Art In Motion Income Fund
TSX : AIM.UN

Art In Motion Income Fund

November 09, 2006 07:30 ET

Art In Motion Income Fund Announces 3rd Quarter Results for 2006

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - Nov. 9, 2006) - Art In Motion Income Fund (the "Fund") (TSX:AIM.UN) today reported its interim financial results for the quarter ended September 30, 2006. The Fund's unaudited consolidated financial statements and Management's Discussion and Analysis for the quarter ended September 30, 2006 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 Thursday, November 9, 2006 at 8:30 AM Pacific time to discuss the Fund's first quarter results. Larry Sullivan, 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, dial (800) 215-4598 (North America toll-free) or (416) 641-6440 (Toronto/International) at least five minutes before the scheduled start time.

The call will be web cast simultaneously at http://www.vcall.com/IC/CEPage.asp?ID=110821. 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.

Highlights for the Quarter

- The Fund's revenue was $12.3 million.

- Gross profit was $3.6 million or 29.5% of revenue.

- The Fund posted a net loss of $0.9 million.

- Earnings before interest, taxes depreciation and amortization ("EBITDA") were $1.6 million for an EBITDA margin of 13.4%.

- The Fund generated $1.4 million in cash flow from operations before changes in non-cash working capital and ended the quarter with $2.4 million of cash on hand.

- During the quarter the Fund made a principal payment of $3.0 million on its capital loan.

- The Fund generated distributable cash of $1.3 million and paid cash distributions of $1.3 million for a payout ratio of 101%.

- Subsequent to the end of the reporting period, AIM LP accepted an offer to sell its real estate that was listed for sale in the third quarter. Gross proceeds are expected to be $9.6 million which will result in a net book gain of approximately $3.0 million on closing of the sale.

CEO's Remarks

"As Art In Motion's new Chief Executive Officer, I am pleased to take on the responsibility of leading the organization through a difficult and challenging time," says Larry Sullivan, Chief Executive Officer. "I am also pleased that Art In Motion's co-founders Garry and Vicki Peters will continue their active involvement in the business as Directors and advisors to management. Unfortunately, we do find ourselves with difficult market conditions and Art In Motion continues to experience the pressures of the appreciating Canadian dollar and competition from overseas," continued Sullivan.

"The challenges we face have caused us to respond in many ways, including putting in place programs to improve the efficiency and effectiveness of our cost structure as well as a re-evaluation of our growth strategy. We are now in a period of strengthening the competitive ability of the Company, which we believe will lead to greater market success.

By the end of the year we will have completed a restructuring that, on an annualized basis, will reduce our salary and benefit costs and create a flatter, less complex organization. In an effort to consolidate our real estate and further reduce our costs, we put our Coquitlam corporate office building up for sale during the quarter. We plan to move our corporate offices into our main manufacturing facility early in 2007. With our executives, design team, support staff and manufacturing operations under one roof we look forward to further benefits from enhanced teamwork and efficiency improvements.

When we look to the coming months, we anticipate that the market will level out. If we are not yet at the bottom, we believe that we are near it. That being said, the last quarter of this year will be characterized by continued weak sales and soft market conditions. Slow retail sales during the first half of the year have resulted in high customer inventories and orders coming out of this fall's trade shows are down, with retailers focusing on selling their existing stock.

Although the future health of the U.S. economy is still uncertain, I am cautiously optimistic that Art In Motion will begin to see a turnaround toward the end of 2007. We have recently reached an arrangement with a major US retailer who will be rolling out a new wall decor program in 2007 in which Art In Motion will be one of two key vendors," concluded Sullivan.



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

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September 30, December 31,
2006 2005
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Assets

Current assets:
Cash and cash equivalents $ 2,390 $ 3,448
Accounts receivable 7,512 8,802
Forward foreign exchange contracts 2,503 3,679
Inventories 5,637 5,942
Prepaid expenses 914 919
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18,956 22,790

Forward foreign exchange contracts 37 878

Interest rate swap (Note 4) - 136

Property, plant and equipment 17,748 18,641

Deferred financing costs 14 26

Intangible assets (note 2) 5,595 11,548

Goodwill (note 2) - 29,384

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$ 42,350 $ 83,403
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Liabilities and Unitholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 4,663 $ 5,289
Current portion of long-term debt (note 3) 17,000 -
Distributions payable 428 428
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22,091 5,717

Long-term debt (note 3) - 20,000

Non-controlling interest 10,029 18,639

Unitholders' equity 10,230 39,047

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$ 42,350 $ 83,403
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Subsequent events (note 8)

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 Nine months
ended September 30 ended September 30
-------------------- --------------------
2006 2005 2006 2005
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Revenue:
Sales $ 12,070 $ 15,186 $ 39,252 $ 48,645
Royalties 218 624 1,192 2,065
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12,288 15,810 40,444 50,710

Cost of goods sold (note 5) 8,662 10,893 28,169 34,889
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3,626 4,917 12,275 15,821

Expenses:
Amortization (note 2) 1,327 1,610 6,448 4,818
General and administrative
(note 5) 1,024 1,272 2,609 4,270
Image and product
development (note 5) 424 456 1,057 1,370
Interest and bank charges 313 318 951 982
Selling (note 5) 1,631 2,212 4,768 6,538
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4,719 5,868 15,833 17,978
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Loss before undernoted items (1,093) (951) (3,558) (2,157)

Other earnings (expenses):
Interest rate swap (note 4) (95) 221 (9) 104
Interest and miscellaneous 50 13 165 56
Foreign exchange gain (loss) (72) 2,471 1,513 2,235
Goodwill impairment (note 2) - - (29,384) (34,826)
Gain on disposal of
property, plant and
equipment - - - 20
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(117) 2,705 (27,715) (32,411)
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Loss before non-
controlling interest (1,210) 1,754 (31,273) (34,568)

Non-controlling interest (295) 223 (6,069) (9,617)

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Net earnings (loss) for the
period $ (915) $ 1,531 $ (25,204) $ (24,951)
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Basic and diluted earnings
(loss) per unit $ (0.11) $ 0.19 $ (3.14) $ (3.11)
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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)

---------------------------------------------------------------------------
---------------------------------------------------------------------------
Accumu-
Unitholders' lated Distri-
capital loss butions Total
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Balance, December 31, 2005 $ 72,714 $ (20,806) $ (12,861) $ 39,047

Activity for the period - (1,330) (1,205) (2,535)
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Balance, March 31, 2006 72,714 (22,136) (14,066) 36,512

Activity for the period - (22,959) (1,204) (24,163)
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Balance, June 30, 2006 $ 72,714 $ (45,095) $ (15,270) $ 12,349

Activity for the period - (915) (1,204) (2,119)
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Balance, September 30, 2006 $ 72,714 $ (46,010) $ (16,474) $ 10,230
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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 Nine months
ended September 30 ended September 30
-------------------- --------------------
2006 2005 2006 2005
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Cash provided by (used in):

Operations:
Net earnings (loss) for the
period $ (915) $ 1,531 $ (25,204) $ (24,951)
Items not involving cash:
Amortization 1,517 1,822 7,020 5,437
Goodwill impairment - - 29,384 34,826
Gain on disposal of property,
plant and equipment - - - (20)
Non-controlling interest (295) 223 (6,069) (9,617)
Founders' Employee
Participation
Plan expenses (note 5) - 305 (2,300) 1,333
Net change in interest rate swap 222 (222) 136 (104)
Net change in forward foreign
exchange contracts 832 (1,692) 2,017 915
Change in non-cash operating
working capital (note 7) 1,730 1,400 974 3,286
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3,091 3,367 5,958 11,105

Investments:
Purchase of property, plant
and equipment (85) (247) (162) (443)
Proceeds on disposal of property,
plant and equipment - - - 20
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(85) (247) (162) (423)

Financing:
Bank indebtedness - - - (662)
Repayment of long term debt (3,000) - (3,000) -
Distributions paid or due to
unitholders (1,204) (2,509) (3,613) (7,529)
Distributions paid or due to
non-controlling interest (80) (168) (241) (502)
Due to related party - - - (57)
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(4,284) (2,677) (6,854) (8,750)
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Increase (decrease) in cash and
cash equivalents (1,278) 443 (1,058) 1,932

Cash and cash equivalents,
beginning of period 3,668 3,370 3,448 1,881

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Cash and cash equivalents,
end of period $ 2,390 $ 3,813 $ 2,390 $ 3,813
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Supplementary information:
Interest received $ 41 $ 15 $ 98 $ 32
Interest paid 178 288 740 836
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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 months ended September 30, 2006

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. 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").

2. Asset impairment:

During the second quarter, goodwill underwent an annual impairment test. Based on a significant decline in the current value of the Fund's unit trading value and current distribution level, the current valuation of goodwill was determined to be nil, requiring an impairment loss of $29,384,000.

In conjunction with the annual goodwill impairment test, the intangible assets were reviewed for current fair values during the second quarter. Both the Artist Agreements and Image Bank intangible assets had current fair values that exceeded their net carrying values. However, due to the decline in sales, the Customer Base intangible asset required an impairment charge of $1,926,000 to reduce its carrying value to match its current fair value. This charge was included in amortization in the second quarter.

3. Long-term debt:

The Fund has a $20,000,000 non-revolving term loan ("Capital Loan"). The Capital Loan bears interest at bank's prime rate plus 0.25% per annum and has a three-year term with interest only payable during the term. A $3,000,000 repayment was made on the Capital Loan during the quarter. As the balance of the Capital Loan expires August 20, 2007, the remaining $17,000,000 is presented as a current liability. The Fund expects to renegotiate the Capital Loan prior to its maturity.

4. 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 quarter, the interest rate swap was redeemed for proceeds of $127,000.

5. 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. In the second quarter, management reviewed the charges related to the FEPP. Based on recent earnings, cash flow and terms of the FEPP Agreement, management concluded that certain provisions of the plan will not be achieved. All prior accruals related to the FEPP were reversed. The amount of the charges reversed in the second quarter totals $2,560,000. The reversal of the FEPP was credited 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.

6. 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 Nine months
ended September 30 ended September 30
-------------------- --------------------
2006 2005 2006 2005
--------------------------------------------------------------------------

Artpints $ 1,324 $ 2,011 $ 4,383 $ 6,295
Framed and other 6,151 8,524 21,686 28,431
Decographs 4,422 4,663 12,470 15,029
Transfers 658 937 2,451 2,091
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Gross sales 12,555 16,135 40,990 51,846
Discounts and allowances (485) (949) (1,738) (3,201)
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Sales 12,070 15,186 39,252 48,645
Royalties 218 624 1,192 2,065

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$ 12,288 $ 15,810 $ 40,444 $ 50,710
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The Fund sells to customers located in the following regions:



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Three months Nine months
ended September 30 ended September 30
-------------------- --------------------
2006 2005 2006 2005
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Canada $ 1,406 $ 2,103 $ 4,007 $ 5,534
United States 9,779 12,047 32,860 40,132
Europe 1,087 1,700 3,388 5,417
Other 283 285 735 763
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Gross sales 12,555 16,135 40,990 51,846
Discounts and allowances (485) (949) (1,738) (3,201)

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Sales $ 12,070 $ 15,186 $ 39,252 $ 48,645
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Royalty income is earned almost entirely from customers located in the United States.

As at September 30, 2006, $165,000 of the Fund's capital assets were located in the United States and the remainder of the assets were located in Canada.

7. Supplemental information:



--------------------------------------------------------------------------
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Three months Nine months
ended September 30 ended September 30
-------------------- --------------------
2006 2005 2006 2005
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Change in non-cash operating
working capital:
Accounts receivable $ 1,217 $ 86 $ 1,290 $ 3,595
Inventories (6) 552 305 289
Prepaid expenses 310 (19) 5 216
Accounts payable and
accrued liabilities 209 781 (626) (814)

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$ 1,730 $ 1,400 $ 974 $ 3,286


8. Subsequent events:

Subsequent to September 30, 2006, the Fund accepted an offer to sell one of its building and real estate for gross proceeds of $9.6 million, which will result in a gain of approximately $3.0 million on closing of the sale. The closing is scheduled for January 2007.

In October 2006, the Fund made an additional payment of $2.0 million towards its long term debt.

9. Comparative figures:

Certain comparative figures have been reclassified to conform with the financial statement presentation adopted for the current period.

Management's Discussion and Analysis - November 3, 2006

This MD&A should be read in conjunction with the unaudited interim consolidated financial statements and accompanying notes of Art In Motion Income Fund (the "Fund") for the period ended September 30, 2006. Results are reported in Canadian dollars unless stated otherwise and have been prepared in accordance with Canadian generally accepted accounting principals ("Canadian GAAP").

Fund Overview

The Fund is an unincorporated, open-ended, limited purpose trust, which was created under the laws of the province of British Columbia to indirectly acquire and hold limited partnership units of Art In Motion Limited Partnership ("AIM LP"). On August 3, 2004 the Fund closed its initial public offering ("IPO") for 7,500,000 trust units at a unit price of $10.00 for gross proceeds of $75.0 million. Underwriting and other issue-related costs totaled $7.3 million, leaving net proceeds of $67.7 million. Concurrent with the IPO the Fund acquired approximately 70% of AIM LP that in turn acquired, directly and indirectly, the business assets of GVP Holdings Inc. ("GVP"). GVP is the predecessor firm that operated the business of Art In Motion. In addition to the net proceeds of the offering, AIM LP borrowed $20 million under its term credit facilities to acquire the business assets from GVP. On August 19, 2004, the underwriters exercised their over-allotment option and an additional 530,070 Fund units were sold. Net proceeds of approximately $5.0 million were used to reduce the non-controlling interest. The Fund currently has 8,030,070 units outstanding and indirectly holds approximately 75% of the limited partnership units of AIM LP.

Overall Performance

Highlights for the Third Quarter

- The Fund's revenue was $12.3 million.

- Gross profit was $3.6 million or 29.5% of revenue.

- The Fund posted a net loss of $0.9 million.

- Earnings before interest, taxes depreciation and amortization ("EBITDA") (1) were $1.6 million for an EBITDA margin of 13.4%.

- Basic and diluted loss per unit was $0.11.

- The Fund generated $1.4 million in cash flow from operations before changes in non-cash working capital and ended the quarter with $2.4 million of cash on hand.

- During the quarter the Fund made a principal payment of $3.0 million on its capital loan.

- The Fund generated distributable cash (2) of $1.3 million or $0.12 per unit on the total 10,706,760 units outstanding (3) and paid cash distributions of $1.3 million for a payout ratio of 101%.

- The Fund had total assets of $42.4 million and $22.1 million in current and long-term liabilities.



Note

(1) EBITDA is not a recognized measure under Canadian GAAP. See our
discussion on "Non-GAAP Measures".

(2) Distributable Cash is not a recognized measure under Canadian GAAP. See
our discussion on "Non-GAAP Measures" and "Reconciliation of
Distributable Cash to Cash Flow from Operations".

(3) 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 provide
that the unsubordinated 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.


Third Quarter and Nine Month Results



Selected Consolidated Financial Information
--------------------------------------------------------------------------
(in thousands of dollars 3 months 3 months 9 months 9 months
except per unit amounts ended ended ended ended
and percentages) Sept 30, Sept 30, Sept 30, Sept 30,
2006 2005 2006 2005
--------------------------------------------------------------------------
Revenue 12,288 15,810 40,444 50,710
Cost of sales(1) 8,662 10,893 28,169 34,889
-----------------------------------------
Gross profit 3,626 4,917 12,275 15,821
29.5% 31.1% 30.4% 31.2%
Operating expenses(1)(2)(3) 4,836 3,163 43,548 50,389
Non-controlling interest (295) 223 (6,069) (9,617)
-----------------------------------------
Net earnings (915) 1,531 (25,204) (24,951)
-7.4% 9.7% -62.3% -49.2%
Add (deduct)
Non-controlling interest (295) 223 (6,069) (9,617)
Founders' employee
participation plan(1) - 305 (2,300) 1,333
Interest 280 277 827 824
Amortization(3) 1,517 1,822 7,020 5,437
Goodwill Impairment(3) - - 29,384 34,826
Net change in interest rate swap 222 (222) 136 (104)
Net change in forward foreign
exchange contracts 832 (1,692) 2,017 915
-----------------------------------------
EBITDA(4) 1,641 2,244 5,811 8,663
13.4% 14.2% 14.4% 17.1%
-----------------------------------------

Basic and diluted earnings
per unit -0.11 0.19 -3.14 -3.11

Total Assets(3) 42,350 87,297 42,350 87,297
Total Long Term Liabilities - 20,000 - 20,000
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(1) Under the Founders' Employee Participation Plan ("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. In the second quarter of
2006 all of the charges accrued to date, totaling $2.6 million, have
been reversed.

(2) Operating Expenses are the combined net total of Expenses and Other
Earnings as shown in our Financial Statements.

(3) In the second quarter of 2006 the Fund completed a fair value
assessment of Other Net Assets and based on this assessment reduced
the carrying value of goodwill by $29.4 million and the carrying
value of identifiable intangible assets by $1.9 million. In the
second quarter of 2005 the Fund wrote down the carrying value of
goodwill by $34.8 million.

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


Revenue for the 3 Months Ended September 30, 2006

Revenue for the quarter ended September 30, 2006 was $12.3 million compared to $15.8 million for the quarter ended September 30, 2005. US-dollar denominated gross sales were down 15% for the quarter this year compared to the same quarter last year. Approximately 89% of our gross sales for the quarter were denominated in US dollars. The strengthening of the Canadian dollar relative to the US dollar continues to impact our gross sales as the average exchange rate for the quarter was down approximately 7% compared to the same quarter in 2005, from $1.20 to $1.12 Canadian for each US dollar.

Sales in our International division were down as sales to distributors and framers in Europe and the United Kingdom slowed from prior quarters. Similar to our experience with tradeshows in North America, tradeshows in Europe and the U.K. experienced fewer participants and lower sales. We have also seen an increase in products from Asia in the European markets. In many cases these products are of lower cost and quality. We have also seen an increase in the amount of counterfeit products in the European market.

Our licensing division was significantly impacted as other manufacturers who license the right to use our images on their products are struggling with current wholesale markets. Two of our licensees have recently exited receivership or creditor protection and are working to grow their business.

Sales of wall decor products were also lower with both our independent retailers and our large national accounts. Customers' attendance at tradeshows in the third quarter was down considerably over last year at most of the major shows in North America. Buyers were looking for new items to add to their lines but were often dealing with significant inventory that they were working to discount and clear out.

Revenue for the 9 Months Ended September 30, 2006

Revenue for the nine months ended September 30, 2006 was $40.4 million compared to $50.7 million or down 20% compared to the same period in 2005. Retailers continued to sell through inventory they have had on hand for the past few quarters. Wholesale prices were under pressure from lower cost imports and gross sales were also impacted by foreign exchange rates as the value of the US dollar relative to the Canadian dollar declined 7% compared to the same nine months in 2005.

Expenses for the 3 Months Ended September 30, 2006

Gross profit for the quarter ended September 30, 2006 was $3.6 million or 29.5% of sales compared to $4.9 million or 31.1% of sales for the quarter ended September 30, 2005. The quarter last year includes $0.2 million of non-cash charges related to the FEPP (see "Transactions with Related Parties"). Excluding these non-cash charges, gross profit for the quarter ended September 30, 2005 was $5.1 million or 32.2% of sales. There were no charges related to the FEPP in the third quarter of this year. Lower prices and sales volume along with fixed manufacturing costs and normal operating cost increases all contributed to the overall impact on our gross margin.

Operating expenses were $4.8 million for the quarter ended September 30, 2006 compared to $3.2 million for the same quarter in 2005 which includes a non-cash charge of $0.1 million related to the FEPP. Excluding this charge, operating expenses were $3.0 million for the quarter last year. There were no FEPP charges in the quarter this year. The net increase of $1.8 million in operating expense for the quarter this year was related to a $0.7 million reduction in selling, general and administrative expenses, a $0.3 million reduction in amortization expense, a $0.1 million increase in interest and miscellaneous income and a $2.9 million increase in charges related to the change in the value of our foreign exchange and interest rate hedges. Selling, general and administrative costs were lower as a result of lower sales commissions paid to outside sales representatives and lower salary and benefit costs.

Expenses for the 9 Months Ended September 30, 2006

Gross profit for the nine months ended September 30, 2006 was $12.3 million compared to $15.8 million for the same nine month period in 2005. Cost of sales for the period this year includes a credit of $1.0 million for non-cash charges related to the FEPP as reversed in the second quarter this year. Cost of sales for the same period in 2005 included charges related to the FEPP of $0.5 million. Excluding these charges, gross profit for the nine months ended September 30, 2006 was $11.2 million or 27.8% of sales, compared to $16.4 million or 32.3% of sales for the nine months ended September 30, 2005.

Operating expenses were $43.5 million for the nine months ended September 30, 2006 compared to $50.4 million for the same period in 2005. The operating expenses for the nine months ended September 30, 2006 include a charge of $29.4 million related to the write-down of goodwill and increased amortization of $1.9 million related to the reduction in the carrying value of identifiable intangible assets. The same period in 2005 included a charge of $34.8 million related to the write-down of goodwill. Operating expense for the nine month period in 2006 also included a credit of $1.3 million related to the reversal of the non-cash charges related to the FEPP previously charged to operating expenses and reversed in the second quarter of this year. The same period in 2005 includes a charge of $0.8 million related to the FEPP. Excluding the adjustments related to goodwill, intangible assets and the FEPP, operating expenses for the nine months ended September 30, 2006 were $13.5 million compared to $14.8 million for the first nine months in 2005. The net decrease of $1.3 million in operating expenses for the period this year was represented by a $1.7 million reduction in selling, general and administrative expenses, a $0.4 million increase in realized foreign exchange gains, a $0.2 million increase in interest and miscellaneous income, a $0.3 million reduction in amortization expense and a $1.3 million increase in charges related to the change in the value of our foreign exchange and interest rate hedges. Selling, general and administrative costs are lower as a result of lower sales commissions paid to outside sales representatives, lower marketing and promotion expenses and lower salary and benefit costs.

Net Earnings and EBITDA for the 3 Months Ended September 30, 2006

For the quarter ended September 30, 2006, the Fund posted a net loss of $0.9 million after non-controlling interest. The Fund posted net earnings of $1.5 million for the same quarter in 2005.

EBITDA was $1.6 million for the quarter this year compared to $2.2 million for the same quarter last year.

Net Earnings and EBITDA for the 9 Months Ended September 30, 2006

For the nine months ended September 30, 2006, the Fund posted a net loss of $25.2 million. The net loss for the same period in 2005 was $25.0 million.

EBITDA was $5.8 million for the nine months ended September 30, 2006 compared to $8.7 million for the nine month period ended September 30, 2005.

Liquidity and Capital Resources

Cash Flow

During the three month period ended September 30, 2006 the Fund generated cash from operations of $3.1 million including changes in non-cash working capital compared to $3.4 million for the third quarter of 2005. Excluding changes in non-cash working capital, the Fund generated $1.4 million for the quarter compared to $2.0 for the same quarter in 2005.

For the nine months ended September 30, 2006 the Fund generated $6.0 million of cash from operations including changes in non-cash working capital compared to $11.1 million for the nine months ended September 30, 2005. Excluding changes in non-cash working capital, the Fund generated $5.0 million for the nine months this year compared to $7.8 million for the same period in 2005.

At September 30, 2006 the Fund had a net cash position of approximately $2.4 million. Our operating line was not used as of September 30, 2006.

Credit Facilities

The Fund has a three-year non-amortizing $20.0 million CAD capital loan due August 20, 2007. The full amount of the capital loan has been drawn since August 3, 2004. During the third quarter the Fund made a $3.0 million payment against the principal of the loan leaving an outstanding balance of $17.0 million. In conjunction with this payment, the Fund terminated its interest rate swap realizing cash proceeds of $0.13 million. The interest rate on the capital loan is based on a floating rate of our lender's prime rate plus 0.25%. This rate currently stands at 6.25%. The balance of the loan is recorded as a current liability on the Fund's interim consolidated financial statements. The Fund expects to renegotiate the loan prior to the maturity date. The change from long term to current on the financial statements does not affect the debt covenant calculations.

The Fund has a 364-day committed operating facility with a $15 million CAD limit based on various margin requirements. The operating facility was unused at September 30, 2006.

The Fund also has a foreign exchange facility with a notional risk limit of $22.8 million USD. This facility allows us to enter into a maximum of $60 million USD face value of USD/CAD forward foreign exchange contracts with maturities of up to 36 months. At September 30, 2006 the Fund had US$29.0 million face value of contracts with maturities through November 2007. These contracts have exchange rates from 1.12 USD/CAD to 1.25 USD/CAD and a weighted average rate of 1.20 USD/CAD.

During the third quarter, the Canadian chartered bank that is the lender under our credit facilities completed its annual review of the credit facilities and has extended the operating facility and foreign exchange facility to July 31, 2007.

In October, subsequent to the interim reporting period, the Fund made an additional $2.0 million payment against the capital loan. The Fund has also requested the lender to reduce the operating facility from $15 million CAD to $10 million CAD. Based on recent levels of inventory and accounts receivable, the margin requirements would not provide access to the full $15 million limit of the facility. Reducing the limit will reduce future standby charges.

Capital Expenditures

For the quarter ended September 30, 2006 the Fund spent approximately $85,000 on capital items. For the same quarter in 2005 capital expenditures were approximately $247,000. For the nine months ended September 30, 2006 the Fund spent approximately $162,000 on capital items compared to $443,000 for the nine months ended September 30, 2005. Capital expenditures were higher in the third quarter of 2005 largely due to investments to fixture our expanded warehouse in Ferndale, Washington.

Sale of Building and Real Estate

Subsequent to the end of the reporting period, AIM LP accepted an offer to sell its real estate that was listed for sale in the third quarter. Conditions of the sale have been removed and closing is scheduled for January 2007 subject to normal closing activities. Gross proceeds are expected to be $9.6 million which will result in a net book gain of approximately $3.0 million on closing of the sale.

Cash Distributions

For the period from July 1, 2006 to September 30, 2006, the Fund declared three monthly distributions of $0.05 per Fund unit. The same distributions were paid on the unsubordinated Class B Limited Partnership (LP) units. Distributions for the subordinated Class C LP units were suspended after the third quarter of 2004.

The Fund has historically calculated distributable cash using EBITDA as a basis from which to make adjustments. In August 2006 the Canadian Securities Administrators ("CSA") issued revised Staff Notice 52-306, "Non-GAAP Financial Measures", to clarify their expectations for the presentation of distributable cash by income trusts. The CSA has concluded that distributable cash is a cash flow measure and that it is fairly presented only when reconciled to cash flows from operating activities, including changes during the period in non-cash working capital balances, as presented in the issuer's financial statements.

The Fund has adopted this cash flow method and the table below presents the Fund's reconciliation of distributable cash to cash flow from operations. This method results in a small difference from the method previously used. Gains and losses from disposal or property, plant and equipment are not included in cash flow from operations but were previously included in the reconciliation to EBITDA. The impact on the table below is that a $20,000 gain on disposal of fixed assets that was recorded in the second quarter of 2005 has been removed and the distributable cash for the nine months ended September 30, 2005 is $20,000 lower than was previously reported with our interim results for the third quarter of 2005.



Reconciliation of Distributable Cash to Cash Flow from Operations
--------------------------------------------------------------------------
(in thousands of dollars 3 months 3 months 9 months 9 months
except per unit amounts ended ended ended ended
and distribution ratio) Sept 30, Sept 30, Sept 30, Sept 30,
2006 2005 2006 2005
--------------------------------------------------------------------------
Cash flow from operations 3,091 3,367 5,958 11,105
Deduct
Changes in non-cash
working capital(1) (1,730) (1,400) (974) (3,286)
Capital expenditures (85) (247) (162) (443)
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Distributable cash(2) 1,276 1,720 4,822 7,376
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Distributions on Fund units 1,204 2,510 3,613 7,529
Distributions on unsubordinated
non-controlling interest(3) 80 167 241 502
Distributions on subordinated
non-controlling interest(3) - - - -
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Distributions paid 1,284 2,677 3,854 8,031
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Distribution ratio 101% 156% 80% 109%
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Outstanding units and
per unit amounts
Total units outstanding(3) 10,706,760 10,706,760 10,706,760 10,706,760
Distributable cash per unit $ 0.12 $ 0.16 $ 0.45 $ 0.69
Distributions paid per unit $ 0.12 $ 0.25 $ 0.36 $ 0.75
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Outstanding units and per
unit amounts (excludes Class
C LP units)
Total units outstanding(3) 8,565,408 8,565,408 8,565,408 8,565,408
Distributable cash per unit $ 0.15 $ 0.20 $ 0.56 $ 0.86
Distributions paid per unit $ 0.15 $ 0.31 $ 0.45 $ 0.94
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(1) Changes in non-cash working capital are excluded as the Fund's working
capital needs are financed using its credit facilities.

(2) Distributable Cash is not a recognized measure under Canadian GAAP.
See our discussion on "Non-GAAP Measures".

(3) In addition to the 8,030,070 outstanding Fund units, there are
535,338 unsubordinated Class B LP units and 2,141,352 subordinated
Class C LP units 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. The Fund
pays monthly distributions on 8,565,408 units being the total of
the Fund units and the unsubordinated Class B LP units. Distributions
on the Class C LP units have been suspended.


Off-Balance Sheet Arrangements

The Fund had no changes in its off-balance sheet arrangements.

Transactions with Related Parties

In our Annual Information Form we describe the Founders' Employee Participation Plan ("FEPP") established by GVP for the benefit of the employees of AIM LP. Under the FEPP, GVP provides bonus payments to employees based on the notional interest in certain retained interest units of AIM LP. Employees are entitled to bonus payments based on the quarterly distributions on Class C LP units. The FEPP will also entitle the employees to the notional value of the Fund units subject to certain vesting and subordination provisions. The FEPP costs are accrued and recorded as a charge against the Fund but are funded by GVP. There is no impact to net earnings, EBITDA or distributable cash. Amounts previously accrued for the FEPP were reversed in the second quarter of 2006.

Accounting Policies and Critical Accounting Estimates

There have been no changes to the Fund's accounting policies. During the second quarter of 2006, management completed a fair value assessment of assets and reduced the carrying value of goodwill by $29.4 million and the carrying value of identifiable intangible assets by $1.9 million. There were no changes in the methods used to calculate critical estimates for the quarter ended September 30, 2006.

Financial Instruments

We use currency derivatives to manage our exposure to fluctuations in exchange rates between the Canadian and US dollar. Our practice is to enter into forward foreign exchange contracts to minimize our exposure to currency fluctuations related to changes in exchange rates between Canadian and US dollars.

Summary of Quarterly Results

The table below presents a summary of our quarterly results for the trailing two years.



--------------------------------------------------------------------------
--------------------------------------------------------------------------
(in thousands of dollars
except per unit amounts) 2006 2006 2006
and percentages) Q3 Q2 Q1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenue 12,288 13,903 14,253
Gross Profit 3,626 5,224 3,425
Gross Profit % 29.5% 37.6% 24.0%
Operating expenses 4,836 33,268 5,444
Non-Controlling Interest (295) (5,085) (689)
Net earnings (loss) (915) (22,959) (1,330)
EBITDA 1,641 2,200 1,970
EBITDA % 13.4% 15.8% 13.8%
Distributable cash 1,276 1,896 1,650
Distributions 1,284 1,285 1,285
Payout ratio 101% 68% 78%
Basic and diluted
earnings (loss) per unit (0.11) (2.86) (0.17)
Weighted average
number of units
outstanding 8,030,070 8,030,070 8,030,070
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--------------------------------------------------------------------------

--------------------------------------------------------------------------
--------------------------------------------------------------------------
(in thousands of dollars
except per unit amounts) 2005 2005 2005 2005 2004
and percentages) Q4 Q3 Q2 Q1 Q4
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Revenue 15,096 15,810 17,128 17,772 19,283
Gross Profit 4,210 4,917 5,329 5,575 6,000
Gross Profit % 27.9% 31.1% 31.1% 31.4% 31.1%
Operating expenses 5,461 3,163 40,938 6,288 3,375
Non-Controlling Interest (540) 223 (9,150) (690) 397
Net earnings (loss) (711) 1,531 (26,459) (23) 2,228
EBITDA 2,604 2,244 3,342 3,077 3,370
EBITDA % 17.2% 14.2% 19.5% 17.3% 17.5%
Distributable cash 2,264 1,720 2,902 2,754 2,966
Distributions 1,284 2,677 2,677 2,677 2,676
Payout ratio 57% 156% 92% 97% 90%
Basic and diluted
earnings (loss) per unit (0.09) 0.19 (3.30) (0.00) 0.28
Weighted average
number of units
outstanding 8,030,070 8,030,070 8,030,070 8,030,070 8,030,070
--------------------------------------------------------------------------
--------------------------------------------------------------------------


Over the last several quarters revenue and gross profit has been impacted by lower sales volume from each of our customer channels as well as the rising value of the Canadian dollar relative to the US dollar combined with certain fixed manufacturing costs. Gross profit percentage for the second quarter of 2006, excluding the FEPP adjustment was 29.1%. The improvement in gross profit over the last two quarters is a result of better resource utilization. Operating expenses for the second quarter of 2006 and the second quarter of 2005 include write-downs in the value of goodwill of $29.4 million and $34.8 million respectively. The second quarter of 2006 also includes a $1.9 million write-down in the value of intangible assets. As discussed earlier in this MD&A, the Fund has used Cash Flow from Operations as the basis from which to make adjustments to determine distributable cash. Distributable cash for 2005 Q2 has been adjusted to $2.902 million from $2.922 million to remove a $20,000 gain on sale of equipment (see "Non-GAAP Measures"). No other changes are required to any of the eight quarters presented in the above summary.

Outlook

Tradeshows in North America and Europe in the third quarter had fewer attendees than past shows. Orders booked at these shows were lower than the same show last year. Attendance at the High Point Furniture show in October was also lower but our product offerings were well received and our average order value was up. Overall our sales were up at this show. A number of our customers continue to comment about the need to clear out inventory before they will take on many new products. The market continues to see price pressure from cheaper products being imported from China. While fuel costs have come down in recent months, ocean carriers and trucking companies have not reduced the fuel surcharges they implemented several months ago. The value of the Canadian dollar relative to the US dollar has come down slightly from recent highs but is still considerably stronger than last year and will continue to impact our gross revenue. We continue to focus on cost management in the short term and expect to complete our facilities consolidation early in 2007. We are also working on some new product design initiatives that we expect will yield savings in the second half of next year. Further we are focused on working with our existing customers and new accounts to build sales volume. We have recently reached an arrangement with a major US retailer who will be rolling out a new wall decor program in 2007. Art In Motion will be one of two key vendors for this program.

October 31, 2006 Announcement by the Minister of Finance

On October 31, 2006, the federal Minister of Finance announced a proposal that, if enacted, would tax publicly-traded income trusts on distributions of income to their Unitholders. Existing publicly-traded income trusts would not be subject to the proposed tax until their 2011 taxation year. The proposal may have important consequences for publicly-traded income trusts and their investors.

The rate of the proposed tax on distributions of income would approximate the combined federal and provincial tax rate applicable to income earned by Canadian public corporations. The applicable rate in 2011 would be based on tax rates at that time. Currently, based on information released by the federal Department of Finance in conjunction with the announcement of the proposed tax, the rate in 2011 would be 31.5% but this is subject to changes in tax rates between now and 2011.

The proposed tax that would be imposed on income trusts may result in a reduction in the level of distributions made to their Unitholders. Distributions subject to the proposed tax and received by Unitholders of income trusts would be characterized as eligible dividends from a Canadian public corporation. Generally, individual Unitholders resident in Canada would be subject to tax based on the enhanced gross-up and dividend tax credit and, consequently, would receive an after-tax return from their now reduced distribution of income approximately equal to the after-tax return if pre-tax income of the income trust had been distributed directly to the investor and taxed in the hands of the investor. However, reduced distributions will be an absolute cost to other types of investors including pension funds, Registered Retirement Savings Plans (RRSPs) and non-residents who would not benefit from characterization of the distribution as dividends.

Draft legislation implementing this proposal has not yet been released. It is not possible at this time for the Fund to determine whether the proposal will be enacted as proposed, or at all, and, if enacted, what impact this proposal would have on the Fund or its Unitholders. As more information becomes available, the Fund will assess the strategic and economic issues arising from this proposal.

Non-GAAP Measures

References in this MD&A 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 interest rate swap and exclusion of unrealized changes in mark to market value on forward foreign exchange contracts and interest rate swap, and charges related to the Founders' Employee Participation Plan. See "Transactions with Related Parties" for a discussion on the FEPP.

EBITDA is a measure used by many investors to compare issuers on the 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. Readers are cautioned 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. The Fund uses distributable cash as a supplemental measure that provides an indication of cash available for distribution. Historically, the Fund has used EBITDA as the measure from which to make adjustments to determine its Distributable Cash. Distributable Cash was presented as the net result of EBITDA less interest expense and capital expenditures. Distributable cash should not be construed as an alternative to net earnings determined according to Canadian GAAP or as a measure of liquidity or cash flows. Management does not use this measure as a performance measure of earnings.

In August 2006 the Canadian Securities Administrators ("CSA") issued revised Staff Notice 52-306, "Non-GAAP Financial Measures", to clarify their expectations for the presentation of distributable cash by income trusts. The CSA has concluded that distributable cash is a cash flow measure and that it is fairly presented only when reconciled to cash flows from operating activities, including changes during the period in non-cash working capital balances, as presented in the issuer's financial statements.

In this MD&A we have adopted the cash flow based method and calculated distributable cash using Cash Flow from Operations as recommended in CSA Staff Notice 52-306. The result of this approach has one difference from our historical method using EBITDA. The difference is attributable to gains and losses on disposal of property, plant and equipment. The net gains and losses on the sale of assets are not included in cash flow from operations but are included in EBITDA. The Fund's distributable cash is calculated as cash flow from operations adjusted for changes in non-cash working capital, interest expense, capital expenditures and any required principal payments on amortizing debt (see "Reconciliation of Distributable Cash to Cash Flow from Operations"). We believe that this method is more representative of cash available for distribution.

Forward-Looking Statements and Risks

This document may contain forward-looking statements that reflect our current internal projections, expectations or beliefs and are based on information currently available to us. 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.

We are subject to a number of risks and uncertainties relating to our business and operations. These risks and uncertainties include but are not limited to: dependence on key personnel, our ability to renew contracts with existing artists or to secure contracts with new artists, changes in tax laws applicable to the Fund or its Unitholders, our ability to anticipate consumer preferences and market trends and to create leading-edge products, sustaining our level of sales or EBITDA margins, loss of customers, seasonal and other fluctuations in our sales, decreases in the demand for wall decor, competition in our markets, failure to protect our intellectual property, labour disruptions, currency fluctuations, energy cost increases, dependence on key suppliers, the ability to fund future capital requirements, dependence on our management information systems, our ability to obtain insurance, exposure to foreign, political and economic instability, losses related to credit provided to our customers, failure to comply with regulatory requirements, and we may become involved in litigation.

The risks and uncertainties described above are not the only risks and uncertainties we face. Additional risks and uncertainties not currently known to us or that we currently deem immaterial also may impair our business operations.

Additional Information

Additional information relating to the Fund, including all public filings, is available on SEDAR (www.sedar.com) and our website at www.aimincomefund.com.


Contact Information