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 MARCH 31, 2004

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 000-31230

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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Indicate by check mark whether the registrant 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 May 7, 2004, there were 10,027,962 shares of common stock of Pioneer
Companies, Inc. outstanding.

TABLE OF CONTENTS

Page
----

PART I -- FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Consolidated Balance Sheets -- March 31, 2004 and December 31, 2003 3

Consolidated Statements of Operations -- Three Months Ended March 31, 2004 and 2003 4

Consolidated Statements of Cash Flows -- Three Months Ended March 31, 2004 and 2003 5

Notes to Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13

Item 3. Quantitative and Qualitative Disclosures About Market Risk 19

Item 4. Controls and Procedures 19

PART II -- OTHER INFORMATION

Item 5. Other Information 19

Item 6. Exhibits and Reports on Form 8-K 21

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. Forward-looking statements relate
to matters that are not historical facts. Such statements involve risks and
uncertainties, including, but not limited to, Pioneer's high financial leverage,
global political and economic conditions, the demand and prices for Pioneer's
products and raw materials, 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, 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.

2

PART I -- FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

PIONEER COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT PAR VALUE)

MARCH 31, DECEMBER 31,
2004 2003
--------------- ------------

ASSETS
Current assets:
Cash and cash equivalents $ 2,502 $ 1,946
Accounts receivable, net of allowance for doubtful accounts of $2,294 at
March 31, 2004 and $2,947 at December 31, 2003 38,751 38,800
Inventories, net 13,612 15,707
Prepaid expenses and other current assets 4,092 5,018
-------------- ------------
Total current assets 58,957 61,471
Property, plant and equipment:
Land 6,520 6,520
Buildings and improvements 30,032 29,522
Machinery and equipment 191,630 190,953
Construction in progress 3,870 2,975
-------------- ------------
232,052 229,970
Less: accumulated depreciation (49,255) (40,436)
-------------- ------------
Net property, plant and equipment 182,797 189,534
Other assets, net 4,288 3,931
Excess reorganization value over the fair value of identifiable assets 84,064 84,064
-------------- ------------
Total assets $ 330,106 $ 339,000
============== ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 16,459 $ 13,027
Accrued liabilities 23,634 17,369
Short-term debt, including current portion of long-term debt 8,372 18,485
--------------- ------------
Total current liabilities 48,465 48,881
Long-term debt, less current portion 202,669 203,803
Accrued pension and other employee benefits 24,983 24,584
Other long-term liabilities 42,274 42,742
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, $.01 par value, authorized 10,000 shares, none issued or
outstanding -- --
Common stock, $.01 par value, authorized 50,000 shares, issued and
outstanding 10,011 shares 100 100
Additional paid-in capital 10,959 10,941
Other comprehensive loss (5,481) (5,481)
Retained earnings 6,137 13,430
--------------- ------------
Total stockholders' equity 11,715 18,990
--------------- ------------
Total liabilities and stockholders' equity $ 330,106 $ 339,000
=============== ============

See notes to consolidated financial statements.

3

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

THREE MONTHS ENDED
MARCH 31,
----------------------
2004 2003
---------- ----------

Revenues $ 90,026 $ 89,031
Cost of sales - product (86,311) (84,591)
Cost of sales - derivatives - (20,999)
---------- ----------
Total cost of sales (86,311) (105,590)
---------- ----------
Gross profit (loss) 3,715 (16,559)
Selling, general and administrative expenses (6,589) (8,358)
Change in fair value of derivatives - 87,271
Asset impairment and other items (165) (40,818)
---------- ----------
Operating income (loss) (3,039) 21,536
Interest expense, net (4,642) (4,811)
Other income (expense), net 126 (1,880)
---------- ----------
Income (loss) before income taxes (7,555) 14,845
Income tax benefit 262 1,533
---------- ----------
Net income (loss) $ (7,293) $ 16,378
========== ==========
Net income (loss) per share:
Basic $ (0.73) $ 1.64
Diluted $ (0.73) $ 1.63
Weighted average number of shares outstanding:
Basic 10,006 10,000
Diluted 10,006 10,029

See notes to consolidated financial statements.

4

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

THREE MONTHS ENDED
MARCH 31,
----------------------------
2004 2003
------------ ------------

Operating activities:
Net income (loss) $ (7,293) $ 16,378
Adjustments to reconcile net income (loss) to net cash flows
from operating activities:
Depreciation and amortization 8,884 5,194
Provision for (recovery of) losses on accounts receivable (653) 1,754
Deferred tax benefit (262) (1,533)
Derivatives - cost of sales and change in fair value - (66,272)
Loss on disposals of assets 175 -
Asset impairment - 40,818
Currency exchange loss (gain) (129) 1,883
Net effect of changes in operating assets and liabilities 13,481 9,646
------------ ------------
Net cash flows from operating activities 14,203 7,868
------------ ------------
Investing activities:
Capital expenditures (2,325) (1,724)
------------ ------------
Net cash flows from investing activities (2,325) (1,724)
------------ ------------
Financing activities:
Net payments under revolving credit arrangements (10,209) (244)
Payments on debt (1,166) (2,025)
Proceeds from issuance of stock 18 -
------------ ------------
Net cash flows from financing activities (11,357) (2,269)
------------ ------------
Effect of exchange rate changes on cash 35 359
------------ ------------
Net change in cash and cash equivalents 556 4,234
Cash and cash equivalents at beginning of period 1,946 2,789
------------ ------------
Cash and cash equivalents at end of period $ 2,502 $ 7,023
============ ============

See notes to consolidated financial statements.

5

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

1. ORGANIZATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Pioneer
Companies, Inc. (the "Company" or "PCI") and its consolidated subsidiaries
(collectively, "Pioneer"). All significant intercompany balances and
transactions have been eliminated in consolidation.

Pioneer operates in one industry segment, the production, marketing and
selling of chlor-alkali and related products. Pioneer operates in one geographic
area, North America. Pioneer conducts its primary business through its operating
subsidiaries: PCI Chemicals Canada Company ("PCI Canada") and Pioneer Americas
LLC ("Pioneer Americas").

The consolidated balance sheet at March 31, 2004, and the consolidated
statements of operations and cash flows for the periods presented are unaudited
and reflect all adjustments, which consist only of normal recurring items, that
management considers necessary for a fair presentation. Operating results for
the first three months of 2004 are not necessarily indicative of results to be
expected for the year ending December 31, 2004. All dollar amounts in the
tabulations in the notes to the consolidated financial statements are stated in
thousands of dollars unless otherwise indicated. Certain amounts have been
reclassified in the prior period to conform to the current period presentation.

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires estimates
and assumptions that affect the reported amounts as well as certain disclosures.
Pioneer's financial statements include amounts that are based on management's
best estimates and judgments. Actual results could differ from those estimates.

The consolidated balance sheet at December 31, 2003, is derived from the
December 31, 2003, audited consolidated financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America, 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 Company's Annual
Report on Form 10-K for the year ended December 31, 2003.

2. DEBT

Debt consisted of the following:

MARCH 31, DECEMBER 31,
2004 2003
--------- ------------

Senior Secured Debt:
Senior Secured Floating Rate Guaranteed Notes, due December 2006,
variable rates based on the three-month LIBOR
rate plus 3.5% ("Senior Guaranteed Notes")...................................................... $ 43,151 $ 43,151
Senior Floating Rate Term Notes, due December 2006, variable interest
rates based on the three-month LIBOR rate
plus 3.5% ("Senior Floating Notes")............................................................. 4,413 4,413
10% Senior Secured Guaranteed Notes, due December 2008 ("10% Senior
Secured Notes")................................................................................. 150,000 150,000
Revolving credit facility, variable interest rates based
on U.S. prime rate plus a margin ranging from 0.5% to
1.25% or LIBOR plus a margin ranging from 2.50% to 3.25% expiring December
31, 2006, as amended ("Revolver")............................................................... 6,614 16,823
Other debt:
Unsecured, non-interest-bearing, long-term debt, denominated in Canadian dollars
(amounts below are in Canadian dollars), original face value of $5.5 million,
payable in five annual installments of $1.0 million and a final payment of
$0.5 million, beginning January 10, 2002, with an effective interest rate of
8.25%, net of unamortized discount of $0.1 million and $0.2 million at March
31, 2004, and December 31, 2003, respectively................................................... 1,678 2,432
Other notes, maturing in various years through 2014, with various installments,
at various interest rates....................................................................... 5,185 5,469
--------- ------------
Total.......................................................................................... 211,041 222,288
Short-term debt, including current maturities of long-term debt................................... (8,372) (18,485)
--------- ------------
Long-term debt, less current maturities........................................................ $ 202,669 $ 203,803
========= ============

6

Senior secured debt outstanding under various debt instruments consists of
the Senior Guaranteed Notes, the Senior Floating Notes, the 10% Senior Secured
Notes and the Revolver. Collectively, the $197.6 million in Senior Guaranteed
Notes, Senior Floating Notes and 10% Senior Secured Notes are referred to as the
Senior Notes, and together with the Revolver are referred to as the Senior
Secured Debt. In addition, at March 31, 2004, Pioneer had a $1.7 million
unsecured non-interest bearing instrument payable to a critical vendor for the
settlement of pre-petition amounts owed to that vendor, which contains a
covenant that 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); $0.7 million payable over several years to a state taxing
authority; and $4.5 million of other debt outstanding, comprised of notes
maturing in various years through 2014.

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. Borrowings under the Revolver are available
through December 31, 2006, so long as no default exits and all conditions to
borrowings are met. Borrowings under the Revolver accrue interest at a rate
equal to either the prime rate plus a margin or LIBOR plus a margin. Pioneer
incurs a fee on the unused amount of the facility at a rate of 0.375% per year.
On March 31, 2004, the borrowing base under the Revolver was $30.0 million.
Borrowing availability net of outstanding letters of credit was $20.7 million,
and Liquidity (consisting of cash, less outstanding disbursements, and borrowing
availability) was $22.2 million.

The Revolver requires Pioneer to maintain Liquidity (as defined) of at
least $5.0 million, and limit its capital expenditures to $25.0 million in each
fiscal year. At March 31, 2004, Liquidity was $22.2 million, consisting of
borrowing availability of $20.7 million and cash of $2.5 million, less
outstanding disbursements of $1.0 million. Capital expenditures were $2.3
million during the three months ended March 31, 2004. One of the covenants in
the Revolver requires Pioneer to generate at least $21.550 million of
Lender-Defined EBITDA (as defined) for each twelve-month period ending at the
end of each fiscal quarter. Lender-Defined EBITDA for the twelve months ended
March 31, 2004, was $36.6 million. 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).

If in the future the required Lender-Defined EBITDA level under the
Revolver is not met or if Pioneer fails to comply with other covenants, and the
lender does not waive Pioneer's non-compliance, Pioneer will be in default under
the terms of the Revolver. Moreover, if conditions constituting a material
adverse change occur, the lender can 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 it would lose the
ability to operate on a day-to-day basis. In addition, a default under the
Revolver would allow the lender to accelerate the outstanding indebtedness under
the Revolver and would also result in a cross-default under the Senior Notes
that would provide the holders of the Senior Notes with the right to demand
immediate repayment.

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 (collectively, the "Tranche A Notes") is payable quarterly on March 31st,
June 30th, September 30th and December 31st.

Pioneer is required to make mandatory redemptions of the Tranche A Notes
from and to the extent of 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), and if there is a change of control.

The Tranche A Notes also provide that, within 60 days after each calendar
quarter during 2003 through 2006, Pioneer is required to redeem and prepay the
greater of (a) an amount determined on the basis of Pioneer Americas' net income
before extraordinary items, other income, net, interest, income taxes,
depreciation and amortization ("Tranche A Notes EBITDA") and (b) an amount
determined on the basis of the Company's excess cash flow and average liquidity,
as defined. With respect to the Tranche A Notes EBITDA, the amount that is to be
redeemed and prepaid is (i) $2.5 million if Tranche A Notes EBITDA for a
calendar quarter is $20 million or more but less than $25 million, (ii) $5
million if Tranche A Notes EBITDA for a calendar quarter is $25 million or more
but less than $30 million and (iii) $7.5 million if Tranche A Notes EBITDA for a
calendar quarter is $30 million or more, in each case plus accrued and unpaid
interest to the date of redemption and prepayment. With respect to excess cash
flow, the amount that is to be redeemed and prepaid is a percentage of the
Company's consolidated net income, without regard to extraordinary gains and
losses and net after-tax other income, plus depreciation, amortization and other
non-cash charges, and less all cash principal payments, capital expenditures and
extraordinary cash gains or cash income received, plus or minus cash changes in
working capital. The applicable percentage is to be determined on the basis of
the Company's average liquidity, which is the average of cash plus borrowing
availability under the Revolver for the quarter or for the 45-day period
following the end of the quarter. Each holder of Senior Floating Notes may
refuse any such prepayment. As a result of the application of these provisions
with respect to the first quarter of 2003, Pioneer redeemed and prepaid $2.4
million of the principal amount of the Tranche A Notes on May 23, 2003. One
holder refused the prepayment

7

of the balance of the $2.5 million that was to have been prepaid on that date.
No redemption and prepayment of Tranche A Notes was required with respect to any
other calendar quarter during 2003 or with respect to the quarter ended March
31, 2004.

The holders of the 10% Senior Secured Notes may require Pioneer to redeem
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 Tranche A 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 Tranche A Notes and the 10% Senior
Secured Notes in minimum amounts of $1.0 million or more, and Pioneer may, at
its option, terminate the Revolver. If the Revolver is terminated early, there
will be a premium due of $600,000 if the termination occurs on or before
December 31, 2004, and of $300,000 if the termination occurs thereafter. On or
after December 31, 2005, Pioneer may redeem some or all of the 10% Senior
Secured Notes by paying the holders a percentage declining from 105% to 100%
(depending on the year of redemption) of the stated principal amount to be
redeemed 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 or prohibiting 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 agreements also include customary
events of default, including one in the Revolver relating to a change of
control. 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 does not anticipate that the cash that it will generate from its
operations will be sufficient to repay the Revolver and the Tranche A Notes when
they are due in December 2006, or the 10% Senior Secured Notes when they are due
in December 2008. In such events, it would be necessary to refinance the
indebtedness, issue new equity or sell assets. The terms of any necessary new
borrowings would be determined by then-current market conditions and other
factors, and could impose significant additional burdens on Pioneer's financial
condition and operating flexibility, and the issuance of new equity securities
could dilute the interest of Pioneer's existing stockholders. Pioneer cannot
provide any assurance that it would be able to refinance any of its
indebtedness, raise equity on commercially reasonable terms or at all, or sell
assets, which failure could cause Pioneer to default on its obligations and
impair its liquidity. Pioneer's inability to generate sufficient cash flow to
satisfy its debt obligations, or to refinance its obligations on commercially
reasonable terms, would have a material adverse effect on its business,
financial condition and results of operations.

3. TACOMA FACILITY

In March 2004 Pioneer completed its evaluation of the resumption of
operations at the Tacoma chlor-alkali facility, which was idled in March 2002.
As a result of the evaluation, Pioneer decided that the chlor-alkali production
operations at the facility would not be restarted. However, Pioneer continues to
use the facility as a terminal and calcium chloride production facility. Pioneer
recorded additional depreciation expense of $3.4 million related to the
non-productive chlor-alkali assets at the Tacoma facility during the quarter
ended March 31, 2004. As of March 31, 2004, the residual net book value of the
Tacoma facility was $1.3 million. Pioneer is continuing to evaluate other uses
of the facility.

4. SETTLEMENT OF DISPUTE WITH THE COLORADO RIVER COMMISSION OF NEVADA

All of the conditions of the settlement of Pioneer's dispute with the
Colorado River Commission of Nevada ("CRC") were satisfied on March 3, 2003. As
a result of the settlement, which was effective as of January 1, 2003, Pioneer
was released from all claims for liability with respect to electricity
derivatives positions, and all litigation between Pioneer and CRC was dismissed.
As of December 31, 2002, Pioneer had recorded a net liability of $87.3 million
for the net mark-to-market loss on outstanding derivative positions, and a
receivable from CRC of $21.0 million for estimated proceeds received by CRC for
matured derivative contracts. Due to the settlement of the dispute with CRC,
both the $87.3 million net liability and the $21.0 million receivable were
reversed in the first quarter of 2003, resulting in a non-cash net gain of $66.3
million. These amounts appear in the consolidated statement of operations for
the three months ended March 31, 2003, as $87.3 million of operating income
under the caption "Change in Fair Value of Derivatives" to reflect the reversal
of the previously recorded mark-to-market loss, and $21.0 million of "Cost of
Sales - Derivatives," reflecting the reversal of the receivable from CRC.

8

5. ASSET IMPAIRMENT AND OTHER

Pioneer evaluates long-lived assets for impairment whenever indicators of
impairment exist. Under applicable accounting standards, if the sum of the
future cash flows expected to result from an asset, undiscounted and without
interest, is less than the book value of the asset, asset impairment must be
recognized. The amount of impairment is calculated by subtracting the fair value
of the asset from the book value of the asset. Fluctuations in anticipated
future product prices and energy costs can have a material impact on Pioneer's
expectations of future cash flows.

Under a new supply agreement that was entered into with CRC in connection
with the settlement discussed in Note 4, CRC provides power to meet the majority
of the needs of Pioneer's Henderson plant at market rates. The market rates are
expected to remain at levels higher than the rates under the long-term
hydropower contracts that were assigned to the Southern Nevada Water Authority
as part of the settlement. As a result, Pioneer performed an impairment test and
determined that the book value of the Henderson facility exceeded the
undiscounted sum of future expected cash flows over the remaining life of the
facility. Pioneer then calculated the estimated fair value of the facility by
discounting expected future cash flows using a risk-adjusted discount rate of
13%. Based on that analysis, Pioneer recorded an impairment charge of $40.8
million in the first quarter of 2003.

Other items in the three months ended March 31, 2004, included a $0.2
million loss from disposals of fixed assets.

6. NET INCOME (LOSS) PER SHARE

Basic net income (loss) per share is based on the weighted average number
of shares outstanding during the period. Diluted net income (loss) per share
considers, in addition to the above, the dilutive effect of potentially issuable
shares pursuant to stock option plans (see Note 8) during the period.

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

THREE MONTHS ENDED
MARCH 31,
-------------------------
2004 2003
---------- -------

Net income (loss) $ (7,293) $16,378
========== =======
Basic net income (loss) per share:
Weighted average number of shares
outstanding 10,006 10,000
========== =======
Net income (loss) per share $ (0.73) $ 1.64
========== =======
Diluted net income (loss) per share:
Weighted average number of shares
outstanding 10,006 10,029
========== =======
Net income (loss)per share $ (0.73) $ 1.63
========== =======

Options to purchase 639,069 and 285,000 shares that were outstanding
during the three months ended March 31, 2004 and 2003, respectively, were not
included in the computation of diluted earnings per share because their
inclusion would be anti-dilutive.

7. INVENTORIES

Inventories consisted of the following:

MARCH 31, DECEMBER 31,
2004 2003
--------- ------------

Raw materials, supplies and parts, net.................... $ 7,281 $ 7,673
Finished goods............................................ 6,331 8,034
--------- ------------
$ 13,612 $ 15,707
========= ============

9

8. STOCK BASED COMPENSATION

At March 31, 2004, PCI had options for the purchase of 639,069 shares of
common stock outstanding with exercise prices ranging from $2.00 to $8.15 per
share, a weighted average exercise price of $3.33 and a weighted average
remaining contractual life of 8.38 years. No options were granted during the
three months ended March 31, 2004 and 2003. Stock options generally expire 10
years from the date of grant and fully vest after three years.

Pioneer accounts for stock options under Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees." Stock
options issued under Pioneer's stock option plans have no intrinsic value at the
grant date, and Pioneer recorded no compensation costs under APB 25. Had
compensation expense for the stock option plans been determined in accordance
with Statement of Financial Accounting Standards ("SFAS") 123, "Accounting for
Stock-Based Compensation", Pioneer's pro-forma net income (loss) and income
(loss) per share would have been as follows:

THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
-------- --------

Net income(loss):
As reported................................................. $ (7,293) $ 16,378
Pro forma stock compensation expense........................ (114) (99)
-------- --------
Pro forma net income (loss).................................... $ (7,407) $ 16,279
======== ========
Income (loss) per common share:
Basic, as reported.......................................... $ (0.73) $ 1.64
Basic, pro forma............................................ $ (0.74) $ 1.63
Diluted, as reported........................................ $ (0.73) $ 1.63
Diluted, pro forma.......................................... $ (0.74) $ 1.62

9. SUPPLEMENTAL CASH FLOW INFORMATION

The net effect of changes in operating assets and liabilities was as
follows:

THREE MONTHS ENDED
MARCH 31,
------------------------
2004 2003
---------- ----------

Accounts receivable $ 654 $ (2,562)
Inventories 2,036 (1,544)
Prepaid expenses and other current assets 893 980
Other assets (381) 800
Accounts payable 3,420 1,050
Accrued liabilities 6,259 994
Other long-term liabilities 600 9,928
---------- ----------
Net change in operating assets and liabilities $ 13,481 $ 9,646
========== ==========

Following are supplemental disclosures of cash flow information:

THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
------ ---------

Cash payments for:
Interest $ 920 $ 1,005
Income taxes - -

10. 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.

10

Pioneer Americas (a wholly-owned subsidiary of PCI Canada) is the issuer
of the $43.2 million of Senior Guaranteed Notes and $4.4 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.

Condensed consolidating financial information for PCI and its
wholly-owned subsidiaries is presented below. Separate financial statements of
PCI Canada and Pioneer Americas are not provided because Pioneer does not
believe that such information would be material to investors or lenders of the
Company.

CONDENSED CONSOLIDATING BALANCE SHEET - MARCH 31, 2004 (IN THOUSANDS)

PCI PIONEER OTHER
PCI CANADA AMERICAS GUARANTORS
-------- --------- --------- ----------

ASSETS
Current assets:
Cash and cash equivalents............................................ $ - $ 1,446 $ 1,052 $ 3
Accounts receivable, net............................................. - 10,593 28,157 -
Inventories, net..................................................... - 5,131 8,482 -
Prepaid expenses and other current assets............................ 1,941 1,787 363 -
-------- --------- --------- ----------
Total current assets.......................................... 1,941 18,958 38,055 3
Property, plant and equipment, net .................................... - 110,784 70,485 1,528
Other assets........................................................... - 164 4,125 -
Intercompany receivable................................................ - 90,933 - 69,559
Investment in subsidiaries............................................. 18,320 - - -
Excess reorganization value over the fair value of
identifiable assets................................................. - 84,063 - -
-------- --------- --------- ----------
Total assets.................................................. $ 20,261 $ 304,902 $ 112,665 $ 71,090
======== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable..................................................... $ - $ 7,301 $ 9,158 $ -
Accrued liabilities.................................................. - 10,485 13,146 -
Current portion of long-term debt.................................... - 633 7,712 28
-------- --------- --------- ----------
Total current liabilities..................................... - 18,419 30,016 28
Long-term debt, less current portion................................... - 151,045 51,567 57
Investment in subsidiary............................................... - 152,590 - 447
Intercompany payable................................................... 8,546 594 151,352 -
Accrued pension and other employee benefits............................ - 8,073 16,911 -
Other long-term liabilities............................................ - 25,369 15,409 1,496
Stockholders' equity (deficiency in assets) ........................... 11,716 (51,189) (152,590) 69,062
-------- --------- --------- ----------
Total liabilities and stockholders' equity (deficiency
in assets)................................................. $ 20,261 $ 304,902 $ 112,665 $ 71,090
======== ========= ========= ==========

PIONEER
ELIMINATIONS CONSOLIDATED
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents............................................ $ - $ 2,502
Accounts receivable, net............................................. - 38,751
Inventories, net..................................................... - 13,612
Prepaid expenses and other current assets............................ - 4,092
------------ ------------
Total current assets.......................................... - 58,957
Property, plant and equipment, net .................................... - 182,797
Other assets........................................................... - 4,288
Intercompany receivable................................................ (160,492) -
Investment in subsidiaries............................................. (18,320) -
Excess reorganization value over the fair value of
identifiable assets................................................. - 84,064
------------ ------------
Total assets.................................................. $ (178,812) $ 330,106
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable..................................................... $ - $ 16,459
Accrued liabilities.................................................. - 23,634
Current portion of long-term debt.................................... - 8,372
------------ ------------
Total current liabilities..................................... - 48,465
Long-term debt, less current portion................................... - 202,669
Investment in subsidiary............................................... (153,037) -
Intercompany payable................................................... (160,492) -
Accrued pension and other employee benefits............................ - 24,983
Other long-term liabilities............................................ - 42,274
Stockholders' equity (deficiency in assets) ........................... 134,717 11,715
------------ ------------
Total liabilities and stockholders' equity (deficiency
in assets)................................................. $ (178,812) $ 330,106
============ ============

CONDENSED CONSOLIDATING BALANCE SHEET -- DECEMBER 31, 2003 (IN THOUSANDS)

PCI PIONEER OTHER
PCI CANADA AMERICAS GUARANTORS
--------- --------- --------- ----------

ASSETS
Current assets:
Cash and cash equivalents............................................. $ - $ 500 $ 1,422 $ 24
Accounts receivable, net.............................................. - 10,218 28,582 -
Inventories, net...................................................... - 6,219 9,488 -
Prepaid expenses and other current assets............................. 2,812 1,341 865 -
--------- --------- --------- ----------
Total current assets............................................... 2,812 18,278 40,357 24
Property, plant and equipment, net...................................... - 113,615 74,390 1,528
Other assets, net....................................................... - 166 3,766 -
Intercompany receivable................................................. - 87,356 - 67,581
Investment in subsidiaries.............................................. 25,376 - - -
Excess reorganization value over fair value of identifiable Assets...... - 84,064 - -
--------- --------- --------- ----------
Total assets..................................................... $ 28,188 $ 303,478 $ 118,513 $ 69,133
========= ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable...................................................... $ - $ 5,875 $ 7,152 $ -
Accrued liabilities................................................... - 5,751 11,585 33
Current portion of long-term debt..................................... - 627 17,830 28
--------- --------- --------- ----------
Total current liabilities.......................................... - 12,253 36,567 61
Long-term debt, less current portion.................................. - 151,805 51,936 62
Investment in subsidiary.............................................. - 144,036 - 445
Intercompany payable.................................................. 9,198 3,527 142,212 -
Accrued pension and other employee benefits........................... - 8,050 16,534 -
Other long-term liabilities........................................... - 25,856 15,301 1,585
Stockholders' equity (deficiency in assets)........................... 18,990 (42,049) (144,036) 66,980
--------- --------- --------- ----------
Total liabilities and stockholders' equity......................... $ 28,188 $ 303,478 $ 118,513 $ 69,133
========= ========= ========= ==========

PIONEER
ELIMINATIONS CONSOLIDATED
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents............................................. $ - $ 1,946
Accounts receivable, net.............................................. - 38,800
Inventories, net...................................................... - 15,707
Prepaid expenses and other current assets............................. - 5,018
------------ ------------
Total current assets............................................... - 61,471
Property, plant and equipment, net...................................... - 189,534
Other assets, net....................................................... - 3,931
Intercompany receivable................................................. (154,937) -
Investment in subsidiaries.............................................. (25,376) -
Excess reorganization value over fair value of identifiable Assets...... - 84,064
------------ ------------
Total assets..................................................... $ (180,313) $ 339,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY IN ASSETS)
Current liabilities:
Accounts payable...................................................... $ - $ 13,027
Accrued liabilities................................................... - 17,369
Current portion of long-term debt..................................... - 18,485
------------ ------------
Total current liabilities.......................................... - 48,881
Long-term debt, less current portion.................................. - 203,803
Investment in subsidiary.............................................. (144,481) -
Intercompany payable.................................................. (154,937) -
Accrued pension and other employee benefits........................... - 24,584
Other long-term liabilities........................................... - 42,742
Stockholders' equity (deficiency in assets)........................... 119,105 18,990
------------ ------------
Total liabilities and stockholders' equity......................... $ (180,313) $ 339,000
============ ============

11

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - THREE MONTHS ENDED MARCH 31,
2004 (IN THOUSANDS)

PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ---------- ------------ ------------

Revenues................................................. $ - $ 43,745 $ 66,693 $ - $ (20,413) $ 90,026
Cost of sales............................................ - (38,890) (67,834) - 20,413 (86,311)
-------- ---------- ---------- ---------- ------------ ------------
Gross profit............................................. - 4,856 (1,141) - - 3,715
Selling, general and administrative expenses............. (237) (2,047) (4,335) 31 (0) (6,589)
Asset impairment and other .............................. - (1) (163) - - (165)
-------- ---------- ---------- ---------- ------------ ------------
Operating income (loss).................................. (237) 2,807 (5,640) 31 (0) (3,039)
Interest expense, net.................................... - (3,786) (856) (1) - (4,642)
Other income (expense), net.............................. - 131 (2,059) 2,054 1 126
-------- ---------- ---------- ---------- ------------ ------------
Income (loss) before income taxes........................ (237) (848) (8,554) 2,084 1 (7,555)
Income tax expense ...................................... - 262 - - - 262
-------- ---------- ---------- ---------- ------------ ------------
Net income (loss) before equity in earnings (loss) of
subsidiary............................................ (237) (586) (8,554) 2,084 1 (7,293)
Equity in net earnings (loss) of subsidiary.............. (7,056) (8,554) - (1) 15,611 -
-------- ---------- ---------- ---------- ------------ ------------
Net income (loss)........................................ $ (7,293) $ (9,140) $ (8,554) $ 2,083 $ 15,611 $ (7,293)
======== ========== ========== ========== ============ ============

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS - THREE MONTHS ENDED MARCH 31,
2003 (IN THOUSANDS)

PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ---------- ---------- ---------- ------------ ------------

Revenues................................................. $ - $ 40,608 $ 68,177 $ - $ (19,754) $ 89,031
Cost of sales............................................ - (38,332) (87,093) 81 19,754 (105,590)
-------- ---------- ---------- ---------- ------------ ------------
Gross profit (loss)...................................... - 2,276 (18,916) 81 - (16,559)
Selling, general and administrative expenses............. (91) (1,981) (6,306) 20 - (8,358)
Change in fair value of derivatives...................... - - 87,271 - - 87,271
Asset impairment and other............................... - - (40,818) - - (40,818)
-------- ---------- ---------- ---------- ------------ ------------
Operating income (loss).................................. (91) 295 21,231 101 - 21,536
Interest expense, net.................................... - (3,791) (1,018) (2) - (4,811)
Other income (expense), net.............................. - (1,881) (7,163) 7,164 - (1,880)
-------- ---------- ---------- ---------- ------------ ------------
Income (loss) before income taxes........................ (91) (5,377) 13,050 7,263 - 14,845
Income tax expense....................................... - 1,533 - - - 1,533
-------- ---------- ---------- ---------- ------------ ------------
Net income (loss) before equity in earnings of subsidiary (91) (3,844) 13,050 7,263 - 16,378
Equity in net earnings of subsidiary..................... 16,469 13,050 - - (29,519) -
-------- ---------- ---------- ---------- ------------ ------------
Net income .............................................. $ 16,378 $ 9,206 $ 13,050 $ 7,263 $ (29,519) $ 16,378
======== ========== ========== ========== ============ ============

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- THREE MONTHS ENDED MARCH 31,
2004 (IN THOUSANDS)

PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS CONSOLIDATED
--------- -------- ----------- ---------- ------------

Cash flows from operating activities:
Net cash flows from operating activities.................. $ (18) $ 2,149 $ 12,088 $ (16) $ 14,203
Cash flows from investing activities:
Capital expenditures.............................................. - (445) (1,880) - (2,325)
--------- -------- ----------- ---------- ------------
Net cash flows from investing activities.................. - (445) (1,880) - (2,325)
--------- -------- ----------- ---------- ------------
Cash flows from financing activities:
Net payments under revolving credit arrangements.................... - - (10,209) - (10,209)
Payments on debt.................................................. - (792) (369) (5) (1,166)
Proceeds from issuance of stock................................... 18 - - - 18
--------- -------- ----------- ---------- ------------
Net cash flows from financing activities.................. 18 (792) (10,578) (5) (11,357)
--------- -------- ----------- ---------- ------------
Effect of exchange rate changes on cash............................. - 35 - - 35
--------- -------- ----------- ---------- ------------
Net change in cash and cash equivalents............................. - 947 (371) (21) 556
Cash and cash equivalents at beginning of period.................... - 500 1,423 24 1,946
--------- -------- ----------- ---------- ------------
Cash and cash equivalents at end of period.......................... $ - $ 1,446 $ 1,052 $ 3 $ 2,502
========= ======== =========== ========== ============

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS -- THREE MONTHS ENDED MARCH 31,
2003 (IN THOUSANDS)

PCI PIONEER OTHER PIONEER
PCI CANADA AMERICAS GUARANTORS CONSOLIDATED
--------- -------- ----------- ---------- ------------

Cash flows from operating activities:
Net cash flows from operating activities.................. $ 1,013 $ 1,154 $ 5,696 $ 5 $ 7,868
--------- -------- ----------- ---------- ------------
Cash flows from investing activities:
Capital expenditures.............................................. - (710) (1,014) - (1,724)
--------- -------- ----------- ---------- ------------
Net cash flows from investing activities.................. - (710) (1,014) - (1,724)
--------- -------- ----------- ---------- ------------
Cash flows from financing activities:
Net proceeds under revolving credit arrangements.................. - - (244) - (244)
Payments on debt.................................................. (1,013) (649) (356) (7) (2,025)
--------- -------- ----------- ---------- ------------
Net cash flows from financing activities.................. (1,013) (649) (600) (7) (2,269)
--------- -------- ----------- ---------- ------------
Effect of exchange rate changes on cash............................. - 359 - - 359
--------- -------- ----------- ---------- ------------
Net change in cash and cash equivalents............................. - 154 4,082 (2) 4,234
Cash and cash equivalents at beginning of period.................... - 1,702 1,074 13 2,789
--------- -------- ----------- ---------- ------------
Cash and cash equivalents at end of period.......................... $ - $ 1,856 $ 5,156 $ 11 $ 7,023
========= ======== =========== ========== ============

12

11. PENSION AND OTHER POSTRETIREMENT BENEFITS

Effective February 29, 2004, Pioneer Americas froze benefits under its
defined benefit pension plans for substantially all U.S. salaried and union and
non-union hourly employees. The effect of the freezing of defined benefit
pension plan benefits will be accounted for as a curtailment pursuant to SFAS
88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits". As a result of the curtailment, the
projected benefit obligations for the Pioneer Americas pension plans decreased
by $3.1 million. The actuarial gain from such decrease was applied against
existing unrecognized actuarial losses and Pioneer recorded no curtailment gain
in its statement of operations for the quarter ended March 31, 2004.

The component of net periodic benefit costs related to Pioneer's defined
benefit pension plans for the three months ended March 31, 2004 and 2003 were:

Pension contributions, which are based on regulatory requirements, totaled
$0.3 million and $0 in the three months ended March 31, 2004 and 2003,
respectively. Required contributions in 2004 are expected to be $4.9 million to
$6.3 million.

The component of net periodic benefit costs related to Pioneer's post
retirement benefits other than pensions for the three months ended March 31,
2004 and 2003 were:

13

12. COMMITMENTS AND CONTINGENCIES

Present or future environmental laws and regulations 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 certain indemnities from previous owners and has
adequate environmental reserves covering known and estimable environmental
liabilities at its chlor-alkali plants and other facilities. There can be no
assurance, however, that such indemnity agreements will be adequate to protect
Pioneer from environmental liabilities at these sites or that such parties will
perform their obligations under the respective indemnity agreements. The failure
by such parties to perform under these indemnity agreements and/or any material
increase in Pioneer's environmental obligations will have a material adverse
effect on Pioneer's future results of operations and liquidity.

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.

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

Our annual report on Form 10-K for the year ended December 31, 2003,
provides a discussion of our business, including the chlor-alkali industry, our
customers and markets, the major components of our production process and costs
and the means we use to distribute our products.

The following discussion and analysis should be read in conjunction with
the information provided in the annual report on Form 10-K for the year ended
December 31, 2003, the consolidated financial statements and the related notes
thereto.

PRODUCT PRICES

Our quarterly average ECU netback (that is, the price of an
electrochemical unit, or "ECU," consisting of one ton of chlorine and 1.1 tons
of caustic soda, adjusted to eliminate the product transportation element) for
each of the most recent five quarters was as follows:

First Quarter 2003 $ 362
Second Quarter 2003 406
Third Quarter 2003 392
Fourth Quarter 2003 366
First Quarter 2004 339

In February 2004 we announced a $75 per ton price increase for chlorine,
but caustic soda prices continued to decline in the first quarter of 2004.
Continuing strong demand for chlorine led us to implement an order control
program in April 2004, under which we limit our chlorine customers to contract
volumes based on average purchases over the previous three months. To date,
demand for caustic soda has increased in the second quarter, and in May 2004 we
announced a $50 per ton price increase and implemented an order control program
for that product.

The chlorine price increase in the first quarter and the caustic soda
price increase in the second quarter were implemented when announced or as soon
as permitted by applicable contract terms. In some cases individual contract
terms limit or prohibit the imposition of an increase, so that changes in
realized prices and revenues lag changes in our announced prices. We expect to
realize the effect on our average ECU netback during the balance of 2004 as a
result of these provisions in some of our product sale agreements that delay the
implementation of price increases. In addition, Chemical Market Associates,
Inc., a leading industry observer, anticipates further increases in ECU netbacks
during 2004.

The order control programs that we have implemented for both chlorine and
caustic soda are a necessary means of balancing the demand for the products with
our manufacturing capacity and the availability of products that we are able to
purchase for resale. We do not believe that the order control programs expose us
to any material breach of contract claims, although we do anticipate some level
of resulting customer dissatisfaction.

14

PRODUCTION

Quarterly ECU production volumes at our chlor-alkali facilities for the
most recent five quarters were as follows:

ECUS IN TONS
------------

First Quarter 2003............ 175,764
Second Quarter 2003........... 161,725
Third Quarter 2003............ 173,565
Fourth Quarter 2003........... 160,071
First Quarter 2004............ 169,555

The volumes of caustic soda that we purchased for resale were as follows:

TONS
------

First Quarter 2003............ 24,195
Second Quarter 2003........... 27,412
Third Quarter 2003............ 38,495
Fourth Quarter 2003........... 47,307
First Quarter 2004............ 30,636

RAW MATERIAL COSTS

The energy costs associated with our production of chlor-alkali products
can materially affect our results of operations, as each one dollar change in
our cost for a megawatt hour of electricity generally results in a corresponding
change of approximately $2.75 in our cost to produce an ECU. The amounts that we
spent on our power requirements during each of the most recent five quarters,
and the corresponding percentages of our cost of sales - product that those
amounts represented, were as follows:

PERCENTAGE OF COST OF
TOTAL POWER COSTS SALES - PRODUCT
----------------- ---------------------

First Quarter 2003 $19,691 23%
Second Quarter 2003 18,780 23%
Third Quarter 2003 21,272 25%
Fourth Quarter 2003 18,560 21%
First Quarter 2004 19,989 23%

Electricity rates have continued to increase during 2004, and as a result we
anticipate a continuing unfavorable effect on our production costs during the
remainder of the year.

ORGANIZATIONAL EFFICIENCY PROJECT

During the first quarter of 2004 we began the development and
implementation of an organizational efficiency project that we refer to as
Project STAR. Project STAR involves the design, development and implementation
of uniform and standardized systems, processes and policies to improve our
management, sales and marketing, production, process efficiency, logistics and
material management and information technology functions. The consulting fees
that we will incur in connection with the Project are expected to be in the
range from $2.8 million to $3.6 million, depending on the attainment of
specified savings. We expect that after the project is implemented we will have
at least 12% fewer employees than the 648 that we employed on December 31, 2003,
and that our annual payroll and benefits cost will be reduced by more than $6.3
million. We anticipate that we will incur a related severance expense of at
least $3.1 million in June 2004, which will be paid in 2004 and 2005 in
accordance with applicable severance arrangements. We expect to recover that
expense and the other costs that will arise in the implementation of Project
STAR through savings generated as a result of the Project. We anticipate that we
will begin to realize those savings in July 2004, and that during the first
quarter of 2005 a majority of the project's initiatives will be producing
savings. However, we can provide no assurance that the savings from Project STAR
will exceed its costs.

LIQUIDITY AND CAPITAL RESOURCES

Debt, Financial Leverage and Covenants. At March 31, 2004, our senior
secured debt aggregated $204.2 million, consisting of Senior Secured Floating
Rate Guaranteed Notes due 2006 in the aggregate principal amount of $43.2
million (the "Senior Guaranteed Notes"), Floating Rate Term Notes due 2006 in
the aggregate principal amount of $4.4 million (the

15

"Senior Floating Notes"), 10% Senior Secured Guaranteed Notes due 2008 in the
aggregate principal amount of $150 million (the "10% Senior Secured Notes"), and
$6.6 million outstanding under a Revolving Credit Facility with a $30 million
commitment and a borrowing base restriction (the "Revolver"). Collectively, the
$197.6 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 debt agreements contain covenants limiting or preventing our 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
agreements also include customary events of default, including one for a change
of control under the Revolver. Borrowings under the Revolver are 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.

Under the agreements we also may be required to redeem or prepay Senior
Notes from and to the extent of net cash proceeds of certain asset sales,
certain new equity issuances and excess cash flow, or if there is a change of
control. Each holder of Senior Floating Notes may refuse certain prepayments. As
a result of the application of the applicable provisions with respect to the
first quarter of 2003, we redeemed and prepaid $2.4 million of Senior Guaranteed
Notes and Senior Floating Notes on May 23, 2003. One holder refused the
prepayment of the balance of the $2.5 million that was to have been prepaid on
that date. No redemption and prepayment of Senior Notes was required with
respect to the calendar quarters that ended on June 30, 2003, September 30,
2003, December 31, 2003, and March 31, 2004.

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

One of the covenants in the Revolver requires us to generate at least
$21.55 million of net earnings before extraordinary gains, the effects of
derivative instruments excluding derivative expenses paid by us, interest,
income taxes, depreciation and amortization (referred to as "Lender-Defined
EBITDA") for each twelve-month period ending at the end of each calendar
quarter. Our Lender-Defined EBITDA for the twelve months ended March 31, 2004,
was $36.6 million, which was greater than the $21.55 million required under the
Revolver covenant for that period.

We report amounts of Lender-Defined EBITDA generated by our business
because, as indicated above, there is a covenant in the Revolver that requires
us to generate specified levels of Lender-Defined EBITDA. Lender-Defined EBITDA
is not a measure of performance calculated in accordance with accounting
principles generally accepted in the United States of America. Lender-Defined
EBITDA should not be considered in isolation of, or as a substitute for, income
before income taxes as an indicator of operating performance or cash flows from
operating activities as a measure of liquidity. Lender-Defined EBITDA, as
defined in the Revolver, may not be comparable to similar measures reported by
other companies. In addition, Lender-Defined EBITDA does not represent funds
available for discretionary use.

The calculation of Lender-Defined EBITDA for the twelve months ended March
31, 2004, and for each of the quarters in that period is as follows (dollar
amounts in thousands):

THREE THREE THREE THREE TWELVE
MONTHS MONTHS MONTHS MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, MARCH 31,
2003 2003 2003 2004 2004
-------- ------------- ------------ --------- ---------

Net income (loss) ............................................. $ 5,046 $ 1,953 $ (5,190) $ (7,293) $ (5,484)
Extraordinary gains............................................ - - - - -
Income tax (benefit) expense................................... (2,126) 1,057 (684) (262) (2,015)
Change in fair value of derivatives............................ - - - - -
Interest expense, net.......................................... 4,792 4,582 4,879 4,642 18,895
Depreciation and
amortization................................................. 5,360 5,497 5,500 8,884 25,241
-------- ------------- ------------ --------- ---------
Lender-Defined EBITDA.......................................... $ 13,072 $ 13,089 $ 4,505 $ 5,971 $ 36,637
======== ============= ============ ========= =========

The Revolver contains additional covenants requiring us to maintain
Liquidity of at least $5.0 million, and limit capital expenditure levels to
$25.0 million in each calendar year. At March 31, 2004, our Liquidity was $22.2
million, consisting of borrowing availability of $20.7 million and cash of $2.5
million, less outstanding disbursements of $1.0 million. Our capital
expenditures were $2.3 million in the three months ended March 31, 2004, and we
estimate capital expenditures will be

16

approximately $9.4 million during 2004. The Revolver also provides that, as a
condition of borrowings, there shall not have occurred any material adverse
change in our business, prospects, operations, results of operations, assets,
liabilities or condition (financial or otherwise).

If in the future the required Lender-Defined EBITDA level under the
Revolver is not met or if we fail to comply with other covenants, and the lender
does not waive our non-compliance, we will be in default under the terms of the
Revolver. Moreover, if conditions constituting a material adverse change occur,
our lender can refuse to make further advances. Following any such refusal,
customer receipts would be applied to our borrowings under the Revolver, and we
would not have the ability to reborrow. This would cause us to suffer a rapid
loss of liquidity, and we would lose the ability to operate on a day-to-day
basis. In addition, a default under the Revolver would allow our lender to
accelerate the outstanding indebtedness under the Revolver and would also result
in a cross-default under our Senior Notes which would provide the holders of our
Senior Notes the right to accelerate the $197.6 million in Senior Notes
outstanding and demand immediate repayment.

Our borrowings under the Revolver as of April 30, 2004, were $13.8
million. Our $30 million Revolver commitment is subject to borrowing base
limitations related to the level of accounts receivable and reserves, and is
further reduced by letters of credit that are outstanding. As a result, on April
30, 2004, our additional availability under the Revolver was approximately $13.6
million, and our Liquidity was $13.1 million.

We do not anticipate that the cash that we will generate from our
operations will be sufficient to repay the Revolver and the Tranche A Notes
when they are due in December 2006, or the 10% Senior Secured Notes when they
are due in December 2008. In such events, it would be necessary to refinance
the indebtedness, issue new equity or sell assets. The terms of any necessary
new borrowings would be determined by then-current market conditions and other
factors, and could impose significant additional burdens on our financial
condition and operating flexibility, and the issuance of new equity securities
could dilute the interest of our existing stockholders. We cannot provide any
assurance that we would be able to refinance any of our indebtedness, raise
equity on commercially reasonable terms or at all, or sell assets, which
failure could cause us to default on our obligations and impair our liquidity.
Our inability to generate sufficient cash flow to satisfy our debt obligations,
or to refinance our obligations on commercially reasonable terms, would have a
material adverse effect on our business, financial condition and results of
operations.

Future Payment Commitments. For the nine months ending December 31, 2004,
we expect to have cash requirements, in addition to operating and administrative
costs, of approximately $28.2 million consisting of the following: (i) interest
payments of $17.9 million, (ii) capital expenditures of $7.2 million, (iii)
environmental remediation spending of $1.6 million, (iv) severance payments
(other than those that will arise as a result of the organizational efficiency
discussed above) of $0.9 million and (v) contractual debt repayments of $0.6
million. These amounts are our current estimates and they could materially
change. We expect to fund these obligations through available borrowings under
our Revolver and internally-generated cash flows from operations, including
changes in working capital, although we can provide no assurance that we will
have sufficient resources to fund all of the obligations.

Consulting fees that we will incur in connection with the organizational
efficiency project that we initiated in February 2004 will range from $2.8
million to $3.6 million. We anticipate making the majority of the staffing
reductions that will be implemented during the course of the project and
incurring related severance expense by the end of June 2004, although the
severance payments will be made over a period of time. We expect to fund the
severance expense and other costs that will arise in the implementation of the
project through savings generated as a result of the project. However, we can
provide no assurance that the savings from the project will exceed its costs.

Settlement of Dispute with the Colorado River Commission. On March 3,
2003, all of the conditions were satisfied with respect to the settlement of our
dispute with the Colorado River Commission ("CRC"), a Nevada state agency,
regarding the supply of power to our Henderson facility. As a result of the
settlement, which was effective as of January 1, 2003, we were released from all
claims for liability with respect to electricity derivatives agreements and all
litigation with CRC was dismissed.

As of December 31, 2002, we had recorded a net liability of $87.3 million
for the net mark-to-market loss on outstanding derivative positions, and a
receivable from CRC of $21.0 million, included in "Other Assets" on the balance
sheet, for estimated proceeds received by CRC for matured derivative contracts.
Due to the settlement of the CRC dispute, both the $87.3 million net liability
and the $21.0 million receivable were reversed in the first quarter of 2003,
resulting in a non-cash net gain of $66.3 million. These amounts were recorded
in the consolidated statement of operations for the three months ended March 31,
2003, as $87.3 million of operating income under the caption "Change in Fair
Value of Derivatives," to reflect the reversal of the previously recorded
mark-to-market loss, and $21.0 million of "Cost of Sales - Derivatives,"
reflecting the reversal of the receivable from CRC.

Net Cash Flows from Operating Activities. During the first three months of
2004 our cash flow provided by operating activities was $14.2 million, a $6.3
million increase from the same period in 2003. The increase was primarily
attributable to improved collections of accounts receivable, reduced inventory
levels and an increase in accounts payable.

Net Cash Flows from Investing Activities. Cash used in investing
activities, all of which related to capital expenditures during the first three
months of 2004, was $2.3 million as compared to $1.7 million in the same period
in 2003.

Net Cash Flows from Financing Activities. Cash used in financing
activities during the first three months of 2004 was approximately $11.4
million, due primarily to repayments, net of borrowings, of $10.2 million on the
Revolver and other debt payments of $1.2 million. In the same period in 2003,
$2.3 million was used in financing activities, due to repayments, net of
borrowings, of $0.2 million on the Revolver and other debt payments of $2.0
million.

17

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our Annual Report on Form 10-K for the year ended December 31, 2003,
includes a discussion of the critical accounting policies and estimates that we
use in the preparation of our financial statements. There were no significant
changes in our critical accounting policies and estimates during the quarter
ended March 31, 2004.

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2004, COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

Revenues. Our revenues for the three months ended March 31, 2004 and 2003
were derived as follows:

THREE MONTHS ENDED
MARCH 31,
------------------
2004 2003
-------- --------

Chlorine and caustic soda $ 64,745 $ 67,010
Other Products 25,281 22,021
-------- --------
$ 90,026 $ 89,031
======== ========
ECU netback $ 339 $ 362
======== ========

* The ECU netback relates only to sales of chlorine and caustic soda
to customers, and not to sales of other products.

During the three months ended March 31, 2004, we produced 169,555 tons of
chlorine and 186,510 tons of caustic soda; we used approximately 29% of the
chlorine and 11% of the caustic soda to manufacture bleach and hydrochloric
acid, as well as other downstream products. We also purchased 30,636 tons of
caustic soda for resale during the quarter. During the three months ended March
31, 2003, we produced 175,764 tons of chlorine and 193,340 tons of caustic soda;
we used approximately 26% of the chlorine and 10% of the caustic soda to
manufacture bleach and hydrochloric acid, as well as other downstream products.
We also purchased 24,195 tons of caustic soda for resale during the 2003
quarter.

Revenues increased by $1.0 million, or approximately 1%, to $90.0 million
for the three months ended March 31, 2004, as compared to the three months ended
March 31, 2003. Revenues in the most recent quarter were favorably affected by
increased prices and volumes for our other products, with an increase of $2.5
million in revenues resulting from improved bleach and hydrochloric acid sales.
Our revenues from sales of chlorine and caustic soda decreased, with lower ECU
prices being offset in part by higher ECU sales volumes. The average ECU netback
(which relates only to sales of chlorine and caustic soda) for the three months
ended March 31, 2004, was $339, a decrease of 6% from the average netback of
$362 during the three months ended March 31, 2003. The higher volumes in the
most recent quarter were supported by drawing down inventory levels, offsetting
reduced production resulting from an equipment problem at one plant and a
logistics problem at another, both of which have been addressed.

Cost of Sales - Product. Cost of sales - product increased by $1.7
million, or approximately 2%, for the three months ended March 31, 2004, as
compared to the three months ended March 31, 2003. As a result, cost of sales -
product represented approximately 96% of revenues in the 2004 quarter, compared
to approximately 95% in the year-earlier quarter. In the most recent quarter
there were increased variable product costs of $4.3 million resulting from
higher purchase for resale volume and increased bleach production, increased
freight costs of $1.3 million resulting from higher sales volumes, higher plant
labor and maintenance costs of $2.3 million and higher depreciation expense of
$3.4 million due primarily to the charge recorded in the quarter for
non-productive assets at the Tacoma chlor-alkali facility. The increases in the
2004 quarter were offset by the absence of an environmental charge (a charge of
$9.5 million was recorded in the first quarter of 2003).

Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased by $1.8 million, or approximately 21%, to $6.6
million for the three months ended March 31, 2004, as compared to the three
months ended March 31, 2003. The decrease was attributable to a decrease in bad
debt expense of $2.2 million and a decrease in local taxes of $0.6 million,
offset by a $0.9 million increase in professional fees that were incurred
primarily in connection with the operational efficiency project.

Asset Impairment and Other. Asset impairment and other for the three
months ended March 31, 2004, was nominal. Asset impairment and other for the
three months ended March 31, 2003, of $40.8 million was comprised of an
impairment charge related to the Henderson facility (see Note 5 to the
consolidated financial statements).

18

Interest Expense. Interest expense was relatively unchanged during the
three months ended March 31, 2004, as compared to the three months ended March
31, 2003.

Other Income (Expense), Net. Other income, net of $0.1 million in the
first quarter of 2004 reflected currency exchange gain. Other expense, net of
$1.9 million in the first quarter of 2003 reflected currency exchange loss.

Income Tax Benefit. Income tax benefit for the quarters ended March 31,
2004, and March 31, 2003, was $0.3 million and $1.5 million, respectively,
reflecting Canadian tax benefit on losses from our Canadian operations.

Net Income (Loss). Due to the factors described above, net loss for the
three months ended March 31, 2004, was $7.3 million, compared to net income of
$16.4 million for the first quarter of 2003.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The nature of our market risk disclosures set forth in our Annual Report
on Form 10-K for the year ended December 31, 2003, have not changed
significantly during the three months ended March 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES

In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an
evaluation, under the supervision and with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of March 31, 2004, to provide reasonable assurance
that information required to be disclosed in our reports filed or submitted
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.

There has been no change in our internal controls over financial reporting
that occurred during the three months ended March 31, 2004, that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.

PART II - OTHER INFORMATION

ITEM 5. OTHER INFORMATION

Forward Looking Statements. We are including the following discussion to
inform our existing and potential security holders generally of some of the
risks and uncertainties that can affect our company and to take advantage of the
"safe harbor" protection for forward-looking statements that applicable federal
securities law affords. Many of these risks are described in more detail in our
Annual Report on Form 10-K for the year ended December 31, 2003, in "Item 1.
Business -- Risks" which is hereby incorporated by reference.

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

Various statements this report contains, including those that express a
belief, expectation or intention, as well as those that are not statements of
historical fact, are forward-looking statements. These forward-looking
statements speak only as of the date of this report, we disclaim any obligation
to update these statements, and we caution against any undue reliance on them.
We have based these forward-looking statements on our current expectations and
assumptions about future events. While our management considers these
expectations and assumptions to be reasonable, they are inherently subject to
significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control. These risks, contingencies and uncertainties
relate to, among other matters, the following:

19

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

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

- competitive pressures affecting selling prices and volumes;

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

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

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

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

- loss of key customers or suppliers;

- higher than expected raw material and utility costs;

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

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

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

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

- the outcome of our operational efficiency project; and

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

We believe the items we have outlined above, as well as others, are
important factors that could cause our actual results to differ materially from
those expressed in a forward-looking statement made in this report or elsewhere
by us or on our behalf. We have discussed most of these factors in more detail
elsewhere in this report and in our Annual Report on From 10-K for the year
ended December 31, 2003. These factors are not necessarily all of the important
factors that could affect us. Unpredictable or unknown factors that we have not
discussed in this report could also have material adverse effects on actual
results of matters that are the subject of our forward-looking statements. We do
not intend to update our description of important factors each time a potential
important factor arises. We advise our security holders that they should (i) be
aware that important factors we do not refer to above could affect the accuracy
of our forward-looking statements and (ii) use caution and common sense when
considering our forward-looking statements.

20

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

31.1 Certification of Michael Y. McGovern required by Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 1934.

31.2 Certification of Gary L. Pittman required by Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Act of 1934.

32.1 Certification of Michael Y. McGovern required by Rule 13a-14(b) or
Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350.

32.2 Certification of Gary L. Pittman required by Rule 13a-14(b) or Rule
15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350.

99.1+ Items incorporated by reference from the Pioneer Companies, Inc.
Form 10-K for the year ended December 31, 2002: Item 1 Business --
Risks.

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

(b) Reports on Form 8-K

On March 24, 2004, we filed a report on Form 8-K. We reported that we had
issued a press release disclosing that we had determined not to resume
chlor-alkali production at our plant in Tacoma, Washington, and we filed the
press release as an exhibit to the report.

We also filed a report on Form 8-K on March 30, 2004. We reported that we
had issued a press release announcing our results for the year ended December
31, 2003, and we furnished the press release as an exhibit to the report.

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: May 13, 2004 By: /s/ Gary L. Pittman
-----------------------------------
Gary L. Pittman
Vice President and
Chief Financial Officer
(Principal Financial Officer)

21

EXHIBIT INDEX

31.1 Certification of Michael Y McGovern required by Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 1934.

31.2 Certification of Gary L. Pittman required by Rule 13a-14(a) or Rule
15d-14(a) under the Securities Exchange Act of 1934.

32.1 Certification of Michael Y. McGovern required by Rule 13a-14(b) or
Rule 15d-14(b) under the Securities Exchange Act of 1934 and 18
U.S.C. Section 1350.

32.2 Certification of Gary L. Pittman required by Rule 13a-14(b) or Rule
15d-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350.

99.1+ Items incorporated by reference from the Pioneer Companies, Inc.
Form 10-K for the year ended December 31, 2002: Item 1 Business --
Risks.

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

22