Hardwoods Distribution Income Fund Announces 2009 Second Quarter Results



    
    Hardwoods Distribution Income Fund will hold a conference call and
    webcast to discuss second quarter and first half financial results on
    August 7, 2009 at 8:00 a.m. Pacific Time (11:00 am Eastern). The call can
    be accessed by dialing: 1-866-250-4910 or 416-644-3434. A replay will be
    available until August 21, 2009 at: 1-877-289-8525 or 416-640-1917
    (Passcode 21312100 followed by the number sign).
    

    LANGLEY, BC, Aug. 6 /CNW/ - Hardwoods Distribution Income Fund (the
"Fund") today reported financial results for the second quarter and first half
of 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 serves over 2000
industrial customers through a network of 27 distribution centres in the US
and Canada.

    
    Second Quarter Overview

    (For the three months ended June 30, 2009)

    -   Second quarter revenue declined 25.6% to $49.5 million year-over-year

    -   Gross profit percentage of 17.5% declined from 18.0% in Q2 2008

    -   Selling and administrative expenses decreased by 4.4% to
        $8.8 million, from $9.2 million in Q2 2008

    -   Second quarter EBITDA, net loss and Distributable Cash were lower
        year-over-year

    -   The Fund amended its US credit facility to gain more covenant
        flexibility and ease financing risk in the US

    -   Hardwoods continued to rationalize its distribution network with the
        closure of two additional satellite branches
    

    "We continued to feel the impact of reduced market demand and lower
prices for hardwood lumber products during the second quarter," said Maurice
Paquette, Hardwoods' President and CEO.
    "The Canadian and US economies remained weak, with housing starts at
historically low levels. Hardwood lumber prices also continued to decline in
reaction to lower demand. While we began to see indications that the US
housing market may finally be starting to stabilize, we do not expect to see
any corresponding benefit in hardwood prices or demand for several more
quarters. As we have noted previously, hardwood demand typically lags the
residential construction cycle because kitchen cabinets and furniture, which
are key end-uses for hardwood products, are purchased late in the building
cycle," said Mr. Paquette.
    "In light of the reduced demand, we took action to further reduce costs
during the second quarter. We closed two satellite facilities in Portland,
Oregon and Sacramento, California, and continued to reduce our workforce in
line with market conditions. Our strict focus on cost control has helped to
trim $3 million from our S&A costs in the first half of 2009, despite
incurring higher bad debt expense and a negative foreign currency impact on
conversion of our US operating costs. Factoring out the negative foreign
exchange impact, we reduced underlying expenses by $4.9 million, or 23.9%, in
the first six months of 2009, compared to the same period in 2008."
    "Reducing financing risk also continues to be a key strategy for us.
Year-to-date, we have lowered our bank indebtedness (net of cash) by $8.0
million, or 45.7%. In addition, we renegotiated our US credit facility during
the second quarter, reducing the size of the facility and making favourable
modifications to our bank covenant," said Mr. Paquette. "Overall, we are
focused on not simply surviving this downturn, but on emerging as a
financially sound business with our strong market position intact."

    
    Summary of Results

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

                             3 months     3 months     6 months     6 months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2009         2008         2009         2008
                                 ----         ----         ----         ----
    Total sales           $    49,489  $    66,488  $   102,911  $   137,536
      Sales in the US (US$)    26,303       42,584       52,806       88,776
      Sales in Canada          18,806       23,464       39,243       48,103
    Gross profit                8,643       11,962       18,259       25,598
      Gross profit %            17.5%        18.0%        17.7%        18.0%
    Selling and
     administrative
     expenses                  (8,835)      (9,225)     (17,535)     (20,543)
    Realized gain on
     foreign currency
     contracts                      -          354            -          949
    -------------------------------------------------------------------------
    Earnings before
     interest, taxes,
     depreciation and
     amortization and
     non-controlling
     interest ("EBITDA")         (192)       3,091          724        6,004
      Add (deduct):
        Amortization             (240)        (422)        (465)        (847)
        Interest                 (116)        (310)        (268)        (698)
        Non-cash foreign
         currency
         gains (losses)          (666)        (108)        (334)      (1,309)
        Intangibles
         impairment                 -       (5,468)           -       (5,468)
        Goodwill impairment         -      (64,606)           -      (64,606)
        Non-controlling
         interest                 891       14,182        1,365       14,590
        Income tax recovery
         (expense)               (168)      19,925          354       28,147
    -------------------------------------------------------------------------
    Net earnings (loss)
     for the period       $      (491) $   (33,716) $     1,376  $   (24,187)
    -------------------------------------------------------------------------
    Basic and fully
     diluted earnings
     (loss) per Class A
     Unit                 $    (0.034) $    (2.340) $     0.095  $    (1.678)
    Average Canadian
     dollar exchange rate
     for one US dollar         1.1669       1.0101       1.2057       1.0074
    -------------------------------------------------------------------------



    Distributable Cash and Cash Distributions

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

                             3 months     3 months     6 months     6 months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2009         2008         2009         2008
                                 ----         ----         ----         ----
    Net cash provided by
     operating activities $     1,498  $     7,663  $     6,912  $    10,260
    Increase (decrease)
     in non-cash
     operating working
     capital                   (2,022)      (5,011)      (6,726)      (4,264)
                          ------------ ------------ ------------ ------------
    Cash flow from
     operations before
     changes in non-cash
     operating working
     capital                     (524)       2,652          186        5,996
    Capital expenditures          (45)        (225)         (50)        (298)
                          ------------ ------------ ------------ ------------
    Distributable Cash    $      (569) $     2,427  $       136  $     5,698
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

    Distributions relating
     to the period:
      Class A Units       $         -  $   3,242(1) $         -  $   6,484(2)
      Class B Units(2)              -            -            -            -
                          ------------ ------------ ------------ ------------
      Total Units         $         -  $     3,242  $         -  $     6,484
                          ------------ ------------ ------------ ------------
                          ------------ ------------ ------------ ------------

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

    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      $    (0.032) $     0.135  $     0.008  $     0.316

    Distributions relating
     to the period:
      Class A Units       $         -  $   0.225(1) $         -  $   0.450(2)
      Class B Units(3)    $         -  $         -  $         -  $         -
      Total Units         $         -  $     0.180  $         -  $     0.360

    Payout ratio(4)              0.0%       133.6%         0.0%       113.8%
    -------------------------------------------------------------------------

                            March 23, 2004
    Cumulative since       to June 30, 2009
     inception:            ----------------
      Distributable Cash       75,753
      Distributions
       relating to the
       period                  66,754
      Payout ratio(4)           88.1%
    -------------------------------------------------------------------------
    (1) Includes the cash distributions of $0.075 per Class A Unit per month
        which relate to the operations of the Fund for January, February, and
        March 2008.
    (2) Includes the cash distributions of $0.075 per Class A Unit per month
        which relate to the operations of the Fund for January through June
        2008.
    (3) On January 10, 2006, Hardwoods Specialty Products LP and Hardwoods
        Specialty Products US LP, limited partnerships in each of which the
        Fund owns an 80% interest, announced that quarterly distributions
        were suspended on the Class B LP and Class B US LP units. The Class B
        LP units and Class B US LP units represent a 20% interest in
        Hardwoods Specialty Products LP and Hardwoods Specialty Products US
        LP, respectively. No distributions are to be paid on the Class B LP
        units and Class B US LP units unless distributions in stipulated
        minimum amounts are paid on the units in the limited partnerships
        held by the Fund, and in certain other circumstances. Accordingly, no
        distributions have been declared since the third quarter of 2005 to
        the non-controlling interests. No liability for distributions payable
        to the non-controlling interests is reflected in the March 31, 2009
        balance sheet.
    (4) Payout ratio measures the ratio of distributions by the Fund relating
        to the period to Distributable Cash for the period.
    


    Results from Operations - Three Months Ended June 30, 2009

    For the three months ended June 30, 2009, the Fund and its subsidiaries
reported negative Distributable Cash of $0.6 million or $0.032 per unit. No
distributions were paid to either the public unitholders (Class A Units) or to
the Class B Units. By comparison, the Fund generated total distributable cash
of $2.4 million or $0.135 per unit in the same period of 2008. Distributions
of $3.2 million, or $0.225 per unit were declared to the Class A Units and no
distributions were paid to the Class B Units, for a payout ratio of 133.6% in
the second quarter of 2008.
    Second quarter 2009 sales were $49.5 million, down 25.6% from $66.5
million in 2008. The change reflects a 31.8% decrease in underlying sales
activity, partially offset by a 6.2% increase in sales due to the positive
effect of a weaker Canadian dollar. Sales in the United States, as measured in
US dollars, decreased 38.2% to $26.3 million, compared to $42.6 million during
the second quarter of 2008. This decline reflects the continuing impact of the
depressed housing market and recession in the general US economy, as well as
the impact of lower prices for hardwood lumber products. Sales in Canada, as
measured in Canadian dollars, decreased by 19.9%, with sales down as a result
of a slowing in the Canadian housing market and weakness in the general
economy.
    Second quarter gross profit was $8.6 million, compared to $11.9 million
in Q2 2008. The change in gross profit reflects lower sales, as well as a
decrease in gross profit percentage to 17.5%, from 18.0% a year ago. The lower
gross margin reflects the impact of product price reductions in response to
more intense competition, and discounting of some inventory in an effort to
continue to balance inventory levels to the reduced sales pace.
    Selling and administrative expenses decreased by $0.4 million, or 4.4%,
to $8.8 million, from $9.2 million in Q2 2008. This improvement primarily
reflects lower employee costs and a $0.8 million reduction in premises and
sales and warehousing costs. These savings were partially offset by the
negative impact of a weaker Canadian dollar on the conversion of S&A expenses
at Hardwoods' US operations, an increase in bad debt expense and an increase
in other expenses related to the closure of the two satellite branches during
the quarter.
    The Fund reported a second quarter EBITDA loss of $0.2 million, compared
to positive EBITDA of $3.1 million in Q2 2008. The change in EBITDA primarily
reflects lower gross profit and reduced gains on foreign currency contracts,
partially offset by lower S&A expenses.
    The Fund also reported a net loss of $0.5 million, compared to a net loss
of $33.7 million in the comparable quarter in 2008. The $33.2 million decrease
in net loss primarily reflects a $70.1 million reduction in goodwill and
intangibles impairment, $0.2 million reduction in interest expense, and $0.2
million reduction in amortization expense. These decreases were partially
offset by the $3.3 million decrease in EBITDA, a $0.6 million increase in
non-cash foreign currency losses, a $13.3 million decrease related to the
change in the non-controlling interest and a $20.1 million decrease in income
tax recovery.

    Results from Operations - Six months ended June 30, 2009

    For the six months ended June 30, 2009, the Fund and its subsidiaries
generated Distributable Cash of $0.1 million, or $0.008 per unit. No
distributions were paid to either the public unitholders (Class A Units) or to
the Class B Units. By comparison, the Fund generated total Distributable Cash
of $5.7 million or $0.316 per unit in the first half of 2008 and declared
distributions of $6.5 million, or $0.45 per unit to the Class A Units, for a
payout ratio of 113.8%. No distributions were paid to the Class B Units in
either year.
    First-half 2008 sales declined by 25.2% to $102.9 million, from $137.5
million in 2008 as a result of this year's more challenging market conditions.
The decline in total sales reflects a 32.8% decrease in underlying sales
activity and a 7.6% increase in sales due to the positive impact of a stronger
Canadian dollar. Sales at Hardwoods' US operations, as measured in US dollars,
decreased by 40.5% in the first half of 2009, and sales in Canada, as measured
in Canadian dollars, were down by 18.4% year-over-year.
    First-half gross profit was $18.3 million, down from $25.6 million during
the first six months of 2008. The reduction in gross profit primarily reflects
lower sales. As a percentage of sales, gross profit was 17.7% in the first
half of 2009, compared to 18.0% during the same period last year. The change
in margin reflects highly competitive market conditions and ongoing efforts to
reduce inventory in line with reduced sales demand.
    Hardwoods was successful in decreasing selling and administrative
expenses to $17.5 million in the first half of 2009, from $20.5 million last
year. The improvement in S&A expense primarily reflects workforce reductions
and lower employee bonus accruals, along with savings related to branch
network downsizing and the absence of reorganization costs that were incurred
during the first half of 2008. These cost reductions were partially offset by
increased bad debt expense and the negative impacts of a weaker Canadian
dollar on costs at Hardwoods' US operations.
    First-half EBITDA was $0.7 million, compared to $6.0 million in the same
period in 2008. The decrease in EBITDA reflects the lower gross profit and a
decrease in realized gains on foreign currency contracts, partially offset by
lower S&A costs.
    The Fund reported net earnings of $1.4 million in the first half of 2009,
compared to a net loss of $24.2 million in the same period in 2008. The
significant improvement in net earnings primarily reflects the absence of the
$70.1 million reduction in goodwill and intangibles impairment that negatively
affected 2008 results, a $0.4 million reduction in interest expense, a $0.3
million reduction in amortization expense, and a $1.0 million reduction in
non-cash foreign currency losses. These improvements to net earnings were
partially offset by the $5.3 million decrease in EBITDA, a $13.2 million
decrease related to the change in the non-controlling interest, and a $27.7
million decrease in income tax recovery.

    Outlook

    Hardwoods anticipates that business conditions will remain extremely
challenging through 2009 and into 2010. Demand for furniture, cabinets,
recreational vehicles and other products that utilize hardwood lumber and
sheet goods are expected to remain weak in the near-term as a result of the
depressed US housing market and the global recession. While there are signs
that the US residential construction market may finally be starting to
stabilize, it will likely be several more quarters before Hardwoods
experiences a corresponding trend in its business. This reflects the fact that
demand for the type of hardwood products sold by the company typically lags
the construction cycle by between six and twelve months.
    In this environment, Hardwoods continues to believe that its business
risk is higher than normal, particularly in the areas of product demand and
the potential for customer and supplier business failures in a weakened
economy. While the Fund has made good progress in reducing debt and securing
new credit facilities, financing risk also remains a concern, particularly in
the US where it is uncertain if Hardwoods' results will be strong enough to
remain in compliance with its bank agreement in the next 12 months.
    Accordingly, the focus going forward will remain on cost reduction and
tight management of inventory levels and working capital as management works
to align the business as closely as possible to sales levels. Minimizing
customer credit risk also remains a priority as Hardwoods works to contain bad
debt expense resulting from customer business failures. At the same time, the
company is aggressively pursuing market opportunities for its growing lines of
"green" building products, while also continuing to support its successful
import program. Hardwoods' goal is to protect its business, balance sheet and
strong market position through the balance of this economic downturn, and to
emerge positioned to participate fully in the eventual recovery.

    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.
    We believe 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 2008 Second Quarter 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 2008 Second Quarter 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 one of North America's largest distributors of high-grade
hardwood lumber and sheet goods to the cabinet, moulding, millwork, furniture
and specialty wood products industries. The company currently operates a
network of 27 distribution centres organized into eight geographic regions
throughout North America.

    Forward-Looking Information

    Certain statements in this press release contain forward-looking
information within the meaning of applicable securities laws in Canada
("forward-looking information"). The words "anticipates", "believes",
"budgets", "could", "estimates", "expects", "forecasts", "intends", "may",
"might", "plans", "projects", "schedule", "should", "will", "would" and
similar expressions are often intended to identify forward-looking
information, although not all forward-looking information contains these
identifying words.
    The forward-looking information in this press release is based on a
number of assumptions including, but not limited to: while we began to see
indications that the US housing market may finally starting to stabilize, we
do not expect to see any corresponding benefit in hardwood prices or demand
for several more quarters; hardwood demand typically lags the residential
construction cycle because kitchen cabinets and furniture, which are key
end-uses for hardwood products, are purchased late in the building cycle; we
anticipate that business conditions will remain extremely challenging through
2009 and into 2010; demand for furniture, cabinets, recreational vehicles and
other products that utilize hardwood lumber and sheet goods are expected to
remain weak in the near-term as a result of the depressed US housing market
and the global recession; while there are signs that the US residential
construction market may finally be starting to stabilize, it will likely be
several more quarters before Hardwoods experiences a corresponding trend in
its business; in the current business environment, Hardwoods continues to
believe that its business risk is higher than normal, particularly in the
areas of product demand and the potential for customer and supplier business
failures in a weakened economy; while the Fund has made good progress in
reducing debt and securing new credit facilities, financing risk also remains
a concern, particularly in the US where it is uncertain if Hardwoods' results
will remain strong enough to remain in compliance with its bank agreement in
the next 12 months; our focus going forward will remain on cost reduction and
tight management of inventory levels and working capital as management works
to align the business as closely as possible to sales levels; minimizing
customer credit risk also remains a priority as Hardwoods works to contain bad
debt expense resulting from customer business failures; the company is
aggressively pursuing market opportunities for its growing lines of "green"
building products, while also continuing to support its successful import
program; Hardwoods' goal is to protect its business, balance sheet and strong
market position through the balance of this economic downturn, and to emerge
positioned to participate fully in the eventual recovery.
    The forecasts and projections that make up the forward-looking
information are based on assumptions which include, but are not limited to:
there are no material exchange rate fluctuations between the Canadian and US
dollar that affect the amount of cash we are able to generate in Canadian
dollars; we do not lose any key personnel; there are no significant decreases
in the supply of, demand for, or market values of hardwood lumber or sheet
goods that harm our business; we do not incur material losses related to
credit provided to our customers; our products are not subjected to negative
trade outcomes; we are able to sustain our level of sales and EBITDA margins;
we are able to grow our business and to manage our growth; there is no new
competition in our markets that leads to reduced revenues and profitability;
we do not become subject to more stringent regulations; importation of
products manufactured with hardwood lumber or sheet goods does not increase
and replace products manufactured in North America; the downturn in the
general state of the economy does not worsen and impact upon our results; our
management information systems upon which we are dependent are not impaired;
our insurance is sufficient to cover losses that may occur as a result of our
operations; and, the financial condition and results of operations of our
business upon which we are dependent is not impaired.
    The forward-looking information is subject to risks, uncertainties and
other factors that could cause actual results to differ materially from
historical results or results anticipated by the forward-looking information.
The factors which could cause results to differ from current expectations
include, but are not limited to: exchange rate fluctuations between the
Canadian and US dollar could affect the amount of cash we have available to
distribute to our unitholders in Canadian dollars; we depend on key personnel,
the loss of which could harm our business; decreases in the supply of, demand
for, or market values of hardwood lumber or sheet goods could harm our
business; we may incur losses related to credit provided to our customers; our
products may be subject to negative trade outcomes; we may not be able to
sustain our level of sales or EBITDA margins; we may be unable to grow our
business or to manage any growth; competition in our markets may lead to
reduced revenues and profitability; we may become subject to more stringent
regulations; importation of products manufactured with hardwood lumber or
sheet goods may increase, and replace products manufactured in North America;
our results are dependent upon the general state of the economy; we are
dependent upon our management information systems; our insurance may be
insufficient to cover losses that may occur as a result of our operations; our
credit facilities contain restrictions on our ability to borrow funds and
restrictions on distributions that can be made; there are tax risks associated
with an investment in our units; our future growth may be restricted by the
payout of substantially all of our operating cash flow; and, other risks
described in our Annual Information Form and our other continuous disclosure
documents.
    All forward-looking information in this press release is qualified in its
entirety by this cautionary statement and, except as may be required by law,
the Fund undertakes no obligation to revise or update any forward-looking
information as a result of new information, future events or otherwise after
the date hereof.


    
    HARDWOODS DISTRIBUTION INCOME FUND

    Consolidated Balance Sheets
    (Expressed in thousands of Canadian dollars)
    -------------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2009         2008
    -------------------------------------------------------------------------
                                                     (unaudited)
    Assets

    Current assets:
      Cash and cash equivalents                     $       190  $        85
      Accounts receivable (note 6)                       33,335       32,218
      Income tax recoverable                                376        2,316
      Inventory (note 5)                                 24,923       30,868
      Prepaid expenses                                    1,250        1,039
      -----------------------------------------------------------------------
                                                         60,074       66,526

    Long-term receivables (note 6)                        2,550        3,639

    Property, plant and equipment                         1,728        2,168

    Deferred financing costs                                226          235

    Future income taxes                                  30,221       30,782

    -------------------------------------------------------------------------
                                                    $    94,799  $   103,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
      Bank indebtedness (note 7)                    $     9,735  $    17,561
      Accounts payable and accrued liabilities            4,593        3,365
      -----------------------------------------------------------------------
                                                         14,328       20,926

    Deferred gain on sale-leaseback of land
     and building                                           503          572

    Non-controlling interests (note 8)                   11,045       13,080

    Unitholders' equity:
      Fund units                                        133,454      133,454
      Deficit                                           (48,582)     (49,958)
      Accumulated other comprehensive loss              (15,949)     (14,724)
      -----------------------------------------------------------------------
                                                         68,923       68,772

    Continuance of operations (note 1)
    Contingencies (note 15)

    -------------------------------------------------------------------------
                                                    $    94,799  $   103,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND

    Consolidated Statement of Earnings (Loss) and Retained Earnings (Deficit)
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                         Three months Three months   Six months   Six months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------
    Sales                 $    49,489  $    66,488  $   102,911  $   137,536
    Cost of sales              40,846       54,526       84,652      111,938
    -------------------------------------------------------------------------

    Gross profit                8,643       11,962       18,259       25,598

    Expenses:
      Selling and
       administrative           8,835        9,225       17,535       20,543
      Amortization:
        Plant and equipment       207          235          430          474
        Deferred financing
         costs                     55            3           79            5
        Other intangible
         assets                     -          203            -          405
        Deferred gain on
         sale - leaseback
         of land and
         building                 (22)         (18)         (44)         (37)
      Interest                    116          310          268          698
      Unrealized foreign
       currency losses
       (gains)                    666         (247)         334          360
      Intangibles impairment        -        5,468            -        5,468
      Goodwill impairment           -       64,606            -       64,606
      -----------------------------------------------------------------------
                                9,857       79,785       18,602       92,522
    -------------------------------------------------------------------------

    Earnings (loss) before
     non-controlling
     interests and income
     taxes                     (1,214)     (67,823)        (343)     (66,924)

    Non-controlling
     interests (note 8)          (891)     (14,182)       (1,366)    (14,590)
    -------------------------------------------------------------------------

    Earnings (loss) before
     income taxes                (323)     (53,641)       1,022      (52,334)

    Income tax expense
     (recovery) (note 13):
      Current                     102           39          107         (752)
      Future                       66      (19,964)        (461)     (27,395)
      -----------------------------------------------------------------------
                                  168      (19,925)        (354)     (28,147)
    -------------------------------------------------------------------------

    Net earnings (loss)
     for the period              (491)     (33,716)       1,376      (24,187)

    Retained earnings
     (deficit), beginning
     of period                (48,091)         137      (49,958)      (6,150)

    Distributions declared
     to Unitholders                 -       (3,242)           -       (6,484)

    -------------------------------------------------------------------------
    Deficit, end of
     period               $   (48,582) $   (36,821) $   (48,582) $   (36,821)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted
     earnings (loss)
     per Unit             $     (0.03) $     (2.34) $      0.10  $     (1.68)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

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

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND

    Consolidated Statement of Comprehensive Income (Loss)
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                         Three months Three months   Six months   Six months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------

    Net earnings (loss)
     for the period       $      (491) $   (33,716) $     1,376  $   (24,187)

    Other comprehensive
     income:
      Unrealized gain
       (loss) on translation
       of self-sustaining
       foreign operations      (2,275)        (411)      (1,225)       1,658
      -----------------------------------------------------------------------
      Other comprehensive
       income (loss)           (2,275)        (411)      (1,225)       1,658

    -------------------------------------------------------------------------
    Comprehensive income
     (loss)               $    (2,766) $   (34,127) $       151  $   (22,529)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


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

    -------------------------------------------------------------------------
                         Three months Three months   Six months   Six months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive loss,
     beginning of period  $   (13,674) $   (19,496) $   (14,724) $   (21,565)

    Other comprehensive
     income (loss)             (2,275)        (411)      (1,225)       1,658

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

    Accumulated other
     comprehensive loss,
     end of period        $   (15,949) $   (19,907) $   (15,949) $   (19,907)

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



    HARDWOODS DISTRIBUTION INCOME FUND

    Consolidated Statements of Cash Flows
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                         Three months Three months   Six months   Six months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2009         2008         2009         2008
    -------------------------------------------------------------------------

    Cash flows provided
     by (used in) operating
     activities:
      Net earnings (loss)
       for the period     $      (491) $   (33,716) $     1,376  $   (24,187)
      Items not involving
       cash:
        Amortization              240          422          465          847
        Imputed interest
         income in employee
         loans                    (98)         (17)        (137)         (31)
        Gain on sale of
         property, plant
         and equipment            (16)           -          (25)           -
        Unrealized foreign
         exchange losses
         (gains)                  666          108          334        1,309
        Non-controlling
         interests               (891)     (14,182)      (1,366)     (14,590)
        Future income taxes        66      (20,037)        (461)     (27,426)
        Intangibles
         impairment                 -        5,468            -        5,468
        Goodwill impairment         -       64,606            -       64,606
      -----------------------------------------------------------------------
                                 (524)       2,652          186        5,996

      Change in non-cash
       operating working
       capital (note 9)         2,022        5,011        6,726        4,264
      -----------------------------------------------------------------------
      Net cash provided by
       operating
       activities               1,498        7,663        6,912       10,260

    Cash flows provided by
     (used in) investing
     activities:
      Additions to
       property, plant and
       equipment                  (45)        (225)         (50)        (298)
      Proceeds on disposal
       of property, plant
       and equipment               20            -           30            -
      Increase (decrease)
       in long-term
       receivables, net           437         (303)         623         (116)
      -----------------------------------------------------------------------
      Net cash provided by
       (used in) investing
       activities                 412         (528)         603         (414)

    Cash flows provided by
     (used in) financing
     activities:
      Decrease in bank
       indebtedness            (2,227)      (3,012)      (7,330)      (2,423)
      Increase in deferred
       bank fees                  (80)           -          (80)           -
      Distributions paid
       to Unitholders               -       (3,242)           -       (6,484)
      -----------------------------------------------------------------------
      Net cash used in
       financing activities    (2,307)      (6,254)      (7,410)      (8,907)
    -------------------------------------------------------------------------

    Increase (decrease)
     in cash                     (397)         881          106          939

    Cash, beginning of
     period                       587          353           84          295

    -------------------------------------------------------------------------
    Cash, end of period   $       190  $     1,234  $       190  $     1,234
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary
     information
     (cash amounts):
      Interest paid       $       278  $       310  $            $       698
      Income taxes paid             -           43            -          752
      Income taxes received       175            -        1,975            -
      Transfer of accounts
       receivable to
       long-term customer
       notes receivable,
       net of write offs,
       being a non-cash
       transaction                958           35          958        2,270

    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND

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

    For the periods ended June 30, 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.

        In accordance with the Canadian Institute of Chartered Accountants
        ("CICA") Handbook Section 1400, General Standards of Financial
        Statement Presentation, the Fund is required to assess and disclose
        its ability to continue as a going concern. 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 to be effective to
        the June 30, 2009 reporting period. The 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 June 30, 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 financial covenant at June 30, 2009, it would not have
        met its minimum trailing EBITDA 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 incurring significant customer or credit
        losses, could cause the U.S. subsidiary to violate 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 as circumstance, the
        Fund anticipates 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 which 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.  Basis of presentation:

        The Fund prepares its consolidated interim financial statements in
        accordance with Canadian generally accepted accounting principles on
        a basis consistent with those used and described in the annual
        consolidated financial statements for the year ended December 31,
        2008. The disclosures contained in these consolidated interim
        financial statements do not include all the requirements of Canadian
        generally accepted accounting principles for annual financial
        statements, and accordingly, these consolidated interim financial
        statements should be read in conjunction with the annual consolidated
        financial statements for the period ended December 31, 2008. Certain
        comparative figures have been restated to conform to the current
        period's financial statement presentation.

    3.  Adoption of changes in accounting standards:

        Effective January 1, 2009, the Fund adopted 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 did not have any goodwill or intangible assets at December 31,
        2008, the adoption of this new standard did not impact the amounts
        presented in 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:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2009         2008
        ---------------------------------------------------------------------

        Cash and cash equivalents                   $      (190) $       (85)
        Bank indebtedness                                 9,735       17,561
        ---------------------------------------------------------------------
        Net debt                                          9,545       17,476

        Unitholders' equity                              68,923       68,772

        ---------------------------------------------------------------------
        Total capitalization                        $    78,468  $    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 maximum ratio of net debt to EBITDA allowed
        under the Canadian credit facility is 2.50 times, and the minimum
        ratio of EBITDA to interest is 3.0 times.  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 terms of the agreements with the Fund's lenders provide that
        distributions cannot be made to its unitholders in the event that its
        subsidiaries did not meet the foregoing leverage as well as certain
        additional credit ratios. The Fund's operating subsidiaries were
        compliant with all required credit ratios under the US and Canadian
        credit facilities as at June 30, 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 period ended June 30, 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:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2009         2008
        ---------------------------------------------------------------------
        Lumber                                      $     9,140  $    12,077
        Sheet Goods                                      12,419       14,990
        Specialty                                         2,307        2,356
        Goods in-transit                                  1,057        1,445
        ---------------------------------------------------------------------
                                                    $    24,923  $    30,868
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the three months ended June 30, 2008 inventory write-downs
        totaling $0.4 million (six months ended June 30, 2009 - $0.9 million)
        were recorded to reduce certain inventory items to their net
        realizable value.

        Cost of sales for the three months ended June 30, 2009 were
        $40.8 million (six months ended June 30, 2009 - $84.7 million), which
        included $39.3 million (six months ended June 30, 2009 -
        $81.4 million) of costs associated with inventory. The other
        $1.5 million (six months ended June 30, 2009 - $3.3 million) related
        principally to freight and other related selling expenses.

    6.  Receivables:

        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:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
        Accounts receivable                                2009         2008
        ---------------------------------------------------------------------

        Trade accounts receivable - Canada          $    11,075  $     8,404
        Trade accounts receivable - United States        21,705       23,423
        Sundry receivable                                   208          495
        Current portion of long-term receivables          3,524        2,243
        ---------------------------------------------------------------------
                                                         36,512       34,565

        Less: allowance for doubtful accounts             3,177        2,347

        ---------------------------------------------------------------------
                                                    $    33,335  $    32,218
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        ---------------------------------------------------------------------
                                                        June 30, December 31,
        Long-term receivables                              2009         2008
        ---------------------------------------------------------------------

        Employee housing loans                      $     1,203  $     1,507
        Customer notes                                    4,306        3,772
        Security deposits                                   565          603
        ---------------------------------------------------------------------
                                                          6,074        5,882
        Less: current portion, included in accounts
         receivable                                       3,524        2,243

        ---------------------------------------------------------------------
                                                    $     2,550  $     3,639
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The aging of trade receivables was:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2009         2008
        ---------------------------------------------------------------------

        Current                                     $    18,604  $    17,037
        Past due 31-60 days                               6,306        6,696
        Past due 61-90 days                               2,899        3,706
        Past due 90+ days                                 4,971        4,388

        ---------------------------------------------------------------------
                                                    $    32,780  $    31,827
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Fund determines its allowance for doubtful accounts based on its
        best estimate of the net recoverable amount by customer account.
        Accounts that are considered uncollectable are written off. The total
        allowance at June 30, 2009 was $3.1 million (December 31, 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.

        Bad debt expense for the three months ended June 30, 2009 was
        $1.2 million which equates to 2.4% of sales (three month period ended
        June 30, 2008 - $0.5 million, being 0.8% of sales). Historically bad
        debt as a percentage of sales has averaged approximately 0.7%.

    7.  Bank indebtedness:

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2009         2008
        ---------------------------------------------------------------------

        Checks issued in excess of funds on deposit $       897  $     1,087
        Credit facility, Hardwoods LP                       362          265
        Credit facility, Hardwoods USLP (June 30,
         2009 - US$7,288;December 31, 2008 -
         US$13,308)                                       8,476       16,209
        ---------------------------------------------------------------------
                                                    $     9,735  $    17,561
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        In Canada, a subsidiary of the Fund has a revolving credit facility
        of up to $12.0 million. In the US, a subsidiary of the Fund has a
        revolving credit facility of up to $29.1 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 these credit facilities is
        limited to the extent of the value of certain accounts receivable and
        inventories held by subsidiaries of the Fund in Canada and the US
        respectively. At June 30, 2009 the Canadian and US credit facilities
        have $11.4 million and $7.2 million (US$6.2 million), respectively of
        additional borrowing capacity, subject to the subsidiaries being able
        to continue to meet their respective financial covenants as described
        in note 4.

    8.  Non-controlling interests:

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

        Balance, January 1, 2009                                 $    13,080

        Interest in earnings:
          Interest in earnings before taxes                              (69)
          Adjustment to non-controlling interest from
           subordination of Class B Unit Holders                      (1,297)
          -------------------------------------------------------------------
                                                                      (1,366)
        Foreign currency translation adjustment of
         non-controlling interest in Hardwoods USLP                     (669)
        ---------------------------------------------------------------------
        Balance, end of period                                   $    11,045
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

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

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

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

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

        The Subordinated End Date had not occurred at June 30, 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 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
              June 30, 2009, the amount of such deficiency was $12.6 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 June 30, 2009, the amount of such deficiency was
              $3.1 million.

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

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

        The cumulative deficiency prior to June 30, 2008, 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
        $0.6 million for the three-month period ended June 30, 2009
        ($1.3 million for the six-month period ended June 30, 2009).

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

        ---------------------------------------------------------------------
                         Three months Three months   Six months   Six months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2009         2008         2009         2008
        ---------------------------------------------------------------------

        Accounts
         receivable       $      (833) $       927  $    (4,743) $    (2,577)
        Income taxes
         recoverable/payable      184           (1)       1,915         (858)
        Inventory               1,788        5,395        5,150        8,638
        Prepaid expenses         (438)        (585)        (239)        (327)
        Accounts payable and
         accrued liabilities    1,321         (725)       4,643         (612)
        ---------------------------------------------------------------------
                          $     2,022  $     5,011  $     6,726  $     4,264
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        CICA 1540, Cash Flow Statements, require entities to disclose total
        cash distributions on financial instruments classified as equity in
        accordance with a contractual agreement and the extent to which total
        cash distributions are non-discretionary. The Fund has no contractual
        requirement to pay cash distributions to Unitholders' of the Fund.
        During the three month period ended June 30, 2009 no discretionary
        cash distributions were paid to Unitholders (2008 - $3.2 million).
        During the six month period ended June 30, 2009 no discretionary cash
        distributions were paid to Unitholders (2008 - $6.5 million).

    10. Segment disclosure:

        Information about geographic areas is as follows:

        ---------------------------------------------------------------------
                         Three months Three months   Six months   Six months
                                ended        ended        ended        ended
                              June 30,     June 30,     June 30,     June 30,
                                 2009         2008         2009         2008
        ---------------------------------------------------------------------

        Revenue from
         external
         customers:
          Canada          $    18,806  $    23,464  $    39,243  $    48,103
          United States        26,303       43,024       63,668       89,433
        ---------------------------------------------------------------------
                          $    49,489  $    66,488  $   102,911  $   137,536
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
                                                        June 30, December 31,
                                                           2009         2008
        ---------------------------------------------------------------------

        Property, plant and equipment:
          Canada                                    $       622  $       752
          United States                                   1,106        1,416
        ---------------------------------------------------------------------
                                                    $     1,728  $     2,168
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    11. 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 three months
        ended June 30, 2009, Hardwoods USLP contributed and expensed $60,131
        (US$51,531) (three months ended June 30, 2008 - $72,545 (US$72,012))
        in relation to the USLP Plan. During the six months ended June 30,
        2009, Hardwoods USLP contributed and expensed $128,816 (US$106,839)
        (six months ended June 30, 2008 - $216,923 (US$215,330)) 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
        three months ended June 30, 2009, Hardwoods LP contributed and
        expensed $41,728 (three months ended June 30, 2008 - $60,775) in
        relation to the LP Plan. During the six months ended June 30, 2009,
        Hardwoods LP contributed and expensed $91,581 (six months ended
        June 30, 2008 - $176,969) in relation to the LP Plan.

    12. Related party transactions:

        For the three months ended June 30, 2009, sales of $108,553 (three
        months ended June 30, 2008 - $108,048) were made to affiliates of
        SIL, and the Fund made purchases of $24,169 (three months ended June
        30, 2008 - $24,143) from affiliates of SIL. For the six months ended
        June 30, 2009, sales of $270,762 (six months ended June 30, 2008 -
        $235,123) were made to affiliates of SIL, and the Fund made purchases
        of $32,087 (six months ended June 30, 2008 - $40,628) from affiliates
        of SIL. All these sales and purchases took place at prevailing market
        prices.

    13. Income taxes:

        Effective, March 31, 2008 the Fund completed an internal
        reorganization that involved the refinancing of inter-corporate debt
        in the form of notes issued and held by subsidiaries of the Fund. The
        reorganization did not have any effect upon the management or
        business activities of the Fund's operating subsidiaries. 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 amounts 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 is comprised
        of an estimated $0.8 million current income tax recovery and
        $2.8 million future income tax recovery.

        During the quarter ended March 31, 2008, tax pools consisting
        principally of Canadian tax losses carried forward, of approximately
        $16.0 million were recorded by a subsidiary of the Fund
        as a result of the Fund's re-organization plan. The tax losses
        carried forward will result in a reduction of tax otherwise payable
        under the Canadian federal government's tax on publicly traded income
        trusts. 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.

        In addition, during the quarter ended June 30, 2008, the Fund
        recorded a future tax asset of approximately $20.1 million as a
        result of the write-down of the goodwill and intangible assets.
        Goodwill and intangible assets remain deductible for Canadian and
        U.S. tax purposes.

    14. Seasonality:

        The Fund is subject to seasonal influences. Historically the first
        and fourth quarters are seasonally slower periods for construction
        activity and therefore demand for hardwood products.

    15. Contingencies:

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

    %SEDAR: 00020372E




For further information:

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

Organization Profile

HARDWOODS DISTRIBUTION INCOME FUND

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