KAISER ALUMINUM & CHEMICAL CORP - 10-K Annual Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934 For the fiscal year ended December 31, 2003 Commission file number 1-3605

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

DELAWARE
(State of Incorporation)

94-0928288
(I.R.S. Employer Identification No.)
5847 SAN FELIPE, SUITE 2500, HOUSTON, TEXAS 77057-3268
(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange
Title of each class on which registered
Cumulative Convertible Preference Stock
(par value $100)
4 1/8% Series None
4 3/4% (1957 Series) None
4 3/4% (1959 Series) None
4 3/4% (1966 Series) None

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, and (2) has been subject to such filing requirements
for the past 90 days. Yes /X/ No / /

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

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

As of February 29, 2004, there were 46,171,365 shares of the common stock of the
registrant outstanding, all of which were owned by Kaiser Aluminum Corporation,
the parent corporation of the registrant.

Documents Incorporated By Reference
None

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

NOTE

Kaiser Aluminum & Chemical Corporation's Report on Form 10-K filed with the
Securities and Exchange Commission includes all exhibits required to be filed
with the Report. Copies of this Report on Form 10-K, including only Exhibit 21
of the exhibits listed on pages 109 - 114 of this Report, are available without
charge upon written request. The registrant will furnish copies of the other
exhibits to this Report on Form 10-K upon payment of a fee of 25 cents per page.
Please contact the office set forth below to request copies of this Report on
Form 10-K and for information as to the number of pages contained in each of the
exhibits and to request copies of such exhibits:

Corporate Secretary
Kaiser Aluminum & Chemical Corporation
5847 San Felipe, Suite 2500
Houston, Texas 77057-3268
(713) 267-3777

TABLE OF CONTENTS
Page

PART I................................................................................. 1

ITEM 1. BUSINESS............................................................. 1

ITEM 2. PROPERTIES........................................................... 16

ITEM 3. LEGAL PROCEEDINGS.................................................... 16

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................. 18

PART II................................................................................ 18

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.................................................. 18

ITEM 6. SELECTED FINANCIAL DATA.............................................. 18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................ 18

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK........... 35

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................... 37

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE................................ 90

ITEM 9A. CONTROLS AND PROCEDURES.............................................. 90

PART III............................................................................... 90

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................... 90

ITEM 11. EXECUTIVE COMPENSATION............................................... 94

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS..................... 102

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....................... 104

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES............................... 105

PART IV................................................................................ 106

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K................................................ 106

SIGNATURES ..................................................................... 108

INDEX OF EXHIBITS...................................................................... 109

EXHIBIT 21 SUBSIDIARIES......................................................... 115

PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K (the "Report") 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 Report (including, but not limited to, Item 1. "Business -
Business Operations," " - Competition," " - Environmental Matters," and " -
Factors Affecting Future Performance," Item 3. "Legal Proceedings," and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations"). 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. Certain sections of
this Report identify other factors that could cause differences between such
forward-looking statements and actual results (for example, see Item 1.
"Business - Factors Affecting Future Performance"). 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.

GENERAL

Kaiser Aluminum & Chemical Corporation (the "Company"), a Delaware corporation
organized in 1940, is a direct subsidiary of Kaiser Aluminum Corporation
("Kaiser" or "KAC") and an indirect subsidiary of MAXXAM Inc. ("MAXXAM"). Kaiser
owns all of the Company's Common Stock and MAXXAM and one of its wholly owned
subsidiaries together own approximately 62% of Kaiser's Common Stock, with the
remaining approximately 38% publicly held. The Company has historically operated
in all principal aspects of the aluminum industry - the mining of bauxite, the
refining of bauxite into alumina, the production of primary aluminum from
alumina, and the manufacture of fabricated (including semi-fabricated) aluminum
products. However, as discussed below, the Company expects it will emerge from
the Chapter 11 proceedings primarily as a fabricated products company.

REORGANIZATION PROCEEDINGS

The Company, Kaiser 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.

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 other 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 million accelerated funding requirement to its salaried employee
retirement plan in January 2003. The filing of the Cases by the Additional
Debtors had no material 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 been resolved.

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

All Debtors. The following table sets forth certain financial information for
the Debtors and non-Debtors as of and for the year ended December 31, 2003 (in
millions).

Consolidation/
Elimination
Debtors Non-Debtors Entries Consolidated
---------------- ------------- -------------- ---------------

Net sales $ 1,272.5 $ 106.2 $ (13.4) $ 1,365.3
Operating income (loss) (686.7) (52.2) - (738.9)
Net income (loss) (788.1) (32.4) 32.4 (788.1)

Total assets $ 1,393.2 $ 579.5 $ (344.0) $ 1,628.7
Liabilities not subject to compromise 304.4 116.4 (2.0) 418.8
Liabilities subject to compromise 2,820.0 - - 2,820.0
Minority interests - 105.6 15.5 121.1
Total stockholders' equity (deficit) (1,731.2) 357.5 (357.5) (1,731.2)

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 Debtors
expect that the Committees, together with the legal representative for potential
future asbestos claimants (the "Futures' Representative") that has been
appointed in the Cases, 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 most recent of which was set to expire February 29, 2004. A motion
to extend the exclusivity period for KAAC, KJC and AJI through April 30, 2004,
and for the remaining Debtors through June 30, 2004, was filed by the Company in
February 2004. By filing the motion to extend the exclusivity period, the period
is automatically extended until the April 26, 2004 Court hearing date. As the
Debtors' motion to extend the exclusivity period was agreed to by the UCC and as
the ACC and the Futures' Representative have indicated that they support a
common extension of the exclusivity period for all Debtors through either April
30, 2004 or June 30, 2004, the Debtors believe that it is likely that the
exclusivity period for all Debtors will be extended through at least April 30,
2004. Additional extensions may 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 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 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 holders of 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 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
substantially all other pre- and post-petition intercompany claims between the
Debtors. The proposed Intercompany Agreement, if finalized substantially in its
current form, would, among other things, provide 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 April 1, 2004 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 what, if any, alumina
sales contracts are transferred) pursuant to the Company's January 2004
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. Under the proposed Intercompany
Agreement, all such payments, 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. Additionally, the ACC and the
Futures' Representative have not yet reviewed, commented on or agreed to the
terms of the Intercompany Agreement. The Company currently expects the Court to
consider the proposed Intercompany Agreement at the regularly scheduled April
2004 or May 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 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
7 of Notes to Consolidated Financial Statements). If payments under the proposed
Intercompany Agreement together with existing cash resources and liquidity
available under an exit financing facility are not sufficient to pay or
otherwise provide for all Exit Costs, the Company and 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 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 has also begun 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 addition, after extensive negotiations with the
Government of Ghana ("GoG") and the Volta River Authority ("VRA") failed to
result in a resolution to Volta Aluminium Company Limited's ("Valco") power
situation and other matters, the Company, in December 2003, entered into a
Memorandum of Understanding ("MOU") with the GoG and the VRA to sell its
interests in Valco (see Notes 1, 5 and 15 of Notes to Consolidated Financial
Statements for additional discussion regarding the MOU and the possible sale of
the Company's interests in Valco).

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

SUMMARY OF OPERATIONS

The Company has historically sold significant amounts of alumina and primary
aluminum in domestic and international markets. The following table sets forth
historical product flows for the years ended December 31, 2003, 2002 and 2001.
However, as discussed above, the Company expects it will emerge from the Chapter
11 proceedings primarily as a fabricated products company.

Sources(1) Uses(1)
------------------------------------ ----------------------------------
Third Party Third Party Intersegment
Production(2) Purchases Shipments(2) Transfers
------------------ ---------------- ----------------- ---------------
(in thousands of tons*)
Fabricated Products - expected to be core of
reorganizing entity(3)
2003 - 165.5 168.9 -
2002 - 164.7 170.7 -
2001 - 187.1 192.5 -

Commodities - sales pending or
disposition under consideration
Bauxite -
2003 6,094.5 1,578.8 1,525.5 4,694.6
2002 6,289.7 1,582.5 1,568.1 4,493.5
2001 5,628.3 1,916.3 1,512.2 4,355.4
Alumina -
2003 2,926.7 96.1 2,929.0 176.6
2002 2,848.5 258.9 2,626.6 343.9
2001 2,813.9(4) 115.0 2,582.7 422.8
Primary Aluminum -
2003 84.8 .7 89.7 -
2002 187.4 6.1 194.8 1.7
2001 214.3 27.3 244.7 2.3

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

* All references to tons in this Report are to metric tons of 2,204.6 pounds.
(1) Sources and uses will not equal due to the impact of intrasegment
consumption, inventory changes and alumina and primary aluminum swaps.
(2) Production and third party shipments include Kaiser's share of consolidated
joint venture activities.
(3) Fabricated products activity is reported in equivalent tons of primary
aluminum. Third party purchases represent purchases of primary aluminum,
including scrap.
(4) During September 2001, the Company sold an 8.3% interest in QAL. See
"Business Operations--Bauxite and Alumina Business Unit--QAL" below for a
discussion of effects of the sale on alumina production.

BUSINESS OPERATIONS

The Company has historically conducted its business through its business units
(Fabricated products, Bauxite and alumina, Primary aluminum and Commodities
marketing), each of which is discussed below. As previously discussed, while the
Company has historically operated in all aspects of the aluminum industry, the
Company expects it will emerge from the Chapter 11 proceedings primarily as a
fabricated products company. As such, the Company has attempted to provide
additional information in this Annual Report on Form 10-K to separately disclose
amounts related to the Fabricated products business.

- - Fabricated Products Business Unit
The Fabricated products business operates (1) the Trentwood rolling mill, in
Spokane Valley, Washington, which produces heat-treat sheet and plate products;
(2) soft-alloy extrusion facilities located in Los Angeles, California; Sherman,
Texas; Tulsa, Oklahoma; Richmond, Virginia; and London, Ontario, Canada, which
produce rod, bar, tube, shapes and billet; (3) hard-alloy extrusion plants
located in Newark, Ohio, and Jackson, Tennessee, which produce rod, bar, screw
machine stock, redraw rod, forging stock and billet; and (4) an engineered
component (forging) facility located in Greenwood, South Carolina, which
produces products particularly well-suited for automotive applications because
of their high strength-to-weight properties. The Fabricated products business
also extrudes seamless tubing in both hard- and soft-alloys at a facility in
Richland, Washington, and produces drawn tube in both hard- and soft-alloys at
its operations in Chandler, Arizona. Soft-alloy extruded seamless and drawn
tubing is also produced at the Richmond, Virginia facility.

Primary and scrap aluminum to meet the business unit's manufacturing
requirements are purchased from third parties at market terms.

Major markets for the Fabricated products business include:

- - aerospace
- - ground transportation, including automobiles, light trucks, heavy duty
trucks and trailers, and shipping containers
- - distribution
- - durable goods
- - ordnance
- - electrical

A significant portion of sales are made through distributors.

Through its sales and engineering office in Southfield, Michigan, the Fabricated
products business staff works with automobile makers and other customers and
plant personnel to create new automotive component designs and to improve
existing products.

Over the last several years, there has been a significant integration of the
Fabricated products business operations. The business operations of the plants
have similar economic characteristics and are similar in product and production
process, with common customers. Because of common customers, there has been
substantial integration of the sales force and management.

All of the Fabricated products business operations are owned directly by the
Company with two exceptions: (1) the London, Ontario facility is owned by
KACOCL, a wholly owned subsidiary, which was one of the Company's subsidiaries
that filed a petition for reorganization under the Code in January 2003, and (2)
the Richmond, Virginia facility, which is owned by Bellwood, also a wholly owned
subsidiary, which filed a petition for reorganization in February 2002. The
Company does not believe that KACOCL's or Bellwood's operations will be
adversely affected by the Cases.

In 2003, the Fabricated products business unit had approximately 600 customers,
including approximately 100 customers in the aerospace, transportation and
industrial markets, most of which represented heat-treat product shipments to
distributors who sell to a variety of industrial end-users. The largest and top
five customers for fabricated products accounted for approximately 10% and 30%,
respectively, of the business unit's third-party net sales. See Item 1.
"Business--Competition" in this Report. Sales are made directly to end-use
customers and distributors by Company sales personnel located in the United
States and Europe, and by independent sales agents in Asia, Mexico and the
Middle East.

- - Bauxite and Alumina Business Unit
The Company has historically been a major producer of alumina and sold
significant amounts of its alumina production in domestic and international
markets. The Company's strategy was to sell a substantial portion of the alumina
available to it in excess of its internal smelting requirements under multi-year
sales contracts with prices linked to the price of primary aluminum. However, as
previously disclosed, as a part of its reorganization process, the Company has
been exploring the possible sale of certain or all of its commodities assets,
which include the interests of the Bauxite and Alumina business unit. As more
fully discussed in Note 5 of Notes to Consolidated Financial Statements, the
Company will conduct an auction in April 2004 that may result in the sale of its
interests in and related to Alpart, is close to reaching an agreement in respect
of the sale of its interests in and related to Gramercy/KJBC and has begun
certain processes that could lead to the Company's interests in and related to
QAL being sold. Further, under the Intercompany Agreement, if approved by the
Court, any net cash flow related to Alpart's and QAL's activities beginning
April 1, 2004 would be for the benefit of AJI's, KJC's and the Company's
creditors and, to the extent collected by the Company in the interim, would
reduce the payments required to be made to the Company by AJI, KJC and KAAC
pursuant to the Intercompany Agreement.

The following table lists the Company's bauxite mining and alumina refining
facilities as of December 31, 2003:

Annual
Production Total
Capacity Annual
Company Available to Production
Activity Facility Location Ownership the Company Capacity
- ------------------ ------------ -------------- ---------------- ----------------- ----------------
(tons) (tons)

Bauxite Mining KJBC Jamaica 49.0% 4,500,000 4,500,000
Alpart(1) Jamaica 65.0% 2,275,000 3,500,000
----------------- ----------------

6,775,000 8,000,000
================= ================

Alumina Refining Gramercy Louisiana 100.0% 1,250,000 1,250,000
Alpart Jamaica 65.0% 1,072,500 1,650,000
QAL Australia 20.0% 730,000 3,650,000
----------------- ----------------

3,052,500 6,550,000
================= ================
- ------------
(1) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina at
the Alpart refinery.

KJBC. The Government of Jamaica has granted the Company a mining lease for the
mining of bauxite which will, at a minimum, satisfy the bauxite requirements of
the Company's Gramercy, Louisiana, alumina refinery so that it will be able to
produce at its current rated capacity until 2020. KJBC mines bauxite from land
which is subject to the mining lease as an agent for the Company. The Company
holds its interest in KJBC through a wholly owned subsidiary (KBC) which was one
of the Company's subsidiaries that filed a petition for reorganization under the
Code in January 2003. KJBC did not file a petition for reorganization. The
Company and KBC have the authority from the Court to fund KJBC's cash
requirements in the ordinary course of business. Although the Company (through
KBC) owns 49% of KJBC, it is entitled to, and generally takes, all of its
bauxite output. A substantial majority of the bauxite mined by KJBC is refined
into alumina at the Gramercy facility and the remainder is sold to a third
party. KJBC's operations were impacted by the Gramercy incident (see Gramercy
below). The Government of Jamaica, which owns 51% of KJBC, has agreed to grant
the Company an additional bauxite mining lease. The new mining lease will be
effective upon the expiration of the current lease in 2020 and will enable the
Gramercy facility to produce at its rated capacity for an additional ten year
period.

Gramercy. Alumina produced by the Gramercy refinery is primarily sold to third
parties. The Gramercy refinery produces two products: smelter grade alumina and
chemical grade alumina (e.g. hydrate). Smelter grade alumina is sold under
multi-year contracts typically linked to London Metal Exchange prices ("LME
prices") for primary aluminum. Chemical grade alumina is sold at a premium price
over smelter grade alumina. Production at the plant was curtailed from July 1999
until December 2000 (at which time partial production commenced) as a result of
an explosion in the digestion area of the plant. Construction at the facility
was substantially completed in the third quarter of 2001. During the first nine
months of 2001, the plant operated at approximately 68% of its newly-rated
estimated annual capacity of 1,250,000 tons. During the fourth quarter of 2001,
the plant operated at approximately 90% of its newly-rated capacity. Since the
end of February 2002, the plant has, except for normal operating variations,
generally operated at approximately 100% of its newly-rated capacity. While
production was curtailed, the Company purchased alumina from third parties, in
excess of the amounts of alumina available from other Company-owned facilities,
to supply major customers' needs as well as to meet intersegment requirements.

Alpart. The Company owns a 65% interest in Alpart, and Hydro Aluminium a.s
("Hydro") owns the remaining 35% interest. The Company holds its interests in
Alpart through two wholly owned subsidiaries (KJC and AJI), which were two of
the Company's subsidiaries that filed petitions for reorganization under the
Code in January 2003. Alpart did not file a petition for reorganization. The
Debtors have the authority from the Court to fund their share of Alpart's cash
requirements in the ordinary course of business. Alpart holds bauxite reserves
and owns an alumina plant located in Jamaica. The Company has management
responsibility for the facility on a fee basis. The Company and Hydro are
responsible for their proportionate shares of Alpart's costs and expenses. The
Government of Jamaica has granted Alpart a mining lease and has entered into
other agreements with Alpart designed to assure that sufficient reserves of
bauxite will be available to Alpart to operate its refinery, as it may be
expanded up to a capacity of 2,000,000 tons per year, through the year 2024.
Alpart and JAMALCO, a joint venture between affiliates of Alcoa Inc. and the
Government of Jamaica, have been operating a bauxite mining operation joint
venture that consolidated their bauxite mining operations in Jamaica since the
first half of 2000. The joint venture agreement also grants Alpart certain
rights to acquire bauxite mined from JAMALCO's reserves with the objective to
optimize mining operations and capital costs. As part of the Company's
initiatives launched in 2001, Alpart's annual production capacity was increased
from 1,450,000 to 1,650,000 tons during late 2003.

QAL. The Company owns a 20% interest in QAL, after selling an approximate 8.3%
interest in September 2001. The Company holds its interest in QAL through a
wholly owned subsidiary (KAAC), which is one of the Company's subsidiaries that
filed a petition for reorganization under the Code in 2002. The Debtors have the
authority from the Court to fund its share of QAL's cash requirements in the
ordinary course of business. QAL, which is located in Queensland, Australia,
owns one of the largest and most competitive alumina refineries in the world.
QAL refines bauxite into alumina, essentially on a cost basis, for the account
of its shareholders under long-term tolling contracts. The shareholders,
including KAAC, purchase bauxite from another QAL shareholder under long-term
supply contracts. KAAC has contracted with QAL to take approximately 600,000
tons per year of alumina or pay standby charges. KAAC is unconditionally
obligated to pay amounts calculated to service its share ($60.0 million at
December 31, 2003) of certain debt of QAL, as well as other QAL costs and
expenses, including bauxite shipping costs. In recent years, since the
curtailment of the Mead and Tacoma smelters, the Company has sold its share of
QAL's production to third parties.

Customers. During 2003, the Company sold alumina to approximately 10 customers,
the largest and top five of which accounted for approximately 19% and 71%,
respectively, of the business unit's third-party net sales. All of the Company's
third-party sales of bauxite in 2003 were made to one customer, which sales
represent approximately 5% of the business unit's third-party net sales. The
Company's principal customers for bauxite and alumina consist of other aluminum
producers, trading intermediaries, and users of chemical grade alumina.
Marketing and sales efforts are conducted by personnel located in Baton Rouge,
Louisiana.

- - Primary Aluminum Business Unit
The Company has historically been a major producer of primary aluminum and sold
significant amounts of its primary aluminum production in domestic and
international markets. The Company's strategy was to sell a substantial portion
of the primary aluminum available to it in excess of its internal smelting
requirements to third parties. However, as previously disclosed, as a part of
its reorganization process, the Company has been exploring the possible sale of
certain or all of its commodities assets, which include the interests of the
Primary aluminum business unit. As more fully discussed in Note 5 of Notes to
Consolidated Financial Statements, the Company has entered into agreements to
sell the Company's interests in Valco and Mead smelting facilities.

The following table lists the Company's primary aluminum smelting facilities as
of December 31, 2003:

Annual Rated Total 2003
Capacity Annual Average
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
- ----------------- ---------- ------------ ---------------- ----------- ------------
(tons) (tons)
Ghana Valco 90% 180,000 200,000 8%
Wales, United Kingdom Anglesey 49% 66,150 135,000 107%
Washington, United States Mead 100% 200,000 200,000 __(1)
---------------- -----------
Total 446,150 535,000
================ ===========

- --------
(1) Production has been completely curtailed since 2001.

Electric power represents an important production input for the Company at its
aluminum smelters and its cost can significantly affect the Business Unit's
profitability.

Valco. The Company manages, and directly owns a 90% interest in Valco, which
owns an aluminum smelter in Ghana. The Valco smelter uses pre-bake technology
and processes alumina supplied by the Company and the other participant into
primary aluminum under tolling contracts which provide for proportionate
payments by the participants. The Company's share of the primary aluminum is
sold to third parties. In December 2003, as discussed below, the Company entered
into a Memorandum of Understanding to sell its interests in Valco to the
Government of Ghana.

Valco's operating level has been subject to fluctuations resulting from the
amount of hydro-electric power it is allocated by the VRA. The operating level
over the last five years has ranged from none to four out of a total of five
potlines. The amount of power made available to Valco by the VRA depends in
large part on the level of the lake that is the primary source for generating
the hydroelectric power used to supply the smelter. The level of the lake is
primarily a function of the level of annual rainfall and the alternative
(non-Valco) uses of the power generated, as directed by the VRA.

During late 2000, Valco, the GoG and the VRA reached an agreement, subject to
Parliamentary approval, that would provide sufficient power for Valco to operate
at least three and one-half of its five potlines through 2017. However,
Parliamentary approval was not received and, in March 2002, the GoG reduced
Valco's power allocation forcing Valco to curtail one of its four operating
potlines. In December 2002, after substantial attempts to reach an amicable
solution, Valco and the Company filed for arbitration with the International
Chamber of Commerce in Paris against both the VRA and the GoG. An attempt of
mediation in January 2003 was also unsuccessful, following which Valco's power
allocation was further reduced in January 2003 resulting in the curtailment of
two additional operating potlines.

As previously disclosed, during the first half of 2003, the lake level was at or
near a record low level. Based on the level of the lake and the rate at which it
had been declining, the Company believed that curtailment of Valco's last
remaining operating potline was likely. Accordingly in light of the previous
curtailments ordered by the VRA and the declining lake level, in May 2003, the
Company curtailed the last operating potline. The curtailment of the last
operating potline was believed to: (1) offer the VRA and the GoG a contribution
toward conservation of the water supply to improve their ability to meet Valco's
future power needs as well as meet the near-term power needs of the rest of
Ghana, and (2) provide Valco its best opportunity to restart late in 2003 once
the annual rainy season had replenished the lake level and Valco's 2004 power
allocation was known. The rainy season ended in late 2003 and the lake level
crested at a more typical level. During 2003, Valco met regularly with the GoG
and the VRA in respect of the current and future power situation and other
matters including appropriate compensation to Valco for power curtailments. The
continuation of the negotiations and arbitration ultimately led to the 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. The MOU
contemplates that the transaction will close by April 30, 2004. The transaction
is subject to due diligence and a number of approvals, including by the
President or Cabinet of the GoG, the Parliament of Ghana, the Boards of
Directors of the Company and Valco and the Court. As a result, no assurance can
be given that the MOU will be approved by any or all of the parties. See Notes 5
and 15 of Notes to Consolidated Financial Statements for additional information
regarding the MOU and the possible sale of the Company's interests in Valco.

Valco did not file a petition for reorganization. The Company did not expect
Valco's operations to be adversely affected as a result of the Cases as the
Debtors had received the authority from the Court to fund Valco's cash
requirements in the ordinary course of business. The Company and the PBGC
entered into a stipulation, which was approved by the Court, that extended the
automatic stay in bankruptcy to Valco to prevent statutory liens from arising
against Valco in respect of certain pension obligations related to the Company's
U.S. pension plans (see Note 9 of Notes to Consolidated Financial Statements).
The stipulation currently expires on June 30, 2004. It can be extended beyond
that date either through agreement of the parties or involuntarily by order of
the Court. The Company is unable to assess at this time whether an extension of
the stipulation might be necessary or whether, if sought, an extension might be
obtained. If the stipulation were not extended, a PBGC lien could arise against
Valco that could have material consequences. The Company is unable to state at
this time whether a lien, if one arose, would be enforceable in Ghana against
Valco.

Anglesey. The Company also owns a 49% interest in Anglesey, which owns an
aluminum smelter at Holyhead, Wales. As discussed in Reorganization Proceedings
above, the Company has explored the possible sale of its interest in and related
to Anglesey and may explore the possibility of a sale again at some point in the
future. The Anglesey smelter uses pre-bake technology. The Company supplies 49%
of Anglesey's alumina requirements and purchases 49% of Anglesey's aluminum
output. The Company sells its share of Anglesey's output to third parties.
Anglesey operates under a power agreement that provides sufficient power to
sustain its operations at full capacity through September 2009.

Anglesey did not file a petition for reorganization. The Company does not expect
Anglesey's operations to be adversely affected as a result of the Cases as the
Debtors have received the authority from the Court to fund Anglesey's cash
requirements in the ordinary course of business.

Washington Smelters. The Company owned and operated two aluminum smelters in the
State of Washington (the Mead and Tacoma smelters) since the 1940s. Through
2000, the Bonneville Power Administration ("BPA") was supplying approximately
half of the electric power for the Mead and Tacoma smelters, with the balance
coming from other suppliers. In response to the unprecedented high market prices
for power in the Pacific Northwest, the Company curtailed primary aluminum
production at the Tacoma smelter and partially curtailed production at the Mead
smelter during the last half of 2000. Mead was subsequently fully curtailed in
early 2001. During this same period, as permitted under the BPA contract, the
Company remarketed to the BPA the available power that it had under contract
through September 30, 2001. As a result of the curtailments, the Company avoided
the need to purchase power on a variable market price basis and received cash
proceeds sufficient to more than offset the cash impact of the potline
curtailments over the period for which the power was sold.

The Company has previously disclosed that, in connection with the development of
a plan of reorganization, it conducted a study of the long-term competitive
position of the Mead and Tacoma facilities and potential options for these
facilities. When the Company received the preliminary results of the study, it
analyzed the findings and met with the United Steelworkers of America ("USWA")
and other parties prior to making its determination as to the appropriate
action(s). The outcome of the study and the Company's ongoing work on developing
a plan of reorganization led the Company to conclude that the Mead and Tacoma
facilities were unlikely to be able to compete with the much larger, newer and
more efficient smelters, generally located outside the United States except
perhaps as a "swing" facility.

In January 2003, the Company announced the indefinite curtailment of the Mead
facility. The curtailment of the Mead facility was due to the continuing
unfavorable market dynamics, specifically unattractive long-term power prices
and weak primary aluminum prices - both of which are significant impediments for
an older smelter with higher-than-average operating costs. The Mead facility was
initially expected to remain completely curtailed unless and until an
appropriate combination of reduced power prices, higher primary aluminum prices
and other factors occurred. In February 2004, the Company entered into an
agreement to sell the Mead facility (see Note 5 of Notes to Consolidated
Financial Statements for additional discussion of the sale of the Mead
facility).

In January 2003, the Court also approved the sale of the Tacoma smelter to the
Port of Tacoma. The sale closed in February 2003 (see Note 5 of Notes to
Consolidated Financial Statements for additional discussion on the sale of the
Tacoma facility).

Other. The Company uses proprietary retrofit and control technology in all of
its smelters. This technology - which includes the redesign of the cathodes,
anodes and bus that conduct electricity through reduction cells, improved feed
systems that add alumina to the cells, computerized process control and energy
management systems, and furnace technology for baking of anode carbon - has
significantly contributed to increased and more efficient production of primary
aluminum and enhanced the Company's ability to compete more effectively with the
industry's newer smelters.

The Company's principal primary aluminum customers consist of large trading
intermediaries and metal brokers. In 2003, the Company sold its primary aluminum
production to approximately five customers, of which the largest accounted for
approximately 82% of the business unit's third-party net sales. See
"-Competition" in this Report. Marketing and sales efforts are conducted by
personnel located in Baton Rouge, Louisiana.

- - Commodities Marketing Business Unit
The Company's operating results have historically been 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. Primary aluminum prices have been subject to significant cyclical
fluctuations. Alumina prices, as well as fabricated aluminum product prices
(which vary considerably among products), are significantly influenced by
changes in the price of primary aluminum and generally lag behind primary
aluminum prices by up to three months. From time to time in the ordinary course
of business, the Company has entered into hedging transactions to provide risk
management in respect of its net exposure of earnings and cash flow related to
primary aluminum price changes. Given the significance of primary aluminum
hedging activities to the Company, the Company has reported its primary
aluminum-related hedging activities as a separate segment. Primary
aluminum-related hedging activities have been managed centrally on behalf of all
of the Company's business segments to minimize transaction costs, to monitor
consolidated net exposures and to allow for increased responsiveness to changes
in market factors.

Hedging activities conducted in respect of the Company's cost exposure to energy
prices and foreign exchange rates are not considered a part of the Commodity
marketing segment. Rather, such activities are included in the results of the
business unit to which they relate.

COMPETITION

The Company has historically competed globally with companies in all aspects of
aluminum industry. Many of the Company's competitors have greater financial
resources than the Company. The Company competes with numerous domestic and
international fabricators in the sale of fabricated aluminum products. The
Company markets fabricated aluminum products it manufactures in the United
States and abroad. Sales are made directly and through distributors to a large
number of customers. Competition in the sale of fabricated products is based
upon quality, availability, price and service, including delivery performance.
The Company concentrates its fabricating operations on selected products in
which it believes it has production expertise, high-quality capability, and
geographic and other competitive advantages.

Primary aluminum and, to some degree, alumina are commodities with generally
standard qualities, and competition in the sale of these commodities is based
primarily upon price, quality and availability. Aluminum competes in many
markets with steel, copper, glass, plastic, and other materials. The Company
believes that, assuming the current relationship between worldwide supply and
demand for alumina and primary aluminum does not change materially, the loss of
any one of the Company's customers, including intermediaries, would not have a
material adverse effect on the Company's financial condition or results of
operations.

RESEARCH AND DEVELOPMENT

Net expenditures for the Fabricated products business unit's research and
development activities were $1.6 million in 2003, $1.4 million in 2002, and $2.1
million in 2001. The Company estimates that research and development
expenditures for Fabricated products will be approximately $2.7 million in 2004.

Net expenditures for all other business units' research and development
activities were $1.0 million in 2003, $.4 million in 2002 and $1.9 million in
2001. As discussed above, the Company expects it will emerge from the Chapter 11
proceedings primarily as a fabricated products company. Therefore, research and
development expenditures in 2004 for the Commodities business units are expected
to be minimal.

EMPLOYEES

At December 31, 2003, the Company employed approximately 4,500 persons, of which
approximately 2,100 were employed in the Fabricated products business unit,
approximately 2,300 were employed in the Commodities business units and
approximately 100 were employed in Corporate. At December 31, 2002, the Company
employed approximately 5,200 persons of which approximately 2,000 were employed
in the Fabricated products business unit, approximately 3,100 were employed in
the Commodities business units and less than 100 were employed in Corporate.

ENVIRONMENTAL MATTERS

The Company is subject to a wide variety of international, federal, state and
local environmental laws and regulations. For a discussion of this subject, see
"Factors Affecting Future Performance - the Company's current or past operations
subject it to environmental compliance, clean-up and damage claims that may be
costly" below. During the pendency of the Cases, substantially all pending
litigation, except certain environmental claims and litigation, against the
Debtors is stayed.

FACTORS AFFECTING FUTURE PERFORMANCE

This section discusses certain factors that could cause actual results to vary,
perhaps materially, from the results described in forward-looking statements
made in this Report. Forward-looking statements in this Report are not
guarantees of future performance and involve significant risks and
uncertainties. In addition to the factors identified below, actual results may
vary materially from those in such forward-looking statements as a result of a
variety of other factors including 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 Report also identifies other factors that
could cause such differences. No assurance can be given that these factors are
all of the factors that could cause actual results to vary materially from the
forward-looking statements.

- - The Cases and any plan or plans of reorganization may have adverse
consequences on the Company and its stakeholders and/or our reorganization
from the Cases may not be successful
Our objective is to achieve the highest possible recoveries for all
stakeholders, consistent with our ability to pay and the continuation of our
businesses. However, there can be no assurance that we will be able to attain
these objectives or achieve a successful reorganization and remain a going
concern. The consolidated financial statements included elsewhere in this Report
include some of the impacts of the Cases (e.g., some asset dispositions, some
claim resolutions, etc.) but not all of such effects of all such 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 Debtors to
continue in existence. Adjustments necessitated by such plans, arrangements or
other actions could materially change the consolidated financial statements
included elsewhere in this Report.

While valuation of the Debtors' assets and pre-Filing Date claims at this stage
of the Cases is subject to inherent uncertainties, the Debtors currently believe
that it is likely that their liabilities will be found in the Cases to exceed
the fair value of their assets. Therefore, the Debtors currently believe that it
is likely that 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. Because of such possibility, the value of the
Common Stock is speculative and any investment in the Common Stock would pose a
high degree of risk.

Additionally, while the Debtors operate their businesses as
debtors-in-possession pursuant to the Code during the pendency of the Cases, the
Debtors will be required to obtain the approval of the Court prior to engaging
in any transaction outside the ordinary course of business. In connection with
any such approval, creditors and other parties in interest may raise objections
to such approval and may appear and be heard at any hearing with respect to any
such approval. Accordingly, the Debtors may be prevented from engaging in
transactions that might otherwise be considered beneficial to the Company. The
Court also has the authority to oversee and exert control over the Debtors'
ordinary course operations.

- - We may not operate profitably in the future
We reported a net loss of $788.1 million for the year ended December 31, 2003,
which included a number of significant items and charges. Even if such items
were excluded from the results for 2003, results for the year ended December 31,
2003 would have been a net loss. There can be no assurance that we will generate
a profit from recurring operations or that we will operate profitably in future
periods. During 2003, the Company also experienced a net decrease in cash and
cash equivalents of $42.8 million; $87.8 million of which was used in operating
activities and $4.1 million of which was used in financing activities offset by
$49.1 million of which was provided from investing activities. The $87.8 million
of cash and cash equivalents used in operations included several items that were
significant. These receipt and payment items included: (a) receipts of (i)
asbestos-related insurance receipts of $18.6 million in respect of prior year
asbestos-related payments, (ii) cash outflows avoided as a result of the
Company's share of QAL net borrowings in the second and third quarters of 2003
that reduced the Company's cash requirements by approximately $11.0 million, and
(iii) the benefit from decreases in receivables and inventories of approximately
$20.0 million due to Valco's 2003 potline curtailment in excess of lost
earnings; and (b) payments of (i) a foreign income tax payment related to prior
periods of $22.0 million, and (ii) end of service benefits payments totaling
approximately $13.2 million in connection with the Valco potline curtailments.
The balance of the net cash used by operating activities in 2003 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) weak demand for fabricated metal products in general,
but particularly for engineered products, (c) higher than average fuel oil and
natural gas prices, and (d) significant expenditures in respect of retiree
medical and reorganization costs. Cash used by operating activities during the
year ended December 31, 2002 ($49.6 million) included several items not
typically considered part of our normal recurring operations including: (a)
asbestos-related insurance recoveries of $23.3 million; (b) approximately $30.0
million of funding to QAL in respect of QAL's scheduled debt maturities; and (c)
foreign income tax payments related to prior year activities of $8.0 million.

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. 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 such 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 still
likely be in the $50.0 million - $100.0 million range and that amount should be
adequate for the fabricated products operations. 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, thereby increasing the Company's
liquidity needs. 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 an April 2004 or May 2004 Court hearing, no assurances can be given in
this regard.

- - Our earnings are sensitive to a number of variables
Our operating earnings are sensitive to a number of variables over which we have
no direct control. Key variables in this regard include prices for primary
aluminum and energy and general economic conditions.

The price of primary aluminum significantly affects our financial results.
Primary aluminum prices historically have been subject to significant cyclical
price fluctuations. The Company believes the timing of changes in the market
price of aluminum are largely unpredictable. Since 1993, the average LME
transaction price has ranged from approximately $.50 to $1.00 per pound. If the
Company were to complete the sale of its interests in and related to Alpart,
QAL, Gramercy/KJBC and Valco, the Company would change from being a net seller
of primary aluminum to a net user of primary aluminum. As such, the Company's
risk would be whether it can successfully pass on any metal price increases to
its customers. See Item 7A., Quantitative and Qualitative Disclosures About
Market Risks, Sensitivity for additional discussion.

Electric power has historically represented an important production input for us
at our aluminum smelters and its cost can significantly affect our
profitability. Power contracts for our smelters have varying contractual terms.
See "Business--Primary Aluminum Business Unit." Our earnings, particularly in
our Bauxite and Alumina business unit, are also sensitive to changes in the
prices for natural gas, fuel oil and diesel oil, which are used in our
production processes, and to foreign exchange rates in respect of our cash
commitments to our foreign subsidiaries and affiliates. Assuming the Company
were to complete the sale of its interests in and related to Alpart, QAL,
Gramercy/KJBC and Valco, the Company's exposure to energy prices would be
dramatically reduced, but not eliminated. See Item 7A., Quantitative and
Qualitative Disclosures About Market Risks, Sensitivity for additional
discussion.

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, and aerospace markets. Such changes in
demand can directly affect our 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 alumina and primary aluminum.

- - The Company's current or past operations subject it to environmental
compliance, clean-up and damage claims that have been and continue to be
costly
The operations of the Company's facilities are regulated by a wide variety of
international, federal, state and local environmental laws. These environmental
laws regulate, among other things, air and water emissions and discharges; the
generation, storage, treatment, transportation and disposal of solid and
hazardous waste; and the release of hazardous or toxic substances, pollutants
and contaminants into the environment. Compliance with these environmental laws
is costly. While legislative, regulatory and economic uncertainties make it
difficult for us to project future spending for these purposes, we currently
anticipate that in the 2004 - 2005 period, the Company's environmental capital
spending will be approximately $.5 million per year and that the Company's
operating costs will include pollution control costs totaling approximately
$15.8 million per year. However, subsequent changes in environmental laws may
change the way the Company must operate and may force the Company to spend more
than we currently project.

Additionally, the Company's current and former operations can subject it to
fines or penalties for alleged breaches of environmental laws and to other
actions seeking clean-up or other remedies under these environmental laws. The
Company also may be subject to damages related to alleged injuries to health or
to the environment, including claims with respect to certain waste disposal
sites and the clean-up of sites currently or formerly used by the Company.

Currently, the Company is subject to certain lawsuits under the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA"). The
Company, along with certain other companies, has been named as a Potentially
Responsible Party for clean-up costs at certain third-party sites listed on the
National Priorities List under CERCLA. As a result, the Company may be exposed
not only to its assessed share of clean-up but also to the costs of others if
they are unable to pay. Additionally, the Company's Mead, Washington, facility
has been listed on the National Priorities List under CERCLA. The Company and
the regulatory authorities agreed to a plan of remediation in respect of the
Mead facility in January 2000.

In response to environmental concerns, we have established environmental
accruals representing our estimate of the costs we reasonably expect the Company
to incur in connection with these matters. At December 31, 2003, the balance of
our accruals, which are primarily included in our long-term liabilities, was
$82.5 million. We estimate that the annual costs charged to these environmental
accruals will be approximately $25.4 million in 2004, $2.2 million to $4.3
million per year for the years 2005 through 2008 and an aggregate of
approximately $45.7 million thereafter. However, we cannot assure you that the
Company's actual costs will not exceed our current estimates. We believe 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 $15.4 million. See Note 12 of Notes to Consolidated Financial
Statements for additional information.

- - The settlement of the asbestos-related matters may have a major impact on our
plan or plans of reorganization
The Company has been one of many defendants in numerous lawsuits in which the
plaintiffs allege that they have injuries caused by 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 sold more than 20 years ago.
Due to the Cases, existing lawsuits are stayed and new lawsuits cannot be
commenced against us or the Company.

Our December 31, 2003, balance sheet includes a liability for estimated
asbestos-related costs of $610.1 million. In determining the amount of the
liability, we have included estimates only for the costs of claims through 2011
because we do not have a reasonable basis for estimating costs beyond that
period. However, the plan of reorganization process could require an estimation
of the Company's entire asbestos-related liability, which may go beyond 2011.
Additional asbestos-related claims are likely to be asserted against the Company
as a part of the Chapter 11 process. Management cannot 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 resolved as a part of the overall
Chapter 11 proceedings. Management will periodically continue to 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 the reevaluation of the
Company's asbestos-related liabilities or estimated insurance recoveries could
have a material impact on the Company's future financial statements.

We believe the Company has insurance coverage for a substantial portion of such
asbestos-related costs. Accordingly, our December 31, 2003 balance sheet
includes a long-term receivable for estimated insurance recoveries of $465.4
million. We believe that recovery of this amount is probable and additional
amounts may be recoverable in the future if additional claims are received.
However, we cannot assure you that all such amounts will be collected. The
timing and amount of future recoveries from the Company's insurance carriers
will depend on the pendency of the Cases and on the resolution of disputes
regarding coverage under the applicable insurance policies. During October 2001,
June 2003 and January 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 our
estimates of current and future asbestos-related insurance recoveries. The trial
court may hear additional issues from time to time. 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 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. It is possible that settlements with additional
insurers will occur. However, no assurance can be given that such settlements
will occur. Given the expected significance of probable future asbestos-related
payments, the receipt of timely and appropriate payments from the Company's
insurers is critical to a successful plan of reorganization and our long-term
liquidity.

- - Our profits and cash flows may be adversely impacted by the results of the
Company's hedging programs
From time to time in the ordinary course of business, the Company enters into
hedging transactions to limit its exposure resulting from price risks in respect
of primary aluminum prices, energy prices and foreign currency requirements. To
the extent that the prices for primary aluminum exceed the fixed or ceiling
prices established by the Company's hedging transactions or that energy costs or
foreign exchange rates are below the fixed prices, our profits and cash flow
would be lower than they otherwise would have been.

- - We operate in a highly competitive industry
Each of the segments of the aluminum industry in which the Company operates is
highly competitive. There are numerous companies who operate in the aluminum
industry. Certain of our competitors are substantially larger, have greater
financial resources than we do and may have other strategic advantages.

- - The Company is subject to political and regulatory risks in a number of
countries
The Company operates facilities in the United States and in a number of other
countries, including Australia, Canada, Ghana, Jamaica, and the United Kingdom.
While we believe the Company's relationships in the countries in which it
operates are generally satisfactory, we cannot assure you that future
developments or governmental actions in these countries will not adversely
affect the Company's operations particularly or the aluminum industry generally.
Among the risks inherent in the Company's operations are unexpected changes in
regulatory requirements, unfavorable legal rulings, new or increased taxes and
levies, and new or increased import or export restrictions. The Company's
operations outside of the United States are subject to a number of additional
risks, including but not limited to currency exchange rate fluctuations,
currency restrictions, and nationalization of assets.

Assuming that the Company were to complete the sale of its interests in and
related to Alpart, QAL, Gramercy/KJBC and Valco, these risks would be reduced.
However, no assurance can be given that these sales will occur.

ITEM 2. PROPERTIES

The locations and general character of the principal plants, mines, and other
materially important physical properties relating to the Company's operations
are described in Item 1 "- Business Operations" and those descriptions are
incorporated herein by reference. The Company owns in fee or leases all the real
estate and facilities used in connection with its business. Plants and equipment
and other facilities are generally in good condition and suitable for their
intended uses.

The Company's obligations under the DIP Facility are secured by, among other
things, liens on the Company's domestic plants. See Note 7 of Notes to
Consolidated Financial Statements for further discussion.

ITEM 3. LEGAL PROCEEDINGS

This section contains statements which constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. See
Item 1 of this Report for cautionary information with respect to such
forward-looking statements.

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 the plan of reorganization.
See Item 1. "Business - Reorganization Proceedings" for a discussion of the
reorganization proceedings. Such discussion is incorporated herein by reference.

ASBESTOS-RELATED LITIGATION

The Company is a defendant 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 manufactured for more than 20
years. The lawsuits are currently stayed by the Cases. The portion of Note 12 of
Notes to Consolidated Financial Statements under the heading "Asbestos
Contingencies" is incorporated herein by reference.

LABOR MATTERS

In connection with the USWA strike and subsequent lock-out by the Company,
certain allegations of ULPs were filed by the USWA with the NLRB. As previously
disclosed, the Company responded to all such allegations and believed they were
without merit. Twenty-two of the twenty-four allegations of ULPs brought against
the Company by the USWA were dismissed 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 million 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 the 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 to Consolidated Financial Statements for additional
discussion of agreements. 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 million 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 December 31, 2003. 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.

The portion of Note 12 of Notes to Consolidated Financial Statements under the
heading "Labor Matters" is incorporated herein by reference.

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 million. As such, the Company recorded a
$15.8 million charge in the fourth quarter of 2003 and a corresponding
obligation. 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 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 December 31, 2003 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 MATTERS

Various other lawsuits and claims are pending against the Company. 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 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.

See Note 12 of Notes to Consolidated Financial Statements for discussion of
additional litigation.

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

No matter was submitted to a vote of security holders of the Company during the
fourth quarter of 2003.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

There is no established public market for the Company's Common Stock, which is
held solely by Kaiser. The Company has not paid any dividends on its Common
Stock during the two most recent fiscal years. In accordance with the Code and
the DIP Facility, the Company is currently not permitted to pay any dividends or
purchase any of its stock.

Kaiser's non-qualified stock option plans, which are Kaiser's only stock option
plans, have been approved by Kaiser's stockholders. The number of shares of
Common Stock to be issued upon exercise of outstanding options, the weighted
average price per share of the outstanding options and the number of shares of
Common Stock available for future issuance under Kaiser's non-qualified stock
option plans at December 31, 2003, included under the heading "Incentive Plans"
in Note 9 of Notes to Consolidated Financial Statements is incorporated herein
by reference.

See Note 7 of Notes to Consolidated Financial Statements under the heading "Debt
Covenants and Restrictions" and the " Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
- - Capital Structure" for additional information, which information is
incorporated herein.

ITEM 6. SELECTED FINANCIAL DATA

Selected financial data for the Company is incorporated herein by reference to
the table at page 7 of this Report, to the table at page 22 of Management's
Discussion and Analysis of Financial Condition and Results of Operations, to
Note 17 of Notes to Consolidated Financial Statements, and to the Five-Year
Financial Data on pages 88 - 89 in this Report.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

REORGANIZATION PROCEEDINGS

The Company, Kaiser, and 24 of the Company's subsidiaries have filed separate
voluntary petitions with the Court for reorganization under Chapter 11 of 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.

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 Gramercy alumina refinery, the interests in Anglesey, the
interests in 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 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 holders of 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 Alpart, and KAAC, which owns
the Company's interests in 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 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
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 April 1, 2004 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 what, if any, alumina
sales contracts are transferred) pursuant to the Company's January 2004
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. Under the proposed Intercompany
Agreement, all such payments, 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. Additionally, the ACC and the
Futures' Representative have not yet reviewed, commented on or agreed to the
terms of the Intercompany Agreement. The Company currently expects the Court to
consider the proposed Intercompany Agreement at the regularly scheduled April
2004 or May 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.

In exploring the sale of its interest in and related to Alpart, Anglesey and
Gramercy/KJBC, 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.

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 and Gramercy/KJBC were likely and, therefore, that
recoverability should be evaluated differently at December 31, 2003. The change
in evaluation methodology is 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.

As more fully discussed in Notes 5 and 15 of Notes to Consolidated Financial
Statements, given uncertainties as to the ultimate consummation of these
transactions as well as the ultimate proceeds that may be received in respect of
a sale of the Company's interests in and related to Alpart and Valco, no
impairment charges have been recorded in the December 31, 2003 financial
statements. However, based on the minimum end of the range of expected proceeds
pursuant to the previously disclosed January 2004 agreement to sell the
Alpart-related interests, the amounts ultimately received from any such sale at
closing may be less than the current book value by approximately $50.0 million.
Additionally, based on the minimum purchase price pursuant to the MOU between
the Company and the GoG and the VRA in respect of the sale of the Company's
interests in Valco, it is possible that the amounts ultimately received may be
less than the Company's investment in Valco-related assets and liabilities by
$20.0 - $30.0 million. By contrast, in evaluating the recoverability of the
Company's basis in Gramercy/KJBC, the Company concluded that an impairment
charge of approximately $368.0 million was required as there were no offers that
were anywhere near the carrying value of the assets (see Note 5 of Notes to
Consolidated Financial Statements for a discussion of the impairment charge).
The actual amount of gain or loss if and when the sales are consummated may
differ from the foregoing amounts as a result of closing adjustments, changes in
economic circumstances and other matters.

OVERVIEW

The Company operates in the following business segments: Bauxite and alumina,
Primary aluminum, Fabricated products and Commodities marketing. 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.

The table below provides selected operational and financial information on a
consolidated basis with respect to the Company for the years ended December 31,
2003, 2002 and 2001. The following data should be read in conjunction with the
Company's consolidated financial statements and the notes thereto contained
elsewhere herein. See Note 17 of Notes to Consolidated Financial Statements for
further information regarding segments. (All references to tons are to metric
tons of 2,204.6 pounds.) Intersegment transfers are valued at estimated market
prices.

Year Ended December 31,
-----------------------------------------------
(In millions of dollars, except shipments and prices) 2003 2002 2001
- ------------------------------------------------------------------------- ------------- --------------- --------------
Fabricated Products:(1)
Shipments (000 tons) 168.9 170.7 192.5
Net Sales $ 597.8 $ 608.6 $ 737.5
Operating Income (Loss)(2) $ (25.7) $ (22.2) $ 5.0

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

Commodities, Corporate and Other:
Shipments (000 tons) -
Alumina
Third Party 2,929.0 2,626.6 2,582.7
Intersegment 176.6 343.9 422.8
------------- --------------- --------------
Total Alumina 3,105.6 2,970.5 3,005.5