The shares of common
stock are being sold by the selling stockholders named in this
prospectus. We will not receive any proceeds from sales of
common stock by the selling stockholders.
Our common stock is
listed on the New York Stock Exchange under the symbol
“ABD.” The last reported closing price on the New York
Stock Exchange on September 21, 2006 was $21.01 per
share.
The underwriters
have an option to purchase a maximum of 530,400 additional
shares from the selling stockholders to cover over-allotments of
shares.
Investing in our
common stock involves risks. See “Risk Factors”
beginning on page 11.
Underwriting
Proceeds
Price to
Discounts and
to Selling
Public
Commissions
Stockholders
Per Share
$21.01
$1.0505
$19.9595
Total
$74,291,360
$3,714,568
$70,576,792
Delivery of the
shares of common stock will be made on or about
September 27, 2006.
Neither the
Securities and Exchange Commission nor any state or foreign
securities commission or regulatory authority has approved or
disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a
criminal offense.
OFFICE PRODUCTS
Our portfolio of leading brands includes
Swingline, Rexel, Wilson Jones, Quartet, and
GBC, among others.
COMPUTER PRODUCTS
Our Kensington Computer Products Group
designs a broad range of computer
accessories from mice, trackballs and
keyboards, to computer security devices
and mobile accessories.
COMMERCIAL PRODUCTS
Under the GBC banner, we offer print finishing
solutions for a range of printing applications, as
well as high-speed and wide format
lamination and a variety of commercial binding
solutions. Personal organizers and time
management planners are marketed under the
Day-Timers brand name.
As used in this prospectus, the terms “ACCO Brands,”“we,”“our,” and “us” refer to
ACCO Brands Corporation (and its predecessor) and our
consolidated subsidiaries, including GBC, unless the context
indicates otherwise. The term “GBC” refers to General
Binding Corporation, a Delaware corporation acquired by ACCO
Brands in the merger described below under “History of
Spin-off and Merger.” The term “Fortune Brands”
refers to Fortune Brands, Inc., a Delaware corporation, and the
former parent company of ACCO Brands prior to the spin-off. The
term “ACCO World” refers to ACCO World Corporation,
our predecessor company prior to its spin-off from Fortune
Brands.
This prospectus includes our trademarks and other tradenames
identified herein. All other trademarks and tradenames appearing
in this prospectus are the property of their respective holders.
You should rely only on the information contained in this
prospectus or incorporated by reference in this prospectus. We
have not authorized anyone to provide you with information that
is different. This prospectus may only be used where it is legal
to sell these securities. The information in this prospectus may
only be accurate on the date of this document.
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 premium pricing. 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.
Acquisition
and Integration of GBC
We were spun off from Fortune Brands, Inc. on August 16,2005, and acquired General Binding Corporation on
August 17, 2005. The acquisition significantly expanded our
size and scale, increasing pro forma 2004 revenues over
historically reported 2004 revenues by more than 60%, and
strengthened our presence across our principal geographic
markets.
We have identified approximately $40 million in expected
annual cost synergies once the integration of GBC is completed.
We expect these synergies to result from our shared operating
expense platform of distribution, information technology,
certain marketing and sales functions and other administrative
services. We also expect synergies from the rationalization of
product offerings and our emphasis on improvements in supply
chain and other operating efficiencies. Since our acquisition of
GBC, we have announced 21 facility closures and consolidations
and have combined our office products sales forces. These
actions are expected to account for approximately 85% of the
targeted cost synergies. Our current senior management team is
experienced in improving operating efficiencies, having led the
former ACCO World in a turnaround from 2001 through the first
half of 2005. During this time, we improved operating margins
from (7)% in 2001 to 11% for the twelve-month period ended
June 25, 2005. Restructuring and restructuring-related
charges, including the write down of certain intangibles,
negatively impacted the operating margins by 10% and 1% for 2001
and the twelve-month period ended June 25, 2005,
respectively. In addition to the targeted cost savings, we
believe that our focus on premium brands, our ability to
innovate and rejuvenate existing brands and the
complementary nature of the brand and product portfolios of the
combined companies will all contribute to increased top-line
growth.
Industry
Overview
The office products industry in our principal markets is a
mature industry comprised of a broad range of supplies,
equipment and furniture that are commonly found in a typical
office setting, as well as in schools and homes. We estimate
that the office products industry in North America, Europe and
Australia is approximately $100 billion annually. Based on
our estimates, we believe that the portion of this market in
which we compete (including supplies, computer accessories and
binding and laminating equipment) is approximately
$15 billion annually. Historically, demand for office
products in the United States has closely tracked trends in
white-collar employment levels, gross domestic product (GDP)
and, more recently, the growth of small businesses and home
offices. We believe that demand in our addressable market
generally is driven by the same factors as those affecting the
broader office products industry.
The industry is also characterized by the emergence of office
products channel consolidators, such as Office Depot, Staples
and OfficeMax, which distribute products to their customers
through multiple distribution channels (e.g., contract
stationer, retail, mail order and Internet). The rapid growth of
these chains, which represent some of our largest customers, has
contributed to increased consumer awareness of office products
and has improved the negotiating power of these chains with
suppliers. Additionally, these large chains and other companies
increasingly seek to source and sell products under their own
private label brands. Private label products typically emerge in
lower to middle price point items or in commodity-type
categories. In contrast, we believe that higher priced,
innovative premium brands are more likely to be driven by one or
two recognized national brands and by large premium brand
suppliers. Although private label office products typically
target a different end of the market as compared to premium
office products, private label office products remain largely
dependent on premium office products to increase consumer
awareness of the entire product category, making premium office
products suppliers even more important to these large chains and
other private label retailers. Pricing and demand levels for
office products have also reflected a substantial consolidation
within global resellers of office products. As the office
products industry continues to consolidate, it becomes
increasingly important for office products suppliers to have
sufficient scale in a category (often requiring wider geographic
presence) to invest in product innovation and marketing that can
provide a consumer
trade-up
strategy and a price umbrella for customer private label
strategies.
Our
Products
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 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 (67% of 2005 pro forma 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 (Brands: Swingline, Rexel and GBC)
• staplers and staples
• punches
• shredders
• trimmers
• calculators
Document Communication (Brands: GBC, Rexel,
Ibico®
and Wilson Jones)
• binding equipment and supplies
• laminating equipment and supplies
• report covers
• indexes
Visual Communication (Brands: Quartet,
NOBO®
and
Apollo®)
• dry-erase boards
• dry-erase markers
• easels
• bulletin boards
• overhead projectors
• transparencies
• laser pointers
• screens
Storage and Organization (Brands: Wilson Jones, Rexel,
Eastlight®,
Marbig®
and
Dox®)
• ring binders
• sheet protectors
• data binders
• labels
• hanging file folders
• clips
• fasteners
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 (11% of 2005 pro forma 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.
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 2005 pro forma 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
sell for in excess of $1 million, 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 2005 pro forma 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-Timers calendars and personal
organizers, that are primarily sold direct to consumers or
through large retailers and commercial dealers.
Competitive
Strengths
Portfolio of Leading Commercial and Consumer
Brands. We have leading market share positions in
a number of product categories in which we compete. Our leading
positions enable us to generate sufficient revenue and cash flow
to support ongoing innovation in our products, which is
necessary to maintain and enhance our market position in our
premium brands and to enhance our market position in other
brands. Approximately 83% of our $1.9 billion in pro forma
2005 net sales came from brands that occupy the number one
or number two positions in the select markets in which we
compete. Several of our brand names, including Swingline and
Day-Timer, have among the highest unaided consumer awareness in
the office products industry. As we continue to invest in
innovation and marketing and consolidate our premium brand
names, we expect them to become stronger in the marketplace.
Scale Player in a Global Industry. As one of
the world’s largest suppliers of branded office products,
we enjoy significant economies of scale. The global office
products industry continues to consolidate, with an increasing
share of the distribution of office products represented by
channel consolidators such as Office Depot, Staples and
OfficeMax. As office products resellers continue to consolidate
the distribution of office products both within and across
multiple channels, it becomes increasingly important for office
products suppliers to have sufficient breadth and depth of
premium product offerings, size, scope, and geographic presence,
all of which make them more important participants in the office
products industry. The resellers of office products are
dependent on suppliers to improve total industry sales through
continuous product innovation. We believe that the breadth,
depth, premium stature and brand recognition of our product
offerings, when combined with our size, scope and geographic
presence, position us well to succeed in the consolidating
office products industry.
Innovation and Product Development. As a
leading innovator in our industry, we believe that product
innovation maintains and enhances the premium nature of many of
our products. Additionally, we find that consumers will
transition to higher price points when introduced to products
with innovative features or benefits. The profit margins we
derive from sales of our premium brands generate sufficient cash
flow to enable us to make substantial investments in product
innovation. For example, in 2004 the former ACCO
World generated in excess of 30% of its net sales from products
and line extensions introduced in the preceding 36 months.
Since acquiring GBC, we have sought to apply a similar emphasis
on increased innovation and product development to GBC’s
product categories.
Global Platform with Diverse Revenue Base. We
have a wide geographic footprint, with pro forma 2005 net
sales of 62%, 27% and 7% in North America, Europe and Australia,
respectively. Our diverse product lines let us reach a broad
array of customers worldwide, while limiting our exposure to
economic downturns in specific regions or industries. We believe
that our customers wish to deal with fewer suppliers overall
and, in particular, with suppliers that effectively support a
consumer driven marketing and merchandising strategy with
innovative products at acceptable price and service levels. We
also believe that our sales are well-balanced by product,
channel and customer. Our four segments — Office
Products Group, Computer Products Group, Commercial-Industrial
Print Finishing Group and Other Commercial — accounted
for 67%, 11%, 9% and 13%, respectively, of our pro forma
2005 net sales. We have a significant presence in the
indirect sales channel through our Office Products and Computer
Products Groups, and a significant presence in the direct sales
channel through the products we sell in the Other Commercial
segment. Our ten largest customers accounted for 49% of our pro
forma 2005 net sales, with our largest customer, Office
Depot and its related entities, accounting for 13% of our pro
forma 2005 net sales.
Consumer-focused, Scalable Business Model. We
organize our product development and
go-to-market
strategies around distinct consumer categories, as each has
unique and distinct marketing and product needs. We operate
separate profit-responsible business units to focus on and
address the key consumer and customer needs of each category.
This structure enables each of our business units to move
independently to best position itself within the market
categories in which it competes. However, these business units
use a shared operating expense platform to gain economies of
scale across distribution, freight, administration, information
technology and some selling and marketing functions. Our shared
operating expense model also allows us to more easily and
cost-effectively integrate the operations of acquired
businesses, as we are able to “plug” these businesses
directly into the platform.
Low-cost Operating Model. We emphasize
operating efficiencies in the conduct of our business. Our
low-cost operating model is based on a consumer-focused business
unit model balanced with a flexible supply chain and
efficiencies realized from our shared operating expense
platform. Through our flexible supply chain, products are
manufactured or sourced in a manner we believe will provide our
customers with appropriate customer service, quality products,
innovative solutions and attractive pricing. We seek to
manufacture products for which the freight and distribution
expense or service needs are relatively high while typically
sourcing other products that have relatively high direct labor
costs. By using a combination of manufacturing and third-party
sourcing, we can reduce our costs and effectively manage
production assets, thereby minimizing our capital investment and
working capital requirements. For the pro forma 2005 fiscal
year, approximately 58% of our cost of product was from goods we
manufactured in proximity to our markets (either in North
America or in Europe) and approximately 42% was from products
sourced primarily in Asia. Our shared operating expense platform
enables each of our business units to benefit from economies of
scale across various shared expenses and also facilitates the
efficient integration of acquired businesses. We continue to
integrate GBC’s businesses into our lower-cost supply
chain, balanced manufacturing and outsourcing approach, and
shared operating expense platform.
Strong Cash Flow Generation. The former ACCO
World historically generated significant cash flow from
operating activities. In the fiscal years 2001 through 2004 cash
flow from operating activities totaled $449 million. Our
strong cash flow has allowed us to pay down $85 million of
indebtedness since our spin-off from Fortune Brands in August
2005. We believe our restructuring initiatives, our recent
acquisition of GBC, and our overall business model position us
to derive increased cash flow from operations. Our business
requires limited capital expenditures, and we have been able to
reduce our capital investment and working capital requirements
by utilizing a combination of company manufacturing and
outsourcing. In addition, we expect annual cost savings from the
integration of GBC, after our costs to implement these
synergies, to further enhance our free cash flow generation
capabilities. We believe that our ability to generate
substantial cash flow from operations, combined with our
anticipated capital expenditure requirements, will provide us
sufficient financial flexibility to pursue a range of corporate
initiatives, including paying down debt and funding any future
acquisitions.
Strong, Experienced and Incentivized Management
Team. We are led by an experienced management
team of executive officers and business unit leaders with a
track record of strong operating performance, business process
reengineering and restructuring, consumer focus and product
innovation. Our business is additionally supported by strong
geographic, product and customer focused management with
significant industry experience. As a result of the previous
ACCO World business restructuring initiated in 2001 by certain
members of our current management team, we generated
$449 million in cash flow from operating activities over
the 2001 to 2004 period, after fully funding the restructuring
effort. Our restructuring efforts also improved operating
margins from (7)% in 2001 to 11% for the twelve-month period
ended June 25, 2005. During 2001 and the twelve-month
period ended June 25, 2005, restructuring and
restructuring-related charges, including the write down of
certain intangibles, negatively impacted operating margin by 10%
and 1%, respectively. We continue to apply their experience in
restructuring the former ACCO World to the integration of GBC
into our operations. As of June 30, 2006, our management
team held stock, vested and unvested options and other
equity-based awards representing approximately 7% of our
outstanding common stock on a fully diluted basis (assuming
realization of certain performance targets set by the
compensation committee of our board of directors).
Growth
Strategy
Our goal is to strengthen and expand our leading premium brand
positions in select categories of the office products industry.
Our strategy for achieving this goal centers on enhancing
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.
The following are the principal elements of our growth strategy:
Invest in Research, Marketing and
Innovation. We believe that if office product
suppliers develop new, innovative products that are
appropriately marketed and address consumers’ needs,
product categories will trend toward growth and premium pricing
by trading the consumer up from commodity priced products. We
also believe that by increasing product innovation and
marketing, consumers will increasingly associate our strong
brand names with premium products. Based on our research and
understanding of consumer needs, we continually seek to design
and develop new and innovative products and merchandising
strategies that address those needs, which we believe is a key
contributor to our success in the office products industry.
Additionally, we seek to develop marketing that communicates the
advantages of our products to consumers, which we believe will
further drive consumer demand through the resulting product
awareness. As such, our category-focused business model allows
us to provide the necessary customer support, sales advice and
merchandising strategies to help drive our customers’
sales. In addition to our own direct investment in research and
development, we work collaboratively with select suppliers for
certain products and leverage their research and development
capabilities which we pay for in subsequent cost of goods
purchased.
Leverage Acquisition of GBC. In the near term,
we are focused on realizing cost synergies from our combination
with GBC. We have identified $40 million of annual cost
savings opportunities from the overlap of GBC and the former
ACCO World, arising from potential cost reductions attributable
to efficiencies and synergies to be derived from facility
integration, headcount reduction, supply chain optimization and
enhancement. In addition, the GBC acquisition provides
opportunities for top-line growth through the addition of
GBC’s complementary products and increased market share, as
well as the ability to apply our emphasis on innovation to
GBC’s product portfolio.
Focus on Premium Categories and Driving Consumer
“Trade-up.”Premium categories
(e.g., computer products or stapling) are characterized
by high brand and product equity, high customer loyalty, premium
pricing and premium brands comprising a large percentage of the
category volume. We have identified products in these and other
premium categories that we feel we can supply competitively to
the office products industry while enhancing consumer demand for
these products based on our product innovation, design,
marketing and brand influence. We have a broad mix of premium
products and plan to build upon our product offering within
these higher margin categories.
Opportunistically Pursue Acquisitions. We
intend to actively pursue strategic acquisitions of selected
businesses to strengthen our market share in existing categories
where we are geographically less strong and expand our market
presence with new, complementary product categories. In
addition, our shared operating expense platform makes it
attractive to add new product categories in adjacent market
segments and eliminate duplicative costs.
Company
Information
We are incorporated under the laws of the State of Delaware. Our
principal executive offices are located at 300 Tower Parkway,
Lincolnshire, Illinois60069, and our telephone number at that
address is
(847) 541-9500.
Our Internet address is www.accobrands.com. The contents of our
website are not a part of this prospectus.
3,536,000 shares (or 4,066,400 shares if the
underwriters exercise their over-allotment option in full).
Common stock outstanding before and after the offering
53,543,671 shares
Use of proceeds
We will not receive any proceeds from the sale of common stock
by the selling stockholders.
New York Stock Exchange Symbol
“ABD”
The above information regarding shares outstanding before and
after the offering is as of August 31, 2006.
The number of shares outstanding excludes 8,050,351 shares
of common stock reserved for issuance pursuant to the exercise
of options under our stock option plans as of August 31,2006. Under such plans, options for 4,923,791 shares are
currently outstanding at a weighted average exercise price of
$18.19 per share.
You should carefully read and consider the information set forth
in “Risk Factors” and all other information set forth
in this prospectus before investing in our common stock.
The income statement and balance sheet data for the six-month
period ended June 30, 2006 are unaudited but, in the
opinion of management, such information reflects all
adjustments, consisting of only normal recurring adjustments
necessary for a fair presentation of the financial data for the
interim period. The results for the interim periods presented
are not necessarily indicative of the results for a full year.
The pro forma condensed financial information at and for the six
months ended June 25, 2005 and at and for the year ended
December 31, 2005 have been prepared to reflect the
acquisition of GBC as if it had occurred at January 1,2005. This information should be read in conjunction with the
unaudited pro forma combined condensed financial information
included elsewhere in this prospectus, “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations,” our audited consolidated financial statements,
GBC’s audited financial statements and other financial
information appearing elsewhere or incorporated by reference in
this prospectus.
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
$7.6 million and $7.1 million for the six months ended
June 30, 2006 and June 25, 2005, respectively, and
$18.3 million for the year ended December 31, 2005.
(2)
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.
(3)
Working capital is defined as total current assets less total
current liabilities.
You should carefully consider the risks described below, in
addition to the other information contained in this prospectus
and the documents incorporated by reference in this prospectus,
before making an investment decision. The risks described below
are not the only ones we face. Additional risks described below
under “Cautionary Statement Regarding Forward-Looking
Statements” and other risks that are not currently known to
us or that we currently do not consider to be material may also
impair our business operations and financial condition.
Our business, financial condition or results of operations
could be materially adversely affected by any of these risks.
The trading price of our common stock could decline due to any
of these risks, and you may lose all or part of your
investment.
Risks
Related to Our Business
The raw materials and labor costs we incur are subject to
price increases that could adversely affect our
profitability.
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.
We are subject to risks related to our dependence on the
strength of economies in various parts of the world.
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.
Our business is dependent on a limited number of
customers, and a substantial reduction in sales to these
customers could significantly impact our operating
results.
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. For the fiscal year ended December 31,2005 (pro forma) and for the six months ended June 30,2006, approximately 49% and 45%, respectively, of our net sales
were to our ten largest customers, and Office Depot, currently
our largest customer, accounted for 13% and 14%, respectively,
of net sales. 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.
If we do not compete successfully in the competitive
office products industry, our business and revenues may be
adversely affected.
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 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 is subject to risks associated with
seasonality, which could adversely affect our cash flow,
financial condition or results of operations.
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 do not materialize, we could experience a material adverse
effect on our business, financial condition and results of
operations.
Risks associated with our international operations could
harm our business.
Approximately 46% of our net sales for the fiscal year ended
December 31, 2005 and 46% of our net sales for the six
months ended June 30, 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 recent
strengthening trend of the U.S. dollar were to make 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.
Risks associated with outsourcing the production of
certain of our products could harm our business.
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.
We depend on certain manufacturing sources whose inability
to perform their obligations could harm our business.
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.
Our inability to secure and maintain rights to
intellectual property could harm 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 failure to achieve and maintain effective internal
control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act could divert
significant company resources and management attention and could
have a material adverse effect on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002,
we will be required to furnish a report by our management on our
internal control over financial reporting for our fiscal year
ending December 31, 2006. Although ACCO Brands was subject
to these requirements as a subsidiary of Fortune Brands, and GBC
had been subject to such requirements prior to the merger
through which we acquired GBC, the combined companies have not
yet been subject to such requirements. To achieve compliance
with Section 404 within the prescribed period, we will be
engaged in a process to document and evaluate our internal
control over financial reporting, which will be both costly and
challenging and may strain our resources and distract
management. We will need to dedicate internal resources, engage
outside consultants and adopt a detailed work plan to
(1) assess and document the adequacy of internal control
over financial reporting, (2) take steps to improve control
processes where appropriate, (3) validate through testing
that controls are functioning as documented, and
(4) implement a continuous reporting and improvement
process for internal control over financial reporting. There is
a risk that neither we nor our independent registered public
accounting firm will be able to conclude within the prescribed
timeframe that our internal control over financial reporting is
effective. Any failure to implement effective internal control
over financial reporting, or difficulties encountered in its
implementation, could harm our operating results or cause us to
fail to meet our reporting obligations. Inadequate internal
control over financial reporting could also cause investors to
lose confidence in our reported financial information, which
could have a negative effect on the trading price of our stock.
Our success depends on our ability to attract and retain
qualified personnel.
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 are subject to environmental regulation and
environmental risks.
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.
Impairment charges could have a material adverse effect on
our financial results.
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.
Product liability claims or regulatory actions could
adversely affect our financial results or harm our reputation or
the value of our end-user brands.
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.
Risks
Related to Our Acquisition of GBC
We may not realize the anticipated benefits from the
acquisition of GBC.
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.
The integration of ACCO Brands and GBC may present
significant challenges.
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;
•
the potential difficulties in retaining key officers and
personnel through the transition; and,
•
the added difficulties of achieving compliance with
Section 404 of the Sarbanes-Oxley Act during a period of
rapid business, process, systems and personnel change.
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.
Risks
Related to Our Indebtedness
Our substantial indebtedness could adversely affect our
results of operations and financial condition and prevent us
from fulfilling our financial obligations.
We have a significant amount of indebtedness. As of
June 30, 2006, we had approximately $856.9 million of
outstanding long-term 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.
We are subject to restrictive debt covenants, which may
restrict our operational flexibility.
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.
We will require a significant amount of cash to service
our debts. Our ability to generate cash depends on many factors
beyond our control.
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.
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.
We may be affected by significant restrictions with
respect to the issuance of our equity securities for two years
after the spin-off.
Because of the change in control limitation imposed by
section 355(e) of the Internal Revenue Code as the result
of our spin-off from Fortune Brands, we may be limited in the
amount of stock that we can issue to make acquisitions or raise
additional capital in the two years following the spin-off and
GBC acquisition. Also, our indemnity obligation to Fortune
Brands might discourage, delay or prevent a change of control
during this two-year period that our stockholders may consider
favorable. See “— 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.”
Risks
Related to Corporate Control and Our Stock Price
Certain provisions in our organizational documents and
Delaware law may make it difficult for someone to acquire
control of ACCO Brands.
Our restated certificate of incorporation, our amended by-laws
and the Delaware General Corporation Law contain several
provisions that would make more difficult an acquisition of
control of our company in a transaction not approved by our
board of directors, even if such a transaction is seen as
benefiting our stockholders. Provisions in our restated
certificate of incorporation and amended by-laws that make it
more difficult to acquire control of us include:
•
the division of our board of directors into three classes to be
elected on a staggered basis, one class each year;
•
the ability of our board of directors to issue shares of
preferred stock in one or more series without further
authorization of stockholders;
•
a prohibition on stockholder action by written consent;
•
a prohibition on the right of stockholders to call a special
meeting of stockholders;
•
a requirement that stockholders provide advance notice of any
stockholder nominations of directors or any proposal of new
business to be considered at any meeting of stockholders;
•
a requirement that the affirmative vote of at least 80% of our
shares be obtained to amend or repeal the provisions of the
restated certificate of incorporation relating to the election
and removal of directors, the classified board or the right to
act by written consent; and
•
a fair price provision.
In addition, Section 203 of the Delaware General
Corporation Law generally provides that a corporation shall not
engage in any business combination with any interested
stockholder during the three-year period following the time that
such stockholder becomes an interested stockholder, unless a
majority of the directors then in office approves either the
business combination or the transaction that results in the
stockholder becoming an interested stockholder or specified
stockholder approval requirements are met.
Our stockholder rights plan could prevent stockholders
from receiving a premium over the market price for their shares
of common stock from a potential acquirer.
We have a stockholder rights plan that entitles our stockholders
to acquire shares of our common stock at a price equal to 50% of
the then-current market value in limited circumstances when a
third party acquires 15% or more of our outstanding common stock
or announces its intent to commence a tender offer for at least
15% of our common stock, in each case, in a transaction that our
board of directors does not approve. Under these limited
circumstances, because all of our stockholders would become
entitled to effect discounted purchases of our common stock,
other than the person or group that caused the rights to become
exercisable,
the existence of these rights would significantly increase the
cost of acquiring control of our company without the support of
our board of directors. The existence of the rights plan could
therefore deter potential acquirers and thereby reduce the
likelihood that stockholders will receive a premium for their
common stock in an acquisition.
Shares of our common stock will be eligible for public
sales in the future, which could depress the price of our common
stock.
Future sales in the public markets of substantial amounts of our
common stock, or the perception that these sales could occur,
could adversely affect the market prices prevailing from time to
time for our common stock. Immediately after this offering,
assuming the underwriters’ over-allotment option is
exercised in full, an aggregate 4,038,137 shares of our
common stock will continue to be held by Lane Industries, Inc.
and its subsidiaries. Under the terms of our registration rights
agreement with Lane Industries, it may request until August 2010
that we register all or a portion of these shares, subject to
certain restrictions. Subject to volume and other limitations
under Rule 144, and the
lock-up
restrictions more fully described under
“Underwriting,” Lane Industries may be able to freely
sell these shares in the open market. Additionally, several
other of our stockholders currently hold large positions of our
common stock (see “Principal and Selling
Stockholders”), and we also maintain equity incentive plans
for eligible employees, officers and directors that provide for
stock-based awards. The sale of a substantial amount of our
common stock in the public market in the future could cause our
market price to decline. An increase in the number of shares of
our common stock in the public market could adversely affect
prevailing market prices and could impair our future ability to
raise capital through the sale of our equity securities.
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.
Among the factors that could cause plans, actions and results to
differ materially from current expectations are:
•
the risk that targeted cost savings and synergies from the GBC
acquisition and other previous business combinations may not be
fully realized or take longer to realize than expected;
•
the risk that businesses that have been combined into ACCO
Brands as a result of the acquisition of GBC will not be
integrated successfully;
•
fluctuations in cost and availability of raw materials;
•
the degree to which higher raw material costs, and freight and
distribution costs, can be passed on to customers through
selling price increases and the effect on sales volumes as a
result thereof;
•
competition within the markets in which we operate;
•
the effect of consolidation in the office products industry;
•
the effects of both general and extraordinary economic,
political and social conditions;
•
our dependence on certain suppliers of manufactured products;
•
foreign exchange rate fluctuations;
•
disruption from business combinations making it more difficult
to maintain relationships with our customers, employees or
suppliers;
•
the development, introduction and acceptance of new products;
•
increases in health care, pension and other employee welfare
costs; and
•
other risks and uncertainties described in this prospectus,
including under the caption “Risk Factors.”
Our common stock is traded on The New York Stock Exchange 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 New York Stock Exchange
beginning August 17, 2005, the first date our stock began
trading.
The last reported sale price of our common stock on The New York
Stock Exchange on September 21, 2006 was $21.01 per
share.
As of August 31, 2006, we had 53,543,671 outstanding shares
of common stock and had, as of August 31, 2006,
approximately 16,840 stockholders of record, which does not
include shares held in securities position listings.
Dividend
Policy
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.
The following table sets forth, as of June 30, 2006, our
unaudited consolidated cash and cash equivalents and
capitalization. The table should be read in conjunction with our
historical consolidated financial statements and the notes
thereto, and the other financial information appearing elsewhere
in this prospectus or incorporated by reference herein. See
“Index to Financial Statements.”
As of June 30, 2006, the amount available for borrowings
under our revolving credit facility was $142.5 million
after giving effect to $0.0 million in revolving credit
facility borrowings and $7.5 million in outstanding letters
of credit.
(2)
Consists principally of short-term foreign debt facilities in
place to support local operations.
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, 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
December 27, 2002 and 2001, and for the years then ended,
and as of June 30, 2006 and June 25, 2005 and for the
six months ended June 30, 2006 and June 25, 2005, 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 prospectus or incorporated by
reference in this prospectus. Results presented for interim
periods are not necessarily indicative of results to be expected
for the full year or any other future period.
Basis of
Presentation
The ACCO Brands businesses have historically been 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 in this prospectus
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 for periods prior
to ACCO Brands’ spin-off from Fortune Brands. 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.).
The financial statements for the annual period ended
December 31, 2005 include a restatement of results
affecting the previously filed three month and year to date
periods ended March 25, June 25, and
September 30, 2005 for the cumulative effect of a change in
accounting principle related to the removal of a one-month lag
in reporting by several of our foreign subsidiaries. The change
was made to better align their reporting periods with ACCO
Brands’ fiscal calendar. A reconciliation indicating the
effect of this change on previously issued periodic data can be
found in Note 15, Cumulative Effect of Change in
Accounting Principle to the Notes to Consolidated Financial
Statements contained elsewhere in this prospectus.
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
$7.6 million and $2.9 million for the six months ended
June 30, 2006 and June 25, 2005, respectively, and
$14.1 million, $18.2 million, $19.1 million,
$13.9 million and $29.8 million for the fiscal years
ended December 31, 2005, and December 27, 2004, 2003,
2002 and 2001, respectively.
(2)
ACCO Brands recorded impairments of certain identifiable
intangible assets of $12.0 million and $64.4 million
in 2003 and 2001, respectively, 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)
External long-term 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 periods presented.
The following unaudited pro forma combined condensed statement
of income for the year ended December 31, 2005 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 combined condensed financial information is
based on the assumptions, adjustments and eliminations described
in the accompanying notes to the unaudited pro forma combined
condensed financial statement.
The unaudited pro forma combined condensed financial statement
has been prepared using the purchase method of accounting, and
is presented as if the merger transaction had occurred at the
beginning of fiscal 2005 for purposes of the pro forma combined
statement of income.
The unaudited pro forma combined condensed financial statement
presents the combination of the historical financial statements
of ACCO Brands and GBC adjusted to (1) give effect to the
spin-off of ACCO Brands from its parent, Fortune Brands, and the
repayment of an aggregate of $625.0 million loan notes with
respect to the pre-spin-off special dividend to Fortune Brands
and ACCO Brands’ pre spin-off minority stockholder, and
(2) give effect to the merger of ACCO Brands and GBC.
The unaudited pro forma combined condensed financial statement
was prepared using (1) the audited Consolidated Statement
of Income of ACCO Brands for the year ended December 31,2005, and (2) the unaudited condensed consolidated
statement of income of GBC for the period from January 1,2005 to August 17, 2005.
Under the purchase method of accounting, the purchase price has
been allocated to the underlying tangible and intangible assets
and liabilities acquired based on their respective fair market
values, net of tax, with any excess purchase price allocated to
goodwill. ACCO Brands engaged independent consultants to
complete the appraisals necessary to arrive at the fair market
value of the assets and liabilities acquired from GBC and the
related allocations of purchase price.
The unaudited pro forma combined condensed financial statement
does not include the effects of the costs associated with any
restructuring or other integration activities resulting from the
merger. The unaudited pro forma combined condensed financial
statement does not include the realization of any cost savings
from operating efficiencies, synergies or other restructuring
activities which might result from the merger. The unaudited pro
forma combined condensed financial statement should be read in
conjunction with the separate historical consolidated financial
statements and accompanying notes of ACCO Brands and GBC that
are incorporated by reference herein.
The unaudited pro forma combined condensed financial statement
is not intended to represent or be indicative of the
consolidated results of operations of ACCO Brands that would
have been reported had the merger been completed as of the date
presented, and should not be taken as representative of the
future consolidated results of operations of ACCO Brands.
Unaudited
Pro Forma Combined Condensed Statement of Income
Twelve Months Ended December 31, 2005
GBC
Pro Forma
ACCO Brands
As Reported
Pre-Acquisition
Adjustments
Pro Forma
Income Statement
Data:
Net sales
$
1,487.5
$
449.5
$
—
$
1,937.0
Cost of products sold
1,048.0
322.5
—
1,370.5
Advertising, selling, general and
administrative expense
(a
)
307.0
113.8
1.1
421.9
Amortization of intangibles
(b
)
4.9
0.3
6.0
11.2
Restructuring charges
2.9
1.0
—
3.9
Operating income
124.7
11.9
(7.1
)
129.5
Interest expense, net
28.8
17.0
21.9
67.7
(c
)
—
—
(30.0
)
—
(d
)
—
—
48.6
—
(e
)
—
—
3.3
—
Other (income)/expense, net
—
(0.5
)
—
(0.5
)
Income/(loss) before income taxes,
minority interest and change in accounting principle
95.9
(4.6
)
(29.0
)
62.3
Income tax expense/(benefit)
(f
)
39.5
(0.2
)
(10.7
)
28.6
Minority interest
0.2
—
—
0.2
Net income(loss) before change in
accounting principle
$
56.2
$
(4.4
)
$
(18.3
)
$
33.5
Pro Forma income before change in
accounting principle per common share:
(g
)
Basic Shares Outstanding
41.5
10.8
52.3
Diluted Shares Outstanding
42.4
10.9
53.3
Basic income before change in
accounting principle per common share
$
1.35
$
0.64
Diluted income before change in
accounting principle per common share
$
1.32
$
0.63
Note: Certain reclassifications have been made to the
presentation of the GBC income statement in order to conform to
the presentation of the ACCO Brands and pro forma combined
condensed company income statements.
The accompanying notes are an integral part of these unaudited
pro forma combined condensed financial statements.
Represents amortization of unearned compensation related to
stock options and restricted stock units (RSUs), which did not
vest upon change of control (at merger date). The portion
related to stock options of $4.4 million is amortized over
the remaining vesting period of approximately four years. The
portion related to RSUs of $1.5 million is amortized over
the remaining vesting period of approximately two years.
(b)
Represents the amortization of the fair values of
$38.2 million, $10.5 million and $17.5 million
assigned to customer relationships, developed technology
intangibles and acquired tradenames, respectively. For the first
year, post acquisition amortization expense is expected to be
$7.3 million, $1.4 million and $0.8 million,
respectively. The amortization amounts per year for customer
relationships are weighted in accordance with the expected level
of benefit to be realized.
(c)
Reflects the reversal of interest expense and debt issuance
amortization related to pre-existing debt for each of ACCO
Brands and GBC. Prior to ACCO Brands’ spin-off from Fortune
Brands, the ACCO Brands financial statements reflected an
allocation of Fortune Brands interest expense. GBC debt was
repaid subsequent to the ACCO Brands merger with GBC.
(d)
Represents estimated annual interest expense of
$68.6 million based on current LIBOR rates and recognized
on the initial debt structure of the combined company totaling
$950.0 million.
(e)
Reflects amortization of capitalized debt issuance costs of
$25.9 million, which for the first year post acquisition is
expected to be $4.4 million. The amortization amounts per
year are weighted in accordance with the expected level of debt
outstanding.
(f)
Assumes estimated average effective income tax rate of 37% on
the sum of pre-tax adjustments of the combined company.
(g)
Pro forma outstanding shares are determined based on a share
exchange of one share of ACCO Brands common stock for each share
of GBC common stock or Class B common stock outstanding, as
identified in the terms of the merger agreement among ACCO
Brands, Fortune Brands and GBC.
On August 17, 2005, ACCO Brands, following its spin-off
from Fortune Brands, became the parent company of General
Binding Corporation, or 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.
We are one of the world’s largest suppliers 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 management products,
presentation aids and label products. We have leading market
positions and brand names, including
Day-Timer®,
Swingline®,
Kensington®,
Quartet®,
GBC®,
Rexel®
and Wilson
Jones®,
among others.
We also manufacture and market specialized laminating films for
book printing, packaging and digital print lamination, as well
as high-speed laminating and binding equipment targeted at
commercial consumers.
Our customers include commercial contract stationers, 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 announced the sale of the
Perma®
storage business during the third quarter of 2006, and the
discontinuance of the Kensington cleaning product category as of
the end of the first quarter of 2006, which together represent
approximately $40 million of annual net sales. These
actions are in addition to our previously stated intention to
adjust pricing or discontinue sale of approximately
$75 million of low margin SKU’s by the end of 2006.
(Presently, $25 million is currently planned to be dropped
from our product lines in January 2007. The remaining
$50 million is still under review.) 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 “Risk Factors.”
The following discussion of historical results includes the
consolidated financial results of operations for the former ACCO
World Corporation businesses for the six months ended
June 25, 2005 and year ended December 31, 2005, and
the financial results of operations for the former GBC business
from August 17, 2005 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 Brands 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 (FAS No. 141), “Business
Combinations,” which are described in more detail in
Note 3, Acquisition and Merger, in the Notes to
Consolidated Financial Statements contained in this prospectus.
The discussion of operating results at the consolidated level is
followed by a more detailed discussion of operating results by
segment on both a historical and an adjusted pro forma basis.
As more fully described in our 2005 annual report on
Form 10-K,
the financial statements for the six months ended June 25,2005 include a restatement of results affecting the previously
filed three-month and six-month periods ended June 25, 2005
for the cumulative effect of a change in accounting principle
related to the removal of a one-month lag in reporting by
several of our foreign subsidiaries. The change was made to
better align their reporting periods with our fiscal calendar.
Our comparative discussion below includes references to the
impact of a change in calendar days in comparison to the prior
year. During the third quarter of 2005, the financial reporting
calendar for our ACCO North American businesses was changed to a
calendar month end from the previous 25th day of the last
month of each quarterly reporting period. Our fiscal year end
calendar, previously ended December 27th, was also changed
to a calendar month end. The change was made to better align the
reporting calendars of ACCO Brands and the acquired GBC
businesses. As a result, our first six months ended
June 30, 2006 includes the results of one additional
calendar day in comparison to the prior year. It should be
understood, however, that the impact of this change is
influenced by a number of factors, including seasonality of the
business. In addition, our business segments have both gained
and lost sales revenues on a comparative basis, depending on the
impact of seasonality on each business segment. While the impact
of this change was not material to the overall business, the
impact of the change in calendar is included in the segment
discussions below where the impact is believed to be of use in
understanding the change in results.
Management’s discussion and analysis of financial condition
and results of operations should be read in conjunction with our
condensed financial statements and the accompanying notes
contained therein.
Overview
Our 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, as well as regional
competitors and against our own customers’ direct and
private label sourcing initiatives.
As much of our business is conducted in foreign markets
(approximately 46% of revenues for the fiscal year ended
December 31, 2005), foreign currency plays a major role in
our reported results. During both 2003 and 2004 the
U.S. dollar weakened relative to certain currencies. This
benefited us as the same amount of foreign (e.g., local)
currency units were translated into more U.S. dollars.
Additionally, the impact of the weakened U.S. dollar
benefited us in inventory purchase transactions made by our
foreign operations. Our foreign operations’ purchases of
outsourced products are primarily denominated in
U.S. dollars, and as a result their costs of goods sold
decreased as the value of the U.S. dollar has weakened.
However, in many of our foreign operations, market prices at
which we resell products have fallen reflecting lower relative
costs of sourcing from Asia. During the second half of 2005 the
U.S. dollar strengthened modestly relative to most
currencies, the effect of which on net sales was not material.
We have substantially completed our integration planning for the
Office Products Group, and have made significant progress
relocating our people, aligning our customer relationships and
toward upgrading
information technology systems. Since the beginning of 2006 we
have announced and moved ahead with plans to close, consolidate,
downsize, or relocate 21 manufacturing, distribution and
administrative operations. In addition, we have successfully
integrated key information technology systems in the United
States, Canada and Mexico, creating a common technology platform
for our office products businesses, and consolidated our
European office products sales force. Collectively, these
actions are expected to ultimately account for more than 85% of
our previously announced $40 million of targeted annual
cost synergies. In addition, we have initiated a more formal
review of the commercial businesses we acquired in the GBC
merger. This review will be completed in the second half of 2006.
Cash payments related to our restructuring and integration
activities have amounted to $13.4 million (excluding
capital expenditures) since January 1, 2006. It is expected
that additional disbursements will be made throughout 2006 and
2007 as we continue to implement phases of our strategic and
business integration plans. We have adequate cash facilities to
finance the anticipated requirements.
Net sales increased $380.7 million, or 69%, to
$931.2 million. The increase was principally related to the
acquisition of GBC.
Gross
Profit Margin
Gross profit increased $93.8 million to
$256.5 million, primarily as a result of the acquisition of
GBC. Gross profit margin decreased to 27.5% from 29.6%. The
decrease in gross profit margin was primarily due to increased
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
(advertising, selling, general and administrative
expenses)
SG&A increased $104.2 million to $217.1 million.
The increase was primarily attributable to the acquisition of
GBC. SG&A as a percentage of sales increased to 23.3% from
20.5%. The increase in SG&A margin is attributable to higher
marketing and selling investments to drive growth, significantly
higher cost related to expensing of equity based management
incentive programs, as well as infrastructure costs to support
our public company status, align our business model globally and
develop our European business model.
Our results of operations for the six months ended June 30,2006 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. We adopted
SFAS No. 123(R) effective January 1, 2006, using
the modified prospective method. Therefore, stock-based
compensation expense was recorded during the first half of 2006,
but the prior year consolidated statement of income was not
restated.
In December 2005, we issued an inaugural grant of stock options,
restricted stock units and performance stock units 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. We will
therefore have a larger charge related to the expensing of
equity awards for the next three years.
The following is a summary of the incremental impact of all
stock compensation expense and other long-term compensation
recorded during the first six months of 2006 and 2005, which
includes expenses related to grants of both stock options and
restricted stock units, along with the impact of the pre-tax
expense amounts as a percentage of sales.
Six Months Ended
Stock-Based and Other Long Term Compensation
June 30,
June 25,
Incremental
Historical Results
2006
2005
Expense
(In millions of dollars)
Expensing required under
SFAS No. 123(R)(a)
$
5.6
$
—
$
5.6
Previously required expensing(b)
4.0
—
4.0
Other non-equity based long term
compensation
(0.2
)
0.7
(0.9
)
Total long term executive
compensation
$
9.4
$
0.7
$
8.7
% of Sales
1.0
%
0.1
%
0.9
%
(a)
We have 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 No. 123, and unvested stock options/unearned
compensation related to GBC.
Refer to Note 2 for information specific to the adoption of
SFAS No. 123®
in the condensed consolidated financial statements.
Operating
Income
Operating income decreased $35.2 million, or 72%, to
$13.6 million, and decreased as a percentage of sales to
1.5% from 8.9%. The decrease was driven by lower gross margin
and higher SG&A margin as discussed above, and
$24.5 million of higher restructuring and
restructuring-related costs.
Interest,
Other Expense (Income) and Income Taxes
Interest expense increased $26.8 million, to
$30.7 million, as debt levels increased significantly in
order to finance the transactions related to the spin-off from
Fortune Brands and the merger with GBC. Other income increased
$3.7 million to $1.7 million, primarily due to a
foreign exchange gain in 2006 compared to a loss in 2005 and the
inclusion of our share of earnings in a GBC joint venture
investment.
Income tax for the first six months of 2006 was a benefit of
$5.6 million, compared to an expense of $17.4 million
in the same period of 2005. The effective tax rate for the six
months ended June 30, 2006 was 36.4% compared to 40.6% for
the six months ended June 25, 2005. Included in the first
six months of 2006 was a reduction in tax expense on non-US
income resulting from the Tax Increase Prevention and
Reconciliation Act of 2005 signed into law in May 2006. This
benefit was partially offset by the lower tax benefit associated
with restructuring and related charges recorded during the first
six months. The effective tax rate for the six months ended
June 25, 2005 was unfavorably impacted by the repatriation
expenses of foreign earnings no longer considered permanently
reinvested.
Net
Income (Loss)
Net income (loss) was $(9.9) million for the six months
ended June 30, 2006 compared to $28.8 million in the
six months ended June 25, 2005, and was significantly
impacted by lower operating income and increased interest
expense. Included in net income for the six months ended
June 30, 2006 were restructuring and restructuring related
non-recurring after-tax costs of $19.4 million, or
$0.36 per share. Similar expenses in the 2005 period were
$2.0 million or $0.06 per share.
We have 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 our Current Report on
Form 8-K
filed on February 14, 2006.
The following table presents ACCO Brands’ pro forma
combined results and the amounts of restructuring and
restructuring-related charges for the six months ended
June 30, 2006 and June 25, 2005.
Restructuring and
restructuring-related charges included in the results:
Restructuring costs
—
—
—
19.8
Restructuring-related expense
—
2.4
5.2
7.6
We have incurred a net total of $27.4 million in pre-tax
restructuring, restructuring-related and merger and integration
related expenses in the 2006 period. The charges were primarily
related to the closure or consolidation of facilities, primarily
in the United States and Europe, and associated employee
termination benefits.
Restructuring and
restructuring-related charges included in the results:
Restructuring costs
—
—
—
1.3
Restructuring-related expense
—
—
7.1
7.1
Pro
Forma Net Sales
Pro forma net sales increased $14.2 million, or 2%, to
$931.2 million. The increase was driven by volume growth
across all business segments, led by 10% growth in Computer
Products, 4% growth in Commercial-IPFG, and 3% growth in Other
Commercial. These increases were offset by a decrease in the
Office Products Group. Price increases contributed an additional
1% overall to our sales. The unfavorable impact of currency
translation reduced pro forma sales by 1%.
Pro
Forma Gross Profit/Margin
Pro forma gross profit decreased $7.8 million, or 3.0%, to
$256.5 million. Gross profit margin decreased to 27.5% from
28.8%. The decrease in gross profit margin was primarily due to
increased raw material and freight costs and an adjustment
related to slow-moving inventory, partially offset by sales
price increases. In
addition, unfavorable sales mix, including volume growth in
lower relative margin products, contributed to the decrease.
Pro
Forma SG&A (advertising, selling, general and administrative
expenses)
Pro forma SG&A increased $11.9 million, or 5.8%, to
$217.1 million and increased as a percentage of sales to
23.3% from 22.4%. The increase in relative SG&A was
attributable to higher marketing and selling investments to
drive growth, significantly higher cost related to expensing of
equity based management incentive programs, and infrastructure
costs to support our status as an independent public company,
align our business model globally and develop our pan-European
business model.
The following is a summary of the incremental impact of all
stock compensation expense and other long-term compensation
recorded during the first six months of 2006 and 2005, which
includes expenses related to grants of stock options, RSUs and
PSUs, along with the impact of pre-tax expense amounts as a
percentage of sales.
Six Months Ended
Stock-Based and Other Long Term Compensation
June 30,
June 25,
Incremental
Combined Companies (Pro Forma)
2006
2005
Expense
(In millions of dollars)
Expensing required under
SFAS No. 123(R)(a)
$
5.6
$
—
$
5.6
Previously required expensing(b)
4.0
2.5
1.5
Other non-equity based long term
compensation
(0.2
)
0.7
(0.9
)
Total long term executive
compensation
$
9.4
$
3.2
$
6.2
% of Sales
1.0
%
0.3
%
0.7
%
(a)
We have 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 No. 141 “Business
Combinations.”
Pro
Forma Operating Income
Operating income on a pro forma basis decreased
$38.7 million, or 74%, to $13.6 million, and decreased
as a percentage of sales to 1.5% from 5.7%. The decrease is
attributable to the $19.0 million increase in restructuring
and restructuring-related charges, and the lower gross margin
and higher SG&A expenses as discussed above.
Pro
Forma Net Income (Loss) Before Change in Accounting
Principle
Net income (loss) for the six months ended June 30, 2006
was $(9.9) million, or $(0.18) per share, compared to
$4.6 million, or $0.09 per share, before the change in
accounting principle in the six months ended June 25, 2005.
The decrease was attributable to the lower operating income
partially offset by lower effective income tax rate and interest
expense.
Office Products net sales increased $188.0 million, or 44%,
to $619.3 million. The increase was principally related to
the acquisition of GBC.
Office Products operating income declined $31.8 million, or
96%, to $1.3 million. The decrease resulted from higher
restructuring and restructuring related costs, as well as an
overall decline in operating margin due to higher raw material
and freight cost and unfavorable pricing.
The table below provides ACCO Brands’ pro forma segment
results and the amounts of restructuring and
restructuring-related charges to be excluded for comparison
purposes for the indicated periods.
Six Months Ended
June 30,
June 25,
Amount of Change
Combined Companies (Pro Forma)
2006
2005
$
%
(In millions of dollars)
Pro forma net sales
$
619.3
$
623.5
$
(4.2
)
(1
)%
Pro forma operating income
1.3
38.0
(36.7
)
(97
)%
Restructuring and related charges
23.4
3.3
20.1
NM
Pro forma net sales decreased $4.2 million, or 1%.
Adjusting for the impact of foreign currency translation, pro
forma net sales increased 1%. Growth in the United States,
Australia and Latin America was offset by a decline in European
operations. Excluding Europe, Office Products sales increased
2%. The decline in Europe was primarily related to sales to
retail customers in the United Kingdom and unfavorable pricing.
Office Products pro forma operating income declined
$36.7 million, or 97%, to $1.3 million including
restructuring and restructuring-related charges. Excluding the
adverse impact of restructuring and restructuring-related
charges of $20.1 million, the decline in operating profit
and margin was attributable to European operations, specifically
unfavorable pricing coupled with higher raw material costs, an
adjustment related to slow-moving inventory, increased
amortization, increased investments in SG&A to transition to
a pan-European business model, and lower sales in the United
Kingdom, primarily at retail.
Computer
Products Group
Six Months Ended
June 30,
June 25,
Amount of Change
Historical Results
2006
2005
$
%
(In millions of dollars)
Net sales
$
103.1
$
93.4
$
9.7
10
%
Operating income
14.8
21.0
(6.2
)
(30
)%
Operating income margin
14.4
%
22.5
%
—
(8.1
)%
Restructuring and related charges
$
1.3
—
$
1.3
100
%
Computer Products delivered strong sales growth for 2006,
increasing $9.7 million, or 10%, to $103.1 million.
The strong sales growth was driven by sales of
iPod®
accessories, mobile power adapters, notebook docking stations
and other computer accessory products. Sales increases were
partially offset by lower than historical rates in the second
quarter attributable to our planned exit from the cleaning
category and inventory reduction actions by two major customers.
Computer Products operating income decreased $6.2 million,
or 30%, to $14.8 million. Operating margins decreased to
14.4% from 22.5%, principally due a change in product mix,
higher product costs, planned increased investments in selling,
marketing and product development activities and restructuring
and restructuring-related charges of $1.3 million.
No pro forma information is provided for the Computer Products
segment as it was not impacted by the GBC acquisition.
The Industrial and Print Finishing Group, or IPFG, business was
contributed as part of the merger with GBC and was not merged
into an existing ACCO Brands segment; therefore, it is presented
on a standalone pro forma basis below.
Six Months Ended
Amount of Change
June 30,
June 25,
Combined Companies (Pro Forma)
2006
2005
$
%
(In millions of dollars)
Pro forma net sales
$
97.5
$
93.0
$
4.5
5
%
Pro forma operating income
9.7
6.6
3.1
47
%
IPFG pro forma net sales increased $4.5 million, or 5%, to
$97.5 million. Excluding the effects of unfavorable
currency, pro forma net sales increased 6%. Growth was driven by
improved sales from new product introductions (including some
initial stocking), higher volume reflecting normalized volumes
after soft demand in the fourth quarter of 2005 and increased
selling prices to recover raw material cost increases.
IPFG pro forma operating income increased $3.1 million, or
47%, to $9.7 million. Operating income margins also
improved to 9.9% from 7.1% in the prior year. The increase was
due to improved mix from new products and higher selling prices,
which more than offset the impact of higher raw material costs.
Other
Commercial
Six Months Ended
Amount of Change
June 30,
June 25,
Historical Results
2006
2005
$
%
(In millions of dollars)
Net sales
$
111.3
$
25.8
$
85.5
N/A
Operating income (loss)
5.9
(0.1
)
6.0
N/A
Operating income margin
5.3
%
(0.4
)%
—
5.7
%
Other Commercial net sales increased from $25.8 million to
$111.3 million. The acquisition of GBC’s Document
Finishing business accounted for $86.3 million of the
increase. Sales volumes at Day-Timers declined by
$0.8 million with lower sales in its reseller channels,
partially due to the change in calendar, offset in part by
higher direct-to — end-user catalog sales.
Other Commercial operating income increased $6.0 million to
$5.9 million. The acquisition of GBC accounted for
substantially all of the increase. Operating income within our
Day-Timers business was unfavorably impacted by the change in
the calendar.
On a pro forma basis net sales increased $4.2 million, or
4%. Unfavorable currency translation impacted pro forma sales by
1%. The increase was driven by higher sales of custom products
and higher pricing and servicing in the Document Finishing
business. This growth was partially offset by a 3% reduction in
sales, primarily related to the Day-Timers business, which was a
result of the change in calendar days for the comparative
periods.
Pro forma operating income increased $0.9 million, to
$5.9 million. The improvement in operating income and
margin primarily resulted from the recognition of
$1.2 million in inventory acquisition expense in 2005,
offset by higher sales of lower relative margin products in 2006.
Fiscal
2005 Versus Fiscal 2004
Years Ended
Amount of Change
December 31,
December 27,
Historical Results
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
)%
Net
Sales
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/Margin
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.
SG&A
(advertising, selling, general and administrative
expenses)
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
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 Brands 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 we determined would be realized against future
earnings.
Net
Income
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 our 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)
The presentation of (and supporting calculations related to)
the pro forma information contained in this Management’s
Discussion and Analysis is derived from our Report on
Form 8-K
dated February 14, 2006. Such pro forma financial
information has been prepared as though ACCO Brands and GBC 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.
Restructuring
and Restructuring-Related Charges
Management believes that an analysis of restructuring and
restructuring-related charges and their net impact on operating
income allow for a better understanding of the underlying
business performance from year to year. The following table
presents our pro forma combined results and the amounts of
restructuring and restructuring-related charges for the years
ended December 31, 2005 and December 27, 2004.
Restructuring and
restructuring-related charges included in the results:
Restructuring costs
—
3.9
Restructuring-related
expense/(income)
—
(1.3
)
19.6
18.3
We have incurred a net total of $22.2 million in merger and
integration related expenses, restructuring-related
expense/(income) and restructuring expenses in 2005. The charges
were primarily related to non-capitalizable costs associated
with the acquisition of GBC and with the spin-off from Fortune
Brands.
Restructuring and
restructuring-related charges included in the results:
Restructuring costs
—
—
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 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 Wheeling,
Illinois and St. Charles, Illinois facilities. SG&A
cost reduction programs and asset impairment charges in the
United States were also incurred in the prior year period.
Pro
Forma Net Sales
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/Margin
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.
Pro
Forma SG&A (advertising, selling, general and administrative
expenses)
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.
Pro
Forma Operating Income
Operating income on a pro forma basis decreased
$5.6 million, or 4.1%, to $129.5 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 $33.5 million, or $0.64 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/Margin 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.
Segment
Discussion
Office
Products Group
Years Ended
Amount of Change
December 31,
December 27,
Historical Results
2005
2004
$
%
(In millions of dollars)
Net sales
$
1,068.0
$
928.1
$
139.9
15
%
Operating income
84.3
64.6
19.7
31
%
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
Brands 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 our pro
forma segment results and the amounts of restructuring and
restructuring-related charges to be excluded for comparative
purposes for the indicated periods.
Years Ended
Amount of Change
December 31,
December 27,
Combined Companies (Pro Forma)
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 the former 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 2005. These
were partially offset by lower provisions for management
incentive bonuses in 2005.
Computer
Products Group
Years Ended
Amount of Change
December 31,
December 27,
Historical Results
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
)
—
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 our 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.
Commercial —
Industrial and Print Finishing Group
Years Ended
December 31,
December 27,
Amount of Change
Historical Results
2005
2004
$
%
(In millions of dollars)
Net sales
$
68.5
—
$
68.5
N/A
Operating income
4.4
—
4.4
N/A
Operating income margin
6.4
%
—
—
N/A
The Industrial and Print Finishing Group, or 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.
Years Ended
December 31,
December 27,
Amount of Change
Combined Companies (Pro Forma)
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
)
—
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
2005. 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 United States during the second half
of 2005.
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.
Other
Commercial
Years Ended
December 31,
December 27,
Amount of Change
Historical Results
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.
Years Ended
December 31,
December 27,
Amount of Change
Combined Companies (Pro Forma)
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
)
—
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.
Fiscal
2004 Versus Fiscal 2003
The following discussion of fiscal 2004 results compared to
fiscal 2003 relates to the legacy ACCO Brands businesses only,
and does not include the pro forma results of GBC.
Years Ended
December 27,
December 27,
Amount of Change
2004
2003
$
%
(In millions of dollars)
Net sales
$
1,175.7
$
1,101.9
$
73.8
7
%
Operating income
96.9
47.3
49.6
105
%
Net income
68.5
26.7
41.8
157
%
Net
Sales
Sales for fiscal year 2004 increased $73.8 million, or 7%,
to $1.18 billion. The increase was principally related to
favorable foreign currency translation ($54.6 million or
5%), higher sales in the Office Products
Group due to volume growth and new products including Wilson
Jones sheet protectors and binding and laminating machines and
Rexel business machines. In addition, increased sales volumes in
the Computer Products Group included new product introductions
of Kensington mobile computer accessories. These factors were
partially offset by increased customer programs due to the
consolidation of major customers and competitive pricing.
Restructuring
and Restructuring-Related Charges
Fiscal year 2004’s results were impacted by restructuring
charges totaling $19.4 million and restructuring-related
charges of $18.2 million. Fiscal year 2003’s results
were impacted by restructuring charges totaling
$17.3 million and restructuring-related charges of
$19.1 million. Management believes that comparative review
of operating income before restructuring and
restructuring-related charges allows for a better understanding
of the underlying businesses’ performance and trends.
The following tables provide a comparison of our reported
results and the amounts of restructuring and
restructuring-related charges for years 2004 and 2003.
Restructuring and
restructuring-related charges included in reported results:
Restructuring costs
—
—
—
17.3
Restructuring-related expense
—
9.8
9.3
19.1
Gross
Profit/Margin
Gross profit in 2004 increased $42.1 million, or 13%, to
$365.4 million and the gross profit margin increased to
31.1% from 29.3%. The increase in gross profit was driven by
favorable foreign currency translation, decreased
restructuring-related costs, and the continued benefits of
restructuring actions implemented throughout the 2003 to 2004
period, including facility closure and supply chain realignment
initiatives. Sales growth in higher relative margin product
categories in the Computer Products Group, and the favorable
impact of foreign exchange on purchases by foreign operations,
also contributed to the improvement.
SG&A
(advertising, selling, general and administrative)
SG&A expense increased $2.8 million, or 1%, to
$247.8 million in 2004, but decreased as a percentage of
sales to 21.1% from 22.2%. Included in SG&A were
restructuring-related charges as identified above. The
underlying decrease in SG&A was driven by continued cost
reductions generated by previously implemented restructuring
programs in the Office Products Group. These factors were partly
offset by higher incentive plan accruals.
Operating income increased $49.6 million, or 105%, to
$96.9 million in 2004 and increased as a percentage of
sales to 8.2% from 4.3%. The negative impact of restructuring
and restructuring-related charges was more than offset by
significant volume growth in the Computer Products and Office
Products Groups, a favorable change in product mix to higher
relative margin products, the benefits of previously implemented
restructuring programs, including facility closure and supply
chain realignment initiatives, and the favorable impact of
foreign exchange on translation.
Interest,
Other Expense/(Income) and Income Taxes
Interest expense increased $0.5 million to
$8.5 million in 2004. Other expense (income) increased
$0.6 million to ($1.2) million in fiscal 2004,
primarily due to earnings from joint ventures. The effective tax
rate for 2004 was 23.5% compared to 33.1% in 2003. The 2004
effective tax rate was lower due to the reversal of a deferred
tax asset valuation allowance which management determined would
be realized following the improved results of certain European
operations after completion of their restructuring activities,
and the reversal of reserves for items resolved more favorably
than anticipated.
Net
Income
Net income increased $41.8 million, or 157%, to
$68.5 million in 2004 due to increased operating income and
favorable income tax adjustments.
Segment
Discussion
Office
Products Group
Years Ended
December 27,
December 27,
Amount of Change
2004
2003
$
%
(In millions of dollars)
Net sales
$
928.1
$
882.4
$
45.7
5
%
Operating income
64.6
31.5
33.1
105
%
Operating income margin
7.0
%
3.6
%
—
3.4
%
Restructuring and
restructuring-related charges
36.9
30.2
6.7
22
%
Sales in 2004 increased $45.7 million, or 5%, to
$928.1 million. The increase was driven by favorable
foreign currency translation of $49.1 million, as well as
volume growth and the introduction of new products, including
Wilson Jones sheet protectors and binding and laminating
machines, Swingline stapling products and Rexel business
machines. This was partly offset by increased customer programs
due to the merger of major customers, competitive pricing and
changes in sales volume levels.
Operating income increased $33.1 million, or 105%, to
$64.6 million in 2004, reflecting higher gross profit
levels and significantly reduced administrative expenses as a
percentage of sales. Cost improvements were achieved through
previously implemented restructuring programs, favorable
currency translation, and the favorable impact of foreign
exchange on certain foreign purchase transactions. Favorable
product mix due to higher relative margin products also improved
operating income levels. Increased customer programs and
increased restructuring-related charges partially offset the
year-over-year
operating income growth.
Sales for 2004 increased $31.6 million, or 23%, to
$169.6 million. New product introductions, demand-driven
robust volume growth, foreign currency translation and the
favorable outcome of certain intellectual property litigation
all contributed to the increase. Computer security products and
the introduction of mobile computer accessories were the
principal drivers of the growth.
Operating income increased $11.6 million, or 56%, to
$32.3 million, reflecting increased gross profit levels
from the sales growth and increased royalty income. In addition,
decreased SG&A expenses as a percentage of sales were the
result of increased sales volumes, thereby leveraging the
previous year’s investments in marketing and product
development.
Other
Commercial(a)
Years Ended
December 27,
December 27,
Amount of Change
2004
2003
$
%
(In millions of dollars)
Net sales
$
78.0
$
81.5
$
(3.5
)
(4
)%
Operating income
10.9
11.3
(0.4
)
(4
)%
Operating income margin
14.0
%
13.9
%
—
0.1
%
Restructuring and related charges
0.7
—
0.7
N/A
(a)
Substantially includes our previously reported Day-Timers
segment.
Sales in 2004 decreased $3.5 million, or 4%, to
$78.0 million. The decrease was driven by customer
attrition in the Day-Timers direct channel and exiting the mass
market channel, partly offset by share gains in the office
superstores.
Operating income decreased $0.4 million, or 4%, to
$10.9 million in 2004 due to lower sales partially offset
by reduced administrative costs as we executed our strategy to
minimize costs and investments in the more mature Day-Timer
planners business.
Liquidity
and Capital Resources
Our primary liquidity needs are to fund capital expenditures,
service indebtedness 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 our former parent. See “Capitalization”
below for a description of our debt.
Cash provided by operating activities was $30.5 million for
the six months ended June 30, 2006 and cash used was
($1.4) million for the six months ended June 30, 2005.
Net income (loss) in 2006 was $(9.9) million,
or $38.7 million less than 2005. Non-cash adjustments to
net income were $39.7 million in 2006, compared to
$14.5 million in 2005, on a pre-tax basis.
Principal cash items favorably affecting operating activities
included:
•
Higher accounts payable as we benefited from later timing of
inventory purchases compared to the prior year, extended payment
terms, improved inventory management and other cash management
initiatives.
•
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 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:
•
Higher inventory levels resulted from the seasonal back to
school build, as well as lower than expected second quarter 2006
sales mainly in Computer Products and in European Office
Products. The timing of receipt for inventories sourced by us
(instead of manufactured), coupled with increased raw material
and other product input costs, have also increased inventory
values.
•
Lower cash collections from accounts receivable resulting
principally from the resolution of 2004 customer billing delays,
which benefited the first quarter of 2005.
•
Higher payments for customer programs resulting from enhanced
programs (customer consolidation & competitive
pricing), including such programs associated with pre-merger GBC.
•
Payments associated with acquisition related interest expense.
Cash Flow
from Investing Activities
Cash used by investing activities was $10.0 million in 2006
and $13.5 million in 2005. Gross capital expenditure was
$12.1 million and $13.3 million in 2006 and 2005,
respectively; both years include substantial investment in
enhanced information technology systems. The 2006 period
includes cash distributions received from our investments in
unconsolidated subsidiaries of $1.3 million.
Cash Flow
from Financing Activities
Cash used by financing activities was $72.6 million in
2006. During the 2006 six month period, we paid all of the
required fiscal 2006 debt service of $24.7 million and paid
down an additional $55.0 million of the Senior Secured Term
Loan Credit Facilities. We expect to pay down additional
debt during the remainder of the year. Cash provided by
financing activities in 2005 of $39.0 million was
principally related to funding provided by our former parent,
Fortune Brands.
Fiscal
2005 Versus Fiscal 2004
Cash Flow
from Operating Activities
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 United States following our 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, we contributed a supplemental $22.0 million to our
ACCO U.K. pension fund, which did not recur in 2005.
Cash Flow
from Investing Activities
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 our Wheeling, Illinois and St.
Charles, Illinois plants, and our University Park, Illinois
distribution center (all closed under our restructuring program).
Cash Flow
from Financing Activities
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 our shareholders as of
August 16, 2005, and the repayment of $293.6 million
of debt assumed in the merger with GBC.
Fiscal
2004 Versus Fiscal 2003
Cash Flow
from Operating Activities
Cash provided by operating activities was $64.9 million and
$67.7 million for the fiscal years ended 2004 and 2003,
respectively. While 2004 net income increased $41.8 million
year over year, 2003 net income included an $8.0 million
non-cash write-off (net of tax) of identifiable intangibles.
Other principal items impacting the change were:
•
Higher accounts payable generated $16.6 million more cash
in 2004 than in 2003 driven by extended vendor payment terms and
the later timing of inventory purchases in the fourth quarter of
2004.
•
Increased customer program accruals at 2004 year end (to be paid
in 2005) on higher achievement of volume targets compared to
2003, which added to cash retained in 2004.
•
Higher accounts receivable at year end 2004 used
$57.8 million more cash than in 2003, as the result of
higher fourth quarter sales, customer billing delays in the
United States following the Oracle systems implementation (which
delayed receipt of some payments to the first quarter of 2005),
and the adverse impact of extended payment terms due to customer
consolidations.
•
Additional pension contributions of $22.0 million in 2004,
and $16 million in 2003, were made to the U.K. pension fund.
Cash Flow
from Investing Activities
Cash used by investing activities was $6.1 million and
$1.7 million for the fiscal years 2004 and 2003,
respectively. Gross capital expenditure was $27.6 million
and $16.3 million, for the fiscal years 2004 and 2003,
respectively. The increase in capital expenditure in 2004 was
largely due to costs associated with the implementation of
Oracle systems modules in the United States. Further, capital
spending in recent years was suppressed as we placed focus on
restructuring-related initiatives, including the overall
reduction of our facility footprint. Capital expenditure was
partly offset by proceeds, principally from the sale of
facilities, of
$21.5 million and $14.6 million for the fiscal years
2004 and 2003, respectively. In 2004, proceeds were generated
primarily from the sale of our Wheeling, Illinois and St.
Charles, Illinois plants and our University Park, Illinois
distribution center. In 2003, proceeds were substantially
related to the sale of one manufacturing plant in Nogales,
Mexico and the sale of our former European headquarters facility
in the U.K.
Cash Flow
from Financing Activities
Cash used by financing activities was $46.5 million and
$57.3 million for the fiscal years 2004 and 2003,
respectively. The change in this account is substantially due to
reduced working capital requirements, which resulted in an
increase to the “inter-company cash receivable”
balance from ACCO Brands’ former parent. In ACCO
Brands’ historical financing structure, Fortune Brands
secured and provided nearly all credit facilities and swept the
majority of the ACCO Brands’ cash accounts, and therefore
its cash generation, on a daily basis.
Capitalization
Approximately 52.2 million shares of the our common stock,
par value of $0.01 per share, were issued in connection
with the distribution of all outstanding shares of ACCO Brands
held by Fortune Brands to its stockholders and our merger with
GBC (see further discussion in Notes 3, 5 and 11 to our
Consolidated Financial Statements contained in this prospectus).
We had approximately 52.8 million common shares outstanding
as of December 31, 2005.
Our total debt at June 30, 2006 and at December 31,2005 was $873.1 million and $941.9 million,
respectively. The ratio of our debt to stockholders’ equity
at June 30, 2006 and at December 31, 2005 was 2.2 to 1
and 2.3 to 1, respectively.
In conjunction with the spin-off of ACCO Brands to the
shareholders of Fortune Brands and the GBC merger, we issued
$350 million in senior subordinated notes with a fixed
interest rate of 7.625% due 2015. Additionally, we, our
Day-Timers, Inc. subsidiary and two of our foreign subsidiaries
located in the United Kingdom and in the Netherlands have
entered into the following new 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 sublimit)
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 net proceeds of the senior subordinated notes issue,
together with borrowings under the new senior secured credit
facilities and cash on hand were used to finance the repayment
of special dividend notes issued by ACCO World to its
stockholders, repay existing indebtedness of GBC and ACCO World
and fund fees and expenses related to the note offering.
The senior secured credit facilities are guaranteed by all of
our domestic subsidiaries (which we refer to as
U.S. guarantors) and secured by substantially all of the
assets of the borrowers and each U.S. guarantor.
We must meet certain restrictive financial covenants as defined
under the senior secured credit facilities. The covenants become
more restrictive over time and require us to maintain certain
ratios related to total leverage and interest coverage. The
financial covenant ratio levels under the senior secured credit
facilities are as follows:
Maximum — Leverage
Minimum — Interest
Ratio(1)
Coverage Ratio(2)
4th Quarter 2005 to
3rd Quarter 2006
5.00 to 1
2.75 to 1
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 our 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 our EBITDA for
such period divided by our cash interest expense 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 our 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, our ability, and the
ability of our 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 June 30, 2006, the amount available for borrowings
under the revolving credit facilities was $142.5 million
(allowing for $7.5 million of letters of credit outstanding
on that date).
As of and for the period ended June 30, 2006, we were in
compliance with all applicable covenants. On February 13,2006 we entered into an amendment to our senior secured credit
facilities waiving any default that may have arisen under those
facilities as a result of the restatement of our financial
statements as described in Note 1 of the December 31,2005 Consolidated Financial Statements contained in this
prospectus.
Adequacy
of Liquidity Sources
We believe that our internally generated funds, together with
revolver availability under our senior secured credit facilities
and our access to global credit markets, provide adequate
liquidity to meet both our long-term and short-term capital
needs with respect to operating activities, capital expenditures
and debt service requirements. Our existing credit facilities
would not be affected by a change in our credit rating.
Off-Balance-Sheet
Arrangements and Contractual Financial Obligations
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.
Our contractual obligations and related payments by period at
December 31, 2005 were as follows:
After 5
Total
Year 1
Years 2-3
Years 4-5
Years
(In millions of dollars)
Contractual obligations
Long-term debt and capital lease
obligations
$
941.9
$
30.1
$
73.6
$
109.2
$
729.0
Interest on long-term debt(1)
463.0
60.6
117.0
106.6
178.8
Operating lease obligations
131.8
27.5
39.8
27.9
36.6
Purchase obligations(2)
94.5
92.4
1.8
0.3
—
Other long-term liabilities(3)
5.1
5.1
—
—
—
Total
$
1,636.3
$
215.7
$
232.2
$
244.0
$
944.4
(1)
Interest expense calculated at December 31, 2005 rates for
variable rate debt.
(2)
Purchase obligations primarily consist of contracts and
noncancellable 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.
Critical
Accounting Policies
Our financial statements are prepared in conformity with U.S.
generally accepted accounting principles. 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.
Revenue
Recognition
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.
Allowances
for Doubtful Accounts and Sales Returns
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.
Inventories
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
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
Long-Lived
Assets
In accordance with Statement of Financial Accounting Standards
No. 144 (FAS 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. During 2004, and in
previous years, provisions were established for certain assets
impacted by restructuring activities. 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.
Intangibles
In accordance with Statement of Financial Accounting Standards
No. 142 (FAS 142), “Goodwill and Other
Intangible Assets,”goodwill and 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 of the reporting unit
below the carrying value.
In addition, FAS 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 FAS 142.
In conjunction with our ongoing review of the carrying value of
identifiable intangibles, in the years 2004 and 2005, there were
no write-downs of intangible assets. In 2003, we recorded a
non-cash write-down of identifiable intangibles of
$12.0 million ($8.0 million after tax) to recognize
the diminished values of identifiable intangibles resulting from
the repositioning of our Boone and Hetzel businesses.
Goodwill
We test the goodwill for impairment at least annually and it is
required to be tested 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. At June 30, 2006, we believe that
no event or circumstance has occurred or exists since the
August 17, 2005 acquisition of GBC to indicate that the
carrying value of goodwill of $443.2 million exceeds fair
value.
Employee
Benefit Plans
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 generally
accepted accounting principles, 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 United States generally accepted accounting
principles, 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, 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 post-retirement expenses
in 2005, 2004 and 2003 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, 2005 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 $8.2 million, $7.9 million and
$4.9 million, respectively, in the years ended
December 31, 2005 and December 27, 2004 and 2003.
Post-retirement expenses (income) were ($0.2) million,
($0.7) million and $0.1 million, respectively, in the
years ended December 31, 2005 and December 27, 2004
and 2003. In 2006, we expect pension expense of approximately
$8.7 million and post-retirement expense of approximately
$0.6 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 $1.7 million for
2006. 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 $0.9 million for 2006.
Customer
Program Costs
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).
Income
Taxes
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.
Recent
Accounting Pronouncements
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.
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 Value
Assumption
Assumption
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 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 implementation of this interpretation is
not expected to have a material effect on our 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 is not expected to have a material
effect on our consolidated financial statements.
In May 2005, the FASB issued FAS No. 154,
“Accounting Changes and Error Corrections — a
Replacement of APB Opinion No. 20 and FASB Statement
No. 3” (FAS 154). FAS 154 changes the
requirements for the accounting for, and reporting of, a change
in accounting principle. FAS 154 requires that a voluntary
change in accounting principle be applied retrospectively with
all prior period financial statements presented using the new
accounting principle. FAS 154 is effective for accounting
changes and corrections of errors in fiscal years beginning
after December 15, 2005. We will apply the requirements of
FAS 154 on any changes in principle made on or after
January 1, 2006.
On August 16, 2005, Fortune Brands then our majority
stockholder, completed its spin-off of ACCO Brands by means of a
pro rata 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, we became an
independent, separately traded public 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, by and among Fortune Brands, ACCO Brands,
Gemini Acquisition Sub, Inc., a wholly owned subsidiary of ACCO
Brands and General Binding Corporation, or GBC, Gemini
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 Gemini Acquisition
Sub common stock was converted into one share of GBC common
stock. As a result of the merger, the separate corporate
existence of Gemini Acquisition Sub ceased and GBC continues as
the surviving corporation and a wholly owned subsidiary of ACCO
Brands.
We are 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, 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
$1.9 billion in pro forma 2005 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.
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.
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
combination with GBC. We believe there are significant potential
savings opportunities from the acquisition of GBC, arising from
potential cost reductions attributable to efficiencies and
synergies to be derived from facility integration, headcount
reduction, supply chain optimization and revenue enhancement. As
a result of this transaction, our near-term priorities for the
use of cash flow will be to fund integration and
restructuring-related activities and to pay down
acquisition-related debt.
Industry
The office products industry in our principal markets is a
mature industry comprised of a broad range of supplies,
equipment and furniture that are commonly found in a typical
office setting, as well as in schools and homes. We estimate
that the office products industry in North America, Europe and
Australia is approximately $100 billion annually. Based on
our estimates, we believe that the portion of this market in
which we compete (including supplies, computer accessories and
binding and laminating equipment) is approximately
$15 billion annually.
Key
Factors and Trends Affecting Industry Demand
Historically, demand for office products in the United States
has closely tracked trends in white-collar employment levels,
gross domestic product (GDP) and, more recently, the growth of
small businesses and home offices. We believe that demand in our
addressable market generally is driven by the same factors as
those affecting the broader office products industry,
particularly trends in the office market segment of the office
products industry.
White-Collar Employment Levels. As most
developed market economies have shifted from manufacturing to
service based economies, the number of white-collar office
workers has grown which has contributed to growth in the overall
office products industry. Service industries are expected to
continue to account for a significant portion of future job
growth. Demand for office products is also believed to be driven
by the proliferation of paper in the office created by a range
of machines including printers, faxes and copiers, as well as
the ease by which information and documents may be shared
through electronic mail and overnight couriers. Some studies
project that consumers may shift toward relying on electronic
mediums, particularly electronic storage; however, studies also
show that most people still print
e-mails and
find it easier to read information on paper.
Trends in GDP. U.S. GDP grew by 3.9% in
2004 and 3.2% in 2005. European GDP grew by 2.3% in 2004 and
1.7% in 2005. According to the School, Home & Office
Products Association (SHOPA), which covers the office products
industry in the United States, the school and office products
industry grew at a rate of approximately 3.3% in 2004, with 2005
growth estimated at 3.5%.
Growth in Small Businesses and Home
Offices. Growth in the number of small businesses
and home offices, which SHOPA refers to as the home environment,
has been recognized as a major industry trend affecting growth
in the office products markets. Increased worker mobility and
the creation of secondary home offices has led to more temporary
filing and increased demand for the products in our addressable
market. The growth of small businesses is estimated by the
U.S. Small Business Administration to generate between 60%
and 80% of U.S. jobs annually, which has positive effects
on industry demand for office products. Office products
superstores and mass merchandisers and retailers are the main
distribution channels for this market, contributing to the
growing importance of retail distribution channels. SHOPA
estimates that sales in the home environment represented
approximately $112 billion, or 36%, of total
U.S. industry sales in 2004, and grew approximately 3% over
the prior year.
In other geographic regions in which we compete, notably Canada,
Mexico, Europe and Australia, we believe trends in a
country’s gross national product, white-collar employment
levels and small business and home office growth will impact the
demand for office products in a manner similar to how those
trends affect the industry in the United States.
The industry is also characterized by the emergence of office
products channel consolidators, such as Office Depot, Staples
and OfficeMax, which distribute products to their customers
through multiple distribution channels (e.g., contract
stationer, retail, mail order and Internet). The rapid growth of
these chains, which represent some of our largest customers, has
contributed to increased consumer awareness of office products
and has improved the negotiating power of these chains with
suppliers. We believe consolidation is further along in North
America than in Europe but will accelerate in Europe. As channel
consolidation accelerates in these areas, we anticipate that a
number of the smaller, regional office products suppliers that
lack premium product offerings, product innovation capabilities,
or adequate size, scope and geographic presence will be acquired
or forced to consolidate.
Additionally, large chains and other companies increasingly seek
to source and sell products under their own private label
brands. Private label products typically emerge in lower to
middle price point items or in commodity-type categories. In
contrast, we believe that higher priced, innovative premium
brands are more likely to be driven by one or two recognized
national brands and by large premium brand suppliers. Although
private label office products typically target a different end
of the market as compared to premium office products, private
label office products remain largely dependent on premium office
products to increase consumer awareness of the entire product
category, making premium office products suppliers even more
important to these large chains and other private label
retailers. Pricing and demand levels for office products also
have reflected a substantial consolidation within global
resellers of office products. As the office products industry
continues to consolidate, it becomes increasingly important for
office products suppliers to have sufficient scale in a category
(often requiring wider geographic presence) to invest in product
innovation and marketing that can provide a consumer
trade-up
strategy and a price umbrella for customer private label
strategies.
Distribution
Channels
Key distribution channels in the office products industry
include:
Commercial Contract Stationers. Most large
commercial end-users buy a broad range of office products in
bulk from a commercial contract stationer through a contract
purchasing system. These commercial contract stationers
typically generate most of their revenues from their commercial
contract stationery operations, but also typically distribute
office products through many of the other distribution channels
described below.
Mail Order Distributors. Mail order
distributors sell office product supplies through catalogues
mailed to potential customers. They have sophisticated marketing
research and target marketing programs.
Retail Office Products Superstores. Office
products superstores carry thousands of different office
products and sell brand name and private label products at
attractive prices and are primarily targeted at small businesses
and the home office and school consumers.
Dealers and Buying Groups. Independent office
products dealers have joined together to form large and
geographically dispersed buying groups to effectively compete
against the larger commercial contract stationers. These groups
increase their buying power through negotiated purchasing
programs covering a full range of office products.
Wholesalers. Wholesalers sell a broad range of
different manufacturers’ office products to independent
office products dealers and contract stationers, national
mega-dealers, office products superstores, computer products
resellers, office furniture dealers, mass merchandisers, mail
order companies, sanitary supply distributors, drug and grocery
store chains, and
e-commerce
merchants.
Mass Retailers. Mass retailers sell a limited
range of high volume office supplies, particularly consumable
products that represent a small portion of such store’s
total volume. This distribution base is growing in its
significance in the office products industry.
Club Stores. Similar to mass retailers, club
stores sell a limited range of high volume office supplies,
particularly consumable products that represent a small portion
of such store’s total volume. These stores
typically require annual memberships, including membership
programs targeted to small businesses, and represent an
increasing portion of sales of office products.
School Suppliers. School suppliers represent a
largely seasonal segment of the office products industry, with
smaller retailers prevalent in North America and larger,
wholesale channels prevalent in Europe where school supplies
purchasing tends to be more centralized.
The principal market participants in each of the above
distribution channels are identified below:
We were spun off from Fortune Brands, Inc. on August 16,2005, and acquired General Binding Corporation on
August 17, 2005. The acquisition significantly expanded our
size and scale, increasing pro forma 2004 revenues over
historically reported 2004 revenues by more than 60%, and
strengthened our presence across our principal geographic
markets.
We have identified approximately $40 million in expected
annual cost synergies once the integration of GBC is completed.
We expect these synergies to result from our shared operating
expense platform of distribution, information technology,
certain marketing and sales functions and other administrative
services. We also expect synergies from the rationalization of
product offerings and our emphasis on improvements in supply
chain and other operating efficiencies. Since our acquisition of
GBC, we have announced 21 facility closures and consolidations
and have combined our office products sales forces.
These actions are expected to account for approximately 85% of
the targeted cost synergies. Our current senior management team
is experienced in improving operating efficiencies, having led
the former ACCO World in a turnaround from 2001 through the
first half of 2005. During this time, we improved operating
margins from (7)% in 2001 to 11% for the twelve-month period
ended June 25, 2005. Restructuring and
restructuring-related charges, including the write down of
certain intangibles, negatively impacted the operating margins
by 10% and 1% for 2001 and the twelve-month period ended
June 25, 2005, respectively. In addition to the targeted
cost savings, we believe that our focus on premium brands, our
ability to innovate and rejuvenate existing brands and the
complementary nature of the brand and product portfolios of the
combined companies will all contribute to increased top-line
growth.
Competitive
Strengths
Portfolio of Leading Commercial and Consumer
Brands. We have leading market share positions in
a number of product categories in which we compete. Our leading
positions enable us to generate sufficient revenue and cash flow
to support ongoing innovation in our products, which is
necessary to maintain and enhance our market position in our
premium brands and to enhance our market position in other
brands. Approximately 83% of our $1.9 billion in pro forma
2005 net sales came from brands that occupy the number one
or number two positions in the select markets in which we
compete. Our Swingline stapling and punch products are the
market share leaders in North America, and our GBC binding and
laminating equipment and
supplies and Kensington computer security products are the
market share leaders globally. We are the global leader in
dry-erase boards and easels (visual communication) using the
Quartet brand in North America and NOBO brand in Europe. Other
brands that are generally leaders in their respective categories
and provide us with an industry-leading global product mix
include:
•
Rexel in stapling and punching in United Kingdom and Ireland;
•
Rexel and Ibico in binding and laminating in Europe;
•
Apollo and NOBO in overhead projector presentation products;
•
regional brands Wilson Jones, Rexel, Eastlight, Marbig and Dox
in storage and organization; and
•
Day-Timer in time management products.
In addition, several of our brands, including Swingline and
Day-Timer, have among the highest unaided consumer awareness in
the office products industry. As we continue to invest in
innovation and marketing and consolidate our premium brand
names, we expect them to become stronger in the marketplace.
Scale Player in a Global Industry. As one of
the world’s largest suppliers of branded office products,
we enjoy significant economies of scale. The global office
products industry continues to consolidate, with an increasing
share of the distribution of office products represented by
channel consolidators such as Office Depot, Staples and
OfficeMax. As office products resellers continue to consolidate
the distribution of office products both within and across
multiple channels, it becomes increasingly important for office
products suppliers to have sufficient breadth and depth of
premium product offerings, size, scope, and geographic presence,
all of which make them more important participants in the office
products industry. The resellers of office products are
dependent on suppliers to improve total industry sales through
continuous product innovation. We believe that the breadth,
depth, premium stature and brand recognition of our product
offerings, when combined with our size, scope and geographic
presence, position us well to succeed in the consolidating
office products industry.
Innovation and Product Development. As a
leading innovator in our industry, we believe that product
innovation maintains and enhances the premium nature of many of
our products. Additionally, we find that consumers will
transition to higher price points when introduced to products
with innovative features or benefits. The profit margins we
derive from sales of our premium brands generate sufficient cash
flow to enable us to make substantial investments in product
innovation. For example, in 2004 the former ACCO World generated
in excess of 30% of its net sales from products and line
extensions introduced in the preceding 36 months. Since
acquiring GBC, we have sought to apply a similar emphasis on
increased innovation and product development to GBC’s
product categories.
Global Platform with Diverse Revenue Base. We
have a wide geographic footprint, with pro forma 2005 net
sales of 62%, 27% and 7% in North America, Europe and Australia,
respectively. Our diverse product lines let us reach a broad
array of customers worldwide, while limiting our exposure to
economic downturns in specific regions or industries. We believe
that our customers wish to deal with fewer suppliers overall
and, in particular, with suppliers that effectively support a
consumer driven marketing and merchandising strategy with
innovative products at acceptable price and service levels. We
also believe that our sales are well-balanced by product,
channel and customer. Our four segments — Office
Products Group, Computer Products Group, Commercial —
Industrial Print Finishing Group and Other
Commercial — accounted for 67%, 11%, 9% and 13%,
respectively, of our pro forma 2005 net sales. We have a
significant presence in the indirect sales channel through our
Office Products and Computer Products Groups, and a significant
presence in the direct sales channel through the products we
sell in the Other Commercial segment. Our ten largest customers
accounted for 49% of our pro forma 2005 net sales, with our
largest customer, Office Depot and its related entities,
accounting for 13% of our pro forma 2005 net sales.
Consumer-focused, Scalable Business Model. We
organize our product development and
go-to-market
strategies around distinct consumer categories, as each has
unique and distinct marketing and product needs. We operate
separate profit-responsible business units to focus on and
address the key consumer and customer needs of each category.
This structure enables each of our business units to move
independently to best
position itself within the market categories in which it
competes. However, these business units use a shared operating
expense platform to gain economies of scale across distribution,
freight, administration, information technology and some selling
and marketing functions. Our shared operating expense model also
allows us to more easily and cost-effectively integrate the
operations of acquired businesses, as we are able to
“plug” these businesses directly into the platform.
Low-cost Operating Model. We emphasize
operating efficiencies in the conduct of our business. Our
low-cost operating model is based on a consumer-focused business
unit model balanced with a flexible supply chain and
efficiencies realized from our shared operating expense
platform. Through our flexible supply chain, products are
manufactured or sourced in a manner we believe will provide our
customers with appropriate customer service, quality products,
innovative solutions and attractive pricing. We seek to
manufacture products for which the freight and distribution
expense or service needs are relatively high while typically
sourcing other products that have relatively high direct labor
costs. By using a combination of manufacturing and third-party
sourcing, we can reduce our costs and effectively manage
production assets, thereby minimizing our capital investment and
working capital requirements. For the pro forma 2005 fiscal
year, approximately 58% of our cost of product was from goods we
manufactured in proximity to our markets (either in North
America or in Europe) and approximately 42% was from products
sourced primarily in Asia. Our shared operating expense platform
enables each of our business units to benefit from economies of
scale across various shared expenses and also facilitates the
efficient integration of acquired businesses. We continue to
integrate GBC’s businesses into our lower-cost supply
chain, balanced manufacturing and outsourcing approach, and
shared operating expense platform.
Strong Cash Flow Generation. The former ACCO
World historically generated significant cash flow from
operating activities. In the fiscal years 2001 through 2004 cash
flow from operating activities totaled $449 million. Our
strong cash flow has allowed us to pay down $85 million of
indebtedness since our spin-off from Fortune Brands in August
2005. We believe our restructuring initiatives, our recent
acquisition of GBC, and our overall business model position us
to derive increased cash flow from operations. Our business
requires limited capital expenditures, and we have been able to
reduce our capital investment and working capital requirements
by utilizing a combination of company manufacturing and
outsourcing. In addition, we expect annual cost savings from the
integration of GBC, after our costs to implement these
synergies, to further enhance our free cash flow generation
capabilities. We believe that our ability to generate
substantial cash flow from operations, combined with our
anticipated capital expenditure requirements, will provide us
sufficient financial flexibility to pursue a range of corporate
initiatives, including paying down debt and funding any future
acquisitions.
Strong, Experienced and Incentivized Management
Team. We are led by an experienced management
team of executive officers and business unit leaders with a
track record of strong operating performance, business process
reengineering and restructuring, consumer focus and product
innovation. Our business is additionally supported by strong
geographic, product and customer focused management with
significant industry experience. As a result of the previous
ACCO World business restructuring initiated in 2001 by certain
members of our current management team, we generated
$449 million in cash flow from operating activities over
the 2001 to 2004 period, after fully funding the restructuring
effort. Our restructuring efforts also improved operating
margins from (7)% in 2001 to 11% for the twelve-month period
ended June 25, 2005. During 2001 and the twelve-month
period ended June 25, 2005, restructuring and
restructuring-related charges, including the write down of
certain intangibles, negatively impacted operating margin by 10%
and 1%, respectively. We continue to apply their experience in
restructuring the former ACCO World to the integration of GBC
into our operations. As of June 30, 2006, our management
team held stock, vested and unvested options and other
equity-based awards representing approximately 7% of our
outstanding common stock on a fully diluted basis (assuming
realization of certain performance targets set by the
compensation committee of our board of directors).
Growth
Strategy
Our goal is to strengthen and expand our leading premium brand
positions in select categories of the office products industry.
Our strategy for achieving this goal centers on enhancing
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. The following are the principal
elements of our growth strategy:
Invest in Research, Marketing and
Innovation. We believe that if office product
suppliers develop new, innovative products that are
appropriately marketed and address consumers’ needs,
product categories will trend toward growth and premium pricing
by trading the consumer up from commodity priced products. We
also believe that by increasing product innovation and
marketing, consumers will increasingly associate our strong
brand names with premium products. Based on our research and
understanding of consumer needs, we continually seek to design
and develop new and innovative products and merchandising
strategies that address those needs, which we believe is a key
contributor to our success in the office products industry.
Additionally, we seek to develop marketing that communicates the
advantages of our products to consumers, which we believe will
further drive consumer demand through the resulting product
awareness. As such, our category-focused business model allows
us to provide the necessary customer support, sales advice and
merchandising strategies to help drive our customers’
sales. In addition to our own direct investment in research and
development, we work collaboratively with select suppliers for
certain products and leverage their research and development
capabilities which we pay for in subsequent cost of goods
purchased.
Leverage Acquisition of GBC. In the near term,
we are focused on realizing cost synergies from our combination
with GBC. We have identified $40 million of annual cost
savings opportunities from the overlap of GBC and the former
ACCO World, arising from potential cost reductions attributable
to efficiencies and synergies to be derived from facility
integration, headcount reduction, supply chain optimization and
enhancement. In addition, the GBC acquisition provides
opportunities for top-line growth through the addition of
GBC’s complementary products and increased market share, as
well as the ability to apply our emphasis on innovation to
GBC’s product portfolio.
Focus on Premium Categories and Driving Consumer
“Trade-up.”Premium categories (e.g.,
computer products or stapling) are characterized by high brand
and product equity, high customer loyalty, a reasonably high
price gap between branded and non-branded products and premium
brands comprising a large percentage of the category volume. We
have identified products in these and other premium categories
that we feel we can supply competitively to the office products
industry while enhancing consumer demand for these products
based on our product innovation, design, marketing and brand
influence. We have a broad mix of premium products and plan to
build upon our product offering within these higher margin
categories.
Opportunistically Pursue Acquisitions. We
intend to actively pursue strategic acquisitions of selected
businesses to strengthen our market share in existing categories
where we are geographically less strong and expand our market
presence with new, complementary product categories. In
addition, our shared operating expense platform makes it
attractive to add new product categories in adjacent market
segments and eliminate duplicative costs.
Products
We are organized around four segments: Office Products Group,
Computer Products Group, Commercial — Industrial and
Print Finishing Group, and Other Commercial. These four segments
accounted for 67%, 11%, 9% and 13%, respectively, of our pro
forma net sales for the fiscal year ended December 31, 2005.
Office
Products Group
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 (Brands: Swingline, Rexel and GBC)
• staplers and staples
• punches
• shredders
• trimmers
• calculators
Document Communication (Brands: GBC, Rexel,
Ibico®
and Wilson Jones)
• binding equipment and supplies
• laminating equipment and supplies
• report covers
• indexes
Visual Communication (Brands: Quartet,
NOBO®
and
Apollo®)
• dry-erase boards
• dry-erase markers
• easels
• bulletin boards
• overhead projectors
• transparencies
• laser pointers
• screens
Storage and Organization (Brands: Wilson Jones, Rexel,
Eastlight®,
Marbig®
and
Dox®)
• ring binders
• sheet protectors
• data binders
• labels
• hanging file folders
• clips
• fasteners
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
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.
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.
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
sell for in excess of $1 million, 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
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-Timers calendars and personal organizers, that are primarily
sold direct to consumers or through large retailers and
commercial dealers.
Customers/Competition
Our sales are balanced between our principal markets in North
America, Europe, and Australia. For the fiscal year ended
December 31, 2005, these markets represented 63%, 28% and
8% of our net sales, respectively, and 62%, 27% and 7% of our
pro forma 2005 net sales, respectively. Our top ten
customers, including Office Depot, Staples, Boise/OfficeMax,
United Stationers, Corporate Express, S.P. Richards, BPGI,
Wal-Mart/Sam’s Club, Spicers and Tech Data, accounted for
54% of our net sales for the fiscal year ended December 31,2005, and 49% of our pro forma 2005 net sales. Sales to
Office Depot, Inc. and subsidiaries amounted to approximately
16%, 18% and 19% of consolidated net sales for the years ended
December 31, 2005 and December 27, 2004 and 2003
respectively. Sales to Office Depot on a pro forma basis
accounted for 13% of our 2005 net sales. Sales to no other
customer exceeded 10% of consolidated sales.
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 Transilwrap, Neschen and Deprosa. Other
Commercial competitors include Mead, Franklin Covey and Spiral
Binding.
Product
Development and Product Line Rationalization
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. Further costs related to
consumer research and product research are included in marketing
costs and research and development expenses.
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;
its importance to key customers; its relationship with existing
product lines; its impact to the market; and the business’
actual and potential impact on our operating performance.
As part of this review process, we currently are reviewing
approximately $75 million of sales in our Office Products
Group that do not produce margins that meet our profit
objectives, of which $25 million is currently expected to
be dropped from our product lines in January 2007. These sales
are from products that represent a limited number of stock
keeping units, or SKUs, sold to a limited number of customers.
Raw
Materials
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 in
2006. See “Risk Factors — Risks Relating to Our
Business — The raw materials and labor costs we incurare subject to price increases that could adversely affect ourprofitability.” 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.
Supply
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 intermediate cost regions, namely
Mexico and the Czech Republic. 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.
Intellectual
Property
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-Timers,
Kensington, Rexel, Wilson Jones, Marbig, NOBO, Boone, Apollo,
Microsaver®
and Ibico.
Environmental
Matters
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.
Employees
As of June 30, 2006, we and our subsidiaries had
7,525 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.
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 August 31, 2006:
It is the belief of management that the properties are suitable
to the respective businesses and have production capacities
adequate to meet the needs of the businesses.
Litigation
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 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.
The following table sets forth the name, age as of June 30,2006 and position of our directors and executive officers.
Name
Age
Position
David D. Campbell
56
Chairman, Chief Executive Officer
and Director
Neal V. Fenwick
45
Executive Vice President and Chief
Financial Officer
Dennis L. Chandler
52
Chief Operating Officer, Office
Products Division
Boris Elisman
44
President, Kensington Computer
Products Group
John M. Turner
57
President, Industrial Print
Finishing Group
Thomas P.
O’Neill, Jr.
53
Vice President, Finance and
Accounting
Steven Rubin
59
Senior Vice President, Secretary
and General Counsel
George V. Bayly
63
Director
Dr. Patricia O. Ewers
70
Director
G. Thomas Hargrove
67
Director
Robert J. Keller
52
Director
Pierre E. Leroy
58
Director
Gordon R. Lohman
72
Director
Forrest M. Schneider
59
Director
Norman H. Wesley
56
Director
David D. Campbell has been a director of ACCO Brands
since July 2004 and was appointed Chairman effective
August 17, 2005. Mr. Campbell has served as Chief
Executive Officer since January 2000 and served as our President
from January 2000 until August 2005. Mr. Campbell was
previously employed by Fortune Brands beginning in 1989 and
served as President, ACCO Canada and Senior Vice-President, ACCO
U.S.
Neal V. Fenwick serves as our Executive Vice President
and Chief Financial Officer, and served as Executive Vice
President of Finance and Administration and Chief Financial
Officer from November 1999 until August 2005.
Dennis L. Chandler serves as our Chief Operating Officer,
Office Products Division, and served as Chief Operating Officer
from April 2005 until August 2005; President of ACCO
U.S. from April 2003 to March 2005; and President of the
Wilson Jones business unit from April 2000 to March 2003.
Boris Elisman serves as President, Kensington Computer
Products Group, and served as President, Kensington Computer
Accessories from November 2004 until August 2005.
Mr. Elisman was Vice President of Marketing and Sales,
Supplies Business Unit, Imaging and Print Group of
Hewlett-Packard Corporation from 2003 to November 2004; Vice
President and General Manager, Emerging Businesses Organization
of Hewlett-Packard Corporation from 2001 to 2003; and Group
Marketing Manager, Embedded and Personal Systems Organization of
Hewlett-Packard Corporation prior thereto.
John M. Turner serves as President, Industrial and Print
Finishing Group, and served as Group President, Industrial and
Print Finishing Group for GBC from January 2000 until August
2005.
Thomas P. O’Neill, Jr. serves as Vice
President, Finance and Accounting. Prior to assuming this
position in July 2005, he was a Group Vice President, Global
Finance for the medical group of Teleflex, Inc. since December
2003. Mr. O’Neill served as the Senior Vice President
and Chief Financial Officer of and as a consultant to Philip
Services Corporation from June 2001 to December 2003 and, prior
to that time, served in several financial capacities for Premark
International and Tupperware Corp. Mr. O’Neill is a
certified public accountant.
Steven Rubin serves as Senior Vice President, General
Counsel and Secretary, and served as Vice President, Secretary
and General Counsel for GBC from 1986 until August 2005.
George V. Bayly has been a director of ACCO Brands since
August 2005. Mr. Bayly is a private investor.
Mr. Bayly served as interim Chief Executive Officer of
U.S. Can Corporation from April 2004 to January 2005. Until
June 2002, he had been the Chairman, President and CEO of Ivex
Packaging Corporation, a specialty packaging company engaged in
the manufacturing and marketing of a broad range of plastic and
paper packaging products. He had held that position for more
than five years. Mr. Bayly was a director of GBC from 1998
until August 2005. Mr. Bayly is also a director of
Huhtamaki Oyj and TreeHouse Foods, Inc.
Dr. Patricia O. Ewers has been a director of ACCO
Brands since August 2005. Dr. Ewers has been retired since
July 2000 and was President of Pace University prior thereto.
Dr. Ewers is also a director of Fortune Brands.
G. Thomas Hargrove has been a director of ACCO
Brands since August 2005. Mr. Hargrove is a private
investor. From 1999 until 2001, he served as the non-executive
Chairman of AGA Creative, a catalog creative agency.
Mr. Hargrove was a director of GBC from 2001 until August
2005.
Robert J. Keller has been a director of ACCO Brands since
August 2005. Since March 2004, Mr. Keller has served as the
President and Chief Executive Officer of APAC Customer Services,
Inc. From February 1998 through September 2003, Mr. Keller
served in various capacities at Office Depot, Inc., most
recently as President, Business Services Group. Mr. Keller
is also a director of APAC Customer Services, Inc.
Pierre E. Leroy has been a director of ACCO Brands since
August 2005. Mr. Leroy has been retired since February
2005. From December 2003 until February 2005, Mr. Leroy was
President, Worldwide Construction & Forestry Division
and Worldwide Parts Division of Deere & Company. He was
President, Worldwide Construction and Forestry Division of John
Deere Power Systems from 2000 to December 2003, and President,
Worldwide Construction Equipment Division of Deere &
Company prior thereto. Mr. Leroy is also a director of
Fortune Brands, Nuveen Investments, Inc. and Capital One
Financial Corp.
Gordon R. Lohman has been a director of ACCO Brands since
August 2005. Mr. Lohman has been retired since 1999.
Previously, Mr. Lohman was the Chairman and Chief Executive
Officer of Amsted Industries Incorporated. Mr. Lohman is
also a director of Ameren Corporation and Fortune Brands.
Forrest M. Schneider has been a director of ACCO Brands
since August 2005. Mr. Schneider is the President and Chief
Executive Officer of Lane Industries, Inc. and has held that
position since June 2000. Prior to that appointment, he had been
the Senior Vice President and Chief Financial Officer for Lane
Industries, Inc. Mr. Schneider was a director of GBC from
2000 until August 2005. Mr. Schneider is also a director of
Harris Preferred Capital Corporation, a real estate investment
company and indirect subsidiary of the Harris Trust and Savings
Bank.
Norman H. Wesley has been a director of ACCO Brands since
August 2005. Mr. Wesley is the Chairman and Chief Executive
Officer of Fortune Brands and has held that position since
December 1999. Mr. Wesley was President and Chief Operating
Officer of Fortune Brands prior thereto. Mr. Wesley is also
a director of R.R. Donnelly & Sons Company, Pactiv
Corporation and Fortune Brands.
Classified
Board
Our restated certificate of incorporation provides that our
board of directors is divided into three classes, each class
consisting of a number as close as possible to one-third of the
directors. The term of the successors of each such class of
directors expires at the annual stockholders meeting in the
third year following the year of election.
The members of Class I, whose terms expire at the 2009
annual meeting of stockholders, are David D. Campbell, Pierre E.
Leroy and G. Thomas Hargrove; the members of Class II,
whose terms expire at the 2007 annual meeting of stockholders,
are Gordon R. Lohman, Patricia O. Ewers and George V. Bayly; and
the members of Class III, whose terms expire at the 2008
annual meeting of stockholders, are Norman H. Wesley, Robert J.
Keller and Forrest M. Schneider.
The table below sets forth the beneficial ownership of our
common stock as of August 31, 2006, except as otherwise
provided in the footnotes to the table. The information set
forth in the table does not give effect to the exercise of the
underwriters’ over-allotment option. The table sets forth
the beneficial ownership by the following individuals or
entities:
•
each selling stockholder;
•
each person who owns more than 5% of the outstanding shares of
our common stock;
•
our named executive officers;
•
our directors; and
•
all our directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules
of the SEC. Except as otherwise indicated, each person named in
the table has sole voting and investment power with respect to
all shares of the issuer’s common stock shown as
beneficially owned, subject to applicable community property
laws. As of August 31, 2006, 53,588,135 shares of our
common stock were issued and 53,543,671 shares of our
common stock were outstanding. In computing the number of shares
of our common stock beneficially owned by a person and the
percentage ownership of that person, shares that are subject to
options held by that person that are currently exercisable or
that are exercisable within 60 days of August 31, 2006
are deemed outstanding. These shares are not, however, deemed
outstanding for the purpose of computing the percentage
ownership of any other person.
Selling
Stockholders
We are registering the shares owned by the selling stockholders
and covered by this prospectus pursuant to a Registration Rights
Agreement, dated as of March 15, 2005, among us and Lane
Industries, Inc. Lane Industries was the majority stockholder of
GBC immediately prior to our acquisition of GBC in August 2005.
Forrest M. Schneider, a member of our board of directors, is
President and Chief Executive Officer of Lane Industries.
Certain shares of our common stock beneficially owned by Lane
Industries through its wholly owned subsidiary, LED I, LLC,
are subject to a variable forward purchase contract with
Deutsche Bank AG. Pursuant to such contract, LED I may deliver
on or about November 27, 2006 a variable number of shares
of common stock not to exceed 1,467,125 shares. The actual
number of shares to be delivered will depend upon the then
prevailing market price of the shares. In lieu of delivering
shares, LED I has the option to settle its obligations to
Deutsche Bank by paying a cash amount equal to the then current
market value of such shares to Deutsche Bank.
The number of shares the selling stockholders may offer under
this prospectus may be reduced if marketing factors require a
limitation of the amount of securities sold in connection with
an underwritten offering under this prospectus and any
supplement to this prospectus.
Includes the number of shares of ACCO Brands common stock
issuable upon the exercise of options exercisable within
60 days of August 31, 2006.
(2)
The number of shares being offered does not assume exercise of
the underwriters’ option to purchase additional shares.
(3)
The shares to be sold in this offering by Lane Industries, Inc.
(“Lane”) are owned of record by LED II LLC, a
wholly owned subsidiary of Lane.
(4)
Based solely on a Form 4 filed with the SEC by Lane on
August 9, 2006 and on an amended Schedule 13D filed
with the SEC on March 21, 2006 by Lane, LED I LLC, a
Delaware limited liability company and wholly owned subsidiary
of Lane, and LED II LLC. Of these shares, Lane has shared
voting and dispositive power over 7,979,613 shares and sole
voting and dispositive power over the remaining
88,924 shares. Lane and LED I disclosed in an amended
Schedule 13D filed with the SEC on November 23, 2005
that, on November 21, 2005, LED I entered into a variable
forward purchase contract with Deutsche Bank AG pursuant to
which LED I may deliver on or about November 27, 2006 a
variable number of shares of common stock not to exceed
1,467,125 shares. The actual number of shares to be
delivered will depend upon the then prevailing market price of
the shares. In lieu of delivering shares, LED I has the option
to settle its obligations to Deutsche Bank AG by paying a cash
amount equal to the then current market value of such shares to
Deutsche Bank AG.
(5)
If the underwriters exercise in full their option to purchase
additional shares, the number of shares beneficially owned by
Lane and its subsidiaries immediately after the offering would
be 4,038,137, which would represent approximately 7.5% of our
outstanding common stock as of August 31, 2006.
(6)
Mr. Schneider is the President and Chief Executive Officer
of Lane and a director of ACCO Brands. Includes options to
acquire 15,000 shares; also includes 2,375 shares
owned by Mr. Schneider’s wife.
(7)
Based solely upon information provided by Lane.
Mr. Fabbrini is the Senior Vice President and Chief
Financial Officer of Lane.
(8)
Based solely upon information provided by Lane, and includes
options to acquire 4,500 shares held by
Ms. Knez’s husband, Marc J. Knez. Ms. Knez is the
Vice President — Treasurer of Lane and holds the
6,000 shares to be offered by this prospectus in a joint
account with her husband.
(9)
Based solely upon information provided by Lane. Mr. Keating
is a Vice President of Lane and holds the 8,000 to be offered by
this prospectus shares in a joint account with his wife, Carol
A. Keating.
(10)
Based solely on an amended Schedule 13G filed with the SEC
on July 10, 2006 by Ariel Capital Management, LLC. Of these
shares Ariel Capital Management has sole voting power over
6,396,095 shares and sole dispositive power over
7,900,620 shares.
(11)
Based solely on a Schedule 13G filed with the SEC on
February 6, 2006 by Sasco Capital, Inc. Of these shares
Sasco Capital has sole voting power over 1,068,759 shares
and sole dispositive power over all of the shares.
(12)
Includes options to acquire 487,439 shares; also includes
163 shares owned by Mr. Campbell through our 401(k)
plan.
(13)
Includes options to acquire 25,000 shares.
(14)
Includes options to acquire 15,000 shares.
(15)
Includes options to acquire 108,131 shares; also includes
430 shares owned by Mr. Fenwick’s wife.
(16)
Includes options to acquire 104,610 shares; also includes
267 shares owned by Mr. Chandler through our 401(k)
plan.
(17)
Includes options to acquire 92,124 shares.
(18)
Includes options to acquire 34,875 shares; also includes
3,945 shares owned by Mr. Rubin through our 401(k)
plan.
(19)
Includes options to acquire 13,293 shares.
(20)
All of these shares are owned by Mr. O’Neill through
our 401(k) plan.
We are authorized to issue 200,000,000 shares of common
stock, par value $0.01 per share, and
25,000,000 shares of preferred stock, par value
$0.01 per share. As of August 31, 2006, approximately
53,543,671 shares of common stock were outstanding and no
shares of preferred stock were outstanding. The authorized
shares of common stock and preferred stock are available for
issuance without further action by our stockholders unless such
action is required by applicable law or the rules of the New
York Stock Exchange or any other stock exchange or automated
quotation system on which our securities may be listed or
traded. If the approval of the stockholders is not required, our
board of directors may determine not to seek such approval prior
to any issuance of common stock or preferred stock.
Common
Stock
Holders of our common stock are entitled to such dividends as
may be declared by our board of directors out of funds legally
available for such purpose. Dividends may not be paid on common
stock unless all accrued dividends on preferred stock, if any,
have been paid or declared and set aside. In the event of our
liquidation, dissolution or winding up, holders of common stock
will be entitled to share pro rata in the assets remaining after
payment to creditors and after payment of the liquidation
preference plus any unpaid dividends to holders of outstanding
preferred stock, if any.
Each holder of our common stock is entitled to one vote for each
such share outstanding in the holder’s name. Holders of
common stock are not entitled to cumulate votes in voting for
directors. Our restated certificate of incorporation provides
that, unless otherwise determined by the board of directors, no
holder of common stock has any preemptive right to purchase or
subscribe for any stock of any class which we may issue or sell.
Preferred
Stock
Our restated certificate of incorporation permits us to issue up
to 25,000,000 shares of preferred stock in one or more
series and with rights and preferences that may be fixed or
designated by the board of directors without any further action
by our stockholders. The designation, powers, preferences,
rights and qualifications, limitations and restrictions of the
preferred stock of each series will be fixed by the certificate
of designation relating to such series, which will specify the
terms of the preferred stock, including:
•
the designation of the series, which may be by distinguishing
number, letter or title;
•
the number of shares of the series, which number the board of
directors may thereafter (except where otherwise provided in the
preferred stock designation) increase or decrease (but not below
the number of shares of the series then outstanding);
•
whether dividends, if any, shall be cumulative or noncumulative
and the dividend rate of the series;
•
the dates at which dividends, if any, shall be payable;
•
the redemption rights and price or prices, if any, for shares of
the series;
•
the terms and amount of any sinking fund provided for the
purchase or redemption of shares of the series;
•
the amounts payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up
of the affairs of ACCO Brands;
•
whether the shares of the series shall be convertible into
shares of any other class or series, or any other security, of
ACCO Brands or any other corporation, and, if so, the
specification of such other class or series or such other
security, the conversion price or prices or rate or rates, any
adjustments thereof, the date or dates as of which such shares
shall be convertible and all other terms and conditions upon
which such conversion may be made;
•
restrictions on the issuance of shares of the same series or of
any other class or series; and
the voting rights, if any, of the holders of shares of the
series.
Although our board of directors currently has no intention of
doing so, it could issue a series of preferred stock that could,
depending on the terms of such series, impede the completion of
a merger, tender offer or other takeover attempt.
promote the stability of our stockholder base; and
•
render more difficult certain unsolicited or hostile attempts to
take ACCO Brands over which could disrupt our operations, divert
the attention of our directors, officers and employees and
adversely affect the independence and integrity of our business.
Pursuant to our restated certificate of incorporation, the
number of directors is fixed by the board of directors by
approval of a majority of the whole board of directors; however,
prior to the annual meeting of stockholders to be held in 2008,
any resolution to fix the number of directors at a number
greater than nine directors will require the approval of at
least 80% of the directors then in office. Our directors are
divided into three classes and are elected on a staggered basis,
with one class of directors elected each year. Each class
consists of a number as close as possible to one-third of the
directors. Directors are elected to a three-year term by
stockholders at each annual meeting by a plurality of all votes
cast.
Our restated certificate of incorporation contains a fair price
provision pursuant to which a business combination (including,
among other things, a merger or consolidation) between ACCO
Brands or its subsidiaries and an interested stockholder (as
defined in our restated certificate of incorporation) requires
approval by the affirmative vote of the holders of at least 80%
of the voting power of the then outstanding shares of capital
stock entitled to vote, voting together as a single class,
unless the business combination is approved by at least
two-thirds of the continuing directors (as defined in our
restated certificate of incorporation) or certain fair price
criteria and procedural requirements specified in the fair price
provision are met.
Under the fair price provision, the fair price criteria that
must be satisfied to avoid the 80% stockholder voting
requirement include the requirement that the consideration paid
to our stockholders in a business combination must be either
cash or the same form of consideration used by the interested
stockholder in acquiring its beneficial ownership of the largest
number of shares of our capital stock acquired by the interested
stockholder.
Under the fair price provision, even if the foregoing fair price
criteria are met, the following procedural requirements must be
met if the business combination with an interested stockholder
not approved by at least two-thirds of the continuing directors
is not to require approval by the holders of at least 80% of
voting power of the then outstanding shares of capital stock
entitled to vote generally in the election of directors, voting
together as a single class:
•
after the interested stockholder had become an interested
stockholder and before the consummation of such business
combination, the interested stockholder must not have become the
beneficial owner of any additional shares of our common stock,
except as part of the transaction resulting in such interested
stockholder becoming an interested stockholder, or in a
transaction that would not result in any increase in the
interested stockholder’s percentage beneficial ownership of
any class or series of our capital stock;
•
after the interested stockholder had become an interested
stockholder and before the consummation of such business
combination, we must not have (1) failed to pay full
quarterly dividends on payable in accordance with the terms of
any outstanding ACCO Brands capital stock, if any,
(2) reduced the rate of dividends paid on our common stock
or (3) failed to increase such annual rate of dividends as
necessary to reflect any reclassification, recapitalization,
reorganization or any similar transaction that
has the effect of reducing the number of outstanding shares of
common stock, unless such failure, reduction or reclassification
was approved by two-thirds of the continuing directors;
•
the interested stockholder must not have received (other than
proportionately as a stockholder) at any time after becoming an
interested stockholder, the benefit of any loans, advances,
guarantees, pledges or other financial assistance or any tax
advantages provided by ACCO Brands;
•
a proxy or information statement describing the proposed
business combination and complying with the requirements of the
Exchange Act must have been mailed to all stockholders of ACCO
Brands at least 30 days prior to the consummation of the
business combination and such proxy or information statement
must have contained any recommendation as to the advisability or
inadvisability of the business combination that any of the
continuing directors wish to make and, if deemed advisable by at
least two-thirds of the continuing directors, a fairness opinion
from an investment bank; and
•
the interested stockholder shall not have made any material
change in our business or equity capital structure without
approval of at least two-thirds of the continuing directors.
Our restated certificate of incorporation and amended by-laws
provide that a special meeting of stockholders may be called
only by a resolution adopted by a majority of the entire board
of directors. Stockholders are not permitted to call, or to
require that the board of directors call, a special meeting of
stockholders. Moreover, the business permitted to be conducted
at any special meeting of stockholders is limited to the
business brought before the meeting pursuant to the notice of
the meeting given by ACCO Brands. In addition, our restated
certificate of incorporation provides that any action taken by
our stockholders must be effected at an annual or special
meeting of stockholders and may not be taken by written consent
instead of a meeting. Our amended by-laws establish an advance
notice procedure for stockholders to nominate candidates for
election as directors or to bring other business before meetings
of our stockholders.
Our restated certificate of incorporation requires the
affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of capital stock, voting
together as a single class, to:
•
amend or repeal the provisions of the restated certificate of
incorporation relating to the number, election and removal of
directors, the classified board, amendments to our restated
certificate of incorporation or amended by-laws, or the right to
act by written consent; or
•
adopt any provision inconsistent with such provisions.
Rights
Agreement
Prior to the spin-off, our board of directors declared a
dividend of one preferred share purchase right, which we refer
to in this prospectus as a “right,” for each
outstanding share of our common stock immediately prior to the
spin-off. Each right entitles the registered holder to purchase
from us a unit consisting of one one-hundredth of a share of
Series A Junior Participating Preferred Stock, subject to
adjustment.
The rights will not be exercisable until the earlier of:
•
ten business days following a public announcement that a person
or group has acquired 15% or more of the outstanding shares of
our common stock (thereby becoming an “acquiring
person” under the stockholder rights plan); or
•
ten business days following the commencement of a tender offer
or exchange offer that would result in a person or group
becoming an acquiring person.
An “acquiring person” under the rights agreement does
not include Lane Industries, Inc. and its affiliates if and so
long as they are and continue to be beneficial owners of 15% or
more of the outstanding shares of our common stock unless they
acquire beneficial ownership of an additional 1% of our common
stock. This exception will no longer be applicable if Lane
Industries and its affiliates’ beneficial ownership falls
below 15%, which will be the case after sale of the common stock
offered by this prospectus. Additionally, a person will not
become an acquiring person solely by reason of the acquisition
of our shares following the completion
of the merger from Lane Industries as part of an exercise of
remedies under a specified pledge agreement between Lane
Industries and Harris Trust and Savings Bank.
Under the rights agreement, we generally have the right to lower
the ownership threshold triggering a person to become an
“acquiring person” to an amount not less than the
greater of (1) the sum of .001% and the largest percentage
of the outstanding shares of our common stock owned by any
stockholder (excluding, among others, Lane Industries) and
(2) 10%. If the threshold is lowered, the above exception
for Lane Industries would be revised so that it would be based
on the new threshold.
The date in which the rights are exercisable as described above
is referred to as the “rights agreement distribution
date.” The rights will expire 10 years after the date
of issuance, unless such date is extended or the rights are
earlier redeemed or exchanged.
Until the rights agreement distribution date, the rights will be
evidenced only by shares of our common stock and will be
transferred with and only with such common stock. After the
rights agreement distribution date, rights certificates will be
mailed to holders of record of the common stock as of the close
of business on the rights agreement distribution date.
In the event that a person becomes an acquiring person, each
holder of a right other than the acquiring person will have the
right to receive our common stock having a value equal to two
times the exercise price of the right. In the event that, at any
time following the date on which a person becomes an acquiring
person, we engage in certain types of merger or other business
combination transactions, each holder of a right other than the
acquiring person will have the right to receive common stock of
the acquiring company having a value equal to two times the
exercise price of the right.
At any time after a person becomes an acquiring person and prior
to their acquisition of 50% or more of our outstanding common
stock, our board of directors may exchange the rights (other
than rights owned by the acquiring person), in whole or in part,
for one share of our common stock, subject to adjustment. At any
time until 10 business days following the date on which a person
becomes an acquiring person, we may redeem the rights in whole,
but not in part, at a price of $0.01 per right.
Under the terms and subject to the conditions contained in an
underwriting agreement dated September 21, 2006, the
selling stockholders have agreed to sell to the underwriters
named below, for whom Credit Suisse Securities (USA) LLC and
Deutsche Bank Securities Inc. are acting as representatives, the
following respective numbers of shares of common stock:
Underwriter
Number of Shares
Credit Suisse Securities (USA) LLC
1,595,621
Deutsche Bank Securities Inc.
1,175,720
BMO Capital Markets Corp.
587,860
Barrington Research Associates,
Inc.
58,933
CJS Securities, Inc.
58,933
SunTrust Capital Markets, Inc.
58,933
Total
3,536,000
The underwriting agreement provides that the underwriters are
obligated to purchase all the shares of common stock in the
offering if any are purchased, other than those shares covered
by the over-allotment option described below. The underwriting
agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be
increased or the offering may be terminated.
The selling stockholders have granted to the underwriters a
30-day
option to purchase on a pro rata basis up to 530,400 additional
shares at the initial public offering price less the
underwriting discounts and commissions. The option may be
exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock
initially at the public offering price on the cover page of this
prospectus and to selling group members at that price less a
selling concession of $0.6303 per share. After the initial
public offering, the representatives may change the public
offering price and concession and discount to broker/dealers.
The following table summarizes the compensation the selling
stockholders will pay:
Per Share
Total
Without
With
Without
With
Over-allotment
Over-allotment
Over-allotment
Over-allotment
Underwriting Discounts and
Commissions paid by selling stockholders
$
1.0505
$
1.0505
$
3,714,568
$
4,271,753
We estimate that the total expenses of the offering, excluding
underwriting discounts and commissions, will be $375,000, which
will be paid by us.
We have agreed not to offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the
SEC a registration statement under the Securities Act relating
to any shares of our common stock or securities convertible into
or exchangeable or exercisable for any shares of our common
stock, enter into a transaction which would have the same
effect, or enter into any swap, hedge or other arrangement that
transfers, in whole or in part, any of the economic consequences
of ownership of our common stock, whether any of these
transactions are to be settled by delivery of our common stock
or other securities, in cash or otherwise, or publicly disclose
the intention to make any offer, sale, pledge, disposition or
filing or enter into any transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of
Credit Suisse Securities (USA) LLC for a period of 90 days
after the date of this prospectus, subject to certain limited
exceptions. However, in the event that either (1) during
the last 17 days of the “lock-up” period, we
release earnings results or material news or a material event
relating to us occurs or (2) prior to the expiration of the
“lock-up” period, we announce that we will release
earnings results during the
16-day
period beginning on the last day of the “lock-up”
period, then in either case the expiration of the
“lock-up” will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the
occurrence of the material news or event, as applicable, unless
Credit Suisse Securities (USA) LLC waives, in writing, such an
extension.
The selling stockholders, all of our directors and certain of
our executive officers have agreed, subject to certain limited
exceptions, that they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any
shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock,
enter into a transaction that would have the same effect, or
enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of
ownership of our common stock, whether any of these transactions
are to be settled by delivery of our common stock or other
securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge or disposition, or to
enter into any transaction, swap, hedge or other arrangement,
without, in each case, the prior written consent of Credit
Suisse Securities (USA) LLC for a period of 90 days after
the date of this prospectus. However, in the event that either
(1) during the last 17 days of the “lock-up”
period, we release earnings results or material news or a
material event relating to us occurs or (2) prior to the
expiration of the “lock-up” period, we announce that
we will release earnings results during the
16-day
period beginning on the last day of the “lock-up”
period, then in either case the expiration of the
“lock-up” will be extended until the expiration of the
18-day
period beginning on the date of the release of the earnings
results or the occurrence of the material news or event, as
applicable, unless Credit Suisse Securities (USA) LLC waives, in
writing, such an extension.
We have agreed to indemnify the underwriters against liabilities
under the Securities Act, or to contribute to payments which the
underwriters may be required to make in that respect. The
selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or to contribute
to payments which the underwriters may be required to make in
that respect, arising from information provided by the selling
stockholders.
Our common stock is listed on the New York Stock Exchange under
the symbol “ABD.”
Some of the underwriters and their affiliates have provided, and
may provide in the future, investment banking and other
financial services for us in the ordinary course of business for
which they have received and would receive customary
compensation. An affiliate of BMO Capital Markets Corp., one of
the underwriters in this offering, is one of the creditors under
our current credit facility.
In connection with the offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act.
•
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
•
Over-allotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the over-allotment option.
In a naked short position, the number of shares involved is
greater than the number of shares in the over-allotment option.
The underwriters may close out any short position by either
exercising their over-allotment option
and/or
purchasing shares in the open market.
•
Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering.
Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the New York Stock Exchange or otherwise and, if
commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the
web sites maintained by one or more of the underwriters or
selling group members, if any, participating in this offering
and one or more of the underwriters participating in this
offering may distribute prospectuses electronically. The
representatives may agree to allocate a number of shares to
underwriters and selling group members for sale to their online
brokerage account holders. Internet distributions will be
allocated by the underwriters and selling group members that
will make internet distributions on the same basis as other
allocations.
The common stock is offered for sale in those jurisdictions in
the United States, Europe and elsewhere where it is lawful to
make such offers.
The common stock will not be offered, sold or delivered,
directly or indirectly, and this prospectus and any other
offering material relating to the common stock will not be
distributed, in or from any jurisdiction except under
circumstances that will result in compliance with the applicable
laws and regulations thereof and that will not impose any
obligations on us except as set forth in the underwriting
agreement.
In relation to each member state of the European Economic Area
which has implemented the Prospectus Directive (each, a relevant
member state), each underwriter has represented and agreed that
with effect from and including the date on which the Prospectus
Directive is implemented in that relevant member state (the
relevant implementation date) it has not made and will not make
an offer of common stock to the public in that relevant member
state prior to the publication of a prospectus in relation to
the common stock which has been approved by the competent
authority in that relevant member state or, where appropriate,
approved in another relevant member state and notified to the
competent authority in that relevant member state, all in
accordance with the Prospectus Directive, except that it may,
with effect from and including the relevant implementation date,
make an offer of common stock to the public in that relevant
member state at any time,
(a) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(b) to any legal entity which has two or more of
(1) an average of at least 250 employees during the last
financial year; (2) a total balance sheet of more than
€43,000,000 and (3) an annual net turnover of more
than €50,000,000, as shown in its last annual or
consolidated accounts;
(c) to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive)
subject to obtaining the prior consent of the manager for any
such offer; or
(d) in any other circumstances which do not require the
publication by the issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an
“offer of common stock to the public” in relation to
any common stock in any relevant member state means the
communication in any form and by any means of sufficient
information on the terms of the offer and the common stock to be
offered so as to enable an investor to decide to purchase or
subscribe the common stock, as the same may be varied in that
member state by any measure implementing the Prospectus
Directive in that member state and the expression Prospectus
Directive means Directive 2003/71/EC and includes any relevant
implementing measure in each relevant member state.
Each of the underwriters has severally represented, warranted
and agreed as follows:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of section 21 of FSMA) to persons who
have professional experience in matters relating to investments
falling with Article 19(5) of the Financial Services and
Markets Act 2000 (Financial Promotion) Order 2005 or in
circumstances in which section 21 of FSMA does not apply to
ACCO Brands; and
(b) it has complied with and will comply with all
applicable provisions of FSMA with respect to anything done by
it in relation to the common stock in, from or otherwise
involving the United Kingdom.
The distribution of the common stock offered by this prospectus
in Canada is being made only on a private placement basis exempt
from the requirement that we and the selling stockholders
prepare and file a prospectus with the securities regulatory
authorities in each province where trades of our common stock
are made. Any resale of the common stock offered by this
prospectus in Canada must be made under applicable securities
laws which will vary depending on the relevant jurisdiction, and
which may require resales to be made under available statutory
exemptions or under a discretionary exemption granted by the
applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the
common stock offered by this prospectus.
Representations
of Purchasers
By purchasing the common stock offered by this prospectus in
Canada and accepting a purchase confirmation a purchaser is
representing to us, the selling stockholders and the dealer from
whom the purchase confirmation is received that:
•
the purchaser is entitled under applicable provincial securities
laws to purchase the common stock without the benefit of a
prospectus qualified under those securities laws,
•
where required by law, that the purchaser is purchasing as
principal and not as agent,
•
the purchaser has reviewed the text above under Resale
Restrictions, and
•
the purchaser acknowledges and consents to the provision of
specified information concerning its purchase of the common
stock to the regulatory authority that by law is entitled to
collect the information.
Further details concerning the legal authority for this
information is available on request.
Rights of
Action — Ontario Purchasers Only
Under Ontario securities legislation, certain purchasers who
purchase a security offered by this prospectus during the period
of distribution will have a statutory right of action for
damages, or while still the owner of the common stock, for
rescission against us and the selling stockholders in the event
that this prospectus contains a misrepresentation without regard
to whether the purchaser relied on the misrepresentation. The
right of action for damages is exercisable not later than the
earlier of 180 days from the date the purchaser first had
knowledge of the facts giving rise to the cause of action and
three years from the date on which payment is made for the
common stock offered by this prospectus. The right of action for
rescission is exercisable not later than 180 days from the
date on which payment is made for the common stock offered by
this prospectus. If a purchaser elects to exercise the right of
action for rescission, the purchaser will have no right of
action for damages against us or the selling stockholders. In no
case will the amount recoverable in any action exceed
the price at which the shares of common stock were offered to
the purchaser and if the purchaser is shown to have purchased
the securities with knowledge of the misrepresentation, we and
the selling stockholders will have no liability. In the case of
an action for damages, we and the selling stockholders will not
be liable for all or any portion of the damages that are proven
to not represent the depreciation in value of the common stock
offered by this prospectus as a result of the misrepresentation
relied upon. These rights are in addition to, and without
derogation from, any other rights or remedies available at law
to an Ontario purchaser. The foregoing is a summary of the
rights available to an Ontario purchaser. Ontario purchasers
should refer to the complete text of the relevant statutory
provisions.
Enforcement
of Legal Rights
All of our directors and officers as well as the experts named
herein and the selling stockholders may be located outside of
Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon us or
those persons. All or a substantial portion of our assets and
the assets of those persons may be located outside of Canada
and, as a result, it may not be possible to satisfy a judgment
against us or those persons in Canada or to enforce a judgment
obtained in Canadian courts against us or those persons outside
of Canada.
Taxation
and Eligibility for Investment
Canadian purchasers of the common stock offered by this
prospectus should consult their own legal and tax advisors with
respect to the tax consequences of an investment in the common
stock in their particular circumstances and about the
eligibility of the common stock for investment by the purchaser
under relevant Canadian legislation.
The validity of the common stock to be offered by this
prospectus is being passed upon for us by Vedder, Price,
Kaufman & Kammholz, P.C. Certain legal matters
will be passed upon for the underwriters by Mayer, Brown,
Rowe & Maw LLP.
The consolidated financial statements of ACCO Brands and its
subsidiaries as of December 31, 2005 and December 27,2004, and for each of the three years in the period ended
December 31, 2005 included in this prospectus, have been so
included in reliance on the report of PricewaterhouseCoopers
LLP, an independent registered public accounting firm, given on
the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of General Binding
Corporation and management’s assessment of the
effectiveness of internal control over financial reporting
(which is included in Management’s Report on Internal
Control over Financial Reporting) incorporated in this
prospectus by reference to the Annual Report on
Form 10-K
of General Binding Corporation for the year ended
December 31, 2004 have been so incorporated in reliance on
the report of PricewaterhouseCoopers LLP, an independent
registered public accounting firm, given on the authority of
said firm as experts in accounting and auditing.
The Securities and Exchange Commission, or SEC, allows us to
“incorporate by reference” certain of our publicly
filed documents into this prospectus, which means that
information included in these documents is considered part of
this prospectus. The following documents filed by us with the
SEC are incorporated by reference into this prospectus:
•
our Annual Report on
Form 10-K
for the year ended December 31, 2005;
our Proxy Statement on Schedule 14A for our 2006 annual
meeting of stockholders (with the exception of the Report of the
Compensation Committee on Executive Compensation, the ACCO
Brands Stock Price Performance Graph, and the Report of the
Audit Committee, as indicated therein);
the consolidated financial statements of General Binding
Corporation as of December 31, 2004 and 2003 and for each
of the three years in the period ended December 31, 2004
and management’s report on internal controls over financial
reporting contained in its Annual Report on
Form 10-K
for the year ended December 31, 2004; and
•
the unaudited condensed consolidated financial statements of
General Binding Corporation as of and for the six months ended
June 30, 2005 contained in its Quarterly Report on
Form 10-Q
for the quarter ended June 30, 2005.
All documents filed by us with the SEC pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after
the date of this prospectus and prior to the termination of the
offering covered by this prospectus will be deemed to be
incorporated by reference into this prospectus and to be a part
of the prospectus from the date of filing of such documents. Any
statement contained in this prospectus or in any document
incorporated or deemed to be incorporated by reference into this
prospectus shall be deemed to be modified or superseded for
purposes of this prospectus to the extent that a statement
contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this prospectus.
We will provide, without charge to each person, including any
beneficial owner, to whom this prospectus is delivered, upon
written or oral request of such person, a copy of any and all of
the information that has been or may be incorporated by
reference in this prospectus, other than exhibits to such
documents (unless such exhibits are specifically incorporated by
reference into such documents). Such requests should be directed
to Investor Relations, ACCO Brands Corporation, 300 Tower
Parkway, Lincolnshire, Illinois60069, telephone number
(847) 541-9500.
We have filed with the SEC a registration statement under the
Securities Act with respect to this offering. This prospectus,
which forms a part of the registration statement, does not
contain all the information included in the registration
statement and the attached exhibits. For further information
about us and our common stock, you should refer to the
registration statement. This prospectus summarizes provisions
that we consider material of certain contracts and other
documents to which we refer you. Because the summaries may not
contain all of the information that you may find important, you
should review the full text of those documents. We have included
copies of those documents as exhibits to the registration
statement, or have provided references to our other SEC filings
where those documents can be found.
We file annual, quarterly and special reports, proxy statements
and other information with the SEC under the Exchange Act. The
registration statement of which this prospectus forms a part and
these reports, proxy statements and other information can be
inspected and copied at the Public Reference Room maintained by
the SEC at Station Place, 100 F Street NE, Washington, D.C.
20549. Copies of these materials may also be obtained from the
SEC at prescribed rates by writing to the Public Reference Room
maintained by the SEC at the above address. You may obtain
information on the operation of the Public Reference Room by
calling the SEC at
1-800-SEC-0330.
Additionally, you can access our reports, proxy statements and
other information about us through the SEC’s website at
www.sec.gov. Our SEC filings are also available on our website
at www.accobrands.com. Information on our website does not
constitute a part of this prospectus.
To Board of Directors and Stockholders of ACCO Brands
Corporation:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, cash flows and
stockholders’ equity and comprehensive income present
fairly, in all material respects, the financial position of ACCO
Brands Corporation and its subsidiaries at December 31,2005 and December 27, 2004, and the results of their
operations and their cash flows for the years ended
December 31, 2005 and December 27, 2004 and 2003 in
conformity with accounting principles generally accepted in the
United States of America. These financial statements are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements 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 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 15 to the financial statements, the
Company changed its reporting to remove the one month lag in
reporting for certain foreign subsidiaries.
Accounts receivable less allowances
for discounts, doubtful accounts and returns; $30.0 and $18.5
for 2005 and 2004, respectively
438.9
320.1
Inventories:
Raw materials
39.7
24.7
Work in process
10.3
5.8
Finished products
218.2
142.0
Inventories, net
268.2
172.5
Deferred income taxes
37.5
11.0
Other current assets
25.3
19.9
Total current assets
861.0
603.3
Property, plant and equipment, net
239.8
157.7
Deferred income taxes
17.4
—
Goodwill
433.8
—
Identifiable intangibles, net of
accumulated amortization of $67.1 and $63.3 for 2005 and 2004,
respectively
240.6
117.6
Prepaid pension
81.9
87.1
Other assets
55.0
3.9
Total assets
$
1,929.5
$
969.6
Liabilities and
Stockholders’ Equity
Current liabilities:
Notes payable to banks
$
7.0
$
0.1
Current portion of long term debt
23.1
—
Accounts payable
150.1
120.6
Accrued income taxes
3.9
19.6
Accrued compensation
27.7
54.1
Accrued customer program liabilities
122.9
81.6
Other current liabilities
118.3
54.1
Total current liabilities
453.0
330.1
Long term debt
911.8
—
Deferred income taxes
94.1
30.5
Postretirement and other liabilities
62.3
42.9
Total liabilities
1,521.2
403.5
Commitments and
Contingencies — Note 12.
Common stock —
200,000,000 shares of $.01 par value; 52,828,725 and
53,476 shares of $1 per value, issued and outstanding
at December 31, 2005 and December 27, 2004,
respectively
Amount represents issue of stock related to spin-off from
Fortune Brands, Inc. See notes 1 and 3 to the consolidated
financial statements for additional information.
(2)
Amount represents adjustments related to the Tax Allocation
Agreement entered into by Fortune Brands and ACCO Brands in
connection with the spin-off and merger transactions. See
note 6 to the consolidated financial statements for
additional information.
The management of ACCO Brands Corporation is responsible for the
accuracy and internal consistency of the preparation of the
consolidated financial statements and footnotes contained in
this annual report.
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.
The financial statements are prepared on a basis consistent with
the Company’s restated financial statements filed as
Exhibit 99.2 to the Company’s Current Report on
Form 8-K
on February 14, 2006.
Certain reclassifications have been made in the prior
year’s financial statements to conform to the current year
presentation.
The consolidated financial statements include the accounts of
ACCO Brands Corporation and its domestic and international
subsidiaries. Intercompany accounts and transactions have been
eliminated in consolidation. Our investments in companies which
are between 20% to 50% owned are accounted for as equity
investments. ACCO Brands has equity investments in the following
joint ventures: Pelikan-Quartet Pty Ltd
(“Pelikan-Quartet”) — 50% ownership; and
Neschen/GBC Graphic Films (“Neschen”) — 50%
ownership. The Company’s share of earnings from equity
investments are included on the line entitled “Other
(income)/expense, net” in the consolidated statements of
income. Companies in which our investment exceeds 50% have been
consolidated.
The Company has elected to report its expenses for shipping and
handling as a component of cost of products sold. The Company
has defined such costs as those to ship and move product from
the seller’s place of business to the buyer’s place of
business, as well as costs to store, move and prepare products
for shipment. The consolidated statements of income for all
periods presented have been adjusted to reflect this change in
presentation. For the annual periods ended December 31,2005, December 27, 2004 and 2003, shipping and handling
costs included in cost of products sold were
$139.3 million, $100.0 million and $92.8 million,
respectively. See further discussion in Note 15.
The financial statements include the allocation of general and
administrative expenses and interest expense from Fortune
Brands, Inc. up to the date of the Distribution (as further
described in Note 2, Significant Accounting
Policies — Fortune Brands Investment).
The financial statements for annual period ended
December 31, 2005 include a restatement of results
affecting the previously filed three-month and
year-to-date
periods ended March 25, June 25, and
September 30, 2005 for the cumulative effect of a change in
accounting principle related to the removal of a
Notes to
Consolidated Financial
Statements — (Continued)
one-month lag in reporting by several of the Company’s
foreign subsidiaries. The change was made to better align their
reporting periods with the Company’s fiscal calendar. A
reconciliation indicating the effect of this change on
previously issued periodic data can be found in Note 15,
Cumulative Effect of Change in Accounting Principle.
The Company has changed its financial reporting to a calendar
month end, from the previous 27th day of the last month of
our annual reporting period. The change, which was made during
the third quarter of 2005, was made to better align the
reporting calendars of ACCO Brands’ companies and the
acquired GBC companies. The period change affected the
Company’s ACCO North American businesses and contributed
four additional days to annual period ended December 31,2005. The financial statements for the annual period ended
December 31, 2005 include the estimated benefit of
additional net sales, operating income, and net income of
$10.8 million, $1.5 million, and $1.0 million,
respectively.
2.
Significant
Accounting Policies
Nature
of Business
ACCO Brands is primarily involved in the manufacturing,
marketing and distribution of office products —
including paper fastening, document management, computer
accessories, time management, presentation and other office
products — selling primarily to large resellers. The
Company’s subsidiaries operate principally in the United
States, the United Kingdom, Australia and Canada.
Use of
Estimates
The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
these estimates.
Cash
and Cash Equivalents
Highly liquid investments with an original maturity of three
months or less are included in cash and cash equivalents.
Allowances
for Doubtful Accounts
Trade receivables are stated net of discounts, allowances for
doubtful accounts and allowance for returns. The allowances
represent estimated uncollectible receivables associated with
potential customer non-payment on contractual obligations,
usually due to customers’ potential insolvency. The
allowances include amounts for certain customers where a risk of
non-payment has been specifically identified. In addition, the
allowances include a provision for customer non-payment on a
general formula basis when it is determined the risk of some
non-payment is probable and estimable, but cannot yet be
associated with specific customers. The assessment of the
likelihood of customer non-payment is based on various factors,
including the length of time the receivables are past due,
historical experience and existing economic conditions.
Inventories
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
Notes to
Consolidated Financial
Statements — (Continued)
favorably or unfavorably, from actual requirements if future
economic conditions, customer inventory levels or competitive
conditions differ from expectations.
Property,
Plant and Equipment
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. The following table shows estimated useful lives of
property, plant and equipment:
In accordance with Statement of Financial Accounting Standards
No. 144 (FAS 144), “Accounting for the
Impairment or Disposal of Long-Lived Assets,”a
long-lived asset or asset group is tested for recoverability
wherever events or changes in circumstances indicate that its
carrying amounts may not be recoverable. When such events occur,
the Company compares 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. If this comparison indicates that there is
an impairment, the amount of the impairment is typically
calculated using discounted expected future cash flows. The
discount rate applied to these cash flows is based on the
Company’s weighted average cost of capital, which
represents the blended after-tax costs of debt and equity.
Intangibles
Intangible assets are comprised primarily of indefinite-lived
intangible assets relating to Fortune Brands’ acquisitions
allocated to the Company prior to the spin-off described in
Note 1, Basis of Presentation, and purchased
intangible assets arising from the application of purchase
accounting to merger with GBC described in Note 2,
Acquisition and Merger. FAS 142 requires purchased
intangible assets other than goodwill to be amortized over their
useful lives unless these lives are determined to be indefinite.
Indefinite-lived intangible assets will not be amortized, but
are required to be evaluated at each reporting period to
determine whether the indefinite useful life is appropriate. In
accordance with Statement of Financial Accounting Standards
No. 142, “Goodwill and Other Intangible
Assets”(FAS 142), indefinite-lived intangibles
are tested for impairment on
Notes to
Consolidated Financial
Statements — (Continued)
an annual basis and written down where impaired, rather than
amortized as previous standards required. Certain of the
Company’s trade names have been assigned an indefinite life
as it was deemed that these trade names are currently
anticipated to contribute cash flows to the Company indefinitely.
The Company reviews indefinite lived intangibles for impairment
annually, and whenever market or business events indicate there
may be a potential impact on that intangible. The Company
considers the implications of both external (e.g., market
growth, pricing, competition, and technology) and internal
factors (e.g., product costs, margins, support expenses, 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.
Finite lived intangibles are amortized over 15 or 30 years.
In conjunction with the Company’s ongoing review of the
carrying value of our identifiable intangibles as prescribed by
FAS 142, the Company recorded a non-cash write-off of
identifiable intangibles, primarily trademarks, of
$12.0 million, ($8.0 million after tax) in 2003. The
write-off recognized the diminished fair values of selected
identifiable intangibles resulting from the repositioning of the
Boone and Hetzel trade names.
The Company’s intangible amortization was
$4.9 million, $1.3 million and $1.7 million for
the years ended December 31, 2005 and December 27,2004 and 2003, respectively. Estimated 2006 amortization is
$10.0 million, and is expected to decline approximately
$1 million for each of the 5 years following as the
amount of amortizable intangibles associated with customer
relationships acquired in the merger with GBC is amortized on an
accelerated basis.
Goodwill
Goodwill has been recorded on the Company’s balance sheet
related to the merger with GBC (described in Note 1,
Basis of Presentation and Note 3, Acquisition and
Merger) and represents the excess of the cost of the
acquisition when compared to the fair value of the net assets
acquired on August 17, 2005 (the acquisition date). The
company will test the goodwill for impairment at least annually
and is required to be tested on an interim basis if an event or
circumstance indicates that it is more likely than not that an
impairment loss has been incurred. Recoverability of goodwill is
evaluated using a two-step process. The first step involves a
comparison of the fair value of a reporting unit with its
carrying value. If the carrying value of the reporting unit
exceeds its fair value, the second step of the process involves
a comparison of the implied fair value and the carrying value of
the goodwill of that reporting unit. If the carrying value of
the goodwill of a reporting
Notes to
Consolidated Financial
Statements — (Continued)
unit exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to the excess.
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 the Company’s products,
capital needs, economic trends and other factors. At
December 31, 2005, the Company believes that no event or
circumstance has occurred or exists since the August 17,2005 acquisition of GBC to indicate the carrying value of
goodwill exceeded fair-value.
Employee
Benefit Plans
The Company and its subsidiaries provide a range of benefits to
their employees and retired employees, including pension,
postretirement, post-employment and health care benefits. The
Company records annual amounts relating to these plans based on
calculations, which include various actuarial assumptions,
including discount rates, assumed rates of return, compensation
increases, turnover rates and health care cost trend rates. The
Company reviews its actuarial assumptions on an annual basis and
makes modifications to the assumptions based on current rates
and trends when it is deemed appropriate to do so. The effect of
the modifications are generally recorded or amortized over
future periods.
Income
Taxes
Deferred tax liabilities or assets are established for temporary
differences between financial and tax reporting bases. 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 issue is
subject to management’s assessment of relevant risks, facts
and circumstances existing at that time. We believe that we have
adequately provided for our best estimate of the expected
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.
Fortune
Brands Investment
Certain services were provided to ACCO Brands by Fortune Brands,
ACCO Brands’ parent company prior to the spin-off and
merger described in Note 1, above. Executive compensation
and consulting expenses paid by Fortune Brands on behalf of ACCO
Brands have been allocated based on actual direct costs
incurred. Where specific identification of expenses was not
practicable, the cost of such services was allocated based on
the most relevant allocation method to the service provided.
Costs for the most significant of these services, legal and
internal audit, were allocated to ACCO Brands based on the
relative percentage of net sales and total assets, respectively,
of ACCO Brands to Fortune Brands. The cost of all other services
have been allocated to ACCO Brands based on the most relevant
allocation method to the service provided, either net sales of
ACCO Brands as a percentage of net sales of Fortune Brands total
assets of ACCO Brands as a percentage of total assets of Fortune
Brands, or headcount of ACCO Brands as a percentage of headcount
of Fortune Brands. Total expenses other than interest allocated
to ACCO Brands were $1.3 million, $13.0 million and
$10.3 million in 2005, 2004 and 2003, respectively.
In addition, interest expense associated with ACCO Brands
outstanding debt has been allocated to ACCO Brands based upon
average net assets of ACCO Brands as a percentage of average net
assets plus average consolidated debt not attributable to other
operations of Fortune Brands, ACCO Brands believes this method
of allocating interest expense produced reasonable results
because average net assets is a significant factor in
determining the amount of the former parent company borrowings.
No debt was allocated by Fortune Brands to ACCO Brands’
balance sheet. Total interest expense allocated to ACCO Brands
was $5.4 million, $10.4 million and $9.5 million
in 2005, 2004 and 2003, respectively.
Notes to
Consolidated Financial
Statements — (Continued)
Revenue
Recognition
The Company recognizes revenues from product sales when earned,
net of applicable provisions for discounts, returns and
allowances, as defined by GAAP and in accordance with SEC Staff
Accounting Bulletins No. 101 and No. 104. For product
sales, revenue is not recognized until title and risk of loss
have transferred to the customer, generally upon shipment. The
Company provides for its estimates of potential doubtful
accounts at the time of revenue recognition.
Customer
Program Costs
Customer program costs include, but are not limited to, sales
rebates which are generally tied to achievement of certain sales
volume levels, in-store promotional allowances, shared media and
customer catalog allowances and other cooperative advertising
arrangements, and freight allowance programs. The Company
generally recognizes customer program costs as a deduction to
gross sales at the time that the associated revenue is
recognized. Certain customer incentives that do not directly
relate to future revenues are expensed when initiated. In
addition, incentives to the Company’s end consumer, such as
mail-in rebates and coupons, are also reported as sales
deductions.
In addition, “accrued customer programs” principally
include, but are not limited to, sales volume rebates,
promotional allowances, shared media and customer catalog
allowances and other cooperative advertising arrangements, and
freight allowances as discussed above.
Advertising
Costs
Advertising costs amounted to $94.9 million,
$81.5 million and $74.8 million for the years ended
December 31, 2005 and December 27, 2004 and 2003,
respectively. These costs include, but are not limited to,
cooperative advertising and promotional allowances as described
in “Customer Program Costs” above, and are principally
expensed as incurred.
The Company capitalizes certain direct-response advertising
costs which are primarily from catalogs and reminder mailings
sent to customers. Such costs are generally amortized in
proportion to when related revenues are recognized, usually no
longer than three months. In addition, direct response
advertising includes mailings to acquire new customers, and this
cost is amortized over the periods that benefits are realized.
Direct response advertising amortization of $7.3 million,
$6.9 million and $7.3 million was recorded in the
years ended December 31, 2005 and December 27, 2004
and 2003, respectively, and is included in the above amounts. At
December 31, 2005 and December 27, 2004 and 2003 there
were $0.8 million, $0.5 million and $0.4 million,
respectively, of unamortized direct response advertising costs
included in other current assets.
Research
and Development
Research and development expenses, which amounted to
$16.8 million, $12.6 million and $12.9 million
for the years ended December 31, 2005 and December 27,2004 and 2003, respectively, are classified as general and
administration expenses and are principally charged to expense
as incurred.
Stock-Based
Compensation
The Company applies Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to
Employees,”and related interpretations in accounting
for its stock options. APB 25 requires the use of the
intrinsic value method, which measures compensation expense as
the excess, if any, of the quoted market price of the stock at
date of grant over the amount an employee must pay to acquire
the stock. Accordingly, no compensation expense has been
recognized for the stock option plans at the date of grant, but
compensation expense is recognized for restricted stock unit
awards. Statement of Financial Accounting Standards No. 123
Notes to
Consolidated Financial
Statements — (Continued)
(FAS 123), “Accounting for Stock-Based
Compensation,”requires disclosure of pro forma net
income and pro forma earnings per share amounts as if
compensation expense was recognized.
Pursuant to FAS 123, the Company, for purposes of its pro
forma disclosure determined its compensation expense in
accordance with the Black-Scholes option-pricing model fair
value method.
Had compensation cost for the stock options granted in 2005,
2004 and 2003 been determined consistent with FAS 123, pro
forma net income and earnings per common share of the Company
would have been as follows:
Add: Stock based employee
compensation included in reported net income, net of tax
0.7
0.5
0.5
Deduct: Total stock based employee
compensation determined under the fair-value based method for
all awards, net of tax
(4.0
)
(3.7
)
(3.0
)
Pro forma net income
$
56.2
$
65.3
$
24.2
Net earnings per share —
as reported — basic
$
1.43
$
1.96
$
0.76
Pro forma net earnings per
share — basic
$
1.35
$
1.86
$
0.69
Net earnings per share —
as reported — diluted
$
1.40
$
1.92
$
0.75
Pro forma net earnings per
share — diluted
$
1.33
$
1.84
$
0.68
Foreign
Currency Translation
Foreign currency balance sheet accounts are translated into
U.S. dollars at the rates of exchange at the balance sheet
date. Income and expenses are translated at the average rates of
exchange in effect during the period. The related translation
adjustments are made directly to a separate component of the
Accumulated Other Comprehensive Income (Loss) (OCI) caption in
stockholder’s equity. Some transactions are made in
currencies different from an entity’s functional currency.
Gain and losses on these foreign currency transactions are
generally included in income as they occur.
Derivative
Financial Instruments
The Company records all derivative instruments in accordance
with Statement of Financial Accounting Standards No. 133
(FAS 133), “Accounting for Derivative Instruments
and Hedging Activities”and its amendments and
interpretations These statements require recognition of all
derivatives as either assets or liabilities on the balance sheet
and the measurement of those instruments at fair value. If the
derivative is designated as a fair value hedge and is effective,
the changes in the fair value of the derivative and of the
hedged item attributable to the hedged risk are recognized in
earnings in the same period. If the derivative is designated as
a cash flow hedge, the effective portions of changes in the fair
value of the derivative are recorded in other comprehensive
income and are recognized in the income statement when the
hedged item affects earnings. Ineffective portions of changes in
the fair value of cash flow hedges are recognized in earnings.
Certain forecasted transactions, assets and liabilities are
exposed to foreign currency risk. The Company continually
monitors its foreign currency exposures in order to maximize the
overall effectiveness of its foreign currency hedge positions.
Principal currencies hedged include the U.S. dollar and
Pound sterling.
Notes to
Consolidated Financial
Statements — (Continued)
Recent
Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard
No. 123 (Revised) (FAS 123(R)) “Share-Based
Payment,”which requires the Company to recognize
compensation expense for stock options and restricted stock unit
plans granted to employees based on the estimated fair value of
the equity instrument at the time of grant. Currently, the
Company discloses the pro forma net income and earnings per
share as if the Company applied the fair value recognition
provisions of FAS 123,“Accounting for Stock-Based
Compensation”as amended by FAS 148
“Accounting for Stock-Based Compensation —
Transition and Disclosure — an amendment of FASB
Statement No. 123.”The requirements of
FAS 123(R) are effective for the Company beginning in the
first quarter of fiscal 2006. The company intends to adopt
FAS 123(R) and the related FASB staff provisions using the
“modified prospective” transition method as defined in
FAS 123(R). Under the modified prospective method,
companies are required to record compensation cost for new and
modified awards over the related vesting period of such awards
prospectively and record compensation cost prospectively for the
unvested awards, at the date of adoption, of previously issued
and outstanding awards over the remaining vesting period of such
awards. The Company has adopted the provisions of the new
standard using the Black-Scholes option pricing model effective
January 1, 2006. As a result of adoption, the Company
expects to recognize approximately $11 million, pre-tax, in
additional expense in 2006. This is in addition to charges of
approximately $5 million relating to expensing of
restricted stock and performance stock already required under
APB Opinion No. 25, “Accounting for Stock Issued to
Employees.”
In May 2005, the FASB issued FAS No. 154,
“Accounting Changes and Error Corrections — a
Replacement of APB Opinion No. 20 and FASB Statement
No. 3” (FAS 154). FAS 154 changes the
requirements for the accounting for, and reporting of, a change
in accounting principle. FAS 154 requires that a voluntary
change in accounting principle be applied retrospectively with
all prior period financial statements presented using the new
accounting principle. FAS 154 is effective for accounting
changes and corrections of errors in fiscal years beginning
after December 15, 2005. The Company will apply the
requirements of FAS 154 on any changes in principle made on
or after January 1, 2006.
In March 2005, the FASB issued Interpretation No. 47,
“Accounting for Conditional Asset Retirement
Obligations, an Interpretation of FASB Statement
No. 143”(FIN 47). FIN 47 clarifies the
term “conditional asset retirement obligation” used in
FAS 143, “Accounting for Asset Retirement
Obligations,”and refers to a legal obligation to
perform an asset retirement activity in which the timing and
(or) method of settlement are conditional on a future event that
may or may not be within the control of the Company. The
obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing
and (or) method of settlement. Accordingly, FIN 47 requires
the Company to recognize a liability for the fair value of a
conditional asset retirement obligation if the fair value of the
liability can be reasonably estimated. The fair value of a
liability for the conditional asset retirement obligation is to
be recognized when incurred. FIN 47 will be effective for
the Company no later than the end of its 2006 fiscal year. The
implementation of this interpretation is not expected to have a
material effect on the Company’s Consolidated Financial
Statements.
3.
Acquisition
and Merger
On August 17, 2005, as described in Note 1, Basis
of Presentation, above, ACCO Brands acquired 100% of the
outstanding common stock of GBC. The results of GBC’s
operations have been included in ACCO Brands’ consolidated
financial statements since the merger date. The GBC companies
are engaged in the design, manufacture and distribution of
office equipment, related supplies and laminating equipment and
films. The combination of ACCO Brands and GBC created the
world’s largest supplier of branded office products
(excluding furniture, computers, printers and bulk paper) to the
office products resale industry. The Company expects its larger
scale and combined operations to result in the realization of
operating synergies.
Notes to
Consolidated Financial
Statements — (Continued)
The aggregate purchase price was $424.3 million, comprised
primarily of 17.1 million shares of ACCO Brands common
stock which was issued to GBC shareholders with a fair value of
$392.4 million. ACCO Brands employee stock options and
restricted stock units with a Black-Scholes fair value of
$31.1 million were issued to replace GBC employee stock
options and restricted stock units outstanding at
August 17, 2005, and are also included in the purchase
price. The following table presents the preliminary allocation
of the purchase price to the fair values of the assets acquired
and liabilities assumed at the date of acquisition. ACCO Brands
is continuing to develop its integration plans. As these plans
are finalized, the allocation of the purchase price is expected
to change. Goodwill is expected to increase as integration plans
are expected to result in additional costs to close GBC
facilities and take other integration actions.
Of the $129.0 million assigned to intangible assets,
$38.2 million was assigned to customer relationships with
estimated remaining amortizable lives of approximately
13.5 years, amortizing on an accelerated basis, and
$10.5 million was assigned to developed technology with an
estimated life of approximately 8.5 years. The remaining
$80.3 million was preliminarily assigned to
indefinite-lived intangibles, primarily trademarks. The
remaining excess of purchase price over the fair value of net
assets of $433.8 million has been preliminarily allocated
to goodwill, and reflects the benefit the Company expects to
realize from expanding its scale in the office products market,
and from expected operating cost synergies. Goodwill has not yet
been assigned to the Company’s operating segments as
required by Statement of Financial Accounting Standard
No. 142, “Goodwill and Other Intangibles,”
pending completion of the analyses required to finalize
goodwill, and to establish an allocation base. The Company
expects to have the analyses completed by the end of the first
quarter of 2006. The Company believes that the majority of the
synergies to be realized by the acquisition
Notes to
Consolidated Financial
Statements — (Continued)
of GBC will occur in the Office Products Group and that the
majority of goodwill will be assigned to the Office Products
segment.
The following table provides unaudited pro forma results of
operations for the periods noted below, as if the acquisition
had occurred on the first day of the Company’s fiscal year
for each of 2005 and 2004. The pro forma amounts are not
necessarily indicative of the results that would have occurred
if the acquisition had been completed at that time.
Basic earnings per share, before
change in accounting principle
$
0.65
$
1.06
Diluted earnings per share, before
change in accounting principle
$
0.63
$
1.02
Basic earnings per share, net
income
$
0.71
$
1.06
Diluted earnings per share, net
income
$
0.70
$
1.02
Basic weighted average shares
52.3
51.1
Diluted weighted average shares:
53.3
52.7
The pro forma amounts are based on the historical results of
operations, and are adjusted for amortization of definite lived
intangibles and property, plant and equipment, and other charges
related to acquisition accounting which will continue beyond the
first full year of acquisition. The pro forma results of
operations for the period ended December 31, 2005 include
$5.4 million of expense related to the
step-up in
inventory value that was recognized as an adjustment to the
opening balance sheet of GBC; a similar charge is not included
in the period ended December 27, 2004. In addition, the
2005 results of operations include expenses incurred by both
ACCO and GBC related to the merger and integration of the
companies, and to the spin-off of ACCO Brands from Fortune
Brands, which for the period ended December 31, 2005
amounted to $16.5 million.
The Company has progressed its plans for the future integration
of the combined businesses. These plans are expected to be
completed no later than twelve months following the date of
acquisition. Included in the preliminary determination of
goodwill are accruals for certain estimated costs, including
those related to the closure of GBC facilities, the termination
of GBC lease agreements and to GBC employee-related severance
arrangements. The amount provided for these costs as of the date
of acquisition is $26.6 million. The following table
provides a reconciliation of the activity by cost category,
since the acquisition date.
Notes to
Consolidated Financial
Statements — (Continued)
4.
Pension
and Other Retiree Benefits
The Company has a number of pension plans, principally in the
United States and the United Kingdom. The plans provide for
payment of retirement benefits, mainly commencing between the
ages of 60 and 65, and also for payment of certain disability
and severance benefits. After meeting certain qualifications, an
employee acquires a vested right to future benefits. The
benefits payable under the plans are generally determined on the
basis of an employee’s length of service and earnings. Cash
contributions to the plans are made as necessary to ensure legal
funding requirements are satisfied.
The Company provides postretirement health care and life
insurance benefits to certain employees and retirees in the
United States and certain employee groups outside of the United
States. These benefit plans have been frozen to new
participants. Many employees and retirees outside of the United
States are covered by government health care programs.
Pension Benefits
Postretirement
U.S.
International
2005
2004
2005
2004
2005
2004
(In millions of dollars)
Change in projected benefit
obligation (PBO)
Projected benefit obligation at
beginning of year
$
132.4
$
121.0
$
197.7
$
173.0
$
11.2
$
10.8
Service cost
4.8
4.4
3.6
2.8
0.2
0.2
Interest cost
7.7
7.5
11.9
9.9
0.7
0.7
Actuarial loss
1.1
6.5
14.8
1.4
0.9
—
Participants’ contributions
—
—
1.4
1.3
0.1
0.1
Foreign exchange rate changes
—
—
(23.2
)
19.2
(0.7
)
0.7
Benefits paid
(6.8
)
(7.0
)
(9.2
)
(9.9
)
(1.0
)
(0.7
)
Other items
—
—
0.3
—
—
(0.6
)
Acquired balance
—
—
39.7
—
5.7
—
Projected benefit obligation at
end of year
139.2
132.4
237.0
197.7
17.1
11.2
Change in plan assets
Fair value of plan assets at
beginning of year
127.0
123.6
189.0
140.8
—
—
Actual return on plan assets
11.6
9.8
35.9
9.1
—
—
Employer contributions
0.1
0.1
6.4
30.8
0.9
0.6
Participants’ contributions
—
—
1.4
1.3
0.1
0.1
Foreign exchange rate changes
—
—
(22.5
)
16.9
—
—
Benefits paid
(6.8
)
(7.0
)
(9.2
)
(9.9
)
(1.0
)
(0.7
)
Acquired balance
—
—
29.9
—
—
—
Other items
—
0.5
0.1
—
—
—
Fair value of plan assets at end
of year
131.9
127.0
231.0
189.0
—
—
Funded status (Fair value of plan
assets less PBO)
Notes to
Consolidated Financial
Statements — (Continued)
Included in the amounts recognized in the balance sheet are:
Pension Benefits
Postretirement
U.S.
International
2005
2004
2005
2004
2005
2004
(In millions of dollars)
Prepaid pension benefit
$
29.3
$
30.0
$
52.6
$
57.1
$
—
$
—
Accrued benefit liability
(2.4
)
(2.2
)
(11.7
)
(0.5
)
(20.9
)
(17.5
)
Net amount recognized
$
26.9
$
27.8
$
40.9
$
56.6
$
(20.9
)
$
(17.5
)
The accumulated benefit obligation for all defined benefit
pension plans was $352.3 million and $307.2 million at
December 31, 2005 and December 27, 2004, respectively.
The following table sets out information for pension plans with
an accumulated benefit obligation in excess of plan assets:
U.S.
International
2005
2004
2005
2004
(In millions of dollars)
Projected benefit obligation
$
2.4
$
2.3
$
33.3
$
—
Accumulated benefit obligation
2.0
1.6
32.5
—
Fair value of plan assets
—
—
21.9
—
The change in international plan status is entirely due to the
acquired plans of the GBC companies.
The following table sets out the components of net periodic
benefit cost:
Rate that the cost trend rate is
assumed to decline (the ultimate trend rate)
5
%
5
%
5
%
Year that the rate reaches the
ultimate trend rate
2016
2015
2014
Assumed health care cost trend rates may have a significant
effect on the amounts reported for the health care plans. A
one-percentage-point change in assumed health care cost trend
rates would have the following effects:
The investment strategy for the Company is to optimize
investment returns through a diversified portfolio of
investments, taking into consideration underlying plan
liabilities and asset volatility. The U.S. defined benefit
asset allocation policy allows for an equity allocation of 45%
to 75%, a fixed income allocation of 25% to 50% and a cash
allocation of up to 25%. Each plan has a different target asset
allocation which is reviewed periodically and is based on the
underlying liability structure. The asset allocation for
non-U.S. plans
is set by the local plan trustees. Some
non-U.S. plans
allow for an investment in real estate.
Notes to
Consolidated Financial
Statements — (Continued)
Cash
Flows Contributions
The Company expects to contribute $10.0 million to its
pension plans in 2006.
The Company sponsors a number of defined contribution plans.
Contributions are determined under various formulas. Costs
related to such plans amounted to $5.3 million,
$4.5 million and $3.9 million in 2005, 2004 and
2003, respectively.
The following benefit payments, which reflect expected future
service, are expected to be paid:
Pension
Postretirement
Benefits
Benefits
(In millions of dollars)
2006
$
15.7
$
1.0
2007
$
15.7
$
1.0
2008
$
16.1
$
1.1
2009
$
17.1
$
1.2
2010
$
17.2
$
1.3
Years 2011 — 2015
$
101.7
$
5.5
5.
Stock
Based Compensation
ACCO
Brands Stock-Based Plans
As part of becoming a separate public company after the
spin-off, the Company established two stock-based compensation
plans (the “ACCO Plans”). These plans, which include
the Company’s 2005 Long Term Incentive Plan (the
“LTIP”), are separate from the plans previously
administered by the Parent. Stock options from the Parent plan
that were not vested as of the spin-off date were converted to
options to acquire ACCO stock under the Company’s 2005
Assumed Option and Restricted Stock Unit Plan (the “Assumed
Plan”). The number of options outstanding and the strike
price of these options were converted based on the conversion
ratio from the spin-off, such that the intrinsic value of the
options was the same before and after the spin-off. As a result,
707,210 unvested options with a weighted average strike price of
$64.42 under the Parent plans were converted to 2,819,952
unvested options with a weighted average strike price of $16.16
under the Assumed Plan. The terms and conditions related to
these options, other than the numbers and strike prices as
described above, did not change in any material manner from
those under which they were originally awarded. These terms and
conditions are generally described in Fortune Brands
Stock-Based Plans below. No additional grants of options or
other awards may be made under the Assumed Plan. Vested options
from the Parent plans were not converted to options to acquire
ACCO stock.
Included in the ACCO Plans is
Sub-Plan A
of the Assumed Plan
(“Sub-Plan
A”). As part of the acquisition and merger with GBC,
options and restricted stock units held by former GBC employees
were converted to similar instruments on ACCO stock on a
one-for-one
basis at the time of the merger. Restricted stock units that had
been previously awarded to GBC employees that did not convert to
the right to receive common stock of the Company upon completion
of the merger in accordance with the terms of such awards were
converted to similar ACCO restricted stock units on a
one-for-one
basis. The converted options and restricted stock units are now
subject to the terms of
Sub-Plan A.
Options under
Sub-Plan A
had exercise prices equal to fair market values at dates of
grant. Options generally were not exercisable prior to one year
or more than ten years from the date of grant. Options issued
since February, 2001 generally vested one-fourth each year over
a four-year period, subject, generally, to acceleration of
vesting upon a
change-in-control.
The options converted upon the merger that remain subject to
Sub-Plan A
generally accelerated and vested upon completion of the merger.
Restricted stock units that converted to restricted stock units
under
Sub-Plan A
vest three years from the date of their original grant. No
additional awards may be made under
Sub-Plan A.
The fair value of these instruments was included as part of the
purchase price of GBC, and a portion of the
Notes to
Consolidated Financial
Statements — (Continued)
intrinsic value of the unvested options and restricted stock
units was recorded as deferred compensation. This deferred
compensation expense will be recorded over the remaining vesting
period of the instruments.
Changes during 2005 in shares under option related to the ACCO
Plans were as follows:
Options outstanding at December 31, 2005 related to the
ACCO Plans were as follows:
Weighted-
Average
Weighted-
Remaining
Average
Number
Contractual
Exercise
Number
Range of Exercise Prices
Outstanding
Life
Price
Exercisable
$ 7.00 to $ 8.94
271,739
5.8
$
8.38
234,239
$10.82 to $14.86
1,943,691
7.6
13.46
1,225,430
$16.61 to $20.47
1,704,888
8.7
18.06
736,307
$21.07 to $30.00
1,870,076
6.9
22.68
27,451
$ 7.00 to $30.00
5,790,394
7.6
$
17.55
2,223,427
There were 30,186 and 25,600 GBC restricted stock units
outstanding as of December 31, 2005, which had previously
been granted in 2004 and 2005, respectively, which were
converted to ACCO Brands restricted stock units. These
instruments will vest in 2007 and 2008, respectively. The 2005
LTIP provides for stock based awards, restricted stock units,
performance stock units, restricted stock, incentive and
non-qualified stock options, and stock appreciation rights, any
of which may be granted alone or with other types of awards and
dividend equivalents. Restricted stock units vest over a
pre-determined period of time, typically three years from grant.
Performance stock units also vest over a pre-determined period
of time, but are further subject to the achievement of certain
business performance criteria. Based upon the level of achieved
performance, the number of shares actually awarded can vary from
0% to 150% of the original grant. There were 323,500 restricted
stock units and 373,000 performance stock units outstanding at
December 31, 2005 that were granted under the 2005 LTIP in
2005 and will vest in 2008. Upon vesting, all of these
instruments will be converted into the right to receive one
share of common stock of the Company for each unit that vests.
Compensation expense related to all these instruments will be
recorded over the vesting period of the instruments.
Compensation expense recorded for 2005 related to ACCO Brands
stock based plans was $0.8 million. There was no expense in
2004 or 2003 related to the ACCO Plans.
Fortune
Brands Stock-Based Plans
As a subsidiary of Fortune Brands, the Company had no employee
stock award plan; however, certain employees of the Company had
been granted stock options and performance awards under the
incentive plans of the Parent, including the 1999 and 2003
Long-Term Incentive Plans (“Fortune Brands Plans”).
The 1999 and 2003 Long-Term Incentive Plans authorized the
granting to key employees of the Parent and its subsidiaries,
including the Company, of incentive and nonqualified stock
options, stock appreciation rights, restricted stock,
performance awards and other stock-based awards, any of which
may have been granted alone or in combination with other types
of awards or dividend equivalents. Grants under the 2003
Long-Term
Notes to
Consolidated Financial
Statements — (Continued)
Incentive Plan could have been made on or before
December 31, 2008 for up to 12 million shares of
common stock. Under each plan, no more than two million shares
could have been granted to any one individual.
Stock options under the Fortune Brands Plans had exercise prices
equal to fair market values at dates of grant. Options generally
were not exercisable prior to one year or more than ten years
from the date of grant. Options issued since November 1998
generally vested one-third each year over a three-year period
after the date of grant. Performance awards were amortized into
expense over the three-year vesting period, and were generally
paid in stock but could be paid in cash if individual stock
ownership guidelines were met.
Changes during the periods ended December 31, 2005 in
shares under options related to the Fortune Brands Plans were as
follows:
Represents unvested Fortune Brands options converted into ACCO
Brands options in connection with the spin-off of ACCO Brands
from Fortune Brands. The exercise prices of the ACCO Brands
options converted from Fortune Brands options were calculated
based on the ratio of the Fortune Brands closing stock price on
August 16, 2005 and ACCO Brands opening stock price on
August 17, 2005. The number of options was calculated to
preserve, as closely as possible, the economic value of the
options that existed at the time of the spin-off.
(2)
Exercise price of vested Fortune Brands options was converted
based on the ratio of the closing price of the Fortune Brands
closing stock price on August 16, 2005 and Fortune Brands
opening stock price on August 17, 2005. The number of
options was converted to preserve, as closely as possible, the
economic value of the options that existed at the time of the
spin-off.
Notes to
Consolidated Financial
Statements — (Continued)
Options exercisable at the end of each of the three years ended
December 31, 2005, and December 27, 2004 and 2003
related to the Fortune Brands Plans were as follows:
Options
Weighted-Average
Exercisable
Exercise Price
2005
615,683
$
34.09
2004
802,939
$
38.92
2003
717,659
$
32.74
At December 31, 2005, performance awards under the Fortune
Brands Plan were outstanding; pursuant to which up to 8,312,
5,145 and 1,516 shares may be issued in 2006, 2007 and
2008, respectively, depending on the extent to which certain
specified performance objectives are met. Pursuant to the
performance awards. 8,256 and 5,463 shares were issued
during 2004 and 2003 respectively. The costs of those
performance awards were expensed over the performance period.
Compensation expense for the Fortune Brands Plan recorded for
2005, 2004 and 2003 was $0.2 million, $0.8 million and
$0.8 million, respectively.
The weighted-average fair values of options granted during 2005
(under the ACCO Plan) and 2004 and 2003 (under the Fortune
Brands Plan) were $7.84, $16.28 and $13.40, respectively. The
fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2005,
2004 and 2003:
2005
2004
2003
Expected dividend yield
0.0
%
1.8
%
2.1
%
Expected volatility
35.0
%
26.7
%
29.4
%
Risk-free interest rate
3.4
%
3.2
%
2.8
%
Expected term
4.5 years
4.5 years
4.5 years
6.
Income
Taxes
The components of income before income taxes are as follows:
Notes to
Consolidated Financial
Statements — (Continued)
A reconciliation of income taxes at the 35% federal statutory
income tax rate to income taxes as reported is as follows:
2005
2004
2003
(In millions of dollars)
Income tax expense computed at
U.S. statutory income tax rate
$
33.6
$
31.2
$
13.9
State, local and other income
taxes, net of federal tax benefit
1.8
1.3
0.3
U.S. effect of foreign
dividends and earnings
4.5
—
—
Foreign income taxed at different
effective tax rates
(4.5
)
(3.4
)
(3.2
)
Release of valuation allowance
—
(3.7
)
—
Reversal of reserves for items
resolved more favorably than anticipated
—
(3.7
)
—
Effect of foreign earnings
repatriation under the American Jobs Creation Act of 2004
—
1.2
—
Miscellaneous
4.1
(1.8
)
2.2
Income taxes as reported
$
39.5
$
21.1
$
13.2
Included in the 2005 U.S. effect of foreign dividends and
earnings amount above are: $3.4 million for U.S. tax
on foreign dividends paid prior to the spin-off,
$3.2 million for U.S. tax on certain foreign earnings
resulting from a reorganization of various foreign operations,
and a tax benefit of $2.2 million for foreign earnings no
longer considered permanently reinvested.
The components of the income tax expense are as follows:
Notes to
Consolidated Financial
Statements — (Continued)
The components of deferred tax assets (liabilities) are as
follows:
2005
2004
(In millions of dollars)
Deferred tax assets
Compensation and benefits
$
10.3
$
14.4
Inventory valuation related
5.1
3.3
Other reserves
2.1
2.7
Restructuring
6.5
(0.7
)
Accounts receivable
8.6
3.6
Goodwill with tax basis
9.5
11.8
Foreign tax credit carry forwards
6.0
—
Net operating loss carry forwards
43.8
15.1
Miscellaneous
15.3
7.3
Gross deferred tax assets
107.2
57.5
Valuation allowance
(28.5
)
(12.4
)
Net deferred tax assets
78.7
45.1
Deferred tax
liabilities
Dividends receivable
—
(2.0
)
Pension
(12.4
)
(12.2
)
Depreciation
(17.6
)
(6.3
)
Identifiable intangibles
(86.8
)
(40.3
)
Miscellaneous
(1.4
)
(3.8
)
Gross deferred tax liabilities
(118.2
)
(64.6
)
Net deferred tax liabilities
$
(39.5
)
$
(19.5
)
Deferred income taxes are not provided on certain undistributed
earnings of foreign subsidiaries that are expected to be
permanently reinvested in those companies, aggregating
approximately $285.6 million at December 31, 2005.
At December 31, 2005, $110.7 million of net operating
loss carry forwards are available to reduce future taxable
income of domestic and international companies. These loss carry
forwards expire in the years 2010 through 2025 or have an
unlimited carryover period. A valuation allowance has been
provided for a portion of the foreign and state net operating
loss carry forwards and other deferred tax assets in those
jurisdictions where the Company has determined that it is more
likely than not that the deferred tax assets will not be
realized. Additionally, the 2005 valuation allowance has
increased by $16.5 million due to the merger with GBC,
which, if subsequently recognized, the associated tax benefits
would be allocated to reduce goodwill or other non-current
intangible assets.
As part of the spin-off and merger transactions, ACCO Brands
entered into tax allocation agreements with Fortune and with
Lane Industries, Inc. (“Lane”). ACCO was formerly
included in certain tax returns of Fortune, and GBC was formerly
included in certain tax returns of Lane. Under the agreement,
Fortune assumes all U.S. federal income tax liabilities for
periods prior to the spin-off except for the taxes to be shown
on the 2005 U.S. income tax returns for the pre-spin-off
period. The agreement with Fortune also limits the
Company’s tax liabilities for periods prior to the spin-off
for state, local and foreign income tax audit assessments to an
aggregate net amount of $1 million. Under the agreement
with Lane, ACCO is liable for the
Notes to
Consolidated Financial
Statements — (Continued)
U.S. federal income taxes associated with pre-merger tax
years of General Binding Corporation and subsidiaries.
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 our best estimate of the
expected 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.
7.
Long-term
Debt and Short-term Borrowings
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 subsidiaries of ACCO Brands located in the United
Kingdom and the Netherlands have entered into the following new
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 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 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.
As of December 31, 2005, ACCO Brands had approximately
$144.1 million of availability under its revolving credit
facilities.
The net proceeds of the senior subordinated notes, together with
borrowings under the senior secured credit facilities and cash
on hand were used to finance the payment of special dividend
notes issued by ACCO World to its stockholders, repay existing
indebtedness of GBC and ACCO World and fund fees and expenses
related to the spin-off and merger.
The senior secured credit facilities are guaranteed by
substantially 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 related to total leverage and
interest coverage. There are also other restrictive covenants,
including restrictions on dividend payments, acquisitions,
additional indebtedness, and capital expenditures. Additionally,
under
Notes to
Consolidated Financial
Statements — (Continued)
certain conditions the Company is required to pay down debt to
the extent it generates excess cash flows or sells assets.
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 and for the period ended December 31, 2005, the
Company was in compliance with all applicable covenants. On
February 13, 2006the Company entered into an amendment of
its senior secured credit facilities waiving any default that
may have arisen under those facilities as a result of the
restatement of the Company’s financial statement as
described in Note 1, Basis of Presentation.
Notes to
Consolidated Financial
Statements — (Continued)
The scheduled maturities of notes payable and long-term debt for
each of the five years subsequent to December 31, 2005 are
as follows:
Fiscal Year
Amount
(In millions of dollars)
2006
$
30.1
2007
27.9
2008
45.7
2009
58.8
2010
50.4
Thereafter
729.0
Total
$
941.9
At December 31, 2005 there was $24.8 million available
under bank lines of credit. Included in these amounts as of
December 31, 2005 was $7.0 million of borrowings
outstanding. The weighted-average interest rate on these
outstanding borrowings was 4.15% in 2005.
Financial instruments are used to principally reduce the impact
of changes in foreign currency exchange rates and interest
rates. The principal financial instruments used are forward
foreign exchange contracts and interest rate basis swaps. The
counterparties are major financial institutions. The Company
does not enter into financial instruments for trading or
speculative purposes.
The Company enters into forward foreign exchange contracts,
principally as cash flow hedges, to hedge currency fluctuations
in transactions denominated in foreign currencies, thereby
limiting the Company’s risk that would otherwise result
from changes in exchange rates. The periods of the forward
foreign exchange contracts correspond to the periods of the
hedged transactions, and do not extend beyond 2006. Deferred
amounts of $0.2 million are expected to be reclassified
into earnings from other comprehensive income during 2006.
The Company also uses interest rate swaps to manage its exposure
to interest rate movements and to reduce borrowing costs. The
Company accounts for interest rate swaps as fair value hedges
and records gains and losses related to these derivative
instruments as components of interest expense.
The Company utilizes a cross currency swap to hedge its net
investment in Euro based subsidiaries against movements in
exchange rates. The five-year cross currency derivative swaps
$185 million at 3 month U.S. LIBOR interest rates
for €152.2 million at three-month EURIBOR rates. The
Company makes quarterly interest payments on
€152.2 million and receives quarterly interest
payments on $185.0 million. The swap has served as an
effective net investment hedge for accounting purposes. The
Company uses the spot rate method for accounting purposes and,
accordingly, any increase or decrease in the fair value of the
swap is recorded as a component of accumulated other
comprehensive income. Any ineffectiveness is recorded in
interest expense. The net after-tax income related to derivative
net investment hedge instruments recorded in accumulated other
comprehensive income totaled $3.2 million at
December 31, 2005.
The estimated fair value of the Company’s cash and cash
equivalents, notes payable to banks and commercial paper
approximates the carrying amounts due principally to their short
maturities.
The estimated fair value of the Company’s
$941.9 million total long-term debt (including the
current portion) at December 31, 2005 was approximately
$927.0 million. The fair value is determined from quoted
Notes to
Consolidated Financial
Statements — (Continued)
market prices, where available, and from investment bankers
using current interest rates considering credit ratings and the
remaining terms of maturity.
A significant percentage of the Company’s sales are to
customers engaged in the office products resale industry.
Concentration of credit risk with respect to trade accounts
receivable is limited because a large number of geographically
diverse customers make up each operating companies’
domestic and international customer base, thus spreading the
credit risk. Trade receivables from the Company’s five
largest customers were $205.4 million, $170.8 million
and $136.7 million at December 31, 2005 and
December 27, 2004 and 2003, respectively. Also see
Note 10, Information on Business Segments —
Major Customers.
9.
Restructuring
and Restructuring-Related Charges
The restructuring charges and reconciliations presented below
are principally related to the Company’s strategic plans
announced in early 2001, aimed at repositioning the business for
long term growth. As part of the 2001 restructuring program, the
Company recorded the final restructuring charges of
$19.4 million (pre-tax) in the year 2004. This amount
includes a release of $1.6 million of excess amounts
established in a prior year. The 2004 charges related to
employee termination costs (283 positions) and to asset
write-offs with a significant portion related to consolidation
or closure of manufacturing and other facilities in Mainland
Europe, the United Kingdom and the United States, and
operational downsizing throughout the Company.
In March of 2005, the Company announced its plan to merge with
GBC. In connection with the pending merger, the Company began to
take strategic actions aimed at aligning its management and
business structures with that of the future combined business
model. The restructuring provision for 2005 presented below is
principally related to these actions.
Reconciliation of the restructuring liability as of
December 31, 2005 is as follows:
International distribution and
lease agreements(1)
2.7
2.4
1.4
(1.0
)
(0.3
)
5.2
Loss on disposal of assets
—
—
0.4
—
—
0.4
$
2.9
$
2.8
$
2.9
$
(1.9
)
$
(0.3
)
$
6.4
(1) The acquired reserve balance of $2.8 million
includes a reserve of $2.4 million related to future lease
obligations (net of assumed sub-lease income). The related cash
expenditures are expected to continue through to the date of the
last lease expiration in the year 2013.
Of the 31 positions planned for elimination under
restructuring initiatives in 2005, 20 had been eliminated as of
December 31, 2005.
In association with the Company’s plan to abandon one
long-term lease agreement, a charge for $2.6 million was
recorded in the year 2001, and as of December 31, 2005, the
balance remaining is $1.5 million. Cash expenditures
related to this lease are expected to continue through the year
2007. All other restructuring provisions have been recognized
subject to the provisions of SFAS 146, which was effective
from January 1, 2003.
The Company expects that all other activity under these programs
will be completed within the next 12 months.
In association with the Company’s restructuring, certain
non-recurring costs were expensed to cost of products sold and
advertising, selling, general and administrative expenses in the
income statement. These charges were principally related to
strategic product category exits and to implementation of the
new company footprint (establishing our combined physical
locations). These charges totaled $1.9 million,
$18.2 million and $19.2 million for the years ended
December 31, 2005 and December 27, 2004 and 2003,
respectively. In addition, charges reported in the year ended
December 31, 2005 related to the merger and integration of
ACCO Brands and GBC, and the spin-off of ACCO Brands from
Fortune Brands, totaled $12.2 million, and were classified
in advertising, selling, general and administrative expense in
the income statement.
Notes to
Consolidated Financial
Statements — (Continued)
10.
Information
on Business Segments
Following the merger with GBC on August 17, 2005, the
Company’s business segments were realigned to reflect the
product and global markets served. The historical segment
results were restated to present the business segments on a
comparable basis. The Company’s business segments are
described below:
Office
Products Group
Office Products includes four broad consumer-focused product
groupings throughout our global operations. These product
groupings are: Workspace Tools (stapling and punch products and
supplies), Visual Communication (dry erase boards, easels, laser
pointers and overhead projectors), Document Communication
(personal and office use binding and laminating machines,
presentation quality binders) and Storage and Organization
(storage bindery, filing systems, storage boxes, business
essentials). Our businesses, principally in North America,
Europe and Asia/Pacific distribute and sell such products on a
regional basis.
Our office products are manufactured internally or sourced from
outside suppliers. The customer base to which our office
products are sold is made up of large global and regional
resellers of our product. It is through these large resellers
that the Company’s office products reach the end consumer.
Computer
Products Group
Computer Products designs, distributes, markets and sells
accessories for laptop and desktop computers and Apple iPod
products. These accessories primarily include security locks,
power adapters, input devices such as mice and keyboards,
computer carrying cases, hubs and docking stations and
technology accessories for iPods. Computer Products sells,
mostly under the Kensington brand name, globally to
distributors, large resellers and retailers, with the majority
of its revenue coming from the U.S. and Western Europe.
All of our computer products are manufactured to our
specifications by third party companies, principally in Asia,
and are stored, shipped and distributed from facilities which
are shared with our regional Office Products groups. Our
Computer Products are sold primarily to consumer electronic
retailers, information technology value added resellers/IT VARs,
original equipment manufacturers/OEMs and office products
retailers.
Commercial —
Industrial and Print Finishing Group
The Industrial and Print Finishing Group (“IPFG”)
targets
“print-for-pay”
and other finishing customers who use our professional grade
finishing equipment and supplies. The Industrial and Print
Finishing Group’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.
Other
Commercial
Other Commercial consists of a grouping of our Day-Timers
business and our various Document Finishing businesses located
in dispersed geographic markets. The results of these companies
are not individually significant to the consolidated results of
ACCO Brands.
Our Day-Timers business includes U.S., Australia, New Zealand
and U.K. operating companies which sell personal organization
tools and products regionally, primarily utilizing their own
manufacturing, supply, sales force, customer service and
distribution structures. Approximately two-thirds of the
Day-Timers business is through the direct channel, which markets
product through periodic sales catalogs and ships product
directly to our end user customer. The remainder of the business
sells to large resellers and commercial dealers.
Notes to
Consolidated Financial
Statements — (Continued)
Our Document Finishing businesses sell binding and punching
equipment, binding supplies, custom and stock binders and
folders, and also provide maintenance and repair services. The
Document Finishing products and services are primarily sold
direct to high volume commercial end users, commercial
reprographic centers and education markets.
Income before taxes, minority
interest and change in accounting principle
$
95.9
$
89.6
$
39.9
Operating income as presented in the segment table above is
defined as i) net sales, ii) less cost of products
sold, iii) less advertising, selling, general and
administrative expenses, iv) less amortization of
intangibles, and v) less restructuring charges.
Represents total assets excluding: intangibles resulting from
business acquisitions, intercompany balances, cash, deferred
taxes, prepaid pension assets, prepaid debt issuance costs and
joint ventures accounted for on an equity basis, which are not
allocated to the Company’s business segments.
Long-lived assets, net by geographic region are as follows (b):
2005
2004
2003
(In millions of dollars)
United States
$
128.9
$
79.1
$
88.7
United Kingdom
39.2
40.4
42.2
Australia
17.1
15.9
15.4
Canada
9.6
4.9
4.8
Other countries
45.0
17.4
18.9
Long-lived assets
$
239.8
$
157.7
$
170.0
(b)
Represents property, plant and equipment, net.
Net sales by geographic region are as follows (c):
2005
2004
2003
(In millions of dollars)
United States
$
803.8
$
615.5
$
601.0
United Kingdom
193.0
199.8
179.1
Australia
113.6
95.4
84.0
Canada
91.9
68.1
67.8
Other countries
285.2
196.9
170.0
Net sales
$
1,487.5
$
1,175.7
$
1,101.9
(c)
Net Sales are attributed to geographic areas based on the
location of the selling company.
Major
Customers
Sales to the Company’s five largest customers were
$592.3 million, $481.5 million and $482.3 million
for the years ended December 31, 2005 and
December 27, 2004 and 2003, respectively. Our sales
to Office Depot were $234.1 million (16%),
$215.8 million (18%) and $213.1 million (19%) for the
years ended December 31,
Notes to
Consolidated Financial
Statements — (Continued)
2005, December 27, 2004 and 2003, respectively, and
represented the only customer with more than 10% of total sales.
11.
Earnings
per Share
The distribution and merger discussed in Note 1,
significantly impacted the capital structure of the Company.
ACCO Brands’ Certificate of Incorporation provides for
200 million authorized shares of Common Stock with a par
value of $0.01 per share. Approximately 35.0 million
shares of the Company’s common stock were issued to
shareholders of Fortune and a minority shareholder of the
Company in connection with the spin-off. In connection with the
merger, approximately 17.1 million additional shares were
issued to GBC’s shareholders and employees in exchange for
their GBC common and Class B common shares and restricted
stock units that converted into the right to receive the
Company’s common stock upon consummation of the merger.
Total outstanding shares as of December 31, 2005 were
52.8 million. These amounts, as well as the dilutive impact
of ACCO Brands stock options on the date of the spin-off have
been used in the basic and dilutive earnings per common share
calculation below for all periods prior to the spin-off.
The calculation of basic earnings per common share is based on
the weighted average number of common shares outstanding in the
year, or period, over which they were outstanding. The
Company’s diluted earnings per common share assume that any
common shares outstanding were increased by shares that would be
issued upon exercise of those stock options for which the market
price on the last day of the period exceeds the exercise price;
less, the shares which could have been purchased by the Company
with the related proceeds.
The following table provides a reconciliation of basic to
diluted weighted average shares outstanding:
2005
2004
2003
(In millions)
Weighted average number of common
shares outstanding — basic
41.5
35.0
35.0
Employee stock options
0.8
0.5
0.5
Restricted stock units
0.1
—
—
Adjusted weighted-average shares
and assumed conversions — diluted
42.4
35.5
35.5
12.
Commitments
and Contingencies
Pending
Litigation
The Company and its subsidiaries are defendants in lawsuits
associated with their business and operations. It is not
possible to predict the outcome of the pending actions, but
management believes that there are meritorious defenses to these
actions and that these actions will not have a material adverse
effect upon the results of operations, cash flows or financial
condition of the Company.
Notes to
Consolidated Financial
Statements — (Continued)
Lease
Commitments
Future minimum rental payments under noncancellable operating
leases not otherwise accrued for in connection with
restructuring plans (see Note 3, Acquisition and Merger
and Note 9, Restructuring and Restructuring-Related
Charges) as of December 31, 2005 are as follows:
(In millions of dollars)
2006
$
27.5
2007
21.2
2008
18.6
2009
16.0
2010
11.9
Thereafter
36.6
Total minimum rental payments
131.8
Less minimum rentals to be
received under noncancellable subleases
(2.7
)
$
129.1
Total rental expense reported in the Company’s income
statement for all operating leases (reduced by minor amounts
from subleases) amounted to $22.2 million,
$19.5 million and $18.3 million in 2005, 2004 and
2003, respectively.
Unconditional
Purchase Commitments
Future minimum payments under unconditional purchase
commitments, primarily for inventory purchases at
December 31, 2005 are as follows:
2006
$
92.4
2007
1.3
2008
0.5
2009
0.2
2010
0.1
Thereafter
—
$
94.5
Environmental
The Company is subject to laws and regulations relating to the
protection of the environment. While it is not possible to
quantify with certainty the potential impact of actions
regarding environmental matters, particularly remediation and
other compliance efforts that the Company’s subsidiaries
may undertake in the future, in the opinion of management,
compliance with the present environmental protection laws,
before taking into account any estimated recoveries from third
parties, will not have a material adverse effect upon the
results of operation, cash flows or financial condition of the
Company.
Notes to
Consolidated Financial
Statements — (Continued)
13.
Accumulated
Other Comprehensive Income (Loss)
Comprehensive income is defined as net income (loss) and other
changes in stockholders’ equity from transactions and other
events from sources other than stockholders. The components of
and changes in accumulated other comprehensive income (loss) are
as follows:
The following is an analysis of certain items in the
Consolidated Statements of Income by quarter for 2005 and 2004:
1st
2nd
3rd
4th
2005
Quarter(a)
Quarter(a)
Quarter(a)
Quarter
(In millions of dollars)
Net sales
$
274.8
$
275.7
$
424.0
$
513.0
Gross profit
83.0
79.7
122.9
153.9
Operating income
26.1
22.7
32.2
43.7
Income before cumulative effect of
changes in accounting principle
11.3
14.2
4.5
26.2
Net income
14.6
14.2
4.5
26.2
Basic earnings per common share:
Income before change in accounting
principle
$
0.32
$
0.41
$
0.10
$
0.50
Net income
$
0.42
$
0.41
$
0.10
$
0.50
Diluted earnings per common share:
Income before change in accounting
principle
$
0.32
$
0.40
$
0.10
$
0.48
Net income
$
0.42
$
0.40
$
0.10
$
0.48
(a)
Previously reported quarters of 2005 have been restated to
reflect 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. (See
Note 15, “Cumulative Effect of Change in Accounting
Principle.”)
Notes to
Consolidated Financial
Statements — (Continued)
1st
2nd
3rd
4th
2004
Quarter
Quarter
Quarter
Quarter
Net sales
$
270.9
$
268.7
$
303.8
$
332.3
Gross profit
77.1
79.4
95.4
113.5
Operating income/(loss)
13.6
(0.8
)
36.1
48.0
Net income/(loss)
8.6
(6.5
)
38.5
27.9
Basic earnings per common share:
Net income/(loss)
$
0.25
$
(0.19
)
$
1.10
$
0.79
Diluted earnings per common share:
Net income/(loss)
$
0.24
$
(0.19
)
$
1.08
$
0.78
15.
Cumulative
Effect of Change in Accounting Principle
The financial statements for annual period ended
December 31, 2005 include a restatement of results
affecting the previously filed three month and year to date
periods ended March 25, June 25, and
September 30, 2005 for 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. The treatment is to effectively collapse the net
income resulting from the previously reported first month of the
calendar year into the cumulative effect of a change in
accounting principle for these foreign subsidiaries. The change
was made to better align their reporting periods with the
Company’s fiscal calendar. As a result, all material
subsidiaries now report on a calendar basis. The effect of this
change for the prior quarters was as follows:
Advertising, selling, general and
administrative expenses
88.5
0.4
88.9
Amortization of intangibles
1.4
—
1.4
Restructuring charges
0.3
0.1
0.4
Operating income
31.5
0.7
32.2
Interest expense, including
allocation from parent
7.9
1.2
9.1
Other expense (income), net
(1.1
)
(0.2
)
(1.3
)
Income (loss) before income taxes
and change in accounting principle
24.7
(0.3
)
24.4
Income taxes
21.1
(1.2
)
19.9
Income before change in accounting
principle
3.6
0.9
4.5
Change in accounting principle
—
—
—
Net income
$
3.6
$
0.9
$
4.5
(1)
As described in Note 1, Basis of Presentation, the
Company has elected to report its expenses for shipping and
handling as a component of cost of products sold. As a result,
reclassifications of these amounts from advertising, selling,
general and administrative expenses have also been reflected in
the tables above.
Notes to
Consolidated Financial
Statements — (Continued)
16.
Condensed
Consolidated Financial Information
Following the Distribution and merger the Company’s
wholly-owned domestic subsidiaries were required to jointly and
severally, fully and unconditionally guarantee the notes issued
in connection with the merger with GBC (see Note 3,
Acquisition and Merger and Note 7, Long-term Debt
and Short-Term Borrowings). Rather than filing separate
financial statements for each guarantor subsidiary with the
Securities and Exchange Commission, the Company has elected to
present the following consolidating financial statements which
detail the results of operations, for the twelve months ended
December 31, 2005 and December 27, 2004 and 2003, cash
flows for the twelve months ended December 31, 2005 and
December 27, 2004 and 2003 and financial position as
of December 31, 2005 and December 27, 2004 of
the Company and its guarantor and non-guarantor subsidiaries (in
each case carrying investments under the equity method), and the
eliminations necessary to arrive at the reported consolidated
financial statements of the Company.
The management of ACCO Brands Corporation is responsible for the
accuracy and internal consistency of the preparation of the
consolidated financial statements and footnotes contained in
this quarterly report on
Form 10-Q.
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 (the
“Merger”). 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.
The condensed consolidated balance sheet as of June 30,2006, the related condensed consolidated statements of income
for the three and six months ended June 30, 2006 and
June 25, 2005, and the related condensed consolidated
statements of cash flows for the six months ended June 30,2006 and June 25, 2005 are unaudited. The year-end
condensed balance sheet data was derived from audited financial
statements but does not include all disclosures required
annually by accounting principles generally accepted in the
United States of America. In the opinion of management, all
adjustments consisting of only normal recurring adjustments
necessary for a fair presentation of the financial statements
have been included. Interim results may not be indicative of
results for a full year. The interim financial statements should
be read in conjunction with the audited consolidated financial
statements and notes thereto included in our 2005 Annual Report
on
Form 10-K.
As more fully described in the Company’s 2005 annual report
on
Form 10-K,
the financial statements for the six months ended June 25,2005 include a restatement of results affecting the previously
filed three-month and six-month periods ended June 25, 2005
for 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. The change
was made to better align their reporting periods with the
Company’s fiscal calendar.
During the third quarter of 2005, the Company’s financial
reporting calendar for its ACCO North American businesses was
changed to a calendar month end from the previous 25th day
of the last month of each quarterly reporting period. The
Company’s fiscal year end calendar, previously ended
December 27th, was also changed to a calendar month end.
The change was made to better align the reporting calendars of
the Company and the acquired GBC businesses.
The condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and note
disclosures normally included in annual financial statements
prepared in accordance with generally accepted accounting
principles have been
Notes to Condensed Consolidated Financial
Statements — (Continued)
condensed or omitted pursuant to those rules and regulations,
although the Company believes that the disclosures made are
adequate to make the information not misleading.
In December 2004, the Financial Accounting Standards Board
(FASB) revised and reissued Statement of Financial Accounting
Standards (SFAS) No. 123, “Share-Based Payment”
(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.
Refer to Note 2, Stock-Based Compensation, for
further information about the Company’s share-based
compensation plans and related accounting treatment in the
current and prior periods.
2.
Stock-Based
Compensation
As more fully described in the Company’s annual report on
Form 10-K,
in connection with becoming a separate public company after the
spin-off, the Company established two stock-based compensation
plans (the “ACCO Plans”) which included the
Company’s 2005 Long-Term Incentive Plan (the
“LTIP”). As referenced in Part II, Item 4.
of this document, at the Company’s May 25, 2006 Annual
Meeting of Stockholders, a shareholder vote approved an Amended
and Restated ACCO Brands Corporation 2005 Incentive Plan
(“Restated LTIP”). Among other changes more fully
described in the Company’s Proxy Statement filed on
Schedule 14A with the Securities and Exchange Commission on
April 7, 2006, the terms of the Restated LTIP increased the
number of shares of the Company’s common stock reserved for
issuance in respect of stock based awards to its key employees
and non-employee directors from 4,200,000 to 4,578,000. Stock
options from the GBC plans that were assumed in connection with
the merger, and from the Fortune Brands plans that were not
vested as of the spin-off date, were converted to options to
acquire ACCO Brands stock under the Company’s 2005 Assumed
Option and Restricted Stock Unit Plan.
As part of the acquisition and merger with GBC, options and
restricted stock units held by former GBC employees were
converted to similar awards of ACCO Brands stock on a
one-for-one
basis at the time of the merger. The fair value of these
instruments was included as part of the purchase price of GBC,
and a portion of the intrinsic value of the unvested options
(and restricted stock units) was recorded as unearned
compensation.
On January 1, 2006, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 123(R),
“Share-Based Payment” (FAS 123(R)) using
the modified prospective method. FAS 123(R) requires
companies to recognize the cost of employee services received in
exchange for awards of equity instruments based upon the grant
date fair value of those awards. Under the modified prospective
method of adopting FAS 123(R), the Company will recognize
compensation cost for all stock-based awards granted after
January 1, 2006, plus any awards granted to employees prior
to January 1, 2006 that remain unvested at that time. Under
this method of adoption, no restatement of prior periods is
made. As a result of adopting this standard the remaining amount
of unearned compensation was reclassified to
paid-in-capital.
Notes to Condensed Consolidated Financial
Statements — (Continued)
The following table summarizes the impact of all stock-based
compensation on the Company’s consolidated financial
statements for three and six months ended June 30, 2006
(under SFAS No. 123(R)).
Advertising, selling, general and
administrative expenses
$
5.1
$
9.6
Income from continuing operations
before income taxes
$
5.1
$
9.6
Income tax expense
$
1.8
$
3.4
Net income
$
3.3
$
6.2
Basic earnings per share
$
0.06
$
0.12
There was no capitalization of stock based compensation expense.
The incremental effect of adopting SFAS 123(R) for the
three months ended June 30, 2006 was an additional pre-tax
expense of $2.8 million, lower net income of
$1.8 million and an incremental reduction in earnings per
share of $0.03. For the six months ended June 30, 2006 the
incremental effect was an additional pre-tax expense of
$5.6 million, lower net income of $3.6 and an incremental
reduction in earnings per share of $0.07.
Prior to January 1, 2006, the Company recognized the cost
of employee services received in exchange for equity awards in
accordance with Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to
Employees,”and related interpretations in accounting
for its stock options. APB 25 required the use of the
intrinsic value method, which measures compensation expense as
the excess, if any, of the quoted market price of the stock at
date of grant over the amount an employee must pay to acquire
the stock. Accordingly, no compensation expense was recognized
for stock option awards at the date of grant, but compensation
expense was recognized for restricted stock unit
(“RSU”) awards.
During the three and six months ended June 25, 2005, if
compensation cost of employee services received in exchange for
equity awards had been recognized based on the grant-date fair
value of those awards in accordance with the provisions of
FAS 123(R), the Company’s net income and earnings per
share would have been impacted as shown in the following table:
Add: Stock-based employee
compensation included in reported net income, net of tax
0.1
0.2
Deduct: Total stock-based employee
compensation determined under the fair-value based method for
all awards, net of tax
(1.1
)
(2.1
)
Pro forma net income
$
13.2
$
26.9
Basic earnings per share, as
reported
$
0.41
$
0.82
Diluted earnings per share, as
reported
$
0.40
$
0.81
Pro forma net earnings per
share — basic
$
0.38
$
0.77
Pro forma net earnings per
share — diluted
$
0.37
$
0.76
Information regarding 2005 compensation expense related to stock
options of Fortune Brands held by ACCO Brands employees is
discussed in the Company’s annual report on
Form 10-K.
Notes to Condensed Consolidated Financial
Statements — (Continued)
Stock
Options
The exercise price of each stock option equals or exceeds the
market price of the Company’s stock on the date of grant.
Options can generally be exercised over a maximum term of up to
10 years. Options generally vest ratably over the shorter
of three years or one year after the date of grant upon the
retirement of an employee (age 55, with at least
5 years of service) . The fair value of each option grant
is estimated on the date of grant using the Black-Scholes
option-pricing model using the weighted average assumptions as
outlined in the following table:
The Company has 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 risk-free interest rate assumption is based upon the average
daily closing rates during the quarter for U.S. treasury
notes that have a life which approximates the expected life of
the option. The dividend yield assumption is based on the
Company’s expectation of dividend payouts. The expected
life of employee stock options represents the weighted-average
period the stock options are expected to remain outstanding.
These expected life assumptions are established annually through
the review of historical employee exercise behavior of option
grants with similar vesting periods.
A summary of the changes in stock options outstanding under the
Company’s option plans during the six months ended
June 30, 2006 is presented below:
During the three and six months ended June 30, 2006, the
total intrinsic value of options exercised was $2.0 million
and $5.3 million, and the Company received cash of
$5.5 million and $9.1 million, respectively, from the
exercise of stock options. No options vested during the three
months ended June 30, 2006. The fair value of options
vested during the six months ended June 30, 2006 was
$1.2 million. As of June 30, 2006, the Company had
$17.5 million of total unrecognized compensation expense
related to stock option plans that will be recognized over a
weighted average period of 1.4 years.
Notes to Condensed Consolidated Financial
Statements — (Continued)
Stock
Unit Awards
There were 28,906 and 25,600 GBC restricted stock units
outstanding as of June 30, 2006, which had previously been
granted in 2004 and 2005, respectively, which were converted to
ACCO Brands restricted stock units (“RSUs”) in
connection with the merger. These awards will vest in 2007 and
2008, respectively. The Restated LTIP provides for stock based
awards in the form of RSUs, performance stock units
(“PSUs”), incentive and non-qualified stock options,
and stock appreciation rights, any of which may be granted alone
or with other types of awards and dividend equivalents. RSUs
vest over a pre-determined period of time, typically three years
from grant. PSUs also vest over a pre-determined period of time,
presently 3 years, but are further subject to the
achievement of certain business performance criteria in 2008.
Based upon the level of achieved performance, the number of
shares actually awarded can vary from 0% to 150% of the original
grant.
There were an additional 321,776 RSUs outstanding at
June 30, 2006 that were granted in 2005 and 32,841 that
were granted during the six months ended June 30, 2006.
Substantially all outstanding RSUs as of June 30, 2006 vest
within three years of the date of grant. Also outstanding at
June 30, 2006 were 353,000 and 11,500 PSUs granted in 2005
and 2006 respectively, all of which will vest in 2008. Upon
vesting, all of these awards will be converted into the right to
receive one share of common stock of the Company for each unit
that vests. The cost of these awards is determined using the
fair value of the shares on the date of grant, and compensation
expense is recognized over the period during which the employees
provide the requisite service to the Company. A summary of the
changes in the stock unit awards outstanding under the
Company’s equity compensation plans during the first six
months of fiscal 2006 is presented below:
There were no stock unit awards that vested during the quarter
ended June 30, 2006. As of June 30, 2006, the Company
had $13.7 million of total unrecognized compensation
expense related to stock unit awards which will be recognized
over the weighted average period of 1.6 years. The Company
will satisfy the requirement for delivering the common shares
for stock-based plans by issuing new shares.
SFAS No. 123(R) changes the presentation of realized
excess tax benefits associated with exercised stock options in
the statement of cash flows. Prior to the adoption of
SFAS No. 123(R), such realized tax benefits were
required to be presented as an inflow within the operating
section of the cash flow statement. Under
SFAS No. 123(R), such realized tax benefits are
presented as an inflow within the financing section of the
statement. The Company had no realized excess tax benefits
associated with the exercise of options during the first six
months of 2006.
On August 17, 2005, as described in Note 1, Basis
of Presentation, above, ACCO Brands acquired 100% of the
outstanding common stock of GBC. The results of GBC’s
operations have been included in ACCO Brands’ consolidated
financial statements since the merger date. The GBC companies
are engaged in the design, manufacture and distribution of
office equipment, related supplies and laminating equipment and
films. The combination of ACCO Brands and GBC created a world
leader in the supply of branded office products (excluding
furniture, computers, printers and bulk paper) to the office
products resale industry. The Company expects its larger scale
and combined operations to result in the realization of
operating synergies. The consolidated statements of income
reflect the results of operations of GBC since the effective
date of the purchase.
The aggregate purchase price of $424.4 million was
comprised primarily of 17.1 million shares of ACCO Brands
common stock which was issued to GBC shareholders with a fair
value of $392.4 million. ACCO Brands has substantially
completed its integration planning process. Goodwill arising
from the integration plan liabilities, including costs related
to the closure of GBC facilities and other actions, is also
substantially final. The Company expects to recognize
adjustments to goodwill in future periods which may relate to
changes in tax positions and to tax benefits on the exercise of
stock options issued to GBC employees prior to the acquisition
date.
Of the $129.0 million of purchase price assigned to
intangible assets, $38.2 million was assigned to customer
relationships with remaining amortizable lives of approximately
13.5 years, amortizing on an accelerated basis, and
$10.5 million was assigned to developed technology with a
life of approximately 8.5 years. The remaining
$80.3 million was assigned to intangible trade names, of
which $62.8 million was assigned an indefinite life and the
remaining $17.5 million was assigned to trade names with a
life of 23 years. The finite life assigned to a portion of
the acquired trade names was determined based on a consideration
of the product categories, competitive position, and other
factors associated with the Company’s expected use of the
trade names. The excess of purchase price over the fair value of
net assets of $442.0 million has been allocated to goodwill
and reflects the benefit the Company expects to realize from
expanding its scale in the office products market, and from
expected operating cost synergies. The Company has completed the
allocation of goodwill to its operating segments. The results of
that allocation are included in Note 5, Goodwill and
Intangibles.
Notes to Condensed Consolidated Financial
Statements — (Continued)
The following table provides unaudited pro forma results of
operations for the period noted below, as if the acquisition had
occurred on the first day of the Company’s fiscal year of
2005. The pro forma amounts are not necessarily indicative of
the results that would have occurred if the acquisition had been
completed at that time.
Basic earnings per share, before
change in accounting principle
$
0.17
$
0.18
Diluted earnings per share, before
change in accounting principle
$
0.16
$
0.18
Basic earnings per share, net
income
$
0.17
$
0.24
Diluted earnings per share, net
income
$
0.16
$
0.24
Basic weighted average shares
51.5
51.4
Diluted weighted average shares
52.9
52.5
The pro forma amounts are based on the historical results of
operations, and are adjusted for depreciation and amortization
of finite lived intangibles and property, plant and equipment,
and other charges related to acquisition accounting which will
continue beyond the first full year of acquisition. These pro
forma results of operations for the six months ended
June 25, 2005 do not include $5.4 million of one-time
expense related to the
step-up in
inventory value that was recorded as an adjustment to the
opening balance sheet of GBC as presented in the Company’s
Form 8-K
as furnished in February, 2006. The SEC requirements regulating
pro forma disclosure (SEC
Regulation S-X,
Article 11) are different than generally accepted
accounting principles.
The Company has substantially completed its plans for the future
integration of the combined businesses. The identification of
such plans is required to be completed no later than twelve
months following the date of acquisition. Included in the
determination of goodwill are accruals for certain estimated
costs, including those related to the closure of GBC facilities,
the termination of GBC lease agreements and to GBC
employee-related severance arrangements. The amount provided for
these costs as of the date of acquisition is $36.2 million.
The following tables provide a reconciliation of the activity by
cost category since the acquisition date.
The Company had goodwill of $443.2 million as June 30,2006. The increase in goodwill during the six months ended
June 30, 2006 was $9.4 million. The increase was
related to the addition of further business integration
liabilities, as described in Note 4, Acquisition and
Merger, as well as currency translation.
The gross carrying value and accumulated amortization by class
of identifiable intangible assets as of June 30, 2006 and
December 31, 2005 are as follows:
Accumulated amortization prior to the adoption of
SFAS No. 142 “Goodwill and Other Intangible
Assets”.
The Company’s intangible amortization was $3.5 million
and $0.4 million for the three months ended June 30,2006 and June 25, 2005, respectively. For the six months
ended June 30, 2006 and June 25, 2005 intangible
amortization was $6.0 million and $1.1 million,
respectively. Estimated 2006 amortization is $11.5 million,
and is expected to decline by approximately $1.0 million
for each of the 5 years following. As of June 30,2006, $12.6 million of the value previously assigned to
indefinite-lived trade names was changed to an amortizable
intangible asset and is included within the June 30, 2006
amortizable intangible asset balances above. The change was made
in respect of recent decisions regarding the Company’s
future use of the trade name. The Company will commence
amortizing the trade name in the third quarter of 2006 on a
prospective basis over a life of 23 years. No impairment
has been incurred as a result of the change in life of the asset.
Notes to Condensed Consolidated Financial
Statements — (Continued)
The Company has completed the allocation of goodwill to its
operating segments. The results of that allocation are as
follows:
Balance at
June 30,
Reportable Segment
2006
(In millions of dollars)
Office Products
$
269.4
Computer Products
7.0
Commercial-IPFG
94.5
Other Commercial
72.3
Total Goodwill
$
443.2
As more fully described in the Company’s 2005 annual report
on
Form 10-K,
the Company must complete an annual assessment of the carrying
value of its goodwill. The Company performed this assessment
during the second quarter and concluded that no impairment
exists.
6.
Transactions
with Fortune Brands
Certain services were provided to ACCO Brands by Fortune Brands,
ACCO Brands’ parent company prior to the spin-off and
merger described in Note 1, Basis of Presentation.
Executive compensation and consulting expenses paid by Fortune
Brands on behalf of ACCO Brands were allocated based on actual
direct costs incurred. Where specific identification of expenses
was not practicable, the cost of such services was allocated
based on the most relevant allocation method to the service
provided. Costs for the most significant of these services,
legal and internal audit, were allocated to ACCO Brands based on
the relative percentage of net sales and total assets,
respectively, of ACCO Brands to Fortune Brands. The cost of all
other services have been allocated to ACCO Brands based on the
most relevant allocation method to the service provided, either
net sales of ACCO Brands as a percentage of net sales of Fortune
Brands, total assets of ACCO Brands as a percentage of total
assets of Fortune Brands, or headcount of ACCO Brands as a
percentage of headcount of Fortune Brands. Total expenses, other
than interest allocated to ACCO Brands, were $0.7 million
and $1.4 million for the three and six month periods ended
June 25, 2005.
In addition, interest expense associated with Fortune
Brands’ outstanding debt was allocated to ACCO Brands based
upon the average net assets of ACCO Brands as a percentage of
the parent’s average net assets, plus average consolidated
debt not attributable to other operations of Fortune Brands,
ACCO Brands believes this method of allocating interest expense
produced reasonable results because average net assets is a
significant factor in determining the amount of the former
parent company’s borrowings. Total interest expense
allocated to ACCO Brands was $2.5 million and
$5.2 million for the three and six month periods ended
June 25, 2005.
Notes to Condensed Consolidated Financial
Statements — (Continued)
7.
Pension
and Other Retiree Benefits
The components of net periodic benefit cost for pension and
postretirement benefits for the six months ended June 30,2006 and June 25, 2005 are as follows:
The company expects to contribute approximately
$10.0 million to its pension plans in 2006. For the six
months ended June 30, 2006, the Company has contributed
approximately $3.7 million to these plans.
U.S. Dollar Senior Secured
Term Loan Credit Facility (weighted-average floating
interest rate of 6.87% at June 30, 2006 and 5.97% at
December 31, 2005)
$
340.0
$
399.0
British Pound Senior Secured Term
Loan Credit Facility (weighted-average floating interest
rate of 6.66% at June 30, 2006 and 6.61% at
December 31, 2005)
101.1
106.5
Euro Senior Secured Term
Loan Credit Facility (weighted-average floating interest
rate of 4.83% at June 30, 2006 and 4.27% at
December 31, 2005)
76.1
78.7
Notes Payable
U.S. Dollar Senior
Subordinated Notes, due 2015 (fixed interest rate of 7.625%)
350.0
350.0
Other borrowings
5.9
7.7
Total debt
873.1
941.9
Less: current portion of long-term
debt
(16.2
)
(30.1
)
Total long-term debt
$
856.9
$
911.8
As more fully described in the Company’s 2005 annual report
on
Form 10-K,
the Company must meet certain restrictive debt covenants under
the senior secured credit facilities and the indenture governing
the senior subordinated notes also contains certain covenants.
As of and for the periods ended June 30, 2006 and
December 31, 2005, the Company was in compliance with all
applicable covenants. On February 13, 2006the Company
entered into an amendment of its senior secured credit
facilities waiving any default that may have arisen as a result
of the restatement of the Company’s financial statements
related to income taxes as discussed in our 2005 annual report
on
Form 10-K
in February, 2006.
9.
Restructuring
and Restructuring-Related Charges
In March of 2005, the Company announced its plan to merge with
GBC and took certain restructuring actions in preparation for
the merger. Subsequent to the merger, additional restructuring
actions have been initiated which will result in the closure or
consolidation of facilities which are engaged in manufacturing
and distributing the Company’s products, primarily in the
United States and Europe. The Company has accrued employee
termination benefits and lease cancellation costs related to
these actions. Additional charges are expected to be incurred
throughout 2006 and 2007 as the Company continues to identify
and implement phases of its strategic and business integration
plans.
Notes to Condensed Consolidated Financial
Statements — (Continued)
A summary of the activity in the restructuring accounts and
reconciliation of the liability for, and as of, the six months
ended June 30, 2006 is as follows:
Rationalization of operations
Employee termination costs
$
0.8
$
17.5
$
(2.2
)
$
0.3
$
16.4
International distribution and
lease agreements
5.2
—
(0.7
)
0.2
4.7
Loss on disposal of assets
0.4
0.4
—
(0.7
)
0.1
Other
—
0.2
(0.2
)
—
—
Subtotal
$
6.4
$
18.1
$
(3.1
)
$
(0.2
)
$
21.2
Asset impairments(1)
—
1.7
—
(1.7
)
—
Total rationalization of operations
$
6.4
$
19.8
$
(3.1
)
$
(1.9
)
$
21.2
(1)
Included in the total restructuring provision recognized during
the six months ended June 30, 2006 is a pre-tax charge of
$1.7 million related to the exit of a facility meeting the
criteria for recognition as an impaired asset group as defined
by SFAS 144 “Impairment or Disposal of Long-Lived
Assets”. The decision to exit the facility was a part of
the restructuring actions undertaken subsequent to the
Company’s merger with GBC.
Of the 847 positions planned for elimination under
restructuring initiatives provided for through June 30,2006, 56 had been eliminated as of the balance sheet date.
Management expects the $16.4 million employee termination
costs balance to be substantially paid within the next twelve
months. Lease costs included in the $4.7 million balance
are expected to continue until the last lease terminates in 2013.
In association with the Company’s restructuring, certain
non-recurring costs were expensed to cost of products sold and
advertising, selling, general and administrative expense in the
income statement. These charges were principally related to the
implementation of the new company footprint, including internal
and external project management costs, and to strategic product
category exits. For the six months ended June 30, 2006 and
June 25, 2005 these charges totaled $6.7 million and
$2.1 million, respectively. The Company expects to record
additional amounts as it continues its restructuring
initiatives. In addition, the final charges related to planning
for the integration of ACCO Brands and GBC businesses of
$0.8 million were recorded during the six months ended
June 30, 2006 and were classified in advertising, selling,
general and administrative expense in the income statement.
Similar expenses were recorded during the six months ended
June 25, 2005 of $0.8 million.
10.
Information
on Business Segments
The Company’s four business segments are described below:
Office
Products Group
Office Products includes four broad consumer-focused product
groupings throughout our global operations. These product
groupings are: Workspace Tools (stapling and punch products and
supplies), Visual Communication (dry erase boards, easels, laser
pointers, overhead projectors and supplies), Document
Communication (office and personal use binding, laminating
machines and supplies) and Storage and
Notes to Condensed Consolidated Financial
Statements — (Continued)
Organization (storage bindery, filing systems, storage boxes,
and business essentials). Our businesses, principally in North
America, Europe and Asia-Pacific distribute and sell such
products on a regional basis.
Our office products are manufactured internally or sourced from
outside suppliers. The customer base to which our office
products are sold is made up of large global and regional
resellers of our product. It is through these large resellers
that the Company’s office products reach the end consumer.
Computer
Products Group
Computer Products designs, distributes, markets and sells
accessories for laptop and desktop computers and
Apple®
iPod®
products. These accessories primarily include security locks,
power adapters, input devices such as mice and keyboards,
computer carrying cases, hubs and docking stations and
technology accessories for
iPods®.
Computer Products sells mostly under the Kensington brand name,
with the majority of its revenue coming from the U.S. and
Western Europe.
All of our computer products are manufactured to our
specifications by third party companies, principally in Asia,
and are stored, shipped and distributed from facilities which
are shared with our regional Office Products groups. Our
Computer Products are sold primarily to consumer electronic
retailers, information technology value added resellers/IT VARs,
original equipment manufacturers/OEMs and office products
retailers.
Commercial —
Industrial and Print Finishing Group
The Industrial and Print Finishing Group (“IPFG”)
targets book publishers,
“print-for-pay”
and other finishing customers who use our professional grade
finishing equipment and supplies. The Industrial and Print
Finishing Group’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.
Other
Commercial
Other Commercial consists of a grouping of our various Document
Finishing businesses located in dispersed geographic markets and
our Day-Timers business. The results of these companies are not
individually significant to the consolidated results of ACCO
Brands.
Our Document Finishing businesses sell binding and punching
equipment, binding supplies, custom and stock binders and
folders, and also provide maintenance and repair services. The
Document Finishing products and services are primarily sold
direct to high volume commercial end users, commercial
reprographic centers and education markets in North America,
Australia and Europe.
Our Day-Timers business includes U.S., Australia, New Zealand
and U.K. operating companies which sell personal organization
tools and products regionally, primarily utilizing their own
manufacturing, customer service and distribution structures.
Approximately two-thirds of the Day-Timers business is through
the direct channel, which markets product through periodic sales
catalogs and ships product directly to our end user customer.
The remainder of the business sells to large resellers and
commercial dealers.
Income (loss) before taxes,
minority interest and change in accounting principle
$
(15.2
)
$
20.2
$
(15.4
)
$
42.9
Operating income as presented in the segment table above is
defined as i) net sales, ii) less cost of products
sold, iii) less advertising, selling, general and
administrative expenses, iv) less amortization of
intangibles, and v) less restructuring charges.
11.
Earnings
per Share
The distribution and merger discussed in Note 1, Basis
of Presentation, significantly impacted the capital
structure of the Company. ACCO Brands’ Certificate of
Incorporation provides for 200 million authorized shares of
Common Stock with a par value of $0.01 per share.
Approximately 35.0 million shares of the Company’s
common stock were issued to shareholders of Fortune and a
minority shareholder of the Company in connection with the
spin-off. In connection with the Merger, approximately
17.1 million additional shares were issued to GBC’s
shareholders and employees in exchange for their GBC common and
Class B common shares and restricted stock units that
converted into the right to receive the Company’s common
stock upon consummation of the Merger. Total outstanding shares
as of June 30, 2006 were 53.5 million. These amounts,
as well as the dilutive impact of ACCO Brands stock options on
the date of the spin-off have been used in the basic and
dilutive earnings per common share calculation below for all
periods prior to the spin-off.
Notes to Condensed Consolidated Financial
Statements — (Continued)
The calculation of basic earnings per common share is based on
the weighted average number of common shares outstanding in the
year, or period, over which they were outstanding. The
Company’s diluted earnings per common share assume that any
common shares outstanding were increased by shares that would be
issued upon exercise of those stock options for which the
average market price for the period exceeds the exercise price;
less, the shares which could have been purchased by the Company
with the related proceeds including compensation expense
measured but not yet recognized, net of tax.
Weighted average number of common
shares outstanding — basic
53.4
35.0
53.2
35.0
Employee stock options(1)
—
0.5
—
0.5
Adjusted weighted-average shares
and assumed conversions — diluted
53.4
35.5
53.2
35.5
(1)
The company has dilutive shares related to stock options and
restricted stock units that were granted under the
Company’s stock compensation plans. As the company had a
net loss at June 30, 2006, potentially dilutive shares (an
additional 1.0 million shares) were not included in the
2006 diluted earnings calculation as they would have been
anti-dilutive.
12. Commitments
and Contingencies
Pending
Litigation
The Company and its subsidiaries are defendants in lawsuits
associated with their business and operations. It is not
possible to predict the outcome of the pending actions, but
management believes that there are meritorious defenses to these
actions and that these actions will not have a material adverse
effect upon the results of operations, cash flows or financial
condition of the Company.
Environmental
The Company is subject to laws and regulations relating to the
protection of the environment. While it is not possible to
quantify with certainty the potential impact of actions
regarding environmental matters, particularly remediation and
other compliance efforts that the Company’s subsidiaries
may undertake in the future, in the opinion of management,
compliance with the present environmental protection laws,
before taking into account any estimated recoveries from third
parties, will not have a material adverse effect upon the
results of operation, cash flows or financial condition of the
Company.
13. Comprehensive
Income (Loss)
Comprehensive income is defined as net income and other changes
in stockholders’ equity from transactions and other events
from sources other than stockholders, including currency
translation gains and losses. Total comprehensive income (loss)
recognized during the three months ended June 30, 2006 and
June 25, 2005 was $(13.9) million and
$4.5 million, respectively, and during the six months ended
June 30, 2006 and June 25, 2005 was
$(19.8) million and $16.8 million, respectively.
Notes to Condensed Consolidated Financial
Statements — (Continued)
14. Income
Taxes
During the three months ended June 30, 2006, the Company
recorded an income tax benefit of $5.4 million for an
effective tax benefit rate of 35.5%. Tax expense for the three
months ended June 25, 2005 was $6.0 million, an
effective tax rate of 29.7%. Included in the second quarter of
2006 was a reduction in tax expense on non-US income resulting
from the Tax Increase Prevention and Reconciliation Act of 2005
signed into law in May 2006.
The tax benefit recorded during the six month period ended
June 30, 2006 was $5.6 million. The Company reported a
year to date effective tax benefit rate of 36.4%. For the six
month period ended June 25, 2005, the Company recorded
income tax expense of $17.4 million, including
$2.6 million related to foreign earnings no longer
considered permanently reinvested. Of this charge,
$1.2 million was associated with foreign earnings
repatriation under the provisions of the American Jobs Creation
Act of 2004. As a result, the effective tax rate was 40.6%.
15.
Condensed
Consolidated Financial Information
Following the Distribution and Merger the Company’s 100%
owned domestic subsidiaries were required to jointly and
severally, fully and unconditionally guarantee the notes issued
in connection with the merger with GBC. Rather than filing
separate financial statements for each guarantor subsidiary with
the Securities and Exchange Commission, the Company has elected
to present the following consolidating financial statements
which detail the results of operations for the three and six
months ended June 30, 2006 and June 25, 2005, cash
flows for the six months ended June 30, 2006 and
June 25, 2005 and financial position as of June 30,2006 and December 31, 2005 of the Company and its guarantor
and non-guarantor subsidiaries (in each case carrying
investments under the equity method), and the eliminations
necessary to arrive at the reported consolidated financial
statements of the Company.
