PIONEER COMPANIES INC - 10-Q Quarterly Report

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

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR

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

FOR THE TRANSITION PERIOD FROM TO
--------- ---------

COMMISSION FILE NUMBER 1-9859

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

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

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

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

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 for 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 whether the registrant (1) has filed all documents
and reports required to be filed by Sections 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 [ ]

On August 9, 2002, there were outstanding 10,000,000 shares of Common Stock
of Pioneer Companies, Inc.

TABLE OF CONTENTS

Certain statements in this Form 10-Q regarding future expectations of
Pioneer's business and Pioneer's results of operations may be regarded as
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act. Such statements are subject to various risks, including,
but not limited to, Pioneer's high financial leverage, global economic
conditions, the demand and prices for Pioneer's products, Pioneer and industry
production volumes, competitive prices, the cyclical nature of the markets for
many of Pioneer's products and raw materials, the effect of Pioneer's results of
operations on its debt agreements, Pioneer's derivatives position and other
risks and uncertainties. Attention is directed to Pioneer's Annual Report on
Form 10-K and Item 5 of Part II of this Report on Form 10-Q for a discussion of
such risks and uncertainties. Actual outcomes may vary materially.

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PART I -- FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

PIONEER COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements.

3

PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)

See notes to consolidated financial statements.

4

PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)

See notes to consolidated financial statements.

5

PIONEER COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION

The consolidated financial statements include the accounts of Pioneer
Companies, Inc. (the "Company" or "PCI") and its consolidated subsidiaries
(collectively, "Pioneer"). The term "Predecessor Company" refers to Pioneer
prior to its emergence from bankruptcy on December 31, 2001. References to
predecessors of Pioneer Americas LLC ("Pioneer Americas") an indirect
wholly-owned subsidiary of PCI, include Pioneer Americas, Inc., Pioneer
Corporation of America and Pioneer Chlor-Alkali Company, Inc. during the period
from 1998 to 2001.

The consolidated balance sheet at June 30, 2002 and the consolidated
statements of operations and cash flows for the periods presented are unaudited
and reflect all adjustments, consisting of normal recurring items, which
management considers necessary for a fair presentation. Operating results for
the first six months of 2002 are not necessarily indicative of results to be
expected for the year ending December 31, 2002. All significant intercompany
balances and transactions have been eliminated in consolidation. All dollar
amounts in the tabulations in the notes to the consolidated financial statements
are stated in thousands of dollars unless otherwise indicated. Certain amounts
have been reclassified in prior years to conform to the current year
presentation.

The consolidated balance sheet at December 31, 2001 is derived from the
December 31, 2001 audited consolidated financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America ("GAAP"), since certain information and disclosures
normally included in the notes to the financial statements have been condensed
or omitted as permitted by the rules and regulations of the Securities and
Exchange Commission. The accompanying unaudited financial statements should be
read in conjunction with the financial statements contained in the Annual Report
on Form 10-K for the year ended December 31, 2001.

2. BASIS OF PRESENTATION AND MANAGEMENT PLANS

On December 31, 2001, the Company and each of its direct and indirect
wholly-owned subsidiaries emerged from protection under the U.S. Bankruptcy
Code, and on the same date PCI Chemicals Canada Company ("PCI Canada"), an
indirect wholly-owned subsidiary of PCI, emerged from protection under the
provisions of Canada's Companies Creditors' Arrangement Act. On that date,
Pioneer's plan of reorganization, which was confirmed by the U.S. Bankruptcy
Court on November 28, 2001, became effective.

Pioneer has applied the accounting principles provided for in the American
Institute of Certified Public Accountants' Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7"), including fresh start accounting upon emergence from bankruptcy on
December 31, 2001. Accordingly, Pioneer's statements of financial position,
results of operations and cash flows for the periods after Pioneer's emergence
from bankruptcy are not comparable to earlier periods.

Upon emergence from bankruptcy, Pioneer's senior secured debt outstanding
consisted of Senior Secured Floating Rate Guaranteed Notes due 2006 in the
aggregate principal amount of $45.4 million (the "Senior Guaranteed Notes"),
Senior Floating Rate Term Notes due 2006 in the aggregate principal amount of
$4.6 million (the "Senior Floating Notes"), 10% Senior Secured Guaranteed Notes
due 2008 in the aggregate principal amount of $150 million (the "10% Senior
Secured Notes"), and a Revolving Credit Facility with a $30 million commitment
and a borrowing base restriction (the "Revolver"), borrowings under which were
used shortly after the emergence from bankruptcy to replace $6.7 million of
debtor-in-possession financing which was outstanding as of December 31, 2001.
Collectively, the $200 million in Senior Guaranteed Notes, Senior Floating Notes
and 10% Senior Secured Notes are referred to as the Senior Notes and together
with the Revolver are referred to as the Senior Secured Debt.

The Senior Secured Debt requires payments of interest in cash and contains
various covenants including a financial covenant in the Revolver (which if
violated would create a default under the cross-default provisions of the Senior
Notes) which obligates Pioneer to comply with certain cash flow requirements.
The interest payment requirements of the Senior Secured Debt and the financial
covenant in the Revolver were originally set at levels based on financial
projections prepared in connection with the plan of reorganization and did not
accommodate significant downward variations in operating results. The plan of
reorganization and the related financial projections were predicated on
expectations that the chlorine and caustic soda markets

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would experience a modest decline in early 2002 followed by improving market
conditions from the historic lows experienced in the last few years. Those
market improvements, along with the reduced debt levels resulting from the
reorganization, were expected to return Pioneer to a more sound financial basis.

Since Pioneer emerged from bankruptcy, the chlorine and caustic soda
markets have not attained the levels included in the projections prepared in
connection with the plan of reorganization, and based on current expectations
Pioneer will not achieve the financial results that were included in the
projections for 2002. During the first two quarters of 2002, ECU prices
generally averaged approximately $230, while the projections prepared in
connection with Pioneer's reorganization assumed an average ECU price of
approximately $280. Some increase in chlorine prices occurred during the second
quarter of 2002 and a substantial increase has occurred during the third
quarter. Recently, caustic soda prices have stabilized and are expected to rise
in the third and fourth quarters. The low ECU prices experienced during the
first half of 2002 created liquidity that is significantly less than that which
would have resulted from the projections prepared in connection with the plan of
reorganization, and Pioneer responded by cutting costs and reducing
expenditures, including idling manufacturing capacity and laying off operating
and administrative employees. With the increases that have occurred and are
expected to occur during the third and fourth quarters, ECU prices are currently
expected by the end of 2002 to be at levels closer to the levels projected in
connection with the plan of reorganization. Unless this significant improvement
in product prices for the second half of 2002 does occur and is maintained,
Pioneer may not have the liquidity necessary to meet all of its debt service and
other obligations during second half of 2002.

As discussed in Note 3, Pioneer has recorded net liability relating to
a substantial portfolio of mark-to-market derivative instruments. Changes in
the fair value of the derivatives are reported in the statement of operations in
the period of change. Pioneer records income and/or expense incurred to fulfill
or settle derivative contract obligations as a component of cost of sales.

Pioneer amended its Revolver in April 2002 (the "First Amendment") and
again in June 2002 (the "Second Amendment"), which amendments are discussed
below. As amended, one of the covenants in the Revolver requires Pioneer to
generate at least:

o $186,000 of net earnings before extraordinary gains, the effects
of Pioneer's derivative instruments excluding derivative
expenses paid by Pioneer, interest, income taxes, depreciation
and amortization (referred to as Lender-Defined EBITDA) during
the quarter ended June 30, 2002,

o $5.116 million of Lender-Defined EBITDA during the quarter ending
September 30, 2002,

o $5.608 million of Lender-Defined EBITDA during the quarter ending
December 31, 2002 and $10.910 million of Lender-Defined EBITDA
during the nine month period ending on the same date,

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

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

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

Prior to the First Amendment, the Revolver's financial covenant required
Pioneer to generate $5.1 million of net earnings before extraordinary gains,
interest, income taxes, depreciation and amortization (which Pioneer continues
to define as "EBITDA") during the quarter ended March 31, 2002, including the
effect of changes in the fair value of derivative instruments. Pioneer was in
compliance with the EBITDA covenant during the quarter ended March 31, 2002, but
only as a result of the effect of the change in fair value of derivatives.
Pioneer generated $1.5 million of Lender-Defined EBITDA during the quarter ended
June 30, 2002, which exceeded the required amount of Lender-Defined EBITDA
during that quarter, although Pioneer may not generate the required amount of
Lender-Defined EBITDA during subsequent quarters. During March 2002, the lender
under the Revolver advised Pioneer that it believed that a material adverse
change had occurred, although it continued to fund loans under the Revolver. In
order to address concerns about adverse changes in Pioneer's financial condition
and the possibility that Pioneer might not comply with the EBITDA covenant
during the remainder of the current year, Pioneer had discussions with the
lender on the proposed terms of an amendment to the Revolver. The lender
rescinded its notice that a material adverse change had occurred. Pioneer
entered into the First Amendment to the Revolver to (i) revise the definition of
EBITDA to exclude the effects of changes in the fair value of derivative
instruments, (ii) eliminate

7

the availability of interest rates based on the London interbank offered rate
("LIBOR") and (iii) replace the previously applicable margin over the prime rate
(the "Previous Rate") with the Previous Rate plus 2.25% for all loans that are
and will be outstanding under the Revolver. Pioneer paid a forbearance fee of
$250,000 in connection with the First Amendment. Also in connection with the
First Amendment, Pioneer agreed with its lender to effect the Second Amendment
to further revise the EBITDA covenant to exclude realized gains and losses
(except to the extent such losses are paid by Pioneer) on derivatives (as so
adjusted, "Lender-Defined EBITDA"), to take into account Pioneer's current
expectations for the amount of Lender-Defined EBITDA that will be generated
during 2002 as agreed to by the lender and to add such other financial covenants
to the Revolver as the lender deemed necessary to monitor Pioneer's performance
in meeting such projections. The Second Amendment requires Pioneer to meet the
Lender-Defined EBITDA amounts set forth above and adds the additional financial
covenants contemplated in the First Amendment. The additional covenants require
Pioneer to maintain Liquidity (as defined in the Second Amendment) of at least
$5.0 million, and limit capital expenditure levels to $20.0 million in 2002 and
$25.0 million in each fiscal year thereafter. At June 30, 2002, Pioneer's
liquidity was $17.7 million. Pioneer estimates capital expenditures will be
approximately $12.2 million during 2002, $3.0 million of which were incurred
during the six months ended June 30, 2002. In addition, Pioneer agreed to an
increase in the fees applicable to letters of credit issued pursuant to the
Revolver, to a rate equal to 4.25% times the daily balance of the undrawn amount
of all outstanding letters of credit

If the required Lender-Defined EBITDA level under the Revolver for any
quarter is not met, Pioneer will be in default under the terms of the Revolver.
Moreover, if conditions constituting a material adverse change occur or have
occurred, Pioneer's lender can exercise its rights under the Revolver and refuse
to make further advances. Following any such refusal, customer receipts would be
applied to Pioneer's borrowings under the Revolver without Pioneer having the
ability to reborrow. This would cause Pioneer to suffer a rapid loss of
liquidity and Pioneer would lose the ability to operate on a day-to-day basis.
In addition, a default under the Revolver would allow Pioneer's lender to
accelerate the outstanding indebtedness under the Revolver and would also result
in a cross-default under Pioneer's Senior Notes, which would provide the holders
of the Senior Notes with the right to accelerate $200 million in Senior Notes
outstanding and demand immediate repayment. In such circumstances, or if Pioneer
otherwise did not have sufficient liquidity to satisfy all of its debt service
obligations, Pioneer would be required to refinance, restructure or reorganize
all or a portion of its indebtedness, defer payments on its debt, sell assets,
obtain additional debt or equity financing or take other actions, including
seeking protection under Chapter 11 of the U.S. Bankruptcy Code and under the
Canadian Companies' Creditors Arrangement Act. In such circumstances Pioneer
could not predict the outcome of discussions with its lender under the Revolver
or the holders of the Senior Notes, including any action which could lead
Pioneer to seek voluntary bankruptcy protection or could force Pioneer into
involuntary bankruptcy proceedings if there is a breach of the Revolver
covenants or a default under the Senior Notes, or the outcome of any of the
actions that Pioneer may need to take in response to such actions if they were
to occur.

The uncertainties described above raise concern about Pioneer's ability to
continue as a going concern. The accompanying consolidated financial statements
have been prepared on the going concern basis of accounting, which contemplates
the realization of assets and the satisfaction of liabilities in the normal
course of business. The consolidated financial statements do not include any
adjustments that may result from the outcome of these uncertainties.

3. DERIVATIVE INSTRUMENTS

Pioneer adopted the accounting and reporting standards of Statement of
Financial Accounting Standard 133, "Accounting for Derivative Instruments and
Hedging Activities," as interpreted and amended ("SFAS 133"), as of January 1,
2001. This statement established accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133 requires a company
to recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The change in
the fair value of derivatives that are not hedges must be recognized currently
as a gain or loss in the statement of operations. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
are either offset against the change in fair value of assets, liabilities, or
firm commitments through earnings or recognized in other comprehensive income
until the hedged item is settled. Under hedge accounting, the ineffective
portion of a derivative's change in fair value will be immediately recognized in
earnings. Based upon the contracts in effect at January 1, 2001, the adoption of
SFAS 133 had no effect on the consolidated financial statements at that date.

The Colorado River Commission ("CRC") supplies power to Pioneer's
Henderson facility pursuant to three basic contracts covering hydro-generated
power, power requirements in excess of hydropower, and power transmission and
supply balancing services. CRC is a state agency established in 1940 to manage
federal hydropower contracts with utilities and other customers, including
Pioneer's Henderson facility, in Southern Nevada. Since the low cost hydropower
supplied by CRC does not entirely meet Henderson's power demands and those of
CRC's other customers, CRC purchases supplemental power from various sources and
resells it to Pioneer and other customers.

8

Approximately 50% of the electric power supply for Pioneer's Henderson
facility is provided under a supplemental supply contract with CRC. The
supplemental supply contract sets forth detailed procedures governing the
procurement of power by CRC on Pioneer's behalf. This agreement is not intended
to provide for speculative power purchases on Pioneer's behalf.

Pioneer has recorded a net liability of $87.8 million at June 30, 2002
with respect to various derivative positions executed by CRC purportedly for
Pioneer's benefit under the supplemental supply arrangements with CRC. The
derivative positions consist of contracts for the forward purchase and sale of
electricity as well as put and call options that have been written for electric
power. While a portion of the net liability relating to the derivative
positions, in the amount of $7.9 million at June 30, 2002, relates to
transactions specifically approved by Pioneer pursuant to the procedures
established by a pre-existing agreement with CRC (the "Approved Derivatives"),
Pioneer is disputing CRC's contention that the other derivatives (the "Disputed
Derivatives") with an additional net liability at June 30, 2002 of $79.9 million
are its responsibility. All $87.8 million of such net liability is reflected in
Pioneer's June 30, 2002 balance sheet, but the outcome of the dispute with
respect to the $79.9 million net liability as of June 30, 2002 is in doubt. CRC
has further contended that other contracts (the "Rejected Derivatives")
reflecting an additional net liability of $35.0 million as of June 30, 2002, are
Pioneer's responsibility although CRC has not provided Pioneer any documentation
of any relationship of those contracts to Pioneer. Pioneer has not recorded any
net liability with respect to the Rejected Derivatives, and CRC's contention
that Pioneer has any liability with respect to those derivatives is being
contested.

Efforts to resolve the dispute as to the Disputed Derivatives and the
Rejected Derivatives have not been successful, and on July 9, 2002, CRC was
served with a complaint filed on June 11, 2002, by Pioneer Americas in the
District Court of Harris County, Texas. Pioneer Americas is seeking a
declaratory judgment that it is not liable for the Disputed Derivatives or the
Rejected Derivatives. On July 9, 2002, CRC filed a lawsuit in the U.S. District
Court for the District of Nevada against Pioneer and each of the parties to the
derivative contracts that were entered into by CRC. CRC contends in its
complaint that the Texas state court does not have jurisdiction over CRC or the
controversy, and it seeks the court's determination as to the proper disposition
of cash in the amount of approximately $34.7 million that it has accumulated in
its accounts from its trading in derivatives and the power it has committed to
purchase or sell. CRC also seeks specific performance by Pioneer of the
contracts with CRC and unspecified damages. Pioneer intends to vigorously
litigate these matters.

On July 11, 2002, Pioneer Americas received a notice from CRC dated July
2, 2002, stating that on July 1, 2002, CRC had adopted regulations applicable to
its industrial customers which, if implemented, will require Pioneer Americas to
post a bond or other security deposit in an initial amount of approximately $2.1
million, to secure its contractual obligations to CRC. CRC also adopted
regulations that purport to unilaterally add additional terms to the contractual
relationship between CRC and Pioneer Americas, including a provision that
purports to give CRC the right to cease providing us hydropower in certain
circumstances. Pioneer Americas has filed a lawsuit in Nevada state court
contesting the application of such regulations. While Pioneer Americas believes
that, if necessary, it will be able to satisfy the initial deposit requirement,
there is no assurance that CRC will not seek to impose unreasonably high
collateral requirements in the future. If Pioneer Americas is unable to either
successfully contest or satisfy a requirement for collateral, CRC might cease to
provide supplemental power to the Henderson facility and Pioneer Americas would
not be able to operate the facility.

Pioneer records actual income and expense related to fulfilling or
settling the Approved Derivative and Disputed Derivative contract obligations as
a component of cost of sales. Pioneer has recorded in "other assets" a net
receivable from CRC of $4.7 million at June 30, 2002. The net receivable
includes $9.6 million for cash that CRC has collected in the form of premiums
related to options that expired prior to June 30, 2002. A total of $0.6 million
of the $9.6 million is attributable to the Approved Derivatives and $9.0 million
is attributable to the Disputed Derivatives (and the distribution of the latter
amount should also be determined during the course of litigation). Pioneer
believes CRC is obligated to allocate that amount to the reduction of power
costs at Pioneer's Henderson facility during the remainder of 2002. However, the
Approved Derivatives and the Disputed Derivatives that mature during 2003 and
later years would, given current industry conditions, have a material adverse
effect on Pioneer's cash flow. Offsetting the $9.6 million receivable is a $4.9
million payable for expenses Pioneer believes were incurred by CRC to fulfill
the contractual requirements of the Approved Derivatives and Disputed
Derivatives during the first six months of 2002.

The derivative positions include many types of contracts with varying
strike prices and maturity dates extending through 2006. The fair value of the
instruments varies over time based upon market circumstances. The fair value of
the derivative positions is determined for Pioneer by an independent consultant
using available market information and appropriate valuation methodologies that
include current and forward pricing. Considerable judgement, however, is
necessary to interpret market data and develop the related estimates of fair
value. Accordingly, the estimates for the fair value of the derivative positions
are not necessarily indicative of the amounts that could currently be realized
upon disposition of the derivative positions or the ultimate amount that would
be paid or received when the positions are settled. The use of different market
assumptions and/or

9

estimation methodologies would result in different fair values. Management of
Pioneer believes that the market information, methodologies and assumptions used
by the independent consultant to fair value the derivative positions produces a
reasonable estimation of the fair value of the derivative positions.

The information in the tables below presents the electricity futures and
options positions outstanding as of June 30, 2002 ($ in thousands, except per
megawatt hours ("mwh") amounts, and volumes in mwh), for Approved Derivatives
and Disputed Derivatives.

10

4. SUPPLEMENTAL CASH FLOW INFORMATION

Net effect of changes in operating assets and liabilities are as follows:

Non-cash financing activity:

On May 15, 2002, Pioneer converted amounts owed to certain professionals
totaling $3.4 million for services provided during the bankruptcy proceedings
into interest bearing promissory notes due July 1, 2003. The $3.4 million was
reclassified from accrued liabilities to long-term debt.

Following are supplemental disclosures of cash flow information:

5. INVENTORIES

Inventories consist of the following:

6. COMMITMENTS AND CONTINGENCIES

Pioneer and its operations are subject to extensive United States and
Canadian federal, state, provincial and local laws, regulations, rules and
ordinances relating to pollution, the protection of the environment and the
release or disposal of regulated materials. The operation of any chemical
manufacturing plant and the distribution of chemical products entail certain
obligations under current environmental laws. Present or future laws may affect
Pioneer's capital and operating costs relating to compliance, may impose cleanup
requirements with respect to site contamination resulting from past, present or
future spills and releases and may affect the markets for Pioneer's products.
Pioneer believes that its operations are currently in general compliance with
environmental laws and regulations, the violation of which could result in a
material adverse effect on Pioneer's business, properties or results of
operations on a consolidated basis. There can be no assurance, however, that
material costs will not be incurred as a result of instances of noncompliance or
new regulatory requirements.

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Pioneer relies on indemnification from the previous owners in connection
with certain environmental liabilities at its chlor-alkali plants and other
facilities. There can be no assurance, however, that such indemnification
arrangements will be adequate to protect Pioneer from environmental liabilities
at these sites or that such third parties will perform their obligations under
the respective indemnification arrangements, in which case Pioneer would be
required to incur significant expenses for environmental liabilities, which
would have a material adverse effect on Pioneer.

Pioneer is subject to various legal proceedings and potential claims
arising in the ordinary course of its business. In the opinion of management,
Pioneer has adequate legal defenses and/or insurance coverage with respect to
these matters, and management does not believe that they will materially affect
Pioneer's operations or financial position. See Note 3 for information regarding
litigation with CRC.

7. LONG-TERM DEBT

Long-term debt consisted of the following:

Upon emergence from bankruptcy, senior secured debt outstanding under
various debt instruments consisted of the Senior Guaranteed Notes, the Senior
Floating Notes, the 10% Senior Secured Notes and the Revolver which was used
shortly after Pioneer's emergence from bankruptcy to replace $6.7 million of
debtor-in-possession financing which was outstanding as of December 31, 2001.
Collectively, the $200 million in Senior Guaranteed Notes, Senior Floating Notes
and 10% Senior Secured Notes are referred to as the Senior Notes and together
with the Revolver are referred to as the Senior Secured Debt. In addition, at
June 30, 2002 Pioneer had $3.4 million of promissory notes outstanding related
to fees owed to professionals for services they provided during the bankruptcy
proceedings, as well as $5.6 million of other debt outstanding, comprised of
notes maturing in various years through 2014. Because the Revolver requires a
lock-box arrangement and contains a clause which allows the lender to refuse to
fund further advances in the event of a material adverse change in Pioneer's
business, the Revolver must be classified as current debt.

The Revolver provides for revolving loans in an aggregate amount up to $30
million, subject to borrowing base limitations related to the level of accounts
receivable and inventory, which secure borrowings under the facility. The
Revolver provides for up to an additional $20 million of availability in the
event of successful syndication of additional credit to one or more lenders
acceptable to the lender, but it is not anticipated that such syndication
efforts will be successful in the near future.

Borrowings under the Revolver are available through December 31, 2004 so
long as no default exists and all conditions to borrowings are met. Borrowings
under the Revolver accrue interest determined on the basis of the prime rate
plus a margin. Pioneer incurs a fee on the unused amount of the facility at a
rate of .375% per year.

Pioneer amended its Revolver in April 2002 (the "First Amendment") and
again in June 2002 (the "Second Amendment"), which amendments are discussed
below. As amended, one of the covenants in the Revolver requires Pioneer to
generate at least:

12

o $186,000 of net earnings before extraordinary gains, the effects
of Pioneer's derivative instruments excluding derivative
expenses paid by Pioneer, interest, income taxes, depreciation
and amortization (referred to as Lender-Defined EBITDA) during
the quarter ended June 30, 2002,

o $5.116 million of Lender-Defined EBITDA during the quarter ending
September 30, 2002,

o $5.608 million of Lender-Defined EBITDA during the quarter ending
December 31, 2002 and $10.910 million of Lender-Defined EBITDA
during the nine month period ending on the same date,

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

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

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

Prior to the First Amendment, the Revolver's financial covenant required
Pioneer to generate $5.1 million of net earnings before extraordinary gains,
interest, income taxes, depreciation and amortization (which Pioneer continues
to define as "EBITDA") during the quarter ended March 31, 2002, including the
effect of changes in the fair value of derivative instruments. Pioneer was in
compliance with the EBITDA covenant during the quarter ended March 31, 2002, but
only as a result of the effect of the change in fair value of derivatives.
Pioneer generated $1.5 million of Lender-Defined EBITDA during the quarter ended
June 30, 2002, which exceeded the required amount of Lender-Defined EBITDA
during that quarter, although Pioneer may not generate the required amount of
Lender-Defined EBITDA during subsequent quarters. During March 2002, the lender
under the Revolver advised Pioneer that it believed that a material adverse
change had occurred, although it continued to fund loans under the Revolver. In
order to address concerns about adverse changes in Pioneer's financial condition
and the possibility that Pioneer might not comply with the EBITDA covenant
during the remainder of the current year, Pioneer had discussions with the
lender on the proposed terms of an amendment to the Revolver. The lender
rescinded its notice that a material adverse change had occurred. Pioneer
entered into the First Amendment to the Revolver to (i) revise the definition of
EBITDA to exclude the effects of changes in the fair value of derivative
instruments, (ii) eliminate the availability of interest rates based on the
London interbank offered rate ("LIBOR") and (iii) replace the previously
applicable margin over the prime rate (the "Previous Rate") with the Previous
Rate plus 2.25% for all loans that are and will be outstanding under the
Revolver. Pioneer paid a forbearance fee of $250,000 in connection with the
First Amendment. Also in connection with the First Amendment, Pioneer agreed
with its lender to effect the Second Amendment to further revise the EBITDA
covenant to exclude realized gains and losses (except to the extent such losses
are paid by Pioneer) on derivatives (as so adjusted, "Lender-Defined EBITDA"),
to take into account Pioneer's current expectations for the amount of
Lender-Defined EBITDA that will be generated during 2002 as agreed to by the
lender and to add such other financial covenants to the Revolver as the lender
deemed necessary to monitor Pioneer's performance in meeting such projections.
The Second Amendment requires Pioneer to meet the Lender-Defined EBITDA amounts
set forth above and adds the additional financial covenants contemplated in the
First Amendment. The additional covenants require Pioneer to maintain Liquidity
(as defined in the Second Amendment) of at least $5.0 million, and limit capital
expenditure levels to $20.0 million in 2002 and $25.0 million in each fiscal
year thereafter. At June 30, 2002, Pioneer's liquidity was $17.7 million.
Pioneer estimates capital expenditures will be approximately $12.2 million
during 2002, $3.0 million of which were incurred during the six months ended
June 30, 2002. In addition, Pioneer agreed to an increase in the fees applicable
to letters of credit issued pursuant to the Revolver, to a rate equal to 4.25%
times the daily balance of the undrawn amount of all outstanding letters of
credit

If the required Lender-Defined EBITDA level under the Revolver for any
quarter is not met, Pioneer will be in default under the terms of the Revolver.
Moreover, if conditions constituting a material adverse change occur or have
occurred, Pioneer's lender can exercise its rights under the Revolver and refuse
to make further advances. Following any such refusal, customer receipts would be
applied to Pioneer's borrowings under the Revolver without Pioneer having the
ability to reborrow. This would cause Pioneer to suffer a rapid loss of
liquidity and Pioneer would lose the ability to operate on a day-to-day basis.
In addition, a default under the Revolver would allow Pioneer's lender to
accelerate the outstanding indebtedness under the Revolver and would also result
in a cross-default under Pioneer's Senior Notes, which would provide the holders
of the Senior Notes with the right to accelerate $200 million in Senior Notes
outstanding and demand immediate repayment. In such circumstances, or if Pioneer
otherwise did not have sufficient liquidity to satisfy all of its debt service
obligations, Pioneer would be required to refinance, restructure or reorganize
all or a portion of its indebtedness, defer payments on its debt, sell assets,
obtain additional debt or equity financing or take other actions, including
seeking protection under Chapter 11 of the U.S. Bankruptcy Code and under the
Canadian Companies' Creditors Arrangement Act. In such circumstances Pioneer
could

13

not predict the outcome of discussions with its lender under the Revolver or the
holders of the Senior Notes, including any action which could lead Pioneer to
seek voluntary bankruptcy protection or could force Pioneer into involuntary
bankruptcy proceedings if there is a breach of the Revolver covenants or a
default under the Senior Notes, or the outcome of any of the actions that
Pioneer may need to take in response to such actions if they were to occur.

Interest on the 10% Senior Secured Notes is payable on June 30th and
December 31st. Interest on the Senior Guaranteed Notes and the Senior Floating
Notes is payable quarterly on March 31st, June 30th, September 30th and December
31st.

Pioneer is required to make mandatory prepayments of amounts owed on the
Senior Floating Notes and the Senior Guaranteed Notes from net cash proceeds of
certain asset sales, new equity issuances in excess of $5 million and excess
cash flow (as defined in the related agreements). Pioneer is also required to
make mandatory prepayments if certain levels of EBITDA are realized, and if
there is a change of control.

The holders of the 10% Senior Secured Notes may require Pioneer to make
mandatory payments of amounts owed on the 10% Senior Secured Notes with net cash
proceeds of certain asset sales and of new equity issuances in excess of $35
million (if there is no indebtedness outstanding under the Senior Floating Notes
and the Senior Guaranteed Notes). In addition, the holders may require Pioneer
to repurchase all or a portion of the notes upon the occurrence of a change of
control.

Pioneer may prepay amounts owed on the Senior Guaranteed Notes and the
Senior Floating Notes in minimum amounts of $1,000,000 or more, and Pioneer may,
at its option, terminate the Revolver. If the Revolver is terminated early,
there will be a premium due that ranges from 1% to 3% of $50 million, depending
upon the termination date. On or after December 31, 2005, Pioneer may redeem
some or all of the 10% Senior Secured Notes by paying the holders a percentage
ranging from 100% to 105% depending on the year of redemption of the stated
principal amount plus accrued and unpaid interest to the redemption date.

The obligations under the Revolver are secured by liens on Pioneer's
accounts receivable and inventory, and the obligations under the Senior Notes
are secured by liens on substantially all of Pioneer's other assets, with the
exception of certain assets that secure the obligations outstanding under
certain other long-term liabilities.

The new debt agreements contain covenants limiting Pioneer's ability to,
among other things, incur additional indebtedness, prepay or modify debt
instruments, grant additional liens, guarantee any obligations, sell assets,
engage in another type of business or suspend or terminate a substantial portion
of business, declare or pay dividends, make investments, make capital
expenditures in excess of certain amounts, or make use of the proceeds of
borrowings for purposes other than those specified in the agreements. The new
agreements also include customary events of default, including a change of
control under the Revolver. Borrowings under the Revolver will generally be
available subject to the accuracy of all representations and warranties,
including the absence of a material adverse change and the absence of any
default or event of default.

On June 30, 2002, the borrowing base under the Revolver was approximately
$22.3 million. Borrowing availability after reserves, borrowings and letters of
credit was $12.3 million, and net liquidity (consisting of cash and borrowing
availability) was $17.7 million.

8. CONSOLIDATING FINANCIAL STATEMENTS

PCI Canada (a wholly-owned subsidiary of PCI) is the issuer of the $150
million 10% Senior Secured Notes, which are fully and unconditionally guaranteed
on a joint and several basis by PCI and all of PCI's other direct and indirect
wholly-owned subsidiaries.

Pioneer Americas (a wholly-owned subsidiary of PCI Canada) is the issuer
of the $45.4 million of Senior Guaranteed Notes and $4.6 million of Senior
Floating Notes, which are fully and unconditionally guaranteed on a joint and
several basis by PCI and all of PCI's other direct and indirect wholly-owned
subsidiaries. Together, PCI Canada, Pioneer Americas and the subsidiary note
guarantors comprise all of the direct and indirect subsidiaries of PCI.

14

Condensed consolidating financial information for PCI and its wholly-owned
subsidiaries is presented below. Information is presented as though the
Successor Company organizational structure had been in place for all periods
presented.

CONDENSED CONSOLIDATING BALANCE SHEET -
SUCCESSOR COMPANY
JUNE 30, 2002
(IN THOUSANDS)

15

CONDENSED CONSOLIDATING BALANCE SHEET -
SUCCESSOR COMPANY
DECEMBER 31, 2001
(IN THOUSANDS)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -
SUCCESSOR COMPANY
THREE MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)

16

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -
PREDECESSOR COMPANY
THREE MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -
SUCCESSOR COMPANY
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS -
PREDECESSOR COMPANY
SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)

17

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -
SUCCESSOR COMPANY
SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -
PREDECESSOR COMPANY
SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)

9. ASSET IMPAIRMENT AND OTHER CHARGES

In March 2002, Pioneer idled the Tacoma plant due to poor market
conditions. The Tacoma idlement resulted in the termination of 84 employees, all
of whom were terminated prior to June 30, 2002, and for whom $1.9 million of
severance expense was recorded during the quarter ended March 31, 2002.
Approximately $1.4 million of the severance was paid out during the six months
ended June 30, 2002, leaving $0.5 million of accrued severance at June 30, 2002.
Pioneer also accrued for $1.0 million of other exit costs related to the Tacoma
idlement during the quarter ended March 31, 2002. During the six months ended
June 30, 2002, Pioneer incurred $0.7 million of idlement costs and completed the
idlement prior to June 30, 2002. The remaining $0.3 accrual was reversed during
the second quarter of 2002.

10. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share are based on the weighted average number
of common shares outstanding during the period. Diluted earnings (loss) per
share considers, in addition to the above, the dilutive effect of potentially
issuable common shares during the period. Earnings per share for the three
months and six months ended June 30, 2002 was not affected by outstanding
options to acquire 0.6 million shares of common stock because the exercise price
of those options was greater than the average market price of Pioneer's common
stock, and because their effect was anti-dilutive for the three months and six
months ended June 30, 2002. Loss per share for the predecessor company for the
three months and six months ended June 30, 2001 was not affected by outstanding
options to acquire 1.4 million shares of common stock because their effect was
anti-dilutive and the exercise prices of those options were greater than the
average market price of Pioneer's common stock.

18

11. RECENT ACCOUNTING PRONOUNCEMENTS

Effective December 31, 2001, Pioneer adopted SFAS 142. SFAS 142 requires
that an intangible asset that is acquired shall be initially recognized and
measured based on its fair value. The statement also provides that goodwill
should not be amortized, but must be tested for impairment annually, or more
frequently if circumstances indicate potential impairment. For the three months
and six months ended June 30, 2001 the net loss, excluding goodwill amortization
expense, would have been $42.7 million and $60.1 million, respectively, and
basic and diluted loss per share, excluding goodwill amortization expense, would
have been $3.70 and $5.26, respectively.

In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15, 2002.
SFAS 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. Pioneer adopted SFAS 143 upon emergence from bankruptcy as
part of fresh start accounting, and it did not have an impact on Pioneer's
financial position, results of operations, or cash flows.

In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which Pioneer adopted on January 1, 2002.
SFAS 144 addresses accounting and reporting for the impairment or disposal of
long-lived assets and the disposal of a segment of a business. Pioneer adopted
SFAS 144 upon emergence from bankruptcy as part of fresh start accounting, and
it did not have an impact on Pioneer's financial position, results of
operations, or cash flows.

In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 eliminates SFAS 4 "Reporting Gains and Losses from
Extinquishment of Debt" and thus allows for only those gains or losses on the
extinguishment of debt that meet the criteria of extraordinary items to be
treated as such in the financial statements. SFAS 145 also amends SFAS 13,
"Accounting for Leases" to require sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The provisions of this statement relating to the rescission of
SFAS 4 are effective for fiscal years beginning after May 15, 2002, the
provisions of this statement relating to the amendment of SFAS 13 are effective
for transactions occurring after May 15, 2002, and all other provisions of this
Statement are effective for financial statements issued on or after May 15,
2002. Pioneer does not expect the adoption of SFAS 145 to have a material impact
on its financial position, results of operations or cash flows.

In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for fiscal years beginning
after December 31, 2002. SFAS 146 requires that the liability for costs
associated with exit or disposal activities be recognized when incurred, rather
than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The adoption of SFAS 146 is not expected to have a material impact on
Pioneer's financial position, results of operations, or cash flows.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion and analysis should be read in conjunction with
the consolidated financial statements and the related notes thereto.

OVERVIEW

During the second quarter of 2002, Pioneer's average electrochemical unit
("ECU") netback (that is, prices adjusted to eliminate the product
transportation element) was $225 compared to $240 during the first quarter of
2002 and $359 in the second quarter of 2001. The average ECU netback of $225
during the second quarter of 2002 reinforced the need to continue cost-cutting
and other cash conservation initiatives. Some increases in chlorine prices
occurred during the second quarter of 2002 and a substantial increase has
occurred during the third quarter. Recently, caustic soda prices have stabilized
and are expected to rise in the third and fourth quarters.

EMERGENCE FROM BANKRUPTCY

Pioneer's financial results have been affected by its emergence from
bankruptcy on December 31, 2001. The consolidated balance sheet information at
December 31, 2001 and June 30, 2002, and the consolidated statements of
operations and cash flows for the six months ended June 30, 2002 reflect results
after the consummation of Pioneer's plan of reorganization and the application
of the principles of fresh start accounting in accordance with the provisions of
SOP 90-7. Pioneer before and Pioneer after adopting fresh start accounting are
different reporting entities and Pioneer's consolidated financial statements
have not been prepared on the same basis.

19

COLORADO RIVER COMMISSION DERIVATIVE TRANSACTIONS

Approximately 50% of the electric power supply for Pioneer's Henderson
facility is hydropower furnished under a contract with the Colorado River
Commission ("CRC"), with the other approximately 50% provided under a
supplemental supply contract with CRC. The supplemental supply contract entered
into in March 2001 sets forth detailed procedures governing the procurement of
power by CRC on Pioneer's behalf. This agreement is not intended to provide for
speculative power purchases on Pioneer's behalf.

Pioneer has recorded a net liability of $87.8 million at June 30, 2002
with respect to various derivative positions executed by CRC purportedly for
Pioneer's benefit under the supplemental supply arrangements with CRC. The
derivative positions consist of contracts for the forward purchase and sale of
electricity as well as put and call options that have been written for electric
power. While a portion of the net liability relating to the derivative
positions, in the amount of $7.9 million at June 30, 2002, relates to
transactions specifically approved by Pioneer pursuant to the procedures
established by a pre-existing agreement with CRC (the "Approved Derivatives"),
Pioneer is disputing CRC's contention that the other derivatives (the "Disputed
Derivatives") with an additional net liability at June 30, 2002 of $79.9 million
are its responsibility. All $87.8 million of such net liability is reflected in
Pioneer's June 30, 2002 balance sheet, but the outcome of the dispute with
respect to the $79.9 million net liability as of June 30, 2002 is in doubt. CRC
has further contended that other contracts (the "Rejected Derivatives")
reflecting an additional net liability of $35.0 million as of June 30, 2002, are
Pioneer's responsibility although CRC has not provided Pioneer any documentation
of any relationship of those contracts to Pioneer. Pioneer has not recorded any
net liability with respect to the Rejected Derivatives, and CRC's contention
that Pioneer has any liability with respect to those derivatives is being
contested.

Efforts to resolve the dispute as to the Disputed Derivatives and the
Rejected Derivatives have not been successful, and on July 9, 2002, CRC was
served with a complaint filed on June 11, 2002, by Pioneer Americas in the
District Court of Harris County, Texas. Pioneer Americas is seeking a
declaratory judgment that it is not liable for the Disputed Derivatives or the
Rejected Derivatives. On July 9, 2002, CRC filed a lawsuit in the U.S. District
Court for the District of Nevada against Pioneer and each of the parties to the
derivative contracts that were entered into by CRC. CRC contends in its
complaint that the Texas state court does not have jurisdiction over CRC or the
controversy, and it seeks the court's determination as to the proper disposition
of cash in the amount of approximately $34.7 million that it has accumulated in
its accounts from its trading in derivatives and the power it has committed to
purchase or sell. CRC also seeks specific performance by Pioneer of the
contracts with CRC and unspecified damages. Pioneer intends to vigorously
litigate these matters.

Pioneer records actual income and expense related to fulfilling or
settling the Approved Derivative and Disputed Derivative contract obligations as
a component of cost of sales. Pioneer has recorded in "other assets" a net
receivable from CRC of $4.7 million at June 30, 2002. The net receivable
includes $9.6 million for cash that CRC has collected in the form of premiums
related to options that expired prior to June 30, 2002. A total of $0.6 million
of the $9.6 million is attributable to the Approved Derivatives and $9.0 million
is attributable to the Disputed Derivatives (and the distribution of the latter
amount should also be determined during the course of litigation). Pioneer
believes CRC is obligated to allocate that amount to the reduction of power
costs at Pioneer's Henderson facility during the remainder of 2002. However, the
Approved Derivatives and the Disputed Derivatives that mature during 2003 and
later years would, given current industry conditions, have a material adverse
effect on Pioneer's cash flow. Offsetting the $9.6 million receivable is a $4.9
million payable for expenses Pioneer believes were incurred by CRC to fulfill
the contractual requirements of the Approved Derivatives and Disputed
Derivatives during the first six months of 2002.

While the amount of any actual cash flow effect from the derivative
positions will be determined by electricity prices at the time, based on future
price estimates as of June 30, 2002, the cost of the derivative positions during
the years from 2003 to 2006, considered without regard to other factors, could
range from $20.1 million in 2003 to as high as $29.2 million in 2005. However,
the costs stated do not reflect the fact that in the absence of any costs
attributable to derivative contracts, the Henderson facility will in any event
have power needs that must be met through the purchase of supplemental power,
although the amounts of power that would be provided under the Approved
Derivatives and the Disputed Derivatives would substantially exceed the power
needs of the Henderson plant. A portion of those needs are currently being met
by two forward purchases arranged by CRC, which are not accounted for as
derivative transactions because Pioneer has designated them as purchases in the
normal course of business. Had these two forward purchase contracts been
accounted for as derivative transactions, they would have resulted in a net
unrealized loss to Pioneer of $15.9 million at June 30, 2002.

If it is determined that Pioneer must satisfy the contractual obligations
relating to the Disputed Derivatives and the Rejected Derivatives, the failure
or inability to mitigate them may result in Pioneer's having to significantly
restructure its indebtedness, of which there can be no assurance and which
currently would be unlikely, or having to seek protection under Chapter 11 of
the U.S. Bankruptcy Code and under Canada's Companies Creditors' Arrangement
Act.

20

On July 11, 2002, Pioneer Americas received a notice from CRC dated July
2, 2002, stating that on July 1, 2002, CRC had adopted regulations applicable to
its industrial customers which, if implemented, will require Pioneer Americas to
post a bond or other security deposit in an initial amount of approximately $2.1
million, to secure its contractual obligations to CRC. CRC also adopted
regulations that purport to unilaterally add additional terms to the contractual
relationship between CRC and Pioneer Americas, including a provision that
purports to give CRC the right to cease providing us hydropower in certain
circumstances. Pioneer Americas has filed a lawsuit in Nevada state court
contesting the application of such regulations. While Pioneer Americas believes
that, if necessary, it will be able to satisfy the initial deposit requirement,
there is no assurance that CRC will not seek to impose unreasonably high
collateral requirements in the future. If Pioneer Americas is unable to either
successfully contest or satisfy a requirement for collateral, CRC might cease to
provide supplemental power to the Henderson facility and Pioneer Americas would
not be able to operate the facility.

The information set forth above with respect to the derivative contracts
provides an incomplete analysis of current and future electric power costs
relating to the Henderson facility, since long-term hydropower contracts allow
Pioneer to purchase at favorable rates approximately 50% of the Henderson
facility's power requirements. Since the contracts are not derivatives and the
power purchased under the contracts cannot be resold by Pioneer at market rates,
the fair market value of the hydropower contracts has not been recorded by
Pioneer in its financial statements. However, employing the same valuation
methodology to the hydropower contracts as to the derivatives, the contracts
would have a value to Pioneer of approximately $52.3 million at June 30, 2002.

CRITICAL ACCOUNTING POLICIES

Pioneer applies those accounting policies that it believes best reflect
the underlying business and economic events, consistent with generally accepted
accounting principles. Pioneer's more significant accounting policies include
those related to derivatives, long-lived assets, accruals for long-term employee
benefit costs such as pension, postretirement and other postemployment costs, as
well as accruals for income taxes. Inherent in such policies are certain key
assumptions and estimates made by Pioneer.

With respect to the Approved Derivatives and the Disputed Derivatives,
Pioneer accounts for the derivatives based upon the fair value accounting
methods prescribed by Statement of Financial Accounting Standard 133,
""Accounting For Derivative Instruments and Hedging Activities," as interpreted
and amended ("SFAS 133"). SFAS 133 requires that Pioneer determine the fair
value of the instruments in Pioneer's portfolios of Approved Derivatives and
Disputed Derivatives and reflect them in its balance sheet at their fair values.
Changes in the fair value from period to period for the Approved Derivatives and
the Disputed Derivatives are recorded in Pioneer's income statement each period.
One of the primary factors that can have an impact on Pioneer's results each
period is the price assumptions used to value the derivative instruments. Some
of these instruments have quoted market prices. However, Pioneer is required to
use valuation techniques or models to estimate the fair value of instruments
that are not traded on an active exchange or that have terms that extend beyond
the time period for which exchange-based quotes are available. These modeling
techniques require estimates of future prices, price correlation, interest rates
and market volatility and liquidity. The estimates also reflect modeling risk,
credit risk of Pioneer's counterparties and operational risk. The amounts
Pioneer reports in its financial statements change as these estimates are
revised to reflect actual results, changes in market conditions or other
factors, many of which are beyond Pioneer's control. Additional information on
the Approved Derivatives and the Disputed Derivatives appears in Note 3 to the
Consolidated Financial Statements.

With respect to long-lived assets, key assumptions include the estimate of
useful lives and the recoverability of carrying values of fixed assets and
goodwill. Such estimates could be significantly modified and/or the carrying
values of the assets could be impaired by such factors as new technological
developments, new chemical industry entrants with significant raw material cost
advantages, uncertainties associated with the United States and world economies,
the cyclical nature of the chemical industry, and uncertainties associated with
governmental actions. See also "Forward-Looking Statements."

With respect to long-term employee benefit costs, key assumptions include
the long-term rate of return on pension assets, the annual rate of inflation of
health care costs and the general interest rate environment.

With respect to income taxes, Pioneer has significant amounts of deferred
tax assets that are reviewed periodically for recoverability and valued
accordingly. These assets are evaluated by using estimates of future taxable
income streams and the impact of tax planning strategies. Valuations related to
tax accruals and assets could be impacted by changes to tax codes, changes in
the statutory tax rates and Pioneer's future taxable income levels.

Pioneer periodically updates its estimates used in the preparation of the
financial statements based on its latest assessment of the current and projected
business and general economic environment.

21

LIQUIDITY AND CAPITAL RESOURCES

Debt, Financial Leverage and Covenants. Upon emergence from bankruptcy,
Pioneer's senior secured debt outstanding under various debt instruments
consisted of Senior Secured Floating Rate Guaranteed Notes due 2006 in the
aggregate principal amount of $45.4 million, (the "Senior Guaranteed Notes"),
Senior Floating Rate Term Notes due 2006 in the aggregate principal amount of
$4.6 million, (the "Senior Floating Notes"), 10% Senior Secured Guaranteed Notes
due 2008 in the aggregate principal amount of $150 million, (the "10% Senior
Secured Notes") and a Revolving Credit Facility with a $30 million commitment
and a borrowing base restriction (the "Revolver"), borrowings under which were
used shortly after Pioneer's emergence from bankruptcy to replace $6.7 million
of debtor-in-possession financing which was outstanding as of December 31, 2001.
Collectively, the $200 million in Senior Guaranteed Notes, Senior Floating Notes
and 10% Senior Secured Notes are referred to as the Senior Notes and, together
with the Revolver, are referred to as the Senior Secured Debt.

The Senior Secured Debt requires payments of interest in cash and contains
various covenants including a financial covenant in the Revolver (which if
violated will create a default under the cross-default provisions of the Senior
Notes), which obligates Pioneer to comply with certain cash flow requirements.
The interest payment requirements of the Senior Secured Debt and the financial
covenant in the Revolver were originally set at levels based on financial
projections prepared in connection with the plan of reorganization and did not
accommodate significant downward variations in operating results. The plan of
reorganization and the related financial projections were predicated on
expectations that the chlorine and caustic soda markets would experience a
modest decline in early 2002 followed by improving market conditions from the
historic lows experienced in the last few years. Those market improvements,
along with the reduced debt levels resulting from the reorganization, were
expected to return Pioneer to a more sound financial basis. During the first
half of 2002, however, the chlorine and caustic soda markets did not attain the
levels included in the projections prepared in connection with the plan or
reorganization. Some increase in chlorine prices occurred during the second
quarter of 2002 and a substantial increase has occurred during the third
quarter. Recently, caustic soda prices have stabilized and are expected to rise
in the third and fourth quarters. With the increases that have occurred and are
expected to occur during the third and fourth quarters, ECU prices are currently
expected by the end of 2002 to be at levels closer to the levels projected in
connection with the plan of reorganization. Unless this significant improvement
in product prices for the second half of 2002 does occur and is maintained,
Pioneer may not have the liquidity necessary to meet all of its debt service and
other obligations during the second half of 2002.

Should Pioneer's cash flow be insufficient to meet its obligations,
Pioneer will have to take appropriate action including refinancing,
restructuring or reorganizing all or a portion of its indebtedness, deferring
payments on its debt, selling assets, obtaining additional debt or equity
financing or taking other actions, including seeking protection under Chapter 11
of the U.S. Bankruptcy Code and under Canada's Companies Creditors' Arrangement
Act.

An important element in Pioneer's liquidity is the availability of
borrowings under the Revolver. Subject to borrowing base limitations, borrowings
and repayments are made on a daily basis as circumstances warrant. On June 30,
2002, Pioneer had cash of approximately $5.4 million and borrowings under the
Revolver were $5.4 million. On June 30, 2002, the borrowing base under the
Revolver was approximately $22.3 million. Borrowing availability after
borrowings, reserves and letters of credit was $12.3 million for a net
liquidity of $17.7 million.

Pioneer has obligations for interest on its debt, which, based on interest
rates in effect on June 30, 2002 (and after giving effect to the increases in
the interest rate payable on borrowings under the Revolver discussed below), is
approximately $18.7 million per year (although to the extent that Pioneer draws
additional funds under the Revolver, the aggregate interest expense would
increase), as well as for ordinary business expenses. In addition, on June 30,
2002, a total of approximately $8.7 million remained payable under critical
vendor settlement agreements. On May 15, 2002, Pioneer converted $3.4 million
payable to professionals for fees in connection with the bankruptcy proceedings
into interest bearing promissory notes due July 1, 2003.

Pioneer amended its Revolver in April 2002 (the "First Amendment") and
again in June 2002 (the "Second Amendment"), which amendments are discussed
below. As amended, one of the covenants in the Revolver requires Pioneer to
generate at least:

o $186,000 of net earnings before extraordinary gains, the effects
of the Company's derivative instruments excluding derivative
expenses paid by Pioneer, interest, income taxes, depreciation
and amortization (referred to as Lender-Defined EBITDA) during
the quarter ended June 30, 2002,

o $5.116 million of Lender-Defined EBITDA during the quarter ending
September 30, 2002,

o $5.608 million of Lender-Defined EBITDA during the quarter ending
December 31, 2002 and $10.910 million of Lender-Defined EBITDA
during the nine month period ending on the same date,

22

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

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

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

Prior to the First Amendment, the Revolver's financial covenant required
Pioneer to generate $5.1 million of net earnings before extraordinary gains,
interest, income taxes, depreciation and amortization (which Pioneer continues
to define as "EBITDA") during the quarter ended March 31, 2002, including the
effect of changes in the fair value of derivative instruments. Pioneer was in
compliance with the EBITDA covenant during the quarter ended March 31, 2002, but
only as a result of the effect of the change in fair value of derivatives.
Pioneer generated $1.5 million of Lender-Defined EBITDA during the quarter ended
June 30, 2002, which exceeded the required amount of Lender-Defined EBITDA
during that quarter, although Pioneer may not generate the required amount of
Lender-Defined EBITDA during subsequent quarters. During March 2002, the lender
under the Revolver advised Pioneer that it believed that a material adverse
change had occurred, although it continued to fund loans under the Revolver. In
order to address concerns about adverse changes in Pioneer's financial condition
and the possibility that Pioneer might not comply with the EBITDA covenant
during the remainder of the current year, Pioneer had discussions with the
lender on the proposed terms of an amendment to the Revolver. The lender
rescinded its notice that a material adverse change had occurred. Pioneer
entered into the First Amendment to the Revolver to (i) revise the definition of
EBITDA to exclude the effects of changes in the fair value of derivative
instruments, (ii) eliminate the availability of interest rates based on the
London interbank offered rate ("LIBOR") and (iii) replace the previously
applicable margin over the prime rate (the "Previous Rate") with the Previous
Rate plus 2.25% for all loans that are and will be outstanding under the
Revolver. Pioneer paid a forbearance fee of $250,000 in connection with the
First Amendment. Also in connection with the First Amendment, Pioneer agreed
with its lender to effect the Second Amendment to further revise the EBITDA
covenant to exclude realized gains and losses (except to the extent such losses
are paid by Pioneer) on derivatives (as so adjusted, "Lender-Defined EBITDA"),
to take into account Pioneer's current expectations for the amount of
Lender-Defined EBITDA that will be generated during 2002 as agreed to by the
lender and to add such other financial covenants to the Revolver as the lender
deemed necessary to monitor Pioneer's performance in meeting such projections.
The Second Amendment requires Pioneer to meet the Lender-Defined EBITDA amounts
set forth above and adds the additional financial covenants contemplated in the
First Amendment. The additional covenants require Pioneer to maintain Liquidity
(as defined in the Second Amendment) of at least $5.0 million, and limit capital
expenditure levels to $20.0 million in 2002 and $25.0 million in each fiscal
year thereafter. At June 30, 2002, Pioneer's liquidity was $17.7 million.
Pioneer estimates capital expenditures will be approximately $12.2 million
during 2002, $3.0 million of which were incurred during the six months ended
June 30, 2002. In addition, Pioneer agreed to an increase in the fees applicable
to letters of credit issued pursuant to the Revolver, to a rate equal to 4.25%
times the daily balance of the undrawn amount of all outstanding letters of
credit

If the required Lender-Defined EBITDA level under the Revolver for any
quarter is not met, Pioneer will be in default under the terms of the Revolver.
Moreover, if conditions constituting a material adverse change occur or have
occurred, Pioneer's lender can exercise its rights under the Revolver and refuse
to make further advances. Following any such refusal, customer receipts would be
applied to Pioneer's borrowings under the Revolver without Pioneer having the
ability to reborrow. This would cause Pioneer to suffer a rapid loss of
liquidity and Pioneer would lose the ability to operate on a day-to-day basis.
In addition, a default under the Revolver would allow Pioneer's lender to
accelerate the outstanding indebtedness under the Revolver and would also result
in a cross-default under Pioneer's Senior Notes, which would provide the holders
of the Senior Notes with the right to accelerate $200 million in Senior Notes
outstanding and demand immediate repayment. In such circumstances, or if Pioneer
otherwise did not have sufficient liquidity to satisfy all of its debt service
obligations, Pioneer would be required to refinance, restructure or reorganize
all or a portion of its indebtedness, defer payments on its debt, sell assets,
obtain additional debt or equity financing or take other actions, including
seeking protection under Chapter 11 of the U.S. Bankruptcy Code and under the
Canadian Companies' Creditors Arrangement Act. In such circumstances Pioneer
could not predict the outcome of discussions with its lender under the Revolver
or the holders of the Senior Notes, including any action which could lead
Pioneer to seek voluntary bankruptcy protection or could force Pioneer into
involuntary bankruptcy proceedings if there is a breach of the Revolver
covenants or a default under the Senior Notes, or the outcome of any of the
actions that Pioneer may need to take in response to such actions if they were
to occur.

Pioneer's debt agreements contain covenants limiting its ability to, among
other things, incur additional indebtedness, prepay or modify debt instruments,
grant additional liens, guarantee any obligations, sell assets, engage in
another type of business or suspend or terminate a substantial portion of
business, declare or pay dividends, make investments, make capital expenditures
in excess of certain amounts, or make use of the proceeds of borrowings for
purposes other than those specified in

23

the agreements. The new agreements also include customary events of default,
including a change of control under the Revolver. Borrowings under the Revolver
will generally be available subject to the accuracy of all representations and
warranties, including the absence of a material adverse change and the absence
of any default or event of default.

Pioneer's total assets decreased $130.2 million from December 31, 2001 to
June 30, 2002. The decrease is due primarily to changes in the current and
non-current assets related to Pioneer's portfolio of derivatives. Total
derivative assets decreased from $265.7 million at December 31, 2001 to $158.7
million at June 30, 2002 due to changes in fair value of the derivatives as well
as the expiration of derivative contracts during the first six months of 2002.

Foreign Operations and Exchange Rate Fluctuations. Pioneer has operating
activities in Canada and engages in export sales to various countries.
International operations and exports to foreign markets are subject to a number
of risks, including currency exchange rate fluctuations, trade barriers,
exchange controls, political risks and risks of increases in duties, taxes and
governmental royalties, as well as changes in laws and policies governing
foreign-based companies. In addition, earnings of foreign subsidiaries and
intracompany payments are subject to foreign taxation rules.

A portion of Pioneer's sales and expenditures are denominated in Canadian
dollars, and accordingly, Pioneer's results of operations and cash flows may be
affected by fluctuations in the exchange rate between the United States dollar
and the Canadian dollar. Currently, Pioneer is not engaged in forward foreign
exchange contracts, but may enter into such hedging activities in the future.

Net Cash Flows from Operating Activities. During the first six months of
2002, Pioneer's cash flow provided by operating activities was $6.2 million,
primarily attributable to changes in working capital.

Net Cash Flows from Investing Activities. Cash used in investing
activities during the first six months of 2002 totaled $2.6 million, which
included $3.0 million for capital expenditures offset by $0.4 million of
proceeds from asset sales. During the first six months of 2002, capital
expenditures were considerably lower than normal. This low level of capital
expenditures will not be sustained through the remainder of 2002. Pioneer
estimates that capital expenditures for the remainder of 2002 will approximate
$9.2 million.

Net Cash Flows from Financing Activities. Cash used in financing
activities during the first six months of 2002 totaled approximately $1.6
million, due to net repayments under the Revolver of $1.3 million and scheduled
debt payments on long-term debt.

Working Capital. Pioneer's working capital was $3.1 million at June 30,
2002, including a net current derivative asset of $1.7 million, compared to
working capital of $11.7 million at December 31, 2001. This $8.6 million
decrease was primarily due to a $7.4 million decrease in the net current
derivative asset.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

Revenues. Revenues decreased by $29.0 million, or approximately 28%, to
$74.2 million for the three months ended June 30, 2002, as compared to the three
months ended June 30, 2001. The decrease in revenues was primarily attributable
to lower ECU prices. The average ECU sales price for the three months ended June
30, 2002 was $225, a decrease of approximately 37% from the average sales price
of $359 during the three months ended June 30, 2001.

Cost of Sales. Cost of sales decreased $12.6 million, or approximately
14%, for the three months ended June 30, 2002, as compared to the three months
ended June 30, 2001. Included in cost of sales for the three months ended June
30, 2002 are $4.9 million of net expenses related to fulfilling Approved
Derivative and Disputed Derivative contract obligations during the period.
Excluding the $4.9 million of derivative expense, cost of sales decreased $17.5
million, or 23% for the second quarter of 2002 as compared to the second quarter
of 2001. Of the $17.5 million decrease, $3.3 million resulted from cost savings
from an organizational restructuring and cost reduction initiatives, and $3.0
million resulted from idling the Tacoma plant. The remainder of the decrease is
attributable to a decrease in power costs of approximately $5.6 million and a
decrease in depreciation expense of approximately $2.2 million resulting from
the revaluation of property, plant and equipment pursuant to fresh start
accounting.

24

Gross Profit. Gross profit margin decreased to a loss of 5% for the three
months ended June 30, 2002 compared with a profit of 13% for the three months
ended June 30, 2001, primarily as a result of the ECU pricing decrease and
derivative contract expenses, offset by the decrease in cost of sales discussed
above.

Change in Fair Value of Derivatives. For the three months ended June 30,
2002, the change in fair value of the derivative positions was a net unrealized
gain of $5.0 million which related primarily to the Disputed Derivatives. For
the three months ended June 30, 2001, the change in fair value of the derivative
positions was a net unrealized loss of $29.8 million, all of which related to
Approved Derivatives. See " - Colorado River Commission Derivative Transactions"
above and Note 3 to the consolidated financial statements.

Asset impairment and other charges. Other charges for the three months
ended June 30, 2001 was primarily comprised of professional fees related to
Pioneer's reorganization.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $4.2 million, or approximately 43%, for the
three months ended June 30, 2002, as compared to the three months ended June 30,
2001. The decrease was primarily attributable to non-cash items, including $0.8
million related to a reduction in bad debt expense, $0.6 million resulting for
the absence of amortization of debt issuance costs which were written off upon
emergence from bankruptcy when the related debt was forgiven, $2.2 million due
to the absence of goodwill amortization resulting from the adoption of SFAS 142,
"Goodwill and Other Intangible Assets," on January 1, 2002, and a $0.7 million
decrease in depreciation and amortization expense caused by the revaluation of
property, plant and equipment and intangibles upon emergence from bankruptcy.

Interest Expense, Net. Interest expense, net decreased by $9.8 million, or
67% in the second quarter of 2002 as compared to the second quarter of 2001. The
decrease resulted primarily from debt forgiveness of $368 million, which
represents a 63% decrease in the debt outstanding immediately prior to emergence
from Chapter 11. This decrease from debt forgiveness was partially offset by an
increase in interest rates.

Other Income (Expense,) Net. Other income (expense), net for the quarter
ended June 30, 2002 included a foreign exchange loss of $1.3 million, offset by
a $0.4 million gain from the sale of assets. Other income (expense), net for the
quarter ended June 30, 2001 was primarily comprised of a foreign exchange loss.

Income Tax (Expense) Benefit. The income tax benefit for the quarter ended
June 30, 2002 was $2.7 million, reflecting foreign tax benefit on the loss from
Pioneer's Canadian operations. Due to recurring losses of Pioneer's U.S.
operations and uncertainty as to the effect of Pioneer's restructuring on the
availability and use of Pioneer's U.S. net operating loss carryforwards, a 100%
valuation allowance amounting to $121.8 million was recorded in connection with
Pioneer's U.S. deferred tax assets at December 31, 2001. During the quarter
ended June 30, 2002 Pioneer recorded a further valuation allowance in an amount
equal to the benefit from income taxes generated by the losses from Pioneer's
U.S. operations. Income tax expense of $0.6 million was recorded for the quarter
ended June 30, 2001.

Net Loss. Due to the factors described above, net loss for the three
months ended June 30, 2002 was $6.7 million, compared to a net loss of $44.9
million for the same period in 2001.

SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

Revenues. Revenues decreased by $58.6 million, or approximately 29%, to
$146.0 million for the six months ended June 30, 2002, as compared to the six
months ended June 30, 2001. Approximately $49 million of the decrease was
attributable to lower ECU prices. The average ECU sales price for the six months
ended June 30, 2002 was $230, a decrease of 37% from the average sales price of
$366 during the six months ended June 30, 2001. The remainder of the decrease
was primarily attributable to lower sales volumes.

Cost of Sales. Cost of sales decreased $36.2 million, or approximately
20%, for the six months ended June 30, 2002, as compared to the six months ended
June 30, 2001. Included in cost of sales for the six months ended June 30, 2002
is $3.5 million of net expense related to fulfilling Approved Derivative and
Disputed Derivative contract obligations during the period. No such expenses
were incurred during the corresponding period in 2001. Excluding the derivative
expenses, cost of sales decreased $39.7 million, or 22% in the first half of
2002 as compared to the first half of 2001. The $39.7 million decrease included
approximately $12.6 million from decreased power costs and approximately $6.0
million attributable to decreased

25

volume. Other components of the decrease include cost savings resulting from an
organizational restructuring and other cost reduction initiatives of
approximately $7.9 million, $6.6 million resulting from idling the Tacoma plant,
and a decrease in depreciation expense of $4.5 million resulting from the
revaluation of property, plant and equipment pursuant to fresh start accounting.

Gross Profit. Gross profit margin decreased to 0% for the six months ended
June 30, 2002 from 12% for the six months ended June 30, 2001, due to the
factors discussed above.

Change in Fair Value of Derivatives. For the six months ended June 30,
2002, the change in fair value of the derivative positions was a net unrealized
gain of $23.0 million. Of the $23.0 million increase in fair value, $20.5
million related to the Disputed Derivatives and the remaining $2.5 million
related to the Approved Derivatives. For the six months ended June 30, 2001, the
change in fair value of the derivative positions was a net unrealized loss of
$29.8 million, all of which related to Approved Derivatives. See " - Liquidity
and Capital Resources - Colorado River Commission Derivative Transactions" above
and Note 3 to the consolidated financial statements.

Asset impairment and other charges. Other charges for the six months ended
June 30, 2002 included primarily $1.9 million of severance expense and $0.7
million of accrued costs related to idling the Tacoma plant, along with $0.4
million of severance expense related to staff reductions at the Cornwall plant.
Other charges for the six months ended June 30, 2001 were primarily comprised of
severance expense and professional fees related to Pioneer's reorganization.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $9.1 million, or approximately 45%, for the
six months ended June 30, 2002, as compared to the six months ended June 30,
2001. The decrease is partially attributable to approximately $0.6 million of
cost savings resulting from cost-cutting measures. The remaining decrease was
made up of non-cash items, including $1.4 million related to a reduction in bad
debt expense, $1.3 million resulting from the absence of amortization of debt
issuance costs, which were written off upon emergence from bankruptcy when the
related debt was forgiven, $4.4 million due to the absence of goodwill
amortization resulting from the adoption of SFAS 142, "Goodwill and Other
Intangible Assets," on January 1, 2002, and a $1.3 million decrease in
depreciation and amortization expense caused by the revaluation of property,
plant and equipment and intangibles upon emergence from bankruptcy.

Interest Expense, Net. Interest expense, net decreased by $20.7 million,
or 68% in the first half of 2002 as compared to the first half of 2001. The
decrease resulted primarily from debt forgiveness of $368 million, which
represents a 63% decrease in the debt outstanding immediately prior to emergence
from Chapter 11. This decrease from debt forgiveness was partially offset by an
increase in interest rates.

Other Income (Expense), Net. Other income (expense), net for the six
months ended June 30, 2002 included a foreign exchange loss of $1.4 million,
offset by a $0.4 million gain from the sale of assets. Other income, net for the
six months ended June 30, 2001 was primarily comprised of a sales tax refund of
$0.5 million.

Income Tax (Expense) Benefit. The income tax benefit for the six months
ended June 30, 2002 was $3.5 million, reflecting foreign tax benefit on the loss
from Pioneer's Canadian operations. Due to recurring losses of Pioneer's U.S.
operations and uncertainty as to the effect of Pioneer's restructuring on the
availability and use of Pioneer's U.S. net operating loss carryforwards, a 100%
valuation allowance amounting to $121.8 million was recorded in connection with
Pioneer's U.S. deferred tax assets at December 31, 2001. During the six months
ended June 30, 2002 Pioneer recorded a further valuation allowance in an amount
equal to the benefit from income taxes generated by the losses from Pioneer's
U.S. operations. Income tax expense of $2.2 million was recorded for the six
months ended June 30, 2001.

Net Income (Loss). Due to the factors described above, net income for the
six months ended June 30, 2002 was $3.2 million, compared to a net loss of $65.1
million for the same period in 2001.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective December 31, 2001, Pioneer adopted SFAS 142. SFAS 142 requires
that an intangible asset that is acquired shall be initially recognized and
measured based on its fair value. The statement also provides that goodwill
should not be amortized, but must be tested for impairment annually, or more
frequently if circumstances indicate potential impairment. For the three months
and six months ended June 30, 2001 the net loss, excluding goodwill amortization
expense, would have been $42.7 million and $60.1 million, respectively, and
basic and diluted loss per share, excluding goodwill amortization expense, would
have been $3.70 and $5.26, respectively.

26

In June 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which is effective for fiscal years beginning after June 15, 2002.
SFAS 143 addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement costs. Pioneer adopted SFAS 143 upon emergence from bankruptcy as
part of fresh start accounting, and it did not have an impact on Pioneer's
financial position, results of operations, or cash flows.

In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets," which Pioneer adopted on January 1, 2002.
SFAS 144 addresses accounting and reporting for the impairment or disposal of
long-lived assets and the disposal of a segment of a business. Pioneer adopted
SFAS 144 upon emergence from bankruptcy as part of fresh start accounting, and
it did not have an impact on Pioneer's financial position, results of
operations, or cash flows.

In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS 145 eliminates SFAS 4 "Reporting Gains and Losses from
Extinquishment of Debt" and thus allows for only those gains or losses on the
extinguishment of debt that meet the criteria of extraordinary items to be
treated as such in the financial statements. SFAS 145 also amends SFAS 13,
"Accounting for Leases" to require sale-leaseback accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The provisions of this statement relating to the rescission of
SFAS 4 are effective for fiscal years beginning after May 15, 2002, the
provisions of this statement relating to the amendment of SFAS 13 are effective
for transactions occurring after May 15, 2002, and all other provisions of this
Statement are effective for financial statements issued on or after May 15,
2002. Pioneer does not expect the adoption of SFAS 145 to have a material impact
on its financial position, results of operations or cash flows.

In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which is effective for fiscal years beginning
after December 31, 2002. SFAS 146 requires that the liability for costs
associated with exit or disposal activities be recognized when incurred, rather
than at the date of a commitment to an exit or disposal plan. SFAS 146 is to be
applied prospectively to exit or disposal activities initiated after December
31, 2002. The adoption of SFAS 146 is not expected to have a material impact on
Pioneer's financial position, results of operations, or cash flows.

27

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The nature of Pioneer's market risk disclosures set forth in PCI's Annual
Report on Form 10-K for the year ended December 31, 2001 have not changed
significantly, except as shown below, through the six months ended June 30,
2002.

The information in the table below presents the electricity futures and
options positions outstanding as of June 30, 2002 allocated over the lives of
the contracts ($ in thousands, except per megawatt hours ("mwh") amounts, and
volumes in mwh), whether Approved Derivatives or Disputed Derivatives. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Colorado River Commission
Derivative Transactions" and Note 3 to Pioneer's consolidated financial
statements for more information regarding the Approved Derivatives and Disputed
Derivatives. The information in the table below constitutes "forward-looking
statements."

The information set forth in the table above with respect to the
derivative contracts provides an incomplete analysis of current and future
electric power costs relating to Pioneer's Henderson facility, since long-term
hydropower contracts allow

28

Pioneer to purchase at favorable rates approximately 50% of the Henderson
facility's power requirements. Since the contracts are not derivatives and the
power purchased under the contracts cannot be resold by Pioneer at market rates,
the fair market value of the hydropower contracts has not been recorded by
Pioneer in its financial statements. However, employing the same valuation
methodology to the hydropower contracts as to the derivatives, the contracts
would have a value to Pioneer of approximately $52.3 million at June 30, 2002.

In addition, a portion of Pioneer's power needs are currently being met by
two forward purchases arranged by CRC, which are not accounted for as derivative
transactions as Pioneer has designated them as purchases in the normal course of
business. Had these two forward purchase contracts been accounted for as
derivative transactions, they would have resulted in a net unrealized loss to
Pioneer of approximately $15.9 million at June 30, 2002.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Pioneer Americas LLC ("Pioneer Americas"), a subsidiary of PCI, owns and
operates a chlor-alkali manufacturing facility in Henderson, Nevada. The
Colorado River Commission ("CRC") supplies power to the facility pursuant to
three basic contracts covering hydro-generated power, supplemental power
requirements, and power transmission and supply balancing services. CRC is a
state agency established in 1940 to manage federal hydropower contracts with
utilities and other customers, including Pioneer Americas' Henderson facility,
in Southern Nevada. Since the low cost hydropower supplied by CRC does not
entirely meet the Henderson facility's power demands and those of CRC's other
customers, CRC purchases supplemental power from various sources and resells it
to Pioneer Americas and to other customers.

Approximately 50% of the electric power supply for the Henderson facility
is provided under the supplemental supply contract with CRC. The supplemental
supply contract sets forth detailed procedures governing the procurement of
power by CRC for purchase by Pioneer Americas. This agreement does not provide
for speculative trading in power-related derivatives.

As previously reported, CRC entered into various derivative positions
purportedly for the benefit of Pioneer Americas under the supplemental supply
contract. The derivative positions consist of contracts for the forward purchase
and sale of electricity as well as put and call options that have been written
for electric power. While certain of the transactions, reflecting a net
liability in the amount of $7.9 million at June 30, 2002, relate to transactions
that were specifically approved by Pioneer Americas pursuant to established
procedures (the "Approved Derivatives"), Pioneer Americas has disputed CRC's
contention that additional transactions (the "Disputed Derivatives") with an
additional net liability at June 30, 2002 of $79.9 million are its
responsibility. CRC has further contended that other contracts (the "Rejected
Derivatives") reflecting an additional net liability of $35.0 million as of June
30, 2002, are Pioneer Americas' responsibility, although CRC has not provided
any documentation of any relationship of those contracts to Pioneer Americas.
Under applicable accounting rules Pioneer Americas has been required to reflect
the $87.8 million net liability relating to the Approved Derivatives and the
Disputed Derivatives in its June 30, 2002 balance sheet, but Pioneer Americas
has not recorded any net liability with respect to the Rejected Derivatives.

Efforts to resolve the dispute as to the Disputed Derivatives and the
Rejected Derivatives have not been successful, and on July 9, 2002, CRC was
served with a complaint filed on June 11, 2002, by Pioneer Americas in the
District Court of Harris County, Texas. Pioneer Americas is seeking a
declaratory judgment that it is not liable for the Disputed Derivatives or the
Rejected Derivatives. On July 9, 2002, CRC filed a lawsuit in the U.S. District
Court for the District of Nevada against Pioneer and each of the parties to the
derivative contracts that were entered into by CRC. CRC contends in its
complaint that the Texas state court does not have jurisdiction over CRC or the
controversy, and it seeks the court's determination as to the proper disposition
of cash in the amount of approximately $34.7 million that it has accumulated in
its accounts from its trading in derivatives and the power it has committed to
purchase or sell. CRC also seeks specific performance by Pioneer of the
contracts with CRC and unspecified damages. Pioneer intends to vigorously
litigate these matters.

29

ITEM 5. OTHER INFORMATION

Forward Looking Statements. Pioneer is including the following discussion
to inform its existing and potential security holders generally of some of the
risks and uncertainties that can affect Pioneer and to take advantage of the
"safe harbor" protection for forward-looking statements that applicable federal
securities law affords. Many of these risks are described in more detail in
Pioneer's Form 10-K for the year ended December 31, 2001 in "Item 1. Business --
Risks" which are hereby incorporated by reference.

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

Various statements this report contains, including those that express a
belief, expectation or intention, as well as those that are not statements of
historical fact, are forward-looking statements. These forward-looking
statements speak only as of the date of this report, Pioneer disclaims any
obligation to update these statements, and cautions against any undue reliance
on them. Pioneer has based these forward-looking statements on its current
expectations and assumptions about future events. While Pioneer 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 Pioneer's control. These risks,
contingencies and uncertainties relate to, among other matters, the following:

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

o the cyclical nature of Pioneer's product markets and operating
results;

o competitive pressures affecting selling prices and volumes;

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

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

o failure to fulfill financial covenants contained in Pioneer's debt
instruments;

o inability to make scheduled payments on or refinance Pioneer's
indebtedness;

o certain derivatives contracts relating to electricity for Pioneer's
Henderson facility, and any necessity to mitigate their effect;

o loss of key customers or suppliers; o higher than expected raw
material and utility costs;

o higher than expected transportation and/or logistics costs;

o failure to achieve targeted cost reduction programs;

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

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

o higher than expected interest rates; and

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

Pioneer believes the items outlined above are important factors that could
cause its actual results to differ materially from those expressed in a
forward-looking statement made in this report or elsewhere by Pioneer or on
Pioneer's behalf. Pioneer has discussed most of these factors in more detail
elsewhere in this report and on Pioneer's Form 10-K for the year ended December
31, 2001. These factors are not necessarily all the important factors that could
affect Pioneer. Unpredictable or unknown factors that have not been discussed in
this report could also have material adverse effects on actual results of
matters that are the subject of such forward-looking statements. Pioneer does
not intend to update its description of important factors each time a potential
important factor arises. Pioneer advises its security holders that they should
(i) be aware that important factors Pioneer does not refer to above could affect
the accuracy of Pioneer's forward-looking statements and (ii) use caution and
common sense when considering Pioneer's forward-looking statements.

30

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

4.1+ Second Amendment to Loan and Security Agreement effective as of May
31, 2002 between and among the lenders identified on the signature
pages thereto, Foothill Capital Corporation, PCI Chemicals Canada
Company and Pioneer Americas LLC (incorporated by reference to
Exhibit 4.1 of the Company's Current Report on Form 8-K filed on
June 14, 2002).

99.1+ Items incorporated by reference from the Pioneer Companies, Inc.
Form 10-K for the year ended December 31, 2001: Item 1 Business --
Risks.

99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

----------

+ Indicates exhibit previously filed with the Securities and Exchange
Commission as indicated and incorporated herein by reference

(b) Reports on Form 8-K

On June 14, 2002, PCI filed a report on Form 8-K. Under Item 5,
"Other Events," Pioneer reported that effective as of May 31, 2002,
PCI Chemicals Canada Company and Pioneer Americas LLC, wholly owned
subsidiaries of Pioneer Companies, Inc, Inc., entered into a second
amendment to their $30 million revolving credit facility, which was
attached to the Form 8-K as an exhibit.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.

PIONEER COMPANIES, INC.

Date: August 13, 2002 By: /s/ Philip J. Ablove
--------------------------------
Philip J. Ablove
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

31

INDEX TO EXHIBITS

- ----------

+ Indicates exhibit previously filed with the Securities and Exchange Commission
as indicated and incorporated herein by reference