MAXXAM INC, S-3, 1996-01-05

MAXXAM INC
S-3, 1996-01-05
LAND SUBDIVIDERS & DEVELOPERS (NO CEMETERIES)

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 5, 1996

REGISTRATION NO. 33-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
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, ESQ.
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.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[X]

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) OFFERING PRICE(1) FEE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt Securities........ $200,000,000 100% $200,000,000 $68,965.52
</TABLE>
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(1) Estimated in accordance with Rule 457(a) solely for purposes of
calculating the registration fee.

---------------
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.

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<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 Outside Front Cover Page of
Prospectus........................... 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 Incorporation of Certain Documents
by Reference......................... 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 JANUARY 5, 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" 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 January , 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, 1994.

(2) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.

(3) The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.

(4) The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995.

(5) The Company's Current Report on Form 8-K dated October 6, 1995.

See "Business--Aluminum Operations--Kaiser--Environmental Matters,"
"Business--Forest Products Operations--Regulatory and Environmental Factors,"
"Legal Proceedings" and "Certain Transactions" in this Prospectus for
additional information regarding various contingencies affecting the Company
subsequent to the publication of the audited and unaudited financial
statements contained in the foregoing documents.

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.
An independent committee of Kaiser's Board of Directors is considering the
desirability of a recapitalization transaction whereby a separate class of
lesser voting or non-voting capital stock would be created for Kaiser;
however, there can be no assurance that the committee will propose a
recapitalization transaction or as to its terms. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Possible
Recapitalization of 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 8% of the western world's alumina capacity and production in
1994. 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 2.1 million tons in 1994 or 71% of production) and primary
aluminum (approximately 224,000 tons in 1994 or 54% 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 Operations."

The Company, through various 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--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, before making an investment in
the Securities.

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 November 30, 1995, the Company's assets (exclusive of
deferred income tax assets and other miscellaneous assets) consisted of (i)
$25.7 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 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.

4
<PAGE>

As of November 30, 1995, the indebtedness of the Company and its
subsidiaries reflected on the Company's consolidated balance sheet was
approximately $1,620.5 million, of which approximately $1,578.7 million
consisted of indebtedness of the subsidiaries of the Company, and minority
interests were approximately $221.2 million. Approximately $719.9 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 which aggregated
approximately $191.6 million as of November 30, 1995, 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 of November 30, 1995, the Company (excluding its
subsidiaries) had cash, cash equivalents and marketable securities of
approximately $25.7 million and approximately $25.9 million available from its
subsidiaries. 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, 1994, general and administrative expenses have ranged
between $11.0 million and $19.0 million. These costs often include non-cash
accruals for contingent liabilities. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Other Items Not Directly
Related to Industry Segments." The Company's cash expenditures for corporate
overhead (net of reimbursements from subsidiaries and non-cash contingency
accruals) have been in the range of $6.0-$10.0 million during each of the last
three years ended December 31, 1994.

The Company expects that for the foreseeable future 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. On
September 29, 1995, MGI paid dividends of $4.8 million. As of November 30,
1995, approximately $1.6 million of dividends could be paid by MGI. 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 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. Pacific
Lumber is restricted by its debt instruments as to the amount of funds that
can be paid in the form of dividends or loans to MGI, and Scotia Pacific is
also restricted by the indenture governing its Timber Notes (as defined below)
as to the amount of funds that can be paid in the form of dividends or loans
to Pacific Lumber. 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 subject to certain regulatory
developments that could adversely affect such performance. See "--Regulatory
and Environmental Factors--Forest Products Operations," "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--

5
<PAGE>

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 Kaiser's ability to pay cash dividends and
restrict transactions between Kaiser and its affiliates.

As of November 30, 1995, the Real Estate Subsidiaries had approximately
$22.8 million available for borrowing under various credit agreements, all of
which could be distributed to the Company. As of November 30, 1995, the Real
Estate Subsidiaries had total assets of approximately $200.7 million, total
liabilities of approximately $54.4 million (including total indebtedness of
approximately $19.7 million) and combined net worth of approximately $146.3
million. The Real Estate Subsidiaries had significant operating losses in each
of the last several years. While the loan agreements governing indebtedness of
the Real Estate Subsidiaries have restrictions on dividends that may be paid
by certain of the Real Estate Subsidiaries, the Company believes that such
restrictions are not material.

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 foreseeable future and to pay interest on Securities
which are sold; however, 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.

RISK FACTORS RELATING TO KAISER

Kaiser accounts for a 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."

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. 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 Environmental
Litigation." KACC is also a defendant in a 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
"Business--Legal Proceedings--Asbestos-related Litigation" and Note 7 to the
Company's Unaudited 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."

6
<PAGE>

Kaiser is highly leveraged, with consolidated indebtedness of $810.6 million
and stockholders' equity of $43.2 million at September 30, 1995. 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.

Electric power represents an important production cost at certain of
Kaiser's facilities. See "Business--Aluminum Operations--Kaiser--Primary
Aluminum Products" for information regarding the power supply for Kaiser's
Pacific Northwest and Ghana operations.

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. Pacific
Lumber does not expect that compliance with such existing laws and regulations
will have a material adverse effect on its future operating results or
financial position; however, 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" for a
description of a pending critical habitat designation, sustained yield
regulations, pending and proposed legislative matters 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
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 60.8% 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 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 and 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.

7
<PAGE>

LITIGATION

The Company and certain of its affiliates are defendants (or threatened
defendants) in a variety of actions, including a pending action by the Office
of Thrift Supervision and pending actions under the Employee Retirement Income
Security Act of 1974, as amended ("ERISA") relating to Pacific Lumber's former
retirement plan. For information concerning certain litigation matters
involving the Company, see "Legal Proceedings" and "Certain Transactions--
Litigation Matters."

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 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.

CAPITALIZATION

The following table summarizes the consolidated and parent only
(unconsolidated) capitalization of the Company at September 30, 1995. This
table should be read in conjunction with the Audited and Unaudited
Consolidated Financial Statements of the Company and the Notes thereto
appearing elsewhere herein.

<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
---------------------
PARENT
CONSOLIDATED ONLY
------------ ------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
SHORT-TERM DEBT:
Current maturities of long-term debt.................. $ 29.7 (1) $ .3
-------- ------
LONG-TERM DEBT:
The Company:
12 1/2% Subordinated Debentures due December 15,
1999 (2)........................................... 16.4 16.4
14% Senior Subordinated Reset Notes due May 20,
2000............................................... 25.0 25.0
Other............................................... .1 .1
Aluminum Operations................................... 798.5 --
Forest Products Operations............................ 761.5 --
Real Estate Operations................................ 18.8 --
-------- ------
Total long-term debt.............................. 1,620.3 41.5
-------- ------
Minority interests...................................... 218.2 --
STOCKHOLDERS' DEFICIT:
Preferred stock....................................... .3 .3
Common stock.......................................... 5.0 5.0
Additional capital.................................... 153.4 153.4
Accumulated deficit (3)............................... (231.6) (231.6)
Pension liability adjustment.......................... (11.4) (11.4)
Treasury stock........................................ (19.5) (19.5)
-------- ------
Total Stockholders' Deficit......................... (103.8) (103.8)
-------- ------
Total Capitalization.............................. $1,764.4 $(62.0)
======== ======
</TABLE>
- --------
(1) Reflects current maturities of approximately $12.1 million, $14.2 million,
$3.1 million and $0.3 million, relating to the Company's aluminum
operations, forest products operations, real estate operations and other
Company debt, respectively.
(2) Net of discount of $1.2 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."

8
<PAGE>

SELECTED HISTORICAL 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, 1994, 1993, 1992, 1991 and 1990, are derived from the Company's
Consolidated Financial Statements which have been audited by independent
public accountants. The selected historical consolidated financial data as of
and for the nine months ended September 30, 1995, and for the nine months
ended September 30, 1994, have been derived from the Company's Unaudited
Consolidated Financial Statements, which in the opinion of management contain
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the consolidated financial position and consolidated results of
operations of the Company as of such date and for such periods.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- --------------------------------------------------
1995 1994 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data:
Net sales.............. $1,892.6 $1,577.7 $2,115.7 $2,031.1 $2,202.6 $2,254.5 $2,360.7
Cost of products sold.. 1,474.2 1,365.0 1,817.9 1,787.6 1,786.9 1,735.6 1,654.5
Gross profit........... 418.4 212.7 297.8 243.5 415.7 518.9 706.2
Depreciation and
depletion............. 91.0 89.9 121.1 120.8 111.4 106.1 100.0
Selling,
administrative,
research and
development, and
general............... 140.5 122.3 169.4 183.0 173.5 177.3 192.3
Operating income
(loss)................ 186.9 .5 7.3 (96.1) 130.8 235.5 413.9
Interest expense....... 136.1 132.0 176.9 185.1 195.6 210.9 222.1
Income (loss) before
income taxes, minority
interests,
extraordinary loss and
cumulative effect of
changes in accounting
principles............ 59.5 (134.7) (171.8) (211.4) (13.2) 67.4 222.0
Income (loss) before
extraordinary loss and
cumulative effect of
changes in accounting
principles............ 35.1 (92.6) (116.7) (131.9) (7.3) 57.5 144.4
Net income (loss)...... 35.1 (98.0) (122.1) (600.2)(1) (7.3) 57.5 161.9
Ratio of earnings to
fixed charges (2)..... 1.2x -- -- -- -- 1.3x 1.9x
Fixed charge coverage
deficiency (2)........ -- 162.4 210.4 226.6 23.0 -- --
Other Data:
Capital expenditures... 63.9 53.1 89.3 86.2 132.7 130.9 135.0
EBITDA (3)............. 277.9 90.4 128.4 24.7 242.2 341.6 513.9
Ratio of EBITDA to
interest expense...... 2.0x 0.7x 0.7x 0.1x 1.2x 1.6x 2.3x
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------
SEPTEMBER 30, 1995 1994 1993 1992 1991 1990
------------------ -------- -------- -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital........ $ 559.5 $ 413.5 $ 414.3 $ 466.0 $ 424.2 $ 366.5
Total assets........... 3,767.1 3,690.8 3,572.0 3,198.8 3,215.0 3,027.5
Long-term liabilities,
exclusive of long-term
debt.................. 1,445.8 1,361.5 1,370.4 418.3 355.5 406.8
Long-term debt, less
current portion....... 1,620.3 1,582.5 1,567.9 1,592.7 1,551.9 1,445.5
Minority interests..... 218.2 344.3 224.3 176.7 179.2 123.2
Total stockholders'
equity (deficit)...... (103.8) (275.3) (167.9)(1) 443.9 459.6 395.3
</TABLE>

(footnotes on the following page)

9
<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) 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. 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."

10
<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; and real estate investment and development,
principally through MAXXAM Property Company and various other wholly owned
subsidiaries. The following should be read in conjunction with the Company's
Consolidated Financial Statements contained elsewhere herein.

ALUMINUM OPERATIONS

Aluminum operations account for a 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 nine months ended September 30, 1995 and 1994
and for the years ended December 31, 1994, 1993 and 1992. The information
presented in the table is in millions of dollars except shipments and prices.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Shipments:(1)
Alumina...................... 1,494.6 1,577.3 2,086.7 1,997.5 2,001.3
Aluminum products:
Primary aluminum........... 184.5 175.8 224.0 242.5 355.4
Fabricated aluminum
products.................. 284.3 307.1 399.0 373.2 343.6
-------- -------- -------- -------- --------
Total aluminum products.. 468.8 482.9 623.0 615.7 699.0
======== ======== ======== ======== ========
Average realized sales price:
Alumina (per ton)............ $ 203 $ 162 $ 169 $ 169 $ 195
Primary aluminum (per
pound)...................... .82 .56 .59 .56 .66
Net sales:
Bauxite and alumina:
Alumina.................... $ 303.8 $ 255.3 $ 352.8 $ 338.2 $ 390.8
Other(2)(3)................ 65.3 60.6 79.7 85.2 75.7
-------- -------- -------- -------- --------
Total bauxite and
alumina................. 369.1 315.9 432.5 423.4 466.5
-------- -------- -------- -------- --------
Aluminum processing:
Primary aluminum........... 335.0 218.2 292.0 301.7 515.0
Fabricated aluminum
products.................. 929.0 790.8 1,043.0 981.4 913.7
Other(3)................... 13.6 10.8 14.0 12.6 13.9
-------- -------- -------- -------- --------
Total aluminum
processing.............. 1,277.6 1,019.8 1,349.0 1,295.7 1,442.6
-------- -------- -------- -------- --------
Total net sales........ $1,646.7 $1,335.7 $1,781.5 $1,719.1 $1,909.1
======== ======== ======== ======== ========
Operating income (loss)........ $ 153.9 $ (42.2) $ (50.3) $ (117.4) $ 91.6
======== ======== ======== ======== ========
Income (loss) before income
taxes, minority interests,
extraordinary item and
cumulative effect of changes
in accounting principles...... $ 73.0 $ (105.4) $ (145.8) $ (201.7) $ 33.8
======== ======== ======== ======== ========
Capital expenditures........... $ 53.2 $ 37.5 $ 70.0 $ 67.7 $ 114.4
======== ======== ======== ======== ========
</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.

11
<PAGE>

NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1994

Net sales

Bauxite and alumina. Revenues from net sales to third parties for the
bauxite and alumina segment were 17% higher in the nine months ended September
30, 1995 than in the nine months ended September 30, 1994. Revenues from
alumina increased 19% in the nine months ended September 30, 1995 from the
nine months ended September 30, 1994, due to higher average realized prices
partially offset by lower shipments.

Aluminum processing. The bulk of this segment's sales represents Kaiser's
primary aluminum and fabricated aluminum products, with the remainder due to
the portion of sales of primary aluminum attributable to the minority interest
in Volta Aluminium Company Limited ("Valco"). Revenues from net sales to third
parties for the aluminum processing segment were 25% higher in the nine months
ended September 30, 1995 than in the nine months ended September 30, 1994.
Revenues from primary aluminum increased 54% in the nine months ended
September 30, 1995 from the nine months ended September 30, 1994, due
primarily to higher average realized prices and higher shipments. The increase
in revenues for the first nine months of 1995 was partially offset by
decreased shipments caused by the strike by the United Steelworkers of America
(the "USWA") discussed below. Shipments of primary aluminum to third parties
were approximately 39% of total aluminum products shipments in the nine months
ended September 30, 1995 compared to 36% for the nine months ended September
30, 1994. Revenues from fabricated aluminum products increased 17% in the nine
months ended September 30, 1995 from the nine months ended September 30, 1994,
due to higher average realized prices partially offset by lower shipments for
most of these products.

Operating income (loss)

Kaiser's corporate general and administrative expenses of $57.9 million and
$53.4 million for the nine months ended September 30, 1995 and 1994,
respectively, were allocated by the Company to the bauxite and alumina and
aluminum processing segments based on those segments' ratio of sales to
unaffiliated customers.

Improved operating results in the nine months ended September 30, 1995 were
partially offset by third quarter expenditures related to Kaiser's joint
venture in China (see "Business--Aluminum Operations--Kaiser--Operations in
China"), accelerated expenditures 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 signing a new labor contract. The
combined impact of these expenditures on the results for the nine months ended
September 30, 1995 was approximately $6.0 million (on a pre-tax basis).
Operating results in the nine months ended September 30, 1995 were further
impacted by (i) an eight-day strike at five major domestic locations by the
USWA, (ii) a six-day strike by the National Workers Union at Kaiser's 65%-
owned Alumina Partners of Jamaica ("Alpart") alumina refinery in Jamaica, 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 the nine
months ended September 30, 1995 was approximately $17.0 million in the
aggregate (on a pre-tax basis) principally from lower production volume and
other related costs.

Bauxite and alumina. This segment had operating income for the nine months
ended September 30, 1995 of $25.1 million, compared with an operating loss of
$5.6 million for the nine months ended September 30, 1994, principally due to
higher revenue, partially offset by the effect of the strikes and boiler
failure.

Aluminum processing. This segment had operating income for the nine months
ended September 30, 1995 of $128.8 million, compared with an operating loss of
$36.6 million for the nine months ended September 30, 1994, principally due to
higher revenue, partially offset by the effect of the strike by the USWA.

Income (loss) before income taxes, minority interests and extraordinary item

Income before income taxes, minority interests and extraordinary item for
the nine months ended September 30, 1995, as compared to the loss for the nine
months ended September 30, 1994, resulted from the improvement in operating
income previously described, partially offset by other charges in the third
quarter of 1995, principally related to the establishment of additional
litigation reserves.

12
<PAGE>

FOR THE THREE YEARS ENDED DECEMBER 31, 1994

Net sales

Bauxite and alumina. Revenue from alumina increased 4% in 1994 compared to
1993 because of increased shipments. Revenue from alumina decreased 13% in
1993 compared to 1992 because of lower average realized prices. The remainder
of the segment's sales revenues were from sales of bauxite, which remained
about the same throughout the three years, and the portion of sales of alumina
attributable to the minority interest in Alpart.

Aluminum processing. 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 in respect of 1994 shipments, which was
initiated prior to improvements in metal prices in 1994. In 1994, Kaiser's
average realized price from sales of primary aluminum was approximately $.59
per pound, compared to the average Midwest United States transaction price of
approximately $.72 per pound during the year. Shipments in 1994 reflected
production curtailments at Kaiser's smelters in the Pacific Northwest and
Ghana (see "Business--Aluminum Operations--Kaiser--Primary Aluminum
Products"). Revenue from primary aluminum decreased 41% in 1993 compared to
1992 because of lower shipments and lower average realized prices. Shipments
of primary aluminum to third parties were approximately 36% of total aluminum
products shipments in 1994 compared to approximately 39% in 1993 and 51% in
1992.

Revenue from fabricated aluminum products increased 6% in 1994 compared to
1993, principally due to increased shipments of most of these products.
Revenue from fabricated aluminum products increased 7% in 1993 compared to
1992, principally due to increased shipments of most fabricated aluminum
products, partially offset by a decrease in average realized prices of most of
these products.

Operating income (loss)

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 and $29.0 million in the fourth quarter of 1993
and 1992, respectively, because of reductions in the carrying value of its
inventories caused principally by prevailing lower prices for alumina, primary
aluminum and fabricated aluminum products. Kaiser's corporate general and
administrative expenses of $67.6 million, $72.6 million and $77.6 million in
1994, 1993 and 1992, 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. In 1994 compared to 1993, operating income was
favorably affected by increased shipments and lower manufacturing cost. In
1993 compared to 1992, operating income was adversely affected principally due
to a decrease in average realized prices for alumina, which more than offset
above-market prices for virtually all of Kaiser's excess alumina sold forward
in prior periods under long-term contracts.

Aluminum processing. The decrease in operating loss in 1994 compared to 1993
was caused principally by the $35.8 million of restructuring charges 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 1993 compared to 1992, operating income was adversely
affected due principally to reduced shipments and lower average realized
prices of primary aluminum, which more than offset increased shipments of
fabricated aluminum products. 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

13
<PAGE>

for various other items. Other contributing factors to the 1993 decrease in
operating results were lower production at Kaiser's smelters in the Pacific
Northwest in 1993 as a result of the removal of three reduction potlines from
production in January 1993 in response to the reduction by the Bonneville
Power Administration (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. In 1993 and 1992, 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

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. The loss in 1993, compared to income in 1992, resulted
from the operating losses previously described and $10.8 million of other pre-
tax charges in 1993, principally related to establishing additional litigation
and environmental reserves.

As described in Note 1 to the Company's Audited Consolidated Financial
Statements, Kaiser's cumulative losses in the first and second quarter 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
Company's Audited 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 Company's Audited
Consolidated Financial Statements). The Company will record 100% of Kaiser's
losses and profits 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 Company's Audited Consolidated Financial Statements.

14
<PAGE>

FOREST PRODUCTS OPERATIONS

The Company's forest products operations are conducted by MGI through its
principal operating subsidiaries. MGI's business is seasonal in that the
forest products business generally experiences lower first quarter sales
during the winter months due largely to the general decline in construction
related activity. Accordingly, MGI's results for any interim period are not
necessarily indicative of results to be expected for the full year. The
following table presents selected operational and financial information for
the nine months ended September 30, 1995 and 1994 and for the years ended
December 31, 1994, 1993 and 1992. The information presented in the table is in
millions of dollars except shipments and prices.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------- ----------------------------
1995 1994 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Shipments:
Lumber:(1)
Redwood upper grades....... 35.0 38.2 52.9 68.3 76.6
Redwood common grades...... 164.2 160.9 218.4 184.7 193.9
Douglas-fir upper grades... 5.0 6.1 8.6 10.7 10.2
Douglas-fir common grades
and other................. 53.3 47.9 66.3 46.4 56.0
-------- -------- -------- -------- --------
Total lumber.............. 257.5 253.1 346.2 310.1 336.7
======== ======== ======== ======== ========
Logs(2).................... 6.9 12.0 17.7 18.6 19.1
======== ======== ======== ======== ========
Wood chips(3).............. 166.8 152.2 210.3 156.8 202.7
======== ======== ======== ======== ========
Average sales price:
Lumber:(4)
Redwood upper grades....... $ 1,510 $ 1,436 $ 1,443 $ 1,275 $ 1,141
Redwood common grades...... 476 460 460 469 427
Douglas-fir upper grades... 1,308 1,402 1,420 1,218 1,125
Douglas-fir common grades.. 395 439 444 447 298
Logs(4)..................... 462 638 615 704 366
Wood chips(5)............... 102 82 83 81 83
Net sales:
Lumber, net of discount..... $ 158.0 $ 156.6 $ 216.5 $ 202.6 $ 194.2
Logs........................ 3.2 7.6 10.9 13.1 7.0
Wood chips.................. 17.0 12.5 17.4 12.7 16.9
Cogeneration power.......... 1.7 2.7 3.5 3.8 3.7
Other....................... 1.0 1.0 1.3 1.3 1.6
-------- -------- -------- -------- --------
Total net sales........... $ 180.9 $ 180.4 $ 249.6 $ 233.5 $ 223.4
======== ======== ======== ======== ========
Operating income............. $ 53.7 $ 56.3 $ 79.1 $ 54.3 $ 64.1
======== ======== ======== ======== ========
Operating cash flow(6)....... $ 72.7 $ 72.6 $ 103.8 $ 78.8 $ 92.5
======== ======== ======== ======== ========
Income (loss) before income
taxes, minority interests,
extraordinary item and
cumulative effect of changes
in accounting principles.... $ 2.6 $ (10.9) $ (5.2) $ (17.7) $ (28.4)
======== ======== ======== ======== ========
Capital expenditures......... $ 6.6 $ 10.0 $ 11.3 $ 11.1 $ 8.7
======== ======== ======== ======== ========
</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 before depletion and depreciation, also referred to as
"EBITDA."

15
<PAGE>

NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1994

Shipments. Lumber shipments to third parties for the nine months ended
September 30, 1995 increased from the nine months ended September 30, 1994.
Increased shipments of common grade Douglas-fir lumber and redwood common
lumber were partially offset by decreased shipments of upper grade redwood
lumber. Log shipments for the nine months ended September 30, 1995 were 6.9
million feet (net Scribner Scale), a decrease from 12.0 million feet for the
nine months ended September 30, 1994.

Net sales. Revenues from net sales for the nine months ended September 30,
1995 were essentially unchanged from the nine months ended September 30, 1994.
Increased sales of wood chips, higher average realized prices for both upper
and common grades of redwood lumber, and increased shipments of common grade
Douglas-fir lumber and redwood common lumber were mostly offset by decreased
shipments of logs and upper grade redwood lumber, lower average realized
prices for logs and common grade Douglas-fir lumber, and lower sales of
electrical power.

Operating income. Operating income for the nine months ended September 30,
1995 decreased as compared to the nine months ended September 30, 1994. This
decrease was primarily due to lower sales of logs and higher costs of lumber
sales, partially offset by higher gross margins on wood chip sales and higher
sales of lumber. Costs of lumber sales for the nine months ended September 30,
1995 were unfavorably impacted by higher purchases of logs from third parties,
partially offset by improved sawmill productivity. Cost of goods sold for the
nine months ended September 30, 1995 was reduced by $1.5 million of business
interruption insurance proceeds for the settlement of claims related to an
April 1992 earthquake.

Income (loss) before income taxes, minority interests and extraordinary
item. Income (loss) before income taxes, minority interests and extraordinary
item improved for the nine months ended September 30, 1995 as compared to the
nine months ended September 30, 1994. This improvement resulted from increased
investment, interest and other income, partially offset by the decrease in
operating income as discussed above. Investment, interest and other income
(expense) for the nine months ended September 30, 1994 included a pre-tax loss
on a litigation settlement of $21.2 million, along with a franchise tax refund
of $7.2 million (the substantial portion of which represented interest) from
the State of California.

FOR THE THREE YEARS ENDED DECEMBER 31, 1994

Shipments. Lumber shipments to third parties in 1994 increased by 12%
compared to 1993. This increase was attributable to an 18% increase in redwood
common lumber shipments and a 43% increase in shipments of common grade
Douglas-fir and other lumber, partially offset by a 23% decrease in shipments
of upper grade redwood lumber. Log shipments in 1994 were 17.7 million feet
(net Scribner scale), a decrease of 5% from 18.6 million feet in 1993.

Lumber shipments to third parties in 1993 decreased 8% compared to 1992.
This decrease was attributable to a 5% decrease in redwood common lumber
shipments, a 14% decrease in shipments of Douglas-fir lumber and an 11%
decrease in shipments of upper grade redwood lumber. The Company believes the
decrease in total lumber shipments was caused primarily by a decline in
construction related activity resulting from weak economic conditions in the
Western region of the United States and, to a lesser extent, by the
difficulties related to weather conditions in the West and Midwestern United
States during 1993. Log shipments in 1993 of 18.6 million feet decreased 3%
from 19.1 million feet in 1992.

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 the production of manufactured upper grade lumber products through
its end and edge glue facility (which was

16
<PAGE>

expanded during 1994). However, unless Pacific Lumber is able to sustain the
harvest level of old growth trees it has experienced in recent years, Pacific
Lumber expects that its production of premium upper grade lumber products will
decrease from current levels and that its manufactured lumber products will
constitute a higher percentage of its shipments of upper grade lumber
products.

Net sales. Revenues from net sales for 1994 increased by approximately 7%
from 1993. This increase was principally due to increased shipments of redwood
common lumber, a 13% 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 2% decrease in the average realized
price of redwood common lumber and a 13% decrease in the average realized
price of log sales. The increase in sales of wood chips reflects higher demand
from pulp mills.

Revenues from net sales for 1993 increased by approximately 5% from 1992.
This increase was principally due to a 12% increase in the average realized
price of upper grade redwood lumber, a 10% increase in the average realized
price of redwood common lumber, a 92% increase in the average realized price
of log sales and a 50% increase in the average realized price of common grade
Douglas-fir lumber, partially offset by decreased shipments of lumber and
logs, as previously discussed, and decreased sales of wood chips. The decrease
in sales of wood chips resulted from the closure of a pulp mill by one of
Pacific Lumber's customers.

Operating income. Operating income for 1994 increased by approximately 46%
as 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.

Operating income for 1993 decreased by approximately 15% as compared to
1992. This decrease was primarily due to the additional cost of logs purchased
from third parties, lower shipments of high margin wood chips and higher
overhead costs, partially offset by the increase in sales of lumber and logs,
as previously discussed. The Company 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 the Company'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. During the second quarter of 1992, Pacific
Lumber experienced lumber production delays attributable to the earthquake and
aftershocks which struck Humboldt County, California in April. The earthquake
and related aftershocks disabled, for a period of approximately six weeks, a
large number of the kilns used to dry the upper grade redwood lumber and the
sawmill which produces a significant portion of Pacific Lumber's upper grade
redwood lumber. Cost of goods sold for 1992 was reduced by a $3.3 million
business interruption insurance claim as a result of the April 1992
earthquake. The business interruption insurance claim represents partial
compensation for the added costs and lower realized gross margins on lumber
sales, primarily due to lost production capacity of Pacific Lumber's drying
kilns. Cost of goods sold for 1993 includes a reduction of $1.2 million
reflecting an additional business interruption insurance claim.

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, the
Company 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 the Company'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. The Company 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.

17
<PAGE>

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 decreased for 1994 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 (as described in Note 1 to the
Company's Audited Consolidated Financial Statements) and net gains on
marketable securities of $2.0 million. The litigation settlement in the second
quarter of 1994 (as described in Note 1 to the Company's Audited Consolidated
Financial Statements) 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 additional 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.

The loss before income taxes, minority interests, extraordinary item and
cumulative effect of changes in accounting principles decreased for 1993 as
compared to 1992 due to an increase in investment, interest and other income
and a decrease in interest expense, partially offset by the decrease in
operating income. Investment, interest and other income for 1993 includes net
gains on marketable securities of $6.7 million. Investment, interest and other
income for 1992 includes estimated minimum insurance recoveries of $1.6
million for earthquake damage incurred in April 1992. Interest expense
decreased in 1993 as compared to 1992 due to lower interest rates resulting
from the refinancing of long-term debt during 1993. See "--Financial Condition
and Investing and Financing Activities--Forest Products Operations."

REAL ESTATE OPERATIONS

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Net sales......................... $ 65.0 $ 61.6 $ 84.6 $ 78.5 $ 70.1
Operating loss.................... (6.4) (6.0) (10.0) (13.5) (9.3)
Income (loss) before income taxes,
minority interests, extraordinary
item and cumulative effect of
changes in accounting
principles....................... ( .9) (3.8) (1.5) 38.1 (5.2)
</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1994

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, and (iii) rental revenues
associated with the Company's RTC Portfolio (defined below). Net sales for the
nine months ended September 30, 1995 increased compared to the same period in
1994. This increase was primarily due to a bulk sale of condominiums at the
Company's Palmas del Mar resort in Puerto Rico and a bulk sale of acreage in
Texas. Net sales for the nine months ended September 30, 1994 included bulk
acreage sales in New Mexico.

Operating loss. The operating loss for the nine months ended September 30,
1995 increased slightly as compared to the nine months ended September 30,
1994. Operating results were favorably impacted by the bulk sale of acreage in
Texas, offset by higher overhead costs.

Income (loss) before income taxes, minority interests and extraordinary
item. The loss before income taxes, minority interests and extraordinary item
for the nine months ended September 30, 1995 decreased compared to the nine
months ended September 30, 1994. This decrease was primarily due to higher
investment, interest and other income and lower interest expense. Investment,
interest and other income for the nine months ended September 30, 1995
includes the sale of three real properties from the RTC Portfolio resulting in
pre-tax gains of $3.7 million.

18
<PAGE>

FOR THE THREE YEARS ENDED DECEMBER 31, 1994

Net sales. Net sales for 1994 increased by 8% 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 in December 1993. Net sales for 1993 increased 12%
compared to 1992. This increase was primarily due to rental revenues
associated with real properties purchased from the Resolution Trust
Corporation ("RTC") in June 1991 (the "RTC Portfolio").

Operating loss. The operating loss for 1994 decreased by $3.5 million
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 as a result of the sale of sixteen apartment complexes in
December 1993. The operating loss for 1993 included a $5.9 million writedown
of certain of the Company's nonstrategic real estate holdings to their
estimated net realizable value. The operating loss for 1993 increased by $4.2
million compared to 1992. This increase was primarily due to the $5.9 million
writedown in the first quarter of 1993, partially offset by improved
operations at the multi-family properties in the RTC Portfolio.

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 1994 was $1.5 million, compared to income
of $38.1 million for 1993. The loss for 1994 was primarily due to 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 the sale of two real properties and one
loan from the RTC Portfolio resulting in pre-tax gains of $7.3 million. The
decrease in interest expense for 1994 compared to 1993 resulted primarily from
repayments on debt attributable to the sale of the sixteen apartment complexes
in December 1993. Income before income taxes, minority interests,
extraordinary item and cumulative effect of changes in accounting principles
for 1993 was $38.1 million, compared to a loss of $5.2 million for 1992. This
improvement was primarily due to an increase in investment, interest and other
income and a decrease in interest expense, offset by the increased operating
losses discussed above. Investment, interest and other income for 1993
includes the sale of sixteen multi-family real estate properties from the RTC
Portfolio in December 1993 for $113.6 million, resulting in a pre-tax gain of
$47.8 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. Investment, interest and
other income for 1992 includes the sale of six real properties and four loans
from the RTC Portfolio resulting in pre-tax gains of $6.7 million. Interest
income decreased in 1993 compared to 1992 due to the loan sales and the
Company's acquisition of properties that were collateral for certain loans.
The decrease in interest expense for 1993 compared to 1992 resulted from lower
interest rates and repayments on the debt related to the RTC Portfolio.

OTHER ITEMS NOT DIRECTLY RELATED TO INDUSTRY SEGMENTS

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------- ----------------------------
1995 1994 1994 1993 1992
------ ------ -------- -------- --------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C>
Operating loss................... $(14.3) $ (7.6) $ (11.5) $ (19.5) $ (15.6)
Loss before income taxes,
minority interests,
extraordinary item and
cumulative effect of changes in
accounting principles........... (15.2) (14.6) (19.3) (30.1) (13.4)
</TABLE>

NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1994

Operating loss. The operating losses represent corporate general and
administrative expenses that are not attributable to the Company's industry
segments. The operating losses for the nine months ended September 30, 1995
increased compared to the nine months ended September 30, 1994. This increase
was primarily due to

19
<PAGE>

accruals of $2.3 million and $1.1 million for certain contingencies the
Company recorded during the second and third quarters of 1995, respectively,
and higher overhead costs.

Loss before income taxes, minority interests and extraordinary item. The
loss before income taxes, minority interests and extraordinary item 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 losses for the nine
months ended September 30, 1995 increased compared to the nine months ended
September 30, 1994. This increase was primarily due to the increased operating
loss, partially offset by higher investment, interest and other income.
Investment, interest and other income (expense) for the nine months ended
September 30, 1994 includes the equity in losses of affiliates attributable to
the Company's equity interest in SHRP, Ltd.

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 taxes, net of related
federal tax benefits. The Company's provision for income taxes as reflected in
its consolidated statement of operations for the nine months ended September
30, 1995 reflects a benefit of approximately $18.0 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.

FOR THE THREE YEARS ENDED DECEMBER 31, 1994

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 1994 decreased compared to 1993. This
decrease was primarily due to lower overhead costs. The operating loss for
1993 increased compared to 1992. This increase was primarily due to a $6.5
million charge related to litigation contingencies.

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 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 (the "Reset Notes"). Investment,
interest and other income (expense) for 1994 includes the losses attributable
to the Company's equity interest in SHRP, Ltd., offset by net gains on
marketable securities. See"--Financial Condition and Investing and Financing
Activities--Investment in Sam Houston Race Park." The loss before income
taxes, minority interests, extraordinary item and cumulative effect of changes
in accounting principles for 1993 increased compared to 1992. This increase
was primarily due to lower investment, interest and other income and the
increased operating losses discussed above.

Extraordinary item. The refinancing activities of Kaiser during the first
quarter of 1994, as described in Note 4 to the Company's Audited 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
1989 Credit Agreement (the "1989 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
Company's Audited 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

20
<PAGE>

paid and the write-off of unamortized discount and deferred financing costs on
Pacific Lumber's 12% Series A Senior Notes, 12.2% Series B Senior Notes and 12
1/2% Senior Subordinated Debentures (collectively, the "Old Pacific Lumber
Securities"), MGI's 12 3/4% Notes and the KACC 14 1/4% Senior Subordinated
Notes.

Cumulative effect of changes in accounting principles. 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 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. 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 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 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 contained elsewhere herein.

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 November 30, 1995, the indebtedness of the
subsidiaries and the minority interests reflected on the Company's
Consolidated Balance Sheet were $1,578.7 million and $221.2 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 (as amended, the "1994 Credit Agreement") and the
indentures governing the KACC Notes contain covenants which, among other
things, limit Kaiser's ability to pay cash dividends and restrict transactions
between Kaiser and its affiliates. Pursuant to the terms of the 1994 Credit
Agreement, Kaiser is precluded from paying any dividends in respect of its
common stock. 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. On September 29, 1995, MGI paid
dividends of $4.8 million. As of November 30, 1995, an additional $1.6 million
of dividends could be paid by MGI. Under the most restrictive covenants
governing debt of the Company's real estate subsidiaries, approximately $24.3
million could be paid as of November 30, 1995.

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

On October 10, 1994, the Company entered into the Custodial Trust Agreement
providing for up to $25.0 million in borrowings. Any amounts drawn would be
payable upon demand and be secured by Kaiser capital 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 this agreement will bear interest at the
prime rate plus 1% per annum. No borrowings were outstanding as of November
30, 1995.

21
<PAGE>

On October 6, 1995, an affiliate of the Company made an investment 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, an
affiliate of the Company agreed to purchase, for approximately $7.3 million,
approximately $14.6 million aggregate principal amount of SHRP, Ltd.'s amended
Senior Secured Notes. See "--Investment in Sam Houston Race Park."

As of November 30, 1995, the Company (excluding its subsidiaries) had cash
and marketable securities of approximately $25.7 million. 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 pay dividends in the foreseeable future. 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 foreseeable future.

ALUMINUM OPERATIONS

The offering of the 8.255% Preferred Redeemable Increased Dividend Equity
Securities (the "PRIDES"), the issuance of the KACC Senior Notes and the
replacement of the 1989 Credit Agreement during the first quarter of 1994 (as
described in Notes 4 and 7 to the Company's Audited Consolidated Financial
Statements) were the final steps of a comprehensive refinancing plan which
Kaiser began in January 1993 to extend the maturities of its outstanding
indebtedness, enhance its liquidity and raise new equity capital. Kaiser
expects that cash flows from operations and borrowings under available sources
of financing will be sufficient to satisfy its working capital and capital
expenditures requirements for the foreseeable future and to pay interest on
its indebtedness.

Kaiser's 1994 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 November 30, 1995, $250.2 million (of which $72.4 million
could have been used for letters of credit) was available to KACC under the
1994 Credit Agreement. The 1994 Credit Agreement is unconditionally guaranteed
by Kaiser and by certain significant subsidiaries of KACC. Loans under the
1994 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 LIBO Rate (Reserve
Adjusted) (as defined) plus 3 1/4%. After June 30, 1995, the interest rate
margins applicable to borrowings under the 1994 Credit Agreement may be
reduced by up to 1 1/2% (non-cumulatively), based on a financial test,
determined quarterly. As of September 30, 1995, the financial test permitted a
reduction of 1% per annum in margins effective October 1, 1995.

On June 30, 1993, Kaiser issued 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 Company's Audited Consolidated Financial Statements. On September 19,
1995, Kaiser redeemed all 1,938,295 of its Series A Shares. Redemption of the
Series A Shares resulted in the simultaneous redemption of all 19,382,950
Depositary Shares in exchange for (i) 13,126,521 shares of Kaiser Common
Stock, (ii) an amount in cash equal to all accrued and unpaid dividends up to
and including the day immediately prior to the redemption date, and (iii) cash
in lieu of any fractional shares of Kaiser Common Stock that would have
otherwise been issuable.

As a result of the issuance of 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 62.2% 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

22
<PAGE>

certain subsidiaries of KACC. See Note 4 to the Company's Audited Consolidated
Financial Statements for a description of the terms of the KACC Notes and the
use of proceeds from their issuance. The indentures governing the KACC Notes
contain, among other things, restrictions on KACC's ability to incur debt,
undertake transactions with affiliates and pay dividends. Pursuant to the
terms of the 1994 Credit Agreement, Kaiser is precluded from paying any
dividends in respect of 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 Credit Agreement.

Kaiser has historically participated in various raw material joint ventures
outside the United States. At September 30, 1995, Kaiser was unconditionally
obligated for $85.7 million of indebtedness of one such joint venture
affiliate.

Kaiser's capital expenditures of approximately $252.1 million (of which
$34.0 million was funded by Kaiser's minority partners in certain foreign
joint ventures) during the three years ended December 31, 1994 were made
primarily to improve production efficiency, reduce operating costs, expand
capacity at existing facilities and construct new facilities. For the nine
months ended September 30, 1995, Kaiser's capital expenditures were $53.2
million (of which $4.7 million was funded by the minority partners in certain
foreign joint ventures). Kaiser's capital expenditures were $70.0 million in
1994, compared to $67.7 million in 1993 and $114.4 million in 1992 (of which
$7.5 million, $9.4 million and $17.1 million were funded by the minority
partners in certain foreign joint ventures in 1994, 1993 and 1992,
respectively). Kaiser's capital expenditures (of which approximately 11% is
expected to be funded by the minority partners in certain foreign joint
ventures) are expected to be between $80.0 million and $130.0 million per year
in the 1995-1997 period, subject to necessary approvals, if required, from the
lenders under the 1994 Credit Agreement. A portion of the capital expenditures
are spent on environmental matters.

As described in Note 7 to the Company's Unaudited Consolidated Financial
Statements, Kaiser and KACC are subject to a wide variety 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 September 30, 1995, the balance of such
accruals, which is primarily included in other noncurrent liabilities, was
$39.7 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 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 million to $12.0 million for the years
1995 through 1999 and an aggregate of approximately $11.0 million 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 approximately $22.0 million. While
uncertainties are inherent in the final outcome of these environmental
matters, and it is presently impossible to determine the actual costs that
ultimately may be incurred, management currently believes that the resolution
of such uncertainties should not have a material adverse effect on the
Company's consolidated financial position or results of operations.

Additionally, 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
15 years. At October 31, 1995, the number of claims pending was approximately

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58,200, as compared to 31,700 at June 30, 1995 and 25,200 at December 31,
1994. In the first ten months of 1995, approximately 39,400 claims were
received and 6,400 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 October 31, 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, the current state of case law
related to asbestos claims, and the advice of counsel. Accordingly, an
asbestos-related cost accrual of $155.3 million, before consideration of
insurance recoveries, is included primarily in other noncurrent liabilities at
September 30, 1995. KACC estimates that annual future cash payments in
connection with such litigation will be approximately $11.0 million to $19.0
million for each of the years 1995 through 1999, and an aggregate of
approximately $90.8 million thereafter through 2008. While KACC does not
presently believe there is a reasonable basis for estimating such costs beyond
2008 and, accordingly, no accrual has been recorded for such costs which may
be incurred beyond 2008, 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. KACC believes, based on prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of counsel, that substantial recoveries
from the insurance carriers are probable. Accordingly, an estimated aggregate
insurance recovery of $134.7 million, determined on the same basis as the
asbestos-related cost accrual, is recorded primarily in long-term receivables
and other assets at September 30, 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 currently 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 or results of operations.

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 or results of operations.

FOREST PRODUCTS OPERATIONS

MGI conducts its operations primarily through its subsidiaries. Creditors of
MGI's subsidiaries have priority with respect to the assets and earnings of
such subsidiaries over the claims of the creditors of MGI, including the
holders of the MGI Notes. As of November 30, 1995, the indebtedness of the
subsidiaries reflected on MGI's Consolidated Balance Sheet was $586.1 million.
The indentures governing Pacific Lumber's 10 1/2% Senior Notes due 2003 (the
"Pacific Lumber Senior Notes") and Scotia Pacific's 7.95% Timber
Collateralized Notes due 2015 (the "Timber Notes") and Pacific Lumber's
Amended and Restated Revolving Credit Agreement contain various covenants
which, among other things, restrict transactions between Pacific Lumber and
its affiliates and the

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<PAGE>

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 so long as any Timber Notes are
outstanding. As of November 30, 1995, under the most restrictive of these
covenants, approximately $16.2 million of dividends could be paid by Pacific
Lumber. Pacific Lumber paid an aggregate of $24.5 million of dividends in 1994,
and paid $19.0 million of dividends during the nine months ended September 30,
1995.

As of November 30, 1995, MGI and its subsidiaries had consolidated working
capital of $120.1 million and long-term debt of $732.0 million (net of current
maturities and restricted cash deposited in a liquidity account for the benefit
of the holders of the Timber Notes). MGI anticipates that cash flows from
operations, together with existing cash, cash equivalents, marketable
securities and available sources of financing, will be sufficient to fund the
working capital and capital expenditures requirements of MGI and its respective
subsidiaries for the foreseeable future; however, due to its highly leveraged
condition, MGI is more sensitive than less leveraged companies to factors
affecting its operations, including governmental regulation affecting its
timber harvesting practices, increased competition from other lumber producers
or alternative building products and general economic conditions. See "--
Trends--Forest Products Operations."

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 flow 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
indenture governing the Timber Notes (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. See Note 4 to the Company's
Audited Consolidated Financial Statements for a description of the principal
payment requirements of the Timber Notes.

MGI expects that, consistent with Scotia Pacific's purposes and its need to
fund operating and capital expenses, substantially all of Scotia Pacific's
available cash will be periodically distributed to Pacific Lumber. 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. 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. Scotia Pacific paid $88.9 million and $58.3
million of dividends to Pacific Lumber during the year ended December 31, 1994
and the period from March 23, 1993 to December 31, 1993, respectively. During
the nine months ended September 30, 1995, Scotia Pacific paid $39.3 million of
cash dividends to Pacific Lumber.

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 Common Stock.
See Note 4 to the Company's Audited 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 Pacific Lumber Senior Notes and the Timber Notes.

As of November 30, 1995, MGI (excluding Pacific Lumber and its subsidiary
companies) had cash and marketable securities of approximately $55.6 million.
MGI believes, although there can be no assurance, that the

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<PAGE>

aggregate dividends that 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 MGI's 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 will 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.

On June 23, 1993, Pacific Lumber entered into a new Revolving Credit
Agreement with a bank which provides for borrowings of up to $30.0 million, of
which $15.0 million may be used for standby letters of credit. In November
1995, the Revolving Credit Agreement was amended and restated to extend its
maturity date to May 31, 1998 and provide for an additional $30.0 million of
available borrowings which is restricted to acquisition of timberlands. As of
November 30, 1995, $48.1 million of borrowings was available under the
Revolving Credit Agreement, of which $3.1 million was available for letters of
credit and $30.0 million was restricted to timberland acquisitions. No
borrowings were outstanding as of November 30, 1995, and letters of credit
outstanding amounted to $11.9 million. The Revolving Credit Agreement is
secured by Pacific Lumber's trade receivables and inventories and contains
covenants substantially similar to those contained in the indenture governing
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 Company's Audited 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.

During the nine months ended September 30, 1995, and the years ended
December 31, 1994, 1993 and 1992, Pacific Lumber's operating income plus
depletion and depreciation ("operating cash flow") amounted to $65.3 million,
$95.9 million, $76.6 million and $90.1 million, respectively, which exceeded
interest accrued on all of its indebtedness in those periods by $23.7 million,
$39.8 million, $17.4 million and $24.5 million, respectively. The Company
believes that Pacific Lumber's and Scotia Pacific's level of operating cash
flow and other available sources of financing will enable them to meet the
debt service requirements on the Pacific Lumber Senior Notes and the Timber
Notes, respectively.

Pacific Lumber's and Britt's capital expenditures were made to improve
production efficiency and reduce operating costs. Pacific Lumber's and Britt's
capital expenditures were $6.6 million, $11.3 million, $11.1 million and $8.7
million for the nine months ended September 30, 1995 and the years ended
December 31, 1994, 1993 and 1992, respectively. Capital expenditures for 1995
are expected to be $10 million and for the 1996-1997 period are estimated to
be between $5 million and $10 million per year (exclusive of timberland
purchases). Capital expenditures for timberlands during the nine months ended
September 30, 1995 and for each of the three years ended December 31, 1994
have not been significant; however, Pacific Lumber may purchase additional
timberlands from time to time as appropriate opportunities arise. Capital
expenditures attributable to the reconstruction of Pacific Lumber's commercial
facilities destroyed by the April 1992 earthquake were approximately $1.9
million for 1993 and $2.6 million for 1994, when construction was completed.
The Company anticipates that the funds necessary to finance Pacific Lumber's
and Britt's capital expenditures will be obtained through cash flows generated
by operations and other available sources of financing.

REAL ESTATE OPERATIONS

As of November 30, 1995, the Company's real estate subsidiaries had
approximately $22.8 million available for use under various credit agreements.
A substantial portion of the availability was attributable to the credit
availability pursuant to the loan agreement secured by the RTC Portfolio (the
"RTC Portfolio Loan"). See "Business--Real Estate Operations--Principal
Properties--Texas." The Company believes that the existing cash and credit
facilities of the Real Estate Subsidiaries are sufficient to fund the working
capital requirements of such Real Estate Subsidiaries for the foreseeable
future.

As of November 30, 1995, approximately $8.0 million was outstanding under
the RTC Portfolio Loan. The loan agreement governing the RTC Portfolio Loan
provides for additional borrowings of up to approximately $12.1 million on or
before March 31, 1996. The Company anticipates that such amount will be
borrowed if such

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date is not extended. 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. See Note 4 to the
Company's Audited Consolidated Financial Statements for additional information
regarding the terms of the RTC Portfolio Loan.

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 MCOP's eligible
receivables and real estate held for investment or development and sale, MCOP's
pledge of the common stock of certain of its subsidiaries, and 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 million which includes up to $8.5 million for standby letters of
credit. The available credit is subject to borrowing base limitation
calculations. As of November 30, 1995, $10.7 million of additional borrowings
was available under the MCOP Credit Agreement, and outstanding letters of
credit amounted to $3.0 million.

INVESTMENT IN SAM HOUSTON RACE PARK

In July 1993, the Company, through various subsidiaries, acquired various
interests in SHRP, Ltd., a Texas limited partnership, which owns and operates
Sam Houston 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 $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. (collectively, the "Debtors"), a wholly owned subsidiary of
the Company and SHRP, Ltd.'s largest limited partner, 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 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 approximately $5.9 million
(affiliates of the Company contributed $5.8 million). Additionally, an
affiliate of the Company contributed to SHRP, Ltd. an adjoining approximately
87 acre tract of land (having 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. The 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. On October 20, 1995, an
affiliate of the Company agreed to purchase, for approximately $7.3 million,
approximately $14.6 million of SHRP, Ltd.'s amended Senior Secured 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 is entitled. Such shares of common stock represent
approximately 39.0% of the shares of common stock of SHRP Equity, Inc. After
giving effect to this transaction, affiliates of the Company hold, directly or
indirectly, approximately 78.8% of the equity in the reorganized SHRP, Ltd.

TRENDS

ALUMINUM OPERATIONS--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 heavily

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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. Although Kaiser has attempted to lessen
the effect of the decline of primary aluminum and alumina prices during the
past several years through a variety of forward sales transactions and hedging
programs, earnings have been, and are expected to remain, sensitive to changes
in primary aluminum prices and revenues derived from the sale of alumina to
third parties and to KACC's hedging strategies.

As of December 21, 1995, KACC had sold approximately 73% and 45% of the
alumina available to it in excess of its projected internal smelting
requirements for 1996 and 1997, respectively. Alumina is sold at prices linked
to the future spot prices of primary aluminum and also at fixed prices under
certain contracts.

KACC enters into primary aluminum hedging transactions with off-balance
sheet risk 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. In respect of its 1996 anticipated net exposure, at November
30, 1995, KACC had purchased approximately 45,000 tons of primary aluminum at
fixed prices as a partial hedge against approximately 147,000 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.

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 September 30, 1995, KACC had net forward foreign exchange contracts
totaling approximately $125.9 million for the purchase of 174.0 million
Australian dollars through April 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 September 30, 1995, KACC had $2.5
million, compared with $50.5 million at December 31, 1994, on deposit with a
counterparty in respect of such contracts. These amounts are recorded in
prepaid expenses and other current assets.

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, water quality
and air and water pollution. Pacific Lumber does not expect that compliance
with such existing laws and regulations will have a material adverse effect on
its future operating results or financial position; however, 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 adversely affect the Company or its ability
to sell lumber, logs or timber. 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 U.S. Fish and Wildlife Service ("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 its proposed final designation
of critical habitat for the marbled murrelet, designating 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. It is impossible to determine
the potential adverse impact of such designation on the Company's consolidated
financial position or results of operations until such time as the

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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 consolidated financial position and results of operations. If Pacific
Lumber is unable to harvest or is severely limited in harvesting, Pacific
Lumber intends to seek full compensation from the appropriate governmental
agencies on the grounds that such restrictions constitute a regulatory taking.
See also "Business--Forest Products Operations--Regulatory and Environmental
Factors" for a description of sustained yield regulations, pending and proposed
legislative matters and other regulatory and legal challenges to Pacific
Lumber's timber harvesting plans and practices.

During the first five months of 1995, a combination of severe weather
conditions, seasonally low log inventories, the issuance of a temporary
restraining order ("TRO") (which required Pacific Lumber to cease all timber
harvesting operations on one of the few all-season harvest sites from which it
had been able to supplement its log inventories), and other regulatory delays
forced Pacific Lumber to curtail operations at one of its four sawmills and to
temporarily idle another sawmill from April 17 to May 2, 1995. During late May,
the weather improved and the TRO was lifted, thereby allowing Pacific Lumber to
resume operations on such harvesting site. Accordingly, Pacific Lumber has
since been able to secure an adequate supply of logs in order to resume normal
operations of its sawmills. Additional judicial or regulatory actions adverse
to Pacific Lumber, further regulatory delays and inclement weather in northern
California, independently or collectively, could again 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.

RECENT ACCOUNTING PRONOUNCEMENT

In March 1995, the Financial Accounting Standards Board 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. The
Company is required to adopt SFAS 121 no later than January 1, 1996. The
Company does not expect that the adoption of SFAS 121 will have a material
impact on the Company's consolidated financial statements.

POSSIBLE RECAPITALIZATION OF KAISER

Since July 1995, an independent committee of Kaiser's Board of Directors (the
"Kaiser Independent Committee") has been considering the desirability of a
recapitalization transaction whereby a separate class of lesser voting or non-
voting capital stock would be created for Kaiser and distributed to its
stockholders on a pro rata basis. The purpose of such recapitalization would
be, among other things, to provide Kaiser with a form of consideration to be
used in connection with future acquisitions and financings, if any, and to
lessen the likelihood of possible repurchase obligations with respect to
various issues of Kaiser indebtedness, which would occur in the event that
MAXXAM no longer beneficially owned a minimum percentage of Kaiser's voting
stock (defined to range from 30%-40% of such voting stock, depending upon
various circumstances). The Kaiser Independent Committee retained an investment
banking firm which is advising it in connection with a possible
recapitalization transaction and the various alternative structures and methods
by which it might be implemented. The Kaiser Independent Committee's advisor is
continuing to review the trading history and minority protection provisions of
other corporations with dual capital stock structures, and continuing to
consider the impact of any such transaction on (i) the aggregate market value
of Kaiser's stock, (ii) the ability of Kaiser's stockholders to dispose of
their shares, and (iii) the ability of Kaiser to raise equity capital. The
Kaiser Independent Committee is continuing to study this matter but there can
be no assurance that it will propose a recapitalization transaction or as to
its terms.

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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 7% of the world's
alumina production and for approximately 8% of the Western world's capacity
and production in 1994. 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 2.1 million tons in 1994 or
71% of 1994 production) and primary aluminum (approximately 224,000 tons in
1994 or 54% of 1994 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 People's Republic of China (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 will be constructed in
Nevada in 1996 as a demonstration production facility, and Kaiser expects
operational startup of the facility by the end of 1996. See "--Kaiser--
Research and Development."

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. 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.

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

30
<PAGE>

approximately two pounds of alumina mare 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 22% of consumption in
1993, 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 approximately 95% of the 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 in 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 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 29% of
aluminum consumption in the United States, Japan, and Western Europe in 1993,
automotive manufacturers use aluminum instead of steel or copper for an
increasing number of components, including radiators, wheels, and engines, in
order to meet more stringent environmental and fuel efficiency requirements
through vehicle weight reduction. 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. Kaiser believes
that consumption of aluminum in the construction industry will follow the
cyclical growth pattern of that industry.

SUPPLY

As of year-end 1994, Western world aluminum capacity from 108 smelting
facilities was approximately 16.3 million tons per year. Annual Western world
production of primary aluminum was curtailed during 1994 by approximately .7
million tons compared to 1993. Western world production of primary aluminum
for the first nine months of 1995 increased slightly compared to the first
nine months of 1994. Net exports of aluminum from the former Sino Soviet bloc
increased approximately threefold from 1990 levels during the period from 1991
through 1994 to approximately two 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. Through September 1995, LME
stocks of primary aluminum declined 2.1 million tons from this peak level. See
"--Recent Industry Trends."

Based upon information currently available, Kaiser believes that only
moderate additions will be made during 1995-1996 to Western world alumina and
primary aluminum production capacity. The increases in alumina capacity during
1995-1996 are expected to come from one new refinery and incremental
expansions of existing refineries. In addition, at the current time, Kaiser
believes that there is approximately 1.2 million tons of curtailed smelting
capacity that could be restarted by aluminum producers.

RECENT INDUSTRY TRENDS

Aluminum industry fundamentals improved significantly in 1994 as Western
world consumption of aluminum grew strongly, particularly in the United
States, and aluminum producers worldwide curtailed primary aluminum
production. In the first nine months of 1995, consumption of aluminum
continued to grow, but at a lower rate than in 1994, and production of primary
aluminum increased slightly. There was a significant decline of 1.1 million
tons in the inventories of primary aluminum on the LME during the first nine
months of 1995. 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.

31
<PAGE>

Western world demand for alumina, and the price of alumina, declined in 1994
in response to the curtailment of Western 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.
Slightly increased Western world production of primary aluminum, as well as
continued imports of Western world alumina by the CIS and the PRC, during the
first nine months of 1995 resulted in higher demand for Western world alumina
and significantly stronger spot alumina pricing.

United States shipments of fabricated aluminum products grew 11% in 1994, as
a result of significant growth in all major consuming sections--
transportation, packaging, construction and exports. In the first nine months
of 1995, United States shipments of fabricated aluminum products were 5%
higher than in the first nine months of 1994.

Overall, Kaiser believes that there will be relatively strong demand for
aluminum for the near future, barring an economic recession. This demand is
expected to come both from continued growth in the developed markets through
increased penetration of the automotive sector, and from general uses in
emerging markets.

KAISER

GENERAL

Kaiser is a direct subsidiary of the Company which, through its subsidiary,
KACC, operates in all principal aspects of the aluminum industry. 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 1994, KACC produced approximately 2,928,500 tons of alumina, of which
approximately 71% was sold to third parties, and produced 415,000 tons of
primary aluminum, of which approximately 54% was sold to third parties. KACC
is also a major domestic supplier of fabricated aluminum products. In 1994,
KACC shipped approximately 399,000 tons of fabricated aluminum products to
third parties, which accounted for approximately 6% of the total tonnage of
United States domestic shipments in 1994. A majority of KACC's fabricated
products are used by customers as components in the manufacture and assembly
of finished end-use products. See also Note 11 to the Company's Audited
Consolidated Financial Statements.

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

<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------
1995 1994 1993 1992
------------- ------- ------- -------
(IN THOUSANDS OF TONS)
<S> <C> <C> <C> <C>
ALUMINA:
Shipments to Third Parties.............. 1,494.6 2,086.7 1,997.5 2,001.3
Intracompany Transfers.................. 546.3 820.9 807.5 878.2
PRIMARY ALUMINUM:
Shipments to Third Parties.............. 184.5 224.0 242.5 355.4
Intracompany Transfers.................. 171.3 225.1 233.6 224.4
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties.............. 284.3 399.0 373.2 343.6
</TABLE>

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 heavily 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

32
<PAGE>

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," Note 10 to the Company's Audited Consolidated Financial Statements
and Note 8 to the Company's Unaudited Consolidated Financial Statements.

PRODUCTION OPERATIONS

Kaiser'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 1994. During 1994, KACC utilized approximately
80% of its bauxite production at its alumina refineries and the
remainder was either sold to third parties or tolled into alumina by a
third party. In addition, during 1994 KACC utilized approximately 29% of
its alumina for internal purposes and sold the remainder to third
parties. KACC's share of total Western world alumina capacity was
approximately 8% in 1994.

. 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. In 1994, KACC utilized
approximately 46% of its primary aluminum for internal purposes and sold
the remainder to third parties. KACC's share of total Western world
primary aluminum capacity was approximately 3% in 1994.

. Fabricated aluminum products are manufactured by three business units--
flat-rolled products, extruded products and forgings--which manufacture
a variety of fabricated products (including body, lid, and tab stock for
beverage containers, sheet and plate products, screw machine stock,
redraw rod, forging stock, truck wheels and hubs, air bag canisters, and
other forgings and extruded products) and operate plants located in
principal marketing areas of the United States and Canada. Substantially
all of the primary aluminum utilized in KACC's fabricated products
operations is obtained internally, with the balance of the metal
utilized in its fabricated products operations obtained from scrap metal
purchases.

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 /4//9/% of Kaiser Jamica Bauxite Company, it has the
right to receive all of such entity's output.
(/2/) Alpart bauxite is refined into alumina at the Alpart refinery.

33
<PAGE>

Bauxite mined in Jamaica by Kaiser Jamaica Bauxite Company ("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 has 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 holds 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 pursuant to long-term
tolling contracts. The stockholders, including KACC, purchase bauxite from
another QAL stockholder pursuant to long-term supply contracts. KACC has
contracted 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 ($85.7 million at September 30, 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 and trading intermediaries who resell raw materials to end-users. In
1994, KACC sold all of its bauxite to one customer, and sold alumina to 12
customers, the largest and top five of which accounted for approximately 19%
and 82% of such sales, respectively. Among alumina producers, the Company
believes KACC is now the world's second largest seller of alumina to third
parties. KACC's strategy is to sell a substantial portion of the bauxite and
alumina available to it in excess of its internal refining and smelting
requirements pursuant to multi-year sales contracts.

PRIMARY ALUMINUM PRODUCTS

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

<TABLE>
<CAPTION>
FIRST NINE
ANNUAL RATED TOTAL MONTHS
CAPACITY ANNUAL 1994 1995
COMPANY AVAILABLE TO RATED OPERATING OPERATING
LOCATION FACILITY OWNERSHIP THE COMPANY CAPACITY RATE RATE
- -------- -------- --------- ------------ -------- --------- ----------
(TONS) (TONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Domestic
Washington............ Mead 100% 200,000 200,000 80% 78%
Washington............ Tacoma 100% 73,000 73,000 76% 77%
------- -------
Subtotal............ 273,000 273,000
======= =======
International
Ghana................. Valco 90% 180,000 200,000 70% 68%
Wales, United
Kingdom.............. Anglesey 49% 55,000 112,000 113% 117%
------- -------
Subtotal............ 235,000 312,000
------- -------
Total............. 508,000 585,000
======= =======
</TABLE>

34
<PAGE>

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, almost all of which is used at KACC's Trentwood
fabricating facility and the balance of which is 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 Kaiser's
facilities in the Pacific Northwest were successfully restructured, which the
Company 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. From 1981 until 1995, electric power for
KACC's Mead and Tacoma smelters in Washington 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 direct service industrial customers (the "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 Northwest facilities for a five year term beginning
October 1, 1995. KACC is receiving power from the WWP 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, and agreements in principle for the supply of
substantially all of such power through March 1997 have been reached. However,
definitive contracts for the purchase of such power have not 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 "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 5-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, intend to file motions to intervene in the two lawsuits.

In 1995, KACC also entered into agreements with the BPA and with the WWP,
with terms ending in 2001, pursuant to 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. In
December 1995, certain of the DSIs, including KACC, filed motions to intervene
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 its Mead smelter and one at its
Tacoma smelter) 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

35
<PAGE>

contract with the BPA, for a term ending September 30, 1996, in connection with
the restart of idled capacity at its Mead smelter. The restart began in late
October 1995 and the Mead smelter has returned to full production.

KACC manages, and holds 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 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 during 1996.

KACC has 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 technology in all of
its smelters. 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."

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 1994, 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 68% of such sales, respectively. 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, both domestic and foreign. In
1994, seven domestic beverage container manufacturers constituted the leading
customers for KACC's fabricated products and accounted for approximately 17% of
KACC's sales revenue.

KACC's fabricated products compete with those of numerous domestic and
foreign producers and with products made with 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
refocused its fabricated products operations to concentrate 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

36
<PAGE>

KACC's largest fabricating plant and accounted for substantially more than one-
half of KACC's 1994 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. KACC announced in
October 1993 that it was restructuring its flat-rolled products operation at
its Trentwood plant to reduce that facility's annual operating costs. The
Trentwood restructuring is expected to result in annual cost savings of at
least $50.0 million after full implementation. The restructuring was
successfully completed in 1995.

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 KACC's 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 1994, the flat-rolled products business unit had 25 foreign and domestic
and foreign can stock customers, the majority of which were beverage can
manufacturers (including five of the six major domestic beverage can
manufacturers) and the balance of which were brewers. The largest and top five
of such customers accounted for approximately 26% and 51%, respectively, of the
business unit's revenue. In 1994, the business unit shipped products to over
200 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 aluminum and magnesium; rod and bar facilities in Newark, Ohio; a
facility in Jackson, Tennessee, which produces 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
1994, the extruded products business unit had over 950 customers for its
products, the largest and top five of which accounted for approximately 6% and
20%, respectively, of its revenue. Sales are made directly from plants as well
as marketing locations across the United States.

Forgings. The forgings business unit operates forging facilities at Erie,
Pennsylvania; Oxnard, California; and Greenwood, South Carolina; and a machine
shop at Greenwood, South Carolina. The forgings 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 aluminum make it particularly well-suited for automotive
applications.

In 1994, the forgings business unit had over 300 customers for its products,
the largest and top five of which accounted for approximately 30% and 69%,
respectively, of the forgings business unit's revenue. The forgings business
unit's headquarters is located in Erie, Pennsylvania, and there is a sales and
engineering office located in Detroit, Michigan.

37
<PAGE>

COMPETITION

Aluminum products compete 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
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 KACC's financial
condition or results of operations.

RESEARCH AND DEVELOPMENT

KACC conducts research and development activities principally at four
facilities: the Center for Technology ("CFT") in Pleasanton, California; the
Primary Aluminum Products Division Technology Center ("DTC") adjacent to the
Mead smelter in Washington; the Alumina Development Laboratory ("ADL") at the
Gramercy, Louisiana refinery, which supports Kaiser Alumina Technical Services
("KATS"); and the Automotive Product Development Office located near Detroit,
Michigan. Net expenditures for KACC-sponsored research and development
activities were $16.7 million in 1994, $18.5 million in 1993, and $13.5 million
in 1992. KACC's research staff totaled 166 at December 31, 1994. KACC estimates
that research and development net expenditures will be in the range of
approximately $17.0 to $19.0 million in 1995.

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.
A significant effort is directed at the automotive market. One project directed
at automotive sheet development is carried out cooperatively with Furukawa
Electric Co., Ltd. of Japan, Pechiney Rhenalu of France, and Kawasaki Steel
Corporation of Japan. The largest and most notable single project being
developed at CFT is a micromill process for producing can body sheet. A pilot
facility has been constructed and operated at CFT. The first micromill will be
constructed in Nevada in 1996 as a demonstration production facility, and KACC
expects operational startup of the facility at the end of 1996.

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, including ADL, provides improved alumina process technology to KACC
facilities and technical support to new business ventures in cooperation with
KACC's international business development group. The Automotive Product
Development Office is a sales and application engineering facility located near
Detroit-area car makers and works with customers, CFT and plant personnel to
create new automotive component designs and improve existing products.

KACC is actively engaged in efforts to license its technology and sell
technical and managerial assistance to other producers worldwide. Pursuant to
various arrangements, KACC's technology has been installed in alumina
refineries, aluminum smelters and rolling mills located in the United States,
Jamaica, Sweden, Germany,

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<PAGE>

Russia, India, Australia, Korea, New Zealand, Ghana, Europe, and the United
Kingdom. KACC's technology sales and revenue from technical assistance to third
parties were $10.0 million in 1994, $12.8 million in 1993, and $14.1 million in
1992.

KACC has entered into agreements with respect to the Krasnoyarsk smelter
located in Russia pursuant to 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 located in Russia and the
Korba smelter of the Bharat Aluminum Co. Ltd., located in India, pursuant to
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, Kaiser 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. Kaiser intends to use its technical skills,
together with capital investments, to form joint ventures or acquire equity in
facilities in such countries.

In 1995, Kaiser Yellow River Investment Limited ("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 (collectively, 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 Yellow
River Aluminum Industry Company Limited, a Sino-foreign joint equity enterprise
organized under PRC law (the "Joint Venture").

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 produces approximately 55,000 tons of aluminum ingots
per year. The smelter at Lianhai produces approximately 30,000 tons of aluminum
ingots per year. LAS's capital contribution to the Joint Venture consisted
primarily of the Lanzhou and Lianhai smelters.

The Joint Venture Agreements include provisions for KYRIL to contribute up to
$59.7 million to the Joint Venture in exchange for up to a 49% interest in the
Joint Venture (the "Capital Contribution") and contemplate that such capital
may be used to expand LAS's production capacity from 85,000 to 115,000 metric
tons, construct a dry Soderberg paste plant, install and upgrade pollution
control equipment, and provide for general corporate purposes, including
working capital. KYRIL contributed $9.0 million as a contribution to the
capital of 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.
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.

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.

EMPLOYEES

During 1994, KACC employed an average of 9,744 persons, compared with an
average of approximately 10,200 employees in 1993, and 10,100 employees in
1992. At September 30, 1995, KACC's work force was

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<PAGE>

approximately 9,600, including a domestic work force of approximately 5,900, of
whom approximately 4,000 were paid at an hourly rate. Most hourly paid domestic
employees are covered by collective bargaining agreements with various labor
unions. Approximately 72% of such employees are covered by a master agreement
(the "Labor Contract") with the USWA. 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. 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.

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, and will be raised an
additional amount effective November 6, 1995, and 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, if a
profitability test is satisfied, KACC will acquire during 1996 or 1997 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. 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 ("Environmental Laws"). Such
laws are periodically amended and from time to time 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 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 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. In certain instances, KACC
may be exposed to joint and several liability for those costs or damages to
natural resources, which could effectively expose KACC to liability for all
costs associated with any such remedial action irrespective of its degree of
culpability for the environmental damages related thereto. 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
indemnified the purchasers of assets 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 consolidated financial position or results of operations.

Environmental capital spending was $11.9 million in 1994, $12.6 million in
1993, and $13.1 million in 1992. Annual operating costs for pollution control,
not including corporate overhead or depreciation, were

40
<PAGE>

approximately $23.1 million in 1994, $22.4 million in 1993, and $21.6 million
in 1992. Legislative, regulatory, and economic uncertainties make it difficult
to project future spending for these purposes. However, Kaiser currently
anticipates that in the 1995-1996 period, environmental capital spending will
be within the range of approximately $15.0-$18.0 million per year, and
operating costs for pollution control will be within the range of $25.0-$27.0
million per year. In addition, $3.6 million in cash expenditures in 1994, $7.2
million in 1993, and $9.6 million in 1992 were charged to previously
established reserves relating to environmental costs. Approximately $4.0
million is expected to be charged to such reserves in 1995.

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 7 to the Company's Unaudited Consolidated Financial
Statements.

PROPERTIES

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. Kaiser
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 1994 Credit Agreement are secured by, among
other things, mortgages on KACC's major domestic plants (other than the
Gramercy alumina plant). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Financial Condition and
Investing and Financing Activities--Aluminum Operations."

FOREST PRODUCTS OPERATIONS

GENERAL

The Company engages in forest products operations through MGI and MGI's
wholly owned subsidiaries, Pacific Lumber and 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.

PACIFIC LUMBER OPERATIONS

Timberlands

Pacific Lumber owns and manages approximately 189,000 acres of commercial
timberlands in Humboldt County in northern California. 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 significantly reduce harvesting costs and facilitate
Pacific Lumber's 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.

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<PAGE>

Approximately 179,000 acres of Pacific Lumber's timberlands are owned by
Scotia Pacific (the "SPHC 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 SPHC Timberlands consisting
substantially of virgin old growth redwood and virgin old growth Douglas-fir
timber located on numerous small parcels throughout the SPHC Timberlands.
Substantially all of Scotia Pacific's assets, including the SPHC Timberlands,
are pledged as security for the Timber Notes. Pacific Lumber harvests and
purchases from Scotia Pacific all or substantially all of the logs harvested
from the SPHC Timberlands. See"--Relationships among Pacific Lumber, Scotia
Pacific and Britt Lumber" 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 selectively harvested in the
past.

Pacific Lumber has engaged in extensive efforts, at relatively low cost, to
supplement the natural regeneration of timber and increase the amount of
timber on its timberlands. Regeneration of redwood timber generally is
accomplished through the natural growth of 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 generation by planting redwood seedlings. Douglas-
fir timber grown on Pacific Lumber's timberlands is regenerated almost
entirely by planting seedlings. During the 1994-1995 planting season (December
through March), Pacific Lumber planted approximately 676,000 redwood and
Douglas-fir seedlings.

Harvesting Practices

The ability of Pacific Lumber to sell logs or lumber products depends, in
part, upon its ability to obtain regulatory approval of timber harvesting
plans ("THPs"). THPs are required to be filed with the California Department
of Forestry (the "CDF") prior to the harvesting of timber and are designed to
comply with existing environmental laws and regulations. The CDF's evaluation
of proposed THPs incorporates review and analysis of such THPs provided 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. The method of
harvesting as set forth in a THP is chosen from among a number of accepted
methods based upon suitability to the particular site conditions. 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, Pacific
Lumber's foresters are able to develop detailed THPs. 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 principally harvests trees through selective harvesting,
which harvests only a portion of the trees in a given area, as opposed to
clearcutting, which harvests an entire area of trees in one logging operation.
Selective harvesting generally accounts for over 90% (by volume on a net board
foot basis) of Pacific Lumber's timber harvest in any given year. Harvesting
by clearcutting is used only when selective harvesting methods are impractical
due to unique conditions. Selective harvesting allows the remaining trees to
obtain more light, nutrients and water thereby promoting faster growth rates.
Due to the size of its timberlands and conservative harvesting practices,
Pacific Lumber has historically conducted harvesting operations on
approximately 5% of its timberlands in any given year.

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<PAGE>

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 259 million board feet, with approximately 286, 228 and 264
million board feet produced in 1994, 1993 and 1992, respectively. During the
first nine months of 1995, Pacific Lumber produced approximately 209 million
board feet of lumber. 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 lumber by cutting out knot-
free pieces and reassembling them into longer or wider pieces in Pacific
Lumber's 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 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 Pacific Lumber's 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 owned by Pacific Lumber
where several of its manufacturing facilities are located. Pacific Lumber
sells surplus power to Pacific Gas and Electric Company. In 1994 and the first
nine months of 1995, the sale of surplus power to Pacific Gas and Electric
Company accounted for approximately 1% of Pacific Lumber's total revenues.

Products

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1995 YEAR ENDED DECEMBER 31, 1994
------------------------------------------ ----------------------------
% OF TOTAL % OF TOTAL % OF
LUMBER % OF TOTAL LUMBER TOTAL % OF
PRODUCTION LUMBER % OF TOTAL PRODUCTION LUMBER TOTAL
VOLUME REVENUES REVENUES VOLUME REVENUES REVENUES
PRODUCT ------------- ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Upper grade redwood
lumber................. 17% 39% 32% 17% 41% 33%
Common grade redwood
lumber................. 53% 40% 32% 58% 36% 30%
------------ ------------ ----------- ---- ---- ---
Total redwood lumber.. 70% 79% 64% 75% 77% 63%
------------ ------------ ----------- ---- ---- ---
Upper grade Douglas-fir
lumber................. 3% 5% 4% 3% 7% 5%
Common grade Douglas-fir
lumber................. 23% 13% 10% 20% 13% 10%
------------ ------------ ----------- ---- ---- ---
Total Douglas-fir
lumber............... 26% 18% 14% 23% 20% 15%
------------ ------------ ----------- ---- ---- ---
Other grades of lumber.. 4% 3% 4% 2% 3% 4%
------------ ------------ ----------- ---- ---- ---
Total lumber.......... 100% 100% 82% 100% 100% 82%
============ ============ =========== ==== ==== ===
Logs.................... 7% 9%
=========== ===
Hardwood chips.......... 5% 4%
Softwood chips.......... 5% 4%
----------- ---
Total wood chips...... 10% 8%
=========== ===
</TABLE>

Lumber. Pacific Lumber primarily produces and markets lumber. In 1994 and
the first nine months of 1995, Pacific Lumber sold approximately 272 and 203
million board feet of lumber, respectively. Lumber

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<PAGE>

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 paint and other finishes, dimensional stability and innate
resistance to decay, insects and chemicals. 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. 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.

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 among Pacific Lumber, Scotia Pacific and Britt Lumber" 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 the Company. See also "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Forest Products Operations--Operating Income" for a description of
1993 log purchases by Pacific Lumber due to inclement weather conditions.

Wood Chips. In 1990, Pacific Lumber installed a whole-log chipper to produce
wood chips from hardwood trees which were previously left as waste. These
chips primarily are sold to third parties 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.

Backlog and Seasonality

Pacific Lumber's backlog of sales orders at December 31, 1994 and 1993 was
approximately $11.9 million and $16.0 million, respectively, the substantial
portion of which was delivered in the first quarter of the succeeding fiscal
year. Pacific Lumber's backlog of sales orders at November 30, 1995 was $12.7
million. 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.

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 55% of these sales in 1994. Common grades of Douglas-fir lumber

44
<PAGE>

are sold primarily in California. In 1994, 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 lumber revenues in 1994.
Pacific Lumber markets its products through its own sales staff which focuses
primarily on domestic sales.

Competition

Pacific Lumber's lumber is sold in highly competitive markets. Competition
is generally based upon a combination of price, service 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 December 1, 1995, Pacific Lumber had approximately 1,500 employees.

Relationships Among Pacific Lumber, Scotia Pacific and Britt Lumber

In March 1993, Pacific Lumber consummated its offering of $235 million of
the Pacific Lumber 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 a
variety of operational, management and related services with respect to
timberlands containing timber of Scotia Pacific ("SPHC Timber") not performed
by Scotia Pacific's own employees. Pursuant to the Additional Services
Agreement, Scotia Pacific provides Pacific Lumber with a variety of services,
including assisting Pacific Lumber to operate, maintain and harvest its own
timber properties.

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 SPHC 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 a price based upon a schedule
published periodically by the California State Board of Equalization. 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 SPHC Timber covered by approved THPs.
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 another 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 SPHC Timberlands.

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<PAGE>

Pacific Lumber also entered into an agreement with Britt 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 California State Board of Equalization 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.

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 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 (the "ESA")
and the 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, California's water quality statutes require,
in part, that Pacific Lumber's operations be conducted so as to reasonably
protect the water quality of nearby rivers and streams. Pacific Lumber does
not expect that compliance with such existing laws and regulations will have a
material adverse effect on its future operating results or financial position;
however, 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 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.

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, additional mitigation measures into
its THPs to protect and maintain habitat for the marbled murrelet on its
timberlands. The California Department of Fish and Game (the "CDFG") requires
Pacific Lumber to conduct pre-harvest marbled murrelet surveys to provide
certain other 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,

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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 could restrict
or prevent Pacific Lumber from conducting certain of its harvesting
operations.

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 its proposed final designation of critical habitat for the
marbled murrelet (the "Proposed Designation"), designating 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. It is impossible to determine
the potential adverse impact of such designation on the Company's 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 consolidated financial condition and results of operations. If
Pacific Lumber is unable to harvest or is severely limited in harvesting,
Pacific Lumber intends to seek full compensation from the appropriate
governmental agencies on the grounds that such restrictions constitute a
regulatory taking.

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

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

Various groups and individuals have filed objections with the CDF regarding
the CDF's actions and rulings with respect to certain of Pacific Lumber's
THPs, and the Company 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, litigation with respect to Pacific Lumber's THPs relating to
young growth and residual old growth timber has been limited; however, no
assurance can be given as to the extent of such litigation in the future. The
Company believes that environmentally focused challenges to Pacific Lumber's
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
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 operating results or consolidated financial position of
Pacific Lumber.

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

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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"). 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.

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 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 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 this
bill and the other 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 operating results
or consolidated financial position of Pacific Lumber. 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, 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 operating results or consolidated financial
position of Pacific Lumber.

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 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
14 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" 1" x 6" fence stock in six
and eight foot lengths, 4" x 4" 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
Among Pacific Lumber, Scotia Pacific and Britt Lumber" for a description of
Britt's log purchases from Pacific Lumber.

Marketing

In 1994, Britt sold approximately 79 million board feet of lumber products
to approximately 83 different customers. Over one-half of its sales were in
northern California. The remainder of its 1994 sales were in southern
California, Arizona, Colorado, Hawaii, Nevada, Oregon and Washington. The
largest and top five of such customers accounted for approximately 35% and
81%, respectively, of such 1994 sales. During the first nine months of 1995,
Britt sold approximately 61 million board feet of lumber products. Britt
markets its products through its own sales person to a variety of customers,
including distribution centers, industrial remanufacturers, wholesalers and
retailers.

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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 on a yearly basis. Britt's (single shift) mill capacity,
assuming 40 production hours per week, is estimated at 40.3 million board feet
of fencing products per year. As of December 1, 1995, Britt employed
approximately 100 people.

REAL ESTATE OPERATIONS

The Company, principally through its wholly owned subsidiaries, is engaged
in the business of residential and commercial real estate investment and
development, primarily in Arizona, California, Texas and Puerto Rico. The
Company had approximately $21.3 million of outstanding receivables at November
30, 1995, from the financing of real estate sales in its developments and may
continue to finance such real estate sales in the future. As of November 30,
1995, these receivables had a weighted average interest rate of approximately
9.5%, a weighted average maturity of less than three years and average
borrower equity of approximately 45%. As of November 30, 1995, the Company
also held $8.5 million of other receivables as a portion of the RTC Portfolio.

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,
consisting 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). Substantially all of the real property was
located in Texas, with the largest concentration in the vicinity of San
Antonio, Houston, Austin and Dallas. From 1992 to November 30, 1995, an
aggregate of approximately $28.7 million in loans (which represented nine
loans) were sold or paid off and thirty properties were sold for aggregate
consideration of approximately $148.7 million. These transactions resulted in
aggregate gains of $73.0 million. As of November 30, 1995, the Company held
six loans (including two resulting from property sales) and twelve properties
(including six acquired via foreclosures), which had an aggregate net book
value of $36.2 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 ("Palmas"), a resort, time-sharing and land
development and sales business, located on the southeastern coast of Puerto
Rico near Humacao, was acquired in 1984. Palmas 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 1,044
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 by their owners 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. In 1994, Palmas
sold approximately twenty-two acres of undeveloped land, twenty-two
condominium units, three estate lots and fifty time-share intervals. During
the first eleven months of 1995, Palmas sold 60 condominium units and 55 time-
share intervals. The sale of condominium units included the bulk sale on July
14, 1995 of 33 furnished condominium units for approximately $8.4 million,
subject to certain leaseback arrangements. As of November 30, 1995, the net
book value of Palmas' assets was approximately $21.7 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

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Scottsdale, Arizona. As of November 30, 1995, Fountain Hills had approximately
4,012 acres of undeveloped residential land, 97 developed commercial and
industrial lots, 134 acres of undeveloped commercial and industrial land and
90 developed residential lots available for sale. The population of Fountain
Hills is approximately 13,000. The Company is planning the development of
certain of its remaining acreage. 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. In 1994, approximately 181 lots and 161 acres were sold
which resulted in aggregate sales proceeds of approximately $14.3 million.
During the first eleven months of 1995, approximately 87 residential lots, 18
commercial parcels and 96 acres were sold for an aggregate of $9.8 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 million. The other parcel was
developed 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 twenty-three 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, 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 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

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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 resort
operations of Palmas are seasonal and are subject to, among other things, the
condition of the United States economy and tourism business in Puerto Rico.

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 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 December 1, 1995, the Company's real estate operations had
approximately 720 employees, of which approximately 640 are 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.

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 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, 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 Debtors's plan of reorganization
and on October 6, 1995, the transactions called for by the plan of
reorganization were completed.

The New SHRP Investor Group made a capital contribution of cash in the
aggregate amount of approximately $5.9 million (affiliates of the Company
contributed $5.8 million). Additionally, an affiliate of the Company
contributed to SHRP, Ltd., an adjoining approximately 87 acre tract of land
(having a fair market value of $2.3 million). SHRP Managing General Partner,
the new managing general partner of SHRP, Ltd. and a wholly owned subsidiary
of the Company, 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. On October 20, 1995, an affiliate of the Company agreed
to purchase, for approximately $7.3 million, approximately $14.6 million of
SHRP, Ltd.'s amended Senior Secured 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 is
entitled. Such shares of common stock represent approximately 39.0% of the
shares of common stock of SHRP Equity, Inc. After giving effect to this
transaction, affiliates of the Company hold, directly or indirectly,
approximately 78.8% of the equity in the reorganized SHRP, Ltd.

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RACING OPERATIONS AND RACE PARK FACILITIES

The Race Park offers pari-mutual 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. In addition to revenues from wagering and
simulcasting, the Race Park derives revenues from admission fees, food
services, club memberships, luxury suites, advertising sales and other
sources. The Race Park is located on approximately 215 acres of land in
northwest Harris County approximately 18 miles from the Houston central
business district and approximately 15 miles from Houston Intercontinental
Airport.

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.

MARKETING AND COMPETITION

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 live and televised
professional and collegiate sporting events that are available 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.

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 consolidated
financial position or results of operations.

USAT MATTERS

In October 1994, the Company learned that the United States Department of
Treasury's Office of Thrift Supervision ("OTS") had commenced an investigation
into United Financial Group, Inc. ("UFG") and the insolvency of its wholly
owned subsidiary, United Savings Association of Texas ("USAT"). 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. The OTS has indicated that
its investigation includes certain present and former officers and directors
of the Company, some of whom have also served as an officer or director of or
had some other relationship with UFG or USAT.

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On December 26, 1995, the 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 USAT. 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.
("Drexel"). The OTS, among other things, seeks unspecified damages in excess
of $138 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. Unless otherwise arranged, MAXXAM has 20 days to formally
respond to the Notice and 60 days until a hearing before an administrative law
judge. See "Certain Transactions--Litigation Matters" for a description of the
FDIC action in which the Company has filed a motion to intervene and
conditioned it on the Court joining the OTS to this action. It is impossible
to predict the ultimate outcome of the foregoing matter or its potential
impact on the Company's financial position or results of operation.

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").

In January 1995, an action entitled U.S., ex rel., Martel v. Hurwitz, et al.
was filed in the U.S. District Court for the Northern District of California
(No. C950322) against Mr. Hurwitz, MGI, Federated, UFG and a former director
of the Company. The action was unsealed in September 1995. In October 1995,
plaintiff filed an amended complaint which adds the Company as a defendant.
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. Plaintiff seeks,
among other things, that the Court impose a constructive trust upon the fruits
of the alleged improper use of USAT funds. This action is purportedly brought
by plaintiff on behalf of the U.S. government; however, it is the Company's
understanding that the U.S. government has declined to participate in the
suit.

KAISER 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 million as of
February 9, 1993, and alleges that response costs will continue to be incurred
in the future.

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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 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 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, and these respondents are proceeding with work required under the
Administrative Orders dated June 22, 1994.

Based upon the information presently available to it, Kaiser is unable to
determine whether KACC has any liability with respect to any of the Sites or,
if there is any liability, the amount thereof. Two government witnesses have
testified that KACC acquired pesticide products from the operator of the
formulation site over a two to three year period. KACC has been unable to
confirm the accuracy of this testimony.

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.

In the course of the litigation, questions arose as to whether the observers
who recorded the alleged exceedances were qualified under the SIP to read
opacity. In July 1990, KACC and the DOJ agreed to a voluntary dismissal of the
action. At that time, however, the EPA had arranged for increased surveillance
of the Trentwood facility by consultants and the EPA's personnel. From May
1990 through May 1991, these observers recorded approximately 130 alleged
exceedances of the SIP opacity rule. DOJ representatives have stated their
intent to file a second lawsuit against KACC based on the opacity observations
recorded during that period.

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 on October 31, 1995, was filed for
approval in United States District Court for the Eastern District of
Washington. If approved, this Consent Decree would settle the underlying
disputes and require KACC to (i) pay a $.5 million civil penalty, (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. The Company 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.

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<PAGE>

CATELLUS DEVELOPMENT CORPORATION V. KAISER ALUMINUM & CHEMICAL CORPORATION
AND JAMES L. FERRY & SON INC.

In January 1991, the City of Richmond, et al. filed a Second Amended
Complaint for Damages and Declaratory Relief against the United States,
Catellus Development Corporation ("Catellus") and other 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 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 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 35 percent 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 final Judgment on those claims concluding that 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 affected
property and certain fees and costs associated specifically with the claim by
Catellus against KACC. Entry of judgment is pending.

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 believes that the total amount that could
be reasonably allocated to KACC is substantially less than the volume computed
by the PRPs' consultant. 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 $500,000.

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
October 31, 1995, the number of claims pending was approximately 58,200, as
compared to 31,700 at June 30, 1995 and 25,200 at December 31, 1994. In the
first ten months of 1995, approximately 39,400 claims were received and 6,400
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

55
<PAGE>

asbestos-related claims that were filed and served on KACC between June 30,
1995, and October 31, 1995, were filed in Texas prior to September 1, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Financial Condition and Investing and Financing Activities--
Aluminum Operations"for additional information. See also Note 7 to the
Company's Unaudited Consolidated Financial Statements under the heading
"Asbestos Contingencies."

OTHER KAISER PROCEEDINGS

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, certain current and former
directors and officers of the Company, Pacific Lumber and MGI, and First
Executive Life Insurance Company ("First Executive") (subsequently dismissed as
a defendant) in the United States District Court, Northern District of
California, entitled Kayes, et al. v. Pacific Lumber Company, et al. (No. C89-
3500) ("Kayes"). 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 First Executive
and selecting First Executive 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) ("Miller") on April 26, 1993; the Miller
case was dismissed on May 14, 1993. These dismissals were appealed. 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 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. A status conference is scheduled for January 19, 1996 in this
case and the DOL civil action (see below).

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) ("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.

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<PAGE>

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.

OTHER LITIGATION MATTERS

For information regarding certain derivative and other actions relating to
the Company (i.e., the Zero Coupon Note Litigation and the Rancho Mirage
Litigation), see "Certain Transactions".

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<PAGE>

MANAGEMENT

The following table sets forth certain information, as of December 1, 1995,
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, and from December 1992 until February 1993, he
served as Chairman of the Board 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 Sallie Mae Funding Corporation, which is a
subsidiary of the Student Loan Marketing Association.

John T. La Duc. Mr. La Duc, age 52, 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. From January 1993 until April 1993, Mr. La Duc
served as Treasurer of Kaiser and KACC, having previously served as Treasurer
of Kaiser and KACC from September 1987 to May 1990 and January 1990,
respectively. 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

58
<PAGE>

of MGI and Pacific Lumber since May 1989, and of Scotia Pacific since November
1992, and has served as a 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. He also
currently serves as Chairman of the Board of the National Environmental
Development Association, and as a director, Secretary and Treasurer of Global
Climate Coalition, both of which are nonprofit organizations.

Diane M. Dudley. Ms. Dudley, age 54, 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 58, 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 48, 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.

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<PAGE>

Ezra G. Levin. Mr. Levin, age 61, 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 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

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
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 November 14, 1995, defendant 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 (see "Legal Proceedings--USAT Matters"). The Company's
bylaws provide for indemnification of its officers and directors to the
fullest extent permitted by Delaware law, which could include items other than
defense costs under certain circumstances. The Company has an obligation 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. No claim for, or
determination regarding the appropriateness of, such indemnification in this
instance has been made. It is impossible to predict the ultimate outcome of
the foregoing matter or its potential impact on the Company's financial
position or results of operations. See "Legal Proceedings--USAT Matters" for a
description of a related proceeding which has been initiated by the OTS
against Mr. Hurwitz, the Company and others.

In April 1989, an action was filed against the Company, MGI, MAXXAM
Properties Inc., a wholly owned subsidiary of MGI ("MPI"), 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. Charles Hurwitz (Chairman of the
Board of the Company, MGI and MPI), 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 MAXXAM 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 MAXXAM 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

60
<PAGE>

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.

In May 1991, a derivative action entitled Progressive United Corporation v.
MAXXAM Inc., et al. (No. 12111) ("Progressive United") was filed in the Court
of Chancery, State of Delaware against the Company, Federated, MCOP and the
Company's Board of Directors. 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
case, were filed in 1991 and 1992 in Delaware Chancery Court challenging the
Mirada transactions: NL Industries, et al. v. MAXXAM Inc., et al. (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; 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. 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 has
been set for trial commencing January 29, 1996. With respect to the similar NL
Industries Inc., et al., v. Federated Development Co., et. al. action, the
parties have agreed to stay this action in light of the In re MAXXAM
Inc./Federated Development Shareholders Litigation.

OTHER MATTERS

In May 1995, MCOP, the common stock of which is owned by the Company and the
preferred stock of which is owned by a wholly owned subsidiary of Federated,
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 1994, 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
$174,000 for 1994 and approximately $160,000 in respect of the first nine
months of 1995. During 1994, Federated and the Company shared office space
leased by the Company. The obligations of Federated

61
<PAGE>

relating to 1994 under such sharing arrangement amounted to approximately
$28,000 and are approximately $6,000 in respect of the first nine months of
1995. 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, 1994 of approximately $71,000 and $124,000, respectively, and
$61,000 and $150,000, respectively, for the first nine months of 1995.

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 $3,754,000 for fees and $404,000 for
disbursements and other charges with respect to legal services rendered by
such firm during 1994 for the Company and its subsidiaries. For the first nine
months of 1995, billings by such firm for fees and disbursements were
approximately $667,000 and $51,000, respectively.

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.; 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 on March 8, 1995, 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 further provides that installments of $18,750 to be
paid by Mr. Pierno on each of December 31, 1995, 1996 and 1997, with any
remaining principal balance, together with accrued interest, 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

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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.

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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. 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 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.

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(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.

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(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.

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)

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)

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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 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; (5) certain events of bankruptcy, insolvency or reorganization with
respect to the Company; or (6) any other Event of Default provided with
respect to Securities of that series pursuant to the Indenture. (Section 5.01)

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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. (Section 5.06) 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)

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 corporation or convey, transfer or lease all or substantially
all its assets to any Person, unless (1) the corporation 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 corporation organized
and existing under the laws of the United States or any State or the District
of Columbia and expressly

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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 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

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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 and 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 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

70
<PAGE>

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 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 (with respect to (i) and (ii)) 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 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

71
<PAGE>

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 Borough of Manhattan, the City and
State of New York, 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)

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

72
<PAGE>

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.

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

73
<PAGE>

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 Statement, 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.

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

74
<PAGE>

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.

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.

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<PAGE>

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 unconsolidated schedule for the
years ended December 31, 1994, 1993 and 1992 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.

76
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AUDITED 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, 1994 and 1993................ F-3
Consolidated Statement of Operations for the Years Ended December 31,
1994, 1993 and 1992.................................................... F-4
Consolidated Statement of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992.................................................... F-5
Consolidated Statement of Stockholder's Equity (Deficit) for the Years
Ended December 31, 1994, 1993 and 1992................................. F-6
Notes to Consolidated Financial Statements.............................. F-7

UNAUDITED QUARTERLY FINANCIAL INFORMATION

MAXXAM INC. AND SUBSIDIARY COMPANIES
Consolidated Balance Sheet at September 30, 1995........................ F-35
Consolidated Statement of Operations for the Nine Months Ended September
30, 1995 and 1994...................................................... F-36
Consolidated Statement of Cash Flows for the Nine Months Ended September
30, 1995 and 1994...................................................... F-37
Condensed Notes to Consolidated Financial Statements.................... F-38
Unaudited Summary Quarterly Financial Data.............................. F-43

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
and Unaudited Consolidated Financial Statements of MAXXAM Inc. and its
subsidiary companies on pages F-2 through F-43.

MAXXAM INC.--Parent only (Unconsolidated):
Audited Information:
Report of Independent Public Accountants.............................. F-44
Balance Sheet at December 31, 1994 and 1993........................... F-45
Statement of Operations for the years ended December 31, 1994, 1993
and 1992............................................................. F-46
Statement of Cash Flows for the years ended December 31, 1994, 1993
and 1992............................................................. F-47
Notes to Financial Statements......................................... F-48
Unaudited Information:
Balance Sheet at September 30, 1995................................... F-50
Statement of Operations for the nine months ended September 30, 1995
and 1994............................................................. F-51
Statement of Cash Flows for the nine months ended September 30, 1995
and 1994............................................................. F-52
Notes to Unaudited Financial Statements............................... F-53
</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, 1994 and 1993,
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, 1994. 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, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1994, 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 17, 1995

F-2
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
ASSETS 1994 1993
------ -------- --------
(IN MILLIONS OF
DOLLARS,
EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 84.6 $ 83.9
Marketable securities......................................... 40.3 44.7
Receivables:
Trade, net of allowance for doubtful accounts of $4.4 and
$3.2 at December 31, 1994 and 1993, respectively........... 176.8 175.3
Other....................................................... 62.9 90.8
Inventories................................................... 541.4 503.6
Prepaid expenses and other current assets..................... 185.3 93.3
-------- --------
Total current assets...................................... 1,091.3 991.6
Property, plant and equipment, net.............................. 1,231.6 1,245.0
Timber and timberlands, net of depletion of $123.9 and $108.2 at
December 31, 1994 and 1993, respectively....................... 325.2 338.6
Investments in and advances to unconsolidated affiliates........ 169.7 183.2
Deferred income taxes........................................... 425.6 359.9
Long-term receivables and other assets.......................... 447.4 453.7
-------- --------
$3,690.8 $3,572.0
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable.............................................. $ 161.8 $ 135.2
Accrued interest.............................................. 62.0 53.7
Accrued compensation and related benefits..................... 138.3 114.4
Other accrued liabilities..................................... 200.2 161.7
Payable to affiliates......................................... 81.8 74.0
Long-term debt, current maturities............................ 33.7 38.3
-------- --------
Total current liabilities................................. 677.8 577.3
Long-term debt, less current maturities......................... 1,582.5 1,567.9
Accrued postretirement benefits................................. 743.1 720.1
Other noncurrent liabilities.................................... 618.4 650.3
-------- --------
Total liabilities......................................... 3,621.8 3,515.6
-------- --------
Commitments and contingencies
Minority interests.............................................. 344.3 224.3
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares authorized;
Class A $.05
Non-Cumulative Participating Convertible Preferred Stock;
shares issued:
1994--669,957 and 1993--679,084.............................. .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,359.................................... 5.0 5.0
Additional capital............................................ 53.2 51.2
Accumulated deficit........................................... (302.9) (180.8)
Pension liability adjustment.................................. (11.4) (23.9)
Treasury stock, at cost (shares held: preferred--845; common:
1994--1,355,768 and 1993--1,364,895)......................... (19.5) (19.7)
-------- --------
Total stockholders' deficit............................... (275.3) (167.9)
-------- --------
$3,690.8 $3,572.0
======== ========
</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,
----------------------------
1994 1993 1992
-------- -------- --------
(IN MILLIONS OF DOLLARS,
EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales:
Aluminum operations............................ $1,781.5 $1,719.1 $1,909.1
Forest products operations..................... 249.6 233.5 223.4
Real estate operations......................... 84.6 78.5 70.1
-------- -------- --------
2,115.7 2,031.1 2,202.6
-------- -------- --------
Costs and expenses:
Costs of sales and operations (exclusive of
depreciation and depletion):
Aluminum operations.......................... 1,625.5 1,587.7 1,619.3
Forest products operations................... 129.6 134.6 113.8
Real estate operations....................... 62.8 65.3 53.8
Selling, general and administrative expenses... 169.4 183.0 173.5
Depreciation and depletion..................... 121.1 120.8 111.4
Restructuring of aluminum operations........... -- 35.8 --
-------- -------- --------
2,108.4 2,127.2 2,071.8
-------- -------- --------
Operating income (loss).......................... 7.3 (96.1) 130.8
Other income (expense):
Investment, interest and other income
(expense)..................................... (2.2) 69.8 51.6
Interest expense............................... (167.3) (169.5) (181.8)
Amortization of deferred financing costs....... (9.6) (15.6) (13.8)
-------- -------- --------
Loss before income taxes, minority interests,
extraordinary item and cumulative effect of
changes in accounting principles................ (171.8) (211.4) (13.2)
Credit for income taxes.......................... 77.1 82.5 9.2
Minority interests............................... (22.0) (3.0) (3.3)
-------- -------- --------
Loss before extraordinary item and cumulative
effect of changes in accounting principles...... (116.7) (131.9) (7.3)
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 loss......................................... $ (122.1) $ (600.2) $ (7.3)
======== ======== ========
Per common and common equivalent share:
Loss before extraordinary item and cumulative
effect of changes in accounting principles.... $ (12.35) $ (13.95) $ (.77)
Extraordinary item............................. (.57) (5.35) --
Cumulative effect of changes in accounting
principles.................................... - (44.17) -
-------- -------- --------
Net loss....................................... $ (12.92) $ (63.47) $ (.77)
======== ======== ========
</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,
---------------------------
1994 1993 1992
------- --------- -------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(122.1) $ (600.2) $ (7.3)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and depletion..................... 121.1 120.8 111.4
Minority interests............................. 22.0 3.0 3.3
Amortization of deferred financing costs and
discounts on long-term debt................... 19.3 21.7 19.9
Equity in losses of unconsolidated affiliates.. 15.0 4.9 1.9
Net sales (purchases) of marketable
securities.................................... 12.9 31.1 (7.0)
Extraordinary loss on early extinguishment of
debt, net..................................... 5.4 50.6 --
Incurrence of financing costs.................. (19.7) (47.9) (7.1)
Net gain on sales of real estate, mortgage
loans and other assets........................ (6.5) (45.8) (6.4)
Net losses (gains) on marketable securities.... (4.2) (7.1) 6.3
Cumulative effect of changes in accounting
principles, net............................... -- 417.7 --
Recognition of previously deferred income from
a forward alumina sale........................ -- (.6) (25.7)
Increase (decrease) in payable to affiliates
and other liabilities......................... 37.5 110.5 (72.0)
Increase (decrease) in accounts payable........ 26.3 (14.1) (6.1)
Decrease (increase) in receivables............. 24.5 5.0 (63.1)
Increase (decrease) in accrued interest........ 8.3 14.3 (1.6)
Increase in accrued and deferred income taxes.. (77.2) (96.5) (16.3)
Decrease (increase) in inventories............. (37.5) 10.9 66.7
Decrease (increase) in prepaid expenses and
other assets.................................. (37.0) 18.0 9.4
Other.......................................... 2.6 10.9 17.2
------- --------- -------
Net cash provided by (used for) operating
activities.................................. (9.3) 7.2 23.5
------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and
investments..................................... 30.0 143.0 45.7
Capital expenditures............................. (89.3) (86.2) (132.7)
Other............................................ (8.6) (12.2) 2.3
------- --------- -------
Net cash provided by (used for) investing
activities.................................. (67.9) 44.6 (84.7)
------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt......... 229.7 1,201.3 26.7
Proceeds from issuance of Kaiser capital stock... 100.1 119.3 --
Net borrowings (payments) under revolving credit
agreements and short-term borrowings
(payments)...................................... (191.8) (107.6) 84.1
Redemptions, repurchase of and principal payments
on long-term debt............................... (39.1) (1,219.4) (65.3)
Dividends paid to Kaiser's minority
stockholders.................................... (13.7) (5.6) (1.5)
Redemption of preference stock................... (8.5) (4.2) (7.3)
Restricted cash deposits......................... -- (35.0) --
Other............................................ 1.2 1.4 1.3
------- --------- -------
Net cash provided by (used for) financing
activities.................................. 77.9 (49.8) 38.0
------- --------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS....................................... .7 2.0 (23.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 83.9 81.9 105.1
------- --------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 84.6 $ 83.9 $ 81.9
======= ========= =======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Net margin borrowings for marketable securities.. $ 5.9
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest....... $ 149.3 $ 149.1 $ 177.3
Income taxes paid................................ 18.3 13.2 6.3
</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,
1992................... $ .3 8.7 $5.0 $47.4 $ 426.7 $ -- $(19.8) $ 459.6
Net loss.............. -- -- -- -- (7.3) -- -- (7.3)
Common stock issued
under employee stock
option plans......... -- -- -- .5 -- -- .1 .6
Additional pension
liability............ -- -- -- -- -- (9.0) -- (9.0)
----- ----- ---- ----- ------- ------ ------ -------
Balance, December 31,
1992................... .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)
===== ===== ==== ===== ======= ====== ====== =======
</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 consolidated financial statements include the accounts of MAXXAM Inc.
and its majority and wholly owned subsidiaries, collectively referred to
herein as the "Company." Investments in unconsolidated affiliates are
accounted for utilizing the equity method of accounting. Certain
reclassifications have been made to prior years' financial statements to be
consistent with the presentation in the current year.

The cumulative losses of Kaiser Aluminum Corporation ("Kaiser," a majority
owned subsidiary of the Company) in the first and second quarter 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 will record
100% of Kaiser's losses and profits 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

On December 31, 1993, the Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities ("SFAS 115"). In accordance with the provisions of SFAS 115,
marketable securities are carried at fair value beginning on December 31,
1993. Prior to that date, marketable securities portfolios were carried at the
lower of cost or market at the balance sheet date. 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, 1994 were: 1994--net unrealized holding losses of $1.0 and
net realized gains of $5.2; 1993--net realized gains of $4.2, the recovery of
$2.0 of net unrealized losses and net unrealized gains of $.9; and 1992--net
realized losses of $6.0 and net unrealized losses of $.3. 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.
Subsequent to the adoption of SFAS 115, purchases and sales of marketable
securities are presented as cash flows from operating activities in the
Consolidated Statement of Cash Flows.

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 and $29.0 in
1993 and 1992, respectively, 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 and a
reduction in LIFO inventories which increased cost of sales by $10.2 in 1992.

F-7
<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,
-------------
1994 1993
------ ------
<S> <C> <C>
Aluminum Operations:
Finished fabricated products................................ $ 49.4 $ 83.7
Primary aluminum and work in process........................ 203.1 141.4
Bauxite and alumina......................................... 102.3 94.0
Operating supplies and repair and maintenance parts......... 113.2 107.8
------ ------
468.0 426.9
------ ------
Forest Products Operations:
Lumber...................................................... 61.3 58.4
Logs........................................................ 12.1 18.3
------ ------
73.4 76.7
------ ------
$541.4 $503.6
====== ======
</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

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, 1994 and 1993, cash and cash equivalents includes $19.4 and
$20.3, 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, 1994 and 1993, long-term receivables and other assets includes
$32.4 and $33.6, 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 markets
and declining demand for aluminum products sold to customers in the commercial
aerospace industry,

F-8
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
all of which had resulted in declining prices in Trentwood's key markets. As
of December 31, 1994, the costs related to the 1993 pre-tax charge for this
restructuring of $35.8 have been substantially incurred.

Investment, Interest and Other Income (Expense)

During 1994, the Company, The Pacific Lumber Company ("Pacific Lumber," a
wholly owned indirect subsidiary of the Company) 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, MAXXAM Group Inc. ("MGI," a wholly owned subsidiary of the Company),
Pacific Lumber, former directors of Pacific Lumber and others concerning MGI's
acquisition of Pacific Lumber. Of the approximately $52.0 settlement,
approximately $33.0 was paid by insurance carriers of the Company and Pacific
Lumber, approximately $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 related to the settlement
and associated costs. This amount is included in investment, interest and
other income (expense).

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. This amount is 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, 1994 and 1993 includes $10.3 and $10.8 of pre-tax charges related
principally to the establishment of additional litigation and environmental
reserves by Kaiser. Investment, interest and other income for the year ended
December 31, 1993 included 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. Included in investment, interest and other income for the year ended
December 31, 1992 was $19.1 of pre-tax income for unrelated and non-recurring
adjustments to previously recorded liabilities and reserves.

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 as of December
31, 1994 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 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

F-9
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
Company's financial instruments, along with the carrying amounts of the
related assets (liabilities), are as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash and cash equivalents.......... $ 84.6 $ 84.6 $ 83.9 $ 83.9
Marketable securities (held for
trading purposes)................. 40.3 40.3 44.7 44.7
Restricted cash.................... 32.4 32.4 33.6 33.6
Long-term debt..................... (1,616.2) (1,545.9) (1,606.2) (1,647.0)
Foreign currency contracts......... -- 3.5 -- --
</TABLE>

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 9,447,878 shares, 9,457,083 shares and
9,427,011 shares for the years ended December 31, 1994, 1993 and 1992,
respectively.

2. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Kaiser's investments in unconsolidated affiliates are held by its principal
operating subsidiary, Kaiser Aluminum & Chemical Corporation ("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 $219.7, $206.6 and $219.4 for the years ended December 31,
1994, 1993 and 1992, respectively (see Note 9). KACC's equity in income (loss)
before income taxes of such operations is treated as a reduction (increase) in
costs of sales. At December 31, 1994 and 1993, KACC's net receivables from
these affiliates were not material.

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

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
<S> <C> <C>
Current assets................................................ $342.3 $312.3
Property, plant and equipment, net............................ 349.4 371.1
Other assets.................................................. 42.4 46.3
------ ------
Total assets................................................ $734.1 $729.7
====== ======
Current liabilities........................................... $122.4 $130.4
Long-term debt................................................ 307.6 290.0
Other liabilities............................................. 31.0 17.8
Stockholders' equity.......................................... 273.1 291.5
------ ------
Total liabilities and stockholders' equity.................. $734.1 $729.7
====== ======
</TABLE>

F-10
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
----------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Net sales........................................... $489.8 $510.3 $586.6
Costs and expenses.................................. (494.8) (527.2) (586.7)
Provision (credit) for income taxes................. (6.3) 1.9 6.9
------ ------ ------
Net income (loss)................................... $(11.3) $(15.0) $ 6.8
====== ====== ======
KACC's equity in losses of affiliates............... $ (1.9) $ (3.3) $ (1.9)
====== ====== ======
</TABLE>

KACC's equity in losses 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, 1994,
KACC's investment in these affiliates exceeded its equity in their net assets
by $67.9. KACC is amortizing this amount over a twelve-year period which
results in an annual charge of approximately $11.6.

On July 8, 1993, the Company, through various subsidiaries, acquired the
control of the general partner and became responsible for the management of
Sam Houston Race Park, Ltd. ("SHRP"). SHRP owns and operates a Class 1 horse
racing track in northwest Houston. The Company's investment in SHRP and its
interest in the management contract with respect to the race track aggregated
approximately $14.7. At December 31, 1994, SHRP 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 incurred net losses for the years ended December 31, 1994 and
1993 of approximately $20.0 and $5.9, respectively. The Company recorded
losses in respect of its investment in SHRP 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. Certain affiliated parties of the Company, including Mr.
Charles E. Hurwitz, President and Chief Executive Officer of the Company,
collectively hold less than a 7% equity interest in SHRP.

3. PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL ------------------
LIVES 1994 1993
---------- -------- --------
<S> <C> <C> <C>
Land and improvements......................... 8-25 years $ 176.1 $ 157.2
Buildings..................................... 7-45 years 259.6 240.1
Machinery and equipment....................... 3-22 years 1,330.8 1,263.9
Construction in progress...................... 45.0 65.1
-------- --------
1,811.5 1,726.3
Less: accumulated depreciation................ (579.9) (481.3)
-------- --------
$1,231.6 $1,245.0
======== ========
</TABLE>

Depreciation expense for the years ended December 31, 1994, 1993 and 1992
was $105.7, $104.9 and $90.2, respectively.

F-11
<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,
------------------
1994 1993
-------- --------
<S> <C> <C>
Corporate:
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......................................... 20.9 25.2
Other.................................................... .2 .5
Aluminum Operations:
1994 Credit Agreement.................................... 6.7 --
1989 Credit Agreement:
Revolving Credit Facility.............................. -- 188.0
9 7/8% Senior Notes due February 15, 2002, net of
discount................................................ 223.6 --
Alpart CARIFA Loan....................................... 60.0 60.0
12 3/4% Senior Subordinated Notes due February 1, 2003... 400.0 400.0
Other.................................................... 69.2 78.1
Forest Products Operations:
7.95% Timber Collateralized Notes due July 20, 2015...... 363.8 377.0
11 1/4% Senior Secured Notes due August 1, 2003.......... 100.0 100.0
12 1/4% Senior Secured Discount Notes due August 1, 2003,
net of discount......................................... 82.8 73.5
10 1/2% Senior Notes due March 1, 2003................... 235.0 235.0
Other.................................................... .9 2.9
Real Estate Operations:
Secured notes due December 31, 1999, interest at prime
plus 3%................................................. 10.0 17.2
Other notes and contracts, primarily secured by
receivables, buildings, real estate and equipment....... 18.1 23.8
-------- --------
1,616.2 1,606.2
Less: current maturities............................... (33.7) (38.3)
-------- --------
$1,582.5 $1,567.9
======== ========
</TABLE>

CORPORATE

14% Senior Subordinated Reset Notes (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% Subordinated Debentures (the "12 1/2% Debentures")

The 12 1/2% Debentures, which are net of discount of $1.7 and $2.4 at
December 31, 1994 and 1993, respectively, have mandatory redemptions of $3.3
in December of each year through 1998. The 12 1/2% Debentures are redeemable
at the Company's option, in whole or in part, at par.

F-12
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Demand Loan Agreement

On October 10, 1994, the Company entered into a demand loan and pledge
agreement with Custodial Trust Company providing for up to $25.0 in
borrowings. Any amounts drawn under the agreement would be secured by Kaiser
capital stock owned by the Company (or such other marketable securities
acceptable to the lender) having an initial market value (as defined) of
approximately three times the amount borrowed. Borrowings under this agreement
will bear interest at the prime rate plus 1% per annum. No borrowings were
outstanding as of December 31, 1994.

ALUMINUM OPERATIONS

The 1994 Credit Agreement

On February 17, 1994, Kaiser and KACC entered into a credit agreement with
BankAmerica Business Credit, Inc. (as agent for itself and other lenders),
Bank of America National Trust and Savings Association and certain other
lenders (as amended, the "1994 Credit Agreement"). The 1994 Credit Agreement
consists of a $275.0 five-year secured revolving line of credit which matures
in 1999, and replaced the credit agreement entered into in December 1989 by
Kaiser and KACC with a syndicate of commercial banks and other financial
institutions (as amended, the "1989 Credit Agreement"). 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 $275.0 or a
borrowing base relating to eligible accounts receivable and inventory. As of
December 31, 1994, $202.5 (of which $59.3 could have been used for letters of
credit) was available to KACC under the 1994 Credit Agreement. The 1994 Credit
Agreement is unconditionally guaranteed by Kaiser and by certain significant
subsidiaries of KACC. Loans under the 1994 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 plus 3 1/4%. After June 30, 1995, the interest rate
margins applicable to borrowings under the 1994 Credit Agreement may be
reduced by up to 1 1/2% (non-cumulatively) based on a financial test,
determined quarterly. 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 the 1989 Credit
Agreement.

The 1994 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 Credit Agreement is secured by, among
other things, (i) mortgages on KACC's major domestic plants (excluding the
Gramercy 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 Credit Agreement indebtedness.

9 7/8% 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-13
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
credit facility of the 1989 Credit Agreement immediately prior to the
effectiveness of the 1994 Credit Agreement and for working capital and general
corporate purposes. The KACC Senior Notes are net of discount of $1.4 at
December 31, 1994.

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

On February 1, 1993, KACC issued $400.0 of the KACC Notes. The net proceeds
from the sale of the KACC Notes were used to retire KACC's 14 1/4% Senior
Subordinated Notes due 1995, to prepay $18.0 of the term loan under KACC's
1989 Credit Agreement and to reduce outstanding borrowings under the revolving
credit facility of the 1989 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
Notes are guaranteed, jointly and severally, by certain subsidiaries of KACC.
The indentures governing the KACC Senior Notes and the KACC Notes and the 1994
Credit Agreement restrict, among other things, KACC's and Kaiser's ability to
incur debt, undertake transactions with affiliates and pay dividends. At
December 31, 1994, under the most restrictive of these covenants, Kaiser was
not permitted to pay dividends on its common stock.

Alpart CARIFA Loan

In December 1991, Alpart 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. The Series A bonds bear
interest at a floating rate of 87% of the applicable LIBID rate (LIBOR less
1/8 of 1%) on $37.5 of the principal amount (5.2% at December 31, 1994) with
the remaining $.5 bearing interest at a fixed rate of 6.35%. 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

Timber Notes and 10 1/2% Senior Notes (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 ("SPHC"), issued $385.0 of the Timber Notes. Pacific Lumber and SPHC
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, 1996 (the

F-14
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
"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
thereof; (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 SPHC from incurring any additional indebtedness for borrowed money
and limits the business activities of SPHC to the ownership and operation of
its timber and timberlands. The Timber Notes are senior secured obligations of
SPHC and are not obligations of, or guaranteed by, Pacific Lumber or any other
person. The Timber Notes are secured by a lien on (i) SPHC's timber and
timberlands (representing $192.4 of the Company's consolidated balance at
December 31, 1994), (ii) substantially all of SPHC's property and equipment,
(iii) SPHC's contract rights and certain other assets and (iv) 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 cash available,
the deemed depletion of SPHC'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 SPHC 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 SPHC will pay the final installment of
principal is July 20, 2015. The amount of principal which SPHC 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 SPHC will pay the final
installment of principal is July 20, 2009.

Principal and interest on the Timber Notes is payable semi-annually on
January 20 and July 20. The Timber Notes are redeemable at the option of SPHC,
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.

The indentures governing the Pacific Lumber Senior Notes and the Timber
Notes and Pacific Lumber's other debt 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, 1994 under the most
restrictive of these covenants, approximately $20.8 of dividends could be paid
by Pacific Lumber.

F-15
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

11 1/4% Senior Secured Notes (the "MGI Senior Notes") and 12 1/4% Senior
Secured Discount Notes (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 Lumber Co., Inc. ("Britt") and MAXXAM Properties Inc.
("MPI," a wholly owned subsidiary of MGI) and by the Company's pledge of 28
million shares of Kaiser's common stock. 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, 1994, under the most restrictive of these
covenants, approximately $4.9 of dividends could be paid by MGI. 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
$43.9 and $53.2 at December 31, 1994 and 1993, 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 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 OPERATIONS

Secured Notes

The secured notes represent borrowings of the Company's wholly owned
partnership, MXM Mortgage L.P. ("MXM L.P."). The proceeds from the notes were
originally used by MXM Mortgage Corp., a wholly owned subsidiary of the
Company, to finance a portion of the purchase for $122.3 of certain loans
secured by real properties and certain parcels of income producing real
property from the Resolution Trust Corporation. The notes mature on December
31, 1999 and bear interest at the prime rate plus 3% per annum, payable
monthly. The amended loan agreement provides for additional borrowings of up
to $20.0 on or before March 31, 1995. Upon the sale of any secured property or
loan, the terms of the loan agreement require MXM L.P. to make principal
payments based on the release price (as defined) of such property or loan. In
addition, the loan agreement requires MXM L.P. to repay the entire outstanding
balance of the notes if such balance declines to less than $8.0. Principal
payments of $60.2 were made in December 1993 in connection with the sale of
multi-family properties discussed in Note 1--"Investment, Interest and Other
Income (Expense)."

F-16
<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, 1994 are
as follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
----------------------------------------
1995 1996 1997 1998 1999 THEREAFTER
----- ----- ----- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C>
14% Senior Subordinated Reset
Notes............................ $ -- $ -- $ -- $ -- $ -- $ 25.0
12 1/2% Subordinated Debentures... 1.6 3.3 3.3 3.3 11.1 --
1994 Credit Agreement............. -- -- -- -- 6.7 --
9 7/8% Senior Notes............... -- -- -- -- -- 225.0
Alpart CARIFA Loan................ -- -- -- -- -- 60.0
12 3/4% Senior Subordinated
Notes............................ -- -- -- -- -- 400.0
7.95% Timber Collateralized
Notes............................ 13.6 14.1 16.2 19.3 21.6 279.0
11 1/4% Senior Secured Notes...... -- -- -- -- -- 100.0
12 1/4% Senior Secured Discount
Notes............................ -- -- -- -- -- 126.7
10 1/2% Senior Notes.............. -- -- -- -- -- 235.0
Secured real estate notes......... -- -- -- -- 10.0 --
Other............................. 18.5 10.1 10.2 9.6 1.5 38.5
----- ----- ----- ----- ----- --------
$33.7 $27.5 $29.7 $32.2 $50.9 $1,489.2
===== ===== ===== ===== ===== ========
</TABLE>

Capitalized Interest

Interest capitalized during the years ended December 31, 1994, 1993 and 1992
was $3.0, $4.4 and $5.2, 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, 1994, all of the assets relating to the Company's aluminum
and forest products operations are subject to such restrictions. The
restricted net assets of the Company's real estate subsidiaries totaled $27.2
at December 31, 1994. Under the most restrictive covenants governing debt of
the Company's real estate subsidiaries, approximately $25.3 could be paid as
of December 31, 1994.

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,
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Domestic.......................................... $(177.9) $(223.4) $(112.3)
Foreign........................................... 6.1 12.0 99.1
------- ------- -------
$(171.8) $(211.4) $ (13.2)
======= ======= =======
</TABLE>

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.

F-17
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

The credit (provision) for income taxes on the 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,
---------------------
1994 1993 1992
------ ----- ------
<S> <C> <C> <C>
Current:
Federal............................................. $ -- $ (.1) $ (.4)
State and local..................................... (.2) (1.3) 1.2
Foreign............................................. (18.0) (7.9) (11.4)
------ ----- ------
(18.2) (9.3) (10.6)
------ ----- ------
Deferred:
Federal............................................. 94.3 77.1 4.9
State and local..................................... .4 2.7 11.6
Foreign............................................. .6 12.0 3.3
------ ----- ------
95.3 91.8 19.8
------ ----- ------
$77.1 $82.5 $ 9.2
====== ===== ======
</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 for income taxes and the amount computed
by applying the federal statutory income tax rate to the 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,
------------------------
1994 1993 1992
------- ------- ------
<S> <C> <C> <C>
Loss before income taxes, minority interests,
extraordinary item and cumulative effect of changes
in accounting principles............................ $(171.8) $(211.4) $(13.2)
======= ======= ======
Amount of federal income tax based upon the statutory
rate................................................ $ 60.1 $ 74.0 $ 4.5
Revision of prior years' tax estimates and other
changes in valuation allowances..................... 16.7 (.6) 14.9
Percentage depletion................................. 5.6 6.4 6.3
Increase in net deferred income tax assets due to tax
rate change......................................... 1.8 7.0 --
State and local taxes, net of federal tax benefit.... .1 .9 .6
Foreign taxes, net of federal tax benefit............ (5.3) (5.0) (8.1)
Removal of Kaiser from the Company's consolidated
federal return group................................ -- 3.5 --
Losses and expenses for which no federal tax benefit
was recognized...................................... -- -- (9.2)
Other................................................ (1.9) (3.7) .2
------- ------- ------
$ 77.1 $ 82.5 $ 9.2
======= ======= ======
</TABLE>

F-18
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

As shown in the Consolidated Statement of Operations for the years ended
December 31, 1994 and 1993, the Company reported extraordinary losses related
to 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.

The components of the Company's net deferred income tax assets (liabilities)
are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993
------- -------
<S> <C> <C>
Deferred income tax assets:
Postretirement benefits other than pensions............ $ 297.2 $ 288.2
Loss and credit carryforwards.......................... 208.8 161.5
Other liabilities...................................... 133.5 116.8
Real estate............................................ 71.5 75.9
Pensions............................................... 51.0 60.7
Timber and timberlands................................. 46.2 46.5
Foreign and state deferred income tax liabilities...... 28.1 33.0
Property, plant and equipment.......................... 23.7 24.1
Other.................................................. 26.7 36.1
Valuation allowances................................... (147.0) (149.3)
------- -------
Total deferred income tax assets, net................ 739.7 693.5
------- -------
Deferred income tax liabilities:
Property, plant and equipment.......................... (202.7) (224.2)
Investments in and advances to unconsolidated
affiliates............................................ (63.8) (60.6)
Inventories............................................ (27.4) (33.3)
Other.................................................. (20.0) (31.2)
------- -------
Total deferred income tax liabilities................ (313.9) (349.3)
------- -------
Net deferred income tax assets........................... $ 425.8 $ 344.2
======= =======
</TABLE>

The valuation allowances listed above relate primarily to loss and credit
carryforwards and postretirement benefits other than pensions. As of December
31, 1994, approximately $281.0 of the net deferred income tax

F-19
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
assets listed above are attributable to Kaiser. Of this amount, approximately
$125.1 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 $155.9 at December 31, 1994. 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 approximately $144.8 as of
December 31, 1994. This amount includes approximately $108.7 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.

Certain of the deferred income tax assets and liabilities listed above are
included on the Consolidated Balance Sheet in the captions entitled prepaid
expenses and other current assets, other accrued liabilities and other
noncurrent liabilities.

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, 1994 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>
THE COMPANY NEW KAISER TAX GROUP
---------------- -----------------------
EXPIRING EXPIRING
THROUGH THROUGH
---------- --------------
<S> <C> <C> <C> <C>
Regular Tax Attribute Carryforwards:
Current year net operating loss... $19.2 2009 $ 83.7 2009
Prior year net operating losses... 25.9 2008 135.4 2008
General business tax credits...... .9 2002 37.4 2006
Foreign tax credits............... -- -- 42.2 1999
Alternative minimum tax credits... 1.4 Indefinite 15.3 Indefinite
Alternative Minimum Tax Attribute
Carryforwards:
Current year net operating loss... $30.5 2009 $ 64.3 2009
Prior year net operating losses... 8.4 2007 84.4 2008
Foreign tax credits............... -- -- 33.8 1999
</TABLE>

F-20
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

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 now 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.

A summary of the components of net periodic postretirement benefit cost is
as follows:

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

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. Kaiser's cost of providing postretirement health care and life insurance
benefits to retired employees was $47.2 for the year ended December 31, 1992.

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

<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1993
------ ------
<S> <C> <C>
Retirees...................................................... $568.3 $631.2
Actives eligible for benefits................................. 31.4 36.2
Actives not eligible for benefits............................. 102.8 132.1
------ ------
Accumulated postretirement benefit obligation............... 702.5 799.5
Unrecognized prior service cost............................... 31.8 35.0
Unrecognized net gain (loss).................................. 55.8 (66.8)
------ ------
Postretirement benefit liability............................ $790.1 $767.7
====== ======
</TABLE>

F-21
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

The annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rates) are approximately 9.5% and 8.0%
for retirees under age 65 and over age 65, respectively, and are assumed to
decrease gradually to approximately 5.5% for 2007 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, 1994 by approximately $81.0 and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost by
approximately $9.8.

The discount rates and rates of compensation increase used in determining
the accumulated postretirement benefit obligation were 8.5% and 5.0% at
December 31, 1994, respectively, and 7.5% and 5.0% at December 31, 1993,
respectively.

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, 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 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.

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,
----------------------
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Defined benefit plans:
Service cost-benefits earned during the year........ $ 13.6 $ 13.0 $ 13.1
Interest cost on projected benefit obligations...... 59.5 60.8 60.2
Return on assets:
Actual gain...................................... (.8) (73.9) (28.2)
Deferred gain (loss)............................. (53.0) 15.9 (31.2)
Net amortization and deferral....................... 2.8 4.7 2.9
------ ------ ------
Net periodic pension cost........................... 22.1 20.5 16.8
Defined contribution plans........................... 2.8 1.7 1.7
Non-qualified retirement and incentive plans......... 5.0 4.3 5.5
------ ------ ------
$29.9 $ 26.5 $ 24.0
====== ====== ======
</TABLE>

F-22
<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,
----------------
1994 1993
------- -------
<S> <C> <C>
Actuarial present value of accumulated plan benefits:
Vested benefit obligation.............................. $ 684.3 $ 724.1
Non-vested benefit obligation.......................... 42.9 42.2
------- -------
Total accumulated benefit obligation................. $ 727.2 $ 766.3
======= =======
Projected benefit obligation............................. $ 761.2 $ 816.8
Plan assets at fair value, primarily common stocks and
fixed income obligations................................ (546.9) (590.8)
------- -------
Projected benefit obligation in excess of plan assets.... 214.3 226.0
Unrecognized net transition obligation................... (.9) (1.7)
Unrecognized net loss.................................... (40.4) (76.2)
Unrecognized prior service cost.......................... (31.6) (17.8)
Adjustment required to recognize minimum liability....... 42.9 47.7
------- -------
Accrued pension cost................................. $ 184.3 $ 178.0
======= =======
</TABLE>

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

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Rate of increase in compensation levels.................... 5.0% 5.0% 5.0%
Discount rate.............................................. 8.5% 7.5% 8.25%
Expected long-term rate of return on assets................ 9.5% 10.0% 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 charge to stockholders' equity. In 1994, the
pension liability adjustment was reduced by $12.5. This reduction was recorded
net of related deferred federal and state income taxes of $7.3, which
approximated the federal and state statutory rates. In 1993 and 1992, the
pension liability adjustment charged to stockholders' equity amounted to $14.9
and $9.0, respectively. The Company recorded the 1993 charge net of related
deferred federal and state income taxes of $8.7, which approximated the
federal and state statutory rate. The Company did not record a tax benefit
with respect to the 1992 charge.

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 now 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-23
<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,
-------------
1994 1993
------ ------
<S> <C> <C>
Kaiser Aluminum Corporation:
Common stock, par $.01...................................... $ -- $ --
$.65 Depositary Shares...................................... 128.0 119.3
8.255% PRIDES............................................... 100.1 --
Subsidiary redeemable preference stock:
KACC Series A and B Cumulative Preference Stock, par $1..... 29.1 33.6
KACC Cumulative Convertible Preference Stock, par $100...... 1.7 1.8
KACC Minority Interest:
Alumina Partners of Jamaica................................. 70.4 56.9
Volta Aluminium Company Limited............................. 13.6 11.5
Kaiser LaRoche Hydrate Partners............................. 1.4 1.2
------ ------
$344.3 $224.3
====== ======
</TABLE>

As a result of Kaiser's issuance of preferred stock in 1993 and 1994 (each
as described below) and, to a lesser extent, the Company's sales of Depositary
Shares and the issuance of common stock in connection with the LTIP (each as
described below), the Company's voting interest in Kaiser has decreased to
approximately 58.9% on a fully diluted basis, as of December 31, 1994.

$.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 used approximately $81.5 of
the net proceeds it received from the sale of the Depositary Shares together
with the MGI Loan to make a capital contribution to KACC, and $37.8 of the net
proceeds it received from the sale of the Depositary Shares to make a non-
interest bearing loan to KACC (evidenced by a note) which is designed to
provide sufficient funds to make the required dividend payments on the Series
A Shares until June 30, 1996 (the "Series A Shares Mandatory Conversion
Date"). KACC used approximately $13.7 of such funds to prepay the remaining
balance of the Term Loan under the 1989 Credit Agreement and $105.6 of such
funds to reduce outstanding borrowings under the Revolving Credit Facility of
the 1989 Credit Agreement. On June 30, 1996, each of the outstanding
Depositary Shares will automatically convert (upon the automatic conversion of
the Series A Shares) into one share of Kaiser's common stock, plus the right
to receive an amount in cash equal to the accrued and unpaid dividends payable
with respect to such Depositary Share. Automatic conversion of the outstanding
Depositary Shares (and the Series A Shares) will occur upon certain mergers or
consolidations of Kaiser (as defined). At any time or from time to time prior
to June 30, 1996, Kaiser may call the outstanding Depositary Shares (by
calling the Series A Shares) for redemption, in whole or in part, at a call
price per Depositary Share initially equal to $12.46, declining by $.0018 on
each day following the date of issue to $10.624 on April 30, 1996, and equal
to $10.51 thereafter, payable in shares of common stock having an aggregate
Current Market Price (as defined) equal to the applicable call price, plus an
amount in cash equal to

F-24
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
all accrued and unpaid dividends payable with respect to such Depositary
Share. Holders of Depositary Shares (based on the voting rights of the Series
A Shares) have one vote for each Depositary Share held of record, except as
required by law, and are entitled to vote with the holders of common stock on
all matters submitted to a vote of Kaiser's common stockholders. The
Depositary Shares call 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 has accounted for Kaiser's issuance of the Depositary
Shares as additional minority interest. During 1994, the Company sold
1,239,400 of such Depositary Shares for an aggregate net proceeds of $10.3,
resulting in pre-tax gains of $1.6. The Company may consummate the sale of all
or any portion of the remaining Depositary Shares at any time.

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 (including the Series A Shares) 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 of the outstanding shares 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 dividends thereon. Shares of PRIDES are not
redeemable 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 (A) 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 (B) 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 United
Steelworkers of America ("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 $45.6 at December 31, 1994.

F-25
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Changes in Series A and B Stock are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Shares:
Beginning of year......................... 1,081,548 1,163,221 1,305,550
Redeemed.................................. (169,381) (81,673) (142,329)
--------- --------- ---------
End of year............................... 912,167 1,081,548 1,163,221
========= ========= =========
</TABLE>

No additional Series A or B Stock will be issued based on compensation
earned in 1992 or subsequent years. 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 1993 and 1994, KACC contributed $4.3 for each of the years ended
December 31, 1992 and 1993, and will contribute $4.3 in March 1995 for the
year ended December 31, 1994.

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 is 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, if a profitability test is satisfied for
either 1995 or 1996, 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 either 1996 or
1997. The employees may elect to receive their shares, accept cash or place
the proceeds into KACC's 401(k) savings plan. KACC will provide 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

F-26
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 as of December 31, 1992 under the LTIP, as
amended in 1991 and 1992, has been paid to the participants in cash or common
stock of Kaiser as of December 31, 1993. 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 will generally vest at the rate of 25% per
year. Kaiser will record 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 504,044 shares were
available to be awarded at December 31, 1994. During 1994, 102,564 restricted
shares, which will vest at the rate of 25% per year, were distributed to two
Kaiser executives. Kaiser will record the related expense of $1.0 over the
four-year period ending December 31, 1998. In 1994 and 1993, the Compensation
Committee of Kaiser's Board of Directors approved the award of 494,800 and
664,400 shares, respectively, as "nonqualified stock options" to members of
management other than those participating in the LTIP. These options generally
will vest at the rate of 20% to 25% per year. The exercise price of these
shares ranges from $7.25 to $12.75 per share. During 1994, 6,920 of such
options were exercised at a price of $7.25 per share. At December 31, 1994,
1,122,380 of such options were outstanding, of which 119,980 were exercisable.

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 are reserved for awards or for
payment of rights granted under the 1994 Omnibus Plan. In December 1994,
options to purchase 25,000 shares of common stock of the Company were granted
to an executive officer. In addition,

F-27
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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), and the options are exercisable at the rate of
20% per year commencing one year from the date of grant. None of these options
were exercisable at December 31, 1994.

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 1994, options to purchase 1,500 shares of common stock of the
Company were granted to three non-employee directors. The exercise price of
these options is $36.50 per share (the quoted market price at the date of
grant), and the options are exercisable at the rate of 25% per year commencing
one year from the date of grant. None of these options were exercisable at
December 31, 1994.

The 1980 Incentive Plan authorized the granting of options to purchase up to
750,000 shares of the Company's common stock through June 1990. Options
granted were exercisable at the market price at the date of grant and became
exercisable in five equal annual installments, commencing one year from the
date of grant, and expiring ten years from the date of grant. On July 1, 1988,
pursuant to the terms of the 1980 Incentive Plan, holders of the 1980
Incentive Plan options were granted stock appreciation rights. During the year
ended December 31, 1992, 63,000 options were exercised at prices ranging from
$7.875 to $14.50 per share resulting in the issuance of 19,761 shares. At
December 31, 1992, all options to purchase shares under the 1980 Incentive
Plan had been exercised.

In 1988, 354,000 options granted under MGI's 1976 Stock Option Plan (the
"MGI 1976 Plan"), at prices ranging from $7.875 to $18.75 per share, 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 and 1992, 60,000 options and 100,000 options granted under the MGI
1976 Plan at prices of $10.875 and $11.625 per share, respectively, 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, 1994, the Company had the following shares reserved for
future issuance:

<TABLE>
<S> <C>
Common shares:
Class A Preferred Stock.......................................... 669,112
MAXXAM 1994 Omnibus Employee Incentive Plan...................... 1,000,000
MAXXAM 1994 Non-Employee Director Plan........................... 35,000
---------
1,704,112
=========
Class A Preferred Stock:
MAXXAM 1994 Omnibus Employee Incentive Plan...................... 1,000,000
=========
</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

F-28
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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 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 Company ("Federated") and Mr. Charles E. Hurwitz
collectively own 98.3% of the Company's Class A Preferred Stock and 31.2% of
the Company's common stock (resulting in combined voting control of
approximately 60.2% 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. The aggregate minimum
amount of required future principal payments at December 31, 1994 is $78.7,
due in 1997. KACC's share of payments, including operating costs and certain

F-29
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
other expenses under the agreement, was $85.6, $86.7 and $99.2 for the years
ended December 31, 1994, 1993 and 1992, respectively. KACC also has agreements
to supply alumina to and to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases at December 31, 1994 are
as follows: years ending December 31, 1995--$26.0; 1996--$25.4; 1997--$23.7;
1998--$26.8; 1999--$33.0; thereafter--$215.9. Rental expense for operating
leases was $29.2, $31.3 and $29.2 for the years ended December 31, 1994, 1993
and 1992, respectively. The minimum future rentals receivable under
noncancelable subleases at December 31, 1994 were $74.6.

Environmental Contingencies

Kaiser and KACC are subject to a wide variety of environmental laws and
regulations and to fines or penalties assessed for alleged breaches of the
environmental 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 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.

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
1994 1993 1992
----- ----- -----
<S> <C> <C> <C>
Balance at beginning of year............................ $40.9 $46.4 $51.5
Additional amounts...................................... 2.8 1.7 4.5
Less expenditures....................................... (3.6) (7.2) (9.6)
----- ----- -----
Balance at end of year.................................. $40.1 $40.9 $46.4
===== ===== =====
</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 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 to $11.0 for the years 1995 through 1999 and an aggregate
of approximately $11.0 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 approximately $20.0. While uncertainties
are inherent in the final outcome of these environmental matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of such
uncertainties should not have a material adverse effect on Kaiser's
consolidated financial position or results of operations.

F-30
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

Asbestos Contingencies

Based on prior experience, KACC estimates that annual future cash payments
in connection with such litigation will be approximately $11.0 to $14.0 for
the years 1995 through 1999, and an aggregate of approximately $95.0
thereafter through 2007. Based on past experience and reasonably anticipated
future activity, Kaiser has established an accrual for estimated asbestos-
related costs for claims filed and estimated to be filed and settled through
2007. Kaiser does not presently believe there is a reasonable basis for
estimating such costs beyond 2007 and, accordingly, no accrual has been
recorded for such costs which may be incurred. This accrual was calculated
based on the current and anticipated number of asbestos-related claims, the
prior timing and amounts of asbestos-related payments, the current state of
case law related to asbestos claims, the advice of counsel and the anticipated
effects of inflation and discounting at an estimated risk-free rate (8% at
December 31, 1994). Accordingly, an asbestos-related cost accrual of $102.0 is
included primarily in other noncurrent liabilities at December 31, 1994. The
aggregate amount of the undiscounted liability at December 31, 1994 is $158.1,
before considerations for insurance recoveries.

Kaiser believes that KACC has insurance coverage available to recover a
substantial portion of its asbestos-related costs. While claims for recovery
from some of KACC's insurance carriers are currently subject to pending
litigation and other carriers have raised certain defenses, Kaiser believes,
based on prior insurance-related recoveries in respect of asbestos-related
claims, existing insurance policies and the advice of counsel, that
substantial recoveries from the insurance carriers are probable. Accordingly,
an estimated aggregate insurance recovery of $86.4, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily in long-term
receivables and other assets as of December 31, 1994.

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 currently 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 Kaiser's consolidated financial
position or results of operations.

Other Contingencies

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
currently believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on the
Company's consolidated financial position or results of operations.

10. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

KACC enters into a number of financial instruments with off-balance-sheet
risk 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.

F-31
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

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 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, 1994, KACC had net forward foreign exchange contracts
totaling approximately $74.4 for the purchase of 102.0 Australian dollars
through December 31, 1996.

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, in respect of its
1995 anticipated production, as of December 31, 1994, KACC had sold forward
170,950 metric tons of primary aluminum at fixed prices, purchased call
options in respect of 69,000 metric tons of primary aluminum, purchased put
options to establish a minimum price for 193,500 metric tons of primary
aluminum and entered into option contracts that established a price range for
90,000 metric tons of primary aluminum. KACC will not receive the benefit of
market price increases to the extent (i) the quantity of production sold
forward is greater than the tonnage covered by the purchased call options;
(ii) market prices exceed the prices at which primary aluminum is sold
forward, but are less than the strike price of the purchased call options, on
the tonnage covered by the options; or (iii) market prices exceed the maximum
of the price range on the tonnage covered by the option contracts entered to
establish a price range.

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 and options contracts. In this regard, at December 31,
1994, KACC had purchased 4,500 metric tons of primary aluminum under forward
purchase contracts at fixed prices that expire at various times through June
1995.

KACC has also entered into a natural gas pricing contract to fix future
prices of a portion (20,000 million BTUs per day) of a plant's natural gas
supply through March 1995.

At December 31, 1994, the net unrealized gain on KACC's position in forward
foreign exchange was $3.5 and the net unrealized loss on aluminum forward
sales and option contracts and the natural gas pricing contract was $80.4,
based on a price of $1,955 per metric ton of aluminum and $1.59 per million
BTUs of natural gas.

Kaiser has established margin accounts with its counterparties related to
aluminum forward sales and option contracts. Kaiser 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, 1994, Kaiser had $50.5 on
deposit with various counterparties in respect of such unrealized losses. This
amount is included in prepaid expenses and other current assets.

F-32
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

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 credit
worthiness. When appropriate, KACC arranges master netting agreements.

11. SEGMENT INFORMATION

The following tables present financial information by industry segment and
by geographic area at December 31, 1994 and 1993 and for the three years ended
December 31, 1994, 1993 and 1992.

Industry Segments

<TABLE>
<CAPTION>
BAUXITE FOREST REAL
YEARS AND ALUMINUM PRODUCTS ESTATE
ENDED ALUMINA PROCESSING OPERATIONS OPERATIONS CORPORATE TOTAL
----- ------- ---------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers.............. 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
1992 466.5 1,442.6 223.4 70.1 -- 2,202.6
Operating income
(loss)................. 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)
1992 44.6 47.0 64.1 (9.3) (15.6) 130.8
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
(losses) of
unconsolidated
affiliates............. 1994 (4.6) 2.7 -- -- (13.1) (15.0)
1993 (2.5) (.8) -- -- (1.6) (4.9)
1992 1.8 (3.7) -- -- -- (1.9)
Depreciation and
depletion.............. 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
1992 29.4 49.2 28.4 3.5 .9 111.4
Capital expenditures.... 1994 29.4 40.6 11.3 7.6 .4 89.3
1993 35.8 31.9 11.1 7.1 .3 86.2
1992 60.0 54.4 8.7 8.1 1.5 132.7
Investments in and
advances to
unconsolidated
affiliates............. 1994 137.1 32.6 -- -- -- 169.7
1993 151.9 31.3 -- -- -- 183.2
Identifiable assets..... 1994 987.9 1,637.3 674.8 201.7 189.1 3,690.8
1993 930.7 1,540.5 676.8 215.7 208.3 3,572.0
</TABLE>

Sales to unaffiliated customers excludes intersegment sales between bauxite
and alumina and aluminum processing of $146.8, $129.4 and $179.9 for the years
ended December 31, 1994, 1993 and 1992, respectively. Intersegment sales are
made on a basis intended to reflect the market value of the products.

F-33
<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 allocated to the Company's industry segments.
General and administrative expenses of subsidiary companies 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.............. 1994 $1,566.3 $201.0 $180.0 $168.4 $ -- $2,115.7
1993 1,463.1 182.1 207.5 178.4 -- 2,031.1
1992 1,551.0 197.6 263.5 190.5 -- 2,202.6
Sales and transfers
among geographic
areas.................. 1994 -- 98.7 -- 139.4 (238.1) --
1993 -- 88.2 -- 79.6 (167.8) --
1992 -- 90.1 -- 86.5 (176.6) --
Operating income
(loss)................. 1994 (55.3) (.1) 18.3 44.4 -- 7.3
1993 (111.3) (19.1) 21.9 12.4 -- (96.1)
1992 9.6 20.9 65.4 34.9 -- 130.8
Equity in losses of
unconsolidated
affiliates............. 1994 (12.9) -- -- (2.1) -- (15.0)
1993 (1.6) -- -- (3.3) -- (4.9)
1992 -- -- -- (1.9) -- (1.9)
Investments in and
advances to
unconsolidated
affiliates............. 1994 1.2 28.8 -- 139.7 -- 169.7
1993 1.0 30.5 -- 151.7 -- 183.2
Identifiable assets..... 1994 2,867.9 423.4 200.0 199.5 -- 3,690.8
1993 2,740.8 421.7 223.0 186.5 -- 3,572.0
</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 $.8, $4.9 and $12.0 for the years ended December 31,
1994, 1993 and 1992, respectively.

Export sales were less than 10% of total revenues during the years ended
December 31, 1994, 1993 and 1992. For the years ended December 31, 1994, 1993
and 1992, the Company had bauxite and alumina sales of $58.2, $40.7 and
$135.3, respectively, and aluminum processing sales of $147.7, $145.7 and
$144.9, respectively, to one customer.

F-34
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1995 1994
------ ------------- ------------
(UNAUDITED)
(IN MILLIONS OF DOLLARS)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 100.2 $ 84.6
Marketable securities.................................. 30.4 40.3
Receivables:
Trade, net of allowance for doubtful accounts of $4.9
and $4.4 at
September 30, 1995 and December 31, 1994,
respectively........................................ 234.6 176.8
Other................................................ 72.0 62.9
Inventories............................................ 609.9 541.4
Prepaid expenses and other current assets.............. 99.0 185.3
-------- --------
Total current assets............................... 1,146.1 1,091.3
Property, plant and equipment, net of accumulated
depreciation of $653.7 and $579.9 at September 30, 1995
and December 31, 1994, respectively..................... 1,190.9 1,231.6
Timber and timberlands, net of depletion of $135.6 and
$123.9 at September 30, 1995 and December 31, 1994,
respectively............................................ 315.5 325.2
Investments in and advances to unconsolidated
affiliates.............................................. 197.1 169.7
Deferred income taxes.................................... 438.1 425.6
Long-term receivables and other assets................... 479.4 447.4
-------- --------
$3,767.1 $3,690.8
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable....................................... $ 156.5 $ 161.8
Accrued interest....................................... 25.9 62.0
Accrued compensation and related benefits.............. 122.4 138.3
Other accrued liabilities.............................. 164.6 200.2
Payable to affiliates.................................. 87.5 81.8
Long-term debt, current maturities..................... 29.7 33.7
-------- --------
Total current liabilities.......................... 586.6 677.8
Long-term debt, less current maturities.................. 1,620.3 1,582.5
Accrued postretirement benefits.......................... 747.6 743.1
Other noncurrent liabilities............................. 698.2 618.4
-------- --------
Total liabilities.................................. 3,652.7 3,621.8
-------- --------
Commitments and contingencies
Minority interests....................................... 218.2 344.3
Stockholders' deficit:
Preferred stock, $.50 par value; 12,500,000 shares
authorized; Class A $.05 Non-Cumulative Participating
Convertible Preferred Stock; shares issued: September
30, 1995--669,756 and December 31, 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..................................... 153.4 53.2
Accumulated deficit.................................... (231.6) (302.9)
Pension liability adjustment........................... (11.4) (11.4)
Treasury stock, at cost (shares held: preferred--845;
common: September 30, 1995--1,355,567 and December 31,
1994--1,355,768)...................................... (19.5) (19.5)
-------- --------
Total stockholders' deficit........................ (103.8) (275.3)
-------- --------
$3,767.1 $3,690.8
======== ========
</TABLE>

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

F-35
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF OPERATIONS

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1994
-------- --------
(UNAUDITED)
<S> <C> <C>
Net sales:
Aluminum operations...................................... $1,646.7 $1,335.7
Forest products operations............................... 180.9 180.4
Real estate operations................................... 65.0 61.6
-------- --------
1,892.6 1,577.7
-------- --------
Costs and expenses:
Costs of sales and operations (exclusive of depreciation
and depletion):
Aluminum operations.................................... 1,329.8 1,222.8
Forest products operations............................. 96.0 95.8
Real estate operations................................. 48.4 46.4
Selling, general and administrative expenses............. 140.5 122.3
Depreciation and depletion............................... 91.0 89.9
-------- --------
1,705.7 1,577.2
-------- --------
Operating income........................................... 186.9 .5
Other income (expense):
Investment, interest and other income (expense).......... 8.7 (3.2)
Interest expense......................................... (136.1) (132.0)
-------- --------
Income (loss) before income taxes, minority interests and
extraordinary item........................................ 59.5 (134.7)
Credit (provision) for income taxes........................ (4.6) 58.0
Minority interests......................................... (19.8) (15.9)
-------- --------
Income (loss) before extraordinary item.................... 35.1 (92.6)
Extraordinary item:
Loss on early extinguishment of debt, net of related
benefit for income taxes of $2.9........................ -- (5.4)
-------- --------
Net income (loss).......................................... $ 35.1 $ (98.0)
======== ========
Per common and common equivalent share:
Income (loss) before extraordinary item.................. $ 3.71 $ (9.80)
Extraordinary item....................................... -- (.57)
-------- --------
Net income (loss)........................................ $ 3.71 $ (10.37)
======== ========
</TABLE>

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

F-36
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

(IN MILLIONS OF DOLLARS)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1995 1994
------ ------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ 35.1 $(98.0)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and depletion................................. 91.0 89.9
Minority interests......................................... 19.8 15.9
Amortization of deferred financing costs and discounts on
long-term debt............................................ 14.3 14.6
Net sales (purchases) of marketable securities............. 8.9 (6.5)
Amortization of excess investment over equity in net assets
of unconsolidated affiliates.............................. 8.7 8.7
Equity in losses (income) of unconsolidated affiliates..... (17.1) 2.8
Net gains on marketable securities......................... (6.0) (2.6)
Extraordinary loss on early extinguishment of debt, net.... -- 5.4
Decrease in prepaid expenses and other assets.............. 78.2 2.7
Increase in payable to affiliates and other liabilities.... 9.0 6.3
Decrease (increase) in receivables......................... (72.9) 16.1
Decrease (increase) in inventories......................... (68.6) 10.3
Decrease in accrued interest............................... (33.1) (25.4)
Increase in accrued and deferred income taxes.............. (11.1) (57.1)
Increase (decrease) in accounts payable.................... (4.8) .9
Other...................................................... 5.6 (2.6)
------ ------
Net cash provided by (used for) operating activities..... 57.0 (18.6)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from disposition of property and investments.... 24.8 8.5
Capital expenditures......................................... (63.9) (53.1)
Other........................................................ (.6) (4.7)
------ ------
Net cash used for investing activities................... (39.7) (49.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under revolving credit agreements.. 53.0 (193.9)
Proceeds from issuance of long-term debt..................... 7.2 225.5
Repurchase of and principal payments on long-term debt....... (35.3) (31.0)
Dividends paid to Kaiser's minority preferred stockholders... (18.4) (13.8)
Redemption of preference stock............................... (8.8) (8.5)
Incurrence of financing costs................................ (1.1) (19.4)
Proceeds from issuance of Kaiser preferred stock............. -- 100.4
Other........................................................ 1.7 .9
------ ------
Net cash provided by (used for) financing activities..... (1.7) 60.2
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... 15.6 (7.7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............... 84.6 83.9
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $100.2 $ 76.2
====== ======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Net margin borrowings (repayments) for marketable
securities.................................................. $ (6.9) $ 10.0
Reduction of stockholders' deficit due to redemption of
Kaiser preferred stock...................................... 134.3
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid, net of capitalized interest................... $154.8 $142.8
Income taxes paid, net....................................... 21.4 12.0
</TABLE>

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

F-37
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

1. GENERAL

The information contained in the following notes to the consolidated
financial statements is condensed from that which would appear in the annual
consolidated financial statements; accordingly, the consolidated financial
statements included herein should be reviewed in conjunction with the
consolidated financial statements and related notes thereto contained in the
Annual Report on Form 10-K filed by MAXXAM Inc. with the Securities and
Exchange Commission for the fiscal year ended December 31, 1994 (the "Form 10-
K"). All references to the "Company" include MAXXAM Inc. and its subsidiary
companies unless otherwise indicated or the context indicates otherwise.
Accounting measurements at interim dates inherently involve greater reliance
on estimates than at year end. The results of operations for the interim
periods presented are not necessarily indicative of the results to be expected
for the entire year.

The consolidated financial statements included herein are unaudited;
however, they include all adjustments of a normal recurring nature which, in
the opinion of management, are necessary to present fairly the consolidated
financial position of the Company at September 30, 1995 and the consolidated
results of operations and cash flows for the nine months ended September 30,
1995 and 1994. Certain reclassifications of prior period information have been
made to conform to the current presentation.

2. CASH AND CASH EQUIVALENTS

At September 30, 1995 and December 31, 1994, cash and cash equivalents
includes $4.7 and $19.4, respectively, which is restricted for debt service
payments on the 7.95% Timber Collateralized Notes due 2015.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
Aluminum Operations:
Finished fabricated products.................. $ 70.1 $ 49.4
Primary aluminum and work in process.......... 207.3 203.1
Bauxite and alumina........................... 134.1 102.3
Operating supplies and repair and maintenance
parts........................................ 119.1 113.2
------ ------
530.6 468.0
------ ------
Forest Products Operations:
Lumber........................................ 64.2 61.3
Logs.......................................... 15.1 12.1
------ ------
79.3 73.4
------ ------
$609.9 $541.4
====== ======
</TABLE>

F-38
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONDENSED 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>
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- ------------
<S> <C> <C>
Corporate:
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............................ 16.4 20.9
Other............................................. .2 .2
Aluminum Operations:
1994 Credit Agreement............................. 62.4 6.7
9 7/8% Senior Notes due February 15, 2002, net of
discount......................................... 223.8 223.6
Alpart CARIFA Loan................................ 60.0 60.0
12 3/4% Senior Subordinated Notes due February 1,
2003............................................. 400.0 400.0
Other............................................. 64.4 69.2
Forest Products Operations:
7.95% Timber Collateralized Notes due July 20,
2015............................................. 350.2 363.8
11 1/4% Senior Secured Notes due August 1, 2003... 100.0 100.0
12 1/4% Senior Secured Discount Notes due August
1, 2003, net of discount......................... 89.7 82.8
10 1/2% Senior Notes due March 1, 2003............ 235.0 235.0
Other............................................. .8 .9
Real Estate Operations:
Secured notes due December 31, 1999, interest at
prime plus 3%.................................... 8.0 10.0
Other notes and contracts, secured by receivables,
buildings, real estate and equipment............. 14.1 18.1
-------- --------
1,650.0 1,616.2
Less: current maturities............................ (29.7) (33.7)
-------- --------
$1,620.3 $1,582.5
======== ========
</TABLE>

5. CREDIT (PROVISION) FOR INCOME TAXES

The provision for income taxes for the nine months ended September 30, 1995
includes a credit relating to the revision of prior years' tax estimates and
other changes in valuation allowances.

6. PER SHARE INFORMATION

Per share calculations are based on the weighted average number of common
shares outstanding in each period and, if dilutive, weighted average common
equivalent shares assumed to be issued from the exercise of common stock
options based upon the average price of the Company's common stock during the
period.

7. CONTINGENCIES

Environmental Contingencies

Kaiser Aluminum Corporation ("Kaiser," a majority owned subsidiary of the
Company) and its principal operating subsidiary, Kaiser Aluminum & Chemical
Corporation ("KACC"), are subject to a wide variety of environmental laws and
regulations and to fines or penalties assessed for alleged breaches of the
environmental laws and to claims and litigation based on such laws. KACC is
currently subject to a number

F-39
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
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. At
September 30, 1995, the balance of such accruals, which is primarily included
in other noncurrent liabilities, was $39.7. 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 $12.0 for the years
1995 through 1999 and an aggregate of approximately $11.0 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 approximately $22.0. While uncertainties
are inherent in the final outcome of these environmental matters, and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management currently believes that the resolution of such
uncertainties should not have a material adverse effect on the Company's
consolidated financial position or results of operations.

Asbestos Contingencies

KACC is a defendant in a 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. The
lawsuits generally relate to products KACC has not manufactured for at least
15 years. At October 31, 1995, the number of such lawsuits pending was
approximately 58,200, as compared to 31,700 at June 30, 1995. KACC has been
advised by its regional counsel that, although there can be no assurance, the
recent increase in pending lawsuits 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 lawsuits that were filed and served on KACC between June 30, 1995, and
October 31, 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. 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, the current
state of case law related to asbestos claims, and the advice of counsel.
Accordingly, an asbestos-related cost accrual of $155.3 ($134.4 at June 30,
1995), before considerations for insurance recoveries, is included primarily
in other noncurrent liabilities at September 30, 1995. KACC estimates that
annual future cash payments in connection with such litigation will be
approximately $11.0 to $19.0 for each of the years 1995 through 1999, and an
aggregate of approximately $90.8 thereafter through 2008. KACC does not
presently believe there is a reasonable basis for estimating such costs beyond
2008 and, accordingly, no accrual has been recorded for such costs which may
be incurred beyond 2008.

F-40
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

KACC believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. While claims for recovery
from some of KACC's insurance carriers are currently subject to pending
litigation and other carriers have raised certain defenses, KACC believes,
based on prior insurance-related recoveries in respect of asbestos-related
claims, existing insurance policies, and the advice of counsel, that
substantial recoveries from the insurance carriers are probable. Accordingly,
an estimated aggregate insurance recovery of $134.7 ($120.6 at June 30, 1995),
determined on the same basis as the asbestos-related cost accrual, is recorded
primarily in long-term receivables and other assets at September 30, 1995.

Other Contingencies

By letter dated November 1, 1995, the Enforcement Office of the United
States Department of Treasury's Office of Thrift Supervision ("OTS") advised
that, subject to final approval by the acting director of the OTS, the OTS
intends to issue a notice of charges against the Company after 30 days from
the date of the letter. It is the Company's understanding that other
individuals and entities involved in the investigation of the failure of
United Savings Association of Texas ("USAT"), a wholly owned subsidiary of
United Financial Group Inc. ("UFG"), have received similar notices from the
OTS. Although the OTS has not formally articulated any claims against the
Company, the Enforcement Office of the OTS has stated that the charges may
include, among other things, claims that the Company had a duty to maintain
the net worth of USAT and that the Company is liable for the alleged unsafe
and unsound practices of others. The Company denies these charges and believes
it has meritorious defenses in this matter. It is premature to assess the
impact, if any, the outcome of this matter may have on the Company's
consolidated financial position or results of operations.

8. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS

KACC enters into primary metal hedging transactions with off-balance sheet
risk in the normal course of business. The prices realized by Kaiser under
certain sales contracts for alumina, primary aluminum and fabricated aluminum
products as well as the costs incurred by Kaiser on 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 metal 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 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. In this regard, in respect of its remaining 1995 anticipated
net exposure, at September 30, 1995, KACC had net forward sales contracts for
53,875 tons (all references to tons in this report refer to metric tons of
2,204.6 pounds) of primary aluminum at fixed prices, had purchased call
options in respect of 17,250 tons of primary aluminum, had

F-41
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
purchased put options to establish a minimum price for 48,375 tons of primary
aluminum, and had entered into option contracts that established a price range
for 22,500 tons of primary aluminum. In respect of its 1996 anticipated net
exposure, at September 30, 1995, KACC had sold forward 11,100 tons of primary
aluminum at fixed prices.

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 September 30, 1995, KACC had net forward foreign exchange contracts
totaling approximately $125.9 for the purchase of 174.0 Australian dollars
through April 1997.

At September 30, 1995, the net unrealized gain on KACC's position in
aluminum forward sales and option contracts (based on a market price of $1,773
per ton of primary aluminum) and forward foreign exchange contracts was $9.1.

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 September 30, 1995, KACC had $2.5,
compared with $50.5 at December 31, 1994, on deposit with a counterparty in
respect of such contracts. These amounts are recorded in prepaid expenses and
other current assets.

9. STOCKHOLDERS' DEFICIT

On September 19, 1995, Kaiser redeemed all 1,938,295 of its Series A
Mandatory Conversion Premium Dividend Preferred Stock (the "Series A Shares").
Redemption of the Series A Shares resulted in the simultaneous redemption of
all 19,382,950 $.65 Depositary Shares (the "Depositary Shares") in exchange
for (i) 13,126,521 shares of Kaiser's common stock, (ii) an amount in cash
equal to all accrued and unpaid dividends up to and including the day
immediately prior to the redemption date, and (iii) cash in lieu of any
fractional shares of common stock that would have otherwise been issuable.

In May of 1995, the Company sold the remaining Depositary Shares that it
owned on December 31, 1994. As a result, 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 decreased Kaiser's preferred equity,
and reduced Kaiser's deficit in common equity, by $134.3. 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.

F-42
<PAGE>

MAXXAM INC. AND SUBSIDIARIES

UNAUDITED SUMMARY QUARTERLY FINANCIAL DATA

<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
Operating income................... 40.6 81.9 64.4
Net income (loss).................. (1.0) 25.4 10.7
Per common and common equivalent
share:
Net income (loss)................ (0.11) 2.69 1.13
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-43
<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-34), and have issued our report thereon dated February 17, 1995. 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-45 through F-49) 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 17, 1995

F-44
<PAGE>

MAXXAM INC.

BALANCE SHEET (UNCONSOLIDATED)

<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
------ ----------------
1994 1993
------- -------
(IN MILLIONS OF
DOLLARS)
----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................. $ 15.5 $ 26.7
Marketable securities...................................... 20.8 26.9
Other current assets....................................... 4.4 5.4
------- -------
Total current assets..................................... 40.7 59.0
Investment in subsidiaries................................... -- 3.6
Deferred income taxes........................................ 68.4 60.7
Other assets................................................. 4.6 6.0
------- -------
$ 113.7 $ 129.3
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Accounts payable and accrued liabilities................... $ 10.5 $ 9.3
Long-term debt, current maturities......................... 2.4 4.1
------- -------
Total current liabilities................................ 12.9 13.4
Long-term debt, less current maturities...................... 44.6 48.0
Losses recognized in excess of investment in subsidiaries.... 198.9 --
Notes payable to subsidiaries, net of notes receivable and
advances.................................................... 12.2 108.6
Other noncurrent liabilities................................. 120.4 127.2
------- -------
Total liabilities........................................ 389.0 297.2
------- -------
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: 1994--669,957 and
1993--679,084............................................. .3 .3
Common stock, $.50 par value; 28,000,000 shares authorized;
shares issued: 10,063,359................................. 5.0 5.0
Additional capital......................................... 53.2 51.2
Accumulated deficit........................................ (302.9) (180.8)
Pension liability adjustment............................... (11.4) (23.9)
Treasury stock, at cost (shares held: preferred--845;
common: 1994--1,355,768 and 1993--1,364,895).............. (19.5) (19.7)
------- -------
Total stockholders' deficit.............................. (275.3) (167.9)
------- -------
$ 113.7 $ 129.3
======= =======
</TABLE>

See notes to consolidated financial statements and accompanying notes.

F-45
<PAGE>

MAXXAM INC.

STATEMENT OF OPERATIONS (UNCONSOLIDATED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1994 1993 1992
------- ------- ------
(IN MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Investment, interest and other income................ $ 12.6 $ 3.0 $ 2.8
Interest expense..................................... (11.7) (13.7) (15.1)
General and administrative expenses.................. (11.0) (15.4) (8.4)
Equity in earnings (losses) of subsidiaries.......... (132.0) (615.5) 9.3
------- ------- ------
Loss before income taxes and cumulative effect of
changes in accounting principles.................... (142.1) (641.6) (11.4)
Credit (provision) for income taxes.................. 20.0 (3.1) 4.1
------- ------- ------
Loss before cumulative effect of changes in account-
ing principles...................................... (122.1) (644.7) (7.3)
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 loss............................................. $(122.1) $(600.2) $ (7.3)
======= ======= ======
</TABLE>

See notes to consolidated financial statements and accompanying notes.

F-46
<PAGE>

MAXXAM INC.

STATEMENT OF CASH FLOWS (UNCONSOLIDATED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1994 1993 1992
------- ------- -----
(IN MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(122.1) $(600.2) $(7.3)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Equity in losses (earnings) of subsidiaries......... 132.0 615.5 (9.3)
Net sales (purchases) of marketable securities...... 6.8 18.3 (30.7)
Amortization of deferred financing costs and dis-
counts on long-term debt........................... .3 .5 .6
Cumulative effect of changes in accounting princi-
ples, net.......................................... -- (44.5) --
Decrease in receivables............................. 1.1 .8 1.1
Increase in accrued and deferred income taxes....... (7.9) (13.1) (6.5)
Increase (decrease) in accounts payable and other
liabilities........................................ (5.3) 24.3 (1.8)
Other............................................... (.2) 2.6 (1.4)
------- ------- -----
Net cash provided by (used for) operating activi-
ties.............................................. 4.7 4.2 (55.3)
------- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Kaiser Depositary Shares....... 10.3 -- --
Dividends received from subsidiaries................. 7.5 66.1 18.1
Investments in and net advances from (to) subsidiar-
ies................................................. (27.5) (22.2) 18.0
Capital expenditures................................. (.4) (.3) (1.5)
------- ------- -----
Net cash provided by (used for) investing activi-
ties.............................................. (10.1) 43.6 34.6
------- ------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption, repurchase of and principal payments on
long-term debt...................................... (5.8) (24.3) (3.9)
Proceeds from issuance of common stock............... -- -- .6
------- ------- -----
Net cash used for financing activities............. (5.8) (24.3) (3.3)
------- ------- -----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.. (11.2) 23.5 (24.0)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........ 26.7 3.2 27.2
------- ------- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. $ 15.5 $ 26.7 $ 3.2
======= ======= =====
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FI-
NANCING ACTIVITIES:
Distribution received from subsidiary of the
Company's payable................................... $ 132.0
Assumption by the Company of subsidiary's payables to
the Company and affiliates.......................... (63.1)
Net assets transferred from subsidiary............... $ 30.5
Dividend of the Company's marketable securities
received from subsidiary............................ $14.9
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid........................................ $ 7.0 $ 6.8 $11.1
Income taxes paid (refunded)......................... 1.1 (.5) (1.9)
</TABLE>

See notes to consolidated financial statements and accompanying notes.

F-47
<PAGE>

MAXXAM INC.

NOTES TO FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

A. SIGNIFICANT TRANSACTIONS

On August 4, 1993, MAXXAM Group Inc. ("MGI," a wholly owned subsidiary of
the Company) issued $100.0 aggregate principal amount of 11 1/4% Senior
Secured Notes due 2003 (the "MGI Senior Notes") and $126.7 aggregate principal
amount (approximately $70.0 net of original issue discount) of 12 1/4% Senior
Secured Discount Notes due 2003 (the "MGI Discount Notes," which, together
with the MGI Senior Notes, are referred to collectively as the "MGI Notes").
The MGI Notes are secured by MGI's pledge of 100% of the common stock of The
Pacific Lumber Company, Britt Lumber Co., Inc. and MAXXAM Properties Inc.
(wholly owned subsidiaries of MGI) and by the Company's pledge of 28 million
shares of the common stock of Kaiser Aluminum Corporation ("Kaiser," a
majority owned subsidiary of the Company). Contemporaneously with the issuance
of the MGI Notes, MGI (i) transferred to the Company 50 million common shares
of Kaiser held by a subsidiary of MGI, representing MGI's (and the Company's)
entire interest in Kaiser's common stock, (ii) transferred to the Company
60,075 shares of the Company's common stock held by a subsidiary of MGI, (iii)
transferred to the Company certain notes receivable, long-term investments,
and other assets, each net of related liabilities, collectively having a
carrying value to MGI of approximately $1.1 and (iv) exchanged with the
Company 2,132,950 of Kaiser's $.65 Depositary Shares (the "Depositary Shares")
(acquired by MGI from Kaiser in exchange for a $15.0 cash loan made by MGI to
Kaiser Aluminum & Chemical Corporation, Kaiser's operating subsidiary, in
January 1993), such exchange being in satisfaction of a related $15.0
promissory note evidencing a cash loan made by the Company to MGI in January
1993. On the same day, the Company assumed approximately $17.5 of certain
liabilities of MGI that were unrelated to MGI's forest products operations or
were related to operations which have been disposed of by MGI. Additionally,
on September 28, 1993, MGI transferred its interest in Palmas del Mar to the
Company.

During 1994, the Company sold 1,239,400 of the Depositary Shares for an
aggregate net proceeds of $10.3, resulting in pre-tax gains of $1.6. The
carrying value of the remaining 893,550 Depositary Shares at December 31, 1994
was $6.3. The Company may consummate the sale of all or any portion of the
remaining Depositary Shares at any time.

B. 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 of
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.

F-48
<PAGE>

MAXXAM INC.

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

(IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)

C. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
DECEMBER
31,
------------
1994 1993
----- -----
<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 $1.7 and $2.4 at December 31, 1994 and 1993, re-
spectively................................................... 20.9 25.2
Other......................................................... 1.1 1.9
----- -----
47.0 52.1
Less: current maturities...................................... (2.4) (4.1)
----- -----
$44.6 $48.0
===== =====
</TABLE>

Scheduled maturities of long-term debt outstanding at December 31, 1994 are
as follows: years ending December 31, 1995--$2.4; 1996--$3.6; 1997--$3.3;
1998--$3.3; 1999--$11.0; thereafter--$25.1.

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

At December 31, 1994, the Company has unsecured notes payable to its real
estate subsidiaries totalling $73.8 (including interest) which consist of a
$60.9 note, bearing interest at 6% per annum, and four notes totalling $12.9,
bearing interest at 7% per annum. The Company also has secured nonrecourse
notes receivable from a real estate subsidiary totalling $43.6 (including
interest) which bear interest at 12% per annum on the first $15.0 of principal
and at prime plus 1% to 2% per annum on the remaining principal.

F-49
<PAGE>

MAXXAM INC.

BALANCE SHEET (UNCONSOLIDATED)

See notes to consolidated financial statements and accompanying notes.

F-50
<PAGE>

MAXXAM INC.

STATEMENT OF OPERATIONS (UNCONSOLIDATED)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1995 1994
------ ------
(UNAUDITED)
(IN MILLIONS
OF DOLLARS)
<S> <C> <C>
Investment, interest and other income........................... $ 3.4 $ 2.9
Interest expense................................................ (4.7) (9.0)
General and administrative expenses............................. (13.8) (7.2)
Equity in earnings (losses) of subsidiaries..................... 26.6 (100.0)
------ ------
Income (loss) before income taxes............................... 11.5 (113.3)
Credit for income taxes......................................... 23.6 15.3
------ ------
Net income (loss)............................................... $ 35.1 $(98.0)
====== ======
</TABLE>

See notes to consolidated financial statements and accompanying notes.

F-51
<PAGE>

MAXXAM INC.

STATEMENT OF CASH FLOWS (UNCONSOLIDATED)

<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
--------------
1995 1994
------ ------
(UNAUDITED)
(IN MILLIONS
OF DOLLARS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $ 35.1 $(98.0)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Net sales (purchases) of marketable securities............. 18.6 (2.7)
Equity in losses (earnings) of subsidiaries................ (26.6) 100.0
Decrease in prepaid expenses and other assets.............. 2.7 1.2
Increase (decrease) in accounts payable and other liabili-
ties...................................................... (14.5) .8
Increase in accrued and deferred income taxes.............. (8.1) (.8)
Other...................................................... .2 (4.0)
------ ------
Net cash provided by (used for) operating activities..... 7.4 (3.5)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of Kaiser Depositary Shares............... 7.6 .1
Dividends received from subsidiaries......................... 4.8 2.4
Investments in and net advances from (to) subsidiaries....... 1.9 (17.0)
Capital expenditures......................................... (.2) (.2)
Other........................................................ -- (1.6)
------ ------
Net cash provided by (used for) investing activities..... 14.1 (16.3)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of and principal payments on long-term debt....... (5.8) (5.8)
------ ------
Net cash used for financing activities................... (5.8) (5.8)
------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... 15.7 (25.6)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............... 15.5 26.7
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD..................... $ 31.2 $ 1.1
====== ======
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING AC-
TIVITIES:
Reduction of stockholders' deficit due to redemption of Kai-
ser preferred stock......................................... $134.3
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid................................................ $ 3.1 $ 3.7
Income taxes paid............................................ .3 1.1
</TABLE>

See notes to consolidated financial statements and accompanying notes.

F-52
<PAGE>

MAXXAM INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

(IN MILLIONS OF DOLLARS)

A. DEFERRED INCOME TAXES

B. LONG-TERM DEBT

Long-term debt consists of the following:

<TABLE>
<CAPTION>
SEPTEMBER 30, 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 $1.2 and $1.7 at
September 30, 1995 and December 31, 1994,
respectively.................................... 16.4 20.9
Other............................................ .4 1.1
----- -----
41.8 47.0
Less: current maturities......................... (.3) (2.4)
----- -----
$41.5 $44.6
===== =====
</TABLE>

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

At September 30, 1995, the Company has unsecured notes payable to its real
estate subsidiaries totalling $31.5 (including interest) which consist of an
$18.0 note, bearing interest at 6% per annum, and four notes totalling $13.5,
bearing interest at 7% per annum.

F-53
<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, 1990, 1991, 1992, 1993 and 1994 and the nine months ended
September 30, 1994 and 1995
23 Consent of Arthur Andersen & Co.
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,
1994 (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, 1994, File No. 1-8857)
99.2 The Unaudited Consolidated Financial Statements and notes thereto of
Kaiser Aluminum Corporation for the nine months ended September 30,
1995 (incorporated herein by reference to the Quarterly Report on Form
10-Q of Kaiser Aluminum Corporation for the quarter ended September
30, 1995, File No. 1-9447)
</TABLE>
- --------
* 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
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THERETO
DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS, ON JANUARY 5, 1996.

MAXXAM Inc.

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

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Anthony R. Pierno, Byron L. Wade,
Bernard L. Birkel and Karen Bryant, and each of them, his true and lawful
attorneys-in-fact and agent, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments, including any post-effective
amendments, to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the above
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or either of them or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof. This Power of Attorney may be executed in
multiple counterparts, each of which shall be deemed an original, but which
taken together shall constitute one instrument.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
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 January 5, 1996
- ------------------------------------- Board, Chief
CHARLES E. HURWITZ Executive Officer
and President
(Principal
Executive Officer)

/s/ Paul N. Schwartz Executive Vice January 5, 1996
- ------------------------------------- President and Chief
PAUL N. SCHWARTZ Financial Officer
(Principal
Financial Officer)

/s/ Terry L. Freeman Assistant Controller January 5, 1996
- ------------------------------------- (Principal
TERRY L. FREEMAN Accounting Officer)

/s/ Robert J. Cruikshank Director January 5, 1996
- -------------------------------------
ROBERT J. CRUIKSHANK

/s/ Ezra G. Levin Director January 5, 1996
- -------------------------------------
EZRA G. LEVIN

/s/ Stanley D. Rosenberg Director January 5, 1996
- -------------------------------------
STANLEY D. ROSENBERG

II-4

<PAGE>

EXHIBIT 12

MAXXAM INC.

CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES

<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, YEARS ENDED DECEMBER 31,
--------------------- ----------------------------------------
1995 1994 1994 1993 1992 1991 1990
--------- ---------- ------- ------- ------ ------ ------
(IN MILLIONS OF DOLLARS)
<S> <C> <C> <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........... $ 59.5 $(134.7) $(171.8) $(211.4) $(13.2) $ 67.4 $222.0
Add (deduct):
Fixed charges as
calculated
below.............. 162.6 167.0 225.2 210.8 215.1 227.7 243.1
Capitalized inter-
est, included in
fixed charges...... (2.0) (2.6) (3.0) (4.3) (5.2) (5.1) (10.2)
Preferred stock div-
idend requirements
of subsidiaries,
included in fixed
charges............ (17.2) (25.1) (35.6) (10.9) (4.6) (2.0) (2.4)
--------- ---------- ------- ------- ------ ------ ------
$202.9 $ 4.6 $ 14.8 $ (15.8) $192.1 $288.0 $452.5
========= ========== ======= ======= ====== ====== ======
Fixed charges are
calculated as follows:
Interest expense...... $129.7 $ 124.6 $ 167.3 $ 169.5 $181.8 $198.8 $210.9
Amortization of
deferred financing
costs................ 6.4 7.4 9.6 15.6 13.8 12.1 11.2
Capitalized interest.. 2.0 2.6 3.0 4.3 5.2 5.1 10.2
Interest component of
rental expense....... 7.3 7.3 9.7 10.5 9.7 9.7 8.4
Preferred stock
dividend requirements
of subsidiaries...... 17.2 25.1 35.6 10.9 4.6 2.0 2.4
--------- ---------- ------- ------- ------ ------ ------
$162.6 $ 167.0 $ 225.2 $ 210.8 $215.1 $227.7 $243.1
========= ========== ======= ======= ====== ====== ======
Ratio of earnings to
fixed charges.......... 1.2x 1.3x 1.9x
========= ====== ======
Fixed charge coverage
deficiency............. $(162.4) $(210.4) $(226.6) $(23.0)
========== ======= ======= ======
</TABLE>

<PAGE>

EXHIBIT 23

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
January 2, 1996