Art In Motion Income Fund
TSX : AIM.UN

Art In Motion Income Fund

March 03, 2008 08:00 ET

Art In Motion Income Fund Appoints Trustees and Announces 2007 Annual and Fourth Quarter Results

VANCOUVER, BRITISH COLUMBIA--(Marketwire - March 3, 2008) - Art In Motion Income Fund (the "Fund") (TSX:AIM.UN) today announced that the Fund has appointed two new Trustees to its Board of Trustees and reported its financial results for the year ended December 31, 2007.

Appointment of new Trustees

Rob Normandeau, Chair of the Board of Trustees of Art In Motion Income Fund, announced that Brian Luborsky and David Wood have been appointed to the Boart of Trustees of the Fund effective February 29, 2008. Mr. Luborsky and Mr. Wood have also been appointed as Directors of Art in Motion GP Ltd the operating subsidiary of the Fund.

Mr. Luborsky is the President and Chief Executive Officer of Premier Salons, a private company that he founded in 1984. Premier Salons operates 375 salons and spas throughout Canada and the United States. Mr. Luborsky has more that 20 years experience and earned a Bachelor of Commerce from the University of Toronto. He received his Chartered Accountant designation in 1982 while working at Coopers & Lybrand. Mr. Luborsky is a Trustee of ATS Andlauer Income Fund and a Trustee of General Donlee Income Fund.

Mr. Wood is the Vice-President, Finance for the Municipal Group of Companies in Bedford, Nova Scotia. Mr. Wood received a Bachelor of Business Administration Degree with a major in accounting from Acadia University in 1984. He received his Certified Management Accountant Designation in 1994. Prior to joining Municipal Group in 1988, Mr. Wood worked for the Accounting Firm of Doane Raymond (Grant Thornton) in their New Glasgow and Halifax, Nova Scotia offices. David is a member of the Atlantic Chapter of Financial Executives International. He is Treasurer, 1st Vice Chairman and Executive Member of the Construction Association of Nova Scotia, and has served as student mentor with the Society of Management Accountants of Nova Scotia.

The Fund's audited consolidated financial statements 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.

Highlights for the year ended December 31, 2007

- The Fund's revenue was $38.9 million.

- Gross profit was $10.2 million.

- The Fund posted net earnings of $1.3 million before income taxes.

- Basic and diluted earnings per unit were $0.16.

- The Fund generated $2.8 million in cash flow from operations including changes in non-cash working capital.

- During the year the Fund made principal payments of $10.5 million against its term loan.

- The Fund generated distributable cash of $1.8 million and paid cash distributions of $1.9 million.

- The Fund had total assets of $22.3 million and $6.3 million in current and long-term liabilities.

"Despite the significant progress we have made in reducing costs and attaining a more competitive cost structure 2007 was a difficult year," says Larry Sullivan, Chief Executive Officer. "Economic and market conditions remained difficult in both North American and European markets. As with most Canadian manufacturers, the rapid rise of the Canadian dollar has put significant pressure on our results. Going forward we expect the high Canadian dollar combined with a faltering U.S. economy will continue to have a negative impact on sales and margins. While we hope this situation is temporary, it will have a negative impact on operations in the first half of 2008," concluded Sullivan.

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, 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.



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

December 31, 2007, with comparative figures for 2006

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2007 2006
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Assets

Current assets:
Cash and cash equivalents $ 221 $ 622
Accounts receivable 4,675 5,850
Forward foreign exchange contracts (note 10) 1,295 597
Inventories (note 4) 3,506 5,064
Prepaid expenses 427 442
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10,124 12,575

Property, plant and equipment (note 6) 11,159 17,905

Deferred financing costs - 10

Intangible assets (note 7) 1,047 4,455

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$ 22,330 $ 34,945
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Liabilities and Unitholders' Equity

Current liabilities:
Bank indebtedness (note 8) $ 215 $ -
Accounts payable and accrued liabilities 2,541 4,293
Distributions payable (note 5) - 428
Long-term debt, current portion (note 8) 3,500 14,000
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6,256 18,721

Forward foreign exchange contracts - 32

Non-controlling interest (note 9) 9,629 9,261

Unitholders' equity 6,445 6,931

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$ 22,330 $ 34,945
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Commitments (note 12)
Contingencies (note 13)
Subsequent events (note 18)

See accompanying notes to consolidated financial statements.

Approved on behalf of Art In Motion Income Fund:

---------------------------------- ----------------------------------
Trustee Trustee


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

Year ended December 31, 2007, with comparative figures for 2006

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2007 2006
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Revenue:
Sales $ 36,999 $ 49,688
Royalties 1,918 1,777
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38,917 51,465

Cost of goods sold 28,728 36,190
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10,189 15,275

Expenses:
Amortization 3,784 7,903
General and administrative 4,025 3,800
Image and product development 1,178 1,413
Interest and bank charges 503 1,237
Selling 4,684 6,121
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14,174 20,474
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Loss before undernoted items (3,985) (5,199)

Other earnings (expenses):
Foreign exchange gain 2,470 457
Goodwill impairment (note 3(g)) - (29,384)
Gain on disposal of property,
plant and equipment 3,235 -
Interest and miscellaneous 90 71
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5,795 (28,856)
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Earnings (loss) before non-controlling interest 1,810 (34,055)

Non-controlling interest (note 9) 489 (6,757)

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Net earnings (loss) and comprehensive
income (loss) $ 1,321 $ (27,298)
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Basic and diluted earnings (loss) per unit $ 0.16 $ (3.40)
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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, 2007, with comparative figures for 2006

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Unithold- Accumu-
Number ers' lated Distrib-
of units capital earnings utions Total
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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

Activity for the year - - 1,321 (1,807) (486)

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Balance, December 31,
2007 8,030,070 $ 72,714 $ (46,783) $ (19,486) $ 6,445
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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, 2007, with comparative figures for 2006

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2007 2006
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Cash provided by (used in):

Operations:
Net earnings (loss) $ 1,321 $ (27,298)
Items not involving cash:
Amortization 4,371 8,804
Gain on disposal of property,
plant and equipment (3,235) -
Goodwill impairment (note 3(g)) - 29,384
Non-controlling interest 489 (6,757)
Founders' Employee Participation
Plan expenses (note 14) - (2,300)
Net change in interest rate swap - 136
Net change in forward foreign
exchange contracts (730) 3,992
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2,216 5,961
Change in non-cash operating working
capital (note 17) 535 3,311
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2,751 9,272

Financing:
Bank indebtedness 215 -
Distributions paid or payable
to unitholders (1,807) (4,818)
Distributions paid or payable to
non-controlling interest (120) (321)
Repayment of long-term debt (10,500) (6,000)
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(12,212) (11,139)

Investments:
Purchase of property, plant and equipment (413) (959)
Proceeds from sale of property,
plant and equipment 9,473 -
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9,060 (959)
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Decrease in cash and cash equivalents (401) (2,826)

Cash and cash equivalents, beginning of year 622 3,448

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Cash and cash equivalents, end of year $ 221 $ 622
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Supplementary information:
Interest received $ 67 $ 114
Interest paid 455 935
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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, 2007

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. Changes in accounting policies:

(a) Financial instruments:

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

(b) Income taxes:

Generally, the Fund allocates all of its taxable income and taxable capital gains to unitholders such that the Fund will not be subject to tax. As of June 12, 2007, certain changes in the Income Tax Act affecting income trusts passed a third reading in the House of Commons and became substantively enacted, which would make the Fund subject to income taxes starting in 2011. As such, the Fund has determined the impact of this legislation on its operations (note 15).

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

3. 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 charged to selling expenses over their estimated useful lives and trade show booth costs, which are charged 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) Goodwill:

Goodwill is recorded at cost and not amortized, however any excess in carrying value of goodwill over fair value is charged to income in the period in which the impairment is determined. During the quarter ended June 30, 2006, after the Company performed its annual impairment test on goodwill, the valuation of the Fund was determined to be lower than its carrying value and a goodwill impairment charge of $29,384,000 was recorded to bring the balance of goodwill to nil. 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.

(h) 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 quarter ended June 30, 2006, after the Company performed an impairment test on the intangible assets, the valuation of the customer base was determined to be lower than its carrying value and an impairment charge of $1,926,000 was recorded. This charge has been included in amortization for 2006. No additional write-down was considered necessary for 2007.

(i) 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 a daily exchange rate. Any gains or losses on translation are included in income.

(j) Derivative financial instruments:

Derivative financial instruments are utilized by the Fund in the management of its foreign currency exposures and are classified as held-for-trading for financial statement purposes.

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 initial three-year term of the loan. During 2006, the interest rate swap was redeemed for proceeds of $127,000.

(k) 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 collectability of accounts receivable, net realizable value of inventories, useful lives of property, plant and equipment, valuation of intangible assets and provisions for current liabilities. Actual results could differ from these estimates.

(l) 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 years ended December 31, 2007 and 2006, the class B LP 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. For the years ended December 31, 2007 and 2006, these units were antidilutive.

(m) Unit-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 14). 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.

(n) Recent accounting standards:

New or revised CICA Handbook Sections become effective for the Fund's next year end December 31, 2008. These include Section 1535 Capital Disclosures, Section 3862 Financial Instruments - Disclosures, Section 3863 Financial Instruments - Presentation, and Section 3031 Inventories. The Fund has not evaluated or determined the impact of adopting these sections.

4. Inventories:



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2007 2006
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Artprints $ 1,455 $ 1,710
Framing materials 1,508 2,334
Finished goods 543 1,020

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$ 3,506 $ 5,064
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5. Related party transactions:

Included in distributions payable at December 31, 2006 is $26,767 which represents distributions on class B LP units which was paid in the following January to the Non-controlling Interest (GVP Holdings Inc.).

6. Property, plant and equipment:



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Accumulated Net book
2007 Cost amortization value
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Land $ 2,750 $ - $ 2,750
Buildings 7,441 878 6,563
Production equipment 2,163 1,105 1,058
Office and warehouse equipment 547 234 313
Computer hardware 535 331 204
Computer software 1,052 932 120
Leasehold improvements 218 67 151

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$14,706 $ 3,547 $11,159
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Accumulated Net book
2006 Cost amortization value
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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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On January 18, 2007, the Fund sold its Brigantine facility for gross proceeds of $9.6 million (net proceeds of $9.4 million) as part of a plan to consolidate operations into its Hartley facility. The Fund realized a net gain of approximately $3.3 million after closing costs and the disposal of the related land and buildings, which had a net book value of approximately $6.1 million. The Fund used $8.0 million of the proceeds to reduce its long-term debt.

7. Intangible assets:



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Accumulated Net book
2007 Cost amortization value
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Image bank $ 501 $ 501 $ -
Artist agreements 8,290 8,290 -
Customer base 10,880 9,833 1,047

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$19,671 $18,624 $ 1,047
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Accumulated Net book
2006 Cost amortization value
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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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8. Bank indebtedness and long-term debt:

The Fund has available a $10,000,000 (2006 - $10,000,000) 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 (2006 - $8,300,000). 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, 2007, $215,000 (2006-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 10).

The Fund had 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 had a three-year term with interest only payable during the term. Through July 2007, the Fund had repaid principal on the loan of $14,000,000. At that time, the Fund renegotiated the Capital loan into a CAD $6,000,000 364-day committed non-revolving term loan. The remaining balance of the loan, after additional repayments, was $3,500,000 at December 31, 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, 2007, the Fund was in compliance with its covenants.

9. Non-controlling interest:

The class B LP units (535,338 units) are exchangeable into units of the Fund 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 14), offset by distributions made against class B and class C LP units.

10. Financial instruments:

(a) 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, 2007, the Fund had $8,000,000 (2006 - $26,500,000) in US dollar forward foreign exchange contracts to sell, expiring at various dates to July 2008. The rates on the forward contracts range from 1.1668 to 1.1338 Canadian for each US dollar. The Fund also had $500,000 (2006 - nil) in US dollar forward foreign exchange contracts to buy US dollars, expiring in January 2008 at a rate of 0.9985 Canadian dollar for each US dollar.

(b) 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.

11. Concentration of credit risk:

For the year ended December 31, 2007, no single customer met or exceeded 10% of total gross sales (2006 - 10% of gross sales were earned from one customer).

As at December 31, 2007, approximately 88% (2006 - 90%) of the trade accounts receivable were denominated in United States dollars.

12. 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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2008 $ 665
2009 563
2010 544
2011 411
2012 and thereafter -

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$ 2,183
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13. Contingencies:

At December 31, 2007, the Fund had no letters of credit outstanding (2006 CAD$102,507 - USD$87,959), issued in relation to inventory in transit.

14. 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 of 2006. The net charges reversed in 2006 totalled $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.

15. Future income taxes:

Under the provisions of Bill C-52, Budget Implementation Act, 2007, which received Royal Assent on June 22, 2007, the Fund, as a publicly traded income trust, is considered a specified investment flow-through and will become subject to tax commencing January 1, 2011. Future income tax is assessed based on temporary differences expected to reverse after 2011 at the substantively enacted tax rate for that period of 31.5%.

The tax effects of temporary differences that give rise to significant portions of the future tax assets and future tax liabilities at December 31, 2007 are presented below:



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Future income tax assets (liabilities):
Intangible assets $ 10,600
Investment in AIM Holdings Trust 4,300
Loss carryforwards 500
Property, plant and equipment (100)
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15,300

Less valuation allowance (15,300)

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

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

16. 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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2007 2006
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Artprints $ 4,744 $ 5,723
Framed and other 18,691 27,121
Decographs 13,355 15,861
Transfers 2,942 3,060
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Gross sales 39,732 51,765
Discounts and allowances (2,733) (2,077)
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Sales 36,999 49,688
Royalties 1,918 1,777

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$ 38,917 $ 51,465
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The Fund sells to customers located in the following regions:



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2007 2006
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Canada $ 4,981 $ 5,120
United States 30,486 41,326
Europe 3,615 4,410
Other 650 909
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Gross sales 39,732 51,765
Discounts and allowances (2,733) (2,077)

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Sales $ 36,999 $ 49,688
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Royalty income is earned almost entirely from customers located in the United States.

As at December 31, 2007, $282,322 (2006 - $323,198) of the Fund's assets were located in the United States and the remainder of the assets were located in Canada.

17. Supplemental information:



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2007 2006
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Change in non-cash operating working capital:
Accounts receivable $ 1,175 $ 2,952
Inventories 1,558 878
Prepaid expenses (18) 477
Accounts payable and accrued liabilities (1,752) (996)
Distributions payable (428) -

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$ 535 $ 3,311
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18. Subsequent events:

(a) Change of control:

The non-controlling interest previously held by GVP Holdings, Inc. was purchased by Clarke Inc. Clarke Inc. acquired all of the class B LP units (535,338 units) as well as the class C LP units (2,141,352 units).

The obligations under the FEPP were also assumed by Clarke Inc.

The chief executive officer and chief financial officer have employment contracts which require a payment to them, if, upon a change in control of the Trust, their contract is terminated either by the Trust or by the executive within twelve months of the change in control. The payment is based on 24 months of salary and average bonus. Subsequent to year end, the chief financial officer resigned. At the time of his resignation, the chief financial officer's salary was $225,000 per annum. Amounts paid under this arrangement will be charged to income when such executive resigns or is terminated.

(b) Long-term debt covenant violation:

The Fund is required to test compliance with financial covenants contained in the Capital Loan agreement on a monthly basis.

At January 31, 2008, the Fund was not in compliance with one of the financial covenants. The covenant is related to the amount of cash distributions the Fund can make. The Fund has ceased distributions since July 2007 and the lender has provided forbearance for the breach. The Fund and the lender are currently reviewing the covenants to better address the current capital structure of the Fund. The Capital Loan is included in current liabilities as it expires in August, 2008.

Contact Information

  • Art In Motion Income Fund
    Larry Sullivan
    Chief Executive Officer
    1-877-AIM-3233 (1-877-246-3233)
    Website: www.aimincomefund.com