2008

2007

Change

Assets under Management

$1.21bn

$2.89bn

-58%

Net Management Fee Income

£6.1m

£4.0m

+52%

Net Performance Fee Income

£0.2m

£1.6m

-87%

Net Brokerage Income

£4.8m

£5.1m

-6%

(Loss)/Profit before Tax from Continuing Operations *

£(2.3)m

£1.4m

-264%

Cash on hand **

£11.0m

£12.0m

-8%

Adjusted Earnings per Share***

(6.75)p

2.64p

-356%

* Stated before amortisation and impairment of intangible assets arising on consolidation and share-based payment expense.  Continuing operations include those related to the conditional disposal.

** Excluding cash held by the Employee Benefit Trust.

*** Calculated on earnings from continuing operations before amortisation and impairment of intangible assets arising on consolidation and share-based payment expense on a diluted basis.

Business Review

The Group consists of two businesses - asset management, more specifically fund of hedge fund management and institutional brokerage.

Asset Management

Assets under Management ('AUM')

AUM is analysed between the following products and mandates:

31 December

31 December

2008

2007

US$ millions

US$ millions

Total discretionary portfolios

1,095 

2,052 

Non-discretionary portfolios

33 

384 

Other assets under advice

87 

460 

Total AUM

1,215 

2,896 

The components of and movements in Discretionary Portfolios are described below. As disclosed in last year's business review, significant non-discretionary and advisory contracts were discontinued at the end of 2007 as the Group concentrated on its higher yielding core discretionary assets.

Discretionary portfolios are constituted of the following products:

Integrated Multi-Strategy Fund and Integrated Strategic Funds - the single strategies

Integrated Multi-Strategy Fund is the original Integrated Fund that was opened to public investment in 2001. The five core strategies that comprise the Multi-Strategy are Directional Trading, Equity Hedge, Emerging Markets, Event Driven and Relative Value. To give greater flexibility to investors, these five strategies are maintained as separate portfolios within Integrated Strategic Funds and investors have the choice of either investing in the Multi-Strategy Fund or directly in to the Strategic Funds with a weighting of their own choice. A further portfolio, into which the Multi-Strategy Fund does not invest, the Integrated Long Short Selector Fund was added to the Strategic Funds range in December 2007.

Altipro

Altigefi's core product is the Altipro family of funds. The main Altipro master fund has a nine-year track record of consistent performance with low volatility.

Other portfolios

Other portfolios have a range of different mandates, both single and multi-strategy, for specific sets of customers.  These include German on-shore funds managed for Sal. Oppenheim and managed accounts for Sal. Oppenheim clients.

The total of the above funds constitute Integrated's discretionary AUM. Movement in AUM of discretionary portfolios is analysed as follows:

2008

2007

US$ millions

US$ millions

Discretionary assets at 1st January

2,052 

921 

Net subscriptions/(redemptions)

(697)

36 

Discontinued portfolios

  - 

(188)

Acquisitions

  - 

1,177 

Fund performance

(152)

33 

Foreign exchange movements

(108)

73 

Discretionary assets at 31st December

1,095 

2,052 

Fund performance

Fund performance of our core funds for 2008 with related volatility measures is detailed in the table below:

2008

2008

Annualised

Fund Name / Benchmark

Currency

Share Class

Performance

Volatility

Integrated Multi Strategy Fund

USD

B

-18.68%

9.53%

HFRX Global Hedge Fund Index

USD

-23.25%

11.37%

Altipro

EUR

III

-3.26%

3.80%

Eonia

EUR

4.00%

0.16%

Altipro Plus

EUR

-6.27%

5.22%

HFRX Global Hedge Fund Index

EUR

-23.76%

12.69%

Integrated Directional Trading Fund

USD

C

-1.73%

8.48%

HFRX Macro Index

USD

-5.61%

13.65%

Integrated Event Driven Fund

USD

A

-23.30%

10.37%

HFRX Event Driven Index

USD

-22.11%

10.62%

Integrated Relative Value Fund

USD

B

-9.13%

5.14%

HFRX Relative Value Arbitrage Index

USD

-37.60%

15.62%

Integrated Emerging Markets Fund

USD

D

-31.03%

11.01%

Tremont Emerging Markets

USD

-30.41%

15.57%

Integrated Equity Hedge Fund

USD

-13.10%

11.15%

HFRX Equity Hedge Fund

USD

-25.45%

13.33%

Integrated European Fund

EUR

-0.28%

7.07%

HFRX Global Hedge Fund Index

EUR

-23.76%

12.69%

Management Fees & Distribution Costs

Management fees are normally charged at 1.0% to 2.25% per annum, dependent on the investor type, and on the underlying AUM.

In common with much of the rest of our industry, Integrated raises its assets through a network of distributors, intermediaries and institutions buying the product on behalf of underlying customers. These third parties are remunerated by the retrocession or rebate of a portion of the management fees paid by the fund to Integrated.

In addition, where Integrated manages portfolios which have been established by third parties and Integrated is not involved in raising assets for that portfolio, Integrated is not the direct recipient of the management fee from the fund, but receives a share of such fee from the originator of the fund, for instance 0.75% per annum. However in these instances, the fee would not normally be subject to any retrocession or rebate.

As a consequence of these variations in rates of gross revenue, the management fee net of any retrocession or rebate, the net management fee, is considered a more reliable guide of the achievement of the Group.

Net yields on our portfolios are analysed as follows:

Asset type

Net margin in basis points

2008

2007**

Discretionary assets

64 

73 

Non-discretionary assets

22 

39 

Other assets under advice

9 

11 

** Excluding portfolios discontinued during 2007

The reduction in yield on discretionary assets was entirely in line with our expectations following the inclusion of the Altigefi funds in 2008 which yield about 60 basis points net per annum.

Performance Fees

Performance fees may be generated by all discretionary and some non-discretionary portfolios subject to certain criteria being met. All funds have a high water mark whereby the fund price at the close of a given performance period must be higher than that at the close of the last performance period on which a performance fee was paid. In addition, certain funds have a hurdle whereby fund performance in the given period must exceed a pre-determined benchmark or hurdle and a performance fee is paid on the excess of the performance over this benchmark, subject to any high water mark. Performance periods usually range from three months to twelve months. Performance fees are normally calculated at the rate of 10% of the relevant performance and retrocession to distributors is only usually granted in exceptional circumstances.

The Altipro funds have a complex performance fee structure which, while potentially highly remunerative, has a number of conditions to achieve and no performance fee income is forecast for 2009.

Net performance fees totalled £0.2 million (2007:£1.6 million), reflecting the more difficult conditions in the second half of the year. While Integrated is not dependent on performance fees, representing 2.6% and 1.5% of net fund management income and net group income respectively (2007: 30.5% and 14.9%), they represent a key element of our financial success for any given period.

Brokerage

Products

In the wide range of products that are covered by the global inter-dealer/institutional markets, Integrated Financial Products Ltd ('IFP') is focused on foreign exchange, interest rate derivatives, equities, bonds, equity derivatives and the marketing and promotion of securities and derivatives for Sal. Oppenheim in Italy.

Performance is measured by both gross and net revenues, but more generally the latter, and returns on both of those streams.

2008

2007

£ 000

£ 000

Net brokerage

4,045 

4,137 

Net marketing

754 

993 

Other

53 

43 

Total net brokerage

4,852 

5,173 

The analysis of net brokerage by product is set out below.

2008

2007

Equity derivatives

24.5%

25.7%

Equities

14.5%

28.1%

Foreign exchange

27.8%

22.7%

Interest rate derivatives

18.5%

16.7%

Bonds

14.7%

6.8%

100%

100%

Although net brokerage only decreased marginally, this does not reflect the relative performance of the core products within IFP's business. Both relatively and absolutely, the most improved performance was given by the Bonds desk which benefited from the return of spreads in the bond markets in the second half of the year and the additional consequent value offered by the broker in such a market. The foreign exchange desk also reported strong turnover consistently in excess of 2007 levels in line with the high levels of activity reported for this asset class in the wholesale markets. Interest rate derivatives performed satisfactorily given the difficulties posed by the dislocation in the money markets, particularly in the second half,with the consequent reduction in credit afforded by counterparties to each other. This factor and the general lack of liquidity in the underlying markets was a negative factor for equity derivatives after a strong first half while equities was relatively the most disappointing after performing so strongly in earlier periods as certain clients reduced the levels of their activity.

For its marketing and promotional activities, IFP is remunerated by means of a fixed retainer and variable compensation dependent primarily upon the volume of products that are sold by Sal. Oppenheim, their profitability to the bank and the level of actual marketing activity. The volatility of the underlying markets and the appetite of investors for financial assets in general limited activity in 2008 compared with 2007.

Results summary

Fund

2008

2007

Management

Brokerage

Total

Total

£ 000

£ 000

£ 000

£ 000

Turnover

11,354 

5,704 

17,058 

14,342 

Cost of sales

(5,025)

(852)

(5,877)

(3,639)

Net Revenue

6,329 

4,852 

11,181 

10,703 

Operating costs

(8,609)

(5,149)

(13,758)

(9,372)

Operating (loss)/profit before amortisation of intangibles, share-based payment expenses, currency exchange differences and exceptional charges

(2,280)

(297)

(2,577)

1,331 

Amortisation of intangibles

(1,049)

  - 

(1,049)

(327)

Impairment of Intangibles

(14,632)

  - 

(14,632)

  - 

Share-based payments expense

(16)

(16)

(32)

(155)

Write down of investments

  - 

(67)

(67)

  - 

Currency exchange differences

101 

(154)

(53)

(389)

Operating (loss)/profit

(17,876)

(534)

(18,410)

460 

Net finance and other income

240 

163 

403 

* 454 

(Loss)/profit on continuing activities before tax

(17,636)

(371)

(18,007)

914 

* Including Integrated's share of Altigefi's post-tax result from 12th October 2007 to 31st December 2007 in the prior year.

Operating margins

It remains one of the Group's core strategies to improve our margins. During the year we changed our focus from the careful management of the cost base against AUM and revenue growth in order to benefit from the economies of scale that such growth offers to the implementation of plans to reduce our operating expenditure in line with actual and forecast revenue flows. By their nature there are one-off costs associated with such actions and in certain cases a time lag from the taking of the action to its physically taking effect in either profit and loss and/or cash flow terms.

Such cost reduction has been continued in 2009.

The most significant item of operating expenditure was staff compensation which represented 60% of operating costs including write-down of investments and currency exchange differences (2007: 51%).

Under International Financial Reporting Standard 2 - Share-based Payment ('IFRS 2'), deferred bonuses are charged to the Income Statement over the performance and vesting period, dependent upon vesting conditions, rather than in the year in which the performance is generated. The maturing of such deferrals, including payments made into an Employee Benefit Trust during 2007 from which no allocations to employees at 31 December 2007 had been made, generated an increase in variable compensation costs in 2008.

The most significant charge in the profit and loss for the year relates to the impairment of goodwill, which arose from the acquisitions of Integrated Alternative Investments Ltd, formerly Attica, and Altigefi in 2006 and 2007. Given the reduction in AUM during 2008 and the consequent lack of generation of positive cash flows in the Hedge Fund Division, IAS 36 requires the impairment of such assets. Consequently there is a heavy charge in the year.

Included within operating costs are two significant charges arising from the strengthening of the Euro against Sterling as at 31 December 2008.  

.

Firstly, during the course of 2008 the Group took out forward foreign exchange contracts to hedge its forecast net management fee income receivable in 2009 from its UK fund management subsidiaries which is mostly denominated in Euro but converted to Sterling to meet Sterling expenses. While we reduced the extent of our hedging during the second half of 2008 as a result of the continued strength of the Euro and the decrease in our forecasts of management fee income, the outstanding contracts at 31 December 2008 for income not yet earned, when marked to market, caused us to book losses of £199,000. Such losses may be reversed during 2009.

.

Secondly, in order to reduce the exposure of the Group to movements in the Euro, assets surplus to working capital requirements held in foreign operations are held in Sterling. However these Sterling assets are revalued to Euros in the results of the foreign operations, such revaluation being taken through profit and loss, while the reverse revaluation of the foreign operation back in to Sterling is taken through reserves. There is a charge to the current year profit and loss of £266,000 for this revaluation the reverse of which is effectively included within the Exchange Difference Reserve gain of £2,523,000 reported in the Group Statement of Recognised Income and Expense.

Capital and Cash Flow

2008

2007

£ 000

£ 000

Net assets

14,689 

29,907 

Net Current Assets

10,208 

11,947 

Cash at bank ***

10,997 

12,072 

*** Cash at bank excluding cash held under Trust by the EBT.

While net assets decreased markedly, primarily as a consequence of the impairment of goodwill and intangible assets noted above, net current assets decreased by less than 15%. Impairments to goodwill and intangible assets do not impact the regulatory capital held by the Group as they are wholly disallowed in any financial resources calculations.

The residual balance of £1.0 million of the Convertible Unsecured Loan Notes that had not been converted prior to 31 December 2007 were either redeemed or converted on 28 January 2008 and the Group subsequently has no long term debt or funding liability.

Net current assets are largely represented by cash and demonstrate the strength of our balance sheet and a positive operating cash flow excluding the vesting of benefits in the EBT. While certain amounts of cash are held by subsidiaries for both working capital and regulatory requirements, there remains significant liquidity within the Group.

Employee Share Ownership

Despite the decrease in value of Integrated's shares, we still consider it essential that share ownership is widely distributed amongst employees and that key professionals either retain, receive or be entitled to receive, subject to performance conditions where applicable, meaningful interest in Integrated's equity.

Dividends

The results for 2008 do not justify the payment of a dividend to shareholders.

Risk Management

Operating in the financial services industry, Integrated faces a number of risks which are inherent to its activities and require active management. The principal risks have been identified as investment risk, relating to our fund management business, operational risk and financial risks.

Investment risk

Poor investment performance in our underlying funds, either absolutely or relative to the particular fund's peer group, may result in a decrease in management and performance fees as well as redemptions in the funds by investors with similar effect. This fundamental risk is managed by:

.

The use and continued evolution of an institutional quality Investment Process which combines a top-down approach, guided by a Senior Advisory Board comprised of individuals from within and without the Group, and an in-depth bottom up analysis carried out by specialists within each core hedge fund strategy.

.

The operation of such a process by highly experienced, qualified and motivated staff who have clearly defined roles and responsibilities as required by the investment process.

.

An independent and well staffed Risk Management team which not only ensures that the Investment Process is adhered to but also monitors each portfolio continuously to ensure its compliance with pre-determined limits using sophisticated in-house developed software.

Operational Risk

Operational risk is the risk that the Group suffers a loss, either directly or indirectly, from inadequate or failed internal processes and systems or from external events. This risk manifests itself in slightly different ways across our two businesses, but in summary would include:

.

Broker error in negotiation of a deal

.

Administrative error either in the settlement of a broking deal or in the instruction of a trade on behalf of a fund

.

Loss of key members from a broking desk or key investment professionals

.

Introduction of new products and related issues in the legal, fiscal, regulatory and accounting domains.

Given the nature of such risks, it is Group policy to review continually the controls in place to manage them, to ensure that such controls are appropriate and adequate for the risks involved and that the controls have evolved and developed to reflect the changes in our underlying businesses and how it is carried out.

Financial Risks 

The Group operates in a number of different countries and is exposed to a number of financial risks and particularly currency risk. Details of these and the measures undertaken by the Group to manage them will be given in the financial statements.

Regulatory environment

Each of Integrated's principal operating subsidiaries is subject to regulation. In the United Kingdom, the two fund management companies, Integrated Alternative Advisors Limited and Integrated Alternative Investments Limited, which together trade as Integrated Alternative Investments, are regulated and authorised by the Financial Services Authority as is the broking subsidiary Integrated Financial Products Limited ('IFP').

IFP's Milan branch is responsible to the Italian regulator ('Consob') for its conduct of business.

In France, Altigefi is authorised and regulated by the Autorite Marches Financieres ('AMF').

During 2007, both the EU Capital Requirements Directive ('CRD') and the Markets in Financial Instruments Directive ('MiFID') came in to force.

CRD introduced new rules for the calculation of financial resources and financial resources requirements, dependent upon the scope of regulated firm's permissions. In March 2008, IFP amended its FSA permission so that, in common with the other regulated firms in the Group, it became a limited license firm. As a consequence the Group became eligible and successfully applied for a waiver from consolidated supervisory reporting. With or without the waiver, the Group has excess regulatory capital over the requirement.

Group Income Statement

for the year ended 31 December 2008

Year ended

Year ended

31 December

31 December

2008

2007

£000s

£000s

Continuing operations

Revenue

17,058 

14,342 

Cost of sales

(5,877)

(3,639)

Net revenue

11,181 

10,703 

Operating costs

(13,878)

(9,761)

Amortisation of intangibles

(1,049)

(327)

Share-based payments cost

(32)

(155)

Operating (loss)/profit before impairment of goodwill and intangibles

(3,778)

460 

Impairment of goodwill and intangibles

(14,632)

  - 

Operating (loss)/profit

(18,410)

460 

Finance income

485 

685 

Finance expense

(82)

(362)

Share of profit of associate

  - 

131 

(Loss)/profit before taxation

(18,007)

914 

Taxation

61 

(117)

(Loss)/profit from continuing operations

(17,946)

797 

Discontinued operations

(Loss) on sale of subsidiary

  - 

(535)

(Loss)/profit for the period

(17,946)

262 

Attributable to :

Equity holders of the parent

(18,249)

16 

Minority interests

303 

246 

(17,946)

262 

Earnings per share

Continuing operations

Basic

(43.42)p

1.69p

Diluted

(43.42)p

1.64p

Total

Basic

(43.42)p

0.05p

Diluted

(43.42)p

0.05p

Statement of Recognised Income and Expense

for the year ended 31 December 2008

Year ended

Year ended

31 December

31 December

2008

2007

£000s

£000s

(Loss)/ profit for the period

(17,946)

262 

Currency translation differences on overseas operations

2,523 

498 

Total recognised income for the year

(15,423)

760 

Attributable to :

Equity holders of the parent

(15,726)

514 

Minority interests

303 

246 

(15,423)

760 

Group Balance Sheet

as at 31 December 2008

As at

As at

31 December

31 December

2008

2007

£000s

£000s

Assets

Non-current assets

Intangible assets

4,300 

17,958 

Property, plant and equipment

739 

750 

Financial assets

139 

173 

5,178 

18,881 

Current assets

Trade and other receivables

5,328 

26,065 

Cash and cash equivalents

11,062 

13,418 

Financial assets

  - 

131 

16,390 

39,614 

Total assets

21,568 

58,495 

Liabilities

Non-current liabilities

Borrowings

  - 

  - 

Deferred tax liabilities

(697)

(921)

Trade and other payables

  - 

  - 

(697)

(921)

Current liabilities

Borrowings

(1,309)

(2,090)

Trade and other payables

(4,849)

(25,134)

Tax payable

(24)

(443)

(6,182)

(27,667)

Total liabilities

(6,879)

(28,588)

Net assets

14,689 

29,907 

Capital and Reserves

Called up share capital

2,107 

2,083 

Share premium account

27,025 

26,527 

Shares to be issued

  - 

251 

Share options reserve

313 

473 

Exchange difference reserve

2,946 

423 

Investment in own shares

(2,519)

(2,525)

Retained earnings

(16,667)

1,472 

Equity attributable to equity holders of the parent

13,205 

28,704 

Equity attributable to minority interests

1,484 

1,203 

Total equity

14,689 

29,907 

Group Statement of Changes in Shareholders' Equity

for the year ended 31 December 2008

Share

Share

Retained 

Other

Minority

capital

premium

earnings

reserves

interests

Total

£000s

£000s

£000s

£000s

£000s

£000s

Balance at 1 January 2008

2,083 

26,527 

1,472 

(1,378)

1,203 

29,907 

Currency translation adjustments

  - 

  - 

  - 

2,523 

  - 

2,523 

Net income/(expense) recognised directly in equity:

  - 

  - 

  - 

2,523 

  - 

2,523 

(Loss) for the period

  - 

  - 

(18,249)

  - 

303 

(17,946)

Total recognised income for the period

  - 

  - 

(18,249)

2,523 

303 

(15,423)

Placing of shares

  - 

  - 

  - 

  - 

  - 

  - 

Conversion of loan notes

16 

295 

  - 

  - 

  - 

311 

Shares issued on acquisition

1 

21 

  - 

(22)

  - 

  - 

Deferred consideration

7 

182 

  - 

(229)

  - 

(40)

Share-based payments

  - 

  - 

  - 

33 

  - 

33 

Exercise of share options

  - 

  - 

  - 

  - 

  - 

  - 

Cancelled/forfeited share options

  - 

  - 

187 

(187)

  - 

  - 

Deferred tax on share options

  - 

  - 

(77)

  - 

  - 

(77)

Purchase of own shares by EBT/ESOT

  - 

  - 

  - 

  - 

  - 

  - 

Dividend paid to minority interests

  - 

  - 

  - 

  - 

(338)

(338)

Movement in minority interests

  - 

  - 

  - 

  - 

316 

316 

Balance 31 December 2008

2,107 

27,025 

(16,667)

740 

1,484 

14,689 

Share

Share

Retained 

Other

Minority

capital

premium

earnings

reserves

interests

Total

£000s

£000s

£000s

£000s

£000s

£000s

Balance at 1 January 2007

1,194 

5,025 

1,404 

732 

632 

8,987 

Currency translation adjustments

  - 

  - 

  - 

498 

  - 

498 

Net income/(expense) recognised directly in equity:

  - 

  - 

  - 

498 

  - 

498 

Profit for the period

  - 

  - 

16 

  - 

246 

262 

Total recognised income for the period

  - 

  - 

16 

498 

246 

760