**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C.  20549**

 

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**FORM 10-Q**

 

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**(Mark One)**

 

**ý****QUARTERLY REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended March 31, 2004**

 

**OR**

 

**o****TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition periodfrom         to         **

 

**Commission file number 0-24976**

 

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**CROWNPACIFIC PARTNERS, L.P.**

(Exact name of registrant as specified in itscharter)

 

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common equity, as of the latest practicable date.

 

| **Common Units** |   | **30,527,030**                |
|------------------|--------|-------------------------------|
| (Class)          |   | (Outstanding at May 24, 2004) |

 

 

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**CROWNPACIFIC PARTNERS, L.P.**

**FORM10-Q**

**INDEX**

 
| PART I - FINANCIAL INFORMATION |                                                                                          |
|--------------------------------|-----------------------------------------------------------------------------------------------|
|                           |                                                                                          |   |
| Item 1.                        | Financial Statements (unaudited)                                                              |   |
|                           |                                                                                          |   |
|                           | Consolidated Statements of Operations –  Three Months Ended March 31, 2004 and 2003 |   |
|                           |                                                                                          |   |
|                           | Consolidated Balance Sheets – March 31, 2004 and December 31,  2003            |   |
|                           |                                                                                          |   |
|                           | Consolidated Statements of Cash Flows –  Three Months Ended March 31, 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 6.                        | Exhibits and Reports on Form 8-K                                                              |   |
|                           |                                                                                          |   |
| Signatures                     |                                                                                          |

 

1

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**PART 1- FINANCIAL INFORMATION**

 

**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 March 31,** |   |
|------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                     |   | **2004**                                       |   | **2003** |   |
|                                                                                     |   |                                           |   |   |   |
| Revenues                                                                                 |   | $                                              | 82,547 |   | $ | 66,113 |   |
|                                                                                     |   |                                           |   |   |   |
| Operating costs:                                                                         |   |                                           |   |   |   |
| Cost of products sold                                                                    |   | 69,511                                         |   | 60,507 |   |
| Gain on disposal of assets                                                               |   | (18                                            | )      | (485 | ) |
| Selling, general and administrative  expenses                                            |   | 5,404                                          |   | 5,347 |   |
|                                                                                     |   |                                           |   |   |   |
| Operating income                                                                         |   | 7,650                                          |   | 744 |   |
|                                                                                     |   |                                           |   |   |   |
| Interest expense (excluding contractual  interest expense of $12,736 and $0)             |   | 268                                            |   | 11,952 |   |
| Amortization of debt issuance costs                                                      |   | 468                                            |   | 423 |   |
| Other income, net                                                                        |   | (54                                            | )      | (129 | ) |
|                                                                                     |   |                                           |   |   |   |
| Income (loss) from operations before  reoganization items                                |   | 6,968                                          |   | (11,502 | ) |
|                                                                                     |   |                                           |   |   |   |
| Reorganization items:                                                                    |   |                                           |   |   |   |
| Professional fees                                                                        |   | (2,015                                         | )      | — |   |
| Other                                                                                    |   | (108                                           | )      | — |   |
|                                                                                     |   | (2,123                                         | )      | — |   |
|                                                                                     |   |                                           |   |   |   |
| Income (loss) before discontinued  operations                                            |   | 4,845                                          |   | (11,502 | ) |
|                                                                                     |   |                                           |   |   |   |
| Income (loss) from discontinued operations                                               |   | 480                                            |   | (5,013 | ) |
|                                                                                     |   |                                           |   |   |   |
| Net income (loss).                                                                       |   | $                                              | 5,325  |   | $ | (16,515 | ) |
|                                                                                     |   |                                           |   |   |   |
| Basic and diluted income (loss) per limited  partner unit before discontinued operations |   | $                                              | — |   | $ | (0.37 | ) |
|                                                                                     |   |                                           |   |   |   |
| Basic and diluted income (loss) per limited  partner unit from discontinued operations   |   | —                                         |   | (0.17 | ) |
|                                                                                     |   |                                           |   |   |   |
| Basic and diluted net income (loss) per  limited partner unit                            |   | $                                              | — |   | $ | (0.54 | ) |
|                                                                                     |   |                                           |   |   |   |
| Weighted average units outstanding.                                                      |   | 30,527,030                                     |   | 30,527,030 |   |

 

The accompanying notes are an integral partof these financial statements.

 

2

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**Crown PacificPartners, L.P.**

**(Debtor-in-Possession)**

**ConsolidatedBalance Sheets**

**(Inthousands, except unit data)**

**(Unaudited)**

 
|                                                                                               |   | **March 31,  2004** |    | **December 31,  2003** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-----------------------------|--------|
| **Assets**                                                                                         |   |                     |    |                        |   |
|                                                                                               |   |                     |    |                        |   |
| Current assets:                                                                                    |   |                     |    |                        |   |
| Cash and cash equivalents                                                                          |   | $                        | 7,897   |                        | $      | 11,028 |   |
| Accounts receivable, net of allowance of  $927 and $862                                            |   | 41,315                   |    | 43,993                      |   |
| Notes receivable                                                                                   |   | 528                      |    | 558                         |   |
| Inventories                                                                                        |   | 23,093                   |    | 27,943                      |   |
| Deposits on timber cutting contracts                                                               |   | 1,206                    |    | 516                         |   |
| Assets held for sale                                                                               |   | 14,286                   |    | —                      |   |
| Prepaid and other current assets                                                                   |   | 13,252                   |    | 12,305                      |   |
|                                                                                               |   |                     |    |                        |   |
| Total current assets                                                                               |   | 101,577                  |    | 96,343                      |   |
| Property, plant and equipment, net of  accumulated depreciation of $43,896 and $44,390             |   | 40,007                   |    | 41,476                      |   |
| Timber, timberlands and roads, net                                                                 |   | 300,763                  |    | 302,737                     |   |
| Other assets                                                                                       |   | 5,462                    |    | 5,930                       |   |
|                                                                                               |   |                     |    |                        |   |
| Total assets                                                                                       |   | $                        | 447,809 |                        | $      | 446,486 |   |
|                                                                                               |   |                     |    |                        |   |
| **Liabilities and Partners’ Deficit**                                                         |   |                     |    |                        |   |
|                                                                                               |   |                     |    |                        |   |
| Liabilities not subject to compromise:                                                             |   |                     |    |                        |   |
| Current liabilities:                                                                               |   |                     |    |                        |   |
| Revolving credit facility                                                                          |   | $                        | 18,346  |                        | $      | 23,370 |   |
| Accounts payable                                                                                   |   | 5,899                    |    | 4,291                       |   |
| Accrued expenses                                                                                   |   | 9,395                    |    | 9,194                       |   |
| Liabilities held for sale                                                                          |   | 838                      |    | —                      |   |
| Current portion of long-term debt                                                                  |   | 94                       |    | 123                         |   |
| Total current liabilities                                                                          |   | 34,572                   |    | 36,978                      |   |
| Long-term debt                                                                                     |   | 53                       |    | 86                          |   |
| Other non-current liabilities                                                                      |   | 270                      |    | 270                         |   |
|                                                                                               |   | 34,895                   |    | 37,334                      |   |
|                                                                                               |   |                     |    |                        |   |
| Liabilities subject to compromise                                                                  |   | 545,640                  |    | 547,203                     |   |
|                                                                                               |   |                     |    |                        |   |
| Total liabilities                                                                                  |   | 580,535                  |    | 584,537                     |   |
|                                                                                               |   |                     |    |                        |   |
| Partners’ deficit:                                                                            |   |                     |    |                        |   |
| General partners                                                                                   |   | (132,726                 | )       | (138,051                    | )      |
| Limited partners (30,527,030 units  outstanding at March 31, 2004 and December 31, 2003) |   | —                   |    | —                      |   |
| Total partners’ deficit                                                                       |   | (132,726                 | )       | (138,051                    | )      |
|                                                                                               |   |                     |    |                        |   |
| Total liabilities and partners’ deficit                                                       |   | $                        | 447,809 |                        | $      | 446,486 |   |

 

The accompanying notes are an integral partof these financial statements.

 

3

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

**(Debtor-in-Possession)**

**ConsolidatedStatements of Cash Flows**

**(In thousands)**

**(Unaudited)**

 
|                                                                                                |   | **For the  Three Months Ended March 31,** |   |
|-----------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                                |   | **2004**                                       |   | **2003** |   |
| Cash flows from operating activities:                                                               |   |                                           |   |   |   |
| Net income (loss)                                                                                   |   | $                                              | 5,325  |   | $ | (16,515 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by (used in) operating activities: |   |                                           |   |   |   |
| Depletion, depreciation and amortization                                                            |   | 5,020                                          |   | 6,110 |   |
| Deferred interest                                                                                   |   | —                                         |   | 1,168 |   |
| Impairment of goodwill                                                                              |   | —                                         |   | 5,502 |   |
| Loss on purchase commitments                                                                        |   | —                                         |   | 149 |   |
| Gain on disposal of assets                                                                          |   | (18                                            | )      | (479 | ) |
| Net change in current assets and current  liabilities:                                              |   |                                           |   |   |   |
| Accounts and notes receivable                                                                       |   | (6,945                                         | )      | (570 | ) |
| Inventories                                                                                         |   | 917                                            |   | (5,299 | ) |
| Deposits on timber cutting contracts                                                                |   | (690                                           | )      | 105 |   |
| Prepaid and other current assets                                                                    |   | (1,646                                         | )      | (386 | ) |
| Accounts payable and accrued expenses                                                               |   | 2,560                                          |   | 3,321 |   |
| Net cash provided by (used in) operating activities                                                 |   | 4,523                                          |   | (6,894 | ) |
|                                                                                                |   |                                           |   |   |   |
| Cash flows from investing activities:                                                               |   |                                           |   |   |   |
| Additions to timberlands                                                                            |   | (1,001                                         | )      | (1,389 | ) |
| Additions to timber cutting rights                                                                  |   | (10                                            | )      | (529 | ) |
| Additions to equipment                                                                              |   | (97                                            | )      | (637 | ) |
| Proceeds from sale of assets                                                                        |   | 18                                             |   | 641 |   |
| Net cash used in investing activities                                                               |   | (1,090                                         | )      | (1,914 | ) |
|                                                                                                |   |                                           |   |   |   |
| Cash flows from financing activities:                                                               |   |                                           |   |   |   |
| Net increase (decrease) in revolving credit  facility                                               |   | (5,024                                         | )      | 1,000 |   |
| Repayments of long-term debt                                                                        |   | (1,540                                         | )      | (22 | ) |
| Net cash provided by (used in) financing  activities                                                |   | (6,564                                         | )      | 978 |   |
|                                                                                                |   |                                           |   |   |   |
| Net decrease in cash and cash equivalents                                                           |   | (3,131                                         | )      | (7,830 | ) |
| Cash and cash equivalents at beginning of  period                                                   |   | 11,028                                         |   | 12,993 |   |
|                                                                                                |   |                                           |   |   |   |
| Cash and cash equivalents at end of period                                                          |   | $                                              | 7,897  |   | $ | 5,163 |   |
|                                                                                                |   |                                           |   |   |   |
| **Supplemental Cash  Flow Information:**                                                            |   |                                           |   |   |   |
| Cash paid for reorganization items                                                                  |   | $                                              | 1,393  |   | $ | — |   |
| Cash paid for interest                                                                              |   | $                                              | 268    |   | $ | 7,891 |   |

 

The accompanying notes are an integral partof these financial statements.

 

4

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**CROWNPACIFIC PARTNERS, L.P.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1: Organizationand Basis of Presentation**

 

CrownPacific Partners, L.P. (the “Partnership”), a Delaware limited partnership,through its 99% owned subsidiary, Crown Pacific Limited Partnership (the“Operating Partnership”), was formed in 1994 to acquire, own and operatetimberlands and wood product manufacturing facilities located in the NorthwestUnited States. The Partnership’s business consists primarily of growing andharvesting timber for sale as logs in domestic and export markets and themanufacturing, selling and distribution of lumber and other wood products.

 

During the second quarter of 2003, thePartnership was unable to meet the financial covenants and scheduled interestpayments pursuant to its bank loan and senior note agreements. In addition, thePartnership was unable to successfully negotiate a recapitalization with itsbank lenders and senior note holders. Therefore, on June 29, 2003, the Partnership and all but one of itssubsidiaries, Klamath Northern Railway, Co., each filed voluntary petitions forrelief under Chapter 11 of title 11 of the United States Code (the “BankruptcyCode”) in the United States Bankruptcy Court for the District of Arizona inPhoenix, Arizona (the “Bankruptcy Court”), case numbers 03-11258-PHX-RJHthrough 03-11263-PHX-RJH.  These casesare jointly administered under case number 03-11258-PHX-RJH.  The Partnership and its subsidiariescurrently manage their properties and operate their businesses as “debtors-in-possession”under the jurisdiction of the Bankruptcy Court and in accordance with theapplicable provisions of the Bankruptcy Code. See Note 2 below.

 

The Partnership has experienced net losses inthirteen of the last fourteen fiscal quarters, and would have reported a netloss in the current quarter if $12.7 million of contractual interest expensehad been recognized. The accompanying consolidated financial statements havebeen prepared assuming that the Partnership will continue as a going concern, andin accordance with Statement of Position 90-7 (“SOP 90-7”), “FinancialReporting by Entities in Reorganization Under the Bankruptcy Code.” As a resultof the Chapter 11 filing, there is no assurance that the carrying amounts ofassets will be realized or that the liabilities will be settled for the amountsrecorded.  Until a plan ofreorganization is confirmed by the Bankruptcy Court, the Partnership is notable to determine the ultimate disposition of its assets and liabilities.  All significant intercompany transactionsand balances have been eliminated in consolidation.  Certain prior period reclassifications have been made to conformto the current period presentation.

 

**Note 2: Chapter 11Bankruptcy Reorganization**

 

During the first quarter of 2004, thefollowing occurred under the jurisdiction of the Bankruptcy Court:

 

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

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

•                  OnMarch 24, 2004, the Bankruptcy Court approved a motion to dispose of thePartnership’s Alliance Lumber Segment operations in Las Vegas, Nevada.  See Note 10.

 

The creditors on the acquisition facility and senior notes assertthat their debt is collateralized by the Partnership’s timberlands and certainreal property and equipment associated with its Manufacturing Segment. Theremaining liabilities subject to compromise are generally unsecured.  The Chapter 11 filing constitutes adefault or event of default under a number of the company’s debt, lease andother contractual relationships.  While the Partnership is underbankruptcy protection, any scheduled interest or principal payments on debt aredeferred and creditors are generally prohibited from pursuing collection oftheir pre-petition claims by the automatic stay provisions of the BankruptcyCode.  In accordance with SOP 90-7, thePartnership discontinued accruing interest on its term debt effectiveJune 30, 2003, because it is not probable it will be paid during thebankruptcy proceedings or be an allowed claim. An additional $12.7 million of interest expense would have beenrecognized in the first quarter of 2004 if not for the Chapter 11 bankruptcypetition.

 

5

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On November 10, 2003, a hearing was held in the Bankruptcy Courton a motion from the Partnership, which was opposed by the creditors, to extendthe period of exclusivity in which only the Partnership may present a plan ofreorganization to the Bankruptcy Court. At the hearing, the Bankruptcy Court denied the Partnership’s motion,thereby ending the period within which the Partnership had the exclusive rightto propose a reorganization plan.  ThePartnership is negotiating with the major creditor constituents in its Chapter11 proceedings, and has begun to pursue a process by which the Partnership’sassets and operations will be sold or otherwise divested in order to satisfycreditor claims. Management anticipates that the Partnership will file aconsensual Chapter 11 plan, jointly with these creditor constituents, that willfurther this divestiture process. It appears highly unlikely that the claims ofthe holders of the acquisition facility bank debt and senior notes will besatisfied in full. Accordingly, the Chapter 11 plan that is currently undernegotiation contemplates the extinguishment of the Partnership units with norecovery to holders of units, and any plan that is ultimately confirmed by theBankruptcy Court will likely extinguish the equity units. Further, it is likelythat any plan that is ultimately confirmed will, in conjunction with anypre-confirmation asset dispositions, result in the disposition of all of thePartnership’s operations and associated assets.

 

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

 

On July 1, 2003, the Bankruptcy Court entered an interim financing order and 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 reduced to $20 million should the Partnership dispose of all of its Alliance Lumber Segment. The DIP Revolver 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 March 31, 2004, there was $18.3 million outstanding at an interest rate of 4.5% and approximately $16.5 million remained available on the DIP Revolver (see Note 10). As of March 31, 2004, the Partnership was not in compliance with all of the financial reporting covenants of the DIP Revolver, but CIT did not declare an event of default and the Partnership has subsequently complied with all financial reporting covenants.  As of March 31, 2004, the Partnership was in compliance with all of the other covenants of the DIP Revolver.

 

**Note 4:  Liabilities Subject to Compromise**

 

Pursuant to the bankruptcy proceedings, the Partnership hasclassified certain liabilities which existed prior to the June 29, 2003bankruptcy petition filing as liabilities subject to compromise in accordancewith SOP 90-7.  Disposition andsettlement of such liabilities is under the jurisdiction of the BankruptcyCourt.  The following table summarizesthe pre-petition liabilities that are included as liabilities subject tocompromise on the accompanying consolidated balance sheets (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) |   | (4,500                   | )       | (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                |   | 1,294                    |    | 1,419                       |   |
| Other accrued expenses          |   | 3,490                    |    | 3,428                       |   |
| Total                           |   | $                        | 545,640 |                        | $      | 547,203 |   |

 

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(1)          In October 2003,the Partnership agreed to pay $0.5 million per month, retroactive toJuly 2003, to the acquisition facility banks and senior note holders asadequate protection payments 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 thesenior note holders and the acquisition facility banks.  The method for allocating the adequateprotection payments will be determined by the Bankruptcy Court and, therefore,the Partnership is not able to apply these payments to specific debt componentsat this time.

 

6

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**Note 5: Inventories**

 

All inventories, consisting primarily of logs, lumber and buildingmaterials, are stated at the lower of average cost or market and consisted ofthe following (in thousands):

 
|                    |   | **March 31,  2004** |   | **December 31,  2003** |   |
|-------------------------|--------|--------------------------|--------|-----------------------------|--------|
| Lumber                  |   | $                        | 4,505  |                        | $      | 3,554 |   |
| Logs                    |   | 2,434                    |   | 1,887                       |   |
| Supplies                |   | 3,342                    |   | 3,326                       |   |
| Manufacturing inventory |   | 10,281                   |   | 8,767                       |   |
| Wholesale products      |   | 12,812                   |   | 19,176                      |   |
| Total                   |   | $                        | 23,093 |                        | $      | 27,943 |   |

 

**Note 6: Timber, Timberlands and Roads, Net**

 

The Partnership updates its timber inventory system annually forchanges in estimated volume due to timber verification cruises, timber growthfactors and actual harvest levels by species. The changes to estimated timber volume, along with changes in book valuefrom capitalized expenditures, impairment adjustments and any timber purchaseor sale transactions, result in a change in estimated depletion rates. Therevised estimate made at the beginning of 2004 decreased depletion expense forthe first quarter of 2004 by $0.2 million, compared to the depletion rates thatwere in effect at the start of 2003 applied to the actual volume harvested inthe first quarter of 2004.

 

**Note 7: Allocation ofPartnership Losses**

 

The Partnership Agreementprovides that profit and losses are generally allocated 1.01% to the GeneralPartner interest and 98.99% to the Limited Partner interest.  In addition, the Partnership Agreementspecifies that net losses are not allocated to limited partners to the extentdoing so would result in (or increase) a deficit balance in their capitalaccounts. At that point, net losses are allocated 100% to the General Partners.  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 first quarter of2004.  100% of income and losses willcontinue to be allocated to the General Partners unless and until thecumulative additional losses they have been allocated are fully recovered.

 

**Note 8: Unit-BasedCompensation**

 

The Partnership accounts for unit options using the intrinsic valuemethod as prescribed by Accounting Principles Board (APB) Opinion No. 25,“Accounting for Stock Issued to Employees.”  Pursuant to Statement of Financial Accounting Standards (SFAS) No. 148“Accounting for Stock-Based Compensation - Transition and Disclosure,” thePartnership has computed, for pro forma disclosure purposes, the impact on netincome (loss) and net income (loss) per unit as if it had accounted for itsunit-based compensation plans in accordance with the fair value methodprescribed by SFAS No. 123 “Accounting for Stock-Based Compensation” as follows(in thousands, except per unit amounts):

 
| **Three Months Ended March 31,**                          |   | **2004** |   | **2003** |   |
|----------------------------------------------------------------|--------|----------|--------|----------|--------|
| Net income (loss), as reported                                 |   | $        | 5,325  |     | $      | (16,515 | ) |
| Fair value of unit-based employee  compensation                |   | (1       | )      | (8       | )      |
| Net income (loss), pro forma                                   |   | $        | 5,324  |     | $      | (16,523 | ) |
| Basic and diluted net income (loss) per  limited partner unit: |   |     |   |     |   |
| As reported                                                    |   | $        | — |     | $      | (0.54 | ) |
| Pro forma                                                      |   | $        | — |     | $      | (0.54 | ) |

 

There were no unit options granted in the first quarter of 2004 or2003.

 

7

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**Note 9: SegmentReporting**

 

The Partnershipclassifies its business into three fundamental areas for purposes of providingsegment information: 1) Timberlands, consisting of the operation of tree farmsand the harvest and sale of logs to the Partnership’s manufacturing facilitiesand to third parties, and the sale of timber and timberlands to third parties;2) Manufacturing, consisting of the manufacture of logs into dimension lumberand the 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.  Corporate and Other includes generalcorporate overhead and expenses not allocated to the segments, miscellaneousoperations not significant enough to be classified as a separate segment andother items not specifically allocated to the operating segments.

 

The Partnershipdiscontinued its Trading and Distribution Segment during the second quarter of2003, and the results from this segment are shown as discontinued operationsfor all periods presented. The Trading and Distribution Segment consisted ofthe wholesale trading, marketing and distribution of lumber and panel products.See Note 10.

 

On March 24, 2004the Bankruptcy Court approved a motion to sell the net assets of the Las Vegasoperations of the Partnership’s Alliance Lumber Segment, and, accordingly, theresults from the Las Vegas business unit are shown as discontinued operationsfor all periods presented.  See Note 10.

 

The Partnership does notshow assets by segment, as historic costs are not used by management toallocate resources or assess performance.

 

The followingsummarizes the Partnership’s segment information (in thousands):

 
|                  |   | **Three Months Ended March 31,** |   |
|-----------------------|--------|---------------------------------------|--------|
| **Revenues**          |   | **2004**                              |   | **2003** |   |
| Timberlands:          |   |                                  |   |   |   |
| Trade                 |   | $                                     | 5,529  |   | $ | 6,917 |   |
| Intersegment          |   | 8,890                                 |   | 9,544 |   |
|                  |   | 14,419                                |   | 16,461 |   |
| Manufacturing:        |   |                                  |   |   |   |
| Trade                 |   | 26,121                                |   | 21,976 |   |
| Intersegment          |   | 852                                   |   | 1,173 |   |
|                  |   | 26,973                                |   | 23,149 |   |
| Alliance  Lumber:     |   |                                  |   |   |   |
| Trade                 |   | 48,620                                |   | 34,781 |   |
| Intersegment          |   | —                                |   | — |   |
|                  |   | 48,620                                |   | 34,781 |   |
| Corporate and  Other: |   |                                  |   |   |   |
| Trade                 |   | 2,277                                 |   | 2,439 |   |
| Intersegment          |   | —                                |   | 60 |   |
|                  |   | 2,277                                 |   | 2,499 |   |
| Total:                |   |                                  |   |   |   |
| Total Revenue         |   | 92,289                                |   | 76,890 |   |
| Less  Intersegment    |   | (9,742                                | )      | (10,777 | ) |
| Net Revenue           |   | $                                     | 82,547 |   | $ | 66,113 |   |

 

8

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|                                                                         |   | **Three Months Ended March 31,** |   |
|------------------------------------------------------------------------------|--------|---------------------------------------|--------|
| **Operating  income (loss)**                                                 |   | **2004**                              |   | **2003** |   |
| Timberlands                                                                  |   | $                                     | 408    |   | $ | 779 |   |
| Manufacturing                                                                |   | 6,962                                 |   | (576 | ) |
| Alliance  Lumber                                                             |   | 2,369                                 |   | 2,368 |   |
| Corporate and  Other                                                         |   | (2,089                                | )      | (1,827 | ) |
| Operating  Income                                                            |   | 7,650                                 |   | 744 |   |
| Interest  Expense (excluding contractual interest expense of $12,736 and $0) |   | (268                                  | )      | (11,952 | ) |
| Other                                                                        |   | (414                                  | )      | (294 | ) |
| Reorganization Items                                                         |   | (2,123                                | )      | — |   |
| Income (Loss) from Continuing  Operations                                    |   | $                                     | 4,845  |   | $ | (11,502 | ) |

 
|                                          |   | **Three Months Ended March 31,** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|
| **Depreciation,  depletion and amortization** |   | **2004**                              |   | **2003** |   |
| Timberlands                                   |   | $                                     | 3,172  |   | $ | 4,146 |   |
| Manufacturing                                 |   | 1,212                                 |   | 1,218 |   |
| Alliance Lumber                               |   | 75                                    |   | 144 |   |
| Corporate and Other                           |   | 561                                   |   | 583 |   |
| Total                                         |   | $                                     | 5,020  |   | $ | 6,091 |   |

 

**Note 10:  Discontinued Operations**

 

***Las Vegas Operations of Alliance Lumber Segment***

On March 24, 2004,the Bankruptcy Court approved a motion to dispose of the Partnership’s AllianceLumber Segment operations in Las Vegas, Nevada.  In April 2004, the Partnership closed the sale of thisoperation, resulting in a recognized loss of $1.2 million in the second quarterof 2004.  Results of operations for theLas Vegas operations are reported as discontinued operations for all periodspresented in accordance with Statement of Financial Accounting Standards No.144 (“SFAS No. 144”) “Accounting for the Impairment or Disposal of Long-LivedAssets.”  Summarized financialinformation for these operations is as follows (in thousands):

 
| **Three  Months Ended March 31,** |   | **2004** |   | **2003** |   |
|----------------------------------------|--------|----------|--------|----------|--------|
| Revenues                               |   | $        | 18,756 |     | $      | 13,040 |   |
| Operating  income                      |   | 480      |   | 338      |   |
|                                        |        |          |        |          |        |  |  |

 

As of March 31, 2004, the assets and liabilities of the LasVegas operations were classified as held for sale on the consolidated balancesheet.  Components of these assets andliabilities were as follows (in thousands):

 
|                       |   | **March 31,  2004** |   |
|----------------------------|--------|--------------------------|--------|
| Accounts  receivable, net  |   | $                        | 9,653  |   |
| Inventory                  |   | 3,933                    |   |
| Other assets               |   | 700                      |   |
| Assets held  for sale      |   | $                        | 14,286 |   |
|                       |   |                     |   |
| Liabilities  held for sale |   | $                        | (838   | ) |

 

Sale of the net assets of the Las Vegas operations produced cashproceeds of $12.3 million, all of which was immediately paid to CIT to reduceoutstanding borrowings under the DIP Revolver. This disposition is expected to reduce availability under the DIPRevolver by $4.0 to $5.0 million.

 

9

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***Trading and Distribution Segment***

In April and May2003, in two separate transactions, the Partnership sold the inventory andfixed assets related to its Trading and Distribution Segment and discontinuedthe segment’s operations.  Thepurchasers of these assets assumed the operating leases, accounts payable andaccrued expenses related to these businesses. The Partnership received a total of $4.5 million from these asset sales,all of which was immediately applied to outstanding principal on the revolvingcredit facility. The results of operations of the Trading and DistributionSegment are reflected as discontinued operations on the accompanyingconsolidated statements of operations for all periods presented in accordancewith SFAS No. 144.

 

During March 2003, deterioration of thePartnership’s trade credit availability began to adversely affect operatingmargins in the Trading and Distribution Segment.  Pursuant to the provisions of SFAS No. 142 “Goodwill and OtherIntangible Assets,” the Partnership evaluated the goodwill balance of thissegment for impairment following the change in circumstances during the firstquarter of 2003, utilizing a fair value analysis of the business in the currentmarket environment.  Based on theresults of this evaluation, the Partnership determined that itsgoodwill was impaired and recorded a non-cash impairment charge of $5.5 millionin the three months ended March 31, 2003. This $5.5 million charge is included in discontinued operations.

 

Summarized financial information for these operations is asfollows (in thousands):

 
| **Three  Months Ended March 31,** |   | **2003** |   |
|----------------------------------------|--------|----------|--------|
| External  revenues                     |   | $        | 27,807 |   |
| Operating loss                         |   | (5,351   | )      |
|                                        |        |          |        |  |

 

***Reno, Nevada Operations ofAlliance Lumber Segment***

The Partnership is innegotiations to sell its Alliance Lumber Segment operations in Reno, Nevada andanticipates signing an asset purchase agreement in the second quarter of2004.  If an asset purchase agreement issigned and approved by the Bankruptcy Court, the disposition of the Reno,Nevada operations is expected to generate approximately $11.0 to $12.5 millionof cash, all of which will be immediately paid to CIT to reduce outstandingborrowings under the DIP Revolver.  Inaddition, the disposition is expected to reduce the borrowing base on thePartnership’s DIP Revolver by approximately $8.5 to $9.5 million.

 

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

 

**Chapter 11 BankruptcyReorganization**

 

During the second quarter of 2003, we wereunable to meet the financial covenants and scheduled interest payments pursuantto our bank loan and senior note agreements. In addition, we were unable tosuccessfully negotiate a recapitalization with our bank lenders and senior noteholders.  Accordingly, on June 29,2003, we 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”)for the Partnership and all but one of our subsidiaries, Klamath NorthernRailway, Co.  We currently manage ourproperties and operate our businesses as “debtors-in-possession” under thejurisdiction of the Bankruptcy Court and in accordance with the applicableprovisions of the Bankruptcy Code.

 

We have experienced net losses in thirteen ofthe last fourteen fiscal quarters, and would have reported a net loss in thecurrent quarter if $12.7 million of contractual interest expense had beenrecognized.  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 or thatthe 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.

 

10

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The following occurred under the jurisdictionof the Bankruptcy Court in the first quarter of 2004:

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

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

•                  OnMarch 24, 2004, the Bankruptcy Court approved a motion to dispose of ourAlliance Lumber Segment operations in Las Vegas, Nevada. See DiscontinuedOperations below.

 

The creditors on the acquisition facility and senior notes assertthat their debt is collateralized by our timberlands and certain real propertyand equipment associated with our Manufacturing Segment. The remaining liabilitiessubject to compromise are generally unsecured. The Chapter 11 filingconstitutes a default or event of default under a number of our debt, lease andother contractual relationships. While we are under bankruptcy protection, anyscheduled interest or principal payments 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 SOP90-7, 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 $12.7 million and $25.3million, respectively, of interest expense would have been recognized in thefirst quarter of 2004 and in the second half of 2003 if not for the Chapter 11bankruptcy petition.

 

OnNovember 10, 2003, a hearing was held in the Bankruptcy Court on a motionfrom us, which was opposed by the creditors, to extend the period ofexclusivity in which only we could present a plan of reorganization to theBankruptcy Court.  At the hearing, theBankruptcy Court denied our motion, thereby ending the period within which wehad the exclusive right to propose a reorganization plan.  We are negotiating with the major creditor constituents inour Chapter 11 proceedings, and have begun to pursue a process by which ourassets and operations will be sold or otherwise divested in order to satisfycreditor claims. We anticipate that we will file a consensual Chapter 11 plan,jointly with these creditor constituents, that will further this divestitureprocess. It appears highly unlikely that the claims of the holders of ouracquisition facility bank debt and senior notes will be satisfied in full.Accordingly, the Chapter 11 plan that is currently under negotiationcontemplates the extinguishment of our partnership units with no recovery toholders of units, and any plan that is ultimately confirmed by the BankruptcyCourt will likely extinguish the equity units. Further, it is likely that anyplan that is ultimately confirmed will, in conjunction with anypre-confirmation asset dispositions, result in the disposition of substantiallyall of our operations and associated assets.

 

**IndustryOverview**

 

The forest products and building materialsindustries are characterized by highly volatile commodity pricing.  Product pricing for logs, dimension lumberand other building materials is a function of species, grade, size andavailability. Prices are heavily influenced by supply and demand for products.Prices tend to follow broad seasonal and cyclical patterns. Demand isinfluenced by activity levels in the housing and construction industries, aswell as general economic conditions and foreign currency exchange rates. In recentyears, over capacity of lumber manufacturing facilities has led to an abundanceof supply. Supply has been further increased by imported products from Canadaand other countries. In addition, competition from non-wood based products andcomposite materials has also influenced prices for dimension lumber. Althoughdemand has been strong over the last three years, excess supply has contributedto low prices for lumber, which, in turn, has depressed prices for logs andtimberlands.  Beginning in the second halfof 2003, prices for lumber and paneling increased sharply, and have remainedrelatively strong through the first quarter of 2004.  Prices for logs have remained relatively low, but have increasedmodestly in late 2003 and early 2004.  Amajor trade dispute with Canada over the importation of lumber and paneling hascontinued to cast uncertainty over the markets for these products.  Weather and forest fire activity, as well asenvironmental issues concerning the harvesting of timber, are also contributingfactors to supply and the volatility of prices in our industry.

 

11

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**Forward-LookingStatements**

 

Information contained in Item 2 and other sections of this reportincludes “forward-looking statements” within the meaning of the PrivateSecurities Litigation Reform Act of 1995, including statements regarding ourexpectations, forecasts, hopes, beliefs, predictions, intentions or strategiesregarding the future that are not purely historical, but are based on assumptionsthat in the future may prove not to be accurate. These assumptions includeharvest volumes, species mix, prices for logs and lumber, demand for housingand levels and amounts received for stumpage and property sales. Our businessand prospects are subject to a number of risks, including the volatility oftimber and lumber prices, factors limiting harvesting of timber includingcontractual obligations, governmental restrictions, weather and accesslimitations – as well as the substantial capital resources required to fund ouroperations and the uncertainty regarding procurement of additional equitycapital.  Accordingly, actual resultsmay differ materially from the expectations expressed in this report.

 

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

 

##### **Liquidityand Capital Resources**

##### ** **

As discussed above, on June 29, 2003, we filed for Chapter 11bankruptcy protection.  Pursuant to thebankruptcy proceedings, we have listed certain pre-petition liabilities whichexisted prior to the June 29, 2003 bankruptcy filing as liabilitiessubject to compromise.  Disposition andsettlement of such liabilities is under the jurisdiction of the BankruptcyCourt.

 

The following table summarizes the pre-petition liabilities thatare included as liabilities subject 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) |   | (4,500                   | )       | (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                |   | 1,294                    |    | 1,419                       |   |
| Other accrued expenses          |   | 3,490                    |    | 3,428                       |   |
| Total                           |   | $                        | 545,640 |                        | $      | 547,203 |   |

 

----

(1)          InOctober 2003, the Partnership agreed to pay $0.5 million per month, retroactiveto July 2003, to the acquisition facility banks and senior note holders asadequate protection payments 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 thesenior note holders and the acquisition facility banks.  The method for allocating the adequateprotection payments will be determined by the Bankruptcy Court and, therefore,the Partnership is not able to apply these payments to specific debt componentsat this time.  All of these paymentshave been made as scheduled.

 

On July 1, 2003, the Bankruptcy Court entered an interim financing order and 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 reduced to $20 million should we dispose of all of our Alliance Lumber Segment. The DIP Revolver 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

 

12

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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 March 31, 2004, there was $18.3 million outstanding at an interest rate of 4.5% and approximately $16.5 million remained available on the DIP Revolver. As of March 31, 2004, we were not in compliance with all of the financial reporting covenants of the DIP Revolver, but CIT did not declare an event of default and we have subsequently complied with all financial reporting covenants.  As of March 31, 2004, we were in compliance with all of the other covenants of the DIP Revolver.

 

Working capitalincreased to $67.0 million at March 31, 2004 compared to $59.4 million atDecember 31, 2003, primarily due to $4.5 million of cash provided byoperating activities.  Net cash providedby operating activities resulted from net income of $5.3 million and depletion,depreciation and amortization of $5.0 million, partially off-set by changes inworking capital components.

 

Accountsreceivable decreased to $41.3 million at March 31, 2004 compared to $44.0million at December 31, 2003, primarily due to the reclassification of receivablesassociated with our Las Vegas, Nevada operations to assets held for sale,net.  Excluding this reclassification,accounts receivable would have increased by $7.0 million reflecting increasedrevenues from higher prices for lumber and paneling.

 

The $4.9 milliondecrease in inventories is primarily due to the reclassification of inventoryassociated with our Las Vegas, Nevada operations to assets held for sale,net.  Excluding this reclassification,inventories would have decreased by $0.9 million, reflecting normal timingfluctuations in inventory levels, offset by a $1.8 million increase in prepaidinventories included in prepaid and other current assets.

 

Assets andliabilities held for sale at March 31, 2004 relate to the net assets soldwith our Las Vegas operations in April 2004, and consisted of thefollowing (in thousands):

 
|                       |   | **March 31,  2004** |   |
|----------------------------|--------|--------------------------|--------|
| Accounts  receivable, net  |   | $                        | 9,653  |   |
| Inventory                  |   | 3,933                    |   |
| Other assets               |   | 700                      |   |
| Assets held  for sale      |   | $                        | 14,286 |   |
|                       |   |                     |   |
| Liabilities  held for sale |   | $                        | (838   | ) |

 

Sale of the net assets ofour Las Vegas operations produced cash proceeds of $12.3 million, all of whichwas immediately paid to CIT to reduce outstanding borrowings under the DIPRevolver.  This disposition is expectedto reduce the borrowing base under the DIP Revolver by $4.0 to $5.0 million. Ifan asset purchase agreement is signed and approved by the Bankruptcy Court, thedisposition of the Reno, Nevada operations is expected to generateapproximately $11.0 to $12.5 million of cash, all of which will be immediatelypaid to CIT to reduce outstanding borrowings under the DIP Revolver.  In addition, the disposition is expected toreduce the borrowing base on the Partnership’s DIP Revolver by approximately$8.5 to $9.5 million.

 

Additions totimberlands of $1.0 million in the first quarter of 2004 resulted from normalcosts for road building and maintenance, pre-commercial thinning andreforestation activities.

 

We indefinitely suspended our cash distributions beginning in thefourth quarter of 2000. Furthermore, we are prohibited from making cashdistributions to unitholders during our Chapter 11 reorganization process.Since it is unlikely that our unitholders will receive anything as a result ofour Chapter 11 bankruptcy proceedings, it is unlikely that we will make anyfuture cash distributions on our units.

 

13

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**Results of Operations**

 

During the second quarter of 2003, we sold our Trading and DistributionSegment, which is reflected as discontinued operations on our consolidatedstatements of operations for the first quarter of 2003.  In addition, in March 2004, theBankruptcy Court approved the sale of, and in April 2004, we sold, theassets related to our Las Vegas, Nevada Alliance Lumber Segment operations. Theresults of the Las Vegas operations are reflected as discontinued operations inall periods presented.  Please seeadditional discussion below.

 
|                                                       |   | **Quarter  Ended March 31,** |   |
|------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                       |   | **2004**                          |   | **2003** |   |
| **(In thousands, except per  share amounts)**              |   | **Dollars**                       |   | **% of  revenue(1)** |   | **Dollars** |   | **% of  revenue(1)** |   |
| Revenue                                                    |   | $                                 | 82,547 |   | 100.0 | % | $ | 66,113 |   | 100.0 | % |
| Operating costs:                                           |   |                              |   |   |   |   |   |   |   |
| Cost of products sold                                      |   | 69,511                            |   | 84.2 |   | 60,507 |   | 91.5 |   |
| Gain on disposal of assets                                 |   | (18                               | )      | — |   | (485 | ) | (0.7 | ) |
| Selling, general and administrative  expenses              |   | 5,404                             |   | 6.6 |   | 5,347 |   | 8.1 |   |
| Operating income                                           |   | 7,650                             |   | 9.3 |   | 744 |   | 1.1 |   |
| Interest expense                                           |   | 268                               |   | 0.3 |   | 11,952 |   | 18.1 |   |
| Amortization of debt issuance costs                        |   | 468                               |   | 0.6 |   | 423 |   | 0.6 |   |
| Other income, net                                          |   | (54                               | )      | (0.1 | ) | (129 | ) | (0.2 | ) |
| Income (loss) from operations before  reorganization items |   | 6,968                             |   | 8.4 |   | (11,502 | ) | (17.4 | ) |
| Reorganization items                                       |   | (2,123                            | )      | (2.6 | ) | — |   | — |   |
| Income (loss) before discontinued  operations              |   | 4,845                             |   | 5.9 |   | (11,502 | ) | (17.4 | ) |
| Income (loss) from discontinued operations                 |   | 480                               |   | 0.6 |   | (5,013 | ) | (7.6 | ) |
| Net income (loss)                                          |   | $                                 | 5,325  |   | 6.5 | % | $ | (16,515 | ) | (25.0 | )% |

 

----

(1)  Percentagesmay not add due to rounding.

 

**Revenue**

Revenue increased$16.4 million, or 24.9%, to $82.5 million in the first quarter of 2004 comparedto $66.1 million in the first quarter of 2003 due primarily to increasedrevenues from our Manufacturing Segment and our Alliance Lumber Segment,partially offset by a decrease in revenues from our Timberlands Segment, asdiscussed more fully below.

 

**Cost of Products Sold**

Cost of products sold increased $9.0 million, or 14.9%, to 69.5 millionin the first quarter of 2004 compared to $60.5 million in the first quarter of2003 due to increased sales volume.  The decrease in cost of products sold as a percentage of revenue in thefirst quarter of 2004 compared to the first quarter of 2003 is primarily due toimproved gross margins in our Manufacturing Segment, partially off-set by lowergross margins in our Alliance Lumber Segment, as discussed more fully below.

 

**Gain on Disposal ofAssets**

Gain on disposal of assets of $0.5 million in the first quarter of 2003represents the gain on sale of aviation equipment.

 

**Selling, General andAdministrative Expenses**

Selling, general and administrative expenses were relatively flat at$5.4 million in the first quarter of 2004 compared to $5.3 million in the firstquarter of 2003.  Reductions inpersonnel costs from reduced headcount were off-set by increased costs forinsurance and bad debts expense.

 

14

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**Interest Expense**

In accordance with SOP90-7, interest expense in the first quarter of 2004 does not includecontractual interest totaling $12.7 million on the Senior Notes and AcquisitionFacility since it is not probable it will be paid subsequent to ourJune 29, 2003 Chapter 11 bankruptcy filing.  Please read “Chapter 11 Bankruptcy Reorganization” above also.

 

**Reorganization Items**

Reorganizationitems consist primarily of professional fees and other charges incurred relatedto our Chapter 11 reorganization and recapitalization efforts subsequent toJune 29, 2003. We anticipate continuing to incur significant professionalfees and court costs in future quarters related to our reorganization effortsunder Chapter 11.

 

**Income Taxes**

In the past, wehave not paid significant income taxes and have not included a provision forincome taxes in our financial statements. As a partnership, taxation on ourresults of operations 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 theApril 2004 disposition of our Las Vegas operations, but we are not able toestimate the final 2004 tax liability for the consolidated group ofcorporations at this time. We may incur material income tax liability in thefuture from any further disposition of additional assets.  Any such income tax incurred by thesetaxable entities would generally not be allocated to unitholders.

 

**Allocation of Income (Losses)**

Our partnership agreementprovides that profit and losses are generally allocated 1.01% to the GeneralPartner interest and 98.99% to the Limited Partner interest.  In addition, the partnership agreementspecifies that net losses are not allocated to limited partners to the extentdoing so would result in (or increase) a deficit balance in their capitalaccounts. At that point, net losses are allocated 100% to the GeneralPartners.  In the third quarter of 2003,the Limited Partners’ capital accounts were reduced to zero, and subsequentincome and losses have been allocated 100% to the General Partners.Accordingly, the General Partner interest was allocated our entire $5.0 millionof income in the first quarter of 2004. 100% of income and losses will continue to be allocated to the GeneralPartners unless and until the cumulative additional losses they have beenallocated are fully recovered.

 

**Discontinued Operations**

 

***Trading and Distribution Segment***

Our Trading andDistribution Segment, which was comprised of operations based in Eugene, Oregonand Albuquerque, New Mexico, was sold during the second quarter of 2003. TheTrading and Distribution Segment involved the wholesale trading of lumber,panels and other wood products, most of which were not manufactured by us. Theresults of operations for this segment are reflected as discontinued operationson our consolidated statement of operations for the quarter endedMarch 31, 2003.  This segmentproduced revenues of $27.8 million and an operating loss of $5.3 million in thefirst quarter of 2003.  The operatingloss from this segment in the first quarter of 2003 included a $5.5 millioncharge for the impairment of goodwill.

 

***Las Vegas, NevadaAlliance Lumber Operations***

In March 2004, the Bankruptcy Court approved the sale of, and inApril 2004, we sold, the assets related to our Las Vegas, Nevada AllianceLumber Segment operations. The results of the Las Vegas operations arereflected as discontinued operations in all periods presented.

 

The sale of these operations in April 2004, resulted in anadditional loss of $1.2 million. Summarized financial information for the Las Vegas operations is asfollows (in thousands):

 
| **Three  Months Ended March 31,** |   | **2004** |   | **2003** |   |
|----------------------------------------|--------|----------|--------|----------|--------|
| Revenues                               |   | $        | 18,756 |     | $      | 13,040 |   |
| Operating  income                      |   | 480      |   | 338      |   |
|                                        |        |          |        |          |        |  |  |

 

15

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**Results of Operations by Segment**

 

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

 
|                |   | **Quarter  Ended March 31,** |   |
|---------------------|--------|-----------------------------------|--------|
|                |   | **2004**                          |   | **2003** |   |
| Timberlands         |   | $                                 | 5,529  |   | 6.7 | % | $ | 6,917 |   | 10.5 | % |
| Manufacturing       |   | 26,121                            |   | 31.6 | % | 21,976 |   | 33.2 | % |
| Alliance Lumber     |   | 48,620                            |   | 58.9 | % | 34,781 |   | 52.6 | % |
| Corporate and Other |   | 2,277                             |   | 2.8 | % | 2,439 |   | 3.7 | % |
|                |   | $                                 | 82,547 |   |   |   | $ | 66,113 |   |   |   |

 

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

 
|                |   | **Quarter  Ended March 31,** |   |
|---------------------|--------|-----------------------------------|--------|
|                |   | **2004**                          |   | **2003** |   |
| Timberlands         |   | $                                 | 408    |   | $ | 779 |   |
| Manufacturing       |   | 6,962                             |   | (576 | ) |
| Alliance Lumber     |   | 2,369                             |   | 2,368 |   |
| Corporate and Other |   | (2,089                            | )      | (1,827 | ) |
|                |   | $                                 | 7,650  |   | $ | 744 |   |

 

**Timberlands**

The $1.4 million,or 20.1%, decrease in external Timberlands Segment sales in the first quarterof 2004 compared to the first quarter of 2003 reflects a 13.3% decrease indomestic log shipments, a 67.0% decrease in export log shipments and a 27.8%decrease in export weighted average sales realizations.  These factors were partially offset by an8.3% increase in domestic weighted average sales realizations.  These factors are discussed more fullybelow.

 

Internal sales oflogs to our Manufacturing Segment decreased to $8.9 million in the firstquarter of 2004 compared to $9.5 million in the first quarter of 2003. Thedecrease primarily reflects an 8.3% reduction in volume, due in large part tolower production levels in our Oregon manufacturing operations, following theshut-down of the dry-end operations at our Prineville sawmill inApril 2003.  These decreases werepartially offset by a 1.7% increase in average internal sales realizationsreflecting higher market log prices in the first quarter of 2004 compared tothe first quarter of 2003.

 

The $0.4 milliondecrease in Timberlands operating income in the first quarter of 2004 comparedto the first quarter of 2003 was primarily a result of the decreased volumediscussed above, partially off-set by a $0.2 million reduction in overheadexpenses.

 

***Domestic Log Sales***

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

 
|             |   | **Quarter  Ended March 31,** |   |     |   |
|------------------|--------|-----------------------------------|--------|----------|--------|
| **Tree Farm**    |   | **2004**                          |   | **2003** |   | **% Change** |   |
| Hamilton         |   | $                                 | 490    |     | $      | 421 |   | 16.4 | % |
| Olympic          |   | $                                 | 373    |     | $      | 377 |   | (1.1 | )% |
| Weighted average |   | $                                 | 433    |     | $      | 400 |   | 8.3 | % |

 

The increase atthe Hamilton Tree Farm is due to higher market prices for logs and changes inspecies and grade mix, while the slight decrease at the Olympic Tree Farmreflects changes in species and grade mix.

 

All volume fromthe Oregon Tree Farm was utilized by our Gilchrist mill and therefore, therewere no external sales from this tree farm.

 

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The domesticexternal volume from each of our tree farms was as follows (in MBF):

 
|          |   | **Quarter  Ended March 31,** |   |     |   |
|---------------|--------|-----------------------------------|--------|----------|--------|
| **Tree Farm** |   | **2004**                          |   | **2003** |   | **% Change** |   |
| Hamilton      |   | 5,584                             |   | 6,460    |   | (13.6 | )% |
| Olympic       |   | 5,307                             |   | 6,107    |   | (13.1 | )% |
| Total         |   | 10,891                            |   | 12,567   |   | (13.3 | )% |

 

The decreases in volume from both tree farmsare due to reduced fee harvests.

 

***Export Log Sales***

 

Information regardingsales of logs to customers involved in exporting activities is as follows:

 
|                                |   | **Quarter  Ended March 31,** |   |
|-------------------------------------|--------|-----------------------------------|--------|
|                                |   | **2004**                          |   | **2003** |   |
| Export sales revenue (in thousands) |   | $                                 | 134    |   | $ | 563 |   |
| As a percentage of total revenue    |   | 0.2                               | %      | 0.9 | % |
| Sales volume (in MBF)               |   | 316                               |   | 959 |   |
| Average realizations ($/MBF)        |   | $                                 | 424    |   | $ | 587 |   |

 

The decrease inexport sales volume is due to reduced availability of export grade logs in theareas of our Washington tree farms which are currently being harvested.  In addition, higher domestic prices for suchlogs have currently mitigated much of the advantage from exporting them.  The decrease in the average realizations isdue to changes in product mix.

 

**Manufacturing**

The $4.1 million,or 18.9%, increase in external revenue from our sawmills in the first quarterof 2004 compared to the first quarter of 2003 reflects a 30.2% increase inaverage external lumber sales realizations, partially offset by a 7.0% decreasein external lumber sales volumes.  Thesefactors are discussed more fully below.

 

Internal shipmentsdecreased 48.8% to 2.4 MMBF in the first quarter of 2004 compared to 4.6 MMBFin the first quarter of 2003, primarily due to the disposition of our Tradingand Distribution Segment in the second quarter of 2003.

 

The improvement inoperating results in the first quarter of 2004 compared to the first quarter of2003 is primarily a result of the improved realizations and improved productionefficiencies at our saw mills, partially off-set by lower sales volume.

 

Average externalprices received for lumber sales by region were as follows (dollars per MBF):

 
|             |   | **Quarter  Ended March 31,** |   |     |   |
|------------------|--------|-----------------------------------|--------|----------|--------|
| **Region**       |   | **2004**                          |   | **2003** |   | **% Change** |   |
| Oregon           |   | $                                 | 345    |     | $      | 270 |   | 27.8 | % |
| Washington       |   | $                                 | 344    |     | $      | 259 |   | 32.8 | % |
| Weighted average |   | $                                 | 345    |     | $      | 265 |   | 30.2 | % |

 

The improvementsin the average realizations are due to improved market prices resulting fromstrong demand from the domestic housing market, as well as changes in productmix.

 

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External lumbersales volumes by region were as follows (in MBF):

 
|       |   | **Quarter  Ended March 31,** |   |     |   |
|------------|--------|-----------------------------------|--------|----------|--------|
| **Region** |   | **2004**                          |   | **2003** |   | **% Change** |   |
| Oregon     |   | 38,576                            |   | 42,172   |   | (8.5 | )% |
| Washington |   | 31,699                            |   | 33,380   |   | (5.0 | )% |
| Total      |   | 70,275                            |   | 75,552   |   | (7.0 | )% |

 

The decrease involume from the Oregon region is primarily due to the curtailment of dry-endoperations at our Prineville sawmill subsequent to the first quarter of 2003,and lower production levels in the 2004 period.  The decrease in volume from the Washington region is due to lowerproduction levels at our Washington saw mills.

 

Following isinformation regarding our chip sales:

 
|                                              |   | **Quarter  Ended March 31,** |   |
|---------------------------------------------------|--------|-----------------------------------|--------|
|                                              |   | **2004**                          |   | **2003** |   |
| Chip sales revenue (in thousands of  dollars)     |   | $                                 | 1,874  |   | $ | 1,750 |   |
| Chip sales as a percentage of revenue             |   | 2.3                               | %      | 2.6 | % |
| Chip prices (per bone-dry unit (“BDU”)) |   | $                                 | 65     |   | $ | 59 |   |
| Chip volume (in BDUs)                             |   | 28,661                            |   | 29,805 |   |

 

The increase inthe price per BDU is due to improved market prices for chips.  The decrease in volume is due to thedecrease in production volume at our saw mills, as chips are a by-product ofsaw mill operations.

 

**Alliance Lumber Segment**

Our Alliance Lumber Segment includes professional contractor serviceyards in Arizona and Nevada and involves the sale of lumber and buildingmaterials. Our Las Vegas, Nevada operations were sold in April 2004 andare reflected as discontinued operations for both periods presented.  In addition, if an asset purchase agreementis signed and approved by the Bankruptcy Court, we anticipate selling our Reno,Nevada operations in the second quarter of 2004.

 

The $13.8 million, or 39.8%, increase in revenue from our AllianceLumber Segment in the first quarter of 2004 compared to the first quarter of2003 reflects a 7.2% increase in unit volume, measured in total board feet, aswell as higher market prices for lumber and paneling, reflecting the stronghousing market in the southwestern region of the United States.

 

Operating income was flat in the comparable periods for our AllianceLumber Segment.  Increased revenues inthe first quarter of 2004 compared to the first quarter of 2003 were off-set bylower gross margins and increased operating expenses.  Gross margins were negatively impacted in the first quarter of2004 by forward pricing commitments made to customers during a period of risingmarket prices for materials.  Operatingexpenses were negatively impacted in the first quarter of 2004 by higher fuelcosts and overtime labor costs incurred to meet higher sales volumes.

 

**Corporate and Other**

 

The operating loss fromour Corporate and Other Segment increased from $1.8 million in the firstquarter of 2003 to $2.1 million in the first quarter of 2004.  The larger loss reflects increased costs forinsurance and bad debt expense.

 

##### **CriticalAccounting Policies**

##### ** **

We reaffirm thecritical accounting policies and estimates described in our 2003 Annual Reporton Form 10-K, which was filed with the Securities and Exchange Commission onApril 22, 2004.

 

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

 

Our $40 milliondebtor-in-possession financing agreement (“DIP Revolver”) has a variable rateof interest.  At March 31, 2004, wehad $18.3 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 of long-term fixed interest rate debt is subjectto interest rate risk.  Generally, thefair market value of fixed interest rate debt will increase as interest ratesfall and decrease as interest rates rise. The interest rate changes affect the fair market value but do not impactearnings or cash flows.  Our acquisitionfacility has a variable rate of interest. Our senior notes and acquisition facility, included in liabilitiessubject to compromise at March 31, 2004, are not publicly traded andsimilar instruments are not available for comparison.  We are therefore unable to estimate the fair value of the seniornotes or acquisition facility.

 

**Item 4.  Controls and Procedures**

 

**Disclosure Controlsand Procedures**

Our management has evaluated, under the supervision and with theparticipation of our President and Chief Executive Officer and Chief FinancialOfficer, the effectiveness of our disclosure controls and procedures as of theend of the period covered by this report pursuant to Rule 13a-15(b) under theSecurities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation,our President and Chief Executive Officer and Chief Financial Officer haveconcluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures are effective in ensuring that informationrequired to be disclosed in our Exchange Act reports is (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 OverFinancial Reporting**

There has been no change in our internal control over financialreporting that occurred during our last fiscal quarter that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

**PART II - OTHERINFORMATION**

 

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

 

**(a)Exhibits**

 

The exhibits filed as part of this report are listed below and thislist is intended to serve as the exhibit index:

 
| 3.1  |   | Form  of Second Amended and Restated Agreement of Limited Partnership of Crown  Pacific Partners, L.P. (filed as Exhibit A to Part I of Registrant’s  Registration Statement on Form S-1 No. 83-85066).                 |
|------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2  |   | Form  of Agreement of Limited Partnership of Crown Pacific Limited Partnership  (filed as Exhibit 3.2 to the Registrant’s Statement on Form S-1 No.  83-85066).                                                         |
| 3.3  |   | First  Amendment to Second Amended and Restated Agreement of Limited Partnership of  Crown Pacific Limited Partnership (filed as Exhibit 3.1 to the Registrant’s  Form 10-Q for the quarter ended March 31, 1997). |
| 3.4  |   | Second  Amendment to Amended and Restated Agreement of Limited Partnership of Crown  Pacific Limited Partnership (filed as Exhibit 3.4 to the Registrant’s Form  10-K for the year ended December 31, 1997).       |
| 3.5  |   | Third  Amendment to Amended and Restated Agreement of Limited Partnership of Crown  Pacific Limited Partnership (filed as Exhibit 3.5 to the Registrant’s Form  10-K for the year ended December 31, 1999).        |
| 31.1 |   | Certification  of the Chief Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                               |
| 31.2 |   | Certification  of the Chief Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                               |
| 32.1 |   | Certification  of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                           |
| 32.2 |   | Certification  of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                           |

 

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

 

We did not file any reports on Form 8-Kduring the quarter ended March 31, 2004.

 

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**SIGNATURES**

 

 

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

 

 
| Date:   May 26, 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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