-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QWzxW2I3Vuq9rsKJZqoK3whzBvpkZvYdLrUdpSDyc21wryBDQgRTDfiE8Yr4OnWK gyBywOYGSxNzYxXbuEvG7A== 0000927356-97-001224.txt : 19971029 0000927356-97-001224.hdr.sgml : 19971029 ACCESSION NUMBER: 0000927356-97-001224 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19971028 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MAIL WELL INC CENTRAL INDEX KEY: 0000920321 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 841250533 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-12551 FILM NUMBER: 97701595 BUSINESS ADDRESS: STREET 1: 23 INVERNESS WAY EAST STREET 2: STE 160 CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3037908023 MAIL ADDRESS: STREET 1: 23 INVERNESS WAY EAST STREET 2: SUITE 160 CITY: ENGLEWOOD STATE: CO ZIP: 80112 FORMER COMPANY: FORMER CONFORMED NAME: MAIL WELL HOLDINGS INC DATE OF NAME CHANGE: 19940328 10-Q/A 1 AMENDMENT #2 TO FORM 10-Q/A - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A AMENDMENT NO. 2 TO [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 Commission file number 0-26692 MAIL-WELL, INC. (Exact name of Registrant as specified in its charter.) Colorado 84-1250533 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23 Inverness Way East, Englewood, CO 80112 (Address of principal executive offices) (Zip Code) 303-790-8023 (Registrant's telephone number, including area code) Indicate by checkmark 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 [X] No [_] As of July 31, 1997, the Registrant had 18,815,356 shares of Common Stock, $0.01 par value, outstanding. - -------------------------------------------------------------------------------- MAIL-WELL, INC. AND SUBSIDIARIES TABLE OF CONTENTS - -------------------------------------------------------------------------------- Page Part I - Financial Information Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 3 2 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following should be read in conjunction with the consolidated historical financial statements and related notes of Mail-Well, Inc. and its subsidiaries (the "Company") included elsewhere in this report. In addition to the historical information contained herein, this report contains forward-looking statements. The reader of this information should understand that all such forward-looking statements are subject to various uncertainties and risks that could affect their outcome. The Company's actual results could differ materially from those suggested by such forward-looking statements. Factors which could cause or contribute to such differences include, but are not limited to, product demand and sales, growth rate, ability to obtain assumed productivity savings, quality controls, availability of acquisition opportunities and their related costs, cost savings due to integration and synergies associated with acquisitions, ability to obtain additional financings and bank debt restructuring, interest rates, foreign currency exchange rates, paper and raw material costs, waste paper prices, ability to pass through paper costs to customers, postage rates, changes in the direct mail industry, competition, ability to develop new products, labor costs, labor relations and advertising costs. This entire report should be read to put such forward-looking statements in context and to gain a more complete understanding of the uncertainties and risks involved in the Company's business. Overview
Quarter Ended June 30, Six Months Ended June 30, ---------------------- ------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- $ $ $ $ -------- -------- -------- -------- Net Sales U.S. Envelope $139,677 $140,679 $279,377 $269,356 Canadian Envelope 27,466 20,176 59,082 42,326 High Impact Color Printing 40,339 24,255 81,055 67,153 -------- -------- -------- -------- Total Net Sales 207,482 185,110 419,514 378,835 -------- -------- -------- -------- Cost of Sales U.S. Envelope 108,325 112,088 216,648 214,982 Canadian Envelope 19,017 14,146 41,794 30,309 High Impact Color Printing 33,319 19,494 67,021 56,468 Corporate 540 0 1,136 0 -------- -------- -------- -------- Total Cost of Sales 161,201 145,728 326,599 301,759 -------- -------- -------- -------- Gross Profit 46,281 39,382 92,915 77,076 -------- -------- -------- -------- Operating Expenses U.S. Envelope 16,738 14,399 33,471 29,252 Canadian Envelope 4,176 2,942 8,746 5,926 High Impact Color Printing 5,255 3,934 10,420 8,976 Corporate 2,851 4,052 6,837 6,171 -------- -------- -------- -------- Total Operating Expenses 29,020 25,327 59,474 50,325 -------- -------- -------- -------- Operating Income 17,261 14,055 33,441 26,751 Corporate expenses: Interest expense - debt 4,551 7,064 9,105 14,145 Interest expense - amortization of deferred financing costs 724 748 1,448 1,480 Discount on sale of accounts receivable 938 0 1,961 0 Other (income) expense (354) (77) (884) (23) Income tax expense 4,826 2,708 9,254 4,770 -------- -------- -------- -------- Net Income $ 6,576 $ 3,612 $ 12,557 $ 6,379 ======== ======== ======== ========
3 Operating Results -- Net income for the quarter ended June 30, 1997 increased by $3.0 million ($0.15 per share), or 82%, compared with the prior year period. For the six months ended June 30, 1997, net income increased by $6.2 million ($0.32 per share), or 97%, compared with the six months ended June 30, 1996. Sales for the quarter ended June 30, 1997 rose $22.4 million, or 12%, from the prior year's quarter, and for the first six months of 1997 increased by $40.7 million, or 10.7%, over the first six months of 1996. During the most recent quarter and the first six months of 1997, the Company focused its efforts on integrating the operations of recently acquired businesses into the Canadian Envelope and High Impact Color Printing segments of the Company. These efforts included reviewing the acquired operations to determine changes to be made to cost structures, pricing and strategic markets. The High Impact Color Printing segment continued to address market pressures by repositioning its marketing efforts toward the channels within this segment for which the gross margins were higher. In November 1996, the bank credit agreement was amended, the Company refinanced certain equipment under a sale/leaseback arrangement and a receivable securitization facility was arranged. The effects of these transactions are reflected in the results for 1997. Acquisitions In April 1996, the Company acquired Quality Park Products, Inc. ("Quality"), a printer and manufacturer of envelopes. In November 1996, the Company acquired Pac National Group Products, Inc. ("PNG"), a Canadian envelope printer and manufacturer based in Ontario. In December 1996, the Company acquired Shepard Poorman Communications Corporation ("SP"), a high impact color printer located in Indianapolis, Indiana. On June 27, 1997, the Company acquired all of the outstanding shares of common stock of Griffin Envelope, Inc. ("Griffin"). Griffin, which is located in Seattle, Washington, manufactures and distributes envelopes in the northwestern United States. Annual sales for Griffin approximate $12 million. The balance sheet of Griffin is included in the consolidated balance sheet of the Company as of June 30, 1997; the statement of operations excludes the operations of Griffin. On July 11,1997, the Company acquired all of the outstanding shares of common stock of The Allied Printers ("Allied"). Allied, which is located in Seattle, Washington, is a high impact color printer servicing customers with sheet fed printing needs. Annual sales for Allied approximate $17 million. The Company issued 36,531 shares of common stock in connection with this acquisition. On July 14, 1997, the Company acquired all of the outstanding shares of common stock of Murray Envelope Corporation ("Murray"). Murray, which is located in Hattiesburg, Mississippi, manufactures envelopes primarily for sales through distributors in the southeastern and south central markets. Additionally, the Barkley division of Murray distributes filing products for the national market. Annual sales for Murray approximate $48 million. In connection with the acquisition, a wholly-owned subsidiary of the Company issued 110,236 shares of common stock which are convertible into an equal number of shares of Company common stock. The Company paid approximately $35.0 million in the aggregate, in cash, Company common stock, notes and convertible securities (as described above with respect to Murray) for Griffin, Allied and Murray. 4 The table below presents the historical sales and cost of sales of the Company adjusted to show the effects of acquisitions as if the acquisitions had occurred on the January 1 of the year prior to the acquisition date.
Quarter Ended June 30, Six Months Ended June 30, ---------------------- ------------------------- 1997 1996 1997 1996 $ $ $ $ -------- -------- -------- -------- Net Sales as reported $207,482 $185,110 $419,514 $378,835 Pre-acquisition net sales of acquired companies: Quality 23,266 All other acquisitions in the aggregate (PNG, SP, Griffin) 3,021 29,768 6,069 56,954 -------- -------- -------- -------- Total Net Sales 210,503 214,878 425,583 459,055 -------- -------- -------- -------- Cost of Sales as reported 161,201 145,728 326,599 301,759 Pre-acquisition cost of sales of acquired companies: Quality 19,654 All other acquisitions in the aggregate (PNG, SP, Griffin) 2,332 22,978 4,494 45,337 -------- -------- -------- -------- Total Cost of Sales 163,533 168,706 331,093 366,750 -------- -------- -------- -------- Pro Forma Gross Profit $ 46,970 $ 46,172 $ 94,490 $ 92,305 ======== ======== ======== ========
5 Results Of Operations U.S. Envelope The following table presents historical financial data for the U.S. Envelope operations of the Company, including the operations of Quality from the date of acquisition (April 1, 1996).
Quarter Ended June 30, Six Months Ended June 30, 1997 1996 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------------- (dollars in thousands) $ % $ % $ % $ % - ----------------------------------------------------------------------------------------------------------------------------------- Net sales......................................... $139,677 100.0 $140,679 100.0 $279,377 100.0 $269,356 100.0 Cost of sales..................................... 108,325 77.5 112,088 79.7 216,648 77.5 214,982 79.8 Operating expenses................................ 16,738 12.0 14,399 10.2 33,471 12.0 29,252 10.9 -------- ----- -------- ----- -------- ----- -------- ----- Operating income.................................. $ 14,614 10.5 $ 14,192 10.1 $ 29,258 10.5 $ 25,122 9.3 ======== ===== ======== ===== ======== ===== ======== =====
Quarter Ended June 30, 1997 Compared to the Quarter Ended June 30, 1996 Net sales -- Net sales decreased by $1.0 million (or 0.7%) for the quarter ended June 30, 1997 compared to the quarter ended June 30, 1996. The average selling price decreased 8.1% to $19.08 per thousand units for the quarter ended June 30, 1997 from $20.76 per thousand units for the quarter ended June 30, 1996, due mainly to lower paper costs and competitive pricing pressures. Because of its ability to pass on changes in paper costs to its customers, the Company uses volumes of units sold and material gross margin (that is, net sales less cost of materials net of waste recovery revenue, measured on a per thousand unit basis) as indicators of revenue trends in its envelope operations. Unit volume increased 7.3% to 7.3 billion units in the second quarter of 1997 from 6.8 billion units in the same quarter of 1996, indicating that customers have been increasing their volumes at the lower prices. Material gross margin decreased to $11.09 per thousand units in the second quarter of 1997 from $11.32 per thousand units in the year-ago period, as lower selling prices were not entirely offset by lower paper prices. Cost of sales -- Total cost of sales, as a percentage of sales, decreased from 79.7% in 1996 to 77.5% in 1997. Cost of sales includes materials, labor, manufacturing, depreciation and other manufacturing costs, net of waste recovery revenue. A decrease in average paper costs of approximately 16% in the second quarter of 1997 from the second quarter of 1996 was the major factor in the reduction in total cost of sales. The decline in paper costs, while material gross margins remained relatively constant, resulted in the decrease in cost of sales as a percentage of sales. In addition, factory labor and overhead costs declined to $5.71 per thousand units in the second quarter of 1997 from $5.81 per thousand units in the year-ago quarter. Gross profit per thousand units increased 1.4% from $4.22 in the second quarter of 1996 to $4.28 in 1997. Operating expenses -- For the second quarter ended June 30, 1997, selling and administrative expenses increased by $2.3 million, to 12.0% of sales from 10.2% of sales compared to the same period in 1996. The increase included increases in salaries and bonuses, profit sharing and health insurance. In particular, the Company accrued for profit sharing and bonuses in the second quarter of 1997, whereas the Company did not accrue for these items in the first half of 1996 due to business conditions at that time. Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996 Net sales -- Net sales increased 3.7% for the six months ended June 30, 1997 compared to the six months ended June 30, 1996. The total increase in net sales of $10.0 million includes $19.8 million of net sales related to the acquisition of Quality which is offset by a decrease in net sales on the other U.S. Envelope operations. The average selling price decreased 8.6% to $19.27 per thousand units for the six months ended June 30, 1997 from $20.54 per thousand units for the six months ended June 30, 1996, due mainly to lower paper costs and competitive pricing pressures. Unit volume increased 10.6% to 14.5 billion units in the first six months of 1997 from 13.1 billion units in the same period of 1996, indicating that customers have been increasing their volumes at the lower prices. Material gross margin increased to $11.18 per thousand units in the six months ended June 30, 1997 from $11.08 6 per thousand units in the year-ago period. The increase in material gross margin in the first quarter of 1997 was offset by lower material gross margins in the second quarter of 1997. Cost of sales -- Total cost of sales, as a percentage of sales, decreased from 79.8% in 1996 to 77.5% in 1997. A decrease in average paper costs of approximately 19% as compared with the prior year period was the major factor in the reduction in total cost of sales, as was an 8.7% decrease in factory labor and overhead expenses from $5.76 per thousand units in the first six months of 1996 to $5.26 per thousand units in the 1997 period. Gross profit per thousand units increased 3.6% from $4.15 in the first half of 1996 to $4.33 in 1997. Operating expenses -- For the six months ended June 30, 1997, selling and administrative expenses, as a percent of sales, increased to 12.0% compared to 10.9% from the same period in 1996. The $4.2 million increase includes $1.5 million additional operating expenses as a result of the acquisition of Quality, increases in salaries and bonuses, profit sharing and health insurance, $2.4 million of which occurred in the second quarter chiefly as a result of accruals for profit sharing and bonuses which were not made in the year-ago period. Canadian Envelope The following table presents financial information with respect to the Canadian Envelope operations for the quarters and six months ended June 30, 1997 and 1996. All amounts are in U.S. dollars.
Quarter Ended June 30, Six Months Ended June 30, ------------------------- ------------------------- 1997 1996 1997 1996 ------------------------------------------------------------------- (dollars in thousands) $ % $ % $ % $ % - --------------------------------------------------------------------------------------------- Net sales............... $27,466 100.0 $20,176 100.0 $59,082 100.0 $42,326 100.0 Cost of sales........... 19,017 69.2 14,146 70.1 41,794 70.7 30,309 71.6 Operating expenses...... 4,176 15.2 2,942 14.6 8,746 14.8 5,926 14.0 ------- ----- ------- ----- ------- ----- ------- ----- Operating income........ $ 4,273 15.6 $ 3,088 15.3 $ 8,542 14.5 $ 6,091 14.4 ======= ===== ======= ===== ======= ===== ======= =====
Quarter Ended June 30, 1997 Compared to the Quarter Ended June 30, 1996 Net sales -- Net sales of $27.5 million for the Canadian Envelope segment included $8.0 million of net sales attributable to PNG. The 1997 net sales for Supremex of $19.5 million represented a $0.7 million, or 3.5%, decline in net sales dollars as compared to the quarter ended June 30, 1996. Paper prices decreased approximately 10% in the quarter ended June 30, 1997 as compared to paper prices for the quarter ended June 30, 1996, which translates to an expected decline in selling prices of 4.3%. The average selling price decreased only 3.1% to $19.58 per thousand units in the most recent quarter as compared to $20.20 per thousand units for the year-ago quarter. As a result of the Company exiting certain markets with relatively low selling prices and margins, the average selling price did not decline as much as expected. Unit volume at Supremex was stable at 1.0 billion units for both quarters, while unit volume for Canadian Envelope (including PNG) increased to 1.4 billion units in 1997. Material gross margin increased from $11.33 per thousand units in the quarter ended June 30, 1996 to $11.57 per thousand units for the same quarter in 1997. The higher material gross margin was attributable to the shift away from less profitable markets. Cost of sales -- Total cost of sales, as a percentage of sales, decreased from 70.1% in 1996 to 69.2% in 1997. The gross profit per thousand units increased 1.0% to $6.11 per thousand units from $6.04 per thousand units in 1996. As PNG's operations are integrated with those of Supremex, the cost of sales (as a percentage of net sales), is expected to decrease further as Supremex's operating strategies are applied to PNG's operations. Operating expenses - As a percentage of sales, operating expenses increased to 15.2% of net sales for the quarter ended June 30, 1997 from 14.6% of net sales in the same quarter of 1996 due to the higher cost structure of PNG and severance payments made in the most recent quarter. Operating expenses as a percentage of net sales are 7 expected to decrease as PNG's cost structure is changed to reflect that of Supremex. Specifically, PNG's costs for administrative expenses exceed the parameters of Supremex's cost structure. Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996 Net sales -- Net sales of $59.1 million for the Canadian Envelope segment included $17.6 million of net sales attributable to PNG. The net sales for Supremex of $41.5 million for the six months ended June 30, 1997 represented a $0.8 million, or 2.0%, decline in net sales dollars as compared to the same period in 1996. Paper prices decreased 10% in the six months ended June 30, 1997 as compared to paper prices for the six months ended June 30, 1996, which translates to an expected decline in selling prices of 4.3%. The average selling price decreased 4.1% to $19.50 per thousand units as compared to $20.33 per thousand units for the six months ended June 30, 1996. As a result of the Company exiting certain markets with relatively low selling prices and margins, the average selling price did not decline as much as expected. Unit volume at Supremex was stable at 2.1 billion units for both periods, while unit volume for Canadian Envelope (including PNG) increased to 2.95 billion units in 1997. Material gross margin increased from $11.21 per thousand units in the year-ago period to $11.42 per thousand units for the same period in 1997. The higher material gross margin was attributable to the shift away from less profitable markets. Cost of sales -- Total cost of sales, as a percentage of sales, decreased from 71.6% for the six months ended June 30, 1996 to 70.7% in the same period in 1997. The gross profit per thousand units increased 1.6% to $5.86 per thousand units from $5.77 per thousand units in 1996. As PNG's operations are integrated with those of Supremex, the cost of sales (as a percentage of net sales), is expected to decrease as Supremex's operating strategies are applied to PNG's operations. Operating expenses -- As a percentage of sales, operating expenses increased to 14.8% of net sales for the six months ended June 30, 1997 from 14.0% of net sales in the year-ago period, due to the higher cost structure of PNG. Operating expenses as a percentage of net sales are expected to decrease as PNG's cost structure is changed to reflect that of Supremex. Specifically, PNG's costs for administrative expenses exceed the parameters of Supremex's cost structure. High Impact Color Printing The following table presents financial information with respect to the High Impact Color Printing operations for the periods ended June 30, 1997 and 1996.
Quarter Ended June 30, Six Months Ended June 30, ---------------------- ------------------------- 1997 1996 1997 1996 (dollars in thousands) $ % $ % $ % $ % - -------------------------------------------------------------------------------------------------------- Net sales............... $40,339 100.0 $24,255 100.0 $81,055 100.0 $67,153 100.0 Cost of sales........... 33,319 82.6 19,494 80.4 67,021 82.7 56,468 84.1 Operating expenses...... 5,255 13.0 3,934 16.2 10,420 12.9 8,976 13.4 ------- ----- ------- ----- ------- ----- ------- ----- Operating income........ $ 1,765 4.4 $ 827 3.4 3,614 4.4 $ 1,709 2.5 ======= ===== ======= ===== ======= ===== ======= =====
Quarter Ended June 30, 1997 Compared to the Quarter Ended June 30, 1996 Net sales -- Net sales produced at the Company's Graphic Arts Center, Inc. subsidiary ("GAC") for the quarter ended June 30, 1997 were $26.6 million of the quarter's net sales for the High Impact Color Printing segment of the Company, a 9.7% increase from the prior year. Net sales produced at SP constituted $13.7 million of the quarter's net sales and represented a decrease of 6.1% compared with those of the prior year (before SP was owned by the Company). A shift of annual report work from the first quarter to the second quarter resulted in increased net annual report sales of $0.8 million in the second quarter of 1997. Annual report sales to new customers (net of customer losses) added another $0.1 million to net sales in the second quarter of 1997. Catalog and car brochure sales increases of $1.0 million and $0.4 million, respectively, comprise the remainder of the $2.4 million increase in GAC net sales. The increase in catalog sales includes $0.8 million from a new client; the remaining increase was due to changes in existing customer orders. The sales increase from car brochures was from an existing client; net sales in 8 this time period for car brochures was unusual. The decrease in sales at SP (as compared to the same period in 1996) was due, primarily, to one client that was acquired by another company which caused a temporary delay in its highly seasonal production cycle; the sales volumes attributable to this customer are expected to occur in the third quarter. Cost of sales -- For GAC, the total cost of sales as a percentage of net sales increased from 80.4% in the second quarter of 1996 to 82.6% in the second quarter of 1997. Cost of sales for GAC and SP totaled $22.3 million and $11.0 million, respectively. Due to changes in the mix of paper used in its operations, the declining paper market had a negligible effect on cost of sales at GAC. The $2.8 million increase in cost of sales related to GAC included $1.9 million which correlates to the increase in the sales. The remaining $0.9 million increase included $0.5 million for outside tradework paid for specialties which could not be done in-house. Increased wages required another $0.3 million. SP cost of sales of $11.0 million is included in the 1997 amount and represents 80.6% of SP's sales which is consistent with the second quarter of 1996 (before SP was owned by the Company). Operating expenses -- Total operating expense was $1.3 million higher than the amount for the quarter ended June 30, 1996. This increase included $1.6 million of operating expenses related to SP offset by $0.3 million in operating expense reductions implemented by the GAC operations of the High Impact Color Printing segment. The GAC reductions were almost exclusively due to declines in selling expenses, including sales commissions and sales salaries, as certain sales representatives were moved to full-commission status from salaried status and lower unit prices reduced commission expense. Additional reductions were made to the travel and entertainment and information services costs. Six Months Ended June 30, 1997 Compared to the Six Months Ended June 30, 1996 Net sales -- Net sales produced at GAC for the six months ended June 30, 1997 were $55.3 million, a 17.6% decrease from the prior year. Net sales produced at SP constituted $25.7 million of the net sales for the six months ended June 30, 1997 and represented a decrease of 4.1% compared with those of the prior year (before SP was owned by the Company). This decline in net sales at GAC was due to the Company targeting higher margin markets and allocating sales resources to those markets; the remarketing effort has caused a decline in sales volumes. Operating income margins for the High Impact Color Printing segment of the Company have increased to 4.4% of net sales from 2.5% of net sales. Another factor affecting the decline in sales dollars was the decrease in paper costs between 1996 and 1997 which caused a corresponding decrease in net sales dollars. Cost of sales -- Total cost of sales decreased to 82.7% of sales for the six months ended June 30, 1997 as compared to 84.1% for the six months ended June 30, 1996. Cost of sales for GAC and SP totaled $45.4 million and $21.6 million, respectively. The $11.1 million decline in GAC's cost of sales was comprised of declines in paper prices and other manufacturing costs. Reduction in paper prices, coupled with improved corporate purchasing power, resulted in lower paper costs of approximately $5.9 million as compared with the six months ended June 30, 1996. Outside tradework declined both as a percentage of revenue and by $1.5 million in nominal dollars. A reduction in factory costs constituted the remainder of the favorable variance and corresponds largely to the downward movement in volumes. Improved control over overtime and factory chargeability also yielded favorable variances. SP cost of sales of $21.6 million is included in the 1997 figure and represents 84.1% of SP's sales. The comparable figure for SP in 1996 was $23.2 million or 86.5% of SP's sales. Operating expenses -- Total operating expense was $1.4 million greater for the six months ended June 30, 1997 than that recorded for the six months ended June 30, 1996. The increase included $2.8 million of operating expenses related to SP offset by $1.4 million in operating expense reductions implemented by the GAC operations of the High Impact Color Printing segment. The GAC reductions are almost exclusively due to declines in selling expenses including sales commissions and sales salaries. These reductions occurred as GAC has moved certain sales representatives to full-commission status from salaried status and lower unit prices have reduced commission expense. Additionally, reductions have been made to the travel and entertainment and information services costs. 9 Corporate Expenses Cost of sales -- operating lease expenses - Certain property, plant and equipment of the Company was sold as part of a sales/leaseback transaction in the fourth quarter of 1996. The expense amounts represent the operating lease payments for the quarter and six month periods ending June 30, 1997; there was no comparable expense in the quarter or six months ended June 30, 1996. Operating expenses -- Total operating expenses decreased by $1.2 million (or 30%) in the quarter ended June 30, 1997 compared to the quarter ended June 30, 1996, and increased $0.7 million for the six months ended June 30, 1997 compared to the six months ended June 30, 1996. The decrease in operating expenses for the quarter offset the increase in expenses recorded for the first quarter ended March 31, 1997, primarily as a result of certain corporate expenses, including the annual report and proxy statements, having been incurred in the earlier quarter in 1997. Included in operating expenses in the quarter and six months ended June 30, 1997 is $0.3 million and $0.5 million, respectively, of administrative expenses related to the accounts receivable securitization program. Also included in this figure is the loss on disposal of assets. The majority of the loss on disposal of assets relates to building and equipment costs written off related to the closing of the Pittsburgh warehouse and reorganizations of the plants in Salt Lake City and Chicago. In 1996, the loss on disposal of assets included costs to relocate the Philadelphia plant and consolidate the Texas facilities. Interest expense-debt -- Interest expense decreased for the quarter ended June 30, 1997 as compared to the quarter ended June 30, 1996 primarily as a result of the lower average bank debt balance of $160.6 million in 1997 as compared to $216.0 million in 1996. The bank debt restructuring, the sale/leaseback transaction and the accounts receivable securitization transaction resulted in the reduction of outstanding debt balances toward the end of 1996. The average interest rate of 7.7% for the six months ended June 30, 1997 was less than the average interest rate of 8.1% for the same period in 1996. Discount on sale of accounts receivable -- This amount represents expenses related to the accounts receivable securitization program, including an effective interest rate of approximately 5.6% and associated utilization fees. Since the program was implemented in November 1996, there are no appropriate comparisons for previous periods. Other (income) expense -- This line item includes a $0.3 million foreign exchange gain and $0.6 million of interest income earned from the investment of funds in cash equivalents for the six months ended June 30, 1997. Income taxes -- The effective tax rate for the quarter and six months ended June 30, 1997 was 42.3% and 42.4%, respectively, as compared to an effective tax rate of 42.8% for the quarter and six months ended June 30, 1996. The effective tax rate for all periods was higher than the federal statutory rate due to state and provincial income taxes. Additionally, certain goodwill amortization and a portion of the employee stock ownership contribution are not tax deductible. 10 SIGNATURES Pursuant to the requirements 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. MAIL-WELL, INC. (Registrant) By /s/ PAUL V. REILLY -------------------------- Paul V. Reilly Senior Vice President, Chief Financial Officer October 24, 1997 10 -----END PRIVACY-ENHANCED MESSAGE-----