MAXXAM INC, S-3/A, 1996-04-12

MAXXAM INC
S-3/A, 1996-04-12
LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES)

Previous: MCCORMICK & CO INC, 10-Q, 1996-04-12

Next: MCDONALDS CORP, DEF 14A, 1996-04-12

<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 12, 1996

REGISTRATION NO. 333-69
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

AMENDMENT NO. 2

TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

MAXXAM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

DELAWARE 95-2078752
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

5847 SAN FELIPE, SUITE 2600
HOUSTON, TEXAS 77057
(713) 975-7600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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

ANTHONY R. PIERNO
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
MAXXAM INC.
5847 SAN FELIPE, SUITE 2600
HOUSTON, TEXAS 77057
(713) 975-7600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

COPIES TO:

BERNARD L. BIRKEL HOWARD A. SOBEL
SENIOR CORPORATE COUNSEL KRAMER, LEVIN, NAFTALIS,
MAXXAM INC. NESSEN, KAMIN & FRANKEL
5847 SAN FELIPE, SUITE 2600 919 THIRD AVENUE
HOUSTON, TEXAS 77057 NEW YORK, NEW YORK 10022
(713) 975-7600 (212) 715-9100

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to
time after this Registration Statement becomes effective, as determined by
market conditions and other factors.

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

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

MAXXAM INC.

CROSS REFERENCE SHEET

(SHOWING LOCATION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM S-3
PURSUANT TO ITEM 501(B) OF REGULATION S-K)

<TABLE>
<C> <C> <S>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus........................... Outside Front Cover Page of
Prospectus; Prospectus Supplement

2. Inside Front and Outside Back Cover
Pages of Prospectus.................. Inside Front and Outside Back
Cover Pages of Prospectus;
Available Information;
Incorporation of Certain
Documents by Reference;
Prospectus Supplement
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges... The Company; Risk Factors;
Selected Historical Consolidated
Financial Data
4. Use of Proceeds....................... Use of Proceeds; Prospectus
Supplement
5. Determination of Offering Price....... Outside Front Cover Page of
Prospectus; Plan of Distribution;
Prospectus Supplement
6. Dilution.............................. *
7. Selling Security Holders.............. *
8. Plan of Distribution.................. Outside Front Cover Page of
Prospectus; Plan of Distribution;
Prospectus Supplement
9. Description of Securities to be Description of Securities;
Registered........................... Prospectus Supplement
10. Interests of Named Experts and
Counsel.............................. Legal Matters; Experts
11. Material Changes...................... Risk Factors; Selected Historical
Consolidated Financial Data;
Management's Discussion and
Analysis of Financial Condition
and Results of Operations;
Business; Management; Certain
Transactions; Prospectus
Supplement

12. Incorporation of Certain Information
by Reference......................... Incorporation of Certain Documents
by Reference

13. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.......................... *
</TABLE>
- --------
* Not Applicable
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

SUBJECT TO COMPLETION, DATED APRIL 12, 1996

PROSPECTUS

$200,000,000

MAXXAM INC.

DEBT SECURITIES

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

MAXXAM Inc., a Delaware corporation (the "Company"), may offer from time to
time secured or unsecured debt securities ("Securities") consisting of bonds,
debentures, notes, and/or other evidences of indebtedness in one or more
series, or any combination of the foregoing, at an aggregate initial offering
price not to exceed $200 million, at prices and on terms to be determined at or
prior to the time of sale.

Specific terms of the Securities in respect of which this Prospectus is being
delivered will be set forth in an accompanying Prospectus Supplement
("Prospectus Supplement"), together with the terms of the offering of the
Securities, the initial offering price and the net proceeds to the Company from
the sale thereof. The Prospectus Supplement will set forth, among other
matters, the following with respect to the particular Securities being offered:
the specific designation, aggregate principal amount, purchase price,
authorized denominations, maturity, rate or method of calculation of interest
and dates for payment thereof, any conversion, exchange, redemption, prepayment
or sinking fund provisions, any security provisions, and any other specific
terms of the Securities offered hereby not set forth herein under "Description
of Securities" in this Prospectus.

Any statement contained in the Prospectus will be deemed to be modified or
superseded by any inconsistent statement contained in the Prospectus
Supplement.

SEE "RISK FACTORS", COMMENCING ON PAGE 4 OF THIS PROSPECTUS, FOR A
DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS IN EVALUATING AN INVESTMENT IN THE SECURITIES.

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

THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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

The Company may sell Securities directly to purchasers or through agents
designated from time to time by the Company or to or through one or more
underwriters. If any agents of the Company or any underwriters are involved in
the sale of Securities in respect of which this Prospectus is being delivered,
the names of such agents or underwriters and any applicable commissions or
discounts will be set forth in the accompanying Prospectus Supplement.

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

This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.

The date of this Prospectus is April , 1996
<PAGE>

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information ("SEC Reports") filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549 and at the Commission's regional offices located at Seven World
Trade Center, Suite 1300, New York, New York 10048, and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials can be obtained from the Public Reference Section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The 12 1/2% Subordinated Debentures, the 14% Senior
Subordinated Reset Notes and the common stock, par value $.50 per share, of
the Company (the "MAXXAM Common Stock") are listed on the American Stock
Exchange, Inc. (the "AMEX") and the MAXXAM Common Stock is also listed on the
Pacific Stock Exchange and the Philadelphia Stock Exchange. Such reports,
proxy statements and other information concerning the Company can be inspected
at such exchanges.

This Prospectus constitutes a part of a Registration Statement on Form S-3
filed by the Company with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"). This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement and related exhibits for further
information with respect to the Company. Statements contained herein
concerning the provisions of any document are not necessarily complete and, in
each instance, reference is made to the copy of such documents filed as an
exhibit to the Registration Statement or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents heretofore filed by the Company with the Commission
pursuant to the Exchange Act are incorporated by reference in this Prospectus.

(1) The Company's Annual Report on Form 10-K for the year ended December
31, 1995.

All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of any
offering of the Securities shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of the filing of such documents.
The Company will provide without charge a copy of any and all of such
documents (exclusive of exhibits unless such exhibits are specifically
incorporated by reference therein) without charge to each person to whom a
copy of this Prospectus is delivered, upon written or oral request to MAXXAM
Inc. at 5847 San Felipe, Suite 2600, Houston, Texas 77057, Attention: Investor
Relations Coordinator (telephone number: (713) 267-3675). Copies of exhibits
will be made for a nominal fee, which covers the Company's copying costs.

Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained
herein or in any subsequently filed document which also is incorporated or
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.

2
<PAGE>

THE COMPANY

MAXXAM Inc. is a holding company, which through its subsidiaries engages in
aluminum, forest products, real estate, horse racing and related operations.
Unless the context otherwise requires, all references herein to the "Company"
or "MAXXAM" include MAXXAM Inc. and its majority owned and wholly owned
subsidiaries.

KAISER ALUMINUM

Kaiser Aluminum Corporation ("Kaiser"), through which the Company engages in
aluminum operations, accounts for a substantial portion of the Company's
revenues and operating results. The Company owns 50 million shares of Kaiser's
common stock ("Kaiser Common Stock"), which after giving pro forma effect to
the conversion of each of the 8,673,850 shares of PRIDES (see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Investing and Financing Activities--Aluminum
Operations") into a share of Kaiser Common Stock, would result in the Company
owning approximately 62.2% of Kaiser's Common Stock on a fully diluted basis.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Financial Condition and Investing and Financing Activities--
Aluminum Operations" for a description of a proposed recapitalization with
respect to Kaiser.

Kaiser, through its wholly owned subsidiary Kaiser Aluminum & Chemical
Corporation ("KACC"), engages in all principal aspects of the aluminum
industry--the mining of bauxite (the major aluminum-bearing ore), the refining
of bauxite into alumina (the intermediate material), the production of primary
aluminum and the manufacture of fabricated and semi-fabricated aluminum
products. Kaiser is one of the largest U.S. aluminum producers in terms of
primary smelting capacity and is the western world's second largest
producer/seller of alumina, accounting for approximately 7% and 8% of the
western world's alumina capacity and production, respectively, in 1995.
Kaiser's production levels of alumina and primary aluminum exceed its internal
processing needs, which allows it to be a major net seller of alumina
(approximately 2.0 million tons in 1995 or 72% of production) and primary
aluminum (approximately 272,000 tons in 1995 or 66% of production).

OTHER OPERATIONS

The Company engages in forest products operations through its wholly owned
subsidiary, MAXXAM Group Inc. ("MGI") and MGI's wholly owned subsidiaries, The
Pacific Lumber Company ("Pacific Lumber") and its wholly owned subsidiaries,
and Britt Lumber Co., Inc. ("Britt"). Pacific Lumber, which has been in
continuous operation for over 125 years, engages in all principal aspects of
the lumber industry--the growing and harvesting of redwood and Douglas-fir
timber, the milling of logs into lumber products and the manufacturing of
lumber into a variety of value-added finished products. Britt manufactures
redwood and cedar fencing and decking products from small diameter logs, a
substantial portion of which Britt acquires from Pacific Lumber. See
"Business--Forest Products Operations."

The Company, principally through its wholly owned subsidiaries, is also
engaged in the business of residential and commercial real estate investment
and development, primarily in Arizona, California, Texas and Puerto Rico. The
Company derives revenue and cash flow from the sale of its real estate
properties, rental income and payments received on real estate receivables.
See "Business--Real Estate and Other Operations." The Company, through wholly
owned subsidiaries, is the general partner of and holds directly or indirectly
approximately 78.8% of the equity in Sam Houston Race Park, Ltd. ("SHRP,
Ltd."). SHRP, Ltd. is the owner and operator of a Texas Class 1 horse racing
facility located in the greater Houston metropolitan area. See "Business--
Real Estate and Other Operations--Sam Houston Race Park."

3
<PAGE>

ORGANIZATIONAL CHART

A summary of MAXXAM's organizational structure is set forth below. The
percentages represent fully diluted equity ownership.

MAXXAM Inc.

------------------------------------------------------------------
62.2% 100% 100% 78.8%

Real
Kaiser MGI Estate SHRP, Ltd.

100%

----------------
100% 100%
KACC

Pacific Lumber
Britt

100%

Scotia Pacific

RISK FACTORS

Prospective purchasers of the Securities should carefully consider the
following risk factors, as well as the other information contained in, and
incorporated by reference in, this Prospectus and the accompanying Prospectus
Supplement, before making an investment in the Securities. Information
contained or incorporated by reference in this Prospectus or in the
accompanying Prospectus Supplement contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
which can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "will," "should" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy. See e.g. "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Aluminum
Operations--Strategy" and "--Industry Overview" and "Legal Proceedings." No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The following matters constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause actual
results to vary materially from those in such forward-looking statements.
Other factors could also cause actual results to vary materially from those in
such forward-looking statements.

STRUCTURAL SUBORDINATION AND ASSET ENCUMBRANCES

The Company conducts substantially all of its operations through its
subsidiaries. Unless otherwise indicated in the Prospectus Supplement, the
Company will be the sole obligor with respect to the Securities, and the
Securities will not be obligations of, or guaranteed by, any of the Company's
subsidiaries. In the event of a default under any indenture governing the
Securities, only the assets of the Company itself and the collateral, if any,
for the Securities will be available to the holders of Securities, and the
holders of the Securities will not have claims as creditors of the Company's
subsidiaries. As of February 29, 1996, the Company's assets (exclusive of
deferred income tax assets and other miscellaneous assets) consisted of (i)
$31.3 million in cash, cash equivalents and marketable securities, (ii) 50
million shares of Kaiser Common Stock, of which 28 million shares are pledged
to secure MGI's 11 1/4% Senior Subordinated Notes due 2003 (the "MGI Senior
Notes") and 12 1/4% Senior Secured Discount Notes due 2003 (the "MGI Discount
Notes" and, together with the MGI Senior Notes, the "MGI

4
<PAGE>

Notes"), (iii) the capital stock of MGI, (iv) the capital stock of certain
other directly wholly owned subsidiaries engaged in real estate operations
(the "Real Estate Subsidiaries"), and (v) the interests in SHRP, Ltd. held by
wholly owned subsidiaries of the Company. See "Business."

Any indebtedness of the Company's subsidiaries will be effectively senior to
the claims of the holders of Securities with respect to the assets of such
subsidiaries, and the rights of the Company and its creditors, including
holders of Securities, to realize upon the assets of any subsidiary upon such
subsidiary's liquidation or reorganization (and the consequent right of
holders of Securities to participate in those assets) will be subject to the
prior claims of such subsidiary's creditors and of the holders of certain
minority interests, except to the extent that the Company may itself be a
creditor with recognized claims against such subsidiary. In such case, the
Company's claims would still be subordinate to any security interest in the
assets of such subsidiary and any indebtedness of such subsidiary senior to
the claims of the Company.

As of February 29, 1996, the indebtedness of the Company and its
subsidiaries reflected on the Company's consolidated balance sheet was
approximately $1,688.0 million, of which approximately $1,646.2 million
consisted of indebtedness of the subsidiaries of the Company, and minority
interests were approximately $223.7 million. Additionally, at December 31,
1995, Kaiser was unconditionally obligated for $88.9 million of indebtedness
of a foreign joint venture. The Company and its subsidiaries frequently review
acquisition and investment opportunities, some of which may be material. The
Company and/or its subsidiaries could, in connection with such opportunities
or otherwise, incur additional indebtedness, which indebtedness could be
material in amount. Except as disclosed or incorporated by reference herein,
neither the Company nor any of its subsidiaries has any specific plans to
incur any material additional indebtedness in the near future, except for such
amounts as may be borrowed from time to time under existing bank credit
agreements. Approximately $787.3 million of such indebtedness of the Company's
subsidiaries is secured. In addition, the Company has guaranteed a $14.0
million revolving credit facility of one of its real estate subsidiaries. The
Company has also granted a lien on 28 million shares of Kaiser Common Stock as
security for the MGI Notes. The MGI Notes aggregated approximately $194.4
million as of February 29, 1996, and are scheduled to accrete to approximately
$225.7 million aggregate principal amount at August 1, 1998. The holders of
the MGI Notes will have priority over the holders of Securities and the other
direct creditors of the Company with respect to the 28 million shares of
Kaiser Common Stock (which represents 56% of the shares of Kaiser Common Stock
owned by the Company) that are pledged as security for the MGI Notes. The
capital stock of Pacific Lumber and Britt is also pledged as security for the
MGI Notes. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition and Investing and Financing
Activities."

ABILITY TO SERVICE INDEBTEDNESS

The Company is a holding company and its ability to service its indebtedness
will be largely dependent on dividends distributed to the Company from its
subsidiaries. As described in the following paragraph, the debt agreements of
both Kaiser and MGI contain significant restrictions on the amounts of funds
that could be paid in the form of dividends or loaned to the Company. Because
the substantial portion of the Company's consolidated results of operations
and cash flows are attributable to the operations of Kaiser and MGI, the
substantial portion of the Company's consolidated results of operations and
cash flows are generally not available to the Company. As of February 29,
1996, the Company (excluding its subsidiaries) had cash, cash equivalents and
marketable securities of approximately $31.3 million and approximately $14.7
million available from its subsidiaries, after giving effect to a March 1996
amendment to one of these credit agreements (see "Management's Discussion and
Analysis of Financial Condition and Results of Operation--Financial Condition
and Investing and Financing Activities--Real Estate and Other Operations").
The Company also has up to $25.0 million available to it pursuant to a demand
credit facility described below under which borrowings would be secured by a
portion of the Kaiser Common Stock the Company owns or other marketable
securities acceptable to the lender. Exclusive of its subsidiary companies,
the principal cash requirements of the Company are for debt service and
general and administrative expenses. During the three years ended December 31,
1995, the Company's corporate general and

5
<PAGE>

administrative expenses, net of cost reimbursements from its subsidiaries have
ranged between $11.0 million and $19.0 million per year. These costs often
include non-cash accruals for contingent liabilities. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Results of Operations--Other Items Not Directly Related to Industry Segments."

The Company expects that for at least the next two to three years the Real
Estate Subsidiaries will constitute the primary source of dividends to the
Company. The indentures and other agreements governing the indebtedness of MGI
and its subsidiaries and the indebtedness of Kaiser's principal subsidiary,
KACC, limit the amount of funds that can be paid in the form of dividends by
such entities or loaned to the Company. The indenture governing the MGI Notes
contains various covenants which, among other things, limit the payment of
dividends and restrict transactions between MGI and its affiliates. MGI paid
dividends of $4.8 million during 1995 and an additional $1.6 million in
January 1996. As of February 29, 1996, only $0.1 million of dividends could be
paid by MGI. The Company does not expect to receive a significant amount of
cash dividends from MGI at least for the next two to three years. Moreover,
MGI is itself a holding company and is dependent upon dividends distributed to
it from its subsidiaries, Pacific Lumber and Britt. Pacific Lumber is
restricted by the terms of the indenture governing its 10 1/2% Senior Notes
(the "Pacific Lumber Senior Notes") and its Amended and Restated Revolving
Credit Agreement (the "Pacific Lumber Credit Agreement") as to the amount of
funds that can be paid in the form of dividends or loans to MGI. Pacific
Lumber is also dependent upon its principal subsidiary, Scotia Pacific Holding
Company ("Scotia Pacific"), for a significant portion of its timber
requirements from which it generates the substantial portion of its operating
cash flow. Once the appropriate provision is made for expenditures for
operating and capital costs and current debt service, as provided in the
indenture (the "Timber Note Indenture") governing Scotia Pacific's 7.95%
Timber Collateralized Notes (the "Timber Notes"), and in the absence of
certain Trapping Events (as described in the Timber Note Indenture) or
outstanding judgments, the Timber Note Indenture does not limit monthly
distributions of available cash from Scotia Pacific to Pacific Lumber.
However, in the event Scotia Pacific's cash flows are not sufficient to
generate distributable funds to Pacific Lumber, Pacific Lumber's ability to
pay interest on the Pacific Lumber Senior Notes and to service its other
indebtedness would be materially impaired and MGI's ability to pay interest on
the MGI Notes would also be materially impaired. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Condition and Investing and Financing Activities--Forest Products Operations."
The operating performance of Pacific Lumber and Scotia Pacific are also
subject to certain regulatory developments that could adversely affect such
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Trends--Forest Products Operations" and "Business--
Forest Products Operations--Regulatory and Environmental Factors."

Kaiser's 1994 Credit Agreement (as defined below--see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Financial Condition and Investing and Financing Activities-- Aluminum
Operations") does not permit either Kaiser or KACC to pay any dividends on
their common stock. In addition, the indentures governing KACC's 9 7/8% Senior
Notes due 2002 (the "KACC Senior Notes") and KACC's 12 3/4% Senior
Subordinated Notes due 2003 (the "KACC Senior Subordinated Notes" and,
together with the KACC Senior Notes, the "KACC Notes") contain covenants
which, among other things, limit KACC's ability to pay cash dividends and
restrict transactions between KACC and its affiliates.

As of February 29, 1996, the Real Estate Subsidiaries had approximately
$14.6 million available for borrowing under various credit agreements, after
giving effect to a March 1996 amendment to one of these credit agreements (see
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Financial Condition and Investing and Financing Activities--Real
Estate and Other Operations"). All of such amount could be distributed to the
Company. As of February 29, 1996, the Real Estate Subsidiaries had total
assets of approximately $198.0 million, total liabilities of approximately
$57.4 million (including total indebtedness of approximately $18.6 million)
and combined net worth of approximately $140.6 million. The Real Estate
Subsidiaries had significant operating losses in each of the last several
years. The ability of the Real Estate Subsidiaries to distribute dividends to
the Company is not dependent upon their ability to generate any specified
level of income or cash flows from operations. As certain assets are sold and
related borrowings are repaid (according to predetermined amounts), the
remaining proceeds may be distributed to the Company under the

6
<PAGE>

terms of such credit agreements. The MCOP Credit Agreement (as defined and
described under "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Financial Condition and Investing and Financing
Activities--Real Estate and Other Operations") contains minimum net worth
requirements and limits dividend distributions to the Company.

The Company has entered into a demand loan and pledge agreement with
Custodial Trust Company providing for up to $25.0 million in borrowings (the
"Custodial Trust Agreement"). Any amounts drawn would be secured by Kaiser
Common Stock owned by the Company (or such other marketable securities
acceptable to the lender) having an initial market value (as defined therein)
of approximately three times the amount borrowed. Borrowings under such
agreement would bear interest at the prime rate plus 1% per annum. The
Custodial Trust Agreement contains a negative pledge on 22 million shares of
Kaiser Common Stock (the terms of which provide that the Company may sell
Kaiser Common Stock upon 24 hours notice to Custodial Trust Company). No
borrowings were outstanding as of the date of this Prospectus.

The Company believes that its existing cash, cash equivalents and marketable
securities (excluding such items owned by its subsidiaries), together with the
funds available to it, will be sufficient to fund its working capital
requirements for the next year. With respect to its long-term liquidity, the
Company believes that its existing cash and cash resources, together with cash
proceeds from the sale of assets, distributions from subsidiaries and net cash
proceeds from the sale of securities should be sufficient to meet its working
capital requirements and to pay interest on Securities which are sold.
However, these forward-looking statements are subject to risks and
uncertainties, including those described in this section and the "Risk
Factors" section of any Propsectus Supplement and there can be no assurance
that the Company's cash will be sufficient for such purposes or that the
Company would be able to refinance or repay at maturity Securities which are
sold.

LITIGATION

The Company and certain of its subsidiaries and affiliates are defendants
(or threatened defendants) in a variety of actions, including, but not limited
to (a) pending actions by and on behalf of the federal government with respect
to the insolvency of United Savings Association of Texas, (b) actions with
respect to certain transactions between certain Real Estate Subsidiaries and
Federated Development Company, a principal shareholder of the Company (see "--
Control of the Company"), (c) environmental and asbestos litigation involving
Kaiser, (d) a pending action involving the proposed recapitalization of
Kaiser, (e) pending actions under the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), relating to Pacific Lumber's former retirement
plan, and (f) state court antitrust proceedings and federal antitrust
investigations with respect to Kaiser. Certain of these actions make claims
for substantial damages against the Company, its subsidiaries or affiliates.
Adverse determinations and/or unfavorable settlements with respect to one or
more of such actions could materially adversely affect the financial
condition, results of operations and liquidity of the Company and the
Company's ability to pay principal and interest with respect to the
Securities. In particular, any payments made in actions relating to the
Company itself would reduce the cash the Company has available to service its
indebtedness, including the Securities. See "--Ability to Service
Indebtedness." For information concerning these litigation matters, see "Legal
Proceedings" and Note 9 to the Consolidated Financial Statements.

RISK FACTORS RELATING TO KAISER

Sensitivity to Prices

Kaiser accounts for the substantial portion of the Company's revenues and
operating results. Kaiser's operating results are sensitive to changes in the
prices of alumina, primary aluminum and fabricated aluminum products and also
depend to a significant degree upon the volume and mix of all products sold.
In addition, Kaiser's operating results during the past few years have been
greatly affected by KACC's hedging strategies. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Trends--
Aluminum Operations--Sensitivity to Prices and Hedging Programs" and
"Business--Aluminum Operations--Industry Overview."

7
<PAGE>

Environmental Matters and Litigation

Kaiser and KACC are subject to a wide variety of environmental laws and
regulations, to fines or penalties assessed for alleged breaches of such laws
and to claims and litigation based upon such laws. KACC is currently subject
to a number of lawsuits under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended by the Superfund Amendments
and Reauthorization Act of 1986 ("CERCLA"). Under CERCLA and other related
laws, past disposal of wastes, whether on-site or at other locations, may
result in the imposition of clean-up obligations by federal or state
regulatory authorities and/or claims by third parties. For a discussion of
certain KACC environmental litigation, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial Condition
and Investing and Financing Activities--Aluminum Operations," "Business--
Aluminum Operations--Kaiser--Environmental Matters" and "Legal Proceedings--
Kaiser Litigation--Environmental Litigation" and Note 9 to the Consolidated
Financial Statements. KACC is also a defendant in a substantial number of
lawsuits 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 KACC or exposure to products
containing asbestos produced or sold by KACC. For a discussion of Kaiser's
asbestos contingencies, see "Legal Proceedings--Kaiser Litigation--Asbestos-
related Litigation" and Note 9 to the Company's Consolidated Financial
Statements. See also "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Aluminum Operations."

Leverage

Kaiser is highly leveraged, with consolidated indebtedness of $758.1 million
and stockholders' equity of $57.7 million at December 31, 1995. Additionally,
at December 31, 1995, Kaiser was unconditionally obligated for $88.9 million
of indebtedness of a foreign joint venture. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Financial Condition
and Investing and Financing Activities--Aluminum Operations." Kaiser's
leverage is substantially greater than most of its North American competitors,
which generally have greater financial resources than Kaiser. Due to its
highly leveraged condition, Kaiser is more sensitive than less leveraged
companies to factors affecting its operations, including changes in the prices
for its products, the availability of power and the rates charged for power at
its various facilities, and general economic conditions.

Power Supply

Electric power represents an important production cost for KACC at its
aluminum smelters. In 1995, electric power purchase agreements for KACC's
facilities in the Pacific Northwest were successfully restructured, which
Kaiser anticipates will result in significantly lower electric power costs in
1996 and beyond for the Mead and Tacoma, Washington, smelters and the
Trentwood, Washington, rolling mill compared to 1995 electric power costs.
Contracts for the purchase of all power required by KACC's Mead and Tacoma
smelters and Trentwood rolling mill for 1996, and for approximately one-half
of such power for the period 1997-2000, have been finalized. Although these
agreements would significantly reduce KACC's power costs, two lawsuits were
filed in December 1995 against the Bonneville Power Administration ("BPA") by
various parties, one of which petitions for a review of the BPA's "Record of
Decision on Direct Service Industrial Customer Requirements Power Sales
Contract" issued on September 28, 1995, and one of which petitions for review
of, and to set aside, suspend, or modify the action of the BPA to decide to
offer five-year "block" power sales to its direct service industrial customers
("DSIs"). The effect of such lawsuits, if any, on KACC's new power purchase
contract with the BPA is not known. Certain of the DSIs, including KACC, have
intervened in the two lawsuits.

In 1995, KACC also entered into agreements with the BPA and with the
Washington Water Power Company ("WWP"), with terms ending in 2001, under which
the BPA and the WWP would provide to KACC transmission services for power
purchased from sources other than the BPA. The term of the transmission
services agreement with the BPA was subsequently extended for an additional
fifteen years, which extension has been challenged. Four lawsuits have been
filed against the BPA by various parties, which lawsuits either challenge the
BPA's record of decision offering such an extension agreement to the DSIs or
challenge the BPA's Business Plan Environmental Impact Statement record of
decision in connection therewith. Certain of the DSIs, including KACC, have
intervened in the four lawsuits.

8
<PAGE>

KACC manages, and owns a 90% interest in, the Volta Aluminium Company
Limited ("Valco") aluminum smelter in Ghana. Power for the Valco smelter is
supplied under an agreement which expires in 2017. The agreement indexes two-
thirds of the price of the contract quantity to the market price of primary
aluminum. The agreement also provides for a review and adjustment of the base
power rate and the price index every five years. The most recent review was
completed in April 1994 for the 1994-1998 period. Valco has entered into an
agreement with the government of Ghana under which Valco has been assured
(except in cases of force majeure) that it will receive sufficient electric
power to operate at its current level of three and one-half potlines through
December 31, 1996. Kaiser believes that, assuming normal rainfall during 1996,
Valco should have available sufficient electric power to operate at its
current level through 1996, although no assurance can be given that such power
will be available. KACC also has a 49% interest in the Anglesey Aluminium
Limited aluminum smelter and port facility in Holyhead, Wales. Power for the
Anglesey aluminum smelter is supplied under an agreement which expires in
2001.

See "Business--Aluminum Operations--Kaiser--Primary Aluminum Products."

REGULATORY AND ENVIRONMENTAL FACTORS--FOREST PRODUCTS OPERATIONS

Regulatory and environmental factors play a significant role in the
Company's forest products operations. Pacific Lumber's operations are subject
to a variety of California and federal laws and regulations dealing with
timber harvesting, endangered species and air and water quality. These laws
and regulations are periodically modified and there can be no assurance that
certain pending or future legislation, governmental regulations or judicial or
administrative decisions would not materially adversely affect Pacific Lumber.
See also "Business--Forest Products Operations--Regulatory and Environmental
Factors" and "Legal Proceedings--Pacific Lumber Litigation" for a description
of a pending critical habitat designation, sustained yield regulations,
pending and proposed legislative matters, certain pending litigation and other
regulatory and legal challenges to Pacific Lumber's timber harvesting plans
and practices, certain of which could have a material adverse effect on the
Company's liquidity, consolidated financial position and results of
operations.

CONTROL OF THE COMPANY

Mr. Charles E. Hurwitz, the Chairman of the Board, Chief Executive Officer
and President of the Company, and a wholly owned subsidiary of Federated
Development Company ("Federated"), a New York business trust of which Mr.
Hurwitz is Chairman of the Board and Chief Executive Officer and which is
wholly owned by Mr. Hurwitz, members of his immediate family and trusts for
the benefit thereof, collectively own approximately 60.7% of the aggregate
voting power of the Company. Accordingly, Mr. Hurwitz will be able to control
the election of the directors of the Company and to determine the corporate
and management policies of the Company, including decisions relating to any
merger or acquisition of the Company, the sale of substantially all of the
assets of the Company and other significant corporate transactions.

ABSENCE OF COVENANT PROTECTION

The indenture governing the Securities does not limit the Company's ability
to incur additional indebtedness, or to grant liens on its assets to secure
indebtedness, to pay dividends or to repurchase shares of its capital stock.
Such indenture does not contain any provisions specifically intended to
protect holders of the Securities in the event of a future highly leveraged
transaction involving the Company. Any covenants applicable to any Securities
which are offered will be set forth in the Prospectus Supplement and any
supplemental indenture.

ABSENCE OF PRIOR MARKET; PRICE OF SECURITIES

Any Securities which are sold will constitute a new issue of securities with
no established trading market and there can be no assurance that an active
public market for such Securities will develop or as to the liquidity of any
such market or that holders of such Securities will be able to sell them at
prices acceptable to them. If

9
<PAGE>

such a market develops, future trading prices of such Securities will depend
upon many factors, including, among other things, prevailing interest rates,
the Company's results of operations and the market for similar securities. It
is possible that such Securities could trade at a discount from their face
value.

The Securities are likely to be sold into markets which have fewer
participants, involve a smaller amount of securities than certain other
capital markets and have historically been subject to disruptions that have
caused substantial volatility in prices. There can be no assurance that the
market for any Securities which are sold will not be subject to similar
disruptions that will render them difficult to sell.

USE OF PROCEEDS

The Company intends to apply the net proceeds from the sale of the
Securities to its general funds to be used to retire outstanding debt, for
working capital and for general corporate and other purposes. Any specific
allocations of the proceeds to a particular purpose that has been made at the
date of any Prospectus Supplement will be described therein.

10
<PAGE>

CAPITALIZATION

The following table summarizes the consolidated and parent only
(unconsolidated) capitalization of the Company at December 31, 1995. This
table should be read in conjunction with the Audited Consolidated Financial
Statements of the Company and the Notes thereto appearing elsewhere herein.

<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------
PARENT
CONSOLIDATED ONLY
------------ ------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
SHORT-TERM DEBT:
Current maturities of long-term debt.................. $ 25.1 (1) $ .2
-------- ------
LONG-TERM DEBT:
The Company:
12 1/2% Subordinated Debentures due December 15,
1999 (2)........................................... 16.5 16.5
14% Senior Subordinated Reset Notes due May 20,
2000............................................... 25.0 25.0
Other............................................... .1 .1
Aluminum Operations................................... 749.2 --
Forest Products Operations............................ 764.3 --
Real Estate and Other Operations...................... 30.0 --
-------- ------
Total long-term debt.............................. 1,585.1 41.6
-------- ------
Minority interests...................................... 223.2 --
STOCKHOLDERS' DEFICIT:
Preferred stock....................................... .3 .3
Common stock.......................................... 5.0 5.0
Additional capital.................................... 155.0 155.0
Accumulated deficit (3)............................... (208.5) (208.5)
Pension liability adjustment.......................... (16.1) (16.1)
Treasury stock........................................ (19.5) (19.5)
-------- ------
Total Stockholders' Deficit......................... (83.8) (83.8)
-------- ------
Total Capitalization.............................. $1,749.6 $(42.0)
======== ======
</TABLE>
- --------

(1) Reflects current maturities of approximately $8.9 million, $14.2 million,
$1.8 million and $0.2 million, relating to the Company's aluminum
operations, forest products operations, real estate and other operations
and other Company debt, respectively.

(2) Net of discount of $1.1 million.
(3) Stockholders' deficit reflects aggregate one time charges of approximately
$417.7 million relating to the implementation of SFAS 106, SFAS 109 and
SFAS 112. See Note 1 to "Selected Historical Consolidated Financial Data."

11
<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected historical consolidated financial data should be read
in conjunction with the Consolidated Financial Statements of the Company and
the Notes thereto appearing elsewhere in this Prospectus (including the
unconsolidated Parent only, condensed financial information of the Company as
described on the index to the accompanying financial statements on page F-1 of
this Prospectus), and the information contained in "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
historical consolidated financial data as of and for the years ended December
31, 1995, 1994, 1993, 1992 and 1991, are derived from the Company's
Consolidated Financial Statements which have been audited by independent
public accountants.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales.............. $2,565.2 $2,115.7 $2,031.1 $2,202.6 $2,254.5
Cost of products sold.. 1,990.9 1,817.9 1,787.6 1,786.9 1,735.6
Gross profit........... 574.3 297.8 243.5 415.7 518.9
Depreciation and
depletion............. 120.9 121.1 120.8 111.4 106.1
Selling,
administrative,
research and
development, and
general............... 195.8 169.4 183.0 173.5 177.3
Operating income
(loss)................ 257.6 7.3 (96.1) 130.8 235.5
Interest expense....... 181.3 176.9 185.1 195.6 210.9
Income (loss) before
income taxes, minority
interests,
extraordinary loss and
cumulative effect of
changes in accounting
principles............ 94.5 (171.8) (211.4) (13.2) 67.4
Income (loss) before
extraordinary loss and
cumulative effect of
changes in accounting
principles............ 57.5 (116.7) (131.9) (7.3) 57.5
Net income (loss)...... 57.5 (122.1) (600.2)(1) (7.3) 57.5
Ratio of earnings to
fixed charges (2)..... 1.3x -- -- -- 1.3x
Fixed charge coverage
deficiency (2)........ -- 210.4 226.6 23.0 --
Other Data:
Capital expenditures... 97.7 89.3 86.2 132.7 130.9
Summary cash flow
information (3):
Cash provided by (used
for) operating
activities............ 137.9 4.5 52.1 26.7 113.3
Cash provided by (used
for) investing
activities............ (75.4) (67.9) 44.6 (84.7) (138.0)
Cash provided by (used
for) financing
activities............ (42.9) 64.1 (94.7) 34.8 63.4
EBITDA (4)............. 378.5 128.4 24.7 242.2 341.6
Ratio of EBITDA to
interest expense (5).. 2.1x 0.7x 0.1x 1.2x 1.6x
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital........ $ 546.8 $ 413.5 $ 414.3 $ 466.0 $ 424.2
Total assets........... 3,832.3 3,690.8 3,572.0 3,198.8 3,215.0
Long-term debt, less
current portion....... 1,585.1 1,582.5 1,567.9 1,592.7 1,551.9
Accrued postretirement
benefit............... 742.6 743.1 720.1 -- --
Other noncurrent
liabilities........... 680.3 618.4 650.3 418.3 355.5
Minority interests..... 223.2 344.3 224.3 176.7 179.2
Total stockholders'
equity (deficit)...... (83.8) (275.3) (167.9)(1) 443.9 459.6
</TABLE>

(footnotes on the following page)

12
<PAGE>

- --------
(1) As of January 1, 1993, the Company adopted SFAS 109, SFAS 106 and SFAS 112
as defined and more fully described in Notes 5 and 6 to the Company's
Audited Consolidated Financial Statements. The cumulative effect of the
change in accounting principle for the adoption of SFAS 109 increased
results of operations by $26.6 million. The cumulative effect of the
change in accounting principle for the adoption of SFAS 106 reduced
results of operations by $437.9 million, net of related benefits for
minority interests of $63.6 million and income taxes of $236.8 million.
The cumulative effect of the change in accounting principle for the
adoption of SFAS 112 reduced results of operations by $6.4 million, net of
related benefits for minority interests of $1.0 million and income taxes
of $3.4 million. These accounting methods had no effect on the Company's
cash outlays for postretirement and postemployment benefits, nor does the
cumulative effect of the changes in accounting principles affect the
Company's compliance with its existing debt covenants.

(2) For the purpose of calculating the ratio of earnings to fixed charges,
"earnings" consist of the sum of (i) income (loss) before income taxes,
minority interests, extraordinary item and cumulative effect of changes in
accounting principles of the Company and its consolidated subsidiaries,
and (ii) fixed charges, excluding capitalized interest and preferred stock
dividend requirements of subsidiaries. "Fixed charges" consist of the sum
of interest expense, amortization of deferred financing costs, capitalized
interest, the portion of rental expense representative of an interest
factor and preferred stock dividend requirements of subsidiaries.

(3) Reference is made to the Statement of Cash Flows contained in the
Company's Consolidated Financial Statements contained elsewhere in this
Prospectus for a complete presentation of cash flows from operating,
investing and financing activities prepared in accordance with generally
accepted accounting principles. Because the Company operates through
subsidiaries and limits exist on dividends payable by such subsidiaries to
the Company, such cash flows would generally not be available to service
the Company's obligations on the Securities. See "Risk Factors--Ability to
Service Indebtedness" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition and
Investing and Financing Activities."

(4) EBITDA means operating income plus depreciation and depletion. EBITDA is
not intended to represent cash flow, an alternative to net income or any
other measure of performance in accordance with generally accepted
accounting principles; it is included here because management believes
that certain investors find it a useful tool in the determination of an
entity's ability to service debt.

(5) The ratio of EBITDA to interest expense is included here because
management believes that certain investors find it a useful tool in the
determination of an entity's ability to service debt. Due to dividend
limitations with respect to subsidiaries, such ratio is not necessarily
indicative of the Company's ability to service the Securities. See "Risk
Factors--Ability to Service Indebtedness."

13
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

RESULTS OF OPERATIONS

The Company operates in three principal industries: aluminum, through its
majority owned subsidiary, Kaiser, a fully integrated aluminum producer;
forest products, through MGI and its wholly owned subsidiaries, principally
Pacific Lumber and Britt; real estate investment and development, managed
through MAXXAM Property Company; and other commercial operations through
various other wholly owned subsidiaries. The following should be read in
conjunction with the Company's Consolidated Financial Statements and the Notes
thereto which are contained elsewhere herein.

ALUMINUM OPERATIONS

Aluminum operations account for the substantial portion of the Company's
revenues and operating results. Kaiser's operating results are sensitive to
changes in 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 and on hedging strategies. Kaiser, through its principal
subsidiary, KACC, operates in two business segments: bauxite and alumina, and
aluminum processing. The following table presents selected operational and
financial information for the years ended December 31, 1995, 1994 and 1993.
The information presented in the table is in millions of dollars except
shipments and prices.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Shipments:(1)
Alumina......................................... 2,040.1 2,086.7 1,997.5
Aluminum products:
Primary aluminum.............................. 271.7 224.0 242.5
Fabricated aluminum products.................. 368.2 399.0 373.2
-------- -------- --------
Total aluminum products..................... 639.9 623.0 615.7
======== ======== ========
Average realized sales price:
Alumina (per ton)............................... $ 208 $ 169 $ 169
Primary aluminum (per pound).................... .81 .59 .56
Net sales:
Bauxite and alumina:
Alumina....................................... $ 424.8 $ 352.8 $ 338.2
Other(2)(3)................................... 89.4 79.7 85.2
-------- -------- --------
Total bauxite and alumina................... 514.2 432.5 423.4
-------- -------- --------
Aluminum processing:
Primary aluminum.............................. 488.0 292.0 301.7
Fabricated aluminum products.................. 1,218.6 1,043.0 981.4
Other(3)...................................... 17.0 14.0 12.6
-------- -------- --------
Total aluminum processing................... 1,723.6 1,349.0 1,295.7
-------- -------- --------
Total net sales........................... $2,237.8 $1,781.5 $1,719.1
======== ======== ========
Operating income (loss)........................... $ 216.5 $ (50.3) $ (117.4)
======== ======== ========
Income (loss) before income taxes, minority
interests, extraordinary item and cumulative
effect of changes in accounting principles....... $ 108.7 $ (145.8) $ (201.7)
======== ======== ========
Capital expenditures.............................. $ 79.4 $ 70.0 $ 67.7
======== ======== ========
</TABLE>
- --------
(1) Shipments are expressed in thousands of metric tons. A metric ton is
equivalent to 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests in
consolidated subsidiaries.

14
<PAGE>

Net Sales

Bauxite and alumina. Net sales to third parties for the bauxite and alumina
segment increased 19% in 1995 compared to 1994 and increased 2% in 1994
compared to 1993. Revenue from alumina increased 20% in 1995 compared to 1994
due to higher average realized prices, partially offset by lower shipments.
Revenue from alumina increased 4% in 1994 compared to 1993 because of
increased shipments. The remainder of the segment's sales revenues was from
sales of bauxite, which remained about the same throughout the three-year
period, and the portion of sales of alumina attributable to the minority
interest in Alumina Partners of Jamaica ("Alpart").

Aluminum processing. Net sales to third parties for the aluminum processing
segment increased 28% in 1995 compared to 1994 and increased 4% in 1994
compared to 1993. The bulk of this segment's sales represents Kaiser's primary
aluminum and fabricated aluminum products, with the remainder representing the
portion of sales of primary aluminum attributable to the minority interest in
Kaiser's 90%-owned Volta Aluminium Company Limited ("Valco") aluminum smelter
in Ghana.

Revenue from primary aluminum increased 67% in 1995 compared to 1994 due
primarily to higher average realized prices and higher shipments. The higher
shipments of primary aluminum were due to increased production at Kaiser's
smelters in the Pacific Northwest and Valco, and reduced intracompany
consumption of primary aluminum at Kaiser's fabricated products units. The
increase in revenue for 1995 was partially offset by decreased shipments
caused by a strike of the United Steelworkers of America (the "USWA")
discussed below. In 1995, Kaiser's average realized price from sales of
primary aluminum was approximately $.81 per pound, compared to the average
Midwest United States transaction price of approximately $.86 per pound.

Revenue from primary aluminum decreased 3% in 1994 compared to 1993 as
higher average realized prices were more than offset by lower shipments.
Average realized prices in 1994 reflected the defensive hedging of primary
aluminum prices with respect to 1994 shipments, which was initiated prior to
then-recent improvements in metal prices. Shipments in 1994 reflected
production curtailments at Kaiser's smelters in the Pacific Northwest and
Valco. Shipments of primary aluminum to third parties were approximately 42%
of total aluminum products shipments in 1995 compared to approximately 36% in
1994 and 39% in 1993.

Revenue from fabricated aluminum products increased 17% in 1995 compared to
1994 due to higher average realized prices, partially offset by lower
shipments for most of these products. Revenue from fabricated aluminum
products increased 6% in 1994 compared to 1993, principally due to increased
shipments of most of these products.

Operating Income (Loss)

Improved operating results for 1995 were partially offset by expenses
related to Kaiser's smelting joint venture in China (see "--Financial
Condition and Investing and Financing Activities-Aluminum Operations"),
accelerated expenses on Kaiser's micromill technology, maintenance expenses as
a result of an electrical lightning strike at Kaiser's Trentwood, Washington,
facility, and a work slowdown at Kaiser's 49%-owned Kaiser Jamaica Bauxite
Company prior to the signing of a new labor contract. The combined impact of
these expenditures on the results for 1995 was approximately $6.0 million (on
a pre-tax basis). Operating results for 1995 were further impacted by (i) an
eight-day strike of the USWA at Kaiser's five major domestic locations, (ii) a
six-day strike of the National Workers Union at Kaiser's 65%-owned Alpart
alumina refinery, and (iii) a four-day disruption of alumina production at
Alpart caused by a boiler failure. The combined impact of these events on the
results for 1995 was approximately $17.0 million (on a pre-tax basis),
principally from lower production volume and other related costs. In 1993,
Kaiser recorded pre-tax charges of $35.8 million relating to the restructuring
of aluminum operations (see "--Aluminum processing" below) and approximately
$19.4 million in the fourth quarter of 1993 because of reductions in the
carrying value of its inventories caused principally by prevailing lower
prices for alumina, primary aluminum and fabricated aluminum products.

15
<PAGE>

Kaiser's corporate general and administrative expenses of $82.3 million,
$67.6 million and $72.6 million in 1995, 1994 and 1993, respectively, were
allocated by the Company to the bauxite and alumina and aluminum processing
segments based upon those segments' ratio of sales to unaffiliated customers.

Bauxite and alumina. Operating income for the bauxite and alumina segment
was $37.2 million in 1995, compared to operating income of $5.6 million in
1994 and an operating loss of $20.1 million in 1993. In 1995 compared to 1994,
operating income increased principally due to higher revenue, partially offset
by the effect of the strikes and boiler failure. In 1994 compared to 1993,
operating income was favorably affected by increased shipments and lower
manufacturing cost.

Aluminum processing. Operating income for the aluminum processing segment
was $179.3 million in 1995, compared to operating losses of $55.9 million in
1994 and operating losses of $97.3 million in 1993. Operating results improved
in 1995 compared to 1994, principally due to higher revenue, partially offset
by the effect of the USWA strike. The decrease in operating loss in 1994
compared to 1993 was caused principally by a nonrecurring $35.8 million
restructuring charge recorded in 1993, as described below, increased shipments
of fabricated aluminum products, and higher average realized prices of primary
aluminum, partially offset by lower shipments of primary aluminum. In October
1993, KACC announced that it was restructuring its flat-rolled products
operation at its Trentwood plant to reduce that facility's annual operating
costs by at least $50.0 million after full implementation. Additionally, KACC
implemented a plan to streamline its casting operations, which included the
shutdown of two facilities located in Ohio. This entire restructuring was
successfully completed by the end of 1995. The pre-tax charge for this
restructuring of $35.8 million included $25.2 million for pension, severance
and other termination benefits at Trentwood; $8.0 million related to casting
facilities; and $2.6 million for various other items. Other contributing
factors to the 1993 operating results were lower production at Kaiser's
smelters in the Pacific Northwest as a result of the removal of three
reduction potlines from production in January 1993 in response to the
reduction by the BPA during the first quarter of 1993 of the amount of power
it normally provides to Kaiser, and the increased cost of substitute power in
such quarter. Additionally, during 1993, Kaiser realized above-market prices
for significant quantities of primary aluminum sold forward in prior periods
under long-term contracts.

Income (Loss) Before Income Taxes, Minority Interests, Extraordinary Item and
Cumulative Effect of Changes in Accounting Principles

Income before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles for 1995, as compared to
the loss for 1994, resulted from the improvement in operating income
previously described, partially offset by other charges, principally related
to the establishment of additional litigation reserves. See "--Financial
Condition and Investing and Financing Activities--Aluminum Operations." The
decrease in the loss before income taxes, minority interests, extraordinary
item and cumulative effect of changes in accounting principles in 1994
compared to 1993 resulted from the reduction in operating losses previously
described.

As described in Note 1 to the Consolidated Financial Statements, Kaiser's
cumulative losses in the first and second quarters of 1993, principally due to
the implementation of the new accounting standard for postretirement benefits
other than pensions as described in Note 6 to the Consolidated Financial
Statements, eliminated Kaiser's equity with respect to its common stock;
accordingly, the Company recorded 100% of Kaiser's losses in the third and
fourth quarters of 1993 and all of 1994, without regard to the minority
interests represented by Kaiser's other common stockholders (as described in
Note 7 to the Consolidated Financial Statements). The Company recorded 100% of
Kaiser's earnings in 1995 and will continue to do so until such time as the
cumulative losses recorded by the Company with respect to Kaiser's minority
common stockholders are recovered.

Information concerning net sales, operating income (loss) and assets
attributable to certain geographic areas and industry segments is set forth in
Note 11 to the Consolidated Financial Statements.

16
<PAGE>

FOREST PRODUCTS OPERATIONS

The Company's forest products operations are conducted by MGI through its
principal operating subsidiaries, Pacific Lumber and Britt. MGI's business is
seasonal in that the forest products business generally experiences lower
first quarter sales due largely to the general decline in construction-related
activity during the winter months. The following table presents selected
operational and financial information for the years ended December 31, 1995,
1994 and 1993.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Shipments:
Lumber:(1)
Redwood upper grades........................... 46.5 52.9 68.3
Redwood common grades.......................... 216.7 218.4 184.7
Douglas-fir upper grades....................... 7.4 8.6 10.7
Douglas-fir common grades and other............ 76.0 66.3 46.4
-------- -------- --------
Total lumber.................................. 346.6 346.2 310.1
======== ======== ========
Logs(2)........................................ 12.6 17.7 18.6
======== ======== ========
Wood chips(3).................................. 214.0 210.3 156.8
======== ======== ========
Average sales price:
Lumber:(4)
Redwood upper grades........................... $ 1,495 $ 1,443 $ 1,275
Redwood common grades.......................... 477 460 469
Douglas-fir upper grades....................... 1,301 1,420 1,218
Douglas-fir common grades...................... 392 444 447
Logs(4)......................................... 440 615 704
Wood chips(5)................................... 102 83 81
Net sales:
Lumber, net of discount......................... $ 211.3 $ 216.5 $ 202.6
Logs............................................ 5.6 10.9 13.1
Wood chips...................................... 21.7 17.4 12.7
Cogeneration power.............................. 2.5 3.5 3.8
Other........................................... 1.5 1.3 1.3
-------- -------- --------
Total net sales............................... $ 242.6 $ 249.6 $ 233.5
======== ======== ========
Operating income................................. $ 74.3 $ 79.1 $ 54.3
======== ======== ========
Operating cash flow(6)........................... $ 99.6 $ 103.8 $ 78.8
======== ======== ========
Income (loss) before income taxes, minority
interests, extraordinary item and cumulative
effect of changes in accounting principles...... $ 6.4 $ (5.2) $ (17.7)
======== ======== ========
Capital expenditures............................. $ 9.9 $ 11.3 $ 11.1
======== ======== ========
</TABLE>
- --------
(1) Lumber shipments are expressed in millions of board feet.
(2) Log shipments are expressed in millions of feet, net Scribner scale.
(3) Wood chip shipments are expressed in thousands of bone dry units of 2,400
pounds.
(4) Dollars per thousand board feet.
(5) Dollars per bone dry unit.

(6) Operating income plus depletion and depreciation, also referred to as
"EBITDA." See Note 4 of the Notes to Selected Historical Consolidated
Financial Data.

17
<PAGE>

Shipments

Lumber shipments to third parties in 1995 were essentially unchanged from
1994. Increased shipments of common grade Douglas-fir lumber were mostly
offset by decreased shipments of both upper and common grades of redwood
lumber. Log shipments in 1995 were 12.6 million feet (net Scribner scale), a
decrease of 5.1 million feet from 1994 shipments.

Lumber shipments to third parties in 1994 increased by 12% compared to 1993.
Increased shipments of redwood common lumber and common grade Douglas-fir and
other lumber were partially offset by decreased shipments of upper grade
redwood lumber. Log shipments in 1994 were 17.7 million feet, a decrease of .9
million feet from 1993 shipments.

Old growth trees constitute Pacific Lumber's principal source of upper grade
redwood lumber. Due to the severe restrictions on Pacific Lumber's ability to
harvest virgin old growth timber on its property (see "--Trends--Forest
Products Operations"), Pacific Lumber's supply of upper grade lumber has
decreased in some premium product categories. Pacific Lumber has been able to
lessen the impact of these decreases by augmenting its production facilities
to increase its recovery of upper grade lumber from smaller diameter logs and
increasing production capacity for manufactured upper grade lumber products
through its end and edge glue facility (which was expanded during 1994).
However, unless Pacific Lumber is able to sustain the harvest level of old
growth trees, Pacific Lumber expects that its production of premium upper
grade lumber products will decline and that its manufactured lumber products
will constitute a higher percentage of its shipments of upper grade lumber
products. See also "--Trends--Forest Products Operations" and "Risk Factors--
Regulatory and Environmental Factors--Forest Products Operations."

Net Sales

Revenues from net sales for 1995 decreased compared to 1994. Decreased
shipments of upper grade redwood lumber, lower average realized prices for
common grade Douglas-fir lumber and logs, decreased shipments of logs and
redwood common lumber and lower sales of electrical power were largely offset
by increased shipments of common grade Douglas-fir lumber, increased sales of
wood chips and higher average realized prices for both common and upper grades
of redwood lumber.

Revenues from net sales for 1994 increased compared to 1993. This increase
was principally due to increased shipments of redwood common lumber, an
increase in the average realized price of upper grade redwood lumber,
increased shipments of common grade Douglas-fir and other lumber and increased
sales of wood chips, partially offset by decreased shipments of upper grade
redwood lumber, a decrease in the average realized price of redwood common
lumber and a decrease in the average realized price of log sales. The increase
in sales of wood chips reflects higher demand from pulp mills.

Operating Income

Operating income for 1995 decreased compared to 1994. This decrease was
primarily due to lower sales of lumber, higher cost of lumber sales and lower
sales of logs and electrical power, partially offset by increased sales of
wood chips and higher gross margins on wood chip sales. Cost of lumber sales
for 1995 was unfavorably impacted by higher purchases of logs from third
parties, partially offset by improved sawmill productivity. Cost of goods sold
for 1995 and 1993 was reduced by $1.5 million and $1.2 million, respectively,
of business interruption insurance proceeds for the settlement of claims
related to an earthquake in April 1992.

Operating income for 1994 increased compared to 1993. This increase was
principally due to higher sales of lumber and wood chips, lower purchases of
lumber and logs from third parties, improved sawmill productivity and reduced
overhead costs. Pacific Lumber arranged for the purchase of a significant
number of logs early in 1993 in response to concerns regarding inclement
weather conditions hindering logging activities on Pacific Lumber's
timberlands during the first five months of 1993. The cost associated with the
purchase of logs from third parties significantly exceeds the Company's cost
to harvest its own timber. As a result of the Company's last-in, first-out
("LIFO") methodology of accounting for inventories, a substantial portion of
the additional cost associated with the purchased logs was charged to cost of
sales in the third quarter of 1993.

18
<PAGE>

Logging costs have increased primarily due to the harvest of smaller
diameter logs and, to a lesser extent, compliance with environmental
regulations relating to the harvesting of timber and litigation costs incurred
in connection with certain timber harvesting plans filed by Pacific Lumber.
See "--Trends--Forest Products Operations." During the past few years, Pacific
Lumber has significantly increased its production capacity for manufactured
lumber products by assembling knot-free pieces of common grade lumber into
wider and longer pieces in Pacific Lumber's end and edge glue plant. This
manufactured lumber results in a significant increase in lumber recovery and
produces a standard size upper grade product which is sold at a premium price
compared to common grade products of similar dimensions. Pacific Lumber has
instituted a number of measures at its sawmills during the past several years
designed to enhance the efficiency of its operations such as expansion of its
manufactured lumber facilities and other improvements in lumber recovery,
automated lumber handling and the modification of its production scheduling to
maximize cogeneration power revenues.

Income (Loss) Before Income Taxes, Minority Interests, Extraordinary Item and
Cumulative Effect of Changes in Accounting Principles

Income before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles was $6.4 million for
1995 compared to a loss of $5.2 million in 1994. This improvement resulted
from increased investment, interest and other income reported for 1995
compared to 1994, partially offset by the decrease in operating income as
previously described. Investment, interest and other income for 1994 included
the loss of $21.2 million for the settlement of litigation, partially offset
by the receipt of a $7.2 million franchise tax refund, both of which are
described further in the following paragraph and in Note 1 to the Consolidated
Financial Statements. Additionally, investment, interest and other income
included net gains on marketable securities of $4.9 million for 1995, an
increase of $2.9 million as compared to 1994.

The loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles decreased for 1994 as
compared to 1993. This decrease resulted from the increase in operating income
and decreased interest expense, partially offset by the loss on litigation
settlement. In addition, investment, interest and other income (expense) for
1994 includes the receipt of a franchise tax refund of $7.2 million (the
substantial portion of which represented interest) from the State of
California and net gains on marketable securities of $2.0 million. The
litigation settlement in the second quarter of 1994 resulted in a pre-tax loss
of $21.2 million which consists of Pacific Lumber's $14.8 million cash payment
to the settlement fund, a $2.0 million accrual for certain contingent claims,
and $4.4 million of related legal fees. Interest expense decreased due to
lower interest rates resulting from the refinancing of the long-term debt of
Pacific Lumber and MGI in March and August of 1993, respectively. Investment,
interest and other income for 1993 includes net gains on marketable securities
of $6.7 million.

REAL ESTATE AND OTHER OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1995 1994 1993
----- ----- -----
(IN MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Net sales................................................. $84.8 $84.6 $78.5
Operating loss............................................ (13.6) (10.0) (13.5)
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles.................................... (.8) (1.5) 38.1
</TABLE>

Net Sales

Net sales includes revenues from (i) sales of developed lots, bulk acreage
and real property associated with the Company's real estate developments, (ii)
resort and other commercial operations conducted at certain of the Company's
real estate developments, (iii) rental revenues associated with the real
properties purchased from the Resolution Trust Corporation in June 1991 (the
"RTC Portfolio"), and (iv) beginning in the fourth quarter of

19
<PAGE>

1995, revenues from Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas
limited partnership which owns and operates a Class 1 horse racing facility in
the greater Houston metropolitan area (see "--Financial Condition and
Investing and Financing Activities--Real Estate and Other Operations"). Net
sales for 1995 were essentially unchanged from 1994. Revenues from SHRP, Ltd.
and a bulk sale of acreage in Texas were offset by a decrease in rental
revenues from the RTC Portfolio due to the sale of some of those properties.
Net sales for 1994 increased as compared to 1993. This increase was primarily
due to bulk acreage sales in New Mexico and increased lot sales at the
Company's Fountain Hills development in Arizona, partially offset by a
decrease in rental revenues resulting from the sale of sixteen apartment
complexes from the RTC Portfolio in December 1993.

Operating Loss

The operating loss for 1995 increased as compared to 1994, primarily due to
a $4.0 million writedown of certain real property to its estimated net
realizable value, partially offset by a bulk sale of acreage in Texas. The
operating loss for 1994 decreased as compared to 1993. The operating results
for 1994 were favorably impacted by the bulk acreage sales and the increased
sales at Fountain Hills, offset by decreased revenues from the RTC Portfolio
as a result of the sale of the sixteen apartment complexes in December 1993.
The operating loss for 1993 also included a $5.9 million writedown of certain
of the Company's nonstrategic real estate holdings to their estimated net
realizable value.

Income (Loss) Before Income Taxes, Minority Interests, Extraordinary Item and
Cumulative Effect of Changes in Accounting Principles

The loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles for 1995 decreased as
compared to 1994. This decrease was primarily due to higher investment,
interest and other income and lower interest expense, partially offset by the
increased operating loss discussed above. Investment, interest and other
income for 1995 includes a pre-tax gain of $10.5 million resulting from the
sale of five real properties and one loan from the RTC Portfolio for $25.5
million. The loss before income taxes, minority interests, extraordinary item
and cumulative effect of changes in accounting principles for 1994 was $1.5
million, as compared to income of $38.1 million for 1993. The loss for 1994
reflects a decrease in investment, interest and other income, offset by a
decrease in interest expense and the decreased operating loss discussed above.
Investment, interest and other income for 1994 includes pre-tax gains of $7.3
million resulting from the sale of two real properties and one loan from the
RTC Portfolio for $14.2 million. The decrease in interest expense for 1994
compared to 1993 resulted primarily from repayments on debt attributable to
the sixteen apartment complexes sold. Investment, interest and other income
for 1993 includes a pre-tax gain of $47.8 million attributable to the sale of
these properties from the RTC Portfolio in December 1993 for $113.6 million.
Also included in investment, interest and other income for 1993 are the sales
of two other real properties and three loans from the RTC Portfolio resulting
in pre-tax gains of $5.1 million.

OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1995 1994 1993
------ ------ ------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Operating loss......................................... $(19.6) $(11.5) $(19.5)
Loss before income taxes, minority interests,
extraordinary item and cumulative effect of changes in
accounting principles................................. (19.8) (19.3) (30.1)
</TABLE>

Operating Loss

The operating losses represent corporate general and administrative expenses
that are not attributable to the Company's industry segments. The operating
loss for 1995 increased compared to 1994, primarily due to a $2.5 million
increase in costs attributable to phantom share rights granted to certain
employees and a $6.1 million

20
<PAGE>

charge for the cost of certain litigation. These phantom share rights,
together with rights granted to certain employees of the Company's real estate
subsidiaries, were exercised in 1995. See Note 8 to the Consolidated Financial
Statements. The operating loss for 1994 decreased compared to 1993, primarily
due to a $6.5 million charge related to litigation contingencies in 1993 and
lower overhead costs.

Loss Before Income Taxes, Minority Interests, Extraordinary Item and
Cumulative Effect of Changes in Accounting Principles

The loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles includes operating
losses, investment, interest and other income (expense) and interest expense,
including amortization of deferred financing costs, that are not attributable
to the Company's industry segments. The loss for 1995 increased compared to
1994, primarily due to the increased operating loss, partially offset by
higher investment, interest and other income. The loss before income taxes,
minority interests, extraordinary item and cumulative effect of changes in
accounting principles for 1994 was significantly less than the loss for 1993.
This decrease was primarily due to the decreased operating losses discussed
above and a decrease in interest expense. The decrease in interest expense
resulted primarily from the redemption in August 1993 of $20.0 million
aggregate principal amount of the Company's 14% Senior Subordinated Reset
Notes due May 20, 2000 (the "Reset Notes"). Investment, interest and other
income (expense) for 1994 includes the equity in losses of affiliates
attributable to the Company's equity interest in SHRP, Ltd., offset by net
gains on marketable securities. Affiliates of the Company held an equity
interest in SHRP, Ltd. of approximately 29.7% until October 1994, when, as a
result of an additional capital contribution of $5.6 million, the Company's
interest increased to approximately 45%. The Company obtained a majority
interest in SHRP, Ltd. upon its emergence from Chapter 11 bankruptcy
proceedings on October 6, 1995. See "--Financial Condition and Investing and
Financing Activities--Real Estate and Other Operations."

Credit (Provision) for Income Taxes

The Company's credit (provision) for income taxes differs from the federal
statutory rate due principally to (i) revision of prior years' tax estimates
and other changes in valuation allowances, (ii) percentage depletion, and
(iii) foreign, state and local taxes, net of related federal tax benefits. The
Company's provision for income taxes as reflected in its Consolidated
Statement of Operations for the year ended December 31, 1995 reflects a
benefit of $24.2 million relating to the revision of prior years' tax
estimates and other changes in valuation allowances.

Minority Interests

Minority interests represent the minority stockholders' interest in the
Company's aluminum operations and, with respect to periods after October 6,
1995, minority partners' interest in SHRP, Ltd.

Extraordinary Item

The refinancing activities of Kaiser during the first quarter of 1994, as
described in Note 4 to the Consolidated Financial Statements, resulted in an
extraordinary loss of $5.4 million, net of benefits for income taxes of $2.9
million. The extraordinary loss consists primarily of the write-off of
unamortized deferred financing costs on Kaiser's previous credit agreement
(the "1989 KACC Credit Agreement").

The refinancing activities of KACC and Pacific Lumber in the first quarter
of 1993 and MGI in the third quarter of 1993, as described in Note 4 to the
Consolidated Financial Statements, resulted in an extraordinary loss of $50.6
million, net of benefits for minority interests of $2.8 million and income
taxes of $27.5 million. The extraordinary loss consists primarily of the
respective tender and redemption premiums paid and the write-off of
unamortized discount and deferred financing costs on Pacific Lumber's retired
12% Series A Senior Notes, 12.2% Series B Senior Notes and 12 1/2% Senior
Subordinated Debentures, MGI's retired 12 3/4% Notes and KACC's retired 14
1/4% Senior Subordinated Notes.

21
<PAGE>

Cumulative Effect of Changes in Accounting Principles

As of January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109"), Statement of
Financial Accounting Standards No. 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions ("SFAS 106") and Statement of
Financial Accounting Standards No. 112, Employers' Accounting for
Postemployment Benefits ("SFAS 112") as more fully described in Notes 5 and 6
to the Consolidated Financial Statements. The cumulative effect of the change
in accounting principle for the adoption of SFAS 109 increased 1993 results of
operations by $26.6 million. The cumulative effect of the change in accounting
principle for the adoption of SFAS 106 reduced 1993 results of operations by
$437.9 million, net of related benefits for minority interests of $63.6
million and income taxes of $236.8 million. The cumulative effect of the
change in accounting principle for the adoption of SFAS 112 reduced 1993
results of operations by $6.4 million, net of related benefits for minority
interests of $1.0 million and income taxes of $3.4 million. The new accounting
methods have no effect on the Company's cash outlays for postretirement and
postemployment benefits, nor does the cumulative effect of the changes in
accounting principles affect the Company's compliance with its existing debt
covenants. Postretirement benefits other than pensions are generally provided
through contracts with various insurance carriers. The Company has not funded
the liability for these benefits, which are expected to be paid out of cash
generated by operations. The Company reserves the right, subject to applicable
collective bargaining agreements and applicable legal requirements, to amend
or terminate these benefits.

FINANCIAL CONDITION AND INVESTING AND FINANCING ACTIVITIES

Since 1993, subsidiaries of the Company's aluminum operations and forest
products operations have completed a number of transactions designed to
enhance their liquidity, significantly extend their debt maturities and lower
their interest costs. Collectively, these transactions included public
offerings for approximately $1.4 billion of debt securities, approximately
$220.0 million of additional equity capital and the replacement of revolving
credit facilities. The following should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes thereto.

THE COMPANY

The Company conducts its operations primarily through its subsidiaries.
Creditors of and holders of minority interests in subsidiaries of the Company
have priority with respect to the assets and earnings of such subsidiaries
over the claims of the creditors of the Company, including the holders of the
Company's public debt. As of February 29, 1996, the indebtedness of the
subsidiaries and the minority interests reflected on the Company's
Consolidated Balance Sheet were $1,646.2 million and $223.7 million,
respectively. Certain of the Company's subsidiaries, principally Kaiser and
MGI, are restricted by their various debt agreements as to the amount of funds
that can be paid in the form of dividends or loaned to the Company. KACC's
1994 Credit Agreement contains covenants which, among other things, limit
Kaiser's ability to pay cash dividends and restrict transactions between
Kaiser and its affiliates. The indentures governing KACC's Senior Notes and
the KACC Senior Subordinated Notes contain covenants which, among other
things, limit KACC's ability to pay cash dividends and restrict transactions
between KACC and its affiliates. Pursuant to the terms of the 1994 KACC Credit
Agreement, Kaiser is precluded from paying any dividends with respect to its
common stock. The indenture governing the MGI Senior Notes and the MGI
Discount Notes contains various covenants which, among other things, limit the
payment of dividends and restrict transactions between MGI and its affiliates.
MGI paid dividends of $4.8 million during 1995 and an additional $1.6 million
in January 1996. As of February 29, 1996, only $0.1 million of dividends could
be paid by MGI. Under the most restrictive covenants governing debt of the
Company's real estate and other subsidiaries and after giving effect to the
March 1996 amendment to one of these credit agreements (see "--Real Estate and
Other Operations"), approximately $14.6 million of dividends could be paid as
of February 29, 1996. See also "Risk Factors--Ability to Service
Indebtedness."

During 1994, the Company sold 1,239,400 of Kaiser's Depositary Shares (as
defined in "--Aluminum Operations" below) for aggregate net proceeds of $10.3
million. The Company sold its remaining 893,550 of Depositary Shares during
the first six months of 1995 for aggregate net proceeds of $7.6 million. See
Note 7 to the Consolidated Financial Statements.

22
<PAGE>

On October 10, 1994, the Company entered into the Custodial Trust Agreement
with Custodial Trust Company providing for up to $25.0 million in borrowings.
Any amounts drawn would be payable upon demand and be secured by Kaiser Common
Stock owned by the Company (or such other marketable securities acceptable to
the lender) with an initial market value (as defined therein) of approximately
three times the amount borrowed. Borrowings under this agreement would bear
interest at the prime rate plus 1% per annum. The Custodial Trust Agreement
contains a negative pledge on 22 million shares of Kaiser Common Stock owned
by the Company and provides that the Company may sell such shares upon 24
hours notice to the Custodial Trust Company. No borrowings were outstanding as
of December 31, 1995.

On October 6, 1995, wholly owned subsidiaries of the Company made
investments in SHRP, Ltd. of approximately $8.7 million, consisting of land,
cash ($5.8 million) and other assets. In an unrelated transaction, on October
20, 1995, a wholly owned subsidiary of the Company purchased, for $7.3
million, $14.6 million aggregate initial principal amount of SHRP, Ltd.'s 11%
Senior Secured Extendible Notes (the "SHRP Notes"). See "--Real Estate and
Other Operations."

As of February 29, 1996, the Company (excluding its subsidiaries) had cash
and marketable securities of approximately $31.3 million. The Company expects
that its corporate general and administrative costs, net of cost
reimbursements from subsidiaries, will range from $11.0 to $19.0 million for
the next year. The Company's cash outlays for interest and sinking fund
obligations with respect to parent company indebtedness will aggregate
approximately $6.0 million in 1996 and $9.0 million in 1997. The Company
believes that its existing cash, cash equivalents and marketable securities
(excluding such items owned by its subsidiaries), together with the funds
available to it, will be sufficient to fund its working capital requirements
for the next year. With respect to its long-term liquidity, the Company
believes that its existing cash and cash resources, together with the cash
proceeds from the sale of assets, distributions from its subsidiaries, and the
proceeds from the sale of debt securities should be sufficient to meet its
working capital requirements. Although there are no restrictions on the
Company's ability to pay dividends on its capital stock, the Company has not
paid any dividends for a number of years and has no present intention to do
so. See also "Risk Factors--Ability to Service Indebtedness" and "--
Litigation."

On December 26, 1995, the United States Department of Treasury's Office of
Thrift Supervision ("OTS") initiated formal administrative proceedings against
the Company and others by filing a Notice of Charges (the "Notice"). The
Notice alleges misconduct by the Company, Federated, Mr. Charles Hurwitz and
others (the "respondents") with respect to the failure of United Savings
Association of Texas ("USAT"), a wholly owned subsidiary of United Financial
Group Inc. ("UFG"). The Notice claims that the Company was a savings and loan
holding company, that with others it controlled USAT, and that it was
therefore obligated to maintain the net worth of USAT. The Notice makes
numerous other allegations against the Company and the other respondents,
including allegations that through USAT it was involved in prohibited
transactions with Drexel, Burnham, Lambert Inc. The OTS, among other things,
seeks unspecified damages in excess of $138.0 million from the Company, civil
money penalties and a removal from, and prohibition against the Company and
the other respondents engaging in, the banking industry. The Company has
concluded that it is unable to determine a reasonable estimate of the loss (or
range of loss), if any, that could result from this contingency. Accordingly,
it is impossible to assess the ultimate impact, if any, of the outcome this
matter may have on the Company's consolidated financial position, results of
operations or liquidity.

23
<PAGE>

it on the Court joining the OTS to this action. The Company filed with its
motion to intervene a proposed complaint which alleges that the OTS violated
the Administrative Procedures Act by rejecting the Company's bid for USAT. The
Company's bylaws provide for indemnification of its officers and directors to
the fullest extent permitted by Delaware law. The Company is obligated to
advance defense costs to its officers and directors, subject to the
individual's obligation to repay such amount if it is ultimately determined
that the individual was not entitled to indemnification. In addition, the
Company's indemnity obligation can, under certain circumstances, include
amounts other than defense costs, including judgments and settlements. The
Company has concluded that it is unable to determine a reasonable estimate of
the loss (or range of loss), if any, that could result from this contingency.
It is impossible to assess the ultimate outcome of the foregoing matter or its
potential impact on the Company's consolidated financial position, results of
operations or liquidity.

The Company believes that its existing cash resources, together with the
cash available from subsidiaries and other sources of financing, will be
sufficient to fund its working capital requirements, and to pay interest on
any Securities which may be sold; however, there can be no assurance that the
Company's cash resources, together with the cash available from subsidiaries
and other sources of financing, will be sufficient for such purposes or that
the Company would be able to refinance or repay at maturity Securities which
may be sold. See also "Risk Factors--Ability to Service Indebtedness" and "--
Litigation."

ALUMINUM OPERATIONS

The 1994 KACC Credit Agreement consists of a $325.0 million five-year
secured revolving line of credit which matures in 1999. KACC is able to borrow
under the facility by means of revolving credit advances and letters of credit
(up to $125.0 million) in an aggregate amount equal to the lesser of $325.0
million or a borrowing base relating to eligible accounts receivable and
inventory. As of February 29, 1996, $174.9 million (of which $72.4 million
could have been used for letters of credit) was available to KACC under the
1994 KACC Credit Agreement. The 1994 KACC Credit Agreement is unconditionally
guaranteed by Kaiser and by certain

significant subsidiaries of KACC. Loans under the 1994 KACC Credit Agreement
bear interest at a rate per annum, at KACC's election, equal to a Reference
Rate (as defined) plus 1 1/2% or LIBOR (Reserve Adjusted) (as defined) plus 3
1/4%. Effective June 30, 1995, the interest rate margins applicable to
borrowings under the 1994 KACC Credit Agreement may be reduced by up to 1 1/2%
(non-cumulatively), based on a financial test, determined quarterly. As of
December 31, 1995, the financial test permitted a reduction of 1 1/2% per
annum in margins effective January 1, 1996.

In 1993, Kaiser issued 19,382,950 of its $.65 Depositary Shares (the
"Depositary Shares"), each representing one-tenth of a share of Series A
Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares").
See Note 7 to the Consolidated Financial Statements. On September 19, 1995,
Kaiser redeemed all 1,938,295 of its Series A Shares, which resulted in the
simultaneous redemption of all Depositary Shares in exchange for (i)
13,126,521 shares of Kaiser's common stock, (ii) cash equal to all accrued and
unpaid dividends up to and including the day immediately prior to the
redemption date of $2.8 million, and (iii) cash in lieu of any fractional
shares of common stock that would have otherwise been issuable.

As a result of the issuance of the 8.255% PRIDES, Convertible Preferred
Stock (the "PRIDES") and the Depositary Shares, and the subsequent redemption
of the Depositary Shares, the Company's equity interest in Kaiser has
decreased to approximately 62% on a fully diluted basis.

On February 17, 1994, KACC issued $225.0 million of the KACC Senior Notes.
On February 1, 1993, KACC issued $400.0 million of the KACC Senior
Subordinated Notes. The obligations of KACC with respect to the KACC Senior
Subordinated Notes and the KACC Senior Notes are guaranteed, jointly and
severally, by certain subsidiaries of KACC. See Note 4 to the Consolidated
Financial Statements for a description of the terms of the KACC Notes and the
use of proceeds from their issuance. Pursuant to the terms of the 1994 KACC
Credit Agreement, Kaiser is precluded from paying any dividends with respect
to its common stock. The declaration and payment of dividends by Kaiser with
respect to the PRIDES are expressly permitted by the terms of the 1994 KACC
Credit Agreement.

24
<PAGE>

Kaiser's Board of Directors has approved a proposed recapitalization (the
"Proposed Recapitalization"). The Proposed Recapitalization would (i) provide
for two classes of common stock: Class A Common Shares, $.01 par value, with
one vote per share and a new lesser-voting class designated as Common Stock,
$.01 par value, with 1/10 vote per share, (ii) redesignate as Class A Common
Shares the 100 million currently authorized shares of existing Kaiser Common
Stock and authorize 250 million shares to be designated as Common Stock, and
(iii) reclassify each issued share of the existing Kaiser Common Stock into
(a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock.
Kaiser would pay cash in lieu of fractional shares. Kaiser anticipates that
both the Class A Common Shares and the Common Stock would be approved for
trading on the New York Stock Exchange.

Upon the effective date of the Proposed Recapitalization, approximately 23.6
million Class A Common Shares and 48.0 million shares of Common Stock would be
issued and outstanding. The proportionate voting power of the holders of the
PRIDES will increase immediately after the effectiveness of the Proposed
Recapitalization until such shares are redeemed or converted, which will occur
on or before December 31, 1997. As of January 31, 1996, holders of the
existing Kaiser Common Stock and the PRIDES had 91.2% and 8.8%, respectively,
of the total voting power of all stockholders. Immediately after the
effectiveness of the Proposed Recapitalization, the voting power of such
holders of the PRIDES would increase to 19.6% in the aggregate, with a
corresponding reduction in the voting power of such holders of the existing
Kaiser Common Stock. At such time as the PRIDES were redeemed or converted,
the relative voting power of such holders of the PRIDES would decrease and the
relative voting power for both such holders of the PRIDES and the existing
Kaiser Common Stock would be approximately the same as it would have been had
the Proposed Recapitalization not occurred.

A special meeting of shareholders to consider the Proposed Recapitalization
was scheduled for April 10, 1996. On April 8, 1996, the Delaware Court of
Chancery issued a ruling which preliminarily enjoins Kaiser from implementing
the Proposed Recapitalization. On April 10, 1996, Kaiser called the scheduled
special meeting of stockholders to order and then adjourned the meeting to May
1, 1996, without taking a vote on the Proposed Recapitalization. Kaiser is
currently evaluating the alternatives available to it in view of the Court's
ruling.

Kaiser's capital expenditures of approximately $217.1 million (of which
$25.2 million was funded by Kaiser's minority partners in certain foreign
joint ventures) during the three years ended December 31, 1995 were made
primarily to improve production efficiency, reduce operating costs, expand
capacity at existing facilities and construct new facilities. Kaiser's capital
expenditures were $79.4 million in 1995, compared to $70.0 million in 1994 and
$67.7 million in 1993 (of which $8.3 million, $7.5 million and $9.4 million
were funded by such minority partners in 1995, 1994 and 1993, respectively).
Kaiser's capital expenditures (of which approximately 10% is expected to be
funded by such minority partners) are expected to be between $123.0 million
and $143.0 million per year in the 1996 -1998 period, subject to necessary
approvals, if required, from the lenders under the 1994 KACC Credit Agreement.
A portion of the capital expenditures is spent on environmental matters.

Kaiser has historically participated in various raw material joint ventures
outside the United States. At December 31, 1995, Kaiser was unconditionally
obligated for $88.9 million of indebtedness of one such joint venture
affiliate.

Kaiser has developed a unique micromill for the production of can sheet from
molten metal based on a proprietary thin-strip, high-speed, continuous-belt
casting technique linked directly to hot rolling and cold rolling mills. The
first micromill is being constructed in Nevada as a demonstration production
facility, and Kaiser expects operational startup of the facility by the end of
1996. KACC currently intends to finance the cost of the construction of the
Nevada micromill, estimated to be $45.0 million, from general corporate funds,
including possible borrowings under the 1994 KACC Credit Agreement, although
KACC is in discussions with third parties which might provide some or all of
such funding.

25
<PAGE>

In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of
Kaiser, was formed to participate in the privatization, expansion,
modernization and operation of aluminum smelting facilities in the People's
Republic of China (the "PRC"). KYRIL has entered into a joint venture
agreement and related agreements with the Lanzhou Aluminum Smelters of the
China National Nonferrous Metals Industry Corporation relating to the
formation and operation of Yellow River Aluminum Industry Company Limited, a
Sino-foreign joint equity enterprise organized under the laws of the PRC (the
"Joint Venture"). See also "Business--Aluminum Operations--Kaiser--Operations
in China." KYRIL contributed $9.0 million to the Joint Venture in July 1995.
The parties to the Joint Venture are currently engaged in discussions
concerning the amount, timing, and other conditions relating to KYRIL's
additional contributions to the Joint Venture and the use thereof by the Joint
Venture. Governmental approval in the PRC will be necessary in order to
implement any arrangements agreed to by the parties, and there can be no
assurance such approvals will be obtained.

As described in Note 9 to the Consolidated Financial Statements, Kaiser and
KACC are subject to a number of environmental laws and regulations, to fines
or penalties assessed for alleged breaches of the environmental laws and
regulations, and to claims and litigation based upon such laws. KACC is
currently subject to a number of lawsuits under CERCLA and, along with certain
other entities, has been named as a potentially responsible party for remedial
costs at certain third-party sites listed on the National Priorities List
under CERCLA. Based on Kaiser's evaluation of these and other environmental
matters, Kaiser has established environmental accruals primarily related to
potential solid waste disposal and soil and groundwater remediation matters.
At December 31, 1995, the balance of such accruals, which is primarily
included in other noncurrent liabilities, was $38.9 million. These
environmental accruals represent Kaiser's estimate of costs reasonably
expected to be incurred based on presently enacted laws and regulations,
currently available facts, existing technology and Kaiser's assessment of the
likely remediation actions to be taken. Kaiser expects that these remediation
actions will be taken over the next several years and estimates that annual
expenditures to be charged to these environmental accruals will be
approximately $3.0 million to $9.0 million for the years 1996 through 2000 and
an aggregate of approximately $10.0 million thereafter.

other factors may result in actual costs exceeding the current environmental
accruals. Kaiser believes that it is reasonably possible that costs associated
with these environmental matters may exceed current accruals by amounts that
could range, in the aggregate, up to an estimated $23.0 million and that the
factors upon which a substantial portion of this estimate is based are
expected to be resolved over the next twelve months. While uncertainties are
inherent in the final outcome of these environmental matters, and it is
impossible to determine the actual costs that ultimately may be incurred,
management believes that the resolution of such uncertainties should not have
a material adverse effect on the Company's consolidated financial position,
results of operations or liquidity. See also "Risk Factors--Risk Factors
Relating to Kaiser--Environmental Matters and Litigation."

Additionally, KACC is a defendant in a substantial 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 KACC
or exposure to products containing asbestos produced or sold by KACC. The
lawsuits generally relate to products KACC has not manufactured for at least
15 years. At December 31, 1995, the number of claims pending was approximately
59,700, compared to 25,200 at December 31, 1994. During 1995, approximately
41,700 claims were received and approximately 7,200 were settled or dismissed.
KACC believes that, although there can be no assurance, the recent increase in
pending claims may be attributable, in part, to tort reform legislation in
Texas which was passed by the legislature in March 1995 and which became
effective on September 1, 1995. The legislation, among other things, is
designed to restrict, beginning September 1, 1995, the filing of cases in
Texas that do not have a sufficient nexus to that jurisdiction, and to impose,
generally as of September 1, 1996, limitations relating to joint and several
liability in tort cases. A substantial portion of the asbestos-related claims
that were filed and served on KACC between June 30, 1995 and November 30, 1995
were filed in Texas prior to September 1, 1995.

26
<PAGE>

Based on past experience and reasonably anticipated future activity, KACC
has established an accrual for estimated asbestos-related costs for claims
filed and estimated to be filed and settled through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs and KACC's actual
costs could exceed these estimates. KACC's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior timing
and amounts of asbestos-related payments, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law
related to asbestos claims. Accordingly, an asbestos-related cost accrual of
$160.1 million, before consideration of insurance recoveries, is included
primarily in other noncurrent liabilities at December 31, 1995. KACC estimates
that annual future cash payments in connection with such litigation will be
approximately $13.0 million to $20.0 million for each of the years 1996
through 2000, and an aggregate of approximately $78.0 million thereafter
through 2008. While KACC does not believe there is a reasonable basis for
estimating such costs beyond 2008, and, accordingly, did not accrue such
costs, there is a reasonable possibility that such costs may continue beyond
2008, and that such costs may be substantial.

KACC believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from
some of KACC's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from the insurance carriers. The timing and amount of
ultimate recoveries from these insurance carriers are dependent upon the
resolution of these disputes. KACC believes, based on prior insurance-related
recoveries with respect to asbestos-related claims, existing insurance
policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to
applicable insurance coverage law relating to the terms and conditions of
those policies, that substantial recoveries from the insurance carriers are
probable. Accordingly, an estimated aggregate insurance recovery of $137.9
million, determined on the same basis as the asbestos-related cost accrual, is
recorded primarily in long-term receivables and other assets at December 31,
1995.

While uncertainties are inherent in the final outcome of these asbestos
matters and it is presently impossible to determine the actual costs that
ultimately may be incurred and the insurance recoveries that will be received,
management believes that, based on the factors discussed in the preceding
paragraphs, the resolution of the asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries
should not have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity. See also "Risk
Factors--Risk Factors Relating to Kaiser--Environmental Matters and
Litigation."

Kaiser and KACC are involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. 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.

Kaiser expects that its existing cash resources, together with cash flow
from operations and borrowings under the 1994 KACC Credit Agreement, will be
sufficient to satisfy its working capital and capital expenditure requirements
for the next year. With respect to its long-term liquidity, Kaiser believes
that its history of prior operating cash flow, together with its ability to
obtain both short and long-term financing should provide sufficient funds to
meet its long-term working capital and capital expenditure requirements.
Kaiser enters into forward sales and hedging transactions to mitigate the
effect declining prices for primary aluminum could have on its results of
operations and liquidity. See "--Trends--Aluminum Operations--Sensitivity to
Prices and Hedging Programs."

FOREST PRODUCTS OPERATIONS

MGI conducts its operations primarily through its subsidiaries, Pacific
Lumber and Britt. Creditors of MGI's subsidiaries have priority with respect
to the assets, cash flows and earnings of such subsidiaries over the claims of
the creditors of MGI, including the holders of the MGI Notes. As of February
29, 1996, the indebtedness of the subsidiaries reflected on MGI's Consolidated
Balance Sheet was $577.5 million. The indentures governing

27
<PAGE>

Pacific Lumber's Senior Notes and the Timber Notes and the Pacific Lumber
Credit Agreement contain various covenants which, among other things, restrict
transactions between Pacific Lumber and its affiliates and the payment of
dividends. Pacific Lumber can pay dividends in an amount that is generally
equal to 50% of Pacific Lumber's consolidated net income plus depletion and
cash dividends received from Scotia Pacific, exclusive of the net income and
depletion of Scotia Pacific for as long as any Timber Notes are outstanding.
As of February 29, 1996, under the most restrictive of these covenants,
approximately $18.8 million of dividends could be paid by Pacific Lumber.
Pacific Lumber paid an aggregate of $22.0 million and $24.5 million of
dividends in 1995 and 1994, respectively.

Substantially all of MGI's consolidated assets are owned by Pacific Lumber
and a significant portion of Pacific Lumber's consolidated assets are owned by
Scotia Pacific. MGI expects that Pacific Lumber will provide a major portion
of its future operating cash flow. Pacific Lumber is dependent upon Scotia
Pacific for a significant portion of its timber requirements from which it
generates the substantial portion of its operating cash flow. The holders of
the Timber Notes have priority over the claims of creditors of Pacific Lumber
with respect to the assets and cash flows of Scotia Pacific, and the holders
of the Pacific Lumber Senior Notes have priority over the claims of creditors
of MGI with respect to the assets and cash flows of Pacific Lumber. Under the
terms of the Timber Note Indenture, Scotia Pacific will not have available
cash for distribution to Pacific Lumber unless Scotia Pacific's cash flow from
operations exceeds the amounts required by the Timber Note Indenture to be
reserved for the payment of current debt service (including interest,
principal and premiums) on the Timber Notes, capital expenditures and certain
other operating expenses. Once appropriate provision is made for current debt
service on the Timber Notes and expenditures for operating and capital costs,
and in the absence of certain Trapping Events (as defined in the Timber Note
Indenture) or outstanding judgments, the Timber Note Indenture does not limit
monthly distributions of available cash from Scotia Pacific to Pacific Lumber.
Accordingly, the Company expects that, once Scotia Pacific's debt service and
operating and capital expenditure requirements have been met, substantially
all of Scotia Pacific's available cash will be periodically distributed to
Pacific Lumber. Scotia Pacific paid $59.0 million, $88.9 million and $58.3
million of dividends to Pacific Lumber during the years ended December 31,
1995 and 1994 and the period from March 23, 1993 to December 31, 1993,
respectively. In the event Scotia Pacific's cash flows are not sufficient to
generate distributable funds to Pacific Lumber, Pacific Lumber's ability to
pay interest on the Pacific Lumber Senior Notes and to service its other
indebtedness would be materially impaired and MGI's ability to pay interest on
the MGI Notes and its other indebtedness would also be materially impaired.
See Note 4 to the Consolidated Financial Statements for a description of the
principal payment requirements of the Timber Notes.

During the years ended December 31, 1995, 1994 and 1993, Pacific Lumber's
operating income plus depletion and depreciation ("operating cash flow")
amounted to $90.5 million, $95.9 million and $76.6 million, respectively,
which exceeded interest accrued on all of its indebtedness in those years by
$35.0 million, $39.8 million and $17.4 million, respectively. The Company
believes that Pacific Lumber's level of operating cash flow and other
available sources of financing will enable it to meet the debt service
requirements on the Pacific Lumber Senior Notes and the Timber Notes for the
next year. With respect to its long-term liquidity, Pacific Lumber believes
that its ability to generate sufficient levels of cash from operations, and
its ability to obtain both short and long-term financing should provide
sufficient funds to meet its long-term working capital and capital expenditure
requirements. See also "Risk Factors--Ability to Service Indebtedness."

As of February 29, 1996, MGI (excluding Pacific Lumber and its subsidiary
companies) had cash and marketable securities of approximately $53.6 million.
MGI believes, although there can be no assurance, that the aggregate dividends
which will be available to it from Pacific Lumber and Britt, during the period
in which cash interest will not be payable on the MGI Discount Notes, will
exceed its cash interest payments on the MGI Senior Notes. When cash interest
payments on the MGI Discount Notes commence on February 1, 1999, MGI believes
that it should be able to make such cash interest payments out of its then
existing cash resources and from cash expected to be available to it from
Pacific Lumber and Britt. See also "Risk Factors--Ability to Service
Indebtedness."

28
<PAGE>

On August 4, 1993, MGI issued $100.0 million aggregate principal amount of
the MGI Senior Notes and $126.7 million aggregate principal amount
(approximately $70.0 million net of original issue discount) of the MGI
Discount Notes. The MGI Notes are secured by, among other things, the capital
stock of Pacific Lumber and Britt and 28 million shares of Kaiser's common
stock owned by the Company. See Note 4 to the Consolidated Financial
Statements for a description of the terms of the MGI Notes and the use of
proceeds from their issuance. The MGI Notes are senior indebtedness of MGI;
however, they are effectively subordinate to the liabilities of MGI's
subsidiaries, which include the Timber Notes and the Pacific Lumber Senior
Notes.

On March 23, 1993, Pacific Lumber issued $235.0 million of the Pacific
Lumber Senior Notes and Scotia Pacific issued $385.0 million of the Timber
Notes. See Note 4 to the Consolidated Financial Statements for a description
of the terms of the Pacific Lumber Senior Notes and the Timber Notes and the
use of proceeds from their issuance.

Borrowings under the Pacific Lumber Credit Agreement, which expires on May
31, 1998, are secured by Pacific Lumber's trade receivables and inventories,
with interest computed at the bank's reference rate plus 1 1/4% or the bank's
offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement provides for
borrowings of up to $60.0 million, of which $15.0 million may be used for
standby letters of credit and $30.0 million is restricted to timberland
acquisitions. Borrowings made pursuant to the portion of the credit facility
restricted to timberland acquisitions would also be secured by the purchased
timberlands. As of February 29, 1996, $48.4 million of borrowings was
available under the Pacific Lumber Credit Agreement, of which $3.4 million was
available for letters of credit and $30.0 million was restricted to timberland
acquisitions. No borrowings were outstanding as of December 31, 1995, and
letters of credit outstanding amounted to $11.9 million. The Pacific Lumber
Credit Agreement contains covenants substantially similar to those contained
in the indenture governing the Pacific Lumber Senior Notes.

Pacific Lumber's and Britt's capital expenditures were made to improve
production efficiency, reduce operating costs and, to a lesser degree, acquire
additional timberlands. Pacific Lumber's and Britt's capital expenditures were
$9.9 million, $11.3 million and $11.1 million for the years ended December 31,
1995, 1994 and 1993, respectively. Capital expenditures for 1996 are expected
to be $12.5 million and for the 1997-1998 period are estimated to be between
$10.0 million and $15.0 million per year. Pacific Lumber may purchase
additional timberlands from time to time as appropriate opportunities arise.
Moreover, such purchases could exceed historical levels. Capital expenditures
attributable to the reconstruction of Pacific Lumber's commercial facilities
destroyed by an earthquake in April 1992 were approximately $1.9 million for
1993 and $2.6 million for 1994, when construction was completed.

As of February 29, 1996, MGI and its subsidiaries had consolidated working
capital of $131.0 million and long-term debt of $726.4 million (net of current
maturities and restricted cash deposited in a liquidity account for the
benefit of the holders of the Timber Notes). MGI and its subsidiaries
anticipate that cash flow from operations, together with existing cash,
marketable securities and available sources of financing, will be sufficient
to fund their working capital and capital expenditure requirements for the
next year. With respect to their long-term liquidity, MGI and its subsidiaries
believe that their existing cash and cash equivalents, together with their
ability to generate sufficient levels of cash from operations, and their
ability to obtain both short and long-term financing, should provide
sufficient funds to meet their working capital and capital expenditure
requirements. However, due to their highly leveraged condition, MGI and its
subsidiaries are more sensitive than less leveraged companies to factors
affecting their operations, including governmental regulation affecting their
timber harvesting practices, increased competition from other lumber producers
or alternative building products and general economic conditions. See also "--
Trends--Forest Products Operations" and "'Risk Factors--Regulatory and
Environmental Factors--Forest Products Operations."

REAL ESTATE AND OTHER OPERATIONS

As of December 31, 1995, approximately $8.0 million was outstanding pursuant
to a loan agreement secured by the RTC Portfolio (the "RTC Portfolio Loan").
On March 28, 1996, the Company amended the loan

29
<PAGE>

agreement to reduce additional borrowing availability by $8.9 million in
exchange for the elimination of $8.9 million of release prices for certain
properties. In connection with this amendment, the remaining $2.9 million of
availability was borrowed on March 28, 1996. The RTC Portfolio Loan matures on
December 31, 1999 and bears interest at prime plus 3%. Upon the sale of any
secured property or loan, principal payments are required based on the release
price (as defined) of such property or loan. The entire amount of the loan
must also be paid if the principal balance declines to less than $8.0 million.

On July 15, 1995, a real estate subsidiary of the Company, MCO Properties
Inc. ("MCOP"), amended and restated its revolving credit agreement with a bank
which will expire on May 15, 1998 (the "MCOP Credit Agreement"). Borrowings
under the MCOP Credit Agreement are secured primarily by (i) MCOP's eligible
receivables and real estate held for investment or development and sale, (ii)
MCOP's pledge of the common stock of certain of its subsidiaries, and (iii)
the guarantee of certain of MCOP's subsidiaries and the Company. Further, the
Company has pledged MCOP's common stock as additional security. Interest is
computed at the bank's prime rate plus 1/2% or the bank's Eurodollar rate plus
2 3/4%. The MCOP Credit Agreement contains various covenants including a
minimum net worth requirement and limitations on the payment of dividends
(neither of which the Company believes is material), investments and the
incurrence of indebtedness. The MCOP Credit Agreement provides for borrowings
of up to $14.0 million, of which $8.5 million may be used for standby letters
of credit. The available credit is subject to borrowing base limitation
calculations. As of February 29, 1996, $11.7 million of additional borrowings
was available under the MCOP Credit Agreement and letters of credit
outstanding amounted to $2.3 million.

In July 1993, the Company, through various subsidiaries, acquired various
interests (which totaled approximately 29.7%) in SHRP, Ltd. for $9.1 million.
The Company increased its equity interest in SHRP, Ltd. to 45.0%, as a result
of a $5.6 million capital contribution in October 1994. On January 15, 1995,
SHRP, Ltd. defaulted on the $4.4 million semi-annual interest payment due on
$75.0 million aggregate principal amount of its 11 3/4% Senior Secured Notes.
On April 17, 1995, SHRP, Ltd. and its wholly owned subsidiary, SHRP Capital
Corp., together with SHRP Acquisition, Inc., a wholly owned subsidiary of the
Company and SHRP, Ltd.'s largest limited partner (collectively, the
"Debtors"), filed voluntary petitions seeking to reorganize under the
provisions of Chapter 11 of the United States Bankruptcy Code. The bankruptcy
cases were consolidated and transferred to the United States Bankruptcy Court
for the Southern District of Texas, Houston Division, Case No. 95-43739-H3-11.
On September 22, 1995, the bankruptcy plan of the Debtors (the "Plan") was
confirmed and on October 6, 1995, the transactions called for by the Plan were
completed.

A new investor group (the "New SHRP Investor Group") made a capital
contribution of cash in the aggregate amount of $5.9 million (wholly owned
subsidiaries of the Company contributed $5.8 million) to SHRP, Ltd.
Additionally, a wholly owned subsidiary of the Company contributed an
adjoining approximately 87-acre tract of land (with a fair market value of
$2.3 million). The new managing general partner of the reorganized SHRP, Ltd.
(the "SHRP Managing General Partner") is SHRP General Partner, Inc., a wholly
owned subsidiary of the Company. SHRP Managing General Partner was issued a 1%
interest in the reorganized SHRP, Ltd. in exchange for contributing its pro
rata share of the investment made by the New SHRP Investor Group. In an
unrelated transaction, on October 20, 1995, a wholly owned subsidiary of the
Company purchased, for $7.3 million, $14.6 million aggregate initial principal
amount of the SHRP Notes and the corresponding shares of common stock of SHRP
Equity, Inc. (a Delaware corporation and an additional general partner of the
reorganized SHRP, Ltd.) to which the selling noteholder was entitled. Such
shares of common stock represent 39.0% of the shares of common stock of SHRP
Equity, Inc. After giving effect to these transactions, wholly owned
subsidiaries of the Company hold, directly or indirectly, approximately 78.8%
of the equity in the reorganized SHRP, Ltd.

As of February 29, 1996, the Company's real estate and other subsidiaries
had approximately $14.6 million available for use under various credit
agreements, after giving effect to the March 1996 amendment to the RTC
Portfolio Loan, as described above. The substantial portion of the
availability was attributable to the credit availability pursuant to the RTC
Portfolio Loan and the MCOP Credit Agreement. The Company believes that

30
<PAGE>

the existing cash and credit facilities of its real estate and other
subsidiaries are sufficient to fund the working capital and capital expenditure
requirements of such subsidiaries for the next year. With respect to the long-
term liquidity of such subsidiaries, the Company believes that their ability to
generate cash from the sale of their existing real estate, together with their
ability to obtain financing should provide sufficient funds to meet their
working capital and capital expenditure requirements. See also "Risk Factors--
Ability to Service Indebtedness."

TRENDS

ALUMINUM OPERATIONS - SENSITIVITY TO PRICES AND HEDGING PROGRAMS

KACC enters into primary aluminum hedging transactions in the normal course
of business. The prices realized by KACC under certain sales contracts for
alumina, primary aluminum and fabricated aluminum products, as well as the
costs incurred by KACC for certain items, such as aluminum scrap, rolling
ingot, power and bauxite, fluctuate with the market price of primary aluminum,
together resulting in a "net exposure" of earnings. The primary aluminum
hedging transactions are designed to mitigate the net exposure of earnings to
declines in the market price of primary aluminum, while retaining the ability
to participate in favorable pricing environments that may materialize. KACC has
employed strategies which include forward sales of primary aluminum at fixed
prices and the purchase or sale of options for primary aluminum. With respect
to its 1996 anticipated net exposure, at December 31, 1995, KACC had purchased
approximately 53,300 tons of primary aluminum at fixed prices as a partial
hedge against approximately 161,100 tons of fabricated aluminum products sold
to customers at fixed or capped prices, and had sold forward 15,750 tons of
primary aluminum at fixed prices.

In addition, as of December 31, 1995, KACC had sold approximately 75% and 45%
of the alumina available to it in excess of its projected internal smelting
requirements for 1996 and 1997, respectively. Approximately 56% of such alumina
sold for 1996 and all of such alumina sold for 1997 has been sold at prices
linked to the future prices of primary aluminum as a percentage of the price of
primary aluminum ("Variable Price Contracts"), and approximately 44% of such
alumina sold for 1996 has been sold at fixed prices ("Fixed Price Contracts").
The average realized prices of alumina sold under Variable Price Contracts will
depend on future prices of primary aluminum, and the average realized prices of
alumina sold under Fixed Price Contracts will substantially exceed Kaiser's
manufacturing cost of alumina.

KACC also enters into hedging transactions in the normal course of business
that are designed to reduce its exposure to fluctuations in foreign exchange
rates. At December 31, 1995, KACC had net forward foreign exchange contracts
totaling $102.8 million for the purchase of 142.4 million Australian dollars
through April 30, 1997.

KACC has established margin accounts with its counterparties related to
forward aluminum sales and option contracts. KACC is entitled to receive
advances from counterparties related to unrealized gains and, in turn, is
required to make margin deposits with counterparties to cover unrealized losses
related to these contracts. At December 31, 1995, Kaiser was not required to
maintain any such margin deposits. At December 31, 1994, KACC had $50.5 million
on deposit with various counterparties with respect to such deposit
requirements. These amounts are recorded in prepaid expenses and other current
assets.

Since December 31, 1995, KACC has entered into additional hedge positions
with respect to its anticipated 1996, 1997, and 1998 production. As of February
29, 1996, KACC had sold forward an additional 19,500 metric tons of primary
aluminum at fixed prices, had purchased 20,150 metric tons of primary aluminum
under forward purchase contracts at fixed prices, and had purchased put options
to establish a minimum price for 45,000 metric tons of primary aluminum. It has
also entered into additional forward foreign exchange contracts totaling $12.8
million for the purchase of 18.0 million Australian dollars from March 1996
through December 1997 with respect to its commitments for 1996 and 1997
expenditures denominated in Australian dollars.

At February 29, 1996, the net unrealized gain on KACC's position in aluminum
forward sales and option contracts, based on an average price of $1,747 per
metric ton ($.79 per pound) of primary aluminum, and forward foreign exchange
contracts was $13.3 million.

31
<PAGE>

FOREST PRODUCTS OPERATIONS

The Company's forest products operations are primarily conducted by Pacific
Lumber and are subject to a variety of California and federal laws and
regulations dealing with timber harvesting, endangered species and critical
habitat, and air and water quality. These laws include the California Forest
Practice Act (the "Forest Practice Act"), which requires that timber
harvesting operations be conducted in accordance with detailed requirements
set forth in the Forest Practice Act and in the regulations promulgated
thereunder by the California Board of Forestry (the "BOF"). The federal
Endangered Species Act and California Endangered Species Act provide in
general for the protection and conservation of specifically listed fish,
wildlife and plants which have been declared to be endangered or threatened.
The California Environmental Quality Act provides, in general, for protection
of the environment of the state, including protection of air and water quality
and of fish and wildlife. In addition, the California Water Quality Act
requires, in part, that Pacific Lumber's operations be conducted so as to
reasonably protect the water quality of nearby rivers and streams. The Company
does not expect that Pacific Lumber's compliance with such existing laws and
regulations will have a material adverse effect on Pacific Lumber's future
consolidated operating results, financial position or liquidity; however,
these laws and regulations are modified from time to time and are subject to
judicial and administrative interpretation and there can be no assurance that
future legislation, governmental regulations or judicial or administrative
decisions would not adversely affect Pacific Lumber or its ability to sell
lumber, logs or timber.

In 1994, the BOF adopted certain regulations regarding compliance with long-
term sustained yield objectives. These regulations require timber companies to
project the average annual growth they will have on their timberlands during
the last decade of a 100-year planning period ("Projected Annual Growth").
During any rolling ten-year period, the average annual harvest over such ten-
year period may not exceed Projected Annual Growth. The first ten-year period
began in May 1994. Pacific Lumber is required to submit, by October 1996, a
plan setting forth, among other things, its Projected Annual Growth. Pacific
Lumber has not completed its analysis of the projected productivity of its
timberlands and is therefore unable to predict the impact that these
regulations will have on its future timber harvesting practices; however, the
final results of this analysis could require Pacific Lumber to reduce (or
permit it to increase) its timber harvest in future years from the average
annual harvest that it has experienced in recent years. Pacific Lumber
believes that it would be able to mitigate the effect of any required
reduction in harvest level by acquisitions of additional timberlands and by
increasing the productivity of its timberlands, although no assurance can be
given that it will be able to do so.

In 1995, the U.S. Fish and Wildlife Service ("USFWS") published its proposed
final designation ("Proposed Designation") of critical habitat for the marbled
murrelet, seeking to designate over four million acres as critical habitat for
the marbled murrelet, including approximately 33,000 acres of Pacific Lumber's
timberlands. The Proposed Designation was subject to a 60-day comment period
and Pacific Lumber filed comments vigorously opposing the Proposed
Designation. The USFWS has not yet published its final designation of critical
habitat for the marbled murrelet. Pacific Lumber is unable to predict when or
if it will be able to harvest on any acreage finally designated as critical
habitat. Furthermore, it is impossible for the Company to determine the
potential adverse impact of such designation on Pacific Lumber's consolidated
financial position, results of operations or liquidity until such time as the
Proposed Designation and related regulatory and legal issues are fully
resolved. However, if Pacific Lumber is unable to harvest, or is severely
limited in harvesting, on timberlands designated as marbled murrelet critical
habitat, such restrictions could have a material adverse effect on the
Company's consolidated financial position, results of operations or liquidity.
If Pacific Lumber is unable to harvest or is severely limited in harvesting,
it intends to seek full compensation from the appropriate governmental
agencies on the grounds that such restrictions constitute a governmental
taking.

Judicial or regulatory actions adverse to Pacific Lumber, increased
regulatory delays and inclement weather in northern California, independently
or collectively, could impair Pacific Lumber's ability to maintain adequate
log inventories and force Pacific Lumber to temporarily idle or curtail
operations at certain of its lumber mills from time to time. With respect to
the foregoing, see also "Risk Factors--Regulatory and Environmental Factors--
Forest Products Operations."

32
<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"). SFAS 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. If the sum of the estimated future cash
flows expected to result from the use and eventual disposition of an asset is
less than the carrying amount of the asset, an impairment loss is recognized.
Measurement of an impairment loss is based on the fair value of the asset. SFAS
121 requires that long-lived assets and certain identifiable intangibles to be
disposed of be reported at the lower of carrying amount or fair value, less
cost to sell. SFAS 121 is effective for financial statements for fiscal years
beginning after December 31, 1995. The Company does not expect that the
adoption of SFAS 121 will have a material impact on the Company's consolidated
financial statements.

In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation ("SFAS 123"). SFAS 123
establishes financial accounting and reporting standards for stock-based
employee compensation plans, and provides for alternative methods for an
employer to recognize stock-based compensation costs. Under the first method,
an employer may continue to account for compensation costs for stock, stock
options, and other equity instruments issued to employees as it has
historically, using the "intrinsic value based method" (as described in SFAS
123), and such compensation costs would be the excess, if any, of the quoted
market price of the stock subject to an option at the grant date or other
measurement date over the amount an employee must pay to acquire the stock. The
intrinsic value based method generally would not result in the recognition of
compensation costs upon the grant of stock options. Under the second method, an
employer may adopt the "fair value based method" (as described in SFAS 123).
Under the fair value based method, such compensation costs would be valued
using an option-pricing model, and such amount would be charged to expense over
the option's vesting period. Employers which elect to continue to account for
stock-based compensation under the intrinsic value based method will be
required by SFAS 123 to disclose in the notes to their financial statements the
amount of net income and the earnings per share which would have been reported
had the employer elected to use the fair value based method. The Company has
elected to continue to account for stock-based compensation under the intrinsic
value based method, and will comply with the disclosure requirement of SFAS 123
for fiscal years beginning January 1, 1996.

33
<PAGE>

BUSINESS

ALUMINUM OPERATIONS

The Company engages in aluminum operations through Kaiser and Kaiser's
principal operating subsidiary, KACC. KACC is a fully integrated aluminum
producer operating in all principal aspects of the aluminum industry--the
mining of bauxite (the major aluminum-bearing ore), the refining of bauxite
into alumina (the intermediate material), the production of primary aluminum
and the manufacture of fabricated (including semi-fabricated) aluminum
products. KACC is one of the largest U.S. aluminum producers in terms of
primary smelting capacity and is the western world's second largest
producer/seller of alumina, accounting for approximately 8% of the world's
alumina production and for approximately 7% of the Western world's capacity in
1995. Kaiser's production levels of alumina and primary aluminum exceed its
internal processing needs which allows it to be a major seller of alumina to
third parties (approximately 2.0 million tons in 1995 or 72% of 1995
production) and primary aluminum (approximately 271,700 tons in 1995 or 66% of
1995 production).

STRATEGY

Kaiser's strategic objectives include (i) increasing the competitiveness of
its existing facilities through the application of capital and its proprietary
technology, (ii) developing new technologies and participating in additional
markets for engineered products and other value-added products, and (iii)
increasing its level of foreign activities by using its technical expertise
and capital investments to form joint ventures or acquire equity in aluminum-
related facilities in foreign countries.

During 1994 Kaiser created a new organization, Kaiser Aluminum
International, with the mission of identifying growth opportunities in
targeted emerging markets and developing the needed "country" competence to
match Kaiser's product and process competence in capitalizing on such
opportunities. This organization is actively pursuing opportunities in various
countries. An example of the strategic initiatives Kaiser is undertaking is a
new joint venture in the PRC which is designed to utilize Kaiser's unique
technologies for retrofitting older primary aluminum smelters in order to
modernize and expand existing Chinese facilities. See "--Kaiser--Operations in
China."

Kaiser has also developed a unique micromill for the production of can sheet
from molten metal based on a proprietary thin-strip, high-speed, continuous-
belt casting technique linked directly to hot rolling and cold rolling mills.
The conversion and capital costs of these micromills are expected to be
significantly lower than conventional rolling mills and to result in improved
economics compared with historical manufacturing and transportation costs for
can stock. Most micromills are expected to be installed in emerging markets in
Asia and Latin America where demand for can sheet is growing rapidly and there
is limited indigenous supply. The first micromill is being constructed in
Nevada as a demonstration production facility, and Kaiser expects operational
startup of the facility by the end of 1996. See "--Kaiser--Research and
Development." KACC currently intends to finance the cost of the construction
of the Nevada micromill, estimated to be approximately $45.0 million, from
general corporate funds, including possible borrowings under the KACC 1994
Credit Agreement, although KACC is in discussions with third parties which
might provide some or all of such funding. At February 29, 1996, $174.9
million was available to KACC under its 1994 Credit Agreement.

In 1995, Kaiser's Primary Aluminum Products business unit successfully
restructured electric power purchase agreements for Kaiser's facilities in the
Pacific Northwest. See "--Kaiser--Primary Aluminum Products." Kaiser
anticipates that such restructuring will result in significantly lower
electric power costs in 1996 and beyond for the Mead and Tacoma, Washington,
smelters and the Trentwood, Washington, rolling mill compared to 1995 costs.
The Flat Rolled Products business unit is engaged in a major cost reduction
and productivity improvement program at the Trentwood rolling mill based on a
cooperative team-based effort with its employees, including the members of the
USWA. This effort includes a significant shift in the mix of products produced
at the mill toward the products where Kaiser has particular technological
competence. Similar strategies to improve Kaiser's competitive position and
enhance earnings are being implemented in each of Kaiser's businesses.

34
<PAGE>

INDUSTRY OVERVIEW

Primary aluminum is produced by the refining of bauxite into alumina and the
reduction of alumina into primary aluminum. Approximately two pounds of
bauxite are required to produce one pound of alumina, and approximately two
pounds of alumina are required to produce one pound of primary aluminum.
Aluminum's valuable physical properties include its light weight, corrosion
resistance, thermal and electrical conductivity, and high tensile strength.

Demand

The packaging, transportation and construction industries are the principal
consumers of aluminum in the United States, Japan, and Western Europe. In the
packaging industry, which accounted for approximately 20% of aluminum
consumption in 1994, aluminum's recyclability and weight advantages have
enabled it to gain market share from steel and glass, primarily in the
beverage container area. Nearly all beer cans and soft drink cans manufactured
for the United States market are made of aluminum. Kaiser believes that growth
in the packaging area is likely to continue through the 1990s due to general
population increase and to further penetration of the beverage container
market in Asia and Latin America, where aluminum cans are a substantially
lower percentage of the total beverage container market than in the United
States. Kaiser believes that growth in demand for can sheet in the United
States will follow the growth in population, offset in part by the effects of
the use of lighter gauge aluminum for can sheet and of plastic container
production from newly installed capacity.

In the transportation industry, which accounted for approximately 28% of
aluminum consumption in the United States, Japan and Western Europe in 1994,
automotive manufacturers use aluminum instead of steel, ductile iron or copper
for an increasing number of components, including radiators, wheels,
suspension components and engines, in order to meet more stringent
environmental, safety, and fuel efficiency requirements. Kaiser believes that
sales of aluminum to the transportation industry have considerable growth
potential due to projected increases in the use of aluminum in automobiles. In
addition, Kaiser believes that consumption of aluminum in the construction
industry will follow the cyclical growth pattern of that industry, and will
benefit from higher growth in Asian and Latin American economies.

Supply

As of year-end 1995, Western world aluminum capacity from 107 smelting
facilities was approximately 16.6 million tons per year. Western world
production of primary aluminum for 1995 increased approximately 1.8% compared
to 1994. Net exports of aluminum from the former Sino Soviet bloc increased
approximately 250% from 1990 levels during the period from 1991 through 1994
to approximately 2.2 million tons per year. These exports contributed to a
significant increase in London Metal Exchange ("LME") stocks of primary
aluminum which peaked in June 1994 at 2.7 million tons. By the end of 1995,
LME stocks of primary aluminum had declined 2.1 million tons from this peak
level and 1.1 million tons from the beginning of 1995. See "--Recent Industry
Trends."

Based upon information currently available, the Company believes that
moderate additions will be made during 1996-1998 to Western world alumina and
primary aluminum production capacity. The increases in alumina capacity during
1996-1998 are expected to come from one new refinery which began operations in
1995 and incremental expansions of existing refineries. In addition, Kaiser
believes that there is currently approximately 0.9 million tons of curtailed
smelting capacity that could be restarted by aluminum producers. The increases
in primary aluminum capacity during 1996-1998 are expected to come from one
new smelter which began operations in 1995 and is expected to reach its rated
capacity of approximately 466,000 tons per year in 1996, and the remainder
principally from incremental expansions of existing smelters.

Recent Industry Trends

Market fundamentals for aluminum improved significantly in 1994 as aluminum
producers worldwide curtailed primary aluminum production. Western world
consumption of aluminum grew strongly, and customers

35
<PAGE>

replenished inventories, particularly in the United States. In 1995,
production of primary aluminum increased and consumption of aluminum continued
to grow, but at a much lower rate than in 1994. In general, the overall
aluminum market was strongest in the first half of 1995. By the second half of
1995, orders and shipments for certain products had softened and the rate of
decline in LME inventories had leveled off. By the end of 1995, some small
increases in LME inventories occurred, and prices of aluminum weakened from
first-half levels. The Midwest U.S. transaction price for primary aluminum in
1995 averaged approximately 86 cents per pound, compared to a 1994 annual
average of approximately 72 cents per pound. The Midwest U.S. transaction
price for primary aluminum averaged approximately 79 cents per pound in
December 1995.

Western world demand for alumina, and the price of alumina, declined in 1994
in response to the curtailment of Western world smelter production of primary
aluminum, partially offset by increased usage of Western world alumina by
smelters in the Commonwealth of Independent States (the "CIS") and in the PRC.
Increased Western world production of primary aluminum, as well as continued
imports of Western world alumina by the CIS and the PRC, during 1995 resulted
in higher demand for Western world alumina and significantly stronger alumina
pricing. United States shipments of domestic fabricated aluminum products in
1995 were approximately at 1994 levels, although in 1995 demand for can sheet
in the United States softened relative to 1994. Overall, Kaiser believes that
the market fundamentals for aluminum will be good through 1996, barring an
economic recession, and that demand is likely to continue growing at levels
sufficient to absorb the output from restarts of industry smelter capacity and
from the limited additions of new supply under construction.

See "Risk Factors" for a discussion of certain factors that could cause
actual results to differ from those that could otherwise result from the
industry trends discussed above.

KAISER

General

Kaiser is a direct subsidiary of the Company and, through KACC, operates 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. In addition to the production utilized by KACC in its
operations, KACC sells significant amounts of alumina and primary aluminum in
domestic and international markets. In 1995, KACC produced approximately
2,838,000 tons of alumina, of which approximately 72% was sold to third
parties, and produced 413,600 tons of primary aluminum, of which approximately
66% was sold to third parties. KACC is also a major domestic supplier of
fabricated aluminum products. In 1995, KACC shipped approximately 368,200 tons
of fabricated aluminum products to third parties, which accounted for
approximately 6% of the total tonnage of United States domestic shipments. A
majority of KACC's fabricated products are sold to distributors or used by
customers as components in the manufacture and assembly of finished end-use
products. See Note 11 of the Notes to the Consolidated Financial Statements
for additional information regarding revenues, operating income and other
financial disclosures relating to Kaiser's segments.

The following table sets forth total shipments and intracompany transfers of
KACC's alumina, primary aluminum, and fabricated aluminum operations:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1995 1994 1993
------ ------ ------
(IN THOUSANDS OF
TONS)
<S> <C> <C> <C>
ALUMINA:
Shipments to Third Parties............................... 2040.1 2086.7 1997.5
Intracompany Transfers................................... 800.6 820.9 807.5
PRIMARY ALUMINUM:
Shipments to Third Parties............................... 271.7 224.0 242.5
Intracompany Transfers................................... 217.4 225.1 233.6
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties............................... 368.2 399.0 373.2
</TABLE>

36
<PAGE>

Sensitivity to Prices and Hedging Programs

Kaiser's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also depend
to a significant degree upon the volume and mix of all products sold and on
KACC's hedging strategies. Fabricated aluminum prices, which vary considerably
among products, are influenced by changes in the price of primary aluminum and
generally lag behind primary aluminum prices for periods of up to six months.
Changes in the market price of primary aluminum also affect Kaiser's
production costs of fabricated products because they influence the price of
aluminum scrap purchased by Kaiser and Kaiser's labor costs, to the extent
such costs are indexed to primary aluminum prices. Through its variable cost
structures, forward sales, and hedging programs, KACC has attempted to
mitigate its exposure to possible declines in the market prices of alumina,
primary aluminum and fabricated aluminum products while retaining the ability
to participate in favorable pricing environments that may materialize. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Trends--Aluminum Operations--Sensitivity to Prices and Hedging
Programs" and Note 10 of the Notes to Consolidated Financial Statements.

Production Operations

The Company's operations are conducted through KACC's decentralized business
units which compete throughout the aluminum industry.

. The alumina business unit, which mines bauxite and obtains additional
bauxite tonnage under long-term contracts, produced approximately 8% of
Western world alumina in 1995. During 1995, KACC shipments of bauxite to
third parties represented approximately 21% of bauxite mined. In
addition, KACC third party shipments of alumina represented
approximately 72% of alumina produced. KACC's share of total Western
world alumina capacity was approximately 7% in 1995.

. The primary aluminum products business unit operates two domestic
smelters wholly owned by KACC and two foreign smelters in which KACC
holds significant ownership interests. During 1995, KACC's shipments of
primary aluminum to third parties represented approximately 66% of
primary aluminum production. KACC's share of total Western world primary
aluminum capacity was approximately 3% in 1995.

. Fabricated aluminum products are manufactured by three business units--
flat-rolled products, extruded products and engineered components. The
products include body, lid, and tab stock for beverage containers, sheet
and plate products, heat-treated products, screw machine stock, redraw
rod, forging stock, truck wheels and hubs, air bag canisters, engine
manifolds and other castings, forgings and extruded products, which are
manufactured at plants located in principal marketing areas of the
United States and Canada. The aluminum utilized in KACC's fabricated
products operations is comprised of primary aluminum, obtained both
internally and from third parties, and scrap metal purchased from third
parties.

37
<PAGE>

Alumina

The following table lists KACC's bauxite mining and alumina refining
facilities as of December 31, 1995:

<TABLE>
<CAPTION>
ANNUAL
PRODUCTION
CAPACITY TOTAL
AVAILABLE ANNUAL
COMPANY TO THE PRODUCTION
ACTIVITY FACILITY LOCATION OWNERSHIP COMPANY CAPACITY
- -------- -------- -------- --------- ---------- ----------
(TONS) (TONS)
<S> <C> <C> <C> <C> <C>
Bauxite Mining.......... KJBC(/1/) Jamaica 49% 4,500,000 4,500,000
Alpart(/2/) Jamaica 65% 2,275,000 3,500,000
--------- ---------
6,775,000 8,000,000
========= =========
Alumina Refining........ Gramercy Louisiana 100% 1,000,000 1,000,000
Alpart Jamaica 65% 943,000 1,450,000
QAL Australia 28.3% 934,000 3,300,000
--------- ---------
2,877,000 5,750,000
========= =========
</TABLE>
- --------

(1) Although KACC owns 49% of Kaiser Jamaica Bauxite Company ("KJBC"), it has
the right to receive all of such entity's output.

(2) Alpart's bauxite is refined into alumina at the Alpart refinery.

Bauxite mined in Jamaica by KJBC is refined into alumina at KACC's plant at
Gramercy, Louisiana, or is sold to third parties. In 1979, the Government of
Jamaica granted KACC a mining lease for the mining of bauxite sufficient to
supply KACC's then-existing Louisiana alumina refineries at their annual
capacities of 1,656,000 tons per year until January 31, 2020. Alumina from the
Gramercy plant is sold to third parties.

Alpart holds bauxite reserves and owns a 1,450,000 tons per year alumina
plant located in Jamaica. KACC owns a 65% interest in Alpart and Hydro
Aluminium a.s ("Hydro") owns the remaining 35% interest. KACC has management
responsibility for the facility on a fee basis. KACC and Hydro have agreed to
be 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 to a capacity of 2,000,000 tons per year through the year 2024.
Alpart has entered into an agreement for the supply of substantially all of
its fuel oil through 1996. The balance of Alpart's fuel oil requirements
through 1996 will be purchased in the spot market.

KACC owns a 28.3% interest in Queensland Alumina Limited ("QAL"), which owns
the largest and one of the most efficient alumina refineries in the world,
located in Queensland, Australia. QAL refines bauxite into alumina,
essentially on a cost basis, for the account of its stockholders under long-
term tolling contracts. The stockholders, including KACC, purchase bauxite
from another QAL stockholder under long-term supply contracts. KACC has
contracted with QAL to take approximately 792,000 tons per year of capacity or
pay standby charges. KACC is unconditionally obligated to pay amounts
calculated to service its share ($88.9 million at December 31, 1995) of
certain debt of QAL, as well as other QAL costs and expenses, including
bauxite shipping costs. QAL's annual production capacity is approximately
3,300,000 tons, of which approximately 934,000 tons are available to KACC.

KACC's principal customers for bauxite and alumina consist of large and
small domestic and international aluminum producers that purchase bauxite and
reduction-grade alumina for use in their internal refining and smelting
operations, trading intermediaries who resell raw materials to end-users, and
users of chemical-grade alumina. In 1995, KACC sold all of its bauxite to two
customers, the largest of which accounted for approximately 74% of such sales.
KACC also sold alumina to nine customers, the largest and top five of which
accounted for approximately 23% and 90% of such sales, respectively. See "--
Competition." Kaiser believes that among alumina producers it is now the
world's second largest seller of alumina to third parties. KACC's

38
<PAGE>

strategy is to sell a substantial portion of the bauxite and alumina available
to it in excess of its internal refining and smelting requirements under
multi-year sales contracts.

Primary Aluminum Products

The following table lists KACC's primary aluminum smelting facilities as of
December 31, 1995:

<TABLE>
<CAPTION>
ANNUAL RATED TOTAL
CAPACITY ANNUAL 1995
COMPANY AVAILABLE TO RATED OPERATING
LOCATION FACILITY OWNERSHIP THE COMPANY CAPACITY RATE
- -------- -------- --------- ------------ -------- ---------
(TONS) (TONS)
<S> <C> <C> <C> <C> <C>
Domestic
Washington................. Mead 100% 200,000 200,000 82%
Washington................. Tacoma 100% 73,000 73,000 82%
------- -------
Subtotal................. 273,000 273,000
------- -------
International
Ghana...................... Valco 90% 180,000 200,000 68%
Wales, United Kingdom...... Anglesey 49% 55,000 112,000 119%
------- -------
Subtotal................. 235,000 312,000
------- -------
Total.................... 508,000 585,000
======= =======
</TABLE>

KACC owns two smelters located at Mead and Tacoma, Washington, where alumina
is processed into primary aluminum. The Mead facility uses pre-bake technology
and produces primary aluminum. Approximately 71% of Mead's 1995 production was
used at KACC's Trentwood fabricating facility and the balance was sold to
third parties. The Tacoma plant uses Soderberg technology and produces primary
aluminum and high-grade, continuous-cast, redraw rod, which currently commands
a premium price in excess of the price of primary aluminum. Both smelters have
achieved significant production efficiencies in recent years through retrofit
technology, cost controls, and semi-variable wage and power contracts, leading
to increases in production volume and enhancing their ability to compete with
newer smelters. At the Mead plant, KACC has converted to welded anode
assemblies to increase energy efficiency, extended the anode life-cycle in the
smelting process, changed from pencil to liquid pitch to produce carbon anodes
which achieved environmental and operating savings, and engaged in efforts to
increase production through the use of improved, higher-efficiency reduction
cells.

Electric power represents an important production cost for KACC at its
aluminum smelters. In 1995, electric power purchase agreements for KACC's
facilities in the Pacific Northwest were successfully restructured, which
Kaiser anticipates will result in significantly lower electric power costs in
1996 and beyond for the Mead and Tacoma, Washington, smelters and the
Trentwood, Washington, rolling mill compared to 1995 electric power costs.
From 1981 until 1995, electric power for KACC's Mead and Tacoma smelters was
purchased exclusively from the BPA by KACC under a contract which expires in
2001. In April 1995, the BPA agreed to allow each of its DSIs, which include
KACC, to purchase a portion of its requirement for electric power from sources
other than the BPA beginning October 1, 1995. In June 1995, KACC entered into
an agreement with the WWP to purchase up to 50 megawatts of electric power for
its Pacific Northwest facilities for a five-year term beginning October 1,
1995. KACC is receiving power under that contract, which power displaces a
portion of KACC's interruptible power from the BPA. In addition, in 1995 KACC
entered into a new power purchase contract with the BPA, which amends the
existing BPA power contract and which contemplates reductions during 1996 in
the amount of power which KACC is obligated to purchase from the BPA and which
the BPA is obligated to sell to KACC, and the replacement of such power with
power to be purchased from other suppliers. KACC is negotiating power purchase
agreements for such power with suppliers other than the BPA. Contracts for the
purchase of all power required by KACC's Mead and Tacoma smelters and
Trentwood rolling mill for 1996, and for approximately one-half of such power
for the period 1997-2000, have been finalized. Two lawsuits were filed in
December 1995 against the BPA by various parties, one of which petitions for a
review of the BPA's

39
<PAGE>

"Record of Decision on Direct Service Industrial Customer Requirements Power
Sales Contract" issued on September 28, 1995, and one of which petitions for
review of, and to set aside, suspend, or modify the action of the BPA to
decide to offer five-year "block" power sales to the DSIs. The effect of such
lawsuits, if any, on KACC's new power purchase contract with the BPA is not
known. Certain of the DSIs, including KACC, have intervened in the two
lawsuits.

In 1995, KACC also entered into agreements with the BPA and with the WWP,
with terms ending in 2001, under which the BPA and the WWP would provide to
KACC transmission services for power purchased from sources other than the
BPA. The term of the transmission services agreement with the BPA was
subsequently extended for an additional fifteen years, which extension has
been challenged. Four lawsuits have been filed against the BPA by various
parties, which lawsuits either challenge the BPA's record of decision offering
such an extension agreement to the DSIs or challenge the BPA's Business Plan
Environmental Impact Statement record of decision in connection therewith.
Certain of the DSIs, including KACC, have intervened in the four lawsuits.

KACC began operating its Mead and Tacoma smelters in Washington at
approximately 75% of their full capacity in January 1993, when three reduction
potlines were removed from production (two at Mead and one at Tacoma) in
response to a power reduction imposed by the BPA. In March 1995, the BPA
offered to its industrial customers, including KACC, surplus firm power at a
discounted rate for the period April 1, 1995, through July 31, 1995, to enable
such customers to restart idle industrial loads. In April 1995, KACC and the
BPA entered into a contract for an amount of such power, and thereafter KACC
restarted one-half of an idle potline (approximately 9,000 tons of annual
capacity) at its Tacoma, Washington, smelter. The Tacoma smelter was returned
to full production in October 1995. In 1995, KACC entered into a one-year
power supply contract with the BPA, for a term ending September 30, 1996, in
connection with the restart of idled capacity at its Mead smelter. The Mead
smelter returned to full production in December 1995.

KACC manages, and owns a 90% interest in, the Valco aluminum smelter in
Ghana. The Valco smelter uses pre-bake technology and processes alumina
supplied by KACC and the other participant into primary aluminum under long-
term tolling contracts which provide for proportionate payments by the
participants in amounts intended to pay not less than all of Valco's operating
and financing costs. KACC's share of the primary aluminum is sold to third
parties. Power for the Valco smelter is supplied under an agreement which
expires in 2017. The agreement indexes two-thirds of the price of the contract
quantity of power to the market price of primary aluminum. The agreement also
provides for a review and adjustment of the base power rate and the price
index every five years. The most recent review was completed in April 1994 for
the 1994-1998 period. Valco has entered into an agreement with the government
of Ghana under which Valco has been assured (except in cases of force majeure)
that it will receive sufficient electric power to operate at its current level
of three and one-half potlines through December 31, 1996. Kaiser believes
that, assuming normal rainfall during 1996, Valco should have available
sufficient electric power to operate at its current level through 1996.

KACC owns a 49% interest in the Anglesey Aluminium Limited ("Anglesey")
aluminum smelter and port facility at Holyhead, Wales. The Anglesey smelter
uses pre-bake technology. KACC supplies 49% of Anglesey's alumina requirements
and purchases 49% of Anglesey's aluminum output. KACC sells its share of
Anglesey's output to third parties. Power for the Anglesey aluminum smelter is
supplied under an agreement which expires in 2001.

KACC has developed and installed proprietary retrofit and control technology
in all of its smelters, as well as at third party locations. This technology--
which includes the redesign of the cathodes and anodes that conduct
electricity through reduction cells, improved feed systems that add alumina to
the cells, and a computerized system that controls energy flow in the cells--
enhances KACC's ability to compete more effectively with the industry's newer
smelters. KACC is actively engaged in efforts to license this technology and
sell technical and managerial assistance to other producers worldwide, and may
participate in joint ventures or similar business partnerships which employ
KACC's technical and managerial knowledge. See "--Research and Development."

40
<PAGE>

KACC's principal primary aluminum customers consist of large trading
intermediaries and metal brokers, who resell primary aluminum to fabricated
product manufacturers, and large and small international aluminum fabricators.
In 1995, KACC sold its primary aluminum production not utilized for internal
purposes to approximately 35 customers, the largest and top five of which
accounted for approximately 25% and 62% of such sales, respectively. See "--
Competition." Marketing and sales efforts are conducted by a small staff
located at the business unit's headquarters in Pleasanton, California, and by
senior executives of KACC who participate in the structuring of major sales
transactions. A majority of the business unit's sales are based upon long-term
relationships with metal merchants and end-users.

Fabricated Aluminum Products

KACC manufactures and markets fabricated aluminum products for the
packaging, transportation, construction, and consumer durables markets in the
United States and abroad. Sales in these markets are made directly and through
distributors to a large number of customers. In 1995, four domestic beverage
container manufacturers were among the leading customers for KACC's fabricated
products and accounted for approximately 12% of Kaiser's sales revenue.

KACC's fabricated products compete with those of numerous domestic and
foreign producers and with products made of steel, copper, glass, plastic, and
other materials. Product quality, price, and availability are the principal
competitive factors in the market for fabricated aluminum products. KACC has
focused its fabricated products operations on selected products in which KACC
has production expertise, high-quality capability, and geographic and other
competitive advantages.

Flat-Rolled Products. The flat-rolled products business unit, the largest of
KACC's fabricated products businesses, operates the Trentwood sheet and plate
mill at Spokane, Washington. The Trentwood facility is KACC's largest
fabricating plant and accounted for approximately 64% of its 1995 fabricated
aluminum products shipments. The business unit supplies the beverage container
market (producing body, lid, and tab stock), the aerospace market, and the
tooling plate, heat-treated alloy and common alloy coil markets, both directly
and through distributors. During 1995, KACC successfully completed a two year
restructuring of its flat-rolled products operation at its Trentwood plant to
reduce that facility's annual operating costs by at least $50.0 million.

KACC's flat-rolled products are sold primarily to beverage container
manufacturers located in the western United States and in the Asian Pacific
Rim countries where the Trentwood plant's location provides KACC with a
transportation advantage. Quality of products for the beverage container
industry and timeliness of delivery are the primary bases on which KACC
competes. Kaiser believes that capital improvements at Trentwood have enhanced
the quality of KACC's products for the beverage container industry and the
capacity and efficiency of KACC's manufacturing operations, and that KACC is
one of the highest quality producers of aluminum beverage can stock in the
world.

In 1995, the flat-rolled products business unit had 31 domestic and foreign
can stock customers, including the five major domestic beverage can
manufacturers. The largest and top five of such customers accounted for
approximately 14% and 41%, respectively, of the business unit's revenue. See
"--Competition." In 1995, the business unit shipped products to approximately
150 customers in the aerospace, transportation, and industrial ("ATI")
markets, most of which were distributors who sell to a variety of industrial
end-users. The top five customers in the ATI markets for flat-rolled products
accounted for approximately 13% of the business unit's revenue. The marketing
staff for the flat-rolled products business unit is located at the Trentwood
facility and in Pleasanton, California. Sales are made directly to customers
(including distributors) from eight sales offices located throughout the
United States. International customers are served by sales offices in the
Netherlands and Japan and by independent sales agents in Asia and Latin
America.

Extruded Products. The extruded products business unit is headquartered in
Dallas, Texas, and operates soft-alloy extrusion facilities in Los Angeles,
California; Santa Fe Springs, California; Sherman, Texas; and London, Ontario,
Canada; a cathodic protection business located in Tulsa, Oklahoma, that also
extrudes both

41
<PAGE>

aluminum and magnesium; rod and bar facilities in Newark, Ohio, and Jackson,
Tennessee, which produce screw machine stock, redraw rod, forging stock, and
billet; and a facility in Richland, Washington, which produces seamless tubing
in both hard and soft alloys for the automotive, other transportation, export,
recreation, agriculture, and other industrial markets. Each of the soft-alloy
extrusion facilities has fabricating capabilities and provides finishing
services.

The extruded products business unit's major markets are in the
transportation industry, to which it provides extruded shapes for automobiles,
trucks, trailers, cabs, and shipping containers, and in the distribution,
durable goods, defense, building and construction, ordnance and electrical
markets. In 1995, the extruded products business unit had approximately 825
customers for its products, the largest and top five of which accounted for
approximately 6% and 20%, respectively, of its revenue. See "--Competition."
Sales are made directly from plants as well as marketing locations across the
United States.

Engineered Components. The engineered components business unit operates
forging facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood,
South Carolina; a machine shop at Greenwood, South Carolina; and a casting
facility in Canton, Ohio. The engineered components business unit is one of
the largest producers of aluminum forgings in the United States and is a major
supplier of high-quality forged parts to customers in the automotive,
commercial vehicle and ordnance markets. The high strength-to-weight
properties of forged and cast aluminum make it particularly well-suited for
automotive applications. The business unit's casting facility manufactures
aluminum engine manifolds for the automobile, truck and marine markets.

In 1995, the engineered components business unit had approximately 250
customers, the largest and top five of which accounted for approximately 34%
and 77%, respectively, of the business unit's revenue. See "--Competition."
The engineered components business unit's headquarters is located in Erie,
Pennsylvania, and there is a sales and engineering office located in Detroit,
Michigan, which works with car makers and other customers, the Center for
Technology (see "--Research and Development") and plant personnel to create
new automotive component designs and improve existing products.

Research and Development

KACC conducts research and development activities principally at three
facilities--the Center for Technology ("CFT") in Pleasanton, California; the
Primary Aluminum Products Division Technology Center ("DTC") adjacent to the
Mead smelter in Washington; and the Alumina Development Laboratory ("ADL") at
the Gramercy, Louisiana, refinery, which supports Kaiser Alumina Technical
Services ("KATS") and the facilities of the alumina business unit. Net
expenditures for Company-sponsored research and development activities were
$18.5 million in 1995, $16.7 million in 1994, and $18.5 million in 1993.
KACC's research staff totaled 157 at December 31, 1995. KACC estimates that
research and development net expenditures will be approximately $22.5 million
in 1996.

CFT performs research and development across a range of aluminum process and
product technologies to support KACC's business units and new business
opportunities. It also selectively offers technical services to third parties.
Significant efforts are directed at product and process technology for the can
stock, aircraft and automotive markets, and aluminum reduction cell models
which are applied to improving cell designs and operating conditions. The
largest and most notable single project being developed at CFT is the
micromill process described under "--Strategy." DTC maintains specialized
laboratories and a miniature carbon plant where experiments with new anode and
cathode technology are performed. DTC supports KACC's primary aluminum
smelters, and concentrates on the development of cost-effective technical
innovations such as equipment and process improvements. KATS provides improved
alumina process technology to KACC's facilities and technical support to new
business ventures in cooperation with KACC's international business
development group.

KACC is actively engaged in efforts to license its technology and sell
technical and managerial assistance to other producers worldwide. KACC's
technology has been installed in alumina refineries, aluminum smelters and
rolling mills located in the United States, Jamaica, Sweden, Germany, Russia,
India, Australia, Korea, New Zealand, Ghana, the United Arab Emirates, and the
United Kingdom. KACC's revenue from technology sales and technical assistance
to third parties was $5.7 million in 1995, $10.0 million in 1994, and $12.8
million in 1993.

42
<PAGE>

KACC has entered into agreements with respect to the Krasnoyarsk smelter in
Russia under which KACC has licensed certain of its technology for use in such
facility and agreed to provide purchasing services in obtaining Western-
sourced technology and equipment to be used in such facility. These agreements
were entered into in November 1990, and the services under them are expected
to be completed in 1996. In addition, in 1993 KACC entered into agreements
with respect to the Nadvoitsy smelter in Russia and the Korba smelter of the
Bharat Aluminum Co. Ltd., in India, under which KACC has licensed certain of
its technology for use in such facilities. Services under the Nadvoitsy
agreement were completed in 1995, and KACC expects that services under the
Korba agreement will be completed in 1996.

Operations in China

In 1994, KACC commenced efforts to increase its activities in certain
countries that are expected to be important suppliers of aluminum and large
customers for aluminum and alumina. KACC intends to use its technical skills,
together with capital investments, to form joint ventures or acquire equity in
facilities in such countries.

In 1995, KYRIL was formed to participate in the privatization,
modernization, expansion, and operation of aluminum smelting facilities in the
PRC. KYRIL has entered into a Joint Venture Agreement and related agreements
(the "Joint Venture Agreements") with the Lanzhou Aluminum Smelters ("LAS") of
the China National Nonferrous Metals Industry Corporation relating to the
formation and operation of the Joint Venture, a Sino-foreign joint equity
enterprise organized under PRC law. The Joint Venture constitutes the first
large-scale privatization in the Chinese aluminum smelting industry. The Joint
Venture's assets and operations are located primarily in the industrial city
of Lanzhou, the capital of Gansu Province in northwestern China, and in nearby
Lianhai, a special economic zone also in Gansu Province. The smelter at
Lanzhou is the fifth largest aluminum smelter in the PRC and has a capacity of
approximately 55,000 tons of primary aluminum per year. The smelter at Lianhai
has a capacity of approximately 30,000 tons of primary aluminum per year. In
1995, the two smelters produced an aggregate of approximately 71,000 tons of
primary aluminum, which amount was less than the aggregate capacity of the
plants principally because of a shortage of electric power available to the
plants in 1995 due to a drought which impacted the hydroelectric system. The
shortage of electric power available to the plants has continued during the
first part of 1996, and the planned production of the two plants for 1996 is
estimated to be approximately 78,000 tons.

LAS's capital contribution to the Joint Venture consisted primarily of the
Lanzhou and Lianhai smelters. KYRIL contributed $9.0 million as a contribution
to the capital of the Joint Venture in July 1995. The Joint Venture Agreements
include provisions for KYRIL to contribute up to a total of $59.7 million to
the Joint Venture in exchange for up to a 49% interest in the Joint Venture.
The parties to the Joint Venture are currently engaged in discussions
concerning the amount, timing and other conditions relating to KYRIL's
additional contributions to the Joint Venture and the use thereof by the Joint
Venture. Uses of such additional contributions by the Joint Venture may
include (i) the acquisition and installation of new equipment to improve
smelter operations, (ii) the acquisition and installation of new equipment for
the production of value-added products, (iii) the acquisition, installation
and upgrading of pollution control equipment, and (iv) the provision of funds
for general purposes, including working capital. Expansion of the two smelters
and construction of a dry Soderberg paste plant are not presently
contemplated. Governmental approval in the PRC will be necessary in order to
implement any arrangements agreed to by the parties, and there can be no
assurance such approval will be obtained.

KACC, through its extruded products business unit, has entered into
contracts to form two small joint venture companies in the PRC. KACC will
indirectly acquire equity interests of approximately 45% and 49%,
respectively, in these two companies which will manufacture aluminum
extrusions, in exchange for the contribution to those companies of certain
used equipment, technology, services and cash. The majority equity interests
in the two companies will be owned by affiliates of Guizhou Guang Da
Construction Company.

Competition

Aluminum competes in many markets with steel, copper, glass, plastic, and
numerous other materials. In recent years, plastic containers have increased
and glass containers have decreased their respective shares of the

43
<PAGE>

soft drink sector of the beverage container market. In the United States,
beverage container materials, including aluminum, face increased competition
from plastics as increased polyethylene ("PET") container capacity is brought
on line by plastics manufacturers. Within the aluminum business, KACC competes
with both domestic and foreign producers of bauxite, alumina and primary
aluminum, and with domestic and foreign fabricators. Many of KACC's competitors
have greater financial resources than KACC. KACC's principal competitors in the
sale of alumina include Alcoa Alumina and Chemicals LLC, Billiton Marketing and
Trading BV, and Alcan Aluminium Limited. KACC competes with most aluminum
producers in the sale of primary aluminum.

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. KACC also competes with a wide
range of domestic and international fabricators in the sale of fabricated
aluminum products. Competition in the sale of fabricated products is based upon
quality, availability, price and service, including delivery performance. KACC
concentrates its fabricating operations on selected products in which KACC has
production expertise, high-quality capability, and geographic and other
competitive advantages. Kaiser 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 KACC's customers, including
intermediaries, would not have a material adverse effect on Kaiser's financial
condition or results of operations.

Employees

During 1995, KACC employed an average of approximately 9,550 persons,
compared with an average of 9,740 employees in 1994, and 10,220 employees in
1993. At December 31, 1995, KACC's work force was approximately 9,620,
including a domestic work force of approximately 5,950, of whom approximately
4,010 were paid at an hourly rate. Most hourly paid domestic employees are
covered by collective bargaining agreements with various labor unions.
Approximately 74% of such employees are covered by a master agreement (the
"Labor Contract") with the USWA expiring September 30, 1998. The Labor Contract
covers KACC's plants in Spokane (Trentwood and Mead) and Tacoma, Washington;
Gramercy, Louisiana; and Newark, Ohio. The Labor Contract replaced a contract
that expired October 31, 1994, and was reached after an eight-day work stoppage
by the USWA at these plants in February 1995.

The Labor Contract provides for base wages at all covered plants. In
addition, workers covered by the Labor Contract may receive quarterly bonus
payments based on various indices of profitability, productivity, efficiency,
and other aspects of specific plant performance, as well as, in certain cases,
the price of alumina or primary aluminum. Pursuant to the Labor Contract, base
wage rates were raised effective January 2, 1995, were raised again effective
November 6, 1995, and will be raised an additional amount effective November 3,
1997, and an amount in respect of the cost of living adjustment under the
previous master agreement will be phased into base wages during the term of the
Labor Contract. In the second quarter of 1995, KACC acquired up to $2,000 of
preference stock held in a stock plan for the benefit of each of approximately
82% of the employees covered by the Labor Contract and in the first half of
1998 will acquire up to an additional $4,000 of such preference stock held in
such plan for the benefit of substantially the same employees. In addition, a
profitability test was satisfied and, therefore, KACC will acquire during 1996
up to an additional $1,000 of such preference stock held in such plan for the
benefit of substantially the same employees. KACC made and will make comparable
acquisitions of preference stock held for the benefit of each of certain
salaried employees.

In February 1995, Alpart's employees engaged in a six-day work stoppage by
its National Workers Union, which was settled by a new contract.

Kaiser considers KACC's employee relations to be satisfactory.

Environmental Matters

Kaiser and KACC are subject to a wide variety of international, federal,
state and local environmental laws and regulations (the "Environmental Laws").
From time to time the Environmental Laws are amended and new ones are adopted.
The Environmental Laws regulate, among other things, air and water emissions
and discharges; the generation, storage, treatment, transportation, and
disposal of solid and hazardous waste; the release of

44
<PAGE>

hazardous or toxic substances, pollutants and contaminants into the
environment; and, in certain instances, the environmental condition of
industrial property prior to transfer or sale. In addition, Kaiser and KACC
are subject to various federal, state, and local workplace health and safety
laws and regulations ("Health Laws").

From time to time, KACC is subject, with respect to its current and former
operations, to fines or penalties assessed for alleged breaches of the
Environmental and Health Laws and to claims and litigation brought by federal,
state or local agencies and by private parties seeking remedial or other
enforcement action under the Environmental and Health Laws or damages related
to alleged injuries to health or to the environment, including claims with
respect to certain waste disposal sites and the remediation of sites presently
or formerly operated by KACC. See " Legal Proceedings--Kaiser Litigation--
Environmental Litigation." KACC currently is subject to a number of lawsuits
under CERCLA. KACC, along with certain other entities, has been named as a
Potentially Responsible Party ("PRP") for remedial costs at certain third-
party sites listed on the National Priorities List under CERCLA and, in
certain instances, may be exposed to joint and several liability for those
costs or damages to natural resources. KACC's Mead, Washington, facility has
been listed on the National Priorities List under CERCLA. In addition, in
connection with certain of its asset sales, KACC has agreed to indemnify the
purchasers with respect to certain liabilities (and associated expenses)
resulting from acts or omissions arising prior to such dispositions, including
environmental liabilities. While uncertainties are inherent in the final
outcome of these matters, and it is presently impossible to determine the
actual costs that ultimately may be incurred, Kaiser believes that the
resolution of such uncertainties should not have a material adverse effect on
KACC's liquidity, consolidated financial position or results of operations.

Environmental capital spending was $9.2 million in 1995, $11.9 million in
1994, and $12.6 million in 1993. Annual operating costs for pollution control,
not including corporate overhead or depreciation, were approximately $26.0
million in 1995, $23.1 million in 1994, and $22.4 million in 1993.
Legislative, regulatory, and economic uncertainties make it difficult to
project future spending for these purposes. However, Kaiser currently
anticipates that in the 1996-1997 period, environmental capital spending will
be within the range of $27.0-$33.0 million per year, and operating costs for
pollution control will be within the range of $28.0-$29.0 million per year. In
addition, $4.5 million in cash expenditures in 1995, $3.6 million in 1994, and
$7.2 million in 1993 were charged to previously established reserves relating
to environmental costs. Approximately $8.4 million is expected to be charged
to such reserves in 1996.

Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Financial Condition and Investing and Financing Activities--
Aluminum Operations," Note 9 of the Notes to Consolidated Financial Statements
and "Risk Factors--Risk Factors Relating to Kaiser--Environmental Matters and
Litigation."

Other

See "--Kaiser" above for a description of the locations and general
character of the principal plants, mines, and other materially important
physical properties relating to KACC's operations. KACC 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, subject to changing environmental
requirements. Although KACC's domestic aluminum smelters and alumina facility
were initially designed early in KACC's history, they have been modified
frequently over the years to incorporate technological advances in order to
improve efficiency, increase capacity, and achieve energy savings. KACC
believes that KACC's domestic plants are cost competitive on an international
basis. Due to KACC's variable cost structure, the plants' operating costs are
relatively lower in periods of low primary aluminum prices and relatively
higher in periods of high primary aluminum prices.

KACC's obligations under the KACC 1994 Credit Agreement are secured by,
among other things, mortgages on Kaiser's major domestic plants (other than
the Gramercy alumina plant).

45
<PAGE>

FOREST PRODUCTS OPERATIONS

GENERAL

The Company also engages in forest products operations through MGI and its
wholly owned subsidiaries, Pacific Lumber and Britt. Pacific Lumber, which has
been in continuous operation for over 125 years, engages in several principal
aspects of the lumber industry--the growing and harvesting of redwood and
Douglas-fir timber, the milling of logs into lumber products and the
manufacturing of lumber into a variety of value-added finished products. Britt
manufactures redwood and cedar fencing and decking products from small
diameter logs, a substantial portion of which Britt acquires from Pacific
Lumber (which cannot efficiently process them in its own mills).

PACIFIC LUMBER OPERATIONS

Timberlands

Pacific Lumber owns and manages approximately 192,000 acres of commercial
timberlands. These timberlands are located in Humboldt County along the
northern California coast which has very favorable soil and climate
conditions. These timberlands contain approximately three-quarters redwood and
one-quarter Douglas-fir timber. Pacific Lumber's acreage is virtually
contiguous, is located in close proximity to its sawmills and contains an
extensive (1,100 mile) network of roads. These factors greatly facilitate
Pacific Lumber's operations and forest management techniques. The extensive
roads throughout Pacific Lumber's timberlands facilitate log hauling, serve as
fire breaks and allow Pacific Lumber's foresters access to employ forest
stewardship techniques which protect the trees from forest fires, erosion,
insects and other damage.

Approximately 179,000 acres of Pacific Lumber's timberlands are owned by
Scotia Pacific (the "Scotia Pacific Timberlands"), a special purpose Delaware
corporation and wholly owned subsidiary of Pacific Lumber. Pacific Lumber has
the exclusive right to harvest (the "Pacific Lumber Harvest Rights")
approximately 8,000 non-contiguous acres of the Scotia Pacific Timberlands
consisting substantially of virgin old growth redwood and virgin old growth
Douglas-fir timber located on numerous small parcels throughout the Scotia
Pacific Timberlands. Substantially all of Scotia Pacific's assets, including
the Scotia Pacific Timberlands and the GIS (defined below), are pledged as
security for the Timber Notes of Scotia Pacific. Pacific Lumber harvests and
purchases from Scotia Pacific all of the logs harvested from the Scotia
Pacific Timberlands. See "--Relationships With Scotia Pacific and Britt" for a
description of this and other relationships among Pacific Lumber, Scotia
Pacific and Britt.

The forest products industry grades lumber in various classifications
according to quality. The two broad categories within which all grades fall,
based on the absence or presence of knots, are called "upper" and "common"
grades, respectively. "Old growth" trees, often defined as trees which have
been growing for approximately 200 years or longer, have a higher percentage
of upper grade lumber than "young growth" trees (those which have been growing
for less than 200 years). "Virgin" old growth trees are located in timber
stands that have not previously been harvested. "Residual" old growth trees
are located in timber stands which have been partially harvested in the past.

Pacific Lumber has engaged in extensive efforts to supplement the natural
regeneration of timber and increase the amount of timber on its timberlands.
Pacific Lumber is required to comply with California forestry regulations
regarding reforestation, which generally require that an area be reforested to
specified standards within an established period of time. Pacific Lumber also
actively engages in efforts to establish timberlands from open areas such as
pasture land. During 1995, Pacific Lumber planted approximately 676,000
redwood and Douglas-fir seedlings. Regeneration of redwood timber generally is
accomplished through the natural growth of new redwood sprouts from the stump
remaining after a redwood tree is harvested. Such new redwood sprouts grow
quickly, thriving on existing mature root systems. In addition, Pacific Lumber
supplements natural redwood regeneration by planting redwood seedlings.
Douglas-fir timber grown on Pacific Lumber's timberlands is regenerated almost
entirely by planting seedlings.

46
<PAGE>

Harvesting Practices

The ability of Pacific Lumber to sell logs or lumber products will depend,
in part, upon its ability to obtain regulatory approval of timber harvesting
plans ("THPs"). THPs are required to be developed by registered professional
foresters and must be filed with, and approved by, the California Department
of Forestry ("CDF") prior to the harvesting of timber. Each THP is designed to
comply with applicable environmental laws and regulations. The CDF's
evaluation of proposed THPs incorporates review and analysis of such THPs by
several California and federal agencies and public comments received with
respect to such THPs. An approved THP is applicable to specific acreage and
specifies the harvesting method and other conditions relating to the
harvesting of the timber covered by such THP. See "--Regulatory and
Environmental Factors" for information regarding proposed critical habitat
designation, sustained yield regulations and related matters. Pacific Lumber
maintains a detailed geographical information system covering its timberlands
(the "GIS"). The GIS covers numerous aspects of Pacific Lumber's properties,
including timber type, tree class, wildlife data, roads, rivers and streams.
By carefully monitoring and updating this data base and conducting field
studies, Pacific Lumber's foresters are able to develop detailed THPs
addressing the various regulatory requirements. Pacific Lumber also utilizes a
Global Positioning System ("GPS") which allows precise location of geographic
features through satellite positioning. Use of the GPS greatly enhances the
quality and efficiency of GIS data.

Pacific Lumber employs a variety of well-accepted methods of selecting trees
for harvest. These methods, which are designed to achieve optimal
regeneration, are referred to as "silvicultural systems" in the forestry
profession. Silvicultural systems range from very light thinnings aimed at
enhancing the growth rate of retained trees to clear cutting which results in
the harvest of all trees in an area and replacement with a new forest stand.
In between are a number of varying levels of partial harvests which can be
employed. Pacific Lumber's foresters select the appropriate silvicultural
system for any given site based upon the specific conditions of that site.
Pacific Lumber customarily employs silvicultural systems that involve
thinnings followed by a variety of partial cuttings to achieve a high degree
of natural regeneration. Partial harvesting allows the remaining trees to
obtain more light, nutrients and water, thereby promoting faster growth rates.
Pacific Lumber uses a variety of factors, including the size and density of
the remaining trees, to determine when to again submit a THP with respect to a
given area. Clear cutting is only used under specific circumstances where it
is advisable due to specific site conditions (such as undesirable tree species
composition for natural regeneration, topographic difficulties which preclude
partial cuttings or the need to create more diverse wildlife habitats within
watersheds as recommended by Pacific Lumber's wildlife biologists). Due to the
magnitude of its timberlands and conservative application of silvicultural
systems that retain substantial numbers of trees on areas that are harvested,
Pacific Lumber has historically conducted harvesting operations on
approximately 5% of its timberlands in any given year.

Production Facilities

Pacific Lumber owns four highly mechanized sawmills and related facilities
located in Scotia, Fortuna and Carlotta, California. The sawmills historically
have been supplied almost entirely from timber harvested from Pacific Lumber's
timberlands. Since 1986, Pacific Lumber has implemented numerous technological
advances which have increased the operating efficiency of its production
facilities and the recovery of finished products from its timber. Over the
past three years, Pacific Lumber's annual lumber production has averaged
approximately 268 million board feet, with approximately 290, 286, and 228
million board feet produced in 1995, 1994 and 1993, respectively. The Fortuna
sawmill, built by Pacific Lumber in 1972, produces primarily common grade
lumber. During 1995, the Fortuna mill produced approximately 94 million board
feet of lumber. The Carlotta sawmill was acquired in 1986 and produces both
common and upper grade redwood lumber. During 1995, the Carlotta mill produced
approximately 67 million board feet of lumber. Sawmill "A," located in Scotia,
was remodeled in 1983 and processes Douglas-fir logs while Sawmill "B," also
located in Scotia, primarily processes large diameter redwood logs. During
1995, Sawmills "A" and "B" produced 79 and 51 million board feet of lumber,
respectively.

Pacific Lumber operates a finishing plant which processes rough lumber into
a variety of finished products such as trim, fascia, siding and paneling.
These finished products include the industry's largest variety of customized
trim and fascia patterns. Pacific Lumber also enhances the value of some
grades of common grade

47
<PAGE>

lumber by assembling knot-free pieces of narrower and shorter lumber into
wider or longer pieces in its state-of-the-art end and edge glue plant. The
result is a standard sized upper grade product which can be sold at a
significant premium over common grade products.

Pacific Lumber dries the majority of its upper grade lumber before it is
sold. Upper grades of redwood lumber are generally air-dried for six to
eighteen months and then kiln-dried for seven to twenty-four days to produce a
dimensionally stable and high quality product which generally commands higher
prices than "green" lumber (which is lumber sold before it has been dried).
Upper grade Douglas-fir lumber is generally kiln-dried immediately after it is
cut. Pacific Lumber owns and operates 34 kilns, having an annual capacity of
approximately 95 million board feet, to dry its upper grades of lumber
efficiently in order to produce a quality, premium product. Pacific Lumber
also maintains several large enclosed storage sheds which hold approximately
25 million board feet of lumber.

In addition, Pacific Lumber owns and operates a modern 25-megawatt
cogeneration power plant which is fueled almost entirely by the wood residue
from its milling and finishing operations. This power plant generates
substantially all of the energy requirements of Scotia, California, the town
adjacent to Pacific Lumber's timberlands where several of its manufacturing
facilities are located. Pacific Lumber sells surplus power to Pacific Gas and
Electric Company. In 1995, the sale of surplus power accounted for
approximately 1% of Pacific Lumber's total revenues.

Products

The following table sets forth the distribution of Pacific Lumber's lumber
production (on a net board foot basis) and revenues by product line:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 31, 1994
---------------------------- ----------------------------
% OF TOTAL % OF % OF TOTAL % OF
LUMBER TOTAL % OF LUMBER TOTAL % OF
PRODUCTION LUMBER TOTAL PRODUCTION LUMBER TOTAL
VOLUME REVENUES REVENUES VOLUME REVENUES REVENUES
PRODUCT ---------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Upper grade redwood
lumber................. 17 % 38% 31% 17% 41% 33%
Common grade redwood
lumber................. 54% 40% 32% 58% 36% 30%
---- ---- --- ---- ---- ---
Total redwood lumber.. 71% 78% 63% 75% 77% 63%
---- ---- --- ---- ---- ---
Upper grade Douglas-fir
lumber................. 3% 5% 4% 3% 7% 5%
Common grade Douglas-fir
lumber................. 23% 14% 11% 20% 13% 10%
---- ---- --- ---- ---- ---
Total Douglas-fir
lumber............... 26% 19% 15% 23% 20% 15%
---- ---- --- ---- ---- ---
Other grades of lumber.. 3% 3% 4% 2% 3% 4%
---- ---- --- ---- ---- ---
Total lumber.......... 100% 100% 82% 100% 100% 82%
==== ==== === ==== ==== ===
Logs.................... 7% 9%
=== ===
Hardwood chips.......... 4% 4%
Softwood chips.......... 5% 4%
--- ---
Total wood chips...... 9% 8%
=== ===
</TABLE>

Lumber

Pacific Lumber primarily produces and markets lumber. In 1995, Pacific
Lumber sold approximately 277 million board feet of lumber, which accounted
for approximately 82% of Pacific Lumber's total revenues. Lumber products vary
greatly by the species and quality of the timber from which it is produced.
Lumber is sold not only by grade (such as "upper" grade versus "common"
grade), but also by board size and the drying process associated with the
lumber.

Redwood lumber is Pacific Lumber's largest product category. Redwood is
commercially grown only along the northern coast of California and possesses
certain unique characteristics which permit it to be sold at a premium to many
other wood products. Such characteristics include its natural beauty, superior
ability to retain

48
<PAGE>

paint and other finishes, dimensional stability and innate resistance to
decay, insects and chemicals. Typical applications include exterior siding,
trim and fascia for both residential and commercial construction, outdoor
furniture, decks, planters, retaining walls and other specialty applications.
Redwood also has a variety of industrial applications because of its chemical
resistance and because it does not impart any taste or odor to liquids or
solids.

Upper grade redwood lumber, which is derived primarily from old growth trees
and is characterized by an absence of knots and other defects and a very fine
grain, is used primarily in more costly and distinctive interior and exterior
applications. The overall supply of upper grade lumber has been diminishing
due to increasing environmental and regulatory restrictions and other factors.
While Pacific Lumber's competitive position with respect to upper grade lumber
has been improving due to the quality of its timberlands, Pacific Lumber's
supply of upper grade lumber has decreased in some premium product categories.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations--Forest Products Operations." Common
grade redwood lumber, Pacific Lumber's largest volume product, has many of the
same aesthetic and structural qualities of redwood uppers, but has some knots,
sapwood and a coarser grain. Such lumber is commonly used for construction
purposes, including outdoor structures such as decks, hot tubs and fencing.

Douglas-fir lumber is used primarily for new construction and some
decorative purposes and is widely recognized for its strength, hard surface
and attractive appearance. Douglas-fir is grown commercially along the west
coast of North America and in Chile and New Zealand. Upper grade Douglas-fir
lumber is derived primarily from old growth Douglas-fir timber and is used
principally in finished carpentry applications. Common grade Douglas-fir
lumber is used for a variety of general construction purposes and is largely
interchangeable with common grades of other whitewood lumber.

Logs

Pacific Lumber currently sells certain logs that, due to their size or
quality, cannot be efficiently processed by its mills into lumber. The
purchasers of these logs are largely Britt, and surrounding mills which do not
own sufficient timberlands to support their mill operations. See "--
Relationships With Scotia Pacific and Britt" below. Except for the agreement
with Britt described below, Pacific Lumber does not have any significant
contractual relationships with any third parties relating to the purchase of
logs. Pacific Lumber has historically not purchased significant quantities of
logs from third parties; however, Pacific Lumber may from time to time
purchase logs from third parties for processing in its mills or for resale to
third parties if, in the opinion of management, economic factors are
advantageous to Pacific Lumber.

Wood Chips

Pacific Lumber uses a whole-log chipper to produce wood chips from hardwood
trees which would otherwise be left as waste. These chips are sold to third
parties primarily for the production of facsimile and other specialty papers.
Pacific Lumber also produces softwood chips from the wood residue and waste
from its milling and finishing operations. These chips are sold to third
parties for the production of wood pulp and paper products.

Backlog and Seasonality

Pacific Lumber's backlog of sales orders at December 31, 1995 and 1994 was
approximately $11.5 million and $11.9 million, respectively, the substantial
portion of which was delivered in the first quarter of the next fiscal year.
Pacific Lumber has historically experienced lower first quarter sales due
largely to the general decline in construction-related activity during the
winter months. As a result, Pacific Lumber's results in any one quarter are
not necessarily indicative of results to be expected for the full year.

49
<PAGE>

Marketing

The housing, construction and remodeling markets are the primary markets for
Pacific Lumber's lumber products. Pacific Lumber's policy is to maintain a
wide distribution of its products both geographically and in terms of the
number of customers. Pacific Lumber sells its lumber products throughout the
country to a variety of accounts, the large majority of which are wholesalers,
followed by retailers, industrial users, exporters and manufacturers. Upper
grades of redwood and Douglas-fir lumber are sold throughout the entire United
States, as well as to export markets. Common grades of redwood lumber are sold
principally west of the Mississippi River, with California accounting for
approximately 63% of these sales in 1995. Common grades of Douglas-fir lumber
are sold primarily in California. In 1995, no single customer accounted for
more than 4% of Pacific Lumber's total revenues. Exports of lumber accounted
for approximately 4% of Pacific Lumber's total revenues in 1995. Pacific
Lumber markets its products through its own sales staff which focuses
primarily on domestic sales.

Pacific Lumber actively follows trends in the housing, construction and
remodeling markets in order to maintain an appropriate level of inventory and
assortment of product. Due to its high quality products, large inventory,
competitive prices and long history, Pacific Lumber believes that it has a
strong degree of customer loyalty.

Competition

Pacific Lumber's lumber is sold in highly competitive markets. Competition
is generally based upon a combination of price, service, product availability
and product quality. Pacific Lumber's products compete not only with other
wood products but with metals, masonry, plastic and other construction
materials made from non-renewable resources. The level of demand for Pacific
Lumber's products is dependent on such broad factors as overall economic
conditions, interest rates and demographic trends. In addition, competitive
considerations, such as total industry production and competitors' pricing, as
well as the price of other construction products, affect the sales prices for
Pacific Lumber's lumber products. Pacific Lumber currently enjoys a
competitive advantage in the upper grade redwood lumber market due to the
quality of its timber holdings and relatively low cost production operations.
Competition in the common grade redwood and Douglas-fir lumber market is more
intense, and Pacific Lumber competes with numerous large and small lumber
producers.

Employees

As of March 1, 1996, Pacific Lumber had approximately 1,600 employees, none
of whom are covered by a collective bargaining agreement.

Relationships With Scotia Pacific and Britt

In March 1993, Pacific Lumber consummated its offering of $235 million of
its Senior Notes and Scotia Pacific consummated its offering of $385 million
of Timber Notes. Upon the closing of such offerings, Pacific Lumber, Scotia
Pacific and Britt entered into a variety of agreements. Pacific Lumber and
Scotia Pacific entered into a Services Agreement (the "Services Agreement")
and an Additional Services Agreement (the "Additional Services Agreement").
Pursuant to the Services Agreement, Pacific Lumber provides operational,
management and related services with respect to the Scotia Pacific Timberlands
containing timber of Scotia Pacific ("Scotia Pacific Timber") not performed by
Scotia Pacific's own employees. Such services include the furnishing of all
equipment, personnel and expertise not within Scotia Pacific's possession and
reasonably necessary for the operation and maintenance of the Scotia Pacific
Timberlands containing Scotia Pacific Timber. In particular, Pacific Lumber is
required to regenerate Scotia Pacific Timber, prevent and control loss of
Scotia Pacific Timber by fires, maintain a system of roads throughout the
Scotia Pacific Timberlands, take measures to control the spread of disease and
insect infestation affecting Scotia Pacific Timber and comply with
environmental laws and regulations, including measures with respect to
waterways, habitat, hatcheries and endangered species. Pacific Lumber is also
required (to the extent necessary) to assist Scotia Pacific personnel in
updating the GIS and to prepare and file, on Scotia Pacific's behalf, all
pleadings and motions and otherwise diligently pursue appeals of any denial of
any THP and related matters. As compensation for these and the other services
to be provided by

50
<PAGE>

Pacific Lumber, Scotia Pacific pays a fee which is adjusted on January 1 of
each year based on a specified government index relating to wood products. The
fee was approximately $115,100 per month in 1995 and is expected to be
approximately $112,100 per month in 1996. Pursuant to the Additional Services
Agreement, Scotia Pacific provides Pacific Lumber with a variety of services,
including (a) assisting Pacific Lumber to operate, maintain and harvest its
own timber properties, (b) updating and providing access to the GIS with
respect to information concerning Pacific Lumber's own timber properties, and
(c) assisting Pacific Lumber with its statutory and regulatory compliance.
Pacific Lumber pays Scotia Pacific a fee for such services equal to the actual
cost of providing such services, as determined in accordance with generally
accepted accounting principles.

Pacific Lumber and Scotia Pacific also entered into a Master Purchase
Agreement (the "Master Purchase Agreement"). The Master Purchase Agreement
governs all purchases of logs by Pacific Lumber from Scotia Pacific. Each
purchase of logs by Pacific Lumber from Scotia Pacific is made pursuant to a
separate log purchase agreement (which incorporates the terms of the Master
Purchase Agreement) for the Scotia Pacific Timber covered by an approved THP.
Each log purchase agreement generally constitutes an exclusive agreement with
respect to the timber covered thereby, subject to certain limited exceptions.
The purchase price must be at least equal to the SBE Price (as defined below).
The Master Purchase Agreement provides that if the purchase price equals or
exceeds (i) the price for such species and category thereof set forth on the
structuring schedule applicable to the Timber Notes and (ii) the SBE Price,
then such price shall be deemed to be the fair market value of such logs. The
Master Purchase Agreement defines the "SBE Price," for any species and
category of timber, as the stumpage price for such species and category as set
forth in the most recent "Harvest Value Schedule" published by the California
State Board of Equalization ("SBE") applicable to the timber sold during the
period covered by such Harvest Value Schedule. Such Harvest Value Schedules
are published for purposes of computing yield taxes and generally are released
every six months. As Pacific Lumber purchases logs from Scotia Pacific
pursuant to the Master Purchase Agreement, Pacific Lumber is responsible, at
its own expense, for harvesting and removing the standing Scotia Pacific
Timber covered by approved THPs and, thus, the purchase price thereof is based
upon "stumpage prices." Title to the harvested logs does not pass to Pacific
Lumber until the logs are transported to Pacific Lumber's log decks and
measured. Substantially all of Scotia Pacific's revenues are derived from the
sale of logs to Pacific Lumber under the Master Purchase Agreement.

Pacific Lumber, Scotia Pacific and Salmon Creek Corporation ("Salmon Creek,"
a wholly owned subsidiary of Pacific Lumber) also entered into a Reciprocal
Rights Agreement granting to each other certain reciprocal rights of egress
and ingress through their respective properties in connection with the
operation and maintenance of such properties and their respective businesses.
In addition, Pacific Lumber entered into an Environmental Indemnification
Agreement with Scotia Pacific pursuant to which Pacific Lumber agreed to
indemnify Scotia Pacific from and against certain present and future
liabilities arising with respect to hazardous materials, hazardous materials
contamination or disposal sites, or under environmental laws with respect to
the Scotia Pacific Timberlands.

Pacific Lumber entered into an agreement with Britt (the "Britt Agreement")
which governs the sale of logs by Pacific Lumber and Britt to each other, the
sale of hog fuel (wood residue) by Britt to Pacific Lumber for use in Pacific
Lumber's cogeneration plant, the sale of lumber by Pacific Lumber and Britt to
each other, and the provision by Pacific Lumber of certain administrative
services to Britt (including accounting, purchasing, data processing, safety
and human resources services). The logs which Pacific Lumber sells to Britt
and which are used in Britt's manufacturing operations are sold at
approximately 75% of applicable SBE prices (to reflect the lower quality of
these logs). Logs which either Pacific Lumber or Britt purchases from third
parties and which are then sold to each other are transferred at the actual
cost of such logs. Hog fuel is sold at applicable market prices, and
administrative services are provided by Pacific Lumber based on Pacific
Lumber's actual costs and an allocable share of Pacific Lumber's overhead
expenses consistent with past practice.

BRITT LUMBER OPERATIONS

Business

Britt is located in Arcata, California, approximately 45 miles north of
Pacific Lumber's headquarters. Britt's primary business is the processing of
small diameter redwood logs into wood fencing products for sale to retail

51
<PAGE>

and wholesale customers. Britt was incorporated in 1965 and operated as an
independent manufacturer of fence products until July 1990, when it was
purchased by a subsidiary of the Company. Britt purchases small diameter (6 to
11 inch) and short length (6 to 12 feet) redwood logs from Pacific Lumber and
a variety of different diameter and different length logs from various
timberland owners. Britt processes logs at its mill into a variety of
different fencing products, including "dog-eared" 19 x 69 fence stock in six
and eight foot lengths, 49 x 49 fence posts in 6 through 12 foot lengths, and
other fencing products in 6 through 12 foot lengths. Britt's purchases of logs
from third parties are generally consummated pursuant to short-term contracts
of twelve months or less. See "--Pacific Lumber Operations--Relationships With
Scotia Pacific and Britt" for a description of Britt's log purchases from
Pacific Lumber.

Marketing

In 1995, Britt sold approximately 78 million board feet of lumber products
to approximately 100 different customers. Over one-half of its lumber sales
were in northern California. The remainder of its 1995 sales were in southern
California and ten other western states. The largest and top five of such
customers accounted for approximately 33% and 72%, respectively, of such 1995
sales. Britt markets its products through its own salesmen to a variety of
customers, including distribution centers, industrial remanufacturers,
wholesalers and retailers and is expanding its market eastward.

Britt's backlog of sales orders at December 31, 1995 and 1994 was
approximately $3.2 million and $3.6 million, respectively, the substantial
portion of which was delivered in the first quarter of the next fiscal year.

Facilities and Employees

Britt's manufacturing operations are conducted on 12 acres of land, 10 acres
of which are leased on a long-term fixed-price basis from an unrelated third
party. Fence production is conducted in a 46,000 square foot mill. An 18 acre
log sorting and storage yard is located one quarter of a mile away. The mill
was constructed in 1980, and capital expenditures to enhance its output and
efficiency are made periodically. Britt's (single shift) mill capacity,
assuming 40 production hours per week, is estimated at 35.5 million board feet
of fencing products per year. As of March 1, 1996, Britt employed
approximately 110 people, none of whom are covered by a collective bargaining
agreement.

Competition

Management estimates that Britt accounted for approximately one-third of the
redwood fence market in 1995. Britt competes primarily with the northern
California mills of Louisiana Pacific, Georgia Pacific and Eel River.

REGULATORY AND ENVIRONMENTAL FACTORS

Regulatory and environmental issues play a significant role in Pacific
Lumber's forest products operations. Pacific Lumber's forest products
operations are subject to a variety of California and federal laws and
regulations dealing with timber harvesting, endangered species and critical
habitat, and air and water quality. These laws include the Forest Practice
Act, which requires that timber harvesting operations be conducted in
accordance with detailed requirements set forth in the Forest Practice Act and
in the regulations promulgated thereunder by the BOF. The federal Endangered
Species Act (the "ESA") and California Endangered Species Act (the "CESA")
provide in general for the protection and conservation of specifically listed
fish, wildlife and plants which have been declared to be endangered or
threatened. The California Environmental Quality Act ("CEQA") provides, in
general, for protection of the environment of the state, including protection
of air and water quality and of fish and wildlife. In addition, the California
Water Quality Act requires, in part, that Pacific Lumber's operations be
conducted so as to reasonably protect the water quality of nearby rivers and
streams. The Company does not expect that compliance with such existing laws
and regulations will have a material adverse effect on its future liquidity,
consolidated operating results or financial position; however, these laws and
regulations are

52
<PAGE>

modified from time to time and are subject to judicial and administrative
interpretation and there can be no assurance that certain pending or future
legislation, governmental regulations or judicial or administrative decisions
would not materially adversely affect the Company (see below).

In 1994, the BOF adopted certain regulations regarding compliance with long-
term sustained yield objectives. These regulations require timber companies to
project the average annual growth they will have on their timberlands during
the last decade of a 100-year planning period ("Projected Annual Growth").
During any rolling ten-year period, the average annual harvest over such ten-
year period may not exceed Projected Annual Growth. The first ten-year period
began in May 1994. Pacific Lumber is required to submit, by October 1996, a
plan setting forth, among other things, its Projected Annual Growth. Pacific
Lumber has not completed its analysis of the projected productivity of its
timberlands and is therefore unable to predict the impact that these
regulations will have on its future timber harvesting practices; however, the
final results of this analysis could require Pacific Lumber to reduce (or
permit it to increase) its timber harvest in future years from the average
annual harvest that it has experienced in recent years. Pacific Lumber
believes that it would be able to mitigate the effect of any required
reduction in harvest level by acquisitions of additional timberlands and by
increasing the productivity of its timberlands, although there can be no
assurance that it would be able to do so.

In March 1992, the marbled murrelet was approved for listing as endangered
under the CESA. In October 1992, the USFWS issued its final rule listing the
marbled murrelet as a threatened species under the ESA in the tri-state area
of Washington, Oregon and California. Pacific Lumber has incorporated, and
will continue to incorporate as required, mitigation measures into its THPs to
protect and maintain habitat for the marbled murrelet on its timberlands. The
BOF requires Pacific Lumber to conduct pre-harvest marbled murrelet surveys to
provide certain site specific mitigations in connection with THPs covering
virgin old growth timber and unusually dense stands of residual old growth
timber. Such surveys can only be conducted during a portion of the murrelet's
nesting and breeding season, which extends from April through mid-September.
Accordingly, such surveys are expected to delay the review and approval
process with respect to certain of the THPs filed by Pacific Lumber. The
results of such surveys to date (based upon current survey protocols) have
indicated that Pacific Lumber has approximately 6,000 acres of occupied
marbled murrelet habitat. A substantial portion of this land contains virgin
and residual old growth timber and the bulk of it falls within the areas
proposed to be designated as critical habitat for the marbled murrelet (see
below). Pacific Lumber is unable to predict when or if it will be able to
harvest this acreage.

In January 1994, the USFWS proposed designation of critical habitat for the
marbled murrelet under the ESA (which proposed designation did not include any
of Pacific Lumber's timberlands). In July 1995, in a case entitled Marbled
Murrelet v. Babbitt (Case No. C-91-522R), a U.S. District Court in Seattle
ordered the USFWS to make its final designation of critical habitat for the
marbled murrelet by January 29, 1996 and to issue its proposed final
designation of critical habitat by August 1, 1995. On August 10, 1995, the
USFWS published the Proposed Designation of critical habitat for the marbled
murrelet, seeking to designate over four million acres as critical habitat for
the marbled murrelet, including approximately 33,000 acres of Pacific Lumber's
timberlands. The Proposed Designation was subject to a 60-day comment period
and Pacific Lumber filed comments vigorously opposing the Proposed
Designation. In February 1996, the Court extended until May 15, 1996 the
deadline for final designation of critical habitat for the marbled murrelet.
The USFWS has not yet published its final designation of critical habitat for
the marbled murrelet. Pacific Lumber is unable to predict when or if it would
be able to harvest on any acreage finally designated as critical habitat.
Furthermore, it is impossible to determine the future adverse impact of such
designation on the Company's liquidity, consolidated financial position or
results of operations until such time as the Proposed Designation is finalized
and related regulatory and legal issues are fully resolved. However, if
Pacific Lumber is unable to harvest, or is severely limited in harvesting, on
timberlands designated as marbled murrelet critical habitat, such restrictions
could have a material adverse effect on the Company's liquidity, consolidated
financial condition and results of operations. If Pacific Lumber is unable to
harvest or is severely limited in harvesting, it intends to seek full
compensation from the appropriate governmental agencies on the grounds that
such restrictions constitute a taking.

53
<PAGE>

Pacific Lumber's wildlife biologists are conducting research concerning the
marbled murrelet on its timberlands and are currently developing a habitat
conservation plan for the marbled murrelet (the "Murrelet HCP"). The Murrelet
HCP, which is designed to mitigate the impact of the Proposed Designation, is
being prepared for submission to the USFWS. Pacific Lumber is working with the
USFWS and other government agencies on the Murrelet HCP. It is uncertain when
the Murrelet HCP review process will be completed or what the outcome will be
of the review process or its effect upon the Company's liquidity, consolidated
financial position or results of operations.

There also continue to be other regulatory actions and lawsuits seeking to
have various other species listed as threatened or endangered under the ESA
and/or the CESA and to designate critical habitat for such species. It is
uncertain what effect any such other listings and/or designations of critical
habitat would have on the Company's liquidity, consolidated financial position
or results of operations.

Various groups and individuals have filed objections with the CDF and the
BOF regarding the CDF's and the BOF's actions and rulings with respect to
certain of Pacific Lumber's THPs, and Pacific Lumber expects that such groups
and individuals will continue to file objections to certain of Pacific
Lumber's THPs. In addition, lawsuits are pending which seek to prevent Pacific
Lumber from implementing certain of its approved THPs and other harvesting
operations. These challenges have severely restricted Pacific Lumber's ability
to harvest virgin old growth timber on its property (and to a lesser extent,
its residual old growth timber). To date, challenges with respect to Pacific
Lumber's THPs relating to young growth and residual old growth timber have
been limited; however, no assurance can be given as to the extent of such
challenges in the future. Pacific Lumber believes that environmentally focused
challenges to its THPs are likely to occur in the future, particularly with
respect to virgin and residual old growth timber. Although such challenges
have delayed or prevented Pacific Lumber from conducting a portion of its
operations, to date such challenges have not had a material adverse effect on
the Company's liquidity, consolidated financial position or results of
operations. It is, however, impossible to predict the future nature or degree
of such challenges or their ultimate impact on the liquidity, consolidated
operating results or financial position of the Company. See also "Legal
Proceedings--Pacific Lumber Litigation" for a description of the pending
Marbled Murrelet action.

In June 1990, the USFWS designated the northern spotted owl as threatened
under the ESA. The owl's range includes all of Pacific Lumber's timberlands.
The ESA and its implementing regulations (and related California regulations)
generally prohibit harvesting operations in which individual owls might be
killed, displaced or injured or which result in significant habitat
modification that could impair the survival of individual owls or the species
as a whole. Since 1988, biologists have conducted inventory and habitat
utilization studies of northern spotted owls on Pacific Lumber's timberlands.
Pacific Lumber has developed and the USFWS has given its full concurrence to a
comprehensive wildlife management plan for the northern spotted owl (the "Owl
Plan"). The Owl Plan was recently updated through 1999 and the USFWS expressed
its agreement that operations consistent with the Owl Plan would not result in
the take of any owls. By incorporating the Owl Plan into each THP filed with
the CDF, Pacific Lumber is able to expedite the approval time with respect to
its THPs. Both federal and state agencies continue to review and consider
possible additional regulations regarding the northern spotted owl. It is
uncertain if such additional regulations will become effective or their
ultimate content. The plaintiffs in the Marbled Murrelet action have requested
and received injunctive relief with respect to certain THPs involving the Owl
Plan. See "Legal Proceedings--Pacific Lumber Litigation."

Laws and regulations dealing with Pacific Lumber's operations are subject to
change and new laws and regulations are frequently introduced concerning the
California timber industry. From time to time, bills are introduced in the
California legislature and the U.S. Congress which relate to the business of
Pacific Lumber, including the protection and acquisition of old growth and
other timberlands, endangered species, environmental protection, air and water
quality, and the restriction, regulation and administration of timber
harvesting practices. For example, a bill has been introduced in the
California legislature which would, among other things, initiate negotiations
by the California Resources Agency for the public acquisition of approximately
4,700 acres of Pacific Lumber's timberlands, 3,000 acres of which is a
contiguous block of virgin old growth redwood forest

54
<PAGE>

often referred to as the "Headwaters Forest." In addition, the U.S.
Congressman from the congressional district in which Pacific Lumber is located
has introduced a bill which would, among other things, authorize public
acquisition of the Headwaters Forest and up to 1,700 contiguous acres. The
bill would authorize the Secretary of the Interior to exchange government-
owned timberlands and other property for the appraised fair market value of
the Headwaters Forest and any contiguous acreage to be acquired. Because such
bills are subject to amendment, it is premature to assess the ultimate content
of these bills, the likelihood of any of the bills passing or the impact of
any of these bills on the future liquidity, consolidated financial position or
operating results of the Company. Furthermore, any bills which are passed are
subject to executive veto and court challenge. In addition to existing and
possible new or modified statutory enactments, regulatory requirements and
administrative and legal actions, the California timber industry remains
subject to potential California or local ballot initiatives and evolving
federal and California case law which could affect timber harvesting
practices. It is, however, impossible to assess the effect of such matters on
the future liquidity, consolidated financial position or operating results of
the Company.

REAL ESTATE AND OTHER OPERATIONS

REAL ESTATE AND RESORT OPERATIONS

General

The Company, principally through its wholly owned subsidiaries, is also
engaged in the business of residential and commercial real estate investment
and development, primarily in Arizona, California, Texas and Puerto Rico. At
December 31, 1995, the Company had approximately $23.1 million of outstanding
receivables derived from the financing of real estate sales in its
developments and may continue to finance such real estate sales in the future.
As of December 31, 1995, these receivables had a weighted average interest
rate of approximately 9.4%, a weighted average maturity of less than four
years and average borrower equity of approximately 45%. As of December 31,
1995, the Company also held $8.4 million of other receivables as a portion of
the RTC Portfolio (defined below).

Principal Properties

Texas. In June 1991, a wholly owned subsidiary of the Company purchased from
the RTC at an auction, for approximately $122.3 million, the RTC Portfolio,
which consisted of 27 parcels of income producing real property and 28 loans
secured by real property, fifteen of which have subsequently been converted to
income-producing real property through either foreclosure or contractual
agreement with the borrower (the "RTC Portfolio"). Substantially all of the
real property was located in Texas, with the largest concentration in the
vicinities of San Antonio, Houston, Austin and Dallas. From 1992 to December
31, 1995, an aggregate of approximately $28.7 million in loans (which
represented nine loans) were sold or paid off and thirty-one properties were
sold for aggregate consideration of approximately $157.5 million. These
transactions resulted in aggregate gains of $77.3 million. As of December 31,
1995, the Company held six loans (including two resulting from property sales)
and eleven properties (including five acquired via foreclosures), which had an
aggregate net book value of $32.1 million. All of the remaining assets are
being managed (and marketed for sale or disposition as appropriate) by the
Company.

Palmas del Mar. Palmas del Mar, a time-sharing and land development and
sales business with resort amenities, located on the southeastern coast of
Puerto Rico near Humacao, was acquired in 1984. Palmas del Mar consists of
approximately 1,919 acres of undeveloped land, 100 condominiums utilized in
its time-sharing program (comprising 5,300 time-share intervals of which
approximately 1,036 remain to be sold), a 100-room hotel and adjacent
executive convention center known as the Candelero Hotel, a 23-room luxury
hotel known as the Palmas Inn, a casino, a Gary Player-designed 18-hole golf
course, 20 tennis courts, golf and tennis pro shops, restaurants, beach and
pool facilities, an equestrian center and a marina. Certain stores and
restaurants and the equestrian center are operated by third parties.
Approximately 1,300 private residences and a marina are owned by third
parties. A number of these private residences are made available to Palmas del
Mar by their owners

55
<PAGE>

throughout the year for rental to vacationers. Since 1985, the Company has
been actively engaged in the development and sale of condominiums, estate lots
and villas. During 1995, Palmas sold 31 condominium units and 65 time-share
intervals. Additionally, Palmas completed a sale and leaseback transaction on
July 14, 1995 of 33 furnished condominium units for approximately $8.4
million. As of December 31, 1995, the net book value of Palmas' assets was
approximately $16.2 million.

Fountain Hills. In 1968, a subsidiary of the Company purchased and began
developing approximately 12,100 acres of real property at Fountain Hills,
Arizona, which is located near Phoenix and adjacent to Scottsdale, Arizona. As
of December 31, 1995, Fountain Hills had approximately 3,910 acres of
undeveloped residential land, 101 developed commercial and industrial lots,
121 acres of undeveloped commercial and industrial land and 102 developed
residential lots available for sale. The population of Fountain Hills is
approximately 13,000. The Company is planning the development of certain of
the remaining acreage at Fountain Hills. Future sales are expected to consist
mainly of undeveloped acreage, semi-developed parcels and fully-developed
lots, although the Company may engage in limited construction and direct sale
of residential units. During 1995, approximately 115 residential lots, 22
commercial parcels and 103 acres were sold for an aggregate of $14.5 million.

Additionally, in 1994 a subsidiary of the Company entered into a venture to
develop 950 acres in Fountain Hills in an area known as SunRidge Canyon. The
development of SunRidge Canyon contemplates a residential golf-oriented,
upscale master-planned community. The project includes 950 acres, of which 185
have been developed into a championship-quality, public golf course which
opened for play in November 1995. The remaining 765 acres are being developed
into approximately 860 single family lots. Sales of the individual lots began
in November 1995. The development is being undertaken by SunRidge Canyon
L.L.C., an Arizona limited liability company organized by a subsidiary of the
Company and SunCor Development Company. A subsidiary of the Company holds a
50% equity interest in the venture.

The Company intends to continue development of its remaining acreage at
Fountain Hills in a manner that will allow it to maintain recent sales levels,
although there can be no assurance that it will be able to do so.

Lake Havasu City. In 1963, a subsidiary of the Company purchased and began
developing approximately 16,700 acres of real property at Lake Havasu City,
Arizona, which were offered for sale in the form of subdivided single and
multiple family residential, commercial and industrial sites. The Company has
sold substantially all of its lot inventory in Lake Havasu City and is
currently planning the development of the remaining 145 acres.

Rancho Mirage. In 1991, a subsidiary of the Company acquired Mirada, a 195-
acre luxury resort-residential project located in Rancho Mirage, California.
Mirada is a master planned community built into the Santa Rosa Mountains, 650
feet above the Coachella Valley floor. Two of the five parcels have been
developed, one of which is a custom lot subdivision of 46 estate lots with
home prices ranging from $1.5 million to $3.0 million. The other parcel was
developed by Ritz-Carlton hotels and an affiliate of the Company as the Ritz-
Carlton Rancho Mirage, a hotel with views of the Palm Springs area. The three
remaining parcels encompass nearly 150 acres with entitlements allowing a
variety of residential options. The Company is currently marketing the
project's 23 fully-developed lots.

Other. The Company, through its subsidiaries, owns a number of other
properties in Arizona, New Mexico, Texas and Colorado. Efforts are underway to
sell most of these properties. Most notably, in June 1995 the Company sold
approximately 6,000 acres at its Waterwood National Resort and Country Club
project in Texas, for an aggregate of $4.1 million.

Marketing

The Company is engaged in marketing and sales programs of varying magnitudes
at its real estate developments. In recent years, the Company has constructed
residential units and sold time-share intervals at certain of its real estate
developments. The Company intends to continue selling land to builders and
developers

56
<PAGE>

and lots to individuals and expects to continue to construct and sell
completed residential units at certain of its developments. It also expects to
sell certain of its commercial real estate assets. All sales are made directly
to purchasers through the Company's marketing personnel, independent
contractors or through independent real estate brokers who are compensated
through the payment of customary real estate brokerage commissions.

Competition and Regulation and Other Industry Factors

There is intense competition among companies in the real estate investment
and development business. Sales and payments on real estate sales obligations
depend, in part, on available financing and disposable income and, therefore,
are affected by changes in general economic conditions and other factors. The
real estate development business and commercial real estate business are
subject to other risks such as shifts in population, fluctuations in the real
estate market, and unpredictable changes in the desirability of residential,
commercial and industrial areas. The resort and time-sharing business of
Palmas competes with similar businesses in the Caribbean, Florida and other
locations.

The Company's real estate operations are subject to comprehensive federal,
state and local regulation. Applicable statutes and regulations may require
disclosure of certain information concerning real estate developments and
credit policies of the Company and its subsidiaries. Periodic approval is
required from various agencies in connection with the layout and design of
developments, the nature and extent of improvements, construction activity,
land use, zoning, and numerous other matters. Failure to obtain such approval,
or periodic renewal thereof, could adversely affect the real estate
development and marketing operations of the Company and its subsidiaries.
Various jurisdictions also require inspection of properties by appropriate
authorities, approval of sales literature, disclosure to purchasers of
specific information, bonding for property improvements, approval of real
estate contract forms and delivery to purchasers of a report describing the
property.

Employees

As of March 1, 1996, the Company's real estate operations had approximately
800 employees, of which approximately 720 were employed by Palmas. On July 20,
1995, a majority of the employees of Palmas voted to have a local union
represent them for collective bargaining purposes. The Company and the union
are engaged in collective bargaining negotiations. Until the collective
bargaining process is completed, the Company is unable to estimate the impact,
if any, the union representation of its employees may have on its resort
operations at Palmas. The union is encouraging a 24-hour work stoppage. The
Company is uncertain if a work stoppage will occur; however, Palmas is taking
steps to ensure an adequate employment force if a work stoppage does take
place.

SAM HOUSTON RACE PARK

General

In July 1993, the Company, through subsidiaries, acquired various interests
in SHRP, Ltd., a Texas limited partnership which owns and operates Sam Houston
Race Park (the "Race Park"), a Texas Class 1 horse racing facility located
within the greater Houston metropolitan area. On January 15, 1995, SHRP, Ltd.
defaulted on the $4.4 million semi-annual interest payment due on its 11 3/4%
Senior Secured Notes. On April 17, 1995, the Debtors, consisting of SHRP, Ltd.
and two affiliated entities, filed voluntary petitions, each seeking to
reorganize under the provisions of Chapter 11 of the United States Bankruptcy
Code. The bankruptcy cases were consolidated and transferred to the United
States Bankruptcy Court (the "Bankruptcy Court") for the Southern District of
Texas, Houston Division (Case No. 95-43739-H3-11). On September 22, 1995, the
Bankruptcy Court confirmed the Plan (the Debtors's plan of reorganization) and
on October 6, 1995, the transactions called for by the Plan were completed.

The Plan provided for, among other things, a significant modification of
SHRP, Ltd.'s 11 3/4% Senior Secured Notes (the "Original Notes" and, as
modified, the "Extendible Notes"), an additional capital infusion

57
<PAGE>

and a reorganization of SHRP, Ltd. The Extendible Notes have an aggregate
initial principal amount of $37.5 million, mature on September 1, 2001 and
bear interest at the rate 11% per annum. The maturity date of the Extendible
Notes may be extended to September 1, 2003 (with an increase in the rate of
interest to 13% per annum) if the Texas legislature passes significant gaming
legislation (as defined) during the 2001 legislative session. Interest on the
Extendible Notes will accrue in-kind and will not be payable in cash until a
certain level of cash flow from operations has been achieved. Once cash
interest payments commence, interest payments may not thereafter be paid in-
kind. The indenture governing the Extendible Notes provides additional
latitude for SHRP, Ltd. to incur indebtedness and make investments in gaming,
entertainment and other ventures.

The New SHRP Investor Group made a capital contribution of cash in the
aggregate amount of $5.9 million (wholly owned subsidiaries of the Company
contributed $5.8 million). Additionally, a wholly owned subsidiary of the
Company contributed to SHRP, Ltd. an adjoining approximately 87 acre tract of
land (having a fair market value of $2.3 million). A wholly owned subsidiary
of the Company is the new managing general partner of SHRP, Ltd. Each member
of the New SHRP Investor Group provided its pro rata share of a $1.7 million
line of credit, should the initial cash contributed to SHRP, Ltd. prove
insufficient to fund the future operating and working capital requirements of
SHRP, Ltd. The Company has guaranteed its subsidiaries' share of the line of
credit, which totaled $1.6 million. On October 20, 1995, a wholly owned
subsidiary of the Company purchased, for $7.3 million, $14.6 million of the
Extendible Notes and the corresponding shares of common stock of SHRP Equity,
Inc. (a Delaware corporation and an additional general partner of the
reorganized SHRP, Ltd.) to which one noteholder was entitled. Such shares of
common stock represent approximately 39.0% of the shares of common stock of
SHRP Equity, Inc. After giving effect to these transactions, wholly owned
subsidiaries of the Company hold, directly or indirectly, approximately 78.8%
of the equity in the reorganized SHRP, Ltd.

The Race Park has sustained substantial operating losses since it began
operations in April 1994. The cash contribution made by the New SHRP Investor
Group was intended to provide sufficient capital to enable the Race Park to
meet is obligations for a three-year period. During such period the Race Park
must develop a market for horse racing and compete with other forms of
entertainment in the greater Houston metropolitian area. The only continuing
obligation the Company has with respect to the Race Park is limited to its
$1.6 million commitment under the line of credit agreement, as previously
described. Accordingly, the ability of the Race Park to continue in existence
is largely dependent upon its ability to achieve a level of cash flow from
operations sufficient to enable it to meet its operating and financing
obligations as they become due. In this regard, management has undertaken a
number of steps designed to improve the Race Park's operations. These steps
include but are not limited to: (i) the reorganization of SHRP, Ltd. which
provided new equity capital and a reduction and restructuring of its principal
indebtedness, (ii) renegotiating contracts with vendors, (iii) reducing
staffing and other administrative costs, and (iv) strengthening management
with experienced racetrack personnel. However, there can be no assurance that
the operating changes and the capital infusion (together with the $1.7 million
line of credit) will be sufficient to enable the Race Park to achieve the
level of cash flow from operations necessary to enable it to meet its long-
term operating and financing obligations as they become due. Should the Race
Park be unable to achieve sufficient levels of cash flows from its operations,
it will be required to seek additional capital, which may or may not be
available.

Racing Operations and Race Park Facilities

The Race Park offers pari-mutuel wagering on live thoroughbred or quarter
horse racing or simulcast racing generally seven days a week throughout the
year. Simulcasting is the process by which live races held at one facility are
broadcast simultaneously to other locations at which additional wagers are
placed on the race being broadcast. The Race Park's principal sources of
revenue are its statutory and contractual share of total wagering on live and
simulcast racing. The Race Park also derives revenues from admission fees,
food services, club memberships, luxury suites, advertising sales and other
sources. The Race Park is located on approximately 300 acres of land in
northwest Harris County approximately 18 miles from the Houston central
business district and approximately 15 miles from Houston Intercontinental
Airport.

58
<PAGE>

Regulation of Racing Operations

The ownership and operation of horse racetracks in Texas are subject to
significant regulation by the Texas Racing Commission (the "Racing
Commission") under the Texas Racing Act and related regulations (collectively,
the "Racing Act"). The Racing Act provides, among other things, for how
wagering proceeds are to be allocated among betting participants, horsemen's
purses, racetracks, the State of Texas and for other purposes, and empowers
the Racing Commission to license and regulate substantially all aspects of
horse racing in the state. The Racing Commission must approve the number of
live race days that may be offered at the Race Park each year, as well as all
simulcast agreements. Class 1 racetracks in Texas are entitled to conduct at
least seventeen weeks of live racing for each breed of horses (thoroughbreds
and quarter horses).

Marketing and Competition

The Race Park believes that the majority of the patrons for the Race Park
reside within a 50-mile radius of the Race Park, which includes the greater
Houston metropolitan area, and that a secondary market of occasional patrons
can be developed outside the 50-mile radius but within a 100-mile radius of
the Race Park. The Race Park uses a number of marketing strategies in an
attempt to reach these people and make them more frequent visitors to the Race
Park. The Race Park competes with other forms of entertainment, including
casinos located approximately 125 to 150 miles from Houston, a greyhound
racetrack located 60 miles from the Race Park and a wide range of sporting
events and other entertainment activities in the Houston area. The Race Park
could in the future also compete with other forms of gambling in Texas,
including casino gambling on Indian reservations or otherwise. While the Race
Park believes that the location of the Race Park is a competitive advantage
over the other more distant gaming ventures mentioned above, the most
significant challenge for the Race Park is to develop and educate new racing
fans in a market where pari-mutuel wagering has been absent since the 1930's.
Other competitive factors faced by the Race Park include the allocation of
sufficient live race days by the Racing Commission and attraction of
sufficient race horses to run at the Race Park. The Race Park has been able to
obtain sufficient number of live race days (102) for 1996. The Race Park
believes that it will be able to attract sufficient horses to conduct its live
racing during 1996.

EMPLOYEES

At March 1, 1996, the Company and its subsidiaries employed approximately
2,500 persons, exclusive of those involved in Aluminum Operations.

LEGAL PROCEEDINGS

GENERAL

The following describes certain legal proceedings in which the Company or
its subsidiaries are involved. The Company and certain of its subsidiaries are
also involved in various claims, lawsuits and other proceedings not discussed
herein which relate to a wide variety of matters. Uncertainties are inherent
in the final outcome of those and the below-described matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred. Nevertheless, the Company believes (unless otherwise indicated
below) that the resolution of such uncertainties and the incurrence of such
costs should not have a material adverse effect on the Company's liquidity,
consolidated financial position or results of operations. See also "Risk
Factors--Litigation." However, there can be no assurance that there will not
be adverse determinations or settlements in one or more of the matters
identified below or other proceedings that could have a material adverse
effect on the Company's financial condition, results of operations and
liquidity.

Certain present and former directors and officers of the Company are
defendants in certain of the actions described below. The Company's bylaws
provide for indemnification of its officers and directors to the fullest
extent permitted by Delaware law. The Company is obligated to advance defense
costs to its officers and directors, subject to the individual's obligation to
repay such amount if it is ultimately determined that the individual was not
entitled to indemnification. In addition, the Company's indemnity obligation
can under certain circumstances include amounts other than defense costs,
including judgments and settlements.

59
<PAGE>

USAT MATTERS

In October 1994, the Company learned that the OTS had commenced an
investigation into UFG and the insolvency of USAT, its wholly owned
subsidiary. In December 1988, the Federal Home Loan Bank Board ("FHLBB")
placed USAT into receivership and appointed the Federal Savings & Loan
Insurance Corp. ("FSLIC") as receiver. At the time of the receivership, the
Company owned approximately 13% of the voting stock of UFG. The OTS, successor
to the FHLBB for some purposes, subsequently requested certain documents from
the Company which the Company has been working to provide. The OTS also has
deposed certain current and former officers and/or directors of the Company.

On December 26, 1995, the OTS initiated formal administrative proceedings
(the "OTS action") against the Company and others by filing the Notice. The
Notice alleges misconduct by the Company, Federated, Mr. Charles Hurwitz and
the other respondents with respect to the failure of USAT. Mr. Hurwitz is the
Chairman of the Board, Chief Executive Officer and President of the Company.
Mr. Hurwitz is also the Chairman of the Board and Chief Executive Officer of
Federated, a New York business trust wholly owned by Mr. Hurwitz, members of
his immediate family and trusts for the benefit thereof. Mr. Hurwitz and a
wholly owned subsidiary of Federated collectively own approximately 60.7% of
the aggregate voting power of the Company. The Notice claims that the Company
was a savings and loan holding company, that with others it controlled USAT,
and that, as a result of such status and agreements with the Federal Home Loan
Bank Board, it was therefore obligated to maintain the net worth of USAT. The
Notice makes numerous other allegations against the Company and the other
respondents, including allegations that through USAT it was involved in
prohibited transactions with Drexel, Burnham, Lambert Inc. ("Drexel"). See the
description of the Martel matter below. The OTS, among other things, seeks
unspecified damages in excess of $138.0 million from the Company and
Federated, civil money penalties and a removal from, and prohibition against
the Company and the other respondents engaging in, the banking industry. On
February 20, 1996, the respondents filed their responses to the Notice. The
administrative law judge has set this matter for hearing on January 21, 1997.
It is impossible to predict the ultimate outcome of the foregoing matter or
its potential impact on the Company's liquidity, consolidated financial
position or results of operations, although there can be no assurance that
such impact will not be material.

In a separate but related matter, on December 7, 1995, the Company filed a
petition for review in the U.S. Fifth Circuit Court of Appeals alleging
various statutory violations by certain predecessor agencies to the OTS and
seeking to modify, terminate or set aside the December 30, 1988 order awarding
the bid to acquire USAT to a bidder other than the Company, whose bid was
lower than the Company's bid (i.e. more costly to the government and
taxpayers). The action is entitled MAXXAM Inc. v. Office of Thrift
Supervision, Department of the Treasury (No. 95-60753) (the "MAXXAM v. OTS
action"). The bidder that was awarded USAT subsequently filed a motion to
intervene in this action and on March 6, 1996, the Court granted the motion.

In another separate but related matter, on February 21, 1996, the Company
filed an action, pursuant to the Freedom of Information Act, entitled MAXXAM
Inc. v. FDIC (No. H-96-6041) in the U.S. District Court for the Southern
District of Texas seeking to compel the FDIC to produce certain documents
concerning the bidding process for and award of USAT.

On August 2, 1995, the FDIC filed a civil action entitled Federal Deposit
Insurance Corporation, as manager of the FSLIC Resolution Fund v. Charles E.
Hurwitz (No. H-95-3936) (the "FDIC action") in the U.S. District Court for the
Southern District of Texas. This action did not name the Company as a
defendant. The suit against Mr. Hurwitz seeks damages in excess of $250.0
million based on the allegation that Mr. Hurwitz was a controlling
shareholder, de facto senior officer and director of USAT, and was involved in
certain decisions which contributed to the insolvency of USAT. The FDIC
further alleges, among other things, that Mr. Hurwitz was obligated to ensure
that UFG, Federated and the Company maintained the net worth of USAT. On
October 24, 1995, Mr. Hurwitz filed a motion to dismiss this action. On
November 14, 1995, Mr. Hurwitz filed a motion to join the OTS to this action.
The Company and certain other respondents in the OTS action subsequently filed
motions to intervene in this action; the Company conditioned its motion on the
Court joining the OTS to this action. The Company filed with its motion to
intervene a proposed complaint which alleges that the OTS violated

60
<PAGE>

the Administrative Procedures Act by rejecting the Company's bid for USAT. The
FDIC is opposing the motion to join the OTS and the intervention motions and
is seeking to stay this action pending the outcome of the OTS action or
proceed in this case only against Mr. Hurwitz. It is impossible to predict the
ultimate outcome of the foregoing matter or its potential impact on the
Company's liquidity, consolidated financial position or results of operations,
although there can be no assurance that such impact will not be material.

In January 1995, an action entitled U.S., ex rel., Martel v. Hurwitz, et al.
(the "Martel" action) was filed in the U.S. District Court for the Northern
District of California (No. C950322) and names as defendants the Company, Mr.
Hurwitz, MGI, Federated, UFG and a former director of the Company. This action
is purportedly brought by plaintiff on behalf of the U.S. government; however,
the U.S. government has declined to participate in the suit. The suit alleges
that defendants made false statements and claims in violation of the Federal
False Claims Act in connection with USAT. Plaintiff alleges, among other
things, that defendants used the federally insured assets of USAT to acquire
junk bonds from Michael Milken and Drexel and that, in exchange, Mr. Milken
and Drexel arranged financing for defendants' various business ventures,
including the acquisition of Pacific Lumber. Plaintiff alleges that USAT
became insolvent in 1988 and that defendants should be required to pay $1.6
billion (subject to trebling) to cover USAT's losses. The Company's alleged
portion of such damages has not been specified. Plaintiff seeks, among other
things, that the Court impose a constructive trust upon the fruits of the
alleged improper use of USAT funds. On March 22, 1996, the Court granted
defendants' motion to have this case transferred to the U.S. District Court
for the Southern District of Texas.

ZERO COUPON NOTE LITIGATION

In April 1989, an action was filed against the Company, MGI, MAXXAM
Properties Inc. ("MPI"), a wholly owned subsidiary of MGI, and certain of the
Company's directors in the Court of Chancery of the State of Delaware,
entitled Progressive United Corporation v. MAXXAM Inc., et al., Civil Action
No. 10785. Plaintiff purports to bring this action as a stockholder of the
Company derivatively on behalf of the Company and MPI. In May 1989, a second
action containing substantially similar allegations was filed in the Court of
Chancery of the State of Delaware, entitled Wolf v. Hurwitz, et al. (No.
10846) and the two cases were consolidated (collectively, the "Zero Coupon
Note actions"). The Zero Coupon Note actions relate to a Put and Call
Agreement entered into between MPI and Mr. Hurwitz, as well as a predecessor
agreement (the "Prior Agreement"). Among other things, the Put and Call
Agreement provided that Mr. Hurwitz had the option (the "Call") to purchase
from MPI certain notes (or the Company's common stock into which they were
converted) for $10.3 million. In July 1989, Mr. Hurwitz exercised the Call and
acquired 990,400 shares of the Company's common stock. The Zero Coupon Note
actions generally allege that in entering into the Prior Agreement Mr. Hurwitz
usurped a corporate opportunity belonging to the Company, that the Put and
Call Agreement constituted a waste of corporate assets of the Company and MPI,
and that the defendant directors breached their fiduciary duties in connection
with these matters. Plaintiffs seek to have the Put and Call Agreement
declared null and void, among other remedies.

RANCHO MIRAGE LITIGATION

In May 1991, a derivative action entitled Progressive United Corporation v.
MAXXAM Inc., et al. (No. 12111) (the "Progressive United action") was filed in
the Court of Chancery, State of Delaware against the Company, Federated, the
Company's Board of Directors and MCOP. The action alleges abuse of control and
breaches of fiduciary obligations based on, and unfair consideration for, the
Company's Agreement in Principle with Federated to (a) forgive payments of
principal and interest of approximately $32.2 million due from Federated under
two loan agreements entered into between MCOP and Federated in 1987 (and later
assigned by MCOP to the Company), and (b) grant an additional $11.0 million of
consideration to Federated, in exchange for certain real estate assets valued
at approximately $42.9 million in Rancho Mirage, California, held by Federated
(the "Mirada transactions"). Plaintiff seeks, among other things, an
accounting under the loan agreements, repayment of any losses or damages
suffered by the Company or MCOP, costs and attorneys fees.

The following six additional lawsuits, similar to the Progressive United
action, were filed in 1991 and 1992 in Delaware Chancery Court challenging the
Mirada transactions: NL Industries, et al. v. MAXXAM Inc., et al.

61
<PAGE>

(No. 12353); Kahn, et al. v. Federated Development Company, et al. (No.
12373); Thistlethwaite, et al. v. MAXXAM Inc., et al. (No. 12377); Glinert, et
al. v. Hurwitz, et al. (No. 12383); Friscia, et al. v. MAXXAM Inc., et al.
(No. 12390); and Kassoway, et al. v. MAXXAM Inc., et al. (No. 12404). The
Kahn, Glinert, Friscia and Kassoway actions have been consolidated with the
Progressive United action into In re MAXXAM Inc./Federated Development
Shareholders Litigation (No. 12111); the NL Industries action has been
"coordinated" with the consolidated actions; and the Thistlethwaite action has
been stayed pending the outcome of the consolidated actions. In January 1994,
a derivative action entitled NL Industries, Inc., et al. v. Federated
Development Company, et al. (No. 94-00630) was filed in the District Court of
Dallas County, Texas, against the Company (as nominal defendant) and
Federated. This action contains allegations and seeks relief similar to that
contained in the In re MAXXAM Inc./Federated Development Shareholders
Litigation. The parties have agreed to stay this action in light of the In re
MAXXAM Inc./Federated Development Shareholders Litigation. With respect to the
In re MAXXAM Inc./Federated Development Shareholders Litigation, on February
10, 1995, the Court issued its decision disapproving a previously announced
proposed settlement and on June 23, 1995, the Court denied defendants' motion
to dismiss certain of plaintiffs' claims. This matter was tried before the
Court commencing January 29, 1996. The Court held a hearing for April 2, 1996
on various trial-related matters, including defendants' motion to dismiss the
claims relating to the 1987 loan transactions, and has taken the matter under
advisement.

KAISER LITIGATION

ENVIRONMENTAL LITIGATION

Aberdeen Pesticide Dumps Site Matter

The Aberdeen Pesticide Dumps Site, listed on the Superfund National
Priorities List, is composed of five separate sites around the town of
Aberdeen, North Carolina (collectively, the"Sites"). The Sites are of concern
to the United States Environmental Protection Agency (the"EPA") because of
their past use as either pesticide formulation facilities or pesticide
disposal areas from approximately the mid-1930's through the late-1980's. The
United States filed a cost recovery complaint (the "Complaint") in the United
States District Court for the Middle District of North Carolina, Rockingham
Division, No. C-89-231-R, which, as amended, includes KACC and a number of
other defendants. The Complaint, as amended, seeks reimbursement for past and
future response costs and a determination of liability of the defendants under
Section 107 of CERCLA. The EPA has performed a Remedial
Investigation/Feasibility Study and issued a Record of Decision ("ROD") for
the Sites in September 1991. The estimated cost of the major soil remediation
remedy selected for the Sites is approximately $32 million. Other possible
remedies described in the ROD would have estimated costs of approximately $53
million and $222 million, respectively. The EPA has stated that it has
incurred past costs at the Sites in the range of $7.5--$8.0 million as of
February 9, 1993, and alleges that response costs will continue to be incurred
in the future.

On May 20, 1993, the EPA issued three unilateral Administrative Orders under
Section 106(a) of CERCLA ordering the respondents, including KACC, to perform
the soil remedial design and remedial action described in the ROD for three of
the Sites. The estimated cost as set forth in the ROD for the remedial action
at the three Sites is approximately $27 million. A number of other companies
are also named as respondents. KACC has entered into a PRP Participation
Agreement with certain of the respondents (the "Aberdeen Site PRP Group" or
the "Group") to participate jointly in responding to the Administrative Orders
dated May 20, 1993, regarding soil remediation, to share costs incurred on an
interim basis, and to seek to reach a final allocation of costs through
agreement or to allow such final allocation and determination of liability to
be made by the United States District Court. By letter dated July 6, 1993,
KACC has notified the EPA of its ongoing participation with such group of
respondents which, as a group, are intending to comply with the Administrative
Orders to the extent consistent with applicable law. By letters dated December
30, 1993, the EPA notified KACC of its potential liability for, and requested
that KACC, along with a number of other companies, undertake or agree to
finance groundwater remediation at certain of the Sites. The ROD-selected
remedy for the groundwater remediation selected by EPA includes a variety of
techniques. The EPA has estimated the total present worth cost, including
thirty years of operation and maintenance, at approximately $11.8 million. On
June 22, 1994, the EPA issued

62
<PAGE>

two unilateral Administrative Orders under Section 106(a) of CERCLA ordering
the respondents, including KACC, to undertake the groundwater remediation at
three of the Sites. A PRP Participation Agreement with respect to groundwater
remediation has been entered into by certain of the respondents, including
KACC.

By letter dated March 6, 1996, KACC gave notice of withdrawal from the
Aberdeen Site PRP Group pursuant to the provisions of the PRP Participation
Agreement. KACC advised the Group and the EPA that even if it were liable for
cleanup at the Sites, which is expressly denies, it had already contributed
far more than its allocable potential share of response costs. KACC has
advised the Group and the EPA that it has fully complied with the Unilateral
Orders and that should additional evidence be presented which demonstrates
KACC's liability in excess of the amount contributed to date, KACC would be
willing to discuss the matter further at that time.

United States of America v. Kaiser Aluminum & Chemical Corporation

In February 1989, a civil action was filed by the United States Department
of Justice (the "DOJ") at the request of the EPA against KACC in the United
States District Court for the Eastern District of Washington, Case No. C-89-
106-CLQ. The complaint alleged that emissions from certain stacks at KACC's
Trentwood facility in Spokane, Washington intermittently violated the opacity
standard contained in the Washington State Implementation Plan ("SIP"),
approved by the EPA under the federal Clean Air Act. The complaint sought
injunctive relief, including an order that KACC take all necessary action to
achieve compliance with the SIP opacity limit and the assessment of civil
penalties of not more than $25,000 per day.

KACC and the EPA, without adjudication of any issue of fact or law, and
without any admission of the violations alleged in the underlying complaint,
have entered into a Consent Decree, which was approved by a Consent Order
entered by United States District Court for the Eastern District of Washington
in January 1996. As approved, the Consent Decree settles the underlying
disputes and requires KACC to (i) pay a $.5 million civil penalty (which
penalty has been paid), (ii) complete a program of plant improvements and
operational changes that began in 1990 at its Trentwood facility, including
the installation of an emission control system to capture particulate
emissions from certain furnaces, and (iii) achieve and maintain furnace
compliance with the opacity standard in the SIP by no later than February 28,
1997. Kaiser anticipates that capital expenditures for the environmental
upgrade of the furnace operation at its Trentwood facility, including the
improvements and changes required by the Consent Decree, will be approximately
$20.0 million.

Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation
and James L. Ferry & Son Inc.

In January 1991, the City of Richmond, et al. (the "Plaintiffs") filed a
Second Amended Complaint for Damages and Declaratory Relief against the United
States, Catellus Development Corporation ("Catellus") and other defendants
(collectively, the "Defendants") alleging, among other things, that the
Defendants caused or allowed hazardous substances, pollutants, contaminants,
debris and other solid wastes to be discharged, deposited, disposed of or
released on certain property located in Richmond, California (the "Property")
formerly owned by Catellus and leased to KACC for the purpose of shipbuilding
activities conducted by KACC on behalf of the United States during World War
II. The Plaintiffs sought recovery of response costs and natural resource
damages under CERCLA. Certain of the Plaintiffs alleged they had incurred or
expected to incur costs and damages of approximately $49 million. Catellus
subsequently filed a third party complaint (the "Third Party Complaint")
against KACC in the United States District Court for the Northern District of
California, Case No. C-89-2935 DLJ. Thereafter, the Plaintiffs filed a
separate complaint against KACC, Case No C-92-4176. The Plaintiffs settled
their CERCLA and tort claims against the United States for $3.5 million plus
thirty-five percent (35%) of future response costs.

The trial involving this case commenced in March 1995. During the trial, the
Plaintiffs settled their claims against Catellus in exchange for payment of
approximately $3.25 million. Subsequently, on June 2, 1995, the United States
District Court for the Northern District of California issued an order on the
remaining claims in that action. On December 7, 1995, the District Court
issued the Final Judgment on those claims concluding that

63
<PAGE>

KACC is liable for various costs and interest, aggregating approximately $2.2
million, fifty percent (50%) of the future costs of cleaning up certain parts
of the Property and certain fees and costs associated specifically with the
claim by Catellus against KACC. KACC paid the City of Richmond $1.76 million
in partial satisfaction of this judgment. In January 1996, Catellus filed a
notice of appeal with respect to its indemnity judgment against KACC. KACC has
since filed a notice of cross appeal as to the Court's decision adjudicating
that KACC is obligated to indemnify Catellus. In February 1996, the Plaintiffs
filed motions, which KACC is contesting, seeking reimbursement of fees and
costs from KACC in the aggregate amount of $2.76 million.

Waste Inc. Superfund Site

On December 8, 1995, the EPA issued a unilateral Administrative Order for
Remedial Design and Remedial Action under CERCLA to KACC and thirty-one other
respondents for remedial design and action at the Waste Inc. Superfund Site at
Michigan City, Indiana. This site was operated as a landfill from 1965 to
1982. KACC is alleged to have arranged for the disposal of waste from its
formerly-owned plant at Wanatah, Indiana, during the period from 1964 to 1972.
In its Record of Decision, the EPA estimated the cost of the work to be
performed to have a present value of $15.7 million. KACC's share of the total
waste sent to the site is unknown. A consultant retained by a group of PRPs
estimated that KACC contributed 2.0% of the waste sent to the site by the
forty-one largest contributors. KACC's ultimate exposure will depend on the
number of PRPs that participate and the volume of waste properly allocable to
KACC. Based on the EPA's cost estimate, KACC believes that its financial
exposure for remedial design and remedial action at this site is less than $.5
million. A PRP participation agreement is under negotiation.

ASBESTOS-RELATED LITIGATION

KACC 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 KACC or exposure to
products containing asbestos produced or sold by KACC. The lawsuits generally
relate to products KACC has not manufactured for at least fifteen years. At
December 31, 1995, the number of such claims pending was approximately 59,700,
as compared with 25,200 at December 31, 1994. In 1995, approximately 41,700 of
such claims were received and 7,200 settled or dismissed. KACC has been
advised by its regional counsel that, although there can be no assurance, the
recent increase in pending claims may be attributable in part to tort reform
legislation in Texas which was passed by the legislature in March 1995 and
which became effective on September 1, 1995. The legislation, among other
things, is designed to restrict, beginning September 1, 1995, the filing of
cases in Texas that do not have a sufficient nexus to that jurisdiction, and
to impose, generally as of September 1, 1996, limitations relating to joint
and several liability in tort cases. A substantial portion of the asbestos-
related claims that were filed and served on KACC between June 30, 1995 and
November 30, 1995 were filed in Texas prior to September 1, 1995. For
additional information, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Financial Condition and Investing and
Financing Activities--Aluminum Operations." See also Note 9 to the Company's
Consolidated Financial Statements under the heading "Asbestos Contingencies"
and "Risk Factors--Risk Factors Relating to Kaiser--Environmental Litigation."

OTHER KAISER PROCEEDINGS

Recapitalization Litigation

On March 19, 1996, a lawsuit was filed against the Company, Kaiser and
Kaiser's directors challenging and seeking to enjoin the Proposed
Recapitalization and the April 10, 1996 special shareholders' meeting at which
the Proposed Recapitalization was to be considered. The suit, which is
entitled Matheson et. al. v. Kaiser Aluminum Corporation et. al. (No. 14900)
and was filed in the Delaware Court of Chancery, purports to be a class action
by persons who as of March 18, 1996 (the record date for the April 10, 1996
meeting) owned Kaiser's outstanding common stock and 8.255% PRIDES,
Convertible Preferred Stock ("PRIDES"). Plaintiffs allege, among other things,
breaches of fiduciary duties by certain defendants and that the proposed
recapitalization violates Delaware law and the certificate of designation for
the PRIDES. Plaintiffs seek injunctive relief, rescission, rescissory damages
and other relief. On April 8, 1996, the Delaware Court of

64
<PAGE>

Chancery issued a ruling which preliminarily enjoins Kaiser from implementing
the Proposed Recapitalization. On April 10, 1996, Kaiser called the scheduled
special meeting of stockholders to order and then adjourned the meeting to May
1, 1996, without taking a vote on the Proposed Recapitalization. Kaiser is
currently evaluating the alternatives available to it in view of the Court's
ruling.

Hammons Action

On March 5, 1996, a class action complaint was filed in California against
Kaiser, Alcan Aluminum Corp., Aluminum Company of America, Alumax, Inc.
Reynolds Metal Company, the Aluminum Association and others in the Superior
Court of California for the County of Los Angeles, Case No. BC145612. The
complaint claims that the defendants conspired, in violation of state
antitrust laws, to raise, stabilize and maintain the price of primary aluminum
and aluminum products through cuts in production allegedly in connection with
the ratification of a Memorandum of Understanding in 1994 by representatives
of the authorities of Australia, Canada, the European Union, Norway, the
Russian Federation and the United States. The complaint seeks certification of
a class consisting of persons who at any time between January 1, 1994, and the
date of the complaint purchased aluminum or aluminum products manufactured by
one or more of the defendants and estimates damages sustained by the class to
be $4.4 billion, before trebling.

DOJ Investigation

On August 24, 1994, the DOJ issued Civil Investigative Demand No. 11356
("CID No. 11356") requesting information from Kaiser regarding (i) its
production, capacity to produce, and sales of primary aluminum from January 1,
1991, to the date of the response; (ii) any actual or contemplated reduction
in its production of primary aluminum during that period; and (iii) any
communications with others regarding any actual, contemplated, possible or
desired reductions in primary aluminum production by Kaiser or any of its
competitors during that period. Management believes that Kaiser's actions have
at all times been appropriate, and Kaiser has submitted documents and
interrogatory answers to the DOJ responding to CID No. 11356.

On March 27, 1995, the DOJ issued Civil Investigative Demand No. 12503 ("CID
No. 12503"), as part of an industry-wide investigation, requesting information
from KACC regarding (i) any actual or contemplated changes in its method of
pricing can stock from January 1, 1994, through March 31, 1995; (ii) the
percentage of aluminum scrap and primary aluminum ingot used by KACC to
produce can stock and the manner in which KACC's cost of acquiring aluminum
scrap is factored into its can stock prices; and (iii) any communications with
others regarding any actual or contemplated changes in its method of pricing
can stock from January 1, 1994, through March 31, 1995. Kaiser believes that
KACC's actions have at all times been appropriate, and KACC has submitted
documents and interrogatory answers to the DOJ responding to CID No. 12503.

PACIFIC LUMBER LITIGATION

In September 1989, seven past and present employees of Pacific Lumber
brought an action against Pacific Lumber, the Company, MGI, and certain
current and former directors and officers of the Company, Pacific Lumber and
MGI, in the United States District Court, Northern District of California,
entitled Kayes, et al. v. Pacific Lumber Company, et al. (No. C89-3500) (the
"Kayes action"). Plaintiffs purport to be participants in or beneficiaries of
Pacific Lumber's former Retirement Plan (the "Retirement Plan") for whom a
group annuity contract was purchased from Executive Life Insurance Company
("Executive Life") in 1986 after termination of the Retirement Plan. The Kayes
action alleges that the Company, Pacific Lumber and MGI defendants breached
their ERISA fiduciary duties to participants and beneficiaries of the
Retirement Plan by purchasing the group annuity contract from Executive Life
and selecting Executive Life to administer the annuity payments. Plaintiffs
seek, among other things, a new group annuity contract on behalf of the
Retirement Plan participants and beneficiaries. This case was dismissed on
April 14, 1993 and was refiled as Jack Miller, et al. v. Pacific Lumber
Company, et al. (No. C-89-3500-SBA) (the "Miller action") on April 26, 1993.
The Miller action was dismissed on May 14, 1993. On October 22, 1994, the
President signed the Pension Annuitants' Protection Act of 1994, which is
intended, in part, to overturn the District Court's dismissal of the Miller
action and to make available certain remedies not previously provided under
ERISA. On April 10, 1995, the U.S. Ninth Circuit Court

65
<PAGE>

of Appeals reversed the dismissal of the Miller action. On August 7, 1995, the
defendants requested the U.S. Supreme Court to review the case by filing a
petition for writ of certiorari. The U.S. Supreme Court denied defendants'
petition for writ of certiorari.

In June 1991, the U.S. Department of Labor filed a civil action entitled
Lynn Martin, Secretary of the U.S. Department of Labor v. The Pacific Lumber
Company, et al. (No. 91-1812-RHS) (the "DOL civil action") in the United
States District Court, Northern District of California, against the Company,
Pacific Lumber, MGI and certain of their current and former officers and
directors. The allegations in the DOL civil action are substantially similar
to that in the Kayes action.

On December 8, 1995, the parties in the Kayes/Miller actions and DOL civil
action reached an agreement in principle to settle these matters (for an
amount which would not result in any additional charge to the Company's
results of operations). The proposed settlement is subject to execution of a
definitive agreement and other contingencies. A status conference is scheduled
for April 12, 1996 in the Kayes/Miller action and the DOL civil action. A
special committee of the Board of Directors of the Company has been appointed
to review the proposed settlement and a related derivative action. The Company
believes the settlement of this litigation will not have a material adverse
effect on the Company's liquidity, consolidated financial position or results
of operations.

On September 15, 1995, an action entitled Marbled Murrelet, et al. v. Bruce
Babbitt, et al. (No. C-95-3261) (the "Marbled Murrelet action") was filed in
the U.S. District Court for the Northern District of California. This action
relates to exemptions for forest health which Pacific Lumber and its
subsidiaries had previously filed covering their entire timberlands. As
amended, the complaint alleges, among other things, violations of the ESA, the
National Environmental Protection Act ("NEPA") and the Administrative
Procedures Act ("APA"). Plaintiffs claim, among other things, that the timber
harvesting operations pursuant to the forest health exemptions will contribute
to the destruction of habitat for the marbled murrelet and the northern
spotted owl. Following a hearing on September 28, 1995, the Court dissolved a
temporary restraining order ("TRO") and issued a preliminary injunction
enjoining Pacific Lumber and its subsidiaries from conducting timber
harvesting operations under portions of the forest health exemptions until a
trial on the merits of the case. The majority of the timberlands which are
subject to the injunction are timberlands which have been proposed as critical
habitat for the marbled murrelet. In October 1995, Pacific Lumber appealed the
issuance of the preliminary injunction to the U.S. Ninth Circuit Court of
Appeals; oral argument in the appeal was held March 14, 1996. On March 6,
1996, the plaintiffs asked for leave to amend their pleadings to add
additional claims and seek additional injunctive relief concerning, among
other things, Pacific Lumber's Owl Plan and up to eight other THPs (only two
of which are presently approved). The eight THPs cover approximately 1,360
acres of the Company's timberlands and represent a substantial portion of the
volume Pacific Lumber and its subsidiaries are planning to utilize in their
operations for 1996. On March 15, 1996, the Court granted plaintiffs' motion
to file an amended complaint and issued a TRO enjoining Pacific Lumber and its
subsidiaries from harvesting pursuant to the eight THPs. On April 3, 1996, the
Court granted a preliminary injunction preventing harvesting on the eight THPs
to the extent that they rely on the Owl Plan. Although it has not yet been
able to fully assess the potential impact of this ruling, Pacific Lumber does
not currently believe that this ruling will have a material adverse effect
upon its liquidity, results of operations or financial position.

OTHER LITIGATION MATTERS

The Company is involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. 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 liquidity,
consolidated financial position or results of operations.

66
<PAGE>

MANAGEMENT

The following table sets forth certain information, as of March 31, 1996,
with respect to the executive officers and directors of the Company.

<TABLE>
<CAPTION>
NAME POSITIONS AND OFFICES WITH THE COMPANY
---- --------------------------------------
<S> <C>
Charles E. Hurwitz...... Chairman of the Board, President and Chief Executive Officer
Paul N. Schwartz........ Executive Vice President and Chief Financial Officer
John T. La Duc.......... Senior Vice President
Anthony R. Pierno....... Senior Vice President and General Counsel
Robert E. Cole.......... Vice President-Federal Government Affairs
Diane M. Dudley......... Vice President-Chief Personnel Officer
Robert W. Irelan........ Vice President-Public Relations
Ronald L. Reman......... Vice President-Taxes
Byron L. Wade........... Vice President, Secretary and Deputy General Counsel
Robert J. Cruikshank.... Director
Ezra G. Levin........... Director
Stanley D. Rosenberg.... Director
</TABLE>

Charles E. Hurwitz. Mr. Hurwitz, age 55, has served as a member of the Board
of Directors and the Executive Committee of the Company since August 1978 and
was elected as Chairman of the Board and Chief Executive Officer of the
Company in March 1980. Mr. Hurwitz has also served the Company as President
since January 1993. Mr. Hurwitz was appointed Vice Chairman of the Board of
KACC in December 1994. He has served as a director of Kaiser since October
1988 and of KACC since November 1988. Since May 1982, Mr. Hurwitz has been
Chairman of the Board and Chief Executive Officer, and since January 1, 1993,
President, of MGI. From May 1986 until February 1993, Mr. Hurwitz served as a
director of Pacific Lumber. Mr. Hurwitz has been, since January 1974, Chairman
of the Board and Chief Executive Officer of Federated.

Paul N. Schwartz. Mr. Schwartz, age 49, has served as Executive Vice
President and Chief Financial Officer of the Company since January 1, 1995. He
previously served as Senior Vice President-Corporate Development of the
Company from June 1987 until December 31, 1994, and Vice President-Corporate
Development of the Company from July 1985 to June 1987. Mr. Schwartz has
served as a Vice President of MGI and Pacific Lumber since May 1987 and
January 1987, respectively, and was elected Chief Financial Officer of Pacific
Lumber and Scotia Pacific in February, 1995. He also serves as Chairman of the
Board and sole executive officer of United Financial Group, Inc., a Delaware
public corporation, and has served as a director of Pacific Lumber and Scotia
Pacific since February 1993, and as a director of MGI since January 1994. Mr.
Schwartz is also a director of SLM Funding Corporation, which is a subsidiary
of the Student Loan Marketing Association.

John T. La Duc. Mr. La Duc, age 53, has served as Senior Vice President of
the Company since September 1990, and as Vice President and a director of MGI
since October 1990 and January 1994, respectively. He also served the Company
and MGI as Chief Financial Officer from September 1990 until December 1994 and
February 1995, respectively. Mr. La Duc has also served Kaiser as Chief
Financial Officer since May 1990 and as a Vice President since June 1989. He
has also served KACC as a Vice President since June 1989 and Chief Financial
Officer since January 1990. Mr. La Duc also served as Kaiser's Treasurer from
August 1995 until February 1996 and from January 1993 until April 1993, and as
KACC's Treasurer from June 1995 until February 1996 and from January 1993
until April 1993. Mr. La Duc also currently serves as a director and Vice
President of Pacific Lumber and Scotia Pacific. He previously served as Chief
Financial Officer of Pacific Lumber and of Scotia Pacific from October 1990
and November 1992, respectively, until February 1995.

Anthony R. Pierno. Mr. Pierno, age 63, serves as Senior Vice President and
General Counsel of the Company, positions he has held since February 1989. He
has also served as Vice President and General Counsel of MGI and Pacific
Lumber since May 1989, and of Scotia Pacific since November 1992, and has
served as a

67
<PAGE>

director of Pacific Lumber and MGI since November 1993 and January 1994,
respectively. Additionally, Mr. Pierno has served as Vice President and
General Counsel of Kaiser and KACC since January 1992. From 1986 until joining
the Company in February 1989, Mr. Pierno served as partner in charge of the
business practice group in the Los Angeles office of the law firm of
Pillsbury, Madison & Sutro. He has served as the Commissioner of Corporations
of the State of California and as Chair of several committees of the State Bar
of California. Mr. Pierno is Chairman of the Board of Trustees of Whittier
College, and a former member and past Chairman of the Board of Trustees of
Marymount College.

Robert E. Cole. Mr. Cole, age 49, has been the Vice President-Federal
Government Affairs of the Company, MGI and Pacific Lumber since September
1990. Since March 1981, Mr. Cole also has served as a Vice President of KACC.
Mr. Cole is also Chaiman of the U.S. Auto Parts Advisory Committee established
by the U.S. Congress.

Diane M. Dudley. Ms. Dudley, age 55, was named Vice President-Chief
Personnel Officer of the Company in May 1990. From June 1987 until May 1990,
she was Vice President-Personnel and Administration of the Company. From
December 1983 until June 1987, Ms. Dudley served as Assistant Vice President-
Personnel of the Company.

Robert W. Irelan. Mr. Irelan, age 59, has been Vice President-Public
Relations of the Company, MGI and Pacific Lumber since September 1990. He has
also been Vice President-Public Relations of KACC since February 1988. From
June 1985 to February 1988, Mr. Irelan served as Divisional Vice President-
Corporate Public Relations of KACC, and from 1968 to June 1985 he served KACC
and certain affiliated companies in a variety of positions.

Ronald L. Reman. Mr. Reman, age 38, was named Vice President-Taxes of the
Company in September 1992. Prior to September 1992, he had served the Company
as Director of Taxes since joining the Company in October 1986. From July 1984
until October 1986, Mr. Reman was a Senior Manager in the Tax Department of
the New York office of Price Waterhouse after having served seven years with
the New York office of Coopers & Lybrand, both of which are accounting firms.
Mr. Reman also serves as Vice President-Taxes of MGI and certain other
subsidiaries of the Company, and as Assistant Treasurer of Kaiser and KACC.

Byron L. Wade. Mr. Wade, age 49, has served as Vice President and Deputy
General Counsel of the Company since May 1990, and Secretary of the Company
since October 1988. Mr. Wade has also served as Vice President and Secretary
of Kaiser and KACC since January 1992, and Deputy General Counsel of Kaiser
and KACC since May and June 1992, respectively. He has been Vice President,
Secretary and Deputy General Counsel of Pacific Lumber and Scotia Pacific
since June 1990 and November 1992, respectively. Mr. Wade has also served as a
Vice President, Secretary and Deputy General Counsel of MGI since July 1990.
He was Assistant Secretary of the Company from November 1987 to October 1988
and Assistant General Counsel from November 1987 until May 1990. He had
previously served as Vice President, Secretary and General Counsel of MCO
Resources, Inc., a publicly traded oil and gas company, which was majority
owned by the Company.

Robert J. Cruikshank. Mr. Cruikshank, age 65, has served as a director of
the Company since May 1993. In addition, he has served as a director of Kaiser
and KACC since January 1994. Mr. Cruikshank was a Senior Partner in the
international public accounting firm of Deloitte & Touche from December 1989
until his retirement from that firm in March 1993. Prior to its merger with
Touche Ross & Co. in December 1989, Mr. Cruikshank served as Managing Partner
of Deloitte Haskins & Sells from June 1974 until the merger and served on such
firm's board of directors from 1981 to 1985. Mr. Cruikshank also serves as a
director and on the Compensation Committee of Houston Industries Incorporated,
a public utility holding company with interests in electric utilities, coal
and transportation businesses; as a director of Texas Biotechnology
Incorporated; and as Advisory Director of Compass Bank--Houston.

Ezra G. Levin. Mr. Levin, age 62, was first elected a director of the
Company in May 1978. He has served as a director of Kaiser and KACC since July
1991 and November 1988, respectively. From May 1982 through

68
<PAGE>

December 1993, he also served as a director of MGI. He is a partner in the law
firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel. Mr. Levin also
serves as a trustee of Federated and as a director of Pacific Lumber, Scotia
Pacific and United Mizrahi Bank and Trust Company.

Stanley D. Rosenberg. Mr. Rosenberg, age 64, has been a director of the
Company since June 1981. He is a partner in the law firm of Rosenberg, Tuggey,
Agather & Rosenthal. Mr. Rosenberg was a partner in the law firm of
Oppenheimer, Rosenberg & Kelleher, Inc. from its inception in 1971 until
February 1990, at which time he served as Of Counsel to that firm through June
30, 1993.

CERTAIN TRANSACTIONS

LITIGATION MATTERS

See "Legal Proceedings--USAT Matters,--Zero Coupon Note Litigation,--Rancho
Mirage Litigation, and--Pacific Lumber Litigation" with respect to certain
actions in which certain directors and officers of the Company are defendants.

OTHER MATTERS

In May 1995, MCOP granted Olympus Rancho Mirage, L.P. ("Olympus"), an
unaffiliated third party, a non-exclusive easement on certain property in
Rancho Mirage, California. Such easement is to allow access to a proposed golf
course. At the same time, Federated, which owned all of the interests in the
partnership then operating the business of the Ritz-Carlton Hotel (the
"Hotel"), which is also located in Rancho Mirage, California, transferred the
Hotel to Olympus.

In consideration for such easement, Olympus agreed to provide MCOP with
Hotel amenity benefits which will be available to area lot owners for a fee.
Such amenities include, among other things, room service, maid service and use
of the tennis center, health club, meeting rooms and swimming pool. MCOP also
agreed not to develop a contemplated hotel-type facility on other real
property it owns in the vicinity. Olympus received a revocable parking license
on certain other adjacent property of MCOP.

During 1995, the Company and certain of its subsidiaries shared certain
administrative and general expenses with Federated. Under these arrangements,
Federated's obligation to the Company and its subsidiaries was approximately
$201,000 for 1995. During 1995, Federated and the Company shared office space
leased by the Company. The obligations of Federated relating to 1995 under
such sharing arrangement amounted to approximately $9,000. At December 31,
1995, Federated owed the Company $279,000 for shared office space and certain
general and administrative expenses. The Company's wholly owned subsidiary,
Bering Holdings, Inc. ("Bering Holdings"), is a Texas registered investment
adviser which has an agreement with Federated whereby Bering Holdings manages
an investment portfolio for Federated on substantially the same terms as
provided to other persons. The agreement provides for an annual management fee
equal to 1% of the average value of the portfolio, except for certain short-
term investments for which the management fee is 1/2 of 1% per annum. The
agreement also provides for an annual performance fee equal to 10% of the net
gain in certain portfolios. Bering Holdings has accrued management and
performance fees for the year ended December 31, 1995 of approximately $84,000
and $215,000, respectively.

Mr. Levin, a director of both the Company and Kaiser, is a partner in the
law firm of Kramer, Levin, Naftalis, Nessen, Kamin & Frankel, which provides
legal services for the Company and its subsidiaries. The Company was billed by
such firm an aggregate of approximately $911,000 for fees and $77,000 for
disbursements and other charges with respect to legal services rendered by
such firm during 1995 for the Company and its subsidiaries.

69
<PAGE>

As described under "Business--Sam Houston Race Park--General," on April 17,
1995, SHRP, Ltd., SHRP Acquisition, Inc. and SHRP Capital Corp. filed
voluntary petitions under Chapter 11 of the United States Bankruptcy Code.
Their bankruptcy reorganization plan has since been confirmed and the
transactions contemplated by the bankruptcy reorganization plan have been
consummated. See "Business--Sam Houston Race Park." Since July 1993, Mr. Wade
has served as a director, Vice President and Secretary of SHRP Inc., SHRP,
Ltd.'s sole general partner prior to SHRP, Ltd.'s bankruptcy reorganization,
and of SHRP Capital Corp., a subsidiary of SHRP, Ltd.; Mr. Schwartz has served
as a director and Executive Vice President of both SHRP, Inc. and SHRP
Capital; and Mr. Hurwitz has served as director and Chairman of the Board of
SHRP, Inc., and as a director, Chairman of the Board and President of SHRP
Capital.

In August 1990, two real estate ventures holding unimproved real property in
which Mr. Rosenberg was a general partner filed voluntary petitions for
bankruptcy reorganization under Chapter 11 in the United States Bankruptcy
Court for the Western Division of Texas. One reorganization plan was
successfully confirmed and implemented. In the second filing, a plan has been
confirmed.

In January 1995, Mr. Pierno repaid a $150,000 loan which had been guaranteed
by the Company. Pursuant to the terms of Mr. Pierno's employment agreement
with the Company (which expired in March 1995), his personal loans outstanding
on the date of such agreement were forgiven at the rate of $15,000 per year
beginning March 8, 1991 through March 8, 1995. At the time of the agreement,
the Company had loaned an aggregate of $150,000 at 6% interest to Mr. Pierno.
Upon expiration of Mr. Pierno's employment agreement, his principal balance on
such loans was $75,000. As of February 28, 1995, the Company entered into an
amendment of Mr. Pierno's promissory note evidencing such loans. The amendment
provides that installments of $18,750 be paid by Mr. Pierno on each of
December 31, 1995, 1996 and 1997, with the balance to be paid in full on
December 31, 1998. The amendment also provides that the loans be secured by
any amounts to which Mr. Pierno may be entitled pursuant to the Company's
Revised Capital Accumulation Plan. Mr. Pierno's employment agreement also
provided for up to an additional $200,000 in loans to Mr. Pierno bearing
interest at 6% per annum, with interest being payable monthly and principal
being due December 15, 1994 (with prepayments due upon the exercise by Mr.
Pierno of any stock appreciation rights granted pursuant to the agreement or
employee benefit plan). All of such amount was borrowed by Mr. Pierno. Such
promissory note was also amended, extending the due date to December 15, 1998,
and securing such loan with any amounts to which Mr. Pierno may be entitled
pursuant to the Company's Revised Capital Accumulation Plan.

Pursuant to the terms of Mr. Schwartz's employment agreement with the
Company (which expired in March 1995), his personal loans outstanding on the
date of the agreement were forgiven at the rate of $20,000 per year beginning
March 8, 1991 through March 8, 1995. The agreement also provided for
additional loans to Mr. Schwartz, all of which were received by Mr. Schwartz
in 1990. As of June 30, 1995, Mr. Schwartz had $100,000 in principal amount of
loans outstanding. Mr. Schwartz repaid the outstanding loans together with
accrued interest thereon in August 1995.

In July 1993, the Company loaned Mr. Wade $50,000 in connection with his
purchase of an interest in SHRP, Ltd. This loan was evidenced by an unsecured
promissory note, interest being payable monthly at an annual rate of 6%. As of
June 30, 1995, Mr. Wade had $20,000 in principal amount outstanding on this
loan. In August 1995, Mr. Wade repaid the principal of this loan, together
with accrued interest thereon.

As of June 30, 1995, Ms. Diane Dudley had a loan outstanding in the
principal amount of $100,000 at an annual interest rate of 6%. Ms. Dudley
repaid the outstanding loan together with accrued interest thereon in
September 1995.

70
<PAGE>

DESCRIPTION OF SECURITIES

The Securities will be issued under an indenture to be dated as of a date
prior to the first issuance of Securities, as supplemented from time to time
(the "Indenture") between the Company and State Street Bank and Trust Company,
as Trustee ("Trustee"). The form of Indenture is filed as an Exhibit to the
Registration Statement. Except to the extent an exemption therefrom has been
granted by the Commission, the Indenture is subject to and governed by the
Trust Indenture Act of 1939, as amended. The statements made under this
heading relating to the Securities and the Indenture are summaries of the
provisions thereof, do not purport to be complete and are qualified in their
entirety by reference to the Indenture, including the definitions of certain
terms therein. Certain capitalized terms used below but not defined herein
have the meanings ascribed to them in the Indenture.

GENERAL

The Securities will be direct, secured or unsecured obligations of the
Company. The Securities may be issued in one or more series, in each case as
authorized from time to time by the Board of Directors of the Company or any
committee thereof or any duly authorized officer. The particular terms of the
Securities being offered (the "Offered Securities"), any modifications of or
additions to the general terms of the Securities as described herein that may
be applicable in the case of the Offered Securities and any applicable federal
income tax considerations will be described in the Prospectus Supplement
relating to the Offered Securities. Accordingly, for a description of the
terms of the Offered Securities, reference must be made both to the Prospectus
Supplement relating thereto and the description of Securities set forth in
this Prospectus.

The Indenture does not limit the aggregate principal amount of Securities or
other indebtedness that may be issued or incurred by the Company or any of its
subsidiaries. Other indebtedness of the Company or its subsidiaries may
contain covenants, events of default and other provisions which are different
from or which are not contained in the Securities or certain series thereof.
Also, unless otherwise specified in the Prospectus Supplement relating to a
series of Offered Securities, the terms of the Offered Securities will not
afford holders of the Offered Securities protection in the event of a highly
leveraged or other similar transaction involving the Company, or any other
transaction which might result in a decline in ratings on or credit quality of
the Securities, that may adversely affect holders of Offered Securities.

The Securities will rank pari passu in right and priority of payment with
any senior indebtedness of the Company (e.g. any borrowings under the
Custodial Trust Agreement) and will not be expressly subordinated to any other
indebtedness of the Company. However, the operations of the Company are
conducted through its subsidiaries and the Company is therefore dependent upon
the cash flow of its subsidiaries to meet its obligations, including its
obligations under any Securities which are issued. The Securities will be
effectively subordinated to all indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of the Company's
subsidiaries. Any right of the Company to receive assets of any of its
subsidiaries upon liquidation or reorganization (and the consequent right of
the holders of Securities to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors, except to the
extent that the Company is itself recognized as a creditor of such subsidiary,
in which case the claims of the Company would still be subordinate to any
security in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by the Company. The stock and assets of certain
subsidiaries of the Company are pledged to secure certain subsidiary
obligations, and numerous limitations exist on the ability of the Company's
subsidiaries to pay dividends. See "Risk Factors--Structural Subordination and
Asset Encumbrances" and "--Ability to Service Indebtedness."

The Prospectus Supplement for, or a Prospectus including a description of
all material terms of, the Offered Securities will set forth the terms of such
Securities, which may include the following:

(1) The title of such Securities and whether they are secured or
unsecured.

(2) The aggregate principal amount of such Securities and any limit on
the aggregate principal amount of Securities of such series.

71
<PAGE>

(3) The percentage of the principal amount at which such Securities will
be issued and, if other than the principal amount thereof, the portion of
the principal amount thereof payable upon declaration of acceleration of
the Maturity thereof or the method by which such portion shall be
determined.

(4) The date or dates on which or periods during which the Securities of
a series may be issued, and the date or dates, or the method by which such
date or dates will be determined, on which the principal of (and premium,
if any, on) such Securities will be payable.

(5) The rate or rates at which such Securities will bear interest, if
any, or the method by which such rate or rates shall be determined, the
date or dates from which such interest, if any, shall accrue or the method
by which such date or dates shall be determined, the interest payment dates
on which such interest will be payable and, in the case of Registered
Securities, the regular record dates, if any, for the interest payable on
such interest payment dates, and, in the case of floating rate securities,
the notice, if any, to Holders regarding the determination of interest and
the manner of giving such notice.

(6) The place or places, if any, in addition to those described in the
Indenture, where the principal of (and premium, if any) and interest on
Securities of the series shall be payable; the extent to which, or the
manner in which, any interest payable on any Global Security on an interest
payment date will be paid, and the manner in which any principal of, or
premium, if any, on, any Global Security will be paid.

(7) The obligation, if any, of the Company to redeem, repay or purchase
Securities of the series pursuant to any sinking fund or analogous
provisions or at the option of the Holder and the period or periods within
which, or the dates on which, the prices at which and the terms and
conditions upon which Securities of the series shall be redeemed, repaid or
purchased, in whole or in part, pursuant to such obligation.

(8) The period or periods within which, or the date or dates on which,
and the terms and conditions upon which Securities may be converted into or
exchanged or redeemed for Kaiser Common Stock owned by MAXXAM, if any, in
whole or in part, at the option of the Company or otherwise, and any
specific terms relating to the adjustment thereof.

(9) The period or periods within which, or the date or dates on which,
the price or prices at which, and the terms and conditions upon which
Securities of the series may be redeemed, if any, in whole or in part, at
the option of the Company or otherwise.

(10) The denominations of such Securities if other than denominations of
$1,000 and any integral multiple thereof.

(11) Whether the Securities of the series are to be issued as original
issue discount securities ("Discount Securities") and the amount of
discount at which such Securities may be issued and, if other than the
principal amount thereof, the portion of the principal amount of Securities
of the series which shall be payable upon declaration of acceleration of
the Maturity thereof upon an Event of Default.

(12) Whether Securities of the series are to be issued as Registered
Securities or Bearer Securities or both, and, if Bearer Securities are
issued, whether any interest coupons appertaining thereto ("Coupons") will
be attached thereto, whether Bearer Securities of the series may be
exchanged for Registered Securities of the series and the circumstances
under which and the place or places at which any such exchanges, if
permitted, may be made.

(13) Whether provisions for payment of additional amounts or tax
redemptions shall apply and, if such provisions shall apply, such
provisions; and, if Bearer Securities of the series are to be issued, the
applicable procedures and certificates relating to the exchange of
temporary Global Securities for definitive Bearer Securities.

(14) The date as of which any Securities of the series shall be dated.

(15) Any addition to, or modification or deletion of, any Events of
Default or covenants provided for with respect to Securities of the series.

72
<PAGE>

(16) If Bearer Securities of the series are to be issued, (x) whether
interest in respect of any portion of a temporary Security in global form
(representing all of the Outstanding Bearer Securities of the series)
payable in respect of any interest payment date prior to the exchange of
such temporary Security for definitive Securities of the series shall be
paid to any clearing organization with respect to the portion of such
temporary Security held for its account and, in such event, the terms and
conditions (including any certification requirements) upon which any such
interest payment received by a clearing organization will be credited to
the Persons entitled to interest payable on such interest payment date, and
(y) the terms upon which interests in such temporary Security in global
form may be exchanged for interests in a permanent Global Security or for
definitive Securities of the series and the terms upon which interests in a
permanent Global Security, if any, may be exchanged for definitive
Securities of the series.

(17) Whether the Securities of the series shall be issued in whole or in
part in the form of one or more Global Securities and, in such case, the
depositary or any common depositary for such Global Securities; and if the
Securities of the series are issuable only as Registered Securities, the
manner in which and the circumstances under which Global Securities
representing Securities of the series may be exchanged for Registered
Securities in definitive form.

(18) The nature and terms of any security applicable to the Offered
Securities.

(19) Any other terms of the series.

Securities offered pursuant to this Prospectus may include debt securities
of the Company which are convertible, exchangeable or redeemable into or for
Kaiser Common Stock. Kaiser has filed with the Commission a Form S-3
Registration Statement (the "Kaiser Registration Statement") with respect to
Kaiser Common Stock for or into which the Securities might be exchanged,
redeemed or converted. In the event that any such Security is offered, the
terms thereof will be set forth in the related Prospectus Supplement. No
offering or sale of a Security which is convertible, exchangeable or
redeemable into or for Kaiser Common Stock will be made unless a registration
statement relating to such securities has become effective under the Act or an
exemption from such registration is available. If such a Security is offered,
this Prospectus, together with the related Prospectus Supplement, will include
as an attachment a prospectus or will otherwise include disclosure with
respect to the material information relating to Kaiser and Kaiser Common Stock
into or for which such Security is convertible, exchangeable or redeemable.

To the extent that a series of Securities provides for the optional
redemption, prepayment or conversion of such Security upon the occurrence of
certain events constituting a change of control of the Company (each, a
"Change of Control Event"), the applicable Prospectus Supplement will contain
information concerning such provisions, including without limitation (i) the
timing and circumstances upon which payments would be

required due to a Change of Control Event, (ii) any limitations on the
Company's ability to make such payments contained in its then-existing credit
and other agreements, and (iii) any anti-takeover effects of such provisions.
With respect to any Change of Control Event, the Company would comply with the
requirements of Section 14(e), Rule 14e-1 and Rule 13e-4 under the Exchange
Act, to the extent then applicable.

In the event that Discount Securities are issued, the federal income tax
consequences and other special considerations applicable to such Discount
Securities will be described in the Prospectus Supplement relating thereto.

Reference is made to the Prospectus Supplement related to the Offered
Securities for information with respect to any deletions from, modifications
of or additions to the Events of Default or covenants of the Company that are
described below, including any addition of covenants or other provisions
providing event risk or similar protection.

All of the Securities of a series need not be issued at the same time, and
may vary as to interest rate, maturity and other provisions and, unless
otherwise provided, a series may be reopened for issuance of additional
Securities of such series. (Section 3.01)

73
<PAGE>

DENOMINATIONS, REGISTRATION AND TRANSFER

Unless otherwise specified in the Prospectus Supplement, the Securities of
any series shall be issuable only as Registered Securities in denominations of
$1,000 and any integral multiple thereof and shall be payable only in U.S.
dollars. (Section 3.02) The Indenture also provides that Securities of a
series may be issuable in global form. See "--Book-Entry Securities." Unless
otherwise indicated in the Prospectus Supplement, Bearer Securities will have
Coupons attached. (Section 2.01)

Registered Securities of any series will be exchangeable for other
Registered Securities of the same series of like aggregate principal amount
and of like Stated Maturity and with like terms and conditions. If so provided
in the Prospectus Supplement, at the option of the Holder thereof, to the
extent permitted by law, any Bearer Security of any series which by its terms
is registrable as to principal and interest may be exchanged for a Registered
Security of such series of like aggregate principal amount and of a like
Stated Maturity and with like terms and conditions, upon surrender of such
Bearer Security at the corporate trust office of the Trustee or at any other
office or agency of the Company designated for the purpose of making any such
exchanges. Subject to certain exceptions, any Bearer Security issued with
Coupons surrendered for exchange must be surrendered with all unmatured
Coupons and any matured Coupons in default attached thereto. (Section 3.05)

Notwithstanding the foregoing, the exchange of Bearer Securities for
Registered Securities will be subject to the provisions of United States
income tax laws and regulations applicable to Securities in effect at the time
of such exchange. (Section 3.05)

Except as otherwise specified in the Prospectus Supplement, in no event may
Registered Securities, including Registered Securities received in exchange
for Bearer Securities, be exchanged for Bearer Securities. (Section 3.05)

Upon surrender for registration of transfer of any Registered Security of
any series at the office or agency of the Company maintained for such purpose,
the Company shall deliver, in the name of the designated transferee, one or
more new Registered Securities of the same series of like aggregate principal
amount of such denominations as are authorized for Registered Securities of
such series and of a like Stated Maturity and with like terms and conditions.
No service charge will be made for any transfer or exchange of Securities, but
the Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. (Section 3.05)

The Company shall not be required (i) to register, transfer or exchange
Securities of any series during a period beginning at the opening of business
15 days before the day of the transmission of a notice of redemption of
Securities of such series selected for redemption and ending at the close of
business on the day of such transmission or (ii) to register, transfer or
exchange any Security so selected for redemption in whole or in part, except
the unredeemed portion of any Security being redeemed in part. (Section 3.05)

EVENTS OF DEFAULT

Under the Indenture, "Event of Default" with respect to the Securities of
any series means any one of the following events (whatever the reason for such
Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law, pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body): (1) default in the payment of any interest upon any Security or any
payment with respect to the Coupons, if any, of such series when it becomes
due and payable, and continuance of such default for a period of 30 days; (2)
default in the payment of the principal of (and premium, if any, on) any
Security of such series at its Stated Maturity upon optional or special
redemption, upon declaration or otherwise; (3) default in the deposit of any
sinking fund payment, when and as due by the terms of a Security of such
series; (4) default in the performance, or breach of any covenant or warranty
in the Indenture (other than a covenant or warranty a default in whose
performance or whose breach is elsewhere in the Indenture specifically dealt
with or which expressly has been included in the Indenture solely for the
benefit

74
<PAGE>

of Securities of a series other than such series), and continuance of such
default or breach for a period of 60 days after there has been given to the
Company by the Trustee or to the Company and the Trustee by the Holders of at
least 25% in principal amount of the Outstanding Securities of such series, a
written notice specifying such default or breach and requiring it to be
remedied and stating that the notice is a "Notice of Default"; (5) a default
under any mortgage, indenture or instrument under which there may be issued,
secured or evidenced any indebtedness for money borrowed by the Company or any
Significant Subsidiary in an aggregate principal amount exceeding $25,000,000,
which default shall have resulted in such indebtedness becoming or being
declared due and payable prior to the date on which it would otherwise have
become due and payable, or with respect to which the principal amount remains
unpaid upon its stated maturity, without such indebtedness having been
discharged, or such acceleration having been rescinded or annulled, or there
having been deposited in a trust a sum of money sufficient to discharge in
full such indebtedness, within a period of 30 days after there shall have been
given to the Company by the Trustee, or to the Company and the Trustee by the
holders of at least 25% of the aggregate principal amount of the Securities of
such series then outstanding, a written notice specifying such default and
requiring the Company to cause such indebtedness to be discharged, to cause
there to be deposited in trust a sum sufficient to discharge in full such
indebtedness or to cause such acceleration to be rescinded or annulled and
stating that such notice is a "Notice of Default;" (6) certain events of
bankruptcy, insolvency or reorganization with respect to the Company or a
Significant Subsidiary; or (7) the entry by a court having jurisdiction in the
premises of one or more judgments or orders against the Company or any
Significant Subsidiary for the payment of money in an aggregate amount in
excess of $25,000,000 (to the extent not covered by insurance) which remain
undischarged or unsatisfied for a period of 60 consecutive days after the
judgments or orders become final and the right to appeal them has expired. The
term "Significant Subsidiary" shall have the meaning assigned to that term
under Regulation S-X of the Securities Act as in effect on the date of the
Indenture; provided, however, that neither Sam Houston Race Park, Ltd., or any
successor thereto, nor any subsidiary of the Company, the principal asset of
which consists of equity interests in Sam Houston Race Park, Ltd., or any
successor thereto, shall be deemed to be a Significant Subsidiary of the
Company. (Section 5.01)

The Indenture requires the Company to file with the Trustee, annually, an
officer's certificate as to the Company's compliance with all conditions and
covenants under the Indenture. (Section 12.02)

The Indenture provides that the Trustee may withhold notice to the Holders
of a series of Securities of any default (except payment defaults on such
Securities) if it considers such withholding to be in the interest of the
Holders of such series of Securities to do so. (Section 6.02)

If an Event of Default with respect to Securities of any series at the time
Outstanding occurs and is continuing, then in every case the Trustee or the
Holders of not less than 25% in principal amount of the Outstanding Securities
of such series may declare the principal amount (or, if any Securities of such
series are Discount Securities, such portion of the principal amount of such
Discount Securities as may be specified in the terms of such Discount
Securities) and accrued interest, if any, of all the Securities of such series
to be due and payable immediately, by a notice in writing to the Company (and
to the Trustee if given by Holders), and upon any such declaration such
principal amount (or specified amount) shall become immediately due and
payable. Upon payment of such amount, all obligations of the Company in
respect of the payment of principal of the Securities of such series shall
terminate. (Section 5.02)

Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default with respect to Securities of a
particular series shall occur and be continuing, the Trustee shall be under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders of Securities of that
series, unless such Holders shall have offered to the Trustee reasonable
indemnity against the expenses and liabilities which might be incurred by it
in compliance with such request. Subject to such provisions for the
indemnification of the Trustee, the Holders of a majority in principal amount
of the Outstanding Securities of such series shall have the right to direct
the time, method and place of conducting any proceeding for any remedy
available to the Trustee under the Indenture, or exercising any trust or power
conferred on the Trustee with respect to the Securities of that series.
(Section 5.05)

75
<PAGE>

At any time after such a declaration of acceleration with respect to
Securities of any series has been made and before a judgment or decree for
payment of the money due has been obtained by the Trustee as provided in the
applicable Indenture, the Holders of a majority in principal amount of the
Outstanding Securities of such series, by written notice to the Company and
the Trustee, may rescind and annul such declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum sufficient to pay
(A) all overdue installments of interest on all Securities or all overdue
payments with respect to any Coupons of such series, (B) the principal of (and
premium, if any, on) any Securities of such series which have become due
otherwise than by such declaration of acceleration and interest thereon at the
rate or rates prescribed therefor in such Securities; (C) to the extent that
payment of such interest is lawful, interest upon overdue installments of
interest on each Security of such series or upon overdue payments on any
Coupons of such series at the rate established for such series, and (D) all
sums paid or advanced by the Trustee and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel;
and (2) all Events of Default with respect to Securities of such series, other
than the nonpayment of the principal of Securities of such series which have
become due solely by such declaration of acceleration, have been cured or
waived as provided in the Indenture. No such rescission and waiver will affect
any subsequent default or impair any right consequent thereon. (Section 5.02)

MERGER OR CONSOLIDATION

The Indenture provides that the Company may not consolidate with or merge
into any other Person or convey, transfer or lease all or substantially all
its assets to any Person, unless (1) the Person formed by such consolidation
or into which the Company is merged or the Person which acquires by conveyance
or transfer, or which leases, all or substantially all the assets of the
Company (the "successor corporation") is a Person organized and existing under
the laws of the United States or any State or the District of Columbia and
expressly assumes by a supplemental indenture all of the obligations of the
Company under the Securities and the Indenture; and (2) immediately after
giving effect to such transaction, no Event of Default, and no event which,
after notice or lapse of time, or both, would become an Event of Default,
shall have happened and be continuing. The Trustee may request, in accordance
with the applicable Indenture, an officers' certificate and an opinion of
counsel stating that such consolidation, merger, conveyance, transfer or lease
and such supplemental indenture comply with the Indenture provisions and that
all conditions precedent therein provided for relating to such transaction
have been complied with. (Section 10.01)

MODIFICATION OR WAIVER

Without the consent of any Holders, the Company and the Trustee, at any time
and from time to time, may modify the Indenture for any of the following
purposes: (1) to evidence the succession of another corporation to the Company
and the assumption by such successor of the covenants of the Company contained
in the Indenture and in the Securities; (2) to add to the covenants of the
Company, for the benefit of the Holders of all or any series of Securities and
the Coupons, if any, appertaining thereto (and if such covenants are to be for
the benefit of less than all series, stating that such covenants are expressly
being included solely for the benefit of such series), or to surrender any
right or power conferred in the Indenture upon the Company; (3) to add any
additional Events of Default (and if such Events of Default are to be
applicable to less than all series, stating that such Events of Default are
expressly being included solely to be applicable to such series); (4) to add
or change any of the provisions of the Indenture to such extent as shall be
necessary to permit or facilitate the issuance of Securities of any series in
bearer form, registrable or not registrable, and with or without Coupons, to
permit Bearer Securities to be issued in exchange for Registered Securities,
to permit Bearer Securities to be issued in exchange for Bearer Securities of
other authorized denominations or to permit the issuance of Securities of any
series in uncertificated form, provided that any such action shall not
materially adversely affect the interests of the Holders of Securities of any
series or any related Coupons in any material respect; (5) to change or
eliminate any of the provisions of the Indenture, provided that any such
change or elimination will become effective only when there is no Outstanding
Security or Coupon of any series created prior to such modification which is
entitled to the benefit of such provision and as to which such modification
would apply; (6) to secure, or in the

76
<PAGE>

case of secured Securities to further secure, the Securities; (7) to
supplement any of the provisions of the Indenture to such extent as is
necessary to permit or facilitate the defeasance and discharge of any series
of Securities, provided that any such action will not materially adversely
affect the interests of the Holders of Securities of such series or any other
series of Securities or any related Coupons in any material respect; (8) to
establish the form or terms of Securities and Coupons, if any, of any series
as permitted by such Indenture; (9) to evidence and provide for the acceptance
of appointment thereunder by a successor Trustee with respect to one or more
series of Securities and to add to or change any of the provisions of the
Indenture as is necessary to provide for or facilitate the administration of
the trusts thereunder by more than one Trustee; or (10) to cure any ambiguity,
to correct or supplement any provision therein which may be defective or
inconsistent with any other provision therein, or to make any other provisions
with respect to matters or questions arising under the Indenture which will
not be inconsistent with any provision of the Indenture, or to make any other
change; provided such other provisions or changes shall not materially
adversely affect the interests of the Holders of Outstanding Securities or
Coupons, if any, of any series created prior to such modification in any
material respect. (Section 11.01)

With the consent of the Holders of not less than a majority in principal
amount of the Outstanding Securities of each series affected by such
modification voting separately, the Company and the Trustee may modify the
Indenture for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of the Indenture or of modifying
in any manner the rights of the Holders under the Indenture of such
Securities; provided, however, that, among other things, no such modification
shall, without the consent of the Holder of each Outstanding Security of each
such series affected thereby, (1) change the Stated Maturity of the principal
of, or any installment of interest on, any Security, or reduce the principal
amount thereof or the interest thereon or any premium payable upon redemption
thereof, or change the Stated Maturity of or reduce the amount of any payment
to be made with respect to any Coupon, or reduce the amount of the principal
of a Discount Security that would be due and payable upon a declaration of
acceleration of the Maturity thereof, or adversely affect the right of
repayment or repurchase, if any, at the option of the Holder, or reduce the
amount of, or postpone the date fixed for, any payment under any sinking fund
or analogous provisions for any Security, or limit the obligation of the
Company to maintain a paying agency outside the United States for payments on
Bearer Securities; or (2) reduce the percentage in principal amount of the
Outstanding Securities of any series, the consent of whose Holders is required
for any supplemental indenture, or the consent of whose Holders is required
for any waiver of compliance with certain provisions of the Indenture or
certain defaults thereunder and their consequences provided for in the
Indenture.

A modification which changes or eliminates any covenant or other provision
of the Indenture with respect to one or more particular series of Securities
and Coupons, if any, or which modifies the rights of the Holders of Securities
and Coupons of such series with respect to such covenant or other provision,
shall be deemed not to affect the rights under the Indenture of the Holders of
Securities and Coupons, if any, of any other series. (Section 11.02)

The Holders of not less than a majority in principal amount of the
Outstanding Securities of any series may on behalf of the Holders of all the
Securities of any such series waive any existing or past default under the
Indenture with respect to such series and its consequences, except a default
(1) in the payment of the principal of (or premium, if any) or interest on any
Security of such series, or in the payment of any sinking fund installment or
analogous obligation with respect to the Securities of such series, or (2) in
respect of a covenant or provision hereof which pursuant to the second
paragraph under "--Modification or Waiver" cannot be modified or amended
without the consent of the Holder of each Outstanding Security of such series
affected. Upon any such waiver, such default will cease to exist, and any
Event of Default arising therefrom will be deemed to have been cured, for
every purpose of the Securities of such series under the Indenture, but no
such waiver will extend to any subsequent or other default or impair any right
consequent thereon. (Section 5.04)

The Company may omit in any particular instance to comply with certain
covenants in the Indenture (including, if so specified in the Prospectus
Supplement, any covenant not set forth in the Indenture but specified

77
<PAGE>

in the Prospectus Supplement to be applicable to the Securities of any series,
except as otherwise provided in the Prospectus Supplement) with respect to the
Securities of any series if before the time for such compliance the Holders of
at least a majority in principal amount of the Outstanding Securities of such
series either waive such compliance in such instance or generally waive
compliance with such provisions, but no such waiver may extend to or affect
any term, provision or condition except to the extent expressly so waived,
and, until such waiver becomes effective, the obligations of the Company and
the duties of the Trustee in respect of any such provision will remain in full
force and effect. (Section 12.07)

DISCHARGE, LEGAL DEFEASANCE AND COVENANT DEFEASANCE

The Indenture with respect to the Securities of any series may be
discharged, subject to certain terms and conditions, when (1) either (A) all
Securities and the Coupons, if any, of such series have been delivered to the
Trustee for cancellation, or (B) all Securities and the Coupons, if any, of
such series not theretofore delivered to the Trustee for cancellation (i) have
become due and payable, (ii) will become due and payable at their Stated
Maturity within one year, or (iii) are to be called for redemption within one
year under arrangements satisfactory to the Trustee for the giving of notice
by the Trustee, and the Company, in the case of (i), (ii) or (iii) of
subclause (B), has irrevocably deposited or caused to be deposited with the
Trustee as trust funds in trust for such purpose an amount sufficient to pay
and discharge the entire indebtedness on such Securities for principal (and
premium, if any) and interest to the date of such deposit (in the case of
Securities which have become due and payable) or to the Stated Maturity or
Redemption Date, as the case may be; provided, however, in the event a
petition for relief under applicable federal bankruptcy, insolvency or other
similar law is filed with respect to the Company within 91 days after the
deposit and the Trustee is required to return the deposited money to the
Company, the obligations of the Company under the Indenture with respect to
such Securities will not be deemed terminated or discharged; (2) the Company
has paid or caused to be paid all other sums payable under the Indenture in
respect of such Securities by the Company; (3) the Company has delivered to
the Trustee an officers' certificate and an opinion of counsel each stating
that all conditions precedent therein provided relating to the satisfaction
and discharge of the Indenture with respect to such series have been complied
with; and (4) the Company has delivered to the Trustee an opinion of counsel
or a ruling of the Internal Revenue Service to the effect that Holders of the
Securities of the series will not recognize income, gain or loss for federal
income tax purposes as a result of such deposit and discharge. (Section 4.01)

If provision is made for the defeasance of Securities of a series, then the
provisions of the Indenture relating to defeasance shall be applicable except
as otherwise specified in the Prospectus Supplement for Securities of such
series. Defeasance provisions, if any, for Bearer Securities may be specified
in the Prospectus Supplement. (Section 15.01)

At the Company's option, either (a) the Company shall be deemed to have been
Discharged (as defined below) from its obligations with respect to Securities
of any series ("legal defeasance option") or (b) the Company shall cease to be
under any obligation to comply with certain provisions of the Indenture
relating to mergers and consolidations of the Company, with respect to
Securities of any series (and, if so specified, any other obligation of the
Company or restrictive covenant added for the benefit of such series)
("covenant defeasance option") at any time after the applicable conditions set
forth below have been satisfied: (1) the Company shall have deposited or
caused to be deposited irrevocably with the Trustee as trust funds in trust
for, and dedicated solely to, the benefit of the Holders of the Securities of
such series (i) money in an amount, or (ii) U.S. Government Obligations which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide, not later than one day before the due date of
any payment, money in an amount, or (iii) a combination of (i) and (ii),
sufficient, in the opinion of a nationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to
the Trustee, to pay and discharge each installment of principal (including any
mandatory sinking fund payments) of and premium, if any, and interest on, the
Outstanding Securities of such series on the dates such installments of
interest or principal and premium are due; (2) such deposit shall not cause
the Trustee with respect to the Securities of that series to have a
conflicting interest with respect to the Securities of any series; (3) such
deposit will not result in

78
<PAGE>

a breach or violation of, or constitute a default under, the Indenture or any
other agreement or instrument to which the Company is a party or by which it
is bound (other than such a breach, violation or default (a) with respect to
Indebtedness of the Company which is defeased, redeemed or otherwise satisfied
prior to or contemporaneously with such deposit, or (b) which is consented to
or waived by the relevant other party to such agreement or instrument); (4)
with respect to the legal defeasance option only, no Event of Default under
the provisions of the Indenture relating to certain events of bankruptcy or
insolvency or event which with the giving of notice or lapse of time, or both,
would become an Event of Default under such bankruptcy or insolvency
provisions shall have occurred and be continuing on the 91st day after such
date; and (5) the Company shall have delivered to the Trustee an opinion of
counsel or a ruling of the Internal Revenue Service to the effect that the
Holders of the Securities of such series will not recognize income, gain or
loss for federal income tax purposes as a result of such deposit, defeasance
or Discharge. (Section 15.02)

PAYMENT AND PAYING AGENTS

If Securities of a series are issuable only as Registered Securities, the
Company will maintain in each Place of Payment for such series an office or
agency where Securities of that series may be presented or surrendered for
payment, where Securities of that series may be surrendered for registration
of transfer or exchange and where notices and demands to or upon the Company
in respect of the Securities of that series and the Indenture may be served.
If Securities of a series are issuable as Bearer Securities, the Company will
maintain (A) in the Borough of Manhattan, The City and State of New York, an
office or agency where any Registered Securities of that series may be
presented or surrendered for payment, where any Registered Securities of that
series may be surrendered for registration of transfer, where Securities of
that series may be surrendered for exchange, where notices and demands to or
upon the Company in respect of the Securities of that series and the Indenture
may be served and where Bearer Securities of that series and related Coupons
may be presented or surrendered for payment in the circumstances described in
the following paragraph (and not otherwise), (B) subject to any laws or
regulations applicable thereto, in a Place of Payment for that series which is
located outside the United States, an office or agency where Securities of
that series and related Coupons may be presented and surrendered for payment
(including payment of any additional amounts payable on Securities of that
series, if so provided in such series); provided, however, that if the
Securities of that series are listed on The Stock Exchange of the United
Kingdom and the Republic of Ireland, the Luxembourg Stock Exchange or any
other stock exchange located outside the United States and such stock exchange
shall so require, the Company will maintain a Paying Agent for the Securities
of that series in London, Luxembourg or any other required city located
outside the United States, as the case may be, so long as the Securities of
that series are listed on such exchange, and (C) subject to any laws or
regulations applicable thereto, in a Place of Payment for that series located
outside the United States, an office or agency where any Registered Securities
of that series may be surrendered for registration of transfer, where
Securities of that series may be surrendered for exchange and where notices
and demands to or upon the Company in respect of the Securities of that series
and the Indenture may be served. The Company will give prompt written notice
to the Trustee of the location, and any change in the location, of such office
or agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the corporate trust office of the Trustee (in the case of Registered
Securities) and at the principal London office of the Trustee (in the case of
Bearer Securities), and the Company has appointed the Trustee as its agent to
receive all presentations, surrenders, notices and demands. (Section 12.03)

No payment of principal, premium or interest on Bearer Securities shall be
made at any office or agency of the Company in the United States or by check
mailed to any address in the United States or by transfer to an account
maintained with a bank located in the United States; provided, however, that,
payment of principal of and any premium and interest on Bearer Securities of
such series, if so provided in the Prospectus Supplement, shall be made at the
office of the Company's Paying Agent in the City of Boston, State of
Massachusetts, if (but only if) payment of such principal, premium, interest
or additional amounts, as the case may be, at all offices or agencies outside
the United States maintained for the purpose by the Company in accordance with
the Indenture is illegal or effectively precluded by exchange controls or
other similar restrictions. (Section 12.03)

79
<PAGE>

BOOK-ENTRY SECURITIES

The Securities of a series may be issued in whole or in part in global form
that will be deposited with, or on behalf of, a depositary identified in the
Prospectus Supplement. Global securities may be issued in either registered or
bearer form and in either temporary or permanent form (each a "Global
Security"). Payments of principal of (premium, if any) and interest on
Securities represented by a Global Security will be made by the Company to the
Trustee and then by the Trustee to the depositary.

The Company anticipates that any Global Securities will be deposited with,
or on behalf of, The Depository Trust Company, New York, New York ("DTC"),
that such Global Securities will be registered in the name of DTC's nominee,
and that the following provisions will apply to the depositary arrangements
with respect to any such Global Securities. Additional or differing terms of
the depositary arrangements will be described in the Prospectus Supplement
relating to a particular series of Securities issued in the form of Global
Securities.

So long as DTC or its nominee is the registered owner of a Global Security,
DTC or its nominee, as the case may be, will be considered the sole Holder of
the Securities represented by such Global Security for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a
Global Security will not be entitled to have Securities represented by such
Global Security registered in their names, will not receive or be entitled to
receive physical delivery of Securities in certificated form and will not be
considered the owners or Holders thereof under the Indenture. The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in certificated form; accordingly, such laws may limit the
transferability of beneficial interests in a Global Security.

If DTC is at any time unwilling or unable to continue as depositary and a
successor depositary is not appointed by the Company within 90 days, the
Company will issue individual Securities in certificated form in exchange for
the Global Securities. In addition, the Company may at any time, and in its
sole discretion, determine not to have any Securities represented by one or
more Global Securities and, in such event, will issue individual Securities in
certificated form in exchange for the relevant Global Securities. If
Registered Securities of any series shall have been issued in the form of one
or more Global Securities and if an Event of Default with respect to the
Securities of such series shall have occurred and be continuing, the Company
will issue individual Securities in certificated form in exchange for the
relevant Global Securities.

The following is based on information furnished by DTC:

DTC will act as securities depositary for the Securities. The Securities
will be issued as fully registered securities registered in the name of Cede &
Co. (DTC's partnership nominee). One fully registered Security certificate is
issued with respect to each $150 million of principal amount of the Securities
of a series, and an additional certificate will be issued with respect to any
remaining principal amount of such series.

DTC is a limited-purpose trust company organized under the Banking Law of
the State of New York, a "banking organization" within the meaning of the
Banking Law of the State of New York, a member of the Federal Reserve System,
a "clearing corporation" within the meaning of the New York Uniform Commercial
Code, and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act. DTC holds securities that its participants
("Participants") deposit with DTC. DTC also facilitates the settlement among
Participants of securities transactions, such as transfers and pledges, in
deposited securities through electronic computerized book-entry changes in
Participants' accounts, thereby eliminating the need for physical movement of
securities certificates. Direct Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations ("Direct Participants"). DTC is owned by a number of its Direct
Participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc. Access
to the DTC system is also available to others such as securities brokers and
dealers, banks and trust companies that clear through or maintain a custodial
relationship with a Direct Participant, either directly or indirectly
("Indirect Participants"). The rules applicable to DTC and its Participants
are on file with the Commission.

80
<PAGE>

Purchases of Securities under the DTC system must be made by or through
Direct Participants, which will receive a credit for the Securities on DTC's
records. The ownership interest of each actual purchaser of each Security
("Beneficial Owner") is in turn recorded on the Direct and Indirect
Participants' records. A Beneficial Owner does not receive written
confirmation from DTC of its purchase, but such Beneficial Owner is expected
to receive a written confirmation providing details of the transaction, as
well as periodic statements of its holdings, from the Direct or Indirect
Participant through which such Beneficial Owner entered into the transaction.
Transfers of ownership interests in Securities are accomplished by entries
made on the books of Participants acting on behalf of Beneficial Owners.
Beneficial Owners do not receive certificates representing their ownership
interests in Securities, except in the event that use of the book-entry system
for the Securities is discontinued.

To facilitate subsequent transfers, the Securities are registered in the
name of DTC's partnership nominee, Cede & Co. The deposit of the Securities
with DTC and their registration in the name of Cede & Co. effects no change in
beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of
the Securities; DTC records reflect only the identity of the Direct
Participants to whose accounts Securities are credited, which may or may not
be the Beneficial Owners. The Participants remain responsible for keeping
account of their holdings on behalf of their customers. Delivery of notices
and other communications by DTC to Direct Participants, by Direct Participants
to Indirect Participants, and by Direct Participants and Indirect Participants
to Beneficial Owners are governed by arrangements among them, subject to any
statutory or regulatory requirements as may be in effect from time to time.

Neither DTC nor Cede & Co. will consent or vote with respect to the
Securities. Under its usual procedures, DTC mails a proxy (an "Omnibus Proxy")
to the Issuer as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants
to whose accounts the Securities are credited on the record date (identified
on a list attached to the Omnibus Proxy). Principal and interest payments on
the Securities will be made to DTC. DTC's practice is to credit Direct
Participants' accounts on the payable date in accordance with their respective
holdings as shown on DTC's records unless DTC has reason to believe that it
will not receive payment on the payable date. Payments by Participants to
Beneficial Owners will be governed by standing instructions and customary
practices, as is the case with securities held for the accounts of customers
in bearer form or registered in "street name," and will be the responsibility
of such Participant and not of DTC, the Paying Agent or the Company, subject
to any statutory or regulatory requirements as may be in effect from time to
time. Payment of principal and interest to DTC is the responsibility of the
Company or the Paying Agent, disbursement of such payments to Direct
Participants is the responsibility of DTC, and disbursement of such payments
to the Beneficial Owners is the responsibility of Direct and Indirect
Participants.

DTC may discontinue providing its services as securities depositary with
respect to the Securities at any time by giving reasonable notice to the
Company or the Paying Agent. Under such circumstances, in the event that a
successor securities depositary is not appointed, certificates for Securities
are required to be printed and delivered. The Company may decide to
discontinue use of the system of book-entry transfers through DTC (or a
successor securities depositary). In that event, certificates for Securities
will be printed and delivered.

The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources (including DTC) that the Company believes to be
reliable, but the Company takes no responsibility for the accuracy thereof.

Unless stated otherwise in the Prospectus Supplement, the underwriters or
agents with respect to a series of Securities issued as Global Securities will
be Direct Participants in DTC. None of the Company, any underwriter or agent,
the Trustee or any applicable Paying Agent will have the responsibility or
liability for any aspect of the records relating to or payments made on
account of beneficial interests in a Global Security, or for maintaining,
supervising or reviewing any records relating to such beneficial interests.

81
<PAGE>

CERTAIN DEFINITIONS

Set forth below is a summary of certain defined terms used in the Indenture.
Reference is made to the Indenture for the full definition of all such terms.

"Discharged" means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by, and obligations under, the
Securities of such series and to have satisfied all the obligations under the
Indenture relating to the Securities of such series, except (i) the rights of
Holders of Securities of such series to receive, from the trust fund described
under "--Discharge, Legal Defeasance and Covenant Defeasance" above, payment
of the principal of (and premium, if any) and interest on such Securities when
such payments are due, (ii) the Company's obligations with respect to the
Securities of such series under the provisions relating to exchanges,
transfers and replacement of Securities, the maintenance of an office or
agency of the Company and the defeasance trust fund and (iii) the rights,
powers, trusts, duties and immunities of the Trustee thereunder. (Section
15.02)

"U.S. Government Obligations" means securities that are (i) direct
obligations of the United States for the payment of which its full faith and
credit is pledged, or (ii) obligations of a Person controlled or supervised by
and acting as an agency or instrumentality of the United States the payment of
which is unconditionally guaranteed as a full faith and credit obligation by
the United States, which, in either case under clauses (i) or (ii), are not
callable or redeemable at the option of the issuer thereof, and shall also
include a depository receipt issued by a bank or trust company as custodian
with respect to any such U.S. Government Obligation or a specific payment of
interest on or principal of any such U.S. Government Obligation held by such
custodian for the account of the holder of a depository receipt; provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt
from any amount received by the custodian in respect of the U.S. Government
Obligation or the specific payment of interest on or principal of the U.S.
Government Obligation evidenced by such depository receipt. (Section 15.02)

PLAN OF DISTRIBUTION

The Company may sell the Securities in and/or outside the United States: (i)
through underwriters or dealers; (ii) directly to a limited number of
purchasers or to a single purchaser; or (iii) through agents. The Prospectus
Supplement with respect to Offered Securities will set forth the terms of the
offering of the Offered Securities, including the name or names of any
underwriters or agents, the purchase price of the Offered Securities and the
proceeds to the Company from such sale, any delayed delivery arrangements, any
underwriting discounts and other items constituting underwriters'
compensation, any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers. Any initial public
offering price and any discounts or concessions allowed or reallowed or paid
to dealers may be changed from time to time.

If underwriters are used in the sale, the Offered Securities will be
acquired by the underwriters for their own account and may be resold from time
to time in one or more transactions, including negotiated transactions, at a
fixed public offering price or at varying prices determined at the time of
sale. The Securities may be offered to the public either through underwriting
syndicates represented by one or more managing underwriters or directly by one
or more firms acting as underwriters. The underwriter or underwriters with
respect to a particular underwritten offering of Securities will be named in
the Prospectus Supplement relating to such offering and, if an underwriting
syndicate is used, the managing underwriter or underwriters will be set forth
on the cover of such Prospectus Supplement. Unless otherwise set forth in the
Prospectus Supplement relating thereto, the obligations of the underwriters to
purchase the Offered Securities will be subject to conditions precedent and
the underwriters will be obligated to purchase all the Offered Securities if
any are purchased.

If dealers are utilized in the sale of Offered Securities in respect of
which this Prospectus is delivered, the Company will sell such Offered
Securities to the dealers as principals. The dealers may then resell such
Offered Securities to the public at varying prices to be determined by such
dealers at the time of resale. The names of the dealers and the terms of the
transaction will be set forth in the Prospectus Supplement relating thereto.

82
<PAGE>

The Securities may be sold directly by the Company or through agents
designated by the Company from time to time. Any agent involved in the offer
or sale of the Offered Securities in respect of which this Prospectus is
delivered will be named, and any commissions payable by the Company to such
agent will be set forth, in the Prospectus Supplement relating thereto.

The Securities may be sold directly by the Company to institutional
investors or others, who may be deemed to be underwriters within the meaning
of the Act with respect to any resale thereof. The terms of any such sales
will be described in the Prospectus Supplement relating thereto.

Agents, dealers and underwriters may be entitled under agreements entered
into with the Company to indemnification by the Company against certain civil
liabilities, including liabilities under the Securities Act of 1933, or to
contribution with respect to payments which the agents or underwriters may be
required to make in respect thereof. Agents, dealers and underwriters may be
customers of, engage in transactions with, or perform services for, the
Company in the ordinary course of business.

The Securities may or may not be listed on a national securities exchange.
No assurance can be given that there will be a market for the Securities.

Securities offered pursuant to this Prospectus may include debt securities
of the Company which are convertible, exchangeable or redeemable into or for
Kaiser Common Stock. In the event that any such Security is offered, the terms
thereof will be set forth in the related Prospectus Supplement. No offering or
sale of a Security which is convertible, exchangeable or redeemable into or
for Kaiser Common Stock will be made unless a registration statement relating
to such securities has become effective under the Act or an exemption from
such registration is available. If such a Security is offered, this
Prospectus, together with the related Prospectus Supplement, will include as
an attachment a prospectus or will otherwise include disclosure with respect
to the material information relating to Kaiser and Kaiser Common Stock into or
for which such Security is convertible, exchangeable or redeemable.

LEGAL MATTERS

Certain legal matters in connection with the Securities offered hereby will
be passed upon for the Company by Anthony R. Pierno, Esq., Senior Vice
President and General Counsel of the Company.

EXPERTS

The Consolidated Financial Statements and Condensed Financial Information
for the years ended December 31, 1995, 1994 and 1993 included in this
Prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

83
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MAXXAM INC. AND SUBSIDIARY COMPANIES
Report of Independent Public Accountants................................ F- 2
Consolidated Balance Sheet at December 31, 1995 and 1994................ F- 3
Consolidated Statement of Operations for the Years Ended December 31,
1995, 1994 and 1993.................................................... F- 4
Consolidated Statement of Cash Flows for the Years Ended December 31,
1995, 1994 and 1993.................................................... F- 5
Consolidated Statement of Stockholder's Equity (Deficit) for the Years
Ended December 31, 1995, 1994 and 1993................................. F- 6
Notes to Consolidated Financial Statements.............................. F- 7
Unaudited Summary Quarterly Financial Data.............................. F-41

CONDENSED FINANCIAL INFORMATION

The following Parent only (unconsolidated) condensed financial information
of MAXXAM Inc. was prepared in accordance with the Commission's rules and
should be read in conjunction with the Audited Consolidated Financial
Statements of MAXXAM Inc. and its subsidiary companies on pages F-2 through
F-40.

MAXXAM INC.--Parent only (Unconsolidated):
Audited Information:
Report of Independent Public Accountants.............................. F-42
Balance Sheet at December 31, 1995 and 1994........................... F-43
Statement of Operations for the years ended December 31, 1995, 1994
and 1993............................................................. F-44
Statement of Cash Flows for the years ended December 31, 1995, 1994
and 1993............................................................. F-45
Notes to Financial Statements......................................... F-46
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of MAXXAM Inc.:

We have audited the accompanying consolidated balance sheets of MAXXAM Inc.
(a Delaware corporation) and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, cash flows and
stockholders' equity (deficit) for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of MAXXAM
Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.

As explained in Notes 5 and 6 to the consolidated financial statements,
effective January 1, 1993, the Company changed its method of accounting for
income taxes, postretirement benefits other than pensions and postemployment
benefits.

Arthur Andersen LLP

Houston, Texas

February 16, 1996

F-2
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
ASSETS 1995 1994
------ -------- --------
(IN MILLIONS OF
DOLLARS,
EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 104.2 $ 84.6
Marketable securities......................................... 45.9 40.3
Receivables:
Trade, net of allowance for doubtful accounts of $5.5 and
$4.4 at December 31, 1995 and 1994, respectively........... 246.2 176.8
Other....................................................... 98.9 62.9
Inventories................................................... 606.8 541.4
Prepaid expenses and other current assets..................... 129.7 185.3
-------- --------
Total current assets...................................... 1,231.7 1,091.3
Property, plant and equipment, net.............................. 1,231.9 1,231.6
Timber and timberlands, net of depletion of $139.6 and $123.9 at
December 31, 1995 and 1994, respectively....................... 313.0 325.2
Investments in and advances to unconsolidated affiliates........ 189.1 169.7
Deferred income taxes........................................... 414.0 425.6
Long-term receivables and other assets.......................... 452.6 447.4
-------- --------
$3,832.3 $3,690.8
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.............................................. $ 196.7 $ 161.8
Accrued interest.............................................. 58.0 62.0
Accrued compensation and related benefits..................... 166.5 138.3
Other accrued liabilities..................................... 148.4 200.2
Payable to affiliates......................................... 90.2 81.8
Long-term debt, current maturities............................ 25.1 33.7
-------- --------
Total current liabilities................................. 684.9 677.8
Long-term debt, less current maturities......................... 1,585.1 1,582.5
Accrued postretirement benefits................................. 742.6 743.1
Other noncurrent liabilities.................................... 680.3 618.4
-------- --------
Total liabilities......................................... 3,692.9 3,621.8
-------- --------
Commitments and contingencies
Minority interests.............................................. 223.2 344.3
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized;
Class A $.05
Non-Cumulative Participating Convertible Preferred Stock;
shares issued:
1995--669,701 and 1994--669,957.............................. .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,359.................................... 5.0 5.0
Additional capital............................................ 155.0 53.2
Accumulated deficit........................................... (208.5) (302.9)
Pension liability adjustment.................................. (16.1) (11.4)
Treasury stock, at cost (shares held: preferred--845; common:
1995--1,355,512 and 1994--1,355,768)......................... (19.5) (19.5)
-------- --------
Total stockholders' deficit............................... (83.8) (275.3)
-------- --------
$3,832.3 $3,690.8
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-3
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
(IN MILLIONS OF DOLLARS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales:
Aluminum operations........................... $2,237.8 $1,781.5 $1,719.1
Forest products operations.................... 242.6 249.6 233.5
Real estate and other operations.............. 84.8 84.6 78.5
-------- -------- --------
2,565.2 2,115.7 2,031.1
-------- -------- --------
Costs and expenses:
Costs of sales and operations (exclusive of
depreciation and depletion):
Aluminum operations......................... 1,798.4 1,625.5 1,587.7
Forest products operations.................. 127.1 129.6 134.6
Real estate and other operations............ 65.4 62.8 65.3
Selling, general and administrative expenses.. 195.8 169.4 183.0
Depreciation and depletion.................... 120.9 121.1 120.8
Restructuring of aluminum operations.......... -- -- 35.8
-------- -------- --------
2,307.6 2,108.4 2,127.2
-------- -------- --------
Operating income (loss)......................... 257.6 7.3 (96.1)
Other income (expense):
Investment, interest and other income
(expense).................................... 18.2 (2.2) 69.8
Interest expense.............................. (172.7) (167.3) (169.5)
Amortization of deferred financing costs...... (8.6) (9.6) (15.6)
-------- -------- --------
Income (loss) before income taxes, minority
interests, extraordinary item and cumulative
effect of changes in accounting principles..... 94.5 (171.8) (211.4)
Credit (provision) for income taxes............. (14.8) 77.1 82.5
Minority interests.............................. (22.2) (22.0) (3.0)
-------- -------- --------
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles..................................... 57.5 (116.7) (131.9)
Extraordinary item:
Loss on early extinguishment of debt, net of
related benefits for minority interests of
$nil in 1994 and $2.8 in 1993 and income
taxes of $2.9 in 1994 and $27.5 in 1993,
respectively................................. -- (5.4) (50.6)
Cumulative effect of changes in accounting
principles:
Postretirement benefits other than pensions
and postemployment benefits, net of related
benefits for minority interests of $64.6 and
income taxes of $240.2....................... -- -- (444.3)
Accounting for income taxes................... -- -- 26.6
-------- -------- --------
Net income (loss)............................... $ 57.5 $ (122.1) $ (600.2)
======== ======== ========
Per common and common equivalent share:
Income (loss) before extraordinary item and
cumulative effect of changes in accounting
principles................................... $ 6.08 $ (12.35) $ (13.95)
Extraordinary item............................ -- (.57) (5.35)
Cumulative effect of changes in accounting
principles................................... - - (44.17)
-------- -------- --------
Net income (loss)............................. $ 6.08 $ (12.92) $ (63.47)
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 57.5 $ (122.1) $ (600.2)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and depletion................. 120.9 121.1 120.8
Minority interests......................... 22.2 22.0 3.0
Amortization of deferred financing costs
and discounts on long-term debt........... 19.5 19.3 21.7
Amortization of excess investment over
equity in net assets of unconsolidated
affiliates................................ 11.4 11.6 11.9
Equity in (earnings) loss of unconsolidated
affiliates................................ (19.1) 15.0 4.9
Net gain on sales of real estate, mortgage
loans and other assets.................... (9.7) (6.5) (45.8)
Net gains on marketable securities......... (8.6) (4.2) (7.1)
Net sales (purchases) of marketable
securities................................ (4.0) 12.9 31.1
Extraordinary loss on early extinguishment
of debt, net.............................. -- 5.4 50.6
Cumulative effect of changes in accounting
principles, net........................... -- -- 417.7
Decrease (increase) in prepaid expenses and
other assets.............................. 84.5 (47.9) 5.4
Increase (decrease) in accounts payable.... 34.7 26.3 (14.1)
Decrease (increase) in receivables......... (103.6) 24.5 5.0
Decrease (increase) in inventories......... (65.3) (37.5) 10.9
Increase in accrued and deferred income
taxes..................................... (13.1) (77.2) (96.5)
Increase (decrease) in payable to
affiliates and other liabilities.......... (1.2) 37.5 110.5
Increase (decrease) in accrued interest.... (1.0) 8.3 14.3
Other...................................... 12.8 (4.0) 8.0
--------- --------- ---------
Net cash provided by operating
activities.............................. 137.9 4.5 52.1
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property
and investments............................ 39.3 30.0 143.0
Capital expenditures........................ (97.7) (89.3) (86.2)
Investment in subsidiaries and joint
ventures................................... (15.9) (7.4) (9.4)
Other....................................... (1.1) (1.2) (2.8)
--------- --------- ---------
Net cash provided by (used for) investing
activities.............................. (75.4) (67.9) 44.6
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.... 5.7 229.7 1,201.3
Net borrowings (payments) under revolving
credit agreements and short-term borrowings
(payments)................................. 4.4 (191.8) (107.6)
Proceeds from issuance of Kaiser capital
stock...................................... 1.2 100.1 119.3
Restricted cash (deposits), net of
withdrawals ............................... 1.0 1.2 (33.6)
Redemptions, repurchase of and principal
payments on long-term debt................. (40.9) (39.1) (1,219.4)
Dividends paid to Kaiser's minority
preferred stockholders..................... (20.5) (13.7) (5.6)
Redemption of preference stock.............. (8.8) (8.5) (4.2)
Incurrence of financing costs............... (1.8) (19.7) (47.9)
Other....................................... 16.8 5.9 3.0
--------- --------- ---------
Net cash provided by (used for) financing
activities.............................. (42.9) 64.1 (94.7)
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS..... 19.6 .7 2.0
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR......................................... 84.6 83.9 81.9
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR...... $ 104.2 $ 84.6 $ 83.9
========= ========= =========
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Net margin borrowings (repayments) for
marketable securities...................... $ (6.9) $ 5.9 $ (.9)
Reduction of stockholders' deficit due to
redemption of Kaiser preferred stock....... 136.2 -- --
Contribution of property in exchange for
joint venture interest, net of deferred
gain of $8.6............................... 1.3 -- --
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid, net of capitalized interest.. $ 162.8 $ 149.3 $ 149.1
Income taxes paid, net...................... 30.3 18.3 13.2
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

<TABLE>
<CAPTION>
PREFERRED COMMON STOCK RETAINED PENSION
STOCK ----------------- ADDITIONAL EARNINGS LIABILITY TREASURY
($.50 PAR) SHARES ($.50 PAR) CAPITAL (DEFICIT) ADJUSTMENT STOCK TOTAL
---------- ------ ---------- ---------- --------- ---------- -------- ------
(IN MILLIONS OF DOLLARS AND SHARES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1993................... $.3 8.7 $5.0 $ 47.9 $ 419.4 $ (9.0) $(19.7) $443.9
Net loss.............. -- -- -- -- (600.2) -- -- (600.2)
Gain from issuance of
Kaiser Aluminum
Corporation common
stock................ -- -- -- 3.3 -- -- -- 3.3
Additional pension
liability............ -- -- -- -- -- (14.9) -- (14.9)
--- --- ---- ------ ------- ------ ------ ------
Balance, December 31,
1993................... .3 8.7 5.0 51.2 (180.8) (23.9) (19.7) (167.9)
Net loss.............. -- -- -- -- (122.1) -- -- (122.1)
Gain from issuance of
Kaiser Aluminum
Corporation common
stock................ -- -- -- 2.2 -- -- -- 2.2
Conversions of
preferred stock to
common stock......... -- -- -- (.2) -- -- .2 --
Reduction of pension
liability............ -- -- -- -- -- 12.5 -- 12.5
--- --- ---- ------ ------- ------ ------ ------
Balance, December 31,
1994................... .3 8.7 5.0 53.2 (302.9) (11.4) (19.5) (275.3)
--- --- ---- ------ ------- ------ ------ ------
Net income............ -- -- -- -- 57.5 -- -- 57.5
Gain from issuance of
Kaiser Aluminum
Corporation common
stock................ -- -- -- 2.5 -- -- -- 2.5
Redemption of Kaiser
Aluminum Corporation
preferred stock...... -- -- -- 99.3 36.9 -- -- 136.2
Additional pension
liability............ -- -- -- -- -- (4.7) -- (4.7)
--- --- ---- ------ ------- ------ ------ ------
Balance, December 31,
1995................... $.3 8.7 $5.0 $155.0 $(208.5) $(16.1) $(19.5) $(83.8)
=== === ==== ====== ======= ====== ====== ======
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The Company

The consolidated financial statements include the accounts of MAXXAM Inc.
and its majority and wholly owned subsidiaries. All references to the
"Company" include MAXXAM Inc. and its majority owned and wholly owned
subsidiaries, unless otherwise indicated or the context indicates otherwise.
Intercompany balances and transactions have been eliminated. Investments in
affiliates (20% to 50%-owned) are accounted for utilizing the equity method of
accounting. Certain reclassifications have been made to prior years' financial
statements to be consistent with the current year's presentation.

The Company is a holding company and, as such, conducts substantially all of
its operations through its subsidiaries. The Company operates in three
principal industries: aluminum, through its majority owned subsidiary, Kaiser
Aluminum Corporation ("Kaiser"), a fully integrated aluminum producer; forest
products, through its wholly owned subsidiary, Maxxam Group Inc. ("MGI") and
MGI's wholly owned subsidiaries, principally The Pacific Lumber Company
("Pacific Lumber") and Britt Lumber Co., Inc. ("Britt"); real estate
investment and development, managed through its wholly owned subsidiary,
Maxxam Property Company; and other commercial operations through various other
wholly owned subsidiaries.

Description of the Company's Operations

Kaiser operates in the aluminum industry through its principal operating
subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"). KACC operates in
all principal aspects of the aluminum industry--the mining of bauxite (the
major aluminum-bearing ore), the refining of bauxite into alumina (the
intermediate material), the production of aluminum, and the manufacture of
fabricated and semi-fabricated aluminum products. KACC's production levels of
alumina and primary aluminum exceed its internal requirements and allow it to
be a major seller of alumina and primary aluminum in domestic and
international markets. The substantial portion of the Company's consolidated
assets, liabilities, revenues, results of operations and cash flows are
attributable to Kaiser (see Note 11).

Pacific Lumber operates in several principal aspects of the lumber
industry--the growing and harvesting of redwood and Douglas-fir timber, the
milling of logs into lumber and the manufacture of lumber into a variety of
finished products. Britt manufactures redwood and cedar fencing and decking
products from small diameter logs, a substantial portion of which is obtained
from Pacific Lumber. Housing, construction and remodeling markets are the
principal markets for the Company's lumber products. Export sales generally
constitute less than 4% of forest products sales. A significant portion of
forest products sales are made to third parties located west of the
Mississippi river.

The Company, principally through its wholly owned subsidiaries, is engaged
in the business of residential and commercial real estate investment and
development, primarily in California, Arizona, Texas and Puerto Rico. With
respect to periods after October 6, 1995, other commercial operations include
the results of Sam Houston Race Park, Ltd. ("SHRP, Ltd."), a Texas limited
partnership which owns and operates a Class 1 horse racing facility in the
greater Houston metropolitan area.

The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect (i) the reported amounts of assets and liabilities, (ii)
disclosure of contingent assets and liabilities known to exist as of the date
the financial statements are published, and (iii)

F-7
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

the reported amount of revenues and expenses recognized during each period
presented. The Company reviews all significant estimates affecting its
consolidated financial statements on a recurring basis and records the effect
of any necessary adjustments prior to their publication. Adjustments made with
respect to the use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the subsequent
resolution of any one of the contingent matters described in Note 9 could
differ materially from current estimates. The results of an adverse resolution
of such uncertainties could have a material effect on the reported amounts of
the Company's consolidated assets and liabilities.

The cumulative losses of Kaiser in the first and second quarters of 1993,
principally due to the implementation of the new accounting standard for
postretirement benefits other than pensions as described in Note 6, eliminated
Kaiser's equity with respect to its common stock; accordingly, the Company
recorded 100% of Kaiser's losses in the third and fourth quarters of 1993 and
all of 1994, without regard to the minority interests represented by Kaiser's
other common stockholders (as described in Note 7). The Company recorded 100%
of Kaiser's earnings in 1995 and will continue to do so until such time as the
cumulative losses recorded by the Company with respect to Kaiser's minority
common stockholders are recovered.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Cash Equivalents

Cash equivalents consist of highly liquid money market instruments with
original maturities of three months or less.

Marketable Securities

Marketable securities are carried at fair value. Prior to December 31, 1993,
marketable securities were carried at the lower of cost or market. The cost of
the securities sold is determined using the first-in, first-out method.
Included in investment, interest and other income (expense) for each of the
three years ended December 31, 1995 were: 1995--net unrealized holding gains
of $1.9 and net realized gains of $6.8; 1994--net unrealized holding losses of
$1.0 and net realized gains of $5.2; and 1993--net realized gains of $4.2, the
recovery of $2.0 of net unrealized losses and net unrealized gains of $.9. Net
unrealized losses represent the amount required to reduce the short-term
marketable securities portfolios from cost to market value prior to December
31, 1993.

Inventories

Inventories are stated at the lower of cost or market. Cost for the aluminum
and forest products operations inventories is primarily determined using the
last-in, first-out ("LIFO") method. Other inventories of the aluminum
operations, principally operating supplies and repair and maintenance parts,
are stated at the lower of average cost or market. Inventory costs consist of
material, labor and manufacturing overhead, including depreciation and
depletion.

The Company recorded pre-tax charges of approximately $19.4 in 1993 because
of reductions in the carrying value of its aluminum operations inventories
caused principally by prevailing lower prices for alumina, primary aluminum
and fabricated aluminum products.

F-8
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Inventories consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Aluminum Operations:
Finished fabricated products................................... $ 91.5 $ 49.4
Primary aluminum and work in process........................... 195.9 203.1
Bauxite and alumina............................................ 119.6 102.3
Operating supplies and repair and maintenance parts............ 118.7 113.2
------ ------
525.7 468.0
------ ------
Forest Products Operations:
Lumber......................................................... 65.5 61.3
Logs........................................................... 15.6 12.1
------ ------
81.1 73.4
------ ------
$606.8 $541.4
====== ======
</TABLE>

Property, Plant and Equipment

Property, plant and equipment is stated at cost, net of accumulated
depreciation. Depreciation is computed principally utilizing the straight-line
method at rates based upon the estimated useful lives of the various classes
of assets.

Timber and Timberlands

Timber and timberlands are stated at cost, net of accumulated depletion.
Depletion is computed utilizing the unit-of-production method based upon
estimates of timber values and quantities.

Deferred Financing Costs

Costs incurred to obtain financing are deferred and amortized over the
estimated term of the related borrowing.

Restricted Cash and Concentrations of Credit Risk

At December 31, 1995 and 1994, cash and cash equivalents includes $19.7 and
$19.4, respectively, which is reserved for debt service payments on the
Company's 7.95% Timber Collateralized Notes due 2015 (the "Timber Notes"). At
December 31, 1995 and 1994, long-term receivables and other assets includes
$31.4 and $32.4, respectively, of restricted cash deposits held for the
benefit of the Timber Note holders as described in Note 4. Each of these
deposits is held by a different financial institution. In the event of
nonperformance by such financial institutions, the Company's exposure to
credit loss is represented by the amounts deposited plus any unpaid accrued
interest thereon. The Company mitigates its concentrations of credit risk with
respect to these restricted cash deposits by maintaining them at high credit
quality financial institutions and monitoring the credit ratings of these
institutions.

Restructuring of Aluminum Operations

In 1993, Kaiser implemented a restructuring plan primarily for its flat-
rolled products operation at its Trentwood plant in response to overcapacity
in the aluminum rolling industry, flat demand in the U.S. can stock

F-9
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

markets and declining demand for aluminum products sold to customers in the
commercial aerospace industry, all of which had resulted in declining prices
in Trentwood's key markets. Additionally, KACC implemented a plan to
streamline its casting operations, which included the shutdown of two
facilities located in Ohio. This entire restructuring was successfully
completed by the end of 1995. The pre-tax charge for this restructuring of
$35.8 included $25.2 for pension, severance and other termination benefits at
Trentwood; $8.0 related to casting facilities; and $2.6 for various other
items.

Investment, Interest and Other Income (Expense)

During 1994, the Company, Pacific Lumber and others agreed to a settlement,
subsequently approved by the court, of class and related individual claims
brought by former stockholders of Pacific Lumber against the Company, MGI,
Pacific Lumber, former directors of Pacific Lumber and others concerning MGI's
acquisition of Pacific Lumber. Of the $52.0 settlement, $33.0 was paid by
insurance carriers of the Company and Pacific Lumber, $14.8 was paid by
Pacific Lumber, and the balance was paid by other defendants and through the
assignment of certain claims. In 1994, the Company recorded a pre-tax loss of
$21.2 which consists of Pacific Lumber's $14.8 cash payment to the settlement
fund, a $2.0 accrual for certain contingent claims, and $4.4 of related legal
fees. Insofar as these matters do not originate from, or relate in any manner
to, its ongoing operations, the Company recorded the settlement as a charge to
investment, interest and other income (expense). Additionally, in February
1994, Pacific Lumber received a franchise tax refund of $7.2, the substantial
portion of which represents interest, from the state of California relating to
tax years 1972 through 1985. The net effect of these transactions are included
in investment, interest and other income (expense) for the year ended December
31, 1994.

Investment, interest and other income (expense) for the years ended December
31, 1995, 1994 and 1993 includes $17.8, $16.5 and $17.9, respectively, of pre-
tax charges related principally to establishing additional litigation reserves
for asbestos claims and environmental reserves for potential solid waste
disposal and soil and ground water remediation matters, each pertaining to
operations which were discontinued prior to the acquisition of Kaiser by the
Company in 1988. Investment, interest and other income for the year ended
December 31, 1993 includes a fourth quarter pre-tax gain of $47.8 from the
sale of sixteen multi-family real estate properties for cash proceeds of
$113.6.

Foreign Currency Translation

The Company uses the United States dollar as the functional currency for its
foreign operations.

Derivative Financial Instruments

Gains and losses arising from the use of derivative financial instruments
are reflected in Kaiser's operating results concurrently with the consummation
of the underlying hedged transactions. Deferred gains or losses are included
in prepaid expenses and other current assets and other accrued liabilities.
Kaiser does not hold or issue derivative financial instruments for trading
purposes (see Note 10).

Fair Value of Financial Instruments

The carrying amounts of cash and cash equivalents and restricted cash
approximate fair value. The fair value of marketable securities is determined
based on quoted market prices. The estimated fair value of long-term debt is
determined based on the quoted market prices for the publicly traded issues
and on the current rates offered for borrowings similar to the other debt.
MGI's publicly traded debt issues are thinly traded financial instruments;
accordingly, their market prices at any balance sheet date may not be
representative of the prices which would

F-10
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

be derived from a more active market. The fair value of foreign currency
contracts generally reflects the estimated amounts that Kaiser would receive
to enter into similar contracts at the balance sheet date, thereby taking into
account unrealized gains or losses on open contracts (see Note 10). The
estimated fair values of the Company's financial instruments, along with the
carrying amounts of the related assets (liabilities), are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents............. $ 104.2 $ 104.2 $ 84.6 $ 84.6
Marketable securities (held for
trading purposes).................... 45.9 45.9 40.3 40.3
Restricted cash....................... 31.4 31.4 32.4 32.4
Long-term debt........................ (1,610.2) (1,672.0) (1,616.2) (1,545.9)
Foreign currency contracts............ -- 1.9 -- 3.5
</TABLE>

Stock-Based Compensation

The Company applies the intrinsic value based method for accounting for
stock or stock-based compensation awards described by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations (see Note 8).

Per Share Information

Per share calculations are based on the weighted average number of common
shares outstanding in each year and, if dilutive, weighted average common
equivalent shares and common stock options based upon the average price of the
Company's common stock during the year. The weighted average number of common
and common equivalent shares was 9,459,293 shares, 9,447,878 shares and
9,457,083 shares for the years ended December 31, 1995, 1994 and 1993,
respectively.

2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

KACC INVESTORS

Kaiser's investments in unconsolidated affiliates are held by KACC. KACC
holds a 28.3% interest in Queensland Alumina Limited ("QAL"), a leading
producer of alumina, and a 49% interest in both Kaiser Jamaica Bauxite
Company, a bauxite supplier, and Anglesey Aluminium Limited ("Anglesey"),
which produces primary aluminum. KACC provides some of its affiliates with
services such as financing, management and engineering. Purchases from these
affiliates for the acquisition and processing of bauxite, alumina and primary
aluminum aggregated $284.4, $219.7 and $206.6 for the years ended December 31,
1995, 1994 and 1993, respectively (see Note 9). KACC received dividends of
$8.1 from the investees for the year ended December 31, 1995. No dividends
were received for the years ended December 31, 1994 or 1993. KACC's equity in
earnings (loss) before income taxes of such operations is treated as a
reduction (increase) in cost of sales. At December 31, 1995 and 1994, KACC's
net receivables from these affiliates were not material.

F-11
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Summarized combined financial information for KACC's investees is as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Current assets................................................... $429.0 $342.3
Property, plant and equipment, net............................... 330.8 349.4
Other assets..................................................... 39.3 42.4
------ ------
Total assets................................................... $799.1 $734.1
====== ======
Current liabilities.............................................. $125.4 $122.4
Long-term debt................................................... 331.8 307.6
Other liabilities................................................ 35.6 31.0
Stockholders' equity............................................. 306.3 273.1
------ ------
Total liabilities and stockholders' equity..................... $799.1 $734.1
====== ======
</TABLE>

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Net sales........................................... $ 685.9 $ 489.8 $ 510.3
Costs and expenses.................................. (618.7) (494.8) (527.2)
Credit (provision) for income taxes................. (18.7) (6.3) 1.9
------- ------- -------
Net income (loss)................................... $ 48.5 $ (11.3) $ (15.0)
======= ======= =======
KACC's equity in earnings (loss) of affiliates...... $ 19.2 $ (1.9) $ (3.3)
======= ======= =======
</TABLE>

KACC's equity in earnings (loss) differs from the summary net income (loss)
for unconsolidated affiliates due to various percentage ownerships in the
constituent entities and the amortization of the excess of KACC's investment
in the affiliates over its equity in their net assets. At December 31, 1995,
KACC's investment in these affiliates exceeded its equity in their net assets
by $54.9. KACC is amortizing this amount over a twelve-year period which
results in an annual charge of approximately $11.4.

OTHER INVESTEES

In 1995, pursuant to a joint venture agreement with SunCor Development
Company ("SunCor") for the purpose of developing and managing a real estate
project, the Company, through a wholly owned real estate subsidiary,
contributed 950 acres of undeveloped land valued at $10.0 and cash of $1.0 in
exchange for a 50% interest. SunCor, the managing partner, contributed $11.0
in cash in exchange for its 50% interest. A subsidiary of the Company and
SunCor are each guarantors of 50% of $4.6 aggregate principal amount of the
joint venture's debt. At December 31, 1995, the joint venture had assets of
$32.6, liabilities of $10.5 and equity of $22.1. For the year ended December
31, 1995, the joint venture incurred losses of $.2.

On July 8, 1993, the Company, through various subsidiaries, acquired control
of the general partner and became responsible for the management of SHRP, Ltd.
for an investment of $9.1. The Company's subsidiaries held an initial equity
interest in SHRP, Ltd. of 29.7%. The Company increased its equity interest in
SHRP, Ltd. to 45.0% as a result of a $5.6 capital contribution in October
1994. At December 31, 1994, SHRP, Ltd. had assets of $76.9 ($6.5 current),
liabilities of $88.6 ($13.4 current) and a deficiency in net assets of $11.7.
SHRP, Ltd. incurred net losses for the years ended December 31, 1994 and 1993
of approximately $20.0 and $5.9, respectively. The Company recorded losses
with respect to its investment in SHRP, Ltd. of $13.1 and $1.6 for the year
ended December 31, 1994 and for the period from July 8, 1993 to December 31,
1993, respectively.

F-12
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

1995 ACQUISITION OF MAJORITY INTEREST IN SHRP, LTD.

On April 17, 1995, SHRP, Ltd. and its wholly owned subsidiary, together with
SHRP, Ltd.'s largest limited partner (a wholly owned subsidiary of the
Company), filed voluntary petitions seeking to reorganize under the provisions
of Chapter 11 of the United States Bankruptcy Code. The bankruptcy plan (the
"Plan") was confirmed on September 22, 1995, and the transactions called for
by the Plan were completed on October 6, 1995. Such transactions included cash
contributions to SHRP, Ltd. from a new investor group totaling $5.9 (of which
wholly owned subsidiaries of the Company contributed $5.8). Additionally, a
wholly owned subsidiary of the Company contributed a tract of land to SHRP,
Ltd. (with a fair market value of $2.3). The new managing general partner of
the reorganized SHRP, Ltd. is a wholly owned subsidiary of the Company. In an
unrelated transaction, on October 20, 1995, a wholly owned subsidiary of the
Company purchased, for $7.3 (which approximated fair value), $14.6 aggregate
initial principal amount of the SHRP Notes (as defined in Note 4) and the
corresponding equity interest in SHRP Equity, Inc. (a Delaware corporation and
an additional general partner of the reorganized SHRP, Ltd.) to which the
selling noteholder was entitled. After giving effect to the previously
described transactions, wholly owned subsidiaries of the Company hold,
directly or indirectly, approximately 78.8% of the equity in the reorganized
SHRP, Ltd. Supplemental cash flows disclosure related to the acquisition of
SHRP, Ltd. in October 1995 is as follows: assets acquired of $29.3, assumed
liabilities of $20.7, and additional minority interest of $2.8.

The assets and liabilities of SHRP, Ltd. are included in the accompanying
Consolidated Balance Sheet as of December 31, 1995, and the results of SHRP,
Ltd.'s operations and cash flows for the period from October 6, 1995 to
December 31, 1995 are included in the accompanying Consolidated Statements of
Operations and Cash Flows. The carrying value of SHRP, Ltd.'s assets and
liabilities following its emergence from the Chapter 11 proceedings differs in
material amounts from those of the predecessor entity. The pro forma
disclosures, assuming SHRP, Ltd. was included in the Company's consolidated
results of operations are as follows: revenue--$2,579.3, $2,135.9; income
(loss) before extraordinary items--$50.6, ($125.0); net income (loss)--$50.6,
($130.4); and earnings (loss) per common and common equivalent share--$5.35,
($13.80), for the years ended December 31, 1995 and 1994, respectively. The
pro forma information excludes amounts attributable to SHRP, Ltd.'s
extraordinary gain of $14.9 resulting from the restructuring transactions
contained in the Plan. The extraordinary gain was omitted because the Company
believes the item would distort normal trends.

3. PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL ------------------
LIVES 1995 1994
---------- -------- --------
<S> <C> <C> <C>
Land and improvements............................ 5-30 years $ 185.8 $ 176.1
Buildings........................................ 5-45 years 272.4 259.6
Machinery and equipment.......................... 3-40 years 1,388.5 1,330.8
Construction in progress......................... 63.3 45.0
-------- --------
1,910.0 1,811.5
Less: accumulated depreciation................... (678.1) (579.9)
-------- --------
$1,231.9 $1,231.6
======== ========
</TABLE>

Depreciation expense for the years ended December 31, 1995, 1994 and 1993
was $105.4, $105.7 and $104.9, respectively.

F-13
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

4. LONG-TERM DEBT

Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
Corporate:
14% MAXXAM Senior Subordinated Reset Notes due May 20,
2000.................................................... $ 25.0 $ 25.0
12 1/2% MAXXAM Subordinated Debentures due December 15,
1999, net of discount................................... 16.5 20.9
Other.................................................... .1 .2
Aluminum Operations:
1994 KACC Credit Agreement............................... 13.1 6.7
9 7/8% KACC Senior Notes due February 15, 2002, net of
discount................................................ 223.8 223.6
Alpart CARIFA Loan....................................... 60.0 60.0
12 3/4% KACC Senior Subordinated Notes due February 1,
2003.................................................... 400.0 400.0
Other.................................................... 61.2 69.2
Forest Products Operations:
7.95% Scotia Pacific Timber Collateralized Notes due July
20, 2015................................................ 350.2 363.8
11 1/4% MGI Senior Secured Notes due August 1, 2003...... 100.0 100.0
12 1/4% MGI Senior Secured Discount Notes due August 1,
2003, net of discount................................... 92.5 82.8
10 1/2% Pacific Lumber Senior Notes due March 1, 2003.... 235.0 235.0
Other.................................................... .8 .9
Real Estate and Other Operations:
11% SHRP, Ltd. Senior Secured Extendible Notes due
September 1, 2001, net of discount...................... 13.3 --
RTC Portfolio secured notes due December 31, 1999,
interest at prime plus 3%............................... 8.0 10.0
MCOP Credit Agreement.................................... .7 2.6
Other notes and contracts, primarily secured by
receivables, buildings, real estate and equipment....... 10.0 15.5
-------- --------
1,610.2 1,616.2
Less: current maturities............................... (25.1) (33.7)
-------- --------
$1,585.1 $1,582.5
======== ========
</TABLE>

CORPORATE

14% MAXXAM Senior Subordinated Reset Notes due 2000 (the "Reset Notes")

Pursuant to the terms of the indenture governing the Reset Notes, no further
adjustments to the interest rate are permitted. The Reset Notes are redeemable
at the Company's option, in whole or in part, at par.

12 1/2% MAXXAM Subordinated Debentures due 1999 (the "12 1/2% Debentures")

The 12 1/2% Debentures, which are net of discount of $1.1 and $1.7 at
December 31, 1995 and 1994, respectively, have mandatory redemptions of $3.2 in
December 1997 and $3.3 in December 1998. The 12 1/2% Debentures are redeemable
at the Company's option, in whole or in part, at par.

F-14
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

MAXXAM Demand Loan Agreement

On October 10, 1994, the Company entered into a demand loan and pledge
agreement (the "Custodial Trust Agreement") with Custodial Trust Company
providing for up to $25.0 in borrowings. Any amounts drawn would be payable
upon demand and be secured by Kaiser common stock owned by the Company (or
such other marketable securities acceptable to the lender) with an initial
market value (as defined therein) of approximately three times the amount
borrowed. Borrowings under the Custodial Trust Agreement would bear interest
at the prime rate plus 1% per annum. The Custodial Trust Agreement contains a
negative pledge on 22 million shares of Kaiser's common stock owned by the
Company and provides that the Company may sell such shares upon 24 hours
notice to the Custodial Trust Company. No borrowings were outstanding as of
December 31, 1995.

ALUMINUM OPERATIONS

The 1994 KACC Credit Agreement (as amended, the "1994 KACC Credit Agreement")

The 1994 KACC Credit Agreement consists of a $325.0 five-year secured
revolving line of credit which matures in 1999. KACC is able to borrow under
the facility by means of revolving credit advances and letters of credit (up
to $125.0) in an aggregate amount equal to the lesser of $325.0 or a borrowing
base relating to eligible accounts receivable and inventory. As of December
31, 1995, $259.3 (of which $72.4 could have been used for letters of credit)
was available to KACC under the 1994 KACC Credit Agreement. The 1994 KACC
Credit Agreement is unconditionally guaranteed by Kaiser and by certain
significant subsidiaries of KACC. Loans under the 1994 KACC Credit Agreement
bear interest at a rate per annum, at KACC's election, equal to a Reference
Rate (as defined) plus 1 1/2% or LIBOR (Reserve Adjusted) (as defined) plus 3
1/4%. Effective June 30, 1995, the interest rate margins applicable to
borrowings under the 1994 KACC Credit Agreement may be reduced by up to 1 1/2%
(non-cumulatively), based on a financial test, determined quarterly. As of
December 31, 1995, the financial test permitted a reduction of 1 1/2% per
annum in margins effective January 1, 1996. Kaiser recorded a pre-tax
extraordinary loss of $8.3 ($5.4 after taxes) in the first quarter of 1994,
consisting primarily of the write-off of unamortized deferred financing costs
related to Kaiser's previous credit agreement (the "1989 KACC Credit
Agreement").

The 1994 KACC Credit Agreement requires KACC to maintain certain financial
covenants and places restrictions on Kaiser's and KACC's ability to, among
other things, incur debt and liens, make investments, pay dividends, undertake
transactions with affiliates, make capital expenditures and enter into
unrelated lines of business. The 1994 KACC Credit Agreement is secured by,
among other things, (i) mortgages on KACC's major domestic plants (excluding
Kaiser's Gramercy alumina plant), (ii) subject to certain exceptions, liens on
the accounts receivable, inventory, equipment, domestic patents and trademarks
and substantially all other personal property of KACC and certain of its
subsidiaries, (iii) a pledge of all of the stock of KACC owned by Kaiser, and
(iv) pledges of all of the stock of a number of KACC's wholly owned domestic
subsidiaries, pledges of a portion of the stock of certain foreign
subsidiaries and pledges of a portion of the stock of certain partially owned
foreign affiliates. Substantially all of the identifiable assets of the
bauxite and alumina and aluminum processing segments (see Note 11) are
attributable to KACC and collateralize the 1994 KACC Credit Agreement
indebtedness.

9 7/8% KACC Senior Notes due 2002 (the "KACC Senior Notes")

Concurrent with the offering by Kaiser of the 8.255% Preferred Redeemable
Increased Dividend Equity Securities (the "PRIDES") (see Note 7), KACC issued
$225.0 of the KACC Senior Notes. The net proceeds from the offering of the
KACC Senior Notes were used to reduce outstanding borrowings under the
revolving

F-15
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

credit facility of the 1989 KACC Credit Agreement immediately prior to the
effectiveness of the 1994 KACC Credit Agreement and for working capital and
general corporate purposes. The KACC Senior Notes are net of discount of $1.2
and $1.4 at December 31, 1995 and 1994, respectively.

12 3/4% KACC Senior Subordinated Notes due 2003 (the "KACC Senior
Subordinated Notes")

On February 1, 1993, KACC issued $400.0 of the KACC Senior Subordinated
Notes. The net proceeds from the sale of the KACC Senior Subordinated Notes
were used to retire KACC's 14 1/4% Senior Subordinated Notes due 1995, to
prepay $18.0 of the term loan under the 1989 KACC Credit Agreement and to
reduce outstanding borrowings under the revolving credit facility of the 1989
KACC Credit Agreement. These transactions resulted in a pre-tax extraordinary
loss of $33.0, consisting primarily of the payment of premiums and the write-
off of unamortized discount and deferred financing costs on the 14 1/4% Senior
Subordinated Notes.

The obligations of KACC with respect to the KACC Senior Notes and the KACC
Senior Subordinated Notes are guaranteed, jointly and severally, by certain
subsidiaries of KACC. Pursuant to the terms of the 1994 KACC Credit Agreement,
at December 31, 1995, Kaiser is precluded from paying any dividends on its
common stock. Further, the indentures governing the KACC Senior Notes and the
KACC Subordinated Notes provide that KACC must offer to purchase such notes
upon the occurrence of a Change of Control (as defined therein), and the 1994
KACC Credit Agreement provides that the occurrence of a Change in Control (as
defined therein) shall constitute an Event of Default thereunder.

Alpart CARIFA Loan

In December 1991, Alumina Partners of Jamaica ("Alpart," a majority owned
subsidiary of KACC) entered into a loan agreement with the Caribbean Basin
Projects Financing Authority ("CARIFA") under which CARIFA loaned Alpart the
proceeds from the issuance of CARIFA's industrial revenue bonds. The terms of
the loan parallel the bonds' repayment terms. The $38.0 aggregate principal
amount of Series A bonds matures on June 1, 2008. Substantially all of the
Series A bonds bear interest at a floating rate of 87% of the applicable LIBID
rate (LIBOR less 1/8 of 1%). The $22.0 aggregate principal amount of Series B
bonds matures on June 1, 2007 and bears interest at a fixed rate of 8.25%.
Proceeds from the sale of the bonds were used by Alpart to refinance interim
loans from the partners in Alpart, to pay eligible project costs for the
expansion and modernization of its alumina refinery and related port and
bauxite mining facilities, and to pay certain costs of issuance. Under the
terms of the loan agreement, Alpart must remain a qualified recipient for
Caribbean Basin Initiative funds as defined by applicable laws. Alpart has
agreed to indemnify bondholders of CARIFA for certain tax payments that could
result from events, as defined, that adversely affect the tax treatment of the
interest income on the bonds. Alpart's obligations under the loan agreement
are secured by a $64.2 letter of credit guaranteed by the partners in Alpart
(of which $22.5 is guaranteed by Kaiser's minority partner).

FOREST PRODUCTS OPERATIONS

Scotia Pacific Timber Notes and 10 1/2% Pacific Lumber Senior Notes due 2003
(the "Pacific Lumber Senior Notes")

On March 23, 1993, Pacific Lumber issued $235.0 of the Pacific Lumber Senior
Notes and its newly formed wholly owned subsidiary, Scotia Pacific Holding
Company ("Scotia Pacific"), issued $385.0 of the Timber Notes. Pacific Lumber
and Scotia Pacific used the net proceeds from the sale of the Pacific Lumber
Senior Notes and the Timber Notes, together with Pacific Lumber's cash and
marketable securities, to (i) retire (a) $163.8 aggregate principal amount of
Pacific Lumber's 12% Series A Senior Notes due July 1, 1996 (the "Series A
Notes"), (b) $299.7 aggregate principal amount of Pacific Lumber's 12.2%
Series B Senior Notes due July 1,

F-16
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

1996 (the "Series B Notes"), and (c) $41.7 aggregate principal amount of
Pacific Lumber's 12 1/2% Senior Subordinated Debentures due July 1, 1998 (the
"Debentures;" the Series A Notes, the Series B Notes and the Debentures are
referred to collectively as the "Old Pacific Lumber Securities"), (ii) pay
accrued interest on the Old Pacific Lumber Securities through the date of
redemption, (iii) pay the applicable redemption premiums on the Old Pacific
Lumber Securities, (iv) repay Pacific Lumber's $28.9 cogeneration facility
loan, (v) fund the initial deposit of $35.0 to an account held by the trustee
for the Timber Notes (the "Liquidity Account"), and (vi) pay a $25.0 dividend
to a subsidiary of MGI. These transactions resulted in a pre-tax extraordinary
loss of $38.1, consisting primarily of the payment of premiums and the write-
off of unamortized discounts and deferred financing costs on the Old Pacific
Lumber Securities.

The indenture governing the Timber Notes (the "Timber Note Indenture")
prohibits Scotia Pacific from incurring any additional indebtedness for
borrowed money and limits the business activities of Scotia Pacific to the
ownership and operation of its timber and timberlands. The Timber Notes are
senior secured obligations of Scotia Pacific and are not obligations of, or
guaranteed by, Pacific Lumber or any other person. The Timber Notes are
secured by a lien on (i) Scotia Pacific's timber and timberlands (representing
$179.4 of the Company's consolidated balance at December 31, 1995), (ii)
substantially all of Scotia Pacific's property and equipment, and (iii) other
property including cash equivalents reserved for debt service payments and the
funds deposited in the Liquidity Account.

The Timber Notes are structured to link, to the extent of available cash,
the deemed depletion of Scotia Pacific's timber (through the harvest and sale
of logs) to required amortization of the Timber Notes. The required amount of
amortization due on any Timber Note payment date is determined by various
mathematical formulas set forth in the Timber Note Indenture. The minimum
amount of principal which Scotia Pacific must pay (on a cumulative basis)
through any Timber Note payment date in order to avoid an Event of Default (as
defined in the Timber Note Indenture) is referred to as rated amortization
("Rated Amortization"). If all payments of principal are made in accordance
with Rated Amortization, the payment date on which Scotia Pacific will pay the
final installment of principal is July 20, 2015. The amount of principal which
Scotia Pacific must pay through each Timber Note payment date in order to
avoid payment of prepayment or deficiency premiums is referred to as scheduled
amortization ("Scheduled Amortization"). If all payments of principal are made
in accordance with Scheduled Amortization, the payment date on which Scotia
Pacific will pay the final installment of principal is July 20, 2009.

Principal and interest on the Timber Notes are payable semi-annually on
January 20 and July 20. The Timber Notes are redeemable at the option of
Scotia Pacific, in whole but not in part, at any time. The redemption price of
the Timber Notes is equal to the sum of the principal amount, accrued interest
and a prepayment premium calculated based upon the yield of like-term Treasury
securities plus 50 basis points.

Interest on the Pacific Lumber Senior Notes is payable semi-annually on
March 1 and September 1. The Pacific Lumber Senior Notes are redeemable at the
option of Pacific Lumber, in whole or in part, on or after March 1, 1998 at a
price of 103% of the principal amount plus accrued interest. The redemption
price is reduced annually until March 1, 2000, after which time the Pacific
Lumber Senior Notes are redeemable at par.

Pacific Lumber Revolving Credit Agreement (as amended and restated, the
"Pacific Lumber Credit Agreement")

F-17
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

or the bank's offshore rate plus 2 1/4%. The Pacific Lumber Credit Agreement
provides for borrowings of up to $60.0, of which $15.0 may be used for standby
letters of credit and $30.0 is restricted to timberland acquisitions.
Borrowings made pursuant to the portion of the credit facility restricted to
timberland acquisitions would also be secured by the purchased timberlands. As
of December 31, 1995, $48.1 of borrowings was available under the Pacific
Lumber Credit Agreement, of which $3.1 was available for letters of credit and
$30.0 was restricted to timberland acquisitions. No borrowings were
outstanding as of December 31, 1995, and letters of credit outstanding
amounted to $11.9. The Pacific Lumber Credit Agreement contains covenants
substantially similar to those contained in the indenture governing the
Pacific Lumber Senior Notes.

The indentures governing the Pacific Lumber Senior Notes, the Timber Notes,
and the Pacific Lumber Credit Agreement contain various covenants which, among
other things, limit the payment of dividends and restrict transactions between
Pacific Lumber and its affiliates. As of December 31, 1995, under the most
restrictive of these covenants, approximately $15.7 of dividends could be paid
by Pacific Lumber.

11 1/4% MGI Senior Secured Notes due 2003 (the "MGI Senior Notes") and

12 1/4% MGI Senior Secured Discount Notes due 2003 (the "MGI Discount Notes")

On August 4, 1993, MGI issued $100.0 aggregate principal amount of the MGI
Senior Notes and $126.7 aggregate principal amount (approximately $70.0 net of
original issue discount) of the MGI Discount Notes (together, the "MGI
Notes"). The MGI Notes are secured by MGI's pledge of 100% of the common stock
of Pacific Lumber, Britt and Maxxam Properties Inc. (a wholly owned subsidiary
of MGI) and by the pledge of 28 million shares of Kaiser's common stock owned
by the Company. The indenture governing the MGI Notes, among other things,
restricts the ability of MGI to incur additional indebtedness, engage in
transactions with affiliates, pay dividends and make investments. As of
December 31, 1995, under the most restrictive of these covenants,
approximately $1.9 of dividends could be paid by MGI, of which $1.6 was paid
in January 1996. The MGI Notes are senior indebtedness of MGI; however, they
are effectively subordinate to the liabilities of MGI's subsidiaries, which
include the Timber Notes and the Pacific Lumber Senior Notes. The MGI Discount
Notes are net of discount of $33.2 and $43.9 at December 31, 1995 and 1994,
respectively.

The MGI Senior Notes pay interest semi-annually on February 1 and August 1
of each year. The MGI Discount Notes will not pay any interest until February
1, 1999, at which time semi-annual interest payments will become due on each
February 1 and August 1 thereafter.

MGI used a portion of the net proceeds from the sale of the MGI Notes to
retire the entire outstanding balance of its former 12 3/4% Notes at 101% of
their principal amount, plus accrued interest through November 14, 1993. MGI
used the remaining portion of the net proceeds from the sale of the MGI Notes,
together with a portion of its existing cash resources, to pay a $20.0
dividend to the Company. The Company used such proceeds to redeem, on August
20, 1993, $20.0 aggregate principal amount of its Reset Notes at 100% of their
principal amount plus accrued interest thereon. The early retirement of the 12
3/4% Notes and the redemption of $20.0 aggregate principal amount of the Reset
Notes resulted in a pre-tax extraordinary loss of $9.8 consisting of net
interest cost, the write-off of unamortized deferred financing costs, premiums
and the write-off of unamortized original issue discount.

REAL ESTATE AND OTHER OPERATIONS

11% SHRP, Ltd. Senior Secured Extendible Notes due 2001 (the "SHRP Notes")

The SHRP Notes were issued on October 6, 1995 at an aggregate principal
amount of $37.9, maturing on September 1, 2001. The SHRP Notes were recorded
at their estimated fair value which resulted in a discount of

F-18
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

approximately $17.1. At December 31, 1995, the aggregate principal amount
(including accrued interest thereon) of the SHRP Notes and the unamortized
discount were $38.8 and $17.0, respectively. On October 20, 1995, a wholly
owned subsidiary of the Company purchased approximately 39% of the SHRP Notes
from an unrelated party. Accordingly, the amount of indebtedness shown in the
accompanying table has been adjusted to reflect the elimination of the
Company's holdings. Should the Texas Legislature pass certain gaming
legislation, the SHRP Notes may be extended to September 1, 2003; such
extension would increase the rate of interest to 13% per annum. The SHRP Notes
are secured by substantially all of the assets of SHRP, Ltd., which aggregate
$33.6 of the assets reflected on the accompanying Consolidated Balance Sheet
at December 31, 1995. Interest on the SHRP Notes is payable in-kind on April 1
and October 1, and will not be payable in cash until a specified level of cash
flow from operations has been achieved. Once cash interest payments commence,
subsequent interest payments may not be paid in-kind. The indenture governing
the SHRP Notes generally precludes the payment of cash distributions until two
consecutive cash interest payments have been made.

RTC Portfolio Secured Notes due 1999 (the "RTC Portfolio Loan")

As of December 31, 1995, approximately $8.0 was outstanding pursuant to the
RTC Portfolio Loan. The loan agreement governing the RTC Portfolio Loan
provides for additional borrowings of up to approximately $12.1 on or before
March 31, 1996. The Company anticipates that such amount will be borrowed if
such date is not extended. Upon the sale of any secured property or loan,
principal payments are required based on the release price (as defined) of
such property or loan. The entire amount of the loan must also be paid if the
principal balance declines to less than $8.0.

The MCOP Credit Agreement (as amended, the "MCOP Credit Agreement")

On July 15, 1995, a real estate subsidiary of the Company, MCO Properties
Inc. ("MCOP"), amended and restated its revolving credit agreement with a bank
which will expire on May 15, 1998. Borrowings under the MCOP Credit Agreement
are secured primarily by (i) MCOP's eligible receivables and real estate held
for investment or development and sale, (ii) MCOP's pledge of the common stock
of certain of its subsidiaries, and (iii) the guarantee of certain of MCOP's
subsidiaries and the Company. Further, the Company has pledged MCOP's common
stock as additional security. Interest is computed at the bank's prime rate
plus 1/2% or the bank's Eurodollar rate plus 2 3/4%. The MCOP Credit Agreement
contains various covenants including a minimum net worth requirement and
limitations on the payment of dividends, investments and the incurrence of
indebtedness. The MCOP Credit Agreement provides for borrowings of up to
$14.0, of which $8.5 may be used for standby letters of credit. The available
credit is subject to borrowing base limitation calculations. As of December
31, 1995, $10.6 of additional borrowings was available under the MCOP Credit
Agreement and outstanding letters of credit amounted to $2.1.

F-19
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

OTHER

Maturities

Scheduled maturities of long-term debt outstanding at December 31, 1995 are
as follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
----------------------------------------
1996 1997 1998 1999 2000 THEREAFTER
----- ----- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
14% MAXXAM Senior Subordinated Reset
Notes............................... $ -- $ -- $ -- $ -- $25.0 $ --
12 1/2% MAXXAM Subordinated
Debentures.......................... -- 3.2 3.3 11.1 -- --
1994 KACC Credit Agreement........... -- -- -- 13.1 -- --
9 7/8% KACC Senior Notes............. -- -- -- -- -- 225.0
Alpart CARIFA Loan................... -- -- -- -- -- 60.0
12 3/4% KACC Senior Subordinated
Notes............................... -- -- -- -- -- 400.0
7.95% Scotia Pacific Timber
Collateralized Notes................ 14.1 16.2 19.3 21.6 24.0 255.0
11 1/4% MGI Senior Secured Notes..... -- -- -- -- -- 100.0
12 1/4% MGI Senior Secured Discount
Notes............................... -- -- -- -- -- 125.7
10 1/2% Pacific Lumber Senior Notes.. -- -- -- -- -- 235.0
11% SHRP, Ltd. Senior Secured
Extendible Notes.................... -- -- -- -- -- 43.4
RTC Portfolio secured notes.......... -- -- -- 8.0 -- --
Other................................ 11.0 10.2 10.1 1.6 2.0 38.0
----- ----- ----- ----- ----- --------
$25.1 $29.6 $32.7 $55.4 $51.0 $1,482.1
===== ===== ===== ===== ===== ========
</TABLE>

Capitalized Interest

Interest capitalized during the years ended December 31, 1995, 1994 and 1993
was $2.8, $3.0 and $4.4, respectively.

Restricted Net Assets of Subsidiaries

Certain debt instruments restrict the ability of the Company's subsidiaries
to transfer assets, make loans and advances and pay dividends to the Company.
As of December 31, 1995, all of the assets relating to the Company's aluminum,
forest products, real estate and other operations are subject to such
restrictions. The Company could eliminate all of such restrictions with
respect to approximately $200.2 (see Note 11) of the Company's real estate
assets with the extinguishment of $18.7 of debt.

5. INCOME TAXES

Income (loss) before income taxes, minority interests, extraordinary item
and cumulative effect of changes in accounting principles by geographic area
is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Domestic............................................. $ (49.4) $(177.9) $(223.4)
Foreign.............................................. 143.9 6.1 12.0
------- ------- -------
$ 94.5 $(171.8) $(211.4)
======= ======= =======
</TABLE>

F-20
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Income taxes are classified as either domestic or foreign based on whether
payment is made or due to the United States or a foreign country. Certain
income classified as foreign is subject to domestic income taxes.

The credit (provision) for income taxes on income (loss) before income
taxes, minority interests, extraordinary item and cumulative effect of changes
in accounting principles consists of the following:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1995 1994 1993
------- ------ ------
<S> <C> <C> <C>
Current:
Federal.............................................. $ (4.3) $ -- $ (.1)
State and local...................................... (.4) (.2) (1.3)
Foreign.............................................. (40.2) (18.0) (7.9)
------- ------ ------
(44.9) (18.2) (9.3)
------- ------ ------
Deferred:
Federal.............................................. 35.4 94.3 77.1
State and local...................................... (.4) .4 2.7
Foreign.............................................. (4.9) .6 12.0
------- ------ ------
30.1 95.3 91.8
------- ------ ------
$(14.8) $ 77.1 $ 82.5
======= ====== ======
</TABLE>

The 1994 federal deferred credit for income taxes of $94.3 includes $36.0
for the benefit of operating loss carryforwards generated in 1994. The 1993
federal deferred credit for income taxes of $77.1 includes $29.2 for the
benefit of operating loss carryforwards generated in 1993 and a $7.0 benefit
for increasing net deferred income tax assets (liabilities) as of the date of
enactment (August 10, 1993) of the Omnibus Budget Reconciliation Act of 1993,
which retroactively increased the federal statutory income tax rate from 34%
to 35% for periods beginning on or after January 1, 1993.

A reconciliation between the credit (provision) for income taxes and the
amount computed by applying the federal statutory income tax rate to income
(loss) before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income (loss) before income taxes, minority
interests, extraordinary item and cumulative effect
of changes in accounting principles................ $ 94.5 $(171.8) $(211.4)
======= ======= =======
Amount of federal income tax based upon the
statutory rate..................................... $ (33.1) $ 60.1 $ 74.0
Revision of prior years' tax estimates and other
changes in valuation allowances.................... 24.2 16.7 (.6)
Percentage depletion................................ 4.2 5.6 6.4
Foreign taxes, net of federal tax benefit........... (6.9) (5.3) (5.0)
State and local taxes, net of federal tax benefit... (2.4) .1 .9
Increase in net deferred income tax assets due to
tax rate change.................................... -- 1.8 7.0
Removal of Kaiser from the Company's consolidated
federal return group............................... -- -- 3.5
Other............................................... (.8) (1.9) (3.7)
------- ------- -------
$ (14.8) $ 77.1 $ 82.5
======= ======= =======
</TABLE>

F-21
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

The caption entitled "Revision of prior years' tax estimates and other
changes in valuation allowances," as shown in the preceding table, includes
amounts for the reversal of reserves which the Company no longer believes are
necessary, other changes in prior year tax estimates and changes in valuation
allowances with respect to deferred income tax assets. Generally, the reversal
of reserves relate to the expiration of the relevant statute of limitations
with respect to certain income tax returns, or the resolution of specific
income tax matters with the relevant tax authorities. For the years ended
December 31, 1995, 1994 and 1993, the reversal of reserves which the Company
believes are no longer necessary amounted to $20.0, $20.1 and $2.9,
respectively.

As shown in the Consolidated Statement of Operations for the years ended
December 31, 1994 and 1993, the Company reported extraordinary losses on the
early extinguishment of debt. The Company reported the losses net of related
deferred federal income taxes of $2.9 and $27.5, respectively, which
approximated the federal statutory income tax rate in effect on the dates the
transactions occurred.

Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). The
adoption of SFAS 109 changed the Company's method of accounting for income
taxes to an asset and liability approach from the deferral method prescribed
by Accounting Principles Board Opinion No. 11, Accounting for Income Taxes.
The asset and liability approach requires the recognition of deferred income
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax
returns. Under this method, deferred income tax assets and liabilities are
determined based on the temporary differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates. The
cumulative effect of the change in accounting principle, as of January 1,
1993, increased the Company's results of operations by $26.6. The
implementation of SFAS 109 required the Company to restate certain assets and
liabilities to their pre-tax amounts from their net-of-tax amounts originally
recorded in connection with the acquisitions of various subsidiaries in prior
years. As a result of restating these assets and liabilities, the loss before
income taxes, minority interests, extraordinary item and cumulative effect of
changes in accounting principles for the year ended December 31, 1993 was
increased by $5.9.

F-22
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Certain of the deferred income tax assets and liabilities listed in the
following table are included in the Consolidated Balance Sheet in the captions
entitled prepaid expenses and other current assets, other accrued liabilities
and other noncurrent liabilities. The components of the Company's net deferred
income tax assets (liabilities) are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994
------ ------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions................... $293.6 $297.2
Loss and credit carryforwards................................. 190.5 208.8
Other liabilities............................................. 139.0 133.5
Real estate................................................... 58.1 71.5
Pensions...................................................... 56.0 51.0
Timber and timberlands........................................ 41.9 46.2
Foreign and state deferred income tax liabilities............. 30.8 28.1
Property, plant and equipment................................. 23.3 23.7
Other......................................................... 32.5 26.7
Valuation allowances.......................................... (141.5) (147.0)
------ ------
Total deferred income tax assets, net....................... 724.2 739.7
------ ------
Deferred income tax liabilities:
Property, plant and equipment................................. (177.9) (202.7)
Investments in and advances to unconsolidated affiliates...... (66.4) (63.8)
Inventories................................................... (15.5) (27.4)
Other......................................................... (22.8) (20.0)
------ ------
Total deferred income tax liabilities....................... (282.6) (313.9)
------ ------
Net deferred income tax assets.................................. $441.6 $425.8
====== ======
</TABLE>

The valuation allowances listed above relate primarily to loss and credit
carryforwards and postretirement benefits other than pensions. As of December
31, 1995, approximately $291.8 of the net deferred income tax assets listed
above are attributable to Kaiser. Of this amount, approximately $97.7 relates
to the benefit of loss and credit carryforwards, net of valuation allowances.
The Company evaluated all appropriate factors to determine the proper
valuation allowances for these carryforwards, including any limitations
concerning their use, the year the carryforwards expire and the levels of
taxable income necessary for utilization. For example, full valuation
allowances were provided for certain credit carryforwards that expire in the
near term. With regard to future levels of income, the Company believes that
Kaiser, based on the cyclical nature of its business, its history of prior
operating earnings and its expectations for future years, will more likely
than not generate sufficient taxable income to realize the benefit
attributable to the loss and credit carryforwards for which valuation
allowances were not provided. The remaining portion of Kaiser's net deferred
income tax assets is approximately $194.1 at December 31, 1995. A principal
component of this amount is the tax benefit associated with the accrual for
postretirement benefits other than pensions. The future tax deductions with
respect to the turnaround of this accrual will occur over a thirty to forty-
year period. If such deductions create or increase a net operating loss in any
one year, Kaiser has the ability to carry forward such loss for fifteen
taxable years. For these reasons, the Company believes a long-term view of
profitability is appropriate and has concluded that this net deferred income
tax asset will more likely than not be realized despite Kaiser's operating
losses incurred in recent years. The net deferred income tax assets listed
above which are not attributable to Kaiser are

F-23
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

approximately $149.8 as of December 31, 1995. This amount includes
approximately $91.2 which relates to the excess of the tax basis over
financial statement basis with respect to timber and timberlands and real
estate. The Company has concluded that it is more likely than not that these
net deferred income tax assets will be realized based in part upon the
estimated values of the underlying assets which are in excess of their tax
basis.

The Company files consolidated federal income tax returns together with its
domestic subsidiaries. As a consequence of Kaiser's public offering of shares
on June 30, 1993, as discussed in Note 7, Kaiser and its subsidiaries are no
longer included in the consolidated federal income tax return group of the
Company. Kaiser and its subsidiaries have become members of a new consolidated
return group of which Kaiser is the common parent corporation (the "New Kaiser
Tax Group"). The New Kaiser Tax Group files consolidated federal income tax
returns for taxable periods beginning on or after July 1, 1993.

The following table presents the tax attributes for federal income tax
purposes at December 31, 1995 attributable to the Company and to the New
Kaiser Tax Group. The utilization of certain of these tax attributes is
subject to limitations.

<TABLE>
<CAPTION>
NEW KAISER TAX
THE COMPANY GROUP
---------------- ----------------
EXPIRING EXPIRING
THROUGH THROUGH
---------- ----------
<S> <C> <C> <C> <C>
Regular Tax Attribute Carryforwards:
Current year net operating loss........... $26.4 2010 $ -- --
Prior year net operating losses........... 51.2 2009 32.9 2007
General business tax credits.............. .9 2002 28.4 2008
Foreign tax credits....................... -- -- 89.7 2000
Alternative minimum tax credits........... 1.5 Indefinite 19.4 Indefinite
Alternative Minimum Tax Attribute
Carryforwards:
Current year net operating loss........... $21.6 2010 $ -- --
Prior year net operating losses........... 42.4 2009 17.1 2002
Foreign tax credits....................... -- -- 83.5 2000
</TABLE>

6. EMPLOYEE BENEFIT AND INCENTIVE PLANS

POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company has unfunded defined postretirement benefit plans which cover
most of its employees. Under the plans, employees are eligible for health care
benefits (and life insurance benefits for Kaiser employees) upon retirement.
Retirees from companies other than Kaiser make contributions for a portion of
the cost of their health care benefits.

The Company adopted Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106") as of January 1, 1993. The costs of postretirement benefits other than
pensions are accrued over the period the employees provide services to the
date of their full eligibility for such benefits. Previously, such costs were
expensed as actual claims were incurred. The cumulative effect of the change
in accounting principle for the adoption of SFAS 106 was recorded as a charge
to results of operations of $437.9, net of related benefits for minority
interests of $63.6 and income taxes of $236.8. The deferred income tax benefit
related to the adoption of SFAS 106 was recorded at the federal statutory rate
in effect on the date SFAS 106 was adopted, before giving effect to certain
valuation allowances.

F-24
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

The adoption of SFAS 106 increased the Company's loss before extraordinary
item and cumulative effect of changes in accounting principles by $13.3, or
$1.41 per share ($19.9 before income taxes), for the year ended December 31,
1993.

In 1995, Kaiser adopted the Kaiser Aluminum Medicare Program ("KAMP"). KAMP
is mandatory for all salaried retirees over 65 and for the United Steelworkers
of America ("USWA") retirees who retire after December 31, 1995, and when they
become 65, and voluntary for other hourly retirees of Kaiser's operations in
California, Louisiana, and Washington. The USWA contract, ratified on February
28, 1995, also contained changes to the retiree health benefits including
increased retirees' copayments, deductibles, and coinsurance, and restricted
Medicare Part B premium reimbursement to the 1995 level for employees retiring
after November 1, 1994. These changes will lower Kaiser's expenses for retiree
medical care.

Postretirement benefits other than pensions are generally provided through
contracts with various insurance carriers. The Company has not funded the
liability for these benefits, which are expected to be paid out of cash
generated by operations. A summary of the components of net periodic
postretirement benefit cost is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Service cost--benefits earned during the year.... $ 4.9 $ 8.8 $ 7.4
Interest cost on accumulated postretirement
benefit obligation.............................. 52.7 57.5 59.0
Net amortization and deferral.................... (9.1) (3.2) --
-------- -------- --------
Net periodic postretirement benefit cost......... $ 48.5 $ 63.1 $ 66.4
======== ======== ========
</TABLE>

The postretirement benefit liability recognized in the Company's
Consolidated Balance Sheet is as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Retirees......................................................... $558.9 $568.3
Actives eligible for benefits.................................... 31.5 31.4
Actives not eligible for benefits................................ 65.5 102.8
------ ------
Accumulated postretirement benefit obligation.................. 655.9 702.5
Unrecognized prior service cost.................................. 111.1 31.8
Unrecognized net gain (loss)..................................... 22.4 55.8
------ ------
Postretirement benefit liability............................... $789.4 $790.1
====== ======
</TABLE>

The annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rates) are approximately 8.0% and 7.5%
for retirees under age 65 and over age 65, respectively, and are assumed to
decrease gradually to approximately 5.0% in 2008 and remain at that level
thereafter. Each one percentage point increase in the assumed health care cost
trend rate would increase the accumulated postretirement benefit obligation as
of December 31, 1995 by approximately $69.7 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost by
approximately $7.9.

The discount rates and rates of compensation increase used in determining
the accumulated postretirement benefit obligation were 7.5% and 5.0% at
December 31, 1995, respectively, and 8.5% and 5.0% at December 31, 1994,
respectively.

F-25
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

RETIREMENT PLANS

The Company has various retirement plans which cover essentially all
employees. Most of the Company's employees are covered by defined benefit
plans. The benefits are determined under formulas based on years of service
and the employee's compensation. The Company's funding policy is to contribute
annually an amount at least equal to the minimum cash contribution required by
ERISA.

The Company has various defined contribution savings plans designed to
enhance the existing retirement programs of participating employees. Under the
MAXXAM Inc. Savings Plan (the "MAXXAM Savings Plan"), employees may elect to
contribute up to 16% of their compensation to the plan. For those participants
who have elected to make voluntary contributions to the MAXXAM Savings Plan,
the Company's contributions consist of a matching contribution of up to 4% of
the compensation of participants for each calendar quarter. Under the Kaiser
Aluminum Savings and Retirement Plan, salaried employees may elect to
contribute from 2% to 18% of their compensation to the plan. For those
eligible participants who have elected to make contributions to the plan,
Kaiser's contributions are determined based on earnings and net worth
formulas. In 1995, Kaiser adopted the Kaiser Aluminum Total Compensation
System, an unfunded incentive compensation program, which provides incentive
pay based upon performance against plan over a three-year period.

A summary of the components of net periodic pension costs for the defined
benefit plans and total pension costs for the defined contribution plans and
non-qualified retirement and incentive plans is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the year...... $ 12.1 $ 13.6 $ 13.0
Interest cost on projected benefit obligations.... 62.5 59.5 60.8
Return on assets:
Actual gain..................................... (118.7) (.8) (73.9)
Deferred gain (loss)............................ 64.6 (53.0) 15.9
Net amortization and deferral..................... 8.7 2.8 4.7
-------- ------- -------
Net periodic pension cost......................... 29.2 22.1 20.5
Defined contribution plans.......................... 5.4 2.8 1.7
Non-qualified retirement and incentive plans........ 8.2 5.0 4.3
-------- ------- -------
$ 42.8 $ 29.9 $ 26.5
======== ======= =======
</TABLE>

F-26
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

The following table sets forth the funded status and amounts recognized for
the defined benefit plans in the Consolidated Balance Sheet:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation................................. $ 781.7 $ 684.3
Non-vested benefit obligation............................. 31.1 42.9
------- -------
Total accumulated benefit obligation.................... $ 812.8 $ 727.2
======= =======
Projected benefit obligation................................ $ 853.1 $ 761.2
Plan assets at fair value, primarily common stocks and fixed
income obligations......................................... (623.1) (546.9)
------- -------
Projected benefit obligation in excess of plan assets....... 230.0 214.3
Unrecognized net transition obligation...................... (.6) (.9)
Unrecognized net loss....................................... (54.9) (40.4)
Unrecognized prior service cost............................. (29.1) (31.6)
Adjustment required to recognize minimum liability.......... 49.8 42.9
------- -------
Accrued pension cost.................................... $ 195.2 $ 184.3
======= =======
</TABLE>

The assumptions used in accounting for the defined benefit plans were as
follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1995 1994 1993
---- ---- -----
<S> <C> <C> <C>
Rate of increase in compensation levels......................... 5.0% 5.0% 5.0%
Discount rate................................................... 7.5% 8.5% 7.5%
Expected long-term rate of return on assets..................... 9.5% 9.5% 10.0%
</TABLE>

The Company has recorded an additional pension liability equal to the excess
of the accumulated benefit obligation over the fair value of plan assets. The
amount of the additional pension liability in excess of unrecognized prior
service cost is recorded as a reduction to stockholders' equity. In 1995 and
1994, the pension liability adjustment increased by $4.7 and decreased by
$12.5, respectively. These adjustments were recorded net of a related deferred
federal and state income tax credit (provision) of $2.8 and ($7.3),
respectively, which approximated the federal and state statutory rates.

POSTEMPLOYMENT BENEFITS

The Company adopted Statement of Financial Accounting Standards No. 112,
Employers' Accounting for Postemployment Benefits ("SFAS 112") as of January
1, 1993. The costs of postemployment benefits are accrued over the period the
employees provide services to the date of their full eligibility for such
benefits. Previously, such costs were expensed as actual claims were incurred.
The cumulative effect of the change in accounting principle for the adoption
of SFAS 112 was recorded as a charge to results of operations of $6.4, net of
related benefits for minority interests of $1.0 and income taxes of $3.4.

F-27
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

7. MINORITY INTERESTS

Minority interests represent the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1995 1994
------ ------
<S> <C> <C>
Kaiser Aluminum Corporation:
Common stock, par $.01......................................... $ -- $ --
$.65 Depositary Shares......................................... -- 128.0
8.255% PRIDES.................................................. 98.1 100.1
Subsidiary redeemable preference stock:
KACC Series A and B Cumulative Preference Stock, par $1........ 29.7 29.1
KACC Cumulative Convertible Preference Stock, par $100......... 1.7 1.7
KACC Minority Interests:
Alumina Partners of Jamaica.................................... 73.9 70.4
Volta Aluminium Company Limited................................ 14.9 13.6
Kaiser LaRoche Hydrate Partners................................ 2.5 1.4
Sam Houston Race Park, Ltd....................................... 2.4 --
------ ------
$223.2 $344.3
====== ======
</TABLE>

As a result of Kaiser's issuance of preferred stock in 1993 and 1994, the
1995 redemption of the Depositary Shares (each as described below), and the
issuance of Kaiser's common stock in connection with the LTIP (as described
below), the Company's equity interest in Kaiser has decreased to approximately
62% on a fully diluted basis, as of December 31, 1995.

KAISER PROPOSED RECAPITALIZATION

On February 5, 1996, Kaiser announced that it had filed a preliminary proxy
statement with the Securities and Exchange Commission relating to a proposed
recapitalization. Under the terms of the proposed recapitalization, the
relative ownership interest and voting power of stockholders would be
unchanged as a result of the recapitalization (except as a result of the
treatment of fractional shares). The proposed recapitalization would (i)
provide for two classes of common stock: Class A Common Shares, $.01 par
value, with one vote per share and a new lesser-voting class designated as
Common Stock, $.01 par value, with 1/10 vote per share, (ii) redesignate as
Class A Common Shares the 100 million currently authorized shares of existing
common stock and authorize 250 million shares to be designated as Common
Stock, and (iii) change each issued share of Kaiser's existing common stock
into (a) .33 of a Class A Common Share and (b) .67 of a share of Common Stock.
Kaiser would pay cash in lieu of fractional shares. Kaiser anticipates that
both the Class A Common Shares and the Common Stock would be approved for
trading on the New York Stock Exchange. Upon the effective date of the
recapitalization, approximately 23.6 million Class A Common Shares and 48.0
million shares of Common Stock would be issued and outstanding. The
proportionate voting power of the holders of the PRIDES would increase
immediately after the effectiveness of the recapitalization until such shares
are redeemed or converted, which would occur on or before December 31, 1997.
As of January 31, 1996, holders of the existing common stock and the PRIDES
had 91.2% and 8.8%, respectively, of the total voting power of all
stockholders. Immediately after the recapitalization, the voting power of such
holders of the PRIDES would increase to 19.6% in the aggregate, with a
corresponding reduction in the voting power of such holders of the existing
common stock. At such time as the PRIDES were redeemed or converted, the
relative voting power of such holders of the PRIDES would decrease and the
relative voting power for both such holders of the PRIDES

F-28
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

and the existing common stock would be approximately the same as it would have
been had the recapitalization not occurred.

$.65 DEPOSITARY SHARES

On June 30, 1993, Kaiser issued 17,250,000 of its $.65 Depositary Shares
(the "Depositary Shares"), each representing one-tenth of a share of Series A
Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares").
In connection with the issuance of the Depositary Shares, Kaiser issued an
additional 2,132,950 of its Depositary Shares to MGI in exchange for a $15.0
promissory note issued by KACC which evidenced a $15.0 cash loan made by MGI
to KACC in January 1993 (the "MGI Loan"). Kaiser made capital contributions
and intercompany loans to KACC from the proceeds of the sale of the Series A
Shares. KACC used approximately $13.7 of such funds to prepay the remaining
balance of the term loan under the 1989 KACC Credit Agreement and $105.6 of
such funds to reduce outstanding borrowings under the revolving credit
facility of the 1989 KACC Credit Agreement. The Depositary Shares called for
the payment of quarterly dividends (when and as declared by Kaiser's Board of
Directors) of approximately $3.2 ($.1625 per share). The Company accounted for
Kaiser's issuance of the Depositary Shares as additional minority interest.

On September 19, 1995, Kaiser redeemed all 1,938,295 of its Series A Shares,
which resulted in the simultaneous redemption of all 19,382,950 Depositary
Shares in exchange for (i) 13,126,521 shares of Kaiser's common stock, (ii)
cash equal to all accrued and unpaid dividends up to and including the day
immediately prior to the redemption date of $2.8, and (iii) cash in lieu of
any fractional shares of common stock that would have otherwise been issuable.

During 1994, the Company sold 1,239,400 of the Depositary Shares for
aggregate net proceeds of $10.3, resulting in pre-tax gains of $1.6. From
January through May of 1995, the Company sold the remaining Depositary Shares
that it owned for aggregate net proceeds of $7.6, resulting in pre-tax gains
of $1.3. As a result of these sales, the shares of Kaiser's common stock which
were issued upon redemption of the Series A Shares are held by minority
stockholders. The Company has recorded 100% of the losses attributable to
Kaiser's common stock since July 1993, as Kaiser's cumulative losses through
that date had eliminated Kaiser's equity with respect to its common stock. The
redemption of Kaiser's Series A Shares, together with the voluntary redemption
of 181,700 shares of PRIDES in 1995, decreased Kaiser's preferred equity, and
reduced Kaiser's deficit in common equity, by $136.2. Accordingly, the Company
recorded an adjustment to reduce the minority interests reflected on its
Consolidated Balance Sheet for that same amount, with an offsetting decrease
in the Company's stockholders' deficit.

8.255% PREFERRED REDEEMABLE INCREASED DIVIDEND EQUITY SECURITIES

During the first quarter of 1994, Kaiser consummated a public offering for
the sale of 8,855,550 shares of its PRIDES. The net proceeds from the sale of
the PRIDES were approximately $100.1. Kaiser used $33.2 of such net proceeds
to make non-interest bearing loans to KACC (evidenced by notes) which are
designed to provide sufficient funds to make the required dividend payments on
the PRIDES until December 31, 1997 (the "PRIDES Mandatory Conversion Date")
and $66.9 of such net proceeds to make capital contributions to KACC. Holders
of shares of PRIDES have a 4/5 vote for each share held of record and, except
as required by law, are entitled to vote together with the holders of Kaiser's
common stock and together with the holders of any other classes or series of
Kaiser's stock who are entitled to vote in such manner on all matters
submitted to a vote of common stockholders. On December 31, 1997, unless
either previously redeemed or converted at the option of the holder, each
outstanding share of PRIDES will mandatorily convert into one share of
Kaiser's common stock, subject to adjustment in certain events, and the right
to receive an amount in cash equal to all accrued and unpaid

F-29
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

dividends thereon. Shares of PRIDES are not redeemable, at the election of
Kaiser, prior to December 31, 1996. At any time and from time to time on or
after December 31, 1996, Kaiser may redeem any or all of the outstanding
shares of PRIDES. Upon any such redemption, each holder will receive, in
exchange for each share of PRIDES, the number of shares of Kaiser's common
stock equal to (i) the sum of $11.9925, declining after December 31, 1996 to
$11.75 until December 31, 1997, plus, in the event Kaiser does not elect to
pay cash dividends to the redemption date, all accrued and unpaid dividends
thereon divided by (ii) the Current Market Price (as defined) on the
applicable date of determination, but in no event less than .8333 of a share
of Kaiser's common stock, subject to adjustment in certain events. At any time
prior to December 31, 1997, unless previously redeemed, each share of PRIDES
is convertible at the option of the holder thereof into .8333 of a share of
Kaiser's common stock (equivalent to a conversion price of $14.10 per share of
Kaiser's common stock), subject to adjustment in certain events. The number of
shares of Kaiser's common stock a holder will receive upon redemption, and the
value of the shares received upon conversion, will vary depending on the
market price of Kaiser's common stock from time to time. The PRIDES call for
the payment of quarterly dividends of approximately $2.1 ($.2425 per share).
The Company accounted for Kaiser's issuance of the PRIDES as additional
minority interest.

SUBSIDIARY REDEEMABLE PREFERENCE STOCK

In March 1985, KACC entered into a three-year agreement with the USWA
whereby shares of a new series of KACC Cumulative (1985 Series A) Preference
Stock (the "Series A Stock") would be issued to an employee stock ownership
plan in exchange for certain elements of wages and benefits. Concurrently, a
similar plan was established for certain nonbargaining employees which
provided for the issuance of KACC Cumulative (1985 Series B) Preference Stock
(the "Series B Stock"). The Series A Stock and the Series B Stock ("Series A
and B Stock") each have a liquidation and redemption value of $50 per share
plus accrued dividends, if any, and have a total redemption value of $36.9 at
December 31, 1995.

Changes in Series A and B Stock are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Shares:
Beginning of year............................. 912,167 1,081,548 1,163,221
Redeemed...................................... (174,804) (169,381) (81,673)
-------- --------- ---------
End of year................................... 737,363 912,167 1,081,548
======== ========= =========
</TABLE>

No additional Series A or B Stock will be issued. While held by the plan
trustee, Series B Stock is entitled to cumulative annual dividends, when and
as declared by KACC's Board of Directors, payable in Series B Stock or in cash
at the option of KACC, based on a formula tied to KACC's income before tax
from aluminum operations. When distributed to plan participants (generally
upon separation from KACC), the Series A and B Stock is entitled to an annual
cash dividend of $5 per share, payable quarterly, when and as declared by
KACC's Board of Directors.

Redemption fund agreements require KACC to make annual payments by March 31
of each year based on a formula tied to KACC's consolidated net income until
the redemption funds are sufficient to redeem all Series A and B Stock. On an
annual basis, the minimum payment is $4.3 and the maximum payment is $7.3. In
March 1994 and 1995, KACC contributed $4.3 for each of the years ended
December 31, 1993 and 1994, and will contribute $4.3 in March 1996 for the
year ended December 31, 1995.

F-30
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Under the USWA labor contract effective November 1, 1990, KACC was obligated
to offer to purchase up to 40 shares of Series A Stock from each active
participant in 1994 at a price equal to its redemption value of $50 per share.
The employees could elect to receive their shares, accept cash or place the
proceeds into KACC's 401(k) savings plan. Under separate action, KACC also
offered to purchase 40 shares of Series B Stock from active participants in
1994. Under the provisions of these contracts, in February 1994, KACC
purchased $4.6 and $.8 of the Series A Stock and Series B Stock, respectively.

Under the USWA labor contract effective November 1, 1994, KACC was obligated
to offer to purchase up to 40 shares of Series A Stock from each active
participant in 1995 at a price equal to its redemption value of $50 per share.
KACC also agreed to offer to purchase up to an additional 80 shares from each
participant in 1998. In addition, a profitability test was satisfied for 1995;
therefore, KACC will offer to purchase from each active participant an
additional 20 shares of such preference stock held in the stock ownership plan
for the benefit of substantially the same employees in 1996. The employees may
elect to receive their shares, accept cash or place the proceeds into KACC's
401(k) savings plan. KACC also will offer to make comparable purchases of
Series B Stock from active participants.

The Series A and B Stock is distributed in the event of death or retirement
of the plan participant, or in other specified circumstances. KACC may also
redeem such stock at $50 per share plus accrued dividends, if any. At the
option of the plan participant, the trustee shall redeem stock distributed
from the plans at the redemption value to the extent funds are available in
the redemption fund. Under the Tax Reform Act of 1986, at the option of the
plan participant, KACC must purchase distributed shares earned after December
31, 1985 at the redemption value on a five-year installment basis, with
interest at market rates. The obligation of KACC to make such installment
payments must be secured.

The Series A and B Stock is entitled to the same voting rights as KACC
common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other KACC preference
stockholders, two directors whenever accrued dividends have not been paid on
two annual dividend payment dates, or when accrued dividends in an amount
equivalent to six full quarterly dividends are in arrears. The Series A and B
Stock restricts the ability of KACC to redeem or pay dividends on its common
stock if KACC is in default on any dividends payable on the Series A and B
Stock.

KAISER STOCK INCENTIVE PLANS

Kaiser has an unfunded Long-Term Incentive Plan (the "LTIP") for certain key
employees. All compensation vested at December 31, 1993 under the LTIP was
paid to the participants in cash or common stock of Kaiser. Under the LTIP, as
amended, 764,092 restricted shares of Kaiser common stock were distributed to
six Kaiser executives during 1993 for benefits generally earned but not vested
as of December 31, 1992. These shares generally vest at the rate of 25% per
year. Kaiser is recording the related expense of $6.5 over the four-year
period ending December 31, 1996.

In 1993, Kaiser adopted the Kaiser 1993 Omnibus Stock Incentive Plan. A
total of 2,500,000 shares of Kaiser common stock were reserved for awards or
for payment of rights granted under the plan, of which 544,839 shares were
available to be awarded at December 31, 1995. During 1994, 102,564 restricted
shares, which vest at the rate of 25% per year, were distributed to two Kaiser
executives. Kaiser is recording the related expense of $1.0 over the four-year
period ending December 31, 1998.

In 1993 and 1994, the Compensation Committee of Kaiser's Board of Directors
approved the award of "nonqualified stock options" to members of management
other than those participating in the LTIP. These

F-31
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

options generally will vest at the rate of 20 - 25% per year. Information
relating to nonqualified stock options is shown below:

<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at beginning of year............... 1,119,680 664,400 --
Granted........................................ -- 494,800 664,400
Exercised (at $7.25 and $9.75 per share)....... (155,500) (6,920) --
Expired or forfeited........................... (38,095) (32,600) --
--------- --------- ---------
Outstanding at end of year (prices ranging from
$7.25 to $12.75 per share).................... 926,085 1,119,680 664,400
========= ========= =========
Exercisable at end of year..................... 211,755 120,180 --
========= ========= =========
</TABLE>

8. STOCKHOLDERS' DEFICIT

PREFERRED STOCK

The holders of the Company's Class A $.05 Non-Cumulative Participating
Convertible Preferred Stock (the "Class A Preferred Stock") are entitled to
receive, if and when declared, preferential cash dividends at the rate of $.05
per share per annum and will participate thereafter on a share for share basis
with the holders of common stock in all cash dividends, other than cash
dividends on the common stock in any fiscal year to the extent not exceeding
$.05 per share. Stock dividends declared on the common stock will result in
the holders of the Class A Preferred Stock receiving an identical stock
dividend payable in shares of Class A Preferred Stock. At the option of the
holder, the Class A Preferred Stock is convertible at any time into shares of
common stock at the rate of one share of common stock for each share of Class
A Preferred Stock. Each holder of Class A Preferred Stock is generally
entitled to ten votes per share on all matters presented to a vote of the
Company's stockholders.

STOCK OPTION PLANS

In 1994, the Company adopted the MAXXAM 1994 Omnibus Employee Incentive Plan
(the "1994 Omnibus Plan"). Up to 1,000,000 shares of common stock and
1,000,000 shares of Class A Preferred Stock were reserved for awards or for
payment of rights granted under the 1994 Omnibus Plan. The 1994 Omnibus Plan
replaced the Company's 1984 Phantom Share Plan (the "1984 Plan") which expired
in June 1994, although previous grants thereunder remain outstanding. In
December 1994, options to purchase 25,000 shares of common stock of the
Company were granted to an executive officer. In addition, also in December
1994, another executive officer relinquished stock appreciation rights
relating to 50,000 shares of common stock of the Company in exchange for
options to purchase 45,000 shares of Class A Preferred Stock. The exercise
price of these options is $30.375 per share (the quoted market price at the
date of grant). In November 1995, stock appreciation rights equivalent to
36,000 shares of common stock of the Company were granted to certain employees
with an exercise price of $45.15 (reflecting a 20% premium above the quoted
market price at the date of grant). These options (or rights, as applicable)
vest at the rate of 20% per year commencing one year from the date of grant.
At December 31, 1995, 14,000 of rights granted pursuant to the 1994 Omnibus
Plan were exercisable. The Company paid $2.7 with respect to the 1984 Plan for
the year ended December 31, 1995. Amounts paid with respect to the 1984

F-32
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Plan for the years ended December 31, 1994 and 1993 were not significant. The
following table summarizes the options or rights outstanding and exercisable
relating to the 1984 Plan and the 1994 Omnibus Plan:

<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Outstanding at beginning of year................... 238,000 267,800 226,300
Granted............................................ 36,000 70,000 50,000
Exercised.......................................... (66,100) (37,050) (8,500)
Expired or forfeited............................... -- (62,750) --
------- ------- -------
Outstanding at end of year (prices ranging from
$13.75 to $45.15 per share)........................ 207,900 238,000 267,800
======= ======= =======
Exercisable at end of year......................... 93,900 124,100 133,725
======= ======= =======
</TABLE>

Concurrent with the adoption of the 1994 Omnibus Plan, the Company adopted
the MAXXAM 1994 Non-Employee Director Plan (the "1994 Director Plan"). Up to
35,000 shares of common stock are reserved for awards under the 1994 Director
Plan. In May 1995 and 1994, options to purchase 900 shares and 1,500 shares of
common stock, respectively, were granted to three non-employee directors. The
exercise prices of these options are $31.60 and $36.50 per share,
respectively, based on the quoted market price at the date of grant. The
options vest at the rate of 25% per year commencing one year from the date of
grant. At December 31, 1995, 375 of such options were exercisable.

In 1988, 354,000 options granted under MGI's 1976 Stock Option Plan (the
"MGI 1976 Plan") were converted into the right to receive, upon exercise of
each option, $6.11 in cash, .25 shares of the Company's common stock (88,500
shares) and $6.00 principal amount of the Reset Notes. Options granted under
the MGI 1976 Plan generally were exercisable for a period of ten years from
the date of grant. During 1993, 60,000 options granted under the MGI 1976 Plan
at a price of $10.875 per share were surrendered for a cash payment in lieu of
the consideration referred to above. At December 31, 1993, all options granted
under the MGI 1976 Plan had been exercised.

SHARES RESERVED FOR ISSUANCE

At December 31, 1995, the Company had the following shares reserved for
future issuance:

<TABLE>
<S> <C>
Common shares:
Class A Preferred Stock............................................. 668,856
1994 Omnibus Plan................................................... 939,000
1994 Director Plan.................................................. 32,600
---------
1,640,456
=========
Class A Preferred Stock:
1994 Omnibus Plan................................................... 955,000
=========
</TABLE>

RIGHTS

On November 29, 1989, the Board of Directors of the Company declared a
dividend to its stockholders consisting of (i) one Series A Preferred Stock
Purchase Right (the "Series A Right") for each outstanding share of the
Company's Class A Preferred Stock and (ii) one Series B Preferred Stock
Purchase Right (the "Series B Right") for each outstanding share of the
Company's common stock. The Series A Right and the Series B Right

F-33
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

are collectively referred to herein as the "Rights." The Rights are
exercisable only if a person or group of affiliated or associated persons (an
"Acquiring Person") acquires beneficial ownership, or the right to acquire
beneficial ownership, of 15% or more of the Company's common stock, or
announces a tender offer that would result in beneficial ownership of 15% or
more of the outstanding common stock. Any person or group of affiliated or
associated persons who, as of November 29, 1989, was the beneficial owner of
at least 15% of the outstanding common stock will not be deemed to be an
Acquiring Person unless such person or group acquires beneficial ownership of
additional shares of common stock (subject to certain exceptions). Each Series
A Right, when exercisable, entitles the registered holder to purchase from the
Company one share of Class A Preferred Stock at an exercise price of $165.00,
subject to adjustment. Each Series B Right, when exercisable, entitles the
registered holder to purchase from the Company one one-hundredth of a share of
the Company's new Class B Junior Participating Preferred Stock, with a par
value of $.50 per share (the "Junior Preferred Stock"), at an exercise price
of $165.00, subject to adjustment.

Under certain circumstances, including if any person becomes an Acquiring
Person other than through certain offers for all outstanding shares of stock
of the Company, or if an Acquiring Person engages in certain "self-dealing"
transactions, each Series A Right would enable its holder to buy Class A
Preferred Stock (or, under certain circumstances, preferred stock of an
acquiring company) having a value equal to two times the exercise price of the
Series A Right, and each Series B Right shall enable its holder to buy common
stock of the Company (or, under certain circumstances, common stock of an
acquiring company) having a value equal to two times the exercise price of the
Series B Right. Under certain circumstances, Rights held by an Acquiring
Person will be null and void. In addition, under certain circumstances, the
Board is authorized to exchange all outstanding and exercisable Rights for
stock, in the ratio of one share of Class A Preferred Stock per Series A Right
and one share of common stock of the Company per Series B Right. The Rights,
which do not have voting privileges, expire in 1999, but may be redeemed by
action of the Board prior to that time for $.01 per right, subject to certain
restrictions.

VOTING CONTROL

Federated Development Inc., a wholly owned subsidiary of Federated
Development Company ("Federated"), and Mr. Charles E. Hurwitz collectively own
99.1% of the Company's Class A Preferred Stock and 31.1% of the Company's
common stock (resulting in combined voting control of approximately 60.7% of
the Company). Mr. Hurwitz is the Chairman of the Board, President and Chief
Executive Officer of the Company and Chairman and Chief Executive Officer of
Federated. Federated is wholly owned by Mr. Hurwitz, members of his immediate
family and trusts for the benefit thereof.

9. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

The Company, principally through KACC, has financial commitments, including
purchase agreements, tolling arrangements, forward foreign exchange and
forward sales contracts (see Note 10), letters of credit and other guarantees.
Such purchase agreements and tolling arrangements include long-term agreements
for the purchase and tolling of bauxite into alumina in Australia by QAL.
These obligations expire in 2008. Under the agreements, KACC is
unconditionally obligated to pay its proportional share of debt, operating
costs and certain other costs of this joint venture. At December 31, 1995,
such indebtedness was $88.9, with $26.7 due in 1997 and $62.2 due in 2002.
KACC's share of payments, including operating costs and certain other expenses
under the agreement, was $77.5, $85.6 and $86.7 for the years ended December
31, 1995, 1994 and 1993, respectively. KACC also has agreements to supply
alumina to and to purchase aluminum from Anglesey.

F-34
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Minimum rental commitments under operating leases at December 31, 1995 are
as follows: years ending December 31, 1996 - $27.7; 1997 - $25.5; 1998 -
$28.3; 1999 - $33.0; 2000 - $29.9; thereafter - $187.3. Rental expense for
operating leases was $31.4, $29.2 and $31.3 for the years ended December 31,
1995, 1994 and 1993, respectively. The minimum future rentals receivable under
noncancelable subleases at December 31, 1995 were $67.6.

ENVIRONMENTAL CONTINGENCIES

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

Based on Kaiser's evaluation of these and other environmental matters,
Kaiser has established environmental accruals primarily related to potential
solid waste disposal and soil and groundwater remediation matters. The
following table presents the changes in such accruals, which are primarily
included in other noncurrent liabilities:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year...................... $ 40.1 $ 40.9 $ 46.4
Additional amounts................................ 3.3 2.8 1.7
Less expenditures................................. (4.5) (3.6) (7.2)
-------- -------- --------
Balance at end of year............................ $ 38.9 $ 40.1 $ 40.9
======== ======== ========
</TABLE>

These environmental accruals represent Kaiser's estimate of costs reasonably
expected to be incurred based on presently enacted laws and regulations,
currently available facts, existing technology and Kaiser's assessment of the
likely remediation action to be taken. Kaiser expects that these remediation
actions will be taken over the next several years and estimates that annual
expenditures to be charged to these environmental accruals will be
approximately $3.0 to $9.0 for the years 1996 through 2000 and an aggregate of
approximately $10.0 thereafter.

As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are
established or alternative technologies are developed, changes in these and
other factors may result in actual costs exceeding the current environmental
accruals. Kaiser believes that it is reasonably possible that costs associated
with these environmental matters may exceed current accruals by amounts that
could range, in the aggregate, up to an estimated $23.0 and that the factors
upon which a substantial portion of this estimate is based are expected to be
resolved over the next twelve months. While uncertainties are inherent in the
final outcome of these environmental matters, and it is impossible to
determine the actual costs that ultimately may be incurred, management
believes that the resolution of such uncertainties should not have a material
adverse effect on the Company's consolidated financial position, results of
operations or liquidity.

ASBESTOS CONTINGENCIES

F-35
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

and as a result of, their employment or association with KACC or exposure to
products containing asbestos produced or sold by KACC. The lawsuits generally
relate to products KACC has not manufactured for at least 15 years. At
December 31, 1995, the number of claims pending was approximately 59,700,
compared to 25,200 at December 31, 1994. During 1995, approximately 41,700
claims were received and approximately 7,200 were settled or dismissed. KACC
believes that, although there can be no assurance, the recent increase in
pending claims may be attributable in part to tort reform legislation in Texas
which was passed by the legislature in March 1995 and which became effective
on September 1, 1995. The legislation, among other things, is designed to
restrict, beginning September 1, 1995, the filing of cases in Texas that do
not have a sufficient nexus to that jurisdiction, and to impose, generally as
of September 1, 1996, limitations relating to joint and several liability in
tort cases. A substantial portion of the asbestos-related claims that were
filed and served on KACC between June 30, 1995 and November 30, 1995 were
filed in Texas prior to September 1, 1995.

Based on past experience and reasonably anticipated future activity, KACC
has established an accrual for estimated asbestos-related costs for claims
filed and estimated to be filed and settled through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs and KACC's actual
costs could exceed these estimates. KACC's accrual was calculated based on the
current and anticipated number of asbestos-related claims, the prior timing
and amounts of asbestos-related payments, and the advice of Wharton Levin
Ehrmantraut Klein & Nash, P.A. with respect to the current state of the law
related to asbestos claims. Accordingly, an asbestos-related cost accrual of
$160.1, before consideration of insurance recoveries, is included primarily in
other noncurrent liabilities at December 31, 1995. KACC estimates that annual
future cash payments in connection with such litigation will be approximately
$13.0 to $20.0 for each of the years 1996 through 2000, and an aggregate of
approximately $78.0 thereafter through 2008. While KACC does not believe there
is a reasonable basis for estimating such costs beyond 2008, and, accordingly,
did not accrue such costs, there is a reasonable possibility that such costs
may continue beyond 2008, and such costs may be substantial.

KACC believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from
some of KACC's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from the insurance carriers. The timing and amount of
ultimate recoveries from these insurance carriers are dependent upon the
resolution of these disputes. KACC believes, based on prior insurance-related
recoveries with respect to asbestos-related claims, existing insurance
policies, and the advice of Thelen, Marrin, Johnson & Bridges with respect to
applicable insurance coverage law relating to the terms and conditions of
these policies, that substantial recoveries from the insurance carriers are
probable. Accordingly, an estimated aggregate insurance recovery of $137.9
determined on the same basis as the asbestos-related cost accrual, is recorded
primarily in long-term receivables and other assets at December 31, 1995.

OTS CONTINGENCY AND RELATED MATTERS

F-36
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

"respondents") with respect to the failure of United Savings Association of
Texas ("USAT"), a wholly owned subsidiary of United Financial Group Inc.
("UFG"). The Notice claims that the Company was a savings and loan holding
company, that with others it controlled USAT, and that it was therefore
obligated to maintain the net worth of USAT. The Notice makes numerous other
allegations against the Company and the other respondents, including
allegations that through USAT it was involved in prohibited transactions with
Drexel, Burnham, Lambert Inc. The OTS, among other things, seeks unspecified
damages in excess of $138.0 from the Company, civil money penalties and a
removal from, and prohibition against the Company and the other respondents
engaging in, the banking industry. The Company has concluded that it is unable
to determine a reasonable estimate of the loss (or range of loss), if any,
that could result from this contingency. Accordingly, it is impossible to
assess the ultimate impact, if any, of the outcome this matter may have on the
Company's consolidated financial position, results of operations or liquidity.

On August 2, 1995, the Federal Deposit Insurance Corporation ("FDIC") filed
a civil action entitled Federal Deposit Insurance Corporation, as manager of
the FSLIC Resolution Fund v. Charles E. Hurwitz (No. H-95-3936) (the "FDIC
action") in the U.S. District Court for the Southern District of Texas (the
"Court"). The FDIC action did not name the Company as a defendant. The suit
against Mr. Hurwitz seeks damages in excess of $250.0 based on the allegation
that Mr. Hurwitz was a controlling shareholder, de facto senior officer and
director of USAT, and was involved in certain decisions which contributed to
the insolvency of USAT. The FDIC further alleges, among other things, that Mr.
Hurwitz was obligated to ensure that UFG, Federated and the Company maintained
the net worth of USAT. On November 14, 1995, Mr. Hurwitz filed a motion to
join the OTS to this action. On December 8, 1995, the Company filed a motion
to intervene in this action and conditioned it on the Court joining the OTS to
this action. The Company filed with its motion to intervene a proposed
complaint which alleges that the OTS violated the Administrative Procedures
Act by rejecting the Company's bid for USAT. The Company's bylaws provide for
indemnification of its officers and directors to the fullest extent permitted
by Delaware law. The Company is obligated to advance defense costs to its
officers and directors, subject to the individual's obligation to repay such
amount if it is ultimately determined that the individual was not entitled to
indemnification. In addition, the Company's indemnity obligation can, under
certain circumstances, include amounts other than defense costs, including
judgments and settlements. The Company has concluded that it is unable to
determine a reasonable estimate of the loss (or range of loss), if any, that
could result from this contingency. It is impossible to assess the ultimate
outcome of the foregoing matter or its potential impact on the Company's
consolidated financial position, results of operations or liquidity.

The Company is involved in various other claims, lawsuits and other
proceedings relating to a wide variety of matters. 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.

10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

KACC enters into a number of financial instruments in the normal course of
business that are designed to reduce its exposure to fluctuations in foreign
exchange rates, alumina, primary aluminum and fabricated aluminum products
prices and the cost of purchased commodities.

KACC has significant expenditures which are denominated in foreign
currencies related to long-term purchase commitments with its affiliates in
Australia and the United Kingdom, which expose KACC to certain exchange rate
risks. In order to mitigate its exposure, KACC periodically enters into
forward foreign exchange and currency option contracts in Australian dollars
and Pounds Sterling to hedge these commitments. The

F-37
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

forward foreign currency exchange contracts are agreements to purchase or sell
a foreign currency, for a price specified at the contract date, with delivery
and settlement in the future. At December 31, 1995, KACC had net forward
foreign exchange contracts totaling $102.8 for the purchase of 142.4
Australian dollars through April 30, 1997.

To mitigate its exposure to declines in the market prices of alumina,
primary aluminum and fabricated aluminum products, while retaining the ability
to participate in favorable pricing environments that may materialize, KACC
has developed strategies which include forward sales of primary aluminum at
fixed prices and the purchase or sale of options for primary aluminum. Under
the principal components of KACC's price risk management strategy, which can
be modified at any time, (i) varying quantities of KACC's anticipated
production are sold forward at fixed prices, (ii) call options are purchased
to allow KACC to participate in certain higher market prices, should they
materialize, for a portion of KACC's primary aluminum and alumina sold
forward, (iii) option contracts are entered into to establish a price range
KACC will receive for a portion of its primary aluminum and alumina, and (iv)
put options are purchased to establish minimum prices KACC will receive for a
portion of its primary aluminum and alumina. In this regard, with respect to
its 1996 anticipated production, as of December 31, 1995, KACC had sold
forward 15,750 metric tons of primary aluminum at fixed prices.

In addition, KACC enters into forward fixed price arrangements with certain
customers which provide for the delivery of a specific quantity of fabricated
aluminum products over a specified future period of time. In order to
establish the cost of primary aluminum for a portion of such sales, KACC may
enter into forward sales and options contracts. In this regard, at December
31, 1995, KACC had purchased 53,300 metric tons of primary aluminum under
forward purchase contracts at fixed prices that expire at various times
through December 1996.

At December 31, 1995, the net unrealized gain on KACC's position in aluminum
forward sales and option contracts, based on an average price of $1,721 per
metric ton ($.78 per pound) of primary aluminum, and forward foreign exchange
contracts was $4.1.

KACC has established margin accounts with its counterparties related to
aluminum forward sales and option contracts. KACC is entitled to receive
advances from counterparties related to unrealized gains and, in turn, is
required to make margin deposits with counterparties to cover unrealized
losses related to these contracts. At December 31, 1995, KACC was not required
to maintain any such margin deposits. At December 31, 1994, KACC had $50.5 on
deposit with various counterparties with respect to such deposit requirements.
These amounts were included in prepaid expenses and other current assets.

KACC is exposed to credit risk in the event of non-performance by other
parties to these currency and commodity contracts, but KACC does not
anticipate non-performance by any of these counterparties given their
creditworthiness. When appropriate, KACC arranges master netting agreements.

F-38
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

11. SEGMENT INFORMATION

The following tables present financial information by industry segment and
by geographic area at December 31, 1995 and 1994 and for the three years ended
December 31, 1995, 1994 and 1993.

INDUSTRY SEGMENTS

<TABLE>
<CAPTION>
REAL
BAUXITE FOREST ESTATE AND
YEARS AND ALUMINUM PRODUCTS OTHER
ENDED ALUMINA PROCESSING OPERATIONS OPERATIONS CORPORATE TOTAL
----- ------- ---------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. 1995 $514.2 $1,723.6 $242.6 $84.8 $ -- $2,565.2
1994 432.5 1,349.0 249.6 84.6 -- 2,115.7
1993 423.4 1,295.7 233.5 78.5 -- 2,031.1
Operating income
(loss)................. 1995 37.2 179.3 74.3 (13.6) (19.6) 257.6
1994 5.6 (55.9) 79.1 (10.0) (11.5) 7.3
1993 (20.1) (97.3) 54.3 (13.5) (19.5) (96.1)
Effect of changes in
accounting principles
on operating income
(loss):
Postretirement
benefits other than
pensions............. 1993 (2.3) (16.9) (.4) (.2) (.1) (19.9)
Income taxes.......... 1993 (6.3) (5.6) .1 .7 -- (11.1)
Equity in earnings
(loss) of
unconsolidated
affiliates............. 1995 3.5 15.7 -- (.1) -- 19.1
1994 (4.6) 2.7 -- -- (13.1) (15.0)
1993 (2.5) (.8) -- -- (1.6) (4.9)
Depreciation and
depletion.............. 1995 30.0 58.4 25.3 6.2 1.0 120.9
1994 32.3 57.2 24.7 5.9 1.0 121.1
1993 33.8 57.3 24.5 4.1 1.1 120.8
Capital expenditures.... 1995 30.2 49.2 9.9 10.5 .2 100.0
1994 29.4 40.6 11.3 7.6 .4 89.3
1993 35.8 31.9 11.1 7.1 .3 86.2
Investments in and
advances to
unconsolidated
affiliates............. 1995 130.3 47.9 -- 10.9 -- 189.1
1994 137.1 32.6 -- -- -- 169.7
Identifiable assets..... 1995 981.0 1,763.8 678.1 236.4 173.0 3,832.3
1994 987.9 1,637.3 674.8 201.7 189.1 3,690.8
</TABLE>

Sales to unaffiliated customers exclude intersegment sales between bauxite
and alumina and aluminum processing of $159.7, $146.8 and $129.4 for the years
ended December 31, 1995, 1994 and 1993, respectively. Intersegment sales are
made on a basis intended to reflect the market value of the products.

F-39
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Operating losses for Corporate represent general and administrative expenses
of MAXXAM Inc. that are not attributable to the Company's industry segments.
General and administrative expenses of Kaiser are allocated in the Company's
industry segment presentation based upon those segments' ratio of sales to
unaffiliated customers.

GEOGRAPHICAL INFORMATION

<TABLE>
<CAPTION>
YEARS OTHER
ENDED DOMESTIC CARIBBEAN AFRICA FOREIGN ELIMINATIONS TOTAL
----- -------- --------- ------ ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. 1995 $1,916.9 $191.7 $239.4 $217.2 $ -- $2,565.2
1994 1,597.4 169.9 180.0 168.4 -- 2,115.7
1993 1,489.8 155.4 207.5 178.4 -- 2,031.1
Sales and transfers
among geographic
areas.................. 1995 -- 79.6 -- 191.5 (271.1) --
1994 -- 98.7 -- 139.4 (238.1) --
1993 -- 88.2 -- 79.6 (167.8) --
Operating income
(loss)................. 1995 79.0 9.8 83.5 85.3 -- 257.6
1994 (65.3) 9.9 18.3 44.4 -- 7.3
1993 (118.6) (11.8) 21.9 12.4 -- (96.1)
Equity in earnings
(loss) of
unconsolidated
affiliates............. 1995 (.3) -- -- 19.4 -- 19.1
1994 (12.9) -- -- (2.1) -- (15.0)
1993 (1.6) -- -- (3.3) -- (4.9)
Investments in and
advances to
unconsolidated
affiliates............. 1995 12.1 27.1 -- 149.9 -- 189.1
1994 1.2 28.8 -- 139.7 -- 169.7
Identifiable assets..... 1995 3,037.0 381.9 196.5 216.9 -- 3,832.3
1994 2,926.5 364.8 200.0 199.5 -- 3,690.8
</TABLE>

Sales and transfers among geographic areas are made on a basis intended to
reflect the market value of the products.

Included in results of operations are aggregate foreign currency translation
and transaction gains of $5.3, $.8 and $4.9 for the years ended December 31,
1995, 1994 and 1993, respectively.

Export sales were less than 10% of total revenues during the years ended
December 31, 1995, 1994 and 1993. For the year ended December 31, 1995, sales
to any one customer did not exceed 10% of consolidated revenues. For the years
ended December 31, 1994 and 1993, the Company had bauxite and alumina sales of
$58.2 and $40.7, respectively, and aluminum processing sales of $147.7 and
$145.7, respectively, to one customer.

F-40
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA

Summary quarterly financial information for the years ended December 31,
1995, 1994 and 1993 is as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN MILLIONS OF DOLLARS, EXCEPT SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
1995 QUARTERLY INFORMATION:
Net sales.......................... $ 581.3 $673.3 $638.0 $672.6
Operating income................... 40.6 81.9 64.4 70.7
Net income (loss).................. (1.0) 25.4 10.7 22.4
Per common and common equivalent
share:
Net income (loss)................ (0.11) 2.69 1.13 2.37
1994 QUARTERLY INFORMATION:
Net sales.......................... $ 489.0 $543.8 $544.9 $538.0
Operating income (loss)............ (15.0) 6.5 9.0 6.8
Loss before extraordinary item..... (34.5) (43.2) (14.9) (24.1)
Extraordinary item, net............ (5.4) -- -- --
Net loss........................... (39.9) (43.2) (14.9) (24.1)
Per common and common equivalent
share:
Loss before extraordinary item... (3.65) (4.57) (1.58) (2.55)
Extraordinary item, net.......... (0.57) -- -- --
Net loss......................... (4.22) (4.57) (1.58) (2.55)
1993 QUARTERLY INFORMATION:
Net sales.......................... $513.7 $507.9 $506.5 $503.0
Operating loss..................... (1.8) (1.1) (10.8) (82.4)
Loss before extraordinary item and
cumulative effect of changes in
accounting principles............. (25.9) (15.8) (26.8) (63.4)
Extraordinary item, net............ (44.1) -- (6.5) --
Cumulative effect of changes in ac-
counting principles, net.......... (417.7) -- -- --
Net loss........................... (487.7) (15.8) (33.3) (63.4)
Per common and common equivalent
share:
Loss before extraordinary item
and cumulative effect of changes
in accounting principles........ (2.74) (1.67) (2.83) (6.71)
Extraordinary item, net.......... (4.66) -- (0.69) --
Cumulative effect of changes in
accounting principles, net...... (44.14) -- -- --
Net loss......................... (51.54) (1.67) (3.52) (6.71)
</TABLE>

F-41
<PAGE>

MAXXAM INC.

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors of MAXXAM Inc.:

We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of MAXXAM Inc. (included on pages F-3
through F-40), and have issued our report thereon dated February 16, 1996. Our
audits were made for the purpose of forming an opinion on those statements
taken as a whole. The condensed financial information of MAXXAM Inc. (included
on pages F-43 through F-46) is the responsibility of the Company's management
and is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic consolidated financial
statements. This condensed financial information has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.

Arthur Andersen LLP

Houston, Texas
February 16, 1996

F-42
<PAGE>

MAXXAM INC.

BALANCE SHEET (UNCONSOLIDATED)

<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
------ ----------------
1995 1994
------- -------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 20.4 $ 15.5
Marketable securities...................................... 9.3 20.8
Other current assets....................................... 1.8 4.4
------- -------
Total current assets..................................... 31.5 40.7
Deferred income taxes........................................ 64.2 68.4
Other assets................................................. 3.7 4.6
------- -------
$ 99.4 $ 113.7
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable and accrued liabilities................... $ 7.4 $ 10.5
Long-term debt, current maturities......................... .2 2.4
------- -------
Total current liabilities................................ 7.6 12.9
Long-term debt, less current maturities...................... 41.6 44.6
Losses recognized in excess of investment in subsidiaries.... 12.4 198.9
Notes payable to subsidiaries, net of notes receivable and
advances.................................................... 18.8 12.2
Other noncurrent liabilities................................. 102.8 120.4
------- -------
Total liabilities........................................ 183.2 389.0
------- -------
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares autho-
rized; Class A $.05 Non-Cumulative Participating Convert-
ible Preferred Stock; shares issued: 1995--669,701 and
1994--669,957............................................. .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,359................................. 5.0 5.0
Additional capital......................................... 155.0 53.2
Accumulated deficit........................................ (208.5) (302.9)
Pension liability adjustment............................... (16.1) (11.4)
Treasury stock, at cost (shares held: preferred--845;
common: 1995--1,355,512 and 1994--1,355,768) ............. (19.5) (19.5)
------- -------
Total stockholders' deficit.............................. (83.8) (275.3)
------- -------
$ 99.4 $ 113.7
======= =======
</TABLE>

See notes to consolidated financial statements and accompanying notes.

F-43
<PAGE>

MAXXAM INC.

STATEMENT OF OPERATIONS (UNCONSOLIDATED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1995 1994 1993
------- ------- -------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Investment, interest and other income.............. $ 5.6 $ 12.6 $ 3.0
Interest expense................................... (6.2) (11.7) (13.7)
General and administrative expenses................ (18.9) (11.0) (15.4)
Equity in earnings (losses) of subsidiaries........ 43.6 (132.0) (615.5)
------- ------- -------
Income (loss) before income taxes and cumulative
effect of changes in accounting principles........ 24.1 (142.1) (641.6)
Credit (provision) for income taxes................ 33.4 20.0 (3.1)
------- ------- -------
Income (loss) before cumulative effect of changes
in accounting principles.......................... 57.5 (122.1) (644.7)
Cumulative effect of changes in accounting princi-
ples:
Postretirement benefits other than pensions, net
of related credit for income taxes of $.2........ -- -- (.4)
Accounting for income taxes....................... -- -- 44.9
------- ------- -------
Net income (loss).................................. $ 57.5 $(122.1) $(600.2)
======= ======= =======
</TABLE>

See notes to consolidated financial statements and accompanying notes.

F-44
<PAGE>

MAXXAM INC.

STATEMENT OF CASH FLOWS (UNCONSOLIDATED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-------------------------
1995 1994 1993
------- ------- -------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 57.5 $(122.1) $(600.2)
Adjustments to reconcile net income (loss) to net
cash provided by (used for) operating activities:
Equity in losses (earnings) of subsidiaries....... (43.6) 132.0 615.5
Net sales of marketable securities................ 14.5 6.8 18.3
Amortization of deferred financing costs and dis-
counts on long-term debt......................... .3 .3 .5
Cumulative effect of changes in accounting princi-
ples, net........................................ -- -- (44.5)
Decrease in receivables........................... .6 1.1 .8
Increase in accrued and deferred income taxes..... (18.9) (7.9) (13.1)
Increase (decrease) in accounts payable and other
liabilities...................................... (14.5) (5.3) 24.3
Other............................................. 2.3 (.2) 2.6
------- ------- -------
Net cash provided by (used for) operating activi-
ties............................................ (1.8) 4.7 4.2
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Kaiser Depositary Shares..... 7.6 10.3 --
Dividends received from subsidiaries............... 4.8 7.5 66.1
Investments in and net advances from (to) subsidi-
aries............................................. .4 (27.5) (22.2)
Capital expenditures............................... (.2) (.4) (.3)
------- ------- -------
Net cash provided by (used for) investing activi-
ties............................................ 12.6 (10.1) 43.6
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption, repurchase of and principal payments on
long-term debt.................................... (5.9) (5.8) (24.3)
------- ------- -------
Net cash used for financing activities........... (5.9) (5.8) (24.3)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.............................................. 4.9 (11.2) 23.5
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...... 15.5 26.7 3.2
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 20.4 $ 15.5 $ 26.7
======= ======= =======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FI-
NANCING ACTIVITIES:
Reduction of stockholders' deficit due to redemp-
tion of Kaiser preferred stock.................... $ 136.2 $ -- $ --
Distribution received from subsidiary of the
Company's payable................................. 8.0 132.0 --
Assumption by the Company of subsidiary's payables
to the Company and affiliates..................... -- (63.1) --
Net assets transferred (to) from subsidiary........ (14.5) -- 30.5
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid...................................... $ 6.0 $ 7.0 $ 6.8
Income taxes paid (refunded)....................... (.3) 1.1 (.5)
</TABLE>

See notes to consolidated financial statements and accompanying notes.

F-45
<PAGE>

MAXXAM INC.

SCHEDULE I--CONDENSED FINANCIAL INFORMATION OF REGISTRANT

NOTES TO FINANCIAL STATEMENTS
(IN MILLIONS OF DOLLARS)

A. DEFERRED INCOME TAXES

The deferred income tax assets and liabilities reported in the accompanying
unconsolidated balance sheet are determined by computing such amounts on a
consolidated basis, for the Company and members of its consolidated federal
income tax return group, and then reducing such consolidated amounts by the
amounts recorded by the Company's subsidiaries pursuant to their respective
tax allocation agreements with the Company. The Company's net deferred income
tax assets relate primarily to the excess of the tax basis over financial
statement basis with respect to timber and timberlands and real estate held
for sale by various subsidiaries. The Company has concluded that it is more
likely than not that these net deferred income tax assets will be realized
based in part upon the estimated values of the underlying assets which are in
excess of their tax basis.

B. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER
31,
------------
1995 1994
----- -----
<S> <C> <C>
14% Senior Subordinated Reset Notes due May 20, 2000.......... $25.0 $25.0
12 1/2% Subordinated Debentures due December 15, 1999, net of
discount of $1.1 and $1.7 at December 31, 1995 and 1994,
respectively................................................. 16.5 20.9
Other......................................................... .3 1.1
----- -----
41.8 47.0
Less: current maturities...................................... (.2) (2.4)
----- -----
$41.6 $44.6
===== =====
</TABLE>

Scheduled maturities of long-term debt outstanding at December 31, 1995 are
as follows: years ending December 31, 1996-$.2; 1997-$3.3; 1998-$3.3; 1999-
$11.1; 2000-$25.0.

C. NOTES PAYABLE TO SUBSIDIARIES, NET OF NOTES RECEIVABLE AND ADVANCES

At December 31, 1995, the Company's indebtedness to its subsidiaries, which
includes accrued interest, consists of the following:

<TABLE>
<CAPTION>
DECEMBER
31,
------------
1995 1994
----- -----
<S> <C> <C>
Unsecured note payable, interest at 6%....................... $18.3 $60.9
Unsecured notes payable, interest at 7%...................... 13.7 12.9
Secured notes receivable, interest at 12% on first $15.0, at
prime plus 1% to 2% on remainder............................ -- (43.6)
Net advances................................................. (13.2) (18.0)
----- -----
$18.8 $12.2
===== =====
</TABLE>

In August 1995, the notes receivable reflected above were canceled to reduce
the 6% unsecured note payable by $45.5 ($43.6 plus accrued interest).

F-46
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The expenses of this offering will be paid by MAXXAM Inc. (the "Company")
and, exclusive of underwriting discounts and commissions, are as follows:

<TABLE>
<S> <C>
SEC registration fee................................................... $
*Printing and engraving................................................
*Legal fees and expenses...............................................
*Accounting fees and expenses..........................................
*Blue Sky fees and expenses (including counsel fees)...................
*Trustee fees and expenses.............................................
*Miscellaneous.........................................................
----
Total................................................................ $
====
</TABLE>
- --------
* Estimated

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

Reference is made to Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), which enables a corporation in its original certificate of
incorporation or an amendment thereto to eliminate or limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of the director's fiduciary duty, except (i) for any breach
of the director's duty of loyalty to the corporation or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
DGCL (providing for liability of directors for unlawful payment of dividends
or unlawful stock purchases or redemptions), or (iv) for any transaction from
which the director derived an improper personal benefit.

Reference also is made to Section 145 of the DGCL which provides that a
corporation may indemnify any person, including directors and officers, who
was or is, or is threatened to be made, a party to any threatened, pending or
completed legal action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
such corporation), by reason of the fact that such person is or was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent
of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, if such person acted in good faith and in a manner
he reasonably believed to be in or not opposed to the corporation's best
interests and, with respect to any criminal proceeding, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify its directors, officers, employees and agents in an action by or in
the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the director,
officer, employee or agent is adjudged to be liable to the corporation. Where
a director, officer, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such director, officer, employee or
agent actually and reasonably incurred in connection therewith.

The Company's Articles of Incorporation (Article Twelfth) and By-laws
(Article IX) provide generally that the directors, officers of the Company and
certain other persons shall be indemnified to the fullest extent permitted by
Delaware law.

Subject to certain limitations and exceptions, the Company has insurance
coverage for losses by any person who is or hereafter may be a director or
officer of the Company arising from claims against that person for any

II-1
<PAGE>

wrongful act in his capacity as a director or officer of the Company or any of
its subsidiaries. The policy also provides for reimbursement to the Company
for indemnification given by the Company pursuant to common or statutory law
or its certificate or incorporation or by-laws to any such person arising from
any such claims.

The foregoing discussion is qualified in its entirety by reference to the
DGCL and the Company's Articles of Incorporation and By-laws.

ITEM 16. EXHIBITS.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*4.1 Form of Indenture between the Company and State Street Bank and Trust
Company, Trustee (the "Indenture")
**5.1 Opinion of Anthony R. Pierno, General Counsel of the Company, with
respect to the Securities to be issued under the Indenture
12 Computation of Ratio of Earnings to Fixed Charges for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Wharton Levin Ehrmantraut Klein & Nash, P.A.
23.3 Consent of Thelen, Marrin, Johnson & Bridges
*25 Power of Attorney (on signature page)
*26.1 Form T-1, Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939, as amended, of a Corporation Designated to Act
as Trustee with respect to the Indenture
99.1 The Audited Consolidated Financial Statements and Notes thereto of
Kaiser Aluminum Corporation for the fiscal year ended December 31,
1995 (incorporated herein by reference to Exhibit 99.1 to the Annual
Report on Form 10-K of MAXXAM Group Inc. for the fiscal year ended
December 31, 1995, File No. 1-8857)
</TABLE>
- --------

* Previously filed.

** To be filed by amendment.

ITEM 17. UNDERTAKINGS

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:

(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");

(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;

(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;

Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
registration statement is on Form S-3, Form S-8 or Form F-3, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
Securities and Exchange Commission

II-2
<PAGE>

(the "Commission") by the registrant pursuant to Section 13 or Section 15(d)
of the Securities Exchange Act of 1934 (the "Exchange Act") that are
incorporated by reference in the registration statement.

(2) That for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.

(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.

The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act
(and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described in Item 15 above, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.

The Company hereby undertakes that:

(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS
AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THERETO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON APRIL 11, 1996.

MAXXAM Inc.

/s/ Charles E. Hurwitz
By: _________________________________
Charles E. Hurwitz, Chairman of
the Board,
Chief Executive Officer and
President

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURES CAPACITIES DATE

/s/ Charles E. Hurwitz Chairman of the
- ------------------------------------- Board, Chief April 11, 1996
CHARLES E. HURWITZ Executive Officer
and President
(Principal
Executive Officer)

/s/ Paul N. Schwartz Executive Vice
- ------------------------------------- President and Chief April 11, 1996
PAUL N. SCHWARTZ Financial Officer
(Principal
Financial Officer)

/s/ Terry L. Freeman Assistant Controller
- ------------------------------------- (Principal April 11, 1996
TERRY L. FREEMAN Accounting Officer)

/s/ Robert J. Cruikshank Director
- ------------------------------------- April 11, 1996
ROBERT J. CRUIKSHANK

/s/ Ezra G. Levin Director
- ------------------------------------- April 11, 1996
EZRA G. LEVIN

/s/ Stanley D. Rosenberg Director
- ------------------------------------- April 11, 1996
STANLEY D. ROSENBERG
<PAGE>

INDEX TO EXHIBITS

* Previously filed.

** To be filed by amendment.

<PAGE>

EXHIBIT 12

MAXXAM INC.

CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1995 1994 1993 1992 1991
------ ------- ------- ------ ------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Earnings are calculated as
follows:
Income (loss) before income
taxes, minority interests,
extraordinary item and
cumulative effect of
changes in accounting
principles................ $ 94.5 $(171.8) $(211.4) $(13.2) $ 67.4
Add (deduct):
Fixed charges as calcu-
lated
below................... 216.3 225.2 210.8 215.1 227.7
Capitalized interest, in-
cluded in fixed
charges................. (2.8) (3.0) (4.3) (5.2) (5.1)
Preferred stock dividend
requirements of subsidi-
aries, included in fixed
charges................. (21.7) (35.6) (10.9) (4.6) (2.0)
------ ------- ------- ------ ------
$286.3 $ 14.8 $ (15.8) $192.1 $288.0
====== ======= ======= ====== ======
Fixed charges are calculated
as follows:
Interest expense........... 172.7 $ 167.3 $ 169.5 $181.8 $198.8
Amortization of deferred
financing costs........... 8.6 9.6 15.6 13.8 12.1
Capitalized interest....... 2.8 3.0 4.3 5.2 5.1
Interest component of
rental expense............ 10.5 9.7 10.5 9.7 9.7
Preferred stock dividend
requirements of
subsidiaries.............. 21.7 35.6 10.9 4.6 2.0
------ ------- ------- ------ ------
$216.3 $ 225.2 $ 210.8 $215.1 $227.7
====== ======= ======= ====== ======
Ratio of earnings to fixed
charges..................... 1.3x 1.3x
====== ======
Fixed charge coverage
deficiency.................. $(210.4) $(226.6) $(23.0)
======= ======= ======
</TABLE>

<PAGE>

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in, incorporated by
reference or made a part of this registration statement.

ARTHUR ANDERSEN LLP

Houston, Texas

April 8, 1996

<PAGE>

EXHIBIT 23.2

We hereby consent to (i) any references to our firm, or (ii) any references
to advice rendered by our firm and contained in Amendment No. 2 to the Form S-3
Registration Statement of MAXXAM Inc. (Registration No. 333-69).

WHARTON LEVIN EHRMANTRAUT

KLEIN & NASH, P.A.

By: /s/ ROBERT DALE KLEIN

Robert Dale Klein

Dated: April 11, 1996

<PAGE>

EXHIBIT 23.3

April 11, 1996

MAXXAM Inc.

5847 San Felipe, Suite 2600

Houston, Texas 77057

Dear Sirs:

With respect to the Registration Statement on Form S-3 (No. 333-69), as
amended, filed by MAXXAM Inc., a Delaware corporation (the "Registration
Statement"), we hereby consent to the use of our name in the prospectus
included in the Registration Statement under the headings (i) Management's
Discussion and Analysis of Financial Condition and Results of Operation--
Financial Condition and Investing and Financing Activities--Aluminum
Operations; (ii) Legal Proceedings--Kaiser Litigation--Asbestos-related
Litigation; and (iii) Note 9 to the Notes to Consolidated Financial
Statements.

Very truly yours,

/s/ Thelen, Marrin, Johnson &
Bridges

THELEN, MARRIN, JOHNSON & BRIDGES