**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

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** **

**FORM 10-Q**

 

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|                                                                                                          | **(Mark One)** |
|---------------------------------------------------------------------------------------------------------------|----------------|
| **ý****  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |

**For the quarterly period ended June 30, 2002**

**OR**
| **o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-----------------------------------------------------------------------------------------------------------|

**For thetransition periodfrom      to      **

 

**Commissionfile number 0-24976**

 

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

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                                     |   | **93-1161833**                        |
|----------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                  |   | (I.R.S. Employer  Identification No.) |
|                                                                             |   |                                  |
| **121 SW Morrison Street, Suite 1500,  Portland, Oregon**                        |   | **97204**                             |
| (Address of principal  executive offices)                                        |   | (Zip Code)                            |
|                                                                             |   |                                  |
| Registrant’s telephone  number, including area code:  **503-274-2300** |

 

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Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

Yes    ý           No    o

 

Indicate 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 August 14, 2002) |

 

 

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

**FORM 10-Q**

**INDEX**

 
| PART I - FINANCIAL  INFORMATION |
|---------------------------------|
|                            |   |
| Item 1.                         | Financial Statements |
|                            |   |
|                            | Consolidated  Statement of Operations – Three and Six Month Periods Ended June 30, 2002 and  2001 |
|                            |   |
|                            | Consolidated Balance Sheet  – June 30, 2002 and December 31, 2001 |
|                            |   |
|                            | Consolidated Statement  of Cash Flows – Six Months Ended June 30, 2002 and 2001 |
|                            |   |
|                            | 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 |
|                            |   |
| PART II - OTHER  INFORMATION    |
|                            |   |
| Item 5.                         | Other Items |
|                            |   |
| Item 6.                         | Exhibits and  Reports on Form 8-K |
|                            |   |
| Signatures                      |

 

1

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**CrownPacific Partners, L.P.**

 

**ConsolidatedStatement of Operations**

**(Inthousands, except unit and per unit data)**

**(Unaudited)**

 
|                                          |   | **For the Three Months Ended  June 30,** |    |
|-----------------------------------------------|--------|------------------------------------------|---------|
|                                          |   | **2002**                                 |    | **2001** |   |
|                                          |   |                                     |    | **(as restated)** |   |
| Revenues                                      |   | $                                        | 134,220 |   | $ | 166,158 |   |
|                                          |   |                                     |    |   |   |
| Operating costs:                              |   |                                     |    |   |   |
| Cost of products  sold                        |   | 123,657                                  |    | 147,133 |   |
| Gain on sale of  assets held for sale         |   | (1,429                                   | )       | — |   |
| Selling, general  and administrative expenses |   | 7,586                                    |    | 9,293 |   |
|                                          |   |                                     |    |   |   |
| Operating income                              |   | 4,406                                    |    | 9,732 |   |
|                                          |   |                                     |    |   |   |
| Interest expense                              |   | 13,015                                   |    | 15,613 |   |
| Debt  restructuring and redemption premium    |   | 14,133                                   |    | — |   |
| Amortization of  debt issuance costs          |   | 624                                      |    | 741 |   |
| Other income,  net                            |   | (187                                     | )       | (168 | ) |
|                                          |   |                                     |    |   |   |
| Net loss                                      |   | $                                        | (23,179 | ) | $ | (6,454 | ) |
|                                          |   |                                     |    |   |   |
| Basic and  diluted net loss per unit          |   | $                                        | (0.75   | ) | $ | (0.21 | ) |
|                                          |   |                                     |    |   |   |
| Weighted average  units outstanding           |   | 30,527,030                               |    | 30,527,030 |   |

 

Note:      2001 amounts have been restated to reflecta change in accountingfrom the Last-in, First-out (LIFO) to the average method of costing inventory.

 

See accompanying Notes toConsolidated Financial Statements.

 

2

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**CrownPacific Partners, L.P.**

 

**ConsolidatedStatement of Operations**

**(Inthousands, except unit and per unit data)**

**(Unaudited)**

 
|                                          |   | **For the Six Months Ended  June 30,** |    |
|-----------------------------------------------|--------|----------------------------------------|---------|
|                                          |   | **2002**                               |    | **2001** |   |
|                                          |   |                                   |    | **(as restated)** |   |
| Revenues                                      |   | $                                      | 256,995 |   | $ | 304,977 |   |
|                                          |   |                                   |    |   |   |
| Operating costs:                              |   |                                   |    |   |   |
| Cost of products  sold                        |   | 235,921                                |    | 274,298 |   |
| Gain on sale of  assets held for sale         |   | (7,449                                 | )       | — |   |
| Selling, general  and administrative expenses |   | 16,045                                 |    | 18,681 |   |
|                                          |   |                                   |    |   |   |
| Operating income                              |   | 12,478                                 |    | 11,998 |   |
|                                          |   |                                   |    |   |   |
| Interest expense                              |   | 27,221                                 |    | 31,527 |   |
| Debt  restructuring and redemption premium    |   | 14,133                                 |    | — |   |
| Amortization of  debt issuance costs          |   | 1,690                                  |    | 973 |   |
| Other income,  net                            |   | (455                                   | )       | (291 | ) |
|                                          |   |                                   |    |   |   |
| Net loss                                      |   | $                                      | (30,111 | ) | $ | (20,211 | ) |
|                                          |   |                                   |    |   |   |
| Basic and  diluted net loss per unit          |   | $                                      | (0.98   | ) | $ | (0.66 | ) |
|                                          |   |                                   |    |   |   |
| Weighted average  units outstanding           |   | 30,527,030                             |    | 30,516,123 |   |

 

Note:      2001 amounts have been restated to reflecta change in accountingfrom the LIFO to the average method of costing inventory.

 

See accompanying Notes toConsolidated Financial Statements.

 

3

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**CrownPacific Partners, L.P.**

 

**ConsolidatedBalance Sheet**

**(Inthousands, except unit data)**

**(Unaudited)**

 
|                                                                                                   |   | **June 30,  2002** |    | **December 31,  2001** |   |
|--------------------------------------------------------------------------------------------------------|--------|--------------------|---------|------------------------|--------|
|                                                                                                   |   |               |    | **(as restated)**      |   |
| **Assets**                                                                                             |   |               |    |                   |   |
| Current assets:                                                                                        |   |               |    |                   |   |
| Cash and cash  equivalents                                                                             |   | $                  | 8,545   |                   | $      | 9,219 |   |
| Restricted cash                                                                                        |   | 15,337             |    | —                 |   |
| Accounts  receivable, net of allowances of $1,364 and $1,000                                           |   | 78,126             |    | 85,120                 |   |
| Notes receivable                                                                                       |   | 4,717              |    | 7,194                  |   |
| Inventories                                                                                            |   | 39,649             |    | 33,626                 |   |
| Deposits on  timber cutting contracts                                                                  |   | 1,902              |    | 1,441                  |   |
| Prepaid and  other current assets                                                                      |   | 3,105              |    | 3,177                  |   |
| Property held  for sale                                                                                |   | 4,234              |    | 184,405                |   |
|                                                                                                   |   |               |    |                   |   |
| Total current  assets                                                                                  |   | 155,615            |    | 324,182                |   |
| Property, plant  and equipment, net of accumulated depreciation of $43,429 and $29,541                 |   | 57,617             |    | 55,756                 |   |
| Timber,  timberlands and roads, net                                                                    |   | 425,960            |    | 433,183                |   |
| Goodwill                                                                                               |   | 34,272             |    | 34,272                 |   |
| Other assets                                                                                           |   | 6,413              |    | 8,970                  |   |
|                                                                                                   |   |               |    |                   |   |
| Total assets                                                                                           |   | $                  | 679,877 |                   | $      | 856,363 |   |
|                                                                                                   |   |               |    |                   |   |
| **Liabilities and Partners’ Capital**                                                             |   |               |    |                   |   |
|                                                                                                   |   |               |    |                   |   |
| Current  liabilites:                                                                                   |   |               |    |                   |   |
| Notes payable                                                                                          |   | $                  | 27,500  |                   | $      | 19,000 |   |
| Accounts payable                                                                                       |   | 26,139             |    | 31,557                 |   |
| Accrued expenses                                                                                       |   | 14,194             |    | 12,708                 |   |
| Accrued interest                                                                                       |   | 8,113              |    | 10,132                 |   |
| Current portion  of long-term debt                                                                     |   | 15,345             |    | 174,064                |   |
|                                                                                                   |   |               |    |                   |   |
| Total current  liabilities                                                                             |   | 91,291             |    | 247,461                |   |
| Long-term debt                                                                                         |   | 515,777            |    | 511,406                |   |
| Other  non-current liabilities                                                                         |   | 5,694              |    | 270                    |   |
|                                                                                                   |   | 612,762            |    | 759,137                |   |
|                                                                                                   |   |               |    |                   |   |
| Commitments and  contigent liabilities                                                                 |   |               |    |                   |   |
|                                                                                                   |   |               |    |                   |   |
| Partners’  capital:                                                                               |   |               |    |                   |   |
| General partners                                                                                       |   | (617               | )       | (315                   | )      |
| Limited partners  (30,527,030 units outstanding at June 30, 2002 and December 31, 2001,  respectively) |   | 67,732             |    | 97,541                 |   |
| Total partners’  capital                                                                          |   | 67,115             |    | 97,226                 |   |
|                                                                                                   |   |               |    |                   |   |
| Total  liabilities and partners’ capital                                                          |   | $                  | 679,877 |                   | $      | 856,363 |   |

 

Note:  2001 amounts have been restated to reflect achange in accounting from the LIFO to the average method of costing inventory.

 

See accompanying Notes to Consolidated Financial Statements.

 

4

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

 

**Consolidated Statement of Cash Flows**

**(In thousands)**

**(Unaudited)**

 
|                                                                         |   | **For the Six Months Ended June 30,** |       |
|------------------------------------------------------------------------------|--------|---------------------------------------|------------|
|                                                                         |   | **2002**                              |       | **2001** |   |
|                                                                         |   |                                  | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                       |   |                                  |       |   |   |
| Net loss                                                                     |   | $                                     | (30,111    | ) | $ | (20,211 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                                  |       |   |   |
| Depletion,  depreciation and amortization                                    |   | 16,461                                |       | 21,823 |   |
| Redemption  premium and write-off of deferred charges                        |   | 9,967                                 |       | — |   |
| Deferred  interest                                                           |   | 897                                   |       | — |   |
| Gain on sale of  property                                                    |   | (7,561                                | )          | (9,206 | ) |
| Other                                                                        |   | —                                |       | (1 | ) |
| Net change in  current assets and current liabilities:                       |   |                                  |       |   |   |
| Accounts and  notes receivable                                               |   | 6,857                                 |       | (2,729 | ) |
| Inventories                                                                  |   | (6,023                                | )          | 5,373 |   |
| Deposits on  timber cutting contracts                                        |   | (461                                  | )          | 683 |   |
| Prepaid and  other current assets                                            |   | (1,310                                | )          | (2,454 | ) |
| Accounts payable  and accrued expenses                                       |   | (6,047                                | )          | (6,130 | ) |
| Net cash used in  operating activities                                       |   | (17,331                               | )          | (12,852 | ) |
|                                                                         |   |                                  |       |   |   |
| Cash flows from  investing activities:                                       |   |                                  |       |   |   |
| Additions to  timberlands                                                    |   | (3,727                                | )          | (6,065 | ) |
| Additions to  timber cutting rights                                          |   | (476                                  | )          | (201 | ) |
| Additions to  equipment                                                      |   | (2,170                                | )          | (4,321 | ) |
| Proceeds from  sales of property                                             |   | 186,162                               |       | 11,116 |   |
| Principal payments  received on notes                                        |   | 2,614                                 |       | 521 |   |
| Other investing  activities                                                  |   | (15                                   | )          | — |   |
| Net cash  provided by investing activities                                   |   | 182,388                               |       | 1,050 |   |
|                                                                         |   |                                  |       |   |   |
| Cash flows from  financing activities:                                       |   |                                  |       |   |   |
| Net increase in  short-term borrowings                                       |   | 8,500                                 |       | 4,000 |   |
| Proceeds from  issuance of long-term debt                                    |   | 116                                   |       | 29 |   |
| Repayments of  long-term debt                                                |   | (154,464                              | )          | (1,124 | ) |
| Contributions of  capital                                                    |   | —                                |       | 45 |   |
| Change in  restricted cash                                                   |   | (15,337                               | )          | — |   |
| Other financing  activities                                                  |   | (4,546                                | )          | (21 | ) |
| Net cash (used  in) provided by financing activities                         |   | (165,731                              | )          | 2,929 |   |
|                                                                         |   |                                  |       |   |   |
| Net decrease in  cash and cash equivalents                                   |   | (674                                  | )          | (8,873 | ) |
| Cash and cash  equivalents at beginning of period                            |   | 9,219                                 |       | 14,537 |   |
|                                                                         |   |                                  |       |   |   |
| Cash and cash  equivalents at end of period                                  |   | $                                     | 8,545      |   | $ | 5,664 |   |

 

Note:  2001 amounts have been restated to reflect achange in accounting from the LIFO to the average method of costing inventory.

 

See accompanying Notes to Consolidated Financial Statements.

 

5

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(In thousands, except per unit amounts or as otherwiseindicated)**

**(Unaudited)**

 

**Note 1: Organization and Basis ofPresentation**

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

 

The financial statements included in this Form 10-Q are unaudited andreflect the consolidated financial position, results of operations and cashflows of the Partnership.  Thesefinancial statements include all the accounts of the Partnership but do notcontain all of the information required by generally accepted accountingprinciples to be included in a full set of financial statements.  The financial statements in this Form 10-Qshould be read in conjunction with the financial statements in thePartnership’s 2001 Annual Report on Form 10-K, which includes a summary ofsignificant accounting policies of the Partnership.  In the opinion of management, all material adjustments necessaryto present fairly the results of operations for the three and six-month periodsended June 30, 2002 and 2001 have been included.  All such adjustments are of a normal and recurring nature and allsignificant inter-company transactions have been eliminated.  The results of operations for any interimperiod are not necessarily indicative of the results of operations for the entireyear.

 

Net loss per unit was calculated using the weighted average number ofcommon units outstanding divided into net loss, after adjusting for the GeneralPartner interest**. **The General Partnerloss allocation was $232 and $65 for the three months ended June 30, 2002 and2001, respectively and $301 and $202 for the six months ended June 30, 2002 and2001, respectively.  There is nosignificant difference between basic and diluted earnings per unit.

 

**Note 2:Inventories**

In the first quarter of 2002, thePartnership changed its method of accounting for manufacturing log and lumberinventories from the lower of LIFO cost or market to the lower of average costor market.  Given the volatility of bothprices and quantities and a fundamental change in the composition ofinventories, management believes that accounting for inventories at averagecost better matches revenues and expenses, and therefore is preferable.Supplies and inventories maintained at non-manufacturing locations continue tobe valued at the lower of average cost or market.  In accordance with Accounting Principles Board Opinion No. 20,“Accounting Changes,” upon adoption of the new inventory accounting method, thePartnership retroactively restated prior periods by accounting for inventoriesat average cost.

 

6

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Had the Partnership adopted this change in2001, the effect of the accounting change on net losses as previously reportedare as follows:

 
| **Statement  of Operations**                            |   | **Three  Months Ended  June 30, 2001** |    | **Six Months  Ended  June 30, 2001** |   |
|---------------------------------------------------------|--------|----------------------------------------|---------|--------------------------------------|--------|
| Net loss as previously reported                         |   | $                                      | (6,823) |                                 | $      | (19,802) |   |
| Adjustment for change in accounting principle           |   | 369                                    |    | (409                                 | )      |
| Net loss as adjusted                                    |   | $                                      | (6,454  | )                                    | $      | (20,211 | ) |
|                                                    |   |                                   |    |                                 |   |
| Basic and diluted loss per share as previously reported |   | $                                      | (0.22   | )                                    | $      | (0.64 | ) |
| Adjustment for change in accounting principle           |   | 0.01                                   |    | (0.02                                | )      |
| Basic and diluted loss per share as adjusted            |   | $                                      | (0.21   | )                                    | $      | (0.66 | ) |

 

Inventoriesconsisted of the following:

 
|                    |   | **June 30,  2002** |   | **December  31, 2001** |   |
|-------------------------|--------|--------------------|--------|------------------------|--------|
|                    |   |               |   | **(as  restated)**     |   |
| Lumber                  |   | $                  | 7,424  |                   | $      | 5,749 |   |
| Logs                    |   | 2,735              |   | 1,809                  |   |
| Supplies                |   | 3,213              |   | 3,187                  |   |
| Manufacturing inventory |   | 13,372             |   | 10,745                 |   |
| Wholesale products      |   | 26,277             |   | 22,881                 |   |
| Total                   |   | $                  | 39,649 |                   | $      | 33,626 |   |

 

**Note 3:  CreditFacility and Senior Note Agreement Amendments**

On April 19, 2002, the Partnership’s senior note agreements and bankcredit facilities were amended.  Thesignificant provisions of the amendments are as follows:

•                  The expirationdates of the Partnership’s bank working capital and bank acquisition facilitieswere extended to December 31, 2005.

•                  As a conditionto the closing of the amendments, the Partnership was required to apply $10.0million of the net proceeds from the sale of its Inland South tree farm toprepay outstanding amounts under the working capital facility, 50% of theremainder of such net proceeds (after deducting certain fees and expenses) toprepay outstanding borrowings under the acquisition facility (approximately$54.7 million) and approximately 50% of the remainder of such net proceeds(after deducting certain fees and expenses) to prepay outstanding principal ofits senior notes (approximately $53.1 million). These three payments were madeon April 19, 2002 (see Note 4).

•                  The Partnershipwas also required to apply 50% of the net proceeds from the sale of its InlandNorth tree farm, which closed on April 30, 2002 and generated net proceeds ofapproximately $46.4 million, to prepay outstanding borrowings under theacquisition facility and 50% of the net proceeds to prepay outstandingprincipal of its senior notes. Immediately following the application of suchnet proceeds, the Partnership had $121.3 million borrowed under its acquisitionfacility and $409.6 million under the senior notes (see Note 4).  Up to an additional $15.0 million of debtreduction is expected following the release of restricted cash from escrow inAugust 2002 as a result of a timber verification cruise related to the Inlandtree farm sales.  Upon release, thesefunds will be split 50% to the senior notes and 50% to the acquisitionfacility.

•                  Requiredprincipal payments of $5.0 million, $40.0 million and $30.0 million are due onthe acquisition facility on or before September 30, 2003, January 15, 2004 andJune 30, 2005, respectively.  Theaggregate commitment of the acquisition facility will be correspondingly andpermanently reduced by such amounts at the times of such payments.

 

7

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•                  Within 30 daysfollowing each September 30 and March 31, through September 30, 2005, thePartnership is required to make principal payments on the acquisition facilityand the senior notes in an aggregate amount equal to 75% of the excess ofactual cash flow over forecasted cash flow for the previous two-quarter period.

•                  The Partnershipis required to make mandatory, pro rata principal payments on the senior noteswhenever principal payments are made on the acquisition facility so that theacquisition facility and the senior notes are repaid in the same proportions ofoutstanding principal amount (except that the Partnership may, at its option,use cash proceeds of permitted equity financings to repay principal under theacquisition facility or the senior notes without making a corresponding paymenton the other).

•                  The Partnershiphas the option to defer until December 31, 2005 originally scheduled principalpayments (but not the mandatory payments described in the preceding paragraph)due on the senior notes on December 1, 2002, 2003, 2004 and 2005.

•                  If, on July 1,2005, the Partnership’s senior notes do not have an investment grade ratingfrom a nationally recognized rating agency, it is required to pay in full, onDecember 31, 2005, all outstanding amounts due on the senior notes.  If, on July 1, 2005, its senior notes dohave an investment grade rating from a nationally recognized rating agency, itis not required to repay the senior notes on December 31, 2005, but, instead,the senior note holders will have the option, exercisable no later than August1, 2005, to put some or all of their senior notes to the Partnership onDecember 31, 2005.

•                  The Partnershiphas agreed to pay interest on the senior notes (including on principal,deferred interest and deferred redemption premiums) of an additional 100 basispoints, or 1.0%.  The Partnership may,at its option, defer until December 31, 2005, payment of this additionalinterest (except accrued interest on prepaid principal, which must be paid atthe time of prepayment).  As of June 30,2002, the Partnership had deferred interest of $0.9 million.

•                  Except incertain circumstances, redemption premiums will be due in connection withprincipal payments made on the senior notes. The Partnership has the option to defer payment of such redemptionpremiums until December 31, 2005, or, for redemption premiums due prior toDecember 31, 2004, to pay such premiums in common units of Crown PacificPartners, L.P.  In conjunction withprincipal repayments associated with proceeds from the Inland tree farm sales,the Partnership deferred $4.5 million in redemption premiums.  If the Partnership has an investment graderating as described in the immediately preceding paragraph, no additionalredemption premiums will be due on any principal payments made on December 31,2005 on senior notes that are put to the Partnership by the senior noteholders.

•                  The Partnershiphas granted registration rights to senior note holders with respect to anycommon units they may receive in payment of redemption premiums.

•                  Redemptionpremiums on senior note principal prepayments will now be calculated based oninterest rates of U.S. Treasury Securities for similar maturities, plus 150basis points, compared to 50 basis points previously.

•                  The senior notesand bank facilities now have substantially identical restrictivecovenants.  In addition to complyingwith covenants similar to covenants previously contained in the senior notesand bank facilities, the Partnership must meet certain financial ratios and islimited in the amount of its annual capital expenditures.

•                  Furtheramendment of our working capital facility, acquisition facility and seniornotes will require the written consent of banks holding at least 66-2/3% of theaggregate unpaid principal amount of the acquisition facility loans and thewritten consent of holders of at least 55% of the aggregate outstandingprincipal amount of each series of senior notes.

 

8

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•                  In exchange forthese senior note and bank facility amendments, the Partnership granted to thebanks and the note holders, as collateral for the obligations, a securityinterest in the Partnership’s timberland assets and substantially all of itssawmill assets.

 

The Partnership accounted for its April 2002 debt restructuringaccording to criteria outlined in Emerging Issues Task Force Issue No. 96-19“Debtor’s Accounting for a Modification or Exchange of Debt Instruments” (EITF96-19).  The restructuring of the seniornotes was deemed an extinguishment of the original debt and the issuance of newdebt, and the restructuring of the bank debt was deemed a modification ofexisting debt.  Accordingly, withrespect to the senior notes, all previously deferred financing costs and feespaid to the note holders for the debt restructuring were expensed.  Fees incurred with third parties forpurposes of restructuring the senior notes were capitalized. No significantfees were paid to the banks as a result of the restructuring.  Fees incurred with third parties as a resultof restructuring the Acquisition Facility were capitalized. As a result, thePartnership expensed $4.2 million of the $8.7 million of fees incurred in theApril 2002 restructuring and expensed $5.5 million of previously deferred feesand expenses.  The Partnership has abalance of deferred fees and expenses of $5.6 million at June 30, 2002 that arebeing amortized through December 31, 2005.

 

The Partnership was in compliance with all of therestrictive debt covenants at June 30, 2002.

 

**Note 4: Property Sales**

On March 29, 2002, the Partnership closed the sale ofits Inland South tree farm to Patriot Investments, LLC for proceeds ofapproximately $132.2 million, which was used to pay down outstanding debt asdiscussed in Note 3 and Item 2.  ThePartnership recognized a gain on this sale of approximately $6.0 million.

 

The Partnership closed the sale of its Inland Northtree farm to Patriot Investments, LLC on April 30, 2002. The proceeds, net ofcertain fees and expenses and escrow hold-backs, of approximately $53.8million, were also used to pay down outstanding debt as discussed in Note 3 andItem 2.  The Partnership recognized again of approximately $1.4 million on this sale.

 

The Partnership anticipates the release of up to $15.0million in restricted cash from escrow in August 2002 as a result of a timberverification cruise.  These additionalproceeds will be used to pay down outstanding debt as discussed in Note 3 andItem 2.

 

**Note 5: Timber, Timberlands and Roads**

In the first quarter of each year, thePartnership performs an update of its timber inventory system.  The update in 2002 resulted in a netdecrease in depletion costs for the first six months of 2002 of approximately$0.2 million, or $0.01 per unit, and a net increase in depletion costs for thefirst six months of 2001 of approximately $0.5 million, or $0.02 per unit, withno impact on cash flow.

 

**Note 6: Goodwill**

On January 1, 2002, the Partnership adopted Statementof Financial Accounting Standards (SFAS) No. 142, “Goodwill and OtherIntangible Assets.”  The adoption ofSFAS No. 142 requires that goodwill and indefinite lived intangibles no longerbe amortized, but instead be annually tested for impairment.  We have completed the impairment analysisand determined that, as of January 1, 2002, there was no impairment.

 

9

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Had SFAS No. 142 been adopted in the first quarter of2001, it would have resulted in $0.2 million, or $0.01 per unit and $0.4million, or $0.02 per unit, respectively, in additional earnings, with noimpact on cash flow, for the three and six month periods ended June 30, 2001.

 

**Note 7: Supplemental Cash Flow Information**

Supplemental disclosure of cash flow information is asfollows:

 
|                                           |   | **Six months  ended June 30,** |   |
|------------------------------------------------|--------|--------------------------------|--------|
|                                           |   | **2002**                       |   | **2001** |   |
| Cash paid during  the period for interest      |   | $                              | 28,378 |   | $ | 33,553 |   |
| Business assets  acquired with debt and equity |   | —                         |   | 1,000 |   |
| Note received  for sale of property            |   | —                         |   | 1,500 |   |
|                                                |        |                                |        |  |  |  |  |

 

**Note 8:Segment Reporting**

The Partnership classifies its businessinto three fundamental areas for purposes of providing segment information: 1)Timberlands, consisting of the sale of logs to the Partnership’s manufacturingfacilities and to third parties, and the sale of timber and timberlands tothird parties; 2) Manufacturing, consisting of the manufacture of logs into lumberand the sale of residual chips to pulp and paper mills; and 3) WholesaleMarketing, consisting of the trading of various forest products and thedistribution of lumber and panel products through the Partnership’sprofessional 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 andthe gains related to the sale of the Inland North and South tree farms. ThePartnership does not show assets by segment, as historic costs are not used bymanagement to allocate resources or assess performance.

 

Thefollowing summarizes the Partnership’s segment information (in thousands):

 
|                 |   | **Three Months Ended June 30,** |    | **Six Months Ended June 30,** |   |
|----------------------|--------|---------------------------------|---------|-------------------------------|--------|
| **Revenues**         |   | **2002**                        |    | **2001**                      |   | **2002** |   | **2001** |   |
| Timberlands:         |   |                            |    |                          |   |   |   |   |   |
| Trade                |   | $                               | 9,071   |                          | $      | 18,149 |   | $ | 19,829 |   | $ | 40,747 |   |
| Intersegment         |   | 9,634                           |    | 23,874                        |   | 20,180 |   | 48,761 |   |
|                 |   | 18,705                          |    | 42,023                        |   | 40,009 |   | 89,508 |   |
| Manufacturing:       |   |                            |    |                          |   |   |   |   |   |
| Trade                |   | 27,284                          |    | 40,717                        |   | 51,060 |   | 72,581 |   |
| Intersegment         |   | 927                             |    | 3,081                         |   | 2,198 |   | 7,339 |   |
|                 |   | 28,211                          |    | 43,798                        |   | 53,258 |   | 79,920 |   |
| Wholesale Marketing: |   |                            |    |                          |   |   |   |   |   |
| Trade                |   | 95,255                          |    | 106,983                       |   | 181,203 |   | 191,139 |   |
| Intersegment         |   | 4,889                           |    | 8,000                         |   | 10,473 |   | 13,974 |   |
|                 |   | 100,144                         |    | 114,983                       |   | 191,676 |   | 205,113 |   |
| Corporate and Other: |   |                            |    |                          |   |   |   |   |   |
| Trade                |   | 2,610                           |    | 309                           |   | 4,903 |   | 510 |   |
| Intersegment         |   | 118                             |    | 229                           |   | 195 |   | 551 |   |
|                 |   | 2,728                           |    | 538                           |   | 5,098 |   | 1,061 |   |
| Total:               |   |                            |    |                          |   |   |   |   |   |
| Total Revenues       |   | 149,788                         |    | 201,342                       |   | 290,041 |   | 375,602 |   |
| Less Intersegment    |   | (15,568                         | )       | (35,184                       | )      | (33,046 | ) | (70,625 | ) |
| Revenues             |   | $                               | 134,220 |                          | $      | 166,158 |   | $ | 256,995 |   | $ | 304,977 |   |

 

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|                                      |   | **Three Months Ended June 30,** |    | **Six Months Ended June 30,** |   |
|-------------------------------------------|--------|---------------------------------|---------|-------------------------------|--------|
| **Operating income (loss)**               |   | **2002**                        |    | **2001**                      |   | **2002** |   | **2001** |   |
| Timberlands                               |   | $                               | 1,215   |                          | $      | 7,639 |   | $ | 2,883 |   | $ | 13,324 |   |
| Manufacturing                             |   | 2,111                           |    | 2,160                         |   | 2,676 |   | (742 | ) |
| Wholesale                                 |   | 2,306                           |    | 3,166                         |   | 4,820 |   | 6,205 |   |
| Corporate and Other                       |   | (1,226                          | )       | (3,233                        | )      | 2,099 |   | (6,789 | ) |
| Operating Income                          |   | 4,406                           |    | 9,732                         |   | 12,478 |   | 11,998 |   |
| Interest Expense                          |   | (13,015                         | )       | (15,613                       | )      | (27,221 | ) | (31,527 | ) |
| Debt restructuring and redemption premium |   | (14,133                         | )       | —                        |   | (14,133 | ) | — |   |
| Other                                     |   | (437                            | )       | (573                          | )      | (1,235 | ) | (682 | ) |
| Net Loss                                  |   | $                               | (23,179 | )                             | $      | (6,454 | ) | $ | (30,111 | ) | $ | (20,211 | ) |

 

**Note 9:New Accounting Pronouncements**

Refer to Item 2 for a discussion of all new accountingpronouncements affecting the Partnership.

 

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

 

**General**

Our principal operations consist of the growing and harvesting oftimber, the sale of logs and the processing and sale of lumber and other woodproducts.

 

Our ability to implement our business strategy over the long-term andour results of operations depend upon a number of factors, many of which arebeyond our control.  These factorsinclude general industry conditions, domestic and international prices andsupply and demand for logs, lumber and other wood products, seasonality andcompetition from other supplying regions and substitute products.

 

**Forward-LookingStatements**

Informationcontained in Item 2 and other sections of this report include forward-lookingstatements including statements regarding our expectations, hopes, beliefs,intentions or strategies regarding the future that are not purely historical,but are based on assumptions that in the future may prove not to beaccurate.  These assumptions includeharvest volumes, species mix, prices for logs and lumber, demand for housingand levels, timing and amounts received for stumpage, property and asset sales.Our business and prospects are subject to a number of risks, including thevolatility of timber and lumber prices and supplies, factors limitingharvesting of timber including contractual obligations, governmentalrestrictions, weather and access limitations, as well as the substantialcapital expenditures required to supply our operations.

 

Additional factors that could affect future performance includeenvironmental risks, operating risks normally associated with the timberindustry, competition, government regulation and economic changes in theregions where our products or substitute products are sold, including SoutheastAsia and Japan.  Other risk factorsinclude our ability to implement our business strategy and the value of theU.S. dollar against foreign currencies. These and other risks are described in our registration statements andreports filed from time to time on forms 10-K, 8-K and 10-Q and reports tounitholders, which are available from us or the United States Securities andExchange Commission.

 

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**FinancialCondition**

Cashnecessary to enable us to satisfy interest and principal payments onindebtedness and to pay for capital expenditures is significant.

 

Cashused by operating activities was $17.3 million in the first six months of 2002and resulted primarily from a net loss of $10.2 million (net of non-cashexpenses and gain on sale of property of $19.9 million), an increase ininventories of $6.0 million and a decrease in accounts payable and accruedexpenses of $6.0 million, which were offset in part by a $6.9 million decreasein accounts and notes receivable. Working capital decreased to $64.3 million at June 30, 2002 compared to$76.7 million at December 31, 2001.

 

Netcash provided by investing activities of $182.4 million resulted primarily from$186.2 million of proceeds from the sale of our Inland North and Inland Southtree farms and the collection of $2.6 million of notes receivable, which wereoffset in part by the use of $4.2 million for additions to timberlands andtimber cutting rights and $2.2 million used for additions to equipment.

 

Netcash used by financing activities of $165.7 million resulted primarily from thepay-down of $154.5 million of long-term debt from cash proceeds from the salesof our Inland North and South tree farms, $15.3 million of cash received fromthe Inland tree farm sales being transferred to an escrow account as restrictedcash and $4.5 million of deferred finance fees incurred in our debtrestructuring, offset by an $8.5 million net increase in short-term borrowings.

 

Additionsto plant and equipment totaled $2.2 million in the first six months of 2002,primarily for improvements at our Marysville, Gilchrist and Port Angelessawmills and rolling stock for the Alliance and Desert contractor service yardoperations.  Additions to timber andtimberland purchases totaled $4.2 million in the first six months of 2002 andconsisted primarily of road construction, reforestation and the purchase oftimber.  We anticipate spendingapproximately $10.0 million in 2002 for timber and timberland additions andplant and equipment combined.  TheManaging General Partner expects that capital expenditures will be funded by acombination of any or all of the following: property and asset sales, cashgenerated from operations, current funds or bank borrowings.

 

Asamended in April 2002, we have a $40 million revolving credit facility with agroup of banks for working capital purposes and stand-by letters of credit thatexpires on December 31, 2005.  Thecredit facility bears a floating rate of interest and is secured by accountsreceivable and inventory.  As requiredby the April 2002 amendments, $10.0 million of the Inland South tree farmproceeds were applied to pay down outstanding principal on this facility and,as of June 30, 2002, $27.5 million was outstanding under this facility.  The weighted average interest rate on thisfacility as of June 30, 2002 was 5.4%. We are currently in discussions with several lending institutions inorder to secure a $55.0 million working capital line of credit, which wouldreplace this existing $40.0 million working capital line.  We anticipate that the new line of creditwill be in place later this year.

 

Asamended in April 2002, we also had a $199.3 million facility with a group ofbanks that previously provided for the acquisition of timber, timberlands andrelated assets and capital expenditures. This facility bears a floating rate ofinterest, is secured by our timberlands and sawmill assets and expires December31, 2005.  As required in the April 2002amendment, $78.0 million of the Inland South and North tree farm sales proceedswere applied to pay down outstanding principal on this facility and, as of June30, 2002, $121.3 million was outstanding.  Principal payments of $5.0 million, $40.0 million and $30.0 million aredue on this facility in September 2003, January 2004 and

 

12

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June2005, respectively.  Principal paymentson this facility cannot be re-borrowed. The weighted average interest rate on this facility as of June 30, 2002was 5.53%.

 

Wesought and received the April 2002 bank facility amendments to obtain relieffrom restrictive covenants and upcoming debt maturities during a period of timewhen operating cash flows continue to be negatively impacted by weak log andlumber prices and our decision to preserve our timber assets until pricing forlogs and lumber improves.  In connectionwith these amendments, we paid the banks a fee of $0.6 million, which wasfunded by the Inland South tree farm proceeds. See Note 3 for more information about the amendments.

 

Our9.78%, 9.60%, 8.17% and 7.80% senior notes, issued in 1994, 1995, 1996 and1998, respectively, and amended in April 2002, are now also secured by ourtimberlands and sawmill assets and require semi-annual interest paymentsthrough 2018.  Pursuant to the April2002 amendments, the notes also accrue an additional 100 basis points ofinterest through December 31, 2005, which may be deferred until that date orpaid earlier, at the option of the Partnership.  As amended in April 2002, we were required to apply $76.4 millionof the Inland South and North tree farm sale proceeds to pay down principaloutstanding on these notes and, as of June 30, 2002, there was $409.6 millionoutstanding.  The April 2002 amendmentallows us to defer principal payments previously due on December 1, 2003, 2004and 2005, until December 31, 2005.  Inaddition, we are also required to make mandatory principal payments, on a prorata basis, with our existing bank debt, if asset sale proceeds or operatingcash flow are used to pay outstanding bank principal prior to December 31,2005.  Also, we may be required to paythe entire outstanding principal balance, plus accrued interest, of the seniornotes on December 31, 2005 if our credit ratings are below investmentgrade.  If our credit ratings are investmentgrade on July 1, 2005, the note holders have the right to put to us some or allof their outstanding notes (without any associated redemption charges) onDecember 31, 2005 after giving notice to us on August 1, 2005.

 

Thesenior notes are redeemable prior to maturity, subject to payment of aredemption premium, which is calculated based on interest rates of U.S.Treasury securities having a similar average maturity as the senior notes, plus150 basis points.  Additionally, thesenior notes require the application of asset sale proceeds to principalreduction, which, under certain conditions, may be subject to a redemptioncharge.  If asset sales are employed byus as a source of funds for the mandatory principal payments required on ouracquisition facility, as described above, pro rata funds from these asset saleproceeds must also be applied to redeem outstanding senior notes.  Redemption charges incurred on these prorata payments will be deferred until December 31, 2005, unless we elect to paythe equivalent amount in common units on December 31, 2004.

 

Inexchange for these revisions to the senior note agreements, we agreed to grantthe holders of our senior notes a security interest in our timberlands andsawmill assets pari passu with our bank lenders and to increase the interestrate on each senior note by 100 basis points, as mentioned above, untilDecember 31, 2005.  Additionally, wepaid the senior note holders an amendment fee of $2.0 million, which was fundedby the Inland South tree farm sale proceeds.

 

We accounted for the April 2002 debt restructuring in accordance withEmerging Issues Task Force Issue No. 96-19 “Debtor’s Accounting for aModification or Exchange of Debt Instruments” (EITF 96-19).  Accordingly, the restructuring of the seniornotes was deemed an extinguishment of the original debt and the issuance of newdebt, and the restructuring of the bank debt was deemed a modification ofexisting debt.  Pursuant to therespective accounting rules, we expensed $4.2 million of the $8.7 million offees incurred in the April 2002 restructuring and expensed $5.5 million ofpreviously

 

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deferred fees and expenses.  Wehave a balance of deferred fees and expenses of $5.6 million at June 30, 2002that are being amortized through December 31, 2005 (see Note 3).

 

As so amended, we believe we will be able to remain in compliance withall current terms and covenants of our senior note agreements.

 

As of June 30, 2002, $15.3 million of debt is classified ascurrent.  Restricted cash in thisamount, held in escrow, is expected to be applied to this current portion oflong-term debt in the third quarter of 2002 (see Note 4).

 

All of our senior note agreements and bank facilities contain certainrestrictive covenants, including:

•                limitationson harvest levels, capital expenditures, land sales, cash distributions,acquisitions and investments;

•                the amountof future indebtedness;

•                restrictionson the use of proceeds from property and other assets sales; and

•                compliancewith certain financial ratios.

 

Asof June 30, 2002, we were in compliance with all of our bank agreement andsenior note covenants.

 

Weexpect to receive between $4.0 and $6.0 million in proceeds related to the saleof our Coeur d’Alene assets (former mill site land) later in 2002, which willbe used for repayment of short-term debt and the current portion of long-termdebt.

 

Wedo not expect to make cash distributions from our current funds or from cashgenerated by operating activities until our overall debt levels are substantiallyreduced and significantly improved market conditions will support a sustainedquarterly distribution.

 

**NewAccounting Pronouncements**

 

InJuly 2001, the FASB issued Statement of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”).  SFAS 142 requires that goodwill and identifiable intangibleassets determined to have an indefinite life no longer be amortized, butinstead be tested for impairment at least annually.  We adopted SFAS 142 on January 1, 2002.

 

SFAS142 requires that goodwill be tested annually for impairment using a two-stepprocess.  The first step is to identifya potential impairment and, in transition, this step must be measured as of thebeginning of the fiscal year.  However,a company has six months from the date of adoption to complete the firststep.  The second step of the goodwillimpairment test measures the amount of the impairment loss (measured as of thebeginning of the year of adoption), if any, and must be completed by the end of2002.  We completed the first stepduring the quarter ended June 30, 2002 and have determined, at this time, thereis no impairment.  In connection withthe adoption of SFAS 142, we are no longer recording $0.9 million ofamortization expense per year ($0.2 million and $0.5 million in the three andsix months ended June 30, 2002, respectively, relating to existinggoodwill).  The unaudited pro formaearnings for the three and six month periods ended June 30, 2002 would haveincreased by $0.2 million, or $0.01 per unit, and $0.5 million, or $0.02 perunit, respectively.

 

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InAugust 2001, the FASB issued SFAS No. 143, “Accounting for ObligationsAssociated with the Retirement of Long-Lived Assets” (“SFAS 143”).  SFAS 143 establishes accounting standardsfor the recognition and measurement of asset retirement obligations and theassociated asset retirement costs.  Weare required to adopt the provisions of SFAS 143 no later than the firstquarter of 2003.  SFAS 143 is notexpected to have a material effect on our financial position, results ofoperations or cash flows.

 

InOctober 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 supercedes SFAS No. 121“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto Be Disposed Of” (“SFAS 121”).  SFAS144 applies to all long-lived assets and consequently amends AccountingPrinciples Board Opinion No. 30 (“APB 30”), Reporting Results of Operations andReporting the Effects of Disposal of a Segment of a Business.  SFAS 144 requires that long-lived assetsthat are to be disposed of by sale be measured at the lower of book value orfair value less cost to sell. Consistent with SFAS 121, long-lived assets to be held and used shouldbe tested for recoverability using undiscounted cash flows upon certaintriggering events.  An impairment existsif long-lived assets are not recoverable and exceed fair value.  Additionally, SFAS 144 expands the scope ofdiscontinued operations to include all components of an entity with operationsthat (1) can be distinguished from the rest of the entity and (2) will beeliminated from the ongoing operations of the entity in a disposal transaction.  The adoption of SFAS 144 on January 1, 2002did not have a material effect on our financial position, results of operationsor cash flows.

 

InMay 2002, the FASB issued SFAS 145, “Rescission of FAS Nos. 4, 44, and 64,Amendment of FAS 13, and Technical Corrections.”  Among other things, SFAS 145 rescinds various pronouncementsregarding early extinguishment of debt and allows extraordinary accountingtreatment for early extinguishment only when the provisions of AccountingPrinciples Board Opinion No. 30, “Reporting the Results of Operations –Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions” aremet.  SFAS 145 provisions regarding earlyextinguishment of debt are generally effective for fiscal years beginning afterMay 15, 2002, with earlier adoption encouraged.  The Partnership has adopted the provisions of SFAS 145, which didnot have a material effect on our financial position, results of operations orcash flows.

 

InJuly 2002, the FASB approved SFAS 146, “Accounting for Costs Associated withExit or Disposal Activities.”  SFAS 146addresses the financial accounting and reporting for obligations associatedwith an exit activity, including restructuring, or with a disposal oflong-lived assets.  Exit activitiesinclude, but are not limited to, eliminating or reducing product lines,terminating employees and contracts and relocating plant facilities orpersonnel.  SFAS 146 specifies that acompany will record a liability for a cost associated with an exit or disposalactivity only when that liability is incurred and can be measured at fairvalue.  Therefore, commitment to an exitplan or a plan of disposal expresses only management’s intended future actionsand, therefore, does not meet the requirement for recognizing a liability andthe related expense.  SFAS 146 iseffective prospectively for exit or disposal activities initiated afterDecember 31, 2002, with earlier adoption encouraged.  We do not anticipate that the adoption of SFAS 146 will have amaterial effect on our financial position, results of operations or cash flows.

 

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**Resultsof Operations**

**ThreeMonths Ended June 30, 2002 compared to Three Months Ended June 30, 2001**

 

**General**

Revenuesduring the quarter ended June 30, 2002 decreased $31.9 million, or 19.2%, to$134.2 million, from $166.2 million in the same quarter of 2001.  The decrease reflects the ongoing impact ofsoft lumber and panel pricing, lower fee timber harvest and the absence ofnormal-course property sales during the current period, as well as the sale orclosure of three of our sawmills in the latter part of 2001.

 

InJuly 2002, Canada received a favorable ruling regarding the Department ofCommerce’s preliminary determination in the countervailing duty case.  However, these preliminary duties havealready been eliminated, and this ruling does not affect the 27.2% dutycurrently in place on Canadian lumber shipments to the U.S.  Canada has filed an appeal regarding thefinal duties, but a final ruling is not expected until the second quarter of2003.  We do not expect this currentruling to have an effect on our revenue in the third or fourth quarters of2002.

 

Costof sales as a percentage of sales increased to 92.1% in the second quarter of2002, compared to 88.6% in the same quarter of 2001.  This increase reflects higher wholesale revenues, which typicallyrealize lower margins, as a percentage of our current period sales mix, as wellas lower lumber realizations and the lack of property sales, which typicallyprovide higher margins than other operating activities.  In addition, there was a lower revenue baseover which to spread fixed costs.  Thesefactors were partially offset by lower overhead and operating costs andincreased efficiencies at many of our operations.

 

Gain on sale of assets held for sale of $1.4million in the second quarter of 2002 represents the recognized gain on thesale of our Inland North tree farm in April 2002.

 

Selling, general and administrativeexpenses decreased $1.7 million, or 18.4%, to $7.6 million in the secondquarter of 2002, compared to $9.3 million in the second quarter of 2001,primarily as a result of lower salaries and wages, lower depreciation due tofewer mills, the cessation of goodwill amortization upon adoption of SFAS No.142 on January 1, 2002 and other reductions implemented throughout thePartnership in late 2001.  Selling,general and administrative expenses represented 5.7% of revenue in the second quarterof 2002 and 5.6% of revenue in the second quarter of 2001.

 

Interest expense decreased $2.6 million,or 16.6%, to $13.0 million in the second quarter of 2002, from $15.6 million inthe same quarter of 2001.  The decreaseis a result of lower average debt balances in the second quarter of 2002compared to the second quarter of 2001, partially offset by higher interestrates.

 

Debt restructuring and redemption premium of $14.1 million in thesecond quarter of 2002 relates to our debt restructuring in April 2002.  Of the $14.1 million loss, $10.0 million wasnon-cash in nature. We incurred a total of $8.7 million in fees and costs inconnection with the April 2002 debt restructuring, $4.2 million of which wasincluded in the $14.1 million loss recognized in the second quarter of 2002 inaccordance with the provisions outlined in Emerging Issues Task Force Issue No.96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments”(EITF 96-19).   In addition, we expensed$5.5 million of previously deferred fees and expenses and a $4.5 millionredemption premium described below.

 

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We incurred a redemption premium of $4.5 million in April 2002 when weprepaid our senior notes in advance of their scheduled maturity.  Payment of the redemption premium, accordingto the terms of the senior note restructuring, is deferred until December 31,2005.

 

As of June 30, 2002, we had a total of $5.6million of unamortized debt issuance costs, which will be amortized throughDecember 31, 2005.

 

The Partnership pays no significantincome taxes and does not include a provision for income taxes in its financialstatements.

 

**Timberlands**

Totalexternal segment sales, including property sales (except for the Inland Southand Inland North sales) and stumpage sales, decreased 50.0% to $9.1 million, or6.8% of revenue in the second quarter of 2002, compared to $18.1 million, or10.9% of revenue in the second quarter of 2001.  The decrease in external segment sales reflects the sale of ourInland tree farm, the absence of stumpage sale activity at our Oregon tree farmand lower fee harvest activity, which reflects our strategy to reduceproduction to more sustainable levels, particularly during periods ofrelatively low market pricing.

 

Internalsales of logs to manufacturing decreased 59.6% to $9.6 million in the secondquarter of 2002 from $23.9 million in the second quarter of 2001.  The decrease primarily reflects the absenceof three of our sawmills from the production mix during the second quarter of2002 compared to the second quarter of 2001.

 

Overalloperating income from timberlands, including property sales (except for theInland South and Inland North sales), decreased $6.4 million, or 84.1%, to $1.2million in the second quarter of 2002 from $7.6 million in the second quarterof 2001, primarily as a result of $4.8 million of property gains included inthe second quarter of 2001 compared to none in the second quarter of 2002.   Without the property sales gains in thesecond quarter of 2001, operating income decreased $1.6 million in the secondquarter of 2002 compared to the second quarter of 2001 due to the lowerrevenues as discussed above, offset in part by a 37.5% decrease in segmentoverhead expense and improved market demand for logs in the Olympic tree farmarea in the second quarter of 2002.

 

***Domestic Log Sales***

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

 
|             |   | **Quarter Ended June 30,** |    |     |    |
|------------------|--------|----------------------------|---------|----------|---------|
| **Tree Farm**    |   | **2002**                   |    | **2001** |    | **% Change** |   |
| Oregon           |   | —                     |    | $        | 157/MBF |   | — |   |
| Inland           |   | $                          | 477/MBF |     | $       | 397/MBF |   | 20.2 | % |
| Hamilton         |   | $                          | 472/MBF |     | $       | 470/MBF |   | 0.4 | % |
| Olympic          |   | $                          | 392/MBF |     | $       | 355/MBF |   | 10.4 | % |
| Weighted average |   | $                          | 418/MBF |     | $       | 339/MBF |   | 23.3 | % |

 

Theincrease at the Olympic tree farm is primarily due to higher demand from thatregion.

 

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Domesticexternal log sales volumes decreased****33.9% in the second quarter of 2002 to17.8 million board feet (MMBF), compared to 27.0 MMBF in the same quarter of2001, primarily as a result of significantly lower activity on the Oregon treefarm, a sharp decline in stumpage sale volume and the absence of our Inlandtree farm in the second quarter of 2002 compared to the second quarter of2001.  The external volume from each ofour tree farms was as follows (in thousands of board feet (MBF)):

 
|               |   | **Quarter Ended June 30,** |   |     |   |
|--------------------|--------|----------------------------|--------|----------|--------|
| **Tree Farm**      |   | **2002**                   |   | **2001** |   | **% Change** |   |
| Oregon tree farm   |   | 8                          |   |     | 8,160  |   | (99.9 | )% |
| Inland tree farm   |   | 132                        |   |     | 5,918  |   | (97.8 | )% |
| Hamilton tree farm |   | 6,419                      |   |     | 7,547  |   | (14.9 | )% |
| Olympic tree farm  |   | 11,284                     |   |     | 5,354  |   | 110.8 | % |
| Total              |   | 17,843                     |   |     | 26,979 |   | (33.9 | )% |

 

Theincrease at the Olympic tree farms is primarily a result of increased demand.

 

Thedecrease at our Oregon tree farm is due to the fact that a majority of theproduction from that tree farm was utilized by our Gilchrist sawmill.

 

Wesold a portion of our Inland tree farm in the first quarter of 2002 and soldthe final portion of our Inland tree farm on April 30, 2002.  Therefore, there was very little volume fromour Inland tree farm during the second quarter of 2002.

 

***Export Log Sales***

Salesof logs to customers involved in exporting activities were approximately $0.9million, or 0.7% of sales, in the second quarter of 2002, compared to $0.5million, or 0.3% of sales, for the same quarter in 2001.  The average realization for export logs wasflat at $510/MBF in the second quarter of 2002 compared to $509/MBF in thesecond quarter of 2001.  Sales volumesof export logs increased 71.4% to 1,798 MBF in the second quarter of 2002compared to 1,049 MBF in the second quarter of 2001.   The increase in volume is primarily due to increased demand forKorean sort logs from our Hamilton tree farm.

 

***Property Sales***

Exceptfor the disposition of the Inland South and Inland North tree farms, we did nothave any property sales in the second quarter of 2002.  This level compares to revenue and operatingincome from property sales in the second quarter of 2001 of $6.2 million and$4.8 million, respectively.   We do notanticipate any property sales in the third quarter of 2002.

 

**Manufacturing**

Segmentsales, excluding sales of lumber products through the wholesale marketing segment,decreased $13.4 million, or 33.0%, to $27.3 million, or 20.3% of sales, in thesecond quarter of 2002 from $40.7 million, or 24.5% of sales, in the samequarter of 2001.  The reduced revenuesreflect a 28.8% decrease in external lumber sales volume, a 44.4% decline inchip revenue and a 6.2% decrease in average external lumber sales realizations.

 

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Operatingincome from manufacturing was $2.1 million in the second quarter of 2002compared to $2.2 million in the second quarter of 2001.  The slightly lower operating income was aresult of the declines in revenue and average sales realizations mentionedabove.  These factors were partiallyoffset by a 16.9% decrease in unit log costs, a 23.8% decrease in overheadexpense and a 6.9% decline in unit manufacturing costs.  These comparisons include the Bonners Ferry,Coeur d’Alene and Prineville sawmills in the second quarter of 2001, which wereabsent from our manufacturing segment in the second quarter of 2002.  The lower log costs resulted from theabsence of these three sawmills, which consumed primarily higher cost logs,together with lower log costs at our Gilchrist operation during the secondquarter of 2002 compared to the second quarter of 2001.

 

Averageprices received for all lumber sales, excluding sales to the wholesaledivision, in the various regions were as follows:

 
|             |   | **Quarter Ended June 30,** |    |     |    |
|------------------|--------|----------------------------|---------|----------|---------|
| **Region**       |   | **2002**                   |    | **2001** |    | **% Change** |   |
| Oregon           |   | $                          | 305/MBF |     | $       | 338/MBF |   | (9.8 | ) |
| Inland           |   | —                     |    | $        | 324/MBF |   | — |   |
| Washington       |   | $                          | 301/MBF |     | $       | 298/MBF |   | 1.0 | % |
| Weighted average |   | $                          | 303/MBF |     | $       | 323/MBF |   | (6.2 | )% |

 

Thelower realization from the Oregon region in the second quarter of 2002 comparedto the second quarter of 2001 primarily reflects the absence of the Prinevillemill’s previous product output from the sales mix.

 

TheInland region ceased production at the end of 2001 with the sale of the BonnersFerry mill in September 2001 and the closure of our Coeur d’Alene sawmill inpreparation for the sale of our Inland tree farm.

 

Externallumber sales volumes decreased 28.8% in the second quarter of 2002 to 79.7 MMBFcompared to 111.9 MMBF in the same period of 2001.  External sales volumes from the various regions were as follows(in MBF):

 
|       |   | **Quarter Ended June 30,** |   |     |   |
|------------|--------|----------------------------|--------|----------|--------|
| **Region** |   | **2002**                   |   | **2001** |   | **% Change** |   |
| Oregon     |   | 45,583                     |   | 45,431   |   | 0.3 | % |
| Inland     |   | —                     |   | 34,550   |   | (100.0 | )% |
| Washington |   | 34,137                     |   | 31,907   |   | 7.0 | % |
| Total      |   | 79,720                     |   | 111,888  |   | (28.8 | )% |

 

Theslight increase in volume from the Oregon region reflects improved operatingefficiencies at our Gilchrist facility in the second quarter of 2002 comparedto the second quarter of 2001, which more than offset the absence of thePrineville sawmill in 2002.  During thesecond quarter of 2002, we began using the previously closed Prineville drykilns and planer to finish the excess rough green lumber from the Gilchristfacility.  This has enhanced the overallrealization at our Gilchrist facility and, therefore, we plan to continue toutilize the dry-end of the Prineville operation indefinitely.

 

Theincrease in shipments from the Washington region reflects increased productionat both Washington sawmills.

 

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By-productrevenues accounted for 1.8% of revenue in the second quarter of 2002, comparedto 2.2% of revenue in the second quarter of 2001.  Residual wood chip prices decreased to $56 per bone dry unit(BDU) in the second quarter of 2002 compared to $71/BDU in the second quarterof 2001. The lower average realization reflects the impact of continued weaknessand high chip supplies in the pulp industry. Woodchip sales volume decreased 28.9% to 35,738 BDUs in the secondquarter of 2002 compared to 50,246 BDUs in the second quarter of 2001,reflecting lower volume due to the absence of our Inland lumber operations.

 

**WholesaleMarketing**

Ourwholesale marketing segment involves sales of lumber and other wood products,most of which were not manufactured by us. Sales from the wholesale segment decreased $11.7 million, or 11.0%, to$95.3 million, or 71.0% of sales, in the second quarter of 2002 from $107.0million, or 64.4% of sales in the second quarter of 2001.  Operating income from wholesale operationsdecreased 27.2% to $2.3 million in the second quarter of 2002 from $3.2 millionin the second quarter of 2001.  Thedecrease in revenue primarily reflects lower lumber and panel prices.

 

Salesvolume of Partnership-produced lumber through the wholesale marketing segmentdecreased 51.5% during the second quarter of 2002 compared to the secondquarter of 2001, due primarily to the absence of three sawmills in the mixduring the 2002 period.  Volume fromcomparable mills increased 33.8%, reflecting our efforts to increase internalsales of Gilchrist lumber output through our Cheshire Lumber operation.

 

Thedecline in operating profit is primarily a result of lower overall revenues andhigher proportionate cost of raw materials at our Eugene and Cheshireoperations.  These factors more thanoffset decreases in selling, general and administrative expenses.  The Eugene operation typically produces alower operating margin, compared to the other operations in this segment, givenits business as a true wholesaling operation.

 

Duringthe second quarter of 2002, we reorganized our Eugene operation.  Headcount was reduced, the trading functionwas moved to a new, smaller location, a long-standing sales and financialaccommodation agreement with a regional lumber producer was terminated, and theon-going operations were refocused to higher margin trading opportunities.  We expect the operating results of thisoperation to improve as a result of these actions.

 

Duringthe third quarter of 2002, our Desert Lumber operation is scheduled to startthe integration of a new insulation business in the Las Vegas area, expandingthe range of products offered to professional builders.

 

**Resultsof Operations**

**SixMonths Ended June 30, 2002 compared to Six Months Ended June 30, 2001**

**General**

Revenuesduring the six months ended June 30, 2002 decreased $48.0 million, or 15.7%, to$257.0 million, from $305.0 million in the same period of 2001.  The decrease reflects the ongoing impact ofsoft lumber, panel and log pricing and reduced fee harvest activity, as well asthe sale or closure of three of our sawmills in the latter part of 2001 and theabsence of normal-course property sales during the current period.

 

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Cost of sales as a percentage of salesincreased to 91.8% in the first six months of 2002, compared to 89.9% in thesame period of 2001.   This increasereflects the higher wholesale revenues, which typically realize lowermargins, as a percentage of our current period sales mix, as well as lowerlumber realizations and the lack of property sales, which typically providehigher margins than other operating activities.  In addition, there was a lower revenue base over which to spreadfixed costs.  These factors werepartially offset by lower overhead and operating costs and increasedefficiencies at many of our operations.

 

Gain on sale of assets held for sale of $7.4million in the first six months of 2002 represents the recognized gains on thesale of our Inland South and Inland North tree farms in March and April 2002,respectively.

 

Selling, general and administrativeexpenses decreased $2.6 million, or 14.1%, to $16.0 million in the first sixmonths of 2002, compared to $18.7 million in the first six months of 2001,primarily as a result of lower salaries and wages and the cessation of goodwillamortization upon adoption of SFAS No. 142 on January 1, 2002.  The lower salaries and wages reflect thesale and/or closure of three sawmills during the latter part of 2001 and otherreductions implemented throughout the Partnership in late 2001.  Selling, general and administrative expensesrepresented 6.2% of revenue in the first six months of 2002 and 6.1% of revenuein the first six months of 2001.

 

Interest expense decreased $4.3 million,or 13.7%, to $27.2 million in the first six months of 2002, from $31.5 millionin the first six months of 2001.  Thedecrease is a result of lower average debt balances in the first six months of2002 compared to the first six months of 2001, partially offset by higherinterest rates.

 

Debt restructuring and redemption premium of $14.1 million in the firstsix months of 2002 relates to our debt restructuring in April 2002.  Of the $14.1 million loss, $10.0 million wasnon-cash in nature. We incurred a total of $8.7 million in fees and costs inconnection with the April 2002 debt restructuring, $4.2 million of which wasincluded in the $14.1 million loss recognized in the second quarter of 2002 inaccordance with the provisions outlined in Emerging Issues Task Force Issue No.96-19 “Debtor’s Accounting for a Modification or Exchange of Debt Instruments,”(EITF 96-19).   In addition, we expensed$5.5 million of previously deferred fees and expenses and a $4.5 millionredemption premium incurred in April 2002.

 

Amortization of debt issuance costs increased$0.7 million to $1.7 million in the first six months of 2002 compared to $1.0million in the first six months of 2001. The increase is due primarily to $4.2 million of debt issuance costsincurred as a result of our November 2001 bank facility amendment, whichresulted in increased amortization expense during the first three months of2002.  As a result of the debtrestructuring in April 2002, previously deferred fees of $5.5 million relatedto the senior notes were expensed and the amortization period for remainingdeferred fees was prospectively extended until December 2005, resulting inlower amortization expense for the second quarter of 2002 as compared to thefirst quarter of 2002.  As of June 30,2002, we had a total of $5.6 million of unamortized debt issuance costs, whichwill be amortized through December 31, 2005.

 

The Partnership pays no significantincome taxes and does not include a provision for income taxes in its financialstatements.

 

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**Timberlands**

Totalexternal segment sales, including property sales (except for the Inland Southand Inland North sales) and stumpage sales, decreased 51.3% to $19.8 million,or 7.7% of revenue in the first six months of 2002, compared to $40.7 million,or 13.4% of revenue in the first six months of 2001.  The decrease in external segment sales reflects a 47.3% decreasein log shipments, which was influenced by significantly lower stumpage saleactivity and weather related production delays on the Hamilton tree farm andthe absence of any property sales in the first six months of 2002, as well asthe sale of our Inland North and Inland South tree farms.  The lower stumpage sales and fee harvestactivity reflect our on-going strategy to focus our current fee timberproduction primarily for internal use while prices are soft.

 

Internalsales of logs to manufacturing decreased 58.6% to $20.2 million in the firstsix months of 2002 from $48.8 million in the first six months of 2001.  The decrease primarily reflects the absenceof three sawmills from the production mix during the 2002 period compared tothe 2001 period.

 

Overalloperating income from timberlands, including property sales (except for theInland South and Inland North sales), decreased $10.4 million, or 78.4%, to$2.9 million in the first six months of 2002 from $13.3 million in the firstsix months of 2001, primarily as a result of $9.2 million of property gainsincluded in the first six months of 2001 compared to none in the first sixmonths of 2002.   In addition, sales volumedecreased 47.3% in the first six months of 2002 compared to the first sixmonths of 2001.  These declines werepartially offset by a 45.6% increase in average sales realizations and a 28.4%decrease in segment overhead expense. The decrease in sales volume is primarily due to the sale of our Inlandtree farm and the utilization of a majority of the volume from our Oregon treefarm for internal use at our Gilchrist sawmill.  The increase in average sales realizations is primarily due tothe effect of slightly higher lumber prices on domestic log markets and asignificant decrease in stumpage sales during the first six months of 2002compared to the first six months of 2001.

 

***Domestic Log Sales***

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

 
|             |   | **Six Months  Ended June 30,** |    |     |    |
|------------------|--------|--------------------------------|---------|----------|---------|
| **Tree Farm**    |   | **2002**                       |    | **2001** |    | **% Change** |   |
| Oregon           |   | —                         |    | $        | 155/MBF |   | — |   |
| Inland           |   | $                              | 466/MBF |     | $       | 407/MBF |   | 14.5 | % |
| Hamilton         |   | $                              | 483/MBF |     | $       | 457/MBF |   | 5.7 | % |
| Olympic          |   | $                              | 377/MBF |     | $       | 373/MBF |   | 1.1 | % |
| Weighted average |   | $                              | 428/MBF |     | $       | 294/MBF |   | 45.6 | % |

 

Increasesat the Inland, Hamilton and Olympic tree farms are due to the effect thatslightly higher lumber prices had on domestic log markets as well as the factthat there were significantly less stumpage sales in the first six months of2002 compared to the first six months of 2001.

 

Theincrease at the Oregon tree farm is due to the absence of stumpage sales in thefirst six months of 2002 compared to $5.1 million for the same period of 2001.

 

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Domesticexternal log sales volumes decreased****48.7% in the first six months of 2002 to36.5 million board feet (MMBF), compared to 71.2 MMBF in the first six monthsof 2001, primarily as a result of significantly lower stumpage sales, lowerHamilton fee harvest activity and insignificant external sales from our Oregontree farm.  The external volume fromeach of our tree farms was as follows (in thousands of board feet (MBF)):

 
|                |   | **Six Months  Ended June 30,** |   |     |   |
|---------------------|--------|--------------------------------|--------|----------|--------|
| **Tree Farm**       |   | **2002**                       |   | **2001** |   | **% Change** |   |
| Oregon tree farm    |   | 8                              |   | 33,191   |   | (100.0 | )% |
| Inland tree farm    |   | 7,373                          |   | 9,760    |   | (24.5 | )% |
| Hamilton tree  farm |   | 8,764                          |   | 15,535   |   | (43.6 | )% |
| Olympic tree  farm  |   | 20,332                         |   | 12,679   |   | 60.4 | % |
| Total               |   | 36,477                         |   | 71,165   |   | (48.7 | )% |

 

Theincrease at the Olympic tree farm is a result of increases in available timberand improved demand in this region.

 

Thedecrease at the Inland tree farm is due to the sale of this tree farm, in twoseparate transactions, in the first and second quarters of 2002.

 

Thedecrease at the Hamilton tree farm is primarily due to the impact of snowrelated production delays in the first quarter of 2002 compared to the firstquarter of 2001 and decreased stumpage sale activity in the 2002 period.

 

***Export Log Sales***

Salesof logs to customers involved in exporting activities were approximately $1.9million, or 0.7% of sales, in the first six months of 2002, compared to $1.2million, or 0.4% of sales, for the first six months of 2001.  The average realization for export logsdecreased 10.3% to $494/MBF in the first six months of 2002 compared to$551/MBF in the first six months of 2001. Sales volumes of export logs increased 76.2% to 3.9 MMBF in the firstsix months of 2002 compared to 2.2 MMBF in the first six months of 2001.   The increase in volume is primarily due toincreased shipments from our Hamilton tree farm as a result of an increase indemand for Korean sort logs. The decrease in realization is primarily a resultof a change in mix to lower grade Korean sort logs during the first six monthsof 2002 compared to the first six months of 2001.

 

***Property Sales***

Exceptfor the disposition of the Inland South and Inland North tree farms, we did nothave any property sales in the first six months of 2002.  This level compares to revenue and operatingincome from property sales in the first six months of 2001 of $12.5 million and$9.2 million, respectively.   We do notanticipate any property sales in the third quarter of 2002.

 

**Manufacturing**

Externalsegment sales, excluding sales of lumber products through the wholesalemarketing segment, decreased $21.5 million, or 29.7%, to $51.1 million, or19.9% of sales, in the first six months of 2002 from $72.6 million, or 23.8% ofsales, in the first six months of 2001. The decreased revenues reflect a 28.7% decrease in external lumber salesvolume, a 39.2% decline in chip revenue and a 2.0% decrease in average externallumber sales realizations.  The decreasein external sales volume is primarily due to the sale and/or closure of threesawmills during the third quarter of 2001, offset in part by increases inproduction at our Gilchrist, Oregon and Washington sawmills.  The

 

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decreasein average sales realizations is due to changes in mix, offset in part bymoderately improved market pricing on comparable species in the 2002 periodcompared to the 2001 period.

 

Operatingincome from manufacturing was $2.7 million in the first six months of 2002compared to an operating loss of $0.7 million in the first six months of2001.  The improved operating resultsare primarily a result of lower log costs, a significant decrease in segmentoverhead expense and the absence of the Bonners Ferry, Coeur d’Alene andPrineville sawmills from the manufacturing segment in the first six months of2002 compared to the first six months 2001. The lower log costs are a result of the absence of three sawmills thatconsumed primarily higher cost logs, together with lower log costs at ourGilchrist operation during the first six months 2002 compared to the first sixmonths of 2001.

 

Averageprices received for all lumber sales, excluding sales to the wholesaledivision, in the various regions were as follows:

 
|             |   | **Six Months  Ended June 30,** |    |     |    |
|------------------|--------|--------------------------------|---------|----------|---------|
| **Region**       |   | **2002**                       |    | **2001** |    | **% Change** |   |
| Oregon           |   | $                              | 295/MBF |     | $       | 314/MBF |   | (6.1 | )% |
| Inland           |   | —                         |    | $        | 300/MBF |   | — |   |
| Washington       |   | $                              | 289/MBF |     | $       | 275/MBF |   | 5.1 | % |
| Weighted average |   | $                              | 292/MBF |     | $       | 298/MBF |   | (2.0 | )% |

 

Thelower average sales realizations from the Oregon region primarily reflect theabsence of Prineville’s previous product output from the sales mix during the2002 period compared to the 2001 period.

 

Theimproved realizations from the Washington region primarily reflect miximprovements at our Port Angeles sawmill.

 

OurBonners Ferry and Coeur d’Alene sawmills, which were in the Inland region, wereclosed in the second half of 2001 and, therefore, there is no activity duringthe 2002 period from that region.

 

Externallumber sales volumes decreased 28.7% in the first six months of 2002 to 151.9MMBF compared to 213.0 MMBF in the first six months of 2001.  External sales volumes from the variousregions were as follows (in MBF):

 
|       |   | **Six Months  Ended June 30,** |   |     |   |
|------------|--------|--------------------------------|--------|----------|--------|
| **Region** |   | **2002**                       |   | **2001** |   | **% Change** |   |
| Oregon     |   | 88,166                         |   | 81,775   |   | 7.8 | % |
| Inland     |   | —                         |   | 69,572   |   | (100.0 | )% |
| Washington |   | 63,710                         |   | 61,640   |   | 3.4 | % |
| Total      |   | 151,876                        |   | 212,987  |   | (28.7 | )% |

 

Theincreased volume from the Oregon region reflects improved operatingefficiencies at our Gilchrist facility in the first six months of 2002 comparedto the first six months of 2001, which more than offset the absence of thePrineville sawmill in the 2002 period. In addition, in the second quarter of 2002, we began utilizing thepreviously closed Prineville dry kilns and planer to finish the

 

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excessrough green lumber from the Gilchrist facility.  Given the results we experienced in the second quarter of 2002,we plan to utilize the dry-end of the Prineville operation indefinitely.

 

Slightlyincreased volume from the Washington region reflects increased production atboth our Washington region sawmills. During the first quarter of 2002, a dry kiln roof at our Marysvillesawmill was replaced and a new heat exchanger was installed at our Port Angelessawmill.  These improvements contributedto the increased efficiency and production.

 

By-productrevenues accounted for 2.0% of revenue in the first six months of 2002,compared to 2.7% of revenue in the first six months of 2001.  Residual wood chip prices decreased to $61per bone dry unit (BDU) in the first six months of 2002 compared to $73/BDU inthe first six months of 2001. The lower average realization reflects the impactof depressed pulp industry pricing and high levels of supply.  The lower volume reflects the absence of theInland region and Prineville sawmills from the sales mix.  Excluding the effect of the Inland andPrineville sawmills, sales volume increased 22.2%, reflecting increased volumefrom all of our existing operations.

 

**WholesaleMarketing**

Ourwholesale marketing segment involves sales of lumber and other wood products,most of which were not manufactured by us. Sales from the wholesale segment decreased $9.9 million, or 5.2%, to$181.2 million, or 70.5% of sales, in the first six months of 2002 from $191.1million, or 62.7% of sales, in the first six months of 2001.  Operating income from wholesale operationsdecreased 22.3% to $4.8 million in the first six months of 2002 from $6.2million in the first six months of 2001. The decrease in revenue reflects the impact of decreased lumber andpanel prices, offset in part by increased volume at our Alliance Lumber andDesert Lumber operations.

 

Salesvolume of Partnership-produced lumber through the wholesale marketing segmentdecreased 58.3% during the first six months of 2002 compared to the first sixmonths of 2001, due primarily to the absence of three sawmills in the mixduring the 2002 period.  Volume from comparablemills increased 5.6%, reflecting our successful efforts to increase internalsales of Gilchrist lumber output through our Cheshire Lumber operations.

 

Thedecline in operating profit is primarily a result of a significantproportionate increase in the Eugene wholesale operation revenues in theoverall sales mix.  The Eugene operationtypically produces a lower operating margin, compared to the other operationsin this segment, given its business as a true wholesaling operation.  Lower selling, general and administrativecosts helped to offset the decline in revenue.

 

**Item 3.  Quantitativeand Qualitative Disclosures About Market Risk**

 

Ouronly financial instruments with market risk exposure are our variable ratelines of bank credit.  At June 30, 2002,we had $148.8 million outstanding under our lines of credit with a weightedaverage interest rate of 5.51%.  Ahypothetical 10 percent increase in interest rates to 6.06% would not have amaterial effect on our cash flows.

 

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**PARTII - OTHER INFORMATION**

 

**Item 5.  Other Information**

 

In July 2002, we announced that, effective August 1, 2002, Steven E.Dietrich, our Vice President of Finance for the past two and one half years,has been promoted to Senior Vice President, Chief Financial Officer andTreasurer.  Mr. Dietrich replaces Mr.Richard D. Snyder, who has resigned his position effective July 31, 2002 inorder to pursue other opportunities. Mr. Snyder will serve as a consultant to Crown Pacific for six months inorder to assist Mr. Dietrich with the transition of responsibilities.****

 

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

 

**(a) The exhibits filed as part of this report are listedbelow and this list is intended to serve as the exhibit index:**

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

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

 

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

Wefiled two reports on Form 8-K during the quarter ended June 30, 2002:

•                  Form 8-K dated April 1, 2002 and filed April2, 2002 pursuant to Item 5. Other Events regarding the closing of the InlandSouth tree farm and the fact that the Partnership was in negotiations with itsbank lenders to amend its debt agreements; and

•                  Form 8-K dated April 19, 2002 and filed April29, 2002 pursuant to Item 5. Other Events regarding the amendment of thePartnership’s bank debt and senior note agreements.

 

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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:  August  14, 2002 | CROWN PACIFIC PARTNERS, L.P.                                                                                                  |
|------------------------------|-------------------------------------------------------------------------------------------------------------------------------|
|                         |                                                                                                                          |   |
|                         | By:                                                                                                                           | Crown Pacific Management Limited  Partnership, as General Partner |
|                         |                                                                                                                          |   |
|                         |                                                                                                                          |   |
|                         | By:                                                                                                                           | /s/ Steven E. Dietrich |   |
|                         | Steven E. Dietrich                                                                                                            |
|                         | Senior Vice President and Chief Financial Officer   (Duly Authorized Officer and Principal Financial  and Accounting Officer) |

 

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