Art In Motion Income Fund
TSX : AIM.UN

Art In Motion Income Fund

August 12, 2005 07:20 ET

Art In Motion Income Fund Announces 2nd Quarter Results for 2005

VANCOUVER,BRITISH COLUMBIA--(CCNMatthews - Aug. 12, 2005) - Art In Motion Income Fund (the "Fund") (TSX: AIM.UN) today reported its interim financial results for the period ended June 30, 2005. The Fund's unaudited consolidated financial statements for the three months ended June 30, 2005 are included in this news release. 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.

Management will host a conference call on Friday, August 12, 2005 at 10:00 am pacific time (1:00 PM eastern) to discuss the Fund's financial results for the period ended June 30, 2005. Garry Peters, Chief Executive Officer, and Allan Achtemichuk, Chief Financial Officer will host the call. Following management's presentation, there will be a question and answer session.

To participate in the teleconference, the numbers are 416.641.6451 or 800.765.7646.

The call will webcast simultaneously at http://www.vcall.com/CEPage.asp?ID=93068 and an archive will be available until November 12, 2005 at midnight. The archive will also be posted to Art In Motion's web site at www.aimincomefund.com approximately one hour after the end of the conference call.

CEO's Remarks

"The second quarter is generally a slower period for Art In Motion as our customers clear out existing inventory and wait for the launch of our fall product line," says Garry Peters, CEO. "Our results for the second quarter of 2005 reflect this annual sales cycle, continuing weakness of the U.S. retail market and the ongoing strength of the Canadian dollar. Although we continue to face some margin pressure, we were able to improve our EBITDA margin, which rose to 19.5% compared to 14.9% during the second quarter of last year. During the quarter we generated all of the cash required to pay distributions to our public Unitholders resulting in a payout ratio of 91.6%.

Art in Motion's good reputation, financial strength and superior product quality are helping us to weather the current dip in the home dÚcor sector. Our team has risen to the challenge with a spirit of creativity and innovation that has become a hallmark of our success over the past two decades. Today we are applying that spirit in three key areas: new products, new customers, and new markets.

In July we launched our fall catalogue with a beautiful collection of new images and presentation styles. Our sales team is showcasing the new line-up at industry trade shows throughout the key summer buying period as our customers order new inventory for the coming holiday season. During the quarter we received our first order from Jo-Ann Stores, one of the largest retailers of fabrics and crafts in the U.S. At the same time as we develop new products and seek out new business in North America, we are also turning our attention to expanding into international markets. In Europe, for example, we have a long history as a wholesaler of unframed prints, and we are now looking to offer our complete range of products in this market utilizing our current relationships and working with our existing customers. We also see growth potential in other international markets.

As we look out into the next quarter and beyond, we do not see any immediate market improvements on the horizon as U.S. retail sales are expected to remain soft. That being said, signals for our industry are mixed and leave some room for optimism. While some of our largest customers have posted declines in sales, others are reporting healthy increases in revenues. Considering the size of the market and the quality of our current product offering, there is potential for growth, and the third quarter is traditionally a stronger period for us."

Overall Performance

This report presents the results for the period ended June 30, 2005. A discussion of our results is presented in the sections that follow. The following points present the highlights of our performance.



- The Fund's revenue for the quarter was $17.1 million.
- Gross profit for the quarter was $5.3 million for a gross margin
of 31.1%.
- Earnings before interest, taxes depreciation and amortization
(EBITDA) for the quarter were $3.3 million for an EBITDA margin
of 19.5%.
- The Fund posted a net loss of $26.5 million for the quarter after
reducing the carrying value goodwill by $34.8 million, before non-
controlling interest, or approximately 28.7% of the funds
enterprise value as presented in our 2004 audited consolidated
financial statements.
- Basic and diluted loss per unit was $3.2949.
- The Fund generated $3.3 million in cash flow from operations and
ended the quarter with $3.4 million of cash on hand.
- The Fund generated distributable cash of $2.9 million or
$0.27291 per unit on the total 10,706,760 units outstanding(1).
The Fund's payout ratio for the quarter was 91.6%.
- The Fund had total assets of $87.5 million and $45.5 million in
current and long-term liabilities.


Note

(1) In addition to the 8,030,070 outstanding Fund units, there are 535,338 unsubordinated units of AIM LP and 2,141,352 subordinated units of AIM LP held by the non-controlling interest. The subordinated and unsubordinated units of AIM LP are currently held by GVP and represent GVP's retained interest in our business. The Exchange Rights associated with the unsubordinated units provide that these units could be exchanged for Fund units on a one-for-one basis as of January 30, 2005. These rights have not been exercised as of the date of this report.



Second Quarter and Six Month Results
Selected Consolidated Financial Information
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
The Fund Pre-Fund(1) The Fund Pre-Fund(1)
3 months 3 months 6 months 6 months
ended ended ended ended
(in thousands of dollars June 30, June 30, June 30, June 30,
except per unit amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Revenue 17,128 21,140 34,900 45,477
Cost of sales 11,799 13,596 23,996 29,744
---------------------------------------------
Gross profit 5,329 5,329 7,544 10,904 15,733
31.1% 35.7% 31.2% 34.6%
Operating expenses (2) 40,938 2,485 47,226 6,659
Non-controlling interest (9,150) - (9,840) -
---------------------------------------------
Net earnings for the period (26,459) 5,059 (26,482) 9,074
-154.5% 23.9% -75.9% 20.0%

Add (deduct)
Non-controlling interest (9,150) - (9,840) -
Founders' employee
participation plan(3) 336 - 1,028 -
Interest 275 19 547 45
Amortization 1,810 456 3,615 910
Goodwill Impairment 34,826 - 34,826 -
Net change in value of
hedges 1,704 (2,379) 2,725 (2,379)
---------------------------------------------

EBITDA(4) 3,342 3,155 6,419 7,650
19.5% 14.9% 18.4% 16.8%
---------------------------------------------

Basic earnings per unit -3.2950 n/a -3.2978 n/a
Diluted earnings per unit -3.2948 n/a -3.2974 n/a
-------------------------------------------------------------------------
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(1) The values for the period ended June 30, 2004 are for the combined
entities of the predecessor companies that were amalgamated prior to
the IPO to form GVP. To provide comparable amounts we have eliminated
shareholder bonuses and income taxes from the 2004 amounts. The 2004
amounts have not been adjusted for our $20 million term loan or the
amortization of our identifiable intangible assets.

(2) Operating Expenses are the combined net total of Expenses and Other
Earnings as shown in our Financial Statements. Operating expenses
include $34.8 million related to a goodwill impairment adjustment.

(3) Under the FEPP, GVP provides bonus payments to employees based on the
notional interest in a portion of its non-controlling interest in
AIM LP. The costs of the FEPP are recorded as a charge against the
Fund but are funded by GVP. These charges are then offset against the
non-controlling interest resulting in no impact to our net earnings.

(4) See "Non-GAAP Measures" for our definition of EBITDA.


Write-down of Goodwill

Under Canadian Generally Accepted Accounting Principles (Canadian GAAP), goodwill is subject to an annual impairment test. When the Fund purchased its indirect interest in Art In Motion Limited Partnership, $64.2 million of the purchase price was assigned as goodwill on the consolidated financial statements. As the Fund's Unit trading price, at the time of the assessment, was significantly lower than the issue price, we have identified impairment in the recorded value of goodwill. Following a fair value assessment of other net assets, we have written this amount down to by $34.8 million before non-controlling interest, or approximately 28.7% of the Fund's enterprise value as presented in our 2004 audited consolidated financial statements. This change is a non-cash item and does not have any impact on EBITDA, distributable cash or our credit facilities. We have identified no impairment in the value of the identifiable intangible assets or property, plant and equipment.

Discussion of 2nd Quarter Results

Revenue for the quarter ended June 30, 2005 was $17.1 million compared to $21.1 million for the quarter ended June 30, 2004 or a decrease of 19%. The revenue decrease was largely as a result of some of our key customers holding excess inventory that resulted in lower replenishment orders. Royalty income from our licensing business has been adjusted to reflect our estimate of royalties for the first half of the year.

Approximately 90% of our sales are denominated in US dollars. The strengthening of the Canadian dollar relative to the US dollar also impacted our sales for the quarter. The average exchange rate for the quarter was down approximately 8.5% compared to the same quarter in 2004. Although the drop in foreign exchange rates has impacted our gross sales, we use forward foreign exchange contracts to hedge our currency risks and protect our margins.

Gross margin was 31.1% for the quarter ended June 30, 2005 compared to 35.7% for the quarter ended June 30, 2004. Gross profit for the quarter ended June 30, 2005 was $5.3 million compared to $7.5 million for the quarter ended June 30, 2004. The current period includes approximately $0.3 million of charges related to the FEPP where $0.2 million is charged to cost of sales and $0.1 million is charged to operating expenses. These costs are funded by GVP and do not impact net earnings. Excluding these charges, our gross margin was 32.1% for the quarter this year. The reduction in gross profit and gross margin compared to the prior year are largely a result of certain fixed manufacturing costs, lower gross revenue and higher customer allowances and rebates.

Operating expenses were $40.9 million for the quarter ended June 30, 2005 compared to $2.5 million for the same period in 2004. The current period includes a $34.8 million charge related to the write-down of goodwill. Excluding this charge, operating expenses were $6.1 million for the quarter this year. The net increase in current year expenses is a result of several items the most notable being increased amortization of $1.4 million, non-cash charges of $0.1 million related to the FEPP, a $0.3 million foreign exchange loss and increased interest expense of $0.3 million all of which are partially offset by a $0.8 million reduction in selling, general and administrative expenses. In 2004, operating expenses included a $2.4 million foreign exchange gain.

For the quarter ended June 30, 2005 the Fund posted a net loss of $26.5 million after the write-down of $34.8 million related to goodwill impairment. Net earnings for the same quarter in 2004 were $5.1 million.

EBITDA of $3.3 million for the quarter this year was a small increase over the $3.2 million for the same quarter last year. The EBITDA margin was 19.5% this year compared very favourably to 14.9% for the same quarter last year.

Discussion of Six month Results

Revenue for the six months ended June 30, 2005 was $34.9 million compared to $45.5 million for the six months ended June 30, 2004 or a decrease of 23%. The revenue decrease was largely as a result of some of our key customers holding excess inventory after the holiday season and sluggish post holiday sales. In 2004 our first quarter sales were higher as our customers had very low inventory after the 2003 holiday season and were replenishing their stock in the first quarter of 2004.

Gross margin was 31.2% for the six months ended June 30, 2005 compared to 34.6% for the six months ended June 30, 2004. Gross profit for the six months ended June 30, 2005 was $10.9 million compared to $15.7 million for the quarter ended June 30, 2004. The current period includes approximately $1.0 million of charges related to the FEPP where $0.4 million is charged to cost of sales and $0.6 million is charged to operating expenses. These costs are funded by GVP and do not impact net earnings. Excluding these charges, our gross margin was 32.3% for the six months this year.

Operating expenses were $47.2 million for the six months ended June 30, 2005 compared to $6.7 million for the same period in 2004. The current period includes a $34.8 million charge related to the write-down of goodwill. Excluding this charge, operating expenses were $12.4 million for the six months this year. The net increase in current year expenses is a result of several items the most notable being increased amortization of $2.7 million, non-cash charges of $0.6 million related to the FEPP, increased interest expense of $0.5 million, a decrease in hedge values of $2.7 million and a one-time charge of $0.4 million related to the resignation of our Chief Executive Officer on March 24, 2005, all of which are partially offset by a $1.1 million reduction in selling, general and administrative expenses and a $1.5 million foreign exchange gain. In 2004, operating expenses included a $2.4 million increase in hedge values.

For the six months ended June 30, 2005 the Fund posted a net loss of $26.8 million after the $34.8 million write-down of goodwill. Net earnings for the same period in 2004 were $9.1 million.

EBITDA was $6.4 million for the six months this year compared to $7.7 million for the same period last year. The EBITDA margin was 18.4% for the six months this year compared to 16.8% for the same period last year. EBITDA was $6.8 million or 19.3% if we exclude the severance costs paid in the first quarter.

Liquidity, Cash Flow and Distributions

At June 30, 2005 we had a net cash position of approximately $3.4 million. Our operating line was not used as of June 30, 2005. During the three-month period ended June 30, 2005 the Fund generated cash from operations of $3.3 million including $0.3 million related to changes in our non-cash operating working capital. For the six-months ended June 30, 2005, the Fund generated $7.7 million of cash from operations.

For the period from April 1, 2005 to June 30, 2005, the Fund declared three monthly distributions of $0.10417 per Fund unit. The same distributions were paid on the unsubordinated Class B Limited Partnership (LP) units. The Board of Trustees of the Fund suspended distributions for the subordinated Class C LP units for the quarter ended June 30, 2005. The payout ratio for the period was 91.6%.




Distributable Cash for the Period Ended June 30, 2005
-------------------------------------------------------------------------
(in thousands of dollars except per unit amounts) 3 months 6 months
ended ended
June 30, June 30,
2005 2005
-------------------------------------------------------------------------
EBITDA(1) 3,342 6,419
Add (deduct)
Interest (275) (546)
Capital expenditures (145) (196)
---------------------------------------------
Distributable cash(1) 2,922 5,677
---------------------------------------------

Distributions on Fund units 2,510 5,020
Distributions on unsubordinated
non-controlling interest(2) 167 334
Distributions on subordinated
non-controlling interest(2) - -
---------------------------------------------
2,677 5,354
---------------------------------------------
-------------------------------------------------------------------------
Outstanding units and per
unit amounts
Total units outstanding 10,706,760 10,706,760
Distributable cash per unit $0.27291 $0.53023
Distributions paid per unit $0.25003 $0.50006
Distribution ratio 91.6% 94.3%
-------------------------------------------------------------------------
Outstanding units and per unit
amounts excluding subordinated units
Total units outstanding 8,565,408 8,565,408
Distributable cash per unit $0.34116 $0.66270
Distributions paid per unit $0.31251 $0.62502
Distribution Ratio 91.6% (94.3%)
-------------------------------------------------------------------------
(1) EBITDA and Distributable Cash are not recognized measures under
Canadian GAAP. See our discussion on "Non-GAAP Measures".

(2) In addition to the 8,030,070 outstanding Fund units, there are
535,338 unsubordinated units of AIM LP and 2,141,352 subordinated
units of AIM LP held by the non-controlling interest. These
subordinated and unsubordinated units of AIM LP are currently held by
GVP and represent GVP's retained interest in AIM LP.


Outlook

We are well into the current schedule of tradeshows where we are showing our fall collection of images and products. Early response from our regional customers has been good. Guest attendance at major tradeshows has been declining over the last few tradeshow seasons and sales volume at our key tradeshows has been mixed. At one major show sales were up slightly over the same show last year while sales at other shows are down. We have attended some new tradeshows this year and are taking orders from new customers. Our new Canvas Collection has been launched with this tradeshow season and sales are meeting our expectations.

Several of our large national customers have selected their fall collections. September and October are normally key months for shipments as the large retailers get product into their distribution systems for the November and December holiday periods. Some of our key customers are also planning new marketing campaigns for the "back to school" period when they expect increased traffic in their stores. We have seen an improvement in the replenishment orders from some of our customers as they sell through their inventory but they are carefully managing and releasing their open to buy dollars.

A number of our large customers have indicated that they need to increase their retail margins in order to improve their financial performance. Some are prepared to increase their retail price points to improve their margins but several have indicated they would like to improve their margins while maintaining current retail price points.

We use a significant amount of polystyrene composite mouldings. Rising oil prices are putting pressure on the cost of this important raw material as well as transportation costs. The low value of the US dollar continues to put pressure on margins from both a cost and sales perspective. We have been able to absorb some of the currency differences in our costs and prices but we do not believe we can continue to increase prices to offset the rising value of the Canadian dollar. This will put additional pressure on our gross margins as we work to improve our production, sourcing and product design to meet the customers purchase prices.

Our financial position remains strong and we will continue to focus on developing new products, securing new customers and growing our top-line sales. We are focused on these items, which we believe will improve our results over the next several quarters.

Forward Looking Statements

This report contains "forward looking statements". These statements relate to future events or future performance and reflect our expectations regarding our growth, results of operations, performance, business prospects or opportunities or industry performance or trends. These forward-looking statements reflect our current internal projections, expectations or beliefs and are based on information currently available to us. In some cases, forward looking statements can be identified by terminology such as "may", "will", "should", "expect", "intend", "plan", "anticipate", "believe", "predict", "potential", "continue" or the negative of these terms or other comparable terminology. A number of factors could cause actual events or results to differ materially from those discussed in the forward-looking statements. You should specifically consider these factors including the risks and uncertainties described under "Risk Factors" elsewhere in this report. Although we believe that the forward-looking statements contained herein are based on reasonable assumptions, you cannot be assured that actual results will be consistent with such statements. Forward-looking statements are made as of the date hereof and we assume no obligation to update or revise them to reflect new events or circumstances.

Non-GAAP Measures

References to EBITDA are to our net earnings that have been adjusted for: Non-controlling interest, interest expense, income taxes, amortization, inclusion of realized gains and losses on forward foreign exchange contracts and exclusion of unrealized gains and losses on forward foreign exchange contracts and interest rate swap, and charges related to the Founders' Employee Participation Plan (FEPP).

EBITDA is a measure used by many investors to compare issuers on the basis of ability to generate cash flows from operations. EBITDA is not a recognized measure under Canadian GAAP and is not intended to be representative of cash flows or results of operations determined in accordance with Canadian GAAP or cash available for distribution. We believe that EBITDA is the appropriate measure from which to make adjustments to determine our Distributable Cash. Since we intend to distribute substantially all of our available cash on an ongoing basis, we believe that EBITDA is a useful supplemental measure in evaluating our performance. You are cautioned, however, that EBITDA should not be construed as an alternative to net earnings (as determined in accordance with Canadian GAAP) as an indicator of our performance or to cash flows from operating activities as a measure of our liquidity and cash flows. Our methods of calculating EBITDA may differ from methods used by other issuers and, accordingly, our EBITDA may not be comparable to similarly titled amounts presented by other issuers.

Distributable cash is not a recognized measure under Canadian GAAP. Canadian open-ended income trusts, such as the Fund, use distributable cash as an indicator of financial performance. We define Distributable Cash as EBITDA less interest expense and sustaining capital expenditures.

Distributable cash may differ from similar computations as reported by other issuers and, accordingly, may not be comparable to distributable cash as reported by such issuers. We believe that Distributable cash is a useful supplemental measure that tracks the performance of the business, excluding the effect of non-cash items. As such, we believe the most directly comparable GAAP measure is net earnings.


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

-------------------------------------------------------------------------
June 30, December 31,
2005 2004
-------------------------------------------------------------------------

Assets

Current assets:
Cash and cash equivalents $ 3,370 $ 1,881
Accounts receivable 8,816 12,325
Forward foreign exchange contracts 3,996 4,780
Inventories 6,733 6,470
Prepaid expenses 1,091 1,326
-----------------------------------------------------------------------
24,006 26,782

Forward foreign exchange contracts 510 2,333

Property, plant and equipment 19,108 19,652

Deferred financing costs 35 43

Intangible assets (note 3) 14,415 17,282

Goodwill (note 3) 29,384 64,210
-------------------------------------------------------------------------
$ 87,458 $ 130,302
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Liabilities and Unitholders' Equity

Current liabilities:
Bank indebtedness $ - $ 662
Accounts payable and accrued liabilities 5,747 7,342
Distributions payable 892 892
Due to related party - 57
-----------------------------------------------------------------------
6,639 8,953

Interest rate swap 289 171

Long-term debt 20,000 20,000

Non-controlling interest 18,590 27,736

Unitholders' equity 41,940 73,442
-------------------------------------------------------------------------
$ 87,458 $ 130,302
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



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

-------------------------------------------------------------------------
Three months Six months
ended ended
June 30, June 30,
2005 2005
-------------------------------------------------------------------------
Revenue:
Sales $ 16,706 $ 33,459
Royalties 422 1,441
-----------------------------------------------------------------------
17,128 34,900
Cost of goods sold 11,799 23,996
-------------------------------------------------------------------------
5,329 10,904

Expenses:
Amortization 1,606 3,208
General and administrative 1,106 2,998
Image and product development 444 914
Interest and bank charges 331 664
Selling 2,149 4,326
-----------------------------------------------------------------------
5,636 12,110
-------------------------------------------------------------------------

Loss before undernoted items (307) (1,206)

Other earning (expenses):
Interest rate swap (218) (117)
Foreign exchange loss (310) (236)
Goodwill impairment (34,826) (34,826)
Gain on disposal of property, plant and equipment 20 20
Interest and miscellaneous 32 43
-----------------------------------------------------------------------
(35,302) (35,116)
-------------------------------------------------------------------------

Loss before non-controlling interest (35,609) (36,322)

Non-controlling interest (9,150) (9,840)
-------------------------------------------------------------------------

Loss for the period $ (26,459) $ (26,482)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Basic and diluted loss per unit $ (3.2949) $ (3.2975)
-------------------------------------------------------------------------
-------------------------------------------------------------------------

Weighted average number of units outstanding 8,030,070 8,030,070
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



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

Three months ended June 30, 2005

-------------------------------------------------------------------------
Unitholders' Accumulated Distri-
capital earnings butions Total
-------------------------------------------------------------------------

Balance, December 31,
2004 $ 72,714 $ 728 $ - $ 73,442

Activity for the period - (23) (2,510) (2,533)
-------------------------------------------------------------------------

Balance, March 31, 2005 $ 72,714 $ 705 $ (2,510) $ 70,909

Activity for the period - (26,459) (2,510) (28,969)
-------------------------------------------------------------------------

Balance, June 30, 2005 $ 72,714 $ (25,754) $ (5,020) $ 41,940
-------------------------------------------------------------------------
-------------------------------------------------------------------------

See accompanying notes to consolidated financial statements.



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

-------------------------------------------------------------------------
Three months Six months
ended ended
June 30, June 30,
2005 2005
-------------------------------------------------------------------------

Cash provided by (used in):

Operations:
Loss for the period $ (26,459) $ (26,482)
Items not involving cash:
Amortization 1,810 3,615
Goodwill impairment 34,826 34,826
Gain on sale disposal of property, plant and
equipment (20) (20)
Non-controlling interest (9,150) (9,840)
Founders' Employee Participation Plan expenses 336 1,028
-----------------------------------------------------------------------
1,343 3,127
Net change in interest rate swap 219 118
Net change in forward foreign exchange contracts 1,485 2,607
Change in non-cash operating working capital
(note 5) 265 1,886
-----------------------------------------------------------------------
3,312 7,738

Investments:
Purchase of property, plant and equipment (145) (196)
Proceeds on disposal of property, plant and
equipment 20 20
-----------------------------------------------------------------------
(125) (176)

Financing:
Bank indebtedness (17) (662)
Distributions paid or due to unitholders (2,510) (5,020)
Distributions paid or due to non-controlling
interest (167) (334)
Due to related party - (57)
-----------------------------------------------------------------------
(2,694) (6,073)
-------------------------------------------------------------------------

Increase in cash and cash equivalents 493 1,489

Cash and cash equivalents, beginning of period 2,877 1,881
-------------------------------------------------------------------------

Cash and cash equivalents, end of period $ 3,370 $ 3,370
-------------------------------------------------------------------------

Interest paid $ 268 $ 548
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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 months ended June 30, 2005
-------------------------------------------------------------------------

1. Basis of presentation:

These interim consolidated financial statements have been prepared using Canadian generally accepted accounting principles (Canadian GAAP). The interim 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 statements do not conform in all aspects to the requirements of Canadian GAAP for annual financial statements. These 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 statements should be read in conjunction with the significant accounting policies and other information in the most recent annual financial statements of Art In Motion Income Fund (the "Fund").

There is no comparative information for the statements of operations and cash flows as the Fund was established on August 3, 2004.

2. Accounting changes:

As of January 1, 2005, the Fund adopted Accounting Guideline 15, which requires a variable interest entity ("VIE") to be consolidated by its primary beneficiary ("PB"). The PB is the party that absorbs a majority of the VIE's expected losses and/or receives a majority of the expected residual returns. The Fund has evaluated its variable interests and has determined that the adoption of this guidance has no material impact on the financial statements.

3. Asset impairment:

During the period, both the intangible assets and goodwill underwent annual impairment tests. All individual intangible asset classes have current fair valuations greater than their net carrying values.

The current valuation of the Fund required a goodwill impairment charge of $34,826,000 to be recorded in the period. The decline of the estimated value of the Fund was primarily due to lower than expected revenue, which in turn resulted in less cash available for distribution. As such, distributions on Class C Limited Partnership units have been suspended since December 31, 2004.

4. 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:


---------------------------------------------------------------------
Three months Six months
ended ended
June 30, June 30,
2005 2005
---------------------------------------------------------------------

Artprints $ 1,958 $ 4,284
Framed and other 10,450 19,907
Decographs 5,058 10,366
Transfers 516 1,154
---------------------------------------------------------------------

Gross sales 17,982 35,711
Discounts and allowances (1,276) (2,252)
---------------------------------------------------------------------

Sales 16,706 33,459
Royalties 422 1,441
---------------------------------------------------------------------

$ 17,128 $ 34,900
---------------------------------------------------------------------


The Fund sells to customers located in the following regions:

---------------------------------------------------------------------

Canada $ 1,501 $ 2,950
United States 14,368 28,231
Europe 1,625 3,717
Other 488 813
---------------------------------------------------------------------

Gross sales 17,982 35,711
Discounts and allowances (1,276) (2,252)
---------------------------------------------------------------------

Sales $ 16,706 $ 33,459
---------------------------------------------------------------------
---------------------------------------------------------------------


Royalty income is earned almost entirely from customers located in the United States.

As at June 30, 2005, $71,000 of the Fund's assets were located in the United States and the remainder of the assets were located in Canada.

5. Supplemental information:



---------------------------------------------------------------------
Three months Six months
ended ended
June 30, June 30,
2005 2005
---------------------------------------------------------------------

Change in non-cash operating working capital:
Accounts receivable $ 2,090 $ 3,509
Inventories (388) (263)
Prepaid expenses 253 235
Accounts payable and accrued liabilities (1,690) (1,595)
---------------------------------------------------------------------

$ 265 $ 1,886
---------------------------------------------------------------------
---------------------------------------------------------------------


The Fund is an unincorporated, open-ended limited purpose trust established under the laws of British Columbia to hold, indirectly, the securities of Art In Motion Limited Partnership. Art In Motion is a leading global publisher, framer and licensor of images and fine-art reproductions. Art In Motion designs, manufactures and markets fine-art reproductions based on proprietary artwork.

Contact Information

  • Art In Motion Income Fund
    Allan Achtemichuk
    Chief Financial Officer
    (877) AIM-3233 ((877) 246-3233)