Art In Motion Income Fund
TSX : AIM.UN

Art In Motion Income Fund

March 05, 2007 07:30 ET

Art In Motion Income Fund Announces 4th Quarter and Annual Results for 2006, Reduction of Cash Distributions and Intent to Seek Strategic Alternatives

VANCOUVER, BRITISH COLUMBIA--(CCNMatthews - March 5, 2007) - Art In Motion Income Fund (the "Fund") (TSX:AIM.UN) today reported its financial results for the year ended December 31, 2006. The Fund's audited consolidated financial statements for the year ended December 31, 2006 and Management's Discussion and Analysis 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 Monday, March 5, 2007 at 8:30 AM Pacific time to discuss the Fund's fourth 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) 774-7358 (North America toll-free) or (416) 641-6444 (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=113994. The archive of the call will 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 4th Quarter 2006

- The Fund's revenue was $11.0 million.

- Gross profit was $3.0 million or 27.2% of revenue.

- The Fund posted a net loss of $2.1 million.

- Earnings before interest, taxes depreciation and amortization ("EBITDA") were $1.2 million for an EBITDA margin of 11.1%.

- The Fund generated $3.3 million in cash flow from operations including changes in non-cash working capital and ended the quarter with $0.6 million of cash on hand.

- During the quarter the Fund made principal payments of $3.0 million on its capital loan and paid cash distributions of $1.3 million.

- The Fund accepted an offer to sell its Brigantine real estate for gross proceeds of $9.6 million. The transaction closed on January 18, 2007.

CEO's Remarks

"The strength of the Canadian dollar continued to erode our competitive position, and sales were hurt by the ongoing influx of lower quality, lower priced imports from Asia," says Larry Sullivan, Chief Executive Officer. "The flood of offshore framed prints and substitute wall decor products has reduced our total market opportunity, created excess capacity within the industry, and put pressure on our margins. In addition to these challenges, continued and substantial copyright infringement by Chinese companies has also negatively impacted our performance. Weak copyright laws in many countries, combined with retailers willing to purchase counterfeit products, have reduced unit sales of prints while also causing us to increase our level of spending to combat the criminal behavior.

Art In Motion's management team is responding to these challenges," continued Sullivan. "We have streamlined our management structure to create a flatter organization, which has reduced our staffing costs and improved communication. We have increased the efficiency of our supply chain, reduced our manufacturing costs and consolidated our Canadian manufacturing, warehouse and office facilities under one roof. At the same time as we have driven down costs and increased efficiency, we have also bolstered our sales and marketing resources. While we expect margins to be under continued pressure as we fight to protect and grow market share, we will benefit from a more efficient and effective cost structure.

The reaction to our January 2007 product release has been very positive. Even though trade show attendance continues to be down, our sales at the early 2007 shows saw an overall increase from the same shows in 2006 - the first such increase in the last two years. We also are working to launch a new and significant framed art program with a major North American retailer in Q1 2007, which is expected to provide an incremental increase in sales.

While we believe these changes will improve our business, they may not be enough to sustain the current level of cash distributions. As a result, we will be taking the necessary steps of reducing cash distributions to $0.025 per unit per month and at the same time taking a focused look at strategic alternatives.

Regardless of the outcome of this process, the management at Art in Motion remains optimistic about the future of the Company, and is committed to achieving sustainable performance levels for all of its stakeholders," concluded Sullivan.

Strategic Review Process

The Board of Trustees has engaged Capital West Partners to assist the Board in its ongoing process of identifying and considering strategic alternatives for the Fund to enhance Unitholders value. The Board has established a special committee consisting of all of the independent trustees to oversee the strategic review process. While the Trustees and management have been periodically reviewing strategic value enhancement initiatives, the Trustees have decided to accelerate and now formalize the process in response to the uncertainty and challenges facing the income trust sector with respect to the Canadian Federal Government's October 31, 2006 announcement of its intention to tax income trusts. The strategic review process is intended to consider a range of value enhancement alternatives but there can be no assurance that the evaluation process will result in any transactions. The Fund does not intend to disclose developments regarding its evaluation of strategic alternatives unless the process results in a material change to the Fund such as the receipt of an acceptable acquisition offer or the approval of a transaction by the Board.

Cash Distributions

In recent quarters the Fund reported lower than expected revenue partially due to lower US dollar denominated sales and further impacted by low cost wall decor products being imported from China. The Fund's policy is to make distributions of available cash based on our estimate of Distributable Cash for the year less any reasonable reserves established by the Trustees.

Given recent sales volume and cash flows, the Board believes it is prudent to align monthly distributions with the distributable cash the Fund expects to generate in the next several quarters. Cash flows from foreign exchange gains have been significant in the past two years but can not be sustained going forward. Accordingly, the Fund will reduce its cash distributions on Fund units to $0.025 per month for the month of March, 2007 and does not anticipate declaring monthly distributions in excess of this amount until levels of distributable cash improve. The Fund recognizes the importance of regular distributions to our Unitholders and notwithstanding the recent challenges we have faced, we remain optimistic about the future of our business.



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

December 31, 2006, with comparative figures for 2005

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2006 2005
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Assets

Current assets:
Cash and cash equivalents $ 622 $ 3,448
Accounts receivable 5,850 8,802
Forward foreign exchange contracts 597 3,679
Inventories (note 3) 5,064 5,942
Prepaid expenses 442 919
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12,575 22,790
Forward foreign exchange contracts - 878
Interest rate swap - 136
Property, plant and equipment (note 5) 17,905 18,641
Deferred financing costs 10 26
Intangible assets (note 6) 4,455 11,548
Goodwill - 29,384

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$ 34,945 $ 83,403
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Liabilities and Unitholders' Equity

Current liabilities:
Accounts payable and accrued liabilities $ 4,293 $ 5,289
Distributions payable (note 4) 428 428
Long-term debt, current portion (note 7) 14,000 -
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18,721 5,717
Forward foreign exchange contracts 32 -
Long-term debt (note 7) - 20,000
Non-controlling interest (note 8) 9,261 18,639
Unitholders' equity 6,931 39,047

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$ 34,945 $ 83,403
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Commitments (note 11)
Contingencies (note 12)
Subsequent event (note 16)

See accompanying notes to consolidated financial statements.


Approved on behalf of Art In Motion Income Fund:

------------------------- -------------------------
Bob Quart, Trustee Wanda Costuros, Trustee


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

Year ended December 31, 2006, with comparative figures for 2005

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2006 2005
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Revenue:
Sales $ 49,688 $ 63,030
Royalties 1,777 2,776
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51,465 65,806
Cost of goods sold 36,190 45,775
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15,275 20,031

Expenses:
Amortization 7,903 6,432
General and administrative 3,800 5,494
Image and product development 1,413 1,778
Interest and bank charges 1,237 1,312
Selling 6,121 8,474
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20,474 23,490

Loss before undernoted items (5,199) (3,459)

Other earnings (expenses):
Interest rate swap (9) 307
Foreign exchange gain 457 2,056
Goodwill impairment (note 2(h)) (29,384) (34,826)
Gain on disposal of property, plant and
equipment - 20
Interest and miscellaneous 80 83
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(28,856) (32,360)
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Loss before non-controlling interest (34,055) (35,819)

Non-controlling interest (note 8) 6,757 10,157

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Net loss $ (27,298) $ (25,662)
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Basic and diluted loss per unit $ (3.40) $ (3.20)
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Weighted average number of units
outstanding 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
(Expressed in thousands of Canadian dollars except number of units)

Year ended December 31, 2006, with comparative figures for 2005

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Unithold- Accumu-
Number ers' lated Distrib-
of units capital earnings utions Total
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December 31, 2004 8,030,070 $ 72,714 $ 4,856 $ (4,128) $ 73,442

Activity for
the year - - (25,662) (8,733) (34,395)
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Balance,
December 31, 2005 8,030,070 72,714 (20,806) (12,861) 39,047

Activity for
the year - - (27,298) (4,818) (32,116)

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Balance,
December 31, 2006 8,030,070 $ 72,714 $ (48,104) $ (17,679) $ 6,931
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See accompanying notes to consolidated financial statements.


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

Year ended December 31, 2006, with comparative figures for 2005

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2006 2005
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Cash provided by (used in):

Operations:
Net loss $ (27,298) $ (25,662)
Items not involving cash:
Amortization 8,804 7,270
Gain on disposal of property, plant and
equipment - (20)
Goodwill impairment (note 2(h)) 29,384 34,826
Non-controlling interest (6,757) (10,157)
Founders' Employee Participation Plan
expenses (note 13) (2,300) 1,642
Net change in interest rate swap 136 (307)
Net change in forward foreign exchange
contracts 3,992 2,556
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5,961 10,148
Change in non-cash operating working
capital (note 15) 3,311 1,941
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9,272 12,089

Investments:
Purchase of property, plant and
equipment (959) (508)
Proceeds from sale of property, plant
and equipment - 20
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(959) (488)

Financing:
Bank indebtedness - (662)
Distributions paid or payable to
unitholders (4,818) (8,733)
Distributions paid or payable to
non-controlling interest (321) (582)
Due to related party - (57)
Repayment of long-term debt (6,000) -
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(11,139) (10,034)
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Increase (decrease) in cash and cash
equivalents (2,826) 1,567

Cash and cash equivalents, beginning of
year 3,448 1,881

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Cash and cash equivalents, end of year $ 622 $ 3,448
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Supplementary information:
Interest received $ 114 $ 63
Interest paid $ 935 $ 1,122
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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)

Year ended December 31, 2006

1. Organization and nature of operations:

Art In Motion Income Fund (the "Fund") is an unincorporated open-ended limited purpose trust established under the laws of the Province of British Columbia and governed by an Amended and Restated Declaration of Trust dated June 1, 2004. The Fund was created to acquire, indirectly, an interest in the business of publishing, framing and licensing of images and fine-art reproductions. The Fund commenced active operations on August 3, 2004 when it completed an initial public offering and the acquisition. The Fund holds, indirectly, a 75% interest in the units of Art In Motion Limited Partnership ("AIM LP"), a partnership established under the laws of the Province of Manitoba. The partnership is managed by Art In Motion GP Ltd., the general partner, over which the Fund has indirect control. The financial statements include the consolidated operations of AIM LP. The Fund intends to distribute, on a monthly basis, all cash available for distribution less reasonable reserves determined by the board of directors of AIM GP, including those required to fund debt service obligations and maintenance capital expenditures.

2. Significant accounting policies:

(a) Basis of presentation:

These financial statements have been prepared in accordance with Canadian generally accepted accounting principles and include the accounts of the Fund and its majority owned subsidiaries.

(b) Cash and cash equivalents:

Cash and cash equivalents include deposits in banks and short-term investments with original maturities of three months or less when acquired.

(c) Prepaid expenses:

Among other prepaid costs such as insurance and annual software maintenance, included in this amount are: costs to produce product catalogues, which are expensed to selling expenses over their estimated useful lives and trade show booth costs, which are expensed to selling expenses in the month the trade show occurs.

(d) Inventories:

Inventories are valued at the lower of cost and net realizable value. Cost includes attributable direct costs and applicable share of manufacturing overhead. The Fund periodically reviews its inventories for potential slow-moving or obsolete items and records inventories, net of any obsolescence provisions.

(e) Revenue recognition:

Revenue on the sale of products is recognized when goods are shipped and title to the goods has passed to the customer and collection is reasonably assured. The Fund makes a provision for estimated rebates and returns at the date of sale.

The Fund earns royalty income by assigning its rights to reproduce certain images on retail merchandise to third parties. Royalty income is recognized when a third party has sold goods that include the images and collection is reasonably assured.

(f) Property, plant and equipment:

Property, plant and equipment are stated at cost less accumulated amortization. The Fund periodically reviews its property, plant and equipment and an impairment charge is recorded when it is determined that the carrying amount of the assets is not recoverable and exceeds their fair value. Amortization is provided for over the estimated useful lives of the assets using the following methods and rates:



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Asset Basis Rate
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Buildings Declining balance 4%
Production equipment Declining balance 20%
Office and warehouse equipment Declining balance 20%
Computer hardware Declining balance 30%
Computer software Straight-line 5 years
Automobiles Declining balance 30%
Leasehold improvements Straight-line Lease term
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(g) Deferred financing costs:

Financing costs incurred to obtain credit facilities are deferred and amortized on a straight-line basis over the life of the related debt.

(h) Goodwill:

Goodwill is recorded at cost and not amortized. Management reviews the carrying value of goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Any excess in carrying value of goodwill over fair value will be charged to income in the period in which the impairment is determined. During the second quarter ending June 30, 2006, the Company performed its annual impairment test on goodwill. The current valuation of the Fund was determined to be lower than its then carrying value and required a goodwill impairment of $29,384,000 (2005 - $34,826,000) to be recorded. A significant cause in the decline of the estimated value of the Fund was due to lower sales volume, which in turn had significant impact on lower than expected cash available for distribution to all unitholders of the Partnership.

(i) Intangible assets:

Intangible assets are comprised of an image bank, artist agreements and customer base. Amortization is provided for on a straight-line basis over the estimated useful lives of the assets as follows:



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----------------------------------------------------------------------
Asset
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Image bank 2 years
Artist agreements 3 years
Customer base 4 years
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Management reviews the carrying value of intangible assets for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. An impairment charge is recorded when it is determined that the carrying amount of these assets is not recoverable and exceeds their fair value. During the second quarter ending June 30, 2006, the Company performed impairment tests on the intangible asset classes. The current valuation of the customer base was determined to be lower than its then carrying value and an impairment charge of $1,926,000 (2005 - $0) was recorded. This charge has been included in amortization for the year.

(j) Foreign currency translation:

The Fund's functional currency is the Canadian dollar. Monetary assets and liabilities denominated in a foreign currency are translated at the prevailing rate of exchange at the balance sheet date and non-monetary assets and liabilities are translated at their historic exchange rates. Revenue and expenses denominated in foreign currencies are translated at the average exchange rates for the period. Any gains or losses on translation are included in income.

(k) Derivative financial instruments:

Derivative financial instruments are utilized by the Fund in the management of its foreign currency exposures.

The Fund enters into forward foreign exchange contracts to hedge its exposure to currency fluctuations for net U.S. dollar cash flows. The forward contracts are marked to market with the current fair value recorded on the balance sheet and the change included in other earnings on the statement of operations. The value is allocated between current and long-term portions based on the settlement date of the related contracts.

The Fund had entered into an interest rate swap agreement, which effectively fixed the variable interest rate for long-term debt at 5.4% per annum for the three-year term of the loan. It was marked to market with its fair value recorded on the balance sheet and the change included in other earnings on the statement of operations. During 2006, the interest rate swap was redeemed for proceeds of $127,000.

(l) Income tax:

As the Fund allocates all of its taxable income and taxable capital gains to unitholders, the Fund itself will not be subject to income taxes. The tax bases of the Fund's net assets exceed the accounting bases by approximately $28 million.

(m) Use of estimates:

The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Significant areas requiring the use of management estimates relate to the determination of the collectibility of accounts receivable, net realizable value of inventories, useful lives of property, plant and equipment, valuation of goodwill and intangible assets and provisions for current liabilities. Actual results could differ from these estimates.

(n) Earnings (loss) per unit:

Basic earnings (loss) per unit is calculated by dividing the net earnings (loss) by the weighted average number of units outstanding during the reporting period. Diluted earnings (loss) per unit is calculated by dividing the net earnings (loss) by the sum of the weighted average number of units outstanding used in the basic earnings (loss) per unit calculation and the number of units that would be issued assuming conversion of all potentially dilutive convertible securities using the treasury stock method.

For the year ended December 31, 2006, there were 535,338 (2005 - 492,804) class B LP units that were potentially dilutive securities which have been excluded in the diluted per share calculation as the Fund is in a loss position.

(o) Stock-based compensation:

The employees of the Fund receive remuneration from GVP Holdings Inc., the founder of the Art In Motion business, based on distributions to and market value of certain class C LP units (note 13). The Fund expenses and accrues for distributions to be made to employees under the plan when it is likely that such distributions will be made. Cash entitlements under the plan are accounted for over their vesting period based on the value of the entitlement at each reporting date. The Fund recognizes a charge attributable to the class C LP units granted under the plan over their vesting period based on their fair value at grant date. The resulting compensation expense is charged to the statement of operations with any amounts received or to be received from GVP Holdings Inc. recognized as an offset to non-controlling interest. Based on current distributions trends, management believes that it is unlikely to achieve the required distribution levels required to fund this plan, and as such reversed all prior accruals under the plan during period ended December 31, 2006.

3. Inventories:



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2006 2005
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Artprints $ 1,710 $ 2,209
Framing materials 2,334 2,942
Finished goods 1,020 791

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$ 5,064 $ 5,942
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4. Related party transactions:

Included in distributions payable is $26,767 which represents distributions on class B LP units for 2006 (2005 - $26,767) which were paid in the following January to the Non-controlling Interest (GVP Holdings Inc.).

5. Property, plant and equipment:



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Net book
Accumulated value
Cost amortization 2006
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Land $ 4,310 $ - $ 4,310
Buildings 12,187 1,078 11,109
Production equipment 2,505 1,106 1,399
Office and warehouse
equipment 594 266 328
Computer hardware 522 268 254
Computer software 1,094 792 302
Automobiles 33 18 15
Leasehold improvements 218 30 188

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$ 21,463 $ 3,558 $ 17,905
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Net book
Accumulated value
Cost amortization 2005
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Land $ 4,310 $ - $ 4,310
Buildings 11,500 644 10,856
Production equipment 2,510 625 1,885
Office and warehouse
equipment 653 174 479
Computer hardware 584 204 380
Computer software 1,143 486 657
Automobiles 33 11 22
Leasehold improvements 61 9 52

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$ 20,794 $ 2,153 $ 18,641
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On January 18, 2007, the Fund sold its Brigantine facility which included land and building with a net book value of approximately $6.1 million (note 16).

6. Intangible assets:



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Net book
Accumulated value
Cost amortization 2006
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Image bank $ 501 $ 501 $ -
Artist agreements 8,290 6,678 1,612
Customer base 10,880 8,037 2,843

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$ 19,671 $ 15,216 $ 4,455
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Net book
Accumulated value
Cost amortization 2005
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Image bank $ 501 $ 355 $ 146
Artist agreements 8,290 3,915 4,375
Customer base 10,880 3,853 7,027

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$ 19,671 $ 8,123 $ 11,548
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7. Bank indebtedness and long-term debt:

The Fund has available a $10,000,000 (2005 - $15,000,000) 364-day committed operating facility ("Operating Loan"). The Operating Loan is available in Canadian or U.S. equivalent dollars; however, the maximum USD advance is $8,300,000 (2005 - $12,000,000). The Operating Loan bears interest at a floating rate based on the Canadian or US dollar prime rate depending on the currency borrowed. At December 31, 2006, nil (2005 - nil) was outstanding under the Operating Loan.

The Fund has a US$22,800,000 364-day committed line to allow AIM LP to enter into a maximum of US$60,000,000 in forward foreign exchange contracts (note 9).

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. 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 2006, the interest rate swap was redeemed for proceeds of $127,000. Additionally, during the year, the Fund repaid $6,000,000 against the Capital loan, and a further $8,000,000 subsequent to the sale of the Brigantine facility (note 16). Although the loan is presented as a current liability, the Fund plans to renegotiate the remaining $6,000,000 balance in 2007.

The credit facilities are secured by a general security agreement creating a first security interest in the personal property of AIM LP, a first charge over the land and buildings and a floating charge over all other acquired real property of AIM LP. The credit facilities are subject to customary terms and conditions, leverage and interest coverage ratios.

As of December 31, 2006, the Fund is in compliance with its covenants.

8. Non-controlling interest:

The class B LP units (535,338 units) are exchangeable into units of the Fund (as of January 30, 2005) on the basis of one class B LP unit for each Fund unit.

The class C LP units (2,141,352 units) are exchangeable into units of the Fund after the Subordination End Date and in other limited circumstances at the option of GVP Holdings Inc. on the basis of one class C LP unit for each Fund unit.

Non-controlling interest is charged with its share of net loss as well as full charges for the Founders' Employee Participation Plan (note 13), offset by distributions made against class B and class C LP units.

9. Financial instruments:

Risk management activities:

The Fund enters into forward foreign exchange contracts to hedge its foreign currency exposure on export sales. The contracts oblige the Fund to sell US dollars in the future at predetermined exchange rates. At December 31, 2006, the Fund had forward foreign exchange contracts to sell $26,500,000 (2005 - $41,500,000) in US dollars expiring at various dates to March 2008. The rates on the forward contracts range from 1.123 to 1.205 Canadian for each US dollar.

Fair values:

The carrying values of cash and cash equivalents, accounts receivable and accounts payable and accrued liabilities and bank indebtedness approximate their fair values due to the relatively short periods to maturity of the instruments.

The carrying value of the long-term debt approximates its fair value as the debt has a floating rate of interest. The forward foreign exchange contracts are carried at fair value on the consolidated balance sheet.

10. Concentration of credit risk:

For the year ended December 31, 2006, approximately 10% (2005 - 22%) of gross sales were earned from one customer (2005 - two customers for 12% and 10%, respectively).

As at December 31, 2006, approximately 90% (2005 - 91%) of the trade accounts receivable were denominated in United States dollars.

11. Commitments:

The Fund has entered into operating leases for certain equipment and premises. The annual operating lease obligations over the remaining term of the leases are approximately as follows:



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2007 $ 920
2008 748
2009 627
2010 605
2011 453
2012 and thereafter -

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$ 3,353
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12. Contingencies:

At December 31, 2006, the Fund had $102,507 (USD $87,959) (2005 - $182,634 (USD $157,037)) in letters of credit outstanding, issued in relation to inventory in transit.

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

GVP Holdings Inc., the founder of the Art In Motion business, established the FEPP to remunerate employees of the Fund and will compensate the Fund for all payments under the FEPP.

Under the FEPP, 503,200 of the class C LP units are allocated to employees from which quarterly payments to employees are based on distributions received on those units by GVP Holdings Inc. These class C LP units vest to the employees at the end of three years from the date of grant, subject to subordination provisions.

Based on current 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 in the second quarter. The net charges reversed in the current year totals $2,300,000. The net reversal of the FEPP was charged to the various expense categories as follows: cost of goods sold $1,029,000, general and administrative $692,000, image and product development $180,000 and selling $399,000. During the year ended December 31, 2005, the Fund recognized compensation expense relating to the FEPP in the amount of $1,641,832. Amounts for both years were offset by charges to non-controlling interest.

14. 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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2006 2005
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Artprints $ 5,723 $ 8,227
Framed and other 27,121 36,659
Decographs 15,861 18,808
Transfers 3,060 3,052
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Gross sales 51,765 66,746
Discounts and allowances (2,077) (3,716)
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Sales 49,688 63,030
Royalties 1,777 2,776

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$ 51,465 $ 65,806
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The Fund sells to customers located in the following regions:



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2006 2005
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Canada $ 5,120 $ 7,247
United States 41,326 51,369
Europe 4,410 7,160
Other 909 970
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Gross sales 51,765 66,746
Discounts and allowances (2,077) (3,716)

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Sales $ 49,688 $ 63,030
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Royalty income is earned almost entirely from customers located in the United States.

As at December 31, 2006, $323,198 (2005 - $189,417) of the Fund's assets were located in the United States and the remainder of the assets were located in Canada.

15. Supplemental information:



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2006 2005
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Change in non-cash operating working capital:
Accounts receivable $ 2,952 $ 2,933
Inventories 878 528
Prepaid expenses 477 407
Accounts payable and accrued liabilities (996) (1,463)
Distributions payable - (464)

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$ 3,311 $ 1,941
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16. Subsequent event:

On January 18, 2007, the Fund sold its Brigantine facility for gross proceeds of $9.6 million. 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.

Management's Discussion and Analysis - March 2, 2007

Art In Motion Income Fund (the "Fund") was launched on August 3, 2004. The accompanying financial statements present the Fund's results from January 1, 2006 to December 31, 2006 with comparative information for 2005. Management's Discussion and Analysis should be read in conjunction with the audited consolidated financial statements and accompanying notes of Art In Motion Income Fund for the year ended December 31, 2006. Results are reported in Canadian dollars unless stated otherwise and have been prepared in accordance with Canadian generally accepted accounting principals ("Canadian GAAP").

Overview of the Fund

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.

Discussion of Annual Results

Overall Performance

- The Fund's revenue was $51.5 million.

- Gross profit was $15.3 million or 29.7% of revenue.

- The Fund posted a net loss of $27.3 million after non-controlling interest and after reducing the carrying value of goodwill by $29.4 million.

- Earnings before interest, taxes depreciation and amortization ("EBITDA") (1) were $7.0 million for an EBITDA margin of 13.7%.

- Basic and diluted loss per unit was $3.40.

- The Fund generated $9.3 million in cash flow from operations including changes in non-cash working capital and ended the year with $0.6 million of cash on hand.

- During the year the Fund made principal payments of $6.0 million on its capital loan.

- The Fund generated distributable cash (2) of $5.0 million and paid cash distributions of $5.1 million.

- The Fund had total assets of $34.9 million and $18.8 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".



Selected Annual Consolidated Financial Information

-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in thousands of dollars except
per unit amounts) 12 months ended 12 months ended
Dec 31, 2006 Dec 31, 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue 51,465 65,806
Cost of sales(1) 36,190 45,775
-------------------------------------------------------------------------
Gross profit 15,275 20,031
29.7% 30.4%
Operating expenses(1)(2)(3) 49,330 55,850
Non-controlling interest (6,757) (10,157)
-------------------------------------------------------------------------
Net earnings (loss) (27,298) (25,662)
-53.0% -39.0%
Add (deduct)
Non-controlling interest (6,757) (10,157)
Founders' employee participation plan(1) (2,300) 1,642
Interest 1,072 1,099
Amortization(3) 8,804 7,270
Goodwill Impairment(3) 29,384 34,826
Net change in interest rate swap 136 (307)
Net change in forward foreign exchange
contracts 3,992 2,556
-------------------------------------------------------------------------
EBITDA(4) 7,033 11,267
13.7% 17.1%
-------------------------------------------------------------------------

Basic and diluted earnings per unit (3.40) (3.20)

Total Assets 34,945 83,403
Total Long Term Liabilities (including
current portion) 14,000 20,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------

(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 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.


Goodwill and Intangible Assets

Under 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. Following a fair value assessment of net assets in the second quarter of 2005, the Fund reduced the carrying value of goodwill by $34.8 million and did not identify any impairment in the value of identifiable intangible assets or property plant and equipment.

In the second quarter of 2006 after completion of its annual impairment tests, the Fund concluded that a reduction in the carrying value of goodwill was required in the amount of $29.4 million. Further the carrying value of identifiable intangible assets was reduced by $1.9 million. These reductions are largely a result of lower revenue and cash flow generated in recent quarters.

Founders' Employee Participation Plan

In conjunction with the fair value assessment of assets, management reviewed the charges related to the Founders' Employee Participation Plan ("FEPP"). Based on current earnings, distributions and terms of the FEPP Agreement, management concluded that certain provisions of the plan will not likely be achieved. All prior accruals related to the FEPP were reversed in the second quarter of 2006. The amount of the charges reversed in the second quarter totals $2.6 million. The reversal of the FEPP charges, while reducing labour expense, had no effect on net earnings, EBITDA or distributable cash as any charges were funded by GVP. The net amount of this reversal was fully absorbed in the non-controlling interest both on the balance sheet and statement of operations.

The plan remains in place and the notional units continue to vest to the benefit of the plan members. The Fund will not accrue any amounts until the valuation provisions of the plan, which are closely linked to the subordination provisions of the Class C LP units, are materially achieved.

Revenue

Revenue for the year ended December 31, 2006 was $51.5 million compared to $65.8 million for the year ended December 31, 2005. Customer discounts and allowances were 4% of gross sales for 2006 compared to almost 6% in 2005. The reduction in customer allowances was related to several customers not achieving their expected sales volumes. US-dollar denominated gross sales were down 16% this year compared to last year. Approximately 90% of our gross sales for the year were denominated in US dollars. The strengthening of the Canadian dollar relative to the US dollar continues to impact our gross sales. The average exchange rate for 2006 was down approximately 6% compared to 2005, from $1.21 to $1.13 Canadian for each US dollar.

Our sales mix by product segment was comparable to 2005. Loose prints represented 11% of our gross sales in 2006 compared to 12% in 2005. Frame products represented 52% this year compared to 55% last year. Unframed decographs increased to 31% of gross sales in 2006 compared to 28% in 2005. Canvas transfers increased to 6% in 2006 from 5% in 2005. Geographically our sales in the United States increased to 80% of gross sales in 2006 up from 77% in 2005. Sales to our Canadian customers represented 10% or gross sales in 2006 compared to 11% in 2005 while sales outside of North America represented 10% of gross sales compared to 12% in 2005.

Sales across all of our channels were weaker than the prior year as a number of our key customers experienced slower inventory turns and the lower value of the US dollar relative to the Canadian dollar impacted our gross sales. Lower priced, as well as substitute wall decor products imported from China caused retailers to shift some of their sourcing and to lower retail price points. Overall, our independent retail customers showed a smaller decrease in sales than our large customers with multiple locations. Restructuring at some of our larger customers has also impacted the timing of new program decisions with some customers delaying new program deliveries until 2007. While we have experienced decreases in sales with a number of our key accounts, some of our large customers have had significant increases in sales over 2005.

Expenses

Gross profit for the year ended December 31, 2006 was $15.3 million or 29.7% of sales compared to $20.0 million or 30.4% of sales for the year ended December 31, 2005. Cost of sales for the year ended December 31, 2006 included a net credit of $1.0 million related to the reversal of accrued FEPP (see "Founders' Employee Participation Plan") charges while the year ended December 31, 2005 included a charge of $0.7 million related to the FEPP. Excluding these non-cash charges, gross profit for the year ended December 31, 2006 was $14.2 million or 27.7% of sales compared to $20.7 million or 31.5% for the year ended December 31, 2005. Lower product 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 $49.3 million for the year ended December 31, 2006 compared to $55.9 million for the year ended in 2005. Operating expenses for the year ended December 31, 2006 included a credit of $1.3 million related to the reversal of accrued charges for the FEPP. In 2006 the Fund reduced the carrying value of goodwill by $29.4 million. In 2005 the carrying value of goodwill was reduced by $34.8 million. In the second quarter of 2006 the Fund also reduced the carrying value of identifiable intangible assets by $1.9 million. Excluding the adjustments for the FEPP, goodwill and intangible assets, operating expenses were $19.3 million for the year ended December 31, 2006 compared to $20.8 million for the year ended December 31, 2005. The net decrease of $1.5 million in operating expense for 2006 was related to a $2.3 million reduction in selling, general and administrative expenses, a $0.4 million reduction in amortization expense, a $0.1 million decrease in interest and miscellaneous income and a $1.1 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 salary and benefit costs and lower sales commissions paid to outside sales representatives.

Net Earnings and EBITDA

For the year ended December 31, 2006, the Fund posted a net loss of $27.3 million after non-controlling interest compared to a net loss of $25.7 million for the year ended December 31, 2005.

EBITDA was $7.0 million for the year ended December 31, 2006 compared to $11.3 million for the year ended December 31, 2005.

Summary of Quarterly Results

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



--------------------------------------------------------------------------
(in thousands of
dollars except per unit 2006 2006 2006 2006
amounts and percentages) Q4 Q3 Q2 Q1
--------------------------------------------------------------------------
Revenue 11,021 12,288 13,903 14,253
Gross Profit 3,000 3,626 5,224 3,425
Gross Profit % 27.2% 29.5% 37.6% 24.0%
Operating expenses 5,782 4,836 33,268 5,444
Non-Controlling Interest (688) (295) (5,085) (689)
Net earnings (loss) (2,094) (915) (22,959) (1,330)
EBITDA 1,222 1,641 2,200 1,970
EBITDA % 11.1% 13.4% 15.8% 13.8%
Distributable cash 180 1,276 1,896 1,650
Distributions 1,285 1,284 1,285 1,285
Payout ratio 714% 101% 68% 78%
Basic and diluted
earnings (loss) per unit (0.26) (0.11) (2.86) (0.17)
Weighted average
number of units
outstanding 8,030,070 8,030,070 8,030,070 8,030,070
--------------------------------------------------------------------------

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

Liquidity and Capital Resources

Cash Flow

During the year ended December 31, 2006 the Fund generated cash from operations of $9.3 million including changes in non-cash working capital compared to $12.1 million for the year ended December 31, 2005. Excluding changes in non-cash working capital, the Fund generated cash flow of $6.0 million in 2006 compared to $10.1 million in 2005.

At December 31, 2006 the Fund had a net cash position of approximately $0.6 million. Our operating line was not used as of December 31, 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 was drawn at the time of Fund's IPO on August 3, 2004. During the second half of 2006 the Fund made payments totaling $6.0 million against the principal of the loan leaving an outstanding balance of $14.0 million. In conjunction with these payments, 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 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.

Subsequent to the year end, the Fund made an additional principal payment of $8.0 million against the capital loan using the majority of the net proceeds from the sale of its building and real estate at 2000 Brigantine Drive, Coquitlam, BC (see "Sale of Building and Real Estate").

The Fund has a 364-day committed operating facility with a $10 million CAD limit based on various margin requirements. The operating facility was unused at December 31, 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 December 31, 2006 the Fund had US$26.5 million face value of contracts with maturities through March 2008. These contracts have exchange rates from 1.12 USD/CAD to 1.25 USD/CAD and a weighted average rate of 1.18 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. During the year the Fund 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 year ended December 31, 2006 the Fund spent approximately $1.0 million on capital items compared to $0.5 million for the year ended December 31, 2005. In 2006 the Fund spent approximately $688,000 on tenant improvements and fixtures at our Hartley Avenue facility (see "Sale of Building and Real Estate") and $157,000 on tenant improvements, furniture and fixtures for a new showroom at the World Market Center in Las Vegas, Nevada. In 2005 the Fund spent approximately $157,000 for fixtures and equipment for our expanded warehouse in Ferndale, Washington.

Sale of Building and Real Estate

In the third quarter of 2006 AIM LP listed for sale its building and real estate at 2000 Brigantine Drive, Coquitlam, BC. In the fourth quarter of 2006 AIM LP accepted an offer to sell the property and the sale transaction was closed on January 18, 2007. AIM LP received net proceeds of approximately $9.4 million ($9.6 gross proceeds) which will result in a net book gain of approximately $3.3 million in the first quarter of 2007.

Cash Distributions

The Fund makes monthly cash distributions to Unitholders of record on the last business day of the month. The distributions are paid on or about the 15th of the month following the end of the month to which such distributions relate. The amount of cash available for distribution will equal the interest and any principal repayments on the Trust Notes and distributions on or in respect of the Trust Units received by the Fund, together with all amounts, if any, received by the Fund from any other permitted investments, less amounts we estimate will be required for expenses of the Fund and other obligations of the Fund, cash redemptions or repurchases of Units, and tax liability and any reasonable reserves established by the Trustees.

The Trustees periodically review cash distributions taking into account the Fund's current and prospective performance. Some of the factors considered in making decisions related to distributions include cash amounts to service debt obligations, maintenance capital expenditures, and other items considered to be prudent.

For the year ended December 31, 2006, the Fund declared twelve 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.

Prior to the third quarter of 2006 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 year ended December 31, 2005 is $20,000 lower than was previously reported.

During 2006 the Fund generated distributable cash of $5.0 million and made cash distributions of $5.1 million for a payout ratio of 103%. During the year $4.4 million of cash flows were the result of foreign exchange gains. Foreign exchange gains are expected to be considerably lower in future quarters.

In the fourth quarter of 2006 the Fund generated distributable cash of $0.2 million. In the same period, AIM LP spent $0.8 million on capital expenditures of which $0.7 million related to tenant improvements and relocation costs for its facilities consolidation project. Excluding this portion of the capital expenditures, the Fund generated $0.9 million in distributable cash and made cash distributions of $1.3 million.

Since inception the Fund generated distributable cash of $19.7 million and made cumulative distributions of $19.3 million for a payout ratio of 98%.

Reconciliation of Distributable Cash to Cash Flow from Operations



--------------------------------------------------------------------------
--------------------------------------------------------------------------
(in thousands
of dollars
except per
unit amounts
and 3 months ended 3 months ended 3 months ended 3 months ended
distribution December 31, December 31, December 31, December 31,
ratio) 2006 2005 2006 2005
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash flow from
operations 3,314 985 9,272 12,089
Deduct
Changes in
non-cash
working
capital (1) (2,338) 1,345 (3,311) (1,941)
Capital
expenditures (797) (65) (959) (508)
--------------------------------------------------------------------------
Distributable
cash (2) 179 2,265 5,002 9,640
--------------------------------------------------------------------------

Distributions
on Fund units 1,205 1,204 4,818 8,733
Distributions
on unsubord-
inated non-
controlling
interest (3) 80 80 321 582
Distributions
on subordin-
ated non-
controlling
interest (3) - - - -
--------------------------------------------------------------------------
Distribution
paid 1,285 1,284 5,139 9,315
--------------------------------------------------------------------------

Distribution
ratio 718% 57% 103% 97%
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding
units and per
unit amounts
Total units
Outstan-
ding (3) 10,706,760 10,706,760 10,706,760 10,706,760
Distributable
cash per unit $0.02 $0.21 $0.47 $0.90
Distributions
paid per unit $0.12 $0.12 $0.48 $0.87
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Outstanding
units
and per unit
amounts (exc-
ludes Class C
LP units)
Total units
outstanding (3) 8,565,408 8,565,408 8,565,408 8,565,408
Distributable
cash per unit $0.02 $0.26 $0.58 $1.13
Distributions
paid per unit $0.15 $0.15 $0.60 $1.09
--------------------------------------------------------------------------
--------------------------------------------------------------------------

(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.


Contractual Obligations

The table below presents the Fund's obligations for operating leases related to equipment and premises and for repayments of long term debt.



-------------------------------------------------------------
Operating Term
(in thousands of dollars) Leases Debt Total
-------------------------------------------------------------
Less than 1 year 920 14,000 14,920
1 - 3 years 1,980 - 1,980
4 - 5 years 453 - 453
After 5 years - - -
-------------------------------------------------------------
Total 3,353 14,000 17,353
-------------------------------------------------------------


Operating lease commitments at December 31, 2006 were $3.4 million compared to $3.5 million at December 31, 2005. Term debt was $14.0 million at December 31, 2006 compared to $20.0 million at December 31, 2005. The term debt matures in August 2007 at which time we plan to re-finance the outstanding amount.

Off-Balance Sheet Arrangements

The Fund had no changes in its off-balance sheet arrangements with the exception of the forward foreign exchange contracts discussed below in Financial Instruments.

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.

Discussion of Fourth Quarter Results

Selected Consolidated Financial Information



-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in thousands of dollars except 3 months ended 3 months ended
per unit amounts) Dec 31, 2006 Dec 31, 2005
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Revenue 11,021 15,096
Cost of sales(1) 8,021 10,886
-------------------------------------------------------------------------
Gross profit 3,000 4,210
27.2% 27.9%
Operating expenses(1)(2)(3) 5,782 5,461
Non-controlling interest (688) (540)
-------------------------------------------------------------------------
Net earnings (loss) (2,094) (711)
-19.0% -4.7%
Add (deduct)
Non-controlling interest (688) (540)
Founders' employee participation plan(1) - 309
Interest 245 275
Amortization(3) 1,784 1,833
Goodwill Impairment(3) - -
Net change in interest rate swap - (203)
Net change in forward foreign exchange
contracts 1,975 1,641
-------------------------------------------------------------------------
EBITDA(4) 1,222 2,604
11.1% 17.2%
-------------------------------------------------------------------------

Basic and diluted earnings per unit (0.26) (0.09)

Total Assets 34,945 83,403
Total Long Term Liabilities (including
current portion) 14,000 20,000
-------------------------------------------------------------------------
-------------------------------------------------------------------------

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

(2) 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.

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


Revenue

Revenue for the quarter ended December 31, 2006 was $11.0 million compared to $12.3 million for the third quarter of 2006 and $15.1 million for the quarter ended December 31, 2005. Approximately 90% of our gross sales for the quarter were denominated in US dollars. The average USD/CAD foreign exchange rate for the quarter was down approximately 3% compared to the same quarter in 2005. Revenues did not meet expectations due in part to a December order that was cancelled and other shipments that customers delayed to January. Otherwise revenues for the quarter continued to be negatively impacted by oversea sourcing by significant key accounts and reduced consumer demand for traditional wall decor products.

Expenses

Gross profit for the quarter ended December 31, 2006 was $3.0 million or 27.2% of sales compared to $4.2 million or 27.9% of sales for the quarter ended December 31, 2005. The quarter last year includes $0.2 million of non-cash charges related to the FEPP (see "Founders' Employee Participation Plan"). Excluding these non-cash charges, gross profit for the quarter ended December 31, 2005 was $4.4 million or 29.0% of sales. There were no charges related to the FEPP in the fourth quarter of this year. Lower sales volume and fixed manufacturing overhead costs impacted our gross margin.

Operating expenses were $5.8 million for the quarter ended December 31, 2006 compared to $5.5 million for the same quarter in 2005 which includes a non-cash charge of $0.2 million related to the FEPP. Excluding this charge, operating expenses were $5.3 million for the quarter last year. There were no FEPP charges in the quarter this year. The net increase of $0.5 million in operating expense for the quarter this year was related to a $0.7 million reduction in interest and miscellaneous income and a $0.5 million increase in charges related to the change in the value of our foreign exchange and interest rate hedges which were offset by a $0.6 million reduction in selling, general and administrative expenses and a $0.1 million reduction in amortization expense. Selling, general and administrative costs were lower as a result of lower selling expenses.

Net Earnings and EBITDA

For the quarter ended December 31, 2006, the Fund posted a net loss of $2.1 million after non-controlling interest. The Fund posted a net loss of $0.7 million for the same quarter in 2005.

EBITDA was $1.2 million for the quarter this year compared to $2.6 million for the same quarter last year.

Disclosure Controls and Procedures

As required by Multilateral Instrument 52-109 ("MI 52-109"), the Fund's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") will be making certifications related to the information contained in the Fund's annual filings. As part of the certification, the CEO and CFO must certify that they are responsible for establishing and maintaining disclosure controls and procedures to ensure that material information about the Fund and its subsidiaries is made known to them and that they have evaluated the effectiveness of the disclosure controls and procedures as of the end of the period covered by the annual filings.

Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Fund is processed and reported on a timely basis to the Fund's management, including the CEO and CFO, as appropriate, to allow timely decisions with respect to required disclosure. The Fund's management, including the CEO and CFO, does not expect that the implemented disclosure controls will prevent or detect all misstatements due to error or fraud. There are inherent limitations in all control systems and an evaluation of control can provide only reasonable, not absolute assurance, that all control issues and instances of fraud or error, if any, have been detected. The Fund has adopted or formalized such controls and procedures as it believes are necessary and consistent with its business and internal management and supervisory practices.

As of December 31, 2006, the Fund management, under the supervision of, and with the participation of the CEO and CFO evaluated the effectiveness of the design and operation of the disclosure controls and procedures. Based on this evaluation, the CEO and CFO have concluded that as at December 31, 2006, the Fund's disclosure controls and procedures were effective. Management has also concluded that during the year ended December 31, 2006, no changes were made to internal controls over financial reporting that would have materially affected, or would be reasonably considered to materially affect these controls.

Critical Accounting Estimates

We believe that the accounting policies that are critical to our business relate to our use of estimates regarding the collectability of accounts receivable and valuation of inventories. The preparation of financial statements in accordance with Canadian GAAP requires that we make assumptions and estimates that can have a material impact on our results of operations as reported on a periodic basis.

Receivables and Inventory

Due to the nature of our business and the credit terms we provide to our customers, estimates and judgments are inherent in the ongoing assessment of the recoverability of our accounts receivable. We set up reserves for uncollectible accounts. We also set up reserves for product returns or customer credits based on historical data. In addition, assessments and judgments are inherent in the determination of the net realizable value of our inventories. Inventory is valued at the lower of cost and net realizable value. While we apply judgment based on assumptions believed to be reasonable in the circumstances, actual results can vary from these assumptions. It is possible that materially different results would be reported using different assumptions.

Goodwill and Intangible Assets Impairment Tests

Goodwill is recorded at cost, and is not amortized. Intangible assets, comprising of image bank, artist agreements, and our customer base are recorded at cost and amortized over their estimated useful life. At least annually, management reviews the carrying value of intangible assets and goodwill for potential impairment. Among other things, this review considers the fair value of the business based on discounted estimated cash flows. If circumstances indicate that impairment in the value of these assets has occurred, we record the impairment against the earnings of the current period. During the second quarter ending June 30, 2006, our goodwill was written down by $29.4 million and intangible assets were written down by $1.9 million due primarily to a decline in the estimated value of the Fund as a result of lower sales volumes. As at December 31, 2006, there was no impairment in intangible assets.

Founders Employee Participation Plan (FEPP")

Under the FEPP, employees are entitled to receive quarterly payments based on distributions received on Class C LP units by GVP Holdings Inc. and they will receive the value of those units, if those units have met the subordination release provisions. We are required to estimate if the units will meet the subordination criteria before the FEPP expires in 2009. Changes in our estimate of whether we will meet the subordination criteria will result in an adjustment in the accrual for the FEPP in the consolidated financial statements.

Changes in Accounting Policies Including Initial Adoptions

Our significant accounting policies are provided in the notes to our financial statements dated December 31, 2006. These policies are consistent with the policies followed for the period ended December 31, 2005.

The following standards regarding financial instruments are effective for January 1, 2007; 3855 - "Financial Instruments - Recognition and Measurement", 3861 Financial Instruments -- Disclosure and Presentation, 1530 - "Comprehensive Income", and 3865 - "Hedges". The standards require all financial instruments other than held-to maturity investments, loans and receivables to be included on a company's balance sheet at their fair value. Held-to maturity investments, loans and receivables would be measured at their amortized cost. The standards create a new statement for comprehensive income that will include changes in the fair value of certain derivative financial instruments. Management does not believe that these new standards will have a significant impact on the financial statements of the Fund.

Financial Instruments

We use currency derivatives to manage our exposure to fluctuations in exchange rates between the Canadian and US dollar. Approximately 90% of our sales are denominated in US dollars. While a portion of our costs are in US dollars, each period we normally have net US dollars to sell. Our practice is to enter into forward foreign exchange contracts to minimize our exposure to currency fluctuations related to these net US dollars. At December 31, 2006 we had US$26.5 million face value of contracts with maturities through March 2008. These contracts have exchange rates from 1.12 USD/CAD to 1.25 USD/CAD and a weighted average rate of 1.18 USD/CAD. Canadian GAAP requires that we record our sales at the USD/CAD exchange rate at the time of the sale. We then record an unrealized gain or loss based on the mark-to-market ("MTM") value of our forward foreign exchange contracts in the statement of operations. Based on our existing contracts in place at December 31, 2006, our net earnings for the twelve months then ended included a $4.0 million unrealized loss related to the drop in the MTM value of our foreign exchange hedges. At December 31, 2006 our forward foreign exchange contracts were booked as a net asset of $0.6 million based on their MTM value.

Outlook

The market influences which negatively impacted results in 2006 are not expected to be greatly diminished in 2007. Major customers continue to comment on high inventory levels. Their plans to source from outside of North America will remain as long as they perceive a competitive advantage. Consumer demands for alternative and substitute wall products for our more traditional look, while appearing to be slowing in growth will not be a trend that reverses soon. Uncertainties in the U.S. housing market could put further pressure on our market sector. Despite these challenges, we do feel that we are better positioned to compete in a difficult and competitive environment.

The consolidation of our Coquitlam facilities will create a significant book gain in the first quarter of 2007 and reduce our operating costs going forward. Changes made to the management of our sales and marketing resources are beginning to have a positive impact. Early sales reaction to our January product release was encouraging. While attendance at tradeshows has continued to be down versus prior years, we have been able to achieve sales increases compared to the same shows last year. Our larger accounts also remain attracted to our product lines and we continue to work with them to develop new programs. We will be launching a significant and new sales program with a major retailer in Q1. In addition, changes that we have made elsewhere within our organization have improved communication as well as our cost structure. While continuing to develop a lean organization, we are still investing new resources into the marketplace. We are optimistic that operating results will improve in the first quarter.

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, 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.

As of March 2, 2007, 8,030,070 Units and 2,676,690 Special Voting Units of the Fund were issued and outstanding. In addition, 535,338 Class B Units and 2,141,352 Class C Units of AIM LP, which are exchangeable for Units of the Fund in accordance with terms of the Exchange Agreement between, among others, the Fund and AIM LP, were issued and outstanding as of March 2, 2007.

Contact Information