UNITED STATIONERS SUPPLY CO - 10-Q Quarterly Report

Commission file numbers:

United Stationers Inc.: 0-10653
United Stationers Supply Co.: 33-59811

UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
(Exact Name of Registrant as Specified in its Charter)

United Stationers Inc.: Delaware		United Stationers Inc.: 36-3141189
United Stationers Supply Co.: Illinois		United Stationers Supply Co.: 36-2431718
(State or Other Jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or Organization)

2200 East Golf Road
Des Plaines, Illinois 60016-1267
(847) 699-5000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrants'
Principal Executive Offices)

Indicate by check mark whether each registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that each registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

On August 9, 2002, United Stationers Inc. had outstanding 32,995,852 shares of Common Stock, par value $0.10 per share. On August 9, 2002, United Stationers Supply Co. had 880,000 shares of Common Stock, $1.00 par value per share, outstanding; United Stationers Inc. owns 100% of these shares.

The registrant United Stationers Supply Co. meets the conditions set forth in General Instructions (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format with respect to United Stationers Supply Co.

This integrated Form 10-Q is filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for each of United Stationers Inc., a Delaware corporation, and its wholly owned subsidiary, United Stationers Supply Co., an Illinois corporation (collectively, the "Company"). United Stationers Inc. is a holding company with no operations separate from its operating subsidiary, United Stationers Supply Co. and its subsidiaries. No separate financial information for United Stationers Supply Co. and its subsidiaries has been provided herein because management for the Company believes such information would not be meaningful because (i) United Stationers Supply Co. is the only direct subsidiary of United Stationers Inc., which has no operations other than those of United Stationers Supply Co. and (ii) all assets and liabilities of United Stationers Inc. are recorded on the books of United Stationers Supply Co. There is no material difference between United Stationers Inc. and United Stationers Supply Co. for the disclosure required by the instructions to Form 10-Q and therefore, unless otherwise indicated, the responses set forth herein apply to each of United Stationers Inc. and United Stationers Supply Co.

We have reviewed the accompanying condensed consolidated balance sheet of United Stationers Inc. and Subsidiaries as of June 30, 2002, and the related condensed consolidated statements of income for the three month and six month periods ended June 30, 2002 and 2001, and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2002 and 2001. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of United Stationers Inc. as of December 31, 2001, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for the year then ended (not presented herein) and in our report dated January 29, 2002, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2001, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(Unaudited)

UNITED STATIONERS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)

UNITED STATIONERS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying Condensed Consolidated Financial Statements are unaudited, except for the Condensed Consolidated Balance Sheet as of December 31, 2001. These financial statements have been prepared in accordance with the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. Accordingly, the reader of this Quarterly Report on Form 10-Q should refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2001 for further information. In the opinion of the Company's management, the Condensed Consolidated Financial Statements for the unaudited interim periods presented include all adjustments necessary to fairly present the results of such interim periods and the financial position as of the end of said periods. Certain interim estimates of a normal, recurring nature are recognized throughout the year, relating to accounts receivable, manufacturers' allowances, inventory, self-insurance, customer rebates, price changes and product mix. Any refinements to these estimates based on actual experience are recorded when known. Certain amounts from prior periods have been reclassified to conform to the 2002 presentation.

The Condensed Consolidated Financial Statements represent United Stationers Inc. ("United") with its wholly owned subsidiary, United Stationers Supply Co. ("USSC"), and its subsidiaries—collectively the "Company." The Company is the largest general line business products wholesaler in the United States, with trailing 12 months net sales of approximately $3.7 billion. The Company operates in a single reportable segment as a national wholesale distributor of business products. The Company offers 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 and facilities management supplies. The Company primarily serves commercial and contract office products dealers. 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 are distributed through a computer-based network of 36 USSC regional distribution centers, 24 dedicated Lagasse, Inc. ("Lagasse") distribution centers that serve the janitorial and sanitation industry, two distribution centers in Mexico that serve computer supply resellers, two distribution centers that serve the Canadian marketplace and a mega-center that supports several of the Company's business units. During the second quarter of 2002, the computer systems and product offerings of Azerty Incorporated ("Azerty"), a wholly owned subsidiary of USSC, were integrated into USSC. In connection with this integration, the Company closed the four separate U.S. Azerty distribution centers.

On January 5, 2001, USSC's subsidiary, Lagasse, acquired all of the capital stock of Peerless Paper Mills, Inc. ("Peerless"). Subsequently, Peerless was merged into Lagasse. Peerless was a wholesale distributor of janitorial/sanitation, paper, and food service products. The purchase price of approximately $32.7 million was financed through the Company's Senior Credit Facility. The acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated 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 $15.5 million was allocated to goodwill. The pro forma effects of the acquisition were not material.

On July 1, 2000, the Company acquired all of the capital stock of CallCenter Services, Inc. CallCenter Services, Inc. was a customer relationship management outsourcing service company with inbound call centers in Wilkes-Barre, Pennsylvania, and Salisbury, Maryland. In November 2001, the Wilkes-Barre portion of the business acquired as part of CallCenter Services, Inc. was sold to Customer Satisfaction First for a nominal cash payment, the assumption of associated liabilities and the payment of expenses relating to that business during a post-closing transition period. Disputes relating to expense payments and certain liabilities associated with this sale have adversely contributed and may continue to contribute to the operating expenses attributable to The Order People Company during 2002. In the second quarter of 2002, the Company sold the Salisbury portion of the business acquired as a part of CallCenter Services, Inc. to 1-800-BARNONE, a Financial Corporation, Inc. for $1.2 million in cash and the assumption of $1.7 million of debt. The sale of these assets did not have a material impact on the Company's Condensed Consolidated Financial Statements.

On October 23, 2000, the Company's Board of Directors authorized the repurchase of up to $50.0 million of United common stock. During the six-month period ended June 30, 2002, the Company purchased 333,600 shares at a cost of approximately $10.3 million. The Company purchased 167,500 shares at a cost of $4.1 million in the same period last year. As of June 30, 2002, there was approximately $4.9 million remaining under this authorization. Acquired shares are included in the issued shares of the Company and treasury stock, but are not included in average shares outstanding when calculating earnings per share data. During the six months ended June 30, 2002 and 2001, the Company reissued 203,504 shares and 38,839 shares, respectively, of treasury stock primarily to fulfill its obligations under its management equity plans.

On July 1, 2002, the Company's Board of Directors approved an expanded stock repurchase program, authorizing the purchase of an additional $50.0 million of United common stock. In July 2002, the Company used the remaining $4.9 million of the October 2000 authorization and repurchased $7.6 million under the new authorization.

The Condensed Consolidated Financial Statements include the accounts of the Company. All intercompany accounts and transactions have been eliminated in consolidation. For all acquisitions, account balances and results of operations are included in the Condensed Consolidated Financial Statements as of the date acquired.

Revenue is recognized when a service is rendered or when a product is shipped and title has transferred to the customer. Management records an estimate for future product returns related to revenue recognized in the current period. This estimate is based on historical product return trends and the gross margin associated with those returns. Management also records an estimate for customer rebates which is based on estimated annual sales volume to the Company's customers. This estimate is used to determine the projected annual rebates earned by customers for growth components, volume hurdle components, and advertising allowances.

All highly liquid debt instruments with an original maturity of three months or less are considered cash equivalents. Cash equivalents are stated at cost, which approximates market value.

Accounts receivable are presented net of the allowance for doubtful accounts. To determine the allowance for doubtful accounts, management reviews specific customers and the Company's accounts receivable aging.

Inventory constituting approximately 88% and 77% of total inventory at June 30, 2002 and December 31, 2001, respectively, have been valued under the last-in, first-out ("LIFO") method. The increase in the percentage of inventory on LIFO is primarily the result of the integration of Azerty's product offering into USSC. Inventory valued under the first-in, first-out ("FIFO") and LIFO accounting methods is recorded at the lower of cost or market. If the lower of FIFO cost or market method of inventory accounting had been used by the Company for all inventory, merchandise inventory would have been approximately $24.5 million and $26.2 million higher than reported at June 30, 2002 and December 31, 2001, respectively.

Inventory reserves are recorded for shrinkage, obsolete, damaged, defective, and slow-moving inventory. These reserve estimates are determined using historical trends and are adjusted, if necessary, as new information becomes available.

Property, plant and equipment are recorded at cost. Depreciation is determined by using the straight-line method over the estimated useful lives of the assets. The estimated useful life assigned to fixtures and equipment is from two to 10 years; the estimated useful life assigned to buildings does not exceed 40 years; leasehold improvements are amortized over the lesser of their useful lives or the term of the applicable lease.

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS 142 requires the Company to annually, or more frequently if impairment indicators arise, test goodwill and other indefinite-lived intangible assets for impairment rather than amortize them. Application of the non-amortization provisions of SFAS 142 resulted in an after-tax benefit of $2.7 million, or $0.08 per diluted share, for the six months ended June 30, 2002 compared with the prior year. During 2001, the Company recorded an after-tax charge of $5.3 million, or $0.16 per share. The Company completed its impairment analysis for its $180.6 million of goodwill in the second quarter of 2002. The Company's assessment resulted in no adjustment to the net carrying amount of goodwill.

The following table reflects the actual results for the three and six months ended June 30, 2002, and the pro-forma results for the same periods last year, assuming the discontinuation of goodwill amortization:

The Company capitalizes internal-use software development costs in accordance with the American Institute of Certified Public Accountants' 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 estimated useful life of the software, generally not to exceed seven years.

The Company is primarily responsible for retained liabilities related to workers' compensation, auto and general liability and certain employee health benefits. The Company records an expense for claims incurred but not reported based on historical trends and certain assumptions about future events.

Income taxes are accounted for using the liability method, under which deferred income taxes are recognized for the estimated tax consequences for temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities. A provision has not been made for deferred U.S. income taxes on the undistributed earnings of the Company's foreign subsidiaries because these earnings are intended to be permanently invested.

The functional currency for the Company's foreign operations is the local currency. Assets and liabilities of these operations are translated at the rates of exchange at the balance sheet date. The resulting translation adjustments are included in accumulated other comprehensive income, a separate component of stockholders' equity. Income and expense items are translated at average monthly rates of exchange. Gains and losses from foreign currency transactions were not material.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Actual results could differ from these estimates.

Various assumptions and other factors underlie the determination of significant accounting estimates. The process of determining significant estimates is fact specific and takes into account factors such as historical experience, current and expected economic conditions, product mix, and in some cases, actuarial techniques. The Company periodically reevaluates these significant factors and makes adjustments where facts and circumstances dictate. Historically, actual results have not significantly deviated from those determined using the estimates described above.

The Company's board of directors approved a restructuring plan in the third quarter of 2001 that included:

The restructuring plan calls for a workforce reduction of 1,375. These positions primarily relate to The Order People and call center operations. The associate groups that are affected by the restructuring plan include management personnel, inside and outside sales representatives, call center associates, distribution workers, and hourly administrative staff. The restructuring plan is designed to have all initiatives completed within approximately one year from the commitment date.

During the third quarter of 2001, the Company recorded a pre-tax restructuring charge of $47.6 million, or $0.85 per share (on an after-tax basis). This charge included a pre-tax cash charge of $31.7 million and a $15.9 million non-cash charge. During the first quarter 2002, the Company reversed

$0.7 million of the pre-tax cash charge and $1.7 million of the non-cash charge. The major components of the restructuring charge and the remaining accrual balance as of June 30, 2002 are as follows:

The non-cash asset write-downs of $15.9 million were primarily the result of facility closures and business divestitures, including $8.8 million related to property, plant and equipment and $7.1 million related to goodwill. Asset write-downs were based on management's estimate of net realizable value. Proceeds from the sale of certain assets exceeded the estimated net realizable value, resulting in the reversal of $1.7 million during the first quarter of 2002.

Employment termination and severance costs are related to voluntary and involuntary terminations and reflect cash termination payments to be paid to associates affected by the restructuring plan. Severance-related costs (health care benefits and career transition services) are included in termination and severance costs. The restructuring plan allows associates to continue their participation in the Company's health care plans during the term of their severance. During the first quarter of 2002, the Company reversed $0.5 million of severance-related costs due to such costs being lower than originally estimated.

Accrued exit costs are primarily contractual lease obligations that existed prior to September 30, 2001 for buildings that the Company has closed or will be closing in the near future. During the first quarter of 2002, the Company reversed $0.2 million of accrued exit costs as a result of such costs being lower than originally estimated.

Implementation costs will be recognized as incurred and consist of costs directly related to the realization of the restructuring plan. These costs include training, stay bonuses, consulting fees, costs to relocate inventory, and accelerated depreciation. Implementation costs incurred during second quarter of 2002 and the six months ended June 30, 2002 totaled $2.5 million and $4.3 million, respectively. Accumulated implementation costs incurred for the period September 30, 2001 through June 30, 2002 were $6.5 million. The Company estimates that the remaining implementation costs, which will be expensed as incurred during the next two quarters, should total approximately $1.5 million.

As of June 30, 2002, the Company completed the closure of nine distribution centers and one USSC call center, eliminated one administrative office, divested the call center operations dedicated to serving The Order People's clients and implemented its organizational restructuring and workforce reduction. As a result, the Company reduced its workforce by 1,147 associates through its voluntary and involuntary termination programs. The Company is on target to save $25 million during 2002 as a result of the restructuring initiative. These savings will be reflected in both gross margin and in operating expenses.

The following table sets forth the computation of comprehensive income (dollars in thousands):

Basic earnings per share ("EPS") is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if dilutive securities were exercised into common stock. Stock options are considered dilutive securities.

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

United is a holding company and, as a result, its primary source of funds is cash generated from operating activities of its operating subsidiary, USSC, and from borrowings by USSC. The Credit Agreement and the indentures governing the 8.375% Notes (as defined) contain restrictions on the ability of USSC to transfer cash to United.

The prevailing prime interest rate at June 30, 2002 and December 31, 2001 was 4.75%.

In order to restate and further amend the Second Amended and Restated Credit Agreement, dated April 3, 1998 (the "Prior Credit Agreement"), USSC, as borrower, and United, as guarantor, entered into the Third Amended and Restated Revolving Credit Agreement, dated as of June 29, 2000, and Amendment No. 1 to the Third Amended and Restated Revolving Credit Agreement dated as of May 7, 2002, (as amended, the "Credit Agreement"), with various lenders and the administrative agent named therein. The Credit Agreement, among other things, provides a facility ("Tranche A Term Loan Facility") for the continuation of the term loans outstanding as of its effective date under the Prior Credit Agreement; an additional $150.0 million aggregate principal amount, five year term loan facility (the "Tranche A-1 Term Loan Facility" and, together with the Tranche A Term Loan Facility, the "Term Loan Facilities"); and a revolving credit facility of up to $250.0 million aggregate principal amount (the "Revolving Credit Facility").

As of June 30, 2002, the aggregate principal amount of debt outstanding under the Term Loan Facilities included $119.3 million of term loan borrowings, consisting of $25.6 million under the Tranche A Term Loan Facility and $93.7 million under the Tranche A-1 Term Loan Facility. Amounts outstanding under the Tranche A Term Loan Facility are to be repaid in seven quarterly installments of $3.7 million. Amounts outstanding under the Tranche A-1 Term Loan Facility are to be repaid in 12 quarterly installments of $7.8 million.

The Revolving Credit Facility is limited by its terms to $250.0 million aggregate in principal amount, less the aggregate amount of letter of credit liabilities under the facility. The Revolving Credit Facility matures on March 31, 2004. As of June 30, 2002, the Company had $215.8 million available under its Revolving Credit Facility after deducting certain outstanding letter-of-credit liabilities of $34.2 million. Availability may effectively be further reduced based on limitations imposed by covenants under the Credit Agreement. See "Liquidity and Capital Resources—General" on page 30 for further discussion of these restrictions.

USSC's obligations under the Credit Agreement are guaranteed by United and secured by a first-priority pledge by United of USSC's stock. Additionally, USSC's obligations under the Credit Agreement are guaranteed by its direct and indirect subsidiaries (the "Affiliated Guarantors"), which exclude The Order People, USS Receivables Company, Ltd. and other foreign subsidiaries.

As collateral security for the obligations of USSC and the Affiliated Guarantors, security interests and liens have been placed upon accounts receivable and related instruments, inventory, equipment, contract rights, intellectual property and all other tangible and intangible personal property (including proceeds) and fixtures and certain real property of USSC and the Affiliated Guarantors other than accounts receivable sold in connection with the Receivables Securitization Program. Also securing these obligations are first priority pledges of all of the outstanding stock of USSC and of its domestic direct and indirect subsidiaries, including Lagasse and Azerty but excluding TOP, as well as certain of the stock of identified foreign direct and indirect subsidiaries of USSC excluding USS Receivables Company, Ltd. (the "Receivables Company"). The loans outstanding under the Term Loan Facilities and the Revolving Credit Facility bear interest as determined within a pricing matrix. The interest rate is based on the ratio of total debt to earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The Tranche A Term Loan Facility and Revolving Credit Facility bear interest at the prime rate plus 0.00% to 1.00% per annum, or, at the Company's option, the London Interbank Offered Rate ("LIBOR") plus 1.25% to 2.25% per annum. The Tranche A-1 Term Loan Facility bears interest at the prime rate plus 0.25% to 1.25% per annum or, at the Company's option, LIBOR plus 1.50% to 2.50% per annum.

The Credit Agreement contains representations and warranties, affirmative and negative covenants, and events of default customary for financing of this type. The Company believes it was in compliance at June 30, 2002, with all covenants contained in the Credit Agreement.

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

The 8.375% Senior Subordinated Notes ("8.375% Notes") were issued on April 15, 1998, under the 8.375% Notes Indenture. As of June 30, 2002, the aggregate outstanding principal amount of 8.375% Notes was $100.0 million. The 8.375% Notes are unsecured senior subordinated obligations of USSC, and payment of the 8.375% Notes is fully and unconditionally guaranteed by the Company and USSC's domestic "restricted" subsidiaries that incur indebtedness (as defined in the 8.375% Notes Indenture) on a senior subordinated 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 following redemption 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 the redemption date.

Upon the occurrence of a change of control (which includes the acquisition by any person or group of more than 50% of the voting power of the outstanding common stock of either United or USSC, or certain significant changes in the composition of the Board of Directors of either United or USSC), USSC would 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 and unpaid interest, if any, to the date of the redemption.

The 8.375% Notes Indenture governing the 8.375% Notes contains certain covenants, including limitations on the incurrence of indebtedness, the making of restricted payments, transactions with affiliates, the existence of liens, disposition of proceeds of asset sales, the making of guarantees by restricted subsidiaries, transfer and issuances of stock of subsidiaries, the imposition of certain payment restrictions on restricted subsidiaries and certain mergers and sales of assets. In addition, the 8.375% Notes Indenture permits the issuance of up to $100.0 million aggregate principal amount of additional 8.375% Notes having substantially identical terms and conditions to the 8.375% Notes, subject to compliance with the covenants contained in the 8.375% Notes Indenture, including compliance with the restrictions contained in the 8.375% Notes Indenture relating to incurrence of indebtedness.

As part of an overall financing strategy, the Company utilizes a standard third-party receivables securitization program (the "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 certain excluded accounts receivable, which initially includes all accounts receivable from Lagasse and foreign subsidiaries) to the Receivables Company, a wholly owned offshore, bankruptcy-remote special purpose limited liability company. This company in turn ultimately transfers the eligible accounts receivable to a trust, for which the trustee is JPMorgan Chase Bank. The trustee then sells investment certificates to third-party investors, which are backed by the accounts receivable owned by the trust. Affiliates of PNC Bank and JPMorgan Chase act as funding agents. The funding agents, together with other commercial banks rated at least A-1/P-1, provide standby liquidity funding to support the sale of the accounts receivable by the Receivables Company under 364-day liquidity facilities.

The Receivables Securitization Program is accounted for as a sale in accordance with FASB Statement No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." Accounts receivable sold under these arrangements are excluded from accounts receivable in the Condensed Consolidated Balance Sheets. The annual interest rate on the certificates issued under the Receivables Securitization Program during the three months ended June 30, 2002 was 1.9%, and ranged between 4.1% and 5.1% during the same period last year. For the six months ended June 30, 2002 and 2001, the annual interest rate was 1.9% and ranged between 4.1% and 6.5%, respectively. The Company's retained interests on $297.6 million and $244.8 million of receivables in the master trust as of June 30, 2002 and December 31, 2001 were approximately $252.6 million and $119.8 million, respectively. Accordingly, as of June 30, 2002 and December 31, 2001, the Company had sold $45.0 and $125.0 million, respectively, of accounts receivable through the Receivables Securitization Program. The retained interest, which is included in the accounts receivable balance reflected in the Condensed Consolidated Balance Sheets, is recorded at fair value. Due to a short average collection cycle for such accounts receivable of approximately 40 days and the Company's collection history, the fair value of the Company's retained interest approximates book value. Losses recognized on the sale of account receivable totaled approximately $0.3 million and $0.8 million for the three and six months ended June 30, 2002, respectively, and $1.9 million and $4.4 million for the three and six months ended June 30, 2001, respectively. These costs vary on a monthly basis and generally are related to certain short-term interest rates. These costs are included in the Condensed Consolidated Statements of Income under the caption Other Expense. As a result of the short average collection cycle referenced above, proceeds from the collections under this revolving agreement were $1.4 billion for the six months ended June 30, 2002 and 2001. The Company has retained the responsibility for servicing accounts receivable transferred to the master trust. No servicing asset or liability has been recorded because the fees the Company receives for servicing the receivables approximate the related

costs. No accounts receivable sold to the master trust were written off during the six months ended June 30, 2002 or the 12 months ended December 31, 2001.

In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which is effective for disposal activities initiated after December 31, 2002. This Statement nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than recognized at the date of commitment to an exit plan as was dictated under EITF No. 94-3. The Company will adopt Statement 146 on January 1, 2003, and based on current circumstances, does not believe that this adoption will have a material impact on its financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, Amendment of FASB Statement No. 13, and Technical Corrections," which is effective for fiscal years beginning after May 15, 2002. This Statement requires most gains and losses from extinguishment of debt to be presented as a gain or loss from continuing operations rather than as an extraordinary item. Accounting Principles Board ("APB") Opinion No. 30, "Reporting the Results of Operations—Reporting Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" will now be used to classify those gains and losses. This Statement also amends FASB No. 13, which requires that certain capital lease modifications be treated as a sale-leaseback transaction. The Company will adopt Statement 145 on January 1, 2003, and based on current circumstances, does not believe that this adoption will have a material impact on its financial position or results of operations.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS 144 as of January 1, 2002 and the adoption of this Statement did not have a material impact on the Company's financial position or results of operations.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which is effective for fiscal years beginning after June 15, 2002. The Statement requires legal obligations associated with the retirement of long-lived assets to be recognized at their fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost should be capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. The Company will adopt SFAS 143 on January 1, 2003, and, based on current circumstances, does not believe that the impact of adopting of SFAS 143 will have a material impact on its financial position or results of operations.

The following table presents condensed consolidating financial information, as required by the Company's 8.375% Notes, for United Stationers Inc., the parent holding company and guarantor; United Stationers Supply Co., the issuer; Azerty Incorporated, The Order People, Lagasse, Inc., United Stationers Financial Services LLC, and United Stationers Technology Services LLC, the subsidiary guarantors; United Worldwide Limited, United Stationers Hong Kong Limited and USS Receivables Company, LTD., are non-guarantors; and elimination adjustments. Separate financial statements of the guarantors are not presented, as the Company believes the condensed consolidating financial information is more meaningful in understanding the statements of operations, balance sheets, and cash flows of the guarantor subsidiaries. Therefore, the following condensed consolidating financial information has been prepared using the equity method of accounting in accordance with the requirements for presentation of such information.

Condensed Consolidating Statements of Operations
(dollars in thousands)
(unaudited)

Condensed Consolidating Statements of Cash Flows
(dollars in thousands)
(unaudited)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis and other parts of this Quarterly Report on Form 10-Q contain "forward-looking statements," within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act. These include references to plans, strategies, objectives, projected costs or savings, anticipated future performance or events and other statements that are not strictly historical in nature. These forward-looking statements are based on management's current expectations, forecasts and assumptions. They involve a number of risks and uncertainties that could cause actual results to differ materially from those expressed or implied here. These risks and uncertainties include, but are not limited to: the Company's restructuring plan, including its ability to realize expected cost savings from facility rationalization, systems integration and other initiatives and the timing of any of these savings; the Company's ability to streamline its organization and operations and other acquired businesses and implement general cost-reduction initiatives, including timely reduction of expenses associated with The Order People; the Company's ability to timely and successfully integrate four national call centers into two; the Company's reliance on key suppliers and the impact of fluctuations in their pricing; variability in vendor allowances and promotional incentives payable to the Company based on its inventory purchase volume and the impact of this on the Company's gross margin; the Company's ability to anticipate and respond to changes in end-user demand; the impact of variability in customer demand on the Company's product offerings and sales mix and, in turn, on customer rebates payable by the Company and the Company's gross margin; competitive activity and competitive pricing pressures; reliance on key management personnel; and economic conditions and changes affecting the business products industry and the general economy. For additional information on these and other factors, please see the other reports filed by the Company with the Securities and Exchange Commission this year.

Readers are cautioned not to place undue reliance on forward-looking statements contained in this Quarterly Report on Form 10-Q. The forward-looking information here is given as of this date only, and the Company undertakes no obligation to revise or update it. The following discussion should be read in conjunction with the Company's Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

United Stationers Inc. ("United") through its wholly owned operating subsidiary United Stationers Supply Co. ("USSC"), and USSC's subsidiaries (collectively, the "Company") is the largest general line business products wholesaler in the United States, with trailing 12 months net sales of $3.7 billion. The Company's business products offerings comprise five principal product categories—traditional office products, computer consumables, office furniture, janitorial/sanitation and other facilities supplies and business machines and presentation products. The Company sells its products through a national distribution network to more than 20,000 resellers, who in turn sell directly to end-users. Many of these resellers are commercial dealers, contract stationers (including the contract stationer divisions of national office product superstores) and retail dealers.

The Company's products are distributed through a computer-based network of 36 USSC regional distribution centers, 24 dedicated Lagasse, Inc. ("Lagasse") distribution centers that serve the janitorial and sanitation industry, two distribution centers in Mexico that serve computer supply resellers, two distribution centers that serve the Canadian marketplace and a mega-center that supports several of the Company's business units. During the second quarter of 2002, the information technology systems and product offerings of Azerty Incorporated ("Azerty"), a wholesale supplier of computer consumables and peripherals, wholly owned by USSC, were integrated into USSC, and the Company closed the four

dedicated U.S. Azerty distribution centers. Following the integration, the Company is continuing to market computer consumables under the Azerty name. By the end of the fourth quarter of 2002, the Company also plans to consolidate four regional USSC customer service call centers into two national call centers with enhanced telephony and customer service systems technology.

During 2000, the Company established The Order People Company ("TOP") to operate as its third-party fulfillment provider for product categories beyond office products and enhanced its full service capabilities through the acquisition of CallCenter Services, Inc., a customer relationship management outsourcing service company with inbound call centers in Wilkes-Barre, Pennsylvania, and Salisbury, Maryland. During 2001, as the Company did not achieve the estimated revenue to support TOP's cost structure, the Company began to significantly reduce the operating expenses of TOP.

Therefore, in November 2001, TOP sold the Wilkes-Barre portion of the business it had acquired as a part of CallCenter Services, Inc. to Customer Satisfaction First for a nominal cash payment, the assumption of associated liabilities and the payment of expenses relating to that business during a post-closing transition period. Disputes relating to expense payments and certain liabilities associated with this sale have adversely contributed and may continue to contribute to the operating expenses attributable to TOP during 2002. In the second quarter of 2002, the Company sold the Salisbury portion to 1-800-BARNONE, a Financial Corporation, Inc., for $1.2 million in cash and the assumption of $1.7 million of debt. The Company expects to continue to seek opportunities to build its third-party fulfillment business with current and future clients, using the Company's Memphis distribution center as its lead distribution point and leveraging substantial resources within its Supply Division.

The Company continued to experience soft sales in all of its major product categories during the second quarter of 2002, representing the fourth consecutive quarter of year-over-year negative sales growth. Sales for the month of July were down approximately 7% on an equivalent workday basis, compared with last year, which had one fewer workday in the month. While the soft sales are expected to continue through the balance of the year, year-over-year sales comparisons for the third quarter will be favorably impacted by one additional workday as well as the anniversary of the divestiture of Positive ID, which occurred in late July 2001, and by the anniversary of the integration of certain U.S. Office Products' warehouses into the Corporate Express business model which occurred between June 2001 and December 2001. For a description of the primary factors contributing to the comparative sales declines for the second quarter, see the discussion of "Net Sales" under "Results of Operations—Second Quarter Ended June 30, 2002 Compared with the Second Quarter Ended June 30, 2001."

In addition, the Company's gross margin continues to be negatively affected by a number of factors: a continuing sales mix shift toward lower-margin products (such as computer consumables); as a result of the weak economy, a continuing mix shift within product categories toward lower-margin commodity products; lower sales volume, which negatively impacts the Company's ability to absorb overhead and other fixed operating costs and results in reduced manufacturers' allowances; and competitive pricing and promotional pressures. Gross margin declined during the second quarter of 2002 and into July, due to the factors noted above and seasonally lower sales volume, with such declines partially offset by restructuring cost savings that positively affected gross margins. The 14.6% gross margin rate for the second quarter of 2002 reflects the third sequential quarterly decline in the Company's gross margin rate. Although the Company is working to address these matters, it anticipates that gross margin may continue to be under pressure throughout the balance of the year. In addition, should these influences intensify—and the Company experiences difficulty in meeting annual purchase volume targets established on the variable portion of its manufacturers' allowance programs—the Company may realize lower than expected manufacturers' allowances for the year which would negatively influence gross margin. See "Critical Accounting Policies, Judgments and Estimates" and

"Results of Operations—Second Quarter Ended June 30, 2002 Compared with the Second Quarter Ended June 30, 2001" below for a further description of these trends and uncertainties.

The Company believes it is managing the controllable expenses and other aspects of its business appropriately in light of these factors, and this should allow it to improve its operating cost leverage when sales demand increases. The Company continues to seek opportunities to reduce its cost structure through best practices implementation, operational efficiencies, and its restructuring initiatives.

As described in Note 2 of the Notes to the Company's Condensed Consolidated Financial Statements, preparing financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty or precision. This means judgments must be made in determining some estimates. Actual results inevitably will differ from those estimates, and these differences may be material to the Company's financial results.

The Company's accounting policies are described under the caption "Critical Accounting Policies" in the information provided in response to Item 7 of the Company's most recent Annual Report on Form 10-K. These policies are important to portraying the Company's financial condition and results and require especially difficult, subjective or complex judgments or estimates by management. These policies, as described in the Company's Annual Report on Form 10-K, relate to: revenue recognition (in particular, the impact of future product returns, for which an estimate—based on historical product return trends and the gross margin associated with those returns—is recorded); valuation of accounts receivable (reflecting judgments on their collectibility based on historical trends and expectations); customer rebates; manufacturers' allowances; and estimated inventory reserves for shrinkage and obsolete, damaged, defective, and slow-moving inventory. The following information is provided as a supplement to, and should be considered in conjunction with, the descriptions of the Company's critical accounting policies referred to above.

Manufacturers' Allowances. As previously described, manufacturers' allowances and promotional incentives, which are common in the business products industry, have a significant impact on the Company's overall gross margin. Gross margin includes, among other items, file margin (determined by reference to invoiced price), as reduced by estimated customer discounts and rebates as discussed below, and increased by estimated manufacturers' allowances and promotional incentives. Many of these allowances and incentives are determined on an annual basis and the potential variation between the actual amount of these margin contribution elements and the Company's estimates of them could be material to its financial results.

Approximately 55% to 60% of the Company's current estimated annual manufacturers' allowances and incentives are variable, based on the volume of the Company's product purchases from manufacturers. These variable allowances are recorded based on the Company's estimated annual inventory purchase volume and appear in the financial statements as a reduction to cost of goods sold to reflect the net inventory purchase cost. The balance represents promotional incentives, which are based on committed vendor participation in various Company advertising and marketing programs. These promotional incentives are also recorded as a reduction to cost of goods sold to reflect net advertising cost. The potential amount of variable manufacturers' allowances often differs, based on specific manufacturer and product category. As a result, slower Company sales (which reduce inventory purchase requirements) and product sales mix changes (especially as higher margin products often benefit from higher manufacturers' allowance rates) can make it difficult to reach some manufacturers' allowance growth hurdles.

Customer Rebates. As previously described, customer rebates—which are common in the business products industry—have a significant impact on the Company's overall sales and gross margin. Rebates are reported in the Company's financial statements as a reduction of sales.

Customer rebates include volume rebates, sales growth incentives, participation in promotions and other miscellaneous discount programs. Estimates for volume rebates and growth incentives are based on estimated annual sales volume to the Company's customers. The amount of customer rebates depend on product sales mix and customer mix changes. Reported results reflect management's best then-current estimate of such rebates. Further changes from those underlying current estimates of product mix, customer mix or sales patterns may impact future results.

Self-Insurance. Insurance liability estimates and reserves also involve critical accounting estimates and judgments. The Company is primarily self-insured for workers' compensation, auto, general liability and certain employee health benefits. Its self-insurance liability estimates are based on historical trends and an estimate of claims incurred but not reported.

The Company's Board of Directors approved a restructuring plan in the third quarter of 2001 that included an organizational restructuring (including a workforce reduction of 1,375, primarily relating to TOP and call center operations), a consolidation of certain distribution facilities and call center operations, an information technology platform consolidation, divestiture of TOP's call center operations and certain other assets, and a significant reduction of TOP's cost structure.

Upon adoption of this restructuring plan in the third quarter of 2001, the Company recorded a pre-tax restructuring charge of $47.6 million, or $0.85 per share (on an after-tax basis). This charge included a pre-tax cash charge of $31.7 million and a $15.9 million non-cash charge. During the first quarter of 2002, the Company reversed $0.7 million of the pre-tax cash charge (with the reversal comprising $0.5 million of severance-related costs and $0.2 million of accrued exit costs, which were lower than originally estimated) and $1.7 million of the non-cash charge (reflecting proceeds from the sale of certain assets that exceeded their estimated net realizable value). See Note 3 to the Company's Condensed Consolidated Financial Statements for additional information on the major components of the restructuring charge and the remaining accrual balance as of June 30, 2002.

Implementation costs, consisting of those directly related to realizing the restructuring plan (such as training, stay bonuses, costs of inventory relocation and accelerated depreciation) recognized for the second quarter 2002 and the six months ended June 30, 2002 totaled $2.5 million and $4.3 million, respectively. Accumulated implementation costs incurred for the period September 30, 2001 through June 30, 2002 were $6.5 million. The Company estimates that the remaining restructuring implementation costs, which will be expensed as incurred over the next two quarters, should total approximately $1.5 million.

As of June 30, 2002, the Company had closed nine distribution centers and one USSC call center, eliminated one administrative office, sold the dedicated TOP call center operations as described above, and made substantial progress in implementing its planned organizational restructuring and workforce reduction. The Company has competed a workforce reduction to date of 1,147 associates through its voluntary and involuntary termination programs. The Company is on target to save $25 million during 2002 as a result of the restructuring initiative. These savings will be reflected in both gross margin and in operating expenses.

Selected Comparative Results for the Three Months and Six Months Ended June 30, 2002 and 2001

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

Results of Operations—Second Quarter Ended June 30, 2002 Compared with the
Second Quarter Ended June 30, 2001

Net Sales. Net sales for the second quarter of 2002 were $897.6 million, down 8.3% compared with sales of $978.9 million for the second quarter of 2001. The three primary factors that affected the first quarter of 2002 continued to have an impact on sales comparisons in the second quarter: the consolidation of two major customers, U.S. Office Products and Corporate Express, and integration of U.S. Office Products into the Corporate Express business model (in which a greater percentage of products are bought directly from manufacturers); the divestitures of the Positive ID division by USSC and the CallCenter Services business by TOP; and lower sales to national accounts, which management believes are consistent with the white collar work force reduction in the Fortune 500 companies that are serviced primarily through our national accounts. The Company believes these three factors accounted for approximately 6.5% of the 8.3% comparative sales decline. Finally, a challenging macroeconomic environment and slow recovery in employment, especially for white-collar office workers, negatively impacted sales across all product categories.

Office furniture sales declined by approximately 11%, compared with the prior year quarter. These results continue to reflect slower customer demand for products, such as furniture, that are regarded as "discretionary" purchases in light of continued weak macroeconomic and employment conditions, as well as the continuing availability of high-quality used office furniture at substantially discounted prices.

Sales in the janitorial and sanitation product category, primarily distributed through Lagasse, were up 1% compared with the prior year quarter. Sales of traditional office products experienced a decline of approximately 9% versus the prior year quarter. Uncertainty surrounding the economy slowed consumption of non-commodity office products within the commercial sector, particularly in medium-to-large companies affected by workforce reductions and systematic cost-reduction initiatives.

Sales in the computer supplies and hardware categories declined approximately 17% over the prior year quarter. This weakness is attributable to an overall decline in computer consumable consumption due to a general workforce reduction and a decline in the number of start-up businesses. In addition, the consolidation of Corporate Express and US Office Products resulted in an increasing percentage of US Office Products purchases being made direct from manufacturers or through the internal Corporate Express distribution network.

In the three month period ended June 30, 2002, no single customer accounted for more than 6% of the Company's net sales.

Gross Profit and Gross Margin Rate. Gross profit (gross margin dollars) for the second quarter of 2002 was $131.1 million, down $23.9 million, or 15.4%, from the second quarter of last year. Excluding TOP, for which a significant portion of fixed margin costs were eliminated as a result of the restructuring initiative, gross margin for the three months ending June 30, 2002 would have been $131.5 versus $156.1 for the same period last year. This is a decrease of $24.6 million or 15.8%. The margin dollar decrease was primarily a result of the sales decline.

The gross margin rate (gross profit as a percent of net sales) was 14.6% in the second quarter of 2002 as compared to 15.8% for the comparable second quarter in 2001. The margin rate was negatively impacted by the continued shift in the Company's product sales mix, overall and within each major product category, as customers continued to postpone higher margin, discretionary purchases, such as furniture, and order primarily lower margin, commodity office products essential for their business.

Also adversely affecting this gross margin rate was a lower level of manufacturers' allowances estimated as earned due to lower inventory purchase volume, partially offset by lower customer rebates, credit memos and inventory related costs.

Indicative of the Company's lower inventory purchase volume requirements as well as continued focus on managing working capital, the Company's inventory position at June 30, 2002 was approximately $87.3 million lower than June 30, 2001. Partially offsetting the negative impact of lower estimated manufacturers' allowances on gross margin are the reduced levels of estimated rebates to the Company's customers. These rebates, which are based on customer purchase volume, payment terms and product mix, are down due to declining sales, as customers did not reach certain product purchase or incremental growth milestones.

The gross margin rate for the immediately preceding first quarter of 2002 was 15.2%. The decline between the first and second quarter of 2002 was primarily due to the lower sales volumes in the second quarter.

Operating Expenses. Operating expenses declined to $101.4 million, compared with $112.8 million last year. Operating expenses as a percentage of net sales were 11.3% of sales in the second quarter of 2002 and 11.5% of sales in the same period last year. Operating expenses in 2002 were positively affected by the elimination of goodwill amortization. Excluding goodwill amortization of $1.6 million recorded in the second quarter of 2001, operating expenses for that period would have been $111.2 million, or 11.4% of sales. The 2002 results were also unfavorably impacted by incremental expenses related to the implementation of the restructuring plan of $2.5 million, or 0.3% of sales. Adjusting for the above factors, the Company's operating expense ratio would have been 11.0% of sales versus 11.4% last year. This reduction was the result of savings from the restructuring plan, cost control measures, best practices implementation, and operational efficiencies partially offset by less leveraging of fixed costs due to lower sales levels this year as compared to last year.

Income from Operations. The Company reported income from operations of $29.7 million for the second quarter of 2002, compared with income of $42.2 million for the same period last year. Income

from operations, excluding the 2001 goodwill amortization, would have been $43.8 million, or 4.5% of sales, in the prior year period.

Interest Expense, net. Net interest expense for the second quarter of 2002 totaled $4.1 million, compared with $6.4 million in the same period last year. This decline reflects lower borrowings resulting from lower working capital requirements and lower interest rates.

Other Expense (Income), net. Net other expense (income) recorded in the second quarter of 2002, totaled $0.4 million compared with $(0.4) million in the same period last year. This expense represents the costs associated with the sale of certain trade accounts receivable through the Receivables Securitization Program (as defined) and a $0.1 million loss on the sale of certain assets in the current year. The prior year period was favorably impacted by the $2.4 million gain on the sale of a distribution center, which was partially offset by the loss on the sale of receivables through the Receivables Securitization Program.

Income Before Income Taxes. Income before income taxes totaled $25.2 million for the second quarter of 2002, compared with $36.2 million for the second quarter of last year.

Income Taxes. Income tax expense of $9.4 million was recorded in the second quarter of 2002, compared with $14.4 million last year. This was a result of lower net income and a reduction in the estimated effective tax rate, which was due to a change in the mix of pre-tax earnings between states.

Net Income. For the three months ended June 30, 2002, the Company recorded net income of $15.7 million, or $0.46 per diluted share, compared with net income of $21.8 million, or $0.65 per diluted share, in the prior year period. Excluding the 2001 goodwill amortization, net income would have been $23.3 million in the prior year.

Results of Operations—Six Months Ended June 30, 2002 Compared with the Six Months Ended June 30, 2001

Net Sales. Net sales for the first six months of 2002 were $1.8 billion or down 9.5% compared with $2.0 billion last year. After adjusting for one fewer selling day in 2002, sales were down 8.8%. See "Net Sales" under "Results of Operations—Second Quarter Ended June 30, 2002 Compared with the Second Quarter Ended June 30, 2001" for a further description of these trends.

Gross Profit and Gross Margin Rate. Gross margin dollars for the first six months of 2002 were $275.5 million, down 14.2% or $45.6 million from last year. The gross margin rate was 14.9% of sales in the first half of the year of 2002 as compared to 15.7% for the same period last year. Excluding TOP, for which a significant portion of fixed margin costs were eliminated as a result of the restructuring initiative, gross margin for the six months ending June 30, 2002 would have been $275.9 versus $323.4 for the same period last year. See "Gross Profit Margin and Gross Margin Rate" under "Results of Operations—Second Quarter Ended June 30, 2002 Compared with the Second Quarter Ended June 30, 2001" for a further description of these trends.

Operating Expenses. Operating expenses declined to $202.4 million, compared with $232.5 million last year. Operating expenses as a percentage of net sales were 10.9% of sales for the first six months of 2002 and 11.4% of sales in the same period last year. In the first quarter of 2002, the Company reversed $2.4 million of the initial restructuring accrual of $47.6 million recorded in the third quarter of 2001. Operating expenses in 2002 were also positively affected by eliminating the amortization of goodwill, which was $3.0 million in the first six months of 2001. The 2002 results were also unfavorably impacted by incremental expenses related to the implementation of the restructuring plan of $4.3 million, or 0.2% of sales. Adjusting for the above factors, the Company's operating expense ratio would have been 11.0% of sales versus 11.3% last year. This was the result of savings from the restructuring plan, cost control measures, best practices implementation, and operational

efficiencies partially offset by less leveraging of fixed costs due to lower sales levels this year as compared to last year.

Income from Operations. Including the restructuring charge reversal, the Company reported income from operations of $73.1 million, compared with income of $88.6 million last year. Income from operations, excluding the 2002 restructuring charge reversal and the 2001 goodwill amortization, would have been $70.7, or 3.8% of sales, versus $91.6 million, or 4.5% of sales, in the prior year.

Interest Expense, net. Net interest expense for the first half 2002 totaled $8.6 million, compared with $14.5 million in the same period last year. This decline reflects lower borrowings resulting from lower working capital requirements and lower interest rates.

Other Expense, net. Net other expense recorded in the first six months of 2002, totaled $0.8 million compared with $2.1 million in the same period last year. This expense represents the costs associated with the sale of certain trade accounts receivable through the Receivables Securitization Program (as defined) and gains and losses on the sale of certain assets. This reduction is primarily related to lower interest rates and lower utilization of the Receivables Securitization Program resulting from strong operating cash flow.

Income Before Income Taxes. Income before income taxes totaled $63.8 million for the first six months of 2002, compared with $72.1 million last year. Excluding the 2002 restructuring accrual reversal and the 2001 goodwill amortization, income before taxes for year to date 2002 would have been $61.4 million versus $75.0 million last year.

Income Taxes. Income tax expense of $23.9 million was recorded in the first half of 2002, compared with $28.6 million last year. This was a result of lower net income and a reduction in the estimated effective tax rate, which was due to a change in the mix of pre-tax earnings between states.

Net Income. For the six months ended June 30, 2002, the Company recorded net income of $39.9 million, or $1.16 per diluted share, compared with net income of $43.5 million, or $1.28 per diluted share, in the prior year period. Excluding the 2002 restructuring charge reversal, net income would have totaled $38.4 million, or $1.11 per diluted share. Excluding the 2002 restructuring charge reversal and the 2001 goodwill amortization, net income would have been $38.4 million versus $46.2 million in the prior year.

United is a holding company and, as a result, its primary sources of funds are cash generated from the operating activities of its operating subsidiary, USSC, including the sale of certain accounts receivable, and from borrowings by USSC. Restrictive covenants in USSC's debt agreements restrict USSC's ability to pay cash dividends and make other distributions to United. In addition, the right of United to participate in any distribution of earnings or assets of USSC is subject to the prior claims of the creditors, including trade creditors, of USSC.

During the six months ended June 30, 2002, the Company generated $108.4 million of cash from its operating activities, before the effects of selling accounts receivable. Sources and uses of cash are discussed further below under the sub-caption "Cash Flow." The Company's working capital reductions have contributed significantly to cash from operating activities. These working capital reductions are a function of both lower sales and the Company's achievement of improved working capital efficiency.

Working capital reductions, before the effects of selling accounts receivable, generated $56.7 million during the six-month period. This contrasts with working capital reductions, on the same basis, of $40.8 million during the six months ended June 30, 2001. The Company estimates that the

majority of the 2002 cash flow resulted from working capital efficiency improvements. Management assesses efficiency in terms of "core" working capital as a percentage of annualized sales. "Core" working capital includes net accounts receivable plus sold receivables, inventory, and other current assets, less accounts payable and accrued liabilities other than those accrued as part of the September 2001 restructuring charge. The Company expects to continue its efforts to sustain and make further working capital efficiency improvements in the future. However, there may be fewer opportunities for additional working capital improvements to contribute positively to cash flow in the future. Among other factors, increases in sales generally would be expected to increase overall working capital requirements.

The Company utilized cash flow primarily to reduce the total of debt and accounts receivable sold by $102.5 million during the six months ended June 30, 2002 and by $206.9 million during the 12 months ended the same date. At June 30, 2002, the Company's debt to total capitalization ratio (adjusted to reflect the receivables then sold under the Company's Receivables Securitization Program as debt) was 34%, as compared to 42% at December 31, 2001 and 49% at June 30, 2001.

In addition, the Company used cash flow to fund net capital expenditures (gross capital expenditures minus proceeds from property, plant and equipment dispositions) of $6.1 million and $19.1 million during the six months ended June 30, 2002 and 2001, respectively. Capitalized software expenditures totaled $3.5 million and $3.7 million during the first six months of 2002 and 2001, respectively. Net capital spending (net capital expenditures plus capitalized software expenditures) was $9.6 million and $22.8 million for the same respective periods. Capital expenditures are utilized primarily to replace, upgrade and equip the Company's distribution facilities. The Company also invested $32.7 million to acquire Peerless Paper in January 2001. The Company expects net capital spending for all of 2002 to total between $30 million and $35 million.

The Company has also utilized cash flow to purchase shares of its stock. Under its share repurchase program initiated in October 2000, the Company purchased approximately $45.1 million of United stock through June 30, 2002. In July 2002, United's Board of Directors increased the amount authorized for share repurchases by an additional $50 million. During July 2002, the Company purchased approximately $4.9 million to complete the October 2000 program and began purchasing shares under the July 2002 increased authorization. See the discussion of share repurchases below under the sub-caption "Cash Flow."

Operating cash requirements, capital expenditures and share repurchase activities are funded from operating cash flow and available financing. Financing available from debt and the sale of accounts receivable at June 30, 2002, is summarized below:

Availability ($ in millions)
Funded debt		$	249.2
Accounts receivable sold			45.0

	Total utilized financing			$	294.2
Revolving Credit Facility availability			215.8
Accounts receivable sold availability			115.0

	Total unutilized				330.8

	Total available financing at June 30, 2002			$	625.0

Restrictive covenants under the Credit Agreement (as defined below) separately limit total available financing at points in time, as further discussed below. At June 30, 2002, total funding from debt and the sale of accounts receivable was effectively limited by the leverage ratio covenant in the

Company's Credit Agreement to approximately $580.0 million, or $45.0 million less than the $625.0 million total then-available under the Company's facilities, as shown above.

The Company believes that its operating cash flow and financing capacity, as described, provide adequate liquidity for operating the business for the foreseeable future.

In order to restate and further amend the Second Amended and Restated Credit Agreement, dated April 3, 1998 (the "Prior Credit Agreement"), USSC, as borrower, and United, as guarantor, entered into the Third Amended and Restated Revolving Credit Agreement, dated as of June 29, 2000, and Amendment No. 1 to the Third Amended and Restated Revolving Credit Agreement, dated as of May 7, 2002 (as amended, the "Credit Agreement"), with various lenders and the administrative agent named therein. The Credit Agreement, among other things, provided a facility ("Tranche A Term Loan Facility") for the continuation of the term loans outstanding as of its effective date under the Prior Credit Agreement, an additional $150.0 million aggregate principal amount, five-year term loan facility (the "Tranche A-1 Term Loan Facility" and, together with the Tranche A Term Loan Facility, the "Term Loan Facilities"), and a revolving credit facility of up to $250.0 million aggregate principal amount (the "Revolving Credit Facility").

As of June 30, 2002, the aggregate principal amount of debt outstanding under the Term Loan Facilities included $119.3 million of term loan borrowings, including a $25.6 million Tranche A Term Loan Facility and a $93.7 million Tranche A-1 Term Loan Facility. Amounts outstanding under the Tranche A Term Loan Facility are to be repaid in seven quarterly installments of $3.7 million. Amounts outstanding under the Tranche A-1 Term Loan Facility are to be repaid in 12 quarterly installments of $7.8 million.

The Revolving Credit Facility is limited by its terms to $250.0 million aggregate in principal amount, less the aggregate amount of letter of credit liabilities under the facilities. The Revolving Credit Facility matures on March 31, 2004. As of June 30, 2002, the Company had $215.8 million available under its Revolving Credit Facility after deducting certain outstanding letter-of-credit liabilities of $34.2 million. As described above, availability from time-to-time may effectively be further limited by restrictions imposed by financial covenants under the Credit Agreement.

The amounts outstanding under the Term Loan Facilities and the Revolving Credit Facility bear interest as determined within a pricing matrix. The interest rate spread payable by USSC is based on the ratio of total debt to earnings before interest, taxes, depreciation, and amortization ("EBITDA"). The Tranche A Term Loan Facility and Revolving Credit Facility bear interest at the prime rate plus 0.00% to 1.00% per annum or, at the Company's option, the London Interbank Offered Rate

("LIBOR") plus 1.25% to 2.25% per annum. The Tranche A-1 Term Loan Facility bears interest at the prime rate plus 0.25% to 1.25% per annum or, at the Company's option, LIBOR plus 1.50% to 2.50% per annum. Adjustments to the interest rate spread occur on a quarterly basis after USSC delivers its financial statements (and related certificates as to compliance with the Credit Agreement) to the lenders under the Credit Agreement.

In addition, the Credit Agreement contains various representations and warranties, affirmative and negative covenants, and events of default pertaining to the operations and assets of United, USSC and its subsidiaries and customary for financings of this type. The Company believes it was in compliance at June 30, 2002, with all covenants contained in the Credit Agreement.

One of the covenants in the Credit Agreement restricts USSC's ability to pay cash dividends and make cash or other distributions in respect of USSC's capital stock to United. As United depends on cash resources from USSC, United's ability to make distributions in respect of its capital stock is effectively restricted under the Credit Agreement to those made for the limited purposes for which USSC may distribute cash to United, including United common stock acquisitions up to a specified aggregate dollar amount, the repurchase of its common stock (or related options) from management up to a permitted annual dollar amount and the payment of cash dividends. For USSC to make any cash distribution to United to fund any such permitted securities acquisitions or cash dividends by United, the Credit Agreement requires the absence of any default thereunder, satisfaction of a specific fixed charges ratio and minimum availability of at least $50 million under the Revolving Credit Facility for the preceding three-month period.

Among its financial covenants, the Credit Agreement requires that the Company maintain certain financial ratios within defined ranges. At this time, the most restrictive such ratio for the Company is a leverage ratio. Pursuant to the agreement, the leverage ratio must not exceed 3.25 to 1 through December 30, 2002 and 3.00 to 1 thereafter. This ratio is computed by dividing the Company's aggregate consolidated indebtedness (including any receivables then sold under the Receivables Securitization Program but excluding any undrawn amounts under outstanding letters of credit) by an EBITDA measure that is defined for such purposes in the Credit Agreement. At June 30, 2002, this ratio was approximately 1.4. In addition, the Company must maintain other financial ratios, including a ratio of cash flow to fixed charges and a ratio of EBITDA to defined interest expenses. The Company believes that none of these covenants present significant liquidity restrictions under current operating conditions.

The Credit Agreement contains various other negative covenants that, among other things: (1) limit the incurrence of indebtedness (including secured indebtedness) by the Company or any subsidiaries; (2) prohibit the making of restricted payments by USSC or its subsidiaries, subject to exceptions for certain subsidiary intercompany payments and cash dividends by USSC to United for specified purposes (including United share repurchases and operating expense payments) and within prescribed dollar limits; (3) limit debt and equity investments (including acquisitions) by the Company or its subsidiaries; (4) restrict transactions with affiliates unless certain conditions have been satisfied, including, among others, that any such transaction is in the ordinary course of business and is on terms no less favorable than those that could be obtained from an unaffiliated third party; (5) prohibit liens, other than any liens arising in connection with the Credit Agreement, certain other pre-existing indebtedness, the Receivables Securitization Program and certain other statutory, tax, contractual and immaterial liens; and (6) prohibit mergers or liquidations of the Company or any of its subsidiaries or their entry into any new lines of business, and limit their sale, lease or other disposition of assets.

The 8.375% Senior Subordinated Notes ("8.375% Notes") were issued on April 15, 1998 under the 8.375% Notes Indenture. As of June 30, 2002, the aggregate outstanding principal amount of 8.375%

Notes was $100.0 million. The 8.375% Notes are unsecured senior subordinated obligations of USSC, and payment of the 8.375% Notes is fully and unconditionally guaranteed by United and USSC's domestic "restricted" subsidiaries that incur indebtedness (as defined in the 8.375% Notes Indenture) on a senior subordinated 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 Indenture governing the 8.375% Notes contains certain affirmative and negative covenants applicable to USSC and its subsidiaries which are customary for financings of this type. See Note 6 to the Condensed Consolidated Financial Statements included in this report. Included, among others, are restrictions on the ability of USSC to make distributions to United (conditioned on the absence of a default, cumulative aggregate dollar limitations and the satisfaction of a debt incurrence test) and on the ability of USSC and its subsidiaries to enter into transactions with their affiliates (which, in addition to conditions similar to those described above with respect to the comparable covenant under the Credit Agreement, may require Board approval and a fairness opinion if above prescribed dollar values). The restrictions imposed are of the same nature as those under the Credit Agreement, but are generally less restrictive.

In addition, as of June 30, 2002, the Company had $29.8 million of industrial development bonds outstanding.

As part of an overall financing strategy, the Company utilizes a standard third-party receivables securitization program (the "Receivables Securitization Program") to provide low-cost funding. Under this $163.0 million program, the Company sells its eligible accounts receivable (except for certain excluded accounts receivable, which initially includes all accounts receivable from Lagasse and foreign subsidiaries) to the Receivables Company, a wholly owned offshore, bankruptcy-remote special purpose limited liability company. This company in turn ultimately transfers the eligible accounts receivable to a trust, for which the trustee is JPMorgan Chase Bank. The trustee then sells investment certificates to third-party investors, which are backed by the accounts receivable owned by the trust. Affiliates of PNC Bank and JPMorgan Chase act as funding agents. The funding agents, together with other commercial banks rated at least A-1/P-1, provide standby liquidity funding to support the sale of the accounts receivable by the Receivables Company under 364-day liquidity facilities.

The documents evidencing the Receivables Securitization Program require the Receivables Company to comply with certain affirmative and negative covenants customary for facilities of this type, but include, among others, requirements to maintain a separate corporate existence from USSC and its affiliates and to maintain a minimum net worth of $45 million at all times. USSC acts as the servicer of the accounts receivable on behalf of the trustee, for which it receives a fee, and is required to deliver reports regarding the accounts receivable and related collections, as well as to comply with certain other covenants set forth in the servicing agreement.

The sale of trade accounts receivable includes not only those eligible accounts receivable that existed on the closing date of the Receivables Securitization Program, but also eligible accounts receivable created thereafter. In the ordinary course, the Receivables Company uses collections received by the trust to make distributions to USSC (subject to compliance with the Receivables Company's corporate formalities and the restrictions set forth in the documents evidencing the Receivables Securitization Program); however, in the event that receivables quality fails to satisfy certain standards, the trustee will retain the collections on the accounts receivable held by the trust and will use such collections to repay amounts owed to the trust by the Receivables Company. Upon the occurrence of such an event, USSC will cease selling its accounts receivable into the Receivables Securitization Program.

Costs related to this facility vary on a monthly basis and generally are related to certain short-term interest rates. These costs are included in the Condensed Consolidated Statements of Income under the caption, "Other Expense."

The Receivables Company determines the level of funding achieved by the sale of accounts receivable, subject to a maximum amount. It retains a residual interest in the eligible receivables transferred to the trust, such that amounts payable in respect of such residual interest will be distributed to the Receivables Company upon payment in full of all amounts owed by the Receivables Company to the trust (and by the trust to the investors). At December 31, 2001, the Company decided to sell approximately $125.0 million of accounts receivable. At June 30, 2002, the Company elected to sell $45.0 million, based on reduced Company funding needs. As a result, the balance sheet assets of the Company as of June 30, 2002 and December 31, 2001 exclude $45.0 million and $125.0 million, respectively, of accounts receivable sold.

The statements of cash flows for the Company for the periods indicated are summarized below:

	For the Six Months Ended June 30,
	2002			2001
	(dollars in thousands)
Net cash provided by operating activities	$	28,417		$	115,852
Net cash used in investing activities		(6,093	)		(51,487	)
Net cash used in financing activities		(28,469	)		(64,547	)

Net cash provided by operating activities for the six months ended June 30, 2002 was $28.4 million. This includes a $74.6 million reduction in inventory (which is primarily due to lower inventory requirements based on lower sales volume as well as the Company's continued focus on working capital management), $39.9 million of net income, and $17.7 million of depreciation and amortization, partially offset by a $72.0 million increase in accounts receivable (which is primarily due to the $80.0 million reduction in receivables sold under the Receivables Securitization Program), and a $21.5 million decrease in accounts payable which is primarily due to lower inventory purchases. Net cash provided by operating activities reached $115.9 million for the six months ended June 30, 2001. This was primarily due to a $28.5 million decrease in accounts receivable (including a $2.0 million increase in receivables sold under the Receivables Securitization Program), a $105.5 million decrease in inventory, $43.5 million of net income and $18.2 million in depreciation and amortization, partially offset by a $59.3 million decrease in accounts payable.

Net cash used in investing activities for the six months ended June 30, 2002 was $6.1 million, including $10.3 million for the purchase of property, plant and equipment offset by $4.2 million of proceeds primarily from the sale of assets related to CallCenter Services and the sale of a distribution center. Net cash used in investing activities for the six months ended June 30, 2001 was $51.5 million including $32.3 million for the acquisition of Peerless Paper Mills, Inc. and $22.5 million for purchase of plant, property, and equipment, offset by $3.4 million of proceeds. For further discussion of net cash used in investing activities, see "Liquidity and Capital Resources—General" on page 30.

Net cash used in financing activities for the six months ended June 30, 2002 was $28.5 million, including $22.5 million of payments on the Company's Term Loan Facilities and $10.3 million for the acquisition of treasury stock through the Company's announced share repurchase program, partially offset by $5.0 million of proceeds from the issuance of treasury stock upon the exercise of outstanding stock options under the Company's management equity plans. Net cash used in financing activities for the six months ended June 30, 2001 was $64.5 million, including net payments of $43.0 million on the Company's Revolving Credit Facility, $18.3 million of payments on the Company's Term Loan Facilities, and $4.1 million for the acquisition of treasury stock through the Company's common stock repurchase program.

The Company is subject to market risk associated principally with changes in interest rates and foreign currency exchange rates. Interest rate exposure is principally limited to the Company's outstanding long-term debt at June 30, 2002, of $249.2 million, and $45.0 million of receivables sold under the Receivables Securitization Program, whose discount rate varies with market interest rates ("Receivables Exposure"). Approximately 34% of the outstanding debt and Receivables Exposure is priced at interest rates that are fixed. The remaining debt and Receivables Exposure are priced at interest rates that re-price with the market. A 50 basis point movement in interest rates would result in an annualized increase or decrease of approximately $1.0 million in interest expense, loss on the sale of certain accounts receivable and cash flows. The Company may from time-to-time enter into interest rate swaps, options or collars. These agreements generally require the Company to pay to or entitle the Company to receive from the other party the amount, if any, by which the Company's interest payments fluctuate beyond the rates specified in the agreements. The Company is subject to the credit risk that the other party may fail to perform under such agreements. The Company does not use financial or commodity derivative 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 derivative instruments is, in the aggregate, not material to its financial position, results of operations and cash flows. As of June 30, 2002, the Company had no financial or commodity derivative instruments outstanding.

The Company's foreign currency exchange rate risk is limited principally to the Mexican Peso and the Canadian Dollar, as well as product purchases from Asian countries currently paid in U.S. dollars. Many of the products the Company sells in Mexico and Canada are purchased in U.S. dollars, while the sale is invoiced in the local currency. The Company's foreign currency exchange rate risk is not material to its financial position, results of operations and cash flows. The Company has not previously hedged these transactions, but it may enter into such transactions in the future.

At the Annual Meeting of Stockholders of United Stationers Inc. held on May 8, 2002, the following matters were voted on:

	Number of Votes
Class I Directors:	Number of Votes
Class I Directors:	For	Withheld
Daniel J. Good	30,636,269	427,253
Max D. Hopper	30,584,671	478,851

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

			Page No.
Part I—Financial Information
	Item 1.	Financial Statements
		Important Explanatory Note	2
		Independent Accountants' Review Report	3
		Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001	4
		Condensed Consolidated Statements of Income for the Three Months and Six Months ended June 30, 2002 and 2001	5-6
		Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2002 and 2001	7
		Notes to Condensed Consolidated Financial Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	23-35
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Part II—Other Information
	Item 4.	Submission of Matters to a Vote of Security Holders	37
	Item 6.	Exhibits and Reports on Form 8-K	37
Signatures			38
Index to Exhibits			39

				(Unaudited) As of June 30, 2002			(Audited) As of December 31, 2001
ASSETS
	Current assets:
		Cash and cash equivalents		$	22,669		$	28,814
		Accounts receivable, net			383,041			311,047
		Inventory			507,171			581,705
		Other current assets			19,013			28,532

			Total current assets		931,894			950,098
	Property, plant and equipment, net				177,886			189,012
	Goodwill, net				180,580			180,117
	Other				25,251			20,360

			Total assets	$	1,315,611		$	1,339,587

LIABILITIES AND STOCKHOLDERS' EQUITY
	Current liabilities:
		Accounts payable		$	315,269		$	336,722
		Accrued liabilities			133,653			147,640
		Current maturities of long-term debt			53,405			52,970

			Total current liabilities		502,327			537,332
	Deferred income taxes				20,482			18,228
	Long-term debt				195,803			218,735
	Other long-term liabilities				24,297			26,611

			Total liabilities		742,909			800,906
	Stockholders' equity:
		Common stock, $0.10 par value, authorized 100,000,000 shares, issued 37,217,814 shares in 2002 and 2001			3,722			3,722
		Additional paid-in capital			313,266			310,150
		Treasury stock, at cost — 3,744,050 shares in 2002 and 3,613,954 shares in 2001			(76,850	)		(69,402	)
		Retained earnings			337,292			297,407
		Accumulated other comprehensive loss			(4,728	)		(3,196	)

			Total stockholders' equity		572,702			538,681

			Total liabilities and stockholders' equity	$	1,315,611		$	1,339,587

		For the Three Months Ended June 30,
		2002		2001
Net sales		$	897,605	$	978,886
Cost of goods sold			766,493		823,883

Gross profit			131,112		155,003
Operating expenses:
	Warehousing, marketing and administrative expenses		101,418		111,175
	Goodwill amortization		—		1,576

Total operating expenses			101,418		112,751

Income from operations			29,694		42,252
Interest expense, net			4,134		6,398
Other expense (income), net			389		(366	)

Income before income taxes			25,171		36,220
Income tax expense			9,438		14,379

Net income		$	15,733	$	21,841

Net income per common share:
	Net income per share	$	0.47	$	0.66

	Average number of common shares outstanding		33,789		33,311
Net income per common share — assuming dilution:
	Net income per share	$	0.46	$	0.65

	Average number of common shares outstanding — assuming dilution		34,437		33,698

		For the Six Months Ended June 30,
		2002			2001
Net sales		$	1,845,697		$	2,038,728
Cost of goods sold			1,570,149			1,717,602

Gross profit			275,548			321,126
Operating expenses:
	Warehousing, marketing and administrative expenses		204,832			229,528
	Goodwill amortization		—			2,965
	Restructuring charge reversal		(2,425	)		—

Total operating expenses			202,407			232,493

Income from operations			73,141			88,633
Interest expense, net			8,556			14,453
Other expense, net			770			2,118

Income before income taxes			63,815			72,062
Income tax expense			23,930			28,609

Net income		$	39,885		$	43,453

Net income per common share:
	Net income per share	$	1.18		$	1.30

	Average number of common shares outstanding		33,753			33,321
Net income per common share—assuming dilution:
	Net income per share	$	1.16		$	1.28

	Average number of common shares outstanding—assuming dilution		34,425			33,832

			For the Six Months Ended June 30,
			2002			2001
Cash Flows From Operating Activities:
	Net income		$	39,885		$	43,453
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			17,684			18,237
	Amortization of capitalized financing costs			516			714
	Other			977			(1,388	)
	Changes in operating assets and liabilities:
	Decrease in accounts receivable			8,006			26,481
	(Decrease) increase in accounts receivable sold			(80,000	)		2,000
	Decrease in inventory			74,534			105,520
	Decrease (increase) in other assets			2,215			(10,094	)
	Decrease in accounts payable			(21,453	)		(59,300	)
	Decrease in accrued liabilities			(11,633	)		(9,367	)
	Decrease in other liabilities			(2,314	)		(404	)

		Net cash provided by operating activities		28,417			115,852
Cash Flows From Investing Activities:
	Capital expenditures			(10,277	)		(22,518	)
	Acquisitions			—			(32,322	)
	Proceeds from the disposition of property, plant and equipment			4,184			3,411
	Other			—			(58	)

		Net cash used in investing activities		(6,093	)		(51,487	)
Cash Flows From Financing Activities:
	Principal payments on debt			(22,497	)		(18,304	)
	Net payments under revolver			—			(43,000	)
	Issuance of treasury stock			4,959			918
	Acquisition of treasury stock, at cost			(10,251	)		(4,124	)
	Payment of employee withholding tax related to stock option exercises			(680	)		(37	)

		Net cash used in financing activities		(28,469	)		(64,547	)

Net change in cash and cash equivalents				(6,145	)		(182	)
Cash and cash equivalents, beginning of period				28,814			19,784

Cash and cash equivalents, end of period			$	22,669		$	19,602

Other Cash Flow Information:
	Income taxes paid		$	18,769		$	22,640
	Interest paid			7,750			20,526
	Discount on the sale of accounts receivable			1,012			4,402

(dollars in thousands)		Employment Termination and Severance Costs			Accrued Exit Costs			Total Accrued Restructuring Charge			Non-Cash Asset Write-Downs			Total Restructuring Charge
Restructuring charge		$	19,189		$	12,489		$	31,678		$	15,925		$	47,603
Amounts reversed into income:
	For the six months ended June 30, 2002		(503	)		(197	)		(700	)		(1,725	)		(2,425	)
Amounts utilized:
	2001		(3,023	)		(1,226	)		(4,249	)		(15,925	)		(20,174	)
	For the six months ended June 30, 2002		(6,489	)		(1,194	)		(7,683	)		1,725			(5,958	)

Total amounts utilized			(9,512	)		(2,420	)		(11,932	)		(14,200	)		(26,132	)

Accrued restructuring costs— as of June 30, 2002		$	9,174		$	9,872		$	19,046		$	—		$	19,046

		As of June 30, 2002			As of December 31, 2001
Tranche A term loan, due in installments until March 31, 2004		$	25,552		$	32,331
Tranche A-1 term loan, due in installments until June 30, 2005			93,750			109,375
8.375% Senior Subordinated Notes, due April 15, 2008			100,000			100,000
Industrial development bonds, at market-based interest rates, 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			106			199

	Subtotal		249,208			271,705
	Less—current maturities		(53,405	)		(52,970	)

Total		$	195,803		$	218,735

	United Stationers Inc. (Parent)			United Stationers Supply Co. (Issuer)			Subsidiary Guarantors			Subsidiary Non-Guarantors		Eliminations			Consolidated
For the Three Months Ended June 30, 2002:
Net sales	$	—		$	749,401		$	186,709		$	5,471	$	(43,976	)	$	897,605
Cost of goods sold		—			633,588			133,307			—		(402	)		766,493

Gross profit		—			115,813			53,402			5,471		(43,574	)		131,112
Warehouse, marketing and
administrative expenses		—			98,597			25,321			852		(23,352	)		101,418

Income (loss) from operations		—			17,216			28,081			4,619		(20,222	)		29,694
Other expense (income)		—			14,130			5,926			—		(19,667	)		389
Interest (income) expense		(1,300	)		5,930			(496	)		2,459		(2,459	)		4,134

Income before income taxes		1,300			(2,844	)		22,651			2,160		1,904			25,171
Income taxes		462			(6,186	)		13,698			749		715			9,438
Equity from subsidiaries		13,703			1,411			—			—		(15,114	)		—

Net income (loss)	$	14,541		$	4,753		$	8,953		$	1,411	$	(13,925	)	$	15,733

For the Three Months Ended June 30, 2001:
Net sales	$	—		$	701,565		$	283,781		$	6,555	$	(13,015	)	$	978,886
Cost of goods sold		—			572,046			253,044			—		(1,207	)		823,883

Gross profit		—			129,519			30,737			6,555		(11,808	)		155,003
Warehouse, marketing and
administrative expenses		—			90,750			22,759			809		(1,567	)		112,751

Income (loss) from operations		—			38,769			7,978			5,746		(10,241	)		42,252
Other expense (income), net		—			11,559			—			—		(11,925	)		(366	)
Interest (income) expense, net		(1,938	)		5,682			931			3,611		(1,888	)		6,398

Income before income taxes		1,938			21,528			7,047			2,135		3,572			36,220
Income tax expense		766			8,550			2,798			847		1,418			14,379
Equity from subsidiaries		20,669			1,288			—			—		(21,957	)		—

Net income (loss)	$	21,841		$	14,266		$	4,249		$	1,288	$	(19,803	)	$	21,841

	United Stationers Inc. (Parent)			United Stationers Supply Co. (Issuer)			Subsidiary Guarantors			Subsidiary Non-Guarantors		Eliminations			Consolidated
For the Six Months Ended June 30, 2002:
Net sales	$	—		$	1,445,229		$	477,652		$	9,908	$	(87,092	)	$	1,845,697
Cost of goods sold		—			1,207,846			366,624			—		(4,321	)		1,570,149

Gross profit		—			237,383			111,028			9,908		(82,771	)		275,548
Warehouse, marketing and administrative expenses		—			195,921			52,187			1,686		(44,962	)		204,832
Restructuring charge reversal		—			(492	)		(1,933	)		—		—			(2,425	)

Total operating expenses		—			195,429			50,254			1,686		(44,962	)		202,407

Income (loss) from operations		—			41,954			60,774			8,222		(37,809	)		73,141
Other expense (income)		—			24,008			11,660			—		(34,898	)		770
Interest (income) expense		(2,585	)		11,957			(816	)		4,815		(4,815	)		8,556

Income before income taxes		2,585			5,989			49,930			3,407		1,904			63,815
Income taxes		969			2,245			18,723			1,278		715			23,930
Equity from subsidiaries		37,077			2,129			—			—		(39,206	)		—

Net income (loss)	$	38,693		$	5,873		$	31,207		$	2,129	$	(38,017	)	$	39,885

For the Six Months Ended June 30, 2001:
Net sales	$	—		$	1,487,094		$	562,595		$	13,697	$	(24,658	)	$	2,038,728
Cost of goods sold		—			1,217,763			504,498			—		(4,659	)		1,717,602

Gross profit		—			269,331			58,097			13,697		(19,999	)		321,126
Warehouse, marketing and administrative expenses		—			187,532			46,163			1,615		(2,817	)		232,493

Income (loss) from operations		—			81,799			11,934			12,082		(17,182	)		88,633
Other expense (income), net		—			18,487			—			—		(16,369	)		2,118
Interest (income) expense, net		(4,132	)		12,828			2,046			8,096		(4,385	)		14,453

Income before income taxes		4,132			50,484			9,888			3,986		3,572			72,062
Income tax expense		1,637			20,046			3,926			1,582		1,418			28,609
Equity from subsidiaries		40,958			2,404			—			—		(43,362	)		—

Net income (loss)	$	43,453		$	32,842		$	5,962		$	2,404	$	(41,208	)	$	43,453

			United Stationers Inc. (Parent)		United Stationers Supply Co. (Issuer)		Subsidiary Guarantors			Subsidiary Non- Guarantors		Eliminations			Consolidated
AS OF JUNE 30, 2002
ASSETS
	Cash and cash equivalents		$	425	$	16,224	$	4,992		$	1,028	$	—		$	22,669
	Accounts receivable, net			—		96,076		79,128			248,595		(40,758	)		383,041
	Inventory			—		450,224		56,947			—		—			507,171
	Other current assets			—		22,215		3,769			13		(6,984	)		19,013
	Property, plant and equipment, net			—		164,985		12,878			21		2			177,886
	Goodwill, net			—		68,200		112,380			—		—			180,580
	Intercompany notes receivable			112,124		363		85,990			—		(198,477	)		—
	Investment in subsidiaries			784,414		276,984		138,396			—		(1,199,794	)		—
	Other noncurrent assets			2		14,583		13,980			—		(3,314	)		25,251

		Total assets	$	896,965	$	1,109,854	$	508,460		$	249,657	$	(1,449,325	)	$	1,315,611

LIABILITIES AND STOCKHOLDERS' EQUITY
	Accounts payable		$	—	$	279,456	$	35,814		$	—	$	(1	)	$	315,269
	Accrued liabilities			3,570		80,815		53,163			2,175		(6,070	)		133,653
	Current maturities of long-term debt			—		53,345		60			—		—			53,405
	Deferred income taxes			—		20,672		(190	)		—		—			20,482
	Long-term obligations			—		219,259		841			45,000		(45,000	)		220,100
	Intercompany notes payable			—		141,894		363			56,220		(198,477	)		—
	Stockholders' equity			893,395		314,413		418,409			146,262		(1,199,777	)		572,702

		Total liabilities and stockholders' equity	$	896,965	$	1,109,854	$	508,460		$	249,657	$	(1,449,325	)	$	1,315,611

AS OF DECEMBER 31, 2001
ASSETS
	Cash 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
	Inventory			—		450,278		131,427			—		—			581,705
	Other current assets			—		30,287		5,214			16		(6,985	)		28,532
	Property, 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	)		20,360

		Total assets	$	740,847	$	1,099,150	$	543,297		$	221,433	$	(1,265,140	)	$	1,339,587

LIABILITIES AND STOCKHOLDERS' EQUITY
	Accounts payable		$	—	$	253,561	$	87,261		$	—	$	(4,100	)	$	336,722
	Accrued liabilities			2,549		92,935		52,592			5,016		(5,452	)		147,640
	Current maturities of long-term debt			—		52,830		140			—		—			52,970
	Deferred income taxes			—		18,418		(190	)		—		—			18,228
	Long-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	)		538,681

	Total liabilities and stockholders' equity		$	740,847	$	1,099,150	$	543,297		$	221,433	$	(1,265,140	)	$	1,339,587

		United Stationers Inc. (Parent)			United Stationers Supply Co. (Issuer)			Subsidiary Guarantors			Subsidiary Non-Guarantors			Eliminations			Consolidated
For the Six Months Ended June 30, 2002:
Net cash flows provided by (used in) operating activities		$	5,293		$	102,306		$	47,361		$	(29,348	)	$	(97,195	)	$	28,417
Cash flows from investing activities:
	Capital expenditures		—			(9,778	)		(499	)		—			—			(10,277	)
	Proceeds from the disposition of property, plant and equipment		—			2,935			1,249			—			—			4,184
	Investment in subsidiaries		—			(107,766	)		(107,766	)		—			215,532			—

Net cash (used in) provided by investing activities			—			(114,609	)		(107,016	)		—			215,532			(6,093	)
Cash flows from financing activities:
	Principal payments of debt		—			(22,497	)		—			(80,000	)		80,000			(22,497	)
	Issuance of treasury stock		4,959			—			—			—			—			4,959
	Acquisition of treasury stock, at cost		(10,251	)		—			—			—			—			(10,251	)
	Capital contribution		—			—			107,766			107,766			(215,532	)		—
	Intercompany notes payable		—			32,355			(50,792	)		1,242			17,195			—
	Payment of employee withholding tax related to stock option exercises		—			(680	)		—			—			—			(680	)

Net cash (used in) provided by financing activities			(5,292	)		9,178			56,974			29,008			(118,337	)		(28,469	)
Net change in cash and cash equivalents			1			(3,125	)		(2,681	)		(340	)		—			(6,145	)
Cash and cash equivalents, beginning of period			424			19,349			7,673			1,368			—			28,814

Cash and cash equivalents, end of period		$	425		$	16,224		$	4,992		$	1,028		$	—		$	22,669

For the Six Months Ended June 30, 2001:
Net cash flows (used in) provided by operating activities		$	(918	)	$	64,208		$	(15,751	)	$	5,907		$	62,406		$	115,852
Cash flows from investing activities:
	Acquisitions		—			—			(32,322	)		—			—			(32,322	)
	Capital expenditures		—			(13,011	)		(9,507	)		—			—			(22,518	)
	Proceeds from the disposition of property, plant, and equipment		—			3,411			—			—			—			3,411
	Investment in subsidiaries		4,124			—			—			—			(4,124	)		—
	Other		—			(58	)		—			—			—			(58	)

Net cash provided by (used in) investing activities			4,124			(9,658	)		(41,829	)		—			(4,124	)		(51,487	)
Cash flows from financing activities:
	Net repayments under revolver		—			(43,000	)		—			—			—			(43,000	)
	Retirements and principal payments of debt		—			(18,304	)		—			2,000			(2,000	)		(18,304	)
	Issuance of treasury stock		918			—			—			—			—			918
	Acquisition of treasury stock, at cost		(4,124	)		—			—			—			—			(4,124	)
	Intercompany dividend		—			(4,124	)		—			—			4,124			—
	Intercompany notes payable		—			4,132			64,624			(8,350	)		(60,406	)		—
	Payment of employee withholding tax related to stock option exercises		—			(37	)		—			—			—			(37	)

	Net cash (used in) provided by financing activities		(3,206	)		(61,333	)		64,624			(6,350	)		(58,282	)		(64,547	)
Net change in cash and cash equivalents			—			(6,783	)		7,044			(443	)		—			(182	)
Cash and cash equivalents, beginning of period			424			13,202			4,201			1,957			—			19,784

Cash and cash equivalents, end of period		$	424		$	6,419		$	11,245		$	1,514		$	—		$	19,602


Date: August 13, 2002		/s/ KATHLEEN S. DVORAK Kathleen S. Dvorak Senior Vice President and Chief Financial Officer (Duly authorized signatory and principal financial officer)

Exhibit No.		Description
4.1		Amendment No. 1 to the Third Amended and Restated Credit Agreement, dated as of May 7, 2002, among USSC, United and JPMorgan Chase Bank, as agent for the lenders
15.1		Letter regarding unaudited interim financial information
15.2		Letter regarding unaudited interim financial information
99.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002