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 le

A service of YellowBrix, Inc.