** **

**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  March 31, 2003**                                |
|                                                                              |                                                                                          |
| **OR**                                                                            |
|                                                                              |                                                                                          |
| **o**                                                                             | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|                                                                              |                                                                                          |
| **For  the transition period from         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.) |
|                                                                             |   |                                  |
| **805 SW Broadway Street, Suite 1500,  Portland, Oregon**                        |   | **97205**                             |
| (Address of principal  executive offices)                                        |   | (Zip Code)                            |
|                                                                             |   |                                  |
| Registrant’s telephone  number, including area code:  **503-274-2300** |

 

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Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý            No o

 

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

 

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

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

 

 

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

**FORM 10-Q**

**INDEX**

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

 

1

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**PART I - FINANCIAL INFORMATION**

 

**Item. 1.  Financial Statements**

 

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

 

**ConsolidatedStatements of Operations**

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

**(Unaudited)**

 
|                                          |   | **For the Three Months Ended March 31,** |       |
|-----------------------------------------------|--------|------------------------------------------|------------|
|                                          |   | **2003**                                 |       | **2002** |   |
|                                          |   |                                     | ** ** |   | ** ** |
| Revenues                                      |   | $                                        | 106,959    |   | $ | 122,775 |   |
|                                          |   |                                     |       |   |   |
| Operating costs:                              |   |                                     |       |   |   |
| Cost of products  sold                        |   | 98,904                                   |       | 112,264 |   |
| Impairment of  goodwill                       |   | 5,502                                    |       | — |   |
| Gain on disposal  of assets                   |   | (479                                     | )          | (6,020 | ) |
| Selling, general  and administrative expenses |   | 7,301                                    |       | 8,459 |   |
|                                          |   |                                     |       |   |   |
| Operating income  (loss)                      |   | (4,269                                   | )          | 8,072 |   |
|                                          |   |                                     |       |   |   |
| Interest expense                              |   | 11,952                                   |       | 14,206 |   |
| Amortization of  debt issuance costs          |   | 423                                      |       | 1,066 |   |
| Other income,  net                            |   | (129                                     | )          | (268 | ) |
|                                          |   |                                     |       |   |   |
| Net loss                                      |   | $                                        | (16,515    | ) | $ | (6,932 | ) |
|                                          |   |                                     |       |   |   |
| Net loss per  unit                            |   | $                                        | (0.54      | ) | $ | (0.22 | ) |
|                                          |   |                                     |       |   |   |
| Weighted average  units outstanding           |   | 30,527,030                               |       | 30,527,030 |   |

 

The accompanying notesare an integral part of these financial statements.

 

2

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

 

**Consolidated Balance Sheets**

**(Inthousands, except unit data)**

**(Unaudited)**

 
|                                                                                     |   | **March 31,  2003** |       | **December  31,  2002** | ** ** |
|------------------------------------------------------------------------------------------|--------|---------------------|------------|-------------------------|------------|
|                                                                                     |   |                | ** ** |                    | ** ** |
| **Assets**                                                                               |   |                |       |                    |       |
| Current assets:                                                                          |   |                | ** ** |                    | ** ** |
| Cash and cash  equivalents                                                               |   | $                   | 5,163      |                    | $          | 12,993 |   |
| Accounts  receivable, net of allowances of $1,706 and $1,655                             |   | 40,880              |       | 39,833                  |       |
| Notes receivable                                                                         |   | 2,380               |       | 2,540                   |       |
| Inventories                                                                              |   | 38,684              |       | 33,385                  |       |
| Deposits on timber  cutting contracts                                                    |   | 1,030               |       | 1,135                   |       |
| Prepaid and  other current assets                                                        |   | 4,438               |       | 4,053                   |       |
| Total current  assets                                                                    |   | 92,575              |       | 93,939                  |       |
|                                                                                     |   |                |       |                    |       |
| Property, plant  and equipment, net of accumulated depreciation of $43,615 and $42,609   |   | 52,217              |       | 53,484                  |       |
| Timber, timberlands  and roads, net                                                      |   | 411,782             |       | 413,987                 |       |
| Goodwill                                                                                 |   | 28,770              |       | 34,272                  |       |
| Other assets                                                                             |   | 16,540              |       | 17,283                  |       |
|                                                                                     |   |                |       |                    |       |
| Total assets                                                                             |   | $                   | 601,884    |                    | $          | 612,965 |   |
|                                                                                     |   |                |       |                    |       |
| **Liabilities and Partners’ Capital**                                               |   |                |       |                    |       |
|                                                                                     |   |                |       |                    |       |
| Current  liabilities:                                                                    |   |                |       |                    |       |
| Revolving credit  facility                                                               |   | $                   | 27,000     |                    | $          | 26,000 |   |
| Accounts payable                                                                         |   | 12,048              |       | 10,766                  |       |
| Accrued expenses                                                                         |   | 6,988               |       | 7,886                   |       |
| Accrued interest                                                                         |   | 10,717              |       | 7,798                   |       |
| Current portion  of long-term debt                                                       |   | 41,009              |       | 10,009                  |       |
|                                                                                     |   |                |       |                    |       |
| Total current  liabilities                                                               |   | 97,762              |       | 62,459                  |       |
| Long-term debt                                                                           |   | 472,159             |       | 503,181                 |       |
| Other  non-current liabilities                                                           |   | 10,323              |       | 9,170                   |       |
|                                                                                     |   | 580,244             |       | 574,810                 |       |
|                                                                                     |   |                |       |                    |       |
| Commitments and  contingent liabilities                                                  |   |                |       |                    |       |
|                                                                                     |   |                |       |                    |       |
| Partners’  capital:                                                                 |   |                |       |                    |       |
| General partners                                                                         |   | (1,071              | )          | (906                    | )          |
| Limited partners  (30,527,030 units outstanding at March 31, 2003 and December 31, 2002) |   | 22,711              |       | 39,061                  |       |
| Total partners’  capital                                                            |   | 21,640              |       | 38,155                  |       |
|                                                                                     |   |                |       |                    |       |
| Total  liabilities and partners’ capital                                            |   | $                   | 601,884    |                    | $          | 612,965 |   |

 

The accompanying notesare an integral part of these financial statements.

 

3

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

 

**ConsolidatedStatements of Cash Flows**

**(Inthousands)**

**(Unaudited)**

 
|                                                                         |   | **For the Three Months Ended March 31,** |    |
|------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|                                                                         |   | **2003**                                 |    | **2002** |   |
| Cash flows from  operating activities:                                       |   |                                     |    |   |   |
| Net loss                                                                     |   | $                                        | (16,515 | ) | $ | (6,932 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |   |                                     |    |   |   |
| Depletion,  depreciation and amortization                                    |   | 6,110                                    |    | 8,293 |   |
| Deferred  interest                                                           |   | 1,168                                    |    | — |   |
| Impairment of  goodwill                                                      |   | 5,502                                    |    | — |   |
| Loss on purchase  commitments                                                |   | 149                                      |    | — |   |
| Gain on disposal  of property                                                |   | (479                                     | )       | (6,096 | ) |
| Net change in  current assets and current liabilities:                       |   |                                     |    |   |   |
| Accounts and  notes receivable                                               |   | (603                                     | )       | 1,270 |   |
| Inventories                                                                  |   | (5,299                                   | )       | (2,736 | ) |
| Deposits on timber  cutting contracts                                        |   | 105                                      |    | (521 | ) |
| Prepaid and  other current assets                                            |   | (386                                     | )       | (773 | ) |
| Accounts payable  and accrued expenses                                       |   | 3,321                                    |    | 1,629 |   |
| Net cash used by  operating activities                                       |   | (6,927                                   | )       | (5,866 | ) |
|                                                                         |   |                                     |    |   |   |
| Cash flows from  investing activities:                                       |   |                                     |    |   |   |
| Additions to  timberlands                                                    |   | (1,389                                   | )       | (1,440 | ) |
| Additions to  timber cutting rights                                          |   | (529                                     | )       | (476 | ) |
| Additions to  equipment                                                      |   | (637                                     | )       | (951 | ) |
| Proceeds from  sales of property and timberlands                             |   | 641                                      |    | 131,515 |   |
| Principal  payments received on notes                                        |   | 33                                       |    | 2,376 |   |
| Other investing  activities                                                  |   | —                                   |    | (15 | ) |
| Net cash (used)  provided by investing activities                            |   | (1,881                                   | )       | 131,009 |   |
|                                                                         |   |                                     |    |   |   |
| Cash flows from  financing activities:                                       |   |                                     |    |   |   |
| Net increase in  short-term borrowings                                       |   | 1,000                                    |    | 5,500 |   |
| Proceeds from  issuance of long-term debt                                    |   | —                                   |    | 116 |   |
| Repayments of  long-term debt                                                |   | (22                                      | )       | (113 | ) |
| Change in  restricted cash                                                   |   | —                                   |    | (132,828 | ) |
| Other financing  activities                                                  |   | —                                   |    | (681 | ) |
| Net cash  provided (used) by financing activities                            |   | 978                                      |    | (128,006 | ) |
|                                                                         |   |                                     |    |   |   |
| Net decrease in  cash and cash equivalents                                   |   | (7,830                                   | )       | (2,863 | ) |
| Cash and cash  equivalents at beginning of period                            |   | 12,993                                   |    | 9,219 |   |
|                                                                         |   |                                     |    |   |   |
| Cash and cash  equivalents at end of period                                  |   | $                                        | 5,163   |   | $ | 6,356 |   |

 

The accompanying notesare an integral part of these financial statements.

 

4

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

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

Crown Pacific Partners, L.P. (“Crown Pacific” orthe “Partnership”), a Delaware limited partnership, through its 99% ownedsubsidiary, Crown Pacific Limited Partnership (the “Operating Partnership”),was formed in 1994 to acquire, own and operate timberlands and wood productmanufacturing facilities located in the Northwest United States. ThePartnership’s business consists primarily of growing and harvesting timber forsale as logs in domestic and export markets and the manufacturing, selling,trading and distribution 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 the Partnership’s2002 Annual Report on Form 10-K, which includes a summary of significantaccounting policies of the Partnership. In the opinion of management, all material adjustments necessary topresent fairly the results of operations for the three-month periods endedMarch 31, 2003 and 2002 have been included. All such adjustments are of a normal and recurring nature, except for a$5.5 million charge to record the estimated impairment of goodwill in the threemonths ended March 31, 2003, and all significant intercompany transactions havebeen eliminated.  The results ofoperations for any interim period are not necessarily indicative of the resultsof operations for the entire year.

 

The accompanying consolidated financialstatements have been prepared assuming that the Partnership will continue as agoing concern.  The Partnership hasexperienced net losses in each of the last ten fiscal quarters, and hasrecently experienced decreased liquidity. The Partnership’s loan agreements contain financial covenants andscheduled interest and principal payments that it may not be able to meet.  These factors raise substantial doubt aboutthe Partnership’s ability to meet future expected expenditures necessary tocontinue as a going concern.  Theconsolidated financial statements do not reflect any adjustments that mightresult from the outcome of this uncertainty.  See further discussion inNote 2.

 

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 $(165,000) and $(69,000) for the three months ended March31, 2003 and 2002, respectively.  Thereis no difference between basic and diluted earnings per unit.

 

**Note 2: Liquidity**

 

As of March 31, 2003, $41.0 millionof the Partnership’s long-term debt was classified as current, as well as $27.0million under the revolving credit facility. Furthermore, the Partnership is currently unable to borrow additionalfunds under its revolving credit facility (see Note 10 below).

 

The Partnership had a net loss of$59.1 million for the year ended December 31, 2002, and $16.5 million for thethree months ended March 31, 2003, and expects to realize a loss during theremainder of 2003.  The Partnership doesnot expect to generate sufficient cash from operations without asset sales tomake the principal and interest payments required under the terms of itsindebtedness in 2003 and January 2004. In addition, the Partnership may not be able to comply with thefinancial covenants of its debt agreements during 2003.  The Partnership’s ability to comply withthese financial covenants will depend on its future results of operations andpotential future asset sales.  If thePartnership fails to comply with these covenants, or fails to make scheduledinterest or principal payments, and if the lenders do not agree to waive thecovenants or defer such scheduled payments, then the Partnership would be indefault under its debt agreements.  If thePartnership is in default under its debt agreements, the lenders can requestimmediate repayment of all outstanding principal balances.

 

5

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The Partnership would not havesufficient liquidity to repay its indebtedness without substantial asset sales.  The Partnership’s debt is classifiedon the accompanying consolidated balance sheets, as of March 31, 2003 andDecember 31, 2002, under the scheduled maturity dates without regard to anypotential acceleration which would result if an event of default weredetermined.

 

The Partnership is activelynegotiating a recapitalization with its lenders to avoid having to sell assetsin the current market environment and to avoid any potential covenant defaultsunder the debt agreements.  If thelenders do not grant the Partnership payment forbearance in the near future,and if the Partnership is not successful in negotiating a recapitalization withits lenders, the Partnership will likely need to seek protection from itscreditors through bankruptcy proceedings to protect the interests of all of itsstakeholders.

 

**Note 3:Inventories**

 

All inventories, consisting of lumber, logs and building supplies, arestated at the lower of average cost or market. Inventories consisted of the following (in thousands):

 
|                            |   | **March 31,  2003** |   | **December  31,  2002** |   |
|---------------------------------|--------|---------------------|--------|-------------------------|--------|
| Lumber                          |   | $                   | 5,156  |                    | $      | 5,079 |   |
| Logs                            |   | 2,950               |   | 2,355                   |   |
| Supplies                        |   | 3,504               |   | 3,455                   |   |
| Manufacturing inventory         |   | 11,610              |   | 10,889                  |   |
| Wholesale and Alliance products |   | 27,074              |   | 22,496                  |   |
| Total                           |   | $                   | 38,684 |                    | $      | 33,385 |   |

 

**Note 4: Timber, Timberlands and Roads**

 

In the first quarter of each year, the Partnershipperforms an update of its timber inventory system to reflect the previousyear’s harvest, growth volume adjustments, acquisitions, dispositions andcapitalized costs.  The update resultedin net decreases in depletion costs of approximately $0.2 million for the firstquarter of 2003, and approximately $0.1 million for the first quarter of 2002compared to the prior year periods, with no impact on cash flows in eitherperiod.

 

**Note 5: Goodwill Impairment**

 

During March 2003,deterioration of the Partnership’s trade credit availability began to adverselyaffect operating margins in the Partnership’s Trading and Distributionsegment.  Pursuant to the provisions ofSFAS No. 142 “Goodwill and Other Intangible Assets,” the Partnership evaluatedthe goodwill balance of this segment for impairment following the change incircumstances during the first quarter of 2003, utilizing a fair value analysisof the business in the current market environment.  Based on the results of this evaluation, the Partnershipdetermined that its goodwill was impaired and recorded a non-cashimpairment charge of $5.5 million. Following this charge, the Partnership’s goodwill balance in the Tradingand Distribution segment was zero.  Theremaining goodwill balance of $28.8 million at March 31, 2003 pertains to thePartnership’s Alliance Lumber segment (see Note 10 below).

 

6

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**Note 6: Unit-Based Compensation**

 

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

 
| **Three Months Ended March 31,**                                                                                     |   | **2003** |    | **2002** |   |
|----------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| Net loss, as reported                                                                                                |   | $        | (16,515 | )        | $      | (6,932 | ) |
| Add - unit-based employee compensation expense included in reported  net loss                                        |   | —   |    | —   |   |
| Deduct - total unit-based employee compensation expense determined  under the fair value based method for all awards |   | (8       | )       | (22      | )      |
| Net loss, pro forma                                                                                                  |   | $        | (16,523 | )        | $      | (6,954 | ) |
| Basic and diluted net loss per unit:                                                                                 |   |     |    |     |   |
| As reported                                                                                                          |   | $        | (0.54   | )        | $      | (0.22 | ) |
| Pro forma                                                                                                            |   | $        | (0.54   | )        | $      | (0.23 | ) |

 

There were no unit options granted, exercised orforfeited in the first quarter of 2003 or 2002.

 

**Note 7: Supplemental Cash Flow Information**

 

Cash paid for interest was $7.9 million in the firstquarter of 2003 and $10.8 million in the first quarter of 2002.

 

**Note 8:Segment Reporting**

 

The Partnership classifies its business into four fundamental areas forpurposes of providing segment information: 1) Timberlands, consisting of thesale of logs to the Partnership’s manufacturing facilities and to thirdparties, and the sale of timber and timberlands to third parties; 2)Manufacturing, consisting of the manufacture of logs into lumber and the saleof residual chips to pulp and paper mills; 3) Trading and Distribution,consisting of the wholesale trading and distribution of lumber and panelproducts; and 4) Alliance Lumber, consisting of the distribution and supply ofbuilding products through the Partnership’s professional contractor serviceyards.  Corporate and Other includesgeneral corporate overhead and expenses not allocated to the segments,miscellaneous operations not significant enough to be classified as a separatesegment, the goodwill impairment recognized in the first quarter of 2003 andthe gain related to the sale of the Inland Tree Farm in 2002. The Partnershipdoes not show assets by segment, as historic costs are not used by managementto allocate resources or assess performance. Prior to January 1, 2003, the Partnership reported the activities of theTrading and Distribution segment and the Alliance Lumber segment on a combinedbasis as a single Wholesale Marketing segment. These businesses were separated into two reporting segments at thebeginning of 2003 to reflect that the Partnership began managing these segmentsas separate businesses. The 2002 period has been conformed in the followingtables to the current year presentation for segments.

 

7

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The following summarizes the Partnership’s segment information (inthousands):

 
|                      |   | **Three Months Ended March 31,** |    |
|---------------------------|--------|----------------------------------|---------|
| **Revenues**              |   | **2003**                         |    | **2002** |   |
| Timberlands:              |   |                             |    |   |   |
| Trade                     |   | $                                | 6,917   |   | $ | 10,758 |   |
| Intersegment              |   | 9,544                            |    | 10,546 |   |
|                      |   | 16,461                           |    | 21,304 |   |
| Manufacturing:            |   |                             |    |   |   |
| Trade                     |   | 21,976                           |    | 23,776 |   |
| Intersegment              |   | 1,173                            |    | 1,271 |   |
|                      |   | 23,149                           |    | 25,047 |   |
| Trading and Distribution: |   |                             |    |   |   |
| Trade                     |   | 27,806                           |    | 47,318 |   |
| Intersegment              |   | 5,252                            |    | 5,584 |   |
|                      |   | 33,058                           |    | 52,902 |   |
| Alliance Lumber:          |   |                             |    |   |   |
| Trade                     |   | 47,821                           |    | 38,630 |   |
| Intersegment              |   | —                           |    | — |   |
|                      |   | 47,821                           |    | 38,630 |   |
| Corporate and Other:      |   |                             |    |   |   |
| Trade                     |   | 2,439                            |    | 2,293 |   |
| Intersegment              |   | 60                               |    | 77 |   |
|                      |   | 2,499                            |    | 2,370 |   |
| Total:                    |   |                             |    |   |   |
| Total Revenue             |   | 122,988                          |    | 140,253 |   |
| Less Intersegment         |   | (16,029                          | )       | (17,478 | ) |
| Net Revenue               |   | $                                | 106,959 |   | $ | 122,775 |   |

 
|                        |   | **Three Months Ended March 31,** |    |
|-----------------------------|--------|----------------------------------|---------|
| **Operating income (loss)** |   | **2003**                         |    | **2002** |   |
| Timberlands                 |   | $                                | 779     |   | $ | 1,668 |   |
| Manufacturing               |   | (576                             | )       | 565 |   |
| Trading and Distribution    |   | 163                              |    | 375 |   |
| Alliance Lumber             |   | 2,706                            |    | 2,139 |   |
| Corporate and Other         |   | (7,341                           | )       | 3,325 |   |
| Operating Income (Loss)     |   | (4,269                           | )       | 8,072 |   |
| Interest Expense            |   | (11,952                          | )       | (14,206 | ) |
| Other                       |   | (294                             | )       | (798 | ) |
| Net Loss                    |   | $                                | (16,515 | ) | $ | (6,932 | ) |

 
|                                          |   | **Three Months Ended March 31,** |   |
|-----------------------------------------------|--------|----------------------------------|--------|
| **Depreciation, depletion and  amortization** |   | **2003**                         |   | **2002** |   |
| Timberlands                                   |   | $                                | 4,146  |   | $ | 4,804 |   |
| Manufacturing                                 |   | 1,218                            |   | 2,045 |   |
| Trading and Distribution                      |   | 19                               |   | 23 |   |
| Alliance Lumber                               |   | 144                              |   | 139 |   |
| Corporate and Other                           |   | 583                              |   | 1,282 |   |
| Total                                         |   | $                                | 6,110  |   | $ | 8,293 |   |

 

8

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**Note 9:  NewAccounting Pronouncements**

 

In August 2001, the FASB issuedSFAS No. 143, “Accounting for Obligations Associated with the Retirement ofLong-Lived Assets.”  SFAS No. 143establishes accounting standards for the recognition and measurement of asset retirementobligations and the associated asset retirement costs.  The Partnership adopted the provisions ofSFAS No. 143 in the first quarter of 2003 with no material effect on itsfinancial position, results of operations or cash flows.

 

In July 2002, the FASB issued SFASNo. 146, “Accounting for Costs Associated with Exit or DisposalActivities.”  SFAS No. 146 addresses thefinancial accounting and reporting for obligations associated with an exitactivity, including restructuring.  Exitactivities include, but are not limited to, eliminating or reducing productlines, terminating employees and contracts and relocating plant facilities orpersonnel.  SFAS No. 146 specifies thata company 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 No. 146 iseffective prospectively for exit or disposal activities initiated afterDecember 31, 2002, with earlier adoption encouraged.  The adoption of SFAS No. 146 in the first quarter of 2003 did nothave any affect on the Partnership’s financial position, results of operationsor cash flows.

 

In November 2002, the FASB issuedInterpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45),which elaborates on required disclosures by a guarantor in its financialstatements about obligations under certain guarantees that it has issued andclarifies the need for a guarantor to recognize, at the inception of certainguarantees, a liability for the fair value of the obligation undertaken inissuing the guarantee.  The Partnershiphas reviewed the provisions of FIN 45 relating to initial recognition andmeasurement of guarantor liabilities, which are effective for qualifying guaranteesentered into or modified after December 31, 2002.  FIN 45 did not have a material effect on the Partnership’sfinancial position, results of operations or cash flows.

 

In January 2003, the FASB issuedInterpretation No. 46 (FIN 46), “Consolidation of Variable InterestEntities.” FIN 46 clarifies the application of Accounting Research BulletinNo. 51, “Consolidated Financial Statements,” to certain entities in whichequity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN 46 applies immediately to variable interest entities (VIE’s)created after January 31, 2003, and to VIE’s in which an enterpriseobtains an interest after that date. It applies in the first fiscal year orinterim period beginning after June 15, 2003, to VIE’s in which anenterprise holds a variable interest that it acquired before February 1,2003. FIN 46 applies to public enterprises as of the beginning of theapplicable interim or annual period. The Operating Partnership is considered a VIE under FIN 46, however, FIN46 does not require any change in the Partnership’s current accountingmethod.  Therefore, the Partnership doesnot anticipate that the adoption of FIN 46 will have a material effect on itsfinancial position, results of operations or cash flows.

 

**Note 10:  SubsequentEvents**

 

**Disposition of Trading and Distribution Segment**

 

In April and May2003, in two separate transactions, the Partnership sold the inventory andfixed assets related to its Trading and Distribution segment and discontinuedthe segment’s operations.  Thepurchasers of these assets assumed the operating leases, accounts payable andaccrued expenses related to these businesses. The Partnership received a total of $4.5 million from these asset sales,all of which was immediately applied to outstanding principal on the revolvingcredit facility.  These assets were soldat approximately their book value, resulting in a negligible effect on thePartnership’s results of operations. The Partnership retained its accounts receivable related to theseoperations, which totaled $6.7 million as of the dispositions, and is requiredto apply 50 percent of the collections of such accounts receivable tooutstanding principal on the revolving credit facility (see below).

 

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**Consentand Agreement Concerning Revolving Credit Facility**

 

In April and May 2003, thePartnership signed consent and agreement documents with the banks and theiragent for its revolving credit facility relating to each of the twotransactions for the sale of certain of the Partnership’s Trading andDistribution segment assets, effectively amending certain provisions of thisfacility.  The agent informed thePartnership that the agent and banks believe that certain events of defaultexist under the credit agreement.  ThePartnership disputes the occurrence and existence of any default or event ofdefault under the credit agreement.  Theagreements with the banks contain the following provisions:

 

•                  Theaggregate commitment of the revolving credit facility was immediately andpermanently reduced to the then outstanding balance under the facility ($27.0million) and the Partnership agreed not to request additional creditextensions.

•                  Theaggregate commitment is automatically and permanently reduced by eachsubsequent payment of principal.

•                  ThePartnership agreed to apply all of the net proceeds from the sale of inventoryand fixed assets related to its Trading and Distribution segment to outstandingprincipal on the revolving credit facility.

•                  ThePartnership agreed to apply 50 percent of the proceeds from collection of itstrade accounts receivable related to its Trading and Distribution segment tooutstanding principal on the revolving credit facility.

 

As a result of these agreements, the Partnership’sliquidity has been significantly reduced.

 

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

 

**General**

 

We have prepared the accompanying consolidated financial statementsincluded in this Quarterly Report on Form 10-Q assuming that we will continueas a going concern.  We have experiencednet losses in each of the last ten fiscal quarters, and we have recentlyexperienced decreased liquidity.  Ourloan agreements contain financial covenants and scheduled interest andprincipal payments that we may not be able to meet.  These factors raise substantial doubt about our ability to meetfuture expected expenditures necessary to continue as a going concern.  The consolidated financial statements do notreflect any adjustments that might result from the outcome of thisuncertainty.  We are currently pursuinga financial recapitalization to enable the Partnership to continue as a goingconcern.  If we are not able tosuccessfully negotiate a recapitalization with our lenders in the near future,we will likely need to seek protection from our creditors through bankruptcyproceedings to protect the interests of all of our stakeholders.

 

**Forward-LookingStatements**

 

Information contained in Item 2 and other sections of this reportincludes forward-looking statements including statements regarding ourexpectations, hopes, beliefs, intentions or strategies regarding the futurethat are not purely historical, but are based on assumptions that in the futuremay prove not to be accurate.  Theseassumptions may include, but are not limited to, harvest volumes, species mix,prices for logs and lumber, demand for housing and levels, timing and amountsreceived for stumpage, property and asset sales. Our business and prospects aresubject to a number of risks, including the volatility of timber and lumber pricesand supplies, factors limiting harvesting of timber including contractualobligations, governmental restrictions, weather and access limitations, as wellas the substantial capital 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, our ability tosuccessfully negotiate and consummate a recapitalization with our lenders, ourability to comply with our debt agreement covenants, our liquidity and thevalue of the U.S. dollar against foreign currencies.  These and other risks are described in our registrationstatements and reports filed from time to time on forms 10-K, 8-K and 10-Q andreports to unitholders, which are available from us or the United StatesSecurities and Exchange Commission.

 

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

 

Cash necessary to enable us to satisfy our operating requirements,interest and principal payments on indebtedness and to pay for capitalexpenditures is significant.

 

Cash used by operating activities was $6.9 million in the first quarterof 2003 and resulted primarily from a net loss of $16.5 million, non-cashexpenses and gain on sale of property totaling $12.5 million, an increase inaccounts and notes receivable of $0.6 million, an increase in inventories of$5.3 million, an increase in accounts payable and accrued expenses of $3.3million, and other items totaling $0.3 million.  The increase in inventories is a result of timing of purchases inour Alliance Lumber segment.  Theincrease in accounts payable and accrued expenses reflects the increase ininventory and the accrual of interest. Working capital decreased to $(5.2) million at March 31, 2003 compared to$31.5 million at December 31, 2002, primarily due to the reclassification of$31.0 million of long-term debt to current portion of long-term debt, as it isdue in January 2004.

 

Prepaid and other currentassets of $4.4 million at March 31, 2003 include $0.8 million of expenses paidto our advisors and our lenders’ advisors related to our recapitalizationnegotiations.  In addition, another $2.5million was paid to these advisors from April 1, 2003 to May 12, 2003.  We are deferring recognition of these expensesuntil the recapitalization process is complete.

 

Net cash used by investing activities of $1.9 million resultedprimarily from the use of $1.9 million for additions to timberlands and timbercutting rights and $0.6 million used for additions to equipment, off-set inpart by $0.6 million received from the sale of equipment.

 

Net cash provided by financing activities of $1.0 million resulted froma $1.0 million net increase in short-term borrowings.

 

Additions to plant and equipment totaled $0.6 million in the firstquarter of 2003, primarily for certain heavy equipment in our Alliance Lumberand Timberlands segments and leasehold improvements following a location changefor our Portland headquarters. Additions to timberlands and timber cutting rights totaled $1.9 millionin the first quarter of 2003 and consisted primarily of recurring reforestationand road construction in our Timberlands segment.  We anticipate continuing to invest in our timberlands, timber cuttingrights and plant and equipment.

 

As amended in April 2002, we have a revolving creditfacility with a group of banks for working capital purposes and stand-byletters of credit that expires on December 31, 2005.  The credit facility bears a floating rate of interest and issecured by accounts receivable and inventory. As of March 31, 2003, $27.0 million was outstanding under thisfacility.  The weighted average interestrate on this facility as of March 31, 2003 was 6.33%. In April and May 2003, we signed a consent and agreement with the banksand their agent relating to each of the two transactions for the sale of ourTrading and Distribution segment assets, effectively amending certainprovisions of this facility.  The agentinformed us that the agent and banks believe that certain events of defaultexist under the credit agreement.  Wedispute the occurrence and existence of any default or event of default underthe credit agreement.  The agreementswith the banks contain the following provisions:

 

•                  Theaggregate commitment was immediately and permanently reduced to the outstandingbalance under the facility ($27.0 million) and we agreed not to requestadditional credit extensions.

•                  Theaggregate commitment is automatically and permanently reduced by eachsubsequent payment of principal.

•                  Weagreed to apply all of the net proceeds from the sale of inventory and fixedassets related to our Trading and Distribution segment to outstanding principalon the revolving credit facility.

•                  Weagreed to apply 50 percent of the proceeds from collection of our tradeaccounts receivable related to our Trading and Distribution segment tooutstanding principal on this facility.

 

As a result of these agreements, our liquidity hasbeen significantly reduced.

 

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As amended in April 2002, we also have a facility (the “AcquisitionFacility”) with a group of banks that previously provided for the acquisitionof timber, timberlands and related assets and capital expenditures. TheAcquisition Facility bears a floating rate of interest, is secured by ourtimberlands and sawmill assets and expires December 31, 2005. As of March 31,2003, $112.4 million was outstanding under the Acquisition Facility.  Principal payments of $5.0 million, $40.0million (of which $9.0 million has been prepaid) and $30.0 million are due onthe Acquisition Facility in September 2003, January 2004 and June 2005,respectively. Any remaining principal balance is due on December 31, 2005.Principal payments on the Acquisition Facility cannot be re-borrowed. Theweighted average interest rate on the Acquisition Facility as of March 31, 2003was 4.96%.

 

Our 9.78%, 9.60%, 8.17% and 7.80% senior notes, issued in 1994, 1995,1996 and 1998, respectively, and amended in April 2002, are 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, except such additional interestmust be paid in conjunction with any pre-payments made.  We are currently deferring this additionalinterest, which totaled $4.3 million as of March 31, 2003.  As of March 31, 2003, there was $400.7million outstanding on these senior notes. The April 2002 amendments allow us to defer principal paymentspreviously due on December 1, 2002, 2003, 2004 and 2005, until December 31,2005.  We are required to pay $5.0 millionin principal on these notes in September 2003. In addition, we are also required to make mandatory principal payments,on a pro rata basis, with our Acquisition Facility debt, if asset sale proceedsor operating cash flow are used to pay outstanding Acquisition Facilityprincipal prior to December 31, 2005. Also, we may be required to pay the entire outstanding principal balanceof the senior notes, plus accrued interest and redemption premiums, on December31, 2005 if our credit ratings are below investment grade on July 1, 2005.  If our credit ratings are investment gradeon July 1, 2005, the note holders have the right to put to us some or all oftheir outstanding notes (without any associated redemption charges) on December31, 2005 after giving notice to us on August 1, 2005.

 

The senior notes are redeemable prior to maturity, subject to paymentof a redemption 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.

 

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;

•                  theamount of future indebtedness;

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

•                  compliancewith certain financial ratios, including minimum cash flow from operations.

 

The senior notes and bank credit facilities containcross-default provisions as well as acceleration clauses.  As of March 31, 2003, we believe we were incompliance with all of our bank agreement and senior note covenants.  However, see the preceding discussionconcerning the assertion by our banks and their agent that certain events ofdefault have occurred under our revolving credit facility agreement.  Our debt is classified on the accompanyingconsolidated balance sheet, as of March 31, 2003, under the scheduled maturitydates without regard to the bank lenders’ assertion.

 

We do not expect to generate sufficient cash from operations, withoutasset sales, to make the principal payments required under the terms of our indebtednessin 2003 and January 2004, and we will likely need to sell assets in order tomake those payments.  In addition, weare uncertain of our ability to comply with

 

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the financial covenants in our debt agreements during 2003.  Our ability to comply with these covenantswill depend on our future results of operations and potential future assetsales.  It is not currently possible topredict our ability to achieve our projected results or to consummate requiredasset sales.  If we fail to comply withthese covenants, and if our lenders do not agree to waive the covenants, thenwe would be in default under our debt agreements.

 

We also have interest payments due on our acquisition facility ofapproximately $1.2 million on May 28, 2003 and on our senior notes ofapproximately $12.1 million on June 2, 2003. Due to our reduced liquidity discussed above, we may be unable to makethese interest payments.  If we do notmake these interest payments within five days of their due dates, we will be indefault under these agreements, and, if our lenders do not waive thesedefaults, they can request immediate repayment of all outstanding principalbalances.  We have requested that ourlenders consider a forbearance from interest payments in order to allow us tocontinue negotiating the restructuring of our debt.  If our lenders do not agree to a payment forbearance and insteadchoose to take immediate action against us with respect to any such paymentdefaults, including actions to enforce their liens securing the debt, we willlikely need to seek protection from our creditors through bankruptcyproceedings to protect the interests of all our stakeholders.

 

Therefore, we are actively negotiating a recapitalization with ourlenders to avoid having to sell assets in the current market environment and toavoid any potential covenant defaults under our debt agreements.  The objective of the recapitalization is toestablish a capital structure that is consistent with our cash flows throughoutthe industry cycle, and that affords us adequate funding for capitalexpenditures, working capital needs and debt service requirements.  If our lenders do not grant us paymentforbearance in the near future, and if we are not successful in negotiating arecapitalization with our lenders, we will likely need to seek protection fromour creditors through bankruptcy proceedings to protect the interests of all ofour stakeholders.  Throughout this processwe intend to remain a reliable supplier of our products to our customers, andwe do not expect any interruption to our operations as a result of arecapitalization.

 

We do not expect to make cash distributions from our current funds orfrom cash generated by operating activities until our overall debt levels aresubstantially reduced and significantly improved market conditions couldsupport a sustained quarterly distribution.

 

**Resultsof Operations**

**ThreeMonths Ended March 31, 2003 compared to Three Months Ended March 31, 2002**

 

**General**

 

Revenues during the quarter ended March 31, 2003 decreased $15.8million, or 12.9%, to $107.0 million, from $122.8 million in the same quarterof 2002.  The decrease reflects lowerrevenues from our Timberlands, Manufacturing and Trading and Distributionsegments.  Significant declines inmarket pricing for logs and lumber, as well as decreased volume from ourTimberlands segment, lower chip revenue and lower volume and pricing from ourTrading and Distribution segment contributed to the lower revenues.

 

Cost of sales as a percentage of sales increased to 92.5% in the firstquarter of 2003, compared to 91.4% in the same quarter of 2002.  Cost of sales in the first quarter of 2003includes a $149,000 charge related to the write-down of timber purchasecontracts resulting from a further deterioration of lumber prices in the pinemarket.  This increase reflects lowerprices for our products, as well as increased fuel and other energy costs.

 

During March 2003,deterioration of our trade credit availability began to adversely affectoperating margins in our Trading and Distribution segment.  Pursuant to the provisions of SFAS No. 142“Goodwill and Other Intangible Assets,” we evaluated the goodwill balance ofthis segment for impairment following the change in circumstances during thefirst quarter of 2003, utilizing a fair value analysis of the business in thecurrent market environment.  Based onthe results of this evaluation, we determined that our goodwill wasimpaired and recorded a non-cash impairment charge of $5.5 million.  Following this charge, our goodwill balancein the Trading and Distribution segment was zero.  The remaining goodwill balance of $28.8 million at March 31, 2003pertains to our Alliance Lumber segment.

 

Gain on sale of assets of $479,000 in the first quarter of 2003represents the recognized gain on the sale of equipment.  Gain on sale of assets in the first quarterof 2002 of $6.0 million represents the recognized gain on the sale of ourInland South Tree Farm in March 2002.

 

Selling, general and administrative expenses decreased $1.2 million, or13.7%, to $7.3 million (6.8% of total revenues) in the first quarter of 2003,compared to $8.5 million (6.9% of total revenues) in the first quarter of2002.  The decrease is primarily due todecreases in salaries and related personnel costs due to lower headcount andcost reduction initiatives and allocation of some overhead expense to pertinentoperations, partially off-set by higher insurance expenses and professionalfees.

 

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Interest expense decreased $2.3 million, or 15.9%, to $12.0 million inthe first quarter of 2003, from $14.2 million in the same quarter of 2002.  The decrease is a result of lower averagedebt balances in the first quarter of 2003 compared to the first quarter of2002, partially off-set by higher interest rates.

 

Amortization of debt issuance costs decreased $0.6 million to $0.4million in the first quarter of 2003 compared to $1.1 million in the firstquarter of 2002.  The decrease is due tothe second quarter 2002 write-off of $5.5 million of previously deferred feesrelated to our senior notes as a result of our debt restructuring in April2002.  In addition, the amortizationperiod for remaining deferred bank fees was prospectively extended untilDecember 2005, thereby lowering the amount amortized in each quarter.  At March 31, 2003, we had $4.7 million ofunamortized debt issuance costs, which are being amortized through December 31,2005.

 

In the past, the Partnership has not paid significant income taxes andhas not included a provision for income taxes in its financial statements.  The Partnership owns, directly andindirectly, four corporations that constitute a consolidated group ofcorporations for federal income tax purposes. This consolidated group of corporations may be subject to significantincome taxes in the future under certain circumstances, including dispositionsof assets by the Partnership. Any such income tax incurred by these taxableentities would generally not be allocated to unit holders. We do not currentlyanticipate any income tax liability from our disposition of the Trading andDistribution segment assets.

 

**Timberlands**

 

Total external segment sales, including stumpage sales, decreased 35.7%to $6.9 million, or 6.5% of revenue in the first quarter of 2003, compared to$10.8 million, or 8.8% of revenue in the first quarter of 2002.  The decrease in external segment salesreflects a 32.6% decrease in domestic log shipments, a 54.4% decrease in exportlog shipments and an 8.9% decrease in the weighted average domestic salesrealizations.  The decrease in domesticlog shipments primarily reflects the sale of our Inland Tree Farm in twoseparate transactions in March and April 2002. Excluding the Inland Tree Farm operations, external domestic logshipments increased 10.3% in the first quarter of 2003 compared to the firstquarter of 2002 due to increased demand in the Washington region.  The decrease in export log shipmentsprimarily reflects lower demand for Korean sort logs.  Absent the effects from the sale of our Inland Tree Farm, salesrealizations decreased 2.7% as a result of species mix changes and lowerponderosa pine and Douglas fir pricing in the first quarter of 2003 compared tothe first quarter of 2002.  Except forthe Inland South Tree Farm sale (which is reflected in the Corporate and Othersegment) in the first quarter of 2002, there were no property sales in eitherthe 2003 or 2002 period.

 

Internal sales of logs to manufacturing decreased 9.5% to $9.5 millionin the first quarter of 2003, from $10.5 million in the first quarter of2002.  The decrease primarily reflectsthe effects of a slight decrease in fee harvest volume and a 5.3% decrease inaverage sales realizations due to weak market pricing.  Our internal transfer pricing is based oncurrent market prices at the time of sale. We terminated all Inland manufacturing operations in 2001, hence noInland internal sales are included in the first quarters of 2003 or 2002.

 

Overall operating income from timberlands decreased $0.9 million, or53.3%, to $0.8 million in the first quarter of 2003 from $1.7 million in thefirst quarter of 2002, primarily as a result of the decreased volume and salesrealizations discussed above.  The gainfrom the sale of the Inland South Tree Farm was included in our Corporate andOther segment during the first quarter of 2002.

 

***Domestic Log Sales***

 

Average external domestic prices received for logs sold from thevarious tree farms, including stumpage but excluding pulpwood, were as follows(dollars per thousand board feet or “MBF”):

 
|             |   | **Quarter  Ended March 31,** |   |     |   |
|------------------|--------|------------------------------|--------|----------|--------|
| **Tree Farm**    |   | **2003**                     |   | **2002** |   | **% Change** |   |
| Oregon           |   | —                       |   | —   |   | — |   |
| Inland           |   | —                       |   | $        | 515    |   | n/a |   |
| Hamilton         |   | $                            | 421    |     | $      | 513 |   | (17.9 | )% |
| Olympic          |   | $                            | 377    |     | $      | 358 |   | 5.3 | % |
| Weighted average |   | $                            | 400    |     | $      | 439 |   | (8.9 | )% |

 

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The decrease at the Hamilton Tree Farm is primarily due to lower marketpricing and changes in species mix.  Theincrease at the Olympic Tree Farm is primarily due to a shift in species mixpartially off-set by lower market prices.

 

All volume from the Oregon Tree Farm was utilized by our Gilchrist milland therefore, there were no external sales from this tree farm.

 

Domestic external log sales volumes decreased****32.6% in the first quarterof 2003 to 12.6 million board feet (MMBF), compared to 18.6 MMBF in the samequarter of 2002, primarily as a result of the sale of our Inland Tree Farm inthe first and second quarters of 2002. The external volume from each of our tree farms was as follows (in MBF):

 
|          |   | **Quarter  Ended March 31,** |   |     |   |
|---------------|--------|------------------------------|--------|----------|--------|
| **Tree Farm** |   | **2003**                     |   | **2002** |   | **% Change** |   |
| Oregon        |   | —                       |   | —   |   | — |   |
| Inland        |   | —                       |   | 7,241    |   | n/a |   |
| Hamilton      |   | 6,460                        |   | 2,345    |   | 175.5 | % |
| Olympic       |   | 6,107                        |   | 9,048    |   | (32.5 | )% |
| Total         |   | 12,567                       |   | 18,634   |   | (32.6 | )% |

 

The increase at the Hamilton Tree Farm was a result of increased demandfrom local sawmill customers.  Incomparison, volume in the first quarter of 2002 from the Hamilton Tree Farm wasnegatively affected by snow related production delays.  The decrease at the Olympic Tree Farmreflects strong demand experienced in the first quarter of 2002 compared to thefirst quarter of 2003.

 

***Export Log Sales***

 

Sales of logs to customers involved in exporting activities (includedin total log sales above) were approximately $0.6 million, or 0.5% of revenue,in the first quarter of 2003, compared to $1.0 million, or 0.8% of revenue, forthe same quarter in 2002.  The averagerealization for export logs increased 22.3% to $587/MBF in the first quarter of2003 compared to $480/MBF in the first quarter of 2002.  Sales volumes of export logs decreased 54.4%to 959 MBF in the first quarter of 2003 compared to 2,102 MBF in the firstquarter of 2002.  The decrease in salesvolume is primarily due to decreased demand for Korean sort logs.  The increase in the average realization isprimarily due to a greater proportion of higher grade Korean sort logs duringthe first quarter of 2003 compared to the first quarter of 2002.  We did not export any logs from our InlandTree Farm and, therefore, our export sales were not affected by theirdisposition.

 

***Property Sales***

 

The disposition of the Inland South Tree Farm in the first quarter of2002 was reported as an asset sale in the Corporate and Other segment.  There were no other property sales in thefirst quarter of 2003 or 2002.

 

**Manufacturing**

 

External revenues from our sawmills, excluding sales of lumber productsthrough the Trading and Distribution and Alliance Lumber segments, decreased$1.8 million, or 7.6% to $22.0 million, or 20.5% of revenue, in the firstquarter of 2003 from $23.8 million, or 19.4% of revenue, in the same quarter of2002.  The decreased revenues reflect a7.3% decrease in average external lumber sales realizations and a 26.6% declinein chip revenue, off-set in part by a 4.7% increase in external lumber salesvolumes.  The lower sales realizationsreflect the impact of weak lumber market pricing, which more than off-set thebenefit of mix changes.  The highersales volumes reflect increased production and shipments from all of ourfacilities during the first quarter of 2003.

 

The operating loss from manufacturing was $0.6 million in the firstquarter of 2003 compared to operating income of $0.6 million in the firstquarter of 2002.  The decline inoperating results is primarily a result of decreased revenues as discussedabove, an 8.4% increase in segment overhead expense and a 3.5% increase inmanufacturing expense, off-set in part by a 6.8% decrease in unit logcosts.  The increases in segmentoverhead expense and manufacturing expense are primarily a result of increaseddepreciation and the inclusion of our Prineville mill dry-end costs.  The Prineville mill was not operating duringthe first quarter of 2002, but was

 

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utilized during the first quarter of 2003 for drying and finishing ofincreased rough lumber production from the Gilchrist mill.

 

Average external prices received for lumber sales by region were asfollows (dollars per MBF):

 
|             |   | **Quarter  Ended March 31,** |   |     |   |
|------------------|--------|------------------------------|--------|----------|--------|
| **Region**       |   | **2003**                     |   | **2002** |   | **% Change** |   |
| Oregon           |   | $                            | 270    |     | $      | 287 |   | (5.9 | )% |
| Washington       |   | $                            | 259    |     | $      | 285 |   | (9.1 | )% |
| Weighted average |   | $                            | 265    |     | $      | 286 |   | (7.3 | )% |

 

External lumber sales volumes increased 4.7% in the first quarter of2003 to 75.6 MMBF compared to 72.2 MMBF in the same period of 2002.  External lumber sales volumes by region wereas follows (in MBF):

 
|       |   | **Quarter  Ended March 31,** |   |     |   |
|------------|--------|------------------------------|--------|----------|--------|
| **Region** |   | **2003**                     |   | **2002** |   | **% Change** |   |
| Oregon     |   | 42,172                       |   | 42,584   |   | (1.0 | )% |
| Washington |   | 33,380                       |   | 29,573   |   | 12.9 | % |
| Total      |   | 75,552                       |   | 72,157   |   | 4.7 | % |

 

The increased volume from the Washington region reflects increasedproduction at both of our Washington mills.

 

Although external shipments from the Oregon region declined slightly,internal shipments from the Oregon region increased 261.5% to 2.5MMBF in thefirst quarter of 2003 compared to 697MBF in the first quarter of 2002.  The increase in internal shipments isprimarily a result of increased efforts at down-stream marketing of ourmanufactured products through our Trading and Distribution and Alliance Lumbersegments.

 

Internal shipments from the Washington region decreased to 2.1MMBF inthe first quarter of 2003 compared to 3.8MMBF in the first quarter of 2002.

 

In response to continued low market prices for lumber products, we havereduced our planned production levels in the near-term and temporarilycurtailed operations at our sawmills beginning in April 2003.  In conjunction with our decision to scaleback production at our Gilchrist sawmill, we closed our Prineville dry kilnsand planer operation in April 2003, which has been utilized to finish excessrough green lumber production from the Gilchrist facility since mid-2002. Wetherefore expect reduced sales revenue and operating results in ourmanufacturing segment in the second quarter of 2003.

 

Chip sales accounted for 1.6% of revenue in the first quarter of 2003compared to 2.2% of revenue in the first quarter of 2002.  Residual wood chip prices decreased to $59per bone dry unit (BDU) in the first quarter of 2003 compared to $65/BDU in thefirst quarter of 2002. The lower average sales realization reflects depressedpulp industry pricing.  Woodchip salesvolume decreased 18.9% to 29,805 BDUs in the first quarter of 2003 compared to36,757 BDUs in the first quarter of 2002. The woodchip volume in the first quarter of 2002 was unusually high dueto delayed deliveries in the fourth quarter of 2001, which were completedduring the first quarter of 2002.

 

**Tradingand Distribution**

 

Our Trading and Distribution segment, comprised of operations based inEugene, Oregon and Albuquerque, New Mexico involves the wholesale trading oflumber, panels and other wood products, most of which were not manufactured byus.  Sales from the Trading andDistribution segment decreased $19.5 million, or 41.2%, to $27.8 million, or26.0% of revenue, in the first quarter of 2003 from $47.3 million, or 38.5% ofrevenue, in the first quarter of 2002. The decrease in revenue is a result of the impact of the second quarter2002 termination by us of a sales agreement with a regional lumber producer atour Eugene, Oregon operation and lower lumber and panel pricing in the firstquarter of 2003 compared to the first quarter of 2002.

 

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Operating income from our Trading and Distribution segment decreased56.5% to $163,000 in the first quarter of 2003 from $375,000 in the firstquarter of 2002.  The decrease inoperating income primarily reflects the lower revenues as discussed above.

 

In April and May 2003, in twoseparate transactions, we sold the inventory and fixed assets related to thissegment and discontinued its operations. The purchasers assumed the operating leases, accounts payable andaccrued expenses related to these operations. We received a total of $4.5 million in net proceeds from these assetsales, all of which were immediately applied to outstanding principal on therevolving credit facility.  These assetswere sold at approximately their book value, resulting in a negligible effecton our results of operations.  Weretained the accounts receivable related to these operations, and are requiredto apply 50 percent of the collections of such accounts receivable tooutstanding principal on the revolving credit facility.  Accordingly, following these dispositions,we expect revenues and operating results from this segment to declinesignificantly in the second quarter of 2003.

 

**AllianceLumber**

 

Our Alliance Lumber segment includes professional contractor serviceyards in Arizona and Nevada and involves the sale of lumber and buildingproducts.  Total revenue from ourAlliance Lumber segment increased 23.8% to $47.8 million, or 44.7% of totalrevenue, in the first quarter of 2003 compared to $38.6 million, or 31.5% oftotal revenue, in the first quarter of 2002.  This increase reflects increased sales volumes at all threeoperations driven by strong demand in their respective regional housingmarkets.

 

Operating income from our Alliance Lumber segment increased 26.5% to$2.7 million in the first quarter of 2003 compared to $2.1 million in the firstquarter of 2002.  The improved operatingresults reflect increased revenue and a decrease in product costs, partiallyoff-set by a slight increase in operating expenses.

 

##### **CriticalAccounting Policies**

 

We reaffirm the critical accounting policies and estimates described inour 2002 Annual Report on Form 10-K, which was filed with the Securities andExchange Commission on March 31, 2003.

 

**NewAccounting Pronouncements**

 

Pleaseread Note 9 for a discussion of new accounting pronouncements and theiranticipated effects on the Partnership.

 

**Item3.  Quantitativeand Qualitative Disclosures About Market Risk**

 

We have market risk exposure on our variable rate lines of bankcredit.  At March 31, 2003, we had$139.4 million outstanding under our revolving and acquisition creditfacilities with a variable combined weighted average interest rate of5.23%.  A hypothetical 10 percentincrease in interest rates to 5.75% would have a $0.5 million adverse effect onour results of operations and cash flows over the remaining three quarters of2003.

 

The fair market value of long-term fixed interest rate debt is subjectto interest rate risk.  Generally, thefair market value of fixed interest rate debt will increase as interest ratesfall and decrease as interest rates rise. The interest rate changes affect the fair market value but do not impactearnings or cash flows.  Our seniornotes are not publicly traded and similar instruments are not available forcomparison.  We are therefore unable toestimate the fair value of the senior notes.

 

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**Item4.  Controls andProcedures**

 

Within the 90 days prior to the date of this report, we carried out anevaluation, under the supervision and with the participation of our management,including our President and Chief Executive Officer and our Chief FinancialOfficer, of our disclosure controls and procedures.  Based on their review, the President and Chief Executive Officerand the Chief Financial Officer have concluded that our disclosure controls andprocedures are effective.

 

There were no significant changes in internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof their evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

**PARTII - OTHER INFORMATION**

 

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

 

**(a) The exhibits filed as part ofthis report are listed below and this list is intended to serve as the exhibitindex:**

3.1                     Form ofSecond Amended and Restated Agreement of Limited Partnership of Crown PacificPartners, L.P. (filed as Exhibit A to Part I of Registrant’s RegistrationStatement on Form S-1 No. 83-85066).

3.2                     Form ofAgreement of Limited Partnership of Crown Pacific Limited Partnership (filed asExhibit 3.2 to the Registrant’s Statement on Form S-1 No. 83-85066).

3.3                     FirstAmendment to Second Amended and Restated Agreement of Limited Partnership ofCrown Pacific Limited Partnership (filed as Exhibit 3.1 to the Registrant’sForm 10-Q for the quarter ended March 31, 1997).

3.4                     SecondAmendment to Amended and Restated Agreement of Limited Partnership of CrownPacific Limited Partnership (filed as Exhibit 3.4 to the Registrant’s Form 10-Kfor the year ended December 31, 1997).

3.5                     ThirdAmendment to Amended and Restated Agreement of Limited Partnership of CrownPacific Limited Partnership (filed as Exhibit 3.5 to the Registrant’s Form 10-Kfor the year ended December 31, 1999).

99.1               Certification ofChief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuantto Section 906 of the Sarbanes-Oxley Act of 2002.

99.2             Certification of ChiefFinancial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002.

** **

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

We filed the following reports on Form 8-K during thequarter ended March 31, 2003:

•                  UnderItem 9. Regulation FD Disclosure dated March 10, 2003 and filed March 12, 2003regarding notification from NYSE and continued discussions with lenders.

•                  UnderItem 9. Regulation FD Disclosure dated March 14, 2003 and filed March 17, 2003regarding Crown Pacific Partners’ expectation that its limited partnershipunits will be quoted on the Over-The-Counter Bulletin Board (OTCBB) as ofTuesday, March 18, 2003.

•                  UnderItem 9. Regulation FD Disclosure dated March 18, 2003 and filed March 19, 2003regarding Crown Pacific Partners’ limited partnership units now being quoted onthe Over-The-Counter Bulletin Board under the new trading symbol “CRPP”.

 

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**SIGNATURES**

 

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

 
| Date:    May  20, 2003 | CROWN PACIFIC PARTNERS, L.P.                                              |
|---------------------------------------|---------------------------------------------------------------------------|
|                                  |                                                                      |   |
|                                  | By:                                                                       | Crown Pacific Management Limited Partnership, as   General Partner |
|                                  |                                                                      |   |
|                                  | By:                                                                       | /s/ Steven E. Dietrich |   |
|                                  | Steven E. Dietrich                                                        |
|                                  | Senior Vice President and Chief Financial Officer                         |
|                                  | (Duly Authorized Officer and Principal Financial and  Accounting Officer) |

 

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**CERTIFICATION****PURSUANT TO**

**SECTION 302(a) OF THESARBANES-OXLEY ACT OF 2002**

 

I, Peter W. Stott, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Crown Pacific Partners, L.P.;

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3.               Based on myknowledge, the financial statements and other financial information included inthis quarterly report fairly present, in all material respects, the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.               The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 20, 2003                               |
|--------------------------------------------------|
|                                             |
|                                             |
| /s/ Peter W. Stott                               |   |
| Peter W. Stott                                   |
| Director, President and  Chief Executive Officer |
| Crown Pacific Partners, L.P.                     |

 

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**CERTIFICATION PURSUANT TO**

**SECTION 302(a) OF THESARBANES-OXLEY ACT OF 2002**

 

I, Steven E. Dietrich, certify that:

 

1.               I have reviewedthis quarterly report on Form 10-Q of Crown Pacific Partners, L.P.;

2.               Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

3.               Based on myknowledge, the financial statements and other financial information included inthis quarterly report fairly present, in all material respects, the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

4.               The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the “EvaluationDate”); and

c)              presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

5.               The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

6.               The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date: May 20, 2003                                 |
|----------------------------------------------------|
|                                               |
|                                               |
| /s/ Steven E. Dietrich                             |   |
| Steven E. Dietrich                                 |
| Senior Vice President and  Chief Financial Officer |
| Crown Pacific Partners, L.P.                       |

 

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