leadership in alternative asset...

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L e a d e r s h i p i n A l t e r n a t i v e A s s e t M a n a g e m e n t

The Company’s mission is to be Canada’s premier alternative asset class manager. Integrated Asset Management Corp. is guided by certain key objectives and values:

• To create superior risk-adjusted returns for our clients.

• To consistently exceed client expectations.

• To know that our success depends on the success of our clients.

• To be the industry leader in product quality.

• To foster innovation and creativity in new product development.

• To be a leading industry source of alternative asset class information.

• To practise the highest standards of professionalism and integrity.

m i s s i o na n d v a l u e s

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I n t e g r a t e d A s s e t M a n a g e m e n t C o r p .

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f i n a n c i a lh i g h l i g h t s

Years ended September 30, except 9 months ended September 30, 1999

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c h a i r m a n ’ sr e p o r t

V i c t o r K o l o s h u kChairman, President and Chief Executive Officer, Integrated Asset Management Corp.

IAM is focused exclusively on alternative asset classes. Alternative asset manage-ment tends to be “skill-based” investing as opposed to “style-based” investing.

Most large portfolios of publicly-traded stocks and bonds are managed by “style-based” managers. That is, managers who select investments on the basis of a particu-lar style such as growth, value, or momen-tum or, in many cases, tracking some form of index.

In our opinion, there are five extremely important attributes of skill-based invest-ment management:

• In each alternative asset class the returns on a risk-adjusted basis are significantly higher than in compa-rable style-based management.

• In alternative asset management, good managers outperform poor managers by a wide margin. For example, in private equity the difference between

C h a i r m a n ’ s R e p o r t t o S h a r e h o l d e r s

F i f t h A n n u a l R e p o r t

1st quartile performance and 4th quar-tile performance is usually over 1,000 basis points or 10.0 % each year.

• Good alternative managers tend to remain in the top quartile and poor managers tend to remain in the fourth quartile. Conversely, with tradition-ally managed, publicly-traded stocks and bonds there is little or no continu-ity of performance, good or bad. The obvious corollary to this is that skill-based asset management should not be indexed.

• Skill-based managers tend to operate in less efficient markets where their skills have the greatest opportunity to augment returns.

• Skill-based managers typically have serious capacity constraints in that they can only manage maximum dollar size portfolios. Beyond that size, excess returns start to shrink. For this reason they have no choice but to charge performance fees. On the other hand, style-based managers prosper by simply stressing asset growth.

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C o n t i n u i n g t o m e e t a n d e x c e e d o u r c l i e n t s ’ e x p e c t a t i o n s i s a

c o r n e r s t o n e o f o u r s u c c e s s .

As a general observation, I regard style-based investment management as a means of maintaining purchasing power for large portfolios through investment in liquid, efficiently-priced stocks and bonds. Skill-based investing actually allows a portfolio to earn a real and significant positive return, in many cases uncorrelated to the stock or bond markets.

Given all of the above, our core corporate objective must be “to be the best alternative managers in the country in each asset class” -without exception.

There is real synergy among the various alternative asset classes - real estate, hedge funds, private equity, private debt and man-aged futures - in terms of gathering assets, managing people, and most importantly controlling the inherent risks for our cli-ents.

IAM is majority-owned by its asset manag-ers and as such we are committed to build-ing value for our shareholders.

In terms of our financial performance in fiscal 2003, our core management fees grew by 35% (from $10.8 million in 2002 to

$14.5 million in 2003) because of the assets added in 2002 and 2003. Performance fees on the other hand decreased significantly as no major pools were realized upon in 2003, unlike 2002 where a large real estate pool had matured. Realized performance fees in 2003 were $ 1.9 million compared w i t h $ 6 . 0 m i l l i o n i n 2 0 0 2 . I n aggregate, revenues increased mod-estly to $ 17.1 mill ion in 2003 from $ 17.0 million in 2002.

Our assets under management grew mod-estly, from $ 1.3 billion at year end 2002 to over $ 1.4 billion at year end 2003. Since September 2003, we have begun marketing a number of new funds, which we expect will close in 2004.

Performance fees form a significant portion of our total income and over a longer period of time they should represent a steady and significant source of income. During 2003, unrealized performance fees increased to $ 13.4 million as at September 30, 2003. These unrealized performance fees have not been reflected in our financial statements and will be recognized only when realized.

The size of our unrealized performance fees

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now in a position where approximately 50% of new revenues (base management fees or performance fees) should flow to the bottom line as pre-tax income.

As you will see in the Review of Operations, each of our businesses achieved notable successes. We also expanded our line-up of alternative asset classes to include managed futures with the formation of Integrated Managed Futures Corp.

Elsewhere in this report, we discuss the very attractive growth potential inherent in the alternative investment arena. We have a winning strategy and the talented people needed to execute it.

We are confident that the hard work and investment of 2003 will bear fruit in 2004 and beyond.

Victor KoloshukChairman, President and Chief Executive Officer

is an indication of the superior results that our investment professionals produce for our clients. Continuing to meet and exceed our clients’ expectations is a cornerstone of our success.

The Corporation reported an operating loss for 2003 of $ 1.2 million compared with an operating income of $ 0.7 million in 2002. Included in these operating results are net performance fees ( after deducting related third party expenses ) of $ 0.5 million in 2003 compared with $ 5.3 million in 2002.

Operating income from Asset Management in fiscal 2003 was $ 0.2 million compared with $ 2.3 million in fiscal 2002 because no performance fees were realized from Asset Management in fiscal 2003. The operating results also include a loss of $ 1.4 million from BluMont, compared with a $ 1.6 mil-lion loss in the prior year.

Net loss for the year ended September 30, 2003 was $ 467,639 or $ 0.02 per share com-pared with net income of $ 1,850,931 or $ 0.09 per share in fiscal 2002.

Over the last three years we have been build-ing the infrastructure for growth and we are

W e h a v e a w i n n i n g s t r a t e g y a n d t h e t a l e n t e d p e o p l e

n e e d e d t o e x e c u t e i t .

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s t r a t e g ya n d p e o p l eAs you have read earlier in this report, our mission is to become Canada’s premier alternative asset manager. That means that Integrated Asset Management Corp. will be synonymous with the highest quality alter-native asset management.

All of our constituents - investors, clients, prospects, distributors and advisors - will consider us to be the acknowledged leader. Our clients will enjoy superior risk-adjusted returns and we will consistently exceed their expectations. Achieving this status will confer on us prestige, profitability and market presence.

The essence of our strategy is to hire or buy the best managers in each asset class and build around them. While many such opportunities are presented to us, we will only pursue those in which we can add significant value for our clients. Typically, part of our model is to ensure that the key principals in each operating company have a significant economic interest in their busi-ness.

In the photograph facing this section you see the senior management of IAM. People are at the heart of everything we do. The skills we need to implement our strategy reside in our people, and our people represent our

capacity to meet client needs.

Capacity is a precious commodity in the alternative asset management business. As a consequence, we must ensure that it is used effectively and priced appropriately. Part of the enduring appeal of the alternative asset arena is that capacity, like any scarce com-modity, commands a premium price.

We are committed to attracting only the very best people to the IAM group of companies. Everyone who joins us must not only bring exemplary skill and experience but also the crucial intangible of fit. Each and every one of us must share the vision, embrace the strategy and exhibit the highest standard of professionalism and integrity.

It has become very clear to us that many prospective institutional investors are held back from investing in alternative assets by a lack of understanding and a correspond-ing fear of the unknown. At the same time, they know that traditional asset classes and conventional asset allocation are no longer enough to meet their needs.

As we strive to be the acknowledged indus-try leader, we are responding to the knowl-edge gap among our prospective clients.

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Back row, left to right: Gary Hudson, John Robertson, George Engman, Stephen Johnson, Roland Austrup. Front row, left to right: Victor Koloshuk, Tony Pacaud, Brent Chapman, David Mather. Absent: Toreigh Stuart and Veronika Hirsch.

A key element of our strategy is to position IAM as a knowledgeable, credible source of objective information about the world of alternative assets. We are a market leader in research, development and product innova-tion. We take very seriously our responsi-bility in providing information, analysis and understanding in a variety of forums. This takes many different forms, including sponsorship of and participation in industry conferences, direct involvement in industry associations, ongoing research into new and emerging issues in alternatives, maintaining

current and informative websites and shar-ing knowledge and insight with clients, pro-spective clients and their advisors.

First rate performance is the tangible evi-dence of our success as investment manag-ers; an expanding client base and increasing assets under management demonstrate that investors are responding to our positioning.

We will know we have succeeded when the name IAM is synonymous with the best in alternative asset management.

E a c h a n d e v e r y o n e o f u s m u s t s h a r e t h e v i s i o n , e m b r a c e t h e s t r a t e g y a n d

e x h i b i t t h e h i g h e s t s t a n d a r d o f p r o f e s s i o n a l i s m a n d i n t e g r i t y .

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Canadian pension funds represent the larg-est potential market for the various alterna-tive strategies offered by IAM. Over the last few years, these funds have suffered their own version of the perfect storm, with declining, and still low interest rates expanding their liabilities while sharply falling global equity markets carved bil-lions of dollars out of their assets. For many corporations, the company pension fund now represents a significant exposure both to their balance sheet and income state-ment. While estimates vary, it is clear that the unfunded liability of Canada’s pension funds runs to the billions of dollars.

Most pension funds need to achieve a real rate of return of between 4.5% and 5.0% to meet their funding objectives. Any reason-able set of assumptions about the trend in interest rates and a more modest equity risk premium leads to the conclusion that tradi-tional assets alone will not get the job done.

Both institutional and individual investors are coming to understand that confining themselves to efficient markets is a losing strategy. Efficient markets offer index-like returns, as the portions of portfolios not directly indexed tend to hug the indexes as traditional active managers remain deter-mined to retain their clients.

Superior returns can only be achieved by turning to less efficient markets, like private equity, real estate and private debt. As insti-tutional investors begin to comprehend that their need for liquidity is much less than they once believed, they realize that they can get paid handsomely for accepting the illiquidity associated with higher-return, uncorrelated asset classes.

One of the most dramatic examples of the rewards available from alternatives is the Yale University endowment fund. This U.S. $10.5 billion fund has exceeded 17% per annum returns over the last 20 years. Yale has 62.5% of its portfolio in alternatives.

The university believes that the 17%, 20 year return represents a return that is higher than any endowment, any foundation, any corporate pension plan or any state pension plan. Remarkable as this sounds, Harvard, Princeton and Stanford also have similar asset allocations, and, like Yale, are in the top decile for 20 years.

The need is real and the evidence compel-ling. We know that more pension plan sponsors will be increasing their allocation to alternatives. Looking ahead, traditional asset managers can only gain market share in a shrinking overall market, at the expense

t h eo p p o r t u n i t y

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of competitors. Conversely, the market opportunity for IAM is expanding, as more and more investors make allocations to alter-natives. There is ample room for growth. At the end of 2002, the top 100 pension funds had the following allocations to alternatives: hedge funds 1.1%, managed futures 0.6%, private equity 3.1%, real estate 6.8%, high-yield bonds 0.4%, private placements 0.4% and venture capital 0.1% (Source: Benefits Canada, IAM research).

The largest funds, like CDP, CPPIB, Ontario Teachers’ and OMERS already have sig-nificant commitments to alternatives, particularly real estate. This means that par-ticipation by the other funds in alternatives is even lower than it seems. Therein lies the opportunity.

The 2003 Report on Alternative Investing by Goldman Sachs and the Russell Investment Group examined the intentions with respect to alternatives among tax-exempt investors on a global basis. In North America, among the findings are that average strategic alloca-tions to private equity increased, percentage of capital committed to special situations surged, the number of respondents invest-ing in hedge funds grew 40% worldwide and that comparatively high strategic allo-cations to real estate would be increased modestly.

We have already positioned IAM to capture an increasing share of the expanding market. We were there early and are well prepared. We are confident that we can take advantage of the structural opportunities before us.

T h e n e e d i s r e a la n d t h e e v i d e n c e c o m p e l l i n g .

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Integrated Asset Management Corp. is a leading Canadian alternative asset management company headquartered in Toronto.

Founded in 1998, we offer the highest quality alternative asset class management to institutional, pension and private clients.

r e v i e w o fo p e r a t i o n s

a s s e t s u n d e rm a n a g e m e n t

IAM comprises a group of leading specialist alternative asset managers. We manage a broad range of alternatives, which at present are private equity, private debt, real estate, managed futures and hedge funds.

(1) Includes real estate assets managed by Darton, estimated to have a value of approximately $508.7 million as at September 30, 2003 (2002 - $494.8 million; 2001 - $430.5 million).

($ millions) September 30, 2003 September 30, 2002 September 30, 2001Asset Management

Real Estate Management $ 804.0 (1) $ 789.3 (1) $ 710.5 (1)

Private Corporate Debt 169.0 129.0 159.5Private Equity 54.0 54.0 54.0Managed Futures 4.2 ------ ------

1,031.2 972.3 924.0Hedge Funds 402.5 315.6 59.0Total $ 1,433.7 $ 1,287.9 $ 983.0

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c o r p o r a t es t r u c t u r e

We are:

• The leader in alternative asset manage-ment

• Publicly listed and majority-owned by management

• Focused on growth• More than 120 employees• $1.4 billion in assets under management• An industry resource centre for educa-

tion, opinion and commentary• Commi�ed to research and development

in alternative assets

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p r i v a t ec o r p o r a t e d e b t

J o h n R o b e r t s o nPresident and Chief Executive Officer,

First Treasury Corporation

First Treasury Corporation (“First Trea-sury“), founded in 1987, is Canada’s lead-ing independent manager of senior secured private corporate debt. The total value of the loans originated, underwritten, admin-istered and managed by First Treasury since it was founded is approaching $ 1 billion.

Private corporate debt is becoming an increasingly important source of capital for mid-sized Canadian businesses, both public and private. Responding to new risk-weighted capital allocations, Canada’s banks have shifted emphasis toward fee-based income and begun to aggres-sively scale back their corporate lending. The result has been to create significantly expanding demand for term loans from First Treasury.

From a borrower’s point of view, a First Trea-sury loan allows it to diversify its sources of long-term capital, generate higher free cash flow, finance expansion and leverage its earnings. The seasoned professionals at First Treasury, with a combined 180 years of lending experience, are able to custom-tailor loan arrangements to meet the specific circumstances of each individual borrower.

For example, this year First Treasury pro-vided a $ 40 million long-term loan to an

environmental compliance services com-pany. This financing was used to fund a significant portion of the construction of an emission scrubbing and by-product manu-facturing process under contract with a major oil refinery.

On the east coast, First Treasury provided a $ 24 million facility to a textile manufacturer. The proceeds were used to consolidate bal-ance sheet debt, redeem preferred shares and provide working capital. In structuring this loan, First Treasury worked closely with the Government of New Brunswick, who provided support for the project.

During calendar 2003, First Treasury arranged over $ 160 million in financing, including a significant portion which closed after September 30, 2003, a new single year record for the company. Assets under man-agement as at September 30, 2003 were $ 169 million. However, subsequent to the fiscal 2003 year end, they exceeded $ 235 million, the highest level in the company’s 16 year history.

Sectors in which First Treasury was active included chemical processing, environmen-tal compliance, textiles, agricultural co-ops, oil and gas and transportation. The growth in loan volume reflects growing market

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demand and the success of a highly focused, proactive marketing program that identifies and targets prime prospective borrowers. At year-end, First Treasury had identified and was in discussions with prospective bor-rowers for potential loans with an aggregate value of approximately $ 500 million.

First Treasury generates attractive, well- managed investment product for its cus-tomers, the institutional investors. At a time of low interest rates and declining returns from fixed income portfolios, pension funds are keenly interested in ways to increase their current income. A First Treasury port-folio offers institutional investors high cur-rent income, low volatility and attractive diversification. The combination of strong covenants and the depth of experience of the First Treasury team in structuring loans

means that investors enjoy significantly higher income and a better credit experience than that of ‘A’ rated public debt.

Last year, First Treasury developed the First Treasury Private Debt Fund LP to give insti-tutional investors exposure to a portfolio of private debt. While it took longer than antic-ipated to educate investors about the merits of a new asset class, First Treasury has now identified key investors with strong inter-est. The success of the marketing program and the size of the pipeline of high quality loans have provided persuasive evidence to investors of First Treasury’s ability to source attractive investments. We expect that the fund will have its first closing in the first quarter of calendar 2004.

A F i r s t T r e a s u r y p o r t f o l i o o f f e r s i n s t i t u t i o n a l i n v e s t o r s h i g h c u r r e n t

i n c o m e , l o w v o l a t i l i t y a n d a t t r a c t i v e d i v e r s i f i c a t i o n .

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r e a l e s t a t em a n a g e m e n t

B r e n t C h a p m a nPresident,

Greiner-Pacaud Management Associates

Greiner-Pacaud Management Associates (“GPM”) and its subsidiaries, Darton Prop-erty Advisors & Managers Inc. (“Darton”) and Greiner-Pacaud / Hamilton Manage-ment Inc. are the real estate management arm of IAM.

A fully integrated real estate management firm, GPM offers a complete range of real estate services including investment man-agement, asset management, development, leasing, property management, mezzanine lending and merchant banking. GPM pro-vides these services to pension fund, endow-ment fund and private equity clients.

Assets under management of $ 804.0 million as at September 30, 2003 increased modestly from $ 789.3 million at the previous year end due to growth at Darton.

GPM’s core product is its highly success-ful series of closed-end pooled funds. We believe this to be the best performing series of such funds in Canada. For over 21 years from July of 1982, the funds have earned an average internal rate of return, net of fees, of 13.4 %. The funds, which have almost no mortgage or other debt, have included a range of property types with a concentra-tion on industrial property, in which GPM has built unrivalled expertise.

In July of last year, the ninth fund in the series, GPM 9, closed with proceeds of $ 55 million. GPM set out to invest the proceeds in a challenging market, facing declining yields and unrealistic price expectations on the part of vendors. Nonetheless, call-ing upon the cumulative experience from the purchase and disposition of over 400 properties, GPM has been able to acquire excellent properties that meet its uncompro-mising standards. By the end of September, investments and commitments exceeded 80 % of the fund, with sufficient additional properties identified to complete the invest-ment program.

Late in September 2003, GPM announced the launch of GPM 10, seeking to raise between $75 and $ 100 million. Active marketing is already underway.

Development work and prel iminarymarketing are also well advanced forthe launch of the GPM Opportunity Fund. This new fund is intended for investors seeking higher returns than those expected from the core product.

The Opportunity Fund will combine income producing industrial properties, land devel-opment, speculative building, joint ventures and will utilize leverage to enhance returns. GPM is also offering its expertise to pension

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A crucial element in maximizing the value of a portfolio is top quality, disciplined and cost effective property management. GPM’s wholly-owned property management sub-sidiary, Darton, provides a full range of services, including property management and operations, property analysis, leasing, financial management, tenant retention programs, development and construction co-ordination and management.

R e a l e s t a t e c o n t i n u e s t o b e a c o r e a s s e t c l a s s f o r p e n s i o n f u n d s .

Greiner-Pacaud / Hamilton Management Inc. (“GPH”) is 51 % owned by GPM, with the balance held by its management. GPH is a real estate merchant bank. Assets under management total approximately $ 56 mil-lion, including a 350,000 square foot, 10 story building in central Toronto.

This industrial style building was purchased on behalf of two pension funds, renovated and converted to high-tech office space and re-leased to tenants who need a technology friendly environment. This is an excellent example of one of the value added situa-tions successfully managed by GPH.

Providing capital to the real estate develop-ment industry with various forms of financ-ing and expertise has been a constant focus of GPH. GPH has consistently earned supe-rior returns for its investors, which include pension funds and high net worth individu-als.

funds that require separately managed port-folios.

Real estate continues to be a core asset class for pension funds. It is ideally suited to match the requirements of a pension fund, offering high current income, low volatility, appreciation potential, inflation protection, low correlation to traditional asset classes and a long horizon. Some of Canada’s largest pension funds have real estate allocations in excess of 15 % of their entire portfolio, and for many it has been their best performing

asset class over the last few years. We believe that the volatility and sharply falling equity markets that pension funds have suffered until recently will continue to draw more funds to real estate for the first time, as well as attract additional capital from investors already committed to the asset class.

Toward the end of September, Darton announced that it had agreed to acquire Monarch Property Management Limited (“Monarch”). Monarch is a full service property management company with over 50 years of experience. Acquisition of the Monarch business effective November 2003, expanded Darton’s reach in Toronto and gave it an important new presence in the Ottawa region. With the Monarch acquisi-tion, Darton now manages a commercial portfolio of over 8.5 million square feet, with 120 properties and more than 1,500 tenants.

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The seasoned professionals at Integrated Partners represent one of the most experi-enced private equity teams in Canada. They are led by George Engman, President and Chief Executive Officer. George is one of Canada’s pioneering private equity inves-tors, as well as one of the most successful.

Adopting a time-tested merchant banking approach, Integrated Partners focuses on working with talented management teams which wish to execute business plans that have the potential to significantly add value for shareholders.

One of the hallmarks of Integrated Part-ners is patience, combined with exhaustive analysis and thorough due diligence. Inte-grated Partners will only contemplate those potential transactions that meet its rigorous criteria.

Since the closing of Integrated Partners LP One in July, 2001, the team has painstakingly reviewed over 250 potential investments. Of these, many were reviewed in detail and a significant number were subjected to due diligence. Three transactions have been completed and two additional term sheets agreed upon, with others in various stages. If these proceed as anticipated, the fund will complete its investment program early in the new year.

The fund has already enjoyed its first real-ization of an investment. This particular transaction is an excellent illustration both of the Integrated Partners process and the potential returns from well-managed pri-vate equity.

In August of 2002, the fund invested $ 10 million in an Ottawa-based company, Interactive Circuits and Systems Ltd. (“ICS”). ICS had become the dominant sup-plier of embedded computer solutions to the military sonar market. Major custom-ers include the US Navy, Lockheed Martin, Boeing and Motorola.

One of the co-founders of ICS was seeking new opportunities and wished to realize his investment in ICS. The investment pro-vided Integrated Partners with a 43% equity stake.

After closing, Integrated Partners estab-lished a professional board of directors and began to implement the governance and management processes associated with a public company. This meant that ICS had a foundation for rapid growth and a lead-ership groomed to go public. ICS quickly completed two complementary acquisitions in the US and made key additions to the sales team.

p r i v a t e e q u i t y

G e o r g e E n g m a nPresident and Chief Executive Officer,

Integrated Partners

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Soon after the acquisitions were completed, ICS received an unsolicited takeover offer from a similar company in the UK. Man-agement was focused on executing the new business plan, and wary of the potential dis-traction. However, the bidder committed to a premium purchase price and to allow ICS to continue with its business plan.

In September 2003, the transaction closed

with cash consideration to the fund of $ 16.1 million along with entitlement to additional cash payments if certain profit conditions are met. This all-cash transac-tion has earned the fund an internal rate of return of 46.7 %, with a potential IRR of over 60 % assuming realization of the earnout over the next two years.

In July, 2002, the fund agreed to advance up to $ 10 million to support an informal financial restructuring of Systech Retail Sys-tems Corp. (“Systech”). Systech is a leading independent developer, integrator and sup-porter of best-in-class point-of-sale solutions for North American supermarket, general merchandise and hospitality chains.

Following a period of rapid expansion, Systech found itself in financial difficulty. Nonetheless, Integrated Partners could see that the company enjoyed some unique advantages. There were significant market opportunities, many opportunities for cost reductions and valuable intellectual prop-erty.

As part of the restructuring, the company was placed in Chapter 11 in the US and CCAA in Canada in January, 2003, and Inte-grated Partners provided additional DIP financing. Restructuring proceeded, includ-ing cutting the workforce in half, remov-ing some of the senior officers, cutting the number of offices in half, restructuring the service fleet and recruiting a new CFO and conducting a search for a new CEO.

Systech emerged from creditor protection in October, 2003. At the current market price, the fund’s investment of $ 12 million has a value in excess of $ 20 million, excluding the value of warrants received in the restructur-ing.

These transactions underscore some of the core elements of the Integrated Partners suc-cess: find fundamentally good businesses with unique products or services, work with or install good management, organize to unlock value, be proactive in structuring the board of directors and optimize the capital structure.

As the investment program for the fund is nearly completed, Integrated Partners will return to institutional investors to raise a second fund to continue to apply these proven principles.

More and more Canadian pension funds are coming to understand the inherent potential of private equity and we are confident the process and results achieved by Integrated Partners will appeal to them.

T h e f u n d h a s a l r e a d y e n j o y e d i t s f i r s t r e a l i z a t i o n o f a n i n v e s t m e n t .

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Integrated Managed Futures Corp. (“IMFC”) is the latest alternative asset manager in the IAM group. IMFC was formed in March 2003, and subsequently acquired the assets of a Commodity Trading Advisor (“CTA”), Aero Capital Corporation, based in Toronto. IMFC is 65 % owned by IAM and 35 % by its management. Assets under management at September 2003 are $ 4.2 million.

IMFC is registered as a CTA and CPO (Com-modity Pool Operator) with the Commod-ity Futures Trading Commission (“CFTC”) in the United States, is a member of the National Futures Association, and is reg-istered as a Commodity Trading Manager (“CTM”) and Limited Market Dealer in Canada.

The formation of IMFC arose from one of a number of research and development projects undertaken at IAM during the year. Our research showed that as an asset class, managed futures exhibit a number of highly desirable characteristics. They include liquidity, complete transparency, the ability to profit from both rising and falling prices and a strong tendency to perform well in times of political or economic upheaval.

Over the last 20 years, without exception, when major world stock markets experi-

m a n a g e df u t u r e s

enced sharp declines, managed futures pro-vided positive performance. Of particular interest is the impact of adding managed futures to a hedge fund portfolio; the effect is to reduce risk and enhance returns.

Recognizing the structural appeal of man-aged futures, it was subsequently deter-mined that the most attractive investment management style was longer term trend following. During the course of a subse-quent manager search, it became clear that Aero Capital Corporation had developed a sound, systematic trend following meth-odology that had produced superior risk-adjusted returns over the previous 6 years. Rigorous testing of the proprietary models showed equally attractive results over a 20-year period.

IAM is fundamentally appealing to emerg-ing managers like Aero Capital Corporation. IAM brings capital, credibility, marketing, distribution, infrastructure, market pres-ence, compliance and oversight. When com-bined with the unique talents and processes of an emerging manager, this provides a solid platform for successful growth.

IMFC’s core philosophy is rooted in the fact that commodity futures markets are statisti-cally trend persistent with no long or short

R o l a n d A u s t r u pPresident and Chief Executive Officer,

Integrated Managed Futures Corp.

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bias. This trend persistence is a function of deeply rooted macro-economic shifts in commodity prices over time, the risk pre-mium and basis between futures and spot commodity prices, and the manner in which changing expectations of prices manifest themselves in long-term trends.

IMFC uses a systematic trading strategy to manage client portfolios. All investment decisions are made based upon clearly quan-tifiable information and are executed in a rational and methodical manner unaffected by behavioral or judgmental biases.

IMFC’s strategies are designed to capture this long-term trend persistence across a broadly diversified portfolio of futures markets. IMFC’s models use multiple non-correlated signal generators that have the

effect of reducing position sizes in markets in equilibrium and increasing position sizes in markets that are trending. Proprietary smoothing techniques are used to separate underlying trend-persistence from random noise, resulting in continuous exposure to long-term market trends of one year or more.

All IMFC portfolios are broadly diversi-fied across more than 25 equally weighted

futures markets. Markets traded include:

Currencies: Euro, Swiss Franc, Japanese Yen, British Pound, Australian Dollar, Cana-dian Dollar, and Yen/Euro cross

Energy: crude oil, heating oil, unleaded gasoline and natural gas

Metals: gold and high grade copper

Interest Rates: Eurodollar and US 10 year notes

Grains: corn, soybean meal, soybeans, soy-bean oil and wheat

Meats: live cattle and lean hogs

Softs: cotton, sugar, cocoa, and coffee

The strategy is producing excellent returns. For example, the average return over two years has been 13.9 %, ranking globally in the top 20 % of all CTA’s, the best calendar year return in the last 6 years was 41.6 %.

We see strong growth opportunity ahead for managed futures from fund of hedge funds, high net worth individuals and pen-sion funds who are seeking greater portfolio diversification and return enhancement.

T h e a v e r a g e r e t u r n o v e r t h e l a s t t w o y e a r s h a s r a n k e d I M F C g l o b a l l y i n

t h e t o p 2 0 % o f a l l C T A ’ s .

20

Through this alliance, in fiscal 2003, BluMont launched two highly successful Notes investment programs that raised $ 146.5 million in assets through two principal guaranteed products – the BluMont Man-IP 220 Series 1 and Series 2 Notes.

Over the last two years, structured products have become an increasingly important focus of the hedge funds operations. Structured products are unlike open-

e n d h e d g e funds in that t h e y h a v e a short offering period as well a s a l i m i t e d term, usually 5 to 10 years. They typically allow investors a c c e s s t o

sophisticated hedge fund products with lower minimum investment amounts, such as $ 5,000, than traditional hedge fund products sold by means of accredited investor exemptions.

The BluMont Strategic Partners Hedge Fund, BluMont’s first structured product offering which closed in May, 2002 has been enhanced by the addition of two of Canada’s most highly regarded investment managers

IAM continues to capitalize on the hedge fund industry’s explosive growth through its 46.1% owned subsidiary, BluMont Capital Inc. (“BluMont”). A TSX Venture Exchange listed company since January 2001 (TSXV: BCC), BluMont offers Canadian retail investors the opportunity to invest in leading alternative investment products and is one of Canada’s leading hedge fund companies with assets under management of approximately $ 402 million as at September 30, 2003.

h e d g ef u n d s

Fiscal 2003 was another year of significant growth for the company, with assets increasing 28% from $ 315 million at September 30, 2002. BluMont’s asset growth has been primarily derived from the strategic alliance formed one year ago with Man Investment Products Inc. (“Man”), one of the world’s largest independent alternative investment managers with assets under management of over US $ 30 billion as of September 30, 2003.

T o r e i g h S t u a r tChief Executive Officer,

BluMont Capital Inc.

($ millions) September 30, 2003 September 30, 2002 September 30, 2001Hedge Funds

Structured Products $ 282.3 $ 181.8 ------Open-end Products 101.1 116.1 36.5

383.4 297.9 36.5 Investment Counselling 19.1 17.7 22.5*Total $ 402.5 $ 315.6 $ 59.0

* Mutual funds

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to its advisor lineup – Frank Mersch of Front Street Investment Management Inc. and Veronika Hirsch of BluMont. With these new managers joining the current advisor lineup of Spro� Asset Management Inc., Hillsdale Investment Management Inc., J.C. Clark Ltd., and SciVest Capital Management Inc., BluMont has succeeded in bringing six of the best long/short equity managers in Canada together in one fund.

Funds managed by BluMont’s Chief Investment Officer, Veronika Hirsch, continue to deliver exceptionally strong performance. For the five years ended September 30, 2003, the BluMont Hirsch Performance Fund was ranked in the first percentile among Canadian equity funds in the SEI Pooled Fund Survey.

As mentioned earlier, BluMont closed two structured products in fiscal 2003, raising $ 146.5 million, and closed a third in November, 2003, raising $ 35.8 million as a result of the strategic alliance with Man.

BluMont made a strategic decision to devote significant resources to distributing structured products managed by Man to investors in Canada and further increased staffing levels and associated expenditures. Management’s focus was also on achieving profitability through the execution of this strategy.

The marketing of the Man products proved successful with an aggregate of $ 182 million

W e w i l l r e a p t h e b e n e f i t s o f C a n a d a ’ s h e d g e f u n d g r o w t h a s B l u M o n t s o l i d i f i e s i t s l e a d e r s h i p p o s i t i o n .

raised in the first three offerings. BluMont expects to grow its structured product assets further by rolling-out Man’s product offerings on a quarterly basis in fiscal 2004.

Over the course of fiscal 2003, operating losses have declined on a quarter by quarter basis and it is management’s task to reach profitability in fiscal 2004.

The strategic alliance with Man is an exciting opportunity for BluMont which should lead to significant asset growth over the next few years. However, there are also risks to BluMont in dedicating significant resources to one manufacturer, and these are addressed in the “Risks and Uncertainties” section in the management’s discussion and analysis. The Canadian hedge fund market continues to enjoy strong growth as both individual and institutional investors discover the benefits that hedge funds can provide to a traditional portfolio in terms of the potential for greater diversification and risk-adjusted returns. The number of hedge funds worldwide is now estimated at more than 6,500, with global hedge fund assets estimated at US $ 850 billion.

We are particularly optimistic that we will reap the benefits of Canada’s hedge fund growth as BluMont solidifies its leadership position. The opportunity is a�ractive as the Canadian retail hedge fund market represents significant potential growth.

22

The management’s discussion and analysis that follows is based on the reported earnings in accordance with Canadian generally accepted accounting principles (“GAAP”). Management’s discussion and analysis is also based on operating income (loss). This earnings measure does not have any standardized meaning prescribed by GAAP and is therefore unlikely to be comparable to similar measures presented by other issuers.

Integrated Asset Management Corp. (“IAM” or the “Corporation”) is a full service investment manager offering high quality alternative asset class management to institutional, pension and private clients. The Corporation comprises a group of leading specialist investment management firms managing a variety of alternative asset classes. The group provides investors with private equity, private corporate debt, managed futures, real estate investment management, property management and leasing and hedge funds.

This section provides management’s discussion and analysis of the financial condition and results of operations of IAM for the years ended September

30, 2003 and September 30, 2002. This analysis is supplemental to the audited consolidated financial statements of the Corporation and its accompanying notes, and is intended to provide investors with additional information on the Corporation’s recent performance, its current financial situation and its future prospects. Readers should also refer to the Chairman’s Report to Shareholders of this Annual Report for additional remarks relating to the Corporation’s operations.

d i s c u s s i o n a n d a n a l y s i s

m a n a g e m e n t ’ s

a s s e t s u n d e rm a n a g e m e n t

S t e p h e n J o h n s o nChief Financial Officer,

Integrated Asset Management Corp.

O v e r v i e w

Asset growth continued during the year approximating $ 1.4 billion of assets under management. At September 30, 2003, the Corporation had two business segments:

Asset Management: comprises our real estate management, private corporate debt, managed futures and private equity with an institutional and high net worth client base.

Hedge Funds: comprises our retail hedge funds activities under BluMont.

23


The Corporation earns revenue primarily from two sources:

1 . M a n a g e m e n t F e e s

These are typically based on an agreed per-centage of the assets under management, which includes the market value of hedge funds, pooled funds and other assets admin-istered by the Corporation. Revenues gener-ated from management fees are generally expected to increase in direct proportion to the pool of assets under management. For income statement purposes, this revenue is recognized when it is earned.

2 . P e r f o r m a n c e F e e s

The Corporation earns performance fees when investment returns outperform a designated benchmark. These benchmarks (“hurdle rates”) are contract specific and

only apply to certain investment products. Some of the pools of assets managed by the Corporation have expected terms of up to 10 years and are structured such that per-formance fees are generally only realized towards the end of the life of the pool of assets. Unrealized performance fees can build up over time and form a significant portion of the total revenue of the Corpora-tion. Unrealized performance fees can also decrease or be eliminated completely over the life of the pool of assets. As the consoli-dated financial statements of the Corpora-tion recognizes performance fees only when realized, the revenues and operating income of the Corporation will tend to be volatile.

f i n a n c i a l s t a t e m e n t sThe accompanying audited consolidated financial statements included in this Annual Report comprise the results for the years ended September 30, 2003 and September 30, 2002.

o v e r v i e w o f t h e b u s i n e s s

A s s e t s U n d e r M a n a g e m e n t

(1) Includes real estate assets managed by Darton, estimated to have a value of approximately $508.7 million as at September 30, 2003 (2002 - $494.8 million; 2001 - $430.5 million).

($ millions) September 30, 2003 September 30, 2002 September 30, 2001Asset Management

Real Estate Management $ 804.0 (1) $ 789.3 (1) $ 710.5 (1)

Private Corporate Debt 169.0 129.0 159.5Private Equity 54.0 54.0 54.0Managed Futures 4.2 ------ ------

1,031.2 972.3 924.0Hedge Funds 402.5 315.6 59.0Total $ 1,433.7 $ 1,287.9 $ 983.0

Assets under management in the Asset M a n a g e m e n t o p e r a t i o n s i n c r e a s e d approximately 6 % in fiscal 2003 to $ 1,031.2 million from $ 972.3 million in 2002. The increase in assets under management at

the Hedge Funds operations is due to the closings of two BluMont Man structured products in 2003. BluMont experienced some redemptions and market depreciation in some of its other funds.

24


O p e r a t i n g R e s u l t s :N e t i n c o m e a n d e a r n i n g s p e r s h a r e

The Corporation reported a net loss of $467,639 for the year ended September 30, 2003 or $(0.02) per share compared with net income of $1,850,931 or $0.09 per share for the year ended September 30, 2002. The main reasons for the decrease in net income are the reduction in realized performance fees from $6.0 million in 2002 to $1.9 million in 2003 and the absence of a dilution gain in 2003 (2002 - $876,933).

R e v e n u e s

Revenues remained flat from $17,019,201 in 2002 to $17,144,119 in 2003, however the Corporation did see growth of 35% in its predictable revenues of management fees, administration and redemption fees. These fees increased $3.7 million from $10.8 mil-lion in 2002 to $14.5 million in 2003. The Corporation’s less predictable revenues (performance fees) offset the increase by declining $4.1 million from $6.0 million in 2002 to $1.9 million in 2003.

IAM’s predictable revenues are correlated to the value of the assets it manages on behalf of its clients. Assets under management in both fiscal 2003 and 2002 increased, and accordingly, management fees, administra-tion and redemption fees in fiscal 2003 also increased over 2002.

IAM’s less predictable revenues, consisting of performance fees, added positively to this year’s results, however they did not have the impact that the higher performance fees did in 2002. Almost $2 million in performance fees, virtually entirely from our hedge funds operations, were realized in 2003, which

compares unfavorably with the $6 million realized in 2002 in which $4.2 million of the performance fees were generated by our real estate management division and $1.8 million by BluMont.

E x p e n s e s

The Corporation reported consolidated expenses for the year ended September 30, 2003 of $18,377,304 (year ended September 30, 2002: $16,290,553).

The principal components of expenses are selling, general and administration of $13,062,757 (year ended September 30, 2002: $13,111,894), a significant portion of which is salaries. Expenses increased at BluMont as a result of increased staffing levels, how-ever, this was offset by lower expenses in the real estate management division due to lower compensation expenses as there were minimal performance fees realized in fiscal 2003.

The impact of performance fees on the Corporation’s profitability depends on a number of factors. Generally, funds which are internally-managed generate higher margins on performance fees than funds which are managed by external investment advisers.

All funds in the Asset Management operations are internally-managed and the expenses associated with performance fees are typically bonuses and other per-formance related employee compensation which are included in selling, general and administration expenses.

s u m m a r y o f c o n s o l i d a t e df i n a n c i a l r e s u l t s

25


In the Hedge Funds operations, some of the funds are internally-managed and some are managed by external advisers. In addition, there are other expenses associated with the performance fees from hedge funds includ-ing servicing fees to dealers in providing ongoing support to investors in BluMont hedge funds.

During the year, B luMont incurred investment adviser fees and service fees totaling $1,401,063 which related to per-formance fees earned of $1,760,937 resulting in net performance fees of $359,874. This was lower than in 2002 because most of the performance fees were from externally- managed funds. In 2002, net performance fees were $1,031,571 based on performance fees realized of $1,784,106 net of investment adviser fees and dealer fees of $752,535.

Total investment adviser fees paid during the year, excluding the portion paid relating to performance fees were $ 2,041,317 in 2003 compared to $ 1,200,991 in 2002. Similarly, service fees paid to dealers, excluding the portion paid relating to performance fees were $873,917 compared to $647,312 in 2002. This is consistent with the asset growth experienced by BluMont.

The Corporation continues to self-finance commissions on the sale of hedge funds on a deferred sales charge (“DSC”) basis. As at September 30, 2003, the Corporation’s asset relating to DSC commissions was $2,569,215 ($2,814,767 as at September 30, 2002) and commissions are paid from the Corpora-tion’s cash resources. For financial report-ing purposes, these commissions are being amortized evenly over 7 years. During fiscal 2003, the amortization of DSC commissions amounted to $485,003 compared to $291,365 in fiscal 2002. The current level of DSC commissions being paid by the Corpora-tion is not likely to significantly impact the cash resources of the Corporation, however should these commissions increase, alter-native arrangements to finance these DSC assets will be considered.

Interest expense increased to $240,042 in fiscal 2003 from $82,141 in fiscal 2002. The higher level of interest expense is a result of the increase in interest-bearing debt held during the year. Effective December 31, 2002, BluMont completed a convertible debenture financing of $1.3 million with an institution. In addition, the Corpora-tion paid down part of the debt related to a credit facility provided by a significant shareholder of the Corporation.

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R e v e n u e s

The decrease in Asset Management rev-enues to $8,802,093 is primarily due to the performance fee realized by GPM in 2002 of approximately $4.2 million. Nominal per-formance fees were realized in 2003. Par-tially offsetting the decrease in performance fee revenues was an increase in manage-ment fee revenues as a result of an increase in assets under management in fiscal 2003 and 2002. The Hedge Funds operations experienced another year of rapid growth in revenues

O p e r a t i n g I n c o m e ( l o s s )

The operating results of the Corporation’s two reportable business segments are shown below:

Operating Income (Loss) 2003 2002Asset Management $ 205,628 $ 2,283,681Hedge Funds (1,438,813) (1,555,033)Total $ (1,233,185) $ 728,648

Revenues 2003 2002Asset Management $ 8,802,093 $ 11,704,550Hedge Funds 8,454,526 5,547,151Eliminations (112,500) (232,500)Total $ 17,144,119 $ 17,019,201

s e g m e n t e d i n f o r m a t i o n

The decrease in the operating income of the Asset Management operations in 2003 from 2002 is primarily due to the performance fees realized in the real estate management operations in 2002.

over the prior year due to management fees earned on a higher base of assets under management.

Hedge fund assets under management increased from $315.6 million to $402.5 mil-lion primarily as a result of the closings of two BluMont Man structured products, and, accordingly, management fees also increased. Performance fees for the 2003 year compared to the prior year remained relatively unchanged from $1,784,106 to $1,760,937 in fiscal 2003.

The Hedge Funds operations experienced a decrease in operating losses in fiscal 2003. BluMont made a strategic decision to devote significant resources to distributing structured products managed by Man to

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U n r e a l i z e d P e r f o r m a n c e F e e s

IAM manages investment products where significant amounts of unrealized per-formance fees have built up because the performances to date have exceeded the applicable benchmarks, however, the excess returns have not yet been monetized. Many of these products have expected terms of up to 10 years and performance fees tend to be realized only towards the end of the term of the product.

The Asset Management operations cre-ated additional unrealized performance of approximately $2.7 million in fiscal 2003 in its real estate management and private equity activities. A nominal amount of per-formance fees was realized in fiscal 2003.

f i n a n c i a l p o s i t i o n a t S e p t e m b e r 3 0 , 2 0 0 3

Unrealized Performance Fees 2003 2002Asset Management $ 12,500,000 $ 9,800,000Hedge Funds 900,000 3,300,000Total $ 13,400,000 $ 13,100,000

investors in Canada and further increased staffing levels and associated expenditures.

Two BluMont Man structured products were closed in March and July 2003 which should provide BluMont with management fees over the expected ten year lives of the products. The management fees in 2003 from these two products which are reflected

in the financial statements are significantly less than the additional upfront expenses incurred by BluMont. Some of the third party costs relating to the establishment of these sophisticated products, which were not recovered out of the offering expenses of the structured products, have been capital-ized and will be amortized over subsequent periods.

There was an erosion of the unrealized per-formance fees of $3.3 million at September 30, 2002 in the Hedge Funds operations and only approximately $1.4 million was real-ized on December 31, 2002 (performance fees in hedge funds are generally earned on December 31 or June 30). The realized performance fees in the Hedge Funds opera-tions for fiscal 2003 were approximately $1.8 million.

These unrealized performance fees have not been reflected in the consolidated financial statements and will only be reflected when realized.

28


on the amounts raised by the products. During 2003, BluMont incurred third party expenses of approximately $720,000 which were not recovered.

IAM’s management believes that the Cor-poration has sufficient resources to meet its requirements through fiscal 2004. However, additional funds may be required in connec-tion with the Corporation’s commitments to invest in funds managed by the Corporation and with acquisitions of interests in addi-tional asset management firms.

R i s k a n d U n c e r t a i n t i e s

Similar to other investment management companies, IAM faces risks and uncertain-ties that can be managed but not eliminated. The Corporation has various corporate gov-ernance policies and procedures which are reviewed periodically. These policies and procedures require specific business units to assist in the identification, assessment and control of these risks.

Major risks and uncertainties associated with IAM include:

1. Operational risk2. Poor investment performance3. Loss of key employees4. Lack of client diversification

One aspect of operational risk facing the Corporation is revenue volatility. It is caused by changes in business and eco-nomic conditions and public expectations of the markets. Over the past couple of years, poor equity markets and economic and political uncertainty have contributed to increasing revenue volatility. To manage this risk, IAM continues to diversify its product line to promote alternatives for our client base and by offering superior risk-adjusted returns that have low correlation to equity markets. Another aspect of operational risk is the Corporation’s ability to accumulate, pro-

The Corporation’s primary liquidity require-ments are to generate sufficient cash flow to meet its operating obligations on a continu-ous basis, and, applicable only at the Hedge Funds operations, to finance fund establish-ment expenses and to finance commissions arising from the sale of hedge funds on a DSC basis. At September 30, 2003, the Corporation’s net liquid assets (excluding future income taxes) decreased slightly to $3,473,000 com-pared to $3,521,000 as at September 30, 2002. The Corporation had cash of $4,817,895 as at September 30, 2003 compared to cash of $2,523,244 at September 30, 2002. Included in the cash of $4,817,895 is cash of $1,264,793 in BluMont which is the result of two financings by that company during fiscal 2003 undertaken to provide funding for the hedge funds operations.

Receivables were $ 1.8 million at September 30, 2003 compared with $ 5.6 million at Sep-tember 30, 2002. The receivables at the end of fiscal 2002 included a significant portion of performance fees which were received shortly after the fiscal 2002 year end.

Capital expenditures incurred in the year ended September 30, 2003 were primarily for computer hardware and software related to the expansion at BluMont.BluMont incurs significant upfront costs in developing and marketing new sophis-ticated financial products. In particular, the development of structured products with Man requires certain significant upfront costs which BluMont either recov-ers entirely or in part by reimbursement out of the proceeds of those structured product closings. The extent to which Blu-Mont recovers these upfront costs depends

l i q u i d i t y a n dc a p i t a l r e s o u r c e s

29


cess and communicate information neces-sary to conduct business. At this stage of the Corporation’s life, this aspect of operational risk is minimal. With anticipated growth in the coming years, the Corporation is currently assessing options to integrate the various divisions to efficiently manage the accumulation, processing and communica-tion of proprietary information.

Poor investment performance can lead to a loss of assets under management resulting in lower revenues. To mitigate this risk, IAM has diversified across several different alternative asset classes unrelated to each other: private corporate debt, private equity, managed futures, real estate and hedge funds. In addition, new products are con-tinuously being developed and additional asset class categories sought.

All senior employees of IAM are considered to be important in the performance of the Corporation. IAM has ensured that each senior employee has been compensated accordingly with some combination of salary, bonus and stock incentives. While some employee turnover is expected, IAM has attempted to prevent the loss of key employees. Many senior employees are shareholders of the Corporation, owning in excess of 50% of the outstanding common shares as at September 30, 2003.

A risk arises when significant revenues

generated for a corporation are contributed by one client or a group of related clients. The Corporation offers several different alternative asset classes for a client to invest in and there are few clients or relat-ed client groups that currently invest in more than one alternative asset class prod-uct of the Corporation. IAM is not in this position, however the Hedge Funds opera-tions, viewed as its own operating unit, is exposed to this risk.

In September 2002, BluMont entered into a strategic relationship with Man to offer retail investors in Canada structured prod-ucts in which Man provides investment management and other important services. The strategic relationship provides BluMont with exclusivity for marketing Man struc-tured products to retail investors in Canada, however BluMont is expected to meet a specified asset goal of closing over $500 mil-lion of BluMont Man products by December 31, 2005. Failure to meet that goal would result in lower fees from certain Man prod-ucts in subsequent periods and the claw-back of part of the fees received by BluMont prior to 2006. At September 30, 2003, these Man products represented approximately $146 million or 36% of the assets managed by BluMont and 6% of BluMont’s revenue in 2003 (2002 - $Nil).

BluMont intends to dedicate significant resources to launching more products in

30


association with Man. Accordingly, the outcome of this strategic relationship will likely have a significant impact on the finan-cial future of BluMont. The success of these products (and their impact on the financial affairs of BluMont) will be determined by Man’s investment performance, marketing support and other factors over which Blu-Mont may have little or no influence.

In the event that the specified asset goal of $500 million is not met by December 31, 2005, Man could reduce its financial obli-gations to BluMont after 2005 by an amount based on a portion of the fees received by BluMont prior to 2006. At September 30, 2003, the amount that could be offset by Man after 2005 is $267,105 (2002 - $Nil).

F i n a n c i a l O u t l o o k

In fiscal 2003, equity markets experienced a recovery which continued through the fiscal year end, however hesitation from investors was still evident. As an asset man-agement company, our revenues and earn-ings are affected directly and indirectly by the changes in the economic, business and capital markets environments. However, the impact of these factors is diminished as the Corporation focuses solely on the man-agement of alternative assets. As a result, investors continued pursuing alternatives to their traditional investment portfolios. The

Corporation’s position remains strong and well positioned to profit from this evolv-ing shift in investors’ attitudes and looks to capitalize on the benefits that alternative asset classes offer.

IAM’s revenues are generated primarily from asset management fees which are based on a percentage of client assets under management. In addition, performance fees are recognized upon IAM outperform-ing benchmarks jointly agreed upon be-tween the client and the Corporation. IAM is therefore impacted by the amount of client assets under IAM management and the performance of our managers. With increasing exposure to a larger and larger pool of investors whose attitudes continue to recognize the value of alterna-tive asset classes, IAM‘s assets under man-agement could grow and this would reflect favorably in our revenues. In addition, IAM believes that with our current manager lineup, continued performance fee results are not unlikely.

IAM remains well positioned over the longer term. Our alternative asset classes continue to attract the financial community and we continue to see growing opportuni-ties in the retail and institutional markets. We have experienced growing interest in all of our asset classes and continue to seek other alternative asset classes to add to the IAM portfolio.

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The Corporation’s management is respon-sible for the integrity and the fairness of pre-sentation of the accompanying consolidated financial statements and all information in this Annual Report. The consolidated finan-cial statements and Management’s Discus-sion and Analysis have been approved by the Board of Directors. The consolidated financial statements have been prepared by management, in accordance with accounting principles generally accepted in Canada and where appropriate reflect management’s judgement and best estimates. Preparation of financial statements necessarily requires inclusion of amounts which have been based on management’s best estimates, which have been made using careful judgement. Financial information contained elsewhere in this Annual Report are consistent with the consolidated financial statements.

The Corporation’s management is respon-sible for maintaining systems of internal accounting and administrative controls that provide reasonable assurance that assets are safeguarded from loss or unauthorized use and produce reliable accounting records for the preparation of financial information. Such systems are designed to meet the man-agement needs of a growing business and to provide assurance that financial informa-tion is accurate and reliable in all material respects. The Corporation’s management believes that such systems are operating effectively and that the systems of internal controls meet management’s responsibilities

m a n a g e m e n t ’ s

s t a t e m e n t o n f i n a n c i a l r e p o r t i n g

for the integrity of the consolidated financial statements. The Audit Committee of the Board of Directors, all of which are indepen-dent directors, meets with management and the auditors to discuss the Corporation’s financial reporting and internal control. The Committee meets at least quarterly with management to satisfy itself that manage-ment is properly discharging their respon-sibilities. The Committee, among other things, reviews financial matters related to Corporate Governance, the quality of audits and financial reporting and maintains prac-tices intended to preserve the independence of the external auditors including a review of economic independence. The Committee reviews the consolidated financial state-ments, the independent auditors’ report and the annual and quarterly reports to the shareholders prior to submitting the information to the Board of Directors for approval. Both the independent auditors and the Audit Committee have the right to request a meeting in the absence of manage-ment at any time.

Management recognizes its responsibility to conduct the Corporation’s affairs in the best interest of its shareholders.

Victor KoloshukChairman, President and Chief Executive Officer - December 19, 2003

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a u d i t o r s ’ r e p o r tT o t h e S h a r e h o l d e r s o f I n t e g r a t e d

A s s e t M a n a g e m e n t C o r p .

We have audited the consolidated balance sheets of Integrated Asset Management Corp. as at September 30, 2003 and 2002 and the consolidated statements of operations and retained earnings and cash flows for the years then ended. These consolidated finan-cial statements are the responsibility of the Corporation’s management. Our respon-sibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing stan-dards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence

supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the over-all financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Cor-poration as at September 30, 2003 and 2002 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generally accepted account-ing principles.

Toronto, CanadaDecember 1, 2003

Grant Thornton LLPChartered Accountants


33

c o n s o l i d a t e d s t a t e m e n t s o f o p e r a t i o n s a n d r e t a i n e d e a r n i n g s

Revenue Management fees, administration and redemption fees $ 14,545,053 $ 10,810,846 Performance fees 1,897,409 6,028,348 Interest and other income 701,657 180,007 17,144,119 17,019,201Expenses Selling, general and administration 13,062,757 13,111,894 Investment adviser fees 2,041,317 1,200,991 Service fees paid to dealers 873,917 647,312 Investment adviser and service fees paid relating to performance fees revenue earned 1,401,063 752,535 Depreciation of capital assets 247,877 204,315 Amortization of deferred sales commissions 485,003 291,365 Amortization of management contract establishment expenses 25,328 - Interest expense 240,042 82,141 18,377,304 16,290,553

Operating income (loss) (Note 16) (1,233,185) 728,648

Dilution gain on issue of common shares of subsidiary (Note 12) - 876,933

Income (loss) before provision for income taxes and minority interest (1,233,185) 1,605,581

Income taxes (recovery) (Note 13) Current 11,544 (43,234) Future (258,548) 195,021 (247,004) 151,787

Income (loss) before minority interest (986,181) 1,453,794Minority interest share of loss 518,542 397,137

Net income (loss) $ (467,639) $ 1,850,931

Basic and diluted income (loss) per share $ (0.02) $ 0.09

Weighted average number of shares outstanding Basic 20,789,366 20,175,792

Diluted 20,789,366 20,184,451

Retained earnings (deficit), beginning of year $ 889,171 $ (961,760)Net income (loss) (467,639) 1,850,931Retained earnings, end of year $ 421,532 $ 889,171

Y e a r s E n d e d S e p t e m b e r 3 0 2 0 0 3 2 0 0 2

See accompanying notes to the consolidated financial statements

34


c o n s o l i d a t e d b a l a n c e s h e e t s

AssetsCurrent Cash and cash equivalents $ 4,817,895 $ 2,523,244 Receivables 1,844,881 5,643,363 Income taxes recoverable 10,769 28,610 Prepaids 390,200 201,665 Future income taxes (Note 13) 722,858 686,567 7,786,603 9,083,449

Capital assets (Note 3) 753,233 628,778Deferred sales commissions (Note 4) 2,569,215 2,814,767Goodwill (Note 5) 2,194,717 2,010,671Other assets (Note 6) 3,337,388 2,842,203Future income taxes (Note 13) 1,004,560 782,303

$ 17,645,716 $ 18,162,171

LiabilitiesCurrent Payables and accruals $ 2,637,359 $ 3,532,429 Deferred revenue 369,275 399,021 Current portion of notes payable (Note 7) 522,356 920,995 Current portion of capital lease obligations (Note 8) 61,777 23,920 3,590,767 4,876,365

Notes payable (Note 7) 23,521 59,889Capital lease obligations (Note 8) 56,870 27,219Convertible debenture (Note 9) 1,138,735 -

4,809,893 4,963,473

Minority interest 4,336,729 4,231,965

Shareholders’ EquityCapital stock (Note 10) 8,077,562 8,077,562Retained earnings 421,532 889,171 8,499,094 8,966,733

$ 17,645,716 $ 18,162,171

Commitments (Note 15)On behalf of the Board

Director Director

S e p t e m b e r 3 0 2 0 0 3 2 0 0 2



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c o n s o l i d a t e d s t a t e m e n t so f c a s h f l o w s

Increase (decrease) in cash and cash equivalents

Operating activities Net income (loss) $ (467,639) $ 1,850,931 Add non-cash items Depreciation of capital assets 247,877 204,315 Amortization of deferred sales commissions 485,003 291,365 Amortization of management contract establishment expenses 25,328 - Future income taxes (recovery) (258,548) 195,021 Minority interest share of loss (518,542) (397,137) Dilution gain on issue of common shares of subsidiary - (876,933) Other 68,952 - Operating cash flow (417,569) 1,267,562 Net change in non-cash working capital balances relating to operations (Note 14) 2,702,970 (2,331,135) 2,285,401 (1,063,573) Financing activities Issuance of common shares of subsidiaries, net of issue costs 695,193 2,991,460 Issuance of convertible debenture of subsidiary, net of issue costs 1,250,774 - Issuance of common shares on exercise of stock options - 54,330 Distributions and dividends paid to minority interests (441,967) - Issuance of notes payable - 946,213 Repayment of notes payable (435,007) - Repayment of capital lease obligations (39,170) (21,132) Repayment of share purchase loan of subsidiary 10,000 - Repayment of management loan 17,278 2,500 1,057,101 3,973,371 Investing activities Net proceeds from sale of mutual fund contracts - 202,006 Mutual fund future income stream 133,003 18,109 Investment in funds managed by the Corporation (761,171) (1,637,901) Distributions from funds managed by the Corporation 827,723 - Payment of sales commissions (239,451) (2,445,414) Payment of management contract establishment expenses (720,389) - Purchase of other assets (21,912) (110,660) Purchase of capital assets (265,654) (289,102) (1,047,851) (4,262,962)

Increase (decrease) in cash and cash equivalents 2,294,651 (1,353,164)Cash and cash equivalents, beginning of year 2,523,244 3,876,408

Cash and cash equivalents, end of year $ 4,817,895 $ 2,523,244



36


n o t e s t o t h e c o n s o l i d a t e df i n a n c i a l s t a t e m e n t s

1 . O r g a n i z a t i o n

Integrated Asset Management Corp. (the “Corporation” or “IAM”) was incorporated under the laws of Ontario and its common shares are listed on the TSX Venture Exchange. The Corporation’s principal business is the ownership and management of alternative asset management companies.

2 . S u m m a r y o f s i g n i f i c a n t a c c o u n t i n g p o l i c i e s

These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles. The significant accounting policies are summarized as follows:

Basis of presentation

The consolidated financial statements include the accounts of the Corporation and the following:

Greiner-Pacaud Management Associates (“GPM”) (a partnership) 74.975% Darton Property Advisors & Managers Inc. (“Darton”) (1) 100% Integrated Investment Management Inc. (“IIMI”) 100% First Treasury Corporation (“First Treasury”) (2) 100% BluMont Capital Inc. (“BluMont”, formerly i Performance Fund Inc.) 46.1% Integrated Managed Futures Corp. 65.0% Integrated Partners Integrated Management Limited (“IML”) 75.0% Integrated Partners Holding GP One Limited (“IPHGPOL”) 57.8%

(1) Owned by GPM(2) 63.4% prior to September 30, 2002

Fiscal 2002 Acquisition:

IAM Acquisition of First Treasury

Effective September 30, 2002, IAM acquired the remaining 36.6% minority interest in First Treasury, for consideration of 583,391 common shares of IAM valued at $556,847. The effect of this transaction resulted in an increase in goodwill of $452,150.

Use of estimates

The consolidated financial statements of the Corporation have been prepared by management in accordance with Canadian generally accepted accounting principles. The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The financial statements have, in management’s opinion, been properly prepared using careful judgement within reasonable limits of materiality and within the framework of the accounting policies summarized below.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and balances with banks, net of bank overdrafts, and short term investments with original maturities of three months or less.

S e p t e m b e r 3 0 , 2 0 0 3 a n d 2 0 0 2


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Income taxes

The Corporation provides for income taxes using the asset and liability method of tax allocation. Under this method, future tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recognized to the extent that the recoverability of future income tax assets cannot be considered more likely than not.

Capital assets

Capital assets are stated at cost less accumulated depreciation. Depreciation based on the estimated useful life of the asset is calculated as follows:

Furniture and fixtures - 20% diminishing balance basis Computer hardware and software - 30% diminishing balance basis Leasehold improvements - straight-line over the term of the lease

Deferred sales commissions

The Corporation pays commissions to brokers and dealers on sales of deferred sales charge hedge funds. The commissions are recorded at cost and amortized over 7 years on a straight-line basis. Unamortized deferred sales commissions are written-off in the period where it is determined that it is unlikely that future revenues will recover the unamortized costs.

Goodwill

The CICA issued Handbook Section 3062, Goodwill and Other Intangible Assets which the Corporation adopted effective October 1, 2001. Under the recommendation, which can only be applied prospectively, goodwill and other intangible assets with indefinite lives are no longer amortized, but are tested for impairment upon adoption of the new recommendation and at least annually thereafter. The impairment test was performed as at September 30, 2002 and again as at September 30, 2003 and in management’s best judgement, it was determined that there is no impairment in value of the goodwill that is reported on these audited consolidated financial statements.

Investments in funds managed by the Corporation

The Corporation accounts for its investments in funds managed by the Corporation at the lower of cost and net realizable value. The carrying value of the asset is written down to net realizable value when declines in value are considered to be other than temporary.

Management contract establishment expenses

Management contract establishment expenses represent the portion of third party costs incurred in respect of the development of structured products which are not reimbursed from the proceeds of the closing of the structured product offerings. The management contract establishment expenses are being amortized on a straight-line basis over the expected life of the products (approximately ten years) and, in certain circumstances, may be reimbursed from the proceeds of other related structured product closings by the Corporation. Unamortized management contract establishment expenses are written off in the period where it is determined that it is unlikely that future revenues will recover the unamortized costs.

Revenue recognition

Management and administration fees are based upon the net asset value of the respective funds and are recognized on an accrual basis. Performance fees are recognized when management is assured of their realization. Redemption fees payable by unitholders of deferred sales charge hedge funds, the sales commissions of which have been financed by the Corporation, are recognized as revenue on the trade date of the redemption of the applicable hedge fund security.

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Income (loss) per share

In fiscal 2002, the Corporation retroactively adopted, with restatement of prior year amounts, the recommendations of The Canadian Institute of Chartered Accountants’ Handbook Section 3500, Earnings Per Share. The recommendations require the application of the treasury stock method for the calculation of the dilutive effect of stock options and other dilutive securities. Basic per share amounts are determined by dividing income by the weighted average number of shares outstanding during the year. Diluted per share amounts are determined by adjusting the weighted average number of shares outstanding for the dilutive effect of stock options and warrants.

The change in accounting policy had no effect on income (loss) per share and diluted income (loss) per share for the year ended September 30, 2002. For diluted per share amounts, the effect of options for 1,779,400 shares in fiscal 2003 (2002 – 1,739,400 shares) have not been reflected as to do so would be anti-dilutive.

Stock-based compensation and other stock-based payments

In fiscal 2003, the Corporation adopted, on a prospective basis, The Canadian Institute of Chartered Accountants’ Handbook Section 3870, Stock-Based Compensation and Other Stock-Based Payments. In accordance with the transitional provisions of the new accounting recommendations, the Corporation has adopted the new recommendations for awards granted after October 1, 2002. Under the new standard, the Corporation is required to disclose pro forma net income (loss) and pro forma income (loss) per share as if the fair value based method of accounting had been used to account for stock options granted to employees for awards granted on or after October 1, 2002 ( See Note 11 ). The recommendations do not require the use of the fair value method when accounting for stock-based awards to employees, except for stock-based compensation that meets specific criteria. The recommendations also require the use of a fair value based approach of accounting for stock-based payments to non-employees.The Corporation does not recognize any compensation cost for its stock option plan in the consolidated statements of operations and deficit.

3 . C a p i t a l a s s e t s 2 0 0 3 2 0 0 2

Cost Furniture and fixtures $ 176,939 $ 159,685Computer hardware and software 1,352,818 1,028,323Leasehold improvements 119,318 88,738 $ 1,649,075 $ 1,276,746

Accumulated depreciation Furniture and fixtures $ 118,238 $ 91,677Computer hardware and software 732,075 531,664Leasehold improvements 45,529 24,627 $ 895,842 $ 647,968

Net book valueFurniture and fixtures $ 58,701 $ 68,008Computer hardware and software 620,743 496,659Leasehold improvements 73,789 64,111 $ 753,233 $ 628,778

2 . S u m m a r y o f s i g n i f i c a n t a c c o u n t i n g p o l i c i e s ( c o n t i n u e d )


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4 . D e f e r r e d s a l e s c o m m i s s i o n s 2 0 0 3 2 0 0 2

Cost $ 3,461,924 $ 3,222,473Accumulated amortization 892,709 407,706Net book value $ 2,569,215 $ 2,814,767

5 . G o o d w i l l 2 0 0 3 2 0 0 2

Cost $ 3,303,211 $ 3,119,165Accumulated amortization 1,108,494 1,108,494 $ 2,194,717 $ 2,010,671

6 . O t h e r a s s e t s 2 0 0 3 2 0 0 2

Investments in funds managed by the Corporation $ 1,571,349 $ 1,637,901Management contract establishment expenses, net of accumulated amortization of $25,328 (2002 - $Nil) 695,061 -Management loans (a) 579,389 596,667Mutual fund future income stream (b) 285,837 418,840Other 205,752 188,795 $ 3,337,338 $ 2,842,203

(a) Each of the management loans is secured against the shares of BluMont acquired by the employee/director under the loan agreement plus shares owned by that employee/director which were acquired pursuant to the issuance of Special Warrants by BluMont. The principal on each of the loans will be repayable over ten years in equal payments at the end of each year provided that the employee’s bonus covers the principal payments, and in the event of termination, the repayment schedule of the principal amount outstanding will be accelerated. Interest on the loans will be the dividend on the related common shares.

The market value of the shares at September 30, 2003 was $843,333 (2002 – $1,581,250)

During fiscal 2002, loans in the amount of $1,050,000 were issued to employees and directors of BluMont. For accounting purposes, in these financial statements, these loans were applied against the capital stock of BluMont and were not recorded as an asset as these loans were secured only against those shares of BluMont purchased with the proceeds of the loans. Also, during fiscal 2002, $350,000 of these loans were repaid as a result of the repurchase by BluMont of shares pledged by an employee. During fiscal 2003, $10,000 of these loans was repaid and as at September 30, 2003, there were $690,000 (2002 – $700,000) of these loans outstanding.

(b) Effective November 30, 2001, BluMont sold its mutual fund contracts to a third party for cash of $330,000 plus a future income stream based on assets under management of that third party. Although the future consideration cannot be estimated with any degree of precision, management expects total proceeds to be sufficient for BluMont to reflect a gain on the sale of these assets.

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6 . O t h e r a s s e t s ( c o n t i n u e d ) 2 0 0 3 2 0 0 2

For accounting purposes, BluMont reflected no gain or loss on the closing of this transaction in these financial statements. Subsequent amounts received based on the assets under management of the third party are netted against the carrying value of the asset. The carrying value of the asset (as defined) of $285,837 (2002 – $418,840) was determined as follows:

2 0 0 3 2 0 0 2

Book value of assets sold $ 638,955 $ 638,955 Less: Proceeds received on the closing of the sale of assets, net of estimated transaction costs (202,006) (202,006) 436,949 436,949 Less: income stream received - 2002 (18,109) (18,109) - 2003 (133,003) - $ 285,837 $ 418,840

The carrying value of the asset is written down to fair value when declines in value are considered to be other than temporary based on expected cash flows to BluMont. Management will periodically review the carrying value of this asset.

7 . N o t e s p a y a b l e 2 0 0 3 2 0 0 2

Note payable to significant shareholder $ 496,688 $ 903,884Other note payable 49,189 77,000 545,877 980,884Less: amount due within one year (522,356) (920,995) $ 23,521 $ 59,889

The note is payable on demand and bears interest at 10% per annum. The amount is due to a significant shareholder of the Corporation and was part of a standby credit facility whereby the Corporation could draw down up to $2,000,000 in the form of demand loans. In fiscal 2002, the Corporation issued warrants enabling the significant shareholder to purchase 250,000 common shares of the Corporation at a price of $1.00 per common share on or before October 3, 2004. Interest of $94,406 (2002 - $14,660) has been incurred in respect of the notes drawn down.

The other note is non-interest bearing and unsecured, repayable monthly in the amount of $2,318 and began February 7, 2003 for a four-year term.

8 . C a p i t a l l e a s e o b l i g a t i o n s

Future minimum annual lease payments under capital leases, together with the balance of the obligation due under the capital leases, are as follows:

2 0 0 3 2 0 0 2Year ending September 30, 2003 $ - $ 28,815 2004 71,902 28,035 2005 40,109 714 2006 21,261 - Total minimum lease payments 133,272 57,564 Less: amounts representing interest (14,625) (6,425) Present value of net minimum capital lease payments 118,647 51,139 Less: amounts due within one year (61,777) (23,920) $ 56,870 $ 27,219


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Capital lease obligations are secured by certain office equipment.

Included in capital assets are assets held under capital leases at a net book value of $114,263 in fiscal 2003 (2002 – $33,695).

9 . C o n v e r t i b l e d e b e n t u r e

On December 31, 2002, BluMont completed a private placement of a convertible debenture of $1,300,000 with an annual interest rate of 11%, payable quarterly. The convertible debenture matures on December 31, 2007 and is secured by a floating charge on the assets of BluMont and its subsidiary. The holder of the convertible debenture may convert all or part of the convertible debenture into common shares of BluMont at a price of $1.00 per common share at any time on or prior to December 31, 2007. BluMont may force conversion of the debenture into common shares at the conversion price of $1.00 after December 31, 2003 if certain conditions are met.

In accordance with Canadian generally accepted accounting principles, BluMont has classified the convertible debenture into its respective debt and equity components on BluMont’s financial statements. For the purposes of these consolidated financial statements, the equity portion is included in minority interest of the Corporation. The debt component has been calculated using the present value of the total required principal and interest installments, at a rate approximating the interest applicable to non-convertible debt at the time of issue as follows:

2 0 0 3 2 0 0 2

Debt portion $ 1,138,735 $ -

Equity portion included in minority interest $ 180,651 $ -

1 0 . C a p i t a l s t o c k

Authorized:

The Corporation is authorized to issue an unlimited number of common shares.

Issued: Common Shares Amount

Balance, September 30, 2001 20,133,535 $ 7,466,385 Issuance of common shares on acquisition of minority interest of First Treasury (see Note 2) 583,391 556,847 Issuance of common shares on exercise of incentive stock options 72,440 54,330

Balance, September 30, 2002 and 2003 20,789,366 $ 8,077,562

In fiscal 2002, the Corporation issued warrants to a significant shareholder of the Corporation in respect of a standby credit facility provided by that shareholder (see Note 7). At September 30, 2003, there were warrants outstanding to purchase 250,000 common shares (2002 – 250,000) of the Corporation at a price of $1.00 per common share on or before October 3, 2004.

During fiscal 2002, share purchase loans totaling $700,000 were provided by BluMont to certain of its employees/directors to purchase 700,000 common shares of BluMont at a price of $1.00 per common share. For accounting purposes, the share purchase loans were applied against the capital stock of BluMont and were not recorded as an asset. During fiscal 2003, $10,000 (2002 – $Nil) of these loans was repaid and the amount credited to the capital stock of BluMont.

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1 1 . S t o c k b a s e d c o m p e n s a t i o n

The Corporation has established an incentive stock option plan for the executives, key employees, directors and consultants to the Corporation. As at September 30, 2003, there were 1,779,400 common shares (2002 – 1,799,400) reserved for issuance on exercise of stock options.

These options may be exercised at prices ranging from $0.83 to $1.17 per common share with a total exercisable value of $1,958,398 (2002 – $1,990,398) and expire at dates up to 2008.

Number of Number of Exercise Expiry Options Options Vested Price Date

60,000 60,000 $0.83 2004 440,000 293,333 $1.00 2007 80,000 26,667 $1.00 2008 535,000 535,000 $1.15 2005 200,000 200,000 $1.15 2006 464,400 464,400 $1.17 2004 1,779,400 1,579,400

The changes in the stock options are as follows: Total Number Weighted Average Of Options Exercise PriceSeptember 30, 2002 Outstanding at beginning of year 1,631,840 $1.13 Granted during the year 460,000 $1.00 Exercised (72,440) $0.75 Cancelled (220,000) $1.15 Outstanding at end of year 1,799,400 $1.11

September 30, 2003 Granted during the year 80,000 $1.00 Expired (50,000) $1.09 Cancelled (50,000) $1.15 Outstanding at end of year 1,779,400 $1.10

The Corporation accounts for its stock option grants based on the recognition, measurement and disclosing standards of Section 3870, Stock-Based Compensation and Other Stock-Based Payments. The application of this Section results in no compensation expense being recorded in the Corporation’s circumstances as all options granted had an exercise price greater than or equal to the market value of the underlying stock on the date of grant. The following table illustrates the effect on net income (loss) for the year and net income (loss) per share as if the Corporation had applied the fair value recognition provisions of this Section to account for its stock option grants.

2 0 0 3 2 0 0 2

Net income (loss), as reported $ (467,639) $ 1,850,931 Less: - the Corporation’s total stock-based employee compensation determined under fair-value based method for all awards (4,282) (38,042) - the Corporation’s interest in a subsidiary’s total stock-based employee compensation determined under fair-value based method for all awards (21,810) (97,197)

Pro forma net income (loss) $ (493,731) $ 1,715,692

Net income (loss) per share: Basic and diluted, as reported $ (0.02) $ 0.09 Basic and diluted, pro forma $ (0.02) $ 0.09


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The Corporation estimated the fair value of options under the Black-Scholes option-pricing model with the following weighted average assumptions:

2 0 0 3 2 0 0 2

Risk free rate 2.35% 2.60% Expected life of options (in years) 4.0 4.0 Expected volatility of the Corporation’s share price 39.3% 31.7% Expected dividend yield 0.0% 0.0%

The Black-Scholes option-pricing model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. As the Corporation’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions, such as expected stock market price volatility, can materially affect the fair value estimate, in management’s opinion, the existing pricing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

1 2 . D i l u t i o n g a i n o n i s s u e o f c o m m o n s h a r e s o f s u b s i d i a r y

In fiscal 2002, BluMont issued 2,250,000 common shares for total cash consideration, net of issue costs, of $2,229,666. This transaction resulted in a gain of $876,933.

Effective December 2002, BluMont issued 1,596,667 common shares of which the Corporation subscribed for 1,100,000 shares. As a result of this transaction, the Corporation increased its ownership in BluMont from approximately 45.0% to 46.1%, the effect of which is an increase in goodwill of $184,046.

1 3 . I n c o m e t a x e s

The provision for income taxes differs from the amount computed by applying statutory federal and provincial income tax rates to income (loss) before income taxes and minority interest. This difference results from the following:


Income (loss) before provision for income taxes and minority interest $ (1,233,185) $ 1,605,581

Statutory income tax rate 37.12% 39.12%

Expected income tax (457,758) 628,103

Effect on income tax of: Non-taxable dilution gain - (343,056) Prior year losses recognized (58,793) (383,376) Rate change of future income taxes 240,484 212,000 Utilization of losses not previously recognized - (177,000) Losses for which an income tax benefit has not been recognized - 31,000 Permanent items 1,708 256,045 Other 27,355 (71,929) Income tax expense (recovery) $ (247,004) $ 151,787

As at September 30, 2003, the Corporation and its subsidiaries had net operating losses for tax purposes of approximately $5,163,000 and timing differences of $320,000. The net operating losses expire as follows: 2006 – $36,000, 2007 – $27,000, 2008 – $1,511,000, 2009 – $2,270,000 and 2010 – $1,319,000. A future income tax asset of $1,727,418 (2002 – $1,468,870) has been recognized relating thereto of which $722,858 (2002 – $686,567) is reflected under current assets.

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1 3 . I n c o m e t a x e s ( c o n t i n u e d )

Significant components of the Corporation’s future income tax asset as of September 30, 2003 and 2002 are as follows:

2 0 0 3 2 0 0 2

Operating losses carried forward $ 1,779,000 $ 1,484,000Other temporary differences 22,418 47,870Valuation allowance (74,000) (63,000)Future income tax asset $ 1,727,418 $ 1,468,870

1 4 . S u p p l e m e n t a l c a s h f l o w i n f o r m a t i o n 2 0 0 3 2 0 0 2

Net change in non-cash working capital: Receivables, prepaids and income taxes $ 3,627,788 $ (4,298,116) Payables, accruals and deferred revenue (924,818) 1,966,981 $ 2,702,970 $ (2,331,135)Interest and income taxes paid: Interest paid $ 240,042 $ 82,141

Income taxes paid $ - $ -

Supplemental disclosure from cash investment and financing activities: Capital assets acquired by means of capital leases $ 106,678 $ 6,908 Common stock issued for acquisition of minority interest of First Treasury $ - $ 556,847

Repurchase by BluMont of capital stock for cancellation through a reduction in management loans $ - $ 350,000

1 5 . C o m m i t m e n t s

(a) Future minimum annual lease payments under operating leases are as follows:

2004 $ 861,000 2005 863,000 2006 873,000 2007 585,000 2008 and thereafter 388,000 $ 3,570,000

(b) A subsidiary is the manager of three hedge funds and has agreed to fund the annual operating costs of the funds in excess of 45 basis points of each fund’s net assets. It is the subsidiary’s current policy to absorb or waive these costs in order to establish an upper limit for the management expense ratio for each fund for the benefit of its unitholders. These absorptions or waivers by the subsidiary may be terminated at any time by the subsidiary and at the subsidiary’s direction may be continued indefinitely.

(c) A subsidiary of the Corporation has committed to invest in a fund managed by the Corporation. This commitment was made pari passu with the other investors in that fund including those employees of the Corporation responsible for managing that fund. The commitment has been drawn down in tranches over time as the fund makes investments. At September 30, 2003 the commitments outstanding were approximately $900,000 (2002 – $1,300,000).


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1 6 . S e g m e n t e d i n f o r m a t i o n

The following table discloses information about the Corporation’s reportable segments:

Year Ended AssetSeptember 30, 2003 Management Hedge Funds Eliminations Total

Revenue $ 8,802,093 $ 8,454,526 $ (112,500) $ 17,144,119Interest and other income 460,494 241,163 - 701,657Interest expense 102,365 137,677 - 240,042Amortization and depreciation 169,346 588,862 - 758,208Segment operating income (loss) 205,628 (1,438,813) - (1,233,185)Assets 10,544,091 8,500,279 (1,398,654) 17,645,716

Year Ended September 30, 2002

Revenue $ 11,704,550 $ 5,547,151 $ (232,500) $ 17,019,201Interest and other income 106,436 73,571 - 180,007Interest expense 70,090 12,051 - 82,141Amortization and depreciation 162,850 332,830 - 495,680Segment operating income (loss) 2,283,681 (1,555,033) - 728,648Assets 11,774,592 7,099,483 (711,904) 18,162,171

1 7 . F i n a n c i a l i n s t r u m e n t s

Fair Value of Financial InstrumentsThe fair value of all financial instruments approximates carrying amounts on the consolidated balance sheets.

Credit RiskThe Corporation does not have a significant exposure to any individual client.

Interest Rate RiskThe Corporation does not have significant exposure to changes in interest rates.


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b o a r d o fd i r e c t o r s

(1) Member of the Audit Committee

(2) Member of the Compensation and Governance Committee

(3) Secretary of the Corporation

V i c t o r K o l o s h u kChairman, President and Chief Executive OfficerIntegrated Asset Management Corp.

G . E . A . P a c a u dChairman, Greiner-Pacaud Management Associates Vice Chairman, Integrated Asset Management Corp.

G e o r g e J . E n g m a nPresident and Chief Executive OfficerIntegrated Partners

V e r o n i k a H i r s c hChief Investment OfficerBluMont Capital Corporation

S t e p h e n C . J o h n s o n (3)Chief Financial OfficerIntegrated Asset Management Corp.

M i c h e l L e B e l (1) (2)Chairman and PresidentEBITD Financial Advisory Corporation

D o n a l d C . L o w e (1) (2)Corporate Director

J o h n F . K . R o b e r t s o nPresident and Chief Executive OfficerFirst Treasury Corporation

P a u l F . S t a r i t aPresidentCPPS Consulting Inc.

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p r i n c i p a lo f f i c e r s

I n t e g r a t e d A s s e tM a n a g e m e n t C o r p .

Victor KoloshukChairman, President and Chief Executive Officer

G.E.A. PacaudVice Chairman

Stephen JohnsonChief Financial Officer

David MatherExecutive Vice President

Michael StaresinicCorporate Controller

I n t e g r a t e d P a r t n e r s

Victor KoloshukChairman

George EngmanPresident and Chief Executive Officer

Stephen JohnsonSenior Vice President

Douglas HarrisVice President

James RidoutVice President

G r e i n e r - P a c a u d M a n a g e m e n t A s s o c i a t e s

G.E.A. PacaudChairman

Brent ChapmanPresident

Rick ZagrodnyVice President, Asset Management

David WarkentinVice President, Investments

Frank BartelloDirector, Asset and Property Management

Joseph KoszoSecretary-Treasurer

G r e i n e r - P a c a u d /H a m i l t o n M a n a g e m e n t I n c .

Robert HamiltonPresident

D a r t o n P r o p e r t yA d v i s o r s a n d M a n a g e r s I n c .

Gary HudsonPresident

Steven HarrisSenior Vice President

F i r s t T r e a s u r yC o r p o r a t i o n

John RobertsonPresident and Chief Executive Officer

Frank DuffyExecutive Vice President

Philip RobsonSenior Vice President

Donald BangaySenior Vice President

Michael LeClairVice President

F i r s t T r e a s u r yW e s t I n c .

Ben BacigalupiPresident

I n t e g r a t e d M a n a g e d F u t u r e s C o r p .

Roland Austrup President and Chief Executive Officer

David MatherVice President

B l u M o n t C a p i t a l

David CurrieChairman

Toreigh StuartPresident and Chief Executive Officer

Thomas GerginisManaging Director

Pierre NovakExecutive Vice President

Veronika HirschChief Investment Officer

Stephen JohnsonChief Financial Officer


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c o r p o r a t ei n f o r m a t i o na u d i t o r s :Grant Thornton LLP

t r a n s f e r a g e n t :CIBC Mellon Trust Company

s t o c k l i s t i n g :TSX Venture Exchange - “IAM”

c o r p o r a t e h e a d q u a r t e r s :130 Adelaide Street WestSuite 2200Toronto, OntarioM5H 3P5Canada

Phone: (416) 360.7667Fax: (416) 360.7446www.iamgroup.ca

s u b s i d i a r y w e b s i t e s :www.gpma.cawww.dartonproperty.comwww.blumontcapital.comwww.imfc.ca

p u b l i c l y l i s t e d s u b s i d i a r y :BluMont Capital Inc. is a TSX Venture Exchange listed company (“BCC”) and financial information regarding the company is available through SEDAR (www.sedar.com) or by contacting:

BluMont Capital Corporation220 Bay StreetSuite 1500, P.O. Box 23Toronto, OntarioM5J 2W4Canada

Phone: (416) 216.3566Fax: (416) 216.3559Toll-Free: (866) 473.7376

p u b l i c l y l i s t e d i n v e s t m e n t t r u s t :BluMont Strategic Partners Hedge Fund is a Toronto Stock Exchange listed investment trust (“BSP.UN”) which is managed by BluMont Capital Corporation.

Creative Direction and Project Management: Marlene Jandricic DesignCityscape Photography: Terry Pidsadny PhotographyPortrait Photography: Roger Yip PhotographyPrinting: Richard Bearg Printing & Design Services

Integrated Asset Management Corp. Printed in Canada, 2004


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