Document k7NKoqgyKwqENrL3QGmwKMO0

MAFCO CONSOLIDATED GROUP INC (Form: 10-K, Received 03/28/1997 00:00 0 ..Page 29 of 116 The Company expects to use the net cash proceeds from the Flavors Disposition, the Cigar IPO, the Cigar Secondary Offering, and existmg cash for general corporate purposes, including the funding of corporate liabilities and the transaction contemplated by the 1997 Merger Agreement INFLATION The Company's cigar business has historically been able to pass inflationary increases for raw materials and other costs onto its customers through price mcreases and anticipates that it will be able to do so in the future TAXATION AND REGULATION Excise Taxes Cigars and pipe tobacco have long been subject to federal, state and local excise taxes, and such taxes have frequently been increased or proposed to be increased, m some cases significantly, to fund various legislative initiatives. In particular, there have been proposals by the federal government in the past to reform health care through a national program to be funded principally through increases in federal excise taxes on tobacco products Enactment of significant increases m or new federal, state or local excise taxes would result in decreased unit sales of cigars and pipe tobacco, which would have a material adverse effect on the Company's business. Possessions Tax Credit Prior to December 31,1993, income earned by the Company from its Puerto Rico operations was subject to the provisions of Section 936 of the Internal Revenue Code of 1986, as amended (the "Code") Section 936 of the Code allowed for a "possessions tax credit" against Umted States federal mcome tax for the amount of United States federal income tax attributable to the Puerto Rico taxable earnings. As part of the Omnibus Budget Reconciliation Act of 1993, for the years after December 31,1993, the possessions tax credit has been limited based upon a percentage of qualified wages m Puerto Rico, plus certain amounts of depreciation (the "Current Limitation"). The Company beheves that it qualified for the possessions tax credit during 1996,1995 and 1994. The Company expects that it will continue to qualify for the possessions tax credit for every year that such credit is available in such amounts to offset the majority of any Umted States federal income tax related thereto, but eligibility and the amounts of the credit will depend on the facts and circumstances of the Company's Puerto Rico operations during each of the taxable years subsequent to 1996 Failure to receive the possessions tax credit attributable to the Company's Puerto Rico operations would have a material adverse effect on the Company. On August 20, 1996, the Small Business Job Protection Act of 1996 (the "SBJPA") was enacted into law Under the SBJPA, Section 936 of the Code, the possessions tax credit, was repealed, subject to special grandfather rules for which the Company would be eligible, provided that the Company does not add a "substantial new line of business " Under the grandfather rules, for the Company's taxable years beginning after December 31, 2001 and before January 1,2006, the Company's business income from its Puerto Rico operations eligible for the possessions tax credit would, in addition to the Current Limitation, generally be limited to its average annual income from its Puerto Rico operations, adjusted for inflation, computed during the Company's five most recent taxable years ending before October 14, 1995 and excluding the highest and lowest years (the "Income Limitation") For taxable years after http //www edgarpro com/EFX_dll/EDGARpro.dll?FetchFilmgHTMLl`?ID=969943&Ses . 10/19/2003