UNITED STATIONERS INC - 10-Q Quarterly Report

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

Indicate by check mark whether 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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

On August 11, 2003, the registrant had outstanding 33,154,931 shares of common stock, par value $0.10 per share.

		Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements.
	Independent Accountants' Review Report	2
	Condensed Consolidated Balance Sheets as of June 30, 2003 and December 31, 2002	3
	Condensed Consolidated Statements of Income for the Three Months and Six Months ended June 30, 2003 and 2002	4
	Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 2003 and 2002	5
	Notes to Condensed Consolidated Financial Statements	6–15
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	16–26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
PART II—OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders	28
Item 6.	Exhibits and Reports on Form 8-K	28
SIGNATURES	29
INDEX TO EXHIBITS	30

We have reviewed the accompanying condensed consolidated balance sheet of United Stationers Inc. and Subsidiaries as of June 30, 2003, and the related condensed consolidated statements of income for the three month and six month periods ended June 30, 2003 and 2002, and the condensed consolidated statements of cash flows for the six month periods ended June 30, 2003 and 2002. 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, 2002, 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 27, 2003, except for Notes 6 and 8, as to which the date was March 28, 2003, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph related to a change in 2002 in the method of accounting for goodwill. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2002, 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
(Unaudited)

The accompanying Condensed Consolidated Financial Statements are unaudited, except for the Consolidated Balance Sheet as of December 31, 2002. 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, 2002 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. The Company periodically reevaluates these estimates and makes adjustments where facts and circumstances dictate. Certain amounts from prior periods have been reclassified to conform to the 2003 presentation.

The accompanying 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 broad line wholesale distributor of business products and a provider of marketing and logistics services to resellers, with trailing 12 months net sales of approximately $3.8 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 traditional office products, computer consumables, office furniture, business machines and presentation products, and facilities supplies. The Company primarily serves commercial and contract office products dealers. The Company sells its products through a national distribution network to more than 15,000 resellers, who in turn sell directly to end-users. These products are distributed through a computer-based network of 35 USSC regional distribution centers, 24 Lagasse distribution centers that serve the janitorial and sanitation industry, two Azerty distribution centers in Mexico that serve computer supply resellers, and two distribution centers that serve the Canadian marketplace.

As of June 30, 2003, the Company has authorization to repurchase approximately $27 million of its common stock. All common stock repurchases are executed under two separate authorizations given by the Company's Board of Directors on October 23, 2000 and July 1, 2002. In addition, the New Credit Agreement (described below) limits the Company's stock repurchases to the greater of $50 million or $50 million plus 25% of the Company's net income (or minus 25% of any loss) in each fiscal quarter beginning with the fiscal quarter ended June 30, 2003. During the six months ended June 30, 2003 the Company did not repurchase any of its common stock. The Company repurchased 333,600 shares at a cost of approximately $10.3 million during the first six

months of 2002. A summary of total shares repurchased and the remaining amounts available under each authorization are detailed as follows (amounts in millions, except share data):

		Authorizations
		July 1, 2002				October 23, 2000				Total
		Cost			Shares	Cost			Shares	Cost			Shares
2002 repurchases		$	23.1		858,964	$	15.2		506,137	$	38.3		1,365,101
2001 repurchases			—		—		12.4		467,500		12.4		467,500
2000 repurchases			—		—		22.4		857,100		22.4		857,100

	Total repurchases	$	23.1		858,964	$	50.0		1,830,737	$	73.1		2,689,701

Total amount remaining under authorization:
	Initial authorization	$	50.0			$	50.0			$	100.0
	Less: total repurchases		(23.1	)			(50.0	)			(73.1	)

	Amount remaining	$	26.9			$	—			$	26.9

Purchases may be made from time to time in the open market or in privately negotiated transactions. Depending on market and business conditions and other factors, the Company may continue or suspend repurchasing its own common stock at any time without notice.

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, 2003 and 2002, the Company reissued 478,124 and 203,504 shares, respectively, of treasury stock primarily to fulfill its obligations under its equity compensation plans.

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.

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 on 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 below.

Revenue is recognized when a service is rendered or when title to the product 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.

Shipping and handling costs billed to customers are treated as revenues and recognized at the time title to the product has transferred to the customer. Shipping and handling costs are included in the Company's financial statements as a component of cost of goods sold and not netted against shipping and handling revenues.

Customer rebates and discounts are common practice in the business products industry and have a significant impact on the Company's overall sales and gross margin. Such rebates are reported in the Condensed Consolidated Financial Statements as a reduction of sales.

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

Manufacturers' Allowances and Cumulative Effect of a Change in Accounting Principle

Manufacturers' allowances (fixed and variable) are common practice in the business products industry and 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 above, and increased by estimated manufacturers' allowances and promotional incentives. These allowances and incentives are estimated on an on-going 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. Reported results reflect management's best current estimate of such allowances and incentives.

As previously announced, effective January 1, 2003, the Company adopted the FASB's Emerging Issues Task Force ("EITF") Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. As a result, during the first quarter of 2003 the Company recorded a non-cash, cumulative after-tax charge of $6.1 million, or $0.18 per diluted share, related to the capitalization into inventory of a portion of fixed promotional allowances received from vendors for participation in the Company's advertising publications. Adoption of EITF Issue No. 02-16 had no impact on the Company's accounting for variable promotional allowances and incentives. On a pro-forma basis, if EITF Issue No. 02-16 had been in effect during all periods presented, cost of goods sold for the three and six-month periods ended June 30, 2002 would have been higher by $0.5 million and $1.1 million, respectively, resulting in the following pro forma amounts:

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	As Reported 2003		Pro Forma 2002		Pro Forma 2003		Pro Forma 2002
Amounts, assuming accounting change was applied retroactively:
Income before income taxes and cumulative effect of a change in accounting principle	$	24,365	$	24,625	$	54,664	$	62,723
Net income		15,106		15,394		33,890		39,208
Earnings per share—basic	$	0.46	$	0.46	$	1.04	$	1.16
Earnings per share—diluted	$	0.46	$	0.45	$	1.03	$	1.14

Approximately 40% to 45% of the Company's estimated annual manufacturers' allowances and incentives are fixed based on vendor participation in various Company advertising and marketing publications. Historically, these promotional incentives were recorded as a reduction to cost of goods sold over the life of the publication to reflect net advertising cost. EITF Issue No. 02-16 now requires that the cash consideration received from vendors related to these fixed advertising allowances and incentives be reflected as a reduction to the cost of inventory. As a result, fixed allowances and incentives will now be taken to income through lower cost of goods sold as inventory is sold.

The remaining 55% to 60% of the Company's estimated annual manufacturers' allowances and incentives are variable, based on the volume of the Company's product purchases from manufacturers. As noted above, adoption of EITF Issue No. 02-16 did not impact the Company's accounting for variable allowances and incentives. These variable allowances are recorded based on the Company's estimated annual inventory purchase volume and are included in the Company's financial statements as a reduction to cost of goods sold to reflect the net inventory purchase cost. Manufacturers' allowances and incentives attributable to unsold inventory are carried as a

component of net inventory cost. The potential amount of variable manufacturers' allowances often differs based on purchase volume by manufacturer and product category. As a result, lower Company sales volume (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.

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.

The Company makes judgments as to the collectibility of accounts receivable based on historical trends and future expectations. Management estimates an allowance for sales returns and doubtful accounts, which represents the collectibility of trade accounts receivable. These allowances adjust gross trade accounts receivable down to net realizable value. To determine the allowance for sales returns, management uses historical trends to estimate future period product returns. To determine the allowance for doubtful accounts, management reviews specific customers and the Company's accounts receivable aging.

Inventory constituting approximately 90% and 88% of total inventory at June 30, 2003 and December 31, 2002, respectively, has been valued under the last-in, first-out ("LIFO") method. 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, inventory would have been $25.1 million and $22.9 million higher than reported at June 30, 2003 and December 31, 2002, respectively. In addition, 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 and amortization are 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.

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. The Company has a per claim maximum cap on employee medical benefits provided by a third-party insurance company. In addition, the Company has both an individual per claim maximum loss and an annual aggregate maximum cap on workers' compensation claims.

The Company's stock based compensation includes employee stock options. As allowed under Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the Company accounts for its stock options using the "intrinsic value" method permitted by Accounting Principles Board

("APB") Opinion No. 25, Accounting for Stock Issued to Employees. APB No. 25 requires calculation of an intrinsic value of the stock options issued in order to determine compensation expense, if any.

In conformity with SFAS No. 123 and SFAS No. 148 supplemental disclosures are provided below. Several valuation models are available for determining fair value. For purposes of these supplemental disclosures, the Company uses the Black-Scholes option-pricing model to determine the fair value of its stock options. Had compensation cost been determined on the fair value basis of SFAS No. 123, net income and earnings per share would have been adjusted as follows (in thousands, except per share data):

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 loss, a separate component of stockholders' equity. Income and expense items are translated at average monthly rates of exchange. Realized gains and losses from foreign currency transactions were not material.

The Company's Board of Directors approved a restructuring plan in the fourth quarter of 2002 (the "2002 Restructuring Plan") that included additional charges related to revised real estate sub-lease assumptions used in the 2001 Restructuring Plan (described below), further downsizing of The Order People ("TOP") operations, including severance and anticipated exit costs related to a portion of the Company's Memphis distribution center, closure of the Milwaukee, Wisconsin distribution center and the write-down of certain e-commerce-related investments. The restructuring plan included workforce reductions of 105 associates through involuntary separation programs. The restructuring plan called for all initiatives to be completed within approximately one year from the commitment date.

$2.0 million non-cash charge for the write-down of certain e-commerce-related investments. The remaining accrual balances related to the 2002 Restructuring Plan as of June 30, 2003, are included in the combined table below.

As of June 30, 2003, the 2002 Restructuring Plan is substantially complete. The Company completed the closure of its Milwaukee distribution center, terminated the majority of its third-party fulfillment contracts with TOP customers and terminated the employment of 87 associates through an involuntary termination program. Implementation costs associated with this restructuring plan were not material.

The Company's Board of Directors approved a restructuring plan in the third quarter of 2001 (the "2001 Restructuring Plan") that included an organizational restructuring, a consolidation of certain distribution facilities and USSC's 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. The restructuring plan included workforce reductions of approximately 1,375 associates through voluntary and involuntary separation programs. All initiatives under the 2001 Restructuring Plan are complete, however, certain cash payments will continue for accrued exit costs that relate to long-term lease obligations that expire at various times over the next seven years. The Company continues to actively pursue opportunities to sublet unused facilities.

During the third quarter 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. The remaining accrual balances related to the 2002 and 2001 Restructuring Plans as of June 30, 2003, are as follows (in thousands):

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2003		2002			2003		2002
	(dollars in thousands)
Net income	$	15,106	$	15,733		$	27,782	$	39,885
Unrealized currency translation adjustment		2,906		(629	)		4,129		(694	)
Minimum pension liability adjustment, net of tax		—		—			—		(838	)

Total comprehensive income	$	18,012	$	15,104		$	31,911	$	38,353

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 and deferred stock units 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 sources of funds are cash generated from operating activities of its operating subsidiary, USSC, and from borrowings by USSC. The New Credit Agreement (as defined below) contains, and the indentures governing the Company's 8.375% Notes (as defined below) contained restrictions on the ability of USSC to transfer cash to United.

		As of June 30, 2003			As of December 31, 2002
Revolver		$	56,500		$	—
Tranche A term loan, due in installments until March 31, 2004			—			18,251
Tranche A-1 term loan, due in installments until June 30, 2005			—			78,125
8.375% Senior Subordinated Notes, due April 15, 2008			—			100,000
Industrial development bonds, at market-based interest rates, maturing at various dates through 2011			6,800			6,800
Industrial development bonds, at 66% to 78% of prime, maturing at various dates through 2004			—			8,000
Other long-term debt			46			73

	Subtotal		63,346			211,249
	Less—current maturities		(43	)		(45,904	)

Total		$	63,303		$	165,345

The Company has historically used both fixed-rate and variable or short-term rate debt. At June 30, 2003, 100% of the Company's outstanding debt and receivables sold under the Company's Receivables Securitization Program is priced at variable interest rates, compared to 32% of such outstanding amounts at December 31, 2002. The Company's variable rate debt is based primarily on the applicable prime or London InterBank Offered Rate ("LIBOR"). The prevailing prime interest rate was 4.00% at June 30, 2003 and 4.25% at December 31, 2002. The LIBOR rate as of June 30, 2003 was approximately 1.20%, compared to 1.45% at December 31, 2002.

As previously disclosed, in March 2003, the Company replaced its then existing senior secured credit facility (the "Credit Agreement") by entering into a new Five-Year Revolving Credit Agreement (the "New Credit Agreement") dated as of March 21, 2003 by and among USSC, as borrower, and United, as guarantor, the various lenders and Bank One, NA, as administrative agent. The New Credit Agreement provides for a revolving credit

facility with an aggregate committed amount of $275 million. USSC may, upon the terms and conditions of the New Credit Agreement, seek additional commitments from its current or new lenders to increase the aggregate committed principal amount under the facility to a total amount of up to $325 million. As a result of the replacement of the Credit Agreement, the Company recorded pre-tax charges of $0.8 million in the first quarter of 2003 and $1.7 million during the second quarter of 2003 relating to the write-off of associated deferred financing costs.

The New Credit Agreement provides for the issuance of letters of credit for amounts totaling up to a sublimit of $90 million. It also provides a sublimit for swingline loans in an aggregate principal amount not to exceed $25 million at any one time outstanding. These amounts, as sublimits, do not increase the aggregate committed amount, and any undrawn issued letters of credit and all outstanding swingline loans under the facility reduce the remaining availability. The revolving credit facility matures on March 21, 2008.

Obligations of USSC under the New Credit Agreement are guaranteed by United and certain of USSC's domestic subsidiaries. USSC's obligations under the New Credit Agreement and the guarantors' obligations under the guaranty are secured by liens on substantially all assets, including accounts receivable, chattel paper, commercial tort claims, documents, equipment, fixtures, instruments, inventory, investment property, pledged deposits and all other tangible and intangible personal property (including proceeds) and certain real property, but excluding accounts receivable (and related credit support) subject to any accounts receivable securitization program permitted under the New Credit Agreement. Also securing these obligations are first priority pledges of all of the capital stock of USSC and the domestic subsidiaries of USSC, other than TOP.

Loans outstanding under the New Credit Agreement bear interest at a floating rate (based on the higher of either the prime rate or the federal funds rate plus 0.50%) plus a margin of 0% to 0.75% per annum, or at USSC's option, LIBOR (as it may be adjusted for reserves) plus a margin of 1.25% to 2.25% per annum, or a combination thereof. The margins applicable to floating rate and LIBOR loans are determined by reference to a pricing matrix based on the total leverage of United and its consolidated subsidiaries. Initial applicable margins are 0.50% and 2.00%, respectively.

The Credit Agreement contains representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type.

As previously announced, on April 28, 2003, the Company redeemed the entire $100 million outstanding principal amount of its 8.375% Senior Subordinated Notes ("8.375% Notes" or the "Notes") at the redemption price of 104.188% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. In connection with the redemption of the Notes, the Company recorded a pre-tax charge of $4.2 million, or $0.08 per share, in the second quarter of 2003.

The 8.375% Notes were issued on April 15, 1998, pursuant to the 8.375% Notes Indenture. The Notes were unsecured senior subordinated obligations of USSC, and payment of the Notes were 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 Notes were redeemable on or after April 15, 2003, in whole or in part, at a redemption price of 104.188% (percentage of principal amount). The 8.375% Notes were to mature on April 15, 2008, and bore interest at the rate of 8.375% per annum, payable semi-annually on April 15 and October 15 of each year.

In addition, as of June 30, 2003 the Company has one remaining industrial development bond outstanding with a balance of $6.8 million.

On March 28, 2003, USSC replaced its then existing $160 million Receivables Securitization Program with a new third-party receivables securitization program with Bank One, NA, as trustee (the "New Receivables Securitization Program"). Under this $225 million program, USSC sells, on a revolving basis, its eligible trade accounts receivable (except for certain excluded accounts receivable, which initially includes all accounts receivable of Lagasse, Canada and foreign subsidiaries) to the Receivables Company. The Receivables Company, in turn, ultimately transfers the eligible trade accounts receivable to a trust. The trustee then sells investment certificates,

which represent an undivided interest in the pool of accounts receivable owned by the trust, to third-party investors. Affiliates of PNC Bank and Bank One act as funding agents. The funding agents provide standby liquidity funding to support the sale of the accounts receivable by the Receivables Company under 364-day liquidity facilities. The New Receivables Securitization Program provides for the possibility of other liquidity facilities that may be provided by other commercial banks rated at least A-1/P-1.

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." Trade accounts receivable sold under this Program are excluded from accounts receivable in the Condensed Consolidated Financial Statements. At June 30, 2003, the Company sold $225 million of trade accounts receivable, compared with $105 million at December 31, 2002. Accordingly, trade accounts receivable of $225 million as of June 30, 2003 and $105 million as of December 31, 2002 are excluded from the Condensed Consolidated Financial Statements. As discussed further below, the Company retains an interest in the master trust based on funding levels determined by the Receivables Company. The Company's retained interest in the master trust is included in the Condensed Consolidated Financial Statements under the caption, "Retained interest in receivables sold, less allowance for doubtful accounts". For further information on the Company's retained interest in the master trust, see the caption "Retained Interest" included herein below.

The Company recognizes certain costs and/or losses related to the Receivables Securitization Program. Costs related to this facility vary on a daily basis and generally are related to certain short-term interest rates. The interest rate on the certificates issued under the Receivables Securitization Program during the six months ended June 30, 2003 ranged between ..931% and 1.6% annually. Losses recognized on the sale of accounts receivable totaled approximately $1.4 million and $0.8 million for the six months ended June 30, 2003 and 2002, respectively. Proceeds from the collections under this revolving agreement were $1.7 billion for the six months ended June 30, 2003, compared with $1.4 billion for the same period in 2002. All costs and/or losses related to the Receivables Securitization Program are included in the Condensed Consolidated Statements of Income under the caption, "Other Expense, net".

The Company has maintained the responsibility for servicing the sold trade accounts receivable and those 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.

The Receivables Company determines the level of funding achieved by the sale of trade 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). The Company's net retained interest on $350.4 million and $296.6 million of trade receivables in the master trust as of June 30, 2003 and December 31, 2002 was $125.4 million and $191.6 million, respectively. The Company's retained interest in the master trust is included in the Condensed Consolidated Financial Statements under the caption, "Retained interest in receivables sold, less allowance for doubtful accounts".

The Company measures the fair value of its retained interest throughout the term of the securitization program using a present value model incorporating the following two key economic assumptions: (1) an average collection cycle of approximately 40 days and (2) an assumed discount rate of 5% per annum. In addition, the Company estimates and records an allowance for doubtful accounts related to the Company's retained interest. Considering the above noted economic factors and estimates of doubtful accounts, the book value of the Company's retained interest approximates fair value. A 10% and 20% adverse change in the assumed discount rate or average collection cycle would not have a material impact on the Company's financial position or results of operations. No accounts receivable sold to the master trust were written off during the six months ended June 30, 2003 or 2002.

In May 2003, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 requires certain freestanding financial instruments, such as mandatorily redeemable preferred stock, to be measured at fair value

and classified as liabilities. The provisions of SFAS No. 150 are generally effective beginning in the third quarter of 2003. The Company does not currently utilize financial instruments covered by SFAS No. 150 as part of its financing strategy. Accordingly, the Company does not believe adoption of SFAS No. 150 will have a material impact on its financial position or results of operations.

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003 and should be applied prospectively. The Company does not currently utilize derivative instruments or hedging as part of its financing strategy. Accordingly, the Company does not believe adoption of SFAS No. 149 will have a material impact on its financial position or results of operations.

In November 2002, the FASB's EITF issued EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Cash Consideration Received from a Vendor, effective for fiscal periods beginning after December 15, 2002. EITF Issue No. 02-16 requires cash consideration given by a vendor to a customer be recognized in the customer's financial statements as a reduction to cost of goods sold, unless certain limited conditions are met. The Company receives certain fixed and variable advertising allowances and incentives from vendors for participation in the Company's advertising publications. Effective January 1, 2003, the Company adopted EITF Issue No. 02-16, Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor. As a result, during the first quarter of 2003 the Company recorded a non-cash, cumulative after-tax charge of $6.1 million, or $0.18 per share (after-tax), related to fixed promotional allowances received from vendors for participation in the Company's advertising publications. Adoption of EITF Issue No. 02-16 had no impact on the Company's accounting for variable promotional allowances and incentives. See Note 2 for further discussion of manufacturers' allowances and the cumulative effect of a change in accounting principle.

In January 2003, the FASB issued FASB Interpretation ("FIN") No. 46, Consolidation of Variable Interest Entities. FIN No. 46 addresses consolidation of variable interest entities, including special purpose entities and non-voting controlled entities. FIN No. 46 requires the "primary beneficiary" of a variable interest entity to consolidate it in its financial statements. However, FIN No. 46 specifically excludes some qualified financing mechanisms, including the Company's Receivables Securitization Program, from the scope of the interpretation. Adoption of FIN No. 46 did not have a material impact on its financial position or results of operations.

In November 2002, the FASB issued FIN No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires that upon issuance of a guarantee, the guarantor recognize a liability for the fair value of the obligation it assumes under the particular guarantee. In addition, FIN No. 45 provides new disclosure requirements for all direct and indirect guarantees. Adoption of FIN No. 45 did not have a material impact on its financial position or results of operations.

In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an Amendment of FASB Statement No. 123. SFAS No. 148 provides two alternative methods for accounting for the transition to the fair value based method of accounting for stock-based compensation. In addition, SFAS No. 148 amends the annual and quarterly disclosure requirements of SFAS No. 123, Accounting for Stock-Based Compensation. These amended disclosure and transition requirements are effective for fiscal years ending after December 15, 2002. The Company currently accounts for stock-based compensation using the "intrinsic value" method permitted by Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. The Company provides supplemental disclosures including the pro forma net income and earnings per share as if the fair value based accounting method in SFAS No. 123 had been used. The Company is continuing to account for stock-based compensation using the intrinsic value and will continue to provide the required supplemental disclosures. The Company has adopted the disclosure requirements in these financial statements. Based on current circumstances and the Company's chosen method of accounting for stock-based compensation, the provisions of SFAS No. 148 did not have a material impact on its financial position or results of operations.

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 Securities Exchange Act of 1934. These include references to plans, strategies, objectives, projected costs and savings, anticipated future performance or events and other statements that are not strictly historical in nature. These statements are based on management's current expectations, forecasts and assumptions. This means 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 ability to streamline its organization and operations, and to implement general cost-reduction initiatives; 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 inventory purchase volumes and vendor participation in the Company's general line catalog and other annual and quarterly publications, and the impact of these 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 on the Company's gross margin; competitive activity, including competitive customer acquisition and pricing pressures; reliance on key management personnel; acts of terrorism or war; and prevailing economic conditions and changes affecting the business products industry and the general economy.

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 Condensed Consolidated Financial Statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q.

The Condensed Consolidated Financial Statements represent United Stationers Inc. ("United") and its wholly owned subsidiary United Stationers Supply Co. ("USSC") and its subsidiaries - collectively (the "Company"). The Company is the largest broadline business products wholesaler in the United States and a provider of marketing and logistics services to resellers, with trailing 12 months net sales of approximately $3.8 billion. The Company's business products offerings comprise five principal product categories—traditional office products, computer consumables, office furniture, facilities supplies and business machines and presentation products. The Company sells its products through a national distribution network to 15,000 resellers, who in turn sell directly to end-users. These products are distributed through a computer-based network of 35 USSC regional distribution centers, 24 Lagasse distribution centers that serve the janitorial and sanitation industry, two Azerty distribution centers in Mexico that serve computer supply resellers and two distribution centers that serve the Canadian marketplace.

Sales for the third quarter of 2003 through the date of this filing are up approximately 6% as compared to the same period in 2002. This is due in part to favorable current industry dynamics, including customer acquisition or expansion opportunities and increased sales volume resulting from the bankruptcy filing of Daisytek International. However, management believes that the Company's year over year sales may not continue to reflect comparative growth at the same rate, as the Company is facing increasing competitive pressures, while the challenging economic environment and high unemployment levels persist. Although net sales for each of the first two quarters of 2003 are above the respective amounts reported for the comparable quarters in the prior year, they remain below the revenues achieved by the Company during the same periods in 2001.

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 will inevitably 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, Judgments and Estimates" 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 and Cumulative Effect of a Change in Accounting Principle

Manufacturers' allowances (fixed and variable) are common practice in the business products industry and 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 in Note 2 to the Condensed Consolidated Financial Statements, and increased by estimated manufacturers' allowances and promotional incentives. These allowances and incentives are estimated on an on-going 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. Reported results reflect management's best current estimate of such allowances and incentives.

	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	As Reported 2003		Pro Forma 2002		Pro Forma 2003		Pro Forma 2002
Amounts, assuming accounting change was applied retroactively:
Income before income taxes and cumulative effect of a change in accounting principle	$	24,365	$	24,625	$	54,664	$	62,723
Net income		15,106		15,394		33,890		39,208
Earnings per share—basic	$	0.46	$	0.46	$	1.04	$	1.16
Earnings per share—diluted	$	0.46	$	0.45	$	1.03	$	1.14

Approximately 40% to 45% of the Company's estimated annual manufacturers' allowances and incentives are fixed based on vendor participation in various Company advertising and marketing publications. Historically, these promotional incentives were recorded as a reduction to cost of goods sold over the life of the publication to reflect net advertising cost. EITF Issue No. 02-16 now requires that the cash compensation received from vendors related to these fixed advertising allowances and incentives be reflected as a reduction to the cost of inventory. As a result, fixed allowances and incentives will now be taken to income through lower cost of goods sold as inventory is sold.

the Company's financial statements as a reduction to cost of goods sold to reflect the net inventory purchase cost. Manufacturers' allowances and incentives attributable to unsold inventory are carried as a component of net inventory cost. The potential amount of variable manufacturers' allowances often differs based on purchase volume by manufacturer and product category. As a result, lower Company sales volume (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.

Upon adoption of the 2002 Restructuring Plan in the fourth quarter of 2002, the Company recorded pre-tax restructuring and other charges of $8.9 million, or $0.17 per share (on an after-tax basis). These charges included a pre-tax cash charge of $6.9 million for employment termination and severance costs and accrued exit costs and a $2.0 million non-cash charge for the write-down of certain e-commerce-related investments. See Note 3 to the Condensed Consolidated Financial Statements for detail of the remaining accrual balances.

The Company's Board of Directors approved a restructuring plan in the third quarter of 2001 that included an organizational restructuring, a consolidation of certain distribution facilities and USSC's 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. The restructuring plan included workforce reductions of approximately 1,375 associates through voluntary and involuntary separation programs. All initiatives under the 2001 Restructuring Plan are complete, however, certain cash payments will continue for accrued exit costs which relate to long-term lease obligations that expire at various times over the next seven years are expected to continue (see Note 3 to the Condensed Consolidated Financial Statements for detail of the remaining accrual balances). The Company continues to actively pursue opportunities to sublet unused facilities.

Selected Comparative Results for the Three Months and Six Months Ended June 30, 2003 and 2002

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

Results of Operations—Three Months Ended June 30, 2003 Compared with the Three Months Ended June 30, 2002

Net Sales. Net sales for the second quarter of 2003 were $955.5 million, up 6.4% compared with sales of $897.6 million for the second quarter of 2002. Sales growth by product category for the current quarter compared with the prior quarter were mixed. The computer consumables category continued to increase as a percentage of our total sales while the sales mix of traditional office products and furniture continued to decline.

Sales in the computer consumables and business machines and presentation products categories grew at a rate of mid-teens and currently represents nearly forty percent of the Company's sales. This growth is primarily the result of favorable industry dynamics and the addition of new customers.

Sales in the janitorial and sanitation product category, primarily distributed through Lagasse, were up slightly compared with the prior year quarter. Growth in this sector was primarily due to continued growth at large distributors the Company serves.

Office furniture sales were down by low—single digits, 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 conditions, as well as the continuing availability of high-quality used office furniture at substantially discounted prices.

Sales of traditional office products experienced a decline in the mid-single digits versus the prior year quarter. Consumption of discretionary office products remains stagnant within the commercial sector, particularly in medium-to-large companies affected by workforce reductions and systematic cost-reduction initiatives.

Gross Profit and Gross Margin Rate. Gross profit (gross margin dollars) for the three-month period ended June 30, 2003 was $134.5 million, or a gross margin rate of 14.1% (gross profit as a percent of net sales), compared with $131.1 million, or a gross margin rate of 14.6% in the prior year quarter. Gross margin in the first quarter of 2003 was 14.3% and 13.7% during the fourth quarter of 2002.

The Company's gross margin rate continues to be negatively impacted by the shift in the Company's product sales mix, overall and within each major product category, as customers continued to remain cautious and postpone higher margin, discretionary purchases, such as furniture, and ordered primarily lower margin,

commodity business products essential for their companies. As a result, file margin (invoice price less current cost) rate declined approximately 0.8 percentage points versus the second quarter of last year. However, file margin was partially offset by a 0.3 percentage point increase related to estimated vendor allowances.

Operating Expenses. Operating expenses for the second quarter of 2003 were $102.2 million, or 10.7% of sales, compared with $101.4 million, or 11.3% of sales, in the same three-month period last year. During the second quarter of 2003, the Company recorded lower depreciation and amortization expense (0.2 percentage points) and lower salary expense (0.3 percentage points), compared with last year.

Income from Operations. Income from operations was $32.2 million for the three months ended June 30, 2003, compared with $29.7 million for the same three-month period in 2002.

Interest Expense, net. Net interest expense for the second quarter of 2003 totaled $1.5 million, compared with $4.1 million in the same period last year. This decline reflects savings due to the redemption of the 8.375% Notes financed primarily through the Company's lower cost Receivables Securitization Program.

Loss on early extinguishment of debt. As a result of the redemption of the 8.375% Notes during the second quarter of 2003, the Company recorded a loss on early extinguishment of debt totaling $5.9 million, of which $4.2 million was associated with a redemption premium of 4.188% of the principal amount and $1.7 million related to the write-off of deferred financing costs (see Note 6 to the Condensed Consolidated Financial Statements). No such loss was recorded in 2002.

Other Expense, net. Net other expense for the three months ended June 30, 2003 totaled $0.5 million compared with $0.4 million for the same three-month period last year. Net other expense for the three months ended June 30, 2003 includes $0.9 million associated with the sale of certain trade accounts receivable through the Receivables Securitization Program (described below), offset by a net gain of $0.5 million from the disposition of property, plant and equipment.

Income Before Income Taxes and Cumulative Effect of a Change in Accounting Principle. Income before income taxes and cumulative effect of a change in accounting principle totaled $24.4 million for the second quarter of 2003, compared with $25.2 million for the second quarter of last year.

Income Taxes. Income tax expense totaled $9.3 million in the second quarter of 2003, compared with $9.4 million during the second quarter of 2002. The Company's effective tax rate for the second quarter of 2003 and 2002 was 38.0% and 37.5%, respectively.

Net Income. For the three months ended June 30, 2003, the Company recorded net income of $15.1 million, or $0.46 per diluted share, compared with net income of $15.7 million, or $0.46 per diluted share for the same period in 2002. Net income for the second quarter of 2003 includes a charge of $3.6 million, or $0.11 per diluted share related to the early retirement of debt.

Results of Operations—Six Months Ended June 30, 2003 Compared with the Six Months Ended June 30, 2002

Net Sales. Net sales for the first six months of 2003 were $1.9 billion, up 4.3% compared with sales of $1.8 billion for the same six-month period in 2002. This increase was the result of growth within the computer consumables, business machines and presentation products and janitorial and sanitation categories, offset by declines in the office furniture and traditional office products categories.

Sales in the computer consumables and business machines and presentation products categories grew by upper-single digits versus the prior year period.

Sales in the janitorial and sanitation product category, primarily distributed through Lagasse, were up by mid-single digits, compared with the prior year period. Growth in this sector was primarily due to continued growth at large distributors the Company serves.

Office furniture sales were down by mid-single digits, compared with the prior-year period. 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 of traditional office products experienced a decline in the mid-single digits versus the prior year period. Consumption of discretionary office products remains stagnant within the commercial sector, particularly in medium-to-large companies affected by workforce reductions and systematic cost-reduction initiatives.

Gross Profit and Gross Margin Rate. Gross profit (gross margin dollars) for the six months ended June 30, 2003 was $273.1 million, or a gross margin rate of 14.2% (gross profit as a percent of net sales), compared with $275.5 million, or a gross margin rate of 14.9%, for the same period in 2002. See "Gross Profit and Gross Margin Rate" under "Results of Operations—Three Months Ended June 30, 2003 Compared with the Three Months Ended June 30, 2002" for further description of these trends.

Operating Expenses. Operating expenses during the six-month period ended June 30, 2003 totaled $205.7 million, or 10.7% of sales, compared with $202.4 million, or 10.9% of sales, in the same period last year. The first half of 2002 included a favorable adjustment of $2.4 million, or 0.1% of net sales, related to a partial reversal of the restructuring charge recorded in the third quarter of 2001.

Income from Operations. Income from operations was $67.3 million for the six months ended June 30, 2003, compared with $73.1 million for the same six-month period in 2002. Income from operations for the six months ended June 30, 2002 includes a favorable adjustment of $2.4 million, related to a partial reversal of the restructuring charge recorded in the third quarter of 2001.

Interest Expense, net. Net interest expense for the first six months of 2003 totaled $4.8 million, compared with $8.6 million in the same period last year. This decline reflects savings due to the redemption of the Company's 8.375% Notes financed primarily through the Company's lower cost Receivables Securitization Program.

Loss on early extinguishment of debt. As a result of the redemption of the 8.375% Notes and replacement of the Company's Credit Agreement during the first half of 2003, the Company recorded a loss on early extinguishment of debt totaling $6.7 million, of which $5.9 million was associated with the redemption of the Notes and $0.8 related to the write-off of deferred financing costs associated with replacing the Credit Agreement (see Note 6 to the Condensed Consolidated Financial Statements). No such loss was recorded in 2002.

Other Expense, net. Net other expense for the first six months of 2003 totaled $1.2 million compared with $0.8 million for the same six-month period last year. Net other expense for the six months ended June 30, 2003 includes $1.7 million associated with the sale of certain trade accounts receivable through the Receivables Securitization Program (described below), offset by $0.5 million net gain on the disposition of plant, property and equipment.

Income Before Income Taxes and Cumulative Effect of a Change in Accounting Principle. Income before income taxes and cumulative effect of a change in accounting principle totaled $54.7 million for the six months ended June 30, 2003, compared with $63.8 million for the same period last year.

Income Taxes. Income tax expense totaled $20.8 million in the six months ended June 30, 2003, compared with $23.9 million during the first six months of 2002. The Company's effective tax rate for the six months ended June 30, 2003 and 2002 was 38.0% and 37.5%, respectively.

Cumulative Effect of a Change in Accounting Principle. Cumulative effect of a change in accounting principle was $6.1 million, representing a one-time, non-cash, cumulative after-tax charge related to the adoption of EITF Issue No. 02-16 (see Note 2 to the Condensed Consolidated Financial Statements). No such charge was recorded in 2002.

Net Income. For the six months ended June 30, 2003, the Company recorded net income of $27.8 million, or $0.85 per diluted share, compared with net income of $39.9 million, or $1.16 per diluted share for the same period in 2002. Net income for the six months ended June 30, 2003 includes a charge of $4.2 million, or $0.13 per diluted share related to the early retirement of debt and a charge of $6.1 million, or $0.18 per diluted share related to the cumulative effect of a change in accounting principle. Net income for the six months ended June 30, 2002 includes a favorable adjustment of $1.5 million, or $0.04 per diluted share, related to a partial reversal of the restructuring charge recorded in 2001.

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. The Company's outstanding debt under Generally Accepted Accounting Principles ("GAAP"), together with funds generated from the sale of receivables under the Company's Receivables Securitization Program (also referred to below as "liquidity sources") consisted of the following amounts (in thousands):

	As of June 30, 2003			As of December 31, 2002
Revolver	$	56,500		$	—
Tranche A term loan, due in installments until March 31, 2004		—			18,251
Tranche A-1 term loan, due in installments until June 30, 2005		—			78,125
8.375% Senior Subordinated Notes, due April 15, 2008		—			100,000
Industrial development bonds, at market-based interest rates, maturing at various dates through 2011		6,800			6,800
Industrial development bonds, at 66% to 78% of prime, maturing at various dates through 2004		—			8,000
Other long-term debt		46			73

Total debt under GAAP		63,346			211,249
Receivables Securitization (liquidity sources)⁽¹⁾		225,000			105,000

Total outstanding debt under GAAP and liquidity sources		288,346			316,249
Stockholders' equity under GAAP		598,814			558,884

Total capitalization	$	887,160		$	875,133

Debt-to-total capitalization ratio		32.5	%		36.1	%

The most directly comparable financial measure to total outstanding debt under GAAP and liquidity resources that is calculated and presented in accordance with GAAP is total debt (as provided in the above table as "Total debt under GAAP"). Under GAAP, accounts receivable sold under the Company's Receivables Securitization Program are required to be reflected as a reduction in accounts receivable and not reported as debt. Internally, the Company considers accounts receivables sold to be a financing mechanism. The Company believes its is helpful to provide readers of its financial statements with a measure that adds accounts receivable sold to debt.

During the six months ended June 30, 2003, the Company utilized cash flow to reduce debt. The Company reduced total debt and accounts receivable sold by $27.9 million during the first half of 2003. At June 30, 2003, the Company's debt-to-total capitalization ratio (adjusted from the GAAP total debt amount to add the receivables then sold under the Company's Receivables Securitization Program as debt) was 32.5%, compared to 36.1% at December 31, 2002.

The debt-to-total capitalization ratio is provided as an additional liquidity measure. GAAP requires that accounts receivable sold under the Company's Receivables Securitization Program be reflected as a reduction in accounts receivable and not reported as debt. Internally, the Company considers accounts receivables sold to be a financing mechanism. The Company believes it is helpful to provide readers of its financial statements with a measure that adds accounts receivable sold to debt, and calculates debt-to-total capitalization on the same basis. A reconciliation of this non-GAAP measure is provided in the table above.

Funding for net capital expenditures (gross capital expenditures minus net proceeds from property, plant and equipment dispositions) was $5.3 million for the first half of 2003, compared to $10.3 million during the same period in 2002. For the six months ended June 30, 2003, capitalized software expenditures totaled $1.3 million, compared to $3.5 million during the first six months of 2002. Net capital spending (net capital expenditures plus

capitalized software expenditures) was $3.0 million and $9.6 million for the first six months of 2003 and 2002, respectively. Capital expenditures are utilized primarily to replace, upgrade and equip the Company's distribution facilities. The Company expects net capital spending for all of 2003 to be approximately $20 million.

Net capital spending is provided as an additional measure of investing activities. The most directly comparable financial measure calculated and presented in accordance with GAAP is net capital expenditures (as defined). Under GAAP, net capital expenditures are required to be included on the cash flow statement under the caption "Net Cash Used in Investing Activities." The Company's accounting policy is to include capitalized software (system costs) in "Other Assets." GAAP requires that "Other Assets" be included on the cash flow statements under the caption "Net Cash Provided by (used in) Operating Activities. Internally, the Company measures cash used in investing activities including capitalized software. A reconciliation of this non-GAAP measure is provided as follows:

Operating cash requirements and capital expenditures are funded from operating cash flow and available financing. Financing available from debt and the sale of accounts receivable at June 30, 2003, is summarized below:

Availability ($ in millions)
Funded debt		$	63.3
Accounts receivable sold			225.0

	Total utilized financing				288.3
Revolving Credit Facility availability			204.5
Availability Under the Receivables Securitization Program			—

	Total unutilized				204.5

	Total available financing, before restrictions				492.8
Restrictive covenant limitation					55.4

	Total available financing at June 30, 2003			$	437.4

Restrictive covenants under the New Credit Agreement (as defined below) separately limit total available financing at points in time, as further discussed below. At June 30, 2003, total funding from debt and the sale of accounts receivable was effectively limited by the leverage ratio covenant in the Company's New Credit Agreement to approximately $437 million, or $55 million less than the $492 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.

As previously disclosed, on March 21, 2003, the Company replaced its then existing senior secured credit facility (the "Credit Agreement") by entering into a new Five-Year Revolving Credit Agreement (the "New Credit Agreement") dated as of March 21, 2003 by and among USSC, as borrower, and United, as guarantor, the various lenders and Bank One, NA, as administrative agent. The New Credit Agreement provides for a revolving credit facility with an aggregate committed amount of $275 million. USSC may, upon the terms and conditions of the

New Credit Agreement, seek additional commitments from its current or new lenders to increase the aggregate committed principal amount under the facility to a total amount of up to $325 million. As a result of the replacement of the Credit Agreement, the Company recorded pre-tax charges of $0.8 million in the first quarter of 2003 and $1.7 million during the second quarter of 2003 relating to the write-off of associated deferred financing costs.

Loans outstanding under the New Credit Agreement bear interest at a floating rate (based on the higher of either the prime rate or the federal funds rate plus 0.50%) plus a margin of 0% to 0.75% per annum, or at USSC's option, the London Interbank Offered Rate ("LIBOR") (as it may be adjusted for reserves) plus a margin of 1.25% to 2.25% per annum, or a combination thereof. The margins applicable to floating rate and LIBOR loans are determined by reference to a pricing matrix based on the total leverage of United and its consolidated subsidiaries. Initial applicable margins are 0.50% and 2.00%, respectively.

The Credit Agreement contains representations and warranties, affirmative and negative covenants, and events of default customary for financings of this type.

As previously announced, on March 28, 2003, USSC replaced its then existing $160 million Receivables Securitization Program with a new third-party receivables securitization program with Bank One, NA, as trustee (the "New Receivables Securitization Program"). Under this $225 million program, USSC sells, on a revolving basis, its eligible trade accounts receivable (except for certain excluded accounts receivable, which initially includes all accounts receivable of Lagasse, Canada and foreign subsidiaries) to the Receivables Company. The Receivables Company, in turn, ultimately transfers the eligible trade accounts receivable to a trust. The trustee then sells investment certificates, which represent an undivided interest in the pool of accounts receivable owned by the trust, to third-party investors. Affiliates of PNC Bank and Bank One act as funding agents. The funding agents provide standby liquidity funding to support the sale of the accounts receivable by the Receivables Company under

364-day liquidity facilities. The New Receivables Securitization Program provides for the possibility of other liquidity facilities that may be provided by other commercial banks rated at least A-1/P-1.

The Receivables Company determines the level of funding achieved by the sale of trade 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). The Company's net retained interest on $350.4 million and $296.6 million of trade receivables in the master trust as of June 30, 2003 and December 31, 2002 was $125.4 million and $191.6 million, respectively. The Company's retained interest in the master trust is included in the Condensed Consolidated Financial Statements under the caption "Retained interest in receivables sold, less allowance for doubtful accounts".

Cash flows for the Company for the six months ended June 30, 2003 and 2002 are summarized below (in thousands):

	For the Six Months Ended June 30,
	2003			2002
Net cash provided by operating activities	$	148,928		$	28,610
Net cash used in investing activities		(1,713	)		(6,093	)
Net cash used in financing activities		(143,024	)		(28,469	)

Net cash provided by operating activities for the six months ended June 30, 2003 was $148.9 million. This includes $27.8 million of net income, a $66.2 million decrease in the Company's retained interest in receivables sold, a $50.4 million reduction in inventory, a $33.4 million decrease in accounts receivable, a $7.4 million increase in accounts payable, $15.2 million of depreciation and amortization, a $6.1 million non-cash charge for a cumulative effect of a change in accounting principle (see Note 2 to the Condensed Consolidated Financial Statements), an increase in deferred taxes of $1.3 million and $2.9 million in amortization of capitalized financing costs, partially offset by a $33.7 million decrease in deferred credits, $18.0 million decline in accrued liabilities and a $9.2 million increase in other assets. Net cash used in operating activities for the six months ended June 30, 2002 was $28.6 million. This includes $39.9 million in net income, a $90.7 million decrease in accounts receivable, a $74.5 million decline in inventory, a decrease of $2.1 million in other assets, an increase in deferred taxes of $2.3 million, $17.7 million of depreciation and amortization and $0.5 million in amortization of capitalized financing costs, partially offset by a $132.8 million increase in the Company's retained interest in receivables sold, $30.5 million decline in deferred credits, a decrease in accounts payable of $21.3 million, a $12.1 million decline in accrued liabilities and a $2.3 million decrease in other liabilities.

Net cash used in investing activities for the six months ended June 30, 2003 was $1.7 million, related to normal capital expenditures of $5.3 million, offset by proceeds of approximately $3.6 million primarily from the sale of the Company's Milwaukee and Charlotte distribution centers. Net cash used in investing activities for the six months ended June 30, 2002 was $6.1 million, including $10.3 million for capital expenditures, offset by $4.2 million of proceeds from the sale of assets primarily related to CallCenter Services and a distribution center.

Net cash used in financing activities for the six months ended June 30, 2003 was $143.0 million, including $204.4 million of principal payments and retirements of debt including amounts outstanding under the Company's Credit Agreement, redemption of the Notes and an outstanding industrial development bond, and $2.6 million for payment of withholding tax related to stock option exercises, partially offset by $56.5 million in borrowings under the Company's Revolving Credit Facility and $7.4 million of proceeds from the issuance of treasury stock upon the exercise of stock options under the Company's equity compensation plans. 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 Credit Agreement and $10.3 million for the acquisition of treasury stock through the Company's share repurchase program, partially offset by $5.0 million of proceeds from the issuance of treasury stock upon the exercise of stock options under the Company's equity compensation plans.

The Company is subject to market risk associated principally with changes in interest rates and foreign currency exchange rates.

The Company's exposure to interest rate risks is principally limited to the Company's outstanding long-term debt at June 30, 2003 of $63.3 million, $225 million of receivables sold under the Receivables Securitization Program and the Company's $125.4 million retained interest in the master trust (as defined above).

The Company has historically used both fixed-rate and variable or short-term rate debt. At June 30, 2003, 100% of the Company's outstanding debt is priced at variable interest rates. The Company's variable rate debt is based primarily on the applicable prime or London InterBank Offered Rate ("LIBOR"). The prevailing prime interest rate was 4.00% at June 30, 2003 and the LIBOR rate as of June 30, 2003 was approximately 1.20%. A 50 basis point movement in interest rates would result in an annualized increase or decrease of approximately $1.4 million in interest expense, loss on the sale of certain accounts receivable and cash flows from operations.

The Company's retained interest in the master trust (defined above) is also subject to interest rate risk. The Company measures the fair value of its retained interest throughout the term of the securitization program using a present value model that includes an assumed discount rate of 5% per annum and an average collection cycle of approximately 40 days. Based on the assumed discount rate and short average collection cycle, the retained interest is recorded at book value, which approximates fair value. Accordingly, a 50 basis point movement in interest rates would not result in a material impact on the Company's results of operations.

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 valued in the local currency and 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 or cash flows. The Company has not previously hedged these transactions, but it may enter into such transactions in the future.

United's Annual Meeting of Stockholders for 2003 ("2003 Annual Meeting") was held on May 14, 2003. The only matter voted on at the 2003 Annual Meeting involved the election of two Class II Directors of United, each to serve for a three-year term expiring in 2006.

The following nominees, having received the votes for their election set forth opposite their respective names, were elected as such Class II Directors by a plurality of the votes cast:

As such directors were elected by a plurality of the votes cast, broker non-votes and instructions to withhold voting authority were not counted and did not affect the outcome of the election.

The remaining United Class I and Class III Directors, Richard W. Gochnauer, Daniel J. Good, Roy W. Haley, Max D. Hopper, Benson P. Shapiro and Alex D. Zoghlin continued in office.

The list of exhibits filed with or incorporated by reference into this report is contained in the Index to Exhibits to this report on page 30, which is incorporated herein by reference.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 0-10653

				(Unaudited) As of June 30, 2003			(Audited) As of December 31, 2002
ASSETS
	Current assets:
		Cash and cash equivalents		$	22,120		$	17,426
		Retained interest in receivables sold, less allowance for doubtful accounts of $1,942 in 2003 and $2,058 in 2002			125,415			191,641
		Accounts receivable, less allowance for doubtful accounts of $17,821 in 2003 and $16,445 in 2002			125,044			158,374
		Inventories			515,524			572,498
		Other current assets			32,188			26,958

			Total current assets		820,291			966,897
	Property, plant and equipment, at cost:				343,896			357,225
	Less—accumulated depreciation and amortization				174,296			176,689

	Net property, plant and equipment				169,600			180,536
	Goodwill, net				181,979			180,186
	Other				20,159			21,610

			Total assets	$	1,192,029		$	1,349,229

LIABILITIES AND STOCKHOLDERS' EQUITY
	Current liabilities:
		Accounts payable		$	342,092		$	333,800
		Accrued liabilities			117,113			141,857
		Deferred credits			11,074			44,749
		Current maturities of long-term debt			43			45,904

			Total current liabilities		470,322			566,310
	Deferred income taxes				18,384			17,059
	Long-term debt				63,303			165,345
	Other long-term liabilities				41,206			41,631

			Total liabilities		593,215			790,345
	Stockholders' equity:
		Common stock, $0.10 par value; authorized—100,000,000 shares, issued—37,217,814 in 2003 and 2002			3,722			3,722
		Additional paid-in capital			314,523			313,961
		Treasury stock, at cost—4,260,428 shares in 2003 and 4,738,552 shares in 2002			(96,993	)		(104,450	)
		Retained earnings			385,417			357,635
		Accumulated other comprehensive loss			(7,855	)		(11,984	)

			Total stockholders' equity		598,814			558,884

			Total liabilities and stockholders' equity	$	1,192,029		$	1,349,229

		For the Three Months Ended June 30,				For the Six Months Ended June 30,
		2003		2002		2003			2002
Net sales		$	955,466	$	897,605	$	1,925,686		$	1,845,697
Cost of goods sold			821,013		766,493		1,652,606			1,570,149

Gross profit			134,453		131,112		273,080			275,548
Operating expenses:
	Warehousing, marketing and administrative expenses		102,211		101,418		205,740			204,832
	Restructuring charge reversal		—		—		—			(2,425	)

Total operating expenses			102,211		101,418		205,740			202,407

Income from operations			32,242		29,694		67,340			73,141
Interest expense, net			1,537		4,134		4,763			8,556
Loss on early extinguishment of debt			5,885		—		6,693			—
Other expense, net			455		389		1,220			770

Income before income taxes and cumulative effect of a change in accounting principle			24,365		25,171		54,664			63,815
Income tax expense			9,259		9,438		20,774			23,930

Income before cumulative effect of a change in accounting principle			15,106		15,733		33,890			39,885
Cumulative effect of a change in accounting principle, net of tax benefit of $3,696			—		—		6,108			—

Net income		$	15,106	$	15,733	$	27,782		$	39,885

Net income per share—basic:
	Income before cumulative effect of a change in accounting principle	$	0.46	$	0.47	$	1.04		$	1.18
	Cumulative effect of a change in accounting principle		—		—		(0.19	)		—

	Net income per share—basic	$	0.46	$	0.47	$	0.85		$	1.18

	Average number of common shares outstanding—basic		32,802		33,789		32,674			33,753
Net income per share—diluted:
	Income before cumulative effect of a change in accounting principle	$	0.46	$	0.46	$	1.03		$	1.16
	Cumulative effect of a change in accounting principle		—		—		(0.18	)		—

	Net income per share—diluted	$	0.46	$	0.46	$	0.85		$	1.16

	Average number of common shares outstanding—diluted		33,108		34,437		32,873			34,425

			For the Six Months Ended June 30,
			2003			2002
Cash Flows From Operating Activities:
	Net income		$	27,782		$	39,885
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			15,160			17,684
	Gain on the disposition of plant, property and equipment			(457	)		(58	)
	Amortization of capitalized financing costs			2,909			516
	Cumulative effect of a change in accounting principle, net of tax			6,108			—
	Changes in operating assets and liabilities:
		Decrease in accounts receivable, net		33,445			90,706
		Decrease (increase) in retained interest in receivables sold, net		66,226			(132,827	)
		Decrease in inventory		50,367			74,511
		(Increase) decrease in other assets		(9,164	)		2,129
		Increase (decrease) in accounts payable		7,359			(21,321	)
		Decrease in accrued liabilities		(18,031	)		(12,053	)
		Decrease in deferred credits		(33,675	)		(30,502	)
		Increase in deferred taxes		1,325			2,254
		Decrease in other liabilities		(426	)		(2,314	)

		Net cash provided by operating activities		148,928			28,610
Cash Flows From Investing Activities:
	Capital expenditures			(5,322	)		(10,277	)
	Proceeds from the disposition of property, plant and equipment			3,609			4,184

		Net cash used in investing activities		(1,713	)		(6,093	)
Cash Flows From Financing Activities:
	Retirements and principal payments of debt			(204,403	)		(22,497	)
	Net borrowings under revolver			56,500			—
	Issuance of treasury stock			7,448			4,959
	Acquisition of treasury stock, at cost			—			(10,251	)
	Payment of employee withholding tax related to stock option exercises			(2,569	)		(680	)

		Net cash used in financing activities		(143,024	)		(28,469	)
Effect of exchange rate changes on cash and cash equivalents				503			(193	)

Net change in cash and cash equivalents				4,694			(6,145	)
Cash and cash equivalents, beginning of period				17,426			28,814

Cash and cash equivalents, end of period			$	22,120		$	22,669

Other Cash Flow Information:
	Income taxes paid, net		$	22,887		$	18,641
	Interest paid			6,475			7,750
	Discount on the sale of accounts receivable			1,355			1,012

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2003			2002			2003			2002
Net income, as reported		$	15,106		$	15,733		$	27,782		$	39,885
	Add: Stock-based employee compensation expense included in reported net income, net of tax		11			51			23			325
	Less: total stock-based employee compensation determined if the fair value method had been used, net of tax		(1,280	)		(1,603	)		(2,243	)		(3,177	)

Pro forma net income		$	13,837		$	14,181		$	25,562		$	37,033

Net income per share—basic:
	As reported	$	0.46		$	0.47		$	0.85		$	1.18
	Pro forma		0.42			0.42			0.78			1.10
Net income per share—diluted:
	As reported	$	0.46		$	0.46		$	0.85		$	1.16
	Pro forma		0.42			0.41			0.78			1.08

Delaware (State or Other Jurisdiction of Incorporation or Organization)		36-3141189 (I.R.S. Employer Identification No.)
2200 East Golf Road Des Plaines, Illinois 60016-1267 (847) 699-5000 (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices)

		Employment Termination and Severance Costs			Accrued Exit Costs			Total Accrued Restructuring Charge			Non-Cash Asset Write-Downs			Total Restructuring Charge
Restructuring and other charges		$	19,637		$	18,973		$	38,610		$	17,928		$	56,538
Amounts reversed into income in 2002			(503	)		(197	)		(700	)		(1,725	)		(2,425	)
Amounts utilized:
	2001		(3,023	)		(1,226	)		(4,249	)		(15,925	)		(20,174	)
	2002		(13,273	)		(2,627	)		(15,900	)		(278	)		(16,178	)
	For the six months ended June 30, 2003		(2,769	)		(1,251	)		(4,020	)		—			(4,020	)

Total amounts utilized			(19,065	)		(5,104	)		(24,169	)		(16,203	)		(40,372	)

Accrued restructuring costs—as of June 30, 2003		$	69		$	13,672		$	13,741		$	—		$	13,741

	Number of Votes
	For	Withheld
Frederick B. Hegi, Jr.	29,770,871	978,665
Ilene S. Gordon	29,478,568	1,270,968

	UNITED STATIONERS INC. (Registrant)
Date: August 14, 2003	/s/ KATHLEEN S. DVORAK Kathleen S. Dvorak Senior Vice President and Chief Financial Officer (Duly authorized signatory and principal financial officer)

Exhibit No.		Description
15.1		Letter regarding unaudited interim financial information
15.2		Letter regarding unaudited interim financial information
31.1		Certification of Chief Executive Officer, dated as of August 14, 2003, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer, dated as of August 14, 2003, as Adopted Pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer, dated as of August 14, 2003, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer, dated as of August 14, 2003, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002