1. Basis of Presentation

The accompanying Consolidated Financial Statements represent United Stationers Inc. (“USI”) with its wholly owned subsidiary United Stationers Supply Co. (“USSC”), and USSC’s subsidiaries (collectively, “United” or the “Company”). The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States and include the accounts of USI and its subsidiaries. All intercompany transactions and balances have been eliminated. The Company operates in a single reportable segment as a leading national wholesale distributor of workplace essentials, with net sales of approximately $5.3 billion for the year ended December 31, 2014. The Company stocks over 160,000 items on a national basis from over 1,600 manufacturers. These items include a broad spectrum of technology products, traditional office products, office furniture, janitorial and breakroom supplies, and industrial supplies. The Company sells its products through a national distribution network of 77 distribution centers to its approximately 30,000 reseller customers, who in turn sell directly to end-consumers. The Company’s customers include independent office products dealers; contract stationers; office products superstores; computer products resellers; office furniture dealers; mass merchandisers; mail order companies; sanitary supply, paper and foodservice distributors; drug and grocery store chains; healthcare distributors; e-commerce merchants; oil field, welding supply and industrial/MRO distributors; aftermarket automotive supply distributors and retailers; other independent distributors and end consumers. Many resellers have online capabilities. The Company also operates as an online retailer which sells direct to end consumers.

Acquisition of O.K.I. Supply Co.

During the fourth quarter of 2012, USSC completed the acquisition of all of the capital stock of O.K.I. Supply Co. (OKI), a welding, safety and industrial products wholesaler. This acquisition was completed at a purchase price of $90.0 million. The purchase price included a $4.5 million indemnification reserve, which was paid in the fourth quarter of 2014. In total, the purchase price, net of cash acquired, was $79.8 million. The acquisition extends the Company’s position as the leading pure-wholesale industrial distributor in the United States and brings expanded categories and services to customers. The purchase was financed through the Company’s existing debt agreements.

OKI contributed $20.5 million to the Company’s 2012 net financial sales after its acquisition on November 1, 2012. Had the OKI acquisition been completed as of the beginning of 2012, the Company’s unaudited pro forma net sales for the year ended December 31, 2012 would have been $5.2 billion and unaudited pro forma net income for the year ended December 31, 2012 would have been $112.6 million.

Acquisition of CPO Commerce, Inc.

On May 30, 2014, USSC completed the acquisition of CPO, a leading online retailer of brand name power tools and equipment. The acquisition of CPO significantly expanded the Company’s digital resources and capabilities to support resellers as they transition to an increasingly online environment. CPO’s expertise will strength United’s ability to offer features like improved product content, real-time access to inventory and pricing, digital marketing and merchandising, and an enhanced digital platform to our manufacturing partners.

The purchase price was $37.4 million, including $5.1 million related to the estimated fair value of contingent consideration which is based upon the achievement of certain sales targets during a three-year period immediately following the acquisition date. The final payments related to the contingent consideration will be determined by actual achievement in the earn-out periods and will be between zero and $10 million. Any changes to the estimated fair value after the original purchase accounting is completed will be recorded in “warehousing, marketing and administrative expenses” in the period in which a change occurs. The Company financed the 100% stock acquisition with borrowings under the Company’s available committed bank facilities.

The Company has developed a preliminary estimate of the fair value of assets acquired and liabilities assumed for purposes of allocating the purchase price. This estimate is subject to change as the valuation activities are completed. The fair value of the assets and liabilities acquired were estimated using various valuation methods including estimated selling price, a market approach, and discounted cash flows using both an income and cost approach.

At December 31, 2014, the preliminary allocation of the purchase price is as follows (amounts in thousands):

Purchase Price, net of cash acquired…………………..				$	31,825
Preliminary Allocation of Purchase Price:
Accounts receivable……………………………………	$	(2,658	)
Inventories……………………………………………..		(13,051	)
Other current assets…………………………………….		(307	)
Property, plant and equipment…………………………		(488	)
Intangible assets………………………………………..		(12,800	)
Total assets acquired……………………………….					(29,304	)
Trade accounts payable………………………………..		17,124
Accrued liabilities……………………………………..		2,130
Deferred taxes…………………………………………		3,282
Other long-term liabilities…………………………….		51
Total liabilities assumed……………………………					22,587
Goodwill………………………………………………				$	25,108

The purchased identifiable intangible assets are as follows (amounts in thousands):

	Total		Estimated Life
Customer relationships	$	5,200	3 years
Trademark		7,600	15 years
Total	$	12,800

Any changes to the preliminary allocation of the purchase price, some of which may be material, will be allocated to residual goodwill.

The impact of CPO on the Company’s 2014 net financial sales was immaterial. Had the CPO acquisition been completed as of the beginning of 2012, the Company’s unaudited pro forma net sales and net income for the twelve-month periods ending December 31, 2014, 2013, and 2012 would not have been materially impacted.

Acquisition of MEDCO

On October 31, 2014, USSC completed the acquisition of all of the capital stock of Liberty Bell Equipment Corp., a United States wholesaler of automotive aftermarket tools and equipment, and its affiliates (collectively, MEDCO) including G2S Equipment de Fabrication et d’Entretien ULC, a Canadian wholesaler. MEDCO advances a key pillar of the Company’s strategy, diversification into higher growth and margin channels and categories. It also brings expanded categories and services to customers.

The purchase price was $150.0 million, including $4.8 million related to the estimated fair value of contingent consideration which is based upon the achievements of certain sales and EBITDA targets over the next three years as well as $6.0 million reserved as a payable upon completion of an eighteen month indemnification period. The final payments related to the contingent consideration will be determined by actual achievement in the earn-out periods and will be between zero and $10 million. Any changes to the estimated fair value after the original purchase accounting is completed will be recorded in “warehousing, marketing and administrative expenses” in the period in which a change occurs. This acquisition was funded through a combination of cash on hand and cash available under the Company’s committed bank facility.

The Company has developed a preliminary estimate of the fair value of assets acquired and liabilities assumed for purposes of allocating the purchase price. The estimate is subject to change as the valuation activities are completed. The fair value of the assets and liabilities acquired were estimated using various valuation methods including estimated selling price, a market approach, and discounted cash flows using both an income and cost approach.

At December 31, 2014, the preliminary allocation of the purchase price is as follows (amounts in thousands):

Purchase Price, net of cash acquired…………………..				$	145,471
Preliminary Allocation of Purchase Price:
Accounts receivable……………………………………	$	(44,732	)
Inventories……………………………………………..		(54,656	)
Other current assets…………………………………….		(1,299	)
Property, plant and equipment…………………………		(4,408	)
Deferred Income tax assets…………………………….		(1,615	)
Other assets……………………………………………..		(442	)
Intangible assets………………………………………..		(44,070	)
Total assets acquired……………………………….					(151,222	)
Trade accounts payable………………………………..		32,383
Accrued liabilities……………………………………..		3,830
Other long-term liabilities…………………………….		52
Total liabilities assumed……………………………					36,265
Goodwill………………………………………………				$	30,514

The purchased identifiable intangible assets are as follows (amounts in thousands):

	Total		Estimated Life
Customer relationships	$	40,030	4-15 years
Trademarks		4,040	3-15 years
Total	$	44,070

Any changes to the preliminary allocation of the purchase price, some of which may be material, will be allocated to residual goodwill.

MEDCO contributed $36.3 million to the Company’s 2014 net sales after its acquisition on October 31, 2014. Had the MEDCO acquisition been completed as of the beginning of 2012, the Company’s unaudited pro forma net sales for the years ended December 31, 2014, 2013, and 2012 would have been $5.5 billion, $5.3 billion, and $5.3 billion respectively and the Company’s unaudited pro forma net income for the years ended December 31, 2014, 2013, and 2012 would have been $125.0 million, $129.0 million, and $119.2 million, respectively.

Divestiture of MBS Dev, Inc.

During the fourth quarter of 2014, the Company completed the sale of MBS Dev, Inc. (“MBS Dev”), a software solutions provider to business products resellers which the Company had acquired in the first quarter of 2010. In conjunction with the sale, United recognized a loss on disposition of MBS Dev. See Note 4 “Goodwill and Intangible Assets” and Note 15 “Fair Value of Financial Instruments” for further information.

Investments

In the fourth quarter of 2013, the Company impaired the remaining investment of $1.2 million in its minority interest in the capital stock of a managed print services and technology solution business that was acquired in 2010. This charge and the Company’s share of the earnings and losses of this investment are included in the Operating Expenses section of the Consolidated Statements of Income.