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2 0 0 1 W A S

A Y E A R O F

C H A L L E N G E S ,

C H A N G E A N D

D E T E R M I N AT I O N

United Stationers Inc.

Annual Report 2001

2200 East Golf Road

Des Plaines, Illinois 60016

(847) 699-5000

www.unitedstationers.com

C H A L L E N G E S

C H A N G E +


n the middle of a changing marketplace, United Stationers is changing, too. But we continue to focus on what has made us the largest wholesale distributor of business products in North America:

• The industry’s broadest product line—more than 40,000 items, including traditional office products, computer consumables, office furniture, business machines and presentation products, and janitorial and sanitation supplies from 500 manufacturers;

• Same-day pick, pack and ship capabilities;

• An integrated network of 65 distribution centers;

• A wide range of value-added services; and

• Relationships with 20,000 reseller customers, including office products dealers, mega-dealers, contract stationers, office products superstores, computer products resellers, mass merchandisers, mail order companies, sanitary supply distributors,and e-commerce merchants.

In 2001, we also embarked on a plan to improve United’s cost and organizational structure to provide a sustainable competitive advantage:

• We dramatically cut costs;

• We generated operating cash flow of approximately $200 million;

• We developed a new organizational structure that brings decision-making closer to our customers;

• We strengthened company leadership; and

• We are consolidating our computer consumables and traditional business products platforms to better serve customers and promote synergies and cost savings.

T a b l e o f C o n t e n t s

Lower Sales, Earnings Pressure in 2001 2 Strengthening Our Balance Sheet 3 Stock Repurchase Plan Activity 3 Restructuring as a Springboard 4 Improving the Efficiency of Our Distribution Network 6 Restructuring The Order People for Growth 6 Building on Our Strengths 8 Recognition of Our Strengths 11 Returning to Record Results 12 Management’s Discussion and Analysis 13 Selected Consolidated Financial Data 22Quarterly Financial and Stock Price Data 24Report of Management / Report of Independent Auditors 25 Consolidated Financial Statements 26 Notes to Consolidated Financial Statements 32 Directors/Officers Stockholder Information Inside Back Cover

Y o u ’ l l N o t e t h e C h a n g e s

I

Directors Frederick B. Hegi, Jr. (e) (g)

Chairman of United Stationers Inc.; Founding Partner of Wingate Partners

Randall W. Larrimore (e)

President and Chief Executive Officer,United Stationers Inc.

Daniel J. Good (g)

Chairman, Good Capital Co., Inc.

Ilene S. Gordon (a) (h)

President, Pechiney Plastic Packaging, Inc.

Roy W. Haley (a) (h)

Chairman and Chief Executive Officer, WESCO International, Inc.

Max D. Hopper (a)

Principal and Chief Executive Officer, Max D. Hopper Associates, Inc.; Retired Chairman of SABRE Technology Group

Benson P. Shapiro (e) (g)

Malcolm P. McNair Professor of Marketing Emeritus at Harvard Business School; consultant and speaker

Alex D. Zoghlin (h)

Chief Technology Officer, Orbitz, LLC

(a) Audit Committee

(e) Executive Committee (g) Governance Committee (h) Human Resources Committee

Executive Officers

Randall W. Larrimore President and Chief Executive Officer

Steven M. Cappaert Senior Vice President and Controller

Brian S. CooperSenior Vice President and Treasurer

Kathleen S. DvorakSenior Vice Presidentand Chief Financial Officer

Deidra D. GoldSenior Vice President, GeneralCounsel and Secretary

Mark J. HamptonSenior Vice President, Marketingand Field Support Services

Jeffrey G. HowardSenior Vice President, Sales and Customer Support Services

John T. Sloan Senior Vice President, Human Resources

Joseph R. TempletSenior Vice President, Field Sales and Operations

Ergin UskupSenior Vice President and Chief Information Officer

StockholderInformation

Offer of 10-KThe annual report on Form 10-K filed with the SEC is available without charge on the company’s Web site atwww.unitedstationers.com or by writing to the Investor Relations Department at United Stationers’ headquarters.

HeadquartersUnited Stationers Inc. 2200 East Golf Road Des Plaines, IL 60016-1267 TELEPHONE: (847) 699-5000 FAX: (847) 699-4716 www.unitedstationers.com

Investor Relations ContactKathleen Dvorak Senior Vice President and Chief Financial Officer E-MAIL: [email protected]:(847) 699-5000 EXT. 2321

Stock Market ListingNasdaq National Market System Trading Symbol: USTR Included in the S&P SmallCap 600 Index

Annual MeetingThe annual meeting of stockholders is scheduled for 2:00 p.m. on May 8, 2002, at United Stationers’ headquarters.

Transfer Agent and RegistrarCommunications on stock transfer requirements, lost stock certificates or change ofaddress should be directed to: EquiServe Trust Company, N. A.P. O. Box 43010 Providence, RI 02940-3010 TELEPHONE: (781) 575-3400 E-MAIL:shareholder-equiserve @equiserve.com WEB SITE:www.equiserve.com

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Back row, left to right: Alex D. Zoghlin; Roy W. Haley;Ilene S. Gordon; Daniel J. Good;and Max D. Hopper.

Front row, left to right: Benson P. Shapiro; Randall W. Larrimore; and Frederick B. Hegi, Jr.

B o a r d o f D i r e c t o r s

Directors

ExecutiveOfficers


1U n i t e d S t a t i o n e r s A n n u a l R e p o r t

United Stat ioners Inc . and Subsidiar ies

Income Statement Data for the Years Ended Dec. 31, 2001 Dec. 31, 2000

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,925,936 $ 3,944,862

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,055 202,546

Income before income taxes and extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,641 164,116

Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,978 92,167

Net income per share—assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.68 2.65

Operating Results Before Restructuring1 and Extraordinary 2 Charges

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,658 1 $ 202,546

Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,9211 98,6432

Net income per share — assuming dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.531 2.842

Balance Sheet Data at Year End

Working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 412,7663 $ 495,4563

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,339,5873 1,447,0273

Long-term debt (including current maturities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,705 409,867

Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538,681 478,439

Financial Highlights(dollars in thousands, except per share data)

$3.9

01

$3.9

00

$3.4

99

$3.1

98

$2.6

97

$1701

01

$203

00

$182

99

$1694

98

$1354

97

$2.531

01

$2.842

00

$2.37

99

$2.002, 4

98

$1.472, 4

97

In the face of a challenging economic environment, we were able to hold salessteady in 2001, achieving a 12.9% four-yearcompound annual growth rate.

Operating income in 2001 was negatively affect-ed by an operating loss at The Order People.

While net income per share fell below ourexpectations, cost control measures preventeda further decline, and the savings from ourrestructuring should help boost earnings in 2002.

(Dollars in Billions) (Dollars in Millions)

NET SALES OPERATING INCOME(Dollars per Share)

NET INCOME PER SHARE

1 Excluding a pre-tax restructuring charge of $47.6 million. (See Note 3 to the Consolidated Financial Statements.) 2 Excluding the extraordinary charge. (See Note 7 to the Consolidated Financial Statements and Notes 10 and 11 to the Selected Consolidated Financial Data.) 3 Excluding trade accounts receivable sold under a receivable securitization program. (See Note 5 to the Consolidated Financial Statements.)4 Excluding non-recurring charges. (See Notes 10 and 11 to the Selected Consolidated Financial Data.)

409,867

478,439

271,705

538,681

A S h a r p e r F o c u s

2

2001 was one of the toughest periods in United Stationers’ 80-year history. First, we faced a number of negative macro-economic factors. The U.S. entered an economic downturn in March 2001, which was made worse by the terrorist attackson September 11th. This led to an unemployment rate of5.8% by year end— the highest level since 1994 — and a 7% increase in the number of companies that went out ofbusiness compared with 2000.

Second, with the benefit of hindsight, we now recognizethat United built an infrastructure to support a business thatdid not materialize as expected. We also had not foreseen thecollapse in e-commerce that would lengthen the selling cyclesfor The Order People (TOP)— our third-party non-officeproducts fulfillment business. This meant we had staffed up anddeveloped an infrastructure that was out of balance with ourability to ramp up revenues. In addition, U.S. Office Products(USOP) was acquired in May 2001 by Buhrmann N.V., theparent company of Corporate Express, Inc. As a result, USOPwas integrated into Corporate Express’ business model, whichis based on buying a higher percentage of products directlyfrom manufacturers. This resulted in a loss of more than $100million of sales volume in 2001.

The combination of these internal and external issues putan end to four straight years of record performance. However,United’s business model is sound and its financial conditionremains strong. Just as important, the challenges we facedalso gave us the determination to change United into a morecompetitive company with an even greater focus on customerservice, distribution excellence, employee advancement andreturn on invested capital.

Lower Sales, Earnings Pressure in 2001

The factors mentioned earlier, plus the sale of our non-corePositive ID bar code scanning business and a portion ofCallCenter Services, reduced annual sales by approximately$30 million. However, the determination and efforts of ourassociates allowed United to nearly offset this sales shortfall.So revenues of $3.9 billion were essentially flat with the prioryear. On a product category basis, the hardest hit areas weretraditional office products (down 7%) and furniture (down6%). Sales of computer consumables rose 5%. In addition,sales of janitorial and sanitation products were strong, grow-ing 31% during the year. This increase was the result ofacquiring Peerless Paper in January 2001 and an organicgrowth rate in the high single digits.

We also saw mixed performance on a business channelbasis. Our larger customers who serve “Fortune 500” firmswere negatively affected as these companies laid off employ-ees and pulled back on spending. However, our independentdealer customers— who contribute the majority of our sales—managed to avoid the steep decline in business experiencedby other types of resellers.

9%

BusinessMachines &Presentation

Products

Traditional Office Products

32%

Office Furniture13%

U n i t e d S t a t i o n e r s A n n u a l R e p o r t

Both traditional office products and computer consumablescontinue to account for about a third of our business.

To Our Stockholders

35%

Computer Consumables

2001 Revenues by P roduc t L ine

Janitorial & Sanitation

Supplies11%

TOP’s

Flat sales put pressure on our gross margin, whichended the year at 15.8%compared with 16.3% for2000. Operating expenses as a percent of sales grew to12.7% (including the restruc-turing charge) in 2001 versus11.2% in 2000. This led tooperating income of $122.1million or 3.1% of sales in2001, compared with $202.5million or 5.1% in 2001.Excluding the restructuringcharge, operating expenses in 2001 were 11.5% of sales, which led to operatingincome of $169.7 million, or 4.3% of sales (including a$21.7 million loss beforeinterest and taxes in The Order People).

In the third quarter, we recorded a $47.6 million pre-taxrestructuring charge, which included a $31.7 million cash chargeand a $15.9 million non-cash charge. In addition, we incurredabout $2.2 million of implementation costs related to the restruc-turing in 2001. During 2002, we expect to record an additional$4.5 million of restructuring-related implementation costs.

As a result, we reported net income of $57.0 million, or $1.68per share in 2001, compared with $92.2 million, or $2.65 pershare in 2000. Excluding the restructuring charge, net incomewas $85.9 million, or $2.53 per share, compared with 2000’s$98.6 million, or $2.84 per share, which excludes the $6.5 mil-lion extraordinary charge related to the early retirement of debttaken in that year.

Strengthening Our Balance Sheet

We kept capital expenditures under control during the year.Spending totaled $28.6 million compared with $39.3 million

in 2000. In 2002, we expect capital expenditures will reach about $35 million, which includes $17 million in restructuring-related costs.

As the sales rate slowed, we focused on the prudent use of our working capital. Incentives for our management team andsales force now include specific EPS and working capital goals,because we believe what you measure and reward gets managed.With this focus, we improved the balance sheet by reducinginventory levels by $107 million, lowered accounts receivable by$44 million (which includes $125 million and $150 million ofreceivables sold under the asset-backed securitization in 2001and 2000, respectively), and decreased accounts payable by $56 million. This allowed us to reduce core elements of working capital by $95 million, compared with an increase of $92 millionin 2000.

In addition, we elected to sell only $125 million of receivablesunder our asset-backed securitization— a fairly standard, third-party program used to provide funding at very low interest rates.This was $25 million lower than in 2000. As a result, we reducedour debt (including the asset-backed securitization) during theyear by $163.2 million, which improved our debt to total bookcapitalization to 42.4% from 53.9% a year ago. Earnings beforeinterest, taxes, depreciation and amortization (EBITDA) com-bined with lower debt improved our total debt to EBITDA ratioto 1.9x (including the $125.0 million of sold receivables), its lowest level in the last five years.

Stock Repurchase Plan Activity

Strong free cash flow allowed us to continue repurchasing Unitedstock. During 2001, we bought 467,500 shares, at an averageprice of $26.50, under an existing $50 million authorization. Westill have $15 million of the original authorization for purchases.


1.9 x3

01

2.4 x

00

2.3 x

99

2.4 x2

98

3.3 x2

97

The combination of high levels of cash flow and lower debt reduced this ratio to the lowest level since 1995.

1 Total debt includes the accounts receivable soldunder the asset-backed securitization. (See Note5 to the Consolidated Financial Statements.)

2 Excluding non-recurring charges. (See Notes 10 and 11 to the SelectedConsolidated Financial Data.)

3 Excluding restructuring charge. (See Note 3 to the Consolidated Financial Statements.)

(Dollars in Millions)

TOTAL DEBT 1 TO EBITDA

O r g a n i z i n g O u r O p e r a t i o n s

Restructuring as a Springboard

We expect our restructuring to produce cost savings of $25million in 2002. Beginning in 2003— the first full year after it is completed— the restructuring should save approximately$40 million and significantly improve our return on investedcapital. However, we view the restructuring as more than away to cut costs. It’s part of a fundamental change at United:removing barriers to serving our customers, while increasingefficiencies in our operations.

Cutt ing Costs

United had a compound annual revenue growth rate of 12.9%between 1997 and 2001. We obviously needed to increase ourstaff and build an infrastructure to accommodate this expan-sion. As growth slowed in 2001, however, we had excesscapacity and overhead.

This meant we had to rationalize our facilities and reduceour staff to be in-line with lower revenue expectations. Wesignificantly trimmed our headcount through a voluntary separation program, and then through a layoff. Both programswere implemented at every level of the company.Selling part of our call center business and restructuring our operations led to an additional reduction. By early summer2002, we will have lowered ouremployee base 20% from August2001. While we sincerely regretthe impact on the associateswho were affected, this wasa necessary action tostrengthen our positionfor the future.

Creat ing a New Organizat ional Structure

As we reduced our headcount, we also reorganized United todo a better job of capitalizing on opportunities. Our specificgoals for the reorganization— in addition to cost savings—included driving decision-making closer to customers, speed-ing implementation of best practices, improving overall effectiveness, encouraging new ideas, and strengthening ourleadership team.

As the President and CEO, I am charged with ensuringthat United has a long-term growth strategy and the resourcesto meet its goals. The following Senior Vice Presidents reportdirectly to me: Chief Financial Officer, Chief InformationOfficer, General Counsel, and the head of Human Resources.In addition, we have created a new position— Chief OperatingOfficer— which we hope to fill within the next few months.This person also will report to me and will supervise United’sday-to-day operations. A number of people will report directly to the COO: the heads of Sales and CustomerSupport Services, Field Sales and Operations, Marketing and Field Support Services, Merchandising, Inventory Management and Strategic Facilities Support, and the President of Lagasse . I believe this structure will give us

a more efficient chain of command and a more effective distribution of authority and responsibility. I also am very excited about the caliber of people we have filling each position. In addition to Ergin Uskup,

who has held the CIO position for eight years, we welcomed the following to United’s senior

leadership ranks:

4 U n i t e d S t a t i o n e r s A n n u a l R e p o r t

Playing lead roles in the company’s drive for working

capital efficiency, Senior Vice Presidents Jim Fahey

(left) and Ron Berg are directing merchandising and

inventory management efforts.

Manag ing Our Work ing Cap i ta l


• Kathy Dvorak was promoted to Senior VP and CFO. Her 20 years of experience with various aspects of United’sfinancial management and investor relations made her theideal candidate for this position.

• Deidra Gold, our new Senior VP and General Counsel, has a strong background in mergers and acquisitions, financingtransactions, compensation and benefits, and corporate law.Before joining United, Deidra was an officer of AmeritechCorporation and then eLoyalty Corporation, where she wasinvolved in financing, strategic planning and M&A activi-ties and provided legal guidance to management and theboard of directors.

• John Sloan, our new Senior VP of Human Resources joined us in January 2002 from Sears, Roebuck and Co.,where he served as the Executive VP of Human Resources.John led all aspects of this function, including compensa-tion, benefits, labor relations, recruitment, and training anddevelopment. He also established a nationally recognizeddiversity program.

We implemented another important organizational changewithin our Supply Division. Instead of having four independentregions— each with its own infrastructure— we now have seven zones:West, Northwest, Southwest, Midwest, Great Lakes, East, andSoutheast. The leaders of these zones focus exclusively on sellingand operations. Our goal is to give the people who work directlywith customers more responsibility and authority to get thingsdone quickly and correctly, so we can provide better service.

To operate more efficiently and to support zone efforts, weformed the Shared Services Group. Many of the people in thisgroup came from former region support staffs. They now are help-ing local teams to cross geographic and organizational boundariesand implement best practices throughout the company.

The goals for restructuring our organization include driving decision-making

closer to customers, improving overall effectiveness, reducing costs, encour-

aging new ideas, and accelerating implementation of best practices. These

executives will take a leading role in this process (from left to right): Joe

Templet, Senior VP of Field Sales and Operations; Kathy Dvorak, Senior VP and

CFO; Mark Hampton, Senior VP of Marketing and Field Support Services; and

Jeff Howard, Senior VP of Sales and Customer Support Services.

Our new 300,000 square foot Denver distribu-

tion center opened in May 2001. Designed for

optimum efficiency, this facility can warehouse

almost $20 million in inventory and ship

over 20,000 order lines per night. Automated

conveyor systems use bar code intelligence

to guide orders through the warehouse in the

most efficient manner— from picking zones

to packing stations— and then on to the

appropriate shipping lanes where they can

be loaded onto trucks for delivery.

C h a m p i o n s o f C h a n g e

S t a t e - o f - t h e - A r t F a c i l i t i e s

I n t e g r a t i n g O u r O p e r a t i o n s

Improving the Efficiency of Our Distribution Network

None of our competitors can match United’s ability to get itsbroad product offering into the hands of end-consumers inevery major metropolitan area in North America within 12 hours of order placement. We are committed to maintain-ing this ability.

Integrat ing Systems and Processes

We are reviewing our entire operation, looking for ways toeffectively consolidate our business platforms. One opportunitywe identified is to have a single operating platform for com-puter consumables and traditional office products. To achievethis, we are putting the Supply Division and Azerty on thesame system during the second quarter of 2002.

This integration has major benefits to our customers andUnited. Our office products customers no longer will have togo through a separate Azerty operation to order a full line ofcomputer consumables. They now will have the ability toreceive computer consumables and office products in a singlebox. We will benefit from incorporating Azerty’s productoffering into our Supply Division facilities, and by closingfour dedicated computer consumables distribution centers andconsolidating some administrative and support staff functions.We are confident that this will produce efficiencies andeconomies of scale for both United and its customers.

We also completed the integration of Peerless Paper into Lagasse last November. This wholesale distributor of janitorial and sanitation, paper, and food service products,was acquired in January 2001. By the first quarter of 2002, we had a fully integrated product offering from the combinedoperations— increasing Lagasse’s number of stockkeepingunits (SKUs) from 6,000 to 7,000.

Capita l iz ing on Opportuni t ies

We saw other opportunities to expand in several areas lastyear. This included replacing old warehouses with two new300,000 square foot distribution centers in Denver andCharlotte, and expanding a furniture annex to 214,000 squarefeet in Los Angeles. In addition, we broke ground on a new600,000 square foot state-of-the-art distribution center inAtlanta that will replace an older facility there.

We also are looking at ways to modernize and reduce thenumber of distribution centers without affecting our enviablecustomer service record. For example, plans are underway to strengthen the Sacramento operations by consolidatingtwo facilities into a single distribution center with a new furniture annex. Two existing centers in Memphis are beingconsolidated. In addition, we closed our Cincinnati facility inNovember and are successfully serving those customers fromour Indianapolis and Columbus distribution centers. Our goalis to continue leveraging the distribution network to betterserve our customers and generate more profit as we grow.

Restructuring The Order People for Growth

A year ago, I wrote about the opportunities we saw for growthat The Order People (TOP). This year we restructured theoperation. What happened?

TOP was formed during the period of explosive growth in e-commerce. Internal projections, reviewed and supported by third-party professionals, convinced us that we could build on our pick, pack, ship and track core competencies to become a significant player in third-party fulfillment.


We focused on both traditional and dot.com businesses, withthe latter providing a quick ramp-up. The idea was to investquickly and fully in our business model to develop a sustain-able competitive advantage.

However, with a longer-than-expected selling cycle and the collapse of the dot.com universe, TOP had sizableexpenses and investments and little revenue.

Rather than wait for the tide to turn, we took a number of steps to trim the cost structure in 2001.

• The Reno and Harrisburg facilities were closed.

• Part of CallCenter Services was sold.

• Staffing and expenses were dramatically reduced.

• The Memphis distribution center, originally devoted to TOP customers, now also is being used to help us betterserve Supply Division, Lagasse and Azerty customers.

• Instead of being freestanding, TOP now is a priority initiative within the Supply Division. This means we arekeeping a dedicated staff for sales, marketing and clientintegration, while leveraging Supply Division resourcesfor all other areas.

As a result of these actions, we expect that TOP shouldbegin making a contribution to earnings in the second half of 2002.


United’s customers can make next-day deliveries to over 90% of the U.S.population and in major metropolitan areas of Canada and Mexico. They cando this because our integrated network of distribution centers allows us tosend shipments to customers within 12 hours of receiving the order. OurSupply Division has 37 regional distribution facilities with a mix of traditionaloffice products, computer consumables, business machines and presentationproducts, furniture, and janitorial and sanitation products. This includes amega-center that also supports the Azerty, Lagasse and The Order Peoplebusinesses. These facilities also can provide fulfillment services for non-officeproduct items. We have 24 dedicated janitorial and sanitation distributioncenters, two distribution centers that provide computer consumables and traditional office automation products in Canada, and two more facilities inMexico that offer computer consumables.

T h e P o w e r o f a n I n t e g r a t e d N e t w o r k

More than 40 miles of conveyors keep

product moving in our state-of-the-art

distribution centers. This equipment

facilitates the high volume throughput

required to pick, pack and ship over

525,000 order lines per night, so our

customers can make their business

products deliveries the next day. A

sophisticated warehouse management

system integrates our inventory and

logistics capabilities, so we can track

each carton and its contents as they

move through our distribution center

and onto the truck for delivery.

S t a t e - o f - t h e - A r t D i s t r i b u t i o n S y s t e m s

F i n d i n g S o l u t i o n s

Over the longer term, we still believe in the concept of offering order fulfillment to third parties. It addresses asupply chain need: companies in non-office products areaswant to outsource their product procurement and fulfillment.We believe that providing a source for these activities — a core competency of United — offers an opportunity for significant growth.

Building on Our Strengths

The restructuring will make us a more focused organizationand allow us to build on the competitive advantages thatmade United strong in the first place. This will improve ourposition as a critical link in the supply chain for manufacturersand resellers.

A Cr i t ica l L ink for Manufacturers

We give our 500 manufacturers an edge in the marketplacethat they could not cost-effectively achieve on their own.

Reach a Wider Audience Our distribution network helpsvendors reach more than 20,000 customers: office productsdealers, mega-dealers, contract stationers, office productssuperstores, computer products resellers, mass merchandisers,mail order companies, sanitary supply distributors, and e-commerce merchants. In addition, our infrastructure allows us to deliver vendors’ products to resellers in everymajor North American market within 12 hours of orderplacement— meeting resellers’ demands for quick delivery.

Frequent Contact with Potential Customers Our manu-facturers’ products are featured in an unmatched array of print and online catalogs. During 2001, United distributed 30 million catalogs and promotional flyers. This includes ourGeneral Line Catalog, the biggest and most widely distributedoffice products catalog in North America. Our electronic catalog database also was syndicated to more than 2,000reseller Web sites by year end. To further improve the sales process, in 2001 we developed biggestbook.com™. This Web site offers more details on manufacturers’ productsthan is feasible in print and online catalogs. As a result, end-consumers can get quick answers to their questions andensure they are buying the right products to meet their needs.

Deeper Product Line Exposure By stocking more than 40,000 products, United can feature items that most resellersdo not keep in stock. This allows end-consumers to see moreof a manufacturer’s product line— and also helps manufactur-ers more cost-effectively launch new products and createdemand for them.

Easy, Efficient Ordering Process In an effort to improvequality while saving time and costs, we send more than 90%of our orders electronically to manufacturers. This eliminatesthe redundant data entry (associated with traditional paperpurchase orders), ensures high quality data, timely turnaroundof orders, and administrative cost savings. In addition,because United handles fulfillment for so many resellers, itgenerates large orders that can be efficiently handled by themanufacturers. Then United breaks down orders into “one-eaches” that resellers and end-consumers want. As a result,manufacturers do not have to pick, pack and ship small volume orders, which saves them from the costs of buildingelaborate distribution systems.



A Cr i t ica l L ink for Resel lers

As resellers look for ways to reduce their costs without compromising product offerings and service to end-consumers,United becomes their natural choice.

Broadest Product Line Without investing in inventory and warehouses, resellers capitalize on United’s capabilities as North America’s:

• Largest wholesale distributor of traditional office supplies.

• Largest wholesale distributor of computer consumables.

• Largest wholesale distributor of office furniture.

• Largest wholesale distributor of janitorial and sanitation supplies.

• Leading wholesale distributor of business machines and presentation products.

United’s 2002 General Line Catalog has 27,000 items and the most new products ever introduced in one year: 1,700 on 96 more pages than in 2001.

Handle Backroom Operations Resellers want to increase the efficiency of their assets while reducing investments in inventory, warehouses and delivery vehicles. They turn to United for a number of reasons:

• Our substantial investment in a broad range of inventorygives resellers access to the products their end-consumerswant— even items that would not be cost-effective forresellers to carry.

• Our state-of-the-art order processing capabilities allowed us to handle an average of 525,000 order lines per day lastyear. United receives orders from its customers by phone,fax, e-mail or the Internet. Then our integrated systems help us to locate products at warehouses across the country,consolidate the items, and then provide a single on-timedelivery of the entire order.

• Our state-of-the-art distribution infrastructure includes 65 regional distribution centers in 40 major cities in 29states and provinces in the U.S., Canada and Mexico. In the past three years, we invested nearly $50 million in newdistribution centers and in warehouse technology — some-thing our competition has not done.

• Our fleet of more than 400 trucks delivers orders as soonas they have been picked. In addition, our relationships with third-party express and package carriers help us ensurenext-day delivery to resellers or end-consumers across North America.

This operating system is backed by a corporate culture focusedon providing superior service and fulfillment excellence. As aresult, we have maintained the highest service levels in the indus-try: a 98% order fill rate, a 99.5% order accuracy rate, and a 99%on-time delivery rate.

F i n d A l l t h e D e t a i l s i n b i g g e s t b o o k . c o m

The biggestbook.com Web site and CD-ROM are extensions of the General Line

Catalog, providing more detailed information on the 27,000 products in the

traditional print catalog. Both also provide easy access to aid customer searches.

For example, the “Resource” section includes interactive tools to help select the

right products, such as chairs and desks, and a cost containment calculator that

shows customers the benefits of using one supplier rather than several.

D e l i v e r i n g F u l f i l l m e n t E x c e l l e n c e


Unmatched Value-Added Programs United has a numberof programs designed to help resellers sell more products and better serve their customers. Some of our more popularones include:

• A wide range of sales generating materials. Theseinclude print and online catalogs that are informative,easy to use — and feature the reseller’s name. Promotionalflyers remind end-consumers that resellers are price-competitive on commodity items.

• Customized packaging programs. This includes ourWrap and Label Program. United packages the itemsordered by each end-consumer, attaches an address labelwith the reseller’s name, then delivers the order to thereseller or facilitates delivery to the end-consumer at thereseller’s direction. Resellers value this program becauseit means they do not need to break down bulk shipmentsfrom manufacturers and repackage them for end-consumers.As a result, they can reduce handling delays, lower theircosts and increase their financial returns.

• Customized delivery programs. Our relationships with a network of small package carriers and other serv-ice providers allow us to offer the Nationwide ExpressDelivery Program. Products ordered through Unitedreach 98% of business consumers in the U.S. on a same-day, next-day or second-day basis. This means that local,regional and virtual resellers can serve end-consumersacross the country.

• Customer training programs. United provides profes-sional, affordable training on business-related subjectsthat otherwise would not be available to many resellers.In 2001, this translated into 90 courses attended by1,200 resellers — from “Exceptional Customer Service” to “Growing Market Share and Margin.”

• End-consumer research. United sponsors end-consumerresearch each year, then presents the results and recom-mendations to our resellers on how to capitalize onthem. For example, purchasers of business products say a “big catalog” is the single most important item theywant to see from a prospective supplier — so United’sGeneral Line Catalog is a competitive advantage. Lastyear, thousands of resellers turned to United for a betterunderstanding of end-consumers and how to reach them.

• Premier Performance Shows. In 2001, resellers and end-consumers attended six shows across the country,sponsored by United, to preview new products andreceive in-depth product information from approximately60 manufacturers. These shows are more than informa-tive. They also help strengthen relationships betweenthe thousands of dealers and end-consumers who attend.

Pursuing Operat ional Excel lence

Over 90% of the orders we fill each day represent orders thatour resellers received earlier that same day. We truly providejust-in-time delivery to resellers so they can offer same- ornext-day delivery to their customers. We essentially serve as a warehouse for our resellers — for many of them we are theirwarehouse. Our services are critical to resellers, so we continueto look for ways to strengthen them. Here are some of theenhancements made in 2001:

• We now pick orders based on the times when trucks must leave to deliver them. This improves our abilityto meet shipping cut-off times for our own truck fleetand third-party carriers.

• Packing lists now are laser-printed with a shippinglabel and the picking document on the same form.We also provide a peel-off label on the packing list tomake the return process easier. In addition, resellers andend-consumers have the option of choosing a separatepacking list for each box of the order rather than a singlepacking list for the entire order.

10


• We now have a carton-sizing standardization program.It uses a formula that looks at the “cube” requirement of an order to ensure it is put in the appropriate-sized box forshipping. This leads to improved handling, reduced shippingdamage and lower packaging costs.

Recognition of Our Strengths

In a year when we could not post strong near-term financialresults, it was particularly gratifying to receive recognition for the approach we take to our business.

• United was again listed as a “Fortune 500” company.

• In 2002, Fortune Magazine included United as one of “America’s Most Admired Companies.” The survey identified the 10 largest companies (by revenue), in 58industries. Then 10,000 executives, directors and securitiesanalysts rated the companies on eight criteria. Unitedranked #6 in the “Stores and Distributors” category, under“Wholesalers: Electronics and Office Equipment.”

• United was named to Forbes Magazine’s “Platinum 400”list of best performing companies. The list includes “thebest big companies in America”— those “that are better than their competitors, with outstanding profitability andgrowth.” The companies are selected based on 23 broadindustry sectors. United posted the highest earnings-per-sharegrowth rate in the “Business Supplies” sector.

• Information Week Magazine ranked United 104th in its “Information Week 500,” which tracks the largest and most innovative IT organizations based in the U.S.Companies included in this annual listing had at least $1 billion in annual revenue and exhibited “a pattern of technological, procedural, and organizational innovation.”

• United also placed #21 in Computerworld Magazine’s “100Best Places to Work in IT.” The judging criteria includedcompany benefits, training and development, average salaryincreases, and staff advancement and turnover.

Products offered by United Stationers and Azerty now are available through

one integrated system. This means one order, one shipment and one invoice

from United, the leading wholesale distributor of business products for

office supplies and computer consumables.

D e l i v e r i n g F u l f i l l m e n t E x c e l l e n c e

11

W o r k i n g f o r aB r i g h t e r F u t u r e

Returning to Record Results

We are committed to returning to our long-term growth goals: 6-9% annual revenue expansion, 12-15% increases in earnings, a 300 basis point improvement in return on invested capital, and free cash flow in excess of $100 million. We face some significant challenges in reaching these goals:

• Economists currently expect a slower first half of the year, followed by a stronger second half— of course, they did forecast the same scenario a year ago.

• We also will have to overcome some macroeconomic and industry-related trends. Economic conditions and widespread layoffs mean there is a smaller employee population in need of our products, as well as budget constraints on the amount of dollars spent per employee on office supplies. In addition, there is an excess supply

of Grade “A” furniture due to the demise of dot.com and other companies.As a result, the office products industryis expected to experience only nominal growth during this year.

What makes us expect that Unitedcan do better than the market? The firstreason is history: we have grown fasterthan the market for most of the last 20years. Secondly, we believe the steps weare taking should position us well for thechanging industry conditions.


“United Stationers has a tradition of meeting challenges with

change, determination and just as importantly — enthusiasm.

This has made us the industry leader and we believe will create

opportunities for continued growth and profitability.”

Randal l W. Larr imore

• We are driving down our cost base, so we can reachacceptable profitability at a lower level of revenue.

• We have reorganized our operation to better share and implement best practices and capitalize on opportunitiesthat come our way.

• We are strengthening our leadership team and are providing them with the tools needed to succeed.

• We are using incentives to reward employees for achiev-ing cost reductions and working capital efficiency goals.

• We have proven that United can continue to offer fulfillment excellence to its customers — in tough timesas well as good.

On behalf of the board of directors and management team,I want to extend my thanks to all of our associates for theirhard work during this difficult year. I also want to thank theshareholders who supported us in 2001 and renew our pledgeto create even more value for them in the coming years.


March 15, 2002

12

U n i t e d S t a t i o n e r s A n n u a l R e p o r t 13

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis andother parts of this Annual Report contain “forward-lookingstatements,” within the meaning of Section 27A of the SecuritiesAct and Section 21E of the Exchange Act, that are based oncurrent management expectations, forecasts and assumptions.These include, without limitation, statements using forward-looking terminology such as “may,” “will,” “future,” “expect,”“intend,” “anticipate,” “believe,” “estimate,” “project,” “forecast”or “continue” or the negative thereof or other variations thereonor comparable terminology. All statements other than statementsof historical fact included in this Annual Report, including thoseregarding the Company’s financial position, business strategy,projected costs and plans and objectives of management for futureoperations are forward-looking statements. Certain risks anduncertainties could cause actual results to differ materially fromthose in such forward-looking statements. Such risks anduncertainties include, but are not limited to, uncertaintiesrelating to: the Company’s restructuring plan, including its abilityto realize expected cost savings from facility rationalization,systems integration and other initiatives and the timing of thosesavings; the Company’s ability to streamline its organization andoperation, successfully integrate Azerty and implement generalcost-reduction initiatives; the Company’s reliance on keysuppliers and the impact of fluctuations in their pricing andvariability in vendor allowances based on sales volume; theCompany’s ability to anticipate and respond to changes in end-user demand; competitive activity and the resulting impact onpricing and product offerings and mix; reliance on keymanagement personnel; and economic conditions and changesaffecting the business products industry and the general economicconditions. A description of these factors, as well as other factors, which could affect the Company’s business, can be foundin certain filings by the Company with the Securities andExchange Commission.

Readers are cautioned not to place undue reliance on forward-looking statements contained in this Annual Report. TheCompany undertakes no obligation to release the results of anyupdates or revisions to these forward-looking statements that maybe made to reflect any future events or circumstances.

The following discussion should be read in conjunction withthe Company’s Consolidated Financial Statements and relatednotes appearing elsewhere in this Annual Report.

OverviewUnited Stationers Inc. through its wholly owned operating

subsidiary United Stationers Supply Co. (“USSC”), and USSC’ssubsidiaries (collectively, the “Company”) is the largest generalline business products wholesaler in the United States, with 2001net sales of $3.9 billion. The Company sells its products through

a national distribution network to more than 20,000 resellers,who in turn sell directly to end-users. These products aredistributed through a computer-based network of 36 USSCregional distribution centers, 24 dedicated Lagasse, Inc.(“Lagasse”) distribution centers that serve the janitorial andsanitation industry, four Azerty Incorporated (“Azerty”)distribution centers that serve the U.S. and two in Mexico thatserve computer supply resellers, two distribution centers that servethe Canadian marketplace and a mega-center that supportsUSSC, Azerty, Lagasse, and The Order People. During thesecond quarter of 2002, Azerty’s computer systems and productoffering will be integrated into USSC and the Company intendsto close the four Azerty distribution centers. Following theintegration the Company intends to continue to market computer consumables using the Azerty name.

During 2000, the Company established The Order People(“TOP”) to operate as its third-party fulfillment provider forproduct categories beyond office products. To become a fullservice provider, the Company acquired CallCenter Services, Inc.which was a customer relationship management outsourcingservice company with inbound call centers in Wilkes-Barre,Pennsylvania, and Salisbury, Maryland. In 2001, the Company didnot achieve the estimated revenue to support TOP’s cost structure.As a result, the Company began to significantly reduce theoperating expenses of TOP. Therefore, in November 2001, theWilkes-Barre portion of CallCenter Services, Inc. was sold toCustomer Satisfaction First and the Salisbury portion was sold to 1-800-BARNONE, a Financial Corporation, Inc., in January 2002.However, the Company remains committed to building the third-party fulfillment business and to providing outstanding customerservice to current and future clients. To accomplish this, TOP’sclients will be serviced utilizing the resources within the Company’sSupply Division. TOP will use the Memphis distribution center asits lead distribution point with USSC’s facilities providing supportwhere necessary.

The Company is focused on leveraging its infrastructure acrossall business units to lower its operating expenses and increase cashflow. In addition, the Company’s entire distribution network iscontinuously under review to improve productivity and efficiency,including the ability to reduce working capital requirements.

Restructuring Charge. In the third quarter of 2001, theCompany’s Board of Directors approved a restructuring plan that includes:

• An organizational restructuring aimed at eliminating certain layers of management to achieve a lower cost structure and provide better customer service;

• The consolidation of certain distribution facilities and call center operations;

United Stationers Inc. and Subsidiaries

U n i t e d S t a t i o n e r s A n n u a l R e p o r t14

• An information technology platform consolidation;

• Divestiture of The Order People’s call center operations and certain other assets; and

• A significant reduction to The Order People’s cost structure.

The restructuring plan calls for a workforce reduction of 1,375.These positions are related primarily to The Order People andcall center operations. The associate groups that will be affectedby the restructuring plan include management personnel, insideand outside sales representatives, call center associates,distribution workers, and hourly administrative staff. Therestructuring plan is designed to have all initiatives completedwithin approximately one year from the commitment date.

During the third quarter 2001, the Company recorded a pre-tax restructuring charge of $47.6 million, or $0.85 per share (onan after-tax basis). This charge includes a pre-tax cash charge of$31.7 million and a $15.9 million non-cash charge. The majorcomponents of the restructuring charge and the remaining accrualbalance as of December 31, 2001, are as follows:

EmploymentNon-Cash Termination

Asset and Accrued TotalWrite- Severance Exit Restructuring

(dollars in thousands) Downs Costs Costs Charge

Restructuring Charge . . . . . . . $15,925 $19,189 $12,489 $47,603Amounts Utilized – as of

December 31, 2001 . . . . . . . (15,925) (3,023) (1,226) (20,174)Accrued Restructuring Costs –

as of December 31, 2001 . . . . $ — $16,166 $11,263 $ 27,429

The non-cash asset write-downs of $15.9 million were primarilythe result of facility closures and business divestitures, including$8.8 million related to property, plant and equipment and $7.1million related to goodwill. Asset write-downs are based onmanagement’s estimate of net realizable value.

Employment termination and severance costs are related tovoluntary and involuntary terminations and reflect cashtermination payments to be paid to associates affected by therestructuring plan. Healthcare benefits and career transitionservices are included in the termination and severance costs. The restructuring plan allows associates to continue theirparticipation in the Company’s healthcare plan during the term of their severance.

Accrued exit costs are primarily contractual lease obligationsthat existed prior to September 30, 2001, for buildings that theCompany has closed or will be closing in the near future.

Implementation costs will be recognized as incurred and consistof incremental costs directly related to the realization of therestructuring plan. The Company estimates that the total cost of implementation will be approximately $6.7 million incurredratably through approximately September 30, 2002. These costs

include training, stay bonuses, consulting fees, costs to relocateinventory, and accelerated depreciation. Implementation costsincurred through December 31, 2001, were $2.2 million.

As of December 31, 2001, the Company completed the closureof three distribution centers and one USSC call center,eliminated one administrative office, divested a portion of the callcenter operations dedicated to serving The Order People’s clientsand began the implementation of its organizational restructuringand workforce reduction. As a result, the Company reduced itsworkforce by 580 associates through its voluntary and involuntarytermination programs. The remaining 795 associates will beterminated throughout the implementation period of approximately one year.

Common Stock Repurchase. On October 23, 2000, theCompany’s Board of Directors authorized the repurchase of up to$50.0 million of its common stock. Under this authorization, theCompany purchased 467,500 and 857,100 shares of its commonstock at a cost of approximately $12.4 million and $22.4 million,during 2001 and 2000, respectively. Acquired shares are includedin the issued shares of the Company, but are not included inaverage shares outstanding when calculating earnings per sharedata. During 2001 and 2000, the Company reissued 621,453 and 309,674 shares of treasury stock, respectively, to fulfill itsobligations under its management equity plan.

Critical Accounting PoliciesThe Company’s accounting policies are more fully described in

Note 2 to the Consolidated Financial Statements. As disclosedin Note 2, the preparation of financial statements in conformitywith generally accepted accounting principles requiresmanagement to make estimates and assumptions about futureevents that affect the amounts reported in the financialstatements and accompanying notes. Future events and theireffects cannot be determined with absolute certainty. Therefore,the determination of estimates requires the exercise of judgment.Actual results inevitably will differ from those estimates, and suchdifferences may be material to the financial statements. The mostsignificant accounting estimates inherent in the preparation ofthe Company’s financial statements include the following:

• Revenue RecognitionRevenue is recognized when a service is rendered or when a

product is shipped and title has transferred to the customer.

• Valuation of Accounts ReceivableThe Company makes judgments as to the collectibility of

accounts receivable based on historical trends and futureexpectations. Management estimates an allowance for salesreturns and doubtful accounts, which represents the collectibility

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)


of trade accounts receivable. These allowances adjust gross tradeaccounts receivable down to net realizable value. To determinethe allowance for sales returns, management uses historical trendsto estimate future period product returns. To determine theallowance for doubtful accounts, management reviews specificcustomers and the Company’s accounts receivable aging.

• Customer RebatesCustomer rebates and discounts are common practice in the

business products industry. Customer rebates consist of volumerebates, sales growth incentives, participation in promotions andother miscellaneous discount programs. These rebates arerecorded as a reduction to gross sales. Customer rebates areestimated based on customer participation and are recorded asrevenue is recognized. These estimates are adjusted, if necessary,as new information becomes available.

• Manufacturers’ AllowancesManufacturers’ allowances and promotional incentives are

common practice in the business products industry and contributesignificantly to the Company’s gross margin. Manufacturers’allowances are recorded at the time of sale based upon theCompany’s inventory purchase volume estimates. Promotionalincentives are based on vendor participation in the Company’svarious advertising programs. These programs are recorded as areduction to cost of goods sold to reflect the net inventorypurchase cost and the net advertising cost.

• Inventory Inventories constituting approximately 77% of total

inventories at December 31, 2001, have been valued under thelast-in, first-out (“LIFO”) method. The remaining inventories arevalued under the first-in, first-out (“FIFO”) method. Inventoryvalued under the FIFO and LIFO accounting methods is recordedat the lower of cost or market. Inventory reserves are recorded forshrinkage, obsolete, damaged, defective, and slow-movinginventory. These reserve estimates are determined usinghistorical trends and are adjusted, if necessary, as new informationbecomes available.

Various assumptions and other factors underlie thedetermination of significant accounting estimates. The process ofdetermining significant estimates is fact specific and takes intoaccount factors such as historical experience, current andexpected economic conditions, product mix, and in some cases,actuarial techniques. The Company periodically reevaluates thesesignificant factors and makes adjustments where facts andcircumstances dictate. Historically, actual results have notsignificantly deviated from those determined using the estimatesdescribed above.

Results for the Years Ended December 31, 2001, 2000, and 1999

The following table presents the Consolidated Statements ofIncome as a percentage of net sales:

2001 2000 1999

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%Cost of goods sold . . . . . . . . . . . . . . . . . . 84.2 83.7 83.6Gross margin . . . . . . . . . . . . . . . . . . . . . . 15.8 16.3 16.4Operating expenses:

Warehouse, marketing and administrative expenses . . . . . . . . . . . . 11.5 11.2 11.1

Restructuring charge . . . . . . . . . . . . . . . 1.2 — —Total operating expenses . . . . . . . . . . . . . 12.7 11.2 11.1

Income from operations . . . . . . . . . . . . . . 3.1 5.1 5.3Interest expense . . . . . . . . . . . . . . . . . . . . (0.7) (0.8) (0.8)Interest income. . . . . . . . . . . . . . . . . . . . . 0.1 0.1 —Other expense, net . . . . . . . . . . . . . . . . . (0.1) (0.3) (0.3)

Income before income taxes and extraordinary item . . . . . . . . . . . . . . . . . 2.4 4.1 4.2

Income taxes . . . . . . . . . . . . . . . . . . . . . . 0.9 1.7 1.8

Income before extraordinary item . . . . . . 1.5 2.4 2.4Extraordinary item – loss on early

retirement of debt, net of tax benefit . . . — (0.1) —Net income . . . . . . . . . . . . . . . . . . . . . . . 1.5% 2.3% 2.4%

Comparison of Results for the Years Ended December 31, 2001 and 2000

Net Sales. Net sales were flat at $3.9 billion for 2001 and 2000.The lower sales in the categories of traditional office products andfurniture were offset by growth in janitorial and sanitation productsand computer consumables, both of which were supported byacquisitions in 2001 and 2000. There were several factors thatcontributed to flat sales. First, sales volume to Corporate ExpressInc. and US Office Products (“USOP”) declined by approximately$100 million. This primarily is due to the integration of USOPinto the Corporate Express business model, which is designed tobuy more products directly from the manufacturer. Second, at theend of July 2001, the Company completed the sale of the PositiveID business unit. This sale reduced sales growth for the year byapproximately 1%. Finally, a worsening macroeconomicenvironment negatively impacted all product categories.

Office furniture sales declined by mid-single-digits, comparedwith the prior year. These results continue to reflect slowingconsumer demand and weak macroeconomic conditions. Whilethe current economic environment presents challenges, theCompany sees an opportunity for sales growth as dealers shift theirinventory investment to wholesalers to limit their working capitalrequirements. Furthermore, in a weak economy consumers tend toshift their demand toward the mid-priced furniture lines offered by




the Company. However, the Company is challenged by theexcess supply of premium grade furniture available in themarketplace due to the failure of Internet and other companies.Typical purchasers of mid-grade furniture are purchasing usedpremium grade furniture at extremely attractive prices.

The janitorial and sanitation product category, primarilydistributed through the Lagasse operating unit, achieved a 31%growth rate, compared with the prior year. This growth primarilyreflected Lagasse’s January 5, 2001, acquisition of Peerless PaperMills, Inc. (“Peerless”) as well as a growth rate in the high single-digits with Lagasse’s existing customer base. Peerless was awholesale distributor of janitorial/sanitation, paper, and foodservice products. This acquisition enabled the Company toexpand the Lagasse product line, enhance scale and infrastructure,and add experienced management to the Lagasse operation.

Sales of traditional office products experienced a decline of 7% versus the prior year. Uncertainty surrounding the economy and workforce reductions slowed consumption of officeproducts within the commercial sector, particularly in medium-to-large companies.

Gross Margin. Gross margin in 2001 was $619.8 million, or15.8% of net sales, compared with $643.8 million, or 16.3% ofnet sales, in 2000. The rate decline is due to lower pricing margindue to a shift in product mix toward computer consumables,partially offset by incremental vendor allowances, lower inventoryshrinkage and lower distressed inventory losses. Approximately55% of the Company’s vendor rebates are variable and are directlylinked to achieving certain purchase volume hurdles. During2001, inventory purchase levels declined significantly asevidenced by the Company’s lower working capital requirements.Manufacturers’ allowances as a percentage of net sales increasedby approximately 0.5% resulting from a change in product mixand the impact of new vendor agreements.

Operating Expenses. Operating expenses for 2001 were up12.8% to $497.7 million and were 12.7% of net sales, comparedwith $441.3 million, or 11.2% of net sales, in the prior year. Theincrease in operating expenses was partially due to the $47.6million restructuring charge (see Note 3 to the ConsolidatedFinancial Statements), which resulted in a 1.2% increase to theoperating expense ratio. The increase was also a result ofinvestments in The Order People, the Company’s third-partyfulfillment business. Operating expenses related to TOP for 2001,excluding the TOP portion of the restructuring charge, and 2000,totaled $18.2 million and $9.0 million, respectively, resulting in a0.5% and a 0.2% increase in the operating expense ratio.

Income from Operations. Income from operations decreased39.7% to $122.1 million, or 3.1% of net sales, compared with

$202.5 million, or 5.1% of net sales in 2000. Excluding theinvestments in The Order People and the restructuring charge,income from operations decreased 9.1% to $191.4 million or4.9% of net sales in 2001, compared with an increase of 15.5% to$210.5 million or 5.4% of net sales in 2000.

Interest Expense. Interest expense for 2001 was $25.9 million,or 0.7% of net sales, compared with $30.2 million, or 0.8% of netsales, in 2000. This reduction reflected the interest expensesavings related to the redemption of the 12.75% Notes (asdefined) as well as lower interest rates on variable rate debt.

Interest Income. Interest income for 2001 was $2.1 million, or0.1% of net sales, compared with $2.9 million, or 0.1% of netsales, in 2000.

Other Expense. Other expense for 2001 was $4.6 million, or0.1% of net sales, compared with $11.2 million, or 0.3% of netsales in 2000. This expense primarily represented the costsassociated with the sale of certain trade accounts receivablethrough the Receivables Securitization Program (as defined)partially offset by a gain on the sale of fixed assets of $2.4 million.

Income Taxes. Income tax expense as a percent of net saleswas 0.9% in 2001 and 1.7% in 2000. The effective tax ratedeclined to 39.2% in 2001 from 39.9% in 2000. This was due toa change in the mix of pre-tax earnings between states.

Net Income. Net income for 2001 decreased 38.2% to $57.0million, or 1.5% of net sales, from $92.2 million, or 2.3% of netsales, in 2000. Excluding the restructuring charge, net income for 2001 was $85.9 million, compared with $98.6 million in 2000,excluding the extraordinary item.

Fourth Quarter Results. Certain expense and cost of saleestimates are recorded throughout the year, including inventoryshrinkage and obsolescence, required LIFO reserve,manufacturers’ allowances, advertising costs and various expenseitems. During the fourth quarter of 2001, the Company recorded a favorable net income adjustment of approximately$5.8 million related to the refinement of estimates recorded inthe prior three quarters.

Comparison of Results for the Years Ended December 31, 2000 and 1999

Net Sales. Net sales increased 14.6% to $3.9 billion for 2000,compared with $3.4 billion for 1999. This increase reflectedgrowth in the Company’s core business, incremental sales fromacquisitions completed in 2000, and increases in freight revenue.The Company’s sales growth within its core business was broadbased, with strength in all geographic regions, across all productcategories and customer channels. Specifically, the janitorial



and sanitation products, computer consumables and officefurniture categories experienced strong sales growth. Sales growth for the year ended December 31, 2000, excluding theacquisitions of Azerty Canada and CallCenter Services, Inc.,increased 12.2%.

Gross Margin. Gross margin in 2000 reached $643.8 million,up 14.1% from last year and was 16.3% of net sales, comparedwith $564.2 million, or 16.4% of net sales, in 1999. The 0.1%rate decline was due to lower pricing margin partially offset byincremental vendor allowances earned as a result of higher sales volume.

Operating Expenses. Operating expenses for 2000 were up15.5% to $441.3 million and were 11.2% of net sales, comparedwith $382.0 million, or 11.1% of net sales, in the prior year. Theincrease in the operating expense rate was attributable toinvestments in The Order People, the Company’s third-partyfulfillment business. Operating expenses for 2000 related to TheOrder People totaled $9.0 million resulting in a 0.2% increase inthe operating expense ratio.

Income from Operations. Income from operations increased11.1% to $202.5 million, or 5.1% of net sales, compared with$182.2 million, or 5.3% of net sales, in 1999. Excluding theinvestments in The Order People, income from operationsincreased 15.5% to $210.5 million or 5.4% of net sales.

Interest Expense. Interest expense for 2000 was $30.2 million,or 0.8% of net sales, compared with $30.0 million, or 0.8% of netsales, in 1999. This reduction reflected the Company’s continuedleveraging of interest costs against higher sales, and the interestexpense savings related to the redemption of the 12.75% Notes(as defined) partially offset by slightly higher interest rates onvariable rate debt.

Interest Income. Interest income for 2000 was $2.9 million, or 0.1% of net sales, compared with $0.8 million in 1999. Thisincrease was primarily due to an increase in interest earned on notes receivable.

Other Expense. Other expense for 2000 reached $11.2million, or 0.3% of net sales, compared with $9.4 million, or 0.3%of net sales, in 1999. This expense primarily represents the costsassociated with the sale of certain trade accounts receivablethrough the Receivables Securitization Program (as defined).These costs vary on a monthly basis and generally are related tocertain short-term interest rates.

Income Before Income Taxes and Extraordinary Item. Incomebefore income taxes and extraordinary item was $164.1 million,or 4.1% of net sales, compared with $143.6 million, or 4.2% ofnet sales, in 1999.

Income Taxes. Income tax expense as a percent of net sales was1.7% in 2000 compared to 1.8% in 1999. The effective tax ratedeclined to 39.9% in 2000 from 41.9% in 1999. This was due to achange in the mix of pre-tax earnings between states and higherpre-tax earnings with relatively constant nondeductible expenses,such as goodwill.

Net Income. Net income for 2000 increased 10.6% to $92.2million, or 2.3% of net sales, from $83.4 million, or 2.4% of netsales, in 1999. Net income for 2000, excluding the impact of theextraordinary item, increased 18.2% to $98.6 million, or 2.4% ofnet sales.

Fourth Quarter Results. Certain expense and cost of saleestimates are recorded throughout the year, including inventoryshrinkage and obsolescence, required LIFO reserve, manufacturers’allowances, advertising costs and various expense items. Duringthe fourth quarter of 2000, the Company recorded a favorable netincome adjustment of approximately $5.9 million related to therefinement of estimates recorded in the prior three quarters.

Liquidity and Capital ResourcesUnited is a holding company and, as a result, its primary source

of funds is cash generated from operating activities of its operatingsubsidiary, USSC, and bank borrowings by USSC. The CreditAgreement and the indentures governing the Notes containrestrictions on the ability of USSC to transfer cash to United.

The Company’s outstanding debt and liquidity sources(1)

consisted of the following amounts (dollars in thousands):

As of December 31,2001 2000

Revolver – $250.0 million less letter ofcredit liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 98,000

Tranche A term loan, due in installmentsuntil March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . 32,331 44,325

Tranche A-1 term loan due in installments until June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,375 137,500

8.375% Senior Subordinated Notes, due April 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000

Industrial development bonds, at market interestrates, maturing at various dates through 2011 . . . . . . 14,300 14,300

Industrial development bonds, at 66% to 78% of prime, maturing at various dates through 2004 . . . . 15,500 15,500

Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 199 242Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,705 409,867 Receivables Securitization (liquidity sources)(1) . . . . . 125,000 150,000

Total outstanding debt and liquidity sources(1) . . . . . . $396,705 $559,867

(1) See discussion under Receivables Securitization Program.



Disclosures about Contractual Obligationsand Commercial Commitments

The following table aggregates all contractual commitments and commercial obligations that affect financial condition andliquidity as of December 31, 2001.

Dollars in thousands Payment due by periodLess than 1 – 3 4 – 5 After 5

Contractual obligations 1 year years years years Total

Long-term debt . . . . . . . . . . . . $52,970 $111,935 $ — $106,800 $271,705

Operating leases . . . 43,887 95,018 36,101 36,867 211,873

Total contractual cashobligations . . . . . . $96,857 $206,953 $36,101 $143,667 $483,578

In addition, the Company obtains up to $160.0 million ofliquidity from the Company’s Receivables Securitization Program(as defined). At December 31, 2001, the Company had liquidity of $125.0 million from the sale of accounts receivable under thisprogram. Continued sales of receivables under this program depend upon stand-by liquidity funding that is subject to annualrenewal. If the stand-by liquidity funding were unavailable, no new sale of accounts receivable would occur and collections against accounts receivable would largely be dedicated to reducingthe balance of accounts receivable sold under the ReceivablesSecuritization Program and as a result debt may increase or liquid assets may decrease.

Credit AgreementIn order to restate and further amend the Second Amended

and Restated Credit Agreement, dated April 3, 1998 (the “PriorCredit Agreement”), USSC, as issuer, entered into the ThirdAmended and Restated Revolving Credit Agreement, dated June 29, 2000, with various lenders and the administrative agentnamed therein (the “Credit Agreement”). The Credit Agreement,among other things, provides a facility (“Tranche A Term LoanFacility”) for the continuation of the term loans outstanding as ofits effective date under the Prior Credit Agreement, an additional$150.0 million aggregate principal amount, five-year term loanfacility (the “Tranche A-1 Term Loan Facility” and, together withthe Tranche A Term Loan Facility, the “Term Loan Facilities”), and a revolving credit facility of up to $250.0 million aggregateprincipal amount (the “Revolving Credit Facility”). Availabilityunder the Revolving Credit Facility is reduced by the amount ofletters of credit outstanding under the facility.

As of December 31, 2001, the available credit under the TermLoan Facilities included $141.7 million of term loan borrowings. In addition, the Company has $100.0 million of 8.375% SeniorSubordinated Notes due 2008, and $29.8 million of industrialrevenue bonds.

As of December 31, 2001, principal amounts borrowed andoutstanding under the Term Loan Facilities consisted of a $32.3million Tranche A Term Loan Facility and a $109.4 millionTranche A-1 Term Loan Facility. Amounts outstanding under theTranche A Term Loan Facility are to be repaid in nine quarterlyinstallments ranging from $3.1 million at March 31, 2002, to $3.7million at March 31, 2004. Amounts outstanding under theTranche A-1 Term Loan Facility are to be repaid in 14 quarterlyinstallments of $7.8 million.

The Revolving Credit Facility is limited to $250.0 million, less the aggregate amount of letter of credit liabilities under thefacility, and contains a provision for swingline loans in anaggregate amount up to $25.0 million. The Revolving CreditFacility matures on March 31, 2004. The Company had noborrowings outstanding under the Revolving Credit Facility atDecember 31, 2001. As of December 31, 2001, the Company had $215.8 million available under its Revolving Credit Facilityafter deducting certain outstanding letter-of-credit liabilities of$34.2 million.

As collateral security for the obligations of USSC and securityinterests, liens have been placed upon accounts receivable andrelated instruments, inventory, equipment, contract rights,intellectual property and all other tangible and intangiblepersonal property (including proceeds) and fixtures and certainreal property of USSC and its domestic subsidiaries, other thanaccounts receivables sold in connection with the ReceivablesSecuritization Program. Also securing these obligations are firstpriority pledges of all of the outstanding stock of USSC and of itsdomestic direct and indirect subsidiaries, including Lagasse andAzerty but excluding The Order People, as well as certain of thestock of identified foreign direct and indirect subsidiaries of USSC(excluding USS Receivables Company, Ltd.).

The loans outstanding under the Term Loan Facilities and theRevolving Credit Facility bear interest as determined within apricing matrix. The interest rate is based on the ratio of total debtto earnings before interest, taxes, depreciation, and amortization(“EBITDA”). The Tranche A Facility and Revolving CreditFacility bear interest at the prime rate plus 0% to 1.00%, or, atthe Company’s option, the London Interbank Offered Rate(“LIBOR”) plus 1.25% to 2.25%. The Tranche A-1 Facility bears interest at the prime rate plus 0.25% to 1.25%, or, at theCompany’s option, LIBOR plus 1.50% to 2.50%.

The Credit Agreement contains representations andwarranties, affirmative and negative covenants, and events ofdefault customary for financing of this type. At December 31,2001, the Company was in compliance with all covenantscontained in the Credit Agreement.



The right of United to participate in any distribution ofearnings or assets of USSC is subject to the prior claims of thecreditors of USSC. In addition, the Credit Agreement containscertain restrictive covenants, including covenants that restrict orprohibit USSC’s ability to pay cash dividends and make otherdistributions to United.

The Company is exposed to market risk for changes in interestrates. The Company may enter into interest rate protectionagreements, including collar agreements, to reduce the impact offluctuations in interest rates on a portion of its variable rate debt.These agreements generally require the Company to pay to orentitle the Company to receive from the other party the amount,if any, by which the Company’s interest payments fluctuatebeyond the rates specified in the agreements. The Company issubject to the credit risk that the other party may fail to performunder such agreements. The Company’s cost for these agreementswas amortized to interest expense over the term of theagreements, and the unamortized cost was included in otherassets. Any payments received or made as a result of theagreements were recorded as an addition to or a reduction frominterest expense. For the year ended December 31, 1999, theCompany recorded $0.2 million to interest expense resulting fromLIBOR rate fluctuations below the floor rate specified in thecollar agreements. The Company’s interest rate collar agreementson $200.0 million of borrowings at LIBOR rates between 5.2%and 8.0% expired on October 29, 1999. As of December 31,2001, the Company has not entered into any new interest ratecollar agreements.

Management believes that the Company’s cash on hand,anticipated funds generated from operations and borrowingsavailable under the Credit Agreement will be sufficient to meetthe short-term (fewer than 12 months) and long-term operatingand capital needs of the Company, as well as to service its debt inaccordance with its terms. There is, however, no assurance thatthis will be accomplished.

12.75% Senior Subordinated NotesThe 12.75% Senior Subordinated Notes (“12.75% Notes”)

were originally issued on May 3, 1995, pursuant to the 12.75%Notes Indenture. On May 2, 2000, the Company redeemed theremaining $100.0 million of its 12.75% Senior SubordinatedNotes (the “12.75% Notes”). The 12.75% Notes were redeemedat the redemption price of 106.375% of the principal amount plusaccrued interest. As a result, the Company recognized anextraordinary loss on the early retirement of debt ofapproximately $10.7 million ($6.5 million net of tax benefit of$4.2 million). This charge included the write-off of approximately$4.3 million ($2.6 million net of tax benefit of $1.7 million) ofcapitalized costs. The redemption was funded through theCompany’s Revolving Credit Facility.

8.375% Senior Subordinated NotesThe 8.375% Senior Subordinated Notes (“8.375% Notes”)

were issued on April 15, 1998, pursuant to the 8.375% NotesIndenture. As of December 31, 2001, the aggregate outstandingprincipal amount of 8.375% Notes was $100.0 million. The8.375% Notes are unsecured senior subordinated obligations ofUSSC, and payment of the 8.375% Notes is fully andunconditionally guaranteed by the Company and USSC’sdomestic “restricted” subsidiaries that incur indebtedness (asdefined in the 8.375% Notes Indenture) on a senior subordinatedbasis. The Notes are redeemable on April 15, 2003, in whole orin part, at a redemption price of 104.188% (percentage ofprincipal amount). The 8.375% Notes mature on April 15, 2008,and bear interest at the rate of 8.375% per annum, payable semi-annually on April 15 and October 15 of each year.

Receivables Securitization ProgramAs part of an overall financing strategy, the Company utilizes a

standard third-party receivables securitization program to providelow-cost funding. Under this $163.0 million program, theCompany sells its eligible accounts receivable (except for certainexcluded accounts receivable, which initially includes allaccounts receivable from Azerty and Lagasse) to the ReceivablesCompany, a wholly owned offshore, bankruptcy-remote specialpurpose limited liability company. This company in turnultimately transfers the eligible accounts receivable to a third-party, multi-seller asset-backed commercial paper program,existing solely for the purpose of issuing commercial paper rated A-1/P-1 or higher. The sale of trade accounts receivableincludes not only those eligible accounts receivable that existedon the closing date of the Receivables Securitization Program, but also eligible accounts receivable created thereafter. Costsrelated to this facility vary on a monthly basis and generally arerelated to certain short-term interest rates. These costs areincluded in the Consolidated Statements of Income under thecaption Other Expense.

Affiliates of PNC Bank and JP Morgan Chase act as fundingagents. The funding agents, together with other commercialbanks rated at least A-1/P-1, provide standby liquidity funding tosupport the sale of the accounts receivable by the ReceivablesCompany under 364-day liquidity facilities. The ReceivablesCompany retains an interest in the eligible receivables transferredto the third party. As a result of the Receivables SecuritizationProgram, the balance sheet assets of the Company as of December 31, 2001 and 2000 exclude $125.0 million and $150.0 million, respectively, of accounts receivable sold to theReceivables Company.



Cash Flow InformationThe statements of cash flows for the Company for the periods

indicated are summarized below:

Years Ended December 31,(dollars in thousands) 2001 2000 1999Net cash provided by

operating activities . . . . . . . . . . . . . . $191,140 $ 38,670 $ 53,581 Net cash used in

investing activities . . . . . . . . . . . . . . . (46,327) (83,534) (26,011) Net cash (used in) provided by

financing activities . . . . . . . . . . . . . . (135,783) 45,655 (27,615)

Net cash provided by operating activities for the year endedDecember 31, 2001, reached $191.1 million, including a $105.7million decline in inventory, $57.0 million in net income, $39.9million in depreciation and amortization, a $23.4 million decline in accounts receivable, a $20.0 million increase in accruedliabilities, and a $9.4 million increase in other liabilities partiallyoffset by a $52.6 million decline in accounts payable and a $12.8million increase in other assets. Net cash provided by operatingactivities was $38.7 million for the year ended December 31, 2000.This was primarily due to net income of $92.2 million, an increasein accounts payable of $46.2 million, and $32.9 million ofdepreciation and amortization, partially offset by a $73.7 millionincrease in inventory, a $49.5 million increase in accountsreceivable and a $14.9 million increase in other assets. Net cashprovided by operating activities for the year ended December 31,1999, was $53.6 million. This was primarily driven by net incomeof $83.4 million and depreciation and amortization of $31.3million, partially offset by a $62.0 million increase in net operating assets and liabilities.

Net cash used in investing activities for the year endedDecember 31, 2001, was $46.3 million, which includes $32.7million for the acquisition of Peerless Paper Mills, Inc., and $32.5million for capital expenditures, partially offset by $14.9 million ofproceeds from the sale of Positive ID and $3.9 million in proceedsfrom the disposition of property, plant and equipment. Net cashused in investing activities for the year ended December 31, 2000,was $83.5 million, including capital expenditures of $43.6 millionand business acquisitions of $44.2 million, partially offset by $4.3million of proceeds from disposition of property, plant andequipment. Net cash used in investing activities for the year endedDecember 31, 1999, was $26.0 million, resulting primarily fromcapital expenditures of $25.5 million.

Net cash used in financing activities for the year endedDecember 31, 2001, reached $135.8 million, including a $98.0million repayment under the Revolving Credit Facility, $40.2million Term Loan repayment and $12.4 million related to theacquisition of treasury stock, partially offset by $15.8 million inproceeds from the issuance of treasury stock. Net cash provided by

financing activities for the year ended December 31, 2000, was$45.7 million, including $150.0 million of Term Loan borrowingsand $45.0 million of net borrowings under the Revolving CreditFacility, partially offset by $128.5 million of Term Loanretirements and principal payments and $22.4 million related tothe acquisition of treasury stock. Net cash used in financingactivities for the year ended December 31, 1999, was $27.6million, including $49.6 million of common stock repurchases,partially offset by net borrowings of $21.5 million.

SeasonalityThe Company’s sales generally are relatively steady throughout

the year. However, sales vary to the extent of seasonal buyingpatterns of consumers of office products. In particular, theCompany’s sales usually are higher than average during January,when many businesses begin operating under new annual budgets.

The Company experiences seasonality in its working capitalneeds, with highest requirements in December through February,reflecting a build-up in inventory prior to and during the peaksales period. The Company believes that its current availabilityunder the Revolving Credit Facility is sufficient to satisfy theseasonal working capital needs for the foreseeable future.

Inflation/Deflation and Changing PricesThe Company maintains substantial inventories to

accommodate the prompt service and delivery requirements of itscustomers. Accordingly, the Company purchases its products on aregular basis in an effort to maintain its inventory at levels that itbelieves are sufficient to satisfy the anticipated needs of itscustomers, based upon historical buying practices and marketconditions. Although the Company historically has been able topass through manufacturers’ price increases to its customers on atimely basis, competitive conditions will influence how much offuture price increases can be passed on to the Company’scustomers. Conversely, when manufacturers’ prices decline, lowersales prices could result in lower margins as the Company sellsexisting inventory. As a result, changes in the prices paid by theCompany for its products could have a material adverse effect onthe Company’s net sales, gross margins and net income.

New Accounting Pronouncements In August 2001, the Financial Accounting Standards Board

(“FASB”) issued Statements of Financial Accounting Standards(“SFAS”) No. 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets,” which addresses financial accounting andreporting for the impairment or disposal of long-lived assets.SFAS 144 is effective for fiscal years beginning after December15, 2001. The Company will adopt SFAS 144 as of January 1,2002 and it does not expect that the adoption of the Statement



will have a significant impact on its financial position and resultsof operations.

In June 2001, the FASB issued SFAS No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets.” SFAS 141 requires that the purchase method ofaccounting be used for all business combinations initiated afterJune 30, 2001. In addition, SFAS 141 includes guidance on theinitial recognition and measurement of goodwill and otherintangible assets arising from business combinations completedafter June 30, 2001. The amortization of goodwill and intangibleassets with indefinite useful lives is prohibited under SFAS 142.SFAS 142 requires that these assets be reviewed for impairment atleast annually. Intangible assets with finite lives will continue tobe amortized over their estimated useful lives. Additionally,SFAS 142 requires that goodwill included in the carrying value ofequity method investments no longer be amortized.

The Company will apply SFAS 142 beginning in the first halfof 2002. Application of the non-amortization provisions of SFAS142 is expected to result in an increase in net income ofapproximately $4.9 million, or $0.15 per share, in 2002. Changesin the estimated useful lives of intangible assets are not expectedto have a material impact on net income in 2002. The Companywill test goodwill for impairment using the two-step processprescribed in SFAS 142. The first step is a screen for potentialimpairment, while the second step measures the amount of theimpairment, if any. The Company expects to perform the first of the required impairment tests of goodwill and indefinite livedintangible assets in the first half of 2002. Any impairment charge resulting from these transitional impairment tests will be reflected as the cumulative effect of a change in accountingprinciple in the first half of 2002. The Company has not yetdetermined what the effect of these tests will be on its earningsand financial position.

In June 2001, the FASB issued SFAS No. 143, “Accounting forAsset Retirement Obligations,” which is effective for fiscal yearsbeginning after June 15, 2002. The Statement requires legalobligations associated with the retirement of long-lived assets tobe recognized at their fair value at the time that the obligationsare incurred. Upon initial recognition of a liability, that costshould be capitalized as part of the related long-lived asset andallocated to expense over the useful life of the asset. TheCompany will adopt SFAS 143 on January 1, 2003, and, based oncurrent circumstances, does not believe that the impact ofadoption of SFAS 143 will have a material impact on its financialposition or results of operations.

Effective January 1, 2001, the Company adopted theprovisions of SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities” issued by the Financial Accounting

Standards Board. SFAS No. 133, as amended by SFAS Nos. 137and 138, establishes accounting and reporting standards forderivative instruments and hedging activities. It requires an entityto recognize all derivatives as either assets or liabilities on thebalance sheet. The statement also requires changes in the fairvalue of the derivative instruments to be recorded in either netearnings or other comprehensive income depending on theirintended use. The adoption of SFAS Nos. 133, 137, and 138 didnot have a material impact on the Company’s ConsolidatedFinancial Statements.

Quantitative and Qualitative DisclosureAbout Market Risk

The Company is subject to market risk associated principallywith changes in interest rates and foreign currency exchangerates. Interest rate exposure principally is limited to theCompany’s outstanding long-term debt at December 31, 2001, of$271.7 million, and $125.0 million of receivables sold under theReceivables Securitization Program, whose discount rate varieswith market interest rates (“Receivables Exposure”).Approximately 25% of the outstanding debt and ReceivablesExposure is priced at interest rates that are fixed. The remainingdebt and Receivables Exposure are priced at interest rates that re-price with the market. A 50 basis point movement in interestrates would result in an annualized increase or decrease ofapproximately $1.5 million in interest expense, loss on the sale ofcertain accounts receivable and cash flows. The Company mayfrom time-to-time enter into interest rate swaps, options orcollars. The Company does not use financial or commodityderivative instruments for trading purposes. Typically, the use of such derivative instruments is limited to interest rate swaps,options or collars on the Company’s outstanding long-term debt. The Company’s exposure related to such derivativeinstruments is, in the aggregate, not material to its financialposition, results of operations and cash flows. As of December 31,2001, the Company had no financial or commodity derivativeinstruments outstanding.

The Company’s foreign currency exchange rate risk is limitedprincipally to the Mexican Peso, Canadian Dollar, as well asproduct purchases from Asian countries currently paid in U.S.dollars. Many of the products the Company sells in Mexico andCanada are purchased in U.S. dollars, while the sale is invoicedin the local currency. The Company’s foreign currency exchangerate risk is not material to its financial position, results ofoperations and cash flows. The Company has not previouslyhedged these transactions, but it may enter into such transactionswhen it believes there is a financial advantage.


Selected Consolidated Financial Data(dollars in thousands, except per share data)

Years Ended December 31, 2001 2000

Income Statement Data:Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,925,936 $3,944,862Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,306,143 3,301,018

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619,793 643,844Operating expenses:

Warehousing, marketing and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,135 441,298Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,603(1) —Non-recurring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497,738 441,298

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,055 202,546Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,872) (30,171)Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,079 2,942Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,621)(4) (11,201)(4)

Income before income taxes and extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,641 164,116Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,663 65,473

Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,978 98,643Extraordinary item – loss on early retirement of debt, net of tax benefit

of $4,248 in 2000, $3,970 in 1998, and $3,956 in 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (6,476)Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,978 $ 92,167

Net income attributable to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,978 $ 92,167

Net income per common share – assuming dilution Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.68 $ 2.84Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.19)

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.68 $ 2.65

Cash dividends declared per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ —

Operating and Other Data:EBITDA(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,596 233,651EBITDA margin(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1% 5.9%Depreciation and amortization(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,541 $ 31,105Capital expenditures, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,618 39,301

Operating Results Before Charges: (8, 9, 10, 11)

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,658 202,546Net income attributable to common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,921 98,643Net income per common share – assuming dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.53 2.84EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,199 233,651EBITDA margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3% 5.9%

Balance Sheet DataWorking capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 412,766(12) $ 495,456(12)

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,339,587(12) 1,447,027(12)

Total debt and capital leases(13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,705 409,867Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538,681 478,439


(1) In the third quarter of 2001, the Company recorded a restructuring charge of$47.6 million ($28.9 million net of tax benefit of $18.7 million). See Note 3to the Consolidated Financial Statements.

(2) In the second quarter of 1998, the Company recognized a non-recurring chargeof $13.9 million ($8.3 million net of tax benefit of $5.6 million) related to thewrite-off of the remaining payments and prepaid expense under a contract forcomputer services from a vendor.

(3) In the fourth quarter of 1997, the Company recognized a non-recurring non-cash charge of $59.4 million ($35.5 million net of tax benefit of $23.9 million),and a non-recurring cash charge of $5.3 million ($3.2 million net of tax benefitof $2.1 million) related to the vesting of stock options and the termination ofcertain management advisory service agreements.

(4) Represents the loss on the sale of certain trade accounts receivable through anasset-backed securitization program and the gain or loss on the sale of certaincapital assets. See Note 5 to the Consolidated Financial Statements.

(5) EBITDA is defined as earnings before interest, taxes, depreciation andamortization, and extraordinary items. EBITDA is commonly used by certaininvestors to analyze operating performance and to determine a company’sability to service and incur debt. EBITDA should not be considered inisolation from, or as a substitute for, measurements prepared in accordance withgenerally accepted accounting principles.

(6) EBITDA margin represents EBITDA as a percent of net sales.(7) Excludes amortization related to deferred financing costs, which is a component

of interest expense.(8) In the third quarter of 2001, the Company recorded a restructuring charge of

$47.6 million ($28.9 million net of tax benefit of $18.7 million). See Note 3to the Consolidated Financial Statements.

(9) In the second quarter of 2000, the Company recorded an extraordinary chargeof $10.7 million ($6.5 million net of tax benefit of $4.2 million) related to theearly retirement of debt. See Note 7 to the Consolidated Financial Statements.

(10) In the second quarter of 1998, the Company recognized a non-recurringcharge of $13.9 million ($8.3 million net of tax benefit of $5.6 million)related to the write-off of the remaining payments and prepaid expense undera contract for computer services from a vendor. In addition, during thesecond quarter of 1998 the Company recorded an extraordinary charge of $9.9million ($5.9 million net of tax benefit of $4.0 million) related to the earlyretirement of debt.

(11) In the fourth quarter of 1997, the Company recognized a non-recurring non-cash charge of $59.4 million ($35.5 million net of tax benefit of $23.9million) and a non-recurring cash charge of $5.3 million ($3.2 million net oftax benefit of $2.1 million) related to the vesting of stock options and thetermination of certain management advisory service agreements. In addition,during the fourth quarter of 1997 the Company recorded an extraordinarycharge of $9.8 million ($5.9 million net of tax benefit of $3.9 million) relatedto early retirement of debt.

(12) Excludes $125.0 million in 2001, $150.0 million in 2000 and $160.0 millionin 1999 and 1998 of certain trade accounts receivable sold through an asset-backed securitization program. See Note 5 to the Consolidated FinancialStatements.

(13) Total debt and capital leases include current maturities.


1999 1998 1997

$ 3,442,696 $3,097,595 $2,585,826 2,878,539 2,566,158 2,137,551

564,157 531,437 448,275

381,963 362,074 313,346 — — —— 13,852(2) 64,698(3)

381,963 375,926 378,044

182,194 155,511 70,231 (30,044) (37,095) (53,741)

849 794 230(9,432)(4) (8,221)(4) —

143,567 110,989 16,720 60,158 47,064 8,532

83,409 63,925 8,188

— (5,907) (5,884)$ 83,409 $ 58,018 $ 2,304

$ 83,409 $ 58,018 $ 776

$ 2.37 $ 1.76 $ 0.22 — (0.16) (0.19)

$ 2.37 $ 1.60 $ 0.03

$ — $ — $ —

211,642 182,449 96,272 6.1% 5.9% 3.7%

$ 29,448 $ 26,938 $ 26,041 21,331 24,616 12,991

182,194 169,363 134,929 83,409 72,212 45,364

2.37 2.00 1.47 211,642 196,301 160,970

6.1% 6.3% 6.2%

$ 415,548(12) $ 357,024(12) $ 451,449 1,279,903(12) 1,166,991(12) 1,148,021

336,927 315,384 537,135 406,009 370,563 223,308

The selected consolidated financial data of the Company forthe years ended December 31, 1997 through 2001 have beenderived from the Consolidated Financial Statements of theCompany, which have been audited by Ernst & Young LLP,independent auditors. All selected consolidated financial dataset forth should be read in conjunction with, and is qualified inits entirety by Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and theConsolidated Financial Statements of the Company.


Quarterly Financial Data(dollars in thousands, except share data) (unaudited)

Income/Income/ (Loss) Net(Loss) Per Diluted Income/Before Net Share Before (Loss)

Extraordinary Income/ Extraordinary Per Diluted(dollars in thousands, except share data) Net Sales Gross Profit Item (Loss) Item (1) Share (1)

Year Ended December 31, 2001First Quarter . . . . . . . . . . . . . . . . . . . . . $1,059,842 $ 166,123 $ 21,613 $ 21,613 $ 0.64 $ 0.64Second Quarter . . . . . . . . . . . . . . . . . . . 978,886 155,003 21,841 21,841 0.65 0.65Third Quarter . . . . . . . . . . . . . . . . . . . . 950,910 152,403 (5,943) (5,943) (0.18) (0.18)Fourth Quarter . . . . . . . . . . . . . . . . . . . 936,298 146,264 19,467 19,467 0.57 0.57Total . . . . . . . . . . . . . . . . . . . . . . . . . . $3,925,936 $ 619,793 $ 56,978 $ 56,978 1.68 1.68

Year Ended December 31, 2000First Quarter . . . . . . . . . . . . . . . . . . . . . $ 994,883 $ 158,130 $ 23,924 $ 23,924 $ 0.69 $ 0.69Second Quarter . . . . . . . . . . . . . . . . . . . 944,023 148,795 22,768 16,292 0.65 0.47Third Quarter . . . . . . . . . . . . . . . . . . . . 1,015,441 164,516 26,427 26,427 0.76 0.76Fourth Quarter . . . . . . . . . . . . . . . . . . . 990,515 172,403 25,524 25,524 0.74 0.74Total . . . . . . . . . . . . . . . . . . . . . . . . . . $3,944,862 $ 643,844 $ 98,643 $ 92,167 2.84 2.65

(1) As a result of changes in the number of common and common equivalent shares during the year, the sum of quarterly earnings per share will not necessarily equal earnings per share for the total year.

The Company’s common stock is quoted through the NasdaqNational Market System under the symbol USTR. The followingtable shows the high and low closing sale prices per share for theCompany’s common stock as reported by Nasdaq.

2001 High Low

First Quarter . . . . . . . . . . . . . . . . . . $ 27.56 $ 22.00Second Quarter . . . . . . . . . . . . . . . . 31.56 22.63Third Quarter . . . . . . . . . . . . . . . . . 34.25 27.25Fourth Quarter . . . . . . . . . . . . . . . . 34.95 26.50

2000 High Low

First Quarter . . . . . . . . . . . . . . . . . . $ 37.25 $ 25.31Second Quarter . . . . . . . . . . . . . . . . 37.81 28.31Third Quarter . . . . . . . . . . . . . . . . . 32.75 26.88Fourth Quarter . . . . . . . . . . . . . . . . 30.63 21.50

On March 11, 2002, there were approximately 841 holders ofrecord of common stock.

The Company’s policy has been to reinvest earnings to fund futuregrowth. Accordingly, the Company has not paid cash dividends anddoes not anticipate declaring cash dividends on its common stock inthe foreseeable future. Furthermore, as a holding company, United’sability to pay cash dividends in the future depends upon the receipt

of dividends or other payments from its operating subsidiary, USSC.The payment of these dividends is subject to certain restrictionsimposed by the Company’s debt agreements. See Note 7 to theConsolidated Financial Statements.

On October 23, 2000, the Company’s Board of Directorsauthorized the repurchase of up to $50.0 million of its commonstock. Under this authorization, the Company purchased 467,500shares at a cost of approximately $12.4 million during 2001. During2000, the Company purchased 857,100 shares of its common stock ata cost of approximately $22.4 million. Acquired shares are includedin the issued shares of the Company, but are not included in averageshares outstanding when calculating earnings per share data. During2001 and 2000, the Company reissued 621,453 and 309,674 shares oftreasury stock, respectively, to fulfill its obligations under itsmanagement equity plan.

Common Stock100,000,000 shares authorized, $0.10 par value, 37,217,814 and

37,213,207 shares issued as of December 31, 2001 and 2000,respectively.

Preferred Stock15,000,000 shares authorized, without par value, no shares

outstanding as of December 31, 2001 and 2000.

Quarterly Stock Price Data

Report of Management


The management of United Stationers Inc. is primarilyresponsible for the information and representations contained in thisAnnual Report. The Consolidated Financial Statements and relatedNotes were prepared in accordance with accounting principlesgenerally accepted in the United States and include amounts thatare based on management’s best judgments and estimates. The otherfinancial information included in this Annual Report is consistentwith that in the Consolidated Financial Statements.

In meeting its responsibility for the reliability of the ConsolidatedFinancial Statements, the Company depends on its system ofinternal accounting control. The system is designed to providereasonable, but not absolute, assurance that assets are safeguardedand that transactions are properly recorded and executed inaccordance with management’s authorization. It is management’sopinion that its system of internal controls was effective in providingreasonable assurance that its financial statements are free of material

misstatement. In addition, the system is augmented by writtenpolicies and an internal audit department.

The Audit Committee of the Board of Directors, comprised solelyof directors who are not officers or employees, meets regularly withmanagement, with the Company’s internal auditors, and with itsindependent auditors to discuss their evaluation of internalaccounting controls and the quality of financial reporting. Theindependent auditors and the internal auditors have free access tothe Audit Committee, without management’s presence.

To the Stockholders and Board of Directors of United Stationers Inc.

We have audited the accompanying consolidated balance sheets ofUnited Stationers Inc. and Subsidiaries as of December 31, 2001 and2000 and the related consolidated statements of income, changes instockholders’ equity and cash flows for each of the three years in theperiod ended December 31, 2001. These financial statements are theresponsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standardsgenerally accepted in the United States. Those standards require thatwe plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements. An audit alsoincludes assessing the accounting principles used and significant

estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits providea reasonable basis for our opinion.

In our opinion, the financial statements referred to above presentfairly, in all material respects, the consolidated financial position ofUnited Stationers Inc. and Subsidiaries at December 31, 2001 and2000, and the consolidated results of their operations and their cashflows for each of the three years in the period ended December 31,2001 in conformity with accounting principles generally accepted inthe United States.

Chicago, IllinoisJanuary 29, 2002


Report of Independent Auditors

President and Chief Executive Officer


Consolidated Statements of Income(dollars in thousands, except per share data)


Years Ended December 31, 2001 2000 1999

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,925,936 $ 3,944,862 $ 3,442,696

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,306,143 3,301,018 2,878,539

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 619,793 643,844 564,157

Operating expenses:

Warehousing, marketing and administrative expenses . . . . . . . . . . . . . . . . 450,135 441,298 381,963

Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,603 — —

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 497,738 441,298 381,963

Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,055 202,546 182,194

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,872) (30,171) (30,044)

Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,079 2,942 849

Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,621) (11,201) (9,432)

Income before income taxes and extraordinary item . . . . . . . . . . . . . . . . . . . . . . 93,641 164,116 143,567

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,663 65,473 60,158

Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,978 98,643 83,409

Extraordinary item – loss on early retirement of debt, net of tax benefit of $4,248 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (6,476) —

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,978 $ 92,167 $ 83,409

Net income per common share:Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.70 $ 2.89 $ 2.40Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.19) —

Net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.70 $ 2.70 $ 2.40

Average number of common shares (in thousands) . . . . . . . . . . . . . . . . . . . 33,561 34,101 34,708

Net income per common share – assuming dilution:Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.68 $ 2.84 $ 2.37 Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.19) —

Net income per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.68 $ 2.65 $ 2.37

Average number of common shares (in thousands) . . . . . . . . . . . . . . . . . . . 33,928 34,775 35,208

See notes to consolidated financial statements.


Years Ended December 31, 2001 2000 1999

Cash Flows from Operating Activities:Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,978 $ 92,167 $ 83,409 Adjustments to reconcile net income to net cash provided

by operating activities:Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,210 22,835 22,817 Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,331 8,270 6,631 Amortization of capitalized financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,310 1,748 1,828 Restructuring charge – write-down of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,925 — —Gain on sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . (2,424) — —Extraordinary item – early retirement of debt . . . . . . . . . . . . . . . . . . . . . . . . . — 10,724 —Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,320) 5,320 662 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,060) (546) 236

Changes in operating assets and liabilities, net of acquisitions and dispositions:

Decrease (increase) in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,414 (49,506) (59,965) Decrease (increase) in inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,723 (73,663) (52,742) Increase in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,758) (14,943) (2,831) (Decrease) increase in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,555) 46,231 44,606 Increase (decrease) in accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,014 (6,894) 11,120 Increase (decrease) in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,352 (3,073) (2,190)

Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 191,140 38,670 53,581

Cash Flows from Investing Activities:Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,650) (44,233) (4,680)Sale of Positive ID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,941 — —Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,503) (43,638) (25,461) Proceeds from the disposition of property, plant & equipment . . . . . . . . . . . . . 3,885 4,337 4,130

Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (46,327) (83,534) (26,011)

Cash Flows from Financing Activities:Net (repayments) borrowings under revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . (98,000) 45,000 29,000 Retirements and principal payments of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40,163) (128,509) (7,604) Borrowings under financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 150,000 145 Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 250 Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 2,523 Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,796 4,247 323Acquisition of treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,383) (22,437) (49,600) Payment of employee withholding tax related to stock option exercises . . . . . (1,033) (2,646) (2,652)

Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . (135,783) 45,655 (27,615)

Net Change in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,030 791 (45)

Cash and Cash Equivalents, Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . 19,784 18,993 19,038

Cash and Cash Equivalents, End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,814 $ 19,784 $ 18,993


Consolidated Statements of Cash Flows(dollars in thousands)



Consolidated Balance Sheets(dollars in thousands, except share data)

As of December 31,

Assets 2001 2000

Current assets:

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,814 $ 19,784

Accounts receivable, less allowance for doubtful accountsof $13,462 in 2001 and $14,376 in 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311,047 329,934

Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 581,705 688,926

Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,532 15,843

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950,098 1,054,487

Property, plant and equipment, at cost:

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,423 19,898

Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92,855 93,471

Fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235,039 213,257

Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,433 2,906

Total property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,750 329,532

Less — accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 161,738 139,745

Net property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189,012 189,787

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,117 181,923

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,360 20,830

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,339,587 $ 1,447,027




As of December 31,

Liabilities and Stockholders’ Equity 2001 2000

Current liabilities:

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 336,722 $ 392,789

Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,640 125,969

Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,970 40,273

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 537,332 559,031

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,228 22,703

Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218,735 369,594

Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,611 17,260

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,906 968,588

Stockholders’ equity:

Common stock, $0.10 par value; authorized – 100,000,000 shares, issued – 37,217,814 shares in 2001 and 37,213,207 shares in 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,722 3,721

Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,150 302,837

Treasury stock, at cost – 3,613,954 shares in 2001 and 3,767,907 shares in 2000 . . . . . . . . . . . . . . . . . . . (69,402) (66,832)

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297,407 240,429

Accumulated translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,196) (1,716)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 538,681 478,439

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,339,587 $ 1,447,027


Consolidated Statements of Changes in Stockholders’ Equity(dollars in thousands, except share data)

Numberof

Common CommonShares Stock

As of December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,912,173 $ 3,691

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Unrealized translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,254 30

Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,780 —

As of December 31, 1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,213,207 3,721

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —


Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

As of December 31, 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,213,207 3,721

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —


Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Acquisition of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — —

Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,607 1

As of December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,217,814 $ 3,722




Numberof Treasury Capital Other Total

Treasury Stock in Excess Comprehensive Retained Stockholders’Shares at Cost of Par Income Earnings Equity

— $ — $ 303,330 $ (1,311) $ 64,853 $ 370,563

— — — — 83,409 83,409

— — — 194 — 194

— — — 194 83,409 83,603

(3,250,000) (49,600) — — — (49,600)

29,519 455 666 — — 1,151

— — 292 — — 292

(3,220,481) (49,145) 304,288 (1,117) 148,262 406,009

— — — — 92,167 92,167

— — — (599) — (599)

— — — (599) 92,167 91,568

(857,100) (22,437) — — — (22,437)

309,674 4,750 (1,451) — — 3,299

(3,767,907) (66,832) 302,837 (1,716) 240,429 478,439

— — — — 56,978 56,978

— — — (1,480) — (1,480)

— — — (1,480) 56,978 55,498

(467,500) (12,383) — — — (12,383)

621,453 9,813 7,313 — — 17,127

(3,613,954) $ (69,402) $ 310,150 $ (3,196) $ 297,407 $ 538,681


Notes to Consolidated Financial Statements

Note 1. Basis of Presentation

The Consolidated Financial Statements represent UnitedStationers Inc. (“United”) with its wholly owned subsidiary UnitedStationers Supply Co. (“USSC”) and its subsidiaries – collectively(the “Company”). The Company is the largest general line businessproducts wholesaler in the United States, with 2001 net sales of $3.9billion. The Company operates in a single reportable segment as anational wholesale distributor of business products. The Companyoffers approximately 40,000 items from more than 500 manufacturers.This includes a broad spectrum of office products, computer supplies,office furniture, business machines, presentation products andfacilities management supplies. The Company primarily servescommercial and contract office products dealers. The Company sellsits products through a national distribution network to more than20,000 resellers, who in turn sell directly to end-users. Theseproducts are distributed through a computer-based network of 36USSC regional distribution centers, 24 dedicated Lagasse, Inc.(“Lagasse”) distribution centers that serve the janitorial andsanitation industry, four Azerty Incorporated (“Azerty”) distributioncenters that serve the U.S. and two in Mexico that serve computersupply resellers, two distribution centers that serve the Canadianmarketplace and a mega-center that supports USSC, Azerty, Lagasse,and The Order People. During the second quarter of 2002, Azerty’scomputer systems and product offering will be integrated into USSC.In connection with this integration, the Company intends to closethe four Azerty distribution centers.

Acquisition of Peerless Paper Mills, Inc. On January 5, 2001, the Company’s subsidiary Lagasse acquired all

of the capital stock of Peerless Paper Mills, Inc. (“Peerless”).Subsequently, Peerless was merged into Lagasse. Peerless was awholesale distributor of janitorial/sanitation, paper and food serviceproducts. The purchase price of approximately $32.7 million wasfinanced through the Company’s Senior Credit Facility. Theacquisition was accounted for using the purchase method ofaccounting and, accordingly, the purchase price was allocated to theassets purchased and the liabilities assumed, based upon the estimatedfair values at the date of acquisition. The excess of cost over fairvalue of approximately $15.5 million was allocated to goodwill. Thepro forma effects of the acquisition are not material.

Acquisition of CallCenter Services, Inc. On July 1, 2000, the Company acquired all of the capital stock of

CallCenter Services, Inc. from Corporate Express, a BuhrmannCompany. The purchase price was approximately $10.7 millionfinanced through the Company’s Senior Credit Facility. CallCenterServices, Inc. was a customer relationship management outsourcingservice company with inbound call centers in Wilkes-Barre,Pennsylvania, and Salisbury, Maryland. The acquisition was

accounted for using the purchase method of accounting and,accordingly, the purchase price was allocated to the assets purchasedand the liabilities assumed, based upon the estimated fair values atthe date of acquisition. The excess of cost over fair value ofapproximately $3.1 million was allocated to goodwill. The pro formaeffects of the acquisition were not material.

In November 2001, the Wilkes-Barre portion of CallCenterServices, Inc. was sold to Customer Satisfaction First. In addition,the Salisbury portion of CallCenter Services, Inc. was sold to 1-800-BARNONE, a Financial Corporation, Inc., in January 2002 for $1.2million in cash and the assumption of $1.7 million of debt. The saleof these assets did not have a material impact on the Company’sConsolidated Financial Statements.

Acquisition of Azerty CanadaOn July 5, 2000, the Company completed the acquisition of the

net assets of Azerty Canada from MCSi, Inc. The purchase price was approximately $33.5 million (U.S. dollars) financed through the Company’s Senior Credit Facility. Azerty Canada is a specialtywholesale distributor of computer consumables, peripherals andaccessories. The acquisition was accounted for using the purchasemethod of accounting and, accordingly, the purchase price wasallocated to the assets purchased and the liabilities assumed, based upon the estimated fair values at the date of acquisition. The excess of cost over fair value of approximately $11.8 million was allocated to goodwill. The pro forma effects of the acquisitionwere not material.

Establishing The Order PeopleDuring 2000, the Company established The Order People (“TOP”)

to operate as its third-party fulfillment provider for product categoriesbeyond office products. In 2001, the Company did not achieve theestimated revenue to support TOP’s cost structure. As a result, theCompany began to reduce the operating expenses of TOP. However,the Company remains committed to building the third-partyfulfillment business.

Common Stock RepurchaseOn October 23, 2000, the Company’s Board of Directors

authorized the repurchase of up to $50.0 million of its CommonStock. Under this authorization, the Company purchased 467,500shares at a cost of approximately $12.4 million, during 2001. During2000, the Company purchased 857,100 shares of its Common Stockat a cost of approximately $22.4 million. Acquired shares areincluded in the issued shares of the Company and treasury stock, butare not included in average shares outstanding when calculatingearnings per share data. During 2001 and 2000, the Companyreissued 621,453 and 309,674 shares of treasury stock, respectively, tofulfill its obligations under its management equity plan.


Note 2. Summary of Significant Accounting Policies

Principles of ConsolidationThe Consolidated Financial Statements include the accounts of

the Company. All intercompany accounts and transactions havebeen eliminated in consolidation. For all acquisitions, accountbalances and results of operations are included in the ConsolidatedFinancial Statements as of the date acquired.

Revenue RecognitionRevenue is recognized when a service is rendered or when a

product is shipped and title is transferred to the customer.

Cash EquivalentsAll highly liquid debt instruments with an original maturity of

three months or less are considered cash equivalents. Cashequivalents are stated at cost, which approximates market value.

InventoriesInventories constituting approximately 77% and 73% of total

inventories at December 31, 2001 and 2000, respectively, have beenvalued under the last-in, first-out (“LIFO”) method. The increase inthe percentage of inventory on LIFO resulted from a decline ininventory levels at business units whose inventory is valued underthe first-in, first-out (“FIFO”) method. Inventory valued under theFIFO and LIFO accounting methods is recorded at the lower of costor market. If the lower of FIFO cost or market method of inventoryaccounting had been used by the Company for all inventories,merchandise inventories would have been approximately $26.2million and $19.0 million higher than reported at December 31,2001 and 2000, respectively.

Property, Plant and EquipmentProperty, plant and equipment are recorded at cost. Depreciation

and amortization are determined by using the straight-line methodover the estimated useful lives of the assets.

The estimated useful life assigned to fixtures and equipment is fromtwo to 10 years; the estimated useful life assigned to buildings doesnot exceed 40 years; leasehold improvements are amortized over thelesser of their useful lives or the term of the applicable lease.

GoodwillGoodwill represents the excess of cost over the value of net assets

of businesses acquired and is amortized on a straight-line basis overperiods ranging between 10 and 40 years. The Company periodicallyevaluates whether events or circumstances have occurred indicatingthat the remaining estimated useful life of goodwill may not beappropriate. If factors indicate that goodwill should be evaluated forpossible impairment, the Company will use an estimate ofundiscounted future operating income compared with the carryingvalue of goodwill to determine if a write-off is necessary. Thecumulative amount of goodwill amortized at December 31, 2001 and2000 is $27.9 million and $22.2 million, respectively. During 2000,

the Company reversed approximately $9.2 million of goodwill relatedto certain purchase accounting reserves recorded in conjunction withthe 1995 ASI/USI merger. See New Accounting Pronouncementswithin this note regarding changes in goodwill accounting.

Software CapitalizationThe Company capitalizes internal use software development costs

in accordance with the American Institute of Certified PublicAccountants’ Statement of Position No. 98-1 “Accounting for Costs of Computer Software Developed or Obtained for Internal Use.”Amortization is recorded on a straight-line basis over the estimateduseful life of the software, generally not to exceed seven years.

Income TaxesIncome taxes are accounted for using the liability method, under

which deferred income taxes are recognized for the estimated taxconsequences for temporary differences between the financialstatement carrying amounts and the tax basis of assets and liabilities.Provision has not been made for deferred U.S. income taxes on theundistributed earnings of the Company’s foreign subsidiaries becausethese earnings are intended to be permanently invested.

Foreign Currency TranslationThe functional currency for the Company’s foreign operations is

the local currency. Assets and liabilities of these operations aretranslated at the rates of exchange at the balance sheet date. Theresulting translation adjustments are included in accumulated othercomprehensive income, a separate component of stockholders’equity. Income and expense items are translated at average monthlyrates of exchange. Gains and losses from foreign currencytransactions were not material.

Use of EstimatesThe preparation of financial statements in conformity with

accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the amounts reported in the Consolidated FinancialStatements and accompanying notes. Actual results could differ from these estimates.

New Accounting Pronouncements In August 2001, the Financial Accounting Standards Board

(“FASB”) issued Statements of Financial Accounting Standards(“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses financial accounting and reporting forthe impairment or disposal of long-lived assets. SFAS 144 iseffective for fiscal years beginning after December 15, 2001. TheCompany will adopt SFAS 144 as of January 1, 2002 and it does notexpect that the adoption of the Statement will have a significantimpact on its financial position and results of operations.



Notes to Consolidated Financial Statements (continued)

Note 3. Restructuring Charge

Note 2. Summary of Significant Accounting Policies (continued)

In June 2001, the FASB issued SFAS No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Other IntangibleAssets.” SFAS 141 requires that the purchase method of accountingbe used for all business combinations initiated after June 30, 2001.In addition, SFAS 141 includes guidance on the initial recognitionand measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. The amortization of goodwill and intangible assets with indefiniteuseful lives is prohibited under SFAS 142. SFAS 142 requires thatthese assets be reviewed for impairment at least annually. Intangibleassets with finite lives will continue to be amortized over theirestimated useful lives. Additionally, SFAS 142 requires that goodwill included in the carrying value of equity method investmentsno longer be amortized.

The Company will apply SFAS 142 beginning in the first half of2002. Application of the non-amortization provisions of SFAS 142 isexpected to result in an increase in net income of approximately $4.9million, or $0.15 per share, in 2002. Changes in the estimated usefullives of intangible assets are not expected to have a material impacton net income in 2002. The Company will test goodwill forimpairment using the two-step process prescribed in SFAS 142. Thefirst step is a screen for potential impairment, while the second stepmeasures the amount of the impairment, if any. The Companyexpects to perform the first of the required impairment tests ofgoodwill and indefinite lived intangible assets in the first half of2002. Any impairment charge resulting from these transitionalimpairment tests will be reflected as the cumulative effect of a

change in accounting principle in the first half of 2002. TheCompany has not yet determined what the effect of these tests willbe on its earnings and financial position.

In June 2001, the FASB issued SFAS No. 143, “Accounting for AssetRetirement Obligations,” which is effective for fiscal years beginningafter June 15, 2002. The Statement requires legal obligationsassociated with the retirement of long-lived assets to be recognized attheir fair value at the time that the obligations are incurred. Uponinitial recognition of a liability, that cost should be capitalized as partof the related long-lived asset and allocated to expense over the usefullife of the asset. The Company will adopt SFAS 143 on January 1,2003, and, based on current circumstances, does not believe that theimpact of adoption of SFAS 143 will have a material impact on itsfinancial position or results of operations.

Effective January 1, 2001, the Company adopted the provisions ofSFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities” issued by the Financial Accounting Standards Board.SFAS No. 133, as amended by SFAS Nos. 137 and 138, establishesaccounting and reporting standards for derivative instruments andhedging activities. It requires an entity to recognize all derivatives aseither assets or liabilities on the balance sheet. The statement alsorequires changes in the fair value of the derivative instruments to berecorded in either net earnings or other comprehensive incomedepending on their intended use. The adoption of SFAS Nos. 133,137, and 138 did not have a material impact on the Company’sConsolidated Financial Statements.

In the third quarter 2001, the Company’s board of directorsapproved a restructuring plan that includes:

• An organizational restructuring aimed at eliminating certain layers of management to achieve a lower cost structure and provide better customer service;

• The consolidation of certain distribution facilities and call center operations;

• An information technology platform consolidation;

• Divestiture of The Order People’s call center operations and certain other assets; and

• A significant reduction to The Order People’s cost structure.

The restructuring plan calls for a workforce reduction of 1,375.These positions primarily are related to The Order People and callcenter operations. The associate groups that will be affected by the

restructuring plan include management personnel, inside and outsidesales representatives, call center associates, distribution workers, andhourly administrative staff. The restructuring plan is designed tohave all initiatives completed within approximately one year fromthe commitment date.

During the third quarter 2001, the Company recorded a pre-taxrestructuring charge of $47.6 million, or $0.85 per share (on an after-tax basis). This charge includes a pre-tax cash charge of $31.7 million and a $15.9 million non-cash charge. The majorcomponents of the restructuring charge and the remaining accrualbalance as of December 31, 2001, are as follows:


Note 4. Segment Information

United States, which were immaterial. The Company sells itsproducts through a national distribution network to more than20,000 resellers, who in turn sell directly to end-users. Theseproducts are distributed through a computer-based network of 36USSC regional distribution centers, 24 dedicated Lagasse distributioncenters that serve the janitorial and sanitation industry, four Azertydistribution centers that serve the U.S. and two in Mexico that servecomputer supply resellers, two distribution centers that serve theCanadian marketplace and a mega-center that supports USSC,Azerty, Lagasse, and The Order People. During the second quarter of2002, Azerty’s computer systems and product offering will beintegrated into USSC. In connection with this integration, theCompany will close the four Azerty distribution centers.

The Company’s product offerings, comprised of more than 40,000stockkeeping units (SKUs), may be divided into five primarycategories. (i) The Company’s core business continues to betraditional office products, which includes both brand name productsand the Company’s private brand products. Traditional officeproducts include writing instruments, paper products, organizers andcalendars and various office accessories. (ii) The Company alsooffers computer supplies, and peripherals to computer resellers andoffice products dealers. (iii) The Company sells office furniture,such as leather chairs, wooden and steel desks and computer

The Company adopted SFAS No. 131, “Disclosure about Segmentsof an Enterprise and Related Information,” in 1998. SFAS No. 131requires companies to report financial and descriptive informationabout their reportable operating segments, including segment profitor loss, certain specific revenue and expense items, and segmentassets, as well as information about the revenues derived from thecompany’s products and services, the countries in which thecompany earns revenues and holds assets, and major customers. This statement also requires companies that have a single reportablesegment to disclose information about products and services,information about geographic areas, and information about majorcustomers. This statement requires the use of the managementapproach to determine the information to be reported. Themanagement approach is based on the way management organizesthe enterprise to assess performance and make operating decisionsregarding the allocation of resources. It is management’s opinionthat, at this time, the Company has several operating segments,however only one reportable segment.

The following discussion sets forth the required disclosureregarding single segment information:

The Company operates as a single reportable segment as the largestgeneral line business products wholesaler in the United States with2001 net sales of $3.9 billion – including operations outside the


Non-Cash EmploymentAsset Termination Accrued TotalWrite- and Severance Exit Restructuring

(dollars in thousands) Downs Costs Costs Charge

Restructuring Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,925 $ 19,189 $ 12,489 $ 47,603 Amounts Utilized – as of December 31, 2001 . . . . . . . . . . . . . . . . . . (15,925) (3,023) (1,226) (20,174) Accrued Restructuring Costs – as of December 31, 2001 . . . . . . . . . $ — $ 16,166 $ 11,263 $ 27,429

The non-cash asset write-downs of $15.9 million were primarilythe result of facility closures and business divestitures, including $8.8million related to property, plant and equipment and $7.1 millionrelated to goodwill. Asset write-downs are based on management’sestimate of net realizable value.

Employment termination and severance costs are related tovoluntary and involuntary terminations and reflect cash terminationpayments to be paid to associates affected by the restructuring plan.Healthcare benefits and career transition services are included in the termination and severance costs. The restructuring plan allowsassociates to continue their participation in the Company’shealthcare plan during the term of their severance.

Accrued exit costs are primarily contractual lease obligations thatexisted prior to September 30, 2001, for buildings that the Companyhas closed or will be closing in the near future.

Implementation costs will be recognized as incurred and consist of

incremental costs directly related to the realization of therestructuring plan. The Company estimates that the total cost ofimplementation will be approximately $6.7 million incurred ratablythrough approximately September 30, 2002. These costs includetraining, stay bonuses, consulting fees, costs to relocate inventory,and accelerated depreciation. Implementation costs incurredthrough December 31, 2001, were $2.2 million.

As of December 31, 2001, the Company completed the closure ofthree distribution centers and one USSC call center, eliminated oneadministrative office, divested a portion of the call center operationsdedicated to serving The Order People’s clients and began theimplementation of its organizational restructuring and workforcereduction. As a result, the Company reduced its workforce by 580 associates through its voluntary and involuntary terminationprograms. The remaining 795 associates will be terminatedthroughout the implementation period of approximately one year.



Note 5. Other Expense

The following table sets forth the components of other expense(dollars in thousands):

Years Ended December 31,2001 2000 1999

Loss on the sale of accounts receivable,net of servicing revenue . . . . . . . . . . $ 7,045 $ 11,133 $ 9,393

Other . . . . . . . . . . . . . . . . . . . . . . . . . . (2,424)(1) 68 39

Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,621 $ 11,201 $ 9,432

(1) Represents a net gain on the sale of a distribution center.

Receivables Securitization ProgramAs part of an overall financing strategy, the Company utilizes a

standard third-party receivables securitization program, to provide low-cost funding. Under this $163.0 million program the Company sells,on a revolving basis, its eligible accounts receivable (except for certainexcluded accounts receivable, which initially includes all accountsreceivable from Azerty and Lagasse) to the Receivables Company, awholly owned offshore, bankruptcy-remote special purpose limitedliability company. This company in turn ultimately transfers theeligible accounts receivable to a third-party, multi-seller asset-backedcommercial paper program, existing solely for the purpose of issuingcommercial paper rated A-1/P-1 or higher. The sale of trade accountsreceivable includes not only those eligible receivables that existed onthe closing date of the Receivables Securitization Program, but alsoeligible accounts receivable created thereafter. Affiliates of PNC Bankand JP Morgan Chase act as funding agents. The funding agents,together with other commercial banks rated at least A-1/P-1, providestandby liquidity funding to support the sale of the accounts receivableby the Receivables Company under 364-day liquidity facilities.

The Receivables Securitization Program is accounted for as a salein accordance with FASB Statement No. 140 “Accounting forTransfers and Servicing of Financial Assets and Extinguishments ofLiabilities.” The Company formed a master trust for purposes ofpooling its eligible accounts receivable. The Company transfers allof its right, title and interest in, to and under these accountsreceivable to the master trust. At the direction of the Company, thismaster trust issues investor certificates that represent undividedinterests in the eligible accounts receivable. Accounts receivablesold under these arrangements are excluded from accounts receivablein the Consolidated Balance Sheets. The interest rate on thecertificates issued under the Receivables Securitization Programduring 2001 ranged between 2.1% and 6.5% annually. TheCompany’s retained interests on $244.8 million and $248.2 millionof receivables in the master trust as of December 31, 2001 and 2000,were approximately $119.8 million and $98.2 million, respectively.Accordingly, as of December 31, 2001 and 2000, the Company hadsold $125.0 million and $150.0 million, respectively, of accountsreceivable through the Receivables Securitization Program. Theretained interest, which is included in the accounts receivablebalance reflected in the Consolidated Balance Sheets, is recorded atfair value. Due to a short average collection cycle for such accountsreceivable of approximately 40 days and the Company’s collectionhistory, the fair value of the Company’s retained interestapproximates book value. Losses recognized on the sale of accountsreceivable totaled approximately $7.0 million, $11.1 million and $9.4million in 2001, 2000, and 1999, respectively. These costs vary on amonthly basis and generally are related to certain short-term interest

Note 4. Segment Information (continued)

furniture. The Company currently offers nearly 5,500 furniture itemsfrom 60 different manufacturers. (iv) A fourth category is facilitysupplies, including janitorial and sanitation supplies, safety andsecurity items, and shipping and mailing supplies. The Companydistributes these products through 24 Lagasse distribution centers tosanitary supply dealers. (v) The Company also distributes businessmachines and presentation products.

The Company’s customers include office products dealers, mega-dealers, office furniture dealers, office products superstores and massmerchandisers, mail order companies, computer products resellers,sanitary supply distributors and e-commerce dealers. For the yearended December 31, 2001, Corporate Express, Inc. (“CorporateExpress”) accounted for approximately 10% of the Company’s netsales. This percentage includes the combined 12-month volume forCorporate Express and U.S. Office Products (“USOP”). On March5, 2001, USOP filed for Chapter 11 bankruptcy protection to

facilitate its sale to Corporate Express. On May 14, 2001, the sale ofUSOP to Corporate Express was completed. Other than CorporateExpress, no single customer accounted for more than 6% of theCompany’s net sales in 2001.

The following table sets forth net sales by product category (dollars in millions):


Traditional office products . . . . . . . . . . $ 1,245 $ 1,356 $ 1,204Computer consumables . . . . . . . . . . . . 1,349 1,288 1,136Office furniture . . . . . . . . . . . . . . . . . . 499 513 435Facilities supplies . . . . . . . . . . . . . . . . . 402 310 240Business machines and

presentation products . . . . . . . . . . . . . . 352 385 344Freight revenue . . . . . . . . . . . . . . . . . . 60 64 50Other . . . . . . . . . . . . . . . . . . . . . . . . . . 19 29 34

Total net sales . . . . . . . . . . . . . . . . . . . $ 3,926 $ 3,945 $ 3,443


Note 6. Earnings Per ShareBasic earnings per share is calculated by dividing net income by the

weighted average number of common shares outstanding during theperiod. Diluted earnings per share is calculated by dividing netincome by the weighted average number of common and common

equivalent shares outstanding during the period. Stock options anddeferred stock units are considered common equivalent shares.

The following table sets forth the computation of basic and dilutedearnings per share (in thousands, except per share data):


Numerator:Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,978 $ 98,643 $ 83,409Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (6,476) —Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,978 $ 92,167 $ 83,409

Denominator:Denominator for basic earnings per share – weighted average shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,561 34,101 34,708Effect of dilutive securities:

Employee stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 367 674 500Denominator for diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,928 34,775 35,208

Earnings per common share:Basic

Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.70 $ 2.89 $ 2.40Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.19) —Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.70 $ 2.70 $ 2.40

DilutedIncome before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.68 $ 2.84 $ 2.37Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (0.19) —Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.68 $ 2.65 $ 2.37


rates. These costs are included in the Consolidated Statements ofIncome under the caption Other Expense. As a result of the shortaverage collection cycle referenced above, proceeds from thecollections under this revolving agreement were $2.8 billion, $2.9billion and $2.8 billion in 2001, 2000, and 1999, respectively. The

Company has retained the responsibility for servicing accountsreceivable transferred to the master trust. No servicing asset or liabilityhas been recorded because the fees the Company receives for servicingthe receivables approximate the related costs. No accounts receivablesold to the master trust were written off during 2001, 2000 or 1999.

Note 7. Long-Term DebtUnited is a holding company and, as a result, its primary source of

funds is cash generated from operating activities of its operatingsubsidiary, USSC, and bank borrowings by USSC. The CreditAgreement and the indentures governing the 8.375% Notes (as

defined) contain restrictions on the ability of USSC to transfer cash to United.

Long-term debt consisted of the following amounts (dollars inthousands):


Revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 98,000Tranche A term loan, due in installments until March 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32,331 44,325Tranche A-1 term loan due in installments until June 30, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109,375 137,500 8.375% Senior Subordinated Notes, due April 15, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000Industrial development bonds, at market interest rates, maturing at various dates through 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . 14,300 14,300Industrial development bonds, at 66% to 78% of prime, maturing at various dates through 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 15,500 15,500Other long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 242

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271,705 409,867Less – current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (52,970) (40,273)

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 218,735 $369,594



Note 7. Long-Term Debt (continued)

The loans outstanding under the Term Loan Facilities and theRevolving Credit Facility bear interest as determined within a pricingmatrix. The interest rate is based on the ratio of total debt to earningsbefore interest, taxes, depreciation, and amortization (“EBITDA”). TheTranche A Term Loan Facility and Revolving Credit Facility bearinterest at the prime rate plus 0% to 1.00%, or, at the Company’s option,the London Interbank Offered Rate (“LIBOR”) plus 1.25% to 2.25%.The Tranche A-1 Term Loan Facility bears interest at the prime rate plus 0.25% to 1.25%, or, at the Company’s option, LIBOR plus 1.50% to 2.50%.

The Credit Agreement contains representations and warranties,affirmative and negative covenants, and events of default customary forfinancings of this type. At December 31, 2001, the Company was incompliance with all covenants contained in the Credit Agreement.

The right of United to participate in any distribution of earnings orassets of USSC is subject to the prior claims of the creditors of USSC.In addition, the Credit Agreement contains certain restrictivecovenants, including covenants that restrict or prohibit USSC’s abilityto pay cash dividends and make other distributions to United.

The Company is exposed to market risk for changes in interest rates.The Company may enter into interest rate protection agreements,including collar agreements, to reduce the impact of fluctuations ininterest rates on a portion of its variable rate debt. These agreementsgenerally require the Company to pay to or entitle the Company toreceive from the other party the amount, if any, by which the Company’sinterest payments fluctuate beyond the rates specified in the agreements.The Company is subject to the credit risk that the other party may fail toperform under such agreements. The Company’s cost for theseagreements was amortized to interest expense over the term of theagreements, and the unamortized cost was included in other assets. Any payments received or made as a result of the agreements wererecorded as an addition to or a reduction from interest expense. For theyear ended December 31, 1999, the Company recorded $0.2 million tointerest expense resulting from LIBOR rate fluctuations below the floorrate specified in the collar agreements. The Company’s interest ratecollar agreements on $200.0 million of borrowings at LIBOR ratesbetween 5.2% and 8.0% expired on October 29, 1999. As of December31, 2001, the Company has not entered into any new interest rate collar agreements.

Debt maturities for the years subsequent to December 31, 2001, are asfollows (dollars in thousands):

Year Amount

2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,9702003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,4012004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42,9092005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,6252006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —Later years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106,800

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 271,705

The prevailing prime interest rates at the end of 2001 and 2000 were4.75% and 9.50%, respectively.

In order to restate and further amend the Second Amended andRestated Credit Agreement, dated April 3, 1998 (the “Prior CreditAgreement”), USSC, as issuer, entered into the Third Amended andRestated Revolving Credit Agreement, dated June 29, 2000, withvarious lenders and the administrative agent named therein (the“Credit Agreement”). The Credit Agreement, among other things,provides a facility (“Tranche A Term Loan Facility”) for thecontinuation of the term loans outstanding as of its effective dateunder the Prior Credit Agreement, an additional $150.0 millionaggregate principal amount, five-year term loan facility (the “TrancheA-1 Term Loan Facility” and, together the Tranche A Term LoanFacility, the “Term Loan Facilities”), and a revolving credit facility ofup to $250.0 million aggregate principal amount (the RevolvingCredit Facility”).

As of December 31, 2001, the available credit under the Term LoanFacilities included $141.7 million of term loan borrowings. In addition,the Company has $100.0 million of 8.375% Senior Subordinated Notesdue 2008, and $29.8 million of industrial development bonds.

As of December 31, 2001, principal amounts borrowed andoutstanding under the Term Loan Facilities consisted of a $32.3 millionTranche A Term Loan Facility and a $109.4 million Tranche A-1 TermLoan Facility. Amounts outstanding under the Tranche A Term LoanFacility are to be repaid in nine quarterly installments ranging from$3.1 million at March 31, 2002, to $3.7 million at March 31, 2004.Amounts outstanding under the Tranche A-1 Term Loan Facility are tobe repaid in 14 quarterly installments of $7.8 million.

The Revolving Credit Facility is limited to $250.0 million, less theaggregate amount of letter of credit liabilities under the facility, andcontains a provision for swingline loans in an aggregate amount up to$25.0 million. The Revolving Credit Facility matures on March 31,2004. The Company had no borrowings outstanding under theRevolving Credit Facility at December 31, 2001. As of December 31,2001, the Company had $215.8 million available under its RevolvingCredit Facility after deducting certain outstanding letter-of-creditliabilities of $34.2 million.

As collateral security for the obligations of USSC and securityinterests, liens have been placed upon accounts receivable and relatedinstruments, inventory, equipment, contract rights, intellectual propertyand all other tangible and intangible personal property (includingproceeds) and fixtures and certain real property of USSC and itsdomestic subsidiaries, other than accounts receivables sold inconnection with the Receivables Securitization Program. Also securingthese obligations are first priority pledges of all of the outstanding stockof USSC and of its domestic direct and indirect subsidiaries, includingLagasse and Azerty but excluding The Order People Company, as wellas certain of the stock of identified foreign direct and indirectsubsidiaries of USSC (excluding USS Receivables Company, Ltd.)


Note 8. Leases

As of December 31, 2001 and 2000, the Company had issuedletters of credit of $38.6 million and $53.0 million, respectively, ofwhich $36.0 million and $49.6 million, respectively, wereoutstanding.

12.75% Senior Subordinated NotesThe 12.75% Senior Subordinated Notes (“12.75% Notes”) were

originally issued on May 3, 1995, under the 12.75% Notes Indenture.On May 2, 2000, the Company redeemed the remaining $100.0million of its 12.75% Senior Subordinated Notes. The 12.75%Notes were redeemed at the redemption price of 106.375% of theprincipal amount plus accrued interest. As a result, the Companyrecognized an extraordinary loss on the early retirement of debt ofapproximately $10.7 million ($6.5 million net of tax benefit of $4.2million). This charge included the write-off of approximately $4.3million ($2.6 million net of tax benefit of $1.7 million) of capitalizedcosts. The redemption was funded through the Company’s Revolving Credit Facility.

8.375% Senior Subordinated NotesThe 8.375% Senior Subordinated Notes (“8.375% Notes”) were

issued on April 15, 1998, under the 8.375% Notes Indenture. As ofDecember 31, 2001, the aggregate outstanding principal amount of8.375% Notes was $100.0 million. The 8.375% Notes are unsecuredsenior subordinated obligations of USSC, and payment of the8.375% Notes is fully and unconditionally guaranteed by theCompany and USSC’s domestic “restricted” subsidiaries that incurindebtedness (as defined in the 8.375% Notes Indenture) on a seniorsubordinated basis. The 8.375% Notes mature on April 15, 2008,and bear interest at the rate of 8.375% per annum, payable semi-annually on April 15 and October 15 of each year.

The 8.375% Notes are redeemable at the option of USSC at any

time on or after April 15, 2003, in whole or in part, at the followingredemption prices (expressed as percentages of principal amount):

Year Beginning April 15, Redemption Price

2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104.188%2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102.792%2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101.396%

After 2005 the Notes are payable at 100% of the principal amount,in each case together with accrued and unpaid interest, if any, to theredemption date.

Upon the occurrence of a change of control (which includes theacquisition by any person or group of more than 50% of the votingpower of the outstanding Common Stock of either the Company or USSC, or certain significant changes in the composition of theBoard of Directors of either the Company or USSC), USSC shall be obligated to offer to redeem all or a portion of each holder’s 8.375%Notes at 101% of the principal amount, together with accrued andunpaid interest, if any, to the date of the redemption. This obligation,if it arose, could have a material adverse effect on the Company.

The 8.375% Notes Indenture governing the 8.375% Notes containscertain covenants, including limitations on the incurrence ofindebtedness, the making of restricted payments, transactions withaffiliates, the existence of liens, disposition of proceeds of asset sales,the making of guarantees by restricted subsidiaries, transfer andissuances of stock of subsidiaries, the imposition of certain paymentrestrictions on restricted subsidiaries and certain mergers and sales ofassets. In addition, the 8.375% Notes Indenture provides for theissuance of up to $100.0 million aggregate principal amount ofadditional 8.375% Notes having substantially identical terms andconditions to the 8.375% Notes, subject to compliance with thecovenants contained in the 8.375% Notes Indenture, includingcompliance with the restrictions contained in the 8.375% NotesIndenture relating to incurrence of indebtedness.

The Company has entered into non-cancelable long-term leasesfor certain property and equipment. Future minimum lease paymentsunder operating leases in effect at December 31, 2001 having initialor remaining non-cancelable lease terms in excess of one year are asfollows (dollars in thousands):

OperatingYear Leases (1)

2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,8872003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,2862004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,8402005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,8922006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,647Later years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,321

Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . $ 211,873(1) Operating leases are net of immaterial sublease income.

Operating lease expense was approximately $44.7 million, $31.0million, and $27.1 million in 2001, 2000, and 1999, respectively.




Note 9. Pension Plans and Defined Contribution PlanPension Plans

As of December 31, 2001, the Company has pension planscovering approximately 4,600 of its employees. Non-contributoryplans covering non-union employees provide pension benefits thatare based on years of credited service and a percentage of annualcompensation. Non-contributory plans covering union members

generally provide benefits of stated amounts based on years of service.The Company funds the plans in accordance with current tax laws.

The following table sets forth the plans’ changes in ProjectedBenefit Obligation for the years ended December 31, 2001 and 2000(dollars in thousands):

2001 2000

Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,419 $ 35,647Service cost – benefit earned during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,452 3,171Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,463 2,997Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 267Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,053 3,447Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (486) —Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,375) (1,110)Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 55,526 $ 44,419

The plans’ assets consist of corporate and government debt securities and equity securities. The following table sets forth the change in theplans’ assets for the years ended December 31, 2001 and 2000 (dollars in thousands):

2001 2000Fair value of assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,847 $ 47,891Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,213) 8,015Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430 2,051Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,375) (1,110)Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 43,689 $ 56,847

The following table sets forth the plans’ funded status as of December 31, 2001 and 2000 (dollars in thousands):

2001 2000Funded status of the plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (11,836) $ 12,428Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,293 1,429Unrecognized net actuarial loss (gain) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,300 (15,113) Pension liability recognized in the Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (2,243) $ (1,256)

Net periodic pension cost for 2001, 2000 and 1999 for pension and supplemental benefit plans includes the following components (dollars inthousands):

2001 2000 1999

Service cost – benefit earned during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,452 $ 3,171 $ 3,231Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,463 2,997 2,598Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,809) (4,114) (3,485)Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 111 99Plan curtailment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 — 193Amortization of actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (825) (623) (13)Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,417 $ 1,542 $ 2,623

The assumptions used in accounting for the Company’s defined benefit plans are set forth below:

2001 2000 1999

Assumed discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.25% 7.75% 7.75%Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.00% 5.50% 5.50%Expected long-term rate of return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.50% 8.50% 8.50%


Note 10. Postretirement Benefits

Defined Contribution PlanThe Company has a defined contribution plan. Salaried employees

and non-union hourly paid employees are eligible to participate aftercompleting six consecutive months of employment. The planpermits employees to have contributions made as 401(k) salarydeferrals on their behalf, or as voluntary after-tax contributions, and

provides for Company contributions, or contributions matchingemployees’ salary deferral contributions, at the discretion of theBoard of Directors. Company contributions to match employees’contributions were approximately $3.6 million, $3.1 million and $1.5 million in 2001, 2000 and 1999, respectively.


The Company maintains a postretirement plan. The plan isunfunded and provides health care benefits to substantially all retirednon-union employees and their dependents. Eligibility requirementsare based on the individual’s age (minimum age of 55), years ofservice and hire date. The benefits are subject to retiree

contributions, deductible, co-payment provision and otherlimitations. The following tables set forth the plan’s change inAccrued Postretirement Benefit Obligation (“APBO”), plan assetsand funded status for the years ended December 31, 2001 and 2000(dollars in thousands):

2001 2000

Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,780 $ 3,606Service cost – benefit earned during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620 574Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 335Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 111Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 613Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (202) —Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (266) (459)Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,542 $ 4,780

Fair value of assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ —Company contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 348Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 111Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (266) (459)Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ —

Funded status of the plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,542) $ (4,780)Unrecognized net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (65)Accrued postretirement benefit obligation in the Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (5,542) $ (4,845)

The costs of postretirement health care benefits for the years ended December 31, 2001, 2000 and 1999 were as follows (dollars in thousands):

2001 2000 1999

Service cost – benefit earned during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 620 $ 574 $ 498 Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 335 229 Curtailment gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (174) — —Amortization of actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (7) Net periodic postretirement benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 812 $ 909 $ 720

The assumptions used in accounting for the Company’s postretirement plan for the three years presented are set forth below:

2001 2000 1999

Assumed average health care cost trend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.00% 3.00% 3.00%Assumed discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.25% 7.75% 7.75%

The postretirement plan states that the Company’s medical cost increases for current and future retirees and their dependents are capped at3%. Because annual medical cost increases are trending above 4% and the Company’s portion of any increase is capped at 3%, a 1% increase ordecrease in these costs will have no effect on the APBO, the service cost or the interest cost.


Note 11. Stock Option Plan

The following table summarizes the transactions of the Plan for the last three years:

Weighted Weighted WeightedAverage Average Average

Management Equity Plan Exercise Exercise Exercise(excluding restricted stock) 2001 Prices 2000 Prices 1999 PricesOptions outstanding at beginning

of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,430,555 $ 23.13 2,968,875 $ 19.60 2,212,578 $ 15.28Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,093,740 32.87 984,100 28.85 1,293,025 22.89Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (640,084) 20.43 (396,480) 10.82 (434,978) 6.52Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (700,283) 27.61 (125,940) 23.40 (101,750) 23.41Options outstanding at

end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . 3,183,928 $ 25.29 3,430,555 $ 23.13 2,968,875 $ 19.60

Number of options exercisable . . . . . . . . . . . . . . . 977,253 $ 19.66 834,225 $ 19.04 701,160 $ 12.98

The following table summarizes information concerning the Plan’soutstanding options as of December 31, 2001:

RemainingExercise ContractualPrices Outstanding Life (Years) Exercisable

$ 10.81 500,000 5.5 400,00022.00 237,130 7.6 59,08022.13 30,000 6.0 24,00023.38 332,740 6.2 110,38023.38 448,060 7.2 139,64026.25 30,000 8.2 6,00026.83 30,000 9.0 6,00029.13 627,158 8.7 190,15330.56 3,600 6.5 2,40030.84 51,000 10.0 —31.63 30,000 6.3 18,00032.40 20,000 9.7 —32.99 810,640 9.7 —33.06 30,000 6.7 18,00033.56 3,600 6.7 3,600

Total 3,183,928 977,253

The Company elected the supplemental disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.”Accordingly, the Company is required to disclose pro forma netincome and earnings per share as if the fair value-based accountingmethod in SFAS No. 123 had been used to account for stock-basedcompensation cost.

Options granted under the Plan during 2001, 2000 and 1999 didnot require compensation cost to be recognized in the incomestatement. However, they are subject to the supplemental disclosurerequirements of SFAS No. 123. Had compensation cost beendetermined on the basis of SFAS No. 123 for options granted during2001, 2000 and 1999, net income and earnings per share would havebeen adjusted as follows (in thousands, except per share data):

The Management Equity Plan (the “Plan”) is administered by theHuman Resources Committee, or the Board of Directors or by suchother committee, as determined by the Board of Directors of theCompany. The Plan provides for the issuance of Common Stock,through the exercise of options, to members of the Board of Directorsand to key employees of the Company, either as incentive stockoptions or as non-qualified stock options.

In May 2000, the Company’s stockholders approved the 2000Management Equity Plan, which provided for the issuance of up to3.7 million shares of Common Stock through the exercise of options,to members of the Board of Directors and to key employees of theCompany. During 2001, 2000 and 1999, options of approximately1.0 million, 1.0 million and 1.3 million, respectively, were granted tomanagement employees and directors, with option exercise pricesequal to fair market value, generally vesting ratably between three

and five years and generally expire 10 years from the date of grant.As of December 31, 2001, there were 3.2 million shares available forfuture grant.

An optionee under the Plan must pay the full option price uponexercise of an option (i) in cash; (ii) with the consent of the Boardof Directors, by delivering mature shares of Common Stock alreadyowned by the optionee and having a fair market value at least equalto the exercise price; or (iii) in any combination of the above. TheCompany may require the optionee to satisfy federal tax withholdingobligations with respect to the exercise of options by (i) additionalwithholding from the employee’s salary, (ii) requiring the optionee topay in cash, or (iii) reducing the number of shares of Common Stockto be issued to meet only the minimum statutory withholdingrequirement (except in the case of incentive stock options).



2001 2000 1999Net Income Attributable to Common Stockholders:

As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,978 $ 92,167 $ 83,409Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,488 87,951 79,821

Net Income per Common Share – Basic:As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.70 $ 2.70 $ 2.40Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.56 2.58 2.30Average number of common shares (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,561 34,101 34,708

Net Income per Common Share – Diluted:As reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.68 $ 2.65 $ 2.37Pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.55 2.53 2.27

Average number of common shares (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,928 34,775 35,208

The Company uses a binomial option pricing model to estimate the fair value of options at the date of grant. The weighted averageassumptions used to value options and the weighted average fair value of options granted during 2001, 2000 and 1999 were as follows:

2001 2000 1999

Fair value of options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12.73 $ 13.84 $ 13.20Exercise price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.87 28.85 22.89Expected stock price volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51.0% 52.8% 55.5%Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.0% 0.0% 0.0%Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6% 6.1% 5.1%Expected life of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 years 4 years 6 years

Note 12. Preferred Stock

The Company’s authorized capital shares include 15.0 millionshares of preferred stock. The rights and preferences of preferredstock are established by the Company’s Board of Directors upon


Retention Grant PlanDuring 2001, the Company established a Retention Grant Plan

(the “Retention Plan”) to retain key executives and to provideadditional incentive for such key executives to achieve the objectivesand promote the business success of the Company by providing suchindividuals opportunities to acquire common shares of the Companythrough the settlement of deferred stock units. Each deferred stockunit is equal to one share of the Company’s Common Stock. Themaximum number of deferred stock units that may be granted underthe Retention Plan is 270,000. During 2001, 100,000 deferred stockunits were granted with a cliff vesting of eight years, subject tocertain accelerated vesting conditions. The value of the grant of$24.25 per deferred stock unit was established by the market price ofthe Company’s Common Stock on the date of the grant. During2001, the Company recorded approximately $0.2 million of expensein connection with the Retention Plan.

Directors Grant PlanDuring 2001, the Company established a Directors Grant Plan

(the “Directors Plan”) to retain directors who are not employees ofthe Company and to provide additional incentive for such directorsto achieve the objectives and promote the business success of theCompany by providing such individuals opportunities to acquirecommon shares of the Company through the settlement of deferredstock units. Each deferred stock unit is equal to one share of theCompany’s Common Stock. At such times as determined by theBoard of Directors of the Company, each director of the Companywho is not an employee of the Company may be granted up to 4,000deferred stock units each year as determined by the Board ofDirectors in its sole discretion. Vesting terms will be determined atthe time of the grant. During 2001, 19,200 deferred stock units weregranted to certain members of the Board of Directors, which vestedimmediately. The value of the grant was established by the marketprice of the Company’s Common Stock on the date of the grant.During 2001, the Company recorded approximately $0.6 million ofexpense, which represented the entire value of the grant, inconnection with the Directors Plan.

issuance. At December 31, 2001, the Company had no preferredstock outstanding and all 15.0 million shares are specified asundesignated preferred stock.



Note 13. Income TaxesThe provision for income taxes consisted of the following (dollars in thousands):


Currently Payable – Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 41,271 $ 49,329 $ 47,774State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,712 10,824 11,722

Total currently payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,983 60,153 59,496

Deferred, net –Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,857) 4,491 530State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,463) 829 132

Total deferred, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,320) 5,320 662Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,663 $ 65,473 $ 60,158

The Company’s effective income tax rates for the years ended December 31, 2001, 2000 and 1999 varied from the statutory federal income taxrate as set forth in the following table (dollars in thousands):


% of % of % ofPre-tax Pre-tax Pre-tax

Amount Income Amount Income Amount Income

Tax provision based on the federal statutory rate . . . . . . . . $ 32,774 35.0% $ 57,441 35.0% $ 50,248 35.0%State and local income taxes – net of federal

income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,371 3.6 7,713 4.7 7,710 5.4Non-deductible and other . . . . . . . . . . . . . . . . . . . . . . . . . . 518 0.6 319 0.2 2,200 1.5

Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,663 39.2% $ 65,473 39.9% $ 60,158 41.9%

The deferred tax assets and liabilities resulted from temporary differences in the recognition of certain income and expense items for financialand tax accounting purposes. The sources of these differences and the related tax effects were as follows (dollars in thousands):


Assets Liabilities Assets Liabilities

Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,233 $ — $ 13,926 $ —Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,930 — 6,251 —Inventory reserves and adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 14,125 — 13,411Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 29,784 — 28,604Restructuring costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,968 — — —Reserve for stock option compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,394 — 447 —Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,397 — 5,858 —Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38,922 $ 43,909 $ 26,482 $ 42,015

In the Consolidated Balance Sheets, these deferred assets and liabilities were classified on a net basis as current and non-current, based on theclassification of the related asset or liability or the expected reversal date of the temporary difference.


Note 14. Supplemental Cash Flow InformationIn addition to the information provided in the Consolidated Statements of Cash Flows, the following are supplemental disclosures of cash

flow information for the years ended December 31, 2001, 2000 and 1999 (dollars in thousands):

2001 2000 1999

Cash Paid During the Year for:Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,036 $ 28,555 $ 27,449Discount on the sale of accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,882 10,632 8,919Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,075 62,691 54,520

Note 15. Fair Value of Financial Instruments

Note 16. Quarterly Financial Data – Unaudited

The estimated fair value of the Company’s financial instruments is as follows (dollars in thousands):

As of December 31, 2001 As of December 31, 2000Carrying Fair Carrying FairAmount Value Amount Value

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,814 $ 28,814 $ 19,784 $ 19,784Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,970 52,970 40,273 40,273Long-term debt:

8.375% Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 101,020 100,000 92,950All other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,735 118,735 269,594 269,594

The fair value of the Notes are based on quoted market prices and quotes from counterparties, respectively.

Income/Income/ (Loss) Net(Loss) Per Diluted Income/Before Net Share Before (Loss)

Extraordinary Income/ Extraordinary Per Diluted(dollars in thousands, except share data) Net Sales Gross Profit Item (Loss) Item (1) Share (1)

Year Ended December 31, 2001First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $1,059,842 $ 166,123 $ 21,613 $ 21,613 $ 0.64 $ 0.64Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 978,886 155,003 21,841 21,841 0.65 0.65Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 950,910 152,403 (5,943) (5,943) (0.18) (0.18)Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . 936,298 146,264 19,467 19,467 0.57 0.57

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,925,936 $ 619,793 $ 56,978 $ 56,978 1.68 1.68

Year Ended December 31, 2000First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . $ 994,883 $ 158,130 $ 23,924 $ 23,924 $ 0.69 $ 0.69Second Quarter . . . . . . . . . . . . . . . . . . . . . . . 944,023 148,795 22,768 16,292 0.65 0.47Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . 1,015,441 164,516 26,427 26,427 0.76 0.76Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . 990,515 172,403 25,524 25,524 0.74 0.74

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,944,862 $ 643,844 $ 98,643 $ 92,167 2.84 2.65

(1) As a result of changes in the number of common and common equivalent shares during the year, the sum of quarterly earnings per share will not necessarily equal earnings per share for the total year.




Note 17. Condensed Consolidating Financial Statements – Unaudited

The following table presents condensed consolidating financialinformation, as required by the Company’s 8.375% Notes for UnitedStationers Inc., the parent holding company; United StationersSupply Co., the issuer; Azerty Incorporated, The Order People,Lagasse, Inc., United Stationers Financial Services LLC, and UnitedStationers Technology Services LLC, the guarantors; UnitedWorldwide Limited, United Stationers Hong Kong Limited and USSReceivables Company, LTD., are non-guarantors; and elimination

adjustments. Separate financial statements of the guarantors are not presented, as the Company believes the condensed consolidatingfinancial information is more meaningful in understanding thestatements of operations, balance sheets, and cash flows of the guarantor subsidiaries. Therefore, the following condensedconsolidating financial information has been prepared using theequity method of accounting in accordance with the requirements for presentation of such information.

Condensed Consolidating Statements of Operations (dollars in thousands)

United United Stationers Stationers Subsidiary

Inc. Supply Co. Subsidiary Non-(Parent) (Issuer) Guarantors Guarantors Eliminations Consolidated

For the Year Ended December 31, 2001:

Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 2,867,543 $ 1,150,939 $ 27,190 $ (119,736) $ 3,925,936Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,350,790 967,160 — (11,807) 3,306,143 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 516,753 183,779 27,190 (107,929) 619,793Warehouse, marketing and administrative expenses . . . . . . . — 388,786 106,850 3,350 (48,851) 450,135Restructuring charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 30,072 17,531 — — 47,603Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 418,858 124,381 3,350 (48,851) 497,738Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . — 97,895 59,398 23,840 (59,078) 122,055Other expense (income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 76,813 (30,044) — (42,148) 4,621Interest (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,222) 27,559 6,949 13,437 (16,930) 23,793Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 7,222 (6,477) 82,493 10,403 — 93,641Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,549 245 29,717 4,152 — 36,663 Equity from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,305 6,251 — — (58,556) —Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,978 $ (471) $ 52,776 $ 6,251 $ (58,556) $ 56,978


Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 2,965,590 $ 982,904 $ 33,305 $ (36,937) $ 3,944,862Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,417,632 885,179 — (1,793) 3,301,018Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 547,958 97,725 33,305 (35,144) 643,844Warehouse, marketing and administrative expenses . . . . . . . — 381,623 59,212 3,495 (3,032) 441,298Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 32,180 — — (20,979) 11,201Interest (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,793) 24,575 4,220 18,360 (11,133) 27,229Income before income taxes and and extraordinary item . . . 8,793 109,580 34,293 11,450 — 164,116Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,103 43,655 14,196 4,519 — 65,473Equity from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91,117 6,931 — — (98,048) —Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . 96,807 72,856 20,097 6,931 (98,048) 98,643Extraordinary item — loss on early

retirement of debt, net of tax . . . . . . . . . . . . . . . . . . . . . . . — (6,476) — — — (6,476)Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,807 $ 66,380 $ 20,097 $ 6,931 $ (98,048) $ 92,167


Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 2,624,564 $ 819,448 $ 31,570 $ (32,886) $ 3,442,696Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 2,138,757 739,782 — — 2,878,539Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 485,807 79,666 31,570 (32,886) 564,157Warehouse, marketing and administrative expenses . . . . . . . — 330,162 51,045 3,444 (2,688) 381,963Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 30,237 — — (20,805) 9,432Interest (income) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,978) 25,364 4,894 15,308 (9,393) 29,195Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 6,978 100,044 23,727 12,818 — 143,567Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,491 42,127 10,293 5,247 — 60,158Equity from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,922 7,571 — — (86,493) —Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,409 $ 65,488 $ 13,434 $ 7,571 $ (86,493) $ 83,409


United Stat ioners Inc . and Subsidiar iesCondensed Consolidating Statements of Cash Flows (dollars in thousands)

United United Stationers Stationers Subsidiary


For the Year Ended December 31, 2001:Net cash flows (used in) provided by operating activities . . . . . . . . $ (15,796) $ 169,433 $ 26,813 $ 34,890 $ (24,200) $ 191,140Cash flows from investing activities:Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — (32,650) — — (32,650)Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (22,729) (9,774) — — (32,503)Proceeds from the disposition of property, plant and equipment . . . — 3,800 85 — — 3,885Proceeds from the sale of Positive ID. . . . . . . . . . . . . . . . . . . . . . . . — — 14,941 — — 14,941Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,383 — — — (12,383) —Net cash provided by (used in) investing activities . . . . . . . . . . . . . 12,383 (18,929) (27,398) — (12,383) (46,327) Cash flows from financing activities:Net repayments under revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (98,000) — — — (98,000)Retirements and principal payments of debt . . . . . . . . . . . . . . . . . . — (40,163) — (25,000) 25,000 (40,163)Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,796 — — — — 15,796Acquisition of treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . (12,383) — — — — (12,383)Intercompany dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (12,383) — — 12,383 —Intercompany notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 7,222 4,057 (10,479) (800) —Payment of employee withholding tax related to

stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (1,033) — — — (1,033) Net cash provided by (used in) financing activities . . . . . . . . . . . . . 3,413 (144,357) 4,057 (35,479) 36,583 (135,783)Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . — 6,147 3,472 (589) — 9,030Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . 424 13,202 4,201 1,957 — 19,784Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . $ 424 $ 19,349 $ 7,673 $ 1,368 $ — $ 28,814For the Year Ended December 31, 2000:Net cash flows (used in) provided by operating activities . . . . . . . . $ (4,247) $ 30,087 $ 27,957 $ 1,576 $ (16,703) $ 38,670 Cash flows from investing activities:Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (44,233) — — — (44,233)Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (41,079) (2,559) — — (43,638)Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,437 — — — (22,437) —Proceeds from the disposition of property, plant and equipment . . . — 4,337 — — — 4,337 Net cash provided by (used in) investing activities . . . . . . . . . . . . . 22,437 (80,975) (2,559) — (22,437) (83,534)Cash flows from financing activities:Net borrowings under revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 45,000 — — — 45,000 Retirements and principal payments of debt . . . . . . . . . . . . . . . . . . — (128,509) — (10,000) 10,000 (128,509)Borrowings under financing agreements . . . . . . . . . . . . . . . . . . . . . — 150,000 — — — 150,000 Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,247 — — — — 4,247 Acquisition of treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . (22,437) — — — — (22,437)Intercompany dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (22,437) — — 22,437 —Intercompany notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 8,793 (23,703) 8,207 6,703 — Payment of employee withholding tax related to

stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (2,646) — — — (2,646)Net cash (used in) provided by financing activities . . . . . . . . . . . . (18,190) 50,201 (23,703) (1,793) 39,140 45,655 Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . — (687) 1,695 (217) — 791 Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . 424 13,889 2,506 2,174 — 18,993 Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . $ 424 $ 13,202 $ 4,201 $ 1,957 $ — $ 19,784 For the Year Ended December 31, 1999:Net cash flows (used in) provided by operating activities . . . . . . . . $ (2,848) $ 54,589 $ (46,712) $ 11,597 $ 36,955 $ 53,581 Cash flows from investing activities:Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (4,680) — — — (4,680)Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (21,910) (3,551) — — (25,461)Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,600 — — — (49,600) —Proceeds from the disposition of property, plant and equipment . . . — 4,130 — — — 4,130 Net cash provided by (used in) investing activities . . . . . . . . . . . . . 49,600 (22,460) (3,551) — (49,600) (26,011)Cash flows from financing activities:Net borrowings under revolver . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 29,000 — — — 29,000Retirements and principal payments of debt . . . . . . . . . . . . . . . . . . — (7,604) — — — (7,604)Borrowings under financing agreements . . . . . . . . . . . . . . . . . . . . . . . . — 145 — — — 145 Financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 250 — — — 250 Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,523 — — — — 2,523 Issuance of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323 — — — — 323 Acquisition of treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . (49,600) — — — — (49,600)Intercompany dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (49,600) — — 49,600 —Intercompany notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (234) 47,618 (10,429) (36,955) — Payment of employee withholding tax related to

stock option exercises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (2,652) — — — (2,652)Net cash (used in) provided by financing activities . . . . . . . . . . . . . (46,754) (30,695) 47,618 (10,429) 12,645) (27,615)Net change in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . (2) 1,434 (2,645) 1,168 — (45)Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . 426 12,455 5,151 1,006 — 19,038 Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . $ 424 $ 13,889 $ 2,506 $ 2,174 $ — $ 18,993



Note 17. Condensed Consolidating Financial Statements – Unaudited (continued)


Condensed Consolidating Balance Sheets (dollars in thousands)

United UnitedStationers Stationers Subsidiary


As of December 31, 2001:AssetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 424 $ 19,349 $ 7,673 $ 1,368 $ — $ 28,814 Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . — 48,764 170,429 220,031 (128,177) 311,047 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 450,278 131,427 — — 581,705Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 30,287 5,214 16 (6,985) 28,532Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . — 171,031 17,963 18 — 189,012 Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 67,674 112,443 — — 180,117 Intercompany notes receivable . . . . . . . . . . . . . . . . . . . . . . . 109,539 51,155 54,978 — (215,672) —Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 630,880 249,309 30,630 — (910,819) —Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 11,303 12,540 — (3,487) 20,360Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740,847 1,099,150 543,297 221,433 (1,265,140) 1,339,587

Liabilities and Stockholders’ EquityAccounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 253,561 87,261 — (4,100) 336,722Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,549 92,935 52,592 5,016 (5,452) 147,640 Current maturities of long-term debt . . . . . . . . . . . . . . . . . . — 52,830 140 — — 52,970Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 18,418 (190) — — 18,228Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 261,390 (16,044) 125,000 (125,000) 245,346 Intercompany notes payable . . . . . . . . . . . . . . . . . . . . . . . . . — 109,539 51,155 54,978 (215,672) —Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 738,298 310,477 368,383 36,439 (914,916) 538,681Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . $ 740,847 $1,099,150 $ 543,297 $ 221,433 $(1,265,140) $ 1,339,587

As of December 31, 2000:

AssetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 424 $ 13,202 $ 4,201 $ 1,957 $ — $ 19,784 Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 139,905 124,451 241,572 (175,994) 329,934 Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 524,120 164,806 — — 688,926 Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10,599 5,239 5 — 15,843 Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . — 179,370 10,412 5 — 189,787 Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 77,914 104,009 — — 181,923 Intercompany notes receivable . . . . . . . . . . . . . . . . . . . . . . . 102,317 112,555 — — (214,872) —Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 525,011 197,198 — — (722,209) — Other noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 21,157 — — (329) 20,830 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 627,754 1,276,020 413,118 243,539 (1,113,404) 1,447,027

Liabilities and Stockholders’ EquityAccounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 273,697 119,092 — — 392,789 Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,102 95,001 27,563 5,575 (5,272) 125,969 Current maturities of long-term debt . . . . . . . . . . . . . . . . . . — 40,193 80 — — 40,273Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 22,301 402 — — 22,703 Long-term obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 393,178 (6,324) 150,000 (150,000) 386,854 Intercompany notes payable . . . . . . . . . . . . . . . . . . . . . . . . . — 102,317 47,098 65,457 (214,872) —Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 624,652 349,333 225,207 22,507 (743,260) 478,439 Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . $ 627,754 $1,276,020 $ 413,118 $ 243,539 $(1,113,404) $ 1,447,027

n the middle of a changing marketplace, United Stationers is changing, too. But we continue to focus on what has made us the largest wholesale distributor of business products in North America:

• The industry’s broadest product line—more than 40,000 items, including traditional office products, computer consumables, office furniture, business machines and presentation products, and janitorial and sanitation supplies from 500 manufacturers;

• Same-day pick, pack and ship capabilities;

• An integrated network of 65 distribution centers;

• A wide range of value-added services; and

• Relationships with 20,000 reseller customers, including office products dealers, mega-dealers, contract stationers, office products superstores, computer products resellers, mass merchandisers, mail order companies, sanitary supply distributors,and e-commerce merchants.

In 2001, we also embarked on a plan to improve United’s cost and organizational structure to provide a sustainable competitive advantage:

• We dramatically cut costs;

• We generated operating cash flow of approximately $200 million;

• We developed a new organizational structure that brings decision-making closer to our customers;

• We strengthened company leadership; and

• We are consolidating our computer consumables and traditional business products platforms to better serve customers and promote synergies and cost savings.

T a b l e o f C o n t e n t s

Lower Sales, Earnings Pressure in 2001 2 Strengthening Our Balance Sheet 3 Stock Repurchase Plan Activity 3 Restructuring as a Springboard 4 Improving the Efficiency of Our Distribution Network 6 Restructuring The Order People for Growth 6 Building on Our Strengths 8 Recognition of Our Strengths 11 Returning to Record Results 12 Management’s Discussion and Analysis 13 Selected Consolidated Financial Data 22Quarterly Financial and Stock Price Data 24Report of Management / Report of Independent Auditors 25 Consolidated Financial Statements 26 Notes to Consolidated Financial Statements 32 Directors/Officers Stockholder Information Inside Back Cover

Y o u ’ l l N o t e t h e C h a n g e s

I

Directors Frederick B. Hegi, Jr. (e) (g)

Chairman of United Stationers Inc.; Founding Partner of Wingate Partners

Randall W. Larrimore (e)

President and Chief Executive Officer,United Stationers Inc.

Daniel J. Good (g)

Chairman, Good Capital Co., Inc.

Ilene S. Gordon (a) (h)

President, Pechiney Plastic Packaging, Inc.

Roy W. Haley (a) (h)

Chairman and Chief Executive Officer, WESCO International, Inc.

Max D. Hopper (a)

Principal and Chief Executive Officer, Max D. Hopper Associates, Inc.; Retired Chairman of SABRE Technology Group

Benson P. Shapiro (e) (g)

Malcolm P. McNair Professor of Marketing Emeritus at Harvard Business School; consultant and speaker

Alex D. Zoghlin (h)

Chief Technology Officer, Orbitz, LLC

(a) Audit Committee

(e) Executive Committee (g) Governance Committee (h) Human Resources Committee

Executive Officers


Steven M. Cappaert Senior Vice President and Controller

Brian S. CooperSenior Vice President and Treasurer

Kathleen S. DvorakSenior Vice Presidentand Chief Financial Officer

Deidra D. GoldSenior Vice President, GeneralCounsel and Secretary

Mark J. HamptonSenior Vice President, Marketingand Field Support Services

Jeffrey G. HowardSenior Vice President, Sales and Customer Support Services

John T. Sloan Senior Vice President, Human Resources

Joseph R. TempletSenior Vice President, Field Sales and Operations

Ergin UskupSenior Vice President and Chief Information Officer


Offer of 10-KThe annual report on Form 10-K filed with the SEC is available without charge on the company’s Web site atwww.unitedstationers.com or by writing to the Investor Relations Department at United Stationers’ headquarters.

HeadquartersUnited Stationers Inc. 2200 East Golf Road Des Plaines, IL 60016-1267 TELEPHONE: (847) 699-5000 FAX: (847) 699-4716 www.unitedstationers.com

Investor Relations ContactKathleen Dvorak Senior Vice President and Chief Financial Officer E-MAIL: [email protected]:(847) 699-5000 EXT. 2321

Stock Market ListingNasdaq National Market System Trading Symbol: USTR Included in the S&P SmallCap 600 Index

Annual MeetingThe annual meeting of stockholders is scheduled for 2:00 p.m. on May 8, 2002, at United Stationers’ headquarters.

Transfer Agent and RegistrarCommunications on stock transfer requirements, lost stock certificates or change ofaddress should be directed to: EquiServe Trust Company, N. A.P. O. Box 43010 Providence, RI 02940-3010 TELEPHONE: (781) 575-3400 E-MAIL:shareholder-equiserve @equiserve.com WEB SITE:www.equiserve.com

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Back row, left to right: Alex D. Zoghlin; Roy W. Haley;Ilene S. Gordon; Daniel J. Good;and Max D. Hopper.

Front row, left to right: Benson P. Shapiro; Randall W. Larrimore; and Frederick B. Hegi, Jr.

B o a r d o f D i r e c t o r s

Directors

ExecutiveOfficers


2 0 0 1 W A S

A Y E A R O F

C H A L L E N G E S ,

C H A N G E A N D


United Stationers Inc.

Annual Report 2001

2200 East Golf Road

Des Plaines, Illinois 60016

(847) 699-5000

www.unitedstationers.com

C H A L L E N G E S

C H A N G E +


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