Hardwoods Distribution Income Fund Announces 2009 Third Quarter Results

TRADING SYMBOL: Toronto Stock Exchange - HWD.UN

Hardwoods Distribution Income Fund will hold a conference call and

webcast to discuss third quarter and first nine months financial results

on November 4, 2009 at 8:00 a.m. Pacific Time (11:00 am Eastern). The

call can be accessed by dialing: 1-877-974-0451 or 416-644-3430. A replay

will be available until November 18, 2009 at: 1-877-289-8525 or

416-640-1917 (Passcode 4179460 followed by the number sign).

LANGLEY, BC, Nov. 3 /CNW/ - Hardwoods Distribution Income Fund (the "Fund") today reported financial results for the third quarter and first nine months 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.

    
    Third Quarter Overview
    (For the three months ended September 30, 2009)

    -   Third quarter revenue declined 25.2% to $46.4 million year-over-year

    -   Gross profit percentage increased to 18.5% from 17.7% in Q3 2008

    -   Selling and administrative (S&A) expenses decreased by 19.3% or
        $2.0 million to $8.0 million, from $10.0 million in Q3 2008

    -   Third quarter EBITDA, net earnings and distributable cash were lower
        year-over-year

    -   The Fund reduced bank indebtedness (net of cash) by $2.6 million in
        the third quarter, and by $10.6 million year-to-date, ending the
        quarter with just $6.9 million of bank indebtedness (net of cash)
    

"We increased our gross profit margin, protected our market share and strengthened our balance sheet during the third quarter of 2009, as we entered what we believe is the final phase of market downturn that began three years ago," said Maurice Paquette, Hardwoods' President and CEO.

"Over the past ten quarters, demand and prices for our products have suffered as US residential construction has fallen from a peak of about 2.3 million housing starts at the beginning of 2006, to the current depressed rate of less than 0.6 million annual starts. A weakened North American economy has further impacted our business by reducing demand for other products that use hardwood. While we are now seeing signs that housing starts are finally starting to stabilize, our own results typically lag the construction market by nine-to-twelve months because hardwood products are used in the finishing stages of construction. Accordingly, our customers continue to be affected by the declining curve in the residential construction market and third quarter sales revenue and product prices remained well below last year's levels," added Mr. Paquette.

"Despite these challenges, the third quarter brought several successes. Our efforts to align our branch network and cost structure with softer market conditions resulted in significantly lower S&A expense. We also continued to protect our market share by introducing innovative new products and attracting new customers to help mitigate the impact of losing customers that have gone out of business."

"On the finance front, we continued to strengthen our balance sheet. As at September 30, 2009, we had reduced our bank indebtedness (net of cash) to $6.9 million, a reduction of $2.0 for the third quarter and $10.6 million year-to-date. Our steady debt reduction has enabled us to enhance our banking arrangements, and during the third quarter, we negotiated a new Canadian agreement, gaining important new flexibility to invest capital into our US business if required."

"As a result of these efforts, we fully expect to emerge from this downturn in sound financial condition. We are currently operating just above EBITDA breakeven despite the loss of nearly half of our sales since the market peak in 2006, and our balance sheet is significantly strengthened with low bank indebtedness backed by significant working capital assets."

"It is important to note that we anticipate one, and possibly two, more quarters of declining results as we work through the final phase of the downturn and enter our seasonally slowest quarters. However, our longer-term outlook anticipates a gradual market improvement through 2010, with more significant growth in 2011. In the near term, we will continue to emphasize tight management of our business, but aggressive cost cutting will become less of a focus. Our emphasis will instead shift to stabilizing the business as we prepare for the eventual market recovery," said Mr. Paquette.

    
    Summary of Results

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

                                3 months    3 months    9 months    9 months
                                   ended       ended       ended       ended
                               September   September   September   September
                                30, 2009    30, 2008    30, 2009    30, 2008
                                --------    --------    --------    --------
    Total sales               $   46,435  $   62,115  $  149,346  $  199,651
      Sales in the US (US$)       25,419      38,352      78,225     127,128
      Sales in Canada             18,596      22,055      57,839      70,158
    Gross profit                   8,587      11,013      26,846      36,611
      Gross profit %               18.5%       17.7%       18.0%       18.3%
    Selling and administrative
     expenses                     (8,044)     (9,967)    (25,579)    (30,510)
    Realized gain on foreign
     currency contracts                -         298           -       1,247
    -------------------------------------------------------------------------
    Earnings before interest,
     taxes, depreciation and
     amortization and non-
     controlling interest
     ("EBITDA")                      543       1,344       1,267       7,348
      Add (deduct):
        Amortization                (206)       (298)       (672)     (1,145)
        Interest                    (165)       (237)       (434)       (935)
        Non-cash foreign
         currency gains
         (losses)                 (1,049)       (522)     (1,382)     (1,831)
        Intangibles impairment         -           -           -      (5,468)
        Goodwill impairment            -           -           -     (64,606)
        Non-controlling
         interest                    391         560       1,757      15,150
        Income tax recovery
         (expense)               (10,586)         38     (10,232)     28,185
    -------------------------------------------------------------------------
    Net earnings (loss) for
     the period               $  (11,072) $      885  $   (9,696) $  (23,302)
    -------------------------------------------------------------------------
    Basic and fully diluted
     earnings (loss) per
     Class A Unit             $   (0.768) $    0.061  $   (0.673) $   (1.617)
    Average Canadian dollar
     exchange rate for one
     US dollar                     1.098      1.0411      1.1698      1.0186
    -------------------------------------------------------------------------



    Distributable Cash and Cash Distributions

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

                                3 months    3 months    9 months    9 months
                                   ended       ended       ended       ended
                               September   September   September   September
                                30, 2009    30, 2008    30, 2009    30, 2008
                                --------    --------    --------    --------

    Net cash provided by
     operating activities     $    1,955  $    3,941  $    8,867  $   14,201
    Increase (decrease) in
     non-cash operating
     working capital              (1,680)     (2,893)     (8,406)     (7,157)
                              ----------- ----------- ----------- -----------
    Cash flow from operations
     before changes in
     non-cash operating
     working capital                 275       1,048         461       7,044
    Capital expenditures             (45)        (48)        (95)       (346)
                              ----------- ----------- ----------- -----------
    Distributable Cash        $      230  $    1,000  $      366  $    6,698
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

    Distributions relating to
     the period:
      Class A Units                    -  $  1,081(1) $        -  $  7,565(2)
      Class B Units(3)                 -           -           -           -
                              ----------- ----------- ----------- -----------
      Total Units             $        -  $    1,081  $        -  $    7,565
                              ----------- ----------- ----------- -----------
                              ----------- ----------- ----------- -----------

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

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

    Distributable Cash per
     Total Units              $    0.013  $    0.056  $    0.020  $    0.372

    Distributions relating
     to the period:
      Class A Units           $        -  $  0.075(1) $        -  $  0.525(2)
      Class B Units(3)        $        -  $        -  $        -  $        -
      Total Units             $        -  $    0.060  $        -  $    0.420

    Payout ratio(4)                 0.0%      108.2%        0.0%      113.0%
    -------------------------------------------------------------------------

                          March 23, 2004
                         to September 30,
                                    2009
                                    ----
    Cumulative since
     inception:
      Distributable Cash          75,983
      Distributions
       relating to the
       period                     66,754
      Payout ratio(4)              87.9%
    -------------------------------------------------------------------------
    (1) Includes the cash distributions of $0.025 per Class A Unit per month
        which relate to the operations of the Fund for July, August and
        September 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, and cash distributions of $0.025 per Class A Unit per
        month which relate to the operations of the Fund for July through
        September 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 September 30,
        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 September 30, 2009

For the three months ended September 30, 2009, the Fund and its subsidiaries generated Distributable Cash of $0.2 million or $0.013 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 $1.0 million or $0.056 per unit in the same period of 2008. Distributions of $1.1 million, or $0.075 per unit were declared to the Class A Units and no distributions were paid to the Class B Units, for a payout ratio of 108.2% in the third quarter of 2008.

Third quarter 2009 sales were $46.4 million, down 25.2% from $62.1 million during the same period in 2008. The change reflects a 27.5% decrease in underlying sales activity, partially offset by a 2.3% increase in sales due to the positive effect of a weaker Canadian dollar. Sales in the United States, as measured in US dollars, decreased 33.7% to $25.4 million, compared to $38.4 million during the third quarter of 2008. The depressed US housing market and weakness in the general US economy were key factors in this decline. Sales in Canada, as measured in Canadian dollars, decreased by 15.7%, reflecting weakness in the domestic market, as well as reduced export opportunities for Canadian manufacturers selling into the US.

Third quarter gross profit was $8.6 million, compared to $11.0 million in Q3 2008. The change in gross profit reflects lower sales, partially offset by an increase in gross profit percentage on those sales. Gross profit percentage increased to 18.5% from 17.7% a year ago, primarily reflecting the discounting of some inventory that took place in the third quarter of 2008 in an effort to rebalance inventory levels, but was not repeated in the 2009 period.

Selling and administrative expenses decreased by $2.0 million, or 19.3%, to $8.8 million, from $10.0 million in Q3 2008. This improvement reflects broad-based efforts to reduce costs in all areas of the business through downsizing and efficiency initiatives. The savings were partially offset by the negative impact of a weaker Canadian dollar on the conversion of S&A expenses at Hardwoods' US operations and a slight increase in bad debt expense.

The Fund reported third quarter EBITDA of $0.5 million, compared to EBITDA of $1.3 million in Q3 2008. The change in EBITDA primarily reflects lower gross profit and reduced gains on foreign currency contracts, partially offset by the lower S&A expenses. The Fund also reported a net loss of $11.1 million, compared to net earnings of $0.9 million in 2008. The change in net earnings reflects the $0.8 decrease in EBITDA, $0.5 million increase in non-cash foreign currency losses, and $10.6 million increase in income tax expense, partially offset by a $0.2 million decrease related to the change in non-controlling interest. The $10.6 million increase in income tax expense reflects a provision against net future income tax assets as a result of the continued downturn in results at the Fund's US operations.

Results from Operations - Nine months ended September 30, 2009

For the nine months ended September 30, 2009, the Fund and its subsidiaries generated total Distributable Cash of $0.4 million, or $0.020 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 $6.7 million or $0.372 per unit in the first nine months of 2008 and declared distributions of $7.6 million, or $0.525 per unit to the Class A Units, for a payout ratio of 113.0%. No distributions were paid to the Class B Units in either year.

Sales for the first nine months of 2009 declined by 25.2% to $149.3 million, from $199.7 million in 2008. The decline in total sales reflects a 41.1% decrease in underlying sales activity related to extremely challenging market conditions, partially offset by a 15.9% increase in sales due to the positive impact of a weaker Canadian dollar. Sales at Hardwoods' US operations, as measured in US dollars, decreased by 38.5% in the first nine months of 2009, and sales in Canada, as measured in Canadian dollars, were down by 17.6% year-over-year.

Nine month gross profit was $26.8 million, down from $36.6 million during the first nine months of 2008. The reduction in gross profit primarily reflects lower sales, as well as a reduction in gross profit margin. As a percentage of sales, gross profit was 18.0% in the first nine months of 2009, compared to 18.3% during the same period last year. The change in gross profit 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 $25.6 million in the first nine months of 2009, from $30.5 million last year. The $4.9 million savings primarily reflect workforce reductions and employee bonus accruals, along with savings related to branch network downsizing and reduced sales activity, as well as the absence of reorganization costs that were incurred during the first nine months 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.

Year-to-date EBITDA was $1.3 million, compared to $7.3 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 the $4.9 million reduction in S&A costs.

The Fund reported a net loss of $9.7 million in the first nine months of 2009, compared to a net loss of $23.3 million in the same period in 2008. The reduction in net loss primarily reflects the absence of the $70.1 reduction in goodwill and intangibles impairment that negatively affected 2008 results, a $0.5 million reduction in interest expense, a $0.4 million reduction in amortization expense, and a $0.4 million reduction in non-cash foreign currency losses. These improvements to net earnings were partially offset by the $6.0 million decrease in EBITDA, a $13.4 million decrease in recovery from the non-controlling interest, and a $38.4 million decrease in income tax recovery.

Outlook

Hardwoods anticipates that market conditions will remain challenging through the fourth quarter of 2009 and into the first quarter of 2010 as business enters the seasonally slowest period of the year. The risk of bad debt also remains elevated with many customers feeling the effects of the prolonged downturn. If the Canadian dollar continues to strengthen, this could also have a negative impact on our results.

Despite these near-term challenges, the longer-term outlook is improving. In the US, the pace of housing sales has improved, the inventory of unsold homes has started to decline and housing prices are beginning to firm up. Hardwoods expects to see a corresponding trend in its own business beginning in 2010, as cabinet and furniture orders related to this new construction are placed and help to stabilize hardwood demand and prices.

While these developments are encouraging, management believes that the transition period preceding any significant recovery will be lengthy. Accordingly, Hardwoods will continue to pursue strategies that help protect its business. Cash conservation will remain a priority with a strict focus on accounts receivable and credit control. The company will also continue to actively introduce and promote new import and green products that help to protect and build market share. While cost efficiency will continue to be emphasized, further significant cost cuts are not planned as Hardwoods' distribution network is now closely aligned with market opportunities and will be increasingly engaged in responding to the eventual resumption of demand.

Overall, Hardwoods believes it is well positioned to ride out the remainder of the market downturn and 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.

Hardwoods believes that, in addition to net income or loss, EBITDA and Distributable Cash are each useful supplemental measures of operating performance that may assist investors in assessing their investment in units of the Fund. Neither EBITDA nor Distributable Cash are earnings measures recognized by GAAP and they do not have a standardized meaning prescribed by GAAP. Investors are cautioned that EBITDA should not replace net income or loss (as determined in accordance with GAAP) as an indicator of our performance, nor should Distributable Cash replace cash flows from operating, investing and financing activities or as a measure of liquidity and cash flows. The Fund's method of calculating EBITDA and Distributable Cash may differ from the methods used by other issuers. Therefore, the Fund's EBITDA and Distributable Cash may not be comparable to similar measures presented by other issuers. For reconciliation between EBITDA and net income or loss as determined in accordance with GAAP, and for reconciliation between Distributable Cash and net cash provided by operating activities as determined in accordance with GAAP, please refer to the Management Discussion and Analysis ("MD&A") included in the Fund's 2009 Third 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 2009 Third 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 includes, but is not limited to: we entered what we believe is the final phase of market downturn that began three years ago; our own results typically lag the construction market by nine-to-twelve months because hardwood products are used in the finishing stages of construction; we fully expect to emerge from this downturn in sound financial condition; we anticipate one, and possibly two, more quarters of declining results as we work through the final phase of the downturn and enter our seasonally slowest quarters; our longer-term outlook anticipates a gradual market improvement through 2010, with more significant growth in 2011; Hardwoods anticipates that market conditions will remain challenging through the fourth quarter of 2009 and into the first quarter of 2010 as business enters the seasonally slowest period of the year; the risk of bad debt also remains elevated with many customers feeling the effects of the prolonged downturn; if the Canadian dollar continues to strengthen, this could also have a negative impact on our results; despite these near-term challenges, the longer-term outlook is improving; Hardwoods expects to see a corresponding trend in its own business beginning in 2010, as cabinet and furniture orders related to this new construction are placed and help to stabilize hardwood demand and prices; management believes that the transition period preceding any significant recovery will be lengthy; Hardwoods will continue to pursue strategies that help protect its business; cash conservation will remain a priority with a strict focus on accounts receivable and credit control; the company will also continue to actively introduce and promote new import and green products that help to protect and build market share; while cost efficiency will continue to be emphasized, further significant cost cuts are not planned as Hardwoods' distribution network is now closely aligned with market opportunities and will be increasingly engaged in responding to the eventual resumption of demand; and overall, Hardwoods believes it is well positioned to ride out the remainder of the market downturn and 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 the Fund has available to distribute to unitholders in Canadian dollars; the Fund does not lose any key personnel; there are no decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods that harm the business; the Fund does not incur material losses related to credit provided to customers; there is no significant rise in interest rates that increases Hardwoods cost of borrowing under its credit agreements and leads to reduced profitability; Hardwoods' products are not subjected to negative trade outcomes; the company is able to sustain its level of sales and EBITDA margins; Hardwoods' is able to grow its business and to manage its growth; there is no new competition in Hardwoods' markets that leads to reduced revenues and profitability; the Fund does 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 the Fund's results; Hardwoods' management information systems upon which it depends, are not impaired; Hardwoods' insurance is sufficient to cover losses that may occur as a result of operations; and, the financial condition and results of operations of the business upon which the Fund is dependent are 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 the Fund has available to distribute to unitholders in Canadian dollars; Hardwoods' depends on key personnel, the loss of which could harm its business; decreases in the supply of, demand for, or market values of hardwood lumber or sheet goods could harm the business; Hardwoods' may incur losses related to credit provided to customers; a significant rise in interest rates could increase Hardwoods' cost of borrowing under its credit agreements and lead to reduced profitability; Hardwoods' products may be subject to negative trade outcomes; the company may not be able to sustain its level of sales or EBITDA margins; Hardwoods may be unable to grow its business or to manage any growth; competition in the company's markets may lead to reduced revenues and profitability; the Fund 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; the Fund's results are dependent upon the general state of the economy; Hardwoods' is dependent upon its management information systems; the Fund's insurance may be insufficient to cover losses that may occur as a result of operations; the Fund's credit facilities contain restrictions on its ability to borrow funds and restrictions on distributions that can be made; there are tax risks associated with an investment in the Fund's units; the Fund's future growth may be restricted by the payout of substantially all of its operating cash flow; and, other risks described in the Fund's Annual Information Form and 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)

    -------------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
    -------------------------------------------------------------------------
                                                      (unaudited)
    Assets

    Current assets:
      Cash and cash equivalents                       $    1,263  $       85
      Accounts receivable (note 6)                        31,123      32,218
      Income tax recoverable                                 347       2,316
      Inventory (note 5)                                  23,478      30,868
      Prepaid expenses                                     1,053       1,039
      -----------------------------------------------------------------------
                                                          57,264      66,526
    Long-term receivables (note 6)                         2,241       3,639
    Property, plant and equipment                          1,488       2,168
    Deferred financing costs                                 415         235
    Future income taxes                                   17,936      30,782

    -------------------------------------------------------------------------
                                                      $   79,344  $  103,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Unitholders' Equity

    Current liabilities:
      Bank indebtedness (note 7)                      $    8,124  $   17,561
      Accounts payable and accrued liabilities             5,368       3,365
      -----------------------------------------------------------------------
                                                          13,492      20,926
    Deferred gain on sale-leaseback of land
     and building                                            443         572

    Non-controlling interests (note 8)                     9,535      13,080

    Unitholders' equity:
      Fund units                                         133,454     133,454
      Deficit                                            (59,654)    (49,958)
      Accumulated other comprehensive loss               (17,926)    (14,724)
      -----------------------------------------------------------------------
                                                          55,874      68,772
    Continuance of operations (note 1)
    Contingencies (note 15)

    -------------------------------------------------------------------------
                                                      $   79,344  $  103,350
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    See accompanying notes to consolidated financial statements.



    HARDWOODS DISTRIBUTION INCOME FUND
    Consolidated Statement of Earnings (Loss) and Deficit
    (Unaudited)
    (Expressed in thousands of Canadian dollars)

    -------------------------------------------------------------------------
                                   Three       Three        Nine        Nine
                                  months      months      months      months
                                   ended       ended       ended       ended
                               September   September   September   September
                                30, 2009    30, 2008    30, 2009    30, 2008
    -------------------------------------------------------------------------

    Sales                     $   46,435  $   62,115  $  149,346  $  199,651
    Cost of sales                 37,848      51,102     122,500     163,040
    -------------------------------------------------------------------------

    Gross profit                   8,587      11,013      26,846      36,611

    Expenses:
      Selling and
       administrative              8,044       9,967      25,579      30,510
      Amortization:
        Plant and equipment          189         229         620         703
        Deferred financing
         costs                        37           8         117          14
        Other intangible
         assets                        -          80           -         484
        Deferred gain on
         sale - leaseback of
         land and building           (20)        (19)        (65)        (56)
      Interest                       165         237         434         935
      Unrealized foreign
       currency losses             1,049         224       1,382         584
      Intangibles impairment           -           -           -       5,468
      Goodwill impairment              -           -           -      64,606
      -----------------------------------------------------------------------
                                   9,464      10,726      28,067     103,248
    -------------------------------------------------------------------------

    Earnings (loss) before
     non-controlling interests
     and income taxes               (877)        287      (1,221)    (66,637)

    Non-controlling interests
     (note 8)                       (391)       (560)     (1,757)    (15,150)
    -------------------------------------------------------------------------

    Earnings (loss) before
     income taxes                   (486)        847         536     (51,487)

    Income tax expense
     (recovery) (note 13):
      Current                         86         114         193        (638)
      Future                      10,500        (152)     10,039     (27,547)
      -----------------------------------------------------------------------
                                  10,586         (38)     10,232     (28,185)
    -------------------------------------------------------------------------

    Net earnings (loss) for
     the period                  (11,072)        885      (9,696)    (23,302)

    Deficit, beginning of
     period                      (48,582)    (36,821)    (49,958)     (6,150)

    Distributions declared
     to Unitholders                    -      (1,081)          -      (7,565)

    -------------------------------------------------------------------------
    Deficit, end of period    $  (59,654) $  (37,017) $  (59,654) $  (37,017)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Basic and diluted
     earnings (loss) per
     Unit                     $    (0.77) $     0.06  $    (0.67) $    (1.62)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    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       Three        Nine        Nine
                                  months      months      months      months
                                   ended       ended       ended       ended
                               September   September   September   September
                                30, 2009    30, 2008    30, 2009    30, 2008
    -------------------------------------------------------------------------

    Net earnings (loss) for
     the period               $  (11,072) $      885  $   (9,696) $  (23,302)

    Other comprehensive
     income (loss):
      Unrealized gain (loss)
       on translation of
       self-sustaining
       foreign operations         (1,977)      1,335      (3,202)      2,993
      -----------------------------------------------------------------------
      Other comprehensive
       income (loss)              (1,977)      1,335      (3,202)      2,993

    -------------------------------------------------------------------------
    Comprehensive income
     (loss)                   $  (13,049) $    2,220 $   (12,898) $  (20,309)
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



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

    -------------------------------------------------------------------------
                                   Three       Three        Nine        Nine
                                  months      months      months      months
                                   ended       ended       ended       ended
                               September   September   September   September
                                30, 2009    30, 2008    30, 2009    30, 2008
    -------------------------------------------------------------------------

    Accumulated other
     comprehensive loss,
     beginning of period      $  (15,949) $  (19,907) $  (14,724) $  (21,565)

    Other comprehensive
     income (loss)                (1,977)      1,335      (3,202)      2,993

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

    Accumulated other
     comprehensive loss,
     end of period            $  (17,926) $  (18,572) $  (17,926) $  (18,572)

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



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

    -------------------------------------------------------------------------
                                   Three       Three        Nine        Nine
                                  months      months      months      months
                                   ended       ended       ended       ended
                               September   September   September   September
                                30, 2009    30, 2008    30, 2009    30, 2008
    -------------------------------------------------------------------------

    Cash flows provided by
     (used in) operating
     activities:
      Net earnings (loss)
       for the period         $  (11,072) $      885  $   (9,696) $  (23,302)
      Items not involving
       cash:
        Amortization                 206         298         672       1,145
        Imputed interest
         income in employee
         loans                       (11)        (17)       (148)        (48)
        Gain on sale of
         property, plant and
         equipment                    (6)          1         (31)          1
        Unrealized foreign
         exchange losses           1,049         522       1,382       1,831
        Non-controlling
         interests                  (391)       (560)     (1,757)    (15,150)
        Future income taxes       10,500         (81)     10,039     (27,507)
        Intangibles
         impairment                    -           -           -       5,468
        Goodwill impairment            -           -           -      64,606
      -----------------------------------------------------------------------
                                     275       1,048         461       7,044

      Change in non-cash
       operating working
       capital (note 9)            1,680       2,893       8,406       7,157
      -----------------------------------------------------------------------
      Net cash provided by
       operating activities        1,955       3,941       8,867      14,201

    Cash flows provided by
     (used in) investing
     activities:
      Additions to property,
       plant and equipment           (45)        (48)        (95)       (346)
      Proceeds on disposal of
       property, plant and
       equipment                      13           -          42           -
      Decrease in long-term
       receivables, net              179         302         802         186
      -----------------------------------------------------------------------
      Net cash provided by
       (used in) investing
       activities                    147         254         749        (160)

    Cash flows provided by
     (used in) financing
     activities:
      Decrease in bank
       indebtedness                 (790)     (2,287)     (8,118)     (4,709)
      Increase in deferred
       bank fees                    (239)       (204)       (320)       (204)
      Distributions paid
       to Unitholders                  -      (1,801)          -      (8,286)
      -----------------------------------------------------------------------
      Net cash used in
       financing activities       (1,029)     (4,292)     (8,438)    (13,199)
    -------------------------------------------------------------------------
    Increase (decrease)
     in cash                       1,073         (97)      1,178         842

    Cash, beginning of period        190       1,234          85         295

    -------------------------------------------------------------------------
    Cash, end of period       $    1,263  $    1,137  $    1,263  $    1,137
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplementary information
     (cash amounts):
      Interest paid           $      165  $      237  $      434  $      935
      Income taxes paid               90          19         193         771
      Income taxes received            -           -       1,975           -
      Transfer of accounts
       receivable to long-term
       customer notes
       receivable, net of
       write offs, being a
       non-cash transaction            -           -         958       2,364

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


    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 September 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
        September 30, 2009, it would 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 a circumstance, the Fund could draw on its Canadian credit
        facility, or if that does not suffice, it would need to raise
        additional capital in the form of equity or debt to supplement or
        replace its existing credit facilities in order to have sufficient
        liquidity to meet its obligations in the Forecast Period.

        The accompanying consolidated financial statements have been prepared
        assuming the Fund will continue as a going concern 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:

        ---------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
        ---------------------------------------------------------------------

        Cash and cash equivalents                     $   (1,263) $      (85)
        Bank indebtedness                                  8,124      17,561
        ---------------------------------------------------------------------
        Net debt                                           6,861      17,476

        Unitholders' equity                               55,874      68,772

        ---------------------------------------------------------------------
        Total capitalization                          $   62,735  $   86,248
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

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

        The terms of the agreements with the Fund's lenders provide that
        distributions cannot be made to its unitholders in the event that its
        subsidiaries did not meet the foregoing earnings and cash flow tests
        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 September 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 September 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:

        ---------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
        ---------------------------------------------------------------------

        Lumber                                        $    8,308  $   12,077
        Sheet goods                                       11,653      14,990
        Specialty                                          2,132       2,356
        Goods in-transit                                   1,385       1,445

        ---------------------------------------------------------------------
                                                      $   23,478  $   30,868
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        During the three months ended September 30, 2009 inventory write-
        downs totaling $0.4 million (nine months ended September 30, 2009 -
        $1.2 million) were recorded to reduce certain inventory items to
        their net realizable value.

        Cost of sales for the three months ended September 30, 2009 were
        $37.8 million (nine months ended September 30, 2009 -
        $122.5 million), which included $36.6 million (nine months ended
        September 30, 2009 - $118.8 million) of costs associated with
        inventory. The other $1.2 million (nine months ended September 30,
        2009 - $3.7 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:

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

        Trade accounts receivable - Canada            $   11,456  $    8,404
        Trade accounts receivable - United States         20,312      23,423
        Sundry receivable                                    158         495
        Current portion of long-term receivables           3,198       2,243
        ---------------------------------------------------------------------
                                                          35,124      34,565

        Less: allowance for doubtful accounts              4,001       2,347

        ---------------------------------------------------------------------
                                                      $   31,123  $   32,218
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------



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

        Employee housing loans                        $    1,117  $    1,507
        Customer notes                                     3,787       3,772
        Security deposits                                    535         603
        ---------------------------------------------------------------------
                                                           5,439       5,882
        Less: current portion, included in
         accounts receivable                               3,198       2,243

        ---------------------------------------------------------------------
                                                      $    2,241  $    3,639
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------



        The aging of trade receivables was:
        ---------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
        ---------------------------------------------------------------------

        Current                                       $   18,151  $   17,037

        Past due 31-60 days                                5,144       6,696
        Past due 61-90 days                                2,192       3,706
        Past due 90+ days                                  6,201       4,388

        ---------------------------------------------------------------------
                                                      $   31,688  $   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 September 30, 2009 was $4.0 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 September 30, 2009 was
        $1.0 million which equates to 2.2% of sales (three month period ended
        September 30, 2008 - $0.9 million, being 1.4% of sales). Historically
        bad debt as a percentage of sales has averaged approximately 0.7%.

    7.  Bank indebtedness:

        ---------------------------------------------------------------------
                                                       September    December
                                                        30, 2009    31, 2008
        ---------------------------------------------------------------------

        Checks issued in excess of funds on deposit   $      239  $    1,087
        Credit facility, Hardwoods LP                      1,261         265
        Credit facility, Hardwoods USLP
         (September 30, 2009 - US$6,187;
         December 31, 2008 - US$13,308)                    6,624      16,209

        ---------------------------------------------------------------------
                                                      $    8,124  $   17,561
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        In the US, a subsidiary of the Fund has a revolving credit facility
        of up to $26.8 million (US$25.0 million) and the credit facility
        matures September 30, 2011.

        During the quarter ended September 30, 2009 Hardwoods LP negotiated a
        new three year credit facility that provides financing of up to
        $15.0 million. The new credit facility can be drawn down to meet
        short-term financing requirements, or to make capital contributions
        to the Fund's U.S. operating subsidiary. The new Canadian facility
        matures on August 7, 2012.

        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 September 30, 2009 the Canadian and US credit
        facilities have $10.1 million and $6.3 million (US$5.9 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                             (244)
          Adjustment to non-controlling interest from
           subordination of Class B Unit Holders                      (1,513)
        ---------------------------------------------------------------------
                                                                      11,323

        Foreign currency translation adjustment of
         non-controlling interest in Hardwoods USLP                   (1,788)

        ---------------------------------------------------------------------
        Balance, end of period                                    $    9,535
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        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 September 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
              September 30, 2009, the amount of such deficiency was
              $14.4 million;

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

           -  Fourth, to the holders of Class B LP Units and Class B USLP
              Units, to the extent only that combined advances or
              distributions in respect of any fiscal quarter(s) during the
              12 month period then ended (and not, for greater certainty, in
              any previous 12 month period) on one Class B LP Unit and one
              Class B USLP Unit were not made, or were made in amounts less,
              on a pro-rated basis, that the combined amount advanced or
              distributed on one Class A LP Unit and one Class A USLP Unit
              during such 12 month period, the amount of such deficiency. As
              of September 30, 2009, the amount of such deficiency was
              $90,063.

           -  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 September 30, 2009, 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
        $0.2 million for the three-month period ended September 30, 2009
        ($1.5 million for the nine-month period ended September 30, 2009).

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

        ---------------------------------------------------------------------
                                   Three       Three        Nine        Nine
                                  months      months      months      months
                                   ended       ended       ended       ended
                               September   September   September   September
                                30, 2009    30, 2008    30, 2009    30, 2008
        ---------------------------------------------------------------------

        Accounts receivable   $      (21) $    2,527  $   (1,931) $      (50)
        Income taxes
         recoverable/payable         (13)         (3)      1,902        (861)
        Inventory                     71         188       5,221       8,826
        Prepaid expenses             139         190        (100)       (137)
        Accounts payable and
         accrued liabilities       1,504          (9)      3,314        (621)

        ---------------------------------------------------------------------
                              $    1,680  $    2,893  $    8,406  $    7,157
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        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 September 30, 2009 no
        discretionary cash distributions were paid to Unitholders (2008 -
        $1.8 million). During the nine month period ended September 30, 2009
        no discretionary cash distributions were paid to Unitholders (2008 -
        $8.3 million).

    10. Segment disclosure:

        Information about geographic areas is as follows:

        ---------------------------------------------------------------------
                                   Three       Three        Nine        Nine
                                  months      months      months      months
                                   ended       ended       ended       ended
                               September   September   September   September
                                30, 2009    30, 2008    30, 2009    30, 2008
        ---------------------------------------------------------------------

        Revenue from external
         customers:
          Canada              $   18,596  $   22,055  $   57,839  $   70,158
          United States           27,839      40,060      91,507     129,493

        ---------------------------------------------------------------------
                              $   46,435  $   62,115  $  149,346  $  199,651

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


                                                       September    December
                                                        30, 2009    31, 2008
        ---------------------------------------------------------------------

        Property, plant and equipment:
          Canada                                      $      533  $      752
          United States                                      955       1,416

        ---------------------------------------------------------------------
                                                      $    1,488  $    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 September 30, 2009, Hardwoods USLP contributed and expensed
        $56,545 (US$51,498) (three months ended September 30, 2008 - $78,777
        (US$77,436)) in relation to the USLP Plan. During the nine months
        ended September 30, 2009, Hardwoods USLP contributed and expensed
        $185,224 (US$158,338 (nine months ended September 30, 2008 - $294,933
        (US$292,766)) 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 September 30, 2009, Hardwoods LP contributed and
        expensed $49,744 (three months ended September 30, 2008 - $56,667) in
        relation to the LP Plan. During the nine months ended September 30,
        2009, Hardwoods LP contributed and expensed $149,906 (nine months
        ended September 30, 2008 - $233,636) in relation to the LP Plan.

    12. Related party transactions:

        For the three months ended September 30, 2009, sales of $86,226
        (three months ended September 30, 2008 - $84,435) were made to
        affiliates of SIL, and the Fund made purchases of $14,684
        (three months ended September 30, 2008 - $10,275) from affiliates of
        SIL. For the nine months ended September 30, 2009, sales of $354,734
        (nine months ended September 30, 2008 - $319,658) were made to
        affiliates of SIL, and the Fund made purchases of $46,844
        (nine months ended September 30, 2008 - $51,052) from affiliates of
        SIL. All these sales and purchases took place at prevailing market
        prices.

    13. Income taxes:

        During the quarter ended September 30, 2009, the Fund recorded a
        provision against its net future income tax asset of $11.2 million as
        a result of the continued downturn in financial results in the Fund's
        US operating subsidiary.

        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.

        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

SOURCE HARDWOODS DISTRIBUTION INCOME FUND

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

Organization Profile

HARDWOODS DISTRIBUTION INCOME FUND

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