**UNITEDSTATES**

**SECURITIESAND 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 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**   |
|                                                                                                            |
| **For the quarterly period ended June 30,  2004**                                                               |
|                                                                                                            |
| **OR**                                                                                                          |
|                                                                                                            |
| **o****  TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**       |
|                                                                                                            |
| **For the transition period from        to       ** |
|                                                                                                            |
| **Commission file number 0-24976**                                                                              |

 

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**CROWN PACIFIC PARTNERS, L.P.**

(Exact name of registrant 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 telephone number, including area code:  **503-274-2300** |

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  ý     No  o

 

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

 

| **Common Units** |   | **30,527,030**                  |
|------------------|--------|---------------------------------|
| (Class)          |   | (Outstanding at August 6, 2004) |

 

 

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**CROWN PACIFICPARTNERS, L.P.**

**FORM 10-Q**

**INDEX**

 
| **PART I - FINANCIAL INFORMATION** |                                                                                                   |
|------------------------------------|--------------------------------------------------------------------------------------------------------|
|                               |                                                                                                   |   |
| Item 1.                            | Financial Statements (unaudited)                                                                       |   |
|                               |                                                                                                   |   |
|                               | Consolidated Statements of Operations –  Three and Six Month Periods Ended June 30, 2004 and 2003 |   |
|                               |                                                                                                   |   |
|                               | Consolidated Balance Sheets – June 30, 2004 and December 31, 2003                                 |   |
|                               |                                                                                                   |   |
|                               | Consolidated Statements of Cash Flows – Six  Months Ended June 30, 2004 and 2003                  |   |
|                               |                                                                                                   |   |
|                               | 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 5.                            | Other Information                                                                                      |   |
|                               |                                                                                                   |   |
| Item 6.                            | Exhibits and Reports on Form 8-K                                                                       |   |
|                               |                                                                                                   |
| Signatures                         |                                                                                                   |

 

1

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# **PART I - FINANCIALINFORMATION**

# ** **

**Item 1. Financial Statements**

 

**Crown Pacific Partners, L.P.**

**(Debtor-in-Possession)**

**ConsolidatedStatements of Operations**

**(In thousands, except unit and per unit data)**

**(Unaudited)**

 

 
|                                                                                    |   | **For the  Three Months Ended June 30,** |    |
|-----------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                    |   | **2004**                                      |    | **2003** |   |
|                                                                                    |   |                                          |    |   |   |
| Revenues                                                                                |   | $                                             | 106,836 |   | $ | 60,179 |   |
|                                                                                    |   |                                          |    |   |   |
| Operating costs:                                                                        |   |                                          |    |   |   |
| Cost of products sold                                                                   |   | 87,009                                        |    | 55,313 |   |
| Loss on disposal of assets                                                              |   | —                                        |    | 1,269 |   |
| Selling, general and administrative  expenses                                           |   | 5,309                                         |    | 6,220 |   |
|                                                                                    |   |                                          |    |   |   |
| Operating income (loss)                                                                 |   | 14,518                                        |    | (2,623 | ) |
|                                                                                    |   |                                          |    |   |   |
| Interest expense (excluding contractual  interest expense of $12,875 and $0)            |   | 180                                           |    | 12,068 |   |
| Amortization of debt issuance costs                                                     |   | 752                                           |    | 640 |   |
| Other income, net                                                                       |   | (289                                          | )       | (25 | ) |
|                                                                                    |   |                                          |    |   |   |
| Income (loss) from operations before  reorganization items                              |   | 13,875                                        |    | (15,306 | ) |
|                                                                                    |   |                                          |    |   |   |
| Reorganization items:                                                                   |   |                                          |    |   |   |
| Professional fees                                                                       |   | (1,382                                        | )       | (4,860 | ) |
| Impairment of assets                                                                    |   | (216                                          | )       | — |   |
| Other                                                                                   |   | (286                                          | )       | (218 | ) |
|                                                                                    |   | (1,884                                        | )       | (5,078 | ) |
|                                                                                    |   |                                          |    |   |   |
| Income (loss) before discontinued operations                                            |   | 11,991                                        |    | (20,384 | ) |
|                                                                                    |   |                                          |    |   |   |
| Loss on discontinued operations (including  gain (loss) on disposal of ($1,198) and $4) |   | (1,081                                        | )       | (519 | ) |
|                                                                                    |   |                                          |    |   |   |
| Net income (loss)                                                                       |   | $                                             | 10,910  |   | $ | (20,903 | ) |
|                                                                                    |   |                                          |    |   |   |
| Basic and diluted loss per limited partner  unit before discontinued operations         |   | $                                             | —  |   | $ | (0.66 | ) |
|                                                                                    |   |                                          |    |   |   |
| Basic and diluted loss per limited partner  unit from discontinued operations           |   | —                                        |    | (0.02 | ) |
|                                                                                    |   |                                          |    |   |   |
| Basic and diluted net loss per limited  partner unit                                    |   | $                                             | —  |   | $ | (0.68 | ) |
|                                                                                    |   |                                          |    |   |   |
| Weighted average units outstanding                                                      |   | 30,527,030                                    |    | 30,527,030 |   |

 

See accompanying Notes to ConsolidatedFinancial 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,** |    |
|-----------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                                                    |   | **2004**                                    |    | **2003** |   |
|                                                                                    |   |                                        |    |   |   |
| Revenues                                                                                |   | $                                           | 189,383 |   | $ | 126,291 |   |
|                                                                                    |   |                                        |    |   |   |
| Operating costs:                                                                        |   |                                        |    |   |   |
| Cost of products sold                                                                   |   | 156,519                                     |    | 115,819 |   |
| (Gain) loss on disposal of assets                                                       |   | (18                                         | )       | 794 |   |
| Selling, general and administrative  expenses                                           |   | 10,713                                      |    | 11,567 |   |
|                                                                                    |   |                                        |    |   |   |
| Operating income (loss)                                                                 |   | 22,169                                      |    | (1,889 | ) |
|                                                                                    |   |                                        |    |   |   |
| Interest expense (excluding contractual  interest expense of $25,611 and $0)            |   | 448                                         |    | 24,020 |   |
| Amortization of debt issuance costs                                                     |   | 1,220                                       |    | 1,063 |   |
| Other income, net                                                                       |   | (343                                        | )       | (154 | ) |
|                                                                                    |   |                                        |    |   |   |
| Income (loss) from operations before  reorganization items                              |   | 20,844                                      |    | (26,818 | ) |
|                                                                                    |   |                                        |    |   |   |
| Reorganization items:                                                                   |   |                                        |    |   |   |
| Professional fees                                                                       |   | (3,397                                      | )       | (4,860 | ) |
| Impairment of assets                                                                    |   | (216                                        | )       | — |   |
| Other                                                                                   |   | (394                                        | )       | (218 | ) |
|                                                                                    |   | (4,007                                      | )       | (5,078 | ) |
|                                                                                    |   |                                        |    |   |   |
| Income (loss) before discontinued  operations                                           |   | 16,837                                      |    | (31,896 | ) |
|                                                                                    |   |                                        |    |   |   |
| Loss on discontinued operations (including  gain (loss) on disposal of ($1,198) and $4) |   | (602                                        | )       | (5,522 | ) |
|                                                                                    |   |                                        |    |   |   |
| Net income (loss)                                                                       |   | $                                           | 16,235  |   | $ | (37,418 | ) |
|                                                                                    |   |                                        |    |   |   |
| Basic and diluted loss per limited partner  unit before discontinued operations         |   | $                                           | —  |   | $ | (1.03 | ) |
|                                                                                    |   |                                        |    |   |   |
| Basic and diluted loss per limited partner  unit from discontinued operations           |   | —                                      |    | (0.18 | ) |
|                                                                                    |   |                                        |    |   |   |
| Basic and diluted net loss per limited  partner unit                                    |   | $                                           | —  |   | $ | (1.21 | ) |
|                                                                                    |   |                                        |    |   |   |
| Weighted average units outstanding                                                      |   | 30,527,030                                  |    | 30,527,030 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

3

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**Crown Pacific Partners, L.P.**

**(Debtor-in-Possession)**

**ConsolidatedBalance Sheets**

**(In thousands, except unit data)**

**(Unaudited)**

 
|                                                                                              |   | **June 30,** |    | **December 31,** |   |
|---------------------------------------------------------------------------------------------------|--------|-------------------|---------|-----------------------|--------|
|                                                                                              |   | **2004**          |    | **2003**              |   |
| **Assets**                                                                                        |   |              |    |                  |   |
| Current assets:                                                                                   |   |              |    |                  |   |
| Cash and cash equivalents                                                                         |   | $                 | 10,446  |                  | $      | 11,028 |   |
| Accounts receivable, net of allowance of  $992 and $862                                           |   | 50,704            |    | 43,993                |   |
| Notes receivable                                                                                  |   | 498               |    | 558                   |   |
| Inventories                                                                                       |   | 31,339            |    | 27,943                |   |
| Deposits on timber cutting contracts                                                              |   | 2,610             |    | 516                   |   |
| Prepaid and other current assets                                                                  |   | 11,430            |    | 12,305                |   |
|                                                                                              |   |              |    |                  |   |
| Total current assets                                                                              |   | 107,027           |    | 96,343                |   |
| Property, plant and equipment, net of  accumulated depreciation of $44,880 and $44,390            |   | 38,470            |    | 41,476                |   |
| Timber, timberlands and roads, net                                                                |   | 299,836           |    | 302,737               |   |
| Other assets                                                                                      |   | 4,710             |    | 5,930                 |   |
|                                                                                              |   |              |    |                  |   |
| Total assets                                                                                      |   | $                 | 450,043 |                  | $      | 446,486 |   |
|                                                                                              |   |              |    |                  |   |
| **Liabilities and Partners’ Deficit**                                                        |   |              |    |                  |   |
|                                                                                              |   |              |    |                  |   |
| Liabilities not subject to compromise:                                                            |   |              |    |                  |   |
| Current liabilities:                                                                              |   |              |    |                  |   |
| Revolving credit facility                                                                         |   | $                 | 14,127  |                  | $      | 23,370 |   |
| Accounts payable                                                                                  |   | 5,950             |    | 4,291                 |   |
| Accrued expenses                                                                                  |   | 7,422             |    | 9,194                 |   |
| Current portion of long-term debt                                                                 |   | 96                |    | 123                   |   |
| Total current liabilities                                                                         |   | 27,595            |    | 36,978                |   |
| Long-term debt                                                                                    |   | 21                |    | 86                    |   |
| Other non-current liabilities                                                                     |   | —            |    | 270                   |   |
|                                                                                              |   | 27,616            |    | 37,334                |   |
|                                                                                              |   |              |    |                  |   |
| Liabilities subject to compromise                                                                 |   | 544,243           |    | 547,203               |   |
|                                                                                              |   |              |    |                  |   |
| Total liabilities                                                                                 |   | 571,859           |    | 584,537               |   |
|                                                                                              |   |              |    |                  |   |
| Partners’ deficit:                                                                           |   |              |    |                  |   |
| General partners                                                                                  |   | (121,816          | )       | (138,051              | )      |
| Limited partners (30,527,030 units  outstanding at June 30, 2004 and December 31, 2003) |   | —            |    | —                |   |
| Total partners’ deficit                                                                      |   | (121,816          | )       | (138,051              | )      |
|                                                                                              |   |              |    |                  |   |
| Total liabilities and partners’ deficit                                                      |   | $                 | 450,043 |                  | $      | 446,486 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

4

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**CrownPacific Partners, L.P.**

**(Debtor-in-Possession)**

**ConsolidatedStatements of Cash Flows**

**(Inthousands)**

**(Unaudited)**

 
|                                                                                                |   | **For the  Six Months Ended June 30,** |   |
|-----------------------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                                                |   | **2004**                                    |   | **2003** |   |
| Cash flows from operating activities:                                                               |   |                                        |   |   |   |
| Net income (loss)                                                                                   |   | $                                           | 16,235 |   | $ | (37,418 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                                        |   |   |   |
| Depletion, depreciation and amortization                                                            |   | 9,851                                       |   | 11,283 |   |
| Deferred interest                                                                                   |   | —                                      |   | 2,402 |   |
| Non-cash reorganization items                                                                       |   | 216                                         |   | 218 |   |
| Loss on purchase commitments                                                                        |   | —                                      |   | 413 |   |
| Impairment of goodwill                                                                              |   | —                                      |   | 5,502 |   |
| Loss on disposal of assets                                                                          |   | 1,179                                       |   | 780 |   |
| Net change in current assets and current  liabilities:                                              |   |                                        |   |   |   |
| Accounts and notes receivable                                                                       |   | (16,304                                     | )      | 4,694 |   |
| Inventories                                                                                         |   | (7,329                                      | )      | 5,148 |   |
| Deposits on timber cutting contracts                                                                |   | (2,094                                      | )      | 105 |   |
| Prepaid and other current assets                                                                    |   | 150                                         |   | (2,852 | ) |
| Accounts payable and accrued expenses                                                               |   | 423                                         |   | 9,485 |   |
| Net cash provided by (used in) operating  activities                                                |   | 2,327                                       |   | (240 | ) |
|                                                                                                |   |                                        |   |   |   |
| Cash flows from investing activities:                                                               |   |                                        |   |   |   |
| Additions to timberlands                                                                            |   | (2,605                                      | )      | (2,990 | ) |
| Additions to timber cutting rights                                                                  |   | (10                                         | )      | (629 | ) |
| Additions to equipment                                                                              |   | (300                                        | )      | (1,111 | ) |
| Proceeds from sale of assets                                                                        |   | 12,320                                      |   | 7,143 |   |
| Principal payments received on notes                                                                |   | —                                      |   | 67 |   |
| Net cash provided by investing activities                                                           |   | 9,405                                       |   | 2,480 |   |
|                                                                                                |   |                                        |   |   |   |
| Cash flows from financing activities:                                                               |   |                                        |   |   |   |
| Net decrease in short-term borrowings                                                               |   | (9,221                                      | )      | (6,876 | ) |
| Repayments of long-term debt                                                                        |   | (3,093                                      | )      | (44 | ) |
| Net cash used in financing activities                                                               |   | (12,314                                     | )      | (6,920 | ) |
|                                                                                                |   |                                        |   |   |   |
| Net decrease in cash and cash equivalents                                                           |   | (582                                        | )      | (4,680 | ) |
| Cash and cash equivalents at beginning of  period                                                   |   | 11,028                                      |   | 12,993 |   |
|                                                                                                |   |                                        |   |   |   |
| Cash and cash equivalents at end of period                                                          |   | $                                           | 10,446 |   | $ | 8,313 |   |
|                                                                                                |   |                                        |   |   |   |
| **Supplemental Cash  Flow Information**                                                             |   |                                        |   |   |   |
| Cash paid for reorganization items                                                                  |   | $                                           | 3,520  |   | $ | — |   |
| Cash paid for interest                                                                              |   | $                                           | 448    |   | $ | 8,083 |   |

 

See accompanying Notes to ConsolidatedFinancial Statements.

 

5

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**CROWN PACIFICPARTNERS, L.P.**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1: Organization and Basis ofPresentation**

 

Crown Pacific Partners, L.P.(the “Partnership”), a Delaware limited partnership, through its 99% ownedsubsidiary, Crown Pacific Limited Partnership (the “Operating Partnership”),was formed in 1994 to acquire, own and operate timberlands and wood productmanufacturing facilities located in the Northwest United States. ThePartnership’s business consists primarily of growing and harvesting timber forsale as logs in domestic and export markets and the manufacturing, selling anddistribution of lumber and other wood products.

 

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.  Therefore, on June 29, 2003,the Partnership and all but one of its subsidiaries, Klamath Northern Railway,Co., each filed voluntary petitions for relief under Chapter 11 of title 11 ofthe United States Code (the “Bankruptcy Code”) in the United States BankruptcyCourt for the District of Arizona in Phoenix, Arizona (the “Bankruptcy Court”),case numbers 03-11258-PHX-RJH through 03-11263-PHX-RJH.  These cases are jointly administered undercase number 03-11258-PHX-RJH.  ThePartnership and its subsidiaries currently manage their properties and operatetheir businesses as “debtors-in-possession” under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of theBankruptcy Code.  See Note 2 also.

 

ThePartnership has experienced net losses in thirteen of the last fifteen fiscalquarters, and would have reported a net loss in each of the first and secondquarters of 2004 if $12.7 million and $12.9 million, respectively, ofcontractual interest expense had been recognized. The accompanying consolidatedfinancial statements have been prepared assuming that the Partnership willcontinue as a going concern, and in accordance with Statement of Position 90-7(“SOP 90-7”), “Financial Reporting by Entities in Reorganization Under theBankruptcy Code.” As a result of the Chapter 11 filing, there is no assurancethat the carrying amounts of assets will be realized or that the liabilitieswill be settled for the amounts recorded. Until a plan of reorganization is confirmed by the Bankruptcy Court, thePartnership is not able to determine the ultimate disposition of its assets andliabilities.  All significantintercompany transactions and balances have been eliminated inconsolidation.  Certain prior periodreclassifications have been made to conform to the current period presentation.

 

**Note 2: Chapter 11 Bankruptcy Reorganization**

 

Duringthe first two quarters of 2004, the following occurred under the jurisdictionof the Bankruptcy Court:

 

•                  Negotiations ona consensual plan of re-organization with representatives of the senior noteholders and acquisition facility banks continued.

•                  A marketingprocess was conducted regarding the Partnership’s Manufacturing Segment andAlliance Lumber Segment assets.

•                  In April 2004,the Partnership closed the sale of its Alliance Lumber Segment operations inLas Vegas, Nevada.  See Note 10 also.

•                  In June 2004,the Partnership filed motions with the Bankruptcy Court to dispose of thePartnership’s remaining Alliance Lumber Segment operations in Reno, Nevada andin Phoenix, Arizona.  See Note 11 also.

 

See Note 11 also for events inthe bankruptcy process which occurred subsequent to June 30, 2004.

 

The creditors onthe acquisition facility and senior notes assert that their debt iscollateralized by the Partnership’s timberlands and certain real property andequipment associated with its Manufacturing Segment. The remaining liabilitiessubject to compromise are generally unsecured. The Chapter 11 filing constitutes a

 

6

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default or event of default under a number of thePartnership’s debt, lease and other contractual relationships.  While the Partnership is under bankruptcy protection, anyscheduled interest or principal payments on debt are deferred and creditors aregenerally prohibited from pursuing collection of their pre-petition claims bythe automatic stay provisions of the Bankruptcy Code.  In accordance with SOP 90-7, the Partnership discontinuedaccruing interest on its term debt effective June 30, 2003, because it is notprobable it will be paid during the bankruptcy proceedings or be an allowedclaim.  An additional $12.9 million and$25.6 million, respectively, of interest expense would have been recognized inthe three and six month periods ended June 30, 2004, if not for the Chapter 11bankruptcy petition.

 

On November 10, 2003, a hearingwas held in the Bankruptcy Court on a motion from the Partnership, which wasopposed by the creditors, to extend the period of exclusivity in which only thePartnership may present a plan of reorganization to the Bankruptcy Court.  At the hearing, the Bankruptcy Court deniedthe Partnership’s motion, thereby ending the period within which thePartnership had the exclusive right to propose a reorganization plan.  The Partnership is negotiating with themajor creditor constituents in its Chapter 11 proceedings, and has begun aprocess by which the Partnership’s assets and operations will likely be sold orotherwise divested in order to satisfy creditor claims. Management anticipatesthat the Partnership will file a consensual Chapter 11 plan, jointly with thesecreditor constituents, that will likely further this divestiture process. Itappears highly unlikely that the claims of the holders of the acquisitionfacility bank debt and senior notes will be satisfied in full. Accordingly, theChapter 11 plan that is currently under negotiation contemplates theextinguishment of the Partnership units with no recovery to holders of units,and any plan that is ultimately confirmed by the Bankruptcy Court will likelyextinguish the equity units. Further, it is likely that any plan that isultimately confirmed will, in conjunction with any pre-confirmation assetdispositions, result in the disposition of all of the Partnership’s operationsand associated assets.

 

**Note 3: Debtor-in-Possession Credit Facility**

 

On July 17, 2003 the Bankruptcy Court entered a final financing order approving a $40 million debtor-in-possession credit facility (“DIP Revolver”) with CIT Group/Business Credit (“CIT”).  The $40 million limit is subject to a borrowing base and is collateralized by accounts receivable, inventory and substantially all personal property. The DIP Revolver bears interest at either (a) the Chase Bank Prime Rate plus 0.5% or (b) LIBOR plus 3%, at the option of the Partnership.  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 of reorganization and contains certain covenants and restrictions.  As of June 30, 2004, there was $14.1 million outstanding at an interest rate of 4.5% and approximately $25.9 million remained available on the DIP Revolver.  However, subsequent to June 30, 2004, borrowings and availability under the DIP Revolver have been reduced by the disposition of assets and operations discussed in Note 11.  As of June 30, 2004, the Partnership was in compliance with all of the covenants of the DIP Revolver.

 

**Note 4: Liabilities Subject to Compromise**

 

Pursuant to thebankruptcy proceedings, the Partnership has classified certain liabilities whichexisted prior to the June 29, 2003 bankruptcy petition filing as liabilitiessubject to compromise in accordance with SOP 90-7.  Disposition and settlement of such liabilities is under thejurisdiction of the Bankruptcy Court. Certain accounts payable and accrued expenses classified as liabilitiessubject to compromise have been satisfied through the disposition of thePartnership’s Alliance Lumber operations in Las Vegas, Nevada in April 2004,and additional portions of these liabilities have been further satisfiedthrough the dispositions recorded in July and August of 2004 (see Note 11).

 

7

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The followingtable summarizes the pre-petition liabilities that are included as liabilitiessubject to compromise on the accompanying consolidated balance sheets (inthousands):

 
|                            |   | **June 30,  2004** |    | **December  31,  2003** |   |
|---------------------------------|--------|--------------------|---------|-------------------------|--------|
| Acquisition facility principal  |   | $                  | 112,372 |                    | $      | 112,372 |   |
| Senior notes principal          |   | 400,658            |    | 400,658                 |   |
| Adequate protection payments(1) |   | (6,000             | )       | (3,000                  | )      |
| Accrued interest                |   | 21,039             |    | 21,039                  |   |
| Deferred enhanced interest      |   | 4,927              |    | 4,927                   |   |
| Make whole fees and interest    |   | 6,360              |    | 6,360                   |   |
| Accounts payable                |   | 1,163              |    | 1,419                   |   |
| Other accrued expenses          |   | 3,724              |    | 3,428                   |   |
| Total                           |   | $                  | 544,243 |                    | $      | 547,203 |   |

 

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(1)          In October 2003, the Partnershipagreed to pay $0.5 million per month, retroactive to July 2003, to theacquisition facility banks and senior note holders as adequate protectionpayments related to their asserted collateral. Such payments are to be applied to reduce, on a dollar-for-dollar basis,the aggregate allowed secured claims of the senior note holders and theacquisition facility banks.  The methodfor allocating the adequate protection payments will be determined by theBankruptcy Court and, therefore, the Partnership is not able to apply thesepayments to specific debt components at this time.

 

**Note 5: Inventories**

 

All inventories,consisting primarily of logs, lumber and building materials, are stated at thelower of average cost or market and consisted of the following (inthousands):

 
|                    |   | **June 30,  2004** |   | **December  31,  2003** |   |
|-------------------------|--------|--------------------|--------|-------------------------|--------|
| Lumber                  |   | $                  | 4,106  |                    | $      | 3,554 |   |
| Logs                    |   | 2,390              |   | 1,887                   |   |
| Supplies                |   | 3,383              |   | 3,326                   |   |
| Manufacturing inventory |   | 9,879              |   | 8,767                   |   |
| Distribution products   |   | 21,460             |   | 19,176                  |   |
| Total                   |   | $                  | 31,339 |                    | $      | 27,943 |   |

 

**Note6:  Timber, Timberlands and Roads, Net**

 

The Partnershipupdates its timber inventory system annually for changes in estimated volumedue to timber verification cruises, timber growth factors and actual harvestlevels by species.  The changes toestimated timber volume, along with changes in book value from capitalizedexpenditures, impairment adjustments and any timber purchase or saletransactions result in a change in estimated depletion rates. The revisedestimate made at the beginning of 2004 decreased depletion expense for thethree and six month periods ended June 30, 2004 by $0.1 million and $0.3million, respectively, compared to the depletion rates that were in effect inthe comparable periods of 2003, applied to the actual volume harvested in thethree and six month periods ended June 30, 2004.

 

**Note 7: Allocation of Partnership Losses**

 

The Partnership Agreement provides that profit andlosses are generally allocated 1.01% to the General Partner interest and 98.99%to the Limited Partner interest.  Inaddition, the Partnership Agreement specifies that net losses are not allocatedto the Limited Partner Interest to the extent doing so would result in (orincrease) a deficit balance in their capital accounts. At that point, netlosses are allocated 100% to the General Partner interest.  In the third quarter of 2003, the LimitedPartners’ capital accounts were reduced to zero, and subsequent income andlosses have been allocated 100% to the General Partners.  Accordingly, the General Partner interestwas allocated the entire net income that was reported in the three and sixmonth periods ended

 

8

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June 30, 2004. In accordance with the Partnership Agreement, 100% of income and losseswill continue to be allocated to the General Partners unless and until thecumulative additional losses they have been allocated are fully recovered.

 

**Note 8: Unit-Based Compensation**

 

The Partnership accounts forunit options using the intrinsic value method as prescribed by AccountingPrinciples Board (APB) Opinion No. 25, “Accounting for Stock Issued toEmployees.”   Pursuant to SFAS No. 148“Accounting for Stock-Based Compensation - Transition and Disclosure,” whichthe Partnership adopted in December 2002, the Partnership has computed, for proforma disclosure purposes, the impact on net loss and net loss per unit as ifit had accounted for its unit-based compensation plans in accordance with thefair value method prescribed by SFAS No. 123 “Accounting for Stock-BasedCompensation” as follows (in thousands, except per unit amounts):

 
|                                                                                                                  |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                                                                                  |   | **2004**                          |   | **2003**                        |   | **2004** |   | **2003** |   |
| Net income (loss), as reported                                                                                        |   | $                                 | 10,910 |                            | $      | (20,903 | ) | $ | 16,235 |   | $ | (37,418 | ) |
| Deduct - total unit-based employee  compensation expense determined under the fair value based method for all  awards |   | (1                                | )      | (8                              | )      | (3 | ) | (16 | ) |
| Net income (loss), pro forma                                                                                          |   | $                                 | 10,909 |                            | $      | (20,911 | ) | $ | 16,232 |   | $ | (37,434 | ) |
| Basic and diluted net income (loss) per  unit:                                                                        |   |                              |   |                            |   |   |   |   |   |
| As reported                                                                                                           |   | $                                 | — |                            | $      | (0.68 | ) | $ | — |   | $ | (1.21 | ) |
| Pro forma                                                                                                             |   | $                                 | — |                            | $      | (0.68 | ) | $ | — |   | $ | (1.21 | ) |

 

No unit options have beengranted since 2001.

 

**Note 9: Segment Reporting**

 

The Partnership classifies its business into threesegments: 1) Timberlands, consisting of the operation of tree farms and theharvest and sale of logs to the Partnership’s manufacturing facilities and tothird parties, and the sale of timber and timberlands to third parties; 2)Manufacturing, consisting of the manufacture of logs into dimension lumber andthe sale of such lumber as well as residual chips and other by-products; and 3)Alliance Lumber, consisting of the distribution and supply of buildingmaterials through the Partnership’s professional contractor service yards.  The Corporate and Other category includesgeneral corporate overhead and expenses not allocated to the segments,miscellaneous operations not significant enough to be classified as a separatesegment and other items not specifically allocated to the operating segments.

 

The Partnership does not show assets by segment, ashistoric costs are not used by management to allocate resources or assessperformance.

 

9

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The following summarizesthe Partnership’s segment information (in thousands): 

 
|                 |   | **Three Months Ended June 30,** |    | **Six Months Ended June 30,** |   |
|----------------------|--------|---------------------------------|---------|-------------------------------|--------|
| **Revenues**         |   | **2004**                        |    | **2003**                      |   | **2004** |   | **2003** |   |
| Timberlands:         |   |                            |    |                          |   |   |   |   |   |
| Trade                |   | $                               | 6,161   |                          | $      | 4,252 |   | $ | 11,690 |   | $ | 11,169 |   |
| Intersegment         |   | 3,254                           |    | 6,257                         |   | 12,144 |   | 15,801 |   |
|                 |   | 9,415                           |    | 10,509                        |   | 23,834 |   | 26,970 |   |
| Manufacturing:       |   |                            |    |                          |   |   |   |   |   |
| Trade                |   | 32,790                          |    | 16,611                        |   | 58,911 |   | 38,587 |   |
| Intersegment         |   | 2,036                           |    | 899                           |   | 2,888 |   | 2,072 |   |
|                 |   | 34,826                          |    | 17,510                        |   | 61,799 |   | 40,659 |   |
| Alliance Lumber:     |   |                            |    |                          |   |   |   |   |   |
| Trade                |   | 65,185                          |    | 37,481                        |   | 113,805 |   | 72,261 |   |
| Intersegment         |   | —                          |    | —                        |   | — |   | — |   |
|                 |   | 65,185                          |    | 37,481                        |   | 113,805 |   | 72,261 |   |
| Corporate and Other: |   |                            |    |                          |   |   |   |   |   |
| Trade                |   | 2,700                           |    | 1,835                         |   | 4,977 |   | 4,274 |   |
| Intersegment         |   | —                          |    | 16                            |   | — |   | 76 |   |
|                 |   | 2,700                           |    | 1,851                         |   | 4,977 |   | 4,350 |   |
| Total:               |   |                            |    |                          |   |   |   |   |   |
| Total revenues       |   | 112,126                         |    | 67,351                        |   | 204,415 |   | 144,240 |   |
| Less intersegment    |   | (5,290                          | )       | (7,172                        | )      | (15,032 | ) | (17,949 | ) |
| Revenues             |   | $                               | 106,836 |                          | $      | 60,179 |   | $ | 189,383 |   | $ | 126,291 |   |

 
|                                          |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|-----------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
| **Operating  income (loss)**                  |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
| Timberlands                                   |   | $                               | 609    |                          | $      | 226 |   | $ | 1,214 |   | $ | 1,005 |   |
| Manufacturing                                 |   | 11,277                          |   | (605                          | )      | 18,239 |   | (1,182 | ) |
| Alliance Lumber                               |   | 4,064                           |   | 2,086                         |   | 6,431 |   | 4,455 |   |
| Corporate and Other                           |   | (1,432                          | )      | (4,330                        | )      | (3,715 | ) | (6,167 | ) |
| Operating income (loss)                       |   | 14,518                          |   | (2,623                        | )      | 22,169 |   | (1,889 | ) |
| Interest expense                              |   | (180                            | )      | (12,068                       | )      | (448 | ) | (24,020 | ) |
| Reorganization expenses                       |   | (1,884                          | )      | (5,078                        | )      | (4,007 | ) | (5,078 | ) |
| Other                                         |   | (463                            | )      | (615                          | )      | (877 | ) | (909 | ) |
| Net income (loss) from  continuing operations |   | $                               | 11,991 |                          | $      | (20,384 | ) | $ | 16,837 |   | $ | (31,896 | ) |

 

**Note 10: Discontinued Operations**

 

***Trading and Distribution Segment***

 

In April and May 2003, in two separate transactions, the Partnershipsold the inventory and fixed assets related to its Trading and DistributionSegment and discontinued the segment’s operations.  The purchasers of these assets assumed the operating leases,accounts payable and accrued expenses related to these businesses.  The Partnership received cash proceeds of$4.5 million from these asset sales, all of which was immediately applied tooutstanding principal on the revolving credit facility. The results ofoperations of the Trading and Distribution Segment are reflected asdiscontinued operations on the accompanying consolidated statements ofoperations for all 2003 periods presented in accordance with Statement ofFinancial Accounting Standards No. 144 (“SFAS No. 144”) “Accounting for theImpairment or Disposal of Long-Lived Assets.”

 

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 incircumstances during the first quarter of 2003, utilizing a fair value analysisof the business in the current market environment.  Based on the results of this evaluation, the Partnershipdetermined that its goodwill was impaired and recorded a non-cashimpairment charge of $5.5 million in the three months ended March 31,2003.  This $5.5 million charge isincluded in discontinued operations.

 

10

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Summarizedfinancial information for these operations is as follows (in thousands):

 
|              |   | **Three Months  Ended****June 30, 2003** |   | **Six Months  Ended****June 30, 2003** |   |
|-------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
| External revenues |   | $                                        | 6,333  |                                   | $      | 34,140 |   |
| Operating loss    |   | (482                                     | )      | (5,826                                 | )      |
|                   |        |                                          |        |                                        |        |  |  |

 

***Las Vegas Operations of Alliance LumberSegment***

 

In April 2004, the Partnership closed the sale of its Alliance LumberSegment operations in Las Vegas, Nevada, resulting in a recognized loss of $1.2million in the second quarter of 2004. Results of operations for the Las Vegas operations are reported as discontinuedoperations for all periods presented in accordance with SFAS No. 144.  Summarized financial information for theseoperations is as follows (in thousands):

 
|                    |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|-------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                    |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
| External revenues       |   | $                               | — |                          | $      | 13,231 |   | $ | 18,756 |   | $ | 26,271 |   |
| Operating income (loss) |   | 117                             |   | (41                           | )      | 596 |   | 300 |   |
| Gain (loss) on disposal |   | (1,198                          | )      | 4                             |   | (1,198 | ) | 4 |   |
|                         |        |                                 |        |                               |        |  |  |  |  |  |  |  |  |

 

Sale of the netassets of the Las Vegas operations produced cash proceeds of $12.3 million, allof which was immediately paid to CIT to reduce outstanding borrowings under theDIP Revolver.

 

**Note 11: Subsequent Events**

 

***Reno, Nevada Operations of Alliance Lumber Segment***

 

On July 13, 2004, theBankruptcy Court approved a motion filed by the Partnership to sell its Alliance LumberSegment operations in Reno, Nevada. This transaction closed in July 2004 and generated $14.2 million ofcash, $1.4 million of which was immediately paid to CIT to eliminateoutstanding borrowings under the DIP Revolver. No gain or loss was recognizedon the transaction.  This dispositionreduced the borrowing base and availability on the Partnership’s DIP Revolver(see below).  For income tax purposes,sale of these operations is expected to trigger a deferred taxable gain fromthe original acquisition transaction, resulting in an income tax liability ofapproximately $0.5 million, which will be recognized in the third quarter of2004.  This tax liability is a liabilityof the wholly-owned C-Corporation subsidiary which made the originalacquisition, and would not be allocated to unit holders.

 

***Phoenix, Arizona Operations of Alliance Lumber Segment***

 

On July 13, 2004, theBankruptcy Court approved a motion filed by the Partnership to sell its Alliance LumberSegment operations in Phoenix, Arizona. This transaction closed in August 2004 and generated $39.4 million ofcash. A gain of approximately $1.0 million was recognized on thetransaction.  This disposition, alongwith the earlier Las Vegas and Reno, Nevada dispositions, reduced the DIPRevolver limit from $40.0 million to $20.0 million and also reduced the relatedborrowing base and availability (see below). For income tax purposes, sale ofthese operations is expected to trigger a deferred taxable gain from theoriginal acquisition transaction, resulting in an income tax liability ofapproximately $1.3 million, which will be recognized in the third quarter of2004.  This tax liability is a liabilityof the wholly-owned C-Corporation subsidiary which made the originalacquisition, and would not be allocated to unit holders.

 

***DIPRevolver Availability***

 

The DIP Revolver agreementprovides that the total borrowing limit is reduced from $40.0 million to $20.0million following the disposition of the Alliance Lumber Segment, which wascompleted in August 2004. In addition,borrowings under the DIP Revolver are limited to a borrowing base.  The borrowing base is a function of thelevels of related collateral, and has been reduced by the dispositionsdescribed above.  As of August 3,2004, there was zero outstanding and approximately $13.1 million available onthe DIP Revolver.

 

11

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***Manufacturing Segment***

 

In July 2004, the Partnershipsigned an Asset Purchase Agreement to sell its Manufacturing Segmentoperations, subject to higher and better bids and objections under thejurisdiction of the Bankruptcy Court. On July 13, 2004, the Partnership filed a motion with the BankruptcyCourt for the disposition of these assets. A hearing was held on July 26,2004, and a motion for the bidding procedures regarding these operations wasapproved by the Bankruptcy Court.  Anycompeting bids from interested parties are due at the Bankruptcy Court byAugust 10, 2004.  A hearing is scheduledfor August 18, 2004 with the Bankruptcy Court to conduct an auction, ifnecessary, after which a motion is expected to be filed for the sale of theseoperations.  A hearing has beenscheduled with the Bankruptcy Court to hear the sale motion on August 19, 2004.  If approved by the Bankruptcy Court, thedisposition is expected to close in August or September 2004, resulting inestimated cash proceeds of approximately $57.2 million.  This disposition will further reduce theborrowing base and availability on the Partnership’s DIP Revolver.

 

**Item 2.****                       Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

**Chapter 11 Bankruptcy Reorganization**

 

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 United StatesCode (the “Bankruptcy Code”) in the United States Bankruptcy Court for theDistrict of Arizona in Phoenix, Arizona (the “Bankruptcy Court”) for thePartnership and all but one of our subsidiaries, Klamath Northern Railway, Co.  We currently manage our properties andoperate our businesses as “debtors-in-possession” under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of theBankruptcy Code.

 

We haveexperienced net losses in thirteen of the last fifteen fiscal quarters, andwould have reported a net loss in the first and second quarters of 2004 if$12.7 million and $12.9 million, respectively, of contractual interest expensehad been recognized.  The accompanyingconsolidated financial statements have been prepared assuming that we willcontinue as a going concern, and in accordance with SOP 90-7, “FinancialReporting by Entities in Reorganization Under the Bankruptcy Code.”  As a result of our Chapter 11 filing, thereis no assurance that the carrying amounts of our assets will be realized orthat the liabilities will be settled for the amounts recorded. Until a plan ofreorganization is confirmed by the Bankruptcy Court, we are not able todetermine the ultimate disposition of our assets and liabilities.

 

Duringthe first two quarters of 2004, the following occurred under the jurisdictionof the Bankruptcy Court:

 

•                  Negotiations ona consensual plan of re-organization with representatives of the senior noteholders and acquisition facility banks continued.

•                  A marketingprocess was conducted regarding the Partnership’s Manufacturing Segment andAlliance Lumber Segment assets.

•                  In April 2004,the Partnership closed the sale of its Alliance Lumber Segment operations inLas Vegas, Nevada.

•                  In June, 2004,the Partnership filed motions with the Bankruptcy Court to dispose of thePartnership’s remaining Alliance Lumber Segment operations in Reno, Nevada andin Phoenix, Arizona.

 

See further discussion belowfor events in the bankruptcy process which occurred subsequent to June 30,2004.

 

The creditors onthe acquisition facility and senior notes assert that their debt iscollateralized by our timberlands and certain real property and equipmentassociated with our Manufacturing Segment. The remaining liabilities subject tocompromise are generally unsecured. The Chapter 11 filing constitutes a defaultor event of default under a number of our debt, lease and other contractualrelationships. While we are under bankruptcy protection, any scheduled interestor principal payments are deferred and creditors are generally prohibited frompursuing collection of their pre-petition claims by the automatic stayprovisions of the Bankruptcy Code. In

 

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accordance withSOP 90-7, we stopped accruing interest on our term debt effective June 30,2003, because it is not probable it will be paid during the bankruptcyproceedings or be an allowed claim. An additional $12.9 million and $25.6million, respectively, of interest expense would have been recognized in thethree and six month periods ended June 30, 2004, if not for the Chapter 11bankruptcy petition.

 

On November 10, 2003, a hearing was held inthe Bankruptcy Court on a motion from us, which was opposed by the creditors,to extend the period of exclusivity in which only we could present a plan ofreorganization to the Bankruptcy Court. At the hearing, the Bankruptcy Court denied our motion, thereby endingthe period within which we had the exclusive right to propose a reorganizationplan.  We are negotiating with themajor creditor constituents in our Chapter 11 proceedings, and have begun aprocess by which our assets and operations will likely be sold or otherwisedivested in order to satisfy creditor claims. We anticipate that we will file aconsensual Chapter 11 plan, jointly with these creditor constituents, that willlikely further this divestiture process. It appears highly unlikely that theclaims of the holders of our acquisition facility bank debt and senior noteswill be satisfied in full. Accordingly, the Chapter 11 plan that is currentlyunder negotiation contemplates the extinguishment of our partnership units withno recovery to holders of units, and any plan that is ultimately confirmed bythe Bankruptcy Court will likely extinguish the equity units. Further, it islikely that any plan that is ultimately confirmed will, in conjunction with anypre-confirmation asset dispositions, result in the disposition of substantiallyall of our operations and associated assets.

 

**Subsequent Events**

 

***Reno, Nevada Operations of Alliance Lumber Segment***

 

On July 13, 2004, theBankruptcy Court approved a motion filed by us to sell our Alliance LumberSegment operations in Reno, Nevada. This transaction closed in July 2004 and generated $14.2 million ofcash, $1.4 million of which was immediately paid to CIT to eliminateoutstanding borrowings under the DIP Revolver. No gain or loss was recognizedon the transaction.  This dispositionreduced the borrowing base and availability on our DIP Revolver (see Liquidityand Capital Resources).  For income taxpurposes, sale of these operations is expected to trigger a deferred taxablegain from the original acquisition transaction, resulting in an income tax liabilityof approximately $0.5 million, which will be recognized in the third quarter of2004.  This tax liability is a liabilityof the wholly-owned C-Corporation subsidiary which made the originalacquisition, and would not be allocated to unit holders.

 

***Phoenix, Arizona Operations of Alliance Lumber Segment***

 

On July 13, 2004, theBankruptcy Court approved a motion filed by us to sell our Alliance LumberSegment operations in Phoenix, Arizona. This transaction closed in August 2004 and generated $39.4 million ofcash. A gain of approximately $1.0 million was recognized on thetransaction.  This disposition reducedthe DIP Revolver limit from $40.0 million to $20.0 million and also reduced therelated borrowing base and availability (see Liquidity and Capital Resources).For income tax purposes, sale of these operations is expected to trigger adeferred taxable gain from the original acquisition transaction, resulting inan income tax liability of approximately $1.3 million, which will be recognizedin the third quarter of 2004.  This taxliability is a liability of the wholly-owned C-Corporation subsidiary whichmade the original acquisition, and would not be allocated to unit holders.

 

***Manufacturing Segment***

 

In July 2004, we signed anAsset Purchase Agreement to sell our Manufacturing Segment operations, subjectto higher and better bids and objections under the jurisdiction of theBankruptcy Court.  On July 13, 2004, wefiled a motion with the Bankruptcy Court for the disposition of these assets. A hearing was held on July 26,2004, and a motion for the bidding procedures regarding these operations wasapproved by the Bankruptcy Court.  Anycompeting bids from interested parties are due at the Bankruptcy Court byAugust 10, 2004.  A hearing is scheduledfor August 18, 2004 with the Bankruptcy Court to conduct an auction, ifnecessary, after which a motion is expected to be filed for the sale of theseoperations.  A hearing has beenscheduled with the Bankruptcy Court to hear the sale motion on August 19, 2004.  If approved by the Bankruptcy Court, thedisposition is expected to close in August or September 2004, resulting inestimated cash proceeds of

 

13

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approximately $57.2 million. This disposition will further reduce the borrowing base and availabilityon our DIP Revolver (see Liquidity and Capital Resources).

 

**Industry Overview**

 

Theforest products and building materials industries are characterized by highlyvolatile commodity pricing.  Productpricing for logs, dimension lumber and other building materials is a functionof species, grade, size and availability. Prices are heavily influenced byshort-term supply and demand factors. Prices tend to follow broad seasonal andcyclical patterns. Demand is influenced by activity levels in the housing andconstruction industries, as well as general economic conditions and foreigncurrency exchange rates. In recent years, over capacity of lumber manufacturingfacilities has led to an abundance of supply. Supply has been further increasedby imported products from Canada and other countries. In addition, competitionfrom non-wood based products and composite materials has also influenced pricesfor dimension lumber. Although demand has been strong over the last threeyears, excess supply has contributed to low prices for lumber, which, in turn,has depressed prices for logs and timberlands. Beginning in the second half of 2003, prices for lumber and panelingincreased sharply, and have remained relatively strong through the secondquarter of 2004.  Prices for logs haveremained relatively low, but have increased modestly in late 2003 and the firsthalf of 2004.  A major trade disputewith Canada over the importation of lumber and paneling has continued to castuncertainty over the markets for these products.  Weather and forest fire activity, as well as environmental issuesconcerning the harvesting of timber, are also contributing factors to supplyand the volatility of prices in our industry.

 

**Forward-Looking Statements**

 

Information contained in Item 2and other sections of this report includes “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995, includingstatements regarding our expectations, forecasts, hopes, beliefs, predictions,intentions or strategies regarding the future that are not purely historical,but are based on assumptions that in the future may prove not to be accurate.These assumptions include harvest volumes, species mix, prices for logs andlumber, demand for housing and levels and amounts received for stumpage andproperty sales. Our business and prospects are subject to a number of risks,including the volatility of timber and lumber prices, factors limitingharvesting of timber including contractual obligations, governmental restrictions,weather and access limitations – as well as the substantial capital resourcesrequired to fund our operations and the uncertainty regarding the outcome ofour chapter 11 reorganization process. Accordingly, actual results may differ materially from the expectationsexpressed in this report.

 

Additional factors that couldaffect future performance include our ability to successfully reorganize underbankruptcy protection, environmental risks, operating risks normally associatedwith the timber industry, competition, government regulations and policies, andeconomic changes in the regions where our products or substitute products aresold, including Southeast Asia and Japan. Other risk factors includefluctuations in the value of the U.S. dollar against foreign currencies, andour ability to implement our business strategy. These and other risks aredescribed in our registration statements and reports filed from time to time onforms 10-K, 8-K and 10-Q, which are available from us or the United States Securitiesand Exchange Commission.

 

##### **Liquidity andCapital Resources**

 

As discussedabove, on June 29, 2003, we filed for Chapter 11 bankruptcy protection.  Pursuant to the bankruptcy proceedings, wehave listed certain pre-petition liabilities which existed prior to the June29, 2003 bankruptcy filing as liabilities subject to compromise.  Disposition and settlement of suchliabilities is under the jurisdiction of the Bankruptcy Court. Certain accountspayable and accrued expenses classified as liabilities subject to compromisehave been satisfied through the disposition of our Alliance Lumber operationsin Las Vegas, Nevada in April 2004, and additional portions of theseliabilities have been further satisfied through the dispositions recorded inJuly and August of 2004.

 

14

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The followingtable summarizes the pre-petition liabilities that are included as liabilitiessubject to compromise (in thousands):

 
|                            |   | **March 31,  2004** |    | **December  31,  2003** |   |
|---------------------------------|--------|---------------------|---------|-------------------------|--------|
| Acquisition facility principal  |   | $                   | 112,372 |                    | $      | 112,372 |   |
| Senior notes principal          |   | 400,658             |    | 400,658                 |   |
| Adequate protection payments(1) |   | (6,000              | )       | (3,000                  | )      |
| Accrued interest                |   | 21,039              |    | 21,039                  |   |
| Deferred enhanced interest      |   | 4,927               |    | 4,927                   |   |
| Make whole fees and interest    |   | 6,360               |    | 6,360                   |   |
| Accounts payable                |   | 1,163               |    | 1,419                   |   |
| Other accrued expenses          |   | 3,724               |    | 3,428                   |   |
| Total                           |   | $                   | 544,243 |                    | $      | 547,203 |   |

 

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(1)          In October 2003, we agreed to pay$0.5 million per month, retroactive to July 2003, to the acquisition facilitybanks and senior note holders as adequate protection payments related to theirasserted collateral.  Such payments areto be applied to reduce, on a dollar-for-dollar basis, the aggregate allowedsecured claims of the senior note holders and the acquisition facility banks.The method for allocating the adequate protection payments will be determinedby the Bankruptcy Court and, therefore, we are not able to apply these paymentsto specific debt components at this time.

 

On July 17, 2003 the Bankruptcy Court entered a final financing order approving a $40 million debtor-in-possession credit facility (“DIP Revolver”) with CIT Group/Business Credit (“CIT”).  The $40 million limit is subject to a borrowing base and is collateralized by accounts receivable, inventory and substantially all personal property. The DIP Revolver bears interest at either (a) the Chase Bank Prime Rate plus 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 of reorganization and contains certain covenants and restrictions.  As of June 30, 2004, there was $14.1 million outstanding at an interest rate of 4.5% and approximately $25.9 million remained available on the DIP Revolver.  However, subsequent to June 30, 2004, borrowings and availability under the DIP Revolver have been reduced by the disposition of assets and operations discussed above.  As of June 30, 2004, we were in compliance with all of the covenants of the DIP Revolver.

 

The DIP Revolveragreement provides that the total borrowing limit is reduced from $40.0 millionto $20.0 million following the disposition of the Alliance Lumber Segment,which was completed in August 2004. Inaddition, borrowings under the DIP Revolver are limited to a borrowingbase.  The borrowing base is a functionof the levels of related collateral, and has been reduced by the dispositionsdescribed above.  As of August 3,2004, there was zero outstanding and approximately $13.1 million available onthe DIP Revolver.

 

Working capital increased to$79.4 million at June 30, 2004 compared to $59.4 million at December 31, 2003,primarily due to increases in accounts receivable, inventory and deposits ontimber cutting contracts and a decrease in the amount outstanding on our DIPRevolver.  The increases in accountsreceivable and inventory are primarily due to higher product prices during thequarter ended June 30, 2004 compared with the quarter ended December 31, 2003,partially off-set by the disposition of our Las Vegas, Nevada operations.  The increase in timber cutting contractsreflects deposits we have made on several agency timber sales for fire salvagelogging in Oregon.

 

Net cash provided byoperating activities of $2.3 million resulted from net income of $16.2 millionand depletion, depreciation and amortization of $9.9 million, partially off-setby changes in working capital components.

 

Additions to timberlandsof $2.6 million in the first six months of 2004 resulted from normal costs forroad building and maintenance, pre-commercial thinning and reforestationactivities.

 

15

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The decrease in the balanceoutstanding under our DIP Revolver reflects proceeds from the sale of our LasVegas, Nevada operations, partially off-set by increased borrowing forinventories.  Sale of the net assets of our LasVegas operations produced cash proceeds of $12.3 million, all of which wasimmediately paid to CIT to reduce outstanding borrowings under the DIPRevolver.

 

We indefinitely suspended ourcash distributions beginning in the fourth quarter of 2000. Furthermore, we areprohibited from making cash distributions to unitholders during our Chapter 11reorganization process. Since it is unlikely that our unitholders will receiveanything as a result of our Chapter 11 bankruptcy proceedings, it is unlikelythat we will make any future cash distributions on our units.

 

See further discussion aboveregarding changes in Liquidity and Capital Resources which occurred subsequentto June 30, 2004.

 

**Results of Continuing Operations**

 

During the second quarter of2003, we sold our Trading and Distribution Segment, which is reflected asdiscontinued operations on our consolidated statements of operations for thethree and six month periods ended June 30, 2003.  In addition, in March 2004, the Bankruptcy Court approved thesale of, and in April 2004, we sold, the assets related to our Las Vegas, NevadaAlliance Lumber Segment operations. The results of the Las Vegas operations arereflected as discontinued operations in all periods presented.  Please see additional discussion regardingdiscontinued operations below.

 
|                                                       |   | **Three  Months Ended June 30,** |    |
|------------------------------------------------------------|--------|----------------------------------|---------|
|                                                       |   | **2004**                         |    | **2003** |   |
| **(Dollars in thousands)**                                 |   | **Dollars**                      |    | **% of  revenue(1)** |   | **Dollars** |   | **% of  revenue(1)** |   |
| Revenue                                                    |   | $                                | 106,836 |   | 100.0 | % | $ | 60,179 |   | 100.0 | % |
| Operating costs:                                           |   |                             |    |   |   |   |   |   |   |
| Cost of products sold                                      |   | 87,009                           |    | 81.4 |   | 55,313 |   | 91.9 |   |
| Loss on disposal of assets                                 |   | —                           |    | — |   | 1,269 |   | 2.1 |   |
| Selling, general and administrative  expenses              |   | 5,309                            |    | 5.0 |   | 6,220 |   | 10.3 |   |
| Operating income (loss)                                    |   | 14,518                           |    | 13.6 |   | (2,623 | ) | (4.4 | ) |
| Interest expense                                           |   | 180                              |    | 0.2 |   | 12,068 |   | 20.1 |   |
| Amortization of debt issuance costs                        |   | 752                              |    | 0.7 |   | 640 |   | 1.1 |   |
| Other income, net                                          |   | (289                             | )       | (0.3 | ) | (25 | ) | — |   |
| Income (loss) from operations before  reorganization items |   | 13,875                           |    | 13.0 |   | (15,306 | ) | (25.4 | ) |
| Reorganization items                                       |   | (1,884                           | )       | (1.8 | ) | (5,078 | ) | 8.4 |   |
| Income (loss) before discontinued  operations              |   | 11,991                           |    | 11.2 |   | (20,384 | ) | (33.9 | ) |
| Loss from discontinued operations                          |   | (1,081                           | )       | (1.0 | ) | (519 | ) | (0.9 | ) |
| Net income (loss)                                          |   | $                                | 10,910  |   | 10.2 | % | $ | (20,903 | ) | (34.7 | )% |

 

16

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|                                                       |   | **Six Months  Ended June 30,** |    |
|------------------------------------------------------------|--------|--------------------------------|---------|
|                                                       |   | **2004**                       |    | **2003** |   |
| **(Dollars in thousands)**                                 |   | **Dollars**                    |    | **% of  revenue(1)** |   | **Dollars** |   | **% of  revenue(1)** |   |
| Revenue                                                    |   | $                              | 189,383 |   | 100.0 | % | $ | 126,291 |   | 100.0 | % |
| Operating costs:                                           |   |                           |    |   |   |   |   |   |   |
| Cost of products sold                                      |   | 156,519                        |    | 82.6 |   | 115,819 |   | 91.7 |   |
| (Gain) loss on disposal of assets                          |   | (18                            | )       | — |   | 794 |   | 0.6 |   |
| Selling, general and administrative  expenses              |   | 10,713                         |    | 5.6 |   | 11,567 |   | 9.2 |   |
| Operating income (loss)                                    |   | 22,169                         |    | 11.7 |   | (1,889 | ) | (1.5 | ) |
| Interest expense                                           |   | 448                            |    | 0.2 |   | 24,020 |   | 19.0 |   |
| Amortization of debt issuance costs                        |   | 1,220                          |    | 0.6 |   | 1,063 |   | 0.8 |   |
| Other income, net                                          |   | (343                           | )       | (0.2 | ) | (154 | ) | (0.1 | ) |
| Income (loss) from operations before  reorganization items |   | 20,844                         |    | 11.0 |   | (26,818 | ) | (21.2 | ) |
| Reorganization items                                       |   | (4,007                         | )       | (2.1 | ) | (5,078 | ) | (4.0 | ) |
| Income (loss) before discontinued  operations              |   | 16,837                         |    | 8.9 |   | (31,896 | ) | (25.3 | ) |
| Loss from discontinued operations                          |   | (602                           | )       | (0.3 | ) | (5,522 | ) | 4.4 |   |
| Net income (loss)                                          |   | $                              | 16,235  |   | 8.6 | % | $ | (37,418 | ) | (29.6 | )% |

 

----

(1)  Percentages may not add due to rounding.

 

**Revenue**

 

Revenue increased $46.7million, or 77.5%, to $106.8 million in the second quarter of 2004 compared to$60.2 million in the second quarter of 2003 and increased $63.1 million, or50.0% to $189.4 million in the six months ended June 30, 2004 compared to$126.3 million in the comparable period of 2003.  These increases are primarily due to increased revenues from ourManufacturing and Alliance Lumber Segments, both of which benefited from higherprices for their products in 2004 as discussed more fully below.

 

**Cost of Products Sold**

 

Cost of products soldincreased $31.7 million, or 57.3%, to $87.0 million in the second quarter of2004 compared to $55.3 million in the second quarter of 2003 and increased$40.7 million, or 35.1%, to $156.5 million in the six months ended June 30,2004 compared to $115.8 million in the comparable period of 2003.  These increases were due to increased salesvolume.   The decreases in cost ofproducts sold as a percentage of revenue in the three and six months ended June30, 2004 compared to the same periods of 2003 were primarily due to higherlumber prices in our Manufacturing Segment, as discussed more fully below.

 

**(Gain) Loss on Disposal of Assets**

 

The $0.8 million loss ondisposal of assets in the six months ended June 30, 2003 includes a $0.5million gain in the first quarter of 2003 from the sale of an aircraft, offsetby a $1.3 million loss on disposal of an aircraft in the second quarter of2003.

 

**Selling, General and Administrative Expenses**

 

Selling, general andadministrative expenses decreased $0.9 million, or 14.6%, to $5.3 million inthe second quarter of 2004 compared to $6.2 million in the second quarter of2003 and decreased $0.9 million, or 7.4%, to $10.7 million in the six monthsended June 30, 2004 compared to $11.6 million in the comparable period of2003.  Reductions in personnel costsfrom reduced headcount and reduced retirement plan costs were partially off-setby increased costs for insurance and bad debts expense.

 

**Interest Expense**

 

In accordance with SOP90-7, interest expense in the three and six month periods ended June 30, 2004does not include contractual interest totaling $12.9 million and $25.6 million,respectively, on the Senior Notes and Acquisition Facility since it is notprobable it will be paid subsequent to our June 29, 2003 Chapter 11 bankruptcyfiling.  Please read “Chapter 11 BankruptcyReorganization” above also.

 

17

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**Reorganization Items**

 

Reorganization itemsconsist primarily of professional fees and other charges incurred related toour Chapter 11 reorganization and recapitalization efforts. We anticipatecontinuing to incur significant professional fees and court costs in futurequarters related to our reorganization efforts under Chapter 11.

 

**Income Taxes**

 

In the past, we have notpaid significant income taxes and have not included a provision for incometaxes in our financial statements. As a partnership, taxation on our results ofoperations is generally the responsibility of the unitholders.  However, we own, directly and indirectly,four corporations that constitute a consolidated group of corporations forfederal income tax purposes. This consolidated group of corporations isexpected to incur an income tax liability in 2004, following the 2004dispositions of our Alliance Lumber Segment operations.  We estimate an income tax liability ofapproximately $1.8 million will be incurred in the third quarter of 2004 fromthe disposition of our Reno and Phoenix operations.  We may incur material income tax liabilities in the future fromany further disposition of additional assets. Any such income tax incurred by these taxable entities would generallynot be allocated to unitholders.

 

**Allocation of Income (Losses)**

 

Our partnership agreement provides that profit andlosses are generally allocated 1.01% to the General Partner interest and 98.99%to the Limited Partner interest.  Inaddition, the partnership agreement specifies that net losses are not allocatedto limited partners to the extent doing so would result in (or increase) adeficit balance in their capital accounts. At that point, net losses areallocated 100% to the General Partners. In the third quarter of 2003, the Limited Partners’ capital accountswere reduced to zero, and subsequent income and losses have been allocated 100%to the General Partners. Accordingly, the General Partner interest wasallocated our entire $10.9 million and $16.2 million of net income in the threeand six month periods ended June 30, 2004. In accordance with the Partnership Agreement, 100% of income and losseswill continue to be allocated to the General Partners unless and until thecumulative additional losses they have been allocated are fully recovered.

 

**Discontinued Operations**

 

***Trading and Distribution Segment***

 

In April and May 2003, in two separate transactions, we sold theinventory and fixed assets related to our Trading and Distribution Segment anddiscontinued the segment’s operations. The purchasers of these assets assumed the operating leases, accountspayable and accrued expenses related to these businesses.  We received cash proceeds of $4.5 millionfrom these asset sales, all of which was immediately applied to outstandingprincipal on the revolving credit facility. The results of operations of the Trading and Distribution Segment arereflected as discontinued operations on the accompanying consolidatedstatements of operations for all 2003 periods presented in accordance withStatement of Financial Accounting Standards No. 144 (“SFAS No. 144”)“Accounting for the Impairment or Disposal of Long-Lived Assets.”

 

DuringMarch 2003, deterioration of our trade credit availability began to adverselyaffect operating margins in the Trading and Distribution Segment.  Pursuant to the provisions of SFAS No. 142“Goodwill and Other Intangible Assets,” we evaluated the goodwill balance ofthis segment for impairment following the change in circumstances during thefirst quarter of 2003, utilizing a fair value analysis of the business in thecurrent market environment. Based on the results of this evaluation, wedetermined that our goodwill was impaired and recorded a non-cashimpairment charge of $5.5 million in the three months ended March 31,2003.  This $5.5 million charge isincluded in discontinued operations.

 

Summarizedfinancial information for these operations is as follows (in thousands):

 
|              |   | **Three Months  Ended****June 30, 2003** |   | **Six Months  Ended****June 30, 2003** |   |
|-------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
| External revenues |   | $                                        | 6,333  |                                   | $      | 34,140 |   |
| Operating loss    |   | (482                                     | )      | (5,826                                 | )      |
|                   |        |                                          |        |                                        |        |  |  |

 

18

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***Las Vegas Operations of Alliance LumberSegment***

 

In April 2004, we closed the sale of our Alliance Lumber Segmentoperations in Las Vegas, Nevada, resulting in a recognized loss of $1.2 millionin the second quarter of 2004.  Resultsof operations for the Las Vegas operations are reported as discontinuedoperations for all periods presented in accordance with SFAS No. 144.  Summarized financial information for theseoperations is as follows (in thousands):

 
|                    |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|-------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                    |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
| External revenues       |   | $                               | — |                          | $      | 13,231 |   | $ | 18,756 |   | $ | 26,271 |   |
| Operating income (loss) |   | 117                             |   | (41                           | )      | 596 |   | 300 |   |
| Gain (loss) on disposal |   | (1,198                          | )      | 4                             |   | (1,198 | ) | 4 |   |
|                         |        |                                 |        |                               |        |  |  |  |  |  |  |  |  |

 

Sale of the netassets of the Las Vegas operations produced cash proceeds of $12.3 million, allof which was immediately paid to CIT to reduce outstanding borrowings under theDIP Revolver.

 

**Results of Operations by Segment**

 

External revenue bysegment and as a percentage of total revenue was as follows (dollars inthousands):

 
|                |   | **Three  Months Ended June 30,** |    | **Six Months  Ended June 30,** |   |
|---------------------|--------|----------------------------------|---------|--------------------------------|--------|
|                |   | **2004**                         |    | **2003**                       |   | **2004** |   | **2003** |   |
| Timberlands         |   | $                                | 6,161   |                           | 5.8    | % | $ | 4,252 |   | 7.1 | % | $ | 11,690 |   | 6.2 | % | $ | 11,169 |   | 8.8 | % |
| Manufacturing       |   | 32,790                           |    | 30.7                           | %      | 16,611 |   | 27.6 | % | 58,911 |   | 31.1 | % | 38,587 |   | 30.6 | % |
| Alliance Lumber     |   | 65,185                           |    | 61.0                           | %      | 37,481 |   | 62.3 | % | 113,805 |   | 60.1 | % | 72,261 |   | 57.2 | % |
| Corporate and Other |   | 2,700                            |    | 2.5                            | %      | 1,835 |   | 3.0 | % | 4,977 |   | 2.6 | % | 4,274 |   | 3.4 | % |
|                |   | $                                | 106,836 |                           |   |   | $ | 60,179 |   |   |   | $ | 189,383 |   |   |   | $ | 126,291 |   |   |   |

 

Operating income (loss)by segment was as follows (in thousands):

 
|                |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|---------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
| Timberlands         |   | $                               | 609    |                          | $      | 226 |   | $ | 1,214 |   | $ | 1,005 |   |
| Manufacturing       |   | 11,277                          |   | (605                          | )      | 18,239 |   | (1,182 | ) |
| Alliance Lumber     |   | 4,064                           |   | 2,086                         |   | 6,431 |   | 4,455 |   |
| Corporate and Other |   | (1,432                          | )      | (4,330                        | )      | (3,715 | ) | (6,167 | ) |
|                |   | $                               | 14,518 |                          | $      | (2,623 | ) | $ | 22,169 |   | $ | (1,889 | ) |

 

**Timberlands**

 

The $1.9 million, or44.9%, increase in external Timberlands Segment sales in the second quarter of2004 compared to the second quarter of 2003 reflects a 52.6% increase in domesticlog shipments, a 45.8% decrease in export log shipments and a 14.1% increase inweighted average domestic sales realizations. These factors are discussed more fully below.

 

The $0.5 million, or4.7%, increase in external Timberlands Segment sales in the six month periodended June 30, 2004 compared to the same period of 2003 reflects a 15.6%increase in domestic log shipments, a 62.0% decrease in export log shipmentsand an 8.7% increase in weighted average domestic sales realizations.  These factors are discussed more fullybelow.

 

Internal sales of logs toour Manufacturing Segment decreased to $3.3 million and $12.1 million,respectively, in the three and six month periods ended June 30, 2004 comparedto $6.3 million and $15.8 million, respectively, in the comparable periods of2003. These decreases primarily reflect a 50.2% and a 25.2% reduction,respectively, in volume, due to reduced harvest levels in 2004 at all of ourtree farms.  Our Manufacturing Segmenthas increased its purchases of externally sourced logs during 2004 in order tomitigate the reduced fee harvest from our tree farms.  These decreases were partially offset by a 4.4% and a 2.7%increase, respectively,

 

19

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in average internal salesrealizations reflecting higher market log prices in the first six months of2004 compared to the first six months of 2003.

 

The $0.4 million and $0.2million increases, respectively, in Timberlands operating income in the threeand six month periods ended June 30, 2004 compared to the same periods of 2003were primarily a result of the volume and price changes discussed above as wellas reduced depletion expense rates (see Note 6) partially off-set by slightlyhigher overhead expenses.

 

***Domestic Log Sales***

 

Average external domesticprices received for logs sold from the various tree farms were as follows(dollars per thousand board feet (“MBF”)):

 
|             |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **Tree Farm**    |   | **2004**                         |   | **2003**                       |   | **% Change** |   | **2004** |   | **2003** |   | **% Change** |   |
| Oregon           |   | $                                | 373    |                           | $      | 627 |   | (40.5 | )% | $ | 373 |   | $ | 627 |   | (40.5 | )% |
| Hamilton         |   | $                                | 469    |                           | $      | 436 |   | 7.6 | % | $ | 456 |   | $ | 425 |   | 7.3 | % |
| Olympic          |   | $                                | 446    |                           | $      | 376 |   | 18.6 | % | $ | 403 |   | $ | 376 |   | 7.2 | % |
| Weighted average |   | $                                | 462    |                           | $      | 405 |   | 14.1 | % | $ | 436 |   | $ | 401 |   | 8.7 | % |

 

The increases at theHamilton and Olympic tree farms in 2004 over the comparable 2003 periods aredue to higher market prices for logs and changes in species and grade mix.

 

The domestic externalvolume from each of our tree farms was as follows (in MBF):

 
|          |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|---------------|--------|----------------------------------|--------|--------------------------------|--------|
| **Tree Farm** |   | **2004**                         |   | **2003**                       |   | **% Change** |   | **2004** |   | **2003** |   | **% Change** |   |
| Oregon        |   | 57                               |   | 227                            |   | (74.9 | )% | 58 |   | 227 |   | (74.4 | )% |
| Hamilton      |   | 8,208                            |   | 2,755                          |   | 197.9 | % | 14,548 |   | 9,215 |   | 57.9 | % |
| Olympic       |   | 3,588                            |   | 4,783                          |   | (25.0 | )% | 8,895 |   | 10,890 |   | (18.3 | )% |
| Total         |   | 11,853                           |   | 7,765                          |   | 52.6 | % | 23,501 |   | 20,332 |   | 15.6 | % |

 

The increase in volume from the Hamilton Tree Farmis due to increased fee harvest following the temporary curtailment of loggingactivity in the second quarter of 2003. The decrease in volume from the Olympic Tree Farm reflects reduced feeharvest levels in 2004.

 

During the second quarterof 2003, a small volume of large diameter ponderosa pine logs were sold fromour Oregon Tree Farm to an external customer. During the first half of 2004, a small volume of pulp, post and polelogs were sold to external customers from our Oregon Tree Farm.  The majority of volume from the Oregon TreeFarm was utilized by our Gilchrist mill.

 

***Export Log Sales***

 

Revenue from export logsaccounted for approximately 0.1% of total revenues in the three months and sixmonths ended June 30, 2004.  Revenuefrom export logs accounted for 0.2% and 0.6% of total revenues, respectively,in the three months and six months ended June 30, 2003.  The decrease in export sales revenue is dueto reduced sales volume from reduced availability of export grade logs in theareas of our Washington tree farms which are currently being harvested.  In addition, higher domestic log prices andsoft export demand for such logs have currently mitigated much of the advantagefrom exporting them.

 

**Manufacturing**

 

The $16.2 million, or97.4%, increase in external revenue from our sawmills in the second quarter of2004 compared to the second quarter of 2003 reflects a 53.0% increase in averageexternal lumber sales realizations and a 32.1% increase in external lumbersales volumes.  These factors arediscussed more fully below.

 

20

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The $20.3 million, or52.7%, increase in external revenue from our sawmills in the six month periodended June 30, 2004 compared to the six month period ended June 30, 2003reflects a 42.4% increase in average external lumber sales realizations and a9.9% increase in external lumber sales volumes.  These factors are discussed more fully below.

 

Internal shipmentsincreased 31.7% and decreased 14.3%, respectively, to 4.6 MMBF and 7.0 MMBF,respectively, in the three and six month periods ended June 30, 2004 comparedto 3.5 MMBF and 8.1 MMBF, respectively, in the comparable periods of 2003.  These changes in internal shipments from ourManufacturing Segment are primarily due to the disposition of our Trading andDistribution Segment in the second quarter of 2003. Excluding the impact fromsales to our discontinued Trading and Distribution Segment, internal shipmentsincreased in 2004 compared to 2003, reflecting the reduced production levels inthe second quarter of 2003 resulting from our temporary curtailment ofproduction.

 

The improvement inoperating results of our Manufacturing Segment in the three and six monthperiods ended June 30, 2004 compared to the same periods of 2003 is primarily aresult of the increased realizations and volume described above.  The increased volume in the 2004 periods islargely a result of the temporary market-related curtailment of operations weimplemented in the second quarter of 2003. In addition, we have improved production efficiencies at our sawmillsduring 2004.

 

Average external pricesreceived for lumber sales by region were as follows (dollars per MBF):

 
|             |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|------------------|--------|----------------------------------|--------|--------------------------------|--------|
| **Sawmill**      |   | **2004**                         |   | **2003**                       |   | **% Change** |   | **2004** |   | **2003** |   | **% Change** |   |
| Oregon           |   | $                                | 400    |                           | $      | 268 |   | 49.3 | % | $ | 372 |   | $ | 269 |   | 38.3 | % |
| Washington       |   | $                                | 409    |                           | $      | 259 |   | 57.9 | % | $ | 380 |   | $ | 259 |   | 46.7 | % |
| Weighted average |   | $                                | 404    |                           | $      | 264 |   | 53.0 | % | $ | 376 |   | $ | 264 |   | 42.4 | % |

 

The improvements in theaverage realizations are due to improved market prices resulting from strongdemand from the domestic housing market, as well as changes in product mix.

 

External lumber salesvolumes by region were as follows (in MBF):

 
|         |   | **Three  Months Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|--------------|--------|----------------------------------|--------|--------------------------------|--------|
| **Sawmill**  |   | **2004**                         |   | **2003**                       |   | **% Change** |   | **2004** |   | **2003** |   | **% Change** |   |
| Oregon       |   | 38,193                           |   | 30,179                         |   | 26.6 | % | 76,769 |   | 72,352 |   | 6.1 | % |
| Washington   |   | 37,979                           |   | 27,495                         |   | 38.1 | % | 69,679 |   | 60,876 |   | 14.5 | % |
| Total Volume |   | 76,172                           |   | 57,674                         |   | 32.1 | % | 146,448 |   | 133,228 |   | 9.9 | % |

 

The increases in volumein both regions are primarily caused by the temporary market-related productioncurtailment we implemented during the second quarter of 2003.

 

Following is informationregarding our chip sales:

 
|                                              |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|---------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                              |   | **2004**                        |   | **2003**                      |   | **2004** |   | **2003** |   |
| Chip sales revenue (in thousands of  dollars)     |   | $                               | 1,984  |                          | $      | 1,365 |   | $ | 3,857 |   | $ | 3,116 |   |
| Chip sales as a percentage of revenue             |   | 1.9                             | %      | 2.3                           | %      | 2.0 | % | 2.5 | % |
| Chip prices (per bone-dry unit (“BDU”)) |   | $                               | 67     |                          | $      | 64 |   | $ | 66 |   | $ | 61 |   |
| Chip volume (in BDUs)                             |   | 29,463                          |   | 21,232                        |   | 58,124 |   | 51,036 |   |

 

The increases in theprice per BDU are due to improved market prices for chips.  The increases in volume are due to theincreases in production volume at our saw mills, as chips are a by-product ofsaw mill operations.

 

21

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**Alliance Lumber Segment**

 

Our Alliance LumberSegment includes professional contractor service yards in Arizona and Nevadaand involves the sale of lumber and building materials. Our Las Vegas, Nevadaoperations were sold in April 2004 and are reflected as discontinued operationsfor all periods presented.  In addition,we sold our Reno, Nevada operations and our Phoenix, Arizona operations in thethird quarter of 2004.  Following thesedispositions, the Alliance Lumber Segment has been discontinued in the thirdquarter of 2004.

 

Revenue from our AllianceLumber Segment increased $27.7 million, or 73.9%, in the second quarter of 2004compared to the second quarter of 2003, and increased $41.5 million, or 57.5%,in the six months ended June 30, 2004 compared to the six months ended June 30,2003.  These increases reflect a 15.7%and an 11.7% increase, respectively, in unit volume, measured in total boardfeet, as well as higher market prices for lumber and paneling, reflecting thestrong housing market in the southwestern region of the United States.

 

Operating income from ourAlliance Lumber Segment increased $2.0 million, or 94.8%, in the second quarterof 2004 compared to the second quarter of 2003, and increased $2.0 million, or44.4%, in the six months ended June 30, 2004 compared to the six months endedJune 30, 2003.  The improved operatingincome is primarily a result of the increased volume described above.

 

**Corporate and Other**

 

The operating loss from our Corporate and Other category decreased to$1.4 million and $3.7 million, respectively, in the three and six month periodsended June 30, 2004, compared to $4.3 million and $6.2 million, respectively,in the comparable periods of 2003.  Theimproved results reflect lower personnel costs from reduced headcount andretirement plan expenses, offset in part by increased costs for insurance andbad debt expense.

 

##### **CriticalAccounting Policies**

 

We reaffirm the criticalaccounting policies and estimates described in our 2003 Annual Report on Form10-K, which was filed with the Securities and Exchange Commission on April 22,2004.

 

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

 

Our $40 milliondebtor-in-possession financing agreement (“DIP Revolver”) has a variable rateof interest.  At June 30, 2004, we had$14.1 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 or results of operations.

 

The fair market value oflong-term fixed interest rate debt is subject to interest rate risk.  Generally, the fair market value of fixedinterest rate debt will increase as interest rates fall and decrease asinterest rates rise.  The interest ratechanges affect the fair market value but do not impact earnings or cashflows.  Our acquisition facility has avariable rate of interest.  Our seniornotes and acquisition facility, included in liabilities subject to compromiseat June 30, 2004, are not publicly traded and similar instruments are not availablefor comparison.  We are therefore unableto estimate the fair value of the senior notes or acquisition facility.

 

**Item 4.  Controls and Procedures**

 

**Disclosure Controls and Procedures**

 

Our management has evaluated,under the supervision and with the participation of our President and Chief ExecutiveOfficer and Chief Financial Officer, the effectiveness of our disclosurecontrols and procedures as of the end of the period covered by this reportpursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the“Exchange Act”). Based on that evaluation, our President and Chief ExecutiveOfficer and Chief Financial Officer have concluded that, as of the end of theperiod covered by this report, our disclosure controls and procedures areeffective in ensuring that information required to be disclosed in our ExchangeAct reports is

 

22

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(1) recorded, processed,summarized and reported in a timely manner, and (2) accumulated andcommunicated to our management, including our President and Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosure.

 

**Internal Control Over Financial Reporting**

 

There has been no change in ourinternal control over financial reporting that occurred during our last fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II - OTHER INFORMATION**

 

**Item5.  OtherInformation**

 

***Disposition of Reno, Nevada Operations of Alliance LumberSegment***

 

On July 21, 2004, we sold our Alliance Lumber Segmentoperations in Reno, Nevada to Reno Lumber, Inc. for $14.2 million in cash. RenoLumber, Inc. is partially owned by our former manager of these operations.  The sales price was determined by armslength negotiations.  The buyerpurchased the inventory, accounts receivable, property, plant and equipment,and certain prepaid assets, and assumed the accounts payable and certainaccrued expenses related to these operations. This transaction was approved by the Bankruptcy Court in a hearing onJuly 13, 2004.

 

***Phoenix, Arizona Operations of Alliance Lumber Segment***

 

On August 2, 2004, we sold our Alliance Lumber Segmentoperations in Phoenix, Arizona to ALC Acquisition LLC for $39.4 million in cash.ALC Acquisition LLC is owned by the original founder of Alliance Lumber inPhoenix, Arizona and our former manager of these operations.  The sales price was determined by armslength negotiations.  The buyerpurchased the inventory, accounts receivable, property, plant and equipment,and certain prepaid assets, and assumed the accounts payable and certainaccrued expenses related to these operations. This transaction was approved by the Bankruptcy Court in a hearing onJuly 13, 2004.

 

**Item 6.  Exhibits and Reports on Form 8-K**

 

**(a) Exhibits**

 

The exhibits filedas part of this report are listed below and this list is intended to serve asthe exhibit index:

 

3.1                     Form of Second Amended and Restated Agreementof Limited Partnership of Crown Pacific Partners, L.P. (filed as Exhibit A toPart I of Registrant’s Registration Statement on Form S-1 No. 83-85066).

3.2                     Form of Agreement of Limited Partnership ofCrown Pacific Limited Partnership (filed as Exhibit 3.2 to the Registrant’sStatement on Form S-1 No. 83-85066).

3.3                     First Amendment to Second Amended and RestatedAgreement of Limited Partnership of Crown Pacific Limited Partnership (filed asExhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended March 31,1997).

3.4                     Second Amendment to Amended and RestatedAgreement of Limited Partnership of Crown Pacific Limited Partnership (filed asExhibit 3.4 to the Registrant’s Form 10-K for the year ended December 31,1997).

3.5                     Third Amendment to Amended and RestatedAgreement of Limited Partnership of Crown Pacific Limited Partnership (filed asExhibit 3.5 to the Registrant’s Form 10-K for the year ended December 31,1999).

31.1               Certification of the Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2               Certification of the Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1               Certification of the Chief Executive Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

32.2               Certification of the Chief Financial Officerpursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002.

 

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

 

Wedid not file any reports on Form 8-K during the quarter ended June 30, 2004.

 

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**SIGNATURES**

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned thereunto duly authorized.

 
| Date:   August  9, 2004 | 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, Chief Financial Officer and Treasurer              |
|                                   | (Duly  Authorized Officer and Principal Financial and  Accounting Officer) |
|                                        |                                                                            |  |  |  |

 

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