Series S-1 Income Fund
TSX : SRC.UN

Series S-1 Income Fund

May 30, 2005 19:07 ET

Series S-1 Income Fund: 1st Quarter Report 2005

CALGARY, ALBERTA--(CCNMatthews - May 30, 2005) - Series S-1 Income Fund (TSX: SRC.UN):

For the three months ended March 31, 2005 (unaudited)



Investment Highlights

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Mar. 31, Dec. 31, Sep. 30, Jun. 30, Mar. 31,
2005 2004 2004 2004 2004
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Net Asset Value
per Unit $11.00 $11.14 $10.55 $10.29 $11.01
Market Price per Unit $10.15 $11.40 $10.78 $10.01 $10.66
Trading Premium
(Discount) (7.7%) 2.3% 2.2% (2.7%) (3.2%)
Quarterly Distributions
per Unit $0.225 $0.225 $0.225 $0.225 $0.225
12 Month Trailing Yield 8.9% 7.9% 8.3% 8.2% n/a
Market Capitalization
($ millions) $356.3 $398.9 $375.8 $347.7 $370.3
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Investment Manager Report

After valuations peaked in mid-March, investor concerns over rising interest rates and inflation caused a broad sell-off in the income trust market late in the first quarter of 2005. The hardest hit sectors were the more interest rate sensitive trusts such as real estate and power generation. While oil & gas prices remained strong in the quarter, concerns over the high valuations in the oil & gas royalty trust sector precipitated a sell-off at quarter end as well. The S&P/TSX Income Trust index managed a positive total return of 4.5% during the first quarter of 2005, narrowly outpacing the S&P/TSX Composite index's return of 4.4%. Due to its unit price weakness late in the quarter, Series S-1 generated a negative 9.1% return in the first quarter.

During the first quarter of 2005, the Fund made limited changes to its portfolio. The Fund disposed of its entire position in UE Waterheater and a portion of its holding in Chemtrade Logistics, while adding Paramount Energy subscription receipts.

Despite the pullback in March 2005, there is evidence that investor fears concerning economic slowdown and inflation may be overstated. With lower valuations and Standard and Poor's January 2005 decision to include trusts in the S&P/TSX Composite index, investor interest is expected to return. Series S-1 continues to provide unitholders with stable and sustainable monthly distributions while maintaining its SR-1 stability rated portfolio.

Management's Discussion & Analysis (May 24, 2005)

Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements for the three months ended March 31, 2005, and the audited financial statements and MD&A for the year ended December 31, 2004.

Series S-1's net asset value decreased marginally during the quarter from $11.14 per unit at the end of 2004 to $11.00 per unit at March 31, 2005. Valuation declines in the ongoing business trusts and power generation sectors of the Fund's portfolio contributed to this decline. The Fund's market price experienced a sharp decline, ending the quarter at $10.15 per unit, down from $11.40 per unit at the end of 2004 due to weak market sentiment in the income trust sector. As a result of this weakness, the Fund was required to repurchase 15,500 units for cancellation under its mandatory repurchase program.

Total revenue for the quarter was $7.9 million down from $8.3 million generated in the first quarter of 2004 due to lower yields on certain investments. Administrative and investment manager fees and trailer fees, both of which are calculated in reference to the Fund's net asset value, increased slightly to $1.2 million and $0.4 million respectively during the quarter. General and administration costs totaled $0.1 million for the quarter comparable to the first quarter of 2004. After total expenses of $1.65 million, the Fund generated net investment income of $6.2 million or $0.18 per unit compared to $6.7 million or $0.19 per unit for the comparative quarter of 2004. Distributions for the quarter were $0.225 per unit, consistent with distributions paid in the first quarter of 2004.

Total results of operations for the quarter ended March 31, 2005 were $2.9 million or $0.08 per unit compared to $23.1 million or $0.67 per unit for the first quarter of 2004. Results of operations for the first quarter of 2005 were negatively impacted by unrealized losses on the existing portfolio of $5.2 million slightly offset by realized gains of $1.9 million. Comparatively, net realized and unrealized gains totaled $16.4 million for the first quarter of 2004.



Portfolio Holdings
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Oil & Gas Royalty Trusts 13%
Real Estate Investment Trusts 13%
Cash & Term Deposits 10%
Power Generation Investments 18%
Pipeline/Energy Investments 15%
Ongoing Business Trusts 31%
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Series S-1 Income Fund
Statement of Net Assets
(Unaudited)

As at March 31, December 31,
2005 2004
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Assets
Investments, at market $ 349,857,362 $ 358,142,987
Cash and term deposits 38,438,663 32,257,232
Revenue receivable 2,379,410 2,400,601
Accounts receivable 184,982 98,653
Prepaid expenses 45,168 29,998
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390,905,585 392,929,471
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Liabilities
Accounts payable 2,056,530 384,898
Distributions payable 2,632,972 2,624,313
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4,689,502 3,009,211
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Net Assets $ 386,216,083 $ 389,920,260
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Units outstanding 35,106,294 34,990,842
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Net asset value per unit $ 11.00 $ 11.14
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Series S-1 Income Fund
Statement of Operations
(Unaudited)

March 31, March 31,
For the Three Months Ended 2005 2004
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Revenue
Investment income $ 7,880,251 $ 8,308,072
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7,880,251 8,308,072
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Expenses
Administrative and investment
manager fees 1,167,634 1,095,723
Trailer fees 386,169 382,143
General and administration costs 97,096 108,237
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1,650,899 1,586,103
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Net investment income 6,229,352 6,721,969
Net realized gain 1,874,339 1,262,637
Net change in unrealized gain (loss) (5,212,402) 15,122,860
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Total results of operations $ 2,891,289 $ 23,107,466
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Results of operations per unit:
Net investment income $ 0.18 $ 0.19
Net realized gain 0.05 0.04
Net change in unrealized gain (loss) (0.15) 0.44
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$ 0.08 $ 0.67
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Series S-1 Income Fund
Statement of Changes in Net Assets
(Unaudited)

March 31, March 31,
For the Three Months Ended 2005 2004
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Net Assets - beginning of period $ 389,920,260 $ 365,722,905
Operations:
Net investment income 6,229,352 6,721,969
Net realized gain 1,874,339 1,262,637
Net change in unrealized gain (loss) (5,212,402) 15,122,860
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2,891,289 23,107,466
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Unitholder Transactions:
Issuance of trust units, net 1,455,419 1,327,730
Distributions to unitholders (7,891,323) (7,806,668)
Repurchase of trust units (159,562) -
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(6,595,466) (6,478,938)
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Net Assets - end of period $ 386,216,083 $ 382,351,433
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Distributions per unit $ 0.225 $ 0.225
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Series S-1 Income Fund
Statement of Investments
(Unaudited)

As at March 31, 2005
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% of
Cost Market Market
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Ongoing Business Trusts
ACS Media Income Fund $ 4,755,000 $ 4,850,000
Amtelecom Income Fund 5,249,225 6,531,250
Arctic Glacier Income Fund 5,718,069 6,873,500
Bell Nordiq Income Fund 2,137,105 2,675,461
CML Healthcare Income Fund 5,363,500 6,800,000
Chemtrade Logistics Income Fund 7,491,715 7,669,706
Clearwater Seafoods Income Fund 7,461,912 4,884,000
Consumers' Waterheater Income Fund 4,763,075 5,940,000
Custom Direct Income Fund 7,000,000 9,415,000
KCP Income Fund 5,037,748 4,440,000
Noranda Income Fund 12,560,209 15,024,100
Rogers Sugar Income Fund 5,799,821 6,272,000
Royal LePage Franchise
Facilities Fund 7,550,000 10,117,000
SFK Pulp Fund 6,320,945 5,408,000
Specialty Foods Group Income Fund 5,030,513 2,125,000
Sun Gro Horticulture Income Fund 4,846,342 4,866,000
TransForce Income Fund 4,494,057 9,262,500
UE Waterheater Income Fund - -
Yellow Pages Income Fund 6,520,000 8,684,640
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108,099,236 121,838,157 31.4%
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Power Generation Investments
Algonquin Power Income Fund 11,807,752 11,618,743
Boralex Power Income Fund 8,349,789 8,556,920
Calpine Power Income Fund 6,115,250 6,301,360
Clean Power Income Fund 14,039,535 9,534,000
Innergex Power Income Fund 7,250,220 9,275,000
Northland Power Income Fund 4,871,328 5,665,250
TransAlta Power, L.P. 17,426,317 18,260,160
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69,860,191 69,211,433 17.8%
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Pipeline/Energy Investments
AltaGas Income Trust 5,754,980 6,872,040
Heating Oil Partners Income Fund 6,704,085 2,675,000
Inter Pipeline Fund 10,522,192 14,678,608
Keyspan Facilities Income Fund 6,983,448 9,554,545
Superior Plus Income Fund 11,864,535 16,727,200
Taylor NGL L.P. 5,584,920 7,615,800
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47,414,160 58,123,193 15.0%
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Real Estate Investment Trusts
Borealis Retail Reit 7,000,000 9,380,000
Dundee Reit 8,126,642 10,224,000
Firm Capital Mortgage Investment
Trust 4,895,558 5,055,620
InnVest Reit 5,264,206 6,648,830
O & Y Reit 4,877,617 7,060,500
Retirement Residences Reit 4,799,089 4,440,750
RioCanReit 5,562,176 7,260,000
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40,525,288 50,069,700 12.9%
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Oil & Gas Royalty Trusts
Acclaim Energy Trust 7,142,587 9,727,130
ARC Energy Trust 12,197,033 17,605,500
Enerplus Resources Fund 5,394,211 7,679,000
Paramount Energy Trust 5,000,515 6,984,525
Paramount Energy Trust
Subscription Receipts 759,935 759,935
Petrofund Energy Trust 4,638,849 6,949,349
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35,133,130 49,705,439 12.8%
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Series S-1 Income Fund
- repurchased units to be cancelled 910,426 909,440 0.2%
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Investments 301,942,431 349,857,362 90.1%
Cash and Term Deposits 38,438,663 38,438,663 9.9%
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Total $340,381,094 $388,296,025 100.0%
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Series S-1 Income Fund

Notes to the Financial Statements (Unaudited)

The Trust

Series S-1 Income Fund (the "Fund" or "Series S-1") is a closed-end investment trust, established under the laws of Alberta pursuant to a Declaration of Trust dated April 17, 2003 and amended June 12, 2003. The Fund commenced operations on June 12, 2003 with the completion of its initial public offering. The term of the Fund continues until December 31, 2009, or such earlier or later date as unitholders may determine in accordance with the Declaration of Trust.

The Fund's investment objectives are to provide unitholders with monthly cash distributions derived from a diversified and SR-1 rated portfolio of income producing investments consisting of income funds and high yielding investment grade debt and to return the original issue price to unitholders upon termination of the Fund. This rating signifies S&P's assessment that the Fund's units have the highest level of distribution sustainability and the lowest level of distribution variability in relation to other Canadian income funds. Series S-1's distribution policy is to pay monthly cash distributions targeted at $0.075 per unit.

Significant Accounting Policies

These interim financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include estimates and assumptions by management. Actual results may differ from these estimates. Significant accounting policies employed include:

a) Cash and cash equivalents consists of cash on hand and short term bankers' acceptances with maturities of less than 90 days on acquisition.

b) Investments are stated at market values based on closing market quotations. Average cost is used to compute realized and unrealized gains or losses on investments. Transactions are recorded on the trade date.

c) The Fund qualifies as a unit trust within the meaning of the Income Tax Act (Canada). Provided the Fund distributes to its unitholders its income for tax purposes, the Fund will not generally be liable for income tax under Part I of the Act.

d) Dividend income is recorded on the ex-dividend date, distribution income is recognized on the ex-distribution date and interest is recognized as earned.

Unitholders' Contribution

The authorized capital of the Fund consists of an unlimited number of trust units which are transferable non-redeemable units of beneficial interest.

The Fund has a mandatory repurchase program whereby units offered for sale at a discount to the Fund's net asset value per unit of greater than 5% are repurchased for cancellation. This program is subject to a maximum of 1.25% of the total number of units outstanding at the beginning of each calendar quarter. During the quarter ended March 31, 2005, 15,500 units were purchased for cancellation (quarter ended March 31, 2004 - no units).

Administrative and Investment Manager Fees

Citadel Series Management Ltd. is the administrator of the Fund and Bloom Investment Counsel, Inc. is the investment manager of the Fund. The administrator and investment manager are entitled to fees totaling 1.1% of the average weekly net asset value of the Fund, payable in units monthly in arrears. During the quarter ended March 31, 2005, the Fund recorded an expense of $1,167,634 related to these fees (quarter ended March 31, 2004 - $1,095,723).

Trailer Fees

A trailer fee is paid to investment dealers calculated and payable quarterly in arrears at an annual rate of 0.4% of the net asset value of the Fund held by unitholders in accounts with investment dealers. During the quarter ended March 31, 2005, the Fund recorded an expense of $386,169 in respect of the trailer fee (quarter ended March 31, 2004 - $382,143).



Corporate Information

Administrator
Citadel Series Management Ltd.
Suite 3500, 350 - 7th Avenue S.W.
Calgary, Alberta
T2P 3N9
Telephone: (403) 261-9674
Fax: (403) 261-8670
Website: http://www.citadelfunds.com

Investment Manager
Bloom Investment Counsel, Inc.
Suite 1710, 150 York Street
Toronto, Ontario
M5H 3S5

Trustee
Computershare Trust Company of Canada
6th Floor, 530 - 8th Avenue S.W.
Calgary, Alberta
T2P 3S8

Stock Exchange Listing
Toronto Stock Exchange
Trust units: SRC.un


Contact Information