Art In Motion Income Fund
TSX : AIM.UN

Art In Motion Income Fund

November 08, 2007 07:00 ET

Art In Motion Income Fund Announces 2007 Third Quarter Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Nov. 8, 2007) - Art In Motion Income Fund (the "Fund") (TSX:AIM.UN) today reported its financial results for the interim period ended September 30, 2007. The Fund's unaudited consolidated financial statements for the quarter are included in this news release.

Highlights for the Third Quarter 2007

- The Fund's revenue was $8.4 million.

- Gross profit was $2.2 million.

- The Fund posted a net loss of $0.3 million before income taxes.

- Basic and diluted loss per unit was $0.19.

- The Fund generated $0.4 million in cash flow from operations including changes in non-cash working capital and ended the quarter with $1.4 million of cash on hand.

- During the quarter the Fund made a principal payment of $1.5 million against its term loan.

- The Fund generated distributable cash of $0.1 million and paid cash distributions of $0.2 million.

- The Fund had total assets of $24.8 million and $7.6 million in current and long-term liabilities.

"As indicated in our previous outlook, sales to our larger key accounts were down significantly," says Larry Sullivan, Chief Executive Officer. "Economic and market conditions remain difficult in both North American and European markets. As with most Canadian manufacturers the recent, rapid rise of the Canadian dollar has put further pressure on our results. Despite the many improvements we have made in our cost structure, sales and price points are challenging. We are focused on further changes that will directly and positively impact our sales volumes, but the market environment is expected to remain difficult," concluded Sullivan.

The Fund's financial statements and Management's Discussion and Analysis are being concurrently filed on the SEDAR website (www.sedar.com) and on the Fund's investor website at www.aimincomefund.com.



ART IN MOTION INCOME FUND
Consolidated Balance Sheet
(in thousands of dollars)
(Unaudited)

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September 30, December 31,
2007 2006
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Assets

Current assets:
Cash and cash equivalents $ 1,411 $ 622
Accounts receivable 4,367 5,850
Forward foreign exchange contracts 2,087 597
Inventories 3,616 5,064
Prepaid expenses 508 442
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11,989 12,575

Property, plant and equipment (note 3) 11,360 17,905

Intangible assets (note 4) 1,496 4,455

Deferred financing costs - 10
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$ 24,845 $ 34,945
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Liabilities and Unitholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 3,080 $ 4,293
Distributions payable - 428
Long-term debt, current portion (note 3) 4,500 14,000
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7,580 18,721

Forward foreign exchange contracts - 32

Non-controlling interest 9,918 9,261

Unitholders' equity 7,347 6,931
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$ 24,845 $ 34,945
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See accompanying notes to consolidated financial statements.


ART IN MOTION INCOME FUND
Consolidated Statement of Operations
(in thousands of dollars, except unit and per unit amounts)
(Unaudited)

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Three months ended Nine months ended
September 30 September 30
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2007 2006 2007 2006
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Revenue (note 8):
Sales $ 8,011 $ 12,070 $ 29,949 $ 39,252
Royalties 353 218 1,551 1,192
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8,364 12,288 31,500 40,444

Cost of goods sold (note 6) 6,131 8,662 22,948 28,169
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2,233 3,626 8,552 12,275

Expenses:
Amortization
(notes 3 and 4) 766 1,327 3,224 6,448
General and administrative
(note 6) 1,086 1,024 3,033 2,609
Image and product
development (note 6) 288 424 935 1,057
Interest and bank charges 115 313 405 951
Selling (note 6) 1,134 1,631 3,691 4,768
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3,389 4,719 11,288 15,833
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Loss before under noted items (1,156) (1,093) (2,736) (3,558)

Other earnings (expenses):
Interest rate swap
(note 5) - (95) - (9)
Interest and miscellaneous 21 50 82 165
Foreign exchange
gain (loss) 796 (72) 2,387 1,513
Goodwill impairment
(note 4) - - - (29,384)
Gain on disposal of
property, plant and
equipment (note 3) - - 3,267 -
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817 (117) 5,736 (27,715)
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Loss before non-controlling
interest and income taxes (339) (1,210) 3,000 (31,273)

Non-controlling interest (76) (295) 777 (6,069)

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Net earnings (loss)
before income taxes (263) (915) 2,223 (25,204)

Income taxes (notes 2 and 7) 1,300 - - -

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Net earnings (loss) and
comprehensive income (loss) $ (1,563) $ (915) $ 2,223 $ (25,204)
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Basic and diluted earnings
(loss) per unit $ (0.19) $ (0.11) $ 0.28 $ (3.14)
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Weighted average number of
units outstanding 8,030,070 8,030,070 8,030,070 8,030,070
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See accompanying notes to consolidated financial statements.


ART IN MOTION INCOME FUND
Consolidated Statement of Unitholders' Equity
(in thousands of dollars)
(Unaudited)

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Unitholders' Accumulated
capital income (loss) Distributions Total
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Balance,
December 31, 2006 $ 72,714 $ (48,104) $ (17,679) $ 6,931

Activity for
the period - 2,610 (1,004) 1,606

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Balance,
March 31, 2007 72,714 (45,494) (18,683) 8,537

Activity for
the period - 1,176 (602) 574

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Balance,
June 30, 2007 72,714 (44,318) (19,285) 9,111

Activity for
the period - (1,563) (201) (1,764)

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Balance,
September 30, 2007 $ 72,714 $ (45,881) $ (19,486) $ 7,347
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See accompanying notes to consolidated financial statements.


ART IN MOTION INCOME FUND
Consolidated Statement of Cash Flows
(in thousands of dollars)
(Unaudited)

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Three months ended Nine months ended
September 30 September 30
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2007 2006 2007 2006
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Cash provided by (used in):

Operations:
Net earnings (loss)
for the period $ (1,563) $ (915) $ 2,223 $ (25,204)
Items not involving cash:
Amortization
(notes 3 and 4) 904 1,517 3,628 7,020
Future income taxes
(notes 2 and 7) 1,300 - - -
Goodwill impairment - - - 29,384
Gain on disposal of
property, plant and
equipment (note 3) - - (3,267) -
Non-controlling interest (76) (295) 777 (6,069)
Founders' Employee
Participation Plan
expenses (note 6) - - - (2,300)
Net change in interest
rate swap (note 5) - 222 - 136
Net change in forward
foreign exchange
contracts (393) 832 (1,522) 2,017
Change in non-cash
operating working
capital (note 9) 183 1,730 1,224 974
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355 3,091 3,063 5,958
Investments:
Purchase of property,
plant and equipment (55) (85) (320) (162)
Proceeds on disposal of
property, plant and
equipment (note 3) - - 9,473 -
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(55) (85) 9,153 (162)
Financing:
Repayment of long-term
debt (note 3) (1,500) (3,000) (9,500) (3,000)
Distributions paid or
due to unitholders (201) (1,204) (1,807) (3,613)
Distributions paid or
due to non-controlling
interest (13) (80) (120) (241)
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(1,714) (4,284) (11,427) (6,854)
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Increase (decrease) in cash
and cash equivalents (1,414) (1,278) 789 (1,058)

Cash and cash equivalents,
beginning of period 2,825 3,668 622 3,448

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Cash and cash equivalents,
end of period $ 1,411 $ 2,390 $ 1,411 $ 2,390
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Supplementary information:
Interest received $ 27 $ 41 $ 56 $ 98
Interest paid 95 178 360 740
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See accompanying notes to consolidated financial statements.


ART IN MOTION INCOME FUND

Notes to Consolidated Financial Statements

(Tabular amounts in thousands of Canadian dollars)

(Unaudited)

Three and nine months ended September 30, 2007

1. Basis of presentation:

These interim consolidated financial statements have been prepared using Canadian generally accepted accounting principles (Canadian GAAP). The interim consolidated financial statements include normal recurring adjustments, which in management's opinion, are necessary for a fair presentation of the financial results of the interim period presented.

The disclosures in these interim consolidated financial statements do not conform in all aspects to the requirements of Canadian GAAP for annual financial statements. These interim consolidated financial statements follow the same accounting policies and methods of their application as the most recent annual financial statements, except as described in note 2. These interim consolidated financial statements should be read in conjunction with the significant accounting policies and other information in the 2006 annual financial statements of Art In Motion Income Fund (the "Fund").

2. Changes in accounting policies:

(a) Financial instruments:

As of January 1, 2007, the Fund adopted Handbook Sections 1530 Comprehensive Income, Section 3855 Financial Instruments-Recognition and Measurement, Section 3865 Hedges, Section 3251 Equity and Section 3861 Financial Instruments-Disclosure and Presentation. The Fund has evaluated its operations in connection with the adoption of these sections and has determined that they have no material impact on the financial statements.

(b) Earnings per share:

Diluted earnings per share are equal to basic earnings per share as the conversion of the Class B LP units is antidilutive.

(c) Income taxes:

Generally, the Fund allocates all of its taxable income and taxable capital gains to unitholders such that the Fund will not be subject to tax. As of June 12, 2007, certain changes in the Income Tax Act affecting income trusts passed a third reading in the House of Commons and became substantively enacted, which would make the Fund subject to income taxes starting in 2011. As such, the Fund has recorded the impact on future income taxes which has resulted from this legislation in the second quarter.

Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply when the asset is realized or the liability settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that substantive enactment occurs.

3. Property, plant and equipment:

On January 18, 2007, the Fund sold its Brigantine facility for gross proceeds of $9.6 million (net proceeds of $9.4 million) as part of a plan to consolidate operations into its Hartley facility. The Fund realized a net gain of approximately $3.3 million after closing costs and the disposal of the related land and buildings, which had a net book value of approximately $6.1 million. The Fund used $8.0 million of the proceeds to reduce its long-term debt.

4. Asset impairment:

During the second quarter of 2006, the valuation of goodwill was determined to be nil, requiring an impairment charge of $29,384,000 to be recorded in that period.

During the second quarter of 2006, the Customer Base intangible asset required an impairment charge of $1,926,000 to reduce its carrying value to match its then current fair value. This charge was included in amortization for that period.

5. Interest rate swap:

On August 20, 2004, the Fund entered an interest rate swap agreement, which effectively fixed the interest rate for the capital loan at 5.4% per annum for the three-year term. During the third quarter of 2006, the interest rate swap was redeemed for proceeds of $127,000.

6. Founders' Employee Participation Plan (the "FEPP"):

GVP Holdings Inc., the founder of the Art In Motion business, established the Founders' Employee Participation Plan ("FEPP") to remunerate employees of the Fund and will compensate the Fund for all payments under the FEPP. During the second quarter of 2006, management concluded that certain provisions of the plan will not be achieved and as such, all prior accruals related to the FEPP were reversed. The amount of the charges reversed in the second quarter of 2006 totalled $2,560,000. The reversal of the FEPP was charged to the various expense categories as follows: cost of goods sold $1,174,000, general and administrative $733,000, image and product development $212,000 and selling $441,000.

7. Future income taxes:

The tax effects of temporary differences that give rise to significant portions of the future tax assets and future tax liabilities at September 30, 2007 are presented below:



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September 30,
2007
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Future income tax assets (liabilities):
Intangible assets $ 10,600
Investment in AIM Holdings Trust 4,300
Property, plant and equipment (500)
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14,400

Less valuation allowance 14,400

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Net future income tax asset $ -
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In assessing the realizability of future income tax assets, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considered the scheduled reversal of future income tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As at September 30, 2007, based upon these considerations, management believes it is more likely than not that the Company will not realize any of the benefits of the future income tax assets in years subsequent to December 31, 2010. As a result, the Fund has reversed the future income tax previously recorded of $1,300,000 and provided a full valuation allowance against the future income tax assets.

None of the above noted future income tax assets expire for tax purposes.

The amount of the future income tax asset considered realizable, however, could change in the near term if estimates of future taxable income during the carry-forward period increase or decrease.

8. Segmented information:

The Fund operates in a single reportable operating segment as a publisher, framer and licensor of images and fine art reproductions.

The Fund's gross sales are derived from four main categories as follows:



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Three months ended Nine months ended
September 30 September 30
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2007 2006 2007 2006
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Artprints $ 1,145 $ 1,324 $ 3,765 $ 4,383
Framed and other 3,811 6,151 14,933 21,686
Decographs 3,200 4,422 11,146 12,470
Transfers 302 658 2,574 2,451
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Gross sales 8,458 12,555 32,418 40,990
Discounts and allowances (447) (485) (2,469) (1,738)
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Sales 8,011 12,070 29,949 39,252
Royalties 353 218 1,551 1,192

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$ 8,364 $ 12,288 $ 31,500 $ 40,444
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The Fund sells to customers located in the following regions:

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Three months ended Nine months ended
September 30 September 30
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2007 2006 2007 2006
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Canada $ 1,276 $ 1,406 $ 3,973 $ 4,007
United States 6,241 9,779 25,029 32,860
Europe 758 1,087 2,869 3,388
Other 183 283 547 735
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Gross sales 8,458 12,555 32,418 40,990
Discounts and allowances (447) (485) (2,469) (1,738)

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Sales $ 8,011 $ 12,070 $ 29,949 $ 39,252
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Royalty income is earned almost entirely from customers located in the United States.

As at September 30, 2007, $293,000 of the Fund's capital assets were located in the United States and the remainder of the assets were located in Canada.

9. Supplemental information:



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Three months ended Nine months ended
September 30 September 30
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2007 2006 2007 2006
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Change in non-cash operating
working capital:
Accounts receivable $ (582) $ 1,217 $ 1,483 $ 1,290
Inventories 789 (6) 1,448 305
Prepaid expenses 17 310 (66) 5
Accounts payable and
accrued liabilities 173 209 (1,213) (626)
Distributions payable (214) - (428) -

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$ 183 $ 1,730 $ 1,224 $ 974
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Contact Information

  • Art In Motion Income Fund
    Allan Achtemichuk
    Chief Financial Officer
    1-877-AIM-3233 (1-877-246-3233)
    Website: www.aimincomefund.com