UNITED STATES SECURITIES AND EXCHANGE COMMISSION

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, 2004

Commission File No. 000-31230

Pioneer Companies, Inc.

Registrant’s telephone number, including area code:
(713) 570-3200

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share
(Title of class)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     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. þ

     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 o No þ

     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 þ No o

     The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2004, based on the last reported trading price of the registrant’s common stock on the OTC Bulletin Board on that date, was $71.3 million. For purposes of the above statement only, all directors, executive officers and 10% shareholders are deemed to be affiliates.

     There were 11,175,610 shares of the registrant’s common stock outstanding on March 22, 2005.

DOCUMENTS INCORPORATED BY REFERENCE:

     Portions of the registrant’s definitive proxy statement for the registrant’s 2005 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.

     In December 2004 we began the process of moving the bleach production equipment at our Cornwall, Ontario plant to the Becancour, Quebec plant. Following the March 2005 completion of the equipment transfer, the bleach production capacity of the Becancour plant increased from 9,600 tons to 236,000 tons, and we no longer produce bleach at the Cornwall plant.

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     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 would not be resumed. We have continued to use the plant site as a terminal to serve certain customers in the Pacific Northwest and for the production of calcium chloride. We produce bleach at a separate facility in Tacoma.

     Chlor-alkali manufacturers in the United States and Canada account for approximately 24% of world chlor-alkali annual production capacity, with approximately 14.8 million tons of chlorine and 15.7 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. We believe that percentage will increase to approximately 57% if OxyChem completes its recently-announced acquisition of the chlor-alkali business of Vulcan Chemicals. Seventeen companies (including Vulcan Chemicals) share the remaining capacity, and approximately 75% 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 and OxyChem, are substantially larger and have greater financial resources than we do. While widely available technology is used in chlor-alkali production, capital requirements, regulatory requirements and the difficulty of obtaining permits for the production of chlor-alkali and chlor-alkali related products create some obstacles to entry.

     Our ability to compete effectively depends on our ability to maintain a competitive cost structure, to provide reliable and responsive service to our customers and to operate in a safe and environmentally responsible manner. Our goal is to 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 2004 approximately 202,000 tons (29%) of the chlorine and 81,000 tons (10%) of the caustic soda that we produced at our chlor-alkali plants were used for our internal production of other products, primarily 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 affects the prices we are able to realize for sales of caustic soda.

     Our St. Gabriel and Dalhousie facilities use the mercury cell production process, which yields low-salt caustic soda. In the past low-salt caustic soda has been considered a niche product that is required by certain customers, but that is not currently the case, and 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 availability, 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 vinyl and aluminum industries use significant amounts of chlorine and caustic soda production. While we do not sell large amounts of our products to customers in either industry, conditions in those industries have a material effect on the overall market supply of chlorine and caustic soda and the prices paid by our customers. See “— Marketing, Pricing, Production and Transportation — 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

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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. We produce hydrogen as a by-product of the production of chlorine and caustic soda. Pipelines at the Becancour, Henderson and St. Gabriel plants are used to transport hydrogen produced at those plants directly to purchasers, and we also use hydrogen either as a raw material in the production of hydrochloric acid or as a boiler fuel.

     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 owned by third parties where rail shipments are transloaded to trucks for local distribution.

Recent Developments

Equity Offering

     On December 6, 2004, we completed an underwritten public offering of 1.1 million shares of our common stock. The net proceeds from the offering were approximately $22.1 million, after deducting related expenses. We used all of the net proceeds of the offering to redeem and prepay a portion of our outstanding senior secured indebtedness. The shares issued in the offering were a portion of those included in a shelf registration statement that we filed with the Securities and Exchange Commission and that was declared effective on September 16, 2004.

Recent Trends in Product Prices and Costs

     In accordance with industry practice, we compare ECU prices on a netback basis, reporting and analyzing prices without regard to the cost of transporting the products to customers to allow for a comparable means of price comparisons between periods and with respect to our competitors. We believe that during 2005 our average ECU netback will be greater than the 2004 average of $393, as the demand for chlorine and caustic soda, as well as for bleach and hydrochloric acid (downstream products that we produce), continues to be strong, and no production capacity additions in the North American chlor-alkali industry are anticipated to occur during the year. We expect that our operating margins will improve as a result of the higher ECU values, although natural gas prices are still at relatively high levels and the prices we must pay for salt have also increased over the last few months. 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

     Project STAR. During the first quarter of 2004 we engaged a consulting group to assist us in an organizational efficiency project, which we refer to as Project STAR. The project has involved 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 project has improved 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.

     We anticipate completing Project STAR by June 30, 2005, after incurring total employee severance and benefit-related costs of approximately $3.7 million in connection with the project. During 2004 $3.5 million of those costs were included in other items in our consolidated statements of operations. A total of $2.1 million of such costs were paid during the year, resulting in a liability balance at December 31, 2004, of $1.4 million. We also paid a total of $4.6 million in consulting fees in connection with the project, which were included in our selling, general and administrative expense in 2004.

     We currently anticipate that Project STAR will have the effect of improving our annual cost structure by approximately $11.0 million. We expect that the project, which resulted in the elimination of 128 employee and contract positions, will reduce our annual labor and benefits costs by more than $8.0 million, and efficiency

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measures that have been identified are expected to result in additional annual cost savings of approximately $3.0 million. Of the total anticipated savings, we believe that we realized savings of approximately $5.7 million during 2004, primarily as a result of reductions in labor and benefits costs, although as noted above we also incurred certain consulting fees in 2004 in connection with the project. We anticipate that additional Project STAR initiatives will result in future incremental cost reductions and efficiency improvements, as well as additional consulting fees and severance costs, although of a lesser magnitude than those identified and incurred to date.

     Realignment of Certain Canadian Operations. During the first quarter of 2005 we discontinued the production of bleach at our plant in Cornwall, Ontario, and transferred the production assets to our chlor-alkali plant in Becancour, Quebec. The transfer will result in the termination of 14 employees, resulting in severance costs of approximately $1.0 million, approximately half of which was recognized during the fourth quarter of 2004. There will be a net elimination of nine employee positions, after taking into account necessary additional staffing at the Becancour plant, and we anticipate that the transfer will reduce our annual labor and benefits costs by approximately $1.5 million. We also expect to be able to realize the benefit of additional transportation and production savings as a result of the move, although we have not yet quantified those savings.

     Benefit 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 were effected for 2004 and 2005. However, the reductions 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 plans were frozen, and retirement benefits for current service of our U.S. employees are now provided through enhanced contributions to our defined contribution pension plan.

Marketing, Pricing, Production and Transportation

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 often contain pricing that is determined on a quarterly basis by mutual agreement. Contracts that we entered into during prior periods often contained “meet or release” clauses that allow the customer to terminate the contract if we do not meet a better price that the customer is offered by a competitor for future product purchases. In the current market environment we will agree to such a contractual provision only if the pricing and volume provisions of a particular account justify or limit our risk to adverse market conditions. Our contracts may also allow either party to terminate the agreement if mutual agreement as to the applicable price for future product purchases 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 29% of our 2004 revenues was derived from direct sales of products for use in water treatment, approximately 23% resulted from sales for use in the pulp and paper industry and approximately 8% 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 we have reduced our reliance on the use of distributors over the course of the last couple of years. 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 $393 in 2004, compared to $382 in 2003 and $270 in 2002. For purposes of determining our ECU netback, we use prices that we realize as a result of sales of chlorine and caustic soda to our customers, and we do not include the value of chlorine and caustic soda that is incorporated in other products that we manufacture and sell. During 2004 we used approximately 29% of the chlorine and 10% of the caustic soda that we produced to manufacture other products, primarily bleach and hydrochloric acid.

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     Quarterly average ECU netbacks for 2004, 2003 and 2002 were as follows:

     Increasing demand for chlorine since the beginning of 2004 and increasing demand for caustic soda beginning in the second quarter of 2004 led us to announce price increases for those products since January 1, 2004, as follows (stated on a per ton basis):

     All of the price increases that we announce are implemented when announced or as soon as permitted by applicable contract terms.

     Our annual production capacity is approximately 1,500,000 tons of chlorine and caustic soda. Most of the chlorine and caustic soda that we sell to customers is sold under contracts with varying terms and conditions. As of January 1, 2005, we had contracts covering the anticipated sale of an annual total of approximately 520,000 tons of chlorine and caustic soda (including equivalent amounts that will be sold as bleach or hydrochloric acid), and that are subject to contractual provisions that could restrict or eliminate our ability to increase the netback we will receive for the amount of product that is sold under those contracts. Of the contracts that are subject to such restrictions, contracts with respect to approximately 460,000 tons will expire over the course of the next three years and the remainder will expire over the following five years.

     The prices that we realize for contract sales of chlorine and caustic soda during any quarter, and thus our average ECU netback for the quarter, are different from the chlorine and caustic soda contract prices that are reported by Chemical Market Associates, Inc. (commonly referred to as CMAI), a leading industry observer. CMAI’s reported monthly contract prices are based on the assumption that price changes are implemented on the first day of the calendar quarter that follows announced price changes, while we have a mix of pricing provisions that in some cases limits or delays the implementation of price changes. CMAI’s reported monthly contract prices also relate to products that are produced and delivered in the U.S. Gulf Coast. While the majority of the demand for North American chlor-alkali production does occur in the U.S. Gulf Coast region, only one of our plants is located in that region, and regional supply and demand factors and logistical considerations generally result in varying regional prices for our products.

     During the fourth quarter of 2004 our average ECU netback was $480, while the average ECU netback quoted by CMAI for the same quarter was $640. In general, changes in our average ECU netback and the related effect on our revenues and cash flow have lagged changes in our announced prices and changes in the contract prices that are reported by CMAI, although the corresponding benefit to us in a period of declining prices is of a somewhat lesser magnitude. The following table illustrates the recent relationship between our average ECU netback and the monthly contract price reported by CMAI:

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     Our average ECU netback for the first two months of 2005 was approximately $546. Since part of the benefit of our announced price increases has been delayed, we expect that our average ECU netback will increase during the first six months of 2005, even in the absence of any further price increases. Plant operating rates in the chlor-alkali industry are reportedly at near capacity, and further increases in ECU prices during the remainder of 2005 could be announced if these conditions continue.

Production

     ECU production volumes at our chlor-alkali facilities and at all chlor-alkali industry production facilities in the U.S. and Canada for 2004, 2003 and 2002 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 the facility’s production volume was 15,000 ECUs.
(2)		Source: Chemical Market Associates, Inc.

     We also purchased 130,000 tons, 140,000 tons and 104,000 tons of caustic soda for resale in 2004, 2003 and 2002, respectively. Following the reduction and later termination of chlor-alkali production in Tacoma, we met existing contractual commitments for caustic soda by purchasing caustic soda from other producers. Those commitments have now terminated, and we anticipate a reduced level of purchases for resale in future periods.

     Production rates for chlorine and caustic soda are generally 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 declining margins in caustic soda may offset improving margins in chlorine. 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.

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     From time to time disruptions in transportation interrupt our ability to operate our plants, by reducing our ability to obtain adequate amounts of salt, or by interrupting our ability to transport our products to our customers. In January 2005 we reduced the operation of our chlor-alkali plant in Henderson, Nevada when flooding in California and Utah disrupted rail transportation of salt to the plant and the shipment of chlorine, caustic soda and hydrochloric acid to our customers, as well as the shipment of chlorine and caustic soda to our bleach plants in California. Also in January 2005, an apparently seasonal reduction in orders that would ordinarily be supplied by our Becancour plant led us to reduce that plant’s operating rate for several days. Our production losses at the Henderson and Becancour plants in January 2005 were approximately 9,500 ECUs.

Transportation

     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 1,930 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 two 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.

     The salt that we use for the production of chlorine and caustic soda is purchased from suppliers and transported to our manufacturing facilities in railcars, trucks, ships or barges.

Technology

     We use 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 control 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.

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     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 will 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 conducting more frequent operating and maintenance checks and repairs. We anticipate that the total project cost associated with complying with the new regulations will be approximately $2.3 million. Of that amount, we have spent approximately $1.8 million over the last four years in anticipation of the new requirements. Environmental groups challenged the new regulations, contending that the EPA should reconsider its rules and adopt new standards that bar the use of mercury for chlorine production. The EPA has agreed to reconsider the new rules, and the litigation has been held in abeyance while that process continues. In addition, one national environmental group has suggested that we should voluntarily convert the St. Gabriel facility to a non-mercury chlor-alkali process. See “— Technology” above.

     As a result of voluntary air emissions monitoring that we conducted during October 2004, we discovered that the carbon-based system that we use to remove mercury from the hydrogen gas stream at our St. Gabriel facility was not effective, resulting in mercury vapor emissions that were above the permit limits approved by the Louisiana Department of Environmental Quality (“LDEQ”). We immediately reduced the plant’s operating rate in order to ensure that emissions were below the permitted levels, and evaluated the materials and process changes that would be necessary to address the problem. The installation of the necessary equipment was completed in late November, and the plant returned to its full operating rate. Since that time emissions monitoring has confirmed that air emissions are below the permit limits. LDEQ has issued a notice of violation to us as a result of the permit exceedances. LDEQ has not yet issued a penalty proposal with respect to the violation.

     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. Over the last five years 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. We have also applied for all necessary permits to discharge storm water under such laws. We believe that compliance with existing permits and 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. During 2004 we spent $0.8 million to complete improvements at our Henderson facility to discontinue the use of two chlor-alkali wastewater disposal ponds and replace them with systems to recycle wastewater. The total project cost over the last three years was $2.5 million.

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     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 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 used 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 the 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.

     Our assessment of environmental obligations is based on an independent analysis of environmental concerns at all of our plants that was conducted 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 study included consideration of various factors, including, but not limited to, existing knowledge of site conditions, flexibility in regulatory agency guidance, the use of various alternative remediation technologies, post-acquisition contamination not covered under existing environmental indemnity agreements and the inherent risk of

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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 of December 31, 2004, our total estimated environmental liabilities were $20.3 million, based on the results of the study and the costs that we have incurred since its completion. We base our environmental reserves on undiscounted costs.

     While we believe that adequate accruals have been established to address all known remedial obligations, in March 2005 we arranged for a new independent analysis of environmental concerns at our plants. As a result of the new study we may need to adjust our accruals for environmental obligations, and in any event there can be no guarantee that 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.

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 on or under land 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

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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.

     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, 2004. The environmental liabilities are included in our environmental reserves, which are recorded as other long-term liabilities on our consolidated balance sheet.

     The ZENECA Indemnity expired in April 1999, but it continues to apply to claims 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. If disputes arise between the parties concerning the effect of contractual language 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 adjacent 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.

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     OxyChem has also agreed to indemnify us against certain other environmental conditions and environmental violations caused by pre-closing operations that are identified after the closing. Environmental conditions that are 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.

     On March 15, 2005, the U.S. District Court for the Western District of Washington entered a consent decree relating to the remediation of the Hylebos Waterway in Tacoma. We are a party to the decree by virtue of our current ownership of the Tacoma site. Additional remediation of the site itself is ongoing. 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 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, 2004, we had not incurred any costs covered by the $25 million (Cdn) indemnity, and currently we do not anticipate incurring any liabilities that will be recoverable under the 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 48% of any liabilities incurred during the twelve months ending October 31, 2005, 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.

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Risks

Our operating results could be negatively affected during economic downturns and by declines in the average selling prices of our products, particularly declines in the ECU netback. In addition, contractual provisions in our customer contracts may prevent us from realizing the full extent of strengthening ECU prices.

     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 or domestic economic conditions could result in a reduction in demand for our products and could materially adversely affect our results of operations and financial condition. While demand for both chlorine and caustic soda has strengthened during recent quarters, domestic economic conditions could materially adversely affect demand for our products in the future.

     Although we sell only a small percentage of our products directly to customers abroad, to some extent 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, energy, salt and 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. Our historical operating results reflect the cyclical nature of the chemical industry. As discussed above, we experience cycles of fluctuating supply and demand in our chlor-alkali products business, which results 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. Beginning in mid-2002, a combination of higher demand and reduced industry capacity resulted in an increase in ECU prices. 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. No further price increases were implemented in 2003 and the average ECU netback declined during the latter half of 2003, as caustic soda prices declined because of soft demand and seasonal plant shutdowns and curtailed production at some of our major customers.

     While demand for chlorine began increasing in the first quarter of 2004, leading us to announce a price increase for that product, caustic soda demand continued to soften during that quarter. However, demand for caustic soda also began increasing in the second quarter of the year, and we announced additional price increases for both products during the remainder of 2004 and in February 2005.

     When demand for chlorine is high and the industry operating rate increases as a result, 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 declining margins in caustic soda may offset improving margins in chlorine. 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, these efforts are usually not sufficient to offset fully the effect of any decline in ECU prices on operating results.

     Because of the cyclical nature of our business, our pricing or profitability in the future may not be comparable to any particular historical period. The chlor-alkali industry may experience adverse trends in the future, which could materially adversely affect our results of operations and financial condition.

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Our profitability could be reduced by customer demand factors that are difficult to predict.

     Many of our contracts require us to meet the product requirements of our customers, and the orders for our products can be affected by factors that impact our customers’ businesses, including seasonal slowdowns or other events that cause a reduction in orders from an industry sector in general or from a particular customer. For example, in late December 2004, an unexpected and apparently seasonal reduction in orders that would ordinarily be supplied by our Becancour plant led us to reduce the plant’s operating rate for a few days in January 2005.

     We find it difficult to predict developments of that nature, although we attempt to minimize the difficulty by maintaining regular contact with customers and discussing their production plans with them. Our operating results or financial condition may be materially adversely affected by conditions affecting our customer base in the future.

Higher energy prices can impair our ability to produce chlor-alkali products economically and higher energy costs could materially adversely affect our results of operations and financial condition.

     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 could materially adversely affect our results of operations and financial condition and may cause our production of chlor-alkali products to become uneconomical. Increases in natural gas prices directly increase our cost of operations at our facilities in St. Gabriel and Henderson, which procure their power from sources that rely on natural gas to generate power. Natural gas-based power has generally been more costly than hydropower and has experienced greater price volatility than hydropower. The current contract with the provider of power to our Henderson facility 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 that 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 may be at a competitive disadvantage. We are unable to predict the future impact that energy prices may have on the results of our operations. See “— Marketing, Pricing, Production and Transportation” 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. If we were unable to generate the necessary level of Lender-Defined EBITDA, 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. 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 (the “Senior Guaranteed Notes”) in the aggregate principal amount of $43.2 million as of December 31, 2004, and Floating Rate Term Notes due 2006 (the “Senior Floating Notes”) in the aggregate principal amount of $3.1 million as of December 31, 2004, 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 our 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 $20.0 million

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or more but less than $25.0 million, (ii) $5.0 million of Tranche A Notes if Tranche A Notes EBITDA for such calendar quarter is $25.0 million or more but less than $30.0 million and (iii) $7.5 million of Tranche A Notes if Tranche A Notes EBITDA for such calendar quarter is $30.0 million or more, in each case plus accrued and unpaid interest to the date of redemption and prepayment. If our excess cash flow for specified periods through 2006, when multiplied by a percentage determined by reference to our average liquidity for the applicable period, is greater than the applicable principal amount above, then we must redeem and prepay the indicated principal amount of Tranche A Notes. We must also apply the proceeds of certain equity offerings to the redemption and prepayment of Tranche A Notes.

     In December 2004 we issued 1.1 million shares of our common stock in a public offering. Of the $22.1 million in net proceeds of the offering, we applied a total of $1.3 million to the prepayment of Senior Floating Notes in December 2004, and we applied the remainder to the redemption of $21.1 million principal amount of Senior Guaranteed Notes in January 2005. As a consequence of the applicable redemption and prepayment 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 and repaid the Tranche A Notes. In addition, we may be required to redeem and prepay some or all of the Tranche A Notes as a result of non-cash transactions.

     We are not permitted to refinance the outstanding aggregate principal amount of the 10% Senior Secured Guaranteed Notes due 2008 (the “10% Senior Secured Notes”) before December 31, 2005. Pursuant to the terms of the indenture governing those notes, 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 cash flow from operations may not be sufficient to fund our capital needs in the future.

     Our ability to generate sufficient cash flow from operations in order to make scheduled payments on our debt and to satisfy our other obligations depends on a range of economic, competitive and business factors, many of which are outside our control. Our business may not generate sufficient cash flow from operations to meet these demands. If we are unable to pay our expenses and satisfy our debt obligations, we may need to refinance all or a portion of our indebtedness, sell assets or raise additional equity. In addition, we may need to raise additional capital or undertake additional financing in order to maintain and grow our operations in order to remain competitive in our industry.

     As of December 31, 2004, we had approximately $202.8 million of indebtedness outstanding under various loan agreements, including the Tranche A Notes that are due in December 2006 and the 10% Senior Secured Notes that are due in December 2008. As of December 31, 2004, and February 28, 2005, we had no borrowings outstanding under our Revolver, which expires in December 2006. The Revolver has a $30 million commitment and a borrowing base restriction. If in the future we 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. If the cash that we generate from our operations is not sufficient to repay the outstanding principal amounts, if any, of the Revolver and the Tranche A Notes when they are due in December 2006, or the outstanding principal amount of the 10% Senior Secured Notes when they are due in December 2008, it would be necessary to refinance the indebtedness, issue new equity 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:

	•	the current and future outlook for the chlor-alkali industry;
	•	general economic and capital market conditions;
	•	the availability of credit 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

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•

provisions of relevant tax and securities laws.

     We may not be able to refinance any of our indebtedness, raise equity on commercially reasonable terms or at all, or sell assets, and any of such eventualities could cause us to default on our obligations, impair our liquidity and restrict our ability to continue our operations as currently conducted and to compete in the future. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to refinance our obligations on commercially reasonable terms, could materially adversely affect our results of operations and financial condition. Under those circumstances, we would have to take appropriate action including restructuring or reorganizing all or a portion of our indebtedness, deferring payments on our debt, selling assets, incurring additional debt or issuing additional equity or 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 risks from concentration of customer base.

     In 2004 approximately 23% of our revenues was generated by sales of products for use in the pulp and paper industry and approximately 8% of our revenues was generated by sales of products for use by urethane producers. Poor economic conditions affecting either industry could adversely affect our customers in that industry and could therefore affect the collectability of amounts due and reduce future demand for our products from such customers. Therefore, stress on either of these industries could materially adversely affect our results of operations and financial condition.

Future uncertainty regarding our financial condition could adversely impact our relationship with our suppliers and customers.

     Our day-to-day operations involve trade credit with both our suppliers and our customers. Future market conditions and other business factors, including any uncertainties with respect to our future financial condition, could cause our suppliers and customers to restrict the terms on which they do business with us. As a result, we could face liquidity and other issues that could adversely affect our financial condition and results of operations. There can be no assurances with respect to any actions that our suppliers 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 than us and have greater financial resources and lower debt-to-equity ratios than we do. Additionally, some of our competitors have chlor-alkali manufacturing facilities that are larger and more cost-effective than our facilities. Among our competitors are two of the world’s largest chemical companies, Dow and OxyChem. Because of their greater financial resources and manufacturing economies of scale, these and other larger companies in our industry may be better able to withstand severe price competition and volatile market conditions. See “— Overview” above.

We have ongoing environmental costs and we may be exposed to environmental liabilities that are not currently reserved for in our financial statements.

     The nature of our operations and products and the raw materials that we handle expose 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 environmental laws and regulations in the United States and Canada.

     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

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environmental laws, could require us to make additional expenditures, modify or curtail our operations or install pollution control equipment. See “— Environmental Regulation — U.S. Requirements” and “— Environmental Regulation — Canadian Requirements” above and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Part II of this report.

     In December 2003 the Environmental Protection Agency adopted hazardous air pollutant emissions limitations for mercury-cell chlor-alkali facilities, which would apply to our St. Gabriel facility. The new regulations would require us to implement various measures at the St. Gabriel facility over a three-year period that are designed to reduce mercury emissions. The measures include installing additional emission monitoring systems, adopting more stringent work practices and conducting more frequent operating and maintenance checks and repairs, at a total estimated cost to us of approximately $2.3 million. Of that amount, we have already spent approximately $1.8 million over the last four years in anticipation of the new requirements. Environmental groups have challenged the new regulations, contending that the EPA should reconsider its rules and adopt new standards that bar the use of mercury for chlorine production. In response, the EPA has decided to reconsider the new regulations, although the timetable for the reconsideration has not yet been established.

     Additionally, the Department of Environmental Quality of the State of Louisiana recently initiated a program with goals of continual reduction in the use and release of mercury in the state and the minimization of human exposure to mercury through improved communication, management, research, collection, recycling and disposal. We could incur substantial capital expenditures and/or expenses in meeting any new emissions limitations and standards that result from the EPA’s regulatory process or the State of Louisiana’s initiatives.

     We are entitled to indemnification in various degrees by third parties for particular environmental costs and liabilities associated with real property that we have acquired. We could incur significant costs if an indemnifying party is unable or unwilling to fulfill its obligation to indemnify us, if any of such agreements is terminated or if the coverage limits under any of such agreements is inadequate. See “— Indemnities” above.

Our facilities are subject to operating hazards that 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 hazardous chlorine releases, that have temporarily shut down or otherwise disrupted our manufacturing, causing production delays and resulting in liability for injuries. In October and November of 2004 we were required to reduce the operating rate at our St. Gabriel facility to control mercury emissions while our environmental control processes were replaced. 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 may experience these types of incidents in the future and these incidents could result in production delays or otherwise could materially adversely affect our results of opera