Series S-1 Income Fund
TSX : SRC.UN

Series S-1 Income Fund

August 26, 2005 16:17 ET

Series S-1 Income Fund: 2nd Quarter Report 2005

CALGARY, ALBERTA--(CCNMatthews - Aug. 26, 2005) - Series S-1 Income Fund (TSX:SRC.UN):

For the six months ended June 30, 2005 (unaudited)



Investment Highlights

June 30, March 31, Dec. 31, Sept. 30, June 30,
2005 2005 2004 2004 2004
------------------------------------------------------------------------
Net Asset Value
per Unit $ 11.30 $ 11.00 $ 11.14 $ 10.55 $ 10.29
Market Price
per Unit $ 10.95 $ 10.15 $ 11.40 $ 10.78 $ 10.01
Trading Premium
(Discount) (3.1%) (7.7%) 2.3% 2.2% (2.7%)
Quarterly
Distributions
per Unit $ 0.225 $ 0.225 $ 0.225 $ 0.225 $ 0.225
12 Month Trailing
Yield 8.2% 8.9% 7.9% 8.3% 8.2%
Market
Capitalization
($ millions) $ 382.5 $ 356.3 $ 398.9 $ 375.8 $ 347.7
------------------------------------------------------------------------
------------------------------------------------------------------------


Investment Manager Report

At the end of March 2005, rising interest rate and inflation concerns dominated the income trust market which resulted in a sell-off similar to that experienced in the spring of 2004. Like 2004, the sell-off was short lived as positive year over year funds flow and declining bond yields boosted income trust valuations. With continued strength in oil and natural gas prices, the energy trust sector delivered a strong 8.6% total return in the second quarter of 2005, while real estate investment trusts surpassed the energy trusts with a 9.3% total return. As a result, the S&P/TSX Income Trust index produced a total return of 7.7% over the second quarter of 2005, again outperforming the S&P/TSX Composite index's return of 3.6%. On a net asset value basis, Series S-1 generated a 4.8% total return. On a unit price basis, Series S-1's improved unit price helped boost its total return to 10.2% in the second quarter of 2005.

During the second quarter, Series S-1 made significant changes to its portfolio, by adding a number of new investments and taking profits on many others. Dispositions of Transforce, ARC Resources, Borealis Reit, Altagas and various others generated realized gains of $14.4 million. As a result of the changes, the Fund enhanced its royalty trust exposure while lowering its ongoing business trust and cash positions.

With favorable market sentiment returning to the income trust sector in the second quarter and into the third quarter of 2005, Series S-1 expects to achieve its investment objectives in 2005 with maintenance of its current distribution level and its SR-1 stability rating.

Management's Discussion & Analysis (August 18, 2005)

Management's Discussion and Analysis ("MD&A") should be read in conjunction with the unaudited interim financial statements for the three months ended June 30, 2005, and the audited financial statements and MD&A for the year ended December 31, 2004.

Series S-1's net asset value increased during the quarter from $11.00 per unit at the end of the first quarter of 2005 to $11.30 per unit at June 30, 2005 as portfolio valuations recovered during the latter part of the quarter. The Fund's market price also rose, closing the quarter at $10.95 per unit, up from $10.15 per unit at the end of the first quarter of 2005. Despite the improved market price, the discount to net asset value persisted and the Fund was required to repurchase 316,800 units for cancellation under its mandatory repurchase program as the market price traded below 95% of the net asset value of the Fund.

Total revenue for the quarter was $8.3 million up from $8.0 million generated in the second quarter of 2004 due to lower cash balances in 2005 compared to 2004. Revenue was also up from the first quarter's revenue of $7.9 million. 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 $1.1 million and $0.4 million respectively during the quarter. General and administration costs totaled $0.1 million for the quarter down from $0.2 million in the second quarter of 2004 due to lower annual reporting costs in 2005. After total expenses of $1.6 million, the Fund generated net investment income of $6.7 million or $0.19 per unit compared to $6.4 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 second quarter of 2004.



Portfolio Holdings
----------------------------------------------
Oil & Gas Royalty Trusts 16%
Real Estate Investment Trusts 13%
Cash & Term Deposits 9%
Power Generation Investments 20%
Pipeline/Energy Investments 13%
Ongoing Business Trusts 29%
----------------------------------------------


Total results of operations for the quarter ended June 30, 2005 were $18.0 million or $0.51 per unit compared to negative $17.3 million or negative $0.50 per unit for the second quarter of 2004. Results of operations for the second quarter of 2005 were positively impacted by realized gains on sales of investments totaling $14.4 million offsetting unrealized losses of $3.1 million. Comparatively, net realized gains and unrealized losses totaled a negative $23.7 million for the second quarter of 2004.



Series S-1 Income Fund
Statement of Net Assets

(Unaudited)


As at June 30, 2005 December 31, 2004
------------------------------------------------------------------------
Assets
Investments, at market $ 359,034,593 $ 358,142,987
Cash and term deposits 35,756,815 32,257,232
Revenue receivable 2,660,979 2,400,601
Prepaid expenses 81,743 29,998
Accounts receivable 18,785 98,653
------------------------------------------------------------------------
397,552,915 392,929,471
------------------------------------------------------------------------
------------------------------------------------------------------------

Liabilities
Accounts payable 384,210 384,898
Distributions payable 2,619,611 2,624,313
------------------------------------------------------------------------
3,003,821 3,009,211
------------------------------------------------------------------------
Net Assets $ 394,549,094 $ 389,920,260
------------------------------------------------------------------------
------------------------------------------------------------------------
Units outstanding 34,928,142 34,990,842
------------------------------------------------------------------------
------------------------------------------------------------------------
Net asset value per unit $ 11.30 $ 11.14
------------------------------------------------------------------------
------------------------------------------------------------------------


Series S-1 Income Fund
Statement of Operations

(Unaudited)

Three Months Ended Six Months Ended
For the June 30 June 30
periods ended 2005 2004 2005 2004
------------------------------------------------------------------------
Revenue
Investment income $ 8,315,916 $ 8,038,980 $16,196,167 $16,347,052
------------------------------------------------------------------------
8,315,916 8,038,980 16,196,167 16,347,052
------------------------------------------------------------------------
Expenses
Administrative and
investment manager
fees 1,134,801 1,043,850 2,302,435 2,139,573
Trailer fees 384,210 347,308 770,379 729,451
General and
administration
costs 118,096 221,752 215,192 329,989
------------------------------------------------------------------------
1,637,107 1,612,910 3,288,006 3,199,013
------------------------------------------------------------------------
Net investment
income 6,678,809 6,426,070 12,908,161 13,148,039
Net realized gain 14,445,923 490,269 16,320,262 1,752,906
Net change in
unrealized gain
(loss) (3,143,042) (24,190,725) (8,355,444) (9,067,865)
------------------------------------------------------------------------
Total results of
operations $ 17,981,690 $(17,274,386) $20,872,979 $ 5,833,080
------------------------------------------------------------------------
------------------------------------------------------------------------
Results of
operations per
unit:
Net investment
income $ 0.19 $ 0.19 $ 0.37 $ 0.38
Net realized gain 0.41 0.01 0.47 0.05
Net change in
unrealized loss (0.09) (0.70) (0.24) (0.26)
------------------------------------------------------------------------
$ 0.51 $ (0.50) $ 0.60 $ 0.17
------------------------------------------------------------------------
------------------------------------------------------------------------


Series S-1 Income Fund
Statement of Changes in Net Assets

(Unaudited)

Three Months Ended Six Months Ended
For the June 30 June 30
periods ended 2005 2004 2005 2004
------------------------------------------------------------------------
Net Assets
- beginning
of period $386,216,083 $382,351,433 $389,920,260 $365,722,905
Operations:
Net investment
income 6,678,809 6,426,070 12,908,161 13,148,039
Net realized
gain 14,445,923 490,269 16,320,262 1,752,906
Net change in
unrealized gain
(loss) (3,143,042) (24,190,725) (8,355,444) (9,067,865)
------------------------------------------------------------------------
17,981,690 (17,274,386) 20,872,979 5,833,080
------------------------------------------------------------------------
Unitholder
Transactions:
Distributions to
unitholders (7,848,105) (7,813,082) (15,739,428) (15,619,750)
Issuance of trust
units, net 1,486,250 1,375,416 2,941,669 2,703,146
Repurchase of trust
units (3,286,824) (1,414,703) (3,446,386) (1,414,703)
------------------------------------------------------------------------
(9,648,679) (7,852,369) (16,244,145) (14,331,307)
------------------------------------------------------------------------
Net Assets
- end of period $394,549,094 $357,224,678 $394,549,094 $357,224,678
------------------------------------------------------------------------
------------------------------------------------------------------------
Distributions
per unit $ 0.225 $ 0.225 $ 0.450 $ 0.450
------------------------------------------------------------------------
------------------------------------------------------------------------


Series S-1 Income Fund
Statement of Investments
(Unaudited)
As at June 30, 2005
------------------------------------------------------------------------
% of
Cost Market Market
------------------------------------------------------------------------
Ongoing Business Trusts
ACS Media Income Fund $ 4,755,000 $ 5,225,000
Amtelecom Income Fund 5,249,225 6,602,500
Arctic Glacier Income Fund 5,718,069 6,460,500
Bell Nordiq Income Fund 2,137,105 3,062,478
CML Healthcare Income Fund 5,363,500 6,925,000
Chemtrade Logistics Income Fund 7,491,715 7,813,575
Clearwater Seafoods Income Fund 7,461,912 3,918,000
Consumers' Waterheater Income
Fund 4,763,075 6,512,000
Custom Direct Income Fund 7,000,000 9,821,000
KCP Income Fund 7,128,183 6,876,000
Noranda Income Fund 12,560,209 15,811,500
Rogers Sugar Income Fund 5,799,821 6,510,000
Royal LePage Franchise
Facilities Fund 7,550,000 10,033,950
SFK Pulp Fund 6,320,945 3,992,000
Specialty Foods Group Income Fund 1,358,239 550,800
Sun Gro Horticulture Income Fund 4,846,342 4,848,000
TransForce Income Fund - -
UE Waterheater Income Fund - -
Yellow Pages Income Fund 6,520,000 9,721,320
------------------------------------------------------------------------
102,023,340 114,683,623 29.0%
------------------------------------------------------------------------
Power Generation Investments
Algonquin Power Income Fund 11,807,752 12,779,383
Boralex Power Income Fund 11,260,018 12,155,000
Calpine Power Income Fund 6,115,250 6,073,600
Clean Power Income Fund 14,039,535 9,100,000
Innergex Power Income Fund 4,505,495 5,950,800
Northland Power Income Fund 4,871,328 6,230,500
TransAlta Power, L.P. 17,426,317 18,735,685
TransCanada Power, L.P. 5,742,940 6,222,000
------------------------------------------------------------------------
75,768,635 77,246,968 19.6%
------------------------------------------------------------------------
Pipeline/Energy Investments
AltaGas Income Trust - -
Fort Chicago Partners Class A 5,715,000 5,854,500
Heating Oil Partners Income Fund 6,704,085 1,498,000
Inter Pipeline Fund 11,046,292 16,722,431
Keyera Facilities Income Fund 7,618,728 11,096,494
Superior Plus Income Fund 11,864,535 17,836,000
Taylor NGL L.P. - -
------------------------------------------------------------------------
42,948,640 53,007,425 13.4%
------------------------------------------------------------------------
Real Estate Investment Trusts
Borealis Retail Reit - -
Dundee Reit 10,658,592 13,370,000
Firm Capital Mortgage
Investment Trust 4,895,558 5,290,230
InnVest Reit 5,264,206 7,088,180
O & Y Reit 4,877,617 6,750,000
Retirement Residences Reit 13,459,164 12,726,000
RioCan Reit 4,449,741 6,400,000
------------------------------------------------------------------------
43,604,878 51,624,410 13.1%
------------------------------------------------------------------------
Oil & Gas Royalty Trusts
Acclaim Energy Trust 7,142,587 9,810,267
ARC Energy Trust 4,275,248 6,779,600
Baytex Energy Trust 5,950,439 6,066,000
Enerplus Resources Fund 4,161,249 6,318,000
Espirit Energy Trust 5,969,600 6,208,800
NAL Oil & Gas Trust 6,512,100 6,840,000
Paramount Energy Trust 5,760,450 7,740,000
Petrofund Energy Trust 3,826,909 6,337,500
Viking Energy Royalty Trust 6,318,630 6,372,000
------------------------------------------------------------------------
49,917,212 62,472,167 15.8%
------------------------------------------------------------------------
Investments 314,262,705 359,034,593 90.9%
Cash and Term Deposits 35,756,815 35,756,815 9.1%
------------------------------------------------------------------------
Total $ 350,019,520 $ 394,791,408 100.0%
------------------------------------------------------------------------
------------------------------------------------------------------------


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 issued 99,882 units for administrative and investment manager fees, 5,717 units for directors' retainer fees and 33,049 units under its distribution reinvestment plan during the second quarter of 2005.

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 June 30, 2005, 316,800 units were purchased for cancellation (June 30, 2004 - 147,000 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 June 30, 2005, the Fund recorded an expense of $1,134,801 related to these fees (June 30, 2004 - $1,043,850).

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 June 30, 2005, the Fund recorded an expense of $384,210 in respect of the trailer fee (June 30, 2004 - $347,308).



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: 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

  • Series S-1 Income Fund
    Joe MacDonald
    Executive Vice President, Sales and Marketing
    1-877-261-9674
    Website: www.citadelfunds.com