KAISER ALUMINUM & CHEMICAL CORP - 10-K Annual Report

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

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
Commission file number 1-3605

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

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

6177 SUNOL BOULEVARD, PLEASANTON, CALIFORNIA 94566-7769
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (510) 462-1122

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

Name of each exchange
Title of each class on which registered

Cumulative Convertible Preference Stock
(par value $100)
4 1/8% Series None
4 3/4% (1957 Series) None
4 3/4% (1959 Series) None
4 3/4% (1966 Series) None

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

Title of each class
Cumulative (1985 Series A) Preference Stock
Cumulative (1985 Series B) Preference Stock

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

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

As of March 14, 1997, there were 46,171,365 shares of the common stock of
the registrant outstanding, all of which were owned by Kaiser Aluminum
Corporation, the parent corporation of the registrant. As of March 14,
1997, non-affiliates of the registrant held 535,432 shares of Cumulative
(1985 Series A) Preference Stock and 77,865 shares of Cumulative (1985
Series B) Preference Stock of the registrant. The aggregate value of such
Cumulative (1985 Series A) Preference Stock and the Cumulative (1985 Series
B) Preference Stock, based upon the redemption price for such stock, is
$30.7 million.

Certain portions of the registrant's definitive proxy statement to be filed
not later than 120 days after the close of the registrant's fiscal year are
incorporated by reference into Part III of this Report on Form 10-K.

NOTE

Kaiser Aluminum & Chemical Corporation's Report on Form 10-K filed with the
Securities and Exchange Commission includes all exhibits required to be
filed with the Report. Copies of this Report on Form 10-K, including only
Exhibit 21 of the exhibits listed on pages 54 - 57 of this Report, are
available without charge upon written request. The registrant will furnish
copies of the other exhibits to this Report on Form 10-K upon payment of a
fee of 25 cents per page. Please contact the office set forth below to
request copies of this Report on Form 10-K and for information as to the
number of pages contained in each of the other exhibits and to request
copies of such exhibits:

Corporate Secretary
Kaiser Aluminum & Chemical Corporation
6177 Sunol Boulevard
Pleasanton, California 94566-7769

(i)
TABLE OF CONTENTS

Page

PART I 1

ITEM 1. BUSINESS 1

ITEM 2. PROPERTIES 11

ITEM 3. LEGAL PROCEEDINGS 12

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14

PART II 15

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 15

ITEM 6. SELECTED FINANCIAL DATA 15

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 16

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 51

PART III 51

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 51

ITEM 11. EXECUTIVE COMPENSATION 51

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 51

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 51

PART IV 51

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K 51

SIGNATURES 53

INDEX OF EXHIBITS 54

EXHIBIT 21 SUBSIDIARIES 58

(ii)

PART I

ITEM 1. BUSINESS

This Annual Report on Form 10-K contains statements which constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements appear in a number of
places in this Report (see, for example, Item 1. "Business - Industry
Overview;" "Business - The Company - Profit Enhancement and Cost Reduction
Initiative," "- Production Operations," "- Competition," "- Research and
Development," "- Business Development," and "Environmental Matters," and
Item 3. "Legal Proceedings"). Such statements can be identified by the use
of forward-looking terminology such as "believes," "expects," "may,"
"estimates," "will," "should," "plans" or "anticipates" or the negative
thereof or other variations thereon or comparable terminology, or by
discussions of strategy. Readers are cautioned that any such forward-
looking statements are not guarantees of future performance and involve
significant risks and uncertainties, and that actual results may vary
materially from those in the forward-looking statements as a result of
various factors. These factors include the effectiveness of management's
strategies and decisions, general economic and business conditions,
developments in technology, new or modified statutory or regulatory
requirements and changing prices and market conditions. Other sections of
this Report identify other factors that could cause such differences. No
assurance can be given that these are all of the factors that could cause
actual results to vary materially from the forward-looking statements.

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, Germany, France, Italy,
and the United Kingdom. In the packaging industry, which accounted for an
estimated 21% of aluminum consumption in 1996 in the previously referenced
countries, aluminum's recyclability and weight advantages have enabled it
to gain market share from steel and glass, primarily in the beverage
container area. Nearly all beer cans and soft drink cans manufactured for
the United States market are made of aluminum. Kaiser Aluminum & Chemical
Corporation ("KACC" or 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 by
plastic container production.

In the transportation industry, which accounted for an estimated 30% of
aluminum consumption in the United States, Japan, Germany, France, Italy
and the United Kingdom in 1996, 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 1996, estimated world aluminum capacity from 179 smelting
facilities was approximately 22.9 million tons* per year. World production
of primary aluminum for 1996 increased approximately 4.5% compared to 1995.
Net exports of aluminum from the former Sino Soviet bloc increased
approximately 200% from 1990 levels to an estimated 1.9 million tons per
year as of year-end 1996. In addition, one smelter continued to increase
production following its start-up in 1995, and a number of producers
restarted idled capacity in late 1995 and early 1996. These exports, as
well as new and restarted capacity, contributed to an
__________
* All references to tons in this Report refer to metric tons of 2,204.6
pounds.

ITEM 1. BUSINESS (CONTINUED)

increase in London Metal Exchange ("LME") stocks of primary aluminum which
peaked in October 1996 at 970,000 tons. At the end of 1996, LME stocks of
primary aluminum had declined 18,725 tons from this peak level to 951,275
tons. See "- Industry Trends."

Based upon information currently available, the Company believes that
moderate additions will be made during 1997-1999 to world alumina and
primary aluminum production capacity. The increases in alumina capacity
during 1997-1999 are expected to come from one new refinery, which began
operations in 1996, and incremental expansions of existing refineries. In
addition, the Company believes that there is currently an estimated 1.6
million tons of unutilized world smelting capacity. The increases in world
primary aluminum capacity during 1997-1999 are expected to come from two
new smelters which may begin operations in 1997, two relocated smelters
that are expected to resume operations in 1998, and the remainder
principally from incremental expansions of existing smelters.

Industry Trends

Primary aluminum prices have historically been subject to significant
cyclical price fluctuations. During the first half of 1996, the average
Midwest United States transaction price ("AMT Price") for primary aluminum
remained relatively stable in the $.75 per pound range. However, during
the second half of the year the AMT Price fell, reaching a low of $.65 per
pound for October 1996, before recovering late in the year. During 1996,
the AMT Price for primary aluminum was approximately $.72 per pound,
compared to $.86, $.72 and $.54 per pound in 1995, 1994 and 1993,
respectively. The AMT Price for primary aluminum for the week ended March
14, 1997, was approximately $.81 per pound.

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 continued throughout most of 1996. Net reported primary aluminum
inventories increased by approximately 62,000 tons in 1996 based upon
reports of the LME and the International Primary Aluminium Institute
("IPAI"), following substantial declines of 764,000 and 1,153,000 tons in
1994 and 1995, respectively. However, since year-end 1996, LME stocks of
primary aluminum have continued to decline from their October 1996 peak
level.

Increased production of primary aluminum due to restarts of certain
previously idled capacity, the continued increase in production of a
smelter in South Africa following its start-up in 1995, and the continued
high level of exports from the Commonwealth of Independent States ("CIS")
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, in the aggregate,
performing relatively well, the Company believes that the reduction of
aluminum inventories by customers, as prices have continued to decline, has
mitigated the growth in primary aluminum demand that normally accompanies
growth in economic and industrial activity.

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 People's Republic of China
("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 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. However, increases in primary aluminum production as well
as reductions in alumina production during the second half of 1996 resulted
in stronger alumina pricing in late 1996.

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. United States shipments of
domestic fabricated aluminum
ITEM 1. BUSINESS (CONTINUED)

products in 1996 are estimated to be approximately at 1995 levels, although
in 1996 demand for can sheet in the United States softened relative to
1995.

THE COMPANY

General

The Company is a direct subsidiary of Kaiser Aluminum Corporation
("Kaiser") and is an indirect subsidiary of MAXXAM Inc. ("MAXXAM"). The
Company operates in all principal aspects of the aluminum industry - the
mining of bauxite, the refining of bauxite into alumina, the production of
primary aluminum from alumina, and the manufacture of fabricated (including
semi-fabricated) aluminum products. In addition to the production utilized
by the Company in its operations, the Company sells significant amounts of
alumina and primary aluminum in domestic and international markets. In
1996, the Company produced approximately 2,838,000 tons of alumina, of
which approximately 73% was sold to third parties, and produced
approximately 473,200 tons of primary aluminum, of which approximately 75%
was sold to third parties. The Company is also a major domestic supplier
of fabricated aluminum products. In 1996, the Company shipped
approximately 327,100 tons of fabricated aluminum products to third
parties, which accounted for approximately 5% 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. Note 11 of the
Notes to Consolidated Financial Statements is incorporated herein by
reference.

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

Year Ended December 31,
----------------------------------------------
1996 1995 1994
------------- ------------- -------------

(in thousands of tons)

ALUMINA:
Shipments to Third Parties 2,073.7 2,040.1 2,086.7
Intracompany Transfers 912.4 800.6 820.9
PRIMARY ALUMINUM:
Shipments to Third Parties 355.6 271.7 224.0
Intracompany Transfers 128.3 217.4 225.1
FABRICATED ALUMINUM PRODUCTS:
Shipments to Third Parties 327.1 368.2 399.0

Sensitivity to Prices and Hedging Programs

The Company's operating results are sensitive to changes in the prices of
alumina, primary aluminum, and fabricated aluminum products, and also
depend to a significant degree upon the volume and mix of all products sold
and on its hedging strategies. Primary aluminum prices have historically
been subject to significant cyclical price fluctuations. Alumina prices,
as well as fabricated aluminum product prices (which vary considerably
among products), are significantly influenced by changes in the price of
primary aluminum and generally lag behind primary aluminum prices for
periods of up to three months. From time to time in the ordinary course of
business the Company enters into hedging transactions to provide price risk
management in respect of its net exposure resulting from (i) anticipated
sales of alumina, primary aluminum, and fabricated aluminum products, less
(ii) expected purchases of certain items, such as aluminum scrap, rolling
ingot, and bauxite, whose prices fluctuate with the price of primary
aluminum. Forward sales contracts are used by the Company to effectively
lock-in or fix the price that the Company will receive for its shipments.
The Company also uses option contracts (i) to establish a minimum price for
its product shipments, (ii) to establish a "collar" or range of price for
its anticipated sales, and/or (iii) to permit the Company to realize
possible upside price movements. See Notes 1 and 10 of the Notes to
Consolidated Financial Statements.

ITEM 1. BUSINESS (CONTINUED)

Profit Enhancement and Cost Reduction Initiative
In October 1996, the Company established a goal of achieving significant
cost reduction and other profit improvements by the end of 1997, with the
full effect planned to be realized in 1998 and beyond, measured against
1996 results. To achieve this goal the Company plans reductions in
production costs, decreases in corporate general and administrative
expenses, and enhancements to product mix and volume throughput. There can
be no assurance that the initiative will result in the desired cost
reductions and other profit improvements.

Production Operations

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 7% of total produced alumina in 1996 as reported by
the IPAI. During 1996, the Company's third party shipments of
bauxite represented approximately 25% of bauxite mined. In
addition, the Company's third party shipments of alumina
represented approximately 73% of alumina produced. The Company's
share of total world alumina capacity as reported by the IPAI was
approximately 6% in 1996.

- The primary aluminum products business unit operates two wholly-
owned domestic smelters and two foreign smelters in which the
Company holds significant ownership interests. During 1996, the
Company's third party shipments of primary aluminum represented
approximately 75% of its primary aluminum production. The
Company's share of total world primary aluminum capacity as
reported by the IPAI was approximately 2% in 1996.

- Fabricated aluminum products are manufactured by two business
units - flat-rolled products and engineered products. The
products include heat-treated products, body, lid, and tab stock
for beverage containers, sheet and plate products, screw machine
stock, redraw rod, forging stock, truck wheels and hubs, air bag
canisters, 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, 1996:

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% 1,050,000 1,050,000
Alpart Jamaica 65% 942,500 1,450,000
QAL Australia 28.3% 973,500 3,440,000
------------- -------------
2,966,000 5,940,000
============= =============

____________
(1) Although the Company owns 49% of Kaiser Jamaica Bauxite Company
("KJBC"), it has the right to receive all of such entity's output.
(2) Alumina Partners of Jamaica ("Alpart") bauxite is refined into alumina
at the Alpart refinery.

ITEM 1. BUSINESS (CONTINUED)

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 Aluminum as ("Hydro") owns the remaining 35% 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
under 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 ($94.4 million at December 31, 1996) of certain debt of
QAL, as well as other QAL costs and expenses, including bauxite shipping
costs.

The Company's principal customers for bauxite and alumina consist of other
aluminum producers that purchase bauxite and reduction-grade alumina,
trading intermediaries who resell raw materials to end-users, and users of
chemical-grade alumina. All of the Company's third-party sales of bauxite
in 1996 were made to two customers, the largest of which accounted for
approximately 79% of such sales. The Company also sold alumina to 15
customers, the largest and top five of which accounted for approximately
21% and 79% of such sales, respectively. See "- Competition." The Company
believes that among alumina producers it is the 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 also "- Sensitivity to Prices and Hedging Programs."

Primary Aluminum Products

The following table lists the Company's primary aluminum smelting
facilities as of December 31, 1996:

Annual Rated Total 1996
Capacity Annual Average
Company Available to Rated Operating
Location Facility Ownership the Company Capacity Rate
- ------------------------- -------------- -------------- -------------- -------------- --------------
(tons) (tons)

Domestic
Washington Mead 100% 200,000 200,000 106%
Washington Tacoma 100% 73,000 73,000 100%
------------- -------------
Subtotal 273,000 273,000
------------- -------------
International
Ghana Valco 90% 180,000 200,000 68%
Wales, United Kingdom Anglesey 49% 55,000 112,000 118%
------------- -------------
Subtotal 235,000 312,000
------------- -------------
Total 508,000 585,000
============= =============

ITEM 1. BUSINESS (CONTINUED)

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 53% of Mead's 1996
production was used at KACC's Trentwood fabricating facility and the
balance was sold to third parties. The Tacoma facility 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 through retrofit technology and a variety of cost controls,
leading to increases in production volume and enhancing their ability to
compete with newer smelters. 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. The project
is expected to lower costs, enhance safety, and improve the environmental
performance of the facility, and is expected to be completed in late 1998.

Electric power represents an important production cost for the Company at
its aluminum smelters. In 1995, the Company successfully restructured
electric power purchase agreements for its facilities in the Pacific
Northwest, which resulted in significantly lower electric power costs in
1996 for the Mead and Tacoma, Washington, smelters compared to 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 this time.

The Company manages, and owns a 90% interest in, the Volta Aluminium
Company Limited ("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.
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. The Volta River Authority has
allocated to Valco sufficient electric power to operate at 80% of its
annual rated capacity through December 31, 1997.

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 aluminum smelter is supplied under an agreement
which expires in 2001.

The Company has developed and installed proprietary retrofit and control
technology in all of its smelters, as well as at third party locations.
This technology - which includes the redesign of the cathodes and anodes
that conduct electricity through reduction cells, improved feed systems
that add alumina to the cells, and a computerized system that controls
energy flow in the cells - 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 "-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 1996, the Company sold its primary aluminum production not
utilized for internal purposes to approximately 45 customers, the largest
and top five of which accounted for approximately 16% and 54% 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
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
transportation, packaging, 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. 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

ITEM 1. BUSINESS (CONTINUED)
are the principal competitive factors in the market for fabricated aluminum
products. The Company has 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 products business unit, the largest
of the Company's fabricated products businesses, operates the Trentwood
sheet and plate mill at Spokane, Washington. In addition, the Company
broke ground on its first commercial Micromill facility, near Reno,
Nevada. The Micromill process is a proprietary, compact, high-speed
process for continuous casting and rolling of a thin-strip aluminum sheet
from molten metal. The Company expects the Nevada facility to be in a
start-up mode in the first half of 1997, and anticipates beginning limited
customer shipments from the facility by the second half of 1997. See "-
Research and Development."

The Trentwood facility is the Company's largest fabricating plant and
accounted for approximately 63% of the Company's 1996 fabricated aluminum
products shipments. The business unit supplies the aerospace and general
engineering markets (producing heat-treat products), the beverage container
market (producing body, lid, and tab stock), and the specialty coil markets
(producing automotive brazing sheet, wheel, and tread products), both
directly and through distributors.

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. The Company has approved an
expansion of its heat-treat capacity to approximately 60,000 tons from
approximately 45,000 tons, which will enable the Company to increase the
range of its heat-treat products, including wide heat-treated sheet for the
aerospace market, enhance the quality of its heat-treated products, and
improve Trentwood's operating efficiency. The project is estimated to cost
approximately $45.0 million and to take approximately two years to
complete. Global 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 Company's flat-rolled products are also sold 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, service, 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 stock in the world.

In 1996, 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 15% of the business unit's revenue. In 1996, the
flat-rolled products business unit had 42 domestic and foreign can stock
customers. The largest and top five of such customers accounted for
approximately 18% and 35%, respectively, of the business unit's revenue.
See "- Competition." 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 end-use customers and distributors
from eight sales offices located throughout the United States.
International customers are served by sales offices in England and Japan
and by independent sales agents in Asia and Latin America.

Engineered Products - The engineered products business unit is
headquartered in Detroit, Michigan, 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. Major markets for extruded products are in the
transportation industry, to which the business unit 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. The sales and engineering office in
Detroit, Michigan, works with car makers and other customers, the Center
for Technology (see "- Research and Development"), and plant personnel to

ITEM 1. BUSINESS (CONTINUED)
create new automotive component designs and improve existing products.

The engineered products business unit also 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, and 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 1996, the engineered products business unit had 993 customers, the
largest and top five of which accounted for approximately 13% and 31%,
respectively, of the business unit's revenue. See "- Competition." Sales
are made directly from plants, as well as marketing locations across the
United States.

In September 1996, the Company entered into a letter of intent with
Accuride Corporation ("Accuride"), a business unit of Phelps Dodge
Corporation, to form a joint-venture to design, manufacture and market
aluminum wheels for the commercial ground transportation industry. The
formation of the joint venture, subject to various conditions including
third-party consents, is expected to occur in the second quarter of 1997.

Competition

Aluminum competes in many markets with steel, copper, glass, plastic, and
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 & Chemicals L.L.C., Billiton
Marketing and Trading BV, and Alcan Aluminium Limited. The Company
competes with most aluminum producers in the sale of primary aluminum.

Primary aluminum and, to some degree, alumina are commodities with
generally standard qualities, and competition in the sale of these
commodities is based primarily upon price, quality and availability. 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 the Company's
financial condition or results of operations.

Research and Development

The Company conducts research and development activities principally at two
facilities - the Center for Technology ("CFT") in Pleasanton, California,
and the Primary Aluminum Products Division Technology Center ("DTC")
adjacent to the Mead smelter in Washington. Net expenditures for
company-sponsored research and development activities were $20.5 million in
1996, $18.5 million in 1995, and $16.7 million in 1994. The Company's
research staff totaled 156 at December 31, 1996. The Company estimates
that research and development net expenditures will be approximately $21.6
million in 1997.

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 aircraft, automotive, and can sheet markets, and
aluminum reduction cell models which are applied to improving cell designs
and operating conditions. DTC maintains specialized laboratories and a
miniature carbon plant where experiments with new anode and cathode
technology are performed. DTC supports the Company's primary

ITEM 1. BUSINESS (CONTINUED)

aluminum smelters, and concentrates on the development of cost-effective
technical innovations such as equipment and process improvements.

The largest and most notable single project being developed at CFT and the
Reno, Nevada, facility is a unique Micromill casting facility for the
production of can sheet from molten metal using a continuous cast process.
The capital and conversion costs of the Company's Micromill facilities are
expected to be significantly lower than conventional rolling mills. The use
of a Micromill facility is also expected to result in lower transportation
costs due to the ability to strategically locate a Micromill facility in
close proximity to a manufacturing facility. Micromill facilities 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 Micromill facilities 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 facility, which was constructed in Nevada
during 1996 as a demonstration and production facility, achieved
operational start-up in the fourth quarter of 1996. The Company expects
that the Nevada Micromill facility will be in a start-up mode for the
first half of 1997 and will be able to commence limited shipments to
customers in the second half of 1997. If the Company is successful in
proving and commercializing its Micromill technology, Micromill
facilities 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 capital cost of the construction of the Nevada
Micromill facility, estimated to be approximately $70.0 million, from
available general corporate resources.

The Company licenses its technology and sells 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, United Arab Emirates, and the United
Kingdom. The Company has technical services contracts with smelters in
Wales, Africa, Europe, the Middle East, and India. The Company's revenue
from technology sales and technical assistance to third parties was $3.6
million in 1996, $5.7 million in 1995, and $10.0 million in 1994.

Business Development

The Company is actively pursuing opportunities to grow in targeted areas of
its portfolio, by internal investment and by acquisition, both domestically
and internationally. The Company is 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
Venezuela - where Kaiser is the Qualified Operator in one of five consortia
seeking to participate in the privatization of Venezuela's aluminum
industry - the PRC, Russia and other members of the CIS, and India. 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 "- 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 organized under PRC law
(the "Joint Venture"). 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 future of 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 meeting of the Board of
Directors of the Joint Venture held on January 16, 1997, LAS reported that
negotiations had begun with an investor which might be interested in buying
KYRIL's interest in the Joint Venture. In light of such report, the
directors adopted a resolution that,

ITEM 1. BUSINESS (CONTINUED)

among other things, (i) contained an agreement to continue until June 30,
1997, discussions concerning the future of the Joint Venture, (ii) provided
that KYRIL granted to LAS the right to seek a buyer to purchase KYRIL's
equity interest in the Joint Venture, and (iii) provided that if a buyer to
purchase KYRIL's equity interest in the Joint Venture was not found by June
30, 1997, the Joint Venture would be terminated and dissolved.

The Company, through its engineered products business unit, entered into
contracts to form two small joint ventures 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.

Employees

During 1996, the Company employed an average of 9,567 persons, compared
with an average of 9,546 employees in 1995, and 9,744 employees in 1994.
At December 31, 1996, the Company's work force was 9,509, including a
domestic work force of 5,925, of whom 3,974 were paid at an hourly rate.
Most hourly paid domestic employees are covered by collective bargaining
agreements with various labor unions. Approximately 75% of such employees
are covered by a master agreement (the "Labor Contract") with the United
Steelworkers of America ("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 provides for base wages at all covered plants. In
addition, workers covered by the Labor Contract may receive quarterly or
more frequent bonus payments based on various indices of profitability,
productivity, efficiency, and other aspects of specific plant or
departmental 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 certain 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 certain salaried employees.

The contract covering Alpart's employees expired in April 1996, and
contract negotiations are ongoing.

Management considers the Company's employee relations to be satisfactory.
Environmental Matters

The Company is subject to a wide variety of international, federal, state
and local environmental laws and regulations (the "Environmental Laws").
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 the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended by the Superfund Amendments and Reauthorization Act
of 1986 ("CERCLA"). The Company, along with certain other entities, has
been named as a Potentially Responsible Party ("PRP") for remedial costs at
certain third-party sites listed on the National Priorities

ITEM 1. BUSINESS (CONTINUED)

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 1997. In addition, in connection with certain of its asset sales, the
Company has agreed to indemnify the purchasers with respect to certain
liabilities (and associated expenses) resulting from acts or omissions
arising prior to such dispositions, including environmental liabilities.

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 December 31, 1996, the balance of such accruals, which are
primarily included in Long-term liabilities, was $33.3 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 $3.0 to $9.0 million for the years 1997 through 2001 and an
aggregate of approximately $6.0 million thereafter. Cash expenditures of
$8.8 million in 1996, $4.5 million in 1995, and $3.6 million in 1994 were
charged to previously established accruals relating to environmental costs.
Approximately $9.3 million is expected to be charged to such accruals in
1997.

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 $24.0 million and that, subject to further regulatory review and
approval, 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, 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 $18.4 million in 1996, $9.2
million in 1995, and $11.9 million in 1994. Annual operating costs for
pollution control, not including corporate overhead or depreciation, were
approximately $30.1 million in 1996, $26.0 million in 1995, and $23.1
million in 1994. Legislative, regulatory and economic uncertainties make
it difficult to project future spending for these purposes. However, the
Company currently anticipates that in the 1997-1998 period, environmental
capital spending will be within the range of approximately $6.0 million to
$16.0 million per year, and operating costs for pollution control will be
within the range of $30.0 million to $31.0 million per year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Environmental Contingencies." The portion of Note 9 of the
Notes to Consolidated Financial Statements under the heading "Environmental
Contingencies" is incorporated herein by reference.

ITEM 2. PROPERTIES

The locations and general character of the principal plants, mines, and
other materially important physical properties relating to the Company's
operations are described in "Business - The Company - 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.

The Company's obligations under the Credit Agreement entered into on
February 15, 1994, as amended (the "Credit Agreement"), are secured by,
among other things, mortgages on the Company's 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 - Financing Activities and Liquidity."

ITEM 3. LEGAL PROCEEDINGS

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

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, 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.

In 1993 and 1994, the EPA issued unilateral Administrative Orders under
Section 106(a) of CERCLA ordering the respondents, including the Company,
to perform soil remedial design and remedial action and groundwater
remediation for three of the Sites. In addition to the Company, a number
of other companies are also named as respondents. The Company has entered
into interim PRP Participation Agreements with certain of the respondents
(the "Group") to participate jointly in responding to the Administrative
Orders, 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.

In March 1997, certain members of the Group, including the Company, entered
into a Settlement Agreement and Participation Agreement which allocates one
hundred percent of all costs incurred or to be incurred for work at each of
the five Sites. Negotiations with the United States Department of Justice
("DOJ") and the EPA concerning an acceptable consent decree to resolve the
outstanding litigation in whole or in part commenced during the first
quarter of 1997. Based on current estimates of future costs, the Company
believes that its aggregate financial exposure at these Sites is less than
$2.0 million.

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 No. 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 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 Washington SIP. 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 expected 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

ITEM 3. LEGAL PROCEEDINGS (CONTINUED)

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. On December 7, 1995, the United States
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. 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.

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 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 May 1996, the Company entered into
a Participation Agreement with thirteen of the respondents to perform the
work required under the Administrative Order, under which the Company will
pay 2.79% of the cost of remedial design and work at the Site. Based on
current cost estimates, the Company believes that its financial exposure
for remedial design and remedial action at this site is less than $.5
million.

Hammons v. Alcan Aluminum Corp. et al

On March 5, 1996, a class action complaint was filed against Kaiser, Alcan
Aluminum Corp., Aluminum Company of America, Alumax, Inc, Reynolds Metal
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 Section16720 & 16750), in conjunction with a
Memorandum of Understanding ("MOU") entered into in 1994 by representatives
of Australia, Canada, the European Union, Norway, the Russian Federation
and the United States 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 judgment 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.

Matheson et al v. Kaiser Aluminum Corporation et al

On March 19, 1996, a lawsuit was filed against MAXXAM, Kaiser, and Kaiser's
directors challenging and seeking to enjoin a proposed recapitalization of
Kaiser (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 Kaiser's 8.255% PRIDES,
Convertible Preferred Stock (the "PRIDES"). On April 8, 1996, the Delaware
Court of Chancery issued a ruling which preliminarily enjoined Kaiser from
implementing the Proposed Recapitalization. On April 19, 1996, the
Delaware Supreme Court granted Kaiser's motion to consider, on an expedited
basis, Kaiser's appeal of the preliminary injunction and on May 1, 1996,
Kaiser's stockholders approved the Proposed Recapitalization which was not
implemented at that time due to the pending appeal. On August 29, 1996,
the Delaware Supreme Court upheld the preliminary injunction and remanded
the

ITEM 3. LEGAL PROCEEDINGS (CONTINUED)

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, the Board of Directors of Kaiser adopted a
resolution abandoning the Proposed Recapitalization. On October 2, 1996,
Kaiser 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. Thereafter, plaintiffs' attorneys filed their fee
application, and briefing was submitted by both sides on whether a
permanent injunction was needed, and the amount of the fee to which
plaintiffs' attorneys were entitled. On March 18, 1997, plaintiffs
withdrew their motion for a permanent injunction, leaving their fee
application as the only issue for the Court of Chancery to consider. After
oral argument on March 25, 1997, the Court of Chancery awarded plaintiffs'
attorneys fees and expenses in the total amount of $.8 million. It is
anticipated that the Court of Chancery will sign an order, approved as to
form by all parties, awarding such fees, dissolving the preliminary
injunction, and dismissing plaintiffs' case with prejudice. The decision
to abandon the Proposed Recapitalization does not preclude a
recapitalization from being proposed to the stockholders of Kaiser in the
future.

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 additional information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asbestos Contingencies." The portion of Note 9 of the Notes
to Consolidated Financial Statements under the heading "Asbestos
Contingencies" is incorporated herein by reference.

DOJ Proceedings

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

On March 27, 1995, the DOJ issued Civil Investigative Demand No. 12503
("CID No. 12503"), as part of an industry-wide investigation, requesting
information from 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 informed in November 1996 that the DOJ has officially
closed its investigation and has returned the documents submitted by the
Company.

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.

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

No matter was submitted to a vote of security holders of the Company during
the fourth quarter of 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

There is no established public trading market for the Company's common
stock, which is held solely by Kaiser. The information in Note 4 of the
Notes to Consolidated Financial Statements under the heading "Loan
Covenants and Restrictions" at page 32 of this Report, is incorporated
herein by reference. The Company has not paid any dividends on its common
stock during the two most recent fiscal years.

The Indentures and the Credit Agreement (Exhibits 4.1 through 4.16 to this
Report) contains restrictions on the ability of the Company to pay
dividends on or make distributions on account of the Company's common stock
and restrictions on the ability of the Company's subsidiaries to transfer
funds to the Company in the form of cash dividends, loans or advances.
Exhibits 4.1 through 4.16 to this Report, Note 4 of the Notes to
Consolidated Financial Statements at pages 31-32 of this Report, and the
information under the heading "Financing Activities and Liquidity" at pages
20-21 of this Report, are incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA

Selected financial data for the Company is incorporated herein by reference
to the table at page 3 of this Report, to the table at page 16 of this
Report, to the discussion under the heading "Results of Operations" at
pages 18-19 of this Report, to Note 1 of the Notes to Consolidated
Financial Statements at pages 28-29 of this Report, and to pages 48-49 of
this Report.

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

Kaiser Aluminum & Chemical Corporation (the"Company"), is a wholly owned
subsidiary of Kaiser Aluminum Corporation ("Kaiser"), which is a subsidiary
of MAXXAM Inc. ("MAXXAM"). The Company operates in two business segments:
bauxite and alumina, and aluminum processing. 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 facilities.
Intracompany shipments and sales are excluded from the information set
forth in the table below. The table below provides selected operational
and financial information on a consolidated basis with respect to the
Company for the years ended December 31, 1996, 1995, and 1994. The
following should be read in conjunction with the Company's consolidated
financial statements and the notes thereto, contained elsewhere herein.

Year Ended December 31,
----------------------------------------------
(In millions of dollars, except shipments and prices) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------

Shipments: (000 tons) (1)
Alumina 2,073.7 2,040.1 2,086.7
Aluminum products:
Primary aluminum 355.6 271.7 224.0
Fabricated aluminum products 327.1 368.2 399.0
------------- ------------- -------------
Total aluminum products 682.7 639.9 623.0
============= ============= =============
Average realized sales price:
Alumina (per ton) $ 195 $ 208 $ 169
Primary aluminum (per pound) .69 .81 .59
Net sales:
Bauxite and alumina:
Alumina $ 404.1 $ 424.8 $ 352.8
Other (2)(3) 103.9 89.4 79.7
------------- ------------- -------------
Total bauxite and alumina 508.0 514.2 432.5
------------- ------------- -------------
Aluminum processing:
Primary aluminum 538.3 488.0 292.0
Fabricated aluminum products 1,130.4 1,218.6 1,043.0
Other (3) 13.8 17.0 14.0
------------- ------------- -------------
Total aluminum processing 1,682.5 1,723.6 1,349.0
------------- ------------- -------------
Total net sales $ 2,190.5 $ 2,237.8 $ 1,781.5
============= ============= =============
Operating income (loss):
Bauxite and alumina $ 1.1 $ 54.0 $ 19.8
Aluminum processing 156.5 238.9 (8.4)
Corporate (57.5) (81.8) (67.3)
------------- ------------- -------------
Total operating income (loss) $ 100.1 $ 211.1 $ (55.9)
============= ============= =============
Net income (loss) (4) $ 13.2 $ 65.3 $ (101.6)
============= ============= =============

Capital expenditures:
Property, plant, and equipment $ 160.3 $ 79.4 $ 70.0
Investments in unconsolidated affiliates 1.2 9.0
------------- ------------- -------------
Total capital expenditures $ 161.5 $ 88.4 $ 70.0
============= ============= =============

(1) All references to tons refer to metric tons of 2,204.6 pounds.
(2) Includes net sales of bauxite.
(3) Includes the portion of net sales attributable to minority interests
in consolidated subsidiaries.
(4) Includes extraordinary loss on early extinguishment of debt of $5.4,
net of tax benefit of $2.9, in 1994.

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

This section contains statements which constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. These statements appear in a number of places in this section
(see "Overview," "Profit Enhancement and Cost Reduction Initiative,"
"Results of Operations," "Financial Condition and Liquidity," "Income Tax
Matters" and "Recent Accounting Pronouncements"). Such statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "estimates," "will," "should," "plans" or "anticipates"
or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy. Readers are cautioned that any
such forward-looking statements are not guarantees of future performance
and involve significant risks and uncertainties, and that actual results
may vary materially from those in the forward-looking statements as a
result of various factors. These factors include the effectiveness of
management's strategies and decisions, general economic and business
conditions, developments in technology, new or modified statutory or
regulatory requirements and changing prices and market conditions. This
section and the Company's Annual Report on Form 10-K each identify other
factors that could cause such differences. No assurance can be given that
these are all of the factors that could cause actual results to vary
materially from the forward-looking statements.

OVERVIEW

The Company's operating results are sensitive to changes in prices of
alumina, primary aluminum, and fabricated aluminum products, and also
depend to a significant degree on the volume and mix of all products sold
and on the Company's hedging strategies. Primary aluminum prices have
historically been subject to significant cyclical price fluctuations. See
Notes 1 and 10 of the Notes to Consolidated Financial Statements for a
discussion of the Company's hedging activities.

During the first half of 1996, the Average Midwest United States
transaction price ("AMT Price") for primary aluminum remained relatively
stable in the $.75 per pound range. However, during the second half of the
year the AMT Price fell, reaching a low of $.65 per pound for October 1996,
before recovering late in the year. 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 AMT Price for primary aluminum
for the week ended February 14, 1997, was approximately $.75 per pound.

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 continued throughout most of 1996. Net
reported primary aluminum inventories increased by approximately 62,000
tons in 1996 based upon reports of the LME and the International Primary
Aluminium Institute ("IPAI"), following substantial declines of 764,000 and
1,153,000 tons in 1994 and 1995, respectively.

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 Commonwealth
of Independent States ("CIS") 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, in the aggregate, performing relatively well, the Company
believes that the reduction of aluminum inventories by customers, as prices
have continued to decline, has mitigated the growth in primary aluminum
demand that normally accompanies growth in economic and industrial
activity.

PROFIT ENHANCEMENT AND COST REDUCTION INITIATIVE

The Company has set a goal of achieving significant cost reduction 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, 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 reduction and other profit
improvements.

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

RESULTS OF OPERATIONS

1996 AS COMPARED TO 1995
Summary - For the year ended December 31, 1996, the Company's net income
was $13.2 million, compared to net income of $65.3 million in 1995. Net
sales for 1996 were $2,190.5 million, compared to $2,237.8 million in 1995.
Results for the year ended December 31, 1996, include an after tax benefit
of approximately $17.0 million resulting from settlements of certain tax
matters in December 1996. Excluding the impact of these non-recurring
items, the Company would have reported a net loss for the year ended
December 31, 1996.

Results for the year ended December 31, 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 1996 also include approximately $20.5 million
in research and development expenses and other costs related to the
Company's new Micromill as well as additional expenses related to other
strategic initiatives.

Results for 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 65% owned Alumina Partners of
Jamaica ("Alpart") bauxite mining and alumina refinery in Jamaica, and a
four-day disruption of alumina production at Alpart caused by a boiler
failure.

Bauxite and Alumina - Net segment sales for 1996 were basically unchanged
from 1995 as a nominal decline in the average realized price of alumina was
offset by a modest increase in alumina shipments. The reduction in prices
realized reflects the substantial decline in primary aluminum prices
experienced in 1996 discussed above.

Operating income for this segment of the Company's business declined
significantly from prior year periods as a result of reduced gross margins
from alumina sales resulting from the previously discussed price declines
and increased natural gas costs at the Company's Gramercy, Louisiana,
alumina refinery. Operating income for the year ended December 31, 1996,
was also unfavorably impacted by high operating costs associated with
disruptions in the power supply at the Company's Alpart alumina refinery
during the first nine months of 1996, higher manufacturing costs resulting
from higher market prices for fuel and caustic soda and a temporary raw
material quality problem experienced at the Company's Gramercy facility
during the second quarter of 1996.

Aluminum Processing - An increase in primary aluminum shipments in 1996 of
31% more than offset a 15% decline in the average realized price for
primary aluminum from period to period. The increase in shipments during
the year ended December 31, 1996, was 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 year ended
December 31, 1996, as compared to the prior year as a result of a decrease
in shipments (primarily related to can sheet activities) resulting from
reduced growth in demand and the reduction of customer inventories. The
impact of reduced product shipments was to a limited degree offset by a 4%
increase in the average realized price from the sale of fabricated aluminum
products, resulting primarily from a shift in product mix to higher value
added products.

Operating income for the aluminum processing segment for the year was also
impacted by approximately $5.6 million of scheduled non-recurring
maintenance costs at the Company's Trentwood, Washington, rolling mill
facility in the fourth quarter of 1996, offset by $11.5 million ($7.2 on an
after-tax basis) of reduced operating costs resulting from the non-cash
settlement in December 1996 of certain tax matters.

Corporate - Corporate operating expenses represent corporate general and
administrative expenses which are not allocated to the Company's business
segments. A substantial portion of the 1996 reduction in operating losses
of the corporate segment as compared to 1995 is due to reduced incentive
compensation accruals resulting from the decline in earnings from the prior
year period. Reduced post employment benefit plan and pension plan costs
also contributed to the 1996 reduction.

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

1995 AS COMPARED TO 1994
Summary - The Company reported net income of $65.3 million in 1995,
compared with a net loss of $101.6 million. The principal reason for the
improvement in 1995 compared to 1994 was the improvement in operating
results previously described, partially offset by other charges,
principally related to the establishment of additional litigation reserves.

Improved operating results in 1995 were partially offset by expenses
related to the Company's smelting joint venture in China, accelerated
expenses for 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 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 United Steelworkers of America ("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.

Bauxite and Alumina -- Net sales to third parties for the bauxite and
alumina segment were 19% higher in 1995 than in 1994. 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 at Alpart.

This segment's operating income was $54.0 million in 1995, compared with
$19.8 million in 1994. 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.

Aluminum Processing -- Net sales to third parties for the aluminum
processing segment were 28% higher in 1995 than in 1994. The bulk of the
segment's sales represents the Company's primary aluminum and fabricated
aluminum products, with the remainder representing the portion of sales of
primary aluminum attributable to the minority interest in the Company's
90%-owned Volta Aluminium Company Limited ("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, as compared to the AMT Price of approximately
$.86 per pound during the year. Average realized prices in 1994 reflected
the defensive hedging of primary aluminum prices in respect of 1994
shipments, which was initiated prior to the then-recent improvements in
metal prices. The higher shipments of primary aluminum in 1995 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. 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. 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.

The increase in net sales for 1995 was partially offset by decreased
shipments caused by the strike by the USWA discussed above.

This segment's operating income was $238.9 million in 1995, compared with a
loss of $8.4 million in 1994. 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.

Corporate -- Corporate operating expenses represent corporate general and
administrative expenses that were not allocated to segments.

LIQUIDITY AND CAPITAL RESOURCES

See Note 4 of the Notes to Consolidated Financial Statements for a listing
of the Company's indebtedness and information concerning certain
restrictive debt covenants.

OPERATING ACTIVITIES
Cash provided by operating activities was $22.9 million in 1996 as compared
to $119.5 million in 1995. In 1994, $21.3 million of cash was used by
operating activities. The reduction in cash generated by operating
activities from 1995 to 1996 is primarily due to

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

lower earnings resulting from the reduction in prices realized by the
Company from the sale of primary aluminum and alumina. The improvement in
cash flows from operating activities in 1995 compared with 1994 was
primarily due to higher earnings resulting from increased product prices
and a refund of margin deposits of $50.5 million under certain hedging
contracts.

At December 31, 1996, the Company had working capital of $409.3 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 Cash and
cash equivalents as a result of the debt offerings discussed below.

INVESTING ACTIVITIES
The Company's capital expenditures of $319.9 million during the three years
ended December 31, 1996 (of which $23.2 million was funded by the Company's
minority partners in certain foreign joint ventures) were made primarily to
construct new facilities, improve production efficiency, reduce operating
costs, and expand capacity at existing facilities. Total consolidated
capital expenditures were $161.5 million in 1996, compared with $88.4
million in 1995 and $70.0 million in 1994 (of which $7.4, $8.3, and $7.5
million were funded by the minority partners in certain foreign joint
ventures in 1996, 1995, and 1994, respectively). A substantial portion of
the increase in capital expenditures in 1996 over prior years levels is
attributable to the development and construction of the Company's
proprietary Micromill technology for the production of can sheet from
molten metal. The first Micromill, which was constructed in Nevada during
1996 as a demonstration and production facility, achieved operational
start-up by year-end 1996. The Company expects that the Nevada Micromill
will be in a start-up mode for the first half of 1997 and will be able to
commence limited product shipments to customers in the second half of the
year. Total consolidated capital expenditures are expected to be between
$70.0 and $140.0 million per annum in each of 1997 through 1999 (of which
approximately 7% is expected to be funded by the Company's minority
partners in certain foreign joint ventures). Management continues to
evaluate numerous projects all of which require substantial capital, both
in the United States and overseas.

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 People's Republic of China ("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 future of 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 meeting of the board of directors of the Joint Venture held on January
16, 1997, LAS reported that negotiations had begun with an investor
regarding the possible purchase of KYRIL's interest in the Joint Venture.
Based on such report, the Joint Venture directors adopted a resolution
that, among other things, (i) extended until June 30, 1997, discussions
concerning the future of the Joint Venture, (ii) provided that KYRIL grant
to LAS the right to seek a buyer to purchase KYRIL's equity interest in the
Joint Venture, and (iii) provided that if a buyer to purchase KYRIL's
equity interest in the Joint Venture was not found by June 30, 1997, the
Joint Venture would be terminated and dissolved.

FINANCING ACTIVITIES AND LIQUIDITY
On February 17, 1994, the Company and Kaiser entered into a five year
credit agreement (as amended, the "Credit Agreement") under which the
Company is able to borrow 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 February 14, 1997, $271.9 million
(of which $71.9 million could have been used for letters of credit) was
available to the Company under the Credit Agreement. The Credit Agreement
is unconditionally guaranteed by the Company and by certain of its
significant subsidiaries. The 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. The Credit Agreement is secured by, among other things, (i)
mortgages on the Company's major domestic plants (excluding the Company's
Gramercy alumina plant 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 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. The Credit Agreement does not permit the Company or Kaiser to
pay any dividends on their common stock.

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

During the fourth quarter of 1996, the Company sold a total of $225.0
million principal amount of two separate series of 10-7/8% Senior Notes due
2006 (the "10-7/8% Notes") in separate transactions. A net premium of $.9
million was realized from the issuance of the 10-7/8% Notes. The 10-7/8%
Notes rank pari passu in right and priority of payment with the
indebtedness under the Credit Agreement and the Company's 9-7/8% Senior
Notes due 2002 (the "9-7/8% Notes") and are guaranteed on a senior,
unsecured basis by certain of the Company's subsidiaries.

The indentures governing the 9-7/8% Notes, the 10-7/8% Notes and the
Company's 12-3/4% Senior Subordinated Notes due 2003 (the "12-3/4% Notes")
(collectively, the "Indentures") restrict, among other things, the
Company's ability to incur debt and liens, make investments, undertake
transactions with affiliates, and pay dividends. Further, the Indentures
provide that the Company must offer to purchase the 9-7/8% Notes, the
10-7/8% Notes and the 12-3/4% Notes, respectively, upon the occurrence of a
Change of Control (as defined therein), and the Credit Agreement provides
that the occurrence of a Change in Control (as defined therein) shall
constitute an Event of Default thereunder.

As of December 31, 1996, the Company's total consolidated indebtedness was
$970.5 million and $269.7 million of borrowing capacity was unused under
the revolving credit facility of the Credit Agreement. During the year
ended December 31, 1996, total borrowings and repayments under the
revolving credit facility of the Credit Agreement were $464.3 million and
$477.4 million, respectively. During the year ended December 31, 1995,
total borrowings and repayments under the revolving credit facility of the
Credit Agreement were $532.2 million and $525.8 million, respectively.

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 satisfy its working capital and capital expenditure
requirements for the next year. 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 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. At December 31, 1996, the balance of such accruals, which are
primarily included in Long-term liabilities, was $33.3 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 actions 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 million for the
years 1997 through 2001 and an aggregate of approximately $6.0 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 $24.0 million and that, subject to further regulatory review and
approval, 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. See Note 9 of the Notes to Consolidated Financial Statements for
further description of these contingencies.

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

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 December 31, 1996, the number of
such claims pending was approximately 71,100, as compared with 59,700 at
December 31, 1995. In 1996, approximately 21,100 of such claims were
received and 9,700 were settled or dismissed.

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.

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 through 2008. There are inherent
uncertainties involved in estimating asbestos-related costs, and the
Company's actual costs could exceed or be less than 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 $136.7 million, before consideration of insurance recoveries, is
included primarily in Long-term liabilities at December 31, 1996. 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 estimates that annual future cash
payments in connection with such litigation will be approximately $8.0 to
$17.0 million for each of the years 1997 through 2001, and an aggregate of
approximately $80.0 million thereafter.

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 $109.8 million, determined on the
same basis as the asbestos-related cost accrual, is recorded primarily in
Other assets at December 31, 1996.

Management continues to monitor claims activity, the status of 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
Note 9 of the Notes to Consolidated Financial Statements for further
description of this contingency.

INCOME TAX MATTERS

The Company's net deferred income tax assets as of December 31, 1996, were
$308.0 million, net of valuation allowances of $127.2 million. 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. See Note 5 of the Notes to Consolidated Financial Statements for
a discussion of these and other income tax matters.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In October 1996 the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position No. 96-1 ("SOP 96-1") which provides
authoritative guidance intended to improve and narrow the manner in which
existing accounting literature is applied to the recognition, measurement,
display, and disclosure of environmental remediation liabilities arising
pursuant to existing federal, state and local laws and regulations. SOP 96-
1 addresses the nature of items that are to be included in the measurement
of a company's liability related to any environmental remediation efforts
it is currently undertaking or required to complete in the future. In this
regard, SOP 96-1 requires that all incremental direct third party costs, as
well as any internal compensation costs (including benefits) for employees
expected to devote a significant amount of time directly to remediation
efforts, should be included in the determination of the estimated
liability. The "remediation effort" is defined in SOP 96-1 to include such
things as remedial risk assessment, feasibility studies and operations and
maintenance associated with corrective actions. SOP 96-1 must be adopted in
the first quarter of 1997. The adoption of SOP 96-1 is not currently
expected to have a material impact on the Company's financial position or
results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Page
----

Report of Independent Public Accountants 24

Consolidated Balance Sheets 25

Statements of Consolidated Income (Loss) 26

Statements of Consolidated Cash Flows 27

Notes to Consolidated Financial Statements 28

Five-Year Financial Data 48

Quarterly Financial Data (Unaudited) 50

Financial statement schedules are inapplicable or the required information
is included in the Consolidated Financial Statements or the Notes thereto.

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, 1996 and 1995, and the related statements of consolidated
income and cash flows for each of the three years in the period ended
December 31, 1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP
San Francisco, California
February 14, 1997

December 31,
------------------------------
(In millions of dollars, except share amounts) 1996 1995
- -------------------------------------------------------------------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 81.3 $ 21.7
Receivables:
Trade, less allowance for doubtful
receivables of $4.7 in 1996 and $5.0 in 1995 177.9 222.9
Other 77.7 87.3
Inventories 562.2 525.7
Prepaid expenses and other current assets 127.8 76.6
-------------- --------------
Total current assets 1,026.9 934.2

Investments in and advances to unconsolidated
affiliates 168.4 178.2
Property, plant, and equipment - net 1,168.7 1,109.6
Deferred income taxes 263.3 268.8
Other assets 308.6 323.5
-------------- --------------

Total $ 2,935.9 $ 2,814.3
============== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 189.3 $ 184.5
Accrued interest 35.6 32.0
Accrued salaries, wages, and related expenses 95.4 105.3
Accrued postretirement medical benefit obligation
- current portion 50.1 46.8
Other accrued liabilities 132.8 126.2
Payable to affiliates 96.9 95.3
Long-term debt - current portion 8.9 8.9
Note payable to parent - current portion 8.6 10.7
-------------- --------------

Total current liabilities 617.6 609.7
Long-term liabilities 458.1 548.5
Accrued postretirement medical benefit obligation 722.5 734.0
Long-term debt 953.0 749.2
Note payable to parent 8.6
Minority interests 92.5 91.4
Redeemable preference stock - aggregate liquidation
value of $31.7 in 1996 and $36.9 in 1995 27.5 29.6
Commitments and contingencies
Stockholders' equity:
Preference stock - cumulative and convertible, par
value $100, authorized
1,000,000 shares; issued and outstanding,
21,630 and 22,214 in 1996 and 1995 1.7 1.7
Common stock, par value 33-1/3 cents, authorized
100,000,000 shares; issued and outstanding
46,171,365 15.4 15.4
Additional capital 1,829.8 1,730.7
Accumulated deficit (201.3) (210.9)
Additional minimum pension liability (2.8) (13.8)
Note receivable from parent (1,578.1) (1,479.8)
-------------- --------------
Total stockholders' equity 64.7 43.3
-------------- --------------

Total $ 2,935.9 $ 2,814.3
============== ==============

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

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES

Year Ended December 31,
----------------------------------------------
(In millions of dollars) 1996 1995 1994
- ---------------------------------------------------------------------------------------------

Net sales $ 2,190.5 $ 2,237.8 $ 1,781.5

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

Costs and expenses:
Cost of products sold 1,869.1 1,798.4 1,625.5
Depreciation 96.0 94.3 95.4
Selling, administrative, research and
development, and general 125.3 134.0 116.5
-------------- -------------- --------------
Total costs and expenses 2,090.4 2,026.7 1,837.4
-------------- -------------- --------------

Operating income (loss) 100.1 211.1 (55.9)

Other income (expense):

Interest expense (93.4) (93.9) (88.6)
Other - net (2.6) (14.1) (7.3)
-------------- -------------- --------------

Income (loss) before income taxes, minority
interests and extraordinary loss 4.1 103.1 (151.8)

Credit (provision) for income taxes 8.4 (37.4) 54.0

Minority interests .7 (.4) 1.6
-------------- -------------- --------------

Income (loss) before extraordinary loss 13.2 65.3 (96.2)

Extraordinary loss on early extinguishment of
debt, net of tax benefit of $2.9 (5.4)

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

Net income (loss) $ 13.2 $ 65.3 $ (101.6)
============== ============== ==============

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

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES

Year Ended December 31,
----------------------------------------------
(In millions of dollars) 1996 1995 1994

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

Cash flows from operating activities:
Net income (loss) $ 13.2 $ 65.3 $ (101.6)
Adjustments to reconcile net income (loss)
to net cash provided by(used for)
operating activities:
Depreciation 96.0 94.3 95.4
Amortization of excess investment
over equity in unconsolidated
affiliates 11.6 11.4 11.6

Amortization of deferred financing
costs and net discount on
long-term debt 5.6 5.4 6.2
Undistributed equity in (income)
losses of unconsolidated
affiliates 3.0 (19.2) 1.9
Minority interests (.7) .4 (1.6)
Extraordinary loss on early
extinguishment of debt net 5.4
Decrease (increase) in receivables 50.2 (110.0) 36.2

Increase in inventories (36.5) (57.7) (41.1)
(Increase) decrease in prepaid
expenses and other assets (39.4) 82.9 (60.6)
Increase in accounts payable 4.8 32.4 25.8
Increase (decrease) in accrued
interest 3.6 (.6) 9.3
(Decrease) increase in payable to
affiliates and accrued

liabilities (62.8) 10.6 51.6
Decrease in accrued and deferred
income taxes (35.7) (7.2) (69.2)
Other 10.0 11.5 9.4
-------------- -------------- --------------
Net cash provided by (used
for) operating activities 22.9 119.5 (21.3)
-------------- -------------- --------------

Cash flows from investing activities:

Additions to property, plant, and equipment (160.3) (79.4) (70.0)
Investments in unconsolidated affiliates (1.2) (9.0)
Other 17.2 8.6 4.1
-------------- -------------- --------------

Net cash used for investing
activities (144.3) (79.8) (65.9)
-------------- -------------- --------------

Cash flows from financing activities:
Borrowings (repayments) under revolving

credit facility, net (13.1) 6.4 (181.3)
Borrowings of long-term debt 225.9 223.6
Repayments of long-term debt (9.0) (11.8) (9.0)
Net (payments to) borrowings from parent (10.7) (15.5) 13.2
Incurrence of financing costs (6.2) (.8) (19.2)
Dividends paid (.7) (.7) (.7)
Capital contributions .1 1.2 66.9
Redemption of preference stock (5.3) (8.8) (8.5)
Net cash provided by (used
for) financing
activities 181.0 (30.0) 85.0
-------------- -------------- --------------

Net increase (decrease) in cash and cash
equivalents during the year 59.6 9.7 (2.2)

Cash and cash equivalents at beginning of year 21.7 12.0 14.2
-------------- -------------- --------------
Cash and cash equivalents at end of year $ 81.3 $ 21.7 $ 12.0
============== ============== ==============

Supplemental disclosure of cash flow information:
Interest paid, net of capitalized interest $ 84.2 $ 88.8 $ 73.1
Income taxes paid 22.7 35.7 16.0
Tax allocation payments to Kaiser Aluminum
Corporation 2.7 3.2
Tax allocation payments to (from) MAXXAM

Inc. 1.1 (3.8)

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

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 amounts 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 operations.

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.

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,
------------------------------
1996 1995
- ------------------------------------------------------ ------------------------------

Finished fabricated products $ 113.5 $ 91.5
Primary aluminum and work in process 200.3 195.9
Bauxite and alumina 110.2 119.6
Operating supplies and repair and maintenance parts 138.2 118.7
-------------- --------------
$ 562.2 $ 525.7
============== ==============

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 of land
improvements, buildings, and machinery and equipment are 8 to 25
years, 15 to 45 years, and 10 to 22 years, respectively.

STOCK-BASED COMPENSATION
The Company applies the intrinsic value method to account for a Kaiser
stock-based compensation plan whereby compensation cost is
recognized only to the extent that the quoted market price of the Kaiser
stock at the measurement date exceeds the amount Company
employees must pay to acquire the Kaiser stock. No compensation cost has
been recognized for this plan as no Kaiser stock options
were granted in 1996 or 1995 and as the Kaiser stock options granted in
1994 were at the market price (see Note 6).

OTHER INCOME ( EXPENSE)
Other expense in 1996, 1995, and 1994 includes $3.1, $17.8, and $16.5 of
pre-tax charges related principally to establishing
additional: (i) litigation reserves for asbestos claims, net of estimated
aggregate insurance recoveries, 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.

DEFERRED FINANCING COSTS
Costs incurred to obtain debt financing are deferred and amortized over the
estimated term of the related borrowing. Such
amortization is included in interest expense.

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

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

Most of the Company's hedging activities involve the use of option
contracts (which establish a maximum and/or minimum amount to
be paid or received) and forward sales contracts (which effectively fix or
lock-in the amount the Company will pay or receive).
Option contracts typically require the payment of an up-front premium in
return for the right to receive the amount (if any) by
which the price at the settlement date exceeds the strike price. Any
interim fluctuations in prices prior to the settlement date
are deferred until the settlement date of the underlying hedged
transaction, at which point they are reflected in net sales or
cost of sales (as applicable) together with the related premium cost.
Forward sales contracts do not require an up-front payment
and are settled by the receipt or payment of the amount by which the price
at the settlement date varies from the contract price.
No accounting recognition is accorded to interim fluctuations in prices of
forward sales contracts.

The Company has established margin accounts and credit limits with certain
counterparties related to open forward sales and option
contracts. When unrealized gains or losses are in excess of such credit
limits, the Company is entitled to receive advances from
the counterparties on open positions or is required to make margin deposits
to counterparties, as the case may be. At December
31, 1996, the Company had received $13.0 of margin advances from
counterparties. At December 31, 1995, the Company had neither
received nor made any margin deposits. Management considers credit risk
related to possible failure of the counterparties to
perform their obligations pursuant to the derivative contracts to be
minimal.

Deferred gains or losses as of December 31, 1996, are included in Prepaid
expenses and other current assets and Other accrued
liabilities (See Note 10).

FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of its outstanding indebtedness to be
$1,006.9 and $806.3 at December 31, 1996, and 1995,
respectively, based on quoted market prices for the Company's 9-7/8% Senior
Notes due 2002 (the "9-7/8% Notes") and 12-3/4% Senior
Subordinated Notes due 2003 (the "12-3/4% Notes"), the issuance price of
the 10-7/8% Notes (as defined in Note 4), and the
discounted future cash flows for all other indebtedness, using the current
rate for debt of similar maturities and terms. The
Company believes that the carrying amount of other financial instruments is
a reasonable estimate of their fair value, unless
otherwise noted.

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 Aluminium 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, 1996 and 1995, the Company's net receivables from
these affiliates were not material.

SUMMARY OF COMBINED FINANCIAL POSITION

December 31,
------------------------------
1996 1995
- -------------------------------------------------------------------------------------

Current assets $ 450.3 $ 429.0
Long-term assets (primarily property, plant, and 364.7 370.1
equipment, net) -------------- --------------

Total assets $ 815.0 $ 799.1
============== ==============

Current liabilities $ 116.9 $ 125.4
Long-term liabilities (primarily long-term debt) 386.7 367.4
Stockholders' equity 311.4 306.3
-------------- --------------

Total liabilities and stockholders' equity $ 815.0 $ 799.1
============== ==============

SUMMARY OF COMBINED OPERATIONS

Year Ended December 31,
------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------

Net sales $ 660.5 $ 685.9 $ 489.8
Costs and expenses (631.5) (618.7) (494.8)
Provision for income taxes (8.7) (18.7) (6.3)
------------- ------------- -------------
Net income (loss) $ 20.3 $ 48.5 $ (11.3)
============= ============= =============
Company's equity in income (loss) $ 8.8 $ 19.2 $ (1.9)
============= ============= =============

Dividends received $ 11.8
=============

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, 1996,
the Company's investment in its unconsolidated
affiliates exceeded its equity in their net assets by approximately $42.0
which amount will be fully amortized over the next four
years.

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
$281.6, $284.4, and $219.7 in the years ended December 31,
1996, 1995, and 1994, respectively.

3. PROPERTY, PLANT, AND EQUIPMENT

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

December 31,
------------------------------
1996 1995
- ---------------------------------------------------- ------------------------------

Land and improvements $ 157.5 $ 151.8
Buildings 216.0 198.5
Machinery and equipment 1,441.1 1,337.6
Construction in progress 84.7 59.6
-------------- --------------
1,899.3 1,747.5
Accumulated depreciation 730.6 637.9
-------------- --------------
Property, plant, and equipment, net $ 1,168.7 $ 1,109.6
============== ==============

4. LONG-TERM DEBT

Long-term debt and its maturity schedule are as follows:

December 31,
2002----------------
and 1996 1995
1997 1998 1999 2000 2001 After Total Total
- ---------------------------------------------------------------------------------------------------

Credit Agreement $ 13.1
97/8% Senior Notes due 2002, net $ 224.0$ 224.0 223.8
107/8% Senior Notes due 2006, net 225.9 225.9
Alpart CARIFA Loan - Series A, due
2008 (variable rates) 38.0 38.0 38.0
Alpart CARIFA Loan - Series B, due
2007 (8.25%) 22.0 22.0 22.0
123/4% Senior Subordinated Notes
due 2003 400.0 400.0 400.0
Other borrowings (fixed and
variable rates) $ 8.9$ 9.1$ .4$ .4$ .4 32.8 52.0 61.2
----------------------------------------------------------------
Total
$ 8.9$ 9.1$ .4$ .4$ .4$ 942.7 961.9 758.1

Less current portion 8.9 8.9
----------------
Long-term debt $ 953.0$ 749.2
================

CREDIT AGREEMENT
In February 1994, the Company and Kaiser entered into a credit agreement
(as amended, the "Credit Agreement") which provides a $325.0 five-year
secured, revolving line of credit. 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. As
of December 31, 1996, $269.7 (of which $71.9 could have been used for
letters of credit) was available to the Company under the Credit Agreement.
The Credit Agreement is unconditionally guaranteed by the Company and by
certain of its significant subsidiaries. Interest on outstanding balances
will bear a premium (which varies based on the results of a financial test)
over either a base rate or LIBOR at the Company's option.

1996 ISSUANCES
During the fourth quarter of 1996, the Company sold a total of $225.0
principal amount of two separate series of 10-7/8% Senior Notes due 2006
(the "10-7/8% Notes") in separate transactions. A net premium of $.9 was
realized from the issuance of the 10-7/8% Notes. The 10-7/8% Notes rank
pari passu in right and priority of payment with the indebtedness under the
Credit Agreement and the 9-7/8% Notes and are guaranteed on a senior,
unsecured basis by certain of the Company's subsidiaries.

LOAN COVENANTS AND RESTRICTIONS
The Credit Agreement requires the Company to comply with 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. The Credit Agreement is secured
by, among other things, (i) mortgages on the Company's major domestic
plants (excluding the Company's Gramercy alumina plant 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 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.

The obligations of the Company with respect to its 9-7/8% Notes, its
10-7/8% Notes and its 12-3/4% Notes are guaranteed, jointly and severally,
by certain of its subsidiaries. The indentures governing the 9-7/8%
Notes, the 10-7/8% Notes and the 12-3/4% Notes (collectively, 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 9-7/8%
Notes, the 10-7/8% Notes and the 12-3/4% Notes, respectively, upon the
occurrence of a Change of Control (as defined therein), and the Credit
Agreement provides that the occurrence of a Change in Control (as defined
therein) shall constitute an Event of Default thereunder.

Under the most restrictive of the covenants in the Indentures and the
Credit Agreement, neither the Company nor Kaiser currently is permitted to
pay dividends on its common stock.

In December 1991, Alpart entered into a loan agreement with the Caribbean
Basin Projects Financing Authority ("CARIFA"). Pursuant to the loan
agreement, Alpart must remain a qualified recipient for Caribbean Basin
Initiative funds as defined in applicable laws. Alpart has also agreed to
indemnify bondholders of CARIFA for certain tax payments that could result
from events, as defined, that adversely affect the tax treatment of the
interest income on the bonds. Alpart's obligations under the loan agreement
are secured by a $64.2 letter of credit guaranteed by the partners in
Alpart (of which $22.5 is guaranteed by the Company's minority partner in
Alpart).

CAPITALIZED INTEREST
Interest capitalized in 1996, 1995, and 1994 was $4.9, $2.8, and $2.7,
respectively.

EXTRAORDINARY ITEM
The Company recorded a pre-tax extraordinary loss of $5.4 (net of $2.9 of
deferred income taxes provided at a rate which approximates the federal
statutory rate) in the first quarter of 1994 when the Company entered into
the Credit Agreement, as a result of the write-off of unamortized deferred
financing costs related to the previous credit agreement.

5. INCOME TAXES

Income (loss) before income taxes, minority interests and extraordinary
loss by geographic area is as follows:

Year Ended December 31,
----------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------

Domestic $ (43.4) $ (55.4) $ (168.1)
Foreign 47.5 158.5 16.3
------------- ------------- -------------
Total $ 4.1 $ 103.1 $ (151.8)
============= ============= =============

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.
The credit (provision) for income taxes on income (loss) before income
taxes, minority interests and extraordinary loss consists of:

Federal Foreign State Total
- ----------------------------------------------------------------------------------------------------------

1996 Current $ (1.6) $ (21.8) $ (.1) $ (23.5)
Deferred 7.7 7.6 16.6 31.9
------------- ------------- ------------- -------------
Total $ 6.1 $ (14.2) $ 16.5 $ 8.4
============= ============= ============= =============
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
============= ============= ============= =============

The 1994 federal deferred credit for income taxes of $71.4 includes $29.2
for the benefit of operating loss carryforwards
generated in 1994.

A reconciliation between the credit (provision) for income taxes and the
amount computed by applying the federal statutory income
tax rate to income (loss) before income taxes, minority interest and
extraordinary loss is as follows:

Year Ended December 31,
----------------------------------------------
1996 1995 1994
- --------------------------------------------------- ----------------------------------------------

Amount of federal income tax credit (provision) $ (1.4) $ (36.1) $ 53.1
based on the statutory rate
Revision of prior years' tax estimates and other 10.0 1.5 .5
changes in valuation allowances
Percentage depletion 3.9 4.2 5.6
Foreign taxes, net of federal tax benefit (5.5) (5.4) (5.3)
Other 1.4 (1.6) .1
------------- ------------- -------------
Credit (provision) for income taxes $ 8.4 $ (37.4) $ 54.0
============= ============= =============

Included in revision of prior years' tax estimates and other changes in
valuation allowances for 1996 shown above is $9.8 related
to the resolution of certain income tax matters in the fourth quarter of
1996.

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

December 31,
------------------------------
1996 1995
- ------------------------------------------------------- ------------------------------

Deferred income tax assets:
Postretirement benefits other than pensions $ 290.5 $ 289.9
Loss and credit carryforwards 134.3 155.8
Other liabilities 157.6 163.8
Other 86.3 66.2
Valuation allowances (127.2) (128.5)
------------- -------------
Total deferred income tax assets-net 541.5 547.2
------------- -------------
Deferred income tax liabilities:
Property, plant, and equipment (160.9) (179.8)
Other (72.6) (75.9)
------------- -------------
Total deferred income tax liabilities (233.5) (255.7)
------------- -------------
Net deferred income tax assets $ 308.0 $ 291.5
============= =============

The principal component of the Company's net deferred income tax asset is
the tax benefit, net of certain valuation allowances,associated with the
accrued liability 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 that 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.

A substantial portion of the valuation allowances provided by the Company
relates to loss and credit carryforwards. To determine the proper amount
of valuation allowances with respect to these carryforwards, the Company
evaluated all appropriate factors,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
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.

As of December 31, 1996 and 1995, $69.7 and $53.5, 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 liabilities
listed above are included on the Consolidated Balance Sheets in the
captions entitled Other accrued liabilities and Long-term liabilities.

The Company and its subsidiaries (collectively, the "KACC Subgroup") are
members of the consolidated return group of which Kaiser is the common
parent corporation and are included in Kaiser's consolidated federal income
tax returns. For the period from October 28, 1988 through June 30, 1993,
the KACC Subgroup was included in the consolidated federal income tax
returns of MAXXAM. Payments or refunds for periods ended prior to
July 1, 1993, may still be required by or payable to the Company pursuant
to its tax allocation agreement with MAXXAM (the "KACC Tax Allocation
Agreement") due to the final resolution of audits, amended returns,and
related matters. However, the 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. The KACC Tax Allocation
Agreement terminated pursuant to its terms, effective for taxable periods
beginning after June 30, 1993.

The following table presents the Company's tax attributes for federal
income tax purposes as of December 31, 1996. The utilization of certain of
these tax attributes is subject to limitations:

Expiring
Through
- -------------------------------------------------------------------------------------

Regular tax attribute carryforwards:
Net operating losses $ 36.0 2010
General business tax credits 23.1 2010
Foreign tax credits 67.6 2001
Alternative minimum tax credits 20.0 Indefinite
Alternative minimum tax attribute carryforwards:
Net operating losses $ 26.6 2010
Foreign tax credits 71.7 2001

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,
-----------------------------

1996 1995
- ------------------------------------------------------ ------------- - -------------

Accumulated benefit obligation:
Vested employees $ 737.7 $ 753.0
Nonvested employees 38.5 28.7
------------- -------------
Accumulated benefit obligation 776.2 781.7
Additional amounts related to projected salary 40.0 34.2
increases ------------- -------------
Projected benefit obligation 816.2 815.9
Plan assets (principally common stocks and fixed (662.0) (592.3)
income obligations) at fair value ------------- -------------
Plan assets less than projected benefit obligation 154.2 223.6
Unrecognized net losses (13.6) (54.7)
Unrecognized net obligations (.4) (.5)
Unrecognized prior-service cost (26.9) (28.2)
Adjustment required to recognize minimum liability 13.7 49.8
------------- -------------
Accrued pension obligation included in the
Consolidated Balance Sheets
(principally in Long-term liabilities) $ 127.0 $ 190.0
============= =============

(1) Includes plans with assets exceeding accumulated benefits by approximately
$.3 and $.1 in 1996 and 1995, respectively.

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 $11.0 and $(4.7) at December 31, 1996 and
1995, respectively, for the deficit (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 $(6.5) and
$2.8 as of December 31, 1996 and 1995, respectively, which approximated the
federal and state statutory rates.

The components of net periodic pension cost are:

Year Ended December
31,
----------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------

Service cost - benefits earned during the period $ 12.9 $ 10.0 $ 11.2
Interest cost on projected benefit obligation 60.0 59.8 57.3
Return on assets:
Actual gain (89.8) (112.2) (.8)
Deferred gain (loss) 34.8 64.6 (53.0)
Net amortization and deferral 5.5 4.2 4.1
------------- ------------- -------------
Net periodic pension cost $ 23.4 $ 26.4 $ 18.8
============= ============= =============

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

1996 1995 1994
- ----------------------------------------------------------------------------------------------

Discount rate 7.75% 7.5% 8.5%
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
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. The Company has not funded the liability for these benefits,
which are expected to be paid out of cash generated by operations. The
Company reserves the right, subject to applicable collective bargaining
agreements, to amend or terminate these benefits.

In 1995, the Company adopted the Kaiser Aluminum Medicare Program ("KAMP").
KAMP is mandatory for all salaried retirees over 65 and for United
Steelworkers of America ("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, Pennsylvania,
Rhode Island, and Washington.

The Company's accrued postretirement benefit obligation is composed of the
following:

December 31,
------------------------------
1996 1995
- ----------------------------------------------------------------------------------------------------

Accumulated postretirement benefit obligation:
Retirees $ 498.7 $ 557.6
Active employees eligible for postretirement benefits 36.7 30.7
Active employees not eligible for postretirement 67.4 61.1
benefits -------------- --------------

Accumulated postretirement benefit obligation 602.8 649.4
Unrecognized net gains 71.3 20.5
Unrecognized gains related to prior-service costs 98.5 110.9
-------------- --------------

Accrued postretirement benefit obligation $ 772.6 $ 780.8
============== ==============

The components of net periodic postretirement benefit cost are:

Year Ended December 31,
----------------------------------------------
1996 1995 1994
- ------------------------------------------------------ ------------- --------------- -------------

Service cost $ 3.8 $ 4.5 $ 8.2
Interest cost 46.9 52.3 56.9
Amortization of prior service cost (12.4) (8.9) (3.2)
------------- ------------- -------------

Net periodic postretirement benefit cost $ 38.3 $ 47.9 $ 61.9
============= ============= =============

The 1997 annual assumed rates of increase in the per capita cost of covered
benefits (i.e., health care cost trend rate) for non-HMO are 8.0% and 6.0%
for retirees under 65 and over 65, respectively, and 5.5% for HMO at all
ages. Non-HMO rates are assumed todecrease gradually to 5.5% in 2004 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, 1996, by
approximately $60.4 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost for 1996 by
approximately $6.1. The weighted average discount rate used to determine
the accumulated postretirement benefit obligation at December 31, 1996 and
1995, was 7.75% and 7.5%, respectively.

POSTEMPLOYMENT BENEFITS
The Company provides certain benefits to former or inactive employees after
employment but before retirement.

INCENTIVE PLANS
In 1993, the Company adopted the Kaiser 1993 Omnibus Stock Incentive Plan
(the "1993 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 1993 Incentive Plan, of which 572,254 shares were
available to be awarded at December 31, 1996. During 1994, under the 1993
Incentive Plan, 102,564 restricted shares of Kaiser common stock, which are
now fully vested, were distributed to two Company executives. Compensation
expense recognized during 1996, 1995 and 1994 associated with the 1993
Incentive Plan and a prior long-term incentive plan (the "LTIP")was
approximately $.7, $1.4 and $2.2, respectively.

In 1994, the Compensation Committee of Kaiser's Board of Directors approved
the award of "nonqualified stock options" to certain members of the
Company's management. These options to acquire Kaiser's common stock
generally vest at the rate of 25% per year.Information relating to
nonqualified stock option activity is shown below. The weighted average
price per share is shown parenthetically.

1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------

Outstanding at beginning of year ($10.32, $9.85 and $7.55) 926,085 1,119,680 664,400
Granted ($12.75) 494,800
Exercised ($8.99, $7.32 and $7.25) (8,275) (155,500) (6,920)
Expired or forfeited ($10.45, $8.88 and $7.46) (27,415) (38,095) (32,600)
------------- ------------- -------------
Outstanding at end of year ($10.33, $10.32 and $9.85) 890,395 926,085 1,119,680
============= ============= =============
Exercisable at end of year ($10.47, $10.73 and $7.57) 436,195 211,755 120,180
============= ============= =============

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 annual plans and over rolling three-year
periods. The Company also has a defined contribution plan for salaried
employees. The Company's expense for these plans was $(2.1), $11.9 and
$6.1 for the years ended December 31, 1996, 1995, and 1994, respectively.

7. REDEEMABLE PREFERENCE STOCK

In 1985, the Company issued its Cumulative (1985 Series A) Preference Stock
and its Cumulative (1985 Series B) Preference Stock (together, the
"Redeemable Preference Stock") each of which has a par value of $1 per
share and a liquidation and redemption value of $50 per share plus accrued
dividends, if any. No additional Redeemable Preference Stock is expected
to be issued. Holders of the Redeemable Preference Stock are entitled to
an annual cash dividend of $5 per share, or an amount based on a formula
tied to the Company's pre-tax income from aluminum operations, when and as
declared by the Board of Directors.

The carrying values of the Redeemable Preference Stock are increased each
year to recognize accretion between the fair value (at which the Redeemable
Preference Stock was originally issued) and the redemption value. Changes
in Redeemable Preference Stock are shown below.

1996 1995 1994
- ----------------------------------------------------------- --------------- ---------------

Shares:
Beginning of year 737,363 912,167 1,081,548
Redeemed (102,679) (174,804) (169,381)
------------- ------------- -------------
End of year 634,684 737,363 912,167
============= ============= =============

Redemption fund agreements require the Company to make annual payments by
March 31 of the subsequent year based on a formula tied to consolidated net
income until the redemption funds are sufficient to redeem all of the
Redeemable Preference Stock. On an annual basis, the minimum payment is
$4.3 and the maximum payment is $7.3. The Company also has certain
additional repurchase requirements which are, among other things, based
upon profitability tests.

The Redeemable Preference Stock is entitled to the same voting rights as
the Company common stock and to certain additional voting rights under
certain circumstances, including the right to elect, along with other the
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 Redeemable Preference 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 Redeemable Preference Stock.

8. STOCKHOLDERS' EQUITY

Changes in stockholders' equity were:

Additional Note
Minimum Receivable
Preference Common Additional Accumulated Pension From
Stock Stock Capital Deficit Liability Parent
- ----------------------------------------------------------------------------------------------------------------------------------

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)
Net income 13.2
Interest on note receivable
from parent 98.3 (98.3)
Contribution for LTIP shares .7
Capital contribution .1
Dividends (.5)
Redeemable preference stock
accretion (3.1)
Reduction of minimum pension
liability 11.0
------------- ------------- ------------- ------------- ------------- -------------
BALANCE, DECEMBER 31, 1996 $ 1.7 $ 15.4 $ 1,829.8 $ (201.3) $ (2.8) $ (1,578.1)
============= ============= ============= ============= ============= =============

PREFERENCE STOCK
The Company has four series of $100 par value Cumulative Convertible
Preference Stock ("$100 Preference Stock") with annual dividend
requirements of between 4-1/8% and 4-3/4%. The Company has the option to
redeem the $100 Preference Stock at par value plus accrued dividends. The
Company does not intend to issue any additional shares of the $100
Preference Stock.

The $100 Preference Stock can be exchanged for per share cash amounts
between $69 - $80. The Company records the $100 Preference Stock at their
exchange amounts for financial statement presentation.

KAISER 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 in satisfaction of all accrued and
unpaid dividends up to and including the day immediately prior to the
redemption date and 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.

9. COMMITMENTS AND CONTINGENCIES

COMMITMENTS
The Company has a variety of 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, 1996, is $94.4, of which
approximately $12.0 is due in each of 2000 and 2001 with the balance being
due thereafter. The Company's share of payments, including operating costs
and certain other expenses under the agreements, has ranged between $110.0
- - $120.0 over the past three years. The Company also has agreements to
supply alumina to and to purchase aluminum from Anglesey.

Minimum rental commitments under operating leases at December 31, 1996, are
as follows: years ending December 31, 1997 - $23.2; 1998 - $25.8; 1999 -
$30.7; 2000 - $27.6; 2001 - $27.2; thereafter - $160.3. The future minimum
rentals receivable under noncancelable subleases was $46.7 at December 31,
1996.

Rental expenses were $29.6, $29.0, and $26.8, for the years ended December
31, 1996, 1995, and 1994, 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, 1996, 1995, and 1994:

1996 1995 1994
- ----------------------------------------------------------------- --- ------------- ----------------

Balance at beginning of period $ 38.9 $ 40.1 $ 40.9
Additional amounts 3.2 3.3 2.8
Less expenditures (8.8) (4.5) (3.6)
------------- ------------- -------------
Balance at end of period $ 33.3 $ 38.9 $ 40.1
============= ============= =============

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
1997 through 2001 and an aggregate of approximately $6.0 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
$24.0 and that, subject to further regulatory review and approval, 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.

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, 1996, 1995, and 1994.

1996 1995 1994
- ------------------------------------------------------------------ -------------------------------

Number of claims at beginning of period 59,700 25,200 23,400
Claims received 21,100 41,700 14,300
Claims settled or dismissed (9,700) (7,200) (12,500)
------------- ------------- -------------

Number of claims at end of period 71,100 59,700 25,200
============= ============= =============

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.

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 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 $136.7, before consideration
of insurance recoveries, is included primarily in Long-term liabilities at
December 31, 1996. 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 estimates that annual
future cash payments in connection with such litigation will be
approximately $8.0 to $17.0 for each of the years 1997 through 2001, and an
aggregate of approximately $80.0 thereafter.

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 $109.8, determined on the same
basis as the asbestos-related cost accrual, is recorded primarily
in Other assets at December 31, 1996.

Management continues to monitor claims activity, the status of 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.

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

At December 31, 1996, the net unrealized gain on the Company's position in
aluminum forward sales and option contracts, (based on an average price of
$1,610 per ton ($.73 per pound) of primary aluminum), natural gas and fuel
oil forward purchase and option contracts, and forward foreign exchange
contracts, was approximately $10.5. However, increases in the price of
primary aluminum during January 1997 caused the Company's net hedging
position at January 31, 1997, to change to an unrealized loss of
approximately $2.2. Any gains or losses on the derivative contracts
utilized in the Company's hedging activities are offset by losses or gains,
respectively, on the transactions being hedged.

ALUMINA AND ALUMINUM
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. 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. During the
period January 1, 1993 through December 31, 1996, the Average Midwest
United States transaction price for primary aluminum has ranged from
approximately $.50 to $1.00 per pound.

From time to time in the ordinary course of business, the Company enters
into hedging transactions to provide price risk management in respect of
its net exposure resulting from (i) anticipated sales of alumina, primary
aluminum and fabricated aluminum products, less (ii) expected purchases of
certain items, such as aluminum scrap, rolling ingot, and bauxite, whose
prices fluctuate with the price of primary aluminum. Forward sales
contracts are used by the Company to effectively lock-in or fix the
price that the Company will receive for its shipments. The Company also
uses option contracts (i) to establish a minimum price for its product
shipments, (ii) to establish a "collar" or range of price for the Company's
anticipated sales, and/or (iii) to permit the Company to realize possible
upside price movements. As of December 31, 1996, the Company had sold
forward, at fixed prices, approximately 70,000 and 93,600 tons of primary
aluminum with respect to 1997 and 1998, respectively. As of December 31,
1996, the Company had also purchased put options to establish a minimum
price for approximately 202,700 and 52,000 tons with respect to 1997 and
1998, respectively, and had entered into option contracts that established
a price range for an additional 165,600 tons with respect to 1998. During
January 1997, the Company entered into additional option contracts that
establish a price range for 51,500, 60,000 and 51,000 tons with respect to
1997, 1998 and 1999, respectively. During January 1997 The Company
also sold forward, at fixed prices, an additional 24,000 tons with respect
to 1999.

As of December 31, 1996, the Company had sold forward approximately 90% of
the alumina available to it in excess of its projected internal smelting
requirements for 1997 and 1998. Virtually all of such 1997 and 1998 sales
were made at prices indexed to future prices of primary aluminum.

ENERGY
The Company is exposed to energy price risk from fluctuating prices for
fuel oil and natural gas consumed in the production process. Accordingly,
the Company from time to time in the ordinary course of business enters
into hedging transactions with major suppliers of energy and energy related
financial instruments. As of December 31, 1996, the Company had a
combination of fixed price purchase and option contracts for the purchase
of approximately 40,000 MMBtu of natural gas per day during the first and
second quarter of 1997, and for 25,000 MMBtu of natural gas per day for the
period July 1997 through December 1998. At December 31, 1996, the Company
also held option contracts for an average of 152,000 barrels of fuel oil
per month for 1997 and 174,000 barrels of fuel oil per month for 1998.

FOREIGN CURRENCY
The Company enters into forward exchange contracts to hedge material cash
commitments to foreign subsidiaries or affiliates. At December 31, 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.

11. SEGMENT AND GEOGRAPHICAL AREA INFORMATION

The Company's operations are located in many foreign countries, including
Australia, Canada, the People Republic of China, 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. 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 for the year ended December 31, 1995, and was immaterial in 1996 and
1994.

No single customer accounted for sales in excess of 10% of total revenue in
1996 and 1995. Sales of more than 10% of total revenue to a single
customer were $58.2 of bauxite and alumina and $147.7 of aluminum
processing for the year ended December 31, 1994, respectively.

Export sales were less than 10% of total revenue during the years ended
December 31, 1996, 1995, and 1994, respectively.

Geographical area information relative to operations is summarized as
follows:

Year Ended Other
December 31, Domestic Carribbean Africa Foreign Eliminiations Total
- ----------------------------------------------------- ----------------------------------------------------------------------------

Net sales to unaffiliated customers 1996 $ 1,610.0 $ 201.8 $ 198.3 $ 180.4 $ 2,190.5
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

Sales and transfers among 1996 $ 116.9 $ 206.0 $ (322.9)
geographic areas 1995 79.6 191.5 (271.1)
1994 98.7 139.4 (238.1)

Equity in income (losses) of 1996 $ .3 $ 8.5 $ 8.8
unconsolidated affiliates 1995 (.2) 19.4 19.2
1994 .2 (2.1) (1.9)

Operating income (loss) 1996 $ 6.7 $ 1.6 $ 27.8 $ 64.0 $ 100.1
1995 32.5 9.8 83.5 85.3 211.1
1994 (128.5) 9.9 18.3 44.4 (55.9)

Investment in and advances to 1996 $ .5 $ 25.3 $ 142.6 $ 168.4
unconsolidated affiliates 1995 1.2 27.1 149.9 178.2

Identifiable assets 1996 $ 2,138.6 $ 391.2 $ 194.7 $ 211.4 $ 2,935.9
1995 2,019.0 381.9 196.5 216.9 2,814.3

Financial information by industry segment at December 31, 1996 and 1995,
and for the years ended December 31, 1996, 1995, and 1994, is as follows:

Year Ended Bauxite & Aluminum
December 31, Alumina Processing Corporate Total
- ----------------------------------------------------------------------------------------------------------------

Net sales to unaffiliated customers 1996$ 508.0 $ 1,682.5 $ 2,190.5
1995 514.2 1,723.6 2,237.8
1994 432.5 1,349.0 1,781.5

Intersegment sales 1996$ 181.6 $ 181.6
1995 159.7 159.7
1994 146.8 146.8

Equity in income (losses) of 1996$ 1.7 $ 6.7 $ .4 $ 8.8
unconsolidated affiliates 1995 3.6 15.8 (.2) 19.2
1994 (4.7) 2.6 .2 (1.9)

Operating income (loss) 1996$ 1.1 $ 156.5 $ (57.5) $ 100.1
1995 54.0 238.9 (81.8) 211.1
1994 19.8 (8.4) (67.3) (55.9)

Depreciation 1996$ 31.2 $ 61.7 $ 3.1 $ 96.0
1995 31.1 60.4 2.8 94.3
1994 33.5 59.1 2.8 95.4

Capital expenditures 1996$ 29.9 $ 126.9 $ 4.7 $ 161.5
1995 27.3 53.0 8.1 88.4
1994 28.9 39.9 1.2 70.0

Investment in and advances to 1996$ 121.3 $ 46.6 $ .5 $ 168.4
unconsolidated affiliates 1995 129.9 47.1 1.2 178.2

Identifiable assets 1996$ 784.6 $ 1,408.5 $ 742.8 $ 2,935.9
1995 746.0 1,341.2 727.1 2,814.3

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 "Original Subsidiary Guarantors")
are domestic wholly owned (direct or indirect) subsidiaries of the Company
that have provided subordinated guarantees of the 9-7/8% Notes and the
12-3/4% Notes (see Note 4). KAAC, KJC, and AJI are direct 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 business
is making loans to the Company and its subsidiaries.

In February 1996, pursuant to the indentures to the 9-7/8% Notes and the
12-3/4% Notes, Kaiser Micromill Holdings, LLC, Kaiser Sierra Micromills,
LLC, Kaiser Texas Micromill Holdings, LLC and Kaiser Texas Sierra
Micromills, LLC (collectively referred to as the "New Subsidiary
Guarantors"), also became guarantors of the 9-7/8% Notes and 12-3/4% Notes.
All of the New Subsidiary Guarantors are domestic wholly owned (direct or
indirect) subsidiaries of the Company which were formed in December 1995 to
hold (directly or indirectly) certain of the Company's interests in the
Reno, Nevada and certain future micromills and related projects, if any.
Both the Original Subsidiary Guarantors and the New Subsidiary Guarantors
(collectively referred to as the "Subsidiary Guarantors") also have
provided subordinated guarantees of the 10-7/8 Notes issued in 1996.

Summary combined financial information for the Subsidiary Guarantors as of
December 31, 1996 and 1995, is shown below. The New Subsidiary Guarantors
had only nominal amounts of assets, liabilities and equity at December 31,
1995, and had no 1995 operations, other than limited amounts of general and
administrative expense. As such, the accompanying Summary of Combined
Financial Position and Summary of combined Operations have not been
restated to included the financial position or results of operations of
the New Subsidiary Guarantors as the impact of such restatement would be
immaterial.

Summary of Combined Financial Position

December 31,
------------------------------
1996 1995
- -------------------------------------------------------- ------------- -------------

ASSETS
Current assets $ 116.9 $ 108.0
Due from the Company 740.0 705.4
Investments in and advances to unconsolidated affiliates 95.9 102.8
Property, plant, and equipment - net 321.6 262.4
Other assets 30.1 23.4
------------- -------------
Total $ 1,304.5 $ 1,202.0
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities $ 286.3 $ 180.9
Due to the Company 308.2 272.5
Other long-term liabilities 38.8 51.8
Long-term debt - net of current maturity 60.0 66.3
Minority interests 76.8 73.6
Stockholders' equity 534.4 556.9
------------- -------------
Total $ 1,304.5 $ 1,202.0
============= =============

Summary of Combined Operations

Year Ended December 31,
------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------

Net sales $ 430.5 $ 401.4 $ 354.7
Costs and expenses 413.8 366.7 321.4
------------- ------------- -------------
Operating income 16.7 34.7 33.3
Other income (expense):
Interest and other income (expense) (28.0) 37.2 (28.0)
Interest expense (23.2) (29.9) (22.3)
------------- ------------- -------------
Income (loss) before income taxes, and minority (34.5) 42.0 (17.0)
interests
Credit (provision) for income taxes 6.5 (14.8) (6.9)
Minority interests 5.8 5.5 6.7
------------- ------------- -------------
Net income (loss) $ (22.2) $ 32.7 $ (17.2)
============= ============= =============

Notes to Summary of Combined Financial Information for the Subsidiary
Guarantors

Income Taxes - The Original Subsidiary Guarantors are all members of the
KACC Subgroup (see Note 5). The credit (provision) for income taxes
reflected in the Summary of Combined Operations was computed as if each of
the Original Subsidiary Guarantors filed returns on a separate company
basis. Included in Other assets and Other long-term liabilities at
December 31, 1996, are $27.7 and $38.8 of deferred income tax assets and
liabilities, respectively.

No credit (provision) for income taxes has been reflected for the New
Subsidiary Guarantor's 1996 pre-tax net loss of approximately $20.5, as the
entities are not subject to income tax. However, taxable income or loss of
the New Subsidiary Guarantors is included in the consolidated federal
income tax return of the KACC Subgroup.

Receivables and Payables -- At December 31, 1996, receivables from and
payables to the Company reflected in the Summary of Combined Financial
Position include $718.2 and $280.4 of interest bearing loans, respectively.
The similar amounts at December 31, 1995 were $690.6 and $260.9.

Inventory Valuation -- Inventories are stated at first-in, first-out (FIFO)
cost, not in excess of market.

Investments -- At December 31, 1996, 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 $1.7 and $3.6 in 1996 and 1995, respectively,
is reflected in the Summary of Combined Operations in other income
(expense).

Foreign Currency -- The functional currency of the Subsidiary Guarantors is
the United States dollar, and accordingly, translation gains (losses)
included in net income (loss) in the Summary of Combined Operations were
$(24.6), $14.1, and $(42.4) for the years ended December 31, 1996, 1995,
and 1994, respectively.

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
CONSOLIDATED BALANCE SHEETS

December 31,
------------------------------------------------------------------------------
(In millions of dollars) 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------

ASSETS
Current assets:
Cash and cash equivalents $ 81.3 $ 21.7 $ 12.0 $ 14.2 $ 18.5
Receivables 255.6 310.2 200.5 236.0 271.1
Inventories 562.2 525.7 468.0 426.9 439.9
Prepaid expenses and other current assets 127.8 76.6 158.0 60.7 37.0
------------- ------------- ------------- ------------- -------------
Total current assets 1,026.9 934.2 838.5 737.8 766.5

Investments in and advances to unconsolidated
affiliates 168.4 178.2 169.7 183.2 150.1
Property, plant, and equipment - net 1,168.7 1,109.6 1,133.2 1,163.7 1,066.8
Deferred income taxes 263.3 268.8 271.0 210.3
Other assets 308.6 323.5 281.2 233.2 190.4
------------- ------------- ------------- ------------- -------------
Total $ 2,935.9 $ 2,814.3 $ 2,693.6 $ 2,528.2 $ 2,173.8
============= ============= ============= ============= =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accruals $ 453.1 $ 448.0 $ 434.1 $ 339.6 $ 351.3
Accrued postretirement medical benefit
obligation - current 50.1 46.8 47.0 47.6
Payable to affiliates 96.9 95.3 85.2 62.4 78.5
Long-term debt - current portion 8.9 8.9 11.5 8.7 25.9
Notes payable to parent - current portion 8.6 10.7 21.2 12.6
------------- ------------- ------------- ------------- -------------
Total current liabilities 617.6 609.7 599.0 470.9 455.7

Long-term liabilities 458.1 548.5 495.5 501.7 281.7
Accrued postretirement medical benefit obligation 722.5 734.0 734.9 713.1
Long-term debt 953.0 749.2 751.1 720.2 765.1
Notes payable to parent 8.6 23.5 18.9
Minority interests 92.5 91.4 85.4 69.7 70.1
Redeemable preference stock 27.5 29.6 29.0 33.6 32.8
Stockholders' equity (deficit):
Preference stock 1.7 1.7 1.8 1.8 2.0
Common stock 15.4 15.4 15.4 15.4 15.4
Additional capital 1,829.8 1,730.7 1,626.3 1,471.2 1,255.6
Retained earnings (accumulated deficit) (201.3) (210.9) (271.5) (165.2) 487.9
Additional minimum pension liability (2.8) (13.8) (9.1) (21.6) (6.7)
Less: Note receivable from parent (1,578.1) (1,479.8) (1,387.7) (1,301.5) (1,185.8)
------------- ------------- ------------- ------------- -------------
Total stockholders' equity (deficit) 64.7 43.3 (24.8) .1 568.4
------------- ------------- ------------- ------------- -------------
Total $ 2,935.9 $ 2,814.3 $ 2,693.6 $ 2,528.2 $ 2,173.8
============= ============= ============= ============= =============

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
FIVE-YEAR FINANCIAL DATA
STATEMENTS OF CONSOLIDATED INCOME (LOSS)

Year Ended December 31,
------------------------------------------------------------------------------
(In millions of dollars) 1996 1995 1994 1993 1992
- ------------------------------------ ------------------------------------------------------------------------------

Net sales $ 2,190.5 $ 2,237.8 $ 1,781.5 $ 1,719.1 $ 1,909.1
------------- ------------- ------------- ------------- -------------

Costs and expenses:
Cost of products sold 1,869.1 1,798.4 1,625.5 1,587.7 1,619.3
Depreciation 96.0 94.3 95.4 97.1 80.3
Selling, administrative, research and
development,and general 125.3 134.0 116.5 121.6 119.3
Restructuring of operations 35.8
------------- ------------- ------------- ------------- -------------
Total costs and expenses 2,090.4 2,026.7 1,837.4 1,842.2 1,818.9

Operating income (loss) 100.1 211.1 (55.9) (123.1) 90.2

Other income (expense):
Interest expense (93.4) (93.9) (88.6) (84.2) (78.7)
Other - net (2.6) (14.1) (7.3) (1.5) 16.9
------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes, minority
interests, extraordinary loss, and
cummulative effect of changes in
accounting principles 4.1 103.1 (151.8) (208.8) 28.4

Credit (provision) for income taxes 8.4 (37.4) 54.0 86.9 (5.3)

Minority interests .7 (.4) 1.6 4.3 6.5
------------- ------------- ------------- ------------- -------------
Income (loss) before extraordinary loss and
cumulative effective of changes in accounting
principles 13.2 65.3 (96.2) (117.6) 29.6

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) $ 13.2 $ 65.3 $ (101.6) $ (647.3) $ 29.6
============= ============= ============= ============= =============

KAISER ALUMINUM & CHEMICAL CORPORATION AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA (UNAUDITED)

(In millions of dollars) March 31 June 30 September 30 December 31
- ----------------------------------------------------------------------------------------------------

1996
Net sales $ 531.1 $ 567.6 $ 553.4 $ 538.4
Operating income 40.6 36.8 11.4 11.3
Net income (loss) 11.1 9.4 (4.8) (2.5)(1)

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

(1) Includes approximately $17.0 on an after tax basis resulting from settlements of certain tax matters.

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

None.

PART III

Information required under PART III (Items 10, 11, 12, and 13) has been
omitted from this Report since the Company intends to file with the
Securities and Exchange Commission, not later than 120 days after the close
of its fiscal year, a definitive proxy statement pursuant to Regulation 14A
which involves the election of directors.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) INDEX TO FINANCIAL STATEMENTS AND SCHEDULES

1. Financial Statements Page
-------------------- ----

Report of Independent Public Accountants 24

Consolidated Balance Sheets 25

Statements of Consolidated Income (Loss) 26

Statements of Consolidated Cash Flows 27

Notes to Consolidated Financial Statements 28

Five-Year Financial Data 48

Quarterly Financial Data 50

2. Financial Statement Schedules
-----------------------------

Financial statement schedules are inapplicable or the
required information is included in the Consolidated
Financial Statements or the Notes thereto.

3. Exhibits
--------

Reference is made to the Index of Exhibits immediately
preceding the exhibits hereto (beginning on page 54), which
index is incorporated herein by reference.

(b) REPORTS ON FORM 8-K

Two Reports on Form 8-K were filed by the Company during the
last quarter of the period covered by this Report. One
Report on Form 8-K, dated October 10, 1996, stated that on
October 7, 1996, the Company announced in a press release
that it proposes to make a Rule 144A offering of $175
million principal amount of senior notes due 2006. One
Report on Form 8-K, dated October 23, 1996, stated that on
October 17, 1996, the Company announced in a press release
that it had priced it Rule 144A offering of $175 million
principal amount of 10 7/8% Senior Notes due 2006 at 99.5%
of their principal amount to yield 10.96% to maturity.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(CONTINUED)

(c) EXHIBITS

Reference is made to the Index of Exhibits immediately preceding
the exhibits hereto (beginning on page 54), which index is
incorporated herein by reference.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

KAISER ALUMINUM & CHEMICAL
CORPORATION
Date: March 27, 1997 George T. Haymaker, Jr.
By George T. Haymaker, Jr.
Chairman of the Board,
President, and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

Date: March 27, 1997 George T. Haymaker, Jr.
George T. Haymaker, Jr.
Chairman of the Board,
President, and
Chief Executive Officer
(Principal Executive Officer)

Date: March 27, 1997 John T. La Duc
John T. La Duc
Vice President and Chief Financial
Officer
(Principal Financial Officer)

Date: March 27, 1997 Arthur S. Donaldson
Arthur S. Donaldson
Controller
(Principal Accounting Officer)

Date: March 27, 1997 Robert J. Cruikshank
Robert J. Cruikshank
Director

Date: March 27, 1997 Charles E. Hurwitz
Charles E. Hurwitz
Director

Date: March 27, 1997 Ezra G. Levin
Ezra G. Levin
Director

Date: March 27, 1997 Robert Marcus
Robert Marcus
Director

Date: March 27, 1997 Robert J. Petris
Robert J. Petris
Director

INDEX OF EXHIBITS

Exhibit
Number Description
- ------ -----------

3.1 Restated Certificate of Incorporation of Kaiser Aluminum &
Chemical Corporation (the "Company" or "KACC"), dated July 25,
1989 (incorporated by reference to Exhibit 3.1 to the
Registration Statement on Form S-1, dated August 25, 1989, filed
by KACC, Registration No. 33-30645).

3.2 Certificate of Retirement of KACC, dated February 7, 1990
(incorporated by reference to Exhibit 3.2 to the Report on Form
10-K for the period ended December 31, 1989, filed by KACC, File
No. 1-3605).

3.3 By-laws of KACC, amended and restated as of December 15, 1994
(incorporated by reference to Exhibit 3.3 to the Report on Form
10-K for the period ended December 31, 1994, filed by KACC, File
No. 1-3605).

4.1 Indenture, dated as of February 1, 1993, among KACC, as Issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., and
Kaiser Jamaica Corporation, as Subsidiary Guarantors, and The
First National Bank of Boston, as Trustee, regarding KACC's
12-3/4% Senior Subordinated Notes Due 2003 (incorporated by
reference to Exhibit 4.1 to the Report on Form 10-K for the
period ended December 31, 1992, filed by KACC, File No. 1-3605).

4.2 First Supplemental Indenture, dated as of May 1, 1993, to the
Indenture, dated as of February 1, 1993 (incorporated by
reference to Exhibit 4.2 to the Report on Form 10-Q for the
quarterly period ended June 30, 1993, filed by KACC, File No. 1-
3605).

4.3 Second Supplemental Indenture, dated as of February 1, 1996, to
the Indenture, dated as of February 1, 1993 (incorporated by
reference to Exhibit 4.3 to the Report on Form 10-K for the
period ended December 31, 1995, filed by KACC, File No. 1-3605).

4.4 Indenture, dated as of February 17, 1994, among KACC, as Issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, and Kaiser Finance Corporation, as
Subsidiary Guarantors, and First Trust National Association, as
Trustee, regarding KACC's 9 7/8% Senior Notes Due 2002
(incorporated by reference to Exhibit 4.3 to the Report on Form
10-K for the period ended December 31, 1993, filed by Kaiser
Aluminum Corporation ("Kaiser"), File No. 1-9447).

4.5 First Supplemental Indenture, dated as of February 1, 1996, to
the Indenture, dated as of February 17, 1994 (incorporated by
reference to Exhibit 4.5 to the Report on Form 10-K for the
period ended December 31, 1995, filed by KACC, File No. 1-3605).

4.6 Indenture, dated as of October 23, 1996, among KACC, as Issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica Inc.,
Kaiser Jamaica Corporation, Kaiser Finance Corporation, Kaiser
Micromill Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser
Texas Micromill Holdings, LLC and Kaiser Texas Sierra Micromills,
LLC, as Subsidiary Guarantors, and First Trust National
Association, as Trustee, regarding KACC's 10-7/8% Senior Notes
Due 2006 (incorporated by reference to Exhibit 4.2 to the Report
on Form 10-Q for the quarterly period ended September 30, 1996,
filed by KACC, File No. 1-3605).

4.7 Indenture, dated as of December 23, 1996, among KACC, as Issuer,
Kaiser Alumina Australia Corporation, Alpart Jamaica Inc., Kaiser
Jamaica Corporation, Kaiser Finance Corporation, Kaiser Micromill
Holdings, LLC, Kaiser Sierra Micromills, LLC, Kaiser Texas
Micromill Holdings, LLC, and Kaiser Texas Sierra Micromills, LLC,
as Subsidiary Guarantors, and First Trust National Association,
as Trustee, regarding the Company's 10 7/8% Series C Senior Notes
due 2006 (incorporated by reference to Exhibit 4.4 to the
Registration Statement on Form S-4, dated January 2, 1997, filed
by KACC, Registration No. 333-19143).

Exhibit
Number Description
- ------ -----------

4.8 Credit Agreement, dated as of February 15, 1994, among Kaiser,
KACC, the financial institutions a party thereto, and BankAmerica
Business Credit, Inc., as Agent (incorporated by reference to
Exhibit 4.4 to the Report on Form 10-K for the period ended
December 31, 1993, filed by Kaiser, File No. 1-9447).

4.9 First Amendment to Credit Agreement, dated as of July 21, 1994,
amending the Credit Agreement, dated as of February 15, 1994,
among Kaiser, KACC, the financial institutions party thereto, and
BankAmerica Business Credit, Inc., as Agent (incorporated by
reference to Exhibit 4.1 to the Report on Form 10-Q for the
quarterly period ended June 30, 1994, filed by Kaiser, File No.
1-9447).

4.10 Second Amendment to Credit Agreement, dated as of March 10, 1995,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among Kaiser, KACC, the financial institutions party
thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.6 to the Report on Form
10-K for the period ended December 31, 1994, filed by Kaiser,
File No. 1-9447).

4.11 Third Amendment to Credit Agreement, dated as of July 20, 1995,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among Kaiser, KACC, the financial institutions a party
thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.1 to the Report on Form
10-Q for the quarterly period ended June 30, 1995, filed by
Kaiser, File No. 1-9447).

4.12 Fourth Amendment to Credit Agreement, dated as of October 17,
1995, amending the Credit Agreement, dated as of February 15,
1994, as amended, among Kaiser, KACC, the financial institutions
a party thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.1 to the Report on Form
10-Q for the quarterly period ended September 30, 1995, filed by
Kaiser, File No. 1-9447).

4.13 Fifth Amendment to Credit Agreement, dated as of December 11,
1995, amending the Credit Agreement, dated as of February 15,
1994, as amended, among Kaiser, KACC, the financial institutions
a party thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.11 to the Report on Form
10-K for the period ended December 31, 1995, filed by KACC, File
No. 1-3605).

4.14 Sixth Amendment to Credit Agreement, dated as of October 1, 1996,
amending the Credit Agreement, dated as of February 15, 1994, as
amended, among Kaiser, KACC, the financial institutions a party
thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.1 to the Report on Form
10-Q for the quarterly period ended September 30, 1996, filed by
KACC, File No. 1-3605).

4.15 Seventh Amendment to Credit Agreement, dated as of December 17,
1996, amending the Credit Agreement, dated as of February 15,
1994, as amended, among Kaiser, KACC, the financial institutions
a party thereto, and BankAmerica Business Credit, Inc., as Agent
(incorporated by reference to Exhibit 4.18 to the Registration
Statement on Form S-4, dated January 2, 1997, filed by KACC,
Registration No. 333-19143).

*4.16 Eighth Amendment to Credit Agreement, dated as of February 24,
1997, amending the Credit Agreement, dated as of February 15,
1994, as amended, among Kaiser, KACC, the financial institutions
a party thereto, and BankAmerica Business Credit, Inc., as Agent.

4.17 Intercompany Note between Kaiser and KACC (incorporated by
reference to Exhibit 10.11 to the Report on Form 10-K for the
period ended December 31, 1996, filed by MAXXAM Inc. ("MAXXAM"),
File No. 1-3924).

4.18 Confirmation of Amendment of Non-Negotiable Intercompany Notes,
dated as of October 6, 1993, between Kaiser and KACC
(incorporated by reference to Exhibit 10.12 to the Report on Form
10-K for the period ended December 31, 1996, filed by MAXXAM,
File No. 1-3924).

Exhibit
Number Description
- ------ -----------

4.19 Certificate of Designations of 8.255% PRIDES, Convertible
Preferred Stock of Kaiser, dated February 17, 1994 (incorporated
by reference to Exhibit 4.21 to the Report on Form 10-K for the
period ended December 31, 1993, filed by Kaiser, File No. 1-
9447).

4.20 Senior Subordinated Intercompany Note between Kaiser and KACC
dated February 15, 1994 (incorporated by reference to Exhibit
4.22 to the Report on Form 10-K for the period ended December
31, 1993, filed by Kaiser, File No. 1-9447).

4.21 Senior Subordinated Intercompany Note between Kaiser and KACC
dated March 17, 1994 (incorporated by reference to Exhibit 4.23
to the Report on Form 10-K for the period ended December 31,
1993, filed by Kaiser, File No. 1-9447).

KACC has not filed certain long-term debt instruments not being
registered with the Securities and Exchange Commission where the
total amount of indebtedness authorized under any such
instrument does not exceed 10% of the total assets of KACC and
its subsidiaries on a consolidated basis. KACC agrees and
undertakes to furnish a copy of any such instrument to the
Securities and Exchange Commission upon its request.

10.1 Form of indemnification agreement with officers and directors
(incorporated by reference to Exhibit (10)(b) to the Registration
Statement of Kaiser on Form S-4, File No. 33-12836).

10.2 Tax Allocation Agreement, dated as of December 21, 1989, between
MAXXAM and KACC (incorporated by reference to Exhibit 10.21 to
Amendment No. 6 to the Registration Statement on Form S-1, dated
December 14, 1989, filed by KACC, Registration No. 33-30645).

10.3 Tax Allocation Agreement, dated as of February 26, 1991, between
Kaiser and MAXXAM (incorporated by reference to Exhibit 10.23 to
Amendment No. 2 to the Registration Statement on Form S-1, dated
June 11, 1991, filed by Kaiser, Registration No. 33-37895).

10.4 Tax Allocation Agreement, dated as of June 30, 1993, between KACC
and Kaiser (incorporated by reference to Exhibit 10.3 to the
Report on Form 10-Q for the quarterly period ended June 30, 1993,
filed by KACC, File No. 1-3605).

10.5 Agreement, dated as of June 30, 1993, between Kaiser and MAXXAM
(incorporated by reference to Exhibit 10.2 to the Report on Form
10-Q for the quarterly period ended June 30, 1993, filed by KACC,
File No. 1-3605).

Executive Compensation Plans and Arrangements
[Exhibits 10.6 - 10.16, inclusive]

10.6 KACC's Bonus Plan (incorporated by reference to Exhibit 10.25 to
Amendment No. 6 to the Registration Statement on Form S-1, dated
December 14, 1989, filed by KACC, Registration No. 33-30645).

10.7 Kaiser 1993 Omnibus Stock Incentive Plan (incorporated by
reference to Exhibit 10.1 to the Report on Form 10-Q for the
quarterly period ended June 30, 1993, filed by KACC, File No. 1-
3605).

10.8 Kaiser 1995 Employee Incentive Compensation Program (incorporated
by reference to Exhibit 10.1 to the Report on Form 10-Q for the
quarterly period ended March 31, 1995, filed by Kaiser, File No.
1-9447).

10.9 Kaiser 1995 Executive Incentive Compensation Program
(incorporated by reference to Exhibit 99 to the Proxy Statement,
dated April 26, 1995, filed by Kaiser, File No. 1-9447).

Exhibit
Number Description
- ------ -----------

10.10 Employment Agreement, dated April 1, 1993, among Kaiser, KACC,
and George T. Haymaker, Jr. (incorporated by reference to Exhibit
10.2 to the Report on Form 10-Q for the quarterly period ended
March 31, 1993, filed by Kaiser, File No. 1-9447).

10.11 First Amendment to Employment Agreement by and between KACC,
Kaiser and George T. Haymaker, Jr. (incorporated by reference to
Exhibit 10 to the Report on Form 10-Q for the quarterly period
ended June 30, 1996, filed by KACC, File No. 1-3605).

10.12 Promissory Note, dated February 1, 1989, by Anthony R. Pierno and
Beverly J. Pierno to MAXXAM (incorporated by reference to Exhibit
10.30 to Form 10-K for the period ended December 31, 1988, filed
by MAXXAM, File No. 1-3924).

10.13 Promissory Note, dated July 19, 1990, by Anthony R. Pierno to
MAXXAM (incorporated by reference to Exhibit 10.31 to Form 10-K
for the period ended December 31, 1990, filed by MAXXAM, File No.
1-3924).

10.14 Promissory Note, dated July 20, 1993, between MAXXAM and Byron L.
Wade (incorporated by reference to Exhibit 10.59 to Form 10-K for
the period ended December 31, 1993, filed by MAXXAM, File No. 1-
3924).

10.15 Letter Agreement, dated January 1995, between Kaiser and Charles
E. Hurwitz, granting Mr. Hurwitz stock options under the Kaiser
1993 Omnibus Stock Incentive Plan (incorporated by reference to
Exhibit 10.17 to the Report on Form 10-K for the period ended
December 31, 1994, filed by Kaiser, File No. 1-9447).

10.16 Form of letter agreement with persons granted stock options under
the Kaiser 1993 Omnibus Stock Incentive Plan to acquire shares of
Kaiser common stock (incorporated by reference to Exhibit 10.18
to the Report on Form 10-K for the period ended December 31,
1994, filed by Kaiser, File No. 1-9447).

*21 Significant Subsidiaries of KACC.

*27 Financial Data Schedule.
__________

* Filed herewith