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 SEPTEMBER 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 November 14, 2002, there were outstanding 10,000,000 shares of Common
Stock of Pioneer Companies, Inc.

TABLE OF CONTENTS

PART I--FINANCIAL INFORMATION

Certain statements in this Form 10-Q regarding future expectations of
Pioneer's business and Pioneer's results of operations, financial condition and
liquidity 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 September 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 nine 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 prior
year amounts have been reclassified 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"), a
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, despite recent increases, have not attained the price levels projected
in connection with the plan of reorganization for the nine months ended
September 30, 2002, and based on current expectations, Pioneer will not achieve
the financial results for 2002 that were included in those projections. During
the first nine months of 2002, Pioneer's average electrochemical unit ("ECU")
netback (that is, prices adjusted to eliminate the product transportation
element) averaged approximately $255, while the projections prepared in
connection with Pioneer's reorganization assumed an average ECU netback of
approximately $286. The same projections assumed an average ECU netback of
approximately $301 for the third quarter of 2002. The actual third quarter
average ECU netback of $310 exceeded the projections and represented a
significant increase from the 2002 second quarter $225 average ECU netback.

The low ECU netback experienced during the first half of 2002 created
liquidity that was 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 increase in ECU netback that has occurred in the third quarter,
Pioneer's 2002 ECU netback has averaged $255 for the nine months ended September
30, 2002. However, the average ECU netback for 2002 is expected to fall short of
the $300 average ECU netback projected for 2002 in connection with the plan of
reorganization. The ECU netback may also fall short of the level anticipated in
connection with the amendments to the Revolver. As a result, Pioneer could fail
to meet the required Lender-Defined EBITDA (defined below) in the fourth
quarter. Unless product prices continue to improve, Pioneer may not have the
liquidity necessary to meet all of its debt service and other obligations next
year, and may be unable to satisfy the financial covenants in the Revolver. The
amount of liquidity ultimately needed by Pioneer to meet all of its obligations
going forward will depend on a number of factors, some of which are uncertain,
including particularly the resolution of Pioneer's derivatives dispute with the
Colorado River Commission. See "Derivative Instruments" below.

Pioneer has recorded a net mark-to-market liability relating to a
substantial portfolio of derivative instruments. Changes in the fair value of
the derivatives are reported in the statement of operations in the period of
change. Pioneer records estimated income and expense for obligations that may
arise related to settling the derivatives on their delivery dates as a component
of cost of sales. See Note 3 for additional information related to the
derivatives.

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 $5.116 million 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 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's Lender-Defined EBITDA during the quarter ended June 30, 2002 exceeded
the amount required for that quarter. Pioneer generated $10.5 million of
Lender-Defined EBITDA during the quarter ended September 30, 2002, which
exceeded the required amount of Lender-Defined EBITDA during that quarter,

7

although there is no assurance that Pioneer will 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 Revolver's
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, to take into account Pioneer's expectations
for the amount of Lender-Defined EBITDA that would be generated during 2002 as
agreed to by the lender, and to add such other financial covenants to the
Revolver as the lender deemed necessary to monitor 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 September 30, 2002, Pioneer's
liquidity was $21.2 million. Pioneer estimates capital expenditures will be
approximately $11.6 million during 2002, $5.0 million of which were incurred
during the nine months ended September 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, and Pioneer would not have
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.

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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.

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 $97.6 million at September 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 $6.2 million at September 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 September 30, 2002 of $91.4
million are its responsibility. All $97.6 million of such net liability is
reflected in Pioneer's September 30, 2002 balance sheet, but the outcome of the
dispute with respect to the $91.4 million net liability as of September 30, 2002
is in doubt. CRC has further contended that other contracts (the "Rejected
Derivatives") reflecting an additional net liability of $38.1 million as of
September 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 in the District Court
of Harris County, Texas. Pioneer sought a declaratory judgment that it is not
liable for the Disputed Derivatives or the Rejected Derivatives. On October 10,
2002, the District Court ruled that it did not have jurisdiction over the
dispute, and Pioneer has filed a notice of appeal with respect to that decision.
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 seeks the court's determination as to the
proper disposition of cash in the amount of approximately $34.7 million that it
had accumulated as of June 30, 2002 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 received a notice from CRC stating that on July 1,
2002, CRC had adopted regulations applicable to its industrial customers which,
if implemented, would have required Pioneer 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, including a provision that purports to give CRC the right to cease
providing hydropower in certain circumstances. Pioneer filed a lawsuit in Nevada
state court contesting the application of such regulations. On August 30, 2002,
the Nevada state court entered a temporary restraining order, preventing the
application of the regulations and the imposition of the collateral requirement,
and requiring Pioneer to post a $0.5 million security bond. At a hearing on
November 6, 2002, the court granted Pioneer's motion for the entry of a
preliminary injunction against the application of the regulations and the
imposition of the collateral requirement, and increased the security bond
requirement by $0.3 million. If after further proceedings a collateral
requirement is imposed and if Pioneer is unable to meet it, CRC might cease to
provide supplemental power to the Henderson facility and Pioneer would not be
able to operate the facility.

Pioneer records estimated realized income and expense related to fulfilling
or settling the obligations that may arise with respect to the Approved
Derivatives and Disputed Derivatives as a component of cost of sales. Pioneer
has recorded in "Other Assets" a net receivable from CRC of $18.8 million at
September 30, 2002. The net receivable includes $12.2 million of cash that CRC
has collected in the form of premiums related to options that expired prior to
September 30, 2002 but has not remitted to Pioneer. A total of $0.6 million of
the $12.2 million is attributable to the Approved Derivatives and $11.6 million
is attributable to the Disputed Derivatives (and the distribution of the latter
amount is also a subject of the litigation). Pioneer believes CRC is obligated
to allocate that amount to the reduction of power costs at Pioneer's Henderson
facility. However, the Approved Derivatives and the Disputed Derivatives that
mature during 2003 and later years would, given current industry

9

conditions, have a material adverse effect on Pioneer's cash flow if the
derivatives are found to be Pioneer's obligation. Consequently, depending on
future market movements in power costs, Pioneer's ability to resolve or
significantly mitigate the current net derivative liability may be critical to
Pioneer's ability to generate sufficient liquidity to meet all of its debt
service and other obligations. The remaining $6.6 million included in the $18.8
million net receivable from CRC represents Pioneer's estimate of CRC's net
proceeds from the settlement of the Approved Derivatives and Disputed
Derivatives on their delivery dates during the nine months ended September 30,
2002 that has not been remitted to Pioneer.

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 judgment, 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 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 ($ in thousands, except per megawatt hours ("mwh")
amounts, and volumes in mwh), for Approved Derivatives and Disputed Derivatives
for the periods presented.

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SUMMARY OF APPROVED AND DISPUTED DERIVATIVE ASSETS AND LIABILITIES

4. SUPPLEMENTAL CASH FLOW INFORMATION

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

Non-cash financing activities:

In connection with Pioneer's emergence from bankruptcy, Pioneer reached
agreements with certain vendors regarding the repayment of amounts owed to those
vendors whereby certain amounts will be repaid over several years. To reflect
their long-term due dates, $2.4 million from accounts payable and $1.2 million
from accrued liabilities were reclassified to long-term debt in September 2002.
Corresponding reclassifications are reflected at December 31, 2001.

On May 15, 2002, Pioneer converted $3.4 million of amounts owed to certain
professionals 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.

During the nine months ended September 30, 2001, in accordance with SOP
90-7, $12.4 million of unamortized debt issuance costs related to compromised
debt was reclassified against the related debt balance in Pioneer's consolidated
balance sheet.

Following are supplemental disclosures of cash flow information:

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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.

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. If the arrangements are not
adequate or the obligations are not met, Pioneer would be required to incur
significant expenses for environmental liabilities, which could 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.

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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. In
addition, at September 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. Pioneer also reclassified $2.4 million from
accounts payable to long-term debt related to an unsecured, non-interest bearing
instrument payable to a critical vendor for the settlement of pre-petition
amounts owed to that vendor. The instrument includes a covenant which allows the
vendor to demand immediate repayment, and begin charging interest at a rate of
9.3% if Pioneer's liquidity falls below $5 million (Canadian dollars). In
addition, Pioneer has $6.6 million of other debt outstanding, comprised of notes
maturing in various years through 2014, which includes $1.2 million that was
reclassified from accrued liabilities related to a pre-petition obligation that
will be repaid over several years. 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, inventory and reserves. The Revolver is secured by accounts
receivable and inventory. 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.

Note 2 includes a discussion of the financial covenants included in the
Revolver, and Pioneer's compliance with those covenants.

13

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 debt agreements contain covenants requiring Pioneer to meet minimum
liquidity levels and 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 September 30, 2002, the borrowing base under the Revolver was $30.0
million. Borrowing availability after borrowings and letters of credit was $15.2
million, and net liquidity (consisting of cash and borrowing availability) was
$21.2 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
SEPTEMBER 30, 2002
(IN THOUSANDS)

15

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

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

16

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

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

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

17

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

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

9. ASSET IMPAIRMENT AND OTHER CHARGES

In March 2002, Pioneer idled the Tacoma plant due to poor market conditions.
The idling of the Tacoma plant 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.
Substantially all of the accrued severance was paid out during the nine months
ended September 30, 2002. The remaining $2.4 million of asset impairment and
other charges recorded during the nine months ended September 30, 2002 was
primarily comprised of $0.7 million of exit costs related to idling the Tacoma
plant, $0.4 million related to staff reductions at the Cornwall plant, $0.6
million of executive severance and $0.5 million of legal expense related to the
Pioneer's emergence from bankruptcy.

Other charges for the nine months ended September 30, 2001 of $9.2 million
were primarily comprised of severance expense and professional fees related to
Pioneer's reorganization.

10. EARNINGS (LOSS) PER SHARE

Basic earnings (loss) per share is 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.

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Computational amounts for earnings (loss) per share are as follows:

Earnings per share for the nine months ended September 30, 2002 were not
affected by outstanding options to acquire 0.7 million shares of common stock
because the exercise price of those options was greater than the average market
price of Pioneer's common stock during that period. Loss per share for the
predecessor company for the three months and nine months ended September 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.

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 nine months ended September 30, 2001, the net loss, excluding goodwill
amortization expense, would have been $69.7 million and $130.4 million,
respectively, and basic and diluted loss per share, excluding goodwill
amortization expense, would have been $6.04 and $11.30, respectively.

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 Extinguishment of
Debt," and 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.

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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.

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 September 30, 2002, and the consolidated statements of
operations for the three and nine months ended September 30, 2002, and the
consolidated statement of cash flows for the nine months ended September 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 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"). 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 and
are not comparable.

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 $97.6 million at September 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 $6.2 million at September 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 September 30, 2002 of $91.4
million are its responsibility. All $97.6 million of such net liability is
reflected in Pioneer's September 30, 2002 balance sheet, but the outcome of the
dispute with respect to the $91.4 million net liability as of September 30, 2002
is in doubt. CRC has further contended that other contracts (the "Rejected
Derivatives") reflecting an additional net liability of $38.1 million as of
September 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 in the District Court
of Harris County, Texas. Pioneer sought a declaratory judgment that it is not
liable for the Disputed Derivatives or the Rejected Derivatives. On October 10,
2002, the District Court ruled that it did not have jurisdiction over the
dispute, and Pioneer has filed a notice of appeal with respect to that decision.
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 seeks the court's determination as to the
proper disposition of cash in the amount of approximately $34.7 million that it
had accumulated as of June 30 , 2002 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 received a notice from CRC stating that on July
1, 2002, CRC had adopted regulations applicable to its industrial customers
which, if implemented, would have required Pioneer 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, including a provision that purports to give CRC the right to cease
providing hydropower in certain circumstances. Pioneer filed a lawsuit in Nevada
state court contesting the application of such regulations. On August 30, 2002,
the Nevada state court entered a temporary restraining order, preventing the
application of the regulations and the imposition of the collateral requirement,
and requiring Pioneer to post a $0.5 million security bond. At a hearing on
November 6, 2002, the court granted Pioneer's motion

20

for the entry of a preliminary injunction against the application of the
regulations and the imposition of the collateral requirement, and increased the
security bond requirement by $0.3 million. If after further proceedings a
collateral requirement is imposed and if Pioneer is unable to meet it, CRC might
cease to provide supplemental power to the Henderson facility and Pioneer would
not be able to operate the facility.

Pioneer records estimated realized income and expense related to fulfilling
or settling the obligations that may arise with respect to the Approved
Derivatives and Disputed Derivatives as a component of cost of sales. Pioneer
has recorded in "Other Assets" a net receivable from CRC of $18.8 million at
September 30, 2002. The net receivable includes $12.2 million of cash that CRC
has collected in the form of premiums related to options that expired prior to
September 30, 2002 but has not remitted to Pioneer. A total of $0.6 million of
the $12.2 million is attributable to the Approved Derivatives and $11.6 million
is attributable to the Disputed Derivatives (and the distribution of the latter
amount is also a subject of the litigation). Pioneer believes CRC is obligated
to allocate that amount to the reduction of power costs at Pioneer's Henderson
facility. 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 if the derivatives are
found to be Pioneer's obligation. The remaining $6.6 million included in the
$18.8 million net receivable from CRC represents Pioneer's estimate of CRC's net
proceeds from the settlement of the Approved Derivatives and Disputed
Derivatives on their delivery dates during the nine months ended September 30,
2002, that have not been remitted to Pioneer.

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 September 30, 2002, the cost of the derivative positions
during the years from 2003 to 2006, considered without regard to other factors,
could range from $18.5 million in 2004 to as high as $28.7 million in 2005.
Consequently, depending on future market improvements in power costs, Pioneer's
ability to resolve or significantly mitigate the current net derivative
liability may be critical to Pioneer's ability to generate sufficient liquidity
to meet all of its debt service and other obligations. 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 $18.7 million at
September 30, 2002.

If it is determined that Pioneer bears a contractual obligation with
respect to the Disputed Derivatives and the Rejected Derivatives, the failure or
inability to satisfy or mitigate it 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.

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 a long-term hydropower contract allows
Pioneer to purchase approximately 50% of the Henderson facility's power
requirements at favorable rates. Since the contract is not a derivative and the
power purchased under the contract cannot be resold by Pioneer at market rates,
the fair market value of the hydropower contract has not been recorded by
Pioneer in its financial statements. However, employing the same valuation
methodology to the hydropower contract as to the derivatives, the contract would
have a value to Pioneer of approximately $62.6 million at September 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

21

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 the transaction
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
and Item 3 - Quantitative and Qualitative Disclosures about Market Risk.

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.

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 of
reorganization. The average ECU netback during the first six months of 2002 was
$230, significantly less than the ECU price projected in connection with the
plan of reorganization.

The low ECU netback experienced during the first half of 2002 created
liquidity that was 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 increase in ECU netback that has occurred in the third quarter,
Pioneer's 2002 ECU netback has averaged $255 for the nine months ended September
30, 2002. However, the average ECU netback for 2002 is expected to fall short of
the $300 average ECU netback projected for 2002 in connection with the plan of
reorganization. The ECU netback may also fall short of the level anticipated in
connection with the amendments to the Revolver. As a result,

22

Pioneer could fail to meet the required Lender-Defined EBITDA (defined below) in
the fourth quarter. Unless product prices continue to improve, Pioneer may not
have the liquidity necessary to meet all of its debt service and other
obligations next year, and may be unable to satisfy the financial covenants in
the Revolver. The amount of liquidity ultimately needed by Pioneer to meet all
of its obligations going forward will depend on a number of factors, some of
which are uncertain, including particularly the resolution of Pioneer's
derivatives dispute with CRC.

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 September
30, 2002, Pioneer had cash of approximately $6.0 million and borrowings under
the Revolver were $10.7 million. On September 30, 2002, the borrowing base under
the Revolver was $30.0 million. Borrowing availability after borrowings and
letters of credit was $15.2 million, and net liquidity (consisting of cash and
borrowing availability) was $21.2 million.

In addition to ordinary business expenses, Pioneer has obligations for
interest on its debt, which, based on interest rates in effect on September 30,
2002 (and after giving effect to the increases in the interest rate payable on
borrowings under the Revolver discussed below), is approximately $19.4 million
per year (although to the extent that Pioneer draws additional funds under the
Revolver, the aggregate interest expense would increase). On September 30, 2002,
Pioneer also had approximately $5.0 million payable under critical vendor
settlement agreements.

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 $5.116 million 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 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's Lender-Defined EBITDA during the quarter ended June 30, 2002 exceeded
the amount required for that quarter. Pioneer generated $10.5 million of
Lender-Defined EBITDA during the quarter ended September 30, 2002, which
exceeded the required amount of Lender-Defined EBITDA during that quarter,
although there is no assurance that Pioneer will 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 Revolver's
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

23

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, to take into account Pioneer's expectations for the amount of
Lender-Defined EBITDA that would be generated during 2002 as agreed to by the
lender, and to add such other financial covenants to the Revolver as the lender
deemed necessary to monitor 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 September 30, 2002, Pioneer's liquidity was $21.2 million.
Pioneer estimates capital expenditures will be approximately $11.6 million
during 2002, $5.0 million of which were incurred during the nine months ended
September 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, and Pioneer would not have
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 requiring Pioneer to meet
minimum liquidity levels and 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.

Pioneer's total assets decreased $161.1 million from December 31, 2001 to
September 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 $114.4
million at September 30, 2002 due to changes in fair value of the derivatives as
well as the expiration of derivative contracts during the first nine 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 nine months of
2002, Pioneer's cash flow provided by operating activities was $2.5 million.

24

Net Cash Flows from Investing Activities. Cash used in investing activities
during the first nine months of 2002 totaled $2.9 million, which included $5.0
million for capital expenditures offset by $2.0 million of proceeds from asset
sales. During the first nine 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 $6.6 million.

Net Cash Flows from Financing Activities. Cash provided by financing
activities during the first nine months of 2002 totaled approximately $2.6
million, due to net borrowings under the Revolver of $10.7 million offset by the
DIP facility repayment of $6.7 million and scheduled payments on long-term debt.

Working Capital. Pioneer's working capital was a deficit of $8.1 million at
September 30, 2002, including a net current derivative liability of $14.0
million, compared to working capital of $15.2 million at December 31, 2001. Of
this $19.8 million decrease, $23.2 million was attributable to changes in
current derivative mark-to-market assets and liabilities, offset to an extent by
decreases in accounts payable and accrued liabilities. Working capital,
excluding the mark-to-market derivative assets and liabilities, was $5.9 million
at September 30, 2002, compared with $6.0 million at December 31, 2001.
Consequently, depending on future market movements in power costs, Pioneer's
ability to resolve or significantly mitigate the current net derivative
liability may be critical to Pioneer's ability to generate sufficient liquidity
to meet all of its debt service and other obligations.

RESULTS OF OPERATIONS

During the third quarter of 2002, Pioneer's average electrochemical unit
("ECU") netback (that is, prices adjusted to eliminate the product
transportation element) was $310 compared to $225 during the second quarter of
2002 and $319 in the third quarter of 2001. A substantial increase in chlorine
prices occurred during the third quarter of 2002.

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

Revenues. Revenues decreased by $6.7 million, or approximately 7%, to $86.6
million for the three months ended September 30, 2002, as compared to $93.3
million for the three months ended September 30, 2001. The decrease in revenues
was primarily attributable to lower caustic soda prices, offset somewhat by
increased caustic soda volumes and increased chlorine prices. The average ECU
netback for the three months ended September 30, 2002 was $310, a decrease of
approximately 3% from the average ECU netback of $319 during the three months
ended September 30, 2001.

Cost of Sales. Cost of sales decreased $16.2 million, or approximately 20%,
for the three months ended September 30, 2002, as compared to the three months
ended September 30, 2001. Included in cost of sales for the three months ended
September 30, 2002 is $14.1 million of estimated benefit from settling
obligations relating to Approved Derivatives and Disputed Derivatives during the
period. However, Pioneer has not received any cash related to the $14.1 million.
For the three months ended September 30, 2001, the benefit from derivative
settlements was $1.4 million. Excluding the derivative items, cost of sales
decreased $3.5 million, or 4% for the third quarter of 2002 as compared to the
third quarter of 2001. Of the $3.5 million decrease, approximately $1.3 million
related to decreased freight expense, and approximately $1.6 million related to
decreased depreciation expense resulting from the revaluation of property, plant
and equipment pursuant to fresh start accounting. The remaining decrease related
primarily to idling the Tacoma plant, offset somewhat by a $0.5 million increase
in environmental expense related to revised estimates for clean up costs at one
site and a $1.4 million inventory adjustment to reduce the amount recorded for
stores (spare parts) inventory to the value of inventory on hand based on a
physical count.

Gross Profit. Gross profit margin increased to 26% for the three months
ended September 30, 2002 compared with 14% for the three months ended September
30, 2001, primarily as a result of the net benefit from settling derivatives
during the period and cost of sales reductions, offset by the revenue decrease
discussed above. Excluding derivative items, gross profit margin was 10% for the
three months ended September 30, 2002, compared with 13% for the three months
ended September 30, 2001.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $4.5 million, or approximately 45%, for the
three months ended September 30, 2002, as compared to the three months ended
September 30, 2001. The decrease was primarily attributable to non-cash items,
including $0.5 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,
$2.4 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 $0.6 million decrease in

25

depreciation and amortization expense caused by the revaluation of property,
plant and equipment and intangibles upon emergence from bankruptcy.

Change in Fair Value of Derivatives. For the three months ended September
30, 2002, the change in fair value of the derivative positions was a net
unrealized loss of $9.8 million, which included an $11.4 million loss related to
the Disputed Derivatives offset by a $1.6 million gain related to the Approved
Derivatives. For the three months ended September 30, 2001, the change in fair
value of the derivative positions was a net unrealized loss of $63.4 million, of
which $1.0 million related to the Approved Derivatives and $62.4 million related
to the Disputed 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 September 30, 2002 of $1.3 million were primarily comprised of executive
severance expense and legal fees related to Pioneer's emergence from bankruptcy.
Other charges for the three months ended September 30, 2001 of $2.4 million were
primarily comprised of professional fees related to Pioneer's reorganization
prior to the Chapter 11 filings.

Interest Expense, Net. Contractual interest expense, net decreased by $9.6
million, or 68% in the third quarter of 2002 as compared to the third 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 September 30, 2002 included a foreign exchange gain of $1.3 million and
$0.7 million gain from the sale of assets. Other income for the quarter ended
September 30, 2001 of $0.4 million was primarily comprised of a foreign exchange
gain.

Income Tax (Expense) Benefit. Income tax expense for the quarter ended
September 30, 2002 was $0.7 million, reflecting foreign tax expense on the
income from Pioneer's Canadian operations. Due to uncertainty as to the use of
Pioneer's U.S. net operating loss carryforwards and other deferred tax assets in
future years, 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 September 30, 2002, Pioneer reduced the valuation
allowance in an amount equal to the income tax expense related to the income
from Pioneer's U.S. operations. The valuation allowance will be reviewed at the
end of 2002. Income tax expense of $2.8 million was recorded for the quarter
ended September 30, 2001.

Net Income (Loss). Due to the factors described above, net income for the
three months ended September 30, 2002 was $3.3 million, compared to a net loss
of $71.9 million for the same period in 2001.

NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001

Revenues. Revenues decreased by $65.3 million, or approximately 22%, to
$232.6 million for the nine months ended September 30, 2002, as compared to the
nine months ended September 30, 2001. The decrease was primarily attributable to
lower ECU netbacks. The average ECU netback for the nine months ended September
30, 2002 was $255, a decrease of 27% from the average ECU netback of $350 during
the nine months ended September 30, 2001.

Cost of Sales. Cost of sales decreased $52.4 million, or approximately 20%,
for the nine months ended September 30, 2002, as compared to the nine months
ended September 30, 2001. Included in cost of sales for the nine months ended
September 30, 2002 is $10.7 million of estimated benefit related to settling
obligations relating to Approved Derivatives and Disputed Derivatives during the
period, for which Pioneer has not received any cash, compared with $1.4 million
of benefit from derivative settlements during the corresponding period in 2001.
Pioneer has not received any cash related to the $10.7 million benefit.
Excluding the derivative items, cost of sales decreased $43.1 million, or 16% in
the nine months ended September 30, 2002 as compared to the same period in 2001.
The decrease included approximately $2.8 million from decreased freight expense
and approximately $17.6 million attributable to decreased raw material costs
primarily due to idling the Tacoma plant. Other components of the decrease
include cost savings resulting from an organizational restructuring and other
cost reduction initiatives of approximately $8.2 million, approximately $9.6
million resulting from idling the Tacoma plant, and a decrease in depreciation
expense of $6.1 million resulting from the revaluation of property, plant and
equipment pursuant to fresh start accounting, offset somewhat by a $1.4 million
inventory adjustment to reduce the amount recorded for stores (spare parts)
inventory to the value of inventory on hand based on a physical count.

26

Gross Profit. Gross profit margin decreased to 10% for the nine months
ended September 30, 2002 from 12% for the nine months ended September 30, 2001,
due to the factors discussed above. Excluding derivative items, gross profit
margin was 6% for the nine months ended September 30, 2002, compared with 12%
for the same period in 2001.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $13.6 million, or approximately 45%, for
the nine months ended September 30, 2002, as compared to the nine months ended
September 30, 2001. The decrease is primarily comprised of non-cash items,
including $1.9 million related to a reduction in bad debt expense, $2.0 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,
$7.1 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 $1.6 million decrease in depreciation and amortization expense
caused by the revaluation of property, plant and equipment and intangibles upon
emergence from bankruptcy.

Change in Fair Value of Derivatives. For the nine months ended September
30, 2002, the change in fair value of the derivative positions was a net
unrealized gain of $13.3 million. The $13.3 million increase in fair value
included $9.2 million related to the Disputed Derivatives and $4.1 million
related to the Approved Derivatives. For the nine months ended September 30,
2001, the change in fair value of the derivative positions was a net unrealized
loss of $93.1 million, of which $30.7 million related to the Approved
Derivatives and $62.4 million related to the Disputed Derivatives. See " -
Colorado River Commission Derivative Transactions" above and Note 3 to the
consolidated financial statements.

Asset impairment and other charges. Other charges of $4.3 million for the
nine months ended September 30, 2002 included approximately $1.9 million of
severance expense and $0.7 million of costs related to idling the Tacoma plant,
$0.4 million of severance expense related to staff reductions at the Cornwall
plant, $0.6 million of executive severance expense, and $0.5 million of legal
expense related to Pioneer's emergence from bankruptcy. Other charges for the
nine months ended September 30, 2001 of $9.2 million were primarily comprised of
severance expense and professional fees related to Pioneer's reorganization.

Interest Expense, Net. Contractual interest expense, net decreased by $30.3
million, or 68% during the nine months ended September 30, 2002 as compared to
the same period in 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 nine
months ended September 30, 2002 was primarily comprised of a $1.1 million gain
from the sale of assets. Other income, net for the nine months ended September
30, 2001 of $1.2 million was primarily comprised of a sales tax refund of $0.5
million and a foreign exchange gain.

Income Tax (Expense) Benefit. The income tax benefit for the nine months
ended September 30, 2002 was $2.8 million, reflecting foreign tax benefit on the
net loss from Pioneer's Canadian operations. Due to uncertainty as to the use of
Pioneer's U.S. net operating loss carryforwards and other deferred tax assets in
future years, 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 nine months ended September 30, 2002, Pioneer reduced the
valuation allowance in an amount equal to the income tax expense related to the
income from Pioneer's U.S. operations. The valuation allowance will be reviewed
at the end of 2002. Income tax expense of $5.0 million was recorded for the nine
months ended September 30, 2001.

Net Income (Loss). Due to the factors described above, net income for the
nine months ended September 30, 2002 was $6.5 million, compared to a net loss of
$136.9 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 nine months ended September 30, 2001, the net loss, excluding goodwill
amortization expense, would have been $69.7 million and $130.4 million,
respectively, and basic and diluted loss per share, excluding goodwill
amortization expense, would have been $6.04 and $11.30, respectively.

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 Extinguishment of
Debt," and allows for only those gains or losses on the extinguishment of debt
that meet the criteria of

27

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.

28

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 nine months ended September
30, 2002.

The information in the table below presents the electricity futures and
options positions outstanding as of September 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 - 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."

29

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 a long-term hydropower
contract allows Pioneer to purchase approximately 50% of the Henderson
facility's power requirements at favorable rates. Since the contract is not a
derivative and the power purchased under the contract cannot be resold by
Pioneer at market rates, the fair market value of the hydropower contract has
not been recorded by Pioneer in its financial statements. However, employing the
same valuation methodology to the hydropower contract as to the derivatives, the
contract would have a value to Pioneer of approximately $62.6 million at
September 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 $18.7 million at September 30, 2002.

ITEM 4. CONTROLS AND PROCEDURES

Within the 90-day period prior to the date of this report, Pioneer carried
out an evaluation, under the supervision and with the participation of Pioneer's
management, including Pioneer's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Pioneer's
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities
Exchange Act of 1934 (the "Exchange Act"). Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that Pioneer's
disclosure controls and procedures are effective in timely alerting them to
material information relating to Pioneer (including its consolidated
subsidiaries) required to be included in Pioneer's Exchange Act filings.

There have been no significant changes in Pioneer's internal controls or in
other factors that could significantly affect internal controls subsequent to
the date Pioneer carried out its evaluation.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For information about litigation involving Pioneer, see Note 3 to the
consolidated financial statements in Part I of this report, which is hereby
incorporated by reference into this Item 1.

ITEM 5. OTHER INFORMATION

Annual Meeting of Shareholders. On December 31, 2001, Pioneer's plan of
reorganization was implemented. The plan of reorganization provided for a new
board of directors consisting of five members, including Michael J. Ferris, the
former Chief Executive Officer of Pioneer and a director prior to implementation
of the plan, and four members appointed by a committee of the senior secured
creditors of Pioneer. Effective as of September 17, 2002, Mr. Ferris resigned
from his position as Chief Executive Officer and as a member of Pioneer's board
of directors. The board of directors currently consists of David N. Weinstein
(chairman), Marvin E. Lesser, Michael Y. McGovern, and Gary Rosenthal, each of
whom was designated as a director pursuant to the plan of reorganization. The
plan of reorganization provided that the term of office of each director would
expire at the first annual meeting of shareholders following December 31, 2001
or his earlier resignation or removal. Because the members of the board of
directors were appointed as of December 31, 2001, as well as the costs
associated with holding an annual meeting of shareholders in 2002, Pioneer has
determined not to hold an annual meeting of shareholders in 2002. Pioneer
currently intends to hold its next annual meeting of shareholders in May 2003.

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,"

30

"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 and the
results of the related litigation;

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.

31

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

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 July 16, 2002, PCI filed a report on Form 8-K. Under Item 5,
"Other Events," Pioneer reported that (i) on July 9, 2002, the
Colorado River Commission ("CRC") was served with a complaint
filed on June 11, 2002, by Pioneer Americas LLC ("Pioneer
Americas") in the District Court of Harris County, Texas seeking
a declaratory judgment that Pioneer Americas is not liable for
the Disputed Derivatives or the Rejected Derivatives, (ii) 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 contending
that the Texas state court does not have jurisdiction over CRC or
the controversy, and seeking 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
and seeking specific performance by Pioneer of the contracts with
CRC and unspecified damages and (iii) 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 and that the CRC has also adopted
regulations that purport to unilaterally add additional terms to
the contractual relationship between CRC and Pioneer Americas.

On September 17, 2002, Pioneer filed a report on Form 8-K. Under
Item 5, "Other Events," Pioneer reported that on September 18,
2002, Pioneer issued a press release announcing the selection by
its board of directors of Michael Y. McGovern, then a director of
Pioneer, to serve as its President and Chief Executive Officer
replacing Michael J. Ferris in those positions.

32

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: November 14, 2002 By: /s/ Philip J. Ablove
-----------------------------
Philip J. Ablove
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

33

CERTIFICATION

I, Philip J. Ablove, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Pioneer Companies,
Inc. (the "registrant");

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 14, 2002

/s/ Philip J. Ablove
- -----------------------------
Philip J. Ablove
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

CERTIFICATION

I, Michael Y. McGovern, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Pioneer Companies,
Inc. (the "registrant");

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and

c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):

a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.

Date: November 14, 2002

/s/ Michael Y. McGovern
- ------------------------------------
Michael Y. McGovern
President and Chief Executive Officer

EXHIBIT INDEX

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