PIONEER COMPANIES INC - 10-K Annual Report

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

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, 2003

COMMISSION FILE NO. 000-31230

PIONEER COMPANIES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 06-1215192
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)

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:

TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------- ---------------------------------------------
None Not applicable

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. [ ]

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 [ ]

The aggregate market value of the voting stock held by non-affiliates of
the registrant on June 30, 2003, based on the last reported trading price of the
registrant's common stock on the OTC Bulletin Board on that date, was $22.6
million. For purposes of the above statement only, all directors, executive
officers and 10% shareholders are deemed to be affiliates.

There were 10,010,665 shares of the registrant's common stock outstanding
on March 23, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant's definitive proxy statement for the
registrant's 2004 Annual Meeting of Stockholders are incorporated by reference
into Part III of this report.

TABLE OF CONTENTS

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 that are used in a wide
variety of applications and chemical processes. We believe they are the seventh
and sixth most commonly produced chemicals, respectively, in the United States,
based on volume. 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, chlorination is used to make
public drinking water safe to drink, 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 our chlor-alkali production capacity represents
approximately 5% of the chlor-alkali industry's production capacity in the
United States and Canada. We currently operate the following production
facilities that produce chlorine and caustic soda and related products.
Production capacity is stated in tons.

During 2001 we idled half of the production at our Tacoma, Washington
chlor-alkali plant, and in 2002 the plant's remaining production capacity was
idled. We had considered the possibility of resuming chlor-alkali production
operations at the facility, but in March 2004 it was determined that as a result
of our inability to identify and develop the significant long-term market base
that would be served by the plant, chlor-alkali production at the plant will not
be resumed. We will continue to use the plant site as a terminal to serve our
customers in the Pacific Northwest, and calcium chloride is also produced at the
facility. We produce bleach at a separate facility in Tacoma.

Chlor-alkali manufacturers in the United States and Canada account for
approximately 28% of world chlor-alkali annual production capacity, with
approximately 15.4 million tons of chlorine and 16.4 million tons of caustic
soda production capacity. The Dow Chemical Company ("Dow") and Occidental
Chemical Corporation ("OxyChem") are the two largest chlor-alkali producers in
North America, together representing approximately 52% of U.S. and Canadian
capacity. Seventeen companies share the remaining capacity, and approximately
72% of the total capacity is located on the Gulf Coast. The chlor-alkali
industry in the United States and Canada is highly competitive, and many of our
competitors, including Dow, OxyChem and PPG Industries, Inc., are substantially
larger and have greater financial resources than we do. While widely available
technology is used in chlor-alkali production, capital requirements and the
difficulty of obtaining permits for the production of chlor-alkali and
chlor-alkali related products may create barriers to entry.

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 goal is
build long-term relationships with our customers by meeting their product
quality, delivery schedule and sales support needs. We believe that there are
some characteristics of our production capabilities that distinguish us from
many of our competitors, including the following:

- our Becancour facility is a lower-cost production facility as a result of
that facility's use of hydropower;

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

- our Henderson facility is the only currently operating chlor-alkali
production facility in the western region of the United States, providing
us with a strong regional presence and transportation cost advantages.

In 2003 approximately 200,000 tons (30%) of the chlorine and 90,000 tons
(11%) of the caustic soda that we produced at our chlor-alkali plants were used
for our internal production of bleach and hydrochloric acid. We sell our
remaining production in the merchant market. In contrast, many chlor-alkali
companies use a large proportion of the chlorine that they produce for the
internal production of other chemical products. At times those companies treat
the caustic soda that they produce as a secondary product that they are willing
to dispose of at a discount, which places us at a competitive disadvantage.

Our St. Gabriel and Dalhousie facilities use the mercury cell production
process, which yields premium grade, low-salt caustic soda, a niche product that
is required by certain customers. However, many of our competitors benefit from
a greater use of the membrane production process. See " -- Technology" below.

Other competitive disadvantages that we face include relatively high power
costs at our Henderson and St. Gabriel facilities; our need to acquire salt from
third-party producers, with attendant cost and transportation issues; our
inability to spread our fixed costs over a large manufacturing base; and our
inability to serve some customers in Canada and the United States without
incurring significant transportation costs. The demand for and prices of
chlorine and caustic soda are heavily influenced by conditions in the vinyls and
aluminum industries, respectively, so those conditions have an effect on us,
even though we do not sell large

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amounts of our products to customers in either industry. See "-- Marketing,
Pricing, Production and Distribution -- Marketing" below.

Much of the bleach that we produce at several of our plants is sold in bulk
quantities for use in municipal water treatment and as a disinfectant in food
processing. We also supply bulk bleach to consumer and commercial disinfectant
and cleanser manufacturers. Hydrochloric acid has a variety of industrial uses,
including mining operations and the production of oil and gas, exotic metals,
rocket fuel, computer hardware, dyes, ink and solvents. Sodium chlorate is used
in pulp and paper bleaching, and chlorinated paraffin is used in plastics
compounding and in cosmetics and lotions manufacturing. The hydrogen that is
produced as a by-product of the production of chlorine and caustic soda is
generally used either as a raw material in the production of hydrochloric acid
or as a boiler fuel, although pipelines at the St. Gabriel and Becancour plants
are used to transport the hydrogen produced at those plants directly to
purchasers.

We primarily use our own sales force to serve our markets, although we also
sell some of our products to distributors. We use one facility that we own and
three leased terminal facilities to store and distribute caustic soda and
hydrochloric acid, and we use an additional fifteen transfer facilities where
rail shipments are transloaded to trucks for local distribution.

RECENT DEVELOPMENTS

RECENT TRENDS IN PRODUCT PRICES AND COSTS

We believe that, during the first six months of 2004, our average ECU
netback (that is, price adjusted to eliminate the product transportation
element) will be less than the 2003 average of $382, as we do not expect the
projected improvement in chlorine prices to offset declining caustic soda
prices. Operating margins will be adversely affected by the lower ECU values and
by natural gas prices that are still at relatively high levels, although natural
gas prices are now somewhat lower than the 2003 average. Electricity purchases
account for the largest percentage of our raw material cost, and our plants at
St. Gabriel and Henderson rely on power sources that primarily use natural gas
for the generation of electricity. High energy prices are also affecting the
global positioning of chlor-alkali production capacity, since production
capacity and demand is increasing in Asia, where access to lower-cost power is
available.

COST-REDUCTION MEASURES

In February 2004 we engaged a consulting group to assist us in an
organizational efficiency project. The project will involve the design,
development and implementation of uniform and standardized systems, processes
and policies to improve our management, sales and marketing, production, process
efficiency, logistics and material management and information technology
functions. The consulting fees that we will pay in connection with the project
are estimated to be from $2.8 million to $3.6 million. We believe that this
project will produce significant future cost savings, although the major
benefits of the project have not yet been quantified and will not be realized
until 2005 and future years. We are pursuing the project to improve our
efficiency and our operating margins, so that we will be able to improve our
cost competitiveness with other North American chlor-alkali producers, most of
which are larger, enjoy access to lower-cost raw material and energy sources,
and, because of the scale of their production facilities, have significantly
lower unit operating costs.

As part of a continuing effort to reduce our costs, the employee health
care plan that we provide to our U.S. employees was revised in 2003 to reduce
the share of health care costs that are borne by the company, and further
reductions have been effected for 2004. However, this may be offset in part or
whole by increased health care costs generally. Effective February 29, 2004,
benefits under our U.S. defined benefit pension plan were frozen, and future
retirement benefits for our U.S. employees will be provided through enhanced
contributions to our defined contribution pension plan.

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AMENDMENT OF REVOLVER

An important component of our senior secured debt is a Revolving Credit
Facility with a $30 million commitment and a borrowing base restriction (the
"Revolver"). An amendment to the Revolver that was effective as of December 31,
2003, extended the maturity date of borrowings by two years, from December 31,
2004, to December 31, 2006, and reduced the applicable interest rates and fees
that are payable to the lender. Our ability to borrow under the Revolver on the
basis of the London inter-bank offered rate was also restored.

One of the covenants in the Revolver requires us to generate at least
$21.55 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") for each twelve-month period ending at the end of each calendar
quarter. During some periods in 2002 and 2003, our Lender-Defined EBITDA was
less than the amounts required, although in the absence of certain asset
impairment charges and an increase in our reserve for environmental costs, our
Lender-Defined EBITDA would have exceeded the covenant requirement. The lender
waived our noncompliance during those periods. The December 2003 amendment also
included a change in the definition of Lender-Defined EBITDA that eliminated the
effect of the asset impairment charge and the environmental reserve addition
that occurred in the first quarter of 2003. For the twelve months ended December
31, 2003, we were in compliance with the covenant for that period.

MARKETING, PRICING, PRODUCTION AND 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.
Because chlorine and caustic soda are commodity chemicals, our sales contracts
typically contain pricing that is determined on a quarterly basis by mutual
agreement. Our contracts often contain "meet or release clauses" that allow the
customer to terminate the contract if we do not meet a better price for the
product that the customer is offered by a competitor, and the contracts also
allow either party to terminate the agreement if mutual agreement as to the
applicable price is not reached. 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 15% of our 2003 revenues was derived from sales of products
for use in the water treatment industry, approximately 27% resulted from sales
for use in the pulp and paper industry and approximately 9% 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 our customers. We also sell
certain products to distributors, although recently we have reduced our reliance
on the use of distributors. No customer accounted for more than 10% of our total
revenues in any of our last three fiscal years.

PRICING

Our average ECU netback was $382 in 2003, compared to $270 in 2002 and $337
in 2001. The netback improved in the first quarter of 2003, mainly as a result
of a caustic soda price increase announced for January 1. Strong demand for
chlorine in the first quarter of 2003, principally from the vinyls sector,
coupled with lower industry profitability due to high energy costs, led to price
increases for both chlorine and caustic soda effective on April 1, 2003. These
increases yielded a three-year record high ECU netback in the second quarter of
2003. No further price increases were implemented in 2003 and the average ECU
netback declined in the third quarter, and further eroded in the fourth quarter,
as caustic soda prices declined because of soft

4

demand and seasonal plant shutdowns and curtailed production at some of our
major customers. Quarterly average ECU netbacks for 2003, 2002 and 2001 were as
follows:

Caustic soda prices have continued to decline in the first quarter of 2004,
but the chlorine markets are firming and a $75 per ton price increase for
chorine was announced in February 2004. The increase was implemented immediately
or as soon as contract terms permit, although individual contract terms will in
some cases limit or prohibit the imposition of the increase.

PRODUCTION

ECU production volumes at our chlor-alkali facilities and at all
chlor-alkali industry production facilities in the U.S. and Canada for 2003,
2002 and 2001 were as follows:

- ---------------

(1) Excludes production volumes and capacities at our Tacoma facility. The
facility's capacity was reduced by 50% in March 2001, and the facility was
idled in March 2002. In 2002 and 2001 the facility's production volumes were
15,000 ECUs and 103,000 ECUs, respectively.

(2) Source: Chemical Market Associates, Inc.

We also purchased 140,000 tons, 104,000 tons, and 59,000 tons of caustic
soda for resale in 2003, 2002, 2001, respectively.

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. As a result, the
price of caustic soda is often depressed as there is insufficient demand for the
increased supply. This imbalance may have the short-term effect of limiting our
operating profits because 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
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 because
improving margins for 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 for customers near our plant in St. Gabriel, Louisiana, by pipelines. We
ship caustic soda by railcars, trucks, ships or barges, and we ship our other
products by railcars or trucks. We lease a fleet of approximately 2,100
railcars, and use third-party transportation operators for truck and water-borne
distribution. We are increasing our ability to maintain inventory at leased
terminal space, and we now store inventory at three terminal locations for
truck-load shipments to customers. Another fifteen locations are used for the
direct transfer of product from railcars to trucks for distribution.

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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. As
membrane cell technology produces higher-purity caustic soda than diaphragm cell
technology, and it requires lower power consumption and lower steam consumption,
most new chlor-alkali plants use that technology. See Item 2
"Properties -- Facilities" below for information regarding the use of these
technologies by our chlor-alkali production facilities.

ENVIRONMENTAL REGULATION

U.S. REQUIREMENTS

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. Anticipated
and existing regulations affect our capital expenditures and earnings, and they
may affect our competitive position to the extent that regulatory requirements
with respect to a particular production technology may give rise to costs that
our competitors might not bear. 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 any
personal injury and property damage that might result.

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 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 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 December 2003 the
EPA issued hazardous air pollutant emissions limitations for mercury-cell
chlor-alkali facilities, which apply to our St. Gabriel facility. The new
regulations provide a three-year period during which we must implement various
measures at the St. Gabriel facility, including installing additional emission
monitoring systems, adopting more stringent work practices and conduct more
frequent operating and maintenance checks and repairs, at a total estimated cost
of approximately $3.0 million. Of that amount, approximately $1.0 million has
been spent over the last two years in anticipation of the new requirements.
Environmental groups have challenged the new regulations, contending that the
EPA should reconsider its rules and adopt

6

new standards that bar the use of mercury for chlorine production. Moreover, one
national environmental group has requested that we voluntarily convert the St.
Gabriel facility to a non-mercury chlor-alkali process. See "-- Technology"
above.

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 or resulted in any material claims against us. 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, where required, 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 surface water protection programs that
require permits for discharges or operations that may impact groundwater or
surface water 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 and replace them with systems to
recycle wastewater.

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
specified 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 CERCLA's definition of a "hazardous substance."
We may be jointly

7

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 were 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
chlor-alkali facility that we previously operated in Tacoma, where the
activities are covered by an indemnity from the previous owner. See
"-- Indemnities -- OxyChem Indemnity" below. Investigations and remedial
activities are being carried out at certain facilities under the other statutory
authorities discussed above.

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 government agencies. In some cases we are
conducting this work under administrative orders.

In order to reassess our environmental obligations and to update an
independent environmental analysis conducted in 2000, we commissioned a new
study of environmental concerns at all of our plants during 2003. The study was
based on scenario analysis to estimate the cost to remedy environmental concerns
at our plant sites. For each scenario, the study also used cost estimating
techniques that included actual historical costs, estimates prepared for us by
consultants, estimates prepared by our engineers and other published cost data
available for similar projects completed at the same or other sites.

The 2003 study identified a number of conditions that have changed since
the 2000 environmental analysis, including, but not limited to, flexibility in
regulatory agency guidance, increased knowledge of site conditions, the use of
alternative remediation technologies, post-acquisition contamination not covered
under existing environmental indemnity agreements and the inherent risk of
disputes under some of the indemnity agreements due to passage of time. Based on
the study, we estimated our total environmental remediation liabilities to be
$21.0 million, of which $3.2 million is subject to indemnity claims against a
previous owner, as discussed below. As a result, we recorded an environmental
charge of $9.5 million in the first quarter of 2003, and as of December 31,
2003, our total estimated environmental liabilities were $20.5 million. We base
our environmental reserves on undiscounted costs. We believe that adequate
accruals have been established to address all known remedial obligations,
although there can be no guarantee that the actual remedial costs or associated
liabilities will not exceed accrued amounts. At some of our locations,
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.

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CANADIAN REQUIREMENTS

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 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. Canadian regulatory
authorities have identified mercury contamination in the waterway adjacent to
the Dalhousie facility, but we believe that any liability for the contamination
would be subject to one of the indemnities discussed below.

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
that benefit us. In general, we are indemnified against environmental costs that
arise from or relate to pre-closing actions that 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.

9

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.
We have recorded an environmental reserve related to pre-closing actions at
sites that are the responsibility of the ZENECA Companies, as well as a
receivable from the ZENECA Companies for the same amount. It is our policy to
record such amounts when a liability can be reasonably estimated. The timing of
future cash flows for environmental work is uncertain, such that those cash
flows do not qualify for discounting under generally accepted accounting
principles. As a result, the environmental liabilities and related receivables
are recorded at their undiscounted amounts of $3.2 million at December 31, 2003.

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.

OxyChem Indemnity. We acquired the chlor-alkali facility that we
previously operated in Tacoma from a subsidiary of OxyChem in June 1997. In
connection with the acquisition, we received an indemnification with respect to
certain environmental matters. In general, OxyChem will 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, OxyChem 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.
OxyChem 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 on-going and anticipated remediation work will
be completed prior to the expiration of the indemnity or if additional remedial
requirements will be imposed thereafter.

OxyChem will also indemnify us against certain other environmental
conditions and environmental violations caused by pre-closing operations that
are identified after the closing. Environmental conditions that were the subject
of an administrative or court order before June 2007 will be covered by the
indemnity up to certain dollar amounts and time limits. We have agreed to
indemnify OxyChem 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, 2003, no orders or agency actions had
been imposed.

The EPA has advised OxyChem 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 OxyChem and us of its concern
regarding high pH groundwater in the Hylebos Waterway embankment area and has
requested additional studies. OxyChem 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 timeframes currently estimated

10

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 OxyChem's
indemnity. However, the indemnity is subject to limitations as to dollar amount
and duration, as well as certain other conditions, and there can be no assurance
that the 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 have agreed to retain unlimited responsibility for environmental
liabilities associated with the leased 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
are responsible under the general environmental indemnity for a portion of the
costs incurred in any year during the period ending on October 31, 2007, subject
in any event to the $1 million (Cdn) threshold mentioned above. The ICI
Indemnitors will be responsible for 64% of any liabilities incurred during the
twelve months ending October 31, 2004, and the percentage of any costs that will
be the responsibility of the ICI Indemnitors declines by 16% each year
thereafter. After October 31, 2007, we will be responsible for all 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, most of which
were capital expenditures that we made to achieve compliance with air emissions
standards at the Becancour facility. Those proceedings are still pending. 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,
although demand from the vinyl and urethane industries increased during the
latter half of 2002. There was strong demand for chlorine in the first quarter
of 2003, principally from the vinyls sector, but later in the year caustic soda
demand weakened, and it has continued to weaken in the first quarter of 2004.
Domestic economic conditions are still uncertain and could materially adversely
affect demand for our products in 2004 or thereafter.

11

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 we import caustic soda from overseas for sales to
domestic customers. 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.

OUR PROFITABILITY COULD BE REDUCED BY DECLINES IN AVERAGE SELLING PRICES.

Our historical operating results reflect the cyclical 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. As the U.S.
and world economies deteriorated in 2001 and early 2002, the chlor-alkali
industry 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
capacity, including the termination of production at our own Tacoma chlor-alkali
facility. Beginning in mid-2002, a combination of higher demand and reduced
industry capacity resulted in an increase in ECU prices. Demand for both
chlorine and caustic soda was strong in the first quarter of 2003. Strong demand
for chlorine in the first quarter of 2003, principally from the vinyls sector,
coupled with lower industry profitability due to high energy costs, led to price
increases for both chlorine and caustic soda effective on April 1, 2003. These
increases yielded a three-year record high ECU netback in the second quarter of
2003. No further price increases were implemented in 2003 and the average ECU
netback declined in the third quarter, and further eroded to $366 in the fourth
quarter, as caustic soda prices declined because of soft demand and seasonal
plant shutdowns and curtailed production at some of our major customers.

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 be forced to reduce 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 controlling selling and administration expenses, we cannot
provide any assurance that these efforts will be sufficient to offset fully the
effect of declining ECU prices 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 or financial condition will not be materially adversely
affected by them.

12

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. As a result of
the settlement of our dispute with the Colorado River Commission of Nevada,
which we refer to as 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 pursuant
to our settlement with CRC) and supplied from sources that rely on natural gas
to generate power, rather than hydropower. Natural gas-based power has generally
been more costly than hydropower and has experienced greater price volatility
than hydropower. 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. 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. We are unable to predict the future impact that
energy prices may have on the results of our operations. See "-- Marketing,
Pricing, Production and Distribution" above.

THE RESTRICTIVE TERMS OF OUR INDEBTEDNESS MAY LIMIT OUR ABILITY TO GROW AND
COMPETE.

Our operating flexibility is limited by covenants contained in our debt
instruments, including our Senior Notes and Revolver, that 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. The covenants contained in our debt instruments could limit
our ability to grow and compete.

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 Lender-Defined EBITDA, and our failure to do so would constitute a
default under the Revolver, unless the lender agrees to waive the default. A
default, if not waived, would have a material adverse effect on our business,
financial condition and results of operations. Before the recent amendment to
the definition of Lender-Defined EBITDA in our Revolver, we were required to
seek a waiver from the lender in several of the preceding calendar quarters. 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 accelerate 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. See 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 Senior Secured Floating Rate Guaranteed Notes due 2006 in the aggregate
principal amount of $43.2 million (the "Senior Guaranteed Notes") and Floating
Rate Term Notes due 2006 in the aggregate principal amount of $4.4 million (the
"Senior Floating Notes") provide that, within 60 days after each calendar
quarter through 2006, Pioneer Americas is required to redeem and prepay the
greater of (a) an amount determined on the basis of Pioneer Americas' net income
before extraordinary items, net other income, interest, income taxes,
depreciation and amortization ("Tranche A Notes EBITDA"), and (b) an amount
determined on the basis of the Company's excess cash flow and average liquidity,
as defined. With respect to Tranche A Notes EBITDA, the amount that is to be
redeemed and prepaid is (i) $2.5 million of Senior Guaranteed Notes and Senior
Floating Notes (collectively, the "Tranche A Notes") if Tranche A Notes EBITDA
for such calendar quarter is $20 million or more but less than $25 million, (ii)
$5 million of Tranche A Notes if Tranche A Notes EBITDA for such calendar
quarter is $25 million or more but less than $30 million and (iii) $7.5 million
of Tranche A Notes if Tranche A Notes EBITDA for such calendar quarter

13

is $30 million or more, in each case plus accrued and unpaid interest to the
redemption date. If the Company's 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 as a result of
non-cash transactions.

We cannot refinance the $150 million outstanding aggregate principal amount
of 10% Senior Secured Guaranteed Notes due 2008 (the "10% Senior Secured Notes")
before December 31, 2005. In order to refinance the indebtedness, we would be
required to pay a 5% redemption premium for any refinancing during 2006 and a
2.5% redemption premium for any refinancing during 2007.

OUR ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL. WE
MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH TO FULLY 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
to make such scheduled payments. 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, 2003, we had approximately $222.3 million of
indebtedness under various loan agreements, including the Revolver, which
expires in December 2006, the Tranche A Notes due in December 2006 and the 10%
Senior Secured Notes due in December 2008. As of February 29, 2004, our
borrowings under our $30 million Revolver were $15.9 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 2006.
We do not anticipate that the cash that we will generate from our operations
will be sufficient to repay the Revolver and the Tranche A Notes when they are
due in December 2006, or the 10% Senior Secured Notes when they are due in
December 2008. In such events, it would be necessary to refinance the
indebtedness, either through new borrowings or the sale of newly-issued shares
of preferred or common stock, or sell assets. The terms of any new borrowings
could impose significant additional burdens on our financial condition and
operating flexibility, and the issuance of new equity securities could dilute
the interests of our existing stockholders.

The success of our future financing efforts may depend on many factors,
including but not limited to:

- general economic and capital market conditions;

- credit availability from banks and other financial institutions;

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

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

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

- provisions of relevant tax and securities laws.

We cannot provide any assurance that we would be able to refinance any of
our indebtedness, raise equity on commercially reasonable terms or at all, or
sell assets, and such inability 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. Under those circumstances, we would have to take
appropriate action including refinancing, restructuring or reorganizing all or a
portion of our indebtedness, deferring payments on our debt, selling assets,
obtaining additional debt or equity financing or

14

taking other actions, including seeking protection under Chapter 11 of the U.S.
Bankruptcy Code and under Canada's Companies Creditors' Arrangement Act.

See "-- Recent Developments" 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 2003 approximately 27% 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 adversely affect our customers in
that industry and could therefore affect the collectibility of amounts due and
reduce future demand for our products from such customers. 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 financial condition and 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.

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 significantly larger, have greater financial resources and have
less debt than we do. Among our competitors are two of the world's largest
chemical companies, Dow and OxyChem. 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 "-- Overview" 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 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

15

agreements, or if an indemnifying party is unable or unwilling 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. We believe our operating and safety procedures
are consistent in all material respects 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 PRODUCTION AND SHIPPING OF OUR PRODUCTS MAY BE DISRUPTED BY VARIOUS
EVENTS.

We ship 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,
weather-related delays or disruptions resulting from labor disputes. 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.

Since September 11, 2001, the chemical industry has responded to the issues
surrounding the terrorist attacks by starting new initiatives relating to the
security of chemical industry facilities. Chemical manufacturing facilities may
be at a greater risk of future terrorist attacks, as compared to other targets
in the United States. Additionally, federal, state and local governments have
begun a regulatory process that could lead to new regulations impacting the
security of chemical industry facilities. Our business or our customers'
businesses could be adversely affected due to the cost of complying with new
regulations.

WE ARE EXPOSED TO THE FINANCIAL EFFECTS OF CURRENCY TRANSLATION.

Due to the significance of the U.S. dollar-denominated long-term debt of
our Canadian subsidiary and certain other U.S. dollar-denominated assets and
liabilities, our functional accounting currency is the U.S. dollar. A portion of
our sales and expenditures are denominated in Canadian dollars, and accordingly,
our results of operations and cash flows are affected by fluctuations in the
exchange rate between the U.S. dollar and the Canadian dollar, since Canadian
dollar transactions must be translated into U.S. dollars for accounting
purposes. Our net income is affected by the remeasurement of Canadian
dollar-denominated account balances in U.S. dollars for financial reporting
purposes. Future changes in the relative value of the U.S. dollar against the
Canadian dollar will impact our financial condition and results of operations.
See Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," in Part II of this report.

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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 any future federal taxable
income 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 restricted. In addition, while post-emergence NOLs are
not subject to limitation, the future realization of such NOLs depends on our
ability 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, 2003, we had 648 employees, 295 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 2007. At our
Becancour facility, 135 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 October 2006. 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 11 of our consolidated financial statements, which
presents revenues attributable to each of our geographic areas for the years
ended December 31, 2003, 2002 and 2001 and assets attributable to each of our
geographic areas as of December 31, 2003 and 2002.

ACCESS TO FILINGS

Access to our annual reports on Form 10-K, quarterly reports on Form 10-Q
and current reports on Form 8-K and amendments to those reports filed with or
furnished to the Securities and Exchange Commission pursuant to Section 13(a) of
the Exchange Act, as well as reports filed electronically pursuant to Section
16(a) of the Exchange Act, may be obtained through our website
(http://www.piona.com). These reports may be viewed and printed at no cost as
soon as reasonably practicable after we have electronically filed such material
with the Securities and Exchange Commission. The contents of our website are
not, and shall not be deemed to be, incorporated into this report.

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ITEM 2. PROPERTIES

FACILITIES

The following provides certain information with respect to our production
facilities and other locations:

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 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 repackaging plant on a
15-acre tract. The land at the facility is leased under a lease expiring in the
year 2010, 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. A separate site in Tacoma is
now used for the production of calcium chloride, with an annual capacity of
8,800 tons, and as a terminal facility. That 31-acre site on the Hylebos
Waterway, was previously used for the production of chlorine and caustic soda.

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.

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In addition, we lease three terminal facilities to store and distribute caustic
soda and hydrochloric acid, and we lease an additional fifteen transfer
facilities where rail shipments are transloaded to trucks for local
distribution.

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 had 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 was 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 ruled that Tacoma Power's claim
was not secured by a lien, such that Tacoma Power was 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. In 2003
the U.S. District Court for the Southern District of Texas upheld that decision.

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

No matters were submitted during the fourth quarter of 2003 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 our 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. In February 2002 Coho Energy, Inc. filed a
petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. From
1998 to March 2000, Mr. McGovern 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, publicly-held oil and gas exploration and
development companies.

Ronald E. Ciora has served as our Vice President, Sales and Marketing since
February 2004. From August 2003 to February 2004, he was our Vice President,
Caustic Soda; from August 2001 to August 2003, he was our Vice President,
Western Regional Sales and Marketing; and from November 1999 to August 2001, he
was our Vice President, Bleach and Packaged Chlorine. From November 1995 to
December 1999, he served as President of All-Pure Chemical Co., Inc., a separate
Pioneer subsidiary engaged in the production and sale of bleach and repackaged
chlorine in the western U.S. before it was merged into Pioneer Americas LLC.

Gary L. Pittman has served as our 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.

19

In February 2002 Coho Energy, Inc. filed a petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. From August 1999 to March 2000, Mr.
Pittman was Chief 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.

David A. Scholes has served as our Vice President, Manufacturing since
March 2001. He was our 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. Mr. Scholes was
an executive officer of Pioneer in July 2001 when the petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code was filed.

Kent R. Stephenson has served as our 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. Mr. Stephenson was an
executive officer of Pioneer in July 2001 when the petition for reorganization
under Chapter 11 of the U.S. Bankruptcy Code was filed.

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, cash flows 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. Any statement contained in this report, other than statements of
historical fact, is a forward-looking 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:

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

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

- competitive pressures affecting selling prices and volumes;

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

20

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

- failure to comply with financial covenants contained in our debt
instruments;

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

- loss of key customers or suppliers;

- higher than expected raw material and utility costs;

- disruption of transportation or higher than expected transportation or
logistics costs;

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

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

- uncertainty with respect to interest rates and fluctuations in currency
exchange rates;

- the outcome of our operational efficiency project; and

- 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, as well as others, 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 of the important
factors that could affect us. Unpredictable or unknown factors that 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

Our common stock is currently quoted on the OTC Bulletin Board under the
symbol "PONR." As of March 24, 2004, we had 10,010,665 shares of common stock
outstanding and had 1,289 shareholders of record. The last sale of shares of our
common stock on March 24, 2004, as quoted on the OTC Bulletin Board, was at a
price of $6.20.

The following table contains information about the high and low sales
prices per share of our common stock since January 1, 2002. Price information
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

21

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.

DIVIDEND POLICY

We currently do not anticipate paying dividends on our common stock. The
covenants in the agreements related to our Revolver, our Tranche A Notes and our
10% Senior Secured Notes (collectively, the "Senior Secured Debt") prohibit the
payment of dividends on our common stock, other than dividends payable solely in
our common stock, for so long as any Senior Secured Debt remains outstanding.
Unless we prepay amounts outstanding on our Senior Secured Debt, we will have
borrowings outstanding thereunder until December 31, 2008. Any determination to
declare or pay dividends out of funds legally available for that purpose after
repayment of our Senior Secured Debt will be at the discretion of our board of
directors and will depend on our future earnings, results of operations,
financial condition, capital requirements, future contractual restrictions and
other factors our board of directors deems relevant. No cash dividends have been
declared or paid during the three most recent fiscal years.

EQUITY COMPENSATION PLAN INFORMATION

The following table presents information regarding our 2001 Employee Stock
Option Plan as of December 31, 2003:

- ---------------

* The adoption of our 2001 Employee Stock Option Plan was included in our plan
of reorganization, as confirmed by the Bankruptcy Court after approval by our
creditors.

ITEM 6. SELECTED FINANCIAL DATA

The following selected consolidated financial information is derived from
our consolidated financial statements for periods both before and after emerging
from bankruptcy protection on December 31, 2001.

22

Certain amounts have been reclassified in prior years to conform to the current
year presentation. No cash dividends were declared or paid for the periods
presented below. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements, including the related notes.

The consolidated statements of operations information for the years ended
December 31, 2003 and 2002, and the consolidated balance sheet information at
December 31, 2003, 2002 and 2001, reflects the financial position and operating
results after the effect of the plan of reorganization and the application of
the principles of fresh-start accounting in accordance with the provisions of
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code" ("SOP 90-7"). Accordingly, such financial information
is not comparable to the historical financial information before December 31,
2001.

- ---------------

(1) During March 2001, there was a 50% curtailment of the operations at our
Tacoma chlor-alkali plant, and in March 2002, the Tacoma chlor-alkali plant
was idled. In addition, Pioneer stopped amortizing goodwill effective
January 1, 2002, in accordance with Statement of Financial Accounting
Standards ("SFAS") 142.

(2) For information regarding derivatives transactions, see Note 2 to the
consolidated financial statements.

(3) Asset impairment and other items for 2003 includes a $40.8 million
impairment of our Henderson facilities and a net loss of $0.8 million from
disposition of assets, offset by a gain of $0.4 million from early payment
of debt. Asset impairment and other charges for 2002 includes a $16.9
million impairment loss relating to our Tacoma chlor-alkali facility. Asset
impairments and other items in 2001 include $9.1 million of restructuring
expenses for severance and professional fees incurred prior to the Chapter
11 bankruptcy filings and a $3.8 million loss from an asset impairment. See
Note 12 to the consolidated financial statements.

(4) Interest expense for 2001 excludes contractual interest of $21.8 million,
which was not recorded in accordance with SOP 90-7 as it related to
compromised debt.

(5) Reorganization items include legal and professional fees and expenses
incurred subsequent to the Chapter 11 bankruptcy filings and executive
retention bonuses, offset by gains from individually-negotiated settlements
of certain pre-petition liabilities. See Note 3 to the consolidated
financial statements.

(6) For information regarding fresh-start adjustments, see Note 3 to the
consolidated financial statements.

(7) Debt forgiveness income of $423.1 million was recorded in 2001 as a result
of the cancellation of debt pursuant to the plan of reorganization. See
Note 3 to the consolidated financial statements.

(8) Other income in 1999 includes a $12.0 million gain on the sale of our 15%
partnership interest in Saguaro Power Company.

(9) Income tax expense in 2000 includes a valuation allowance of $67.8 million
reducing U.S. deferred tax assets to zero. See Note 14 to the consolidated
financial statements.

(10) Because we were in default under various loan agreements on December 31,
2000, $597.7 million of debt outstanding under various agreements is
classified as a current liability on our consolidated balance sheet.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

All statements in this report, other than statements of historical facts,
including, without limitation, statements regarding our business strategy, plans
for future operations and industry conditions, are forward-looking statements
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These forward-looking statements are subject to various
risks, uncertainties and assumptions, including those we refer to under the
heading "Cautionary Statement Concerning Forward-Looking Statements" in Part I
of this report. Although we believe that the expectations reflected in such
forward-looking statements are reasonable, because of the inherent limitations
in the forecasting process, as well as the relatively volatile nature of the
industries in which we operate, we can give no assurance that those expectations
will prove to have been correct. Accordingly, evaluation of our future prospects
must be made with caution when relying on forward-looking information.

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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).

The production of chlor-alkali products principally requires salt,
electricity and water as raw materials. 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. As a result, the price of caustic soda is often
depressed because 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 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 because improving margins
for caustic soda may be offset by both declining margins for chlorine and the
reduced production of both products. Our railcars can, under certain
circumstances, be used to provide additional storage capacity.

In 2003 approximately $23.4 million of our cost of sales-product was
attributable to our salt requirements and approximately $78.0 million of our
cost of sales-product was attributable to our power requirements. The cost and
adequacy of our salt supplies are dependent on transportation cost and
availability. Adequate water 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 2003, our costs for power increased by $14.6
million from 2002, even though in 2002 we incurred $2.5 million of power costs
at the Tacoma facility before it was idled early in the year. Our power costs in
2002 were $16.9 million lower than in 2001, with $14.2 million of the decrease
attributable to idling the Tacoma facility. The energy costs associated with our
production of 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 of approximately $2.75
in our cost to produce an ECU.

Electric power for our Becancour and Dalhousie facilities is provided under
public utility tariffs that are based to a substantial extent on lower-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 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.

SETTLEMENT OF DISPUTE WITH THE COLORADO RIVER COMMISSION OF NEVADA

Electric power for our Henderson facility is primarily provided by the
Colorado River Commission of Nevada, or CRC, under a new long-term supply
contract. Variations in the cost