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Acco Brands 10-K 2007
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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
 
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
    For the Fiscal Year Ended December 31, 2006
o
  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 001-08454
 
 
     
Delaware   36-2704017
(State or Other Jurisdiction of
Incorporation or Organization)
  (I.R.S. Employer
Identification Number)
 
300 Tower Parkway
Lincolnshire, Illinois 60069
(Address of Registrant’s Principal Executive Office, Including Zip Code)
 
(847) 541-9500
(Registrant’s Telephone Number, Including Area Code)
 
N/A
 
Securities registered pursuant to Section 12(b) of the Act:
 
         
Title of Each Class
 
Name of Each Exchange on which Registered
 
 
Common Stock, par value $.01 per share
    The New York Stock Exchange  
 
Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities act.  Yes þ     No o
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
 
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 þ     No o
 
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.  þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).
 
Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
 
As of June 30, 2006, the aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was approximately $992.3 million.
 
As of February 1, 2007, the registrant had outstanding 53,837,399 shares of Common Stock.
 
 
Portions of the registrant’s definitive proxy statement to be issued in connection with registrant’s annual stockholder’s meeting to be held on May 15, 2007 are incorporated by reference into Part III of this report.
 


 

 
TABLE OF CONTENTS
 
                 
        Page
 
  Business   3
  Risk Factors   8
  Unresolved Staff Comments   14
  Properties   14
  Legal Proceedings   15
  Submission of Matters to a Vote of Security Holders   16
 
PART II
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities   16
  Selected Financial Data   19
  Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
  Quantitative and Qualitative Disclosures About Market Risk   45
  Financial Statements and Supplementary Data   48
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure   102
  Controls and Procedures   102
  Other Information   102
 
  Directors, Executive Officers and Corporate Governance   102
  Executive Compensation   102
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters   103
  Certain Relationships and Related Transactions, and Director Independence   103
  Principal Accountant Fees and Services   104
 
PART IV
  Exhibits and Financial Statement Schedules   104
  108
 Subsidiaries
 Consent of PricewaterhouseCoopers LLP
 Power of Attorney
 Certification of CEO
 Certification of CFO
 Section 906 Certification of CEO
 Section 906 Certification of CFO


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This Annual Report on Form 10-K contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Our actual results of operation could differ materially from those projected in the forward-looking statements as a result of a number of important factors. For a discussion of important factors that could affect our results, please refer to “Item 1. Business,” “Item 1A. Risk Factors” and the financial statement line item discussions set forth in “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations” below.
 
Unless the context otherwise requires, the terms “ACCO Brands,” “we,” “us,” “our,” “the Company” and other similar terms refer to ACCO Brands Corporation and its consolidated subsidiaries, including GBC. The term “GBC” refers to General Binding Corporation, a Delaware corporation acquired by ACCO Brands in the merger described in the History, Merger and Spin-off section of this annual report and in Note 1, Basis of Presentation, of the Company’s consolidated financial statements. The term “Fortune Brands” refers to Fortune Brands, Inc., a Delaware corporation, and the parent company of ACCO Brands prior to the spin-off.
 
 
The Company’s Internet website can be found at www.accobrands.com. The Company makes available free of charge on or through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as practicable after the Company files them with, or furnishes them to, the Securities and Exchange Commission. We also make available the following documents on our Internet website: the Audit Committee Charter; the Compensation Committee Charter; the Corporate Governance and Nominating Committee Charter; our Corporate Governance Principles; and our Code of Business Conduct and Ethics. The Company’s Code of Business Conduct and Ethics applies to all of our directors, officers (including the Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer) and employees. You may obtain a copy of any of the foregoing documents, free of charge, if you submit a written request to ACCO Brands Corporation, 300 Tower Parkway, Lincolnshire, IL. 60069, Attn: Investor Relations.
 
ITEM 1.   BUSINESS
 
 
ACCO Brands Corporation (“ACCO Brands” or the “Company”), formerly doing business under the name ACCO World Corporation (“ACCO World”), supplies branded office products to the office products resale industry. On August 16, 2005, Fortune Brands, Inc. (“Fortune Brands” or the “Parent”), then the majority stockholder of ACCO World, completed its spin-off of the Company by means of the pro rata distribution (the “Distribution”) of all outstanding shares of ACCO Brands held by Fortune Brands to its stockholders. In the Distribution, each Fortune Brands stockholder received one share of ACCO Brands common stock for every 4.255 shares of Fortune Brands common stock held of record as of the close of business on August 9, 2005. Following the Distribution, ACCO Brands became an independent, separately traded, publicly held company. On August 17, 2005, pursuant to an Agreement and Plan of Merger dated as of March 15, 2005, as amended as of August 4, 2005 (the “Merger Agreement”), by and among Fortune Brands, ACCO Brands, Gemini Acquisition Sub, Inc., a wholly-owned subsidiary of the Company (“Acquisition Sub”) and General Binding Corporation (“GBC”), Acquisition Sub merged with and into GBC. Each outstanding share of GBC common stock and GBC Class B common stock was converted into the right to receive one share of ACCO Brands common stock and each outstanding share of Acquisition Sub common stock was converted into one share of GBC common stock. As a result of the merger, the separate corporate existence of Acquisition Sub ceased and GBC continues as the surviving corporation and a wholly-owned subsidiary of ACCO Brands.
 
 
ACCO Brands is one of the world’s largest suppliers of branded office products to select categories of the office products resale industry (excluding furniture, computers, printers and bulk paper). We design, develop,


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manufacture and market a wide variety of traditional and computer-related office products, supplies, binding and laminating equipment and consumable supplies, personal computer accessory products, paper-based time management products, presentation aids and label products. Through a focus on research, marketing and innovation, we seek to develop new products that meet the needs of our consumers and commercial end-users, which we believe will increase the premium product positioning of our brands. We compete through a balance of innovation, a low-cost operating model and an efficient supply chain. We sell our products primarily to markets located in North America, Europe and Australia. Approximately 83% of our $1.95 billion in 2006 net sales were derived from our commercial and consumer brands representing the number one or number two positions in the select markets in which we compete. Our brands include Swingline®, GBC®, Kensington®, Quartet®, Rexel®, Day-Timer®, and Wilson Jones®, among others.
 
The majority of our office products are used by businesses. Many of these end-users purchase our products from our customers, which include commercial contract stationers, retail superstores, wholesalers, distributors, mail order catalogs, mass merchandisers, club stores and dealers. We also supply our products directly to commercial and industrial end-users and to the educational market. We typically target the premium-end of the product categories in which we compete, which is characterized by high brand and product equity, high customer loyalty and a reasonably high price gap between branded and “private label” products. We limit our participation in value categories to areas where we believe we have an economic advantage or where it is necessary to merchandise a complete category. We completed the sale of the Perma® storage business during the third quarter of 2006, and announced the discontinuance of the Kensington cleaning product category as of the end of the first quarter of 2006. These actions represent approximately $40 million of annual net sales. In addition, we have announced plans to discontinue an additional $60 million of annual net sales in non-strategic products in the Office Products Group.
 
The profitability of our leading premium brands and the scale of our business operations enable us to invest in product innovations and drive market share growth across our product categories. In addition, the expertise we use to satisfy the exacting technical specifications of our demanding industrial and commercial customers is in many instances the basis for expanding our products and innovations to consumer products. For example, our expertise in specialized laminating films for commercial book printing, packaging and digital print lamination, and high-speed laminating and binding equipment for industrial customers, enables us to develop, manufacture and sell consumer binding and laminating equipment targeted at the small-business market. Through a focus on research, marketing and innovation, we seek to develop new products that meet the needs of our consumers and commercial end-users. In addition, we provide value-added features or benefits that enhance product appeal to our customers. This focus, we believe, increases the premium product positioning of our brands.
 
Our strategy centers on maximizing profitability and high-return growth. Specifically, we seek to leverage our platform for organic growth through greater consumer understanding, product innovation, marketing and merchandising, disciplined category expansion including possible strategic transactions and continued cost realignment.
 
We utilize a combination of manufacturing and third-party sourcing to procure our products, depending on transportation costs, service needs and direct labor costs.
 
In the near term, we are focused on realizing synergies from our merger with GBC. We have identified significant potential savings opportunities resulting from the merger. These opportunities include cost reductions attributable to efficiencies and synergies expected to be derived from facility integration, headcount reduction, supply chain optimization and revenue enhancement. Our near-term priorities for the use of cash flow are to fund integration and restructuring-related activities and to pay down acquisition-related debt. For a description of certain factors that may have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see “Risk Factors.”
 
 
Our products include a wide range of familiar consumer brands that are used every day in the office, in the classroom and at home. In order to address the diverse consumer needs of the different markets in which


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we sell our products, our business is organized around four segments: Office Products Group, Computer Products Group, Commercial — Industrial and Print Finishing Group, and Other Commercial.
 
Office Products Group (66% of 2006 net sales)  Our Office Products Group manufactures, sources and sells traditional office products and supplies worldwide. The group is organized around four categories of office products — “workspace tools,” “document communication,” “visual communication,” and “storage and organization” — each with its own separate business unit that allows us the flexibility to focus on the distinct consumer needs of each office product category. We sell our office products to commercial contract stationers, office products superstores, wholesalers, distributors, mail order catalogs, mass merchandisers, club stores and independent dealers. The majority of sales by our customers are to business end-users, which generally seek premium office products that have added value or ease of use features and a reputation for reliability, performance and professional appearance. Representative products that we sell in each category and the principal brand names under which we sell our products in each category are as follows:
 
     
Workspace Tools
 
Document Communication
 
(Brands: Swingline, Rexel and GBC)
  (Brands: GBC, Rexel, Ibico® and Wilson Jones)
• staplers and staples
   • binding equipment and supplies
• shredders
   • laminating equipment and supplies
• calculators
   • report covers
• punches
   • indexes
• trimmers
   
 
     
Visual Communication
 
Storage and Organization
 
(Brands: Quartet, NOBO® and Apollo®)
  (Brands: Wilson Jones, Rexel, Eastlight®, Marbig® and Dox®)
• dry-erase boards
 
 • ring binders
• dry-erase markers
   • sheet protectors
• easels
   • data binders
• bulletin boards
   • labels
• overhead projectors
   • hanging file folders
• transparencies
   • clips
• laser pointers
   • fasteners
• screens
   
 
We are a global leader in the stapling and punching, binding and laminating equipment and supplies, and visual communication categories, and a strong regional leader in storage and organization. In North America, Europe and Australia, our office products are sold by our in-house sales forces and independent representatives, and outside of these regions through distributors.
 
Computer Products Group (12% of 2006 net sales)  We supply products aimed at mobile computer users, which represents a niche market in the computer products segment. Our Computer Products Group designs, sources and distributes accessory products for personal computers and mobile devices worldwide, principally under the Kensington brand name. Our Computer Products Group markets to consumer electronic retailers, information technology value added resellers, original equipment manufacturers (including Dell and Lenovo), mass merchandisers and office products retailers. We have a strong market share position in the mobile computer physical security and accessories category, with products such as:
 
  •  security locks and power adapters for laptop computers;
 
  •  input devices, such as wireless mice and keyboards;
 
  •  computer cases;
 
  •  accessories for Apple® iPod® products; and
 
  •  other computer accessories.


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In North America, Europe and Australia, our products are sold by our in-house sales forces and independent representatives, and outside of these regions through distributors.
 
Commercial — Industrial Print Finishing Group (9% of 2006 net sales)  The Industrial and Print Finishing Group, or IPFG, targets book publishers together with “print-for-pay” and other print finishing customers that use our professional grade finishing equipment and supplies. IPFG’s primary products include:
 
  •  thermal and pressure-sensitive laminating films;
 
  •  mid-range and commercial high-speed laminators;
 
  •  large-format digital print laminators; and
 
  •  other automated finishing products.
 
IPFG’s products and services are sold worldwide through direct and dealer channels. The products in this segment include high-end, complex pieces of industrial equipment, some of which generate in excess of $1 million in net sales, including related services and supplies. Sales of some of our IPFG products, such as our laminating machines, typically result in additional sales of large quantities of consumable products, such as laminating films and other materials, which constitute the majority of IPFG’s revenue and from which we derive higher profit margins. Additionally, we continually seek ways to apply the innovations we develop in designing and manufacturing high-end, highly technological and specialized commercial products and applications to the development of lower priced commercial and consumer products, which can then be sold through our Other Commercial and office products channels.
 
Other Commercial (13% of 2006 net sales).  The Other Commercial segment includes the GBC Document Finishing solutions business, incorporating the direct sales of binding and laminating equipment, supplies and after-sales service to high-volume commercial and corporate users. This segment also includes personal organization tools and products, such as Day-Timer calendars and personal organizers, which are primarily sold direct to consumers or through large retailers and commercial dealers.
 
 
Our sales are balanced between our principal markets in North America, Europe and Australia. For the fiscal year ended December 31, 2006, these markets represented 63%, 27% and 7% of our net sales, respectively. Our top ten customers, including Office Depot, Staples, OfficeMax, United Stationers, Corporate Express, S.P. Richards, Spicers, Wal-Mart/Sam’s Club, BPGI and Lyreco, accounted for 47% of our net sales for the fiscal year ended December 31, 2006. Sales to Office Depot, Inc. and subsidiaries amounted to approximately 12%, 16% and 18% of consolidated net sales for the years ended December 31, 2006 and 2005 and December 27, 2004, respectively. Sales to no other customer exceeded 10% of consolidated sales for any of these periods.
 
Current trends among our customers include fostering high levels of competition among suppliers, demanding innovative new products and requiring suppliers to maintain or reduce product prices and deliver products with shorter lead times and in smaller quantities. Other trends, in the absence of a strong new product development effort or strong end-user brands, are for the retailer to import generic products directly from foreign sources and sell those products, which compete with our products, under the customers’ own private label brands. The combination of these market influences has created an intensely competitive environment in which our principal customers continuously evaluate which product suppliers to use, resulting in pricing pressures and the need for stronger end-user brands, the ongoing introduction of innovative new products and continuing improvements in customer service.
 
Competitors of the Office Products Group include Avery Dennison, Esselte, Fellowes, 3M, Newell, Hamelin and Smead. Competitors of the Computer Products Group include Belkin, Logitech, Targus and Fellowes. Competitors of the Commercial-Industrial Print Finishing Group include Neschen, Transilwrap, Cosmo and Deprosa. Other Commercial competitors include Mead, Franklin Covey and Spiral Binding.


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Certain financial information for each of our business segments and geographic regions is incorporated by reference to Note 13, Information on Business Segments, to our consolidated financial statements contained in Item 8 of this report.
 
 
Our strong commitment to understanding our consumers and defining products that fulfill their needs drives our product development strategy, which we believe is and will be a key contributor to our success in the office products industry. Our new products are developed from our own consumer understanding, our own research and development or through partnership initiatives with inventors and vendors. Costs related to consumer research and product research are included in marketing costs and research and development expenses, respectively.
 
Our divestiture and product line rationalization strategy emphasizes the divestiture of businesses and rationalization of product offerings that do not meet our long-term strategic goals and objectives.
 
We consistently review our businesses and product offerings, assess their strategic fit and seek opportunities to divest non-strategic businesses. The criteria we use in assessing the strategic fit include: the ability to increase sales for the business; the ability to create strong, differentiated brands; the importance of the business to key customers; the business’ relationship with existing product lines; the impact of the business to the market; and the business’ actual and potential impact on our operating performance.
 
As a result of this review process, we completed the sale of the Perma® storage business during the third quarter of 2006, and announced the discontinuance of the Kensington cleaning product category as of the end of the first quarter of 2006. These actions represent approximately $40 million of annual net sales. In addition, we have announced plans to discontinue an additional $60 million of annual net sales in non-strategic products in the Office Products Group.
 
 
The primary materials used in the manufacturing of many of our products are plastics, resin, polyester and polypropylene substrates, paper, steel, wood, aluminum, melamine and cork. These materials are available from a number of suppliers, and we are not dependent upon any single supplier for any of these materials. In general, our gross profit may be affected from time to time by fluctuations in the prices of these materials because our customers require advance notice and negotiation to pass through raw material price increases, creating a gap before cost increases can be passed on to our customers. We have experienced inflation in certain of these raw materials, such as resin, and expect the cost inflation pressures to continue.. See “Risk Factors — Risks Relating to Our Business — The raw materials and labor costs we incur are subject to price increases that could adversely affect our profitability.” We intend to recover some of the higher costs through price increases. Based on experience, we believe that adequate quantities of these materials will be available in adequate supplies in the foreseeable future. In addition, a significant portion of the products we sell are sourced from China and other Far Eastern countries and are paid for in U.S. dollars. Thus, movements of their local currency to the U.S. dollar have the same impacts as raw material price changes.
 
 
Our products are either manufactured or sourced to ensure that we supply our customers with appropriate customer service, quality products, innovative solutions and attractive pricing. We have built a consumer-focused business unit model with a flexible supply chain to ensure that these factors are appropriately balanced. Using a combination of manufacturing and third-party sourcing also enables us to reduce our costs and effectively manage our production assets by lowering our capital investment and working capital requirements. We tend to manufacture those products that would incur a relatively high freight expense or have high service needs and typically source those products that have a high proportion of direct labor cost. Low cost sourcing mainly comes from China, but we also source from other Asian countries and Eastern Europe. Where supply chain flexibility is of greater importance, we source from our own factories located in


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intermediate cost regions, for example, the Czech Republic for Europe. Where freight costs or service issues are significant, we source from factories located in our domestic markets.
 
 
Our business, as it concerns both historical sales and profit, has experienced increased sales volume in the third and fourth quarters of the calendar year. Two principal factors have contributed to this seasonality: the office products industry, its customers and ACCO Brands specifically are major suppliers of products related to the “back-to-school” season, which occurs principally during the months of June, July, August and September for our North American business; and our offering includes several products which lend themselves to calendar year-end purchase timing, including Day-Timer planners, paper organization and storage products (including bindery) and Kensington computer accessories, which increase with traditionally strong fourth quarter sales of personal computers.
 
 
We have many patents, trademarks, brand names and trade names that are, in the aggregate, important to our business. The loss of any individual patent or license, however, would not be material to us taken as a whole. Many of these trademarks are only important in particular geographic markets or regions. Our principal trademarks are: Swingline, GBC, Quartet, Day-Timer, Kensington, Rexel, Wilson Jones, Marbig, NOBO, Apollo, Microsaver® and Ibico.
 
 
We are subject to federal, state and local laws and regulations concerning the discharge of materials into the environment and the handling, disposal and clean-up of waste materials and otherwise relating to the protection of the environment. It is not possible to quantify with certainty the potential impact of actions regarding environmental matters, particularly remediation and other compliance efforts that we may undertake in the future. In the opinion of our management, compliance with the present environmental protection laws, before taking into account estimated recoveries from third parties, will not have a material adverse effect upon our capital expenditures, financial condition, results of operations or competitive position.
 
 
As of December 31, 2006, the Company had 6,846 full-time and part-time employees. There have been no strikes or material labor disputes at any of our facilities during the past five years. We consider our employee relations to be good.
 
ITEM 1A.   RISK FACTORS
 
 
Certain statements contained or incorporated by reference herein that relate to our beliefs or expectations as to future events are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and we are including this statement for purposes of invoking these safe harbor provisions. These forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identifiable by use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “forecast,” “project,” “plan” or similar expressions. Our ability to predict the results or the actual effect of future plans or strategies is inherently uncertain. Because actual results may differ from those predicted by such forward-looking statements, you should not rely on such forward-looking statements when deciding whether to buy, sell or hold our securities. We undertake no obligation to update these forward-looking statements in the future.


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Our business, operating results, cash flows and financial condition are subject to various risks and uncertainties, including, without limitation, those set forth below, any of which could cause our actual results to vary materially from recent results or from our anticipated future results.
 
 
The primary materials used in the manufacturing of many of our products are resin, plastics, polyester and polypropylene substrates, paper, steel, wood, aluminum, melamine and cork. In general, our gross profit may be affected from time to time by fluctuations in the prices of these materials because our customers require advance notice and negotiation to pass through raw material price increases, giving rise to a delay before cost increases can be passed to our customers. We attempt to reduce our exposure to increases in these costs through a variety of measures, including periodic purchases, future delivery contracts and longer term price contracts together with holding our own inventory; however, these measures may not always be effective. Inflationary and other increases in costs of materials and labor have occurred in the past and may recur, and raw materials may not continue to be available in adequate supply in the future. Shortages in the supply of any of the raw materials we use in our products could result in price increases that could have a material adverse effect on our financial condition or results of operations.
 
 
Our business depends on the strength of the economies in various parts of the world, primarily in North America, Europe and Australia and to a lesser extent Central and South America and Asia. These economies are affected primarily by factors such as employment levels and consumer demand, which, in turn, are affected by general economic conditions and specific events such as natural disasters. In recent years, the office products industry in the United States and, increasingly, elsewhere has been characterized by intense competition and consolidation among our customers. Because such competition can cause our customers to struggle or fail, we must continuously monitor and adapt to changes in the profitability, creditworthiness and pricing policies of our customers.
 
 
The office products industry is concentrated in a small number of major customers, principally office products superstores (which combine contract stationers, retail and mail order), office products distributors and mass merchandisers. This concentration increases pricing pressures to which we are subject and leads to pressures on our margins and profits. Additionally, consolidation among customers also exposes us to increased concentration of customer credit risk. A relatively limited number of customers account for a large percentage of our total net sales. Our top ten customers accounted for 47% of our net sales for the fiscal year ended December 31, 2006. Sales to Office Depot, Inc. and subsidiaries during the same period amounted to approximately 12%. The loss of, or a significant reduction in, business from one or more of our major customers could have a material adverse effect on our business, financial condition and results of operations.
 
 
Our products and services are sold in highly competitive markets. We believe that the principal points of competition in these markets are product innovation, quality, price, merchandising, design and engineering capabilities, product development, timeliness and completeness of delivery, conformity to customer specifications and post-sale support. Competitive conditions may require us to match or better competitors’ prices to retain business or market share. We believe that our competitive position will depend on continued investment in innovation and product development, manufacturing and sourcing, quality standards, marketing and


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customer service and support. Our success will depend in part on our ability to anticipate and offer products that appeal to the changing needs and preferences of our customers in the various market categories in which we compete. We may not have sufficient resources to make the investments that may be necessary to anticipate those changing needs and we may not anticipate, identify, develop and market products successfully or otherwise be successful in maintaining our competitive position. There are no significant barriers to entry into the markets for most of our products and services. We also face increasing competition from our own customers’ private label and direct sourcing initiatives.
 
 
Our business, as it concerns both historical sales and profit, has experienced higher sales volume in the third and fourth quarters of the calendar year. Two principal factors have contributed to this seasonality: the office products industry’s customers and our product line. We are major suppliers of products related to the “back-to-school” season, which occurs principally during the months of June, July, August and September for our North American business; and our product line includes several products which lend themselves to calendar year-end purchase timing. If either of these typical seasonal increases in sales of certain portions of our product line does not materialize, we could experience a material adverse effect on our business, financial condition and results of operations.
 
 
Approximately 47% of our net sales for the fiscal year ended December 31, 2006 were from international sales. Our international operations may be significantly affected by economic, political and governmental conditions in the countries where our products are manufactured or sold. Additionally, while the recent relative weakness of the U.S. dollar to other currencies has been advantageous for our businesses’ sales as the results of non-U.S. operations have increased when reported in U.S. dollars, we cannot predict the rate at which the U.S. dollar will trade against other currencies in the future. If the trend of the U.S. dollar were to strengthen, making the dollar significantly more valuable relative to other currencies in the global market, such an increase could harm our ability to compete, our financial condition and our results of operations. More specifically, a significant portion of the products we sell are sourced from China and other Far Eastern countries and are paid for in U.S. dollars. Thus, movements of their local currency to the U.S. dollar have the same impacts as raw material price changes in addition to the currency translation impact noted above.
 
 
Historically, we have outsourced certain manufacturing functions to third party service providers in China and other countries. Outsourcing generates a number of risks, including decreased control over the manufacturing process possibly leading to production delays or interruptions, inferior product quality control and misappropriation of trade secrets. In addition, performance problems by these third-party service providers could result in cost overruns, delayed deliveries, shortages, quality issues or other problems which could result in significant customer dissatisfaction and could materially and adversely affect our business, financial condition and results of operations.
 
If one or more of these third-party service providers becomes unable or unwilling to continue to provide services of acceptable quality, at acceptable costs or in a timely manner, our ability to deliver our products to our customers could be severely impaired. Furthermore, the need to identify and qualify substitute service providers or increase our internal capacity could result in unforeseen operational problems and additional costs. Substitute service providers might not be available or, if available, might be unwilling or unable to offer services on acceptable terms. Moreover, if customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current service providers, or others, on commercially reasonable terms, if at all.


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We rely on GMP Co. Ltd., in which we hold a minority equity interest of less than 20%, as our sole supplier of many of the laminating machines we distribute. GMP may not be able to continue to perform any or all of its obligations to us. GMP’s equipment manufacturing facility is located in the Republic of Korea, and its ability to supply us with laminating machines may be affected by Korean and other regional or worldwide economic, political or governmental conditions. Additionally, GMP has a highly leveraged capital structure and its ability to continue to obtain financing is required to ensure the orderly continuation of its operations. If GMP became incapable of supplying us with adequate equipment, and if we could not locate a suitable alternative supplier, in a timely manner or at all, and negotiate favorable terms with such supplier, it would have a material adverse effect on our business.
 
 
We have many patents, trademarks, brand names and trade names that are, in the aggregate, important to our business. The loss of any individual patent or license may not be material to us taken as a whole, but the loss of a number of patents or licenses that represented principal portions of our business, or expenses related to defending or maintaining the patents or licenses, could have a material adverse effect on our business.
 
 
Our success will depend on our ability to attract and retain qualified personnel, including executive officers and other key management personnel. We may not be able to attract and retain qualified management and other personnel necessary for the development, manufacture and sale of our products, and key employees may not remain with us in the future. If we do not retain these key employees, we may experience substantial disruption in our businesses. The loss of key management personnel or other key employees or our potential inability to attract such personnel may adversely affect our ability to manage our overall operations and successfully implement our business strategy.
 
 
We and our operations, both in the United States and abroad, are subject to national, state, provincial and/or local environmental laws and regulations that impose limitations and prohibitions on the discharge and emission of, and establish standards for the use, disposal and management of, certain materials and waste. These environmental laws and regulations also impose liability for the costs of investigating and cleaning up sites, and certain damages resulting from present and past spills, disposals, or other releases of hazardous substances or materials. Environmental laws and regulations can be complex and may change often. Capital and operating expenses required to comply with environmental laws and regulations can be significant, and violations may result in substantial fines and penalties. In addition, environmental laws and regulations, such as the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, in the United States impose liability on several grounds for the investigation and cleanup of contaminated soil, ground water and buildings and for damages to natural resources at a wide range of properties. For example, contamination at properties formerly owned or operated by us, as well as at properties we will own and operate, and properties to which hazardous substances were sent by us, may result in liability for us under environmental laws and regulations. The costs of complying with environmental laws and regulations and any claims concerning noncompliance, or liability with respect to contamination in the future could, have a material adverse effect on our financial condition or results of operations.
 
 
Future events may occur that would adversely affect the reported value of our assets and require impairment charges. Such events may include, but are not limited to, strategic decisions made in response to changes in economic and competitive conditions, the impact of the economic environment on our customer bases or a material adverse change in our relationship with significant customers.


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Claims for losses or injuries purportedly caused by some of our products arise in the ordinary course of our business. In addition to the risk of substantial monetary judgments, product liability claims or regulatory actions could result in negative publicity that could harm our reputation in the marketplace or the value of our end-user brands. We also could be required to recall possible defective products, which could result in adverse publicity and significant expenses. Although we maintain product liability insurance coverage, potential product liability claims are subject to a self-insured deductible or could be excluded under the terms of the policy.
 
 
 
The success of our acquisition of GBC will depend, in part, on our ability to realize the anticipated synergies, cost savings and growth opportunities from integrating the businesses of GBC with our other businesses. Our success in realizing these synergies, cost savings and growth opportunities, and the timing of this realization, depends on the successful integration of our and GBC’s operations. Even if we are able to integrate the business operations of GBC successfully, we may not experience the full benefits of the synergies, cost savings and growth opportunities that we currently expect from this integration, or that these benefits will be achieved within the anticipated time frame. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, and the benefits from the acquisition may be offset by costs incurred in integrating the companies.
 
 
There is a significant degree of difficulty and management distraction inherent in the process of integrating the GBC businesses. These difficulties include:
 
  •  the challenge of integrating the GBC businesses while carrying on the ongoing operations of each business;
 
  •  the necessity of coordinating geographically separate organizations;
 
  •  the challenge of integrating the business cultures of each company;
 
  •  the challenge and cost of integrating the information technology systems of each company; and
 
  •  the potential difficulties in retaining key officers and personnel through the transition.
 
The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of our businesses. Members of our senior management may be required to devote considerable amounts of time to this integration process, which will decrease the time they will have to manage our business, service existing customers, attract new customers and develop new products or strategies.
 
If our senior management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, our business could suffer. Any failure to successfully or cost-effectively integrate the GBC businesses could have a material adverse effect on our business, financial condition and results of operations.


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We have a significant amount of indebtedness. As of December 31, 2006, we had approximately $805.1 million of outstanding debt. This indebtedness could have important consequences to us, such as:
 
  •  limiting our ability to obtain additional financing to fund growth, working capital, capital expenditures, debt service requirements or other cash requirements;
 
  •  limiting our operational flexibility due to the covenants contained in our debt agreements;
 
  •  limiting our ability to invest operating cash flow in our business due to debt service requirements;
 
  •  limiting our ability to compete with companies that are not as highly leveraged and that may be better positioned to withstand economic downturns;
 
  •  increasing our vulnerability to economic downturns and changing market conditions;
 
  •  to the extent that our debt is subject to floating interest rates, increasing our vulnerability to fluctuations in market interest rates; and
 
  •  limiting our ability to buy back stock or pay cash dividends.
 
Our ability to meet our expenses and debt service obligations will depend on our future performance, which will be affected by financial, business, economic and other factors, including potential changes in customer preferences, the success of product and marketing innovation and pressure from competitors. If we do not have enough money to pay our debt service obligations, we may be required to refinance all or part of our existing debt, sell assets or borrow more money. We may not be able to, at any given time, refinance our debt, sell assets or borrow more money on terms acceptable to us or at all.
 
 
Certain covenants we have made in connection with our borrowings restrict our ability to incur additional indebtedness, issue preferred stock, pay dividends on and redeem capital stock, make other restricted payments, including investments, sell our assets, and enter into consolidations or mergers. Our senior secured credit agreement also requires us to maintain specified financial ratios and satisfy financial condition tests. Our ability to meet those financial ratios and tests may be affected by events beyond our control, and we may not be able to continue to meet those ratios and tests. A breach of any of these covenants, ratios, tests or restrictions, as applicable, could result in an event of default under our credit and debt instruments, in which our lenders could elect to declare all amounts outstanding to be immediately due and payable. If the lenders accelerate the payment of the indebtedness, our assets may not be sufficient to repay in full the indebtedness and any other indebtedness that would become due as a result of any acceleration.
 
 
Our ability to make payments on and to refinance our debt, and to fund planned capital expenditures and research and development efforts, will depend on our ability to generate cash. Our ability to generate cash is subject, in part, to economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control. Our business may not generate sufficient cash flow from operations and future borrowings may not be available to us under our senior secured credit facilities or otherwise in an amount sufficient to enable us to pay our debts, or to fund our other liquidity needs. We may need to refinance all or a portion of our debts, on or before maturity. We might be unable to refinance any of our debt, including our senior secured credit facilities or our Senior Subordinated Notes due 2015, on commercially reasonable terms or at all.


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Risks Related to Our Spin-off From Fortune Brands
 
We may be responsible for the payment of substantial United States federal income taxes if the spin-off from Fortune Brands and the merger through which we acquired GBC did not meet, or do not continue to meet, certain Internal Revenue Code requirements.
 
In connection with our spin-off from Fortune Brands and acquisition of GBC, Fortune Brands, ACCO Brands and GBC were advised by counsel that the spin-off constituted a spin-off under section 355 of the Internal Revenue Code and the merger through which we acquired GBC constituted a reorganization under section 368(a) of the Internal Revenue Code. Such advice was based on, among other things, current law and certain representations as to factual matters made by, among others, Fortune Brands, ACCO Brands and GBC, which, if incorrect, could jeopardize the conclusions reached by such counsel in their opinions.
 
A tax allocation agreement was entered into by Fortune Brands and ACCO Brands in connection with the spin-off and merger transactions and generally provides that we will be responsible for any taxes imposed on Fortune Brands or us as a result of either:
 
  •  the failure of the spin-off to constitute a spin-off under section 355 of the Internal Revenue Code, or
 
  •  the subsequent disqualification of the distribution of ACCO Brands common stock to Fortune Brands stockholders in connection with the spin-off as tax-free to Fortune Brands for United States federal income tax purposes,
 
if such failure or disqualification is attributable to certain post-spin-off actions taken by or in respect of us (including our subsidiaries) or our stockholders, such as our acquisition by a third party at a time and in a manner that would cause such failure or disqualification. For example, even if the spin-off otherwise qualified as a spin-off under section 355 of the Internal Revenue Code, the distribution of our common stock to Fortune Brands common stockholders in connection with the spin-off may be disqualified as tax-free to Fortune Brands if there is an acquisition of our stock as part of a plan or series of related transactions that include the spin-off and that results in a deemed acquisition of 50% or more of our common stock.
 
For purposes of this test, any acquisitions of Fortune Brands stock or our stock within two years before or after the spin-off are presumed to be part of such a plan, although we or Fortune Brands may be able to rebut that presumption. Also, for purposes of this test, the GBC merger will be treated as resulting in a deemed acquisition by GBC stockholders of approximately 34% of our common stock. The process for determining whether a change of ownership has occurred under the tax rules is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. If we do not carefully monitor our compliance with these rules, we might inadvertently cause or permit a change of ownership to occur, triggering our obligation to indemnify Fortune Brands pursuant to the Fortune Brands/ACCO Brands tax allocation agreement.
 
ITEM 1B.   UNRESOLVED STAFF COMMENTS
 
None.
 
ITEM 2.   PROPERTIES
 
We have manufacturing facilities in North America, Europe and Asia, and maintain distribution centers in relation to the regional markets we service. We lease our principal U.S. headquarters in Lincolnshire, Illinois. The following table indicates the principal manufacturing and distribution facilities of our subsidiaries as of December 31, 2006:
 
         
Location
 
Functional Use
 
Owned/Leased
 
U.S. Properties:
       
Ontario, California
  Distribution/Manufacturing   Leased
Addison, Illinois
  Distribution/Manufacturing   Owned/Leased
Hanover Park, Illinois(1)
  Distribution   Leased


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Location
 
Functional Use
 
Owned/Leased
 
Lincolnshire, Illinois(1)
  Manufacturing   Leased
Wheeling, Illinois
  Manufacturing   Leased
Hagerstown, Maryland
  Manufacturing   Owned
Booneville, Mississippi
  Distribution/Manufacturing   Owned/Leased
Ogdensburg, New York
  Distribution/Manufacturing   Owned/Leased
East Texas, Pennsylvania
  Distribution/Manufacturing /Office   Owned
Madison, Wisconsin
  Manufacturing   Leased
Pleasant Prairie, Wisconsin(5)
  Manufacturing   Leased
Non-U.S. Properties:
       
Sydney, Australia
  Distribution/Manufacturing /Office   Owned
Brampton, Canada
  Distribution/Manufacturing /Office   Leased
Don Mills, Canada
  Distribution/Manufacturing   Leased
Tabor, Czech Republic
  Manufacturing   Owned
Vozicka, Czech Republic
  Distribution   Owned
Denton, England
  Manufacturing   Owned
Halesowen, England
  Distribution   Owned
Keswick, England
  Manufacturing   Owned
Peterborough, England
  Manufacturing   Owned
Dijon, France(3)
  Distribution   Leased
Gennevilliers, France
  Distribution/Manufacturing   Leased
Rudesberg, Germany(2)
  Distribution   Leased
Tornaco, Italy
  Distribution   Leased
Turin, Italy
  Distribution   Leased
Asan, Korea
  Manufacturing   Owned
Lerma, Mexico
  Manufacturing/Office   Owned
Nogales, Mexico(4)
  Manufacturing   Owned
Nuevo Laredo, Mexico(3)
  Manufacturing   Leased
Born, Netherlands
  Distribution   Leased
Kerkrade, Netherlands
  Distribution/Manufacturing   Owned/Leased
Wellington, New Zealand
  Distribution/Office   Owned
Arcos de Valdevez, Portugal
  Manufacturing   Owned
 
 
(1) Slated for closure in the first quarter of 2007.
 
(2) Slated for closure in the second quarter of 2007.
 
(3) Slated for closure in the third quarter of 2007.
 
(4) Slated for closure in the first quarter of 2008.
 
(5) Slated to exit one of two leased facilities in the first quarter of 2007. The remaining facility will be retained for manufacturing activities.
 
We believe that the properties are suitable to the respective businesses and have production capacities adequate to meet the needs of the businesses.
 
 
We are, from time to time, involved in routine litigation incidental to our operations. None of the litigation in which we are currently involved, individually or in the aggregate, is material to our consolidated

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financial condition or results of operations nor are we aware of any material pending or contemplated proceedings. We intend to vigorously defend or resolve any such matters by settlement, as appropriate.
 
ITEM 4.   SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
 
None.
 
ITEM 5.   MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “ABD.” The following table sets forth, for the periods indicated, the high and low sales prices for our common stock as reported on the NYSE beginning August 17, 2005, the first date our stock began trading.
 
                         
    High     Low     Dividend  
 
2005
                       
Third Quarter (from August 17, 2005)
  $ 28.52     $ 22.88        
Fourth Quarter
    28.58       21.70        
2006
                       
First Quarter
    25.40       21.29        
Second Quarter
    25.50       21.20        
Third Quarter
    22.58       17.95        
Fourth Quarter
    27.45       21.80        
 
As of February 1, 2007 the Company had approximately 16,103 registered holders of its common stock.
 
 
We have not paid any dividends on our common stock since becoming a public company. We intend to retain any future earnings to fund the development and growth of our business and currently do not anticipate paying any cash dividends in the foreseeable future. Any determination as to the declaration of dividends is at our board of directors’ sole discretion based on factors it deems relevant. In addition, under the terms of our credit facility, we currently are prohibited from paying cash dividends on our common stock.


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The following graph compares the cumulative total stockholder return on our common stock to that of the S&P Office Services and Supplies (SuperCap) Index and the Russell 2000 Index from the date on which our common stock began trading on the NYSE (August 17, 2005) through December 31, 2006:
 
S&P OFFICE SERVICES AND SUPPLIES (SUPER CAP) INDEX AND RUSSELL 2000 INDEX*
 
(PERFORMANCE GRAPH)
 
                                                         
    Cumulative Total Return
    8-17-05   9-05   12-05   3-06   6-06   9-06   12-06
ACCO Brands Corporation
    100.00       113.52       98.55       89.30       88.09       89.54       106.48  
Russell 2000
    100.00       98.45       99.57       113.45       107.75       108.22       117.86  
S & P Office Services & Supplies (SuperCap)
    100.00       93.90       95.01       100.98       94.53       98.67       105.83  
                                                         
 
The comparison above represents a change in comparative indices from the Company’s previous disclosure for the year ended December 31, 2005. Management concluded that based on the Company’s inclusion as a component of the Russell 2000 Index, comparison to this index is a more appropriate measure for entities of similar market capitalization. In addition, management has determined that the S&P Office Services and Supplies (SuperCap) Index is the most appropriate industry index comparison based on the Company’s market and industry presence as a stand-alone publicly traded entity.


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The following graph compares the cumulative total stockholder return on our common stock to those indices previously disclosed, the S&P MidCap 400 Index and the Russell 1000 Index, from the date on which our common stock began trading (August 17, 2005) through December 31, 2006:
 
 
(PERFORMANCE GRAPH)
 
                                                         
    Cumulative Total Return
    8-17-05   9-05   12-05   3-06   6-06   9-06   12-06
ACCO Brands Corporation
    100.00       113.52       98.55       89.30       88.09       89.54       106.48  
S & P Midcap 400
    100.00       99.65       102.98       110.83       107.34       106.18       113.60  
Russell 1000
    100.00       100.06       102.18       106.77       105.00       110.31       117.98  
                                                         
 
* Assumes $100 is invested on August 17, 2005 in ACCO Brands common stock, or on July 31, 2005 in the respective indices, and reinvestment of dividends.


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ITEM 6.   SELECTED FINANCIAL DATA
 
 
The following table sets forth our selected consolidated financial data. The selected consolidated financial data as of and for the fiscal years ended December 31, 2006, and 2005 and December 27, 2004 and 2003 is derived from our consolidated financial statements, which were audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm. The selected financial data as of and for the fiscal year ended December 27, 2002 is derived from our unaudited financial statements, which, in the opinion of management, contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of our financial position and results of operations for the periods and dates presented. The data should be read in conjunction with the financial statements and related notes included elsewhere in this annual report.
 
 
Prior to August 17, 2005, the ACCO Brands businesses were managed largely as a stand-alone business segment of Fortune Brands which provided certain corporate services. The financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations include the use of “push down” accounting procedures in which certain assets, liabilities and expenses historically recorded or incurred at the Fortune Brands parent company level that related to or were incurred on behalf of ACCO Brands have been identified and allocated or “pushed down,” as appropriate, to the financial results of ACCO Brands for the periods presented through August 16, 2005. Allocations for expenses used the most relevant basis and, when not directly incurred, utilized net sales, segment assets or headcount in relation to the rest of Fortune Brands’ business segments to determine a reasonable allocation.
 
Interest expense has been allocated to ACCO Brands as a portion of Fortune Brands’ total interest expense. However, no debt has been allocated to ACCO Brands in relation to this interest expense. These statements are not indicative of the results of operations, liquidity or financial position that would have existed or will exist in the future assuming the ACCO Brands businesses were operated as an independent company.
 
Unless otherwise specifically noted in the presentation, “sales” reflects the net sales of products, and “restructuring-related charges” represent costs related to qualified restructuring projects which can not be reported as restructuring under U.S. GAAP (e.g., losses on inventory disposal related to product category exits, manufacturing inefficiencies following the start of manufacturing operations at a new facility following closure of the old facility, SG&A reorganization and implementation costs, dedicated consulting, stay bonuses, etc.).
 
                                         
          Year Ended
 
    Year Ended December 31,     December 27,  
    2006     2005     2004     2003     2002  
                            (Unaudited)  
 
Income Statement Data:
                                       
Net sales
  $ 1,951.0     $ 1,487.5     $ 1,175.7     $ 1,101.9     $ 1,105.4  
Cost of products sold(1)
    1,382.8       1,048.0       810.3       778.6       789.8  
Advertising, selling, general and administrative expense(1)
    448.1       307.0       247.8       245.0       259.6  
Amortization of intangibles
    11.1       4.9       1.3       1.7       2.1  
Write-down of intangibles(2)
                      12.0        
Restructuring and asset impairment charges
    44.1       2.9       19.4       17.3       34.3  
                                         
Operating income
    64.9       124.7       96.9       47.3       19.6  
Interest expense, net
    61.1       28.8       8.5       8.0       12.3  
Other (income) expense, net
    (3.8 )           (1.2 )     (0.6 )     1.8  
                                         
Income before income taxes, minority interest and change in accounting principle
    7.6       95.9       89.6       39.9       5.5  
Income taxes
    0.2       39.5       21.1       13.2       4.0  
Minority interest
    0.2       0.2                    
                                         
Net income before change in accounting principle
    7.2       56.2       68.5       26.7       1.5  
Change in accounting principle(3)
          3.3                    
                                         
Net income
  $ 7.2     $ 59.5     $ 68.5     $ 26.7     $ 1.5  
                                         


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          Year Ended
 
    Year Ended December 31,     December 27,  
    2006     2005     2004     2003     2002  
                            (Unaudited)  
 
Basic earnings per common share:
                                       
Income before change in accounting principle
  $ 0.13     $ 1.35     $ 1.96     $ 0.76     $ 0.04  
Change in accounting principle
          0.08                    
                                         
Net income
  $ 0.13     $ 1.43     $ 1.96     $ 0.76     $ 0.04  
                                         
Diluted earnings per common share:
                                       
Income before change in accounting principle
  $ 0.13     $ 1.32     $ 1.92     $ 0.75     $ 0.04  
Change in accounting principle
          0.08                    
                                         
Net income
  $ 0.13     $ 1.40     $ 1.92     $ 0.75     $ 0.04  
                                         
Balance Sheet Data (at year end):
                                       
Cash and cash equivalents
  $ 50.0     $ 91.1     $ 79.8     $ 60.5     $ 43.3  
Working capital(4)
    326.1       408.0       273.2       236.3       206.6  
Property, plant and equipment, net
    217.2       239.8       157.7       170.0       195.3  
Total assets
    1,849.6       1,929.5       969.6       865.9       842.7  
External long-term debt(5)
    805.1       941.9       0.1       2.8       4.7  
Total stockholders’ equity
    384.0       408.3       566.1       483.6       479.8  
Other Data:
                                       
Depreciation expense
  $ 39.9     $ 32.0     $ 28.2     $ 33.3     $ 37.0  
Capital expenditures
    33.1       34.5       27.6       16.3       22.0  
Cash provided by operating activities
    120.9       65.3       64.9       67.7       168.2  
Cash used by investing activities
    21.4       32.4       6.1       1.7       17.2  
Cash used by financing activities
    145.0       17.5       46.5       57.3       135.0  
 
 
(1) Income before income taxes and net income was impacted by restructuring-related expenses included in cost of products sold and advertising, selling, general and administrative expenses of $21.6 million, $14.1 million, $18.2 million, $19.1 million and $13.9 million for the fiscal years ended December 31, 2006 and 2005, and December 27, 2004, 2003 and 2002, respectively.
 
(2) ACCO Brands recorded impairments of certain identifiable intangible assets of $12.0 million in 2003 due to diminished fair values resulting from business repositioning and restructuring activities.
 
(3) The accounting change in 2005 related to the elimination of a one month lag in reporting by several foreign subsidiaries to align their reporting periods with ACCO Brands’ fiscal calendar.
 
(4) Working capital is defined as total current assets less total current liabilities.
 
(5) Total debt refers only to the portion financed by third parties and does not include any portion financed through banking relationships or lines of credit secured by ACCO Brands’ then-parent company, Fortune Brands. Interest expense associated with Fortune Brands’ debt has been allocated to ACCO Brands for the period from January 1, 2005 through August 16, 2005 and for the years ended December 27, 2004, 2003 and 2002.
 
ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
 
On August 17, 2005, ACCO Brands Corporation, following its spin-off from Fortune Brands Inc. (“Fortune Brands” or the “Parent”), became the parent company of General Binding Corporation (“GBC”) when GBC merged with a wholly owned subsidiary of ACCO Brands. As a result of the merger, GBC is now a wholly owned subsidiary of ACCO Brands Corporation.
 
ACCO Brands Corporation is a world leader in select categories of branded office products (excluding furniture, computers, printers and bulk paper) to the office products resale industry. We design, develop, manufacture and market a wide variety of traditional and computer-related office products, supplies, binding and laminating equipment and consumable supplies, personal computer accessory products, paper-based time

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management products, presentation aids and label products. We have leading market positions and brand names, including Swingline®, GBC®, Kensington®, Quartet®, Rexel®, Day-Timer® and Wilson Jones®, among others.
 
We also manufacture and market specialized laminating films for book printers, packaging and digital print lamination, as well as high-speed laminating and binding equipment targeted at commercial consumers.
 
Our customers include commercial contract stationers (such as Office Depot, Staples, Corporate Express and Office Max), retail superstores, wholesalers, distributors, mail order catalogs, mass merchandisers, club stores and dealers. We also supply our products to commercial and industrial end-users and to the educational market.
 
We enhance shareholder value by building our leading brands to generate sales, earn profits and create cash flow. We do this by targeting the premium end of select categories, which are characterized by high brand equity, high customer loyalty and a reasonably high price gap between branded and private label products. Our participation in private label or value categories is limited to areas where we believe we have an economic advantage or where it is necessary to merchandise a complete category. We completed the sale of the Perma® storage business during the third quarter of 2006, and announced the discontinuance of the Kensington cleaning product category as of the end of the first quarter of 2006. These actions represent approximately $40 million of annual net sales. In addition, we have announced plans to discontinue an additional $60 million of annual net sales in non-strategic products in the Office Products Group. Through a focus on research, marketing and innovation, we seek to develop new products that meet the needs of our consumers and commercial end-users. In addition, we will provide value-added features or benefits that will enhance product appeal to our customers. This focus, we believe, will increase the premium product positioning of our brands.
 
Our strategy centers on maximizing profitability and high-return growth. Specifically, we seek to leverage our platform for organic growth through greater consumer understanding, product innovation, marketing and merchandising, disciplined category expansion, including possible strategic transactions, and continued cost realignment.
 
In the near term, we are focused on realizing synergies from our merger with GBC. We have identified significant potential savings opportunities resulting from the merger. These opportunities include cost reductions attributable to efficiencies and synergies expected to be derived from facility integration, headcount reduction, supply chain optimization and revenue enhancement. Our near-term priorities for the use of cash flow are to fund integration and restructuring-related activities and to pay down acquisition-related debt.
 
For a description of certain factors that may have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see “Item 1A. Risk Factors.”
 
The following discussion includes a presentation of 2005 historical financial results of operations for the Company, which includes the financial results of operations for the former GBC business from August 17, 2005 (the date of acquisition) through December 31, 2005.
 
In order to provide additional information relating to our operating results, we also present a discussion of our consolidated operating results as if ACCO and GBC had been a combined company (pro forma) in fiscal 2005 and fiscal 2004. We have included this additional information in order to provide further insight into our operating results, prior period trends and current financial position. This supplemental information is presented in a manner consistent with the disclosure requirements of Statement of Financial Accounting Standards (SFAS No. 141), “Business Combinations,” which are described in more detail in Note 5, Acquisition and Merger, in the Notes to Consolidated Financial Statements.
 
The discussion of operating results at the consolidated level is followed by a more detailed discussion of operating results by segment. The discussion of our segment operating results is presented on a historical basis for the years ended December 2006, 2005 and 2004, including GBC’s results of operations from August 17, 2005 (the acquisition date). In order to provide additional information relating to our segment operating results, we also present a discussion of our segment operating results as if ACCO and GBC had been a combined company (pro forma) in fiscal 2005 and fiscal 2004. This supplemental information is presented in a manner consistent with the supplemental disclosures included in the consolidated operating results discussion.


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Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the financial statements of ACCO Brands Corporation and the accompanying notes contained therein.
 
 
ACCO Brands’ results are dependent upon a number of factors affecting sales, pricing and competition. Historically, key drivers of demand in the office products industry have included trends in white collar employment levels, gross domestic product (GDP) and growth in the number of small businesses and home offices together with increasing usage of personal computers. Pricing and demand levels for office products have also reflected a substantial consolidation within the global resellers of office products. This has led to multiple years of industry pricing pressure and a more efficient level of asset utilization by customers, resulting in lower sales volumes for suppliers. We sell products in highly competitive markets, and compete against large international and national companies, regional competitors and against our own customers’ direct and private-label sourcing initiatives.
 
We have completed our integration planning for the Office Products Group, and have made significant progress toward relocating our people, aligning our customer relationships and toward upgrading information technology systems. Since the acquisition of GBC we have announced and moved ahead with plans to close, consolidate, downsize, or relocate more than 30 manufacturing, distribution and administrative operations. In addition, the Company has successfully integrated key information technology systems in the U.S., Canada and Mexico, creating a common technology platform for its office products businesses, and consolidated its European office products sales force. Collectively, these actions are expected to ultimately account for all of the previously announced $40 million of targeted annual cost synergies by the end of 2008 and part of the additional $20 million by the end of 2009. During the third quarter of 2006, the Company completed its review of the former GBC commercial businesses (Industrial and Print Finishing Group and the Document Finishing businesses) resulting in a planned realignment of those businesses. As a result of that review the Company now expects an additional $20 million in annualized synergies to be realized by the end of 2009, resulting in a total of $60 million in targeted annualized synergies that will be realized by the end of 2009.
 
Cash payments related to the Company’s restructuring and integration activities amounted to $29.7 million (excluding capital expenditures) in 2006. It is expected that additional disbursements of approximately $70 million will be substantially completed by the end of 2008 as the Company continues to implement phases of its strategic and business integration plans. The Company has adequate resources to finance the anticipated requirements.
 
 
Unless otherwise specifically noted below, each component of the 2006 results increased, in part, due to changes in foreign currency. These increases were entirely offset, however, by the impact of the prior year having benefited from the change in reporting calendar days. As a result, these factors have not be specifically identified in the discussions below.
 
Historical Results
 
                                 
    Years Ended December 31,     Amount of Change  
    2006     2005     $     %  
    (In millions of dollars)  
 
Net sales
  $ 1,951.0     $ 1,487.5     $ 463.5       31 %
Operating income
    64.9       124.7       (59.8 )     (48 )%
Net income
    7.2       59.5       (52.3 )     (88 )%
 
 
Sales increased $463.5 million, or 31% to $1,951.0 million. The increase was principally related to the acquisition of GBC.


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Gross profit increased $128.7 million to $568.2 million. This increase was primarily related to the acquisition of GBC. Gross profit margin decreased to 29.1% from 29.5%. The decrease in gross profit margin was primarily due to increased restructuring-related expenses and raw material and freight costs, partially offset by sales price increases. In addition, unfavorable sales mix, including volume growth in lower relative margin products, has also depressed margins.
 
 
SG&A increased $141.1 million to $448.1 million. The increase was primarily attributable to the acquisition of GBC. SG&A increased as a percentage of sales to 23.0% from 20.6%. The increase in SG&A as a percentage of sales is attributable to significantly higher cost related to expensing of equity based management incentive programs, higher marketing and selling investments to drive growth and higher infrastructure costs to develop our European business model, support our public company status and align our business model globally.
 
The Company’s results of operations in 2006 were impacted by the adoption of SFAS No. 123(R), which requires companies to expense the fair value of employee stock options and similar awards. The Company adopted SFAS No. 123(R) effective January 1, 2006, using the modified prospective method. Therefore, stock-based compensation expense was recorded during 2006, but the prior year consolidated statement of income was not restated.
 
In December 2005, the Company issued an inaugural grant of stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) following the spin-off and merger. The inaugural grant followed market practice for initial public offerings/spin transactions and was larger than would be expected in a normal year. The Company will therefore have a larger charge related to the expensing of equity awards for the years 2006 through 2008.
 
The following is a summary of the incremental impact of all stock compensation expense and other long-term compensation recorded in 2006 and 2005, which includes expenses related to grants of stock options, RSUs, and PSUs, along with the impact of the pre-tax expense amounts as a percentage of sales.
 
 
Historical Results
 
                         
    Years Ended December 31,     Incremental
 
    2006     2005     Expense  
    (In millions of dollars)  
 
Expensing required under SFAS No. 123(R)(a)
  $ 10.9     $     $ 10.9  
Previously required expensing(b)
    7.7       0.8       6.9  
Other non-equity based long term compensation
    (0.2 )     0.7       (0.9 )
                         
Total long term executive compensation
  $ 18.4     $ 1.5     $ 16.9  
                         
% of Sales
    0.9 %     0.1 %     0.9 %
                         
 
 
(a) The Company has adopted SFAS 123(R) using the modified prospective method. Therefore, restatement of prior periods is not required.
 
(b) Includes expensing of RSUs and PSUs under SFAS 123, and unvested stock options/unearned compensation related to GBC.
 
Refer to Notes 2, Significant Accounting Policies and 3, Stock-Based Compensation for information specific to the adoption of SFAS No. 123(R) in the Notes to Consolidated Financial Statements.


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Operating income decreased $59.8 million, or 48%, to $64.9 million and decreased as a percentage of sales to 3.3% from 8.4%. The decrease was driven by $48.7 million of higher restructuring and restructuring-related costs, and lower gross margin and higher SG&A expense as discussed above.
 
 
Interest expense increased $32.3 million to $61.1 million, as debt was outstanding for the full year in 2006 compared to the prior year when debt was outstanding beginning with the date of the GBC merger. Other income increased to $3.8 million from $0.0 million in the prior year, primarily due to incremental foreign exchange gains in 2006 of $3.0 million and incremental earnings of $1.5 million from the Company’s share of GBC joint venture investments.
 
Income tax for 2006 was an expense of $0.2 million, compared to an expense of $39.5 million in 2005. The effective tax rate for 2006 was 2.6% compared to 41.2% for 2005. Included in 2006 were tax benefits which reflect a reduction in taxes due on certain unrepatriated foreign earnings, a payment from Fortune Brands under a tax allocation agreement entered into in connection with the spin-off, and benefits from the Domestic Production Activities and Extraterritorial Income Exclusion partially offset by an increase in tax loss valuation reserves. The effective tax rate for 2005 was unfavorably impacted by the repatriation expenses of foreign earnings, resulting from a reorganization to facilitate the merger of various foreign operations.
 
 
Net income was $7.2 million compared to $59.5 million in the prior year, and was significantly impacted by lower operating income and increased interest expense partially offset by the tax benefits described above. Included in net income for 2006 were restructuring and restructuring-related after-tax costs of $49.4 million, or $0.91 per diluted share. In 2005 the after-tax cost of restructuring and restructuring-related charges was $12.2 million or $0.29 per diluted share. Additionally, the change in accounting principle related to removal of the one-month lag in reporting by various of the Company’s foreign operations contributed $3.3 million of net income to the prior year. See Note 1, Basis of Presentation to the Consolidated Financial Statements for further discussion.
 
Combined Companies — Pro Forma Discussion
 
The Company has included a “combined companies” discussion below as if GBC had been included in results since the beginning of the 2005 year. Restructuring and restructuring-related costs have been noted where appropriate, as management believes that a comparative review of operating income before restructuring and restructuring-related charges allows for a better understanding of the underlying business performance from year to year.
 
The presentation of, and supporting calculations related to, the 2005 pro forma information contained in this Management’s Discussion and Analysis is derived from the Company’s Report on Form 8-K dated February 14, 2006. Such pro forma financial information has been prepared as though the companies had been combined as of the beginning of the fiscal year for 2005, and is based on the historical financial statements of ACCO Brands and GBC after giving effect to the merger of ACCO Brands and GBC. The unaudited pro forma financial information is not indicative of the results of operations that would have been achieved if the merger had taken place at the beginning of fiscal 2005, or that may result in the future. In addition, the pro forma information has not been adjusted to reflect any operating efficiencies that have been, or may in the future be, realized as a result of the combination of ACCO Brands and GBC.
 
The following table presents ACCO Brands’ reported combined results and pro forma combined results for the years ended December 31, 2006 and 2005, respectively. Amounts of restructuring and restructuring-related charges are also presented for each period. Unless otherwise specifically noted below, each component of the 2006 results increased, in part, due to changes in foreign currency. These increases were entirely offset,


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however, by the impact of the prior year having benefited from the change in reporting calendar days. As a result, these factors have not been specifically identified in the discussions below.
 
 
                                 
    Year Ended December 31, 2006  
          Gross
          Operating
 
    Net Sales     Profit     SG&A     Income  
    (In millions of dollars)  
 
Reported results
  $ 1,951.0     $ 568.2     $ 448.1     $ 64.9  
Restructuring and restructuring-related charges included in the results:
                               
Restructuring and asset impairment charges
                      44.1  
Restructuring-related expense
          10.8       10.8       21.6  
 
The Company has incurred a net total of $65.7 million in restructuring and restructuring-related expenses in 2006. The charges were principally related to costs associated with the closure or consolidation of facilities (including asset impairments and severance), primarily in North America and Europe.
 
Combined Companies (Pro Forma)
 
                                 
    Year Ended December 31, 2005  
          Gross
          Operating
 
    Net Sales     Profit     SG&A     Income  
    (In millions of dollars)  
 
Pro forma results
  $ 1,937.0     $ 566.5     $ 421.9     $ 130.0  
Restructuring and restructuring-related charges included in the results:
                               
Restructuring charges
                      3.9  
Restructuring-related expense (income)
          (1.3 )     19.6       18.3  
 
 
Net sales increased $14.0 million, or 1%, to $1,951.0 million, and was primarily driven by volume growth related to new products across all business segments other than Office Products. Segmental sales growth was 10% for Computer Products, 4% for Commercial-Industrial Print Finishing Group (“IPFG”), and 3% for Other Commercial. These increases were partially offset by a decrease in the Office Products Group of 2%, which resulted from both the planned exit of certain non-strategic business and lower pricing and volume in Europe.
 
 
Gross profit increased $1.7 million to $568.2 million. Gross profit margin decreased to 29.1% from 29.2% and was adversely impacted by the increase in restructuring-related expenses of $12.1 million, or 60 basis points. Excluding the impact of these costs, the improvement in gross margin was due to the favorable impact of manufacturing and distribution footprint restructuring and price increases, partially offset by increased raw material and freight costs.
 
 
SG&A increased $26.2 million, to $448.1 million and as a percentage of sales to 23.0% from 21.8%. The increase in SG&A was attributable to significantly higher cost related to expensing of equity based management incentive programs, higher marketing and selling investments to drive growth and higher infrastructure costs to support our status as an independent public company, align our business model globally and develop our pan-European business model. These costs were partially offset by lower restructuring-related SG&A charges in the current year.
 
The following is a summary of the incremental impact of all stock compensation expense and other long-term compensation expense recorded in 2006 and 2005, which includes expenses related to grants of both


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stock options and restricted stock units, along with the impact of the pre-tax expense amounts as a percentage of sales.
 
 
Combined Companies (Pro Forma)
 
                         
    Years Ended December 31,     Incremental
 
    2006     2005     Expense  
    (In millions of dollars)  
 
Expensing required under SFAS No. 123(R)(a)
  $ 10.9     $     $ 10.9  
Previously required expensing(b)
    7.7       4.0       3.7  
Other non-equity based long term compensation
    (0.2 )     0.6       (0.8 )
                         
Total long term executive compensation
  $ 18.4     $ 4.6     $ 13.8  
                         
% of Sales
    0.9 %     0.2 %     0.7 %
                         
 
 
(a) The Company has adopted SFAS 123(R) using the modified prospective method. Therefore, restatement of prior periods is not required.
 
(b) Includes expensing of RSUs and PSUs under SFAS 123, and unvested stock options/unearned compensation related to GBC pre-merger grants under SFAS 141, “Business Combinations.”
 
 
Operating income decreased $65.1 million, or 50%, to $64.9 million, and operating income margin decreased from 6.7% to 3.3%. The decrease is primarily attributable to the $43.5 million increase in restructuring and restructuring-related charges, and the higher SG&A expenses as discussed above.
 
 
Net income was $7.2 million, or $0.13 per diluted share, compared to $33.8 million, or $0.65 per diluted share, before the change in accounting principle in 2005. The decrease was due to the lower operating income, offset by the income tax benefits, both of which are discussed above.
 
 
 
Historical Results
 
                                 
    Years Ended December 31,     Amount of Change  
    2006     2005     $     %  
    (In millions of dollars)  
 
Net sales
  $ 1,283.3     $ 1,068.0     $ 215.3       20 %
Operating income
    19.5       84.3       (64.8 )     (77 )%
Operating income margin
    1.5 %     7.9 %             (6.4 )%
 
Office Products net sales increased $215.3 million, or 20%. The increase was principally related to the acquisition of GBC.
 
Office Products operating income decreased $64.8 million, to $19.5 million. The decrease resulted from higher restructuring and restructuring related costs, as well as an overall decline in operating margin due to higher cost related to expensing of equity-based management incentive programs, investments to change our European business model and higher raw material cost.


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The following table presents Office Products’ reported combined results and pro forma combined results for the years ended December 31, 2006 and 2005, respectively. Amounts of restructuring and restructuring-related charges are also presented for each period.
 
Combined Companies (Pro Forma)
 
                                 
    Years Ended December 31,     Amount of Change  
    2006     2005     $     %  
    (Reported)     (Pro forma)              
    (In millions of dollars)  
 
Net sales
  $ 1,283.3     $ 1,304.5     $ (21.2 )     (2 )%
Operating income
    19.5       90.8       (71.3 )     (79 )%
Restructuring and related charges
    60.4       6.6       53.8       NM  
 
Net sales decreased 2% from $1,304.5 million to $1,283.3 million. The decline was primarily due to the exit of certain non-strategic products within the U.S. as well as loss of market share and unfavorable pricing in Europe, which offset volume growth in Australia and Latin America.
 
Office Products operating income declined $71.3 million to $19.5 million, including restructuring and restructuring-related charges. Excluding the adverse incremental impact of restructuring and restructuring-related charges of $53.8 million, the decline in operating profit and margin was attributable to European operations, specifically unfavorable pricing and higher raw material costs. The segment in total also saw increased charges related to increased investments in SG&A to transition to a pan-European business model and $8.5 million of increased equity-based incentives. Excluding the results of European operations, Office Products showed an increase in operating profit primarily due to synergy savings and the impact of 2006 price increases, partially offset by the increase in equity-based management incentives.
 
 
Historical Results
 
                                 
    Years Ended December 31,     Amount of Change  
    2006     2005     $     %  
    (In millions of dollars)  
 
Net sales
  $ 228.6     $ 208.7     $ 19.9       10 %
Operating income
    41.5       43.3       (1.8 )     (4 )%
Operating income margin
    18.2 %     20.7 %             (2.5 )%
Restructuring and related charges
    1.6             1.6       NM  
 
Computer Products delivered strong sales growth for 2006, increasing $19.9 million, or 10%, to $228.6 million. The strong sales growth was driven by sales of iPod® accessories, mobile power adapters, notebook docking stations and security products. The growth was primarily the result of new product introductions and was partially offset by the exit of the non-strategic cleaning business. Sales outside the U.S. increased 23%, while U.S. sales were flat, primarily due to the impact of distribution channel shifts from OEM to retail.
 
Computer Products operating income decreased $1.8 million, or 4%, to $41.5 million. Operating margins decreased to 18.2% from 20.7%, principally due to product mix shift, increased investments in selling, marketing and product development activities that were not fully offset by the benefit of volume growth. Restructuring and restructuring-related charges of $1.6 million (representing an allocation of shared services charges) and an increase of $0.7 million for equity-based management incentives also contributed to the decreased operating margins.
 
No pro forma information is provided for the Computer Products segment as it was not impacted by the GBC acquisition.


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Historical Results
 
                                 
    Years Ended December 31,     Amount of Change  
    2006     2005     $     %  
    (In millions of dollars)  
 
Net sales
  $ 189.4     $ 68.5     $ 120.9       NM  
Operating income
    15.1       4.4       10.7       NM  
Operating income margin
    8.0 %     6.4 %             1.6 %
 
Commercial — Industrial and Print Finishing (“IPFG”) net sales increased to $189.4 million from $68.5 million in the prior year, and operating income was $15.1 million compared to $4.4 million in the prior year. The growth was attributable to 2005 results only representing activity subsequent to the GBC acquisition on August 17, 2005.
 
The following table presents IPFG’s reported combined results and pro forma combined results for the years ended December 31, 2006 and 2005, respectively.
 
Combined Companies (Pro Forma)
 
                                 
    Years Ended December 31,     Amount of Change  
    2006     2005     $     %  
    (Reported)     (Pro forma)              
    (In millions of dollars)  
 
Net sales
  $ 189.4     $ 182.0     $ 7.4       4 %
Operating income
    15.1       13.1       2.0       15 %
 
IPFG net sales increased 4%, to $189.4 million. Growth was driven by sales from new product introductions and increased volume of machine sales.
 
Operating income increased 15%, to $15.1 million, and operating margins increased to 8.0% from 7.2%. The increase was due to inclusion of the expense related to the inventory acquisition step-up in 2005 of $1.5 million and higher sales prices and volumes in the current year, partially offset by equity-based management incentive charges, which increased $0.5 million.
 
 
Historical Results
 
                                 
    Years Ended December 31,     Amount of Change  
    2006     2005     $     %  
    (In millions of dollars)  
 
Net sales
  $ 249.7     $ 142.3     $ 107.4       75 %
Operating income
    21.7       17.2       4.5       26 %
Operating income margin
    8.7 %     12.1 %             (3.4 )%
 
Other Commercial net sales increased to $249.7 million from $142.3 million. The acquisition of GBC’s Document Finishing businesses accounted for $107.7 million of the increase. Sales volumes at Day-Timers declined by $3.6 million with lower sales in its reseller channels and the prior year benefiting from the change in reporting calendar, offset in part by higher direct to consumer sales.
 
Other Commercial operating income increased $4.5 million to $21.7 million. The acquisition of GBC accounted for substantially all of the increase. Operating income within our Day-Timers business was unfavorably impacted by lower sales.


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The following table presents Other Commercial’s reported combined results and pro forma combined results for the years ended December 31, 2006 and 2005, respectively. Amounts of restructuring and restructuring-related charges are also presented for each period.
 
Combined Companies (Pro Forma)
 
                                 
    Years Ended December 31,     Amount of Change  
    2006     2005     $     %  
    (Reported)     (Pro forma)              
    (In millions of dollars)  
 
Net sales
  $ 249.7     $ 241.8     $ 7.9       3 %
Operating income
    21.7       22.6       (0.9 )     (4 )%
Restructuring and related charges
    0.8             0.8       NM  
 
Net sales increased $7.9 million, or 3%. The increase was driven by higher pricing and volume in the Document Finishing businesses. This growth was partially offset by a reduction in sales, for the Day-Timers business, which was a result of volume loss in the reseller channel and the prior year benefiting from the change in reporting calendar days for the comparative periods.
 
Operating income decreased $0.9 million, or 4%. The decrease in profit and margins was principally driven by the lower profitability of the Day-Timers business due to its lower sales discussed above partially offset by higher profits for the Document Finishing businesses driven by the strong sales increase and the inclusion of $1.2 million of expense related to the inventory acquisition step-up in the prior year. Equity-based management incentive charges increased $0.3 million during the current year.
 
 
Historical Results
 
                                 
    Years Ended              
    Dec. 31,
    Dec. 27,
    Amount of Change  
    2005     2004     $     %  
    (In millions of dollars)  
 
Net sales
  $ 1,487.5     $ 1,175.7     $ 311.8       27 %
Operating income
    124.7       96.9       27.8       29 %
Net income
    59.5       68.5       (9.0 )     (13 )%
 
 
Sales increased $311.8 million, or 27% to $1,487.5 million. The increase was principally related to the acquisition of GBC which accounted for $292.9 million, or 25% of the increase, and the favorable impact of foreign currency translation which accounted for $12.4 million, or 1%. Modest growth in underlying sales resulted from strong sales in Computer Products, which were driven by new product launches and share gains in key product categories. The increase was largely offset by lower net sales in Office Products, which was adversely impacted by price competition, and the incremental impact of customer consolidations on price and volume, in addition to comparatively weak economic conditions in the U.K.
 
 
Gross profit increased $74.1 million, or 20%, to $439.5 million, primarily due to the acquisition of GBC, which added $80.4 million of gross profit. Gross profit margin decreased to 29.5% from 31.1%. The decrease in margin for 2005 is primarily due to competitive pricing pressures, increased freight and distribution (increased fuel, storage and shipping costs) and manufacturing input costs (primarily resin and petroleum based plastics). These factors were partly offset by significant sales growth in the higher relative margin Computer Products segment, and by the favorable impact of foreign exchange on inventory purchase transactions at our foreign operations.


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SG&A increased $59.2 million, or 24%, to $307.0 million. The increase was attributable to the acquisition of GBC which added $58.5 million in expense. SG&A decreased as a percentage of sales to 20.6% from 21.1%. The improvement in underlying SG&A is attributable to lower administrative expenses, significantly lower cost related to management incentive programs, partially offset by higher marketing and advertising expenses of $6.9 million to drive growth and added infrastructure costs of $4.7 million to support our public company status and to align our business model globally.
 
 
Operating income increased $27.8 million, or 29%, to $124.7 million, and increased as a percentage of sales to 8.4% from 8.2%. The increase was driven by the acquisition of GBC, amounting to $19.0 million, higher sales in the Computer Products segment and lower management incentive costs, partly offset by decreased gross profit margins.
 
 
Interest expense increased $20.3 million, to $28.8 million, as debt levels increased significantly in order to finance the transactions related to the spin-off from Fortune and the merger with GBC. Other income decreased $1.2 million in 2005, primarily due to gains from foreign exchange transactions recognized in the prior year.
 
Income tax expense increased $18.4 million, to $39.5 million. The effective tax rate for 2005 was 41.2% compared to 23.5% for the prior year. The 2005 effective tax rate was impacted by a net charge of $3.4 million for U.S. tax on foreign dividends paid prior to the spin-off. Also included in the current period was tax expense of $3.2 million for U.S. tax on certain unrepatriated foreign earnings, resulting from a reorganization to facilitate the merger of various foreign operations. The prior year’s effective tax rate was favorably impacted by the reversal of valuation allowances of $3.7 million related to deferred tax assets that the Company determined would be realized against future earnings.
 
 
Net income was $59.5 million for 2005 compared to $68.5 million in the prior year, and was significantly impacted by the increase in interest and income tax expenses. Included in net income for 2005 was the cumulative effect of a change in accounting principle related to the removal of a one month lag in reporting by several of the Company’s foreign subsidiaries, which increased net income by $3.3 million. In addition, net income included transaction-related expenses and restructuring and non-recurring after-tax costs of $12.2 million, or $0.29 per share, in the current year, and $26.7 million, or $0.75 per share, in the prior year.
 
Fiscal 2005 versus Fiscal 2004
 
Combined Companies — Pro Forma Discussion
 
The Company has included a “combined companies” discussion below as if GBC had been included in results since the beginning of the fiscal year for 2005 and for 2004. Restructuring and restructuring-related costs have been noted where appropriate, as management believes that a comparative review of operating income before restructuring and restructuring-related charges allows for a better understanding of the underlying business performance from year to year.
 
The presentation of, and supporting calculations related to, the pro forma information contained in this Management’s Discussion and Analysis is derived from the Company’s Report on Form 8-K dated February 14, 2006. Such pro forma financial information has been prepared as though the companies had been combined as of the beginning of the fiscal year for 2005 and for 2004, and is based on the historical financial statements of ACCO Brands and GBC after giving effect to the merger of ACCO Brands and GBC. The unaudited pro forma financial information is not indicative of the results of operations that would have been achieved if the merger had taken place at the beginning of fiscal 2005 or 2004, or that may result in the future. In addition, the pro forma information has not been adjusted to reflect any operating efficiencies that have been, or may in the future be, realized as a result of the combination of ACCO Brands and GBC.


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The following table presents ACCO Brands’ reported combined results and pro forma combined results for the years ended December 31, 2005 and December 27, 2004, respectively. Amounts of restructuring and restructuring-related charges are also presented for each period.
 
Combined Companies (Pro Forma)
 
                                 
    Year Ended December 31, 2005  
          Gross
          Operating
 
    Net Sales     Profit     SG&A     Income  
    (In millions of dollars)  
 
Pro forma results
  $ 1,937.0     $ 566.5     $ 421.9     $ 130.0  
Restructuring and restructuring-related charges included in the results:
                               
Restructuring charges
                      3.9  
Restructuring-related expense (income)
          (1.3 )     19.6       18.3  
 
The Company has incurred a net total of $22.2 million in merger and integration related expenses, restructuring-related expense and restructuring expenses in the current year. The charges were primarily related to non-capitalizable costs associated with the acquisition of GBC, and with the spin-off from Fortune Brands.
 
Combined Companies (Pro Forma)
 
                                 
    Year Ended December 27, 2004  
          Gross
          Operating
 
    Net Sales     Profit     SG&A     Income  
    (In millions of dollars)  
 
Pro forma results
  $ 1,887.0     $ 579.5     $ 413.7     $ 135.1  
Restructuring and restructuring-related charges included in the results:
                               
Restructuring charges
                      20.3  
Restructuring-related expense
          4.8       14.2       19.0  
 
The prior year period included restructuring charges of $20.3 million and restructuring-related charges of $19.0 million. These charges were primarily related to the closure of manufacturing operations at the Company’s Val Reas, France and Turin, Italy locations and the related transfer of the majority of that production to our Tabor, Czech Republic facility. These were offset in part by gains on the sales of the Company’s Wheeling, Illinois and St. Charles, Illinois facilities. SG&A cost reduction programs and asset impairment charges in the U.S. were also incurred in the prior year period.
 
 
Pro forma net sales increased 3% to $1.94 billion, compared to $1.89 billion in the prior year. The impacts of foreign currency benefited pro forma sales by 1%. The underlying increase was primarily attributable to double-digit growth in Computer Products. This was partially offset by lower sales in the Office Products Group which was adversely impacted by price competition, the incremental impact of customer consolidations on price and volume, and comparatively weak economic conditions in the U.K.
 
 
Pro forma gross profit decreased $13.0 million, or 2.2%, to $566.5 million. Gross profit margin decreased to 29.2% from 30.7%. Included in gross profit were the inventory acquisition step-up in value of $5.4 million in 2005, and restructuring-related charges, which negatively impacted gross margin by 0.3% and 0.4% in 2005 and in 2004, respectively. The decrease in margin for 2005 is primarily due to competitive pricing pressures (including unfavorable pricing in categories where the former ACCO World and GBC businesses overlapped), increased freight and distribution (increased fuel, inventory storage and shipping costs) and higher manufacturing input costs (primarily resin and petroleum based plastics). These factors were partly offset by the favorable impact of sales growth in the higher relative margin Computer Products segment, and by the favorable impact of foreign exchange on inventory purchase transactions at our foreign operations.


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Pro forma SG&A increased $8.2 million, to $421.9 million, and decreased as a percentage of sales to 21.8% from 21.9%. The adverse impact of restructuring/merger related charges was 1.0% and 0.7% of sales, for 2005 and 2004, respectively. The improvement in underlying SG&A percentage of sales (SG&A margin) is attributable to lower management incentive provisions, modestly offset by higher marketing and selling expenses to drive growth and added infrastructure costs to support our public company status and to align our business model globally.
 
 
Operating income on a pro forma basis decreased $5.1 million, or 3.8%, to $130.0 million, and decreased as a percentage of sales to 6.7% from 7.2%. The decrease was driven by lower average gross profit margins, partially offset by lower SG&A margins. Pro forma operating income was adversely affected by restructuring and restructuring-related charges which decreased the operating income margin by 1.2% and 2.0%, in 2005 and 2004, respectively.
 
 
Pro forma net income before the change in accounting principle was $33.8 million, or $0.65 per share, compared to $54.0 million, or $1.06 per share, in the prior year. The decline was substantially the result of unfavorable pricing, increased freight and distribution costs and higher raw materials costs, as described in the Pro Forma Gross Profit discussion above. Additionally, the effective income tax rate for 2005 was significantly higher than the prior year, as discussed in Interest, Other expense/(Income) and Income Taxes in the Historical Results above.
 
 
 
Historical Results
 
                                 
    Years Ended              
    Dec. 31,
    Dec. 27,
    Amount of Change  
    2005     2004     $     %  
    (In millions of dollars)  
 
Net sales
  $ 1,068.0     $ 928.1     $ 139.9       15 %
Operating income
    84.3       64.6       19.7       30 %
Operating income margin
    7.9 %     7.0 %             0.9 %
 
Office Products net sales increased 15%, to $1,068.0 million compared to $928.1 million in the prior year. The acquisition of GBC added $159.4 million, or 17.2%. The change due to foreign currency translation added $12.9 million, or 1%. These increases were offset by competitive pricing of 1%, including categories in which ACCO and GBC competed prior to the merger, and particularly in our visual communications product line. Lower sales volumes, including small share losses in lower margin categories, and an overall decline in the U.K. due to small share losses and comparatively weak economic conditions, also contributed to the decline.
 
Office Products operating income increased 31%, to $84.3 million. The acquisition of GBC added $11.0 million, or 17.0%. The increase resulted from the lower restructuring and restructuring related costs which were significant in the prior year.
 
A detailed discussion of the Office Products results as if GBC had been included in results since the beginning of the year is presented below in the combined companies’ discussion. Management believes that a comparative review of operating income before restructuring and restructuring-related charges allows for a better understanding of the underlying business performance from year to year. The table below provides ACCO Brands’ pro forma segment results and the amounts of restructuring and restructuring-related charges to be excluded for comparative purposes for the indicated periods.


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Combined Companies (Pro Forma)
 
                                 
    Years Ended              
    Dec. 31,
    Dec. 27,
    Amount of Change  
    2005     2004     $     %  
    (In millions of dollars)  
 
Pro forma net sales
  $ 1,304.5     $ 1,302.6     $ 1.9        
Pro forma operating income
    90.8       86.6       4.2       5 %
Restructuring and restructuring-related charges
    6.6       38.2       (31.6 )     (83 )%
 
On a pro forma basis, the sales increase was modest, and excluding the favorable impact of currency translation sales declined slightly. The decline was the result of unfavorable pricing established prior to the merger from price competition between ACCO World and GBC. Underlying volume was flat as growth in premium categories was offset by declines in ring binders and storage boxes.
 
Pro forma operating income increased $4.2 million or 5%, to $90.8 million, while the operating income margin improved by 0.4%. Included in operating income were the inventory acquisition step-up of $2.7 million in 2005, and restructuring-related charges which negatively impacted operating income margins by 0.7% in 2005 and by 2.9% in 2004. The underlying decline was the result of the unfavorable pricing arrangements entered into prior to the merger, higher freight and distribution costs (increased fuel, container, storage and shipping costs due to a combination of increased third-party rates, smaller average delivery size and certain information systems change related inefficiencies) and increased raw material costs, particularly in the second half of the year. These were partially offset by lower provisions for management incentive bonuses in the 2005 year.
 
 
Historical Results
 
                                 
    Years Ended              
    Dec. 31,
    Dec. 27,
    Amount of Change  
    2005     2004     $     %  
    (In millions of dollars)  
 
Net sales
  $ 208.7     $ 169.6     $ 39.1       23 %
Operating income
    43.3       32.3       11.0       34 %
Operating income margin
    20.7 %     19.0 %             1.7 %
Restructuring and restructuring-related charges
          1.1       (1.1 )     N/A  
 
Computer Products delivered robust sales growth all year, increasing 23% to $208.7 million, versus $169.6 million in the prior year. The strong sales were driven by sales of mobile computer accessories and the company’s new line of Apple® iPod® accessories, while the high margin security line of products continued to benefit from the resolution of intellectual property issues in the preceding year.
 
Computer Products operating income increased 34%, to $43.3 million, compared to $32.3 million in the prior year. The effect of restructuring costs in the prior year reduced operating income by 3%. Operating margins improved more than 100 basis points, benefiting from sales leverage, which more than offset the adverse impact of changing product mix on margins, higher freight costs to import product and increased spending in research and development and promotional and marketing activities to fuel future sales growth.
 
No pro forma information is provided for the Computer Products segment as it was not impacted by the GBC acquisition.


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Historical Results
 
                                 
    Years Ended              
    Dec. 31,
    Dec. 27,
    Amount of Change  
    2005     2004     $     %  
    (In millions of dollars)  
 
Net sales
  $ 68.5     $     $ 68.5       NM  
Operating income
    4.4             4.4       NM  
Operating income margin
    6.4 %                   NM  
 
The Commercial-Industrial and Print Finishing (“IPFG”) business was acquired as part of the merger with GBC and was not merged into an existing ACCO Brands segment; therefore, it is presented on a stand-alone pro-forma basis below.
 
Combined Companies (Pro Forma)
 
                                 
    Years Ended              
    Dec. 31,
    Dec. 27,
    Amount of Change  
    2005     2004     $     %  
    (In millions of dollars)  
 
Pro forma net sales
  $ 182.0     $ 175.1     $ 6.9       4 %
Pro forma operating income
    13.1       16.2       (3.1 )     (19 )%
Restructuring and restructuring-related charges
          0.1       (0.1 )     NM  
 
IPFG pro forma net sales increased 4%, to $182.0 million. Adjusting for currency, pro forma net sales increased 3%, benefiting from favorable pricing and volume gains. Price increases on film sales were substantial but occurred late in the year. Therefore the price increases only had a marginal impact on total sales and did not fully recover the increased raw material resin costs in the U.S. during the second half of the year.
 
IPFG pro forma operating income declined $3.1 million, to $13.1 million. Excluding the impact of the inventory acquisition step-up of $1.5 million in 2005, the underlying decline was due to substantial increases in raw material costs, particularly resins, which were only partially offset by raw material-related price increases. Additionally, fourth-quarter volume decreased modestly as our customers reacted negatively to our price increase.
 
 
Historical Results
 
                                 
    Years Ended              
    Dec. 31,
    Dec. 27,
    Amount of Change  
    2005     2004     $     %  
    (In millions of dollars)  
 
Net sales
  $ 142.3     $ 78.0     $ 64.3       82 %
Operating income
    17.2       10.9       6.3       58 %
Operating income margin
    12.1 %     14.0 %             (1.9 )%
 
Other Commercial net sales increased 82%, to $142.3 million. The acquisition of GBC’s Document Finishing business accounted for $64.9 million of the increase. Underlying sales volumes at Day-Timers declined by only $0.6 million, as the business continues to closely match newly acquired customer end users to those lost to attrition in the direct channel, and to exit the mass market in the reseller channel.
 
Other Commercial operating income increased 58%, to $17.2 million. The acquisition of GBC accounted for $6.0 million of the increase. Underlying operating income within our Day-Timers business improved due to lower sales returns, and reduced inventory and management incentive costs.


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Combined Companies (Pro Forma)
 
                                 
    Years Ended              
    Dec. 31,
    Dec. 27,
    Amount of Change  
    2005     2004     $     %  
    (In millions of dollars)  
 
Pro forma net sales
  $ 241.8     $ 239.7     $ 2.1       1 %
Pro forma operating income
    22.6       24.4       (1.8 )     (7 )%
Restructuring and restructuring-related charges
          0.7       (0.7 )     NM  
 
On a pro forma basis net sales increased 1%. Excluding the impacts of currency, the increase was modest.
 
Pro forma operating income declined $1.8 million or 7%, to $22.6 million. Included in operating income in 2005 is the inventory acquisition step-up of $1.2 million, which adversely impacted operating income margin by 0.5%. Restructuring-related costs in the prior year reduced operating income margins by 0.2%. The decrease resulted primarily from higher raw material costs which were not recovered within the Document Finishing business.
 
 
Our primary liquidity needs are to service indebtedness, fund capital expenditures and support working capital requirements. Our principal sources of liquidity are cash flows from operating activities and borrowings under our credit agreements and long-term notes. We maintain adequate financing arrangements at competitive rates. Our priority for cash flow over the near term, after internal growth, is to fund integration and restructuring-related activities and the reduction of debt that was incurred in connection with the merger with GBC and the spin-off from Fortune Brands. See “Capitalization” below for a description of our debt.
 
 
 
Cash provided by operating activities was $120.9 million and $65.3 million for 2006 and 2005, respectively. Net income in 2006 was $7.2 million, or $52.3 million less than 2005. Non-cash adjustments to net income were $94.3 million in 2006, compared to $37.9 million in 2005, on a pre-tax basis. The increase in non-cash items was principally attributable to the change in accounting for stock-based compensation and the recognition of restructuring-related asset impairment charges, as well as recognizing depreciation and amortization on the acquired GBC businesses for a full year in 2006.
 
Principal cash items favorably affecting operating activities included:
 
  •  Higher accounts payable as the Company benefited from extended payment terms, later timing of inventory purchases compared to the prior year and other cash management initiatives.
 
  •  Lower accounts receivable due to improved collection activities, including efficient resolution of disputed items.
 
  •  Substantially lower payments in 2006 of long term incentives and annual bonuses (accrued in 2005 and prior years) as a result of underachieved targets in 2005 compared to significant overachievement in the 2004 year. In addition, the first quarter of 2005 included payments amounting to $22.0 million related to long term incentives tied to the successful repositioning of the former ACCO World businesses.
 
Principal cash items unfavorably affecting operating activities included:
 
  •  Increased payments of acquisition related interest expense of $55.7 million, as the acquisition and spin-off related debt was not in place until the third quarter of 2005.
 
  •  Higher inventory levels resulting principally from lower than expected fourth quarter 2006 sales, and sourced inventory timing at Kensington, coupled with increased raw material and other product input costs.
 
  •  Higher payments for customer programs resulting from enhanced programs (customer consolidation & competitive pricing), including such programs associated with GBC.
 
  •  Supplemental cash contributions to the GBC UK pension plan totaling $6.3 million in 2006.


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Cash used by investing activities was $21.4 million and $32.4 million for 2006 and 2005, respectively. Gross capital expenditure was $33.1 million in 2006 and $34.5 million in 2005; both years included substantial investment in enhanced information technology systems of $12.2 million and $12.7 million in 2006 and 2005, respectively. In 2006, capital spending was partly offset by proceeds from the sale of assets of $9.6 million, of which $4.2 million related to the sale of our Perma business assets during the third quarter. In 2005, proceeds were $2.5 million, of which $1.8 million related to the sale of our Turin, Italy facility.
 
 
Cash used by financing activities was $145.0 million in 2006. During 2006, the Company paid all of the required fiscal 2006 debt repayments of $24.7 million and paid down an additional $130.4 million of the Senior Secured Term Loan Credit Facilities, which included all of the mandatory 2007 bank debt reductions. These payments were offset by cash inflow of $13.0 million related to the exercise of employee stock options. Cash used by financing activities in 2005 of $17.5 million included a number of substantial exchanges, including proceeds of $950.0 million from long-term credit facilities and notes, $625.0 million of dividends paid to shareholders of the former ACCO World Corporation, and the repayment of $293.6 million of debt assumed in the acquisition of GBC.
 
 
 
Cash provided by operating activities was $65.3 million and $64.9 million for the years ended December 31, 2005 and December 27, 2004, respectively. Net income in 2005 was $59.5 million, or $9.0 million lower than 2004. Income tax and interest expense payments increased by $15.5 million and $8.8 million, respectively. Other principal items impacting the change were:
 
  •  Cash provided by accounts receivable of $6.1 million, an increase of $57.2 million over 2004, resulting primarily from the 2005 resolution of fourth quarter 2004 customer billing delays in the U.S. following the company’s Oracle systems implementation (which delayed receipt of payments to the first quarter of 2005), and some shift in timing of collections due to the adverse impact of customer consolidations on negotiated payment terms.
 
  •  Customer program payments in 2005 which were higher than the prior year due to enhanced programs, and the overachievement of 2004 targets (a portion of which was paid in early 2005).
 
  •  2005 payments of $22 million related to the achievement of long-term incentives tied to the successful repositioning of the former ACCO World businesses. Also paid in 2005 were annual bonus and executive management incentive payments related to the 2004 year, which exceeded the prior year due to overachievement of targets.
 
  •  In 2004, the Company contributed a supplemental $22.0 million to its ACCO U.K. pension fund, which did not recur in 2005.
 
 
Cash used by investing activities was $32.4 million in 2005 and $6.1 million in 2004. Gross capital expenditure was $34.5 million and $27.6 million in 2005 and 2004, respectively; both years include substantial investment in enhanced information technology systems of $12.7 million and $16.8 million in 2005 and 2004, respectively. In 2005, capital spending was partly offset by proceeds from the sale of certain properties for $2.5 million, of which $1.8 million relates to the sale of our Turin, Italy facility. In 2004, proceeds of $21.5 million were generated primarily from the sale of the Company’s Wheeling, Illinois and St. Charles, Illinois plants, and its University Park, Illinois distribution center (all closed under the Company’s restructuring program).


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Cash used by financing activities was $17.5 million and $46.5 million for the years ended December 31, 2005 and December 27, 2004, respectively. The overall change includes a number of substantial exchanges in the 2005 period, including the initial proceeds of $950.0 million from long-term credit facilities and notes transactions executed in connection with the spin-off and merger, a one-time dividend payment of $625.0 million to the Company’s shareholders as of August 16, 2005, and the repayment of $293.6 million of debt assumed in the merger with GBC.
 
 
Approximately 52.2 million shares of the Company’s common stock, par value of $0.01 per share, were issued in connection with the Distribution and the Merger (see further discussion in Notes 3 and 5 to the Consolidated Financial Statements). We had approximately 53.8 million common shares outstanding as of December 31, 2006.
 
The Company’s total debt at December 31, 2006 was $805.1 million. The ratio of debt to stockholders’ equity at December 31, 2006 was 2.1 to 1, compared with a ratio of 2.3 to 1 at December 31, 2005. The December 31, 2006 ratio was negatively impacted by the $54.0 million reduction of Stockholders’ Equity related to the application of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” See Note 2 to the Consolidated Financial Statements for additional information.
 
In conjunction with the spin-off of ACCO World to the shareholders of Fortune Brands and the merger, ACCO Brands issued $350 million in senior subordinated notes with a fixed interest rate of 7.625% due 2015. Additionally, ACCO Brands and a subsidiary of ACCO Brands located in the United Kingdom and a subsidiary of ACCO Brands located in the Netherlands entered into the following senior secured credit facilities with a syndicate of lenders.
 
  •  A $400.0 million U.S. term loan facility, with quarterly amortization, maturing on August 17, 2012, with interest based on either LIBOR or a base rate;
 
  •  A $130.0 million U.S. dollar revolving credit facility (including a $40.0 million letter of credit sub limit) maturing on August 17, 2010, with interest based on either LIBOR or a base rate;
 
  •  A £63.6 million sterling term loan facility, with quarterly amortization, maturing on August 17, 2010, with interest based on GBP LIBOR;
 
  •  A €68.2 million euro term loan facility, with quarterly amortization, maturing on August 17, 2010, with interest based on EURIBOR; and
 
  •  A $20.0 million U.S. dollar equivalent euro revolving credit facility maturing on August 17, 2010 with interest based on EURIBOR.
 
ACCO Brands is the borrower under the U.S. term loan facility and the U.S. dollar revolving credit facility, the United Kingdom subsidiary is the borrower under the sterling term loan facility and the U.S. dollar equivalent euro revolving credit facility and the Netherlands subsidiary is the borrower under the euro term loan facility. Borrowings under the facilities are subject to a “pricing grid” which provides for lower interest rates in the event that certain financial ratios improve in future periods.
 
The senior secured credit facilities are guaranteed by all of the domestic subsidiaries of ACCO Brands (the “U.S. guarantors”) and secured by substantially all of the assets of the borrowers and each U.S. guarantor.
 
The Company must meet certain restrictive financial covenants as defined under the senior secured credit facilities. The covenants become more restrictive over time and require the Company to maintain certain ratios


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related to total leverage and interest coverage. The remaining financial covenant ratio levels under the senior secured credit facilities are as follows:
 
                 
    Maximum-Leverage
    Minimum-Interest
 
    Ratio(1)     Coverage Ratio(2)  
 
4th Quarter 2006 to 3rd Quarter 2007
    4.75 to 1       2.75 to 1  
4th Quarter 2007 to 3rd Quarter 2008
    4.25 to 1       3.00 to 1  
4th Quarter 2008 to 3rd Quarter 2009
    3.75 to 1       3.00 to 1  
4th Quarter 2009 to 3rd Quarter 2010
    3.50 to 1       3.00 to 1  
4th Quarter 2010 to 2nd Quarter 2012
    3.25 to 1       3.00 to 1  
 
 
(1) The leverage ratio is computed by dividing the Company’s financial covenant debt by the cumulative four quarter trailing EBITDA, which excludes restructuring and restructuring-related charges as well as other adjustments defined under the senior secured credit facilities.
 
(2) The interest coverage ratio for any period is EBITDA for the Company for such period divided by cash interest expense for the Company for such period.
 
There are also other restrictive covenants, including restrictions on dividend payments, share repurchases, acquisitions, additional indebtedness and capital expenditures.
 
The senior secured credit facilities contain customary events of default, including payment defaults, breach of representations and warranties, covenant defaults, cross-defaults and cross-accelerations, certain bankruptcy or insolvency events, judgment defaults, certain ERISA-related events, changes in control or ownership, and invalidity of any collateral or guarantee or other document.
 
Each of ACCO Brands’ domestic subsidiaries that guarantees obligations under the senior secured credit facilities, also unconditionally guarantees the senior subordinated notes on an unsecured senior subordinated basis.
 
The indenture governing the senior subordinated notes contains covenants limiting, among other things, ACCO Brands’ ability, and the ability of the ACCO Brands’ restricted subsidiaries to, incur additional debt, pay dividends on capital stock or repurchase capital stock, make certain investments, enter into certain types of transactions with affiliates, limit dividends or other payments by our restricted subsidiaries to ACCO Brands, use assets as security in other transactions and sell certain assets or merge with or into other companies.
 
As of December 31, 2006 the amount available for borrowings under the revolving credit facilities was $135.9 million (allowing for $14.1 million of letters of credit outstanding on that date).
 
As of and for the period ended December 31, 2006, the Company was in compliance with all applicable loan covenants.
 
 
The Company believes that its internally generated funds, together with revolver availability under its senior secured credit facilities and its access to global credit markets, provide adequate liquidity to meet both its long-term and short-term capital needs with respect to operating activities, capital expenditures and debt service requirements. The Company’s existing credit facilities would not be affected by a change in its credit rating.
 
 
We do not have any material off-balance-sheet arrangements that have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


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Our contractual obligations and related payments by period at December 31, 2006 were as follows:
 
                                         
          Less than
                More Than
 
    Total     1 Year     1-3 Years     3-5 Years     5 Years  
    (In millions of dollars)  
 
Contractual obligations
                                       
Notes payable and long-term debt
  $ 805.1     $ 4.8     $ 81.8     $ 52.5     $ 666.0  
Interest on long-term debt(1)
    393.1       57.8       112.6       100.0       122.7  
Operating lease obligations
    123.8       23.8       39.2       26.5       34.3  
Purchase obligations(2)
    102.4       92.8       6.6       3.0        
Other long-term liabilities(3)
    10.8       3.6       7.2              
                                         
Total
  $ 1,435.2     $ 182.8     $ 247.4     $ 182.0     $ 823.0  
                                         
 
 
(1) Interest expense calculated at December 31, 2006 rates for variable rate debt.
 
(2) Purchase obligations primarily consist of contracts and non-cancelable purchase orders for raw materials and finished goods.
 
(3) Obligations related to the other long-term liabilities consist of payments for certain non-U.S. pension plans.
 
 
Our financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Preparation of our financial statements require us to make judgments, estimates and assumptions that affect the amounts of actual assets, liabilities, revenues and expenses presented for each reporting period. Actual results could differ significantly from those estimates. We regularly review our assumptions and estimates, which are based on historical experience and, where appropriate, current business trends. We believe that the following discussion addresses our critical accounting policies, which require more significant, subjective and complex judgments to be made by our management.
 
 
In accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition,” we recognize revenue from product sales when earned, net of applicable provisions for discounts, return and allowances. Criteria for recognition of revenue are whether title and risk of loss have passed to the customer, persuasive evidence that an arrangement exists, delivery has occurred, the price is fixed or determinable and collectibility is reasonably assured. We also provide for our estimate of potential bad debt at the time of revenue recognition.
 
 
Trade receivables are recorded at the stated amount, less allowances for discounts, doubtful accounts and returns. The allowance for doubtful accounts represents estimated uncollectible receivables associated with potential customer defaults on contractual obligations, usually due to customers’ potential insolvency. The allowance includes amounts for certain customers where a risk of default has been specifically identified. In addition, the allowance includes a provision for customer defaults on a general formula basis when it is determined the risk of some default is probable and estimable, but cannot yet be associated with specific customers. The assessment of the likelihood of customer defaults is based on various factors, including the length of time the receivables are past due, historical experience and existing economic conditions.
 
The allowance for sales returns represents estimated uncollectible receivables associated with the potential return of products previously sold to customers, and is recorded at the time that the sales are recognized. The allowance includes a general provision for product returns based on historical trends. In addition, the allowance includes a reserve for currently authorized customer returns which are considered to be abnormal in comparison to the historical basis.


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Inventories are priced at the lower of cost (principally first-in, first-out with minor amounts at average) or market. A reserve is established to adjust the cost of inventory to its net realizable value. Inventory reserves are recorded for obsolete or slow moving inventory based on assumptions about future demand and marketability of products, the impact of new product introductions and specific identification of items, such as product discontinuance or engineering/material changes. These estimates could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, customer inventory levels or competitive conditions differ from expectations.
 
 
Property, plant and equipment are carried at cost. Depreciation is provided, principally on a straight-line basis, over the estimated useful lives of the assets. Gains or losses resulting from dispositions are included in income. Betterments and renewals, which improve and extend the life of an asset, are capitalized; maintenance and repair costs are expensed. Purchased computer software, as well as internally developed software, is capitalized and amortized over the software’s useful life. Estimated useful lives of the related assets are as follows:
 
     
Buildings
  40 to 50 years
Leasehold improvements
  Lesser of lease term or 10 years
Machinery, equipment and furniture
  3 to 10 years
 
 
In accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), “Accounting for the Impairment or Disposal of Long-lived Assets,” a long-lived asset (including amortizable identifiable intangibles) or asset group is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. When such events occur, we compare the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or asset group to the carrying amount of a long-lived asset or asset group. The cash flows are based on our best estimate at the time of future cash flow, derived from the most recent business projections. If this comparison indicates that there is an impairment, the amount of the impairment is calculated using a quoted market price, or if unavailable, using discounted expected future cash flows. The discount rate applied to these cash flows is based on our weighted average cost of capital, which represents the blended after-tax costs of debt and equity.
 
 
In accordance with Statement of Financial Accounting Standards No. 142 (SFAS 142), “Goodwill and Other Intangible Assets,” indefinite-lived intangibles are tested for impairment on an annual basis and written down when impaired. An interim impairment test is required if an event occurs or conditions change that would more likely than not reduce the fair value below the carrying value.
 
In addition, SFAS 142 requires that purchased intangible assets other than goodwill be amortized over their useful lives unless these lives are determined to be indefinite. Certain of our trade names have been assigned an indefinite life as we currently anticipate that these trade names will contribute cash flows to ACCO Brands indefinitely.
 
We review indefinite-lived intangibles for impairment annually, and whenever market or business events indicate there may be a potential adverse impact on that intangible. We consider the implications of both external factors (e.g., market growth, pricing, competition, and technology) and internal factors (e.g., product costs, margins, support expenses, and capital investment) and their potential impact on cash flows for each business in both the near and long term, as well as their impact on any identifiable intangible asset associated with the business. Based on recent business results, consideration of significant external and internal factors, and the resulting business projections, indefinite-lived intangible assets are reviewed to determine whether they are likely to remain indefinite-lived, or whether a finite life is more appropriate. In addition, based on events in the period and future expectations, management considers whether the potential for impairment exists as required by SFAS 142.


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In conjunction with our ongoing review of the carrying value of identifiable intangibles, in the years 2004, 2005 and 2006, there were no write-downs of intangible assets.
 
 
We test goodwill for impairment at least annually and on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment has been incurred. If the carrying amount of the goodwill exceeds its fair value, an impairment loss would be recognized. In applying a fair-value-based test, estimates would be made of the expected future cash flows to be derived from the applicable reporting unit. Similar to the review for impairment of other long-lived assets, the resulting fair value determination is significantly impacted by estimates of future prices for our products, capital needs, economic trends and other factors.
 
 
We provide a range of benefits to our employees and retired employees, including pensions, post-retirement, post-employment and health care benefits. We record annual amounts relating to these plans based on calculations specified by accounting principles generally accepted in the United States of America, which include various actuarial assumptions, including discount rates, assumed rates of return, compensation increases, turnover rates and health care cost trend rates. Actuarial assumptions are reviewed on an annual basis and modifications to these assumptions are made based on current rates and trends when it is deemed appropriate. As required by accounting principles generally accepted in the United States of America, the effect of our modifications are generally recorded and amortized over future periods. We believe that the assumptions utilized in recording our obligations under the plans are reasonable based on our experience. The actuarial assumptions used to record our plan obligations could differ materially from actual results due to changing economic and market conditions, higher or lower withdrawal rates or other factors which may impact the amount of retirement related benefit expense recorded by us in future periods.
 
The discount rate assumptions used to determine the post-retirement obligations of the U.S. pension plan at December 31, 2006 and 2005 were based on the Hewitt Yield Curve or HYC, which was designed by Hewitt Associates to provide a means for plan sponsors to value the liabilities of their post-retirement benefit plans. The HYC is a hypothetical double-A yield curve represented by a series of annualized individual discount rates. Each bond issue underlying the HYC is required to have a rating of Aa or better by Moody’s Investor Service, Inc. or a rating of AA or better by Standard & Poor’s. Prior to using the HYC rates, the discount rate assumptions for the pension and post-retirement expenses in 2005 and 2004 and the obligations at December 27, 2004 were based on investment yields available on AA rated long-term corporate bonds.
 
The discount rate assumptions used to determine the postretirement obligations of the international pension plans at December 31, 2006 reflect the rates at which we believe the benefit obligations could be effectively settled.
 
The expected long-term rate of return on plan assets reflects management’s expectations of long-term average rates of return on funds invested based on our investment profile to provide for benefits included in the projected benefit obligations. The expected return is based on the outlook for inflation, fixed income returns and equity returns, while also considering historical returns over the last 10 years, and asset allocation and investment strategy.
 
Pension expenses were $9.7 million, $8.2 million and $7.9 million, respectively, in the years ended December 31, 2006 and 2005 and December 27, 2004. Post-retirement expenses (income) were $0.4 million, $(0.2) million and $(0.7) million, respectively, in the years ended December 31, 2006 and 2005 and December 27, 2004. In 2007, we expect pension expense of approximately $10.7 million and post-retirement expense of approximately $0.7 million. Effective January 1, 2007 we have modified the U.S. pension plan to include the former U.S.-based GBC employees as participants. As a result of this change, pension expense and expected funding will increase approximately $3.7 million. A 25-basis point change (0.25%) in our discount rate assumption would lead to an increase or decrease in our pension expense of approximately $2.2 million for 2007. A 25-basis point change (0.25%) in our long-term rate of return assumption would lead to an increase or decrease in pension expense of approximately $1.1 million for 2007.


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Customer programs and incentives are a common practice in the office products industry. We incur customer program costs to obtain favorable product placement, to promote sell-through of products and to maintain competitive pricing. Customer program costs and incentives, including rebates, promotional funds and volume allowances, are accounted for as a reduction to gross sales. These costs are recorded at the time of sale based on management’s best estimates. Estimates are based on individual customer contracts and projected sales to the customer in comparison to any thresholds indicated by contract. In the absence of a signed contract, estimates are based on historical or projected experience for each program type or customer. Management periodically reviews accruals for these rebates and allowances, and adjusts accruals when circumstances indicate (typically as a result of a change in sales volume expectations).
 
 
In accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” deferred tax liabilities or assets are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. A valuation allowance is recorded to reduce deferred tax assets to an amount that is more likely than not to be realized.
 
The amount of income taxes that we pay is subject to ongoing audits by federal, state and foreign tax authorities. Our estimate of the potential outcome of any uncertain tax position is subject to management’s assessment of relevant risks, facts and circumstances existing at that time. We believe that we have adequately provided for reasonably foreseeable outcomes related to these matters. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are revised or resolved.
 
 
We adopted SFAS No. 123(R) effective January 1, 2006, using the modified prospective method. Refer to Note 2 for further information.
 
Under SFAS No. 123(R), stock-based compensation cost is estimated at the grant date based on the fair value of the award, and the cost is recognized as expense ratably over the vesting period. Determining the appropriate fair value model to use requires judgment. Determining the assumptions that enter into the model is highly subjective and also requires judgment, including long-term projections regarding stock price volatility, employee exercise, post-vesting termination, and pre-vesting forfeiture behaviors, interest rates and dividend yields. Management used the guidance outlined in Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB No. 107) relating to SFAS No. 123(R) in selecting a model and developing assumptions.
 
We have historically used the Black-Scholes model for estimating the fair value of stock options in providing the pro forma fair value method disclosures pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation” (SFAS No. 123). After a review of alternatives, we decided to continue to use this model for estimating the fair value of stock options as it meets the fair value measurement objective of SFAS No. 123(R).
 
We have utilized historical volatility for a pool of peer companies for a period of time that is comparable to the expected life of the option to determine volatility assumptions. The weighted average expected option term reflects the application of the simplified method set out in SAB No. 107. The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all option tranches. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The forfeiture rate used to calculate compensation expense is primarily based on our estimate of employee forfeiture patterns based on the experience of Fortune Brands.


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The use of different assumptions would result in different amounts of stock compensation expense. Holding all other variables constant, the indicated change in each of the assumptions below increases or decreases the fair value of an option (and hence, expense), as follows:
 
                 
    Change to
    Impact on Fair
 
Assumption
  Assumption     Value of Option  
 
Expected volatility
    Higher       Higher  
Expected life
    Higher       Higher  
Risk-free interest rate
    Higher       Higher  
Dividend yield
    Higher       Lower  
 
The pre-vesting forfeitures assumption is ultimately adjusted to the actual forfeiture rate. Therefore, changes in the forfeitures assumption would not impact the total amount of expense ultimately recognized over the vesting period. Different forfeitures assumptions would only impact the timing of expense recognition over the vesting period. Estimated forfeitures will be reassessed in subsequent periods and may change based on new facts and circumstances.
 
The fair value of an option is particularly impacted by the expected volatility and expected life assumptions. In order to understand the impact of changes in these assumptions on the fair value of an option, management performed sensitivity analyses. Holding all other variables constant, if the expected volatility assumption for the fourth quarter 2005 stock option grant were to increase by 5 percentage points, the fair value of a stock option would increase by approximately 10.2%, from $7.84 to $8.64. Alternately, if the expected volatility assumption for the fourth quarter 2005 stock option grant were to decrease by 5 percentage points, the fair value of a stock option would decrease by approximately 10.5%, from $7.84 to $7.02. Holding all other variables constant (including the expected volatility assumption), if the expected term assumption for the fourth quarter 2005 stock option grant were to increase by one year, the fair value of a stock option would increase by approximately 11.1% from $7.84 to $8.71.
 
Management is not able to estimate the probability of actual results differing from expected results, but believes our assumptions are appropriate, based upon the requirements of SFAS No. 123(R), the guidance included in SAB No. 107, and our historical and expected future experience.
 
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS 157). The statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with limited exception. Any required transition adjustments (the difference between the carrying amounts and the fair value of those financial instruments at the date SFAS 157 is initially applied) should be recognized as a cumulative-effect adjustment to the opening balance of retained earnings for the fiscal year in which the statement is initially applied. When adopted in 2008, the implementation of this statement is not expected to have a material effect on the Company’s Consolidated Financial Statements.
 
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R)). This statement requires companies to (a) recognize the funded status of a benefit plan — measured as the difference between plan assets at fair value and the benefit obligation — in its statement of financial position; (b) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS 87 Employers’ Accounting for Pensions, or SFAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions; (c) measure defined benefit plan assets and obligations as of the date of the entity’s fiscal year-end statement of financial position; and (d) disclose in the notes to the financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation remaining from the initial application of Statements 87 and 106. Companies with publicly traded equity securities are required to initially


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recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company applied the required change in recognition as of December 31, 2006. The impact of adoption on the financial statements is as follows:
 
Incremental Effect of Applying FASB Statement No. 158 on Individual Line Items
in the Statement of Financial Position
December 31, 2006
 
                         
    Before
          After
 
    Application
          Application of
 
    of Statement 158     Adjustments     Statement 158  
    (In millions of dollars)  
 
Prepaid pension
  $ 86.5     $ (77.8 )   $ 8.7  
Deferred income taxes
    52.8       26.4       79.2  
Total assets
    1,901.0       (51.4 )     1,849.6  
Other current liabilities
    141.9       1.8       143.7  
Postretirement and other liabilities
    70.5       (1.0 )     69.5  
Deferred income taxes
    97.9       1.8       99.7  
Total liabilities
    1,463.0       2.6       1,465.6  
Accumulated other comprehensive income, net of tax
    3.9       (54.0 )     (50.1 )
Total stockholders’ equity
    438.0       (54.0 )     384.0  
 
Additionally, the Company will be required to change the measurement date of certain of its foreign pension plans, which currently have September 30 measurement dates.
 
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). This Statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. It also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The Statement does not: (a) affect any existing accounting literature that requires certain assets and liabilities to be carried at fair value; (b) establish requirements for recognizing and measuring dividend income, interest income, or interest expense; or (c) eliminate disclosure requirements included in other accounting standards. The Statement is effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently assessing the potential impact of SFAS 159 on its Consolidated Financial Statements.
 
In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 establishes a two-step process consisting of (a) recognition and (b) measurement for evaluating a tax position. The interpretation provides that a position should be recognized if it is more likely than not that a tax position will be sustained upon examination. A tax position that meets the more-likely-than-not recognition threshold is measured at the largest amount that has a greater than 50% likelihood of being realized upon ultimate settlement. Any differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in an increase in a liability for income taxes payable or a reduction of an income tax refund receivable; a reduction in a deferred tax asset or an increase in a deferred tax liability; or both. This interpretation is effective for fiscal years beginning after December 15, 2006. The provisions of the Interpretation should be applied to all tax positions upon initial adoption. The cumulative effect of applying the provisions of this Interpretation should be reported as an adjustment to the opening balance of retained earnings as of the date of adoption. The


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implementation of this interpretation is not expected to have a material effect on the Company’s annual Consolidated Financial Statements.
 
In June 2006 the FASB ratified the Emerging Issues Task Force (EITF) consensus on EITF Issue No. 06-3 How Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation) (EITF 06-3). The consensuses reached in EITF 06-3 provide that presentation of any tax assessed by a governmental authority that is directly imposed on a revenue-producing transaction between a seller and a customer, which could include sales, use, value added and other excise taxes on either a gross or a net basis is an accounting policy decision that should be disclosed pursuant to Accounting Principles Board Opinion No. 22, Disclosure of Accounting Policies. In addition, the Task Force noted that for any such taxes that are reported on a gross basis, a company should disclose the amounts of those taxes in interim and annual financial statements for each period for which an income statement is presented if those amounts are significant. The consensuses in EITF 06-3 should be applied to financial reports for interim and annual reporting periods beginning after December 15, 2006, with earlier application permitted. The application of the consensuses in this Issue does not impact the Company’s Consolidated Financial Statements, as the Company currently records the taxes discussed in EITF 06-3 on a net basis.
 
In September 2006, the SEC staff issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 was issued in order to eliminate the diversity of practice surrounding how public companies quantify financial statement misstatements.
 
Traditionally, there have been two widely-recognized methods for quantifying the effects of financial statement misstatements: the “roll-over” method and the “iron curtain” method. The roll-over method focuses primarily on the impact of a misstatement on the income statement — including the reversing effect of prior year misstatements — but its use can lead to the accumulation of misstatements in the balance sheet. The iron-curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. Prior to our application of the guidance in SAB 108, we used the iron curtain method for quantifying financial statement misstatements.
 
In SAB 108, the SEC staff established an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. This model is commonly referred to as a “dual approach” because it requires quantification of errors under both the iron curtain and the roll-over methods.
 
SAB 108 permits existing public companies to initially apply its provisions either by (i) restating prior financial statements as if the “dual approach” had always been applied or (ii) recording the cumulative effect of initially applying the “dual approach” as adjustments to the carrying values of assets and liabilities as of January 1, 2006 with an offsetting adjustment recorded to the opening balance of retained earnings. The Company adopted SAB 108 on December 31, 2006. Its implementation did not have any effect on the Company’s Consolidated Financial Statements.
 
ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
The office products industry is concentrated in a small number of major customers, principally office products superstores, large retailers, wholesalers and contract stationers. Customer consolidation and share growth of private-label products continue to increase pricing pressures, which may adversely affect margins for the Company and its competitors. The Company is addressing these challenges through design innovations, value-added features and services, as well as continued cost and asset reduction.
 
The Company is exposed to various market risks, including changes in foreign currency exchange rates and interest rate changes. The Company enters into financial instruments to manage and reduce the impact of these risks, not for trading or speculative purposes. The counterparties to these financial instruments are major financial institutions.


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The Company enters into forward foreign currency and option contracts principally to hedge currency fluctuations in transactions (primarily anticipated inventory purchases and intercompany loans) denominated in foreign currencies, thereby limiting the risk that would otherwise result from changes in exchange rates. The majority of the Company’s exposure to currency movements is in Europe (United Kingdom pound sterling, euro and Czech koruna), Australia, Canada and Mexico. All of the existing foreign exchange contracts have maturity dates in 2007. Increases and decreases in the fair market values of the forward agreements are expected to be offset by gains/losses in recognized net underlying foreign currency transactions or loans. Selected information related to the Company’s foreign exchange contracts as of December 31, 2006 is as follows (all items except exchange rates in millions):
 
Foreign currency contracts as of December 31, 2006(1)
 
                                 
    Average
          Fair
       
    Exchange
    Notional
    Market
    Gain
 
    Rate     Amount     Value     (Loss)  
    (Dollars in millions, except exchange rate data)  
 
Sell GBP/Buy Euro
  $ 1.48     $ 70.2     $ 69.6     $ (0.6 )
Sell AUD/Buy Euro
    0.59       11.8       11.6       (0.2 )
Sell Euro/Buy USD
    1.32       73.5       73.7       0.2  
Sell GBP/Buy USD
    1.91       22.6       22.0       (0.6 )
Sell CZK/Buy USD
    0.04       14.1       12.3       (1.8 )
Sell Euro/Buy CHF
    1.58       15.1       14.9       (0.2 )
Sell AUD/Buy USD
    0.77       10.6       10.3       (0.3 )
Sell Euro/Buy CAD
    0.66       7.9       8.0       0.1  
Sell USD/Buy Euro
    0.76       7.1       7.1        
Other
            18.5       18.4       (0.1 )
                                 
Total
          $ 251.4     $ 247.9     $ (3.5 )
                                 
 
 
(1) GBP = United Kingdom pound sterling, AUD = Australian dollar, USD = U.S. dollar,
 
CAD = Canadian dollar, CHF = Swiss franc, CZK = Czech koruna
 
Foreign currency contracts are sensitive to changes in exchange rates. At December 31, 2006, a 10% unfavorable exchange rate movement in our portfolio of foreign currency forward contracts would have increased our unrealized losses by $22.7 million. Consistent with the use of these contracts to neutralize the effect of exchange rate fluctuations, such unrealized losses or gains would be offset by corresponding gains or losses, respectively, in the remeasurement of the underlying transactions being hedged. When taken together, these forward contracts and the offsetting underlying commitments do not create material market risk.
 
The Company has hedged the net assets of certain of its foreign operations through cross currency swaps. The swaps serve as net investment hedges for accounting purposes. Any increase or decrease in the fair value of the swaps is recorded as a component of accumulated other comprehensive income. The net after-tax loss related to net investment hedge instruments recorded in accumulated other comprehensive income totaled $9.9 million as of December 31, 2006.
 
 
As a result of our funding program for global activities, the Company has various debt obligations upon which interest is paid on the basis of fixed and floating rates. The Company also uses a cross-currency swap to manage its exposure to interest rate and currency movements and to reduce borrowing costs. The table below provides information about our financial instruments that are sensitive to changes in interest rates, including debt obligations and the cross-currency swap. For debt obligations, the table presents significant principal cash flows and related weighted average interest rates by expected maturity dates using interest rates


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and interest rate spreads in effect as of December 31, 2006 under the Company’s credit facilities. For the cross-currency swap, the table presents notional amounts and weighted average interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contracts. Average Company and counterparty rates are based on implied forward rates in the yield curves at the reporting date. Significant interest rate sensitive instruments as of December 31, 2006, are presented below:
 
 
                                                                 
    Stated Maturity Date     Fair
 
    2007     2008     2009     2010     2011     Thereafter     Total     Value  
    (In millions)  
 
Long term debt:
                                                               
Fixed rate (U.S. dollars)
  $     $     $     $     $     $ 350.0     $ 350.0     $ 342.6  
Average fixed interest rate
    7.63 %     7.63 %     7.63 %     7.63 %     7.63 %     7.63 %     7.63 %        
Variable rate (U.S. dollars)
  $     $     $     $     $     $ 316.0     $ 316.0     $ 316.0  
Variable rate (British pounds)
  $     $     $ 35.9     $ 30.4     $     $     $ 66.3     $ 66.8  
Variable rate (Euros)
  $     $ 19.7     $ 25.9     $ 21.9     $     $     $ 67.5     $ 68.0  
Average variable interest rate(1)
    6.91 %     6.96 %     7.04 %     7.12 %     7.12 %     7.12 %     7.03 %        
Short term debt(2):
                                                               
Variable rate (U.S. dollars)
  $ 4.7     $     $     $     $     $     $ 4.7     $ 4.7  
Average variable interest rate(1)
    6.0 %     %     %     %     %     %     6.0 %        
 
 
(1) Rates presented are as of December 31, 2006. Refer to Note 11 Long-term Debt and Short-Term Borrowings of Notes to Consolidated Financial Statements below for further discussion of interest rates on the Company’s debt.
 
(2) Short-term debt includes $3.6 million of demand notes with an average interest rate of 5.8%. The Company intends to continue to borrow under these notes.
 
 
                                                         
    Stated Maturity Date  
    2007     2008     2009     2010     Thereafter     Total     Fair Value  
    (In millions)  
 
Cross-currency swap:
                                                       
Company obligation
   —      —      —     152.2      —     152.2     $ 200.6  
Counterparty obligation
  $     $     $     $ 185.0     $     $ 185.0     $ 185.0  
Average Company pay rate
    4.1 %     4.3 %     4.3 %     4.3 %     NA                  
Average counterparty pay rate
    5.3 %     5.1 %     5.0 %     5.1 %     NA                  
 
Refer to Note 2 Significant Accounting Policies and Note 12 Financial Instruments of the Notes to Consolidated Financial Statements for additional disclosures about the Company’s foreign exchange and financial instruments.


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To the Board of Directors and Stockholders of
ACCO Brands Corporation:
 
We have completed an integrated audit of ACCO Brands Corporation’s December 31, 2006 consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 and audits of its December 31, 2005 and December 27, 2004 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
 
Consolidated financial statements and financial statement schedule
 
In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of ACCO Brands Corporation and its subsidiaries at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ending December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation as of January 1, 2006 and defined benefit pension and other postretirement plans as of December 31, 2006.
 
As discussed in Note 1 to the consolidated financial statements, in 2005 the Company changed its reporting to remove the one month lag in reporting for certain foreign subsidiaries.
 
Internal control over financial reporting
 
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 8, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.


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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
/s/PricewaterhouseCoopers LLP
 
Chicago, Illinois
March 1, 2007


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Management of ACCO Brands Corporation and its subsidiaries is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over reporting is designed and effected by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of the Company’s financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
As required by Section 404 of the Sarbanes-Oxley Act of 2002, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.
 
Based on our assessment, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2006.
 
Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report that appears in Part III, Item 8 herein.
 
     
/s/  David D. Campbell
 
/s/  Neal V. Fenwick
 
David D. Campbell
  Neal V. Fenwick
Chairman of the Board and
  Executive Vice President and
Chief Executive Officer
  Chief Financial Officer
(principal executive officer)
  (principal financial officer)
     
March 1, 2007
  March 1, 2007


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ACCO Brands Corporation and Subsidiaries
 
 
                 
    December 31,
    December 31,
 
    2006     2005  
    (In millions of dollars,
 
    except share data)  
 
ASSETS
Current assets:
               
Cash and cash equivalents
  $ 50.0     $ 91.1  
Accounts receivable less allowances for discounts, doubtful accounts and returns; $28.7 and $30.0 for 2006 and 2005, respectively
    427.4       438.9  
Inventories, net
    277.6       268.2  
Deferred income taxes
    37.2       37.5  
Other current assets
    30.0       25.3  
                 
Total current assets
    822.2       861.0  
Property, plant and equipment, net
    217.2       239.8  
Deferred income taxes
    79.2       17.4  
Goodwill
    438.3       433.8  
Identifiable intangibles, net of accumulated amortization of $80.0 and $67.1 for 2006 and 2005, respectively
    233.6       240.6  
Prepaid pension
    8.7       81.9  
Other assets
    50.4       55.0  
                 
Total assets
  $ 1,849.6     $ 1,929.5  
                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
               
Notes payable to banks
  $ 4.7     $ 7.0  
Current portion of long-term debt
    0.1       23.1  
Accounts payable
    189.2       150.1  
Accrued compensation
    36.5       27.7  
Accrued customer program liabilities
    121.9       122.9  
Other current liabilities
    143.7       122.2  
                 
Total current liabilities
    496.1       453.0  
Long-term debt
    800.3       911.8  
Deferred income taxes
    99.7       94.1  
Postretirement and other liabilities
    69.5       62.3  
                 
Total liabilities
    1,465.6       1,521.2  
                 
Commitments and Contingencies — Note 15
               
Stockholders’ equity:
               
Preferred stock, $0.01 par value, 25,000,000 shares authorized; none issued and outstanding
           
Common stock, $0.01 par value, 200,000,000 shares authorized; 53,815,985 and 52,873,189 shares issued and 53,771,521 and 52,828,725 outstanding at December 31, 2006 and 2005, respectively
    0.6       0.5  
Treasury stock, 44,464 shares at December 31, 2006 and 2005
    (1.1 )     (1.1 )
Paid-in capital
    1,374.6       1,350.3  
Unearned compensation
          (5.2 )
Accumulated other comprehensive income (loss)
    (50.1 )     11.0  
Accumulated deficit
    (940.0 )     (947.2 )
                 
Total stockholders’ equity
    384.0       408.3  
                 
Total liabilities and stockholders’ equity
  $ 1,849.6     $ 1,929.5  
                 
 
See notes to consolidated financial statements.


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ACCO Brands Corporation and Subsidiaries
 
 
                         
    Years Ended  
    December 31,
    December 31,
    December 27,
 
    2006     2005     2004  
    (In millions of dollars, except per share data)  
 
Net sales
  $ 1,951.0     $ 1,487.5     $ 1,175.7  
                         
Cost of products sold
    1,382.8       1,048.0       810.3  
Advertising, selling, general and administrative expenses
    448.1       307.0       247.8  
Amortization of intangibles
    11.1       4.9       1.3  
Restructuring and asset impairment charges
    44.1       2.9       19.4  
                         
Operating income
    64.9       124.7       96.9  
Interest expense, net
    61.1       28.8       8.5  
Other income, net
    (3.8 )           (1.2 )
                         
Income before income taxes, minority interest and cumulative effect of change in accounting principle
    7.6       95.9       89.6  
Income taxes
    0.2       39.5       21.1  
Minority interest, net of tax
    0.2       0.2        
                         
Income before cumulative effect of change in accounting principle
    7.2       56.2       68.5  
Cumulative effect of change in accounting principle, net of tax
          3.3        
                         
Net income
  $ 7.2     $ 59.5     $ 68.5  
                         
Basic earnings per common share:
                       
Income before change in accounting principle
  $ 0.13     $ 1.35     $ 1.96  
Change in accounting principle
          0.08        
                         
Net income
  $ 0.13     $ 1.43     $ 1.96  
                         
Diluted earnings per common share:
                       
Income before change in accounting principle
  $ 0.13     $ 1.32     $ 1.92  
Change in accounting principle
          0.08        
                         
Net income
  $ 0.13     $ 1.40     $ 1.92  
                         
Weighted average number of shares outstanding:
                       
Basic
    53.4       41.5       35.0  
Diluted
    54.3       42.4       35.5  
 
See notes to consolidated financial statements.


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ACCO Brands Corporation and Subsidiaries
 
 
                         
    Years Ended  
    December 31,
    December 31,
    December 27,
 
    2006     2005     2004  
    (In millions of dollars)  
 
Operating activities
                       
Net income
  $ 7.2     $ 59.5     $ 68.5  
Restructuring, impairment and other non-cash charges
    20.1       0.4       6.4  
(Gain) loss on sale of assets
    (0.2 )     (1.7 )     1.5  
Depreciation
    39.9       32.0       28.2  
Amortization of debt issuance costs
    4.8       1.6        
Amortization of intangibles
    11.1       4.9       1.3  
Stock based compensation
    18.6       0.7        
Deferred income tax (benefit) provision
    (20.9 )     15.3       (15.3 )
Changes in balance sheet items:
                       
Accounts receivable
    23.7       6.1       (51.1 )
Inventories
    (10.0 )     7.1       (9.6 )
Other assets
    2.0       9.8       (19.4 )
Accounts payable
    29.2       (9.0 )     (18.6 )
Accrued expenses and other liabilities
    (2.9 )     (40.7 )     58.8  
Accrued taxes
    0.3       (18.4 )     14.8  
Other operating activities, net
    (2.0 )     (2.3 )     (0.6 )
                         
Net cash provided by operating activities
    120.9       65.3       64.9  
Investing activities
                       
Additions to property, plant and equipment
    (33.1 )     (34.5 )     (27.6 )
Proceeds from the disposition of assets
    9.6       2.5       21.5  
Other investing activities
    2.1       (0.4 )      
                         
Net cash used by investing activities
    (21.4 )     (32.4 )     (6.1 )
Financing activities
                       
Decrease in parent company investment
          (22.9 )     (43.8 )
Net dividends paid
          (625.0 )      
Proceeds from long-term borrowings
          950.0        
Repayments of long-term debt
    (155.1 )     (299.5 )      
(Repayments) borrowings of short-term debt, net
    (2.6 )     1.2       (2.7 )
Cost of debt issuance
    (0.3 )     (27.5 )      
Proceeds from the exercise of stock options
    13.0       6.2        
                         
Net cash used by financing activities
    (145.0 )     (17.5 )     (46.5 )
Effect of foreign exchange rate changes on cash
    4.4       (4.1 )     7.0  
                         
Net (decrease) increase in cash and cash equivalents
    (41.1 )     11.3       19.3  
Cash and cash equivalents
                       
Beginning of year
    91.1       79.8       60.5  
                         
End of period
  $ 50.0     $ 91.1     $ 79.8  
                         
Significant non-cash transaction:
                       
Common stock issued in connection with the acquisition of GBC
  $     $ 392.4     $  
Cash paid during the year for:
                       
Interest
  $ 64.8     $ 9.1     $ 0.3  
Income tax
  $ 19.2     $ 32.4     $ 16.9  
 
See notes to consolidated financial statements.


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ACCO Brands Corporation and Subsidiaries
 
 
                                                                         
                            Accumulated
                         
          Parent
                Other
                         
    Common
    Company
    Paid-in
    Unearned
    Comprehensive
    Treasury
    Accumulated
          Comprehensive
 
    Stock     Investment     Capital     Compensation     Income (Loss)     Stock     Deficit     Total     Income  
    (In millions of dollars)  
 
Balance at December 27, 2003
  $ 0.1     $ (232.7 )   $ 1,832.6     $     $ (41.2 )   $     $ (1,075.2 )   $ 483.6          
Net income
                                        68.5       68.5       68.5  
Minimum pension liability adjustment
                            32.8                   32.8       32.8  
Translation impact
                            24.3                   24.3       24.3  
                                                                         
Total comprehensive income
                                                                  $ 125.6  
                                                                         
Net transfers to Parent
          (45.6 )     (0.4 )                             (46.0 )        
Tax benefit related to stock-based compensation
                2.9                               2.9          
                                                                         
Balance at December 27, 2004
  $ 0.1     $ (278.3 )   $ 1,835.1     $     $ 15.9     $     $ (1,006.7 )   $ 566.1          
Net income
                                        59.5       59.5       59.5  
Income on derivative financial instruments
                            3.3                   3.3       3.3  
Translation impact
                            (8.2 )                 (8.2 )     (8.2 )
                                                                         
Total comprehensive income
                                                                  $ 54.6  
                                                                         
Net transfers to Parent
          (22.6 )                                   (22.6 )        
Adjustments due to tax allocation agreement(2)
                3.8                               3.8          
Dividends
                (625.0 )                             (625.0 )        
Stock issuance — spin-off from Parent(1)
    0.3       300.9       (301.2 )                                      
Stock issuance — GBC acquisition
    0.1             392.3                               392.4          
Impact of assumed GBC stock-based compensation
                31.1       (5.2 )                       25.9          
Stock issuances — stock options and restricted stock units
                7.3                               7.3          
Purchase of treasury stock
                                  (1.1 )           (1.1 )        
Tax benefit related to stock-based compensation
                6.9                               6.9          
                                                                         
Balance at December 31, 2005
  $ 0.5     $     $ 1,350.3     $ (5.2 )   $ 11.0     $ (1.1 )   $ (947.2 )   $ 408.3          
Net income
                                        7.2       7.2       7.2  
Loss on derivative financial instruments
                            (2.7 )                 (2.7 )     (2.7 )
Translation impact
                            (4.4 )                 (4.4 )     (4.4 )
                                                                         
Total comprehensive income
                                                                  $ 0.1  
                                                                         
Adjustment to initially apply FASB Statement No. 158, net of tax
                            (54.0 )                 (54.0 )        
Stock issuances — stock options and restricted stock units
    0.1             12.9                               13.0          
Adjustment to initially adopt FASB Statement No. 123(R)
                (5.2 )     5.2                                  
Stock-based compensation
                18.6                               18.6          
Other
                (2.0 )                             (2.0 )        
                                                                         
Balance at December 31, 2006
  $ 0.6     $     $ 1,374.6     $     $ (50.1 )   $ (1.1 )   $ (940.0 )   $ 384.0          
                                                                         
 
 
(1) Amount represents issue of stock related to spin-off from Fortune Brands, Inc. See Note 1, Basis of Presentation, for additional information.