it did not decline by nearly the amount of prevailing interest rates. The Fund’s use of leverage during a steep yield curve environment has supported the dividend.

Total Return

For the quarter ended November 30, 2003, the total return was 1.83%, compared to a total return of -2.80% in the quarter ended August 31, 2003 and a total return of 0.85% in the comparable period ended November 30, 2002.

Although interest rates continued to be volatile, the quarter ended November 30, 2003 was markedly calmer than the quarter ended August 31, 2003. Rates generally declined and the Fund’s fixed rate holdings increased in value.

Fund Designated Target Regions at November 30, 2003

The Fund’s Designated Target Regions (“DTRs”) are provided by Fund shareholders at the time of investment. At November 30, 2003 DTRs were: