** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION****WASHINGTON, D.C.  20549**

** **

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**FORM 10-Q**

 

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**                (Mark One)**

**ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For the quarterly period ended June30, 2003**

 

**OR**

** **

**oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGEACT OF 1934**

 

**For thetransition period from          to          **

** **

**Commission file number 0-24976**

 

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**CROWNPACIFIC PARTNERS, L.P.**(Exact name ofregistrant as specified in its charter)

 

 

| **Delaware**                                                     |   | **93-1161833**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation  or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **805 SW Broadway Street, Suite 1500,  Portland, Oregon**        |   | **97205**                             |
| (Address of principal  executive offices)                        |   | (Zip Code)                            |
|                                                             |   |                                  |
|                                                                  |        |                                       |  |

 

Registrant’s telephonenumber, including area code:  **503-274-2300**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý   No  o

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 12b-2 of the Exchange Act).    Yes  ý       No  o

 

| **Common Units** |   | **30,527,030**                    |
|------------------|--------|-----------------------------------|
| (Class)          |   | (Outstanding at August  12, 2003) |

 

 

 

1

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**CROWN PACIFIC PARTNERS, L.P.FORM 10-QINDEX**

 
|                                     |   |                                                                                                    |   |   |   |
|------------------------------------------|--------|---------------------------------------------------------------------------------------------------------|--------|--------|--------|
| **PART I — FINANCIAL  INFORMATION** |   |                                                                                                    |   |
|                                     |   |                                                                                                    |   |   |   |
| Item 1.                                  |   | Financial Statements  (unaudited)                                                                       |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
|                                     |   | Consolidated  Statements of Operations — Three and Six Month Periods Ended June 30, 2003  and 2002 |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
|                                     |   | Consolidated Balance Sheets  — June 30, 2003 and December 31, 2002                                 |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
|                                     |   | Consolidated  Statements of Cash Flows — Six Months Ended June 30, 2003 and 2002                   |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
|                                     |   | Notes to  Consolidated Financial Statements                                                             |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
| Item 2.                                  |   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations             |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
| Item  3.                                 |   | Quantitative  and Qualitative Disclosures About Market Risk                                             |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
| Item 4.                                  |   | Controls and  Procedures                                                                                |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
| **PART II — OTHER INFORMATION**     |   |                                                                                                    |   |
|                                     |   |                                                                                                    |   |   |   |
| Item 3.                                  |   | Defaults Upon  Senior Securities                                                                        |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
| Item 6.                                  |   | Exhibits and Reports on  Form 8-K                                                                       |   |   |   |
|                                     |   |                                                                                                    |   |   |   |
| Signatures                               |   |                                                                                                    |   |
|                                     |   |                                                                                                    |   |   |   |

** **

 

1

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**PART I - FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**Crown Pacific Partners, L.P.****(Debtor-in-Possession)Consolidated Statements ofOperations(In thousands, except unit and per unit data)(Unaudited)**

 
|                                                                   |   | **For the  Three Months Ended  June 30,** |    |
|------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                   |   | **2003**                                  |    | **2002** |   |
|                                                                   |   |                                      |    |   |   |
| Revenues                                                               |   | $                                         | 73,410  |   | $ | 83,600 |   |
|                                                                   |   |                                      |    |   |   |
| Operating costs:                                                       |   |                                      |    |   |   |
| Cost of products  sold                                                 |   | 67,859                                    |    | 74,858 |   |
| Loss (gain) on  disposition of assets                                  |   | 1,263                                     |    | (1,429 | ) |
| Selling, general  and administrative expenses                          |   | 6,948                                     |    | 6,167 |   |
| Debt  restructuring negotiation costs                                  |   | 4,860                                     |    | — |   |
|                                                                   |   |                                      |    |   |   |
| Operating income  (loss)                                               |   | (7,520                                    | )       | 4,004 |   |
|                                                                   |   |                                      |    |   |   |
| Interest expense                                                       |   | 12,068                                    |    | 13,015 |   |
| Debt  restructuring and redemption premium                             |   | —                                    |    | 14,133 |   |
| Amortization of  debt issuance costs                                   |   | 640                                       |    | 624 |   |
| Other income,  net                                                |   | (25                                       | )       | (187 | ) |
|                                                                   |   |                                      |    |   |   |
| Loss from  continuing operations before reorganization items           |   | (20,203                                   | )       | (23,581 | ) |
|                                                                   |   |                                      |    |   |   |
| Reorganization  items:                                                 |   |                                      |    |   |   |
| Valuation  adjustment on debt issuance costs                           |   | (218                                      | )       | — |   |
|                                                                   |   | (218                                      | )       | — |   |
|                                                                   |   |                                      |    |   |   |
| Loss before discontinued  operations                                   |   | (20,421                                   | )       | (23,581 | ) |
|                                                                   |   |                                      |    |   |   |
| Income (loss)  from discontinued operations                            |   | (482                                      | )       | 402 |   |
|                                                                   |   |                                      |    |   |   |
| Net loss                                                               |   | $                                         | (20,903 | ) | $ | (23,179 | ) |
|                                                                   |   |                                      |    |   |   |
| Basic and  diluted loss per unit before discontinued operations        |   | $                                         | (0.66   | ) | $ | (0.76 | ) |
|                                                                   |   |                                      |    |   |   |
| Basic and  diluted income (loss) per unit from discontinued operations |   | $                                         | (0.02   | ) | $ | 0.01 |   |
|                                                                   |   |                                      |    |   |   |
| Basic and  diluted net loss per unit                                   |   | $                                         | (0.68   | ) | $ | (0.75 | ) |
|                                                                   |   |                                      |    |   |   |
| Weighted average  units outstanding                                    |   | 30,527,030                                |    | 30,527,030 |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

2

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**Crown Pacific Partners, L.P.****(Debtor-in-Possession)Consolidated Statements of Operations(In thousands, except unit and per unit data)(Unaudited)**

 
|                                                                   |   | **For the  Six Months Ended  June 30,** |    |
|------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                   |   | **2003**                                |    | **2002** |   |
|                                                                   |   |                                    |    |   |   |
| Revenues                                                          |   | $                                       | 152,563 |   | $ | 159,058 |   |
|                                                                   |   |                                    |    |   |   |
| Operating costs:                                                       |   |                                    |    |   |   |
| Cost of products  sold                                            |   | 140,418                                 |    | 141,694 |   |
| Loss (gain) on  disposition of assets                                  |   | 784                                     |    | (7,449 | ) |
| Selling, general  and administrative expenses                     |   | 12,946                                  |    | 13,120 |   |
| Debt  restructuring negotiation costs                                  |   | 4,860                                   |    | — |   |
|                                                                   |   |                                    |    |   |   |
| Operating income  (loss)                                          |   | (6,445                                  | )       | 11,693 |   |
|                                                                   |   |                                    |    |   |   |
| Interest  expense                                                 |   | 24,020                                  |    | 27,221 |   |
| Debt  restructuring and redemption premium                             |   | —                                  |    | 14,133 |   |
| Amortization of debt  issuance costs                              |   | 1,063                                   |    | 1,690 |   |
| Other income,  net                                                |   | (154                                    | )       | (455 | ) |
|                                                                   |   |                                    |    |   |   |
| Loss from  continuing operations before reorganization items           |   | (31,374                                 | )       | (30,896 | ) |
|                                                                   |   |                                    |    |   |   |
| Reorganization  items:                                                 |   |                                    |    |   |   |
| Valuation  adjustment on debt issuance costs                           |   | (218                                    | )       | — |   |
|                                                                   |   | (218                                    | )       | — |   |
|                                                                   |   |                                    |    |   |   |
| Loss before  discontinued operations                                   |   | (31,592                                 | )       | (30,896 | ) |
|                                                                   |   |                                    |    |   |   |
| Income (loss)  from discontinued operations                            |   | (5,826                                  | )       | 785 |   |
|                                                                   |   |                                    |    |   |   |
| Net loss                                                               |   | $                                       | (37,418 | ) | $ | (30,111 | ) |
|                                                                   |   |                                    |    |   |   |
| Basic and  diluted loss per unit before discontinued operations        |   | $                                       | (1.02   | ) | $ | (1.00 | ) |
|                                                                   |   |                                    |    |   |   |
| Basic and  diluted income (loss) per unit from discontinued operations |   | $                                       | (0.19   | ) | $ | 0.03 |   |
|                                                                   |   |                                    |    |   |   |
| Basic and  diluted net loss per unit                                   |   | $                                       | (1.21   | ) | $ | (0.98 | ) |
|                                                                   |   |                                    |    |   |   |
| Weighted average  units outstanding                               |   | 30,527,030                              |    | 30,527,030 |   |

 

See accompanying Notes to Consolidated FinancialStatements.

 

3

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**Crown Pacific Partners, L.P.****(Debtor-in-Possession)Consolidated Balance Sheets(In thousands, except unit data)(Unaudited)**

 
|                                                                                    |   | **June 30,  2003** |    | **December  31,  2002** |   |
|-----------------------------------------------------------------------------------------|--------|--------------------|---------|-------------------------|--------|
| **Assets**                                                                              |   |               |    |                    |   |
| Current assets:                                                                         |   |               |    |                    |   |
| Cash and cash  equivalents                                                              |   | $                  | 8,313   |                    | $      | 12,993 |   |
| Accounts  receivable, net of allowance of $1,746 and $1,655                             |   | 36,536             |    | 39,833                  |   |
| Notes  receivable                                                                  |   | 2,233              |    | 2,540                   |   |
| Inventories                                                                        |   | 23,772             |    | 33,385                  |   |
| Deposits on  timber cutting contracts                                              |   | 1,030              |    | 1,135                   |   |
| Prepaid and  other current assets                                                  |   | 7,248              |    | 4,053                   |   |
|                                                                                    |   |               |    |                    |   |
| Total current  assets                                                              |   | 79,132             |    | 93,939                  |   |
| Property, plant  and equipment, net of accumulated depreciation of $44,540 and $42,609  |   | 47,385             |    | 53,484                  |   |
| Timber,  timberlands and roads, net                                                |   | 410,449            |    | 413,987                 |   |
| Goodwill                                                                                |   | 28,770             |    | 34,272                  |   |
| Other  assets                                                                      |   | 14,496             |    | 17,283                  |   |
|                                                                                    |   |               |    |                    |   |
| Total  assets                                                                      |   | $                  | 580,232 |                    | $      | 612,965 |   |
|                                                                                    |   |               |    |                    |   |
| **Liabilities and Partners’ Capital**                                              |   |               |    |                    |   |
|                                                                                    |   |               |    |                    |   |
| Liabilities not  subject to compromise:                                                 |   |               |    |                    |   |
| Current  liabilities:                                                                   |   |               |    |                    |   |
| Revolving credit  facility                                                         |   | $                  | 19,124  |                    | $      | 26,000 |   |
| Accounts  payable                                                                  |   | —             |    | 10,766                  |   |
| Accrued  expenses                                                                  |   | —             |    | 7,886                   |   |
| Accrued  interest                                                                  |   | —             |    | 7,798                   |   |
| Current portion  of long-term debt                                                 |   | —             |    | 10,009                  |   |
|                                                                                    |   |               |    |                    |   |
| Total current  liabilities                                                         |   | 19,124             |    | 62,459                  |   |
| Long-term debt                                                                          |   | —             |    | 503,181                 |   |
| Other  non-current liabilities                                                          |   | —             |    | 9,170                   |   |
| Liabilities  subject to compromise                                                      |   | 559,301            |    | —                  |   |
|                                                                                    |   |               |    |                    |   |
| Total  liabilities                                                                 |   | 578,425            |    | 574,810                 |   |
|                                                                                    |   |               |    |                    |   |
| Partners’  capital:                                                                |   |               |    |                    |   |
| General  partners                                                                  |   | (1,269             | )       | (906                    | )      |
| Limited partners  (30,527,030 units outstanding at June 30, 2003 and December 31, 2002) |   | 3,076              |    | 39,061                  |   |
| Total partners’  capital                                                      |   | 1,807              |    | 38,155                  |   |
|                                                                                    |   |               |    |                    |   |
| Total liabilities  and partners’ capital                                      |   | $                  | 580,232 |                    | $      | 612,965 |   |
|                                                                                    |   |               |    |                    |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

4

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**CrownPacific Partners, L.P.****(Debtor-in-Possession)Consolidated Statements of Cash Flows(In thousands)(Unaudited)**

** **
|                                                                         |   | **For the  Six Months Ended  June 30,** |    |
|------------------------------------------------------------------------------|--------|-----------------------------------------|---------|
|                                                                         |   | **2003**                                |    | **2002** |   |
| Cash flows from  operating activities:                                       |   |                                    |    |   |   |
| Net loss                                                                |   | $                                       | (37,418 | ) | $ | (30,111 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                                    |    |   |   |
| Depletion,  depreciation and amortization                               |   | 11,283                                  |    | 16,461 |   |
| Deferred  interest                                                           |   | 2,402                                   |    | 897 |   |
| Non-cash  reorganization items                                               |   | 218                                     |    | — |   |
| Redemption  premium and write-off of deferred charges                        |   | —                                  |    | 9,967 |   |
| Loss on purchase  commitments                                           |   | 413                                     |    | — |   |
| Impairment of  goodwill                                                      |   | 5,502                                   |    | — |   |
| (Gain) loss on  disposal of assets                                      |   | 780                                     |    | (7,561 | ) |
| Net change in  current assets and current liabilities:                       |   |                                    |    |   |   |
| Accounts and  notes receivable                                               |   | 4,694                                   |    | 6,857 |   |
| Inventories                                                                  |   | 5,148                                   |    | (6,023 | ) |
| Deposits on  timber cutting contracts                                        |   | 105                                     |    | (461 | ) |
| Prepaid and  other current assets                                            |   | (2,852                                  | )       | (1,310 | ) |
| Accounts payable  and accrued expenses                                       |   | 9,485                                   |    | (6,047 | ) |
| Net cash used in  operating activities                                       |   | (240                                    | )       | (17,331 | ) |
|                                                                         |   |                                    |    |   |   |
| Cash flows from  investing activities:                                       |   |                                    |    |   |   |
| Additions to  timberlands                                                    |   | (2,990                                  | )       | (3,727 | ) |
| Additions to  timber cutting rights                                          |   | (629                                    | )       | (476 | ) |
| Additions to  equipment                                                      |   | (1,111                                  | )       | (2,170 | ) |
| Proceeds from  sale of assets                                                |   | 7,143                                   |    | 186,162 |   |
| Principal  payments received on notes                                        |   | 67                                      |    | 2,614 |   |
| Other investing  activities                                                  |   | —                                  |    | (15 | ) |
| Net cash  provided by investing activities                                   |   | 2,480                                   |    | 182,388 |   |
|                                                                         |   |                                    |    |   |   |
| Cash flows from  financing activities:                                       |   |                                    |    |   |   |
| Net increase  (decrease) in short-term borrowings                            |   | (6,876                                  | )       | 8,500 |   |
| Proceeds from  issuance of long-term debt                               |   | —                                  |    | 116 |   |
| Repayments of  long-term debt                                           |   | (44                                     | )       | (154,464 | ) |
| Change in  restricted cash                                              |   | —                                  |    | (15,337 | ) |
| Other financing  activities                                             |   | —                                  |    | (4,546 | ) |
| Net cash used in  financing activities                                  |   | (6,920                                  | )       | (165,731 | ) |
|                                                                         |   |                                    |    |   |   |
| Net decrease in  cash and cash equivalents                              |   | (4,680                                  | )       | (674 | ) |
| Cash and cash  equivalents at beginning of period                            |   | 12,993                                  |    | 9,219 |   |
|                                                                         |   |                                    |    |   |   |
| Cash and cash  equivalents at end of period                                  |   | $                                       | 8,313   |   | $ | 8,545 |   |
|                                                                         |   |                                    |    |   |   |
| **Supplemental  Cash Flow Information**                                      |   |                                    |    |   |   |
| Cash paid for  interest                                                      |   | $                                       | 8,083   |   | $ | 28,378 |   |

 

Seeaccompanying Notes to Consolidated Financial Statements.

 

5

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**CROWN PACIFIC PARTNERS, L.P.NOTES TO CONSOLIDATED FINANCIALSTATEMENTS(Unaudited)**

 

**Note 1:Organization and Basis of Presentation**

 

CrownPacific Partners, L.P. (“Crown Pacific” or the “Partnership”), a Delawarelimited partnership, through its 99% owned subsidiary, Crown Pacific LimitedPartnership (the “Operating Partnership”), was formed in 1994 to acquire, ownand operate timberlands and wood product manufacturing facilities located inthe Northwest United States. The Partnership’s business consists primarily ofgrowing and harvesting timber for sale as logs in domestic and export marketsand the manufacturing, selling and distribution of lumber and other woodproducts.

 

Duringthe second quarter of 2003, the Partnership was unable to meet the financialcovenants and scheduled interest payments pursuant to its bank loan and seniornote agreements. In addition, the Partnership was unable to successfullynegotiate a recapitalization with its bank lenders and senior noteholders.  Accordingly, on June 29, 2003,the Partnership and all but one of its subsidiaries each filed voluntarypetitions for relief under chapter 11 of title 11 of the United States Code(the “Bankruptcy Code”) in the United States Bankruptcy Court for the Districtof Arizona in Phoenix, Arizona (the “Bankruptcy Court”), case numbers03-11258-PHX-RJH through 03-11263-PHX-RJH. These cases are jointly administered under case number03-11258-PHX-RJH.  The Partnership andits subsidiaries currently manage their properties and operate their businessesas “debtors-in-possession” under the jurisdiction of the Bankruptcy Court andin accordance with the applicable provisions of the Bankruptcy Code.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Partnership will continue as a going concern, which assumes continuity ofoperations and realization of assets and satisfaction of liabilities in the ordinarycourse of business and in accordance with Statement of Position 90-7 (“SOP90-7”), “Financial Reporting by Entities in Reorganization Under the BankruptcyCode.” As a result of the chapter 11 filing, there is no assurance that thecarrying amounts of assets will be realized or that the liabilities will besettled for the amounts recorded.  ThePartnership has experienced net losses in each of the last eleven fiscalquarters, and, as mentioned above, has filed for chapter 11 bankruptcyprotection.  The consolidated financialstatements do not reflect any adjustments that might result should thePartnership be unable to continue as a going concern.

 

As part of the Partnership’s bankruptcyproceedings, the Bankruptcy Court approved a debtor-in-possession financingagreement (“DIP Revolver”) in the amount of $40 million that the Partnershiphas arranged with The CIT Group/Business Credit, Inc.During thereorganization process, vendors who deliver goods and provide services to thePartnership receive priority payment protection under the bankruptcy law forsuch obligations.  Obligations thatarose prior to June 29, 2003 are included on the accompanying consolidatedbalance sheet as liabilities subject to compromise.  See also Notes 2 and 11.

 

The financial statements included in this Form 10-Q are unaudited andreflect the consolidated financial position, results of operations and cashflows of the Partnership.  Thesefinancial statements include all the accounts of the Partnership but do notcontain all of the information required by generally accepted accountingprinciples to be included in a full set of financial statements.  The financial statements in this Form 10-Qshould be read in conjunction with the financial statements in thePartnership’s 2002 Annual Report on Form 10-K, which includes a summary ofsignificant accounting policies of the Partnership.  In the opinion of management, all material adjustments necessaryto present fairly the results of operations for the three and six-month periodsended June 30, 2003 and 2002 have been included.  All such adjustments are of a normal and recurring nature, exceptfor a $5.5 million charge to record the estimated impairment of goodwill(included as a component of discontinued operations) in the six months endedJune 30, 2003 and a $14.1 million charge for debt restructuring and redemptionpremiums in the three and six months ended June 30, 2002.  All significant intercompany transactionshave been eliminated.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations for the entire year. Separate condensed combined financialstatements for the entities under chapter 11 protection are not presentedbecause they are not significantly different from the consolidated financialstatements.

 

6

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Net loss per unit was calculated using the weighted average number ofcommon units outstanding divided into net loss, after adjusting for the GeneralPartner interest**. **The General Partnerloss allocation was $209,000 and $232,000 for the three months ended June 30,2003 and 2002, respectively and $374,000 and $301,000 for the six months endedJune 30, 2003 and 2002, respectively. There is no difference between basic and diluted earnings per unit.

 

**Note 2:Liabilities Subject to Compromise and Bankruptcy Petition**

 

As discussed above, on June 29, 2003, the Partnership and itssubsidiaries filed for chapter 11 bankruptcy protection.  Pursuant to the bankruptcy proceedings, thePartnership has classified all liabilities which existed prior to the June 29,2003 bankruptcy petition filing as liabilities subject to compromise inaccordance with SOP 90-7.  Dispositionof such liabilities is under the jurisdiction of the Bankruptcy Court.

 

The following table summarizes the pre-petition liabilities thatare included as liabilities subject to compromise on the accompanyingconsolidated balance sheet (in thousands):

 
|                          |   | **June 30,  2003** |    |
|-------------------------------|--------|--------------------|---------|
| Acquisition  facility         |   | $                  | 112,372 |   |
| Senior notes                  |   | 400,658            |    |
| Other long-term  debt         |   | 116                |    |
| Accounts payable              |   | 4,336              |    |
| Accrued interest              |   | 21,388             |    |
| Deferred  enhanced interest   |   | 4,927              |    |
| Make whole fees  and interest |   | 6,360              |    |
| Other accrued  expenses       |   | 9,144              |    |
| Total                         |   | $                  | 559,301 |   |

 

Although the Partnership has filed for chapter 11 bankruptcyprotection, it continues to actively pursue a recapitalization plan.  Any recapitalization plan will be subject toapproval by the Bankruptcy Court and may involve the disposition of certainPartnership assets.  The creditors on theacquisition facility and senior notes assert that their debt is secured by thePartnership’s timberlands and certain real property and equipment associatedwith its manufacturing segment.  Theremaining liabilities subject to compromise are generally unsecured.  While the Partnership is under bankruptcyprotection, any scheduled interest or principal payments are deferred andcreditors are generally prohibited from pursuing collection of theirpre-petition claims by the automatic stay provisions of the Bankruptcy Code.

 

**Note 3: Inventories**

 

Allinventories are stated at the lower of average cost or market.  Inventories consisted of the following (inthousands):

 
|                               |   | **June 30,  2003** |   | **December  31,  2002** |   |
|------------------------------------|--------|--------------------|--------|-------------------------|--------|
| Lumber                             |   | $4,229             |   | $5,079                  |   |
| Logs                               |   | 1,866              |   | 2,355                   |   |
| Supplies                           |   | 3,407              |   | 3,455                   |   |
| Total  manufacturing inventory     |   | 9,502              |   | 10,889                  |   |
| Alliance lumber  products          |   | 14,270             |   | 17,388                  |   |
| Trading and  distribution products |   | —             |   | 5,108                   |   |
| Total                              |   | $23,772            |   | $33,385                 |   |

 

 

7

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**Note 4: Debt Restructuring andRedemption Premium**

 

In April 2002, the Partnership reached a global debt restructuringagreement with its banks and note holders and incurred a charge of $14.1million of which $10.0 million was non-cash in nature. The Partnership incurreda total of $8.7 million in fees and costs in connection with the April 2002debt restructuring, $4.2 million of which was included in the $14.1 millionloss recognized in the second quarter of 2002 in accordance with the provisionsoutlined in Emerging Issues Task Force Issue No. 96-19 “Debtor’s Accounting fora Modification or Exchange of Debt Instruments” (“EITF 96-19”). In addition,the Partnership expensed $5.5 million of previously deferred fees and expensesand a $4.5 million redemption premium. The redemption premium was incurred whenthe Partnership prepaid a portion of its senior notes in advance of theirscheduled maturity. Payment of the redemption premium, according to the termsof the senior note restructuring, is deferred until December 31, 2005.

 

**Note 5: Debt RestructuringNegotiation Costs and Reorganization Items**

 

Inconjunction with unsuccessful negotiations to restructure the Partnership’sdebt and activities conducted prior to the Partnership’s bankruptcy petitionfiled on June 29, 2003, the Partnership expensed $4.9 million in professionalfees during the three months ended June 30, 2003.  Of this amount, $0.8 million was incurred in the first quarter of2003 and was included in prepaid expenses on the balance sheet as of March 31,2003 and the remaining amount was incurred during the second quarter of 2003.In addition, on June 30, 2003, the Partnership wrote-off $218,000 ofdeferred debt issuance costs related to its revolving credit facility, whichwas terminated, as a result of the chapter 11 filing, on July 3, 2003 (seeNote 11). This write-off has been classified separately on theconsolidated statement of operations in accordance with SOP 90-7.

 

**Note 6: Discontinued Operations -Disposition of Trading and Distribution Segment**

 

In April and May 2003, in two separate transactions, thePartnership sold the inventory and fixed assets related to its Trading andDistribution segment and discontinued the segment’s operations.  The purchasers of these assets assumed theoperating leases, accounts payable and accrued expenses related to thesebusinesses.  The Partnership received atotal of $4.5 million from these asset sales, all of which was immediatelyapplied to outstanding principal on the revolving credit facility.  These assets were sold at approximatelytheir book value, resulting in a $4,000 gain in the second quarter of2003.  The Partnership retained itsaccounts receivable related to these operations, which totaled $5.8 million asof the disposition dates.  All theseaccounts receivable were either collected or fully reserved as of June 30,2003.  The results of operations of theTrading and Distribution segment are reflected as discontinued operations onthe accompanying consolidated statements of operations for all periods presentedin accordance with Statement of Financial Accounting Standards No. 144 (“SFASNo. 144”) “Accounting for the Impairment or Disposal of Long-LivedAssets.”  Revenues from this segmentwere $6.3 million and $50.6 million for the three months ended June 30, 2003and 2002, respectively.  Revenues fromthis segment were $34.1 million and $97.9 million for the six months ended June30, 2003 and 2002, respectively.

 

DuringMarch 2003, deterioration of the Partnership’s trade credit availability beganto adversely affect operating margins in the Trading and Distributionsegment.  Pursuant to the provisions ofSFAS No. 142 “Goodwill and Other Intangible Assets,” the Partnership evaluatedthe goodwill balance of this segment for impairment following the change in circumstancesduring the first quarter of 2003, utilizing a fair value analysis of thebusiness in the current market environment. Based on the results of this evaluation, the Partnership determined that its goodwill was impaired andrecorded a non-cash impairment charge of $5.5 million in the three months endedMarch 31, 2003.  This $5.5 millioncharge is included in discontinued operations for the six months ended June 30,2003.

 

**Note 7: Unit-Based Compensation**

 

The Partnership accounts for unit options using the intrinsic valuemethod as prescribed by Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees.”  Pursuant to SFAS No. 148 “Accounting for Stock-Based Compensation - Transitionand Disclosure,” which the Partnership adopted in 

 

 

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December 2002, the Partnership has computed, for pro forma disclosurepurposes, the impact on net loss and net loss per unit as if it had accountedfor its unit-based compensation plans in accordance with the fair value methodprescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” as follows(in thousands, except per unit amounts):

 
|                                                                                                                       |   | **Three  Months Ended  June 30,** |    | **Six Months  Ended  June 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|---------------------------------|--------|
|                                                                                                                       |   | **2003**                          |    | **2002**                        |   | **2003** |   | **2002** |   |
| Net loss, as  reported                                                                                                     |   | $                                 | (20,903 | )                               | $      | (23,179 | ) | $ | (37,418 | ) | $ | (30,111 | ) |
| Deduct — total  unit-based employee compensation expense determined under the fair value  based method for all awards |   | (8                                | )       | (22                             | )      | (16 | ) | (44 | ) |
| Net loss, pro  forma                                                                                                       |   | $                                 | (20,911 | )                               | $      | (23,201 | ) | $ | (37,434 | ) | $ | (30,155 | ) |
| Basic and  diluted net loss per unit:                                                                                      |   |                              |    |                            |   |   |   |   |   |
| As reported                                                                                                                |   | $                                 | (0.68   | )                               | $      | (0.75 | ) | $ | (1.21 | ) | $ | (0.98 | ) |
| Pro forma                                                                                                                  |   | $                                 | (0.68   | )                               | $      | (0.75 | ) | $ | (1.21 | ) | $ | (0.98 | ) |

There were no unitoptions granted in the first six months of 2003 or 2002.

**Note8: Segment Reporting**

Priorto January 1, 2003, the Partnership reported the activities of the Trading andDistribution segment and the Alliance Lumber segment on a combined basis as asingle Wholesale Marketing segment. These businesses were separated into two reporting segments at thebeginning of 2003 to reflect that the Partnership began managing these segmentsas separate businesses. The 2002 periods have been conformed in the followingtables to the current year presentation for segments.  The Partnership classifies its business into three fundamentalareas for purposes of providing segment information: 1) Timberlands, consistingof the operation of tree farms and the harvest and sale of logs to thePartnership’s manufacturing facilities and to third parties, and the sale oftimber and timberlands to third parties; 2) Manufacturing, consisting of themanufacture of logs into dimension lumber and the sale of residual chips topulp and paper mills; and 3) Alliance Lumber, consisting of the distributionand supply of building products through the Partnership’s professionalcontractor service yards.  As discussedin Note 6 above, the Partnership disposed of its Trading and Distributionsegment during the second quarter of 2003. The Trading and Distribution segment consisted of the wholesale trading,marketing and distribution of lumber and panel products. Corporate and Otherincludes general corporate overhead and expenses not allocated to the segments,miscellaneous operations not significant enough to be classified as a separatesegment and the gain related to the sale of the Inland Tree Farm in 2002. ThePartnership does not show assets by segment, as historic costs are not used bymanagement to allocate resources or assess performance.  The following summarizes the Partnership’ssegment information (in thousands):
|                 |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|----------------------|--------|---------------------------------|--------|-------------------------------|--------|
| **Revenues**         |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| Timberlands:         |   |                            |   |                          |   |   |   |   |   |
| Trade                |   | $                               | 4,252  |                          | $      | 9,071 |   | $ | 11,169 |   | $ | 19,829 |   |
| Intersegment         |   | 6,257                           |   | 9,634                         |   | 15,801 |   | 20,180 |   |
|                 |   | 10,509                          |   | 18,705                        |   | 26,970 |   | 40,009 |   |
| Manufacturing:       |   |                            |   |                          |   |   |   |   |   |
| Trade                |   | 16,611                          |   | 27,284                        |   | 38,587 |   | 51,060 |   |
| Intersegment         |   | 899                             |   | 927                           |   | 2,072 |   | 2,198 |   |
|                 |   | 17,510                          |   | 28,211                        |   | 40,659 |   | 53,258 |   |
| Alliance Lumber:     |   |                            |   |                          |   |   |   |   |   |
| Trade                |   | 50,712                          |   | 44,635                        |   | 98,533 |   | 83,266 |   |
| Intersegment         |   | —                          |   | —                        |   | — |   | — |   |
|                 |   | 50,712                          |   | 44,635                        |   | 98,533 |   | 83,266 |   |
| Corporate and Other: |   |                            |   |                          |   |   |   |   |   |
| Trade                |   | 1,835                           |   | 2,610                         |   | 4,274 |   | 4,903 |   |
| Intersegment         |   | 16                              |   | 118                           |   | 76 |   | 195 |   |
|                 |   | 1,851                           |   | 2,728                         |   | 4,350 |   | 5,098 |   |
| Total:               |   |                            |   |                          |   |   |   |   |   |
| Total Revenues       |   | 80,582                          |   | 94,279                        |   | 170,512 |   | 181,631 |   |
| Less Intersegment    |   | (7,172                          | )      | (10,679                       | )      | (17,949 | ) | (22,573 | ) |
| Revenues             |   | $                               | 73,410 |                          | $      | 83,600 |   | $ | 152,563 |   | $ | 159,058 |   |

 

9

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|                                             |   | **Three Months Ended June 30,** |    | **Six Months Ended June 30,** |   |
|--------------------------------------------------|--------|---------------------------------|---------|-------------------------------|--------|
| **Operating income (loss)**                      |   | **2003**                        |    | **2002**                      |   | **2003** |   | **2002** |   |
| Timberlands                                      |   | $                               | 226     |                          | $      | 1,215 |   | $ | 1,005 |   | $ | 2,883 |   |
| Manufacturing                                    |   | (605                            | )       | 2,111                         |   | (1,182 | ) | 2,676 |   |
| Alliance Lumber                                  |   | 2,043                           |    | 1,904                         |   | 4,749 |   | 4,035 |   |
| Corporate and Other                              |   | (9,184                          | )       | (1,226                        | )      | (11,017 | ) | 2,099 |   |
| Operating Income (Loss)                          |   | (7,520                          | )       | 4,004                         |   | (6,445 | ) | 11,693 |   |
| Interest Expense                                 |   | (12,068                         | )       | (13,015                       | )      | (24,020 | ) | (27,221 | ) |
| Debt restructuring and   redemption premium |   | —                          |    | (14,133                       | )      | — |   | (14,133 | ) |
| Reorganization expenses                          |   | (218                            | )       | —                        |   | (218 | ) | — |   |
| Other                                            |   | (615                            | )       | (437                          | )      | (909 | ) | (1,235 | ) |
| Net loss from continuing operations              |   | $                               | (20,421 | )                             | $      | (23,581 | ) | $ | (31,592 | ) | $ | (30,896 | ) |

 

**Note 9: Property Sales**

 

On March 29, 2002, thePartnership closed the sale of its Inland South tree farm to PatriotInvestments, LLC for $132.4 million. The Partnership recognized a gain on this sale of $6.0 million.  On April 30, 2002, the Partnership closedthe sale of its Inland North tree farm to Patriot Investments, LLC for $53.9million.  The Partnership recognized again on this sale of $1.4 million.  Netproceeds from these two property sales were used to reduce outstanding debt.

 

**Note 10: New Accounting Pronouncements**

 

In August 2001, the FASB issued SFAS No. 143, “Accounting forObligations Associated with the Retirement of Long-Lived Assets.”  SFAS No. 143 establishes accountingstandards for the recognition and measurement of asset retirement obligationsand the associated asset retirement costs. The Partnership adopted the provisions of SFAS No. 143 in the firstquarter of 2003 with no material effect on its financial position, results ofoperations or cash flows.

 

In July 2002, the FASB issued SFAS No. 146, “Accounting for CostsAssociated with Exit or Disposal Activities.” SFAS No. 146 addresses the financial accounting and reporting forobligations associated with an exit activity, including restructuring.  Exit activities include, but are not limitedto, eliminating or reducing product lines, terminating employees and contractsand relocating plant facilities or personnel. SFAS No. 146 specifies that a company will record a liability for a costassociated with an exit or disposal activity only when that liability isincurred and can be measured at fair value. Therefore, commitment to an exit plan or a plan of disposal expressesonly management’s intended future actions and, therefore, does not meet therequirement for recognizing a liability and the related expense.  SFAS No. 146 is effective prospectively forexit or disposal activities initiated after December 31, 2002, with earlieradoption encouraged.  The adoption ofSFAS No. 146 in the first quarter of 2003 did not have any effect on thePartnership’s financial position, results of operations or cash flows.

 

In November 2002, the FASB issued Interpretation No. 45“Guarantor’s Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others” (FIN 45), which elaborates onrequired disclosures by a guarantor in its financial statements aboutobligations under certain guarantees that it has issued and clarifies the needfor a guarantor to recognize, at the inception of certain guarantees, aliability for the fair value of the obligation undertaken in issuing theguarantee.  The Partnership has reviewedthe provisions of FIN 45 relating to initial recognition and measurement ofguarantor liabilities, which are effective for qualifying guarantees enteredinto or modified after December 31, 2002. FIN 45 did not have a material effect on the Partnership’s financialposition, results of operations or cash flows.

 

 

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In January 2003, the FASB issuedInterpretation No. 46 (FIN 46), “Consolidation of Variable InterestEntities.” FIN 46 clarifies the application of Accounting Research BulletinNo. 51, “Consolidated Financial Statements,” to certain entities in whichequity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN 46 applies immediately to variable interest entities (VIE’s)created after January 31, 2003, and to VIE’s in which an enterpriseobtains an interest after that date. It applies in the first fiscal year orinterim period beginning after June 15, 2003, to VIE’s in which anenterprise holds a variable interest that it acquired before February 1,2003. FIN 46 applies to public enterprises as of the beginning of theapplicable interim or annual period. The Operating Partnership is considered a VIE under FIN 46.  The Partnership has not yet determined theeffect that adoption of FIN 46 may have on its financial position, results ofoperations or cash flows, given the recent chapter 11 bankruptcy filing.

 

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities.”  SFAS No. 149amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts (collectively referred to as derivatives) and for hedging activitiesunder FASB Statement No. 133, “Accounting for Derivative Instruments andHedging Activities.”  SFAS No. 149 iseffective for the Partnership prospectively for contracts entered into ormodified after June 30, 2003.  ThePartnership does not have any derivative instruments, nor is it involved in anyhedging activities and, therefore, the adoption of SFAS No. 149 will not haveany impact on its results of operations, financial position or cash flows

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  It requiresthat an issuer classify a financial instrument that is within its scope as aliability (or an asset in some circumstances). Many of those instruments were previously classified as equity.  SFAS No. 150 is effective for thePartnership for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003.  ThePartnership does not have any financial instruments that fall under theguidance of SFAS No. 150 and, therefore, the adoption of SFAS No. 150 will nothave any impact on its results of operations, financial position or cash flows.

 

**Note 11: Subsequent Event —Debtor-in-Possession Credit Facility**

 

On July 1, 2003, the Bankruptcy Court enteredan interim financing order and on July 17, 2003 the Bankruptcy Court entered a final financing order approving the$40 million DIP Revolver (see also Note 1). The Bankruptcy Court’s July 17, 2003 order temporarily limits borrowingunder the DIP Revolver while a creditors committee is formed and given theopportunity to comment.

 

On July 3, 2003, the Partnership borrowed $19.8 million on the DIPRevolver in order to pay in full the balance outstanding on its pre-existingrevolving credit facility and all related accrued interest and fees.  The pre-existing revolving credit facilitywas then terminated.

 

The $40 million limit issubject to a borrowing base and is reduced to $20 million should thePartnership dispose of its Alliance Lumber segment.  The DIP Revolver is collateralized by accounts receivable,inventory and any personal property that was not subject to a pre-existinglien.  The DIP Revolver bears interestat either (a) the Chase Bank Prime Rate plus 0.5% or (b) LIBOR plus 3%, at theoption of the Partnership.  Any LIBORloans are made for fixed one, two or three month terms.  The DIP Revolver terminates on January 1,2005 or upon the effective date of a Bankruptcy Court approved plan ofreorganization and contains certain covenants and restrictions.  As of July 31, 2003, there was $19.8 millionoutstanding on the DIP Revolver at an interest rate of 4.5% and approximately$12.2 million remained available.

 

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**Item2.****                      ****Management’sDiscussion****and Analysis ofFinancial Condition and Results of Operations**

 

**Chapter 11 Bankruptcy Petition Filing**

Duringthe second quarter of 2003, we were unable to meet the financial covenants andscheduled interest payments pursuant to our bank loan and senior noteagreements. In addition, we were unable to successfully negotiate arecapitalization with our bank lenders and senior note holders.  Accordingly, on June 29, 2003, we filedvoluntary petitions for relief under chapter 11 of title 11 of the UnitedStates Code (the “Bankruptcy Code”) in the United States Bankruptcy Court forthe District of Arizona in Phoenix, Arizona (the “Bankruptcy Court”) for thePartnership and all but one of our subsidiaries.  We currently manage our properties and operate our businesses as“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and inaccordance with the applicable provisions of the Bankruptcy Code.

 

Theaccompanying consolidated financial statements have been prepared assuming thatwe will continue as a going concern.  Wehave experienced net losses in each of the last eleven fiscal quarters, and, asmentioned above, we are under chapter 11 bankruptcy protection.  The consolidated financial statements do notreflect any adjustments that might result should we be unable to continue as agoing concern.

 

Aspart of our bankruptcy proceedings, the Bankruptcy Court approved a debtor-in-possessionfinancing agreement (“DIP Revolver”) in the amount of $40 million that wearranged with The CIT Group/Business Credit, Inc.During the reorganizationprocess, vendors who deliver goods and provide services to us receive prioritypayment protection under the bankruptcy law for such obligations.  Obligations that arose prior to June 29,2003 are included on the accompanying consolidated balance sheet as liabilitiessubject to compromise.  See also Notes 2and 11 above and Liquidity and Capital Resources below.

 

 

**Forward-Looking Statements**

Information contained in Item 2 and other sections of this reportincludes “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995, including statements regarding ourexpectations, forecasts, hopes, beliefs, predictions, intentions or strategiesregarding the future that are not purely historical, but are based onassumptions that in the future may prove not to be accurate. These assumptionsinclude harvest volumes, species mix, prices for logs and lumber, demand forhousing and levels and amounts received for stumpage and property sales. Ourbusiness and prospects are subject to a number of risks, including thevolatility of timber and lumber prices, factors limiting harvesting of timberincluding contractual obligations, governmental restrictions, weather andaccess limitations — as well as the substantial capital resources required tofund our operations and the uncertainty regarding procurement of additionalequity capital.  Accordingly, actualresults may differ materially from the expectations expressed in this report.

 

Additional factors that could affect future performance include ourability to successfully reorganize under bankruptcy protection, environmentalrisks, operating risks normally associated with the timber industry,competition, government regulations and policies, and economic changes in theregions where our products or substitute products are sold, including SoutheastAsia and Japan. Other risk factors include the increase in the value of theU.S. dollar against foreign currencies, and our ability to implement ourbusiness strategy. These and other risks are described in our registrationstatements and reports filed from time to time on forms 10-K, 8-K, and 10-Q andreports to unitholders, which are available from us or the United StatesSecurities and Exchange Commission.

##### ** **

 

##### **Liquidity and CapitalResources**

As discussed above, on June 29, 2003, we filed for chapter 11bankruptcy protection.  Pursuant to thebankruptcy proceedings, we have listed all pre-petition liabilities whichexisted prior to the June 29, 2003 bankruptcy filing as liabilities subject tocompromise.  Disposition of suchliabilities is under the jurisdiction of the Bankruptcy Court.

 

 

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The following table summarizes the pre-petition liabilities thatare included as liabilities subject to compromise (in thousands):

 
|                          |   | **June 30,  2003** |    |
|-------------------------------|--------|--------------------|---------|
| Acquisition  facility         |   | $                  | 112,372 |   |
| Senior notes                  |   | 400,658            |    |
| Other long-term  debt         |   | 116                |    |
| Accounts payable              |   | 4,336              |    |
| Accrued interest              |   | 21,388             |    |
| Deferred  enhanced interest   |   | 4,927              |    |
| Make whole fees  and interest |   | 6,360              |    |
| Other accrued  expenses       |   | 9,144              |    |
| Total                         |   | $                  | 559,301 |   |

 

Although we have filed for chapter 11 bankruptcy protection, wecontinue to actively pursue a recapitalization plan.  Any recapitalization plan will be subject to approval by theBankruptcy Court and may involve the disposition of certain of our assets. Theobjective of the recapitalization is to establish a capital structure that isconsistent with our cash flows throughout the industry cycle, and that affordsus adequate funding for capital expenditures, working capital needs and debtservice requirements.  The creditors on the acquisition facility and senior notes assertthat their debt is secured by our timberlands and certain real property andequipment associated with our manufacturing segment.  The remaining liabilities subject to compromise are generallyunsecured.  While we are underbankruptcy protection, any scheduled interest or principal payments aresuspended and creditors are generally prohibited from pursuing collection oftheir pre-petition claims by the automatic stay provisions of the BankruptcyCode.

 

On July 17, 2003 the Partnership received a final order from theBankruptcy Court approving the implementation of a $40 milliondebtor-in-possession loan facility (“DIP Revolver”) with The CIT Group/BusinessCredit, Inc.  The Bankruptcy Court’s July17, 2003 order temporarily limits borrowing under the DIP Revolver while acreditors committee is formed and given the opportunity to comment.

 

With the DIP Revolver in place, we should have adequate liquidity topay our vendors for goods delivered to and services provided to us on apost-petition basis after June 29, 2003. During the reorganization process,vendors who deliver goods and provide services to us receive priority paymentprotection under the bankruptcy law for such obligations.

 

On July 3, 2003, the Partnership borrowed $19.8 million on the DIPRevolver in order to pay in full the balance outstanding on its pre-existingrevolving credit facility and all related accrued interest and fees.  The pre-existing revolving credit facilitywas then terminated.

 

The $40 million DIP Revolver limit is subject to a borrowing base andis reduced to $20 million should we dispose of our Alliance Lumbersegment.  The DIP Revolver iscollateralized by our accounts receivable, inventory and any personal propertythat was not subject to a pre-existing lien. The DIP Revolver bears interest at either (a) the Chase Bank Prime Rateplus 0.5% or (b) LIBOR plus 3%, at our option. Any LIBOR loans are made for fixed one, two or three month terms.  The DIP Revolver terminates on January 1,2005 or upon the effective date of a Bankruptcy Court approved plan ofreorganization and contains certain covenants and restrictions.  As of July 31, 2003, there was $19.8 millionoutstanding on the DIP Revolver at an interest rate of 4.5% and approximately$12.2 million remained available.

 

Cashused by operating activities was $240,000 in the first six months of 2003 andresulted primarily from a net loss of $37.4 million and an increase in prepaidand other current assets of $2.9 million, partially offset by non-cash expensesand charges totaling $20.6 million, a decrease in accounts and notes receivableof $4.7 million, a decrease in inventories of $5.1 million and an increase inaccounts payable and accrued expenses of $9.4 million.  Working capital increased to $60.0 millionat June 30, 2003 compared to $31.5 million at December 

 

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31,2002, primarily due to the chapter 11 bankruptcy petition filing and theresulting reclassification of $75.6 million of current liabilities toliabilities subject to compromise.

 

The$4.7 million decrease in accounts and notes receivable and the $5.1 milliondecrease in inventories is primarily due to the sale of our Trading andDistribution segment early in the second quarter of 2003.  The increase in accounts payable and accruedexpenses prior to their transfer to liabilities subject to compromise isprimarily due to accrued interest on long-term debt which was due but not paidduring the second quarter of 2003, offset in part by decreases due toaccelerated credit terms imposed by vendors and the disposal of the Trading andDistribution segment.

 

Netcash provided by investing activities of $2.5 million resulted primarily from$7.1 million received from the sale of equipment and the Trading andDistribution segment inventories, partially offset by the use of $3.6 millionfor additions to timberlands and timber cutting rights and $1.1 million usedfor additions to equipment.

 

Netcash used by financing activities of $6.9 million resulted from a $6.9 milliondecrease in short-term borrowings under our pre-existing revolving creditfacility.  Under an agreement with thebank group for this facility, we were required to apply much of the proceedsreceived from our Trading and Distribution segment disposition to theoutstanding balance on this loan.

 

Wedo not expect to make cash distributions from our current funds or from cashgenerated by operating activities until our overall debt levels aresubstantially reduced and significantly improved market conditions couldsupport a sustained quarterly distribution. In addition, cash distributions are not allowed while we are involved inbankruptcy proceedings.

 

 

**Results of Continuing Operations**

**Three Months Ended June 30, 2003 compared to Three MonthsEnded June 30, 2002**

 

**General**

During the second quarter of 2003, we sold our Trading and Distributionsegment, which is reflected as discontinued operations on our consolidatedstatements of operations for all periods presented.  Please see additional discussion below.

 

Revenuesfrom continuing operations during the quarter ended June 30, 2003 decreased$10.2 million, or 12.2%, to $73.4 million, from $83.6 million in the samequarter of 2002.  The decrease reflectslower revenues from our Timberlands and Manufacturing segments partially offsetby increased revenues in our Alliance Lumber segment.  The decreased revenues in Timberlands and Manufacturing are dueto temporary market-related curtailments in these segments as well as weak marketpricing for logs and lumber.  Theincreased Alliance Lumber revenue is due to increased sales volume.

 

Costof sales as a percentage of sales increased to 92.4% in the second quarter of2003, compared to 89.5% in the same quarter of 2002 due to several factors,including increased costs at our Alliance Lumber segment as a result of tradecredit problems and the relative absence of pricing discounts, lower prices forour logs and lumber, increased fuel and other energy costs, and lowerproduction volumes in our manufacturing and timberlands segments due to thetemporary market-related curtailments in the second quarter.

 

The $1.3 million loss on disposal of assets in the second quarter of2003 represents the loss realized on the disposition of an aircraft.  Gain on disposal of assets of $1.4 millionin the prior year quarter represents the recognized gain on the sale of ourInland North tree farm in April 2002.

 

Selling,general and administrative expenses increased $0.8 million, or 12.7%, to $6.9million (9.5% of revenue) in the second quarter of 2003, compared to $6.2million (7.4% of revenue) in the second quarter of 2002.  This increase is primarily a result ofhigher insurance premiums and professional fees, offset in part by decreases insalaries and related personnel costs due to lower headcount and cost reductioninitiatives.

 

14

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Interestexpense decreased $0.9 million, or 7.3%, to $12.1 million in the second quarterof 2003, from $13.0 million in the same quarter of 2002.  The decrease is primarily a result of loweraverage debt balances in the second quarter of 2003 compared to the secondquarter of 2002.

 

Debt restructuring and redemption premium of $14.1 million in thesecond quarter of 2002 relates to our global debt restructuring in April2002.  Of the $14.1 million charge,$10.0 million was non-cash in nature. We incurred a total of $8.7 million infees and costs in connection with the April 2002 debt restructuring, $4.2million of which was included in the $14.1 million loss recognized in thesecond quarter of 2002 in accordance with the provisions outlined in EmergingIssues Task Force Issue No. 96-19 “Debtor’s Accounting for a Modification orExchange of Debt Instruments” (EITF 96-19). In addition, we expensed $5.5 million of previously deferred fees andexpenses and a $4.5 million redemption premium.   The redemption premium was incurred when we prepaid a portion ofour senior notes in advance of their scheduled maturity.  Payment of the redemption premium, accordingto the terms of the senior note restructuring, is deferred until December 31,2005.

 

Amortization of debt issuance costs totaled $0.6 million in the secondquarters of both 2003 and 2002.  Thesecond quarter of 2003 includes $0.2 million of additional amortization relatedto deferred debt issuance costs on the pre-existing revolving credit facilitywhich was terminated early in July 2003. At June 30, 2003, we had $3.8 million of unamortized debt issuancecosts, which are being amortized through December 31, 2005.

 

Debt restructuring negotiation costs of $4.9 million in the quarterended June 30, 2003 consisted primarily of professional fees and chargesincurred related to our reorganization and recapitalization efforts.  Of these charges, $0.8 million were incurredand deferred in the first quarter of 2003 and expensed in the current quarterdue to the failure of our out of court recapitalization efforts and our filingfor chapter 11 bankruptcy protection on June 29, 2003.  We anticipate continuing to incursignificant professional fees and court costs in future quarters related to ourreorganization efforts under chapter 11.

 

Inthe past, the Partnership has not paid significant income taxes and has notincluded a provision for income taxes in its financial statements.  The Partnership owns, directly andindirectly, four corporations that constitute a consolidated group ofcorporations for federal income tax purposes. This consolidated group of corporations may be subject to significantincome taxes in the future under certain circumstances, including dispositionsof certain assets by the Partnership. Any such income tax incurred by thesetaxable entities would generally not be allocated to unit holders. We do notanticipate any significant income tax liability from our disposition of theTrading and Distribution segment assets.

 

**Timberlands**

Totalexternal segment sales, including stumpage sales, decreased 53.1% to $4.3million, or 5.8% of revenue in the second quarter of 2003, compared to $9.1million, or 10.9% of revenue in the second quarter of 2002.  The decrease in external segment salesreflects a 56.5% decrease in domestic log shipments, an 83.5% decrease inexport log shipments, a 3.1% decrease in the weighted average domestic salesrealizations and an 11.5% decrease in the weighted average export salesrealizations.  The decrease in domesticlog shipments primarily reflects decreases at our Washington tree farms due toharvest curtailments during May 2003. The decrease in export log shipments primarily reflects lower demand forKorean sort logs.  The decrease in salesrealizations is a result of species mix changes and lower hemlock and Douglasfir pricing in the second quarter of 2003 compared to the second quarter of2002.  Except for the Inland North TreeFarm sale (which is reflected in the Corporate and Other segment) in the secondquarter of 2002, there were no significant property sales in either the 2003 or2002 period.

 

Internalsales of logs to manufacturing decreased 35.1% to $6.3 million in the secondquarter of 2003 from $9.6 million in the second quarter of 2002.  The decrease primarily reflects the effectsof a 27.6% decrease in volume, due in large part to a temporary harvestcurtailment during the second quarter of 2003 and a 9.3% decrease in averagesales realizations due to weak market pricing. Our internal transfer pricing is based on current market prices at thetime of sale.

 

15

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Overalloperating income from timberlands decreased $1.0 million, or 81.4%, to $0.2million in the second quarter of 2003 from $1.2 million in the second quarterof 2002, primarily as a result of the decreased volume and sales realizationsdiscussed above.

 

***Domestic Log Sales***

Averageexternal domestic prices received for logs sold from the various tree farms,excluding stumpage adjustments and pulpwood, were as follows (dollars perthousand board feet or “MBF”):

 
|             |   | **Quarter  Ended June 30,** |   |     |   |
|------------------|--------|-----------------------------|--------|----------|--------|
| **Tree Farm**    |   | **2003**                    |   | **2002** |   | **% Change** |   |
| Oregon           |   | $                           | 626    |     | — |   | — |   |
| Inland           |   | —                      |   | $        | 477    |   | — |   |
| Hamilton         |   | $                           | 436    |     | $      | 457 |   | (4.6 | )% |
| Olympic          |   | $                           | 376    |     | $      | 393 |   | (4.3 | )% |
| Weighted average |   | $                           | 404    |     | $      | 417 |   | (3.1 | )% |

 

Duringthe second quarter of 2003, certain large diameter salvaged ponderosa pine weresold to an external customer.  All otherproduction from the Oregon Tree Farm was utilized by our Gilchrist mill.  The decreases at the Hamilton and OlympicTree Farms are primarily due to lower market pricing and changes in speciesmix.

 

Domesticexternal log sales volumes decreased****56.5% in the second quarter of 2003 to 7.8million board feet (MMBF), compared to 17.8 MMBF in the same quarter of 2002,primarily as a result of decreases at our Washington tree farms due in part toa temporary harvest curtailment during the second quarter of 2003.  The external volume from each of our treefarms was as follows (in MBF):

 
|                |   | **Quarter  Ended June 30,** |   |     |   |
|---------------------|--------|-----------------------------|--------|----------|--------|
| **Tree Farm**       |   | **2003**                    |   | **2002** |   | **% Change** |   |
| Oregon tree farm    |   | 227                         |   | 8        |   | Not  meaningful |   |
| Inland tree farm    |   | —                      |   | 132      |   | — |   |
| Hamilton tree  farm |   | 2,755                       |   | 6,419    |   | (57.1 | )% |
| Olympic tree  farm  |   | 4,783                       |   | 11,284   |   | (57.6 | )% |
| Total               |   | 7,765                       |   | 17,843   |   | (56.5 | )% |

Thedecreases at the Hamilton and Olympic Tree Farms are a result of decreasedmarket demand compared to the prior year periods and the temporary harvestcurtailment.

 

Aportion of the Inland Tree Farm was sold in the first quarter of 2002 and thefinal portion was sold on April 30, 2002. Therefore, there was very little volume from our Inland Tree Farm duringthe second quarter of 2002 and none in the second quarter of 2003.

 

***Export Log Sales***

Salesof logs to customers involved in exporting activities (included in total logsales above) were approximately $0.1 million, or 0.2% of revenue, in the secondquarter of 2003, compared to $0.9 million, or 0.7% of revenue, for the samequarter in 2002.  The averagerealization for export logs decreased 11.5% to $451/MBF in the second quarterof 2003 compared to $510/MBF in the second quarter of 2002.  Sales volumes of export logs decreased 83.5%to 297 MBF in the second quarter of 2003 compared to 1,798 MBF in the secondquarter of 2002.  The decrease in salesvolume and average realization is primarily due to decreased demand for Koreansort logs.

 

***Property Sales***

Thedisposition of the Inland North Tree Farm in the second quarter of 2002 wasreported as an asset sale in the Corporate and Other segment.  There were no other significant propertysales in the second quarter of 2003 or 2002.

 

16

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**Manufacturing**

Externalrevenues from our sawmills decreased $10.7 million, or 39.1% to $16.6 million,or 22.6% of revenue, in the second quarter of 2003 from $27.3 million, or 32.6%of revenue, in the same quarter of 2002. The decreased revenue reflects a 14.6% decrease in average externallumber sales realizations, a 27.7% decrease in external lumber sales volumesand a 31.5% decline in chip revenue. The lower sales realizations reflect the impact of weak lumber marketpricing and mix changes.  The decreasedsales volume reflects decreased production due to the temporary market-relatedproduction curtailment during the second quarter of 2003.

 

Theoperating loss from manufacturing was $0.6 million in the second quarter of2003 compared to operating income of $2.1 million in the second quarter of2002.  The decline in operating resultsis primarily a result of decreased revenues as discussed above, a 6.3% increasein segment overhead expense and an 8.8% increase in per unit manufacturingexpense.  These factors were partiallyoffset by an 11.6% decrease in unit log costs. The increase in segment overhead expense is primarily a result ofincreased depreciation and costs related to the shut-down of the finishingoperation at our Prineville mill.  ThePrineville mill was not operated during the second quarter of 2002, but hadbeen operating in the fourth quarter of 2002 and the first quarter of 2003 fordrying and finishing of increased rough lumber production from the Gilchristmill.

 

Averageexternal prices received for lumber sales by region were as follows (dollarsper MBF):
|             |   | **Quarter  Ended June 30,** |   |     |   |
|------------------|--------|-----------------------------|--------|----------|--------|
| **Region**       |   | **2003**                    |   | **2002** |   | **% Change** |   |
| Oregon           |   | $                           | 268    |     | $      | 308 |   | (13.0 | )% |
| Washington       |   | $                           | 259    |     | $      | 310 |   | (16.5 | )% |
| Weighted average |   | $                           | 264    |     | $      | 309 |   | (14.6 | )% |

 

Thedecreases reflect weak lumber market pricing and shifts in product mix.

 

Externallumber sales volumes decreased 27.7% in the second quarter of 2003 to 57.7 MMBFcompared to 79.7 MMBF in the same period of 2002.  External lumber sales volumes by region were as follows (in MBF):

 
|       |   | **Quarter  Ended June 30,** |   |     |   |
|------------|--------|-----------------------------|--------|----------|--------|
| **Region** |   | **2003**                    |   | **2002** |   | **% Change** |   |
| Oregon     |   | 30,179                      |   | 45,583   |   | (33.8 | )% |
| Washington |   | 27,495                      |   | 34,137   |   | (19.5 | )% |
| Total      |   | 57,674                      |   | 79,720   |   | (27.7 | )% |

 

Thedecreased volume from both regions reflects our temporary productioncurtailment in the second quarter of 2003.

 

Internalshipments from the Oregon region increased 99.8% to 1.8 MMBF in the secondquarter of 2003 compared to 0.9 MMBF in the second quarter of 2002.

 

Internalshipments from the Washington region decreased 27.1% to 1.7 MMBF in the secondquarter of 2003 compared to 2.3 MMBF in the second quarter of 2002.

 

Chipsales accounted for 1.9% of revenue in the second quarter of 2003, compared to2.4% of revenue in the second quarter of 2002. Residual wood chip prices increased to $64 per bone dry unit (BDU) inthe second quarter of 2003 compared to $56/BDU in the second quarter of 2002,reflecting slightly improved market conditions.   Woodchip sales volume decreased 40.6% to 21,232 BDUs in thesecond quarter of 2003 compared to 35,738 BDUs in the second quarter of 2002due to our temporary production curtailment in the second quarter of 2003.

 

 

17

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**Alliance Lumber**

Our Alliance Lumbersegment includes professional contractor service yards in Arizona and Nevadaand involves the sale of lumber and building products.  Total revenue from our Alliance Lumbersegment increased 13.6% to $50.7 million, or 69.1% of total revenue, in thesecond quarter of 2003 compared to $44.6 million, or 53.4% of total revenue, inthe second quarter of 2002.  Thisincrease reflects increased sales volumes at all three operations driven bystrong demand in their respective regional housing markets, offset in part bylower lumber prices.  Unit volumeincreased 12.5% during the second quarter of 2003, compared to the secondquarter of 2002.

 

Operating income from ourAlliance Lumber segment increased 7.3% to $2.0 million in the second quarter of2003 compared to $1.9 million in the second quarter of 2002.  The increase in operating income reflectsthe increased revenue as discussed above, offset in part by an increase inoperating expenses, a decrease in margins due to the effect of our trade creditdifficulties on our raw materials purchasing and a relative absence of pricingdiscounts as well as shifts in mix between multi-family projects and singlefamily residences.  Multi-familyprojects generally provide greater revenue per project than single familyprojects, but result in lower margins. The increase in operating expenses is due in part to increased wages,which resulted from overtime expense in order to service back orders thatoccurred from supply chain disruptions with our vendors.

 

**Discontinued Operations -Trading and Distribution**

OurTrading and Distribution segment, which was comprised of operations based inEugene, Oregon and Albuquerque, New Mexico, was sold during the second quarterof 2003.  The Trading and Distributionsegment involved the wholesale trading of lumber, panels and other wood products,most of which were not manufactured by us. Primarily due to the sale of this segment, sales from the Trading andDistribution segment decreased $44.3 million, or 87.5%, to $6.3 million in thesecond quarter of 2003 from $50.6 million in the second quarter of 2002.

 

Theloss from our Trading and Distribution segment totaled $482,000 in the secondquarter of 2003 compared to income of $402,000 in the second quarter of2002.  The decrease in income primarilyreflects the lower revenues as discussed above.

 

 

**Results of Continuing Operations**

**Six Months Ended June 30, 2003 compared to Six Months EndedJune 30, 2002**

 

**General**

During the second quarter of 2003, we sold our Trading and Distributionsegment, which is reflected as discontinued operations on our consolidatedstatements of operations for all periods presented.  Please see additional discussion below.

 

Revenuesduring the six months ended June 30, 2003 decreased $6.5 million, or 4.1%, to$152.6 million, from $159.1 million in the same period of 2002.  The decrease reflects lower revenues fromour Timberlands and Manufacturing segments partially offset by increasedrevenues in our Alliance Lumber segment. The decreased revenues from our Timberlands and Manufacturing segmentsare due to temporary market-related curtailments in these segments as well asweak market pricing for logs and lumber. The increase in Alliance Lumber revenues is due to increased salesvolume.

 

Costof sales as a percentage of sales increased to 92.0% in the first six months of2003, compared to 89.1% in the same period of 2002 due to several factorsincluding increased costs at our Alliance Lumber segment as a result of tradecredit problems and the relative absence of pricing discounts, lower prices forour logs and lumber, increased fuel and other energy costs and lower productionvolumes in our Manufacturing and Timberlands segments due to the temporarymarket-related curtailments in the second quarter of 2003.

 

The $0.8 million loss on disposal of assetsin the six months ended June 30, 2003 represents a $1.3 million loss on thesale of an aircraft in the second quarter of 2003, offset by a gain on sale of equipment of $0.5 millionin 

 

 

18

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the first quarter of 2003.  Gainon disposal of assets of $7.4 million in the first six months of 2002represents the recognized gains on the sale of our Inland South and InlandNorth tree farms in March and April 2002, respectively.

 

Selling,general and administrative expenses were $12.9 million (8.5% of net sales) inthe first six months of 2003, compared to $13.1 million (8.3% of net sales) inthe first six months of 2002.  Increasesas a result of higher insurance premiums and professional fees were offset bydecreases in salaries and related personnel costs due to lower headcount andcost reduction initiatives.

 

Interestexpense decreased $3.2 million, or 11.8%, to $24.0 million in the first sixmonths of 2003, from $27.2 million in the first six months of 2002.  The decrease is primarily a result of loweraverage debt balances in the first six months of 2003 compared to the first sixmonths of 2002, partially off-set by higher interest rates effective in April2002 due to the global debt restructuring agreement completed at that time.

 

Debt restructuring and redemption premium of $14.1 million in the firstsix months of 2002 relates to our global debt restructuring in April 2002.  Of the $14.1 million charge, $10.0 millionwas non-cash in nature. We incurred a total of $8.7 million in fees and costsin connection with the April 2002 debt restructuring, $4.2 million of which wasincluded in the $14.1 million loss recognized in the second quarter of 2002 inaccordance with the provisions outlined in Emerging Issues Task Force Issue No.96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments,”(EITF 96-19).   In addition, we expensed$5.5 million of previously deferred fees and expenses and a $4.5 millionredemption premium.  The redemptionpremium was incurred when we prepaid a portion of our senior notes in advanceof their scheduled maturity.  Payment ofthe redemption premium, according to the terms of the senior noterestructuring, is deferred until December 31, 2005.

 

Amortization of debt issuance costs decreased $0.6 million to $1.1million in the first six months of 2003 compared to $1.7 million in the firstsix months of 2002.  The decrease is dueto the second quarter 2002 write-off of $5.5 million of previously deferredfees related to our senior notes as a result of our debt restructuring in April2002.  In addition, the amortizationperiod for remaining deferred debt issuance costs was prospectively extendeduntil December 2005, thereby lowering the amount amortized in each quarter.  These decreases were partially offset by therecognition of $0.2 million of additional amortization of deferred debtissuance costs in 2003 on the pre-existing revolving credit facility which wasterminated in July 2003.  At June 30,2003, we had $3.8 million of unamortized debt issuance costs, which are beingamortized through December 31, 2005.

 

Debt restructuring negotiation costs of $4.9 million in the sixmonths ended June 30, 2003, consisting primarily of professional fees,represent charges incurred related to our reorganization and recapitalizationefforts.  We anticipate continuing toincur significant professional fees and court costs in future quarters relatedto our reorganization efforts under chapter 11.

 

Inthe past, the Partnership has not paid significant income taxes and has notincluded a provision for income taxes in its financial statements.  The Partnership owns, directly andindirectly, four corporations that constitute a consolidated group ofcorporations for federal income tax purposes. This consolidated group of corporations may be subject to significantincome taxes in the future under certain circumstances, including dispositionsof certain assets by the Partnership. Any such income tax incurred by thesetaxable entities would generally not be allocated to unit holders. We do notanticipate any significant income tax liability from our disposition of theTrading and Distribution segment assets.

 

**Timberlands**

Totalexternal segment sales, including stumpage sales, decreased 43.7% to $11.2million, or 7.3% of revenue in the first six months of 2003, compared to $19.8million, or 12.5% of revenue in the first six months of 2002.  The decrease in external segment salesreflects a 44.2% decrease in domestic log shipments, a 66.7% decrease in exportlog shipments and a 6.9% decrease in the weighted average domestic salesrealizations.  The decrease in domesticlog shipments primarily reflects curtailments in production at all of our treefarms in May 2003 and the sale of our Inland Tree Farm in two separatetransactions in March and April 2002. The decrease in export 

 

 

19

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logshipments primarily reflects lower demand for Korean sort logs.  The decrease in realizations reflects theabsence of our Inland Tree Farm, species mix changes and lower market prices inthe first six months of 2003 compared to the first six months of 2002.  Except for the Inland North and Inland SouthTree Farm sales (which are reflected in the Corporate and Other segment) in thefirst and second quarters of 2002, there were no significant property sales ineither the 2003 or 2002 period.

 

Internalsales of logs to manufacturing decreased 21.7% to $15.8 million in the firstsix months of 2003 from $20.2 million in the first six months of 2002.  The decrease primarily reflects the effectsof our temporary harvest curtailment and a 3.1% decrease in average salesrealizations due to weak market pricing. Our internal transfer pricing is based on current market prices at thetime of sale.  We terminated all Inlandmanufacturing operations in 2001, hence no Inland internal sales are includedin the first six months of 2003 or 2002.

 

Overalloperating income from timberlands decreased $1.9 million, or 65.1%, to $1.0million in the first six months of 2003 from $2.9 million in the first sixmonths of 2002, primarily as a result of the decreased volume and salesrealizations discussed above.

 

***Domestic Log Sales***

Averageexternal domestic prices received for logs sold from the various tree farms,excluding stumpage adjustments and pulpwood, were as follows (dollars per MBF):

 
|             |   | **Six Months  Ended June 30,** |   |     |   |
|------------------|--------|--------------------------------|--------|----------|--------|
| **Tree Farm**    |   | **2003**                       |   | **2002** |   | **% Change** |   |
| Oregon           |   | $                              | 626    |     | — |   | — |   |
| Inland           |   | —                         |   | $        | 466    |   | — |   |
| Hamilton         |   | $                              | 425    |     | $      | 457 |   | (7.0 | )% |
| Olympic          |   | $                              | 376    |     | $      | 378 |   | (0.5 | )% |
| Weighted average |   | $                              | 401    |     | $      | 414 |   | (3.1 | )% |

 

Duringthe second quarter of 2003, certain large diameter salvaged ponderosa pineswere sold to an external customer.  Allother production from the Oregon Tree Farm was utilized by our Gilchrist mill.  The decrease at the Hamilton Tree Farm isprimarily due to lower market pricing and changes in species mix.

 

Domesticexternal log sales volumes decreased****44.2% in the first six months of 2003 to20.3 MMBF, compared to 36.5 MMBF in the first six months of 2002, primarily asa result of temporary harvest curtailments during the second quarter of 2003and the sale of our Inland Tree Farm in the first and second quarters of2002.  The external volume from each ofour tree farms was as follows (in MBF):

 
|                |   | **Six Months  Ended June 30,** |   |     |   |
|---------------------|--------|--------------------------------|--------|----------|--------|
| **Tree Farm**       |   | **2003**                       |   | **2002** |   | **% Change** |   |
| Oregon tree farm    |   | 227                            |   | 8        |   | Not meaningful |   |
| Inland tree farm    |   | —                         |   | 7,373    |   | — |   |
| Hamilton tree  farm |   | 9,215                          |   | 8,764    |   | 5.1 | % |
| Olympic tree  farm  |   | 10,890                         |   | 20,324   |   | (46.4 | )% |
| Total               |   | 20,332                         |   | 36,469   |   | (44.2 | )% |

 

Theincrease at the Hamilton Tree Farm was a result of increased market demand fromlocal sawmill customers in the first quarter of 2003, partially offset by ourtemporary harvest curtailment in the second quarter of 2003.

 

Thedecrease at the Olympic Tree Farm reflects strong demand experienced in thesecond quarter of 2002 compared to the second quarter of 2003 and the temporaryharvest curtailment in the second quarter of 2003.

 

Wesold a portion of our Inland Tree Farm in the first quarter of 2002 and sold thefinal portion on April 30, 2002. Therefore, there was low volume related only to sourcing existing logcontracts from our Inland Tree Farm during the first six months of 2002 andnone in the 2003 period, as the sale transaction had been completed.

 

 

20

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***Export Log Sales***

Salesof logs to customers involved in exporting activities (included in total logsales above) were approximately $0.7 million, or 0.5% of revenue, in the firstsix months of 2003, compared to $1.9 million, or 1.2% of revenue, for the firstsix months of 2002.  The averagerealization for export logs increased to $555/MBF in the first six months of2003 compared to $494/MBF in the first six months of 2002.  Sales volumes of export logs decreased 66.7%to 1.3 MMBF in the first six months of 2003 compared to 3.8 MMBF in the firstsix months of 2002.    The decrease insales volume is primarily due to decreased demand for Korean sort logs.  The increase in the average realization isprimarily due to a greater proportion of higher grade Korean sort logs duringthe first six months of 2003 compared to the first six months of 2002.  We did not export any logs from our InlandTree Farm and, therefore, our export sales were not affected by their disposition.

 

***Property Sales***

Thedisposition of the Inland South and Inland North tree farms in the first andsecond quarters of 2002 were reported as asset sales in the Corporate and Othersegment.  There were no othersignificant property sales in the first six months of 2003 or 2002.

 

**Manufacturing**

Externalrevenues from our sawmills decreased $12.5 million, or 24.4% to $38.6 million,or 25.3% of revenue, in the first six months of 2003 from $51.1 million, or32.1% of revenue, in the first six months of 2002.  The decreased revenues reflect an 11.1% decrease in averageexternal lumber sales realizations, a 12.3% decrease in external lumber salesvolumes and a 28.8% decline in chip revenue. The lower sales realizations reflect the impact of weak lumber marketpricing and product mix changes.  Thelower sales volume reflects decreased production, including the effects of ourtemporary market-related production curtailment in the second quarter of 2003.

 

Theoperating loss from manufacturing was $1.2 million in the first six months of2003 compared to operating income of $2.7 million in the first six months of2002.  The decline in operating resultsis primarily a result of decreased revenues as discussed above, a 5.6% increasein segment overhead expense and a 6.2% increase in per unit manufacturingexpense.  These factors were partiallyoffset by an 8.9% decrease in unit log costs. The increase in segment overhead expense is primarily a result ofincreased depreciation and costs related to the shut-down of our Prinevillemill.  The Prineville mill was notoperated during the first half of 2002, but had been operating in the fourthquarter of 2002 and the first quarter of 2003 for drying and finishing ofincreased rough lumber production from the Gilchrist mill.

 

Averageexternal prices received for lumber sales by region were as follows (dollarsper MBF):

 
|             |   | **Six Months  Ended June 30,** |   |     |   |
|------------------|--------|--------------------------------|--------|----------|--------|
| **Region**       |   | **2003**                       |   | **2002** |   | **% Change** |   |
| Oregon           |   | $                              | 269    |     | $      | 298 |   | (9.7 | )% |
| Washington       |   | $                              | 259    |     | $      | 298 |   | (13.1 | )% |
| Weighted average |   | $                              | 265    |     | $      | 298 |   | (11.1 | )% |

 

Thedecreases reflect weak lumber market pricing and shifts in product mix.

 

Externallumber sales volumes decreased 12.3% in the first six months of 2003 to 133.2MMBF compared to 151.9 MMBF in the same period of 2002.  External lumber sales volumes by region wereas follows (in MBF):

 
|       |   | **Six Months  Ended June 30,** |   |     |   |
|------------|--------|--------------------------------|--------|----------|--------|
| **Region** |   | **2003**                       |   | **2002** |   | **% Change** |   |
| Oregon     |   | 72,352                         |   | 88,166   |   | (17.9 | )% |
| Washington |   | 60,876                         |   | 63,710   |   | (4.4 | )% |
| Total      |   | 133,228                        |   | 151,876  |   | (12.3 | )% |

 

 

21

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Thedecrease in external shipments from the Oregon region is due to our temporaryproduction curtailment in the second quarter of 2003 and a 170.8% increase ininternal shipments to 4.3 MMBF in the first six months of 2003 compared to 1.6MMBF in the first six months of 2002.

 

Thedecreased volume from the Washington region reflects the temporary productioncurtailment in the second quarter of 2003. Internal shipments from the Washington region decreased 37.2% to 3.8MMBF in the first six months of 2003 compared to 6.1 MMBF in the first sixmonths of 2002.

 

Chipsales accounted for 2.0% of revenue in the first six months of 2003, comparedto 2.8% of revenue in the first six months of 2002.  Residual wood chip prices were up slightly to $61 per bone dryunit (BDU) in the first six months of 2003 compared to $60 per BDU in the firstsix months of 2002. Woodchip sales volume decreased 29.6% to 51,036 BDUs in thefirst six months of 2003 compared to 72,494 BDUs in the first six months of2002 partially due to our temporary production curtailment in the secondquarter of 2003.

 

**Alliance Lumber**

Our Alliance Lumbersegment includes professional contractor service yards in Arizona and Nevadaand involves the sale of lumber and building products.  Total revenue from our Alliance Lumbersegment increased 18.3% to $98.5 million, or 64.6% of total revenue, in thefirst six months of 2003 compared to $83.3 million, or 52.3% of total revenue,in the first six months of 2002.  Thisincrease reflects increased sales volumes at all three operations driven bystrong demand in their respective regional housing markets, offset in part bylower lumber prices.  Unit volumeincreased 20.9% during the first six months of 2003 compared to the first sixmonths of 2002.

 

Operating income from ourAlliance Lumber segment increased 17.7% to $4.7 million in the first six monthsof 2003 compared to $4.0 million in the first six months of 2002.  The increase in operating income reflects theincreased revenue as discussed above, offset in part by an increase inoperating expenses, a decrease in margins due to the effect of our trade creditdifficulties on our raw materials purchasing and the relative absence ofpricing discounts, as well as shifts in mix between multi-family projects andsingle family residences.  Multi-familyprojects generally provide greater revenue per project than single familyprojects, but result in lower margins.  Theincrease in operating expenses is due in part to increased wages, which resultedfrom overtime expense in the second quarter of 2003 in order to service backorders that occurred from supply chain disruptions with our vendors.

 

**Discontinued Operations -Trading and Distribution**

OurTrading and Distribution segment, which was comprised of operations based inEugene, Oregon and Albuquerque, New Mexico, was sold during the second quarterof 2003.  The Trading and Distributionsegment involved the wholesale trading of lumber, panels and other woodproducts, most of which were not manufactured by us.  Primarily due to the sale of this segment, sales from the Tradingand Distribution segment decreased $63.8 million, or 65.1%, to $34.1 million inthe first six months of 2003 from $97.9 million in the first six months of2002.

 

Theloss from our Trading and Distribution segment totaled $5.8 million in thefirst six months of 2003 compared to income of $0.8 million in the first sixmonths of 2002, primarily due to the decreased revenues as discussed above anda $5.5 million charge for the impairment of goodwill, which occurred in thefirst quarter of 2003.

##### ** **

##### **Critical Accounting Policies**

Wereaffirm the critical accounting policies and estimates described in our 2002Annual Report on Form 10-K, which was filed with the Securities and Exchange Commissionon March 31, 2003.

 

 

22

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**NewAccounting Pronouncements**

Please read Note10 for a discussion of new accounting pronouncements and their anticipatedeffects on the Partnership.

 

**Item3.****  Quantitative andQualitative Disclosures****AboutMarket Risk**

 

Ourpre-existing revolving credit facility was paid off and terminated in July 2003and our acquisition credit facility was transferred to liabilities subject tocompromise on June 29, 2003 upon our filing for chapter 11 bankruptcyprotection.  In July 2003 a $40 milliondebtor-in-possession financing agreement (“DIP Revolver”) was approved by thecourt.  The DIP Revolver has a variablerate of interest.  At July 30, 2003, wehad $19.8 million outstanding under the DIP Revolver at an interest rate of4.5%.  A hypothetical 10 percentincrease in interest rates to 4.95% would not have a material effect on ourcash flows.

 

**Item4.****  Controls andProcedures**

 

**Disclosure Controls and Procedures**

Our management has evaluated, under the supervision and with theparticipation of our President and Chief Executive Officer and Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by this report pursuant to Rule 13a-15(b) under theSecurities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation,our President and Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of the period covered by this report, our disclosurecontrols and procedures are effective in ensuring that information required tobe disclosed in our Exchange Act reports is (1) recorded, processed, summarizedand reported in a timely manner, and (2) accumulated and communicated to ourmanagement, including our President and Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Internal Control Over Financial Reporting**

There has been no change in our internal control over financial reportingthat occurred during our last fiscal quarter that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

**PART II****- OTHER INFORMATION**

 

**Item3.****  Defaults UponSenior Securities**

 

During the second quarterof 2003, we defaulted on our senior notes and on our acquisition creditfacility as a result of not making scheduled interest payments and being out ofcompliance with the related covenants. All amounts due under these facilities were transferred to liabilitiessubject to compromise on June 29, 2003 upon our filing for chapter 11bankruptcy protection.  We alsodefaulted on our revolving credit facility under cross-default provisions withthe senior notes and acquisition facility agreements.  The revolver was paid in full and terminated on July 3, 2003(please see Note 11). Amounts included in liabilities subject to compromise atJune 30, 2003 related to the senior notes and the acquisition credit facilitywere as follows (in thousands):

 
|                  |   |          |    | **Accrued**  |   |           |   |      |   |
|-----------------------|--------|---------------|---------|--------------|--------|----------------|--------|-----------|--------|
|                  |   | **Principal** |    | **Interest** |   | **Other Fees** |   | **Total** |   |
| Acquisition  facility |   | $             | 112,372 |         | $      | 1,848          |   | $         | — |   | $ | 114,220 |   |
| Senior notes          |   | 400,658       |    | 24,721       |   | 5,761          |   | 431,140   |   |
| Total                 |   | $             | 513,030 |         | $      | 26,569         |   | $         | 5,761  |   | $ | 545,360 |   |

 

** **

 

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**Item6.****  Exhibits andReports****on Form 8-K**

 

**(a) The exhibits filed as partof this report are listed below and this list is intended to serve as theexhibit index:**

** **
| 3.1  |   | Form of Second Amended and Restated Agreement of Limited Partnership  of Crown Pacific Partners, L.P. (filed as Exhibit A to Part I of Registrant’s  Registration Statement on Form S-1 No. 83-85066).            |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Form of Agreement of Limited Partnership of Crown Pacific Limited  Partnership (filed as Exhibit 3.2 to the Registrant’s Statement on Form S-1  No. 83-85066).                                                    |
| 3.3  |   | First Amendment to Second Amended and Restated Agreement of Limited  Partnership of Crown Pacific Limited Partnership (filed as Exhibit 3.1 to the  Registrant’s Form 10-Q for the quarter ended March 31, 1997). |
| 3.4  |   | Second Amendment to Amended and Restated Agreement of Limited  Partnership of Crown Pacific Limited Partnership (filed as Exhibit 3.4 to the  Registrant’s Form 10-K for the year ended December 31, 1997).       |
| 3.5  |   | Third Amendment to Amended and Restated Agreement of Limited  Partnership of Crown Pacific Limited Partnership (filed as Exhibit 3.5 to the  Registrant’s Form 10-K for the year ended December 31, 1999).        |
| 10.1 |   | Post-Petition  Financing Agreement between The CIT Group/Business Credit, Inc. (Lender) and  Crown Pacific Limited Partnership, a Debtor and a Debtor-in-Possession  (Borrower), dated June 29, 2003.                  |
| 31.1 |   | Certification  of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                               |
| 31.2 |   | Certification  of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                               |
| 32.1 |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                |
| 32.2 |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                |

 

**(b) Reports on Form 8-K:**

**                       **We filed the following reports on Form 8-K during the quarter ended June30, 2003:

•                  Form 8-K dated June 6, 2003 and filed June 11, 2003 pursuant to Item 9.Regulation FD Disclosure regarding the receipt of forbearance agreements fromits lenders; and

•                  Form 8-K dated June 16, 2003 and filed June 17, 2003 pursuant to Item 9.Regulation FD Disclosure regarding the extension of the forbearance agreementsand the Partnership’s continued negotiations regarding recapitalization.

•                  Form 8-K dated June 30, 2003 and filed June 30, 2003 pursuant to Item 3.Bankruptcy or Receivership regarding the filing of petitions for chapter 11bankruptcy protection.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| Date:    August 14, 2003 |   | CROWN  PACIFIC PARTNERS, L.P.                                             |
|-----------------------------------------|--------|---------------------------------------------------------------------------|
|                                    |   |                                                                      |   |
|                                    |   | By:                                                                       | Crown Pacific  Management Limited Partnership, as General Partner |
|                                    |   |                                                                      |   |
|                                    |   | By:                                                                       | /s/ Steven E.  Dietrich |
|                                    |   | Steven E.  Dietrich                                                       |
|                                    |   | Senior Vice President  and Chief Financial Officer                        |
|                                    |   | (Duly Authorized  Officer and Principal Financial and Accounting Officer) |
|                                    |   |                                                                      |   |

 

 

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