**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 September 30, 2002**

 

**OR**

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

 

**For thetransition period from            to           **

 

**Commissionfile number 0-24976**

 

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**CROWNPACIFIC 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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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 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  November 12, 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 Month Periods Ended September 30, 2002 and  2001 |
|                            |   |
|                            | Consolidated  Statement of Operations – Nine Month Periods Ended September 30, 2002 and  2001 |
|                            |   |
|                            | Consolidated Balance Sheet –  September 30, 2002 and December 31, 2001 |
|                            |   |
|                            | Consolidated  Statement of Cash Flows – Nine Months Ended September 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 |
|                            |   |
| 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.**

**Consolidated Statement of Operations**

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

**(Unaudited)**

 
|                                          |   | **For the Three Months Ended  September 30,** |       |
|-----------------------------------------------|--------|-----------------------------------------------|------------|
|                                          |   | **2002**                                      |       | **2001** |   |
|                                          |   |                                          | ** ** |   | ** ** |
| Revenues                                      |   | $                                             | 120,940    |   | $ | 163,926 |   |
|                                          |   |                                          |       |   |   |
| Operating costs:                              |   |                                          |       |   |   |
| Cost of products  sold                        |   | 115,204                                       |       | 153,639 |   |
| Loss on disposal  of assets                   |   | 1,174                                         |       | — |   |
| Selling, general  and administrative expenses |   | 8,303                                         |       | 9,101 |   |
|                                          |   |                                          |       |   |   |
| Operating (loss)  income                      |   | (3,741                                        | )          | 1,186 |   |
|                                          |   |                                          |       |   |   |
| Interest expense                              |   | 12,482                                        |       | 15,294 |   |
| Amortization of  debt issuance costs          |   | 499                                           |       | 955 |   |
| Other loss  (income), net                     |   | 22                                            |       | (2,199 | ) |
|                                          |   |                                          |       |   |   |
| Net loss                                      |   | $                                             | (16,744    | ) | $ | (12,864 | ) |
|                                          |   |                                          |       |   |   |
| Net loss per  unit                            |   | $                                             | (0.54      | ) | $ | (0.42 | ) |
|                                          |   |                                          |       |   |   |
| Weighted average  units outstanding           |   | 30,527,030                                    |       | 30,527,030 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

2

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

**ConsolidatedStatement of Operations**

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

**(Unaudited)**

 
|                                          |   | **For the Nine Months Ended  September 30,** |    |
|-----------------------------------------------|--------|----------------------------------------------|---------|
|                                          |   | **2002**                                     |    | **2001** |   |
|                                          |   |                                         |    | **(as restated)** |   |
| Revenues                                      |   | $                                            | 377,935 |   | $ | 468,903 |   |
|                                          |   |                                         |    |   |   |
| Operating costs:                              |   |                                         |    |   |   |
| Cost of products  sold                        |   | 351,125                                      |    | 427,937 |   |
| Gain on sale of  assets held for sale         |   | (7,449                                       | )       | — |   |
| Loss on disposal  of assets                   |   | 1,174                                        |    | — |   |
| Selling, general  and administrative expenses |   | 24,348                                       |    | 27,782 |   |
|                                          |   |                                         |    |   |   |
| Operating income                              |   | 8,737                                        |    | 13,184 |   |
|                                          |   |                                         |    |   |   |
| Interest expense                              |   | 39,703                                       |    | 46,821 |   |
| Debt  restructuring and redemption premium    |   | 14,133                                       |    | — |   |
| Amortization of  debt issuance costs          |   | 2,189                                        |    | 1,928 |   |
| Other income,  net                            |   | (433                                         | )       | (2,490 | ) |
|                                          |   |                                         |    |   |   |
| Net loss                                      |   | $                                            | (46,855 | ) | $ | (33,075 | ) |
|                                          |   |                                         |    |   |   |
| Net loss per  unit                            |   | $                                            | (1.52   | ) | $ | (1.07 | ) |
|                                          |   |                                         |    |   |   |
| Weighted average  units outstanding           |   | 30,527,030                                   |    | 30,519,799 |   |

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Note:         2001 amounts have beenrestated to reflect a change in accounting from the Last-in, First-out (LIFO)to the average method of costing inventory.

 

See accompanying Notes to Consolidated Financial Statements.

 

3

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

**Consolidated Balance Sheet**

**(Inthousands, except unit data)**

**(Unaudited)**

 
|                                                                                                        |   | **September 30,  2002** |       | **December 31,  2001** |       |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------|------------|
|                                                                                                        |   |                    |       | **(as restated)**      |       |
| **Assets**                                                                                                  |   |                    |       |                   |       |
|                                                                                                        |   |                    |       |                   |       |
| Current assets:                                                                                             |   |                    | ** ** |                   | ** ** |
| Cash and cash  equivalents                                                                                  |   | $                       | 2,324      |                   | $          | 9,219 |   |
| Restricted cash                                                                                             |   | 15,337                  |       | —                 |       |
| Accounts  receivable, net of allowances of $1,752 and $1,000                                                |   | 67,845                  |       | 85,120                 |       |
| Notes receivable                                                                                            |   | 4,094                   |       | 7,194                  |       |
| Inventories                                                                                                 |   | 34,717                  |       | 33,626                 |       |
| Deposits on  timber cutting contracts                                                                       |   | 1,908                   |       | 1,441                  |       |
| Prepaid and  other current assets                                                                           |   | 4,432                   |       | 3,177                  |       |
| Property held  for sale                                                                                     |   | 4,219                   |       | 184,405                |       |
|                                                                                                        |   |                    |       |                   |       |
| Total current  assets                                                                                       |   | 134,876                 |       | 324,182                |       |
| Property, plant  and equipment, net of accumulated depreciation of $40,805 and $29,541                      |   | 54,973                  |       | 55,756                 |       |
| Timber,  timberlands and roads, net                                                                         |   | 419,631                 |       | 433,183                |       |
| Goodwill                                                                                                    |   | 34,272                  |       | 34,272                 |       |
| Other assets                                                                                                |   | 6,181                   |       | 8,970                  |       |
|                                                                                                        |   |                    |       |                   |       |
| Total assets                                                                                                |   | $                       | 649,933    |                   | $          | 856,363 |   |
|                                                                                                        |   |                    |       |                   |       |
| **Liabilities and Partners' Capital**                                                                       |   |                    |       |                   |       |
|                                                                                                        |   |                    |       |                   |       |
| Current  liabilities:                                                                                       |   |                    |       |                   |       |
| Notes payable                                                                                               |   | $                       | 22,000     |                   | $          | 19,000 |   |
| Accounts payable                                                                                            |   | 16,594                  |       | 31,557                 |       |
| Accrued expenses                                                                                            |   | 12,133                  |       | 12,708                 |       |
| Accrued interest                                                                                            |   | 11,070                  |       | 10,132                 |       |
| Current portion  of long-term debt                                                                          |   | 25,345                  |       | 174,064                |       |
|                                                                                                        |   |                    |       |                   |       |
| Total current  liabilities                                                                                  |   | 87,142                  |       | 247,461                |       |
| Long-term debt                                                                                              |   | 505,804                 |       | 511,406                |       |
| Other  non-current liabilities                                                                              |   | 6,616                   |       | 270                    |       |
|                                                                                                        |   | 599,562                 |       | 759,137                |       |
|                                                                                                        |   |                    |       |                   |       |
| Commitments and  contingent liabilities                                                                     |   |                    |       |                   |       |
|                                                                                                        |   |                    |       |                   |       |
| Partners'  capital:                                                                                         |   |                    |       |                   |       |
| General partners                                                                                            |   | (784                    | )          | (315                   | )          |
| Limited partners  (30,527,030 units outstanding at September 30, 2002 and December 31, 2001,  respectively) |   | 51,155                  |       | 97,541                 |       |
| Total partners'  capital                                                                                    |   | 50,371                  |       | 97,226                 |       |
|                                                                                                        |   |                    |       |                   |       |
| Total  liabilities and partners' capital                                                                    |   | $                       | 649,933    |                   | $          | 856,363 |   |

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Note:         2001 amounts have beenrestated to reflect a change in accounting from the LIFO to the average methodof costing inventory.

 

See accompanying Notes to Consolidated Financial Statements.

 

4

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

**Consolidated Statement of Cash Flows**

**(Inthousands)**

**(Unaudited)**

 
|                                                                         |   | **For the Nine Months Ended  September 30,** |       |
|------------------------------------------------------------------------------|--------|----------------------------------------------|------------|
|                                                                         |   | **2002**                                     |       | **2001** |   |
|                                                                         |   |                                         | ** ** | **(as restated)** | ** ** |
| Cash flows from  operating activities:                                       |   |                                         |       |   |   |
| Net loss                                                                     |   | $                                            | (46,855    | ) | $ | (33,075 | ) |
| Adjustments to  reconcile net loss to net cash used by operating activities: |   |                                         |       |   |   |
| Depletion,  depreciation and amortization                                    |   | 24,214                                       |       | 31,523 |   |
| Redemption  premium and write off of deferred charges                        |   | 9,967                                        |       | — |   |
| Deferred  interest                                                           |   | 2,030                                        |       | — |   |
| Loss on purchase  commitments                                                |   | 3,757                                        |       | — |   |
| Gain on sale of  property                                                    |   | (6,385                                       | )          | (12,160 | ) |
| Net change in  current assets and current liabilities                        |   |                                         |       |   |   |
| Accounts and  notes receivable                                               |   | 16,123                                       |       | 3,603 |   |
| Inventories                                                                  |   | (1,091                                       | )          | 15,371 |   |
| Deposits on  timber cutting contracts                                        |   | (467                                         | )          | 1,154 |   |
| Prepaid and  other current assets                                            |   | (2,604                                       | )          | (1,468 | ) |
| Accounts payable  and accrued expenses                                       |   | (15,021                                      | )          | (9,516 | ) |
| Net cash used by  operating activities                                       |   | (16,332                                      | )          | (4,568 | ) |
|                                                                         |   |                                         |       |   |   |
| Cash flows from  investing activities:                                       |   |                                         |       |   |   |
| Additions to  timberlands                                                    |   | (5,254                                       | )          | (7,701 | ) |
| Additions to  timber cutting rights                                          |   | (476                                         | )          | (201 | ) |
| Additions to  equipment                                                      |   | (2,812                                       | )          | (8,582 | ) |
| Proceeds from  sales of property                                             |   | 186,180                                      |       | 24,610 |   |
| Principal  payments received on notes                                        |   | 3,237                                        |       | 2,088 |   |
| Other investing  activities                                                  |   | (15                                          | )          | 13 |   |
| Net cash  provided by investing activities                                   |   | 180,860                                      |       | 10,227 |   |
|                                                                         |   |                                         |       |   |   |
| Cash flows from  financing activities:                                       |   |                                         |       |   |   |
| Net increase in  short-term borrowings                                       |   | 3,000                                        |       | 4,000 |   |
| Proceeds from  issuance of long-term debt                                    |   | 156                                          |       | 29 |   |
| Repayments of  long-term debt                                                |   | (154,477                                     | )          | (3,680 | ) |
| Contributions of  capital                                                    |   | —                                       |       | 45 |   |
| Change in  restricted cash                                                   |   | (15,337                                      | )          | — |   |
| Other financing  activities                                                  |   | (4,765                                       | )          | (48 | ) |
| Net cash (used)  provided by financing activities                            |   | (171,423                                     | )          | 346 |   |
|                                                                         |   |                                         |       |   |   |
| Net (decrease)  increase in cash and cash equivalents                        |   | (6,895                                       | )          | 6,005 |   |
| Cash and cash  equivalents at beginning of period                            |   | 9,219                                        |       | 14,537 |   |
|                                                                         |   |                                         |       |   |   |
| Cash and cash  equivalents at end of period                                  |   | $                                            | 2,324      |   | $ | 20,542 |   |

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Note:                   2001 amountshave been restated to reflect a change in accounting from the LIFO to theaverage 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**

**(Unaudited)**

 

**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.  This Form 10-Q should be read in conjunctionwith the financial statements in the Partnership’s 2001 Annual Report on Form10-K, which includes a summary of significant accounting policies of thePartnership.  In the opinion ofmanagement, all material adjustments necessary to present fairly the results ofoperations for the three and nine-month periods ended September 30, 2002 and2001 have been included.  All suchadjustments are of a normal and recurring nature and all intercompanytransactions have been eliminated.  Theresults of operations for any interim period are not necessarily indicative ofthe results of operations for the entire year.

 

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 $(167,000) and $(129,000) for the three months ended September30, 2002 and 2001, respectively, and $(469,000) and $(331,000) for the ninemonths ended September 30, 2002 and 2001, respectively.  There is no difference between basic anddiluted earnings per unit.

 

**Note 2:Inventories**

In thefirst quarter of 2002, the Partnership changed its method of accounting formanufacturing log and lumber inventories from the lower of LIFO cost or marketto the lower of average cost or market.   Given the volatility of both prices and quantities and a fundamentalchange in the composition of inventories, management believes that accountingfor inventories at average cost better matches revenues and expenses, andtherefore is preferable. Supplies and inventories maintained atnon-manufacturing locations continue to be valued at the lower of average costor market.  In accordance withAccounting Principles Board Opinion No. 20, “Accounting Changes,” upon adoptionof the new inventory accounting method, the Partnership retroactively restatedprior periods by accounting for inventories at average cost.

 

6

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Had thePartnership adopted this change in 2001, the effect of the accounting change onnet loss as previously reported for the nine month period ended September 30,2001 is as follows.  There was no effecton the three month period ended September 30, 2001.

 
| **Statement of Operations (in thousands, except per unit  amounts)** |   | **Nine Months  Ended  September 30, 2001** |    |
|----------------------------------------------------------------------|--------|--------------------------------------------|---------|
| Net loss as previously reported                                      |   | $                                          | (32,666 | ) |
| Adjustment for change in accounting principle                        |   | (409                                       | )       |
| Net loss as adjusted                                                 |   | $                                          | (33,075 | ) |
|                                                                 |   |                                       |    |
| Basic and diluted loss per share as previously reported              |   | $                                          | (1.06   | ) |
| Adjustment for change in accounting principle                        |   | (0.01                                      | )       |
| Basic and diluted loss per share as adjusted                         |   | $                                          | (1.07   | ) |

 

Inventories consisted of the following (in thousands):

 
|                    |   | **September  30, 2002** |   | **December  31, 2001** |   |
|-------------------------|--------|-------------------------|--------|------------------------|--------|
|                    |   |                    |   | **(as  restated)**     |   |
| Lumber                  |   | $                       | 7,039  |                   | $      | 5,749 |   |
| Logs                    |   | 3,140                   |   | 1,809                  |   |
| Supplies                |   | 3,507                   |   | 3,187                  |   |
| Manufacturing inventory |   | 13,686                  |   | 10,745                 |   |
| Wholesale products      |   | 21,031                  |   | 22,881                 |   |
| Total                   |   | $                       | 34,717 |                   | $      | 33,626 |   |

 

**Note3:  Credit Facility and Senior NoteAgreement Amendments**

On April 19, 2002, the Operating Partnership’s seniornote agreements and bank credit facilities were amended.  The significant provisions of the amendmentsare as follows:

•                  Theexpiration dates of the Partnership’s bank working capital and bank acquisitionfacilities were extended to December 31, 2005.

•                  Asa condition to the closing of the amendments, the Partnership was required toapply $10.0 million of the net proceeds from the sale of its Inland South treefarm to prepay outstanding amounts under the working capital facility, 50% ofthe remainder of such net proceeds (after deducting certain fees, expenses andescrow holdbacks) to prepay outstanding borrowings under the acquisitionfacility (approximately $54.7 million) and approximately 50% of the remainderof such net proceeds (after deducting certain fees, expenses and escrowholdbacks) to prepay outstanding principal of its senior notes (approximately$53.1 million). These three payments were made on April 19, 2002 (see Note 4).

•                  ThePartnership was also required to apply 50% of the net proceeds from the sale ofits Inland North tree farm, which closed on April 30, 2002 and generated net proceeds(after deducting certain fees, expenses and escrow holdbacks) of approximately$46.4 million, to prepay outstanding borrowings under the acquisition facilityand 50% of the net proceeds to prepay outstanding principal of its seniornotes. Immediately following the application of such net proceeds, thePartnership had $121.3 million borrowed under its acquisition facility and$409.6 million under the senior notes (see Note 4).  Approximately $17.9 million of debt reduction is expected in thefourth quarter of 2002 following the release of restricted cash from escrow onOctober 24, 2002 as a result of a timber verification cruise related to theInland tree farm sales.  Upon release,these funds will be applied pro rata to prepay the senior notes and theacquisition facility.

•                  Afterthe prepayments following the release of restricted cash, required principalpayments of $5.0 million, $40.0 million and $30.0 million will be due on theacquisition facility on or before September 30, 2003, January 15, 2004 and June30, 2005, respectively.  The aggregatecommitment

 

7

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of the acquisitionfacility will be correspondingly and permanently reduced by such amounts at thetimes of such payments.

•                  Within30 days following each September 30 and March 31, through September 30, 2005,the Partnership is required to make principal payments on the acquisitionfacility and the senior notes in an aggregate amount equal to 75% of the excessof actual cash flow over forecasted cash flow for the previous two-quarterperiod.

•                  Uponthe sale of an asset, the Partnership is required to make mandatory, pro rataprincipal payments on the senior notes and the acquisition facility so thatthey are repaid in the same proportions of outstanding principal amount (exceptthat the Partnership may, at its option, use cash proceeds of permitted equityfinancings to repay principal under the acquisition facility or the seniornotes without making a corresponding payment on the other).

•                  ThePartnership has the option to defer until December 31, 2005 originallyscheduled principal payments (but not the mandatory payments described in thepreceding paragraph) due on the senior notes on December 1, 2002, 2003, 2004and 2005.

•                  If,on July 1, 2005, the Partnership’s senior notes do not have an investment graderating from a nationally recognized rating agency, it is required to pay infull, on December 31, 2005, all outstanding amounts due on the seniornotes.  If, on July 1, 2005, its seniornotes do have an investment grade rating from a nationally recognized ratingagency, it is not required to repay the senior notes on December 31, 2005, but,instead, the senior note holders will have the option, exercisable no laterthan August 1, 2005, to put some or all of their senior notes to thePartnership on December 31, 2005.

•                  ThePartnership has agreed to pay interest on the senior notes (including onprincipal, deferred interest and deferred redemption premiums) of an additional100 basis points, or 1.0%.  ThePartnership may, at its option, defer until December 31, 2005, payment of thisadditional interest (except accrued interest on prepaid principal, which mustbe paid at the time of prepayment).  Asof September 30, 2002, the Partnership had deferred interest of $2.0 million.

•                  Exceptin certain 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 the Partnership ifspecified up front at time of redemption. In conjunction with principal repayments associated with proceeds fromthe Inland tree farm sales, the Partnership deferred $4.5 million in redemptionpremiums.  If the Partnership has aninvestment grade rating as described in the immediately preceding paragraph, noadditional redemption premiums will be due on any principal payments made on December31, 2005 on senior notes that are put to the Partnership by the senior noteholders.

•                  ThePartnership has granted registration rights to senior note holders with respectto any common 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.

•                  Thesenior notes and 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 the Operating Partnership’s working capital facility, acquisitionfacility and senior notes will require the written consent of banks holding atleast 66-2/3% of the aggregate unpaid principal amount of the acquisitionfacility loans and the written consent of holders of at least 55% of theaggregate outstanding principal amount of each series of senior notes.

 

8

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•                  Inexchange for these senior note and bank facility amendments, the Partnershipgranted to the banks and the note holders, as collateral for the obligations, asecurity interest in the Partnership’s timberland assets and substantially allof its sawmill assets.

 

The Partnership accounted for its April 2002 debtrestructuring according to criteria outlined in Emerging Issues Task ForceIssue No. 96-19 “Debtor’s Accounting for a Modification or Exchange of DebtInstruments” (EITF 96-19).  The restructuringof the senior notes was deemed an extinguishment of the original debt and theissuance of new debt, and the restructuring of the bank debt was deemed amodification of existing debt. Accordingly, with respect to the senior notes, all previously deferredfinancing costs and fees paid to the note holders for the debt restructuringwere expensed.  Fees incurred with thirdparties for purposes of restructuring the senior notes were capitalized.   Fees paid to the banks and incurred withthird parties as a result of restructuring the acquisition facility werecapitalized.  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 had abalance of deferred fees and expenses of approximately $5.4 million atSeptember 30, 2002 that are being amortized through December 31, 2005.

 

The Partnership was in compliance with all of the debtcovenants at September 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 were 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, expenses and escrow hold-backs, of approximately $46.4 million,were also used to pay down outstanding debt as discussed in Note 3 and Item2.  The Partnership recognized a gain ofapproximately $1.4 million on this sale.

 

See also Note 12.

 

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

In the first quarter of each year, the Partnershipperforms an update of its timber inventory system.  The update in 2002 resulted in a net decrease in depletion costsfor the first nine months of 2002 of approximately $0.3 million, or $0.1 perunit, and a net increase in depletion costs for the first nine months of 2001of approximately $0.6 million, or $0.02 per unit, with no impact on cash flow.

 

9

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**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.

 

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 $0.7million, or $0.02 per unit, respectively, in additional earnings, with noimpact on cash flow, for the three and nine month periods ended September 30,2001.

 

**Note 7: Property, Plant and Equipment**

In the third quarter of 2002, the Partnership recordeda $1.2 million write-off of obsolete and retired assets.

 

**Note 8: Loss on Advance Purchase Commitments**

In the third quarter of 2002, the Partnershiprecognized a loss on purchase commitments with the U.S. Forest Service andprivate timber deeds of $3.8 million, which represents the estimated probableloss to be recognized on these contracts through 2003, the completion date, orthe estimated harvest dates, for these contracts.  The Partnership entered into these contracts several years ago toensure adequate raw material supply for its Gilchrist and Prineville sawmills.  Both market demand and pricing for thelumber output from these commitments have declined significantly since thecommitments were made.

 

**Note 9: Supplemental Cash Flow Information**

Supplemental disclosure of cash flow information is asfollows (in thousands):

 
|                                            |   | **Nine months  ended September 30,** |   |
|-------------------------------------------------|--------|--------------------------------------|--------|
|                                            |   | **2002**                             |   | **2001** |   |
| Cash paid during the period for interest        |   | $                                    | 36,817 |   | $ | 44,199 |   |
| Business assets acquired with Partnership units |   | —                               |   | 1,000 |   |
| Note received for sale of property              |   | —                               |   | 1,500 |   |
|                                                 |        |                                      |        |  |  |  |  |

 

**Note 10:Segment Reporting**

The Partnership classifies its business intothree 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 intolumber and the sale of residual chips to pulp and paper mills; and 3) WholesaleMarketing, consisting of the trading of various forest products and the distributionof lumber and panel products through the Partnership’s professional contractorservice yards. Corporate and Other includes general corporate overhead andexpenses not allocated to the segments, miscellaneous operations notsignificant enough to be classified as a separate segment and the gains relatedto the sale of the Inland North and South tree farms. The Partnership does notshow assets by segment, as historic costs are not used by management toallocate resources or assess performance.

 

10

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

 
|                 |   | **Three Months Ended September 30,** |    | **Nine Months Ended September 30,** |   |
|----------------------|--------|--------------------------------------|---------|-------------------------------------|--------|
| **Revenues**         |   | **2002**                             |    | **2001**                            |   | **2002** |   | **2001** |   |
| Timberlands:         |   |                                 |    |                                |   |   |   |   |   |
| Trade                |   | $                                    | 8,226   |                                | $      | 16,792 |   | $ | 28,055 |   | $ | 57,539 |   |
| Intersegment         |   | 10,934                               |    | 21,873                              |   | 31,114 |   | 70,634 |   |
|                 |   | 19,160                               |    | 38,665                              |   | 59,169 |   | 128,173 |   |
| Manufacturing:       |   |                                 |    |                                |   |   |   |   |   |
| Trade                |   | 26,332                               |    | 41,409                              |   | 77,392 |   | 113,990 |   |
| Intersegment         |   | 1,026                                |    | 4,328                               |   | 3,224 |   | 11,667 |   |
|                 |   | 27,358                               |    | 45,737                              |   | 80,616 |   | 125,657 |   |
| Wholesale Marketing: |   |                                 |    |                                |   |   |   |   |   |
| Trade                |   | 83,916                               |    | 105,458                             |   | 265,119 |   | 296,597 |   |
| Intersegment         |   | 2,465                                |    | 6,731                               |   | 12,938 |   | 20,705 |   |
|                 |   | 86,381                               |    | 112,189                             |   | 278,057 |   | 317,302 |   |
| Corporate and Other: |   |                                 |    |                                |   |   |   |   |   |
| Trade                |   | 2,466                                |    | 267                                 |   | 7,369 |   | 777 |   |
| Intersegment         |   | 114                                  |    | (156                                | )      | 309 |   | 395 |   |
|                 |   | 2,580                                |    | 111                                 |   | 7,678 |   | 1,172 |   |
| Total:               |   |                                 |    |                                |   |   |   |   |   |
| Total Revenue        |   | 135,479                              |    | 196,702                             |   | 425,520 |   | 572,304 |   |
| Less Intersegment    |   | (14,539                              | )       | (32,776                             | )      | (47,585 | ) | (103,401 | ) |
| Net Revenue          |   | $                                    | 120,940 |                                | $      | 163,926 |   | $ | 377,935 |   | $ | 468,903 |   |

 
|                        |   | **Three Months Ended September 30,** |    | **Nine Months Ended September 30,** |   |
|-----------------------------|--------|--------------------------------------|---------|-------------------------------------|--------|
| **Operating Income (Loss)** |   | **2002**                             |    | **2001**                            |   | **2002** |   | **2001** |   |
| Timberlands                 |   | $                                    | 1,188   |                                | $      | 1,980 |   | $ | 4,071 |   | $ | 15,304 |   |
| Manufacturing               |   | (4,870                               | )       | (1,053                              | )      | (2,194 | ) | (1,795 | ) |
| Wholesale                   |   | 3,006                                |    | 3,322                               |   | 7,826 |   | 9,527 |   |
| Corporate and Other         |   | (3,065                               | )       | (3,063                              | )      | (966 | ) | (9,852 | ) |
| Operating Income (Loss)     |   | (3,741                               | )       | 1,186                               |   | 8,737 |   | 13,184 |   |
| Interest Expense            |   | (12,482                              | )       | (15,294                             | )      | (39,703 | ) | (46,821 | ) |
| Other                       |   | (521                                 | )       | 1,244                               |   | (15,889 | ) | 562 |   |
| Net Loss                    |   | $                                    | (16,744 | )                                   | $      | (12,864 | ) | $ | (46,855 | ) | $ | (33,075 | ) |

 

**Note 11:New Accounting Pronouncements**

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

 

**Note 12:Subsequent Event**

The Partnership received $17.9 million released fromescrow on October 24, 2002 as a result of a timber verification cruise.  These proceeds were used to pay downoutstanding debt as discussed in Note 3 and Item 2.  At September 30, 2002, $15.3 million was recorded as restrictedcash on the balance sheet related to such amount held in escrow.

 

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**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**

Information contained in Item 2 and other sections of this reportinclude 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 include harvest volumes, species mix, prices for logs and lumber,demand for housing and levels, timing and amounts received for stumpage,property and asset sales. Our business and prospects are subject to a number ofrisks, including the volatility of timber and lumber prices and supplies,factors limiting harvesting of timber including contractual obligations, governmentalrestrictions, weather and access limitations, and the substantial capitalresources 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 are sold, including Southeast Asia and Japan.  Other risk factors include our ability toimplement our business strategy and the value of the U.S. dollar againstforeign currencies.  These and otherrisks are described in our other current filings under the Securities ExchangeAct of 1934 and the Securities Act of 1933, which are available from us or theUnited States Securities and Exchange Commission at its website at“www.sec.gov” or from us.

 

**FinancialCondition**

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 $16.3 million in the first ninemonths of 2002 and resulted primarily from a net loss of $13.3 million (net ofnon-cash expenses and gain on sale of property of $33.6 million), an increasein prepaid and other current assets of $2.6 million and a decrease in accountspayable and accrued expenses of $15.0 million, which were offset in part by a$16.1 million decrease in accounts and notes receivable.  Working capital decreased to $47.7 millionat September 30, 2002 compared to $76.7 million at December 31, 2001.

 

Net cash provided by investing activities of $180.9 million resultedprimarily from $186.2 million of proceeds from the sale of our Inland North andInland South tree farms and the collection of $3.2 million of notes receivable,which were offset in part by the use of $5.7 million for additions totimberlands and timber cutting rights and $2.8 million used for additions toequipment.

 

Net cash used by financing activities of $171.4 million resultedprimarily from the pay-down of $154.5 million of long-term debt from cashproceeds from the sales of our Inland North and South tree farms, $15.3 millionof proceeds received from the Inland tree farm sales being held in an escrowaccount as restricted cash and $4.7 million of deferred finance fees incurredin our debt restructuring, offset by a $3.0 million net increase in short-termborrowings.

 

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Additions to plant and equipment totaled $2.8 million in the first ninemonths of 2002, primarily for improvements at our Marysville, Gilchrist andPort Angeles sawmills and rolling stock for the Alliance and Desert contractorservice yard operations.  Additions totimber and timberland purchases totaled $5.7 million in the first nine monthsof 2002 and consisted primarily of road construction, reforestation and thepurchase of timber.  We anticipatespending less than $10.0 million in 2002 for timber and timberland additionsand plant 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, currentfunds or bank borrowings.

 

As amended in April 2002, we have a $40 million 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 required by the April 2002 amendments, $10.0 million of the InlandSouth tree farm proceeds were applied to pay down outstanding principal on thisfacility and, as of September 30, 2002, $22.0 million was outstanding underthis facility.  The weighted averageinterest rate on this facility as of September 30, 2002 was 5.52%.  We are currently in discussions with alending institution in order to secure a $55.0 million working capital line ofcredit, which would replace this existing $40.0 million working capital line.  At this time, we cannot predict if or when anew line of credit will be obtained.

 

As amended in April 2002, we also had a $199.3 million facility with agroup of banks that previously provided for the acquisition of timber,timberlands and related assets and capital expenditures. This facility bears afloating rate of interest, is secured by our timberlands and sawmill assets andexpires December 31, 2005.  As requiredin the April 2002 amendment, $78.0 million of the Inland South and North treefarm sales proceeds were applied to pay down outstanding principal on thisfacility and, as of September 30, 2002, $121.3 million was outstanding.   Principal payments of $5.0 million, $40.0million and $30.0 million are due on this facility in September 2003, January 2004and June 2005, respectively.  Principalpayments on this facility cannot be re-borrowed.  The weighted average interest rate on this facility as ofSeptember 30, 2002 was 5.47%.

 

We sought and received the April 2002 bank facility amendments toobtain relief from restrictive covenants and upcoming debt maturities during aperiod of time when operating cash flows continue to be negatively impacted byweak log and lumber prices and our decision to preserve our timber assets untilpricing for logs and lumber improves. In connection with these amendments, we paid the banks a fee of $0.7million, which was funded by the Inland South tree farm proceeds.  See Note 3 for more information about theamendments.

 

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 now also secured byour timberlands 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 September 30, 2002, there was $409.6million outstanding.  The April 2002amendment allows us to defer principal payments previously due on December 1,2002, 2003, 2004 and 2005, until December 31, 2005.  In addition, we are also required to make mandatory principalpayments, on a pro rata basis, with our existing bank debt, if asset saleproceeds or operating cash flow are used to pay outstanding bank principalprior to December 31, 2005.  Also, wemay be required to pay the entire outstanding principal balance, plus accruedinterest and redemption premiums, of the senior notes on December 31, 2005 ifour credit ratings are below investment grade. If our credit ratings are investment grade on July 1,

 

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2005, the note holders have the right to put to us some or all of theiroutstanding notes (without any associated redemption charges) on December 31,2005 after giving notice to us on August 1, 2005.  Additionally, we paid the senior note holders an amendment fee of$2.0 million, which was funded by the Inland South tree farm sale proceeds.

 

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.

 

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 deferred fees and expenses. We have a balance of deferred fees and expenses of $5.4 million atSeptember 30, 2002 that are being amortized through December 31, 2005 (see Note3).

 

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

 

As of September 30, 2002, $25.3 million of debt is classified ascurrent.  Restricted cash of $15.3million, held in escrow, will be applied to this current portion of long-termdebt in the fourth quarter of 2002 (see Note 4).  On October 24, 2002, the Partnership received the $15.3 millionof restricted cash plus an additional $2.6 million, all of which was appliedagainst long-term debt.

 

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.

 

As of September 30, 2002, we were in compliance with all of our bankagreement and senior note covenants.

 

We expect to receive between $4.0 and $4.5 million in proceeds relatedto the sale of our Coeur d’Alene assets (former mill site land), which weexpect will close in December 2002, which will be used for repayment ofshort-term debt.

 

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 will supporta sustained quarterly distribution.

 

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**NewAccounting Pronouncements**

In July 2001, the FASB issued Statement of Financial AccountingStandards No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”).  SFAS 142 requires that goodwill andidentifiable intangible assets determined to have an indefinite life no longerbe amortized, but instead be tested for impairment at least annually.  We adopted SFAS 142 on January 1, 2002.

 

SFAS 142 requires that goodwill be tested annually for impairment usinga two-step process.  The first step isto identify a potential impairment and, in transition, this step must bemeasured as of the beginning of the fiscal year.  However, a company has six months from the date of adoption tocomplete the first step.  The secondstep of the goodwill impairment test measures the amount of the impairment loss(measured as of the beginning of the year of adoption), if any, and must becompleted by the end of 2002.  Wecompleted the first step during the quarter ended June 30, 2002 and havedetermined, at this time, there is no impairment.  In connection with the adoption of SFAS 142, we are no longerrecording $0.9 million of amortization expense per year relating to existinggoodwill.

 

In August 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.

 

In October 2001, the FASB issued SFAS No. 144 “Accounting for theImpairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 supercedesSFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and forLong-Lived Assets to Be Disposed Of” (“SFAS 121”).  SFAS 144 applies to all long-lived assets and consequently amendsAccounting Principles Board Opinion No. 30 (“APB 30”), Reporting Results ofOperations and Reporting the Effects of Disposal of a Segment of aBusiness.  SFAS 144 requires thatlong-lived assets that are to be disposed of by sale be measured at the lowerof book value or fair 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 disposaltransaction.  The adoption of SFAS 144on January 1, 2002 did not have a material effect on our financial position,results of operations or cash flows.

 

In May 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 rescindsvarious pronouncements regarding early extinguishment of debt and allowsextraordinary accounting treatment for early extinguishment only when theprovisions of Accounting Principles Board Opinion No. 30, “Reporting theResults of Operations – Reporting the Effects of Disposal of a Segment of aBusiness, and Extraordinary, Unusual and Infrequently Occurring Events andTransactions” are met.  SFAS 145provisions regarding early extinguishment of debt are generally effective forfiscal years beginning after May 15, 2002, with earlier adoptionencouraged.  We have adopted theprovisions of SFAS 145, which did not have a material effect on our financialposition, results of operations or cash flows.

 

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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 is effectiveprospectively for exit or disposal activities initiated after December 31,2002, with earlier adoption encouraged. We do not anticipate that the adoption of SFAS 146 will have a materialeffect on our financial position, results of operations or cash flows.

 

**Resultsof Operations**

 

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

 

**General**

Revenues during the third quarter ended September 30, 2002 decreased$43.0 million, or 26.2%, to $120.9 million, from $163.9 million in the samequarter of 2001.  The decrease reflectsthe ongoing impact of weak lumber and panel pricing, lower fee timber harvestand the absence of normal-course property sales during the current period, aswell as the sale or closure of three of our sawmills in the latter part of2001.

 

In July 2002, Canada received a favorable ruling regarding theDepartment of Commerce’s preliminary determination in the countervailing dutycase.  However, these preliminary dutieshave already 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.

 

Cost of sales as a percentage of sales increased to 95.3% in the thirdquarter of 2002, compared to 93.7% in the same quarter of 2001.  Included in cost of sales in the third quarter of 2002 is a $3.8 millioncharge for estimated losses on timber purchase contracts expiring or expectedto be harvested in 2003.  Exclusive ofthe $3.8 million charge, cost of sales as a percentage of sales for the thirdquarter of 2002 would have been 92.2%.  This decrease reflects a 7.2% proportionate decrease in wholesaletrading revenues, which typically realize lower margins, as a percentage of ourcurrent period sales mix, as well as lower log costs at the Oregon and Washington sawmills.

 

Loss on disposal of assets in the thirdquarter of 2002 of $1.2 million reflects the write-off of obsolete or retiredassets.

 

Selling, general and administrative expenses(“SG&A”) decreased 8.8% to $8.3 million (6.9% of revenues) in the thirdquarter of 2002, compared to $9.1 million (5.6% of revenues) in the thirdquarter of 2001. The decrease was primarily a result of lower salaries andwages, lower depreciation due to fewer mills, the cessation of goodwillamortization upon adoption of SFAS No. 142 on January 1, 2002 and other costreductions implemented throughout the Partnership in late 2001.  These reductions were offset in part by a$387,000 increase to our allowance for bad debts.

 

Interest expense decreased $2.8 million, or18.4%, to $12.5 million in the third quarter of 2002, from $15.3 million in thesame quarter of 2001.  The decrease wasa result of lower average debt balances in the third quarter of 2002 comparedto the third quarter of 2001, partially offset by higher interest rates.

 

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Amortization of debt issuance costs decreased to$499,000 in the third quarter of 2002 from $955,000 in the third quarter of2001.  Amortization of debt issuancecosts in the third quarter of 2001 includes $578,000 of fees, which totaledapproximately $1.1 million, for amendments made to the Partnership’s workingcapital bank facilities in April 2001.

 

Other income typically includes interest incomeon notes receivable, rental income and other miscellaneous income. Other incomein the third quarter of 2001 also included a net gain of $2.4 million on thesale of assets.

 

The Partnership pays no significant income taxes and does not include aprovision for income taxes in its financial statements.

 

**Timberlands**

Total external segment sales, including property sales and stumpagesales, decreased 51.0% to $8.2 million, or 6.8% of revenue in the third quarterof 2002, compared to $16.8 million, or 10.2% of revenue in the third quarter of2001.  The decrease in external segmentsales reflects the sale of our Inland tree farm, the absence of stumpage saleactivity at our Oregon tree farm, a decline in log shipments from comparabletree farms and lower fee harvest activity, which reflects our strategy toreduce production to more sustainable levels, particularly during periods oflow market pricing.

 

Internal sales of logs to manufacturing decreased 50.0% to $10.9million in the third quarter of 2002 from $21.9 million in the third quarter of2001.  The decrease primarily reflectsthe absence of three of our sawmills from the production mix during the thirdquarter of 2002 as well as lower production at our Oregon tree farm compared tothe third quarter of 2001.

 

Overall operating income from timberlands, including property sales,decreased 40.0% to $1.2 million in the third quarter of 2002 from $2.0 millionin the third quarter of 2001, primarily as a result of $546,000 of propertysales gains included in the third quarter of 2001 compared to none in the thirdquarter of 2002.   Without the propertysales gains in the third quarter of 2001, operating income decreased $0.2million in the third quarter of 2002 compared to the third quarter of 2001 dueto the lower revenues as discussed above, offset in part by a 43.5% decrease insegment overhead expense.

 

***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 (“MBF”)):

 
|             |   | **Quarter  Ended September 30,** |   |     |   |
|------------------|--------|----------------------------------|--------|----------|--------|
| **Tree Farm**    |   | **2002**                         |   | **2001** |   | **% Change** |   |
| Oregon           |   | —                           |   | $        | 250    |   | — |   |
| Inland           |   | $                                | 404    |     | $      | 451 |   | (10.4 | )% |
| Hamilton         |   | $                                | 455    |     | $      | 422 |   | 7.8 | % |
| Olympic          |   | $                                | 400    |     | $      | 363 |   | 10.2 | % |
| Weighted average |   | $                                | 433    |     | $      | 416 |   | 4.1 | % |

 

Increases at the Hamilton and Olympic tree farms were due to mixchanges and higher market pricing for both Hemlock and Cedar logs.

 

All of the production from our Oregon tree farm is currently beingutilized at our Gilchrist facility.

 

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Domestic external log sales volumes from the various tree farms,excluding pulpwood, decreased****59.1% in the third quarter of 2002 to 12.4million board feet (“MMBF”), compared to 30.4 MMBF in the same quarter of 2001,primarily as a result of a planned reduction in fee harvest levels, increasedinternal log shipments from existing tree farms as a percent of total feeharvest and the absence of our Inland tree farm in the third quarter of 2002compared to the third quarter of 2001. The external volume from each of our tree farms was as follows (in MBF):

 
|                |   | **Quarter  Ended September 30,** |   |     |   |
|---------------------|--------|----------------------------------|--------|----------|--------|
| **Tree Farm**       |   | **2002**                         |   | **2001** |   | **% Change** |   |
| Oregon tree farm    |   | —                           |   | 4        |   | — |   |
| Inland tree farm    |   | 490                              |   | 9,589    |   | (94.9 | )% |
| Hamilton tree  farm |   | 7,425                            |   | 13,253   |   | (44.0 | )% |
| Olympic tree  farm  |   | 4,521                            |   | 7,565    |   | (40.2 | )% |
| Total               |   | 12,436                           |   | 30,411   |   | (59.1 | )% |

 

The decrease at the Hamilton and Olympic tree farms was primarily aresult of an increase in logs used internally and an overall decrease in feeharvest levels.

 

All of the production from our Oregon tree farm is currently beingutilized at our Gilchrist facility.

 

We sold a portion of our Inland tree farm on March 29, 2002 (InlandSouth) and sold the final portion of our Inland tree farm on April 30, 2002(Inland North).  Therefore, the onlyvolume from our Inland tree farm during the third quarter of 2002 derived froman ongoing timber sale, which was not sold with the tree farm.

 

***Export Log Sales***

Sales of logs to customers involved in exporting activities wereapproximately $1.1 million, or 0.9% of revenues, in the third quarter of 2002,compared to $229,000, or 0.1% of revenues, for the same quarter of 2001.  The average realization for export logsdecreased 18.4% to $537/MBF in the third quarter of 2002 compared to $658/MBFin the third quarter of 2001.  Salesvolumes of export logs increased 497.1% to 2,078 MBF in the third quarter of2002 compared to 348 MBF in the third quarter of 2001.  The increase in volume is primarily due toincreased shipments for Korean sort logs. The decrease in realization is primarily a result of a change in speciesand quality mix during the third quarter of 2002 compared to the same period in2001.

 

***Property Sales***

We did not have any property sales in the third quarter of 2002.  This compares to revenue and operatingincome from property sales in the third quarter of 2001 of $1.0 million and$546,000, respectively.  We do notexpect any property sales during the fourth quarter of 2002.

 

**Manufacturing**

Segment sales, excluding sales of lumber products through the wholesalemarketing segment, were $26.3 million, or 21.8% of sales in the third quarterof 2002, compared to $41.4 million, or 25.3% of sales in the same quarter of2001.  The reduced revenues reflect a32.4% decrease in external lumber sales volume, a 43.2% decline in chip revenueand a 10.0% decrease in average external lumber sales realizations.

 

The operating loss from the manufacturing segment was $4.9 million inthe third quarter of 2002 compared to $1.1 million in the third quarter of2001.  The loss in the third quarter of2002 included a $3.8 million charge for estimated operating losses on timber purchase commitmentsthrough 2003 and a $1.2 million charge for the write-off of retiredassets.  Exclusive of the $3.8 millionand $1.2 million charges, operating

 

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income would have been $0.1 million. Declines in revenue and average sales realizations and a 15% increase inper unit manufacturing costs were partially offset by a 23.1% decrease in unitlog costs and a 23.6% decrease in overhead expense.  These comparisons include the Bonners Ferry, Coeur d’Alene andPrineville sawmills in the third quarter of 2001, which were absent from ourmanufacturing segment in the third quarter of 2002.  The lower log costs resulted from the absence of these three sawmills,which consumed primarily higher cost logs, together with lower log costs at ourGilchrist operation during the third quarter of 2002 compared to the thirdquarter of 2001.

 

Average prices received for all lumber sales, in the various regionswere as follows (dollars per MBF):

 
|             |   | **Quarter Ended  September 30,** |   |     |   |
|------------------|--------|----------------------------------|--------|----------|--------|
| **Region**       |   | **2002**                         |   | **2001** |   | **% Change** |   |
| Oregon           |   | $                                | 295    |     | $      | 326 |   | (9.5 | )% |
| Inland           |   | —                           |   | $        | 323    |   | — |   |
| Washington       |   | $                                | 267    |     | $      | 290 |   | (7.9 | )% |
| Weighted average |   | $                                | 282    |     | $      | 315 |   | (10.5 | )% |

 

The lower realization from the Oregon region in the third quarter of2002 compared to the third quarter of 2001 primarily reflects the absence ofthe Prineville mill’s previous product output from the sales mix.

 

The decrease from the Washington region in the third quarter of 2002compared to the third quarter of 2001 was due to changes in species mix andweak overall lumber market pricing.

 

The Inland region ceased production at the end of 2001 with the sale ofthe Bonners Ferry mill in September 2001 and the closure of our Coeur d’Alenesawmill in preparation for the sale of our Inland tree farm in the first andsecond quarters of 2002.

 

External lumber sales volumes decreased 32.4% in the third quarter of2002 to 79.0 MMBF compared to 116.8 MMBF in the same period of 2001.  External sales volumes from the various regionswere as follows (in MBF):

 
|       |   | **Quarter  Ended September 30,** |   |     |   |
|------------|--------|----------------------------------|--------|----------|--------|
| **Region** |   | **2002**                         |   | **2001** |   | **% Change** |   |
| Oregon     |   | 42,381                           |   | 46,273   |   | (8.4 | )% |
| Inland     |   | —                           |   | 36,412   |   | — |   |
| Washington |   | 36,593                           |   | 34,125   |   | 7.2 | % |
| Total      |   | 78,974                           |   | 116,810  |   | (32.4 | )% |

 

The decrease in volume from the Oregon region reflects the absence ofour Prineville sawmill in 2002, offset by improved operating efficiencies atour Gilchrist facility in the third quarter of 2002 compared to the thirdquarter of 2001.  During the secondquarter of 2002, we began using the previously closed Prineville dry kilns andplaner 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.

 

The increase in shipments from the Washington region reflects increasedproduction at both Washington sawmills.

 

19

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Revenues from all by-products accounted for 2.0% of revenue in thethird quarter of 2002, compared to 2.7% of revenue in the third quarter of2001.  Residual wood chip pricesdecreased to $59 per bone dry unit (“BDU”) in the third quarter of 2002compared to $72/BDU in the third quarter of 2001.  The 18.1% lower average realization reflects the impact ofcontinued weakness and high chip supplies in the pulp industry.  Woodchip volume decreased 30.6% to 34,699BDUs in the third quarter of 2002 compared to 49,996 BDUs in the third quarterof 2001, primarily reflecting the absence of our Inland and Prineville lumberoperations.

 

**WholesaleMarketing**

Our wholesale marketing segment involves sales of lumber and other woodproducts, most of which were not manufactured by us.  External sales from the wholesale operations totaled $83.9million, or 69.4% of sales in the third quarter of 2002, compared to $105.5million, or 64.3% of sales in the third quarter of 2001.  The decrease in revenue reflects lower salesvolume from our Eugene wholesale operation as well as lower lumber and panelprices at all of our operations.  Thedecrease in volume from our Eugene operation was primarily the result of acanceled sales contract with an Oregon lumber producer, as part of our reorganizationof the Eugene operation described below.

 

Sales volume of Partnership-produced lumber through the wholesalemarketing segment decreased 80.8% during the third quarter of 2002 compared tothe third quarter of 2001, due primarily to the absence of three sawmillsduring the 2002 period.  Volume fromcomparable mills increased 2.3%, reflecting the Partnership’s efforts toincrease internal sales of lumber output through the wholesale marketingoperation.

 

Operating income from wholesale operations decreased 9.5% to $3.0million in the third quarter of 2002 from $3.3 million in the third quarter of2001. The decline in operating income was primarily a result of lower overallrevenues at our Eugene and Alliance operations and an overall increase inselling, general and administrative expense. These factors more than offset an increase in the gross profit margin to3.5% in the third quarter of 2002 from 3.1% in the third quarter of 2001.

 

During the second quarter of 2002, we reorganized our Eugeneoperation.  Headcount was reduced, thetrading function was moved to a new, smaller location, a long-standing salesand financial accommodation agreement with a regional lumber producer wasterminated, and the on-going operations were refocused to higher margin tradingopportunities.  We expect the operatingresults of this division to improve as a result of these actions.

 

During the third quarter of 2002, our Desert Lumber operation obtainedthe necessary license enabling it to commence operations in the sale andinstallation of insulation products offered to professional builders.

 

**Resultsof Operations**

**NineMonths Ended September 30, 2002 compared to Nine Months Ended September 30,2001**

 

**General**

Revenues during the nine months ended September 30, 2002 decreased19.4% to $377.9 million, from $468.9 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.

 

Cost of sales as a percentage of sales increased to 92.9% in the firstnine months of 2002, compared to 91.3% in the same period of 2001.  Included in cost of sales in the third quarter of 2002 is a $3.8 millioncharge for estimated losses on timber purchase contracts expiring or expectedto be harvested in 2003.  Exclusive ofthe $3.8 million charge, cost of sales as a percentage of sales for the firstnine months of 2002 would have been 91.9%.

 

20

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

 

Loss on disposal of assets in the first ninemonths of 2002 of $1.2 million reflects the write-off of obsolete or retiredassets.

 

Selling, general and administrative expenses decreased 12.4% to $24.3million (6.4% of revenues) in the first nine months of 2002, from $27.8 million(5.9% of revenues) in the same period of 2001. The decrease is primarilya result of lower salaries and wages and the cessation of goodwill amortizationupon adoption of SFAS No. 142 on January 1, 2002.  The lower salaries and wages reflect the sale and/or closure ofthree sawmills during the latter part of 2001 and other cost reductionsimplemented throughout the Partnership in late 2001.  These reductions were offset in part by a $387,000 increase toour allowance for bad debts.

 

Interest expense decreased 15.2% to $39.7million in the first nine months of 2002, from $46.8 million in the first ninemonths of 2001.  The decrease is aresult of lower average debt balances in the first nine months of 2002 comparedto the first nine months of 2001 as a result of the application of the salesproceeds from the sale of the Inland properties, partially offset by higherinterest rates.

 

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

 

Amortization of debt issuance costs increased $261,000 to $2.2 millionin the first nine months of 2002 compared to $1.9 million in the first ninemonths of 2001.  The increase is dueprimarily to $4.2 million of debt issuance costs incurred as a result of ourNovember 2001 bank facility amendment, which resulted in increased amortizationexpense during the first three months of 2002. As a result of the debt restructuring in April 2002, previously deferredfees of $5.5 million related to the senior notes were expensed and theamortization period for remaining deferred fees was prospectively extendeduntil December 2005, resulting in lower amortization expense for the second andthird quarters of 2002 as compared to the first quarter of 2002.  Amortizationof debt issuance costs for the nine months ended September 30, 2001 includes$1.1 million of fees for an amendment made to the Partnership’s working capitalbank facilities in April 2001.  Asof September 30, 2002, we had a total of $5.4 million of unamortized debtissuance costs, which will be amortized through December 31, 2005.

 

Other income, net typically includes interest incomeon notes receivable, rental income and other miscellaneous income.  For the nine months ended September 30,2001, other income includes a net gain of $2.4 million on the sale of assets.

 

The Partnership pays no significant income taxes and does not include aprovision for income taxes in its financial statements.

 

21

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**Timberlands**

Total external segment sales, includingproperty sales and stumpage sales, decreased 51.2% to $28.1 million, or 7.4% ofrevenue in the first nine months of 2002, compared to $57.5 million, or 12.3%of revenue in the first nine months of 2001. The decrease in external segment sales reflects a 51.8% decrease in logshipments, which was influenced by significantly lower stumpage sale activityand weather related production delays on the Hamilton tree farm and the absenceof any property sales in the first nine months of 2002, as well as the sale ofour Inland North and Inland South tree farms. The lower stumpage sales and fee harvest activity reflect our on-goingstrategy to focus our current fee timber production primarily for internal usewhile prices are soft.   The InlandSouth and Inland North sale gains were included in the corporate and othersegment results.

 

Internal sales of logs to manufacturing decreased 55.9% to $31.1million in the first nine months of 2002 from $70.6 million in the first ninemonths of 2001.  The decrease primarilyreflects the absence of three sawmills from the production mix during the 2002period compared to the 2001 period.

 

Overall operating income from timberlands, including property sales,decreased 73.4% to $4.1 million in the first nine months of 2002 from $15.3million in the first nine months of 2001, primarily as a result of $9.7 millionof property gains included in the first nine months of 2001 compared to none inthe first nine months of 2002.  Inaddition, sales volume decreased 51.8% in the first nine months of 2002compared to the first nine months of 2001. These declines were partially offset by a 30.5% increase in averagesales realizations and a 33.0% decrease in segment overhead expense.  The decrease in sales volume is primarilydue to the sale of our Inland tree farm and the utilization of a majority ofthe volume from our Oregon tree farm for internal use at our Gilchristsawmill.  The increase in average salesrealizations is primarily due to the effect of slightly higher lumber prices ondomestic log markets and a significant decrease in stumpage sales during thefirst nine months of 2002 compared to the first nine months of 2001.

 

***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 MBF):

 
|             |   | **Nine  Months Ended September 30,** |   |     |   |
|------------------|--------|--------------------------------------|--------|----------|--------|
| **Tree Farm**    |   | **2002**                             |   | **2001** |   | **% Change** |   |
| Oregon           |   | —                               |   | $        | 157    |   | — |   |
| Inland           |   | $                                    | 515    |     | $      | 428 |   | 20.3 | % |
| Hamilton         |   | $                                    | 470    |     | $      | 441 |   | 6.6 | % |
| Olympic          |   | $                                    | 381    |     | $      | 373 |   | 2.1 | % |
| Weighted average |   | $                                    | 432    |     | $      | 331 |   | 30.5 | % |

 

Increases at the Inland, Hamilton and Olympic tree farms were due tothe effect that slightly higher lumber prices had on domestic log markets aswell as the fact that there were significantly less stumpage sales in the firstnine months of 2002 compared to the first nine months of 2001.

 

All of the logs from the Oregon tree farm in 2002 have been utilized byour Gilchrist sawmill.

 

Domestic external log sales volumes from the various tree farmsdecreased51.8% in the first nine months of 2002 to 48.9 MMBF, compared to101.5 MMBF in the first nine months of 2001, primarily as a result ofsignificantly lower stumpage sales, the sale of our Inland tree farm, lowerHamilton fee harvest activity and the lack of external sales from our Oregontree farm.

 

22

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The external volume from each of our tree farms was as follows (inMBF):

 
|                |   | **Nine  Months Ended September 30,** |   |     |   |
|---------------------|--------|--------------------------------------|--------|----------|--------|
| **Tree Farm**       |   | **2002**                             |   | **2001** |   | **% Change** |   |
| Oregon tree farm    |   | —                               |   | 33,159   |   | — |   |
| Inland tree farm    |   | 7,863                                |   | 19,349   |   | (59.4 | )% |
| Hamilton tree  farm |   | 16,189                               |   | 28,788   |   | (43.8 | )% |
| Olympic tree  farm  |   | 24,853                               |   | 20,244   |   | 22.8 | % |
| Total               |   | 48,905                               |   | 101,540  |   | (51.8 | )% |

 

The increase at the Olympic tree farm was a result of advantageousharvest conditions in the first six months of 2002 and improved demand in thisregion.

 

The decrease at the Inland tree farm was due to the sale of this asset,in two separate transactions, in the first and second quarters of 2002.

 

The decrease at the Hamilton tree farm was primarily due to the impactof snow related production delays in the first quarter of 2002 compared to thefirst quarter of 2001 and decreased stumpage sale activity in the 2002 period.

 

All of the production from our Oregon tree farm is currently beingutilized by our Gilchrist operation.

 

***Export Log Sales***

Sales of logs to customers involved in exporting activities wereapproximately $3.0 million in the first nine months of 2002, compared to $1.4million in the first nine months of 2001. The average realization for export logs decreased 10.1% to $509/MBF inthe first nine months of 2002 compared to $566/MBF in the first nine months of2001.  Sales volumes of export logsincreased 133.3% to 6.0 MMBF in the first nine months of 2002 compared to 2.6MMBF in the first nine months of 2001. The increase in volume is primarily due to increased shipments from ourHamilton tree farm as a result of an increase in demand for Korean sort logs.The decrease in realization is primarily a result of a change in mix to lowergrade Korean sort logs during the first nine months of 2002 compared to thefirst nine months of 2001.

 

***Property Sales***

Except for the disposition of the Inland South and Inland North treefarms, we did not have any property sales in the first nine months of2002.  This compares to revenue andoperating income of $13.5 million and $9.7 million, respectively in the firstnine months of 2001.  There are noproperty sales planned in the fourth quarter of 2002.

 

**Manufacturing**

External revenues from the Partnership’s sawmills, excluding sales oflumber products through the wholesale marketing segment, were $77.4 million, or20.5% of sales in the first nine months of 2002, compared to $114.0 million, or24.3% of sales in the first nine months of 2001.  The decreased revenues reflect a 30.0% decrease in externallumber sales volume, a 40.5% decline in chip revenue and a 4.5% decrease inaverage external lumber sales realizations. The decrease in external sales volume is primarily due to the saleand/or closure of three sawmills during the third quarter of 2001, offset inpart by slight increases in production at our Gilchrist, Oregon and Washingtonsawmills.  The decrease in average salesrealizations is due to changes in mix, offset in part by moderately improvedmarket pricing on comparable species in the 2002 period compared to the 2001period.

 

23

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Operating loss from the manufacturing segment increased to a loss of$2.2 million in the first nine months of 2002 from a loss of $1.8 million inthe first nine months of 2001. The $2.2 million loss in the first nine monthsof 2002 includes a $3.8 million charge for estimated losses on timber purchase commitments through 2003and a $1.2 million loss related to the write-off of retired equipment.  Exclusive of the $3.8 million and $1.2million charges, we generated operating income of $2.7 million in the firstnine months of 2002.   The improvedoperating results, exclusive of the $3.8 million and $1.2 million charges, areprimarily a result of lower log costs and the absence of the Bonners Ferry,Coeur d’Alene and Prineville sawmills from the manufacturing segment in thefirst nine months of 2002 compared to the first nine months 2001.  The lower log costs are a result of theabsence of three sawmills that consumed primarily higher cost logs, togetherwith lower log costs at our Gilchrist operation during the first nine months2002 compared to the first nine months of 2001.

 

Average prices received for all lumber sales in the various regionswere as follows (dollars per MBF):

 
|             |   | **Nine  Months Ended September 30,** |   |     |   |
|------------------|--------|--------------------------------------|--------|----------|--------|
| **Region**       |   | **2002**                             |   | **2001** |   | **% Change** |   |
| Oregon           |   | $                                    | 295    |     | $      | 318 |   | (7.2 | )% |
| Inland           |   | —                               |   | $        | 309    |   | — |   |
| Washington       |   | $                                    | 280    |     | $      | 280 |   | — |   |
| Weighted average |   | $                                    | 288    |     | $      | 304 |   | (5.3 | )% |

 

The lower average sales realizations from the Oregon region primarilyreflect the absence of Prineville’s previous product output from the sales mixduring the 2002 period compared to the 2001 period.

 

Our Bonners Ferry and Coeur d’Alene sawmills, which were in the Inlandregion, were sold and closed in the second half of 2001, respectively, and,therefore, there is no activity during the 2002 period from that region.

 

External lumber sales volumes decreased 30.0% in the first nine monthsof 2002 to 230.9 MMBF compared to 329.8 MMBF in the same period of 2001.  External sales volumes from the variousregions were as follows (in MBF):

 
|       |   | **Nine  Months Ended September 30,** |   |     |   |
|------------|--------|--------------------------------------|--------|----------|--------|
| **Region** |   | **2002**                             |   | **2001** |   | **% Change** |   |
| Oregon     |   | 130,547                              |   | 128,048  |   | 2.0 | % |
| Inland     |   | —                               |   | 105,984  |   | — |   |
| Washington |   | 100,305                              |   | 95,765   |   | 4.7 | % |
| Total      |   | 230,852                              |   | 329,797  |   | (30.0 | )% |

 

The increased volume from the Oregon region reflects improved operatingefficiencies at our Gilchrist facility in the first nine months of 2002compared to the first nine months of 2001, which more than offset the absenceof the Prineville 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 excess roughgreen lumber from the Gilchrist facility. Given the results we experienced in the second quarter of 2002, we planto utilize the dry-end of the Prineville operation indefinitely.

 

24

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The increased volume from the Washington region reflects increasedproduction at both our Washington region sawmills.  During the first quarter of 2002, a dry kiln roof at ourMarysville sawmill was replaced and a new heat exchanger was installed at ourPort Angeles sawmill.  Theseimprovements contributed to the increased efficiency and production.

 

Revenues from all by-products accounted for 2.0% of revenue in thefirst nine months of 2002, compared to 2.8% of revenue in the first nine monthsof 2001.  Residual wood chip pricesdecreased to $60 per BDU in the first nine months of 2002 compared to $72 perBDU in the first nine months of 2001. The lower average realization reflectsthe impact of depressed pulp industry pricing as a result of high levels ofsupply.  Woodchip volume decreased 28.0%to 107,193 BDUs in the first nine months of 2002 compared to 148,896 BDUs inthe first nine months of 2001.  Thelower volume reflects the absence of the Inland region and Prineville sawmillsfrom the sales mix.  Excluding the effectof the Inland and Prineville sawmills, sales volume increased 20.3%, reflectingincreased volume from all of our existing operations.

 

**WholesaleMarketing**

Our wholesale marketing segment involves sales of lumber and other woodproducts, most of which were not manufactured by us.   Sales from the wholesale operations totaled $265.1 million, or70.1% of sales in the first nine months of 2002, compared to $296.6 million, or63.3% of sales in the first nine months of 2001.  Operating income from wholesale operations decreased 17.9% to$7.8 million in the first nine months of 2002 from $9.5 million in the firstnine months of 2001.  The decrease inrevenue reflects the impact of decreased volume from our Eugene operation anddecreased lumber and panel prices, offset in part by increased sales volume atour Alliance Lumber and Desert Lumber operations.

 

Sales volume of Partnership-produced lumber through the wholesalemarketing segment decreased 70.8% during the first nine months of 2002 comparedto the first nine months of 2001, due primarily to the absence of threesawmills in the mix during the 2002 period. Volume from comparable mills increased 16.3%, reflecting our successfulefforts to increase internal sales of Gilchrist lumber output through ourCheshire Lumber operations.

 

The decline in operating profit is primarily a result of increasedcompetition and low lumber and panel prices. Lower selling, general and administrative costs helped to offset theimpact of lower operating revenue.

 

**Item 3****.  Quantitative and QualitativeDisclosures About Market Risk**

 

Our only financial instruments with market risk exposure are ourvariable rate lines of bank credit.  AtSeptember 30, 2002, we had $143.3 million outstanding under our lines of creditwith a weighted average interest rate of 5.47%.  A hypothetical 10 percent increase in interest rates to 6.02%would not have a material effect on our results of operations or cash flows.

 

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.  The estimatedfair value of our long-term fixed interest rate debt at September 30, 2002 was$409.6 million, which is equal to its carrying value.  The effect of an immediate 10% change in interest rates would nothave a material impact on our future operating results or cash flows.  Fair values were determined from quotedmarket prices.

 

25

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**Item 4****.  Controlsand Procedures**

 

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****.  Exhibitsand Reports on Form 8–K**

 

**(a)****          Theexhibits filed as part of this report are listed below and this list isintended to serve as the exhibit index:**

99.1                           Certificationof Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2                         Certificationof Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

**(b)****          Reportson Form 8-K:**

There were no reports on Form 8-K filed during thequarter ended September 30, 2002.

 

26

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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:    November 12, 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) |

 

27

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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 includedin this 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 this quarterlyreport our conclusions about the effectiveness of the disclosure controls andprocedures based on our evaluation as of the Evaluation Date;

5.               The registrant’sother certifying officers 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: November 12, 2002

 

 
| /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 includedin this 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 officers 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: November 12, 2002

 

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

 

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