** **

**UNITEDSTATESSECURITIES 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, 2003**                                                                                                                        |
|                                                                                                                                                                          |
| **OR**                                                                                                                                                                        |
|                                                                                                                                                                          |
| **o**                                                                                                                                                                         | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                          |   |
| **For  the transition period from               to           ** |
|                                                                                                                                                                          |
| **Commission  file number 0-24976**                                                                                                                                           |

 

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| **CROWN  PACIFIC PARTNERS, L.P.**                                                 |
|-----------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                           |
|                                                                              |
| **Delaware**                                                                      |   | **93-1161833** |
| (State or other  jurisdiction of incorporation  or organization)                  |   | (I.R.S. Employer  Identification No.) |
|                                                                              |   |   |
| **805 SW Broadway, Suite 1500,  Portland, Oregon**                                |   | **97205-3339** |
| (Address of  principal executive offices)                                         |   | (Zip Code) |
|                                                                              |   |   |
| Registrant’s  telephone number, including area code:   **503-274-2300** |

 

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

 

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

 

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

 

| **Common Units** |   | **30,527,030**                     |
|------------------|--------|------------------------------------|
| (Class)          |   | (Outstanding at  November 7, 2003) |

 

 

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

**FORM 10-Q**

**INDEX**

 
| PART I – FINANCIAL INFORMATION |
|-------------------------------------|
|                                |   |
| Item 1.                             | Financial Statements (Unaudited) |
|                                |   |
|                                | Consolidated  Statements of Operations – Three and Nine Month Periods Ended September 30,  2003 and 2002 |
|                                |   |
|                                | Consolidated Balance Sheets  – September 30, 2003 and December 31, 2002 |
|                                |   |
|                                | Consolidated  Statements of Cash Flows – Nine Months Ended September 30, 2003 and 2002 |
|                                |   |
|                                | Notes to  Consolidated Financial Statements |
|                                |   |
| Item 2.                             | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |
|                                |   |
| Item 3.                             | Quantitative and Qualitative Disclosures About  Market Risk |
|                                |   |
| Item 4.                             | Controls and Procedures |
|                                |   |
| PART II – OTHER INFORMATION    |
|                                |   |
| Item 1.                             | Legal Proceedings |
|                                |   |
| Item 3.                             | Defaults Upon  Senior Securities |
|                                |   |
| Item 5.                             | Other Information |
|                                |   |
| Item 6.                             | Exhibits and  Reports on Form 8-K |
|                                |   |
| Signatures                          |

 

1

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**PART I****.  FINANCIALINFORMATION**

 

**Item 1****.  FinancialStatements**

 

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

**(Debtor-in-Posession)**

**ConsolidatedStatements of Operations**

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

**(Unaudited)**

 
|                                                                            |   | **For the Three Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------|--------|-----------------------------------------------|--------|
|                                                                            |   | **2003**                                      |   | **2002** |   |
|                                                                            |   |                                          |   |   |   |
| Revenues                                                                        |   | $                                             | 89,253 |   | $ | 86,261 |   |
|                                                                            |   |                                          |   |   |   |
| Operating  costs:                                                               |   |                                          |   |   |   |
| Cost  of products sold                                                          |   | 81,595                                        |   | 78,475 |   |
| Loss  on timber purchase commitments                                            |   | 5,651                                         |   | 3,757 |   |
| Loss  on disposal of assets                                                     |   | 19                                            |   | 1,174 |   |
| Selling,  general and administrative expenses                                   |   | 6,012                                         |   | 6,962 |   |
|                                                                            |   |                                          |   |   |   |
| Operating  loss                                                                 |   | (4,024                                        | )      | (4,107 | ) |
|                                                                            |   |                                          |   |   |   |
| Interest  expense (excluding contractual interest expense of $11,710 and $0)    |   | 254                                           |   | 12,482 |   |
| Amortization  of debt issuance costs                                            |   | 468                                           |   | 499 |   |
| Other  (income) expense, net                                                    |   | (111                                          | )      | 22 |   |
|                                                                            |   |                                          |   |   |   |
| Loss  from continuing operations before reorganization items                    |   | (4,635                                        | )      | (17,110 | ) |
|                                                                            |   |                                          |   |   |   |
| Reorganization  items:                                                          |   |                                          |   |   |   |
| Professional  fees                                                              |   | (1,720                                        | )      | — |   |
| Other                                                                           |   | (264                                          | )      | — |   |
|                                                                            |   | (1,984                                        | )      | — |   |
|                                                                            |   |                                          |   |   |   |
| Loss  before discontinued operations                                            |   | (6,619                                        | )      | (17,110 | ) |
|                                                                            |   |                                          |   |   |   |
| Income  (loss) from discontinued operations                                     |   | (33                                           | )      | 366 |   |
|                                                                            |   |                                          |   |   |   |
| Net  loss                                                                       |   | $                                             | (6,652 | ) | $ | (16,744 | ) |
|                                                                            |   |                                          |   |   |   |
| Basic  and diluted loss per limited partner unit before discontinued operations |   | $                                             | (0.10  | ) | $ | (0.55 | ) |
|                                                                            |   |                                          |   |   |   |
| Basic  and diluted income per limited partner unit from discontinued operations |   | $                                             | — |   | $ | 0.01 |   |
|                                                                            |   |                                          |   |   |   |
| Basic  and diluted net loss per limited partner unit                            |   | $                                             | (0.10  | ) | $ | (0.54 | ) |
|                                                                            |   |                                          |   |   |   |
| Weighted  average limited partner units outstanding                             |   | 30,527,030                                    |   | 30,527,030 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

2

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|                                                                                    |   | **For the Nine Months Ended  September 30,** |    |
|-----------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                                    |   | **2003**                                     |    | **2002** |   |
|                                                                                    |   |                                         |    |   |   |
| Revenues                                                                                |   | $                                            | 241,864 |   | $ | 245,319 |   |
|                                                                                    |   |                                         |    |   |   |
| Operating  costs:                                                                       |   |                                         |    |   |   |
| Cost  of products sold                                                                  |   | 221,600                                      |    | 220,169 |   |
| Loss  on timber purchase commitments                                                    |   | 6,064                                        |    | 3,757 |   |
| Gain  on sale of assets held for sale                                                   |   | —                                       |    | (7,449 | ) |
| Loss  on disposition of assets                                                          |   | 803                                          |    | 1,174 |   |
| Selling,  general and administrative expenses                                           |   | 18,957                                       |    | 20,082 |   |
| Debt  restructuring negotiation costs                                                   |   | 4,860                                        |    | — |   |
|                                                                                    |   |                                         |    |   |   |
| Operating  income (loss)                                                                |   | (10,420                                      | )       | 7,586 |   |
|                                                                                    |   |                                         |    |   |   |
| Interest  expense (excluding contractual interest expense of $11,710 and $0)            |   | 24,274                                       |    | 39,703 |   |
| Debt  restructuring and redemption premium                                              |   | —                                       |    | 14,133 |   |
| Amortization  of debt issuance costs                                                    |   | 1,531                                        |    | 2,189 |   |
| Other  income, net                                                                      |   | (216                                         | )       | (433 | ) |
|                                                                                    |   |                                         |    |   |   |
| Loss  from continuing operations before reorganization items                            |   | (36,009                                      | )       | (48,006 | ) |
|                                                                                    |   |                                         |    |   |   |
| Reorganization  items:                                                                  |   |                                         |    |   |   |
| Professional  fees                                                                      |   | (1,720                                       | )       | — |   |
| Valuation  adjustment on debt issuance costs                                            |   | (218                                         | )       | — |   |
| Other                                                                                   |   | (264                                         | )       | — |   |
|                                                                                    |   | (2,202                                       | )       | — |   |
|                                                                                    |   |                                         |    |   |   |
| Loss  before discontinued operations                                                    |   | (38,211                                      | )       | (48,006 | ) |
|                                                                                    |   |                                         |    |   |   |
| Income  (loss) from discontinued operations                                             |   | (5,859                                       | )       | 1,151 |   |
|                                                                                    |   |                                         |    |   |   |
| Net  loss                                                                               |   | $                                            | (44,070 | ) | $ | (46,855 | ) |
|                                                                                    |   |                                         |    |   |   |
| Basic  and diluted loss per limited partner unit before discontinued operations         |   | $                                            | (1.09   | ) | $ | (1.56 | ) |
|                                                                                    |   |                                         |    |   |   |
| Basic  and diluted income (loss) per limited partner unit from discontinued  operations |   | $                                            | (0.19   | ) | $ | 0.04 |   |
|                                                                                    |   |                                         |    |   |   |
| Basic  and diluted net loss per limited partner unit                                    |   | $                                            | (1.28   | ) | $ | (1.52 | ) |
|                                                                                    |   |                                         |    |   |   |
| Weighted  average limited partner units outstanding                                     |   | 30,527,030                                   |    | 30,527,030 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

3

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

**(Debtor-in-Possession)**

**ConsolidatedBalance Sheets**

**(Inthousands, except unit data)**

**(Unaudited)**

 
|                                                                                          |   | **September 30,  2003** |       | **December 31,  2002** |       |
|-----------------------------------------------------------------------------------------------|--------|-------------------------|------------|------------------------|------------|
| **Assets**                                                                                    |   |                    |       |                   |       |
| Current  assets:                                                                              |   |                    | ** ** |                   | ** ** |
| Cash  and cash equivalents                                                                    |   | $                       | 8,808      |                   | $          | 12,993 |   |
| Accounts  receivable, net of allowance of $1,903 and $1,655                                   |   | 41,255                  |       | 39,833                 |       |
| Notes  receivable                                                                             |   | 2,339                   |       | 2,540                  |       |
| Inventories                                                                                   |   | 24,082                  |       | 33,385                 |       |
| Deposits  on timber cutting contracts                                                         |   | 1,293                   |       | 1,135                  |       |
| Prepaid  and other current assets                                                             |   | 11,660                  |       | 4,053                  |       |
|                                                                                          |   |                    |       |                   |       |
| Total  current assets                                                                         |   | 89,437                  |       | 93,939                 |       |
| Property,  plant and equipment, net of accumulated depreciation of $46,201 and $42,609        |   | 45,731                  |       | 53,484                 |       |
| Timber,  timberlands and roads, net                                                           |   | 403,000                 |       | 413,987                |       |
| Goodwill                                                                                      |   | 28,770                  |       | 34,272                 |       |
| Other  assets                                                                                 |   | 14,227                  |       | 17,283                 |       |
|                                                                                          |   |                    |       |                   |       |
| Total  assets                                                                                 |   | $                       | 581,165    |                   | $          | 612,965 |   |
|                                                                                          |   |                    |       |                   |       |
| **Liabilities  and Partners’ Capital**                                                   |   |                    |       |                   |       |
|                                                                                          |   |                    |       |                   |       |
| Liabilities  not subject to compromise:                                                       |   |                    |       |                   |       |
| Current  liabilities:                                                                         |   |                    |       |                   |       |
| Revolving  credit facility                                                                    |   | $                       | 20,456     |                   | $          | 26,000 |   |
| Accounts  payable                                                                             |   | 7,695                   |       | 10,766                 |       |
| Accrued  expenses                                                                             |   | 9,940                   |       | 7,886                  |       |
| Accrued  interest                                                                             |   | —                  |       | 7,798                  |       |
| Current  portion of long-term debt                                                            |   | 9                       |       | 10,009                 |       |
|                                                                                          |   |                    |       |                   |       |
| Total  current liabilities                                                                    |   | 38,100                  |       | 62,459                 |       |
| Long-term  debt                                                                               |   | 90                      |       | 503,181                |       |
| Other  non-current liabilities                                                                |   | 270                     |       | 9,170                  |       |
| Liabilities  subject to compromise                                                            |   | 547,551                 |       | —                 |       |
|                                                                                          |   |                    |       |                   |       |
| Total  liabilities                                                                            |   | 586,011                 |       | 574,810                |       |
|                                                                                          |   |                    |       |                   |       |
| Partners’  capital:                                                                      |   |                    |       |                   |       |
| General  partners                                                                             |   | (4,846                  | )          | (906                   | )          |
| Limited  partners (30,527,030 units outstanding at September 30, 2003 and December 31,  2002) |   | —                  |       | 39,061                 |       |
| Total  partners’ capital                                                                 |   | (4,846                  | )          | 38,155                 |       |
|                                                                                          |   |                    |       |                   |       |
| Total  liabilities and partners’ capital                                                 |   | $                       | 581,165    |                   | $          | 612,965 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

4

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

**(Debtor-in-Possession)**

**ConsolidatedStatements of Cash Flows**

**(Inthousands)**

**(Unaudited)**

 
|                                                                                    |   | **For the Nine Months Ended  September 30,** |    |
|-----------------------------------------------------------------------------------------|--------|----------------------------------------------|---------|
|                                                                                    |   | **2003**                                     |    | **2002** |   |
|                                                                                    |   |                                         |    |   |   |
| Cash  flows from operating activities:                                                  |   |                                         |    |   |   |
| Net  loss                                                                               |   | $                                            | (44,070 | ) | $ | (46,855 | ) |
| Adjustments  to reconcile net loss to net cash provided (used) by operating activities: |   |                                         |    |   |   |
| Depletion,  depreciation and amortization                                               |   | 17,021                                       |    | 24,214 |   |
| Reorganization  related valuation adjustment on debt issuance costs                     |   | 218                                          |    | — |   |
| Redemption  premium and write off of deferred charges                                   |   | —                                       |    | 9,967 |   |
| Deferred  interest                                                                      |   | 2,402                                        |    | 2,030 |   |
| Loss  on timber purchase commitments                                                    |   | 6,064                                        |    | 3,757 |   |
| Impairment  of goodwill                                                                 |   | 5,502                                        |    | — |   |
| (Gain)  loss on disposal of assets                                                      |   | 799                                          |    | (6,385 | ) |
| Net  change in current assets and current liabilities:                                  |   |                                         |    |   |   |
| Accounts  and notes receivable                                                          |   | 199                                          |    | 16,123 |   |
| Inventories                                                                             |   | 4,838                                        |    | (1,091 | ) |
| Deposits  on timber cutting contracts                                                   |   | (158                                         | )       | (467 | ) |
| Prepaid  and other current assets                                                       |   | (7,910                                       | )       | (2,604 | ) |
| Accounts  payable and accrued expenses                                                  |   | 15,472                                       |    | (15,021 | ) |
| Net  cash provided (used) by operating activities                                       |   | 377                                          |    | (16,332 | ) |
|                                                                                    |   |                                         |    |   |   |
| Cash  flows from investing activities:                                                  |   |                                         |    |   |   |
| Additions  to timberlands                                                               |   | (4,178                                       | )       | (5,254 | ) |
| Additions  to timber cutting rights                                                     |   | (650                                         | )       | (476 | ) |
| Additions  to equipment                                                                 |   | (1,176                                       | )       | (2,812 | ) |
| Proceeds  from sales of assets                                                          |   | 7,157                                        |    | 186,180 |   |
| Principal  payments received on notes                                                   |   | 67                                           |    | 3,237 |   |
| Other  investing activities                                                             |   | —                                       |    | (15 | ) |
| Net  cash provided by investing activities                                              |   | 1,220                                        |    | 180,860 |   |
|                                                                                    |   |                                         |    |   |   |
| Cash  flows from financing activities:                                                  |   |                                         |    |   |   |
| Net  increase (decrease) in short-term borrowings                                       |   | (5,544                                       | )       | 3,000 |   |
| Proceeds  from issuance of long-term debt                                               |   | —                                       |    | 156 |   |
| Repayments  of long-term debt                                                           |   | (60                                          | )       | (154,477 | ) |
| Change  in restricted cash                                                              |   | —                                       |    | (15,337 | ) |
| Other  financing activities                                                             |   | (178                                         | )       | (4,765 | ) |
| Net  cash used by financing activities                                                  |   | (5,782                                       | )       | (171,423 | ) |
|                                                                                    |   |                                         |    |   |   |
| Net  decrease in cash and cash equivalents                                              |   | (4,185                                       | )       | (6,895 | ) |
| Cash  and cash equivalents at beginning of period                                       |   | 12,993                                       |    | 9,219 |   |
|                                                                                    |   |                                         |    |   |   |
| Cash  and cash equivalents at end of period                                             |   | $                                            | 8,808   |   | $ | 2,324 |   |
|                                                                                    |   |                                         |    |   |   |
| Supplemental  Cash Flow Information:                                                    |   |                                         |    |   |   |
| Cash  paid for reorganization items                                                     |   | $                                            | 644     |   | $ | — |   |
| Cash  paid for interest                                                                 |   | $                                            | 8,627   |   | $ | 36,817 |   |

 

See accompanyingNotes to Consolidated Financial Statements.

 

5

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

**(Debtor-in-Possession)**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

 

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

 

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, selling and distribution of lumber and other woodproducts.

 

Duringthe second quarter of 2003, the Partnership was unable to meet the financialcovenants and scheduled interest payments pursuant to its bank loan and seniornote agreements. In addition, the Partnership was unable to successfullynegotiate a recapitalization with its bank lenders and senior noteholders.  Accordingly, on June 29, 2003,the Partnership and all but one of its subsidiaries each filed voluntarypetitions for relief under chapter 11 of title 11 of the United States Code(the “Bankruptcy Code”) in the United States Bankruptcy Court for the Districtof Arizona in Phoenix, Arizona (the “Bankruptcy Court”), case numbers03-11258-PHX-RJH through 03-11263-PHX-RJH. These cases are jointly administered under case number03-11258-PHX-RJH.  The Partnership andits subsidiaries currently manage their properties and operate their businessesas “debtors-in-possession” under the jurisdiction of the Bankruptcy Court andin accordance with the applicable provisions of the Bankruptcy Code.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Partnership will continue as a going concern, which assumes continuity ofoperations and realization of assets and satisfaction of liabilities in theordinary course of business and in accordance with Statement of Position 90-7(“SOP 90-7”), “Financial Reporting by Entities in Reorganization Under theBankruptcy Code.” As a result of the chapter 11 filing, there is no assurancethat the carrying amounts of assets will be realized or that the liabilitieswill be settled for the amounts recorded. The Partnership has experienced net losses in each of the last twelvefiscal quarters.  The consolidatedfinancial statements do not reflect any adjustments that might result shouldthe Partnership be unable to continue as a going concern.

 

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” long-lived assets to be heldand used are accounted for at their historical cost, unless they are determinedto be impaired.  An impairment loss isrecognized “only if the carrying amount of a long-lived asset is notrecoverable from its undiscounted cash flows...” The Partnership’s property, plant and equipment and timber, timberlandsand roads are all considered to be long-lived assets to be held and used withinthe meaning of SFAS No. 144. Accordingly, such assets are carried at their historical cost, becausethe carrying amount of such assets does not exceed the estimated undiscountedcash flows from such assets.  Given theuncertainties of the chapter 11 process, there can be no assurances that thePartnership, despite its best efforts, will continue to operate these long-livedassets and classify them as held and used and that the carrying amounts ofthese assets will be fully realized.

 

Aspart of the Partnership’s bankruptcy proceedings, the Bankruptcy Court approveda debtor-in-possession financing agreement (“DIP Revolver”) in the amount of$40 million that the Partnership has arranged with The CIT Group/BusinessCredit, Inc.  During thereorganization process, vendors who deliver goods and provide services to thePartnership receive priority payment protection under the bankruptcy law forsuch obligations.  Obligations thatarose prior to June 29, 2003 are included on the accompanying consolidatedbalance sheet as liabilities subject to compromise.  See also Notes 2, 4 and 5.

 

The financial statementsincluded in this Form 10-Q are unaudited and reflect the consolidated financialposition, results of operations and cash flows of the Partnership.  These financial statements include all theaccounts of the Partnership but do not contain all of the information requiredby generally accepted accounting

 

6

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principles to be includedin a full set of financial statements. The financial statements in this Form 10-Q should be read in conjunctionwith the financial statements in the Partnership’s 2002 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, 2003 and2002 have been included.  Allsignificant intercompany transactions have been eliminated.  The results of operations for any interimperiod are not necessarily indicative of the results of operations for theentire year.  Separate condensedcombined financial statements for the entities under chapter 11 protection arenot presented because they are not significantly different from theconsolidated financial statements.

 

**Note 2: Chapter 11 Bankruptcy Reorganization**

 

Duringthe third quarter of 2003, the following occurred under the jurisdiction of theBankruptcy Court:

 

•                  The Bankruptcy Court approved the DIP Revolver (see Note 4).

•                  An unsecured creditors committee wasformed.

•                  Certain of the acquisition facilitycreditors filed a motion for lift of the automatic stay and to proceed with theforeclosure process on collateral.  Ahearing date is set for December 2, 2003 on this issue.

 

Although the Partnership has filed forchapter 11 bankruptcy protection, it continues to actively pursue arecapitalization plan.  Anyrecapitalization plan will be subject to approval by the Bankruptcy Court andmay involve the disposition of certain Partnership assets.  The creditors on the acquisition facilityand senior notes assert that their debt is secured by the Partnership’stimberlands and certain real property and equipment associated with itsmanufacturing segment. The remaining liabilities subject to compromise aregenerally unsecured.  While thePartnership is under bankruptcy protection, any scheduled interest or principalpayments are deferred and creditors are generally prohibited from pursuingcollection of their pre-petition claims by the automatic stay provisions of theBankruptcy Code.  In accordance withSOP 90-7, the Partnership discontinued accruing interest on its term debteffective June 30, 2003, because it is not probable it will be paid during thebankruptcy proceedings or be an allowed claim. An additional $11.7 million of interest expense would have beenrecognized to date if not for the chapter 11 bankruptcy petition.  See also Note 5.

 

**Note 3: Inventories**

 

All inventories arestated at the lower of average cost or market. Inventories consisted of the following (in thousands):

 
|                              |   | **September  30,  2003** |   | **December  31,  2002** |   |
|-----------------------------------|--------|--------------------------|--------|-------------------------|--------|
| Lumber                            |   | $                        | 3,914  |                    | $      | 5,079 |   |
| Logs                              |   | 1,966                    |   | 2,355                   |   |
| Supplies                          |   | 3,297                    |   | 3,455                   |   |
| Total manufacturing inventory     |   | 9,177                    |   | 10,889                  |   |
| Alliance lumber products          |   | 14,905                   |   | 17,388                  |   |
| Trading and distribution products |   | —                   |   | 5,108                   |   |
| Total                             |   | $                        | 24,082 |                    | $      | 33,385 |   |

 

**Note 4: Debtor-in-Possession Credit Facility**

 

OnJuly 1, 2003, the Bankruptcy Court entered an interim financing order and onJuly 17, 2003 the Bankruptcy Court entered a final financing orderapproving the $40 million DIP Revolver (see also Notes 1 and 2).    On July 3, 2003, the Partnership borrowed$19.8 million on the DIP Revolver in order to pay in full the balanceoutstanding on its pre-existing revolving credit facility and all relatedaccrued interest and fees.  Thepre-existing revolving credit facility was then terminated.

 

The $40 million limit issubject to a borrowing base and is reduced to $20 million should thePartnership dispose of its Alliance Lumber segment.  The DIP Revolver is collateralized by accounts receivable,inventory

 

7

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and any personal propertythat was not subject to a pre-existing lien. The DIP Revolver bears interest at either (a) the Chase Bank Prime Rateplus 0.5% or (b) LIBOR plus 3%, at the option of the Partnership.  Any LIBOR loans are made for fixed one, twoor three month terms.  The DIP Revolverterminates on January 1, 2005 or upon the effective date of a Bankruptcy Courtapproved plan of reorganization and contains certain covenants andrestrictions.  As of September 30, 2003,the Partnership was in compliance with the covenants, there was $20.5 millionoutstanding at an interest rate of 4.5% and approximately $18.1 millionremained available on the DIP Revolver.

 

**Note 5: Liabilities Subject to Compromise**

 

As discussed above, on June 29, 2003, thePartnership and its subsidiaries filed for chapter 11 bankruptcyprotection.  Pursuant to the bankruptcyproceedings, the Partnership has classified certain liabilities which existedprior to the June 29, 2003 bankruptcy petition filing as liabilities subject tocompromise in accordance with SOP 90-7. Disposition of such liabilities is under the jurisdiction of theBankruptcy Court.

 

The following table summarizes thepre-petition liabilities that are included as liabilities subject to compromiseon the accompanying consolidated balance sheet (in thousands):

 
|                           |   | **September  30,  2003** |    |
|--------------------------------|--------|--------------------------|---------|
| Acquisition facility principal |   | $                        | 112,372 |   |
| Senior notes principal         |   | 400,658                  |    |
| Accounts payable               |   | 1,377                    |    |
| Accrued interest               |   | 21,039                   |    |
| Deferred enhanced interest     |   | 4,927                    |    |
| Make whole fees and interest   |   | 6,360                    |    |
| Other accrued expenses         |   | 818                      |    |
| Total                          |   | $                        | 547,551 |   |

 

See Note 2 also.

 

**Note 6: Partners’ Capital and Income(Loss) Per Unit**

 

The partnership agreementfor the Partnership provides that profit and losses are generally allocated 1%to the General Partner interest and 99% to the Limited Partner interest.  In addition, the partnership agreementspecifies that net losses are not allocated to limited partners to the extentdoing so would result in (or increase) a deficit balance in their capitalaccounts. At that point, net losses are allocated 100% to the GeneralPartners.  In the third quarter of 2003,the Limited Partners’ capital accounts were reduced to zero, and subsequentlosses have been allocated 100% to the General Partners. Accordingly, theGeneral Partner interest was allocated an additional $3.5 million of lossesduring the three and nine months ended September 30, 2003.

 

Net loss per unit wascalculated using the weighted average number of limited partner unitsoutstanding divided into net loss, after adjusting for the General Partnerallocation.** **There is nodifference between basic and diluted earnings per unit.

 

**Note 7: Loss on Timber Purchase Commitments**

 

During the three and ninemonth periods ended September 30, 2003, the Partnership recognized non-cashlosses on purchase commitments with the U.S. Forest Service and private timberdeeds of $5.7 million and $6.1 million, respectively, which represent theestimated probable losses to be recognized on these contracts through  the completion date, or the estimatedharvest dates, for these contracts.  ThePartnership entered into these contracts several years ago to ensure anadequate log supply for its Gilchrist and Prineville sawmills.  Market pricing for the lumber output fromthese commitments has declined significantly since the commitments weremade.  Non-cash losses recognized ontimber purchase commitments totaled $3.8 million for both the three and ninemonth periods ended September 30, 2002.

 

8

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**Note 8: Property Sales**

 

On March 29, 2002, thePartnership closed the sale of its Inland South tree farm to PatriotInvestments, LLC for $132.4 million. The Partnership recognized a gain on this sale of $6.0 million.  On April 30, 2002, the Partnership closedthe sale of its Inland North tree farm to Patriot Investments, LLC for $53.9million.  The Partnership recognized again on this sale of $1.4 million.  Netproceeds from these two property sales were used to reduce outstanding debt.

 

**Note 9: Debt RestructuringNegotiation Costs and Reorganization Items**

 

Inconjunction with unsuccessful negotiations to restructure the Partnership’sdebt and activities conducted prior to the Partnership’s bankruptcy petitionfiled on June 29, 2003, the Partnership expensed $4.9 million in professionalfees during the second quarter of 2003. In addition, on June 30, 2003, the Partnership wrote-off $218,000 ofdeferred debt issuance costs related to its revolving credit facility, whichwas terminated as a result of the chapter 11 filing (see Note 4).  This write-off has been classifiedseparately on the consolidated statement of operations in accordance with SOP90-7.  In the third quarter of 2003, thePartnership continued to incur professional and other fees related to itsreorganization activities, totaling approximately $2.0 million.

 

**Note 10: Debt Restructuring andRedemption Premium**

 

In April 2002, thePartnership reached a global debt restructuring agreement with its banks andnote holders and incurred a charge of $14.1 million of which $10.0 million wasnon-cash in nature. The Partnership incurred a total of $8.7 million in feesand costs in connection with the April 2002 debt restructuring, $4.2 million ofwhich was included in the $14.1 million loss recognized in the second quarterof 2002 in accordance with the provisions outlined in Emerging Issues TaskForce Issue No. 96-19 “Debtor’s Accounting for a Modification or Exchange ofDebt Instruments” (“EITF 96-19”). In addition, the Partnership expensed $5.5million of previously deferred fees and expenses and a $4.5 million redemptionpremium. The redemption premium was incurred when the Partnership prepaid aportion of its senior notes in advance of their scheduled maturity. Payment ofthe redemption premium, according to the terms of the senior noterestructuring, is deferred until December 31, 2005.  The redemption premium is included in liabilities subject tocompromise on the accompanying consolidated balance sheet as of September 30,2003.

 

**Note 11: Discontinued Operations -Disposition of Trading and Distribution Segment**

 

In April and May 2003, in two separate transactions, thePartnership sold the inventory and fixed assets related to its Trading andDistribution segment and discontinued the segment’s operations.  The purchasers of these assets assumed theoperating leases, accounts payable and accrued expenses related to thesebusinesses.  The Partnership received atotal of $4.5 million from these asset sales, all of which was immediatelyapplied to outstanding principal on the pre-existing revolving creditfacility.  These assets were sold atapproximately their book value, resulting in a $4,000 gain in the secondquarter of 2003.  The Partnershipretained its accounts receivable related to these operations, which totaled$5.8 million as of the disposition dates. All these accounts receivable were either collected or fully reserved asof September 30, 2003. The results of operations of the Trading andDistribution segment are reflected as discontinued operations on theaccompanying consolidated statements of operations for all periods presented inaccordance with SFAS No. 144.  Revenuesfrom this segment were zero and $34.7 million for the three months endedSeptember 30, 2003 and 2002, respectively. Revenues from this segment were $34.1 million and $132.6 million for thenine months ended September 30, 2003 and 2002, respectively.

 

DuringMarch 2003, deterioration of the Partnership’s trade credit availability beganto adversely affect operating margins in the Trading and Distributionsegment.  Pursuant to the provisions ofSFAS No. 142 “Goodwill and Other Intangible Assets,” the Partnership evaluatedthe goodwill balance of this segment for impairment following the change incircumstances during the first quarter of 2003, utilizing a fair value analysisof the business in the current market environment.  Based on the results of this evaluation, the Partnership

 

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determinedthat its goodwill was impaired and recorded a non-cash impairment chargeof $5.5 million in the first quarter of 2003. This $5.5 million charge is included in discontinued operations for thenine months ended September 30, 2003.

 

**Note 12: Unit-Based Compensation**

 

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

 
|                                                                                                           |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|----------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                                                                           |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
| Net loss, as reported                                                                                          |   | $                                     | (6,652 | )                                    | $      | (16,744 | ) | $ | (44,070 | ) | $ | (46,855 | ) |
| Deduct - unit-based employee compensation expense  determined under the fair value based method for all awards |   | (8                                    | )      | (22                                  | )      | (24 | ) | (66 | ) |
| Net loss, pro forma                                                                                            |   | $                                     | (6,660 | )                                    | $      | (16,766 | ) | $ | (44,094 | ) | $ | (46,921 | ) |
| Basic and diluted net loss per unit:                                                                           |   |                                  |   |                                 |   |   |   |   |   |
| As reported                                                                                                    |   | $                                     | (0.10  | )                                    | $      | (0.54 | ) | $ | (1.28 | ) | $ | (1.52 | ) |
| Pro forma                                                                                                      |   | $                                     | (0.10  | )                                    | $      | (0.54 | ) | $ | (1.28 | ) | $ | (1.52 | ) |

 

There were no unitoptions granted in the first nine months of 2003 or 2002.

 

**Note 13: Segment Reporting**

 

Prior to January 1,2003, the Partnership reported the activities of the Trading and Distributionsegment and the Alliance Lumber segment on a combined basis as a singleWholesale Marketing segment.  Thesebusinesses were separated into two reporting segments at the beginning of 2003to reflect that the Partnership began managing these segments as separatebusinesses. The 2002 periods have been conformed in the following tables to thecurrent year presentation for segments. The Partnership classifies its business into three fundamental areas forpurposes of providing segment information: 1) Timberlands, consisting of theoperation of tree farms and the harvest and sale of logs to the Partnership’smanufacturing facilities and to third parties, and the sale of timber andtimberlands to third parties; 2) Manufacturing, consisting of the manufactureof logs into dimension lumber and the sale of residual chips and otherby-products to pulp and paper mills; and 3) Alliance Lumber, consisting of thedistribution and supply of building products through the Partnership’sprofessional contractor service yards. As discussed in Note 11 above, the Partnership disposed of its Tradingand Distribution segment during the second quarter of 2003.  The Trading and Distribution segmentconsisted of the wholesale trading, marketing and distribution of lumber andpanel products. 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 gain relatedto the sale of the Inland Tree Farm in 2002. The Partnership does not showassets by segment, as historic costs are not used by management to allocateresources or assess performance.

 

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

 
|                 |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|----------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
| **Revenues**         |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
| Timberlands:         |   |                                 |   |                                |   |   |   |   |   |
| Trade                |   | $                                    | 5,725  |                                | $      | 8,226 |   | $ | 16,942 |   | $ | 28,055 |   |
| Intersegment         |   | 7,850                                |   | 10,934                              |   | 23,651 |   | 31,114 |   |
|                 |   | 13,575                               |   | 19,160                              |   | 40,593 |   | 59,169 |   |
| Manufacturing:       |   |                                 |   |                                |   |   |   |   |   |
| Trade                |   | 23,462                               |   | 26,332                              |   | 62,049 |   | 77,392 |   |
| Intersegment         |   | 755                                  |   | 1,026                               |   | 2,827 |   | 3,224 |   |
|                 |   | 24,217                               |   | 27,358                              |   | 64,876 |   | 80,616 |   |
| Alliance Lumber:     |   |                                 |   |                                |   |   |   |   |   |
| Trade                |   | 57,811                               |   | 49,237                              |   | 156,344 |   | 132,503 |   |
| Intersegment         |   | —                               |   | —                              |   | — |   | — |   |
|                 |   | 57,811                               |   | 49,237                              |   | 156,344 |   | 132,503 |   |
| Corporate and Other: |   |                                 |   |                                |   |   |   |   |   |
| Trade                |   | 2,255                                |   | 2,466                               |   | 6,529 |   | 7,369 |   |
| Intersegment         |   | —                               |   | 114                                 |   | 76 |   | 309 |   |
|                 |   | 2,255                                |   | 2,580                               |   | 6,605 |   | 7,678 |   |
| Total:               |   |                                 |   |                                |   |   |   |   |   |
| Total Revenue        |   | 97,858                               |   | 98,335                              |   | 268,418 |   | 279,966 |   |
| Less Intersegment    |   | (8,605                               | )      | (12,074                             | )      | (26,554 | ) | (34,647 | ) |
| Net Revenue          |   | $                                    | 89,253 |                                | $      | 86,261 |   | $ | 241,864 |   | $ | 245,319 |   |

 
|                                       |   | **Three Months Ended September 30,** |   | **Nine Months Ended September 30,** |   |
|--------------------------------------------|--------|--------------------------------------|--------|-------------------------------------|--------|
| **Operating income (loss)**                |   | **2003**                             |   | **2002**                            |   | **2003** |   | **2002** |   |
| Timberlands                                |   | $                                    | 392    |                                | $      | 1,188 |   | $ | 1,445 |   | $ | 4,071 |   |
| Manufacturing                              |   | (2,599                               | )      | (4,870                              | )      | (3,781 | ) | (2,194 | ) |
| Alliance Lumber                            |   | 149                                  |   | 2,641                               |   | 4,898 |   | 6,677 |   |
| Corporate and Other                        |   | (1,966                               | )      | (3,066                              | )      | (12,982 | ) | (968 | ) |
| Operating Income (Loss)                    |   | (4,024                               | )      | (4,107                              | )      | (10,420 | ) | 7,586 |   |
| Interest Expense                           |   | (254                                 | )      | (12,482                             | )      | (24,274 | ) | (39,703 | ) |
| Debt restructuring and  redemption premium |   | —                               |   | —                              |   | — |   | (14,133 | ) |
| Other                                      |   | (357                                 | )      | (521                                | )      | (1,315 | ) | (1,756 | ) |
| Reorganization expenses                    |   | (1,984                               | )      | —                              |   | (2,202 | ) | — |   |
| Net loss from continuing  operations       |   | $                                    | (6,619 | )                                   | $      | (17,110 | ) | $ | (38,211 | ) | $ | (48,006 | ) |

 

**Note 14: New Accounting Pronouncements**

 

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

 

In July 2002, the FASB issued SFAS No.146, “Accounting for Costs Associated with Exit or Disposal Activities.”  SFAS No. 146 addresses the financialaccounting and reporting for obligations associated with an exit activity, includingrestructuring.  Exit activities include,but are not limited to, eliminating or reducing product lines, terminatingemployees and contracts and relocating plant facilities or personnel.  SFAS No. 146 specifies that a company willrecord a liability for a cost associated with an exit or disposal activity onlywhen that liability is incurred and can be measured at fair value.  Therefore, commitment to an exit plan or aplan of disposal expresses only management’s intended future actions and,therefore, does not meet the requirement for recognizing a liability and therelated expense.  SFAS No. 146 iseffective prospectively for exit or disposal activities initiated afterDecember 31, 2002, with earlier adoption encouraged.  The adoption of SFAS No. 146

 

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in the nine months ended September 30,2003 did not have any effect on the Partnership’s financial position, resultsof operations or cash flows.

 

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

 

In January 2003, the FASB issuedInterpretation No. 46 (FIN 46), “Consolidation of Variable InterestEntities.” FIN 46 clarifies the application of Accounting Research BulletinNo. 51, “Consolidated Financial Statements,” to certain entities in whichequity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. FIN 46 applies immediately to variable interest entities (VIE’s)created after January 31, 2003, and to VIE’s in which an enterpriseobtains an interest after that date. It applies in the first fiscal year orinterim period ending after December 15, 2003, to VIE’s in which an enterpriseholds a variable interest that it acquired before February 1, 2003. ThePartnership has not yet determined the effect that adoption of FIN 46 may haveon its financial position, results of operations or cash flows, given therecent chapter 11 bankruptcy filing.

 

In April 2003, the FASBissued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments andHedging Activities.”  SFAS No. 149amends and clarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  SFAS No. 149 is effectivefor the Partnership prospectively for contracts entered into or modified afterJune 30, 2003.  The Partnership does nothave any derivative instruments, nor is it involved in any hedging activitiesand, therefore, the adoption of SFAS No. 149 did not have any impact on itsresults of operations, financial position or cash flows.

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity.  It requires that an issuerclassify a financial instrument that is within its scope as a liability (or anasset in some circumstances).  Many ofthose instruments were previously classified as equity.  SFAS No. 150 is effective for thePartnership for financial instruments entered into or modified after May 31,2003, and otherwise is effective at the beginning of the first interim periodbeginning after June 15, 2003, except for paragraphs 9, 10 and 22 of thestandard, which have been deferred indefinitely.  The Partnership has not yet determined the effect that adoptionof SFAS No. 150 may have on its financial position, results of operations orcash flows.

 

**Note 15: Subsequent Events**

 

In October 2003, thePartnership agreed to pay $0.5 million per month, beginning with the month ofJuly 2003, to the acquisition facility banks and senior note holders asadequate protection payments related to their asserted collateral.  Such payments are to be applied to reduce ona dollar-for-dollar basis the aggregate allowed secured claims of the seniornote holders and the acquisition facility banks.  On November 7, 2003, the Partnership made a lump sum adequateprotection payment of $2.5 million covering the period of July through November2003.

 

On November 10, 2003, ahearing was held in the Bankruptcy Court on a motion from the Partnership,which was opposed by the creditors, to extend the period of exclusivity inwhich only the Partnership may present a plan of reorganization to theBankruptcy Court.  At the hearing, theBankruptcy Court denied the Partnership’s

 

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motion, thereby endingthe period within which the Partnership had the exclusive right to propose areorganization plan.

 

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

 

**Chapter 11 Bankruptcy Petition Filing**

 

Duringthe second quarter of 2003, we were unable to meet the financial covenants andscheduled interest payments pursuant to our bank loan and senior noteagreements. In addition, we were unable to successfully negotiate arecapitalization with our bank lenders and senior note holders.  Accordingly, on June 29, 2003, we filedvoluntary petitions for relief under chapter 11 of title 11 of the UnitedStates Code (the “Bankruptcy Code”) in the United States Bankruptcy Court forthe District of Arizona in Phoenix, Arizona (the “Bankruptcy Court”) for thePartnership and all but one of our subsidiaries.  We currently manage our properties and operate our businesses as“debtors-in-possession” under the jurisdiction of the Bankruptcy Court and inaccordance with the applicable provisions of the Bankruptcy Code.

 

Theaccompanying consolidated financial statements have been prepared assuming thatwe will continue as a going concern.  Wehave experienced net losses in each of the last twelve fiscal quarters, and, asmentioned above, we are under chapter 11 bankruptcy protection.  The consolidated financial statements do notreflect any adjustments that might result should we be unable to continue as agoing concern.

 

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting forthe Impairment or Disposal of Long-Lived Assets,” long-lived assets to be heldand used are accounted for at their historical cost, unless they are determinedto be impaired.  An impairment loss isrecognized “only if the carrying amount of a long-lived asset is not recoverablefrom its undiscounted cash flows...”  Ourproperty, plant and equipment and timber, timberlands and roads are allconsidered to be long-lived assets to be held and used within the meaning ofSFAS No. 144.  Accordingly, such assetsare carried at their historical cost, because the carrying amount of suchassets does not exceed the estimated undiscounted cash flows from suchassets.  Given the uncertainties of thechapter 11 process, there can be no assurances that we, despite our bestefforts, will continue to operate these long-lived assets and classify them asheld and used and that the carrying amounts of these assets will be fullyrealized.

 

Aspart of our bankruptcy proceedings, the Bankruptcy Court approved adebtor-in-possession financing agreement (“DIP Revolver”) in the amount of $40million that we arranged with The CIT Group/Business Credit, Inc.  During the reorganization process, vendors whodeliver goods and provide services to us receive priority payment protectionunder the bankruptcy law for such obligations. Obligations that arose prior to June 29, 2003 are included on theaccompanying consolidated balance sheet as liabilities subject to compromise.

 

Seealso “Liquidity and Capital Resources” below.

 

Inaddition to the approval of the DIP Revolver discussed above, during the thirdquarter of 2003, the following occurred under the jurisdiction of theBankruptcy Court:

 

•                  An unsecured creditors committee wasformed.

•                  Certain of the acquisition facilitycreditors filed a motion for lift of the automatic stay and to proceed with theforeclosure process on collateral.  Ahearing date is set for December 2, 2003 on this issue.

 

On November 10, 2003, ahearing was held in the Bankruptcy Court on a motion from us, which was opposedby the creditors, to extend the period of exclusivity in which only we maypresent a plan of reorganization to the Bankruptcy Court.  At the hearing, the Bankruptcy Court deniedour motion, thereby ending the period within which we had the exclusive rightto propose a reorganization plan.

 

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Although we have filed for chapter 11bankruptcy protection, we continue to actively pursue a recapitalization plan.Any recapitalization plan will be subject to approval by the Bankruptcy Courtand may involve the disposition of certain Partnership assets. The creditors onthe acquisition facility and senior notes assert that their debt is secured byour timberlands and certain real property and equipment associated with ourmanufacturing segment. The remaining liabilities subject to compromise aregenerally unsecured. While we are under bankruptcy protection, any scheduledinterest or principal payments are deferred and creditors are generallyprohibited from pursuing collection of their pre-petition claims by theautomatic stay provisions of the Bankruptcy Code. In accordance withSOP 90-7, we discontinued accruing interest on our term debt effectiveJune 30, 2003, because it is not probable it will be paid during the bankruptcyproceedings or be an allowed claim. An additional $11.7 million of interestexpense would have been recognized to date if not for the chapter 11 bankruptcypetition.

 

**Forward-Looking Statements**

 

Information contained inItem 2 and other sections of this report includes “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995,including statements regarding our expectations, forecasts, hopes, beliefs,predictions, intentions or strategies regarding the future that are not purelyhistorical, but are based on assumptions that in the future may prove not to beaccurate. These assumptions include harvest volumes, species mix, prices forlogs and lumber, demand for housing and levels and amounts received forstumpage and property sales. Our business and prospects are subject to a numberof risks, including the volatility of timber and lumber prices, factorslimiting harvesting of timber including contractual obligations, governmentalrestrictions, weather and access limitations – as well as the substantialcapital resources required to fund our operations and the uncertainty regardingprocurement of additional equity capital. Accordingly, actual results may differ materially from the expectationsexpressed in this report.

 

Additional factors thatcould affect future performance include our ability to successfully reorganizeunder bankruptcy protection, environmental risks, operating risks normallyassociated with the timber industry, competition, government regulations andpolicies, and economic changes in the regions where our products or substituteproducts are sold, including Southeast Asia and Japan. Other risk factorsinclude fluctuations in the value of the U.S. dollar against foreigncurrencies, and our ability to implement our business strategy. These and otherrisks are described in our registration statements and reports filed from timeto time on forms 10-K, 8-K, and 10-Q and reports to unitholders, which areavailable from us or the United States Securities and Exchange Commission.

##### ** **

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

 

As discussed above, on June 29, 2003, wefiled for chapter 11 bankruptcy protection. Pursuant to the bankruptcy proceedings, we have listed certainpre-petition liabilities which existed prior to the June 29, 2003 bankruptcyfiling as liabilities subject to compromise. Disposition of such liabilities is under the jurisdiction of theBankruptcy Court.

 

The following table summarizes thepre-petition liabilities that are included as liabilities subject to compromise(in thousands):

 
|                           |   | **September  30,  2003** |    |
|--------------------------------|--------|--------------------------|---------|
| Acquisition facility principal |   | $                        | 112,372 |   |
| Senior notes principal         |   | 400,658                  |    |
| Accounts payable               |   | 1,377                    |    |
| Accrued interest               |   | 21,039                   |    |
| Deferred enhanced interest     |   | 4,927                    |    |
| Make whole fees and interest   |   | 6,360                    |    |
| Other accrued expenses         |   | 818                      |    |
| Total                          |   | $                        | 547,551 |   |

 

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In October 2003, weagreed to pay $0.5 million per month, beginning with the month of July 2003, tothe acquisition facility banks and senior note holders as adequate protectionpayments related to their asserted collateral. Such payments are to be applied to reduce on a dollar-for-dollar basisthe aggregate allowed secured claims of the senior note holders and theacquisition facility banks.  On November7, 2003, we made a lump sum adequate protection payment of $2.5 millioncovering the period of July through November 2003.

 

OnJuly 17, 2003 the Partnership received a final order from the BankruptcyCourt approving the implementation of a $40 million debtor-in-possession loanfacility (“DIP Revolver”) with The CIT Group/Business Credit, Inc.  With the DIP Revolver in place, we shouldhave adequate liquidity to pay our vendors for goods delivered to and servicesprovided to us on a post-petition basis after June 29, 2003.  On July 3, 2003, the Partnership borrowed$19.8 million on the DIP Revolver in order to pay in full the balanceoutstanding on its pre-existing revolving credit facility and all related accruedinterest and fees.  The pre-existingrevolving credit facility was then terminated.

 

The $40 million DIPRevolver limit is subject to a borrowing base and is reduced to $20 millionshould we dispose of our Alliance Lumber segment.  The DIP Revolver is collateralized by our accounts receivable,inventory and any personal property that was not subject to a pre-existinglien.  The DIP Revolver bears interestat either (a) the Chase Bank Prime Rate plus 0.5% or (b) LIBOR plus 3%, at ouroption.  Any LIBOR loans are made forfixed one, two or three month terms. The DIP Revolver terminates on January 1, 2005 or upon the effectivedate of a Bankruptcy Court approved plan of reorganization and contains certaincovenants and restrictions.  As ofSeptember 30, 2003, we were in compliance with the covenants, there was $20.5million outstanding at an interest rate of 4.5% and approximately $18.1 millionremained available on the DIP Revolver.

 

Cash provided byoperating activities was $377,000 in the first nine months of 2003 and resultedprimarily from a net loss of $44.1 million and an increase in prepaid and othercurrent assets of $7.9 million, being more than offset by non-cash expenses andcharges totaling $32.0 million, cash provided by the change in accounts andnotes receivable of $0.2 million, cash provided by the change in inventories of$4.8 million and cash provided by the change in accounts payable and accruedexpenses (including those classified as liabilities subject to compromise) of$15.5 million.  Working capitalincreased to $51.3 million at September 30, 2003 compared to $31.5 million atDecember 31, 2002, primarily due to the chapter 11 bankruptcy petition filingand the classification of liabilities as liabilities subject to compromise,which would otherwise be classified as current liabilities.

 

Accounts receivableincreased to $41.3 million at September 30, 2003 compared to $39.8 million atDecember 31, 2003.  This increase isprimarily due to higher revenues from continuing operations in the thirdquarter of 2003 compared to the fourth quarter of 2002, partially off-set bythe disposition of our Trading and Distribution segment earlier in 2003.  The $9.3 million decrease in inventories isprimarily due to the sale of our Trading and Distribution segment early in thesecond quarter of 2003.  Prepaid andother current assets increased to $11.7 million at September 30, 2003 comparedto $4.1 million at December 31, 2002. This increase is primarily due to our trade credit difficulties whichhave necessitated the pre-payment of inventory purchases from certain vendors.

 

The increase in accountspayable and accrued expenses, including those amounts classified as liabilitiessubject to compromise, is primarily due to accrued interest on long-term debtwhich was due but not paid during the second quarter of 2003, offset in part bydecreases due to accelerated credit terms imposed by vendors and the disposalof the Trading and Distribution segment.

 

Net cash provided byinvesting activities of $1.2 million resulted primarily from $7.2 million receivedfrom the sale of equipment and the Trading and Distribution segmentinventories, partially offset by the use of $4.8 million for additions totimberlands and timber cutting rights (primarily for road construction andreforestation) and $1.2 million used for additions to equipment.

 

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Net cash used byfinancing activities of $5.8 million resulted from a net $5.5 million decreasein short-term borrowings, which resulted from payments on our pre-existingrevolving credit facility, partially offset by borrowings on our DIP revolver.

 

We do not expect to makecash distributions from our current funds or from cash generated by operatingactivities until our overall debt levels are substantially reduced andsignificantly improved market conditions could support a sustained quarterlydistribution.  In addition, cashdistributions are not allowed while we are involved in bankruptcy proceedings.

 

**Results of Operations**

 

**Three Months Ended September 30, 2003 compared to ThreeMonths Ended September 30, 2002**

 

**General**

During the secondquarter of 2003, we sold our Trading and Distribution segment, which isreflected as discontinued operations on our consolidated statements ofoperations for all periods presented.  Pleasesee additional discussion below.

 

Revenues from continuingoperations during the quarter ended September 30, 2003 increased $3.0 million,or 3.5%, to $89.3 million, from $86.3 million in the same quarter of 2002.  The increase reflects strong demand andincreasing prices in our Alliance Lumber segment as well as increased averagesales realizations from our Manufacturing segment.  These increases were partially offset by decreased sales volumein our manufacturing segment and decreased external sales volume and averagesales realizations in our Timberlands segment.

 

Cost of products sold(including charges for losses on timber purchase commitments discussed below)as a percentage of sales increased to 97.8% in the third quarter of 2003,compared to 95.3% in the same quarter of 2002. The increase was primarily dueto increased costs at our Alliance Lumber segment as a result of coveringpre-existing contracts in an environment of rising market prices and tradecredit problems and the relative absence of pricing discounts, as well as thelarger loss on timber purchase commitments recognized in the third quarter of2003 compared to the third quarter of 2002. Increased fuel and other energy costs, and lower production volumes inour Timberlands segments due to fire related harvesting restrictions andproblems with retaining loggers following our chapter 11 bankruptcy filing,also contributed to the increase in cost of sales as a percentage of sales.

 

During the three monthperiod ended September 30, 2003, we recognized non-cash losses on timberpurchase commitments with the U.S. Forest Service and private timber deeds of$5.7 million, which represents the estimated probable losses to be recognizedon these contracts through the completion date, or the estimated harvest dates,for these contracts.  We entered intothese contracts several years ago to ensure an adequate log supply for ourGilchrist and Prineville sawmills. Market pricing for the lumber output from these commitments has declinedsignificantly since the commitments were made. Non-cash losses recognized on timber purchase commitments totaled $3.8million for the three month period ended September 30, 2002.

 

Loss on disposal ofassets in the third quarter of 2002 of $1.2 million reflects the write-off ofobsolete or retired assets.

 

Selling, general andadministrative expenses decreased $950,000, or 13.6%, to $6.0 million (6.7% ofrevenue) in the third quarter of 2003, compared to $7.0 million (8.1% ofrevenue) in the third quarter of 2002. This decrease is primarily a result of decreases in salaries and relatedpersonnel costs due to lower headcount and cost reduction initiatives, offsetin part by higher insurance premiums.

 

Interestexpense decreased to $254,000 in the three months ended September 30, 2003compared to $12.5 million for the comparable period of 2002.   In accordance with SOP 90-7, interest expense in the 2003 period only includes interest expenseon debt incurred since the date of our chapter 11 bankruptcy filing and,therefore,

 

16

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does not include $11.7 million ofcontractual interest on the Senior Notes and Acquisition Facility that wouldhave accrued since that date.

 

Amortization of debtissuance costs totaled $0.5 million in the third quarters of both 2003 and2002.  At September 30, 2003, we had$3.9 million of unamortized debt issuance costs, which are being amortizedthrough December 31, 2005.

 

Reorganization itemstotaling $2.0 million in the third quarter of 2003 consisted primarily ofprofessional fees and other charges incurred related to our reorganization andrecapitalization efforts subsequent to June 29, 2003.  We anticipate continuing to incur significant professional feesand court costs in future quarters related to our reorganization efforts underchapter 11.

 

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

 

Our partnership agreementprovides that profit and losses are generally allocated 1% to the GeneralPartner interest and 99% to the Limited Partner interest.  In addition, the partnership agreementspecifies that net losses are not allocated to limited partners to the extentdoing so would result in (or increase) a deficit balance in their capitalaccounts. At that point, net losses are allocated 100% to the GeneralPartners.  In the third quarter of 2003,the Limited Partners’ capital accounts were reduced to zero, and subsequentlosses have been allocated 100% to the General Partners.

 

**Timberlands**

Total external segmentsales, including stumpage sales, decreased 30.4% to $5.7 million, or 6.4% ofrevenue in the third quarter of 2003, compared to $8.2 million, or 9.5% ofrevenue in the third quarter of 2002. The decrease in external segment sales reflects an 11.3% decrease indomestic log shipments, a 47.8% decrease in export log shipments, a 10.4%decrease in the weighted average domestic sales realizations and a 2.1%decrease in the weighted average export sales realizations.

 

Internal sales of logsto our manufacturing segment decreased 28.2% to $7.9 million in the thirdquarter of 2003 from $10.9 million in the third quarter of 2002.  The decrease primarily reflects the effectsof a 17.6% decrease in volume, due in large part to lower production volume atour sawmills and a 12.8% decrease in average sales realizations due to weak logmarket pricing.  Our internal transferpricing is based on current market prices at the time of sale.

 

Operating income fromthe timberlands segment decreased $0.8 million, or 67.0%, to $0.4 million inthe third quarter of 2003 from $1.2 million in the third quarter of 2002,primarily as a result of the decreased volume and sales realizations discussedabove.

 

***Domestic Log Sales***

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

 
|              |   | **Quarter Ended September 30,** |   |     |   |
|-------------------|--------|---------------------------------|--------|----------|--------|
| **Tree Farm**     |   | **2003**                        |   | **2002** |   | **% Change** |   |
| Oregon            |   | $                               | 624    |     | — |   | — |   |
| Inland            |   | —                          |   | $        | 404    |   | — |   |
| Hamilton          |   | $                               | 417    |     | $      | 455 |   | (8.4 | )% |
| Olympic           |   | $                               | 369    |     | $      | 400 |   | (7.8 | )% |
| Weighted  average |   | $                               | 388    |     | $      | 433 |   | (10.4 | )% |

 

17

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During the third quarterof 2003, certain large diameter salvaged ponderosa pine from our Oregon TreeFarm was sold to an external customer. All other production from the Oregon Tree Farm was utilized by ourGilchrist mill.  The decreases at theHamilton and Olympic Tree Farms are primarily due to lower log market pricingand changes in species mix.

 

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

 
|          |   | **Quarter Ended September 30,** |   |     |   |
|---------------|--------|---------------------------------|--------|----------|--------|
| **Tree Farm** |   | **2003**                        |   | **2002** |   | **% Change** |   |
| Oregon        |   | 21                              |   | —   |   | — |   |
| Inland        |   | —                          |   | 490      |   | — |   |
| Hamilton      |   | 4,255                           |   | 7,425    |   | (42.7 | )% |
| Olympic       |   | 6,758                           |   | 4,521    |   | 49.5 | % |
| Total         |   | 11,034                          |   | 12,436   |   | (11.3 | )% |

 

The decrease in logshipments at our Hamilton Tree Farm is due to fire related logging restrictionsas well as temporary difficulties in finding logging contractors immediatelyfollowing our chapter 11 bankruptcy filing. The increase at our Olympic TreeFarm is due to increased production levels in an effort to offset the impact ofour May logging curtailment.  The firerelated restrictions had less effect on the Olympic Tree Farm, as we were ableto shift our mix of production to logging areas that were not as restricted.The fire related restrictions were lifted in mid-September for all of our treefarms.

 

We sold our Inland TreeFarm the first half of 2002.  The volumeshown above for the third quarter of 2002 represents the completion of a timberpurchase commitment in the Inland region. There was no volume from our Inland Tree Farm during the third quarterof 2003.

 

***Export Log Sales***

Sales of logs tocustomers involved in exporting activities were approximately $0.6 million, or0.6% of revenues, in the third quarter of 2003, compared to $1.1 million, or1.3% of revenues, for the same quarter of 2002.  The average realization for export logs decreased 2.1% to$525/MBF in the third quarter of 2003 compared to $537/MBF in the third quarterof 2002.  Sales volumes of export logsdecreased 47.8% to 1,084 MBF in the third quarter of 2003 compared to 2,078 MBFin the third quarter of 2002.  Thedecrease in sales volume and average realization is primarily due to decreaseddemand for export logs.

 

***Property Sales***

There were nosignificant property sales in the third quarter of 2003 or 2002.

 

**Manufacturing**

External revenues fromour sawmills were $23.5 million, or 26.3% of revenues in the third quarter of2003, compared to $26.3 million, or 30.5% of sales in the same quarter of2002.  The decreased revenue reflects a9.8% decrease in external lumber sales volumes and a 10.5% decline in chiprevenue, partially offset by a 2.4% increase in average external lumber salesrealizations. The decreased sales volume primarily reflects lower productionlevels at our sawmills designed to lower per unit manufacturing costs to theiroptimum levels.  The improved salesrealizations reflect the impact of strengthening lumber market prices andproduct mix changes.

 

Internal shipmentsdecreased 16.3% to 2.6 MMBF in the third quarter of 2003 compared to 3.1 MMBFin the third quarter of 2002, partly due to the disposition of our Trading andDistribution segment.

 

The operating loss fromthe Manufacturing segment was $2.6 million in the third quarter of 2003compared to $4.9 million in the third quarter of 2002.  The loss in the third quarter of 2003includes a $5.7 million charge for estimated operating losses on timberpurchase commitments through 2006. The loss in the third quarter of 2002includes a $3.8 million charge for estimated operating losses on timberpurchase commitments and a $1.2 million charge for the write-off of retiredassets.  The improvement in operatingresults (excluding the effects of the charges discussed above) is primarily aresult of improved lumber market prices, a 15.0% decrease in log

 

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costs, a 17.3% decreasein unit manufacturing costs and a 3.1% decrease in segment overhead expenses.

 

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

 
|              |   | **Quarter Ended September 30,** |   |     |   |
|-------------------|--------|---------------------------------|--------|----------|--------|
| **Region**        |   | **2003**                        |   | **2002** |   | **% Change** |   |
| Oregon            |   | $                               | 308    |     | $      | 298 |   | 3.4 | % |
| Washington        |   | $                               | 279    |     | $      | 275 |   | 1.5 | % |
| Weighted  average |   | $                               | 294    |     | $      | 287 |   | 2.4 | % |

 

The increases reflectthe strengthening lumber market and shifts in product mix.

 

External lumber salesvolumes decreased 9.8% in the third quarter of 2003 to 71.3 MMBF compared to79.0 MMBF in the same period of 2002. External lumber sales volumes by region were as follows (in MBF):

 
|       |   | **Quarter Ended September 30,** |   |     |   |
|------------|--------|---------------------------------|--------|----------|--------|
| **Region** |   | **2003**                        |   | **2002** |   | **% Change** |   |
| Oregon     |   | 37,423                          |   | 42,381   |   | (11.7 | )% |
| Washington |   | 33,836                          |   | 36,593   |   | (7.5 | )% |
| Total      |   | 71,259                          |   | 78,974   |   | (9.8 | )% |

 

The decreased volumefrom both regions reflects production reductions at all of our sawmills.

 

Chip sales accounted for2.0% of revenue in the third quarter of 2003, compared to 2.4% of revenue inthe third quarter of 2002.  Residualwood chip prices increased to $64 per bone dry unit (BDU) in the third quarterof 2003 compared to $59/BDU in the third quarter of 2002, reflecting slightlyimproved market conditions.   Woodchipsales volume decreased 18.0% in the third quarter of 2003 compared to the thirdquarter of 2002 due to our lower lumber production in the third quarter of 2003as discussed above.

 

**Alliance Lumber**

Our Alliance Lumbersegment includes professional contractor service yards in Arizona and Nevadaand involves the sale of lumber and building products.  Total revenue from our Alliance Lumbersegment increased 17.4% to $57.8 million, or 64.8% of total revenue, in thethird quarter of 2003 compared to $49.2 million, or 57.1% of total revenue, inthe third quarter of 2002.  Thisincrease primarily reflects increased sales volumes in Arizona and Reno, Nevadadriven by strong demand in their respective regional housing markets as well ashigher lumber prices.  Unit volume, measuredin total board feet, increased 11.6% during the third quarter of 2003 comparedto the third quarter of 2002.

 

Operating income from ourAlliance Lumber segment decreased 94.4% to $149,000 in the third quarter of2003 compared to $2.6 million in the third quarter of 2002.  The decrease in operating income reflects anincrease in operating expenses and a decrease in gross margin. During the thirdquarter of 2003, we had to cover short lumber and panel positions during aperiod of rapidly rising prices and bankruptcy related supply shortages.  Fire restrictions, panel industrycurtailments, the rebuilding effort in Iraq and adverse weather conditionsdrove panel prices to record all time highs during the third quarter of2003.  In addition, many vendors continueto require COD or advance payment terms, leading to higher inventory costs andlong lead times for receipt of inventories. We also incurred increased wages,which resulted from overtime expense in order to service back orders during aperiod of sporadic supply and high demand.

 

**Discontinued Operations - Trading and Distribution**

Our Trading andDistribution segment, which was comprised of operations based in Eugene, Oregonand Albuquerque, New Mexico, was sold during the second quarter of 2003.  Accordingly, we had no sales from thissegment during the third quarter of 2003. Sales from this segment totaled $34.7 million in the third quarter of2002.  The Trading and Distributionsegment involved the wholesale trading of lumber, panels and other wood products,most of which were not manufactured by us.

 

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**Resultsof Operations**

**Nine Months Ended September 30, 2003 compared to Nine MonthsEnded September 30, 2002**

 

**General**

During the second quarterof 2003, we sold our Trading and Distribution segment, which is reflected asdiscontinued operations on our consolidated statements of operations for allperiods presented.  Please seeadditional discussion below.

 

Revenues from continuingoperations during the nine months ended September 30, 2003 decreased $3.5million, or 1.4%, to $241.9 million, from $245.3 million in the same period of2002.  The decrease reflects lowerrevenues from our Timberlands and Manufacturing segments partially offset byincreased revenues in our Alliance Lumber segment. The decreased revenues fromour Timberlands and Manufacturing segments are due to temporary market relatedcurtailments in these segments as well as weak market pricing for logs andlumber. The increase in the Alliance Lumber segment revenues reflects strongdemand and increased sales volume.

 

Cost of products sold(including charges for losses on timber purchase commitments discussed below)as a percentage of sales increased to 94.1% in the first nine months of 2003,compared to 91.3% in the same period of 2002. The increase was primarily due to increased costs at our Alliance Lumbersegment as a result of covering pre-existing contracts in an environment ofrising market prices and trade credit problems and the relative absence ofpricing discounts, as well as the larger loss on timber purchase commitmentsrecognized in the first nine months of 2003 compared to the first nine monthsof 2002.  Increased fuel and otherenergy costs, and lower production volumes in our Timberlands segments due tomarket-related curtailments in the second quarter of 2003, fire relatedharvesting restrictions and problems with retaining loggers following ourchapter 11 bankruptcy filing in the third quarter of 2003, also contributed tothe increase in cost of sales as a percentage of sales.

 

During the nine monthperiod ended September 30, 2003, we recognized non-cash losses on timberpurchase commitments with the U.S. Forest Service and private timber deeds of$6.1 million, which represent the estimated probable losses to be recognized onthese contracts through the completion date, or the estimated harvest dates,for these contracts.  We entered intothese contracts several years ago to ensure an adequate log supply for ourGilchrist and Prineville sawmills. Market pricing for the lumber output from these commitments has declinedsignificantly since the commitments were made. Non-cash losses recognized on timber purchase commitments totaled $3.8million for the nine month period ended September 30, 2002.

 

Gain on sale of assetsheld for sale of $7.4 million in the first nine months of 2002 represents therecognized gains on the sale of our Inland South and Inland North tree farms inMarch and April 2002, respectively.

 

The$0.8 million loss on disposal of assets in the nine months ended September 30,2003 represents a $1.3 million loss on the sale of an aircraft in the secondquarter of 2003, offset by a gain on sale of equipment of $0.5 millionin the first quarter of 2003.  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 andadministrative expenses were $19.0 million (7.8% of revenues) in the first ninemonths of 2003, compared to $20.1 million (8.2% of revenues) in the first ninemonths of 2002.  Decreases in salariesand related personnel costs due to lower headcount and cost reductioninitiatives were partially offset by increases in insurance premiums.

 

Interestexpense decreased to $24.3 million in the first nine months of 2003 compared to$39.7 million in the first nine months of 2002.  In accordance with SOP 90-7, interest expense in the 2003 perioddoes not include contractual interest totaling $11.7 million on the SeniorNotes and Acquisition Facility since the date of our chapter 11 bankruptcyfiling on June 29, 2003. Please read “Chapter 11 Bankruptcy PetitionFiling” above also.

 

Debt restructuring andredemption premium of $14.1 million in the first nine months of 2002 relates toour global debt restructuring in April 2002. Of the $14.1 million charge, $10.0 million was non-cash in nature. We

 

20

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incurred a total of $8.7million in fees and costs in connection with the April 2002 debt restructuring,$4.2 million of which was included in the $14.1 million loss recognized in thesecond quarter of 2002 in accordance with the provisions outlined in EmergingIssues Task Force Issue No. 96-19 “Debtor’s Accounting for a Modification orExchange of Debt Instruments,” (EITF 96-19). In addition, we expensed $5.5million of previously deferred fees and expenses and a $4.5 million redemptionpremium.  The redemption premium wasincurred when we prepaid a portion of our senior notes in advance of theirscheduled maturity.  Payment of theredemption premium, according to the terms of the senior note restructuring, isdeferred until December 31, 2005.

 

Amortization of debtissuance costs decreased $658,000 to $1.5 million in the first nine months of2003 compared to $2.2 million in the first nine months of 2002.  The decrease is due to the second quarter2002 write-off of $5.5 million of previously deferred fees related to oursenior notes as a result of our debt restructuring in April 2002.  In addition, the amortization period forremaining deferred debt issuance costs was prospectively extended untilDecember 2005, thereby lowering the amount amortized in each quarter.  These decreases were partially offset by therecognition of $0.2 million of additional amortization of deferred debtissuance costs in 2003 on the pre-existing revolving credit facility which wasterminated in July 2003.  At September30, 2003, we had $3.9 million of unamortized debt issuance costs, which arebeing amortized through December 31, 2005.

 

Debt restructuringnegotiation costs of $4.9 million in the nine months ended September 30, 2003,consisting primarily of professional fees, represent charges incurred relatedto our reorganization and recapitalization efforts prior to our chapter 11bankruptcy protection filing.

 

Reorganization itemstotaling $2.2 million in the first nine months of 2003 consisted primarily ofprofessional fees and other charges incurred related to our reorganization andrecapitalization efforts subsequent to June 29, 2003.  We anticipate continuing to incur significant professional feesand court costs in future quarters related to our reorganization efforts underchapter 11.

 

**Timberlands**

Totalexternal segment sales, including stumpage sales, decreased 39.6% to $16.9million, or 7.0% of revenue in the first nine months of 2003, compared to $28.1million, or 11.4% of revenue in the first nine months of 2002.  The decrease in external segment salesreflects a 35.9% decrease in domestic log shipments, a 60.9% decrease in exportlog shipments and a 4.1% decrease in the weighted average domestic salesrealizations.

 

Internalsales of logs to our manufacturing segment decreased 24.0% to $23.7 million inthe first nine months of 2003 from $31.1 million in the first nine months of2002.  The decrease primarily reflects a15.3% reduction in volume, due in large part to lower production volume at oursawmills, and an 8.9% decrease in average internal sales realizations due to weaklog market pricing.  Our internal transferpricing is based on current market prices at the time of sale.

 

Operatingincome from the timberlands segment decreased $2.6 million, or 64.5%, to $1.4million in the first nine months of 2003 from $4.1 million in the first ninemonths of 2002, primarily as a result of the decreased volume and salesrealizations discussed above.

 

***Domestic Log Sales***

Averageexternal domestic prices received for logs sold from the various tree farms,excluding pulpwood, were as follows (dollars per MBF):

 
|              |   | **Nine Months Ended September  30,** |   |     |   |
|-------------------|--------|--------------------------------------|--------|----------|--------|
| **Tree Farm**     |   | **2003**                             |   | **2002** |   | **% Change** |   |
| Oregon            |   | $                                    | 627    |     | — |   | — |   |
| Inland            |   | —                               |   | $        | 457    |   | — |   |
| Hamilton          |   | $                                    | 422    |     | $      | 443 |   | (4.7 | )% |
| Olympic           |   | $                                    | 374    |     | $      | 381 |   | (1.8 | )% |
| Weighted  average |   | $                                    | 397    |     | $      | 414 |   | (4.1 | )% |

 

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During the first ninemonths of 2003, certain large diameter salvaged ponderosa pine from our OregonTree Farm was sold to an external customer. All other production from the Oregon Tree Farm was utilized by our Gilchristmill.  The decreases at the Hamilton andOlympic Tree Farms are primarily due to lower log market pricing and changes inspecies mix.

 

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

 
|          |   | **Nine Months Ended September  30,** |   |     |   |
|---------------|--------|--------------------------------------|--------|----------|--------|
| **Tree Farm** |   | **2003**                             |   | **2002** |   | **% Change** |   |
| Oregon        |   | 248                                  |   | —   |   | — |   |
| Inland        |   | —                               |   | 7,863    |   | — |   |
| Hamilton      |   | 13,470                               |   | 16,189   |   | (16.8 | )% |
| Olympic       |   | 17,648                               |   | 24,853   |   | (29.0 | )% |
| Total         |   | 31,366                               |   | 48,905   |   | (35.9 | )% |

 

The decreases at theHamilton and Olympic Tree Farms are primarily a result of temporarydifficulties retaining loggers following our chapter 11 bankruptcy filing inthe third quarter of 2003 and temporary market-related harvest curtailmentsduring the second quarter of 2003.

 

We sold a portion of ourInland Tree Farm in the first quarter of 2002 and sold the final portion onApril 30, 2002.  Therefore, there waslow volume from our Inland Tree Farm during the first nine months of 2002 andnone in the 2003 period, as the sale transaction had been completed.

 

***Export Log Sales***

Sales of logs tocustomers involved in exporting activities were approximately $1.3 million, or0.5% of revenue, in the first nine months of 2003, compared to $3.0 million, or1.2% of revenue, for the first nine months of 2002.  The average realization for export logs increased 6.3% to$541/MBF in the first nine months of 2003 compared to $509/MBF in the firstnine months of 2002.  Sales volume ofexport logs decreased 60.9% to 2.3 MMBF in the first nine months of 2003 comparedto 6.0 MMBF in the first nine months of 2002.    The decrease in sales volume is primarily due to decreaseddemand for export logs.  The increase inthe average realization is primarily due to a greater proportion of highergrade logs during the first nine months of 2003 compared to the first ninemonths of 2002.  We did not export anylogs from our Inland Tree Farm and, therefore, our export sales were notaffected by their disposition.

 

***Property Sales***

The disposition of theInland South and Inland North tree farms in the first and second quarters of2002 were reported as asset sales in the Corporate and Other segment.  There were no other significant propertysales in the first nine months of 2003 or 2002.

 

**Manufacturing**

External revenues fromour sawmills decreased $15.3 million, or 19.8% to $62.0 million, or 25.7% ofrevenue, in the first nine months of 2003 from $77.4 million, or 31.5% ofrevenue, in the first nine months of 2002. The decreased revenues reflect a 6.8% decrease in average external lumbersales realizations, an 11.4% decrease in external lumber sales volumes and a23.0% decline in chip revenue.  Thelower sales realizations reflect the impact of weak lumber market pricing andproduct mix changes.  The lower salesvolume reflects decreased production levels at all of our sawmills.

 

Internal shipmentsdecreased 0.5% to 10.7 MMBF in the first nine months of 2003 compared to 10.8MMBF in the first nine months of 2002, partly due to the disposition of ourTrading and Distribution segment.

 

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The operating loss frommanufacturing was $3.8 million in the first nine months of 2003 compared to anoperating loss of $2.2 million in the first nine months of 2002.  The $3.8 million loss in the first ninemonths of 2003 includes a $6.1 million charge for estimated losses on timberpurchase commitments through 2006. The $2.2 million loss in the first ninemonths of 2002 includes a $3.8 million charge for estimated losses on timberpurchase commitments through 2003 and a $1.2 million loss related to thewrite-off of retired equipment.  Thedecline in operating results, exclusive of the charges discussed above, isprimarily a result of decreased revenues as discussed above, as well as a 2.6%increase in segment overhead expense, partially off-set by a 17.3% decrease inper unit manufacturing expense and a 15.0% decrease in log costs. The increasein segment overhead expense is primarily a result of increased depreciation andcosts related to the shut-down of our Prineville mill.  The Prineville mill was not operated duringthe first four months of 2002, but was operating in the last eight months of2002 and the first quarter of 2003 for drying and finishing of increased roughlumber production from the Gilchrist mill.

 

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

 
|              |   | **Nine Months Ended September  30,** |   |     |   |
|-------------------|--------|--------------------------------------|--------|----------|--------|
| **Region**        |   | **2003**                             |   | **2002** |   | **% Change** |   |
| Oregon            |   | $                                    | 282    |     | $      | 298 |   | (5.4 | )% |
| Washington        |   | $                                    | 266    |     | $      | 290 |   | (8.3 | )% |
| Weighted  average |   | $                                    | 275    |     | $      | 295 |   | (6.8 | )% |

 

The decreases reflectweak lumber market pricing and shifts in product mix.

 

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

 
|       |   | **Nine Months Ended September  30,** |   |     |   |
|------------|--------|--------------------------------------|--------|----------|--------|
| **Region** |   | **2003**                             |   | **2002** |   | **% Change** |   |
| Oregon     |   | 109,775                              |   | 130,548  |   | (15.9 | )% |
| Washington |   | 94,710                               |   | 100,303  |   | (5.6 | )% |
| Total      |   | 204,485                              |   | 230,851  |   | (11.4 | )% |

 

The decrease inshipments from both regions reflects decreased production at all of oursawmills.

 

Chip sales accounted for2.0% of revenue in the first nine months of 2003, compared to 2.6% of revenuein the first nine months of 2002. Residual wood chip prices were up slightly to $62 per bone dry unit(BDU) in the first nine months of 2003 compared to $60 per BDU in the firstnine months of 2002. Woodchip sales volume decreased 25.8% in the first ninemonths of 2003 compared to the first nine months of 2002 due to lower lumberproduction in the 2003 period compared to the 2002 period.

 

**Alliance Lumber**

Our Alliance Lumbersegment includes professional contractor service yards in Arizona and Nevadaand involves the sale of lumber and building products.  Total revenue from our Alliance Lumbersegment increased 18.0% to $156.3 million, or 64.7% of total revenue, in thefirst nine months of 2003 compared to $132.5 million, or 54.0% of total revenue,in the first nine months of 2002.  Thisincrease reflects increased sales volumes in all regions driven by strongdemand in their respective regional housing markets, offset in part by lowersales realizations.  Unit volume,measured in total board feet, increased 17.5% during the first nine months of2003 compared to the first nine months of 2002.

 

Operating income from ourAlliance Lumber segment decreased 26.6% to $4.9 million in the first ninemonths of 2003 compared to $6.7 million in the first nine months of 2002.  The decrease in operating income reflects anincrease in operating expenses and a decrease in gross margins. During thethird quarter of 2003, we had to cover short lumber and panel positions duringa period of rapidly rising prices and bankruptcy related supply shortages.  Fire restrictions, panel industrycurtailments, the rebuilding effort in Iraq and adverse weather conditionsdrove panel prices to record all time highs during the third quarter of2003.  In addition, many

 

23

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vendors continue torequire COD or advance payment terms, leading to higher inventory costs andlong lead times for receipt of inventories. We also incurred increased wages,which resulted from overtime expense in order to service back orders during aperiod of sporadic supply and high demand.

 

**Discontinued Operations - Trading and Distribution**

Our Trading andDistribution segment, which was comprised of operations based in Eugene, Oregonand Albuquerque, New Mexico, was sold during the second quarter of 2003.  The Trading and Distribution segmentinvolved the wholesale trading of lumber, panels and other wood products, mostof which were not manufactured by us. Primarily due to the sale of this segment, sales from the Trading andDistribution segment decreased $98.5 million, or 74.3%, to $34.1 million in thefirst nine months of 2003 from $132.6 million in the first nine months of 2002.

 

The loss from ourTrading and Distribution segment totaled $5.9 million in the first nine monthsof 2003 compared to income of $1.2 million in the first nine months of 2002,primarily due to the decreased revenues as discussed above and a $5.5 millioncharge for the impairment of goodwill, which occurred in the first quarter of2003.

##### ** **

##### **CriticalAccounting Policies**

We reaffirm the criticalaccounting policies and estimates described in our 2002 Annual Report on Form10-K, which was filed with the Securities and Exchange Commission on March 31,2003.  Please also read Note 1 to theunaudited consolidated financial statements regarding the application of SOP90-7 in the second quarter of 2003.

 

**New Accounting Pronouncements**

Please read Note 14 to the unauditedconsolidated financial statements for a discussion of new accountingpronouncements and their anticipated effects on the Partnership.

 

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

 

Our pre-existingrevolving credit facility was paid off and terminated in July 2003 and ouracquisition credit facility was transferred to liabilities subject tocompromise on June 29, 2003 upon our filing for chapter 11 bankruptcyprotection.  In July 2003 a $40 milliondebtor-in-possession financing agreement (“DIP Revolver”) was approved by thecourt.  The DIP Revolver has a variablerate of interest.  At September 30,2003, we had $20.5 million outstanding under the DIP Revolver at an interestrate of 4.5%.  A hypothetical 10 percentincrease in interest rates to 4.95% would not have a material effect on ourcash flows.

 

**Item 4****.  Controls and Procedures**

 

**Disclosure Controls and Procedures**

Our management hasevaluated, under the supervision and with the participation of our Presidentand Chief Executive Officer and Chief Financial Officer, the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis report pursuant to Rule 13a-15(b) under the Securities Exchange Act of1934 (the “Exchange Act”). Based on that evaluation, our President and ChiefExecutive Officer and Chief Financial Officer have concluded that, as of theend of the period covered by this report, our disclosure controls andprocedures are effective in ensuring that information required to be disclosedin our Exchange Act reports is (1) recorded, processed, summarized and reportedin a timely manner, and (2) accumulated and communicated to our management,including our President and Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure.

 

**Internal Control Over Financial Reporting**

There has been no changein our internal control over financial reporting that occurred during our lastfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PART II - OTHER INFORMATION**

 

**Item1.  LegalProceedings**

 

See Notes 1 and 2 to ourunaudited consolidated financial statements included in Part I, Item 1 of thisForm 10-Q for a description of our bankruptcy proceedings.

 

**Item3.  Defaults UponSenior Securities**

 

During the second quarterof 2003, we defaulted on our senior notes and on our acquisition creditfacility as a result of not making scheduled interest payments and being out ofcompliance with the related covenants. All amounts due under these facilities were transferred to liabilitiessubject to compromise on June 29, 2003 upon our filing for chapter 11bankruptcy protection.  We alsodefaulted on our revolving credit facility under cross-default provisions withthe senior notes and acquisition facility agreements.  The revolver was paid in full and terminated on July 3, 2003(please see Note 4). Amounts included in liabilities subject to compromise at September30, 2003 related to the senior notes and the acquisition credit facility wereas follows (in thousands):

 
|                 |   | **Principal** |    | **Accrued  Interest*** |   | **Other Fees** |   | **Total** |    |
|----------------------|--------|---------------|---------|------------------------|--------|----------------|--------|-----------|---------|
| Acquisition facility |   | $             | 112,372 |                   | $      | 1,848          |   | —    |    | $ | 114,220 |   |
| Senior notes         |   | 400,658       |    | 24,717                 |   | $              | 5,761  |      | 431,136 |   |
| Total                |   | $             | 513,030 |                   | $      | 26,565         |   | $         | 5,761   |   | $ | 545,356 |   |

 

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*Doesnot include contractual interest of $11.7 million subsequent to June 29, 2003.

 

**Item5.  OtherInformation**

 

The Partnership recently implemented several reorganization andmanagement changes.  True Carr, formerlyVice President of Alliance Lumber Segment, resigned from the Partnership onOctober 31, 2003. Effective immediately, long time operations and salesmanagers, respectively, Norb Edwardsen and Brian McMannis were promoted toco-general managers to oversee the Arizona operations of the Alliance Lumbersegment.  Jim Weeks, Vice President ofMarketing and Sales, departed the Partnership on November 1, 2003 following thewinding down of the former Trading and Distribution segment.  Mr. Weeks’ position has beeneliminated.  Gary Cremer, Vice Presidentof Resources, has become a Special Assistant to the President to assist seniormanagement in various aspects of the restructuring process.  Upon completion of these tasks, Mr. Cremerwill leave the Partnership.  His formerresponsibilities have been combined with the responsibilities of the VicePresident of Manufacturing and will be assumed by John Ernst.

 

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

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

 
| **(b) Reports on Form 8-K:**                                                                |
|---------------------------------------------------------------------------------------------|
| The  following reports on Form 8-K were filed during the quarter ended September  30, 2003: |
|                                                                                        |   | • | Dated July 2, 2003 and  furnished to the SEC on July 8, 2003 pursuant to Item 9. “Regulation FD  Disclosure,” regarding the receipt by the Partnership of an interim order  from the Bankruptcy Court approving the implementation of a $40 million  debtor-in-possession loan facility; and |
|                                                                                        |   | • | Dated July 18, 2003 and  furnished to the SEC on July 22, 2003 pursuant to Item 9. “Regulation FD  Disclosure regarding the receipt by the Partnership of a final order from the  Bankruptcy Court approving the implementation of a $40 million  debtor-in-possession loan facility. |
|                                                                                             |  |  |  |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| Date:  | November 13, 2003 |   | CROWN PACIFIC  PARTNERS, L.P.                                                |
|--------|-------------------|--------|------------------------------------------------------------------------------|
|   |              |   |                                                                         |
|   |              |   | By:  Crown Pacific Management Limited  Partnership, as  General Partner |
|   |              |   |                                                                         |
|   |              |   |                                                                         |
|   |              |   | By:                                                                          | /s/ Steven E. Dietrich |   |
|   |              |   | Steven E. Dietrich                                                           |
|   |              |   | Senior Vice President  and Chief Financial Officer                           |
|   |              |   | (Duly Authorized  Officer and Principal Financial and  Accounting Officer)   |

 

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