1
                                                Filed Pursuant to Rule 424(b)(3)
                                                Registration No. 333-15931



   
PROSPECTUS
    
                     KAISER ALUMINUM & CHEMICAL CORPORATION
 
                               OFFER TO EXCHANGE
                            ANY AND ALL OUTSTANDING
                         10 7/8% SENIOR NOTES DUE 2006
                  ($175,000,000 PRINCIPAL AMOUNT OUTSTANDING)
                   FOR 10 7/8% SERIES B SENIOR NOTES DUE 2006
 
              GUARANTEED BY KAISER ALUMINA AUSTRALIA CORPORATION,
                KAISER FINANCE CORPORATION, ALPART JAMAICA INC.,
          KAISER JAMAICA CORPORATION, KAISER MICROMILL HOLDINGS, LLC,
      KAISER SIERRA MICROMILLS, LLC, KAISER TEXAS MICROMILL HOLDINGS, LLC,
   
     AND KAISER TEXAS SIERRA MICROMILLS, LLC (COLLECTIVELY, THE "SUBSIDIARY
                                  GUARANTORS")
    
 
   
     The Exchange Offer (as defined below) and withdrawal rights will expire at
5:00 p.m., New York City time, on Wednesday, February 5, 1997 (as such date may
be extended, the "Expiration Date").
    
 
   
     Kaiser Aluminum & Chemical Corporation (the "Company") hereby offers (the
"Exchange Offer"), upon the terms and subject to the conditions set forth in
this Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal"), to exchange $1,000 in principal amount of its 10 7/8% Series B
Senior Notes due 2006 (the "New Notes") for each $1,000 in principal amount of
its outstanding 10 7/8% Senior Notes due 2006 (the "Old Notes") (the Old Notes
and the New Notes are sometimes collectively referred to herein as the "Notes")
held by Eligible Holders (as defined below). An aggregate principal amount of
$175.0 million of Old Notes is outstanding. See "The Exchange Offer." For
purposes of the Exchange Offer, "Eligible Holder" shall mean the registered
owner of any Old Notes that remain Registrable Securities (as defined below) as
reflected on the records of First Trust National Association, as registrar for
the Old Notes (in such capacity, the "Registrar"), or any person whose Old Notes
are held of record by the depository of the Old Notes. For purposes of the
Exchange Offer, "Registrable Securities" means each Old Note until the earliest
to occur of (i) the date on which such Old Note has been exchanged for a New
Note in the Exchange Offer and is thereafter freely tradeable by the holder
thereof not an affiliate of the Company or any Subsidiary Guarantor, (ii) the
date on which such Old Note is registered under the Securities Act of 1933, as
amended (the "Securities Act"), and disposed of in accordance with a
registration statement, (iii) the date on which such Old Note is distributed to
the public pursuant to Rule 144 under the Securities Act, or (iv) the date on
which such Old Note shall have ceased to be outstanding.
    
 
   
     The Company will accept for exchange any and all Old Notes that are validly
tendered prior to 5:00 p.m., New York City time, on the Expiration Date. Tenders
of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Offer is not conditioned upon any
minimum principal amount of the Old Notes being tendered for exchange. However,
the Exchange Offer is subject to certain customary conditions, which may be
waived by the Company, and to the terms and provisions of the Registration
Rights Agreement, dated as of October 23, 1996 (the "Registration Rights
Agreement") among the Company, the Subsidiary Guarantors (each of which has
guaranteed the Old Notes and has agreed to guarantee the New Notes), and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Salomon Brothers Inc, BA Securities, Inc., and Bear,
Stearns & Co. Inc. (collectively, the "Initial Purchasers"). The Old Notes may
be tendered only in multiples of $1,000. See "The Exchange Offer."
    
                                                        (continued on next page)
 
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SEE "RISK FACTORS" BEGINNING ON PAGE 17 HEREIN FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY ELIGIBLE HOLDERS IN EVALUATING THE EXCHANGE OFFER.
    
 
                             ---------------------
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
      EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
          SECURITIES AND EXCHANGE 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 date of this Prospectus is December 30, 1996.
    
   2
 
   
     The Old Notes were issued in a transaction (the "Offering") pursuant to
which the Company issued an aggregate of $175.0 million principal amount of the
Old Notes to the Initial Purchasers on October 23, 1996 (the "Closing Date")
pursuant to a Purchase Agreement, dated October 17, 1996 (the "Purchase
Agreement") among the Company, the Subsidiary Guarantors, and the Initial
Purchasers. The Initial Purchasers subsequently resold the Old Notes in reliance
on Rule 144A under the Securities Act and certain other exemptions under the
Securities Act. The Company, the Subsidiary Guarantors, and the Initial
Purchasers also entered into the Registration Rights Agreement, pursuant to
which the Company granted certain registration rights for the benefit of the
holders of the Old Notes. The Exchange Offer is intended to satisfy certain of
the Company's obligations under the Registration Rights Agreement with respect
to the Old Notes. See "The Exchange Offer -- Purpose and Effect."
    
 
   
     The Old Notes were issued under an indenture, dated as of October 23, 1996
(the "Indenture"), among the Company, the Subsidiary Guarantors, and First Trust
National Association, as trustee (in such capacity, the "Trustee"). The New
Notes will be issued under the Indenture as it relates to the New Notes. The
form and terms of the New Notes will be identical in all material respects to
the form and terms of the Old Notes, except that (i) the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, (ii) subject to certain limited exceptions,
holders of New Notes will not be entitled to Additional Interest (as defined in
the Registration Rights Agreement) otherwise payable under the terms of the
Registration Rights Agreement in respect of Old Notes held by such holders
during any period in which a Registration Default (as defined in the
Registration Rights Agreement) is continuing, and (iii) holders of New Notes
will not be, and upon the consummation of the Exchange Offer Eligible Holders of
Old Notes will no longer be, entitled to certain rights under the Registration
Rights Agreement intended for the holders of unregistered securities. The
Exchange Offer shall be deemed consummated upon the delivery by the Company to
the Registrar under the Indenture of New Notes in the same aggregate principal
amount as the aggregate principal amount of Old Notes that are validly tendered
by holders thereof pursuant to the Exchange Offer. See "The Exchange
Offer -- Termination of Certain Rights" and "-- Procedures for Tendering Old
Notes" and "Description of New Notes."
    
 
     The New Notes will bear interest at a rate equal to 10 7/8% per annum from
and including their date of issuance. Interest on the New Notes is payable
semi-annually on April 15 and October 15 of each year (each, an "Interest
Payment Date"). Eligible Holders whose Old Notes are accepted for exchange will
have the right to receive interest accrued thereon from the date of their
original issuance or the last Interest Payment Date, as applicable, to, but not
including, the date of issuance of the New Notes, such interest to be payable
with the first interest payment on the New Notes. Interest on the Old Notes
accepted for exchange will cease to accrue on the day prior to the issuance of
the New Notes. The New Notes will mature on October 15, 2006. See "Description
of New Notes."
 
   
     The New Notes will not be redeemable, in whole or in part, prior to October
15, 2001. Thereafter, the New Notes will be redeemable at the redemption prices
set forth herein, plus interest accrued thereon to, but not including, the
redemption date. Upon the occurrence of a Change of Control (as defined herein),
the Company will be required to make an offer to purchase from each holder all
or any part of the holder's Notes for which a Change of Control Purchase Notice
(as defined) shall have been delivered as provided in the Indenture and not
withdrawn at 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase. See "Description of New
Notes -- Offer to Purchase the Notes."
    
 
   
     The New Notes will represent senior, unsecured obligations of the Company,
ranking senior in right and priority of payment to all Indebtedness (as defined)
of the Company that by its terms is expressly subordinated to the New Notes.
Without limiting the generality of the foregoing, the New Notes will rank senior
in right and priority of payment to the Indebtedness represented by the
Company's 12 3/4% Senior Subordinated Notes due 2003 (the "12 3/4% Notes"), and
the New Notes will rank pari passu in right and priority of payment with the
Indebtedness under the Credit Agreement (as defined), the Indebtedness
represented by the Company's 9 7/8% Senior Notes due 2002 (the "9 7/8% Notes")
and 10 7/8% Series C Senior Notes due 2006 (the "10 7/8% Series C Notes"). The
New Notes will also be guaranteed fully and unconditionally on a senior,
unsecured basis by the Subsidiary Guarantors. The New Notes, however, will be
effectively subordinated to secured Indebtedness of the Company and the
Subsidiary Guarantors, including
    
 
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the Indebtedness under the Credit Agreement, with respect to the assets securing
such Indebtedness. The New Notes will also be effectively subordinated to claims
of creditors of the Company's subsidiaries, except to the extent that holders of
the New Notes may be creditors of such subsidiaries pursuant to a subsidiary
guarantee. See "Risk Factors" and "Description of New Notes." See also
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Indenture permits the
Company and its subsidiaries to incur additional Indebtedness, including
additional secured Indebtedness, subject to certain limitations. See
"Description of New Notes."
 
   
     Based on positions of the staff of the Securities and Exchange Commission
(the "Commission") enunciated in Morgan Stanley & Co., Incorporated (available
June 5, 1991) and Exxon Capital Holdings Corporation (available May 13, 1988),
and interpreted in the Commission's letters to Shearman & Sterling (available
July 2, 1993) and K-III Communications Corporation (available May 14, 1993), and
similar no-action or interpretive letters issued to third parties, the Company
believes that New Notes issued pursuant to the Exchange Offer to an Eligible
Holder in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by such Eligible Holder, other than as set forth below, without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that the Eligible Holder is not an affiliate of the
Company or any Subsidiary Guarantor within the meaning of Rule 405 under the
Securities Act, is acquiring the New Notes in the ordinary course of business
and is not participating, and has no arrangement or understanding with any
person to participate, in the distribution of the New Notes. Eligible Holders
wishing to accept the Exchange Offer must represent to the Company, as required
by the Registration Rights Agreement, that such conditions have been met. If any
Eligible Holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such Eligible
Holder cannot rely on the position of the staff of the Commission set forth in
the above no-action and interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available. Each broker-dealer that acquired Old Notes
directly from the Company and that receives New Notes for its own account
pursuant to the Exchange Offer must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any secondary
resale transaction (unless an exemption from registration is otherwise
available). See "The Exchange Offer -- Resales of the New Notes." Each
broker-dealer that receives New Notes in exchange for Old Notes that were
acquired by such broker-dealer as a result of market-making or other trading
activities must, in connection with any resale of such New Notes, comply with
the prospectus delivery requirements of the Securities Act and must acknowledge
that it will deliver a prospectus in connection with any such resale. The
Company has agreed that, for a period of 180 days after the effective date of
this Prospectus, it will make this Prospectus, as it may be amended or
supplemented from time to time, available for use by any broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as a result of market-making
or other trading activities.
    
 
   
     As of December 9, 1996, Cede & Co. ("Cede"), as nominee for The Depository
Trust Company, New York, New York ("DTC"), was the registered holder of
approximately $174.3 million aggregate principal amount of the Old Notes and
held such Old Notes for 31 of its participants. The Company believes that no
such participant is an affiliate (as such term is defined in Rule 405 of the
Securities Act) of the Company or any Subsidiary Guarantor. There has previously
been only a limited secondary market, and no public market, for the Old Notes.
The Old Notes are eligible for trading in the Private Offering, Resales and
Trading through Automatic Linkages ("PORTAL") market. There can be no assurance
as to the liquidity of the trading market for either the New Notes or the Old
Notes. The New Notes constitute securities for which there is no established
trading market, and the Company does not currently intend to list the Notes on
any securities exchange. If such a trading market develops for the New Notes,
future trading prices will depend on many factors, including, among other
things, prevailing interest rates, the Company's results of operations and the
market for similar securities. Depending on such factors, the New Notes may
trade at a discount from their face value. See "Risk Factors -- Absence of
Public Market for the New Notes."
    
 
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     The Company will not receive any proceeds from this Exchange Offer.
Pursuant to the Registration Rights Agreement, the Company will bear all
expenses incident to the Company's consummation of the Exchange Offer and
compliance with the Registration Rights Agreement.
 
     THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
 
   
     Old Notes in the aggregate principal amount of $175.0 million were issued
originally in global form (the "Global Old Note"). The Global Old Note was
deposited with, or on behalf of, DTC, as the initial depository with respect to
the Old Notes (in such capacity, the "Depository"). The Global Old Note is
registered in the name of Cede, as nominee of DTC, and beneficial interests in
the Global Old Note are shown on, and transfers thereof are effected only
through, records maintained by the Depository and its participants. The use of
the Global Old Note to represent certain of the Old Notes permits the
Depository's participants, and anyone holding a beneficial interest in an Old
Note registered in the name of such a participant, to transfer interests in the
Old Notes electronically in accordance with the Depository's established
procedures without the need to transfer a physical certificate. Except as
provided below, the New Notes will also be issued initially as a note in global
form (the "Global New Note", and together with the Global Old Note, the "Global
Notes") and deposited with, or on behalf of, the Depository. Notwithstanding the
foregoing, holders of Old Notes that are held, at any time, by a person that is
not a qualified institutional buyer under Rule 144A under the Securities Act (a
"Qualified Institutional Buyer"), and any Eligible Holder that is not a
Qualified Institutional Buyer that exchanges Old Notes in the Exchange Offer,
will receive the New Notes in certificated form and is not, and will not be,
able to trade such securities through the Depository unless the New Notes are
resold to a Qualified Institutional Buyer. After the initial issuance of the
Global New Note, New Notes in certificated form will be issued in exchange for a
holder's proportionate interest in the Global New Note only as set forth in the
Indenture.
    
 
                               TABLE OF CONTENTS
 
   


                                                                                        PAGE
                                                                                        ----
                                                                                     
Available Information.................................................................    5
Prospectus Summary....................................................................    7
Risk Factors..........................................................................   17
The Exchange Offer....................................................................   22
Capitalization........................................................................   30
Selected Historical and Pro Forma Consolidated Financial Data.........................   31
Management's Discussion and Analysis of Financial Condition and Results of
  Operations..........................................................................   32
Business..............................................................................   42
Management............................................................................   61
Certain Transactions..................................................................   75
Description of Principal Indebtedness.................................................   77
Description of New Notes..............................................................   79
Certain Federal Income Tax Consequences...............................................  115
Plan of Distribution..................................................................  117
Incorporation of Certain Documents By Reference.......................................  118
Legal Matters.........................................................................  118
Experts...............................................................................  118
Index to Consolidated Financial Statements............................................  F-1

    
 
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                             AVAILABLE INFORMATION
 
   
     The Company has filed with the Commission a Registration Statement (which
term shall include any amendments thereto) on Form S-4 under the Securities Act
(the "Registration Statement") with respect to the securities offered by this
Prospectus. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is hereby
made. Each statement made in this Prospectus referring to a document filed as an
exhibit or schedule to the Registration Statement is not necessarily complete
and is qualified in its entirety by reference to the exhibit or schedule for a
complete statement of its terms and conditions. In addition, the Company and
certain of the Subsidiary Guarantors are subject to and, upon the effectiveness
of the Registration Statement filed with the Commission, the remaining
Subsidiary Guarantors will become subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, the Company will file periodic reports and other
information with the Commission relating to its business, financial statements
and other matters, including therein, where applicable, summary combined
financial information of the Subsidiary Guarantors. Any interested parties may
inspect and/or copy the Registration Statement, its schedules and exhibits, and
the periodic reports and other information filed in connection therewith, at the
public reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Commission's
regional offices located at Citicorp Center, 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661, and 7 World Trade Center, Suite 1300, New York, New
York 10048. Copies of such materials can be obtained at prescribed rates by
addressing written requests for such copies to the Public Reference Section of
the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. The Commission also maintains a site on
the World Wide Web, the address of which is http://www.sec.gov, that contains
reports, proxy and information statements and other information regarding
issuers, such as the Company, that file electronically with the Commission. The
obligations of the Company and the Subsidiary Guarantors under the Exchange Act
to file periodic reports and other information with the Commission may, to the
extent that such obligations arise from the registration of the New Notes, be
suspended, under certain circumstances, if the New Notes are held of record by
fewer than 300 holders at the beginning of any fiscal year and are not listed on
a national securities exchange. The Company has agreed that, whether or not it
is required to do so by the rules and regulations of the Commission, for so long
as any of the Notes remain outstanding, it will furnish to the holders of the
Notes and file with the Commission (unless the Commission will not accept such a
filing) all annual, quarterly and current reports that the Company is or would
be required to file with the Commission pursuant to Section 13(a) or 15(d) of
the Exchange Act. In addition, for so long as the Company or any Subsidiary
Guarantor is subject to the reporting requirements of Section 13 or 15 of the
Exchange Act and any Registrable Securities remain outstanding, each of the
Company and the Subsidiary Guarantors has agreed that it will comply with its
reporting obligations under the Securities Act and Section 13(a) or 15(d) of the
Exchange Act and the rules and regulations adopted by the Commission thereunder,
and that if it ceases to be required to file periodic reports thereunder, it
will upon the request of any holder of Registrable Securities (a) make publicly
available such information as is necessary to permit sales pursuant to Rule 144
under the Securities Act, (b) deliver such information to a prospective
purchaser as is necessary to permit sales pursuant to Rule 144A under the
Securities Act, and (c) take such further action that is reasonable in the
circumstances, in each case, to the extent required from time to time to enable
such holder to sell its Registrable Securities without registration under the
Securities Act within the limitation of the exemptions provided by (i) Rule 144
under the Securities Act, as such rule may be amended from time to time, (ii)
Rule 144A under the Securities Act, as such rule may be amended from time to
time, or (iii) any similar rules or regulations hereafter adopted by the
Commission.
    
 
     THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENT
HEREIN OR DELIVERED HEREWITH. COPIES OF ANY SUCH DOCUMENTS FILED BY THE COMPANY,
INCLUDING EXHIBITS TO SUCH DOCUMENTS, ARE AVAILABLE TO ANY REGISTERED HOLDER OR
BENEFICIAL OWNER OF THE OLD NOTES UPON WRITTEN OR ORAL REQUEST AND WITHOUT
CHARGE FROM KAISER ALUMINUM & CHEMICAL CORPORATION, 5847 SAN FELIPE, SUITE 2600,
HOUSTON, TEXAS 77057, ATTENTION: GENERAL COUNSEL. TELEPHONE REQUESTS MAY BE
DIRECTED TO THE COMPANY AT
 
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(713) 267-3777. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH
REQUEST SHOULD BE MADE BY FEBRUARY 3, 1997.
    
 
     NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR
SOLICITATION WITH RESPECT TO ANY SECURITY OTHER THAN THE SECURITIES OFFERED
HEREBY OR AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
 
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   7
 
                               PROSPECTUS SUMMARY
 
     The following summary is qualified in its entirety by the more detailed
information and Consolidated Financial Statements (including the Notes to
Consolidated Financial Statements) appearing elsewhere in this Prospectus. All
references to tons in this Prospectus refer to metric tons of 2,204.6 pounds.
 
                                  THE COMPANY
 
     Kaiser Aluminum & Chemical Corporation (the "Company") is one of the
world's leading producers and marketers of alumina, primary aluminum and
fabricated aluminum products. The Company is a wholly-owned subsidiary of Kaiser
Aluminum Corporation ("KAC") and operates in all principal aspects of the
aluminum industry -- the mining of bauxite, the refining of bauxite into
alumina, the production of primary aluminum, and the manufacture of fabricated
(including semi-fabricated) aluminum products. The Company is one of the largest
domestic 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 Western world's alumina capacity in 1995. The Company's
production levels of alumina and primary aluminum exceed its internal processing
needs, which allows it to be a major seller of alumina (approximately 2.0
million tons in 1995 or 72% of production) and primary aluminum (approximately
271,700 tons in 1995 or 66% of production) to third parties. The Company is also
a major domestic supplier of fabricated aluminum products, shipping
approximately 6% of total domestic tonnage of such products (approximately
368,200 tons in 1995).
 
     The Company's objectives are to maintain leading market positions in its
core businesses, while developing new opportunities both domestically and
internationally which will enhance, and reduce the cyclicality of, the Company's
earnings. The primary elements of the Company's strategies to achieve these
objectives are:
 
     Increasing the competitiveness of its existing facilities. The Company is
continuing to increase the competitiveness of its existing facilities. In 1995,
the Company successfully restructured electric power purchase agreements for its
smelting facilities in the Pacific Northwest, which has resulted in
significantly lower electric power costs in 1996 for the Mead and Tacoma,
Washington, smelters compared with 1995 electric power costs. The Company
expects to continue to benefit from these savings in electric power costs at
these facilities in 1997 and beyond. See "Risk Factors -- Power Supply."
 
     The Company has also commenced the modernization and expansion of the
carbon baking furnace at its Mead smelter at an estimated cost of approximately
$52.0 million. This project will lower costs, enhance safety and improve the
environmental performance of the facility. This modernization is expected to be
completed in late 1998.
 
     The Company continues to implement changes to the process and product mix
of its Trentwood, Washington, rolling mill in an effort to maximize its
profitability and maintain full utilization of the facility. Recently, the
Company has approved an expansion of its heat treat capacity by approximately
one-third, which will enable the Company to increase the range of its heat treat
products and improve Trentwood's operating efficiency. Sales of the Company's
heat treat products have increased significantly over the last several years and
are made primarily to the aerospace and general engineering markets, which are
experiencing growth in demand. The project is estimated to cost approximately
$45.0 million and to take approximately two years to complete. See
"Business -- Production Operations."
 
     Developing proprietary technologies. The Company has developed proprietary
technologies which present growth opportunities in the future and have enabled
it to substantially improve its operating efficiencies.
 
     The Company has developed a unique micromill for the production of can
sheet from molten metal using a continuous cast process. The capital and
conversion costs of these micromills are expected to be significantly lower than
conventional rolling mills. Micromills are also expected to result in lower
transportation costs due to the ability to strategically locate a micromill in
close proximity to a manufacturing facility. Micromills are expected to be
particularly well suited to take advantage of the rapid growth in demand for can
sheet expected in emerging markets in Asia and Latin America where there is
limited indigenous supply. The Company
 
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believes that micromills should also be capable of manufacturing other sheet
products at relatively low capital and operating costs. The micromill technology
is based on a proprietary thin-strip, high-speed, continuous-belt casting
technique linked directly to hot and cold rolling mills. The major advantage of
the process is that the sheet is continuously manufactured from molten metal,
unlike the conventional process in which the metal is first cast into large,
solid ingots and subsequently rolled into sheet through a series of highly
capital-intensive steps. The first micromill is nearing completion in Nevada as
a full-scale demonstration and production facility. The Company expects
operational start-up of the facility by the end of 1996. If the Company is
successful in proving and commercializing its micromill technology, micromills
could represent an important source of future growth. There can be no assurance
that the Company will be able to successfully develop and commercialize the
technology for use at full-scale facilities. See "Business -- Research and
Development."
 
     The Company has developed and installed proprietary retrofit technology in
all of its smelters over the last decade, which has significantly contributed to
increased and more efficient production of primary aluminum. Through continuing
technological improvements, the Company's smelters have achieved improved energy
efficiency and longer average life of reduction cells. The Company is actively
engaged in licensing its smelting and other process and product technology and
selling technical and managerial assistance to other producers worldwide. See
"Business -- Production Operations -- Primary Aluminum Products."
 
     Increasing participation in emerging markets. The Company is actively
pursuing opportunities to increase its participation in emerging markets by
using its technical expertise and capital to form joint ventures or acquire
equity in aluminum-related facilities in foreign countries where it can apply
its proprietary technology. The Company has created Kaiser Aluminum
International to identify growth opportunities in targeted emerging markets and
develop the needed country competence to complement the Company's product and
process competence in capitalizing on such opportunities. The Company has
focused its efforts on countries that are expected to be important suppliers of
aluminum and/or large customers for aluminum and alumina, including the People's
Republic of China (the "PRC"), Russia and other members of the Commonwealth of
Independent States (the "CIS"), India, and Venezuela. The Company's proprietary
retrofit technology has been installed by the Company at various third party
locations throughout the world and is an integral part of the Company's
initiatives for participating in new and existing smelting facilities. See "Risk
Factors -- Foreign Activities" and "Business -- International Business
Development."
 
     The Company's principal executive offices are located at 6177 Sunol
Boulevard, Pleasanton, California 94566-7769, and its telephone number is (510)
462-1122.
 
                         RECENT TRENDS AND DEVELOPMENTS
 
   
     During 1995, the average Midwest U.S. transaction price (the "AMT Price")
for primary aluminum was approximately $.86 per pound compared to $.72 and $.54
per pound in 1994 and 1993, respectively. The significant improvement in prices
during 1994 and 1995 resulted from strong growth in Western world consumption of
aluminum and the curtailment of production in response to lower prices in prior
periods by many producers worldwide. In 1995, production of primary aluminum
increased and consumption of aluminum continued to grow, but at a much lower
rate than in 1994. In general, the overall aluminum market was strongest in the
first half of 1995. By the second half of 1995, orders and shipments for certain
products had softened and the rate of decline in London Metal Exchange ("LME")
inventories had leveled off. By the end of 1995, some small increases in LME
inventories occurred, and prices of aluminum weakened from first-half levels.
This trend has continued throughout the first eleven months of 1996 as the
supply of primary aluminum exceeded demand during this period. Net reported
primary aluminum inventories have increased by approximately 55,000 tons in 1996
based upon recent reports of the LME (through December 20, 1996) and the
International Primary Aluminium Institute (the "IPAI") (through October 31,
1996), following substantial declines of 764,000 and 1,153,000 tons in 1994 and
1995, respectively. The AMT Price for primary aluminum for the week ended
December 20, 1996, was approximately $.73 per pound.
    
 
     Increased production of primary aluminum due to restarts of certain
previously idled capacity, the commissioning of a major new smelter in South
Africa, and the continued high level of exports from the CIS have contributed to
increased supplies of primary aluminum to the Western world in 1996. While the
economies of the major aluminum consuming regions -- the United States, Japan,
Western Europe, and Asia -- are performing relatively well, the Company believes
that the reduction of aluminum inventories by
 
                                        8
   9
 
consumers, as prices have continued to decline, has suppressed the growth in
primary aluminum demand that normally accompanies growth in economic and
industrial activity. In addition to these supply/demand dynamics, the Company
believes that the recent decline in primary aluminum prices may have been
influenced by a recent major decline in copper prices on the LME. See
"Business -- Industry Overview."
 
   
                             FOURTH QUARTER RESULTS
    
 
   
     The Company incurred net losses of $4.8 million in the third quarter of
1996 and expects to continue to sustain net losses in the fourth quarter of
1996, due principally to lower average realized prices for alumina and primary
aluminum, as compared to prices realized in the comparable periods of 1995, and
due to increased raw material, energy, and operational costs associated with the
production of alumina at the Company's Gramercy alumina refinery in Louisiana
and 65%-owned Alpart alumina refinery in Jamaica, as compared to amounts
incurred in the comparable periods of 1995. Such fourth quarter losses could
substantially exceed the loss for the third quarter of 1996.
    
 
   
                 PROFIT ENHANCEMENT AND COST CUTTING INITIATIVE
    
 
   
     The Company has set a goal of achieving significant cost reductions and
other profit improvements during 1997, with the full effect planned to be
realized in 1998. The initiative is based on the Company's conclusion that the
current level of performance of its existing facilities and businesses will not
achieve the level of profits the Company considers satisfactory based upon
historic long-term average prices for primary aluminum and alumina. To achieve
this goal, the Company plans reductions in production costs, improvements in
operating efficiencies, decreases in corporate selling, general and
administrative expenses, and enhancements to product mix. There can be no
assurance that the initiative will result in the desired cost reductions and
other profit improvements.
    
 
   
                           ISSUANCE OF THE OLD NOTES
    
 
   
     On October 23, 1996 (the "Closing Date"), the Company completed the
issuance of $175.0 million principal amount of 10 7/8% Senior Notes due 2006
(the "Old Notes") to the Initial Purchasers at 99.5% of their principal amount
pursuant to a Purchase Agreement, dated October 17, 1996 (the "Purchase
Agreement"), among the Company, the Subsidiary Guarantors and the Initial
Purchasers. The Initial Purchasers subsequently resold the Old Notes in reliance
on Rule 144A under the Securities Act and other available exemptions under the
Securities Act (the "Offering"). The Company also entered into the Registration
Rights Agreement, dated as of the Closing Date (the "Registration Rights
Agreement"), among the Company, the Subsidiary Guarantors and the Initial
Purchasers, pursuant to which the Company granted certain registration rights
for the benefit of the holders of the Old Notes. Under the Registration Rights
Agreement, the Company agreed, for the benefit of the holders of the Old Notes
that it would, at its own cost, (i) within 30 days after the Closing Date file a
registration statement (the "Registration Statement") with the Commission with
respect to a registered offer to exchange the Old Notes for New Notes, which
will have terms substantially identical to the Old Notes and (ii) use its
reasonable best efforts to cause such Registration Statement to be declared
effective under the Securities Act within 90 days after the Closing Date. If the
Company is unable to effect such an Exchange Offer or if for any other reason
the Exchange Offer is not consummated within 180 days after the Closing Date,
the Company is obligated under the Registration Rights Agreement to file a shelf
registration statement with the Commission covering resales of the Old Notes. If
the Company defaults with respect to its obligations under the Registration
Rights Agreement (as defined herein, a "Registration Default"), the Company will
be obligated to pay Additional Interest of 0.25% per annum for the first 90-day
period and an additional 0.25% per annum for each subsequent 90-day period (up
to a maximum aggregate of 1.00% per annum) until all Registration Defaults have
been cured. The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement with respect to the Old
Notes. See "-- The Exchange Offer" and "The Exchange Offer -- Purpose and
Effect."
    
 
                                        9
   10
 
   
                     ISSUANCE OF THE 10 7/8% SERIES C NOTES
    
 
   
     On December 23, 1996, the Company completed the issuance of $50.0 million
principal amount of the 10 7/8% Series C Notes at 103.5% of their principal
amount (the "10 7/8% Series C Notes Offering"). The 10 7/8% Series C Notes were
not registered under the Securities Act, and may not be offered or sold in the
United States absent registration or an applicable exemption from registration
requirements. The 10 7/8% Series C Notes rank pari passu in right and priority
of payment with outstanding Indebtedness under the Credit Agreement, the 9 7/8%
Notes, and the Notes, and are fully and unconditionally guaranteed on a senior,
unsecured basis by the Subsidiary Guarantors. Net proceeds from the 10 7/8%
Series C Notes Offering were approximately $50.4 million, all of which were
invested in short-term investments pending their application for working capital
and general corporate purposes, including capital projects.
    
 
   
     Pursuant to an agreement with the initial purchaser of the 10 7/8% Series C
Notes, the Company and the Subsidiary Guarantors agreed to (i) cause to be filed
with the Commission within 30 days after the date of original issuance of the
10 7/8% Series C Notes (the "Issuance Date") a registration statement (the
"Series C Exchange Offer Registration Statement") with respect to a registered
offer to exchange the 10 7/8 Series C Notes (the "Series C Exchange Offer") for
notes of the Company with terms substantially identical in all respects to the
Notes (the "Series C Exchange Notes") (except that the Series C Exchange Notes
will not contain terms with respect to transfer restrictions or interest rate
increases), (ii) use their reasonable best efforts to cause the Series C
Exchange Offer Registration Statement to become effective within 135 days after
the Issuance Date, and (iii) use their reasonable best efforts to cause the
Series C Exchange Offer to be consummated within 165 days after the Issuance
Date. In the event that (i) any law or the applicable interpretations of the
Securities Act by the staff of the Commission do not permit the Company and the
Subsidiary Guarantors to effect the Series C Exchange Offer, (ii) if for any
reason the Series C Exchange Offer is not consummated or is not capable of being
consummated within 195 days after the Issuance Date, or (iii) upon the request
of the initial purchaser under certain circumstances or, in the event of a
change in law or interpretations of the staff of the Commission, upon the
request of a holder of 10 7/8 Series C Notes under certain circumstances, the
Company and the Subsidiary Guarantors will (a) as promptly as practicable, file
with the Commission a shelf registration statement with respect to the resale of
the 10 7/8 Series C Notes (the "Series C Shelf Registration Statement"), in any
event, in the case of (i) and (iii) above, within 165 days after the Issuance
Date, and, in the case of (ii) above, as soon as reasonably practicable after
the 195 day period set forth therein (notwithstanding that in the case of (ii)
above, the Company shall remain liable for the increases in interest set forth
below until the effectiveness of the Series C Shelf Registration Statement), (b)
use their reasonable best efforts to cause the Shelf Registration Statement to
be declared effective under the Securities Act as soon as reasonably practicable
after its filing, and (c) use their reasonable best efforts to keep the Series C
Shelf Registration Statement effective for a period until the earlier of 36
months following the Issuance Date and such time as all of the 10 7/8% Notes
have been sold thereunder, or otherwise cease to be registrable securities.
    
 
   
     In the event that (i) the Exchange Offer Registration Statement is not
filed with the Commission on or prior to the date specified for such filing,
(ii) the Series C Exchange Offer Registration Statement or the Series C Shelf
Registration Statement is not declared effective on or prior to the date
specified for such effectiveness, (iii) the Series C Exchange Offer is not
consummated on or prior to 165 days after the Issuance Date, and/or (iv) the
Series C Exchange Offer Registration Statement or the Series C Shelf
Registration Statement is declared effective but thereafter ceases to be
effective or usable during the period specified in the Series C Registration
Rights Agreement (each such event referred to in (i) through (iv), a "Series C
Registration Default"), the interest rate borne by the 10 7/8% Series C Notes or
the Series C Exchange Notes (to the extent such Series C Registration Default
relates to such Series C Exchange Notes) which are registrable securities shall
be increased by one quarter of one percent per annum for the first 90-day period
after the first such Series C Registration Default and by an additional one
quarter of one percent per annum for each subsequent 90-day period, in each
case, until all Series C Registration Defaults have been cured (provided that in
the event the Company has abandoned the Series C Exchange Offer for the reasons
stated in clause (i) or (ii) in the first sentence of this paragraph, then the
effectiveness of the Series C Shelf Registration Statement shall be deemed a
cure of such Series C Registration Defaults); provided that the aggregate
increase in such interest rate will in no event exceed one percent per annum. As
applicable, the term
    
 
                                       10
   11
 
   
"10 7/8% Series C Notes" as used herein shall include, when and to the extent
issued, the 10 7/8% Series D Senior Notes due 2006 issued pursuant to the Series
C Exchange Offer.
    
 
                               THE EXCHANGE OFFER
 
   
The Exchange Offer.........  The Company is offering, upon the terms and subject
                             to the conditions set forth herein and in the
                             accompanying letter of transmittal (the "Letter of
                             Transmittal"), to exchange $1,000 in principal
                             amount of its 10 7/8% Series B Senior Notes due
                             2006 (the "New Notes," and together with the Old
                             Notes, sometimes collectively referred to herein as
                             the "Notes") for each $1,000 in principal amount of
                             the outstanding Old Notes (the "Exchange Offer").
                             As of the date of this Prospectus, $175.0 million
                             in aggregate principal amount of the Old Notes is
                             outstanding, the maximum amount authorized by the
                             Indenture for all Notes. As of December 9, 1996,
                             there were two registered holders of the Old Notes,
                             including Cede & Co. ("Cede") which held
                             approximately $174.3 million of aggregate principal
                             amount of the Old Notes for 31 of its participants.
                             See "The Exchange Offer -- Terms of the Exchange
                             Offer."
    
 
   
Expiration Date............  5:00 p.m., New York City time, on Wednesday,
                             February 5, 1997, as the same may be extended. See
                             "The Exchange Offer -- Expiration Date; Extensions;
                             Amendments."
    
Conditions of the Exchange
  Offer....................  The Exchange Offer is not conditioned upon any
                             minimum principal amount of Old Notes being
                             tendered for exchange. However, the Exchange Offer
                             is subject to the condition that it does not
                             violate any applicable law or interpretation of the
                             staff of the Commission. See "The Exchange
                             Offer -- Conditions of the Exchange Offer."
Termination of Certain
  Rights...................  Pursuant to the Registration Rights Agreement and
                             the Old Notes, Eligible Holders of Old Notes (i)
                             have rights to receive the Additional Interest and
                             (ii) have certain rights intended for the holders
                             of unregistered securities. "Additional Interest"
                             means the increase in the interest rate borne by
                             Registrable Securities during the period in which a
                             Registration Default is continuing pursuant to the
                             terms of the Registration Rights Agreement (in
                             general, one-quarter of one percent (0.25%) per
                             annum for the first 90-day period immediately after
                             the first such Registration Default and an
                             additional one-quarter of one percent (0.25%) per
                             annum for each subsequent 90-day period until all
                             Registration Defaults have been cured, provided
                             that the aggregate increase in such interest rate
                             shall not exceed one percent (1.00%) per annum).
                             Holders of New Notes generally will not be and,
                             upon consummation of the Exchange Offer, Eligible
                             Holders of Old Notes will generally no longer be,
                             entitled to (i) the right to receive the Additional
                             Interest, except in certain limited circumstances,
                             and (ii) certain other rights under the
                             Registration Rights Agreement intended for holders
                             of unregistered securities. See "The Exchange
                             Offer -- Termination of Certain Rights" and
                             "-- Procedures for Tendering Old Notes."
Accrued Interest on the Old
  Notes....................  The New Notes will bear interest at a rate equal to
                             10 7/8% per annum from and including their date of
                             issuance. Eligible Holders whose Old Notes are
                             accepted for exchange will have the right to
                             receive interest accrued thereon from the date of
                             original issuance of the Old Notes or the last
                             Interest Payment Date, as applicable, to, but not
                             including, the date of issuance of the New Notes,
                             such interest to be payable with the
 
                                       11
   12
 
                             first interest payment on the New Notes. Interest
                             on the Old Notes accepted for exchange, which
                             accrues at the rate of 10 7/8% per annum, will
                             cease to accrue on the day prior to the issuance of
                             the New Notes.
 
   
Procedures for Tendering
  Old Notes................  Unless a tender of Old Notes is effected pursuant
                             to the procedures for book-entry transfer as
                             provided herein, each Eligible Holder desiring to
                             accept the Exchange Offer must complete and sign
                             the Letter of Transmittal, have the signature
                             thereon guaranteed if required by the Letter of
                             Transmittal, and mail or deliver the Letter of
                             Transmittal, together with the Old Notes or a
                             Notice of Guaranteed Delivery and any other
                             required documents (such as evidence of authority
                             to act, if the Letter of Transmittal is signed by
                             someone acting in a fiduciary or representative
                             capacity), to the Exchange Agent (as defined) at
                             the address set forth on the back cover page of
                             this Prospectus prior to 5:00 p.m., New York City
                             time, on the Expiration Date. Any Beneficial Owner
                             (as defined) of the Old Notes whose Old Notes are
                             registered in the name of a nominee, such as a
                             broker, dealer, commercial bank or trust company
                             and who wishes to tender Old Notes in the Exchange
                             Offer, should instruct such entity or person to
                             promptly tender on such Beneficial Owner's behalf.
                             See "The Exchange Offer -- Procedures for Tendering
                             Old Notes." By tendering Old Notes for exchange,
                             each registered holder will represent to the
                             Company that, among other things, (i) neither the
                             Eligible Holder nor any Beneficial Owner is an
                             affiliate of the Company or any Subsidiary
                             Guarantor within the meaning of Rule 405 under the
                             Securities Act, (ii) any New Notes to be received
                             by the Eligible Holder or any Beneficial Owner are
                             being acquired in the ordinary course of business,
                             (iii) neither the Eligible Holder nor any
                             Beneficial Owner has an arrangement or
                             understanding with any person to participate in the
                             distribution of the New Notes, and (iv) if the
                             Eligible Holder or Beneficial Owner, as applicable,
                             is a broker-dealer that acquired Old Notes for its
                             own account as a result of market making or other
                             trading activities, such Eligible Holder or
                             Beneficial Owner must comply with the prospectus
                             delivery requirements of the Securities Act in
                             connection with a secondary resale transaction of
                             the New Notes acquired by such person and must
                             agree that it will deliver a prospectus in
                             connection with any such resale.
    
 
Guaranteed Delivery
  Procedures...............  Eligible Holders of Old Notes who wish to tender
                             their Old Notes and (i) whose Old Notes are not
                             immediately available or (ii) who cannot deliver
                             their Old Notes or any other documents required by
                             the Letter of Transmittal to the Exchange Agent
                             prior to the Expiration Date (or complete the
                             procedure for book-entry transfer on a timely
                             basis), may tender their Old Notes according to the
                             guaranteed delivery procedures set forth in the
                             Letter of Transmittal. See "The Exchange Offer --
                             Procedures for Tendering Old Notes -- Guaranteed
                             Delivery Procedures."
 
Acceptance of Old Notes and
  Delivery of New Notes....  Upon satisfaction or waiver of all conditions of
                             the Exchange Offer, the Company will accept any and
                             all Old Notes that are properly tendered in the
                             Exchange Offer prior to 5:00 p.m., New York City
                             time, on the Expiration Date. The New Notes issued
                             pursuant to the Exchange Offer
 
                                       12
   13
 
                             will be delivered as soon as practicable after
                             acceptance of the Old Notes. See "The Exchange
                             Offer -- Acceptance of Old Notes for Exchange;
                             Delivery of New Notes."
 
Withdrawal Rights..........  Tenders of Old Notes may be withdrawn at any time
                             prior to 5:00 p.m., New York City time, on the
                             Expiration Date. See "The Exchange
                             Offer -- Withdrawal Rights."
 
Certain Federal Income Tax
  Considerations...........  Generally, the exchange pursuant to the Exchange
                             Offer will not be a taxable event for federal
                             income tax purposes. See "Certain Federal Income
                             Tax Consequences -- The Exchange Offer."
 
The Exchange Agent.........  First Trust National Association is the exchange
                             agent (in such capacity, the "Exchange Agent"). The
                             address and telephone number of the Exchange Agent
                             are set forth in "The Exchange Offer -- The
                             Exchange Agent; Assistance."
 
Fees and Expenses..........  All expenses incident to the Company's consummation
                             of the Exchange Offer and compliance with the
                             Registration Rights Agreement will be borne by the
                             Company. See "The Exchange Offer -- Solicitation of
                             Tenders; Fees and Expenses."
 
   
Resales of the New Notes...  Based on positions of the staff of the Commission
                             enunciated in Morgan Stanley & Co., Incorporated
                             (available June 5, 1991) and Exxon Capital Holdings
                             Corporation (available May 13, 1988), and
                             interpreted in the Commission's letters to Shearman
                             & Sterling (available July 2, 1993) and K-III
                             Communications Corporation (available May 14,
                             1993), and similar no-action or interpretive
                             letters issued to third parties, the Company
                             believes that New Notes issued pursuant to the
                             Exchange Offer to an Eligible Holder in exchange
                             for Old Notes may be offered for resale, resold and
                             otherwise transferred by such Eligible Holder
                             (other than (i) a broker-dealer who purchased the
                             Old Notes directly from the Company for resale
                             pursuant to Rule 144A under the Securities Act or
                             any other available exemption under the Securities
                             Act or (ii) a person that is an affiliate of the
                             Company or any Subsidiary Guarantor within the
                             meaning of Rule 405 under the Securities Act),
                             without compliance with the registration and
                             prospectus delivery provisions of the Securities
                             Act, provided that the Eligible Holder is acquiring
                             the New Notes in the ordinary course of business
                             and is not participating, and has no arrangement or
                             understanding with any person to participate, in a
                             distribution of the New Notes. If any Eligible
                             Holder acquires New Notes in the Exchange Offer for
                             the purpose of distributing or participating in a
                             distribution of the New Notes, such Eligible Holder
                             cannot rely on the position of the staff of the
                             Commission set forth in the above no-action and
                             interpretive letters and must comply with the
                             registration and prospectus delivery requirements
                             of the Securities Act in connection with a
                             secondary resale transaction, unless an exemption
                             from registration is otherwise available. Each
                             broker-dealer that receives New Notes for its own
                             account in exchange for Old Notes, where such Old
                             Notes were acquired by such broker as a result of
                             market making or other trading activities, must
                             acknowledge that it will deliver a prospectus in
                             connection with any resale of such New Notes. See
                             "The Exchange Offer -- Resales of the New Notes"
                             and "Plan of Distribution."
    
 
                                       13
   14
 
                            DESCRIPTION OF NEW NOTES
 
     The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that (i) the New Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof, (ii) holders of the New Notes, except
in limited circumstances, will not be entitled to Additional Interest, and (iii)
holders of the New Notes will not be, and upon consummation of the Exchange
Offer, Eligible Holders of the Old Notes will no longer be, entitled to certain
rights under the Registration Rights Agreement intended for the holders of
unregistered securities. See "Exchange Offer -- Termination of Certain Rights."
The Exchange Offer shall be deemed consummated upon the occurrence of the
delivery by the Company to the Registrar under the Indenture of New Notes in the
same aggregate principal amount as the aggregate principal amount of Old Notes
that are validly tendered by holders thereof pursuant to the Exchange Offer. See
"The Exchange Offer -- Termination of Certain Rights" and "-- Procedures for
Tendering Old Notes" and "Description of New Notes."
 
Maturity...................  October 15, 2006.
 
Interest...................  10 7/8% payable in cash semi-annually in arrears,
                             from October 23, 1996, calculated on the basis of a
                             360-day year consisting of twelve 30-day months.
 
Interest Payment Dates.....  April 15 and October 15, commencing on April 15,
                             1997.
 
Optional Redemption........  The New Notes will be redeemable at the option of
                             the Company, in whole or in part, on or after
                             October 15, 2001, at the redemption prices set
                             forth herein, plus accrued and unpaid interest, if
                             any, to the date of redemption.
 
   
Guarantees.................  The obligations of the Company with respect to the
                             New Notes will be fully and unconditionally
                             guaranteed, jointly and severally, on a senior,
                             unsecured basis by certain subsidiaries of the
                             Company (the "Subsidiary Guarantors"). Any
                             Indebtedness that is incurred by the Company's
                             subsidiaries will be effectively senior to the
                             claims of the holders of the New Notes with respect
                             to the assets of such subsidiaries, except to the
                             extent that the holders of the New Notes may be
                             creditors of a subsidiary pursuant to a subsidiary
                             guarantee. Any such claim by the holders of the New
                             Notes with respect to the assets of any Subsidiary
                             Guarantor will be effectively subordinated to
                             secured Indebtedness of such Subsidiary Guarantor
                             (including the Indebtedness under the Company's
                             Credit Agreement, dated as of February 15, 1994, as
                             amended (the "Credit Agreement")) with respect to
                             the assets securing such Indebtedness. See
                             "Description of New Notes -- General."
    
 
   
Ranking....................  The New Notes will represent senior, unsecured
                             obligations of the Company, ranking senior in right
                             and priority of payment to all Indebtedness of the
                             Company that by its terms is expressly subordinated
                             to the Notes. Without limiting the generality of
                             the foregoing, the New Notes will rank senior in
                             right and priority of payment to the Indebtedness
                             represented by the 12 3/4% Notes, and the New Notes
                             will rank pari passu in right and priority of
                             payment with the Indebtedness under the Credit
                             Agreement and the Indebtedness represented by the
                             9 7/8% Notes and the 10 7/8% Series C Notes. As of
                             September 30, 1996, the Company's total
                             consolidated indebtedness was $878.0 million, and
                             $141.9 million of borrowing capacity was unused
                             under the revolving credit facility of the Credit
                             Agreement. On a pro forma basis, after giving
                             effect to the Offering and the 10 7/8% Series C
                             Notes Offering and the application of proceeds
                             therefrom, as of September 30, 1996, the Company's
                             total
    
 
                                       14
   15
 
   
                             consolidated indebtedness would have been $972.7
                             million (of which $400.0 million would have been
                             expressly subordinated in right and priority of
                             payment to the New Notes), $273.1 million of
                             borrowing capacity would have been available for
                             use under the Credit Agreement, and the Company
                             would have had additional available cash proceeds
                             from the Offering and the 10 7/8% Series C Notes
                             Offering of $88.1 million. As of November 30, 1996,
                             the Company's total consolidated indebtedness was
                             $921.0 million, $273.0 million of borrowing
                             capacity was unused under the revolving credit
                             facility of the Credit Agreement, and the Company
                             had cash and cash equivalents of $44.1 million. The
                             New Notes, however, will be effectively
                             subordinated to secured Indebtedness of the Company
                             and the Subsidiary Guarantors (including the
                             Indebtedness under the Credit Agreement) with
                             respect to the assets securing such Indebtedness.
    
 
Change of Control Offer....  Upon a Change of Control (as defined), the Company
                             will be required to make an offer to purchase all
                             or any part of a holder's New Notes at 101% of the
                             principal amount thereof, plus accrued and unpaid
                             interest, if any, to the date of purchase. The
                             Company will comply with Rules 13e-4 and 14e-1
                             under the Exchange Act and any other securities
                             laws and regulations to the extent such laws and
                             regulations are applicable in the event that a
                             Change of Control occurs and the Company is
                             required under the Indenture to make a Change of
                             Control Offer (as defined herein). Any Change of
                             Control would constitute an event of default under
                             the Credit Agreement. See "Description of New
                             Notes -- Offer to Purchase the Notes" and "Risk
                             Factors -- Controlling Stockholder and Possible
                             Effects; Change of Control."
 
   
Certain Covenants..........  The Indenture contains covenants substantially
                             identical to those contained in the indenture
                             governing the 10 7/8% Series C Notes, including,
                             but not limited to, covenants imposing limitations
                             on: (i) Asset Sales, (ii) transactions with
                             Affiliates and Unrestricted Subsidiaries, (iii)
                             Restricted Payments, Restricted Investments, and
                             Unrestricted Subsidiary Investments, (iv) the
                             Incurrence of Indebtedness and preferred stock, (v)
                             the granting of Liens on U.S. Fixed Assets to
                             secure Indebtedness, (vi) the transfer of assets to
                             entities that are not Subsidiary Guarantors, (vii)
                             mergers and consolidations and (viii) dividend and
                             other payment restrictions affecting Subsidiaries.
                             Each of the foregoing capitalized terms has the
                             meaning assigned to it in the Indenture. See
                             "Description of New Notes -- Covenants."
    
 
Absence of a Public Market
  for the New Notes........  The New Notes are a new issue of securities with no
                             established market. Accordingly, there can be no
                             assurance as to the development or liquidity of any
                             market for the New Notes. The Initial Purchasers
                             have advised the Company that they currently intend
                             to make a market in the New Notes. However, none of
                             the Initial Purchasers is obligated to do so, and
                             any market making with respect to the New Notes may
                             be discontinued at any time without notice. The
                             Company does not intend to apply for listing of the
                             New Notes on a securities exchange.
 
     FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS IN CONNECTION WITH AN INVESTMENT IN THE NEW NOTES, SEE
"RISK FACTORS."
 
                                       15
   16
 
          SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
 
     The following summary historical and pro forma consolidated financial data
have been derived from the Selected Historical and Pro Forma Consolidated
Financial Data appearing elsewhere in this Prospectus, and should be read in
conjunction with the Consolidated Financial Statements of the Company and the
Notes to Consolidated Financial Statements and the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus. Interim results are not
necessarily indicative of those for the full year.
 
   


                                    NINE MONTHS ENDED
                                      SEPTEMBER 30,                 YEAR ENDED DECEMBER 31,
                                -------------------------   ---------------------------------------
                                   1996          1995          1995          1994          1993
                                -----------   -----------   -----------   -----------   -----------
                                              (IN MILLIONS OF DOLLARS, EXCEPT RATIOS)
                                                                         
Operating Data:
  Net sales...................  $   1,652.1   $   1,646.7   $   2,237.8   $   1,781.5   $   1,719.1
  Cost of products sold.......      1,394.8       1,329.8       1,798.4       1,625.5       1,587.7
  Gross profit................        257.3         316.9         439.4         156.0         131.4
  Depreciation................         72.5          71.1          94.3          95.4          97.1
  Selling, administrative,
    research and development,
    and general...............         96.0          96.0         134.0         116.5         121.6
  Operating income (loss).....         88.8         149.8         211.1         (55.9)       (123.1)
  Interest expense............         68.3          71.3          93.9          88.6          84.2
  Income (loss) before income
    taxes, minority interests,
    extraordinary loss and
    cumulative effect of
    changes in accounting
    principles................         23.6          68.7         103.1        (151.8)       (208.8)
  Income (loss) before
    extraordinary loss and
    cumulative effect of
    changes in accounting
    principles................         15.7          43.1          65.3         (96.2)       (117.6)
  Net income (loss)...........         15.7          43.1          65.3        (101.6)(1)      (647.3)(1)
  Ratio of earnings to fixed
    charges(2)................          1.2x          1.7x          1.9x           --(3)          --(3)
Other Data:
  Capital expenditures........  $      91.1   $      53.2   $      88.4   $      70.0   $      67.7
  EBITDA(4)...................        164.4         211.1         291.3          32.2         (27.5)
  Ratio of EBITDA to interest
    expense...................          2.4x          3.0x          3.1x           .4x           --(5)
Pro Forma(6):
  Interest expense............         82.4                       113.8
  Net income..................          7.0                        53.0
  Ratio of EBITDA to interest
    expense...................          2.0x                        2.6x

    
 
   


                                     SEPTEMBER 30, 1996                      DECEMBER 31,
                                -----------------------------   ---------------------------------------
                                PRO FORMA(6)     HISTORICAL        1995          1994          1993
                                ------------    -------------   -----------   -----------   -----------
                                                       (IN MILLIONS OF DOLLARS)
                                                                             
Balance Sheet Data:
  Working capital.............    $  480.5        $   392.4     $     324.5   $     239.5   $     266.9
  Total assets................     2,966.2          2,871.5         2,814.3       2,693.6       2,528.2
  Long-term liabilities.......       558.3            558.3           548.5         495.5         501.7
  Accrued postretirement
    medical benefit
    obligation, less current
    portion...................       727.7            727.7           734.0         734.9         713.1
  Long-term debt, less current
    portion...................       953.1            858.4           749.2         751.1         720.2
  Notes payable to parent,
    less current portion......         2.1              2.1             8.6          23.5          18.9
  Minority interests..........        91.0             91.0            91.4          85.4          69.7
  Redeemable preference
    stock.....................        26.7             26.7            29.6          29.0          33.6
  Total stockholders' equity
    (deficit).................        56.7             56.7            43.3         (24.8)           .1

    
 
- ---------------
 
(1) Includes extraordinary loss on early extinguishment of debt of $5.4 and
    $21.8, net of tax benefits of $2.9 and $11.2 for 1994 and 1993,
    respectively, and cumulative effect of changes in accounting principles of
    $507.9, net of tax benefit of $237.7 in 1993. See "Management's Discussion
    and Analysis of Financial Condition and Results of Operations -- Results of
    Operations."
(2) For the purpose of calculating the ratio of earnings to fixed charges,
    "earnings" consist of the sum of (i) income (loss) before extraordinary loss
    and cumulative effect of changes in accounting principles of the Company and
    its consolidated subsidiaries, (ii) undistributed (earnings) losses of
    less-than-fifty-percent-owned companies, (iii) minority interest share of
    income (losses) of majority-owned subsidiaries that have fixed charges, (iv)
    consolidated provision (credit) for income taxes, (v) minority interest
    share of tax provision (credit) of majority-owned subsidiaries that have
    fixed charges, (vi) fixed charges, (vii) equity in losses of less-
    than-fifty-percent-owned companies where the Company has guaranteed the debt
    of such companies, and (viii) previously capitalized interest amortized
    during the period. Fixed charges consist of the sum of interest expense,
    amortization of deferred financing costs, the portion of rents
    representative of the interest factor, and interest expense related to the
    guaranteed debt of less-than-fifty-percent-owned companies incurring a loss.
(3) For the years ended December 31, 1994 and 1993, earnings were insufficient
    to cover fixed charges by $155.5 and $210.2, respectively.
(4) "EBITDA" represents income from continuing operations before extraordinary
    loss and cumulative effect of changes in accounting principles, before
    giving effect to income tax expense, minority interests, interest expense
    (including amortization of deferred financing costs and original issue
    discount) and depreciation. EBITDA is not intended to represent cash flow,
    an alternative to net income, or any other measure of performance in
    accordance with generally accepted accounting principles. It is included
    because management believes that certain investors find such information
    useful for measuring the Company's ability to service debt.
(5) For the year ended December 31, 1993, EBITDA was insufficient to cover
    interest expense by $111.7.
   
(6) The pro forma information assumes the Offering, the 10 7/8% Series C Notes
    Offering, the application of the net proceeds therefrom to reduce the
    outstanding borrowings under the Credit Agreement to zero and to invest the
    remainder in short-term investments pending its application for working
    capital and general corporate purposes as if such events had occurred as of
    the end of the period with respect to the balance sheet data and as if such
    events had occurred at the beginning of the period with respect to the
    operating data.
    
 
                                       16
   17
 
                                  RISK FACTORS
 
     Holders of the Notes 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 New Notes. Information
contained or incorporated by reference in this Prospectus contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should" or "anticipates" or the negative thereof or other variations thereon or
comparable terminology, or by discussions of strategy. See, e.g., "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Industry Overview," "Business -- Recent Industry Trends,"
"Business -- Strategy," and "Legal Proceedings." No assurance can be given that
the future results covered by the forward-looking statements will be achieved.
The following matters constitute cautionary statements identifying important
factors with respect to such forward-looking statements, including certain risks
and uncertainties, that could cause actual results to vary materially from the
future results covered in such forward-looking statements. Other factors could
also cause actual results to vary materially from the future results covered in
such forward-looking statements.
 
RANKING OF THE NOTES; SUBORDINATION
 
   
     Ranking of the Notes. The Notes represent senior, unsecured obligations of
the Company, ranking senior in right and priority of payment to all Indebtedness
of the Company that by its terms is expressly subordinated to the Notes. Without
limiting the generality of the foregoing, the Notes rank senior in right and
priority of payment to the Indebtedness represented by the 12 3/4% Notes ($400.0
million aggregate principal amount outstanding as of September 30, 1996), and
the Notes rank pari passu in right and priority of payment with the Indebtedness
under the Credit Agreement and the Indebtedness represented by the 9 7/8% Notes
($225.0 million aggregate principal amount outstanding as of September 30, 1996)
and by the 10 7/8% Series C Notes ($50.0 million aggregate principal amount
issued and outstanding on December 23, 1996). The Notes are, however,
effectively subordinated to secured Indebtedness of the Company (including the
Indebtedness under the Credit Agreement) with respect to the assets pledged as
collateral therefor. The Credit Agreement is secured by, among other things, a
pledge of the Company's stock by KAC and the stock of the Company's material
subsidiaries and the grant of a lien on substantially all of the domestic assets
of the Company and its subsidiaries (other than the Company's Gramercy alumina
refinery and Nevada micromill). As of September 30, 1996, the Company's total
consolidated indebtedness was $878.0 million and $141.9 million of borrowing
capacity was unused under the revolving credit facility of the Credit Agreement.
On a pro forma basis, after giving effect to the Offering and the 10 7/8% Series
C Notes Offering and the application of the proceeds therefrom, as of September
30, 1996, the Company's total consolidated indebtedness would have been $972.7
million (of which $400.0 million would have been expressly subordinated in right
and priority of payment to the Notes), $273.1 million of borrowing capacity
would have been available for use under the Credit Agreement, and the Company
would have had additional available cash proceeds from the Offering and the
10 7/8% Series C Notes Offering of $88.1 million. The foregoing does not give
effect to $93.3 million of guaranteed unconsolidated joint venture indebtedness
of the Company and $20.6 million of other guarantees and letters of credit
outstanding as of September 30, 1996. As of November 30, 1996, the Company's
total consolidated indebtedness was $921.0 million, $273.0 million of borrowing
capacity was unused under the revolving credit facility of the Credit Agreement,
and the Company had cash and cash equivalents of $44.1 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." For a description of the
Company's long term debt, see "Description of Principal Indebtedness" and Note 4
of the Notes to Consolidated Financial Statements. Although the Notes will not
be secured by any assets of the Company, in the event the Company or any of its
subsidiaries incurs Indebtedness that is secured by the Company's Gramercy
alumina refinery, Nevada micromill, or certain other domestic real property,
plant or equipment that is acquired subsequent to the issuance of the Notes, the
Company may be required by the Indenture, subject to certain exceptions
(including for the Credit Agreement), to equally and ratably secure the Notes.
See "Description of New Notes -- Covenants -- Limitation on Liens."
    
 
   
     Subordination. The obligations of the Company with respect to the Notes are
fully and unconditionally guaranteed, jointly and severally, on a senior,
unsecured basis by the Subsidiary Guarantors. Any obligations
    
 
                                       17
   18
 
   
of the Company's Subsidiaries (as defined) will be effectively senior to the
claims of the holders of the Notes with respect to the assets of such
Subsidiaries, except to the extent that the holders of the Notes may be
creditors of a Subsidiary pursuant to a subsidiary guarantee. Any such claim by
the holders of the Notes with respect to the assets of any Subsidiary Guarantor
will be effectively subordinated to secured Indebtedness (including Indebtedness
under the Credit Agreement) of such Subsidiary Guarantor with respect to the
assets securing such Indebtedness. The rights of the Company and its creditors,
including holders of the Notes, to realize upon the assets of any Subsidiary
upon such Subsidiary's liquidation or reorganization (and the consequent rights
of holders of the Notes to participate in those assets) will be subject to the
prior claims of such Subsidiary's creditors, except to the extent that the
Company may itself be a creditor with recognized claims against such Subsidiary
or to the extent that the holders of the Notes may be creditors with recognized
claims against such Subsidiary pursuant to the terms of a subsidiary guarantee
(subject, however, to the prior claims of creditors holding secured Indebtedness
of any such Subsidiary with respect to the assets securing such Indebtedness).
The Credit Agreement is secured by, among other things, the grant of a lien on
all now existing and hereafter acquired receivables, inventory, intangibles and
the existing principal domestic plants of the Company and its subsidiaries
(other than the Company's Gramercy alumina refinery and Nevada micromill). See
"Description of Principal Indebtedness." In addition, the Indenture restricts
the amount of Indebtedness that Subsidiaries are permitted to Incur (as
defined). See "Description of New Notes -- Covenants -- Limitation on
Indebtedness and Preferred Stock."
    
 
SENSITIVITY TO PRICES AND HEDGING PROGRAMS
 
     The Company's earnings 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.
 
   
     Primary aluminum prices have historically been subject to significant
cyclical price fluctuations. During the period January 1, 1993 through November
1, 1996, the AMT Price for primary aluminum has ranged from approximately $.50
to $1.00 per pound. For the week ended December 20, 1996, the AMT Price for
primary aluminum was approximately $.73 per pound. Alumina prices as well as
fabricated aluminum product prices (which vary considerably among products) are
significantly influenced by changes in the price of primary aluminum but
generally lag behind primary aluminum price changes by up to three months. See
"Prospectus Summary -- Recent Trends and Developments" and "-- Fourth Quarter
Results."
    
 
     The Company's production levels of alumina and primary aluminum exceed its
internal processing needs, which allows it to be a major seller of alumina
(approximately 2.0 million tons in 1995 or 72% of production) and primary
aluminum (approximately 271,700 tons in 1995 or 66% of production) to third
parties.
 
   
     As of November 30, 1996, the Company had sold forward substantially all of
the alumina available to it in excess of its projected internal smelting
requirements for the balance of 1996, and 89% and 90% of such excess alumina for
1997 and 1998, respectively. Virtually all of such 1997 and 1998 sales were made
at prices indexed to future prices of primary aluminum.
    
 
   
     As of November 30, 1996, the Company had sold forward at fixed prices
approximately 70,000 tons of primary aluminum in excess of its projected
internal fabrication requirements in 1997 and approximately 93,600 tons of such
surplus in 1998. As of November 30, 1996, the Company had also purchased put
options to establish a minimum price in respect of approximately 196,000 tons
and 45,000 tons of such 1997 and 1998 surplus, respectively, and had entered
into option contracts that established a price range for an additional 160,000
tons of the Company's 1998 surplus. The weighted average price of the Company's
1997 and 1998 fixed price contracts, and the weighted average price for the
Company's 1998 put options exceed the AMT Price for primary aluminum for the
week ended December 20, 1996. The weighted average price for the Company's
purchased put options with respect to 1997 are below the AMT Price for the week
ended December 20, 1996. The weighted average price of the minimum of the range
established with respect to the Company's other 1998 option contracts
approximates the AMT Price for the week ended December 20, 1996.
    
 
                                       18
   19
 
LEVERAGE
 
   
     The Company is highly leveraged, with total consolidated indebtedness of
$878.0 million (including $10.7 million of indebtedness to KAC) at September 30,
1996. On a pro forma basis, as of September 30, 1996, after giving effect to the
Offering and the 10 7/8% Series C Notes Offering, and application of proceeds
therefrom, the Company's total consolidated indebtedness would increase to
$972.7 million. As of November 30, 1996, the Company's total consolidated
indebtedness was $921.0 million. The Company's ability to generate sufficient
cash to meet its debt service obligations is subject to many factors, certain of
which are beyond its control, including economic conditions, aluminum prices,
and competition. While the Company believes that, based on current levels of
operations, its cash generated from operations, together with other sources of
liquidity, will be adequate to meet such obligations, there can be no assurance
that such sources of funds will in fact be sufficient to service such
obligations. See "Capitalization," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," and "Description of Principal Indebtedness." The Company's leverage
is substantially greater than the leverage of most of its North American
competitors, which generally have greater financial resources than the Company.
Due to its highly leveraged condition, the Company is more sensitive than less
leveraged companies to factors affecting its operations, including changes in
the prices for its products, the rates charged for power at its various
facilities, and general economic conditions.
    
 
ENVIRONMENTAL MATTERS AND LITIGATION
 
   
     The Company is subject to a wide variety of international, federal, state
and local environmental laws and regulations (the "Environmental Laws"). From
time to time, the Company is subject, with respect to its current and former
operations, to fines or penalties assessed for alleged breaches of the
Environmental Laws, and to claims and litigation based upon such laws. The
Company 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. The Company's Mead, Washington, facility has
been listed on the National Priorities List under CERCLA. In addition, the
Company, along with numerous 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. In certain instances, the Company may be
exposed to joint and several liability for remedial action or damages to natural
resources, which could effectively expose the Company to liability for all costs
associated with any such remedial actions irrespective of its degree of
culpability for the environmental damages related thereto. Further, future
environmental regulations are expected to impose stricter compliance
requirements on the aluminum industry. 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, results of
operations, or liquidity. For a discussion of the Company's environmental
litigation and other environmental matters, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Environmental Contingencies," "Business -- Environmental
Matters," and "-- Legal Proceedings," Note 9 of the Notes to Consolidated
Financial Statements, and Note 3 of the Notes to Interim Consolidated Financial
Statements.
    
 
     In addition, the Company is subject to 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 the Company or exposure to products containing asbestos
produced or sold by the Company (which products have generally not been
manufactured by the Company for at least 15 years). 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
insurance recoveries that will be received, management currently believes that,
based on the factors discussed below under the caption "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Asbestos Contingencies," the resolution of asbestos-related
uncertainties and the incurrence of
 
                                       19
   20
 
asbestos-related costs net of related insurance recoveries should not have a
material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity. For a discussion of the Company's asbestos
related litigation, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital
Resources -- Asbestos Contingencies," Note 9 of the Notes to Consolidated
Financial Statements, and Note 3 of the Notes to Interim Consolidated Financial
Statements.
 
CONTROLLING STOCKHOLDER AND POSSIBLE EFFECTS; CHANGE OF CONTROL
 
   
     Controlling Stockholder and Possible Effects. The Company is a wholly-owned
subsidiary of KAC. KAC is a subsidiary of MAXXAM Inc. ("MAXXAM"). As of the date
of this Prospectus, MAXXAM owns approximately 62% of KAC's Common Stock, par
value $.01 per share (the "KAC Common Stock"), assuming the conversion of each
outstanding share of KAC's 8.255% PRIDES, Convertible Preferred Stock (the
"PRIDES") into one share of KAC Common Stock, with the remaining approximately
38% publicly held. Accordingly, MAXXAM is able to determine the outcome of all
matters required to be submitted to the holders of the KAC Common Stock for
approval, including decisions relating to the election of the directors of KAC,
the determination of day-to-day corporate and management policies of KAC, the
merger or acquisition of KAC, the sale of substantially all of the assets of KAC
and other significant corporate transactions. MAXXAM's significant ownership
interest in KAC may discourage third parties from seeking to acquire control of
KAC which may adversely affect the market price of KAC's equity securities. Mr.
Charles E. Hurwitz, Chairman of the Board, President and Chief Executive Officer
of MAXXAM, together with Federated Development Inc. ("FDI"), collectively own
approximately 61.2% of the aggregate voting power of MAXXAM. FDI is a
wholly-owned subsidiary of Federated Development Company ("Federated"), a New
York business trust that is wholly-owned by Mr. Hurwitz, members of his
immediate family and trusts for the benefit thereof.
    
 
     Change of Control. The Indenture provides that, upon the occurrence of any
Change of Control (as defined), the Company will be required to make an offer (a
"Change of Control Offer") to purchase all or any part of a holder's Notes at
101% of the principal amount thereof plus accrued and unpaid interest thereon,
if any, to the date of purchase. Any Change of Control, and any purchase of the
Notes required under the Indenture upon a Change of Control, would constitute an
event of default under the Credit Agreement, with the result that the
obligations of the Company thereunder could be declared due and payable. Any
acceleration of the Company's obligations under the Credit Agreement would make
it unlikely that the Company would be able to purchase the Notes pursuant to the
Change of Control Offer. See "Description of New Notes -- Offer to Purchase the
Notes."
 
POWER SUPPLY
 
     Electric power supply represents an important production cost for the
Company at its aluminum smelters. In 1995, the Company successfully restructured
electric power purchase agreements for its smelting facilities in the Pacific
Northwest, which has resulted in significantly lower electric power costs in
1996 for the Mead and Tacoma, Washington, smelters compared with 1995 electric
power costs. The Company expects to continue to benefit from these savings in
electric power costs at these facilities in 1997 and beyond. However, a number
of lawsuits challenging the restructuring have been filed and the effect, if
any, of such lawsuits on the Company's power purchase and transmission
arrangements is not known at the current time. In addition, while the Company
has entered into long term arrangements with respect to the power supply for its
90%-owned Volta Aluminium Company Limited ("Valco") smelter in Ghana, there can
be no assurance that the requisite power supply will be available. For a
discussion of the Company's power supply arrangements, see
"Business -- Production Operations -- Primary Aluminum Products."
 
FOREIGN ACTIVITIES
 
     The Company's operations are located in many foreign countries, including
Australia, Canada, the PRC, Ghana, Jamaica, and the United Kingdom. Foreign
operations in general may be more vulnerable than domestic operations due to a
variety of political and other risks. See "Business -- Strategy," "-- Production
Operations," and "-- International Business Development."
 
                                       20
   21
 
CONSEQUENCES OF FAILURE TO EXCHANGE
 
   
     Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold, unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company or any Subsidiary Guarantor within
the meaning of Rule 405 under the Securities Act and other than any broker-
dealer who purchased Old Notes directly from the Company for resale pursuant to
Rule 144A under the Securities Act or any other available exemption under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act provided that such New Notes are acquired in
the ordinary course of such holders' business and such holders have no
arrangement with any person to participate in the distribution of such Notes.
Each broker-dealer that acquired Old Notes for its own account as a result of
market making or other trading activities and that receives New Notes for its
own account pursuant to the Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that, by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180 days after the effective date of this Prospectus, it will make
this Prospectus, as it may be amended or supplemented from time to time,
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution." However, to comply with the securities laws of certain
jurisdictions, if applicable, the New Notes may not be offered or sold unless
they have been registered or qualified for sale in such jurisdictions or an
exemption from registration or qualification is available and is complied with.
To the extent that Old Notes are tendered and accepted in the Exchange Offer,
the trading market for untendered and tendered but unaccepted Old Notes will be
adversely affected.
    
 
ABSENCE OF PUBLIC MARKET FOR THE NEW NOTES
 
     The New Notes are a new issue of securities, have no established trading
market, and may not be widely distributed. The Company does not intend to list
the New Notes on any national securities exchange or to seek the admission
thereof to trading in the National Association of Securities Dealers Automated
Quotation system. No assurance can be given that an active public or other
market will develop for the New Notes or as to the liquidity of or the trading
market for the New Notes. If a trading market does not develop or is not
maintained, holders of the New Notes may experience difficulty in reselling the
New Notes or may be unable to sell them at all. If a market for the New Notes
develops, any such market may be discontinued at any time. If a public trading
market develops for the New Notes, future trading prices of the New Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's results of operations and the market for similar
securities, and the price at which the holders of New Notes will be able to sell
such New Notes is not assured and the New Notes could trade at a premium or
discount to their purchase price or face value. Depending on prevailing interest
rates, the market for similar securities and other facts, including the
financial condition of the Company, the New Notes may trade at a discount from
their principal amount.
 
                                       21
   22
 
                               THE EXCHANGE OFFER
 
PURPOSE AND EFFECT
 
     The Old Notes were sold by the Company to the Initial Purchasers on October
23, 1996, pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes in reliance on Rule 144A under the Securities
Act and certain other exemptions under the Securities Act. The Company and the
Initial Purchasers also entered into the Registration Rights Agreement, pursuant
to which the Company agreed, with respect to the Old Notes and subject to the
Company's determination that the Exchange Offer is permitted under applicable
law, to (i) cause to be filed, on or prior to November 22, 1996, a registration
statement with the Commission under the Securities Act concerning the Exchange
Offer, (ii) use its reasonable best efforts to cause such registration statement
to be declared effective by the Commission on or prior to January 21, 1997, and
(iii) to cause the Exchange Offer to remain open for a period of not less than
30 days. This Exchange Offer is intended to satisfy the Company's exchange offer
obligations under the Registration Rights Agreement.
 
TERMS OF THE EXCHANGE OFFER
 
     The Company hereby offers, upon the terms and subject to the conditions set
forth herein and in the accompanying Letter of Transmittal, to exchange $1,000
in principal amount of the New Notes for each $1,000 in principal amount of the
outstanding Old Notes. The Company will accept for exchange any and all Old
Notes that are validly tendered on or prior to 5:00 p.m., New York City time, on
the Expiration Date. Tenders of the Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date. The Exchange Offer is
not conditioned upon any minimum principal amount of Old Notes being tendered
for exchange. However, the Exchange Offer is subject to the conditions, terms
and provisions of the Registration Rights Agreement. The form and terms of the
New Notes will be identical in all material respects to the form and terms of
the Old Notes, except that (i) the New Notes have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, (ii) subject to certain limited exceptions, holders of New Notes will
not be entitled to Additional Interest, and (iii) holders of New Notes will not
be, and upon consummation of the Exchange Offer, Eligible Holders of Old Notes
will no longer be, entitled to certain rights under the Registration Rights
Agreement intended for holders of unregistered securities. See "-- Conditions of
the Exchange Offer."
 
     Old Notes may be tendered only in multiples of $1,000. Subject to the
foregoing, Holders may tender less than the aggregate principal amount
represented by the Old Notes held by them, provided that they appropriately
indicate this fact on the Letter of Transmittal accompanying the tendered Old
Notes (or so indicate pursuant to the procedures for book-entry transfer).
 
   
     As of the date of this Prospectus, $175.0 million in aggregate principal
amount of the Old Notes is outstanding, the maximum amount authorized by the
Indenture for all Notes. As of December 9, 1996, there were two registered
holders of the Old Notes, including Cede, which held approximately $174.3
million of aggregate principal amount of the Old Notes for 31 of its
participants. Solely for reasons of administration (and for no other purpose),
the Company has fixed the close of business on December 30, 1996, as the record
date (the "Record Date") for purposes of determining the persons to whom this
Prospectus and the Letter of Transmittal will be mailed initially. Only an
Eligible Holder of the Old Notes (or such Eligible Holder's legal representative
or attorney-in-fact) may participate in the Exchange Offer. There will be no
fixed record date for determining Eligible Holders of the Old Notes entitled to
participate in the Exchange Offer. The Company believes that, as of the date of
this Prospectus, no such Eligible Holder is an affiliate (as defined in Rule 405
under the Securities Act) of the Company or any of the Subsidiary Guarantors.
    
 
     The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Eligible
Holders of Old Notes and for the purposes of receiving the New Notes from the
Company.
 
                                       22
   23
 
     If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering Eligible Holder thereof as promptly as
practicable after the Expiration Date.
 
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
 
   
     The Expiration Date shall be Wednesday, February 5, 1997 at 5:00 p.m., New
York City time, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the Expiration Date shall be the latest date and time to
which the Exchange Offer is extended.
    
 
     In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date. Such notice and
public announcement shall set forth the new Expiration Date of the Exchange
Offer.
 
     The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) if any of the
conditions set forth below under "Conditions of the Exchange Offer" shall not
have been satisfied, to terminate the Exchange Offer by giving oral or written
notice of such delay, extension, or termination to the Exchange Agent, and (iv)
to amend the terms of the Exchange Offer in any manner. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will, in accordance with applicable law, file a post-effective
amendment to the registration statement (a "Post-effective Amendment") and
resolicit the registered holders of the Old Notes. If the Company files a
Post-effective Amendment, it will notify the Exchange Agent of an extension of
the Exchange Offer by oral or written notice, and will make a public
announcement thereof, each prior to 9:00 a.m., New York City time, on the next
business day after the effectiveness of such Post-effective Amendment. Such
notice and public announcement shall set forth the new Expiration Date, which
new Expiration Date shall be no less than five days after the then applicable
Expiration Date.
 
CONDITIONS OF THE EXCHANGE OFFER
 
     The Exchange Offer is not conditioned upon any minimum principal amount of
the Old Notes being tendered for exchange. However, notwithstanding any other
provisions of the Exchange Offer, the Company shall not be required to accept
for exchange, or to issue the New Notes in exchange for, any Old Notes, if the
Exchange Offer violates any applicable law or interpretation of the staff of the
Commission. The Company expects that the foregoing conditions will be satisfied.
 
TERMINATION OF CERTAIN RIGHTS
 
   
     The Registration Rights Agreement provides that, subject to certain
exceptions, in the event of a Registration Default (as defined below), Eligible
Holders of Old Notes are entitled to receive Additional Interest. Additional
Interest means the increase in the interest rate borne by Registrable Securities
during the period in which a Registration Default is continuing pursuant to the
terms of the Registration Rights Agreement (in general, one-quarter of one
percent (0.25%) per annum for the first 90-day period immediately after the
first such Registration Default and an additional one-quarter of one percent
(0.25%) per annum for each subsequent 90-day period until all Registration
Defaults have been cured, provided that the aggregate increase in such interest
rate shall not exceed one percent (1.00%) per annum). A "Registration Default"
with respect to the Exchange Offer shall generally occur if: (i) the
registration statement concerning the exchange offer (the "Registration
Statement") has not been filed with the Commission on or prior to November 22,
1996; (ii) the Registration Statement is not declared effective on or prior to
January 21, 1997, or (iii) the Exchange Offer is not consummated on or prior to
March 2, 1997. Holders of New Notes will not be and, upon consummation of the
Exchange Offer, Holders of Old Notes will no longer be, entitled to (i) the
right to receive Additional Interest, except in certain limited circumstances,
and (ii) certain other rights under the Registration Rights Agreement intended
for holders of Registrable Securities. The Exchange Offer shall be deemed
consummated upon the occurrence of the delivery by the Company to the Registrar
under the
    
 
                                       23
   24
 
Indenture of New Notes in the same aggregate principal amount as the aggregate
principal amount of Old Notes that are validly tendered by holders thereof
pursuant to the Exchange Offer.
 
ACCRUED INTEREST ON THE OLD NOTES
 
     The New Notes will bear interest at a rate equal to 10 7/8% per annum from
and including their date of issuance. Eligible Holders whose Old Notes are
accepted for exchange will have the right to receive interest accrued thereon
from the date of their original issuance or the last Interest Payment Date, as
applicable, to, but not including, the date of issuance of the New Notes, such
interest to be payable with the first interest payment on the New Notes.
Interest on the Old Notes accepted for exchange, which interest accrued at the
rate of 10 7/8% per annum, will cease to accrue on the day prior to the issuance
of the New Notes. See "Description of New Notes -- General."
 
PROCEDURES FOR TENDERING OLD NOTES
 
     The tender of an Eligible Holder's Old Notes as set forth below and the
acceptance thereof by the Company will constitute a binding agreement between
the tendering Eligible Holder and the Company upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, an Eligible Holder who wishes to tender
Old Notes for exchange pursuant to the Exchange Offer must transmit such Old
Notes, together with a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to the Exchange Agent at the address set forth on the back cover
page of this Prospectus prior to 5:00 p.m., New York City time, on the
Expiration Date. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE ELIGIBLE HOLDER.
IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. INSTEAD OF DELIVERY BY MAIL, IT
IS RECOMMENDED THAT THE ELIGIBLE HOLDER USE AN OVERNIGHT OR HAND DELIVERY
SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY
DELIVERY.
 
     Each signature on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant hereto are tendered (i) by a registered holder of the Old Notes who has
not completed either the box entitled "Special Exchange Instructions" or the box
entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii) by
an Eligible Institution (as defined). In the event that a signature on a Letter
of Transmittal or a notice of withdrawal, as the case may be, is required to be
guaranteed, such guarantee must be by a firm which is a member of a registered
national securities exchange or the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or otherwise be an "eligible guarantor institution" within the
meaning of Rule 17Ad-15 under the Exchange Act (collectively, "Eligible
Institutions"). If the Letter of Transmittal is signed by a person other than
the registered holder of the Old Notes, the Old Notes surrendered for exchange
must either (i) be endorsed by the registered holder, with the signature thereon
guaranteed by an Eligible Institution or (ii) be accompanied by a bond power, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered holder, with the signature thereon guaranteed by an
Eligible Institution. The term "registered holder" as used herein with respect
to the Old Notes means any person in whose name the Old Notes are registered on
the books of the Registrar.
 
     All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of Old Notes tendered for exchange will be
determined by the Company in its sole discretion, which determination shall be
final and binding. The Company reserves the absolute right to reject any and all
Old Notes not properly tendered and to reject any Old Notes the Company's
acceptance of which might, in the judgment of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any defects or
irregularities or conditions of the Exchange Offer as to particular Old Notes
either before or
 
                                       24
   25
 
after the Expiration Date (including the right to waive the ineligibility of any
holder who seeks to tender Old Notes in the Exchange Offer). The interpretation
of the terms and conditions of the Exchange Offer (including the Letter of
Transmittal and the instructions thereto) by the Company shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes for exchange must be cured within such
period of time as the Company shall determine. The Company will use reasonable
efforts to give notification of defects or irregularities with respect to
tenders of Old Notes for exchange but shall not incur any liability for failure
to give such notification. Tenders of the Old Notes will not be deemed to have
been made until such irregularities have been cured or waived.
 
     If any Letter of Transmittal, endorsement, bond power, power of attorney or
any other document required by the Letter of Transmittal is signed by a trustee,
executor, corporation or other person acting in a fiduciary or representative
capacity, such person should so indicate when signing, and, unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
 
     Any beneficial owner of the Old Notes (a "Beneficial Owner") whose Old
Notes are registered in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender Old Notes in the Exchange
Offer should contact such registered holder promptly and instruct such
registered holder to tender on such Beneficial Owner's behalf. If such
Beneficial Owner wishes to tender directly, such Beneficial Owner must, prior to
completing and executing the Letter of Transmittal and tendering Old Notes, make
appropriate arrangements to register ownership of the Old Notes in such
Beneficial Owner's name. Beneficial Owners should be aware that the transfer of
registered ownership may take considerable time.
 
   
     By tendering, each registered holder will represent to the Company that,
among other things (i) the New Notes to be acquired in connection with the
Exchange Offer by the Eligible Holder and each Beneficial Owner of the Old Notes
are being acquired by the Eligible Holder and each Beneficial Owner in the
ordinary course of business of the Eligible Holder and each Beneficial Owner,
(ii) the Eligible Holder and each Beneficial Owner are not participating, do not
intend to participate, and have no arrangement or understanding with any person
to participate, in the distribution of the New Notes, (iii) the Eligible Holder
and each Beneficial Owner acknowledge and agree that any person participating in
the Exchange Offer for the purpose of distributing the New Notes must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with a secondary resale transaction of the New Notes acquired by
such person and cannot rely on the position of the staff of the Commission
enunciated in Morgan Stanley & Co., Incorporated (available June 5, 1991) and
Exxon Capital Holdings Corporation (available May 13, 1988), and interpreted in
the Commission's letters to Shearman & Sterling (available July 2, 1993) and
K-III Communications Corporation (available May 14, 1993), and similar no-action
or interpretive letters issued to third parties, (iv) that if the Eligible
Holder is a broker-dealer that acquired Old Notes as a result of market making
or other trading activities, it will deliver a prospectus in connection with any
resale of New Notes acquired in the Exchange Offer, (v) the Eligible Holder and
each Beneficial Owner understand that a secondary resale transaction described
in clause (iii) above should be covered by an effective registration statement
containing the selling security holder information required by Item 507 of
Regulation S-K of the Commission, and (vi) neither the Eligible Holder nor any
Beneficial Owner is an "affiliate," as defined under Rule 405 of the Securities
Act, of the Company or any Subsidiary Guarantor except as otherwise disclosed to
the Company in writing. In connection with a book-entry transfer, each
participant will confirm that it makes the representations and warranties
contained in the Letter of Transmittal.
    
 
     Guaranteed Delivery Procedures.  Eligible Holders who wish to tender their
Old Notes and (i) whose Old Notes are not immediately available or (ii) who
cannot deliver their Old Notes or any other documents required by the Letter of
Transmittal to the Exchange Agent prior to the Expiration Date (or complete the
procedure for book-entry transfer on a timely basis), may tender their Old Notes
according to the guaranteed delivery procedures set forth in the Letter of
Transmittal. Pursuant to such procedures: (i) such tender must be made by or
through an Eligible Institution and a Notice of Guaranteed Delivery (as defined
in the Letter of Transmittal) must be signed by such Eligible Holder, (ii) on or
prior to the Expiration Date, the Exchange Agent must have received from the
Eligible Holder and the Eligible Institution a properly completed and duly
executed Notice of Guaranteed Delivery (by facsimile transmission, mail or hand
delivery) setting forth the
 
                                       25
   26
 
name and address of the Eligible Holder, the certificate number or numbers of
the tendered Old Notes, and the principal amount of tendered Old Notes, stating
that the tender is being made thereby and guaranteeing that, within three (3)
business days after the date of delivery of the Notice of Guaranteed Delivery,
the tendered Old Notes, a duly executed Letter of Transmittal and any other
required documents will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) such properly completed and executed documents
required by the Letter of Transmittal and the tendered Old Notes in proper form
for transfer (or confirmation of a book-entry transfer of such Old Notes into
the Exchange Agent's account at DTC) must be received by the Exchange Agent
within three (3) business days after the Expiration Date. Any Eligible Holder
who wishes to tender Old Notes pursuant to the guaranteed delivery procedures
described above must ensure that the Exchange Agent receives the Notice of
Guaranteed Delivery and Letter of Transmittal relating to such Old Notes prior
to 5:00 p.m., New York City time, on the Expiration Date.
 
     Book-Entry Delivery.  The Exchange Agent will establish an account with
respect to the Old Notes at the DTC ("Book-Entry Transfer Facility") for
purposes of the Exchange Offer promptly after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of the Old Notes by causing such
facility to transfer Old Notes into the Exchange Agent's account in accordance
with such facility's procedure for such transfer. Even though delivery of Old
Notes may be effected through book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility, a properly completed and duly
executed Letter of Transmittal (or a manually signed facsimile thereof), with
any required signature guarantees, or an Agent's Message (as defined below) in
connection with a book-entry transfer, and other documents required by the
Letter of Transmittal, must, in any case, be transmitted to and received by the
Exchange Agent at one of its addresses set forth on the back cover of this
Prospectus before the Expiration Date, or the guaranteed delivery procedure set
forth above must be followed. Delivery of the Letter of Transmittal and any
other required documents to the Book-Entry Transfer Facility does not constitute
delivery to the Exchange Agent. The term "Agent's Message" means a message
transmitted by the Book-Entry Transfer Facility to, and received by, the
Exchange Agent and forming a part of a book-entry confirmation, which states
that such Book-Entry Transfer Facility has received an express acknowledgment
from the participant in such Book-Entry Transfer Facility tendering the Old
Notes that such participant has received and agrees to be bound by the terms of
the Letter of Transmittal and that the Company may enforce such agreement
against such participant.
 
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
 
     Upon satisfaction or waiver of all the conditions to the Exchange Offer,
the Company will accept any and all Old Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time, on the Expiration Date.
The New Notes issued pursuant to the Exchange Offer will be delivered as soon as
practicable after acceptance of the Old Notes. For purposes of the Exchange
Offer, the Company shall be deemed to have accepted validly tendered Old Notes,
when, as, and if the Company has given oral or written notice thereof to the
Exchange Agent.
 
     In all cases, issuances of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents (or of confirmation of a
book-entry transfer of such Old Notes into the Exchange Agent's account at DTC);
provided, however, that the Company reserves the absolute right to waive any
defects or irregularities in the tender or conditions of the Exchange Offer. If
any tendered Old Notes are not accepted for any reason, such unaccepted Old
Notes will be returned without expense to the tendering Eligible Holder thereof
as promptly as practicable after the expiration or termination of the Exchange
Offer.
 
WITHDRAWAL RIGHTS
 
     Tenders of the Old Notes may be withdrawn by delivery of a written notice
to the Exchange Agent, at its address set forth on the back cover page of this
Prospectus, at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. Any such notice of withdrawal must (i) specify the name of the
person having deposited the Old Notes to be withdrawn (the "Depositor"), (ii)
identify the Old Notes to be withdrawn
 
                                       26
   27
 
(including the certificate number or numbers and principal amount of such Old
Notes, as applicable), (iii) be signed by the Eligible Holder in the same manner
as the original signature on the Letter of Transmittal by which such Old Notes
were tendered (including any required signature guarantees) or be accompanied by
a bond power in the name of the person withdrawing the tender, in satisfactory
form as determined by the Company in its sole discretion, duly executed by the
registered holder, with the signature thereon guaranteed by an Eligible
Institution together with the other documents required upon transfer by the
Indenture, and (iv) specify the name in which such Old Notes are to be
re-registered, if different from the Depositor, pursuant to such documents of
transfer. Any questions as to the validity, form and eligibility (including time
of receipt) of such notices will be determined by the Company, in its sole
discretion. The Old Notes so withdrawn will be deemed not to have been validly
tendered for exchange for purposes of the Exchange Offer. Any Old Notes which
have been tendered for exchange but which are withdrawn will be returned to the
Eligible Holder thereof without cost to such Eligible Holder as soon as
practicable after withdrawal. Properly withdrawn Old Notes may be retendered by
following one of the procedures described under "The Exchange
Offer -- Procedures for Tendering Old Notes" at any time on or prior to the
Expiration Date.
 
THE EXCHANGE AGENT; ASSISTANCE
 
     First Trust National Association is the Exchange Agent. All tendered Old
Notes, executed Letters of Transmittal and other related documents should be
directed to the Exchange Agent. Questions and requests for assistance and
requests for additional copies of the Prospectus, the Letter of Transmittal and
other related documents should be addressed to the Exchange Agent as follows:
 
                                                                      
             By Mail:                     By Hand/Overnight Express:              Facsimile
 First Trust National Association      First Trust National Association         Transmission:
        180 E. 5th Street                     180 E. 5th Street                 (612) 244-1537
    St. Paul, Minnesota 55101             St. Paul, Minnesota 55101
    Attention: Phyllis Meath,             Attention: Phyllis Meath,          To confirm receipt:
       Specialized Finance                   Specialized Finance                (612) 244-1197


 
SOLICITATION OF TENDERS; FEES AND EXPENSES
 
     No person has been authorized to give any information or to make any
representation in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will offers be
accepted from or on behalf of) holders of Notes in any jurisdiction in which the
making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of Notes in
such jurisdiction.
 
   
     All expenses incident to the Company's consummation of the Exchange Offer
and compliance with the Registration Rights Agreement will be borne by the
Company, including, without limitation: (i) all registration and filing fees
(including, without limitation, fees and expenses of compliance with state
securities or Blue Sky laws), (ii) printing expenses (including, without
limitation, expenses of printing certificates for the New Notes in a form
eligible for deposit with DTC and of printing Prospectuses), (iii) messenger,
telephone and delivery expenses, (iv) fees and disbursements of counsel for the
Company and the Subsidiary Guarantors, (v) fees and disbursements of independent
certified public accountants, (vi) rating agency fees, (vii) internal expenses
of the Company and the Subsidiary Guarantors (including, without limitation, all
salaries and expenses of officers and employees of the Company and the
Subsidiary Guarantors performing legal or accounting duties), and (ix) fees and
expenses incurred in connection with the listing, if any, of the New Notes on a
securities exchange.
    
 
                                       27
   28
 
     The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptance of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
 
ACCOUNTING TREATMENT
 
     The New Notes will be recorded at the same carrying value as the Old Notes,
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss will be recognized by the Company for accounting
purposes. The expenses of the Exchange Offer will be amortized over the term of
the New Notes.
 
RESALES OF THE NEW NOTES
 
   
     Based on interpretations by the staff of the Commission enunciated in
Morgan Stanley & Co., Incorporated (available June 5, 1991) and Exxon Capital
Holdings Corporation (available May 13, 1988), and interpreted in the
Commission's letters to Shearman & Sterling (available July 2, 1993) and K-III
Communications Corporation (available May 14, 1993), and similar no-action or
interpretive letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer to an Eligible Holder in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
such Eligible Holder (other than (i) a broker-dealer who purchased Old Notes
directly from the Company for resale pursuant to Rule 144A under the Securities
Act or any other available exemption under the Securities Act, or (ii) a person
that is an affiliate of the Company or any of the Subsidiary Guarantors within
the meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the Eligible Holder is acquiring the New Notes in the ordinary course of
business and is not participating, and has no arrangement or understanding with
any person to participate, in the distribution of the New Notes. The Company has
not requested or obtained an interpretive letter from the Commission staff with
respect to this Exchange Offer, and the Company and the Eligible Holders are not
entitled to rely on interpretive advice provided by the staff to other persons,
which advice was based on the facts and conditions represented in such letters.
However, the Exchange Offer is being conducted in a manner intended to be
consistent with the facts and conditions represented in such letters. If any
Eligible Holder acquires New Notes in the Exchange Offer for the purpose of
distributing or participating in a distribution of the New Notes, such Eligible
Holder cannot rely on the position of the staff of the Commission set forth in
the above no-action and interpretive letters and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction, unless an exemption from
registration is otherwise available. Each broker-dealer that receives New Notes
for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Company has agreed that for a period of
180 days after the effective date of this Prospectus, it will make this
Prospectus, as amended and supplemented, available to any broker-dealer who
receives New Notes in the Exchange Offer for use in connection with any such
resale. See "Plan of Distribution."
    
 
CONSEQUENCE OF FAILURE TO EXCHANGE
 
     Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the offer or sale of the Old Notes pursuant to an exemption from,
or in a transaction not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exception from, or in a transaction not subject to, the
Securities Act and applicable states securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. See "Risk Factors -- Consequences of Failure to Exchange."
 
                                       28
   29
 
OTHER
 
     Participation in the Exchange Offer is voluntary, and holders of Old Notes
should carefully consider whether to participate. Holders of the Old Notes are
urged to consult their financial and tax advisers in making their own decisions
on what action to take.
 
     As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Notes and will be entitled to all the
rights, and limitations applicable thereto, under the Indenture, except for any
such rights under the Registration Rights Agreement that by their terms
terminate or cease to have further effectiveness as a result of the making of
this Exchange Offer. See "Description of New Notes." All untendered Old Notes
will continue to be subject to the restrictions on transfer set forth in the
Indenture. To the extent that Old Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered Old Notes could be adversely
affected.
 
     The Company may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plan to acquire any Old Notes which are
not tendered in the Exchange Offer.
 
                                       29
   30
 
                                 CAPITALIZATION
 
   
     The following table summarizes the historical consolidated capitalization
of the Company at September 30, 1996, and as adjusted to give effect to the
Offering and the 10 7/8% Series C Notes Offering and the application of the
proceeds therefrom. This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the Notes to Consolidated
Financial Statements appearing elsewhere in this Prospectus.
    
 
   


                                                                        SEPTEMBER 30, 1996
                                                                    --------------------------
                                                                     ACTUAL        AS ADJUSTED
                                                                    --------       -----------
                                                                     (IN MILLIONS OF DOLLARS)
                                                                             
Cash and cash equivalents.........................................  $   21.5        $   109.6(1)
                                                                    ========         ========
Short-term debt (2)(3)............................................      17.5             17.5
                                                                    --------         --------
Long-term debt (2):
  Credit Agreement................................................     131.2(4)            --(1)
  10 7/8% Series C Senior Notes due 2006 (including premium of
     $1.8)........................................................        --             51.8
  10 7/8% Senior Notes due 2006 (net of discount of $.9)..........        --            174.1
  9 7/8% Senior Notes due 2003 (net of discount of $1.0)..........     224.0            224.0
  Pollution Control and Solid Waste Disposal Obligations (less
     current portion of $1.3).....................................      34.4             34.4
  Alpart CARIFA Loan..............................................      60.0             60.0
  12 3/4% Senior Subordinated Notes due 2003......................     400.0            400.0
  Other borrowings (less current portion of $1.4).................       8.8              8.8
                                                                    --------         --------
     Total long-term debt(5)......................................     858.4            953.1(5)
                                                                    --------         --------
Note payable to KAC (less current portion of $8.6)................       2.1              2.1(5)
                                                                    --------         --------
Minority interests................................................      91.0             91.0
                                                                    --------         --------
Redeemable preference stock.......................................      26.7             26.7
                                                                    --------         --------
Stockholders' equity..............................................      56.7             56.7
                                                                    --------         --------
       Total capitalization.......................................  $1,052.4        $ 1,147.1
                                                                    ========         ========
       Total long-term debt as a percentage of total
        capitalization............................................      81.6%            83.1%

    
 
- ------------
 
   
 (1) On a pro forma basis, after giving effect to the Offering and the 10 7/8%
     Series C Notes Offering and the application of the proceeds therefrom, as
     of September 30, 1996, $273.1 million of borrowing capacity would have been
     available for use under the revolving credit facility of the Credit
     Agreement ($51.9 million of letters of credit would have been outstanding)
     and the Company would have had additional available cash proceeds from the
     Offering and the 10 7/8% Series C Notes Offering of $88.1 million.
    
 
   
 (2) Does not give effect to $93.3 million of guaranteed unconsolidated joint
     venture indebtedness of the Company and $20.6 million of other guarantees
     and letters of credit as of September 30, 1996.
    
 
 (3) Short-term debt includes current portion of intercompany notes payable to
     KAC ($8.6 million).
 
 (4) As of September 30, 1996, $141.9 million of borrowing capacity was unused
     under the revolving credit facility of the Credit Agreement and $131.2
     million was outstanding under the Credit Agreement, excluding $51.9 million
     in outstanding letters of credit.
 
   
 (5) The scheduled maturity of the Company's long-term debt (including notes
     payable to KAC) through 2001, as adjusted to reflect the Offering and the
     10 7/8% Series C Notes Offering and the application of proceeds therefrom,
     is as follows: 1997 - $17.5 million; 1998 - $9.1 million; 1999 - $.5
     million; 2000 -  $.4 million; and 2001 - $.4 million.
    
 
                                       30
   31
 
         SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
 
    The following selected historical and pro forma consolidated financial data
should be read in conjunction with the Consolidated Financial Statements of the
Company and the Notes to Consolidated Financial Statements and the Interim
Consolidated Financial Statements and Notes to Interim Consolidated Financial
Statements appearing elsewhere in this Prospectus, and the information contained
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected historical consolidated financial data as of and for
the years ended December 31, 1995, 1994, 1993, 1992, and 1991 have been 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, 1996, and for the nine
months ended September 30, 1995, have not been audited, but in the opinion of
management contain all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position and results of operations of
the Company as of such date and for such periods. However, the results of
operations for the nine months ended September 30, 1996, are not necessarily
indicative of the results for the year ending December 31, 1996.
 
   


                                                          NINE MONTHS
                                                             ENDED
                                                         SEPTEMBER 30,                     YEAR ENDED DECEMBER 31,
                                                      -------------------   -----------------------------------------------------
                                                        1996       1995       1995       1994        1993       1992       1991
                                                      --------   --------   --------   --------    --------   --------   --------
                                                                        (IN MILLIONS OF DOLLARS, EXCEPT RATIOS)
                                                                                                    
Operating Data:
  Net sales.......................................... $1,652.1   $1,646.7   $2,237.8   $1,781.5    $1,719.1   $1,909.1   $2,000.8
  Cost of products sold..............................  1,394.8    1,329.8    1,798.4    1,625.5     1,587.7    1,619.3    1,594.2
  Gross profit.......................................    257.3      316.9      439.4      156.0       131.4      289.8      406.6
  Depreciation.......................................     72.5       71.1       94.3       95.4        97.1       80.3       73.2
  Selling, administrative, research and development,
    and general......................................     96.0       96.0      134.0      116.5       121.6      119.3      117.6
  Operating income (loss)............................     88.8      149.8      211.1      (55.9)     (123.1)      90.2      215.8
  Interest expense...................................     68.3       71.3       93.9       88.6        84.2       78.7       82.7
  Income (loss)before income taxes, minority
    interests, extraordinary loss and cumulative
    effect of changes in accounting principles.......     23.6       68.7      103.1     (151.8)     (208.8)      28.4      149.5
  Income (loss) before extraordinary loss and
    cumulative effect of changes in accounting
    principles.......................................     15.7       43.1       65.3      (96.2)     (117.6)      29.6      124.7
  Net income (loss)..................................     15.7       43.1       65.3     (101.6)(1)   (647.3)(1)     29.6    124.7
  Ratio of earnings to fixed charges(2)..............      1.2x       1.7x       1.9x        --(3)       --(3)      1.3x      2.7x
Other Data:
  Capital expenditures............................... $   91.1   $   53.2   $   88.4   $   70.0    $   67.7   $  114.4   $  118.1
  EBITDA(4)..........................................    164.4      211.1      291.3       32.2       (27.5)     187.4      305.4
  Ratio of EBITDA to interest expense................      2.4x       3.0x       3.1x        .4x         --(5)      2.4x      3.7x
Pro forma(6):
  Interest expense...................................     82.4                 113.8
  Net income.........................................      7.0                  53.0
  Ratio of EBITDA to interest expense................      2.0x                  2.6x

    
 
   


                                                   SEPTEMBER 30, 1996                           DECEMBER 31,
                                                -------------------------   -----------------------------------------------------
                                                PRO FORMA(6)   HISTORICAL     1995       1994        1993       1992       1991
                                                ------------   ----------   --------   --------    --------   --------   --------
                                                                            (IN MILLIONS OF DOLLARS)
                                                                                                    
Balance Sheet Data:
  Working capital..............................   $  480.5      $  392.4    $  324.5   $  239.5    $  266.9   $  310.8   $  242.4
  Total assets.................................    2,966.2       2,871.5     2,814.3    2,693.6     2,528.2    2,173.8    2,138.7
  Long-term liabilities........................      558.3         558.3       548.5      495.5       501.7      281.7      212.9
  Accrued postretirement medical benefit
    obligation, less current portion...........      727.7         727.7       734.0      734.9       713.1         --         --
  Long-term debt, less current portion.........      953.1         858.4       749.2      751.1       720.2      765.1      681.5
  Notes payable to parent, less current
    portion....................................        2.1           2.1         8.6       23.5        18.9         --         --
  Minority interests...........................       91.0          91.0        91.4       85.4        69.7       70.1       71.9
  Redeemable preference stock..................       26.7          26.7        29.6       29.0        33.6       32.8       34.8
  Total stockholders' equity (deficit).........       56.7          56.7        43.3      (24.8)         .1      568.4      562.9

    
 
- ------------
 
(1) Includes extraordinary loss on early extinguishment of debt of $5.4 and
    $21.8, net of tax benefits of $2.9 and $11.2 for 1994 and 1993,
    respectively, and cumulative effect of changes in accounting principles of
    $507.9, net of tax benefit of $237.7 in 1993. See "Management's Discussion
    and Analysis of Financial Condition and Results of Operations -- Results of
    Operations."
 
(2) For the purpose of calculating the ratio of earnings to fixed charges,
    "earnings" consist of the sum of (i) income (loss) before extraordinary loss
    and cumulative effect of changes in accounting principles of the Company and
    its consolidated subsidiaries, (ii) undistributed (earnings) losses of less-
    than-fifty-percent-owned companies, (iii) minority interest share of income
    (losses) of majority-owned subsidiaries that have fixed charges, (iv)
    consolidated provision for income taxes, (v) minority interest share of tax
    provision (credit) of majority-owned subsidiaries that have fixed charges,
    (vi) fixed charges, (vii) equity in losses of less-than-fifty-percent-owned
    companies where the Company has guaranteed the debt of such companies, and
    (viii) previously capitalized interest amortized during the period. Fixed
    charges consist of the sum of interest expense, amortization of deferred
    financing costs, the portion of rents representative of the interest factor,
    and interest expense related to the guaranteed debt of less-than-
    fifty-percent-owned companies incurring a loss.
 
(3) For the years ended December 31, 1994 and 1993, earnings were insufficient
    to cover fixed charges by $155.5 and $210.2, respectively.
 
(4) "EBITDA" represents income from continuing operations before extraordinary
    loss and cumulative effect of changes in accounting principles, before
    giving effect to income tax expense, minority interests, interest expense
    (including amortization of deferred financing costs and original issue
    discount) and depreciation. EBITDA is not intended to represent cash flow,
    an alternative to net income, or any other measure of performance in
    accordance with generally accepted accounting principles. It is included
    because management believes that certain investors find such information
    useful for measuring the Company's ability to service debt.
 
(5) For the year ended December 31, 1993, EBITDA was insufficient to cover
    interest expense by $111.7.
 
   
(6) The pro forma information assumes the Offering, the 10 7/8% Series C Notes
    Offering, the application of the net proceeds therefrom to reduce the
    outstanding borrowings under the Credit Agreement to zero and the investment
    of the remainder in short-term investments pending application for working
    capital and general corporate purposes as if such events had occurred as of
    the end of the period with respect to the balance sheet data and as if such
    events had occurred at the beginning of the period with respect to the
    operating data.
    
 
                                       31
   32
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
RESULTS OF OPERATIONS
 
   
     The Company operates in two business segments: bauxite and alumina, and
aluminum processing. The Company's operating results are sensitive to changes in
prices of alumina, primary aluminum, and fabricated aluminum products, and also
depend to a significant degree on the volume and mix of all products sold and on
the Company's hedging strategies. See Note 4 of the Notes to Interim
Consolidated Financial Statements appearing elsewhere in this Prospectus for an
explanation of the Company's hedging strategies. The following table provides
selected operational and financial information on a consolidated basis with
respect to the Company for the years ended December 31, 1995, 1994, and 1993,
and for the nine months ended September 30, 1996 and 1995. As an integrated
aluminum producer, the Company uses a portion of its bauxite, alumina, and
primary aluminum production for additional processing at certain of its other
facilities. Intracompany shipments and sales are excluded from the information
set forth on the following table. Interim financial and operating data are not
necessarily indicative of those for a full year.
    
 
                 SELECTED OPERATIONAL AND FINANCIAL INFORMATION
 


                                                            NINE MONTHS ENDED
                                                              SEPTEMBER 30,         YEAR ENDED DECEMBER 31,
                                                           -------------------   ------------------------------
                                                             1996       1995       1995       1994       1993
                                                           --------   --------   --------   --------   --------
                                                              (IN MILLIONS OF DOLLARS, EXCEPT SHIPMENTS AND
                                                                                 PRICES)
                                                                                        
Shipments: (000 tons)
  Alumina................................................   1,506.7    1,494.6    2,040.1    2,086.7    1,997.5
  Aluminum products:
    Primary aluminum.....................................     262.9      184.5      271.7      224.0      242.5
    Fabricated aluminum products.........................     245.4      284.3      368.2      399.0      373.2
                                                           --------   --------   --------   --------   --------
         Total aluminum products.........................     508.3      468.8      639.9      623.0      615.7
                                                           ========   ========   ========   ========   ========
Average realized sales price:
  Alumina (per ton)......................................  $    199   $    203   $    208   $    169   $    169
  Primary aluminum (per pound)...........................       .69        .82        .81        .59        .56
Net sales:
  Bauxite and alumina:
    Alumina..............................................  $  300.2   $  303.8   $  424.8   $  352.8   $  338.2
    Other(1)(2)..........................................      77.2       65.3       89.4       79.7       85.2
                                                           --------   --------   --------   --------   --------
         Total bauxite and alumina.......................     377.4      369.1      514.2      432.5      423.4
                                                           --------   --------   --------   --------   --------
  Aluminum processing:
    Primary aluminum.....................................     402.8      335.0      488.0      292.0      301.7
    Fabricated aluminum products.........................     861.4      929.0    1,218.6    1,043.0      981.4
    Other(2).............................................      10.5       13.6       17.0       14.0       12.6
                                                           --------   --------   --------   --------   --------
         Total aluminum processing.......................   1,274.7    1,277.6    1,723.6    1,349.0    1,295.7
                                                           --------   --------   --------   --------   --------
         Total net sales.................................  $1,652.1   $1,646.7   $2,237.8   $1,781.5   $1,719.1
                                                           ========   ========   ========   ========   ========
Operating income (loss):
  Bauxite and alumina....................................  $    8.8   $   36.4   $   54.0   $   19.8   $   (4.5)
  Aluminum processing....................................     127.8      170.9      238.9       (8.4)     (46.3)
  Corporate..............................................     (47.8)     (57.5)     (81.8)     (67.3)     (72.3)
                                                           --------   --------   --------   --------   --------
         Total operating income (loss)...................  $   88.8   $  149.8   $  211.1   $  (55.9)  $ (123.1)
                                                           ========   ========   ========   ========   ========
Income (loss) before extraordinary loss and cumulative
  effect of changes in accounting principles.............  $   15.7   $   43.1   $   65.3   $  (96.2)  $ (117.6)
Extraordinary loss on early extinguishment of debt, net
  of tax benefit of $2.9 and $11.2 for 1994 and 1993,
  respectively...........................................                                       (5.4)     (21.8)
Cumulative effect of changes in accounting principles,
  net of tax benefit of $237.7...........................                                                (507.9)
                                                           --------   --------   --------   --------   --------
Net income (loss)........................................  $   15.7   $   43.1   $   65.3   $ (101.6)  $ (647.3)
                                                           ========   ========   ========   ========   ========
Capital expenditures:
  Property, plant and equipment..........................  $   90.8   $   44.2   $   79.4   $   70.0   $   67.5
  Investments in unconsolidated affiliates...............        .3        9.0        9.0                    .2
                                                           --------   --------   --------   --------   --------
         Total capital expenditures......................  $   91.1   $   53.2   $   88.4   $   70.0   $   67.7
                                                           ========   ========   ========   ========   ========

 
- ---------------
 
(1) Includes net sales of bauxite.
 
(2) Includes the portion of net sales attributable to minority interests in
    consolidated subsidiaries.
 
                                       32
   33
 
RECENT TRENDS AND DEVELOPMENTS
 
   
     During 1995, the AMT Price for primary aluminum was approximately $.86 per
pound compared to $.72 and $.54 per pound in 1994 and 1993, respectively. The
significant improvement in prices during 1994 and 1995 resulted from strong
growth in Western world consumption of aluminum and the curtailment of
production in response to lower prices in prior periods by many producers
worldwide. In 1995, production of primary aluminum increased and consumption of
aluminum continued to grow, but at a much lower rate than in 1994. In general,
the overall aluminum market was strongest in the first half of 1995. By the
second half of 1995, orders and shipments for certain products had softened and
the rate of decline in LME inventories had leveled off. By the end of 1995, some
small increases in LME inventories occurred, and prices of aluminum weakened
from first-half levels. This trend has continued throughout the first eleven
months of 1996 as the supply of primary aluminum exceeded demand during this
period. Net reported primary aluminum inventories have increased by
approximately 55,000 tons in 1996 based upon recent reports of the LME (through
December 20, 1996) and the IPAI (through October 31, 1996), following
substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995,
respectively. The AMT Price for primary aluminum for the week ended December 20,
1996, was approximately $.73 per pound.
    
 
     Increased production of primary aluminum due to restarts of certain
previously idled capacity, the commissioning of a major new smelter in South
Africa, and the continued high level of exports from the CIS have contributed to
increased supplies of primary aluminum to the Western world in 1996. While the
economies of the major aluminum consuming regions -- the United States, Japan,
Western Europe, and Asia -- are performing relatively well, the Company believes
that the reduction of aluminum inventories by consumers, as prices have
continued to decline, has suppressed the growth in primary aluminum demand that
normally accompanies growth in economic and industrial activity. In addition to
these supply/demand dynamics, the Company believes that the recent decline in
primary aluminum prices may have been influenced by a recent major decline in
copper prices on the LME. See "Business -- Industry Overview."
 
FOURTH QUARTER RESULTS
 
   
     The Company incurred net losses of $4.8 million in the third quarter of
1996 and expects to continue to sustain net losses in the fourth quarter of
1996, due principally to lower average realized prices for alumina and primary
aluminum, as compared to prices realized in the comparable periods of 1995, and
due to increased raw material, energy, and operational costs associated with the
production of alumina at the Company's Gramercy alumina refinery in Louisiana
and 65%-owned Alpart alumina refinery in Jamaica as compared to amounts incurred
in the comparable periods of 1995. Such fourth quarter losses could
substantially exceed the loss for the third quarter of 1996.
    
 
PROFIT ENHANCEMENT AND COST CUTTING INITIATIVE
 
     The Company has set a goal of achieving significant cost reductions and
other profit improvements during 1997, with the full effect planned to be
realized in 1998. The initiative is based on the Company's conclusion that the
current level of performance of its existing facilities and businesses will not
achieve the level of profits the Company considers satisfactory based upon
historic long-term average prices for primary aluminum and alumina. To achieve
this goal, the Company plans reductions in production costs, improvements in
operating efficiencies, decreases in corporate selling, general and
administrative expenses, and enhancements to product mix. There can be no
assurance that the initiative will result in the desired cost reductions and
other profit improvements.
 
                                       33
   34
 
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1995
 
     Summary -- For the first nine months of 1996, the Company's net income was
$15.7 million, compared to net income of $43.1 million in the first nine months
of 1995. Net sales for the first nine months of 1996 were $1,652.1 million,
compared to $1,646.7 million for the same period in 1995.
 
     Results for the nine months ended September 30, 1996, reflect the
substantial reduction in market prices for primary aluminum more fully discussed
above. Alumina prices, which are significantly influenced by changes in primary
aluminum prices, also declined from period to period. The decrease in product
prices more than offset the positive impact of increases in shipments in several
segments of the Company's business, as more fully discussed below.
 
     Results for the first nine months of 1995 include approximately $17.0
million of first-quarter 1995 pre-tax expenses associated with an eight-day
strike at five major U.S. locations, a six-day strike at the Company's Alpart
alumina refinery, and a four-day disruption of alumina production at Alpart
caused by a boiler failure.
 
     Bauxite and Alumina -- Net segment sales for the nine months ended
September 30, 1996, were basically unchanged from the same period in 1995 as, on
a year to date basis, nominal alumina price declines were offset by a modest
increase in alumina shipments. The reduction in prices realized reflects the
decline in primary aluminum prices experienced in 1996 discussed above, as well
as the impact of certain short term sales of previously uncommitted alumina
production.
 
   
     Operating income (loss) for this segment of the Company's business declined
significantly from the prior year period as a result of: (1) reduced gross
margins from alumina sales resulting from the previously discussed price
declines; (2) high operating costs associated with disruptions in the power
supply at the Company's Alpart alumina refinery; and (3) increased natural gas
costs at the Company's Gramercy, Louisiana alumina refinery. Operating income
for the nine months ended September 30, 1996, was also unfavorably impacted by a
temporary raw material quality problem experienced at the Company's Gramercy
facility during the second quarter of 1996.
    
 
     Aluminum Processing -- For the first nine months of 1996 increases in
shipments of 42.5% more than offset a 16% decline in product prices from period
to period. The increase in shipments during the nine months ended September 30,
1996, is the result of increased shipments of primary aluminum to third parties
as a result of a decline in intracompany transfers.
 
   
     Net sales of fabricated aluminum products were down 7% for the nine months
ended September 30, 1996, as compared to the prior year period as a result of a
decrease in shipments (primarily related to can sheet activities) resulting from
reduced growth in demand and the reduction of consumer inventories. The impact
of reduced product shipments was to a limited degree offset by 7% increase in
prices realized from the sale of fabricated aluminum products for the nine
months ended September 30, 1996, resulting from a shift in product mix (to
higher-end value added products), due to reduced can sheet shipments.
    
 
     Corporate -- Corporate operating expenses represent normal and recurring
corporate general and administrative expenses which are not allocated to the
Company's business segments.
 
THREE YEARS ENDED DECEMBER 31, 1995
 
  Net Sales
 
     Bauxite and Alumina -- Revenue from net sales to third parties for the
bauxite and alumina segment was 19% higher in 1995 than in 1994 and 2% higher in
1994 than in 1993. Revenue from alumina increased 20% in 1995 from 1994, due to
higher average realized prices partially offset by lower shipments. The
remainder of the segment's sales revenues were from sales of bauxite and the
portion of sales of alumina attributable to the minority interest in Alpart.
 
     Aluminum Processing -- Revenue from net sales to third parties for the
aluminum processing segment was 28% higher in 1995 than in 1994 and 4% higher in
1994 than in 1993. The bulk of the segment's sales represents the Company's
primary aluminum and fabricated aluminum products, with the remainder
 
                                       34
   35
 
representing the portion of sales of primary aluminum attributable to the
minority interest in the Company's 90%-owned Valco aluminum smelter in Ghana.
Revenue from primary aluminum increased 67% in 1995 from 1994, due primarily to
higher average realized prices and higher shipments. In 1995, the Company's
average realized price from sales of primary aluminum was approximately $.81 per
pound, compared to the AMT Price of approximately $.86 per pound during the
year. The higher shipments of primary aluminum were due to increased production
at the Company's smelters in the Pacific Northwest and Valco, and reduced
intracompany consumption of primary metal at the Company's fabricated products
units. The increase in revenue for 1995 was partially offset by decreased
shipments caused by the strike by the USWA discussed below. Revenue from primary
aluminum decreased 3% in 1994 from 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 then-recent improvements in metal prices. Shipments
in 1994 reflected production curtailments at the Company's smelters in the
Pacific Northwest and Valco. Shipments of primary aluminum to third parties were
approximately 42% of total aluminum products shipments in 1995, compared with
approximately 36% in 1994 and 39% in 1993. Revenue from fabricated aluminum
products increased 17% in 1995 from 1994, due to higher average realized prices
partially offset by lower shipments for most of these products. Revenue from
fabricated aluminum products increased 6% in 1994 from 1993, principally due to
increased shipments of most of these products.
 
  Operating Income (Loss)
 
     Improved operating results in 1995 were partially offset by expenses
related to the Company's smelting joint venture in the PRC, increased expenses
related to the Company's micromill technology, maintenance expenses as a result
of an electrical lightning strike at the Company's Trentwood, Washington,
facility, and a work slowdown at the Company's 49%-owned Kaiser Jamaica Bauxite
Company ("KJBC") prior to the signing of a new labor contract. The combined
impact of these expenditures on the results for 1995 was approximately $6.0
million in the aggregate (on a pre-tax basis). Operating results in 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 Alpart, and
(iii) a four-day disruption of alumina production at Alpart caused by a boiler
failure. The combined impact of these events on the results for 1995 was
approximately $17.0 million in the aggregate (on a pre-tax basis) principally
from lower production volume and other related costs. In 1993, the Company
recorded a pre-tax charge of $35.8 million related to restructuring charges and
a pre-tax charge of $19.4 million because of a reduction in the carrying value
of its inventories caused principally by prevailing lower prices for alumina,
primary aluminum, and fabricated aluminum products.
 
     Bauxite and Alumina -- This segment's operating income was $54.0 million in
1995, compared with $19.8 million in 1994 and a loss of $4.5 million in 1993.
The increase in operating income in 1995 compared with 1994 was principally due
to higher revenue, partially offset by the effect of the strike and boiler
failure. In 1994, compared with 1993, operating income was favorably affected by
increased shipments and lower manufacturing costs.
 
     Aluminum Processing -- This segment's operating income was $238.9 million
in 1995, compared with losses of $8.4 million in 1994 and $46.3 million in 1993.
Improvement in operating results in 1995 compared with 1994 was principally due
to higher revenue, partially offset by the effect of the strike by the USWA. The
decrease in operating loss in 1994 compared with 1993 was caused principally by
the $35.8 million restructuring charges in 1993, increased shipments of
fabricated aluminum products, and higher average realized prices of primary
aluminum, partially offset by lower shipments of primary aluminum.
 
     Corporate -- Corporate operating expenses of $81.8 million, $67.3 million,
and $72.3 million in 1995, 1994, and 1993, respectively, represented corporate
general and administrative expenses that were not allocated to segments.
 
  Net Income (Loss)
 
     The Company reported net income of $65.3 million in 1995, compared with a
net loss of $101.6 million in 1994 and a net loss of $647.3 million in 1993. The
principal reason for the improvement in 1995 compared to
 
                                       35
   36
 
1994 was the improvement in operating results previously described, partially
offset by other charges, principally related to the establishment of additional
litigation reserves. The principal reasons for the reduced net loss in 1994
compared with 1993 were the reduction in the operating loss previously described
and the cumulative effect of changes in accounting principles of $507.9 million
related to adoption of Statement of Financial Accounting Standards No. 106, 109,
and 112 as of January 1, 1993. See Note 1 of the Notes to Consolidated Financial
Statements.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  Capital Structure
 
   
     On February 17, 1994, the Company and KAC entered into the Credit
Agreement. The Credit Agreement provides for a $325.0 million five-year secured,
revolving line of credit, scheduled to mature in 1999. The Company 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 plus
eligible inventory. As of September 30, 1996, $141.9 million (of which $73.1
million could have been used for letters of credit) was available to the Company
under the Credit Agreement. As of November 30, 1996, $273.0 of borrowing
capacity was unused under the revolving credit facility of the Credit Agreement.
The Credit Agreement is unconditionally guaranteed by KAC and by certain
significant subsidiaries of the Company. The Credit Agreement requires the
Company to maintain certain financial covenants and places restrictions on the
Company's and KAC'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 Credit Agreement
is secured by, among other things, (i) mortgages on the Company's major domestic
plants (excluding the Company's Gramercy alumina refinery and the Nevada
micromill); (ii) subject to certain exceptions, liens on the accounts
receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of the Company and certain of its
subsidiaries; (iii) a pledge of all of the stock of the Company owned by KAC;
and (iv) pledges of all of the stock of a number of the Company'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.
    
 
     In the first quarter of 1994, KAC consummated the public offering of
8,855,550 shares of its PRIDES. The net proceeds from the sale of the shares of
the PRIDES were approximately $100.1 million. On February 17, 1994, the Company
issued $225.0 million of its 9 7/8% Notes.
 
   
     The obligations of the Company with respect to the 9 7/8% Notes and the
12 3/4% Notes (see Note 4 of the Notes to Consolidated Financial Statements) are
guaranteed, jointly and severally, by certain subsidiaries of the Company.
    
 
   
     On October 23, 1996, the Company completed the Offering of $175.0 million
principal amount of Old Notes at 99.5% of their principal amount. The Old Notes
were not registered under the Securities Act, and may not be offered or sold in
the United States absent registration or an applicable exemption from
registration requirements. The Old Notes rank pari passu in right and priority
of payment with outstanding Indebtedness under the Credit Agreement, the 9 7/8%
Notes and the 10 7/8% Series C Notes, and will rank pari passu in right and
priority of payment with outstanding indebtedness represented by the New Notes,
and are fully and unconditionally guaranteed on a senior, unsecured basis by the
Subsidiary Guarantors. Net proceeds from the Offering on the Closing Date, after
estimated expenses, were approximately $168.9 million, of which $91.7 million
was utilized to reduce the outstanding borrowings under the revolving credit
facility of the Credit Agreement to zero. The remaining net proceeds
(approximately $77.2 million) were invested in short-term investments pending
their application for working capital and general corporate purposes, including
capital projects.
    
 
   
     On December 23, 1996, the Company completed the issuance of $50.0 million
principal amount of the 10 7/8% Series C Notes at 103.5% of their principal
amount. The 10 7/8% Series C Notes were not registered under the Securities Act,
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. The 10 7/8% Series C Notes
rank pari pasu in right and
    
 
                                       36
   37
 
   
priority of payment with outstanding Indebtedness under the Credit Agreement,
the 9 7/8% Notes, and the Notes, and are fully and unconditionally guaranteed on
a senior, unsecured basis by the Subsidiary Guarantors. Net proceeds from the
10 7/8% Series C Notes Offering, after estimated expenses, were approximately
$50.4 million, all of which were invested in short-term investments pending
their application for working capital and general corporate purposes, including
capital projects. Pursuant to an agreement with the initial purchaser, the
Company and the Subsidiary Guarantors agreed to file a registration statement
with the Commission within 30 days of the 10 7/8% Series C Notes Closing Date
with respect to a registered offer to exchange the 10 7/8% Series C Notes for
new notes with substantially identical terms, and to use their reasonable best
efforts to have the registration statement declared effective within 135 days of
the 10 7/8% Series C Notes Closing Date and to consummate such exchange offer
within 165 days of the 10 7/8% Series C Notes Closing Date.
    
 
   
     The indentures governing the 9 7/8% Notes, the 12 3/4% Notes, the 10 7/8%
Series C Notes and the Notes (the "9 7/8% Note Indenture," "12 3/4% Note
Indenture," "10 7/8% Series C Note Indenture," and the "Indenture,"
respectively, restrict, among other things, the Company's ability to incur debt,
undertake transactions with affiliates, and pay dividends.
    
 
   
     During October 1996, the Credit Agreement was amended to, among other
things, provide for the Offering of the Notes and to modify certain of the
financial covenants contained in the Credit Agreement. During December 1996, the
Credit Agreement was again amended to provide for the 10 7/8% Series C Notes
Offering.
    
 
     See "Risk Factors -- Leverage," "Description of Principal Indebtedness,"
and Note 4 of the Notes to Consolidated Financial Statements.
 
  Operating Activities
 
     Cash used for operations was $4.4 million in the first nine months of 1996,
compared with cash provided by operations of $20.8 million in the first nine
months of 1995, primarily due to reduced earnings. Cash provided by operations
was $119.5 million in 1995, compared with cash used for operations of $21.3
million in 1994 and cash provided by operations of $38.0 million in 1993. The
improvement in cash flows from operations in 1995 compared with 1994 was
primarily due to higher earnings and a refund of margin deposits of $50.5
million under certain hedging contracts.
 
     At December 31, 1995, the Company had working capital of $324.5 million,
compared with working capital of $239.5 million at December 31, 1994. The
increase in working capital was due primarily to an increase in Receivables and
Inventories and a decrease in Other accrued liabilities, partially offset by a
decrease in Prepaid expenses and other current assets (principally due to a
refund of margin deposits related to hedging activities) and an increase in
Accounts payable and Accrued salaries, wages, and related expenses.
 
     At September 30, 1996, the Company had working capital of $392.4 million,
compared with working capital of $324.5 million at December 31, 1995. The
increase in working capital was due primarily to an increase in Inventories and
Prepaid expenses and other current assets and a decrease in Accounts payable and
Accrued salaries, wages, and related expenses, partially offset by a decrease in
Receivables and an increase in Other accrued liabilities.
 
     Postretirement benefits other than pensions are provided through contracts
with various insurance carriers. The Company has not funded the liability for
these benefits, which are expected to be paid out of cash generated by
operations.
 
  Investing Activities
 
     The Company's capital expenditures of $217.1 million (of which $25.2
million was funded by the Company's minority partners in certain foreign joint
ventures) during the three years ended December 31, 1995, were made primarily to
improve production efficiency, reduce operating costs, expand capacity at
existing facilities, and construct new facilities. Total consolidated capital
expenditures were $88.4 million in 1995, compared with $70.0 million in 1994 and
$67.7 million in 1993 (of which $8.3, $7.5, and $9.4 million
 
                                       37
   38
 
were funded by the minority partners in certain foreign joint ventures in 1995,
1994, and 1993, respectively). Capital expenditures during the first nine months
of 1996 were $91.1 million, which were used primarily to improve production
efficiency, reduce operating costs, expand capacity at existing facilities, and
construct new facilities, including the Nevada micromill.
 
     Total consolidated capital expenditures (of which approximately 6% is
expected to be funded by the Company's minority partners in certain foreign
joint ventures) are expected to be between $130.0 and $160.0 million per annum
in each of 1996 through 1998. Management continues to evaluate numerous projects
all of which require substantial capital, including the Company's micromill
project and other potential opportunities both in the United States and
overseas. In response to lower aluminum and alumina prices, management may
consider deferring certain non-essential capital expenditures and/or raising
investment capital (including through joint ventures), in order to conserve a
portion of the Company's available cash resources to meet incremental capital
and operating requirements and to take advantage of new investment
opportunities. See "Business -- Strategy" and "-- Research and Development."
 
     In 1995, Kaiser Yellow River Investment Limited ("KYRIL"), a subsidiary of
the Company, entered into a Joint Venture Agreement and related agreements (the
"Joint Venture Agreements") with the Lanzhou Aluminum Smelters ("LAS") of the
China National Nonferrous Metals Industry Corporation relating to the formation
and operation of Yellow River Aluminum Industry Company Limited, a Sino-foreign
joint equity enterprise (the "Joint Venture") organized under the laws of the
PRC. KYRIL contributed $9.0 million 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. At a recent meeting of the
directors of the Joint Venture, KYRIL, LAS and the Joint Venture reached an
agreement (i) that extended until early 1997 the time for KYRIL to make a second
capital contribution to the Joint Venture, and (ii) that KYRIL would continue to
explore various methods of financing any future capital contributions to the
Joint Venture, including financing that could be obtained from third-party
investors. Governmental approval in the PRC will be necessary in order to
implement certain arrangements agreed to by the parties, and there can be no
assurance such approvals will be obtained. See "Business -- International
Business Development."
 
  Financing Activities and Liquidity
 
   
     As of September 30, 1996, the Company's total consolidated indebtedness was
$878.0 million. As of such date, $141.9 million of borrowing capacity was unused
under the revolving credit facility of the Credit Agreement. On a pro forma
basis, after giving effect to the Offering and the 10 7/8% Series C Notes
Offering, and the application of the proceeds therefrom, as of September 30,
1996, the Company's total consolidated indebtedness would have been $972.7
million (of which $400.0 million would have been expressly subordinated in right
and priority of payment to the Notes), $273.1 million of borrowing capacity
would have been available for use under the Credit Agreement, and the Company
would have had additional available cash proceeds from the Offering and the
10 7/8% Series C Notes Offering, of $88.1 million. As of November 30, 1996, the
Company's total consolidated indebtedness was $921.0 million, $273.0 million of
borrowing capacity was unused under the revolving credit facility of the Credit
Agreement, and the Company had cash and cash equivalents of $44.1 million. See
"Risk Factors -- Leverage."
    
 
     During the nine months ended September 30, 1996, total borrowings and
repayments under the revolving credit facility of the Credit Agreement were
$468.7 million and $350.6 million, respectively. During the nine months ended
September 30, 1995, total borrowings and repayments under the revolving credit
facility of the Credit Agreement were $481.9 million and $426.3 million,
respectively.
 
                                       38
   39
 
     Loans under the Credit Agreement bear interest at a rate per annum, at the
Company's election, equal to a Reference Rate (as defined) plus a margin of 0%
to 1.50% or LIBO Rate (Reserve Adjusted) (as defined) plus a margin of 1.75% to
3.25%. The interest rate margins applicable to borrowings under the Credit
Agreement are based on a financial test, determined quarterly. During the first
two quarters of 1996, the Company paid interest at a rate per annum of the
Reference Rate plus 0% or LIBO Rate plus 1.75%. During the third quarter of
1996, the per annum interest rates increased by .5% to the Reference Rate plus
 .5% or LIBO Rate plus 2.25%. Effective October 1, 1996, the margin applicable to
loans under the Credit Agreement increased by an additional .5% per annum based
on the financial test.
 
     The declaration and payment of dividends by the Company and KAC on shares
of their common stock are subject to certain covenants contained in the Credit
Agreement and, in the case of the Company, the Indenture, the 9 7/8% Note
Indenture and the 12 3/4% Note Indenture. The Credit Agreement does not permit
the Company or KAC to pay any dividends on their common stock. The declaration
and payment of dividends by KAC on the PRIDES is expressly permitted by the
terms of the Credit Agreement to the extent KAC receives payments on certain
intercompany notes or certain other permitted distributions from the Company.
See "Description of Principal Indebtedness."
 
     Management believes that the Company's existing cash resources, together
with cash flows from operations and borrowings under the Credit Agreement, will
be sufficient to meet its working capital and capital expenditure requirements
for the next year. Additionally, with respect to long-term liquidity, management
believes that operating cash flows, together with the ability to obtain both
short and long-term financing, should provide sufficient funds to meet the
Company's working capital and capital expenditure requirements.
 
  Environmental Contingencies
 
     The Company is subject to the Environmental Laws, to fines or penalties
assessed for alleged breaches of the Environmental Laws, and to claims and
litigation based upon such laws. The Company currently is subject to a number of
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 the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and groundwater remediation matters. At
September 30, 1996, the balance of such accruals, which are primarily included
in Long-term liabilities, was $32.9 million. These environmental accruals
represent the Company's estimate of costs reasonably expected to be incurred
based on presently enacted laws and regulations, currently available facts,
existing technology, and the Company's assessment of the likely remediation to
be performed. The Company expects remediation to occur over the next several
years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $2.0 to $10.0 million for the years
1996 through 2000 and an aggregate of approximately $7.0 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. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 million and that the factors upon
which a substantial portion of this estimate is based are expected to be
resolved in early 1997. 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, results of operations, or
liquidity.
 
   
     See "Risk Factors -- Environmental Matters and Litigation,"
"Business -- Environmental Matters" and "-- Legal Proceedings," and Note 9 of
the Notes to Consolidated Financial Statements and Note 3 of the Notes to
Interim Consolidated Financial Statements for further descriptions of these
contingencies.
    
 
                                       39
   40
 
  Asbestos Contingencies
 
     The Company is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with the Company or exposure to
products containing asbestos produced or sold by the Company. The lawsuits
generally relate to products the Company has not manufactured for at least 15
years. At September 30, 1996, the number of such claims pending was
approximately 75,900, as compared with 59,700 at December 31, 1995. During the
year 1995, approximately 41,700 of such claims were received and 7,200 settled
or dismissed. During the first nine months of 1996 approximately 20,000 of such
claims were received and 3,800 were settled or dismissed.
 
     Based on past experience and reasonably anticipated future activity, the
Company 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 the
Company's actual costs could exceed these estimates. The Company's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an estimated
asbestos-related cost accrual of $160.0 million, before consideration of
insurance recoveries, is included primarily in Long-term liabilities at
September 30, 1996. The Company estimates that annual future cash payments in
connection with such litigation will be approximately $13.0 to $20.0 million for
each of the years 1996 through 2000, and an aggregate of approximately $78.0
million thereafter through 2008. While the Company does not 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.
 
     A substantial portion of the asbestos-related claims that were filed and
served on the Company during 1995 and 1996, were filed in Texas. The Company has
been advised by its counsel that, although there can be no assurance, the
increase in pending claims may have been attributable in part to tort reform
legislation in Texas. Although asbestos related claims are currently exempt from
certain aspects of the Texas tort reform legislation, management has been
advised that efforts to remove an asbestos-related exemption in the tort reform
legislation relating to the doctrine of forum non conveniens, as well as other
developments in the legislative and legal environment in Texas, may be
responsible for the accelerated pace of new claims experienced in late 1995 and
its continuance in 1996, albeit at a somewhat reduced rate.
 
     The Company believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from some
of the Company's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from the insurance carriers. The timing and amount of
ultimate recoveries from these insurance carriers are dependent upon the
resolution of these disputes. The Company believes, based on prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges LLP with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the insurance
carriers are probable. Accordingly, an estimated aggregate insurance recovery of
$142.3 million, determined on the same basis as the asbestos-related cost
accrual, is recorded primarily in Other assets at September 30, 1996.
 
     Management continues to monitor claims activity, the status of the lawsuits
(including settlement initiatives), legislative progress, and costs incurred in
order to ascertain whether an adjustment to the existing accruals should be made
to the extent that historical experience may differ significantly from the
Company's underlying assumptions. 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 insurance recoveries that
will be received, management currently believes that, based on the factors
discussed in the preceding paragraphs, the resolution of asbestos-related
uncertainties and the incurrence of asbestos-related costs net of related
insurance recoveries should not have a material adverse effect on the Company's
consolidated financial position, results of operations, or liquidity. See "Risk
Factors -- Environmental Matters and Litigation,"
 
                                       40
   41
 
Note 9 of the Notes to Consolidated Financial Statements, and Note 3 of the
Notes to Interim Consolidated Financial Statements, for further description of
this contingency.
 
INCOME TAX MATTERS
 
     The Company's net deferred income tax assets as of December 31, 1995, were
$291.5 million, net of valuation allowances of $128.5 million. Approximately
$97.4 million of these net deferred income tax assets relate to the benefit of
loss and credit carryforwards, net of valuation allowances. 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 the
operating losses incurred in recent years. See Note 5 of the Notes to
Consolidated Financial Statements for a discussion of these and other income tax
matters.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). SFAS 123 establishes financial accounting and
reporting standards for stock-based employee compensation plans, and provides
for alternative methods for an employer to recognize stock-based compensation
costs. Under the first method, an employer may continue to account for
compensation costs for stock, stock options, and other equity instruments issued
to employees, as it has historically, using the "intrinsic value based method"
(as described in SFAS 123), and such compensation costs would be the excess, if
any, of the quoted market price of the stock subject to an option at the grant
date or other measurement date over the amount an employee must pay to acquire
the stock. The intrinsic value based method generally would not result in the
recognition of compensation costs upon the grant of stock options. Under the
second method, an employer may adopt the "fair value based method" (as described
in SFAS 123). Under the fair value based method, such compensation costs would
be valued using an option-pricing model, and such amount would be charged to
expense over the option's vesting period. Employers which elect to continue to
account for stock-based compensation under the intrinsic value based method will
be required by SFAS 123 to disclose in the notes to their financial statements
the amount of net income and the earnings per share which would have been
reported had the employer elected to use the fair value based method. The
Company has elected to continue to account for stock-based compensation under
the intrinsic value based method, and will comply with the disclosure
requirements of SFAS 123 beginning in 1996.
 
                                       41
   42
 
                                     BUSINESS
 
     The Company 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. The Company is one of the largest
domestic aluminum producers in terms of primary aluminum smelting capacity and
is the Western world's second largest producer/seller of alumina, accounting for
approximately 7% of the Western world's alumina capacity in 1995. The Company's
production levels of alumina and primary aluminum exceed its internal processing
needs which allows it to be a major seller of alumina (approximately 2.0 million
tons in 1995 or 72% of 1995 production) and primary aluminum (approximately
271,700 tons in 1995 or 66% of 1995 production) to third parties. The Company is
also a major domestic supplier of fabricated aluminum products. In 1995, the
Company shipped approximately 368,200 tons of fabricated aluminum products to
third parties, which accounted for approximately 6% of the total tonnage of
United States domestic shipments. A majority of the Company's fabricated
products are sold to distributors or used by customers as components in the
manufacture and assembly of finished end-use products. The Company is a Delaware
corporation organized in 1940 and maintains its principal executive offices at
6177 Sunol Boulevard, Pleasanton, California 94566-7769. Its telephone number is
(510) 462-1122.
 
INDUSTRY OVERVIEW
 
     Primary aluminum is produced by the refining of bauxite into alumina and
the reduction of alumina into primary aluminum. Approximately two pounds of
bauxite are required to produce one pound of alumina, and approximately two
pounds of alumina are required to produce one pound of primary aluminum.
Aluminum's valuable physical properties include its light weight, corrosion
resistance, thermal and electrical conductivity and high tensile strength.
 
     Demand
 
     The packaging, transportation and construction industries are the principal
consumers of aluminum in the United States, Japan and Western Europe. In the
packaging industry, which accounted for approximately 22% of consumption in 1995
in the United States, Japan and Western Europe, aluminum's recyclability and
weight advantages have enabled it to gain market share from steel and glass,
primarily in the beverage container area. Nearly all beer cans and soft drink
cans manufactured for the United States market are made of aluminum. The Company
believes that growth in the packaging area is likely to continue through the
1990s due to general population increase and to further penetration of the
beverage container market in emerging markets. The Company believes that growth
in demand for can sheet in the United States will follow the growth in
population, offset, in part, by the effects of the use of lighter gauge aluminum
for can sheet and of plastic container production from newly installed capacity.
 
     In the transportation industry, which accounted for approximately 28% of
aluminum consumption in the United States, Japan and Western Europe in 1995,
automotive manufacturers use aluminum instead of steel, ductile iron, or copper
for an increasing number of components, including radiators, wheels, suspension
components, and engines, in order to meet more stringent environmental, safety,
and fuel efficiency standards. The Company believes that sales of aluminum to
the transportation industry have considerable growth potential due to projected
increases in the use of aluminum in automobiles. In addition, the Company
believes that consumption of aluminum in the construction industry will follow
the cyclical growth pattern of that industry, and will benefit from higher
growth in Asian and Latin American economies.
 
     Supply
 
     As of year-end 1995, Western world aluminum capacity from 107 smelting
facilities was approximately 16.6 million tons per year. Western world
production of primary aluminum for 1995 increased approximately 1.8% compared to
1994. Net exports of aluminum from the former Sino Soviet bloc increased
approximately 240% from 1990 levels during the period from 1991 through 1995 to
approximately 2.1 million tons per year. These exports contributed to a
significant increase in LME stocks of primary aluminum which peaked in
 
                                       42
   43
 
   
June 1994 at 2.7 million tons. By the end of 1995, LME stocks of primary
aluminum had declined 2.1 million tons from this peak level and 1.1 million tons
from the beginning of 1995. As of December 20, 1996, LME stocks of primary
aluminum were approximately 949,475 tons. See "-- Recent Industry Trends."
    
 
     Based upon information currently available, the Company believes that
moderate additions will be made during 1996-1998 to Western world alumina and
primary aluminum production capacity. The increases in alumina capacity during
1996-1998 are expected to come from one new refinery which began operations in
1995 and incremental expansions of existing refineries. In addition, the Company
believes that there is currently approximately 1.1 million tons of unutilized
smelting capacity that is available for production. The increases in primary
aluminum capacity during 1996-1998 are expected to come from a major new smelter
in South Africa which began operations in 1995, two new smelters which may begin
operations in 1996 or 1997, and the remainder principally from incremental
expansions of existing smelters.
 
RECENT INDUSTRY TRENDS
 
  Primary Aluminum
 
   
     During 1995, the AMT Price for primary aluminum was approximately $.86 per
pound compared to $.72 and $.54 per pound in 1994 and 1993, respectively. The
significant improvement in prices during 1994 and 1995 resulted from strong
growth in Western world consumption of aluminum and the curtailment of
production in response to lower prices in prior periods by many producers
worldwide. In 1995, production of primary aluminum increased and consumption of
aluminum continued to grow, but at a much lower rate than in 1994. In general,
the overall aluminum market was strongest in the first half of 1995. By the
second half of 1995, orders and shipments for certain products had softened and
the rate of decline in LME inventories had leveled off. By the end of 1995, some
small increases in LME inventories occurred, and prices of aluminum weakened
from first-half levels. This trend has continued throughout the first eleven
months of 1996 as the supply of primary aluminum exceeded demand during this
period. Net reported primary aluminum inventories have increased by
approximately 55,000 tons in 1996 based upon recent reports of the LME (through
December 20, 1996) and the IPAI (through October 31, 1996), following
substantial declines of 764,000 and 1,153,000 tons in 1994 and 1995,
respectively. The AMT Price for primary aluminum for the week ended December 20,
1996, was approximately $.73 per pound.
    
 
     Increased production of primary aluminum due to restarts of certain
previously idled capacity, the commissioning of a major new smelter in South
Africa, and the continued high level of exports from the CIS have contributed to
increased supplies of primary aluminum to the Western world in 1996. While the
economies of the major aluminum consuming regions -- the United States, Japan,
Western Europe, and Asia -- are performing relatively well, the Company believes
that the reduction of aluminum inventories by consumers, as prices have
continued to decline, has suppressed the growth in primary aluminum demand that
normally accompanies growth in economic and industrial activity. In addition to
these supply/demand dynamics, the Company believes that the recent decline in
primary aluminum prices may have been influenced by a recent major decline in
copper prices on the LME.
 
                                       43
   44
 
   
     The following table indicates the monthly average AMT Price for each of the
months from January 1993 through November 1996 as reported by Metals Week. The
AMT Price for the week ended December 20, 1996, as reported by Metals Week, was
approximately 72.666 cents per pound.
    
 


                                               AVERAGE TRANSACTION PRICES (CENTS/POUND)
                                             --------------------------------------------
                                              1996         1995         1994        1993
                                             -------      -------      ------      ------
                                                                       
        January...........................    75.514      100.377      57.019      56.479
        February..........................    75.100       93.847      61.641      55.993
        March.............................    76.414       88.745      62.343      53.794
        April.............................    75.517       90.388      61.890      52.345
        May...............................    75.314       85.338      64.007      52.694
        June..............................    70.450       85.305      67.807      54.673
        July..............................    69.767       87.788      72.656      56.829
        August............................    70.023       87.828      71.249      55.516
        September.........................    67.567       82.010      77.764      52.095
        October...........................    65.112       78.384      83.839      51.660
        November..........................    70.019       78.000      91.926      50.365
        December..........................                 78.823      91.484      53.902
                                             -------      -------      ------      ------
                  Average.................    71.891       86.403      71.969      53.862
                                             =======      =======      ======      ======

 
  Alumina
 
     Western world demand for alumina, and the price of alumina, declined in
1994 in response to the curtailment of Western world smelter production of
primary aluminum, partially offset by increased usage of Western world alumina
by smelters in the CIS and in the PRC. Increased Western world production of
primary aluminum, as well as continued imports of Western world alumina by the
CIS and the PRC, during 1995 resulted in higher demand for Western world alumina
and significantly stronger alumina pricing. In the first nine months of 1996,
however, the alumina market softened, primarily as a result of increased alumina
production and decreased alumina exports to the CIS and the PRC, resulting in
lower alumina prices.
 
  Fabricated Products
 
     United States shipments of domestic fabricated aluminum products in 1995
were approximately at 1994 levels, although in 1995 demand for can sheet in the
United States softened relative to 1994. Shipments of domestic mill products
during the first nine months of 1996 declined approximately 4% compared to the
first nine months of 1995, principally due to an approximate 10% decline in the
shipment of can sheet and a reduction of consumer inventories of other
fabricated aluminum products. This trend has continued through the fourth
quarter of 1996.
 
     See "Risk Factors" for a discussion of certain factors that could cause
actual results to differ from those that could otherwise result from the
industry trends discussed above.
 
STRATEGY
 
     The Company's objectives are to maintain leading market positions in its
core businesses, while developing new opportunities both domestically and
internationally which will enhance, and reduce the cyclicality of, the Company's
earnings. The primary elements of the Company's strategies to achieve these
objectives are:
 
     Increasing the competitiveness of its existing facilities. The Company is
continuing to increase the competitiveness of its existing facilities. In 1995,
the Company successfully restructured electric power purchase agreements for its
smelting facilities in the Pacific Northwest, which has resulted in
significantly lower electric power costs in 1996 for the Mead and Tacoma,
Washington, smelters compared with 1995 electric power costs. The Company
expects to continue to benefit from these savings in electric power costs at
these facilities in 1997 and beyond. See "Risk Factors -- Power Supply."
 
                                       44
   45
 
     The Company has also commenced the modernization and expansion of the
carbon baking furnace at its Mead smelter at an estimated cost of approximately
$52.0 million. This project will lower costs, enhance safety and improve the
environmental performance of the facility. This modernization is expected to be
completed in late 1998.
 
     The Company continues to implement changes to the process and product mix
of its Trentwood rolling mill in an effort to maximize its profitability and
maintain full utilization of the facility. Recently, the Company has approved an
expansion of its heat treat capacity by approximately one-third. Sales of the
Company's heat treat products have increased significantly over the last several
years and are made primarily to the aerospace and general engineering markets,
which are experiencing growth in demand. The project is estimated to cost
approximately $45.0 million and to take approximately two years to complete. See
"-- Production Operations."
 
     Developing proprietary technologies. The Company has developed proprietary
technologies which present growth opportunities in the future and have enabled
it to substantially improve its operating efficiencies.
 
     The Company has developed a unique micromill for the production of can
sheet from molten metal using a continuous cast process. The capital and
conversion costs of these micromills are expected to be significantly lower than
conventional rolling mills. Micromills are also expected to result in lower
transportation costs due to the ability to strategically locate a micromill in
close proximity to a manufacturing facility. Micromills are expected to be
particularly well suited to take advantage of the rapid growth in demand for can
sheet expected in emerging markets in Asia and Latin America where there is
limited indigenous supply. The Company believes that micromills should also be
capable of manufacturing other sheet products at relatively low capital and
operating costs. The micromill technology is based on a proprietary thin-strip,
high-speed, continuous-belt casting technique linked directly to hot and cold
rolling mills. The major advantage of the process is that the sheet is
continuously manufactured from molten metal, unlike the conventional process in
which the metal is first cast into large, solid ingots and subsequently rolled
into sheet through a series of highly capital-intensive steps. The first
micromill is nearing completion in Nevada as a full-scale demonstration and
production facility. The Company expects operational start-up of the facility by
the end of 1996. If the Company is successful in proving and commercializing its
micromill technology, micromills could represent an important source of future
growth. There can be no assurance that the Company will be able to successfully
develop and commercialize the technology for use at full-scale facilities. See
"-- Research and Development."
 
     The Company has developed and installed proprietary retrofit technology in
all of its smelters over the last decade, which has significantly contributed to
increased and more efficient production of primary aluminum. Through continuing
technological improvements, the Company's smelters have achieved improved energy
efficiency and longer average life of reduction cells. The Company is actively
engaged in licensing its smelting and other process and product technology and
selling technical and managerial assistance to other producers worldwide. See
"-- Production Operations -- Primary Aluminum Products."
 
     Increasing participation in emerging markets. The Company is actively
pursuing opportunities to increase its participation in emerging markets by
using its technical expertise and capital to form joint ventures or acquire
equity in aluminum-related facilities in foreign countries where it can apply
its proprietary technology. The Company has created Kaiser Aluminum
International to identify growth opportunities in targeted emerging markets and
develop the needed country competence to complement the Company's product and
process competence in capitalizing on such opportunities. The Company has
focused its efforts on countries that are expected to be important suppliers of
aluminum and/or large customers for aluminum and alumina, including the PRC,
Russia and other members of the CIS, India, and Venezuela. The Company's
proprietary retrofit technology has been installed by the Company at various
third party locations throughout the world and is an integral part of the
Company's initiatives for participating in new and existing smelting facilities.
See "Risk Factors -- Foreign Activities" and "-- International Business
Development."
 
                                       45
   46
 
SENSITIVITY TO PRICES AND HEDGING PROGRAMS
 
     The Company's earnings 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.
 
   
     Primary aluminum prices have historically been subject to significant
cyclical price fluctuations. During the period January 1, 1993 through November
30, 1996, the AMT Price for primary aluminum has ranged from approximately $.50
to $1.00 per pound. For the week ended December 20, 1996, the AMT Price of
primary aluminum was approximately $.73 per pound. Alumina prices as well as
fabricated aluminum product prices (which vary considerably among products) are
significantly influenced by changes in the price of primary aluminum but
generally lag behind primary aluminum price changes by up to three months. See
"Offering Memorandum Summary -- Recent Trends and Developments" and "-- Fourth
Quarter," and "-- Industry Overview."
    
 
     The Company's production levels of alumina and primary aluminum exceed its
internal processing needs, which allows it to be a major seller of alumina
(approximately 2.0 million tons in 1995 or 72% of production) and primary
aluminum (approximately 271,700 tons in 1995 or 66% of production) to third
parties.
 
   
     As of November 30, 1996, the Company had sold forward substantially all of
the alumina available to it in excess of its projected internal smelting
requirements for the balance of 1996, and 89% and 90% of such excess alumina for
1997 and 1998, respectively. Virtually all of such 1997 and 1998 sales were made
at prices indexed to future prices of primary aluminum.
    
 
   
     As of November 30, 1996, the Company had sold forward, at fixed prices,
approximately 70,000 tons of primary aluminum in excess of its projected
internal fabrication requirements in 1997 and approximately 93,600 tons of such
surplus in 1998. As of November 30, 1996, the Company had also purchased put
options to establish a minimum price in respect of approximately 196,000 tons
and 45,000 tons of such 1997 and 1998 surplus, respectively, and had entered
into option contracts and established a price range for an additional 160,000
tons of the Company's 1998 surplus. The weighted average of the Company's 1997
and 1998 fixed price contracts, and the weighted average price for the Company's
1998 purchased put options, exceed the AMT Price for primary aluminum for the
week ended December 20, 1996. The weighted average price for the Company's
purchased put options with respect to 1997 are below the AMT Price for the week
ended December 20, 1996. The weighted average price for the minimum of the range
established with respect to the Company's other 1998 option contracts
approximates the AMT Price for the week ended December 20, 1996.
    
 
PRODUCTION OPERATIONS
 
     The following table sets forth total shipments and intracompany transfers
of the Company's alumina, primary aluminum, and fabricated aluminum operations:
 


                                              NINE MONTHS ENDED
                                                SEPTEMBER 30,          YEAR ENDED DECEMBER 31,
                                              ------------------    -----------------------------
                                               1996       1995       1995       1994       1993
                                              -------    -------    -------    -------    -------
                                                            (IN THOUSANDS OF TONS)
                                                                           
    ALUMINA:
      Shipments to Third Parties............  1,506.7    1,494.6    2,040.1    2,086.7    1,997.5
      Intracompany Transfers................    662.2      546.3      800.6      820.9      807.5
    PRIMARY ALUMINUM:
      Shipments to Third Parties............    262.9      184.5      271.7      224.0      242.5
      Intracompany Transfers................     97.0      171.3      217.4      225.1      233.6
    FABRICATED ALUMINUM PRODUCTS:
      Shipments to Third Parties............    245.4      284.3      368.2      399.0      373.2

 
                                       46
   47
 
     The Company's operations are conducted through decentralized business units
which compete throughout the aluminum industry.
 
     - The alumina business unit, which mines bauxite and obtains additional
      bauxite tonnage under long-term contracts, produced approximately 8% of
      Western world alumina in 1995. During 1995, the Company's shipments of
      bauxite to third parties represented approximately 21% of bauxite mined.
      In addition, the Company's third party shipments of alumina represented
      approximately 72% of alumina produced. The Company's share of total
      Western world alumina capacity was approximately 7% in 1995.
 
     - The primary aluminum products business unit operates two domestic
      smelters wholly owned by the Company and two foreign smelters in which the
      Company holds significant ownership interests. During 1995, the Company's
      shipments of primary aluminum to third parties represented approximately
      66% of primary aluminum production. The Company's share of total Western
      world primary aluminum capacity was approximately 3% in 1995.
 
     - Fabricated aluminum products are manufactured by three business
      units -- flat-rolled products, extruded products and engineered
      components. The products include body, lid, and tab stock for beverage
      containers, sheet and plate products, heat-treated products, screw machine
      stock, redraw rod, forging stock, truck wheels and hubs, air bag
      canisters, engine manifolds, and other castings, forgings and extruded
      products, which are manufactured at plants located in principal marketing
      areas of the United States and Canada. The aluminum utilized in the
      Company's fabricated products operations is comprised of primary aluminum,
      obtained both internally and from third parties, and scrap metal purchased
      from third parties.
 
     Alumina
 
     The following table lists the Company's bauxite mining and alumina refining
facilities as of December 31, 1995:
 


                                                                                ANNUAL
                                                                              PRODUCTION         TOTAL
                                                                               CAPACITY          ANNUAL
                                                               COMPANY       AVAILABLE TO      PRODUCTION
           ACTIVITY                FACILITY        LOCATION   OWNERSHIP      THE COMPANY        CAPACITY
- -------------------------------  -------------    ----------  ----------     ------------     ------------
                                                                                (TONS)           (TONS)
                                                                               
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
                                                                                =========        =========

 
- ------------
 
(1) Although the Company owns 49% of KJBC, it has the right to receive all of
    such entity's output.
 
(2) Alpart bauxite is refined into alumina at the Alpart refinery.
 
     Bauxite mined in Jamaica by KJBC is refined into alumina at the Company's
plant at Gramercy, Louisiana, or is sold to third parties. In 1979, the
Government of Jamaica granted the Company a mining lease for the mining of
bauxite sufficient to supply the Company'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. The Company owns a 65% interest in Alpart, and Hydro
Aluminium a.s ("Hydro") owns the remaining 35%
 
                                       47
   48
 
interest. The Company has management responsibility for the facility on a fee
basis. The Company 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.
 
     The Company owns a 28.3% interest in Queensland Alumina Limited ("QAL"),
which owns the largest and one of the most efficient alumina refineries in the
world, located in Queensland, Australia. QAL refines bauxite into alumina,
essentially on a cost basis, for the account of its stockholders pursuant to
long-term tolling contracts. The stockholders, including the Company, purchase
bauxite from another QAL stockholder under long-term supply contracts. The
Company has contracted with QAL to take approximately 792,000 tons per year of
capacity or pay standby charges. The Company is unconditionally obligated to pay
amounts calculated to service its share ($93.3 million in principal amount at
September 30, 1996) 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 the Company.
 
     The Company's principal customers for bauxite and alumina consist of large
and small domestic and international aluminum producers that purchase bauxite
and reduction-grade alumina for use in their internal refining and smelting
operations, trading intermediaries who resell raw materials to end-users, and
users of chemical-grade alumina. In 1995, the Company sold all of its bauxite to
two customers, the largest of which accounted for approximately 74% of such
sales. The Company also sold alumina to nine customers, the largest and top five
of which accounted for approximately 23% and 90% of such sales, respectively.
See "-- Competition." The Company believes that among alumina producers it is
now the Western world's second largest seller of alumina to third parties. The
Company'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
under multi-year sales contracts. See " -- Sensitivity to Prices and Hedging
Programs."
 
     Primary Aluminum Products
 
     The following table lists the Company's primary aluminum smelting
facilities as of December 31, 1995:
 
   


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

    
 
     The Company owns two smelters located at Mead and Tacoma, Washington, where
alumina is processed into primary aluminum. The Mead facility uses pre-bake
technology and produces primary aluminum. Approximately 71% of Mead's 1995
production was used at the Company's Trentwood fabricating facility and the
balance was sold to third parties. The Tacoma plant uses Soderberg technology
and produces primary aluminum and high-grade, continuous-cast, redraw rod, which
currently commands a premium price in excess of the price of primary aluminum.
Both smelters have achieved significant production efficiencies in recent years
through retrofit technology, cost controls, and semi-variable wage and power
contracts, leading to increases in production volume and enhancing their ability
to compete with newer smelters. At the Mead
 
                                       48
   49
 
plant, the Company 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 achieve environmental and
operating savings, and engaged in efforts to increase production through the use
of improved, higher-efficiency reduction cells. The Company has also commenced
the modernization and expansion of the carbon baking furnace at its Mead smelter
at an estimated cost of approximately $52.0 million. This project will lower
costs, enhance safety and improve the environmental performance of the facility.
This modernization is expected to be completed in late 1998. See "-- Strategy."
 
     Electric power supply represents an important production cost for the
Company at its aluminum smelters. In 1995, the Company successfully restructured
electric power purchase agreements for its smelting facilities in the Pacific
Northwest, which has resulted in significantly lower electric power costs for
the Mead and Tacoma, Washington, smelters compared with 1995 electric power
costs. The Company expects to continue to benefit from these savings in electric
power costs at these facilities in 1997 and beyond. From 1981 until 1995,
electric power for the Company's Mead and Tacoma smelters was purchased
exclusively from the Bonneville Power Administration ("BPA") by the Company
under a contract which expires in 2001. In April 1995, the BPA agreed to allow
each of the direct service industrial customers (the "DSIs"), which include the
Company, to purchase a portion of its electric power requirement from sources
other than the BPA beginning October 1, 1995. In June 1995, the Company entered
into an agreement with The Washington Water Power Company ("WWP") to purchase up
to 50 megawatts of electric power for its Northwest facilities for a five-year
term beginning October 1, 1995. The Company is receiving power under that
contract, which power displaces a portion of the Company's interruptible power
from the BPA. In addition, in 1995 the Company 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 the Company is
obligated to purchase from the BPA and which the BPA is obligated to sell to the
Company, and the replacement of such power with power to be purchased from other
suppliers. The Company is negotiating power purchase agreements for such power
with suppliers other than the BPA. Contracts for the purchase of all power
required by the Company's Mead and Tacoma smelters and Trentwood rolling mill
for 1996, and for approximately 75% of such power for the period 1997-2001, have
been finalized. Two parties filed lawsuits in December 1995 against the BPA
petitioning the court to review and set aside the BPA's offers of the new power
purchase contracts to the DSIs, including the offer that the Company accepted.
These lawsuits have been consolidated. In addition, the BPA's Business Plan
Environmental Impact Statement that is under review in connection with the
lawsuits challenging the BPA's transmission agreements with the DSIs, including
the Company, as described in the following paragraph, is part of the record
supporting the BPA's new power purchase contracts with the DSIs, and an adverse
decision in those lawsuits may affect the Company's new power purchase contract
with the BPA. The effect of such lawsuits, if any, on the Company's new power
purchase contract with the BPA is not known. Certain of the DSIs, including the
Company, have intervened in the lawsuits.
 
     In 1995, the Company also entered into agreements with the BPA and with the
WWP, with terms ending in 2001, under which the BPA and the WWP would provide to
the Company transmission services for power purchased from sources other than
the BPA. The term of the transmission services agreement with the BPA was
subsequently extended for an additional fifteen years, which extension has been
challenged. Four lawsuits have been filed against the BPA by various parties,
which lawsuits either challenge the BPA's record of decision offering such an
extension agreement to the DSIs or challenge the BPA's Business Plan
Environmental Impact Statement record of decision in connection therewith.
Certain of the DSIs, including the Company, have intervened in the four
lawsuits. See "-- Strategy."
 
     The Company reduced operations at its Mead and Tacoma smelters in
Washington to approximately 75% of their full capacity in January 1993, when
three reduction potlines were removed from production (two at Mead and one at
Tacoma) in response to a power reduction imposed by the BPA. In March 1995, the
BPA offered to its industrial customers, including the Company, 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, the
Company and the BPA entered into a contract for an amount of such power, and
thereafter the Company 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, the
 
                                       49
   50
 
Company entered into a one-year power supply contract with the BPA, for a term
ended September 30, 1996, in connection with the restart of idled capacity at
its Mead smelter. The Mead smelter returned to full production in December 1995.
 
     The Company manages, and owns a 90% interest in, the Valco aluminum smelter
in Ghana. The Valco smelter uses pre-bake technology and processes alumina
supplied by the Company 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. The Company's share of the primary aluminum is sold to
third parties. Power for the Valco smelter is supplied under an agreement which
expires in 2017. The agreement indexes two-thirds of the price of the contract
quantity of power to the market price of primary aluminum. The agreement also
provides for a review and adjustment of the base power rate and the price index
every five years. The most recent review was completed in April 1994 for the
1994-1998 period. Valco has entered into an agreement with the government of
Ghana under which Valco has been assured (except in cases of force majeure) that
it will receive sufficient electric power to operate at its current level of
three and one-half potlines through December 31, 1996. The Company believes that
Valco should have available sufficient electric power to operate at least at its
current level through 1997.
 
     See "Risk Factors -- Power Supply."
 
     The Company owns a 49% interest in the Anglesey Aluminium Limited
("Anglesey") aluminum smelter and port facility at Holyhead, Wales. The Anglesey
smelter uses pre-bake technology. The Company supplies 49% of Anglesey's alumina
requirements and purchases 49% of Anglesey's aluminum output. The Company sells
its share of Anglesey's output to third parties. Power for the Anglesey alumina
smelter is supplied under an agreement which expires in 2001.
 
     The Company has developed and installed proprietary retrofit technology in
all of its smelters, as well as at third party locations. This
technology -- which includes the redesign of the cathodes and anodes that
conduct electricity through reduction cells, improved "feed" systems that add
alumina to the cells, and a computerized system that controls energy flow in the
cells -- has significantly contributed to increased and more efficient
production of primary aluminum and enhances the Company's ability to compete
more effectively with the industry's newer smelters. The Company 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 the Company's technical and
managerial knowledge. See "-- Strategy" and "-- Research and Development."
 
     The Company's principal primary aluminum customers consist of large trading
intermediaries and metal brokers, who resell primary aluminum to fabricated
product manufacturers, and large and small international aluminum fabricators.
In 1995, the Company sold its primary aluminum production not utilized for
internal purposes to approximately 35 customers, the largest and top five of
which accounted for approximately 25% and 62% of such sales, respectively. See
"-- Competition." Marketing and sales efforts are conducted by a small staff
located at the business unit's headquarters in Pleasanton, California, and by
senior executives of the Company who often 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
 
     The Company manufactures and markets fabricated aluminum products for the
packaging, transportation, construction, and consumer durables markets in the
United States and abroad. Sales in these markets are made directly and through
distributors to a large number of customers. In 1995, four domestic beverage
container manufacturers were among the leading customers for the Company's
fabricated products and accounted for approximately 12% of the Company's sales
revenue.
 
     The Company's fabricated products compete with those of numerous domestic
and foreign producers and with products made of steel, copper, glass, plastic,
and other materials. Product quality, price, and availability are the principal
competitive factors in the market for fabricated aluminum products. The Company
has
 
                                       50
   51
 
focused its fabricated products operations on selected products in which the
Company has production expertise, high-quality capability, and geographic and
other competitive advantages.
 
     Flat-Rolled Products. The flat-rolled product business unit, the largest of
the Company's fabricated products businesses, operates the Trentwood sheet and
plate mill at Spokane, Washington. The Trentwood facility is the Company's
largest fabricating plant and accounted for approximately 64% of the Company's
1995 fabricated aluminum products shipments. The business unit supplies the
beverage container market (producing body, lid, and tab stock), the aerospace
and general engineering markets (producing heat treat products), and the
specialty coil markets (producing automotive brazing sheet, wheel, and tread
products), both directly and through distributors. During 1995, the Company
successfully completed a two year restructuring of its flat-rolled products
operation at its Trentwood plant to reduce that facility's annual operating
costs by at least $50.0 million.
 
     The Company'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 the Company with a
transportation advantage. Quality of products for the beverage container
industry and timeliness of delivery are the primary bases on which the Company
competes. The Company has made significant capital expenditures at Trentwood
during the past several years in rolling technology and process control to
improve the metal integrity, shape and gauge control of its products. The
Company believes that such improvements have enhanced the quality of its
products for the beverage container industry and the capacity and efficiency of
its manufacturing operations. The Company believes that it is one of the highest
quality producers of aluminum beverage can sheet in the world.
 
     The Company continues to implement changes to the process and product mix
of its Trentwood rolling mill in an effort to maximize its profitability and
maintain full utilization of the facility. Recently, the Company has approved an
expansion of its heat treat capacity by approximately one-third, which will
enable the Company to increase the range of its heat treat products and improve
Trentwood's operating efficiency. Sales of the Company's heat treat products
have increased significantly over the last several years and are made primarily
to the aerospace and general engineering markets, which are experiencing growth
in demand. The project is estimated to cost approximately $45.0 million and to
take approximately two years to complete.
 
     In 1995, the flat-rolled products business unit had 31 domestic and foreign
can sheet customers. The largest and top five of such customers accounted for
approximately 14% and 41%, respectively, of the business unit's revenue. See
"-- Competition." In 1995, the business unit shipped products to approximately
150 customers in the aerospace, transportation, and industrial ("ATI") markets,
most of which were distributors who sell to a variety of industrial end-users.
The top five customers in the ATI markets for flat-rolled products accounted for
approximately 13% of the business unit's revenue. The marketing staff for the
flat-rolled products business unit is located at the Trentwood facility and in
Pleasanton, California. Sales are made directly to customers (including
distributors) from eight sales offices located throughout the United States.
International customers are served by sales offices in the Netherlands and Japan
and by independent sales agents in Asia and Latin America.
 
     Extruded Products. The extruded products business unit is headquartered in
Dallas, Texas, and operates soft-alloy extrusion facilities in Los Angeles,
California; Santa Fe Springs, California; Sherman, Texas; and London, Ontario,
Canada; a cathodic protection business located in Tulsa, Oklahoma, that also
extrudes both aluminum and magnesium; rod and bar facilities in Newark, Ohio,
and Jackson, Tennessee, which produce screw machine stock, redraw rod, forging
stock, and billet; and a facility in Richland, Washington, which produces
seamless tubing in both hard and soft alloys for the automotive, other
transportation, export, recreation, agriculture, and other industrial markets.
Each of the soft-alloy extrusion facilities has fabricating capabilities and
provides finishing services.
 
     The extruded products business unit's major markets are in the
transportation industry, to which it provides extruded shapes for automobiles,
trucks, trailers, cabs, and shipping containers, and in the distribution,
durable goods, defense, building and construction, ordnance and electrical
markets. In 1995, the extruded products business unit had approximately 825
customers for its products, the largest and top five of
 
                                       51
   52
 
which accounted for approximately 6% and 20%, respectively, of its revenue. See
"-- Competition." Sales are made directly from plants as well as marketing
locations across the United States.
 
     Engineered Components. The engineered components business unit operates
forging facilities at Erie, Pennsylvania; Oxnard, California; and Greenwood,
South Carolina; a machine shop at Greenwood, South Carolina; and a casting
facility in Canton, Ohio. The engineered components business unit is one of the
largest producers of aluminum forgings in the United States and is a major
supplier of high-quality forged parts to customers in the automotive, commercial
vehicle and ordnance markets. The high strength-to-weight properties of forged
and cast aluminum make it particularly well-suited for automotive applications.
The business unit's casting facility manufactures aluminum engine manifolds for
the automobile, truck and marine markets.
 
     In 1995, the engineered components business unit had approximately 250
customers, the largest and top five of which accounted for approximately 34% and
77%, respectively, of the business unit's revenue. See "-- Competition." The
engineered components business unit's headquarters and a sales and engineering
office are located in Detroit, Michigan. The sales and engineering office works
with car makers and other customers, the Center for Technology (see "-- Research
and Development"), and plant personnel to create new automotive component
designs and improve existing products.
 
     The Company entered into a letter of intent with Accuride Corporation
("Accuride") in September 1996 to form a global joint-venture company to design,
manufacture and market aluminum wheels for the commercial transportation
industry. The Company and Accuride will each own 50% of the new company. The
Company will receive a cash payment in exchange for certain wheel manufacturing
assets located primarily at its Erie, Pennsylvania facility, which currently
forges wheels and other fabricated aluminum products. The transaction is
expected to be consummated during the first quarter of 1997 and is subject to
various conditions, including the negotiation of definitive agreements, third
party consents, and board approvals. Negotiations are continuing.
 
COMPETITION
 
     Aluminum competes in many markets with steel, copper, glass, plastic and
numerous other materials. In recent years, plastic containers have increased and
glass containers have decreased their respective shares of the 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 terephthalate ("PET") container capacity is brought on
line by plastics manufacturers. Within the aluminum business, the Company
competes with both domestic and foreign producers of bauxite, alumina and
primary aluminum, and with domestic and foreign fabricators. Many of the
Company's competitors have greater financial resources than the Company. The
Company's principal competitors in the sale of alumina include Alcoa Alumina and
Chemicals LLC, Billiton Marketing and Trading BV, and Alcan Aluminium Limited.
The Company competes with most aluminum producers in the sale of primary
aluminum. See "Risk Factors -- Leverage."
 
     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. The Company 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. The Company concentrates its fabricating operations on selected
products in which it has production expertise, high-quality capability, and
geographic and other competitive advantages. The Company believes that, assuming
the current relationship between worldwide supply and demand for alumina and
primary aluminum does not change materially, the loss of any one of its
customers, including intermediaries, would not have a material adverse effect on
its financial condition or results of operations.
 
RESEARCH AND DEVELOPMENT
 
     The Company conducts research and development activities principally at
three facilities -- the Center for Technology ("CFT") in Pleasanton, California;
the Primary Aluminum Products Division Technology
 
                                       52
   53
 
Center ("ATC") adjacent to the Mead smelter in Spokane, Washington; and the
Alumina Development Laboratory ("ADL") at the Gramercy, Louisiana, refinery,
which supports Kaiser Alumina Technical Services ("KATS") and the facilities of
the alumina business unit. Net expenditures for Company-sponsored research and
development activities were $18.5 million in 1995, $16.7 million in 1994, and
$18.5 million in 1993. The Company's research staff totaled 157 at December 31,
1995. The Company estimates that research and development net expenditures will
be approximately $22.5 million in 1996.
 
   
     CFT performs research and development across a range of aluminum process
and product technologies to support the Company's business units and new
business opportunities. It also selectively offers technical services to third
parties. Significant efforts are directed at product and process technology for
the can sheet, aircraft and automotive markets, and aluminum reduction cell
models which are applied to improving cell designs and operating conditions. The
largest and most notable single project being developed at CFT is a unique
micromill for the production of can sheet from molten metal using a continuous
cast process. The capital and conversion costs of these micromills are expected
to be significantly lower than conventional rolling mills. Micromills are also
expected to result in lower transportation costs due to the ability to
strategically locate a micromill in close proximity to a manufacturing facility.
Micromills are expected to be particularly well suited to take advantage of the
rapid growth in demand for can sheet expected in emerging markets in Asia and
Latin America where there is limited indigenous supply. The Company believes
that micromills should also be capable of manufacturing other sheet products at
relatively low capital and operating costs. The micromill technology is based on
a proprietary thin-strip, high-speed, continuous-belt casting technique linked
directly to hot and cold rolling mills. The major advantage of the process is
that the sheet is continuously manufactured from molten metal, unlike the
conventional process in which the metal is first cast into large, solid ingots
and subsequently rolled into sheet through a series of highly capital-intensive
steps. The first micromill is nearing completion in Nevada as a full-scale
demonstration and production facility. The Company expects operational start-up
of the facility by the end of 1996. If the Company is successful in proving and
commercializing its micromill technology, micromills could represent an
important source of future growth. There can be no assurance that the Company
will be able to successfully develop and commercialize the technology for use at
full-scale facilities. The Company is currently financing the cost of the
construction of the Nevada micromill, estimated to be approximately $70 million,
from available general corporate resources.
    
 
     ATC maintains specialized laboratories and a miniature carbon plant where
experiments with new anode and cathode technology are performed. ATC supports
the Company's primary aluminum smelters, and concentrates on the development of
cost-effective technical innovations such as equipment and process improvements.
KATS provides improved alumina process technology to the Company's facilities
and technical support to new business ventures in cooperation with the Company's
international business development group. See "-- Strategy."
 
     The Company is actively engaged in efforts to license its technology and
sell technical and managerial assistance to other producers worldwide. The
Company's technology has been installed in alumina refineries, aluminum smelters
and rolling mills located in the United States, Jamaica, Sweden, Germany,
Russia, India, Australia, Korea, New Zealand, Ghana, the United Arab Emirates,
and the United Kingdom. The Company's revenue from technology sales and
technical assistance to third parties was $5.7 million in 1995, $10.0 million in
1994, and $12.8 million in 1993. See "-- Strategy."
 
     The Company has entered into agreements with respect to the Krasnoyarsk
smelter in Russia under which the Company 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, the Company entered into
agreements with respect to the Nadvoitsy smelter in Russia and the Korba smelter
of the Bharat Aluminium Co. Ltd., in India, under which the Company has licensed
certain of its technology for use in such facilities. Services under the
Nadvoitsy agreements were completed in 1995, and services under the Korba
agreements are essentially completed although final contract closure will not
occur until mid-1997.
 
                                       53
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INTERNATIONAL BUSINESS DEVELOPMENT
 
     The Company is actively pursuing opportunities to increase its
participation in emerging markets by using its technical expertise and capital
to form joint ventures or acquire equity in aluminum-related facilities in
foreign countries where it can apply its proprietary technology. The Company has
created Kaiser Aluminum International to identify growth opportunities in
targeted emerging markets and develop the needed country competence to
complement the Company's product and process competence in capitalizing on such
opportunities. The Company has focused its efforts on countries that are
expected to be important suppliers of aluminum and/or large customers for
aluminum and alumina, including the PRC, Russia and other members of the CIS,
India, and Venezuela. The Company's proprietary retrofit technology has been
installed by the Company at various third party locations throughout the world
and is an integral part of the Company's initiatives for participating in new
and existing smelting facilities.
 
     In 1995, KYRIL entered into the Joint Venture Agreements with LAS relating
to the formation and operation of the Joint Venture. The Joint Venture's assets
and operations are located primarily in the industrial city of Lanzhou, the
capital of Gansu Province in northwestern China, and in nearby Lianhai, a
special economic zone also in Gansu Province. The smelter at Lanzhou is the
fifth largest aluminum smelter in the PRC and has a capacity of approximately
55,000 tons of primary aluminum per year. The smelter at Lianhai has a capacity
of approximately 30,000 tons of primary aluminum per year. In 1995, the two
smelters produced an aggregate of approximately 71,000 tons of primary aluminum,
which amount was less than the aggregate capacity of the plants principally
because of a shortage of electric power available to the plants in 1995 due to a
drought which impacted the hydroelectric system. The shortage of electric power
available to the plants continued during the first part of 1996; however, normal
power supply has been restored since July.
 
     KYRIL contributed $9.0 million 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 and the use thereof by the Joint
Venture. Governmental approval in the PRC will be necessary in order to
implement any arrangements agreed to by the parties, and there can be no
assurance such approvals will be obtained. At a recent meeting of the directors
of the Joint Venture, KYRIL, LAS, and the Joint Venture reached an agreement (i)
that extended until early 1997 the deadline for KYRIL to make a second capital
contribution to the Joint Venture, and (ii) that KYRIL would continue to explore
various methods of financing any future capital contributions to the Joint
Venture, including possible financing from third-party investors.
 
     The Company, through its extruded products business unit, has entered into
contracts to form two small joint venture companies in the PRC. The Company
indirectly acquired 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 are owned
by affiliates of Guizhou Guang Da Construction Company.
 
     See "Risk Factors -- Foreign Activities."
 
EMPLOYEES
 
     During 1995, the Company employed an average of 9,546 persons, compared
with an average of 9,744 employees in 1994, and 10,220 employees in 1993. At
December 31, 1995, the Company's work force was 9,624, including a domestic work
force of 5,946, of whom 4,010 were paid at an hourly rate. Most hourly paid
domestic employees are covered by collective bargaining agreements with various
labor unions. Approximately 74% of such employees are covered by a master
agreement (the "Labor Contract") with the USWA which expires September 30, 1998.
The Labor Contract covers the Company's plants in Spokane (Trentwood and Mead)
and Tacoma, Washington; Gramercy, Louisiana; and Newark, Ohio. The Labor
Contract replaced a contract that expired October 31, 1994, and was reached
after an eight-day work stoppage by the USWA at these plants in February 1995.
 
     The Labor Contract provides for base wages at all covered plants. In
addition, workers covered by the Labor Contract may receive quarterly bonus
payments based on various indices of profitability, productivity,
 
                                       54
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efficiency, and other aspects of specific plant performance, as well as, in
certain cases, the price of alumina or primary aluminum. Pursuant to the Labor
Contract, base wage rates were raised effective January 2, 1995, were raised
again effective November 6, 1995, and will be raised an additional amount
effective November 3, 1997, and an amount in respect of the cost of living
adjustment under the previous master agreement will be phased into base wages
during the term of the Labor Contract. In the second quarter of 1995, the
Company acquired up to $2,000 of preference stock held in a stock plan for the
benefit of each of approximately 82% of the employees covered by the Labor
Contract and in the first half of 1998 will acquire up to an additional $4,000
of such preference stock held in such plan for the benefit of substantially the
same employees. In addition, a profitability test was satisfied and, therefore,
the Company acquired during 1996 up to an additional $1,000 of such preference
stock held in such plan for the benefit of substantially the same employees. The
Company made comparable acquisitions of preference stock held for the benefit of
each of certain salaried employees.
 
     In February 1995, Alpart's employees engaged in a six-day work stoppage by
its National Workers Union, which was settled by a new contract which expired in
April 1996. Contract negotiations are ongoing.
 
     Management considers the Company's employee relations to be satisfactory.
 
ENVIRONMENTAL MATTERS
 
     The Company is subject to the Environmental Laws. From time to time the
Environmental Laws are amended and new ones are adopted. The Environmental Laws
regulate, among other things, air and water emissions and discharges; the
generation, storage, treatment, transportation and disposal of solid and
hazardous waste; the release of 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, the
Company is subject to various federal, state and local workplace health and
safety laws and regulations ("Health Laws").
 
     From time to time, the Company 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 the Company. See "-- Legal Proceedings." The Company
currently is subject to a number of lawsuits under CERCLA. The Company, along
with several other entities, has also been named as a PRP for remedial costs at
certain third-party sites listed on the National Priorities List under CERCLA
and, in certain instances, may be exposed to joint and several liability for
those costs or damages to natural resources. The Company's Mead, Washington,
facility has been listed on the National Priorities List under CERCLA. By letter
dated June 18, 1996, the Washington State Department of Ecology advised the
Company that there are several options for remediation at the Mead facility that
would be acceptable to the Department. The Company expects that one of these
remedial options will be agreed upon and incorporated into a Consent Decree in
early 1997. In addition, in connection with certain of its asset sales, the
Company 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.
 
     Based on the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and ground-water remediation matters. At
September 30, 1996, the balance of such accruals, which are primarily included
in Long-term liabilities, was $32.9 million. These environmental accruals
represent the Company's estimate of costs reasonably expected to be incurred
based on presently enacted laws and regulations, currently available facts,
existing technology, and the Company's assessment of the likely remediation to
be performed. The Company expects remediation to occur over the next several
years and estimates that annual expenditures to be charged to these
environmental accruals will be approximately $2.0 to $10.0 million for the years
1996 through 2000 and an aggregate of approximately $7.0 million thereafter.
Cash expenditures of $4.5 million in
 
                                       55
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1995, $3.6 million in 1994, and $7.2 million in 1993 were charged to previously
established accruals relating to environmental costs. Approximately $8.4 million
is expected to be charged to such accruals in 1996.
 
     As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 million and that the factors upon
which a substantial portion of this estimate is based are expected to be
resolved in early 1997. 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, the Company currently believes
that the resolution of such uncertainties should not have a material adverse
effect on the Company's consolidated financial position, results of operations,
or liquidity. In addition to cash expenditures charged to environmental
accruals, environmental capital spending was $9.2 million in 1995, $11.9 million
in 1994, and $12.6 million in 1993. Annual operating costs for pollution
control, not including corporate overhead or depreciation, were approximately
$26.0 million in 1995, $23.1 million in 1994, and $22.4 million in 1993.
Legislative, regulatory and economic uncertainties make it difficult to project
future spending for these purposes. However, the Company currently anticipates
that in the 1996-1997 period, environmental capital spending will be within the
range of approximately $27.0 - $33.0 million per year, and operating costs for
pollution control will be within the range of $28.0 - $29.0 million per year.
 
     See "Management's Discission and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources -- Environmental
Contingencies," Note 9 of the Notes to Consolidated Financial Statements under
the heading "Environmental Contingencies," Note 3 of the Notes to Interim
Consolidated Financial Statements, and "Risk Factors -- Environmental Matters
and Litigation."
 
PROPERTIES
 
     The locations and general character of the principal plants, mines, and
other materially important physical properties relating to the Company's
operations are described in "Business -- Production Operations" and those
descriptions are incorporated herein by reference. The Company owns in fee or
leases all the real estate and facilities used in connection with its business.
Plants and equipment and other facilities are generally in good condition and
suitable for their intended uses, subject to changing environmental
requirements. Although the Company's domestic aluminum smelters and alumina
facility were initially designed early in the Company'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. The
Company believes that its domestic plants are cost competitive on an
international basis. Due to the Company'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.
 
     The Company's obligations under the Credit Agreement are secured by, among
other things, mortgages on its major domestic plants (other than the Gramercy
alumina refinery and Nevada micromill). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources -- Capital Structure."
 
LEGAL PROCEEDINGS
 
  Environmental Proceedings
 
     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
originally filed a cost recovery complaint (as amended, the "Complaint") in the
United States District Court for the Middle District of North Carolina,
Rockingham Division,
 
                                       56
   57
 
No. C-89-231-R, which, as amended, includes the Company and a number of other
defendants. The Complaint 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 selected for the Sites is approximately $32
million. Other possible remedies described in the ROD included on-site
incineration and on-site ash disposal at an estimated cost 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.
 
     On May 20, 1993, the EPA issued three unilateral Administrative Orders
under Section 106(a) of CERCLA ordering the Respondents, including the Company,
to perform the 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. In addition to the
Company, a number of other companies are also named as respondents. The Company
has entered into a PRP Participation Agreement with certain of the respondents
(the "Aberdeen Site PRP Group" or the "Group") to participate jointly in
responding to the Administrative Orders dated May 20, 1993, regarding soil
remediation, to share costs incurred on an interim basis, and to seek to reach a
final allocation of costs through agreement or to allow such final allocation
and determination of liability to be made by the United States District Court.
By letter dated July 6, 1993, the Company has notified the EPA of its ongoing
participation with the Group 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 the Company of its potential liability
for, and requested that the Company, 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 the Company,
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 the Company.
 
     By letter dated March 6, 1996, the Company gave notice of withdrawal from
the Aberdeen Site PRP Group pursuant to the provisions of the PRP Participation
Agreement. The Company advised the Group and the EPA that even if it were liable
for cleanup at the Sites, which it expressly denies, it had already contributed
far more than its allocable potential share of response costs. The Company has
advised the Group and the EPA that it has fully complied with the unilateral
Administrative Orders.
 
     In May 1996, the EPA urged the Company to rejoin the Group and indicated
that it would consider seeking penalties against the Company if it did not. On
October 10, 1996, the EPA notified the Company that it deems the Company to be
in violation of the Administrative Orders. The Company and certain members of
the Group have entered into an agreement with the United States Department of
Justice (the "DOJ") to enter into a mediation process regarding an appropriate
allocation of responsibility for response costs at the Sites. The Company has
also agreed to fund a portion of the costs associated with certain work at the
Sites during the mediation process.
 
     United States of America v. Kaiser Aluminum & Chemical Corporation
 
     In February 1989, a civil action was filed by the DOJ at the request of the
EPA against the Company in the United States District Court for the Eastern
District of Washington, Case Number C-89-106-CLQ. The complaint alleged that
emissions from certain stacks at the Company'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 the Company take all necessary action to achieve compliance with the
Washington SIP opacity limit and the assessment of civil penalties of not more
than $25,000 per day.
 
                                       57
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     The Company and the EPA, without adjudication of any issue of fact or law,
and without any admission of the violations alleged in the underlying complaint,
have entered into a Consent Decree, which was approved by a Consent Order
entered by the United States District Court for the Eastern District of
Washington in January 1996. As approved, the Consent Decree settles the
underlying disputes and requires the Company to (i) pay a $.5 million civil
penalty (which penalty has been paid), (ii) complete a program of plant
improvements and operational changes that began in 1990 at its Trentwood
facility, including the installation of an emission control system to capture
particulate emissions from certain furnaces, and (iii) achieve and maintain
furnace compliance with the opacity standard in the SIP by no later than
February 28, 1997. 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.
 
     Catellus Development Corporation v. Kaiser Aluminum & Chemical Corporation
     and James L. Ferry & Son, Inc.
 
     In January 1991, the City of Richmond, et al. (the "Plaintiffs") filed a
Second Amended Complaint for Damages and Declaratory Relief against the United
States, Catellus Development Corporation ("Catellus") and other defendants
(collectively, the "Defendants") alleging, among other things, that the
Defendants caused or allowed hazardous substances, pollutants, contaminants,
debris and other solid wastes to be discharged, deposited, disposed of or
released on certain property located in Richmond, California (the "Property")
formerly owned by Catellus and leased to the Company for the purpose of
shipbuilding activities conducted by the Company 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 that
they had incurred or expect to incur costs and damages of approximately $49.0
million. Catellus subsequently filed a third party complaint (the "Third Party
Complaint") against the Company 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 the Company, Case No. C-92-4176.
The Plaintiffs settled their CERCLA and tort claims against the United States
for $3.5 million plus thirty-five percent (35%) of future response costs.
 
     The trial involving this case commenced in March 1995. During the trial,
Plaintiffs settled their claims against Catellus in exchange for payment of
approximately $3.3 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
a final judgment on those claims concluding that the Company is liable for
various costs and interest, aggregating approximately $2.2 million, fifty
percent (50%) of future costs of cleaning up certain parts of the Property and
certain fees and costs associated specifically with the claim by Catellus
against the Company. The Company paid the City of Richmond $1.8 million in
partial satisfaction of this judgment. In January 1996, Catellus filed a notice
of appeal with respect to its indemnity judgment against the Company. The
Company has since filed a notice of cross appeal as to the Court's decision
adjudicating that the Company is obligated to indemnify Catellus. In February
1996, the Plaintiffs filed motions seeking reimbursement of fees and costs from
the Company in the aggregate amount of $2.8 million. On July 8, 1996 the Court
issued an order awarding Plaintiffs nominal costs, which amount has been paid.
The order also awarded Catellus de minimis costs. Catellus has filed a notice of
appeal. On August 12, 1996, the Court issued an order granting the Catellus
motion for attorneys' fees in the amount of approximately $.9 million. The
Company and Catellus have filed notices of appeal with respect to the attorneys'
fees award. Based on the Company's estimate of future costs of cleanup,
resolution of the Catellus matter is not expected to have a material adverse
effect on the Company's consolidated financial condition, results of operations,
or liquidity.
 
     Waste Inc. Superfund Site
 
     On December 8, 1995, the EPA issued a unilateral Administrative Order for
Remedial Design and Remedial Action under CERCLA to the Company 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
 
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1965 to 1982. The Company 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. The Company's share of the
total waste sent to the site is unknown. A consultant retained by a group of
PRPs estimated that the Company contributed 2.0% of the waste sent to the site
by the forty-one largest contributors. The Company's ultimate exposure will
depend on the number of PRPs that participate and the volume of waste properly
allocable to the Company. Based on the EPA's cost estimate, the Company believes
that its financial exposure for remedial design and remedial action at this site
is less than $500,000. The Company has entered into a Participation Agreement
with thirteen of the respondents to perform the work required under the
Administrative Order.
 
     Asbestos-related Litigation
 
     The Company is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with the Company or exposure to
products containing asbestos produced or sold by the Company. The lawsuits
generally relate to products the Company has not manufactured for at least 15
years. For a discussion of asbestos-related litigation, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Asbestos Contingencies."
 
  DOJ Proceedings
 
     On August 24, 1994, the DOJ issued Civil Investigative Demand No. 11356
("CID No. 11356") requesting information from KAC 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 KAC or any of its competitors during that
period. KAC's management believes that KAC's actions have at all times been
appropriate, and KAC 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 the Company regarding (i) any actual or contemplated changes in
its method of pricing can sheet from January 1, 1994, through March 31, 1995,
(ii) the percentage of aluminum scrap and primary aluminum ingot used by the
Company to produce can sheet and the manner in which the Company's cost of
acquiring aluminum scrap is factored into its can sheet prices, and (iii) any
communications with others regarding any actual or contemplated changes in its
method of pricing can sheet from January 1, 1994, through March 31, 1995.
Management believes that the Company's actions have at all times been
appropriate, and the Company has submitted documents and interrogatory answers
to the DOJ responding to CID No. 12503. The Company was recently informed that
the DOJ has officially closed its investigation and is returning the documents
submitted by the Company.
 
  Other Proceedings
 
     Matheson et al v. Kaiser Aluminum Corporation et al.
 
     On March 19, 1996, a lawsuit was filed against MAXXAM, KAC and KAC's
directors challenging and seeking to enjoin a proposed recapitalization of KAC
(the "Proposed Recapitalization") and the April 10, 1996, special stockholders
meeting at which the Proposed Recapitalization was to be considered. The suit,
which is entitled Matheson et al. v. Kaiser Aluminum Corporation et al. (No.
14900) and was filed in the Delaware Court of Chancery, alleges, among other
things, breaches of fiduciary duties by certain defendants and that the Proposed
Recapitalization violates Delaware law and the certificate of designations for
the PRIDES. On April 8, 1996, the Delaware Court of Chancery issued a ruling
which preliminarily enjoined KAC from implementing the Proposed
Recapitalization. On April 19, 1996, the Delaware Supreme Court granted KAC's
motion to consider, on an expedited basis, KAC's appeal of the preliminary
injunction and on May 1, 1996, KAC's stockholders approved the Proposed
Recapitalization which was not implemented at that
 
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time due to the pending appeal. On August 29, 1996, the Delaware Supreme Court
upheld the preliminary injunction and remanded the case to the Court of
Chancery. On September 24, 1996, the plaintiffs filed a motion to make permanent
the temporary injunction issued on April 8, 1996. On September 27, 1996, KAC's
Board of Directors adopted a resolution abandoning the Proposed
Recapitalization. On October 2, 1996, KAC filed a motion in the Delaware Court
of Chancery to dismiss the shareholder litigation relating to the Proposed
Recapitalization on the ground of mootness and filed a response to plaintiffs'
motion for entry of a permanent injunction. The Court has not ruled on either
motion. The decision to abandon the Proposed Recapitalization does not preclude
a recapitalization from being proposed to the stockholders of KAC in the future,
including a substantially identical recapitalization structure after the
redemption or conversion of the PRIDES. See also "Risk Factors -- Controlling
Stockholder and Possible Effects; Change of Control" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Capital Structure."
 
     Hammons v. Alcan Aluminum Corp., et al
 
     On March 5, 1996, a class action complaint was filed against the Company,
Alcan Aluminum Corp., Aluminum Company of America, Alumax, Inc., Reynolds Metals
Company and the Aluminum Association in the Superior Court of California for the
County of Los Angeles, Case No. BC145612. The complaint claims that the
defendants conspired, in violation of the California Cartwright Act (Bus. &
Prof. Code sec. 16720 & 16750), in conjunction with a Memorandum of
Understanding ("MOU") entered into by representatives of Australia, Canada, the
European Union, Norway, the Russian Federation and the United States in 1994, to
restrict the production of primary aluminum resulting in rises in prices for
primary aluminum and aluminum products. The complaint seeks certification of a
class consisting of persons who at any time between January 1, 1994, and the
date of the complaint purchased aluminum or aluminum products manufactured by
one or more of the defendants and estimates damages sustained by the class to be
$4.4 billion during the year 1994, before trebling. Plaintiff's counsel has
estimated damages to be $4.4 billion per year for each of the two years the MOU
was active, which when trebled equals $26.4 billion.
 
     On April 2, 1996 the case was removed to the United States District Court
for the Central District of California. On July 11, 1996, the Court granted
summary judgement in favor of the Company and other defendants and dismissed the
complaint as to all defendants. On July 18, 1996, the plaintiff filed a notice
of appeal to the United States Court of Appeals for the Ninth Circuit.
 
  Other Matters
 
     Various other lawsuits and claims are pending against the Company. While
uncertainties are inherent in the final outcome of such matters and it is
presently impossible to determine the actual costs that ultimately may be
incurred, management believes that the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on the
Company's consolidated financial position, results of operations, or liquidity.
 
     There can be no assurance that adverse determinations and/or unfavorable
settlements with respect to the Company's legal proceedings will not have a
material adverse effect on the Company's consolidated financial position,
results of operations, or liquidity. See "Risk Factors -- Environmental Matters
and Litigation."
 
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   61
 
                                   MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
 
     The table below sets forth certain information, as of October 31, 1996,
with respect to the executive officers and directors of the Company who perform
services for the Company. All officers and directors hold office until their
respective successors are elected and qualified or until their earlier
resignation or removal.
 


                      NAME                      POSITIONS AND OFFICES WITH THE COMPANY
        ---------------------------------  ------------------------------------------------
                                        
        George T. Haymaker, Jr...........  Chairman of the Board, Chief Executive Officer,
                                             President and Director

        Joseph A. Bonn...................  Vice President, Planning and Administration

        Robert E. Cole...................  Vice President, Government Affairs

        John E. Daniel...................  Vice President, and President of Kaiser Primary
                                             Products

        Jack A. Hockema..................  Vice President, and President of Kaiser Extruded
                                             Products and Kaiser Engineered Components

        Robert W. Irelan.................  Vice President, Public Relations

        John T. La Duc...................  Vice President and Chief Financial Officer

        Alan G. Longmuir.................  Vice President, Research and Development

        Raymond J. Milchovich............  Vice President, and President of Kaiser
                                             Flat-Rolled Products

        Anthony R. Pierno................  Vice President and General Counsel

        Geoffrey W. Smith................  Vice President, and President of Kaiser Alumina
                                             and Kaiser Aluminum Commodities

        Kris S. Vasan....................  Vice President, Financial Risk Management

        Byron L. Wade....................  Vice President, Secretary and Deputy General
                                             Counsel

        Lawrence L. Watts................  Vice President, and President of Kaiser Aluminum
                                             International

        Arthur S. Donaldson..............  Controller

        Karen A. Twitchell...............  Treasurer

        Robert J. Cruikshank.............  Director

        Charles E. Hurwitz...............  Director and Vice Chairman of the Board

        Ezra G. Levin....................  Director

        Robert Marcus....................  Director

        Robert J. Petris.................  Director

 
   
     George T. Haymaker, Jr. Mr. Haymaker, age 59, was elected to the positions
of Chairman of the Board and Chief Executive Officer of the Company and KAC
effective January 1, 1994, and has served as President of the Company and as
President of KAC since June 1996 and May 1996, respectively. From May 1993 to
December 1993, Mr. Haymaker served as President and Chief Operating Officer of
the Company and KAC. Mr. Haymaker became a director of KAC in May 1993, and a
director of the Company in June 1993. From 1987 to April 1993, Mr. Haymaker was
a partner in a partnership which acquired, redirected and operated small to
medium sized companies in the metals industry. Since July 1987, Mr. Haymaker has
been a director, and from February 1992 through March 1993 was President of
Metalmark Corporation, which is in the business of semi-fabrication of aluminum
specialty foils and extrusions. From May 1986 until February 1993,
    
 
                                       61
   62
 
he also served as President of West Coast Sales Corp., which provides management
and acquisition services. Mr. Haymaker also served as Chief Executive Officer
and a director of Amarlite Architectural Products, Inc. ("Amarlite"), a producer
of architectural curtain wall and entrance products, from August 1990 to April
1992 and from April 1989 to February 1993, respectively. He was a director of
American Powdered Metals Company, which is engaged in the manufacture of
powdered metal components, from August 1988 to March 1993, and Hayken Metals
Asia Limited, which represents manufacturers of aluminum and metal products,
from January 1988 to April 1993. From 1984 to 1986, Mr. Haymaker served as
Executive Vice President -- Aluminum Operations of Alumax Inc., responsible for
all primary aluminum and semifabricating activities.
 
     Joseph A. Bonn. Mr. Bonn, age 53, has been Vice President, Planning and
Administration of the Company and KAC since July 1989 and February 1992,
respectively. Mr. Bonn has served as a Vice President of the Company since April
1987 and served as Senior Vice President -- Administration of MAXXAM from
September 1991 through December 1992. He was also the Company's Director of
Strategic Planning from April 1987 until July 1989. From September 1982 to April
1987, Mr. Bonn served as General Manager of various aluminum fabricating
divisions.
 
   
     Robert E. Cole. Mr. Cole, age 50, has been a Vice President of the Company
since March 1981. Since September 1990, Mr. Cole also has served as Vice
President -- Federal Government Affairs of MAXXAM, MAXXAM Group Inc. ("MGI"), a
wholly owned subsidiary of MAXXAM, and The Pacific Lumber Company ("Pacific
Lumber"), an indirect subsidiary of MAXXAM engaged in forest products
operations. Mr. Cole is currently Chairman of the United States Auto Parts
Advisory Committee established by the United States Congress.
    
 
     John E. Daniel. Mr. Daniel, age 61, has been a Vice President of the
Company since January 1992, President of Kaiser Primary Products since June
1995, and has been the General Manager of the Company's primary aluminum
products business unit since November 1990. From November 1990 to January 1992,
he was Divisional Vice President of the Company's primary aluminum products
business unit. From December 1989 to November 1990, Mr. Daniel was Reduction
Plant Manager of the Company's Tacoma, Washington plant and from July 1986 to
December 1989, he was Reduction Plant Manager of the Company's formerly owned
Ravenswood, West Virginia plant.
 
   
     Jack A. Hockema. Mr. Hockema, age 50, has been a Vice President of the
Company, President of Kaiser Extruded Products and President of Kaiser
Engineered Components since September 1996. Mr. Hockema had been a consultant to
the Company since September 1995, serving as acting President of Kaiser
Engineered Components. Mr. Hockema was an employee of the Company from 1977 to
1982, working at the Company's Trentwood facility, and serving as plant manager
of its former Union City, California, can plant and as operations manager for
Kaiser Extruded Products. Mr. Hockema left the Company to become Vice President
and General Manager of Bohn Extruded Products, a division of Gulf+ Western, and
later served as Group Vice President of American Brass Specialty Products until
June 1992. From June 1992 until September 1996, Mr. Hockema provided consulting
and investment advisory services to individuals and companies in the metals
industry.
    
 
     Robert W. Irelan. Mr. Irelan, age 59, has served the Company as Vice
President, Public Relations since February 1988. He has also been Vice
President -- Public Relations of MAXXAM, MGI and Pacific Lumber since September
1990. From June 1985 to February 1988, Mr. Irelan served as divisional Vice
President -- Corporate Public Relations of the Company, and from 1968 to June
1985 he served the Company and certain affiliated companies in a variety of
positions.
 
   
     John T. La Duc. Mr. La Duc, age 53, has been Chief Financial Officer of the
Company since January 1990 and a Vice President of the Company since June 1989.
He was also Treasurer of the Company from June 1995 until February 1996. Mr. La
Duc has been Vice President and Chief Financial Officer of KAC since June 1989
and May 1990, respectively, and was Treasurer of KAC from August 1995 until
February 1996 and from January 1993 until April 1993. Since September 1990, Mr.
La Duc has served as Senior Vice President of MAXXAM. Mr. La Duc also serves as
a Vice President and a director of MAXXAM Group Holdings Inc. ("MGHI"), a wholly
owned subsidiary of MAXXAM, MGI, Pacific Lumber, and Pacific Lumber's
subsidiary, Scotia Pacific Holding Company ("Scotia Pacific"). He previously
served as Chief Financial
    
 
                                       62
   63
 
Officer of MAXXAM and MGI from September 1990 until December 1994 and February
1995, respectively, and of Pacific Lumber from October 1990 and Scotia Pacific
from November 1992 until February 1995.
 
     Alan G. Longmuir. Mr. Longmuir, age 55, has been Vice President -- Research
and Development of the Company since June 1995, and previously was Divisional
Vice President -- Research and Development of the Company since October 1988.
Mr. Longmuir served as the Company's Director of Manufacturing Systems from
January 1985 to October 1988. From September 1982 to January 1985 he acted as
the Company's Manager -- Automated Systems and Electrical Engineering; and from
January 1978 to September 1982 was the Company's Manager -- Metals Automation.
 
     Raymond J. Milchovich. Mr. Milchovich, age 47, has been a Vice President of
the Company and President of Kaiser Flat-Rolled Products since June 1995. From
July 1986 to June 1995, Mr. Milchovich served as Divisional Vice President of
the Company's flat-rolled products business unit and Works Manager of the
Company's Trentwood facility.
 
   
     Anthony R. Pierno. Mr. Pierno, age 64, has served as Vice President and
General Counsel of the Company and KAC since January 1992. He also serves as
Senior Vice President and General Counsel of MAXXAM, positions he has held since
February 1989. Mr. Pierno has also served as Vice President and General Counsel
of MGI and Pacific Lumber since May 1989, Scotia Pacific since November 1992 and
MGHI since November 1996, and as a director of MGHI, MGI and Pacific Lumber
since November 1996, January 1994 and November 1993, respectively. Immediately
prior to joining MAXXAM, 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.
    
 
     Geoffrey W. Smith. Mr. Smith, age 50, has been a Vice President of the
Company since January 1992, President of Kaiser Alumina since June 1995, and
President of Kaiser Aluminum Commodities since June 1996. From December 1994
until June 1995, Mr. Smith was General Manager of the Company's alumina business
unit. Mr. Smith previously served as Co-General Manager of the Company's alumina
business unit from September 1991 through December 1994. From September 1990 to
January 1992, Mr. Smith was Divisional Vice President of the Company's alumina
business unit. From August 1988 to August 1990, Mr. Smith was Director of
Business Development for the alumina business unit, and from 1982 to August
1988, he was Operations/Technical Manager for the Company's Gramercy, Louisiana
facility.
 
     Kris S. Vasan. Mr. Vasan, age 47, has been Vice President, Financial Risk
Management, of the Company since June 1995. Mr. Vasan previously served as
Treasurer of the Company from April 1993 until June 1995 and as Treasurer of KAC
from April 1993 until August 1995. Prior to that, Mr. Vasan served the Company
and KAC as Corporate Director of Financial Planning and Analysis from June 1990
until April 1993. From October 1987 until June 1990, he served as Associate
Director of Financial Planning and Analysis.
 
   
     Byron L. Wade. Mr. Wade, age 49, has served as Vice President and Secretary
of the Company and KAC since January 1992, and Deputy General Counsel of the
Company and KAC since June and May 1992, respectively. Mr. Wade has also served
as Vice President and Deputy General Counsel of MAXXAM since May 1990, and
Secretary of MAXXAM since October 1988. He previously served as Assistant
Secretary and Assistant General Counsel of MAXXAM from November 1987 to October
1988 and May 1990, respectively. In addition, Mr. Wade has served since May 1993
as a Vice President and Secretary of SHRP General Partner, Inc. ("SHRP"), the
current managing general partner of Sam Houston Race Park, Ltd., a Texas limited
partnership and subsidiary of MAXXAM which operates a horse racing facility in
Texas ("SHRP, Ltd."). Mr. Wade has served as Vice President, Secretary and
Deputy General Counsel of Pacific Lumber and Scotia Pacific since June 1990 and
November 1992, respectively, and as Vice President, Secretary and Deputy General
Counsel of MGI and MGHI since July 1990 and November 1996, respectively. He had
previously served since 1983 as Vice President, Secretary and General Counsel of
MCO Resources, Inc., a publicly traded oil and gas company, which was majority
owned by MAXXAM.
    
 
                                       63
   64
 
     Lawrence L. Watts. Mr. Watts, age 50, has been a Vice President of the
Company since January 1992 and President of Kaiser Aluminum International since
June 1995. From April 1994 until June 1995, Mr. Watts was General
Manager -- International Development. Mr. Watts previously served as Co-General
Manager of the Company's alumina business unit from September 1991 until
December 1994. From June 1989 to January 1992, Mr. Watts was Divisional Vice
President, Governmental Affairs and Human Resources, for the alumina business
unit, and from July 1988 to June 1989, he was Divisional Vice President, Public
Relations and Governmental Relations, for the alumina business unit. From
September 1984 to July 1988, Mr. Watts was Manager, Human Resources for the
alumina business unit.
 
   
     Arthur S. Donaldson. Mr. Donaldson, age 54, became Controller of the
Company and KAC effective February 1, 1996. Mr. Donaldson previously served as
Assistant Controller of the Company and KAC since September 1992. From January
1985 to September 1992, Mr. Donaldson was Manager of External Reporting for the
Company.
    
 
     Karen A. Twitchell. Ms. Twitchell, age 41, was elected to the position of
Treasurer of the Company and KAC effective February 1, 1996. Prior to joining
the Company, Ms. Twitchell was Vice President and Treasurer of Southdown, Inc.,
a Houston-based company specializing in portland and masonry cement, since April
1994 and Treasurer since 1989.
 
     Robert J. Cruikshank. Mr. Cruikshank, age 66, has served as a director of
the Company and KAC since January 1994. In addition, he has been a director of
MAXXAM since May 1993. Mr. Cruikshank was a Senior Partner in the international
public accounting firm of Deloitte & Touche from December 1989 until his
retirement 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 the 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; a
director of Texas Biotechnology Incorporated; a director of American Residential
Services; and as Advisory Director of Compass Bank -- Houston.
 
   
     Charles E. Hurwitz. Mr. Hurwitz, age 56, was appointed Vice Chairman of the
Company in December 1994 and has served as a director of the Company and KAC
since November and October 1988, respectively. Mr. Hurwitz has also served as a
member of the Board of Directors and the Executive Committee of MAXXAM since
August 1978 and was elected Chairman of the Board and Chief Executive Officer of
MAXXAM in March 1980. Since May 1982, Mr. Hurwitz has been Chairman of the Board
and Chief Executive Officer of MGI. Since January 1993, Mr. Hurwitz has also
served MAXXAM and MGI as President. From May 1986 until February 1993, Mr.
Hurwitz served as a director of Pacific Lumber. Mr. Hurwitz has also been, since
its formation in November 1996, Chairman of the Board, President and Chief
Executive Officer of MGHI. Mr. Hurwitz has been, since January 1974, Chairman of
the Board and Chief Executive Officer of Federated, a New York business trust
primarily engaged in the management of real estate investments. Mr. Hurwitz has
also served SHRP as a director since May 1993, Chairman of the Board since
October 1995, and President from May 1993 until April 1996.
    
 
     Ezra G. Levin. Mr. Levin, age 62, has been a director of the Company since
November 1988, a director of KAC since July 1991, and a director of MAXXAM since
May 1978. Mr. Levin also served as a director of KAC from April 1988 to May
1990, and as a director of MGI from May 1982 through December 1993. Mr. Levin is
a partner in the law firm of Kramer, Levin, Naftalis & Frankel. He also serves
as a director of Pacific Lumber, Scotia Pacific and United Mizrahi Bank and
Trust Company.
 
     Robert Marcus. Mr. Marcus, age 71, has been a director of the Company and
KAC since September 1991. From 1987 to January 1992, Mr. Marcus was a partner in
American Industrial Partners, a San Francisco and New York based firm
specializing in private equity investments in industrial companies. From 1983 to
1991, Mr. Marcus was a director of Domtar Inc., a Canadian resource-based
multi-business corporation. From 1982 to 1987, Mr. Marcus served as President
and Chief Executive Officer of Alumax Inc., an integrated aluminum company.
 
                                       64
   65
 
     Robert J. Petris. Mr. Petris, age 71, has been a director of the Company
since June 1995 and of KAC since May 1995. He became Special Assistant to the
International President of the USWA in June 1995. Since 1977, Mr. Petris has
been a member of the International Union Executive Board and Director of
District 38, where he has been exposed to a wide range of issues and problems in
the aluminum, steel, container and non-ferrous metals industries. Mr. Petris
plans to retire from the USWA this year.
 
THE BOARD OF DIRECTORS AND ITS COMMITTEES
 
     The Board of Directors of the Company has four standing committees,
consisting of Executive, Audit, Compensation Policy, and Section 162(m)
Compensation Committees.
 
     The Executive Committee, which currently consists of two members, meets on
call and has authority to act on most matters during the intervals between
meetings of the entire Board of Directors. Its current members are Messrs.
Hurwitz (Chairman) and Haymaker.
 
     The Audit Committee presently consists of Messrs. Levin, Marcus (Chairman)
and Petris. The Audit Committee meets with appropriate Company financial and
legal personnel, internal auditors and independent public accountants and
reviews the internal controls of the Company and the objectivity of its
financial reporting. This Committee recommends to the Board the appointment of
the independent public accountants to serve as auditors in examining the
corporate accounts of the Company. The independent public accountants
periodically meet privately with the Audit Committee and have access to the
Audit Committee at any time.
 
     The Compensation Policy Committee administers and establishes overall
compensation policies (except those related to Section 162(m) plans), reviews
and advises management, makes recommendations to the Board, and reviews and
approves proposals regarding the establishment or change of benefit plans,
salaries or compensation afforded the executive officers and other employees of
the Company. Messrs. Cruikshank, Levin (Chairman) and Marcus currently serve as
members of this Committee.
 
   
     The Section 162(m) Compensation Committee administers the Company's Section
162(m) plans, makes recommendations to the Board, and reviews and approves
proposals regarding those plans. Messrs. Cruikshank and Marcus (Chairman)
currently serve as members of this Committee.
    
 
     The Board of Directors of the Company does not have a standing nominating
committee nor does it have any committee performing a similar function.
 
DIRECTOR COMPENSATION
 
     Directors who were not employees of the Company or KAC, received a base fee
of $30,000 for the 1995 calendar year. Non-employee directors of the Company who
were also non-employee directors of MAXXAM, received director or committee fees
for serving as a director of the Company and/or KAC in addition to the fees
received from MAXXAM. In addition to the compensation payable as a director for
1995, the Chairman of each of the Executive, Audit and Compensation Committees
was paid a fee of $3,000 per year for services as Chairman of such committee.
All members of such committees received a fee of $1,500 per day per committee
meeting held in person on a date other than a Board meeting date and $500 per
formal telephone committee meeting. In respect of 1995, Messrs. Cruikshank,
Levin, Marcus and Petris received an aggregate $32,500, $35,500, $40,856 and
$22,209, respectively, in such director and committee fees from the Company and
KAC.
 
     Subject to the approval of the Chairman of the Board, directors may also be
paid additional ad hoc fees for extraordinary services in the amount of $750 per
half day or $1,500 per day for such services. No such extraordinary services
were performed during 1995. Directors are reimbursed for travel and other
disbursements relating to Board and committee meetings. Fees to directors who
are also employees of the Company, KAC or MAXXAM are deemed to be included in
their salary. Directors of the Company were also directors of KAC and received
the foregoing compensation for acting in both capacities.
 
                                       65
   66
 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The following tables contain information as of October 31, 1996 with
respect to persons known to the Company to be the beneficial owners of more than
5% of the Company's common stock, Cumulative (1985 Series A) Preference Stock
and Cumulative (1985 Series B) Preference Stock. For the purposes of these
disclosures and the disclosure of ownership of shares by officers and directors
below, shares are considered to be "beneficially" owned if the person has or
shares the power to vote or direct the voting for the securities, the power to
dispose of or direct the disposition of the securities, or the right to acquire
beneficial ownership within 60 days.
 
  Ownership of Certain Beneficial Owners-Common Stock
 


                      NAME AND ADDRESS OF                     AMOUNT AND NATURE OF    PERCENT OF
                       BENEFICIAL OWNER                       BENEFICIAL OWNERSHIP     CLASS(1)
    -------------------------------------------------------   --------------------    ----------
                                                                                
    Kaiser Aluminum Corporation                                 46,171,365 shares         100%
      5847 San Felipe, Suite 2600
      Houston, Texas 77057

 
  Ownership of Certain Beneficial Owners-Cumulative (1985 Series A) Preference
Stock
 


                      NAME AND ADDRESS OF                     AMOUNT AND NATURE OF    PERCENT OF
                       BENEFICIAL OWNER                       BENEFICIAL OWNERSHIP     CLASS(1)
    -------------------------------------------------------   --------------------    ----------
                                                                                
    Kaiser Aluminum USWA                                           500,132 shares        89.8%
      Employee Stock Ownership Plan(2)
      c/o Mellon Bank, N.A.
      Pittsburgh, Pennsylvania

 
  Ownership of Certain Beneficial Owners-Cumulative (1985 Series B) Preference
Stock
 


                      NAME AND ADDRESS OF                     AMOUNT AND NATURE OF    PERCENT OF
                       BENEFICIAL OWNER                       BENEFICIAL OWNERSHIP     CLASS(1)
    -------------------------------------------------------   --------------------    ----------
                                                                                
    Kaiser Aluminum Salaried                                        37,530 shares        48.0%
      Employee Stock Ownership Plan(2)
      c/o Mellon Bank, N.A.
      Pittsburgh, Pennsylvania

 
  Ownership of Management-Cumulative (1985 Series B) Preference Stock
 


                      NAME AND ADDRESS OF                     AMOUNT AND NATURE OF    PERCENT OF
                       BENEFICIAL OWNER                       BENEFICIAL OWNERSHIP     CLASS(1)
    -------------------------------------------------------   --------------------    ----------
                                                                                
    All directors and officers of the Company                      47.6208 shares           *

 
- ---------------
 
 *  Less than 1%
 
(1) The "Percent of Class" is computed using the shares outstanding on October
    31, 1996.
 
(2) Individual participants in the Kaiser Aluminum Salaried Employee Stock
    Ownership Plan may direct the Plan's Trustee how to vote their shares;
    undirected shares are voted by the Trustee in the same proportion as shares
    voted upon participant direction.
 
                                       66
   67
 
  Ownership of KAC and MAXXAM
 
     As of October 31, 1996, MAXXAM owned approximately 62% of the issued and
outstanding capital stock of KAC on a fully diluted basis.
 
   
     The following table sets forth, as of December 20, 1996, the beneficial
ownership of the common stock and Class A $.05 Non-Cumulative Participating
Convertible Preferred Stock ("Class A Preferred Stock") of MAXXAM by the
directors of the Company, and by the Company's directors and executive officers
as a group:
    
 
   


                                                                                               PERCENT
                                                                                                  OF
                                                                                               COMBINED
         NAME OF                                          NUMBER OF                 PERCENT     VOTING
     BENEFICIAL OWNER             TITLE OF CLASS          SHARES(1)                 OF CLASS   POWER(2)
- --------------------------  --------------------------  --------------              --------   --------
                                                                                   
Charles E. Hurwitz........  Common Stock                     2,733,542(3)(4)(5)      31.3%       61.2
                            Class A Preferred Stock            684,941(4)(5)(6)(7)    99.1
Ezra G. Levin.............  Common Stock                         1,325(4)(5)(8)       *          *
Robert J. Cruikshank......  Common Stock                         1,325(8)             *          *
All directors and
  executive officers of
  the Company as a group
  (21 persons)............  Common Stock                     2,746,951(9)             31.4       61.3
                            Class A Preferred Stock            684,941(7)             99.1

    
 
- ---------------
 
 *  Less than 1%.
 
   
(1) Unless otherwise indicated, beneficial owners have sole voting and
    investment power with respect to the shares listed. Includes the number of
    shares (i) such persons would have received on, or within 60 days of,
    December 20, 1996, if any, for their exercisable stock appreciation rights
    ("SARs") (excluding SARs payable in cash only) if such rights had been paid
    solely in shares of MAXXAM common stock, and (ii) of MAXXAM common stock
    credited to such person's stock fund account under MAXXAM's 401(k) savings
    plan as of September 30, 1996.
    
 
(2) MAXXAM Class A Preferred Stock is generally entitled to ten votes per share.
 
   
(3) Includes 1,669,451 shares of MAXXAM common stock owned by Federated
    Development Inc. ("FDI"), a wholly owned subsidiary of Federated Development
    Company, as to which Mr. Hurwitz possesses voting and investment power.
    Federated Development Company ("Federated") is a New York business trust
    primarily engaged in the management of real estate investments and which is
    wholly owned by Mr. Hurwitz, members of his immediate family, and trusts for
    the benefit thereof. Mr. Hurwitz serves as a trustee of Federated. Also
    includes (a) 20,892 shares of MAXXAM common stock separately owned by Mr.
    Hurwitz's spouse and as to which Mr. Hurwitz disclaims beneficial ownership,
    (b) 46,500 shares of MAXXAM common stock owned by a limited partnership
    controlled by Mr. Hurwitz and his spouse, 23,250 of which shares were
    separately owned by Mr. Hurwitz's spouse prior to their transfer to such
    limited partnership and as to which Mr. Hurwitz disclaims beneficial
    ownership, (c) 119,832 shares of MAXXAM common stock owned by the 1992
    Hurwitz Investment Partnership, L.P., of which 59,916 shares are owned by
    Mr. Hurwitz's spouse as separate property and as to which Mr. Hurwitz
    disclaims beneficial ownership, (d) 805,692 shares of MAXXAM common stock
    held directly, and (e) 71,175 shares of MAXXAM common stock that FDI may
    acquire in exchange for 7% Cumulative Exchangeable Preferred Stock of MCO
    Properties Inc., a wholly owned subsidiary of MAXXAM.
    
 
   
(4) In addition, Federated, Messrs. Hurwitz and Levin, and Mr. James H. Paulin,
    Jr., Secretary and Treasurer of Federated, may be deemed a "group" (the
    "Stockholder Group") within the meaning of Section 13(d) of the Securities
    Exchange Act of 1934, as amended. As of December 20, 1996, in the aggregate,
    the Stockholder Group beneficially owned 2,735,219 shares of MAXXAM common
    stock and 685,074 shares of Class A Preferred Stock, aggregating
    approximately 61.3% of the total voting power of MAXXAM. By reason of the
    foregoing and their relationship with the members of the Stockholder
    
 
                                       67
   68
 
    Group, Messrs. Hurwitz and Levin may be deemed to possess shared voting and
    investment power with respect to the shares held by the Stockholder Group.
 
(5) Does not include shares owned by other members of the Stockholder Group.
 
   
(6) Includes (a) 661,377 shares owned by FDI, (b) options exercisable on, or
    within 60 days of, December 20, 1996, to acquire 22,500 shares, and (c)
    1,064 shares owned directly.
    
 
   
(7) Includes options exercisable on, or within 60 days of, December 20, 1996, to
    acquire 22,500 shares of Class A Preferred Stock.
    
 
   
(8) Includes options exercisable on, or within 60 days of, December 20, 1996, to
    acquire 325 shares of MAXXAM common stock.
    
 
   
(9) Includes (a) 9,717 shares of MAXXAM common stock, which is the number of
    shares certain officers would have received on December 20, 1996 for SARs
    pertaining to 39,000 shares of MAXXAM common stock, if the exercise of such
    SARs had been paid solely in shares of MAXXAM common stock, and (b) options
    to purchase 650 shares of MAXXAM common stock, both of which are exercisable
    on, or within 60 days of, December 20, 1996.
    
 
   
     At December 20, 1996, 27,938,250 shares of KAC Common Stock owned by MAXXAM
were pledged as security for two debt issues of MGI consisting of $100.0 million
aggregate principal amount of 11 1/4% Senior Secured Notes due 2003 and $125.7
million aggregate principal amount of 12 1/4% Senior Discount Notes due 2003
(the "MGI Debt"). On December 18, 1996, MAXXAM announced that its newly-formed
wholly-owned subsidiary, MAXXAM Group Holdings Inc. ("MGHI"), priced its Rule
144A offering of $130.0 million principal amount of 12% Senior Secured Notes due
2003 (the "Senior Secured Notes"). MGHI closed this offering on December 23,
1996. Concurrently with the consummation of the offering, MAXXAM transfered to
MGHI 27,938,250 shares of KAC Common Stock (the "KAC Shares"), which KAC Shares
are pledged to secure the MGI Debt. If any KAC Shares are released as security
for such MGI Debt by reason of early retirement of such indebtedness (other than
by reason of a refinancing of such indebtedness), MGHI will pledge up to
16,055,000 of the KAC Shares as security for the Senior Secured Notes. The
Senior Secured Notes are guaranteed on a senior unsecured basis by MAXXAM. The
Senior Secured Notes will not be registered under the Securities Act and may not
be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
    
 
                                       68
   69
 
EXECUTIVE COMPENSATION
 
  Incentive Compensation Programs
 
     Compensation components -- Total Compensation for Company executives is
made up of a combination of base salary, short and long-term incentive targets,
employee benefits and executive perquisites.
 
     Incentive Compensation -- In 1995, the Company adopted the Kaiser 1995
Executive Incentive Compensation Program (the "Executive Program") and the
Kaiser 1995 Employee Incentive Compensation Program (the "Employee Program").
The Executive and Employee Programs (collectively, the "Incentive Programs") (i)
provide annual incentives based on yearly performance, and long-term incentives
based on three-year performance; (ii) structure a major portion of each
participant's total compensation to be at-risk and performance-based; (iii)
provide incentive toward the achievement of excellent safety practices; and (iv)
promote individual and group contributions that add value to the Company. The
Incentive Programs also reward aggressive and accurate planning.
 
     Methodology of Incentive Programs -- Target incentives under the Incentive
Programs are set at the beginning of each annual or long-term performance
period. The target incentives are established based on a combination of market
survey data, internal force-ranking and assessment of position responsibilities.
The annual and long-term components of the target incentives are based on
achievement of goals or financial accomplishments. The performance goals are set
so that at the end of each performance period the target incentives can be
valued at zero to three times their value, depending on financial performance,
for purposes of determining actual awards to be paid to each participant.
 
     Each year a new three-year performance period is established. Annual
incentive payments are made in cash after the announcement of the financial
results of the Company for the prior fiscal year for which the performance goals
were set. Payments for the long-term incentive component of the Incentive
Programs will be made 43% in cash and 57% in shares of KAC Common Stock and are
expected to be paid in two installments, one-half during the year following the
end of the three-year period and one-half during the second year following the
end of the three-year period. In each case, however, such payments are
conditioned on the continued employment of the participant. As a result, if a
participant voluntarily terminates his or her employment for any reason other
than death, disability or retirement, any unmade payments are forfeited. Any
stock-related awards granted pursuant to the Incentive Programs are intended to
be issued under the 1993 Omnibus Plan.
 
     Executive Program -- The participants in the Executive Program are
currently limited to the Chief Executive Officer ("CEO"), the Chief Financial
Officer ("CFO") and the Chief Administrative Officer ("CAO"). The Executive
Program is currently administered by the Compensation Committee. When incentive
awards are determined at the end of each performance period, an additional
amount equal to 30% of incentive targets based on achievement of goals or other
accomplishments not reflected in the return on assets, is added to the incentive
payment amount. While the Compensation Committee cannot increase the incentive
payment, it may decrease the incentive payment by an amount in the range of 1%
to 60% of the target incentive.
 
     Employee Program -- Participants in the Employee Program include the
Company's executive officers named in the Summary Compensation Table (other than
the CEO, CFO and CAO), certain other executive officers, managers and other key
employees of the Company. Twenty percent of the target incentive for both the
annual and long-term component for all participants for each business unit or
participant group is deducted from the tentative award, pooled and then
allocated to participants in such group by the business unit or participant
group manager based on the individual accomplishments and contributions of each
individual, subject to the limitation that no participant may receive more than
40% of the participant's target incentive. A participant's award may be
increased or decreased by 1% to 10% of the participant's target incentive based
on safety or group achievements during the performance period. The Employee
Program is administered by the Company's corporate human resources department.
 
                                       69
   70
 
  The 1993 Omnibus Plan
 
     In 1993, the Board of Directors adopted and the stockholders of both the
Company and KAC approved the 1993 Omnibus Plan. The 1993 Omnibus Plan is the
Company's first stock-based incentive plan since the Company's 1979 Stock Option
Plan, which expired on December 31, 1988, and is jointly sponsored by the
Company and KAC. The 1993 Omnibus Plan is utilized to provide those persons who
have substantial responsibility for management and growth of the Company with an
opportunity to increase their ownership of KAC Common Stock, stock options or
related types of benefits. In addition, the 1993 Omnibus Plan is intended to be
used to issue KAC Common Stock in connection with awards under the long-term
incentive component of the Incentive Programs.
 
     The description of the Plan herein is qualified in its entirety by the
provisions of the Plan, a copy of which has been filed with the Commission.
 
     General Provisions -- The 1993 Omnibus Plan is administered by the
Compensation Committee. It is the intention of the Board of Directors that the
1993 Omnibus Plan be formulated, adopted and administered in a manner which
allows for transactions under it to be exempt employee benefit transactions
under Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Accordingly, no person shall serve on the Compensation
Committee who has received any grant or award under the 1993 Omnibus Plan within
one year prior to his or her appointment nor shall any person receive a grant or
award under the 1993 Omnibus Plan while a member of the Compensation Committee.
The Compensation Committee may select participants for awards under the 1993
Omnibus Plan, from among those employees of the Company recommended by the CEO
who are, in the opinion of the Compensation Committee, key employees in a
position to contribute materially to the Company's continued growth and
development and to its long-term success.
 
     The Compensation Committee has discretion to make awards under the 1993
Omnibus Plan. In making awards, the Compensation Committee has flexibility in
choosing from a variety of stock-based incentive alternatives. The 1993 Omnibus
Plan allows for the grant of incentive stock options ("ISOs"), nonstatutory
stock options, SARs, performance units, performance shares, restricted stock and
unrestricted stock; however, it is not contemplated that any participant will
receive awards from all categories available under the 1993 Omnibus Plan. Up to
2,500,000 shares of KAC Common Stock are reserved for awards or for payment of
rights granted under the Plan (subject to adjustment in the event of certain
changes in the capitalization of KAC). Payments under the 1993 Omnibus Plan for
other than direct awards of stock may be made in cash, in stock or partly in
each, at the discretion of the Compensation Committee. If any award terminates
or lapses prior to the expiration or earlier termination of the 1993 Omnibus
Plan, the shares of KAC Common Stock subject to the award will be available
again for award under the 1993 Omnibus Plan (except in the case of a stock
option as to which a related SAR has been exercised).
 
     The 1993 Omnibus Plan became effective as of December 1992 and will expire
on December 31, 2002. Awards made under the 1993 Omnibus Plan prior to its
termination shall remain in effect until they shall have been exercised,
satisfied or terminated as set forth in the 1993 Omnibus Plan. The Board of
Directors may suspend or terminate the 1993 Omnibus Plan at any time prior to
its expiration. Any amendment increasing the aggregate number of shares of stock
which may be issued pursuant to ISOs or making certain other material changes
shall require stockholder approval. However, no plan amendment may adversely
impact a previously granted award made under the 1993 Omnibus Plan without
consent of the grantee.
 
     Awards under the 1993 Omnibus Plan (other than direct grants of stock or
stock obtained as payment through exercise of a Plan award) may not be
transferred except by will or the laws of descent and distribution. Stock
obtained under the 1993 Omnibus Plan may be subject to restrictions and
recipients will be subject to reporting and disposition restrictions under
Section 16 of the Exchange Act and related insider trading laws.
 
     Stock Options -- The Compensation Committee may grant options to purchase
shares of KAC Common Stock. Such options may be nonstatutory or nonqualified
stock options and ISOs pursuant to Section 422 of the Internal Revenue Code of
1986, as amended (the "Code").
 
                                       70
   71
 
     The option price for any option may not be less than the par value of KAC
Common Stock and ISOs granted under the 1993 Omnibus Plan may not utilize an
exercise price which is less than the fair market value of KAC Common Stock on
the date of the grant. The option price may be paid in cash, in previously
acquired KAC Common Stock held for at least six (6) months and with a fair
market value on the date of exercise equal to the option price, or by a
combination of cash and KAC Common Stock. The Compensation Committee may also
approve other forms of payment. Options may not be exercised sooner than one
year or more than ten years from the date of grant.
 
     Stock Appreciation Rights -- The Compensation Committee may grant stock
appreciation rights in conjunction with, or apart from, stock options. An SAR
entitles the grantee to receive a payment from KAC equal to the excess of the
fair market value of a share of KAC Common Stock at the date of exercise over a
specified price fixed by the Compensation Committee. The Compensation Committee
may establish a maximum appreciation value when granting SARs. Payment for SARs
may be made in cash, KAC Common Stock, or a combination of both, at the
discretion of the Committee. SARs may not be exercised sooner than one year or
more than ten years from the date of grant.
 
     Restricted Stock -- The Compensation Committee may grant shares of
restricted KAC Common Stock under the 1993 Omnibus Plan. The Committee may make
the grant of restricted stock subject to various conditions including the
participant remaining employed by the Company for a number of years.
Participants holding shares of restricted stock may exercise full voting rights
with respect to those shares but shall not be entitled to receive dividends and
other distributions paid, if any, with respect to those shares during the period
of restriction. A holder of restricted stock may not sell or otherwise transfer
the KAC Common Stock until the restrictions have lapsed or have been removed.
 
     Performance Units and Performance Shares -- The Compensation Committee may
grant performance units and performance shares under the 1993 Omnibus Plan. In
such event, the Compensation Committee will establish a performance period over
which corporate, business unit, or individual performance goals set by the
Compensation Committee will be measured. At the end of the performance period,
the performance units or performance shares will be paid out at their initial
established values, increased or decreased, as the case may be, based upon
performance above or below target levels. Payment may be made in cash, KAC
Common Stock or a combination thereof as determined by the Compensation
Committee. Payment may be made in a lump sum or in installments at the
Compensation Committee's discretion. In the event payment is deferred, interest
or dividend equivalents may be paid to participants.
 
     Unrestricted Stock -- Unrestricted shares of KAC Common Stock also may be
awarded under the 1993 Omnibus Plan as well as upon the exercise of stock
options, in connection with distributions due on the exercise of stock
appreciation rights or as payment on performance units or performance shares.
 
     Rights to Grants Upon Termination of Employment -- In the event a
participant's employment is terminated by reason of death, disability, or
retirement, vested options or other vested rights under the 1993 Omnibus Plan
may be exercised within twelve months of termination (three years in the event
of retirement), or the remaining term of the option or right, whichever is
shorter. If employment is terminated for any other reason, options or rights may
be exercised for three months, or the remaining term of the option or right,
whichever is shorter, except that participants who are terminated for cause
immediately forfeit all exercise rights. In the event a participant dies,
becomes disabled or retires after having reached normal retirement age for
pension purposes, a portion of such person's granted shares of restricted stock
will become free of restrictions, and a portion of such person's granted stock
options, SARs, performance units or performance shares shall vest. Such portion
shall be equal to the number of shares subject to such grants multiplied by the
number of full months elapsed between the date of grant and the date of death,
disability or retirement, divided by the number of full months of the period for
which such grants were to have been restricted or to have remained unvested. The
remaining portion of such grants shall be forfeited. In the event of retirement
before normal retirement age, all such grants shall continue to be subject to
their respective conditions, vesting schedules and restrictions, including any
requiring continued employment. In the event a participant's employment is
terminated involuntarily, other than for cause, the Compensation Committee may,
in its discretion, waive any applicable forfeiture, vesting requirements or
restrictions as it deems appropriate.
 
                                       71
   72
 
  Summary Compensation Table
 
     The following table sets forth compensation information, cash and non-cash,
for each of the Company's last three completed fiscal years with respect to the
CEO and the four most highly compensated executive officers of the Company
(collectively referred to as the "named executive officers") for the fiscal year
ended December 31, 1995:
 


                                                                                  LONG-TERM COMPENSATION
                                                                          --------------------------------------
                                        ANNUAL COMPENSATION                       AWARDS               PAYOUTS
                               --------------------------------------     -----------------------     ----------
         (A)             (B)      (C)         (D)            (E)             (F)           (G)           (H)             (I)
                                                            OTHER         RESTRICTED                                        
                                                            ANNUAL          STOCK        OPTIONS/        LTIP         ALL OTHER
       NAME AND                 SALARY       BONUS       COMPENSATION      AWARD(S)        SARS        PAYOUTS       COMPENSATION
  PRINCIPAL POSITION    YEAR      ($)         ($)           ($)(1)           ($)           (#)           ($)             ($)
- ----------------------  -----  ---------    --------     ------------     ----------     --------     ----------     ------------
                                                                                             
George T. Haymaker,     1995    $465,000    $225,000
 Jr.,                                                            --             -0-          -0-             -0-         23,250(2)
 Chairman, CEO and      1994     450,000     100,000             --             -0-       26,700             -0-          2,079(3)
 President              1993     291,072         -0-             --             -0-      100,000             -0-         40,443(3)
John T. La Duc,         1995     248,333     130,000(4)          --             -0- (5)      -0-             -0-         12,417(2)
 Vice President and     1994     240,000     103,000(4)
   CFO                                                           --             -0-        9,200             -0-          4,800(2)
                        1993     240,000     100,000(4)          --             -0-          -0-             -0-          4,872(2)
Joseph A. Bonn,         1995     224,633      75,000             --             -0- (5)      -0-             -0-         11,232(2)
 Vice President,        1994     216,300      27,000
   Planning                                                      --             -0-        8,500             -0-          4,326(2)
 and Administration     1993     216,300         -0-             --             -0-          -0-             -0-          4,326(2)
John E. Daniel,         1995     191,669     152,000             --             -0-          -0-             -0-          9,583(2)
 Vice President and     1994     170,004      24,000
   President                                                     --             -0-        7,300             -0-          3,590(2)
 Kaiser Primary         1993     159,000         -0-
   Products                                                      --             -0-       21,800             -0-          3,180(2)
Lawrence L. Watts,      1995     211,171     105,000             --             -0- (5)      -0-             -0-         10,559(2)
 Vice President and     1994     172,004      26,000
   President                                                     --             -0-        7,100             -0-          3,440(2)
 Kaiser Aluminum        1993     154,000         -0-             --             -0-       21,100             -0-          3,080(2)
 International

 
- ---------------
 
 (1) Excludes perquisites and other personal benefits because the aggregate
     amount of such compensation is the lesser of either $50,000 or 10% of the
     total of annual salary and bonus reported for the named executive officer.
 
 (2) Includes contributions by the Company of $12,417, $4,800 and $4,872 for Mr.
     La Duc; $11,232, $4,326 and $4,326 for Mr. Bonn; $9,583, $3,590 and $3,180
     for Mr. Daniel; and $10,559, $3,440, and $3,080 for Mr. Watts, under the
     Kaiser Savings Plan (as defined below) for 1995, 1994 and 1993,
     respectively, and $23,250, for 1995 to Mr. Haymaker.
 
 (3) Includes moving related items of $2,079 and $40,443 for Mr. Haymaker in
     1994 and 1993, respectively.
 
 (4) Includes $50,000 (to be paid over a two-year period), $75,000 (to be paid
     over a three-year period) and $100,000 (to be paid over a four-year
     period), awarded for 1995, 1994 and 1993, respectively, for which the
     Company will be reimbursed by MAXXAM.
 
 (5) As of December 31, 1995, Messrs. Bonn, La Duc and Watts owned 47,437,
     47,437 and 38,462 shares, respectively, of restricted Common Stock of KAC
     valued at approximately $622,611, $622,611 and $504,814, respectively,
     based on the closing price of $13.125 per share. Restrictions on such
     shares will be lifted on December 2, 1996 for each of Messrs. Bonn and La
     Duc and on May 24, 1996, May 24, 1997 and May 24, 1998 for 12,820, 12,821
     and 12,821 shares, respectively, for Mr. Watts. No dividends will be paid
     on these shares to Messrs. Bonn, La Duc or Watts during the period of
     restriction. No other named executive officer held restricted stock of KAC
     or the Company at fiscal year end 1995.
 
  Option/SAR Grants
 
     No options to purchase Common Stock or SARs were granted by the Company or
by KAC with respect to KAC Common Stock or SARs in fiscal year 1995.
 
                                       72
   73
 
  Option/SAR Exercises and Fiscal Year End Value Table
 
     The table below provides information on an aggregated basis concerning each
exercise of stock options (or tandem SARs) and freestanding SARs during the
fiscal year ended December 31, 1995 by each of the named executive officers, and
the 1995 fiscal year-end value of unexercised options and SARs.
 


           (A)                 (B)             (C)                    (D)                           (E)
                                                             NUMBER OF UNEXERCISED          VALUE OF UNEXERCISED
                                                                 OPTIONS/SARS            IN-THE-MONEY OPTIONS/SARS
                              SHARES                            AT YEAR END(#)             AT FISCAL YEAR-END($)
                           ACQUIRED ON        VALUE       ---------------------------   ----------------------------
          NAME            EXERCISE(#)(1)   REALIZED($)    EXERCISABLE   UNEXERCISABLE   EXERCISABLE    UNEXERCISABLE
- ------------------------- --------------   -----------    -----------   -------------   -----------    -------------
                                                                                     
George T. Haymaker,
  Jr.....................     40,000          500,000(2)     6,675          80,025          2,503(2)      360,009(3)
Joseph A. Bonn...........         --               --        2,125           6,375            797(2)        2,391(4)
John T. La Duc...........         --               --        2,300           6,900            863(3)        2,588(3)
                                  --               --        6,000           4,000         43,500(4)       29,000(4)
John E. Daniel...........      8,720           78,480(3)     1,825          18,555            684(3)       78,898(3)
Lawrence L. Watts........      8,440           75,433(2)     1,775          17,985            666(3)       76,374(3)

 
- ---------------
 
(1) If no shares received, the number reflected, if any, represents the number
    of securities with respect to which options/SARs were exercised.
 
(2) Valued at the closing price of KAC's Common Stock on the date of exercise,
    less exercise price.
 
(3) Valued at $13.125, the closing price of KAC's Common Stock on December 29,
    1995, less exercise price.
 
(4) Valued at $35.25, the closing price of MAXXAM's common stock on December 29,
    1995, less exercise price.
 
     Except as set forth below, the SARs relating to MAXXAM common stock set
forth in the above table for Mr. La Duc were granted under MAXXAM's 1984 Phantom
Share Plan (the "MAXXAM Phantom Plan"). Certain of such SARs under the MAXXAM
Phantom Plan are exercisable for cash only and certain are exercisable for cash,
MAXXAM common stock or a combination thereof at the discretion of MAXXAM's Board
of Directors. All such SARs under the MAXXAM Phantom Plan vest with respect to
20% on the first anniversary date of the grant and an additional 20% on each
anniversary date thereafter until fully vested.
 
  Kaiser Retirement Plan
 
     The Company maintains a qualified, defined-benefit Retirement Plan (the
"Kaiser Retirement Plan") for salaried employees of the Company and
co-sponsoring subsidiaries who meet certain eligibility requirements. The table
below shows estimated annual retirement benefits payable under the terms of the
Kaiser Retirement Plan to participants with the indicated years of credited
service. These benefits are reflected without reduction for the limitations
imposed by the Code, on qualified plans and before adjustment for the Social
Security offset, thereby reflecting aggregate benefits to be received, subject
to Social Security offsets, under the Kaiser Retirement Plan and the Kaiser
Supplemental Benefits Plan (as defined below).
 


                                                        YEARS OF SERVICE
              ANNUAL              -------------------------------------------------------------
           REMUNERATION              15           20           25           30           35
         ---------------          ---------    ---------    ---------    ---------    ---------
                                                                       
    $150,000..................    $  33,750    $  45,000    $  56,250    $  67,500    $  78,750
     200,000..................       45,000       60,000       75,000       90,000      105,000
     250,000..................       56,250       75,000       93,750      112,500      131,250
     350,000..................       78,750      105,000      131,250      157,500      183,500
     450,000..................      101,250      135,000      168,750      202,500      236,250
     550,000..................      123,750      165,000      206,250      247,500      288,750
     650,000..................      146,250      195,000      243,750      292,500      341,250
     750,000..................      168,750      225,000      281,750      337,500      393,750
     850,000..................      191,250      255,000      318,750      382,500      446,250

 
                                       73
   74
 
The estimated annual retirement benefits shown are based upon the assumptions
that current Kaiser Retirement Plan and Kaiser Supplemental Benefits Plan
provisions remain in effect, that the participant retires at age 65, and that
the retiree receives payments based on a straight life annuity for his lifetime.
Messrs. Haymaker, La Duc, Bonn, Daniel and Watts had 2.7, 26.3, 28.5, 38.5 and
20 years of credited service, respectively, on December 31, 1995. Monthly
retirement benefits, except for certain minimum benefits, are determined by
multiplying years of credited service (not in excess of 40) by the difference
between 1.50% of average monthly compensation for the highest base period (of
36, 48 or 60 consecutive months, depending upon compensation level) in the last
10 years of employment and 1.25% of monthly primary Social Security benefits.
Pension compensation covered by the Kaiser Retirement Plan and the Kaiser
Supplemental Benefits Plan consists of salary and bonus amounts set forth in the
Summary Compensation Table (column (c) plus column (d) thereof).
 
     Participants are entitled to retire and receive pension benefits, unreduced
for age, upon reaching age 62 or after 30 years of credited service. Full early
pension benefits (without adjustment for Social Security offset prior to age 62)
are payable to participants who are at least 55 years of age and have completed
10 or more years of pension service (of whose age and years of pension service
total 70) and who have been terminated by the Company or an affiliate for
reasons of job elimination or partial disability. Participants electing to
retire prior to age 62 who are at least 55 years of age and have completed 10 or
more years of pension service (or whose age and years of pension service total
at least 70) may receive pension benefits, unreduced for age, payable at age 62
or reduced benefits payable earlier. Participants who terminate their employment
after five years or more of pension service, or after age 55 but prior to age
62, are entitled to pension benefits, unreduced for age, commending at age 62
or, if they have completed 10 or more years of pension service, actuarially
reduced benefits payable earlier. For participants with five or more years of
pension service or who have reached age 55 and who die, the Kaiser Retirement
Plan provides a pension to their eligible surviving spouses. Upon retirement,
participants may elect among several payment alternatives including, for most
types of retirement, a lump-sum payment.
 
     Kaiser Supplemental Benefits Plan
 
     The Company maintains an unfunded, non-qualified Supplemental Benefits Plan
(the "Kaiser Supplemental Benefits Plan"), the purpose of which is to restore
benefits which would otherwise be paid from the Kaiser Retirement Plan or the
Supplemental Savings and Retirement Plan, a qualified Section 401(k) plan (the
"Kaiser Savings Plan"), were it not for the limitations imposed by the Internal
Revenue Code. Participation in the Kaiser Supplemental Benefits Plan includes
all employees of the Company and its subsidiaries whose benefits under the
Kaiser Retirement Plan and Kaiser Savings Plan are likely to exceed the maximum
dollar limitations imposed by the Internal Revenue Code. Eligible participants
are entitled to receive the equivalent of the Kaiser Retirement Plan and Kaiser
Savings Plan benefits which they may be prevented from receiving under those
plans because of Internal Revenue Code limitations.
 
Kaiser Termination Payment Policy
 
     Most full-time salaried employees of the Company are eligible for benefits
under an unfunded termination policy if their employment is involuntarily
terminated, subject to a number of exclusions. The policy provides for lump sum
payments after termination ranging from one-half month's salary for less than
one year of service graduating to eight months' salary for 30 or more years of
service. The amounts payable to Messrs. La Duc, Bonn, Daniel and Watts under the
policy if they had been involuntarily terminated on December 31, 1995 would have
been $145,833, $132,008, $133,333 and $122,500, respectively.
 
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
 
     On April 1, 1993, the Company and KAC entered into a five-year employment
agreement with Mr. George T. Haymaker, Jr., pursuant to which Mr. Haymaker
currently serves as Chairman and Chief Executive Officer of the Company and KAC.
Mr. Haymaker's agreement provided for a base salary of $450,000 per annum and a
bonus target of 50% of his salary which began fiscal year 1994. Mr. Haymaker's
base salary is subject to review and possible change on an annual basis but
cannot be reduced below $450,000
 
                                       74
   75
 
without his consent. In 1995, Mr. Haymaker's agreement was amended to increase
his base salary to $465,000 and increase his bonus targets in a manner
consistent with the executive incentive program described above. Pursuant to Mr.
Haymaker's agreement, he received an initial award under the 1993 Omnibus Plan
of options to purchase up to 100,000 shares of KAC Common Stock at its fair
market value on the date of the award. Such options vest 20% per year for a
period of five years and are reflected in the Summary Compensation Table for
1993.
 
     In the event of a change of control of the Company or KAC which within one
year thereafter adversely affects Mr. Haymaker's title, position, duties,
responsibilities or compensation, Mr. Haymaker's employment agreement provides
that he may elect to be deemed terminated without cause, and therefore, entitled
to a severance payment in an amount equal to two times his base annual salary
reduced by any payment made as discussed under "Kaiser Retirement Plan and
Defined Benefit Plans -- Kaiser Termination Payment Policy" above. Additionally,
in the event of such termination, Mr. Haymaker's options for 100,000 shares of
KAC Common Stock shall fully vest.
 
     Mr. Haymaker's employment agreement further provides that he vests 20% per
year in an unfunded non-qualified supplemental benefit, payable at retirement
after age 62, equal to a benefit determined as if his Kaiser Retirement Plan
pension were based on his aggregate service with the Company and a prior
employer (25 years), less his pension from that prior employer and any
retirement benefits from the Company.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
     No member of the Compensation Committee of the Board of Directors of the
Company was, during the 1995 fiscal year, an officer or employee of the Company
or any of its subsidiaries, or was formerly an officer of the Company or any of
its subsidiaries or, other than Mr. Levin, had any relationships requiring
disclosure by the Company under Item 404 of Regulation S-K. Mr. Levin served on
the Company's Compensation Committee and Board of Directors during 1995. Mr.
Levin is also a partner in the law firm of Kramer, Levin, Naftalis & Frankel,
which provided legal services for the Company and its subsidiaries during 1995.
 
     During the Company's 1995 fiscal year, no executive officer of the Company
served as (i) a member of the compensation committee (or other board committee
performing equivalent functions) of another entity, one of whose executive
officers served on the Compensation Committee, (ii) a director of another
entity, one of whose executive officers served on the Compensation Committee, or
(iii) a member of the compensation committee (or other board committee
performing equivalent functions) of another entity, one of whose executive
officers served as a director of the Company.
 
                              CERTAIN TRANSACTIONS
 
     For certain periods through June 30, 1993, KAC and its subsidiaries
(including the Company) were included in the consolidated Federal income tax
return filed by MAXXAM. Payments to MAXXAM or refunds from MAXXAM may still be
required by or payable to the Company or KAC under the tax allocation agreements
that governed those periods due to the final resolution of audits, amended
returns and related matters with respect to such periods. The Credit Agreement
prohibits any cash payments by the Company to MAXXAM pursuant to the relevant
tax allocation agreement after February 15, 1994; however, MAXXAM may offset
amounts owing to it against amounts owed by it under the relevant tax allocation
agreement, and the Company may make certain cash payments to MAXXAM that are
required as a result of audits of MAXXAM's tax returns and only to the extent of
any amounts paid after February 15, 1994 by MAXXAM to the Company under the
relevant tax allocation agreement. While the Company and KAC are severally
liable for the MAXXAM tax group's Federal income tax liability for all of 1993
and applicable prior periods, pursuant to the relevant tax allocation
agreements, MAXXAM indemnifies the Company and KAC to the extent the tax
liability exceeds amounts payable by them under such agreements.
 
     On June 30, 1993, the Company and KAC entered into a tax allocation
agreement (the "KACC Tax Allocation Agreement") effective for periods beginning
on or after July 1, 1993. Pursuant to the terms of the KACC Tax Allocation
Agreement, KAC pays any consolidated Federal income tax liability for KAC and
its
 
                                       75
   76
 
subsidiaries which are members of an affiliated group of corporations (an
"Affiliated Group") within the meaning of Section 1504 of the Internal Revenue
Code of 1986, as amended (the "Code"), of which KAC is the common parent
corporation (the "KAC Tax Group"). The Company is liable to KAC for the Federal
income tax liability of the Company and its subsidiaries (collectively, the
"KACC Subgroup") computed as if the KACC Subgroup were a separate Affiliated
Group which was never affiliated with the KAC Tax Group (taking into account all
limitations under the Code and regulations applicable to the KACC Subgroup),
except that the KACC Subgroup excludes interest income received or accrued on an
intercompany note issued by KAC in connection with a financing consummated in
December 1989 (the "KACC Subgroup's Separate Income Tax Liability"). To the
extent such calculation results in a net operating loss or a net capital loss or
credit which the KACC Subgroup could have carried back to a prior applicable
taxable period under the principles of Sections 172 and 1502 of the Code, KAC
pays to the Company an amount equal to the tax refund to which the Company would
have been entitled (but not in excess of the aggregate amount previously paid by
the Company to KAC for the current year and the three prior taxable years). If
such separately calculated net operating loss or net capital loss or credit of
the KACC Subgroup cannot be carried back to a prior taxable year of the KACC
Subgroup for which the KACC Subgroup paid its separate tax liability to KAC, the
net operating loss or net capital loss or credit becomes a loss or credit
carryover of the KACC Subgroup to be used in computing the KACC Subgroup's
Separate Income Tax Liability for future taxable years. The same principles are
applied to any consolidated or combined state or local income tax returns filed
by the KAC Tax Group with respect to the Company and its subsidiaries. Although,
under Treasury regulations, all members of the KAC Tax Group, including the
members of the KACC Subgroup, are severally liable for the KAC Tax Group's
Federal income tax liability, under the KACC Tax Allocation Agreement, KAC
indemnifies each KACC Subgroup member for all Federal income tax liabilities
relating to taxable years during which such KACC Subgroup member was a member of
the KAC Tax Group, except for payments required under the KACC Tax Allocation
Agreement.
 
     The Company and MAXXAM have an arrangement pursuant to which they reimburse
each other for certain allocable costs associated with the performance of
services by their respective employees. The Company paid a total of
approximately $2.4 million to MAXXAM pursuant to such arrangements and MAXXAM
paid approximately $2.5 million to the Company pursuant to such arrangements in
respect of 1995. Generally, the Company and MAXXAM endeavor to minimize the need
for reimbursement by ensuring that employees are employed by the entity to which
the majority of their services are rendered.
 
     On December 15, 1992, the Company issued a note (the "PIK Note") to a
subsidiary of MAXXAM in the principal amount of $2.5 million, representing the
entire amount of a dividend received by such subsidiary in respect of the shares
of KAC Common Stock which it owned. The PIK Note which accrued interest,
compounded semiannually, at a rate equal to 12% per annum, was paid, together
with accrued interest thereon, on June 30, 1995.
 
     Mr. Levin, a director of the Company and KAC, is a partner in the law firm
of Kramer, Levin, Naftalis & Frankel, which provides legal services for KAC and
its subsidiaries.
 
     On April 17, 1995, SHRP, Ltd. and two affiliated entities, SHRP
Acquisition, Inc. and SHRP Capital Corp., filed voluntary corporate petitions
under Chapter 11 of the United States Bankruptcy Code. Their bankruptcy plan has
since been confirmed and the transactions contemplated by the bankruptcy
reorganization plan were consummated on October 6, 1995. Since July 1993, Mr.
Wade has served as a director, Vice President and Secretary of SHRP, Inc., SHRP,
Ltd.'s sole general partner prior to SHRP, Ltd.'s bankruptcy reorganization, and
of SHRP Capital Corp., a subsidiary of SHRP, Ltd. Also, Mr. Hurwitz has served
as a director of SHRP, Inc. and SHRP Capital Corp. since July 1993, Chairman of
the Board of SHRP, Inc. from July 1993 until October 6, 1995, and Chairman of
the Board and President of SHRP Capital Corp. from July 1993 until October 6,
1995.
 
     In October 1990, Amarlite filed a voluntary corporate petition under
Chapter 11 of the United States Bankruptcy Code. In December 1991, Amarlite
obtained approval of its reorganization plan, which was funded and substantially
consummated on January 14, 1992. Mr. Haymaker was Chief Executive Officer and a
director of Amarlite during such period.
 
                                       76
   77
 
                     DESCRIPTION OF PRINCIPAL INDEBTEDNESS
 
     On February 17, 1994, the Company entered into the Credit Agreement. The
terms and conditions of the Credit Agreement are summarized below. The Credit
Agreement consist of a $325.0 million five-year secured, revolving line of
credit scheduled to mature in 1999. The Company 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 plus eligible
inventory.
 
     Loans under the Credit Agreement bear interest at a rate per annum, at the
Company's election, equal to (i) a Reference Rate (as defined) plus 1.50% or
(ii) LIBOR (as defined) plus 3.25%. The interest rate margins applicable to
borrowings under the Credit Agreement may be reduced (non-cumulatively), based
upon the Company's Interest Coverage Ratio (as defined) ("ICR"), as follows: ICR
<1.25, reduction of 0%, 1.25 2.00, reduction of 1.50%. ICR is defined as the
ratio of (i) EBITDA (as defined), less Adjusted Capital Expenditures (as
defined), to (ii) adjusted interest expense.
 
     In addition, the Credit Agreement is unconditionally guaranteed by KAC and
by all significant subsidiaries of the Company.
 
     The Credit Agreement is also secured by, among other things, (i) mortgages
on the Company's major domestic plants (excluding the Company's Gramercy alumina
refinery and Nevada micromill); (ii) subject to certain exceptions, liens on the
accounts receivable, inventory, equipment, domestic patents and trademarks, and
substantially all other personal property of the Company and certain of its
subsidiaries; (iii) a pledge of all of the stock of the Company owned by KAC;
and (iv) pledges of all stock of a number of the Company'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.
 
     The Credit Agreement contains certain affirmative and negative covenants,
including, but not limited to, covenants relating to (i) the incurrence of liens
and additional indebtedness, (ii) the making of restricted payments and the
payment of fees to MAXXAM, (iii) Asset Dispositions (as defined), (iv) the sale
of accounts receivable, (v) the maximum permitted amount of capital expenditures
each year, (vi) mergers, acquisitions and investments, (vii) leases and
sale-leasebacks, (viii) transactions with affiliates and (ix) the maintenance of
a minimum net worth and ICR. In addition, the Credit Agreement does not permit
the Company or KAC to pay any dividends on their common stock.
 
   
     The Credit Agreement (i) prohibits redemptions or repurchases of the Notes,
including, without limitation, purchases of Notes that might otherwise be
required pursuant to the provisions of the Indenture, (ii) prohibits, without
the written consent of the Required Lenders (as defined in the Credit
Agreement), amendments or supplements to the Indenture and (iii) prohibits, with
certain exceptions, the taking of action or permitting to exist any condition,
which would require (a) any subsidiary of the Company (other than the initial
Subsidiary Guarantors under the Indenture) to guarantee the Notes or (b) the
Company or any of its Subsidiaries to provide collateral in respect of the
Notes.
    
 
     On February 1, 1993, the Company extended a portion of its debt maturities
by refinancing the 14 1/4% Notes with $400.0 million aggregate principal amount
of the 12 3/4% Notes.
 
     On February 17, 1994, the Company sold $225.0 million of its 9 7/8% Notes
due 2002 and used the net proceeds to reduce outstanding borrowings under the
Company's previously existing revolving credit facility immediately prior to the
effectiveness of the Credit Agreement and for working capital and general
corporate purposes.
 
   
     On October 23, 1996, the Company sold $175.0 million of the Old Notes at
99.5% of their principal amount. Net proceeds to the Company from the sale of
the Old Notes, after estimated expenses, were approximately $168.9 million, of
which $91.7 million were utilized to reduce outstanding borrowings under the
revolving credit facility of the Credit Agreement to zero. The remaining net
proceeds of approximately
    
 
                                       77
   78
 
$77.2 million were invested in short-term investments pending their application
for working capital and general corporate purposes, including capital projects.
See "Description of New Notes."
 
   
     On December 23, 1996, the Company sold $50.0 million of the 10 7/8% Series
C Notes at 103.5% of their principal amount. Net proceeds to the Company from
the 10 7/8% Series C Notes Offering were approximately $50.4 million, all of
which were invested in short-term investments pending their application for
working capital and general corporate purposes, including capital projects.
    
 
   
     The 9 7/8% Note Indenture, the 10 7/8% Series C Note Indenture, the 12 3/4%
Note Indenture and the Indenture each contain a number of affirmative and
negative covenants applicable to the Company which, among other things, (a)
limit the incurrence of additional indebtedness and liens, (b) limit Restricted
Payments (as defined), (c) limit Restricted Investments (as defined), (d) limit
mergers, consolidations and sales of all or substantially all of the Company's
assets, (e) impose certain requirements with respect to Asset Sales (as
defined), (f) limit transactions with Affiliates (as defined), (g) prohibit,
with certain exceptions, restrictions on the ability of any Subsidiary (as
defined) to pay dividends, make certain other distributions, pay indebtedness
owed to the Company or another Subsidiary, make loans or advances to the Company
or another Subsidiary or transfer any of its assets to the Company, (h) require
the Company to repurchase the 9 7/8% Notes, the 10 7/8% Notes, the 12 3/4% Notes
and the 10 7/8% Series C Notes at a premium upon the occurrence of a Change of
Control (as defined) if so requested by the holder thereof, (i) in the case of
the 12 3/4% Note Indenture prohibit, with certain exceptions, the incurrence of
indebtedness that is both subordinated to Senior Indebtedness (as defined) and
senior to the 12 3/4% Notes, and (j) in the case of the 10 7/8% Series C Note
Indenture and the Indenture, impose certain requirements with respect to
Unrestricted Subsidiaries (as defined).
    
 
     The declaration and payment of dividends by the Company and KAC on their
shares of common stock are currently subject to certain covenants contained in
the Credit Agreement and, in the case of the Company, the Indenture, the 9 7/8%
Note Indenture, and the 12 3/4% Note Indenture. Under the Credit Agreement,
neither the Company nor KAC is currently permitted to pay dividends on its
common stock.
 
     In December 1991, Alpart entered into a $60 million 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. Proceeds from the sale of the bonds were used by Alpart to refinance the
interim loans from the partners in Alpart, to pay eligible project costs for
expansion and modernization of its refinery and to pay certain costs of
issuance. Alpart's obligations under the loan agreement are secured by a $64.2
million letter of credit severally guaranteed by the partners in Alpart (of
which $22.5 million is guaranteed by the minority partner in Alpart). See Note 4
of the Notes to Consolidated Financial Statements of the Company.
 
     In December 1992, the Company entered into the Sale Agreement with the
Louisiana Parish. To fund the acquisition of the facilities, the Louisiana
Parish issued $20.0 million aggregate principal amount of the Gramercy Bonds,
the proceeds of which were deposited into a construction fund established under
the related indenture and which may be withdrawn from the construction fund,
from time to time, pursuant to the terms of such indenture and the related Sale
Agreement. The Sale Agreement requires the Company to pay the purchase price of
the facilities in installments due on the dates and in the amounts required to
permit the Louisiana Parish to satisfy all of its payment obligations under the
related indenture.
 
     In connection with the offering of the PRIDES in February 1994, KAC made a
non-interest bearing loan to the Company in the principal amount of $33.2
million (an amount equal to the aggregate dividends scheduled to accrue on the
PRIDES issued in February 1994 from the issuance date until the date on which
the PRIDES mandatorily convert into shares of KAC Common Stock). The loan is
evidenced by an intercompany note which matures on December 31, 1997, and is
payable in quarterly installments. As of September 30, 1996, the aggregate
principal amount of such intercompany note was $10.7 million.
 
     See "Risk Factors -- Leverage."
 
                                       78
   79
 
                            DESCRIPTION OF NEW NOTES
GENERAL
 
   
     The New Notes will be issued under the Indenture, among the Company, as
issuer, Kaiser Alumina Australia Corporation ("KAAC"), Kaiser Finance
Corporation ("KFC"), Alpart Jamaica Inc. ("AJI"), Kaiser Jamaica Corporation
("KJC"), Kaiser Micromill Holdings, LLC ("KMH"), Kaiser Sierra Micromills, LLC
("KSM"), Kaiser Texas Micromill Holdings, LLC ("KTMH") and Kaiser Texas Sierra
Micromills, LLC ("KTSM"), as Subsidiary Guarantors, and First Trust National
Association, as Trustee (the "Trustee"). Except as otherwise indicated below,
the following summary applies to both the Old Notes and the New Notes. As used
herein, the term "Notes" shall mean the Old Notes and the New Notes unless
otherwise indicated.
    
 
     The form and terms of the New Notes are substantially identical to the form
and terms of the Old Notes, except that the New Notes (i) will be registered
under the Securities Act, (ii) will not provide for payment of Additional
Interest, which, except in certain limited circumstances, terminates upon
consummation of the Exchange Offer, and (iii) will not bear any legends
restricting transfer thereof. The New Notes will be issued solely in exchange
for an equal principal amount of Old Notes. As of the date hereof, $175.0
million aggregate principal amount of Old Notes is outstanding. See "The
Exchange Offer."
 
     The following statements relating to the Notes, the Indenture and the
Registration Rights Agreement are summaries of certain provisions thereof and
are subject to the detailed provisions of the Indenture and the Registration
Rights Agreement, which documents have been filed as exhibits to this
Registration Statement, to which reference is hereby made for a complete
statement of such provisions. Wherever particular provisions of the Indenture or
terms defined therein are referred to herein, such provisions or definitions are
incorporated by reference and the summaries are qualified in their entirety by
such reference. Capitalized terms used without definition have the respective
meanings ascribed to them in the Indenture, certain of which are described below
under "Certain Definitions." All parenthetical section references are to
sections of the Indenture.
 
     The maximum aggregate principal amount of the New Notes which may be issued
under the Indenture is limited to $175,000,000. The Notes will mature on October
15, 2006, and will bear interest at the rate of 10 7/8% per annum from October
23, 1996, payable semi-annually on April 15 and October 15 of each year to the
persons in whose names the Notes are registered at the close of business on the
April 1 immediately preceding each April 15, or the October 1 immediately
preceding each October 15. Principal of, premium, if any, Change of Control
Purchase Price, Asset Sale Purchase Price and interest on the Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York, except that, at the option of the
Company, payment of interest on the Notes may be made by check, mailed by
first-class mail to the address of the person entitled thereto at such address
as shall appear on the registry books of the Company; provided that all payments
with respect to Global Notes and Certificated Notes the holders of which have
given wire transfer instructions (which instructions must be received by the
Company at least 5 business days prior to the relevant date of payment) to the
Company will be required to be made by wire transfer of immediately available
funds to the accounts specified by the holders thereof; provided, further, that,
in the case of all payments other than interest, the holder of a Note must first
surrender such Note as a condition to the holder's right to receive payment. The
Notes may be presented for registration of transfer or exchange, redemption or
purchase at any such office or agency, as provided in the Indenture. The Notes
will be issued only in fully registered form in denominations of $1,000 and
integral multiples thereof.
 
   
     The Notes will rank senior in right and priority of payment to all
Indebtedness of the Company that by its terms is expressly subordinated to the
Notes, including the 12 3/4% Notes. The Notes will rank pari passu in right and
priority of payment with all senior Indebtedness, including Indebtedness under
the Credit Agreement, the 9 7/8% Notes, and the 10 7/8% Series C Notes. The
Company and the Subsidiary Guarantors may incur additional Indebtedness to the
extent permitted by the Indenture. Holders of secured obligations of the Company
and the Subsidiary Guarantors, including the financial institutions party to the
Credit Agreement, will, however, have claims which are prior to the claims of
the holders of the Notes with respect to the assets securing such other
obligations.
    
 
                                       79
   80
 
     The Company will treat the Notes as debt for Federal income tax purposes.
 
     The obligations of the Company under the Notes will be guaranteed, jointly
and severally, by each Subsidiary Guarantor. See "-- The Guarantees." Under
certain circumstances, the Company will be able to designate current or future
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be
deemed to be "Subsidiaries" for purposes of the Indenture and will not be
subject to many of the restrictive covenants set forth in the Indenture. As of
the date hereof, the Company has no Unrestricted Subsidiaries.
 
OPTIONAL REDEMPTION
 
     The Company may not redeem the Notes before October 15, 2001. On or after
October 15, 2001, the Notes will be redeemable on at least 15 and not more than
60 days notice, at the option of the Company, in whole at any time or in part
from time to time, at the following redemption prices (expressed as a percentage
of principal amount) together with accrued and unpaid interest to but excluding
the date fixed for redemption, if redeemed during the 12-month period beginning
October 15, of the years indicated below:
 


                                                                     REDEMPTION
        YEAR                                                           PRICE
        -----------------------------------------------------------  ----------
                                                                   
        2001.......................................................   105.437%
        2002.......................................................   103.625%
        2003.......................................................   101.813%
        2004 and thereafter........................................   100.000%

 
(Sections 3.01 and 3.02).
 
OFFER TO PURCHASE THE NOTES
 
     If any Change of Control of the Company occurs on or prior to maturity, the
Company shall make an offer to purchase from each holder, subject to the terms
and conditions of the Indenture, all or any part (equal to $1,000 or an integral
multiple thereof) of the holder's Notes on the date that is 30 Business Days
after the occurrence of such Change of Control (the "Change of Control Purchase
Date") at a purchase price in cash equal to 101% of the principal amount thereof
plus accrued and unpaid interest to (but not including) the Change of Control
Purchase Date (the "Change of Control Purchase Price"). (Section 3.05). The
Change of Control purchase feature of the Notes may in certain circumstances
make more difficult or discourage a takeover of the Company and, thus, the
removal of incumbent management.
 
     In addition, the Indenture requires the Company to make an offer to
purchase specified portions of the Notes, under certain circumstances, if the
Company has available Net Cash Proceeds as a result of Asset Sales. See
"-- Covenants -- Limitation on Asset Sales."
 
     The Company will comply with all applicable federal securities laws
(including Rule 14e-1 promulgated under the Exchange Act) in connection with any
repurchase of Notes upon a Change of Control or in the event of certain Asset
Sales.
 
   
     The Credit Agreement (i) prohibits redemptions or repurchases of the Notes,
including, without limitation, purchases of Notes that might otherwise be
required pursuant to the provisions of the Indenture, (ii) prohibits, without
the written consent of the Required Lenders (as defined in the Credit
Agreement), amendments or supplements to the Indenture and (iii) prohibits, with
certain exceptions, the taking of action, or permitting to exist any condition,
which would require (a) any Subsidiary of the Company (other than the initial
Subsidiary Guarantors under the Indenture) to guarantee the Notes or (b) the
Company or any of its Subsidiaries to provide collateral in respect of the
Notes. The existence of circumstances requiring the making of an offer to
repurchase the Notes under the Indenture upon a Change of Control or Asset Sale
would constitute an event of default under the Credit Agreement, with the result
that the obligations of the Company thereunder could be declared due and
payable. See "Risk Factors -- Ranking of the Notes; Subordination." Finally, the
Company's ability to pay cash to the holders of Notes upon a Change of Control
or Asset Sale may be limited by the Company's then existing financial resources.
    
 
                                       80
   81
 
THE GUARANTEES
 
   
     The obligations of the Company under the Notes are fully and
unconditionally guaranteed, jointly and severally, by each of the Subsidiary
Guarantors, who will be KAAC, KFC, AJI, KJC, KMH, KSM, KTMH and KTSM and such
other persons that become Subsidiary Guarantors as described under
"-- Covenants -- Subsidiary Guarantees, Etc." and each of their respective
successors. (Section 15.01). Each of the initial Subsidiary Guarantors is a
guarantor under the 9 7/8% Note Indenture, the 10 7/8% Series C Note Indenture
and the 12 3/4% Note Indenture and, together with certain other Subsidiaries of
the Company and KAC, a guarantor of the Company's obligations under the Credit
Agreement. See "Risk Factors -- Ranking of the Notes; Subordination."
    
 
   
     The Guarantee issued by each Subsidiary Guarantor will rank senior in right
and priority of payment to all Indebtedness of such Subsidiary Guarantor that by
its terms is expressly subordinated to the Notes, including the guarantee of the
12 3/4% Notes issued by such Subsidiary Guarantor, and will rank pari passu in
right and priority of payment with all senior Indebtedness of such Subsidiary
Guarantor, including the guarantees of the Credit Agreement and the 9 7/8%
Notes, and the 10 7/8% Series C Notes by such Subsidiary Guarantor.
    
 
   
     If, at any time, any Subsidiary Guarantor ceases to be a guarantor of the
Indebtedness with respect to the Credit Agreement, the 9 7/8% Notes, the 10 7/8%
Series C Notes and the 12 3/4% Notes and no Event of Default (or event or
condition which with the giving of notice or the passage of time would be an
Event of Default) then exists and is continuing, and either (x) such Subsidiary
Guarantor has not Incurred any Indebtedness or preferred stock (including
preference stock) after the date of the Indenture that is then outstanding,
other than Indebtedness Incurred pursuant to the first full paragraph under
"-- Covenants -- Limitation on Indebtedness and Preferred Stock" (but only to
the extent such Indebtedness is also Indebtedness of Alpart), clauses (iii) and
(iv) of the second full paragraph under "-- Covenants -- Limitation on
Indebtedness and Preferred Stock" and, in each case, permitted refinancings
thereof or (y) the Notes are then rated Baa3 (or the equivalent) or better by
Moody's Investors Service, Inc. (or a successor corporation) or BBB- (or the
equivalent) or better by Standard & Poor's Corporation (or a successor
corporation), then such Person shall cease to be a Subsidiary Guarantor under
the Indenture upon the delivery of an Officers' Certificate and Opinion of
Counsel to such effect. Thereafter, the Guarantee given by such Subsidiary
Guarantor shall no longer have any force or effect and such Person shall be
relieved of all of its obligations and duties under the Indenture and the Notes.
    
 
   
     Upon the sale or disposition (by merger or otherwise) of a Subsidiary
Guarantor (or the Company's or a Subsidiary's interest therein) by the Company
or a Subsidiary of the Company to a Person that is not a Subsidiary of the
Company and which sale or disposition is otherwise in compliance with the terms
of the Indenture, the obligations of such Subsidiary Guarantor under its
Guarantee shall be deemed released without any further action required on the
part of the Trustee, such Subsidiary Guarantor, the Company or any holder of the
Notes, provided that any guarantee of such Subsidiary Guarantor with respect to
the Credit Agreement, the 9 7/8% Notes, the 10 7/8% Series C Note Indenture, the
10 7/8% Series C Notes and the 12 3/4% Notes, and any renewals, extensions,
refundings, replacements, restructurings or refinancings, amendments and
modifications thereof, if any, has been or is simultaneously released.
    
 
   
     Upon the designation by the Board of Directors of the Company of a
Subsidiary Guarantor as an Unrestricted Subsidiary in compliance with the terms
of the Indenture, the obligations of such Subsidiary Guarantor under its
Guarantee shall be deemed released without any further action required on the
part of the Trustee, such Subsidiary Guarantor, the Company or any holder of the
Notes; provided, however, that any guarantee of such Subsidiary Guarantor with
respect to the Credit Agreement, the 9 7/8% Notes, the 10 7/8% Series C Notes
and the 12 3/4% Notes, and any renewals, extensions, refundings, replacements,
restructurings or refinancings, amendments and modifications thereof, if any,
has been or is simultaneously released.
    
 
     At the request of the Company, the Trustee shall execute and deliver an
appropriate instrument evidencing any such release. Upon the release of any
Subsidiary Guarantor from its Guarantee pursuant to the provisions of the
Indenture, each other Subsidiary Guarantor not so released shall remain liable
for the full amount of principal of, and interest on, the Notes as and to the
extent provided in the Indenture.
 
                                       81
   82
 
COVENANTS
 
     Limitation on Indebtedness and Preferred Stock
 
   
     The Indenture provides that the Company shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or become liable with respect to, or extend the maturity of or become
liable for the payment of, contingently or otherwise (collectively, "Incur"),
any preferred stock (including preference stock) or Indebtedness, except that,
without duplication, the Company, the Subsidiary Guarantors and Alpart may Incur
preferred stock (including preference stock) or Indebtedness (including, without
duplication, guarantees of Indebtedness of the Company and its Subsidiaries
otherwise permitted by the Indenture) if after giving effect thereto and the
receipt and application of the proceeds therefrom, and assuming that the full
amount of Indebtedness permitted to be Incurred under clause (ii) of the next
succeeding paragraph (after taking into account any reduction in such amount as
set forth in such clause (ii)) has been Incurred (assuming, for purposes of this
calculation, an interest rate on such additional Indebtedness equal to the
weighted average interest rate on the Indebtedness then outstanding under such
clause (ii)), the Consolidated Fixed Charge Coverage Ratio of the Company is
greater than 2.0 to 1; provided, however, that Indebtedness of Alpart Incurred
pursuant to this paragraph shall not exceed an aggregate of $150,000,000 at any
one time outstanding, plus an amount equal to the reasonable fees and expenses
in connection with the Incurrence of such Indebtedness. (Section 4.10(a)).
    
 
     Notwithstanding the foregoing, the following shall be permitted:
 
   
          (i) the Company and the Subsidiary Guarantors may Incur Indebtedness
     in respect of the Notes;
    
 
   
          (ii) the Company and the Subsidiary Guarantors may Incur Indebtedness
     (without duplication), and the Bank Subsidiary Guarantors may guarantee
     such Indebtedness, under the Credit Agreement, in connection with
     Refinancing Sale and Leaseback Transactions or otherwise, in an aggregate
     amount at any one time outstanding not to exceed $400,000,000, as reduced
     from time to time by any permanent reduction in such amount as set forth in
     a Board Resolution;
    
 
          (iii)(A) Alpart may Incur Indebtedness in an aggregate amount not to
     exceed $150,000,000 at any one time outstanding and (B) the Company, KJC
     and AJI (without duplication) may Incur Indebtedness in an aggregate amount
     not to exceed at any one time outstanding the product of (I) $150,000,000
     multiplied by (II) the Company's then percentage ownership interest in
     Alpart; provided, however, that the aggregate Indebtedness (without
     duplication) Incurred pursuant to clauses (A) and (B) of this clause (iii)
     may not exceed $150,000,000 at any one time outstanding; and provided,
     further, that in each case the proceeds of such Indebtedness are used
     solely for capital improvements and expenditures, expansion and working
     capital with respect to Alpart and/or to reimburse the partners of Alpart
     for advances to Alpart used solely for capital improvements and
     expenditures, expansion and working capital with respect to Alpart, plus in
     each case an amount equal to the reasonable fees and expenses in connection
     with the Incurrence of such Indebtedness;
 
          (iv) the Company and/or KAAC may Incur Indebtedness in an amount not
     to exceed $75,000,000 at any one time outstanding, the proceeds of which
     are used solely for capital improvements and expenditures, expansion and
     working capital with respect to QAL and/or to reimburse the stockholders of
     QAL for advances to QAL used solely for capital improvements and
     expenditures, expansion and working capital with respect to QAL, plus an
     amount equal to the reasonable fees and expenses in connection with the
     Incurrence of such Indebtedness;
 
          (v) VALCO may Incur Indebtedness, and the Company may guarantee such
     Indebtedness, in an aggregate amount (without duplication) not to exceed
     $25,000,000 at any one time outstanding, the proceeds of which are used
     solely for capital improvements and expenditures, expansion and working
     capital with respect to VALCO and/or to reimburse the shareholders of VALCO
     for advances to VALCO used solely for capital improvements and
     expenditures, expansion and working capital, plus an amount equal to the
     reasonable fees and expenses in connection with the Incurrence of such
     Indebtedness;
 
                                       82
   83
 
          (vi) the Company and its Subsidiaries may Incur Indebtedness
     ("Refinancing Indebtedness") that serves to Refinance, in whole or in part,
     the Indebtedness permitted by this paragraph and the immediately preceding
     full paragraph (the "Refinanced Indebtedness"), or any one or more
     successive Refinancings of any thereof; provided, however, that:
 
             (A) such Refinancing Indebtedness is in an aggregate amount not to
        exceed the aggregate amount of such Refinanced Indebtedness (including
        accrued interest thereon and undrawn amounts under credit arrangements
        otherwise permitted to be Incurred pursuant to the Indenture), the
        amount of any premium required to be paid in connection with such
        Refinancing pursuant to the terms of such Refinanced Indebtedness or the
        amount of any reasonable and customary premium determined by the Company
        to be necessary to accomplish such Refinancing by means of a redemption,
        tender offer, privately negotiated transaction, defeasance or other
        similar transaction, and an amount equal to the reasonable fees and
        expenses in connection with the Incurrence of such Refinancing
        Indebtedness;
 
             (B) neither the Company nor any of its Subsidiaries is an obligor
        of such Refinancing Indebtedness, except to the extent that such Person
        (I) was an obligor of such Refinanced Indebtedness or (II) is otherwise
        permitted, at the time such Refinancing Indebtedness is Incurred, to be
        an obligor of such Refinancing Indebtedness; and
 
             (C) in the case of any Refinanced Indebtedness that is subordinated
        (pursuant to its terms) in right and priority of payment to the Notes or
        any Subsidiary Guarantor's obligation under its Guarantee, as the case
        may be, such Refinancing Indebtedness (I) has a final maturity and
        weighted average maturity at least as long as such Refinanced
        Indebtedness and (II) is subordinated (pursuant to its terms) in right
        and priority of payment to the Notes or such Subsidiary Guarantor's
        obligation under its Guarantee, as the case may be, at least to the same
        extent as such Refinanced Indebtedness;
 
          (vii) the Company may Incur Capitalized Lease Obligations not
     exceeding $50,000,000 at any one time outstanding in connection with the
     sale and leaseback of all or a portion of the Company's interest in the
     Center for Technology, provided that the Net Cash Proceeds therefrom are
     applied as described under "-- Limitation on Asset Sales";
 
          (viii) the Company and its Subsidiaries may Incur Indebtedness,
     without duplication, the proceeds of which are used, directly or
     indirectly, (A) to finance the construction, acquisition and/or
     retrofitting of (I) a bauxite mine or mines and/or related facilities, (II)
     an alumina refinery or refineries, and/or related facilities, (III) an
     aluminum smelter or smelters and/or related facilities, and/or (IV) a
     fabrication plant or plants and/or related facilities (and, in each case,
     any direct or indirect interests therein; collectively, the "Facilities")
     and the reasonable fees and expenses in connection with the Incurrence of
     such Indebtedness, in an aggregate amount not to exceed $150,000,000 in any
     fiscal year (without cumulation of unused amounts to successive years);
     provided, however, that the aggregate amount of Indebtedness Incurred
     pursuant to subclause (A)(IV) of this clause (viii) shall not exceed
     $75,000,000 in any fiscal year (without cumulation of unused amounts to
     successive years), (B) to Refinance, in whole or in part, any Indebtedness
     permitted by this clause (viii) (including Indebtedness owed to the Company
     or a Subsidiary of the Company), or any one or more successive Refinancings
     of any thereof, provided, however, that such Refinancing Indebtedness is in
     an aggregate amount not to exceed the aggregate amount of such Refinanced
     Indebtedness, the amount of any premium required to be paid in connection
     with such Refinancing pursuant to the terms of such Refinanced Indebtedness
     or the amount of any reasonable and customary premium determined by the
     Company to be necessary to accomplish such Refinancing by means of a
     redemption, tender offer, privately negotiated transaction, defeasance, or
     other similar transaction, and an amount equal to the reasonable fees and
     expenses in connection with the Incurrence of such Refinancing Indebtedness
     and/or (C) to provide working capital in connection with or in respect of
     any of the Facilities and the reasonable fees and expenses in connection
     with the Incurrence of such Indebtedness, provided that (x) the amount of
     such Indebtedness that may be Incurred pursuant to this subclause (C) shall
     not exceed $40,000,000 in any fiscal year
 
                                       83
   84
 
     (without cumulation of unused amounts to successive years), and provided,
     further, that the aggregate amount of any Indebtedness Incurred pursuant to
     subclauses (A) and (C) of this clause (viii) shall not exceed $150,000,000
     in any fiscal year (without cumulation of unused amounts to successive
     years), and (y) for purposes of computing the amount of Indebtedness
     Incurred pursuant to this clause (viii) at any time in any fiscal year, the
     amount of Indebtedness Incurred by any Subsidiary of the Company pursuant
     to this clause (viii) under lines of credit and/or revolving credit
     agreements in such fiscal year to such time shall not be deemed to exceed
     the amount of the net borrowings (i.e., aggregate borrowings during such
     fiscal year less aggregate repayments during such fiscal year) by such
     Subsidiary under lines of credit and/or revolving credit agreements to such
     time;
 
          (ix) [intentionally omitted];
 
          (x) the Company and its Subsidiaries may Incur preferred stock
     (including preference stock) that is not Redeemable Stock; provided,
     however, that in the case of preferred stock (including preference stock)
     Incurred by any Subsidiary of the Company that is not a Subsidiary
     Guarantor, such preferred stock shall be issued pro rata to the holders of
     Capital Stock of such Subsidiary;
 
          (xi) the Company and its Subsidiaries may Incur preferred stock and
     preference stock (including preferred stock and preference stock that is
     Redeemable Stock), provided that such preferred stock or preference stock
     is issued to the Company, any of its Subsidiaries or pro rata to the
     holders of Capital Stock of any such Subsidiary;
 
          (xii) the Company and its Subsidiaries may Incur Permitted
     Indebtedness; and
 
   
          (xiii) the Company and its Subsidiaries may Incur Indebtedness in an
     amount at any one time outstanding not to exceed $75,000,000, provided that
     the amount of such Indebtedness that may be Incurred by Subsidiaries of the
     Company (other than Subsidiary Guarantors that are not Permitted Entities)
     shall not exceed $50,000,000 at any one time outstanding, and provided,
     further, that, to the extent any such Indebtedness is Incurred from a Bank
     or an affiliate thereof, the Bank Subsidiary Guarantors may guarantee such
     Indebtedness. (Section 4.10(b)).
    
 
     Notwithstanding the foregoing, no Subsidiary of the Company shall assume,
guarantee or in any other manner become liable with respect to any Indebtedness
of the Company or a Subsidiary Guarantor (other than such Subsidiary) ("Other
Indebtedness") which is subordinated (pursuant to its terms) in right and
priority of payment to any other Indebtedness of the Company or such Subsidiary
Guarantor, unless such Subsidiary also assumes, guarantees or otherwise becomes
liable with respect to the Notes on a substantially similar basis for so long as
such Subsidiary is liable with respect to such Other Indebtedness; provided,
however, that if such Other Indebtedness is subordinated (pursuant to its terms)
in right and priority of payment to the Notes or any Subsidiary Guarantor's
obligation under its Guarantee, as the case may be, any such assumption,
guarantee or other liability of such Subsidiary with respect to such Other
Indebtedness shall be subordinated to such Subsidiary's assumption, guarantee or
other liability with respect to the Notes to the same extent as such
subordinated Indebtedness is subordinated to the Notes or such Subsidiary
Guarantor's obligation under its Guarantee, as the case may be; and provided,
further, that this paragraph shall not be applicable to any assumption,
guarantee or other liability of any Subsidiary of the Company which existed at
the time such Person became a Subsidiary of the Company and was not Incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary of
the Company, or any Refinancing Indebtedness in connection therewith complying
with clause (vi) of the immediately preceding full paragraph (provided, that the
guarantee of such Refinancing Indebtedness is on substantially the same terms as
the guarantee of the Refinanced Indebtedness).
 
     The Board of Directors may designate an Unrestricted Subsidiary to be a
Subsidiary, provided that certain conditions specified in the definition of
"Unrestricted Subsidiary" are met. Any such redesignation shall be deemed to be
an Incurrence by the Company or its Subsidiaries of the Indebtedness (if any) of
such redesignated Subsidiary, to the extent that such Indebtedness does not
already constitute Indebtedness of the Company or one of its Subsidiaries, for
purposes of this covenant as of the date of such redesignation.
 
                                       84
   85
 
     Limitations on Restricted Payments, Restricted Investments and Unrestricted
Subsidiary Investments
 
     The Indenture provides that the Company shall not, directly or indirectly,
(i) declare or pay any dividend or make any distribution in respect of its
Capital Stock (other than dividends payable in Capital Stock of the Company
other than Redeemable Stock), (ii) make or permit any of its Subsidiaries to
make any payment on account of the purchase, redemption or other acquisition or
retirement of any Capital Stock of the Company other than through the issuance
solely of Capital Stock of the Company (other than Redeemable Stock) or rights
thereto, provided that any Subsidiary of the Company may purchase Capital Stock
of the Company from the Company or from any other Subsidiary of the Company
(which purchase shall not be a Restricted Payment or a Restricted Investment),
(iii) make or permit any of its Subsidiaries to make any voluntary purchase,
redemption or other acquisition or retirement for value of any Indebtedness that
is subordinated (pursuant to its terms) in right and priority of payment to the
Notes or any Subsidiary Guarantor's obligations under its Guarantee, as the case
may be, other than purchases, redemptions or other acquisitions or retirements
of Permitted Indebtedness described in clause (b) of the definition thereof or
purchases, redemptions or other acquisitions otherwise permitted by the terms of
the Indenture (each of the foregoing in clauses (i), (ii) and (iii), a
"Restricted Payment"), (iv) to the extent the Company or its Subsidiaries
exercise actual control over a Non-Affiliate Joint Venture existing on the date
of the Indenture or formed or acquired after the date of the Indenture (each a
"Controlled Non-Affiliate Joint Venture"), permit such Controlled Non-Affiliate
Joint Venture to make any Restricted Investment, (v) make or permit any of its
Subsidiaries to make any Restricted Investment or (vi) make or permit any of its
Subsidiaries to make any Unrestricted Subsidiary Investment, unless at the time
of, and after giving effect to, each such Restricted Payment, Restricted
Investment or Unrestricted Subsidiary Investment:
 
     (A) no Event of Default (and no event that, after notice or lapse of time
or both, would become an Event of Default) shall have occurred and be continuing
(or would occur and be continuing after giving effect thereto); and
 
     (B) the Consolidated Fixed Charge Coverage Ratio of the Company is greater
than 2.0 to 1; and
 
     (C) the sum of:
 
          (x) the aggregate amount expended for all Restricted Payments after
     December 31, 1992,
 
          (y) the aggregate amount expended for all Restricted Investments after
     the date of the 9 7/8% Note Indenture (less the amount of (1) such
     Restricted Investments returned in cash, or in property if made in
     property, (2) any guarantee that constitutes a Restricted Investment, to
     the extent it has been released, and (3) any direct liabilities or
     obligations to be assumed or discharged in connection with such Restricted
     Investments (in either case without recourse to the Company, any of its
     Subsidiaries or any Controlled Non-Affiliate Joint Venture) if such
     liability or obligation had been a liability or obligation of the Company,
     any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture), and
 
          (z) the aggregate amount of Unrestricted Subsidiary Investments
     Outstanding
 
(in each case, the amount expended for such Restricted Payments, Restricted
Investments and Unrestricted Subsidiary Investments or the amount of any
Restricted Investments returned, if paid or returned in property other than in
cash or a sum certain guaranteed, to be the Fair Market Value of such property),
would not exceed the sum of:
 
          (I) 50% of the Consolidated Net Income of the Company (or, if the
     aggregate Consolidated Net Income of the Company for any such period shall
     be a deficit, minus 100% of such deficit) accrued on a cumulative basis for
     the period (taken as one accounting period) from January 1, 1993 to the end
     of the Company's most recently ended fiscal quarter for which financial
     statements are available at the time such Restricted Payment, Restricted
     Investment or Unrestricted Subsidiary Investment is being made, and
 
          (II) the aggregate net proceeds, including the Fair Market Value of
     property other than cash, received by the Company as capital contributions
     to the Company after December 31, 1992, or from the
 
                                       85
   86
 
     issue or sale (other than to a Non-Affiliate Joint Venture or to a
     Subsidiary or an Unrestricted Subsidiary of the Company), after December
     31, 1992, of Capital Stock other than Redeemable Stock (including Capital
     Stock, other than Redeemable Stock, issued upon the conversion of, or in
     exchange for, indebtedness or Redeemable Stock, and including upon exercise
     of warrants or options or other rights to purchase such Capital Stock,
     issued after December 31, 1992), or from the issue or sale, after December
     31, 1992 of any debt or other security of the Company convertible or
     exercisable into such Capital Stock that has been so converted or
     exercised, and
 
          (III) 50% of any dividends or other distributions consisting of cash
     or Cash Equivalents received, directly or indirectly, by the Company or a
     Subsidiary of the Company that is a Subsidiary Guarantor after the date of
     the Indenture from any Unrestricted Subsidiary to the extent that such
     dividends or other distributions are not required to reduce the amount of
     the Unrestricted Subsidiary Investments Outstanding in respect of such
     Unrestricted Subsidiary to zero;
 
     provided, however, that in no event shall the Company make, or permit any
     of its Subsidiaries to make, a Restricted Payment, Restricted Investment or
     Unrestricted Subsidiary Investment pursuant to this paragraph to or in
     MAXXAM or any Affiliate of MAXXAM if, after giving effect thereto, (A) the
     aggregate amount of all Restricted Payments, Restricted Investments (less
     the amount of (1) such Restricted Investments returned in cash, or in
     property if made in property, (2) any guarantee that constitutes a
     Restricted Investment, to the extent it has been released, and (3) any
     direct liabilities or obligations to be assumed or discharged in connection
     with such Restricted Investments (in either case without recourse to the
     Company, any of its Subsidiaries or any Controlled Non-Affiliate Joint
     Venture) if such liability or obligation had been a liability or obligation
     of the Company, any of its Subsidiaries or any Controlled Non-Affiliate
     Joint Venture) and Unrestricted Subsidiary Investments Outstanding made
     pursuant to this paragraph in any calendar year to or in MAXXAM or any
     Affiliate of MAXXAM, less (B) the aggregate amount of such Restricted
     Payments and Restricted Investments made to or in KAC in such calendar year
     which are distributed or paid within thirty days thereafter by KAC to its
     holders of common stock other than MAXXAM and any Affiliate of MAXXAM,
     would exceed (C) $75,000,000; and provided, further, that notwithstanding
     the foregoing, the Company may make any such Restricted Payment, Restricted
     Investment or Unrestricted Subsidiary Investment to or in MAXXAM or any
     Affiliate of MAXXAM if, after giving pro forma effect thereto, the
     Company's senior debt rating would be Baa3 (or the equivalent) or better by
     Moody's Investors Service, Inc. (or a successor rating agency) or BBB- (or
     the equivalent) or better by Standard & Poor's Corporation (or a successor
     rating agency). (Section 4.09(a)).
 
          The foregoing provisions shall not be violated by reason of:
 
          (I) the payment of any dividend or distribution or the redemption of
     any securities within 60 days after the date of declaration of such
     dividend or distribution or the giving of the formal notice by the Company
     of such redemption, if at said date of declaration of such dividend or
     distribution or the giving of the formal notice of such redemption, such
     dividend, distribution or redemption would have complied with the preceding
     full paragraph;
 
          (II) the retirement of any shares of the Company's Capital Stock by
     exchange for, or out of the proceeds of, the substantially concurrent sale
     (other than to a Non-Affiliate Joint Venture or to a Subsidiary or an
     Unrestricted Subsidiary of the Company) of other shares of its Capital
     Stock other than Redeemable Stock or out of the proceeds of a substantially
     concurrent capital contribution to the Company, provided, however, that, to
     the extent the proceeds are so used, a sale of Capital Stock or capital
     contribution permitted by this clause (II) shall be excluded in determining
     the aggregate net proceeds received by the Company referred to under clause
     (II) of the preceding full paragraph;
 
          (III) the payments provided for by clauses (ii), (iii), (iv) and (v)
     and the transactions described in clauses (vi), (vii), (viii) and (ix) (so
     long as, in the case of clause (ix), immediately following such
     transaction, the Consolidated Net Worth of the entity that survives such
     transaction is not materially lower than the Consolidated Net Worth of the
     Company immediately prior to such transaction) of the second paragraph
     under " -- Restrictions on Transactions with Affiliates and Unrestricted
     Subsidiaries";
 
                                       86
   87
 
          (IV) the voluntary purchase, redemption or other acquisition or
     retirement for value of Indebtedness that is subordinated (pursuant to its
     terms) in right and priority of payment to the Notes or any Subsidiary
     Guarantor's obligation under its Guarantee, as the case may be, to the
     extent that the aggregate amount expended (exclusive of amounts expended
     pursuant to clauses (V) and (VIII) of this paragraph) for all such
     voluntary purchases, redemptions or other acquisitions or retirements after
     the date of the 9 7/8% Note Indenture (the amount expended for such
     purchases, redemptions or other acquisitions or retirements, if paid in
     property other than in cash or a sum certain guaranteed, to be the Fair
     Market Value of such property) does not exceed the aggregate net proceeds,
     including the Fair Market Value of property other than cash, received by
     the Company or any Subsidiary Guarantor from the issue or sale (other than
     an issuance or sale to the Company, a Non-Affiliate Joint Venture or a
     Subsidiary or Unrestricted Subsidiary of the Company), after the date of
     the 9 7/8% Note Indenture, of Indebtedness that is subordinated (pursuant
     to its terms) in right and priority of payment to the Notes or such
     Subsidiary Guarantor's obligation under its Guarantee, as the case may be,
     and that is otherwise permitted to be incurred pursuant to the Indenture,
     provided, that, to the extent the proceeds of Indebtedness so subordinated
     to the Notes or any Subsidiary Guarantor's obligation under its Guarantee,
     as the case may be, are so used, the net proceeds of issuance of any such
     Indebtedness upon conversion into Capital Stock shall not be included in
     determining the aggregate net proceeds received by the Company referred to
     under clause (II) of the preceding full paragraph;
 
          (V) the voluntary purchase, redemption or other acquisition or
     retirement for value of any Indebtedness that is subordinated (pursuant to
     its terms) in right and priority of payment to the Notes or any Subsidiary
     Guarantor's obligation under its Guarantee, as the case may be, by exchange
     for, or out of the proceeds of, the substantially concurrent sale (other
     than to a Non-Affiliate Joint Venture or to a Subsidiary or an Unrestricted
     Subsidiary of the Company) of Capital Stock (other than Redeemable Stock)
     of the Company, provided, however, that, to the extent the proceeds are so
     used, the issuance of Capital Stock as permitted by this clause (V) shall
     not be included in determining the aggregate net proceeds received by the
     Company referred to under clause (II) of the preceding full paragraph;
 
          (VI) the payment of dividends on, and the purchase, redemption,
     retirement or other acquisition of, USWA Preferred Stock or Preferred Stock
     ($100), provided that no such payment is made, directly or indirectly, to
     an Affiliate of the Company;
 
          (VII) the payment to KAC of an amount not to exceed $300,000 in any
     fiscal year for the payment of KAC's reasonable out-of-pocket expenses,
     provided that no part of such amount is paid directly or indirectly to any
     other Affiliate of the Company and that, at the time of each such payment,
     the Company is in compliance with clause (A) of the preceding full
     paragraph;
 
          (VIII) Restricted Payments, Restricted Investments and Unrestricted
     Subsidiary Investments after February 1, 1993, other than Restricted
     Payments, Restricted Investments and Unrestricted Subsidiary Investments
     permitted by the preceding full paragraph or clauses (I) through (VII) of
     this paragraph, in an aggregate amount such that the sum of:
 
             (x) the aggregate amount expended for all such Restricted Payments
        after February 1, 1993 made pursuant to this clause (VIII);
 
             (y) the aggregate amount of all Restricted Investments made after
        February 1, 1993 pursuant to this clause (VIII) (less the amount of (1)
        such Restricted Investments returned in cash, or in property if made in
        property, (2) any guarantee that constitutes a Restricted Investment, to
        the extent it has been released, and (3) any direct liabilities or
        obligations to be assumed or discharged in connection with such
        Restricted Investments (in either case without recourse to the Company,
        any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture)
        if such liability or obligation had been a liability or obligation of
        the Company, any of its Subsidiaries or any Controlled Non-Affiliate
        Joint Venture); and
 
             (z) the aggregate amount of Unrestricted Subsidiary Investments
        Outstanding made pursuant to this clause (VIII)
 
                                       87
   88
 
     (in each case, the amount expended for such Restricted Payments, Restricted
     Investments and Unrestricted Subsidiary Investments or the amount of any
     Restricted Investments returned, if paid or returned in property other than
     in cash or a sum certain guaranteed, to be the Fair Market Value of such
     property) would not exceed $50,000,000, provided that at the time of each
     such Restricted Payment, Restricted Investment or Unrestricted Subsidiary
     Investment made pursuant to this clause (VIII), no Event of Default (and no
     event that, after notice or lapse of time or both, would become an Event of
     Default) shall have occurred and be continuing (or would occur and be
     continuing after giving effect thereto); and provided, further, that in no
     event shall the Company make, or permit any of its Subsidiaries to make, a
     Restricted Payment, Restricted Investment or Unrestricted Subsidiary
     Investment pursuant to this clause (VIII) to or in MAXXAM or any Affiliate
     of MAXXAM if, after giving effect thereto, (A) the aggregate amount of all
     Restricted Payments, Restricted Investments (less the amount of (1) such
     Restricted Investments returned in cash, or in property if made in
     property, (2) any guarantee that constitutes a Restricted Investment, to
     the extent it has been released, and (3) any direct liabilities or
     obligations to be assumed or discharged in connection with such Restricted
     Investments (in either case without recourse to the Company, any of its
     Subsidiaries or any Controlled Non-Affiliate Joint Venture) if such
     liability or obligation had been a liability or obligation of the Company,
     any of its Subsidiaries or any Controlled Non-Affiliate Joint Venture) and
     Unrestricted Subsidiary Investments Outstanding made pursuant to this
     clause (VIII) to or in MAXXAM or any Affiliate of MAXXAM, less (B) the
     aggregate amount of such Restricted Payments and Restricted Investments
     made to or in KAC which are distributed or paid within thirty days
     thereafter by KAC to its holders of common stock other than MAXXAM and
     Affiliates of MAXXAM, would exceed (C) $20,000,000; and
 
          (IX) in the event that the Company merges with or into KAC and the
     Preferred Dividend Intercompany Notes are extinguished, the payment of
     dividends on shares of PRIDES and any other preferred stock of KAC the
     proceeds of which gave rise to a Preferred Dividend Intercompany Note, in
     an aggregate amount not to exceed the outstanding principal amount of such
     Preferred Dividend Intercompany Notes at the time of such merger.
 
No payments and other transfers made under clauses (II) through (VII) and (IX)
of this paragraph shall reduce the amount available for Restricted Payments,
Restricted Investments and Unrestricted Subsidiary Investments under the first
full paragraph of this Section entitled "Limitations on Restricted Payments,
Restricted Investments and Unrestricted Subsidiary Investments"; payments and
other transfers made under clauses (I) and (VIII) of this paragraph shall reduce
the amount available for Restricted Payments, Restricted Investments and
Unrestricted Subsidiary Investments under the first full paragraph of this
Section entitled "Limitations on Restricted Payments, Restricted Investments and
Unrestricted Subsidiary Investments." (Section 4.09(b)).
 
     The Board of Directors of the Company may designate any Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause an Event of Default
(or event that, after notice or lapse of time or both, would become an Event of
Default). For purposes of making such determination, all outstanding
Unrestricted Subsidiary Investments by the Company and its Subsidiaries in the
Unrestricted Subsidiary so designated will be deemed to be Unrestricted
Subsidiary Investments Outstanding at the time of such designation and will
reduce the amount available for Restricted Payments, Restricted Investments and
Unrestricted Subsidiary Investments under the first full paragraph of this
covenant. All such Unrestricted Subsidiary Investments Outstanding will be
deemed to have been made at the time of such designation and to be in an amount
equal to the greater of (A) the net book value of such Unrestricted Subsidiary
Investments at the time of such designation and (B) the Fair Market Value of
such Unrestricted Subsidiary Investments at the time of such designation. Such
designation will only be permitted if such Unrestricted Subsidiary Investment
would be permitted at such time and if such Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
 
     Restrictions on Transactions with Affiliates and Unrestricted Subsidiaries
 
     The Indenture provides that the Company shall not, and shall not permit any
of its Subsidiaries or its Non-Affiliate Joint Ventures to, enter into any
transaction or series of related transactions with any Affiliate or
 
                                       88
   89
 
Unrestricted Subsidiary of the Company, unless (i) the terms thereof are no less
favorable to the Company, such Subsidiary or such Non-Affiliate Joint Venture,
as the case may be, than those that could reasonably be expected to be obtained
in a comparable transaction with an unrelated Person, (ii) such transaction or
series of related transactions shall have been approved as meeting such
standard, in good faith, by a majority of the independent members of the Board
of Directors of the Company evidenced by a Board Resolution and (iii) if the
amount of such transaction or the aggregate amount of such series of related
transactions is greater than $10,000,000 (which amount shall be calculated
excluding the amount of Principal Products transferred to or from an
Unrestricted Subsidiary in accordance with the proviso at the end of this
paragraph), the Company, such Subsidiary and/or such Non-Affiliate Joint
Venture, as the case may be, shall have received an opinion that such
transaction or series of related transactions is fair to the Company, such
Subsidiary and/or such Non-Affiliate Joint Venture, as the case may be, from a
financial point of view, from an independent investment banking firm of national
standing selected by the Company, provided that, in the case of this clause
(iii), the Company, such Subsidiary and/or such Non-Affiliate Joint Venture
shall not be required to procure any such opinion to the extent that such
transaction involves the purchase or sale for cash of Principal Products from or
to an Unrestricted Subsidiary (which Principal Products are used by the
purchaser thereof in its operations in the ordinary course of business).
(Section 4.08(a)).
 
     The provisions contained in the preceding paragraph shall not apply to (i)
the making of any Restricted Payments, Restricted Investments and Unrestricted
Subsidiary Investments otherwise permitted under the caption "Limitations on
Restricted Payments, Restricted Investments and Unrestricted Subsidiary
Investments" (other than clause (IV) of the second paragraph thereunder), (ii)
the making of payments permitted by the Tax Sharing Agreements, (iii) the making
of payments to MAXXAM for reimbursement for actual services provided thereby to
the Company or its Subsidiaries or Non-Affiliate Joint Ventures based on actual
costs and an allocable share of overhead expenses, (iv) compensation (in the
form of reasonable director's fees and reimbursement or advancement of
reasonable out-of-pocket expenses) paid to any director of the Company or its
Subsidiaries or Non-Affiliate Joint Ventures for services rendered in such
person's capacity as a director and indemnification and directors' and officers'
liability insurance in connection therewith, (v) compensation, indemnification
and other benefits paid or made available to officers and employees of the
Company or its Subsidiaries or Non-Affiliate Joint Ventures for services
actually rendered, comparable to those generally paid or made available by
entities engaged in the same or similar businesses (including reimbursement or
advancement of reasonable out-of-pocket expenses and directors' and officers'
liability insurance), (vi) loans to officers, directors and employees of the
Company or its Subsidiaries for business or personal purposes and other loans
and advances to such officers, directors and employees for travel,
entertainment, moving and other relocation expenses, in each case made in the
ordinary course of business and consistent with past practices of the Company
and its Subsidiaries, (vii) any amendment to the Existing Intercompany Note that
extends the maturity thereof or reduces the interest rate thereon, or any other
amendment thereto that does not materially adversely affect the holders of the
Notes, (viii) the dividend by the Company of all or any portion of the Existing
Intercompany Note and accrued interest thereon, (ix) certain mergers,
consolidations, transfers or sales permitted by the provisions of the Indenture
described under "-- Merger or Consolidation" and (x) any amendment to the Tax
Sharing Agreements, provided that a majority of the independent members of the
Board of Directors of the Company evidenced by a Board Resolution determines
that such amendment would not materially adversely affect the holders of the
Notes. (Section 4.08(b)).
 
     Limitation on Liens
 
     The Indenture provides that the Company shall not, and shall not permit any
of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon
any of their respective U.S. Fixed Assets to secure, directly or indirectly, any
Indebtedness, unless the Notes are equally and ratably secured on a senior basis
for so long as such secured Indebtedness is so secured.
 
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     The Indenture provides that the foregoing provision shall not prohibit:
 
          (i) Liens on the Permitted Collateral securing outstanding
     Indebtedness permitted by the Indenture in an aggregate principal amount
     not to exceed the Maximum Secured Amount at the time such Indebtedness is
     Incurred;
 
          (ii) Liens in existence on the date of the Indenture after giving
     effect thereto which Liens, if such Liens secure a single or related items
     of Indebtedness in a principal amount in excess of $5,000,000, are set
     forth in a schedule to the Indenture;
 
          (iii) Liens in favor of the Company or any Subsidiary Guarantor;
 
          (iv) Liens on U.S. Fixed Assets of a person existing at the time such
     person is merged into or consolidated with the Company or any Subsidiary of
     the Company, provided, that such Liens were in existence prior to the
     contemplation of such merger or consolidation and do not extend to any
     other U.S. Fixed Assets (other than Improvements thereto or thereon and any
     proceeds thereof) of the Company or any Subsidiary of the Company;
 
          (v) Liens on U.S. Fixed Assets existing at the time of acquisition
     thereof by the Company or any Subsidiary of the Company, provided, that
     such Liens were in existence prior to the contemplation of such acquisition
     and do not extend to any other U.S. Fixed Assets (other than Improvements
     thereto or thereon and any proceeds thereof) of the Company or any
     Subsidiary of the Company;
 
          (vi) Liens securing Indebtedness permitted by clauses (vii) and (viii)
     of the second paragraph under "-- Limitation on Indebtedness and Preferred
     Stock", provided, that such Liens do not extend to any U.S. Fixed Assets
     other than the Center for Technology in the case of clause (vii) and the
     applicable Facility or Facilities in the case of clause (viii) and, in each
     case, together with any Improvements thereto or thereon and any proceeds
     thereof;
 
          (vii) Liens securing Indebtedness permitted by clause (e) of the
     definition of Permitted Indebtedness;
 
          (viii) Liens securing the Indebtedness permitted by clauses (iii),
     (iv) or (v) of the second paragraph under "-- Limitation on Indebtedness
     and Preferred Stock", provided that such Liens do not extend to any U.S.
     Fixed Assets other than (a) Permitted Collateral (in which case the
     principal amount of such Indebtedness shall be included in the calculation
     of the Maximum Secured Amount for purposes of clause (i) of this paragraph
     and such Liens shall only be permitted if the requirements of clause (i)
     are satisfied) and (b) the Capital Stock and assets of Alpart, KJC and AJI
     in the case of clause (iii), the Capital Stock and assets of KAAC in the
     case of clause (iv), and the Capital Stock and assets of VALCO in the case
     of clause (v), plus, in each case, the proceeds thereof;
 
          (ix) Liens securing Indebtedness consisting of Capitalized Lease
     Obligations, mortgage financings, industrial revenue bonds or other
     monetary obligations, in each case incurred for the purpose of financing
     all or any part of the purchase price or cost of construction or
     installation of U.S. Fixed Assets used in the business of the Company and
     its Subsidiaries, or repairs, additions or Improvements to such U.S. Fixed
     Assets, provided, that such Liens (a) secure Indebtedness in an amount not
     in excess of the original purchase price or the original cost of any such
     U.S. Fixed Assets or repair, addition or Improvement thereto (plus an
     amount equal to the reasonable fees and expenses in connection with the
     Incurrence of such Indebtedness), (b) do not extend to any other U.S. Fixed
     Assets (other than Improvements thereto or thereon and any proceeds
     thereof) of the Company or any Subsidiary of the Company (and, in the case
     of a repair, addition or Improvement, such Lien extends only to the U.S.
     Fixed Assets (and Improvements thereto or thereon) repaired, added to or
     improved), and (c) secure Indebtedness incurred no later than 180 days
     after the acquisition or final completion of such construction, repair,
     addition or Improvement;
 
          (x) Liens securing Refinancings (in whole or in part) of any
     Indebtedness secured by the Liens described in clauses (ii), (iv), (v),
     (vi), (viii) or (ix) of this paragraph, and any successive Refinancings of
     any thereof (together with any increased amount of such Indebtedness
     specifically permitted pursuant
 
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     to the second paragraph under "-- Limitation on Indebtedness and Preferred
     Stock" (to cover the reasonable fees and expenses incurred in connection
     with a Refinancing)), provided that each such Lien (unless otherwise
     permitted by this paragraph) does not extend to any additional U.S. Fixed
     Assets (other than Improvements thereto or thereon and any proceeds
     thereof);
 
          (xi) Liens on U.S. Fixed Assets securing Indebtedness in an aggregate
     principal amount not to exceed $10,000,000; and
 
          (xii) Liens on any U.S. Fixed Assets consisting of easements,
     covenants, restrictions, exceptions, reservations and similar matters which
     do not materially impair the use of such U.S. Fixed Assets for the uses for
     which it is held and which Liens are granted to secure Indebtedness secured
     by Liens permitted by the foregoing clauses (i) through (xi).
 
     The Notes will be considered equally and ratably secured on a senior basis
with any other Lien if the Lien securing the Notes is of at least equal priority
and covers the same U.S. Fixed Assets property or assets as such other Lien,
provided, that if the Indebtedness secured by such other Lien is expressly
subordinated in right and priority of payment by its terms to the Notes, the
Lien securing the Notes shall be senior to such other Lien.
 
     Subsidiary Guarantees, Etc.
 
     The Indenture provides that if the Company or any Subsidiary Guarantor
shall transfer or cause to be transferred, in one or a series of related
transactions, any property or assets (including, without limitation, businesses,
divisions, real property, assets or equipment) to any Subsidiary of the Company
or to any Non-Affiliate Joint Venture of the Company, the Company shall cause
such transferee Subsidiary or Non-Affiliate Joint Venture to (i) execute and
deliver to the Trustee a supplemental indenture in form and substance reasonably
satisfactory to the Trustee pursuant to which such transferee Subsidiary or
Non-Affiliate Joint Venture shall be named as an additional Subsidiary Guarantor
and (ii) deliver to the Trustee an Opinion of Counsel reasonably satisfactory to
the Trustee that such supplemental indenture has been duly executed and
delivered by such Person. (Section 4.12(a)).
 
     The provisions set forth in the immediately preceding paragraph shall not
apply to the following transfers of property or assets by the Company or any
Subsidiary Guarantor:
 
          (A) transfers of property or assets (other than cash) to Subsidiaries
     of the Company and Non-Affiliate Joint Ventures, provided that such
     transfer is made in exchange for cash in an amount equal to the Fair Market
     Value of such property or assets;
 
   
          (B) transfers of property or assets to Subsidiary Guarantors;
    
 
          (C) the use of the proceeds of Indebtedness described in clauses
     (iii), (iv), (v) and (viii) of the second paragraph under "-- Limitation on
     Indebtedness and Preferred Stock";
 
          (D) transfers to Alpart of the proceeds of Indebtedness described in
     the first paragraph under "-- Limitation on Indebtedness and Preferred
     Stock" to the extent that Alpart is an obligor or guarantor of such
     Indebtedness;
 
          (E) the provision of, and the payment for, goods and services, working
     capital and technology to Subsidiaries of the Company and Non-Affiliate
     Joint Ventures, in each case in the ordinary course of the businesses in
     which the Company or its Subsidiaries or its Non-Affiliate Joint Ventures
     were engaged on the date of the Indenture or reasonably related extensions
     thereof;
 
          (F) transfers of assets to a Subsidiary of the Company immediately
     prior to the sale of such Subsidiary;
 
          (G) transfers of cash or Cash Equivalents to Non-Affiliate Joint
     Ventures engaged or to be engaged in the business of bauxite mining and/or
     alumina refining and/or aluminum smelting and/or fabrication and/or
     reasonably related extensions thereof;
 
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          (H) transfers of cash, Cash Equivalents, property or other assets to a
     Permitted Entity in exchange for Permitted Entity Securities of such
     Permitted Entity if, immediately after giving effect to such transfer, such
     Permitted Entity remains a Permitted Entity;
 
          (I) transfers of Capital Stock or other equity interests to the issuer
     of such Capital Stock or other equity interests such that immediately after
     giving effect to such transfer and related transfers, the proportional
     beneficial ownership by the transferor of the class of Capital Stock or
     equity interests so transferred is not reduced; and
 
          (J) other transfers of assets, provided that the aggregate amount
     thereof (if other than cash, such amount shall be the Fair Market Value of
     such asset at the time of such transfer), less the aggregate amount of such
     assets returned to the Company or any Subsidiary Guarantor (if returned
     other than in cash, the amount of such assets shall be the Fair Market
     Value of such assets at the time so returned), does not exceed, in the
     aggregate, the greater of (i) $25,000,000 or (ii) 5% of the Company's
     Consolidated Net Worth, calculated after giving effect to such transfers
     and returns. (Section 4.12(b)).
 
     The Indenture provides that the two preceding full paragraphs of this
section shall not apply to any Restricted Investment or Restricted Payment
otherwise permitted by the provisions described under " -- Limitations on
Restricted Payments, Restricted Investments and Unrestricted Subsidiary
Investments." (Section 4.12(d)).
 
     In addition, the Indenture provides that the Company shall not permit any
Permitted Entity to cease to be a Permitted Entity except:
 
          (i) pursuant to a liquidation or dissolution of such Permitted Entity
     or a transfer of all or substantially all of the properties and assets of
     such Permitted Entity to its Equity Owners in proportion to their
     interests, including by way of merger or consolidation of such Permitted
     Entity with or into its sole Equity Owner;
 
          (ii) pursuant to a sale in compliance with the provisions described
     under " -- Limitation on Asset Sales" of all of the Permitted Entity
     Securities of such Permitted Entity held directly or indirectly by the
     Company or any Subsidiary Guarantor; or
 
          (iii) if such Permitted Entity becomes a Subsidiary Guarantor.
     (Section 4.12(e)).
 
     Notwithstanding anything in the Indenture to the contrary, VALCO shall be
permitted to merge with or into, or distribute substantially all of its assets
and liabilities to, a Permitted Entity, provided that, at the time of such
merger or distribution, such Permitted Entity has no more than $50,000 of assets
other than Capital Stock or other similar interests in VALCO. Upon the
consummation of any transaction contemplated by this paragraph, the entity
surviving such merger or distribution shall not be required (i) to become a
Subsidiary Guarantor pursuant to the provisions described in this section or
(ii) if such entity has no assets except as contemplated in this paragraph or
meets the conditions of the preceding paragraph, to remain a Permitted Entity
pursuant to the terms described in this Section. (Section 4.12(f)).
 
     Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries
 
     The Indenture provides that the Company shall not, and shall not permit its
Subsidiaries to, create or otherwise suffer to exist any consensual encumbrances
or restrictions on the ability of any Subsidiary to pay dividends or make any
other distributions on its Capital Stock or pay any Indebtedness owed to the
Company or any Subsidiaries of the Company or to make loans or advances or
transfer any of its assets to the Company or any Subsidiary of the Company;
provided, however that such restrictions shall not prohibit Permitted Dividend
Encumbrances. (Section 4.13).
 
     Limitation on Asset Sales
 
     The Indenture provides that the Company shall not, and shall not permit any
of its Subsidiaries to, consummate any Asset Sale unless at least 75% of the
consideration therefor received by the Company or such
 
                                       92
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Subsidiary (exclusive of indemnities) is in the form of cash or Cash
Equivalents, provided that this sentence shall not apply to the sale or
disposition of assets as a result of a foreclosure (or a secured party taking
ownership of such assets in lieu of foreclosure) or as a result of an
involuntary proceeding in which the Company cannot, directly or through its
Subsidiaries, direct the type of proceeds received. The amount of (a) any
liabilities of the Company or any Subsidiary of the Company that are actually
assumed by the transferee in such Asset Sale, or for which the Company and its
Subsidiaries are fully released, shall be deemed to be cash for purposes of
determining the percentage of cash consideration received by the Company or its
Subsidiaries and (b) any notes or other obligations received by the Company or
any Subsidiary of the Company from such transferee that are immediately
converted (or are converted within thirty days of the related Asset Sale) by the
Company or such Subsidiary into cash shall be deemed to be cash for purposes of
determining the percentage of cash consideration received by the Company or its
Subsidiaries. (Section 4.14(a)).
 
     The Indenture further provides that the Company shall apply any Net Cash
Proceeds received after the date of the Indenture to (A) the prepayment of
Indebtedness in respect of or under the Credit Agreement and any other
Indebtedness of the Company (other than the Notes) entitled to receive payment
pursuant to the terms thereof (excluding Indebtedness that is subordinated by
its terms to the Notes or the Guarantee thereof) (the "Specified Pari Passu
Indebtedness"), unless the holders thereof elect not to receive such prepayment
and (B) an offer to purchase (an "Asset Sale Offer") the then outstanding Notes,
on any Business Day occurring no later than 175 days after the receipt by the
Company (or any of its Subsidiaries, if applicable) of such Net Cash Proceeds
(the "Asset Sale Purchase Date," which date shall be deferred to the extent
necessary to permit the Asset Sale Offer to remain open for the period required
by applicable law), at a price (the "Asset Sale Purchase Price") equal to 100%
of the principal amount thereof together with accrued and unpaid interest, if
any, to but not including the Asset Sale Purchase Date pursuant to the
provisions set forth below. Such Asset Sale Offer with respect to the Notes
shall be in an aggregate principal amount (the "Asset Sale Offer Amount") equal
to the Net Cash Proceeds (rounded down to the nearest $1,000) from the Asset
Sales to which the Asset Sale Offer relates multiplied by a fraction, the
numerator of which is the principal amount of the Notes outstanding (determined
as of the close of business on the day immediately preceding the date notice of
such Asset Sale Offer is mailed) and the denominator of which is the principal
amount of the Notes outstanding plus the aggregate principal amount of
Indebtedness under the Credit Agreement and the Specified Pari Passu
Indebtedness outstanding (determined as of the close of business on the day
immediately preceding the date notice of such Asset Sale Offer is mailed). If
(x) no Indebtedness is outstanding in respect of or under the Credit Agreement
or the Specified Pari Passu Indebtedness or (y) the holders of such Indebtedness
entitled to receive payment elect not to receive the payments provided for in
the previous sentence, or (z) the application of such Net Cash Proceeds results
in the complete prepayment of such Indebtedness, then in each case any remaining
portion of such Net Cash Proceeds will be required to be applied to an Asset
Sale Offer to purchase the Notes. (Section 4.14(b)).
 
     Notice of an Asset Sale Offer shall be mailed by the Company to all holders
at their last registered address within 145 days of the receipt by the Company
or any of its Subsidiaries of such Net Cash Proceeds. The Asset Sale Offer shall
remain open from the time of mailing until the last Business Day before the
Asset Sale Purchase Date, but in no event for a period less than twenty-four
days or less than that required by applicable law. The notice shall state, among
other things, (1) that holders will be entitled to withdraw their election if
the Trustee receives, not later than one Business Day prior to the Asset Sale
Purchase Date, a telegram, telex, facsimile transmission or letter setting forth
the name of the holder, the principal amount of the Notes the holder delivered
for purchase, the certificate number of each Note the holder delivered for
purchase and a statement that such holder is withdrawing his, her or its
election to have such Notes purchased and (2) that if Notes in a principal
amount in excess of the Asset Sale Offer Amount are surrendered pursuant to the
Asset Sale Offer, the Company shall purchase Notes on a pro rata basis (with
such adjustments as may be deemed appropriate by the Company so that only Notes
in denominations of $1,000 or integral multiples thereof shall be acquired).
(Section 4.14(c)).
 
     Notwithstanding the foregoing, the Company shall not be required to make an
Asset Sale Offer until the aggregate amount of Net Cash Proceeds so to be
applied pursuant to this covenant exceeds $25,000,000 (the
 
                                       93
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"Twenty-Five Million Threshold") and then the total amount of such Net Cash
Proceeds shall be required to be so applied in accordance with this covenant.
The Company may credit against its obligation to offer to repurchase Notes
pursuant to this covenant the principal amount of Notes acquired or held by the
Company subsequent to the date of the Asset Sale giving rise to such Asset Sale
Offer and surrendered for cancellation or redeemed or called for redemption
subsequent to such date and not previously used to satisfy any obligation of the
Company to redeem or offer to purchase Notes. In no event shall any Net Cash
Proceeds that are applied to an Asset Sale Offer be required to be applied to
more than one Asset Sale Offer. (Section 4.14(c)).
 
     The Indenture further provides that, notwithstanding the foregoing, the
Company shall have no obligation to make an Asset Sale Offer, if, and to the
extent, the Company or any of its Subsidiaries commits within 140 days of the
receipt of such Net Cash Proceeds to reinvest (whether by acquisition of an
existing business or expansion, including, without limitation, capital
expenditures) such Net Cash Proceeds in one or more of the lines of business
(including capital expenditures) in which the Company or its Subsidiaries or its
Non-Affiliate Joint Ventures were engaged on the date of the Indenture or
reasonably related extensions of such lines of business, provided that such Net
Cash Proceeds are substantially so utilized no later than the last day of the
twelfth consecutive month (or, in the event the amount of such Net Cash Proceeds
from a single Asset Sale or series of related Asset Sales exceeds $200,000,000,
the twenty-fourth consecutive month) following the month in which such Net Cash
Proceeds are received. (Section 4.16(d)).
 
     The Indenture further provides that notwithstanding the foregoing, if an
Asset Sale consists of a sale of (i) all or a portion of the property, plant or
equipment of the Company's Gramercy alumina refinery or Nevada micromill,
whether now owned or hereafter acquired, or any proceeds thereof or (ii) any
U.S. Fixed Assets acquired after the date of the Indenture which do not
constitute Permitted Collateral, the Company shall make an Asset Sale Offer with
the Net Cash Proceeds received from such Asset Sale (without regard to the
Twenty-Five Million Threshold) to the extent the Company has not committed
within 140 days of the receipt of such Net Cash Proceeds to reinvest (whether by
acquisition of an existing business or expansion, including, without limitation,
capital expenditures) such Net Cash Proceeds in U.S. Fixed Assets (other than
Permitted Collateral), provided that such Net Cash Proceeds are substantially so
utilized no later than the last day of the twelfth consecutive month (or, in the
event the amount of such Net Cash Proceeds from a single Asset Sale or series of
related Asset Sales exceeds $200,000,000, the twenty-fourth consecutive month)
following the month in which such Net Cash Proceeds are received.
 
     Limitations on Unrestricted Subsidiaries
 
     The Indenture provides that (i) the Company shall not permit any of its
Unrestricted Subsidiaries to guarantee or otherwise directly or indirectly
provide credit support for any Indebtedness of the Company or any of its
Subsidiaries, (ii) in the event that an Unrestricted Subsidiary of the Company
incurs Indebtedness that does not involve an Unrestricted Subsidiary Investment
by the Company or any of its Subsidiaries in such Unrestricted Subsidiary
pursuant to the definition of "Unrestricted Subsidiary Investment," the Company
will cause such Unrestricted Subsidiary to notify the lenders thereof in writing
that such lenders will not have any recourse to the stock or assets of the
Company or any of its Subsidiaries and (iii) the Company shall cause each of its
Unrestricted Subsidiaries to have at all times at least one director on its
board of directors that is not a director or executive officer of the Company or
any of its Subsidiaries and to have at all times at least one executive officer
that is not a director or executive officer of the Company or any of its
Subsidiaries (except for any period not exceeding 30 days following the death or
resignation of any such director or executive officer).
 
SEC REPORTS
 
     The Company shall file with the Trustee, within 15 days after it is
required to file them with the Commission, copies of the annual reports and of
the information, documents and other reports (or copies of such portions of any
of the foregoing as the Commission may by rules and regulations prescribe) which
the Company is required to file with the Commission pursuant to Section 13 or
15(d) of the Exchange Act. If the Company is not subject to the requirements of
Section 13 or 15(d) of the Exchange Act, the Company shall nonetheless file with
the Commission and the Trustee copies of such annual reports and such
information, documents and other reports as it would file if it were subject to
the requirements of Section 13 or 15(d) of the
 
                                       94
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Exchange Act. In addition, the Company and the Subsidiary Guarantors have agreed
that, for so long as any Restricted Securities (as defined) remain outstanding,
they will furnish to the holders and to securities analysts and prospective
investors, upon request, the information required to be delivered pursuant to
Rule 144A(d)(4) under the Securities Act.
    
 
MODIFICATION OF INDENTURE
 
     With the consent of the holders of not less than a majority in aggregate
principal amount of the outstanding Notes, the Trustee and the Company may
execute a supplemental indenture to add provisions to, or change in any manner
or eliminate any provisions of, the Indenture or modify in any manner the rights
of the holders of the Notes; provided, however, that, without the consent of
each holder of an outstanding Note affected, no such supplemental indenture
shall (i) extend the stated maturity of any Note, reduce the interest rate,
extend the time or alter the manner of payment of interest, reduce the principal
amount thereof or alter the timing of or reduce any premium payable upon the
redemption thereof or reduce the amount payable thereon in the event of
acceleration or the amount payable in bankruptcy, or (ii) reduce the aforesaid
percentage of aggregate principal amount of Notes the consent of the holders of
which is required for any such supplemental indenture (Section 10.02). The
Company and the Trustee may, without the consent of any holder of the Notes,
amend or supplement the Indenture for certain limited purposes, including to
cure any ambiguity or to correct any defect or inconsistency in the Indenture or
to comply with any requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act of 1939, as
amended. (Section 10.01).
 
DEFAULTS AND CERTAIN RIGHTS ON DEFAULT
 
     An Event of Default is defined in the Indenture as (i) default in the
payment of principal, Change of Control Purchase Price, Asset Sale Purchase
Price or premium (if any) with respect to the Notes, as and when the same shall
become due and payable either at maturity, upon redemption or purchase by the
Company by declaration or otherwise, (ii) default in payment of any installment
of interest on any of the Notes as and when the same shall become due and
payable and such default continues for 30 days, (iii) failure on the part of the
Company, duly to observe or perform in any material respect any other of the
covenants or agreements on the part of the Company in the Notes or in the
Indenture for a period of sixty days after the date on which written notice of
such failure, which notice must specify the failure, demand it be remedied and
state that the notice is a "Notice of Default," shall have been given to the
Company by the Trustee by registered mail, which notice the Trustee shall give
upon receipt of requests to do so by the holders of at least 25% of the
aggregate principal amount of the Notes at the time outstanding, or to the
Company and the Trustee by the holders of at least 25% of the aggregate
principal amount of the Notes at the time outstanding, (iv) a default under any
mortgage, indenture or instrument under which there may be issued, secured or
evidenced any indebtedness for money borrowed by the Company or any Subsidiary,
whether such Indebtedness now exists or shall hereafter be created, in an
aggregate principal amount exceeding $25,000,000, which default (a), in the case
of a failure to make payment on any such indebtedness, shall not have been
waived, cured or otherwise ceased to exist within 30 days thereafter, or (b) in
the case of any default other than a payment default referred to in clause (a),
shall have resulted in such indebtedness becoming or being declared due and
payable prior to the date on which it would otherwise have become due and
payable, or with respect to which the principal amount remains unpaid upon its
stated maturity; (v) a final judgment which, together with other outstanding
final judgments against the Company and its Significant Subsidiaries, exceeds an
aggregate of $25,000,000 (to the extent such judgments are not covered by valid
and collectible insurance from solvent unaffiliated insurers) shall be entered
against the Company and/or its Significant Subsidiaries and (a) within 30 days
after entry thereof, judgments exceeding such amount shall not have been
discharged, settled or bonded or execution thereof stayed pending appeal or,
within 30 days after the expiration of any such stay, such judgments exceeding
such amount shall not have been discharged, settled or bonded or execution
thereof stayed or (b) an enforcement proceeding shall have been commenced (and
not discharged, settled or bonded or execution thereof stayed) by any creditor
upon judgments exceeding such amount; (vi) certain events of bankruptcy,
insolvency, receivership or reorganization and (vii) the Guarantee having been
held unenforceable or invalid with respect to any Subsidiary Guarantor by a
final non-appealable
 
                                       95
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order or judgment issued by a court of competent jurisdiction or having ceased
for any reason to be in full force and effect with respect to any Subsidiary
Guarantor, or any Subsidiary Guarantor or any person acting by or on behalf of
any Subsidiary Guarantor having denied or disaffirmed its obligations under the
Guarantee. (Section 6.01).
 
     The Indenture provides that, if an Event of Default shall have occurred and
be continuing, either the Trustee or the holders of 25% of the aggregate
principal amount of the Notes then outstanding may declare the entire principal
of and interest on the Notes to be due and payable immediately. Upon the
occurrence of certain events of bankruptcy, insolvency, receivership or
reorganization, principal of and interest on the Notes will become due and
payable without necessity of action on the part of the Trustee or the holders of
the Notes. Prior to the declaration of the maturity of the Notes as provided in
the preceding sentences, the holders of a majority of the aggregate principal
amount of the Notes at the time outstanding may on behalf of the holders of all
of the Notes waive any past default under the Indenture and its consequences,
except a default in the payment of principal of, premium, if any, Change of
Control Purchase Price, Asset Sale Purchase Price or interest on any of the
Notes or a default under Article Four of the Indenture or any other covenant or
provision of the Indenture which under Article Ten cannot be modified or amended
without the consent of the holder of each outstanding Note. In the case of any
such waiver, the Company, the Trustee and the holders of the Notes shall be
restored to their former positions and rights hereunder, respectively; but no
such waiver shall extend to any subsequent or other default or impair any right
consequent thereon.
 
MERGER OR CONSOLIDATION
 
     The Indenture provides that the Company may consolidate or merge with or
into any other corporation or corporations or sell or convey all or
substantially all of its property to any other corporation whether in a single
transaction or in a series of transactions; provided, however, that any such
consolidation, merger, sale or conveyance shall be upon the condition that (a)
immediately after giving effect to such consolidation, merger, sale or
conveyance, the corporation formed by or surviving any such consolidation or
merger, or to which such sale or conveyance shall have been made, whether the
Company or such other corporation (the "surviving corporation"), shall not be in
default in the performance or observance of any of the terms, covenants and
conditions of the Indenture to be kept or performed by the Company, (b) the
surviving corporation (if other than the Company) shall be a corporation
organized under the laws of the United States or any State thereof, (c)
immediately after giving effect to such consolidation, merger, sale or
conveyance, the surviving corporation (whether the Company or such other
corporation) could Incur $1.00 of Indebtedness pursuant to provisions described
in the first paragraph under "-- Limitation on Indebtedness and Preferred
Stock," (d) the surviving corporation (if other than the Company) shall
expressly assume the obligations of the Company by supplemental indenture
complying with the requirements of the Indenture satisfactory in form to the
Trustee and (e) immediately after giving effect to such consolidation, merger,
sale or conveyance, the surviving corporation (whether the Company or such other
corporation) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction.
(Section 11.01(a)).
 
     The Indenture further provides that, notwithstanding the foregoing, (i) the
Company may consolidate or merge with or into, or sell or convey all or
substantially all of its property to, KAC; provided, however, that the surviving
corporation (if other than the Company) shall expressly assume by supplemental
indenture complying with the requirements of the Indenture, the due and punctual
payment of the principal premium, if any, Change of Control Purchase Price,
Asset Sale Purchase Price and interest on all of the Notes, according to their
tenor, and the due and punctual performance and observance of all the covenants
and conditions of the Indenture to be performed or observed by the Company and
(ii) the Company may consolidate or merge with or into, or sell or convey all or
substantially all of its property to, a Subsidiary Guarantor; provided, that the
surviving corporation (if other than the Company) shall expressly assume by
supplemental indenture complying with the requirements of the Indenture, the due
and punctual payment of the principal of, premium, if any, Change of Control
Purchase Price, Asset Sale Purchase Price and interest on all of the Notes,
according to their tenor, and the due and punctual performance and observance of
all the covenants and conditions of the Indenture to be performed or observed by
the Company. (Section 11.01(b)).
 
                                       96
   97
 
     The Indenture provides that, notwithstanding any other provision of the
Indenture (i) a Subsidiary Guarantor may consolidate or merge with or into, or
sell or convey all or substantially all of its property to, the Company,
provided, that the surviving corporation (if other than the Company) shall
expressly assume by supplemental indenture complying with the requirements of
the Indenture, the due and punctual payment of the principal of, premium, if
any, Change of Control Purchase Price, Asset Sale Purchase Price and interest on
all of the Notes, according to their tenor, and the due and punctual performance
and observance of all the covenants and conditions of the Indenture to be
performed or observed by the Company and (ii) a Subsidiary Guarantor may
consolidate or merge with or into, or sell or convey all or substantially all of
its property to, any other Subsidiary Guarantor. (Section 15.03(a)).
 
     The Indenture further provides that a Subsidiary Guarantor may merge or
consolidate with or into any other corporation or corporations (whether or not
affiliated with such Subsidiary Guarantor), or sell or convey its property as an
entirety or substantially as an entirety to any other corporation or
corporations (whether or not affiliated with such Subsidiary Guarantor);
provided, that (i) in the event that the surviving corporation is a Subsidiary
of the Company, then (a) such surviving corporation (if other than such
Subsidiary Guarantor) shall be a corporation organized under the laws of the
United States of America or any State thereof, (b) such surviving corporation
(if other than such Subsidiary Guarantor) shall assume the due and punctual
performance and observance of all of the covenants and conditions of the
Indenture to be performed by such Subsidiary Guarantor by supplemental indenture
complying with the requirements of the Indenture, (c) immediately after giving
effect to such consolidation, merger, sale or conveyance, the Company could
Incur $1.00 of Indebtedness pursuant to Section 4.10(a) of the Indenture and (d)
immediately after giving effect to such consolidation, merger, sale or
conveyance, the surviving corporation (whether such Subsidiary Guarantor or such
other corporation) shall have a Consolidated Net Worth equal to or greater than
the Consolidated Net Worth of such Subsidiary Guarantor immediately prior to
such transaction; and (ii) in the event that the surviving corporation is not a
Subsidiary of the Company, then such consolidation, merger, sale or conveyance
shall otherwise have been made in compliance with the terms of the Indenture.
(Section 15.03(b)).
 
SATISFACTION AND DISCHARGE
 
     If at any time (a) the Company delivers all the outstanding Notes to the
Trustee for cancellation, other than destroyed, lost or stolen Notes, or (b) all
Notes have become due and payable, or will be or may be redeemed or will mature
within one year, and the Company has deposited with the Trustee money or certain
direct, non-callable obligations of, or guaranteed by, the United States
sufficient to pay all such Notes, upon redemption or at maturity, together with
all other sums due under the Indenture, the Company may terminate all of its
obligations under the Indenture, other than its obligations to pay the principal
of, premium, if any, Change of Control Purchase Price, Asset Sale Purchase Price
and interest on the Notes and certain other obligations. (Section 12.01).
 
CERTAIN DEFINITIONS
 
     The term "9 7/8% Notes" means the Company's 9 7/8% Senior Notes due 2002,
as amended from time to time, issued pursuant to the 9 7/8% Note Indenture.
 
     The term "9 7/8% Note Indenture" means the indenture, dated as of February
17, 1994, among the Company, as issuer, the parties named therein (including in
any amendment or supplement thereto) as subsidiary guarantors, and First Trust
National Association, a national banking association, as trustee, as heretofore
or hereafter amended or supplemented from time to time in accordance with the
terms thereof.
 
     The term "12 3/4% Notes" means the Company's 12 3/4% Senior Subordinated
Notes due 2003, as amended from time to time, issued pursuant to the 12 3/4%
Note Indenture.
 
     The term "12 3/4% Note Indenture" means the Indenture, dated as of February
1, 1993, among the Company, as issuer, the parties named therein (including in
any amendment or supplement thereto) as subsidiary guarantors, and State Street
Bank and Trust Company, a Massachusetts trust company, as
 
                                       97
   98
 
successor to The First National Bank of Boston, as trustee, as heretofore or
hereafter amended or supplemented from time to time in accordance with the terms
thereof.
 
     The term "14 1/4% Senior Subordinated Notes" means the Company's 14 1/4%
Senior Subordinated Notes Due 1995, as amended, which were retired in 1993 and
are no longer outstanding as of the date of the Indenture.
 
     The term "14 1/4% Senior Subordinated Note Indenture" means the 14 1/4%
Senior Subordinated Note Indenture, dated as of December 21, 1989, among the
Company, as issuer, the parties named therein as and, if applicable, thereafter
becoming, subsidiary guarantors, and The Bank of New York, a New York banking
corporation, as trustee, as amended or supplemented from time to time in
accordance with the terms thereof.
 
     The term "Affiliate" means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with a
specified Person; provided, however, that the term Affiliate shall not include
the Company, any Subsidiary of the Company, any Unrestricted Subsidiary of the
Company or any Non-Affiliate Joint Venture of the Company so long as no
Affiliate of the Company has any direct or indirect interest therein, except
through the Company, its Subsidiaries, its Unrestricted Subsidiaries and/or its
Non-Affiliate Joint Ventures. For the purpose of this definition, control when
used with respect to any specified Person means the possession of the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms controlling and controlled have meanings correlative to the
foregoing. The fact that an Affiliate of a Person is a partner of a law firm
that renders services to such Person or its Affiliates does not mean that the
law firm is an Affiliate of such Person.
 
     The term "Asset Sale" means any sale, transfer or other disposition
(including, without limitation, dispositions pursuant to a merger, consolidation
or sale and leaseback transaction) of any assets (other than cash or Cash
Equivalents) on or after the date of the initial issuance of the Notes by the
Company or any of its Subsidiaries to any Person other than the Company, any of
its Subsidiaries or any Non-Affiliate Joint Venture; provided, however, that
solely for the purposes of the definition of Consolidated Cash Flow Available
for Fixed Charges, the term Asset Sale shall exclude dispositions pursuant to a
sale and leaseback transaction if the lease under such sale and leaseback
transaction is required to be classified and accounted for as a Capitalized
Lease Obligation; and provided, further, that the term Asset Sale shall not
include a Refinancing Sale and Leaseback Transaction; and provided, further,
that the following sales, transfers or other dispositions of assets shall not be
an "Asset Sale" hereunder:
 
          (A) in the ordinary course of business of the Company and its
     Subsidiaries, which may include sales, transfers or other dispositions to
     Unrestricted Subsidiaries;
 
          (B) in a single transaction or group of related transactions, the
     gross proceeds of which (exclusive of indemnities) do not exceed
     $10,000,000 (such proceeds, to the extent non-cash, to be determined in
     good faith by the Board of Directors of the Company);
 
          (C) resulting from the creation, incurrence or assumption of (but not
     any foreclosure with respect to) any Lien not prohibited by the provisions
     described under "-- Limitation on Liens";
 
          (D) in connection with any consolidation or merger of the Company or
     any Subsidiary Guarantor or sale of all or substantially all of the
     property of the Company or any Subsidiary Guarantor in compliance with
     applicable provisions of the Indenture;
 
          (E) by a Subsidiary to its stockholders not prohibited by the
     Indenture;
 
          (F) which are Restricted Investments, Restricted Payments or
     Unrestricted Subsidiary Investments permitted by the provisions described
     under "-- Limitations on Restricted Payments, Restricted Investments and
     Unrestricted Subsidiary Investments"; or
 
          (G) which consist of extensions, modifications, renewals or exchanges
     of Restricted Investments pursuant to clause (b) of the definition thereof,
     so long as neither the Company nor any of its Subsidiaries receives any
     cash proceeds as a result of such transaction.
 
                                       98
   99
 
     The term "Attributable Debt" means, with respect to a Refinancing Sale and
Leaseback Transaction, as of the date of consummation of such transaction, the
greater of (a) the Fair Market Value of the property subject to such Refinancing
Sale and Leaseback Transaction and (b) the present value (discounted at the
interest rate borne by the Notes, compounded semi-annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Refinancing Sale and Leaseback Transaction (including any
period for which such lease has been extended).
 
     The term "Bank" means any of the financial institutions that are, or from
time to time become, lenders under the Credit Agreement.
 
     The term "Bank Agent" means BankAmerica Business Credit, Inc., as agent
under the Credit Agreement, and any successor agent appointed under the Credit
Agreement or any agent under any agreement or agreements pursuant to which
Indebtedness under the Credit Agreement has been renewed, extended, refunded,
replaced, restructured or refinanced (or successively renewed, extended,
refunded, replaced, restructured or refinanced) and as to whom the Company has
notified the Trustee and the noteholders pursuant to the terms of the Indenture.
 
   
     The term "Bank Subsidiary Guarantors" means each of the following Persons,
as long as such Person guarantees any Indebtedness under the Credit Agreement:
Akron Holding Company, an Ohio corporation, Kaiser Aluminum & Chemical
Investment, Inc., a Delaware corporation, Kaiser Aluminum Properties, Inc., a
Delaware corporation, Kaiser Aluminum Technical Services, Inc., a California
corporation, Oxnard Forge Die Company, Inc., a California corporation, Kaiser
Aluminium International, Inc., a Delaware corporation, KAC, KFC, each of their
respective successors, each Subsidiary Guarantor and each Non-Recourse Guarantor
so long as such Non-Recourse Guarantor does not constitute a Subsidiary
Guarantor and would not be required to become a Subsidiary Guarantor hereunder.
    
 
     The term "CARIFA Financing" means the $60,000,000 CBI Industrial Revenue
Bonds, Caribbean Basin Projects Financing Authority CBI Industrial Revenue Bonds
1991 Series A and Series B (Alumina Partners of Jamaica Project) issued pursuant
to that certain Bond Purchase Agreement dated as of December 1, 1991, among the
Caribbean Basin Projects Financing Authority, Alumina Partners of Jamaica and
PaineWebber Incorporated of Puerto Rico, or any Refinancings thereof and any
letters of credit supporting such bonds or any Refinancings thereof.
 
     A "Change of Control" shall be deemed to have occurred at such time as
MAXXAM, directly or indirectly, shall cease to have (other than by reason of the
existence of a Lien but including by reason of the foreclosure of or other
realization upon a Lien) direct or indirect sole beneficial ownership (as
defined under Regulation 13d-3 of the Exchange Act as in effect on the date of
the Indenture) of at least 40% of the total Voting Stock, on a fully diluted
basis, of the Company; provided, however, that such ownership by MAXXAM,
directly or indirectly, of 30% or greater, but less than 40%, of the total
Voting Stock, on a fully diluted basis, of the Company shall not be a Change of
Control if MAXXAM, through direct representation or through Persons nominated by
it, controls a majority of the Board of Directors of the Company necessary to
effectuate any actions by the Board of Directors of the Company; and provided,
further, that the foregoing minimum percentages shall be deemed not satisfied if
any Person or group (as defined in Section 13(d)(3) of the Exchange Act as in
effect on the date of the Indenture) shall, directly or indirectly, own more of
the total Voting Stock entitled to vote generally in the election of directors
of the Company than MAXXAM.
 
     The term "Consolidated Amortization Expense" means, with respect to any
Person for any period, the amortization expense (including without limitation
goodwill, deferred financing charges and other intangible items) of such Person
and its Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP.
 
     The term "Consolidated Cash Flow Available for Fixed Charges" means, with
respect to any Person for any period, the sum of the amounts for such period of
(i) Consolidated Net Income, (ii) Consolidated Fixed Charges, (iii) Consolidated
Income Tax Expense (other than income taxes (including credits) with respect to
items of Net Income not included in the definition of Consolidated Net Income),
(iv) Consolidated Depreciation Expense, (v) Consolidated Amortization Expense
and (vi) any other non-cash items reducing
 
                                       99
   100
 
Consolidated Net Income, minus any non-cash items increasing Consolidated Net
Income, all as determined on a consolidated basis for such Person and its
Subsidiaries in accordance with GAAP; provided, however, that (x) if, during
such period, such Person or any of its Subsidiaries shall have engaged in any
Asset Sale, Consolidated Cash Flow Available for Fixed Charges of such Person
and its Subsidiaries for such period shall be reduced by an amount equal to the
Consolidated Cash Flow Available for Fixed Charges (if positive) directly
attributable to the assets that are the subject of such Asset Sale for such
period, or increased by an amount equal to the Consolidated Cash Flow Available
for Fixed Charges (if negative) directly attributable to the assets that are the
subject of such Asset Sale for such period and (y) if, during such period, such
Person or any of its Subsidiaries shall have acquired any material assets out of
the ordinary course of business, Consolidated Cash Flow Available for Fixed
Charges shall be calculated on a pro forma basis as if such asset acquisition
and related financing had occurred at the beginning of such period.
 
     The term "Consolidated Depreciation Expense" means, with respect to any
Person for any period, the depreciation and depletion expense (including without
limitation the amortization expense associated with Capitalized Lease
Obligations) of such Person and its Subsidiaries for such period, determined on
a consolidated basis in accordance with GAAP.
 
     The term "Consolidated Fixed Charge Coverage Ratio" means, with respect to
any Person as of the date of the transactions giving rise to the need to
calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date"),
the ratio of (i) the aggregate amount of Consolidated Cash Flow Available for
Fixed Charges of such Person for the four fiscal quarters immediately prior to
the Transaction Date for which financial information in respect thereof is
available to (ii) the aggregate Consolidated Fixed Charges of such Person for
the fiscal quarter in which the Transaction Date occurs and the three fiscal
quarters immediately subsequent to such fiscal quarter to be accrued during such
period (based upon the pro forma amount of Indebtedness to be outstanding on the
Transaction Date), assuming for the purposes of this measurement that the
interest rates on which floating interest rate obligations of such Person are
based equal such rates in effect on the Transaction Date; provided, however,
that if the Company or any of its Subsidiaries has incurred Interest Hedging
Obligations (as defined in the Indenture) which would have the effect of
changing the interest rate on any Indebtedness for such four quarter period (or
any portion thereof), the resulting rate shall be used for such four quarter
period or portion thereof; and provided, further, that any Consolidated Fixed
Charges with respect to Indebtedness incurred or for which such Person otherwise
becomes liable during the fiscal quarter in which the Transaction Date occurs
shall be calculated as if such Indebtedness was so incurred on the first day of
the fiscal quarter in which the Transaction Date occurs.
 
     The term "Consolidated Fixed Charges" means (without duplication), with
respect to any Person for any period, the sum of:
 
          (i) the interest expense of such Person and its Subsidiaries for such
     period, determined on a consolidated basis in accordance with GAAP (less,
     to the extent included therein, the portion of the interest expense
     required to be funded or economically borne by the Company's minority
     partners in the Company's joint ventures);
 
          (ii) all fees, commissions, discounts and other charges of such Person
     and its Subsidiaries for such period, determined on a consolidated basis in
     accordance with GAAP, with respect to letters of credit and bankers'
     acceptances and the costs (net of benefits) associated with Interest
     Hedging Obligations;
 
          (iii) the aggregate amount of dividends paid or other similar
     distributions made by such Person and its Subsidiaries during such period
     with respect to preferred stock (including preference stock) of such Person
     or its Subsidiaries determined on a consolidated basis in accordance with
     GAAP; and
 
          (iv) amortization or write-off of debt discount in connection with any
     Indebtedness of such Person and its Subsidiaries, determined on a
     consolidated basis in accordance with GAAP (excluding, to the extent
     otherwise included, the amortization or write-off of any deferred financing
     costs in connection with the amendment or refinancing of the Credit
     Agreement and the predecessor credit agreement).
 
                                       100
   101
 
     The term "Consolidated Income Tax Expense" means (without duplication),
with respect to any Person for any period, the aggregate of the income tax
expense (net of applicable credits) of such Person and its Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP.
 
     The term "Consolidated Net Income" means, with respect to any Person for
any period, the aggregate of the Net Income of such Person and its Subsidiaries
for such period taken as a single accounting period, all as determined on a
consolidated basis in accordance with GAAP, excluding (in each case to the
extent otherwise included):
 
          (i) extraordinary gains but not extraordinary losses and excluding
     gains from extinguishment of debt;
 
          (ii) the Net Income of any Person that is not a Subsidiary of such
     Person or that is accounted for on the equity method of accounting, except
     to the extent of the amount of dividends or other distributions (other than
     dividends or distributions of Capital Stock) actually paid to such Person
     or any of its Subsidiaries by such other Person during such period;
 
          (iii) except to the extent included by clause (ii), the Net Income of
     any Person accrued prior to the date it becomes a Subsidiary of such Person
     or is merged into or consolidated with such Person or any of its
     Subsidiaries or that Person's assets are acquired by such Person or any of
     its Subsidiaries;
 
          (iv) the Net Income of any Subsidiary of such Person during such
     period (A) to the extent that the declaration or payment of dividends or
     similar distributions by such Subsidiary of such Net Income is not at the
     time permitted by operation of the terms of its charter or any agreement,
     instrument, judgment, decree, order, statute, rule or governmental
     regulation applicable to that Subsidiary or (B) in the case of a foreign
     Subsidiary or a Subsidiary with significant foreign source income, to the
     extent such Net Income has not been distributed to such Person and such
     distribution would result in a material tax liability not otherwise
     deducted from the calculation of Consolidated Net Income whether or not
     such deduction is required by GAAP;
 
          (v) net after tax gains from Asset Sales (but not excluding the net
     after tax losses from Asset Sales);
 
          (vi) interest income arising from the Existing Intercompany Note,
     except to the extent such interest income is actually received by the
     Company in cash; and
 
          (vii) the Net Income of any Unrestricted Subsidiary, whether or not
     paid or distributed to the Company or one of its Subsidiaries;
 
provided, however, that (1) in determining Consolidated Net Income with respect
to the Company there shall be disregarded (a) any charge with respect to
premiums paid in excess of the principal amount in connection with the
repurchase, defeasance or redemption of the 14 1/4% Senior Subordinated Notes
and (b) the amortization or write-off of any unamortized deferred financing
costs and debt discount (other than original issue discount with respect to
Indebtedness Incurred after the date hereof) in connection with the amendment or
refinancing of the Credit Agreement and the predecessor credit agreement and/or
the repurchase, defeasance or redemption of the 14 1/4% Senior Subordinated
Notes and (2) the Net Income of each of the Specified Parties otherwise included
in the Consolidated Net Income of the Company shall not be subject to any of the
limitations contained in clauses (ii) and (iv)(B) of this definition so long as
the Company's cash management and intercompany practices with respect to such
entity, as the case may be, for such period are consistent with past practice.
 
     The term "Consolidated Net Worth" means, with respect to any Person as of
any date, the total stockholders' equity of such Person as of such date less, to
the extent otherwise included, amounts attributable to Redeemable Stock and, in
the case of the Company, the amount attributable to the Existing Intercompany
Note, in each case determined on a consolidated basis in accordance with GAAP;
provided, however, that in determining Consolidated Net Worth with respect to
the Company there shall be disregarded (i) any charge with respect to premiums
paid in excess of the principal amount in connection with the repurchase,
defeasance
 
                                       101
   102
 
or redemption of the 14 1/4% Senior Subordinated Notes and (ii) the amortization
or write-off of any unamortized deferred financing costs or debt discount (other
than original issue discount with respect to Indebtedness Incurred after the
date hereof) in connection with the amendment or refinancing of the Credit
Agreement and the predecessor credit agreement and/or the repurchase, defeasance
or redemption of the 14 1/4% Senior Subordinated Notes.
 
     The term "Credit Agreement" means that certain Credit Agreement, dated as
of February 15, 1994, among the Company, KAC, the financial institutions that
are, or from time to time become, parties thereto, and BankAmerica Business
Credit, Inc., as agent, including all related notes, collateral documents and
guarantees, and any agreement (including all related notes, collateral documents
and guarantees) pursuant to which Indebtedness thereunder has been Refinanced
(or successively Refinanced), in each case as any of the same has been or may be
amended, supplemented, restated, restructured or otherwise modified from time to
time (in each case, in whole or in part).
 
     The term "Defaulting Equity Owner" means, with respect to any Permitted
Entity, any Equity Owner who causes an Equity Owner Default.
 
     The term "Equity Owner" means, with respect to any Permitted Entity, any
holder of an Ownership Interest in such Permitted Entity.
 
     The term "Equity Owner Default" means, with respect to any issuance of
Permitted Entity Securities to the Equity Owners of a Permitted Entity, the
failure by one or more of such Equity Owners to acquire such Permitted Entity
Securities in an amount corresponding to at least its Ownership Interest of such
Permitted Entity and, as a result thereof, such Equity Owner becomes subject to,
directly or indirectly, a dilution of its interest in the future net income of
such Permitted Entity and/or a penalty pursuant to the terms of the governing
documents of such Permitted Entity.
 
     The term "Existing Intercompany Note" means the Non-Negotiable Intercompany
Note, dated December 21, 1989, issued by KAC to the Company in an initial
principal amount of $818,585,280, as such Non-Negotiable Intercompany Note has
been or may be amended.
 
     The term "Fair Market Value" means, with respect to any property other than
cash, the fair market value of such property as determined in good faith by the
Board of Directors of the Company, whose determination shall be evidenced by a
Board Resolution; provided, however, that, in the event the Company makes a
payment in the form of or otherwise transfers property other than cash to, or
receives property other than cash from, an Affiliate in an amount in excess of
$10,000,000, or in the event that the Company makes a payment in the form of or
otherwise transfers property other than cash or Cash Equivalents to, or receives
property other than cash or Cash Equivalents from, an Unrestricted Subsidiary in
an amount in excess of $10,000,000, (which amount shall be calculated excluding
the fair market value of any Principal Products within the scope of the proviso
at the end of this definition) the Company, in addition, shall have received an
opinion from an independent investment banking firm of national standing
selected by the Company to the effect that the Board of Directors' determination
of fair market value is fair; provided that, with respect to any determination
of Fair Market Value of property in connection with an Unrestricted Subsidiary
Investment or the designation of an Unrestricted Subsidiary, such opinion shall
not be required, to the extent that such property consists of Principal Products
(which Principal Products are used by such Unrestricted Subsidiary in its
operations in the ordinary course of business).
 
     The term "GAAP" means generally accepted accounting principles as in effect
on December 31, 1992, and used in the preparation of the Company's consolidated
balance sheet at such date and the Company's statements of consolidated income
and cash flows for the year then ended, but in any event (i) giving effect to,
but excluding the effect of any one-time charge related to the implementation
of, Statement of Financial Accounting Standards No. 106 (Employers' Accounting
for Postretirement Benefits Other Than Pensions) and (ii) giving effect to
Statement of Financial Accounting Standards No. 109 (Accounting for Income
Taxes).
 
     The term "Guarantee" means any guarantee of the Notes by any Subsidiary
Guarantor.
 
                                       102
   103
 
     The term "Improvements" means any accessories, accessions, additions,
attachments, substitutions, replacements, improvements, parts and other property
now or hereafter affixed to any U.S. Fixed Assets or used in connection
therewith.
 
     The term "Indebtedness" means, with respect to any Person at any date, any
of the following (without duplication):
 
          (a) the principal amount of all obligations (unconditional or
     contingent) of such Person for borrowed money (whether or not recourse is
     to the whole of the assets of such person or only to a portion thereof) and
     the principal amount of all obligations (unconditional or contingent) of
     such Person evidenced by debentures, notes or other similar instruments
     (including, without limitation, reimbursement obligations with respect to
     letters of credit and bankers' acceptances);
 
          (b) all obligations of such Person to pay the deferred purchase price
     of property or services, except (x) accounts payable and other current
     liabilities arising in the ordinary course of business and (y)
     compensation, pension obligations and other obligations arising from
     employee benefits and employee arrangements;
 
          (c) Capitalized Lease Obligations of such Person;
 
          (d) all Indebtedness of others secured by a Lien on any asset of such
     Person, whether or not such Indebtedness is assumed or guaranteed by such
     Person;
 
          (e) preferred stock (including preference stock) that is Redeemable
     Stock (the amount of the Indebtedness in respect of such preferred stock to
     be equal to the aggregate liquidation value thereof);
 
          (f) all Indebtedness of others guaranteed by such Person;
 
          (g) pension obligations and other similar obligations arising from
     employee benefits, to the extent unfunded and assumed by such Person after
     the date of the initial issuance of the Notes in the acquisition, by such
     Person, of the assets or Capital Stock of another Person ("Assumed Pension
     Obligations"); and
 
          (h) all obligations under Refinancing Sale and Leaseback Transactions;
 
and the amounts thereof shall be the outstanding balance of any such
unconditional obligations as described in clauses (a) through (f) (other than
clause (d)), and the maximum liability of any such contingent obligations at
such date (other than with respect to clause (d)) and, in the case of clause
(d), the lesser of the fair market value at such date of any asset subject to
any Lien securing the Indebtedness of others and the amount of the Indebtedness
secured and, in the case of clause (g), the amount of Assumed Pension
Obligations shall be the amount determined by the Company in good faith as
evidenced by a certificate of the Chief Financial Officer of the Company
delivered to the Trustee and, in the case of clause (h), the Attributable Debt
with respect to such Refinancing Sale and Leaseback Transactions; provided,
however, that Indebtedness shall not include:
 
          (A) the obligations of such Person and/or any of its Subsidiaries to
     purchase or sell goods, services or technology utilized in their bauxite,
     aluminum and alumina business and related extensions thereof, including on
     a take-or-pay basis, pursuant to agreements entered into in the ordinary
     course of business consistent with past practice or to fund or guarantee
     the obligations of National Refractories & Minerals Corporation or any of
     its Affiliates in an aggregate principal amount at any time outstanding not
     exceeding $7,500,000;
 
          (B) obligations of such Person arising from the honoring by a bank or
     other financial institution of a check, draft or similar instrument
     inadvertently (except in the case of daylight overdrafts) drawn against
     insufficient funds in the ordinary course of business, provided that such
     obligations are extinguished within two Business Days of their incurrence
     (or, in the case of foreign overdrafts, within five Business Days of their
     incurrence) unless covered by an overdraft credit line;
 
          (C) obligations of such Person resulting from the endorsement of
     negotiable instruments for collection in the ordinary course of business;
 
                                       103
   104
 
          (D) Indebtedness consisting of stand-by letters of credit to the
     extent collateralized by cash or Cash Equivalents; and
 
          (E) Liens on assets of KAAC granted to secure Indebtedness of QAL,
     provided that such Liens are (i) in existence on the date of the Indenture,
     (ii) similar in all material respects to Liens in existence on the date of
     the Indenture or (iii) not on assets consisting of cash, Cash Equivalents
     or fixed assets and such assets are used or to be used in connection with
     the business of QAL.
 
   
     The term "interest" means, with respect to the Notes, interest payable on
the Notes at the rate set forth therein, plus any additional interest payable by
the Company and the Subsidiary Guarantors in respect of the Notes pursuant to
the Registration Rights Agreement.
    
 
     The term "Maximum Secured Amount" means, at any time (i) $400,000,000, plus
(ii) Net Betterments at such time, plus (iii) the outstanding amount of
Indebtedness relating to the CARIFA Financing, secured by a Lien on Permitted
Collateral, but in no event more than $43,000,000, minus (iv) in the event of a
sale of Permitted Collateral which is subject to a Lien permitted by clause (i)
under "-- Limitation on Liens," the amount, if any, of the net proceeds thereof
required to be applied to a permanent repayment or commitment reduction in
respect of the Indebtedness secured by such Lien, minus (v), in the event of the
Refinancing of any Indebtedness secured by a Lien permitted by clause (i) under
"-- Limitation on Liens," the lesser of (A) the amount of Indebtedness, if any,
not secured by Permitted Collateral which Refinances, in whole or in part, such
Indebtedness secured by a Lien permitted by clause (i) under "-- Limitation on
Liens" and (B) the amount, if any, by which the Maximum Secured Amount
immediately prior to such Refinancing, in whole or in part, of such Indebtedness
secured by a Lien permitted by clause (i) under "-- Limitation on Liens" exceeds
the aggregate amount of Indebtedness which is secured by a Lien on Permitted
Collateral permitted by clause (i) or clause (viii)(a) under "-- Limitation on
Liens" after giving effect to such Refinancing.
 
     The term "Merger" means the merger of a subsidiary of MAXXAM with and into
KAC on October 28, 1988.
 
     The term "Net Betterments" means the amount, if any, by which capital
expenditures (determined in accordance with GAAP) by the Company or any of its
Subsidiaries in respect of the Permitted Collateral on a cumulative basis for
the period from the date of the Indenture, through the date of determination
exceeds depreciation (determined in accordance with GAAP) in respect of the
Permitted Collateral on a cumulative basis for such period (provided, however,
that with respect to any Permitted Collateral existing at the time of the
Merger, the depreciation shall be the historical depreciation before adjustments
to reflect the acquisition of the Company in the Merger), but in no event less
than zero, provided, that in the event any Permitted Collateral ceases to
constitute Permitted Collateral in accordance with the definition thereof, only
the amount of Net Betterments in respect of such Permitted Collateral at such
time shall be included in any subsequent calculation of Net Betterments and
provided, further, that (a) Improvements which are subject to a Lien permitted
by clause (iv), (v) or (vi) under "-- Limitation on Liens" and (b) U.S. Fixed
Assets to the extent subject to a Lien permitted by clause (ix) under
"-- Limitation on Liens" shall not be included in the determination of Net
Betterments.
 
     The term "Net Cash Proceeds" means cash payments received (but if received
in a currency other than United States dollars, such payments shall not be
deemed received until the earliest time at which such currency is, or could
freely be, converted into United States dollars) by or on behalf of the Company
and/or any of its Subsidiaries (including any cash payments received by way of
deferred payment of principal pursuant to a note or installment receivable or
otherwise or the cash realization of any non-cash proceeds of any Asset Sale,
but, in each case, only as and when, and to the extent, received) from an Asset
Sale, in each case net of:
 
          (i) all legal, title and recording tax expenses, commissions,
     consulting fees, investment banking, broker's and accounting fees and
     expenses and fees and expenses incurred in obtaining regulatory approvals
     in connection with such Asset Sale;
 
                                       104
   105
 
          (ii) the amounts of (A) any repayments of debt secured, directly or
     indirectly, by Liens on the assets which are the subject of such Asset Sale
     or (B) any repayments of debt associated with such assets which is due by
     reason of such Asset Sale (i.e., such disposition is permitted by the terms
     of the instruments evidencing or applicable to such debt, or by the terms
     of a consent granted thereunder, on the condition that the proceeds (or
     portion thereof) of such disposition be applied to such debt), provided,
     that this clause (B) shall not apply with respect to any U.S. Fixed Assets
     that do not constitute Permitted Collateral and, in the case of clauses (A)
     and (B), other fees, expenses and other expenditures, in each case,
     reasonably incurred as a consequence of such repayment of debt (whether or
     not such fees, expenses or expenditures are then due and payable or made,
     as the case may be);
 
          (iii) all amounts deemed appropriate by the Company (as evidenced by a
     signed certificate of the Chief Financial Officer of the Company delivered
     to the Trustee) to be provided as a reserve, in accordance with GAAP ("GAAP
     Reserves"), against any liabilities associated with such assets which are
     the subject of such Asset Sale;
 
          (iv) all foreign, federal, state and local taxes payable (including
     taxes reasonably estimated to be payable) in connection with or as a result
     of such Asset Sale; and
 
          (v) with respect to Asset Sales by Subsidiaries of the Company, the
     portion of such cash payments attributable to Persons holding a minority
     interest in such Subsidiary;
 
provided, in each such case, that such fees and expenses and other amounts are
not payable to an Affiliate or an Unrestricted Subsidiary of the Company (except
for payments made pursuant to the Tax Sharing Agreements), and provided,
further, that required redemptions of existing preferred stock (including
preference stock) of the Company outstanding on the date of the Indenture or
issued pursuant to collective bargaining arrangements and related employee
benefit arrangements in effect on the date of the Indenture, in each case, from
Persons other than Affiliates or Unrestricted Subsidiaries of the Company, shall
be deemed to be a fee, expense or other expenditure of such Asset Sale.
Notwithstanding the foregoing, Net Cash Proceeds shall not include proceeds
received in a foreign jurisdiction from an Asset Sale of an asset located
outside the United States to the extent (i) such proceeds cannot under
applicable law be transferred to the United States or (ii) such transfer would
result (in the good faith determination of the Board of Directors of the Company
set forth in a Board Resolution) in a foreign tax liability that would be
materially greater than if such Asset Sale occurred in the United States;
provided that if, as, and to the extent that any of such proceeds may lawfully
be (in the case of clause (i)) or are (in the case of clause (ii)) transferred
to the United States, such proceeds shall be deemed to be cash payments that are
subject to the terms of this definition of Net Cash Proceeds. Subject to the
provisions of the next preceding sentence, Net Cash Proceeds shall also include
(i) cash distributions actually received by or on behalf of the Company or any
of its Subsidiaries from any Non-Affiliate Joint Venture or Unrestricted
Subsidiary of the Company representing the proceeds of a transaction by such
Non-Affiliate Joint Venture or Unrestricted Subsidiary of the Company that would
constitute an Asset Sale if such Non-Affiliate Joint Venture or Unrestricted
Subsidiary were a Subsidiary of the Company and (ii) the amount of any reversal
of GAAP Reserves (but only as and when, and to the extent, reversed) which
amount is otherwise a deduction from Net Cash Proceeds.
 
     The term "Net Income" means, with respect to any Person for any period, the
net income (loss) of such Person for such period determined in accordance with
GAAP.
 
     The term "Non-Affiliate Joint Venture" means any joint venture, partnership
or other Person (other than the Company, a Subsidiary of the Company or an
Unrestricted Subsidiary of the Company) in which the Company and/or its
Subsidiaries have an ownership interest equal to or greater than 5% and in which
no Affiliate of the Company has a direct or an indirect ownership interest other
than by virtue of the direct or indirect ownership interest in such
Non-Affiliate Joint Venture held (in the aggregate) by the Company and/or one or
more of its Subsidiaries, provided that such Non-Affiliate Joint Venture is
engaged in one or more of the lines of business in which the Company or its
Subsidiaries or its Non-Affiliate Joint Ventures are engaged in as of the date
of the Indenture or reasonably related extensions of such lines.
 
                                       105
   106
 
     The term "Non-Defaulting Equity Owner" means, with respect to any Permitted
Entity, any Equity Owner that is not a Defaulting Equity Owner.
 
     The term "Non-Recourse Guarantor" means a Subsidiary of the Company that
guarantees any Indebtedness under the Credit Agreement, provided that such
guarantee is non-recourse to the assets of such Subsidiary other than to
intercompany Indebtedness owed, or from time to time owing, by the Company to
such Subsidiary, and all monetary proceeds therefrom.
 
     The term "Ownership Interest" means, with respect to any Equity Owner of a
Permitted Entity at the time of the determination thereof, the proportion held
at such time by such Equity Owner of the outstanding Permitted Entity Securities
of such Permitted Entity that are last entitled to payment upon liquidation or
dissolution as provided in the governing instruments of such Permitted Entity or
pursuant to an agreement among the Equity Owners of such Permitted Entity.
 
     The term "Permitted Collateral" means real property (listed on a schedule
to the Indenture), plant and equipment of the Company or any of its Subsidiaries
located in the United States of America which, as of the date of issuance of the
Notes, secures Indebtedness under the Credit Agreement (whether or not the Liens
on such real property, plant or equipment are perfected at such time), together
with any Improvements thereto or thereon, any real property that is contiguous
to or structurally related to such real property (the "Contiguous Property"),
and any real property, plant or equipment, whether owned on the date of the
issuance of the Notes or thereafter acquired, located or used at any time after
the date of issuance of the Notes at a facility (other than the Company's
Gramercy alumina refinery and Nevada micromill) owned, leased, occupied or used
by the Company or any of its Subsidiaries as of the date of issuance of the
Notes or on any Contiguous Property, and any proceeds thereof; provided, that
notwithstanding anything to the contrary contained in the Indenture, any
Permitted Collateral which is released from all Liens thereon securing
Indebtedness and which does not become subject to a new Lien within 60 days of
such release securing Indebtedness which Refinances any of the Indebtedness (in
whole or in part) previously secured by such Permitted Collateral shall not
thereafter constitute "Permitted Collateral" under the Indenture.
 
     As of the date of the Indenture, Permitted Collateral will include real
property listed on a schedule to the Indenture and will not include the
Company's Gramercy alumina refinery or Nevada micromill.
 
     The term "Permitted Dividend Encumbrance" means, with respect to any
Person, any consensual encumbrances or restrictions on the ability of such
Person to pay dividends or make any other distributions on its Capital Stock or
pay any Indebtedness owed to the Company or any Subsidiaries of the Company (or,
in the case of a Permitted Entity, to its Equity Owners) or to make loans or
advances or transfer any of its assets to the Company or any Subsidiary of the
Company (or, in the case of a Permitted Entity, to its Equity Owners) existing
under or by reason of any of:
 
          (i) the Indenture;
 
          (ii) Indebtedness permitted by the provisions described in clause (ii)
     of the second paragraph under "-- Limitation on Indebtedness and Preferred
     Stock";
 
          (iii) Indebtedness or other obligations in existence on the date of
     the Indenture and customary rights of first refusal with respect to the
     Company's and its Subsidiaries' interests in their respective Subsidiaries,
     Unrestricted Subsidiaries, Non-Affiliate Joint Ventures and Permitted
     Entities;
 
          (iv) applicable law and agreements with foreign governments with
     respect to assets located in their jurisdictions;
 
          (v)(A) customary provisions restricting (i) the subletting or
     assignment of any lease or (ii) the transfer of copyrighted or patented
     materials, (B) provisions in agreements that restrict the assignment of
     such agreements or rights thereunder or (C) provisions of a customary
     nature contained in the terms of Capital Stock restricting the payment of
     dividends and the making of distributions on Capital Stock;
 
          (vi) Indebtedness or other obligations of any other Person acquired
     (whether pursuant to a purchase of stock or assets) (including any
     Non-Affiliate Joint Venture of the Company or Permitted
 
                                       106
   107
 
     Entity that becomes a Subsidiary of the Company) or applicable to any
     assets at the time such Person or assets were acquired by the Company, its
     Subsidiaries or a Permitted Entity, in each case which Indebtedness and
     obligations (A) were not created in anticipation of such acquired Person
     becoming a Subsidiary of the Company or a Permitted Entity, as the case may
     be, or such assets being acquired by the Company, its Subsidiaries or such
     Permitted Entity, as the case may be, and (B) which encumbrances and
     restrictions are not applicable to any Person or the property or assets of
     any Person other than the Person or the property or assets of the Person so
     acquired (including the Capital Stock of such Person) or any newly
     organized entity formed to effect such acquisition and, in each case, the
     monetary proceeds thereof;
 
          (vii) encumbrances and restrictions with respect to such Person
     imposed in connection with an agreement for the sale or disposition of such
     Person or its assets;
 
          (viii) encumbrances and restrictions applicable only to (A) Alpart and
     its assets and Capital Stock with respect to Indebtedness permitted to be
     Incurred by Alpart pursuant to the first paragraph under "-- Limitation on
     Indebtedness and Preferred Stock," (B) Alpart, KJC and AJI and their
     respective assets and Capital Stock with respect to Indebtedness permitted
     by clause (iii) of the second paragraph under "-- Limitation on
     Indebtedness and Preferred Stock," (C) KAAC and its assets and Capital
     Stock with respect to Indebtedness permitted to be Incurred pursuant to
     clause (iv) of the second paragraph under "-- Limitation on Indebtedness
     and Preferred Stock," and (D) the Person or Persons that Incurred such
     Indebtedness and the Person or Persons that Incurred such Refinancing
     Indebtedness and, in each case, such Persons' assets and Capital Stock with
     respect to Indebtedness and Refinancing Indebtedness permitted to be
     Incurred by clause (viii) of the second paragraph under "-- Limitation on
     Indebtedness and Preferred Stock"; in each case provided, that the Board of
     Directors of the Company has determined in good faith that such
     encumbrances and restrictions would not singly or in the aggregate have a
     materially adverse effect on the holders of the Notes;
 
          (ix) Indebtedness of a Person that was a Subsidiary at the time of
     Incurrence and the Incurrence of which Indebtedness is permitted by the
     provisions described under "-- Limitation on Indebtedness and Preferred
     Stock," provided that such encumbrances and restrictions apply only to such
     Subsidiary and its assets, and provided, further, that the Board of
     Directors of the Company has determined in good faith, at the time of
     creation of each such encumbrance or restriction, that such encumbrances
     and restrictions would not singly or in the aggregate have a materially
     adverse effect on the holders of the Notes;
 
          (x) the subordination of (A) any Indebtedness owed by the Company or
     any of its Subsidiaries to the Company or any other Subsidiary to (B) any
     other Indebtedness of the Company or any of its Subsidiaries, provided (A)
     such other Indebtedness is permitted under the Indenture and (B) the Board
     of Directors of the Company has determined in good faith, at the time of
     creation of each such encumbrance or restriction, that such encumbrances
     and restrictions would not singly or in the aggregate have a materially
     adverse effect on the holders of the Notes;
 
          (xi) the subordination of (A) any Indebtedness owed by a Permitted
     Entity to its Equity Owners or any other Person to (B) any other
     Indebtedness of such Permitted Entity, provided (I) such other
     Indebtedness, at the time of the Incurrence thereof, is permitted by the
     definition of Permitted Entity and (II) the Board of Directors of the
     Company has determined in good faith, at the time of creation of each such
     encumbrance or restriction, that such encumbrances and restrictions would
     not singly or in the aggregate have a materially adverse effect on the
     holders of the Notes;
 
          (xii) Refinancing Indebtedness that is otherwise permitted in
     connection with any Refinanced Indebtedness, provided that, in the case of
     all Refinancing Indebtedness other than Refinancing Indebtedness Incurred
     with respect to Indebtedness permitted under the provisions described under
     clause (ii) under "-- Limitation on Indebtedness and Preferred Stock," any
     such encumbrances or restrictions shall not be materially less favorable to
     the holders of the Notes; and
 
          (xiii) the sale or other disposition of property subject to a Lien
     securing Indebtedness, provided that such Lien and such Indebtedness are
     otherwise permitted by the Indenture.
 
                                       107
   108
 
     The term "Permitted Entity" means any Person (other than a Subsidiary
Guarantor) designated as such by a Board Resolution and as to which (i) the
Company, any Subsidiary Guarantor or any Permitted Entity owns all or a portion
of the Permitted Entity Securities of such Person; (ii) no more than 10
unaffiliated Equity Owners own of record any Permitted Entity Securities of such
Person; (iii) at all times, each Equity Owner owns a proportion of each class of
Permitted Entity Securities of such Person outstanding equal to such Equity
Owner's Ownership Interest at such time, other than as a result of an Equity
Owner Default; (iv) no Indebtedness or preferred stock (including preference
stock) is or has been Incurred by such Person that is outstanding other than (x)
Permitted Entity Securities held by Equity Owners and/or (y) if such Person is a
Subsidiary of the Company, Indebtedness permitted to be Incurred by such
Subsidiary at the time of the Incurrence thereof under the provisions described
in clauses (v) and (xiii) of the second full paragraph under "-- Limitation on
Indebtedness and Preferred Stock"; (v) there exist no consensual encumbrances or
restrictions on the ability of such Person to (x) pay dividends or make any
other distributions to its Non-Defaulting Equity Owners or (y) make loans or
advances or transfer any of its assets to its Non-Defaulting Equity Owners, in
each case other than Permitted Dividend Encumbrances of such Permitted Entity;
(vi) the Company, any Subsidiary Guarantor or any Permitted Entity has the right
at any time (whether by agreement, operation of law or otherwise) to (A) require
the Permitted Entity that it owns an Ownership Interest in to dissolve,
liquidate or wind up its affairs (subject to any right of the other Equity
Owners and/or such Permitted Entity to acquire all of the Permitted Securities
owned by such Equity Owner) and, subject to applicable law, to distribute its
remaining assets to its Equity Owners after payment to creditors or (B) have all
of the Permitted Entity Securities that it owns purchased by such Permitted
Entity and/or other Equity Owners; and (vii) the business engaged in by such
Person is one in which the Company or its Subsidiaries or its Non-Affiliate
Joint Ventures were engaged on the date of the Indenture or reasonably related
thereto or is the business of holding or disposing of Permitted Entity
Securities.
 
     The term "Permitted Entity Securities" means, with respect to any Permitted
Entity, any Capital Stock or Indebtedness (whether or not a security) of such
Permitted Entity, other than Indebtedness permitted to be Incurred by such
Permitted Entity pursuant to clause (iv)(y) of the definition of Permitted
Entity, but in any event including Permitted Indebtedness described in clause
(b) of the definition thereof.
 
     The term "Permitted Indebtedness" means:
 
          (a) Indebtedness and preferred stock (including preference stock) of
     the Company and its Subsidiaries existing on the date of the Indenture,
     including, but not limited to, the 9 7/8% Notes and the 12 3/4% Notes;
 
          (b) Indebtedness (including Redeemable Stock) owed or issued by the
     Company to a Subsidiary or owed or issued by a Subsidiary to the Company,
     any other Subsidiary of the Company or to any other holder of Capital Stock
     of such Subsidiary in proportion to such holder's ownership interest in
     such Subsidiary;
 
          (c) Indebtedness and preferred stock (including preference stock) of a
     Permitted Entity to the extent not prohibited by clause (iii) or clause
     (iv)(x) of the definition thereof;
 
          (d) Indebtedness of the Company and its Subsidiaries by reason of
     entering into indemnification agreements and guarantees in connection with
     the disposition of assets, provided that the Indebtedness with respect to
     such indemnification agreements and guarantees shall be limited to the
     amount of the net proceeds of such disposition;
 
          (e) guarantees, letters of credit and indemnity agreements relating to
     performance and surety bonds incurred in the ordinary course of business;
 
          (f) Indebtedness of a Subsidiary of the Company (including undrawn
     amounts under lines of credit that are subsequently drawn upon) issued,
     assumed or guaranteed by such Subsidiary prior to the date upon which such
     Subsidiary becomes a Subsidiary of the Company (excluding Indebtedness
     incurred by such entity in connection with, or in contemplation of, its
     becoming a Subsidiary of the Company), provided that such Indebtedness and
     the holders thereof do not, at any time, have direct or indirect recourse
     to any property or assets of the Company and its Subsidiaries other than
     the property and assets
 
                                       108
   109
 
     of such acquired entity and its Subsidiaries, including the Capital Stock
     thereof, or any newly organized entity formed to effect such acquisition,
     and, in each case, the monetary proceeds thereof;
 
          (g) Indebtedness incurred by the Company in connection with the
     purchase, redemption, retirement or other acquisition by the Company of the
     USWA Preferred Stock outstanding on the date of the Indenture (plus
     additional shares of such USWA Preferred Stock issued as dividends thereon
     or on such shares issued as dividends);
 
          (h) Indebtedness of the Company and its captive wholly owned insurance
     Subsidiaries in respect of letters of credit in an aggregate amount not to
     exceed at any one time outstanding $20,000,000 issued for the account of
     the Company or such Subsidiaries in support of certain self-insurance and
     reinsurance obligations entered into from time to time by the Company or
     such captive wholly owned insurance Subsidiaries of the Company;
 
          (i) Indebtedness consisting of industrial revenue bonds and related
     indemnity agreements; and
 
          (j) Prior to a merger of the Company and KAC, Indebtedness in respect
     of the Preferred Dividend Intercompany Notes.
 
     The term "Preferred Dividend Intercompany Notes" means (i) the intercompany
note in respect of the PRIDES and (ii) any other intercompany note representing
a loan by KAC to the Company from the proceeds of an offering of preferred stock
by KAC which loan shall have a term not in excess of five years from the date of
issuance and shall be in an amount equal to the aggregate dividends scheduled to
accrue on such preferred stock during the term thereof and payable at
approximately the same times and in approximately the same amounts as such
dividends are payable, provided that, (a) the aggregate amount of all such
intercompany notes referred to in this clause (ii) shall not exceed $50,000,000
at any one time outstanding and (b) the remaining net proceeds from such
preferred stock offering shall have been used by KAC to make a capital
contribution to (or to purchase common stock of) the Company.
 
     The term "Principal Products" means bauxite, alumina, aluminum, fabricated
aluminum products, and other assets related to the production of the foregoing,
used or sold by the Company, its Subsidiaries and its Unrestricted Subsidiaries
in the ordinary course of business.
 
     The term "Redeemable Stock" means, with respect to any Person, any
preferred Capital Stock of such Person, that, by its terms (or by the terms of
any security into which it is convertible or for which it is exchangeable at the
option of the holder thereof), or upon the happening of any event, matures or is
mandatorily redeemable, in whole or in part, pursuant to a sinking fund
obligation or otherwise, or, at the option of the holder thereof, is redeemable
in whole or in part, or is exchangeable into a security of a Person other than
the issuer of such Capital Stock that is owned by such Person or its
Subsidiaries or into Indebtedness of, or that is owned by, such Person or its
Subsidiaries, in each case on or prior to the scheduled maturity date of the
Notes.
 
     The term "Refinance" means to renew, extend, refund, replace, restructure,
refinance, amend or modify any Indebtedness. The term "Refinancing" shall have a
correlative meaning.
 
     The term "Refinancing Sale and Leaseback Transaction" means any sale and
leaseback transaction with respect to which the Attributable Debt is at least
$100,000,000, and which is designated by the Company as a Refinancing Sale and
Leaseback Transaction in a notice to the Trustee pursuant to the terms of the
Indenture, which notice shall indicate the Attributable Debt with respect to
such Refinancing Sale and Leaseback Transaction.
 
   
     The term "Registration Rights Agreement" means that certain registration
rights agreement among the Company, the Subsidiary Guarantors and the Initial
Purchasers, to be entered into on the date of the Indenture.
    
 
     The term "Restricted Investment" means, with respect to any Person, (i) any
amount paid, or any property transferred, in each case, directly or indirectly
by such Person for Capital Stock or other securities of, or as a contribution
to, any Affiliate of the Company; (ii) any direct or indirect loan or advance by
such Person
 
                                       109
   110
 
to any Affiliate of the Company other than accounts receivable of such Person
relating to the purchase and sale of inventory, goods or services arising in the
ordinary course of business; (iii) any direct or indirect guarantee by such
Person of any obligations, contingent or otherwise, of any Affiliate of the
Company; and (iv) the acquisition by such Person of, or any investment by such
Person in, any Capital Stock or similar interest of any other Person (other than
the Company or an Unrestricted Subsidiary); provided, however, that the
following shall not be Restricted Investments:
 
          (a) investments in or acquisitions of Capital Stock or similar
     interests in any Person (other than a Person in which Affiliates of the
     Company have an interest other than through the Company, its Subsidiaries,
     its Unrestricted Subsidiaries and its Non-Affiliate Joint Ventures) that
     (I) is or becomes, at the time of the acquisition thereof, a Subsidiary of
     the Company and is or is to be primarily engaged in an operating business
     or (II) is, at the time of the acquisition thereof, engaged or to be
     engaged primarily in businesses in which the Company or its Subsidiaries or
     its Non-Affiliate Joint Ventures were engaged on the date of the Indenture
     or reasonably related extensions thereof, provided that such securities are
     not, at the time of the acquisition thereof (without regard to any
     exchanges, modifications or other changes thereto subsequent to such
     acquisition), registered under the Exchange Act;
 
          (b) Restricted Investments of such Person existing as of the date of
     the 9 7/8% Note Indenture and any extension, modification or renewal of
     such Restricted Investment (but not increases thereof, other than as a
     result of the accrual or accretion of interest or original issue discount
     pursuant to the terms of such Restricted Investment), or any Restricted
     Investment made in connection with an exchange of such Restricted
     Investment with the issuer thereof;
 
          (c) investments in or acquisitions of Permitted Entity Securities of
     any Permitted Entity;
 
          (d) transactions with officers or directors of the Company or any
     Subsidiary of the Company entered into in the ordinary course of business
     (including compensation or employee benefit arrangements with any officer
     or director of the Company or any Subsidiary of the Company);
 
          (e) investments in or acquisitions of Capital Stock or similar
     interests in Persons (other than Affiliates of the Company) received in the
     bankruptcy or reorganization of or by such Person or any exchange of such
     investment with the issuer thereof or taken in settlement of or other
     resolution of claims or disputes, and, in each case, extensions,
     modifications and renewals thereof; and
 
          (f) investments in Persons (other than Affiliates of the Company)
     received by such person as consideration from Asset Sales to the extent not
     prohibited by the provisions described under "-- Limitation on Asset Sales"
     (including, for the purposes of this definition, those sales, transfers and
     other dispositions described in clause (B) and the transactions described
     in clause (D) of such definition) or any exchange of such investment with
     the issuer thereof, and extensions, modifications and renewals thereof.
 
     The term "Significant Subsidiary" shall have the meaning assigned to that
term under Regulation S-X of the Securities Act as in effect on the date of the
Indenture; provided, however, that (i) each Subsidiary Guarantor on the date of
the Indenture shall be deemed to be a Significant Subsidiary of the Company for
so long as such Subsidiary is a Subsidiary Guarantor, (ii) each of VALCO, KAAC
and Alpart, and each Subsidiary of the Company that, directly or indirectly,
holds an interest in VALCO, Alpart or QAL, and each Subsidiary Guarantor that
becomes a Subsidiary Guarantor after the date of the Indenture (so long as such
Subsidiary Guarantor is a Subsidiary Guarantor) shall be deemed to be a
Significant Subsidiary if it (singly, or, in the case of VALCO, Alpart or QAL,
together with the other Subsidiaries of the Company that hold an interest in
such entity) meets the total assets test of the term "Significant Subsidiary"
under Regulation S-X as in effect on the date of the Indenture, but substituting
5% in such test for 10% and (iii) no Unrestricted Subsidiary shall be deemed to
be a Significant Subsidiary.
 
     The term "Specified Parties" means each of AJI, Alpart, KAAC, KJC, VALCO,
Kaiser Aluminium International, Inc., a Delaware corporation, and its
successors, Kaiser Bauxite Company, a Nevada corpora-
 
                                       110
   111
 
tion, and its successors, Kaiser Jamaica Bauxite Company, a Jamaican
partnership, and its successors, and Queensland Alumina Security Corporation, a
Delaware corporation, and its successors.
 
     The term "Subsidiary" means any corporation or other entity of which more
than 50% of the equity interest (which for a corporation shall be the
outstanding stock having ordinary voting power to elect a majority of the Board
of Directors of such corporation, irrespective of whether or not at the time
stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time
directly or indirectly owned (either alone or through Subsidiaries or together
with Subsidiaries) by the Company or another Subsidiary; provided, however, that
Queensland Alumina Security Corporation, a Delaware corporation, shall be deemed
not to be a Subsidiary of the Company or any of its Subsidiaries and shall be
deemed to be a Non-Affiliate Joint Venture (for as long as it meets the
definition of Non-Affiliate Joint Venture and for as long as its operations
remain substantially the same), and provided, further, that, for purposes of the
definitions of Asset Sale and Net Cash Proceeds and for purposes of the covenant
described under "Covenants -- Limitation on Asset Sales," each of Alpart and
VALCO, so long as it is not a wholly owned Subsidiary, shall be deemed not to be
a Subsidiary of the Company or any of its Subsidiaries and shall be deemed to be
a Non-Affiliate Joint Venture of the Company (for so long as it meets the
definition of Non-Affiliate Joint Venture). For purposes of this definition, any
directors' qualifying shares shall be disregarded in determining the ownership
of a Subsidiary. Notwithstanding anything to the contrary contained herein, no
Unrestricted Subsidiary shall be deemed to be a Subsidiary of the Company or of
any Subsidiary or Subsidiaries of the Company.
 
   
     The term "Subsidiary Guarantors" means the Persons from time to time named
as Subsidiary Guarantors in the Indenture or that become Subsidiary Guarantors
thereunder, and each of their respective successors, provided, however, that in
the event that a Subsidiary Guarantor is released from its Guarantee in
accordance with the terms of the Indenture, such Subsidiary Guarantor shall
without any further action no longer be a Subsidiary Guarantor for any purpose
of the Indenture or the Notes.
    
 
     The term "Tax Sharing Agreements" shall mean, collectively, the tax-sharing
agreement between the Company and KAC, dated as of June 30, 1993, and the
tax-sharing agreement between the Company and MAXXAM, dated as of December 21,
1989, and as each may be amended in accordance with Section 4.08(b)(x) of the
Indenture.
 
     The term "Unrestricted Subsidiary Investment" means with respect to the
Company or any Subsidiary of the Company (such Person being referred to in this
definition as the "Investor") (without duplication), (i) any amount paid, or any
property transferred, in each case, directly or indirectly, by the Investor for
Capital Stock or other securities of, or as a contribution to, an Unrestricted
Subsidiary, (ii) any direct or indirect loan or advance by the Investor to an
Unrestricted Subsidiary other than accounts receivable of the Investor relating
to the purchase and sale of inventory, goods or services arising in the ordinary
course of business, (iii) any direct or indirect guarantee by the Investor of,
or liability (other than liabilities arising by operation of law) of the
Investor for, any obligations, contingent or otherwise, of an Unrestricted
Subsidiary, (iv) any provision of credit support (including any undertaking,
agreement or instrument that would constitute Indebtedness) by the Investor to
or on behalf of an Unrestricted Subsidiary, (v) any Incurrence of Indebtedness
by an Unrestricted Subsidiary, a default with respect to which (including any
rights that the holders thereof may have to take enforcement action against such
Unrestricted Subsidiary) would permit (upon notice, lapse of time or both) any
holder of any Indebtedness of the Investor (other than the Notes being offered
hereby, Indebtedness set forth in a schedule to the Indenture and Indebtedness
in a principal amount of no more than $10,000,000 in any single case) to declare
a default on such Indebtedness of the Investor or cause the payment thereof to
be accelerated or payable prior to its stated maturity, (vi) any direct or
indirect obligation or liability of the Investor (A) to subscribe for additional
Equity Interests of an Unrestricted Subsidiary or (B) to maintain or preserve
such Unrestricted Subsidiary's financial condition or to cause such Unrestricted
Subsidiary to achieve any specified levels of operating results, and (vii) the
acquisition by the Investor of, or any investment by the Investor in, any
Capital Stock or similar interests of an Unrestricted Subsidiary. The amount of
any Unrestricted Subsidiary Investment, if other than in cash or a sum certain
guaranteed, shall be the Fair Market Value thereof.
 
                                       111
   112
 
     The term "Unrestricted Subsidiary Investments Outstanding" means, at any
time of determination, in respect of any Unrestricted Subsidiary, the amount, if
any, by which (i) the sum of all Unrestricted Subsidiary Investments theretofore
made by the Company or any Subsidiary of the Company in such Unrestricted
Subsidiary after the date of the Indenture, exceeds (ii) the amount of all
dividends and distributions received, directly or indirectly, by the Company or
a Subsidiary of the Company that is a Subsidiary Guarantor from such
Unrestricted Subsidiary in cash or Cash Equivalents during the period that such
Person was an Unrestricted Subsidiary, and all repayments in cash or Cash
Equivalents from such Unrestricted Subsidiary, directly or indirectly, to the
Company or one of its Subsidiaries that is a Subsidiary Guarantor of loans or
advances from the Company or any of its Subsidiaries to such Unrestricted
Subsidiary, during the period that such Person was an Unrestricted Subsidiary,
any other reduction (including as a result of the sale by the Company or a
Subsidiary of the Company of Capital Stock of an Unrestricted Subsidiary)
received, directly or indirectly, by the Company or a Subsidiary of the Company
that is a Subsidiary Guarantor in cash or Cash Equivalents of Unrestricted
Subsidiary Investments in such Unrestricted Subsidiary during the period that
such Person was an Unrestricted Subsidiary, and any reductions of Unrestricted
Subsidiary Investments in such Unrestricted Subsidiary of the kind referred to
in clauses (iii) through (vi) of the definition of Unrestricted Subsidiary
Investment; provided that the amount of Unrestricted Subsidiary Investments
Outstanding in respect of any Unrestricted Subsidiary shall at no time be a
negative amount. Notwithstanding the foregoing, in the event that the Company
redesignates an Unrestricted Subsidiary as a Subsidiary, the amount of
Unrestricted Subsidiary Investments Outstanding in respect of such Unrestricted
Subsidiary at the time of such redesignation shall continue to constitute
Unrestricted Subsidiary Investments Outstanding and such redesignated Subsidiary
shall not be required to become a Subsidiary Guarantor in connection with such
redesignation.
 
     The term "Unrestricted Subsidiary" means each of the Subsidiaries of the
Company or any entity which is to become a Subsidiary of the Company, designated
as an "Unrestricted Subsidiary" by a Board Resolution of the Company; but only
to the extent that such Subsidiary (i) is not, at the time of such designation,
party to any transaction or series of related transactions with the Company or
any Subsidiary of the Company, unless such transaction or series of related
transactions would be permitted by the provisions of the covenant described
above under the caption "Covenants--Restrictions on Transactions with Affiliates
and Unrestricted Subsidiaries," and (ii) has, at the time of such designation,
at least one director on its board of directors that is not a director or
executive officer of the Company or any of its Subsidiaries and has at least one
executive officer that is not a director or executive officer of the Company or
any of its Subsidiaries. Any such designation by the Board of Directors of the
Company shall be evidenced to the Trustee by filing with the Trustee a certified
copy of the Board Resolution giving effect to such designation and an Officers'
Certificate, certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described above under the caption
"Covenants--Limitations on Restricted Payments, Restricted Investments and
Unrestricted Subsidiary Investments" and "--Limitations on Unrestricted
Subsidiaries." The Board of Directors of the Company may designate an
Unrestricted Subsidiary to be a Subsidiary, provided that any such redesignation
shall be deemed to be an Incurrence by the Company or its Subsidiaries of the
Indebtedness (if any) of such redesignated Subsidiary, to the extent such
Indebtedness does not already constitute Indebtedness of the Company or one or
more of its Subsidiaries, for purposes of the covenant described above under the
caption "Covenants--Limitation on Indebtedness and Preferred Stock" as of the
date of such redesignation, and such redesignation shall only be permitted if
(i) such Indebtedness is permitted under the covenant described under the
caption "Covenants--Limitation on Indebtedness and Preferred Stock," and (ii) no
Event of Default (or event that, after notice or lapse of time or both, would
become an Event of Default) would be in existence as a result of such
designation.
 
     The term "U.S. Fixed Assets" means, at any time, any real property, plant
or equipment of the Company or any of its Subsidiaries located at such time in
the United States of America, now owned or hereafter acquired, together with any
fixed assets that are Improvements thereto or thereon and any fixed assets that
are proceeds thereof.
 
     The term "Voting Stock" means, with respect to any Person, the Capital
Stock of such Person having general voting power under ordinary circumstances to
elect at least a majority of the board of directors,
 
                                       112
   113
 
managers or trustees of such Person (irrespective of whether or not at the time
capital stock of any other class or classes shall have or might have voting
power by reason of the happening of any contingency).
 
BOOK-ENTRY; DELIVERY AND FORM
 
     Except as set forth below, the New Notes will initially be issued in the
form of one registered New Note in global form (the "Global New Note"). The
Global New Note will be deposited on the date of the closing of the Exchange
Offer with, or on behalf of, The Depository Trust Company (the "Depositary") and
registered in the name of Cede & Co., as nominee of the Depositary. Interests in
the Global New Note will be available for purchase only by "qualified
institutional buyers," as defined in Rule 144A under the Securities Act
("QIBs").
 
     New Notes that are (i) originally issued to or transferred to institutional
"accredited investors," as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act, who are not QIBs or to any other persons who are not QIBs or
(ii) issued as described below under "Certificated Securities," will be issued
in registered form without coupons (the "Certificated Securities"). Upon the
transfer to a QIB of Certificated Securities, such Certificated Securities may,
unless the Global New Note has previously been exchanged for Certificated
Securities, be exchanged for an interest in the Global New Note representing the
principal amount of New Notes being transferred.
 
     The Depositary has advised the Company that it is (i) a limited-purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and (iv) a "Clearing Agency"
registered pursuant to Section 17A of the Exchange Act. The Depositary was
created to hold securities for its participating organizations (collectively,
the "Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in accounts of its Participants. The Depositary's
Participants include securities brokers and dealers (including the Initial
Purchasers), banks and trust companies, clearing corporations and certain other
organizations. Access to the Depositary's system is also available to other
entities such as banks, brokers, dealers and trust companies (collectively, the
"Indirect Participants") that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly. QIBs may elect to hold New
Notes acquired by them through the Depositary. QIBs who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
Participants or Indirect Participants. Persons that are not QIBs may not hold
New Notes through the Depositary.
 
     The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global New Note, the Depositary will credit
the accounts of Participants designated by the Exchange Agent with an interest
in the Global New Note and (ii) ownership of the New Notes will be shown, on,
and the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of Participants),
the Participants and the Indirect Participants. The laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own and that security interests in negotiable instruments can only be
perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer New Notes or to pledge the New Notes as
collateral will be limited to such extent. The New Notes will be subject to
certain other restrictions on transferability.
 
     So long as the Depositary or its nominee is the registered owner of a
Global New Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the New Notes represented by the Global
New Note for all purposes under the Indenture. Except as provided below, owners
of beneficial interests in a Global New Note will not be entitled to have New
Notes represented by such Global New Note registered in their names, will not
receive or be entitled to receive physical delivery of Certificated Securities,
and will not be considered the owners or holders thereof under the Indenture for
any purpose, including with respect to the giving of any directions,
instructions or approvals to the Trustee thereunder. As a result, the ability of
a person having a beneficial interest in New Notes represented by a Global New
Note to pledge such interest to persons or entities that do not participate in
the Depositary's system, or to otherwise take actions with respect to such
interest, may be affected by the lack of a physical certificate evidencing such
interest.
 
                                       113
   114
 
     Accordingly, each QIB owning a beneficial interest in a Global New Note
must rely on the procedures of the Depositary and, if such QIB is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such QIB owns its interest, to exercise any rights of a holder
under the Indenture or such Global New Note. The Company understands that under
existing industry practice, in the event the Company requests any action of
holders of New Notes or a QIB that is an owner of a beneficial interest in a
Global New Note desires to take any action that the Depositary, as the holder of
such Global New Note, is entitled to take, the Depositary would authorize the
Participants to take such action and the Participants would authorize QIBs
owning through such Participants to take such action or would otherwise act upon
the instructions of such QIBs. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of New Notes by the Depositary, or for maintaining,
supervising or reviewing any records of the Depositary relating to such New
Notes.
 
     Payments with respect to the principal of, premium, if any, and interest on
any New Notes represented by a Global New Note registered in the name of the
Depositary or its nominee on the applicable record date will be payable by the
Trustee to or at the direction of the Depositary or its nominee in its capacity
as the registered holder of the Global New Note representing such New Notes
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names the New Notes, including the Global
New Note, are registered as the owners thereof for the purposes of receiving
such payments and for any and all other purposes whatsoever. Consequently,
neither the Company nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of New Notes
(including principal, premium, if any, and interest), or to immediately credit
the accounts of the relevant Participants with such payment, in amounts
proportionate to their respective holdings in principal amount of beneficial
interest in the Global New Note as shown on the records of the Depositary.
Payments by the Participants and the Indirect Participants to the beneficial
owners of New Notes will be governed by standing instructions and customary
practice and will be the responsibility of the Participants or the Indirect
Participants.
 
  Certificated Securities
 
     If the Depositary is at any time unwilling or unable to continue as a
depository and a successor depositary is not appointed by the Company within 90
days then, upon surrender by the Depositary of its Global New Note, Certificated
Securities will be issued to each person that the Depositary identifies as the
beneficial owner of the New Notes represented by the Global New Note. In
addition, subject to certain conditions, any person having a beneficial interest
in a Global New Note may, upon request to the Trustee, exchange such beneficial
interest for Certificated Securities. Upon any such issuance, the Trustee is
required to register such Certificated Securities in the name of such person or
persons (or the nominee of any thereof), and cause the same to be delivered
thereto.
 
     Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Participant or Indirect Participant in identifying the
beneficial owners of the related New Notes and each such person may conclusively
rely on, and shall be protected in relying on instructions from the Depositary
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the New Notes to be issued).
 
     The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable. The
Company will have no responsibility for the performance by DTC or its
Participants of their respective obligations as described hereunder or under the
rules and procedures governing their respective operations.
 
                                       114
   115
 
                    CERTAIN FEDERAL INCOME TAX CONSEQUENCES
 
     The following discussion sets forth the material anticipated federal income
tax consequences expected to result to holders from the acquisition, ownership
and disposition of the New Notes. This discussion is based upon current
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
applicable Treasury regulations, judicial authority and administrative
pronouncements, all of which are subject to change, possibly with retroactive
effect. No ruling has been or will be requested by the Company from the Internal
Revenue Service (the "Service") on any matters relating to the New Notes, and
there can be no assurance that the Service will have a similar view with respect
to the tax consequences described below.
 
     The following discussion is for general information only. The tax treatment
of a holder of the New Notes may vary depending upon such holder's particular
situation. The discussion only addresses the tax consequences to holders who
acquire the New Notes pursuant to the Exchange Offer and who hold the New Notes
as capital assets and does not deal with special classes of holders, such as
insurance companies, tax-exempt organizations, financial institutions, dealers
in securities, foreign corporations and persons who are not citizens or
residents of the United States, that may be subject to special rules not
discussed below. EACH HOLDER OF OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR FOREIGN TAX LAWS.
 
THE EXCHANGE OFFER
 
     The exchange of the New Notes for the Old Notes pursuant to the Exchange
Offer should not be taxable to a holder thereof for federal income tax purposes.
An exchanging holder's tax basis in the New Notes should be equal to his
adjusted tax basis in the Old Notes, and the holding period of the New Notes
should include the holding period of the Old Notes.
 
ORIGINAL ISSUE DISCOUNT AND STATED INTEREST
 
     The Old Notes were issued and the New Notes will be issued without original
issue discount. Stated interest on the Old and New Notes will be taxable to a
holder as ordinary interest income at the time it is accrued or paid in
accordance with such holder's method of accounting for tax purposes.
 
BOND PREMIUM ON THE NEW NOTES
 
     If a holder of a New Note purchased the Old Notes for an amount in excess
of the amount payable at the maturity date (or a call date, if appropriate) of
the Old Notes, the holder may deduct such excess as amortizable bond premium
over the aggregate terms of the Old Notes and the New Notes (taking into account
earlier call dates, as appropriate), under a yield-to-maturity formula. The
deduction is available only if an election is made by the purchaser or is in
effect. This election is revocable only with the consent of the Service. The
election applies to all obligations owned or subsequently acquired by the
holder. The holder's adjusted tax basis in the Old Notes and the New Notes will
be reduced to the extent of the deduction of amortizable bond premium. Except as
may otherwise be provided in future regulations, under the Code the amortizable
bond premium is treated as an offset to interest income on the Old Notes and the
New Notes rather than as a separate deduction item.
 
MARKET DISCOUNT ON THE NEW NOTES
 
     Tax consequences of a disposition of the New Notes may be affected by the
market discount provisions of the Code. These rules generally provide that if a
holder acquired the Old Notes (other than in an original issue) at a market
discount which equals or exceeds 1/4 of 1% of the stated redemption price of the
Old Notes at maturity multiplied by the number of remaining complete years to
maturity and thereafter recognizes gain upon a disposition (or makes a gift) of
the New Notes, the lesser of (i) such gain (or appreciation, in the case of a
gift) or (ii) the portion of the market discount which accrued while the Old or
New Notes were held by such holder will be treated as ordinary income at the
time of the disposition (or gift). For these purposes,
 
                                       115
   116
 
market discount means the excess (if any) of the stated redemption price at
maturity over the basis of such Old Notes immediately after their acquisition by
the holder. A holder of the New Notes may elect to include any market discount
(whether accrued under the Old Notes or the New Notes) in income currently
rather than upon disposition of the New Notes. This election once made applies
to all market discount obligations acquired on or after the first taxable year
to which the election applies, and may not be revoked without the consent of the
Service.
 
     A holder of any New Note who acquired the Old Note at a market discount
generally will be required to defer the deduction of a portion of the interest
on any indebtedness incurred or maintained to purchase or carry such Old or New
Note until the market discount is recognized upon a subsequent disposition of
such New Note. Such a deferral is not required, however, if the holder elects to
include accrued market discount in income currently.
 
REDEMPTION OR SALE OF THE NEW NOTES
 
     Generally, any redemption or sale of the New Notes by a holder should
result in taxable gain or loss equal to the difference between the amount of
cash and the fair market value of property received (except to the extent that
such cash or property received is attributable to accrued, but previously
untaxed, interest) and the holder's tax basis in the New Notes. The tax basis of
a holder of the New Notes should generally be equal to the price paid for the
Old Notes exchanged therefor, plus any accrued market discount on the New Notes
(and the Old Notes exchanged therefor) included in the holder's income prior to
sale or redemption of the New Notes, or reduced by any amortizable bond premium
applied against the holder's income prior to sale or redemption of the New
Notes. Such gain or loss generally would be long-term capital gain or loss if
the holding period exceeded one year, except to the extent it constitutes
accrued market discount.
 
BACKUP WITHHOLDING AND INFORMATION REPORTING
 
     A 31% "backup" withholding tax and information reporting requirements apply
to certain payments of interest and original issue discount on an obligation,
and to proceeds of the sale of an obligation before maturity, to certain
non-corporate holders. The Company, and/or any paying and/or collection agent,
including a broker, as the case may be, will be required to withhold from any
payment that is subject to backup withholding a tax equal to 31% of such payment
unless the holder furnishes its taxpayer identification number (i.e., social
security number in the case of an individual) in the manner prescribed in
applicable Treasury regulations, certifies that such number is correct,
certifies (with respect to payments of interest) as to no loss of exemption from
backup withholding and meets certain other conditions. Backup withholding,
however, in any event, generally does not apply to payments to certain "exempt
recipients" such as corporations.
 
     THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF THE
OLD NOTES SHOULD CONSULT HIS OR HER TAX ADVISOR WITH RESPECT TO THE TAX
CONSEQUENCES TO HIM OR HER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF THE
NEW NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL, FOREIGN AND
OTHER TAX LAWS.
 
                                       116
   117
 
                              PLAN OF DISTRIBUTION
 
     Each broker-dealer that holds Old Notes that were acquired for its own
account as a result of market making or other trading activities (other than Old
Notes acquired directly from the Company), may exchange Old Notes for New Notes
in the Exchange Offer. However, any such broker-dealer may be deemed to be an
"underwriter" within the meaning of such term under the Securities Act and must,
therefore, acknowledge that it will deliver a prospectus in connection with any
resale of New Notes received in the Exchange Offer. This prospectus delivery
requirement may be satisfied by the delivery by such broker-dealer of this
Prospectus, as it may be amended or supplemented from time to time. The Company
has agreed that, for a period of 180 days after the effective date of this
Prospectus, it will make this Prospectus, as amended or supplemented, available
to any broker-dealer who receives New Notes in the Exchange Offer for use in
connection with any such sale. The Company will not receive any proceeds from
any sales of New Notes by broker-dealers. New Notes received by broker-dealers
for their own accounts pursuant to the Exchange Offer may be sold from time to
time in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the New Notes or a combination
of such methods of resale, at market prices at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
of New Notes by broker-dealers may be made directly to a purchaser or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer and/or the purchasers of
any such New Notes. In addition, if any Eligible Holder acquires New Notes in
the Exchange Offer for the purpose of distributing or participating in a
distribution of the New Notes, such Eligible Holder cannot rely on the position
of the staff of the Commission enunciated in Morgan Stanley & Co., Incorporated
(available June 5, 1991) and Exxon Capital Holdings Corporation (available May
13, 1988), and interpreted in the Commission's letters to Shearman & Sterling
(available July 2, 1993) and K-III Communications Corporation (available May 14,
1993), and similar no-action or interpretive letters issued to third parties,
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction, unless an
exemption from registration is otherwise available. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Company has agreed to
pay all expenses incident to the Exchange Offer other than commissions or
concessions of any brokers or dealers and will indemnify Eligible Holders
(including any broker-dealer) against certain liabilities, including liabilities
under the Securities Act.
 
     By acceptance of the Exchange Offer, each broker-dealer that receives New
Notes pursuant to the Exchange Offer hereby agrees to notify the Company prior
to using the Prospectus in connection with the sale or transfer of New Notes,
and acknowledges and agrees that, upon receipt of notice from the Company of the
happening of any event which makes any statement in the Prospectus untrue in any
material respect or which requires the making of any changes in the Prospectus
in order to make the statements herein not misleading (which notice the Company
agrees to deliver promptly to such broker-dealer), such broker-dealer will
suspend use of the Prospectus until the Company has amended or supplemented the
Prospectus to correct such misstatement or omission and has furnished copies of
the amended or supplemented prospectus to such broker-dealer.
 
                                       117
   118
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
     The Company incorporates herein by reference the following documents filed
with the Commission under the Exchange Act:
 
   
     All documents and reports subsequently filed by the Company or the
Subsidiary Guarantors pursuant to Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this Prospectus and prior to termination of the
transactions to which this Prospectus relates shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents or reports.
    
 
     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 other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded, except as so modified or superseded, shall
not be deemed to constitute a part of this Prospectus.
 
     The Company will provide without charge to each person to whom a copy of
this Prospectus has been delivered, on the written or oral request of such
person, a copy of any or all of the documents incorporated herein by reference,
other than exhibits to such documents unless they are specifically incorporated
by reference into such documents. Requests for such copies should be directed
to: Kaiser Aluminum & Chemical Corporation, 5847 San Felipe, Suite 2600,
Houston, Texas 77057, Attention: General Counsel.
 
                                 LEGAL MATTERS
 
     The validity of the New Notes and the Guarantees will be passed upon for
the Company by Kramer, Levin, Naftalis & Frankel, New York, New York.
 
                                    EXPERTS
 
     The audited consolidated financial statements of the Company as of December
31, 1995 and 1994 and for each of the three years in the period ended December
31, 1995, included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said report.
 
                                       118
   119
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 


                                                                                        PAGE
                                                                                        ----
                                                                                     
                                AUDITED FINANCIAL STATEMENTS

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
  Report of Independent Public Accountants............................................   F-2
  Consolidated Balance Sheets at December 31, 1995 and 1994...........................   F-3
  Statements of Consolidated Income (Loss) for the Years Ended December 31, 1995, 1994
     and 1993.........................................................................   F-4
  Statements of Consolidated Cash Flows for the Years Ended December 31, 1995, 1994
     and 1993.........................................................................   F-5
  Notes to Consolidated Financial Statements..........................................   F-6

                               UNAUDITED FINANCIAL STATEMENTS

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
  Quarterly Financial Data............................................................  F-30
  Consolidated Balance Sheets at September 30, 1996 and December 31, 1995.............  F-31
  Statements of Consolidated Income for the Nine Months Ended September 30, 1996 and
     1995.............................................................................  F-32
  Statements of Consolidated Cash Flows for the Nine Months Ended September 30, 1996
     and 1995.........................................................................  F-33
  Notes to Interim Consolidated Financial Statements..................................  F-34

 
                                       F-1
   120
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Stockholders and the Board of Directors of Kaiser Aluminum & Chemical
Corporation:
 
     We have audited the accompanying consolidated balance sheets of Kaiser
Aluminum & Chemical Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1995 and 1994, and the related statements of consolidated income
and cash flows for each of the three years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kaiser Aluminum & Chemical
Corporation and subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted accounting
principles.
 
Arthur Andersen LLP
San Francisco, California
February 16, 1996 (except
with respect to the
matter discussed in
Note 13 as to which
the date is October 23, 1996)
 
                                       F-2
   121
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
                          CONSOLIDATED BALANCE SHEETS
 
 


                                     ASSETS

                                                                              DECEMBER 31,
                                                                        ------------------------
                                                                          1995           1994
                                                                        ---------      ---------
                                                                        (IN MILLIONS OF DOLLARS,
                                                                          EXCEPT SHARE AMOUNTS)
                                                                                 
Current assets:
  Cash and cash equivalents...........................................  $    21.7      $    12.0
  Receivables:
  Trade, less allowance for doubtful receivables of $5.0 in 1995 and
     $4.2 in 1994.....................................................      222.9          150.7
     Other............................................................       87.3           49.8
  Inventories.........................................................      525.7          468.0
  Prepaid expenses and other current assets...........................       76.6          158.0
                                                                        ---------      ---------
          Total current assets........................................      934.2          838.5
Investments in and advances to unconsolidated affiliates..............      178.2          169.7
Property, plant, and equipment -- net.................................    1,109.6        1,133.2
Deferred income taxes.................................................      268.8          271.0
Other assets..........................................................      323.5          281.2
                                                                        ---------      ---------
          Total.......................................................  $ 2,814.3      $ 2,693.6
                                                                        =========      =========
                             LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable....................................................  $   184.5      $   152.1
  Accrued interest....................................................       32.0           32.6
  Accrued salaries, wages, and related expenses.......................      105.3           77.7
  Accrued postretirement medical benefit obligation -- current
     portion..........................................................       46.8           47.0
  Other accrued liabilities...........................................      126.2          171.7
  Payable to affiliates...............................................       95.3           85.2
  Long-term debt -- current portion...................................        8.9           11.5
  Note payable to parent -- current portion...........................       10.7           21.2
                                                                        ---------      ---------
          Total current liabilities...................................      609.7          599.0
Long-term liabilities.................................................      548.5          495.5
Accrued postretirement medical benefit obligation.....................      734.0          734.9
Long-term debt........................................................      749.2          751.1
Note payable to parent................................................        8.6           23.5
Minority interests....................................................       91.4           85.4
Redeemable preference stock -- aggregate liquidation value of $36.9 in
  1995 and $45.6 in 1994..............................................       29.6           29.0
Stockholders' equity (deficit):
  Redeemable preference stock -- cumulative and convertible, par value
     $100, authorized 1,000,000 shares; issued and outstanding, 22,214
     and 23,436 in 1995 and 1994......................................        1.7            1.8
  Common stock, par value 33 1/3 cents, authorized 100,000,000 shares;
     issued and outstanding, 46,171,365 in 1995 and 1994..............       15.4           15.4
  Additional capital..................................................    1,730.7        1,626.3
  Accumulated deficit.................................................     (210.9)        (271.5)
  Additional minimum pension liability................................      (13.8)          (9.1)
  Note payable to parent..............................................   (1,479.8)      (1,387.7)
                                                                        ---------      ---------
          Total stockholders' equity (deficit)........................       43.3          (24.8)
                                                                        ---------      ---------
          Total.......................................................  $ 2,814.3      $ 2,693.6
                                                                        =========      =========

 
The accompanying notes to consolidated financial statements are an integral part
                              of these statements.
 
                                       F-3
   122
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
                    STATEMENTS OF CONSOLIDATED INCOME (LOSS)
 


                                                                     YEAR ENDED DECEMBER 31,
                                                                 --------------------------------
                                                                   1995        1994        1993
                                                                 --------    --------    --------
                                                                     (IN MILLIONS OF DOLLARS)
                                                                                
Net sales.....................................................   $2,237.8    $1,781.5    $1,719.1
                                                                 --------    --------    --------
Costs and expenses:
  Cost of products sold.......................................    1,798.4     1,625.5     1,587.7
  Depreciation................................................       94.3        95.4        97.1
  Selling, administrative, research and development, and
     general..................................................      134.0       116.5       121.6
  Restructuring of operations.................................                               35.8
                                                                 --------    --------    --------
          Total costs and expenses............................    2,026.7     1,837.4     1,842.2
                                                                 --------    --------    --------
Operating income (loss).......................................      211.1       (55.9)     (123.1)
Other expense:
  Interest expense............................................      (93.9)      (88.6)      (84.2)
  Other -- net................................................      (14.1)       (7.3)       (1.5)
                                                                 --------    --------    --------
Income (loss) before income taxes, minority interests,
  extraordinary loss, and cumulative effect of changes in
  accounting principles.......................................      103.1      (151.8)     (208.8)
(Provision) credit for income taxes...........................      (37.4)       54.0        86.9
Minority interests............................................        (.4)        1.6         4.3
                                                                 --------    --------    --------
Income (loss) before extraordinary loss and cumulative effect
  of changes in accounting principles.........................       65.3       (96.2)     (117.6)
Extraordinary loss on early extinguishment of debt, net of tax
  benefit of $2.9 and $11.2 for 1994 and 1993, respectively...                   (5.4)      (21.8)
Cumulative effect of changes in accounting principles, net of
  tax benefit of $237.7.......................................                             (507.9)
                                                                 --------    --------    --------
Net income (loss).............................................   $   65.3    $ (101.6)   $ (647.3)
                                                                 ========    ========    ========

 
The accompanying notes to consolidated financial statements are an integral part
                              of these statements.
 
                                       F-4
   123
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
 


                                                                     YEAR ENDED DECEMBER 31,
                                                                 -------------------------------
                                                                  1995       1994        1993
                                                                 -------    -------    ---------
                                                                    (IN MILLIONS OF DOLLARS)
                                                                              
Cash flows from operating activities:
  Net income (loss)...........................................   $  65.3    $(101.6)   $  (647.3)
  Adjustments to reconcile net income (loss) to net cash
     provided by (used for) operating activities:
     Depreciation.............................................      94.3       95.4         97.1
     Amortization of excess investment over equity in
       unconsolidated affiliates..............................      11.4       11.6         11.9
     Amortization of deferred financing costs and discount on
       long-term debt.........................................       5.4        6.2         11.2
     Equity in (income) losses of unconsolidated affiliates...     (19.2)       1.9          3.3
     Restructuring of operations..............................                              35.8
     Minority interests.......................................        .4       (1.6)        (4.3)
     Extraordinary loss on early extinguishment of
       debt -- net............................................                  5.4         21.8
     Cumulative effect of changes in accounting
       principles -- net......................................                             507.9
     (Increase) decrease in receivables.......................    (110.0)      36.2         (6.2)
     (Increase) decrease in inventories.......................     (57.7)     (41.1)        13.0
     Decrease (increase) in prepaid expenses and other
       assets.................................................      82.9      (60.6)        (5.2)
     Increase (decrease) in accounts payable..................      32.4       25.8        (10.3)
     (Decrease) increase in accrued interest..................       (.6)       9.3         19.2
     Increase in payable to affiliates and accrued
       liabilities............................................      10.6       51.6         76.4
     Decrease in accrued and deferred income taxes............      (7.2)     (69.2)       (96.4)
     Other....................................................      11.5        9.4         10.1
                                                                 -------    -------    ---------
          Net cash provided by (used for) operating
            activities........................................     119.5      (21.3)        38.0
                                                                 -------    -------    ---------
Cash flows from investing activities:
  Net proceeds from disposition of property and investments...       8.6        4.1         13.1
  Capital expenditures........................................     (79.4)     (70.0)       (67.7)
  Investments in joint ventures...............................      (9.0)
                                                                 -------    -------    ---------
          Net cash used for investing activities..............     (79.8)     (65.9)       (54.6)
                                                                 -------    -------    ---------
Cash flows from financing activities:
  Repayments of long-term debt, including revolving credit....    (537.7)    (345.1)    (1,134.5)
  Borrowings of long-term debt, including revolving credit....     532.3      378.9      1,068.1
  Borrowings from MAXXAM Group Inc. (see supplemental
     disclosure below)........................................                              15.0
  Tender premiums and other costs of early extinguishment of
     debt.....................................................                             (27.1)
  Net short-term debt repayments..............................                  (.5)        (4.3)
  Net (payments to) borrowings from parent....................     (15.5)      13.2         31.5
  Incurrence of financing costs...............................       (.8)     (19.2)       (12.7)
  Dividends paid..............................................       (.7)       (.7)        (1.0)
  Capital contribution........................................       1.2       66.9         81.5
  Redemption of preference stock..............................      (8.8)      (8.5)        (4.2)
                                                                 -------    -------    ---------
          Net cash (used for) provided by financing
            activities........................................     (30.0)      85.0         12.3
                                                                 -------    -------    ---------
Net increase (decrease) in cash and cash equivalents during
  the year....................................................       9.7       (2.2)        (4.3)
Cash and cash equivalents at beginning of year................      12.0       14.2         18.5
                                                                 -------    -------    ---------
Cash and cash equivalents at end of year......................   $  21.7    $  12.0    $    14.2
                                                                 =======    =======    =========
Supplemental disclosure of cash flow information:
  Interest paid, net of capitalized interest..................   $  88.8    $  73.1    $    53.7
  Income taxes paid...........................................      35.7       16.0         13.5
  Tax allocation payments to Kaiser Aluminum Corporation......       3.2
  Tax allocation payments from MAXXAM Inc.....................                 (3.8)
Supplemental disclosure of non-cash financing activities:
  Contribution to capital of the borrowings from
     MAXXAM Group Inc.........................................                         $    15.0

 
The accompanying notes to consolidated financial statements are an integral part
                              of these statements.
 
                                       F-5
   124
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the statements of Kaiser
Aluminum & Chemical Corporation (the "Company" or "KACC") and its majority-owned
subsidiaries. The Company is a wholly owned subsidiary of Kaiser Aluminum
Corporation ("Kaiser") which is a subsidiary of MAXXAM Inc. ("MAXXAM"). The
Company operates in all principal aspects of the aluminum industry -- the mining
of bauxite (the major aluminum-bearing ore), the refining of bauxite into
alumina (the intermediate material), the production of primary aluminum, and the
manufacture of fabricated and semi-fabricated aluminum products. The Company's
production levels of alumina and primary aluminum exceed its internal processing
needs, which allows it to be a major seller of alumina and primary aluminum to
domestic and international third parties (see Note 11).
 
     The preparation of financial statements in accordance with generally
accepted accounting principles requires the use of estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities known to exist as of the date the financial
statements are published, and the reported amount of revenues and expenses
during the reporting period. Uncertainties, with respect to such estimates and
assumptions, are inherent in the preparation of the Company's consolidated
financial statements; accordingly, it is possible that the actual results could
differ from these estimates and assumptions, which could have a material effect
on the reported amounts of the Company's consolidated financial position and
results of operation.
 
     Investments in 50%-or-less-owned entities are accounted for primarily by
the equity method. Intercompany balances and transactions are eliminated.
Certain reclassifications of prior-year information were made to conform to the
current presentation.
 
CHANGES IN ACCOUNTING PRINCIPLES
 
     The Company adopted Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106"), and Statement of Financial Accounting Standards No. 112, Employers'
Accounting for Postemployment Benefits ("SFAS 112"), as of January 1, 1993. The
costs of postretirement benefits other than pensions and postemployment benefits
are now accrued over the period 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 changes in accounting
principles for the adoption of SFAS 106 and SFAS 112 were recorded as charges to
results of operations of $497.7 and $7.3, net of related income taxes of $234.2
and $3.5, respectively. These deferred income tax benefits were recorded at the
federal statutory rate in effect on the date the accounting standards were
adopted, before giving effect to certain valuation allowances. The new
accounting standards had no effect on the Company's cash outlays for
postretirement or postemployment benefits, nor did these one-time charges 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.
 
     The Company adopted Statement of Financial Accounting Standards No. 109,
Accounting for Income Taxes ("SFAS 109"), as of January 1, 1993. 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
 
                                       F-6
   125
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
financial statement and tax bases of assets and liabilities using enacted tax
rates. The cumulative effect of the change in accounting principle reduced the
Company's results of operations by $2.9. The adoption 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 acquisition
by MAXXAM in October 1988. As a result of restating these assets and
liabilities, the loss before income taxes, minority interests, extraordinary
loss, and cumulative effect of changes in accounting principles for the year
ended December 31, 1993, was increased by $9.3.
 
CASH AND CASH EQUIVALENTS
 
     The Company considers only those short-term, highly liquid investments with
original maturities of 90 days or less to be cash equivalents.
 
INVENTORIES
 
     Substantially all product inventories are stated at last-in, first-out
("LIFO") cost, not in excess of market value. Replacement cost is not in excess
of LIFO cost. Other inventories, 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. Inventories consist of the following:
 


                                                                            DECEMBER 31,
                                                                           ---------------
                                                                            1995     1994
                                                                           ------   ------
                                                                              
    Finished fabricated products.........................................  $ 91.5   $ 49.4
    Primary aluminum and work in process.................................   195.9    203.1
    Bauxite and alumina..................................................   119.6    102.3
    Operating supplies and repair and maintenance parts..................   118.7    113.2
                                                                           ------   ------
                                                                           $525.7   $468.0
                                                                           ======   ======

 
DEPRECIATION
 
     Depreciation is computed principally by the straight-line method at rates
based on the estimated useful lives of the various classes of assets. The
principal estimated useful lives by class of assets are:
 
                                                                     
    Land improvements.....................................................   8 to 25 years
    Buildings.............................................................  15 to 45 years
    Machinery and equipment...............................................  10 to 22 years

    
 
STOCK-BASED COMPENSATION
 
     The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting for a
stock-based compensation plan. Accordingly, no compensation cost has been
recognized for this plan (see Note 6).
 
OTHER EXPENSE
 
     Other expense in 1995, 1994 and 1993 includes $17.8, $16.5 and $17.9 of
pre-tax charges related principally to establishing additional: (i) litigation
reserves for asbestos claims, and (ii) environmental reserves for potential soil
and ground water remediation matters each pertaining to operations which were
discontinued prior to the acquisition of the Company by MAXXAM in 1988.
 
                                       F-7
   126
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
DEFERRED FINANCING COSTS
 
     Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related borrowing. Amortization of deferred financing
costs of $5.3, $6.0, and $11.2 for the years ended December 31, 1995, 1994, and
1993, respectively, are included in interest expense.
 
FOREIGN CURRENCY
 
     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 the Company's operating results concurrently with the
consummation of the underlying hedged transactions. Deferred gains or losses as
of December 31, 1995, are included in Prepaid expenses and other current assets
and Other accrued liabilities. The Company does not hold or issue derivative
financial instruments for trading purposes (see Note 10).
 
FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The following table presents the estimated fair value of the Company's
financial instruments, together with the carrying amounts of the related assets
or liabilities. Unless otherwise noted, the carrying amount of all financial
instruments is a reasonable estimate of fair value.
 


                                                           DECEMBER 31, 1995         DECEMBER 31, 1994
                                                         ---------------------     ---------------------
                                                         CARRYING   ESTIMATED      CARRYING   ESTIMATED
                                                          AMOUNT    FAIR VALUE      AMOUNT    FAIR VALUE
                                                         --------   ----------     --------   ----------
                                                                                  
Debt...................................................   $758.1      $806.3        $762.6      $747.6
Foreign currency contracts.............................                  1.9                       3.5

 
     The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
 
          Debt -- The quoted market prices were used for the Senior Notes and
     12 3/4% Notes (see Note 4). The fair value of all other debt is based on
     discounting the future cash flows using the current rate for debt of
     similar maturities and terms.
 
          Foreign Currency Contracts -- The fair value generally reflects the
     estimated amounts that the Company would receive to enter into similar
     contracts at the reporting date, thereby taking into account unrealized
     gains or losses on open contracts (see Note 10).
 
2.  INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
 
     Summary combined financial information is provided below for unconsolidated
aluminum investments, most of which supply and process raw materials. The
investees are Queensland Alumina Limited ("QAL") (28.3% owned), Anglesey
Aluminum Limited ("Anglesey") (49.0% owned), and Kaiser Jamaica Bauxite Company
(49.0% owned). The equity in earnings (losses) before income taxes of such
operations is treated as a reduction (increase) in cost of products sold. At
December 31, 1995 and 1994, the Company's net receivables from these affiliates
were not material.
 
                                       F-8
   127
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
SUMMARY OF COMBINED FINANCIAL POSITION
 


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

 
SUMMARY OF COMBINED OPERATIONS
 


                                                                       YEAR ENDED DECEMBER 31,
                                                                       ------------------------
                                                                        1995     1994     1993
                                                                       ------   ------   ------
                                                                                
Net sales............................................................  $685.9   $489.8   $510.3
Costs and expenses...................................................  (618.7)  (494.8)  (527.2)
(Provision) credit for income taxes..................................   (18.7)    (6.3)     1.9
                                                                       ------   ------   ------
Net income (loss)....................................................  $ 48.5   $(11.3)  $(15.0)
                                                                       ======   ======   ======
Company's equity in income (loss)....................................  $ 19.2   $ (1.9)  $ (3.3)
                                                                       ======   ======   ======

 
     The Company's equity in income (loss) differs from the summary net income
(loss) due to various percentage ownerships in the entities and equity method
accounting adjustments. At December 31, 1995, the Company's investment in its
unconsolidated affiliates exceeded its equity in their net assets by
approximately $54.9. The Company is amortizing this amount over a 12-year
period, which results in an annual amortization charge of approximately $11.4.
 
     The Company and its affiliates have interrelated operations. The Company
provides some of its affiliates with services such as financing, management, and
engineering. Significant activities with affiliates include the acquisition and
processing of bauxite, alumina, and primary aluminum. Purchases from these
affiliates were $284.4, $219.7, and $206.6 in the years ended December 31, 1995,
1994, and 1993, respectively. Dividends of $8.1, nil, and nil were received from
investees in the years ended December 31, 1995, 1994, and 1993, respectively.
 
     In 1995, a subsidiary of the Company invested $9.0 in a foreign joint
venture. This amount is included in Investments in and advances to
unconsolidated affiliates.
 
                                       F-9
   128
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
3.  PROPERTY, PLANT, AND EQUIPMENT
 
     The major classes of property, plant, and equipment are as follows:
 


                                                                           DECEMBER 31,
                                                                        -------------------
                                                                          1995       1994
                                                                        --------   --------
                                                                             
    Land and improvements.............................................  $  151.8   $  153.5
    Buildings.........................................................     198.5      196.8
    Machinery and equipment...........................................   1,337.6    1,285.0
    Construction in progress..........................................      59.6       45.0
                                                                        --------   --------
                                                                         1,747.5    1,680.3
    Accumulated depreciation..........................................     637.9      547.1
                                                                        --------   --------
      Property, plant, and equipment -- net...........................  $1,109.6   $1,133.2
                                                                        ========   ========

 
4.  LONG-TERM DEBT
 
     Long-term debt and its maturity schedule are as follows:
 


                                                                                               DECEMBER 31,
                                                                                      2001    ---------------
                                                                                      AND      1995     1994
                                                 1996   1997   1998   1999    2000   AFTER    TOTAL    TOTAL
                                                 ----   ----   ----   -----   ----   ------   ------   ------
                                                                               
    1994 Credit Agreement (9.00% at December
      31, 1995)................................                       $13.1                   $ 13.1   $  6.7
    9 7/8% Senior Notes, net...................                                      $223.8    223.8    223.6
    Pollution Control and Solid Waste Disposal
      Facilities Obligations
      (6.00% -- 7.75%).........................  $1.2   $1.3   $1.4      .2   $.2      32.6     36.9     38.1
    Alpart CARIFA Loan (fixed and variable
      rates)...................................                                        60.0     60.0     60.0
    Alpart Term Loan (8.95%)...................  6.3    6.2                                     12.5     18.7
    12 3/4% Senior Subordinated Notes..........                                       400.0    400.0    400.0
    Other borrowings (fixed and variable
      rates)...................................  1.4    1.4    7.7       .3    .2        .8     11.8     15.5
                                                 ----   ----   ----   -----   ---    ------   ------   ------
             Total.............................  $8.9   $8.9   $9.1   $13.6   $.4    $717.2   $758.1   $762.6
                                                 ====   ====   ====   =====   ===    ======
    Less current portion.......................                                                  8.9     11.5
                                                                                              ------   ------
    Long-term debt.............................                                               $749.2   $751.1
                                                                                              ======   ======

 
1994 CREDIT AGREEMENT
 
     On February 17, 1994, the Company and Kaiser entered into a credit
agreement with BankAmerica Business Credit, Inc. and certain other lenders (as
amended, the "1994 Credit Agreement"). The 1994 Credit Agreement consists of a
$325.0 five-year secured, revolving line of credit, scheduled to mature in 1999.
The Company is able to borrow under the facility by means of revolving credit
advances and letters of credit (up to $125.0) in an aggregate amount equal to
the lesser of $325.0 or a borrowing base relating to eligible accounts
receivable plus eligible inventory. The Company 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 previous credit agreement. As of December 31, 1995, $259.3 (of which $72.4
could have been used for letters of credit) was available to the Company under
the 1994 Credit Agreement. The 1994 Credit Agreement is unconditionally
guaranteed by the Company and by certain significant subsidiaries of the
Company. Loans under the 1994 Credit Agreement bear interest at a rate per
annum, at the Company'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
 
                                      F-10
   129
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
Agreement may be reduced by up to 1 1/2% (non-cumulatively), based on a
financial test, determined quarterly. As of December 31, 1995, the financial
test permitted a reduction of 1 1/2% per annum in margins effective January 1,
1996.
 
     The 1994 Credit Agreement requires the Company to maintain certain
financial covenants and places restrictions on the Company's and Kaiser'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. Neither the Company nor Kaiser
currently is permitted to pay dividends on its common stock. The 1994 Credit
Agreement is secured by, among other things, (i) mortgages on the Company'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 the
Company and certain of its subsidiaries; (iii) a pledge of all the stock of the
Company owned by Kaiser; and (iv) pledges of all of the stock of a number of the
Company'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.
 
SENIOR NOTES
 
     Concurrent with the offering by Kaiser of its 8.255% PRIDES, Convertible
Preferred Stock (the "PRIDES") (see Note 8), the Company issued $225.0 of its
9 7/8% Senior Notes due 2002 (the "Senior Notes"). The net proceeds of the
offering of the Senior Notes were used to reduce outstanding borrowings under
the revolving 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.
 
GRAMERCY SOLID WASTE DISPOSAL REVENUE BONDS
 
     In December 1992, the Company entered into an installment sale agreement
(the "Sale Agreement") with the Parish of St. James, Louisiana (the "Louisiana
Parish"), pursuant to which the Louisiana Parish issued $20.0 aggregate
principal amount of its 7 3/4% Bonds due August 1, 2022 (the "Bonds") to finance
the construction of certain solid waste disposal facilities at the Company's
Gramercy plant. The proceeds from the sale of the Bonds were deposited into a
construction fund and may be withdrawn, from time to time, pursuant to the terms
of the Sale Agreement and the Bond indenture. At December 31, 1995, $3.8
remained in the construction fund. The Sale Agreement requires the Company to
make payments to the Louisiana Parish in installments due on the dates and in
the amounts required to permit the Louisiana Parish to satisfy all of its
payment obligations under the Bonds.
 
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. Substantially all of the
Series A bonds bear interest at a floating rate of 87% of the applicable LIBID
Rate (LIBOR less 1/8 of 1%). The $22.0 aggregate principal amount of Series B
bonds matures on June 1, 2007, and bears interest at a fixed rate of 8.25%.
 
     Proceeds from the sale of the bonds were used by Alpart to refinance
interim loans from the partners in Alpart, to pay eligible project costs for the
expansion and modernization of its alumina refinery and related port and bauxite
mining facilities, and to pay certain costs of issuance. Under the terms of the
loan agreement, Alpart must remain a qualified recipient for Caribbean Basin
Initiative funds as defined in 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
 
                                      F-11
   130
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
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 the
Company's minority partner in Alpart).
 
SENIOR SUBORDINATED NOTES
 
     On February 1, 1993, the Company issued $400.0 of its 12 3/4% Senior
Subordinated Notes due 2003 (the "12 3/4% Notes"). The net proceeds from the
sale of the 12 3/4% Notes were used to retire the 14 1/4% Senior Subordinated
Notes due 1995 (the "14 1/4% Notes"), to prepay $18.0 of the term loan, 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 in the first quarter of 1993, consisting primarily of the write-off of
unamortized discount and deferred financing costs related to the 14 1/4% Notes.
 
     The obligations of the Company with respect to the Senior Notes and the
12 3/4% Notes are guaranteed, jointly and severally, by certain subsidiaries of
the Company. The indentures governing the Senior Notes and the 12 3/4% Notes
(the "Indentures") restrict, among other things, the Company's ability to incur
debt, undertake transactions with affiliates, and pay dividends. Further, the
Indentures provide that the Company must offer to purchase the Senior Notes and
the 12 3/4% Notes, respectively, upon the occurrence of a Change of Control (as
defined therein), and the 1994 Credit Agreement provides that the occurrence of
a Change in Control (as defined therein) shall constitute an Event of Default
thereunder.
 
CAPITALIZED INTEREST
 
     Interest capitalized in 1995, 1994 and 1993 was $2.8, $2.7, and $3.4,
respectively.
 
5.  INCOME TAXES
 
     Income (loss) before income taxes, minority interests, extraordinary loss,
and cumulative effect of changes in accounting principles by geographic area is
as follows:
 


                                                                YEAR ENDED DECEMBER 31,
                                                             ------------------------------
                                                              1995       1994        1993
                                                             ------     -------     -------
                                                                           
    Domestic...............................................  $(55.4)    $(168.1)    $(232.3)
    Foreign................................................   158.5        16.3        23.5
                                                             ------     -------     -------
              Total........................................  $103.1     $(151.8)    $(208.8)
                                                             ======     =======     =======

 
     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 also subject to domestic income taxes.
 
                                      F-12
   131
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
     The (provision) credit for income taxes on income (loss) before income
taxes, minority interests, extraordinary loss, and cumulative effect of changes
in accounting principles consists of:
 


                                                       FEDERAL     FOREIGN     STATE     TOTAL
                                                       -------     -------     -----     ------
                                                                             
    1995
      Current........................................   $(4.3)     $ (40.2)    $ (.1)    $(44.6)
      Deferred.......................................    15.0         (4.9)     (2.9)       7.2
                                                        -----       ------     -----     ------
              Total..................................   $10.7      $ (45.1)    $(3.0)    $(37.4)
                                                        =====       ======     =====     ======
    1994
      Current........................................              $ (18.0)    $ (.1)    $(18.1)
      Deferred.......................................   $71.4           .6        .1       72.1
                                                        -----       ------     -----     ------
              Total..................................   $71.4      $ (17.4)              $ 54.0
                                                        =====       ======     =====     ======
    1993
      Current........................................   $12.5      $  (7.9)    $ (.1)    $  4.5
      Deferred.......................................    68.6         12.0       1.8       82.4
                                                        -----       ------     -----     ------
              Total..................................   $81.1      $   4.1     $ 1.7     $ 86.9
                                                        =====       ======     =====     ======

 
     The 1994 federal deferred credit for income taxes of $71.4 includes $29.2
for the benefit of operating loss carryforwards generated in 1994. The 1993
federal deferred credit for income taxes of $68.6 includes $29.1 for the benefit
of operating loss carryforwards generated in 1993 and a $3.4 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 (provision) credit for income taxes and the
amount computed by applying the federal statutory income tax rate to income
(loss) before income taxes, minority interests, extraordinary loss, and
cumulative effect of changes in accounting principles is as follows:
 


                                                                      YEAR ENDED DECEMBER
                                                                              31,
                                                                     ----------------------
                                                                      1995    1994    1993
                                                                     ------   -----   -----
                                                                             
    Amount of federal income tax (provision) credit based on the
      statutory rate...............................................  $(36.1)  $53.1   $73.1
    Percentage depletion...........................................     4.2     5.6     6.4
    Revision of prior years' tax estimates and other changes in
      valuation allowances.........................................     1.5      .5     3.9
    Foreign taxes, net of federal tax benefit......................    (5.4)   (5.3)   (2.6)
    Increase in net deferred income tax assets due to tax rate
      change.......................................................             1.8     3.4
    Other..........................................................    (1.6)   (1.7)    2.7
                                                                     ------   -----   -----
    (Provision) credit for income taxes............................  $(37.4)  $54.0   $86.9
                                                                     ======   =====   =====

 
     As shown in the Statements of Consolidated Income (Loss) 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 1994
extraordinary loss net of related deferred federal income taxes of $2.9 and
reported the 1993 extraordinary loss net of related current federal income taxes
of $11.2, which approximated the federal statutory rate in effect on the dates
the transactions occurred.
 
                                      F-13
   132
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
     The Company adopted SFAS 109 as of January 1, 1993, as discussed in Note 1.
The components of the Company's net deferred income tax assets are as follows:
 


                                                                          DECEMBER 31,
                                                                       -------------------
                                                                        1995        1994
                                                                       -------     -------
                                                                             
    Deferred income tax assets:
      Postretirement benefits other than pensions....................  $ 289.9     $ 293.7
      Loss and credit carryforwards..................................    155.8       187.4
      Other liabilities..............................................    107.8       109.6
      Pensions.......................................................     56.0        51.0
      Foreign and state deferred income tax liabilities..............     30.8        28.1
      Property, plant, and equipment.................................     22.9        23.1
      Inventories....................................................      1.8
      Other..........................................................     10.7         3.5
      Valuation allowances...........................................   (128.5)     (133.9)
                                                                       -------     -------
              Total deferred income tax assets -- net................    547.2       562.5
                                                                       -------     -------
    Deferred income tax liabilities:
      Property, plant, and equipment.................................   (179.8)     (203.2)
      Investments in and advances to unconsolidated affiliates.......    (66.4)      (63.8)
      Inventories....................................................                 (8.3)
      Other..........................................................     (9.5)       (6.4)
                                                                       -------     -------
              Total deferred income tax liabilities..................   (255.7)     (281.7)
                                                                       -------     -------
    Net deferred income tax assets...................................  $ 291.5     $ 280.8
                                                                       =======     =======

 
     The valuation allowances listed above relate primarily to loss and credit
carryforwards and postretirement benefits other than pensions. As of December
31, 1995, approximately $97.4 of the net deferred income tax assets listed above
relate 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 and the year the carryforwards expire, as well as 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, based
on the cyclical nature of its business, its history of prior operating earnings,
and its expectations for future years, that it 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 the Company's net deferred income tax assets at
December 31, 1995, is approximately $194.1. 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 30- to 40-year period. If such deductions create or
increase a net operating loss in any one year, the Company has the ability to
carry forward such loss for 15 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 the operating losses incurred in recent years.
 
     As of December 31, 1995 and 1994, $53.5 and $37.9, respectively, of the net
deferred income tax assets listed above are included on the Consolidated Balance
Sheets in the caption entitled Prepaid expenses and other current assets.
Certain other portions of the deferred income tax assets and liabilities listed
above are included on the Consolidated Balance Sheets in the captions entitled
Other accrued liabilities and Long-term liabilities.
 
                                      F-14
   133
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
     The Company and its subsidiaries (collectively, the "KACC Subgroup") were
included in the consolidated federal income tax returns of MAXXAM for the period
from October 28, 1988, through June 30, 1993. As a consequence of the issuance
of the Depositary Shares on June 30, 1993, as discussed in Note 8, the KACC
Subgroup is no longer included in the consolidated federal income tax returns of
MAXXAM. The KACC Subgroup has become a member 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 tax allocation agreement between the Company and MAXXAM (the "KACC Tax
Allocation Agreement") terminated pursuant to its terms, effective for taxable
periods beginning after June 30, 1993. Any unused federal income tax attribute
carryforwards under the terms of the KACC Tax Allocation Agreement were
eliminated and are not available to offset federal income tax liabilities for
taxable periods beginning on or after July 1, 1993. Upon the filing of MAXXAM'S
1993 consolidated federal income tax return, the tax attribute carryforwards of
the MAXXAM consolidated return group as of December 31, 1993, were apportioned
in part to Kaiser and the KACC Subgroup, based on the provisions of the relevant
consolidated return regulations. The benefit of such tax attribute carryforwards
apportioned to the KACC Subgroup approximated the benefit of tax attribute
carryforwards eliminated under the KACC Tax Allocation Agreement. To the extent
the KACC Subgroup generates unused tax losses or tax credits for periods
beginning on or after July 1, 1993, such amounts will not be available to obtain
refunds of amounts paid by the Company to MAXXAM for periods ending on or before
June 30, 1993, pursuant to the KACC Tax Allocation Agreement.
 
     The Company and MAXXAM entered into the KACC Tax Allocation Agreement,
which became effective as of October 28, 1988. Under the terms of the KACC Tax
Allocation Agreement, MAXXAM computed the federal income tax liability for the
KACC Subgroup as if the KACC Subgroup were a separate affiliated group of
corporations which was never connected with MAXXAM. The provisions of the KACC
Tax Allocation Agreement will continue to govern for periods ended prior to July
1, 1993. Therefore, payments or refunds may still be required by or payable to
the Company under the terms of the KACC Tax Allocation Agreement for these
periods due to the final resolution of audits, amended returns, and related
matters. However, the 1994 Credit Agreement prohibits the payment by the Company
to MAXXAM of any amounts due under the KACC Tax Allocation Agreement, except for
certain payments that are required as a result of audits and only to the extent
of any amounts paid after February 17, 1994, by MAXXAM to the Company under the
KACC Tax Allocation Agreement.
 
     On June 30, 1993, the Company and Kaiser entered into a tax allocation
agreement (the "New KACC Tax Allocation Agreement"), effective for taxable
periods beginning on or after July 1, 1993. The terms of the New KACC Tax
Allocation Agreement are similar, in all material respects, to those of the KACC
Tax Allocation Agreement except that the Company is liable to Kaiser.
 
                                      F-15
   134
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
     The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1995, under the terms of the New KACC Tax
Allocation Agreement. The utilization of certain of these tax attributes is
subject to limitations:
 


                                                                                  EXPIRING
                                                                                   THROUGH
                                                                                 -----------
                                                                           
    Regular tax attribute carryforwards:
      Net operating losses...........................................  $32.9            2007
      General business tax credits...................................   28.4            2008
      Foreign tax credits............................................   89.4            2000
      Alternative minimum tax credits................................   19.4      Indefinite

    Alternative minimum tax attribute carryforwards:
      Net operating losses...........................................  $17.1            2002
      Foreign tax credits............................................   83.3            2000

 
6.  EMPLOYEE BENEFIT AND INCENTIVE PLANS
 
RETIREMENT PLANS
 
     Retirement plans are non-contributory for salaried and hourly employees and
generally provide for benefits based on a formula which considers length of
service and earnings during years of service. The Company's funding policies
meet or exceed all regulatory requirements.
 
     The funded status of the employee pension benefit plans and the
corresponding amounts that are included in the Company's Consolidated Balance
Sheets are as follows:
 


                                                                          PLANS WITH
                                                                     ACCUMULATED BENEFITS
                                                                      EXCEEDING ASSETS(1)
                                                                         DECEMBER 31,
                                                                     ---------------------
                                                                      1995          1994
                                                                     -------       -------
                                                                             
    Accumulated benefit obligation:
      Vested employees.............................................  $ 753.0       $ 663.9
      Nonvested employees..........................................     28.7          41.1
                                                                     -------       -------
      Accumulated benefit obligation...............................    781.7         705.0
    Additional amounts related to projected salary increases.......     34.2          30.0
                                                                     -------       -------
    Projected benefit obligation...................................    815.9         735.0
    Plan assets (principally common stocks and fixed income
      obligations) at fair value...................................   (592.3)       (524.6)
                                                                     -------       -------
    Plan assets less than projected benefit obligation.............    223.6         210.4
    Unrecognized net losses........................................    (54.7)        (42.5)
    Unrecognized net obligations...................................      (.5)          (.8)
    Unrecognized prior-service cost................................    (28.2)        (30.9)
    Adjustment required to recognize minimum liability.............     49.8          42.9
                                                                     -------       -------
    Accrued pension obligation included in the Consolidated Balance
      Sheets (principally in Long-term liabilities)................  $ 190.0       $ 179.1
                                                                     =======       =======

 
- ---------------
 
(1) Includes plans with assets exceeding accumulated benefits by approximately
    $.1 and $.3 in 1995 and 1994, respectively.
 
                                      F-16
   135
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
     As required by Statement of Financial Accounting Standards No. 87,
Employers' Accounting for Pensions, the Company recorded an after-tax credit
(charge) to equity of $(4.7) and $12.5 at December 31, 1995 and 1994,
respectively, for the reduction (excess) of the minimum liability over the
unrecognized net obligation and prior-service cost. These amounts were recorded
net of the related income tax (provision) credit of $2.8 and $(7.3) as of
December 31, 1995 and 1994, respectively, which approximated the federal and
state statutory rates.
 
     The components of net periodic pension cost are:
 


                                                                   YEAR ENDED DECEMBER 31,
                                                                  -------------------------
                                                                   1995      1994     1993
                                                                  -------   ------   ------
                                                                            
    Service cost -- benefits earned during the period...........  $  10.0   $ 11.2   $ 10.8
    Interest cost on projected benefit obligation...............     59.8     57.3     59.2
    Return on assets:
      Actual gain...............................................   (112.2)     (.8)   (70.3)
      Deferred gain (loss)......................................     64.6    (53.0)    15.9
    Net amortization and deferral...............................      4.2      4.1      2.3
                                                                   ------    -----    -----
    Net periodic pension cost...................................  $  26.4   $ 18.8   $ 17.9
                                                                   ======    =====    =====

 
     Assumptions used to value obligations at year-end, and to determine the net
periodic pension cost in the subsequent year are:
 


                                                                      1995     1994     1993
                                                                      ----     ----     ----
                                                                               
    Discount rate...................................................  7.5%     8.5 %     7.5%
    Expected long-term rate of return on assets.....................  9.5%     9.5 %    10.0%
    Rate of increase in compensation levels.........................  5.0%     5.0 %     5.0%

 
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
 
     The Company and its subsidiaries provide postretirement health care and
life insurance benefits to eligible retired employees and their dependents.
Substantially all employees may become eligible for those benefits if they reach
retirement age while still working for the Company or its subsidiaries. These
benefits are provided through contracts with various insurance carriers. The
Company has not funded the liability for these benefits, which are expected to
be paid out of cash generated by operations. The Company adopted SFAS 106 to
account for postretirement benefits other than pensions as of January 1, 1993,
as discussed in Note 1.
 
     In 1995, the Company adopted the Kaiser Aluminum Medicare Program ("KAMP").
KAMP is mandatory for all salaried retirees over 65 and for USWA retirees who
retire after December 31, 1995, when they become 65, and voluntary for other
hourly retirees of the Company's operations in the states of California,
Louisiana, and Washington. The USWA contract, ratified on February 28, 1995,
also contained changes to the retiree health benefits. These changes included
increased retirees' copayments, deductibles, and coinsurance, and restricted
Medicare Part B premium reimbursement to the 1995 level for employees retiring
after November 1, 1994. These changes will lower the Company's expenses for
retiree medical care.
 
                                      F-17
   136
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
     The Company's accrued postretirement benefit obligation is composed of the
following:
 


                                                                           DECEMBER 31,
                                                                         -----------------
                                                                          1995       1994
                                                                         ------     ------
                                                                              
    Accumulated postretirement benefit obligation:
      Retirees.........................................................  $557.6     $566.2
      Active employees eligible for postretirement benefits............    30.7       30.2
      Active employees not eligible for postretirement benefits........    61.1       98.7
                                                                         ------     ------
      Accumulated postretirement benefit obligation....................   649.4      695.1
    Unrecognized net gains.............................................    20.5       55.0
    Unrecognized gains related to prior-service costs..................   110.9       31.8
                                                                         ------     ------
    Accrued postretirement benefit obligation..........................  $780.8     $781.9
                                                                         ======     ======

 
     The components of net periodic postretirement benefit cost are:
 


                                                                      YEAR ENDED DECEMBER 31, 
                                                                      -----------------------
                                                                      1995     1994     1993
                                                                      -----    -----    -----
                                                                               
    Service cost....................................................  $ 4.5    $ 8.2    $ 7.1
    Interest cost...................................................   52.3     56.9     58.5
    Amortization of prior service cost..............................   (8.9)    (3.2)
                                                                      -----    -----    -----
    Net periodic postretirement benefit cost........................  $47.9    $61.9    $65.6
                                                                      =====    =====    =====

 
     The 1996 annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) are 8.0% and 7.5% for retirees
under 65 and over 65, respectively, and are assumed to decrease gradually to
5.0% in 2007 and remain at that level thereafter. The health care cost trend
rate has a significant effect on the amounts reported. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation as of December 31, 1995, by
approximately $68.7 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1995 by approximately
$7.8. The weighted average discount rate used to determine the accumulated
postretirement benefit obligation at December 31, 1995 and 1994, was 7.5% and
8.5%, respectively.
 
POSTEMPLOYMENT BENEFITS
 
     The Company provides certain benefits to former or inactive employees after
employment but before retirement. The Company adopted SFAS 112 to account for
postemployment benefits as of January 1, 1993, as discussed in Note 1.
 
INCENTIVE PLANS
 
     Effective January 1, 1989, the Company and Kaiser adopted an unfunded
Long-Term Incentive Plan (the "LTIP") for certain key employees of the Company,
Kaiser, and their consolidated subsidiaries. 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 were distributed to six
Company executives during 1993 for benefits generally earned but not vested as
of December 31, 1992. These shares generally will vest at the rate of 25% per
year. The Company will record the related expense of $6.5 over the four-year
period ending December 31, 1996. In 1993, the Company 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
 
                                      F-18
   137
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
544,839 shares were available to be awarded at December 31, 1995. Under the
Kaiser 1993 Omnibus Stock Incentive Plan, 102,564 restricted shares were
distributed to two Company executives during 1994, which will vest at the rate
of 25% per year. The Company will record the related expense of $1.0 over the
four-year period ending December 31, 1998.
 
     In 1993 and 1994, the Compensation Committee of the Board of Directors
approved the award of "nonqualified stock options" to members of management
other than those participating in the LTIP. These options to acquire Kaiser's
common stock generally will vest at the rate of 20-25% per year. Information
relating to nonqualified stock options is shown below:
 


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

 
     In 1995, the Company adopted the Kaiser Aluminum Total Compensation System,
an unfunded incentive compensation program. The program provides incentive pay
based on performance against plan over a three-year period. The Company also has
a supplemental savings and retirement plan for salaried employees, under which
the participants contribute a percentage of their base salaries.
 
     The Company's expense for the above plans was $11.9, $6.1, and $5.3 for the
years ended December 31, 1995, 1994 and 1993, respectively.
 
7.  REDEEMABLE PREFERENCE STOCK
 
     In March 1985, the Company entered into a three-year agreement with the
USWA whereby shares of a new series of "Cumulative (1985 Series A) Preference
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 "Cumulative (1985 Series B) Preference Stock." Series A Stock and Series B
Stock ("Series A and B Stock") each have a par value of $1 per share and a
liquidation and redemption value of $50 per share plus accrued dividends, if
any.
 
     For financial reporting purposes, Series A and B Stock were recorded at
fair market value when issued, based on independent appraisals, with a
corresponding charge to compensation cost. Carrying values have been increased
each year to recognize accretion of redemption values and, in certain years,
there have been other increases for reasons described below. Changes in Series A
and B Stock are shown below.
 


                                                                  1995       1994        1993
                                                                --------   ---------   ---------
                                                                              
Shares:
  Beginning of year...........................................   912,167   1,081,548   1,163,221
  Redeemed....................................................  (174,804)   (169,381)    (81,673)
                                                                 -------     -------   ---------
  End of year.................................................   737,363     912,167   1,081,548
                                                                 =======     =======   =========

 
     No additional Series A or B Stock will be issued. While held by the plan
trustee, Series B Stock is entitled to cumulative annual dividends, when and as
declared by the Board of Directors, payable in stock or in
 
                                      F-19
   138
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
cash at the option of the Company on or after March 1, 1991, in respect to years
commencing January 1, 1990, based on a formula tied to the Company's income
before tax from aluminum operations. When distributed to plan participants
(generally upon separation from the Company), the Series A and B Stocks are
entitled to an annual cash dividend of $5 per share, payable quarterly, when and
as declared by the Board of Directors.
 
     Redemption fund agreements require the Company to make annual payments by
March 31 each year based on a formula tied to consolidated net income until the
redemption funds are sufficient to redeem all Series A and B Stock. On an annual
basis, the minimum payment is $4.3 and the maximum payment is $7.3. In March
1994 and 1995, the Company contributed $4.3 for each of the years 1993 and 1994,
and will contribute $4.3 in March 1996 for 1995.
 
     Under the USWA labor contract effective November 1, 1994, the Company 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. The Company also agreed to offer to purchase up to an additional 80
shares from each participant in 1998. In addition, a profitability test was
satisfied for 1995; therefore, the Company will offer to purchase from each
active participant an additional 20 shares of such preference stock held in the
stock ownership plan for the benefit of substantially the same employees in
1996. The employees could elect to receive their shares, accept cash, or place
the proceeds into the Company's 401(k) savings plan. The Company will provide
comparable purchases of Series B Stock from active participants.
 
     The Series A and B Stock is distributed in the event of death, retirement,
or in other specified circumstances. The Company also may 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
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, the Company
must purchase distributed shares earned after December 31, 1985, at redemption
value on a five-year installment basis, with interest at market rates. The
obligation of the Company to make such installment payments must be secured.
 
     The Series A and B Stock is entitled to the same voting rights as the
Company's common stock and to certain additional voting rights under certain
circumstances, including the right to elect, along with other Company 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 the Company to redeem or pay dividends on common stock
if the Company is in default on any dividends payable on the Series A and B
Stock.
 
                                      F-20
   139
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
8.  STOCKHOLDERS' EQUITY
 
     Changes in stockholders' equity were:
 


                                                                               RETAINED     ADDITIONAL      NOTE
                                                                               EARNINGS      MINIMUM     RECEIVABLE
                                          PREFERENCE   COMMON   ADDITIONAL   (ACCUMULATED    PENSION        FROM
                                            STOCK      STOCK     CAPITAL       DEFICIT)     LIABILITY      PARENT
                                          ----------   ------   ----------   ------------   ----------   ----------
                                                                                       
BALANCE, DECEMBER 31, 1992..............     $2.0      $15.4     $1,255.6      $  487.9       $ (6.7)    $ (1,185.8)
  Net loss..............................                                         (647.3)
  Interest on note receivable from
    parent..............................                            115.7                                    (115.7)
  Contribution for LTIP shares..........                              3.4
  Conversions (1,967 preference shares
    into cash)..........................      (.2)
  Capital contribution..................                             96.5
  Preference stock dividends............                                           (1.0)
  Redeemable preference stock
    accretion...........................                                           (4.8)
  Additional minimum pension
    liability...........................                                                       (14.9)
                                             ----      -----     --------       -------       ------      ---------
BALANCE, DECEMBER 31, 1993..............     $1.8      $15.4     $1,471.2      $ (165.2)      $(21.6)    $ (1,301.5)
  Net loss..............................                                         (101.6)
  Interest on note receivable from
    parent..............................                             86.2                                     (86.2)
  Contribution for LTIP shares..........                              2.0
  Capital contribution..................                             66.9
  Preference stock dividends............                                            (.7)
  Redeemable preference stock
    accretion...........................                                           (4.0)
  Reduction of minimum pension
    liability...........................                                                        12.5
                                             ----      -----     --------       -------       ------      ---------
BALANCE, DECEMBER 31, 1994..............      1.8       15.4      1,626.3        (271.5)        (9.1)      (1,387.7)
  Net income............................                                           65.3
  Interest on note receivable from
    parent..............................                             92.1                                     (92.1)
  Contribution for LTIP shares..........                              1.4
  Capital contribution..................                             10.9
  Conversions (1,222 preference shares
    into cash)..........................      (.1)
  Dividends.............................                                            (.8)
  Redeemable preference stock
    accretion...........................                                           (3.9)
  Additional minimum pension
    liability...........................                                                        (4.7)
                                             ----      -----     --------       -------       ------      ---------
BALANCE, DECEMBER 31, 1995..............     $1.7      $15.4     $1,730.7      $ (210.9)      $(13.8)    $ (1,479.8)
                                             ====      =====     ========       =======       ======      =========

 
PREFERENCE STOCK
 
     The Company's Cumulative Convertible Preference Stock, $100 par value
("$100 Preference Stock"), restricts acquisition of junior stock and payment of
dividends. At December 31, 1995, such provisions were less restrictive as to the
payment of cash dividends than the 1994 Credit Agreement provisions. The Company
has the option to redeem the $100 Preference Stocks at par value plus accrued
dividends. The Company does not intend to issue any additional shares of the
$100 Preference Stocks.
 
     The 4 1/8% and 4 3/4% (1957 Series, 1959 Series, and 1966 Series) $100
Preference Stock can be exchanged for per share cash amounts of $69.30, $77.84,
$78.38, and $76.46, respectively. The Company records the $100
 
                                      F-21
   140
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
Preference Stock at their exchange amounts for financial statement presentation
and the Company includes such amounts in minority interests. The outstanding
shares of preference stock were:
 


                                                                          DECEMBER 31,
                                                                       -------------------
                                                                        1995         1994
                                                                       ------       ------
                                                                              
    4 1/8%...........................................................   3,237        3,657
    4 3/4% (1957 Series).............................................   2,342        2,605
    4 3/4% (1959 Series).............................................  13,162       13,534
    4 3/4% (1966 Series).............................................   3,473        3,640

 
PREFERRED STOCK
 
     Series A Convertible -- In 1993, Kaiser issued 19,382,950 of its $.65
Depositary Shares (the "Depositary Shares"), each representing one-tenth of a
share of Series A Mandatory Conversion Premium Dividend Preferred Stock (the
"Series A Shares"). On September 19, 1995, Kaiser redeemed all 1,938,295 Series
A Shares, which resulted in the simultaneous redemption of all Depositary Shares
in exchange for (i) 13,126,521 shares of Kaiser's common stock and (ii) $2.8 in
cash comprised of (a) an amount equal to all accrued and unpaid dividends up to
and including the day immediately prior to redemption date and (b) cash in lieu
of any fractional shares of common stock that would have otherwise been
issuable.
 
     PRIDES Convertible -- In the first quarter of 1994, Kaiser consummated the
public offering of 8,855,550 shares of the PRIDES. The net proceeds from the
sale of the shares of PRIDES were approximately $100.1. Kaiser used such net
proceeds to make non-interest-bearing loans to the Company in the aggregate
principal amount of $33.2 (the aggregate dividends scheduled to accrue on the
shares of PRIDES from the issuance date until December 31, 1997, the date on
which the outstanding PRIDES will be mandatorily converted into shares of
Kaiser's common stock), evidenced by intercompany notes, and used the balance of
such net proceeds to make capital contributions to the Company in the aggregate
amount of $66.9.
 
NOTE RECEIVABLE FROM PARENT
 
     The Note Receivable from Parent bears interest at a fixed rate of 6 5/8%
per annum. No interest or principal payments are due until December 21, 2000,
after which interest and principal will be payable over a 15-year term pursuant
to a predetermined schedule. Accrued interest is accounted for as additional
contributed capital.
 
DIVIDENDS ON COMMON STOCK
 
     The indentures governing the Senior Notes, the 12 3/4% Notes, and the 1994
Credit Agreement restrict, among other things, the Company's ability to incur
debt, undertake transactions with affiliates, and pay dividends. Under the most
restrictive of these covenants, the Company currently is not permitted to pay
dividends on its common stock.
 
9.  COMMITMENTS AND CONTINGENCIES
 
COMMITMENTS
 
     The Company has financial commitments, including purchase agreements,
tolling arrangements, forward foreign exchange and forward sales contracts (see
Note 10), letters of credit, and guarantees. Such purchase agreements and
tolling arrangements include long-term agreements for the purchase and tolling
of bauxite into alumina in Australia by QAL. These obligations expire in 2008.
Under the agreements, the Company is unconditionally obligated to pay its
proportional share of debt, operating costs, and certain other costs of QAL. The
aggregate minimum amount of required future principal payments at December 31,
1995, is $88.9, of
 
                                      F-22
   141
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
which $26.7 is due in 1997 and the rest is due in 2002. The Company's share of
payments, including operating costs and certain other expenses under the
agreement, was $77.5, $85.6, and $86.7 for the years ended December 31, 1995,
1994, and 1993, respectively. The Company also has agreements to supply alumina
to and to purchase aluminum from Anglesey.
 
     Minimum rental commitments under operating leases at December 31, 1995, are
as follows: years ending December 31, 1996 -- $22.7; 1997 -- $21.6;
1998 -- $24.6; 1999 -- $29.7; 2000 -- $27.3; thereafter -- $187.0. The future
minimum rentals receivable under noncancelable subleases was $67.0 at December
31, 1995.
 
     Rental expenses were $29.0, $26.8, and $29.0 for the years ended December
31, 1995, 1994, and 1993, respectively.
 
ENVIRONMENTAL CONTINGENCIES
 
     The Company is subject to a number of environmental laws, to fines or
penalties assessed for alleged breaches of the environmental laws, and to claims
and litigation based upon such laws. The Company currently is subject to a
number of 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 the Company's evaluation of these and other environmental matters,
the Company has established environmental accruals, primarily related to
potential solid waste disposal and soil and groundwater remediation matters. The
following table presents the changes in such accruals, which are primarily
included in Long-term liabilities, for the years ended December 31, 1995, 1994,
and 1993:
 


                                                                      1995    1994    1993
                                                                      -----   -----   -----
                                                                             
    Balance at beginning of period..................................  $40.1   $40.9   $46.4
    Additional amounts..............................................    3.3     2.8     1.7
    Less expenditures...............................................   (4.5)   (3.6)   (7.2)
                                                                      -----   -----   -----
    Balance at end of period........................................  $38.9   $40.1   $40.9
                                                                      =====   =====   =====

 
     These environmental accruals represent the Company's estimate of costs
reasonably expected to be incurred based on presently enacted laws and
regulations, currently available facts, existing technology, and the Company's
assessment of the likely remediation action to be taken. The Company expects
that these remediation actions will be taken over the next several years and
estimates that annual expenditures to be charged to these environmental accruals
will be approximately $3.0 to $9.0 for the years 1996 through 2000 and an
aggregate of approximately $10.0 thereafter.
 
     As additional facts are developed and definitive remediation plans and
necessary regulatory approvals for implementation of remediation are established
or alternative technologies are developed, changes in these and other factors
may result in actual costs exceeding the current environmental accruals. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $23.0 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved over
the next twelve months. While uncertainties are inherent in the final outcome of
these environmental matters, and it is 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, results of operations, or
liquidity.
 
                                      F-23
   142
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
ASBESTOS CONTINGENCIES
 
     The Company is a defendant in a number of lawsuits, some of which involve
claims of multiple persons, in which the plaintiffs allege that certain of their
injuries were caused by, among other things, exposure to asbestos during, and as
a result of, their employment or association with the Company or exposure to
products containing asbestos produced or sold by the Company. The lawsuits
generally relate to products the Company has not manufactured for at least 15
years.
 
     The following table presents the changes in number of such claims pending
for the years ended December 31, 1995, 1994 and 1993.
 


                                                                       1995     1994      1993
                                                                      ------   -------   ------
                                                                                
Number of claims at beginning of period.............................  25,200    23,400   13,500
Claims received.....................................................  41,700    14,300   11,400
Claims settled or dismissed.........................................  (7,200)  (12,500)  (1,500)
                                                                      ------    ------   ------
Number of claims at end of period...................................  59,700    25,200   23,400
                                                                      ======    ======   ======

 
     The Company 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 the Company between
June 30, 1995 and November 30, 1995, were filed in Texas prior to September 1,
1995.
 
     Based on past experience and reasonably anticipated future activity, the
Company 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 the
Company's actual costs could exceed these estimates. The Company's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton, Levin, Ehrmantraut, Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an
asbestos-related cost accrual of $160.1, before consideration of insurance
recoveries, is included primarily in Long-term liabilities at December 31, 1995.
The Company estimates that annual future cash payments in connection with such
litigation will be approximately $13.0 to $20.0 for each of the years 1996
through 2000, and an aggregate of approximately $78.0 thereafter through 2008.
While the Company 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.
 
     The Company believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from some
of the Company's insurance carriers are currently subject to pending litigation
and other carriers have raised certain defenses, which have resulted in delays
in recovering costs from the insurance carriers. The timing and amount of
ultimate recoveries from these insurance carriers are dependent upon the
resolution of these disputes. The Company believes, based on prior
insurance-related recoveries in respect of asbestos-related claims, existing
insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges with
respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the insurance
carriers are probable. Accordingly, an estimated aggregate insurance recovery of
$137.9, determined on the same basis as the asbestos-related cost accrual, is
recorded primarily in Other assets at December 31, 1995.
 
                                      F-24
   143
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
     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 insurance recoveries that will be received,
management currently believes that, based on the factors discussed in the
preceding paragraphs, the resolution of asbestos-related uncertainties and the
incurrence of asbestos-related costs net of related insurance recoveries should
not have a material adverse effect on the Company's consolidated financial
position, results of operations, or liquidity.
 
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, results of operations, or liquidity.
 
10.  DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
 
     The Company enters into a number of financial instruments in the normal
course of business that are designed to reduce its exposure to fluctuations in
foreign exchange rates, alumina, primary aluminum, and fabricated aluminum
products prices, and the cost of purchased commodities.
 
     The Company 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 the Company to certain exchange
rate risks. In order to mitigate its exposure, the Company 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, 1995, the Company had net forward
foreign exchange contracts totaling approximately $102.8 for the purchase of
142.4 Australian dollars through April 30, 1997.
 
     To mitigate its exposure to declines in the market prices of alumina,
primary aluminum, and fabricated aluminum products, while retaining the ability
to participate in favorable pricing environments that may materialize, the
Company 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 the Company's price risk management strategy, which
can be modified at any time, (i) varying quantities of the Company's anticipated
production are sold forward at fixed prices; (ii) call options are purchased to
allow the Company to participate in certain higher market prices, should they
materialize, for a portion of the Company's primary aluminum and alumina sold
forward; (iii) option contracts are entered into to establish a price range the
Company will receive for a portion of its primary aluminum and alumina; and (iv)
put options are purchased to establish minimum prices the Company will receive
for a portion of its primary aluminum and alumina. In this regard, in respect of
its 1996 anticipated production, as of December 31, 1995, the Company had sold
forward 15,750 metric tons of primary aluminum at fixed prices.
 
     In addition, the Company 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, the Company
may enter into forward and option contracts. In this regard, at December 31,
1995 the Company had purchased 53,300 metric tons of primary aluminum under
forward purchase contracts at fixed prices that expire at various times through
December 1996.
 
                                      F-25
   144
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
     At December 31, 1995, the net unrealized gain on the Company's position in
aluminum forward sales and option contracts, based on an average price of $1,721
per metric ton ($.78 per pound) of aluminum, and forward foreign exchange
contracts was $4.1.
 
     The Company is exposed to credit risk in the event of non-performance by
other parties to these currency and commodity contracts, but the Company does
not anticipate non-performance by any of these counterparties, given their
creditworthiness. When appropriate, the Company arranges master netting
agreements.
 
11.  SEGMENT AND GEOGRAPHICAL AREA INFORMATION
 
     Sales and transfers among geographic areas are made on a basis intended to
reflect the market value of products.
 
     The aggregate foreign currency gain included in determining net income was
$5.3, $.8, and $4.9 for the years ended December 31, 1995, 1994, and 1993,
respectively.
 
     Sales of more than 10% of total revenue to a single customer were nil in
1995 and were $58.2 and $40.7 of bauxite and alumina and $147.7 and $145.7 of
aluminum processing for the years ended December 31, 1994, and 1993,
respectively.
 
     Export sales were less than 10% of total revenue during the years ended
December 31, 1995, 1994, and 1993, respectively.
 
     Geographical area information relative to operations is summarized as
follows:
 


                                  YEAR ENDED                                     OTHER
                                 DECEMBER 31,   DOMESTIC   CARIBBEAN   AFRICA   FOREIGN   ELIMINATIONS    TOTAL
                                 ------------   --------   ---------   ------   -------   ------------   --------
                                                                                    
    Net sales to unaffiliated
      customers................      1995       $1,589.5    $ 191.7    $239.4   $217.2                   $2,237.8
                                     1994        1,263.2      169.9     180.0    168.4                    1,781.5
                                     1993        1,177.8      155.4     207.5    178.4                    1,719.1
    Sales and transfers among
      geographic areas.........      1995                   $  79.6             $191.5      $ (271.1)
                                     1994                      98.7              139.4        (238.1)
                                     1993                      88.2               79.6        (167.8)
    Equity in income (losses)
      of unconsolidated
      affiliates...............      1995       $    (.2)                       $ 19.4                   $   19.2
                                     1994             .2                          (2.1)                      (1.9)
                                     1993                                         (3.3)                      (3.3)
    Operating income (loss)....      1995       $   32.5    $   9.8    $ 83.5   $ 85.3                   $  211.1
                                     1994         (128.5)       9.9      18.3     44.4                      (55.9)
                                     1993         (145.6)     (11.8)     21.9     12.4                     (123.1)
    Investment in and advances                           
      to unconsolidated                                  
      affiliates...............      1995       $    1.2    $  27.1             $149.9                   $  178.2
                                     1994            1.2       28.8              139.7                      169.7
    Identifiable assets........      1995       $2,019.0    $ 381.9    $196.5   $216.9                   $2,814.3
                                     1994        1,929.3      364.8     200.0    199.5                    2,693.6

 
                                      F-26
   145
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
     Financial information by industry segment at December 31, 1995 and 1994,
and for the years ended December 31, 1995, 1994, and 1993, is as follows:
 


                                           YEAR ENDED    BAUXITE &    ALUMINUM
                                          DECEMBER 31,    ALUMINA    PROCESSING    CORPORATE    TOTAL
                                          ------------   ---------   -----------   ---------   --------
                                                                                
    Net sales to unaffiliated
      customers.........................      1995        $ 514.2     $ 1,723.6                $2,237.8
                                              1994          432.5       1,349.0                 1,781.5
                                              1993          423.4       1,295.7                 1,719.1
    Intersegment sales..................      1995        $ 159.7                              $  159.7
                                              1994          146.8                                 146.8
                                              1993          129.4                                 129.4
    Equity in income (losses) of
      unconsolidated affiliates.........      1995        $   3.6     $    15.8     $   (.2)   $   19.2
                                              1994           (4.7)          2.6          .2        (1.9)
                                              1993           (2.5)          (.8)                   (3.3)
    Operating income (loss).............      1995        $  54.0     $   238.9     $ (81.8)   $  211.1
                                              1994           19.8          (8.4)      (67.3)      (55.9)
                                              1993           (4.5)        (46.3)      (72.3)     (123.1)
    Effect of changes in accounting
      principles on operating income
      (loss)
      SFAS 106..........................      1993        $  (2.0)    $   (16.1)    $  (1.1)   $  (19.2)
      SFAS 109..........................      1993           (7.7)         (7.8)         .3       (15.2)
    Depreciation........................      1995        $  31.1     $    60.4     $   2.8    $   94.3
                                              1994           33.5          59.1         2.8        95.4
                                              1993           35.3          59.9         1.9        97.1
    Capital expenditures................      1995        $  27.3     $    44.0     $   8.1    $   79.4
                                              1994           28.9          39.9         1.2        70.0
                                              1993           35.3          31.2         1.2        67.7
    Investment in and advances to
      unconsolidated affiliates.........      1995        $ 129.9     $    47.1     $   1.2    $  178.2
                                              1994          136.6          31.9         1.2       169.7
    Identifiable assets.................      1995        $ 746.0     $ 1,341.2     $ 727.1    $2,814.3
                                              1994          749.6       1,242.3       701.7     2,693.6

 
12.  SUBSIDIARY GUARANTORS
 
   
     Kaiser Alumina Australia Corporation ("KAAC"), Kaiser Finance Corporation
("KFC"), Kaiser Jamaica Corporation ("KJC"), and Alpart Jamaica Inc. ("AJI")
(collectively referred to as the "Subsidiary Guarantors") are domestic wholly
owned (directly or indirectly) subsidiaries of the Company that have provided
guarantees of the Senior Notes and the 12 3/4% Notes (see Note 4).
    
 
     KAAC, KJC, and AJI are wholly owned subsidiaries, which serve as holding
companies for the Company's investments in QAL and Alpart. KFC is a wholly owned
subsidiary of KAAC, whose principal
 
                                      F-27
   146
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
   
business is making loans to the Company and its subsidiaries. Summary of
combined financial information for the Subsidiary Guarantors as of December 31,
1995 and 1994, is as follows:
    
 
                     SUMMARY OF COMBINED FINANCIAL POSITION
 


                                                                          DECEMBER 31,
                                                                      ---------------------
                                                                        1995         1994
                                                                      --------     --------
                                                                             
                                            ASSETS
    Current assets..................................................  $  108.0     $   84.2
    Due from the Company............................................     705.4        683.4
    Investments in and advances to unconsolidated affiliates........     102.8        107.8
    Property, plant, and equipment -- net...........................     262.4        258.0
    Other assets....................................................      23.4         28.0
                                                                      --------     --------
              Total.................................................  $1,202.0     $1,161.4
                                                                       =======      =======
                             LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities.............................................  $  180.9     $  163.2
    Due to the Company..............................................     272.5        281.8
    Other long-term liabilities.....................................      51.8         49.6
    Long-term debt, net of current maturity.........................      66.3         72.5
    Minority interest...............................................      73.6         70.1
    Stockholders' equity............................................     556.9        524.2
                                                                      --------     --------
              Total.................................................  $1,202.0     $1,161.4
                                                                       =======      =======

 
                         SUMMARY OF COMBINED OPERATIONS
 


                                                                   YEAR ENDED DECEMBER 31,
                                                                   ------------------------
                                                                    1995     1994     1993
                                                                   ------   ------   ------
                                                                            
    Net sales....................................................  $401.4   $354.7   $326.3
    Costs and expenses...........................................   366.7    321.4    348.0
                                                                   ------   ------   ------
    Operating income (loss)......................................    34.7     33.3    (21.7)
    Other income (expense):
      Interest and other income (expense)........................    37.2    (28.0)    26.0
      Interest expense...........................................   (29.9)   (22.3)   (20.4)
                                                                   ------   ------   ------
    Income (loss) before income taxes, minority interests, and
      cumulative effect of change in accounting principle........    42.0    (17.0)   (16.1)
    (Provision) credit for income taxes..........................   (14.8)    (6.9)     3.8
    Minority interest............................................     5.5      6.7      7.6
                                                                   ------   ------   ------
    Income (loss) before cumulative effect of change in
      accounting principle.......................................    32.7    (17.2)    (4.7)
    Cumulative effect of change in accounting principle..........                     (11.3)
                                                                   ------   ------   ------
    Net income (loss)............................................  $ 32.7   $(17.2)  $(16.0)
                                                                   ======   ======   ======

 
                                      F-28
   147
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                 (IN MILLIONS OF DOLLARS, EXCEPT SHARE AMOUNTS)
 
   
NOTES TO SUMMARY OF COMBINED FINANCIAL INFORMATION FOR THE SUBSIDIARY GUARANTORS
    
 
   
     Income Taxes.  The Subsidiary Guarantors were included in the consolidated
federal income tax returns of MAXXAM through June 30, 1993. Effective July 1,
1993, the Subsidiary Guarantors became members of the consolidated federal
income tax return group of which Kaiser is the common parent corporation. The
taxable income (loss) of the Subsidiary Guarantors for periods beginning on or
after July 1, 1993, is included in the consolidated federal income tax returns
of Kaiser. The (provision) credit for income taxes is computed as if each
Subsidiary Guarantor filed returns on a separate company basis.
    
 
   
     Effective January 1, 1993, the Subsidiary Guarantors adopted SFAS 109,
which required the restatement of certain assets and liabilities to their
pre-tax amounts from their net-of-tax amounts originally recorded in connection
with the acquisition by MAXXAM in October 1988. The cumulative effect of the
change in the account principle, as of January 1, 1993, reduced the Subsidiary
Guarantors' results of operations by $11.3. Included in Other assets and Other
long-term liabilities at December 31, 1995, are $20.9 and $51.8 of deferred
income tax assets and liabilities, respectively.
    
 
     Receivables and Payables.  At December 31, 1995, receivables from and
payables to the Company include $690.6 and $260.9 of interest bearing loans,
respectively. The similar amounts at December 31, 1994 were $663.8 and $272.9.
 
     Inventory Valuation.  Inventories are stated at first-in, first-out (FIFO)
cost, not in excess of market.
 
     Investments.  At December 31, 1995 KAAC held a 28.3% interest in QAL. This
investment is accounted for by the equity method. The equity in QAL's loss
before income taxes of $3.6 and $4.7 in 1995 and 1994, respectively, is included
in the Company's cost of products sold.
 
   
     Foreign Currency.  The functional currency of the Subsidiary Guarantors is
the United States dollar, and accordingly, translation gains (losses) included
in net income (loss) were $14.1, $(42.4), and $5.6 for the years ended December
31, 1995, 1994, and 1993, respectively.
    
 
13. SUBSEQUENT EVENT
 
   
     On October 23, 1996 (the "Issuance Date"), the Company completed an
offering (the "Offering") of $175.0 of 10 7/8% Senior Notes Due 2006 (the
"10 7/8% Senior Notes") at 99.5% of their principal amount to yield 10.96% to
maturity. Net proceeds from the Offering on the Issuance Date, after estimated
expenses, were approximately $168.9, of which $91.7 was utilized to reduce the
outstanding borrowings under the revolving credit facility of the Credit
Agreement to zero. The remaining net proceeds (approximately $77.2) were
invested in short-term investments pending their application for working capital
and general corporate purposes, including capital projects. The 10 7/8% Senior
Notes are guaranteed on a senior, unsecured basis by the Subsidiary Guarantors
as well as by Kaiser Micromill Holdings, LLC ("KMH"), Kaiser Sierra Micromills,
LLC ("KSM"), Kaiser Texas Micromill Holdings, LLC ("KTMH") and Kaiser Texas
Sierra Micromills, LLC ("KTSM") (KMH, KSM, KTMH and KTSM being collectively
referred to as the "New Subsidiary Guarantors") all of which are domestic wholly
owned (direct or indirect) subsidiaries of the Company. Following their
formation in December 1995, pursuant to provisions of the Indentures to the
Senior Notes and the 12 3/4% Notes, and the 10 7/8% Senior Notes, on February 1,
1996, the New Subsidiary Guarantors also became guarantors of the Senior Notes
and 12 3/4% Notes. The New Subsidiary Guarantors had only nominal amounts of
assets, liabilities and equity at December 31, 1995, and had no 1995 revenues or
operations, other than limited amounts of general and administrative expense.
Based on the above, the Summary of Combined Financial Position and the Summary
of Combined Operations of the Subsidiary Guarantors included in Note 12 have not
been restated to include the financial position or results of operations of the
New Subsidiary Guarantors as the impact of such restatement would be immaterial.
    
 
                                      F-29
   148
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
                            QUARTERLY FINANCIAL DATA
                                  (UNAUDITED)
                            (IN MILLIONS OF DOLLARS)
 


                                                                  QUARTER ENDED
                                                  ---------------------------------------------
                                                  MARCH         JUNE      SEPTEMBER    DECEMBER
                                                    31           30           30           31
                                                  ------       ------       ------       ------
                                                                             
1995
  Net sales....................................   $513.0       $583.4       $550.3       $591.1
  Operating income.............................     32.7         63.7         53.4         61.3
  Net income...................................      4.8         24.5         13.8         22.2
1994
  Net sales....................................   $415.1       $459.5       $461.1       $445.8
  Operating income.............................     25.6         14.1          6.8          9.4
  Net income...................................     33.5         22.1         19.5         26.5(1)

 
- ---------------
 
(1) Includes pre-tax charges of approximately $10.3 principally related to
    establishing additional litigation and environmental reserves in the fourth
    quarter of 1994.
 
                                      F-30
   149
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
                          CONSOLIDATED BALANCE SHEETS
                            (IN MILLIONS OF DOLLARS)
 


                                                                     SEPTEMBER 30,    DECEMBER 31,
                                                                         1996             1995
                                                                     -------------    -------------
                                                                      (UNAUDITED)
                                                                                
                              Assets
Current assets:
  Cash and cash equivalents........................................    $    21.5        $    21.7
  Receivables......................................................        264.3            310.2
  Inventories......................................................        545.5            525.7
  Prepaid expenses and other current assets........................        111.7             76.6
                                                                     -------------    -------------
          Total current assets.....................................        943.0            934.2
Investments in and advances to unconsolidated affiliates...........        174.6            178.2
Property, plant, and equipment -- net..............................      1,126.4          1,109.6
Deferred income taxes..............................................        284.4            268.8
Other assets.......................................................        343.1            323.5
                                                                     -------------    -------------
          Total....................................................    $ 2,871.5        $ 2,814.3
                                                                      ==========       ==========
                Liabilities & Stockholders' Equity
Current liabilities:
  Accounts payable.................................................    $   160.5        $   184.5
  Accrued interest.................................................         13.6             32.0
  Accrued salaries, wages, and related expenses....................         64.9            105.3
  Accrued postretirement medical benefit obligation -- current
     portion.......................................................         46.8             46.8
  Other accrued liabilities........................................        150.9            126.2
  Payable to affiliates............................................         96.4             95.3
  Long-term debt -- current portion................................          8.9              8.9
  Notes payable to parent -- current portion.......................          8.6             10.7
                                                                     -------------    -------------
          Total current liabilities................................        550.6            609.7
Long-term liabilities..............................................        558.3            548.5
Accrued postretirement medical benefit obligation..................        727.7            734.0
Long-term debt.....................................................        858.4            749.2
Note payable to parent.............................................          2.1              8.6
Minority interests.................................................         91.0             91.4
Redeemable preference stock........................................         26.7             29.6
Stockholders' equity:
  Preference stock.................................................          1.7              1.7
  Common stock.....................................................         15.4             15.4
  Additional capital...............................................      1,804.7          1,730.7
  Accumulated deficit..............................................       (198.1)          (210.9)
  Additional minimum pension liability.............................        (13.8)           (13.8)
  Less: Note receivable from parent................................     (1,553.2)        (1,479.8)
                                                                     -------------    -------------
          Total stockholders' equity...............................         56.7             43.3
                                                                     -------------    -------------
          Total....................................................    $ 2,871.5        $ 2,814.3
                                                                      ==========       ==========

 
      The accompanying notes to interim consolidated financial statements
                   are an integral part of these statements.
 
                                      F-31
   150
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
                       STATEMENTS OF CONSOLIDATED INCOME
                                  (UNAUDITED)
               (IN MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
 


                                                                           NINE MONTHS ENDED
                                                                             SEPTEMBER 30,
                                                                         ----------------------
                                                                           1996          1995
                                                                         --------      --------
                                                                                 
Net sales.............................................................   $1,652.1      $1,646.7
                                                                         --------      --------
Costs and expenses:
  Cost of products sold...............................................    1,394.8       1,329.8
  Depreciation........................................................       72.5          71.1
  Selling, administrative, research and development,
     and general......................................................       96.0          96.0
                                                                         --------      --------
          Total costs and expenses....................................    1,563.3       1,496.9
                                                                         --------      --------
Operating income......................................................       88.8         149.8
Other income (expense):
  Interest expense....................................................      (68.3)        (71.3)
  Other -- net........................................................        3.1          (9.8)
                                                                         --------      --------
Income before income taxes and minority interests.....................       23.6          68.7
Provision for income taxes............................................       (8.4)        (24.6)
Minority interests....................................................         .5          (1.0)
                                                                         --------      --------
Net income............................................................   $   15.7      $   43.1
                                                                         ========      ========

 
      The accompanying notes to interim consolidated financial statements
                   are an integral part of these statements.
 
                                      F-32
   151
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
                     STATEMENTS OF CONSOLIDATED CASH FLOWS
                                  (UNAUDITED)
                            (IN MILLIONS OF DOLLARS)
 


                                                                             NINE MONTHS ENDED
                                                                               SEPTEMBER 30,
                                                                             -----------------
                                                                              1996       1995
                                                                             ------     ------
                                                                                  
Cash flows from operating activities:
  Net income...............................................................  $ 15.7     $ 43.1
  Adjustments to reconcile net income to net cash provided by (used for)
     operating activities:
     Depreciation..........................................................    72.5       71.1
     Amortization of excess investment over equity in net assets of
      unconsolidated affiliates............................................     8.7        8.7
     Amortization of deferred financing costs and discount on long-term
      debt.................................................................     4.1        4.1
     Equity in income of unconsolidated affiliates.........................    (7.5)     (17.2)
     Minority interests....................................................     (.4)       1.0
     Decrease (increase) in receivables....................................    36.6      (86.7)
     Increase in inventories...............................................   (19.8)     (62.6)
     (Increase) decrease in prepaid expenses and other assets..............   (38.1)      70.5
     Decrease in accounts payable..........................................   (24.1)      (5.2)
     Decrease in accrued interest..........................................   (18.4)     (18.0)
     (Decrease) increase in payable to affiliates and accrued
      liabilities..........................................................   (18.8)      12.3
     Decrease in accrued and deferred income taxes.........................   (18.6)      (8.5)
     Other.................................................................     3.7        8.2
                                                                             ------     ------
          Net cash (used for) provided by operating activities.............    (4.4)      20.8
                                                                             ------     ------
Cash flows from investing activities:
  Net proceeds from disposition of property and investments................     1.6        6.9
  Expenditures for property, plant, and equipment..........................   (90.8)     (44.2)
  Investments in unconsolidated affiliates.................................     (.3)      (9.0)
  Redemption fund for preference stock.....................................    (1.3)       (.2)
                                                                             ------     ------
          Net cash used for investing activities...........................   (90.8)     (46.5)
                                                                             ------     ------
Cash flows from financing activities:
  Borrowings (repayments) under revolving credit facility, net.............   118.1       55.6
  Repayments of long-term debt.............................................    (9.0)      (8.5)
  Payments to parent.......................................................    (8.6)     (13.4)
  Incurrence of financing costs............................................                (.8)
  Dividends paid...........................................................     (.6)       (.5)
  Redemption of preference stock...........................................    (5.2)      (8.8)
  Capital contribution.....................................................      .3        1.2
                                                                             ------     ------
          Net cash provided by financing activities........................    95.0       24.8
                                                                             ------     ------
Net decrease in cash and cash equivalents during the period................     (.2)       (.9)
Cash and cash equivalents at beginning of period...........................    21.7       12.0
                                                                             ------     ------
Cash and cash equivalents at end of period.................................  $ 21.5     $ 11.1
                                                                             ------     ------
Supplemental disclosure of cash flow information:
  Interest paid, net of capitalized interest...............................  $ 82.7     $ 85.2
  Income taxes paid........................................................    22.4       23.6
  Tax allocation payments to Kaiser Aluminum Corporation...................     2.7        3.0
  Tax allocation payments to MAXXAM Inc....................................     1.1

 
      The accompanying notes to interim consolidated financial statements
                   are an integral part of these statements.
 
                                      F-33
   152
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
               NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
         (IN MILLIONS OF DOLLARS, EXCEPT PRICES AND PER SHARE AMOUNTS)
 
1. GENERAL
 
     Kaiser Aluminum & Chemical Corporation (the "Company") is the principal
operating subsidiary of Kaiser Aluminum Corporation ("Kaiser"). Kaiser is a
subsidiary of MAXXAM Inc. ("MAXXAM"). MAXXAM owns approximately 62% of the
Kaiser's common stock, assuming the conversion of each outstanding share of
8.255% PRIDES, Convertible Preferred Stock into one share of Kaiser's common
stock, with the remaining approximately 38% publicly held.
 
     The foregoing unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X as promulgated by the Securities and Exchange Commission.
Accordingly, these financial statements do not include all of the disclosures
required by generally accepted accounting principles for complete financial
statements. These unaudited interim consolidated financial statements should be
read in conjunction with the audited consolidated financial statements for the
year ended December 31, 1995. In the opinion of management, the unaudited
interim consolidated financial statements furnished herein include all
adjustments, all of which are of a normal recurring nature, necessary for a fair
statement of the results for the interim periods presented.
 
     Operating results for the quarter and the nine month period ended September
30, 1996, are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
 
2. INVENTORIES
 
     The classification of inventories is as follows:
 


                                                                  SEPTEMBER 30,    DECEMBER 31,
                                                                      1996             1995
                                                                  -------------    ------------
                                                                             
    Finished fabricated aluminum products.......................     $ 108.4          $ 91.5
    Primary aluminum and work in process........................       190.0           195.9
    Bauxite and alumina.........................................       122.5           119.6
    Operating supplies and repair and maintenance parts.........       124.6           118.7
                                                                     -------          ------
              Total.............................................     $ 545.5          $525.7
                                                                     =======          ======

 
     Substantially all product inventories are stated at last-in, first-out
(LIFO) cost, not in excess of market. Replacement cost is not in excess of LIFO
cost.
 
3. CONTINGENCIES
 
     Environmental Contingencies -- The Company is subject to a number of
environmental laws, to fines or penalties assessed for alleged breaches of the
environmental laws, and to claims and litigation based upon such laws. The
Company currently is subject to a number of 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 upon the Company's evaluation of these and other environmental
matters, the Company has established environmental accruals primarily related to
potential solid waste disposal and soil and groundwater remediation matters. At
September 30, 1996, the balance of such accruals, which is primarily included in
Long-term liabilities, was $32.9. These environmental accruals represent the
Company's estimate of costs reasonably expected to be incurred based on
presently enacted laws and regulations, currently available facts,
 
                                      F-34
   153
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
existing technology, and the Company's assessment of the likely remediation
action to be taken. The Company 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 $2.0 to $10.0 for
the years 1996 through 2000 and an aggregate of approximately $7.0 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. The
Company believes that it is reasonably possible that costs associated with these
environmental matters may exceed current accruals by amounts that could range,
in the aggregate, up to an estimated $26.5 and that the factors upon which a
substantial portion of this estimate is based are expected to be resolved in
early 1997. 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, results of operations, or
liquidity.
 
     Asbestos Contingencies -- The Company is a defendant in a number of
lawsuits, some of which involve claims of multiple persons, in which the
plaintiffs allege that certain of their injuries were caused by, among other
things, exposure to asbestos during, and as a result of, their employment or
association with the Company or exposure to products containing asbestos
produced or sold by the Company. The lawsuits generally relate to products the
Company has not manufactured for at least 15 years. At September 30, 1996, the
number of such lawsuits pending was approximately 75,900, as compared to 59,700
at December 31, 1995. During the year 1995, approximately 41,700 of such claims
were received and 7,200 were settled or dismissed. During the nine months ended
September 30, 1996, approximately 20,000 of such claims were received and 3,800
were settled or dismissed.
 
     Based on past experience and reasonably anticipated future activity, the
Company 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 the
Company's actual costs could exceed these estimates. The Company's accrual was
calculated based on the current and anticipated number of asbestos-related
claims, the prior timing and amounts of asbestos-related payments, and the
advice of Wharton Levin Ehrmantraut Klein & Nash, P.A. with respect to the
current state of the law related to asbestos claims. Accordingly, an estimated
asbestos-related cost accrual of $160.0, before consideration of insurance
recoveries, is included primarily in Long-term liabilities at September 30,
1996. The Company estimates that annual future cash payments in connection with
such litigation will be approximately $13.0 to $20.0 for each of the years 1996
through 2000, and an aggregate of approximately $78.0 thereafter through 2008.
While the Company 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.
 
     A substantial portion of the asbestos-related claims that were filed and
served on the Company during 1995 and 1996 were filed in Texas. The Company has
been advised by its counsel that, although there can be no assurance, the
increase in pending claims may have been attributable in part to tort reform
legislation in Texas. Although asbestos-related claims are currently exempt from
certain aspects of the Texas tort reform legislation, management has been
advised that efforts to remove the asbestos-related exemption in the tort reform
legislation, relating to the doctrine of forum non conveniens, as well as other
developments in the legislative and legal environment in Texas, may be
responsible for the accelerated pace of new claims experienced in late 1995 and
its continuance in 1996, albeit at a somewhat reduced rate.
 
     The Company believes that it has insurance coverage available to recover a
substantial portion of its asbestos-related costs. Claims for recovery from some
of the Company's insurance carriers are currently
 
                                      F-35
   154
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
subject to pending litigation and other carriers have raised certain defenses,
which have resulted in delays in recovering costs from insurance carriers. The
timing and amount of ultimate recoveries from these insurance carriers are
dependent upon the resolution of these disputes. The Company believes, based on
prior insurance-related recoveries in respect of asbestos-related claims,
existing insurance policies, and the advice of Thelen, Marrin, Johnson & Bridges
with respect to applicable insurance coverage law relating to the terms and
conditions of those policies, that substantial recoveries from the insurance
carriers are probable. Accordingly, an estimated aggregate insurance recovery of
$142.3, determined on the same basis as the asbestos-related cost accrual, is
recorded primarily in Other assets at September 30, 1996.
 
     Management continues to monitor claims activity, the status of the lawsuits
(including settlement initiatives), legislative progress, and costs incurred in
order to ascertain whether an adjustment to the existing accruals should be made
to the extent that historical experience may differ significantly from the
Company's underlying assumptions. 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 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, results of operations, or liquidity.
 
     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, results of
operations, or liquidity.
 
4. DERIVATIVE FINANCIAL INSTRUMENTS AND RELATED HEDGING PROGRAMS
 
     The Company's earnings 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. The Company
enters into primary aluminum hedging transactions from time to time in the
normal course of business. Primary aluminum hedging transactions are designed to
mitigate the Company's exposure to declines in the market price of primary
aluminum, while retaining the ability to participate in favorable environments
that may materialize. The Company has employed strategies which include forward
sales and purchases of primary aluminum at fixed prices and the purchase or sale
of options for primary aluminum. At September 30, 1996, the Company had sold
forward, at fixed prices, approximately 69,000 and 93,600 tons* of primary
aluminum in excess of its projected 1997 and 1998 internal fabrication
requirements respectively, and had purchased put options to establish a minimum
price for 66,000 and 45,000 tons of such 1997 and 1998 surplus, respectively.
During October 1996, the Company purchased put options to establish a minimum
price for an additional 126,000 tons of primary aluminum in excess of its
projected 1997 internal fabrication requirements and entered into option
contracts that established a price range for an additional 48,000 tons of the
Company's 1998 surplus.
 
     In addition, at September 30, 1996, the Company had sold forward
approximately 73% and 85% of the alumina available to it in excess of its
projected internal smelting requirements for 1997 and 1998, respectively.
Virtually all of such 1997 and 1998 sales were made at prices indexed to future
prices of primary aluminum.
 
     From time to time, the Company also enters into forward purchase and option
transactions to limit its exposure to increases in natural gas and fuel oil
costs. As of September 30, 1996, the Company had option
 
- ---------------
 
     * All references to tons in this report refer to metric tons of 2,204.6
       pounds.
 
                                      F-36
   155
 
        KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
 
       NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
contracts for the purchase of approximately 40,000 MMBtu of natural gas per day
during the first quarter of 1997, and a combination of fixed price purchase and
option contracts for 20,000 MMBtu of natural gas per day for the period April
1997 to December 1998. At September 30, 1996, the Company also held option
contracts for 54,000 barrels of fuel oil per month for the period January 1997
through December 1998.
 
     The Company 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, 1996, the Company had net forward foreign
exchange contracts totaling approximately $81.6 for the purchase of 110.0
Australian dollars from January 1997 through June 1998, in respect of its
commitments for 1997 and 1998 expenditures denominated in Australian dollars.
 
     At September 30, 1996, the net unrealized gain on the Company's position in
aluminum forward sales and option contracts, based on an average price of $1,481
per ton ($.67 per pound) of primary aluminum, natural gas and fuel oil forward
purchase and option contracts, and forward foreign exchange contracts, was
approximately $46.4.
 
     See Note 10 of the Notes to Consolidated Financial Statements for the year
ended December 31, 1995.
 
5. SUBSEQUENT EVENTS
 
   
     On October 23, 1996, (the "Issuance Date"), the Company completed an
offering (the "Offering") of $175.0 principal amount of 10 7/8% Senior Notes due
2006 (the "10 7/8% Senior Notes") at 99.5% of their principal amount to yield
10.96% at maturity. The 10 7/8% Senior Notes were not registered under the
Securities Act of 1933, and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements.
The 10 7/8% Senior Notes rank pari passu with outstanding indebtedness under the
Company's Credit Agreement dated as of February 15, 1994, as amended (the
"Credit Agreement") and the Company's 9 7/8% Senior Notes due 2002 (the 9 7/8%
Senior Notes) in right and priority of payment and are guaranteed on a senior,
unsecured basis by certain of the Company's subsidiaries (the "Subsidiary
Guarantors"). Net proceeds from the Offering on the Issuance Date, after
estimated expenses, were approximately $168.9, of which $91.7 were utilized to
reduce the outstanding borrowings under the revolving credit facility of the
Credit Agreement to zero. The remaining net proceeds (approximately $77.2) were
invested in short-term investments pending their application for working capital
and general corporate purposes, including capital projects. Pursuant to an
agreement with the initial purchasers of the 10 7/8% Senior Notes, the Company
and the Subsidiary Guarantors agreed to file a registration statement (the
"Registration Statement") with the Securities & Exchange Commission within 30
days of the Issuance Date with respect to a registered offer to exchange the
10 7/8% Senior Notes for new notes with substantially identical terms (the
"Exchange Offer"), and to use their reasonable best efforts to have the
Registration Statement declared effective within 90 days of the Issuance Date
and the Exchange Offer consummated within 130 days of the Issuance Date. The
Exchange Offer will be made only by means of a prospectus.
    
 
     On a pro forma basis, at September 30, 1996, after giving effect to the
Offering and the application of proceeds therefrom, the Company's total
consolidated indebtedness would have increased from $878.0 to $920.9, borrowing
capacity of $273.1 would have been available for use under the Credit Agreement
and the Company would have had available additional cash proceeds from the
Offering of $37.7.
 
     During October 1996, the Credit Agreement was amended to, among other
things, provide for the Offering of the 10 7/8% Senior Notes discussed above and
to modify certain of the financial covenants contained in the Credit Agreement.
 
                                      F-37
   156
================================================================================
 
  ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:

                                    By Mail:
                        FIRST TRUST NATIONAL ASSOCIATION
                               180 E. 5TH STREET
                           ST. PAUL, MINNESOTA 55101
                           ATTENTION: PHYLLIS MEATH,
                                      SPECIALIZED FINANCE
 
                           By Hand/Overnight Express:
                        FIRST TRUST NATIONAL ASSOCIATION
                               180 E. 5TH STREET
                           ST. PAUL, MINNESOTA 55101
                           ATTENTION: PHYLLIS MEATH,
                                      SPECIALIZED FINANCE
 
                            Facsimile Transmission:
                                 (612) 244-1537
 
                              To confirm receipt:
                                 (612) 244-1197
 
    (ORIGINALS OF ALL DOCUMENTS SUBMITTED BY FACSIMILE SHOULD BE SENT PROMPTLY
BY HAND, OVERNIGHT COURIER OR REGISTERED OR CERTIFIED MAIL)
 
    NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF
THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
 
================================================================================

================================================================================
 
                       OFFER TO EXCHANGE ALL OUTSTANDING
                         10 7/8% SENIOR NOTES DUE 2006
                      ($175,000,000 PRINCIPAL AMOUNT) FOR
                    10 7/8% SERIES B SENIOR NOTES DUE 2006.



                               KAISER ALUMINUM &
                              CHEMICAL CORPORATION



                                   ----------
                                   PROSPECTUS
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                               December 30, 1996
    
 
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