KAISER ALUMINUM & CHEMICAL CORP - 10-Q Quarterly Report

Back to GetFilings.com

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

COMMISSION FILE NUMBER 1-3605

KAISER ALUMINUM & CHEMICAL CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 94-0928288
(State of incorporation) (I.R.S. Employer Identification No.)

5847 SAN FELIPE, SUITE 2500, 77057-3268
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)

(713) 267-3777
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined by Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

At April 30, 2004, the registrant had 46,171,365 shares of Common Stock
outstanding.

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN MILLIONS OF DOLLARS)

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
1

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED INCOME (LOSS)
(UNAUDITED)
(IN MILLIONS OF DOLLARS)

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
2

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY (DEFICIT) AND
COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
FOR THE QUARTER ENDED MARCH 31, 2004

FOR THE QUARTER ENDED MARCH 31, 2003

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
3

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(IN MILLIONS OF DOLLARS)

The accompanying notes to interim consolidated financial statements are an
integral part of these statements.
4

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
(UNAUDITED)

1. REORGANIZATION PROCEEDINGS

Kaiser Aluminum & Chemical Corporation (the "Company"), its parent company,
Kaiser Aluminum Corporation ("Kaiser" or "KAC"), and 24 of the Company's
subsidiaries have filed separate voluntary petitions in the United States
Bankruptcy Court for the District of Delaware (the "Court") for reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Code"); the Company,
Kaiser and 15 of the Company's subsidiaries (the "Original Debtors") filed in
the first quarter of 2002 and nine additional Company subsidiaries (the
"Additional Debtors") filed in the first quarter of 2003. The Original Debtors
and Additional Debtors are collectively referred to herein as the "Debtors" and
the Chapter 11 proceedings of these entities are collectively referred to herein
as the "Cases." For purposes of this Report, the term "Filing Date" means, with
respect to any particular Debtor, the date on which such Debtor filed its Case.
None of the Company's non-U.S. joint ventures are included in the Cases. The
Cases are being jointly administered. The Debtors are managing their businesses
in the ordinary course as debtors-in-possession subject to the control and
administration of the Court.

Original Debtors. During the first quarter of 2002, the Original Debtors
filed separate voluntary petitions for reorganization. The wholly owned
subsidiaries of the Company included in such filings were: Kaiser Bellwood
Corporation ("Bellwood"), Kaiser Aluminium International, Inc. ("KAII"), Kaiser
Aluminum Technical Services, Inc. ("KATSI"), Kaiser Alumina Australia
Corporation ("KAAC") (and its wholly owned subsidiary, Kaiser Finance
Corporation ("KFC")) and ten other entities with limited balances or activities.

The necessity for filing the Cases by the Original Debtors was attributable
to the liquidity and cash flow problems of the Company and its subsidiaries
arising in late 2001 and early 2002. The Company was facing significant
near-term debt maturities at a time of unusually weak aluminum industry business
conditions, depressed aluminum prices and a broad economic slowdown that was
further exacerbated by the events of September 11, 2001. In addition, the
Company had become increasingly burdened by asbestos litigation and growing
legacy obligations for retiree medical and pension costs. The confluence of
these factors created the prospect of continuing operating losses and negative
cash flows, resulting in lower credit ratings and an inability to access the
capital markets.

The outstanding principal of, and accrued interest on, all debt of the
Original Debtors became immediately due and payable upon commencement of the
Cases. However, the vast majority of the claims in existence at the Filing Date
(including claims for principal and accrued interest and substantially all legal
proceedings) are stayed (deferred) during the pendency of the Cases. In
connection with the filing of the Original Debtors' Cases, the Court, upon
motion by the Original Debtors, authorized the Original Debtors to pay or
otherwise honor certain unsecured pre-Filing Date claims, including employee
wages and benefits and customer claims in the ordinary course of business,
subject to certain limitations. In July 2002, the Court also issued a final
order authorizing the Company to fund the cash requirements of its foreign joint
ventures in the ordinary course of business and to continue using the Company's
existing cash management systems. The Original Debtors also have the right to
assume or reject executory contracts existing prior to the Filing Date, subject
to Court approval and certain other limitations. In this context, "assumption"
means that the Original Debtors agree to perform their obligations and cure
certain existing defaults under an executory contract and "rejection" means that
the Original Debtors are relieved from their obligations to perform further
under an executory contract and are subject only to a claim for damages for the
breach thereof. Any claim for damages resulting from the rejection of a
pre-Filing Date executory contract is treated as a general unsecured claim in
the Cases.

5

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Generally, pre-Filing Date claims, including certain contingent or
unliquidated claims, against the Original Debtors will fall into two categories:
secured and unsecured. Under the Code, a creditor's claim is treated as secured
only to the extent of the value of the collateral securing such claim, with the
balance of such claim being treated as unsecured. Unsecured and partially
secured claims do not accrue interest after the Filing Date. A fully secured
claim, however, does accrue interest after the Filing Date until the amount due
and owing to the secured creditor, including interest accrued after the Filing
Date, is equal to the value of the collateral securing such claim.

The Court set January 31, 2003 as the last date by which holders of
pre-Filing Date claims against the Original Debtors (other than asbestos-related
personal injury claims and certain hearing loss claims) could file their claims.
Any holder of a claim that was required to file such claim by January 31, 2003
and did not do so may be barred from asserting such claim against any of the
Original Debtors and, accordingly, may not be able to participate in any
distribution in any of the Cases on account of such claim. The Company has not
yet completed its analysis of all of the proofs of claim to determine their
validity. However, during the course of the Cases, certain matters in respect of
the claims have been resolved. Material provisions in respect of claim
settlements are included in the accompanying financial statements and are fully
disclosed elsewhere herein. The January 31, 2003 bar date does not apply to
asbestos-related personal injury claims, for which the Original Debtors reserve
the right to establish a separate bar date at a later time. A separate bar date
for certain hearing loss and coal tar pitch volatiles claims was reset to
February 29, 2004.

Additional Debtors. On January 14, 2003, the Additional Debtors filed
separate voluntary petitions for reorganization. The wholly owned subsidiaries
included in such filings were: Kaiser Bauxite Company ("KBC"), Kaiser Jamaica
Corporation ("KJC"), Alpart Jamaica Inc. ("AJI"), Kaiser Aluminum & Chemical of
Canada Limited ("KACOCL") and five other entities with limited balances or
activities. Ancillary proceedings in respect of KACOCL and two Additional
Debtors were also commenced in Canada simultaneously with the January 14, 2003
filings.

The Cases filed by the Additional Debtors were commenced, among other
reasons, to protect the assets held by these Debtors against possible statutory
liens that might have arisen and been enforced by the Pension Benefit Guaranty
Corporation ("PBGC") primarily as a result of the Company's failure to meet a
$17.0 accelerated funding requirement to its salaried employee retirement plan
in January 2003 (see Note 9 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding the accelerated funding requirement). The filing of the
Cases by the Additional Debtors had no impact on the Company's day-to-day
operations.

In connection with the Additional Debtors' filings, the Court authorized
the Additional Debtors to continue to pay or otherwise honor certain pre-Filing
Date claims, including employee wages and benefits, and customer and vendor
claims in the ordinary course of business. The Court also approved the
Additional Debtors' continued participation in the Company's existing cash
management systems and routine intercompany transactions involving, among other
transactions, the transfer of materials and supplies among subsidiaries and
affiliates.

In March 2003, the Court set May 15, 2003 as the last date by which holders
of pre-Filing Date claims against the Additional Debtors (other than
asbestos-related personal injury claims and certain hearing loss and coal tar
pitch volatiles claims) could file their claims. Any holder of a claim that was
required to file such claim by May 15, 2003 and did not do so may be barred from
asserting such claim against any of the Additional Debtors and, accordingly, may
not be able to participate in any distribution in any of the Cases on account of
such claim. The Company has not yet completed its analysis of all of the proofs
of claim to determine their validity. However, during the course of the Cases,
certain matters in respect of the claims have

6

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

been resolved. Material provisions in respect of claim settlements are included
in the accompanying financial statements and are fully disclosed elsewhere
herein.

All Debtors. Two creditors' committees, one representing the unsecured
creditors (the "UCC") and the other representing the asbestos claimants (the
"ACC"), have been appointed as official committees in the Cases and, in
accordance with the provisions of the Code, have the right to be heard on all
matters that come before the Court. In August 2003, the Court approved the
appointment of a committee of salaried retirees (the "1114 Committee" and,
together with the UCC and the ACC, the "Committees") with whom the Debtors have
negotiated necessary changes, including the modification or termination, of
certain retiree benefits (such as medical and insurance) under Section 1114 of
the Code. The Committees, together with the legal representative for potential
future asbestos claimants (the "Futures' Representative") that has been
appointed in the Cases, will play important roles in the Cases and in the
negotiation of the terms of any plan or plans of reorganization. The Debtors are
required to bear certain costs and expenses for the Committees and the Futures'
Representative, including those of their counsel and other advisors.

As provided by the Code, the Debtors had the exclusive right to propose a
plan of reorganization for 120 days following the initial Filing Date. The Court
has subsequently approved several extensions of the exclusivity period for all
Debtors. The Debtors have pending a motion to extend exclusivity through May 31,
2004 for KAAC, KJC and AJI and June 30, 2004 for the remaining Debtors. By
filing the motion to extend the exclusivity period, the period is automatically
extended until the May 18, 2004 Court hearing date. As the Debtors' motion to
extend the exclusivity period was agreed to by the UCC in advance of the filing,
the Debtors expect the motion to be approved by the Court. Additional extensions
are likely to be sought. However, no assurance can be given that any such future
extension requests will be granted by the Court. If the Debtors fail to file a
plan of reorganization during the exclusivity period, or if such plan is not
accepted by the requisite numbers of creditors and equity holders entitled to
vote on the plan, other parties in interest in the Cases may be permitted to
propose their own plan(s) of reorganization for the Debtors.

The Debtors anticipate that substantially all liabilities of the Debtors as
of their Filing Date will be settled under one or more plans of reorganization
to be proposed and voted on in accordance with the provisions of the Code.
Although the Debtors intend to file and seek confirmation of such a plan or
plans, there can be no assurance as to when the Debtors will file such a plan or
plans or as to whether such plan or plans will be confirmed by the Court and
consummated.

In working toward one or more plans of reorganization, the Debtors have
been, and continue to be, engaged in discussions with each of their key
constituencies, including the Committees, the Futures' Representative, the PBGC,
and the appropriate union representatives. The treatment of individual groups of
creditors in any such plan of reorganization cannot be determined definitively
at this time. The ultimate treatment of and recoveries to individual creditors
is dependent on, among other things, the total amount of claims against the
Debtors as ultimately determined by the Court, the priority of the applicable
claims, the outcome of ongoing discussions with the key constituencies, the
amount of value available for distribution in respect of claims and the
completion of the plan confirmation process consistent with applicable
bankruptcy law.

The Debtors' objective is to achieve the highest possible recoveries for
all stakeholders, consistent with the Debtors' abilities to pay, and to continue
the operations of their businesses. However, there can be no assurance that the
Debtors will be able to attain these objectives or achieve a successful
reorganization. While valuation of the Debtors' assets and estimation of
pre-Filing Date claims at this stage of the Cases are subject to inherent
uncertainties, the Debtors currently believe that, in the aggregate, it is
likely that their liabilities will be found to significantly exceed the fair
value of their assets. Therefore, the Debtors currently believe that it is
likely that substantially all pre-Filing Date claims will be settled at less
than 100% of their face value and
7

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

the equity interests of the Company's stockholders will be cancelled without
consideration. Further, the Debtors believe that it is likely that: (a) the
claims of pre-petition creditors that are given certain priorities by statute or
have the benefit of guarantees or other contractual or structural seniority will
likely receive substantially greater recoveries than pre-petition creditors that
have no such priorities or seniority; and (b) all pending and future
asbestos-related personal injury claims are likely to be resolved through the
formation, pursuant to a plan of reorganization, of a statutory trust to which
all claims would be directed by a channeling injunction that would permanently
remove all asbestos liability from the Debtors. A similar trust arrangement is
anticipated in respect of pending and future silica, hearing loss and coal tar
pitch volatiles personal injury claims. The trusts would be funded pursuant to
statutory requirements and agreements with representatives of the affected
parties, using the Debtors' insurance assets and certain other consideration
that has yet to be agreed. No assurances can be provided that the foregoing will
ultimately be included in any plan(s) of reorganization the Debtors may file.
Further, while the Debtors believe it is possible to successfully reorganize
their operations and emerge from Chapter 11 in 2004, their ability to do so is
subject to inherent market-related risks as well as successful negotiation and
Court approval for the treatment of creditors consistent with the applicable
bankruptcy law.

The Debtors' Cases are being administered on a consolidated basis. In fact,
however, there are separate cases for each Debtor or twenty-six Cases in total.
The impacts of the Cases and any plans of reorganization proposed for individual
Debtors will depend on each Debtor's specific circumstances and the differing
interests that creditors have in respect of such entities.

A substantial majority of the claims in the Cases are against the Company.
These include claims in respect of substantially all of the Debtors' debt
obligations, obligations in respect of pension and retiree medical benefits,
asbestos-related and personal injury claims, and known environmental
obligations. As such, all of these claimholders will have claims against the
Company that, except as further described below, will have to be satisfied by
the Company's assets, which generally include the alumina refinery located at
Gramercy, Louisiana ("Gramercy"), the interests in Anglesey Aluminium Limited
("Anglesey"), the interests in Volta Aluminium Company Limited ("Valco") and the
fabricated products plants (other than the London, Ontario, Canada and Richmond,
Virginia extrusion facilities, which are owned by separate subsidiaries that are
also Debtors). The Company's assets also include certain intercompany
receivables from certain of its Debtor subsidiaries for funding provided to its
joint venture affiliates.

In general, except as described below, there are a relatively modest number
or amount of third party trade and other claims against the Company's other
Debtor subsidiaries. Sixteen of the Debtors (including KAC) have no material
ongoing activities or operations and have no material assets or liabilities
other than intercompany items. The Company believes that it is likely that most,
if not all, of these entities will ultimately be merged out of existence or
dissolved in some manner. The remaining Debtor subsidiaries (which include AJI,
KJC, KAAC, KAII, KACOCL, KBC, Bellwood, KATSI and KFC) own certain extrusion
facilities or act largely as intermediaries between the Company and certain of
its other subsidiaries and joint venture affiliates or interact with third
parties on behalf of the Company and its joint venture affiliates. As such, the
vast majority of the pre-petition claims against such entities are related to
intercompany activities. However, certain of those entities holding claims
against the Company also have claims against certain Company subsidiaries that
own the Company's interests in joint venture affiliates and which represent a
significant portion of the Company's consolidated asset value. For example,
noteholders have claims against each of AJI and KJC, which own the Company's
interests in Alumina Partners of Jamaica ("Alpart"), and KAAC, which owns the
Company's interests in Queensland Alumina Limited ("QAL"), as a result of AJI,
KJC and KAAC having been subsidiary guarantors of the Company's Senior Notes and
Senior Subordinated Notes. Additionally, the PBGC, pursuant to statute, has
joint and several claims against the Company and all entities which are 80% or
more owned by the Company (referred to as "Controlled Group Members").
Controlled Group
8

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Members include each of AJI, KJC and KAAC, as well as all of the other Debtors.
The only other significant claims against AJI, KJC and KAAC are intercompany
claims related to funding provided to these entities by the Company. As such, it
is likely that the vast majority of any value realized in respect of the
Company's interests in Alpart and QAL, either from their disposition or realized
upon emergence from such operations, is likely to be for the benefit of the
noteholders and the PBGC.

In order to resolve the question of what consideration from any sale or
other disposition of AJI, KJC and/or KAAC, or their respective assets, should be
for the benefit of the Company and its claimholders (in respect of the Company's
intercompany claims against such entities), an intercompany settlement agreement
is being negotiated between the UCC and the Company (the "Intercompany
Agreement"). The proposed Intercompany Agreement would also release or resolve
substantially all other pre-and post-petition intercompany claims between the
Debtors. The proposed Intercompany Agreement, if finalized substantially in its
current form, would provide, among other things, for payments of cash by AJI,
KJC and KAAC to the Company of $85.0 in respect of its intercompany claims
against AJI, KJC and KAAC plus any amounts up to $14.3 plus accrued and unpaid
interest and fees paid by KACC to retire Alpart-related debt. Under the proposed
Intercompany Agreement, such amount would be increased or decreased for (1) any
net cash flows collected by or funded by the Company between the effective date
of the proposed Intercompany Agreement and the earlier of (a) AJI's, KJC's and
KAAC's emergence from Chapter 11 or (b) the sale of AJI's, KJC's and KAAC's
respective interests in and related to Alpart and QAL and (2) any purchase price
adjustments (other than incremental amounts related to alumina sales contracts
to be transferred) pursuant to the Company's agreement to sell its interests in
Alpart, if consummated. The proposed Intercompany Agreement calls for such
payments to be made to the Company at the earlier of the sale of the Company's
interests in Alpart and QAL or the emergence of AJI, KJC and KAAC from Chapter
11. The Company expects that, all such payments under the proposed Intercompany
Agreement, other than $28.0 to be paid to the Company upon the sale of Alpart
and any amounts paid by the Company in respect of retiring the Alpart-related
debt, are likely to be held in escrow for the benefit of the Company until the
Company's emergence from the Cases. In the interim, the Company's claims against
these entities will be secured by liens. There are still a number of issues with
respect to the proposed Intercompany Agreement that must be satisfactorily
resolved. The Intercompany Agreement once finalized will be subject to Court
approval. Discussions are ongoing between the Company, the UCC, the ACC and the
Futures' Representative in an attempt to make the terms of the proposed
Intercompany Agreement acceptable to each of the groups. The Company is
targeting to have the Court consider the proposed Intercompany Agreement at the
regularly scheduled June 2004 omnibus hearing. However, no assurances can be
provided that the issues can be resolved within the time frame necessary to
submit the Intercompany Agreement to the Court under that time frame.

At emergence from Chapter 11, the Company will have to pay or otherwise
provide for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). The Company
currently estimates that its Exit Costs will be in the range of $100.0 to
$120.0. The Company currently expects to fund such Exit Costs using the proceeds
to be received under the proposed Intercompany Agreement together with existing
cash resources and available liquidity under an exit financing facility that
will replace the current Post-Petition Credit Agreement (see Note 5). If
payments under the proposed Intercompany Agreement together with liquidity
available under an exit financing facility are not sufficient to pay or
otherwise provide for all Exit Costs, the Company and some or all of its other
Debtor subsidiaries will not be able to emerge from Chapter 11 unless and until
sufficient funding can be obtained. Management believes it will be able to
successfully resolve any issues that may arise in respect of the proposed
Intercompany Agreement or be able to negotiate a reasonable alternative.
However, no assurances can be given in this regard.

9

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

The Company expects that, when the Debtors ultimately file a plan or plans
of reorganization, it is likely to reflect the Company's strategic vision for
emergence from Chapter 11: (a) a standalone going concern with manageable
leverage and financial flexibility, improved cost structure and competitive
strength; (b) a company positioned to execute its long-standing vision of market
leadership and growth in fabricated products; (c) a company that delivers a
broad product offering and leadership in service and quality for its customers
and distributors; and (d) a company with continued ownership of those commodity
assets that have the potential to generate significant cash at steady-state
metal prices and/or which provide a strategic hedge against the fabricated
products business' needs for primary aluminum. While the Company intends to
continue to pursue a standalone fabricated products company emergence strategy,
from time to time the Debtors may also evaluate other reorganization strategies,
consistent with the Debtors' responsibility to maximize the recoveries for its
stakeholders. The Company's advisors have developed a timeline that, assuming
the current pace of the Cases continues, is expected to allow the Company to
file a plan or plans of reorganization by mid-year 2004 and emerge from Chapter
11 as early as late in the third quarter of 2004. However, the Debtors' ability
to do so is subject to the confirmation of a plan of reorganization in
accordance with the applicable bankruptcy law and, accordingly, no assurances
can be given as to whether or when any plan or plans of reorganization will
ultimately be filed or confirmed.

In light of the Company's stated strategy and to further the Debtors'
ultimate planned emergence from Chapter 11, the Debtors, with the approval of
the Company's Board of Directors and in consultation with the UCC, the ACC and
the Futures' Representative, began exploring the possible sale of one or more of
their commodities assets during the third quarter of 2003. In particular, the
Debtors began exploring the possible sale of their interests in and related to:
(a) Alpart, (b) Anglesey, and (c) the Company's Gramercy alumina refinery and
Kaiser Jamaica Bauxite Company ("KJBC"). The possible sale of the Debtors'
interests in respect of Gramercy and KJBC was explored jointly given their
significant integration. More recently, the Company also began the process of
exploring the possible sale of its 20% interest in and related to QAL. While the
Company believes that the QAL-related interests are likely to be its most
valuable commodity asset and expects that there are or will be a number of
parties interested in acquiring such interests, no assurances can be given that
any such sale will occur.

In exploring the sale of its interests in and related to the commodity
assets, the Debtors, through their advisors, surveyed the potential market and
initiated discussions with numerous parties believed to have an interest in such
assets. In addition, other parties contacted the Debtors and/or their investment
advisors to express an interest in purchasing the assets. The Debtors provided
(subject to confidentiality agreements) information regarding the applicable
interests to these parties, each of which was asked to submit a non-binding
expression of interest regarding the individual assets. After receiving these
initial expressions of interest from potential purchasers, the Debtors
determined which of the expressions of interest received represented reasonable
indications of value ("Qualified Bids"). Potential bidders ("Qualified Bidders")
that submitted Qualified Bids were then permitted to conduct due diligence in
respect of the assets for which they submitted a Qualified Bid and to submit
definitive proposals.

The Debtors reviewed the definitive proposals submitted and, in
consultation with the UCC, the ACC and the Futures' Representative, and other
key constituencies, determined with which Qualified Bidders the Debtors would
pursue further negotiations. See Note 4 for a discussion of subsequent
developments regarding potential dispositions of Alpart, Valco and
Gramercy/KJBC.

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, through the third quarter of 2003, the Company still considered all
of its commodity assets as "held for use," as no definite decisions had been
made regarding the disposition of such assets. However, based on additional
negotiations with prospective buyers and discussions with key

10

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

constituents, the Company concluded that dispositions of Alpart, Valco and
Gramercy/KJBC were likely and, therefore, that recoverability should be
evaluated differently at December 31, 2003 and subsequent periods. The change in
evaluation methodology was required because, under generally accepted accounting
principles ("GAAP"), assets to be held and used are evaluated for recoverability
differently than assets to be sold or disposed of. Assets to be held and used
are evaluated based on their expected undiscounted future net cash flows. So
long as the Company reasonably expects that such undiscounted future net cash
flows for each asset will exceed the recorded value of the asset being
evaluated, no impairment is required. However, if plans to sell or dispose of an
asset or group of assets meet a number of specific criteria, then, under GAAP,
such assets should be considered held for sale/disposition and their
recoverability should be evaluated, for each asset, based on expected
consideration to be received upon disposition. Sales or dispositions at a
particular time will be affected by, among other things, the existing industry
and general economic circumstances as well as the Company's own circumstances,
including whether or not assets will (or must) be sold on an accelerated or more
extended timetable. Such circumstances may cause the expected value in a sale or
disposition scenario to differ materially from the realizable value over the
normal operating life of assets, which would likely be evaluated on long-term
industry trends.

The Company ultimately concluded that no impairment of its interests in and
related to Alpart was appropriate based on its updated expectation that the sale
of the Company's interests in Alpart would result in a pre-tax gain (see Note
4). By contrast, based on the Company reaching a financial agreement in early
May 2004 with the Government of Ghana ("GoG") in respect of the sale of its
interests in and related to Valco, the Company determined that it should impair
its interests in and related to Valco to the amount of the expected proceeds to
be received from the GoG. As a result, as of March 31, 2004, KACC recorded a
non-cash charge of approximately $33.0 (see Note 4). Additionally, in evaluating
the recoverability of the Company's basis in Gramercy/KJBC, the Company recorded
an impairment charge of approximately $368.0 in the fourth quarter of 2003
because all offers received for such assets were substantially below the
carrying value of the assets (see Note 4). The actual amount of gain or loss if
and when the potential sales of Valco and Gramercy/KJBC are consummated may
differ from these amounts as a result of closing adjustments, changes in
economic circumstances and other matters.

Financial Statement Presentation. The accompanying consolidated financial
statements have been prepared in accordance with AICPA Statement of Position
90-7 ("SOP 90-7"), Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code, and on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. However, as a result of the Cases, such realization of assets and
liquidation of liabilities are subject to a significant number of uncertainties.

Upon emergence from the Cases, the Company expects to apply "fresh start"
accounting to its consolidated financial statements as required by SOP 90-7.
Fresh start accounting is required if: (1) a debtor's liabilities are determined
to be in excess of its assets and (2) there will be a greater than 50% change in
the equity ownership of the entity. As previously disclosed, the Company expects
both such circumstances to apply. As such, upon emergence, the Company will
restate its balance sheet to equal the reorganization value as determined in its
plan(s) of reorganization and approved by the Court. Additionally, items such as
accumulated depreciation, accumulated deficit and accumulated other
comprehensive income (loss) will be reset to zero. The Company will allocate the
reorganization value to its individual assets and liabilities based on their
estimated fair value at the emergence date. Typically such items as current
liabilities, accounts receivable, and cash will be reflected at values similar
to those reported prior to emergence. Items such as inventory, property, plant
and equipment, long-term assets and long-term liabilities are more likely to be
significantly adjusted from amounts previously reported. Because fresh start
accounting will be adopted at emergence, and because of the significance of the
pending asset sales and liabilities subject to compromise
11

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

(that will be relieved upon emergence), meaningful comparisons between the
current historical financial statements and the financial statements upon
emergence may be difficult to make.

Financial Information. Condensed consolidating financial statements of the
Debtors and non-Debtors are set forth below:

CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2004

For condensed consolidating balance sheets of the Debtors and non-Debtors
as of December 31, 2003, see Note 1 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003.

12

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2004

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2003

13

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2004

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2003

Classification of Liabilities as "Liabilities Not Subject to Compromise"
Versus "Liabilities Subject to Compromise." Liabilities not subject to
compromise include: (1) liabilities incurred after the Filing Date of the Cases;
(2) pre-Filing Date liabilities that the Debtors expect to pay in full,
including priority tax and employee claims and certain environmental
liabilities, even though certain of these amounts may not be paid until a plan
of reorganization is approved; and (3) pre-Filing Date liabilities that have
been approved for payment by the Court and that the Debtors expect to pay (in
advance of a plan of reorganization) over the next twelve-month period in the
ordinary course of business, including certain employee related items (salaries,
vacation and medical benefits), claims subject to a currently existing
collective bargaining agreement, and certain postretirement medical and other
costs associated with retirees (however, see Note (2) to the table below).

Liabilities subject to compromise refer to all other pre-Filing Date
liabilities of the Debtors. The amounts of the various categories of liabilities
that are subject to compromise are set forth below. These amounts represent the
Company's estimates of known or probable pre-Filing Date claims that are likely
to be resolved in connection with the Cases. Such claims remain subject to
future adjustments. Further, the Debtors currently believe that it is likely
that substantially all pre-Filing Date claims will be settled at less than 100%
of their face value and the equity interests of the Company's stockholders will
be cancelled without consideration.

14

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

The amounts subject to compromise at March 31, 2004 and December 31, 2003
consisted of the following items:

- ---------------

(1) Accrued salaries, wages and related expenses represent estimated minimum
pension contributions that, absent the Cases, would have otherwise been
payable. Amounts as of March 31, 2004 and December 31, 2003 include
approximately $100.0 associated with estimated special liquidity and other
pension contributions that were not made. As previously disclosed, the
Company does not currently expect to make any pension contributions in
respect of its domestic pension plans. See Note 9 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December
31, 2003 for additional information about non-payment of pension
contributions.

(2) In February 2004, the Company concluded an agreement with the 1114 Committee
and union representatives that represent the vast majority of the hourly
employees that provides for the termination of the existing salaried and
hourly postretirement benefit plans, subject to certain conditions. The
Company has included postretirement medical obligations expected to be paid
through May 31, 2004 in the accompanying balance sheets at March 31, 2004
and December 31, 2003, as liabilities not subject to compromise. Such
amounts total $21.7 at March 31, 2004 and $32.5 at December 31, 2003 (see
Note 9 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2003 for additional information about
termination of postretirement benefit plans).

(3) Long-term liabilities include hearing loss claims of $15.8 at March 31, 2004
and December 31, 2003 (see Note 7), environmental liabilities of $43.0 at
March 31, 2004 and December 31, 2003 (see Note 7) and asbestos liabilities
of $480.1 at March 31, 2004 and December 31, 2003 (see Note 7).

The classification of liabilities "not subject to compromise" versus
liabilities "subject to compromise" is based on currently available information
and analysis. As the Cases proceed and additional information and analysis is
completed or, as the Court rules on relevant matters, the classification of
amounts between these two categories may change. The amount of any such changes
could be significant. Additionally, as the Company evaluates the proofs of claim
filed in the Cases, adjustments will be made for those claims that the Company
believes will probably be allowed by the Court. The amount of such claims could
be significant.

15

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Reorganization Items. Reorganization items under the Cases are expense or
income items that are incurred or realized by the Company because it is in
reorganization. These items include, but are not limited to, professional fees
and similar types of expenses incurred directly related to the Cases, loss
accruals or gains or losses resulting from activities of the reorganization
process, and interest earned on cash accumulated by the Debtors because they are
not paying their pre-Filing Date liabilities. For the quarters ended March 31,
2004 and 2003, reorganization items were as follows:

2. GENERAL

This Quarterly Report on Form 10-Q should be read in conjunction with the
Company's Annual Report on Form 10-K for the year ended December 31, 2003.

Going Concern. The interim consolidated financial statements of the
Company have been prepared on a "going concern" basis which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business; however, as a result of the commencement of the Cases, such
realization of assets and liquidation of liabilities are subject to a
significant number of uncertainties. Specifically, the interim consolidated
financial statements do not present: (a) the realizable value of assets on a
liquidation basis or the availability of such assets to satisfy liabilities, (b)
the amount which will ultimately be paid to settle liabilities and contingencies
which may be allowed in the Cases, or (c) the effect of any changes that may
occur in connection with the Debtors' capitalizations or operations of the
Debtors as a result of a plan of reorganization. Because of the ongoing nature
of the Cases, the discussions and consolidated financial statements contained
herein are subject to material uncertainties.

Additionally, as discussed above (see Financial Statement Presentation),
the Company believes that it would, upon emergence, apply fresh start accounting
to its consolidated financial statements which would also adversely impact the
comparability of the March 31, 2004 financial statements to the financial
statements of the entity upon emergence.

Principles of Consolidation. The Company is a wholly owned subsidiary of
Kaiser, which is a subsidiary of MAXXAM Inc. ("MAXXAM").

The accompanying unaudited interim consolidated financial statements have
been prepared in accordance with GAAP for interim financial information and the
rules and regulations of the Securities and Exchange Commission. Accordingly,
these financial statements do not include all of the disclosures required by
GAAP for complete financial statements. In the opinion of management, the
unaudited interim consolidated financial statements furnished herein include all
adjustments, all of which are of a normal recurring nature unless otherwise
noted, necessary for a fair statement of the results for the interim periods
presented.

The preparation of financial statements in accordance with GAAP requires
the use of estimates and assumptions that affect the reported amounts of assets
and liabilities, disclosure of contingent assets and liabilities known to exist
as of the date the financial statements are published, and the reported amounts
of

16

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

revenues and expenses during the reporting period. Uncertainties with respect to
such estimates and assumptions are inherent in the preparation of the Company's
consolidated financial statements; accordingly, it is possible that the actual
results could differ from these estimates and assumptions, which could have a
material effect on the reported amounts of the Company's consolidated financial
position and results of operations.

Operating results for the quarter ended March 31, 2004, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2004.

Derivative Financial Instruments. Hedging transactions using derivative
financial instruments are primarily designed to mitigate the Company's exposure
to changes in prices for certain of the products which the Company sells and
consumes and, to a lesser extent, to mitigate the Company's exposure to change
in foreign currency exchange rates. The Company does not utilize derivative
financial instruments for trading or other speculative purposes. The Company's
derivative activities are initiated within guidelines established by management
and approved by the Company's board of directors. Hedging transactions are
executed centrally on behalf of all of the Company's business segments to
minimize transaction costs, monitor consolidated net exposure and allow for
increased responsiveness to changes in market factors.

See Notes 2 and 8 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003 for additional
information regarding derivative financial instruments.

3. INVENTORIES

The classification of inventories is as follows:

Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market. Replacement cost is not in excess of
LIFO cost.

Inventories at March 31, 2004, have been reduced by a net charge of $1.2
(included in Other operating charges (benefits), net -- see Note 9) to
write-down certain alumina inventories to their estimated net realizable value
as a result of the Company's possible sale of its interests in and related to
Valco (see Note 4).

17

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

4. PROPERTY, PLANT, AND EQUIPMENT

The major classes of property, plant, and equipment are as follows:

The following discusses the divestiture activities of certain of the
Company's commodity assets during the quarters ended March 31, 2004 and 2003.

2004 --

- As previously disclosed, the Company entered into an agreement in January
2004 to sell its interest in Alpart. Net proceeds from the sale pursuant
to the agreement would, at a minimum, have been in the range of $160.0 to
$170.0, subject to certain closing and post-closing adjustments. However,
such purchase price could have increased, possibly significantly,
depending on what, if any, alumina sales contracts were transferred to
the buyer as a part of the transaction. In February 2004, another
potential purchaser filed certain objections with the Court in respect of
the January 2004 sales agreement and stated that it was willing to bid
significantly more than the other party for the Company's interests in
and related to Alpart. In March 2004, the Court terminated the January
2004 contract and ordered that an auction be held during April 2004 in
respect of the possible sale of the Company's interests in and related to
Alpart. As a result of the auction and after consultation with the UCC
and others, the Company entered into an agreement with the successful
bidder to sell its interest in Alpart for a base purchase price of $295.0
plus certain adjustments, which are expected to be in the range of $20.0.
The transaction is expected to result in a gross sales price in the range
of $315.0 and a pre-tax gain of approximately $100.0. The agreement was
approved by the Court in April 2004. As previously disclosed, under
Alpart's existing partnership arrangement, its partner retains the right
for 30 days from date of Court approval to purchase the Company's
interest in Alpart at the price in the agreement approved by the Court.
The Company has targeted a closing date for the transaction near the end
of the second quarter of 2004. The Company currently expects that the
proceeds from the sale will be held in escrow pending the completion and
approval by the Court of a DIP Facility amendment (see Note 5) and the
Intercompany Agreement (see Note 1). However, no assurances can be
provided as to the actual timing of the transaction or whether the sale
will actually be completed on the terms outlined above.

- The Company believes that an agreement to sell its interests in the
Gramercy facility and KJBC will be signed and filed with the Court in the
very near future. Net proceeds from the sale are expected to be in the
$20.0 range, a substantial portion of which may be used to satisfy
transaction related costs and obligations. The Company expects that, if
the agreement is finalized, it would likely be submitted to the Court for
consideration in the second quarter of 2004. While the potential sale of
Gramercy/KJBC has not yet been approved by the Court and, therefore, may
not ultimately occur or may close under

18

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

different terms and conditions, the Company determined that the fair
value of its interests in Gramercy/KJBC was below the carrying value of
the assets because all offers received for such assets were substantially
below the carrying value of the assets. Accordingly, the Company adjusted
the carrying value of its interest in Gramercy/KJBC to their estimated
fair value, which resulted in a fourth quarter 2003 non-cash impairment
charge of approximately $368.0. Previously, the Company had evaluated the
book value of its interests of the Gramercy/KJBC assets on a "hold and
use" basis assuming a normal economic life for the facility and more
normal market conditions than have recently existed and such analysis
indicated that no impairment charge was required. Final adjustments to
the carrying value of the Gramercy facility and KJBC assets may cause the
actual loss from the sale of the Company's interest in and related to the
Gramercy facility and KJBC, if consummated, to vary from the impairment
charge.

- As more fully discussed in Note 14 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31,
2003, during 2003, the Company and Valco participated in extensive
negotiations with the GoG and the Volta River Authority ("VRA") regarding
the power situation and other matters. Such negotiations did not result
in a resolution of such matters. However, as an outgrowth of such
negotiations, the Company and the GoG entered into a Memorandum of
Understanding ("MOU") in December 2003 pursuant to which the Company
would sell its 90% interest in and related to Valco to the GoG for
consideration of between $35.0 and $100.0, plus assumption of all of the
Company's related liabilities and obligations. The MOU contemplated that
the transaction would close by April 30, 2004. The consideration was to
be paid in 2004 and beyond. During 2004, assuming the $35.0 minimum
consideration, the GoG was to pay $7.0 in cash to the Company and $18.0
in cash to Valco, thereby reducing the Company's funding to Valco. The
remainder of the consideration (a minimum of $10.0) was to be paid in
cash to the Company over a four-year period from the closing date. The
GoG obligation to the Company was to be guaranteed by the Bank of Ghana.
However, as of April 30, 2004, the GoG had only paid $5.0 of the $18.0
that was due to Valco under the MOU and the $7.0 escrow payment to the
Company had not been funded. The Company met with the GoG in early May
2004 and reached a new financial agreement. Under the revised financial
terms, $13.0 was to be put into escrow by the GoG by May 14, 2004. As of
May 14, 2004, the Company was informed that $12.0 of the $13.0 had been
paid into the escrow account. The $13.0 amount is to be paid to the
Company as full and final consideration for the transaction at closing.
The Company also agreed to fund certain end of service benefits of Valco
employees (estimated to be approximately $9.0) which the GoG was to
assume under the original MOU. The Company and the GoG are targeting a
closing for the transaction in July 2004, subject to a number of
conditions including the approval by the Ghanaian parliament. No
assurance can be made as to when or if the transaction will close under
the revised terms. However, as the revised purchase price is well below
the Company's recorded value for Valco and given the increased likelihood
of a closing and the payment by the GoG of the escrow amount, the Company
determined that it should impair its interests in and related to Valco at
March 31, 2004 to the amount of the expected proceeds. As such, the
Company recorded a non-cash impairment charge of approximately $33.0
(included in Other operating charges (benefits), net -- see Note 9). The
actual amount of loss if and when the potential sale of the Company's
interests in and related to Valco is consummated may differ from the
above amount as a result of closing adjustments, changes in economic
circumstances and other matters.

- In February 2004, the Company entered into an agreement to sell the Mead
facility and certain related property in connection with which it would
receive net cash proceeds of approximately $3.0 and the buyer would
assume certain site-related liabilities. The sale of the Mead property
was subject to an auction to determine if a higher value could be
obtained. The auction bidding procedures were

19

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

approved by the Court in March 2004. As a result of the auction and after
consultation with the UCC and others, the Company entered into an
agreement with the successful bidder to sell the Mead facility and
certain related property for approximately $7.4 plus assumption of
certain site-related liabilities. The Company expects that the sale will
result in net proceeds in the range of $5.0 to $6.0 and a pre-tax gain of
approximately $20.0. While the Company expects the sale to be approved by
the Court and close during the second quarter of 2004, certain objections
have been filed by third parties to the proposed sale and it is unclear
what impact these objections may have on the sales process. No assurances
can be given that the sale will be completed under the items outlined
above. Additionally, it is possible that all or some portion of the
proceeds from the sale may need to be held in escrow until emergence from
the Chapter 11 proceedings for the benefit of the holders of the 7.6%
solid waste disposal revenue bonds (see Note 5).

- In March 2004, the Company completed the sale of certain non-operating
land that was adjacent to the Mead facility. Net proceeds from the sale
were approximately $7.4. The pre-tax impact of the sale was deferred at
March 31, 2004 pending the finalization of the sale of the Mead facility
and transfer of the site-related liabilities.

2003 --

- In January 2003, the Court approved the sale of the Tacoma facility to
the Port of Tacoma (the "Port"). Gross proceeds from the sale, before
considering approximately $4.0 of proceeds being held in escrow pending
the resolution of certain environmental and other issues, were
approximately $12.1. The Port also agreed to assume the on-site
environmental remediation obligations. The sale closed in February 2003.
The sale resulted in a pre-tax gain of approximately $9.5 (which amount
was reflected in Other operating charges (benefits), net -- see Note 9).
The operating results of the Tacoma facility for 2004 and 2003 have not
been reported as discontinued operations in the accompanying Statements
of Consolidated Income (Loss) because such amounts were not material. The
Tacoma facility's operating loss for the quarter ended March 31, 2003
before considering the gain on the sale and any income tax impact was not
material.

- The Company had a long-term liability, net of estimated subleases income,
on an office complex in Oakland, California, in which the Company had not
maintained offices for a number of years, but for which it was
responsible for lease payments as master tenant through 2008 under a
sale-and-leaseback agreement. The Company also held an investment in
certain notes issued by the owners of the building (which were included
in Other Assets). In October 2002, the Company entered into a contract to
sell its interests and obligations in the office complex. As the contract
amount was less than the asset's net carrying value (included in Other
assets), the Company recorded a non-cash impairment charge in 2002 of
approximately $20.0. The sale was approved by the Court in February 2003
and closed in March 2003. Net cash proceeds were approximately $61.1.

20

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

5. LONG-TERM DEBT

Debt consists of the following:

Post-Petition Credit Agreement. On February 12, 2002, the Company and
Kaiser entered into the DIP Facility with a group of lenders for
debtor-in-possession financing. In March 2003, certain of the Additional Debtors
were added as co-guarantors and the DIP Facility lenders received super-priority
status with respect to certain of the Additional Debtors' assets. The DIP
Facility provides for a secured, revolving line of credit through the earlier of
February 13, 2005, the effective date of a plan of reorganization or voluntary
termination by the Company. Under the DIP Facility, the Company is able to
borrow amounts by means of revolving credit advances and to have issued for its
benefit letters of credit (up to $125.0) in an aggregate amount equal to the
lesser of $285.0 or a borrowing base relating to eligible accounts receivable,
eligible inventory and an amortizing fixed asset subcomponent, reduced by
certain reserves, as defined in the DIP Facility agreement. The DIP Facility is
guaranteed by the Company and certain significant subsidiaries of the Company.
Interest on any outstanding borrowings will bear a spread over either a base
rate or LIBOR, at the Company's option. As of March 31, 2004, $132.1 was
available to the Company under the DIP Facility (of which up to $79.5 could be
used for additional letters of credit) and no borrowings were outstanding under
the revolving credit facility.

The DIP Facility requires the Company to comply with certain covenants and
places restrictions on the Company's, Kaiser's and the Company's subsidiaries'
ability to, among other things, incur debt and liens, make investments, pay
dividends, sell assets, undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business.

During March 2004, the Company received a waiver from the DIP Facility
lenders in respect of a financial covenant, for the quarter ended December 31,
2003 and for all measurement periods through May 31, 2004 and accordingly, the
Company will likely not have to comply with the covenant until June 30, 2004.
The Company is currently working with the DIP Facility lenders to complete an
amendment that is

21

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

anticipated, among other things, to: (1) reset the financial covenant based on
more recent forecasts; (2) authorize the sale of the Company's interests in
Alpart, QAL, Gramercy/KJBC and Valco within certain parameters and (3) reduce
the availability of the fixed asset subcomponent of the borrowing base to a
level that, by emergence will be based on advances solely in respect of
machinery and equipment at the fabricated products facilities.

While the effect of the amendment will be to reduce overall availability,
assuming the previously mentioned commodity assets are sold, the Company
currently anticipates that once amended, availability under the DIP Facility
will likely be in the $50.0-$100.0 range and that such amount should be adequate
to support the Company's liquidity requirements through the remainder of the
Cases. This belief is based on the fact that it was the commodities' assets and
operations that subjected the Company to the most variability and exposure both
from a price risk basis as well as from an operating perspective. While the
Company anticipates that it will be successful in completing an amendment to the
DIP Facility along the lines outlined above in time for submission to the Court
in May 2004, no assurances can be given in this regard.

The Company is also discussing a limited consent and waiver with the DIP
Facility lenders in case completion of the aforementioned amendment is delayed.
The limited consent and waiver would, among other things (1) allow the Company
to complete the sale of its interests in and related to Alpart provided that the
proceeds are escrowed and are subject to the lenders' administrative super
priority claim until the amendment is completed, (2) extend the waiver of the
financial covenant through the June 30, 2004 measurement date and (3) waive the
current DIP Facility requirement that any proceeds from the sale of Alpart
reduce the fixed asset subcomponent of the borrowing base.

While the Company believes it will be successful in either obtaining the
above-described amendment or limited consent and waiver, no assurances can be
provided in this regard.

8 1/4% Alpart CARIFA Loans. In December 1991, Alpart entered into a loan
agreement with the Caribbean Basin Projects Financing Authority ("CARIFA"). As
of March 31, 2004, Alpart's obligations under the loan agreement were secured by
two letters of credit aggregating $23.5. KACC was a party to one of the two
letters of credit in the amount of $15.3 in respect of its 65% ownership
interest in Alpart. Alpart has also agreed to indemnify bondholders of CARIFA
for certain tax payments that could result from events, as defined, that
adversely affect the tax treatment of the interest income on the bonds.

Pursuant to the CARIFA loan agreement, the Alpart CARIFA financing would
have to be repaid at time of closing of the sale if the Company completes the
previously disclosed sale of its interests in Alpart (see Notes 1 and 4).
However, such repayment would have an essentially neutral effect on the
Company's liquidity as, upon any such payment, the Company's letter of credit
obligation under the DIP Facility securing the loans would be cancelled.

7.6% Solid Waste Disposal Revenue Bonds. The 7.6% solid waste disposal
revenue bonds (the "Solid Waste Bonds") are secured by certain (but not all) of
the facilities and equipment at the curtailed Mead facility (see Note 4 for a
discussion of the pending sale of the Mead facility). The Company currently
believes that it is likely that the value of the collateral securing the Solid
Waste Bonds is insufficient for full recovery of the bondholders' claim. The
Company estimates the value of the collateral to be in the $1.0 range. As a
result, the Company has reclassified $18.0 of the Solid Waste Bonds balance to
Liabilities subject to compromise (see Note 1).

6. INCOME TAXES

The income tax provisions of $6.9 and $4.7 for the quarters ended March 31,
2004 and 2003, respectively, relate primarily to foreign income taxes. For the
quarters ended March 31, 2004 and 2003, as a result of the
22

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Cases, the Company did not recognize any U.S. income tax benefit for the losses
incurred from its domestic operations (including temporary differences) or any
U.S. income tax benefit for foreign income taxes. Instead, the increases in
federal and state deferred tax assets as a result of additional net operating
losses and foreign tax credits generated in 2004 and 2003 were fully offset by
increases in valuation allowances. See Note 8 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003 for
additional information regarding the Deferred Tax Assets and Valuation
Allowances.

7. COMMITMENTS AND CONTINGENCIES

Impact of Reorganization Proceedings. During the pendency of the Cases,
substantially all pending litigation, except certain environmental claims and
litigation, against the Debtors is stayed. Generally, claims against a Debtor
arising from actions or omissions prior to its Filing Date will be settled in
connection with its plan of reorganization.

Commitments. The Company has a variety of financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and forward
sales contracts (see Note 8), letters of credit, and guarantees. Such purchase
agreements and tolling arrangements include long-term agreements for the
purchase and tolling of bauxite into alumina in Australia by QAL. These
obligations are scheduled to expire in 2008. Under the agreements, the Company
is unconditionally obligated to pay its proportional share (20%) of debt,
operating costs, and certain other costs of QAL. The Company's share of the
aggregate minimum amount of required future principal payments as of March 31,
2004, was $60.0 which amount matures in varying amounts during the 2005 to 2008
period. The Company's share of QAL's debt increased by approximately $8.0 during
2003 as additional drawdowns on QAL financing (the Company's share $40.0) more
than offset the Company's share ($32.0) of QAL's debt principal payment. During
July 2002, the Company made payments of approximately $29.5 to QAL to fund the
Company's share of QAL's scheduled debt maturities. The Company's share of
payments, including operating costs and certain other expenses under the
agreements, has generally ranged between $70-$100 over the past three years.
However, as discussed more fully in Note 1, the Company is considering the
possibility of selling its interests in QAL. If the Company's interest in QAL
were to be sold, the Company believes that the Company's obligations in respect
of its share of QAL's debt would be assumed by the buyer. The Company also has
agreements to supply alumina to and to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases at December 31, 2003, are
as follows: years ending December 31, 2004 -- $7.5; 2005 -- $4.7; 2006 -- $2.1;
2007 - $.3; 2008 -- $.2; thereafter -- $.7. Pursuant to the Code, the Debtors
may elect to reject or assume unexpired pre-petition leases. At this time, no
final decisions have been made as to which significant leases will be accepted
or rejected (see Note 1). Rental expenses were $15.2, $38.3 and $41.0, for the
years ended December 31, 2003, 2002 and 2001, respectively.

Environmental Contingencies. The Company and Kaiser are subject to a
number of environmental laws, to fines or penalties assessed for alleged
breaches of the environmental laws, and to claims and litigation based upon such
laws. The Company currently is subject to a number of claims under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended by the Superfund Amendments Reauthorization Act of 1986 ("CERCLA"), and,
along with certain other entities, has been named as a potentially responsible
party for remedial costs at certain third-party sites listed on the National
Priorities List under CERCLA.

Based on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and groundwater remediation matters. At
March 31, 2004, the balance of such accruals was $82.2 (of which $43.0 was
included in Liabilities subject to compromise -- see Note 1). These
environmental accruals represent the
23

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Company's estimate of costs reasonably expected to be incurred in the ordinary
course of business based on presently enacted laws and regulations, currently
available facts, existing technology, and the Company's assessment of the likely
remediation action to be taken. In the ordinary course, the Company expects that
these remediation actions would be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $25.4 in 2004, $2.2 to $4.3 per year for the years 2005
through 2008 and an aggregate of approximately $45.7 thereafter. Approximately
$20.2 of the adjustments to the environmental liabilities in 2003 (see below)
that applied to non-owned property sites has been included in the after 2008
balance because such amounts are expected to be settled solely in connection
with the Debtors' plan or plans of reorganization.

The March 31, 2004 accrual balance includes approximately $23.2 that was
provided during the third quarter of 2003. Approximately $20.2 of the amount
provided in the third quarter of 2003 relates to the previously disclosed
multi-site settlement agreement with various federal and state governmental
regulatory authorities and other parties in respect of the Company's
environmental exposure at a number of non-owned sites. Under this agreement,
among other things, the Company agreed to claims at such sites totaling $25.6
($20.2 greater than amounts that had previously been accrued for these sites)
and, in return, the governmental regulatory authorities have agreed that such
claims would be treated as pre-Filing Date unsecured claims (i.e. liabilities
subject to compromise). The Company recorded in the third quarter of 2003 the
portion of the $20.2 accrual that relates to locations with active operations
($15.7) in Other operating charges, net. The remainder of the accrual ($4.5),
which relates to locations that have not operated for a number of years was
recorded in the third quarter of 2003 in Other income (expense).

During September 2003, the Company also provided additional accruals
totaling approximately $3.0 associated with certain Company-owned properties
with no current operations (recorded in the third quarter of 2003 in Other
income (expense)). These additional accruals resulted primarily from additional
cost estimation efforts undertaken by the Company in connection with its
reorganization efforts. The additional accruals were recorded as liabilities not
subject to compromise as they relate to properties owned by the Company.

As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $15.6 (a majority of which are estimated to
relate to owned sites that are likely not subject to compromise). As the
resolution of these matters is subject to further regulatory review and
approval, no specific assurance can be given as to when the factors upon which a
substantial portion of this estimate is based can be expected to be resolved.
However, the Company is currently working to resolve certain of these matters.

The Company believes that it has insurance coverage available to recover
certain incurred and future environmental costs and is pursuing claims in this
regard. However, no amounts have been accrued in the financial statements with
respect to such potential recoveries.

Other Environmental Matters. During April 2004, the Company was served
with a subpoena for documents and has been notified by Federal authorities that
they are investigating certain environmental compliance issues with respect of
the Company's Trentwood facility in the State of Washington. The Company is
undertaking its own internal investigation of the matter through specially
retained counsel to ensure that it has all relevant facts regarding Trentwood's
compliance with applicable environmental laws. The Company believes it is in
compliance with all applicable environmental laws and requirements at the

24

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Trentwood facility and intends to defend any claims or charges, if any should
result, vigorously. The Company cannot assess what, if any, impacts this matter
may have on the Company's or Kaiser's financial statements.

Asbestos Contingencies. The Company has been one of many defendants in a
number of lawsuits, some of which involve claims of multiple persons, in which
the plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with the Company or exposure to products containing asbestos
produced or sold by the Company. The lawsuits generally relate to products the
Company has not sold for more than 20 years. As of the initial Filing Date,
approximately 112,000 claims were pending. The lawsuits are currently stayed by
the Cases.

Due to the Cases, holders of asbestos claims are stayed from continuing to
prosecute pending litigation and from commencing new lawsuits against the
Debtors. However, during the pendency of the Cases, the Company expects
additional asbestos claims will be filed as part of the claims process. A
separate creditors' committee representing the interests of the asbestos
claimants, the ACC, has been appointed. The Debtors' obligations with respect to
present and future asbestos claims will be resolved pursuant to a plan of
reorganization.

The Company has accrued a liability for estimated asbestos-related costs
for claims filed to date and an estimate of claims to be filed through 2011. At
March 31, 2004, the balance of such accrual was $610.1, all of which was
included in Liabilities subject to compromise (see Note 1). The Company's
estimate is based on the Company's view, at March 31, 2004, of the current and
anticipated number of asbestos-related claims, the timing and amounts of
asbestos-related payments, the status of ongoing litigation and settlement
initiatives, and the advice of Wharton Levin Ehrmantraut & Klein, P.A., with
respect to the current state of the law related to asbestos claims. However,
there are inherent uncertainties involved in estimating asbestos-related costs
and the Company's actual costs could exceed the Company's estimates due to
changes in facts and circumstances after the date of each estimate. Further,
while the Company does not presently believe there is a reasonable basis for
estimating asbestos-related costs beyond 2011 and, accordingly, no accrual has
been recorded for any costs which may be incurred beyond 2011, the Company
expects that the plan of reorganization process may require an estimation of the
Company's entire asbestos-related liability, which may go beyond 2011, and that
such costs could be substantial.

The Company believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Although the Company has
settled asbestos-related coverage matters with certain of its insurance
carriers, other carriers have not yet agreed to settlements and disputes with
carriers exist. The timing and amount of future recoveries from these insurance
carriers will depend on the pendency of the Cases and on the resolution of any
disputes regarding coverage under the applicable insurance policies. The Company
believes that substantial recoveries from the insurance carriers are probable
and additional amounts may be recoverable in the future if additional claims are
added. The Company reached this conclusion after considering its prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Heller Ehrman White & McAuliffe LLP with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies. During 2000, the Company filed suit in San
Francisco Superior Court against a group of its insurers, which suit was
thereafter split into two related actions. Additional insurers were added to the
litigation in 2000 and 2002. During October 2001, June 2003 and February 2004,
the court ruled favorably on a number of policy interpretation issues.
Additionally, one of the favorable October 2001 rulings was affirmed in February
2002 by an intermediate appellate court in response to a petition from the
insurers. The rulings did not result in any changes to the Company's estimates
of its current or future asbestos-related insurance recoveries. The trial court
may hear additional issues from time to time. Given the expected significance of
probable future asbestos-related payments, the receipt of

25

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

timely and appropriate payments from its insurers is critical to a successful
plan of reorganization and the Company's long-term liquidity.

The following tables present historical information regarding the Company's
asbestos-related balances and cash flows:

- ---------------

(1) The asbestos-related receivable was determined on the same basis as the
asbestos-related cost accrual. However, no assurances can be given that the
Company will be able to project similar recovery percentages for future
asbestos-related claims or that the amounts related to future
asbestos-related claims will not exceed the Company's aggregate insurance
coverage. As of March 31, 2004 and December 31, 2003, $4.3 and $6.1,
respectively, of the receivable amounts relate to costs paid. The remaining
receivable amounts relate to costs that are expected to be paid by the
Company in the future.

During the pendency of the Cases, all asbestos litigation is stayed. As a
result, the Company does not expect to make any asbestos payments in the near
term. Despite the Cases, the Company continues to pursue insurance collections
in respect of asbestos-related amounts paid prior to its Filing Date.

Management continues to monitor claims activity, the status of lawsuits
(including settlement initiatives), legislative developments, and costs incurred
in order to ascertain whether an adjustment to the existing accruals should be
made to the extent that historical experience may differ significantly from the
Company's underlying assumptions. Additional asbestos-related claims are likely
to be asserted as a part of the Chapter 11 process. Management cannot at this
time reasonably predict the ultimate number of such claims or the amount of the
associated liability. However, it is likely that such amounts could exceed,
perhaps significantly, the liability amounts reflected in the Company's
consolidated financial statements, which (as previously stated) is only
reflective of an estimate of claims through 2011. The Company's obligations in
respect of the currently pending and future asbestos-related claims will
ultimately be determined (and resolved) as a part of the overall Chapter 11
proceedings. It is anticipated that resolution of these matters could be a
lengthy process. Management will continue to periodically reassess its
asbestos-related liabilities and estimated insurance recoveries as the Cases
proceed. However, absent unanticipated developments such as asbestos-related
legislation, material developments in other asbestos-related proceedings or in
the Company's Chapter 11 proceedings, it is not anticipated that the Company
will have sufficient information to reevaluate its asbestos-related obligations
and estimated insurance recoveries until later in the Cases. Any adjustments
ultimately deemed to be required as a result of any reevaluation of the
Company's asbestos-related liabilities or estimated insurance recoveries could
have a material impact on the Company's future financial statements.

The Company has entered into settlement agreements with several of the
insurers whose asbestos-related obligations are primarily in respect of future
asbestos claims. These settlement agreements were approved by

26

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

the Court. In accordance with the Court approval, the insurers are to pay
certain amounts, pursuant to the terms of an escrow agreement, into a fund (the
"Escrow Fund") in which the Company has no interest, but which amounts will be
available for the ultimate settlement of the Company's asbestos-related claims.
Because the Escrow Fund is under the control of the escrow agent, who will make
distributions only pursuant to a Court order, the Escrow Fund is not included in
the accompanying consolidated balance sheet at March 31, 2004. In addition,
since neither the Company nor Kaiser received any economic benefit or suffered
any economic detriment and have not been relieved of any asbestos-related
obligation as a result of the receipt of the escrow funds, neither the
asbestos-related receivable or the asbestos-related liability have been adjusted
as a result of these transactions. As of March 31, 2004, the insurers had paid
$9.1 into the Escrow Fund. It is possible that settlements with additional
insurers will occur. However, no assurance can be given that such settlements
will occur.

Labor Matters. In connection with the United Steelworkers of America (the
"USWA") strike and subsequent lock-out by the Company, which was settled in
September 2000, certain allegations of unfair labor practices ("ULPs") were
filed with the National Labor Relations Board ("NLRB") by the USWA. As
previously disclosed, the Company responded to all such allegations and believed
that they were without merit. Twenty-two of twenty-four allegations of ULPs
previously brought against the Company by the USWA have been dismissed. A trial
before an administrative law judge for the two remaining allegations concluded
in September 2001. In May 2002, the administrative law judge ruled against the
Company in respect of the two remaining ULP allegations and recommended that the
NLRB award back wages, plus interest, less any earnings of the workers during
the period of the lockout. The administrative law judge's ruling did not contain
any specific amount of proposed award and was not self-executing. The USWA filed
a proof of claim for $240.0 in the Cases in respect of this matter.

In January 2004, as part of its settlement with the USWA with respect to
pension and retiree medical benefits, the Company and the USWA agreed to settle
their case pending before the NLRB, subject to approval of the NLRB General
Counsel and the Court and ratification by union members. The settlement was
subsequently ratified by the union members in February 2004. Further, the
settlement with respect to retiree medical and pension benefits and the NLRB
case has been approved by the Court subject to certain conditions. The agreement
may be terminated by either the USWA or the Company in certain circumstances
(see Note 9 of Notes of Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2003). Under the terms of the agreement,
solely for the purposes of determining distributions in connection with the
reorganization, an unsecured pre-petition claim in the amount of $175.0 will be
allowed. The agreement to settle this matter was contingent on NLRB and Court
approval and ratification by union members. This amount was not reflected in the
Company's consolidated financial statements at March 31, 2004. However, the
charge and an offsetting liability associated with the settlement of this matter
will be reflected in the Company's consolidated financial statements if and when
the agreement with the USWA is ultimately approved by the Court. Also, as part
of the agreement, the Company agreed to adopt a position of neutrality regarding
the unionization of any employees of the reorganized company.

Settled Hearing Loss Claims. During February 2004, the Company reached a
settlement in respect of 400 claims, which alleged that certain individuals who
were employees of the Company, principally at a facility previously owned and
operated by the Company in Louisiana, suffered hearing loss in connection with
their employment. Under the terms of the settlement, which is still subject to
Court approval, the claimants will be allowed claims totaling $15.8. As such,
the Company recorded a $15.8 charge (in Other operating charges (benefits), net)
in the fourth quarter of 2003 and a corresponding obligation (included in
Liabilities subject to compromise -- see Note 1). However, no cash payments by
the Company are required in respect of these amounts. Rather the settlement
agreement contemplates that, at emergence, these claims will be transferred to a
separate trust along with certain rights against certain corresponding insurance
policies of the
27

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Company and that such insurance policies will be the sole source of recourse to
the claimants. While the Company believes that the insurance policies are of
value, no amounts have been reflected in the Company's financial statements at
March 31, 2004 in respect of such policies as the Company could not with the
level of certainty necessary determine the amount of recoveries that were
probable.

Other Personal Injury Claims. The Company has received other personal
injury claims related to noise induced hearing loss (approximately 2,900 claims)
and exposure to silica and coal tar pitch volatiles (approximately 3,900 claims
and 300 claims, respectively). The Company believes that all such claims are
pre-petition claims that will be resolved by the Cases. The Company cannot
presently determine the impact or value of these claims. However, the Company
currently expects that all such claims will be transferred, along with certain
rights against certain corresponding insurance policies, to a separate trust
along with (similar to) the settled hearing loss cases discussed above, whether
or not such claims are settled prior to the Company's emergence from the Cases.

Other Contingencies. The Company or Kaiser is involved in various other
claims, lawsuits, and other proceedings relating to a wide variety of matters
related to past or present operations. While uncertainties are inherent in the
final outcome of such matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, management currently believes that
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity.

8. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

In conducting its business, the Company uses various instruments, including
forward contracts and options, to manage the risks arising from fluctuations in
aluminum prices, energy prices and exchange rates. The Company enters into
hedging transactions from time to time to limit its exposure resulting from (1)
its anticipated sales of alumina, primary aluminum, and fabricated aluminum
products, net of expected purchase costs for items that fluctuate with aluminum
prices, (2) the energy price risk from fluctuating prices for natural gas, fuel
oil and diesel oil used in its production process, and (3) foreign currency
requirements with respect to its cash commitments with foreign subsidiaries and
affiliates. As the Company's hedging activities are generally designed to
lock-in a specified price or range of prices, gains or losses on the derivative
contracts utilized in the hedging activities generally offset at least a portion
of any losses or gains, respectively, on the transactions being hedged.

The following table summarizes the Company's material derivative positions
at March 31, 2004.

- ---------------

* All references to tons in this report refer to metric tons of 2,204.6
pounds.

(a) When the hedges in place as of March 31, 2004 are combined with price limits
in the Company's physical supply agreement, the Company's exposure to
increases in natural gas prices has been substantially limited for April
2004 and May 2004.

28

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

The Company anticipates that, subject to prevailing economic conditions, it
may enter into additional hedging transactions with respect to primary aluminum
prices, natural gas and fuel oil prices and foreign currency values to protect
the interests of its constituents. However, no assurance can be given as to when
or if the Company will enter into such additional hedging activities.

As of March 31, 2004, the Company had sold forward a vast majority of the
alumina available to it in excess of its projected internal smelting
requirements for the remainder of 2004 and for 2005 and 2006 at prices indexed
to future prices of primary aluminum.

9. OTHER OPERATING CHARGES (BENEFITS), NET AND OTHER INCOME (EXPENSE)

Other Operating (Charges) Benefits, Net. The income (loss) impact
associated with other operating (charges) benefits, net for the quarter ended
March 31, 2004 related to impairment charges totaling $33.0 associated with the
write-down of the Company's interests in and related to Valco (Property, plant
and equipment of $31.8 and alumina inventories of $1.2 -- see Notes 2 and
8 -- Primary aluminum business unit) offset by the settlement of certain alumina
contract claims that the Company had against a Bauxite and alumina business unit
customer. Total proceeds from the settlement were approximately $1.6 resulting
in a net gain of approximately $1.5 after considering related expenses.

The income (loss) impact associated with other operating (charges)
benefits, net for the quarter ended March 31, 2003 consisted of (a) a pre-tax
gain of approximately $9.5 from the sale of the Tacoma facility (see Note 4)
offset by (b) restructuring charges of approximately $1.3 which consisted of
employee benefit costs associated with 17 salaried job eliminations during the
first quarter of 2003 resulting from the Mead facility's indefinite curtailment
(see Note 6 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2003 -- Primary aluminum business unit).

Other Income (Expense). Other income (expense), other than interest
expense, for the quarter ended March 31, 2003 included approximately $1.7 of
adverse foreign currency exchange impacts associated with a foreign tax
settlement.

10. OPERATING SEGMENT INFORMATION

The Company uses a portion of its bauxite and alumina production for
additional processing at its downstream facilities. Transfers between business
units are made at estimated market prices. The accounting policies of the
segments are the same as those described in Note 2 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2003. Business unit results are evaluated internally by management before any
allocation of corporate overhead and without any charge for income taxes or
interest expense. See Note 17 of Notes to Consolidated Financial Statements in
the Company's Form 10-K for the year ended December 31, 2003.

During the second quarter of 2003, the Company elected to change its
business segment reporting. Two of the Company's previously reported operating
segments, Flat-rolled products and Engineered products, have been designated as
one business segment, Fabricated products. The previously reported segments were
combined primarily due to a significant integration in the organization and
management of the two segments, as well as the similarity of their economic
characteristics, products, customers and production and distribution processes.
The change in segment reporting is also an outgrowth of the Company's strategic
vision as part of its planning for its ultimate emergence from Chapter 11.

29

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

Financial information by operating segment for the quarters ended March 31,
2004 and 2003 is as follows:

30

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

11. NEW ACCOUNTING PRONOUNCEMENT

Statement of Financial Accounting Standards No. 132 (revised), Employers'
Disclosure about Pensions and Other Postretirement Benefits ("SFAS No. 132
(revised)") was issued and was effective in the fourth quarter of 2003. SFAS No.
132 (revised) requires, beginning with the first quarter of 2004, the disclosure
of (1) the amount of the net periodic pension and other postretirement benefits
costs recognized during the quarters ended March 31, 2004 and 2003 and (2) the
total amount of employers' contributions paid, and expected to be paid during
2004.

COMPONENTS OF NET PERIODIC BENEFIT COSTS --

The following table presents the components of net periodic benefit costs
for the quarters ended March 31, 2004 and 2003:

See Note 9 of Notes to Consolidated Financial Statements in the Company's Form
10-K for the year ended December 31, 2003 for key assumptions with respect to
the Company's pension plans and other postretirement benefit plans.

CASH FLOW --

Domestic Plans. As previously discussed, the Company since filing the
Chapter 11 proceedings has not made and does not intend to make any further
significant contributions to any of its domestic pension plans.

Upon emergence from Chapter 11 proceedings, the Company anticipates that it
will provide some form of yet to be determined defined contribution pension plan
in respect of its salaried employees. Any such plans ultimately adopted will be
subject to a number of approvals. The Company currently estimates that the total
annual cash cost of such plans would be less than $5.0 and, if approved, would
likely be required to be funded some time in 2005.

Pursuant to the terms of the USWA agreement, the Company will be required
to make annual contributions into the Steelworkers Pension Trust on the basis of
one dollar USWA employee per hour worked. In addition, the Company will
institute a defined contribution pension plan for active USWA employees. Company
contributions to the plan will range from eight hundred dollars to twenty-four
hundred dollars per employee per year, depending on age and years of service.
The Company believes that similar defined contribution pension plans will be
established for non-USWA hourly employees subject to collective bargaining
agreements. The Company currently estimates that contributions to all such plans
will range from $3.0 to $6.0 per year.

As a replacement for the Company's current postretirement benefit plans,
the Company will fund one or more Voluntary Employee Beneficiary Associations
(each a "VEBA") into which the Company will contribute certain amounts on
emergence from Chapter 11 proceedings and on an annual basis through 2012.

31

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

The initial contribution will be an amount not to exceed $36.0 and will be
payable on emergence from the Chapter 11 proceedings so long as the Company's
liquidity is at least $50.0 after considering such payments. To the extent that
less than the full $36.0 is paid and the Company's interests in Anglesey are
subsequently sold, a portion of the Anglesey interests' proceeds, in certain
circumstances, will be used to pay the shortfall. In addition to the foregoing,
the Company will, on an annual basis, be required to pay 10% of the first $20.0
of annual cash flow, as defined, plus 20% of annual cash flow, as defined, above
$20.0. Such annual payments shall not exceed $20.0 and will also be limited
(with no carryover to future years) to the extent that the payments do not cause
the Company's liquidity to be less than $50.0.

In May 2004, the Company filed a notice with the Court seeking to make the
agreements regarding pension and postretirement medical benefits effective on
June 1, 2004 not withstanding that the Intercompany Agreement will not be
effective by that date. The Court will hear the Company's request at a June 1,
2004 hearing. No assurances can be given that the Company's request will be
granted. If the Court does not grant the Company's request, the pension and
postretirement medical benefit agreements will likely not become effective until
the Intercompany Agreement is finalized and modifications to the agreements may
be required (see Note 1 for discussion of the possible timing and status of the
Intercompany Agreement).

The Company has also reached an agreement with the 1114 Committee and the
representatives of the majority of the Company's hourly employees under which
the Company will increase the advances to the VEBA beginning in June 2004.
Pursuant to the agreement, the Company will advance $3.0 to the VEBA in June
2004 and approximately $2.0 to the VEBA each month thereafter until the Company
emerges from the Cases. Any advances made pursuant to such agreement will
constitute a credit toward the $36.0 maximum contribution due upon emergence.
Whether or not the VEBA advances begin in June 2004 will depend on the outcome
of the Company's notice discussed above.

The PBGC has not completed its review of the replacement pension plans or
the defined contribution plans.

Foreign Plans. Contributions to foreign pension plans were approximately
$9.8 and $9.0 during 2003 and 2002, respectively, and primarily related to the
Company's interests in commodity assets being considered for sale. As a result
of the potential sales of the Company's investments in such assets, future
contributions to foreign pension plans could decline to a nominal amount.

12. SUPPLEMENTAL GUARANTOR INFORMATION

Certain domestic, wholly-owned (direct or indirect) subsidiaries of the
Company (hereinafter collectively referred to as the Subsidiary Guarantors) have
provided, joint and several, guarantees of the 9 7/8% Senior Notes, the 10 7/8%
Senior Notes, due 2006 and the 12 3/4% Senior Subordinated Notes (the "Notes").
Such guarantees are full and unconditional. See Note 18 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2003 for a more complete discussion regarding the Subsidiary Guarantors and
their operations.

The accompanying financial information presents consolidating balance
sheets, statements of income (loss) and statements of cash flows showing
separately the Company, Subsidiary Guarantors, other subsidiaries and
eliminating entries.

32

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2004

33

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2003

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2004

34

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF INCOME (LOSS)
FOR THE QUARTER ENDED MARCH 31, 2003

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2004

35

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
(DEBTOR-IN-POSSESSION)

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE QUARTER ENDED MARCH 31, 2003

NOTES TO CONDENSED CONSOLIDATING FINANCIAL INFORMATION

Income Taxes -- The income tax provisions for the quarters ended March 31,
2004 and 2003, relate primarily to foreign income taxes. As a result of the
Cases, the Company did not recognize any income tax benefit for the losses
incurred from domestic operations (including temporary differences) or any U.S.
income tax benefit for foreign income taxes. Instead, the increases in federal
and state deferred tax assets as a result of additional net operating losses and
foreign tax credits generated were offset by equal increases in valuation
allowances.

Foreign Currency -- The functional currency of the Company and its
subsidiaries is the United States Dollar, and accordingly, pre-tax translation
gains (losses) are included in the Company's and Subsidiary Guarantors'
operating income (loss) and other income (expense), net balances. Such amounts
for the Company totaled $1.9 and $14.2 for the quarters ended March 31, 2004 and
2003, respectively. Such amounts for the Subsidiary Guarantors totaled $(1.7)
and $(14.3) for the quarters ended March 31, 2004 and 2003, respectively.

Debt Covenants and Restrictions -- The Indentures contain restrictions on
the ability of the Company's subsidiaries to transfer funds to the Company in
the form of dividends, loans or advances.

36

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

This section should be read in conjunction with the response to Part I,
Item 1, of this Report.

This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These statements appear in a number of places in this section (see, for
example, "Recent Events and Developments," "Results of Operations," and
"Liquidity and Capital Resources"). Such statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. Readers are cautioned that any such forward-looking statements are not
guarantees of future performance and involve significant risks and
uncertainties, and that actual results may vary materially from those in the
forward-looking statements as a result of various factors. These factors include
the effectiveness of management's strategies and decisions, general economic and
business conditions, developments in technology, new or modified statutory or
regulatory requirements, and changing prices and market conditions. This section
and Part I, Item 1. "Business -- Factors Affecting Future Performance" in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003, each
identify other factors that could cause actual results to vary. No assurance can
be given that these are all of the factors that could cause actual results to
vary materially from the forward-looking statements.

REORGANIZATION PROCEEDINGS

Kaiser Aluminum & Chemical Corporation (the "Company"), its parent company,
Kaiser Aluminum Corporation ("Kaiser" or "KAC"), and 24 of the Company's
subsidiaries have filed separate voluntary petitions with United States
Bankruptcy Court for the District of Delaware ("the Court") for reorganization
under Chapter 11 of the United States Bankruptcy Code (the "Code"). The Company,
Kaiser and 15 of the Company's subsidiaries (the "Original Debtors") filed in
the first quarter of 2002 and nine additional Company subsidiaries (the
"Additional Debtors") filed in the first quarter of 2003. The Original Debtors
and Additional Debtors are collectively referred to herein as the "Debtors" and
the Chapter 11 proceedings of these entities are collectively referred to herein
as the "Cases." For purposes of this Report, the term "Filing Date" shall mean,
with respect to any particular Debtor, the date on which such Debtor filed its
Case. None of the Company's non-U.S. joint ventures are included in the Cases.
The Cases are being jointly administered. The Debtors are managing their
businesses in the ordinary course as debtors-in-possession subject to the
control and administration of the Court.

As provided by the Code, the Debtors had the exclusive right to propose a
plan of reorganization for 120 days following the initial Filing Date. The Court
has subsequently approved several extensions of the exclusivity period for all
Debtors. The Debtors have pending a motion to extend exclusivity through May 31,
2004 for Kaiser Aluminum Australia Corporation ("KAAC"), Kaiser Jamaica
Corporation ("KJC") and Alpart Jamaica Inc. ("AJI") and June 30, 2004 for the
remaining Debtors. By filing the motion to extend the exclusivity period, the
period is automatically extended until the May 18, 2004 Court hearing date. As
the Debtors' motion to extend the exclusivity period was agreed to by the
unsecured creditors committee (the "UCC") in advance of the filing, the Debtors
expect the motion to be approved by the Court. Additional extensions are likely
to be sought. However, no assurance can be given that any such future extension
requests will be granted by the Court. If the Debtors fail to file a plan of
reorganization during the exclusivity period, or if such plan is not accepted by
the requisite numbers of creditors and equity holders entitled to vote on the
plan, other parties in interest in the Cases may be permitted to propose their
own plan(s) of reorganization for the Debtors.

The Debtors anticipate that substantially all liabilities of the Debtors as
of their Filing Date will be settled under one or more plans of reorganization
to be proposed and voted on in accordance with the provisions of the Code.
Although the Debtors intend to file and seek confirmation of such a plan or
plans, there can be no assurance as to when the Debtors will file such a plan or
plans or as to whether such plan or plans will be confirmed by the Court and
consummated.

37

In working toward one or more plans of reorganization, the Debtors have
been, and continue to be, engaged in discussions with each of their key
constituencies, including the UCC, the asbestos claimants committee (the "ACC")
and a committee of salaried retirees (the "1114 Committee" and, together with
the UCC and the ACC, the "Committees"), the legal representative for potential
future asbestos claimants (the "Futures' Representative"), the Pension Benefit
Guaranty Corporation (the "PBGC") and the appropriate union representatives. The
treatment of individual groups of creditors in any such plan of reorganization
cannot be determined definitively at this time. The ultimate treatment of and
recoveries to individual creditors is dependent on, among other things, the
total amount of claims against the Debtors as ultimately determined by the
Court, the priority of the applicable claims, the outcome of ongoing discussions
with the key constituencies, the amount of value available for distribution in
respect of claims and the completion of the plan confirmation process consistent
with applicable bankruptcy law.

The Debtors' objective is to achieve the highest possible recoveries for
all stakeholders, consistent with the Debtors' abilities to pay, and to continue
the operations of their businesses. However, there can be no assurance that the
Debtors will be able to attain these objectives or achieve a successful
reorganization. While valuation of the Debtors' assets and estimation of
pre-Filing Date claims at this stage of the Cases are subject to inherent
uncertainties, the Debtors currently believe that, in the aggregate, it is
likely that their liabilities will be found to significantly exceed the fair
value of their assets. Therefore, the Debtors currently believe that it is
likely that substantially all pre-Filing Date claims will be settled at less
than 100% of their face value and the equity interests of the Company's
stockholders will be cancelled without consideration. Further, the Debtors
believe that it is likely that: (a) the claims of pre-petition creditors that
are given certain priorities by statute or have the benefit of guarantees or
other contractual or structural seniority will likely receive substantially
greater recoveries than pre-petition creditors that have no such priorities or
seniority; and (b) all pending and future asbestos-related personal injury
claims are likely to be resolved through the formation, pursuant to a plan of
reorganization, of a statutory trust to which all claims would be directed by a
channeling injunction that would permanently remove all asbestos liability from
the Debtors. A similar trust arrangement is anticipated in respect of pending
and future silica, hearing loss and coal tar pitch volatiles personal injury
claims. The trusts would be funded pursuant to statutory requirements and
agreements with representatives of the affected parties, using the Debtors'
insurance assets and certain other consideration that has yet to be agreed. No
assurances can be provided that the foregoing will ultimately be included in any
plan(s) of reorganization the Debtors may file. Further, while the Debtors
believe it is possible to successfully reorganize their operations and emerge
from Chapter 11 in 2004, their ability to do so is subject to inherent market-
related risks as well as successful negotiation and Court approval for the
treatment of creditors consistent with the applicable bankruptcy law.

The Debtors' Cases are being administered on a consolidated basis. In fact,
however, there are separate cases for each Debtor or twenty-six Cases in total.
The impacts of the Cases and any plans of reorganization proposed for individual
Debtors will depend on each Debtor's specific circumstances and the differing
interests that creditors have in respect of such entities.

A substantial majority of the claims in the Cases are against the Company.
These include claims in respect of substantially all of the Debtors' debt
obligations, obligations in respect of pension and retiree medical benefits,
asbestos-related and personal injury claims, and known environmental
obligations. As such, all of these claimholders will have claims against the
Company that, except as further described below, will have to be satisfied by
the Company's assets, which generally include the alumina refinery located at
Gramercy, Louisiana ("Gramercy"), the interests in Anglesey Aluminium Limited
("Anglesey"), the interests in Volta Aluminium Company Limited ("Valco") and the
fabricated products plants (other than the London, Ontario, Canada and Richmond,
Virginia extrusion facilities, which are owned by separate subsidiaries that are
also Debtors). The Company's assets also include certain intercompany
receivables from certain of its Debtor subsidiaries for funding provided to its
joint venture affiliates.

In general, except as described below, there are a relatively modest number
or amount of third party trade and other claims against the Company's other
Debtor subsidiaries. Sixteen of the Debtors (including KAC) have no material
ongoing activities or operations and have no material assets or liabilities
other than intercompany items. The Company believes that it is likely that most,
if not all, of these entities will ultimately
38

be merged out of existence or dissolved in some manner. The remaining Debtor
subsidiaries (which include AJI, KJC, KAAC, Kaiser Aluminium International,
Inc., ("KAII"), Kaiser Aluminum & Chemical of Canada Limited ("KACOCL"), Kaiser
Bauxite Company ("KBC"), Kaiser Bellwood Corporation ("Bellwood"), Kaiser
Aluminum Technical Services, Inc. ("KATSI") and Kaiser Financial Corporation
("KFC")) own certain extrusion facilities or act largely as intermediaries
between the Company and certain of its other subsidiaries and joint venture
affiliates or interact with third parties on behalf of the Company and its joint
venture affiliates. As such, the vast majority of the pre-petition claims
against such entities are related to intercompany activities. However, certain
of those entities holding claims against KACC the Company also have claims
against certain Company subsidiaries that own the Company's interests in joint
venture affiliates and which represent a significant portion of the Company's
consolidated asset value. For example, noteholders have claims against each of
AJI and KJC, which own the Company's interests in Aluminum Partners of Jamaica
("Alpart"), and KAAC, which owns the Company's interests in Queensland Alumina
Limited ("QAL"), as a result of AJI, KJC and KAAC having been subsidiary
guarantors of the Company's Senior Notes and Senior Subordinated Notes.
Additionally, the PBGC, pursuant to statute, has joint and several claims
against the Company and all entities which are 80% or more owned by the Company
(referred to as "Controlled Group Members"). Controlled Group Members include
each of AJI, KJC and KAAC, as well as all of the other Debtors. The only other
significant claims against AJI, KJC and KAAC are intercompany claims related to
funding provided to these entities. As such, it is likely that the vast majority
of any value realized in respect of the Company's interests in Alpart and QAL,
either from their disposition or realized upon emergence from such operations,
is likely to be for the benefit of the noteholders and the PBGC.

In order to resolve the question of what consideration from any sale or
other disposition of AJI, KJC and/or KAAC, or their respective assets, should be
for the benefit of the Company and its claimholders (in respect of the Company's
intercompany claims against such entities), an intercompany settlement agreement
is being negotiated between the UCC and the Company (the "Intercompany
Agreement"). The proposed Intercompany Agreement would also release or resolve
substantially all other pre-and post-petition intercompany claims between the
Debtors. The proposed Intercompany Agreement, if finalized substantially in its
current form, would provide, among other things, for payments of cash by AJI,
KJC and KAAC to the Company of $85.0 million in respect of its intercompany
claims against AJI, KJC and KAAC plus any amounts up to $14.3 million plus
accrued and unpaid interest and fees paid by the Company to retire Alpart-
related debt. Under the proposed Intercompany Agreement, such amount would be
increased or decreased for (1) any net cash flows collected by or funded by the
Company between the effective date of the proposed Intercompany Agreement and
the earlier of (a) AJI's, KJC's and KAAC's emergence from Chapter 11 or (b) the
sale of AJI's, KJC's and KAAC's respective interests in and related to Alpart
and QAL and (2) any purchase price adjustments (other than incremental amounts
related to alumina sales contracts to be transferred) pursuant to the Company's
agreement to sell its interests in Alpart, if consummated. The proposed
Intercompany Agreement calls for such payments to be made to the Company at the
earlier of the sale of the Company's interests in Alpart and QAL or the
emergence of AJI, KJC and KAAC from Chapter 11. The Company expects that all
such payments under the proposed Intercompany Agreement, other than $28.0
million to be paid to the Company upon the sale of Alpart and any amounts paid
by the Company in respect of retiring the Alpart-related debt, are likely to be
held in escrow for the benefit of the Company until the Company's emergence from
the Cases. In the interim, the Company's claims against these entities will be
secured by liens. There are still a number of issues with respect to the
proposed Intercompany Agreement that must be satisfactorily resolved. The
Intercompany Agreement once finalized will be subject to Court approval.
Discussions are ongoing between the Company, the UCC, the ACC and the Futures'
Representative in an attempt to make the terms of the proposed Intercompany
Agreement acceptable to each of the groups. The Company currently is targeting
to have the Court consider the proposed Intercompany Agreement at the regularly
scheduled June 2004 omnibus hearing. However, no assurances can be provided that
the issues can be resolved within the time frame necessary to submit the
Intercompany Agreement to the Court under that time frame.

At emergence from Chapter 11, the Company will have to pay or otherwise
provide for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). The Company
currently
39

estimates that its Exit Costs will be in the range of $100.0 million to $120.0
million. The Company currently expects to fund such Exit Costs using the
proceeds to be received under the proposed Intercompany Agreement together with
existing cash resources and available liquidity under an exit financing facility
that will replace the current Post-Petition Credit Agreement (see Note 5 of
Notes to Interim Consolidated Financial Statements). If payments under the
proposed Intercompany Agreement together with liquidity available under an exit
financing facility are not sufficient to pay or otherwise provide for all Exit
Costs, the Company and some or all of its other Debtor subsidiaries will not be
able to emerge from Chapter 11 unless and until sufficient funding can be
obtained. Management believes it will be able to successfully resolve any issues
that may arise in respect of the proposed Intercompany Agreement or be able to
negotiate a reasonable alternative. However, no assurances can be given in this
regard.

The Company expects that, when the Debtors ultimately file a plan or plans
of reorganization, it is likely to reflect the Company's strategic vision for
emergence from Chapter 11: (a) a standalone going concern with manageable
leverage and financial flexibility, improved cost structure and competitive
strength; (b) a company positioned to execute its long-standing vision of market
leadership and growth in fabricated products; (c) a company that delivers a
broad product offering and leadership in service and quality for its customers
and distributors; and (d) a company with continued ownership of those commodity
assets that have the potential to generate significant cash at steady-state
metal prices and/or which provide a strategic hedge against the fabricated
products business' needs for primary aluminum. While the Company intends to
continue to pursue a standalone fabricated products company emergence strategy,
from time to time the Debtors may also evaluate other reorganization strategies,
consistent with the Debtors' responsibility to maximize the recoveries for its
stakeholders. The Company's advisors have developed a timeline that, assuming
the current pace of the Cases continues, is expected to allow the Company to
file a plan or plans of reorganization by mid-year 2004 and emerge from Chapter
11 as early as late in the third quarter of 2004. However, the Debtors' ability
to do so is subject to the confirmation of a plan of reorganization in
accordance with the applicable bankruptcy law and, accordingly, no assurances
can be given as to whether or when any plan or plans of reorganization will
ultimately be filed or confirmed.

In light of the Company's stated strategy and to further the Debtors'
ultimate planned emergence from Chapter 11, the Debtors, with the approval of
the Company's Board of Directors and in consultation with the UCC, the ACC and
the Futures' Representative, began exploring the possible sale of one or more of
their commodities assets during the third quarter of 2003. In particular, the
Debtors began exploring the possible sale of their interests in and related to:
(a) Alpart, (b) Anglesey, and (c) the Company's Gramercy Alumina refinery and
Kaiser Jamaican Bauxite Company ("KJBC"). The possible sale of the Debtors'
interests in respect of Gramercy and KJBC was explored jointly given their
significant integration. More recently, the Company also began the process of
exploring the sale of its 20% interest in QAL. While the Company believes that
the QAL-related interests are likely to be its most valuable commodity asset and
expects that there are or will be a number of parties interested in acquiring
such interests, no assurances can be given that any such sale will occur.

In exploring the sale of its interests in and related to the commodity
assets, the Debtors, through their investment advisors, surveyed the potential
market and initiated discussions with numerous parties believed to have an
interest in such assets. In addition, other parties contacted the Debtors and/or
their investment advisors to express an interest in purchasing the assets. The
Debtors provided (subject to confidentiality agreements) information regarding
the applicable interests to these parties, each of which was asked to submit a
non-binding expression of interest regarding the individual assets. After
receiving these initial expressions of interest from potential purchasers, the
Debtors determined which of the expressions of interest received represented
reasonable indications of value ("Qualified Bids"). Potential bidders
("Qualified Bidders") that submitted Qualified Bids were then permitted to
conduct due diligence in respect of the assets for which they submitted a
Qualified Bid and to submit definitive proposals.

The Debtors reviewed the definitive proposals submitted and, in
consultation with the UCC, the ACC and the Futures' Representative, and other
key constituencies, determined with which Qualified Bidders the Debtors would
pursue further negotiations. See Note 4 of Notes to Interim Consolidated
Financial Statements

40

for a discussion of subsequent developments regarding the potential dispositions
of Alpart, Valco and Gramercy/KJBC.

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, through the third quarter of 2003, the Company still considered all
of its commodity assets as "held for use," as no definite decisions had been
made regarding the disposition of such assets. However, based on additional
negotiations with prospective buyers and discussions with key constituents, the
Company concluded that dispositions of Alpart, Valco and Gramercy/KJBC were
likely and, therefore, that recoverability should be evaluated differently at
December 31, 2003 and subsequent periods. The change in evaluation methodology
was required because, under GAAP, assets to be held and used are evaluated for
recoverability differently than assets to be sold or disposed of. Assets to be
held and used are evaluated based on their expected undiscounted future net cash
flows. So long as the Company reasonably expects that such undiscounted future
net cash flows for each asset will exceed the recorded value of the asset being
evaluated, no impairment is required. However, if plans to sell or dispose of an
asset or group of assets meet a number of specific criteria, then, under GAAP,
such assets should be considered held for sale/disposition and their
recoverability should be evaluated, for each asset, based on expected
consideration to be received upon disposition. Sales or dispositions at a
particular time will be affected by, among other things, the existing industry
and general economic circumstances as well as the Company's own circumstances,
including whether or not assets will (or must) be sold on an accelerated or more
extended timetable. Such circumstances may cause the expected value in a sale or
disposition scenario to differ materially from the realizable value over the
normal operating life of assets, which would likely be evaluated on long-term
industry trends.

The Company ultimately concluded that no impairment of its interest in and
related to Alpart was appropriate based on its updated expectations that the
sale of the Company's interests in Alpart would result in a pre-tax gain (see
Note 4 of Notes to Interim Consolidated Financial Statements). By contrast,
based on the Company reaching a financial agreement in early May 2004 with the
Government of Ghana ("GoG") in respect of the sale of its interests in and
related to Valco, the Company determined that it should impair its interests in
and related to Valco to the amount of the expected proceeds to be received from
the GoG. As a result, as of March 31, 2004, KACC recorded a non-cash charge of
approximately $33.0 million (see Note 4 of Notes to Interim Consolidated
Financial Statements). Additionally, in evaluating the recoverability of the
Company's basis in Gramercy/KJBC, the Company recorded an impairment charge of
approximately $368.0 million in fourth quarter of 2003 as there were no offers
that were anywhere near the carrying value of the assets (see Note 4 of Notes to
Interim Consolidated Financial Statements for a discussion of the impairment
charge). The actual amount of gain or loss if and when the potential sales of
Valco and Gramercy/KJBC are consummated may differ from the foregoing amounts as
a result of closing adjustments, changes in economic circumstances and other
matters.

RECENT EVENTS AND DEVELOPMENTS

Liquidity/Negative Cash Flow. Cash and cash equivalents decreased by $21.7
million during the first quarter of 2004. The net decrease resulted from cash
used by operating activities ($26.0 million) and financing activities ($.2
million) offset by net cash generated from investing activities of $4.5 million.

The cash used by operating activities during the first quarter of 2004 was
primarily the result of increases in working capital associated with improving
demand for fabricated aluminum products and primary aluminum price increases.
These increases were offset by cash generated from operating results (see
Results of Operations and Liquidity and Capital Resources for further
discussions).

During the first quarter of 2003, cash and cash equivalents increased $11.0
million. The net increase resulted from cash generated from investing activities
of $65.4 million (see Note 4 of Notes to Interim Consolidated Financial
Statements) offset by cash used in operating activities ($54.2 million) and
financing activities ($.2 million). The $54.2 million of cash and cash
equivalents used by operating activities included the following significant
items: (a) asbestos-related insurance recoveries of $7.1 million, (b) a foreign
income tax payment related to prior periods of $22.0 million and (c) end of
service benefit payments totaling

41

approximately $6.9 million in connection with Valco potline curtailments. The
balance of the cash and cash equivalents used in operating activities in 2003
(approximately $32.4 million) resulted from a combination of adverse market
factors in the business segments in which the Company operates including (a)
primary aluminum prices that were below long term averages, (b) a weak demand
for fabricated metal products, particularly aerospace products, and (c) higher
than average power, fuel oil and natural gas prices.

At April 30, 2004, the Company had cash and cash equivalents of
approximately $14.8 million and availability under the DIP Facility's borrowing
base of approximately $128.8 million. Borrowings and letters of credit
outstanding at April 30, 2004 under the DIP Facility were $3.3 million and $45.5
million, respectively.

During March 2004, the Company received a waiver from the DIP Facility
lenders in respect of a financial covenant, for the quarter ended December 31,
2003 and measurement periods through May 31, 2004 and accordingly, the Company
will likely not have to comply with the covenant until June 30, 2004. In
connection with the waiver, the Company agreed to reduce the available amount of
the borrowing base by $25.0 million. The Company is currently working with the
DIP Facility lenders to complete an amendment that is anticipated, among other
things, to: (1) reset the financial covenant based on more recent forecasts; (2)
authorize the sale of the Company's interests in and related to Alpart, QAL,
Gramercy/KJBC and Valco within certain parameters, and (3) reduce the
availability of the fixed asset subcomponent to a level that, by emergence will
be based on advances solely in respect of machinery and equipment at the
fabricated products facilities.

While the effect of the amendment will be to reduce overall availability,
assuming the previously mentioned commodity assets are sold, the Company
currently anticipates that once amended, availability under the DIP Facility
will likely be in the $50.0 million -- $100.0 million range and that amount
should be adequate to support the Company's liquidity requirements through the
remainder of the Cases. This belief is based on the fact that it was the
commodities' assets and operations that subjected the Company to the most
variability and exposure both from a price risk basis as well as from an
operating perspective. While the Company anticipates that it will be successful
in completing an amendment to the DIP Facility along the lines outlined above in
time for submission to the Court in May 2004, no assurances can be given in this
regard.

The Company is also discussing a limited consent and waiver with the DIP
Facility lenders in case the aforementioned amendment is delayed. The limited
consent and waiver would, among other things (1) allow the Company to complete
the sale of its interests in and related to Alpart provided that the proceeds
are escrowed and are subject to the lenders' administrative super priority claim
until the amendment is completed, (2) extend the waiver of the financial
covenant through the June 30, 2004 measurement date and (3) waive the current
DIP Facility requirement that any proceeds from the sale of Alpart reduce the
fixed asset subcomponent of the borrowing base.

While the Company believes it will be successful in either obtaining the
above-described amendment or limited consent and waiver, no assurances can be
provided in this regard.

Valco. In May 2003, Valco's operations were completely curtailed. During
2003, Valco met regularly with the GoG and the Volta River Authority ("VRA") in
respect of the current and future power situation and other matters including
appropriate compensation for power curtailments. The continuation of the
negotiations and arbitration ultimately led to a Memorandum of Understanding
("MOU") in December 2003, whereby the Company agreed to sell its 90% interest in
Valco to the GoG for consideration of between $35.0 million and $100.0 million,
plus assumption of all of the Company's related liabilities and obligations.
During 2004, assuming the $35.0 million minimum consideration, the GoG was to
pay $7.0 million in cash to the Company and $18.0 million in cash to Valco,
thereby reducing the Company's funding to Valco. Through April 30, 2004, the GoG
had paid $5 million of the $18.0 million that was due to Valco under the MOU and
the $7.0 million escrow to the Company had not been funded. The Company met with
the GoG in early May 2004 and reached a new financial agreement. Under the
revised financial terms, $13.0 million was to be put into escrow by the GoG by
May 14, 2004. As of May 14, 2004, the Company was informed that $12.0 million of
the $13.0 million had been paid into the escrow account. The $13.0 million
amount is to be paid to the Company as full and final consideration for the
transaction. The Company also agreed to fund certain end of service benefits of
Valco employees (estimated to be approximately $9.0 million) which the GoG was
to
42

assume under the original MOU. The Company and the GoG are targeting a closing
for the transaction near the end of June 2004, subject to a number of conditions
including the approval by Ghana Parliament. No assurance can be made as to when
or if the transaction will close under the revised terms. However, as the
revised purchase price is well below the Company's recorded value for Valco and
given the increased likelihood of a closing and the payment by the GoG of the
escrow amount, the Company determined that it should impair its interests in and
related to Valco at March 31, 2004 to the amount of the expected proceeds. As
such, the Company recorded a non-cash impairment charge of approximately $33.0
million (included in Other operating charges (benefits), net -- see Note 9 of
Notes to Interim Consolidated Financial Statements). The actual amount of loss
if and when the potential sale of the Company's interests in and related to
Valco is consummated may differ from the above amount as a result of closing
adjustments, changes in economic circumstances and other matters.

Under the terms of the MOU, upon the execution of the MOU and the payout by
the GoG of the $13.0 million into escrow, the parties will suspend the
arbitration process. Upon the closing of the transaction, the parties will
dismiss the arbitration with prejudice. If the transaction does not close, the
arbitration will resume.

Benefit (Legacy) Cost Matters. The Company has previously disclosed since
the Filing Date that pension and retiree medical obligations were significant
factors that would have to be addressed during the reorganization process.

In December 2003, the Company was notified by the PBGC that the PBGC
intended to assume responsibility for the Salaried Employees Retirement Plan as
of December 17, 2003. After appropriate consultation with its advisors, the UCC,
the ACC and certain other constituents, the Company reluctantly agreed to the
termination of the Salaried Employees Retirement Plan. As a result of the
termination, the Company recorded a non-cash pension charge of $121.2 million in
the fourth quarter of 2003.

In January 2004, the Company filed motions with the Court to terminate or
substantially modify postretirement medical obligations for both salaried and
certain hourly employees and for a distress termination of substantially all
domestic hourly pension plans. The Company subsequently reached agreements with
the 1114 Committee and union representatives that represent the vast majority of
the Company's hourly employees. The agreements provide for the termination of
existing salaried and hourly postretirement benefit plans, such as medical, and
the termination of substantially all existing hourly pension plans. Under the
agreements, salaried and hourly retirees would be provided an opportunity for
continued medical coverage through COBRA or a proposed Voluntary Employee
Beneficiary Association (a "VEBA") and active hourly employees would be provided
with an opportunity to participate in one or more replacement pension plans
and/or defined contribution plans. The agreements with the 1114 Committee and
certain of the unions have been approved by the Court, but are subject to
certain conditions, including Court approval of the Intercompany Agreement in a
form acceptable to the Debtors and the UCC. The PBGC must ultimately approve a
distress termination of the hourly plans. The PBGC has objected to the Company's
distress termination motion and has appealed the Court's ruling that the Company
has met the statutory criteria for a distress termination of the hourly pension
plans. The PBGC has also not completed its review of the replacement pension
plans or defined contribution plans (see Note 9 of Notes to Consolidated
Financial Statements in the Company's Form 10-K for the year ended December 31,
2003 for additional discussions). Negotiations with the PBGC are ongoing.

In May 2004, the Company filed a notice with the Court seeking to make the
agreements regarding pension and postretirement medical benefits effective on
June 1, 2004 not withstanding that the Intercompany Agreement will not be
effective by that date. The Court will hear the Company's request at a June 1,
2004 hearing. No assurances can be given that the Company's request will be
granted. If the Court does not grant the Company's request, the pension and
postretirement medical benefit agreements will likely not become effective until
the Intercompany Agreement is finalized and modifications to the agreements may
be required (see Note 1 of Notes to Interim Consolidated financial statements
for discussion of the possible timing and status of the Intercompany Agreement).

43

The Company has also reached an agreement with the 1114 Committee and the
representatives of the majority of the Company's hourly employees under which
the Company will increase the advances to the VEBA beginning in June 2004.
Pursuant to the agreement, the Company will advance $3.0 million to the VEBA in
June 2004 and approximately $2.0 million to the VEBA each month thereafter until
the Company emerges from the Cases. Any advances made pursuant to such agreement
will constitute a credit toward the $36.0 million maximum contribution due upon
emergence. Whether or not the VEBA advances begin in June 2004 will depend on
the outcome of the Company's notice discussed above.

RESULTS OF OPERATIONS

As an integrated aluminum producer, the Company has historically used a
portion of its bauxite, alumina, and primary aluminum production for additional
processing at certain of its downstream facilities. However, as previously
disclosed, as a part of a plan of reorganization, the Company expects that it
will emerge from its Chapter 11 proceedings primarily as a fabricated products
company. Intersegment transfers are valued at estimated market prices. The
following table provides selected operational and financial information on a
consolidated basis with respect to the Company for the quarters ended March 31,
2004 and 2003. The following data should be read in conjunction with the
Company's interim consolidated financial statements and the notes thereto
contained elsewhere herein. See Note 17 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31, 2003, for
further information regarding segments.

Interim results are not necessarily indicative of those for a full year.
Average realized prices for the Company's Fabricated products segment are not
presented in the following table as such prices are subject to fluctuations due
to changes in product mix.

44

SELECTED OPERATIONAL AND FINANCIAL INFORMATION

OVERVIEW

The Company's operating results are sensitive to changes in prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree on the volume and mix of all products sold and on the
Company's hedging strategies. Primary aluminum prices have historically been
subject to significant cyclical price fluctuations. See Notes 2 and 8 of Notes
to Interim Consolidated Financial Statements for a discussion of the Company's
hedging activities.

Changes in global, regional, or country-specific economic conditions can
have a significant impact on overall demand for aluminum-intensive fabricated
products in the transportation, distribution, packaging, and other markets. Such
changes in demand can directly affect the Company's earnings by impacting the
overall volume and mix of such products sold. To the extent that these end-use
markets weaken, demand can also diminish for what the Company sometimes refers
to as the "upstream" products: alumina and primary aluminum.

During the quarter ended March 31, 2003, the average London Metal Exchange
transaction price ("LME price") per pound of primary aluminum was $.63 per
pound. During the quarter ended March 31, 2004, the average LME price was $.75
per pound. The average LME price for primary aluminum for the week ended April
30, 2004 was $.76 per pound.

QUARTER ENDED MARCH 31, 2004, COMPARED TO QUARTER ENDED MARCH 31, 2003

SUMMARY

The Company reported a net loss of $63.9 million for the quarter ended
March 31, 2004, compared to a net loss of $65.1 million for the same period in
2003. However, basic loss per common share may not be meaningful, because as a
part of a plan of reorganization, it is likely that the equity interests of the
Company's existing stockholders will be cancelled without consideration.

Net sales in the first quarter of 2004 totaled $367.6 million compared to
$339.4 million in the first quarter of 2003.

46

Fabricated Products. Net sales of fabricated products increased by 21%
during the first quarter 2004 as compared to 2003, primarily due to a 20%
increase in shipments and a 1% increase in average realized prices. Current
period shipments were higher than first quarter 2003 shipments as a result of
improving demand for fabricated aluminum products, particularly rod, bar and
plate for general engineering applications. The increase in the average realized
prices reflects increased product prices due to an increase in primary aluminum
prices offset in part by changes in the mix of products sold as well as
continuing pressure on product margins.

Segment operating results for the quarter ended March 31, 2004, improved
over the comparable period in 2003 primarily due to improved cost performance
offset by modestly increased natural gas prices.

Bauxite and Alumina. Third party net sales of alumina increased modestly
during the quarter 2004, as compared to the same period in 2003, as a 16%
increase in third party average realized prices was offset by a 13% decrease in
third party shipments. The increase in average realized prices was due to an
increase in primary aluminum market prices to which the Company's third-party
alumina sales contracts are linked. Shipments in the quarter ended March 31,
2004 were lower than the comparable prior year period due to normal fluctuations
in the timing of shipments.

Intersegment net sales of alumina for the quarter ended March 31, 2004
decreased 51% as compared to the same period in 2003 primarily as the result of
reduced shipments to the Primary aluminum business unit due to the 2003 Valco
potline curtailment.

Segment operating loss results for the quarter ended March 31, 2004 were
better than the comparable period in 2003. The primary reason for the
period-to-period increase in operating income was the increase in average
realized prices discussed above. Lower fuel oil and natural gas prices in the
first quarter of 2004 had a favorable impact of approximately $4.0 million as
compared to the prior year period. Results for the first quarter of 2004 also
benefited from lower depreciation expense of approximately $5.5 million due to
the year end 2003 impairment charges taken in respect of the Gramercy facility
and the Company's investment in KJBC. The balance of the improvement in
operating results was due to operating performance, primarily at the 65%-owned
Alpart facility and the Gramercy facility. Improved operating performance at the
20%-owned QAL facility was offset by adverse changes in the foreign exchange
rate.

Primary Aluminum. Third party net sales of primary aluminum decreased 5%
for the first quarter of 2004 as compared to the same period in 2003 as a result
of an 18% decrease in third party shipments offset by a 15% increase in third
party average realized prices. The decrease in third party shipments was
primarily due to the curtailment of the 2003 Valco potlines curtailment. The
increase in the average realized prices was primarily due to the increase in
primary aluminum market prices.

Segment operating results (before other operating charges, net) for the
quarter ended March 31, 2004, were better than the comparable period in 2003.
The primary reasons for the increase were (a) the increase in average realized
prices and (b) because operating results for 2003 included approximately $4.3
million of charges for end-of-service benefits at Valco associated with the
potlines curtailments.

Segment operating loss for 2004, discussed above, excludes non-cash charges
of approximately $33.0 million resulting from the write-down of the Company's
interests in and related to Valco (which is included in Operating charges
(benefits), net). Segment operating loss for 2003 excludes a $9.5 million
pre-tax gain on the sale of the Tacoma facility and restructuring charges of
$1.3 million resulting from the Mead facility indefinite curtailment, both which
are included in Other operating charges (benefits), net.

Commodities Marketing. Net sales for this segment represent net
settlements with third-party brokers. Operating income represents the combined
effect of such net settlements and any premium costs associated with maturing
opinions. The minimum and (maximum) price of the hedges in any given period is
primarily the result of the timing of the execution of the hedges contract.

Segment operating results for the quarter ended March 31, 2004, were worse
than the comparable period in 2003 primarily due to (a) hedging net gains from
first quarter 2002 that were being amortized over the original hedging periods
as the underlying purchases/sales occurred becoming fully amortized by year end

47

2003 and (b) hedging premiums related to hedging positions in respect of first
quarter 2004 being higher than net hedging revenues realized.

Eliminations. Eliminations of Intersegment profit vary from period to
period depending on fluctuations in market prices as well as the amount and
timing of the affected segments' production and sales.

Corporate and Other. Corporate operating expenses represent corporate
general and administrative expenses which are not allocated to the Company's
business segments. Corporate operating expenses in the first quarter 2004 were
lower than in the first quarter 2003 primarily due to a reduction in
payroll-related costs and various other overhead costs as a result of cost
reduction initiatives.

LIQUIDITY AND CAPITAL RESOURCES

As a result of the filing of the Cases, claims against the Debtors for
principal and accrued interest on secured and unsecured indebtedness existing on
the Filing Date are stayed while the Debtors continue business operations as
debtors-in-possession, subject to the control and supervision of the Court. See
Note 1 of Notes to Interim Consolidated Financial Statements for additional
discussion of the Cases. At this time, it is not possible to predict the effect
of the Cases on the businesses of the Debtors.

Operating Activities. In the first quarter of 2004, Fabricated products
operating activities used $5.0 million of cash. This amount compares with the
first quarter of 2003 when Fabricated products operating activities provided
$5.8 million of cash. Cash used by Fabricated products in 2004 was primarily due
to increases in working capital associated with improving demand for fabricated
aluminum products offset by improved operating results. Cash provided by
Fabricated products operations in 2003 was largely due to cost cutting
initiatives which offset reduced product prices and shipments. All of the
foregoing exclude consideration of pension and retiree cash payments made by the
Company on behalf of current and former employees of the Fabricated products
facilities. Such amounts are part of the "legacy" costs that the Company
internally categorizes as a corporate cash outflow. As more fully discussed in
Benefit (Legacy) Cost Matters, the Company expects that substantially all such
benefits related to previously existing benefit plans are likely to be cancelled
as part of the reorganization process.

In the first quarter of 2004, Commodities and Corporate operating
activities used $21.0 million of cash. This amount compares with the first
quarter of 2003 when Commodities and Corporate operating activities used $38.2
million of cash, which amount excludes the following significant items: (a)
asbestos-related insurance recoveries of $7.1 million; (b) a foreign income tax
payment related to prior periods of $22.0 million; and (c) end of service
benefits payments totaling approximately $6.9 million in connection with the
Valco potline curtailments. The reduction in net cash used by Commodities and
Corporate operating activities in 2004 over 2003 resulted primarily from
improved results in the Bauxite and alumina segment (approximately $30.0
million) as a result of the operating factors discussed above. This improvement
was partially offset by: (a) less cash generated by the Primary aluminum segment
(approximately $8.0 million), primarily as a result of Valco being fully
curtailed in the first quarter of 2004 versus having had partial operations
during the first quarter of 2003; and (b) increased cash outflow in the
Corporate and other segment of approximately $5.0 million attributable to higher
hedging related costs, reorganization costs and other miscellaneous costs.

Net cash used by Commodities and Corporate operating activities in 2003
resulted from a combination of adverse market factors, primarily in the
commodities business segments, including: (a) primary aluminum prices that were
below long-term averages, (b) higher than average fuel oil and natural gas
prices, and (c) significant expenditures in respect of reorganization costs.

Investing Activities. Total capital expenditures for Fabricated products
during the quarter ended March 31, 2004 were $1.5 million. Total capital
expenditures for Commodities and Corporate during the quarter ended March 31,
2004 were $1.4 million. The capital expenditures during the quarter ended March
31, 2004 were made primarily to improve production efficiency, reduce operating
costs and expand capacity at existing facilities.

48

Total capital expenditures for Fabricated products are currently expected
to be between $7.0 million and $12.0 million per year in each of 2004 and 2005.
The level of capital expenditures may be adjusted from time to time depending on
the Company's price outlook for metal and other products, the Company's ability
to assure future cash flows through the Company's financial position and other
factors.

Financing Activities and Liquidity. On February 12, 2002, the Company and
Kaiser entered into the DIP Facility which provides for a secured, revolving
line of credit through the earlier of February 13, 2005, the effective date of a
plan of reorganization or voluntary termination by the Company. In March 2003,
certain of the Additional Debtors were added as co-guarantors and the DIP
Facility lenders received super priority status with respect to certain of the
Additional Debtors' assets. The Company is able to borrow under the DIP Facility
by means of revolving credit advances and to issue letters of credit (up to
$125.0 million) in an aggregate amount equal to the lesser of $285.0 million or
a borrowing base relating to eligible accounts receivable, eligible inventory
and eligible fixed assets reduced by certain reserves, as defined in the DIP
Facility agreement. The DIP Facility is guaranteed by the Company and certain
significant subsidiaries of the Company. Interest on any outstanding borrowings
will bear a spread over either a base rate or LIBOR, at the Company's option. In
accordance with the Code and the DIP Facility, the Company and Kaiser are not
permitted to pay any dividends or purchase any of their common or preference
stock.

The DIP Facility requires the Company to comply with certain covenants and
places restrictions on the Company's, Kaiser's and the Company's subsidiaries'
ability to, among other things, incur debt and liens, make investments, pay
dividends, sell assets, undertake transactions with affiliates, make capital
expenditures, and enter into unrelated lines of business.

During March 2004, the Company received a waiver from the DIP Facility
lenders in respect of a financial covenant, for the quarter ended December 31,
2003 and for all measurement periods through May 31, 2004 and accordingly, the
Company will likely not have to comply with the covenant until June 30, 2004.
The Company is currently working with the DIP Facility lenders to complete an
amendment that is anticipated, among other things, to: (1) reset the financial
covenant based on more recent forecasts; (2) authorize the sale of the Company's
interests in Alpart, QAL, Gramercy/KJBC and Valco within certain parameters, and
(3) reduce the availability of the fixed asset subcomponent of the borrowing
base to a level that, by emergence will be based on advances solely in respect
of machinery and equipment at the fabricated products facilities.

While the effect of the amendment will be to reduce overall availability,
assuming the previously mentioned commodity assets are sold, the Company
currently anticipates that once amended, availability under the DIP Facility
will likely be in the $50.0 million -- $100.0 million range and that such amount
should be adequate to support the Company's liquidity requirements through the
remainder of the Cases. This belief is based on the fact that it was the
commodities' assets and operations that subjected the Company to the most
variability and exposure both from a price risk basis as well as from an
operating perspective. While the Company anticipates that it will be successful
in completing an amendment to the DIP Facility along the lines outlined above in
time for submission to the Court in May 2004, no assurances can be given in this
regard.

The Company is also discussing a limited consent and waiver with the DIP
Facility lenders in case completion of the aforementioned amendment is delayed.
The limited consent and waiver would, among other things (1) allow the Company
to complete the sale of its interests in and related to Alpart provided that the
proceeds are escrowed and are subject to the lenders' administrative super
priority claim until the amendment is completed, (2) extend the waiver of the
financial covenant through the June 30, 2004 measurement date and (3) waive the
current DIP Facility requirement that any proceeds from the sale of Alpart
reduce the fixed asset subcomponent of the borrowing base.

While the Company believes it will be successful in either obtaining the
above-described amendment or limited consent and waiver, no assurances can be
provided in this regard.

The Company currently believes that the cash and cash equivalents of $14.2
million at March 31, 2004, cash flows from operations, cash proceeds from the
sale of assets that are ultimately determined not to be an important part of the
reorganized entity and availability under the DIP Facility will provide
sufficient liquidity

49

to allow the Company to meet its obligations during the pendency of the Cases.
At April 30, 2004, $3.3 million of borrowings were outstanding under the
revolving credit facility. As of April 30, 2004, $128.8 million (of which $79.5
million could be used for additional letters of credit) was available to the
Company under the DIP Facility.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that are both very important to the
portrayal of the Company's financial condition and results, and require
management's most difficult, subjective, and/or complex judgments. Typically,
the circumstances that make these judgments difficult, subjective and/or complex
have to do with the need to make estimates about the effect of matters that are
inherently uncertain. While the Company believes that all aspect of its
financial statements should be studied and understood in assessing its current
(and expected future) financial condition and results, the Company believes that
the accounting policies that warrant additional attention include:

1. The consolidated financial statements as of and for the quarter
ended March 31, 2004 have been prepared on a "going concern" basis in
accordance with AICPA Statement of Position 90-7, Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code, and do not include
possible impacts arising in respect of the Cases. The interim consolidated
financial statements included elsewhere in this Report do not include any
adjustments relating to the recoverability and classification of recorded
asset amounts or the amount and classification of liabilities or the effect
on existing stockholders' equity that may result from any plans,
arrangements or other actions arising from the Cases, or the possible
inability of the Company to continue in existence. Adjustments necessitated
by such plans, arrangements or other actions could materially change the
interim consolidated financial statements included elsewhere in this
Report. For example,

a. If the Company were to decide to sell certain assets not deemed
a critical part of a reorganized Kaiser, such asset sales could result
in gains or losses (depending on the asset sold) and such gains or
losses could be significant. This is because, under generally accepted
accounting principles ("GAAP"), assets to be held and used are evaluated
for recoverability differently than assets to be sold or disposed of.
Assets to be held and used are evaluated based on their expected
undiscounted future net cash flows. So long as the Company reasonably
expects that such undiscounted future net cash flows for each asset will
exceed the recorded value of the asset being evaluated, no impairment is
required. However, if plans to sell or dispose of an asset or group of
assets meet a number of specific criteria, then, under GAAP, such assets
should be considered held for sale/disposition and their recoverability
should be evaluated, for each asset, based on expected consideration to
be received upon disposition. Sales or dispositions at a particular time
will be affected by, among other things, the existing industry and
general economic circumstances as well as the Company's own
circumstances, including whether or not assets will (or must) be sold on
an accelerated or more extended timetable. Such circumstances may cause
the expected value in a sale or disposition scenario to differ
materially from the realizable value over the normal operating life of
assets, which would likely be evaluated on long-term industry trends.

As previously disclosed, while the Company had stated that it was
considering the possibility of disposing of one or more of its commodity
facilities, the Company, through the third quarter of 2003, still
considered all of its commodity assets as "held for use," as no definite
decisions had been made regarding the disposition of such assets.
However, based on additional negotiations with prospective buyers and
discussions with key constituents, the Company concluded that
dispositions of Gramercy/KJBC and Valco were possible and, therefore,
that recoverability should be considered differently as of December 31,
2003 and subsequent periods. As a result of the change in status, the
Company recorded impairment charges of approximately $33.0 million in
the first quarter of 2004 and $368.0 million in the fourth quarter of
2003. The actual amount of gain or loss if and when the sales are
consummated may differ from these amounts as a result of closing
adjustments and other matters. Management cannot conclude that the sale
of the Company's interests in one or all of the

50

above noted facilities is "probable" due to numerous uncertainties
including that Court approval is required and has not yet been obtained.

b. Additional pre-Filing Date claims may be identified through the
proof of claim reconciliation process and may arise in connection with
actions taken by the Debtors in the Cases. For example, while the
Debtors consider rejection of the Bonneville Power Administration
("BPA") contract to have been in the Company's best long-term interests,
such rejection may increase the amount of pre-Filing Date claims by
approximately $75.0 million based on the BPA's proof of claim filed in
connection with the Cases in respect of the contract rejection.

c. As more fully discussed below, the amount of pre-Filing Date
claims ultimately allowed by the Court in respect of contingent claims
and benefit obligations may be materially different from the amounts
reflected in the Consolidated Financial Statements.

While valuation of the Company's assets and pre-Filing Date claims at
this stage of the Cases is subject to inherent uncertainties, the
Company currently believes that it is likely that its liabilities will
be found in the Cases to exceed the fair value of its assets. Therefore,
the Company currently believes that it is likely that substantially all
pre-Filing Date claims will be paid at less than 100% of their face
value and the equity interests of the Company's stockholders will be
cancelled without consideration.

Additionally, upon emergence from the Cases, the Company expects to
apply "fresh start" accounting to its consolidated financial statements
as required by SOP 90-7. Fresh start accounting is required if: (1) a
debtor's liabilities are determined to be in excess of its assets and
(2) there will be a greater than 50% change in the equity ownership of
the entity. As previously disclosed, the Company expects both such
circumstances to apply. As such, upon emergence, the Company will
restate its balance sheet to equal the reorganization value as
determined in its plan of reorganization and approved by the Court.
Additionally, items such as accumulated depreciation, accumulated
deficit and accumulated other comprehensive income (loss) will be reset
to zero. The Company will allocate the reorganization value to its
individual assets and liabilities based on their estimated fair value at
the emergence date. Typically such items as current liabilities,
accounts receivable, and cash will be reflected at values similar to
those reported prior to emergence. Items such as inventory, property,
plant and equipment, long-term assets and long-term liabilities are more
likely to be significantly adjusted from amounts previously reported.
Because fresh start accounting will be adopted at emergence, and because
of the significance of the pending asset sales and liabilities subject
to compromise (that will be relieved upon emergence), meaningful
comparison between the current historical financial statements and the
financial statements upon emergence may be to difficult to make.

2. The Company's judgments and estimates with respect to commitments
and contingencies, in particular: (a) future asbestos related costs and
obligations as well as estimated insurance recoveries, and (b) possible
liability in respect of claims of unfair labor practices ("ULPs") which
were not resolved as a part of the Company's September 2000 labor
settlement.

Valuation of legal and other contingent claims is subject to a great
deal of judgment and substantial uncertainty. Under GAAP, companies are
required to accrue for contingent matters in their financial statements
only if the amount of any potential loss is both "probable" and the
amount (or a range) of possible loss is "estimatable." In reaching a
determination of the probability of an adverse ruling in respect of a
matter, the Company typically consults outside experts. However, any
such judgments reached regarding probability are subject to significant
uncertainty. The Company may, in fact, obtain an adverse ruling in a
matter that it did not consider a "probable" loss and which, therefore,
was not accrued for in its financial statements. Additionally, facts and
circumstances in respect of a matter can change causing key assumptions
that were used in previous assessments of a matter to change. It is
possible that amounts at risk in respect of one matter may be "traded
off" against amounts under negotiations in a separate matter. Further,
in estimating the amount of any loss, in many instances a single
estimation of the loss may not be possible. Rather, the Company may only
51

be able to estimate a range for possible losses. In such event, GAAP
requires that a liability be established for at least the minimum end of
the range.

The Company has had two potentially material contingent obligations that
are subject to significant uncertainty and variability in their outcome:
(a) the United Steelworkers of America's ("USWA") ULP claim, and (b) the
net obligation in respect of asbestos-related matters. Both of these
matters are discussed in Note 7 of Notes to Interim Consolidated
Financial Statements and it is important that you read this note.

As more fully discussed in Note 7 of Notes to Interim Consolidated
Financial Statements, we have not accrued any amount in our March 31,
2004 financial statements in respect of the USWA ULP matter. We did not
accrue any amount in the past as we did not consider the loss to be
"probable." Our assessment had been that the possible range of loss in
this matter was anywhere from zero to $250.0 million based on the proof
of claims filed (and other information provided) by the National Labor
Relations Board ("NLRB") and USWA in connection with the Company's
reorganization proceedings. While the Company continues to believe that
the ULP charges were without merit, during January 2004, the Company
agreed to allow a claim in favor of the USWA in the amount of the $175.0
million as a compromise and in return for the USWA agreeing to
substantially reduce and/or eliminate certain benefit payments as more
fully discussed in Note 9 of Notes to Consolidated Financial Statements
in the Company's Form 10-K for the year ended December 31, 2003. As the
agreement to settle this matter was contingent on NLRB and Court
approval and ratification by union members, this amount was not
reflected in the Company's consolidated financial statements at March
31, 2004. However, the charge and an offsetting liability associated
with the settlement of this matter will be reflected in the Company's
consolidated financial statements if and when the agreement with the
USWA is ultimately approved by the Court.

Also, as more fully discussed in Note 7 of Notes to Interim Consolidated
Financial Statements, the Company is one of many defendants in personal
injury claims by large number of persons who assert that their injuries
were caused by, among other things, exposure to asbestos during their
employment or association with the Company or by exposure to products
containing asbestos last produced or sold by the Company more than 20
years ago. It is difficult to predict the number of claims that will
ultimately be made against the Company or the settlement value of such
claims. As of March 31, 2004, the Company had recorded an obligation for
approximately $610.1 million in respect of pending and an estimate of
possible future asbestos claims through 2011. The Company did not accrue
for amounts past 2011 because the Company believed that significant
uncertainty existed in trying to estimate any such amounts. However, it
is possible that a different number of claims will be made through 2011
and that the settlement amounts during this period may differ and that
this will cause the actual amounts to differ materially from the
Company's estimate. Further, the Company expects that, during its
reorganization process, an estimate will have to be made in respect of
its exposure to asbestos-related claims after 2011 and that such amounts
could be substantial. Due to the Cases, holders of asbestos claims are
stayed from continuing to prosecute pending litigation and from
commencing new lawsuits against the Debtors. However, during the
pendency of the Cases, the Company expects additional asbestos claims
will be asserted as part of the claims process. A separate creditors'
committee representing the interests of the asbestos claimants, the ACC,
has been appointed. The Debtors' obligations with respect to present and
future asbestos claims will be resolved pursuant to a plan of
reorganization.

The Company believes that it has insurance coverage in respect of its
asbestos-related exposures and that substantial recoveries in this
regard are probable. At March 31, 2004, the Company had recorded a
receivable for approximately $463.6 million in respect of expected
insurance recoveries related to existing claims and the estimate future
claims through 2011. However, the actual amount of insurance recoveries
may differ from the amount recorded and the amount of such differences
could be material. Further, depending on the amount of asbestos-related
claims ultimately determined to exist (including those in the periods
after 2011), it is possible that the amount of such claims could exceed
the amount of additional insurance recoveries available.
52

See Note 7 of Notes to Interim Consolidated Financial Statements for a
more complete discussion of these matters.

3. The Company's judgments and estimates in respect of its employee
benefit plans.

Pension and post-retirement medical obligations included in the
consolidated balance sheet are based on assumptions that are subject to
variation from year-to-year. Such variations can cause the Company's
estimate of such obligations to vary significantly. Restructuring
actions (such as the indefinite curtailment of the Mead smelter in
January 2003) can also have a significant impact on such amounts.

For pension obligations, the most significant assumptions used in
determining the estimated year-end obligation are the assumed discount
rate and long-term rate of return ("LTRR") on pension assets. Since
recorded pension obligations represent the present value of expected
pension payments over the life of the plans, decreases in the discount
rate (used to compute the present value of the payments) will cause the
estimated obligations to increase. Conversely, an increase in the
discount rate will cause the estimated present value of the obligations
to decline. The LTRR on pension assets reflects the Company's assumption
regarding what the amount of earnings will be on existing plan assets
(before considering any future contributions to the plans). Increases in
the assumed LTRR will cause the projected value of plan assets available
to satisfy pension obligations to increase, yielding a reduced net
pension obligation. A reduction in the LTRR reduces the amount of
projected net assets available to satisfy pension obligations and, thus,
causes the net pension obligation to increase.

For post-retirement obligations, the key assumptions used to estimate
the year-end obligations are the discount rate and the assumptions
regarding future medical costs increases. The discount rate affects the
post-retirement obligations in a similar fashion to that described above
for pension obligations. As the assumed rate of increase in medical
costs goes up, so does the net projected obligation. Conversely, if the
rate of increase is assumed to be smaller, the projected obligation will
decline.

As more fully discussed in Note 9 of Notes to Consolidated Financial
Statements in the Company's Form 10-K for the year ended December 31,
2003, all of the Company's material pension and medical benefit plans
are being (or have been) terminated as a part of the Company's
reorganization efforts, subject to the PBGC's rights, including the
ongoing appeal, as to the termination of the hourly pension plans. If
and when an agreement with the PBGC is reached or the appeal is
otherwise resolved, the Company's obligations with respect to the
existing plans will become fixed. However, at this time it is not
possible to definitely determine the "final" amount of such obligations
as the value of such amounts will be subject to negotiations among and
between the Company and the constituents of the ongoing Cases.

In preparing the Company's financial statements at March 31, 2004, the
Company has reflected its obligations in respect of these plans using
assumptions consistent with those used in accordance with GAAP for
ongoing plans. The Company believes that this represents a reasonable
estimation methodology. The Company currently believes that there are
arguments that it can make that the final allowed claim amounts should
be less than that reflected in the financial statements. The Company
also expects that certain constituents will assert that the value of
their obligations is in excess of the amounts reflected in the financial
statements.

See Note 9 of Notes to Consolidated Financial Statements in the
Company's Form 10-K for the year ended December 31, 2003, and Recent
Events and Developments, Benefit (Legacy) Cost Matters above for
information regarding the Company's pension and post-retirement
obligations. Actual results may differ from the assumptions made in
computing the estimated March 31, 2004 obligations and such differences
may be material.

4. The Company's judgments and estimates in respect to environmental
commitments and contingencies.
53

The Company and Kaiser are subject to a number of environmental laws and
regulations ("environmental laws"), to fines or penalties assessed for
alleged breaches of the environmental laws, and to claims and litigation
based upon such laws. The Company currently is subject to a number of
claims under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended by the Superfund Amendments
Reauthorization Act of 1986 ("CERCLA"), and, along with certain other
entities, has been named as a potentially responsible party for remedial
costs at certain third-party sites listed on the National Priorities
List under CERCLA.

Based on the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals, primarily
related to potential solid waste disposal and soil and groundwater
remediation matters. These environmental accruals represent the
Company's estimate of costs reasonably expected to be incurred on a
going concern basis in the ordinary course of business based on
presently enacted laws and regulations, currently available facts,
existing technology, and the Company's assessment of the likely
remediation action to be taken. However, making estimates of possible
environmental remediation costs is subject to inherent uncertainties. As
additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in these
and other factors may result in actual costs exceeding the current
environmental accruals.

An example of how environmental accruals could change is provided by the
multi-site agreement discussed in Note 7 of Notes to Interim
Consolidated Financial Statements. As a means of expediting the
reorganization process and to assure treatment of the claims under a
plan of reorganization that is favorable to the Debtors and their
stakeholders, it may be in the best interests of the stakeholders for
the Company to agree to claim amounts in excess of previous accruals,
which were based on an ordinary course, going concern basis.

CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes the Company's significant contractual obligations
at March 31, 2004 (dollars in millions):

- ---------------

(a) See Note 5 of Notes to Interim Consolidated Financial Statements for
information in respect of long-term debt. Long-term debt obligations
exclude debt subject to compromise of approximately $848.2 million, which
amounts will be dealt with in connection with a plan of reorganization. See
Notes 1 and 5 of Notes to Interim Consolidated Financial Statements for
additional information about debt subject to compromise.

The following paragraphs summarize the Company's off-balance sheet
arrangements.

The Company owns a 20% interest in QAL, which owns one of the largest and
most competitive alumina refineries in the world, located in Queensland,
Australia. QAL refines bauxite into alumina, essentially on a cost basis, for
the account of its shareholders under long-term tolling contracts. The Company
currently sells its share of QAL's production to third parties. The
shareholders, including the Company, purchase bauxite from another QAL
shareholder under long-term purchase contracts. These tolling and purchase
contracts are scheduled to expire in 2008. Under the agreements, the Company is
unconditionally obligated to pay its proportional share of debt, operating costs
and certain other costs of QAL. The Company's share of the aggregate minimum
amount of future principal payments as of March 31, 2004 is $60.0 million, which
will

54

mature in varying amounts from 2005 to 2008. The Company's share of QAL's
scheduled debt principal repayment in July 2003 was funded with additional QAL
borrowings. The Company's share of payments, including operating costs and
certain other expenses under the agreements, has generally ranged between $70
million and $100 million per year over the past three years. However, as
discussed more fully in Note 1 of Notes to Interim Consolidated Financial
Statements, the Company is considering the possibility of selling its interests
in QAL. If the Company's interest in QAL were to be sold, the Company believes
that the Company's obligations in respect of its share of the QAL debt would be
assumed by the buyer. The Company has agreements to supply alumina to and to
purchase aluminum from Anglesey, a 49.0%-owned aluminum smelter in Holyhead,
Wales.

As of March 31, 2004, outstanding letters of credit under the DIP Facility
were approximately $45.5 million, substantially all of which expire within the
next twelve months. The letters of credit relate primarily to environmental,
insurance, Alpart-related debt and other activities. Approximately $15.3 million
of the letters of credit are in respect of the Company's 65% share of the $22.0
million Alpart CARIFA financing (see Note 5 of Notes to Interim Consolidated
Financial Statements) which are reflected in the debt maturities table above. As
such, that portion of the letters of credit is duplicative of the obligation
reflected in the table above. In connection with the expected sale of the
Company's interests in Alpart (see Note 4 of Notes to Interim Consolidated
Financial Statements), the Company expects that at closing Alpart will repay the
CARIFA financing and the Company's letter of credit obligation under the DIP
Facility securing the loans will be cancelled.

Upon emergence from Chapter 11 proceedings, the Company anticipates that it
will provide some form of yet to be determined defined contribution pension plan
in respect of its salaried employees. Any such plans ultimately adopted will be
subject to a number of approvals. The Company currently estimates that the total
annual cash cost of such plans would be less than $5.0 million and, if approved,
would likely be required to be funded some time in 2005.

Pursuant to the terms of the USWA agreement, the Company will be required
to make annual contributions into the Steelworkers Pension Trust on the basis of
one dollar per USWA employee per hour worked. In addition, the Company will
institute a defined contribution pension plan for active USWA employees. Company
contributions to the plan will range from eight hundred dollars to twenty-four
hundred dollars per employee per year, depending on age and years of service.
The Company believes that similar defined contribution pension plans will be
established for non-USWA hourly employees subject to collective bargaining
agreements. The Company currently estimates that contributions to all such plans
will range from $3.0 million to $6.0 million per year. However, because the PBGC
is still reviewing these plans, the benefits could change.

As a replacement for the Company's current postretirement benefit plans,
pursuant to agreements with the 1114 Committee and certain of the unions, the
Company will fund one or more VEBAs into which the Company will contribute
certain amounts on emergence from Chapter 11 proceedings and on an annual basis
through 2012. The initial contribution will be an amount not to exceed $36.0
million and will be payable on emergence from the Chapter 11 proceedings so long
as the Company's liquidity is at least $50.0 million after considering such
payments. To the extent that less than the full $36.0 million is paid and the
Company's interests in Anglesey are subsequently sold, a portion of the Anglesey
interests' proceeds, in certain circumstances, will be used to pay the
shortfall. In addition to the foregoing, the Company will, on an annual basis,
be required to pay 10% of the first $20.0 million of annual cash flow, as
defined, plus 20% of annual cash flow, as defined, above $20.0 million. Such
annual payments shall not exceed $20.0 million and will also be limited (with no
carryover to future years) to the extent that the payments do not cause the
Company's liquidity to be less than $50.0 million. The agreements with the 1114
Committee and unions have been approved by the Court, subject to certain
conditions, including Court approval of the Intercompany Agreement in a form
accepted to the Debtors and the UCC. No assurances can be given as to if and
when final Court approval will be obtained.

In May 2004, the Company filed a notice with the Court seeking to make the
agreements regarding pension and postretirement medical benefits effective on
June 1, 2004 not withstanding that the Intercompany

55

Agreement will not be effective by that date. The Court will hear the Company's
request at a June 1, 2004 hearing. No assurances can be given that the Company's
request will be granted. If the Court does not grant the Company's request, the
pension and postretirement medical benefit agreements will likely not become
effective until the Intercompany Agreement is finalized and modifications to the
agreements may be required (see Note 1 of Notes to Interim Consolidated
financial statements for discussion of the possible timing and status of the
Intercompany Agreement).

The Company has also reached an agreement with the 1114 Committee and the
representatives of the majority of the Company's hourly employees under which,
the Company will increase the advances to the VEBA beginning in June 2004.
Pursuant to the agreement, the Company will advance $3.0 million to the VEBA in
June 2004 and approximately $2.0 million to the VEBA each month thereafter until
the Company emerges from the Cases. Any advances made pursuant to such agreement
will constitute a credit toward the $36.0 million maximum contribution due upon
emergence. Whether or not the VEBA advances begin in June 2004 will depend on
the outcome of the Company's notice discussed above.

At emergence from Chapter 11, the Company will have to pay or otherwise
provide for a material amount of claims. Such claims include accrued but unpaid
professional fees, priority tax and environmental claims, secured claims, and
certain post-petition obligations (collectively, "Exit Costs"). The Company
currently estimates that its Exit Costs will be in the range of $100.0 million
to $120.0 million. The Company expects to fund such Exit Costs using the
proceeds to be received under the proposed Intercompany Agreement together with
existing cash resources and available liquidity under an exit financing facility
that will replace the current Post-Petition Credit Agreement (see Note 5 of
Notes to Interim Consolidated Financial Statements). Given the material portion
of the Exit Costs represented by the expected Intercompany Agreement payments,
such payments are a critical element for the Company's successful emergence from
the Cases. If the proposed Intercompany Agreement were not ultimately approved
by the Court or otherwise put into effect or a reasonable alternative were not
negotiated, it is unlikely that the Company or its other debtor subsidiaries
will be able to emerge from Chapter 11. Management believes it will be able to
successfully resolve any issues that may arise in respect of the proposed
Intercompany Agreement or be able to negotiate a reasonable alternative.
However, no assurances can be given in this regard. An exit financing facility
to replace the current Post-Petition Credit Agreement is also critical for the
Company's successful emergence from the Cases.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend to
a significant degree upon the volume and mix of all products sold. As discussed
more fully in Notes 2 and 8 of Notes to Interim Consolidated Financial
Statements, the Company historically has utilized hedging transactions to
lock-in a specified price or range of prices for certain products which it sells
or consumes in its production process and to mitigate the Company's exposure to
changes in foreign currency exchange rates. However, because the agreements
underlying the Company's hedging positions provided that the counterparties to
the hedging contracts could liquidate the Company's hedging positions if the
Company filed for reorganization, the Company chose to liquidate these positions
in advance of the initial Filing Date. The Company has only completed limited
hedging activities since the Filing Date (see below). The Company anticipates
that, subject to prevailing economic conditions, it may enter into additional
hedging transactions with respect to primary aluminum prices, natural gas and
fuel oil prices and foreign currency values to protect the interests of its
constituents. However, no assurance can be given as to when or if the Company
will enter into such additional hedging activities.

SENSITIVITY

Alumina and Primary Aluminum. The Company has historically been exposed to
commodity price risks and opportunities in respect of alumina and primary
aluminum production in excess of internal requirements that has been sold in
domestic and international markets. The Company's hedging transactions have been
intended to provide price risk management in respect of the net exposure of
earnings resulting from (i) anticipated sales of alumina, primary aluminum and
fabricated aluminum products, less (ii) expected purchases of certain items,
such as aluminum scrap, rolling ingot, and bauxite, whose prices fluctuate with
the
56

price of primary aluminum. On average, before consideration of hedging
activities, variations in production and shipment levels, and timing issues
related to price changes, the Company estimates that during 2004 each $.01
increase (decrease) in the market price per price-equivalent pound of primary
aluminum increases (decreases) the Company's annual pre-tax earnings by
approximately $5.0 million, based on recent operating levels. The lower 2004
impact (as compared to prior periods) on pre-tax earnings linked to primary
aluminum prices was due to the Valco potline curtailments. As of March 31, 2004,
the Company had options covering substantially all of the Company's net
hedgeable volume for the second quarter of 2004 (at a strike price of
approximately $.76 per pound).

Assuming that the Company's interests in Alpart, QAL, Gramercy/KJBC, and
Valco are sold (and that Anglesey remains a part of the emerging entity), the
Company would no longer be a net seller of alumina and aluminum. Rather, net
sales of primary aluminum by Anglesey (reduced by the equivalent primary
aluminum impact of alumina requirements) would offset approximately two-thirds
of the primary aluminum requirements of the fabricated products business (based
on 2004 primary aluminum purchases). As such, the emerging entity would be a net
consumer of primary aluminum. However, the Company's pricing of fabricated
aluminum products is generally intended to lock-in a conversion margin
(representing the value added from the fabrication process(es)) and to pass
metal price risk on to its customers. The fabricated aluminum products business
does, however, from time to time enter into fixed price arrangements (that
include the primary aluminum price component). In such instances, the Company
may use third party hedging instruments to eliminate price exposure or may
consider such fixed price arrangements as a notional (internal) hedge of primary
aluminum to be produced at Anglesey. At March 31, 2004, the fabricated products
business held contracts for the delivery of fabricated aluminum products that
have the effect of fixing or capping the metal price component of the contract
during the period 2004 - 2008 totaling approximately (in 000 pounds of primary
aluminum): 2004: 90,000, 2005: 69,000, 2006: 34,000, 2007: 34,000, and 2008:
10,000.

Foreign Currency. The Company enters into forward exchange contracts to
hedge material cash commitments for foreign currencies. The Company's primary
foreign exchange exposure is related to the Company's Australian Dollar (A$)
commitments in respect of activities associated with QAL. The Company estimates
that, before consideration of any hedging activities, a US $0.01 increase
(decrease) in the value of the A$ results in an approximate $1.5 million
(decrease) increase in the Company's annual pre-tax operating income.

Energy. The Company is exposed to energy price risk from fluctuating
prices for natural gas, fuel oil and diesel oil consumed in the production
process. The Company estimates that each $1.00 change in natural gas prices (per
mcf) impacts the Company's annual pre-tax operating results by approximately
$20.0 million. Approximately two-thirds of such exposure relates to the Gramercy
facility with the remaining one-third primarily relating to the Company's
fabricated products business. Further, the Company estimates that each $1.00
change in fuel oil prices (per barrel) impacts the Company's annual pre-tax
operating results by approximately $3.0 million. A substantial majority of such
price exposure relates to the operations at Alpart with most of the remaining
exposure relating to KJBC's operations.

The Company from time to time in the ordinary course of business enters
into hedging transactions with major suppliers of energy and energy related
financial instruments. As of March 31, 2004, the Company had option contracts
which cap the average price the Company would pay for natural gas to
approximately $5.50 per mcf so that, when combined with price limits in the
physical gas supply agreement, substantially all of the Company's exposure to
increases in natural gas prices during April 2004 and May 2004 was limited.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures. An evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures was performed as of the end of the period covered by this Report
under the supervision and with the participation of the Company's management,
including the Chief Executive Officer and Chief Financial Officer. Based on that
evaluation, the Company's management, including the Chief Executive Officer and
Chief Financial Officer, concluded that the Company's disclosure controls and
procedures were effective.

57

Changes in Internal Control. There have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their evaluation. Additionally, no
changes in the Company's internal controls over financial reporting have
occurred during the Company's most recently completed quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal controls over financial reporting.

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Reference is made to Part I, Item 3. "LEGAL PROCEEDINGS" in the Company's
Form 10-K for the year ended December 31, 2003 for information concerning
material legal proceedings with respect to the Company.

Other Environmental Matters. During April 2004, the Company was served
with a subpoena for documents and has been notified by Federal authorities that
they are investigating certain environmental compliance issues with respect of
the Company's Trentwood facility in the State of Washington. The Company is
undertaking its own internal investigation of the matter through specially
retained counsel to ensure that it has all relevant facts regarding Trentwood's
compliance with applicable environmental laws. The Company believes it is in
compliance with all applicable environmental laws and requirements at the
Trentwood facility and intends to defend any claims or charges, if any should
result, vigorously. The Company cannot assess what, if any, impacts this matter
may have on the Company's or Kaiser's financial statements.

Other Personal Injury Claims. The Company has received other personal
injury claims related to noise induced hearing loss (approximately 2,900 claims)
and exposure to silica and coal tar pitch volatiles (approximately 3,900 claims
and 300 claims, respectively). The Company believes that all such claims are
pre-petition claims that will be resolved by the Cases. The Company cannot
presently determine the impact or value of these claims. However, the Company
currently expects that all such claims will be transferred, along with certain
rights against certain corresponding insurance policies, to a separate trust
along with (similar to) the settled hearing loss cases, whether or not such
claims are settled prior to the Company's emergence from the Cases.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

- ---------------

* Filed herewith.

(b) Reports on Form 8-K.

On January 13, 2004, under Item 5, "Other Events" of Form 8-K, the
Company filed a Current Report on Form 8-K reporting that it had filed
three related motions with the U.S. Bankruptcy Court to enable it to
substantially reduce or eliminate ongoing/future cash requirements for
pension and post-retirement benefit plans.

58

On January 21, 2004, under Item 5, "Other Events" of Form 8-K, the
Company filed a Current Report on Form 8-K reporting that it had signed an
agreement to sell its interest in Alumina Partners of Jamaica ("Alpart"), a
partnership that owns bauxite mining operations and an alumina refinery in
Jamaica, to Glencore AG.

On February 4, 2004, under Item 5, "Other Events" of Form 8-K, the
Company filed a Current Report on Form 8-K reporting that it had reached an
agreement in principle with the United Steelworkers of America with regard
to certain modifications to their labor agreements covering several of the
Company's U.S. facilities and that the U.S. Bankruptcy Court had
conditionally approved the agreement and the recently concluded agreements
with the 1114 Committee and the International Association of Machinists.

On February 27, 2004, under Item 5, "Other Events" of Form 8-K, the
Company filed a Current Report on Form 8-K reporting that it had reached an
agreement to sell the Mead facility.

No other Reports on Form 8-K were filed by the Company during the
quarter ended March 31, 2004, however:

On April 23, 2004 under Item 5, "Other Events" of Form 8-K, the Company
filed a Current Report on Form 8-K reporting that RUSAL was the
successful bidder for the Company's interest in and related to Alpart.

59

SIGNATURE

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 thereunto duly authorized, who have signed this report on behalf of
the registrant as the principal financial officer and principal accounting
officer of the registrant, respectively.

KAISER ALUMINUM & CHEMICAL CORPORATION

By: /s/ KERRY A. SHIBA
------------------------------------
Kerry A. Shiba
Vice President and Chief Financial
Officer
(Principal Financial Officer)

KAISER ALUMINUM & CHEMICAL CORPORATION

By: /s/ DANIEL D. MADDOX
------------------------------------
Daniel D. Maddox
Vice President and Controller
(Principal Accounting Officer)

Dated: May 14, 2004

60

EXHIBIT INDEX

- ---------------

* Filed herewith.