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



    TRADING SYMBOL: Toronto Stock Exchange - HWD.UN

    Hardwoods Distribution Income Fund will hold a conference call and
    webcast to discuss fourth quarter and year-end financial results on
    March 13, 2007 at 8:00 a.m. Pacific Time (11:00 a.m. Eastern). The call
    can be accessed by dialing: 1-800-814-4857 or 416-644-3419. A replay will
    be available until March 27, 2007 at: 1-877-289-8525 or 416-640-1917
    (Passcode 21218507 followed by the number sign).

    The live and archived webcast can be accessed at
    http://www.vcall.com/IC/CEPage.asp?ID=113515 or on the Fund's
    website at www.hardwoods-inc.com.

    LANGLEY, BC, March 12 /CNW/ - Hardwoods Distribution Income Fund (the
"Fund") today announced financial results for the fourth quarter and 2006. For
the three months ended December 31, 2006, the Fund and its subsidiaries
generated distributable cash of $3.7 million, or $0.206 per unit, and declared
distributions of $2.9 million or $0.204 per unit to public unitholders
(Class A Units). No distributions were declared on the 20% interest retained
by Hardwoods' previous owners (Class B Units), resulting in a 79.2% payout
ratio.
    On a full-year basis, the Fund and its subsidiaries generated
distributable cash of $16.7 million, or $0.930 per unit, and declared
distributions of $13.3 million ($0.921 per unit to Class A Units), and no
distributions were declared to Class B Units. This represents an overall
payout ratio of 79.2% for 2006.
    The Fund owns an 80% interest in Hardwoods Inc. ("Hardwoods") - one of
North America's largest wholesale distributors of hardwood lumber and related
sheet good products. Hardwoods serves over 2,500 industrial customers through
a network of 36 distribution centres in the US and Canada.
    "2006 was a year of effective action on a number of challenging issues,"
said Maurice Paquette, Hardwoods President and CEO. "Despite a significant
drop in US housing starts and lower prices for many hardwood lumber products,
our underlying sales continued to grow, led by our operations in the US which
posted an 11.7% year-over-year increase in US dollar sales. This improvement
reflects our diversification across multiple product and market segments, as
well as the success of several strategic initiatives. In particular, we
benefited from the addition of new import products to our product mix, the
ramp up of our two new branches in Minneapolis and Illinois, and increased
investment in personnel," said Paquette.
    "While growing sales, we also succeeded in stabilizing our sales and
administrative expenses in the second half through better cost control and
decisive action on our distribution network. We closed two branches with
limited growth prospects in Albuquerque and Regina. We also closed our Windsor
branch in the fourth quarter due to weakness in the Detroit and Southern
Ontario markets. Concurrently, we expanded in markets that offer long-term
promise, such as Southern California, where we increased space at our hub
facility by 50%. Although branch closures were a factor in a 3.7% year-over-
year reduction in sales at our Canadian operations, we believe our network is
now more closely matched to the sales potential in each geographic region."
    "These actions, together with the 2006 reduction in our monthly cash
distributions, allowed us to end the year with a payout ratio of 79% - a more
prudent payout rate in the current market environment than the 91% ratio we
were tracking midway through the year. In the fourth quarter we also reduced
our debt-to-EBITDA ratio to a more conservative 1.77, and extended for an
additional three years our Canadian and US credit facilities on more
favourable terms," said Paquette.
    "We are pleased with this progress but recognize that there is still much
work to be done. A priority for us in 2007 will be to return our gross margin
to our 18.5% or higher target level while continuing to grow sales. One of the
ways we will achieve this objective is through continued development of our
import product program. We more than doubled our import volume from China in
2006, and we expect to continue to fill our product pipeline with offshore
products that offer cost benefits and other competitive advantages. Cost
containment also remains a strategic priority as does continued strict
management of our distribution network. We look forward to continued
improvement in 2007," said Paquette.

    

    Summary of Results

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

                           For the       For the
                             three         three       For the       For the
                      months ended  months ended    year ended    year ended
                       December 31,  December 31,  December 31,  December 31,
                              2006          2005          2006          2005
                              ----          ----          ----          ----

    Total sales         $   83,120    $   84,130    $  362,528    $  355,775
      Sales in the US
       (US$)                51,502        49,150       223,509       200,079
      Sales in Canada       24,466        26,420       109,024       113,359
    Gross profit            15,116        15,456        66,042        66,387
      Gross profit %         18.2%         18.4%         18.2%         18.7%
    Selling and
     administrative
     expenses               11,354        11,009        45,559        43,480
    Gain on realized
     foreign currency
     contracts                (326)         (259)       (1,338)         (677)
    -------------------------------------------------------------------------
    Earnings before
     interest, taxes,
     depreciation and
     amortization and
     non-controlling
     interest
     ("EBITDA")         $    4,088    $    4,706    $   21,821    $   23,584
      Add (deduct):
        Amortization          (527)         (524)       (2,100)       (2,181)
        Interest              (664)         (595)       (3,127)       (2,114)
        Mark-to-market
         adjustment on
         foreign currency
         contracts          (1,212)         (399)       (1,280)          142
        Intangibles
         impairment           (326)            -          (326)            -
        Goodwill
         impairment         (7,566)            -        (7,566)            -
        Non-controlling
         interest            1,242          (637)       (1,484)       (3,886)
        Income taxes           139          (181)       (2,301)       (2,194)
    -------------------------------------------------------------------------
    Net earnings for
     the period         $   (4,826)   $    2,370    $    3,637    $   13,351
                       ------------  ------------  ------------  ------------
                       ------------  ------------  ------------  ------------
    Basic and fully
     diluted earnings
     per Class A Unit   $   (0.335)   $    0.164    $    0.252    $    0.927
    Average Canadian
     dollar/US dollar
     exchange rate          1.1384        1.1732        1.1342        1.2116
    -------------------------------------------------------------------------



    Distributable Cash and Cash Distributions

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

                           For the       For the
                             three         three       For the       For the
                      months ended  months ended    year ended    year ended
                       December 31,  December 31,  December 31,  December 31,
                              2006          2005          2006          2005
                              ----          ----          ----          ----
    Net cash provided
     by operating
     activities         $    8,860    $    7,917    $   18,539    $   13,875
    Increase (decrease)
     in non-cash
     operating working
     capital                (5,049)       (4,060)         (889)        6,194
                       ------------  ------------  ------------  ------------
    Cash flow from
     operations before
     changes in non-cash
     operating working
     capital                 3,811         3,857        17,650        20,069
    Capital expenditures       (97)         (533)         (902)       (1,356)
                       ------------  ------------  ------------  ------------
    Distributable cash  $    3,714    $    3,324    $   16,748    $   18,713
                       ------------  ------------  ------------  ------------
                       ------------  ------------  ------------  ------------

    Distributions relating
     to the period:
      Class A Units          2,940(2)      3,825        13,265(1)     15,497
      Class B Units              -(3)          -             -(3)      3,065
                       ------------  ------------  ------------  ------------
                        $    2,940    $    3,825    $   13,265    $   18,562
                       ------------  ------------  ------------  ------------
                       ------------  ------------  ------------  ------------

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

    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    $    0.206    $    0.185    $    0.930    $    1.039

    Distributions relating
     to the period:
      Class A Units     $    0.204(2) $    0.265    $    0.921(1) $    1.075
      Class B Units     $        -(3) $        -    $        -(3) $    0.851
      Total Units       $    0.163    $    0.212    $    0.736    $    1.031

    Payout ratio(4)          79.2%        115.1%         79.2%         99.2%
    -------------------------------------------------------------------------

    (1) Includes the cash distributions of $0.08542 per Class A Unit per
        month which relate to the operations of the Fund for the months
        January through June 2006, and distributions of $0.068 per Class A
        Unit per month which relate to the operations of the Fund for July
        through December 2006.
    (2) Includes the cash distributions of $0.068 per Class A Unit per month
        which relate to the operations of the Fund for October, November, and
        December 2006.
    (3) On January 10, 2006, Hardwoods Specialty Products LP and Hardwoods
        Specialty Products US LP, partnerships in which the Fund owns an 80%
        interest, announced that quarterly distributions were suspended on
        the subordinated units, represented by 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 the combined business of Hardwoods, which is
        subordinated to the Fund's ownership interest in the business.
        Accordingly, no distributions were declared payable relating to the
        fourth quarter of 2005, and the first, second, third and fourth
        quarters of 2006 to the non-controlling interests and no current
        liability for distributions payable to the non-controlling interests
        is reflected in the December 31, 2006 balance sheet.
    (4) Payout ratio measures the ratio of distributions relating to the
        period to distributable cash in the period. Comparative distributable
        cash and payout ratio figures have been restated to conform with
        presentation adopted in the year ended December 31, 2006 as a result
        of the suspension of quarterly distributions on the Class B Units.
    


    Results from Operations - Three Months Ended December 31, 2006

    For the three months ended December 31, 2006, Hardwoods reported sales of
$83.1 million, down 1.2% from $84.1 million in 2005. Underlying sales activity
remained solid at the Fund's US operations, with sales (as measured in US
dollars) up by 4.8% compared to the fourth quarter of 2005. The gain in US
sales was achieved despite multi-day, weather-related closures at customer
locations and at some Hardwoods' branches in the Pacific Northwest and Rocky
Mountain regions. Sales in Canada were down 7.4% in the fourth quarter,
primarily reflecting reduced sales contribution from the Windsor, Ontario
branch. A stronger Canadian dollar also resulted in lower selling prices and
reduced demand from Canadian industrial manufacturers that serve the US
market.
    Fourth quarter 2006 gross profit was $15.1 million, a decrease of
$0.4 million, or 2.2%, from the $15.5 million reported in 2005. The change in
gross profit reflects the 1.2% decrease in sales and a reduced gross profit
percentage of 18.2%, compared to 18.4% during the fourth quarter of 2005. Some
quarter-to-quarter variation in gross profit percentage is considered normal
for Hardwoods' business, with 18% to 19% representing a typical range. Over
the longer term, gross profits are targeted to achieve 18.5% of sales or
higher.
    Fourth quarter selling and administrative expenses were $11.4 million, up
slightly from $11.0 million during the same period in 2005. This increase
reflects higher rent expense, partially offset by the benefit of the stronger
Canadian dollar on the conversion of S&A expenses at the Fund's US operations.
    EBITDA decreased to $4.1 million in the fourth quarter of 2006, down
$0.6 million from $4.7 million in 2005. The decrease in EBITDA primarily
reflects a $0.4 million decrease in gross profit combined with a $0.3 million
increase in selling and administrative expenses.
    Fourth quarter net loss was $4.8 million, compared to net earnings of
$2.4 million in the same period in 2005. The $7.2 million decrease in net
earnings primarily reflects the $0.6 million decrease in EBITDA, a
$0.8 million increase in mark-to-market adjustment losses on foreign currency
contracts, and a $7.9 million goodwill and other intangible assets impairment
charge, partially offset by a $0.3 million decrease in income taxes and a
$1.9 million reduction in non-controlling interest as a result of lower
profits in the quarter. The $7.9 million write-down of goodwill and
intangibles in the fourth quarter is a non-cash charge relating solely to
Hardwoods' Canadian operations. Approximately two-thirds of the $7.9 million
in impairment charges are due to the anticipated reduction to cash flows
resulting from the federal government's decision to tax Canadian income trusts
commencing in 2011, and the remainder is due to lower than previously
anticipated revenue and cash flows to be generated.

    Results from Operations - Year ended December 31, 2006

    For the year ended December 31, 2006, sales increased to $362.5 million,
up 1.9% from $355.8 million in 2005, reflecting strong underlying sales,
partially offset by the negative impact of a stronger Canadian dollar. The
average exchange rate on the Canadian dollar was 6.4% higher in 2006 than in
2005. Had exchange rates remained consistent with 2005 levels, reported
revenue for 2006 would have been $17.3 million higher, at $379.8 million.
    Despite the slowdown in the residential construction market, sales in the
United States, as measured in U.S. dollars, increased by 11.7% in 2006. The
higher sales pace reflects the positive impact of more import products in the
sales mix, growing sales from the Minneapolis and Illinois branches, which
opened late in 2005, and general sales growth at other branch locations. All
five of Hardwoods' operating regions in the U.S. either maintained or
increased sales in 2006. In 2006 our import business grew to $30 million in
annual sales, comprising approximately 17% of our sheet goods business and 8%
of our overall sales mix.
    Sales from Hardwoods' Canadian business declined by 3.8% year-over-year.
This was largely due to the negative impact of a stronger Canadian dollar and
weaker demand from the Windsor branch.
    Consolidated gross profit was $66.0 million in 2006, compared to
$66.4 million in 2005. The $0.4 million decrease was due to a reduction in
gross profit percentage to 18.2% in 2006, compared to 18.7% in 2005.
    During 2006, selling and administrative expenses increased $2.1 million
or 4.8% from $43.5 million in 2005, with most of the cost increase occurring
in the first half of the year. The three most significant areas of cost
increase related to higher personnel, bad debt and premises expense. The
benefit of a stronger Canadian dollar on the conversion of selling and
administrative expenses at Hardwoods' U.S. operations partially offset these
increases, reducing costs by $2.3 million in 2006. As a percentage of sales,
2006 selling and administrative expenses were 12.6% of sales, compared to
12.2% in 2005.
    Full-year EBITDA was $21.8 million, compared to $23.6 million in 2005.
The $1.8 million decrease in EBITDA reflects the $0.4 million decrease in
gross profit and the $2.1 million increase in S&A, partially offset by a
$0.7 million increase in realized gains on foreign currency contracts.
    Net earnings were $3.6 million in 2006, compared to $13.4 million in
2005. The $9.7 million decrease in net earnings primarily reflects the
$1.8 million decrease in EBITDA, a $1.0 million increase in interest expense,
a $1.4 million increase in mark-to-market adjustment loss on foreign currency
contracts, the $7.9 million impairment in goodwill and other intangible
assets, and a $0.1 million increase in income taxes. This was partially offset
by a $2.4 million reduction in non-controlling interest as the result of lower
earnings in 2006.

    Unitholder Rights Plan

    On December 12, 2006 the Fund's Board of Trustees adopted a Unitholders'
Rights Plan designed to ensure fair treatment of 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 conditionally accepted by the Toronto Stock
Exchange and is effective immediately. Unitholders will be asked to approve
the Rights Plan at the Fund's Annual General Meeting on May 14, 2007.

    Outlook

    Hardwoods anticipates flat to moderate sales growth in 2007. Although US
housing starts are not expected to recover in the near term and the Canadian
Housing and Mortgage Corporation forecasts a 7.4% decline in Canadian housing
starts in 2007, sales continue to be supported by product, market and
geographic diversification. The Fund's emphasis on higher growth markets and
its successful import product program are also expected to drive sales.
    Internally, Hardwoods is maintaining strict selling discipline and
continues to build its import program as it works to improve gross margins.
Cost control and careful management of working capital remain priorities.
Taking these factors together, it is expected that the Fund will increase
distributable cash in 2007 compared to 2006.
    Management continues to monitor and assess the impact of the federal
government's proposed taxation of income trusts. If passed into law, these
changes will begin to affect the Fund in 2011. Overall, it is anticipated that
the proposed trust tax may have substantially less impact on the Fund than on
other trusts that operate principally or exclusively in Canada. Approximately
70% of Hardwoods' business is conducted in the U.S. and already subject to US
taxation. The Fund believes that it will be able to re-organize its business
structure prior to 2011 such that it will not expose its US source income to
additional taxes associated with the new Canadian trust tax. The remaining 30%
of the Fund's earnings that are generated in Canada are expected to be subject
to tax at a rate of 31.5%. The proposed tax has not yet been finalized and
passed into law, and accordingly all assessments are preliminary and are
subject to change.

    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 intangibles impairment, and the non-controlling
interest in earnings. Management believes that, 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.
    EBITDA is not an earnings measure recognized by generally accepted
accounting principles in Canada ("GAAP") and does 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, or to cash flows from operating, investing and
financing activities or as a measure of our liquidity and cash flows. Our
method of calculating EBITDA may differ from the methods used by other
issuers. Therefore, our EBITDA may not be comparable to similar measures
presented by other issuers.
    Distributable Cash of the Fund is a non-GAAP measure generally used by
Canadian open-ended income funds as an indicator of financial performance. We
define Distributable Cash as net earnings before depreciation, amortization,
future income taxes, non-controlling interest, gains or losses on the sale of
property, plant and equipment, mark-to-market adjustments on foreign currency
contracts, and goodwill and other intangibles impairment, and after capital
expenditures and contributions to any reserves that the Board of Trustees deem
to be reasonable and necessary for the operation of the Fund.
    Our Distributable Cash may differ from similar computations as reported
by other similar entities and, accordingly, may not be comparable to
distributable cash as reported by such entities. We believe that Distributable
Cash is a useful supplemental measure that may assist investors and
prospective investors in assessing the return on an investment in Class A
Units.

    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 at $10.00 per
unit.

    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 36 distribution centres comprising 1.3 million square feet of warehouse and
distribution space in the U.S. and Canada.

    Forward-Looking Statements

    This press release may contain forward-looking statements, which reflect
management's expectations regarding the future growth, results of operations,
performance and business prospects, and opportunities of the Fund. Forward-
looking statements contain such words as "anticipate", "believe", "continue",
"could", "expects", "intend", "may", "plans" or similar expressions suggesting
future conditions or events. Such forward-looking statements reflect current
beliefs and are based on currently available information. Forward-looking
statements involve significant risks and uncertainties. A number of factors
could cause actual results to differ materially from results discussed in the
forward-looking statements, including the effects, as well as changes in:
national and local business conditions; political or economic instability in
local markets; competition; consumer preferences, spending patterns and
demographic trends; legislation and governmental regulation. Although the
forward-looking statements contained in this press release are based on what
management believes to be reasonable assumptions, management cannot assure
readers that actual results will be consistent with these forward-looking
statements.



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

    December 31, 2006 and 2005

    -------------------------------------------------------------------------
                                                          2006          2005
    -------------------------------------------------------------------------

    Assets

    Current assets:
      Cash and cash equivalents                    $      594    $     2,203
      Accounts receivable                               43,767        46,166
      Income taxes recoverable                             596            86
      Inventory                                         44,584        47,666
      Prepaid expenses                                   1,098         1,222
      Foreign currency contracts (note 5)                1,129         1,439
      -----------------------------------------------------------------------
                                                        91,768        98,782

    Long-term receivables (note 3)                       3,236         2,634

    Property, plant and equipment (note 4)               3,219         3,519

    Deferred financing costs                                32            77

    Foreign currency contracts (note 5)                    385         1,214

    Other intangible assets                             10,878        12,103

    Goodwill                                            88,886        96,340

    -------------------------------------------------------------------------
                                                    $  198,404    $  214,669
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
      Bank indebtedness (note 6)                    $   39,152    $   46,925
      Accounts payable and accrued liabilities           7,590         9,231
      Distributions payable to Unitholders                 980             -
      -----------------------------------------------------------------------
                                                        47,722        56,156

    Foreign currency contracts (note 5)                    141             -

    Deferred gain on sale-leaseback of land
     and building                                          719           804

    Non-controlling interests (note 7)                  33,859        32,047

    Future income taxes (note 9)                         2,653         1,364

    Unitholders' equity:
      Fund Units (note 8)                              133,454       133,454
      Retained earnings (deficit)                       (8,973)        1,886
      Cumulative foreign currency translation
       account                                         (11,171)      (11,042)
      -----------------------------------------------------------------------
                                                       113,310       124,298
    Commitments (note 11)
    Contingencies (note 16)

    -------------------------------------------------------------------------
                                                    $  198,404    $  214,669
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



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

    Years ended December 31, 2006 and 2005

    -------------------------------------------------------------------------
                                                          2006          2005
    -------------------------------------------------------------------------

    Sales                                           $  362,528    $  355,775
    Cost of sales                                      296,486       289,388
    -------------------------------------------------------------------------

    Gross profit                                        66,042        66,387

    Expenses (income):
      Selling and administrative                        45,559        43,480
      Amortization:
        Plant and equipment                              1,208         1,236
        Deferred financing costs                            77            64
        Other intangible assets                            899           938
        Deferred gain on sale-leaseback of
         land and building                                 (84)          (57)
      Interest                                           3,127         2,114
      Foreign currency contracts                           (58)         (819)
      Intangibles impairment (note 2(g))                   326             -
      Goodwill impairment (note 2(h))                    7,566             -
      -----------------------------------------------------------------------
                                                        58,620        46,956
    -------------------------------------------------------------------------

    Earnings before non-controlling interests
     and income taxes                                    7,422        19,431

    Non-controlling interests (note 7)                   1,484         3,886
    -------------------------------------------------------------------------

    Earnings before income taxes                         5,938        15,545

    Income taxes (note 9)                                2,301         2,194
    -------------------------------------------------------------------------

    Net earnings for the year                            3,637        13,351

    Retained earnings, beginning of year                 1,886         2,801

    Distributions declared to Unitholders              (14,496)      (14,266)

    -------------------------------------------------------------------------
    Retained earnings (deficit), end of year        $   (8,973)   $    1,886
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted earnings per Unit             $     0.25    $     0.93
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Weighted average number of Units outstanding    14,410,000    14,410,000
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    See accompanying notes to consolidated financial statements.



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

    Years ended December 31, 2006 and 2005

    -------------------------------------------------------------------------
                                                          2006          2005
    -------------------------------------------------------------------------

    Cash flows provided by (used in) operating
     activities:
      Net earnings for the year                     $    3,637    $   13,351
      Items not involving cash:
        Amortization                                     2,100         2,181
        Gain on sale of property, plant and equipment      (32)          (26)
        Mark-to-market adjustment on unrealized
         foreign currency contracts                      1,280          (142)
        Intangibles impairment (note 2(g))                 326             -
        Goodwill impairment (note 2(h))                  7,566             -
        Non-controlling interests                        1,484         3,886
        Future income taxes                              1,289           819
      -----------------------------------------------------------------------
                                                        17,650        20,069
      Change in non-cash operating working
       capital (note 10)                                   889        (6,194)
      -----------------------------------------------------------------------
      Net cash provided by operating activities         18,539        13,875

    Cash flows provided by (used in) financing
     activities:
      Increase (decrease) in bank indebtedness          (7,733)        8,996
      Increase in deferred financing fees                  (33)            -
      Distributions paid to Unitholders                (13,516)      (15,563)
      Distributions paid to non-controlling interests        -        (4,063)
      -----------------------------------------------------------------------
      Net cash used in financing activities            (21,282)      (10,630)

    Cash flows provided by (used in) investing
     activities:
      Additions to property, plant and equipment          (902)       (1,356)
      Proceeds on disposal of property, plant
       and equipment                                        34         2,150
      Decrease (increase) in long-term
       receivables, net                                  2,002        (1,836)
      -----------------------------------------------------------------------
      Net cash provided by (used in) investing
       activities                                        1,134        (1,042)
    -------------------------------------------------------------------------

    Increase (decrease) in cash                         (1,609)        2,203

    Cash, beginning of year                              2,203             -

    -------------------------------------------------------------------------
    Cash, end of year                               $      594    $    2,203
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental information:
      Interest paid                                 $    3,127    $    2,114
      Income taxes paid                                  1,572           946
      Transfer of accounts receivable to
       long-term customer notes receivable,
       being a non-cash transaction                      2,167           509
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    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, 2006 and 2005

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

    1.  Nature of operations and business acquisition:

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

    2.  Significant accounting policies:

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

        (a) Basis of presentation:

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

        (b) Cash and cash equivalents:

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

        (c) Accounts receivable:

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

        (d) Inventory:

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

        (e) Property, plant and equipment:

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

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

            Machinery and equipment                             5 to 10 years
            Mobile equipment                                    7 to 10 years
            Leasehold improvements                 Over the term of the lease
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (f) Deferred financing costs:

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

        (g) Other intangible assets:

            Other intangible assets represent customer relationships acquired
            in the business combination (note 1) and are recorded at cost
            less accumulated amortization and any write-downs. Amortization
            is provided for on a straight- line basis over 15 years.
            Management reviews the carrying value of intangible assets for
            impairment annually, or more frequently if events or changes in
            circumstances indicate that the asset may be impaired. Any excess
            of carrying value over fair value is charged to income in the
            period in which the impairment is determined. During the fourth
            quarter ended December 31, 2006, management performed its annual
            impairment test and having determined that the carrying value of
            intangible assets exceeded their fair value, recorded an
            impairment of $326,000.

        (h) Goodwill:

            Goodwill is recorded at cost less any write-downs and is not
            amortized. Management reviews the carrying value of goodwill for
            impairment annually, or more frequently if events or changes in
            circumstances indicate that the asset may be impaired. Any excess
            of carrying value over fair value is charged to income in the
            period in which the impairment is determined. During the fourth
            quarter ended December 31, 2006, management performed its annual
            impairment test and having determined that the carrying value of
            goodwill exceeded its fair value, recorded a goodwill impairment
            of $7,566,000. The write-down of goodwill relates solely to the
            Fund's Canadian business, Hardwoods LP. The goodwill impairment
            in Hardwoods LP is largely due to the anticipated reduction to
            cash flows resulting from the Canadian federal government's
            intention to tax Canadian income trusts commencing in 2011, as
            well as lower than previously anticipated revenue and cash flows
            to be generated.

        (i) Impairment of long-lived assets:

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

        (j) Sales-leaseback of land and building:

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

        (k) Income taxes:

            Incorporated subsidiaries of the Fund use the asset and liability
            method of accounting for income taxes. Under the asset and
            liability method, future income tax assets and liabilities are
            recognized for the future tax consequences attributable to
            differences between the financial statement carrying amounts of
            existing assets and liabilities and their respective tax bases.
            Future tax assets and liabilities are measured using enacted or
            substantively enacted tax rates expected to apply to taxable
            income in the years in which those temporary differences are
            expected to be recovered or settled. The effect on future tax
            assets and liabilities of a change in tax rates is recognized in
            income in the period that includes the substantive enactment
            date. The amount of future income tax assets recognized is
            limited to the amount that is more likely than not to be
            realized.

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

        (l) Revenue recognition:

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

        (m) Translation of foreign currencies:

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

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

        (n) Foreign currency contracts:

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

        (o) Earnings per Unit:

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

        (p) Use of estimates:

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

        (q) Comparative figures:

            Certain comparative figures have been restated to conform to the
            current year's financial statement presentation.

    3.  Long-term receivables:

        ---------------------------------------------------------------------
                                                            2006        2005
        ---------------------------------------------------------------------
        Employee housing loans                           $ 1,766     $ 3,364
        Customer notes                                     2,277         477
        Security deposits                                    606         611
        ---------------------------------------------------------------------
                                                           4,649       4,452

        Less: current portion                              1,413       1,818
        ---------------------------------------------------------------------
                                                         $ 3,236     $ 2,634
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

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

    4.  Property, plant and equipment:

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

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

        ---------------------------------------------------------------------
                                         $ 6,399       $ 3,180       $ 3,219
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        ---------------------------------------------------------------------
                                                   Accumulated      Net book
        December 31, 2005                   Cost  amortization         value
        ---------------------------------------------------------------------

        Machinery and equipment          $ 1,919       $   743       $ 1,176
        Mobile equipment                   2,922         1,021         1,901
        Leasehold improvements               715           273           442

        ---------------------------------------------------------------------
                                         $ 5,556       $ 2,037       $ 3,519
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    5.  Foreign currency contracts:

        In order to manage the Fund's exposure to exchange rate fluctuations
        on United States dollar denominated distributable cash, at
        December 31, 2006 a subsidiary of the Fund had entered into 16
        foreign currency contracts to exchange US$675,000 each month for
        approximately $878,000 until April 2008, reflecting an exchange rate
        of $1.30. The subsidiary of the Fund also had an additional 12
        monthly foreign currency contracts to exchange US$675,000 into
        approximately $760,000 each month from May 2008 until April 2009,
        reflecting an exchange rate of $1.1255. The fair value of the Fund's
        16 remaining monthly foreign currency contracts covering the period
        January 2007 to April 2008 represent a current asset of $1,129,000
        and a long term asset of $385,000 at December 31, 2006. The fair
        value of the Fund's 12 monthly currency contracts covering the period
        May 2008 to April 2009 represent a long term liability of $141,000 at
        December 31, 2006. The fair values were determined based on
        valuations obtained from the counter-party.

    6.  Bank indebtedness:

        ---------------------------------------------------------------------
                                                            2006        2005
        ---------------------------------------------------------------------

        Checks issued in excess of funds on deposit     $    797    $    753
        Credit facility, Hardwoods LP                     10,788      13,201
        Credit facility, Hardwoods USLP
         (2006 - US$23,655; 2005 - US$28,350)             27,567      32,971

        ---------------------------------------------------------------------
                                                        $ 39,152    $ 46,925
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Bank indebtedness consists of checks issued in excess of funds on
        deposit and advances under operating lines of credit available to
        Hardwoods LP and Hardwoods USLP. Hardwoods LP has a revolving credit
        facility of up to an aggregate amount of $22,000,000 and Hardwoods
        USLP has a revolving credit facility of up to an aggregate amount of
        $40,789,000 (US$35,000,000) less the net exposure under the foreign
        currency contracts facility as described in note 5.

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

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

        The average annual interest rates payable for the year ended
        December 31, 2006 were 6.6% and 7.2% (2005 - 5.0% and 4.9%) for the
        Hardwoods LP and Hardwoods USLP credit facilities, respectively.

    7.  Non-controlling interests:

        ---------------------------------------------------------------------
                                                            2006        2005
        ---------------------------------------------------------------------

        Balance, beginning of the year                  $ 32,047    $ 32,123
        Interest in earnings for the year                  1,484       3,886
        Distributions declared to
         non-controlling interests                             -      (3,066)
        Foreign currency translation adjustment
         of non-controlling interest in Hardwoods
         USLP and other                                      328        (896)

        ---------------------------------------------------------------------
        Balance, end of the year                        $ 33,859    $ 32,047
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

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

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

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

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

        The Subordinated End Date had not occurred at December 31, 2006.

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

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

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

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

           -  Second, to the holders of Class A LP Units and Class A USLP
              Units, to the extent that the combined monthly cash advances or
              distributions in respect of the 12 month period then ended (and
              not, for greater certainty, in any previous 12 month period) on
              Class A LP Units and Class A USLP Units were not made or were
              made in amounts less than a combined amount at least equal to
              $1.025 per Unit, the amount of any such deficiency. As of
              December 31, 2006, the amount of such deficiency was
              $1.5 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, 2006, the amount of such deficiency was
              $3.3 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.

    8.  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 7). 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. 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) are deemed to be "Grandfathered Persons" and are exempt
            from the definition of an "Acquiring Person" under the Rights
            Plan provided their beneficial interest in the outstanding units
            does not increase by more than 1.0% following December 12, 2006.
            The rights become exercisable only when a person or party
            acquires 20% or more of the Units, or in the case of a
            Grandfathered Person increases their beneficial interest in Units
            by more than 1.0%, each without complying with certain provisions
            of the Rights Plan. Each right would entitle each holder of Units
            (other than the acquiring person or party) to purchase additional
            Units of the Fund at a 50 per cent discount to the market price
            at the time. Although the Rights Plan has been conditionally
            accepted by the Toronto Stock Exchange and took effect
            immediately, the Fund will ask its Unitholders to approve it at
            the next meeting of Unitholders. The Rights Plan will expire if
            Unitholder approval is not obtained within six months of
            December 12, 2006. If approved by Unitholders, it will continue
            in effect until the annual general meeting of Unitholders in
            2010.

    9.  Income taxes:

        ---------------------------------------------------------------------
                                                            2006        2005
        ---------------------------------------------------------------------

        Current                                          $ 1,054     $ 1,323
        Future                                             1,247         871

        ---------------------------------------------------------------------
                                                         $ 2,301     $ 2,194
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Income tax expense differs from that calculated by applying U.S.
        federal and state statutory income tax rates in effect in the
        jurisdiction in which a subsidiary of the Fund is subject to tax of
        39.4% (2005 - 39.4%) to earnings before income taxes for the
        following reasons:

        ---------------------------------------------------------------------
                                                            2006        2005
        ---------------------------------------------------------------------

        Earnings before income tax                       $ 5,938    $ 15,545
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Computed tax expenses at statutory rate          $ 2,340    $  6,125
        Income of Fund distributed directly
         to Unitholders                                     (763)     (3,801)
        Income and deductions not subject to tax            (386)       (250)
        Deductible state taxes                                (8)        (67)
        Other                                                275         187
        Taxes paid as a result of Subordination
         Agreement                                           843           -

        ---------------------------------------------------------------------
                                                         $ 2,301     $ 2,194
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

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

        The tax effect of temporary differences that give rise to significant
        portions of the future income tax assets and liabilities at
        December 31, 2006 is as follows:

        ---------------------------------------------------------------------
                                                            2006        2005
        ---------------------------------------------------------------------

        Future income tax assets:
          Accrued                                       $     21    $    196
          Deferred gain on sale-leaseback of land and
           building                                          227         253
          Inventory                                          453         410
          Accounts receivable                                272          45
          Property, plant and equipment                        -          35
          -------------------------------------------------------------------
                                                             973         939
        Future income tax liabilities:
          Property, plant and equipment                      (69)          -
          Goodwill                                        (3,466)     (2,200)
          Prepaid expenses                                   (91)       (103)
          -------------------------------------------------------------------
                                                          (3,626)     (2,303)

        ---------------------------------------------------------------------
        Net future income tax liability                 $ (2,653)   $ (1,364)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        On October 31, 2006, proposed legislation was announced by the
        Canadian federal government that would subject the Fund to tax on
        income of certain of the Fund's subsidiary operations that are
        currently not subject to tax in the Fund. The proposed taxation
        changes, if substantively enacted, would require recognition of
        future income tax assets and liabilities with a corresponding impact
        on future tax expense (recovery) when so enacted, based on the
        temporary differences expected to reverse after the date the taxation
        changes take effect. If substantively enacted in the form currently
        proposed, the Fund expects these taxation changes to take effect in
        2011.

        At December 31, 2006, the tax bases exceeds the reported amounts of
        the Fund's consolidated assets and liabilities for entities that are
        not subject to income taxes by $7,628,000 (2005 - $5,025,000).

    10. Changes in non-cash operating working capital:

        ---------------------------------------------------------------------
                                                            2006        2005
        ---------------------------------------------------------------------
        Accounts receivable                             $   (122)   $ (1,054)
        Income taxes recoverable                            (510)        314
        Inventory                                          3,070      (6,371)
        Prepaid expenses                                     123        (625)
        Accounts payable and accrued liabilities          (1,672)      1,542

        ---------------------------------------------------------------------
                                                        $    889    $ (6,194)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    11. Commitments:

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

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

            2007                                                    $  7,459
            2008                                                       6,018
            2009                                                       4,659
            2010                                                       2,987
            2011                                                       1,085
            -----------------------------------------------------------------
                                                                      22,208
            Thereafter                                                 1,202
            -----------------------------------------------------------------
                                                                    $ 23,410
            -----------------------------------------------------------------
            -----------------------------------------------------------------

        (b) At December 31, 2006, the Fund's subsidiaries were committed in
            the amount of $26,222 (US$22,500) (2005 - $151,702 (US$130,411))
            under letters of credit.

    12. Segment disclosure:

        Information about geographic areas is as follows:

        ---------------------------------------------------------------------
                                                            2006        2005
        ---------------------------------------------------------------------

        Revenue from external customers:
          Canada                                       $ 109,024   $ 113,359
          United States                                  253,504     242,416

        ---------------------------------------------------------------------
                                                       $ 362,528   $ 355,775
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Property, plant and equipment:
          Canada                                       $   1,156   $   1,559
          United States                                    2,063       1,960

        ---------------------------------------------------------------------
                                                       $   3,219   $   3,519
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Goodwill
          Canada                                       $  34,477   $  42,043
          United States                                   54,409      54,297

        ---------------------------------------------------------------------
                                                       $  88,886   $  96,340
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    13. Financial instruments:

        (a) Fair values of financial instruments:

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

        (b) Credit risk:

            The Fund is exposed to credit risk in the event it is unable to
            collect in full amounts receivable from its customers. The Fund
            employs established credit approval practices and engages credit
            attorneys when appropriate to mitigate the credit risk. It is the
            Fund's policy to secure credit terms with customers whenever
            possible by registering security interests in the assets of the
            customer and by obtaining personal guarantees. Our largest
            individual customer balance amounted to 5.7% of accounts
            receivable and customer notes receivable at December 31, 2006.

        (c) Counterparty risk:

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

    14.     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, 2006, Hardwoods USLP contributed and
            expensed $394,505 (US$347,826) (2005 - 400,329 (US$330,414)) 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, 2006, Hardwoods LP contributed
            and expensed $266,153 (2005 - $266,450) in relation to the LP
            Plan.

    15.     Related party transactions:

            For the year ended December 31, 2006, sales of $1,141,799
            (2005 - $2,046,323) were made to affiliates of SIL, and the Fund
            made purchases of $77,932 (2005 - $586,549) from affiliates of
            SIL. All these sales and purchases took place at prevailing
            market prices.

            During the year ended December 31, 2006, the Fund expensed
            $108,000 (2005 - $122,384) for management information systems
            services provided by affiliates of SIL. This cost is included in
            selling and administrative expense in the consolidated statement
            of earnings and retained earnings (deficit).

    16.     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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