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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 OR  o 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. Employerincorporation 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 o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes o 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 o On October 28, 2004, there were 10,049,627 shares of common stock of
Pioneer Companies, Inc. outstanding.




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TABLE OF CONTENTS  
 PagePart
IFinancial InformationItem 1.
    
    Consolidated Financial StatementsConsolidated
Balance SheetsSeptember 30, 2004 and December 31, 2003
    
    
    3Consolidated
Statements of OperationsThree Months Ended September
30, 2004 and 2003 and Nine Months Ended September 30, 2004 and 2003
    
    
    4Consolidated
Statements of Cash FlowsNine Months Ended September
30, 2004 and 2003
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    25Item 4.
    
    Controls and Procedures
    
    
    25Part
IIOther InformationItem 5.
    
    Other Information
    
    
    26Item 6.
    
    Exhibits
    
    
    28Certification of Michael Y. McGovernCertification of Gary L. PittmanCertification of Michael Y. McGovernCertification of Gary L. Pittman
  Certain statements in thisForm 10-Qregarding 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,
Pioneers ability to procure the sale of certain excess land and water rights
at its Henderson facility, and other risks and uncertainties. Attention is
directed to Pioneers Annual Report onForm 10-Kand Item 5 of Part II of this
Report onForm 10-Qfor a discussion of such risks and uncertainties. Actual
outcomes may vary materially. 2




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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) September 30,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    3,272
    
    
    $
    1,946Accounts receivable, net of allowance for doubtful accounts of $2,171 at
September 30, 2004 and $2,947 at December 31, 2003
    
    
    47,016
    
    
    
    38,800Inventories, net
    
    
    15,525
    
    
    
    15,707Prepaid expenses and other current assets
    
    
    3,614
    
    
    
    5,018Total current assets
    
    
    69,427
    
    
    
    61,471Property, plant and equipment:Land
    
    
    6,520
    
    
    
    6,520Buildings and improvements
    
    
    30,374
    
    
    
    29,522Machinery and equipment
    
    
    195,728
    
    
    
    190,953Construction in progress
    
    
    3,156
    
    
    
    2,975235,778
    
    
    
    229,970Less: accumulated depreciation
    
    
    (60,237
    )
    
    
    (40,436
    )Net property, plant and equipment
    
    
    175,541
    
    
    
    189,534Other assets, net
    
    
    4,612
    
    
    
    3,931Excess reorganization value over the fair value of identifiable assets
    
    
    84,064
    
    
    
    84,064Total assets
    
    $
    333,644
    
    
    $
    339,000Liabilities and stockholders equityCurrent liabilities:Accounts payable
    
    $
    18,454
    
    
    $
    13,027Accrued liabilities
    
    
    27,245
    
    
    
    17,369Short-term debt, including current portion of long-term debt
    
    
    8,693
    
    
    
    18,485Total current liabilities
    
    
    54,392
    
    
    
    48,881Long-term debt, less current portion
    
    
    202,239
    
    
    
    203,803Accrued pension and other employee benefits
    
    
    21,548
    
    
    
    24,584Other long-term liabilities
    
    
    41,761
    
    
    
    42,742Commitments and contingenciesStockholders equity:Preferred stock, $.01 par value, authorized 10,000 shares, none issued or
outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, authorized 50,000 shares, 10,049 shares
issued and outstanding
    
    
    100
    
    
    
    100Additional paid-in capital
    
    
    11,432
    
    
    
    10,941Other comprehensive loss
    
    
    (5,481
    )
    
    
    (5,481
    )Retained earnings
    
    
    7,653
    
    
    
    13,430Total stockholders equity
    
    
    13,704
    
    
    
    18,990Total liabilities and stockholders equity
    
    $
    333,644
    
    
    $
    339,000
 See notes to consolidated financial statements. 3




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PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share data) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    104,979
    
    
    $
    100,001
    
    
    $
    292,077
    
    
    $
    285,348Cost of sales  product
    
    
    (90,300
    )
    
    
    (86,351
    )
    
    
    (260,928
    )
    
    
    (251,714
    )Cost of sales  derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,999
    )Total cost of sales
    
    
    (90,300
    )
    
    
    (86,351
    )
    
    
    (260,928
    )
    
    
    (272,713
    )Gross profit
    
    
    14,679
    
    
    
    13,650
    
    
    
    31,149
    
    
    
    12,635Selling, general and
administrative expenses
    
    
    (5,424
    )
    
    
    (5,992
    )
    
    
    (20,381
    )
    
    
    (20,040
    )Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87,271Asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (40,818
    )Other items
    
    
    (97
    )
    
    
    24
    
    
    
    (3,440
    )
    
    
    446Operating income
    
    
    9,158
    
    
    
    7,682
    
    
    
    7,328
    
    
    
    39,494Interest expense, net
    
    
    (4,578
    )
    
    
    (4,582
    )
    
    
    (13,781
    )
    
    
    (14,185
    )Other expense, net
    
    
    (1,848
    )
    
    
    (90
    )
    
    
    (1,113
    )
    
    
    (4,534
    )Income (loss) before income taxes
    
    
    2,732
    
    
    
    3,010
    
    
    
    (7,566
    )
    
    
    20,775Income tax benefit (expense)
    
    
    1,185
    
    
    
    (1,057
    )
    
    
    1,789
    
    
    
    2,602Net income (loss)
    
    $
    3,917
    
    
    $
    1,953
    
    
    $
    (5,777
    )
    
    $
    23,377Net income (loss) per share:Basic
    
    $
    0.39
    
    
    $
    0.20
    
    
    $
    (0.58
    )
    
    $
    2.34Diluted
    
    $
    0.38
    
    
    $
    0.19
    
    
    $
    (0.58
    )
    
    $
    2.31Weighted average number of
shares outstanding:Basic
    
    
    10,038
    
    
    
    10,003
    
    
    
    10,032
    
    
    
    10,002Diluted
    
    
    10,426
    
    
    
    10,145
    
    
    
    10,032
    
    
    
    10,126
 See notes to consolidated financial statements. 4




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PIONEER COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands) Nine Months EndedSeptember 30,2004
    
    2003Operating activities:Net income (loss)
    
    $
    (5,777
    )
    
    $
    23,377Adjustments to reconcile net income (loss) to net cash flows
from operating activities:Depreciation and amortization
    
    
    19,910
    
    
    
    16,051Provision for (recovery of) losses on accounts receivable
    
    
    (776
    )
    
    
    1,257Deferred tax benefit
    
    
    (1,789
    )
    
    
    (2,603
    )Derivatives  cost of sales and change in fair value
    
    
    
    
    
    
    (66,272
    )Gain from early extinguishments of debt
    
    
    
    
    
    
    (420
    )Loss on disposals of assets
    
    
    258
    
    
    
    Asset impairment
    
    
    
    
    
    
    40,818Currency exchange loss
    
    
    1,180
    
    
    
    4,536Changes in operating assets and liabilities:Increase in accounts receivable
    
    
    (7,157
    )
    
    
    (3,364
    )Decrease in inventories, prepaid expenses and other current
assets
    
    
    1,813
    
    
    
    1,818(Increase) decrease in other assets
    
    
    (728
    )
    
    
    831Increase (decrease) in accounts payable and accrued liabilities
    
    
    14,371
    
    
    
    (5,414
    )Increase (decrease) in other long-term liabilities
    
    
    (2,845
    )
    
    
    7,120Other
    
    
    346
    
    
    
    Net cash flows from operating activities
    
    
    18,806
    
    
    
    17,735Investing activities:Capital expenditures
    
    
    (6,179
    )
    
    
    (6,179
    )Proceeds from disposal of assets
    
    
    35
    
    
    
    Net cash flows from investing activities
    
    
    (6,144
    )
    
    
    (6,179
    )Financing activities:Net payments under revolving credit arrangements
    
    
    (9,984
    )
    
    
    (1,918
    )Payments on debt
    
    
    (1,629
    )
    
    
    (8,418
    )Proceeds from issuance of stock
    
    
    145
    
    
    
    7Net cash flows from financing activities
    
    
    (11,468
    )
    
    
    (10,329
    )Effect of exchange rate changes on cash
    
    
    132
    
    
    
    566Net change in cash and cash equivalents
    
    
    1,326
    
    
    
    1,793Cash and cash equivalents at beginning of period
    
    
    1,946
    
    
    
    2,789Cash and cash equivalents at end of period
    
    $
    3,272
    
    
    $
    4,582
 See notes to consolidated financial statements. 5




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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 September 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 nine 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: September 30,
    
    December 31,2004
    
    2003Senior 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
    
    
    $
    43,151Senior 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
    
    
    
    4,41310% Senior Secured Guaranteed Notes, due December 2008 (10% Senior
Secured Notes)
    
    
    150,000
    
    
    
    150,000Revolving 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)
    
    
    6,839
    
    
    
    16,823Other 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 September
30, 2004, and December 31, 2003, respectively
    
    
    1,817
    
    
    
    2,432Other notes, maturing in various years through 2014, with various
installments, at various interest rates
    
    
    4,712
    
    
    
    5,469Total
    
    
    210,932
    
    
    
    222,288Short-term debt, including current maturities of long-term debt
    
    
    (8,693
    )
    
    
    (18,485
    )Long-term debt, less current maturities
    
    $
    202,239
    
    
    $
    203,803
 6




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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 September 30, 2004, Pioneer had a $1.8 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); a $0.6
million obligation payable over several years to a state taxing authority; and
$4.1 million of other debt outstanding, comprised of notes maturing in various
years through 2014. The Revolver provides for revolving loans in an aggregate amount of 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 September 30, 2004, the borrowing base under the Revolver was
$30.0 million. The Revolver requires Pioneer to maintain Liquidity (as defined in the
agreement) of at least $5.0 million, and limit its capital expenditures to
$25.0 million in each fiscal year. At September 30, 2004, Liquidity was $21.0
million, consisting of borrowing availability, net of outstanding letters of
credit, of $17.7 million and cash of $3.3 million. Capital expenditures were
$6.2 million during the nine months ended September 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 September 30, 2004, was $30.6 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 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), or 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 7




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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. The cash that Pioneer will generate from its operations might not be
sufficient to repay the Revolver and the Tranche A Notes when they are due in
December 2006. However, should recent improvements in product margins be sustained, the
cash that Pioneer will generate from its operations might be sufficient to
repay the obligations outstanding under the Revolver and the Tranche A Notes on
or before their maturities in December 2006. Pioneer does not anticipate that
the cash that it will generate from its operations will be sufficient to repay
the 10% Senior Secured Notes when they are due in December 2008. To the extent
that Pioneer is unable to repay any such indebtedness when it is due, 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 will
generate sufficient cash from its operations to repay its outstanding debt
obligations or 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. On
September 16, 2004, Pioneers shelf registration statement on Form S-3 was
declared effective by the Securities and Exchange Commission. Under the shelf
registration statement Pioneer may offer any combination of senior or subordinated
debt securities, common stock, preferred stock and warrants from time to time
in one or more offerings with a total offering price of up to $100 million.
Pioneer has not offered or sold any securities that are available
under the shelf registration statement. 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 March 31, 2004, the net book value of the Tacoma
facility was $1.3 million. Pioneer anticipates that its evaluation of other
uses of the facility will be completed during 2005. 8




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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 nine months ended September 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. 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 nine months ended September 30, 2004, Pioneer recorded $3.2
million for employee severance and benefit costs that were incurred in
connection with an organizational efficiency project. Of the total of $1.1
million of such costs that were paid during the nine-month period; $0.7 million
was paid during the third quarter. Pioneer will pay approximately $0.9 million
of employee severance and benefit costs during the last three months of 2004,
and substantially all of the balance by June 30, 2005. The concepts of the
project are being extended to other areas of Pioneers operations and it is
anticipated that as a result Pioneer will recognize additional severance and
benefits-related charges. The timing and amount of such charges cannot be estimated until
there has been further progress with project implementation in those areas.
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. 9




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Computational amounts for net income (loss) per share are as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    3,917
    
    
    $
    1,953
    
    
    $
    (5,777
    )
    
    $
    23,377Basic net income (loss) per share:Weighted average number of
shares outstanding
    
    
    10,038
    
    
    
    10,003
    
    
    
    10,032
    
    
    
    10,002Net income (loss) per share
    
    $
    0.39
    
    
    $
    0.20
    
    
    $
    (0.58
    )
    
    $
    2.34Diluted net income (loss) per share:Weighted average number of
shares outstanding
    
    
    10,426
    
    
    
    10,145
    
    
    
    10,032
    
    
    
    10,126Net income (loss) per share
    
    $
    0.38
    
    
    $
    0.19
    
    
    $
    (0.58
    )
    
    $
    2.31
 All of the options to purchase shares of common stock that were
outstanding during the three-month period ended September 30, 2004, were
included in the computation of diluted net income per share, while none of the
options to purchase shares of common stock that were outstanding during the
nine-month period ended September 30, 2004, were included in the computation of
diluted net loss per share because their inclusion would be anti-dilutive.
Options to purchase 225,000 shares of common stock that were outstanding during
the three and nine months ended September 30, 2003, were not included in the
computation of diluted net income per share because the option exercise price
exceeded the average market price of the common stock for the applicable
period, making their inclusion anti-dilutive. 8. Inventories Inventories consisted of the following: September 30,
    
    December 31,2004
    
    2003Raw materials, supplies and parts, net
    
    $
    7,576
    
    
    $
    7,673Finished goods
    
    
    7,949
    
    
    
    8,034$
    15,525
    
    
    $
    15,707
 9. Stock-Based Compensation At
September 30, 2004, options to purchase 773,066 shares of PCIs
common stock were outstanding, with exercise prices ranging from $2.00 to $8.28
per share, a weighted average exercise price of $4.46 and a weighted average
remaining contractual life of 8.36 years. Options for the purchase of up to
178,000 shares were granted during the nine months ended September 30, 2004,
while no options were granted during the nine months ended September 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




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss):As reported
    
    $
    3,917
    
    
    $
    1,953
    
    
    $
    (5,777
    )
    
    $
    23,377Add: Stock-based compensation
expense included in reported net
income (loss)
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    Deduct: Stock-based compensation
expense determined under fair-
value-based method
    
    
    (165
    )
    
    
    (158
    )
    
    
    (451
    )
    
    
    (475
    )Pro forma net income (loss)
    
    $
    3,752
    
    
    $
    1,795
    
    
    $
    (6,171
    )
    
    $
    22,902Net income (loss) per common share:Basic, as reported
    
    $
    0.39
    
    
    $
    0.20
    
    
    $
    (0.58
    )
    
    $
    2.34Basic, pro forma
    
    $
    0.37
    
    
    $
    0.18
    
    
    $
    (0.62
    )
    
    $
    2.29Diluted, as reported
    
    $
    0.38
    
    
    $
    0.19
    
    
    $
    (0.58
    )
    
    $
    2.31Diluted, pro forma
    
    $
    0.36
    
    
    $
    0.18
    
    
    $
    (0.62
    )
    
    $
    2.26
 10. Supplemental Cash Flow Information The net effect of changes in operating assets and liabilities was as
follows: Nine Months EndedSeptember 30,2004
    
    2003Accounts receivable
    
    $
    (7,157
    )
    
    $
    (3,364
    )Inventories
    
    
    363
    
    
    
    (544
    )Prepaid expenses and other current assets
    
    
    1,450
    
    
    
    2,362Other assets
    
    
    (728
    )
    
    
    831Accounts payable
    
    
    4,861
    
    
    
    (11,282
    )Accrued liabilities
    
    
    9,510
    
    
    
    5,868Other long-term liabilities
    
    
    (2,845
    )
    
    
    7,120Net change in operating assets and liabilities
    
    $
    5,454
    
    
    $
    991
 Following are supplemental disclosures of cash flow information: Nine Months EndedSeptember 30,2004
    
    2003Cash payments for:Interest
    
    $
    9,976
    
    
    $
    10,296Income taxes
    
    
    
    
    
    
    
 11. Consolidating Financial Statements PCI Canada (a wholly-owned subsidiary of PCI) is the issuer of the $150
million principal amount of 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 principal amount of Senior Guaranteed Notes and the $4.4
million principal amount 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




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##### Table of Contents



Condensed Consolidating Balance Sheet  September 30, 2004 (in thousands) PCI
    
    Pioneer
    
    Other
    
    
    
    
    
    PioneerPCI
    
    Canada
    
    Americas
    
    Guarantors
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    517
    
    
    $
    2,752
    
    
    $
    3
    
    
    $
    
    
    
    $
    3,272Accounts receivable, net
    
    
    
    
    
    
    11,192
    
    
    
    35,824
    
    
    
    
    
    
    
    
    
    
    
    47,016Inventories, net
    
    
    
    
    
    
    6,163
    
    
    
    9,362
    
    
    
    
    
    
    
    
    
    
    
    15,525Prepaid expenses and other current assets
    
    
    934
    
    
    
    2,190
    
    
    
    490
    
    
    
    
    
    
    
    
    
    
    
    3,614Total current assets
    
    
    934
    
    
    
    20,062
    
    
    
    48,428
    
    
    
    3
    
    
    
    
    
    
    
    69,427Property, plant and equipment, net
    
    
    
    
    
    
    105,149
    
    
    
    68,864
    
    
    
    1,528
    
    
    
    
    
    
    
    175,541Other
assets, net
    
    
    
    
    
    
    170
    
    
    
    4,442
    
    
    
    
    
    
    
    
    
    
    
    4,612Intercompany receivable
    
    
    
    
    
    
    100,351
    
    
    
    
    
    
    
    73,945
    
    
    
    (174,296
    )
    
    
    Investment in subsidiaries
    
    
    20,618
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20,618
    )
    
    
    Excess reorganization value over the fair value of
identifiable assets
    
    
    
    
    
    
    84,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,064Total assets
    
    $
    21,552
    
    
    $
    309,796
    
    
    $
    121,734
    
    
    $
    75,476
    
    
    $
    (194,914
    )
    
    $
    333,644Liabilities and stockholders equity (deficiency
in assets)Current liabilities:Accounts payable
    
    $
    
    
    
    $
    10,432
    
    
    $
    8,022
    
    
    $
    
    
    
    $
    
    
    
    $
    18,454Accrued liabilities
    
    
    
    
    
    
    12,179
    
    
    
    15,066
    
    
    
    
    
    
    
    
    
    
    
    27,245Current portion of long-term debt
    
    
    
    
    
    
    686
    
    
    
    7,979
    
    
    
    28
    
    
    
    
    
    
    
    8,693Total current liabilities
    
    
    
    
    
    
    23,297
    
    
    
    31,067
    
    
    
    28
    
    
    
    
    
    
    
    54,392Long-term debt, less current portion
    
    
    
    
    
    
    151,132
    
    
    
    51,066
    
    
    
    41
    
    
    
    
    
    
    
    202,239Investment in subsidiary
    
    
    
    
    
    
    155,711
    
    
    
    
    
    
    
    587
    
    
    
    (156,298
    )
    
    
    Intercompany payable
    
    
    7,848
    
    
    
    568
    
    
    
    165,881
    
    
    
    
    
    
    
    (174,297
    )
    
    
    Accrued pension and other employee benefits
    
    
    
    
    
    
    7,404
    
    
    
    14,144
    
    
    
    
    
    
    
    
    
    
    
    21,548Other long-term liabilities
    
    
    
    
    
    
    25,137
    
    
    
    15,288
    
    
    
    1,336
    
    
    
    
    
    
    
    41,761Stockholders equity (deficiency in assets)
    
    
    13,704
    
    
    
    (53,453
    )
    
    
    (155,712
    )
    
    
    73,484
    
    
    
    135,681
    
    
    
    13,704Total liabilities and stockholders equity
(deficiency
In assets)
    
    $
    21,552
    
    
    $
    309,796
    
    
    $
    121,734
    
    
    $
    75,476
    
    
    $
    (194,914
    )
    
    $
    333,644
 Condensed Consolidating Balance Sheet  December 31, 2003 (in thousands) PCI
    
    Pioneer
    
    Other
    
    
    
    
    
    PioneerPCI
    
    Canada
    
    Americas
    
    Guarantors
    
    Eliminations
    
    ConsolidatedAssetsCurrent assets:Cash and cash equivalents
    
    $
    
    
    
    $
    500
    
    
    $
    1,422
    
    
    $
    24
    
    
    $
    
    
    
    $
    1,946Accounts receivable, net
    
    
    
    
    
    
    10,218
    
    
    
    28,582
    
    
    
    
    
    
    
    
    
    
    
    38,800Inventories, net
    
    
    
    
    
    
    6,219
    
    
    
    9,488
    
    
    
    
    
    
    
    
    
    
    
    15,707Prepaid expenses and other current assets
    
    
    2,812
    
    
    
    1,341
    
    
    
    865
    
    
    
    
    
    
    
    
    
    
    
    5,018Total current assets
    
    
    2,812
    
    
    
    18,278
    
    
    
    40,357
    
    
    
    24
    
    
    
    
    
    
    
    61,471Property, plant and equipment, net
    
    
    
    
    
    
    113,616
    
    
    
    74,390
    
    
    
    1,528
    
    
    
    
    
    
    
    189,534Other assets, net
    
    
    
    
    
    
    165
    
    
    
    3,766
    
    
    
    
    
    
    
    
    
    
    
    3,931Intercompany receivable
    
    
    
    
    
    
    87,356
    
    
    
    
    
    
    
    67,581
    
    
    
    (154,937
    )
    
    
    Investment in subsidiaries
    
    
    25,376
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (25,376
    )
    
    
    Excess reorganization value over fair value of
identifiable assets
    
    
    
    
    
    
    84,064
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,064Total assets
    
    $
    28,188
    
    
    $
    303,479
    
    
    $
    118,513
    
    
    $
    69,133
    
    
    $
    (180,313
    )
    
    $
    339,000Liabilities and stockholders equity (deficiency
in assets)Current liabilities:Accounts payable
    
    $
    
    
    
    $
    5,875
    
    
    $
    7,152
    
    
    $
    
    
    
    $
    
    
    
    $
    13,027Accrued liabilities
    
    
    
    
    
    
    5,751
    
    
    
    11,585
    
    
    
    33
    
    
    
    
    
    
    
    17,369Current portion of long-term debt
    
    
    
    
    
    
    627
    
    
    
    17,830
    
    
    
    28
    
    
    
    
    
    
    
    18,485Total current liabilities
    
    
    
    
    
    
    12,253
    
    
    
    36,567
    
    
    
    61
    
    
    
    
    
    
    
    48,881Long-term debt, less current portion
    
    
    
    
    
    
    151,805
    
    
    
    51,936
    
    
    
    62
    
    
    
    
    
    
    
    203,803Investment in subsidiary
    
    
    
    
    
    
    144,036
    
    
    
    
    
    
    
    445
    
    
    
    (144,481
    )
    
    
    Intercompany payable
    
    
    9,198
    
    
    
    3,527
    
    
    
    142,212
    
    
    
    
    
    
    
    (154,937
    )
    
    
    Accrued pension and other employee benefits
    
    
    
    
    
    
    8,050
    
    
    
    16,534
    
    
    
    
    
    
    
    
    
    
    
    24,584Other long-term liabilities
    
    
    
    
    
    
    25,856
    
    
    
    15,301
    
    
    
    1,585
    
    
    
    
    
    
    
    42,742Stockholders equity (deficiency in assets)
    
    
    18,990
    
    
    
    (42,048
    )
    
    
    (144,037
    )
    
    
    66,980
    
    
    
    119,105
    
    
    
    18,990Total liabilities and stockholders equity
(deficiency in assets)
    
    $
    28,188
    
    
    $
    303,479
    
    
    $
    118,513
    
    
    $
    69,133
    
    
    $
    (180,313
    )
    
    $
    339,000
 12




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Condensed Consolidating Statement of Operations  Three Months Ended September 30, 2004 (in thousands) PCI
    
    Pioneer
    
    Other
    
    
    
    
    
    PioneerPCI
    
    Canada
    
    Americas
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    49,324
    
    
    $
    80,831
    
    
    $
    
    
    
    $
    (25,176
    )
    
    $
    104,979Cost of sales
    
    
    
    
    
    
    (41,509
    )
    
    
    (73,831
    )
    
    
    (136
    )
    
    
    25,176
    
    
    
    (90,300
    )Gross profit
    
    
    
    
    
    
    7,815
    
    
    
    7,000
    
    
    
    (136
    )
    
    
    
    
    
    
    14,679Selling, general and administrative expenses
    
    
    (218
    )
    
    
    (1,629
    )
    
    
    (3,577
    )
    
    
    
    
    
    
    
    
    
    
    (5,424
    )Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other items
    
    
    
    
    
    
    
    
    
    
    (97
    )
    
    
    
    
    
    
    
    
    
    
    (97
    )Operating income (loss)
    
    
    (218
    )
    
    
    6,186
    
    
    
    3,326
    
    
    
    (136
    )
    
    
    
    
    
    
    9,158Interest expense, net
    
    
    
    
    
    
    (3,802
    )
    
    
    (774
    )
    
    
    (2
    )
    
    
    
    
    
    
    (4,578
    )Other income (expense), net
    
    
    
    
    
    
    (1,848
    )
    
    
    (2,434
    )
    
    
    2,434
    
    
    
    
    
    
    
    (1,848
    )Income (loss) before income taxes
    
    
    (218
    )
    
    
    536
    
    
    
    118
    
    
    
    2,296
    
    
    
    
    
    
    
    2,732Income tax benefit
    
    
    
    
    
    
    1,185
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,185Net income
(loss) before equity in earnings of
subsidiaries
    
    
    (218
    )
    
    
    1,721
    
    
    
    118
    
    
    
    2,296
    
    
    
    
    
    
    
    3,917Equity in net loss of subsidiaries
    
    
    4,135
    
    
    
    118
    
    
    
    
    
    
    
    138
    
    
    
    (4,391
    )
    
    
    Net income (loss)
    
    $
    3,917
    
    
    $
    1,839
    
    
    $
    118
    
    
    $
    2,434
    
    
    $
    (4,391
    )
    
    $
    3,917
 Condensed Consolidating Statement of Operations  Three Months Ended September 30, 2003 (in thousands) PCI
    
    Pioneer
    
    Other
    
    
    
    
    
    PioneerPCI
    
    Canada
    
    Americas
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    48,517
    
    
    $
    76,251       $-
    
    
    
    
    
    
    $
    (24,767
    )
    
    $
    100,001Cost of sales
    
    
    
    
    
    
    (38,962
    )
    
    
    (72,164
    )
    
    
    8
    
    
    
    24,767
    
    
    
    (86,351
    )Gross profit
    
    
    
    
    
    
    9,555
    
    
    
    4,087
    
    
    
    8
    
    
    
    
    
    
    
    13,650Selling, general and administrative expenses
    
    
    (81
    )
    
    
    (1,686
    )
    
    
    (4,225
    )
    
    
    
    
    
    
    
    
    
    
    (5,992
    )Asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other items
    
    
    
    
    
    
    (18
    )
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    24Operating income (loss)
    
    
    (81
    )
    
    
    7,851
    
    
    
    (96
    )
    
    
    8
    
    
    
    
    
    
    
    7,682Interest expense, net
    
    
    
    
    
    
    (3,788
    )
    
    
    (792
    )
    
    
    (2
    )
    
    
    
    
    
    
    (4,582
    )Other income (expense), net
    
    
    
    
    
    
    (92
    )
    
    
    (2,259
    )
    
    
    2,261
    
    
    
    
    
    
    
    (90
    )Income (loss) before income taxes
    
    
    (81
    )
    
    
    3,971
    
    
    
    (3,147
    )
    
    
    2,267
    
    
    
    
    
    
    
    3,010Income tax expense
    
    
    
    
    
    
    (1,057
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,057
    )Net income
(loss) before equity in earnings (loss) of
subsidiaries
    
    
    (81
    )
    
    
    2,914
    
    
    
    (3,147
    )
    
    
    2,267
    
    
    
    
    
    
    
    1,953Equity in net earnings of subsidiaries
    
    
    2,034
    
    
    
    (3,147
    )
    
    
    
    
    
    
    
    
    
    
    1,113
    
    
    
    Net income (loss)
    
    $
    1,953
    
    
    $
    (233
    )
    
    $
    (3,147
    )
    
    $
    2,267
    
    
    $
    1,113
    
    
    $
    1,953
 Condensed Consolidating Statement of Operations  Nine Months Ended September 30, 2004 (in thousands) PCI
    
    Pioneer
    
    Other
    
    
    
    
    
    PioneerPCI
    
    Canada
    
    Americas
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    138,709
    
    
    $
    221,513
    
    
    $
    
    
    
    $
    (68,145
    )
    
    $
    292,077Cost of sales
    
    
    
    
    
    
    (120,446
    )
    
    
    (208,490
    )
    
    
    (137
    )
    
    
    68,145
    
    
    
    (260,928
    )Gross profit
    
    
    
    
    
    
    18,263
    
    
    
    13,023
    
    
    
    (137
    )
    
    
    
    
    
    
    31,149Selling, general and administrative expenses
    
    
    (673
    )
    
    
    (5,800
    )
    
    
    (13,961
    )
    
    
    53
    
    
    
    
    
    
    
    (20,381
    )Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Asset impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other items
    
    
    
    
    
    
    (1,521
    )
    
    
    (1,919
    )
    
    
    
    
    
    
    
    
    
    
    (3,440
    )Operating income (loss)
    
    
    (673
    )
    
    
    10,942
    
    
    
    (2,857
    )
    
    
    (84
    )
    
    
    
    
    
    
    7,328Interest expense, net
    
    
    
    
    
    
    (11,350
    )
    
    
    (2,427
    )
    
    
    (4
    )
    
    
    
    
    
    
    (13,781
    )Other income (expense), net
    
    
    
    
    
    
    (1,109
    )
    
    
    (6,738
    )
    
    
    6,734
    
    
    
    
    
    
    
    (1,113
    )Income (loss) before income taxes
    
    
    (673
    )
    
    
    (1,517
    )
    
    
    (12,022
    )
    
    
    6,646
    
    
    
    
    
    
    
    (7,566
    )Income tax benefit
    
    
    
    
    
    
    1,789
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,789Net income
(loss) before equity in earnings (loss) of subsidiaries
    
    
    (673
    )
    
    
    272
    
    
    
    (12,022
    )
    
    
    6,646
    
    
    
    
    
    
    
    (5,777
    )Equity in net loss of subsidiaries
    
    
    (5,104
    )
    
    
    (12,022
    )
    
    
    
    
    
    
    (141
    )
    
    
    17,267
    
    
    
    Net income (loss)
    
    $
    (5,777
    )
    
    $
    (11,750
    )
    
    $
    (12,022
    )
    
    $
    6,505
    
    
    $
    17,267
    
    
    $
    (5,777
    )
 13




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##### Table of Contents



Condensed Consolidating Statement of Operations  Nine Months Ended September 30, 2003 (in thousands) PCI
    
    Pioneer
    
    Other
    
    
    
    
    
    PioneerPCI
    
    Canada
    
    Americas
    
    Guarantors
    
    Eliminations
    
    ConsolidatedRevenues
    
    $
    
    
    
    $
    134,615
    
    
    $
    217,363
    
    
    $
    
    
    
    $
    (66,630
    )
    
    $
    285,348Cost of sales
    
    
    
    
    
    
    (114,518
    )
    
    
    (224,965
    )
    
    
    140
    
    
    
    66,630
    
    
    
    (272,713
    )Gross profit (loss)
    
    
    
    
    
    
    20,097
    
    
    
    (7,602
    )
    
    
    140
    
    
    
    
    
    
    
    12,635Selling, general and administrative expenses
    
    
    (250
    )
    
    
    (4,707
    )
    
    
    (15,073
    )
    
    
    (10
    )
    
    
    
    
    
    
    (20,040
    )Change in fair value of derivatives
    
    
    
    
    
    
    
    
    
    
    87,271
    
    
    
    
    
    
    
    
    
    
    
    87,271Asset impairment
    
    
    
    
    
    
    
    
    
    
    (40,818
    )
    
    
    
    
    
    
    
    
    
    
    (40,818
    )Other items
    
    
    
    
    
    
    (18
    )
    
    
    464
    
    
    
    
    
    
    
    
    
    
    
    446Operating income (loss)
    
    
    (250
    )
    
    
    15,372
    
    
    
    24,242
    
    
    
    130
    
    
    
    
    
    
    
    39,494Interest expense, net
    
    
    
    
    
    
    (11,373
    )
    
    
    (2,806
    )
    
    
    (6
    )
    
    
    
    
    
    
    (14,185
    )Other income (expense), net
    
    
    
    
    
    
    (4,538
    )
    
    
    (11,655
    )
    
    
    11,659
    
    
    
    
    
    
    
    (4,534
    )Income (loss) before income taxes
    
    
    (250
    )
    
    
    (539
    )
    
    
    9,781
    
    
    
    11,783
    
    
    
    
    
    
    
    20,775Income tax benefit
    
    
    
    
    
    
    2,602
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,602Net income (loss) before equity in earnings of
subsidiaries
    
    
    (250
    )
    
    
    2,063
    
    
    
    9,781
    
    
    
    11,783
    
    
    
    
    
    
    
    23,377Equity in net earnings of subsidiaries
    
    
    23,627
    
    
    
    9,781
    
    
    
    
    
    
    
    
    
    
    
    (33,408
    )
    
    
    Net income
    
    $
    23,377
    
    
    $
    11,844
    
    
    $
    9,781
    
    
    $
    11,783
    
    
    $
    (33,408
    )
    
    $
    23,377
 Condensed Consolidating Statement of Cash Flows  Nine Months Ended September 30, 2004 (in thousands) PCI
    
    Pioneer
    
    Other
    
    PioneerPCI
    
    Canada
    
    Americas
    
    Guarantors
    
    ConsolidatedCash flows from operating activities:Net cash flows from operating activities
    
    $
    (145
    )
    
    $
    2,111
    
    
    $
    16,847
    
    
    $
    (7
    )
    
    $
    18,806Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (1,384
    )
    
    
    (4,795
    )
    
    
    
    
    
    
    (6,179
    )Proceeds from disposal of assets
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    35Net cash flows from investing activities
    
    
    
    
    
    
    (1,384
    )
    
    
    (4,760
    )
    
    
    
    
    
    
    (6,144
    )Cash flows from financing activities:Net payments under revolving credit arrangements
    
    
    
    
    
    
    
    
    
    
    (9,984
    )
    
    
    
    
    
    
    (9,984
    )Payments on debt
    
    
    
    
    
    
    (792
    )
    
    
    (826
    )
    
    
    (11
    )
    
    
    (1,629
    )Proceeds from issuance of stock
    
    
    145
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145Net cash flows from financing activities
    
    
    145
    
    
    
    (792
    )
    
    
    (10,810
    )
    
    
    (11
    )
    
    
    (11,468
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    132Net change in cash and cash equivalents
    
    
    
    
    
    
    67
    
    
    
    1,277
    
    
    
    (18
    )
    
    
    1,326Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    499
    
    
    
    1,423
    
    
    
    24
    
    
    
    1,946Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    566
    
    
    $
    2,700
    
    
    $
    6
    
    
    $
    3,272
 Condensed Consolidating Statement of Cash Flows  Nine Months Ended September 30, 2003 (in thousands) PCI
    
    Pioneer
    
    Other
    
    PioneerPCI
    
    Canada
    
    Americas
    
    Guarantors
    
    ConsolidatedCash flows from operating activities:Net cash flows from operating activities
    
    $
    1,513
    
    
    $
    1,835
    
    
    $
    14,381
    
    
    $
    6
    
    
    $
    17,735Cash flows from investing activities:Capital expenditures
    
    
    
    
    
    
    (1,791
    )
    
    
    (4,388
    )
    
    
    
    
    
    
    (6,179
    )Net cash flows from investing activities
    
    
    
    
    
    
    (1,791
    )
    
    
    (4,388
    )
    
    
    
    
    
    
    (6,179
    )Cash flows from financing activities:Net proceeds under revolving credit arrangements
    
    
    
    
    
    
    
    
    
    
    (1,918
    )
    
    
    
    
    
    
    (1,918
    )Payments on debt
    
    
    (1,520
    )
    
    
    (649
    )
    
    
    (6,236
    )
    
    
    (13
    )
    
    
    (8,418
    )Proceeds from issuance of stock
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7Net cash flows from financing activities
    
    
    (1,513
    )
    
    
    (649
    )
    
    
    (8,154
    )
    
    
    (13
    )
    
    
    (10,329
    )Effect of exchange rate changes on cash
    
    
    
    
    
    
    566
    
    
    
    
    
    
    
    
    
    
    
    566Net change in cash and cash equivalents
    
    
    
    
    
    
    (39
    )
    
    
    1,839
    
    
    
    (7
    )
    
    
    1,793Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    1,702
    
    
    
    1,074
    
    
    
    13
    
    
    
    2,789Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    1,663
    
    
    $
    2,913
    
    
    $
    6
    
    
    $
    4,582
 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 has been 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 nine months ended
September 30, 2004. 14




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##### Table of Contents



The component of net periodic benefit costs related to Pioneers defined
benefit pension plans for the three months ended September 30, 2004 and 2003
were: PCI
    
    Pioneer
    
    PioneerCanada
    
    Americas
    
    ConsolidatedThree Months Ended September 30, 2004Components of net periodic benefit cost:Service cost
    
    $
    343
    
    
    $
    79
    
    
    $
    422Interest cost
    
    
    660
    
    
    
    728
    
    
    
    1,388Expected return on plan assets
    
    
    (726
    )
    
    
    (748
    )
    
    
    (1,474
    )Amortization of prior service costs
    
    
    
    
    
    
    
    
    
    
    Amortization of net actuarial loss (gain)
    
    
    (156
    )
    
    
    183
    
    
    
    27Net periodic benefit cost
    
    $
    121
    
    
    $
    242
    
    
    $
    363
 PCI
    
    Pioneer
    
    PioneerCanada
    
    Americas
    
    ConsolidatedThree Months Ended September 30, 2003Components of net periodic benefit cost:Service cost
    
    $
    218
    
    
    $
    328
    
    
    $
    546Interest cost
    
    
    503
    
    
    
    720
    
    
    
    1,223Expected return on plan assets
    
    
    (483
    )
    
    
    (598
    )
    
    
    (1,081
    )Amortization of prior service costs
    
    
    
    
    
    
    (1
    )
    
    
    (1
    )Amortization of net actuarial loss (gain)
    
    
    (1
    )
    
    
    155
    
    
    
    154Net periodic benefit cost
    
    $
    237
    
    
    $
    604
    
    
    $
    841
 The component of net periodic benefit costs related to Pioneers defined
benefit pension plans for the nine months ended September 30, 2004 and 2003
were: PCI
    
    Pioneer
    
    PioneerCanada
    
    Americas
    
    ConsolidatedNine Months Ended September 30, 2004Components of net periodic benefit cost:Service cost
    
    $
    930
    
    
    $
    238
    
    
    $
    1,168Interest cost
    
    
    1,786
    
    
    
    2,183
    
    
    
    3,969Expected return on plan assets
    
    
    (1,947
    )
    
    
    (2,246
    )
    
    
    (4,193
    )Amortization of prior service costs
    
    
    
    
    
    
    1
    
    
    
    1Amortization of net actuarial loss
    
    
    
    
    
    
    628
    
    
    
    628Net periodic benefit cost
    
    $
    769
    
    
    $
    804
    
    
    $
    1,573
 PCI
    
    Pioneer
    
    PioneerCanada
    
    Americas
    
    ConsolidatedNine Months Ended September 30, 2003Components of net periodic benefit cost:Service cost
    
    $
    654
    
    
    $
    986
    
    
    $
    1,640Interest cost
    
    
    1,508
    
    
    
    2,158
    
    
    
    3,666Expected return on plan assets
    
    
    (1,448
    )
    
    
    (1,794
    )
    
    
    (3,242
    )Amortization of prior service costs
    
    
    
    
    
    
    (4
    )
    
    
    (4
    )Amortization of net actuarial loss (gain)
    
    
    (4
    )
    
    
    466
    
    
    
    462Net periodic benefit cost
    
    $
    710
    
    
    $
    1,812
    
    
    $
    2,522
 Pension expense was $1.6 million and $2.5 million for the nine months
ended September 30, 2004 and 2003, respectively. Pension contributions were
$4.8 million and $4.4 million in the nine months ended September 30, 2004 and
2003, respectively. Total contributions in 2004, which are based on regulatory
requirements, are expected to be approximately $5.6 million. Due to the
elimination of employee positions in the second quarter of 2004 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. The component of net periodic benefit costs related to Pioneers
postretirement benefits other than pensions for the three months ended
September 30, 2004 and 2003 were: 15




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##### Table of Contents



PCI
    
    Pioneer
    
    PioneerCanada
    
    Americas
    
    ConsolidatedThree Months Ended September 30, 2004Components of net periodic benefit cost:Service cost
    
    $
    42
    
    
    $
    
    
    
    $
    42Interest cost
    
    
    78
    
    
    
    8
    
    
    
    86Amortization of prior service costs
    
    
    (8
    )
    
    
    (78
    )
    
    
    (86
    )Amortization of net actuarial gain
    
    
    (5
    )
    
    
    (8
    )
    
    
    (13
    )Net periodic benefit cost
    
    $
    107
    
    
    $
    (78
    )
    
    $
    29PCI
    
    Pioneer
    
    PioneerCanada
    
    Americas
    
    ConsolidatedThree Months Ended September 30, 2003Components of net periodic benefit cost:Service cost
    
    $
    25
    
    
    $
    (1
    )
    
    $
    24Interest cost
    
    
    52
    
    
    
    51
    
    
    
    103Amortization of prior service costs
    
    
    (6
    )
    
    
    (234
    )
    
    
    (240
    )Amortization of net actuarial gain
    
    
    (2
    )
    
    
    (10
    )
    
    
    (12
    )Net periodic benefit cost
    
    $
    69
    
    
    $
    (194
    )
    
    $
    (125
    )
 The component of net periodic benefit costs related to Pioneers
postretirement benefits other than pensions for the nine months ended September
30, 2004 and 2003 were: PCI
    
    Pioneer
    
    PioneerCanada
    
    Americas
    
    ConsolidatedNine Months Ended September 30, 2004Components of net periodic benefit cost:Service cost
    
    $
    114
    
    
    $
    2
    
    
    $
    116Interest cost
    
    
    214
    
    
    
    26
    
    
    
    240Amortization of prior service costs
    
    
    (22
    )
    
    
    (234
    )
    
    
    (256
    )Amortization of net actuarial gain
    
    
    (2
    )
    
    
    (26
    )
    
    
    (28
    )Net periodic benefit cost
    
    $
    304
    
    
    $
    (232
    )
    
    $
    72PCI
    
    Pioneer
    
    PioneerCanada
    
    Americas
    
    ConsolidatedNine Months Ended September 30, 2003Components of net periodic benefit cost:Service cost
    
    $
    75
    
    
    $
    2
    
    
    $
    77Interest cost
    
    
    158
    
    
    
    155
    
    
    
    313Amortization of prior service costs
    
    
    (20
    )
    
    
    (234
    )
    
    
    (254
    )Amortization of net actuarial gain
    
    
    (7
    )
    
    
    (33
    )
    
    
    (40
    )Net periodic benefit cost
    
    $
    206
    
    
    $
    (110
    )
    
    $
    96
 Pioneer also maintains matched defined contribution savings plans for its
employees in the U.S. and Canada. Pioneers contributions to these plans are
based on the amount of employee contributions to the plans. In connection with
the freezing of benefits under Pioneer Americas defined benefit plans, after
March 1, 2004, the U.S. defined contribution plans have been supplemented by
Pioneer Americas with the companys voluntary contributions to employees
accounts based on various percentages of compensation. Pioneers contributions
to the U.S. and Canadian defined contribution plans, consisting of both
matching and supplemental contributions, were $0.3 million and $0.1 million for
the three months ended September 30, 2004 and 2003, respectively, and $0.9
million and $0.1 million for the nine months ended September 30, 2004 and 2003,
respectively. 16




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13. 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. 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. Project activities
have included an analysis of our organizational structure and the selection of
an optimum workforce design and staffing, as well as the identification and
introduction of various production and process efficiency measures. We anticipate that the total cost of Project STAR will be approximately
$7.7 million. The changes to our organizational structure that we have made as
a part of the project resulted in the elimination of 128 employee and contract
positions, and almost all of the reductions have now taken place. For the nine
months ended September 30, 2004, we recorded $3.2 million for related employee
severance and benefits costs. That amount is included in other items in our
consolidated statements of operations for the period. The concepts of the
project are being extended to other areas of our operations and we anticipate
that as a result we will recognize additional severance and benefits-related
charges, but the amount of such charges cannot be estimated until there has
been further progress with project implementation in those areas. During the
nine months ended September 30, 2004, we also incurred $3.8 million in
consulting fees and expenses that were related to the project. Those costs
have been included in selling, general and administrative expenses in our
consolidated statements of operations for the period. We anticipate that
during the three months ending December 31, 2004, we will record as a part of
selling, general and administrative expenses an additional $0.7 million for
consulting fees and expenses, based on a fee structure that depends on the
attainment of specified savings. We currently anticipate that Project STAR will have the effect of
improving our annual cost structure by approximately $11.0 million. We expect
that Project Star, which resulted in the elimination of 128 employee and
contract positions, will reduce our annual labor and benefits costs by more
than $8.0 million, and efficiency measures that have been identified are
expected to result in additional annual cost savings of approximately $3.0
million. Of the total savings that are anticipated as a result of Project
STAR, through September 30, 2004, we believe we have realized savings of
approximately $3.0 million. We anticipate that additional Project STAR
initiatives will result in future incremental cost reductions and efficiency 17




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improvements, as well as additional consulting fees and severance costs,
although of a lesser magnitude than those identified and incurred to date. 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 seven quarters was as follows: 2003
    
    2004First Quarter
    
    $
    362
    
    
    $
    339Second Quarter
    
    
    406
    
    
    
    354Third Quarter
    
    
    392
    
    
    
    409Fourth Quarter
    
    
    366
 For purposes of determining our ECU netback, we use prices that we realize as a
result of sales of chlorine and caustic soda to our customers, and we do not
include the value of chlorine and caustic soda that is incorporated in other
products that we manufacture and sell. During the third quarter of 2004, we
used approximately 35% of the chlorine and 14% of the caustic soda that we
produced to manufacture bleach and hydrochloric acid, as well as other
downstream products. In January 2004 we announced a $75 per ton price increase for chlorine,
but caustic soda prices continued to decline in the first quarter of 2004. As a
result of continuing strong demand for chlorine, in April 2004 we implemented
an order control program, under which we limit our chlorine customers to
contract volumes based on average purchases over the previous three months,
with appropriate seasonal adjustments. Demand for caustic soda increased in
the second quarter, and in April 2004 we announced a $50 per ton price increase
and implemented an order control program for that product. Later in May we
announced additional price increases of $45 per ton for caustic soda and $20
per ton for chlorine. In late July we announced an additional $65 per ton
price increase for caustic soda, and in late August we announced additional
price increases for caustic soda and chlorine of $45 per ton and $20 per ton,
respectively. The chlorine and caustic soda price increases were implemented
when announced or as soon as permitted by applicable contract terms. Our
production capacity is approximately 1,500,000 tons of caustic
soda and chlorine. Most of the caustic soda and chlorine that we sell to customers is sold
under contracts with varying terms and conditions. As of October 25, 2004, we
had contracts that will be in effect on January 1, 2005, covering the
anticipated sale of an annual total of approximately 520,000 tons of caustic
soda and chlorine (including equivalent amounts that will be sold as bleach or
hydrochloric acid), and that are subject to contractual provisions
that could restrict or eliminate our ability to increase the netback we will receive for
the amount of product that is sold under the contracts. The prices that we realize for contract sales of caustic soda and chlorine
during any quarter, and thus our average ECU netback for the quarter, are
different from the caustic soda and chlorine contracts prices that are reported
by Chemical Market Associates, Inc. (commonly referred to as CMAI), a leading
industry observer. CMAIs reported monthly contract prices are based on the
assumption that price changes are implemented on the first day of the calendar
quarter that follows announced price changes, while we have a mix of pricing
provisions that in some cases limits or delays the implementation of price
changes. CMAIs reported monthly contract prices also relate to products that
are produced and delivered in the U.S. Gulf Coast. While the majority of the
demand for North American chlor-alkali production does occur in the U.S. Gulf
Coast region, only one of our plants is located in that region, and regional
supply and demand factors and logistical considerations generally result in
varying regional prices for our products. During the most recent quarter our average ECU netback was $409, while the
average ECU netback quoted by CMAI for the same quarter was $503. In general,
changes in our average ECU netback and the related effect on our revenues and
cash flow have lagged changes in our announced prices and changes in contract
prices that are reported by CMAI, although the resulting benefit to us in a
period of declining prices is of a somewhat lesser magnitude. The following
table illustrates the recent relationship between our average ECU netback and
the monthly contract price reported by CMAI: 18




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(ECU CHART) For
the month of October 2004 our average ECU netback was approximately
$450. Since part of the benefit of the price increases that we have announced
has been delayed, we expect that our average ECU netback will increase during
the balance of 2004 and during the first quarter of 2005, even in the absence
of any further price increases. Plant operating rates in the chlor-alkali
industry are reportedly at near capacity, and further increases in ECU prices
during the remainder of 2004 or in 2005 could be announced if these conditions
continue. 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, as permitted by our standard contract terms. Many
of our competitors are reported to have adopted similar programs as a result of
the industrys current operating rate. Production Our quarterly production volumes, expressed in terms of ECUs (one ton of
chlorine and 1.1 tons of caustic soda), at our chlor-alkali facilities for the
most recent seven quarters were as follows: 2003
    
    2004First Quarter
    
    
    175,764
    
    
    
    169,555Second Quarter
    
    
    161,725
    
    
    
    183,404Third Quarter
    
    
    173,565
    
    
    
    177,751Fourth Quarter
    
    
    160,071
 During the most recent quarter our chlor-alkali plants operated at
approximately 97% of capacity. The reduction from the previous quarter
resulted from a combination of planned maintenance outages, certain operating
equipment failures, and a brief disruption in salt supply resulting from one
of the seasons hurricane events. We expect that planned maintenance outages
at our chlor-alkali plants will reduce ECU production by approximately 7,500
tons during each of the quarters ending December 31, 2004, and March 31, 2005,
and additional reductions could occur as a result of operating equipment
failures. The volumes (in tons) of caustic soda that we purchased for resale during
the most recent seven quarters were as follows: 2003
    
    2004First Quarter
    
    
    24,195
    
    
    
    30,636Second Quarter
    
    
    27,412
    
    
    
    39,504Third Quarter
    
    
    38,495
    
    
    
    35,080Fourth Quarter
    
    
    47,307
 19




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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. On average, 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. 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
seven quarters, and the corresponding percentages of our cost of sales 
product that those amounts represented, were as follows: 2003
    
    2004Percentage of Cost of
    
    
    
    
    
    Percentage of Cost ofTotal Power Costs
    
    Sales - Product
    
    Total Power Costs
    
    Sales - ProductFirst Quarter
    
    $
    19,691
    
    
    
    23
    %
    
    $
    19,989
    
    
    
    23
    %Second Quarter
    
    
    18,780
    
    
    
    23
    %
    
    
    21,273
    
    
    
    25
    %Third Quarter
    
    
    21,272
    
    
    
    25
    %
    
    
    23,051
    
    
    
    26
    %Fourth Quarter
    
    
    18,560
    
    
    
    21
    %
 Electricity rates increased during the third quarter of 2004, and our
total power costs increased despite lower production levels during the quarter.
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. The Department of Environmental Quality of the State of Louisiana
recently initiated a program with goals of continual reduction in the use and
release of mercury in the state and the minimization of human exposure to
mercury through improved communication, management, research, collection,
recycling and disposal. We could incur substantial capital expenditures
and/or expenses in meeting any new emissions limitations and standards that
result from the EPAs regulatory process or the State of Louisianas
initiatives. Liquidity and Capital Resources Debt, Financial Leverage and Covenants.At September 30, 2004, our senior
secured debt aggregated $204.4 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 $6.8 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 20




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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 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 September 30,
2004, was $30.6 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
September 30, 2004, and for each of the quarters in that period is as follows
(dollar amounts in thousands): Twelve MonthsThree Months Ended
    
    EndedDecember 31,
    
    March 31,
    
    June 30,
    
    September 30,
    
    September 30,2003
    
    2004
    
    2004
    
    2004
    
    2004Net income (loss)
    
    $
    (5,190
    )
    
    $
    (7,293
    )
    
    $
    (2,401
    )
    
    $
    3,917
    
    
    $
    (10,967
    )Extraordinary gains
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income tax (benefit) expense
    
    
    (684
    )
    
    
    (262
    )
    
    
    (342
    )
    
    
    (1,185
    )
    
    
    (2,473
    )Interest expense, net
    
    
    4,879
    
    
    
    4,642
    
    
    
    4,561
    
    
    
    4,578
    
    
    
    18,660Depreciation and
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization
    
    
    5,500
    
    
    
    8,884
    
    
    
    5,470
    
    
    
    5,557
    
    
    
    25,411Lender-Defined EBITDA
    
    $
    4,505
    
    
    $
    5,971
    
    
    $
    7,288
    
    
    $
    12,867
    
    
    $
    30,631
 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, the 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 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. The Revolver contains additional covenants requiring us to maintain
Liquidity (as defined in the agreement) of at least $5.0 million, and limiting
capital expenditure levels to $25.0 million in each calendar year. At September
30, 2004, our Liquidity was $21.0 million, consisting of borrowing
availability, net of outstanding letters of credit, of $17.7 million and cash
of $3.3 million. Our capital expenditures were $6.2 million in the nine months
ended September 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). 21




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Our borrowings under the Revolver as of September 30, 2004, were $6.8
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 September 30, 2004, our additional availability
under the Revolver was approximately $17.7 million, and our Liquidity was $21.0
million. The cash that we will generate from our operations might not be sufficient
to repay the Revolver and the Tranche A Notes when they are due in December
2006.
However, should recent improvements in product margins be sustained, the cash
that we will generate from our operations might be sufficient to repay the
obligations outstanding under the Revolver and the Tranche A Notes on or before
their maturities in December 2006. We do not anticipate that the cash that we
will generate from our operations will be sufficient to repay the 10% Senior
Secured Notes when they are due in December 2008. To the extent that we are
unable to repay any such indebtedness when it is due, 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 will generate sufficient cash from our operations
to repay our outstanding debt obligations or 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. Shelf Registration Statement.On September 16, 2004, our shelf
registration statement on Form S-3 was declared effective by the Securities and
Exchange Commission. Under the shelf registration statement we may offer any
combination of senior or subordinated debt securities, common stock, preferred
stock and warrants from time to time in one or more offerings with a total
offering price of up to $100 million. We have not offered or
sold any securities that are available under the shelf registration statement. Possible Asset Dispositions.During the third quarter of 2004 we engaged
a real estate broker in connection with the possible sale of approximately 60
acres of vacant land located at our Henderson facility, which is located in the
Las Vegas Valley at the intersection of I-515 and I-215. We are also seeking a
buyer for up to 750 annual acre-feet of Colorado River water rights. The
assets have a nominal book value. If the assets are sold, the
transaction(s) are not expected to be completed until 2005 and/or 2006. The
net proceeds from such sales, if any, must be applied to mandatory redemptions
and prepayments of the Tranche A Notes, as discussed above under Debt,
Financial Leverage and Covenants. Future Payment Commitments.For the three months ending December 31,
2004, we expect to have cash requirements, in addition to recurring operating
and administrative costs, of approximately $15.4 million, consisting of the
following: (i) interest payments of $8.8 million, (ii) capital expenditures of
$3.3 million, (iii) environmental remediation spending of $1.2 million, (iv)
payments of severance and benefit costs of $0.9 million, (v) consulting fees
and expenses in connection with Project STAR of $1.1 million and (vi)
contractual debt repayments of $0.1 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. 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 nine
months ended September 30, 2003, as $87.3 million of operating income under the
caption Change in Fair Value of Derivatives, to reflect 22




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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 (see Note 4 to the consolidated financial statements). Net Operating Loss Carryforwards.As of
December 31, 2003, we had net operating
loss carryforwards (NOLs) originating in 2002 and 2003 of approximately $66 million
available to offset future taxable income. If not utilized, the NOLs will expire in 2022
and 2023 and are currently not subject to limitation. However, the full utilization of the
NOLs might be affected if a 50 percentage point change occurs in ownership among our
stockholders as provided under Internal Revenue Code Section 382. Net Cash Flows from Operating Activities.During the first nine months of
2004 our cash flow provided by operating activities was $18.8 million, $1.1
million more than during the same period in 2003. During the 2004 period
changes in operating assets and liabilities increased operating cash flows by
$5.5 million, compared to an increase of $1.0 million in the comparative prior
period. The current period increase resulted primarily from an increase in
accrued liabilities related to the costs of the organizational efficiency
project, increased accrued interest on Tranche A Notes, increased electricity
prices and an increase in accounts payable to a normal level of activity. These
effects were offset by changes in accounts receivable, which increased due to
the increase of sales volumes and prices in the third quarter. Net Cash Flows from Investing Activities.All of the cash that we used in
investing activities related to capital expenditures during the first nine
months of 2004 and the first nine months of 2003. The net amounts of cash used
in the two periods were $6.1 million and $6.2 million, respectively. Net Cash Flows from Financing Activities.Cash used in financing
activities during the first nine months of 2004 was $11.5 million, due
primarily to debt payments of $1.6 million along with repayments, net of
borrowings, of $10.0 million on the Revolver. In the same period in 2003,
$10.3 million was used in financing activities, consisting primarily of debt
payments made during the period, including a $2.4 million redemption and
prepayment of the Tranche A Notes and $3.0 million for the repayment of two
promissory notes, as well as net repayments under the Revolver of $1.9 million. 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 September 30, 2004. RESULTS OF OPERATIONS Three Months Ended September 30, 2004, Compared to Three Months Ended September
30, 2003 Revenues.Our revenues for the three months ended September 30, 2004 and
2003 were derived as follows (dollars in thousands, except ECU netback): Three Months EndedSeptember 30,2004
    
    2003Chlorine and caustic soda
    
    $
    75,153
    
    
    $
    70,200Other products
    
    
    29,826
    
    
    
    29,801$
    104,979
    
    
    $
    100,001ECU netback*
    
    $
    409
    
    
    $
    392
  *
    
    The ECU netback relates only to sales of chlorine
and caustic soda to customers, and not to the value of chlorine
and caustic soda that is incorporated in other products that we
manufacture and sell. During the three months ended September 30, 2004, we produced 177,751 tons
of chlorine and 195,526 tons of caustic soda; we used approximately 35% of the
chlorine and 14% of the caustic soda to manufacture bleach and hydrochloric
acid, as well as other downstream products. We also purchased 35,080 tons of
caustic soda for resale during the quarter. During the three months ended
September 30, 2003, we produced 173,565 tons of chlorine and 190,922 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 purchased 38,495 tons of caustic soda for resale during the 2003
quarter. Revenues increased by $5.0 million, or approximately 5%, to $105.0 million
for the three months ended September 30, 2004, as compared to the three months
ended September 30, 2003. Our revenues in the most recent quarter from sales
of chlorine and caustic soda were $5.0 million higher than the year-earlier
quarter, primarily as a result of the increased volumes of chlorine and caustic
soda that were sold and a higher average ECU netback price, consisting of
increased chlorine prices partially offset by lower caustic soda prices. The
average ECU netback (which relates only to sales of chlorine and caustic soda
to customers) for the three months ended September 30, 2004, was $409, an
increase of 4% from the average netback of $392 during the three months ended
September 30, 2003. Revenues from other products were relatively flat compared
to the same period in 2003. The higher sales volumes in the most recent quarter
were possible as we operated our plants at higher production rates. 23




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Cost of Sales  Product.Cost of sales  product increased by $3.9
million, or approximately 5%, for the three months ended September 30, 2004, as
compared to the three months ended September 30, 2003, and represented
approximately 86% of revenues in both the 2004 quarter and the year-earlier
quarter. In the most recent quarter our variable product costs were $5.0
million higher than in the prior-year period, primarily as a result of a $2.1
million increase in salt and electricity costs, due to higher production
volumes, and a $1.7 million increase in purchase for resale costs. Freight
cost were also $1.1 million higher during the 2004 period. Partially
offsetting these increases were lower fixed cost of sales, primarily as a
result of a $0.8 million decrease in personnel-related expenses and
maintenance cost that was $1.4 million lower. Selling, General and Administrative Expenses.Selling, general and
administrative expenses decreased by $0.6 million, or approximately 9%, to $5.4
million for the three months ended September 30, 2004, as compared to the three
months ended September 30, 2003. The decrease was primarily attributable to
lower personnel-related expenses of $0.8 million, partially offset by a $0.5
million increase in consulting fees and expenses. Interest Expense.Interest expense was relatively unchanged during the
three months ended September 30, 2004, as compared to the three months ended
September 30, 2003. Other Expense, Net.Other expense, net of $1.8 million in the third
quarter of 2004 reflected currency exchange loss, compared to a currency
exchange loss of $0.1 million for the comparable period in 2003. Income Tax Benefit (Expense).There was an income tax benefit for the
quarter ended September 30, 2004, of $1.2 million, reflecting Canadian tax
benefit from our Canadian operations. Income tax expense of $1.1 million for
the quarter ended September 20, 2003, related to Canadian tax expense for the
Canadian operations. Net Income.Due to the factors described above, net income for the three
months ended September 30, 2004, was $3.9 million, compared to net income of
$2.0 million for the third quarter of 2003. Nine Months Ended September 30, 2004, Compared to Nine Months Ended September
30, 2003 Revenues.Our revenues for the nine months ended September 30, 2004 and
2003 were derived as follows (dollars in thousands, except ECU netback): Nine Months EndedSeptember 30,2004
    
    2003Chlorine and caustic soda
    
    $
    208,911
    
    
    $
    208,739Other products
    
    
    83,166
    
    
    
    76,609$
    292,077
    
    
    $
    285,348ECU netback*
    
    $
    366
    
    
    $
    387
  *
    
    The ECU netback relates only to sales of chlorine
and caustic soda to customers, and not to the value of chlorine
and caustic soda that is incorporated in other products that we
manufacture and sell. During the nine months ended September 30, 2004, we produced 530,710 tons
of chlorine and 583,781 tons of caustic soda; we used approximately 31% of the
chlorine and 12% of the caustic soda to manufacture bleach and hydrochloric
acid, as well as other downstream products. We also purchased 105,220 tons of
caustic soda for resale during the first nine months of 2004. During the nine
months ended September 30, 2003, we produced 511,054 tons of chlorine and
562,159 tons of caustic soda; we used approximately 26% of the chlorine and 11%
of the caustic soda to manufacture bleach and hydrochloric acid, as well as
other downstream products. We purchased 90,102 tons of caustic soda for resale
during the first nine months of 2003. Revenues for the nine months ended September 30, 2004 were $292.1 million,
an increase of $6.7 million, or approximately 2%, as compared to the nine
months ended September 30, 2003. Revenues from sales of chlorine and caustic
soda were relatively flat, with higher sales volumes of caustic soda and
chlorine being offset by lower average ECU netback prices, with a decrease in
caustic soda prices being partially offset by higher chlorine prices . The
average ECU netback (which relates only to sales of chlorine and caustic soda
to customers) for the nine months ended September 30, 2004, was $366, a
decrease of 5% from the average netback of $387 during the nine months ended
September 30, 2003. Revenues from other products increased by $6.6 million
compared to the nine months ended September 30, 2003, including increases of
$2.8 24




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million from sales of hydrochloric acid, $0.9 million from sales of bleach
and $2.9 million from sales of various other products. The higher sales volumes
in the most recent nine-month period were possible as we operated our plants at
higher production rates. Cost of Sales  Product.Cost of sales  product increased by $9.2
million, or approximately 4%, for the nine months ended September 30, 2004, as
compared to the nine months ended September 30, 2003, and represented
approximately 89% of revenues in the 2004 period, compared to approximately 88%
in the year-earlier period. Due to higher production and sales volumes, in the
most recent period our variable product costs were $12.5 million higher than in
the prior-year period, primarily resulting from increased salt and electricity
costs of $5.9 million and $4.3 million of increased purchase for resale costs.
Freight costs also increased by $3.6 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 $0.3 million, or approximately 2%, to
$20.4 million for the nine months ended September 30, 2004, as compared to the
nine months ended September 30, 2003. The increase for the 2004 period was
primarily due to consulting fees and expenses, for the most part related to the
organizational efficiency project, of $3.8 million, partially offset by
decreases of $2.0 million in bad debt expense and $0.6 million in
personnel-related expenses. Asset Impairment.No asset impairment charges were recorded for the nine
months ended September 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). Other Items.Other items increased by $3.9 million for the nine months
ended September 30, 2004, compared to the year-earlier period. In the 2004
period we recognized $3.2 million of severance and related charges associated
with our organizational efficiency project, while the 2003 period included a
gain of $0.4 million for the early payment of a promissory note. Interest Expense.Interest expense decreased by $0.4 million, to $13.8
million, for the nine months ended September 30, 2004, as compared to the nine
months ended September 30, 2003. Other Expense, Net.Other expense, net of $1.1 million in the 2004 period
primarily reflected currency exchange loss, compared to the currency exchange
loss of $4.5 million for the nine months ended September 30, 2003. Income Tax Benefit.The income tax benefit for the nine-month periods
ended September 30, 2004 and September 30, 2003, was $1.8 million and $2.6
million, respectively, reflecting Canadian tax benefit from our Canadian
operations. Net Income (Loss).Net loss for the nine months ended September 30, 2004,
was $5.8 million, compared to net income of $23.4 million for the first nine
months of 2003. The decrease resulted from the factors described above, as
well as the absence of the effects of the settlement of a dispute with the
Colorado River Commission of Nevada that occurred in the first quarter of 2003
(see Note 4 to the consolidated financial statements). 
 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 nine months ended September 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 September 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. 25




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There has been no change in our internal controls over financial reporting
that occurred during the three months ended September 30, 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 (including our
organizational efficiency project and the sale of excess land and water rights
at our Henderson facility) and our future prices, liquidity, debt
levels, production, revenue,
income, expenses, product margins, cash flows, capital spending and
pension contributions. 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:  
    
    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
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;
    
    increased prices for raw materials, including electricity;
    
    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; 26




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
    
    fluctuations in currency exchange rates;
    
    the effects of our organizational efficiency project;
    
    our ability to procure the sale of certain excess land and water
rights at our Henderson facility; 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 Form 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. 27




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ITEM 6. 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 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized. PIONEER COMPANIES, INC.Date: November 1, 2004
    By:
    /s/ Gary L. PittmanGary L. PittmanVice President and
Chief Financial Officer
(Principal Financial Officer) 28




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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 29