Document g2aQvOMgMdo0bewmmRgEDaZLN

MAFCO CONSOLIDATED GROUP INC (Form 10-K, Received. 03/28/1997 00 00:0.. Page 24 of 116 cigars has continued to increase in 1996, the substantial increase in backorders of premium cigars experienced by the Company in 1996 was due, at least in part, to the practice by retailers of submitting orders well m excess of required quantities in an attempt to ensure a larger allocation of the Company's premium cigar production As such, the increase in backorders does not accurately reflect the demand for the Company's premium cigars Beginning m 1997, the Company established new 22 ordering policies to reduce backorders As a result of such new ordering policies, the amount of future backorders will not be comparable to those previously experienced by the Company The Company is hiring and training new rollers and bunchers and is building additional plant capacity to meet future growth in demand for its premium cigars. Although the Company believes that these measures will enable it to mcrease its production of premium cigars, there can be no assurance that the Company will be able to meet any future level of demand for its premium cigars. The Company's ability to manufacture premium and mass market cigars may also be constrained by the ability of tobacco growers and suppliers to meet the Company's demands for its raw materials in a timely manner. The discussion of historical results below includes the results of operations of Flavors' licorice extract and other flavoring agents business through November 25, 1996, the date of the Flavors Disposition RESULTS OF OPERATIONS Year Ended December 31,1996 Compared to the Year Ended December 31,1995. Net sales were $310.7 million and $261.1 million in 1996 and 1995, respectively, an mcrease of $49.6 million or 19.0%. The mcrease m net sales was primarily due to a $58.7 million mcrease in sales of cigar products from $158.2 million m 1995 to $216 9 million m 1996, partially offset by a decrease in sales reflecting the Flavors Disposition on November 25, 1996 Cigar sales, particularly m the premium market, increased primarily as a result of both a shift in sales mix to higher priced cigars and price increases on certain cigar brands, and, to a lesser extent, an mcrease m cigar unit volume. Cost of sales were $177 9 million and $154.0 million in 1996 and 1995, respectively, an mcrease of $23.9 million or 15.5%. The increase m cost of sales for 1996 was primarily due to the increase in sales of cigars, and increases in the costs of raw matenals, partially offset by a decrease m cost of sales reflecting the Flavors Disposition on November 25, 1996 As a percentage of sales, cost of sales decreased to 57 3% in 1996 from 59 0% m 1995 primarily due to fixed manufacturing costs spread over increased production volume Selling, general and administrative ("SG&A") expenses were $54 2 million and $514 million m 1996 and 1995, respectively, an mcrease of $2.8 million or 5 4% The mcrease was primarily due to mcreased compensation, marketing and selling expenses partially offset by a decrease in SG&A expenses reflecting the Flavors Disposition on November 25,1996. A significant portion of these marketing and selling expenses vanes with sales volume. As a percentage ofnet sales, SG&A expenses were 17.4% in 1996 and 19 7% in 1995 The decrease pnmanly reflects SG&A expenses mcreasmg at a lower rate relative to the mcrease in net sales SG&A expenses in 1996 and 1995 include compensation, public company and other incremental expenses incurred by the Company since the Merger The Company expects marketing and selling expenses of the Company's operating business to continue to mcrease if net sales continues to mcrease http://www edgarpro com/EFX_dll/EDGARpro.dll?FetchFihngHTMLl9ID=969943&Ses. 10/19/2003