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  1. 1. 2000 Annual Report We DELIVER Customer Satisfaction
  2. 2. UNITED DELIVERS CUSTOMER SATISFACTION United Stationers Inc. is North America’s largest distributor of business products to resellers and a provider of marketing and logistics services. By asking “If I were the customer…,” United has built an organization devoted to satisfying its 20,000 reseller customers and their end consumers. Contents Stockholders’ Letter 2 ............................ Strengthening Our Competitive Position 5 ................ Expanding into Non-Office Products Fulfillment 9 ............ Management’s Discussion and Analysis 12 ................ Selected Consolidated Financial Data 20 ................ Quarterly Financial and Stock Price Data 22 .............. Report of Management/ Report of Independent Auditors 23 .................... Consolidated Financial Statements 24 .................. Notes to Consolidated Financial Statements 30 .............. Directors and Officers/ Inside Stockholder Information Back Cover ....................
  3. 3. Capturing Growth Opportunities Product Lines or Services Offered Strengths Growth Strategies • General office and computer supplies and accessories • North America’s leading just-in-time distributor Build share in this $85 billion market by: Traditional of business products to resellers • Filing and record storage products • Focusing on operational excellence Office Products • Offers more than 25,000 products • Business machines and audio-visual equipment • Expanding value-added services • Network of 39 regional distribution centers across • Office furniture • Improving its cost position North America • Handling a greater share of manufacturers’ • Ability to reach nearly every reseller or consumer shipments in the U.S. on the same day or overnight • Increasing penetration among current resellers • 98% order fill rate, 99.5% order accuracy rate, and • Attracting new types of resellers 99% on-time delivery rate • Continuing geographic expansion • The largest and most popular General Line Catalog in the industry: more than 6 million copies distributed • Making acquisitions in 2000 • Expanding product categories • Unmatched value-added services • National presence in Canada, with three distribution centers and a bilingual customer service facility • Janitorial and sanitation supplies • One of North America’s leading wholesale sources Increase its share in this $18 billion market through: Janitorial and of janitorial and sanitation maintenance products • Paper products • Greater penetration among current resellers Sanitation • Offers more than 7,000 items via product and service expansion • Safety and health care products • Network of 28 regional distribution centers • Handling larger share of manufacturers’ shipments • Packaging supplies across the U.S. • Developing new reseller relationships across • Industrial maintenance products • Annual growth exceeding 25% per year, every year both new and existing channels • Food service disposables since acquired by United in 1996 • Continuing geographic expansion via new facilities • Distributes industry-leading catalog and/or acquisitions • Expanding e-commerce capabilities • North America’s largest specialty distributor Expand share within this $30 billion market by: • Computer consumables • Computer accessories Computer Consumables of office technology consumables and peripherals and supplies • Handling a greater share of manufacturers’ • Digital imaging • Offers more than 10,000 products shipments • Printers, scanners, fax • Professional graphics machines, and all-in-ones • Network of six regional distribution centers • Increasing penetration of new • Bar code and in the U.S. and Mexico that provide next-day delivery customer markets • Peripherals point-of-sale products • Increasing penetration among current resellers • Attracting new types of resellers • Continuing geographic expansion • Making strategic acquisitions • Continuing to expand product offering • Using the Internet to improve efficiencies and become the partner of choice Customer Relationship Management (CRM) • Offers full set of third-party services, including • Capitalizes on United’s distribution scale, logistics Penetrate the $18 billion market for third-party expertise and technology service-fee revenue by: distribution, fulfillment and customer relationship and Fulfillment Services management (CRM) strategies—such as call center • Provides seamless, reliable service from a single source • Leveraging a solid infrastructure and refining services, data mining and warehousing, and marketing its CRM tools • Can handle a wide variety of product categories, campaigns, which integrate with traditional and sizes and weights • Marketing its services to a broad audience e-commerce business models including manufacturers, “clicks and mortar” retailers • Measures customer satisfaction and is accountable and direct marketers for performance • Utilizes robust, scaleable, flexible systems • Call center complemented by CRM technology • Provides a total back-end solution to traditional and Web-based manufacturers and retailers, service companies and resellers
  4. 4. Financial Highlights UNITED STATIONERS INC. AND SUBSIDIARIES (dollars in thousands, except per share data) Income Statement Data for the Years Ended Dec. 31, 2000 Dec. 31, 1999 $ 3,944,862 Net sales . . . . . . . . . . . . . . . . . . . . $ 3,442,696 202,546 Income from operations . . . . . . . . . . . . . . 182,194 164,116 Income before income taxes and extraordinary item . . . . 143,567 92,167 Net income . . . . . . . . . . . . . . . . . . . . 83,409 2.65 Net income per common share — assuming dilution . . . . 2.37 34,775 Average number of common shares (in thousands) . . . . 35,208 Operating Results Before Extraordinary Charge 1 $ 98,643 Income before extraordinary item .......... $ 83,409 Income before extraordinary item 2.84 per common share — assuming dilution . . . . . . . . 2.37 Balance Sheet Data at Year End $ 495,456 Working capital . . . . . . . . . . . . . . . . . . $ 415,548 1,447,027 Total assets . . . . . . . . . . . . . . . . . . . . 1,279,903 427,127 Long-term obligations (including current maturities) . . . . 355,552 478,439 Stockholders’ equity . . . . . . . . . . . . . . . . 406,009 1. Second quarter 2000 results included an extraordinary charge of $10.7 million ($6.5 million net of tax benefit of $4.2 million) related to the early retirement of debt. Net Income per Share Operating Income Net Sales Operating income grew 11.2% despite a tight The 14.6% increase in sales for 2000 gave Net income continued to outpace United’s labor market and investments in developing the United a 14.1% four-year compound annual goal of 15% annual growth, for a four-year fulfillment business. This gave the company a growth rate (CAGR). CAGR of 29.5%. 15.7% four-year CAGR. DOLLARS IN BILLIONS DOLLARS IN MILLIONS DOLLARS PER SHARE $2.84 $ 203 $3.9 $182 $3.4 $2.37 $169 $3.1 $2.00 $135 $2.6 $2.3 $113 $1.47 $1.01 972 982 002 96 99 96 972 982 97 98 99 00 96 99 00 1 2.Excluding non-recurring charges
  5. 5. To Our Stockholders Strong Balance Sheet Our interest expense was favorably affected by the interest rate spread between the revolving line of credit and the 12.75% bonds we redeemed in May (financed through our senior United ended 2000 with its 19th consecutive credit facility). However, this was partially quarter of record sales and earnings. This was offset by higher interest rates and funding possible because our channel partners were requirements for the July 2000 acquisitions of drawn to United’s ability to deliver customer Azerty/United Canada and CallCenter Services, satisfaction. However, the real story is that which increased total debt to $559.9 million, we achieved these results in the face of strong up 12.7%. Despite the acquisitions, our debt-to- growth in 1999—while investing in other total book capitalization of 53.9% improved opportunities for even greater expansion. when compared with 1999’s 55.0%, and is well Fourth Straight Year within our target range of 50-60%. of Record Performance Capital spending for the core business Net sales rose 14.6% to $3.9 billion. Approx- during the year was $26.0 million, compared imately 12% came from organic growth, with 1999’s $21.3 million. In addition, we exceeding our 6-9% goal. The balance spent about $13.0 million to develop The Order resulted from our Azerty/United Canada People, bringing our total capital expenditures and CallCenter Services acquisitions. for 2000 to $39.0 million. We saw strong performance across all product categories and Our financial strength geographies, led by office furniture (up 16%) comes from a company-wide and janitorial/sanitation focus on serving customers (up 26%). As expected, our 16.3% gross margin was down slightly from 1999’s Expressing Our Confidence in United’s Growth 16.4%. This reflects the higher amount of business we are doing in two lower margin Our ongoing challenge with investors is to com- areas—computer consumables and national municate 1) the role United plays in bringing accounts business —although both have a efficiency to the business products supply chain, lower cost-to-serve. Operating expenses as and 2) how we leverage our distribution a percent of sales were 11.2% compared with competencies to grow and capitalize on new Randall W. Larrimore, 11.1% in the prior year. Operating income market opportunities. We often are incorrectly President and also increased 11.1% to $202.5 million. perceived only as a “traditional wholesaler,” Chief Executive Officer These numbers are even more impressive which ships full cases of merchandise to resellers when you consider that nearly $9.0 million in so they can restock their inventory. This operating expenses were used to build our third- misperception creates some concern United party fulfillment business, The Order People. could be “bypassed” in the supply chain. 2
  6. 6. In reality, we are an integral part of our technology strategist to help guide United’s customer’s supply chain. Our role is to be an e-commerce initiatives. extension of our customers’ warehouses, Our 20,000 reseller providing same-day order turnaround so they can deliver their customers’ customers have made us an orders the next day. We pick indi- vidual end-consumer orders for our industry leader resellers, or drop ship them on behalf of the reseller directly to the end consumer. We are a just-in-time distributor of business products to Turning Growth Opportunities into a Reality resellers, as well as a provider of marketing and Our strategic goal is to be a world-class logistics logistics fulfillment services. and fulfillment expert, providing a complete We continue to take our story to investors— suite of back-end services to office products both in one-on-one meetings and at industry resellers, manufacturers, and resellers of other conferences—and believe in our bright, long- products. To achieve this, we began looking at term future. That’s why we are willing to invest our company not as just a distributor of office in our own stock. In the fourth quarter, the products, but as fulfillment experts. This view board authorized a $50 million stock repurchase reveals opportunities to expand our traditional program. During the year, we bought nearly business and build a non-office products third- 1.0 million shares, at an average price of just party services operation. under $26.00 per share. At year-end, we had We took a number of steps in 2000 to make 33.4 million shares outstanding. We see value 2000 Revenues these growth opportunities a reality. (Details by Product Line in our shares and will, from time-to-time, on how the growth strategies are being imple- continue our repurchase program. And our While office supplies mented can be found in the Operations Review commitment to investor education is ongoing. remain United’s largest following this letter.) Here are the highlights. product category, Strengthening janitorial/sanitation United’s Leadership Increase the Geographic Penetration and office furniture of our Traditional Businesses In addition to Ilene Gordon, President of were the fastest growing categories in 2000. We accomplished this in a number of ways: Pechiney Plastic Packaging, who joined our • Added distribution facilities at United board in January 2000, United’s leadership Stationers Supply Co. and Lagasse— Office Supplies was strengthened with the addition of two other 35% Computer We moved from four less efficient professionals during the year. Eileen Kamerick Consumables 33% facilities into three new state-of- became Executive Vice President and Chief the-art distribution centers and Financial Officer in October 2000. She came opened two new centers. to us from BP Amoco plc where she was • Acquisition broadens Lagasse’s reach— Vice President/Finance, the Americas, and Just after the end of the year, we Vice President and Chief Financial Officer Business Machines Office Furniture completed the acquisition of Peerless, BPAmerica. Eileen has extensive experience & Audio-Visual 10% 13% another wholesaler within the janitorial/ in acquisition evaluation, SEC reporting, Janitorial & Sanitation 9% sanitation industry. This added a total of international expansion, and banking 400,000 additional square feet of distribution relationships. Alex Zoghlin, Chief Technology capacity at six locations, and will help Officer at Orbitz, joined our board in November increase our penetration in the Northeast 2000. Alex will draw on his background as an and Midwest facility supply markets. innovator, a successful leader and an astute 3
  7. 7. We are continuously seeking ways to improve our operational third-party fulfillment business needs. and financial performance It also provides us with two cutting-edge facilities —in Salisbury, Maryland and Wilkes-Barre, Pennsylvania. • Increased geographic penetration in Canada— Outlook for 2001 We purchased a computer consumables All of our operations were performing well operation in Canada during July 2000 and as we entered the new year. We are making renamed it Azerty/United Canada. This investments in infrastructure and in our business has $115 million (US) in annual associates to keep operating at the high level we sales and has served the Canadian need to succeed in our business. We are building marketplace for 10 years. We intend to new growth platforms, such as non-office leverage Azerty/United Canada’s customer products fulfillment through The Order People, base by offering these companies United and expanding our product lines and customer Stationers Supply Co.’s office products, giving base through the Peerless acquisition. We have us scale and growth opportunities. the financial strength to fund this additional Expand the Office Products growth. As a result, we have a positive outlook E-Commerce Business for the year, even though we are realistic about In 2000, we expanded two programs already the type of challenge 2001 is likely to bring— in place. We offered our product lines to non- especially in the first half. Eileen Kamerick joined traditional office products resellers involved United Stationers We can meet this challenge because in e-commerce and helped our traditional as Executive Vice President United’s commitment to delighting customers and CFO in October 2000. resellers increase their presence on the Web. is enthusiastically embraced by associates at Develop Non-Office Products all levels. Their outstanding efforts in 2000 Fulfillment Operation fueled our growth and built even stronger In July 2000, we formed The Order People relationships between United and its manufac- as a subsidiary to reach this market. We believe turers and resellers. We believe our focus on third-party fulfillment and CRM (customer providing superior customer service will help relationship management) represents one us continue to increase shareholder value for of United’s best opportunities for growth. many years to come. The Order People allows United to leverage its core competencies of picking, packing and shipping office products into providing the same services for other types of products. In addition, we made an acquisition to support the new operation. CallCenter Services, purchased in July 2000, has $20+ million in Randall W. Larrimore annual service fee revenues. It gives The Order President and Chief Executive Officer People the in-bound call center capabilities a March 15, 2001 4
  10. 10. Operations Review Manufacturers also want to focus on their Strengthening Our Competitive Position core competencies —designing and making How do we strengthen our competitive products. They, too, want to remove extraneous position when we are already the largest operations and costs. business products provider in North America? The functions these companies want to Our philosophy is to add so much value— outsource are United’s core business. Our from broad product lines to nationwide expertise, combined with a focus on delivering distribution to marketing support— for our customer satisfaction, makes us a compelling manufacturers and resellers that we become channel partner for manufacturers and an integral part of how they go to market. resellers— and gives us great opportunities In 2000, the office Each year we find new ways to products industry increase our value as a business partner niches we serve generated nearly for manufacturers and resellers $130 billion in sales, and had an average growth of 5-6%. United’s for growth. Here are the strategies we are using organic growth was nearly twice as fast, about to capitalize on this. 12%. We accomplished this by executing the Gaining a Greater Share of following strategies, which stem from our Manufacturers’ Shipments Efficient partners’ focus on their core competencies. There is a misconception that it is more Distribution Resellers want to take costs out of their efficient for manufacturers to sell directly to systems and focus on their core competencies— Our fleet of 400 trucks— resellers. This is not always the case, because supplemented by UPS, selling products and solutions. To do this, they we can provide our 500 manufacturers an common carriers and Federal increasingly shed part or all of their inventory Express —allows us to achieve edge with resellers that they typically couldn’t 99% on-time delivery of and product distribution capabilities. match on their own. resellers’ and end -consumers’ orders on the same day, We create demand for their products— overnight, or the next day. We distribute nearly 14 million catalogs, 16 million promotional flyers, and provide an electronic catalog for countless Websites. These are used by more than 20,000 resellers: office products dealers, mega-dealers, contract stationers, office products superstores, computer products resellers, mass merchandisers, mail order companies, sanitary supply distributors, and e-commerce merchants. 5
  11. 11. We broaden their geographic reach— Our unmatched infrastructure allows us to get products to every important U.S. and most Canadian and Mexican metropolitan markets within 24 hours. This fulfills the overnight We provide exposure to a broader product 40,000 Products delivery requirements of many resellers. Just a Click Away offering—We stock thousands of SKUs (stockkeeping units) that most resellers do We receive over 90% Increasing Penetration of our orders electronically, not carry in their inventories. These products among Current Resellers through a proprietary typically have significantly higher margins for Our resellers find it’s easier to reap the benefits order-entry system, the all channel partners, since they are less price Internet and computer-to- of United’s expertise and infrastructure than it is computer transmission. sensitive. This gives most manufacturers to replicate it. exposure to resellers and end consumers they We offer the industry’s broadest product line— would never be able to reach without United. This allows resellers to expand their product We manage the entire ordering process— offering without investing in inventory or More than 90% of our orders are sent warehouses, which leverages their sales and electronically to manufacturers and received distribution assets. With our more than 40,000 electronically from dealers. This automates items, we are: order entry, reducing the chances for errors • the largest provider of office supplies. while shortening the time between receiving • the largest provider of computer supplies. the order and shipping it. In addition, by • the largest provider of office furniture. working with many resellers and accumulating their orders, United saves manufacturers • the largest provider of janitorial and substantial handling and administrative costs— sanitation supplies. particularly on small orders. • the provider of the largest selection of We efficiently handle small order quantities— popular private label commodity products: Manufacturers need our skill in cost-effectively the Universal brand. breaking down bulk shipments into the “one • a leading provider of business machines/ eaches” required by resellers and their end audio-visual equipment, and barcode consumers. This means manufacturers can scanning products. reduce warehousing and inventory costs, avoid We offer unmatched value-added programs— investments in elaborate picking systems, and This helps resellers sell more product and better sell products to resellers who otherwise would satisfy their customers: be too small for them to serve. 6
  12. 12. • Sales generating materials include United’s General Line Catalog—the industry’s favorite—and specialty catalogs. These are The Largest Network available in both a paper and electronic in the Industry format. Each catalog or site is customized with the reseller’s (rather than United’s) name and contact information. • Wrap and Label Program allows us to package the items ordered by an individual consumer into a box, attach an address label— featuring the reseller’s name—then send it to the reseller for immediate delivery, or drop ship it to the end consumer on the reseller’s behalf. Resellers benefit because they don’t have to break down large shipments and repackage them for delivery. United Stationers Supply Division • Nationwide Express Delivery provides Lagasse, Inc. Azerty Incorporated same-day, next-day or second-day delivery via Azerty/United Canada The Order People UPS, reaching 99% of all business customers in the U.S. This allows local, regional and Our 77 distribution centers allow us to reach 90% of the sponsor research on significant industry virtual resellers to serve national accounts. U.S. population on a next-day trends. Then we present the results —and our delivery basis. We also reach • Dealer training included teaching 115 major metropolitan areas in recommendations on how they can be used— courses in 2000 that attracted nearly Canada and Mexico within to resellers throughout the country. In 2000, 24 hours of order placement. 2,000 reseller “students” on subjects from we helped 1,500 resellers in 33 cities better finance and marketing to sales and sales understand their markets and how to build management. United provides professional their businesses. training that might not otherwise be available to many resellers. We can handle their entire backroom operation— Growing numbers of resellers are choosing to • Premier Performance Shows allow resellers outsource their warehousing and distribution, and their end consumers to preview new and stocking fewer items and relying on United’s unique products, while the manufacturers extensive inventory. We support this approach who exhibit them provide detailed through our broad product offering and these information on their features. United characteristics: sponsored seven shows across the country in 2000, showcasing products from about • A $600 million investment in inventory. 100 manufacturers. This helped strengthen • State-of-the-art order processing, which relationships with the thousands of resellers allowed us to handle an average of 160,000 and consumers who attended. customer orders each day in 2000. Our inte- • End-consumer research gives United’s resellers grated systems enable us to locate products an edge in their markets. Each year, we at multiple warehouses, consolidate them 7
  13. 13. Promoting Teamwork Our Helton Center for Performance Improvement hosts five-day training programs for associates. They learn to work as teams to help us better serve our customers. at one of our multiple locations and provide a • Lagasse also expanded into two larger single, on-time delivery of the entire order. hub facilities, one in Chicago and one in Los Angeles. • 77 regional distribution centers in 36 metro- politan areas in 25 states and provinces in the • United Stationers Supply Co. began building U.S., Mexico and Canada. We also have 21 new centers that will replace several older reshipment points. facilities in Denver (263,000 square feet), expected to open in the summer of 2001, and • Our fleet of more than 400 trucks, which in Charlotte (300,000 square feet) expected to delivers orders as soon as they are picked. open by the end of the third quarter 2001. • The highest service levels in the industry. In We estimate our investment in each of 2000, we had a 98% order fill rate, a 99.5% these facilities will have a relatively short order accuracy rate, and a 99% on-time payback period. delivery rate —generally within 24 hours of order placement. Making Acquisitions • An operating system and culture focused We expanded our computer consumables and on providing superior service and fulfillment janitorial/sanitation businesses through two excellence. acquisitions: Azerty Canada in July 2000 and Peerless Paper Mills in January 2001. Continuing Geographic Expansion Azerty/United Canada United has A number of U.S. markets offer opportunities for greater operated in Canada sales or enhanced efficiency. for 10 years. As part In 2000, we either built new of our strategic distribution facilities or expanded current planning process two years ago, we identified ones to capitalize on this situation: growth opportunities in Canada and decided to intensify our efforts there. The acquisition of • United Stationers Supply Co.’s 437,500 Azerty Canada significantly enhanced our square foot distribution center in Dallas market position: replaced a two-building (383,000 square feet) operation there. • It enables us to expand our computer consumables, peripherals and accessories • United Stationers Supply Co.’s 320,000 business. square foot distribution center in Baltimore was retrofitted to provide leading-edge • It adds scale (an additional $115 million picking capabilities. in annual sales) and infrastructure through • Lagasse opened a 55,000 square foot its distribution facilities in Toronto, Vancouver, distribution center in Phoenix, and a 47,000 and Montreal, and a bilingual customer square foot facility near Kansas City. service facility, also in Montreal. 8
  14. 14. • It gives us a national presence and an • It provides additional logistics capabilities, experienced staff that can help us build sales coverage and marketing expertise. our business. Expanding Into Non-Office Products Fulfillment • It provides opportunities to cross-sell our Through The Order People, United is other product lines. beginning to tap the fast-growing third-party Peerless Paper Mills This wholesale services market. Industry experts forecast distributor of janitorial and sanitation products, this market will reach $27 billion in U.S. and paper and food service products, was a revenue by 2004. logical addition to Lagasse: • It will expand Lagasse’s Communicating with our customers product line to nearly helps us continuously find new ways to 10,000 available items. improve our performance • It will allow Lagasse and Peerless to cross-sell complementary product lines to Pricing arrangements for The Order People each other’s customers. will follow the tried-and-true formulas generally used in outsourcing. Typically, this is a fee-based • It enhances the scale and infrastructure of business where the clients pay set-up fees, Lagasse’s Northeast and Midwest operations. transaction fees and fixed time or space fees. This includes distribution centers in several We typically process orders It is a low working capital business since the new markets, including Minneapolis, until 6:00 p.m. We then move clients own the inventory. swiftly to pick and pack orders Pittsburgh, and a state-of-the-art facility for products ranging from The Order People targets a broad audience: outside of Philadelphia. pens, binders and labels to traditional catalog merchants, “clicks and office furniture. These are • It generates $75 million in annual revenues, most often labeled for mortar” retailers, manufacturers, service with annual increases in the high-teens and individual end users and providers and e-commerce businesses providing shipped on our own trucks the potential to improve on this through or via UPS/Federal Express business-to-business (B2B) and business-to- synergies with Lagasse. during the night to resellers consumer (B2C) services. Its mission is to and to end users on behalf of our resellers. This allows end-users’ orders to arrive at Turning the Order -to -Delivery Cycle into Customer Satisfaction their desks the very next day. While the content of each order may vary, the customer satisfaction we deliver each day remains constant. 9
  15. 15. Customer Care—Through the CallCenter Services acquisition, we added two state-of-the- art call centers located in Salisbury, Maryland and Wilkes-Barre, Pennsylvania. Combining Web-enabled end-consumer contact with traditional inbound and outbound teleservices, we are able to meet our customers’ expanding become the leader in the third-party service needs while exceeding their end-consumer’s market by providing outstanding fulfillment expectations on a 24 x 7 x 365 basis. and customer relationship management (CRM) Our core offering includes order entry/status, solutions. By combining leading edge up-sell and cross-sell, credit/services applica- technology with expertise in third-party tions, refunds and exchanges, technical/help fulfillment, The Order People’s goal is to desk, and standard reports. Our special services design and execute personalized and flexible include self-service online, agent monitoring, programs that exceed expectations for its credit card authorizations, script development, customers and their end consumers. Steven R. Schwarz, system integration, software development, mul- Executive Vice President Integrated, tilingual representatives, and agent training. and President, United Supply Single-Source Solution Data Mining & Warehousing—Our state- Division, led another year The Order People is taking United’s 80 years of of record revenues. of-the-art data approach includes a number experience in seamless order taking, “picking, of strategies: packing, shipping and tracking,”and translating • Customer data acquisition and it into categories beyond office products. As management—getting relevant information with United, The Order People will remain The Benefits of and organizing it so our customers can transparent—end consumers will see only its an Integrated make the best use of it. customers’ brand names. Warehouse Network • Analytic services —analyzing end-consumer During 2000, we identified the infrastructure Most of our products reach information to provide customers with a for The Order People’s future success. There resellers and end consumers better understanding of this audience—from within 24 hours of their are two aspects to our approach: customer placing the order. This is “customer lifetime analyses” to precision relationship management (CRM) and fulfillment. possible because our ware- market analysis. CRM creates a win/win relationship between houses are linked with a • Personalization services—generating proprietary inventory locator our customers and their end consumers— system, and use technology personalized end-consumer interactions. The Order People breaks these strategies into to increase their efficiency • Customer access services—providing three broad categories. and accuracy. Our approach allows us to provide very or delivering services over multiple high service levels. communication channels, from the mail to pagers to the Internet. 10
  16. 16. • Transaction services—improving all contacts with end consumers, from informing them of products and services through post-sales support, such as returns processing and billing. Integrated Marketing Solutions—These are the tools customers need to acquire, retain, and expand their end-consumer base. The Order People will support this by combining powerful brand building tools and customer and market data with innovative marketing campaigns. These include: • End-consumer acquisition campaigns. • Lead generation. • Incentive programs— for internal employees Cutting-edge and end consumers. Customer Relationship • End-consumer expansion campaigns— differentiates itself with its seamless integrated Management (CRM) featuring cross-sell and up-sell marketing, approach. End consumers never know they are The Order People gives coupon programs, and spiral marketing, its customers the benefits not dealing directly with our customers. As a of CRM – without the cost in which end consumers are given a result, we provide a unique solution that helps and hassle of installing and continuous loop of information to increase customers build and sustain end-consumer managing their own systems. their awareness of all products and services. relationships and brand value. • End-consumer retention campaigns— such Measuring Our Progress as loyalty or rewards programs, satisfaction As we entered 2001, The Order People had a surveys, renewal programs, memberships, number of customers using its call center and frequent shopper programs. services and was well positioned to offer its Fulfillment allows us to get the right products customers logistics and fulfillment services. to end consumers on a timely basis—In Our goal is to continuously qualify leads each November, The Order People opened its first quarter and sign contracts that will enable warehouse dedicated to third-party fulfillment, The Order People to become profitable in in Memphis, Tennessee. This 650,000 square 2002. We are excited about this new growth foot facility incorporates the latest warehousing opportunity for United and are committed to and distribution technology, including investing in its success. computerized receiving and picking systems. In addition, The Order People is leveraging United’s The Order People has ability to PICK, PACK, SHIP and TRACK office supplies, leased distribution centers in Harrisburg, by handling other product categories Pennsylvania, and Reno, Nevada. A number of companies provide one or more of these services. The Order People 11
  17. 17. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20,000 resellers, who in turn sell directly to end users. The following discussion should be read in conjunction with the Consolidated Financial Statements and related These products are distributed through a computer-based notes. network of warehouse facilities and truck fleets radiating Information contained or incorporated by reference in from 39 regional distribution centers, 28 Lagasse this Annual Report may contain “forward-looking distribution centers, six Azerty distribution centers, statements” within the meaning of Section 27A of the three distribution centers that serve the Canadian Securities Act and Section 21E of the Exchange Act, which marketplace and a distribution center to serve clients can be identified by the use of forward-looking of The Order People. terminology such as “may,” “will,” “expect,” “intend,” On July 25, 2000, the Company announced that it “anticipate,” “believe,” “estimate” or “continue” or the established The Order People (“TOP”) to operate as its negative thereof or other variations thereon or comparable third-party fulfillment provider for product categories terminology. All statements other than statements of beyond office products. TOP offers a full set of services historical fact included in this Annual Report, including specifically designed to support a wide variety of third- those regarding the Company’s financial position, business party service needs. By combining the Company’s state- strategy, projected costs and plans and objectives of of-the-art distribution network with a multi-channel management for future operations are forward-looking customer relationship management (CRM) capability, statements. Certain risks and uncertainties could cause clients have the ability to custom design their order actual results to differ materially from those in such fulfillment experience and then monitor and measure forward-looking statements. These include, but are not consumer satisfaction. The Company has extensive limited to, the highly competitive operating environment, experience and ability to pick, pack, ship and track the market potential for third-party services, the products with a wide range of physical attributes. Company’s ability to adjust The Order People’s cost structure TOP enables the Company to leverage these core to the timing of revenue generation, the integration of competencies in a broader context for third-party acquisitions, changes in end-users’ traditional demands for logistics and fulfillment. business products, the Company’s reliance on certain key In connection with TOP, the Company operates a new suppliers, the effects of fluctuations in manufacturers’ 650,000 square foot state-of-the-art distribution and pricing, potential service interruptions, customer credit service center in Memphis, Tennessee. In addition, the risk, dependence on key personnel, and general economic Company has leased distribution centers in Harrisburg, conditions. A description of these factors, as well as other Pennsylvania, and in Reno, Nevada. factors, which could affect the Company’s business, is set Acquisition of CallCenter Services, Inc. On July 1, forth in certain filings by the Company with the Securities 2000, the Company acquired all of the capital stock of and Exchange Commission. All forward-looking CallCenter Services, Inc. from Corporate Express, a statements contained in this Annual Report and/or any Buhrmann Company. The purchase price was subsequent written or oral forward-looking statements approximately $10.7 million, financed through the attributable to the Company or persons acting on behalf of Company’s Senior Credit Facility. CallCenter Services is a the Company, are expressly qualified in their entirety by customer relationship management outsourcing service such cautionary statements. The Company undertakes no company. It has two inbound call centers, in Wilkes- obligation to release the results of any revisions to these Barre, Pennsylvania and Salisbury, Maryland, with a total forward-looking statements that may be made to reflect of up to 1,000 seats. This acquisition will complement any future events or circumstances. and significantly enhance the third-party fulfillment Overview business of TOP. The acquisition was accounted for using the purchase method of accounting and, accordingly, the The Company is the largest general line business purchase price was allocated to the assets purchased and products wholesaler in the United States, with 2000 net the liabilities assumed, based upon the estimated fair sales of $3.9 billion. The Company sells its products values at the date of acquisition. The excess of cost over through national distribution networks to more than 12
  18. 18. U N I T E D S TAT I O N E R S I N C . A N D S U B S I D I A R I E S fair value of approximately $3.1 million was allocated to of its common stock at a cost of approximately $49.6 goodwill. The pro forma effects of the acquisition were million. Acquired shares are included in the issued shares not material. of the Company, but are not included in average shares Acquisition of Azerty Canada. On July 5, 2000, the outstanding when calculating earnings per share data. Company completed the acquisition of the net assets of During 2000 and 1999, the Company reissued 309,674 Azerty Canada from MCSi, Inc. The purchase price was and 29,519 shares of treasury stock, respectively, to fulfill approximately $33.6 million (U.S. dollars) financed its obligations under its stock option plan. through the Company’s Senior Credit Facility. Azerty June 1998 Equity Offering. In June 1998, United Canada is a specialty wholesale distributor of computer completed an offering of 4.0 million shares of common consumables, peripherals and accessories. The stock (the “June 1998 Equity Offering”), consisting of 3.0 acquisition was accounted for using the purchase method million primary shares sold by United, and 1.0 million of accounting and, accordingly, the purchase price was secondary shares sold by certain selling stockholders. The allocated to the assets purchased and the liabilities shares were priced at $27.00 per share, before underwriting assumed, based upon the estimated fair values at the date discounts and commissions of $1.15 per share. The of acquisition. The excess of cost over fair value of aggregate proceeds to United of approximately $77.6 approximately $11.8 million was allocated to goodwill. million (before deducting expenses) were delivered to USSC The pro forma effects of the acquisition were not material. and used to repay a portion of indebtedness under the Acquisition of Consumer Development Group. On Tranche A Term Loan Facility, which caused a permanent November 1, 1999, the Company acquired all of the reduction of the amount borrowable under this facility. capital stock of Consumer Development Group Inc. United did not receive any of the proceeds from the (“CDG”) for approximately $4.8 million, including an sale of the 1.0 million shares of common stock offered initial payment to the seller of approximately $2.4 by the selling stockholders. It did, however, receive an million, financed through senior debt. The remaining aggregate of approximately $6.4 million paid by the purchase price of approximately $2.4 million will be paid selling stockholders upon exercise of employee stock ratably on each of the first three anniversaries of the options in connection with the June 1998 Equity acquisition. The CDG acquisition was accounted for Offering, which were delivered to USSC and applied to using the purchase method of accounting and, the repayment of indebtedness under the New Credit accordingly, the purchase price was allocated to the assets Facilities. purchased and the liabilities assumed, based upon the After closing the June 1998 Equity Offering, the estimated fair values at the date of acquisition. The excess underwriters exercised an overallotment option to of cost over fair value of approximately $4.8 million was purchase an additional 0.4 million shares from United. allocated to goodwill. The financial information for the The net proceeds to United of approximately $10.3 year ended December 31, 1999, included the results of million from the sale were delivered to USSC and used to CDG for November and December only. The pro forma repay an additional portion of the indebtedness effects of this acquisition were not material. A Certificate outstanding under the Tranche A Term Loan Facility. of Dissolution was filed with the State of Delaware to In the second quarter of 1998, the Company dissolve CDG as of December 31, 1999. CDG is a recognized the following charges: a non-recurring charge division of USSC. of $13.9 million ($8.3 million net of tax benefit of $5.6 million) to write off the remaining payments and related Common Stock Repurchase. On October 23, 2000, prepaid expense under a contract for computer services the Company’s Board of Directors authorized the from a vendor (see Note 1 to the Consolidated Financial repurchase of up to $50.0 million of its common stock. Statements), and an extraordinary loss of $9.9 million Under this authorization, the Company purchased ($5.9 million net of tax benefit of $4.0 million) related to 857,100 shares at a cost of approximately $22.4 million, the early retirement of debt (collectively “1998 Charges”), during 2000. During 1999, under a previous see Note 1 to the Consolidated Financial Statements. authorization, the Company purchased 3,250,000 shares 13
  19. 19. Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued) CallCenter Services Inc., increased 12.2%. Net income attributable to common stockholders for Gross Margin. Gross margin in 2000 reached $643.8 the year ended December 31, 1998, before the 1998 million, up 14.1% from last year and was 16.3% of net Charges, was $72.2 million, up 59.0%, compared with sales, compared with $564.2 million, or 16.4% of net $45.4 million, before the 1997 Charges (as defined). In sales, in 1999. The 0.1% rate decline is due to lower 1998, diluted earnings per share before the 1998 Charges pricing margin partially offset by incremental vendor were $2.00 on 36.2 million weighted average shares allowances earned as a result of higher sales volume. outstanding, up 36.1%, compared with $1.47, before Operating Expenses. Operating expenses for 2000 charges, on 30.8 million weighted average shares were up 15.5% to $441.3 million and were 11.2% of net outstanding for the prior year. sales, compared with $382.0 million, or 11.1% of net Acquisition of the Azerty Business. On April 3, sales, in the prior year. The increase in the operating 1998, the Company acquired all of the capital stock of expense rate was attributable to investments in The Order Azerty Incorporated, Azerty de Mexico, S.A. de C.V., People, the Company’s third-party fulfillment business. Positive ID Wholesale Inc., and AP Support Services Operating expenses for 2000 related to The Order People Incorporated (collectively the “Azerty Business”). These totaled $9.0 million resulting in a 0.2% increase in the businesses comprised substantially all of the United States operating expense ratio. and Mexican operations of the Office Products Division of Income from Operations. Income from operations Abitibi-Consolidated Inc. The aggregate purchase price increased 11.1% to $202.5 million, or 5.1% of net sales, paid by the Company for the Azerty Business was compared with $182.2 million, or 5.3% of net sales in approximately $115.7 million (including fees and 1999. Excluding the investments in The Order People, expenses). The acquisition was financed primarily income from operations increased 15.5% to $210.5 through senior debt. The Azerty Business acquisition was million or 5.4% of net sales. accounted for using the purchase method of accounting Interest Expense. Interest expense for 2000 was and, accordingly, the purchase price was allocated to the $27.2 million, or 0.7% of net sales, compared with $29.2 assets purchased and the liabilities assumed based upon million, or 0.8% of net sales, in 1999. This reduction the estimated fair values at the date of acquisition, with reflects the Company’s continued leveraging of interest the excess of cost over fair value of approximately $73.7 costs against higher sales, and the interest expense savings million allocated to goodwill. The financial information related to the redemption of the 12.75% Notes (as for the year ended December 31, 1998, included nine defined) partially offset by slightly higher interest rates months of the Azerty Business. The pro forma effects of on variable rate debt. this acquisition were not material. Other Expense. Other expense for 2000 reached Comparison of Results for the Years $11.2 million, or 0.3% of net sales, compared with $9.4 Ended December 31, 2000 and 1999 million, or 0.3% of net sales in 1999. This expense Net Sales. Net sales increased 14.6% to $3.9 billion primarily represents the costs associated with the sale of for 2000, compared with $3.4 billion for 1999. This certain trade accounts receivable through the Receivables increase reflected growth in the Company’s core business, Securitization Program (as defined). These costs vary on incremental sales from acquisitions completed in 2000, a monthly basis and generally are related to certain short- and increases in freight revenue. The Company’s sales term interest rates. growth within its core business was broad based, with Income Before Income Taxes and Extraordinary strength in all geographic regions, across all product Item. Income before income taxes and extraordinary categories and customer channels. Specifically, the item was $164.1 million, or 4.1% of net sales, compared janitorial and sanitation products, computer consumables with $143.6 million, or 4.2% of net sales in 1999. and office furniture categories experienced strong sales Income Taxes. Income tax expense as a percent of net growth. Sales growth for the year ended December 31, sales was 1.7% in 2000 and in 1999. The effective tax 2000, excluding the acquisitions of Azerty Canada and rate declined to 39.9% in 2000 from 41.9% in 1999. 14