PIONEER COMPANIES INC - 10-Q Quarterly Report

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

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 9, 2004, there were 10,037,628 shares of common stock of Pioneer
Companies, Inc. outstanding.

TABLE OF CONTENTS

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 results of Pioneer's organizational efficiency project, 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.

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PART I --FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

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

See notes to consolidated financial statements.

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

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
2004 2003 2004 2003
--------- --------- --------- ---------

Revenues $ 97,072 $ 96,316 $ 187,098 $ 185,347

Cost of sales - product (84,317) (80,772) (170,628) (165,363)
Cost of sales - derivatives -- -- -- (20,999)
--------- --------- --------- ---------
Total cost of sales (84,317) (80,772) (170,628) (186,362)
--------- --------- --------- ---------

Gross profit (loss) 12,755 15,544 16,470 (1,015)

Selling, general and administrative expenses (8,368) (5,690) (14,957) (14,048)
Change in fair value of derivatives -- -- -- 87,271
Asset impairment -- -- -- (40,818)
Other items (3,178) 422 (3,343) 422
--------- --------- --------- ---------
Operating income (loss) 1,209 10,276 (1,830) 31,812

Interest expense, net (4,561) (4,792) (9,203) (9,603)
Other income (expense), net 609 (2,564) 735 (4,444)
--------- --------- --------- ---------
Income (loss) before income taxes (2,743) 2,920 (10,298) 17,765

Income tax benefit 342 2,126 604 3,659
--------- --------- --------- ---------
Net income (loss) $ (2,401) $ 5,046 $ (9,694) $ 21,424
========= ========= ========= =========

Net income (loss) per share:
Basic $ (0.24) $ 0.50 $ (0.97) $ 2.14
Diluted $ (0.24) $ 0.50 $ (0.97) $ 2.12

Weighted average number of shares outstanding:
Basic 10,030 10,003 10,022 10,002
Diluted 10,030 10,171 10,022 10,115

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 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 June 30, 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 six 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 are
reclassified in prior periods to conform to current period presentations.

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:

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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 June 30, 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 (as defined in the agreement
with the vendor) falls below $5 million (Canadian dollars); $0.6 million payable
over several years to a state taxing authority; and $4.3 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 eligible
accounts receivable, as determined in accordance with and subject to reserves
established pursuant to the agreement, and as reduced by the amount of letters
of credit that are outstanding. Borrowings under the Revolver are available
through December 31, 2006, so long as no default exists 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 June 30, 2004, the borrowing base under the Revolver was $30.0 million.

The Revolver requires Pioneer to maintain Liquidity (as defined in the
Revolver) of at least $5.0 million, and limit its capital expenditures to $25.0
million in each fiscal year. At June 30, 2004, Liquidity was $14.5 million,
consisting of borrowing availability, net of outstanding letters of credit, of
$8.2 million and cash of $6.3 million. Capital expenditures were $4.8 million
during the six months ended June 30, 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 June 30, 2004, was
$30.9 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 were not met or if Pioneer were to fail to comply with other covenants
and the lender did not waive Pioneer's non-compliance, Pioneer would be in
default under the terms of the Revolver. Moreover, if conditions constituting a
material adverse change occur, the lender could 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 30 and
December 31. Interest on the Senior Guaranteed Notes and the Senior Floating
Notes (collectively, the "Tranche A Notes") is payable quarterly on March 31,
June 30, September 30 and December 31.

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

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and prepaid $2.4 million of the principal amount of the Tranche A 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
Tranche A Notes has been required with respect to any calendar quarter
subsequent to the quarter ended March 31, 2003.

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 intends to
continue to use the facility as a terminal. Pioneer recorded additional
depreciation expense of $3.4 million related to the net book value of the
non-productive chlor-alkali assets at the Tacoma facility during the quarter
ended March 31, 2004. As of June 30, 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

As previously reported, Pioneer had a dispute with the Colorado River
Commission of Nevada ("CRC") with respect to certain derivatives contracts. All
of the conditions of the settlement of the dispute with 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 six months ended June 30, 2003, as $87.3 million of operating
income under the caption "Change in Fair

8

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.

5. ASSET IMPAIRMENT

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.

6. OTHER ITEMS

During the six months ended June 30, 2004, Pioneer recorded $3.2 million
for employee severance and benefit costs that were incurred in connection with
an organizational efficiency project, and paid $0.4 million of such costs during
the period. Pioneer will pay approximately $1.6 million of employee severance
and benefit costs during the last six months of 2004, and substantially all of
the balance by June 30, 2005. Pioneer does not anticipate the recognition of any
additional severance and benefit-related charges in connection with the
organizational efficiency project, although additional charges could result if
the project concepts are extended to other aspects of Pioneer's operations. The
project involves the design, development and implementation of uniform and
standardized systems, processes and policies to improve certain of Pioneer's
management, sales and marketing, production, process efficiency, logistics and
material management and information technology functions.

7. 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 9) during the period.

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

Options to purchase 285,000 shares of common stock that were outstanding
during the three and six months ended June 30, 2003, were not included in the
computation of diluted net income per share because the option exercise price
exceeded the

9

average market price of the common stock, making their inclusion anti-dilutive.
None of the options that were outstanding during the three and six months ended
June 30, 2004, were included in the computation of diluted net loss per share
because their inclusion would be anti-dilutive.

8. INVENTORIES

Inventories consisted of the following:

9. STOCK-BASED COMPENSATION

At June 30, 2004, PCI had options for the purchase of 618,401 shares of
common stock outstanding with exercise prices ranging from $2.00 to $8.15 per
share, a weighted average exercise price of $3.38 and a weighted average
remaining contractual life of 8.31 years. Options for the purchase of 10,000
shares were granted under Pioneer's Nonemployee Director Stock Option Program
during the six months ended June 30, 2004, and no options were granted during
the six months ended June 30, 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," as amended by SFAS 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," Pioneer's pro-forma net income (loss)
and net income (loss) per share would have been as follows:

10

10. SUPPLEMENTAL CASH FLOW INFORMATION

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

Following are supplemental disclosures of cash flow information:

11. 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 $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.

11

CONDENSED CONSOLIDATING BALANCE SHEET - JUNE 30, 2004 (IN THOUSANDS)

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

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - SIX MONTHS ENDED JUNE 30, 2004
(IN THOUSANDS)

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

Cash flows from operating activities:
Net cash flows from operating activities ..... $ (114) $ 4,844 $ 6,133 $ (23) $ 10,840
Cash flows from investing activities:
Capital expenditures ................................ -- (925) (3,885) -- (4,810)
-------- -------- -------- -------- --------
Net cash flows from investing activities .... -- (925) (3,885) -- (4,810)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net payments under revolving credit arrangements .... -- -- (434) -- (434)
Payments on debt .................................... -- (792) (651) (6) (1,449)
Proceeds from issuance of stock ..................... 114 -- -- -- 114
-------- -------- -------- -------- --------
Net cash flows from financing activities .... 114 (792) (1,085) (6) (1,769)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash ............... -- 99 -- -- 99
-------- -------- -------- -------- --------
Net change in cash and cash equivalents ............... -- 3,226 1,163 (29) 4,360
Cash and cash equivalents at beginning of period ...... -- 499 1,423 24 1,946
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period ............ $ -- $ 3,725 $ 2,586 $ (5) $ 6,306
======== ======== ======== ======== ========

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS - SIX MONTHS ENDED JUNE 30, 2003
(IN THOUSANDS)

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

Cash flows from operating activities:
Net cash flows from operating activities ..... $ 1,513 $ 2,262 $ 3,165 $ 4 $ 6,944
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures ................................ -- (1,142) (2,468) -- (3,610)
-------- -------- -------- -------- --------
Net cash flows from investing activities .... -- (1,142) (2,468) -- (3,610)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Net proceeds under revolving credit arrangements .... -- -- 7,152 -- 7,152
Payments on debt .................................... (1,520) (649) (5,446) (13) (7,628)
Proceeds from issuance of stock ..................... 7 -- -- -- 7
-------- -------- -------- -------- --------
Net cash flows from financing activities .... (1,513) (649) 1,706 (13) (469)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash ............... -- 462 -- -- 462
-------- -------- -------- -------- --------
Net change in cash and cash equivalents ............... -- 933 2,403 (9) 3,327
Cash and cash equivalents at beginning of period ...... -- 1,702 1,074 13 2,789
-------- -------- ======== -------- --------
Cash and cash equivalents at end of period ............ $ -- $ 2,635 $ 3,477 $ 4 $ 6,116
======== ======== ======== ======== ========

12. 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 $4.4 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 six months ended June 30, 2004.

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The component of net periodic benefit costs related to Pioneer's defined
benefit pension plans for the three months ended June 30, 2004 and 2003 were:

PCI PIONEER PIONEER
CANADA AMERICAS CONSOLIDATED
-------- -------- ------------

THREE MONTHS ENDED JUNE 30, 2004
Components of net periodic benefit cost:
Service cost ....................................... $ 290 $ (234) $ 56
Interest cost ...................................... 556 715 1,271
Expected return on plan assets ..................... (603) (765) (1,368)
Amortization of prior service costs ................ -- 2 2
Amortization of net actuarial loss ................. 86 467 553
-------- -------- --------
Net periodic benefit cost .......................... $ 329 $ 185 $ 514
======== ======== ========

PCI PIONEER PIONEER
CANADA AMERICAS CONSOLIDATED
-------- -------- ------------

THREE MONTHS ENDED JUNE 30, 2003
Components of net periodic benefit cost:
Service cost ....................................... $ 218 $ 329 $ 547
Interest cost ...................................... 503 719 1,222
Expected return on plan assets ..................... (482) (598) (1,080)
Amortization of prior service costs ................ -- (1) (1)
Amortization of net actuarial loss (gain) .......... (2) 155 153
-------- -------- --------
Net periodic benefit cost .......................... $ 237 $ 604 $ 841
======== ======== ========

The component of net periodic benefit costs related to Pioneer's defined
benefit pension plans for the six months ended June 30, 2004 and 2003 were:

PCI PIONEER PIONEER
CANADA AMERICAS CONSOLIDATED
-------- -------- ------------

SIX MONTHS ENDED JUNE 30, 2004
Components of net periodic benefit cost:
Service cost ....................................... $ 587 $ 159 $ 746
Interest cost ...................................... 1,126 1,455 2,581
Expected return on plan assets ..................... (1,221) (1,498) (2,719)
Amortization of prior service costs ................ -- 1 1
Amortization of net actuarial loss ................. 156 445 601
-------- -------- --------
Net periodic benefit cost .......................... $ 648 $ 562 $ 1,210
======== ======== ========

PCI PIONEER PIONEER
CANADA AMERICAS CONSOLIDATED
-------- -------- ------------

SIX MONTHS ENDED JUNE 30, 2003
Components of net periodic benefit cost:
Service cost ....................................... $ 436 $ 658 $ 1,094
Interest cost ...................................... 1,005 1,438 2,443
Expected return on plan assets ..................... (965) (1,196) (2,161)
Amortization of prior service costs ................ -- (3) (3)
Amortization of net actuarial loss (gain) .......... (3) 311 308
-------- -------- --------
Net periodic benefit cost .......................... $ 473 $ 1,208 $ 1,681
======== ======== ========

Pension expense was $1.2 million and $1.7 million for the six months ended
June 30, 2004 and 2003, respectively. Pension contributions were $4.0 million
and $2.4 million in the six months ended June 30, 2004 and 2003, respectively.
Total contributions in 2004, which are based on regulatory requirements, are
expected to be approximately $4.9 million. Due to the recent elimination of
employee positions as a result of the implementation of an organizational
efficiency project, partial plan terminations were recognized with respect to
two of the Pioneer Americas defined benefit pension plans. Such partial plan
terminations did not have any significant impact on the financial statements.

Effective December 31, 2003, Pioneer Americas' retiree health care benefits
plan was modified to eliminate retiree health care benefits when a participant
reaches age 65. Pioneer Americas accounted for the reduction in benefits as a
negative plan amendment, which resulted in $4.4 million of unamortized gain
included in accrued benefit liability as of December 31, 2003. The gain is
amortized over a period of up to 7.63 years.

15

The component of net periodic benefit costs related to Pioneer's
postretirement benefits other than pensions for the three months ended June 30,
2004 and 2003 were:

PCI PIONEER PIONEER
CANADA AMERICAS CONSOLIDATED
------- -------- ------------

THREE MONTHS ENDED JUNE 30, 2004
Components of net periodic benefit cost:
Service cost ........................................ $ 36 $ 1 $ 37
Interest cost ....................................... 67 9 76
Amortization of prior service costs ................. (7) (156) (163)
Amortization of net actuarial loss (gain) ........... 23 (8) 15
------- ------- -------
Net periodic benefit cost ........................... $ 119 $ (154) $ (35)
======= ======= =======

PCI PIONEER PIONEER
CANADA AMERICAS CONSOLIDATED
------- -------- ------------

THREE MONTHS ENDED JUNE 30, 2003
Components of net periodic benefit cost:
Service cost ........................................ $ 25 $ 1 $ 26
Interest cost ....................................... 53 52 105
Amortization of prior service costs ................. (7) -- (7)
Amortization of net actuarial gain .................. (3) (11) (14)
------- ------- -------
Net periodic benefit cost ........................... $ 68 $ 42 $ 110
======= ======= =======

The component of net periodic benefit costs related to Pioneer's
postretirement benefits other than pensions for the six months ended June 30,
2004 and 2003 were:

PCI PIONEER PIONEER
CANADA AMERICAS CONSOLIDATED
------- -------- ------------

SIX MONTHS ENDED JUNE 30, 2004
Components of net periodic benefit cost:
Service cost ........................................ $ 72 $ 2 $ 74
Interest cost ....................................... 136 18 154
Amortization of prior service costs ................. (14) (156) (170)
Amortization of net actuarial loss (gain) ........... 3 (18) (15)
------- ------- -------
Net periodic benefit cost ........................... $ 197 $ (154) $ 43
======= ======= =======

We use purchases for resale to satisfy contractual commitments to
customers. Some of the purchases are made under contracts with suppliers, and
others are made on a spot basis. Our margins on purchases for resale are lower
than the margins we realize from the sales of caustic soda that is produced in
our own plants. During the remainder of 2004 the decreasing availability of
caustic soda may limit our ability to maintain or increase the amount of caustic
soda that we purchase for resale.

18

RAW MATERIAL COSTS

The electricity 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
six 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%
Second Quarter 2004 21,273 25%

Electricity rates remained at relatively high levels during the second
quarter of 2004, and our total power costs increased as a result of our
increased production rate. Electricity purchases account for the largest
percentage of our raw material cost, and our plants at St. Gabriel and Henderson
rely on power sources that primarily use natural gas for the generation of
electricity.

ENVIRONMENTAL ISSUES

In December 2003 the Environmental Protection Agency adopted hazardous air
pollutant emissions limitations for mercury-cell chlor-alkali facilities, which
would apply to our St. Gabriel facility. The new regulations would require us to
implement various measures at the St. Gabriel facility over a three-year period
that are designed to reduce mercury emissions. The measures include the
installation of additional emission monitoring systems, the adoption of more
stringent work practices and conducting more frequent operating and maintenance
checks and repairs, at a total estimated cost to us of approximately $3.0
million. Of that amount, we have already spent approximately $1.7 million over
the last two years in anticipation of the new requirements. Environmental groups
have challenged the new regulations, contending that the EPA should reconsider
its rules and adopt new standards that bar the use of mercury for chlorine
production. In response, the EPA has decided to reconsider the new regulations,
although the timetable for the reconsideration has not yet been established. We
could incur substantial costs in meeting any new emissions limitations and
standards that result from the EPA's regulatory process.

LIQUIDITY AND CAPITAL RESOURCES

Debt, Financial Leverage and Covenants. At June 30, 2004, our senior
secured debt aggregated $214.0 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 "Senior Floating Notes"),
10% Senior Secured Guaranteed Notes due 2008 in the aggregate principal amount
of $150 million (the "10% Senior Secured Notes"), and $16.4 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

19

that date. No redemption and prepayment of Senior Notes has been required with
respect to any calendar quarter subsequent to the quarter that ended on March
31, 2003.

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 June 30, 2004,
was $30.9 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 June
30, 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
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, JUNE 30,
2003 2003 2004 2004 2004
-------- -------- -------- -------- --------

Net income (loss) ................. $ 1,953 $ (5,190) $ (7,293) $ (2,401) $(12,931)
Extraordinary gains ............... -- -- -- -- --
Income tax (benefit) expense ...... 1,057 (684) (262) (342) (231)
Interest expense, net ............. 4,582 4,879 4,642 4,561 18,664
Depreciation and amortization ..... 5,497 5,500 8,884 5,470 25,351
-------- -------- -------- -------- --------
Lender-Defined EBITDA ............. $ 13,089 $ 4,505 $ 5,971 $ 7,288 $ 30,853
======== ======== ======== ======== ========

The Revolver contains additional covenants requiring us to maintain
Liquidity of at least $5.0 million, and limiting capital expenditure levels to
$25.0 million in each calendar year. At June 30, 2004, our Liquidity was $14.5
million, consisting of borrowing availability of $8.2 million and cash of $6.3
million. Our capital expenditures were $4.8 million in the six months ended June
30, 2004, and we estimate capital expenditures will be approximately $9.5
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 were not met or if we were to fail to comply with other covenants, and
the lender did not waive our non-compliance, we would be in default under the
terms of the Revolver. Moreover, if conditions constituting a material adverse
change occur, our lender could 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 July 31, 2004, were $17.8 million.
Our $30 million Revolver commitment is subject to borrowing base limitations
related to the level of eligible accounts receivable, as determined in
accordance with and subject to reserves established pursuant to the agreement,
and as reduced by the amount of letters of credit that are outstanding. As a
result, on July 31, 2004, our additional availability under the Revolver was
approximately $4.1 million, and our Liquidity was $5.9 million.

We do not anticipate that the cash that we will generate from our
operations will be sufficient to repay the Revolver and the Senior Guaranteed
Notes and Senior Floating 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

20

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 six months ending December 31, 2004,
we expect to have cash requirements, in addition to recurring operating and
administrative costs, of approximately $19.6 million consisting of the
following: (i) interest payments of $9.6 million, (ii) capital expenditures of
$4.7 million, (iii) environmental remediation spending of $1.4 million, (iv)
payments of severance and benefit costs of $1.6 million, (v) consulting fees and
expenses in connection with Project STAR of $2.0 million and (vi) contractual
debt repayments of $0.3 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.

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, Net" 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 six months ended
June 30, 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 six months of
2004 our cash flow provided by operating activities was $10.8 million, a $3.9
million increase from the same period in 2003. During the period changes in
operating assets and liabilities increased operating cash flows by $7.8 million
compared to a decrease of $1.4 million in the comparative prior period. The
current period increase was primarily due an increase in accrued liabilities
related to the costs of the organizational efficiency project, increased
electricity prices and an increase in accounts payable that resulted primarily
from increased purchase for resale volumes. These effects were offset by changes
in accounts receivable, which increased due to the increase of sales during the
summer months.

Net Cash Flows from Investing Activities. All of the cash that we used in
investing activities related to capital expenditures during the first six months
of 2004 and the first six months of 2003. The amount of cash used in the two
periods was $4.8 million and $3.6 million, respectively.

Net Cash Flows from Financing Activities. Cash used in financing
activities during the first six months of 2004 was $1.8 million, due primarily
to debt payments of $1.4 million along with repayments, net of borrowings, of
$0.4 million on the Revolver. In the same period in 2003, $0.5 million was used
in financing activities due to debt payments of $7.6 million, partially offset
by borrowings under the Revolver of $7.2 million. In the 2003 period we were
required to make a redemption and prepayment of $2.4 million with respect to our
Senior Guaranteed Notes and Senior Floating Notes.

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 June 30, 2004.

21

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 2004, COMPARED TO THREE MONTHS ENDED JUNE 30, 2003

Revenues. Our revenues for the three months ended June 30, 2004 and 2003
were derived as follows:

* 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 June 30, 2004, we produced 183,404 tons of
chlorine and 201,744 tons of caustic soda; we used approximately 29% of the
chlorine and 13% of the caustic soda to manufacture bleach and hydrochloric
acid, as well as other downstream products. We also purchased 39,504 tons of
caustic soda for resale during the quarter. During the three months ended June
30, 2003, we produced 161,725 tons of chlorine and 177,898 tons of caustic soda;
we used approximately 33% of the chlorine and 13% of the caustic soda to
manufacture bleach and hydrochloric acid, as well as other downstream products.
We also purchased 27,412 tons of caustic soda for resale during the 2003
quarter.

Revenues increased by $0.8 million, or approximately 1%, to $97.1 million
for the three months ended June 30, 2004, as compared to the three months ended
June 30, 2003. Revenues in the most recent quarter were favorably affected by
increased volumes for our products, partially offset by a decrease in prices for
caustic soda. Our revenues from sales of chlorine and caustic soda were $2.5
million lower than the year-earlier quarter, primarily as a result of lower ECU
prices resulting from decreased prices for caustic soda, the effect of which was
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
June 30, 2004, was $354, a decrease of 13% from the average netback of $406
during the three months ended June 30, 2003. Revenues from other products
increased by $3.3 million compared to the same period in 2003, primarily from an
increase of $1.7 million in sales of hydrochloric acid due to higher sales
volumes, along with increases in revenues from other products. Operating our
plants at higher production rates and purchasing increased amounts of caustic
soda for resale supported the higher sales volumes in the most recent quarter.

Cost of Sales - Product. Cost of sales - product increased by $3.5
million, or approximately 4%, for the three months ended June 30, 2004, as
compared to the three months ended June 30, 2003, and represented approximately
87% of revenues in the 2004 quarter, compared to approximately 84% in the
year-earlier quarter. In the most recent quarter as compared to the prior-year
period there were increased variable product costs of $3.7 million resulting
primarily from $3.5 million of higher salt and electricity costs due to higher
production volumes and $1.9 million of increased freight costs resulting from
higher sales volumes, partially offset by the $1.6 million effect of lower
maintenance costs.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $2.7 million, or approximately 47%, to $8.4
million for the three months ended June 30, 2004, as compared to the three
months ended June 30, 2003. The increase was primarily attributable to
consulting fees and expenses of $1.9 million related to the organizational
efficiency project.

Other Items. Other items increased by $3.6 million for the three-month
period ended June 30, 2004, compared to the same period in 2003 as a result of
the $3.2 million we recorded for severance and related charges associated with
our organizational efficiency project. A $0.4 million gain for the early payment
of a promissory note was also included in the 2003 period.

Interest Expense. Interest expense was relatively unchanged during the
three months ended June 30, 2004, as compared to the three months ended June 30,
2003.

Other Income (Expense), Net. Other income, net of $0.6 million in the
second quarter of 2004 reflected currency exchange gain. Other expense, net of
$2.6 million in the second quarter of 2003 reflected currency exchange loss.

22

Income Tax Benefit. Income tax benefit for the quarters ended June 30,
2004 and 2003, was $0.3 million and $2.1 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 June 30, 2004, was $2.4 million, compared to net income of
$5.0 million for the second quarter of 2003.

SIX MONTHS ENDED JUNE 30, 2004, COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Revenues. Our revenues for the six months ended June 30, 2004 and 2003
were derived as follows:

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

During the six months ended June 30, 2004, we produced 352,959 tons of
chlorine and 388,255 tons of caustic soda; we used approximately 29% of the
chlorine and 12% of the caustic soda to manufacture bleach and hydrochloric
acid, as well as other downstream products. We also purchased 70,140 tons of
caustic soda for resale during the first six months of 2004. During the six
months ended June 30, 2003, we produced 337,489 tons of chlorine and 371,238
tons of caustic soda; we used approximately 29% of the chlorine and 12% of the
caustic soda to manufacture bleach and hydrochloric acid, as well as other
downstream products. We also purchased 51,607 tons of caustic soda for resale
during the first six months of 2003.

Revenues increased by $1.8 million, or approximately 1%, to $187.1 million
for the six months ended June 30, 2004, as compared to the six months ended June
30, 2003. Revenues in the 2004 period were favorably affected by increased
volumes for our products, partially offset by a decrease in prices for caustic
soda and chlorine. We had a decrease of $4.8 million in revenues from sales of
chlorine and caustic soda, resulting from lower ECU prices, which were partially
offset by increased sales volumes. The average ECU netback (which relates only
to sales of chlorine and caustic soda) for the six months ended June 30, 2004,
was $346, a decrease of 10% from the average netback of $384 during the six
months ended June 30, 2003. Revenues from other products increased by $6.5
million compared to the six months ended June 30, 2003, including increases of
$1.3 million from sales of bleach, $3.1 million from sales of hydrochloric acid
and $2.1 million from sales of various other products. Operating our plants at
higher production rates and purchasing increased amounts of caustic soda for
resale supported the higher sales volumes in the 2004 period.

Cost of Sales - Product. Cost of sales - product increased by $5.3
million, or approximately 3%, for the six months ended June 30, 2004, as
compared to the six months ended June 30, 2003, and approximately 91% of
revenues in the 2004 period, compared to approximately 89% in the year-earlier
period. Due to higher production and sales volumes, in the most recent period as
compared to the prior-year period there were increased variable product costs of
$7.7 million, primarily resulting from increased salt and electricity costs of
$3.7 million and $2.5 million of increased purchase for resale costs. Freight
costs also increased by $2.5 million during the period. In the most recent
period we also had higher depreciation expense of $3.7 million, which resulted
primarily from the charge recorded in the first quarter of 2004 for
non-productive assets at the Tacoma chlor-alkali facility. The increases in the
2004 period were partially offset by the absence of an environmental charge of
$9.5 million that was recorded in the first quarter of 2003.

Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $0.9 million, or approximately 7%, to $15.0
million for the six months ended June 30, 2004, as compared to the six months
ended June 30, 2003. The increase for the 2004 period was primarily due to
consulting fees and expenses of $2.9 million related to the organizational
efficiency project, partially offset by decreases of $1.9 million in bad debt
expense.

Asset Impairment. No asset impairment charges were recorded for the six
months ended June 30, 2004. In the corresponding 2003 period there was a $40.8
million impairment charge related to the Henderson facility (see Note 5 to the
consolidated financial statements).

23

Other Items. Other items increased by $3.8 million for the six months
ended June 30, 2004, compared to the year-earlier period as a result of the
recognition of $3.2 million of severance and related charges associated with our
organizational efficiency project. Included in the 2003 period was a gain of
$0.4 million for the early payment of a promissory note.

Interest Expense. Interest expense was relatively unchanged during the six
months ended June 30, 2004, as compared to the six months ended June 30, 2003.

Other Income (Expense), Net. Other income, net of $0.7 million in the 2004
period primarily reflected currency exchange gain. Other expense, net of $4.4
million in the six months ended June 30, 2003, reflected currency exchange loss.

Income Tax Benefit. The income tax benefit for the six months ended June
30, 2004 and 2003, was $0.6 million and $3.7 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
six months ended June 30, 2004, was $9.7 million, compared to net income of
$21.4 million for the first six months 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, did not change significantly
during the six months ended June 30, 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 June 30, 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 June 30, 2004, that has materially
affected, or is reasonably likely to materially affect, our internal controls
over financial reporting.

PART II - OTHER INFORMATION

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

Our stockholders voted on the following matters at their annual meeting
held on May 13, 2004:

(a) The following were elected to serve new terms as directors and
received the number of votes set opposite their respective names:

Name: For Withheld Authority
----- --- ------------------

David N. Weinstein 7,970,258 29,977

Marvin E. Lesser 7,970,258 29,977

Michael Y. McGovern 7,970,282 29,953

Charles L. Mears 7,970,282 29,953

Gary L. Rosenthal 7,970,258 29,977

(b) A proposal to ratify the appointment of Deloitte & Touche LLP as our
independent certified public accountants received 7,983,884 votes FOR and 120
votes AGAINST, with 15,024 abstentions.

24

ITEM 5. OTHER INFORMATION

Accelerated Filer Status. On June 30, 2004, the price at which our common
stock was last sold was $7.11. As a result the aggregate market value of our
common equity held by our non-affiliates was less than $75 million, and we will
not be an accelerated filer at the end of our fiscal year on December 31, 2004.

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 (including our
organizational efficiency project) 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:

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

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

o competitive pressures affecting selling prices and volumes;

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

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

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

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

o loss of key customers or suppliers;

o increased prices for raw materials, including electricity;

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

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

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

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

o the outcome of our operational efficiency project; and

25

o 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.

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, 2003: 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 May 14, 2004, we filed a report on Form 8-K. We reported that we had
issued a press release announcing our results for the quarter ended March 31,
2004, and we furnished the press release as an exhibit to the report.

We also filed a report on Form 8-K on June 25, 2004. We reported that we
had issued a press release reporting on our status in meeting the requirements
of Section 404 of the Sarbanes-Oxley Act, and noting issues that would be likely
to arise if those requirements became applicable to the Company for the year
ending December 31, 2004.

SIGNATURES

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

PIONEER COMPANIES, INC.

Date: August 16, 2004 By: /s/ Gary L. Pittman
---------------------------
Gary L. Pittman
Vice President and
Chief Financial Officer
(Principal Financial Officer)

26

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, 2003: Item 1
Business -- Risks.

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

27