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TABLE OF CONTENTS

United States Securities and Exchange Commission
Washington, DC 20549

Form 10-K

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

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

United Stationers Inc.: Common stock, $0.01 par value per share
(Title of Class)

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.

United Stationers Inc.:    Yes  ý      No  o
United Stationers Supply Co.:    Yes    ý      No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý

Indicate by check mark whether the registrants are accelerated filers (as defined in Rule 12b-2 of the Act)

United Stationers Inc.:    Yes  ý      No  o
United Stationers Supply Co.:    Yes  o      No  ý

The aggregate market value of the common stock of United Stationers Inc. based on the closing sale price of the common stock on June 28, 2002 on the Nasdaq National Market, was approximately $1,004,355,000. United Stationers Inc. owns all of the outstanding common stock of United Stationers Supply Co.

On March 21, 2003, United Stationers Inc. had outstanding 32,603,540 shares of common stock, par value $0.10 per share, and United Stationers Supply Co. had outstanding 880,000 shares of common stock, $1.00 par value per share outstanding.

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

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of United Stationers Inc.'s definitive Proxy Statement relating to its 2003 Annual Meeting of Stockholders to be filed within 120 days after the end of United Stationers Inc.'s fiscal year, are incorporated herein by reference into Part III where indicated.

UNITED STATIONERS INC.
UNITED STATIONERS SUPPLY CO.
FORM 10-K
For The Year Ended December 31, 2002

TABLE OF CONTENTS

PART I

Explanatory Note

This integrated Form 10-K 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 disclosures required by the instructions to Form 10-K and therefore, unless otherwise indicated, the responses set forth herein apply to each of United Stationers Inc. and United Stationers Supply Co.

ITEM 1. BUSINESS

General

United Stationers Inc. ("United") is a holding company incorporated in 1981 under the laws of the State of Delaware. United is the parent company of its direct wholly owned subsidiary, United Stationers Supply Co. ("USSC"), incorporated in 1922 under the laws of the State of Illinois. Except where the context otherwise requires, the term "Company" refers to United and USSC and its subsidiaries. The Company, with 2002 net sales of $3.7 billion, is North America's largest broad line wholesale distributor of business products and a provider of marketing and logistics services to resellers.

In April 1998, USSC acquired all of the capital stock of Azerty Incorporated, Azerty de Mexico, S.A. de C.V., Positive ID Wholesale Inc., and AP Support Services Incorporated (the "Azerty Acquisition"). These businesses represented the United States and Mexican operations of the Office Products Division of Abitibi-Consolidated Inc. (collectively, "Azerty"). The Azerty business is primarily a specialty wholesaler of computer consumables, peripherals and accessories in the U.S. and Mexico. The Positive ID division was sold in July 2001.

In July 2000, USSC acquired all of the capital stock of CallCenter Services, Inc. from Corporate Express, Inc. a Buhrmann Company. CallCenter Services was a customer relationship management outsourcing service company. The Wilkes-Barre, Pennsylvania, portion of CallCenter Services was sold to Customer Satisfaction, Inc. First in November 2001. The Salisbury, Maryland, portion was sold to 1-800-BARNONE, a Financial Corporation, Inc., in February 2002.

In July 2000, USSC established The Order People ("TOP")to operate as a third-party logistics and fulfillment service provider for product categories beyond office products. The Company has significantly downsized TOP's operations as part of its 2001 and 2002 restructuring initiatives.

In July 2000, USSC purchased certain assets of the wholesale business of MCSi Canada Inc. from MCSi, Inc. Azerty United Canada is a specialty distributor of computer consumables, peripherals and accessories. Azerty United Canada operates as a division of USSC.

In January 2001, Lagasse, Inc. ("Lagasse"), a wholly owned subsidiary of USSC, purchased Peerless Paper Mills, Inc., a wholesale distributor of janitorial and sanitation, paper, and food service products. Peerless was immediately merged into Lagasse. USSC had acquired Lagasse, a wholesaler of janitorial and sanitary supplies, in 1996.

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Products

The Company offers more than 40,000 stockkeeping units ("SKUs"), which can be grouped into five primary categories:

Traditional Office Products.    The Company's primary business continues to be traditional office products, which accounted for approximately 30% of the Company's net sales for 2002. This has made the Company the largest North American wholesale provider of a broad line of office supplies. The Company offers more than 25,000 brand-name products and its own private brand products, including writing instruments, paper products, organizers, calendars and general office accessories.

Computer Consumables.    The Company is the largest wholesale provider of computer supplies and peripherals in North America. It offers approximately 7,000 items to value-added computer resellers and office products dealers. Computer consumables accounted for approximately 34% of the Company's 2002 net sales.

Office Furniture.    The Company is the nation's largest office furniture wholesaler. It currently offers more than 5,000 items—such as leather chairs, wooden and steel desks and computer furniture—from more than 60 different manufacturers. This product group accounted for approximately 12% of the Company's 2002 net sales.

Facilities Supplies.    The Company is the largest wholesaler of janitorial and sanitation supplies in North America. It offers approximately 5,500 items in these major categories: janitorial and sanitation supplies, safety and security items, and shipping and mailing supplies. Facilities supplies accounted for approximately 11% of the Company's net sales during 2002.

Business Machines and Presentation Products.    The Company is a leading wholesale provider of business machines—from calculators to telephones—as well as presentation products and supplies. This product class accounted for approximately 10% of the Company's 2002 net sales.

The remaining 3% of the Company's net sales for 2002 were derived from miscellaneous revenue sources.

Customers

The Company's more than 15,000 customers include independent office products dealers and contract stationers, national mega-dealers, office products superstores, computer products resellers, office furniture dealers, mass merchandisers, mail order companies, sanitary supply distributors, and e-commerce merchants. Of its 15,000 customers, no single reseller accounted for more than 6% of the Company's net sales in 2002.

Independent commercial dealers and contract stationers are the Company's most significant reseller channel for office products, contributing about 75% of its revenues in 2002. These companies typically serve medium to large businesses, institutions and government agencies.

The Company maintains and builds its business with commercial dealers, contract stationers (including the contract stationer divisions of national office product superstores) and retail dealers. It also has relationships with most major office products superstore chains.

Marketing and Customer Support

The products distributed by the Company generally are available at similar prices from multiple sources, and most customers purchase their products from more than one source. To differentiate itself from competitors, the Company concentrates its marketing efforts on providing value-added service to resellers. These include broad product offerings, a higher degree of product availability, a variety of high quality customer services, integrated systems and national distribution capabilities that allow for

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overnight delivery. United's marketing programs have emphasized two other major components. First, the Company produces an extensive array of catalogs for commercial dealers, contract stationers and retail dealers. The catalogs usually are custom printed with each reseller's name and then sold to these resellers who, in turn, distribute the catalogs to their customers. Second, the Company provides its resellers with a variety of dealer support and marketing services, including electronic commerce options, and promotional programs. These services are designed to help the reseller differentiate themselves from their competitors by addressing the needs of the end-user's procurement process.

Nearly all of the Company's 40,000 SKUs are sold through its comprehensive general line catalog, promotional pieces and specialty catalogs for the office products, computer supplies, office furniture, facilities management supplies and other specialty markets. The following is a list of the annual or semi-annual catalogs that United currently produces:

1.

General Line Catalog, which is also available in an electronic version;



2.

Office Furniture Catalog featuring furniture and accessories;



3.

Market Development Catalog promoting the Company's private-brand merchandise and other office supplies;



4.

Computer Products Catalog offering computer-related supplies, accessories, hardware and peripheral products;



5.

Facility Supplies Catalog featuring cleaning supplies, food service, warehouse, mailroom and presentation products and supplies;



6.

Lagasse Catalog offering janitorial and sanitation supplies;



7.

Mid-Market FurnitureFOCUS Catalog promoting commodity furniture and accessory products; and



8.

Presentation Products Catalog featuring audio-visual equipment and supplies.

In addition, the Company produces the following quarterly promotional catalogs:

1.

AcquisitionFOCUS featuring nearly 2,000 high-volume commodity items, with graphics and pricing designed to help resellers acquire new accounts;



2.

RetentionFOCUS featuring nearly 2,000 high-volume items with graphics and pricing designed to help resellers retain existing accounts;



3.

ComputerFOCUS offering computer supplies, peripherals, accessories and furniture; and



4.

The Source, a monthly consumer newsletter focusing on new products and solutions to office problems.

The Company also produces separate quarterly flyers covering general office supplies, office furniture, facility supplies and Universal® private brand products. Commercial dealers, contract stationers and retail dealers typically distribute only one wholesaler's catalogs, so they can streamline order entry and concentrate their purchases. To address this, the Company tries to maximize its catalog distribution by offering advertising credits to resellers, which can be used to offset the cost of the catalogs.

The Company offers resellers a variety of electronic order entry systems and business management and marketing programs. For example, the Company maintains electronic data interchange and interactive order systems that link to selected resellers. In addition, the Company's electronic order entry systems allow the reseller to forward its customers' orders directly to the Company, resulting in the delivery of pre-sold products to the reseller. In 2002, the Company received approximately 90% of its orders electronically.

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In addition to marketing its products and services through its catalogs, the Company employs a sales force of approximately 350 field salespeople and approximately 400 customer care representatives. The sales force is responsible for sales to current reseller customers, as well as for establishing relationships with additional resellers.

Distribution

The Company has a network of 35 business products regional distribution centers located in 34 metropolitan areas in 24 states. Most of these centers carry a full line of business products. The Company maintains 24 Lagasse distribution centers with a complete line of janitorial and sanitation supplies, two distribution centers in Mexico that serve computer supply resellers and two Azerty distribution centers that serve the Canadian marketplace. During 2002, the Company integrated Azerty's computer systems and product offerings with those of USSC and closed the four Azerty distribution centers. The Company intends to continue marketing computer consumables using the Azerty name.

The Company supplements its regional distribution centers with 20 local distribution points throughout the U.S. which serve as reshipment points for orders filled at the regional distribution centers. The Company uses a dedicated fleet of more than 400 trucks, most of which are contracted for by the Company, to enable direct delivery to resellers from the regional distribution centers and local distribution points.

The Company enhances its distribution capabilities through a proprietary computerized inventory locator system. If a reseller places an order for an item that is out of stock at the nearest location, the system has the capability to search for it at other distribution centers. If the item is available at another location, the system automatically forwards the order there. The alternate location coordinates shipping with the primary facility and, for the majority of resellers, provides a single on-time delivery of all items. The system effectively gives the Company added inventory support. This means the Company can provide higher service levels to the reseller, reduce back orders and minimize time spent searching for merchandise substitutes. All of these factors contribute to a high order fill rate and efficient levels of inventory. In order to meet the Company's delivery commitments and to maintain a high order fill rate, the Company carries a significant amount of inventory.

The "wrap and label" program is another service the Company offers to its resellers. This gives them the option to receive individually packaged orders customized to meet the needs of specific end users. For example, when a reseller receives orders for several individual end users, the Company can group and wrap the items separately, identifying each specific end user, so that the reseller need only deliver the already individualized packages. Resellers like the "wrap and label" program because it eliminates the need to break down bulk shipments and repackage orders before delivering them to the end user.

Purchasing and Merchandising

As the largest wholesale business products distributor in North America, the Company qualifies for substantial volume allowances and can realize significant economies of scale. The Company obtains products from approximately 500 manufacturers and is a significant customer for most of them. In 2002, no supplier accounted for more than 22% of the Company's aggregate purchases. The Company's centralized Merchandising Department interviews and selects suppliers and products to be included in the catalogs. Selection is based upon end-user acceptance, demand for the product and the manufacturer's total service, price and product quality offering.

Competition

The Company competes with office products manufacturers and with other national, regional and specialty wholesalers of office products, office furniture, computer supplies and related items, and

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facility management supplies. In most cases, competition is based primarily upon net pricing, minimum order quantity and speed of delivery.

United occasionally competes with manufacturers, which may offer lower prices to resellers. The Company remains competitive by offering a combination of value-added services: 1) marketing and catalog programs, 2) speed of delivery, 3) broad line of business products from multiple manufacturers on a "one-stop shop" basis, and 4) lower minimum order quantities. Manufacturers typically sell their products through a variety of distribution channels, which includes wholesalers and resellers.

Competition with other wholesalers is based primarily on breadth of product lines, availability of products, speed of delivery to resellers, order fill rates, net pricing to resellers, and quality of marketing and other value-added services. Management believes it is competitive in each of these areas. Most wholesale distributors of office products have local and regional operations, sometimes with limited product lines, such as writing instruments or computer products. The Company's two major competitors are S.P. Richards (a division of Genuine Parts Co.), a national wholesaler of office products and Daisytek International Corporation, a wholesaler of computer consumables. In 2003, Daisytek also entered the traditional office products industry in two U.S. markets with a limited line of both products and services.

Increased competition in the office products industry, plus increased advertising by competing companies, have heightened price awareness among end users. As a result, purchasers of commodity office products have become more price sensitive. The Company has addressed this by emphasizing to resellers the continuing advantages of its value-added services and competitive strengths (compared with those of manufacturers and other wholesalers).

Segments

See Note 4 to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for additional information on the Company's operating segments and geographical areas.

Employees

As of March 24, 2003, the Company employed approximately 6,000 people.

Management considers its relations with employees to be good. Approximately 900 of the shipping, warehouse and maintenance employees at certain of the Company's Philadelphia, Baltimore, Los Angeles, Minneapolis and New York City facilities are covered by collective bargaining agreements. Agreements with employees in Baltimore and Minneapolis will expire in April 2003 and August 2003, respectively. The other agreements expire at various times during the next three years. The Company has not experienced any work stoppages during the past five years.

Availability of the Company's Reports

The Company's Internet Web site address is www.unitedstationers.com. The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments and exhibits to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through the Company's Web site as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.

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In addition, you may request a copy of these filings (excluding exhibits) at no cost by writing, telephoning or faxing the Investor Relations Department at the following address, telephone number or fax number:

ITEM 2. PROPERTIES

The Company considers its properties to be suitable and adequate for their intended uses. The Company continually evaluates its properties to achieve peak efficiency to maximize customer service and leverage potential economies of scale. Substantially all owned facilities are subject to liens under USSC's Senior Credit Facility (See "Liquidity and Capital Resources" caption herein included below). As of December 31, 2002, these properties consisted of the following:

Executive Offices.    The Company's office space in Illinois totals 183,800 square feet, including owned office space of 135,800 square feet in Des Plaines, leased office space of 25,000 square feet in Des Plaines, 23,000 square feet in Mt. Prospect. The Company owns approximately 48,000 square feet of office space in Orchard Park, New York. The Company's Canadian division leases approximately 17,000 square feet of office space in Montreal, Quebec. In addition, the Company leases approximately 22,000 square feet in Harahan, Louisiana and 6,000 square feet in Metarie, Louisiana.

Distribution Centers.    The Company utilizes approximately 11 million square feet of warehouse space in 35 business products distribution centers, 24 janitorial and sanitation supply distribution centers, two distribution centers that serve Canada and two distribution centers that serve Mexico. Of the 11 million square feet of distribution center space, 3 million square feet was owned and 8 million square feet was leased as of December 31, 2002. The Company considers each distribution center of equal importance to its overall operations and ability to serve its customers.

ITEM 3. LEGAL PROCEEDINGS

The Company is involved in legal proceedings arising in the ordinary course of its business. The Company is not involved in any legal proceeding that it believes will result, individually or in the aggregate, in a material adverse effect upon its financial condition or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth quarter of 2002.

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ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows:

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Executive officers are appointed by the Board of Directors. Except as required by individual employment agreements between executive officers and the Company, there exists no arrangement or understanding between any executive officer and any other person pursuant to which such executive officer was appointed. Each executive officer serves until his or her successor is appointed and qualifies or until his or her earlier removal or resignation.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Common and Preferred Stock

The Company's common stock is quoted through The NASDAQ Stock Market® ("NASDAQ") under the symbol USTR. The following table shows the high and low closing sale prices per share for the Company's common stock as reported by NASDAQ:

On March 19, 2003, there were approximately 796 holders of record of common stock.

During 2002, the Company purchased 1.4 million shares of its common stock at a cost of $38.3 million, compared with repurchases of 0.5 million shares at a cost of $12.4 million during 2001. For further information on the Company's stock repurchases, see Note 1 to the Consolidated Financial Statements.

Dividends

The Company's policy has been to reinvest earnings to fund future growth. Accordingly, the Company has not paid cash dividends and does not anticipate declaring cash dividends on its common stock in the foreseeable future. Furthermore, as a holding company, United's ability to pay cash dividends in the future depends upon the receipt of dividends or other payments from its operating subsidiary, USSC. In addition, the Company's debt agreements impose certain restrictions on the payment of dividends. For further information on the Company's debt agreements, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources" and Note 8 to the Consolidated Financial Statements.

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ITEM 6. SELECTED FINANCIAL DATA

        The selected consolidated financial data of the Company for the years ended December 31, 1998 through 2002 have been derived from the Consolidated Financial Statements of the Company, which have been audited by Ernst & Young LLP, independent auditors. The selected consolidated financial data below should be read in conjunction with, and is qualified in its entirety by, the Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements of the Company. Except for per share data, all amounts presented are in thousands:

(1)

In the first quarter of 2002, the Company reversed $2.4 million of the restructuring charge taken in the third quarter of 2001. In addition, the Company recorded restructuring and other charges of $8.9 million in the fourth quarter of 2002. See Note 3 to the Consolidated Financial Statements.

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(2)

In the third quarter of 2001, the Company recorded a restructuring charge of $47.6 million. See Note 3 to the Consolidated Financial Statements.

(3)

In 1998, the Company recognized a non-recurring charge of $13.9 million related to the write-off of the remaining payments and prepaid expense under a contract for computer services from a vendor.

(4)

During 2000, the Company recorded an after-tax loss of $6.5 million as a result of the early extinguishment of the Company's then outstanding 12.75% Senior Subordinated Notes. In conformity with new accounting provisions included in SFAS No. 145, the pre-tax loss of $10.7 million is included in "interest expense" with the related tax benefit of $4.2 million included in the "income tax expense" line item. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—New Accounting Pronouncements".

(5)

During 1998, the Company recorded an after-tax loss of $5.9 million as a result of the early extinguishment of a portion of a then outstanding term loan. In conformity with new accounting provisions included in SFAS No. 145, the pre-tax loss of $9.9 million is included in "interest expense" with the related tax benefit of $4.0 million included in the "income tax expense" line item. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—New Accounting Pronouncements".

(6)

Represents the loss on the sale of certain trade accounts receivable through the Company's Receivables Securitization Program and certain gains or losses on the sale of capital assets. For further information on the Company's Receivables Securitization Program, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Receivables Securitization Program".

(7)

Excludes $105.0 million in 2002, $125.0 million in 2001, $150.0 million in 2000 and $160.0 million each of 1999 and 1998 of certain trade accounts receivable sold through the Company's Receivables Securitization Program. For further information on the Company's Receivables Securitization Program, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Receivables Securitization Program".

(8)

For comparative purposes, the Company adjusted its Consolidated Balance Sheets for the years ended December 31, 2001, 2000, 1999, and 1998 to conform to the current year presentation of certain promotional incentives. This resulted in an increase to the previously reported total assets. See Note 2 to the Consolidated Financial Statements.

(9)

Total debt and capital leases include current maturities.

(10)

EBITDA is defined as earnings before interest, taxes, depreciation and amortization. EBITDA is calculated as income from operations plus depreciation and amortization. For example, in 2002 EBITDA totaled $149.0 million, which represents income from operations of $115.5 million plus depreciation and amortization of $33.5 million. EBITDA is commonly used by certain investors to analyze operating performance and to determine a company's ability to service and incur debt. EBITDA should not be considered in isolation from, or as a substitute for, measurements prepared in accordance with Generally Accepted Accounting Principles ("GAAP"). The most directly comparable financial measure calculated and presented in accordance with GAAP is income from operations.

(11)

EBITDA margin represents EBITDA as a percent of net sales. The most directly comparable financial measure calculated and presented in accordance with GAAP is income from operations as a percent of net sales.

(12)

Excludes amortization related to deferred financing costs, which is reported as a component of interest expense.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following Management's Discussion and Analysis and other parts of this Annual Report on Form 10-K contain "forward-looking statements", within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the 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 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 plans, 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,

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integrate acquired businesses and 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 its inventory purchase volumes or 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 the Company's gross margin; competitive activity and competitive pricing pressures; reliance on key management personnel; the impact of war and acts of terrorism; and economic conditions and changes affecting the business products industry and the general economy.

Readers should not place undue reliance on forward-looking statements contained in this Annual Report on Form 10-K. The forward-looking information herein 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 Consolidated Financial Statements and related notes appearing elsewhere in this Annual Report on Form 10-K.

Overview

The Consolidated Financial Statements represent United and its wholly owned subsidiary USSC and its subsidiaries, (collectively, the "Company"). The Company is the largest general line business products wholesaler in the United States, with 2002 net sales of $3.7 billion. 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 distribution centers in Mexico that serve computer supply resellers and two distribution centers that serve the Canadian marketplace. During the second quarter of 2002, the computer systems and product offerings of Azerty were integrated into USSC.

During 2000, the Company established TOP to operate as its third-party fulfillment provider for product categories beyond office products. To become a full service provider, 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 2001, the Company did not achieve the estimated revenue to support TOP's cost structure. As a result, the Company decided to significantly downsize TOP's operations. 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 to the operating expenses attributable to TOP 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 financial position or results of operations.

In 2002, the Company further downsized TOP's operations as part of the restructuring and other charges recorded in the fourth quarter of 2002 (see "Restructuring and Other Charges" below).

The Company is focused on leveraging its infrastructure across all business units to lower its operating expenses and increase cash flow. In addition, the Company continues to review its distribution network to determine the most productive and cost efficient organization, including the ability to reduce working capital requirements.

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Overview of Recent Results

Sales for 2003 through this filing date were up slightly compared with the same period last year. The Company continues to experience soft sales in all major product categories. The weak economy and high levels of unemployment continue to make substantial improvements in net sales challenging.

Restructuring and Other Charges

2002 Restructuring Plan

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 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 calls for all initiatives to be completed within approximately one year from the commitment date.

The restructuring plan includes workforce reductions of 105 associates. These positions primarily relate to TOP and the closure of the Milwaukee, Wisconsin distribution center. The associate groups affected by the restructuring plan include management personnel, inside and outside sales representatives, distribution workers, and hourly administrative staff. The restructuring plan calls for all initiatives to be completed within approximately one year from the commitment date.

As part of the 2001 Restructuring Plan, the Company accrued certain exit costs related to facilities that were closed as part of that restructuring plan. At that time, accrued exit costs were calculated using the most current information available about the Company's ability to sub-lease the closed facilities. Further deterioration in the real estate market for the type of facilities made available as a result of the 2001 Restructuring Plan has resulted in unexpected difficulties in subleasing these facilities. As a result, additional charges related to revised real estate sub-lease assumptions as compared to those used in the 2001 Restructuring Plan are included in the 2002 Restructuring Plan.

The further downsizing of TOP's operations includes termination of fulfillment contracts with third-party customers and the elimination of approximately 240,000 square feet of warehouse space.

Non-cash asset write-downs of $2.0 million relate to certain e-commerce-related investments. Based on substantial operating losses, management has determined that the value of these investments is permanently impaired. Therefore, the book value of these investments has been written-down.

Employment termination and severance costs relate to involuntary terminations and reflect cash termination payments to be paid to associates affected by the restructuring plan. Healthcare benefits and career transition services are included in the termination and severance costs. The restructuring plan allows associates to continue their participation in the Company's healthcare plan during the term of their severance.

Accrued exit costs are primarily contractual lease obligations that existed prior to December 31, 2002 for buildings and office equipment that the Company had used in its closed or downsized facilities.

During 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 include a pre-tax cash charge of $6.9 million and a $2.0 million non-cash charge.

As of December 31, 2002, the Company completed the closure of the Milwaukee distribution center and reduced the Company's overall workforce by 47 associates through an involuntary termination program. Implementation costs associated with this restructuring plan are not expected to be material.

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2001 Restructuring Plan Update

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 associates, primarily relating to TOP and call center operations), 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. As of December 31, 2002, the 2001 restructuring plan is complete. While the 2001 Restructuring Plan is complete, 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. The Company actively pursues opportunities to sublet unused facilities.

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).

As of December 31, 2002, the Company has closed 10 distribution centers and three USSC call centers, eliminated one administrative office, sold the TOP call center operations as described above, and made substantial progress in implementing its planned organizational restructuring and workforce reduction. As a result, the Company reduced its workforce by 1,375 associates through its voluntary and involuntary termination programs. The Company does not expect any further workforce reductions as a result of this restructuring plan.

As a result of the 2001 Restructuring Plan, the Company estimates it achieved approximately $25 million in cost savings during 2002. However, these cost savings were substantially offset by reduced leverage of fixed costs as a result of the decline in annual net sales.

Implementation costs were recognized as incurred and consisted of costs directly related to the realization of the restructuring plan. These costs included training, stay bonuses, consulting fees, costs to relocate inventory, and accelerated depreciation. Implementation costs incurred during 2002 and 2001 totaled $5.9 million and $2.2 million, respectively. Accumulated implementation costs incurred for the period September 30, 2001 through December 31, 2002 were $8.1 million. The Company does not expect any further implementation costs related to the 2001 Restructuring Plan. For further information on the Company's restructuring plans, see Note 3 to the Consolidated Financial Statements.

Critical Accounting Policies, Judgments and Estimates

The Company's significant accounting policies are more fully described in Note 2 of the Consolidated Financial Statements. As described in Note 2, the preparation of 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. Therefore, the determination of estimates requires the exercise of judgment. Actual results will inevitably differ from those estimates, and such differences may be material to the Company's financial results.

The Company's critical accounting policies are those that are important to portraying the Company's financial condition and results and require especially difficult, subjective or complex judgments or estimates by management. In most cases, critical accounting policies require management to make estimates on matters that are uncertain at the time the estimate is made. The basis for the estimates is historical experience, terms of existing contracts, observance of industry trends, information provided by

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customers or vendors, and information available from other outside sources, as appropriate. The most significant accounting estimates inherent in the preparation of the Company's financial statements include the following:

Revenue Recognition.    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.

Shipping and handling costs billed to customers are treated as revenues and recognized at the time products are shipped and title 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 are not netted against shipping and handling revenues.

Valuation of Accounts Receivable.    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.

Customer Rebates.    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 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. 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.    Manufacturers' allowances 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. Many of these allowances and incentives are estimated 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 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 are included in the Consolidated 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

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manufacturers' allowance rates) can make it difficult to reach some manufacturers' allowance growth hurdles. The remaining 40% to 45% represents promotional incentives, which are based on vendor participation in various Company advertising and marketing publications. These promotional incentives are recorded as a reduction to cost of goods sold over the life of the publication to reflect net advertising cost. The Company makes available to its customers the products offered in each publication throughout the life of the publication.

Self-Insurance.    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 potential claims incurred but not reported based on historical trends and certain assumptions about future events. During 2002, the Company had an annual aggregate maximum cap on employee medical benefits. In addition, the Company had both an individual per claim maximum loss and an annual aggregate maximum cap on workers' compensation claims.

Inventories.    Inventories constituting approximately 88% of total inventories at December 31, 2002 have 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. 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.

Pension and Postretirement Health Benefits.    Calculating the Company's obligations and expenses related to its pension and postretirement health benefits requires using certain actuarial assumptions. As more fully discussed in Notes 10 and 11 to the Consolidated Financial Statements, these actuarial assumptions include discount rates, expected long-term rates of return on plan assets, and rates of increase in compensation and healthcare costs. To select the appropriate actuarial assumptions, management relies on current market trends, historical information and consultation with and input from the Company's outside actuaries. Pension expense for 2002 was $5.0 million, compared to $1.4 million in 2001. A one percentage point decrease in the expected long-term rate of return on plan assets and the assumed discount rate would have resulted in an increase in pension expense for 2002 of approximately $1.8 million.

Costs associated with the Company's postretirement health benefits plan were $0.9 million and $0.8 million for 2002 and 2001, respectively. A one-percentage point decrease in the assumed discount rate would have resulted in incremental postretirement healthcare expenses for 2002 of approximately $0.1 million. Based on current rates of increase in medical costs, a one percentage point increase in the assumed average health care cost trend would not have a significant impact on the Company's postretirement health plan costs.

The following tables summarizes the Company's actuarial assumptions for discount rates, expected long-term rates of return on plan assets, and rates of increase in compensation and healthcare costs for the years ended December 31, 2002, 2001 and 2000:

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Results for the Years Ended December 31, 2002, 2001 and 2000

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

Comparison of Results for the Years Ended December 31, 2002 and 2001

Net Sales.    Net sales for the year ended December 31, 2002 were $3.7 billion, down 5.7%, compared with $3.9 billion in the prior year. Two primary factors led to the decline in net sales: approximately $150 million related to the integration of U.S. Office Products ("USOP") into the Corporate Express business model (in which a greater percentage of products are bought directly from manufacturers) and approximately $15 million related to the divestiture of the CallCenter Services, Inc. business. Additionally, continued pressure from macroeconomic factors and unemployment levels, especially for white-collar workers, negatively impacted sales across all product categories. The following table shows net sales by product category for 2002 and 2001 (dollars in millions):

Sales of traditional office products experienced a decline in the high single digits versus the prior year. Consumption of discretionary office products slowed within the commercial sector, particularly in medium-to-large companies affected by workforce reductions and systematic cost-reduction initiatives. In addition, the consolidation of USOP into Corporate Express was a major factor in the decline in sales in this product category.

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Sales in the computer consumables category experienced a decline in the mid-single digits versus the prior year due to the consolidation of Corporate Express and USOP, which resulted in an increasing percentage of USOP purchases being made through the internal Corporate Express distribution network.

Office furniture sales were down approximately 10%, compared with 2001. 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 facilities supplies product category, primarily distributed through the Company's Lagasse subsidiary, showed modest growth compared with the prior year. Lower levels of spending on higher-priced discretionary purchases weakened growth in this sector.

Gross Profit and Gross Margin Rate.    Gross profit (gross margin dollars) for 2002 was $538.0 million, or a gross margin rate of 14.5% (gross profit as a percentage of net sales), compared to $619.8 million, or a gross margin rate of 15.8% for 2001.

The decline in gross profit is primarily due to lower net sales. The Company's gross margin rate was negatively impacted by the continued shift in overall product sales mix, as well as within each major product category. The Company's customers continue to postpone higher margin, discretionary purchases, such as furniture, and order primarily lower margin, commodity business products essential for their companies. As a result of these trends, the file margin (invoice price less standard cost) rate declined approximately 1.2 percentage points versus last year. However, this was offset by a 0.7 percentage point decline in customer rebates. These rebates, which are based on customer purchase volume, payment terms and product mix, are down due to declining sales, as customers are not on track to reach certain product purchase or incremental growth milestones.

In addition, lower estimates of vendor allowances also adversely affected the Company's overall gross profit and margin rate due to lower inventory purchase volume. These allowances declined to $204 million from $241 million last year. The result is a 0.7 percentage point decline in the gross margin rate. This is indicative of the Company's continued lower inventory purchases as well as its continued focus on managing working capital.

Operating Expenses.    Operating expenses for 2002 totaled $422.5 million, or 11.4% of net sales, compared with $497.7 million, or 12.7% of net sales in 2001. Operating expenses for 2002 included restructuring and other charges of $8.9 million (for more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operation—2002 Restructuring Plan") and a partial reversal of the restructuring charge taken in the third quarter of 2001 of $2.4 million (for more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operation—2001 Restructuring Plan Update"). Operating expenses for 2001 included a restructuring charge of $47.6 million (for more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operation—2001 Restructuring Plan Update"). In addition, no goodwill impairment or amortization was recorded in 2002, compared with $5.7 million of goodwill amortization recorded in 2001.

Income from Operations.    Income from operations totaled $115.5 million, or 3.1% of net sales, compared with $122.1 million, or 3.1% of net sales in 2001.

Interest Expense.    Interest expense for 2002 was $16.9 million, or 0.5% of net sales, compared with $25.9 million, or 0.7% of net sales, in 2001. This reduction reflects lower borrowings as a result of the Company's reduction in working capital requirements and lower interest rates. Working capital reductions contributed to a decline of approximately $60 million in total debt during 2002 and a $20 million reduction in the amount of account receivables sold under the Company's Receivables Securitization Program.

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Interest Income.    Interest income for 2002 was $0.2 million, or less than 0.1% of net sales, compared with $2.1 million, or 0.1% of net sales, in 2001.

Other Expense, net.    Other expense for 2002 was $2.4 million, or 0.1% of net sales, compared with $4.6 million, or 0.1% of net sales in 2001. Other expense represents the costs associated with the sale of certain trade accounts receivable through the Receivables Securitization Program (as defined).

Income Taxes.    Income tax expense was $36.1 million in 2002, compared with $36.7 million in 2001. The Company's effective tax rate was 37.5% and 39.2% for 2002 and 2001, respectively. This change was primarily due to the accounting changes associated with the amortization of goodwill.

Net Income.    For 2002, the Company recorded net income of $60.2 million, or $1.78 per diluted share, compared with net income of $57.0 million, or $1.68 per diluted share, in 2001.

Fourth Quarter Results.    Certain expense and cost of sale estimates are recorded throughout the year, including inventory shrinkage and obsolescence, required LIFO reserve, manufacturers' allowances, advertising costs and various expense items. During the fourth quarter of 2002, the Company recorded a favorable net income adjustment of approximately $0.7 million related to the refinement of estimates recorded in the prior three quarters.

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

Net Sales.    Net sales were flat at $3.9 billion for 2001 and 2000. The lower sales in the categories of traditional office products and furniture were offset by growth in janitorial and sanitation products and computer consumables, both of which were supported by acquisitions in 2000 and 2001. There were several factors that contributed to flat sales. First, sales volume to Corporate Express Inc. and US Office Products ("USOP") declined by approximately $100 million. This is primarily due to the integration of USOP into the Corporate Express business model. Second, at the end of July 2001, the Company completed the sale of the Positive ID business unit. This sale reduced sales growth for the year by approximately 1%. Finally, a worsening macroeconomic environment negatively impacted all product categories.

Office furniture sales declined by mid-single-digits, compared with the prior year. These results continue to reflect slowing consumer demand and weak macroeconomic conditions. While the current economic environment presents challenges, the Company sees an opportunity for sales growth as dealers shift their inventory investment to wholesalers to limit their working capital requirements. Furthermore, in a weak economy consumers tend to shift their demand toward the mid-priced furniture lines offered by the Company. However, the Company is challenged by the excess supply of premium grade furniture available in the marketplace due to the failure of Internet and other companies. Typical purchasers of mid-grade furniture are purchasing used premium grade furniture at extremely attractive prices.

The janitorial and sanitation product category achieved a 31% growth rate, compared with the prior year. This growth was primarily achieved through the acquisition of Peerless Paper Mills, Inc. This product category is primarily distributed through the Lagasse operating unit, which achieved high single-digit growth with its existing customer base.

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

Gross Profit and Gross Margin Rate.    Gross margin in 2001 was $619.8 million, or 15.8% of net sales, compared with $643.8 million, or 16.3% of net sales, in 2000. The gross margin rate decline was due to lower pricing margin (invoice price less standard cost) of 1.3 percentage points, which resulted from a product mix shift toward computer consumables partially offset by incremental vendor allowances of 0.5 percentage points and combined lower inventory shrinkage and distressed inventory losses of

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0.2 percentage points. Approximately 55% of the Company's vendor rebates are variable and are directly linked to achieving certain purchase volume hurdles. During 2001, inventory purchase levels declined significantly as evidenced by the Company's lower working capital requirements. The manufacturers' allowance increase as a percentage of net sales resulted from a change in product mix and the impact of new vendor agreements.

Operating Expenses.    Operating expenses for 2001 were $497.7 million, or 12.7% of net sales, compared with $441.3 million, or 11.2% of net sales, in the prior year. The increase in operating expenses is partially due to the $47.6 million restructuring charge (for more information, see "Management's Discussion and Analysis of Financial Condition and Results of Operation—2001 Restructuring Plan Update"), which resulted in a 1.2 percentage point increase to the operating expense ratio. The increase is also a result of investments in TOP, the company's third-party fulfillment business. Operating expenses for 2001 and 2000 related TOP totaled $32.9 million and $9.0 million respectively, resulting in a 0.8 percentage point and a 0.2 percentage point increase in the operating expense ratio.

Income from Operations.    Income from operations was $122.1 million, or 3.1% of net sales, compared with $202.5 million, or 5.1% of net sales in 2000.

Interest Expense.    Interest expense for 2001 was $25.9 million, or 0.7% of net sales, compared with $40.9 million, or 1.0% of net sales, in 2000. This reduction reflects the interest expense savings related to the redemption of the 12.75% Notes (as defined) as well as lower interest rates on variable rate debt. In addition, during 2000, the Company recognized a $10.7 million interest charge related to the early extinguishment of the Company's then outstanding 12.75% Notes.

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

Other Expense, net.    Other expense for 2001 was $4.6 million, or 0.1% of net sales, compared with $11.2 million, or 0.3% of net sales in 2000. This expense primarily represents the costs associated with the sale of certain trade accounts receivable through the Receivables Securitization Program (as defined) partially offset by a gain on the sale of fixed assets of $2.4 million.

Income Taxes.    Income tax expense as a percent of net sales was 0.9% in 2001 and 1.6% in 2000. The effective tax rate declined to 39.2% in 2001 from 39.9% in 2000. This was due to a change in the mix of pre-tax earnings between states.

Net Income.    Net income for 2001 was $57.0 million, or $1.68 per diluted share, compared with $92.2 million, or $2.65 per diluted share, in 2000.

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

Liquidity and Capital Resources

General

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.

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During 2002, the Company utilized cash flow to reduce debt and accounts receivable sold, to fund capital expenditures and to repurchase shares of its stock. The Company reduced total debt and accounts receivable sold by $80.5 million during 2002. At December 31, 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 36%, compared to 42% at December 31, 2001.

Funding for net capital expenditures (gross capital expenditures minus net proceeds from property, plant and equipment dispositions) was $23.0 million for 2002, compared to $28.6 million during 2001. Capitalized software expenditures totaled $5.2 million and $7.0 million during 2002 and 2001, respectively. Net capital spending (net capital expenditures plus capitalized software expenditures) was $28.2 million and $35.6 million for 2002 and 2001, 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 $30 million.

During 2002, the Company purchased 1.4 million shares of its common stock at a cost of $38.3 million, compared with repurchases of 0.5 million shares at a cost of $12.4 million during 2001. Further information regarding the Company's stock repurchases is discussed in Note 1 to the Consolidated Financial Statements.

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 December 31, 2002, is summarized below:

Restrictive covenants under the Credit Agreement (as defined below) separately limit total available financing at points in time, as further discussed below. At December 31, 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 $451 million, or $150 million less than the $601 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.

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The Company's outstanding debt and liquidity sources consisted of the following amounts (dollars in thousands):

(1)

See discussion under Receivables Securitization Program

Disclosures About Contractual Obligations and Commercial Commitments

The following table aggregates all contractual commitments and commercial obligations that affect financial condition and liquidity as of December 31, 2002 (dollars in thousands):

(1)

On March 21, 2003, the Company replaced its existing senior credit facility. In addition, the Company announced on March 28, 2003, its intention to redeem all outstanding notes under the 8.375% Notes Indenture. For more information, see "New Credit Agreement" and "8.375% Senior Subordinated Notes" described below.

Credit Agreement

At December 31, 2002, the Company had a senior secured credit facility dated April 3, 1998. 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 December 31, 2002, the aggregate principal amount of debt outstanding under the Term Loan Facilities included $96.4 million of term loan borrowings. This consisted of $18.3 million under the Tranche A Term Loan Facility and $78.1 million under the Tranche A-1 Term Loan Facility. Amounts outstanding under the Tranche A Term Loan Facility were scheduled to be repaid in five quarterly

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installments of $3.7 million. Amounts outstanding under the Tranche A-1 Term Loan Facility were scheduled to be repaid in 10 quarterly installments of $7.8 million.

The Credit Agreement was limited by its terms to $250.0 million in aggregate principal amount, less the aggregate amount of outstanding letters of credit obligations under the facility. The Revolving Credit Facility was scheduled to mature on March 31, 2004. As of December 31, 2002, the Company had $229.8 million available under its Revolving Credit Facility after deducting certain outstanding letter-of-credit obligations of $20.2 million. Availability was effectively further reduced based on limitations imposed by financial covenants under the Credit Agreement.

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

As collateral security for the obligations of USSC and the Affiliated Guarantors, security interests and liens were 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 (as defined). These obligations were secured by first priority pledges of all of the outstanding stock of USSC and its domestic direct and indirect subsidiaries, including Lagasse and Azerty but excluding TOP, as well as a portion of the stock of identified foreign direct and indirect subsidiaries of USSC excluding the Receivables Company.

The Credit Agreement contained representations and warranties, affirmative and negative covenants, and events of default customary for financing of this type. The Company was in compliance at December 31, 2002 with the covenants contained in the Credit Agreement.

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

New Credit Agreement

On March 21, 2003, the Company replaced its existing senior secured credit facility 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 $325.0 million. As a result of the replacement of the Credit Agreement (described above), the Company will record a charge of approximately $0.9 million in the first 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 $90.0 million. It also provides a sublimit for swingline loans in an aggregate principal amount not to exceed $25.0 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.

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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, 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, 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.

8.375% Senior Subordinated Notes and Other Debt

The 8.375% Senior Subordinated Notes ("8.375% Notes" or the "Notes") were issued on April 15, 1998, pursuant to the 8.375% Notes Indenture. As of December 31, 2002, the aggregate outstanding principal amount of 8.375% Notes was $100.0 million. The Notes are unsecured senior subordinated obligations of USSC, and payment of the 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 Notes are redeemable on April 15, 2003, in whole or in part, at a redemption price of 104.188% (percentage of principal amount). The 8.375% Notes mature on April 15, 2008, and bear interest at the rate of 8.375% per annum, payable semi-annually on April 15 and October 15 of each year.

On March 28, 2003, the trustee for the Company's Notes sent notice at the Company's request to the holders of the Notes of its intention to redeem $100.0 million principal amount of the Notes at the redemption price of 104.188% of the principal amount thereof, plus accrued and unpaid interest to the date of redemption. The redemption is expected to be completed on April 28, 2003 and, as a result of the redemption, no Notes will be outstanding after such date. As a result of the redemption, the Company expects to record charges of approximately $4.2 million relating to the redemption premium and $1.8 million for the write-off of deferred financing costs in the second quarter of 2003. The redemption price will be funded primarily through the sale of accounts receivable under the Company's Receivables Securitization Program and borrowings under USSC's New Credit Agreement described above.

In addition, as of December 31, 2002, the Company had $14.8 million of industrial development bonds outstanding. On March 12, 2003, the Company pre-paid $8.0 million to retire one of the outstanding industrial development bonds. As of this filing, the Company has one industrial development bond outstanding with a balance of $6.8 million.

Receivables Securitization Program

General

As part of the Company's overall financing strategies, it utilized a standard third-party receivables securitization program (the "Receivables Securitization Program") to provide low-cost funding. Under this $163.0 million program, the Company sold, on a revolving basis, its eligible trade accounts

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receivable (except for certain excluded accounts receivable, which initially included all accounts receivable from Lagasse and the Company's foreign subsidiaries) to the Receivables Company, a wholly owned offshore, bankruptcy-remote special purpose limited liability company. This company in turn ultimately transferred the eligible trade accounts receivable to a trust, for which the trustee was JPMorgan Chase Bank. The trustee then sold investment certificates to third-party investors, which were backed by the accounts receivable owned by the trust. As a result of the short average collection cycle referred to below, proceeds from the collections under this revolving agreement were $3.1 billion for 2002 and $2.8 billion for 2001. Affiliates of PNC Bank and JPMorgan Chase acted as funding agents. The funding agents, together with other commercial banks rated at least A-1/P-1, provided 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 required the Receivables Company to comply with certain affirmative and negative covenants customary for facilities of this type, including, 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 acted as the servicer of the accounts receivable on behalf of the trustee, for which it received a fee, and was 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 accounts receivable included not only those eligible trade accounts receivable that existed on the closing date of the Receivables Securitization Program, but also eligible trade accounts receivable created thereafter. In the ordinary course, the Receivables Company used 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 failed to satisfy certain standards, the trustee could retain the collections on the accounts receivable held by the trust and would use such collections to repay amounts owed to the trust by the Receivables Company. Upon the occurrence of such an event, USSC would have ceased selling its trade accounts receivable into the Receivables Securitization Program.

On March 28, 2003, USSC replaced its Receivables Securitization Program (defined above) with a third-party receivables securitization program with Bank One, NA, as trustee (the "New Receivables Securitization Program"). The maximum funding from the program at any one time increased from $160 million under the former program to $225 million under the new program. Under this program, USSC sells, on a revolving basis, its eligible trade accounts receivable (except for certain excluded accounts receivable, which initially includes all accounts receivable from 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.

Financial Statement Presentation

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 Consolidated Financial Statements. For the years ended December 31, 2002 and 2001, the Company had decided to sell $105 million and $125 million of trade accounts receivable, respectively. Accordingly, trade accounts receivable of $105 million in 2002, and $125 million in 2001 are excluded from the

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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 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 2002 ranged between 1.5% and 2.1% annually. Losses recognized on the sale of accounts receivable totaled approximately $1.9 million and $7.0 million in 2002 and 2001, respectively. Proceeds from the collections under this revolving agreement were $3.1 billion and $2.8 billion in 2002 and 2001, respectively. All costs and/or losses related to the Receivables Securitization Program are included in the 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.

Retained Interest

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 retained interest on $298.7 million and $244.8 million of trade receivables in the master trust as of December 31, 2002 and 2001 was $191.6 million and $117.6 million, respectively. The Company's retained interest in the master trust is included in the 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 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 our financial position or results of operations. No accounts receivable sold to the master trust were written off during 2002 or 2001.

Cash Flow Information

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

Net cash provided by operating activities for the year ended December 31, 2002 reached $105.7 million, including $60.2 million in net income, $34.7 million in depreciation and amortization, $5.6 million in

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deferred income taxes, a $0.1 million decline in accounts receivable, an $8.6 million decline in inventory, a $3.7 million increase in deferred credits, a $4.1 million increase in other liabilities and $4.0 million related to losses on the sale of assets and write-down of certain investments partially offset by a $2.5 million decline in accounts payable, a $9.4 million increase in other assets and a $3.5 million decline in accrued liabilities. Net cash provided by operating activities was $191.2 million for the year ended December 31, 2001. This was primarily the result of a $105.0 million decline in inventory, $57.0 million in net income, depreciation and amortization of $39.9 million, a $16.2 million decline in accounts receivable, a $20.1 million increase in accrued liabilities, and a $9.4 million increase in other liabilities partially offset by a $52.2 million decline in accounts payable and a $13.0 million increase in other assets. Net cash provided by operating activities was $38.7 million for the year ended December 31, 2000. This was primarily due to net income of $92.2 million, an increase in accounts payable of $46.4 million, and $32.9 million of depreciation and amortization, partially offset by $73.9 million increase in inventory, a $52.9 million increase in accounts receivable and a $15.0 million increase in other assets.

Net cash used in investing activities for the year ended December 31, 2002 was $23.0 million, including $27.2 million of capital expenditures partially offset by $1.3 million in proceeds received from the sale of the Salisbury, Maryland portion of the CallCenters, Inc. and $2.9 million in proceeds from the disposition of property, plant and equipment. Net cash used in investing activities for the year ended December 31, 2001 was $46.3 million, which includes $32.7 million for the acquisition of Peerless Paper Mills, Inc., and $32.5 million for capital expenditures partially offset by $14.9 million of proceeds from the sale of Positive ID and $3.9 million in proceeds from the disposition of property, plant and equipment. Net cash used in investing activities for the year ended December 31, 2000 was $83.5 million, including capital expenditures of $43.6 million and business acquisitions of $44.2 million partially offset by $4.3 million of proceeds from disposition of property, plant and equipment.

Net cash used in financing activities for the year ended December 31, 2002 was $93.9 million, including $60.5 million in repayments on debt, $38.3 million for acquisition of treasury stock partially offset by $5.5 in proceeds from the issuance of treasury stock. Net cash used in financing activities for the year ended December 31, 2001 reached $135.8 million, including a $98.0 million repayment under the Revolving Credit Facility, $40.2 million Term Loan repayment and $12.4 million related to the acquisition of treasury stock partially offset by $15.8 million in proceeds from the issuance of treasury stock. Net cash provided by financing activities for the year ended December 31, 2000 was $45.7 million, including $150.0 million of Term Loan borrowings and $45.0 million of net borrowings under the Revolving Credit Facility partially offset by $128.5 million of Term Loan retirements and principal payments and $22.4 million related to the acquisition of treasury stock.

Seasonality

The Company's sales generally are relatively steady throughout the year. However, sales vary to the extent of seasonal buying patterns of consumers of office products. In particular, the Company's sales usually are higher than average during January, when many businesses begin operating under new annual budgets.

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

Inflation/Deflation and Changing Prices

The Company maintains substantial inventories to accommodate the prompt service and delivery requirements of its customers. Accordingly, the Company purchases its products on a regular basis in an effort to maintain its inventory at levels that it believes are sufficient to satisfy the anticipated needs of

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its customers, based upon historical buying practices and market conditions. Although the Company historically has been able to pass through manufacturers' price increases to its customers on a timely basis, competitive conditions will influence how much of future price increases can be passed on to the Company's customers. Conversely, when manufacturers' prices decline, lower sales prices could result in lower margins as the Company sells existing inventory. As a result, changes in the prices paid by the Company for its products could have a material adverse effect on the Company's net sales, gross margins and net income.

New Accounting Pronouncements

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. As a result, the Company does not believe adoption of FIN No. 46 will 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. Based on current circumstances, the Company does not believe adoption of FIN No. 45 will have a material impact on its financial position or results of operations.

In November 2002, the FASB's Emerging Issues Task Force ("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 manufacturers' allowances and promotional incentives. These promotional incentives are recorded as a reduction to cost of goods sold to reflect the net inventory purchase cost. The Company is currently evaluating whether EITF No. 02-16 will have an 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.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which is effective for disposal activities initiated after December 31, 2002. SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee

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Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 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 SFAS No. 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. SFAS No. 145 requires gains and losses from extinguishment of debt to be presented as a gain or loss from continuing operations rather than as an extraordinary item. SFAS No. 145 also amends SFAS No. 13, which requires that certain capital lease modifications be treated as a sale-leaseback transaction. As a result of the adoption of SFAS No. 145, the Company modified its income statement presentation of the previously reported loss due to extinguishment of debt taken during the year ended December 31, 2000. The loss of $10.7 million is reported in conformity with SFAS No. 145 in interest expense (pre-tax) with the offsetting $4.2 million tax benefit included in the income taxes line item.

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. SFAS No. 143 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 No. 143 on January 1, 2003 and, based on current circumstances, does not believe that the impact of adopting SFAS No. 143 will have a material impact on its financial position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

The Company's exposure to interest rate risks is principally limited to the Company's outstanding long-term debt at December 31, 2002, of $211.2 million, $105.0 million of receivables sold under the Receivables Securitization Program, whose discount rate varies with market interest rates ("Receivables Exposure") and the Company's retained interest in the master trust (as defined above).

The Company utilizes both fixed rate and variable rate debt. Approximately 32% of the outstanding debt and Receivables Exposure is priced at interest rates that are fixed. The Company's variable rate debt is based primarily on the applicable prime or LIBOR rate. A 50 basis point movement in interest rates would result in an annualized increase or decrease of approximately $1.1 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's retained interest is recorded at fair value. 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.

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Foreign Currency Exchange Rate Risk

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF MANAGEMENT

The management of United Stationers Inc. is primarily responsible for the information and representations contained in this Annual Report on Form 10-K. The Consolidated Financial Statements and related Notes are prepared in accordance with accounting principles generally accepted in the United States and include amounts that are based on management's best judgments and estimates. The other financial information included in this Annual Report is consistent with that in the Consolidated Financial Statements.

In meeting its responsibility for the reliability of the Consolidated Financial Statements, the Company depends on its system of internal accounting control. The system is designed to provide reasonable, but not absolute, assurance that assets are safeguarded and that transactions are properly recorded and executed in accordance with management's authorization. It is management's opinion that its system of internal controls was effective in providing reasonable assurance that its financial statements are free of material misstatement. In addition, the system is augmented by written policies and an internal audit department.

The Audit Committee of the Board of Directors, comprised solely of directors who are not officers or employees, meets regularly with management, with the Company's internal auditors, and with its independent auditors to discuss their evaluation of internal accounting controls and the quality of financial reporting. The independent auditors and the internal auditors have free access to the Audit Committee, without management's presence.

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REPORT OF INDEPENDENT AUDITORS

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

We have audited the accompanying consolidated balance sheets of United Stationers Inc. and subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audit also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of United Stationers Inc. and Subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note 2 to the Consolidated Financial Statements, in 2002 the Company changed its method of accounting for goodwill.

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UNITED STATIONERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)

See notes to consolidated financial statements.

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UNITED STATIONERS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)

See notes to consolidated financial statements.

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UNITED STATIONERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(dollars in thousands, except share data)

See notes to consolidated financial statements.

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UNITED STATIONERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)