Document mqzBXZ3bErJZgGRZJMax8wQY0

MAFCO CONSOLIDATED GROUP INC (Form- 10-K, Received: 03/28/1997 00 00:00) Page 6 of 116 Little cigars consist of filler tobacco wrapped only by a wrapper with a filter tip Little cigars are made on a high-speed machine with man-made wrapper made from tobacco ingredients and no binder. Little cigars are flavored and produced with a filter Generally, little cigars are the lowest paced segment of the mass market category The Company's little cigar brands mclude DUTCH TREATS, SUPER VALUE and SUPRE SWEETS. 4 Pipe Tobacco and Accessories In addition to its cigars, the Company manufactures pipe tobaccos for sale under its own brand names, such as MIXTURE NO. 79 and CHINA BLACK, and for sale in bulk to tobaccomsts, as well as private label brands for chain stores and wholesale distnbutors The Company also distnbutes smokers' accessones, such as lighters, tobacco pouches, pipe cleaners and cigar cutters Net sales attnbutable to the distribution of such accessones was not material to the Company's results of operations in fiscal 1996 and 1995. The Company uses tobaccos of vanous types, grades, countnes of origin and crop years for its pipe tobacco, which are moistunzed with steam and then blended according to specific formulas ("pnmary blends") The pnmary blends are "cased" (sprayed or dipped) in liquids containing water, humectant, sugars, licorice, cocoa, fruit juices or other flavonngs in order to keep the tobacco m pliable condition and to enhance its aroma and taste The cased tobaccos are cut and dned and then held in bins to allow the casing and moisture to be distributed uniformly throughout the tobacco Thereafter, the tobacco blends are flavored with natural and artificial flavors, herbs or spices, and blends are held for a short penod of time pnor to packaging into pouches, bags, cans or other selling containers Specialty and Other Products The Company's other products mclude vanous tobacco and non-tobacco related products manufactured by the Company in order to utilize excess manufactunng capacity at certain of its facilities and improve overall efficiency BACKORDERS The increased demand for cigars, especially premium cigars, has caused the Company's back orders of premium cigars to increase from 3 2 million cigars at December 31, 1994 to 4 3 million cigars at December 31, 1995, and to further increase to 37 0 million cigars at December 31, 1996. Although the demand for premium cigars has continued to increase, the substantial increase m backorders of premium cigars expenenced by the Company in 1996 was due, at least in part, to the practice by customers 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 mcrease m backorders does not accurately reflect the demand for the Company's premium cigars. Beginning in 1997, the Company estabhshed new ordering policies to reduce backorders The Company no longer accepts orders from its largest customers for premium cigars, but instead allocates to each of them a portion of its production As a result of such new ordenng policies, the amount of future backorders will not be comparable to those previously expenenced by the Company. The Company's ability to mcrease its production of premium cigars and decrease its backorders is, however, constrained by a shortage of expenenced skilled laborers Although the Company is hinng and training new rollers and bunchers, the framing process averages up to one year and not all tramees are able to successfully complete the Company's training program The Company 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 increase its production of premium http //www.edgarpro.com/EFX_dll/EDGARpro dlUFetchFilmgHTML 1 fTD=969943&Ses . 10/19/2003