<PAGE>

==============================================================================

               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K
(Mark One)

[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1996

[  ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 
         EXCHANGE ACT OF 1934

For the transition period from _________________ to__________________
Commission file number 1-11240

                         MAFCO CONSOLIDATED GROUP INC.
            (Exact name of registrant as specified in its charter)
DELAWARE                                                              02-042104
(State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization)                              identification No.)

35 EAST 62ND STREET, NEW YORK, NY                                         10021
(Address of principal executive offices)                             (Zip code)

      Registrant's telephone number, including area code: (212) 572-8600

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT.

                                                    NAME OF EACH EXCHANGE
    TITLE OF EACH CLASS                              ON WHICH REGISTERED
Common Stock, $.01 par value                       New York Stock Exchange
                                                  
       SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

         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 (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [ [root] ] 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. [ [root] ]

         The aggregate market value of the Common Stock held by non-affiliates
of the registrant as of March 7, 1997 was $146,167,593.

         The number of shares of Common Stock outstanding as of March 7, 1997
were 23,237,340.


==============================================================================


<PAGE>





                                    PART 1

ITEM 1. DESCRIPTION OF BUSINESS

                      BACKGROUND AND RECENT DEVELOPMENTS

         On June 15, 1995, as part of a series of transactions (collectively,
the "Abex Transactions"), C&F Merger Inc. ("C&F"), a wholly owned subsidiary
of Mafco Holdings Inc. ("Mafco Holdings"), which then owned 100% of the
outstanding capital stock of Consolidated Cigar Holdings Inc. ("Cigar
Holdings") and Flavors Holdings Inc. ("Flavors Holdings"), merged (the
"Merger") with and into Abex Inc. ("Abex"), with Abex being the surviving
corporation in the Merger and being renamed Mafco Consolidated Group Inc. ("MC
Group" or the "Company"). Prior to the Abex Transactions, Abex was engaged in
an aerospace business through its then wholly owned subsidiary, Pneumo Abex
Corporation ("Pneumo Abex"), a wholly owned subsidiary of Power Control
Technologies Inc. ("PCT"). In connection with the Abex Transactions, (i)
holders of Abex's common stock ("Abex Common Stock") and related rights to
acquire Abex Common Stock received in exchange therefor, among other
consideration, 20% of the common stock of the Company (the "Company Common
Stock") and all of the outstanding shares of PCT's common stock ("PCT Common
Stock"); (ii) Mafco Holdings, through its wholly owned subsidiary Mafco
Consolidated Holdings Inc. ("Mafco Consolidated Holdings"), received 80% of
the Company Common Stock; and (iii) the Company retained Series A 8%
Convertible Redeemable Preferred Stock of PCT ("PCT Preferred Stock") (in each
case, such percentages reflect the outstanding capital stock immediately
following consummation of the Abex Transactions). In addition, as part of the
Abex Transactions, the Company retained substantially all of Abex's
consolidated assets and liabilities other than those principally related to
PCT's aerospace business. Accordingly, as a result of the Abex Transactions,
the Company acquired certain non-aerospace assets and assumed certain
liabilities of Abex as well as acquired an interest in the PCT Preferred
Stock. PCT, which became a separate publicly-traded company, continued to
operate the aerospace business.

         Subsequently, and in a separate transaction, on July 17, 1995, the
Company purchased 5,939,400 shares of PCT Common Stock (thereby increasing its
beneficial ownership of PCT Common Stock to approximately 36%) and 1,484,850
shares of Company Common Stock from Libra Invest & Trade Ltd. ("Libra") for
approximately $63.9 million in cash. In connection with such purchase, the
Company entered into an agreement with PCT which, subject to certain
exceptions, limits the Company's ability to dispose of its shares of PCT
Common Stock for a period of three years.

         On April 15, 1996, PCT sold its aerospace operations, including
substantially all of its assets, to Parker Hannifin Corporation ("Parker
Hannifin") for an aggregate cash consideration of approximately $201.1 million
before transaction costs.

         On August 21, 1996, Cigar Holdings completed an initial public
offering (the "Cigar IPO") of 6,075,000 shares of its Class A common stock
(the "Cigar Common Stock"). The net proceeds to Cigar Holdings from the Cigar
IPO of approximately $127.8 million were paid as a dividend to the Company. As
a result of the Cigar IPO, the Company beneficially owns 80.2% of the
outstanding shares of capital stock of Cigar Holdings (representing
approximately 97.6% of the combined voting power), which owns 100% of the
outstanding shares of capital stock of Consolidated Cigar Corporation
("Consolidated Cigar"). In connection with the Cigar IPO, Cigar Holdings
issued a 


                                      1
<PAGE>



promissory note in an original principal amount of $70 million to the Company.

         On March 26, 1997, Cigar Holdings completed a public offering (the
"Cigar Secondary Offering") of 5,000,000 shares of the Cigar Common Stock at
an offering price of $23.75 per share. All of the shares sold were owned by MC
Group. In addition, the underwriters have been granted an overallotment option
to purchase an additional 750,000 shares, which as of the date hereof has not
been exercised.

         On November 25, 1996, the Company sold (the "Flavors Disposition") to
a subsidiary of PCT (i) all of the outstanding shares of Flavors Holdings and
(ii) 23,156,502 Value Support Rights ("VSRs") for aggregate consideration of
approximately $297.3 million, consisting of $180.0 million in cash, the
assumption of approximately $110.1 million of indebtedness and deferred cash
payments to the Company of $3.7 million payable on June 30, 1997 and $3.5
million payable on December 31, 1997. The VSRs were subsequently distributed
to PCT shareholders, including 8,439,400 to MC Group due to its ownership of
PCT Common Stock and PCT Preferred Stock.

         On February 20, 1997, Mafco Consolidated Holdings entered into an
Agreement and Plan of Merger (the "1997 Merger Agreement") with MC Group and
MCG Acquisition, Inc., a wholly owned subsidiary of Mafco Consolidated
Holdings, whereby Mafco Consolidated Holdings will acquire the remaining 15%
of MC Group Common Stock that it does not already own (the "1997 Merger").
Pursuant to the 1997 Merger Agreement, each outstanding share of Company
Common Stock (other than shares held by Mafco Consolidated Holdings) will be
converted into the right to receive $33.50 in cash, subject to upward
adjustment (the "Merger Consideration"). Additionally, on February 20, 1997,
in connection with the 1997 Merger Agreement, MC Group declared a special cash
dividend of $10 per share, which was paid on March 14, 1997 to stockholders of
record as of the close of business on March 10, 1997.

         The Merger Consideration shall be equal to the sum of (x) $33.50 plus
(y) an amount, if any (the "Additional Amount"), equal to the Excess (as
defined below) multiplied by 79.7%. The Additional Amount shall be payable
only if the average of the per share closing prices (the "Average") of Cigar
Common Stock on the New York Stock Exchange for the ten trading days ending
two trading days prior to the effectiveness of the Merger, exceeds $33.00 (the
amount by which the Average exceeds $33.00, the "Excess"). MC Group
stockholders will be entitled to receive the Merger Consideration in cash,
without interest, upon surrender of the certificate formerly representing
shares of Cigar Common Stock.

         The 1997 Merger Agreement has been unanimously approved by the Boards
of Directors of each company and, in the case of MC Group, by a special
committee of independent directors formed to consider the transaction. The
consummation of the acquisition is subject to the approval of MC Group
stockholders, the filing with and review by the Securities and Exchange
Commission of an information statement to be sent to MC Group stockholders,
and other customary conditions. Mafco Consolidated Holdings, which owns
approximately 85% of the outstanding shares of MC Group common stock, has
agreed to vote in favor of the transaction, which is expected to close during
the second quarter of 1997.

                             BUSINESS OF MC GROUP

         The Company currently operates in one segment: manufacturing,
distributing, and selling cigars in all sections of the industry. The Company
also manufactures smoking tobaccos for sale under 


                                      2
<PAGE>


its own brand name, in bulk to tobacconists as well as private label brands
for chain stores and wholesale distributors. Prior to the Flavors Disposition,
the Company also produced licorice and other flavoring agents.


         The Company is the largest manufacturer and marketer of cigars sold
in the United States in terms of dollar sales, with a 1996 market share of
approximately 23% according to the Company's estimates. The Company markets
its cigar products under a number of well-known brand names at all price
levels and in all segments of the growing cigar market, including premium
large cigars, mass market large cigars and mass market little cigars. The
Company attributes its leading market position to the following competitive
strengths: (i) well-known brand names, many of which are the leading brands in
their category; (ii) broad range of product offerings within both the premium
and mass market segments of the United States cigar market; (iii) commitment
to and reputation for manufacturing quality cigars; (iv) marketing expertise
and close attention to customer service; (v) efficient manufacturing
operations; and (vi) an experienced management team. The Company is also a
leading producer of pipe tobacco and is the largest supplier of private label
and branded generic pipe tobacco to mass market retailers. In addition, the
Company distributes a variety of pipe and cigar smokers' accessories.

         The Company's cigars and pipe tobacco products are marketed under a
number of well-known brand names. The Company's premium cigars include the H.
UPMANN, MONTECRISTO, DON DIEGO, TE-AMO, SANTA DAMIANA, ROYAL JAMAICA, PRIMO
DEL REY and MONTECRUZ brands. The Company's mass market large cigars include
the ANTONIO Y CLEOPATRA (also known as AYC), DUTCH MASTERS, EL PRODUCTO,
MURIEL, BACKWOODS, SUPER VALUE and SUPRE SWEETS brands. The Company's mass
market little cigars include the DUTCH TREATS, SUPER VALUE and SUPRE SWEETS
brands. The Company's pipe tobacco products include the MIXTURE NO. 79 and
CHINA BLACK brands.

         According to industry sources, the cigar industry experienced
declining consumption between 1964 and 1993 at a compound annual unit rate of
3.6% (and, with respect to large cigar consumption, at a compound annual unit
rate of 5.0%). The Company experienced similar trends in the unit volume of
its cigars during such period. While the cigar industry has experienced
significantly better trends in unit consumption since 1993 compared to this
historical trend, there can be no assurance that the recent positive trends
will continue or that the Company would be able to offset any future decline
in consumption.

BUSINESS STRATEGY

         The Company's business strategy is to (i) capitalize on growth
opportunities in the premium cigar market, (ii) expand mass market cigar and
pipe tobacco products business, (iii) broaden mass market cigar distribution
channels, (iv) improve manufacturing processes and raw material procurement
and (v) pursue selectively strategic acquisitions. The Company's ability to
implement its business strategy successfully will be dependent on business,
financial and other factors beyond the Company's control, including, among
others, prevailing changes in consumer preferences, access to sufficient
quantities of raw materials, availability of trained laborers and changes in
tobacco products regulation. There can be no assurance that the Company will
continue to be successful in implementing its business strategy or that the
Company's net sales, operating margin and net margin will continue to increase
at rates similar to those experienced by the Company in 1996.


                                      3
<PAGE>


PRODUCTS

         The Company manufactures cigars in all subcategories and at all price
levels. The Company also manufactures its own cigar boxes and man-made
wrapper, filler and binder and little-cigar filters.

         Premium Cigars

         Premium cigars are generally hand made and primarily sell at retail
price points above $1.00 per cigar. The Company's premium cigars are primarily
long-filler, large cigars that have high quality natural leaf wrappers and
binders. The Company uses tobaccos of the best grades for its premium cigars.
Such tobaccos are combined according to brand-specified formulas to create the
"filler" of each cigar. In order to make hand made cigars, "binder" tobacco is
hand-wrapped around filler to create the "bunch" which is placed into a mold.
Then, "wrapper" tobacco is hand-wrapped around the bunch, creating a premium
cigar. In the Company's premium cigars, the wrapper, binder and filler are
natural tobacco leaf.

         The Company's premium cigars include the well-known H. UPMANN,
MONTECRISTO, DON DIEGO, TE-AMO, SANTA DAMIANA, ROYAL JAMAICA, PRIMO DEL REY
and MONTECRUZ brands as well as other recognized brand names. The Company's
premium cigars are manufactured in its Dominican Republic and Honduras
facilities, except for TE-AMO, which is manufactured in Mexico and purchased
from a third party.

         Mass Market Cigars

         Mass market cigars are machine made and generally have a retail price
point of $1.00 or less per cigar. Mass market cigars use less expensive
tobacco than premium cigars. The Company uses a variety of techniques and
grades of tobacco to produce mass market cigars which compete at all the price
points in the mass cigar market. Mass market cigars include large cigars
(weighing three pounds per 1,000 cigars or more) and little cigars (weighing
less than three pounds per 1,000 cigars).

         Mass market large cigars generally consist of filler tobacco that is
wrapped first with a binder and then with a wrapper. The more expensive mass
market large cigars combine natural leaf wrapper and man-made binder made from
tobacco ingredients instead of natural binder, with filler threshed into
short, uniform pieces. In less expensive mass market large cigars, man-made
wrapper made primarily from tobacco ingredients replaces natural tobacco 
leaf. The Company adds flavors and/or plastic tips to certain of its popularly
priced mass market large cigars. The Company's major mass market brands in the
middle price range include ANTONIO Y CLEOPATRA, DUTCH MASTERS, EL PRODUCTO,
BACKWOODS, SUPER VALUE and SUPRE SWEETS. The Company's MURIEL brand is in 
the less expensive range.

         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 priced segment of the mass market category. The Company's little cigar
brands include DUTCH TREATS, SUPER VALUE and SUPRE SWEETS.


                                      4
<PAGE>



         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 tobacconists, as well as private label brands for chain
stores and wholesale distributors. The Company also distributes smokers'
accessories, such as lighters, tobacco pouches, pipe cleaners and cigar
cutters. Net sales attributable to the distribution of such accessories was
not material to the Company's results of operations in fiscal 1996 and 1995.

         The Company uses tobaccos of various types, grades, countries of
origin and crop years for its pipe tobacco, which are moisturized with steam
and then blended according to specific formulas ("primary blends"). The
primary blends are "cased" (sprayed or dipped) in liquids containing water,
humectant, sugars, licorice, cocoa, fruit juices or other flavorings in order
to keep the tobacco in pliable condition and to enhance its aroma and taste.
The cased tobaccos are cut and dried 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 period of time prior to packaging into
pouches, bags, cans or other selling containers.

         Specialty and Other Products

         The Company's other products include various tobacco and non-tobacco
related products manufactured by the Company in order to utilize excess
manufacturing 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 in backorders of premium cigars experienced by the
Company in 1996 was due, at least in part, to the practice by customers of
submitting orders well in 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 in 1997, the Company established 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 ordering
policies, the amount of future backorders will not be comparable to those
previously experienced by the Company. The Company's ability to increase its
production of premium cigars and decrease its backorders is, however,
constrained by a shortage of experienced skilled laborers. Although the
Company is hiring and training new rollers and bunchers, the training process
averages up to one year and not all trainees 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 cigars, there can be no assurance that the Company will be able to
meet any future level of demand for its premium cigars. There can be no
assurance, however, that demand for the Company's premium cigars will continue
to grow in the future.


                                      5
<PAGE>

         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. Tobacco,
as a crop that is harvested annually, restricts the ability of tobacco growers
to adjust acreage grown in any given year to meet changes in market demands.
In addition, increases in acreage of tobacco grown requires significant
capital, which growers may be unable or unwilling to invest. If the rate of
escalation in consumption of cigars and other tobacco products continues, but
the supply of tobacco remains constant or increases at a lower rate than
demand, the Company's ability to increase its production of cigars, and
thereby reduce its backorders, could be inhibited.

SALES AND MARKETING

         The Company sells its cigar and pipe tobacco products throughout the
United States to over 2,500 customers, consisting of wholesale distributors,
direct buying chains, including drug store chains and mass market retailers,
and tobacconists. The Company employs a full-time in-house sales organization
to develop and service its sales to wholesalers, distributors, direct buying
chains and tobacconists. The Company's sales force is organized into two sales
units: a mass market division and a premium division. The Company believes
that the organization of its sales force into two divisions positions it to
maintain a high degree of focus on each of its principal product categories.
The mass market sales force calls on distributors and retail and chain store
accounts, including Kmart, Wal-Mart, Eckerd Drug Stores, CVS stores and
Thrifty Drug Stores, across the United States. Approximately 88% of the
Company's mass market cigar products are sold through wholesale distributors
while approximately 12% are sold to direct buying chains or independent
retailers that warehouse for themselves. The premium cigar sales force calls
directly on tobacconists and distributors. The Company's sales force operates
regionally and locally from home and car, maintaining close familiarity with
local customers. Most salespeople maintain a small stock of inventory which is
used primarily to replace local distributors' old or damaged products and to
display new product introductions or promotions.

         The Company supplies cigar merchandising fixtures to retailers at no
cost and believes that it is the primary supplier of such fixtures to the
United States retail trade. These fixtures help to maintain an attractive
product display and to increase shelf space available for the Company's
products.

         For the year ended December 31, 1996, the Company had more than 2,500
customers, the top five of which accounted for approximately 22% of annual
sales with the largest customer accounting for approximately 6%. The Company
believes that the loss of any one customer would not be material to the
Company's business. The Company maintains no long-term contracts for the sale
of its merchandise.

         The Company advertises its mass market cigar products primarily
through coupons and other promotions distributed at point of sale and through
direct mail. The Company advertises its premium cigar products in magazines,
such as Cigar Aficionado, Playboy and The New York Times Sunday Magazine, as
well as in newspapers and on radio. In order to strengthen and broaden further
the brand recognition of its premium cigars and to maximize the business
opportunities created by the resurgence in popularity of and increased demand
for premium cigars, the Company has increased its marketing and advertising
expenditures in connection with its existing premium cigar brands. The
increased advertising and marketing expenditures are being used to support new
product introductions and increase awareness and recognition of the Company's
premium brands.


                                      6
<PAGE>

         Sales of the Company's cigar products outside of the United States
are currently not material, although the Company has begun to strengthen its
presence in the international market for premium and mass market cigars,
particularly in Europe, the Middle East, Latin America and Asia, by increasing
management's focus on the Company's direct export business. The Company has
hired an experienced international marketing manager to concentrate on foreign
sales and promotions and currently has a total of 47 agents and distributors
in Europe, the Middle East, Latin America and Asia. See Note 15 of Notes to
Consolidated Financial Statements.

TRADEMARKS

         Trademarks and brand name recognition are important to the Company's
business. The Company generally owns the trademarks under which its products
are sold. The Company has registered its trademarks in the United States and
many other countries and will continue to do so as new trademarks are
developed or acquired. The Company does not hold or own the right to use
certain of its well-known trademarks and brand names in certain foreign
markets. The Company's ability to expand into such markets by capitalizing on
the strength of its brand names in the United States may be limited by its
right to use or acquire such brand names in those foreign markets.

         Unless otherwise indicated, the Company owns the trademarks listed
below:

                           PREMIUM CIGAR TRADEMARKS

        Cabanas                  Henry Clay                 Primo Del Rey
       Don Diego               Las Cabrillas                Santa Damiana 
       Don Marcos                Malaguena                   Santa Ynez
       Don Miguel              Montecristo(a)                Super Value
    Flor de Canarias             Montecruz                     Te-Amo
      H. Upmann(a)            Por Larranaga(a)              Wonder Blend

                         MASS MARKET CIGAR TRADEMARKS

  Antonio y Cleopatra           El Producto                    Roi-Tan
      Backwoods                  Harvester                   Super Value
    Ben Franklin                 Headline                    Supre Sweets
    Dutch Masters                La Corona                   Wonder Blend
    Dutch Treats                  Muriel

                            PIPE TOBACCO TRADEMARKS

    China Black               Mixture No. 79              Three Star Royal
   Dutch Masters               Super Value                  Wonder Blend
     Kriswill

----------------
(a) Trademark is owned by Cuban Cigar Brands, N.V., a 51% owned subsidiary of
the Company.

         While the Company does not believe that any single trademark is
material to the vitality of its business, it believes that its trademarks
taken as a whole are material to its business. Accordingly, the Company has
taken, and will continue to take, action to protect its interests in all such
trademarks.

                                      7

<PAGE>

RAW MATERIALS

         The Company has developed and is developing long-term relationships
with tobacco suppliers and is expanding its commercial and technical ties with
local growers to secure a variety of sources for raw materials, ensure the
quality of its raw materials and maximize cost savings.

         The Company buys tobacco directly from a large number of suppliers in
Brazil, Cameroon, the Central African Republic, Costa Rica, Germany, Italy,
the Dominican Republic, Paraguay, the Philippines, Indonesia, the United
States, Ecuador, Honduras, Mexico and other countries and does not believe
that it is dependent on any single source for tobacco. The Company has
recently experienced shortages in certain types of its natural wrapper and
premium cigar tobaccos due to the increase in demand for high quality natural
wrapped cigars. These shortages have caused the price of natural wrapper and
premium cigar tobaccos to increase. To date, these shortages of tobacco have
not materially adversely affected cigar manufacturing or the Company's
profitability, but could if the Company is unable to purchase additional
quantities of certain tobaccos in the future or is unable to pass increases
for such raw materials onto its customers.

         In addition, the Company purchases packaging materials from multiple
suppliers predominantly in the United States. No single supplier accounts for
10% or more of the Company's raw materials.

COMPETITION

         The Company is the largest manufacturer and marketer of cigars in the
United States in terms of dollar sales and believes that it is the only
participant in the cigar industry that is a major competitor in all
subcategories of cigars at all price levels. The other three significant
competitors in the cigar market in terms of 1996 market share, in order of
size, are Swisher International Group Inc., General Cigar Co. Inc., a division
of Culbro Corporation during 1996 and Havatampa/Phillies Cigar Corporation, a
privately held corporation. In addition, Tobacco Exporters International
Limited (a subsidiary of Rothmans International) is a significant competitor
in the little cigar market. The Company believes that its leading market
position in the cigar industry is due to its strong, well-known brand names,
broad range of product offerings within both the mass market and premium
segments of the United States cigar market, commitment to and reputation for
manufacturing quality cigars, marketing expertise, close attention to customer
service, efficient manufacturing operations and an experienced management
team. If and when normalization of relations between the United States and
Cuba occurs, the entry of Cuban premium cigars into the United States market
could increase competition in the Company's core premium cigar market.

         Through its Allied Tobacco Division in Richmond, Virginia, the
Company competes in all areas of the U.S. pipe tobacco business including
branded, private label and bulk tobacco. The Company believes it is the fourth
largest manufacturer in the U.S. of pipe tobacco, in terms of dollar sales,
and its largest competitors in order of size are Lane Limited, John Middleton
Inc. and UST Inc.

THE TOBACCO INDUSTRY

         Regulation

         Cigar manufacturers, like other producers of tobacco products, are
subject to regulation in the United States at federal, state and local levels.
Together with changing public attitudes towards smoking, a constant expansion
of smoking regulations since the early 1970's has been a major cause of 

                                      8
<PAGE>

the overall decline in consumption of tobacco products. Moreover, the trend is
toward increasing regulation of the tobacco industry.

         Federal law has required health warnings on cigarettes since 1965 and
has recently required states, in order to receive full funding for federal
substance abuse block grants, to establish a minimum age of 18 years for the
sale of tobacco products together with an appropriate enforcement program. In
recent years, a variety of bills relating to tobacco issues have been
introduced in the Congress of the United States, including bills that would
have (i) prohibited the advertising and promotion of all tobacco products
and/or restricted or eliminated the deductibility of such advertising
expenses; (ii) increased labeling requirements on tobacco products to include,
among other things, addiction warnings and lists of additives and toxins;
(iii) modified federal preemption of state laws to allow state courts to hold
tobacco manufacturers liable under common law or state statutes; (iv) shifted
regulatory control of tobacco products and advertisements from the Federal
Trade Commission to the Food and Drug Administration (the "FDA"); (v)
increased tobacco excise taxes; and required tobacco companies to pay for
health care costs incurred by the federal government in connection with
tobacco related diseases. Hearings have been held on certain of these
proposals; however, to date, none of such proposals have been passed by
Congress. Future enactment of such proposals or similar bills may have an
adverse effect on the sales or operations of the Company. In addition, various
federal agencies, including the FDA, have recently proposed to regulate the
tobacco industry.

         In addition, the majority of states restrict or prohibit smoking in
certain public places and restrict the sale of tobacco products to minors.
Local legislative and regulatory bodies have also increasingly moved to
curtail smoking by prohibiting smoking in certain buildings or areas or by
requiring designated "smoking" areas. In a few states, legislation has been
introduced, but has not yet passed, which would require all little cigars sold
in those states to be "fire-safe" (i.e., cigars which extinguish themselves if
not continuously smoked). Passage of this type of legislation could have a
material adverse effect on the Company's little cigar sales because of the
technological difficulties in complying with such legislation. The Company
does not expect the passage of any such legislation to have a material adverse
effect on the Company's business or results of operations taken as a whole.
There is currently an effort by the U.S. Consumer Product Safety Commission to
establish such standards for cigarettes. The enabling legislation, as
originally proposed, included little cigars; however, little cigars were
deleted due to the lack of information on fires caused by these products.

         Increased cigar consumption and the publicity such increase has
received may increase the risk of additional regulation of tobacco products or
of cigars. Consideration at both the federal and state level also has been
given to the consequences of tobacco smoke on others who are not currently
smoking (so called "second-hand" smoke). There can be no assurance that
regulation relating to second-hand smoke will not be adopted or that such
regulation or related litigation would not have a material adverse effect on
the Company's results of operations or financial condition.

         Although federal law has required health warnings on cigarettes since
1965, there is no federal law requiring that cigars or pipe tobacco carry such
warnings. However, California requires "clear and reasonable" warnings to
consumers who are exposed to chemicals known to the state to cause cancer or
reproductive toxicity, including tobacco smoke and several of its constituent
chemicals. Violations of this law, known as Proposition 65, can result in a
civil penalty not to exceed $2,500 per day for each violation. Although
similar legislation has been introduced in other states, no action has been
taken.

         During 1988, the Company and 25 manufacturers of tobacco products
entered into a settlement of legal proceedings filed against them pursuant to
Proposition 65. Under the terms of the settlement, 


                                      9
<PAGE>

the Company and such other defendants agreed to label retail packages or
containers of cigars, pipe tobaccos and other smoking tobaccos other than
cigarettes manufactured or imported for sale in California with a specified
warning label. To guarantee compliance with the California requirements, to
eliminate errors in distribution and to maintain the efficiencies of the
manufacturing process, the Company and most of its competitors have begun
using the label on all of their tobacco products shipped to customers in all
states, except for a few premium cigar customers.

         Massachusetts recently enacted legislation requiring manufacturers of
cigarettes, chewing tobacco and snuff to provide the state annually with a
list of the additives (in descending order of weight) and the nicotine yield
ratings of each brand they produce, which information will, subject to certain
conditions, be made publicly available. In addition, various legislative
proposals have been introduced in Massachusetts that would extend such
reporting requirement to cigar manufacturers and that would require health
warnings on cigars. Similar legislation has been introduced in other states.

         The U.S. Environmental Protection Agency (the "EPA") published a
report in January 1993 with respect to the respiratory health effects of
passive smoking, which concluded that widespread exposure to environmental
tobacco smoke presents a serious and substantial public health concern. In
June 1993, Philip Morris Companies Inc. and five other representatives of the
tobacco manufacturing and distribution industries filed suit against the EPA
seeking a declaration that the EPA does not have the statutory authority to
regulate environmental tobacco smoke, and that, in view of the available
scientific evidence and the EPA's failure to follow its own guidelines in
making the determination, the EPA's final risk assessment was arbitrary and
capricious. The court ruled in May 1995 that plaintiffs have standing to
pursue this action. Whatever the outcome of this litigation, issuance of the
report, which is based primarily on studies of passive cigarette smokers, may
lead to further legislation designed to protect non-smokers.

         In February 1994, the FDA, in a letter to an anti-smoking group,
claimed that it may be possible for the FDA to regulate cigarettes under the
drug provisions of the Food, Drug, and Cosmetic Act (the "FDC Act"). The FDA's
claim is based upon allegations that manufacturers may intend that their
products contain nicotine to satisfy an alleged addiction on the part of some
of their customers. The letter indicated that regulation of cigarettes under
the FDC Act could ultimately result in the removal from the market of products
containing nicotine at levels that cause or satisfy addiction. In March 1994,
the FDA began investigating whether cigarettes should be regulated as a drug.
In July 1995, the FDA announced that it has concluded for the first time that
nicotine is a drug that should be regulated and proposed to regulate smokeless
tobacco and cigarettes. The FDA recently adopted final regulations relating to
the marketing, promotion and advertisement of smokeless tobacco and
cigarettes. Although the FDA's definition of cigarettes originally included
little cigars, little cigars were excluded from the final regulations. These
regulations are currently being challenged in the United States District Court
for the Eastern District of North Carolina and the United States District
Court for the Southern District of New York. While the Company is unable to
predict the effect of these regulations on its business, these and other
regulations promulgated by the FDA in the future could have a material adverse
effect on the operations of the Company.

         Litigation

         Historically, the cigar industry has not experienced material
health-related litigation and, to date, the Company has not been the subject
of any material health-related litigation. However, the cigarette and
smokeless tobacco industries have experienced and are experiencing significant
health-related litigation involving tobacco and health issues.

                                      10
<PAGE>

         Litigation against the cigarette industry has historically been
brought by individual cigarette smokers. In 1992, the United States Supreme
Court in Cippollone v. Liggett Group, Inc. ruled that federal legislation
relating to cigarette labeling requirements preempts claims based on failure
to warn consumers about the health hazards of cigarette smoking, but does not
preempt claims based on express warranty, misrepresentation, fraud or
conspiracy. To date, individual cigarette smokers' claims against the
cigarette industry have been generally unsuccessful; however, on August 9,
1996, a Florida jury in Carter v. Brown & Williamson Tobacco Corporation
determined that a cigarette manufacturer was negligent in the production and
sale of its cigarettes and sold a product that was unreasonably dangerous and
defective, awarding the plaintiffs a total of $750,000 in compensatory
damages. The verdict is on appeal.

         Current tobacco litigation generally falls within one of three
categories: class actions, individual actions (which have been filed mainly in
the State of Florida), or actions brought by individual states or localities
to recover Medicaid costs allegedly attributable to tobacco-related illnesses.
The pending actions allege a broad range of injuries resulting from the use of
tobacco products or exposure to tobacco smoke and seek various remedies,
including compensatory and, in some cases, punitive damages together with
certain types of equitable relief such as the establishment of medical
monitoring funds and restitution. The major tobacco companies are vigorously
defending these actions, including by challenging the authority of state
attorneys general to bring Medicaid actions attributable to tobacco-related
illnesses and, in some states, bringing preemptive lawsuits to enjoin the
state attorneys general from instituting litigation.

         The recent increase in the sales of cigars and the publicity such
increase has received may have the effect of increasing the probability of
legal claims. Also, a recent study published in the journal Science reported
that a chemical found in tobacco smoke has been found to cause genetic damage
in lung cells that is identical to damage observed in many malignant tumors of
the lung and, thereby, directly links lung cancer to smoking. This study could
affect pending and future tobacco regulation or litigation.

         In May 1996, the Fifth Circuit Court of Appeals in Castano v.
American Tobacco, et al. reversed a Louisiana district court's certification
of a nationwide class consisting essentially of nicotine dependent cigarette
smokers. Notwithstanding the dismissal, new class actions asserting claims
similar to those in Castano have recently been filed in certain states. To
date, two pending class actions against major cigarette manufacturers have
been certified. The first case is limited to Florida citizens allegedly
injured by their addiction to cigarettes; the other is limited to flight
attendants allegedly injured through exposure to secondhand smoke.

         There can be no assurance that there will not be an increase in
health-related litigation involving tobacco and health issues against the
cigarette industry or similar litigation in the future against cigar
manufacturers. The costs to the Company of defending prolonged litigation and
any settlement or successful prosecution of any material health-related
litigation against manufacturers of cigars, cigarettes or smokeless tobacco or
suppliers to the tobacco industry could have a material adverse effect on the
Company's business.

                                      11
<PAGE>


         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, in some cases significantly, to fund various legislative
initiatives.

         From 1977 until December 31, 1990, cigars were subject to a federal
excise tax of 8.5% of wholesale list price, capped at $20.00 per thousand
cigars. Effective January 1, 1991, the federal excise tax rate on large cigars
(weighing more than three pounds per thousand cigars) increased to 10.625%,
capped at $25.00 per thousand cigars, and increased to 12.75%, capped at
$30.00 per thousand cigars, effective January 1, 1993. However, the base on
which the federal excise tax is calculated was lowered effective January 1,
1991 to the manufacturer's selling price, net of the federal excise tax and
certain other exclusions. In addition, the federal excise tax on pipe tobacco
increased from $0.45 per pound to $0.5625 per pound effective January 1, 1991.
The excise tax on pipe tobacco increased effective January 1, 1993, to $0.675
per pound. The federal excise tax on little cigars (weighing less than three
pounds per thousand cigars) increased from $0.75 per thousand cigars to
$0.9375 per thousand cigars effective January 1, 1991. The excise tax on
little cigars increased to $1.125 per thousand cigars effective January 1,
1993. The increase in the federal excise tax rate in 1991 and again in 1993
did not have a material adverse effect on the Company's product sales.

         In the past, there have been various proposals by the federal
government to fund legislative initiatives through increases in federal excise
taxes on tobacco products. In 1993, the Clinton Administration proposed a
significant increase in excise taxes on cigars, pipe tobacco, cigarettes and
other tobacco products to fund the Clinton Administration's health care reform
program. The Company believes that the volume of cigars and pipe tobacco sold
would have been dramatically reduced if excise taxes were enacted as
originally proposed as part of the Clinton Administration's health care reform
program. Future enactment of significant increases in excise taxes, such as
those initially proposed by the Clinton Administration or other proposals not
linked specifically to health care reform, would have a material adverse
effect on the business of the Company. The Company is unable to predict the
likelihood of the passage or the enactment of future increases in tobacco
excise taxes.

         Tobacco products are also subject to certain state and local taxes.
Deficit concerns at the state level continue to exert pressure to increase
tobacco taxes. Since 1964, the number of states that tax cigars has risen from
six to forty-one. Since 1988, the following eleven states have enacted excise
taxes on cigars, where no prior tax had been in effect: California,
Connecticut, New Jersey, New York, North Carolina, Ohio, South Dakota, Rhode
Island, Illinois, Missouri and Michigan. State excise taxes generally range
from 2% to 75% of the wholesale purchase price. In addition, the following
nine states have increased existing taxes on large cigars since 1988: Arizona,
Arkansas, Idaho, Iowa, Maine, New York, North Dakota, Vermont and Washington.
The following five states tax little cigars at the same rates as cigarettes:
California, Connecticut, Iowa, Oregon and Tennessee. Except for Tennessee, all
of these states have increased their cigarette taxes since 1988.

         State cigar excise taxes are not subject to caps similar to the
federal cigar excise tax. From time to time, the imposition of state and local
taxes has had some impact on sales regionally. The enactment of new state
excise taxes and the increase in existing state excise taxes are likely to
have an adverse effect on regional sales as cigar consumption generally
declines, which in turn is likely to have an adverse effect on the Company's
results of operations. The Company is unable to predict the materiality or
likelihood of the enactment of new state excise taxes or the increase in
existing state 

                                      12
<PAGE>


excise taxes and, therefore, is unable to predict the extent of any adverse
effect on the Company's business or results of operations that may result from
the imposition of such taxes.

EMPLOYEES

         The Company employs approximately 4,800 persons. The Company believes
that its relations with its employees are satisfactory. Union contracts,
expiring at various dates, cover salesmen in New York and hourly employees in
McAdoo, Pennsylvania and Richmond, Virginia. The McAdoo agreement with the
Teamsters Local 401 expires in December 1998 and the Richmond agreement with
the Warehouse Employees Local 322 expires in January 1999. The Company has
experienced no work stoppages due to labor problems in the last ten years.

SEASONALITY

         The Company's business is generally non-seasonal. However, slight
increases in cigar unit volume are experienced prior to Father's Day and the
Christmas season.

CONTINGENT AND OTHER LIABILITIES RELATING TO ABEX'S PREDECESSOR BUSINESSES

         In connection with the Abex Transactions, the Company entered into a
transfer agreement (the "Transfer Agreement"), which allocated assets and
liabilities, along with responsibility for various matters, between the
Company and PCT. Pursuant to the Transfer Agreement, the Company assumed and
agreed to indemnify PCT against, or to manage on PCT's behalf, all liabilities
not relating to Abex's then existing aerospace business, including various
contingent and other liabilities as set forth below. PCT assumed, and
indemnified the Company against, all liabilities of the aerospace business and
certain other liabilities. A discussion of the material liabilities for which
PCT has agreed to indemnify the Company is set forth below. The Company has
also assumed responsibility for various other matters relating to businesses
formerly conducted by Abex or its predecessors.

         Environmental Matters

         Certain of Abex's former subsidiaries have been named as parties in
several governmental enforcement and private actions seeking cleanup costs
and/or damages for personal injury or property damage under the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA"), and related federal and state laws. In addition,
certain of these subsidiaries have been identified by governmental authorities
as being potentially responsible for cleanup costs and/or natural resource
damages or have received inquiries from governmental authorities regarding
their possible involvement with hazardous waste sites. One such site in
Portsmouth, Virginia, which was formerly operated by Abex and a portion of
which is owned by the Company, has been placed on the National Priorities List
under CERCLA. The potential costs related to such matters and the possible
impact thereof on future operations are uncertain due to, among other factors,
the following: uncertainty regarding the extent of prior pollution; the
complexity of laws and regulations and their interpretations; the varying
costs and effectiveness of alternative cleanup technologies and methods; and
the questionable and varying degrees of responsibility and/or involvement by
Abex subsidiaries.

         Under applicable state and federal law, including CERCLA, each
potentially responsible party ("PRP") can be held jointly and severally liable
for all cleanup and related costs at each site. For the reasons noted above,
it is impossible to predict the extent to which remediation will be required
at a


                                      13
<PAGE>

particular site and the ultimate cost thereof. Based upon its present
knowledge of the sites at which Pneumo Abex has been named as a PRP, the
Company estimates that the total cost of investigation and remediation at all
sites, to all identified PRPs, could exceed $200 million. Based upon the
Company's experience and its knowledge of the relative contribution of the
various parties at the sites, Pneumo Abex's share of liability at most sites
is expected to be minimal. With respect to the Portsmouth site, Pneumo Abex
has entered into a Consent Decree in which the EPA has required that financial
responsibility in the amount of $20 million be established as evidence of
Pneumo Abex's financial capability of undertaking the remedial work. As
discussed below, the Company is indemnified by Whitman Corporation ("Whitman")
for the costs of establishing and maintaining letters of credit that establish
such financial responsibility. Whitman also is required to indemnify the
Company for the cleanup costs at such site.

         Pursuant to the Transfer Agreement, the Company agreed to indemnify
PCT, to the extent not paid by third party indemnitors or insurers, with
respect to all environmental matters associated with Abex's former operations
other than the operations relating to PCT's aerospace business which were
recently sold to Parker Hannifin. The Company believes that existing insurance
coverage is sufficient to reimburse the Company for all material environmental
expenditures. Moreover, pursuant to a stock purchase agreement, dated April
28, 1988, as amended, between Pneumo Abex and Whitman and related settlement
agreement, dated September 23, 1991, between Pneumo Abex and Whitman
(collectively, the "Whitman Agreements"), Whitman is obligated to indemnify
Pneumo Abex for costs, expenses and liabilities relating to environmental and
natural resource matters to the extent attributable to the operation of the
businesses acquired from Whitman prior to their acquisition in 1988, subject
to certain conditions and limitations principally relating to compliance with
notice, cooperation and other procedural requirements. Generally, known and
unknown liabilities arising after the 1988 Whitman acquisition are the
responsibility of PCT or the Company. Nothing has come to the attention of the
Company, however, that would indicate that post-1988 activities may give rise
to a material environmental liability for the Company. Whitman is generally
discharging the indemnified liabilities in the ordinary course. Whitman is
actively managing a significant number of indemnified matters, including the
potential cleanup of the Portsmouth, Virginia site, and the Company's
involvement varies and is limited for those matters being managed by Whitman.
The Company's obligations pursuant to the Transfer Agreement are also limited
by the presence of other third party indemnitors, including FMC Corporation,
Wagner Electric Corporation and BF Goodrich Company, each of which purchased
assets and businesses of Pneumo Abex and agreed to indemnify Pneumo Abex for
any liabilities arising out of their operations subsequent to the date of
closing each respective transaction. No material claim has been made or is
currently contemplated under these indemnities.

         In addition to the remedial action costs for the Portsmouth, Virginia
site, as to which Whitman has acknowledged its indemnification
responsibilities, there are approximately 33 tort claims pending against
Pneumo Abex alleging exposure to lead dust from the Portsmouth site. Whitman
has agreed to fund 50% of the defense costs and has reserved its rights on any
obligation to indemnify Pneumo Abex in the event of an adverse outcome. These
cases are in the preliminary stages of discovery. The Company does not believe
that Pneumo Abex's activities at the Portsmouth site resulted in any
lead-based injury to the plaintiffs because of, among other things, the low
average lead levels of the plaintiffs and the existence of alternate lead
sources. The Company's belief is based on the facts contained in the official
record of the historical uses of and activities at and around the Portsmouth
site and the medical and personal histories of the plaintiffs. The Company is
defending these cases vigorously. Based upon currently available information,
including the public record and the information described above, the Company
believes that the resolution of these matters will not have a material adverse
effect on the Company's financial condition.

                                      14
<PAGE>

         Based upon the Company's experience to date (including the existence
of the indemnification arrangements referred to above), the cost of compliance
with environmental laws is not expected to have a material adverse effect on
the Company's earnings, liquidity or competitive position. However, future
events, such as changes in existing laws or enforcement policies, may give
rise to additional compliance and/or other costs which could have a material
adverse effect on the Company's financial condition or results of operations.

         The Company has not recognized any liability in its financial
statements for environmental matters occurring prior to the 1988 Whitman
acquisition which are covered by Whitman's indemnification obligations under
the Whitman Agreements. Management of the Company considers these obligations
to be Whitman's and monitors the financial position of Whitman to determine
the level of uncertainty associated with Whitman's ability to satisfy its
obligations. Based upon Whitman's active management of indemnifiable matters,
its discharging of the related liabilities when required, and its financial
position based upon publicly filed financial statements, the Company believes
that the likelihood of Whitman failing to satisfy its obligations is remote.

         Asbestos Matters Relating to the Former Friction Materials Business

         A predecessor of Pneumo Abex has been named as a defendant in
personal injury lawsuits claiming damages relating to asbestos-containing
friction products formerly manufactured by such predecessor. The predecessor,
which discontinued the manufacture and sale of asbestos-containing friction
products in the United States in 1987, has never been found liable in any such
case. As of January 31, 1997, Pneumo Abex or the predecessor had been named as
a defendant in approximately 50,000 pending claims, typically with 10 to 30 or
more co-defendants.

         Pursuant to the Whitman Agreements, Whitman has retained ultimate
responsibility for all asbestos-related claims made through August 1998 and
for certain asbestos-related claims asserted thereafter. In connection with
the sale by Abex in December 1994 of its friction products division (the
"Friction Products Sale"), a subsidiary of Cooper Industries, Inc. ("Cooper")
assumed responsibility for substantially all of the asbestos-related claims
made after August 1998 and therefore such claims are not subject to the
Whitman indemnity. Pneumo Abex maintained products liability insurance
covering substantially all of the period during which asbestos-containing
products were manufactured and both the Company and Whitman have the benefit
of such insurance. Pursuant to court rulings and interim agreements reached
with certain insurance carriers, Pneumo Abex is being reimbursed for
approximately 90% of the aggregate defense and settlement costs associated
with such claims, and continues to seek recovery of the remaining amount of
unreimbursed costs from its carriers in an ongoing insurance coverage
litigation commenced by Pneumo Abex in 1982. As of December 31, 1996, the
Company had approximately $8.8 million in unreimbursed defense and settlement
costs pending receipt from the insurance carriers or Whitman.

         The Company is unable to predict the amount of future defense and
settlement costs associated with asbestos litigation, but consistent with
Abex's historical treatment, the Company has not recognized any liability in
its financial statements for asbestos-related claims as substantially all of
these costs are expected to be insured and, to the extent not insured
entirely, are covered by Whitman's indemnifications under the Whitman
Agreements or by Cooper.

         Although PCT retains ultimate responsibility and indemnifies the
Company for such matters under the Transfer Agreement, the Company undertakes
administrative and funding obligations with 

                                      15
<PAGE>

respect to such matters, including as to such unreimbursed defense and
settlement costs, subject to certain termination events as described below.
PCT's obligation to make reimbursement for the amounts so funded will be
limited to amounts received by PCT under related indemnification and insurance
agreements. The Company's administrative and funding obligations would be
terminated in the case of a bankruptcy of Pneumo Abex or PCT or, following an
exhaustion of available insurance, either a bankruptcy of Whitman or Cooper or
the failure of Whitman or Cooper to make required indemnification payments
other than for reasons primarily caused by actions or inactions taken by the
Company.

         Based upon the Company's experience to date (including the court
rulings and interim agreements relating to its insurers described above and
the existence of the indemnification arrangements with Whitman and Cooper),
the Company believes that aggregate past and future unreimbursed costs
associated with asbestos-related claims arising out of the former friction
products business, including future defense and settlement costs, will not
have a material adverse effect on the Company's financial condition or results
of operations. As discussed in "--Environmental Matters" above, the Company
monitors Whitman's financial position and believes that the likelihood of
Whitman failing to satisfy its obligations is remote. A substantial failure of
Pneumo Abex's insurance and the indemnification arrangements with Whitman or
Cooper, however, could have a material adverse effect on the Company.

         Tax Matters

         In connection with the Abex Transactions, the Company entered into a
tax sharing agreement with PCT, pursuant to which the Company has agreed to
indemnify PCT with respect to all taxes applicable to periods prior to June
15, 1995 except for foreign taxes related to PCT's aerospace business.

         In connection with the July 16, 1992 distribution (the "1992
Distribution") of Abex, the predecessor of the Company, to the stockholders of
its prior parent, The Henley Group, Inc. ("Henley"), Abex entered into a tax
sharing agreement with Henley in which Abex indemnified Henley for tax
liabilities resulting from certain adjustments to the tax liabilities of Abex
entities and for certain tax liabilities of a prior affiliated company,
Wheelabrator Technologies Inc. for the period from May 26, 1986 through
December 31, 1988. All federal tax liabilities related to this period were
settled prior to 1995; however, certain state tax liabilities of approximately
$7 million, which is an obligation of the Company, remained open as of
December 31, 1996.

         Abex had been included in the consolidated federal income tax return
of Henley for 1990 and 1991. The Internal Revenue Service has asserted
deficiencies against Henley for these periods of approximately $23 million,
plus interest. Koll Real Estate Group, Inc. ("Koll"), as the parent of Henley,
has indicated that it will vigorously contest the deficiencies through the
administrative appeals process as well as in court and that a final conclusion
to this matter could take several years. In any event, the adjustments
creating these deficiencies do not relate to Abex entities and are therefore
not liabilities of the Company as successor to Abex under the tax sharing
agreement. However, if Henley or Koll were unable to pay any deficiency
remaining after the review process, then the Internal Revenue Service, in
accordance with Treasury Regulation 1.1502-06, could seek payment from any of
the other entities that were included in the federal consolidated return of
Henley for 1990 and 1991, including the Company as successor to Abex.

         While the Company expects that Koll will discharge its ultimate tax
obligations, the Company 


                                      16
<PAGE>

is aware that Koll has a history of operating losses and retained deficits.
Thus, there can be no assurance that Koll will have the financial ability to
discharge such obligations. In addition, Koll has announced that it is
soliciting consents from its debtholders for a financial restructuring, but
the Company is presently unable to determine the effect, if any, of a
financial restructuring on the ability of Koll to pay any remaining
deficiency.

         Management believes that reserves as of December 31, 1996 are
adequate for all indemnifications associated with these tax sharing agreements
as well as any potential liability asserted by the Internal Revenue Service in 
accordance with Treasury Regulation 1.1502-06.

         Other Matters

         The Company assumed responsibility under the Transfer Agreement for
various other legal proceedings, claims and investigations related to various
commercial transactions and product liability matters. Most of these other
matters are covered by insurance, subject to deductibles and maximum limits,
and/or by third party indemnities. The Company does not believe, based on
currently available information, that the outcome of these other matters,
irrespective of insurance coverage and third party indemnities, will have a
material adverse effect on its financial position or results of operations.

         In connection with the 1992 Distribution, Abex and Henley allocated
between them certain liabilities related to the businesses of Henley or its
predecessors, including certain liabilities relating to self-insurance
programs, and each indemnified the other against loss associated with
liabilities assumed by the indemnifying party. In addition, Abex guaranteed
certain contingent obligations of Koll relating to a predecessor company
pension plan and environmental liabilities of Henley and certain of its
predecessors, and Koll agreed to indemnify Abex in respect thereof. During the
first quarter of 1997, the Company, Koll and certain of its subsidiaries
entered into certain agreements (the "1997 Koll Agreements") pursuant to
which, among other things, the parties re-allocated certain liabilities
relating to the self-insurance programs, the Company agreed to assume
sponsorship of, and financial responsibility for, the predecessor Company
pension plan referred to above, the Company paid to Koll $2.3 million, and the
Company received $0.5 million from a third party in connection with the sale
of an asset by Koll.
 The Company believes that its balance sheet at December 31, 1996 reflects
adequate reserves for its remaining obligations under the 1997 Koll Agreements
with respect to these matters. Furthermore, Koll has been discharging its
assumed and indemnification responsibilities in the ordinary course. The
Company does not believe, based on currently available information, including
information filed with the Securities and Exchange Commission and the EPA
regarding such environmental liabilities, that liability for the discharge of
the Company's remaining guarantee and indemnification obligations would have a
material adverse effect on its financial position or results of operations
even if Koll's financial circumstances, as described above in "--Tax Matters,"
were to cause Koll to stop discharging its responsibilities.

         In connection with the 1997 Koll Agreements, the Company also agreed
to assume whatever liability, if any, Koll or certain of its subsidiaries may
have with respect to personal injury claims arising out of the operations of
either the passenger rail car business of Pullman Incorporated ("Pullman"), a
predecessor of Koll and the Company, or the business of Pullman Passenger Car
Company, a subsidiary of Koll (collectively, the "Pullman Claims"). Koll also
transferred to the Company all of the rights that Koll and such subsidiaries
may have against Wheelabrator Technologies Inc., another predecessor of Koll
and the Company, with respect to the Pullman Claims. As of the date of the
Company's assumption of the Pullman Claims, Koll was defending approximately
360 claims that individuals had contracted asbestos-related diseases by reason
of their work maintaining or 


                                      17
<PAGE>

repairing Pullman cars. Management believes that costs related to these
approximately 360 claims will not have a material adverse effect on the
Company.


ITEM 2. PROPERTIES

         As of December 31, 1996, the principal properties owned or leased by
the Company for use in its business included:
<TABLE>
<CAPTION>
                                                                                            Approximate
                                                                           Owned or         Floor Space
Location                           Principal Use                            Leased           (sq. ft.)
--------                           -------------                           --------         -----------
<S>                               <C>                                       <C>              <C> 
McAdoo, Pennsylvania               Mass market cigar manufacturing           Owned            369,000
                                   and distribution
Cayey, Puerto Rico                 Mass market cigar manufacturing           Owned            280,000
La Romana, Dominican Republic      Premium cigar manufacturing               Leased           170,000
Comerio, Puerto Rico               Tobacco dressing                          Owned            151,000
Richmond, Virginia                 Pipe tobacco manufacturing and            Leased            90,000
                                   premium cigar distribution
Danli, Honduras                    Premium cigar manufacturing               Owned             45,000
Maypen, Jamaica                    Premium cigar manufacturing               Owned             25,000
Fort Lauderdale, Florida           Administrative office                     Leased            19,000
</TABLE>

         The Company believes that its existing and planned manufacturing
facilities and distribution centers are adequate for the current level of the
Company's operations. The Company believes that additional facilities, if
necessary, would be readily available on a timely basis on commercially
reasonable terms. For 1997, the Company is expanding its existing
manufacturing facilities in the Dominican Republic and Honduras and acquiring
additional manufacturing equipment for a total expected cost of approximately
$4 million.

         Further, the Company believes that the leased space that houses its
existing manufacturing and distribution facilities is not unique and could be
readily replaced, if necessary, at the end of the terms of its existing leases
on commercially reasonable terms. The Company's leases have expiration dates
ranging from 1999 to 2000, many of which are renewable at the option of the
Company.

         All of the principal properties owned by the Company are subject to
first priority liens granted in favor of the lenders under the credit
agreement, as amended to February 3, 1997 (the "Credit Agreement") of
Consolidated Cigar Corporation ("Consolidated Cigar"), a wholly-owned
subsidiary of Cigar Holdings.

         The Company has excess capacity in all of its cigar and pipe tobacco
plants. The Company's ability to take advantage of such excess capacity by
increasing shift operations and the production of premium and mass market
cigars may be limited by the availability of trained laborers and shortages in
the supply of tobacco.

         The Company believes that its facilities are well maintained and in
substantial compliance with environmental laws and regulations.

                                      18
<PAGE>


ITEM 3.       LEGAL PROCEEDINGS

         The Company is a party to lawsuits incidental to its business. The
Company believes that the outcome of such pending legal proceedings in the
aggregate will not have a material adverse effect on the Company's
consolidated financial position. The Company carries general liability
insurance but has no health hazard policy, which, to the best of the Company's
knowledge, is consistent with industry practice. There can be no assurance,
however, that the Company will not experience material health- related
litigation in the future.

         In January 1997, six purported class-action lawsuits and one
purported derivative and class- action lawsuit were filed in the Delaware
Court of Chancery (the "Chancery Court"), under the captions Alan R. Kahn v.
Ronald O. Perelman, et al., C.A. No. 15450; Sandy Rywell v. Ronald O.
Perelman, et al., C.A. No. 15468; Crandon Capital Partners v. Ronald O.
Perelman, et al., C.A. No. 15469; Harry Voege v. Ronald O. Perelman, et al.,
C.A. No. 15470; Harry Polikoff v. Mafco Consolidated Group Inc., et al., C.A.
No. 15471; Sal S. Shiry v. Ronald O. Perelman, et al., C.A. No. 15475; and
Jack Fishbaum v. Mafco Consolidated Group Inc., et al., C.A. No. 15481
(collectively, the "Actions"). The Actions allege certain acts allegedly taken
or not taken by the Company and the members of its board of directors in
connection with the proposed transaction that ultimately culminated in the
1997 Merger Agreement and the price originally proposed to be paid for the
Company Common Stock and allege that Andrews Group Incorporated and MC Group's
board of directors breached fiduciary obligations to the Company's
stockholders by entering into certain transactions with Marvel Entertainment
Group, Inc. and Toy Biz, Inc. (the "Marvel and Toy Biz Transactions"), which
transactions were allegedly corporate opportunities of the Company. The
Actions seek to enjoin the consummation of the Merger Agreement and the Marvel
and Toy Biz Transactions, as well as damages and an award of attorneys' fees.
On March 17, 1997, the parties to all of the Actions except Fishbaum executed
a Memorandum of Understanding setting forth the terms of their agreement in
principle to settle these Actions. The Memorandum of Understanding
acknowledges the enhanced terms for stockholders set forth in the Merger
Agreement and provides that settling plaintiffs may seek up to $1.25 million
in attorney's fees. The Memorandum of Understanding contemplates the drafting
and execution of a Stipulation of Settlement by the parties and its approval
by the Chancery Court, which approval is expected to occur in the third
quarter of 1997.

         In addition, various legal proceedings, claims and investigations are
pending against the Company related to commercial transactions, product
liability, safety and health matters and other environmental matters,
involving Abex's former subsidiaries or their predecessors, including those
for which the Company assumed responsibility pursuant to the Abex
Transactions. See "Business of MC Group -- Contingent and Other Liabilities
Related to Abex's Predecessor Business". Most of these matters are related to
matters covered by insurance, subject to deductibles and maximum limits, and
by third party indemnities. The Company does not believe, based on currently
available information, that the outcome of these matters will have material
adverse effect on its financial position or results of operations.

         In connection with the 1997 Koll Agreements, the Company also agreed
to assume whatever liability, if any, Koll or certain of its subsidiaries may
have with respect to the Pullman Claims. Koll also transferred to the Company
all of the rights that Koll and such subsidiaries may have against
Wheelabrator Technologies Inc., another predecessor of Koll and the Company,
with respect to the Pullman Claims. As of the date of the Company's assumption
of the Pullman Claims, Koll was defending approximately 360 claims that
individuals had contracted asbestos-related diseases by reason 


                                      19
<PAGE>

of their work maintaining or repairing Pullman cars. Management believes that
costs related to these approximately 360 claims will not have a material
adverse effect on the Company.

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

         There were no matters submitted to a vote of security holders during
the fourth quarter of 1996.


                                    PART II

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

MARKET PRICES

         From July 17, 1992 through June 15, 1995, the Abex Common Stock
traded on the NYSE under the symbol ABE. Since June 16, 1995, the Company
Common Stock has been traded on the NYSE under the symbol MFO. For the periods
indicated, the high and low closing prices for the Abex and Company Common
Stock as reported by the NYSE were as follows:

1995                                                       HIGH        LOW
----                                                       ----        ---
First Quarter                                               $7         $8
Second Quarter (Abex through June 15, 1995)                 10 1/2      7 5/8
Second Quarter (MC Group from June 16, 1995 through 
 June 30, 1995)                                             22 3/8     19 3/4 
Third Quarter                                               29 1/8     21 1/8
Fourth Quarter                                              26         17 1/4 

1996
----
First Quarter                                              $20 1/4    $14      
Second Quarter                                              24 7/8     15 5/8
Third Quarter                                               30 5/8     19 7/8
Fourth Quarter                                              30 1/4     23 7/8

         As of the close of business on March 7, 1997, there were
approximately 4,310 stockholders of record of Company Common Stock.

         The Company has never paid any cash dividend with respect to the MC
Group Common Stock, except for the $10.00 special cash dividend paid on March
14, 1997 to holders of record on March 10, 1997. The MC Group Board of
Directors will review its dividend policy from time to time in light of MC
Group's results of operations and financial position and such other business
considerations the MC Group Board of Directors deems relevant. The terms of
the credit agreement (the "Cigar Credit Agreement") and Senior Subordinated
Notes due 2003 ("Senior Notes") of Consolidated Cigar limit the payment of
dividends or distributions by Consolidated Cigar to an amount equal to
approximately $9.3 million as of December 31, 1996. Therefore, the Company is
limited in its ability to pay dividends to its stockholders. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" and Note 8 of the notes to the financial
statements.

                                      20
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA

         Prior to the Merger, Mafco Holdings contributed all of the
outstanding capital stock of Flavors Holdings and Cigar Holdings, the
immediate parent companies of Mafco Worldwide Corporation and Consolidated
Cigar, respectively, to C&F. C&F and Abex merged, with Abex as the surviving
corporation and renamed Mafco Consolidated Group Inc. As a result of the
Merger and the purchase from Libra, MC Group owned directly or indirectly 100%
of Consolidated Cigar and Mafco Worldwide Corporation, all of the outstanding
shares of PCT Preferred Stock and a common equity interest in PCT. In
accordance with generally accepted accounting principles, the Merger was
accounted for as a purchase of certain assets and the assumption of certain
liabilities of Abex, with C&F treated as the acquirer for accounting purposes.

         On August 21, 1996, the Company completed the Cigar IPO in which it
issued and sold 6,075,000 shares of Cigar Holdings common stock, thereby
reducing MC Group's ownership interest in Cigar Holdings to approximately
80.2%.

         On November 25, 1996, the Company completed the Flavors Disposition
in which it sold to a subsidiary of PCT (i) all of the outstanding shares of
Flavors Holdings and (ii) the VSRs.

         On March 3, 1993, Mafco Holdings completed the acquisition of
Consolidated Cigar. Therefore, the historical financial data for the periods
preceding March 3, 1993 are not comparable to the financial data for the
periods after March 3, 1993 due to the acquisition of Consolidated Cigar.

         The table below reflects financial information for each of the years
in the five year period ended December 31, 1996, which have been derived from
the audited financial statements of the Company and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements of the Company
included elsewhere herein.

<TABLE>
<CAPTION>
                                               FOR THE YEAR ENDED DECEMBER 31,
                                  ---------------------------------------------------------
                                   1996      1995(3)      1994      1993(1)(2)      1992(1)
                                  ------    --------     ------    -----------     --------
                                         (Dollars in millions, except per share data)
<S>                                <C>         <C>         <C>          <C>             <C>
STATEMENT OF OPERATIONS DATA:
Net sales                         $310.7     $261.1      $226.9       $202.6         $100.1 
Income from continuing operations  243.6(4)    23.1        16.3         10.0            8.2
Net income                         258.6(4)    24.4        13.7         10.0            8.2
Income from continuing operations
  per share                        10.48       1.06        0.82         0.50           0.41
Net income per share               11.13       1.12        0.69         0.50           0.03

BALANCE SHEET DATA (AT PERIOD END):
Total assets                      $769.5     $560.6      $282.9       $293.6         $ 82.6
Long-term debt (including current
  portion and short-term
  borrowings)                       97.5      229.6       250.2        276.4          134.2
Total stockholders' (deficit)
  equity                           360.5(4)   103.7       (10.8)       (25.4)         (67.6)
</TABLE>
                               
--------------
(1) Reflects the results of Flavors Holdings or its predecessor prior to 
    March 3, 1993.

                                      21
<PAGE>

(2) Reflects the combined results of Flavors Holdings and Cigar Holdings
    since March 3, 1993 (the first date that Flavors Holdings and Cigar
    Holdings were under the common control of Mafco Holdings).

(3) Reflects the assets and liabilities of Abex acquired in the Merger from
    June 15, 1995.

(4) Reflects the gains in 1996 on the Cigar IPO of $127.8 and the Flavors 
    Disposition of $151.7.

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

         The following should be read in conjunction with the financial
statements of the Company included elsewhere herein.

OVERVIEW

         The Company is the largest manufacturer and marketer of cigars sold
in the United States in terms of dollar sales, with a 1996 market share of
approximately 23% according to the Company's estimates. The Company markets
its cigar products under a number of well-known brand names at all price
levels and in all segments of the growing cigar market. The Company is also a
leading producer of pipe tobacco and is the largest supplier of private label
and branded generic pipe tobacco to mass market retailers. In addition, the
Company distributes a variety of pipe and cigar smokers' accessories. For the
year ended December 31, 1996, cigars accounted for approximately 92% of the
Company's net sales.

         The United States cigar industry experienced declining consumption
between 1964 and 1993 at a compound annual unit rate of 3.6% (and, with
respect to large cigar consumption, at a compound annual unit rate of 5.0%).
Recently, cigar smoking has gained popularity in the United States, resulting
in a significant increase in consumption and retail sales of cigars,
particularly for premium cigars. Management
believes that this increase in cigar consumption and retail sales is the
result of a number of factors, including: (i) the increase in the number of
adults over the age of 50 (a demographic group believed to smoke more cigars
than any other demographic segment) and (ii) the emergence of an expanding
base of younger affluent adults who have recently started smoking cigars and
who tend to smoke premium cigars. The growth in industry retail sales of
cigars has outpaced unit growth since 1991 primarily as a result of a
combination of increased prices and a shift in the sales mix to more expensive
cigars. There can be no assurance that unit consumption and retail sales of
cigars will continue to increase in the future.

         The increased demand for cigars, especially premium cigars, and the
shortage of experienced skilled laborers caused as a result thereof have
resulted in the Company's backorders 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 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 in 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 in 1997, the Company established new


                                      22
<PAGE>

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 increase 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 increase of $49.6 million or 19.0%. The increase in net sales
was primarily due to a $58.7 million increase in sales of cigar products from
$158.2 million in 1995 to $216.9 million in 1996, partially offset by a
decrease in sales reflecting the Flavors Disposition on November 25, 1996.
Cigar sales, particularly in 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 increase in
cigar unit volume.

         Cost of sales were $177.9 million and $154.0 million in 1996 and
1995, respectively, an increase of $23.9 million or 15.5%. The increase in
cost of sales for 1996 was primarily due to the increase in sales of cigars,
and increases in the costs of raw materials, partially offset by a decrease in
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% in
1995 primarily due to fixed manufacturing costs spread over increased
production volume.

         Selling, general and administrative ("SG&A") expenses were $54.2
million and $51.4 million in 1996 and 1995, respectively, an increase of $2.8
million or 5.4%. The increase was primarily due to increased 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 varies with sales volume. As a
percentage of net sales, SG&A expenses were 17.4% in 1996 and 19.7% in 1995.
The decrease primarily reflects SG&A expenses increasing at a lower rate
relative to the increase 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 increase if net sales
continues to increase.

         Interest expense was $24.6 million and $27.2 million in 1996 and
1995, respectively. The decrease of $2.6 million was due to a lower average
amount of debt outstanding in 1996 as compared to 1995.

                                      23
<PAGE>

         Interest and investment income was $13.0 million and $6.0 million in
1996 and 1995, respectively. The increase primarily reflects interest income
on invested cash acquired in connection with the Merger, the Cigar IPO and the
Flavors Disposition.

         Equity in earnings from continuing operations and preferred dividends
of PCT represents the Company's common equity interest in the continuing
operations of PCT since July 1995 and preferred dividends on the Company's
investment in PCT Preferred Stock from June 1995.

         Equity in discontinued operations of PCT, net of income taxes, was
$15.1 million and $1.3 million in 1996 and 1995. The increase reflects the
gain recorded by PCT on the sale of its aerospace business.

         The Company recorded gains of $151.7 million and $127.8 million in
1996 related to the Flavors Disposition and the Cigar IPO, respectively.

         The provision for income taxes as a percentage of income from
continuing operations before income taxes was 30.1% and 29.6% in 1996 and
1995, respectively. The increase in the effective rate is due to an increase
in income subject to U.S. taxation in 1996, partially offset by a tax benefit
associated with the Company's operations in Puerto Rico and a permanent
benefit on basis differences associated with the Flavors Disposition. In
addition, the 1995 tax provision also reflects a tax benefit associated with
the utilization of Consolidated Cigar's net operating loss carryforwards.

Year Ended December 31, 1995 Compared to the Year Ended December 31, 1994

         Net sales were $261.1 million and $226.9 million in 1995 and 1994,
respectively, an increase of $34.2 million or 15.1%. The increase in net sales
reflected a $26.7 million increase in sales of cigar products from $131.5
million in 1994 to $158.2 million in 1995 due primarily to an increase in
cigar unit volume and a sales mix shift to higher priced cigars and a $7.5
million or 7.9% increase in sales of flavorings due primarily to increased
U.S. and foreign shipment volume.

         Cost of sales were $154.0 million and $136.0 million in 1995 and
1994, respectively, an increase of $18.0 million or 13.2%. The increase in
cost of sales for 1995 was due primarily to the increase in sales. As a
percentage of sales, cost of sales decreased to 59.0% in 1995 from 59.9% in
1994, primarily due to fixed manufacturing costs spread over increased unit
volume and lower materials costs.

         SG&A expenses were $51.4 million and $37.9 million in 1995 and 1994,
respectively, an increase of $13.5 million or 35.6%. As a percentage of net
sales, SG&A expenses increased to 19.7% in 1995 from 16.7% in 1994. The
increase primarily reflects compensation, public company and other incremental
expenses incurred by the Company since the Merger and increased marketing and
selling expenses of the Company's operating businesses. A significant portion
of these marketing and selling expenses varies with sales volume. The Company
expects marketing and selling expenses of the Company's operating business to
continue to increase if net sales continue to increase, and expects to
continue to incur compensation costs in future periods.

         Interest expense was $27.2 million and $27.5 million in 1995 and
1994, respectively. The decrease of $0.3 million was due to a lower amount of
debt outstanding in 1995, partially offset by interest accretion on certain
liabilities assumed by the Company in the Merger.

                                      24
<PAGE>

         Interest and investment income was $6.0 million and $0.2 million in
1995 and 1994, respectively. The increase was primarily due to the investment
of assets acquired by the Company in connection with the Abex Transactions in
cash equivalents such as repurchase agreements, commercial paper, time
deposits and money market investments and dividend income on the PCT Preferred
Stock. The Company expects to continue to invest in cash equivalents and
marketable securities pending the use of its cash for general corporate
purposes, including acquisitions, and pursuant to its share repurchase
program.

         The provision for income taxes as a percentage of income from
continuing operations before income taxes was 29.6% and 31.4% in 1995 and
1994, respectively. Income tax expense in 1995 and 1994 reflects provisions
for federal income taxes, net of the tax benefit resulting from the
utilization of net operating loss carryforwards, along with state income and
franchise taxes. In addition, income tax expense includes a provision for
foreign taxes, Puerto Rico tollgate taxes and taxes on Puerto Rico source
income.

         Equity in discontinued operations of PCT, net of income taxes,
represents the Company's interest in the discontinued operations of PCT.

         In 1994, the Company recorded an extraordinary loss of $2.7 million,
net of a $1.7 million tax benefit, as a result of the June 1994 refinancing of
certain indebtedness. Prepayment premiums, original issue discounts and
certain other capitalized costs of the refinanced indebtedness were expensed
as such extraordinary loss.

LIQUIDITY AND CAPITAL RESOURCES

         Net cash flows provided by (used in) operating activities were
$(358.8) million, $6.1 million and $32.8 million for 1996, 1995 and 1994,
respectively. The decrease from 1995 to 1996 primarily reflects the use of the
proceeds from the Cigar IPO, Flavors Disposition and existing cash to purchase
trading securities partially offset by higher net income, excluding the
after-tax effect of the gain on the Cigar IPO and Flavors Disposition. The
decrease from 1994 to 1995 primarily reflects an increase in restricted
deposits, the payment of liabilities assumed in connection with the Merger and
a smaller decrease in inventories partially offset by increased net income.

         Cash flows from investing activities in 1996 consists primarily of
the proceeds from the Flavors Disposition partially offset by capital
expenditures. Cash flows from investing activities in 1995 consist primarily
of cash acquired in the Merger partially offset by cash used to finance the
purchase of PCT Common Stock from Libra.

         Capital expenditures were $7.0 million, $3.3 million and $2.7 million
for the years ended December 31, 1996, 1995 and 1994, respectively. Capital
expenditures in 1995 and 1994 primarily relate to manufacturing equipment and
are part of the continual maintenance and upgrading of the Company's
manufacturing facilities. The capital expenditures in 1996 relate primarily to
investments in the Company's manufacturing facilities to meet increased demand
for the Company's premium cigars, including expansion of its existing
manufacturing facilities in the Dominican Republic and Honduras and
construction, as part of a joint venture, of a new facility in Jamaica. For
1997, the Company plans to continue expanding its facilities in the Dominican
Republic and Honduras as well as add equipment to other facilities for a total
cost of approximately $4.0 million. In 1996, $0.5 million of cash flows was
also invested, as part of an equity investment, in the Jamaican joint venture.

                                      25
<PAGE>

         Cash flows from financing activities in 1996 reflects the proceeds of
$127.8 million from the Cigar IPO partially offset by net repayments of
borrowings of $22.5 million. Cash flows used for financing activities in 1995
reflect the repurchase of Company Common Stock for $29.9 million, net
repayments of borrowings of $20.6 million and dividends of $14.0 million paid
to Mafco Holdings immediately prior to the Merger. Cash flows used for
financing activities in 1994 primarily reflect repayments of borrowings of
$76.5 million and the issuance of long term debt of $50.0 million

         On February 5, 1996, MC Group entered into a reimbursement agreement
with Chemical Bank and PCT, through Pneumo Abex, under which MC Group has a
reimbursement obligation relating to letters of credit totaling $20.8 million
which have been issued to cover certain environmental issues, not related to
the aerospace business of PCT. To secure its obligation under such agreement,
MC Group pledged the PCT Preferred Stock and its ownership of 5,939,400 shares
of PCT Common Stock.

         In 1993 and 1994, Consolidated Cigar entered into two five-year
interest rate swap agreements in an aggregate notional amount of $85.0
million. Under the terms of the agreements, Consolidated Cigar receives a
fixed interest rate averaging approximately 5.8% and pays a variable interest
rate equal to the six-month London interbank offered rate (LIBOR).
Consolidated Cigar entered into such agreements to take advantage of the
differential between long-term and short-term interest rates and effectively
converted the interest rate on $85.0 million of fixed-rate indebtedness under
the Senior Subordinated Notes to a variable rate. From the inception of the
agreements through January 1997, Consolidated Cigar has paid $0.8 million in
settlement, which occurs at the end of each six month period of the
agreements. Had Consolidated Cigar terminated these agreements, which the
Company considers to be held for other than trading purposes, on January 31,
1997, the Company would have realized a combined loss of approximately $1.1
million. Future positive or negative cash flows associated with these
agreements will depend upon the trend of short-term interest rates during the
remaining life of the agreements. In the event of non-performance of the
counterparties at anytime during the remaining lives of these agreements,
which expire at December 1998 and January 1999, the Company could lose some or
all of any future positive cash flows. However, the Company does not
anticipate non-performance by such counterparties. The Company does not
currently anticipate terminating these agreements; however, the Company will
from time to time continue to review its financing alternatives with respect
to its fixed and floating rate debt.

         Consolidated Cigar intends to fund working capital requirements,
capital expenditures and debt service requirements for the foreseeable future
through cash flows from operations and borrowings under the Cigar Credit
Agreement. The terms of the Cigar Credit Agreement and the Senior Subordinated
Notes limit the payment of dividends or distributions to Cigar Holdings by
Consolidated Cigar to an amount (based on a formula set forth in the Senior
Subordinated Notes Indenture) equal to approximately $9.3 million as of
December 31, 1996.

         The Cigar Credit Agreement consists of a revolving credit facility
(the "Revolving Credit Facility") and a working capital facility (the "Working
Capital Facility"). The Revolving Credit Facility and the Working Capital
Facility have final maturities on April 3, 1999 and have no scheduled
amortization requirements. The Cigar Credit Agreement is secured by first
priority liens on all of the material assets of Consolidated Cigar and its
domestic subsidiaries and pledges of the capital stock of all of Consolidated
Cigar's subsidiaries (with certain exceptions for the capital stock of foreign
subsidiaries). Consolidated Cigar's obligations under the Credit Cigar
Agreement are guaranteed by Cigar Holdings and by all of the domestic
subsidiaries of Consolidated Cigar. The guarantee by Cigar Holdings will
continue to be secured by a pledge of all of the shares of common stock of
Consolidated 


                                      26
<PAGE>

Cigar owned by Cigar Holdings. The Cigar Credit Agreement also contains
various restrictive covenants including, among other things, limitations on
the ability of Consolidated Cigar and its subsidiaries to incur debt, create
liens, pay dividends, sell assets, and make investments, acquisitions and
capital expenditures. In addition, the Cigar Credit Agreement requires
Consolidated Cigar to maintain specified financial ratios and satisfy certain
tests, including maximum leverage ratios and minimum interest coverage ratios.
The Cigar Credit Agreement also contains customary events of default and
permits Consolidated Cigar to pay dividends and make distributions on terms
substantially similar to those contained in the Senior Subordinated Notes
Indenture. The Cigar Credit Agreement was amended on February 3, 1997 to
reduce the amount of various interest rate margins charged against outstanding
borrowings. As of December 31, 1996, there was approximately $25.7 million
unused and available under the Cigar Credit Agreement, after taking into
account approximately $1.7 million utilized to support letters of credit.

         Restricted cash of $14.6 million and $16.6 million included in other
assets at December 31, 1996 and 1995, respectively, reflects segregated cash
held for the benefit of certain parties to cover obligations related to
certain prior dispositions and certain environmental and insurance matters.

         On November 25, 1996, the Company sold to a subsidiary of PCT all of
the outstanding shares of Flavors Holdings and VSRs for an aggregate
consideration of $180 million in cash, the assumption of approximately $110.1
million of indebtedness and deferred cash payments to the Company of $3.7
million payable on June 30, 1997 and $3.5 million payable on December 31,
1997.

         On February 20, 1997, Mafco Consolidated Holdings entered into the
1997 Merger Agreement with MC Group whereby Mafco Consolidated Holdings will
acquire the remaining 15% of Company Common Stock that it does not already
own. Pursuant to the 1997 Merger Agreement, each share of Company Common Stock
(other than shares held by Mafco Consolidated Holdings) will be converted into
the right to receive $33.50, subject to upward adjustment. Additionally, on
February 20, 1997, in connection with the 1997 Merger Agreement, MC Group
declared a special cash dividend of $10 per share which was paid on March 14,
1997 to stockholders of record as of the close of business on March 10, 1997.
In addition, pursuant to the 1997 Merger Agreement the Company has agreed to
make cash payments aggregating $38.8 million in respect of outstanding stock
options.

         The Merger Consideration shall be equal to the sum of (x) $33.50 plus
(y) an amount, if any (the "Additional Amount"), equal to the Excess (as
defined below) multiplied by 79.7%. The Additional Amount shall be payable
only if the average of the per share closing prices (the "Average") of Cigar
Common Stock on the New York Stock Exchange for the ten trading days ending
two trading days prior to the effectiveness of the Merger, exceeds $33.00 (the
amount by which the Average exceeds $33.00, the "Excess"). MC Group
stockholders will be entitled to receive the Merger Consideration in cash,
without interest, upon surrender of the certificate formerly representing
shares of Cigar Common Stock.

         On March 26, 1997, Cigar Holdings completed a public offering (the
"Cigar Secondary Offering") of 5,000,000 shares of the Cigar Common Stock at
an offering price of $23.75 per share. All of the shares sold were owned by MC
Group. In addition, the underwriters have been granted an overallotment option
to purchase an additional 750,000 shares which as of the date hereof has not
been exercised.

         The Company expects to use the net cash proceeds from the Flavors
Disposition, the Cigar IPO, the Cigar Secondary Offering, and existing cash
for general corporate purposes, including the 


                                      27
<PAGE>

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 increases 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, in 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 in 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 United States federal
income 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 in Puerto Rico,
plus certain amounts of depreciation (the "Current Limitation"). The Company
believes 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 United 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
December 31, 2005, the possessions tax credit would be eliminated. The repeal
of the possessions tax credit could have a material adverse effect on the
Company for taxable years beginning after December 31, 2001 and before January
1, 2006, to the 


                                      28
<PAGE>

extent that the Company's annual income from its Puerto Rico operations
exceeds its average annual income from its Puerto Rico operations (as computed
in the manner described in the preceding sentence), and for taxable years
after December 31, 2005. Although it does not currently have any definitive
plans with respect thereto, the Company expects to evaluate alternatives that
may be available to it in order to mitigate the effects of the SBJPA. On
February 6, 1997, President Clinton proposed certain tax law changes which, if
enacted, would eliminate the Income Limitation, extend the possession tax
credit indefinitely and make the credit available to newly established
business operations.

         Puerto Rico Tax Exemption

         Pursuant to a grant of industrial tax exemption which expires in
2002, income earned by Congar International Corporation from the manufacture
of cigars in Puerto Rico enjoys a 90% income tax exemption from Puerto Rican
income taxes. The remaining 10% of such income is taxed at a maximum surtax
rate of 45%, resulting in an effective income tax rate for such income of
approximately 4.5% under current tax rates. Funds repatriated to the Company
are subject to a maximum Puerto Rican tollgate tax of 10%. Legislation enacted
in Puerto Rico in 1993 included a provision for prepaying a portion of these
tollgate taxes effective for the 1993 fiscal year and subsequent periods.
There can be no assurance that the Puerto Rico tax exemption will not be
limited or eliminated in the future. Any significant limitation on or
elimination of the Puerto Rico tax exemption would have a material adverse
effect on the Company. See Note H of the Notes to Consolidated Financial
Statements of the Company included elsewhere in this Report.

         Regulation

         Cigar manufacturers, like other producers of tobacco products, are
subject to regulation in the United States at the federal, state and local
levels. The recent trend is toward increasing regulation of the tobacco
industry. There can be no assurance as to the ultimate content, timing or
effect of any additional regulation of tobacco products by any federal, state,
local or regulatory body, and there can be no assurance that any such
legislation or regulation would not have a material adverse effect on the
Company's business.

FORWARD-LOOKING STATEMENTS

         The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. The forward-looking statements
contained in this Form 10-K are subject to certain risks and uncertainties.
Actual results could differ materially from current expectations. Among the
factors that could affect the Company's actual results and could cause results
to differ from those contained in the forward-looking statements contained
herein is the Company's ability to implement its business strategy
successfully, which will be dependent on business, financial, and other
factors beyond the Company's control, including, among others, prevailing
changes in consumer preferences, access to sufficient quantities of raw
materials, availability of trained laborers and changes in tobacco products
regulation. There can be no assurance that the Company will continue to be
successful in implementing its business strategy. Other factors could also
cause actual results to vary materially from the future results covered in
such forward-looking statements.

                                      29
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         See the Consolidated Financial Statements and supplementary data
listed in the accompanying Index to Consolidated Financial Statements and
Schedule on page F-1 herein. Information required by other schedules called
for under Regulation S-X is either not applicable or is included in the
consolidated financial statements or notes thereto.


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

         None

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth certain information (ages as of January 1,
1997) concerning the Directors and executive officers of the Company. All
Directors serve terms of one year or until the election of their respective
successors.

<TABLE>
<CAPTION>
NAME                                AGE  POSITION
-----                               ---  --------
<S>                                <C>  <C>                                                     
Ronald O. Perelman................   54  Chairman of the Board of Directors and a Director

Howard Gittis ....................   63  Vice Chairman and a Director

James R. Maher ...................   47  President, Chief Executive Officer and a Director

Irwin Engelman ...................   62  Executive Vice President and Chief Financial Officer

Barry F. Schwartz ................   47  Executive Vice President and General Counsel

Theo W. Folz .....................   53  President and Chief Executive Officer of Tobacco
                                         Products Group and a Director

Gary R. Ellis ....................   43  Senior Vice President and Chief Financial Officer of
                                         Tobacco Products Group

Philip E. Beekman ................   65  Director

Jewel S. Lafontant-Mankarious ....   73  Director

Drew Lewis .......................   65  Director
</TABLE>

         Mr. Perelman has been Chairman of the Board and a Director of the
Company since June 1995. Mr. Perelman has been Chairman of the Board and Chief
Executive Officer of Mafco Holdings and MacAndrews & Forbes Holdings Inc.
(together with Mafco Holdings, "MacAndrews & Forbes")

                                      30
<PAGE>

and various of their affiliates since 1980. Mr. Perelman also is Chairman of
the Board of Andrews Group Incorporated ("Andrews Group"), Cigar Holdings,
Meridian Sports Incorporated ("Meridian Sports") and PCT and is the Chairman
of the Executive Committee of the Boards of Directors of Marvel Entertainment
Group, Inc. ("Marvel"), Revlon Consumer Products Corporation ("Revlon
Products") and Revlon, Inc. ("Revlon"). Mr. Perelman is a Director of the
following corporations which file reports pursuant to the Securities Exchange
Act of 1934, as amended (the "Exchange Act"): Andrews Group, Cigar Holdings,
The Coleman Company, Inc. ("Coleman"), Coleman Holdings Inc., Coleman
Worldwide Corporation ("Coleman Worldwide"), Consolidated Cigar, California
Federal Bank, a Federal Savings Bank ("California Federal"), First Nationwide
Holdings, Inc. ("First Nationwide Holdings"), First Nationwide (Parent)
Holdings Inc. ("First Nationwide Parent"), Marvel, Marvel Holdings Inc.
("Marvel Holdings"), Marvel (Parent) Holdings Inc. ("Marvel Parent"), Marvel
III Holdings Inc. ("Marvel III"), Meridian Sports, PCT, Pneumo Abex, Revlon,
Inc., Revlon Products, Revlon Worldwide Corporation ("Revlon Worldwide") and
Toy Biz. (On December 27, 1996, Marvel Holdings, Marvel Parent, Marvel III and
Marvel and several of its subsidiaries filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.)

         Mr. Gittis has been Vice Chairman and a Director of the Company since
June 1995. Mr. Gittis has been Vice Chairman and a Director of MacAndrews &
Forbes and various of its affiliates since 1985. Mr. Gittis is a Director of
the following corporations which file reports pursuant to the Exchange Act:
Andrews Group, Cigar Holdings, Consolidated Cigar, California Federal, First
Nationwide Holdings, First Nationwide Parent, Jones Apparel Group, Inc., Loral
Space and Communications Ltd., PCT, Pneumo Abex, Revlon Worldwide, Revlon,
Revlon Products and Rutherford-Moran Oil Corporation.

         Mr. Maher has been President, Chief Executive Officer and a Director
of the Company since June 1995. Mr. Maher was Chairman of the Board of
Laboratory Corporation of America Holdings, a clinical laboratory company,
from 1995 to April 1996 and was President and Chief Executive Officer of
National Health Laboratories Holdings Inc., a clinical laboratory company,
from 1992 to 1995. Mr. Maher was Vice Chairman of The First Boston
Corporation, an investment bank, from 1990 to 1992 and Managing Director of
The First Boston Corporation from 1982 to 1990. Mr. Maher is a Director of
First Brands Corporation, which files reports pursuant to the Exchange Act.

         Mr. Engelman has been the Executive Vice President and Chief
Financial Officer of the Company since June 1995 and has been the Executive
Vice President and Chief Financial Officer of MacAndrews & Forbes and various
of its affiliates since February 1992. Mr. Engelman was Executive Vice
President, Chief Financial Officer and Director of GAF Corporation, a
specialty chemical and building materials company, from 1990 to February 1992.
Mr. Engelman was President and Chief Operating Officer of Citytrust Bancorp
Inc. from 1988 to 1990; Executive Vice President of the Blackstone Group LP
from 1987 to 1988; and Executive Vice President of General Foods Corporation
for more than five years prior to 1987. (On December 27, 1996, Marvel
Holdings, Marvel Parent and Marvel III, of which Mr. Engelman is an executive
officer, and several subsidiaries filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code.)

         Mr. Schwartz has been Executive Vice President and General Counsel of
the Company since June 1995. He has been Executive Vice President and General
Counsel of MacAndrews & Forbes and various of its affiliates since 1993. Mr.
Schwartz was Senior Vice President of MacAndrews & Forbes from 1989 to 1993.
(On December 27, 1996, Marvel Holdings, Marvel Parent and Marvel III, of which
Mr. Schwartz is an executive officer, and several subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the United States Bankruptcy
Code.)

                                      31
<PAGE>

         Mr. Folz has been President and Chief Executive Officer of the
Tobacco Products Group and a Director of the Company since June 1995. Mr. Folz
has been a Director and President and Chief Executive Officer of Cigar
Holdings since June 1996, Consolidated Cigar since August 1984 and Vice
Chairman, Director and Chief Executive Officer of Pneumo Abex since January
1995. Mr. Folz is a Director of PCT, which files reports pursuant to the
Exchange Act.

         Mr. Ellis has been Senior Vice President and Chief Financial Officer
of the Tobacco Products Group of the Company since June 1995. Mr. Ellis has
been Senior Vice President, Chief Financial Officer and Treasurer of Cigar
Holdings since June 1996 and Consolidated Cigar since November 1988. From 1987
to 1988, Mr. Ellis was the Executive Vice President, Chief Financial Officer
and Treasurer of Brooks Drug, Inc. and from 1985 to 1987, he was the Vice
President and Controller of MacAndrews & Forbes Holdings.

         Mr. Beekman has been a Director of the Company since June 1995. Mr.
Beekman has been President of Owl Hollow Enterprises, a consulting and
investment company, for more than the past five years. Prior to that time Mr.
Beekman was Chairman of the Board of Directors and Chief Executive Officer of
Hook-SuperRx, Inc. Mr. Beekman also is a Director of Fisher Scientific
International Inc. which files reports pursuant to the Exchange Act.

         Ms. LaFontant-Mankarious has been a Director of the Company since
June 1995. Ms. LaFontant-Mankarious has been a Partner in the law firm of
Holleb & Coff since 1993. From 1989 to 1993, Ms. LaFontant-Mankarious was a
United States Ambassador-at-Large. Ms. LaFontant-Mankarious also is a Director
of Trans World Airlines, Inc.

         Mr. Lewis has been a Director of the Company since May 1996. Mr.
Lewis has been Chairman and Chief Executive Officer of Union Pacific
Corporation, a diversified holding company, since 1994 and, for more than five
years prior to such date, was President and Chief Executive Officer of Union
Pacific Corporation ("Union Pacific"). Mr. Lewis also is a Director of the
following corporations which file reports pursuant to the Exchange Act:
American Express Company, Ford Motor Company, FPL Group, Inc., Gannett Co.,
Inc., Lucent Technologies Inc., Union Pacific and Union Pacific Resources
Group.

COMMITTEES OF THE BOARD OF DIRECTORS

         The Company has established an Executive Committee consisting of
Messrs. Perelman, Gittis and Maher, an Audit Committee consisting of Mr.
Beekman and Ms. LaFontant-Mankarious and a Compensation Committee consisting
of Mr. Gittis and Ms. LaFontant-Mankarious.

         The Executive Committee has all powers and rights necessary to
exercise the full authority of the Board of Directors in the management of the
business and affairs of the Company when necessary in between meetings of the
Board of Directors.

         The Compensation Committee has the responsibility of reviewing the
performance of the executive officers of the Company and recommending to the
Board of Directors of the Company annual salary and bonus amounts for all
officers of the Company.

         The Audit Committee has the responsibility of reviewing and
supervising the financial controls of the Company. The Audit Committee's
responsibilities include (i) making recommendations to the 


                                      32
<PAGE>

Board of Directors of the Company with respect to the Company's financial
statements and the appointment of independent auditors, (ii) reviewing
significant audit and accounting policies and practices of the Company, (iii)
meeting with the Company's independent public accountants concerning,
among other things, the scope of audits and reports and (iv) reviewing the
performance of overall accounting and financial controls of the Company.

COMPENSATION OF DIRECTORS

         Directors who do not receive compensation as officers or employees of
the Company or any of its affiliates will be paid an annual retainer fee of
$25,000 and a fee of $1,000 for each meeting of the Board of Directors or any
committee thereof they attend, plus reasonable out-of-pocket expenses.

         On July 22, 1996, the Company granted options to acquire 750,000
shares of Company Common Stock to Mr. Perelman for services rendered and to be
rendered to the Company by Mr. Perelman in his capacity as Chairman of the
Board of Directors. Such options have an exercise price of $21.50 per share
(market price on the date of grant) and vest with respect to one third of the
shares subject to the options on the date of grant, and with respect to an
additional one third of such shares on each of July 22, 1997 and July 22,
1998. The options expire on July 22, 2006.

                                      33
<PAGE>


ITEM 11.  EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

         The following table presents certain information concerning
compensation paid or accrued for services rendered to the Company in all
capacities during the three years ended December 31, 1996 for the Chief
Executive Officer and the two other executive officers of the Company whose
total annual salary and bonus in the last fiscal year exceeded $100,000
(collectively, the "Named Executive Officers").

                          SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                           ANNUAL COMPENSATION
                                         ----------------------------------------------------------
                                                                                          SECURITIES
                                                                             OTHER        UNDERLYING      ALL OTHER
                                                  SALARY       BONUS         ANNUAL         OPTIONS      COMPENSATION
NAME AND PRINCIPAL POSITION              YEAR       ($)         ($)       COMPENSATION       (#)(B)           ($)
---------------------------              ----       ---         ---       ------------       ------           ---
<S>                                     <C>    <C>          <C>             <C>            <C>           <C>
James R. Maher
  President and Chief                    1996   1,000,000    4,972,685(a)                   750,000       1,843,750(c)
  Executive Officer                      1995     500,000    1,250,000                      750,000       1,843,750(c)

Theo W. Folz
  President and Chief Executive          1996   1,072,500(d) 1,487,750(d)    51,243(e)      100,000           3,000(f)
  Officer of Tobacco Products            1995   1,000,000    1,000,000                                        3,000(f)
  Group                                  1994     675,000      400,000                                        3,000(f)

Gary R. Ellis
  Senior Vice President and              1996     217,500      326,250                                        3,000(f)
  Chief Financial Officer of             1995     200,000      200,000                                        3,000(f)
  Tobacco Products Group                 1994     185,000      100,000                                        3,000(f)
</TABLE>
      
____________

(a)      Includes a performance bonus of $500,000, deferred bonus of
         $1,500,000 and a transaction bonus of $2,972,685. See "-- Employment
         Agreements".

(b)      Excludes options granted pursuant to Cigar's 1996 Stock Option Plan.

(c)      Represents that portion of the special payment that vested in 1996
         and 1995 under Mr. Maher's employment agreement with the Company,
         assuming that Mr. Maher becomes entitled to the maximum amount
         payable under his employment agreement. See "--Employment
         Agreements."

(d)      Reflects portion of Mr. Folz's employment agreement assumed by
         Consolidated Cigar for 1996 and portion of Mr. Folz's employment
         agreement paid by Pneumo Abex through November 25, 1996, the date of
         the Flavors Disposition.

(e)      Represents perquisites and other personal benefits, which, in total,
         are valued in excess of $50,000 of which $39,046 was related to the
         personal use of a company automobile.

(f)      Represents the Company's contribution to the employee's account under
         Consolidated Cigar's 401(k) plan.

                                      34
<PAGE>


OPTION GRANTS IN LAST FISCAL YEAR

         The following table contains information concerning the grant of
stock options under the Mafco Consolidated Group Inc. 1995 Stock Option Plan
to Mr. Folz in 1996. No option grants were made to the other Named Executive
Officers in 1996.

<TABLE>
<CAPTION>
                                                                                     GRANT DATE
                                   INDIVIDUAL GRANT (A)                               VALUE (B)
                 ------------------------------------------------------------       -------------
                    NUMBER OF       PERCENT OF TOTAL 
                   SECURITIES       OPTIONS GRANTED  EXERCISE OR  
                   UNDERLYING        TO EMPLOYEES     BASE PRICE   EXPIRATION        GRANT DATE
   NAME          OPTIONS GRANTED        IN 1996         ($/SH)        DATE          PRESENT VALUE
   ----          ---------------        -------         ------        ----          -------------
<S>                <C>                   <C>           <C>       <C>                 <C>       
Theo W. Folz        100,000(c)            80%           $22.00    June 25, 2006       $1,012,000
</TABLE>
                                 
------------
(a)      No stock appreciation rights were granted by the Company in 1996.

(b)      Present values were calculated using the Black-Scholes option pricing
         model. The model as applied used the grant date of June 25, 1996 and
         the exercise price per share specified in the table above was equal
         to the fair market value per share of Common Stock on the date of
         grant. The model also assumes (i) risk-free rate of return of 6.52%
         which was the rate as of the grant date for the U.S. Treasury Zero
         Coupon Bond issues with a remaining term similar to the expected term
         of the option, (ii) stock price volatility of .497 based upon
         historical price analysis, (iii) a constant dividend rate of zero
         percent and (iv) that the options normally would be exercised on the
         final day of the fourth year after grant. No discount from the
         theoretical value was taken to reflect the waiting period, if any,
         prior to vesting of the stock options, the restrictions on the
         transfer of the stock options and the likelihood that the stock
         options will be exercised in advance of the final day of their term.

(c)      Such stock options have a term of ten years and vest one third upon
         the date of grant and one third on each of the first and second
         anniversaries of the date of grant.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION 
VALUES

         The following table provides information with respect to options
exercised by Named Executive Officers of the Company during 1996 and the
number and value of securities underlying unexercised options held by the
Named Executive Officers of the Company on December 31, 1996. No options were
held by the other Named Executive Officers on December 31, 1996.

                                      35
<PAGE>


                AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                       AND FISCAL YEAR END OPTION VALUES

<TABLE>
<CAPTION>
                                                               UNDERLYING                        VALUE OF UNEXERCISED
                                                           UNEXERCISED OPTIONS                   IN-THE-MONEY OPTIONS
                      SHARES                              AT FISCAL YEAR END(#)                AT FISCAL YEAR END($)(A)
                    ACQUIRED ON        VALUE         ------------------------------         ------------------------------
NAME                EXERCISE(#)      REALIZED($)     EXERCISABLE       UNEXERCISABLE        EXERCISABLE      UNEXERCISABLE
----                -----------      -----------     -----------       -------------        -----------      -------------
<S>                                                    <C>                <C>                <C>               <C>       
James R. Maher          --               --            500,000            250,000            $4,000,000        $2,000,000
Theo W. Folz            --               --             33,333             66,667               112,499           225,001
</TABLE>
                      
------------
(a)      Amounts shown represent the market value of the underlying Company
         Common Stock at year end calculated using the December 31, 1996 NYSE
         closing price per share of Company Common Stock of $25 3/8 minus the
         exercise price of the stock option. The actual value, if any, an
         executive may realize is dependent upon the amount by which the
         market price of the Company Common Stock exceeds the exercise price
         when the stock options are exercised. The actual value realized may
         be greater or less than the value shown in the table.

PERFORMANCE BONUS PLAN

         The Company has a performance bonus plan (the "Performance Bonus
Plan") for senior executive officers of the Company. The Performance Bonus
Plan provides for the payment of cash compensation upon the achievement of
predetermined individual and corporate performance goals during the calendar
year. The Performance Bonus Plan is administered by the Compensation
Committee. The Compensation Committee has the full power to select the senior
executive officers for participation in the Performance Bonus Plan and to
establish the performance goals for each senior executive officer in the
Performance Bonus Plan. Such performance goals will be based upon achievement
of operating results targets. Compensation payable under the Performance Bonus
Plan is intended to qualify as "performance based compensation" under Section
162(m) of the Code. The payments under the Performance Bonus Plan to any one
individual during any calendar year may not exceed $500,000. See "--Employment
Agreements."

TRANSACTION BONUS PLAN

         The Company has a performance bonus plan (the "Transaction Bonus
Plan") for the Company's Chief Executive Officer. The Transaction Bonus Plan
provides for the payment of cash compensation to the Company's Chief Executive
Officer for achieving certain performance goals relating to the consummation
of acquisitions of businesses, divestitures of businesses or the value of any
acquisitions and/or divestitures consummated during the applicable performance
period. The Transaction Bonus Plan is administered by the Compensation
Committee. Compensation payable under the Transaction Bonus Plan is intended
to qualify as "performance based compensation" under Section 162(m) of the
Code. The payments under the Transaction Bonus Plan may not exceed an
aggregate maximum of $4,000,000. In connection with the Flavors Disposition,
the Company's Chief Executive Officer received a payment of approximately
$3,000,000 under the Transaction Bonus Plan. See "--Employment Agreements."

                                      36
<PAGE>

CONSOLIDATED CIGAR PERFORMANCE BONUS PLAN

         The Company has adopted the Consolidated Cigar Performance Bonus
Plan. Compensation payable under the Consolidated Cigar Performance Bonus Plan
is intended to qualify as "performance based compensation" under Section
162(m) of the Code. Senior executive officers of Cigar Holdings and
Consolidated Cigar, selected for participation in the Consolidated Cigar
Performance Bonus Plan by the Compensation Committee, will be entitled to
participate in the Consolidated Cigar Performance Bonus Plan. The performance
goals under the Consolidated Cigar Performance Bonus Plan will be based on
achievement of EBITDA targets established by the Compensation Committee with
respect to each calendar year. The payments under the Consolidated Cigar
Performance Bonus Plan to any one individual during any calendar year may not
exceed $2,000,000. See "--Employment Agreements."

DEFINED BENEFIT PLAN

         Domestic (United States) salaried employees of Consolidated Cigar are
eligible to participate in the Consolidated Cigar Domestic Salaried Employees'
Defined Benefit Plan, a defined benefit pension plan (the "Plan"), which,
effective as of the end of 1995, was merged into a defined benefit pension
plan sponsored by a subsidiary of the Company. The merger of the Plan did not
change the level of pension benefits provided to Consolidated Cigar employees.
Plan benefits are a factor of service (up to a maximum of 33 years) with
Consolidated Cigar and Average Final Compensation (average monthly
compensation during the 60 consecutive months in which compensation was
highest in the 10 years prior to termination of employment). Compensation
includes total wages, overtime, bonuses and 401(k) salary deferrals, and
excludes fringe benefits and employer contributions to other deferred
compensation plans.
 Benefits in the Plan are reduced by (i) any annuity purchased under the Gulf
& Western Consumer Products Salaried Employees Retirement Plan (the "Gulf &
Western Plan") as of March 8, 1983 and (ii) the actuarial equivalent of any
Consolidated Cigar-provided benefits received under the Consolidated Cigar's
401(k) plan.

         The Company established a benefit restoration plan effective January
1, 1994 (the "BRP") which was designed to restore retirement benefits to those
employees whose eligible pension earnings were limited to $150,000 under
regulations recently enacted by the Internal Revenue Service. The BRP is not
funded and all other vesting and payment rules follow the Plan.

         Beginning in 1996, the annual payment under the Plan and BRP,
expressed as a straight life annuity, before adjustment for social security
beginning at age 65 and before reduction for the benefits payable under the
Gulf & Western or the Company's 401(k) plan, is as follows:

<TABLE>
<CAPTION>

                                                           YEARS OF SERVICE
                               --------------------------------------------------------------------------- 
REMUNERATION                       5           10            15           20           25            35
------------                   --------      -------       -------     --------     ---------      -------
<C>                           <C>          <C>           <C>          <C>           <C>          <C>     
$  50,000...............      $  3,788     $  7,575      $ 11,363     $ 15,150      $ 18,938     $ 25,000
   75,000...............         5,681       11,363        17,044       22,725        28,406       37,500
  100,000...............         7,575       15,150        22,725       30,300        37,875       50,000
  125,000...............         9,469       18,938        28,406       37,875        47,344       62,500
  150,000...............        11,363       22,725        34,088       45,450        56,813       75,000
  175,000...............        13,256       26,513        39,769       53,025        66,281       87,500
  200,000...............        15,150       30,300        45,450       60,600        75,750      100,000
  225,000...............        17,044       34,088        51,131       68,175        85,219      112,500
  250,000...............        18,938       37,875        56,813       75,750        94,688      125,000
  300,000...............        22,725       45,450        68,175       90,900       113,625      150,000
  400,000...............        30,300       60,600        90,900      121,200       151,500      200,000
  450,000...............        34,088       68,175       102,263      136,350       170,438      225,000
  500,000...............        37,875       75,750       113,625      151,500       189,375      250,000
</TABLE>

                                      37
<PAGE>

         Benefits under the Plan are subject to the maximum limitations
imposed by federal law on pension benefits. The annual limitation in 1996 was
$120,000 or $10,000 per month, based on a maximum annual compensation of
$150,000. The maximum annual remuneration considered for purposes of the BRP
was $500,000 in 1996.

         As of December 31, 1996, the credited years of service were thirteen
years for Mr. Folz, eight years for Mr. Ellis and one year for Mr. Maher.

EMPLOYMENT AGREEMENTS

         The Company entered into an employment agreement (the "CEO Employment
Agreement") with Mr. Maher with respect to an employment term commencing on
July 1, 1995 and ending on June 30, 1998. Under the CEO Employment Agreement,
Mr. Maher has agreed to serve as the Company's President and Chief Executive
Officer at a base salary of $1,000,000 per year. Mr. Maher received a one-time
bonus of $1,000,000 upon execution of the CEO Employment Agreement. In
addition, during the term of the CEO Employment Agreement Mr. Maher will earn
a deferred bonus of $1,500,000 per year, which will be paid upon the later of
the expiration of the term of the CEO Employment Agreement and the date Mr.
Maher ceases to be a "covered employee" under Section 162(m) of the Code. Mr.
Maher also participates in the Performance Bonus Plan and the Transaction
Bonus Plan and is entitled to receive certain stock options. The CEO
Employment Agreement also grants Mr. Maher the right to receive a special
payment, which right vests one-third on December 1, 1995, one-third on July 1,
1996 and one-third on July 1, 1997. The special payment will be paid upon the
later of the expiration of the term of the CEO Employment Agreement and the
date Mr. Maher ceases to be a "covered employee" under Section 162(m) of the
Code. The amount of the special payment will equal the product of (i) the
difference between (A) the lower of (x) $17.375 and (y) the price of a share
of Company Common Stock on the date of payment and (B) $10.00 and (ii)
750,000, up to a maximum of approximately $5.5 million.
 Mr. Maher also receives certain benefits, including the use of an automobile,
participation in the Company's retirement and welfare plans, life insurance
coverage equal to four times his base salary, health benefits coverage with
100% reimbursement of the reasonable and customary expenses incurred by Mr.
Maher, his spouse and his dependents, and use of an aircraft, pursuant to the
CEO Employment Agreement. Upon the death, disability or termination of Mr.
Maher by the Company without cause (as defined in the CEO Employment
Agreement), termination by Mr. Maher for good reason (as defined in the CEO
Employment Agreement) or following a "change in control" (as defined below),
Mr. Maher will receive: (i) a lump sum accelerated payment of the amount of
the base salary, deferred bonuses and performance bonuses otherwise payable
during the remainder of the term of the CEO Employment Agreement (these
payments will not be less than $3,000,000 in total); (ii) a payment of all
transaction bonuses otherwise payable during the remainder of the term of the
CEO Employment Agreement; (iii) a gross-up for any excise tax imposed on
excess parachute payments under the Code; (iv) vesting of stock options and
the special payment; and (v) continued welfare benefits for Mr. Maher and his
dependents for the remainder of the term of the CEO Employment Agreement. Upon
the termination of employment of Mr. Maher by the Company for cause or by Mr.
Maher otherwise than as described above, Mr. Maher will receive: (i) no
further base salary; (ii) a pro rata performance bonus for the year of
termination; (iii) in case of termination for cause only, a lump sum
accelerated payment of deferred bonuses for the remainder of the term of the
CEO Employment Agreement; and (iv) transaction bonuses for the remainder of
the term of the CEO Employment Agreement. Under the CEO Employment Agreement,
a "change in control" of the Company means the failure of Ronald O. Perelman
or his affiliated entities to beneficially own 25% or more of the voting power
of the Company's voting securities, or 


                                      38
<PAGE>

some other person and its affiliates owning more than 50% of the voting power 
of the Company's voting securities.

         The Company entered into an employment agreement (the "Folz
Employment Agreement") with Mr. Folz with respect to an employment term
commencing on July 1, 1995 and ending on December 31, 1998, unless sooner
terminated by Mr. Folz's death, disability, gross neglect or willful
misconduct (in which case the Company may terminate Mr. Folz's employment
immediately upon written notice), or the Company's breach of the Folz
Employment Agreement. In the event of Mr. Folz's death or disability, a pro
rated performance bonus and 60% of his base compensation is to be paid to Mr.
Folz or his beneficiaries, as the case may be, for the longer of the remaining
term of the Folz Employment Agreement or twelve months. In the event that the
Company breaches the Folz Employment Agreement, Mr. Folz is entitled to
terminate his employment under the agreement; in that event, a pro-rated
performance bonus and the remaining base compensation specified in the
agreement is to be paid to Mr. Folz offset by any other compensation Mr. Folz
receives during this period, and Mr. Folz is entitled to group life, health
and pension plan coverage for the remaining term of the Folz Employment
Agreement or, if longer and if no non-renewal notice has been given by the
Company prior to that time, twelve months. The Folz Employment Agreement
provided for an initial annual base salary of $1 million. As of August 1,
1996, for the services to be rendered by Mr. Folz to Cigar Holdings and
Consolidated Cigar, Consolidated Cigar has assumed the obligations of the
Company under the Folz Employment Agreement with respect to a portion of the
base salary and employee benefits to be provided to Mr. Folz under the Folz
Employment Agreement and, simultaneously therewith, has entered into a new
employment agreement with Mr. Folz memorializing such assumption and expiring
on December 31, 1999. After December 31, 1998, Consolidated Cigar may give
notice of non-renewal, in which case the term of the agreement will be
extended for a period of twelve months following such notice. From and after
January 1, 2000, the term will be automatically extended day-by-day until
Consolidated Cigar gives notice of non-renewal, in which case the term will be
extended for a period of twelve months. Consolidated Cigar has assumed 70% of
the obligations of the Company under the Folz Employment Agreement with
respect to any payments or benefits payable upon Mr. Folz's severance, death
or disability. The base salary paid by Consolidated Cigar to Mr. Folz was
$770,000 for the year ended December 31, 1996. In addition, subject to
approval by stockholders of Consolidated Cigar, Mr. Folz is eligible to
receive annual performance bonus payments under the Consolidated Cigar
Performance Bonus Plan. See "-- Consolidated Cigar Performance Bonus Plan".
The Folz Employment Agreement includes compensation for his duties as Chief
Executive Officer of Mafco Worldwide. The portion allocable to Mafco Worldwide
through November 25, 1996, the date of the Flavors Disposition, was reimbursed
by Mafco Worldwide and is included in the compensation table above.

         Consolidated Cigar entered into an employment agreement with Mr.
Ellis (the "Ellis Employment Agreement") with respect to an employment term
commencing July 1, 1995 and ending on December 31, 1999, unless sooner
terminated by Mr. Ellis' death, disability (in which case Consolidated Cigar
may elect to terminate the employment agreement), gross neglect or willful
misconduct (in which case Consolidated Cigar may terminate the employment
agreement immediately upon written notice) or Mr. Ellis' willful and material
failure to perform his contractual obligations or by Consolidated Cigar's
material breach of the Ellis Employment Agreement. After December 31, 1998,
Consolidated Cigar may give notice of non-renewal, in which case the term of
the agreement will be extended for a period of twelve months following such
notice. From and after January 1, 2000, the term will be automatically
extended day-by-day until Consolidated Cigar gives notice of non-renewal, in
which case the term will be extended for a period of twelve months. In the
event that Consolidated Cigar breaches the Ellis Employment Agreement, Mr.
Ellis is entitled to terminate the 


                                      39
<PAGE>

employment agreement; in that event, base salary, performance bonuses and
benefits are to be paid to Mr. Ellis for the remaining term of the Ellis
Employment Agreement or, if longer and if no non-renewal notice has been given
by the Company prior to that time, twelve months, offset by any other
compensation Mr. Ellis receives during this period. The Ellis Employment
Agreement provides for an initial annual base salary of $217,500 for Mr.
Ellis. The Employment Agreement also provides, subject to approval by
stockholders of Consolidated Cigar, for annual performance bonus payments,
subject to an annual maximum of $1 million, based on achievement by
Consolidated Cigar of certain EBITDA targets, which bonus payments shall be
made pursuant to the Consolidated Cigar Performance Bonus Plan, as set forth
in the Ellis Employment Agreement.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         During 1996, Mr. Gittis and Ms. LaFontant-Mankarious served as members
of the Compensation Committee.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth, as of March 28, 1997, the total
number of shares of Company Common Stock beneficially owned, and the percent
so owned, by each Director of the Company, by each person known to the Company
to be the beneficial owner of more than 5% of the outstanding Company Common
Stock, by each Named Executive Officer and by all Directors and executive
officers of the Company as a group.

                                          NUMBER OF SHARES
                                            BENEFICIALLY          PERCENTAGE
         BENEFICIAL OWNER                     OWNED(A)             OF CLASS 
         ----------------                     --------             -------- 
         Ronald O. Perelman(b)               20,027,752               85%
           35 East 62nd Street
           New York, New York 10021
         James  R. Maher(c)                     500,000                2%
         Philip E. Beekman                        5,000                *
         Howard Gittis                            5,000                *
         Drew Lewis                               2,000                *
         Barry F. Schwartz                        3,000                *
         Theo W. Folz(d)                         33,334                *
         Gary R. Ellis                            1,000                *
         All directors and executive officers
           as a group (10 persons)(e)(f)     20,577,086               86%
  
------------

*        Less than 1%

(a)      Shares of Company Common Stock that an individual or group has a
         right to acquire within 60 days after March 28, 1997 pursuant to the
         exercise of options, warrants or other rights are deemed to be
         outstanding 


                                      40
<PAGE>

         for the purpose of computing the percentage ownership of such 
         individual or group, but are not deemed to be outstanding for the 
         purpose of computing the percentage ownership of any other person
         shown in the table.

(b)      All but 250,000 of such shares of Company Common Stock are indirectly
         owned by Mr. Perelman through Mafco Holdings. The remaining 250,000
         shares represent shares of Company Common Stock as to which Mr.
         Perelman has the right to acquire beneficial ownership upon the
         exercise of stock options. All of the shares of Company Common Stock
         owned by Mafco Holdings are, and shares of intermediate holding
         companies may from time to time be, pledged to secure obligations of
         Mafco Holdings or its affiliates.

(c)      Represents shares of Company Common Stock as to which Mr. Maher has 
         the right to acquire beneficial ownership upon the exercise of stock 
         options.

(d)      Represents shares of Company Common Stock as to which Mr. Folz has the
         right to acquire beneficial ownership upon the exercise of stock 
         options.

(e)      Includes 250,000, 500,000 and 33,334 shares of Company Common Stock
         as to which Messrs. Perelman, Maher and Folz, respectively, have the
         right to acquire beneficial ownership upon the exercise of stock
         options.

(f)      Neither Ms. LaFontant-Mankarious, who is a Director of the Company, 
         nor Mr. Engelman, Executive Vice President and Chief Financial Officer
         of the Company, beneficially owns any shares of Company Common Stock.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RELATIONSHIP WITH MAFCO HOLDINGS

         Mafco Holdings currently indirectly owns approximately 85% of the
outstanding shares of Company Common Stock. Mafco Holdings is wholly owned by
Ronald O. Perelman. As a result of Mafco Holdings' stock ownership, the
Company's Board of Directors is, and is expected to continue to be, comprised
entirely of designees of Mafco Holdings, and Mafco Holdings is, and is
expected to continue to be, able to direct and control the policies of the
Company and its subsidiaries, including with respect to mergers, sales of
assets and similar transactions.

         Mafco Holdings is a diversified holding company with interests in
several industries. Through its 83% ownership of Revlon, Mafco Holdings is
engaged in the cosmetics and skin care, fragrance and personal care products
business. Mafco Holdings owns 83% of Coleman, which is engaged in the
manufacture and marketing of recreational outdoor products, portable
generators, power-washing equipment, spas and hot tubs and 65% of Meridian
Sports, a manufacturer and marketer of specialized boats and water sports
equipment. Marvel, a youth entertainment company, is 80% owned by Mafco
Holdings. Mafco Holdings is also engaged through its 85% ownership of the
Company, in the manufacture and distribution of cigars and pipe tobacco and
through its 36% beneficial ownership of PCT, Mafco Holdings is engaged in the
processing of licorice and other flavors . Mafco Holdings also is in the
financial services business through its 80% ownership of California Federal.
The principal executive offices of Mafco Holdings are located at 35 East 62nd
Street, New York, New York 10021.

         Employees of affiliates of the Company provide services to the
Company in connection with insurance and legal services, benefit plan
administration and other services and the Company reimburses such affiliates
for the allocated share of the costs related to such employees. In 1996 and


                                      41
<PAGE>

1995, the amount allocated to the Company was $624,549 and $436,414,
respectively. The Company believes that the terms of such allocated services
are at least as favorable to the Company as would be available from
unaffiliated third parties.

         Included in accrued expenses and other liabilities are payables to
Mafco Holdings and affiliates in the amount of $39.1 million and $2.0 million
at December 31, 1996 and 1995, respectively, principally related to income
taxes payable to Mafco Holdings pursuant to a tax sharing agreement. See "Tax
Sharing Agreement" below.

TAX SHARING AGREEMENT

         The Company and certain of its domestic subsidiaries (including
Consolidated Cigar) (the "Company Group") have been, for federal income tax
purposes, members of an affiliated group of corporations of which Mafco
Holdings is the common parent (the "Mafco Holdings Group"). Accordingly, the
Company Group has been included in the consolidated federal income tax returns
and, to the extent permitted by applicable law, included in combined state or
local income tax returns filed on behalf of the old Mafco Holdings Group.
Pursuant to a tax sharing agreement (the "Mafco Consolidated Tax Sharing
Agreement") between the Company and Mafco Holdings, the Company is required to
pay to Mafco Holdings with respect to each taxable year an amount equal to the
consolidated federal and state and local income taxes that would have been
incurred by the Company Group had it not been included in the consolidated
federal and any combined state or local income tax returns filed by the Mafco
Holdings Group. Pursuant to a tax sharing agreement (the "Subsidiary Tax
Sharing Agreement") between the Company and Consolidated Cigar, Consolidated
Cigar is required to pay to the Company with respect to each taxable year an
amount equal to the consolidated federal and state and local income taxes that
would have been incurred by Consolidated Cigar had it not been included in the
consolidated federal and any combined state or local income tax returns filed
by the Mafco Holdings Group.

         Since the completion of the Secondary Offering, Consolidated Cigar is
no longer included in the Mafco Holdings Group consolidated tax returns and,
instead, files its own tax returns and pays its own taxes on a separate
company basis.

         Under existing federal income tax regulations the Company and
Consolidated Cigar are liable for the consolidated federal income taxes of the
Mafco Holdings Group for any taxable year in which they are a member of the
Mafco Holdings Group. Pursuant to the Mafco Consolidated Tax Sharing Agreement
and the Subsidiary Tax Sharing Agreement, Mafco Holdings has agreed to
indemnify the Company, and the Company has agreed to indemnify Consolidated
Cigar and its direct and indirect subsidiaries for any such federal income tax
liability.

PROMISSORY NOTE

         In connection with the Cigar IPO, Cigar Holdings issued the
Promissory Note in an original principal amount of $70 million to the Company.
The Promissory Note is noninterest bearing, unsecured, subordinated to senior
indebtedness (as defined in the Promissory Note) and repayable in whole or in
part at any time or from time to time without premium or penalty. The
Promissory Note is payable in quarterly installments of $2.5 million beginning
March 31, 1997 with the final installment payable on December 31, 2003.

                                      42
<PAGE>


PURCHASE OF LICORICE EXTRACT

         Consolidated Cigar purchases all of the licorice extract used as
flavoring and moistening agents in its manufacturing processes from Mafco
Worldwide, which following the Flavors Disposition became an indirect wholly
owned subsidiary of PCT. During the years ended December 31, 1996, 1995 and
1994, the Company purchased approximately $211,000, $269,000 and $265,000 of
licorice extract from Pneumo Abex (successor by merger to Mafco Worldwide).
The Company believes that the licorice extract purchased from Pneumo Abex was
purchased on terms no less favorable to the Company than those obtainable in
an arm's length transaction with an independent third party.

SPECIALTY PRODUCTS DIVISION

         Consolidated Cigar's Specialty Products Division assembles lipstick
containers for Revlon Products, an 83% owned subsidiary of Mafco Holdings.
Revlon Products purchased lipstick containers from the Company for
approximately $958,000, $874,000 and $763,000 for the years ended December 31,
1996, 1995 and 1994, respectively. The Company believes that the terms of such
arrangements with Revlon Products were no less favorable to Consolidated Cigar
than those obtainable in an arm's length transaction with an independent third
party.

LICENSE AGREEMENT

         Pursuant to a license agreement, Mafco Holdings has licensed to
Pneumo Abex on a royalty-free basis the right to use the name "MacAndrews &
Forbes" until November 12, 1997.

REGISTRATION RIGHTS AGREEMENTS

         Pursuant to a Registration Rights Agreement, Mafco Consolidated
Holdings has the right to require the Company to use its best efforts to
register under the Securities Act and the securities or blue sky laws of any
jurisdiction designated by Mafco Consolidated Holdings all or a portion of the
shares of Company Common Stock acquired by Mafco Consolidated Holdings
pursuant to the Abex Transactions (the "Registrable Shares"). The Company is
not required to (i) effect a demand registration more than once in any 12
month period, (ii) effect more than two demand registrations with respect to
the Registrable Shares or (iii) file a registration statement during periods
(not to exceed 60 days) when (a) the Company is contemplating a public
offering, (b) the Company is in possession of certain material non-public
information or (c) audited financial statements are not available and their
inclusion in a registration statement is required. In addition, and subject to
certain conditions described in the Registration Rights Agreement, if at any
time the Company proposes to register under the Securities Act an offering of
shares of Company Common Stock or any other classes of equity securities, then
Mafco Consolidated Holdings would have the right to require the Company to use
its best efforts to effect the registration under the Securities Act and the
securities or blue sky laws of any jurisdiction designated by Mafco
Consolidated Holdings of all or a portion of the Registrable Shares as
designated by Mafco Consolidated Holdings. The Company is responsible for all
expenses relating to the performance of, or compliance with, the Registration
Rights Agreement, except that Mafco Consolidated Holdings is responsible for
underwriters' discounts and selling commissions with respect to the
Registrable Shares being sold.

         Prior to the consummation of the Cigar IPO, the Company and Cigar
Holdings entered into a Registration Rights Agreement pursuant to which the
Company and certain transferees of the Class B 


                                      43
<PAGE>

Common Stock, par value $0.01 per share (the "Class B Common Stock") of Cigar
Holdings held by the Company (the "Holders") have the right to require Cigar
Holdings to register (a "Demand Registration") all or part of the Class A
Common Stock issuable upon conversion of the Class B Common Stock owned by
such Holders under the Securities Act); provided that Cigar Holdings (i) will
not be obligated to effect a Demand Registration within 180 days of the
closing date of the Cigar IPO unless the managing underwriter in the Cigar IPO
has given its consent and (ii) may postpone giving effect to a Demand
Registration for up to a period of 30 days if Cigar Holdings believes such
registration might have a material adverse effect on any plan or proposal by
Cigar Holdings with respect to any financing, acquisition, recapitalization,
reorganization or other material transaction, or Cigar Holdings is in
possession of material non-public information that, if publicly disclosed,
could result in a material disruption of a major corporate development or
transaction then pending or in progress or in other material adverse
consequences to Cigar Holdings. In addition, the Holders will have the right
to participate in registrations by Cigar Holdings of its Class A Common Stock
(a "Piggyback Registration"). Cigar Holdings will pay any expenses incurred in
connection with any Demand Registration or Piggyback Registration, except for
underwriting discounts, commissions and certain expenses attributable to the
shares of Class A Common Stock sold by such Holders.


                                    PART IV

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

(a)     (1 and 2) Financial statements and financial statement schedules.  See 
        Index to Consolidated Financial Statements and Schedules which appear 
        on page F-1 herein.

         All other schedules for which provision is made in the applicable
accounting regulation of the SEC are not required under the related
instructions or are inapplicable and therefore have been omitted.

     (3)  Exhibits

     EXHIBIT NO.     DESCRIPTION
     -----------     -----------

     2.1             Stock and VSR Purchase Agreement, dated as of October 23,
                     1996, by and among MC Group, PCT and PCT International
                     Holdings Inc. (incorporated by reference to Exhibit 7 of
                     MC Group's Schedule 13D, dated October 25, 1996, filed
                     with respect to PCT). The Company agrees to furnish
                     supplementally a copy of any omitted schedule to the
                     Securities and Exchange Commission upon request.

     2.2             Agreement and Plan of Merger, dated as of February 20,
                     1997, among MC Group, Mafco Consolidated Holdings and MCG
                     Acquisition Inc. (incorporated by reference to Exhibit 6
                     of Amendment No. 4 to Schedule 13D dated February 24,
                     1997, filed by Mafco Holdings and Mafco Consolidated
                     Holdings with respect to MC Group).

     3.1             Restated Certificate of Incorporation of MC Group
                     (incorporated by reference to Exhibit 4.1 to the Form 8-K
                     of MC Group filed on June 15, 1995 (the "June 8-K")).

                                      44
<PAGE>


     3.2             Amendment dated May 13, 1996 to the Company's Restated
                     Certificate of Incorporation (incorporated by reference
                     to Exhibit 3.1 to MC Group's Form 10-Q dated March 31,
                     1996).

     3.3             By-Laws of MC Group (incorporated by reference to Exhibit
                     4.2 to the June 8-K).

     4.1             Indenture by and between Consolidated Cigar and
                     Continental Bank, National Association, as trustee,
                     relating to the Senior Subordinated Notes due 2003
                     (incorporated by reference to Exhibit 10.2(j) to
                     Amendment No. 2 to Cigar Holdings Registration Statement
                     on Form S- 1 (No. 333-6819) as filed July 30, 1996 (the
                     "1996 Cigar S-1).

     4.2             Value Support Rights Agreement dated November 20, 1996
                     between MC Group and American Stock Transfer & Trust
                     Company, as the trustee (incorporated by reference to
                     Exhibit 4.1 of MC Group's Form 8- K dated November 25,
                     1996).

     4.3             Amendment No. 1 to the Value Support Rights Agreement,
                     dated as of December 20, 1996, between MC Group and
                     American Stock Transfer & Trust Company (incorporated by
                     reference to Exhibit 4.1(b) of MC Group's Form S-1
                     Registration Statement dated December 26, 1996 (No.
                     333-15257) (the "VSR Registration Statement")).

     4.4             Form of Indenture for the VSR Notes (incorporated by
                     reference to Exhibit 4.2 of the VSR Registration
                     Statement).

     10.1            Credit Agreement between Consolidated Cigar and The Chase
                     Manhattan Bank, N.A., dated as of February 23, 1993
                     (incorporated by reference to Exhibit 10.2 to Amendment
                     No. 2 of Consolidated Cigar Corporation's Registration
                     Statement on Form S-1 (Registration No. 33- 56902)).

     10.2(a)         Amendment No. 1 to the Credit Agreement, dated as of
                     March 2, 1993 (incorporated by reference to Exhibit
                     10.2(a) to Consolidated Cigar's Annual Report on Form
                     10-K for the fiscal year ended December 31, 1993).

     10.2(b)         Amendment No. 2 to the Credit Agreement, dated as of
                     March 12, 1993 (incorporated by reference to Exhibit
                     10.2(b) to Consolidated Cigar's Annual Report on Form
                     10-K for the fiscal year ended December 31, 1993).

     10.2(c)         Amendment No. 3 to the Credit Agreement, dated as of
                     March 17, 1993 (incorporated by reference to Exhibit
                     10.2(c) to Consolidated Cigar's Annual Report on Form
                     10-K for the fiscal year ended December 31, 1993).

                                      45
<PAGE>

     10.2(d)         Amendment No. 4 to the Credit Agreement, dated as of
                     April 5, 1993 (incorporated by reference to Exhibit
                     10.2(d) to Consolidated Cigar's Annual Report on Form
                     10-K for the fiscal year ended December 31, 1993).

     10.2(e)         Amendment No. 5 to the Credit Agreement, dated as of June
                     15, 1993 (incorporated by reference to Exhibit 10.2(e) to
                     Consolidated Cigar's Annual Report on Form 10-K for the
                     fiscal year ended December 31, 1993).

     10.2(f)         Amendment No. 6 to the Credit Agreement, dated as of
                     September 12, 1994 (incorporated by reference to Exhibit
                     10.2(f) to Consolidated Cigar's Annual Report on Form
                     10-K for the fiscal year ended December 31, 1994).

     10.2(g)         Amendment No. 7 to the Credit Agreement, dated as of May
                     31, 1995 (incorporated by reference to Exhibit 10.2(g) to
                     Consolidated Cigar's Annual Report on Form 10-K for the
                     fiscal year ended December 31, 1995).

     10.2(h)         Amendment No. 8 to the Credit Agreement, dated as of
                     October 18, 1995 (incorporated by reference to Exhibit
                     10.2(h) to Consolidated Cigar's Annual Report on Form
                     10-K for the fiscal year ended December 31, 1995).

     10.2(i)         Amendment No. 9 to the Credit Agreement, dated as of
                     March 13, 1996 (incorporated by reference to Exhibit
                     10.2(i) of Amendment No. 1 of Cigar Holdings'
                     Registration Statement on Form S-1 (Registration No.
                     333-6819)).

     10.2(j)         Amendment No. 10 to the Credit Agreement, dated as of
                     July 31, 1996 (incorporated by reference to Exhibit 10.3
                     of Amendment No. 2 of Cigar Holdings' Registration
                     Statement on Form S-1 (Registration No. 333- 6819)).

     10.2(k)         Amendment No. 11 to the Credit Agreement dated as of
                     February 3, 1997 (incorporated by reference to Exhibit
                     10.1(k) to Consolidated Cigar's Registration Statement on
                     Form S-1 (Registration No. 333-20743)).

     10.3            Indenture by and between Consolidated Cigar and
                     Continental Bank, National Association, as Trustee,
                     relating to the Senior Subordinated Notes due 2003
                     (incorporated by reference to Exhibit 10.2(j) of
                     Amendment No. 2 of Cigar Holdings' Registration Statement
                     on Form S-1 (Registration No. 333-6819)).

                                      46
<PAGE>


     10.4(a)         Guarantee and Security Agreement, dated as of March 3,
                     1993, between the Registrant and The Chase Manhattan
                     Bank, N.A. (incorporated by reference to Exhibit 10.16(a)
                     of Amendment No. 2 of Cigar Holdings' Registration
                     Statement on Form S-1 (Registration No. 333-6819)).

     10.4(b)         First Amendment to Guarantee and Security Agreement,
                     dated as of July 31, 1996 (incorporated by reference to
                     Exhibit 10.16(b) of Amendment No. 2 of Cigar Holdings'
                     Registration Statement on Form S-1 (Registration No.
                     333-6819)).

     10.5            Promissory Note issued by Cigar Holdings to MC Group
                     (incorporated by reference to Exhibit 10.5 of the VSR
                     Registration Statement).

     10.6            Agreement and Plan of Merger, dated as of January 6,
                     1995, as amended, between Abex and Mafco Holdings,
                     without disclosure schedules (incorporated by reference
                     to

     10.7            Separation Agreement, dated as of June 15, 1995, by and
                     between Fisher Scientific International Inc. ("Fisher
                     Scientific") and C&F (incorporated by reference to
                     Exhibit 10.1 to the June 8-K).

     10.8            Transfer Agreement, dated as of June 15, 1995, among PCT,
                     MCG Intermediate Holdings Inc., Pneumo Abex and PCT
                     International Holdings Inc. (incorporated by reference to
                     Exhibit 10.2 to the June 8-K).

     10.9            Securities Purchase Agreement, dated as of June 26, 1995
                     between Libra and the Registrant (incorporated by
                     reference to Exhibit 10.3 to MC Group's Current Report on
                     Form 8-K dated June 30, 1995).

     10.10           Letter Agreement, dated as of June 26, 1995, between MC
                     Group and PCT (incorporated by reference to Exhibit 10.4
                     to the June 8-K).

     10.11           Letter Agreement, dated as of February 5, 1996, between
                     MC Group and PCT (incorporated by reference to Exhibit 6
                     to Amendment No. 2 to the Schedule 13D dated February 8,
                     1996 filed by Mafco Holdings, C&F (Parent) Holdings Inc.
                     and MC Group in connection with PCT's capital stock).

     10.12           Tax Sharing Agreement between Abex and PCT dated June 15,
                     1995 (incorporated by reference to Exhibit 10.5 to MC
                     Group's Form 10-K dated December 31, 1995).

     10.13           Tax Sharing Agreement between MC Group and Mafco Holdings
                     dated June 15, 1995 (incorporated by reference to Exhibit
                     10.6 to MC Group's Form 10-K dated December 31, 1995).

                                      47
<PAGE>

     10.14           Amended and Restated Tax Sharing Agreement by and among
                     Mafco Holdings, MC Group, Cigar Holdings and Consolidated
                     Cigar (incorporated by reference to Exhibit 10.7 to
                     Mafco's Form 10-K dated December 31, 1995).

     10.15           Second Amended and Restated Tax Allocation Agreement by
                     and among Mafco Holdings, MC Group, Flavors (Parent)
                     Holdings Inc., Flavors and Mafco Worldwide Corporation
                     (incorporated by reference to Exhibit 10.8 to Mafco's
                     Form 10-K dated December 31, 1995).

     10.16           Registration Rights Agreement, dated as of August 21,
                     1996, between MC Group and Cigar Holdings (incorporated
                     by reference to Exhibit 10.22 of the VSR Registration
                     Statement).

     10.17           Registration Rights Agreement between MC Group and PCT
                     (incorporated by reference to Exhibit 2 to the Schedule
                     13D dated June 26, 1995 filed by Mafco Holdings, Mafco
                     Consolidated Holdings and MC Group in connection with
                     PCT's capital stock).

     10.18           Registration Rights Agreement, dated as of June 15, 1995,
                     between MC Group, Mafco Consolidated Holdings and Mafco
                     Holdings (incorporated by reference to Exhibit 2 to the
                     Schedule 13D dated June 26, 1995 filed by Mafco Holdings
                     and Mafco Consolidated Holdings in connection with MC
                     Group's capital stock).

     10.19           Stock Purchase Agreement, dated April 28, 1988, between
                     Pneumo Abex and Whitman (incorporated by reference to
                     Exhibit 2.1 to Pneumo Abex's Registration Statement on
                     Form S-1, Commission File No. 33- 22725) as amended by an
                     Amendment, dated as of August 29, 1988, and a Second
                     Amendment and related Settlement Agreement, dated
                     September 23, 1991 (incorporated by reference to Exhibit
                     10.04 to Abex's Annual Report on Form 10-K for 1992).

     10.20           Asset Purchase Agreement, dated as of May 15, 1993,
                     between Pneumo Abex and The BF Goodrich Company ("BF
                     Goodrich") (incorporated by reference to Exhibit 2.1 to
                     Abex's Current Report on Form 8-K dated June 10, 1993).

     10.21           Asset Purchase Agreement, dated as November 21, 1994, by
                     and between Pneumo Abex and Wagner Electric Corporation
                     (incorporated by reference to Exhibit 1 to Abex's Current
                     Report on Form 8-K dated November 21, 1994).

     10.22           Lease Agreement, dated as of June 15, 1995, between
                     Liberty Lane Real Estate, Inc. ("Liberty Lane") and
                     Fisher Scientific (incorporated by reference to Exhibit
                     10.14 to MC Group's Form 10-K dated December 31, 1995).

                                      48
<PAGE>

     10.23           Option Agreement, dated as of June 15, 1995, between
                     Liberty Lane and Fisher Scientific (incorporated by
                     reference to Exhibit 10.15 to MC Group's Form 10-K dated
                     December 31, 1995).

     10.24           Mortgage and Security Agreement, dated as of June 15,
                     1995, between Liberty Lane and Fisher Scientific
                     (incorporated by reference to Exhibit 10.16 to MC Group's
                     Form 10-K dated December 31, 1995).

     10.25           Reimbursement Agreement, dated as of March 3, 1993,
                     between Consolidated Cigar and Mafco Holdings
                     (incorporated by reference to Exhibit 10.10 to
                     Consolidated Cigar's Registration Statement on Form S-1
                     (Registration No. 333-6819)).

     10.26           Agreement and Plan of Merger, dated as of March 26, 1992,
                     by and among Koll (formerly Henley Properties, Inc.), HP
                     Merger Co. and Henley (incorporated by reference to
                     Exhibit 2.01 to Abex's Registration Statement on Form
                     S-1, Commission File No. 33-48521).

     10.27           Transition Agreement, dated as of July 16, 1992, among
                     Abex, Henley and Koll (incorporated by reference to
                     Exhibit 10.02 to Abex's Annual Report on Form 10-K for
                     1992).

     10.28           Amendment No. 1 to the Transition Agreement, dated as of
                     April 1, 1993 between Abex and Koll (incorporated by
                     reference to Exhibit 10.18 to Abex's Registration
                     Statement on Form S-4, Commission File No. 33-92188).

     10.29           Tax Sharing Agreement, dated as of June 10, 1992, between
                     Abex and Henley (incorporated by reference to Exhibit
                     10.03 to Abex's Annual Report on Form 10-K for 1992).

     10.30           Letter Agreement, dated as of July 15, 1992, between Abex
                     and the Pension Benefit Guaranty Corporation ("PBGC")
                     (incorporated by reference to Exhibit 10.16 to Abex's
                     Annual Report on Form 10-K for 1992).

     10.31           Letter Agreement, dated as of July 15, 1992, made by
                     Henley in favor of PBGC (incorporated by reference to
                     Exhibit 10.17 to Abex's Annual Report on Form 10-K for
                     1992).

     10.32           Pension Agreement, dated as of July 16, 1992, among Koll,
                     Henley and Abex (incorporated by reference to Exhibit
                     10.18 to Abex's Annual Report on Form 10-K for 1992).

     10.33           Conditional Guarantee, dated as of July 9, 1992, among
                     Abex, Henley, Koll and Allied-Signal Inc.
                     ("Allied-Signal") (incorporated by reference to Exhibit
                     10.19 to Abex's Annual Report on Form 10-K for 1992).

                                      49
<PAGE>


     10.34           Reimbursement Agreement, dated as of July 16, 1992, among
                     Henley, Koll and Abex (incorporated by reference to
                     Exhibit 10.20 to Abex's Annual Report on Form 10-K for
                     1992).

     10.35           Tax Sharing Agreement, dated as of December 15, 1988,
                     between Wheelabrator Technologies Inc. ("WTI") and Koll
                     (incorporated by reference to Exhibit 10.02 to Amendment
                     No. 3 on Form 8 to Koll's Registration Statement on Form
                     10, Commission File No. 0-17189).

     10.36           Modification Agreement, dated as of August 24, 1989,
                     among WTI, Resco Holdings Inc. ("RHI"), Henley, Waste
                     Management of North America, Inc. and a subsidiary of
                     Henley (incorporated by reference to Exhibit 10.32 to
                     Henley's Registration Statement on Form 10, Commission
                     File No. 0-18004), as amended by the Assignment,
                     Assumption and Release Agreement, dated as of December
                     18, 1989 (incorporated by reference to Exhibit 10.69 to
                     WTI's Registration Statement on Form S-4, Reg. No.
                     33-36118), as amended by Termination and Amendment
                     Agreement, dated as of December 31, 1991, among Henley,
                     Koll, WTI and RHI (incorporated by reference to Exhibit
                     10.39 to Henley's Annual Report on Form 10-K for 1991,
                     Commission File No. 0-18004).

     10.37           Environmental Expenditures Agreement, dated as of July
                     28, 1989, among Koll, WTI, New Hampshire Oak, Inc. ("New
                     Hampshire Oak") and Fisher Scientific Group Inc. ("Fisher
                     Group") (incorporated by reference to Exhibit 10(a) to
                     Henley Properties' Quarterly Report on Form 10-Q for the
                     quarter ended June 30, 1989, Commission File No.
                     0-17189), as amended by Assignment and Assumption
                     Agreement, dated as of January 1, 1990, among Koll,
                     Henley, New Hampshire Oak, Fisher Group, WTI and Henley
                     Holdings, Inc. (incorporated by reference to Exhibit
                     10.34 to Henley's Annual Report on Form 10-K for 1989,
                     Commission File No. 0-18004).

     10.38           Restated Environmental Matters Agreement, dated as of
                     July 28, 1989, among Allied-Signal, Koll, WTI, New
                     Hampshire Oak and Fisher Group (incorporated by reference
                     to Exhibit 10(b) to Henley Properties' Quarterly Report
                     on Form 10-Q for the quarter ended June 30, 1989,
                     Commission File No. 0-17189), amended by the Assignment,
                     Assumption and Indemnification Agreement, dated as of
                     December 21, 1989, among Henley, Henley Properties, New
                     Hampshire Oak, Fisher Group, WTI and Allied-Signal
                     (incorporated by reference to Exhibit 10.35 to Henley's
                     Annual Report on Form 10-K for 1989, Commission File 
                     No. 0-18004).

     10.39           Tax Sharing Agreement, dated as of February 26, 1986,
                     between Allied-Signal and WTI (incorporated by reference
                     to Exhibit 10E to WTI's Registration Statement on Form
                     10, Commission File No. 0-114246).

                                      50
<PAGE>

     10.40           Guarantee Agreement, dated as of June 10, 1993, between
                     Abex and BF Goodrich (incorporated by reference to
                     Exhibit 2.2 to Abex's Current Report on Form 8-K dated
                     June 10, 1993).

     10.41           Mutual Guaranty Agreement, dated as of December 30, 1994,
                     between Abex and Cooper Industries Inc. (incorporated by
                     reference to Exhibit 10.29 to Abex's Registration
                     Statement on Form S-4, Commission File No. 33-92188).

     10.42*          Mutual release and Settlement Agreement, dated as of
                     March 11, 1997, among MC Group, New Abco Holdings Inc.,
                     Koll, Henley and New Henley Holdings Inc.

                     MANAGEMENT CONTRACTS AND COMPENSATORY PLANS

     10.43           Employment Agreement by and between MC Group and James R.
                     Maher effective as of July 1, 1995 (incorporated by
                     reference to Exhibit 10.33 to MC Group's Form 10-K dated
                     December 31, 1995).

     10.44           Amendment dated March 15, 1996 to Employment Agreement
                     effective July 1, 1995 between MC Group and James R.
                     Maher (incorporated by reference to Exhibit 10.1 to MC
                     Group's Form 10-Q dated March 31, 1996).

     10.45           Employment Agreement by and between MC Group and Theo W.
                     Folz effective as of July 1, 1995 (incorporated by
                     reference to Exhibit 10.34 to MC Group's Form 10-K dated
                     December 31, 1995).

     10.46           First Amendment dated February 29, 1996 to Employment
                     Agreement dated July 1, 1995 by and between MC Group and
                     Theo W. Folz (incorporated by reference to Exhibit 10.35
                     to MC Group's Form 10-K dated December 31, 1995).

     10.47           Second Amendment, dated August 1, 1996, to the Employment
                     Agreement, dated July 1, 1995, between MC Group and Theo
                     W. Folz (incorporated by reference to Exhibit 10.4(c) of
                     Amendment No. 2 of Cigar Holdings' Registration Statement
                     on Form S-1 (Registration No. 333-6819)).

     10.48           Executive Employment Agreement, dated as of August 1,
                     1996, between Consolidated Cigar and Theo W. Folz
                     (incorporated by reference to Exhibit 10.17 of Amendment
                     No. 2 of Cigar Holdings' Registration Statement on Form
                     S-1 (Registration No. 333-6819)).

     10.49           Employment Agreement, dated as of August 15, 1996,
                     between Consolidated Cigar and Gary R. Ellis.

                                      51
<PAGE>

     10.50           The Company's 1995 Stock Option Plan (incorporated by
                     reference to Exhibit 10.2 to MC Group's Form 10-Q dated
                     March 31, 1996).

     10.51           The Company's Performance Bonus Plan (included within and
                     incorporated by reference to the Employment Agreement
                     effective July 1, 1995 between the Company and James R.
                     Maher, filed as Exhibit 10.43).

     10.52           The Company's Chief Executive Officer Transaction Bonus
                     Plan (included within and incorporated by reference to
                     the Employment Agreement effective July 1, 1995 between
                     the Company and James R. Maher, filed as Exhibit 10.43).

     10.53           The Company's Tobacco Products Group Performance Bonus
                     Plan (incorporated by reference to Exhibit 10.5 to MC
                     Group's Form 10-Q dated March 31, 1996).

     10.54           Cigar Holdings' 1996 Stock Plan (incorporated by
                     reference to Exhibit 10.12 of Amendment No. 2 of Cigar
                     Holdings' Registration Statement on Form S-1
                     (Registration No. 333-6819)).

     10.55           Pension Plan Merger Agreement into Abex Retirement Plan
                     (incorporated by reference to Exhibit 10.1 to
                     Consolidated Cigar's Annual Report on Form 10-K for the
                     fiscal year ended December 31, 1995).

     21*             List of Subsidiaries

     23*             Consent of Independent Auditors

     24*             Powers of Attorney executed by Messrs. Perelman, Beekman,
                     Folz, Gittis, LaFontant-Mankarious, Maher and Lewis.

     27*             Financial Data Schedule


*Filed herewith

    (b) Reports on Form 8-K filed during the quarter ended December 31, 1996:

    Form 8-K filed on November 27, 1996 (Items 2 and 7).

    Form 8-K/A filed on December 23, 1996 (Item 7).

                                      52
<PAGE>


                                  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.


                                      MAFCO CONSOLIDATED GROUP INC.
                                             (Registrant)



Dated:  March 28, 1997                By: James R. Maher*
                                         --------------------------------------
                                          James R. Maher
                                          President and Chief Executive Officer


Dated:  March 28, 1997                By:/s/ Irwin Engelman
                                         --------------------------------------
                                          Irwin Engelman
                                          Executive Vice President and
                                          Chief Financial Officer


Dated:  March 28, 1997                By:/s/ Laurence Winoker
                                         --------------------------------------
                                          Laurence Winoker
                                          Vice President and Controller
                                          (Chief Accounting Officer)






                                      53
<PAGE>



         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.

     SIGNATURE                          TITLE                    DATE
     ---------                          -----                    ----

     Ronald O. Perelman *               Director                 March 28, 1997 
------------------------------------                   
     Ronald O. Perelman


     Philip E. Beekman *                Director                 March 28, 1997 
------------------------------------                   
     Philip E. Beekman


     Theo W. Folz *                     Director                 March 28, 1997 
------------------------------------                   
     Theo W. Folz      


     Howard Gittis *                    Director                 March 28, 1997 
------------------------------------                
     Howard Gittis     


     Jewel S. LaFontant-Mankarious *    Director                 March 28, 1997 
------------------------------------                
     Jewel S. LaFontant-Mankarious


     James R. Maher *                   Director                 March 28, 1997 
------------------------------------                   
     James R. Maher


     Drew Lewis *                       Director                 March 28, 1997 
------------------------------------                   
     Drew Lewis            

         *The undersigned by signing his name hereto does hereby execute this
Annual Report pursuant to powers of attorney filed as exhibits to this Annual
Report.


Dated:  March 28, 1997                     By:/s/ Laurence Winoker
                                              ---------------------------------
                                                Laurence Winoker
                                                Attorney-in-Fact








                                      54
<PAGE>



                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
                          --------------------------

                    ITEM 8, ITEM 14 (A)(1) AND (2) AND (D)
           INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
                              STATEMENT SCHEDULE
                         YEAR ENDED DECEMBER 31, 1996



<TABLE>
<CAPTION>

                                                                                                             Pages
                                                                                                             -----
<S>                                                                                                         <C>
         The following consolidated financial statements of Mafco Consolidated Group
Inc. and Subsidiaries are included in Item 8:

Report of Independent Auditors ...............................................................................F-2

Consolidated Balance Sheets as of December 31, 1996 and 1995..................................................F-3

Consolidated Statements of Earnings
         for the years ended December 31, 1996, 1995 and 1994.................................................F-4

Consolidated Statements of Stockholders' Equity (Deficit)
         for the years ended December 31, 1996, 1995 and 1994.................................................F-5

Consolidated Statements of Cash Flows
         for the years ended December 31, 1996, 1995 and 1994.................................................F-6

Notes to Consolidated Financial Statements....................................................................F-7

         The following financial statement schedule of Mafco Consolidated Group Inc. is
included in Item 14(d):

Schedule II- Valuation and Qualifying Accounts................................................................F-34
</TABLE>

All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and, therefore, have been
omitted.


                                     F-1
<PAGE>




                        REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Mafco Consolidated Group Inc.


We have audited the accompanying consolidated balance sheets of Mafco
Consolidated Group Inc. and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of earnings, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1996. Our audits also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits. The 1995 financial statements of Power Control Technologies Inc. (a
corporation in which the Company has a 29% common equity interest), have been
audited by other auditors whose report has been furnished to us; insofar as
our opinion on the 1995 consolidated financial statements relates to data
included for Power Control Technologies Inc., it is based solely on their
report.

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 and the report of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Mafco Consolidated
Group Inc. and subsidiaries at December 31, 1996 and 1995 and the consolidated
results of their operations and their consolidated cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.



                                              Ernst & Young LLP


New York, New York
February 11, 1997


                                     F-2
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
                          CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                               DECEMBER 31,
                                                                   ------------------------------------
                   ASSETS                                               1996                1995
                                                                   ----------------   -----------------
<S>                                                                <C>                 <C> 
Current assets:    
   Cash and cash equivalents                                        $      6,222         $   93,417
   Trading securities                                                    409,605                190
   Notes and trade receivables, net                                       19,498             25,211
   Inventories                                                            45,957             84,494
   Prepaid expenses and other                                             25,396             25,420
                                                                   ----------------   -----------------
      Total current assets                                               506,678            228,732

Property, plant and equipment, net                                        37,277             46,052
Pension asset                                                             62,738             57,245
Investment in PCT preferred and common stock                              12,996             55,547
Trademarks, net                                                           31,155             32,021
Intangible assets related to businesses acquired, net                     59,723             62,770
Other assets                                                              58,934             78,232
                                                                   ================   =================
                                                                    $    769,501         $  560,599
                                                                   ================   =================


      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Current portion of long-term debt and short-term borrowings      $          -         $   10,960
   Accounts payable                                                        7,323              9,595
   Accrued expenses and other                                            100,847             55,515
                                                                   ----------------   -----------------
      Total current liabilities                                          108,170             76,070

Long-term debt                                                            97,500            218,678
Deferred income taxes                                                     36,109              5,280
Other liabilities                                                        167,230            156,850

Commitments and contingencies

Stockholders' equity:
   Common stock, par value $.01 per share, 250,000,000 shares
     authorized, 24,722,190 shares issued in 1996 and 1995                   247                247
   Additional paid-in-capital                                            167,105            167,105
   Retained earnings (accumulated deficit)                               223,043            (35,605)
   Currency translation adjustment                                             -              1,877
   Treasury stock at cost (1,484,850 shares)                             (29,903)           (29,903)
                                                                   ----------------   -----------------
      Total stockholders' equity                                         360,492            103,721
                                                                   ================   =================
                                                                    $    769,501         $  560,599
                                                                   ================   =================
</TABLE>


                See notes to consolidated financial statements.

                                      F-3


<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF EARNINGS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                  -----------------------------------------------------
                                                                       1996               1995               1994
                                                                  ---------------    ---------------    ---------------

  <S>                                                             <C>                <C>                <C>           
   Net sales                                                       $      310,659     $      261,126     $      226,879
   Cost of sales                                                          177,854            154,022            135,967
                                                                  ---------------    ---------------    ---------------
   Gross profit                                                           132,805            107,104             90,912

   Selling, general and administrative expenses                            54,161             51,360             37,906
                                                                  ---------------    ---------------    ---------------
   Operating income                                                        78,644             55,744             53,006

   Interest expense                                                       (24,589)           (27,174)           (27,547)
   Interest and investment income                                          13,045              5,958                242
   Amortization of deferred charges and bank fees                          (1,945)            (2,095)            (2,044)
   Equity in earnings from continuing operations and preferred
         dividends of PCT                                                   3,850                727                  -
   Gain on Flavors Disposition                                            151,747                  -                  -
   Gain on Cigar IPO                                                      127,809                  -                  -
   Other (expense) income, net                                               (141)              (366)               156
                                                                  ---------------    ---------------    ---------------
   Income from continuing operations before income taxes                  348,420             32,794             23,813

   Provision for income taxes                                            (104,824)            (9,703)            (7,478)
                                                                  ---------------    ---------------    ---------------
   Income from continuing operations                                      243,596             23,091             16,335

   Discontinued operations
         Equity in discontinued operations of PCT,
              net of income taxes of $1,311 and $712                       15,052              1,322                  -
                                                                  ---------------    ---------------    ---------------
   Income before before extraordinary item                                258,648             24,413             16,335

   Extraordinary item, net of tax benefit of $1,698                             -                  -             (2,667)
                                                                  ---------------    ---------------    ---------------

   Net income                                                      $      258,648     $       24,413     $       13,668
                                                                  ===============    ===============    ===============

   Income per share:
         Continuing operations                                     $        10.48     $         1.06     $         0.82
         Discontinued operations                                             0.65               0.06                  -
         Extraordinary item                                                     -                  -              (0.13)
                                                                  ---------------    ---------------    ---------------

                                                                   $        11.13     $         1.12     $         0.69
                                                                  ===============    ===============    ===============

   Weighted average common shares outstanding                              23,237             21,794             19,778

</TABLE>



                See notes to consolidated financial statements.

                                      F-4


<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                                (IN THOUSANDS)


<TABLE>
<CAPTION>

                                   COMMON     COMMON      COMMON                  RETAINED
                                  STOCK OF   STOCK OF    STOCK OF   ADDITIONAL    EARNINGS/      CURRENCY
                                     MC       FLAVORS     CIGAR      PAID-IN    (ACCUMULATED    TRANSLATION   TREASURY
                                   GROUP     HOLDINGS    HOLDINGS    CAPITAL      DEFICIT)      ADJUSTMENT      STOCK     TOTAL
                                 ---------   --------    --------   ----------   ------------    -----------   --------- ------- 
<S>                              <C>        <C>         <C>       <C>           <C>             <C>            <C>       <C>      
Balance at December 31, 1993       $ -        $ 1         $ 1       $ 43,290      $ (68,686)      $  (34)        $  -    $(25,428)

Net income                                                                           13,668                                13,668
Currency translation adjustment                                                                      960                      960
                                --------   --------    --------    ---------     ----------      --------    --------     --------

Balance at December 31, 1994         -          1           1         43,290        (55,018)         926            -     (10,800)

Net income                                                                            24,413                               24,413
Currency translation adjustment                                                                       951                     951
Dividends                                                             (9,000)        (5,000)                              (14,000)
Abex merger, net of transaction
  costs                             247        (1)         (1)        71,197                                               71,442
Treasury stock                                                                                                 (29,903)   (29,903)
Retirement of value support 
 rights                                                               61,618                                               61,618
                                --------   --------    --------    ---------     ----------      --------    --------     --------

Balance at December 31, 1995        247         -           -        167,105        (35,605)       1,877      (29,903)    103,721

Net income                                                                           258,648                              258,648
Currency translation adjustment                                                                    (1,877)                 (1,877)
                                 ---------   --------    --------    ---------     ----------      --------   ---------   --------

Balance at December 31, 1996      $ 24        $ -         $ -        167,105      $ 223,043       $    -     $(29,903)   $360,492
                                 =========   ========    ========    =========     ==========      ========   =========   ========
</TABLE>



                See notes to consolidated financial statements.

                                      F-5



<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                                       YEAR ENDED DECEMBER 31,
                                                                             ---------------------------------------------
                                                                                 1996            1995            1994
                                                                             -------------   -------------   -------------
<S>                                                                          <C>            <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income                                                                    $   258,648     $    24,413     $    13,668
                                                                             -------------   -------------   -------------
Adjustments to reconcile net income to net cash flows (used in) provided by
operating activities:
      Extraordinary item                                                                -               -           4,365
      Gain on Flavors Disposition                                                (151,747)              -               -
      Gain on Cigar IPO                                                          (127,809)              -               -
      Depreciation and amortization                                                10,088          10,483          10,407
      Equity in earnings of affiliates in excess of distributions                 (18,613)         (1,894)              -
      Changes in assets and liabilities net of acquisitions and dispositions:
          Net increase in trading securities                                     (409,415)              -               -
          Increase in notes and trade receivables                                  (5,512)         (4,483)         (1,952)
          (Increase) decrease in inventories                                       (6,768)          1,449           5,503
          Increase (decrease) in accounts payable                                   2,684          (2,353)            912
          Decrease (increase) in restricted deposits                                1,987         (16,623)              -
          Deferred taxes, income taxes payable and other, net                      87,662          (4,888)            (87)
                                                                             -------------   -------------   -------------
                                                                                 (617,443)        (18,309)         19,148
                                                                             -------------   -------------   -------------
Net cash flows (used in) provided by operating activities                        (358,795)          6,104          32,816
                                                                             -------------   -------------   -------------

CASH FLOWS FROM INVESTING ACTIVITIES
Cash acquired in Abex  Merger, net of transaction costs                                 -         174,837               -
Net proceeds from the Flavors Disposition                                         172,005               -               -
Capital expenditures                                                               (6,997)         (3,318)         (2,686)
Purchase of PCT Common Stock                                                            -         (33,653)              -
Proceeds from the sale of fixed and other assets                                       10           3,318           6,232
Other, net                                                                           (607)             (7)             (8)
                                                                             -------------   -------------   -------------
Net cash flows provided by investing activities                                   164,411         141,177           3,538
                                                                             -------------   -------------   -------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings                                                                -               -          50,000
Repayment of borrowings                                                            (8,731)         (5,725)        (57,439)
Repayment of revolving loans, net                                                 (13,803)        (14,872)        (19,100)
Purchase of Company Common Stock and Abex VSRs                                          -         (29,903)              -
Net proceeds from the Cigar IPO                                                   127,809               -               -
Dividends paid                                                                          -         (14,000)              -
Due to affiliates and other, net                                                    1,984           1,233          (3,654)
                                                                             -------------   -------------   -------------
Net cash flows provided by (used in) financing activities                         107,259         (63,267)        (30,193)
                                                                             -------------   -------------   -------------
Effect of exchange rate changes on cash                                               (70)             80              64
                                                                             -------------   -------------   -------------
Net (decrease) increase in cash and cash equivalents                              (87,195)         84,094           6,225
Cash and cash equivalents at beginning of period                                   93,417           9,323           3,098
                                                                             -------------   -------------   -------------
Cash and cash equivalents at end of period                                    $     6,222     $    93,417     $     9,323
                                                                             =============   =============   =============

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
      Interest paid                                                           $    23,059     $    28,278     $    27,128
      Income taxes paid, net of refunds                                             3,590           6,789           7,731

</TABLE>

                See notes to consolidated financial statements.

                                      F-6



<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




1.       BACKGROUND AND BASIS OF PRESENTATION

         On June 15, 1995, stockholders of Abex Inc. ("Abex") approved and
adopted an Agreement and Plan of Merger dated as of January 6, 1995 (as
amended, the "Merger Agreement") by and between Abex and Mafco Holdings Inc.
("Mafco Holdings") and certain related agreements. Pursuant to the Merger
Agreement and related agreements, on June 15, 1995, the following occurred:
(i) the transfer (the "Transfer"), to a subsidiary of Abex of substantially
all of Abex's consolidated assets and liabilities, other than those relating
principally to its Abex NWL Aerospace division and such division's overseas
subsidiaries which continued to be owned indirectly by Power Control
Technologies Inc. ("PCT"), (ii) the recapitalization of the capital stock of
PCT into shares of common stock, par value $.01 per share (the "PCT Common
Stock") and shares of Series A 8% Convertible Redeemable Preferred Stock (the
"PCT Preferred Stock") with an aggregate liquidation preference of $20.0
million and is convertible, at the option of MC Group, into 2.5 million shares
of PCT Common Stock, subject to adjustments and (iii) the merger (the
"Merger") of Abex and C&F Merger Inc. ("C&F"), a wholly owned subsidiary of
Mafco Holdings which owned indirectly 100% of the outstanding stock of
Consolidated Cigar Holdings Inc. ("Cigar Holdings"), and Flavors Holdings Inc.
("Flavors") with Abex, which was renamed Mafco Consolidated Group Inc. ("MC
Group" or the "Company"), as the surviving corporation in the Merger. Cigar
Holdings and Flavors conduct their business operations through their
respective wholly owned subsidiaries, Consolidated Cigar Corporation
("Consolidated Cigar") and Mafco Worldwide Corporation ("Mafco Worldwide"). As
a result of the Merger, the Company acquired certain non-aerospace assets and
assumed certain liabilities of Abex as well as acquired an interest in the PCT
Preferred Stock. PCT, which became a separate publicly-traded company,
continued to operate the aerospace business until April 1996 (See Note 3).

         Pursuant to the Merger, Abex's stockholders immediately prior to the
effective time of the Merger (the "Effective Time"), received for each share
of common stock, par value $.01 per share, of Abex (the "Abex Common Stock")
held, in cancellation thereof, (a) one-quarter of one share of common stock of
the Company, par value $.01 per share (the "MC Group Common Stock") and, where
applicable, cash in lieu of a fractional share of MC Group Common Stock, (b)
one share of PCT Common Stock, and (c) one value support right ("Abex VSR")
issued by MVR Inc. ("MVR"), a wholly-owned subsidiary of the Company, and
guaranteed by the Company. Shares of MC Group Common Stock were also issued
upon cancellation of restricted units of Abex (the "Restricted Units")
outstanding under Abex's Restricted Unit Plan for Non-Employee Directors
immediately prior to the Effective Time, and shares of PCT Common Stock were
also issued upon cancellation of Restricted Units and stock appreciation
rights of Abex (the "SARs") outstanding under the 1992 Stock Plan for
Executive Employees of Abex and its Subsidiaries immediately prior to the
Effective Time. On an aggregate basis, Abex's stockholders and the holders of
Restricted Units and SAR's received 100% of the shares of PCT Common Stock and
Abex VSRs; Abex's stockholders and the holders of Restricted Units received
20% of the shares of MC Group Common Stock; and Mafco Consolidated Holdings
Inc., formerly known as C&F (Parent) Holdings Inc. ("Mafco Consolidated
Holdings"), a wholly owned subsidiary of Mafco Holdings, received 80% of the
shares of MC Group Common Stock, in each case the percentages reflecting the
amount outstanding immediately following completion of the Merger.

         As part of the Merger Agreement, Mafco Worldwide paid a dividend of
$9.0 million and Consolidated Cigar paid a dividend of $5.0 million which were
distributed to Mafco Holdings immediately before the Merger.


                                     F-7
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         The Merger was accounted for as a purchase of certain assets and the
assumption of certain liabilities of Abex, with C&F treated as the acquiror
for accounting purposes. Beginning June 15, 1995, the date of the Merger, the
financial statements of the Company reflect the consolidated results of
Flavors through November 25, 1996, the date of the Flavors Disposition, as
described below, Cigar Holdings and the assets and liabilities of Abex
acquired in the Merger. For all periods from March 3, 1993, the first date
that Flavors and Cigar Holdings were under the common control of Mafco
Holdings, to June 15, 1995, the financial statements reflect the combined
results of Flavors and Cigar Holdings. In connection with the Merger, the
Company recorded the assets acquired and liabilities assumed at their
estimated fair market value, with the difference recorded as a credit to
additional paid-in-capital, as follows (in millions):

         Cash, net of transaction expenses of $6.7........  $174.8
         Other current assets.............................    12.9
         Pension asset....................................    60.8
         Other long term assets...........................    98.5
         Accrued expense and other........................    37.2
         Abex VSR obligation..............................    62.0
         Other liabilities................................   176.4
         Stockholders' equity.............................    71.4

         The Abex VSRs were designed to help ensure that, within a stated time
period and subject to certain limitations, the combined market values of the
securities received in the Merger by Abex's stockholders was at least $10 per
share. The Abex VSRs were valued based on 20,667,142 Abex VSRs issued at the
maximum payment per Abex VSR of $3.00. The Abex VSRs expired in accordance
with their terms without the need for any payment on September 19, 1995. As a
result of the purchase of Abex VSRs by the Company and the expiration of all
the Abex VSRs, stockholders' equity increased by $61.6 million.

         On December 11, 1992, Triple C, Mafco Holdings and its wholly owned
subsidiary Consolidated Cigar Holdings Inc. ("CCC Holdings"), entered into an
agreement and plan of merger (the "Cigar Merger Agreement"), pursuant to which
CCC Holdings was merged into Triple C with Triple C being the surviving
corporation. Pursuant to the merger which was consummated on March 3, 1993,
Mafco Holdings acquired all the outstanding shares of Triple C common stock
and warrants to purchase Triple C common stock (the "1993 Acquisition"), for
an aggregate purchase price of approximately $188.0 million, including fees
and expenses. Immediately following the 1993 Acquisition, Triple C merged into
Consolidated Cigar with Consolidated Cigar being the surviving corporation. As
a result, Consolidated Cigar became an indirect wholly owned subsidiary of
Mafco Holdings.

         On November 25, 1996, MC Group and PCT consummated the transactions
contemplated by a Stock and VSR Purchase Agreement (the "Purchase Agreement").
Pursuant to the Purchase Agreement, among other things, all the issued and
outstanding shares (the "Shares") of capital stock of Flavors were sold (see
Note 3).

         The financial statements have been restated to reflect the Company's
equity in the discontinued operations of PCT. Certain financial statement
items and financial statement disclosures for prior years have been
reclassified to be comparable with the 1995 presentation.

                                     F-8
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         The Company currently operates in the tobacco products business. The
Company's tobacco products include cigars and pipe tobacco products
manufactured and distributed by Consolidated Cigar and licorice extract and
flavoring agents manufactured and distributed by Mafco Worldwide through
November 25, 1996, the date of the Flavors Disposition (See Note 3).

2.       SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation:

         The consolidated financial statements include the accounts of the
Company and its majority and wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Investments of less than 50% but greater than 20% in affiliates are accounted
for on the equity method.

Revenue Recognition:

         Revenue is recognized from product sales upon shipment. Allowances
for sales returns, customer incentive programs and promotions are recorded at
the time of sale.

Restricted Cash:

         Restricted cash of $14.6 million and $16.6 million included in other
assets at December 31, 1996 and 1995, respectively, reflects segregated cash
held for the benefit of certain parties to cover obligations related to
certain prior dispositions and certain environmental and insurance matters.

Inventories:

         Leaf tobacco is carried at the lower of average cost or market. In
accordance with generally recognized industry practice, all leaf tobacco
inventory is classified as current although portions of such inventory,
because of the duration of the aging process, ordinarily would not be utilized
within one year. Cigar and other inventories are generally valued at the lower
of cost (using the first-in, first-out method) or market.

Property, Plant and Equipment:

         Property, plant and equipment is recorded at cost and depreciated on
a straight-line basis over the estimated useful lives of such assets ranging
from 3 to 20 years. Leasehold improvements are amortized over their estimated
useful lives or the terms of the leases, whichever is shorter. Repairs and
maintenance are charged to operations as incurred, and expenditures for
additions and improvements are capitalized.

Trademarks:

         Trademarks consist of registered and unregistered tradenames of
cigars or other tobacco brands which are being amortized on a straight-line
basis over 40 years. Accumulated amortization of trademarks was $3.3 million
and $2.5 million in 1996 and 1995, respectively.

                                     F-9
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Intangible Assets Related to Businesses Acquired:

         Intangible assets related to businesses acquired primarily represents
goodwill related to the 1993 Acquisition which is being amortized on a
straight-line basis over 40 years, consistent with industry practice. The
Company's accounting policy regarding the assessment of the recoverability of
the carrying value of goodwill is to review the carrying value of goodwill if
the facts and circumstances suggest that it may be impaired. If this review
indicates that goodwill will not be recoverable, as determined based on the
undiscounted future cash flows of the Company, the carrying value of goodwill
will be reduced to its estimated fair value. Accumulated amortization of
intangible assets related to businesses acquired was $6.6 million and $5.3
million in 1996 and 1995, respectively.

Impairment of Long-Lived Assets:

         The Company accounts for the impairment of long-lived assets under
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
("SFAS 121"). SFAS 121 requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amount. The adoption of SFAS 121 did not impact the
results of operations of the Company.

Advertising:

         The Company expenses advertising costs as incurred. Amounts charged
to advertising expense totaled $2.1 million, $1.2 million and $0.9 million for
the years ended December 31, 1996, 1995 and 1994, respectively.

Earnings Per Share:

         Earnings per share has been computed using the weighted average
number of common shares outstanding. For periods prior to the Merger, the
weighted average number of shares outstanding reflect the number of shares
issued to Mafco Consolidated Holdings in the Merger. The dilutive effect of
options outstanding under the Company's stock option plan is not material.

Interest Rate Swaps:

         The Company entered into interest rate swap agreements to modify the
interest characteristics of its outstanding debt from a fixed to a floating
rate basis. These agreements involve the receipt of fixed rate amounts in
exchange for floating rate interest payments over the life of the agreement
without an exchange of the underlying principal amount. The differential to be
paid or received is accrued as interest rates change and recognized as an
adjustment to interest expense related to the debt. The related amount payable
to or receivable from counterparties is included in accrued expenses. To the
extent previous interest rate swap agreements have been terminated, the
resulting gain is being recognized over the remaining original life of the
terminated agreements. The fair values of the swap agreements (See Note 8),
are not recognized in the financial statements.

                                     F-10
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Issuance of Subsidiary Stock:

         The Company recognizes gains and losses on issuances of subsidiary
stock in its Consolidated Statements of Earnings.

Stock-Based Compensation:

         In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123, encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to account for
stock-based compensation plans using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and related Interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the quoted market
price of the Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock. (See Note 12.)

Income Taxes:

         The Company computes income taxes under the liability method. Under
the liability method, deferred income taxes are generally determined based on
the difference between the financial statement and tax bases of assets and
effect in the years in which the differences are expected to reverse. Net
deferred tax assets are recorded when it is more likely than not that such tax
benefits will be realized.

Concentration of Credit Risk:

         Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
Company's customers are geographically dispersed but are concentrated in the
tobacco industry. The Company historically has had no material losses on its
trade receivables from customers in the tobacco industry in excess of
allowances provided.

Cash Flow Information:

         Cash equivalents are considered to be all highly liquid investments
with maturities of three months or less when acquired and exclude restricted
cash.

Use of Estimates:

         The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates. The most
significant estimates included in the preparation of the financial statements
are related to actuarial assumptions used in the determination of the pension
asset and liability, postretirement benefit liability and the valuation of
deferred tax assets.

                                     F-11
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



3.       ACQUISITIONS AND DISPOSITIONS

         On July 17, 1995, pursuant to a securities purchase agreement dated
as of June 26, 1995, MC Group purchased from Libra Invest & Trade Ltd.
("Libra") for approximately $63.9 million, including expenses, 5,939,400
shares of PCT Common Stock, 5,939,400 Abex VSRs, and 1,484,850 shares of MC
Group Common Stock (the "Libra Purchase"). Of the total purchase price of
approximately $63.9 million, approximately $29.9 million was allocated to the
purchase of 1,484,850 shares of MC Group Common Stock and is classified as
treasury stock. In connection with such purchase, the Company entered into an
agreement with PCT which, subject to certain exceptions, will limit the
Company's ability to dispose of its shares of PCT Preferred Stock and PCT
Common Stock for a period of three years. As a result of this transaction, the
Company's investment in PCT increased to approximately 29% of PCT Common Stock
(36% on a fully diluted basis).

         The Company accounts for its investment in PCT on the equity method.
At December 31, 1996, PCT had total assets, total liabilities, redeemable
convertible preferred stock, and stockholders' equity of $318.1 million,
$132.1 million, $20.0 million and $166.0 million, respectively. At December
31, 1995, PCT had total assets, total liabilities, redeemable preferred stock
and stockholders' equity of $51.3 million, $8.8 million, $20.0 million and
$22.5 million, respectively. For the year ended December 31, 1996, PCT had
income from continuing operations, income from discontinued operations and net
income of $10.4 million, $158.1 million and $168.5 million, respectively. For
the year ended December 31, 1995, PCT had a loss from continuing operations,
income from discontinued operations and net income of $4.0 million, $16.9
million and $11.3 million, respectively. At December 31, 1996 the market value
of PCT Common Stock owned by the Company was $44.5 million.

         On April 15, 1996, PCT sold its aerospace operations, including
substantially all of its assets, to Parker Hannifin Corporation ("Parker
Hannifin") for an aggregate cash consideration of approximately $201.1 million
before transaction costs and recognized a gain in discontinued operations of
$153.7 million.

         On August 21, 1996, Cigar Holdings completed an initial public
offering of 6,075,000 shares of its Class A common stock (the "Cigar IPO").
The net proceeds to Cigar Holdings from the Cigar IPO of approximately $127.8
million were paid as a dividend to the Company. As a result of the Cigar IPO,
the Company beneficially owns 80.2% of the outstanding shares of capital stock
of Cigar Holdings (representing approximately 97.6% of the combined voting
power), which owns 100% of the outstanding shares of capital stock of
Consolidated Cigar. In connection with the Cigar IPO, the Company recorded a
gain of $127.8 million.

         On November 25, 1996, the Company sold (the "Flavors Disposition") to
a subsidiary of PCT (i) all of the outstanding shares of Flavors common stock
and (ii) 23,156,502 Value Support Rights ("VSRs") for aggregate consideration
of approximately $297.3 million, consisting of $180.0 million in cash, the
assumption of approximately $110.1 million of indebtedness and deferred cash
payments to the Company of $3.7 million payable on June 30, 1997 and $3.5
million payable on December 31, 1997. The VSRs were subsequently distributed
to PCT shareholders, including 8,439,400 to the Company due to its ownership
of PCT Common Stock and PCT Preferred Stock.

                                     F-12
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         Each VSR, subject to certain limitations, entitles its holder to
receive a payment, if any, of up to $3.25 per VSR if the 30-Day Average Market
Price (as defined in the VSR Agreement) of PCT Common Stock is below $11.00
per share, subject to adjustment, on January 1, 1999; provided, however, the
Company has an optional right to call the VSRs each April 1, July 1, October 1
and January 1 from and including April 1, 1997 to and including October 1,
1998 (each, an "Optional Call Date"). If the Company calls the VSRs on or
before January 1, 1998, holders will be entitled to receive a payment of at
least $0.50 and up to $3.25 per VSR if the 30-Day Average Market Price is
below $10.25 per share, subject to adjustment, as of such Optional Call Date.
If the Company calls the VSRs after January 1, 1998, each VSR will entitle its
holder to a payment, if any, of up to $3.25 per VSR if the 30-Day Average
Market Price is below $11.00 per share, subject to adjustment, on such
Optional Call Date.

         The Company's VSR obligation (which excludes the 8,439,400 VSR's
received by the Company as a distribution from PCT) was accounted for at the
fair value on the date of issuance and was subsequently marked to the closing
market price of the security on December 31, 1996. The VSR obligation will be
marked to the closing market price of the security at each financial statement
date. As a result, income in future periods may be affected by any positive or
negative mark to market adjustment.

         The Company recorded a gain of $151.7 million in connection with the
Flavors Disposition, which is net of a deferral of $61.2 million corresponding
to the Company's continuing approximate 29% equity interest in PCT following
the Flavors Disposition. The deferral of $61.2 million was recorded as a
reduction of the Company's investment in PCT preferred and common stock.

4.       INVENTORIES

         Inventories consisted of the following:
 
                                              (in thousands)
                                               DECEMBER 31,
                                          ---------------------
                                            1996          1995
                                          -------       -------
                  Raw materials           $34,469       $59,742
                  Work-in progress          1,974         1,988
                  Finished goods            9,514        22,764
                                          -------       -------
                                          $45,957       $84,494
                                          =======       =======





                                     F-13
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



5.       PROPERTY, PLANT AND EQUIPMENT

         Property, plant and equipment consisted of:

                                              (in thousands)
                                               DECEMBER 31,
                                          ---------------------
                                            1996          1995
                                          -------       -------
             Land                         $ 1,884       $ 2,259
             Buildings                     14,140        19,814
             Machinery and equipment       33,220        47,888
             Furniture and fixtures         1,614         2,190
             Leasehold improvements           361           276
             Construction-in-progress         -             640
                                          -------       -------
                                           51,219        73,067
             Accumulated depreciation     (13,942)      (27,015)
                                          -------       -------
                                          $37,277       $46,052
                                          =======       =======

         Depreciation expense was $5.8 million, $5.5 million and $5.5 million
for the years ended December 31, 1996, 1995 and 1994, respectively.

6.       ACCRUED EXPENSES

         Accrued expenses consisted of the following:

                                              (in thousands)
                                               DECEMBER 31,
                                          ---------------------
                                            1996          1995
                                          -------       -------
    Employee benefits, severance and 
      other compensation                 $ 21,535      $ 21,614
    Interest                                3,388         4,737
    Taxes payable                          42,179           219
    Indemnification reserve and other
      tax reserves (see Note 9)            11,500        11,500
    Other                                  22,245        17,445
                                         --------      --------
                                         $100,847      $ 55,515
                                         ========      ========

         The increase in accrued expenses primarily reflects the tax liability
related to the Flavors Disposition.

                                     F-14
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



7.       OTHER LIABILITIES

         Other liabilities consisted of the following:

                                              (in thousands)
                                               DECEMBER 31,
                                          ---------------------
                                            1996          1995
                                          -------       -------
    Casualty reserves                    $ 10,718      $ 11,583
    Employee benefits and other  
      compensation                         75,005        72,916
    Indemnification reserve and other
      tax reserves (see Note 9)            15,900        15,900
    VSR obligation                         13,797           -
    Other                                  51,810        56,451
                                         --------      --------
                                         $167,230      $156,850
                                         ========      ========

8.       LONG-TERM DEBT

                                              (in thousands)
                                               DECEMBER 31,
                                          ---------------------
                                            1996          1995
                                          -------       -------
    Consolidated Cigar:
     Bank Borrowings (a)                 $  7,500      $ 20,600
     Senior Subordinated Notes (b)         90,000        90,000

    Mafco Worldwide(c):
     Senior Credit:
       Tranche A Term Loans              $    -        $ 14,000
       Tranche B Term Loans                   -          19,800
     11 7/8% Senior Subordinated Notes
      Due 2002                                -          84,510
                                         --------      --------
                                           97,500       228,910
    Less: current portion                     -         (10,232)
                                         --------      --------
                                         $ 97,500      $218,678
                                         ========      ========
-------------
(a)      Represents borrowings under a credit agreement (the "Cigar Credit
         Agreement") with Chase dated February 23, 1993, which provides for a
         revolving credit facility (the "Revolving Credit Facility") and a
         working capital facility (the "Working Capital Facility"). The
         Revolving Credit Facility and the Working Capital Facility have final
         maturities on April 3, 1999. The Revolving Credit Facility was
         subject to quarterly commitment reductions of $2.5 million through
         the end of 1996. The Cigar Credit Agreement was amended on February
         3, 1997 to reduce the amount of various interest rate margins charged
         against outstanding borrowings and waive any further scheduled
         amortization of the commitment on the Revolving Credit Facility.

         The maximum borrowings under the Cigar Credit Agreement, as amended,
         at the end of December 31, 1996 and through maturity are $20 million
         under the Working Capital Facility and $14.9 million under the
         Revolving Credit Facility. Outstanding letters of credit of

                                     F-15
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         approximately $1.7 million reduced the available borrowings under the
         Cigar Credit Agreement at December 31, 1996.

         The following indicates the Cigar Credit Agreement's established and
         amended interest payment rates available at the option of
         Consolidated Cigar:

                                              Initial   1996   Rate Effective 
                                               Rate     Rate     March 1997
                                               ----     ----     ----------
         Base Rate Loans    Prime plus         1 3/4%    1%          0%
         936 Loans          936 Rate plus      2 3/4%    2%          1%
         Eurodollar Funds   Eurodollar plus    2 3/4%    2%          1%

         The average interest rate under the Cigar Credit Agreement was
         approximately 7.7% at December 31, 1996.

         The Cigar Credit Agreement is secured by perfected first priority
         liens on all of the material assets of Consolidated Cigar and its
         domestic subsidiaries and perfected pledges of the stock of all
         Consolidated Cigar's subsidiaries (with certain exceptions for the
         stock of foreign subsidiaries). The Cigar Credit Agreement is
         guaranteed by the Company and by all of the domestic subsidiaries of
         Consolidated Cigar. The guarantee by the Company is secured by a
         pledge of all the outstanding stock of Consolidated Cigar.

         The Cigar Credit Agreement contains various covenants which govern,
         among other things, the ability to incur indebtedness, pay dividends,
         incur lease rental obligations, make capital expenditures, use
         proceeds from asset sales, participate in mergers and other
         activities. The Cigar Credit Agreement also requires Consolidated
         Cigar to satisfy certain financial covenants related to net worth,
         capital expenditures and various ratios.

(b)      Represents the $90.0 million in principal amount of 10 1/2% Senior
         Subordinated Notes Due 2003 (the "Senior Subordinated Notes") issued
         in connection with the 1993 Acquisition.

         The Senior Subordinated Notes bear interest at the rate of 10 1/2%
         per annum, mature on March 1, 2003 and are redeemable at a premium
         prior to maturity starting March 1, 1998. The Senior Subordinated
         Notes are redeemable earlier at a premium in the event of a change of
         control.

         The indenture relating to the Senior Subordinated Notes limits, among
         other things, dividends and other distributions, certain types of
         indebtedness, certain mergers, consolidations and sales of assets.

         The terms of the Cigar Credit Agreement and the Senior Subordinated
Notes of Consolidated Cigar limit the payment of dividends or distributions by
Consolidated Cigar to an amount equal to approximately $9.3 million as of
December 31, 1996.

                                     F-16
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(c)      In connection with the Flavors Disposition, PCT assumed Mafco
         Worldwide's obligations under the Senior Credit and its 117/8% Senior
         Subordinated Note indenture. Obligations under the Senior Credit bore
         interest at November 25, 1996 at approximately 8.20%.

         The fair value of the Company's long-term debt at December 31, 1996
is estimated based on the quoted market prices for the same issues or on the
current rates offered to the Company for debt of the same remaining
maturities. The estimated fair value of long-term debt was approximately $3.6
million more than the carrying value of $97.5 million.

         In 1994, the Company recorded an extraordinary loss of $2.7 million,
net of $1.7 million tax benefit, as a result of the June 1994 refinancing of
certain indebtedness. Prepayment premiums, original issue discounts and
certain other capitalized costs of the refinanced indebtedness were expensed
as such extraordinary loss.

         Because judgment is required in interpreting market data to develop
estimates of fair value, the estimates are not necessarily indicative of the
amounts that could be realized or would be paid in a current market exchange.
The effect of using different market assumptions or estimation methodologies
may be material to the estimated fair value amounts.

         Consolidated Cigar entered into two five year interest rate swap
agreements in an aggregate notional amount of $85.0 million. Under the terms
of the agreements, Consolidated Cigar receives a fixed interest rate averaging
5 4/5% and pays a variable interest rate equal to the six month LIBOR.
Consolidated Cigar entered into such agreements to take advantage of the
differential between long-term and short-term interest rates and effectively
converted the interest rate on $85.0 million of fixed-rate indebtedness to a
variable rate. From inception of the agreements through January 1997
Consolidated Cigar has paid $0.8 million in settlement, which occurs at the
end of each six month period of the agreements. Had Consolidated Cigar
terminated these agreements, which the Company considers to be held for other
than trading purposes, on January 31, 1997, a combined loss of approximately
$1.1 million would have been realized. Future positive or negative cash flows
associated with these agreements will depend upon the trend of short-term
interest rates during the remaining life of the agreements. In the event of
non-performance of the counterparties at anytime during the remaining lives of
these agreements which expire at December 1998 and January 1999, the Company
could lose some or all of any future positive cash flows. However, the Company
does not anticipate non-performance by such counterparties.

9.       INCOME TAXES

         Information pertaining to consolidated income from continuing
operations before income taxes and extraordinary item and the applicable
provision for income taxes, excluding amounts related to discontinued
operations and to the extraordinary item, is as follows:

                                     F-17
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                      (in thousands)
                                                  YEAR ENDED DECEMBER 31, 
                                           ------------------------------------
                                             1996          1995          1994
                                             ----          ----          ----
Income from continuing operations
  before income taxes:
  Domestic                                 $320,035      $13,437       $ 8,567
  Foreign (includes Puerto Rico)             28,385       19,357        15,246
                                           --------      -------       -------
                                           $348,420      $32,794       $23,813
                                           ========      =======       =======
Provision (benefit) for income taxes:
Current:
  Federal                                  $ 41,215      $ 2,827       $ 3,477
  State and local                             9,995        1,442           809
  Foreign                                     2,712        1,941         2,036
                                           --------      -------       -------
                                             53,922        6,210         6,322
Deferred:
  Federal                                    50,699        2,794           963 
  State and local                              (675)         108           174
  Foreign                                       878          591            19
                                           --------      -------       -------  
                                           $104,824      $ 9,703       $ 7,478
                                           ========      =======       =======
                              
         The effective tax rate on consolidated income from continuing
operations before income taxes varies from the current statutory federal
income tax rate as follows:

                                             1996          1995          1994
                                             ----          ----          ----
Statutory rate                               35.0%         35.0%         35.0%
Foreign income taxed at other than the
   statutory tax rate                        (1.0)         (8.5)         (7.4)
Non-deductible amortization                   0.2           1.9           2.7
Permanent benefit on sale of Flavors 
  resulting from basis difference 
  in goodwill                               (11.9)            -             -
State and local taxes, net                    1.7           3.1           3.0
Increase (Decrease) in valuation allowance    6.1          (1.8)         (2.5)
Other, net                                      -          (0.1)          0.6
                                            ------        ------        ------  
                                             30.1%         29.6%         31.4%
                                            ======        ======        ======

         The approximate effect of the temporary differences that gave rise to
deferred tax balances were as follows:

                                     F-18
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


                                                        (in thousands)
                                                          DECEMBER 31, 
                                                   --------------------------  
                                                       1996          1995       
                                                       ----          ----       
          Deferred tax assets: 
            Accounts receivable                      $  1,930      $ 2,078      
            Inventory                                     -            466
            Prepaid and other                           2,914        2,914
            Property, plant and equipment                 -            933
            Long term investments and other            23,184        4,277
            Pension liability                             -            607
            Accrued expenses and other                  6,654        7,116
            Employee benefits and other 
              compensation                             27,092       25,108
            Other long term liabilities                11,109        5,384
            Net operating loss carryforwards              -          4,900
                                                     --------      -------      
              Total deferred tax asset                 72,883       53,783
            Valuation allowance                       (23,864)         -
                                                     --------      -------      
              Total deferred tax asset net of
                valuation allowance                    49,019       53,783
                                                     --------      -------      

          Deferred tax liabilities:
            Subsidiary stock issuance                $ 44,769      $   -
            Property, plant and equipment               3,473        3,474
            Pension asset                              22,199       20,035
            Unremitted foreign earnings                 2,521        2,179
            Other                                         385          403
                                                     --------      -------      
              Total deferred tax liability             73,347       26,091
                                                     --------      -------      
              Net deferred tax asset (liability)     $(24,328)     $27,692
                                                     ========      =======      

         As a result of the pension plan merger in 1995 (see Note 10), a
deferred tax asset in the amount of $2.4 million which was related to the
unfunded pension liability at the date of the 1993 Acquisition was recorded
with a resulting reduction of goodwill.

         As a result of the Merger, MC Group and its domestic subsidiaries
(the "Mafco Group") have, for federal income tax purposes, become members of
an affiliated group of corporations of which Mafco Holdings is the common
parent (the "Holdings Group"). Accordingly, the Mafco Group will be included
in the consolidated federal income tax returns and, to the extent permitted by
applicable law, any combined state or local income tax returns filed on behalf
of the Holdings Group. Mafco Holdings and MC Group are parties to a tax
sharing agreement pursuant to which MC Group will pay to Mafco Holdings with
respect to each taxable year an amount equal to the consolidated federal and
state and local income taxes that would have been incurred by the Mafco Group
had it not been included in the consolidated federal and any combined state or
local income tax returns filed by the Holdings Group for such period. Prior to
the Merger, Consolidated Cigar and Mafco Worldwide were party to tax sharing
agreements with Mafco Holdings pursuant to which Consolidated Cigar and Mafco
Worldwide were required to pay to Mafco Holdings with respect to each taxable
year an amount equal to the consolidated federal and state and local income
taxes that would have been incurred by Consolidated Cigar and Mafco Worldwide
had they not been included in the consolidated federal and any combined state
and local income tax returns filed by Mafco Holdings. For all periods
presented, federal and state income taxes are provided as if the Company filed
its own income tax returns.

                                     F-19
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





         Foreign income primarily consists of Puerto Rico and Dominican
Republic income. Pursuant to a grant of industrial tax exemption which expires
in 2002, 90% of the income earned from the manufacture of cigars in Puerto
Rico is tax exempt from Puerto Rican income taxes. The remaining 10% of such
income is taxed at a maximum surtax rate of 45%, resulting in an effective
income tax rate of approximately 4.5%.
The benefit to the Company amounted to approximately $3.5 million for the year
ended December 31, 1994, $5.1 million for the year ended December 31, 1995,
and $7.4 million for the year ended December 31, 1996.

         Funds repatriated to the Company from its Puerto Rico subsidiary are
subject to a maximum Puerto Rico tollgate tax of 10%. Legislation enacted in
Puerto Rico in 1993 included a provision for prepaying a portion of these
tollgate taxes effective for the 1993 fiscal year and subsequent periods.

         The Company manufactures cigars in the Dominican Republic pursuant to
a 100% exemption from Dominican Republic income taxes, which exemption expires
in 2010.

         Income earned from Puerto Rico operations is generally exempt from
federal income tax. Section 936 of the Internal Revenue Code allows a
"possessions tax credit" against U.S. income tax attributable to the Puerto
Rico taxable earnings. As part of OBRA 1993, the Internal Revenue Service has
limited this exemption based upon a percentage of qualified wages in Puerto
Rico, plus certain amounts of depreciation. The Company believes that it
qualified for the possessions tax credit during each of the fiscal years ended
1994, 1995 and 1996.

         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
Internal Revenue 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 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 based upon a percentage of qualified wages in Puerto Rico,
plus certain amounts of depreciation, 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 December 31, 2005, the possessions tax
credit would be eliminated. The repeal of the possessions tax credit could
have a material adverse effect on the Company for taxable years beginning
after December 31, 2001 and before January 2006 to the extent that the
Company's annual income from its Puerto Rico operations exceeds its average
annual income from its Puerto Rico operations (as computed in the manner
described in the preceding sentence), and for taxable years after December 31,
2005. Although it does not currently have any definitive plans with respect
thereto, the Company expects to evaluate alternatives that may be available to
it in order to mitigate the effects of the SBJPA. On February 6, 1997,
President Clinton proposed certain tax law changes which, if enacted, would
eliminate the Income Limitation, extend the possession tax credit indefinitely
and make the credit available to newly established business operations.

                                     F-20
<PAGE>

                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




         In connection with the Merger, MC Group entered into a tax sharing
agreement with its former subsidiary, PCT, pursuant to which MC Group will
indemnify PCT with respect to all taxes applicable to periods prior to June
15, 1995 except for foreign taxes related to PCT's aerospace business.

         In connection with the July 16, 1992 distribution of Abex, the
predecessor of MC Group, from its prior parent, The Henley Group, Inc.
("Henley"), Abex entered into a tax sharing agreement with Henley in which
Abex indemnified Henley for tax liabilities resulting from certain adjustments
to the tax liabilities of Abex entities and for certain tax liabilities of a
prior affiliated company, Wheelabrator Technologies, Inc. for the period May
26, 1986 through December 31, 1988. All federal tax liabilities related to
this period were settled prior to 1995; however, certain state tax liabilities
of approximately $7.0 million, which is an obligation of the Company, remain
open as of December 31, 1996.

         Abex had been included in the consolidated federal income tax return
of Henley for 1990 and 1991. The Internal Revenue Service has asserted
deficiencies against Henley for these periods of approximately $23 million,
plus interest. Koll Real Estate Group, Inc. ("Koll"), as the parent of Henley,
has indicated that it will vigorously contest the deficiencies through the
administrative appeals process as well as in court and that a final conclusion
to this matter could take several years. In any event, the adjustments
creating these deficiencies do not relate to Abex entities and are therefore
not liabilities of the Company as successor to Abex under the tax sharing
agreement. However, if Henley or Koll were unable to pay any deficiency
remaining after the review process, then the Internal Revenue Service, in
accordance with Treasury Regulation 1.1502-06, could seek payment from any of
the other entities that were included in the federal consolidated return of
Henley for 1990 and 1991, including the Company as successor to Abex.

         While the Company expects that Koll will discharge its ultimate tax
obligations, the Company is aware that Koll has a history of operating losses
and retained deficits. Thus, there can be no assurance that Koll will have the
financial ability to discharge such obligations. In addition, Koll has
announced that it is soliciting consents from its debtholders for a financial
restructuring, but the Company is presently unable to determine the effect, if
any, of a financial restructuring on the ability of Koll to pay any remaining
deficiency.

         Management believes that reserves as of December 31, 1996 are
adequate for all tax liabilities associated with these tax sharing agreements
as well as any potential liability asserted by the IRS in accordance with
Treasury Regulation 1.1502-06.

10.      PENSION PLANS

         The Company maintains tax qualified defined benefit pension plans
covering substantially all hourly and salaried employees in the U.S. and
Puerto Rico. In addition, certain employees of Abex's former subsidiaries are
covered under various tax qualified MC Group retirement plans (the "MC Group
Retirement Plan"). The fair value of the assets and liabilities of the former
Abex plans were recognized in the financial statements of the Company as of
June 15, 1995 in connection with the Merger.

         Plans covering salaried employees generally provide pension benefits
based on years of service and compensation. Plans covering hourly employees
and union members generally provide stated 


                                     F-21
<PAGE>

                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




benefits for each year of service. Plan assets consist primarily of equity and 
fixed income securities and mutual funds.

         Effective December 31, 1995, Consolidated Cigar's tax qualified
non-contributory defined benefit pension plans (the "Cigar Plans") covering
substantially all hourly and salaried employees in the U.S. and Puerto Rico
were merged with and into the MC Group Retirement Plan. The MC Group
Retirement Plan was the surviving plan with all the assets and liabilities of
the Cigar Plans becoming assets and liabilities of the surviving MC Group
Retirement Plan.

         In addition, certain employees of Abex's former subsidiaries are
covered under a non-qualified executive defined benefit plan (the "Executive
Defined Benefit Plan") and a defined contribution plan (the "Executive Defined
Contribution Plan"). Assets of these plans of $27.1 million and $26.1 million
at December 31, 1996 and 1995, respectively, are held by a rabbi trust and are
presented as other assets in the Company's balance sheet because they will be
available to general creditors of the Company in the event of the Company's
insolvency. The liability related to the Executive Defined Contribution Plan
was $2.1 million and $2.6 million at December 31, 1996 and 1995, respectively,
and is included in other liabilities.

         The following table reconciles the funded status of the Company's
significant pension plans as of the date indicated:

<TABLE>
<CAPTION>

                                                                       (IN THOUSANDS)
                                                                        DECEMBER 31,
                                        --------------------------------------------------------------------------
                                                      1996                                    1995
                                        -----------------------------------      --------------------------------- 
                                           ASSETS            ACCUMULATED            ASSETS             ACCUMULATED
                                           EXCEED              BENEFITS             EXCEED               BENEFITS
                                        ACCUMULATED             EXCEED            ACCUMULATED             EXCEED
                                          BENEFITS              ASSETS              BENEFITS              ASSETS
                                          --------              ------              --------              ------
<S>                                     <C>                  <C>                  <C>                  <C>
Actuarial present value of benefit
  obligation:
  Accumulated benefit obligation
  includes vested benefits of 
  $127,258 and $27,874 in 1996
  and $127,847 and $28,527 in 1995       $ 127,834             $ 27,938            $ 128,935             $ 28,535
                                         =========             ========            =========             ========

Projected benefit obligation for 
  service rendered to date                 133,095               28,259              135,180               28,684
Less: plan assets at fair value           (202,211)                 -               (195,579)                 -
                                         ---------             --------            ---------             --------

Projected benefit obligation in excess
  of (less than) plan assets               (69,116)              28,259              (60,399)              28,684
Unrecognized transition asset
  (obligation)                                  62                  -                   (182)                 -
Unrecognized prior service benefit (cost)      219                 (541)                   1                 (309)
Unrecognized net (loss) gain                 6,080                  404                5,264                 (452)
Adjustment for minimum liability               -                    198                  -                    -
                                         ---------             --------            ---------             --------
Net pension (asset) liability            $ (62,755)            $ 28,320            $ (55,316)            $ 27,923
                                         =========             ========            =========             ========
</TABLE>
                              

         Pension liabilities are included in accrued expenses and other
liabilities.

                                     F-22
<PAGE>

                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




         The weighted-average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7 1/4% in 1996 and
7 1/4%-7 1/2% in 1995. The rate of increase in future compensation levels
reflected in such determination was 4 1/2% in 1996 and 4%-5% in 1995. The
assumed long-term rate of return on assets was 8-9% for 1996, 6 1/2%-9% for
1995 and 7%-8 1/4% for 1994. The Company's funding policy is to contribute
annually an amount necessary to satisfy the Internal Revenue Service's minimum
funding standards.

         Pension (income) expense includes the following components for the
years ended December 31, 1996, 1995 and 1994 respectively:

                                                      (in thousands)
                                             1996          1995          1994
                                             ----          ----          ----
  Service cost-benefits earned during
   the period                              $  1,047      $   800       $   893
  Interest cost on projected benefit
   obligation                                12,525        7,416         2,194
  Actual return on plan assets              (31,945)     (20,732)         (827)
  Net amortization and deferrals             14,548       11,594          (685)
                                           --------      -------       -------
    Net pension (income) expense           $ (3,825)     $  (922)      $ 1,575
                                           ========      =======       =======

         In addition, the Company maintains certain 401(k) plans for which the
expense for matching contributions was $436,000, $273,000 and $280,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.

11.      POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

         MC Group, generally at its sole discretion, provides certain
employees of Abex and its former subsidiaries retiring on or after attaining
age 55, who have rendered at least 10 years of service and who have
participated in Abex's pension plans, with postretirement health care
coverage. In 1993, Abex amended its existing postretirement health care
programs primarily to adjust certain cost sharing provisions.
 MC Group funds the cost of this benefit on a claims-paid basis and made
payments of $4.3 million in 1996 and $2.6 million in 1995 from the date of the
Merger. The liability related to these benefits was recognized as of June 15,
1995 in connection with the Merger. The plans have no assets.

         The accumulated postretirement benefit obligation consists of the
following components at December 31, 1996 and 1995:

                                                   (in thousands)
                                                 ------------------
                                                 1996          1995       
                                                 ----          ----       
    Accumulated postretirement benefit
      obligation:          
      Retirees                                 $ 41,681      $ 41,800     
      Fully eligible active plan participants       -           1,300     
                                               --------      --------     
    Postretirement benefit liability           $ 41,681      $ 43,100     
                                               ========      ========     

         Unrecognized items at December 31, 1996 and 1995 were not
significant. Net periodic postretirement benefit costs other than pensions
attributable to interest on the accumulated post-


                                     F-23
<PAGE>

                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




retirement benefit obligation was $2.9 million for December 31, 1996 and $1.7
million in 1995 from the date of the Merger on June 15, 1995. For measurement
purposes, a 5.5%-8% annual rate of increase in the per capita cost of covered
health care benefits was assumed for 1997 declining to 5.5% thereafter. An
increase of 1% in the health care cost trend rate will not have a significant
effect on the amounts reported because of cost sharing provisions. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.25% at December 31, 1996 and 1995.


12.      STOCK BASED COMPENSATION

         Under the terms of the Company's 1995 stock option plan (the "MC
Group Stock Option Plan"), stock options and stock appreciation rights may be
granted to key employees of the Company. A maximum of 1,250,000 shares of MC
Group Common Stock have been reserved for issuance under the MC Group Stock
Option Plan. The MC Group options vest one-third each year beginning on the
first anniversary of the date of grant and become 100% vested on the third
anniversary of the date of grant.

         The following table summarizes the stock option transactions under
the MC Group Stock Option Plan and the grant of 750,000 options to the
Chairman of the Board of Directors for services rendered and to be rendered to
the Company:

<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                        -----------------------------------------------------
                                                  1996                        1995
                                        -------------------------   -------------------------
                                                       EXERCISE                    EXERCISE
                                          OPTIONS        PRICE        OPTIONS        PRICE
                                          -------        -----        -------        -----
<S>                                       <C>          <C>                          <C>   
Outstanding - beginning of year           750,000      $ 17.38           -          $    -
Granted                                   875,000        21.57        750,000        17.38
                                        ---------                     -------
Outstanding at year end                 1,625,000        19.63        750,000        17.38
Exercisable at year end                   791,667                     250,000
Weighted average fair value of
  options granted during the year                        10.08                        7.31
Weighted aaverage remaining 
  contractual life of options
  outstanding (in years)                                  9.27                        9.92
</TABLE>

         Cigar Holdings adopted its 1996 stock plan (the "Cigar Stock Option
Plan") prior to the effectiveness of the Cigar IPO. Under the Cigar Stock
Option Plan, incentive stock options, non-qualified stock options, stock
appreciation rights, restricted and unrestricted stock (collectively
"Awards"), may be granted to selected employees, consultants and directors of
Cigar Holdings, and any of its affiliates, from time to time. The aggregate
number of shares of Cigar Holdings common stock as to which options and rights
may be granted under the Cigar Stock Option Plan may not exceed 3,000,000. As
of December 31, 1996 there were 1,237,500 shares of Cigar Holdings
non-qualified options outstanding that were issued to officers and employees,
1,150,000 shares at an exercise price equal to the initial public offering
price of $23.00 per share and 87,500 shares at $25.00 per share. None of the
Cigar Holdings option shares were exercisable at December 31, 1996 and
1,762,500 shares remained available for future grants. These Cigar Holdings
options vest one-third each year 


                                     F-24
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



beginning on the first anniversary of the date of grant and become 100% vested
on the third anniversary of the date of grant. The weighted average fair value
of Cigar Holdings options granted in 1996 is $16.91 per share. At December 31,
1996 the weighted average exercise price of the Cigar Holdings options
outstanding is $23.14 and the weighted average remaining contractual life of
those options is 9.75 years.

         The exercise price of the stock options issued were equal to the
market price of the respective companies' stock on the dates of grant,
accordingly, no compensation cost has been recognized for stock options
issued. Had compensation cost for the stock options issued by the Company and
Cigar Holdings been determined based on the fair value at grant date for
awards in 1995 and 1996 consistent with the provisions of SFAS 123, the
Company's net earnings and earnings per share would have been reduced to the
pro forma amounts indicated below:

                                         YEAR ENDED DECEMBER 31,
                                     ------------------------------
                                         1996            1995
                                        ------          ------
                                            (IN THOUSANDS,
                                       EXCEPT PER SHARE AMOUNTS)
         Net income - as reported    $ 258,648        $ 24,413
         Net income - pro forma        250,338          21,063
         Income per share - 
           as reported                   11.13            1.12
         Income per share - 
           pro forma                     10.77            0.97

         The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants under the MC Group Stock Option Plan in 1996
and 1995, respectively: dividend yield of 0.0%; expected volatility of 50.9%
and 45.6%; risk-free interest rate of 6.52% and 5.37%; and expected life of 4
years. The following weighted-average assumptions were used for grants under
the Cigar Stock Option Plan in 1996: dividend yield of 0.0%; expected
volatility of 90%; risk-free interest rate of 6.13%; and expected life of 5
years.

         The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.

         The Chief Executive Officer of the Company has been granted the right
to receive a special payment of up to $5.5 million which is deferred and is
dependent upon the overall performance of the Company's Common Stock. At
December 31, 1996, the Company has accrued the earned and vested portion of
the special payment right.

                                     F-25
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



13.      RELATED PARTY TRANSACTIONS

         Employees of affiliates of the Company provide services to the
Company in connection with insurance and legal services, benefit plan
administration and other services and the Company reimburses such affiliates
for the allocated share of the costs related to such employees. In 1996 and
1995, the amount allocated to the Company was $624,549 and $436,414,
respectively. The Company believes that the terms of such allocated services
are at least as favorable to the Company as would be available from
unaffiliated third parties.

         The Company performs certain services for a subsidiary of Mafco
Holdings. Revenues for such services were $958,000, $874,000 and $763,000 for
the years ended December 31, 1996, 1995 and 1994.

         Included in accrued expenses and other liabilities are payables to
Mafco Holdings and affiliates in the amount of $39.1 million and $2.0 million
at December 31, 1996 and 1995, respectively, principally related to income
taxes payable to Mafco Holdings pursuant to a tax sharing agreement (See 
Note 9).

14.      COMMITMENTS AND CONTINGENCIES

         Rental expense, which includes rent for facilities, equipment and
automobiles under operating leases expiring through 2008, amounted to $2.5
million, $2.3 million and $2.3 million for the years ended December 31, 1996,
1995 and 1994 respectively. Future minimum rental commitments, which include
obligations related to former operations of Abex, for operating leases with
noncancelable terms in excess of one year from December 31, 1996, net of
sublease payments of $11.9 million, are as follows:

                                             (IN THOUSANDS)
                                             --------------
               1997                             $  2,717
               1998                                2,836
               1999                                2,678
               2000                                1,670
               2001 and thereafter                 2,790
                                                --------
                                                 $12,691
                                                ========

         At December 31, 1996, outstanding contracts to purchase tobacco
amounted to $7.3 million which were all U.S. dollar obligations.

         Under a June 15, 1995 Transfer Agreement to which PCT and a
subsidiary of MC Group are parties, such subsidiary will reimburse PCT for
amounts spent in excess of $1.5 million during each of the years 1996, 1997
and 1998 in connection with certain public company costs. The amount spent for
such costs by PCT in the 1996 and 1995 periods did not exceed $1.5 million;
therefore, no reimbursement was made.

                                     F-26
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



         On February 5, 1996, MC Group entered into a reimbursement agreement
with Chemical Bank and PCT, through its wholly owned subsidiary Pneumo Abex
Corporation ("Pneumo Abex"). The agreement provides for letters of credit
totaling $20.8 million covering certain environmental issues, not related to
the aerospace business of PCT. In connection with such agreement, MC Group
pledged the PCT Preferred Stock and its ownership of 5,939,400 shares of PCT
Common Stock.

         At March 21, 1997, 19,777,752 shares, or approximately 85% of the
Company's stock were pledged and shares of intermediary holding companies may
from time to time be pledged, to secure indebtedness of Mafco Holdings or its
affiliates.

         In connection with the Abex Transactions, the Company entered into a
transfer agreement (the "Transfer Agreement"), which allocated assets and
liabilities, along with responsibility for various matters, between the
Company and PCT. Pursuant to the Transfer Agreement, the Company assumed and
agreed to indemnify PCT against, or to manage on PCT's behalf, all liabilities
not relating to Abex's then existing aerospace business, including various
contingent and other liabilities as set forth below. PCT assumed, and
indemnified the Company against, all liabilities of the aerospace business and
certain other liabilities. A discussion of the material liabilities for which
PCT has agreed to indemnify the Company is set forth below. The Company has
also assumed responsibility for various other matters relating to businesses
formerly conducted by Abex or its predecessors.

         Certain of Abex's former subsidiaries have been named parties in
several government enforcement and private actions seeking cleanup costs
and/or damages for personal injury or property damage under the Federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended ("CERCLA") and related federal and state laws. In addition, certain
of these subsidiaries have been identified by governmental authorities as
being potentially responsible for cleanup costs and/or natural resource
damages or have received inquiries from governmental authorities regarding
their possible involvement with hazardous waste sites. One such site in
Portsmouth, Virginia, which was formerly operated by Abex and a portion of
which is owned by MC Group, has been placed on the National Priorities List
under CERCLA. The potential costs related to such matters and the possible
impact thereof on future operations are uncertain due to, among other factors,
the following: uncertainty regarding the extent of prior pollution; the
complexity of laws and regulations and their interpretations; the varying
costs and effectiveness of alternative cleanup technologies and methods; and
the questionable and varying degrees of responsibility and/or involvement by
Abex subsidiaries.

         Under applicable state and federal law, including CERCLA, each
potentially responsible party ("PRP") can be held jointly and severally liable
for all cleanup and related costs at each site. For the reasons noted above,
it is impossible to predict the extent to which remediation will be required
at a particular site and the ultimate cost thereof. However, the aggregate
cost of cleanup and related expenses with respect to sites at which Abex and
its subsidiaries, together with numerous other third parties, have been named
PRPs could exceed $200 million, including approximately $20 million in
remedial action costs, as estimated by the EPA, in respect of the Portsmouth,
Virginia site.

         As a result of the Transfer, MC Group will indemnify PCT with respect
to all environmental matters associated with Abex's former operations to the
extent not paid by third party indemnitors or insurers, other than the
operations relating to PCT's aerospace business which were recently sold to


                                     F-27
<PAGE>

                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Parker Hannifin. Pursuant to the Stock Purchase Agreement, dated April 28,
1988, as amended, between Pneumo Abex and Whitman Corporation ("Whitman") and
the related Settlement Agreement, dated September 23, 1991, between Pneumo
Abex and Whitman (collectively, the "Whitman Agreements"), Whitman is
obligated to indemnify Pneumo Abex for costs, expenses and liabilities
relating to environmental and natural resource matters to the extent
attributable to the operation of the businesses acquired from Whitman prior to
their acquisition in 1988, subject to certain conditions and limitations
principally relating to compliance with notice, cooperation and other
procedural requirements. Generally, known and unknown liabilities arising
after the 1988 Whitman acquisition that relate to PCT's current facilities
will be the responsibility of PCT. Whitman is generally discharging the
related liabilities in the ordinary course. In addition to the remedial action
costs for the Portsmouth, Virginia site, as to which Whitman has acknowledged
its indemnification responsibilities, Pneumo Abex is party to a number of
cases involving tort claims concerning such site alleging exposure to lead for
which Whitman has declined to accept responsibility. MC Group and Whitman are
currently sharing equally the defense costs for such cases, subject to a
reservation of their respective rights. Whitman is actively managing a
significant number of indemnified matters, including the potential cleanup of
the Portsmouth, Virginia site, and MC Group's involvement varies and is
limited for those matters being managed by Whitman.

         Based upon MC Group's experience to date (including the existence of
the indemnification arrangements referred to above), the cost of compliance
with environmental laws is not expected to have a material adverse effect on
MC Group's earnings, liquidity or competitive position. However, future
events, such as changes in existing laws or enforcement policies, may give
rise to additional compliance and/or other costs which could have a material
adverse effect on MC Group's financial condition or results of operations.

         MC Group has not recognized any liability in its financial statements
for environmental matters occurring prior to the 1988 Whitman acquisition
which are covered by Whitman's indemnification obligations under the Whitman
Agreements. Management of MC Group considers these obligations to be Whitman's
and monitors the financial position of Whitman to determine the level of
uncertainty associated with Whitman's ability to satisfy its obligations.
Based upon Whitman's active management of indemnifiable matters, its
discharging of the related liabilities when required, and its financial
position based upon publicly filed financial statements, MC Group believes
that the likelihood of Whitman failing to satisfy its obligations is remote.

         A predecessor of Pneumo Abex, a wholly owned subsidiary of PCT, has
been named as a defendant in personal injury lawsuits claiming damages
relating to asbestos-containing friction products formerly manufactured by
such predecessor. The predecessor, which discontinued the manufacture and sale
of asbestos-containing friction products in the United States in 1987, has
never been found liable in any such case. As of January 31, 1997, Pneumo Abex
or the predecessor has been named as a defendant in approximately 50,000
pending claims, typically with 10 to 30 or more co-defendants.

         Pursuant to the Whitman Agreements, Whitman has retained ultimate
responsibility for all asbestos- related claims made through August 1998 and
for certain asbestos-related claims asserted thereafter. In connection with
the sale by Abex in December 1994 of its Friction Products Division (the
"Friction Products Sale"), a subsidiary of Cooper Industries, Inc. ("Cooper")
assumed responsibility for substantially all of the asbestos-related claims
made after August 1998 and therefore 


                                     F-28
<PAGE>

                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




such claims are not subject to the Whitman indemnity. Pneumo Abex maintained
product liability insurance covering substantially all of the period during
which asbestos-containing products were manufactured and both the Company and
Whitman have the benefit of such insurance. Pursuant to court rulings and
interim agreements reached with certain insurance carriers, Pneumo Abex is
being reimbursed for approximately 90% of the aggregate defense and settlement
costs associated with such claims, and continues to seek recovery of the
remaining amount of unreimbursed costs from its carriers in an ongoing
insurance coverage litigation commenced by Abex in 1982. As of December 31,
1996, the Company has approximately $8.8 million in unreimbursed costs pending
receipt from the insurance carriers or Whitman.

         MC Group is unable to forecast with precision the amount of future
defense and settlement costs associated with asbestos litigation, but
consistent with Abex's historical treatment, MC Group has not recognized any
liability in its financial statements for asbestos-related claims as
substantially all of these costs are expected to be insured and, to the extent
not insured entirely, are covered by Whitman's indemnifications under the
Whitman Agreements or by Cooper.

         Although PCT retains ultimate responsibility and indemnifies MC Group
for such matters under the Transfer Agreement, a subsidiary of MC Group
undertakes administrative and funding obligations with respect to such
matters, including as to such unreimbursed costs, subject to certain
termination events as described below. PCT's obligation to make reimbursement
for the amounts so funded will be limited to amounts received by PCT under
related indemnification and insurance arrangements. The Company's
administrative and funding obligations would be terminated in the case of a
bankruptcy of Pneumo Abex or PCT or, following an exhaustion of available
insurance, either a bankruptcy of Whitman or Cooper or Whitman or Cooper
failing to make required indemnification payments other than for reasons
primarily caused by actions or inactions taken by MC Group.

         Various legal proceedings, claims and investigations are pending
against MC Group and its subsidiaries related to commercial transactions,
product liability, safety and health matters and other matters relating to MC
Group, including those for which MC Group assumed responsibility under the
Transfer Agreement. Most of these legal proceedings are related to matters
covered by insurance, subject to deductibles and maximum limits, and by third
party indemnities. MC Group does not believe, based on currently available
information, that the outcome of these other matters, irrespective of
insurance coverage and third party indemnities, will have a material adverse
effect on its financial position or results of operations.

         In connection with the 1992 Distribution, Abex and Henley allocated
between them certain liabilities related to the businesses of Henley or its
predecessors, including certain liabilities relating to self-insurance
programs, and each indemnified the other against loss associated with
liabilities assumed by the indemnifying party. In addition, Abex guaranteed
certain contingent obligations of Koll relating to a predecessor company
pension plan and environmental liabilities of Henley and certain of its
predecessors, and Koll agreed to indemnify Abex in respect thereof. During the
first quarter of 1997, the Company, Koll and certain of its subsidiaries
entered into certain agreements (the "1997 Koll Agreements") pursuant to
which, among other things, the parties re-allocated certain liabilities
relating to the self-insurance programs, the Company agreed to assume
sponsorship of, and financial responsibility for, the predecessor Company
pension plan referred to above, the Company paid to Koll $2.3 million, and the
Company received $0.5 million from a third party in connection with the sale
of 


                                     F-29
<PAGE>

                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




an asset by Koll. The Company believes that its balance sheet at December 31,
1996 reflects adequate reserves for its remaining obligations under the 1997
Koll Agreements with respect to these matters. Furthermore, Koll has been
discharging its assumed and indemnification responsibilities in the ordinary
course. The Company does not believe, based on currently available
information, including information filed with the Securities and Exchange
Commission and the EPA regarding such environmental liabilities, that
liability for the discharge of the Company's remaining guarantee and
indemnification obligations would have a material adverse effect on its
financial position or results of operations even if Koll's financial
circumstances, as described in Note 9, were to cause Koll to stop discharging
its responsibilities.

         In connection with the 1997 Koll Agreements, the Company also agreed
to assume whatever liability, if any, Koll or certain of its subsidiaries may
have with respect to personal injury claims arising out of the operations of
either the passenger rail car business of Pullman Incorporated ("Pullman"), a
predecessor of Koll and the Company, or the business of Pullman Passenger Car
Company, a subsidiary of Koll (collectively, the "Pullman Claims"). Koll also
transferred to the Company all of the rights that Koll and such subsidiaries
may have against Wheelabrator Technologies Inc., another predecessor of Koll
and the Company, with respect to the Pullman Claims. As of the date of the
Company's assumption of the Pullman Claims, Koll was defending approximately
360 claims that individuals had contracted asbestos-related diseases by reason
of their work maintaining or repairing Pullman cars. Management believes that
costs related to these approximately 360 claims will not have a material
adverse effect on the Company.

15.      GEOGRAPHIC INFORMATION

         Information related to the Company's geographic areas are presented
below with the following definitions:

         Operating profit, as indicated below, represents net sales less
operating expenses, amortization of identifiable goodwill, equity in earning
from continuing operations of PCT, foreign currency transaction income (loss)
and other income (expense).

         Identifiable assets are those used by each geographic area. Corporate
assets are principally cash, restricted cash, deferred charges and the assets
acquired in connection with the Merger and Libra Purchase.

                                     F-30
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




GEOGRAPHIC AREAS:

                                               (DOLLARS IN THOUSANDS)
                                               YEAR ENDED DECEMBER 31,
                                          --------------------------------
                                            1996        1995        1994
                                            ----        ----        ----
Net Sales (a):
  Domestic - U.S.                        $ 269,725   $ 217,394   $ 187,513
           - Export                         24,877      26,032      25,425
  Foreign                                   16,057      17,700      13,941
                                         ---------   ---------   ---------
                                         $ 310,659   $ 261,126   $ 226,879
                                         =========   =========   ========= 

Operating Profit:
  Domestic                               $  85,684   $  61,502   $  50,656
  Foreign (b)                                4,139       3,476       2,506
  Corporate                                 (9,070)     (9,740)        -
                                         ---------   ---------   ---------
                                         $  80,753   $  55,238   $  53,162

Net interest expense and financing
  charges                                  (11,889)    (22,444)    (29,349)
Gain on Cigar IPO and Flavors
  Disposition                              279,556         -           -
                                         ---------   ---------   ---------
Income from continuing operations
  before income taxes                    $ 348,420   $  32,794   $  23,813
                                         =========   =========   =========


 
                                         (DOLLARS IN THOUSANDS)
                                              DECEMBER 31,
                                         ----------------------
                                            1996        1995
                                            ----        ----
Identifiable assets:
  Domestic (c)                           $ 193,867   $ 237,303
  Foreign                                    1,852      18,919
  Corporate                                573,782     304,377
                                         ---------   ---------
                                         $ 769,501   $ 506,599
                                         =========   =========

------------
(a)      The Company had no intercompany sales from their U.S. businesses to
         their foreign businesses in 1996, 1995 and 1994. Sales from their
         foreign businesses to their U.S. businesses were $39,457, $23,084 and
         $17,473 for the years ended December 31, 1996, 1995 and 1994,
         respectively. Such amounts are excluded from the above table.

(b)      Includes foreign currency transaction gain of $756, $40 and $215 in
         1996, 1995 and 1994, respectively.

(c)      Includes assets located in foreign countries of $15,161 and $14,071
         at December 31, 1996 and 1995, respectively.

                                     F-31
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



16.      UNAUDITED QUARTERLY FINANCIAL INFORMATION

         The following is a summary of unaudited quarterly financial
         information for the quarterly periods in 1996 and 1995:


                                (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
                                                  1996
                              ---------------------------------------------
                               FIRST       SECOND       THIRD       FOURTH
                              -------     --------     -------     --------
Net sales                     $66,168     $78,577      $85,635    $  80,279
Gross profit                   27,866      34,212       36,434       34,293
Income from continuing 
  operations                    7,640       9,886       98,025(a)   128,045(b)
Net income                      8,311      23,883       98,409(a)   128,045(b)
Net income per share          $   .36     $  1.03      $  4.24    $    5.51



                                (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
                                                  1995
                              ---------------------------------------------
                               FIRST       SECOND       THIRD       FOURTH
                              -------     --------     -------     --------
Net sales                     $58,353     $68,236      $68,679      $65,858
Gross profit                   23,804      28,210       27,984       27,106
Income from continuing 
  operations                    4,556       7,885        3,944        6,706
Net income                      4,556       7,885        4,604        7,368
Net income per share          $   .23     $   .38      $   .20      $   .32

------------------
(a)    Reflects the gain on the Cigar IPO.
(b)    Reflects the gain on the Flavors Disposition.

17.    SUBSEQUENT EVENTS

         On February 20, 1997, Mafco Consolidated Holdings entered into an
Agreement and Plan of Merger (the "1997 Merger Agreement") with MC Group
whereby Mafco Consolidated Holdings will buy the remaining 15% of MC Group
that it does not already own. Pursuant to the 1997 Merger Agreement, each
outstanding share of MC Group Common Stock (other than shares held by Mafco
Consolidated Holdings) will be converted into the right to receive $33.50 in
cash, subject to upward adjustment (the "Merger Consideration"). Additionally,
on February 20, 1997, in connection with the 1997 Merger Agreement, MC Group
declared a special cash dividend of $10 per share which was paid on March 14,
1997 to stockholders of record as of the close of business on March 10, 1997.
In addition, pursuant to the 1997 Merger Agreement the Company has agreed to
make cash payments aggregating $38.8 in respect of outstanding stock options.

         The Merger Consideration shall be equal to the sum of (x) $33.50 plus
(y) an amount, if any (the "Additional Amount"), equal to the Excess (as
defined below) multiplied by 79.7%. The Additional Amount shall be payable
only if the average of the per share closing prices (the "Average") of Cigar
Common Stock on the New York Stock Exchange for the ten trading days ending
two trading days prior to the effectiveness of the Merger, exceeds $33.00 (the
amount by which the Average exceeds $33.00, the "Excess"). MC Group
stockholders will be entitled to receive the Merger Consideration in cash,
without interest, upon surrender of the certificate formerly representing
shares 


                                     F-32
<PAGE>


                MAFCO CONSOLIDATED GROUP INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



of Cigar Common Stock.

         The 1997 Merger Agreement has been unanimously approved by the Boards
of Directors of each company and, in the case of MC Group, by a special
committee of independent directors formed to consider the transaction. The
consummation of the transaction is subject to the approval of MC Group
stockholders, the filing with and review by the Securities and Exchange
Commission of an information statement to be sent to Mafco stockholders, and
other customary conditions. Mafco Consolidated Holdings, which owns
approximately 85% of the outstanding shares of MC Group common stock, has
agreed to vote in favor of the transaction, which is expected to close during
the second quarter of 1997.

         In January 1997, six purported class-action lawsuits and one
purported derivative and class- action lawsuit were filed in the Delaware
Court of Chancery (the "Chancery Court"), under the captions Alan R. Kahn v.
Ronald O. Perelman, et al., C.A. No. 15450; Sandy Rywell v. Ronald O.
Perelman, et al., C.A. No. 15468; Crandon Capital Partners v. Ronald O.
Perelman, et al., C.A. No. 15469; Harry Voege v. Ronald O. Perelman, et al.,
C.A. No. 15470; Harry Polikoff v. Mafco Consolidated Group Inc., et al., C.A.
No. 15471; Sal S. Shiry v. Ronald O. Perelman, et al., C.A. No. 15475; and
Jack Fishbaum v. Mafco Consolidated Group Inc., et al., C.A. No. 15481
(collectively, the "Actions"). The Actions allege certain acts allegedly taken
or not taken by the Company and the members of the board of directors in
connection with the proposed transaction that ultimately culminated in the
1997 Merger Agreement and the price originally proposed to be paid for the
Company Common Stock and allege that Andrews Group Incorporated and MC Group's
board of directors breached fiduciary obligations to the Company's
stockholders by entering into certain transactions with Marvel Entertainment
Group, Inc. and Toy Biz, Inc. (the "Marvel and Toy Biz Transactions"), which
transactions were allegedly corporate opportunities of the Company. The
Actions seek to enjoin the consummation of the Merger Agreement and the Marvel
and Toy Biz Transactions, as well as damages and an award of attorneys' fees.
On March 17, 1997, the parties to all of the Actions except Fishbaum executed
a Memorandum of Understanding setting forth the terms of their agreement in
principle to settle these Actions. The Memorandum of Understanding
acknowledges the enhanced terms for stockholders set forth in the Merger
Agreement and provides that settling plaintiffs may seek up to $1.25 million
in attorney's fees. The Memorandum of Understanding contemplates the drafting
and execution of a Stipulation of Settlement by the parties and its approval
by the Chancery Court, which approval is expected to occur in the third
quarter of 1997.

         On March 26, 1997, Cigar Holdings completed a public offering of
5,000,000 shares of the Cigar Common Stock at an offering price of $23.75 per
share. All of the shares sold were owned by MC Group. In addition, the
underwriters have been granted an overallotment option to purchase an
additional 750,000 shares, which as of the date hereof has not been exercised.









                                     F-33
<PAGE>


               SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                            (DOLLARS IN THOUSANDS)


<TABLE>
<CAPTION>

                                             BALANCE AT         CHARGED TO                             BALANCE AT
                                             BEGINNING          COSTS AND             OTHER              END OF
       DESCRIPTION                           OF PERIOD           EXPENSES          DEDUCTIONS(1)         PERIOD
       -----------                           ---------           --------          -------------         ------

<S>                                          <C>               <C>               <S>                  <S> 
Year ended December 31, 1994
  Deducted from asset accounts:
    Sales allowances                          $ 2,734           $      -           $        -           $  2,734
    Allowance for doubtful accounts             1,867                145                  (61)             1,951
    Inventory reserves                            514                247                    -                761
                                              -------           --------           ----------           --------
    Totals                                    $ 5,115           $    392           $      (61)          $  5,446
                                              =======           ========           ==========           ========

Year ended December 31, 1995
  Deducted from asset accounts:
    Sales allowances                          $ 2,734           $    650           $        -           $  3,384
    Allowance for doubtful accounts             1,951                206                 (190)             1,967
    Inventory reserves                            761                198                 (137)               822
                                              -------           --------           ----------           --------
    Totals                                    $ 5,446           $  1,054           $     (327)          $  6,173
                                              =======           ========           ==========           ========

Year ended December 31, 1996
  Deducted from asset accounts:
    Sales allowances                          $ 3,384           $  1,557           $        -           $  4,941
    Allowance for doubtful accounts             1,967               (634)                (670)               663
    Inventory reserves                            822                818                 (339)             1,301
                                              -------           --------           ----------           --------
    Totals                                    $ 6,173           $  1,741           $   (1,009)          $  6,905
                                              =======           ========           ==========           ========
</TABLE>

---------
(1)  Doubtful accounts written off, less recoveries, reclassifications and 
     foreign translation adjustment and effects of businesses sold.


                                     F-34