PIONEER COMPANIES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

COMMISSION FILE NO. 1-9859

PIONEER COMPANIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 06-1215192
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

700 LOUISIANA STREET, SUITE 4300, HOUSTON, TEXAS 77002
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 570-3200

SECURITIES REGISTERED PURSUANT
TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No
[X]

Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]

There were 10,000,000 shares of the registrant's common stock
outstanding on March 28, 2003. The aggregate market value of the voting stock
held by non-affiliates of the registrant on June 28, 2002, based on the last
reported trading price of the registrant's common stock on the OTC Bulletin
Board on that date, was $13.4 million. For purposes of the above statement only,
all directors, executive officers and 10% shareholders are deemed to be
affiliates.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's
definitive proxy statement for the registrant's 2003 Annual Meeting of
Stockholders are incorporated by reference into Part III of this report.

TABLE OF CONTENTS

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PART I

ITEM 1. BUSINESS.

OVERVIEW

Pioneer Companies, Inc. and its subsidiaries have manufactured and
marketed chlorine, caustic soda and related products in North America since
1988. We conduct our primary business through our operating subsidiaries: PCI
Chemicals Canada Company (which we refer to as PCI Canada) and Pioneer Americas
LLC (which we refer to as Pioneer Americas).

Chlorine and caustic soda are commodity chemicals which we believe are
the seventh and sixth most commonly produced chemicals, respectively, in the
United States, based on volume, and are used in a wide variety of applications
and chemical processes. Caustic soda and chlorine are co-products, concurrently
produced in a ratio of approximately 1.1 to 1 through the electrolysis of salt
water. An electrochemical unit, which we refer to as an ECU, consists of 1.1
tons of caustic soda and 1 ton of chlorine.

Chlorine is used in 60% of all commercial chemistry, 85% of all
pharmaceutical chemistry and 95% of all crop protection chemistry. More than
15,000 products, including water treatment chemicals, plastics, detergents,
pharmaceuticals, disinfectants and agricultural chemicals, are manufactured with
chlorine as a raw material. Chlorine is also used directly in water disinfection
applications. In the United States and Canada, virtually all public drinking
water is made safe to drink by chlorination, and a significant portion of
industrial and municipal wastewater is treated with chlorine or chlorine
derivatives to kill water-borne pathogens.

Caustic soda is a versatile chemical alkali used in a diverse range of
manufacturing processes, including pulp and paper production, metal smelting and
oil production and refining. Caustic soda is combined with chlorine to produce
bleach which is used for water treatment and as a cleaning disinfectant. Caustic
soda is also used as an active ingredient in a wide variety of other end-use
products, including detergents, rayon and cellophane.

We believe that we are the seventh largest chlor-alkali producer in
North America, with approximately 5% of North American production capacity. We
currently own and operate the following four chlor-alkali plants in North
America that produce chlorine and caustic soda and related products:

Effective March 15, 2002, we idled our Tacoma, Washington chlor-alkali
plant, which reduced our currently utilized annual production capacity from
approximately 950,000 ECUs to approximately 725,000 ECUs. The Tacoma
chlor-alkali plant site is now being used principally as a terminal to serve our
customers in the Pacific Northwest. The four facilities that we now operate
produce chlorine and caustic soda for sale in the merchant markets and for use
as raw materials in the manufacture of our downstream products. Some of the
important characteristics of our chlor-alkali plants are as follows:

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o our Becancour facility is a low-cost production facility,
which results in part from that facility's use of
hydropower;

o our St. Gabriel facility has three pipelines that allow us
to efficiently transport and supply chlorine to customers
in Louisiana;

o our Henderson facility is the only currently operating
chlor-alkali production facility in the western region of
the United States which provides us with a strong regional
presence, transportation cost advantages and a consistent
and reliable source of supply for our bleach production and
chlorine repackaging operations in California and
Washington; and o our idled Tacoma facility represents a
means of increasing our production capacity to take greater
advantage of any sustained market upturn.

We also operate two bleach production and chlorine repackaging
facilities in Santa Fe Springs and Tracy, California and one bleach production
and chlorine repackaging facility in Tacoma, Washington. We distribute these
products to municipalities and selected commercial markets in the western United
States through various distribution channels. All of the chlorine and caustic
soda used as raw materials at these facilities is supplied by our chlor-alkali
facilities. Our Cornwall, Ontario facility produces hydrochloric acid, bleach,
chlorinated paraffins sold under the brand name Cereclor(R), and IMPAQT(R), a
proprietary pulping additive.

On December 31, 2001, we and our direct and indirect wholly-owned
subsidiaries emerged from protection under Chapter 11 of the U.S. Bankruptcy
Code, and on the same date PCI Canada emerged from protection under the
provisions of Canada's Companies Creditors' Arrangement Act. On that date, our
plan of reorganization, which was confirmed by the U.S. Bankruptcy Court on
November 28, 2001, became effective.

RECENT DEVELOPMENTS

Settlement of Dispute with the Colorado River Commission

Beginning in 2001, we disputed our responsibility for certain
contractual obligations that were undertaken by the Colorado River Commission, a
Nevada state agency that supplies power to our Henderson facility and which we
refer to as CRC. All of the conditions of a settlement of that dispute were
satisfied on March 3, 2003. As a result of the settlement, which is effective as
of January 1, 2003, we have been released from all claims for liability with
respect to electricity derivatives positions, and all litigation between Pioneer
and CRC has been dismissed.

Prior to the settlement with CRC, approximately 35% of the electric
power supply for our Henderson facility was hydropower furnished under a
low-cost, long-term contract with CRC, approximately 50% was provided under a
supplemental supply contract with CRC, and the remaining 15% was provided under
a long-term arrangement with a third party. The supplemental supply contract
entered into in March 2001 set forth detailed procedures governing the
procurement of power by CRC on our behalf.

The dispute with CRC involved various derivative positions that were
executed by CRC, purportedly for our benefit under the supplemental supply
contract. The dispute arose prior to our bankruptcy proceedings, but was not
resolved as a part of our plan of reorganization. The derivative positions
consisted of contracts for the forward purchase and sale of electricity as well
as put and call options that were written for electric power. We disputed CRC's
contention that certain derivative positions (the "Disputed Derivatives") with a
net liability at December 31, 2002, of $82.3 million were our responsibility. A
net liability of $87.3 million, consisting of the $82.3 million liability for
the Disputed Derivatives and a $5.0 million liability relating to transactions
that we did not dispute (the "Approved Derivatives"), was recorded by us and is
reflected in our December 31, 2002 balance sheet. CRC further contended that
other contracts (the "Rejected Derivatives") reflecting an additional net
liability of $41.0 million as of December 31, 2002, were our responsibility. We
did not record any net liability with respect to the Rejected Derivatives.

We recorded estimated realized income and expense related to fulfilling
or settling the obligations that could arise with respect to the Approved
Derivatives and Disputed Derivatives as a component of cost of sales. We
recorded in "Other Assets" a net receivable from CRC of $21.0 million at
December 31, 2002. The net receivable included $14.8 million of cash that CRC
collected in the form of premiums related to options that expired prior to
December 31, 2002, but did not remit to us. The remaining $6.2 million of the
net receivable represented our estimate of CRC's net proceeds from the
settlement of certain Approved Derivatives and Disputed Derivatives on their
delivery dates during 2002 that were not remitted to us.

In accordance with the terms of the settlement, we assigned our
low-cost, long-term hydropower contracts to the Southern Nevada Water Authority
and entered into a new supply agreement with CRC. CRC will provide power to meet
approximately 85% of our

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Henderson facility's needs at a market index rate, during a term extending to
December 31, 2006, although Pioneer and CRC may agree to extend the term. CRC
will retain all amounts of cash previously collected by CRC under the terms of
the derivatives agreements, with $3 million of such amount to be held as a
collateral deposit in satisfaction of a requirement under the supply agreement.

The market index rate under the supply agreement is expected to be
higher than the rates under the hydropower contracts that were assigned to the
Southern Nevada Water Authority as part of the settlement. Since our hydropower
contracts were not derivative contracts and the power purchased under the
contracts could not be resold by us at market rates, the contracts were not
recorded as an asset on our balance sheet. The fair market value of our
hydropower contracts, using the same valuation methodology that was used with
respect to the derivatives, would have been approximately $59 million as of
December 31, 2002.

In the absence of a settlement with CRC, we would have continued our
efforts in seeking a court determination that CRC, rather than Pioneer, was
responsible for satisfying the Disputed Derivatives and the Rejected
Derivatives. The cost of satisfying the Approved Derivative and Disputed
Derivative contracts could have ranged from $17.2 million in 2004 to as high as
$25.3 million in 2006, based on future price estimates as of December 31, 2002.
We may not have had sufficient liquidity to allow us to make those payments
prior to the time a court would likely have rendered a judgment in the case.

Although the settlement with CRC will not generate any cash proceeds
for us, we expect to record a net non-cash gain from the settlement of
approximately $66 million in the first quarter of 2003. Due to the assignment of
our long-term hydropower contracts to the Southern Nevada Water Authority and
the resulting higher energy prices under the new supply agreement effective in
2003, we expect to record an approximate $41 million impairment of the Henderson
facility as the result of reduced plant profitability estimates. The net impact
of the foregoing may result in a redemption obligation under our Senior
Guaranteed Notes and Senior Floating Notes. See " - Matters Affecting our
Liquidity" and " - Asset Impairments" below.

Recent Pricing Trends

As we discuss below, our average ECU netback (that is, price adjusted
to eliminate the product transportation element) was $270 in 2002, a decrease
from $336 in 2001. However, beginning in July 2002 through the end of the year,
our ECU netback ranged from $300 to $322. The increase in price toward the
latter part of the year resulted from an 8% reduction in industry capacity from
the 2001 level and a continuation of stronger demand for chlorine from vinyl
producers. During the first quarter of 2003, we announced price increases, and
we have also announced our intention to impose a fuel cost surcharge in the
future, based on increases in the market price of natural gas (which is a basic
component of the cost of electricity, our largest raw material cost). We intend
to implement the price increases during the second quarter of 2003 as contracts
permit, although individual contract terms will in some cases limit or prohibit
the imposition of the increases, and competitive restraints may also affect the
realization of the increases. We believe that during the first six months of
2003 our average ECU netback will be substantially greater than the 2002
average.

MATTERS AFFECTING OUR LIQUIDITY

Our senior secured debt consists of Senior Secured Floating Rate
Guaranteed Notes due 2006 in the aggregate principal amount of $45.4 million
(the "Senior Guaranteed Notes"), Floating Rate Term Notes due 2006 in the
aggregate principal amount of $4.6 million (the "Senior Floating Notes"), 10%
Senior Secured Guaranteed Notes due 2008 in the aggregate principal amount of
$150 million (the "10% Senior Secured Notes"), and a Revolving Credit Facility
with a $30 million commitment and a borrowing base restriction (the "Revolver").
Collectively, the $200 million in Senior Guaranteed Notes, Senior Floating Notes
and 10% Senior Secured Notes are referred to as the "Senior Notes" and, together
with the Revolver, are referred to as the "Senior Secured Debt." The Senior
Secured Debt requires payments of interest in cash and the related agreements
contain various covenants including financial covenants in our Revolver (which
if violated will create a default under the cross-default provisions of the
Senior Notes) that obligate us to comply with certain cash flow requirements.
The interest payment requirements of the Senior Secured Debt and the financial
covenants in the Revolver were set at levels based on financial projections of
an assumed minimum ECU netback and do not accommodate significant downward
variations in operating results.

Our ECU netback averaged $270 in 2002, while the projections prepared
in connection with our plan of reorganization assumed an average ECU netback of
approximately $300. The low ECU netback experienced during 2002 created lower
than anticipated liquidity, and we responded by cutting costs and reducing
expenditures, including idling manufacturing capacity and laying off operating
and administrative employees. Unless the anticipated improvement in operating
margins as a result of increased product prices occurs, we may not have the
liquidity necessary to meet all of our debt service and other obligations in
2003, and we may be unable to satisfy the financial covenants in the Revolver.
The amount of liquidity ultimately needed by us to meet all of our obligations
going forward will

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depend on a number of factors, some of which are uncertain, although the recent
resolution of our derivatives dispute with CRC has reduced some of the
uncertainty as to our future liquidity needs. See " - Recent Developments -
Settlement of Dispute with the Colorado River Commission" above and " - Risks -
Our operating results could be negatively affected during economic downturns"
and " - Risks - Our profitability could be reduced by declines in average
selling prices" below.

We amended our Revolver in April 2002 and again in June 2002. As
amended, one of the covenants in the Revolver requires us to generate at least:

o $5.608 million of net earnings before extraordinary
gains, the effects of the derivative instruments
excluding derivative expenses paid by us, interest,
income taxes, depreciation and amortization (referred to
as "Lender-Defined EBITDA") during the quarter ending
December 31, 2002, and $10.910 million of Lender-Defined
EBITDA during the nine-month period ending on the same
date,

o $10.640 million of Lender-Defined EBITDA during the
quarter ending March 31, 2003, and

o $21.550 million of Lender-Defined EBITDA for the
twelve-month period ending March 31, 2003, and for each
twelve month period ending each fiscal quarter
thereafter.

Our Lender-Defined EBITDA for the nine months ended December 31, 2002
was a positive $1.2 million, and our Lender-Defined EBITDA for the three months
ended December 31, 2002 was a negative $10.7 million. Those amounts were less
than the amounts required under the Revolver covenant for those periods. In the
absence of a $16.9 million asset impairment charge, our Lender-Defined EBITDA
would have exceeded the covenant requirement, and the lender under our Revolver
has waived our noncompliance with the covenant requirement. We anticipate that
as a result of an additional asset impairment charge in the first quarter of
2003, we will also be required to seek a waiver from the lender under our
Revolver with respect to our compliance with the covenant requirement for that
quarter. In addition, we anticipate that impairment charges in the fourth
quarter of 2002 and the first quarter of 2003 will likely result in the need for
future waivers from the lender under our Revolver, since the impairments will
have a negative effect on Lender-Defined EBITDA for the twelve-month periods
ending each quarter through March 31, 2004.

As a result of the amendments, we are also required to maintain
Liquidity (as defined) of at least $5.0 million, and limit our capital
expenditure levels to $20.0 million in 2002 and $25.0 million in each fiscal
year thereafter. At December 31, 2002, our Liquidity was $14.2 million,
consisting of borrowing availability of $11.4 million and cash of $2.8 million.
Capital expenditures were $10.6 million during 2002 (a level limited by
liquidity constraints), and we estimate capital expenditures will be
approximately $13.2 million during 2003.

The Revolver also provides that as a condition of borrowings there
shall not have occurred any material adverse change in our business, prospects,
operations, results of operations, assets, liabilities or condition (financial
or otherwise).

If the required Lender-Defined EBITDA level under the Revolver is not
met and the lender under the Revolver does not waive our failure to comply with
the requirement, we will be in default under the terms of the Revolver.
Moreover, if conditions constituting a material adverse change occur or have
occurred, our lender can exercise its rights under the Revolver and refuse to
make further advances. Following any such refusal, customer receipts would be
applied to our borrowings under the Revolver, and we would not have the ability
to reborrow. This would cause us to suffer a rapid loss of liquidity and we
would lose the ability to operate on a day-to-day basis. In addition, a default
under the Revolver would allow our lender to accelerate the outstanding
indebtedness under the Revolver and would also result in a cross-default under
our Senior Notes which would provide the holders of our Senior Notes with the
right to accelerate the $200 million in Senior Notes outstanding and demand
immediate repayment. See " - Risks - The restrictive terms of our indebtedness
may limit our ability to grow and compete and prevent us from fulfilling our
obligations under our indebtedness" below.

Our Senior Guaranteed Notes and Senior Floating Notes (collectively
referred to as the "Tranche A Notes") provide that, within 60 days after each
calendar quarter during 2003 through 2006, we are required to redeem (i) $2.5
million principal amount of Tranche A Notes if Pioneer Americas' net income
before extraordinary items, other income, net, interest, income taxes,
depreciation and amortization (which we refer to as Pioneer Americas' EBITDA)
for such calendar quarter is greater than $20 million but less than $25 million,
(ii) $5 million principal amount of Tranche A Notes if Pioneer Americas' EBITDA
for such calendar quarter is greater than $25 million but less than $30 million
and (iii) $7.5 million principal amount of Tranche A Notes if Pioneer Americas'
EBITDA for such calendar quarter is greater than $30 million, in each case plus
accrued and unpaid interest thereon to the redemption date.

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Although we will not receive any cash proceeds from our settlement with
CRC, we expect the settlement to result in a net gain of approximately $66
million in the first quarter of 2003. Due to the assignment of our long-term
hydropower contracts to the Southern Nevada Water Authority and the resulting
higher energy prices under the new supply agreement effective in 2003, we expect
to record an approximate $41 million impairment of the Henderson facility as the
result of reduced plant profitability estimates. The net impact of the
foregoing, which we expect will increase Pioneer Americas' EBITDA by
approximately $25 million for the first quarter of 2003, may result in a partial
redemption obligation under our Tranche A Notes as described above. Any such
redemption would also accelerate our obligation to repay approximately $3.6
million in principal and interest on certain other notes. See " - Recent
Developments - Settlement of Dispute with the Colorado River Commission" above
and " - Asset Impairments" below.

Excluding the potential impact of the redemption obligation discussed
above, in 2003 we expect to have cash requirements, in addition to operating and
administrative costs, of approximately $40.3 million in the aggregate,
consisting of the following: (i) interest payments of $19.5 million, (ii)
capital expenditures of $13.2 million, (iii) bankruptcy-related vendor payments
of $1.0 million, (iv) severance payments of $1.7 million and (v) contractual
debt repayments of $4.9 million. We expect to fund these obligations through
available borrowings under our Revolver and internally-generated cash flows from
operations, including changes in working capital. We can provide no assurance
that we will have sufficient resources to fund all of these obligations and
investments.

Due to the uncertainties affecting our liquidity as a result of the
restrictive financial covenants and redemption obligations described above, no
assurances can be made regarding our ability to continue as a going concern.

ASSET IMPAIRMENTS

As indicated above, the settlement of the dispute with CRC in 2003
involved the assignment of our low-cost, long-term hydropower resource rights to
the Southern Nevada Water Authority. The anticipated increase in power costs at
our Henderson facility due to the assignment of these hydropower rights as a
result of the settlement agreement necessitated an impairment analysis of our
Henderson facility during the first quarter of 2003. Based on the results of
that analysis, we expect to record an impairment of approximately $41 million in
March 2003.

Due to poor chlorine markets and historically high power costs in the
Pacific Northwest, resulting in part from difficulties in the California energy
market and a severe drought, we curtailed production operations at our Tacoma
plant by 50% in March 2001 and idled the remaining Tacoma chlor-alkali
production in March 2002. Due to the continuation of the shutdown and
uncertainty as to when we will restart the Tacoma facility, we reviewed the
Tacoma facility for impairment as of December 31, 2002. Based on our analysis,
we determined that the book value of the facility exceeded its estimated fair
value, and we recognized a $16.9 million impairment loss in December 2002.

PRICING, PRODUCTION, DISTRIBUTION AND MARKETING

Pricing

In 2002 our average ECU netback was $270 compared to $336 in 2001 and
$327 in 2000. Chlor-alkali demand in the United States grew by approximately 1%
during 2002, primarily led by improved demand for vinyl products during the
first half of the year. Strong vinyl demand pushed up operating rates and
created a surplus of caustic soda, resulting in sharply lower caustic soda
prices by the second quarter. The effects of capacity rationalization (including
our idling of our Tacoma chlor-alkali plant in March 2002) allowed caustic soda
pricing to begin a recovery during the third quarter. By mid-year the ECU
netback had begun to recover and reached the $300 mark in July. Cash flows near
the end of the year began to improve as the ECU netback remained between $300
and $322. During the first quarter of 2003, we announced price increases, and we
have also announced our intention to impose a fuel cost surcharge in the future,
based on increases in the market price of natural gas (which is a basic
component of the cost of electricity, our largest raw material cost). We intend
to implement the price increases during the second quarter of 2003 as contracts
permit, although individual contract terms will in some cases limit or prohibit
the imposition of the increases, and competitive restraints may also affect the
realization of the increases.

Production

The production of chlor-alkali products principally requires salt,
electricity and water as raw materials. In 2002, approximately 8% of our cost of
sales-product was attributable to our salt requirements and 22% of our cost of
sales-product was attributable to our power requirements. The amounts expended
for salt and power, as a percentage of our cost of sales-product, have generally
averaged 7% and 24%, respectively, for the last three years. Our salt supplies
are provided under long-term contracts and adequate water

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supplies are available at each of our operating locations. We procure most of
our energy requirements from sources that rely on hydropower or natural gas.
During 2002, our costs for power decreased $16.9 million from 2001, of which
$14.2 million was attributable to the idling of the Tacoma facility. Our power
costs in 2001 were $10 million lower than in 2000. Our energy costs associated
with producing chlor-alkali products can materially affect our results of
operations since each one dollar change in our cost for a megawatt hour of
electricity generally results in a corresponding change in our cost to produce
an ECU of approximately $2.75.

Generally, electric power supplies for our Henderson facility are
primarily provided by CRC under a new long-term supply contract. Variations in
the cost of power used at our Henderson facility have a material impact on that
facility's cost structure. See " - Recent Developments - Settlement of Dispute
with the Colorado River Commission" above.

Electric power for our Becancour and Dalhousie facilities are provided
under public utility tariffs that are based to a substantial extent on low-cost
hydropower resources, which enables us to procure electricity at economical
rates. The St. Gabriel facility, like many in the industry, uses electricity
under a public utility tariff that is based primarily on natural gas resources
and that typically costs more than electricity provided under contracts that
rely on hydropower sources. Because all of the power requirements for our four
chlor-alkali facilities, other than the power procured through the supply
contract for our Henderson facility, are procured in regulated markets, our cost
for power is primarily determined based on the underlying cost of producing such
power (as opposed to market rate pricing). As a result, our Canadian facilities,
which procure power from sources that rely on hydropower, are generally able to
obtain power at favorable rates that are relatively stable over time. Our U.S.
facilities, which procure power from sources that rely on natural gas, will
generally experience higher rates than for hydropower as prices are based on the
underlying price of natural gas.

Production rates for chlorine and caustic soda are generally set based
upon demand for chlorine, because storage capacity for chlorine is both limited
and expensive. When demand for chlorine is high and operational capacity is
expanded accordingly, an increase in the supply of both chlorine and caustic
soda occurs since chlorine and caustic soda are produced in a fixed ratio. The
price of caustic soda is depressed as there is insufficient demand for the
increased supply. This imbalance may have the short-term effect of limiting our
operating profits as improving margins in chlorine may be offset by declining
margins in caustic soda. When demand for chlorine declines to a level below
plant operational capacity and available storage is filled, production
operations must be curtailed, even if demand for caustic soda has increased.
This imbalance may also have the short-term effect of limiting our operating
profits as improving margins in caustic soda may be offset by both declining
margins in chlorine and the reduced production of both products. Our railcars
can, under certain circumstances, be used to provide additional storage
capacity.

Distribution

The chlorine that we produce is transported to our customers in
railcars and trucks, and with respect to customers near our plant in St.
Gabriel, Louisiana, by pipelines. Caustic soda is transported by railcars,
trucks, ships or barges. Our other products, such as bleach and hydrochloric
acid, are transported by railcars or trucks. We lease a fleet of approximately
2,000 railcars, and use third-party transportation operators for truck and
water-borne distribution.

Marketing

Chlorine and caustic soda are commodity chemicals that we typically
sell under contracts to customers in the United States and Canada, although we
occasionally export an immaterial amount of caustic soda on a spot basis. These
contracts contain pricing that is generally determined on a quarterly basis by
mutual agreement. Because chlorine and caustic soda are commodity chemicals and
our contracts typically contain "meet or release clauses" that allow the
customer to terminate the contract if we do not meet a better price obtained by
the customer from a competitor for the product, price is the principal method of
competition. Both the chlorine and caustic soda markets have been, and are
likely to continue to be, cyclical. Periods of high demand, high capacity
utilization and increasing operating margins tend to result in new plant
investments and increased production until supply exceeds demand, followed by a
period of declining prices and declining capacity utilization until the cycle is
repeated. See " - Risks - Our operating results could be negatively affected
during economic downturns" below.

Approximately 28% of our 2002 revenues was derived from sales of
products for use in the water treatment industry, approximately 26% resulted
from sales for use in the pulp and paper industry, and approximately 7% was
derived from sales for use by urethane producers. We rely heavily on repeat
customers, and our management and dedicated sales personnel are responsible for
developing and maintaining successful long-term relationships with key
customers. No customer accounted for more than 10% of our total revenues in any
of our last three fiscal years.

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COMPETITION

The chlor-alkali industry is highly competitive. Many of our
competitors, including the Dow Chemical Company ("Dow"), Occidental Chemical
Corporation ("OxyChem"), and PPG Industries, Inc., are larger and have greater
financial resources than we do. Our ability to compete effectively depends on
our ability to maintain competitive prices, to provide reliable and responsive
service to our customers and to operate in a safe and environmentally
responsible manner. Our cost structure is also a factor in determining whether
we can compete effectively. While a significant portion of our business is based
upon widely available technology, capital requirements and the difficulty in
obtaining permits for the production of chlor-alkali and chlor-alkali related
products may be barriers to entry.

North America represents approximately 29% of world chlor-alkali annual
production capacity, with approximately 15.8 million tons of chlorine and 16.7
million tons of caustic soda production capacity. OxyChem and Dow are the two
largest chlor-alkali producers in North America, together representing
approximately 51% of North American capacity. The remaining capacity is held by
approximately 20 companies. Approximately 72% of North American chlor-alkali
capacity is located on the Gulf Coast. We believe that our chlor-alkali capacity
represents approximately 5% of total North American production capacity. The
chlorine and caustic soda currently produced at our Henderson facility provides
a significant source of supply for the West Coast region, where we believe that
we are the largest supplier of chlorine and bleach for water treatment purposes.
We believe our strong regional presence in eastern Canada and the western United
States contributes to the competitiveness of our operations.

Our St. Gabriel and Dalhousie facilities use a mercury cell production
process that yields premium grade, low-salt caustic soda, a niche product that
is required for certain end-uses and as a result can command premium prices. Our
nine-mile pipeline is used to transport chlorine from our St. Gabriel facility
to our customers at the Geismar industrial complex, and two customers with
plants adjacent to the facility are also served by pipeline connections. The
resulting advantage in transportation costs also distinguishes us from our
competitors.

TECHNOLOGY

We utilize three different technologies in the production of
chlor-alkali products through the electrolysis of brine: diaphragm cell
technology, mercury cell technology and membrane cell technology. Diaphragm cell
technology, which is used for approximately 60% of our production capacity,
employs a coated titanium anode, a steel cathode and an asbestos or
asbestos/polymer separator. While diaphragm cell technology consumes less power,
it produces caustic soda with a relatively higher salt content that requires
evaporation with steam to reach a commercial concentration. Mercury cell
technology, which is used in approximately 31% of our production capacity,
employs a coated titanium anode and flowing mercury as a cathode. Mercury cell
technology produces higher purity caustic soda that does not require
evaporation, but it consumes relatively more power and the mercury requires
heightened handling and disposal practices. Membrane cell technology, which is
used in approximately 9% of our production capacity and is generally the most
efficient technology, employs a coated titanium anode, a nickel cathode and a
fluorocarbon membrane separator. Membrane cell technology produces higher purity
caustic soda, and its advantages include lower power consumption and low steam
consumption. See Item 2 "Properties - Facilities" below for information
regarding the use of these technologies by our chlor-alkali production
facilities.

ENVIRONMENTAL REGULATION - U.S.

General. Various federal, state and local laws and regulations
governing the discharge of materials into the environment, or otherwise relating
to the protection of the environment, affect our operations and costs. In
particular, our activities in connection with the production of chlor-alkali and
chlor-alkali related products are subject to stringent environmental regulation.
As with the industry generally, compliance with existing and anticipated
regulations affects our overall cost of business. Areas affected include capital
costs to construct, maintain and upgrade equipment and facilities. While these
regulations affect our capital expenditures and earnings, we believe that these
regulations do not affect our competitive position in that the operations of our
competitors that comply with such regulations are similarly affected.
Environmental regulations have historically been subject to frequent change by
regulatory authorities, and we are unable to predict the ongoing cost to us of
complying with these laws and regulations or the future impact of such
regulations on our operations. Violation of federal or state environmental laws,
regulations and permits can result in the imposition of significant civil and
criminal penalties, injunctions and construction bans or delays. A discharge of
chlorine or other hazardous substances into the environment could, to the extent
such event is not insured, subject us to substantial expense, including both the
cost to comply with applicable regulations and claims by neighboring landowners
and other third parties for personal injury and property damage.

7

Air Emissions. Our U.S. operations are subject to the Federal Clean Air
Act and comparable state and local statutes. We believe that our operations are
in substantial compliance with these statutes in all states in which we operate.

Amendments to the Federal Clean Air Act enacted in late 1990 (the "1990
Federal Clean Air Act Amendments") require or will require most industrial
operations in the U.S. to incur capital expenditures in order to meet air
emission control standards developed by the Environmental Protection Agency (the
"EPA") and state environmental agencies. Among the requirements that are
potentially applicable to us are those that require the EPA to establish
hazardous air pollutant emissions limitations and control technology
requirements for chlorine production facilities. In 2002 the EPA issued draft
hazardous air pollutant emissions limitations for mercury-cell chlor-alkali
facilities, which if adopted will apply to our St. Gabriel facility. We
anticipate that the cost that we will incur to comply with the regulation will
be approximately $3.0 million. It is expected that the regulation will be
adopted in 2003 with a two-year period to achieve compliance. Although we can
give no assurances, we believe implementation of the 1990 Federal Clean Air Act
Amendments will not have a material adverse effect on our financial condition or
results of operations.

Most of our plants manufacture or use chlorine, which is in gaseous
form if released into the air. Chlorine gas in relatively low concentrations can
irritate the eyes, nose and skin and in large quantities or high concentrations
can cause permanent injury or death. From 1999 to date, there have been minor
releases at our plants, none of which has had any known impact on human health
or the environment. Those releases were controlled by plant personnel, and there
were no material claims against us as a result of those incidents. We maintain
systems to detect emissions of chlorine at our plants, and the St. Gabriel and
Henderson facilities are members of their local industrial emergency response
networks. We believe that our insurance coverage is adequate with respect to
costs that might be incurred in connection with any future release, although
there can be no assurance that we will not incur substantial expenditures that
are not covered by insurance if a major release occurs in the future.

Water. The Federal Water Pollution Control Act of 1972 ("FWPCA")
imposes restrictions and strict controls regarding the discharge of pollutants
into navigable waters. Permits must be obtained to discharge pollutants into
state and federal waters. The FWPCA imposes substantial potential liability for
the costs of removal, remediation and damages. We maintain wastewater discharge
permits for many of our facilities pursuant to the FWPCA and comparable state
laws. Where required, we have also applied for permits to discharge stormwater
under such laws. We believe that compliance with existing permits and compliance
with foreseeable new permit requirements will not have a material adverse effect
on our financial condition or results of operations.

Some states maintain groundwater and surfacewater protection programs
that require permits for discharges or operations that may impact groundwater or
surfacewater conditions. The requirements of these laws vary and are generally
implemented through a state regulatory agency. These water protection programs
typically require site discharge permits, spill notification and prevention and
corrective action plans. We plan to spend approximately $3.0 million during the
next two years on improvements at our Henderson facility to discontinue the use
of two chlor-alkali wastewater disposal ponds, replacing them with systems to
recycle wastewater, and to convert a third wastewater disposal pond into a
stormwater retention pond.

Solid Waste. We generate non-hazardous solid wastes that are subject to
the requirements of the Federal Resource Conservation and Recovery Act ("RCRA")
and comparable state statutes. The EPA is considering the adoption of stricter
disposal standards for non-hazardous wastes. RCRA also governs the disposal of
hazardous wastes. We are not currently required to comply with a substantial
portion of RCRA's requirements because many of our operations do not generate
quantities of hazardous wastes that exceed the threshold levels established
under RCRA. However, it is possible that additional wastes, which could include
wastes currently generated during operations, will in the future be designated
as "hazardous wastes." Hazardous wastes are subject to more rigorous and costly
disposal requirements than are non-hazardous wastes. Such changes in the
regulations could result in additional capital expenditures and operating
expenses.

The EPA has adopted regulations banning the land disposal of certain
hazardous wastes unless the wastes meet defined treatment or disposal standards.
Our disposal costs could increase substantially if our present disposal sites
become unavailable due to capacity or regulatory restrictions. We presently
believe, however, that our current disposal arrangements will allow us to
continue to dispose of land-banned wastes with no material adverse effect on us.

Hazardous Substances. The Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), also known as "Superfund," imposes
liability, without regard to fault or the legality of the original act, on
certain classes of persons that contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the site and companies that disposed or arranged for the disposal of the
hazardous substances found at the site. CERCLA also authorizes the EPA and, in
some instances, third parties to act in response to threats to the public health
or the environment and to seek to recover from the responsible classes of
persons the costs they incur. In the course of our ordinary operations, we may
generate waste that falls within

8

CERCLA's definition of a "hazardous substance." We may be jointly and severally
liable under CERCLA for all or part of the costs required to clean up sites at
which such hazardous substances have been disposed of or released into the
environment.

We currently own or lease, and have in the past owned or leased,
properties at which hazardous substances have been or are being handled.
Although we have utilized operating and disposal practices that were standard in
the industry at the time, hazardous substances may have been disposed of or
released on or under the properties owned or leased by us or on or under other
locations where these wastes have been taken for disposal. In addition, many of
these properties have been operated by third parties whose treatment and
disposal or release of hydrocarbons or other wastes was not under our control.
These properties and wastes disposed thereon may be subject to CERCLA, RCRA and
analogous state laws. Under such laws, we could be required to remove or
remediate previously disposed wastes (including wastes disposed of or released
by prior owners or operators), to clean up contaminated property (including
contaminated groundwater) or to perform remedial plugging operations to prevent
future contamination. However, no investigations or remedial activities are
currently being conducted under CERCLA by third parties at any of our
facilities, with the exception of the former Tacoma chlor-alkali facility, where
the activities are covered by an indemnity from the previous owner. Such
activities are being carried out at certain facilities under the other statutory
authorities discussed above pursuant to provisions of indemnification agreements
protecting us from liability.

Environmental Remediation. Contamination resulting from spills of
hazardous substances is not unusual within the chemical manufacturing industry.
Historic spills and past operating practices have resulted in soil and
groundwater contamination at several of our facilities and at certain sites
where operations have been discontinued. We are currently addressing soil and/or
groundwater contamination at several sites through assessment, monitoring and
remediation programs with oversight by the applicable state agency. In some
cases, we are conducting this work under administrative orders. We believe that
adequate accruals have been established to address all known remedial
obligations. In the aggregate, we have estimated that the total liability for
addressing these sites is approximately $11.6 million although there can be no
guarantee that the actual remedial costs or associated liabilities will not
exceed this amount. At some of these locations, the regulatory agencies are
considering whether additional actions are necessary to protect or remediate
surface or groundwater resources. We could be required to incur additional costs
to construct and operate remediation systems in the future.

OSHA. We are also subject to the requirements of the Federal
Occupational Safety and Health Act ("OSHA") and comparable state statutes that
regulate the protection of the health and safety of workers. In addition, the
OSHA hazard communication standard requires that certain information be
maintained about hazardous materials used or produced in operations and that
this information be provided to employees, state and local government
authorities and citizens. We believe that our operations are in substantial
compliance with OSHA requirements, including general industry standards, record
keeping requirements and monitoring of occupational exposure to regulated
substances.

ENVIRONMENTAL LAWS - CANADA

General. Our Canadian facilities are governed by federal environmental
laws administered by Environment Canada and by provincial environmental laws
enforced by administrative agencies. Many of these laws are comparable to the
U.S. laws described above. In particular, the Canadian environmental laws
generally provide for control and/or prohibition of pollution, for the issuance
of certificates of authority or certificates of authorization, which permit the
operation of regulated facilities and prescribe limits on the discharge of
pollutants, and for penalties for the failure to comply with applicable laws.
These laws include the substantive areas of air pollution, water pollution,
solid and hazardous waste generation and disposal, toxic substances, petroleum
storage tanks, protection of surface and subsurface waters, and protection of
other natural resources. However, there is no Canadian law similar to CERCLA
that would make a company liable for legal off-site disposal.

The Canadian Environmental Protection Act (the "CEPA") is the primary
federal statute that governs environmental matters throughout the provinces. The
federal Fisheries Act is the principal federal water pollution control statute.
This law would apply in the event of a spill of caustic soda or another
deleterious substance that adversely impacts marine life in a waterway. The
Becancour, Dalhousie and Cornwall facilities are all adjacent to major waterways
and are therefore subject to the requirements of this statute. The Chlor-Alkali
Mercury Release Regulations and the Chlor-Alkali Mercury Liquid Effluent
Regulations, adopted under the CEPA, regulate the operation of the Dalhousie
facility. In particular, these regulations provide for the quantity of mercury a
chlor-alkali plant may release into the ambient air and the quantity of mercury
that may be released with liquid effluent. We believe we have operated and are
currently operating in compliance with these statutes.

9

The primary provincial environmental laws include the Environmental
Protection Act in the province of Ontario, the Quebec Environment Quality Act in
Quebec and the Clean Environment Act in New Brunswick. In general, each of these
acts regulates the discharge of a contaminant into the natural environment if
such discharge causes or is likely to cause an adverse effect.

INDEMNITIES

ZENECA Indemnity. Our Henderson facility is located within what is
known as the "Black Mountain Industrial Park." Soil and groundwater
contamination have been identified within and adjoining the Black Mountain
Industrial Park, including land owned by us. A groundwater treatment system has
been installed at the facility and, pursuant to a consent agreement with the
Nevada Division of Environmental Protection, studies are being conducted to
further evaluate soil and groundwater contamination at the facility and other
properties within the Black Mountain Industrial Park and to determine whether
additional remediation will be necessary with respect to our property.

In connection with our 1988 acquisition of the St. Gabriel and
Henderson facilities, the sellers agreed to indemnify us with respect to, among
other things, certain environmental liabilities associated with historical
operations at the Henderson site. ZENECA Delaware Holdings, Inc. and ZENECA,
Inc. (collectively, the "ZENECA Companies") have assumed the indemnity
obligations which benefit us. In general, we are indemnified against
environmental costs which arise from or relate to pre-closing actions which
involved disposal, discharge or release of materials resulting from the former
agricultural chemical and other non-chlor-alkali manufacturing operations at the
Henderson facility. The ZENECA Companies are also responsible for costs arising
out of the pre-closing actions at the Black Mountain Industrial Park. Under the
ZENECA Indemnity, we may only recover indemnified amounts for environmental work
to the extent that such work is required to comply with environmental laws or is
reasonably required to prevent an interruption in the production of chlor-alkali
products. We are responsible for environmental costs relating to the
chlor-alkali manufacturing operations at the Henderson facility, both pre- and
post-acquisition, for certain actions taken without the ZENECA Companies'
consent and for certain operation and maintenance costs of the groundwater
treatment system at the facility.

Payments for environmental liabilities under the ZENECA Indemnity,
together with other non-environmental liabilities for which the ZENECA Companies
agreed to indemnify us, are limited to approximately $65 million. To date we
have been reimbursed for approximately $12 million of costs covered by the
ZENECA Indemnity, but the ZENECA Companies may have directly incurred additional
costs that would further reduce the total amount remaining under the ZENECA
Indemnity. In 1994, we recorded a $3.2 million environmental reserve related to
pre-closing actions at sites that are the responsibility of the ZENECA
Companies. At the same time a receivable was recorded from the ZENECA Companies
for the same amount. It is our policy to record such amounts when a liability
can be reasonably estimated. In 2000, based on the results of a third-party
environmental analysis, the $3.2 million environmental reserve and receivable
were adjusted to the discounted future cash flows for estimated environmental
remediation, which was $2 million. In the course of evaluating future cash flows
upon emerging from bankruptcy, we determined that the timing of future cash
flows for environmental work is uncertain and that those cash flows no longer
qualify for discounting under generally accepted accounting principles. As a
result, we no longer discount the environmental liabilities and related
receivables, which are now recorded at their undiscounted amounts of $3.2
million at December 31, 2002.

The ZENECA Indemnity continues to cover claims after the April 20, 1999
expiration of the term of the indemnity to the extent that, prior to the
expiration of the indemnity, proper notice to the ZENECA Companies was given and
either the ZENECA Companies have assumed control of such claims or we were
contesting the legal requirements that gave rise to such claims, or had
commenced removal, remedial or maintenance work with respect to such claims, or
commenced an investigation which resulted in the commencement of such work
within ninety days. Our management believes proper notice was provided to the
ZENECA Companies with respect to outstanding claims under the ZENECA Indemnity,
but the amount of such claims has not yet been determined given the ongoing
nature of the environmental work at Henderson. We believe that the ZENECA
Companies will continue to honor their obligations under the ZENECA Indemnity
for claims properly presented by us. It is possible, however, that disputes
could arise between the parties concerning the effect of contractual language
and that we would have to subject our claims for cleanup expenses, which could
be substantial, to the contractually-established arbitration process.

Pioneer Americas Sellers' Indemnity. In connection with the 1995
transaction pursuant to which we acquired all of the outstanding common stock
and other equity interests of a predecessor of Pioneer Americas from the holders
of those interests (the "Sellers"), the Sellers agreed to indemnify us and our
affiliates for certain environmental remediation obligations, arising prior to
the closing date from or relating to certain plant sites or arising before or
after the closing date with respect to certain environmental liabilities
relating to certain properties and interests held by us for the benefit of the
Sellers (the "Contingent Payment Properties"). Amounts payable in respect of
such liabilities would generally be payable as follows: (i) out of specified
reserves established on the predecessor's balance sheet at December 31, 1994;
(ii) either by offset against the amounts payable under the $11.5 million in
notes payable by us to the

10

Sellers, or from amounts held in an account (the "Contingent Payment Account")
established for the deposit of proceeds from the Contingent Payment Properties;
and (iii) in certain circumstances and subject to specified limitations, out of
the personal assets of the Sellers. To the extent that liabilities exceeded
proceeds from the Contingent Payment Properties, we would be limited, for a
ten-year period, principally to our rights of offset against the Sellers' notes
to cover such liabilities.

In 1999 disputes arose between us and the Sellers as to the proper
scope of the indemnity. During June 2000, we effected an agreement with the
Sellers, pursuant to which we, in exchange for cash and other consideration,
relieved the Sellers from their environmental indemnity obligations and agreed
to transfer to the Sellers the record title to the Contingent Payment Properties
and the $0.8 million remaining cash balance in the Contingent Payment Account
that we determined to be in excess of anticipated environmental liability. The
cash balance in the Contingent Payment Account at the time of this transaction
was $6.1 million. This cash balance was not previously reflected on our balance
sheet since a right of setoff existed.

A third-party environmental analysis that was performed on all of our
sites subject to the indemnity provided the basis for the anticipated
environmental liability. We then adjusted the remediation reserve on our balance
sheet to the discounted future cash flows for estimated environmental
remediation. As a result of the above transaction and the new environmental
analysis, we reported a pre-tax gain of $1.8 million during the second quarter
of 2000, which was reflected as a reduction of cost of sales. As indicated
above, we are no longer discounting the environmental liabilities and related
receivables, which are now recorded at their undiscounted amounts of $11.6
million at December 31, 2002.

OCC Tacoma Indemnity. We acquired the chlor-alkali facility in Tacoma
from OCC Tacoma, Inc. ("OCC Tacoma"), a subsidiary of OxyChem, in June 1997. In
connection with the acquisition, OCC Tacoma agreed to indemnify us with respect
to certain environmental matters, which indemnity is guaranteed by OxyChem. In
general, OCC Tacoma has agreed to indemnify us against damages incurred for
remediation of certain environmental conditions, for certain environmental
violations caused by pre-closing operations at the site and for certain common
law claims. The conditions subject to the indemnity are sites at which hazardous
materials have been released prior to closing as a result of pre-closing
operations at the site. In addition, OCC Tacoma has agreed to indemnify us for
certain costs relating to releases of hazardous materials from pre-closing
operations at the site into the Hylebos Waterway, site groundwater containing
certain volatile organic compounds that must be remediated under an RCRA permit,
and historical disposal areas on the embankment adjacent to the site for maximum
periods of 24 or 30 years from the June 1997 acquisition date, depending upon
the particular condition, after which we will have full responsibility for any
remaining liabilities with respect to such conditions. OCC Tacoma may obtain an
early expiration date for certain conditions by obtaining a discharge of
liability or an approval letter from a governmental authority. At this time we
cannot determine if the presently anticipated remediation work will be completed
prior to the expiration of the indemnity or if additional remedial requirements
will be imposed thereafter.

OCC Tacoma has also agreed to indemnify us against certain other
environmental conditions and environmental violations caused by pre-closing
operations that are identified after the closing. Environmental conditions that
are subject to formal agency action before June 2002 or to an administrative or
court order before June 2007, and environmental violations that are subject to
an administrative or court order before June 2002, will be covered by the
indemnity up to certain dollar amounts and time limits. We have agreed to
indemnify OCC Tacoma for environmental conditions and environmental violations
identified after the closing if (i) an order or agency action is not imposed
within the relevant time frames or (ii) applicable expiration dates or dollar
limits are reached. As of December 31, 2002, no orders or agency actions had
been imposed.

The EPA has advised OCC Tacoma and us that we have been named as a
"potentially responsible party" in connection with the remediation of the
Hylebos Waterway in Tacoma, by virtue of our current ownership of the Tacoma
site. The state Department of Ecology notified OCC Tacoma and us of its concern
regarding high pH groundwater in the Hylebos Waterway embankment area and has
requested additional studies. OCC Tacoma has acknowledged its obligation to
indemnify us against liability with respect to the remediation activities,
subject to the limitations included in the indemnity agreement. We have reviewed
the time frames currently estimated for remediation of the known environmental
conditions associated with the plant and adjacent areas, including the Hylebos
Waterway, and we presently believe that we will have no material liability upon
the termination of OCC Tacoma's indemnity. However, the OCC Tacoma indemnity is
subject to limitations as to dollar amount and duration, as well as certain
other conditions, and there can be no assurance that such indemnity will be
adequate to protect us, that remediation will proceed on the present schedule,
that it will involve the presently anticipated remedial methods, or that
unanticipated conditions will not be identified. If these or other changes
occur, we could incur a material liability for which we are not insured or
indemnified.

PCI Canada Acquisition Indemnity. In connection with our acquisition of
the assets of PCI Canada in 1997, Imperial Chemical Industrials PLC ("ICI") and
certain of its affiliates (together the "ICI Indemnitors") agreed to indemnify
us for certain liabilities associated with environmental matters arising from
pre-closing operations of the Canadian facilities. In particular, the ICI
Indemnitors

11

have agreed to retain unlimited responsibility for environmental liabilities
associated with the Cornwall site, liabilities arising out of the discharge of
contaminants into rivers and marine sediments and liabilities arising out of
off-site disposal sites. The ICI Indemnitors are also subject to a general
environmental indemnity for other pre-closing environmental matters. This
general indemnity will terminate on October 31, 2007, and is subject to a limit
of $25 million (Cdn). We may not recover under the environmental indemnity until
we have incurred cumulative costs of $1 million (Cdn), at which point we may
recover costs in excess of $1 million (Cdn). As of December 31, 2002, we had
incurred no cumulative costs towards the $25 million (Cdn) indemnity.

With respect to the Becancour and Dalhousie facilities, the ICI
Indemnitors have agreed to be responsible under the general environmental
indemnity for 100% of the costs incurred in the first five years after October
31, 1997 and for a decreasing percentage of such costs incurred in the following
five years. Thereafter, we will be responsible for environmental liabilities at
such facilities (other than liabilities arising out of the discharge of
contaminants into rivers and marine sediments and liabilities arising out of
off-site disposal sites). We have agreed to indemnify ICI for environmental
liabilities arising out of post-closing operations and for liabilities arising
out of pre-closing operations for which we are not indemnified by the ICI
Indemnitors.

In March 2003 we initiated arbitration proceedings to resolve a dispute
with ICI regarding the applicability of certain of ICI's covenants with respect
to approximately $1.3 million of equipment modification costs that we incurred
to achieve compliance with air emissions standards at the Becancour facility. We
believe that the indemnity provided by ICI will be adequate to address the known
environmental liabilities at the acquired facilities, and that residual
liabilities, if any, incurred by us will not be material.

RISKS

Our operating results could be negatively affected during economic downturns.

The businesses of most of our customers are, to varying degrees,
cyclical and have historically experienced periodic downturns. These economic
and industry downturns have been characterized by diminished product demand,
excess manufacturing capacity and, in most cases, lower average selling prices.
Therefore, any significant downturn in our customers' markets or in global
economic conditions could result in a reduction in demand for our products and
could adversely affect our results of operations and financial condition. As a
result of the depressed economic conditions beginning in the fourth quarter of
2000 and continuing throughout 2001 and into 2002, our vinyls, urethanes and
pulp and paper customers had lower demand for our chlor-alkali products. This
lower demand materially adversely affected our business and results of
operations. While demand from the vinyl and urethane industries increased during
the latter half of 2002, providing positive benefits to our business and results
of operations, domestic economic conditions are still uncertain and could
materially adversely affect demand for our products in 2003 or thereafter.

Although we sell only a small percentage of our products directly to
customers abroad, a large part of our financial performance is dependent upon
economies beyond the United States and Canada. Our customers sell a portion of
their products abroad and caustic soda is often imported from overseas when
market conditions make it economical to do so. As a result, our business is
affected by general economic conditions and other factors beyond the United
States and Canada, including fluctuations in interest rates, market demand,
labor costs and other factors beyond our control. The demand for our customers'
products, and therefore, our products, as well as the domestic supply of caustic
soda, is directly affected by such fluctuations. There can be no assurance that
events having a material adverse effect on the industry in which we operate will
not occur or continue, such as a further downturn in the world economies,
increases in interest rates, unfavorable currency fluctuations or a prolonged
slowdown in the industries which consume our chlor-alkali products.

Our profitability could be reduced by declines in average selling prices.

Our historical operating results reflect the cyclical and sometimes
transitory nature of the chemical industry. We experience cycles of fluctuating
supply and demand in our chlor-alkali products business, which result in changes
in selling prices. Periods of high demand, tight supply and increasing operating
margins tend to result in increased capacity and production until supply exceeds
demand, generally followed by periods of oversupply and declining prices. For
example, in 1995 and 1996, the chlor-alkali industry was very profitable due to
a tight supply/demand balance, which resulted in both higher operating rates and
higher ECU prices. Higher profits led to reinvestment to expand capacity. This
new capacity became operational in 1998 and 1999, resulting in industry
over-capacity. This imbalance was exacerbated by falling demand as a result of
the Asian financial crisis. The supply/demand imbalance resulted in both lower
operating rates and lower ECU prices, and in 1999, many chlor-alkali producers
had operating losses. The supply/demand balance improved due to improved
economic conditions in 2000 compared to 1999, and ECU prices increased in 2000
compared to 1999. As the U.S. and world economies deteriorated in 2001 and early
2002, the chlor-alkali industry again experienced a period of oversupply because
of lower industry demand for both chlorine and caustic soda. That in turn led to
a reduction in industry

12

capacity, including the idling of our own Tacoma chlor-alkali facility.
Beginning in mid-2002, a combination of higher industry demand and reduced
industry capacity resulted in an increase in ECU prices.

When demand for chlorine is high and operational capacity is expanded
accordingly, an increase in the supply of both chlorine and caustic soda occurs
since chlorine and caustic soda are produced in a fixed ratio. In that event the
price of caustic soda may be depressed if there is insufficient demand for the
increased supply. This imbalance may have the short-term effect of limiting our
operating profits as improving margins in chlorine may be offset by declining
margins in caustic soda. When demand for chlorine declines to a level below
plant operational capacity and available storage is filled, production
operations must be curtailed, even if demand for caustic soda has increased.
This imbalance may also have the short-term effect of limiting our operating
profits as improving margins in caustic soda may be offset by both declining
margins in chlorine and the reduced production of both products. When
substantial imbalances occur, we will often face reduced prices or take actions
that could have a material adverse effect on our results of operations and
financial condition.

Most of our customers consider price one of the most significant
factors when choosing among the various suppliers of chlor-alkali products. We
have limited ability to influence prices in this large commodity market.
Decreases in the average selling prices of our products could have a material
adverse effect on our profitability. While we strive to maintain or increase our
profitability by reducing costs through improving production efficiency,
emphasizing higher margin products, and by controlling selling and
administration expenses, we cannot provide any assurance that these efforts will
be sufficient to offset fully the effect of changes in pricing on operating
results.

Because of the cyclical nature of our business, we cannot provide any
assurance that pricing or profitability in the future will be comparable to any
particular historical period. We cannot provide any assurance that the
chlor-alkali industry will not experience adverse trends in the future, or that
our operating results and/or financial condition will not be materially
adversely affected by them.

Higher energy prices can impair our ability to produce chlor-alkali products
economically and adversely impact our results of operations.

Energy costs comprise the largest component of the raw material costs
associated with producing chlor-alkali products. As a result, and because we
have limited ability to influence pricing, increases in the cost of energy can
materially adversely affect our results of operations and may cause our
production of chlor-alkali products to become uneconomical. Increases in natural
gas prices increase our cost of operations at our facilities that procure their
power from sources that rely on natural gas to generate power. Likewise, drought
conditions can have the effect of increasing the price that our facilities must
pay to procure power from sources that rely on hydropower to produce energy, and
drought conditions or other factors that decrease the availability of hydropower
may cause us to have to purchase power from other, more expensive sources. As a
result of the settlement of our dispute with CRC, the power requirements of our
Henderson facility are now primarily based on market rates (rather than the
below-market rates under the contracts that were assigned to the Southern Nevada
Water Authority) and supplied from sources that rely on natural gas to generate
power, rather than hydropower, and natural gas based power has generally been
more costly than hydropower and has experienced greater price volatility in the
past. The current contract with CRC terminates in 2006, and in the absence of an
extension of the term it will be necessary to seek an alternative arrangement
for the purchase of power for our Henderson facility, and any such arrangement
might involve greater costs.

To the extent our competitors are able to secure less expensive power
than we are due to their geographic location or otherwise, we will be unable to
compete economically with them in terms of price. We are unable to predict the
future impact that energy prices may have on the results of our operations. See
" - Pricing, Production, Distribution and Marketing" above.

The restrictive terms of our indebtedness may limit our ability to grow and
compete and prevent us from fulfilling our obligations under our indebtedness.

As of December 31, 2002, we had approximately $214.7 million of Senior Secured
Debt outstanding, as well as $12.4 million of other notes. Our borrowings under
the Revolver as of February 28, 2003 were $15.2 million. As of that date, our
$30 million Revolver commitment was subject to borrowing base limitations
related to the level of accounts receivable, inventory and reserves, and was
further reduced by letters of credit that were outstanding on that date. As a
result, on February 28, 2003, our additional availability under the Revolver was
approximately $11.5 million and our Liquidity was $13.1 million. Our operating
flexibility is limited by covenants contained in our debt instruments, including
our Senior Notes and Revolver, which limit our ability to incur additional
indebtedness, prepay or modify debt instruments, create additional liens upon
assets, guarantee any obligations, sell assets and make dividend payments. Our
compliance with the covenants contained in our debt instruments could limit our
ability to grow

13

and compete and prevent us from fulfilling our obligations under those debt
instruments.

Our Revolver requires us to generate a specified amount of
Lender-Defined EBITDA. We cannot provide any assurance that we will generate the
necessary level of earnings, and our failure to do so would constitute a default
under the Revolver, unless the lender under our Revolver agrees to waive the
default. A default, if not waived, could have a material adverse effect on our
business, financial condition and results of operations. A default under our
Revolver, which would also constitute a default under our Senior Notes, would
give the lender under the Revolver and the holders of the Senior Notes the right
to cause the acceleration of all indebtedness outstanding thereunder. This would
cause us to suffer a rapid loss of liquidity and we would lose the ability to
operate on a day-to-day basis. In addition, the lender under our Revolver may
refuse to make further advances if a material adverse change in our business,
prospects, operations, results of operations, assets, liabilities or condition
(financial or otherwise) has occurred.

Our Lender-Defined EBITDA for the nine months ended December 31, 2002
was a positive $1.2 million, and our Lender-Defined EBITDA for the three months
ended December 31, 2002 was a negative $10.7 million. Those amounts were less
than the amounts required under the Revolver covenant for those periods. Since
in the absence of a fourth quarter 2002 asset impairment charge of $16.9 million
(as discussed above) our Lender-Defined EBITDA would have exceeded the covenant
requirement, the lender under our Revolver has waived our noncompliance with the
covenant requirement. We anticipate that as a result of an additional asset
impairment charge in the first quarter of 2003, we will also be required to seek
a waiver from the lender under our Revolver with respect to our compliance with
the covenant requirement for that quarter. In addition, we anticipate that
impairment charges for the fourth quarter of 2002 and the first quarter of 2003
will likely result in the need for future waivers from the lender under our
Revolver, since the impairments will have a negative effect on Lender-Defined
EBITDA for the twelve-month periods ending each quarter through March 31, 2004.

During March 2002, the lender under the Revolver advised us that it
believed that a material adverse change had occurred, although it continued to
fund loans under the Revolver. In order to address concerns about adverse
changes in our financial condition and the possibility that we might not comply
with the financial covenant included in the Revolver during the remainder of
2002, we had discussions with the lender on the proposed terms of an amendment
to the Revolver. The lender rescinded its notice that a material adverse change
had occurred. We entered into the April 2002 amendment to our Revolver (the
"First Amendment") to (i) revise the Revolver's financial covenant to exclude
the effects of changes in the fair value of derivative instruments, (ii)
eliminate the availability of interest rates based on the London interbank
offered rate ("LIBOR") and (iii) replace the previously applicable margin over
the prime rate (the "Previous Rate") with the Previous Rate plus 2.25% for all
loans that are and will be outstanding under the Revolver. We paid a forbearance
fee of $250,000 in connection with the First Amendment. Also in connection with
the First Amendment, we agreed with our lender to effect another amendment to
further revise the financial covenant to exclude realized gains and losses
(except to the extent such losses are paid by us) on derivatives, to take into
account our expectations for the amount of Lender-Defined EBITDA that would be
generated during 2002 as agreed to by the lender, and to add such other
financial covenants to the Revolver as the lender deemed necessary to monitor
our performance in meeting such projections. The June 2002 amendment to the
Revolver (the "Second Amendment") requires us to meet the Lender-Defined EBITDA
amounts set forth above and adds the additional financial covenants contemplated
in the First Amendment. The additional covenants require us to maintain
Liquidity (as defined in the Second Amendment) of at least $5.0 million, and
limit capital expenditure levels to $20.0 million in 2002 and $25.0 million in
each fiscal year thereafter. At December 31, 2002, our liquidity was $14.2
million. Capital expenditures were $10.6 million during 2002. We estimate
capital expenditures will be approximately $13.2 million during 2003. See " -
Matters Affecting our Liquidity" above and Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in Part II of this report.

Our Tranche A Notes provide that, within 60 days after each calendar
quarter during 2003 through 2006, we are required to redeem (i) $2.5 million
principal amount of Tranche A Notes if Pioneer Americas' EBITDA for such
calendar quarter is greater than $20 million but less than $25 million, (ii) $5
million principal amount of Tranche A Notes if Pioneer Americas' EBITDA for such
calendar quarter is greater than $25 million but less than $30 million and (iii)
$7.5 million principal amount of Tranche A Notes if Pioneer Americas' EBITDA for
such calendar quarter is greater than $30 million, in each case plus accrued and
unpaid interest thereon to the redemption date, provided that, if Pioneer
Americas' excess cash flow for specified periods during 2003 through 2006, when
multiplied by a percentage determined by reference to its average liquidity, is
greater than the applicable principal amount above, then we must redeem the
greater principal amount of Tranche A Notes. As a consequence of these
redemption requirements, we will not be able to apply any significant amount of
our income from operations to the expansion of our business or otherwise until
we have redeemed the Tranche A Notes. In addition, we may be required to redeem
some or all of the Tranche A Notes due to the increase in Pioneer Americas'
EBITDA resulting from non-cash transactions, including the settlement with CRC.

14

Our ability to generate cash depends on many factors beyond our control. We may
not be able to generate sufficient cash to service our debt, which may require
us to refinance our indebtedness on less favorable terms or default on our
scheduled debt payments.

Our ability to generate sufficient cash flow from operations to make
scheduled payments on our debt depends on a range of economic, competitive and
business factors, many of which are outside our control. We cannot provide any
assurance that our business will generate sufficient cash flow from operations.
If we are unable to meet our expenses and debt obligations, we may need to
refinance all or a portion of our indebtedness, sell assets or raise equity.

As of December 31, 2002, we had approximately $214.7 million of
indebtedness under various loan agreements, including the Revolver, which
expires in 2004, the Tranche A Notes due in 2006 and the 10% Senior Secured
Notes due in 2008. As of February 28, 2003, our borrowings under our $30 million
Revolver were $15.2 million. To the extent that we continue to need access to
this amount of committed credit, it will be necessary to extend or replace our
Revolver on or before its expiration in 2004. We will also need to redeem or
refinance our outstanding Senior Notes on or before their respective due dates.
The success of our future financing efforts may depend, at least in part, on:

o general economic and capital market conditions;

o credit availability from banks and other financial
institutions;

o investor confidence in us and the market in which we
operate;

o maintenance of acceptable credit ratings;

o market expectations regarding our future earnings and
probable cash flows;

o market perceptions of our ability to access capital
markets on reasonable terms; and

o provisions of relevant tax and securities laws.

We cannot provide any assurance that we would be able to refinance any
of our indebtedness, sell assets or raise equity on commercially reasonable
terms or at all, which could cause us to default on our obligations and impair
our liquidity. Our inability to generate sufficient cash flow to satisfy our
debt obligations, or to refinance our obligations on commercially reasonable
terms, would have a material adverse effect on our business, financial condition
and results of operations, as well as on our ability to satisfy our debt
obligations. See " - Recent Developments" and " - Matters Affecting our
Liquidity" above and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources" in Part
II of this report.

We face industry credit risks from concentration of customer base.

In 2002, approximately 26% of our revenues was generated by sales of
products for use in the pulp and paper industry. Poor economic conditions
affecting the pulp and paper industry could make it more difficult to collect
amounts due from customers in that industry and could reduce future demand for
our products from such customers, and as a result there could be a material
adverse effect on our financial condition, results of operations or cash flows.

Uncertainty regarding our financial condition may adversely impact our
relationship with our trade creditors and our customers.

Due to prevailing market conditions and other business factors, the
uncertainty of our financial condition could cause our suppliers and customers
to do business with us only on terms that are more burdensome than those that
characterize our current relationship or they may decide to curtail our current
business relationship with them. As a result, we could face liquidity issues
that could adversely affect our results of operations. There can be no
assurances with respect to any actions that our trade creditors, competitors or
customers might take in this regard.

15

We face competition from other chemical companies, which could adversely affect
our revenues and financial condition.

The chlor-alkali industry in which we operate is highly competitive. We
encounter competition in price, delivery, service, performance, and product
recognition and quality, depending on the product involved. Many of our
competitors are larger, have greater financial resources and have less debt than
we do. Among our competitors are two of the world's largest chemical companies,
OxyChem and Dow. Because of their greater financial resources, these companies
may be better able to withstand severe price competition and volatile market
conditions. If we do not compete successfully, our business, financial condition
and results of operations could be materially adversely affected. See " -
Competition" above.

We have ongoing environmental costs, which could have a material adverse effect
on our financial condition.

The nature of our operations and products, including the raw materials
we handle, exposes us to a risk of liabilities or claims with respect to
environmental matters. We have incurred, and will continue to incur, significant
costs and capital expenditures in complying with these environmental laws and
regulations.

The ultimate costs and timing of environmental liabilities are
difficult to predict. Liability under environmental laws relating to
contaminated sites can be imposed retroactively and on a joint and several
basis. One liable party could be held responsible for all costs at a site,
regardless of fault, percentage of contribution to the site or the legality of
the original disposal. We could incur significant costs, including cleanup
costs, natural resources damages, civil or criminal fines and sanctions and
third-party claims, as a result of past or future violations of, or liabilities
under, environmental laws. In addition, future events, such as changes to or
more rigorous enforcement of environmental laws, could require us to make
additional expenditures, modify or curtail our operations and/or install
pollution control equipment. See " - Environmental Regulation - U.S." and " -
Environmental Laws - Canada" above and Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Part II of this
report.

We are entitled to be indemnified by various third parties for
particular environmental costs and liabilities associated with real property
sold to us by those third parties. We could incur significant costs upon the
inadequacy of the coverage limits or termination or expiration of one or more of
these indemnification agreements, or if an indemnifying party is unable to
fulfill its obligation to indemnify us. See " - Indemnities" above.

Our facilities are subject to operating hazards, which may disrupt our business.

We are dependent upon the continued safe operation of our production
facilities. Our production facilities are subject to hazards associated with the
manufacture, handling, storage and transportation of chemical materials and
products, including leaks and ruptures, chemical spills or releases, pollution,
explosions, fires, inclement weather, natural disasters, unscheduled downtime
and environmental hazards. From time to time in the past, incidents have
occurred at our plants, including particularly hazardous chlorine releases, that
have temporarily shut down or otherwise disrupted our manufacturing, causing
production delays and resulting in liability for injuries, although no such
incident has occurred since 1995. Our operating and safety procedures are
consistent with those established by the chemical industry as well as those
recommended or required by federal, state and local governmental authorities.
However, we cannot provide any assurance that we will not experience these types
of incidents in the future or that these incidents will not result in production
delays or otherwise have a material adverse effect on our business, financial
condition or results of operations.

We maintain general liability insurance and property and business
interruption insurance with coverage limits we believe are adequate. However,
because of the nature of industry hazards, we cannot provide any assurance that
liabilities for pollution and other damages arising from a major occurrence will
not exceed insurance coverage or policy limits or that adequate insurance will
be available at reasonable rates in the future.

The distribution of our products may be disrupted by various events.

We distribute a large portion of the hazardous chemicals that we
produce by railcar, and the rail transportation system in the United States and
Canada is subject to various hazards that are beyond our control, such as
derailments or weather-related delays. The U.S. transportation system is
currently the subject of intensified examination as a result of the risk of
terrorist activities, and procedures that may be adopted to deal with that risk
may make the distribution of our products more difficult and expensive. The
implementation of any such procedures could have a material adverse effect on
our business, financial condition or results of operations.

16

Availability of our operating loss carryforward may be limited by the Internal
Revenue Code.

We have net operating loss carryforwards ("NOLs") for income tax
reporting purposes, which may be available for offset against future federal
taxable income if generated during the carryforward period. As the result of our
emergence from bankruptcy and certain changes in the ownership of Pioneer, the
utilization of pre-emergence NOLs is subject to limitation under the Internal
Revenue Code and may be substantially and permanently restricted. In addition,
while post-emergence NOLs are not subject to limitation, the future realization
of such NOLs depends on our ability to maintain adequate liquidity and to
generate sufficient taxable income within the carryforward periods. The
limitation on NOL utilization may adversely affect our after-tax cash flow in
future periods.

We are dependent upon a limited number of key suppliers.

The production of chlor-alkali products principally requires
electricity, salt and water as raw materials, and if the supply of such
materials were limited or a significant supplier failed to meet its obligations
under our current supply arrangements, we could be forced to incur increased
costs which could have a material adverse effect on our financial condition,
results of operations or cash flows.

EMPLOYEES

As of December 31, 2002, we had 652 employees, 299 of which are covered
by collective bargaining agreements. Seventy-nine of our employees at our
Henderson, Nevada facility are covered by collective bargaining agreements with
the United Steelworkers of America and with the International Association of
Machinists and Aerospace Workers that are in effect until March 13, 2004. At our
Becancour facility, 139 employees are covered by collective bargaining
agreements with the Communication, Energy and Paperworkers Union that are in
effect until April 30, 2006, and 28 employees at our Cornwall facility are
represented by the United Steelworkers Union, with a collective bargaining
agreement that expires in November 2003. Forty-five of our employees at the
Dalhousie, New Brunswick plant are covered by a collective bargaining agreement
with the Communication, Energy and Paperworkers Union of Canada that is in
effect until May 2007. Eight employees at our Tacoma bleach facility are covered
by a collective bargaining agreement with the Teamsters Union that is in effect
until January 2006. Our employees at other production facilities are not covered
by union contracts or collective bargaining agreements. We consider our
relationship with our employees to be satisfactory, and we have not experienced
any strikes or work stoppages.

FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS

For financial information about our geographic areas of operation,
please see the table in Note 15 of our consolidated financial statements, which
presents revenues attributable to each of our geographic areas for the years
ended December 31, 2002, 2001 and 2000 and assets attributable to each of our
geographic areas as of December 31, 2002 and 2001.

ITEM 2. PROPERTIES.

FACILITIES

The following table summarizes information regarding our principal
production, distribution and storage facilities as of February 28, 2003. All
property is owned by us unless otherwise indicated.

- ----------

* Leased property

Becancour, Quebec. The Becancour facility is located on a 100-acre site in
an industrial park on the deep-water St. Lawrence Seaway. The facility was
constructed in 1975, with additions in 1979 and 1997. Annual production capacity
is 340,000 tons of chlorine, 383,000 tons of caustic soda and 150,000 tons of
hydrochloric acid. In addition, the site has a bleach production facility
capable of producing 9,600 tons of bleach per year. Approximately 82% of the
Becancour facility's production is based on diaphragm cell technology, and more
efficient membrane cell technology accounts for the remaining approximately 18%
of production.

St. Gabriel, Louisiana. The St. Gabriel facility is located on a 100-acre
site near Baton Rouge, Louisiana. Approximately 228 acres adjoining the site are
available to us for future industrial development. The St. Gabriel facility was
completed in 1970 and is situated on the Mississippi River with river frontage
and deepwater docking, loading and unloading facilities. Annual production
capacity at the St. Gabriel facility is 197,000 tons of chlorine and 216,700
tons of caustic soda, using mercury cell technology.

Henderson, Nevada. The Henderson facility is located on a 374-acre site
near Las Vegas, Nevada. Approximately 70 acres are developed and used for
production facilities. The Henderson facility, which began operation in 1942 and
was upgraded and rebuilt in 1976-1977, uses diaphragm cell technology. Annual
production capacity at the Henderson facility is 152,000 tons of chlorine,
167,200 tons of caustic soda and 130,000 tons of hydrochloric acid. In addition,
the facility is capable of producing 180,000 tons of bleach per year. The
Henderson facility is part of an industrial complex shared with three other
manufacturing companies. Common facilities and property are owned and managed by
subsidiaries of Basic Management, Inc. ("BMI"), which provide common services to
the four site companies. BMI's facilities include extensive water and high
voltage power distribution systems and access roads.

Dalhousie, New Brunswick. The Dalhousie facility is located on a 36-acre
site along the north shore of New Brunswick on the Restigouche River. The
Dalhousie facility consists of a mercury cell chlor-alkali plant built in 1963
and expanded in 1971 and a sodium chlorate plant built in 1992. Annual
production capacity is 36,000 tons of chlorine, 40,000 tons of caustic soda and
22,000 tons of sodium chlorate.

Cornwall, Ontario. The Cornwall units are located on leased portions of a
36-acre site on the St. Lawrence River in Cornwall, Ontario, which portions are
leased under a lease expiring in the year 2007, with two five-year renewal
options. The facilities consist of a bleach plant with an annual production
capacity of 236,000 tons, a Cereclor(R) chlorinated paraffin plant capable of
producing 9,800 tons per year, an IMPAQT(R) pulping additive plant capable of
producing 3,000 tons per year and a hydrochloric acid plant with an annual
production capacity of 14,700 tons.

Tracy, California. The Tracy facility includes a bleach production plant
capable of producing 233,000 tons per year and a chlorine

18

repackaging plant on a 15-acre tract. The land at the facility is leased under a
lease expiring in the year 2005, with two five-year renewal options.

Santa Fe Springs, California. The Santa Fe Springs facility includes a
bleach production plant capable of producing 180,000 tons per year and a
chlorine repackaging plant on a 4.5-acre tract. The land at the facility is
leased under a lease expiring in 2008.

Tacoma, Washington. The Tacoma bleach facility serves the Pacific Northwest
market. The bleach production facility, which has an annual production capacity
of 90,000 tons, and a chlorine repackaging facility are located on a five-acre
company-owned site in Tacoma, Washington. The separate, now-idled Tacoma
chlor-alkali plant is located on a 31-acre site which is part of an industrial
complex on the Hylebos Waterway in Tacoma, Washington. The chlor-alkali plant,
which used both diaphragm cell and membrane cell technology, was upgraded and
expanded in the late 1970s and in 1998, and has rail facilities as well as docks
capable of handling ocean-going vessels. The site is now used for the production
of calcium chloride, with annual capacity of 8,800 tons, and as a terminal
facility.

Other Facilities. Our corporate headquarters is located in leased office
space in Houston, Texas under a lease terminating in 2006. We also lease office
space in Montreal, Quebec under a lease terminating in 2011.

ITEM 3. LEGAL PROCEEDINGS.

From time to time and currently, we are involved in litigation relating to
claims arising out of our operations in the normal course of our business. We
maintain insurance coverage against potential claims in amounts that we believe
to be adequate. During the course of our bankruptcy proceedings, Tacoma Power, a
municipally-owned utility, filed a claim in the amount of $2.1 million with
respect to amounts owed by us to Tacoma Power prior to the filing of the
bankruptcy petition. Tacoma Power has asserted that as a result of a state
statutory provision, its claim gave rise to a lien against our Tacoma
chlor-alkali plant site, so that it is entitled to a cash payment of $2.1
million in full satisfaction of its claim in accordance with the provisions of
our plan of reorganization. The Bankruptcy Court has ruled that Tacoma Power's
claim is not secured by a lien; consequently, Tacoma Power is entitled to the
receipt of a pro rata portion of the 300,000 shares of our common stock
allocated by the plan of reorganization to unsecured claims, rather than a cash
payment. Tacoma Power has appealed that decision to the U.S. District Court for
the Southern District of Texas, and the parties are waiting for a decision from
that court.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted during the fourth quarter of 2002 to a vote of
security holders.

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.

The names, ages and current offices of our executive officers, each of whom
is to serve until the officer's successor is elected or appointed and qualified
or until the officer's death, resignation or removal by the Board of Directors,
are set forth below.

Michael Y. McGovern has served as President and Chief Executive Officer
since September 2002. He has been a director of Pioneer since December 31, 2001.
From April 2001 until January 2003, he was President and Chief Executive Officer
and a director of Coho Energy, Inc., a publicly-held oil and gas exploitation,
exploration and development company. From 1998 to March 2000 he was Managing
Director of Pembrook Capital Corporation, a privately held company involved in
providing advisory services to distressed or constrained energy companies, and
from July 1993 to October 1997 he was Chairman and Chief Executive Officer of
Edisto Resources Corporation and Convest Energy Corporation, which are
publicly-held oil and gas exploration and development companies. He also serves
as a director of Goodrich Petroleum Corporation, a public oil and gas company.

Gary L. Pittman has served as Vice President and Chief Financial Officer
since December 2002. From April 2000 to September 2002 he was Vice President and
Chief Financial Officer of Coho Energy, Inc. From August 1999 to March 2000 he
was Chief

19

Financial Officer of Bell Geospace, Inc., a privately-held data-based oil
service company. From 1998 to 1999 he served as a consultant to Perception,
Inc., a privately-held kayak manufacturer, and from 1995 to 1997 he was
Executive Vice President, Chief Financial Officer and Treasurer of Convest
Energy Corporation, a publicly-held oil and gas exploration and production
company.

James E. Glattly has served as Vice President, Sales and Marketing since
August 2001. He was Vice President, Marketing from March 2001 to August 2001,
Senior Vice President, Sales & Marketing - West from June 1999 to March 2001,
and President of a predecessor of Pioneer Americas from December 1996 to June
1999. He was Vice President, Sales and Marketing of predecessors of Pioneer
Americas from 1988 to 1996.

David A. Scholes has served as Vice President, Manufacturing since March
2001. He was Vice President, Manufacturing - U.S. from November 1999 to March
2001, and Vice President - Manufacturing of a predecessor of Pioneer Americas
from January 1997 to November 1999. Prior to that time, he was manager of
Occidental Chemical Corporation's Houston chemical complex.

Kent R. Stephenson has served as Vice President, General Counsel and
Secretary since June 1995. He was Vice President, General Counsel and Secretary
of a predecessor of Pioneer Americas from 1993 to 1995. Prior to 1993, he was
Senior Vice President and General Counsel of Zapata Corporation, then an oil and
gas services company.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS.

We are including the following discussion to inform our existing and
potential security holders generally of some of the risks and uncertainties that
can affect our company and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords.

From time to time, our management or persons acting on our behalf make
forward-looking statements to inform existing and potential security holders
about our company. These statements may include projections and estimates
concerning the timing and success of specific projects and our future prices,
liquidity, backlog, revenue, income and capital spending. Forward-looking
statements are generally accompanied by words such as "estimate," "project,"
"predict," "believe," "expect," "anticipate," "plan," "forecast," "budget,"
"goal" or other words that convey the uncertainty of future events or outcomes.
In addition, sometimes we will specifically describe a statement as being a
forward-looking statement and refer to this cautionary statement.

Various statements this report contains, including those that express a
belief, expectation or intention, as well as those that are not statements of
historical fact, are forward-looking statements. Those forward-looking
statements appear in Item 1 "Business," Item 2 "Properties" and Item 3 "Legal
Proceedings" in Part I of this report and in Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Item 7A
"Quantitative and Qualitative Disclosures About Market Risk" and in the Notes to
the consolidated financial statements incorporated into Item 8 of Part II of
this report and elsewhere in this report. These forward-looking statements speak
only as of the date of this report, we disclaim any obligation to update these
statements, and we caution against any undue reliance on them. We have based
these forward-looking statements on our current expectations and assumptions
about future events. While our management considers these expectations and
assumptions to be reasonable, they are inherently subject to significant
business, economic, competitive, regulatory and other risks, contingencies and
uncertainties, most of which are difficult to predict and many of which are
beyond our control. These risks, contingencies and uncertainties relate to,
among other matters, the following:

o general economic, business and market conditions, including
economic instability or a downturn in the markets served by us;

o the cyclical nature of our product markets and operating results;

o competitive pressures affecting selling prices and volumes;

o the supply/demand balance for our products, including the impact
of excess industry capacity;

o the occurrence of unexpected manufacturing interruptions/outages,
including those occurring as a result of production hazards;

o failure to fulfill financial covenants contained in our debt
instruments;

20

o inability to make scheduled payments on or refinance our
indebtedness;

o loss of key customers or suppliers;

o higher than expected raw material and utility costs;

o disruption of transportation or higher than expected
transportation and/or logistics costs;

o environmental costs and other expenditures in excess of those
projected;

o changes in laws and regulations inside or outside the United
States;

o uncertainty with respect to interest rates; and

o the occurrence of extraordinary events, such as the attacks on
the World Trade Center and The Pentagon that occurred on
September 11, 2001, or the war in Iraq.

We believe the items we have outlined above are important factors that
could cause our actual results to differ materially from those expressed in a
forward-looking statement made in this report or elsewhere by us or on our
behalf. We have discussed most of these factors in more detail elsewhere in this
report. These factors are not necessarily all the important factors that could
affect us. Unpredictable or unknown factors we have not discussed in this report
could also have material adverse effects on actual results of matters that are
the subject of our forward-looking statements. We do not intend to update our
description of important factors each time a potential important factor arises.
We advise our security holders that they should (i) be aware that important
factors we do not refer to above could affect the accuracy of our
forward-looking statements and (ii) use caution and common sense when
considering our forward-looking statements.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

RECENT SALES OF UNREGISTERED SECURITIES

On December 31, 2001, our plan of reorganization became effective. Under
the plan of reorganization, (i) an aggregate of 10,000,000 shares of our common
stock were issued to persons who were our creditors immediately prior to
effectiveness of the plan of reorganization and (ii) the holders of our senior
secured debt existing immediately prior to effectiveness of the plan of
reorganization received $200 million principal amount of new senior secured
debt. The shares issued to creditors and the new senior secured debt were issued
in exchange for our debt and other obligations which were outstanding
immediately prior to effectiveness of the plan of reorganization. The common
stock and the new senior secured debt were issued in reliance on an exemption
from the registration requirements of the Securities Act of 1933 provided by
Section 1145(a)(1) of the U.S. Bankruptcy Code.

MARKET PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "PONR." The Class A common stock existing before our reorganization was
listed and traded on the NASDAQ SmallCap Market under the symbol "PIONA." There
was no established trading market for our Class B common stock that existed
prior to our reorganization. The NASDAQ SmallCap Market delisted our Class A
common stock on January 12, 2001 after which time the Class A common stock
traded on the OTC Bulletin Board under the symbol "PIOAE" until its cancellation
on December 31, 2001. On December 31, 2001, all shares of our Class A common
stock and Class B common stock existing before our reorganization were cancelled
and new shares of our common stock were issued. On February 20, 2002, our newly
issued common stock began trading on the OTC Bulletin Board. As of March 11,
2003 we had 10,000,000 shares of common stock outstanding and had 672
shareholders of record. The last sale of shares of our common stock on March 26,
2003 as quoted on the OTC Bulletin Board, was at a price of $4.00.

The following table contains information about the high and low sales price
per share of (i) our Class A common stock before our plan of reorganization
became effective on December 31, 2001, and (ii) our common stock following the
effectiveness of our plan of

21

reorganization. Sales price information for periods on or before January 12,
2001 reflect prices reported by the NASDAQ SmallCap Market. Sales price
information for periods from January 12, 2001 to December 31, 2002 reflects
quotes from the OTC Bulletin Board. Information about OTC bid quotations
represents prices between dealers, does not include retail mark-ups, mark-downs
or commissions, and may not necessarily represent actual transactions.
Quotations on the OTC Bulletin Board are sporadic and currently there is no
established public trading market for our common stock.

As our Class A common stock was cancelled on December 31, 2001, the prices
set forth on the following table for 2001 are not relevant to or indicative of
the present or future value of our newly issued common stock.