Hardwoods Distribution Income Fund Announces 2007 Fourth Quarter and Year-End Results



    Hardwoods Distribution Income Fund will hold a conference call and
    webcast to discuss fourth quarter and year-end financial results on
    March 13, 2008 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call
    can be accessed by dialing: 1-800-733-7560 or 416-644-3415. A replay will
    be available until March 27, 2008 at: 1-877-289-8525 or 416-640-1917
    (Passcode 21261628 followed by the number sign).

    The live and archived webcast can be accessed at
    http://www.vcall.com/IC/CEPage.asp?ID=125661 or on the Fund's
    website at www.hardwoods-inc.com.

    TRADING SYMBOL: Toronto Stock Exchange - HWD.UN

    LANGLEY, BC, March 12 /CNW/ - Hardwoods Distribution Income Fund (the
"Fund") today reported financial results for the fourth quarter and 12 months
of 2007. The Fund's results are based on the performance of Hardwoods
Specialty Products LP and Hardwoods Specialty Products USLP (collectively
"Hardwoods") - one of North America's largest wholesale distributors of
hardwood lumber and related sheet good products. Hardwoods serves over
2,500 industrial customers through a network of 36 distribution centres in the
US and Canada.

    2007 Highlights

    (For the 12 months ended December 31, 2007)

    
    -   Gross profit percentage increased to 18.9%, from 18.2% in 2006.

    -   Selling and administrative expenses decreased to $43.4 million from
        $45.6 million in 2006.

    -   Net earnings increased to $15.6 million, from $3.6 million in 2006.

    -   Distributable Cash per unit increased 3.1% to $0.959 from $0.930 in
        2006.

    -   The Fund increased monthly cash distributions by 5% in April and by
        an additional 5% in October 2007.

    -   The Fund achieved an annualized payout ratio of 71.5% compared to
        79.2% in 2006, despite implementing two distribution increases.

    -   Bank indebtedness (net of cash) was reduced by $13.4 million,
        resulting in a net debt-to-EBITDA ratio of 1.19 at December 31, 2007,
        compared to 1.77 at December 31, 2006.
    

    "We continued to improve profitability, reduce debt and reward
unitholders in 2007, despite extremely difficult market conditions," said
Maurice Paquette, President and CEO of Hardwoods.
    "US residential housing starts continued to decline, falling 38%
year-over-year and contributing to the downturn in the broader US economy.
While the Canadian economy performed better, a 30-year peak in the value of
the Canadian dollar relative to the US currency provided additional challenges
for our business."
    "Conditions in the hardwood industry reflected these difficulties.
Average prices for hardwood lumber, which fell 10% in 2006, declined another
8% in 2007. US cabinet industry sales were 13% lower and a number of major US
cabinet and furniture manufacturers began to curtail production as 2007
progressed," said Paquette.
    "Given these conditions, our 2007 results were very solid. Our underlying
sales declined by just 5% year-over-year, with foreign exchange factors
increasing the negative impact to 8.5%. Simultaneously, we increased our
average profit margin to 18.9% from 18.2% - a significant achievement
accomplished with disciplined selling and the expansion of our import program.
We also took aggressive action on costs, reducing sales and administrative
expenses by $2.2 million year-over-year."
    "The combination of higher margins and lower costs resulted in relatively
stable EBITDA, higher Distributable Cash, increased net earnings and a
significant reduction in debt. This, in turn, enabled us to increase our
monthly cash distributions twice during the year, while maintaining a
conservative payout ratio of just 71.5%. We are pleased with this performance
and with our ability to reward investors in a challenging year."
    "Going forward, we expect market conditions will remain extremely
challenging in 2008," added Paquette. "As evidenced by our fourth quarter 2007
results, our sales are being hit harder still by the stronger Canadian dollar
and a slowing US economy. We are taking the necessary steps to align our
business with market conditions, including closing two of our US branches in
the first quarter of 2008. Our strategy will not be entirely defensive,
however. We will continue to emphasize margin performance with continued
growth in our import program. We are also working to maintain sales and build
market share with innovative new product and service solutions that help
customers manage through challenging times. Overall, we believe Hardwoods is
well positioned to not just weather this downturn, but to strengthen our
market position as we work through it."

    Summary of Results
    Selected Unaudited Consolidated Financial Information (in thousands of
    Canadian dollars except where noted)

    
                          3 months      3 months
                             ended         ended    Year ended    Year ended
                       December 31,  December 31,  December 31,  December 31,
                              2007          2006          2007          2006

    Total sales        $    68,767   $    83,120   $   331,765   $   362,528
      Sales in
       the US (US$)         46,643        51,502       210,785       223,509
      Sales in Canada       23,665        24,466       105,171       109,024
    Gross profit            12,488        15,116        62,737        66,042
      Gross profit %          18.2%         18.2%         18.9%         18.2%
    Selling and
     administrative
     expenses              (10,024)      (11,354)      (43,360)      (45,559)
    Realized gain on
     foreign currency
     contracts                 648           326         1,883         1,338
    -------------------------------------------------------------------------
    Earnings before
     interest, taxes,
     depreciation and
     amortization and
     non-controlling
     interest ("EBITDA")     3,112         4,088        21,260        21,821
      Add (deduct):
        Amortization          (437)         (527)       (1,866)       (2,100)
        Interest              (487)         (664)       (2,402)       (3,127)
        Mark-to-market
         gain on
         unrealized
         foreign currency
         contracts            (634)       (1,212)          641        (1,280)
        Intangibles
         impairment              -          (326)            -          (326)
        Goodwill impairment      -        (7,566)            -        (7,566)
        Non-controlling
         interest              277         1,242          (109)       (1,484)
        Income taxes           284           139        (1,905)       (2,301)
    -------------------------------------------------------------------------
    Net earnings for
     the period        $     2,115   $    (4,826)  $    15,619   $     3,637
    -------------------------------------------------------------------------
    Basic and fully
     diluted earnings
     per Class A Unit  $     0.147   $    (0.335)  $     1.084   $     0.252
    Average Canadian
     dollar/US dollar
     exchange rate          0.9812        1.1384        1.0750        1.1342
    -------------------------------------------------------------------------



    Distributable Cash and Cash Distributions
    Selected Unaudited Consolidated Financial Information (in thousands of
    dollars except per unit amounts)

                          3 months      3 months
                             ended         ended    Year ended    Year ended
                       December 31,  December 31,  December 31,  December 31,
                              2007          2006          2007          2006
                              ----          ----          ----          ----

    Net cash provided
     by operating
     activities        $    10,514   $    10,513   $    20,629   $    18,539
    Increase (decrease)
     in non-cash
     operating working
     capital                (7,291)       (6,702)       (2,777)         (889)
                      ------------- ------------- ------------- -------------
    Cash flow from
     operations before
     changes in non-cash
     operating working
     capital                 3,223         3,811        17,852        17,650
    Capital
     expenditures              (18)          (97)         (571)         (902)
                      ------------- ------------- ------------- -------------
    Distributable Cash $     3,205   $     3,714   $    17,281   $    16,748
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------
    Distributions
     relating to the
     period:
      Class A Units        3,243(1)        2,940      12,355(2)       13,265
      Class B Units            -(3)            -           -(3)            -
                      ------------- ------------- ------------- -------------
                       $     3,243   $     2,940   $    12,355   $    13,265
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------

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

    Outstanding units
     and per unit
     amounts:
      Class A Units
       outstanding      14,410,000    14,410,000    14,410,000    14,410,000
      Class B Units
       outstanding       3,602,500     3,602,500     3,602,500     3,602,500
                      ------------- ------------- ------------- -------------
      Total Units
       outstanding      18,012,500    18,012,500    18,012,500    18,012,500
                      ------------- ------------- ------------- -------------
                      ------------- ------------- ------------- -------------

    Distributable Cash
     per Total Units   $     0.178   $     0.206   $     0.959   $     0.930

    Distributions
     relating to the
     period:
      Class A Units    $   0.225(1)  $     0.204   $   0.857(2)  $     0.921
      Class B Units    $       -(3)  $         -   $       -(3)  $         -
      Total Units      $     0.180   $     0.163   $     0.686   $     0.736

    Payout ratio(4)          101.2%         79.2%         71.5%         79.2%
    -------------------------------------------------------------------------

                    March 23, 2004
                    to December 31,
                              2007
                              ----
    Cumulative since
     inception:
      Distributable
       Cash                 70,649
      Distributions
       relating to the
       period               59,189
      Payout ratio(4)         83.8%
    -------------------------------------------------------------------------

    (1) Includes the cash distributions of $0.075 per Class A Unit per month
        which relate to the operations of the Fund for October, November, and
        December 2007.
    (2) Includes the cash distributions of $0.068 per Class A Unit per month
        which relate to the operations of the Fund for January, February, and
        March 2007; $0.0714 per Class A Unit per month which relate to the
        operations of the Fund for April through September 2007; and
        $0.075 per Class A Unit per month which relate to the operations of
        the Fund for October through December 2007 inclusive.
    (3) On January 10, 2006, Hardwoods Specialty Products LP and Hardwoods
        Specialty Products US LP, limited partnerships in each of which the
        Fund owns an 80% interest, announced that quarterly distributions
        were suspended on the Class B LP and Class B US LP units. The Class B
        LP units and Class B US LP units represent a 20% interest in
        Hardwoods Specialty Products LP and Hardwoods Specialty Products
        US LP, respectively. No distributions are to be paid on the Class B
        LP units and Class B US LP units unless distributions in stipulated
        minimum amounts are paid on the units in the limited partnerships
        held by the Fund, and in certain other circumstances. Accordingly, no
        distributions have been declared since the third quarter of 2005 to
        the non-controlling interests. No liability for distributions payable
        to the non-controlling interests is reflected in the December 31,
        2007 balance sheet.
    (4) Payout ratio measures the ratio of distributions by the Fund relating
        to the period to Distributable Cash for the period.
    


    Results from Operations - Three Months Ended December 31, 2007

    For the three months ended December 31, 2007 the Fund and its
subsidiaries generated Distributable Cash of $3.2 million, or $0.178 per unit.
Distributions of $3.2 million, or $0.225 per unit, were declared to the public
unitholders (Class A Units) and no distributions were paid to the Class B
Units, resulting in a payout ratio of 101.2% for the fourth quarter. By
comparison, the Fund generated total distributable cash of $3.7 million or
$0.206 per unit in the same period of 2006. Distributions of $2.9 million, or
$0.204 per unit were declared to the Class A Units and no distributions were
paid to the Class B Units, for a payout ratio of 79.2% in the fourth quarter
of 2006.
    Total fourth quarter sales declined by 17.3% to $68.8 million, from the
$83.1 million reported in 2006. The change in sales revenue reflects a 9.7%
decrease in sales due to the negative effect of a stronger Canadian dollar and
a 7.6% decrease in underlying sales activity. Sales in the United States, as
measured in US dollars, decreased by 9.4% to $46.6 million. Weaker residential
construction markets were the primary factor in this decline. The widely
reported slowdown in US housing market has been particularly severe in
California, significantly reducing demand in one of Hardwood's key markets.
Sales in Canada, as measured in Canadian dollars, declined by 3.3%. The change
in Canadian sales reflects a reduced sales contribution from the company's
Windsor, Ontario branch, which closed at the end of 2006, as well as the
negative impact of a stronger Canadian dollar on product prices and customers'
sales.
    Fourth quarter gross profit declined to $12.5 million, from $15.1 million
in Q4 2006 as a result of the lower sales revenue. However, gross profit as a
percentage of sales remained steady at 18.2%.
    Selling and administrative (S&A) expenses continued to improve in the
fourth quarter, declining to $10.0 million, from $11.4 million in the same
period of 2006. The benefit of the stronger Canadian dollar on costs at
Hardwoods' US operations accounted for $1.0 million of the $1.4 million
decrease, with the balance reflecting the absence of non-recurring expenses
that affected 2006 results but were not present in 2007 results.
    EBITDA for the period was $3.1 million, compared to $4.1 million in
Q4 2006. The change in EBITDA reflects lower gross profit due to decreased
sales, partially offset by reduced S&A expenses and a $0.3 million increase in
realized gains on foreign currency contracts.
    Fourth quarter net earnings increased to $2.1 million, from a loss of
$4.8 million in the same period in 2006. The $6.9 million improvement reflects
a $7.9 million decrease in goodwill and intangible impairment, a $0.6 million
decrease in mark-to-market adjustment losses on foreign currency contracts, a
$0.1 million increase in income tax recovery, a $0.2 million decrease in
interest expense and a $0.1 million decrease in amortization expense. This was
partially offset by the $1.0 million decrease in EBITDA and a $1.2 million
increase in non-controlling interest in the fourth quarter.

    Results from Operations - 12 months ended December 31, 2007

    For the 12 months ended December 31, 2007, the Fund and its subsidiaries
generated total Distributable Cash of $17.3 million, or $0.959 per unit.
Distributions of $12.4 million, or $0.857 per unit, were declared to the
public unitholders (Class A Units) and no distributions were paid to the Class
B Units, resulting in a year-to-date payout ratio of 71.5%. By comparison, the
Fund generated total distributable cash of $16.7 million or $0.930 per unit in
2006. Distributions of $13.3 million, or $0.921 per unit were declared to the
Class A Units and no distributions were paid to the Class B Units, for a 2006
payout ratio of 79.2%.
    Total sales declined by 8.5% to $331.8 million, from $362.5 million in
2006 as a result of more challenging market conditions. Sales at Hardwoods'
US operations, as measured in US dollars, decreased by 5.7%, with the most
significant impact felt in the company's California divisions. Sales in
Canada, as measured in Canadian dollars, were down by 3.5% year-over-year,
reflecting the closure of the Windsor, Ontario distribution centre and the
negative impact of the stronger Canadian dollar.
    Gross profit for the year ended December 31, 2007 was $62.7 million,
compared to $66.0 million in 2006. Although sales were down 8.5% in 2007,
gross profit fell by just 5.0%, reflecting a year-over-year increase in gross
margin percentage to 18.9%, from 18.2% in 2006. Hardwoods was also successful
in decreasing selling and administrative expenses to $43.4 million, from
$45.6 million in 2006. Recognizing the more challenging sales environment, the
company controlled costs by reducing its employee base by 6%, eliminating
excess trucking contracts, curtailing employee relocation expenses and
subletting underutilized warehouse space. The reduction in sales and
administrative expenses also reflects the positive impact of a stronger
Canadian dollar on costs at Hardwoods' US operations.
    The combination of lower S&A expenses and a higher gross profit
percentage contributed to relatively stable EBITDA results, despite the lower
sales revenue. EBITDA for 2007 was $21.3 million, down slightly from
$21.8 million in 2006. Net earnings rose sharply to $15.6 million from
$3.6 million in 2006. This increase reflects the $7.9 million reduction in
impairment in goodwill and other intangible assets, a $1.9 million increase in
mark-to-market adjustment gains on foreign currency contracts, a $1.4 million
decrease in non-controlling interest, a $0.4 million decrease in income taxes,
a $0.7 million decrease in interest expense and a $0.2 million reduction in
amortization expense. These gains were partially offset by the $0.5 million
decrease in EBITDA.

    Outlook

    Moving into 2008, Hardwoods' sales are expected to come under continued
pressure from the weak US housing market and the broader economic downturn
which is now affecting the US market as a whole. While general economic
conditions are currently stronger in Canada, the domestic market is being
negatively affected by foreign exchange impacts and by the fact that many of
Hardwoods' Canadian customers serve markets in the US.
    With approximately 70% of its operations in the United States, Hardwoods'
overall sales results are also influenced by changes in the value of the
Canadian dollar relative to the US dollar. To date, Distributable Cash results
have been partially cushioned as the Fund has currency hedges in place that
fix the exchange rate at $1.30 on a portion of the Distributable Cash it
generates in the United States. These hedges will remain in effect until April
2008, after which for the balance of 2008 they will be replaced with currency
hedges at $1.12 Canadian. In 2008, realized gains on foreign currency
contracts under the new hedges at $1.12 Canadian will be $0.9 million less
than would otherwise have been realized under the previous hedges at
$1.30 Canadian.
    In light of these factors, Hardwoods will manage its business closely in
2008 and will continue to take aggressive action on costs. Two distribution
centres with limited sales growth potential are scheduled to close in the
first quarter of 2008: Bozeman, Montana and Oklahoma City, Oklahoma. Going
forward, the distribution network will be closely monitored to ensure
expenditures are matched to sales potential in each market.
    Maintaining strong gross margin performance is another key priority. The
continued expansion of Hardwoods high-margin import business, including the
planned introduction of new "green products," is expected to have a positive
impact in this regard. Hardwoods is also working to expand market share by
targeting new customers with innovative product and service solutions that
help them respond to the challenging conditions.
    Hardwoods will continue to monitor and plan for the impact of the federal
government's decision to tax income trusts. The government's legislation was
substantively enacted on June 12, 2007, and these changes will begin to take
effect in 2011. Overall, it is anticipated that the proposed trust tax will
have substantially less impact on the Fund than on other trusts that operate
principally or exclusively in Canada. The 70% of Hardwoods' business that is
conducted in the U.S. is already subject to US taxation. The Fund believes
that it will be able to re-organize its tax structure prior to 2011 such that
it will not expose its US-sourced income to additional taxes associated with
the proposed new Canadian trust tax.
    Overall, with a strong balance sheet, a conservative payout ratio and a
clear and appropriate strategy for maintaining solid results, the Fund
believes Hardwoods is well positioned to withstand the current economic
downturn and to continue to strengthen the underlying business.

    Non-GAAP Measures - EBITDA and Distributable Cash

    References to "EBITDA" are to earnings before interest, income taxes,
depreciation and amortization, mark-to-market adjustments on foreign currency
contracts, goodwill and other intangible assets impairments, and the
non-controlling interest in earnings. In addition to net income or loss,
EBITDA is a useful supplemental measure of performance and cash available for
distribution prior to debt service, changes in working capital, capital
expenditures and income taxes.
    References to "Distributable Cash" is to net cash provided by operating
activities, before changes in non-cash operating working capital, less capital
expenditures and contributions to any reserves that the Boards of Directors of
our operating entities determine to be reasonable and necessary for the
operation of the businesses owned by these entities.
    We believe that, in addition to net income or loss, EBITDA and
Distributable Cash are each a useful supplemental measures of operating
performance that may assist investors in assessing their investment in units
of the Fund. Neither EBITDA nor Distributable Cash are earnings measures
recognized by GAAP and they do not have a standardized meaning prescribed by
GAAP. Investors are cautioned that EBITDA should not replace net income or
loss (as determined in accordance with GAAP) as an indicator of our
performance, nor should Distributable Cash replace cash flows from operating,
investing and financing activities or as a measure of liquidity and cash
flows. The Fund's method of calculating EBITDA and Distributable Cash may
differ from the methods used by other issuers. Therefore, the Fund's EBITDA
and Distributable Cash may not be comparable to similar measures presented by
other issuers. For reconciliation between EBITDA and net income or loss as
determined in accordance with GAAP, and for reconciliation between
Distributable Cash and net cash provided by operating activities as determined
in accordance with GAAP, please refer to the Management Discussion and
Analysis ("MD&A") included in the Fund's 2007 Annual Report, which will be
filed at www.sedar.com.
    Additional guidance regarding disclosure of distributable cash and cash
distributions was issued in 2007 in an interpretative release by the Canadian
Institute of Chartered Accountants (the "CICA") in respect of "Standardized
Distributable Cash in Income Trusts and other Flow Through Entities" and
National Policy 41-201 of the Canadian Securities Administrators "Income
Trusts and other Indirect Offerings" (collectively, the "Interpretative
Guidance"). For disclosure and discussion of the Fund's Standardized
Distributable Cash in accordance with the Interpretive Guidance, please refer
to the Fund's 2007 MD&A included in the Fund's 2007 Annual Report, which will
be filed at www.sedar.com.

    About the Fund

    Hardwoods Distribution Income Fund is an unincorporated, open-ended,
limited purpose trust established to hold, indirectly, the securities of
Hardwoods Specialty Products LP and Hardwoods Specialty Products USLP
(collectively, "Hardwoods"). The Fund was launched on March 23, 2004, with the
completion of an initial public offering of 14,410,000 shares.

    About Hardwoods

    Hardwoods is one of North America's largest distributors of high-grade
hardwood lumber and sheet goods to the cabinet, moulding, millwork, furniture
and specialty wood products industries. The company currently operates a
network of 36 distribution centres comprising 1.3 million square feet of
warehouse and distribution space in the U.S. and Canada.

    Forward Looking Information

    Certain statements in this press release contain forward-looking
information within the meaning of applicable securities laws in Canada
("forward-looking information"). The words "anticipates", "believes",
"budgets", "could", "estimates", "expects", "forecasts", "intends", "may",
"might", "plans", "projects", "schedule", "should", "will", "would" and
similar expressions are often intended to identify forward-looking
information, although not all forward-looking information contains these
identifying words.
    The forward-looking information in this press release includes, but is
not limited to: our expectation that, moving into 2008, our sales will
continue to come under pressure from the weak US housing market and the
broader economic downturn; our plan to continue to manage our business closely
in 2008 and take aggressive action on costs; our plan to continue to monitor
our distribution network to ensure expenditures are matched to sales potential
in each market; our intention to continue expansion of our high-margin import
business, with the planned introduction of a new line of "green" products in
2008, that is expected to have a positive impact in this regard; our intention
to maintain sales and build market share with innovative new product and
service solutions that help customers manage through challenging times; our
expectation that the proposed trust tax will have substantially less impact on
the Fund than on other trusts that operate principally or exclusively in
Canada; our belief that we will be able to re-organize our tax structure prior
to 2011 so as not to expose our US-sourced income to additional taxes
associated with the proposed new Canadian trust tax; and, our belief that we
are well positioned to withstand the current economic downturn and to continue
to strengthen our underlying business.
    The forecasts and projections that make up the forward-looking
information are based on assumptions which include, but are not limited to:
there are no material exchange rate fluctuations between the Canadian and
US dollar that affect the amount of cash we have available to distribute to
our unitholders in Canadian dollars; we do not lose any key personnel; there
are no decreases in the supply of, demand for, or market values of hardwood
lumber or sheet goods that harm our business; we do not incur material losses
related to credit provided to our customers; our products are not subjected to
negative trade outcomes; we are able to sustain our level of sales and EBITDA
margins; we are able to grow our business and to manage our growth; there is
no new competition in our markets that leads to reduced revenues and
profitability; we do not become subject to more stringent regulations;
importation of products manufactured with hardwood lumber or sheet goods does
not increase and replace products manufactured in North America; the downturn
in the general state of the economy does not worsen and impact upon our
results; our management information systems upon which we are dependent are
not impaired; our insurance is sufficient to cover losses that may occur as a
result of our operations; and, the financial condition and results of
operations of our business upon which we are dependent is not impaired.
    The forward-looking information is subject to risks, uncertainties and
other factors that could cause actual results to differ materially from
historical results or results anticipated by the forward-looking information.
The factors which could cause results to differ from current expectations
include, but are not limited to: exchange rate fluctuations between the
Canadian and US dollar could affect the amount of cash we have available to
distribute to our unitholders in Canadian dollars; we depend on key personnel,
the loss of which could harm our business; decreases in the supply of, demand
for, or market values of hardwood lumber or sheet goods could harm our
business; we may incur losses related to credit provided to our customers; our
products may be subject to negative trade outcomes; we may not be able to
sustain our level of sales or EBITDA margins; we may be unable to grow our
business or to manage any growth; competition in our markets may lead to
reduced revenues and profitability; we may become subject to more stringent
regulations; importation of products manufactured with hardwood lumber or
sheet goods may increase, and replace products manufactured in North America;
our results are dependent upon the general state of the economy; we are
dependent upon our management information systems; our insurance may be
insufficient to cover losses that may occur as a result of our operations; our
credit facilities contain restrictions on our ability to borrow funds and
restrictions on distributions that can be made; there are tax risks associated
with an investment in our units; our future growth may be restricted by the
payout of substantially all of our operating cash flow; and, other risks
described in our Annual Information Form and our other continuous disclosure
documents.
    All forward-looking information in this press release is qualified in its
entirety by this cautionary statement and, except as may be required by law,
we undertake no obligation to revise or update any forward-looking information
as a result of new information, future events or otherwise after the date
hereof.

    
    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Balance Sheets
    (Expressed in thousands of Canadian dollars)

    December 31, 2007 and 2006

    -------------------------------------------------------------------------
                                                          2007          2006
    -------------------------------------------------------------------------

    Assets

    Current assets:
      Cash and cash equivalents                    $       295   $       594
      Accounts receivable                               36,474        43,767
      Income taxes recoverable                           1,041           596
      Inventory                                         38,400        44,584
      Prepaid expenses                                   1,060         1,098
      Foreign currency contracts (note 5)                1,533         1,129
      -----------------------------------------------------------------------
                                                        78,803        91,768

    Long-term receivables (note 4)                       2,191         3,236

    Property, plant and equipment (note 6)               2,413         3,219

    Deferred financing costs                                21            32

    Foreign currency contracts (note 5)                    528           385

    Intangible assets                                    9,013        10,878

    Goodwill                                            80,758        88,886

    -------------------------------------------------------------------------
                                                   $   173,727   $   198,404
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
      Bank indebtedness (note 7)                   $    25,515   $    39,152
      Accounts payable and accrued liabilities           6,950         7,590
      Distributions payable to Unitholders               1,081           980
      -----------------------------------------------------------------------
                                                        33,546        47,722

    Foreign currency contracts (note 5)                     47           141

    Deferred gain on sale-leaseback of land
     and building                                          538           719

    Non-controlling interests (note 8)                  30,068        33,859

    Future income taxes (note 10)                        3,534         2,653

    Unitholders' equity:
      Fund Units (note 9)                              133,454       133,454
      Deficit                                           (5,895)       (8,973)
      Accumulated other comprehensive loss             (21,565)      (11,171)
      -----------------------------------------------------------------------
                                                       105,994       113,310
    Commitments (note 12)
    Contingencies (note 17)

    -------------------------------------------------------------------------
                                                   $   173,727   $   198,404
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statements of Earnings and Retained Earnings (Deficit)
    (Expressed in thousands of Canadian dollars)

    Years ended December 31, 2007 and 2006

    -------------------------------------------------------------------------
                                                          2007          2006
    -------------------------------------------------------------------------

    Sales                                          $   331,765   $   362,528
    Cost of sales                                      269,028       296,486
    -------------------------------------------------------------------------

    Gross profit                                        62,737        66,042

    Expenses (income):
      Selling and administrative                        43,360        45,559
      Amortization:
        Plant and equipment                              1,091         1,208
        Deferred financing costs                            11            77
        Other intangible assets                            843           899
        Deferred gain on sale-leaseback of land
         and building                                      (79)          (84)
      Interest                                           2,402         3,127
      Foreign currency contracts                        (2,524)          (58)
      Intangibles impairment (note 2(g))                     -           326
      Goodwill impairment (note 2(h))                        -         7,566
      -----------------------------------------------------------------------
                                                        45,104        58,620
    -------------------------------------------------------------------------

    Earnings before non-controlling interests and
     income taxes                                       17,633         7,422

    Non-controlling interests (note 8)                     109         1,484
    -------------------------------------------------------------------------

    Earnings before income taxes                        17,524         5,938

    Income taxes (note 10)                               1,905         2,301
    -------------------------------------------------------------------------

    Net earnings for the year                           15,619         3,637

    Retained earnings (deficit), beginning
     of year (note 3)                                   (9,159)        1,886

    Distributions declared to Unitholders              (12,355)      (14,496)

    -------------------------------------------------------------------------
    Deficit, end of year                           $    (5,895)  $    (8,973)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted earnings per Unit            $      1.08   $      0.25
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average number of Units outstanding    14,410,000    14,410,000
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statements of Cash Flows
    (Expressed in thousands of Canadian dollars)

    Years ended December 31, 2007 and 2006

    -------------------------------------------------------------------------
                                                          2007          2006
    -------------------------------------------------------------------------

    Cash flows provided by (used in) operating
     activities:
      Net earnings for the year                    $    15,619   $     3,637
      Items not involving cash:
        Amortization                                     1,866         2,100
        Imputed interest income on employee loans          (60)            -
        Gain on sale of property, plant and equipment      (21)          (32)
        Mark-to-market adjustment on unrealized
         foreign currency contracts                       (641)        1,280
        Intangibles impairment (note 2(g))                   -           326
        Goodwill impairment (note 2(h))                      -         7,566
        Non-controlling interests                          109         1,484
        Future income taxes                                980         1,289
      -----------------------------------------------------------------------
                                                        17,852        17,650
      Change in non-cash operating working
       capital (note 11)                                 2,777           889
      -----------------------------------------------------------------------
      Net cash provided by operating activities         20,629        18,539

    Cash flows used in financing activities:
      Decrease in bank indebtedness                     (9,769)       (7,733)
      Increase in deferred financing fees                    -           (33)
      Distributions paid to Unitholders                (12,254)      (13,516)
      -----------------------------------------------------------------------
      Net cash used in financing activities            (22,023)      (21,282)

    Cash flows provided by investing activities:
      Additions to property, plant and equipment          (571)         (902)
      Proceeds on disposal of property, plant
       and equipment                                        26            34
      Decrease in long-term receivables, net             1,640         2,002
      -----------------------------------------------------------------------
      Net cash provided by investing activities          1,095         1,134
    -------------------------------------------------------------------------

    Decrease in cash                                      (299)       (1,609)

    Cash, beginning of year                                594         2,203

    -------------------------------------------------------------------------
    Cash, end of year                              $       295   $       594
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental information:
      Interest paid                                $     2,402   $     3,127
      Income taxes paid                                    936         1,572
      Transfer of accounts receivable to long-term
       customer notes receivable, net of write offs,
       being a non-cash transaction                        667         2,167
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statement of Comprehensive Income (Loss)
    (Expressed in thousands of Canadian dollars)

    Years ended December 31, 2007 and 2006

    -------------------------------------------------------------------------
                                                          2007          2006
    -------------------------------------------------------------------------

    Net earnings for the year                      $    15,619   $     3,637

    Other comprehensive income (loss):
      Unrealized gains (losses) on translation of
       self-sustaining foreign operations              (10,385)         (129)

    -------------------------------------------------------------------------
    Comprehensive income                           $     5,234   $     3,508
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    Consolidated Statement of Accumulated Other Comprehensive Loss
    (Expressed in thousands of Canadian dollars)

    Years ended December 31, 2007 and 2006

    -------------------------------------------------------------------------
                                                          2007          2006
    -------------------------------------------------------------------------

    Accumulated other comprehensive loss,
     beginning of year (note 3)                    $   (11,180)  $   (11,042)

    Other comprehensive loss                           (10,385)         (129)

    -------------------------------------------------------------------------
    Accumulated other comprehensive loss,
     end of year                                   $   (21,565)  $   (11,171)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.
    

    
    HARDWOODS DISTRIBUTION INCOME FUND

    Notes to Consolidated Financial Statements
    (Tabular amounts expressed in thousands of Canadian dollars)

    Years ended December 31, 2007 and 2006

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

    1.  Nature of operations and business acquisition:

        Hardwoods Distribution Income Fund (the "Fund") is an unincorporated,
        open ended, limited purpose trust established under the laws of the
        Province of British Columbia on January 30, 2004 by a Declaration of
        Trust. The Fund commenced operations on March 23, 2004 when it
        completed an initial public offering (the "Offering") of Units and
        acquired an 80% interest in a hardwood lumber and sheet goods
        distribution business in North America (the "Business") from
        affiliates of Sauder Industries Limited ("SIL"). The Fund holds,
        indirectly, 80% of the outstanding limited partnership units of
        Hardwoods Specialty Products LP ("Hardwoods LP") and Hardwoods
        Specialty Products US LP ("Hardwoods USLP"), limited partnerships
        established under the laws of the Province of Manitoba and the state
        of Delaware, respectively.

    2.  Significant accounting policies:

        These consolidated financial statements have been prepared in
        accordance with Canadian generally accepted accounting principles.

        (a) Basis of presentation:

            These consolidated financial statements include the accounts of
            the Fund and its 80% owned subsidiaries Hardwoods LP and
            Hardwoods USLP and other wholly owned subsidiaries. All
            significant intercompany balances and transactions have been
            eliminated on consolidation.

        (b) Cash and cash equivalents:

            The Fund considers deposits in banks, certificates of deposit and
            short-term investments with original maturities of three months
            or less when acquired as cash and cash equivalents.

        (c) Accounts receivable:

            Accounts receivable includes trade accounts receivable net of
            allowances for doubtful accounts plus the current portion of
            housing loans receivable from employees related to their
            relocation and customer notes receivable.

        (d) Inventory:

            Inventory is valued at the lower of weighted average cost and net
            realizable value.

        (e) Property, plant and equipment:

            Property, plant and equipment are stated at cost. Amortization is
            provided at straight-line rates sufficient to amortize the cost
            of the assets over their estimated useful lives as follows:

            -----------------------------------------------------------------
            Assets                                     Estimated useful life
            -----------------------------------------------------------------

            Machinery and equipment                            3 to 10 years
            Mobile equipment                                         7 years
            Leasehold improvements                Over the term of the lease
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (f) Deferred financing costs:

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

        (g) Intangible assets:

            Intangible assets represent customer relationships acquired at
            the time the Business was purchased from SIL (note 1) and are
            recorded at cost less accumulated amortization and any write-
            downs. Amortization is provided for on a straight-line basis over
            15 years. Management reviews the carrying value of intangible
            assets for impairment annually, or more frequently if events or
            changes in circumstances indicate that the asset may be impaired.
            Any excess of carrying value over fair value is charged to
            earnings in the period in which the impairment is determined.
            During the fourth quarter ended December 31, 2007, management
            performed its annual impairment test and determined that no
            impairment had occurred (2006 - $326,000).

        (h) Goodwill:

            Goodwill is recorded at cost less any write-downs and is 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
            of carrying value over fair value is charged to earnings in the
            period in which the impairment is determined. During the fourth
            quarter ended December 31, 2007, management performed its annual
            impairment test and determined that no impairment had occurred
            (2006 - $7,566,000). The write-down of goodwill in 2006 was
            related solely to the Fund's Canadian business, Hardwoods LP. The
            goodwill impairment in Hardwoods LP was largely due to the
            anticipated reduction of cash flows resulting from the Canadian
            federal government's intention to tax Canadian income trusts
            commencing in 2011, as well as lower than previously anticipated
            revenue and cash flows to be generated.

        (i) Impairment of long-lived assets:

            Long-lived assets, including property, plant and equipment and
            other intangible assets, are reviewed for impairment whenever
            events or changes in circumstances indicate that the carrying
            amount of an asset may not be recoverable. Recoverability of
            assets is measured by a comparison of the carrying amount of an
            asset to estimated undiscounted future cash flows expected to be
            generated by the asset. If the carrying amount for the asset
            exceeds its estimated future cash flows, an impairment charge is
            recognized by the amount that the carrying amount of the asset
            exceeds its fair value.

        (j) Sales-leaseback of land and building:

            During the year ended December 31, 2005, a subsidiary of the Fund
            sold a building and related land and leased back the facilities.
            The gain on the sale has been deferred and is amortized in
            proportion to the rental payments over the lease term.

        (k) Income taxes:

            Incorporated subsidiaries of the Fund use the asset and liability
            method of accounting for income taxes. Under the asset and
            liability method, future income tax assets and liabilities are
            recognized for the future tax consequences attributable to
            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 to taxable
            income in the years in which those temporary differences are
            expected to be recovered or settled. The effect on future tax
            assets and liabilities of a change in tax rates is recognized in
            income in the period that includes the substantive enactment
            date. The amount of future income tax assets recognized is
            limited to the amount that is more likely than not to be
            realized.

            As the Fund allocates all of its net earnings to Unitholders and
            deducts these amounts in computing its taxable income,
            Unitholders, rather than the Fund, will generally be liable for
            any income tax obligations until January 1, 2011. Accordingly, no
            provision for current income taxes has been made in respect of
            the Fund itself.

            On June 12, 2007, the Canadian federal government's legislation
            to tax publicly traded income trusts passed third reading in the
            House of Commons and thus the associated income tax became
            substantively enacted for accounting purposes. The legislation
            imposes a tax on distributions from Canadian public income
            trusts. The new tax is not expected to apply to the Fund until
            January 1, 2011 as a transition period applies to publicly traded
            trusts that existed prior to November 1, 2006. Historically the
            Fund had been exempt from recognizing future income tax assets
            and liabilities associated with temporary differences arising in
            the Fund and its subsidiary Hardwoods LP. As a result of the
            substantive enactment of the new tax legislation, the Fund has
            recognized future income tax assets and liabilities that are
            expected to reverse subsequent to January 1, 2011. The impact on
            the Fund's consolidated financial statements was recorded in the
            year ended December 31, 2007 and the effect was an increase in
            the future income tax liability by $95,000 and an increase in
            future income tax expense of $95,000.

        (l) Revenue recognition:

            Revenue from the sale of hardwood lumber and sheet goods is
            recognized at the time of delivery, which is when title and the
            risks and rewards of ownership transfer to the customer.

        (m) Translation of foreign currencies:

            The accounts of the Fund's self-sustaining foreign operations are
            translated into Canadian dollars using the current rate method.
            Assets and liabilities are translated at the exchange rate in
            effect at the balance sheet date and revenue and expenses are
            translated at average exchange rates for the period. Gains or
            losses arising from the translation of the financial statements
            of the self-sustaining foreign operations are deferred in the
            accumulated other comprehensive loss account in Unitholders'
            equity.

            Foreign monetary assets and liabilities of the Canadian
            operations have been translated into Canadian dollars using the
            rate of exchange in effect at the balance sheet date. Revenue and
            expenses of the Canadian operations denominated in foreign
            currencies are translated at the average exchange rates for the
            period. Exchange gains or losses arising from translation of
            these foreign monetary balances and transactions are reflected in
            earnings.

        (n) Foreign currency contracts:

            The Fund uses currency derivatives to manage its exposure to
            fluctuations in exchange rates between the Canadian and the
            United States dollar. The foreign currency contracts are
            recognized in the balance sheet and measured at fair value, with
            changes in fair value recognized currently in the statement of
            earnings.

        (o) Earnings per Unit:

            Basic earnings per Unit is calculated by dividing net earnings by
            the weighted average number of Units outstanding during the
            reporting period. Diluted earnings per Unit is calculated by
            application of the if-converted method for convertible securities
            (being exchangeable Units held by the non-controlling interest).
            As the conversion of convertible securities would not have a
            dilutive effect on earnings per Unit, diluted and basic earnings
            per Unit are the same amount.

        (p) Use of estimates:

            The preparation of financial statements requires management to
            make estimates and assumptions that affect the reported amounts
            of assets and liabilities and disclosure of contingent assets and
            liabilities at the date of the financial statements and the
            reported amounts of revenue and expenses during the reporting
            period. Areas requiring significant management estimates include
            the valuation and impairment analysis of goodwill and other
            intangible assets, the determination of the allowance for
            doubtful accounts, future income taxes and amounts of accrued
            liabilities. Actual amounts may differ from the estimates applied
            in the preparation of these financial statements.

        (q) Future changes in accounting standards:

            On December 1, 2006, the Canadian Institute of Chartered
            Accountants ("CICA") issued four new accounting standards:
            Handbook Section 1535, Capital Disclosures ("Section 1535"),
            Handbook Section 3031, Inventories ("Section 3031"), Handbook
            Section 3862, Financial Instruments - Disclosures ("Section
            3862") and Handbook Section 3863, Financial Instruments -
            Presentation ("Section 3863"). These new standards become
            effective for the Fund on January 1, 2008.

            Section 1535 specifies the disclosure of: (i) an entity's
            objectives, policies and processes for managing capital; (ii)
            quantitative data about what the entity regards as capital; (iii)
            whether the entity has compiled with any capital requirements;
            and, (iv) if it has not complied, the consequences of such non-
            compliance.

            Section 3031 provides significantly more guidance on the
            measurement of inventories, with an expanded definition of cost
            and the requirement that inventory must be measured at the lower
            of cost and net realizable value. In addition the section has
            additional disclosure requirements, including accounting
            policies, carrying values, and the amount of any inventory write-
            downs.

            Sections 3862 and 3863 replace Handbook Section 3861, Financial
            Instruments - Disclosure and Presentation, revising and enhancing
            its disclosure requirements, and carrying forward its
            presentation requirements. These new sections place increased
            emphasis on disclosures about the nature and extent of risks
            arising from financial instruments and how the entity manages
            those risks.

            While the Fund is currently evaluating the implications of the
            adoption of these new standards, their adoption is not expected
            to materially impact the amounts presented in the financial
            statements.

    3.  Adoption of new accounting standards:

        Effective January 1, 2007, the Fund adopted five new CICA accounting
        standards: (a) Handbook Section 1530, Comprehensive Income; (b)
        Handbook Section 3855, Financial Instruments - Recognition and
        Measurement; (c) Handbook Section 3861 Financial Instruments -
        Disclosure and Presentation; (d) Handbook Section 3865, Hedges; and
        (e) Handbook Section 1506, Accounting Changes. The main requirements
        of these new standards and the resulting financial statement impact
        are described below.

        Consistent with the requirements of the new accounting standards, the
        Fund has not restated any prior period amounts as a result of
        adopting the accounting changes, other than to classify unrealized
        foreign currency translation gain or losses on net investments in
        self-sustaining foreign operations in accumulated other comprehensive
        loss within Unitholders' Equity. As required under the transition
        rules the opening deficit has been adjusted to reflect the cumulative
        impact of adopting the changes in accounting policies described
        below.

        The effect of the adoption of these standards is summarized in the
        following table:

        ---------------------------------------------------------------------
                                          Reclassi-
                                       fication to   Adjustment
                               As at   accumulated  on adoption        As at
                         December 31, other compre-      of new    January 1,
                                2006  hensive loss    standards         2007
        ---------------------------------------------------------------------
        Long-term
         receivables      $    3,236   $         -  $      (365)   $   2,871
        Non-controlling
         interests            33,859             -          (71)      33,788
        Future income
         taxes                 2,653             -          (99)       2,554
        Unitholders
         equity:
          Cumulative
           translation
           adjustment        (11,171)       11,171            -            -
          Accumulated other
           comprehensive
           loss                    -       (11,171)          (9)     (11,180)
          Deficit         $   (8,973)  $         -  $      (186)   $  (9,159)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        (a) Comprehensive Income (Section 1530):

            CICA Section 1530 introduces the term Comprehensive Income, which
            consists of net earnings and other comprehensive income ("OCI").
            OCI represents changes in Unitholders' equity during the period
            arising from transactions and other events with non-owner sources
            and in the case of the Fund includes unrealized foreign currency
            translation gains or losses arising from self-sustaining foreign
            operations. As a result of adopting this standard, a new
            Statement of Comprehensive Income now forms part of the Fund's
            consolidated financial statements which includes the current
            period net earnings and OCI. Cumulative changes in OCI are
            included in Accumulated Other Comprehensive Income, which is
            presented as a new category of Unitholders' Equity in the balance
            sheet. The Fund's accumulated other comprehensive income balance
            at December 31, 2007 and December 31, 2006 is comprised entirely
            of cumulative foreign currency translation adjustments arising on
            translation of the Fund's United States operations to Canadian
            dollars.

        (b) Financial Instruments - Recognition and Measurement (Section
            3855):

            CICA Section 3855 sets out criteria for the recognition and
            measurement of financial instruments for fiscal years beginning
            on or after October 1, 2006. This standard requires all financial
            instruments within its scope, including derivatives, to be
            included on the balance sheet and measured either at fair value
            or, in certain circumstances when fair value may not be
            considered most relevant, at cost or amortized cost. Changes in
            fair value are to be recognized in either the Statements of
            Earnings or the Statement of Comprehensive Income.

            All financial assets and liabilities are recognized when the
            entity becomes a party to the contract creating the item. As
            such, any of the Fund's outstanding financial assets and
            liabilities at the effective date of adoption are recognized and
            measured in accordance with the new requirements as if these
            requirements had always been in effect. Any changes to the
            carrying values of assets and liabilities prior to January 1,
            2007 are recognized by adjusting opening deficit or opening
            accumulated other comprehensive income.

            All financial instruments are classified into one of the
            following five categories: held-for-trading, held to maturity,
            loans and receivables, available for sale financial assets, or
            other financial liabilities. Initial and subsequent measurement
            and recognition of changes in the value of financial instruments
            depends on their initial classification:

              (i)   Held to maturity investments, loans and receivables, and
                    other financial liabilities are initially measured at
                    fair value and subsequently measured at amortized cost.
                    Amortization of premiums or discounts and losses due to
                    impairment are included in current period net earnings
                    using the effective interest method.

              (ii)  Available for sale financial assets are measured at fair
                    value, with unrealized gains and losses recorded in other
                    comprehensive income until the asset is realized, at
                    which time they will be recorded in net earnings.

              (iii) Held for trading financial instruments are measured at
                    fair value. All gains and losses resulting from changes
                    in their fair value are included in net earnings in the
                    period in which they arise.

              (iv)  All derivative financial instruments are classified as
                    held for trading financial instruments and are measured
                    at fair value, even when they are part of a hedging
                    relationship. All gains and losses resulting from changes
                    in their fair value are included in net earnings in the
                    period in which they arise.

                    Upon adoption of these new standards, the Fund has
                    classified its financial instruments as follows:

              (v)   Accounts receivable and long term receivables are
                    classified as loans and receivables, which are initially
                    measured at fair value and subsequently measured at
                    amortized cost. Housing loans provided to employees by
                    the Fund to assist in their relocation to new operating
                    locations were identified to be loans with a non-market
                    rate of interest, requiring an adjustment based on the
                    fair market value of the loans at their inception,
                    adjusted for the accretion of the fair market value
                    discount in the period from inception to the adoption of
                    the new accounting standard. This change in accounting
                    standard resulted in a decrease in the carrying value of
                    employee housing loans receivable of $365,000, a decrease
                    in non-controlling interests of $71,000 and future income
                    taxes of $99,000, and an increase in deficit of $186,000
                    on the balance sheet at January 1, 2007.

              (vi)  The Fund's foreign currency contracts are a derivative
                    financial instrument and as such are classified as held
                    for trading, with all gains and losses included in net
                    earnings in the period in which they arise. This is
                    consistent with the Fund's historic accounting treatment
                    of the foreign currency contracts and thus there was no
                    change in accounting on adoption.

        (c) Financial Instruments - Disclosure and Presentation (Section
            3861):

            CICA Section 3861 sets out standards which address the
            presentation of financial instruments and non-financial
            derivates, and identifies the related information that should
            be disclosed. These standards also revise the requirements for
            entities to provide accounting policy disclosures, including
            disclosure of the criteria for designating as held-for-trading
            those financial assets or liabilities that are not required to
            be classified as held-for-trading; whether categories of normal
            purchases and sales of financial assets are accounted for at
            trade date or settlement date; the accounting policy for
            transaction costs on financial assets and financial liabilities
            classified as other than held-for-trading; and provide several
            new requirements for disclosure about fair value.

        (d) Hedging (Section 3865):

            CICA Section 3865 specifies the circumstances under which hedge
            accounting is permissible and how hedge accounting may be
            performed. The Fund currently does not hold any financial
            instruments designated for hedge accounting.

        (e) Accounting Changes (Section 1506):

            CICA Section 1506 revised the standards on changes in accounting
            policy, estimates or errors to require a change in accounting
            policy to be applied retrospectively (unless doing so is
            impracticable), changes in estimates to be recorded
            prospectively, and prior period errors to be corrected
            retrospectively. Voluntary changes in accounting policy are
            allowed only when they result in financial statements that
            provide reliable and more relevant information. In addition,
            these revised standards call for enhanced disclosures about the
            effects of changes in accounting policies, estimates and errors
            on the financial statements. The impact of this new standard
            cannot be determined until such time as the Fund makes a change
            in accounting policy, other than the changes resulting from the
            implementation of the new CICA Handbook standards discussed in
            this note.

        (f) Cash Flow Statements (Section 1540):

            Amendments to CICA 1540, Cash Flow Statements, require entities
            to disclose total cash distributions on financial instruments
            classified as equity in accordance with a contractual agreement
            and the extent to which total cash distributions are non-
            discretionary. This disclosure requirement is effective for
            interim and annual financial statements for fiscal periods
            ending on or after March 31, 2007. The Fund has no contractual
            requirement to pay cash distributions to Unitholders' of the
            Fund. During the year ended December 31, 2007 $12.3 million
            (2006 - $13.5 million) in discretionary cash distributions were
            paid to Unitholders.

    4.  Long-term receivables:

        ---------------------------------------------------------------------
                                                            2007        2006
        ---------------------------------------------------------------------
        Employee housing loans                           $ 1,130     $ 1,766
        Customer notes                                     1,166       2,277
        Security deposits                                    553         606
        ---------------------------------------------------------------------
                                                           2,849       4,649

        Less: current portion, included in accounts
         receivable                                          658       1,413
        ---------------------------------------------------------------------
                                                         $ 2,191     $ 3,236
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Long-term receivables consist of non-interest bearing housing loans
        receivable from employees related to their relocation, interest
        bearing notes receivable from certain customers, and security
        deposits recoverable on leased premises. The housing loans are
        secured by a deed of trust or mortgage depending upon the
        jurisdiction. The customer notes receivable have various security
        arrangements and bear interest rates ranging from 8%-18%.

    5.  Foreign currency contracts:

        At December 31, 2007 a subsidiary of the Fund held foreign currency
        contacts covering the period 24 months into the future with terms as
        follows:

        ---------------------------------------------------------------------
                                                  Contract           Receive
                                    Sell     exchange rate          Canadian
        Month                 US dollars           ($C/$US)          dollars
        ---------------------------------------------------------------------

        2008
        January               US$675,000            1.3001       Cdn$877,568
        February              US$675,000            1.3001       Cdn$877,568
        March                 US$675,000            1.3001       Cdn$877,568
        April                 US$675,000            1.3001       Cdn$877,568
        May                   US$675,000            1.1255       Cdn$759,712
        June                  US$675,000            1.1255       Cdn$759,712
        July                  US$675,000            1.1255       Cdn$759,712
        August                US$675,000            1.1255       Cdn$759,712
        September             US$675,000            1.1255       Cdn$759,712
        October               US$675,000            1.1255       Cdn$759,712
        November              US$675,000            1.1255       Cdn$759,712
        December              US$675,000            1.1255       Cdn$759,712

        2009
        January               US$675,000            1.1255       Cdn$759,712
        February              US$675,000            1.1255       Cdn$759,712
        March                 US$675,000            1.1255       Cdn$759,712
        April                 US$675,000            1.1255       Cdn$759,712
        May                   US$675,000            1.0882       Cdn$734,535
        June                  US$675,000            1.0595       Cdn$715,162
        July                  US$675,000            1.0625       Cdn$717,187
        August                US$675,000            1.0560       Cdn$712,800
        September             US$675,000            1.0010       Cdn$675,675
        October               US$675,000            0.9315       Cdn$628,762
        November              US$675,000            0.9901       Cdn$668,317
        December              US$675,000            1.0119       Cdn$683,032

        The fair value of the 24 monthly currency contracts covering the
        period January 2008 to December 2009 have been reflected in the
        financial statements and represent a current asset of $1,533,476, a
        long-term asset of $528,165 and a long-term liability of $46,842 at
        December 31, 2007. The fair values were determined based on
        valuations obtained from the counter-party.

    6.  Property, plant and equipment:

        ---------------------------------------------------------------------
                                                   Accumulated      Net book
        December 31, 2007                   Cost  amortization         value
        ---------------------------------------------------------------------

        Machinery and equipment         $  2,345      $  1,534      $    811
        Mobile equipment                   3,195         1,853         1,342
        Leasehold improvements               792           532           260
        ---------------------------------------------------------------------
                                        $  6,332      $  3,919      $  2,413
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
                                                   Accumulated      Net book
        December 31, 2006                   Cost  amortization         value
        ---------------------------------------------------------------------

        Machinery and equipment         $  2,312      $  1,228      $  1,084
        Mobile equipment                   3,322         1,549         1,773
        Leasehold improvements               765           403           362
        ---------------------------------------------------------------------
                                        $  6,399      $  3,180      $  3,219
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    7.  Bank indebtedness:
        ---------------------------------------------------------------------
                                                          2007          2006
        ---------------------------------------------------------------------

        Checks issued in excess of funds on deposit   $  1,034      $    797
        Credit facility, Hardwoods LP                    5,538        10,788
        Credit facility, Hardwoods USLP
         (2007 - US$19,109; 2006 - US$23,655)           18,943        27,567
                                                      $ 25,515      $ 39,152
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Bank indebtedness consists of checks issued in excess of funds on
        deposit and advances under operating lines of credit available to
        Hardwoods LP and Hardwoods USLP. Hardwoods LP has a revolving credit
        facility of up to an aggregate amount of $22,000,000 and Hardwoods
        USLP has a revolving credit facility of up to an aggregate amount of
        $34,695,500 (US$35,000,000) less the net exposure under the foreign
        currency contracts facility as described in note 5.

        The Hardwoods LP credit facility was renegotiated in November 2006
        and now expires November 30, 2009, and is secured by a first security
        interest in all of the present and after acquired property of
        Hardwoods LP and its operating subsidiaries, and by the Hardwoods LP
        Units held indirectly by the Fund. The Hardwoods USLP credit facility
        and the foreign currency contract arrangements were renegotiated in
        December 2006 and now expire March 31, 2010. They are secured by a
        first security interest in all of the present and after acquired
        property of Hardwoods USLP and by the Hardwoods USLP Units held
        indirectly by the Fund.

        The credit facilities are repayable without any prepayment penalties
        and bear interest at a floating rate based on the Canadian dollar or
        US dollar prime rate (as the case may be), LIBOR or bankers
        acceptance rates plus, in each case, an applicable margin. Letters of
        credit are also available under the credit facilities. The rates vary
        with the ratio of total debt for borrowed money, capital leases and
        letters of credit (as adjusted for certain items) to earnings before
        interest, taxes, depreciation and amortization, as defined in the
        credit agreements. Commitment fees and standby charges are payable.

        The average annual interest rates payable for the year ended
        December 31, 2007 were 6.7% and 7.2% (2006 - 6.6% and 7.2%) for the
        Hardwoods LP and Hardwoods USLP credit facilities, respectively.

    8.  Non-controlling interests:

        ---------------------------------------------------------------------
                                                          2007          2006
        ---------------------------------------------------------------------

        Balance, beginning of the year (note 3)       $ 33,788      $ 32,047
        Interest in earnings
          Interest in earnings before taxes              3,527         1,484
          Adjustment to non-controlling interest
           from subordination of Class B Unit
           Holders                                      (3,418)            -
        ---------------------------------------------------------------------
                                                           109         1,484
        Foreign currency translation adjustment
         of non-controlling interest in Hardwoods
         USLP and other                                 (3,829)          328
        ---------------------------------------------------------------------
        Balance, end of the year                      $ 30,068      $ 33,859
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The previous owners of the Business (note 1) have retained a 20%
        interest in Hardwoods LP and Hardwoods USLP through ownership of
        Class B Hardwoods LP units ("Class B LP Units") and Class B Hardwoods
        USLP units ("Class B USLP Units"), respectively. The Fund owns an
        indirect 80% interest in Hardwoods LP and Hardwoods USLP through
        ownership of all Class A Hardwoods LP units ("Class A LP Units") and
        Class A Hardwoods USLP units ("Class A USLP Units"), respectively.

        The Class A LP Units and Class B LP Units and the Class A USLP Units
        and Class B USLP Units, respectively, have economic and voting rights
        that are equivalent in all material respects except distributions on
        the Class B LP Units and Class B USLP Units are subject to the
        subordination arrangements described below until the date (the
        "Subordination End Date") on which:

        -  the consolidated Adjusted EBITDA, as defined in the Subordination
           Agreement dated March 23, 2004, of the Fund for the 12 month
           period ending on the last day of the month immediately preceding
           such date is at least $21,300,000; and

        -  cash distributions of at least $29,540,000 ($2.05 per Unit) have
           been paid on the Units and a combined amount of cash advances or
           distributions of at least $7,385,000 has been paid on the Class B
           LP Units and Class B USLP Units, being $2.05 per combined Class B
           LP and Class B USLP Units (as adjusted for issuances, redemptions
           and repurchases of Units, LP Units and USLP Units subsequently and
           by converting the cash distributions or advances by Hardwoods USLP
           on the USLP Units at the rate of exchange used by the Fund to
           convert funds received by it in US dollars into Canadian dollars)
           for the 24 month period ending on the last day of the month
           immediately preceding such date.

        The Subordinated End Date had not occurred at December 31, 2007.

        Prior to the Subordination End Date, advances and distributions on
        the LP Units and the USLP Units will be made in the following order
        of priority:

        -  At the end of each month, cash advances or distributions will be
           made to the holders of Class A LP Units and Class A USLP Units in
           a combined amount that is sufficient to provide available cash to
           the Fund to enable the Fund to make cash distributions upon the
           Units for such month at least equal to $0.08542 per Unit or, if
           there is insufficient available cash to make distributions or
           advances in such amount, such lesser amount as is available as
           determined by the board of directors of the general partners;

        -  At the end of each fiscal quarter of Hardwoods LP and Hardwoods
           USLP, including the fiscal quarter ending on the fiscal year end,
           available cash of Hardwoods LP and Hardwoods USLP will be advanced
           or distributed in the following order of priority:

           -  First, in payment of the monthly cash advance or distribution
              to the holders of Class A LP Units and Class A USLP Units as
              described above, for the month then ended;

           -  Second, to the holders of Class A LP Units and Class A USLP
              Units, to the extent that the combined monthly cash advances or
              distributions in respect of the 12 month period then ended (and
              not, for greater certainty, in any previous 12 month period) on
              Class A LP Units and Class A USLP Units were not made or were
              made in amounts less than a combined amount at least equal to
              $1.025 per Unit, the amount of any such deficiency. As of
              December 31, 2007, the amount of such deficiency was
              $2.4 million;

           -  Third, to the holders of Class B LP Units and Class B USLP
              Units in a combined amount for one Class B LP Unit and one
              Class B USLP Unit equal, on a pro-rated basis, to the combined
              amount advanced or distributed on one Class A LP Unit and one
              Class A USLP Unit during such fiscal quarter or, if there is
              insufficient available cash to make advances or distributions
              in such amount, such lesser amount as is available;

           -  Fourth, to the holders of Class B LP Units and Class B USLP
              Units, to the extent only that combined advances or
              distributions in respect of any fiscal quarter(s) during the
              12 month period then ended (and not, for greater certainty, in
              any previous 12 month period) on one Class B LP Unit and one
              Class B USLP Unit were not made, or were made in amounts less,
              on a pro-rated basis, that the combined amount advanced or
              distributed on one Class A LP Unit and one Class A USLP Unit
              during such 12 month period, the amount of such deficiency. As
              of December 31, 2007, the amount of such deficiency was
              $3.1 million. The cumulative deficiency prior to December 31,
              2006, which is no longer recoverable by the Class B LP
              Unitholders and Class B USLP Unitholders, has been recorded as
              an adjustment to the non-controlling interest's share of
              earnings in the amount of $3.4 million;

           -  Fifth, to the extent of any excess, to the holders of the Class
              A LP Units and Class B LP Units and Class A USLP Units and
              Class B USLP Units, respectively, so that the combined advances
              or distributions on one Class A LP Unit and one Class A USLP
              Unit are the same as the combined advances or distribution on
              one Class B LP Unit and one Class B USLP Unit in respect of the
              12 month period then ended (and not, for greater certainty, any
              previous 12 month period).

        After the Subordination End Date, the holders of the Class B LP Units
        and Class B USLP Units will generally be entitled to effectively
        exchange all or a portion of their Class B LP Units and Class B USLP
        Units together for up to 3,602,500 Units of the Fund, representing
        20% of the issued and outstanding Units of the Fund on a fully
        diluted basis. In the event the Fund enters into an agreement in
        respect of an acquisition or a take-over bid of the Fund, the holders
        of the Class B LP Units and Class B USLP Units will be entitled to
        exchange such units for Units of the Fund.

    9.  Fund Units:

        (a) An unlimited number of Units and Special Voting Units may be
            created and issued pursuant to the Declaration of Trust. Each
            Unit is transferable and represents an equal undivided
            beneficial interest in any distributions from the Fund, whether
            of net income, net realized capital gains or other amounts and
            in the net assets of the Fund in the event of a termination or
            winding up of the Fund. The Special Voting Units are not
            entitled to any beneficial interest in any distribution from
            the Fund or in the net assets of the Fund in the event of a
            termination or winding up of the Fund. Each Unit, or Special
            Voting Unit, entitles the holder thereof to one vote at all
            meetings of voting Unitholders.

            On March 23, 2004, the Fund issued 14,410,000 Units at a price
            of $10 per Unit pursuant to the Offering. Net proceeds from the
            Offering were $133,454,000 after deducting expenses of the
            Offering of $10,646,000. The holders of the Class B Units of
            Hardwoods LP and Hardwoods USLP were issued 3,602,500 Special
            Voting Units of the Fund, the value of which is included in
            non-controlling interests (note 8). Such Special Voting Units
            are to be cancelled on the exchange of Class B Units of Hardwoods
            LP and Hardwoods USLP for Units of the Fund.

        (b) The Trustees of the Fund approved the adoption of a Unitholders
            Rights Plan (the "Rights Plan") dated December 12, 2006, that
            is intended to ensure fair treatment for all Unitholders in the
            event of a take-over bid or any other attempt to acquire a
            controlling interest in the Fund. The Rights Plan has been
            accepted by the Toronto Stock Exchange and was approved at the
            meeting of Unitholders on May 14, 2007. The Rights Plan will
            continue in effect until the annual general meeting of
            Unitholders in 2010. Provisions of the Rights Plan include the
            limitation on Unitholder ownership at 20% of outstanding units
            in the absence of a take-over bid for all outstanding units and
            a requirement for a take-over bid to be open for a minimum of
            60 days. At the effective date of the Rights Plan, beneficial
            owners of 20% or more of the units of the Fund (including
            holders of securities exchangeable for units of the Fund) were
            deemed to be "Grandfathered Persons" and are exempt from the
            definition of an "Acquiring Person" under the Rights Plan
            provided their beneficial interest in the outstanding units
            does not increase by more than 1.0% following December 12, 2006.
            The rights become exercisable only when a person or party
            acquires 20% or more of the Units, or in the case of a
            Grandfathered Person increases their beneficial interest in
            Units by more than 1.0%, each without complying with certain
            provisions of the Rights Plan. Each right would entitle each
            holder of Units (other than the acquiring person or party) to
            purchase additional Units of the Fund at a 50 per cent discount
            to the market price at the time.

    10. Income taxes:

        ---------------------------------------------------------------------
                                                          2007          2006
        ---------------------------------------------------------------------

        Current                                       $    441      $  1,054
        Future                                           1,464         1,247

        ---------------------------------------------------------------------
                                                      $  1,905      $  2,301
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Under current income tax regulations subsidiaries of the Fund are
        only subject to U.S. tax, thus income tax expense differs from that
        calculated by applying U.S. federal and state statutory income tax
        rates in effect in that jurisdiction in which the U.S. subsidiary is
        subject to tax of 39.4% (2006 - 39.4%) to earnings before income
        taxes for the following reasons:

        ---------------------------------------------------------------------
                                                          2007          2006
        ---------------------------------------------------------------------

        Earnings before income tax                    $ 17,524      $  5,938
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Computed tax expenses at statutory rate       $  6,904      $  2,340
        Income of Fund distributed directly
         to Unitholders                                 (4,317)         (763)
        Income and deductions not subject to tax          (812)         (386)
        Taxes paid as a result of Subordination
         Agreement                                         712           843
        Adjustment to non-controlling interest
         not subject to tax                               (930)            -
        Branch profits tax                                  54           165
        Deductible state taxes                              21            (8)
        Other                                              273           110
        ---------------------------------------------------------------------
                                                      $  1,905      $  2,301
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Taxes paid as a result of Subordination Agreement represent
        additional taxes incurred by subsidiaries of the Fund due to
        distributions having not been made to the non-controlling interests
        on a proportional basis.

        The tax effect of temporary differences that give rise to significant
        portions of the future income tax assets and liabilities at
        December 31, 2007 is as follows:

        ---------------------------------------------------------------------
                                                          2007          2006
        ---------------------------------------------------------------------

        Future income tax assets:
          Accounts receivable                         $    154      $    272
          Inventory                                        383           453
          Employee housing loans                            73             -
          Property, plant and equipment                    249             -
          Accrued liabilities                                -            21
          Deferred gain on sale-leaseback
           of land and building                            170           227
        ---------------------------------------------------------------------
                                                         1,029           973

        Future income tax liabilities:
          Prepaid expenses                                 (84)          (91)
          Property, plant and equipment                   (111)          (69)
          Goodwill                                      (4,368)       (3,466)
        ---------------------------------------------------------------------
                                                        (4,563)       (3,626)

        ---------------------------------------------------------------------
        Net future income tax liability               $ (3,534)     $ (2,653)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    11. Changes in non-cash operating working capital:

        ---------------------------------------------------------------------
                                                          2007          2006
        ---------------------------------------------------------------------

        Accounts receivable                           $  1,470      $   (122)
        Income taxes recoverable                          (445)         (510)
        Inventory                                        1,627         3,070
        Prepaid expenses                                   (70)          123
        Accounts payable and accrued liabilities           195        (1,672)

        ---------------------------------------------------------------------
                                                      $  2,777      $    889
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    12. Commitments:

        (a) The Fund's subsidiaries are obligated under various building and
            automobile operating leases that require minimum rental payments
            in each of the next five years as follows:

            -----------------------------------------------------------------
            2008                                                    $  6,451
            2009                                                       5,207
            2010                                                       3,330
            2011                                                       1,240
            2012                                                         715
            -----------------------------------------------------------------
                                                                      16,943
            Thereafter                                                   684

            -----------------------------------------------------------------
                                                                    $ 17,627
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (b) At December 31, 2007, the Fund's subsidiaries were committed in
            the amount of $22,304 (US$22,500) (2006 - $26,222 (US$22,500))
            under letters of credit.

    13. Segment disclosure:

        Information about geographic areas is as follows:

        ---------------------------------------------------------------------
                                                          2007          2006
        ---------------------------------------------------------------------

        Revenue from external customers:
          Canada                                     $ 105,171     $ 109,024
          United States                                226,594       253,504

        ---------------------------------------------------------------------
                                                     $ 331,765     $ 362,528
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Property, plant and equipment:
          Canada                                     $   1,003     $   1,156
          United States                                  1,410         2,063

        ---------------------------------------------------------------------
                                                     $   2,413     $   3,219
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Goodwill
          Canada                                     $  34,477     $  34,477
          United States                                 46,281        54,409

        ---------------------------------------------------------------------
                                                     $  80,758     $  88,886
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    14. Financial instruments:

        (a) Fair values of financial instruments:

            The carrying values of cash and cash equivalents, trade
            accounts receivable, accounts payable and accrued liabilities
            and distributions payable approximate their fair values due to
            the relatively short period to maturity of the instruments. The
            fair value of long-term receivables is not expected to differ
            materially from the carrying value. The carrying values of the
            credit facilities approximate their fair values due to the
            existence of floating market based interest rates. The foreign
            currency contracts are carried at market values.

        (b) Credit risk:

            The Fund is exposed to credit risk in the event it is unable to
            collect in full amounts receivable from its customers. The Fund
            employs established credit approval practices and engages
            credit attorneys when appropriate to mitigate the credit risk.
            It is the Fund's policy to secure credit terms with customers
            whenever possible by registering security interests in the
            assets of the customer and by obtaining personal guarantees.
            Our largest individual customer balance amounted to 5.3% of
            accounts receivable and customer notes receivable at December 31,
            2007.

        (c) Counterparty risk:

            Changes in the exchange rates and interest rates will result in
            market gains and losses on the foreign currency contracts
            entered into by the Fund. Furthermore, the Fund may be exposed
            to losses should the counterparty to its foreign currency
            contracts fail to fulfill its obligations. The Fund has sought
            to minimize potential counter party losses by transacting with
            high credit quality institutions.

    15. Pensions:

        Hardwoods USLP maintains a defined contribution 401 (k) retirement
        savings plan (the "USLP Plan"). The assets of the USLP Plan are held,
        and related investment transactions are executed, by the Plan's
        Trustee, ING National Trust, and, accordingly, are not reflected in
        these consolidated financial statements. During the year ended
        December 31, 2007, Hardwoods USLP contributed and expensed $403,817
        (US$375,643) (2006 - $394,505 (US$347,826)) in relation to the USLP
        Plan.

        Hardwoods LP does not maintain a pension plan. Hardwoods LP does,
        however, administer a group registered retirement savings plan ("LP
        Plan") that has a matching component whereby Hardwoods LP makes
        contributions to the LP Plan which match contributions made by
        employees up to a certain level. The assets of the LP Plan are held,
        and related investment transactions are executed, by LP Plan's
        Trustee, Sun Life Financial Trust Inc., and, accordingly, are not
        reflected in these consolidated financial statements. During the year
        ended December 31, 2007, Hardwoods LP contributed and expensed
        $246,475 (2006 - $266,153) in relation to the LP Plan.

    16. Related party transactions:

        For the year ended December 31, 2007, sales of $736,573 (2006 -
        $1,141,799) were made to affiliates of SIL, and the Fund made
        purchases of $184,732 (2006 - $77,932) from affiliates of SIL. All
        these sales and purchases took place at prevailing market prices.

        During the year ended December 31, 2007, the Fund expensed $108,000
        (2006 - $108,000) for management information systems services
        provided by affiliates of SIL. This cost is included in selling and
        administrative expense in the consolidated statement of earnings and
        retained earnings (deficit).

    17. Contingencies:

        The Fund and its subsidiaries are subject to legal proceedings that
        arise in the ordinary course of its business. Management is of the
        opinion, based upon information presently available, that it is
        unlikely that any liability, to the extent not provided for through
        insurance or otherwise, would be material in relation to the Fund's
        consolidated financial statements.
    

    %SEDAR: 00020372E




For further information:

For further information: Rob Brown, Chief Financial Officer, Phone:
(604) 881-1990, Fax: (604) 881-1995, Email: robbrown@hardwoods-inc.com

Organization Profile

HARDWOODS DISTRIBUTION INCOME FUND

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