**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

 

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** **

**FORM10-Q**

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**(Mark One)**

**ý****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For the quarterly period ended September 30, 2004**

 

**OR**

** **

**o****  TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the transition period from          to         **

 

**Commission file number 0-24976**

** **

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**CROWNPACIFIC 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 mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.  Yes ý                No o

 

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

 

Indicate the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date.

 
| **Common Units** | ** ** | **30,527,030**                     |
|------------------|------------|------------------------------------|
| (Class)          |       | (Outstanding at November 22, 2004) |

 

 

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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, 2004 and 2003 |   |
|                           |                                                                                                         |   |
|                           | Consolidated Balance Sheets – September 30, 2004 and December 31,  2003                                 |   |
|                           |                                                                                                         |   |
|                           | Consolidated Statements of Cash Flows –  Nine Months Ended September 30, 2004 and 2003                  |   |
|                           |                                                                                                         |   |
|                           | Notes to Consolidated Financial Statements                                                                   |   |
|                           |                                                                                                         |   |
| Item 2.                        | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                  |   |
|                           |                                                                                                         |   |
| Item 3.                        | Quantitative and Qualitative Disclosures  About Market Risk                                                  |   |
|                           |                                                                                                         |   |
| Item 4.                        | Controls and Procedures                                                                                      |   |
|                           |                                                                                                         |   |
| PART II - OTHER INFORMATION    |                                                                                                         |
|                           |                                                                                                         |   |
| Item  6.                       | Exhibits                                                                                                     |   |
|                           |                                                                                                         |   |
| Signatures                     |                                                                                                         |   |

 

1

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**PART I -FINANCIAL INFORMATION**

 

**Item 1.Financial Statements**

 

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

**(Debtor-in-Possession)**

**Consolidated Statements of Operations**

**(In thousands, except unit and per unitdata)**

**(Unaudited)**

 
| ** **                                                                                     | ** ** | **For the Three Months Ended September 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2004**                                     | ** ** | **2003** | ** ** |
|                                                                                           |       |                                         |       |   |   |
| Revenues                                                                                       |       | $                                            | 5,631      |   | $ | 5,725 |   |
|                                                                                           |       |                                         |       |   |   |
| Operating costs:                                                                               |       |                                         |       |   |   |
| Cost of products sold                                                                          |       | 4,417                                        |       | 4,866 |   |
| Gain on disposal of assets                                                                     |       | (31                                          | )          | (10 | ) |
| Selling, general and administrative  expenses                                                  |       | 1,803                                        |       | 2,793 |   |
|                                                                                           |       |                                         |       |   |   |
| Operating loss                                                                                 |       | (558                                         | )          | (1,924 | ) |
|                                                                                           |       |                                         |       |   |   |
| Interest expense (excluding contractual  interest expense of $12,924 and $11,710)              |       | 116                                          |       | 254 |   |
| Amortization of debt issuance costs                                                            |       | 650                                          |       | 468 |   |
| Other income, net                                                                              |       | (570                                         | )          | (110 | ) |
|                                                                                           |       |                                         |       |   |   |
| Loss from operations before reorganization  items                                              |       | (754                                         | )          | (2,536 | ) |
|                                                                                           |       |                                         |       |   |   |
| Reorganization items:                                                                          |       |                                         |       |   |   |
| Professional fees                                                                              |       | (1,493                                       | )          | (1,720 | ) |
| Impairment of assets                                                                           |       | (1,517                                       | )          | — |   |
| Other                                                                                          |       | (550                                         | )          | (263 | ) |
|                                                                                           |       | (3,560                                       | )          | (1,983 | ) |
|                                                                                           |       |                                         |       |   |   |
| Loss before discontinued operations                                                            |       | (4,314                                       | )          | (4,519 | ) |
|                                                                                           |       |                                         |       |   |   |
| Discontinued operations:                                                                       |       |                                         |       |   |   |
| Income (loss) from discontinued operations  (including net gain on disposal of $5,010 in 2004) |       | 12,411                                       |       | (2,133 | )  |
| Income tax provision on disposal of assets                                                     |       | (1,772                                       | )          | — |   |
| Income (loss) from discontinued operations                                                     |       | 10,639                                       |       | (2,133 | )  |
|                                                                                           |       |                                         |       |   |   |
| Net income (loss)                                                                              |       | $                                            | 6,325      |   | $ | (6,652 | ) |
|                                                                                           |       |                                         |       |   |   |
| Basic and diluted loss per limited partner  unit before discontinued operations                |       | $                                            | —     |   | $ | (0.07 | ) |
|                                                                                           |       |                                         |       |   |   |
| Basic and diluted income (loss) per limited  partner unit from discontinued operations         |       | —                                       |       | (0.03 | )  |
|                                                                                           |       |                                         |       |   |   |
| Basic and diluted net loss per limited  partner unit                                           |       | $                                            | —     |   | $ | (0.10 | ) |
|                                                                                           |       |                                         |       |   |   |
| Weighted average units outstanding                                                             |       | 30,527,030                                   |       | 30,527,030 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

2

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

**(Debtor-in-Possession)**

**Consolidated Statements of Operations**

**(In thousands, except unit and per unitdata)**

**(Unaudited)**
| ** **                                                                                    | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                    | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
|                                                                                          |       |                                        |       |   |   |
| Revenues                                                                                      |       | $                                           | 17,321     |   | $ | 16,950 |   |
|                                                                                          |       |                                        |       |   |   |
| Operating costs:                                                                              |       |                                        |       |   |   |
| Cost of products sold                                                                         |       | 13,350                                      |       | 14,058 |   |
| (Gain) loss on disposal of assets                                                             |       | (47                                         | )          | 798 |   |
| Selling, general and administrative  expenses                                                 |       | 7,377                                       |       | 9,088 |   |
| Debt restructuring negotiation costs                                                          |       | —                                      |       | 4,869 |   |
|                                                                                          |       |                                        |       |   |   |
| Operating loss                                                                                |       | (3,359                                      | )          | (11,863 | ) |
|                                                                                          |       |                                        |       |   |   |
| Interest expense (excluding contractual  interest expense of $38,535 and $11,710)             |       | 564                                         |       | 24,274 |   |
| Amortization of debt issuance costs                                                           |       | 1,870                                       |       | 1,531 |   |
| Other income, net                                                                             |       | (913                                        | )          | (264 | ) |
|                                                                                          |       |                                        |       |   |   |
| Loss from operations before reorganization  items                                             |       | (4,880                                      | )          | (37,404 | ) |
|                                                                                          |       |                                        |       |   |   |
| Reorganization items:                                                                         |       |                                        |       |   |   |
| Professional fees                                                                             |       | (4,890                                      | )          | (1,720 | ) |
| Impairment of assets                                                                          |       | (1,517                                      | )          | (218 | ) |
| Other                                                                                         |       | (943                                        | )          | (264 | ) |
|                                                                                          |       | (7,350                                      | )          | (2,202 | ) |
|                                                                                          |       |                                        |       |   |   |
| Loss before discontinued operations                                                           |       | (12,230                                     | )          | (39,606 | ) |
|                                                                                          |       |                                        |       |   |   |
| Discontinued operations:                                                                      |       |                                        |       |   |   |
| Income (loss) from discontinued operations  (including net gain on disposal of $3,812 and $4) |       | 36,562                                      |       | (4,464 | )  |
| Income tax provision on disposal of assets                                                    |       | (1,772                                      | )          | — |   |
| Income (loss) from discontinued operations                                                    |       | 34,790                                      |       | (4,464 | )  |
|                                                                                          |       |                                        |       |   |   |
| Net income (loss)                                                                             |       | $                                           | 22,560     |   | $ | (44,070 | ) |
|                                                                                          |       |                                        |       |   |   |
| Basic and diluted loss per limited partner  unit before discontinued operations               |       | $                                           | —     |   | $ | (1.14 | ) |
|                                                                                          |       |                                        |       |   |   |
| Basic and diluted income (loss) per limited  partner unit from discontinued operations        |       | —                                      |       | (0.14 | )  |
|                                                                                          |       |                                        |       |   |   |
| Basic and diluted net loss per limited  partner unit                                          |       | $                                           | —     |   | $ | (1.28 | ) |
|                                                                                          |       |                                        |       |   |   |
| Weighted average units outstanding                                                            |       | 30,527,030                                  |       | 30,527,030 |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

3

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

**(Debtor-in-Possession)**

**Consolidated Balance Sheets**

**(In thousands, except unit data)**

**(Unaudited)**

 
| ** **                                                                                   | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| **Assets**                                                                                   |       |                    |       |                   |       |
| Current assets:                                                                              |       |                    |       |                   |       |
| Cash and cash equivalents                                                                    |       | $                       | 76,996     |                   | $          | 11,028 |   |
| Accounts receivable, net of allowance of  $413 and $862                                      |       | 15,509                  |       | 43,993                 |       |
| Notes receivable                                                                             |       | 421                     |       | 558                    |       |
| Inventories                                                                                  |       | 437                     |       | 27,943                 |       |
| Deposits on timber cutting contracts                                                         |       | 39                      |       | 516                    |       |
| Prepaid and other current assets                                                             |       | 3,750                   |       | 12,305                 |       |
|                                                                                         |       |                    |       |                   |       |
| Total current assets                                                                         |       | 97,152                  |       | 96,343                 |       |
| Property, plant and equipment, net of  accumulated depreciation of $5,314 and $44,390        |       | 2,181                   |       | 41,476                 |       |
| Timber, timberlands and roads, net                                                           |       | 298,612                 |       | 302,737                |       |
| Other assets                                                                                 |       | 4,049                   |       | 5,930                  |       |
|                                                                                         |       |                    |       |                   |       |
| Total assets                                                                                 |       | $                       | 401,994    |                   | $          | 446,486 |   |
|                                                                                         |       |                    |       |                   |       |
| **Liabilities  and Partners’ Deficit**                                                  |       |                    |       |                   |       |
|                                                                                         |       |                    |       |                   |       |
| Liabilities not subject to compromise:                                                       |       |                    |       |                   |       |
| Current liabilities:                                                                         |       |                    |       |                   |       |
| Revolving credit facility                                                                    |       | $                       | —     |                   | $          | 23,370 |   |
| Accounts payable                                                                             |       | 1,150                   |       | 4,291                  |       |
| Accrued expenses                                                                             |       | 4,680                   |       | 9,194                  |       |
| Accrued income taxes payable                                                                 |       | 1,772                   |       | —                 |       |
| Current portion of long-term debt                                                            |       | 74                      |       | 123                    |       |
| Total current liabilities                                                                    |       | 7,676                   |       | 36,978                 |       |
| Long-term debt                                                                               |       | —                  |       | 86                     |       |
| Other non-current liabilities                                                                |       | —                  |       | 270                    |       |
|                                                                                         |       | 7,676                   |       | 37,334                 |       |
|                                                                                         |       |                    |       |                   |       |
| Liabilities subject to compromise                                                            |       | 509,809                 |       | 547,203                |       |
|                                                                                         |       |                    |       |                   |       |
| Total liabilities                                                                            |       | 517,485                 |       | 584,537                |       |
|                                                                                         |       |                    |       |                   |       |
| Partners’ deficit:                                                                      |       |                    |       |                   |       |
| General partners                                                                             |       | (115,491                | )          | (138,051               | )          |
| Limited partners (30,527,030 units  outstanding at September 30, 2004 and December 31, 2003) |       | —                  |       | —                 |       |
| Total partners’ deficit                                                                 |       | (115,491                | )          | (138,051               | )          |
|                                                                                         |       |                    |       |                   |       |
| Total liabilities and partners’ deficit                                                 |       | $                       | 401,994    |                   | $          | 446,486 |   |
|                                                                                              |            |                         |            |                        |            |  |  |  |  |

 

See accompanying Notes to Consolidated Financial Statements.

 

4

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

**(Debtor-in-Possession)**

**Consolidated Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**
| ** **                                                                                      | ** ** | **For the Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                                      | ** ** | **2004**                                    | ** ** | **2003** | ** ** |
| Cash flows from operating activities:                                                           |       |                                        |       |   |   |
| Net income (loss)                                                                               |       | $                                           | 22,560     |   | $ | (44,070 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities:       |       |                                        |       |   |   |
| Depletion, depreciation and amortization                                                        |       | 13,666                                      |       | 17,021 |   |
| Deferred interest                                                                               |       | —                                      |       | 2,402 |   |
| Non-cash reorganization items                                                                   |       | 1,733                                       |       | 218 |   |
| Loss on purchase commitments                                                                    |       | —                                      |       | 6,064 |   |
| Impairment of goodwill                                                                          |       | —                                      |       | 5,502 |   |
| (Gain) loss on disposal of assets                                                               |       | (3,859                                      | )          | 799 |   |
| Net change in current assets and current  liabilities, excluding effects of disposal of assets: |       |                                        |       |   |   |
| Accounts and notes receivable                                                                   |       | (21,176                                     | )          | 199 |   |
| Inventories                                                                                     |       | (4,693                                      | )          | 4,838 |   |
| Deposits on timber cutting contracts                                                            |       | (1,788                                      | )          | (158 | ) |
| Prepaid and other current assets                                                                |       | 6,020                                       |       | (7,910 | ) |
| Accounts payable and accrued expenses                                                           |       | (4,490                                      | )          | 15,472 |   |
| Net cash provided by operating activities                                                       |       | 7,973                                       |       | 377 |   |
|                                                                                            |       |                                        |       |   |   |
| Cash flows from investing activities:                                                           |       |                                        |       |   |   |
| Additions to timberlands                                                                        |       | (3,560                                      | )          | (4,178 | ) |
| Additions to timber cutting rights                                                              |       | (10                                         | )          | (650 | ) |
| Additions to equipment                                                                          |       | (515                                        | )          | (1,176 | ) |
| Proceeds from sale of assets                                                                    |       | 122,296                                     |       | 7,157 |   |
| Principal payments received on notes                                                            |       | —                                      |       | 67 |   |
| Net cash provided by investing activities                                                       |       | 118,211                                     |       | 1,220 |   |
|                                                                                            |       |                                        |       |   |   |
| Cash flows from financing activities:                                                           |       |                                        |       |   |   |
| Net decrease in short-term borrowings                                                           |       | (23,338                                     | )          | (5,544 | ) |
| Repayments of long-term debt                                                                    |       | (36,878                                     | )          | (60 | ) |
| Other financing activities                                                                      |       | —                                      |       | (178 | ) |
| Net cash used in financing activities                                                           |       | (60,216                                     | )          | (5,782 | ) |
|                                                                                            |       |                                        |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                           |       | 65,968                                      |       | (4,185 | ) |
| Cash and cash equivalents at beginning of  period                                               |       | 11,028                                      |       | 12,993 |   |
|                                                                                            |       |                                        |       |   |   |
| Cash and cash equivalents at end of period                                                      |       | $                                           | 76,996     |   | $ | 8,808 |   |
|                                                                                            |       |                                        |       |   |   |
| **Supplemental Cash Flow Information**                                                          |       |                                        |       |   |   |
| Cash paid for reorganization items                                                              |       | $                                           | 5,768      |   | $ | 644 |   |
| Cash paid for interest                                                                          |       | $                                           | 564        |   | $ | 8,627 |   |
| Cash paid by purchaser of sawmills directly  to lessor                                          |       | $                                           | 16,243     |   | — |   |

 

See accompanying Notes to Consolidated Financial Statements.

 

5

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

**(Debtor-in-Possession)**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

Crown Pacific Partners, L.P.(the “Partnership”), a Delaware limited partnership, through its 99% ownedsubsidiary, Crown Pacific Limited Partnership (the “Operating Partnership”),was formed in 1994 to acquire, own and operate timberlands and wood productmanufacturing facilities located in the Northwest United States. During thethird quarter of 2004, the Partnership completed the disposition of itsManufacturing and Alliance Lumber Segments, which manufactured, sold anddistributed lumber and other wood products (see Note 11).  The Partnership’s business currently consistsof growing and harvesting timber for sale as logs in domestic and exportmarkets.

 

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 note holders.  Therefore, on June 29, 2003, the Partnershipand all but one of its subsidiaries, Klamath Northern Railway, Co. (“KNRC”),each filed a voluntary petition for relief under Chapter 11 of title 11 of theUnited States Code (the “Bankruptcy Code”) in the United States Bankruptcy Courtfor the District of Arizona in Phoenix, Arizona (the “Bankruptcy Court”), casenumbers 03-11258-PHX-RJH through 03-11263-PHX-RJH.  These cases are jointly administered undercase number 03-11258-PHX-RJH.  ThePartnership and its subsidiaries currently manage their properties and operatetheir businesses as “debtors-in-possession” under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of theBankruptcy Code.  See Note 2 also.

 

Theaccompanying consolidated financial statements have been prepared assuming thatthe Partnership will continue as a going concern, and in accordance withStatement of Position 90-7 (“SOP 90-7”), “Financial Reporting by Entities inReorganization Under the Bankruptcy Code.” As a result of the Chapter 11filing, there is no assurance that the carrying amounts of assets will berealized or that the liabilities will be settled for the amounts recorded.  Until a plan of reorganization is confirmedby the Bankruptcy Court, the Partnership is not able to determine the ultimatedisposition of its remaining assets and liabilities. All significantintercompany transactions and balances have been eliminated in consolidation.Certain prior period reclassifications have been made to conform to the currentperiod presentation.

 

**Note 2:  Chapter 11 Bankruptcy Reorganization**

 

Thefollowing events have occurred under the jurisdiction of the Bankruptcy Court:

 

•      OnJune 29, 2003, the Partnership and all of its subsidiaries except KNRC eachfiled a voluntary petition for relief under Chapter 11 of the Bankruptcy Code.

•      Ainterim debtor-in-possession financing facility was arranged and approved bythe Bankruptcy Court in July 2003.  Thefacility was paid in full and the related agreement was terminated in the thirdquarter of 2004.

•      InOctober 2003, the Partnership agreed to pay $0.5 million per month, beginningwith the month of July 2003, to the acquisition facility banks and senior noteholders as adequate 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.  The Partnership has made all scheduledpayments to date totaling $7.5 million through September 30, 2004.

•      OnNovember 10, 2003, a hearing was held in the Bankruptcy Court on a motion fromthe Partnership, which was opposed by the creditors, to extend the period ofexclusivity in which only the Partnership could present a plan ofreorganization to the Bankruptcy Court. At the hearing, the

 

6

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BankruptcyCourt denied the Partnership’s motion, thereby ending the period within whichthe Partnership had the exclusive right to propose a reorganization plan.

•      ThePartnership and its representatives have held negotiations with representativesof the senior note holders and acquisition facility banks on a consensual planof reorganization.

•      InApril 2004, the Partnership closed the sale of its Alliance Lumber Segmentoperations in Las Vegas, Nevada.  SeeNote 11 also.

•      InJuly 2004, the Partnership closed the sale of its Alliance Lumber Segmentoperations in Reno, Nevada.  See Note 11also.

•      InAugust 2004, the Partnership closed the sale of its remaining Alliance LumberSegment operations in Phoenix, Arizona. See Note 11 also.

•      InSeptember 2004, the Partnership closed the sale of its Manufacturing Segmentoperations in Oregon and Washington. $32.3 million of the proceeds from this sale were paid to the securedcreditors in partial satisfaction of their claims.  See Note 11 also.

•      OnOctober 28, 2004, certain of the senior note holders and the official unsecuredcreditors’ committee filed a Chapter 11 plan and a disclosure statement withthe Bankruptcy Court.

•      OnOctober 28, 2004, the Bankruptcy Court granted the plan proponents motion toshorten notice with respect to the disclosure statement hearing and scheduled ahearing to consider the disclosure statement for November 10, 2004 regardingapproval of the disclosure statement.

•      OnNovember 3, 2004, the Board of Control of the Managing General Partner made thedecision to support the plan of reorganization and disclosure statementpresented to the Bankruptcy Court by the representatives of the senior noteholders and acquisition facility banks. In accordance with this decision, prior to the November 10, 2004disclosure statement hearing, the Partnership became a co-proponent of the planand the disclosure statement.

•      OnNovember 10, 2004, the debtors, certain holders of senior notes, and thecreditors’ committee (the “Plan Proponents”) filed their Second Amended JointChapter 11 Plan and Disclosure Statement. Following a hearing to consider the adequacy of the Disclosure Statement,on November 10, 2004, the Bankruptcy Court approved the Disclosure Statementand authorized the solicitation of Plan acceptances. The Bankruptcy Courtfurther ordered that the Plan confirmation hearing will commence on December20, 2004.

 

At the bankruptcypetition date, the creditors under the acquisition facility and the seniornotes asserted that their debt was collateralized by the Partnership’stimberlands and certain real property and equipment associated with itsManufacturing Segment.   The remainingliabilities subject to compromise are generally unsecured.  The Chapter 11 filing constitutes adefault or event of default under a number of the Partnership’s debt, lease andother contractual relationships.  While the Partnership is underbankruptcy protection, any scheduled interest or principal payments on debt aredeferred and creditors are generally prohibited from pursuing collection oftheir pre-petition claims by the automatic stay provisions of the BankruptcyCode.  In accordance with SOP 90-7, thePartnership discontinued accruing interest on its term debt effective June 30,2003, because it is not probable it will be paid during the bankruptcyproceedings or become an allowed claim by the Bankruptcy Court.  An additional $12.9 million and $38.5million, respectively, of interest expense would have been recognized in thethree and nine month periods ended September 30, 2004, and an additional $11.7million of interest expense would have been recognized in the three and ninemonth periods ended September 30, 2003, if not for the Chapter 11 bankruptcypetition.

 

The Partnership has heldnegotiations with the major creditor constituents in its Chapter 11proceedings, and has sold its Alliance Lumber Segment and Manufacturing Segmentoperations during the Chapter 11 cases.  It appears highly unlikely that the claims of the holders of theacquisition facility bank debt and senior notes will be satisfied in full.Accordingly, the Chapter 11 reorganization plan that was filed on October 28,2004 specifies the extinguishment of the Partnership units with no recovery toholders of units and specifies the transfer of the Partnership’s remainingoperations and associated assets, including the timber and timberlands, to oneor more entities that will be owned and controlled by the acquisition facilitylenders and the senior note holders.

 

7

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On November 10, 2004, theBankruptcy Court approved the Disclosure Statement and authorized thesolicitation of Plan acceptances. The Bankruptcy Court set a date for the planconfirmation hearing on December 20, 2004. An effective date for the reorganization plan of December 31, 2004 isproposed.

 

**Note3:  Debtor-in-Possession Credit Facility**

 

On July 17, 2003 the Bankruptcy Court entered a final financing order approving a debtor-in-possession credit facility with an original borrowing availability of $40 million (“DIP Revolver”) with CIT Group/Business Credit (“CIT”).  The original $40 million borrowing limit was subject to a borrowing base and was collateralized by accounts receivable, inventory and substantially all personal property.  The DIP Revolver bore interest at either (a) the Chase Bank Prime Rate plus 0.5% or (b) LIBOR plus 3%, at the option of the Partnership.  The balance outstanding under the DIP revolver was paid in full in July 2004, and the agreement was terminated in August 2004.

 

**Note4:  Liabilities Subject to Compromise**

 

Pursuant to thebankruptcy proceedings, the Partnership has classified certain liabilitieswhich existed prior to the June 29, 2003 bankruptcy petition filing asliabilities subject to compromise in accordance with SOP 90-7.  Disposition and settlement of suchliabilities is under the jurisdiction of the Bankruptcy Court.  Certain accounts payable and accrued expensesclassified as liabilities subject to compromise have been satisfied, underjurisdiction of the Bankruptcy Court, in conjunction with the disposition ofthe Partnership’s Alliance Lumber and Manufacturing Segment operations. Thefollowing table summarizes the pre-petition liabilities that are included asliabilities subject to compromise on the accompanying consolidated balancesheets (in thousands):

 
| ** **                                                         | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| Acquisition facility principal                                     |       | $                       | 112,372    |                   | $          | 112,372 |   |
| Senior notes principal                                             |       | 400,658                 |       | 400,658                |       |
| Adequate protection payments(1)                                    |       | (7,500                  | )          | (3,000                 | )          |
| Payment made in conjunction with sale of  Manufacturing Segment(2) |       | (32,259                 | )          | —                 |       |
| Accrued interest                                                   |       | 21,039                  |       | 21,039                 |       |
| Deferred enhanced interest                                         |       | 4,927                   |       | 4,927                  |       |
| Make whole fees and interest                                       |       | 6,360                   |       | 6,360                  |       |
| Accounts payable                                                   |       | 799                     |       | 1,419                  |       |
| Other accrued expenses                                             |       | 3,413                   |       | 3,428                  |       |
| Total                                                              |       | $                       | 509,809    |                   | $          | 547,203 |   |

----

 

(1)   In October 2003, the Partnershipagreed to pay $0.5 million per month, retroactive to July 2003, to theacquisition facility banks and senior note holders as adequate protectionpayments related to their asserted collateral. Such payments are to be appliedto reduce, on a dollar-for-dollar basis, the aggregate allowed secured claimsof the senior note holders and the acquisition facility banks.  The method for allocating the adequateprotection payments will be determined under the jurisdiction of the BankruptcyCourt and, therefore, the Partnership is not able to apply these payments tospecific debt components at this time.

(2)   In September 2004, the Partnershipcompleted the sale of its Manufacturing Segment operations, which includedcertain assets which the facility banks and senior note holders had assertedwere collateral for their debt. Accordingly, $32.3 million of the proceeds from this transaction,representing the portion related to asserted collateral, were paid to Bank ofAmerica, N.A., as Collateral Agent to the facility banks and senior noteholders.  The allocation of thesepayments to individual creditors was not determined by the Partnership and,therefore, the Partnership is not able to apply these payments to specific debtcomponents at this time.

 

8

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**Note 5:  Inventories**

 

All inventories,consisting primarily of logs, supplies, lumber and building materials, arestated at the lower of average cost or market and consisted of the following (inthousands):

 
| ** **            | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|-----------------------|------------|-------------------------|------------|------------------------|------------|
| Lumber                |       | $                       | —     |                   | $          | 3,554 |   |
| Logs                  |       | 162                     |       | 1,887                  |       |
| Supplies              |       | 275                     |       | 3,326                  |       |
| Distribution products |       | —                  |       | 19,176                 |       |
| Total                 |       | $                       | 437        |                   | $          | 27,943 |   |

 

**Note6:  Timber, Timberlands and Roads, Net**

 

The Partnershipupdates its timber inventory system annually for changes in estimated volumedue to timber verification cruises, timber growth factors and actual harvestlevels by species.  The changes toestimated timber volume, along with changes in book value from capitalizedexpenditures, impairment adjustments and any timber purchase or saletransactions result in a change in estimated depletion rates. The revisedestimate made at the beginning of 2004 decreased depletion expense for thethree and nine month periods ended September 30, 2004 by approximately $0.1million and $0.4 million, respectively, compared to the depletion rates thatwere in effect in the comparable periods of 2003, applied to the actual volumeharvested in the three and nine month periods ended September 30, 2004.

 

**Note 7:  Allocation of Partnership Losses**

 

The Partnership Agreement provides that profit andlosses are generally allocated 1.01% to the General Partner interest and 98.99%to the Limited Partner interest.  Inaddition, the Partnership Agreement specifies that net losses are not allocatedto the Limited Partner Interest to the extent doing so would result in (orincrease) a deficit balance in their capital accounts. At that point, netlosses are allocated 100% to the General Partner interest. In the third quarterof 2003, the Limited Partners’ capital accounts were reduced to zero, andsubsequent income and losses have been allocated 100% to the GeneralPartners.  Accordingly, the GeneralPartner interest was allocated the entire net income that was reported in thethree and nine month periods ended September 30, 2004.  Furthermore, the General Partner interest wasallocated an additional $3.5 million of losses during the three and nine monthsended September 30, 2003.  In accordance withthe Partnership Agreement, 100% of income and losses will continue to be allocatedto the General Partners unless and until the cumulative additional losses theyhave been allocated are fully recovered.

 

**Note 8:  Unit-Based Compensation**

 

The Partnership accounts forunit 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 “Accountingfor Stock-Based Compensation - Transition and Disclosure,” which thePartnership 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 

 

9

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value method prescribed by SFASNo. 123 “Accounting for Stock-Based Compensation” as follows (in thousands,except per unit amounts):

 
| ** **                                                                                                            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                            | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income (loss), as reported                                                                                        |       | $                                     | 6,325      |                                 | $          | (6,652 | ) | $ | 22,560 |   | $ | (44,070 | ) |
| Deduct - total unit-based employee  compensation expense determined under the fair value based method for all  awards |       | (1                                    | )          | (8                                   | )          | (4 | ) | (24 | ) |
| Net income (loss), pro forma                                                                                          |       | $                                     | 6,324      |                                 | $          | (6,660 | ) | $ | 22,556 |   | $ | (44,094 | ) |
| Basic and diluted net income (loss) per  unit:                                                                        |       |                                  |       |                                 |       |   |   |   |   |
| As reported                                                                                                           |       | $                                     | —     |                                 | $          | (0.10 | ) | $ | — |   | $ | (1.28 | ) |
| Pro forma                                                                                                             |       | $                                     | —     |                                 | $          | (0.10 | ) | $ | — |   | $ | (1.28 | ) |

 

No unit options have beengranted since 2001.

 

**Note 9:  Loss on Timber Purchase Commitments**

 

During the three and nine monthperiods ended September 30, 2003, the Partnership recognized non-cash losses onpurchase commitments with the U.S. Forest Service and private timber deeds of$5.7 million and $6.1 million, respectively, which represented the estimatedprobable losses to be recognized on these contracts through their estimatedcompletion dates.  The Partnershipentered into these contracts to ensure an adequate log supply for its Gilchristand Prineville sawmills.  Market pricingfor the lumber output from these commitments had declined significantly sincethe commitments were originally made.  Thesecharges are included as a component of discontinued operations on theconsolidated statements of operations. See Note 11 also.

 

**Note 10:  Segment Reporting**

 

The Partnership previouslyclassified its business into four segments: 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 such lumber as well as residualchips and other by-products;  3) AllianceLumber, consisting of the distribution and supply of building materials throughthe Partnership’s professional contractor service yards; and 4) Trading andDistribution, engaged in the wholesale trading and distribution of lumber andpaneling products.  Following thedisposition of the Trading and Distribution Segment in 2003 and the AllianceLumber Segment and the Manufacturing Segment in 2004, the Partnership nowclassifies its business into a single segment, Timberlands.  See also Note 11, Discontinued Operationsbelow.

 

**Note 11: Discontinued Operations**

 

***Trading and Distribution Segment***

In April and May 2003, in two separate transactions, the Partnershipsold the inventory and fixed assets related to its Trading and DistributionSegment and discontinued the segment’s operations.  The purchasers of these assets assumed theoperating leases, accounts payable and accrued expenses related to thesebusinesses.  The Partnership receivedcash proceeds of $4.5 million from these asset sales, all of which wasimmediately applied to outstanding principal on the revolving credit facility.The results of operations of the Trading and Distribution Segment are reflectedas discontinued operations on the accompanying consolidated statements ofoperations for all 2003 periods presented in accordance with Statement ofFinancial Accounting Standards No. 144 (“SFAS No. 144”) “Accounting for theImpairment or Disposal of Long-Lived Assets.”

 

During March 2003,deterioration of the Partnership’s trade credit availability began to adverselyaffect operating margins in the Trading and Distribution Segment.  Pursuant to the provisions of SFAS No. 142 

 

10

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“Goodwill and Other IntangibleAssets,” the Partnership evaluated the goodwill balance of this segment forimpairment following the change in circumstances during the first quarter of2003, utilizing a fair value analysis of the business in the current marketenvironment.  Based on the results ofthis evaluation, the Partnership determined that its goodwill was impaired andrecorded a non-cash impairment charge of $5.5 million in the three months endedMarch 31, 2003.  This $5.5 million chargeis included in discontinued operations.  Summarized financial informationfor these operations is as follows (in thousands):

 
| ** **        | ** ** | **Three Months  Ended  Sept. 30, 2003** | ** ** | **Nine Months  Ended  Sept. 30, 2003** | ** ** |
|-------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| External revenues |       | $                                       | 2          |                                   | $          | 34,141 |   |
| Operating loss    |       | (33                                     | )          | (5,863                                 | )          |
| Gain on disposal  |       | —                                  |       | 4                                      |       |
|                   |            |                                         |            |                                        |            |  |  |

 

***Alliance Lumber Segment***

In April 2004, thePartnership closed the sale of its Alliance Lumber Segment operations in LasVegas, Nevada, resulting in a recognized loss of $1.2 million in the secondquarter of 2004.  Sale of these netassets produced net cash proceeds of $12.3 million, all of which wasimmediately paid to CIT to reduce outstanding borrowings under the DIP Revolver.

 

In July 2004, the Partnership closed the sale of its Alliance LumberSegment operations in Reno, Nevada, generating $14.2 million of net cashproceeds, $1.4 million of which was immediately paid to CIT to eliminateoutstanding borrowings under the DIP Revolver. No gain or loss was recognizedon the transaction.  For income taxpurposes, sale of these operations resulted in a taxable gain, which had beendeferred since the original acquisition transaction, resulting in an estimatedincome tax liability of $0.5 million, which was recognized in the third quarterof 2004.    This tax liability is aliability of the wholly-owned C-Corporation subsidiary which made the originalacquisition, and would not be allocated to unit holders.  The estimate of the tax liability assumesrecognition in 2004 of a tax benefit related to the wholly-owned C-Corporation’sinvestment in the Operating Partnership.

 

In August 2004, the Partnership closed the sale of its AllianceLumber Segment operations in Phoenix, Arizona, generating $39.2 million of netcash proceeds. A gain of approximately $0.6 million was recognized on thetransaction.  For income tax purposes,sale of these operations resulted in a taxable gain, which had been deferredsince the original acquisition transaction, resulting in an estimated incometax liability of $1.3 million, which was recognized in the third quarter of2004.  This tax liability is a liabilityof the wholly-owned C-Corporation subsidiary which made the originalacquisition, and would not be allocated to unit holders.  The estimate of the tax liability assumesrecognition in 2004 of a tax benefit related to the wholly-owned C-Corporation’sinvestment in the Operating Partnership.

 

Results of operations for the Alliance Lumber Segment are reported asdiscontinued operations for all periods presented in accordance with SFAS No.144.  Summarized financial informationfor these operations is as follows (in thousands):

 
| ** **              | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| External revenues       |       | $                                | 20,847     |                            | $          | 57,811 |   | $ | 153,408 |   | $ | 156,344 |   |
| Operating income        |       | 756                              |       | 149                             |       | 7,785 |   | 4,898 |   |
| Gain (loss) on disposal |       | 646                              |       | —                          |       | (552 | ) | — |   |
|                         |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

***ManufacturingSegment***

In September 2004, thePartnership closed the sale of its Manufacturing Segment operations, generating$72.8 million in net cashproceeds.  $32.3 million of theseproceeds were paid directly from escrow to the facility banks and senior noteholders in partial satisfaction of their claims.  $16.2 million of the proceeds were paiddirectly from escrow to external parties in complete satisfaction of thePartnership’s lease obligation related to the Port Angeles sawmill which wassold as part of the Manufacturing Segment. The Partnership received

 

11

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theremaining proceeds from the disposition in cash.

 

Results of operations for the Manufacturing Segment are reported asdiscontinued operations for all periods presented in accordance with SFAS No.144.  Summarized financial informationfor these operations is as follows (in thousands):

 
| ** **              | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| External revenues       |       | $                                | 21,891     |                            | $          | 23,462 |   | $ | 80,802 |   | $ | 62,049 |   |
| Operating income (loss) |       | 6,613                            |       | (2,599                          | )     | 24,852 |   | (3,781 | )  |
| Gain on disposal        |       | 4,364                            |       | —                          |       | 4,364 |   | — |   |
|                         |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

Charges for losseson timber purchase commitments, totaling $5.7 million and $6.1 million,respectively, are included in the operating loss for the three and nine monthsended September 30, 2003.

 

***OtherDiscontinued Operations***

Included with the sale of theManufacturing Segment in September 2004 was the Partnership’s railcar leaseprogram operations and KNRC.  Theseoperations were sold for cash proceeds of $51,000 and no gain or loss was recognizedon the dispositions.

 

These business units were previously reported in Corporate and Otherfor segment reporting purposes.  Resultsof operations for these business units are reported as discontinued operationsfor all periods presented in accordance with SFAS No. 144.

 

Summarized financial information for these operations is as follows (inthousands):

 
| ** **        | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **        | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| External revenues |       | $                                | 1,620      |                            | $          | 2,255 |   | $ | 6,597 |   | $ | 6,529 |   |
| Operating income  |       | 32                               |       | 350                             |       | 113 |   | 278 |   |
|                   |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

**Note 12: Concentration of Credit Risk**

 

One account represented 41.1% of the total accounts receivable as ofSeptember 30, 2004.  This amount wascollected in full in October 2004. Another customer’s account balance represented 45.3% of the totalaccounts receivable as of September 30, 2004. This amount is due in full on November 30, 2004, and represents thefinal amount due on a stumpage sale recognized in 2000.  No other individual accounts receivable balanceswere significant as of September 30, 2004.

 

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

 

**Overview**

 

Crown Pacific Partners, L.P.(the “Partnership”), a Delaware limited partnership, through our 99% ownedsubsidiary, Crown Pacific Limited Partnership (the “Operating Partnership”),was formed in 1994 to acquire, own and operate timberlands and wood productmanufacturing facilities located in the Northwest United States. During thethird quarter of 2004, we completed the disposition of our Manufacturing andAlliance Lumber Segments, which manufactured, sold and distributed lumber andother wood products (see discussion below). Our business currently consists of growing and harvesting timber forsale as logs in domestic and export markets.

 

12

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**Chapter 11Bankruptcy 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.  Therefore, on June 29, 2003, we and all butone of our subsidiaries, Klamath Northern Railway, Co. (“KNRC”), each filed avoluntary petition for relief under Chapter 11 of title 11 of the United StatesCode (the “Bankruptcy Code”) in the United States Bankruptcy Court for theDistrict of Arizona in Phoenix, Arizona (the “Bankruptcy Court”).  We and our subsidiaries currently manage ourproperties and operate our businesses as “debtors-in-possession” under thejurisdiction of the Bankruptcy Court and in accordance with the applicableprovisions of the Bankruptcy Code.

 

Thefollowing events have occurred under the jurisdiction of the Bankruptcy Court:

•      OnJune 29, 2003, we and all of our subsidiaries except KNRC each filed avoluntary petition for relief under Chapter 11 of the Bankruptcy Code.

•      Ainterim debtor-in-possession financing facility was arranged and approved bythe Bankruptcy Court in July 2003.  Thefacility was paid in full and the related agreement was terminated in the thirdquarter of 2004.

•      InOctober 2003, we agreed to pay $0.5 million per month, beginning with the monthof July 2003, to the acquisition facility banks and senior note holders asadequate protection payments related to their asserted collateral.  Such payments are to be applied to reduce, ona dollar-for-dollar basis, the aggregate allowed secured claims of the seniornote holders and the acquisition facility banks.  We have made all scheduled payments to datetotaling $7.5 million through September 30, 2004.

•      OnNovember 10, 2003, a hearing was held in the Bankruptcy Court on a motion fromus, which was opposed by the creditors, to extend the period of exclusivity inwhich only we could present a plan of reorganization to the BankruptcyCourt.  At the hearing, the BankruptcyCourt denied our motion, thereby ending the period within which we had theexclusive right to propose a reorganization plan.

•      Weand our representatives have held negotiations with representatives of thesenior note holders and acquisition facility banks on a consensual plan ofreorganization.

•      InApril 2004, we closed the sale of our Alliance Lumber Segment operations in LasVegas, Nevada.

•      InJuly 2004, we closed the sale of our Alliance Lumber Segment operations inReno, Nevada.

•      InAugust 2004, we closed the sale of our remaining Alliance Lumber Segmentoperations in Phoenix, Arizona.

•      InSeptember 2004, we closed the sale of our Manufacturing Segment operations inOregon and Washington.  $32.3 million ofthe proceeds from this sale were paid to the secured creditors in partialsatisfaction of their claims.

•      OnOctober 28, 2004, certain of the senior note holders and the official unsecuredcreditors’ committee filed a Chapter 11 plan and a disclosure statement withthe Bankruptcy Court.

•      OnOctober 28, 2004, the Bankruptcy Court granted the plan proponents motion toshorten notice with respect to the disclosure statement hearing, and scheduleda hearing to consider the disclosure statement for November 10, 2004.

•      OnNovember 3, 2004, the Board of Control of the Managing General Partner made thedecision to support the plan of reorganization and disclosure statementpresented to the Bankruptcy Court by the representatives of the senior noteholders and acquisition facility banks. In accordance with this decision, prior to the November 10, 2004disclosure statement hearing, we became a co-proponent of the plan and thedisclosure statement.

•      OnNovember 10, 2004, the debtors, certain holders of senior notes, and thecreditors’ committee (the “Plan Proponents”) filed their Second Amended JointChapter 11 Plan and Disclosure Statement. Following a hearing to consider theadequacy of the Disclosure Statement, on November 10, 2004, the BankruptcyCourt approved the Disclosure Statement and authorized the solicitation of Planacceptances. The Bankruptcy Court further ordered that the Plan confirmation hearingwill commence on December 20, 2004.

 

13

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At the bankruptcypetition date, the creditors under the acquisition facility and the seniornotes asserted that their debt is collateralized by our timberlands and certainreal property and equipment associated with our Manufacturing Segment. Theremaining liabilities subject to compromise are generally unsecured.  The Chapter 11 filing constitutes adefault or event of default under a number of our debt, lease and othercontractual relationships.  While we are under bankruptcyprotection, any scheduled interest or principal payments on debt are deferredand creditors are generally prohibited from pursuing collection of theirpre-petition claims by the automatic stay provisions of the BankruptcyCode.  In accordance with SOP 90-7, wediscontinued accruing interest on its term debt effective June 30, 2003,because it is not probable it will be paid during the bankruptcy proceedings orbecome an allowed claim by the Bankruptcy Court.  An additional $12.9 million and $38.5million, respectively, of interest expense would have been recognized in thethree and nine month periods ended September 30, 2004, and an additional $11.7million of interest expense would have been recognized in the three and ninemonth periods ended September 30, 2003, if not for the Chapter 11 bankruptcypetition.

 

We held negotiations with themajor creditor constituents in our Chapter 11 proceedings, and have sold ourAlliance Lumber Segment and Manufacturing Segment operations during the Chapter11 cases.   It appears highly unlikelythat the claims of the holders of the acquisition facility bank debt and seniornotes will be satisfied in full. Accordingly, the Chapter 11 reorganizationplan that was filed on October 28, 2004 specifies the extinguishment of ourunits with no recovery to holders of units and specifies the transfer of ourremaining operations and associated assets, including the timber andtimberlands, to one or more entities that will be owned and controlled by theacquisition facility lenders and the senior note holders.

 

On November 10, 2004, theBankruptcy Court approved the Disclosure Statement and authorized thesolicitation of Plan acceptances. The Bankruptcy Court set a date for the planconfirmation hearing on December 20, 2004. An effective date for the reorganization plan of December 31, 2004 isproposed.

 

**Dispositionsof Assets**

 

***Trading and Distribution Segment***

In April and May 2003, in two separate transactions, we sold theinventory and fixed assets related to our Trading and Distribution Segment anddiscontinued the segment’s operations. The purchasers of these assets assumed the operating leases, accountspayable and accrued expenses related to these businesses.  We received cash proceeds of $4.5 millionfrom these asset sales, all of which was immediately applied to outstandingprincipal on the revolving credit facility. The results of operations of the Trading and Distribution Segment arereflected as discontinued operations on the accompanying consolidatedstatements of operations for all 2003 periods presented in accordance withStatement of Financial Accounting Standards No. 144 (“SFAS No. 144”) “Accountingfor the Impairment or Disposal of Long-Lived Assets.”

 

DuringMarch 2003, deterioration of our trade credit availability began to adverselyaffect operating margins in the Trading and Distribution Segment.  Pursuant to the provisions of SFAS No. 142 “Goodwilland Other Intangible Assets,” we evaluated the goodwill balance of this segmentfor impairment following the change in circumstances during the first quarterof 2003, utilizing a fair value analysis of the business in the current marketenvironment. Based on the results of this evaluation, we determined thatour goodwill was impaired and recorded a non-cash impairment charge of $5.5million in the three months ended March 31, 2003.  This $5.5 million charge is included indiscontinued operations.

 

Summarizedfinancial information for these operations is as follows (in thousands): 

 
| ** **        | ** ** | **Three Months  Ended  Sept. 30, 2003** | ** ** | **Nine Months  Ended  Sept. 30, 2003** | ** ** |
|-------------------|------------|-----------------------------------------|------------|----------------------------------------|------------|
| External revenues |       | $                                       | 2          |                                   | $          | 34,141 |   |
| Operating loss    |       | (33                                     | )          | (5,863                                 | )          |
| Gain on disposal  |       | —                                  |       | 4                                      |       |
|                   |            |                                         |            |                                        |            |  |  |

 

14

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*** ***

***Alliance Lumber Segment***

In April 2004, weclosed the sale of our Alliance Lumber Segment operations in Las Vegas, Nevada,resulting in a recognized loss of $1.2 million in the second quarter of2004.  Sale of these net assets producednet cash proceeds of $12.3 million, all of which was immediately paid to CIT toreduce outstanding borrowings under the DIP Revolver.

 

In July 2004, we closed the sale of our Alliance Lumber Segmentoperations in Reno, Nevada, generating $14.2 million of net cash proceeds, $1.4million of which was immediately paid to CIT to eliminate outstandingborrowings under the DIP Revolver. No gain or loss was recognized on thetransaction.  This disposition reducedthe borrowing base and availability on our DIP Revolver.  For income tax purposes, sale of theseoperations resulted in a taxable gain, which had been deferred since theoriginal acquisition transaction, resulting in an estimated income taxliability of $0.5 million, which was recognized in the third quarter of 2004.  This tax liability is a liability of thewholly-owned C-Corporation subsidiary which made the original acquisition, andwould not be allocated to unit holders. The estimate of the tax liability assumes recognition in 2004 of a tax benefitrelated to the wholly-owned C-Corporation’s investment in the OperatingPartnership.

 

In August 2004, we closed the sale of our AllianceLumber Segment operations in Phoenix, Arizona, generating $39.2 million of netcash proceeds. A gain of approximately $0.6 million was recognized on thetransaction.  For income tax purposes,sale of these operations resulted in a taxable gain, which had been deferredsince the original acquisition transaction, resulting in an estimated incometax liability of $1.3 million, which was recognized in the third quarter of2004.  This tax liability is a liabilityof the wholly-owned C-Corporation subsidiary which made the originalacquisition, and would not be allocated to unit holders.  The estimate of the tax liability assumesrecognition in 2004 of a tax benefit related to the wholly-owned C-Corporation’sinvestment in the Operating Partnership.

 

Results of operations for the Alliance Lumber Segment operations arereported as discontinued operations for all periods presented in accordancewith SFAS No. 144.  Summarized financialinformation for these operations is as follows (in thousands):

 
| ** **              | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| External revenues       |       | $                                | 20,847     |                            | $          | 57,811 |   | $ | 153,408 |   | $ | 156,344 |   |
| Operating income        |       | 756                              |       | 149                             |       | 7,785 |   | 4,898 |   |
| Gain (loss) on disposal |       | 646                              |       | —                          |       | (552 | ) | — |   |
|                         |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

***ManufacturingSegment***

In September 2004, we closedthe sale of our Manufacturing Segment operations, generating $72.8 million in net cash proceeds.  $32.3 million of these proceeds were paiddirectly from escrow to the facility banks and senior note holders in partialsatisfaction of their claims.  $16.2million of the proceeds were paid directly from escrow to external parties incomplete satisfaction of our lease obligation related to the Port Angelessawmill which was sold as part of the Manufacturing Segment.  We received the remaining proceeds from thedisposition in cash.

 

Results of operations for the Manufacturing Segment operations arereported as discontinued operations for all periods presented in accordancewith SFAS No. 144.  Summarized financialinformation for these operations is as follows (in thousands):

 
| ** **              | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **              | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| External revenues       |       | $                                | 21,891     |                            | $          | 23,462 |   | $ | 80,802 |   | $ | 62,049 |   |
| Operating income (loss) |       | 6,613                            |       | (2,599                          | )     | 24,852 |   | (3,781 | )  |
| Gain on disposal        |       | 4,364                            |       | —                          |       | 4,364 |   | — |   |
|                         |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

Charges for losseson timber purchase commitments, totaling $5.7 million and $6.1 million,respectively, are included in the operating loss for the three and nine monthsended September 30, 2003.

 

15

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***OtherDiscontinued Operations***

Included with the sale of theManufacturing Segment in September 2004 was our railcar lease programoperations and KNRC.  These operationswere sold for cash proceeds of $51,000 and no gain or loss was recognized onthe dispositions.

 

These business units were previously reported in Corporate and Otherfor segment reporting purposes.  Resultsof operations for these business units are reported as discontinued operationsfor all periods presented in accordance with SFAS No. 144.  Summarized financial information for theseoperations is as follows (in thousands):

 
| ** **        | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **        | ** ** | **2004**                         | ** ** | **2003**                        | ** ** | **2004** | ** ** | **2003** | ** ** |
| External revenues |       | $                                | 1,620      |                            | $          | 2,255 |   | $ | 6,597 |   | $ | 6,529 |   |
| Operating income  |       | 32                               |       | 350                             |       | 113 |   | 278 |   |
|                   |            |                                  |            |                                 |            |  |  |  |  |  |  |  |  |

 

**Industry Overview**

 

Theforest products industry is characterized by highly volatile commoditypricing.  Product pricing for logs anddimension lumber is a function of species, grade, size and availability. Pricesare heavily influenced by short-term supply and demand factors. Prices tend tofollow broad seasonal and cyclical patterns. Demand is influenced by activitylevels in the housing and construction industries, as well as general economicconditions and foreign currency exchange rates. In recent years, over capacityof lumber manufacturing facilities has led to an abundance of supply. Supplyhas been further increased by imported products from Canada and othercountries. In addition, competition from non-wood based products and compositematerials has also influenced prices for dimension lumber. Although demand hasbeen strong over the last three years, excess supply has contributed to lowprices for lumber, which, in turn, has depressed prices for logs andtimberlands.  Beginning in the secondhalf of 2003, prices for lumber and paneling increased sharply, and remainedrelatively strong through the second quarter of 2004, but have softened duringthe third quarter of 2004.  Prices forlogs have remained relatively low, but have increased modestly in late 2003 andthe first half of 2004.  Weather andforest fire activity, as well as environmental issues concerning the harvestingof timber, are also contributing factors to supply and the volatility of pricesin our industry.

 

**Forward-LookingStatements**

 

Information contained in Item 2and other sections of this report includes “forward-looking statements” withinthe meaning of the Private Securities Litigation Reform Act of 1995, includingstatements regarding our expectations, forecasts, hopes, beliefs, predictions,intentions or strategies regarding the future that are not purely historical,but are based on assumptions that in the future may prove not to be accurate.These assumptions include harvest volumes, species mix, prices for logs andlevels and amounts received for stumpage and property sales. Our business andprospects are subject to a number of risks, including the volatility of timberprices, factors limiting harvesting of timber including contractualobligations, governmental restrictions, weather and access limitations – aswell as the substantial capital resources required to fund our operations andthe uncertainty regarding the outcome of our chapter 11 reorganizationprocess.  Accordingly, actual results maydiffer materially from the expectations expressed in this report.  These and other risks are described in ourregistration statements and reports filed from time to time on forms 10-K, 8-Kand 10-Q, which are available from us or the United States Securities andExchange Commission.

 

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***Liquidity and Capital Resources***

Pursuant to thebankruptcy proceedings, we have classified certain liabilities which existedprior to the June 29, 2003 bankruptcy petition filing as liabilities subject tocompromise in accordance with SOP 90-7. Disposition and settlement of such liabilities is under the jurisdictionof the Bankruptcy Court.  Certainaccounts payable and accrued expenses classified as liabilities subject tocompromise have been satisfied, under jurisdiction of the Bankruptcy Court, inconjunction with the disposition of our Alliance Lumber and ManufacturingSegment operations.

 

The followingtable summarizes the pre-petition liabilities that are included as liabilitiessubject to compromise on the accompanying consolidated balance sheets (inthousands):

 
| ** **                                                         | ** ** | **September 30, 2004** | ** ** | **December 31, 2003** | ** ** |
|--------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| Acquisition facility principal                                     |       | $                      | 112,372    |                  | $          | 112,372 |   |
| Senior notes principal                                             |       | 400,658                |       | 400,658               |       |
| Adequate protection payments(1)                                    |       | (7,500                 | )          | (3,000                | )          |
| Payment made in conjunction with sale of  Manufacturing Segment(2) |       | (32,259                | )          | —                |       |
| Accrued interest                                                   |       | 21,039                 |       | 21,039                |       |
| Deferred enhanced interest                                         |       | 4,927                  |       | 4,927                 |       |
| Make whole fees and interest                                       |       | 6,360                  |       | 6,360                 |       |
| Accounts payable                                                   |       | 799                    |       | 1,419                 |       |
| Other accrued expenses                                             |       | 3,413                  |       | 3,428                 |       |
| Total                                                              |       | $                      | 509,809    |                  | $          | 547,203 |   |

 

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(1)   In October 2003, we agreed to pay$0.5 million per month, retroactive to July 2003, to the acquisition facilitybanks and senior note holders as adequate protection payments related to theirasserted collateral. Such payments are to be applied to reduce, on adollar-for-dollar basis, the aggregate allowed secured claims of the seniornote holders and the acquisition facility banks.  The method for allocating the adequateprotection payments will be determined under the jurisdiction of the BankruptcyCourt and, therefore, we are not able to apply these payments to specific debtcomponents at this time.

 

(2)   In September 2004, we completed thesale of our Manufacturing Segment operations, which included certain assetswhich the facility banks and senior note holders had asserted were collateralfor their debt.  Accordingly, $32.3million of the proceeds from this transaction, representing the portion relatedto asserted collateral, were paid to Bank of America, N.A., as Collateral Agentto the facility banks and senior note holders. The allocation of these payments to individual creditors was notdetermined by us and, therefore, we are not able to apply these payments tospecific debt components at this time.

 

On July 17, 2003 the Bankruptcy Court entered a final financing order approving a debtor-in-possession credit facility with an original borrowing availability of $40 million (“DIP Revolver”) with CIT Group/Business Credit (“CIT”).  The original $40 million borrowing limit was subject to a borrowing base and was collateralized by accounts receivable, inventory and substantially all personal property.  The DIP Revolver bore interest at either (a) the Chase Bank Prime Rate plus 0.5% or (b) LIBOR plus 3%, at the option of the Partnership.  The balance outstanding under the DIP revolver was paid in full in July 2004, and the agreement was terminated in August 2004.

 

Working capital increased to$89.5 million at September 30, 2004 compared to $59.4 million at December 31,2003, primarily due to the dispositions of our Alliance Lumber andManufacturing segments in the second and third quarters of 2004. Thesedispositions reduced accounts receivable, inventories, deposits on timbercutting contracts and prepaid and other current assets, as well as accountspayable and accrued expenses, while generating significant cash.

 

One account represented 41.1% of the total accounts receivable as ofSeptember 30, 2004.  This amount wascollected in full in October 2004. Another customer’s account balance represented 45.3% of the totalaccounts receivable as of September 30, 2004. This amount is due in full on November 30, 2004, and represents thefinal

 

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amount due on a stumpage sale recognized in 2000.  No other individual accounts receivable balanceswere significant as of September 30, 2004.

 

Net cash provided byoperating activities of $8.0 million resulted from net income of $22.6 million,depletion, depreciation and amortization of $13.7 million and non-cashreorganization items of $1.7 million, partially off-set by changes in workingcapital components, excluding the effects of disposal of assets.

 

Additions to timberlands of$3.6 million in the first nine months of 2004 resulted from normal costs forroad building and maintenance, pre-commercial thinning and reforestationactivities.

 

Proceeds from sale of assetsin 2004 primarily represent cash received for the dispositions of our AllianceLumber Segment operations and our Manufacturing Segment operations.  Proceeds from sale of assets in 2003primarily represent cash received for the disposition of our Trading andDistribution Segment operations, as well as from the sale of two aircraft.

 

During the third quarter of2004, we applied a portion of the proceeds from the sale of our Alliance LumberSegment operations to the then existing DIP Revolver.  The related financing agreement was thenterminated in the third quarter of 2004. $32.3 million of the proceeds from the sale of our Manufacturing Segmentoperations in the third quarter of 2004 were paid directly from escrow to thefacility banks and senior note holders in partial satisfaction of their securedclaims.  We have also paid $0.5 millionper month, beginning with July 2003, to the facility banks and senior noteholders under a Bankruptcy Court order for adequate protection payments.

 

We indefinitely suspended ourcash distributions beginning in the fourth quarter of 2000. Furthermore, we areprohibited from making cash distributions to unitholders during our Chapter 11reorganization process. Since it is unlikely that our unitholders will receiveanything as a result of our Chapter 11 bankruptcy proceedings, it is unlikelythat we will make any future cash distributions on our units.

 

**Results ofContinuing Operations**

During the second quarter of2003, we sold our Trading and Distribution Segment and during the first threequarters of 2004, we sold our Alliance Lumber Segment, our ManufacturingSegment and certain additional business units, all of which are reflected asdiscontinued operations on our consolidated statements of operations for allperiods presented, as applicable.  Pleasesee additional discussion regarding discontinued operations above under “Dispositionsof Assets.”  Our continuing operationsconsist primarily of three tree farms located in Oregon and Washington, as wellas centralized headquarters activities.

 
| ** **                                        | ** ** | **Three Months Ended September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| **(Dollars in thousands)**                        | ** ** | **Dollars**                          | ** ** | **% of  revenue(1)** | ** ** | **Dollars** | ** ** | **% of  revenue(1)** | ** ** |
| Revenue                                           |       | $                                    | 5,631      |   | 100.0 | % | $ | 5,725 |   | 100.0 | % |
| Operating costs:                                  |       |                                 |       |   |   |   |   |   |   |
| Cost of products sold                             |       | 4,417                                |       | 78.4 |   | 4,866 |   | 85.0 |   |
| Gain on disposal of assets                        |       | (31                                  | )          | (0.6 | ) | (10 | ) | (0.2 | ) |
| Selling, general and administrative  expenses     |       | 1,803                                |       | 32.0 |   | 2,793 |   | 48.8 |   |
| Operating loss                                    |       | (558                                 | )          | (9.9 | ) | (1,924 | ) | (33.6 | ) |
| Interest expense                                  |       | 116                                  |       | 2.1 |   | 254 |   | 4.4 |   |
| Amortization of debt issuance costs               |       | 650                                  |       | 11.5 |   | 468 |   | 8.2 |   |
| Other income, net                                 |       | (570                                 | )          | (10.1 | ) | (110 | ) | (1.9 | ) |
| Loss from operations before reorganization  items |       | (754                                 | )          | (13.4 | ) | (2,536 | ) | (44.3 | ) |
| Reorganization items                              |       | (3,560                               | )          | (63.2 | ) | (1,983 | ) | (34.6 | ) |
| Loss before discontinued operations               |       | (4,314                               | )          | (76.6 | ) | (4,519 | ) | (78.9 | ) |
| Income (loss) from discontinued operations        |       | 10,639                               |       | 188.9 |   | (2,133 | )  | (37.3 | )  |
| Net income (loss)                                 |       | $                                    | 6,325      |   | 112.3 | % | $ | (6,652 | ) | (116.2 | )% |

 

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| ** **                                        | ** ** | **Nine Months Ended September 30,** |
|---------------------------------------------------|------------|-------------------------------------|
| ** **                                        | ** ** | **2004**                            | ** ** | **2003** | ** ** |
| **(Dollars in thousands)**                        | ** ** | **Dollars**                         | ** ** | **% of   Revenue(1)** | ** ** | **Dollars** | ** ** | **% of   revenue(1)** | ** ** |
| Revenue                                           |       | $                                   | 17,321 |   | 100.0 | % | $ | 16,950 |   | 100.0 | % |
| Operating costs:                                  |       |                                |   |   |   |   |   |   |   |
| Cost of products sold                             |       | 13,350                              |   | 77.1 |   | 14,058 |   | 82.9 |   |
| (Gain) loss on disposal of assets                 |       | (47                                 | ) | (0.3 | ) | 798 |   | 4.7 |   |
| Selling, general and administrative  expenses     |       | 7,377                               |   | 42.6 |   | 9,088 |   | 53.6 |   |
| Debt restructuring and negotiation costs          |       | —                              |   | — |   | 4,869 |   | 28.7 |   |
| Operating loss                                    |       | (3,359                              | ) | (19.4 | ) | (11,863 | ) | (70.0 | ) |
| Interest expense                                  |       | 564                                 |   | 3.3 |   | 24,274 |   | 143.2 |   |
| Amortization of debt issuance costs               |       | 1,870                               |   | 10.8 |   | 1,531 |   | 9.0 |   |
| Other income, net                                 |       | (913                                | ) | (5.3 | ) | (264 | ) | (1.6 | ) |
| Loss from operations before reorganization  items |       | (4,880                              | ) | (28.2 | ) | (37,404 | ) | (220.7 | ) |
| Reorganization items                              |       | (7,350                              | ) | (42.4 | ) | (2,202 | ) | (13.0 | ) |
| Loss before discontinued operations               |       | (12,230                             | ) | (70.6 | ) | (39,606 | ) | (233.7 | ) |
| Income (loss) from discontinued operations        |       | 34,790                              |   | 200.9 |   | (4,464 | )  | (26.3 | )  |
| Net income (loss)                                 |       | $                                   | 22,560 |   | 130.2 | % | $ | (44,070 | ) | (260.0 | )% |

 

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(1)  Percentages may not add due to rounding.

 

**Revenue**

Revenue was relatively flat at$5.6 million in the third quarter of 2004 compared to $5.7 million in the thirdquarter of 2003 and increased $0.4 million, or 2.2% to $17.3 million in thenine months ended September 30, 2004 compared to $17.0 million in thecomparable period of 2003.  Revenue inthe three months ended September 30, 2004 compared to the three months endedSeptember 30, 2003 reflects a 5.6% increase in domestic log shipment volume, a61.9% decrease in export log shipment volume, an 11.3% increase in weightedaverage domestic log prices and a 16.5% decrease in weighted average export logprices.  The increase in the nine monthsended September 30, 2004 compared to the nine months ended September 30, 2003reflects a 12.1% increase in domestic log shipment volume, a 62.0% decrease inexport log shipment volume, a 9.6% increase in weighted average domestic logprices and an 18.8% decrease in weighted average export log prices.  These factors are discussed more fully below.

 

***Domestic Log Sales***

Averageexternal domestic prices received for logs sold from the various tree farmswere as follows (dollars per thousand board feet (“MBF”)):

 
| ** **       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **Tree Farm**    | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **% Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **% Change** | ** ** |
| Oregon           |       | $                                    | 332        |                                | $          | 624 |   | (46.8 | )% | $ | 350 |   | $ | 627 |   | (44.2 | )% |
| Hamilton         |       | $                                    | 440        |                                | $          | 417 |   | 5.5 | % | $ | 451 |   | $ | 422 |   | 6.9 | % |
| Olympic          |       | $                                    | 458        |                                | $          | 369 |   | 24.1 | % | $ | 419 |   | $ | 374 |   | 12.0 | % |
| Weighted average |       | $                                    | 432        |                                | $          | 388 |   | 11.3 | % | $ | 435 |   | $ | 397 |   | 9.6 | % |

 

The majorityof production at the Oregon Tree Farm was provided to our Gilchrist sawmill asan inter-segment transaction until we sold the sawmill on September 1,2004.  In 2003, a small volume of largediameter salvage logs from our Oregon Tree Farm were sold to an externalcustomer at a premium price.  In 2004,the activity shown for the Oregon Tree Farm primarily represents external salesat current market prices following the disposition of our Gilchristsawmill.  The increases at the Hamiltonand Olympic tree farms in 2004 over the comparable 2003 periods are due tohigher market prices for logs and changes in species and grade mix.

 

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

 
| ** **    | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **Tree Farm** | ** ** | **2004**                             | ** ** | **2003**                            | ** ** | **% Change** | ** ** | **2004** | ** ** | **2003** | ** ** | **% Change** | ** ** |
| Oregon        |       | 1,447                                |       | 21                                  |       |   | *  | 1,505 |   | 248 |   | * |   |
| Hamilton      |       | 6,450                                |       | 4,255                               |       | 51.6 | % | 20,998 |   | 13,470 |   | 55.9 | % |
| Olympic       |       | 3,755                                |       | 6,758                               |       | (44.4 | )% | 12,650 |   | 17,648 |   | (28.3 | )% |
| Total         |       | 11,652                               |       | 11,034                              |       | 5.6 | % | 35,153 |   | 31,366 |   | 12.1 | % |

 

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* Not meaningful.

 

The increase in volume from the Oregon TreeFarm reflects the sale of our Gilchrist sawmill to Interfor in September2004.  Previously, most of the volumeproduced by our Oregon Tree Farm was sold to our Gilchrist sawmill as aninter-segment transaction.  The increasein volume from the Hamilton Tree Farm is due to increased fee harvest followingthe temporary curtailment of logging activity in the second quarter of2003.  The decrease in volume from theOlympic Tree Farm reflects reduced fee harvest levels in 2004.

 

***Export Log Sales***

Revenue fromexport logs accounted for 3.2% and 2.3% of total revenues, respectively, in thethree months and nine months ended September 30, 2004.  Revenue from export logs accounted for 10.0%and 7.5% of total revenues, respectively, in the three months and nine monthsended September 30, 2003.  The decreasein export sales revenue is due to reduced sales volume from reducedavailability of export grade logs in the areas of our Washington tree farmswhich are currently being harvested.  Inaddition, higher domestic log prices and soft export demand for such logs havecurrently mitigated some of the advantage from exporting them.

 

**Cost ofProducts Sold**

Cost ofproducts sold decreased $0.4 million, or 9.2%, to $4.4 million in the thirdquarter of 2004 and decreased $0.7 million, or 5.0%, to $13.4 million in thenine months ended September 30, 2004. These decreases were partially due to reduced depletion rates on our feetimber following the fourth quarter 2003 impairment charge of $100.7 million werecognized on our timberlands.  Inaddition, cost of products sold is affected by grade and species mix,accessibility of the area logged and transportation costs to haul the logs toour customers.

 

**(Gain)Loss on Disposal of Assets**

The $0.8 million loss ondisposal of assets in the nine months ended September 30, 2003 includes a $0.5million gain in the first quarter of 2003 from the sale of an aircraft, offsetby a $1.3 million loss on disposal of an aircraft in the second quarter of 2003.

 

**Selling,General and Administrative Expenses**

Selling, general andadministrative expenses decreased $1.0 million, or 35.4%, to $1.8 million inthe third quarter of 2004 and decreased $1.7 million, or 18.8%, to $7.4 millionin the nine months ended September 30, 2004. The decrease in the comparable third quarter periods resulted fromreductions in personnel costs due to

 

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reduced headcount at ourtimberlands operations as well as at our headquarters office and reducedinsurance and depreciation expenses.  Forthe nine month comparable periods, reductions in personnel costs due to reducedheadcount, as well as reduced costs for outside professionals and reduced depreciationexpense were partially off-set by increased costs for insurance and bad debtsexpense.

 

**DebtRestructuring and Negotiation Costs**

Debt restructuring negotiationcosts of $4.9 million in the nine months ended September 30, 2003, consistingprimarily of professional fees, represent charges incurred related to ourreorganization and recapitalization efforts prior to our Chapter 11 bankruptcyprotection filing. Subsequent to our Chapter 11 bankruptcy protection filing,such charges are included with “Reorganization Items.”

 

**InterestExpense**

In accordancewith SOP 90-7, interest expense in the three and nine month periods endedSeptember 30, 2004 does not include contractual interest totaling $12.9 millionand $38.5 million, respectively, on the Senior Notes and Acquisition Facilitysince it is not probable it will be paid subsequent to our June 29, 2003Chapter 11 bankruptcy filing.  Pleaseread “Chapter 11 Bankruptcy Reorganization” above also.  In addition, the three and nine month periodsended September 30, 2003 exclude $11.7 million of such interest.

 

**ReorganizationItems**

Reorganizationitems consist primarily of professional fees and other charges incurred relatedto our Chapter 11 reorganization and recapitalization efforts. We anticipatecontinuing to incur significant professional fees and court costs related toour reorganization efforts. Reorganization items also include impairment of assets of $1.5 millionfor the three and nine months ended September 30, 2004, and $0.2 million forthe nine months ended September 30, 2003. These impairments relate to the write-off of deferred financing costs,reflecting developments in our Chapter 11 bankruptcy case. Included withinother reorganization items are certain incentive and severance costs paid tocurrent and former employees totaling $0.5 million and $0.7 million,respectively, for the three and nine months ended September 30, 2004.

 

**Income Taxes**

In the past,we have not paid significant income taxes and have not included a provision forincome taxes in our financial statements. As a partnership, taxation on ourresults of operations is generally the responsibility of the unitholders.  However, we own, directly and indirectly,four corporations that constitute a consolidated group of corporations forfederal income tax purposes. This consolidated group of corporations incurredan income tax liability in 2004, following the 2004 dispositions of ourAlliance Lumber Segment operations, as discussed below. We may incur additionalincome tax liabilities in the future.

 

Discontinuedoperations include the estimated income tax provision related to thedisposition of our Alliance Lumber Segment in 2004.  For income tax purposes, sale of these operations resulted in therecognition of taxable gains, which have been deferred since the original acquisitiontransactions, resulting in an estimated income tax liability of $1.8 million,which was recognized in the third quarter of 2004.  This tax liability is a liability of thewholly-owned C-Corporation subsidiary which made the original acquisition, andwould not be allocated to unit holders. The estimate of thetax liability assumes recognition in 2004 of a tax benefit related to thewholly-owned C-Corporation’s investment in the Operating Partnership.

 

**Allocationof Income (Losses)**

Our partnership agreement provides that profit andlosses are generally allocated 1.01% to the General Partner interest and 98.99%to the Limited Partner interest.  Inaddition, the partnership agreement specifies that net losses are not allocatedto limited partners to the extent doing so would result in (or increase) adeficit balance in their capital accounts. At that point, net losses areallocated 100% to the General Partners. In the third quarter of 2003, the Limited Partners’ capital accountswere reduced to zero, and subsequent income and losses have been allocated 100%to the General Partners. Accordingly, the General Partner interest wasallocated our entire $6.3 million and $22.6 million of net income in the threeand nine month periods ended September 30, 2004. Furthermore, the GeneralPartner interest was allocated an additional $3.5 million of losses during thethree and nine months ended September 30, 2003.   In accordance with the PartnershipAgreement, 100% of income and

 

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losses will continue to be allocated to the GeneralPartners unless and until the cumulative additional losses they have beenallocated are fully recovered.

 

**DiscontinuedOperations**

See “Dispositionsof Assets” above.

 

***Critical Accounting Policies***

We reaffirm the criticalaccounting policies and estimates described in our 2003 Annual Report on Form10-K, which was filed with the Securities and Exchange Commission on April 22,2004.

 

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

 

The fair market value oflong-term fixed interest rate debt is subject to interest rate risk.  Generally, the fair market value of fixedinterest rate debt will increase as interest rates fall and decrease as interestrates rise.  The interest rate changesaffect the fair market value but do not impact earnings or cash flows.  Our acquisition facility has a variable rateof interest.  Our senior notes andacquisition facility, included in liabilities subject to compromise atSeptember 30, 2004, are not publicly traded and similar instruments are notavailable for comparison.  We aretherefore unable to estimate the fair value of the senior notes or acquisitionfacility.

 

**Item 4.  Controls and Procedures**

 

**DisclosureControls and Procedures**

Our management has evaluated,under the supervision and with the participation of our President and ChiefExecutive Officer and Chief Financial Officer, the effectiveness of ourdisclosure controls and procedures as of the end of the period covered by thisreport pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934(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.

 

**InternalControl Over Financial Reporting**

There has been no change in ourinternal control over financial reporting that occurred during our last fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

**PART II -OTHER INFORMATION**

 

**Item 6.  Exhibits**

 

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

 

3.1   Form of Second Amended and Restated Agreementof Limited Partnership of Crown Pacific Partners, L.P. (filed as Exhibit A toPart I of Registrant’s Registration Statement on Form S-1 No. 83-85066).

3.2   Form of Agreement of Limited Partnership ofCrown Pacific Limited Partnership (filed as Exhibit 3.2 to the Registrant’sStatement on Form S-1 No. 83-85066).

3.3   First Amendment to Second Amended and RestatedAgreement of Limited Partnership of Crown Pacific Limited Partnership (filed asExhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended March 31,1997).

3.4   Second Amendment to Amended and RestatedAgreement of Limited Partnership of Crown Pacific Limited Partnership (filed asExhibit 3.4 to the Registrant’s Form 10-K for the year ended December 31,1997).

3.5   Third Amendment to Amended and RestatedAgreement of Limited Partnership of Crown Pacific Limited Partnership (filed asExhibit 3.5 to the Registrant’s Form 10-K for the year ended December 31,1999).

31.1Certification of Chief Executive Officerpursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of1934.

31.2Certification of Chief Financial Officerpursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of1934.

32.1Certification of Chief Executive Officerpursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of1934 and 18 U.S.C. Section 1350.

32.2Certification of Chief Financial Officerpursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of1934 and 18 U.S.C. Section 1350.

 

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**SIGNATURES**

 

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

 

 
| Date:  | November 23, 2004                                                          | CROWN PACIFIC PARTNERS,  L.P. |   |
|--------|----------------------------------------------------------------------------|-------------------------------|--------|
|   |                                                                       |                          |
|   | By: Crown Pacific Management Limited Partnership, as  General Partner      |
|   |                                                                       |                          |
|   |                                                                       |                          |
|   | By:                                                                        | /s/ Steven  E. Dietrich       |   |
|   | Steven E.  Dietrich                                                        |                          |
|   | Senior Vice  President and Chief Financial Officer                         |
|   | (Duly  Authorized Officer and Principal Financial and  Accounting Officer) |
|        |                                                                            |                               |        |  |

 

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