Hardwoods Distribution Income Fund Announces 2009 Fourth Quarter and Year-End
Results

Hardwoods Distribution Income Fund will hold a conference call and webcast to discuss fourth quarter and 2009 full-year financial results on March 30, 2010 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call can be accessed by dialing: 1-888-231-8191 or 647-427-7450 (local call in Toronto) and referencing conference call number 61033289. A replay will be available until April 13, 2010 at: 1-800-642-1687 or 416-849-0833 (Passcode 61033289).

TRADING SYMBOL: Toronto Stock Exchange - HWD.UN

LANGLEY, BC, March 29 /CNW/ - Hardwoods Distribution Income Fund (the "Fund") today reported financial results for the three months and 12 months ended December 31, 2009. 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 operates 27 distribution centres in the U.S. and Canada.

2009 Overview

(For the 12 months ended December 31, 2009)

    
    -   Full-year revenue declined 25.5% to $190.9 million

    -   Gross profit percentage increased to 18.1%, from 18.0% in 2008

    -   Selling and administrative expenses were successfully reduced by
        $5.8 million, a 14.0% reduction from 2008

    -   The Fund recorded an EBITDA loss of $1.2 million, compared to an
        EBITDA profit of $5.9 million in 2008

    -   A net loss of $10.2 million was recorded, compared to a net loss of
        $36.2 million in 2008

    -   The Fund continued to strengthen its balance sheet, reducing debt by
        $13.0 million and ending the year with just $4.5 million of bank
        indebtedness (net of cash)
    

"We maintained stable gross margins, reduced expenses and strengthened our financial position in the midst of extremely challenging market conditions," said Maurice Paquette, Hardwoods President and CEO in describing results for the fourth quarter and 12 months of fiscal 2009.

"As we anticipated, the collapse of the US housing market and recessionary conditions in the US and Canada continued to negatively affect demand and prices for our products. Although we saw indications of stability returning to the residential construction market in the second half of 2009, it remains uncertain to what extent market conditions will improve. We have not yet seen any corresponding improvement in demand for the hardwood products we sell, which normally lag changes in housing starts by six to twelve months. Fourth quarter and full-year sales and EBITDA results remained well below last year's levels," added Paquette.

"To help mitigate the short-term sales impact of these conditions, we implemented new incentive programs in 2009 that rewarded our sales force for identifying and winning new customer accounts and for implementing new product programs that produce sustained sales. Approximately 18% of our second half sales were generated as a result of these programs. We also continued to develop our Hardwoods Greenbelt(TM) product line, marketing directly to the architects and designers that specify environmentally friendly green building products in their building projects. These strategies provided important support for our sales and margins in 2009, while laying a foundation for stronger results once markets recover," added Mr. Paquette.

"One of our key objectives in 2009 was to ensure our costs remained closely aligned with the lower level of market demand. We completed further downsizing of our branch network early in the year, reducing our underlying sales and administrative (S&A) costs by $8.5 million, or by $5.8 million after accounting for higher bad debts and negative foreign exchange impacts. Combined with responsible reductions in our working capital, we ended the year with positive cash flow from operating activities of $10.3 million, Distributable Cash results that were close to breakeven, and a further strengthening of our balance sheet. As at December 31, 2009, we had reduced our bank indebtedness (net of cash) to just $4.5 million, from $17.5 million at the start of 2009, and had $20.5 million of unused borrowings available to us."

"Our improved financial position enabled us to make two favourable amendments to our US credit facilities during the year, and secure an attractive new three-year credit facility in Canada. The Fund is now moving forward on a very stable financial footing."

"Overall, we are pleased with our achievements in 2009 given difficult economic conditions, and believe that we have now put the worst of the market downturn behind us. That said, our expectations for 2010 remain cautious. Overall, we anticipate that any improvement in market conditions that occurs in 2010 will be gradual, and that a more sustainable and robust market recovery will not occur prior to 2011. Our focus will remain on tight management of costs, cash and working capital and on continuing to successfully meet new challenges as they arise," said Mr. Paquette.

    
    Summary of Results

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

                            12 months    12 months     3 months     3 months
                                ended        ended        ended        ended
                             December     December     December     December
                             31, 2009     31, 2008     31, 2009     31, 2008
                          ------------ ------------ ------------ ------------
    Total sales           $   190,923  $   256,301  $    41,577  $    56,650
      Sales in the US
       (US$)                  101,212      156,398       22,987       29,270
      Sales in Canada          75,339       89,581       17,500       19,423
    Gross profit               34,482       46,096        7,636        9,485
      Gross profit %             18.1%        18.0%        18.4%        16.7%
    Selling and
     administrative
     expenses                 (35,636)     (41,425)     (10,057)     (10,915)
    Realized gain on
     foreign currency
     contracts                      -        1,247            -            -
    -------------------------------------------------------------------------
    Earnings before
     interest, taxes,
     depreciation and
     amortization and
     non-controlling
     interest ("EBITDA")       (1,154)       5,918       (2,421)      (1,430)
      Add (deduct):
        Amortization             (870)      (1,471)        (198)        (326)
        Interest                 (586)      (1,219)        (152)        (284)
        Non-cash foreign
         currency gains
         (losses)              (1,553)        (333)        (171)       1,498
        Intangibles
         impairment                 -       (8,612)           -       (3,144)
        Goodwill impairment         -      (82,083)           -      (17,477)
        Non-controlling
         interest               2,347       20,031          590        4,881
        Income tax recovery
         (expense)             (8,424)      31,526        1,808        3,341
    -------------------------------------------------------------------------
    Net loss for the
     period               $   (10,240) $   (36,243) $      (544) $   (12,941)
    -------------------------------------------------------------------------
    Basic and fully
     diluted loss per
     Class A Unit         $    (0.711) $    (2.515) $    (0.038) $    (0.898)
    Average Canadian
     dollar exchange rate
     for one US dollar         1.1420        1.066       1.0571       1.2115
    -------------------------------------------------------------------------



    Distributable Cash and Cash Distributions

    Selected Unaudited Consolidated Financial Information
    (in thousands of dollars except per unit amounts)

                                                       3 months     3 months
                           Year ended   Year ended        ended        ended
                             December     December     December     December
                             31, 2009     31, 2008     31, 2009     31, 2008
                          ------------ ------------ ------------ ------------
    Net cash provided by
     operating activities $    10,247  $    20,229  $     1,380  $     6,028
    Increase (decrease)
     in non-cash operating
     working capital          (10,291)     (14,836)      (1,885)      (7,679)
                          ------------ ------------ ------------ ------------
    Cash flow from
     operations before
     changes in non-cash
     operating working
     capital                      (44)       5,393         (505)      (1,651)
    Capital expenditures          (95)        (425)           -          (79)
                          ------------ ------------ ------------ ------------
    Distributable Cash    $      (139) $     4,968  $      (505) $    (1,730)
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Distributions relating
     to the period:
      Class A Units       $         -  $   7,565(1) $         -  $         -
      Class B Units(2)              -            -            -            -
                          ------------ ------------ ------------ ------------
      Total Units         $         -  $     7,565  $         -  $         -
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    -------------------------------------------------------------------------
    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      $    (0.008) $     0.276  $    (0.028) $    (0.096)

    Distributions relating
     to the period:
      Class A Units       $         -  $   0.525(1) $         -  $         -
      Class B Units(2)    $         -  $         -  $         -  $         -
      Total Units         $         -  $     0.420  $         -  $         -

    Payout ratio(3)               0.0%       152.3%         0.0%         0.0%
    -------------------------------------------------------------------------

                                                       March 23,
                                                        2004 to
                                                       December
                                                       31, 2009
                                                    ------------
    Cumulative since
     inception:
      Distributable Cash                                 75,478
      Distributions
       relating to the
       period                                            66,754
      Payout ratio(3)                                      88.4%
    -------------------------------------------------------------------------

    (1) Includes the cash distributions of $0.075 per Class A Unit per month
        which relate to the operations of the Fund for January to June 2008,
        and cash distributions of $0.025 per Class A Unit per month which
        relate to the operations of the Fund for July to September 2008.
    (2) 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,
        2009 balance sheet.
    (3) 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, 2009

For the three months ended December 31, 2009 the Fund and its subsidiaries reported negative Distributable Cash of ($0.5) million, or ($0.028) per unit. By comparison, the Fund reported negative Distributable Cash of ($1.7 million) or ($0.096) per unit in the same period of 2008. No distributions were paid to either the public unitholders (Class A Units) or to the Class B Units in either period, resulting in a payout ratio of 0% in both the fourth quarter of 2008 and 2009.

Total fourth quarter sales declined by 26.6% to $41.6 million, from the $56.7 million reported in 2008. The change in sales revenue reflects a 20.0% decrease in underlying sales activity and a 6.6% decrease in sales due to the negative effect of a stronger Canadian dollar. Sales in the United States, as measured in US dollars, decreased by 21.5% to $23.0 million. Sales in Canada, as measured in Canadian dollars, declined by 9.9% to $17.5 million.

Fourth quarter gross profit declined to $7.6 million, from $9.5 million in Q4 2008 as a result of the lower sales revenue, partially offset by a higher gross profit margin. Gross profit as a percentage of sales increased to 18.4% from 16.7% in Q4 2008. Gross margin percentage in 2008 was weaker than normal due to a write-down to the carrying value of specialized inventory held for a significant customer that went out of business.

Selling and administrative (S&A) expenses continued to improve in the fourth quarter, declining to $10.1 million, from $10.9 million in the same period of 2008. The reduction in S&A expenses reflects a $1.5 million reduction in underlying costs as the Fund implemented a broad range of cost-saving measures, as well as the $0.9 million positive foreign exchange impact of a stronger Canadian dollar on the conversion of S&A expenses at our US operations. These reductions were partially offset by a $0.4 million increase in bad debt expense and by the absence of a $1.1 million credit against fourth quarter S&A which occurred in the 2008 period. The 2008 credit against expenses reflected the last year's decision to cancel accrued year-end incentive plan payments for management and staff. As a percentage of sales, fourth quarter 2009 S&A expenses were 24.2% of sales, compared to 19.3% in 2008.

The Fund reported a fourth quarter EBITDA loss of $2.4 million, compared to a loss of $1.4 million in Q4 2008. The change in EBITDA reflects the lower gross profit, partially offset by the reduced S&A expenses.

The fourth quarter net loss of $0.5 million compared favourably to a net loss of $12.9 million during the same period in 2008. The improvement in net loss reflects a $20.6 million decrease in goodwill and intangible impairment, and a $0.1 million decrease in amortization and interest expense respectively. This was partially offset by the $1.0 million decrease in EBITDA, a $1.7 million decrease in non-cash foreign currency gains, a $4.3 million decrease in recovery from the non-controlling interest, and a $1.5 million decrease in income tax recovery.

Results from Operations - 12 months ended December 31, 2009

For the 12 months ended December 31, 2009, the Fund and its subsidiaries reported negative Distributable Cash of ($0.1) million, or ($0.008) per unit, compared to positive Distributable Cash of $5.0 million, or $0.276 per unit, in 2008. No distributions were paid to the Class A or Blass B Units in 2009 resulting in a payout ratio of 0% for the year, compared to distributions of $7.6 million and a payout ratio of 152.3% in the 2008 period.

Total sales declined by 25.5% to $190.9 million, from $256.3 million in 2008, reflecting significantly reduced demand and lower product prices. Sales at Hardwoods' US operations, as measured in US dollars, decreased by 35.2%. Sales in Canada, as measured in Canadian dollars, were down 15.9% year-over-year.

Gross profit for the 2009 year was $34.5 million, compared to $46.1 million in 2008. The reduction in gross profit reflects lower sales, partially offset by a slightly higher gross profit margin. As a percentage of sales, gross profit was 18.1% in 2009, compared to 18.0% in 2008.

Selling and administrative expenses decreased by $5.8 million to $35.6 million, from $41.4 million in 2008. By reducing the size of the branch network and realizing savings across most expense categories, the Fund achieved underlying 2009 cost savings of $8.5 million, which were partially offset by the $1.7 million negative impact of a weaker Canadian dollar on US operating expenses and a $1.0 million increase in bad debt expense.

The Fund reported an EBITDA loss of $1.2 million, compared to an EBITDA profit of $5.9 million in 2008. The change in EBITDA reflects lower gross profit and a $1.2 million decrease in realized gains on foreign currency contracts, partially offset by lower S&A expenses.

The Fund recorded a net loss of $10.2 million for the 2009 year, compared to a net loss of $36.2 million in 2008. The decrease in net loss primarily reflects a $90.7 million decrease in impairment in goodwill and other intangible assets, a $0.6 million decrease in amortization, and a $0.6 million decrease in interest expense. This was partially offset by the $7.1 million decrease in EBITDA, a $1.2 million increase in non-cash foreign currency losses, a $17.7 million decrease in recovery from non-controlling interest, and a $39.9 million increase in income tax expense.

Outlook

While Hardwoods believes that the bottom of the market cycle has now been reached, its near-term outlook remains cautious. Many economists predict that the recent encouraging signs in the residential construction market may be tempered by higher mortgage rates and the April 2010 expiry of the US government's home-buyers tax credit. Hardwoods' risk of bad debt also remains elevated with many customers feeling the effects of the prolonged downturn. Overall, management anticipates that 2010 will bring a slow, and potentially uneven, improvement in market conditions, and that a more sustainable and robust market recovery will not occur prior to 2011.

In light of these expectations, tight management of expenses, cash and working capital will remain a key focus in 2010, with Hardwoods continuing to ensure that its distribution network and expenditures are appropriately aligned with market conditions. The company plans to remain proactive on the marketing front with continued sales force motivation and further investment in strategic product lines.

The Fund is also preparing for a management transition in 2010, with President and CEO, Maurice Paquette expected to retire in 2010 following a 36-year career with Hardwoods and its predecessor companies. The Board is currently working to identify a successor. In discussing Mr. Paquette's contribution to the company, Terry Holland, Chairman of the Board of Trustees, said, "Maurice Paquette not only strengthened Hardwoods position as one of North America's leading hardwood distributors, but he has also done a superb job of protecting the business and reducing risk through an unprecedented market downturn."

"We are going to greatly miss having Maurice at the helm, but it is a testament to his leadership skill that he leaves a strong business that will be able to participate fully in the eventual recovery, and one that will continue to thrive even after he retires. During his tenure, Maurice has built an exceptional team of operational leaders. The average tenure of the top dozen managers at Hardwoods is over 20 years. This will give us tremendous depth and stability as we prepare for a leadership transition later this year."

Regarding the January 2011 implementation of new taxes on Canadian income trusts, the Board of Trustees announced today that it does not intend to convert the Fund to a corporate structure at this time. The Fund's taxable earnings currently flow through corporate subsidiaries in both Canada and the US, which are already subject to corporate taxation. Accordingly, the introduction of the new income trust tax is not expected to have any near-term impact on the Fund's tax situation. Furthermore, the move to a corporate structure would entail an estimated $0.3 million in costs at a time when the Fund is focused on conserving cash. Given that the tax-free rollover rules for income trusts do not expire until the end of 2012, ample time remains to convert to an alternate structure should the Board determine it is advantageous to do so. The Board will continue to monitor the situation closely.

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 Hardwoods' operating entities determine to be reasonable and necessary for the operation of the businesses owned by these entities.

Hardwoods believes that, in addition to net income or loss, EBITDA and Distributable Cash are each a useful supplemental measure 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 2009 Annual Report to Unitholders, 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 MD&A included in the Fund's 200 Annual Report to Unitholders, 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 North America's largest distributor 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 27 distribution centres in the U.S. and Canada.

Forward Looking Statements

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 belief that although we saw indications of stability returning to the residential construction market in the second half of 2009, it remains uncertain to what extent market conditions will improve; our belief that strategies undertaken to support our sales and margins in 2009 will lay a foundation for stronger results once markets recover; our belief that the Fund is now moving forward on a very stable financial footing; our belief that we have now put the worst of the market downturn behind us but our expectations for 2010 remain cautious; our anticipation that any improvement in market conditions that occurs in 2010 will be gradual and that a more sustainable and robust market recovery will not occur prior to 2011; our intention to remain focused on tight management of costs, cash and working capital and ensuring our distribution network and expenditures are properly aligned with market conditions; our intention to remain proactive on the marketing front with continued sales force motivation and further investment in strategic product lines; our Chief Executive Officer's intention to retire from the business once the board has identified his successor and we have had the chance to make a smooth transition; and our intention not to convert the Fund to a corporate structure at this time.

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 our performance; the general state of the economy does not worsen; 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 long term 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; 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 our performance; our results are dependent upon the general state of the economy; 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 long term 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; 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; we are dependent upon the financial condition and results of operations of our business; our credit facilities affect our liquidity, contain restrictions on our ability to borrow funds, and impose restrictions on distributions that can be made by our operating limited partnerships; 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 this MD&A.

All forward-looking information in this MD&A 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.

    
    Consolidated Financial Statements
    (Expressed in Canadian dollars)

    HARDWOODS DISTRIBUTION INCOME FUND

    Years ended December 31, 2009 and 2008


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

    December 31, 2009 and 2008

    -------------------------------------------------------------------------
                                                          2009          2008
    -------------------------------------------------------------------------

    Assets

    Current assets:
      Cash and cash equivalents                    $       463   $        85
      Accounts receivable (note 6(c))                   25,585        32,218
      Income taxes recoverable                           2,286         2,316
      Inventory (note 5)                                23,901        30,868
      Prepaid expenses                                     878         1,039
      -----------------------------------------------------------------------
                                                        53,113        66,526

    Long-term receivables (note 6(c))                    1,883         3,639

    Property, plant and equipment (note 7)               1,291         2,168

    Deferred financing costs                               396           235

    Future income taxes (note 13)                       17,587        30,782

    -------------------------------------------------------------------------
                                                   $    74,270   $   103,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
      Bank indebtedness (note 10)                  $     4,960   $    17,561
      Accounts payable and accrued liabilities           4,988         3,365
      -----------------------------------------------------------------------
                                                         9,948        20,926

    Deferred gain on sale-leaseback of land and
     building                                              416           572

    Non-controlling interests (note 11)                  8,748        13,080

    Unitholders' equity:
      Fund Units (note 12)                             133,454       133,454
      Deficit                                          (60,198)      (49,958)
      Accumulated other comprehensive loss             (18,098)      (14,724)
      -----------------------------------------------------------------------
                                                        55,158        68,772
    Nature and continuance of operations (note 1)
    Commitments (note 15)
    Contingencies (note 19)

    -------------------------------------------------------------------------
                                                   $    74,270   $   103,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statements of Operations and Deficit
    (Expressed in thousands of Canadian dollars, except per unit amounts)

    Years ended December 31, 2009 and 2008

    -------------------------------------------------------------------------
                                                          2009          2008
    -------------------------------------------------------------------------

    Sales                                          $   190,923   $   256,301
    Cost of sales                                      156,441       210,205
    -------------------------------------------------------------------------

    Gross profit                                        34,482        46,096

    Expenses (income):
      Selling and administrative                        35,636        41,425
      Amortization:
        Plant and equipment                                795           941
        Deferred financing costs                           159            36
        Other intangible assets                              -           573
      Deferred gain on sale-leaseback of land
       and building                                        (84)          (79)
      Interest                                             586         1,219
      Foreign exchange losses (gains)                    1,553          (914)
      Intangibles impairment (note 9)                        -         8,612
      Goodwill impairment (note 9)                           -        82,083
      -----------------------------------------------------------------------
                                                        38,645       133,896
    -------------------------------------------------------------------------

    Loss before non-controlling interests and
     income taxes                                       (4,163)      (87,800)

    Non-controlling interests (note 11)                  2,347        20,031
    -------------------------------------------------------------------------

    Loss before income taxes                            (1,816)      (67,769)

    Income tax expense (recovery) (note 13):
      Current                                           (1,896)         (734)
      Future                                            10,320       (30,792)
      -----------------------------------------------------------------------
                                                         8,424       (31,526)
    -------------------------------------------------------------------------

    Loss for the year                                  (10,240)      (36,243)

    Deficit, beginning of year                         (49,958)       (6,150)

    Distributions declared to Unitholders                    -        (7,565)

    -------------------------------------------------------------------------
    Deficit, end of year                           $   (60,198)  $   (49,958)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted loss per Unit                $     (0.71)  $     (2.52)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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 Comprehensive Income (Loss)
    (Expressed in thousands of Canadian dollars)

    Years ended December 31, 2009 and 2008

    -------------------------------------------------------------------------
                                                          2009          2008
    -------------------------------------------------------------------------

    Net loss for the year                          $   (10,240)  $   (36,243)

    Other comprehensive income (loss):
      Unrealized gains (losses) on translation of
       self-sustaining foreign operations               (3,374)        6,841

    -------------------------------------------------------------------------
    Comprehensive loss                             $   (13,614)  $   (29,402)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

    Years ended December 31, 2009 and 2008
    -------------------------------------------------------------------------
                                                          2009          2008
    -------------------------------------------------------------------------

    Accumulated other comprehensive loss,
     beginning of year                             $   (14,724)  $   (21,565)

    Other comprehensive income (loss)              $    (3,374)  $     6,841
    -------------------------------------------------------------------------
    Accumulated other comprehensive loss,
     end of year                                   $   (18,098)  $   (14,724)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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, 2009 and 2008

    -------------------------------------------------------------------------
                                                          2009          2008
    -------------------------------------------------------------------------

    Cash flows provided by (used in) operating
     activities:
      Net loss for the year                        $   (10,240)  $   (36,243)
      Items not involving cash:
        Amortization                                       954         1,550
        Imputed interest income on employee loans         (158)          (67)
        Deferred gain on sale-leaseback of land
         and building                                      (84)          (79)
        Gain on sale of property, plant and equipment      (42)          (14)
        Unrealized foreign exchange losses               1,553           333
        Non-controlling interests                       (2,347)      (20,031)
        Future income taxes                             10,320       (30,751)
        Intangibles impairment                               -         8,612
        Goodwill impairment                                  -        82,083
      -----------------------------------------------------------------------
                                                           (44)        5,393
      Change in non-cash operating working
       capital (note 14)                                10,291        14,836
      -----------------------------------------------------------------------
      Net cash provided by operating activities         10,247        20,229

    Cash flows used in financing activities:
      Bank indebtedness                                (11,031)      (11,575)
      Deferred financing fees                             (345)         (221)
      Distributions paid to Unitholders                      -        (8,646)
      -----------------------------------------------------------------------
      Net cash used in financing activities            (11,376)      (20,442)

    Cash flows provided by (used in) investing
     activities:
      Additions to property, plant and equipment           (95)         (425)
      Proceeds on disposal of property, plant
       and equipment                                        57            25
      Long-term receivables, net                         1,545           403
      -----------------------------------------------------------------------
      Net cash provided by investing activities          1,507             3
    -------------------------------------------------------------------------

    Increase (decrease) in cash                            378          (210)

    Cash, beginning of year                                 85           295

    -------------------------------------------------------------------------
    Cash, end of year                              $       463   $        85
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental information:
      Interest paid                                $       586   $     1,219
      Income taxes paid                                    207            75
      Transfer of accounts receivable to long-term
       customer notes receivable, being a non-cash
       transaction                                         685         2,508
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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, 2009 and 2008

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

    1.  Nature and continuance of operations:

        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 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.

        The Fund has forecast its financial results and cash flows for the
        next 12 months (the "Forecast Period"). The forecasts are based on
        management's best estimates of operating conditions in the context of
        the current economic climate, today's capital market conditions and
        the depressed state of the housing and renovation markets in both
        Canada and the United States.

        In the second quarter of 2009, the Fund's U.S. subsidiary and its
        lender amended their credit agreement with changes effective for the
        June 30, 2009 reporting period. This amendment removed the U.S.
        subsidiary's previous fixed charge coverage ratio financial covenant
        and replaced it with a minimum trailing EBITDA covenant. Under the
        amendment, the minimum trailing EBITDA covenant is only applicable in
        the event the U.S. subsidiary's unused credit availability falls
        below US$4.0 million. At December 31, 2009, the U.S. subsidiary's
        unused credit availability was in excess of US$4.0 million, and
        accordingly the U.S. subsidiary was not subject to any financial
        covenant and was compliant with its credit facility. If the U.S.
        subsidiary had been subject to its trailing EBITDA covenant at
        December 31, 2009, it would have been in compliance with this
        covenant. Due to the difficulty in predicting the continued severity
        and duration of the current economic and financial crisis, management
        is uncertain whether its U.S. subsidiary will remain in compliance
        with its financial covenant during the Forecast Period. Further
        weakening of the housing and renovation market, or significant
        customer or credit losses, could cause the U.S. subsidiary to be in
        violation of its financial covenant. This could cause the Fund's
        U.S. subsidiary bank indebtedness to become immediately due and
        payable, and the Fund and its U.S. subsidiary may not be able to
        access funds under its revolving credit facility. In the event of
        such a circumstance, the Fund could draw on its Canadian credit
        facility, or if that does not suffice, it would need to raise
        additional capital in the form of equity or debt to supplement or
        replace its existing credit facilities in order to have sufficient
        liquidity to meet its obligations in the Forecast Period.

        The accompanying consolidated financial statements have been prepared
        assuming the Fund will continue as a going concern and contemplates
        the realization of assets and the satisfaction of liabilities in the
        normal course of business. The consolidated financial statements do
        not include any adjustments relating to the recoverability and
        classification of recorded asset amounts should the Fund be unable to
        continue as a going concern.

    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 lower of cost and net realizable value.
            Cost is determined using the weighted average cost method and
            includes invoice cost, duties, freight, and other directly
            attributable costs of acquiring the inventory.

            Volume rebates and other supplier discounts are included in
            income when earned. Volume discounts and supplier trade
            discounts are accounted for as a reduction of the cost of the
            related inventory and are earned when inventory is sold.

        (e) Property, plant and equipment:

            Property, plant and equipment is stated at cost less accumulated
            amortization. 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 credit facility.

        (g) Intangible assets:

            Intangible assets represent customer relationships acquired at
            the time the Business was purchased from SIL (note 1) and were
            recorded at cost less accumulated amortization and any
            write-downs. Amortization was provided for on a straight-line
            basis over 15 years. During the year ended December 31, 2008,
            management performed impairment tests at June 30, 2008 and at
            December 31, 2008 and recorded aggregate intangibles impairments
            of $8.6 million, leaving no intangible asset value at December
            31, 2008.

        (h) Goodwill:

            Goodwill was recorded at cost less any write-downs and was not
            amortized. Management reviewed the carrying value of goodwill for
            impairment annually, or more frequently if events or changes in
            circumstances indicated that the asset may be impaired. Any
            excess of carrying value over fair value was charged to earnings
            in the period in which the impairment is determined. During the
            year ended December 31, 2008, management performed impairment
            tests at June 30, 2008 and at December 31, 2008 and recorded
            aggregate goodwill impairments of $82.1 million, leaving no
            goodwill at December 31, 2008.

        (i) Impairment of long-lived assets:

            Long-lived assets, including property, plant and equipment, 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. 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.

        (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 as a proxy
            for the exchange rates prevailing at the transaction dates. 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 for the period.

        (n) Foreign currency contracts:

            The Fund has used, in preceding years, currency derivatives to
            manage its exposure to fluctuations in exchange rates between the
            Canadian and the United States dollar. The foreign currency
            contracts were recognized in the balance sheet and measured at
            fair value, with changes in fair value recognized in the
            statement of operations.

        (o) Loss per Unit:

            Basic loss per Unit is calculated by dividing net loss by the
            weighted average number of Units outstanding during the reporting
            period. Diluted loss 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 loss per Unit, diluted and basic loss 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 estimate include
            the assessment of the Fund's ability to continue as a going
            concern, the valuation and impairment analysis of goodwill and
            intangible assts, 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:

            International Financial Reporting Standards:

            The CICA will transition Canadian generally accepted accounting
            principles ("GAAP") for publicly accountable entities to
            International Financial Reporting Standards ("IFRS"). The Fund's
            consolidated financial statements are to be prepared in
            accordance with IFRS for the fiscal year commencing January 1,
            2011. While IFRS uses a conceptual framework similar to Canadian
            GAAP, there are significant differences on recognition,
            measurement, and disclosures. While the effects of IFRS have not
            yet been fully determined, the Fund has identified a number of
            key areas which are likely to be impacted, including: deferred
            gain on sale-leaseback of land and building; accumulated other
            comprehensive loss; property plant and equipment, leased
            vehicles, and potentially the classification of non-controlling
            interests and Fund units. In addition, financial statement
            presentation changes and additional disclosure requirements are
            anticipated under IFRS. The adoption of IFRS is not expected to
            have a material impact on the Fund's reported cash flows.

    3.  Adoption of new accounting standards:

        Goodwill and Intangible Assets:

        Effective January 1, 2009, the Fund adopted the new CICA Handbook
        Section 3064, Goodwill and Intangible Assets. This section replaces
        CICA Handbook Section 3062, Goodwill and Intangible Assets, and
        establishes revised standards for the recognition, measurement,
        presentation and disclosure of goodwill and intangible assets. As the
        Fund no longer has goodwill or intangible assets, the adoption of
        this new standard does not impact the amounts presented in the
        financial statements.

        Credit risk and the fair value of financial assets and liabilities:

        On January 23, 2009, the CICA Emerging Issues Committee (EIC) issued
        EIC-173, Credit Risk and the Fair Value of Financial Assets and
        Liabilities. EIC-173 is effective for interim and annual financial
        statements ending on or after January 20, 2009. EIC-173 provides
        guidance that an entity's own credit risk of counterparties should be
        taken into account in determining the fair value of financial assets
        and liabilities. Adoption of this guidance is to be applied
        retrospectively without restatement of prior periods. The Fund has
        evaluated the impact of this new standard and concluded that it does
        not have a material impact on its financial statements.

        Financial instruments disclosures:

        Amended Handbook Section 3862, Financial Instruments - Disclosures,
        establishes revised standards for the disclosure of financial
        instruments. The new standard establishes a three-tier hierarchy as a
        framework for disclosing fair value of financial instruments based on
        inputs used to value the Fund's investments. The hierarchy of inputs
        and description of inputs is described as follows:

        Level 1 - fair values are based on quoted prices (unadjusted) in
        active markets for identical assets or liabilities;

        Level 2 - fair values are based on inputs other than quoted prices
        included in Level 1 that are observable for the asset or liability,
        either directly (as prices) or indirectly (derived from prices); or

        Level 3 - fair values are based on unobservable inputs for which no
        market data exists, therefore, requiring the Fund to develop its own
        assumptions.

        Changes in valuation methods may result in transfers into or out of
        an investment's assigned level.

        These additional disclosures have been provided in Note 6 to the
        Financial Statements.

    4.  Capital disclosures:

        The Fund's policy is to maintain a strong capital base so as to
        maintain investor, creditor and market confidence and to sustain
        future development of the business. The Fund considers its capital to
        be bank indebtedness (net of cash) plus Unitholders' equity. The
        Fund's capitalization is as follows:

        ---------------------------------------------------------------------
                                                           2009         2008
        ---------------------------------------------------------------------

        Cash and cash equivalents                   $      (463) $       (85)
        Bank indebtedness                                 4,960       17,561
        ---------------------------------------------------------------------

        Net debt                                          4,497       17,476

        Unitholders' equity                              55,158       68,772

        ---------------------------------------------------------------------
        Total capitalization                        $    59,655  $    86,248
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Fund monitors on a monthly basis the ratio of net debt to
        earnings before interest, income taxes, depreciation and amortization
        ("EBITDA"). Net debt to EBITDA serves as an indicator of the Fund's
        financial leverage. The U.S. credit facility is subject to a minimum
        trailing EBITDA covenant that is only applicable in the event the
        U.S. subsidiary's unused credit availability falls below US
        $4.0 million. The Canadian credit facility is subject to a Fixed
        Charge Coverage Ratio ("FCCR") calculated as (EBITDA - capital
        expenditures - cash taxes)/(interest expense) which cannot be less
        than 1.1 for Hardwoods LP.

        The terms of the agreements with the Fund's lenders provide that
        distributions cannot be made to its unitholders in the event that its
        subsidiaries do not meet the above covenant requirements as well as
        certain additional credit ratios. The Fund's operating subsidiaries
        were compliant with all required credit ratios as at December 31,
        2009, and accordingly there were no restrictions on distributions
        arising from compliance with financial covenants.

        Distributions are one of the ways the Fund manages its capital.
        Distributions of the Fund's available cash are made to the maximum
        extent possible, subject to reasonable reserves established by the
        Trustees of the Fund. Distributions are made by the Fund having given
        consideration to a variety of factors including the outlook for the
        business, financial leverage, and the ratio of distributions to
        available cash of the Fund.

        There were no changes in the Fund's approach to capital management
        during the year ended December 31, 2009. On November 3, 2008 the
        Trustees of the Fund suspended further monthly distributions until
        such time as market conditions and the Fund's generation of cash has
        improved.

    5.  Inventory:

        ---------------------------------------------------------------------
                                                           2009         2008
        ---------------------------------------------------------------------

        Lumber                                      $     8,224  $    12,077
        Sheet goods                                      12,171       14,990
        Specialty                                         2,099        2,356
        Goods in-transit                                  1,407        1,445

        ---------------------------------------------------------------------
                                                    $    23,901  $    30,868
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the year ended December 31, 2009 inventory write-downs
        totaling $2.7 million (2008 - $3.1 million) were recorded to reduce
        certain inventory items to their net realizable value. The write-down
        for the year ended December 31, 2008 included $0.6 million for
        inventory stocked specifically for a large customer which declared
        bankruptcy.

        Cost of sales for the year ended December 31, 2009 were
        $156.4 million (2008 - $210.2 million), which included $148.3 million
        (2008 - $201.8 million) of costs associated with inventory. The other
        $8.1 million (2008 - $8.4 million) related principally to freight and
        other related expenses.

    6.  Financial instruments:

        Financial assets include cash and cash equivalents, which are
        designated as held-for-trading and measured at fair value, current
        and long-term receivables, and income taxes recoverable which are
        designated as loans and receivables and measured at amortized cost.
        Financial liabilities include bank indebtedness and accounts payable
        and accrued liabilities. All financial liabilities are designated as
        other liabilities and are measured at amortized cost. There are no
        financial instruments classified as available-for-sale or held-to-
        maturity. Until August 2008, financial instruments of the Fund also
        included foreign currency contracts which are derivative financial
        instruments (note 6(b)) and measured at fair value.

        (a) Fair values of financial instruments:

            The carrying values of cash and cash equivalents, accounts
            receivable, income taxes recoverable, accounts payable and
            accrued liabilities 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 carrying value. The carrying values of the credit
            facilities approximate their fair values due to the existence of
            floating market based interest rates.

        (b) Derivative financial instruments:

            Until August 2008 the Fund used foreign currency contracts to
            assist in managing its exposure to fluctuations in exchange rates
            between the Canadian dollar and the U.S. dollar. The foreign
            currency contracts were recognized in the balance sheet and
            measured at their fair value based on the level two valuation
            inputs as described in Note 3, with changes in fair value
            recognized in the statement of operations.

            All of the outstanding foreign currency contracts were settled
            with the counterparty during the year ended December 31, 2008.

        (c) Financial risk management:

            Trustees of the Fund and the Board of Directors of the Fund's
            subsidiaries have the overall responsibility for the
            establishment and oversight of the Fund's risk management
            framework. The Fund's risk management policies are established to
            identify and analyze the risks faced by the Fund, to set
            appropriate risk limits and controls, and to monitor risks and
            adherence to limits. Risk management policies and systems are
            reviewed regularly to reflect changes in market conditions and in
            response to the Fund's activities. Through its standards and
            procedures management has developed a disciplined and
            constructive control environment in which all employees
            understand their roles and obligations. Management regularly
            monitors compliance with the Fund's risk management policies and
            procedures and reviews the adequacy of the risk management
            framework in relation to the risks faced by the Fund.

            The Fund has exposure to credit, liquidity and market risks from
            its use of financial instruments.

            (i)  Credit risk:

                 Credit risk is the risk of financial loss to the Fund if a
                 customer or counterparty to a financial instrument fails to
                 meet its contractual obligations. Credit risk arises
                 principally from the Fund's receivables from its customers.
                 Employee housing loans, customer notes and security deposits
                 also present credit risk to the Fund.

                 The following is a breakdown of the Fund's current and long-
                 term receivables and represents the Fund's exposure to
                 credit risk related to its financial assets:

                 ------------------------------------------------------------
                                                           2009         2008
                 ------------------------------------------------------------

                 Trade accounts receivable -
                  Canada                            $     9,756  $     8,404
                 Trade accounts receivable -
                  United States                          16,117       23,423
                 Sundry receivable                          203          495
                 Current portion of long-term
                  receivables                               919        2,243
                 ------------------------------------------------------------
                                                         26,995       34,565

                 Less: allowance for doubtful
                  accounts                                1,410        2,347

                 ------------------------------------------------------------
                                                    $    25,585  $    32,218
                 ------------------------------------------------------------
                 ------------------------------------------------------------

                 Long-term receivables:
                   Employee housing loans           $       450  $     1,507
                   Customer notes                         1,834        3,772
                   Security deposits                        518          603
                   ----------------------------------------------------------
                                                          2,802        5,882

                 Less: current portion, included
                  in accounts receivable                    919        2,243

                 ------------------------------------------------------------
                                                    $     1,883  $     3,639
                 ------------------------------------------------------------
                 ------------------------------------------------------------

                 Trade accounts receivable:

                 The Fund's exposure to credit risk is influenced mainly by
                 the individual characteristics of each customer. 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 credit risk.
                 It is the Fund's policy to secure credit advanced to
                 customers whenever possible by registering security
                 interests in the assets of the customer and by obtaining
                 personal guarantees.

                 Credit limits are established for each customer and are
                 regularly reviewed. In some instances the Fund may choose to
                 transact with a customer on a cash-on-delivery basis. The
                 Fund's largest individual customer balance amounted to 9.1%
                 (2008 - 8.2%) of trade accounts receivable and customer
                 notes receivable at December 31, 2009.

                 The aging of trade receivables was:

                 ------------------------------------------------------------
                                                           2009         2008
                 ------------------------------------------------------------

                 Current                            $    14,557  $    17,037
                 Past due 31-60 days                      5,283        6,696
                 Past due 61-90 days                      2,181        3,706
                 Past due 90+ days                        3,852        4,388

                 ------------------------------------------------------------
                                                    $    25,873  $    31,827
                 ------------------------------------------------------------
                 ------------------------------------------------------------

                 The Fund determines its allowance for doubtful accounts
                 based on its best estimate of the net recoverable amount by
                 customer. Accounts that are considered uncollectable are
                 written off. The total allowance at December 31, 2009 was
                 $1.4 million (2008 - $2.3 million). The amount of the
                 allowance is considered sufficient based on the past
                 experience of the business, the security the Fund has in
                 place for past due accounts and management's regular review
                 and assessment of customer accounts and credit risk.

                 The change in the allowance for doubtful accounts can be
                 reconciled as follows:

                 ------------------------------------------------------------
                                                           2009         2008
                 ------------------------------------------------------------

                 Balance as at January 1            $     2,347  $     1,046
                 Additions during the period              2,774        2,121
                 Changes due to currency rate
                  fluctuations                             (263)         359
                 Use during the period                   (3,448)      (1,179)

                 ------------------------------------------------------------
                 Balance as at December 31          $     1,410  $     2,347
                 ------------------------------------------------------------
                 ------------------------------------------------------------

                 Bad debt expense comprises additions to the allowance for
                 doubtful accounts plus the value of receivables directly
                 written off. Bad debt expense, net of recoveries, for the
                 year ended December 31, 2009 was $5.2 million which includes
                 $3.4 million related to trade accounts receivable and $1.8
                 million to long-term receivables. For the year ended
                 December 31, 2008 bad debt expense was $3.9 million, all of
                 which related to trade accounts receivable. Historically bad
                 debt expense has averaged approximately 0.8% of sales.

                 Employee housing loans:

                 Employee loans are non-interest bearing and are granted to
                 employees who are relocated. Employee loans are secured by a
                 deed of trust or mortgage depending upon the jurisdiction.
                 Employee loans are repaid in accordance with the loan
                 agreement. These loans are measured at their fair market
                 value upon granting the loan and subsequently measured at
                 amortized cost.

                 Customer notes:

                 Customer notes are issued to certain customers to provide
                 fixed repayment schedules for amounts owing that have been
                 agreed will be repaid over longer periods of time. The terms
                 of each note are negotiated with the customer. For notes
                 issued the Fund requires a fixed payment amount, personal
                 guarantees, general security agreements, and in some cases
                 security over specific property or assets. Customer notes
                 bear market interest rates ranging from 8%-10%.

                 Security deposits:

                 Security deposits are recoverable on leased premises at the
                 end of the related lease term. The Fund does not believe
                 there is any material credit risk associated with its
                 security deposits.

            (ii) Liquidity risk:

                 Liquidity risk is the risk that the Fund will not be able to
                 meet its financial obligations as they fall due. The Fund's
                 approach to managing liquidity is to ensure that it will
                 have sufficient cash available to meet its liabilities when
                 due, under both normal and stressed conditions, without
                 incurring unacceptable losses or risking damage to the
                 Fund's reputation. At December 31, 2009, in Canada, a
                 subsidiary of the Fund had a revolving credit facility of up
                 to $15.0 million. In the US, a subsidiary of the Fund had a
                 revolving credit facility of up to $26.3 million (US$25.0
                 million). These credit facilities can be drawn down to meet
                 short-term financing requirements, including fluctuations in
                 non-cash working capital. The amount made available under
                 the revolving credit facilities from time to time is limited
                 to the extent of the value of certain accounts receivable
                 and inventories held by subsidiaries of the Fund, as well as
                 by continued compliance with credit ratios and certain other
                 terms under the credit facilities. At December 31, 2009 the
                 Canadian and U.S. credit facilities had $9.2 million and
                 $11.3 million (US$10.8 million), respectively of additional
                 borrowing capacity.

           (iii) Market risk:

                 Market risk is the risk that changes in market prices, such
                 as interest rates, foreign exchange rates, and commodity
                 prices will affect the Fund's net earnings or value of its
                 holdings of financial instruments.

                 Interest rate risk:

                 The Fund is exposed to interest rate risk on its credit
                 facilities which bear interest at floating market rates.

                 Based upon December 31, 2009 bank indebtedness balance of
                 $5.0 million, a 1% increase or decrease in the interest
                 rates charged would result in decrease or increase to annual
                 net earnings by $0.05 million.

                 Currency risk:

                 As the Fund conducts business in both Canada and the United
                 States it is exposed to currency risk. Most of the hardwood
                 lumber sold by the Fund in Canada is purchased in U.S.
                 dollars from suppliers in the United States. Although the
                 Fund reports its financial results in Canadian dollars,
                 approximately two-thirds of its sales are generated in the
                 United States. Changes in the currency exchange rates of the
                 Canadian dollar against the U.S. dollar will affect the
                 results presented in the Fund's financial statements and
                 cause its earnings to fluctuate. Changes in the costs of
                 hardwood lumber purchased by the Fund in the United States
                 as a result of the changing value of the Canadian dollar
                 against the U.S. dollar are usually absorbed by the Canadian
                 market. When the hardwood lumber is resold in Canada it is
                 generally sold at a Canadian dollar equivalent selling
                 price, and accordingly revenues in Canada are effectively
                 increased by decreases in value of the Canadian dollar and
                 vice versa. Fluctuations in the value of the Canadian dollar
                 against the U.S. dollar will affect the amount of cash
                 available to the Fund for distribution to its Unitholders.

                 The Fund no longer maintains foreign currency contracts to
                 mitigate the potential impact of foreign exchange on U.S.
                 dollar distributions made by its U.S. operations. Currently
                 no distributions are being made from the Fund's U.S.
                 subsidiary. The Fund previously maintained foreign currency
                 contracts to assist in forward planning cash flows to be
                 received from its U.S. subsidiary.

                 At December 31, 2009 the Fund's Canadian subsidiaries
                 primary exposure to foreign denominated working capital
                 financial instruments was in relation to accounts receivable
                 from U.S. customers (US$0.2 million, (2008 - US$0.1
                 million)), income taxes recoverable (US$1.9 million, (2008 -
                 US$1.3 million)), and accounts payable to U.S. suppliers
                 ($0.2 million, (2008 - US$0.1 million)).

                 Based on the Fund's exposure to foreign denominated
                 financial instruments, the Fund estimates a $0.05 weakening
                 in the Canadian dollar as compared to the U.S. dollar would
                 have reduced the net loss for the year ended December 31,
                 2009 by approximately $0.1 million. A $0.05 strengthening of
                 the Canadian dollar as compared to the U.S. dollar would
                 have had the equal but opposite effect.

                 This foreign currency sensitivity is focused solely on the
                 currency risk associated with the Fund's Canadian
                 subsidiaries exposure to foreign denominated financial
                 instruments as at December 31, 2009 and does not take into
                 account the effect of a change in currency rates will have
                 on the translation of the balance sheet and operations of
                 the Fund's U.S. subsidiaries nor is it intended to estimate
                 the potential impact changes in currency rates would have on
                 the Fund's sales and purchases.

                 Commodity price risk:

                 The Fund does not enter in to any commodity contracts.
                 Inventory purchases are transacted at current market rates
                 based on expected usage and sale requirements and increases
                 or decreases in prices are reflected in the Fund's selling
                 prices to customers.

    7.  Property, plant and equipment:

        ---------------------------------------------------------------------
                                                   Accumulated      Net book
        December 31, 2009                   Cost  amortization         value
        ---------------------------------------------------------------------

        Machinery and equipment        $   2,095     $   1,685     $     410
        Mobile equipment                   3,225         2,394           831
        Leasehold improvements               786           736            50

        ---------------------------------------------------------------------
                                       $   6,106     $   4,815     $   1,291
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
                                                   Accumulated      Net book
        December 31, 2008                   Cost  amortization         value
        ---------------------------------------------------------------------

        Machinery and equipment        $   2,308     $   1,610     $     698
        Mobile equipment                   3,776         2,458         1,318
        Leasehold improvements               840           688           152

        ---------------------------------------------------------------------
                                       $   6,924     $   4,756     $   2,168
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    8.  Foreign currency contracts:

        In August 2008, a subsidiary of the Fund agreed to settle all of its
        remaining foreign currency contracts with the counterparty. The
        amount received by the Fund's subsidiary in settling the remaining
        twenty-two outstanding contracts was $0.2 million.

        For the year ended December 31, 2008, the Fund's subsidiary realized
        cash of $1.2 million from the settlement of foreign currency
        contracts. For the year ended December 31, 2008, a loss of $0.8
        million was recorded in the statement of operations as the cash
        realized was less than the $2.0 million fair value of the contracts
        recorded at December 31, 2007 due to the strengthening of the U.S.
        dollar during that period.

    9.  Intangible assets and goodwill:

        During the year ended December 31, 2008, management reviewed for
        impairment the carrying value of intangible assets and goodwill.
        Results of testing indicated impairment of the carrying value of
        intangible assets of $8.6 million and goodwill of $82.1 million. This
        impairment reduced the intangible asset and goodwill balances to
        zero, and is attributable primarily to the significant decline in
        sales in the U.S. and Canada resulting from reduced residential
        housing starts and remodeling sales and a decline in consumer
        confidence and overall economic activity.

    10. Bank indebtedness:

        ---------------------------------------------------------------------
                                                           2009         2008
        ---------------------------------------------------------------------

        Checks issued in excess of funds
         on deposit                                 $     1,077  $     1,087
        Credit facility, Hardwoods LP                     1,945          265
        Credit facility, Hardwoods USLP
         (December 31, 2009 - US$1,844;
         December 31, 2008 - US$13,308)                   1,938       16,209

        ---------------------------------------------------------------------
                                                    $     4,960  $    17,561
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        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 (the "Credit Facilities").

        Each of the Credit Facilities is separate, is not guaranteed by the
        other partnership, and does not contain cross default provisions to
        the other Credit Facility. The Credit Facility made available to
        Hardwoods LP 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 LP Units held by a subsidiary of the Fund
        and SIL. The Credit Facility made available to Hardwoods USLP is
        secured by a first security interest in all of the present and after
        acquired property of Hardwoods USLP and by the USLP Units held by a
        subsidiary of the Fund and by SIL.

        The Hardwoods LP Credit Facility has a three year term, provides
        financing up to $15.0 million and has a maturity date of August 7,
        2012. The Hardwoods USLP Credit Facility has a three year term,
        provides financing of up to US$ 25.0 million and has a maturity date
        of September 30, 2011. Each facility is payable in full at maturity.
        The Hardwoods LP Credit Facility is repayable subject to prepayment
        penalties of $225,000 if repaid in the first 12 months of the credit
        facility term, $150,000 if repaid in the second 12 months of the
        credit facility term, and $75,000 thereafter if repaid prior to the
        maturity date of the credit facility. The Hardwoods USLP Credit
        Facility is repayable without prepayment penalties. The Credit
        Facilities bear interest at a floating rate based on the Canadian or
        US 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 on customary terms for
        facilities of this nature. The Credit Facilities' rates vary with the
        ratio of EBITDA minus capital expenditures and cash taxes, divided by
        interest. Commitment fees and standby charges usual for borrowings of
        this nature were and are payable.

        The amount made available under the Credit Facility to Hardwoods LP
        from time to time is limited to the extent of 85% of the book value
        of accounts receivable and the lesser of 60% of the book value or 85%
        of appraised value of inventories with the amount based on
        inventories not to exceed 60% of the total amount to be available.
        Certain identified accounts receivable and inventories are excluded
        from the calculation of the amount available under the Credit
        Facility. Hardwoods LP is required to maintain a fixed charge
        coverage ratio (calculated as the ratio of EBITDA less cash taxes
        less capital expenditures, divided by interest) of not less than 1.1
        to 1. At December 31, 2009 the Hardwoods LP credit facility had $9.2
        million of additional borrowing capacity.

        The amount to be made available under the Credit Facility to
        Hardwoods USLP from time to time is limited to the extent of 85% of
        the book value of certain accounts receivable and 50% of the book
        value of inventories (with certain accounts receivable and inventory
        being excluded). Hardwoods USLP is required to maintain a minimum
        trailing EBITDA covenant until December 31, 2010, and a fixed charge
        coverage ratio (calculated as EBITDA less cash taxes less capital
        expenditures, divided by interest plus distributions) of 1.0 to 1
        thereafter. These covenants of the Hardwoods USLP Credit Facility do
        not need to be met however when the unused availability under the
        credit facility is in excess of US$4.0 million. At December 31, 2009
        the Hardwoods USLP credit facility had unused availability of $11.3
        million (US$10.8 million).

        The average annual interest rates paid in respect of bank
        indebtedness for the year ended December 31, 2009 were 3.82% and
        4.88% (2008 - 5.19% and 5.09%) for the Hardwoods LP and Hardwoods
        USLP credit facilities, respectively. In addition, standby fees of
        0.5% and 0.75% (2008 - 0.25% and 0.25%) related to the unused portion
        of the credit facilities was charged by the banks for Hardwoods LP
        and Hardwoods USLP respectively.

    11. Non-controlling interests:

        ---------------------------------------------------------------------
                                                           2009         2008
        ---------------------------------------------------------------------

        Balance, beginning of year                  $    13,080  $    30,006

        Interest in earnings:
          Interest in earnings (loss)
           before taxes                                    (833)     (17,560)
          Adjustment to non-controlling interest
           from subordination of Class B
           Unit Holders                                  (1,514)      (2,471)
          -------------------------------------------------------------------
          Increase (decrease)                            (2,347)     (20,031)

        Foreign currency translation adjustment
         of non-controlling interest in
         Hardwoods USLP                                  (1,985)       3,105

        ---------------------------------------------------------------------
        Balance, end of year                        $     8,748  $    13,080
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        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 U.S. 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 as at December 31, 2009.

        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 and 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, 2009, the amount of such deficiency was $14.8
              million (2008 - $7.2 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, 2009, the amount of such deficiency was nil
              (2008 - $1.9 million); and

           -  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.

        The cumulative deficiency which is no longer recoverable by the Class
        B LP Unitholders and the Class B USLP Unitholders, has been recorded
        as an adjustment to the non-controlling interest's share of earnings
        in the amount of $1.5 million for the year ended December 31, 2009
        and $2.5 million for the year ended December 31, 2008.

    12. 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 11). 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 percent discount to the market price at the time.

    13. Income taxes:

        ---------------------------------------------------------------------
                                                           2009         2008
        ---------------------------------------------------------------------

        Current                                     $    (1,896) $      (734)
        Future                                           10,320      (30,792)

        ---------------------------------------------------------------------
                                                    $     8,424  $   (31,526)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the year ended December 31, 2009, a subsidiary of the Fund
        recorded a future tax expense of $10.1 million related to the
        refinancing of inter-entity debt resulting from the continued
        downturn in financial results in the Fund's US operating subsidiary.
        The future tax expense was comprised of a reduction to the US
        operating loss carry forwards of a subsidiary of the Fund and a
        reduction in the associated tax basis in the subsidiary's investment
        in Hardwoods USLP.

        During the year ended December 31, 2008 the Fund completed an
        internal reorganization that involved the refinancing of inter-entity
        debt in the form of notes issued and held by subsidiaries of the
        Fund. As a result of the internal re-organization, income tax losses
        which are available to reduce US taxable income of approximately US
        $10.3 million arose. Based on statutory income tax rates in effect
        for the Fund's US subsidiary, this amounted to an estimated $3.6
        million tax benefit available to subsidiaries of the Fund. This $3.6
        million benefit was recorded at March 31, 2008 and was comprised of
        an estimated $0.8 million current income tax recovery and $2.8
        million future income tax recovery.

        Also during the year ended December 31, 2008 a Canadian subsidiary of
        the Fund recognized tax pools consisting principally of Canadian tax
        losses carried forward, of approximately $16.0 million as a result of
        the Fund's re-organization plan. Based on tax rates expected to apply
        at the date such tax pools will be utilized, an additional $4.2
        million of future income tax benefit was recorded by the Fund at
        March 31, 2008.

        The reorganizations and inter-entity refinancing noted in the
        preceding paragraphs did not have any effect upon the management or
        business activities of the Fund's operating subsidiaries.

        During the year ended December 31, 2008, the Fund recorded a future
        tax recovery of approximately $22.3 million as a result of the write-
        down of goodwill and intangible assets. Goodwill and intangible
        assets remain deductible for Canadian and U.S. tax purposes.

        Under current income tax regulations subsidiaries of the Fund are
        subject to income taxes in Canada and the United States. The
        applicable statutory rate in Canada for the year ending December 31,
        2009 is 30.4% (2008 - 31.0%) and in the United States is 39.4% (2008
        - 39.4%). As the tax expense related to the Canadian subsidiaries of
        the Fund is only $0.3 million, the following table reconciles the
        Fund's consolidated income tax expense to the statutory rate
        applicable in the United States. Income tax expense differs from that
        calculated by applying the U.S. federal and state income tax rates to
        earnings before income taxes for the following reasons:

        ---------------------------------------------------------------------
                                                           2009         2008
        ---------------------------------------------------------------------

        Earnings before income tax                  $    (1,816) $   (67,769)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Computed tax recovery at statutory rate     $      (716) $   (26,701)
        Internal restructuring and re-financing          10,129       (7,802)
        Income of Fund distributed directly to
         Unitholders                                          -       (2,382)
        Income and deductions not subject to tax              -         (422)
        Taxes paid as a result of Subordination
         Agreement                                            -           92
        Adjustment to non-controlling interest
         not subject to tax                                (596)        (698)
        State and branch profits tax                        228           50
        Reconciling items related to goodwill
         and intangible impairment                            -        5,611
        Rate changes                                       (475)           -
        Other                                              (146)         726
        ---------------------------------------------------------------------
        Income tax expense (recovery)               $     8,424  $   (31,526)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Taxes paid as a result of the 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 proportionate basis.

        The tax effect of temporary differences that give rise to significant
        portions of the future income tax assets and liabilities at December
        31, 2009 is as follows:

        ---------------------------------------------------------------------
                                                           2009         2008
        ---------------------------------------------------------------------

        Future income tax assets:
          Accounts receivable                       $       438  $       380
          Accounts payable                                  207            -
          Inventory                                         290          351
          Employee housing loans                             44           77
          Property, plant and equipment                     351          309
          Goodwill                                       15,926       19,307
          Tax loss carry forwards and future
           interest deductions                            4,427       10,318
          Deferred gain on sale-leaseback of land
           and building                                     131          180
          Financing charges and other                       200            -
        ---------------------------------------------------------------------
                                                         22,014       30,922
        Future income tax liabilities:
          Prepaid expenses                                  (45)         (88)
          Property, plant and equipment                     (62)         (52)
          Investment in Hardwoods USLP                   (4,320)           -
        ---------------------------------------------------------------------
                                                         (4,427)        (140)

        ---------------------------------------------------------------------
        Net future income tax asset                 $    17,587  $    30,782
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        At December 31, 2009, subsidiaries of the Fund have operating loss
        carry forwards for income tax purposes of approximately $14.1 million
        in Canada and US$ nil in the United States that may be utilized to
        offset future taxable income. These losses, if not utilized expire
        between 2014 and 2027.

        At December 31, 2009 the Fund and its Canadian subsidiaries have
        capital losses of approximately $23.4 million (2008 - $nil), and
        suspended capital losses of approximately $44.2 million available to
        offset future Canadian taxable capital gains. These capital losses
        arose as a result of internal restructuring and inter-entity
        transactions during the year ended December 31, 2009. A full
        valuation allowance has been recorded against the associated future
        income tax asset of $8.5 million.

    14. Changes in non-cash operating working capital and additional cash
        flow disclosures:

        ---------------------------------------------------------------------
                                                           2009         2008
        ---------------------------------------------------------------------

        Source (use) of funds
          Accounts receivable                       $     3,842  $     7,858
          Income taxes recoverable/payable                 (223)        (805)
          Inventory                                       4,355       11,820
          Prepaid expenses                                   74          155
          Accounts payable and accrued liabilities        2,243       (4,192)

        ---------------------------------------------------------------------
        Decrease in non-cash operating working
         capital                                    $    10,291  $    14,836
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        CICA 1540, Cash Flow Statements, requires 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. The Fund has no contractual
        requirement to pay cash distributions to Unitholders' of the Fund.
        During the year ended December 31, 2009 no discretionary cash
        distributions were paid to Unitholders (2008 - $8.6 million).

    15. Commitments:

        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:

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

        2010                                                     $     5,746
        2011                                                           3,735
        2012                                                           2,733
        2013                                                           2,041
        2014                                                           1,536
        ---------------------------------------------------------------------
                                                                      15,791
        Thereafter                                                       580

        ---------------------------------------------------------------------
                                                                 $    16,371
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    16. Segment disclosure:

        Information about geographic areas is as follows:

        ---------------------------------------------------------------------
                                                           2009         2008
        ---------------------------------------------------------------------

        Revenue from external customers:
          Canada                                    $    75,339  $    89,581
          United States                                 115,584      166,720

        ---------------------------------------------------------------------
                                                    $   190,923  $   256,301
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Property, plant and equipment:
          Canada                                    $       450  $       752
          United States                                     841        1,416

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

                                                    $     1,291  $     2,168
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    17. 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, 2009, Hardwoods USLP contributed and expensed $239,378
        (US$209,378) (2008- $377,750 (US$354,362)) 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, 2009, Hardwoods LP contributed and expensed
        $196,561 (2008 - $256,469) in relation to the LP Plan.

    18. Related party transactions:

        For the year ended December 31, 2009, sales of $448,257 (2008 -
        $427,795) were made to affiliates of SIL, and the Fund made purchases
        of $53,210 (2008 - $98,005) from affiliates of SIL. All sales and
        purchases took place at prevailing market prices.

        During the year ended December 31, 2008, the Fund paid $108,000 to
        affiliates of SIL under the terms of an agreement to provide services
        for management information systems. This agreement ended December 31,
        2008.

    19. 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

SOURCE HARDWOODS DISTRIBUTION INCOME FUND

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

More on this organization


Custom Packages

Browse our custom packages or build your own to meet your unique communications needs.

Start today.

CNW Membership

Fill out a CNW membership form or contact us at 1 (877) 269-7890

Learn about CNW services

Request more information about CNW products and services or call us at 1 (877) 269-7890