**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

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** **

**FORM 10-K**

 
| **(Mark One)**                                                                                                                                                 |                                                                                          |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                           |                                                                                          |
| **ý**                                                                                                                                                     | **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**     |
|                                                                                                                                                           |                                                                                          |
| **For the  Fiscal Year Ended February 1, 2003**                                                                                                                |
|                                                                                                                                                           |                                                                                          |
| **o**                                                                                                                                                          | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                           |
| **For the  transition period  from          to          ** |
|                                                                                                                                                           |
| **Commission  File Number: 0-22834**                                                                                                                           |

 

**SUCCESSORIES, INC.**

(Exact name ofregistrant as specified in its charter)

 

| **ILLINOIS**                                                                |   | **36-3760230**                        |
|-----------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)             |   | (I.R.S. Employer  Identification No.) |
|                                                                        |   |                                  |
| **2520 Diehl  Road  Aurora, Illinois**                                      |   | **60504**                             |
| (Address of principal executive offices)                                    |   | (Zip Code)                            |
|                                                                        |   |                                  |
| Registrant’s telephone number, including area code: **(630) 820-7200** |

 

| **Securities  registered pursuant to Section 12(b) of the Act:** |
|------------------------------------------------------------------|
|                                                             |
| **Title of  Each Class**                                         |   | **Name of  Each Exchange  on Which Registered** |
| None                                                             |   | None |
|                                                             |
| **Securities  registered pursuant to Section 12(g) of the Act:** |
| $.01 par value Common Stock*                                     |
| (Title of class)                                                 |

 

Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

Yes     ý     No   o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form10-K.                     ý

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act)

 

Yes   o     No   ý

 

The aggregate market value ofthe Registrant’s Common Stock held by non-affiliates of the Registrant onAugust 2, 2002, the last business day of the registrant’s most recentlycompleted second fiscal quarter, based upon the last reported sale price onthat date on the Nasdaq National Market of $0.90 per share, wasapproximately $8,775,656.

 

Registrant had 9,910,984shares of its Common Stock outstanding as of April 30, 2003.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

None

 

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*  Includingrights related thereto

 

 

 

 

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**SUCCESSORIES, INC.**

**FORM 10-K**

**FISCAL YEAR ENDED FEBRUARY 1, 2003**

 

**TABLE OF CONTENTS**

 
| PART I                                                          |
|-----------------------------------------------------------------|
|                                                            |   |
| Item 1.                                                         | Business |
| Item 2.                                                         | Properties |
| Item  3.                                                        | Legal  Proceedings |
| Item 4.                                                         | Submission of Matters to  a Vote of Security Holders |
|                                                            |   |
| PART II                                                         |
|                                                            |   |
| Item 5.                                                         | Market for the  Registrant’s Common Equity and Related Stockholder Matters |
| Item 6.                                                         | Selected Financial Data |
| Item 7.                                                         | Management’s Discussion  and Analysis of Financial Condition and Results of Operations |
| Item  7A.                                                       | Quantitative  and Qualitative Disclosures About Market Risk |
| Item 8.                                                         | Financial Statements and  Supplementary Data |
| Item 9.                                                         | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure |
|                                                            |   |
| PART III                                                        |
|                                                            |   |
| Item 10.                                                        | Directors and  Executive Officers of the Registrant |
| Item 11.                                                        | Executive Compensation |
| Item 12.                                                        | Security Ownership of  Certain Beneficial Owners and Management |
| Item 13.                                                        | Certain Relationships  and Related Transactions |
| Item 14.                                                        | Controls and  Procedures |
|                                                            |   |
| PART IV                                                         |
|                                                            |   |
| Item 15.                                                        | Exhibits,  Financial Statement Schedules and Reports on Form 8-K |
| Index to Financial  Statements and Financial Statement Schedule |

 

1

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**PARTI**

 

**Item 1.****           Business**

 

**Overview**

 

Successories, Inc., an Illinois corporation,(“Successories” or the “Company”) designs, manufactures and markets a diverserange of motivational and self-improvement products, most of which are theCompany’s own proprietary designs. The Company’s products include distinctivelines of wall decor, desktop accessories, books and stationery, andpersonalized gifts and awards. Successories’ personnel create proprietary art work and designs that canbe used in conjunction with a wide variety of products.  The Company will also customize its productsto fulfill customers’ special needs.

 

The Company’s products are currently marketedprimarily under its *Successories* trade name through directmarketing (catalog, electronic commerce and telemarketing), joint ventureretail stores, sales to franchisees, and wholesale distribution channels.  The Company’s products are marketedprimarily to businesses.

 

The operating subsidiaries (the “Subsidiaries”) of theCompany commenced operations in 1985. In October 1990, Primus Development Group II Ltd. (“Primus”) acquired inexcess of 90% of the stock of the Subsidiaries through a share exchange.  The Company was formed in October 1990 as awholly-owned subsidiary of Primus and, in February 1992, Primus merged into theCompany.  In March 1991 and April 1993,the Company acquired the remaining outstanding stock of the Subsidiariesthrough share exchanges.

 

**Products**

 

A majority of the Company’s sales are derived fromproprietary products that have either been internally developed or designed, orindividually customized.  The artworkused in the Company’s products is obtained from third parties through licensingrights.  All products are designed tohave a positive motivational or self-improvement theme that can be used bybusinesses and institutions to reinforce important work themes to motivate andrecognize employees, and as gifts at meetings and conventions.  The Company’s products also appeal to manyindividuals for both personal and professional motivation and for gifts.

 

The Company’s proprietary wall decor product lineincludes dramatic photography and other art developed, designed or customizedin-house, and printed on high-quality coated paper stock with variousmotivational captions.  Companydesigners give each grouping of wall decor products a unique, uniform overallappearance, consistent visual themes, a range of predominant colors, anddistinctive border design and lettering, thereby providing each grouping with adistinctive trade dress.  Framed artcomes with various framing and matting options.  High-quality tempered glass is used for safety reasons and toprotect against damage.  The Company’swall decor includes framed and unframed lithographs in various sizes rangingfrom 16-inch by 20-inch to 20-inch by 36-inch. The Company’s merchandise is categorized into the product “groupings”that convey a specific theme and trade dress.

 

The Company markets smaller versions (5-inch by 7-inchto 9-inch by 11-inch) of its wall decor as well as other products designed tobe placed on desktops and countertops. All desktop accessories contain motivational words and/or images.

 

All books and stationery sold by the Company arespecifically selected for their motivational or inspirational content andinclude those published by the Company as well as by third parties.  The Company markets collections ofmotivational or inspirational quotations and educational books for sales,customer service, human resource and education personnel.

 

The Company offers a wide variety of customizedproducts to its customers.  In-housecustom capabilities include hot-stamping, silk screening, and engraving forlogos and personalized messages.  Etchedbrass and crystal products are also available. Some of the products with customized features include employee awards,promotional items and corporate gifts.

 

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The Company has four reportable segments:  Direct Marketing, 100% Company-owned retailstores - See Note 3 to the Consolidated Financial Statements “DiscontinuedOperations,” sales to Franchisees, and other segments  (Wholesale, Contract Framing and Joint Venture RetailStores).  See Note 13 to the Company’sconsolidated financial statements included in this report for certain financialinformation regarding these segments.

 

**Sales and Marketing**

 

The Company currently generates revenue through directmarketing, joint venture retail stores, franchise stores, wholesaledistribution, list rental and licensing agreements.  Customers are categorized as follows:

 

•                                          corporatebuyers including executives, sales managers, human resource managers andproduction managers of larger corporations

 

•                                          managementpersonnel

 

•                                          teachersand administrative staff in educational organizations

 

•                                          entrepreneurialbuyers including small business owners, home office businesses and salesprofessionals

 

•                                          consumerswho are primarily purchasing the Company’s products for themselves or as a gift

 

The Company believes that the optimal way to reach itsdiverse customer base is to market its products through several distributionchannels.  In addition, the Companybelieves that its different distribution channels provide numerous benefits incross-marketing.

 

The Company’s revenue base is comprised of a widerange of customers including Fortune 500 companies, mid-sized and smallbusinesses, corporate management personnel, governmental and institutional, andretail customers.  No individualcustomer accounted for more than 10% of the Company’s net sales during thefiscal year ended February 1, 2003.  TheCompany emphasizes customer service to achieve its goal of producing a highlevel of customer satisfaction.

 

***Direct Marketing***

 

Through the use of its catalogs, the Company targetssales managers, business executives, meeting planners, human resource managers,corporate training managers and educators who have purchased or shown awillingness to purchase the Company’s products in the past.  In addition, the Company is constantlyprospecting for new customers by mailing its catalogs to prospective customerswho have favorable demographic profiles or purchasing patterns.  The Company maintains a large proprietaryin-house database.  Building on thisfoundation, the Company maintains an ongoing prospecting effort by testingvarious mailing lists and evaluating the recipients’ responsiveness to theCompany’s product offerings.  A group ofcorporate sales representatives handle larger corporate accounts.

 

The Company’s *Successories* catalog features the entireline of the Company’s proprietary products and some third-party products.  The two types of catalogs currently beingmailed are a 64/72-page version mailed to existing customers and catalogrequesters, and a 40-page version mailed to prospective customers whose nameshave been obtained from rented mailing lists. When a prospective customer makes an initial purchase, they are subsequentlysent a 64/72-page catalog using selection criteria based on purchasehistory.  The Company also mails aseparate 48-page recognition awards catalog offering a wide range ofproprietary awards and gifts that can be engraved or personalized, a specialized40-page educational catalog for school administrators, and a 24/32-pageclearance catalog.  During the fiscalyear ended February 1, 2003, the Company mailed approximately 14 million *Successories*catalogs.

 

The Company has an interactive Internet website,www.successories.com.  Visitors to thewebsite are able to view product offerings and place orders for productsfeatured in the Company’s catalogs. Customer interest in the website has steadily increased.  Internet orders during the fiscal year endedFebruary 1, 2003 increased 14.5% in

 

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comparison to the prior fiscal year. The Company believes the Internet offers a significant marketing andsales opportunity.  Successoriesproducts are also marketed through the Skymall catalogs circulated on variousairlines.

 

***Retail***

 

The Company-owned retail locations consisted of storesand temporary locations located in shopping malls.  The Company’s stores were introduced in early 1991.  As of February 1, 2003, the Company closedall of its 100% Company-owned stores - See Note 3 to the Consolidated FinancialStatements “Discontinued Operations.” The following table shows the number of Company-owned retail and jointventure locations that were opened, closed, converted from franchise, convertedto franchise, and in operation for each of the last three fiscal years.

 
| **Fiscal  Year Ended** |   | **Opened** |   | **Closed** |   | **Converted  from  Franchise** |   | **Converted  to  Franchise** |   | **In  Operation  at End of  Fiscal Year** |   |
|------------------------|--------|------------|--------|------------|--------|--------------------------------|--------|------------------------------|--------|-------------------------------------------|--------|
| February  1, 2003      |   | 0          |   | 22         |   | 0                              |   | 0                            |   | 2                                         | *      |
| February  2, 2002      |   | 0          |   | 4          |   | 3                              |   | 0                            |   | 24                                        |   |
| February  3, 2001      |   | 2          |   | 2          |   | 0                              |   | 0                            |   | 25                                        |   |

 

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*As of February 1, 2003, the Company has 2 jointventure retail stores in Minnesota and Texas. The joint venture retail stores typically carry many of the Company’sproprietary products and also a variety of non-proprietary products purchasedfrom outside vendors.

 

***Wholesale***

 

The Company sells products to a number of wholesalecustomers.  Wholesale customers includeother direct marketing distributors and distributors who have acquireddistribution rights for the Company’s products in the United Kingdom and SouthAfrica.

 

The Company also licenses some of its proprietarydesigns to third parties for use in their products for which the Companyreceives licensing revenue.  These thirdparties generally market office supply products.

 

***Franchise***

 

As of February 1, 2003, there were 23 franchisedretail stores.  The following tableshows the number of franchised stores that were opened, closed, converted toCompany-owned, converted from Company-owned and in operation for each of thelast three fiscal years.

 
| **Fiscal  Year Ended** |   | **Opened** |   | **Closed** |   | **Converted  to  Company-Owned** |   | **Converted  from  Company-Owned** |   | **In  Operation  at End of  Fiscal Year** |   |
|------------------------|--------|------------|--------|------------|--------|----------------------------------|--------|------------------------------------|--------|-------------------------------------------|--------|
| February  1, 2003      |   | 0          |   | 12         |   | 0                                |   | 0                                  |   | 23                                        |   |
| February  2, 2002      |   | 2          |   | 14         |   | 3                                |   | 0                                  |   | 35                                        |   |
| February  3, 2001      |   | 6          |   | 14         |   | 0                                |   | 0                                  |   | 50                                        |   |

 

The franchisee purchasesfor resale Company manufactured products or products from third parties thatare subject to Company approval.  Due tothe proprietary nature of most of the Company’s products, the Company is theonly available source for many products sold by franchisees.  Product sales to franchisees are typicallymade at a discount from retail or at product cost plus a certain percentage.

 

All franchisees must comply with Company-establishedoperational policies and procedures relating to, among other things, quality ofservice, training, design and decor of stores, and trademark usage.  The Company retains the right to receive anassignment of leasehold interest if the franchisee fails to comply with theCompany’s operational policies and procedures or upon expiration of thefranchise agreement.  The Companyreviews all proposed franchise store locations and reserves the right to reviewthe lease terms.  The Company providesfranchisees with training which focuses on the various aspects of storemanagement, including marketing fundamentals, and product knowledge.

 

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Franchisees currently pay a monthly royalty to theCompany of 2% of franchise gross sales. The Company temporarily suspended the 2% royalty fee, from July 2002through January 2003, in order to assist the franchisees in weathering thecurrent difficult retail and economic climate. The franchise agreements have an initial term of five years with arenewal option for three additional successive terms of five years each.  The agreements also provide the Company withthe right to purchase the franchisee’s store assets upon termination orexpiration of the franchise agreement, and a right of first refusal if thefranchise is to be sold.  The franchiseemust obtain the Company’s approval in all instances prior to the sale of afranchised store.  The franchiseagreement is granted for the operation of a single retail store at a specifiedlocation.  The Company reserves certainrights to sell products through other channels of distribution distinct fromthat of a franchised retail business.

 

**Manufacturing, Order Fulfillment and Distribution**

 

The Company’s manufacturing operations consistprimarily of framing, product-engraving, and hot-stamping and silkscreening.  The Company mounts andassembles its framed wall and desk decor in-house and has developed a specialpackaging system designed to reduce the risk of breakage in shipping.  The Company uses the services of third partyvendors to manufacture some of the motivational products, primarily desktopaccessories, books and stationery.

 

Generally, the Company’s catalog customers may chooseto have their orders sent via ground shipment (7 - 10 days), economy (4 - 6days), express (2 - 3 days) or next day shipment.  The Company’s manufacturing operations and order fulfillmentcapabilities enable it to accommodate last-minute orders for a variety ofproducts, and to produce samples of products for existing and potentialcustomers.  These capabilities furtherenable the Company to produce and test products before inclusion in thedistribution channels.

 

The Company depends upon outside suppliers for manyitems such as mugs, stationery and components for framing, all of which arereadily available from a number of suppliers. In addition, the Company outsources its film work and printing, althoughits creative staff works closely with outside film houses and printers to assurethat all work is done to the Company’s specifications and satisfaction.

 

**Seasonality**

 

See Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations - Seasonality.”

 

**Competition**

 

The industry supplying motivational, self-improvementand custom awards is highly competitive and fragmented.  The Company competes principally on thebasis of product exclusivity, selection, quality, name recognition and price ofits products.  The Company believes thatthe proprietary products it offers provide a competitive advantage in itsmerchandising offering.

 

**Trademarks and Service Marks**

 

The Company owns a federal registration for theservice mark “Successories” in International Classes 16 and 42 on the PrincipalRegister of the United States Patent and Trademark Office (“PTO”).  The Company believes the use of the servicemark *Successories*is important in establishing and maintaining its reputation and is committed toprotecting this service mark by vigorously challenging any unauthorized use.

 

Although many of the quotations and other art workused by the Company are in the public domain and are not individuallyprotectable under copyright and trademark laws, the Company continuallyendeavors to protect its products by giving its products a distinctive tradedress.

 

**Employees**

 

As of February 1, 2003, the Company employed 148persons, of whom 136 were employed full time. Of this total, 134 were employed at the corporate headquarters inmarketing, manufacturing, order fulfillment and administrative capacities, and14 were field personnel, store managers or store personnel.  In addition, the Company uses contractedlabor to meet its seasonal demands.  TheCompany is not a party to any collective bargaining

 

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agreements and has not experienced a strike or work stoppage.  The Company believes that its employeerelations are good.

 

**Available Information**

 

The Company’s Internet address iswww.successories.com.  The Company makesavailable at this address, free of charge, its annual report on Form 10-K, itsannual reports to shareholders, quarterly reports on Form 10-Q, current reportson Form 8-K and amendments to those reports filed or furnished pursuant toSection 13 (a) or 15 (d) of the Exchange Act as soon as reasonably practicableafter such material is electronically filed, or furnished to, the SEC.

 

**Item 2.**           **Properties**

 

The Company leases its corporate office andmanufacturing/warehouse facility in Aurora, Illinois, under the terms of a leaseagreement which expires in July 2009. The lease is for approximately 20,000 square feet of office space and110,000 square feet of manufacturing/warehouse space.

 

The Company leases both the joint venture retailstores from property owners under terms typical to enclosed shoppingmalls.  Lease terms for the jointventure stores run through January 31, 2005 and October 31, 2009.  None of the Company’s store leases are individuallymaterial to the operations of the Company.

 

**Item3.****           LegalProceedings**

 

The Company was named as a defendant in a case filedby Pyramid Company of Buffalo (“Plaintiff”). Pyramid Company of Buffalo vSuccessories, Inc. (Index No. 2002-8509) was filed in the State of New YorkSupreme Court in the County of Erie on August 15, 2002.  Plaintiff alleged that the Company enteredinto a lease agreement with Plaintiff and was in default under the leaseagreement due to failure to pay rent. Plaintiff sought the sum of $9,415.27 as and for past due rents; allrents that may accrue; and such other and further relief as seems just andproper to the Court.  The partiessettled the matter by entering into a Termination and Release Agreement datedJanuary 31, 2003.

 

The Company was named asa defendant in a case filed by EKLECCO L.L.C. (“Plaintiff”). EKLECCO L.L.C.v Successories, Inc. (Index No. 2002-5591) was filed in the State of NewYork Supreme Court in the County of Erie on August 14, 2002.  Plaintiff alleged that the Company enteredinto a lease agreement with Plaintiff and was in default under the leaseagreement due to failure to pay rent. Plaintiff sought the sum of $11,513.47 as and for past due rents; allrents that may accrue; and such other and further relief as seems just andproper to the Court. The parties settled the matter by entering into aTermination and Release Agreement dated January 31, 2003.

 

The Company was named asa defendant in a case filed by Pyramid Crossgates Company (“Plaintiff”).  Pyramid Crossgates Company vSuccessories, Inc. (Index No. 2002-5653) was filed in the State of New YorkSupreme Court in the County of Erie on August 14, 2002.  Plaintiff alleged that the Company enteredinto a lease agreement with Plaintiff and was in default under the leaseagreement due to failure to pay rent. Plaintiff sought the sum of $10,992.96 as and for past due rents; allrents that may accrue; and such other and further relief as seems just andproper to the Court. The parties settled the matter by entering into aTermination and Release Agreement dated January 31, 2003.

 

The Company was named asa defendant in a case filed by Scottsdale Fashion Square Partnership(“Plaintiff”).  Scottsdale FashionSquare Partnership v Celex Group, Inc. (now Successories, Inc.) (No.CV2002-016540) was filed in the Superior Court of the State of Arizona in theCounty of Maricopa.  Plaintiff allegedthat the Company entered into a lease agreement with Plaintiff and was indefault under the lease agreement due to failure to pay rent.  Plaintiff sought an order for immediatepossession of the premises and all fixtures, trade fixtures, and tenantimprovements; a writ of restitution; the sum of $17,231.46 for unpaid rent,accrued interest and late charges; interest on unpaid rent and late charges atthe rate of 18% per annum; all rents that accrue with interest at the rate of18% per annum, late charges at the rate of 5%, plus applicable rental taxthereon at the rate of 1.9%, court costs with interest thereon at the rate of10% per annum; and such other further relief as the Court deemed just and proper.  The

 

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parties settled thematter by entering into a Mutual Release and Cancellation of Lease Agreementdated November 8, 2002.

 

Except as noted above,there are no other material pending legal proceedings against the Company.  The Company is, however, at times involvedin routine litigation arising in the ordinary course of its business and, whilethe results of such proceedings cannot be predicted with certainty, the Companybelieves that the final outcome of such matters will not have a materialadverse effect on the Company’s consolidated financial position or results ofoperations.

 

**Item4.****           Submissionof Matters****to a Vote of Security Holders**

 

None.

 

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**PART II**

 

**Item5.****           Marketfor Registrant’s****Common Equity and Related Stockholder Matters**

 

The Company’s common stock is quoted on the Over TheCounter Bulletin Board (OTCBB, under the symbol "SCES.OB").  The following table sets forth the high andlow bid prices for the Company’s common stock as reported by the NasdaqNational Market through August 2, 2002 and subsequently by the OTCBB, for theapplicable periods shown.

 

|                                |   | **High** |   | **Low** |   |
|-------------------------------------|--------|----------|--------|---------|--------|
| Fiscal  Year Ended February 1, 2003 |   |     |   |    |   |
| First  Quarter                      |   | $        | 1.23   |    | $      | 0.50 |   |
| Second  Quarter                     |   | 1.05     |   | 0.33    |   |
| Third  Quarter                      |   | 0.90     |   | 0.10    |   |
| Fourth  Quarter                     |   | 0.35     |   | 0.14    |   |
|                                |   |     |   |    |   |
| Fiscal  Year Ended February 2, 2002 |   |     |   |    |   |
| First  Quarter                      |   | $        | 2.35   |    | $      | 1.06 |   |
| Second  Quarter                     |   | 2.00     |   | 1.41    |   |
| Third  Quarter                      |   | 1.41     |   | 0.36    |   |
| Fourth  Quarter                     |   | 1.00     |   | 0.21    |   |

 

The above noted high and low bid prices do notnecessarily represent actual sale prices for the Company’s common stock.

 

As of March 31, 2003, the number of holders of recordof the Company’s common stock was approximately 545, and there wereapproximately 396 beneficial owners of the Company’s common stock.

 

The Company has never declared or paid any cashdividends on its common stock.  TheCompany currently intends to retain its earnings to finance future growth andtherefore has no present intention of paying cash dividends on its common stockin the foreseeable future.  Under theCompany’s current credit facility with The Provident Bank, the payment of cashdividends on common and preferred stock by the Company is prohibited, except,cash dividends on preferred stock are allowed under certain conditions.

 

On April 25, 2002, theCompany received notification from NASDAQ with regards to the Company’snoncompliance with the listing requirements under NASDAQ Marketplace Rules4450(a)(2) and 4450(a)(5) (the “Rules”), respectively.  For 30 consecutive trading days, theCompany’s common stock did not maintain a minimum market value of publicly heldshares (“MVPHS”) of at least $5,000,000 and a minimum bid price per share of atleast $1.00 as required for continued inclusion on the NASDAQ National Marketunder the Rules.  In accordance with theRules, the Company was provided 90 calendar days, or until July 24, 2002 tobecome compliant.  At July 24, 2002, theCompany was not in compliance with the NASDAQ rules and accordingly theCompany’s common stock was delisted at the opening of business on August 2,2002.  Beginning on August 2, 2002, theCompany’s stock is quoted on OTC Bulletin Board.

 

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**Item6.****           SelectedFinancial****Data**

 

Set forth below is selected consolidated financialdata for the Company as of and for each of the last five fiscal periods.  Certain prior year amounts have beenreclassified to conform with the current year presentation.

 
|                                                  |   | **Fiscal  Year Ended**                               |   |
|-------------------------------------------------------|--------|------------------------------------------------------|--------|
|                                                  |   | **February  1,  2003**                               |   | **February  2,  2002** |   | **February  3,  2001** |   | **January  29,  2000** |   | **January  30,  1999** |   |
|                                                  |   | **(In  thousands, except share and per share data)** |   |
| **Statement  of Operations Data:**                    |   |                                                 |   |   |   |   |   |   |   |   |   |
| Net  product sales                                    |   | $                                                    | 32,134 |   | $ | 34,996 |   | $ | 44,830 |   | $ | 41,083 |   | $ | 39,700 |   |
| (Loss)  income from continuing operations             |   | $                                                    | (2,277 | ) | $ | (8,546 | ) | $ | 218 |   | $ | 981 |   | $ | (4,833 | ) |
| Net  (loss) income                                    |   | $                                                    | (5,103 | ) | $ | (10,804 | ) | $ | 430 |   | $ | (1,127 | ) | $ | (7,336 | ) |
| Preferred  stock dividends and accretion              |   | $                                                    | 218    |   | $ | 220 |   | $ | 223 |   | $ | 101 |   | $ | — |   |
| (Loss)  income available to common stockholders       |   | $                                                    | (5,321 | ) | $ | (11,024 | ) | $ | 207 |   | $ | (1,228 | ) | $ | (7,336 | ) |
| (Loss)  income per share – basic and diluted     |   | $                                                    | (0.56  | ) | $ | (1.19 | ) | $ | 0.03 |   | $ | (0.18 | ) | $ | (1.08 | ) |
| Weighted-average  number of common shares outstanding |   | 9,490,127                                            |   | 9,241,355 |   | 7,664,215 |   | 6,927,668 |   | 6,768,929 |   |
|                                                  |   |                                                 |   |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                              |   |                                                 |   |   |   |   |   |   |   |   |   |
| Total  assets                                         |   | $                                                    | 10,725 |   | $ | 15,961 |   | $ | 28,791 |   | $ | 31,029 |   | $ | 35,308 |   |
| Total  liabilities                                    |   | $                                                    | 3,490  |   | $ | 3,296 |   | $ | 3,182 |   | $ | 6,010 |   | $ | 8,243 |   |
| Total  debt                                           |   | $                                                    | 1,131  |   | $ | 1,483 |   | $ | 3,610 |   | $ | 7,605 |   | $ | 11,821 |   |
| Total  stockholder’s equity                      |   | $                                                    | 6,104  |   | $ | 11,182 |   | $ | 21,999 |   | $ | 17,414 |   | $ | 15,244 |   |
|                                                  |   |                                                 |   |   |   |   |   |   |   |   |   |
| **Cash  Flow Data:**                                  |   |                                                 |   |   |   |   |   |   |   |   |   |
| Net  (decrease) increase in cash                      |   | $                                                    | (13    | ) | $ | (1,866 | ) | $ | 1,529 |   | $ | (376 | ) | $ | (136 | ) |

 

**Item 7.****           Management’s Discussion****and Analysis of Financial Condition and Results ofOperations**

 

**Recent Developments**

 

On February 13, 2003, the Company announced that ithad entered into a definitive merger agreement with S.I. Acquisition LLC, anIllinois limited liability company formed principally for the benefit of JackMiller, the Company’s Chairman, members of his family and Howard I. Bernstein,a Board Member of the Company.  Themerger agreement provides that, at the closing of the merger, each outstandingshare of the Company’s common stock will convert into the right to receive$0.30, and each outstanding share of the Company’s Series B preferred stockwill convert into the right to receive $15 (the stated value of each share ofSeries B preferred stock) plus all accrued and unpaid dividends in cash (otherthan Company Series B convertible preferred stock owned by S.I.Acquisition).  As a result of themerger, the Company will become a privately held company and its common stockwill no longer be quoted on the OTCBB. Accordingly upon closing, the registration of the Company’s common stockunder the Securities Exchange Act of 1934, as amended, will terminate.  After the merger, the Company will continueto operate from its headquarters in Aurora, Illinois.  The Company may terminate the merger agreement if it receives anacquisition proposal that is superior to the current transaction.  Upon such termination, the Company wouldreimburse S.I. Acquisition for its expenses, not to exceed $150,000.  The closing of the merger is subject tovarious conditions, including shareholder approval.  The Company will solicit shareholder approval by means of a proxystatement.  Preliminary proxy materialswere filed with the Securities and Exchange Commission (SEC) on March 7,2003.  The Company is in the process ofresponding to comments from the SEC and anticipates filing and mailingdefinitive proxy materials to shareholders in the second quarter of 2003.  There can be no assurance that the mergerwill be consummated.

 

*Thefollowing discussion should be read in conjunction with, and is qualified inits entirety by, the Consolidated Financial Statements and Notes theretoincluded elsewhere in this Report.*

 

Successories designs, manufactures and markets adiverse range of motivational and self-improvement products, most of which arethe Company’s own proprietary designs. The Company’s products include distinctive

 

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lines of wall decor, desktop accessories, books and stationery, andpersonalized gifts and awards. Successories’ personnel create proprietary art work and designs that canbe used in conjunction with a wide variety of products.  The Company will also customize products tofulfill customers’ special needs.

 

The Company’s products are marketed primarily underits *Successories*trade name through direct marketing (catalog, electronic commerce andtelemarketing), retail channel (100% Company-owned stores) -See Note 3 to theConsolidated Financial Statements “Discontinued Operations,” sales tofranchisees and wholesale distribution. Although the Company utilizes multiple distribution channels for itsproducts, the Company’s products have similar purposes and uses in each channelof distribution.  The profitabilityvaries among products and distribution channels.  The Company utilizes its facilities interchangeably for eachdistribution channel.  Furthermore, themarketing channels are directed at a customer base located primarily in NorthAmerica.  In addition, starting infiscal 2000, the Company generated revenue from providing framing services tooutside corporate businesses on a contract fee basis.

 

During the year ended February 1, 2003, the Companyclosed all of its retail 100% Company-owned stores – See Note 3 to theConsolidated Financial Statements “Discontinued Operations.”  The results of operations and costs incurredthrough the year ended February 1, 2003 associated with the Company’s plan toclose the 100% owned retail stores have been reflected as discontinuedoperations in the accompanying consolidated financial statements.  At the end of the first quarter in fiscal2002, the Company discontinued contract-framing services for third partyproducts, which accounted for a loss of $79,000 on $873,000 of net sales infiscal 2001.  Any future contractframing services shall be limited primarily to large and multiple unitproduction runs.

 

The Company will continue its primary focus on salesgrowth in the direct marketing channel, support of its current franchises andjoint venture retail stores, and servicing its current wholesale businesscustomers.

 

For the fiscal years ended February 1, 2003, February2, 2002, and February 3, 2001, net product sales for the various distributionchannels, as a percentage of total net product sales, were as follows:

 
|                              |   | **Fiscal  Year Ended  February 1, 2003** |   | **Fiscal  Year Ended  February 2, 2002** |   | **Fiscal  Year Ended  February 3, 2001** |   |
|-----------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|
|                              |   |                                     |   |                                     |   |                                     |   |
| Direct  marketing                 |   | 73.0                                     | %      | 64.8                                     | %      | 63.0                                     | %      |
| Retail  100% Company-owned stores |   | 13.9                                     | %      | 17.3                                     | %      | 15.9                                     | %      |
| Sales  to franchisees             |   | 6.9                                      | %      | 9.9                                      | %      | 12.1                                     | %      |
| Other  segments                   |   | 6.2                                      | %      | 8.0                                      | %      | 9.0                                      | %      |

 

The gross profit margins for the direct marketing andretail channels vary due to differences in product mix and volume discountsbased on order size.  The gross profitmargin for sales to the franchisee channel is lower than the direct marketingand retail channels since these sales are generally made at a significantdiscount from retail price.

 

**Critical Accounting Policies**

 

The preparation of the financial statements inconformity with accounting principles generally accepted in the United Statesof America requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

During the year ended February 1, 2003 and February 2,2002, based on the Company’s financial performance in the past few years andthe challenging economic environment that has negatively impacted the Company’soperating results, the Company’s management determined that the valuationallowance should be increased to fully reserve the deferred tax asset. Thevaluation of the deferred taxes is a significant estimate.  See Note 11 to the Consolidated FinancialStatements, for further information.

 

The allowance for doubtful accounts related toaccounts and notes receivable is estimated by management, and is based onspecific information about customer accounts, past loss experience and generaleconomic conditions.

 

**Results of Operations**

 

The following table sets forth the results ofoperations for the last three fiscal years and the change from the previousyear, as taken from the Company’s consolidated statements of operations.  The Company’s fiscal year 2002

 

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consisted of the 52 weeks ended February 1, 2003.  The Company’s fiscal year 2001 consisted ofthe 52 weeks ended February 2, 2002. The Company’s fiscal year 2000 consisted of the 53 weeks ended February3, 2001.  Information for the fiscalyears ended February 2, 2002 and February 3, 2001 has been adjusted to reflectthe classification of the 100% Company-Owned retail stores as discontinuedoperations.

 
|                                                             |   | **Fiscal  Years Ended**     |   |                  |   |                     |   |
|------------------------------------------------------------------|--------|-----------------------------|--------|-----------------------|--------|--------------------------|--------|
|                                                             |   | **February  1, 2003**       |   | **February  2, 2002** |   | **Increase  (Decrease)** |   |
|                                                             |   | **Amount**                  |   | **%**                 |   | **Amount**               |   | **%** |   | **Amount** |   | **%** |   |
|                                                             |   | **(Dollars  in thousands)** |   |
| Net product  sales                                               |   | $                           | 32,134 |                  | 100.0  | %                        | $      | 34,996 |   | 100.0 | % | $ | (2,862 | ) | (8.2 | )% |
| Cost of goods  sold                                              |   | 15,774                      |   | 49.1                  |   | 18,048                   |   | 51.6 |   | (2,274 | ) | (12.6 | ) |
| Gross profit on  product sales                                   |   | 16,360                      |   | 50.9                  |   | 16,948                   |   | 48.4 |   | (588 | ) | (3.5 | ) |
| Fees, royalties  and other income                                |   | 969                         |   | 3.0                   |   | 1,059                    |   | 3.0 |   | (90 | ) | (8.5 | ) |
| Gross margin                                                     |   | 17,329                      |   | 53.9                  |   | 18,007                   |   | 51.4 |   | (678 | ) | (3.8 | ) |
| Operating  expenses                                              |   | 19,487                      |   | 60.6                  |   | 21,379                   |   | 61.0 |   | (1,892 | ) | (8.8 | ) |
| Loss from  continuing operations before other expenses and taxes |   | (2,158                      | )      | (6.7                  | )      | (3,372                   | )      | (9.6 | ) | 1,214 |   | 36.0 |   |
| Interest and  other expenses                                     |   | (221                        | )      | (0.7                  | )      | (301                     | )      | (0.9 | ) | (80 | ) | (26.6 | ) |
| Loss from  continuing operations before income taxes             |   | (2,379                      | )      | (7.4                  | )      | (3,673                   | )      | (10.5 | ) | 1,294 |   | 35.2 |   |
| Income tax  expense (benefit)                                    |   | (102                        | )      | (0.3                  | )      | 4,873                    |   | 13.9 |   | (4,975 | ) | (102.1 | ) |
| Loss from  continuing operations                                 |   | (2,277                      | )      | (7.1                  | )      | (8,546                   | )      | (24.4 | ) | 6,269 |   | 73.3 |   |
| Loss from  discontinued operations                               |   | (2,826                      | )      | (8.8                  | )      | (2,039                   | )      | (5.9 | ) | (787 | ) | (38.6 | ) |
| Extraordinary  Loss                                              |   | —                      |   | —                |   | (219                     | )      | (0.6 | ) | 219 |   | 100.0 | % |
| Net loss                                                         |   | $                           | (5,103 | )                     | (15.9  | )%                       | $      | (10,804 | ) | (30.9 | )% | $ | 5,701 |   | 52.8 | % |

 
|                                                                      |   | **Fiscal  Years Ended**     |    | **Increase  (Decrease)** |   |
|---------------------------------------------------------------------------|--------|-----------------------------|---------|--------------------------|--------|
|                                                                      |   | **February  2, 2002**       |    | **February  3, 2001**    |   |   |   |   |   |
|                                                                      |   | **Amount**                  |    | **%**                    |   | **Amount** |   | **%** |   | **Amount** |   | **%** |   |
|                                                                      |   | **(Dollars  in thousands)** |    |
| Net  product sales                                                        |   | $                           | 34,996  |                     | 100.0  | % | $ | 44,830 |   | 100.0 | % | $ | (9,834 | ) | (21.9 | )% |
| Cost  of goods sold                                                       |   | 18,048                      |    | 51.6                     |   | 21,226 |   | 47.3 |   | (3,178 | ) | (15.0 | ) |
| Gross  profit on product sales                                            |   | 16,948                      |    | 48.4                     |   | 23,604 |   | 52.7 |   | (6,656 | ) | (28.2 | ) |
| Fees,  royalties and other income                                         |   | 1,059                       |    | 3.0                      |   | 1,288 |   | 2.9 |   | (229 | ) | (17.8 | ) |
| Gross  margin                                                             |   | 18,007                      |    | 51.4                     |   | 24,892 |   | 55.6 |   | (6,885 | ) | (27.6 | ) |
| Operating  expenses                                                       |   | 21,379                      |    | 61.0                     |   | 22,648 |   | 50.6 |   | (1,269 | ) | (5.6 | ) |
| (Loss)  income from continuing operations before other expenses and taxes |   | (3,372                      | )       | (9.6                     | )      | 2,244 |   | 5.0 |   | (5,616 | ) | (250.3 | ) |
| Interest  and other expenses                                              |   | (301                        | )       | (0.9                     | )      | (1,725 | ) | (3.8 | ) | (1,424 | ) | (82.6 | ) |
| (Loss)  income from continuing operations before income taxes             |   | (3,673                      | )       | (10.5                    | )      | 519 |   | 1.2 |   | (4,192 | ) | (807.7 | ) |
| Income  tax expense (benefit)                                             |   | 4,873                       |    | 13.9                     |   | 301 |   | 0.7 |   | 4,572 |   | 1,518.9 |   |
| (Loss)  income from continuing operations                                 |   | (8,546                      | )       | (24.4                    | )      | 218 |   | 0.5 |   | (8,764 | ) | (4,020.2 | ) |
| (Loss)  income from discontinued operations                               |   | (2,039                      | )       | (5.9                     | )      | 212 |   | 0.5 |   | (2,251 | ) | (1,061.8 | ) |
| Extraordinary  loss                                                       |   | (219                        | )       | (0.6                     | )      | — |   | — |   | (219 | ) | (100.0 | )% |
| Net  loss                                                                 |   | $                           | (10,804 | )                        | (30.9  | )% | $ | 430 |   | 1.0 | % | $ | (11,234 | ) | (2,612.6 | )% |

 

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**YearEnded February 1, 2003 (Fiscal 2002), Compared to Year Ended February 2, 2002(Fiscal 2001)**

 

Net product sales were $32,134,000 for year endedFebruary 1, 2003, compared to $34,996,000 for the prior year ended February 2,2002. The $2,862,000 or 8.2% decrease in net sales is comprised of directmarketing *Successories*of $172,000 or 0.6%, sales to franchisees of $1,632,000 or 38.8%, and other channels of $1,058,000 or 31.5%.

 

The overall direct marketing sales in fiscal 2002 werecomparable to fiscal 2001.  The totalcatalogs mailed in fiscal 2002 and fiscal 2001 were approximately 14 million.However, catalog circulation strategy in fiscal 2002 was refined to increasecustomer catalog circulation and reduce prospect catalog circulation.  The prospect catalog circulation was reducedin the first half of the year in fiscal 2002 due to lower response ratesexperienced in 2001. The refined catalog circulation strategy resulted in apositive impact to the operating profit of the direct marketing channel as aresult of improved return on the catalog advertising costs.  In the last half of the year in fiscal 2002,the Company started to experience better response rates than the prior year forprospect catalogs and as a result increased catalog circulation beginning inthird quarter 2002. Internet sales, which are included in the direct marketingchannel, increased by 14.5% from year to year. Internet sales represented 27.5% of the total direct marketing channelsales in the current year and were 23.9% in the prior year. The Internetcontinues to be a significant marketing and sales opportunity for the Company.The decrease in sales to franchisees can be primarily attributed to 12 fewerstores in operation in the current year in comparison to prior year. Thedecrease in net sales in the other channels from year to year can be primarilyattributed to the Company’s decision made in the first quarter 2002 todiscontinue contract framing services for third party products, and two fewerjoint venture retail stores in operation in the current year.

 

Gross margin decreased in the current year to$17,329,000 from $18,007,000 in prior year. The decrease in gross margin can be attributed to a decline in salesoffset by improvement in gross profit, as a percentage of sales, from year toyear.  The gross profit, as a percentageof net sales, improved to 50.9% in the current year from 48.4% in the prior year.The improvement in gross profit can be attributed to change in channel salesmix, lower material costs and improved manufacturing labor productivity; offsetby negative impact of product discounting in the current year to encourageconsumer spending and higher fixed product costs per unit due to lower unitssales volume in fiscal 2002.

 

Operating expenses decreased in the current year to$19,487,000 from $21,379,000 in prior year. In fiscal 2002, the operating expenses included additional charges of $882,000related to bad debt reserves for franchisees related receivables, corporatepersonnel severance, and legal and consulting costs related to strategicalternatives.  In the second quarter offiscal 2002, the Company instituted a workforce reduction, in efforts tostreamline operating expenses, which is expected to provide annualized payrollexpense savings of approximately $1,000,000 going forward.  In fiscal 2001, the operating expensesincluded additional charges of $883,000 related to bad debt reserves forfranchisees related receivables, discontinuance of a warehouse managementsystem enhancement project and corporate personnel severance. The operatingexpenses decreased from year to year as a result of lower variable operatingexpenses with decline in sales volume, and continued management efforts toreduce corporate administrative expenses.

 

In the current fiscal year 2002 a net income taxbenefit of $102,000 was recorded for the income tax refund claims approved andreceived from amended state returns for previous years.  During fiscal 2002 and fiscal 2001, based onthe Company’s financial performance in the past few years and the currentchallenging economic environment, the Company’s management increased thevaluation allowance associated with the deferred tax assets due to the reducedlikelihood that all the benefits of the deferred tax asset related to the netoperating loss (NOL) carryforwards would be fully utilized before theyexpire.  In fiscal 2002 and fiscal 2001,the valuation allowance was increased to fully reserve for the deferred taxassets.  The Company recorded an incometax expense of $4,873,000 in fiscal 2001 to increase the valuation allowanceassociated with the deferred tax asset.

 

In the second quarter 2002, the Company decided totake immediate steps to close all of its 100% owned retail stores and as aresult began negotiating early lease terminations with the variouslandlords.  At year-end February 1,2003, all of the 100% Company-owned retail stores were closed.  In accordance with FASB No. 144, the Companyhas reflected separately the results of operations of the 100% owned retailstores as discontinued operations.

 

In the current year, the Company had a net loss of$5,103,000, in comparison to a net loss of $10,804,000 in the prior year.  The decrease in net loss is primarily due toimproved operating results from continuing operations

 

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before income taxes in the current year and income tax expense incurredin the prior year.  The improvedoperating results from continuing operations, in spite of lower sales volume,can be attributed to improved gross margin, the Company’s efforts to streamlineoperating expenses and utilization of cost-effective marketing strategies to improvethe operating results of the Company.

 

**YearEnded February 2, 2002 (Fiscal 2001), Compared to Year Ended February 3, 2001(Fiscal 2000)**

 

Net product sales were $34,996,000 for year endedFebruary 2, 2002, compared to $44,830,000 for the prior year ended February 3,2001.  The $9,834,000 or 21.9% decreasein net sales is comprised of direct marketing of $6,187,000 or 18.4%, sales tofranchisees of  $2,265,000 or 35.0%, andother channels of $1,382,000 or 29.1%.

 

In the fiscal year 2001,the decrease in net product sales across the channels can be primarilyattributed to the challenging economic business environment.  Direct marketing sales starting in thesecond quarter of fiscal 2001 were further impacted by a planned reduction inprospect catalog circulation in light of lower response rates experienced as aresult of the economic slow-down. The Company’s direct marketing effortsfocused on aggressively targeting opportunities in niche markets and refiningmarketing strategies focused on increasing sales from its existing customerbase and acquiring new customers. Internet sales, which are included in the direct marketing channel,increased to 23.9% in fiscal 2001 compared to 17.9% in fiscal 2000.  The sales to franchisees were impacted byfewer stores in operation in fiscal 2001 – 35 in fiscal 2001 versus 50 in theprior year. The decrease in sales from other channels is primarily due to lossof sales in contract framing and fewer joint venture stores in operation,compared to the prior year.  The declinein sales in contract framing was due to a major customer in fiscal 2000 who wasno longer in business in fiscal 2001.

 

Gross margin decreased infiscal 2001 to $18,007,000 from $24,892,000 in fiscal 2000.  The decrease in gross margin can beprimarily attributed to a decrease in sales volume and a decline in grossprofit, as a percentage of net sales, to 48.4% in fiscal 2001 from 52.7% infiscal 2000.  The decline in grossprofit percentage can be attributed to increased promotional discountingundertaken in fiscal 2001 to encourage consumer spending.  In addition, the gross profit percentage waslower as a result of higher fixed production costs per unit resulting fromlower units sales volume being generated through the manufacturing facility infiscal 2001.  The decline in fees,royalties and other income in fiscal 2001 was also negatively impacted by thechallenging economic environment.

 

Operating expensesdecreased in fiscal 2001 to $21,379,000 from $22,648,000 in the prioryear.  The operating expenses for fiscal2001 included additional charges of $883,000. The additional charges related to bad debt reserves for franchiseerelated receivables; discontinuance of a warehouse management systemenhancement project due to lower than anticipated production volumes; andseverance payments related to the reduction in workforce instituted during thethird quarter. The variable operating expenses decreased from year to year withthe decline in net product sales. The operating expenses excluding additional charges,as a percentage of net sales, increased in fiscal 2001 to 58.6% from 50.6% infiscal 2000 as a result of fixed operating expenses being spread over a lowersales volume base.

 

In the fiscal year 2001,the Company recorded an income tax expense of $4,873,000 to increase thevaluation allowance to fully reserve for the deferred tax asset balance. As aresult of the challenging economic environment which negatively impacted theoperating results for fiscal 2001, the Company’s management has taken a conservativeapproach due to the reduced likelihood that all the benefits of the deferredtax asset related to the net operating loss (NOL) carryforwards and othertemporary differences would be fully utilized before they expire.

 

In the fiscal year 2001,the Company recorded an extraordinary loss of $219,000 related to early debtextinguishment. As a result of pre-payment of the term loan and fixed rate loanwith the Company’s bank, the Company recorded an additional expense towrite-off the unamortized debt discount associated with the term loan and fixedrate loan.

 

In fiscal year 2001, theCompany had a net loss of $10,804,000 in comparison to a net income of $430,000in the prior fiscal year 2000.  Thedecline in net income in the current year can be primarily attributed to thedecline in gross margin and additional charges recorded to operating expensesas a result of decline in sales volume due to economic downturn, a significantloss incurred in discontinuing operations, income tax expense recorded to increase

 

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the valuation allowanceassociated with the deferred tax asset, and extraordinary loss recorded for theearly extinguishment of debt, offset by a decrease in interest expense due tolower outstanding debt balance.

 

**Liquidityand Capital Resources**

 

The Company’s ongoingcash requirements are for working capital, capital expenditures and debtservice. The Company expects to rely on cash generated from its operations,supplemented by borrowings available on the revolving credit loan, to fund it’scash requirements.

 

Operating activitiesprovided cash of $2,107,000, $929,000 and $1,261,000 in fiscal 2002, fiscal2001 and fiscal 2000, respectively.  Theincrease in cash flow from operating activities in fiscal 2002 in comparison tofiscal 2001 can be attributed primarily to the improvement in operating resultsin the current year and the net change in asset and liability balances fromyear to year.  As a result of decline innet sales, accounts receivable and inventory balances decreased, and accountspayable and accrued expenses balances increased with extending paymentterms.  The decrease in cash flow fromoperating activities in fiscal 2001 in comparison to fiscal 2000 can beprimarily attributed to a reduction in cash flow from operating results, offsetby a decrease in accounts receivable and inventory, and an increase in accountspayable and accrued expenses.

 

Investing activities usedcash of $5,000, $211,000 and $337,000 in fiscal 2002, fiscal 2001 and fiscal2000, respectively.  The principal useof cash was capital expenditures.  Theprincipal source of cash was proceeds from notes receivable issued inconnection with sale of property and equipment.  In fiscal 2002, the Company expended funds for Internet websitedevelopment, and equipment replacement and upgrades.  In fiscal 2001, the Company expended funds primarily for Internetwebsite development, fixed assets upgrades, and equipment replacements and upgrades.  In fiscal 2000, the Company expended fundsprimarily for the Internet website development, new distribution software(subsequently not implemented and costs written-off in fiscal 2001), andequipment replacement and upgrades. Currently, the Company’s credit facility limits annual capital expendituresto $1 million.

 

Financing activities usedcash of $522,000, $2,342,000 and $298,000 in fiscal 2002, fiscal 2001 andfiscal 2000, respectively.  Theprincipal uses of cash were scheduled repayments and pre-payments on theoutstanding bank debt. The principal sources of cash were borrowings on therevolver and proceeds from the sale of common stock issuance in fiscal2000.  In fiscal 2001, the Companyprepaid the entire outstanding bank term loan and fixed rate loan balance,which had payment terms through June 2003. In fiscal 2000, the Company had $3,956,000 in proceeds from issuance ofcommon stock.  As noted, the aboveequity infusion was used to prepay certain debt and improve the overallliabilities to equity position of the Company.

 

The credit facility with The Provident Bank (the"Bank") also contains, among other provisions, requirements formaintaining certain earnings levels and financial ratios, limits on capitalexpenditures and additional indebtedness, and use of proceeds from certainequity offerings.  As of February 1,2003, the Company was in compliance with all the debt covenant requirements ofthe credit facility agreement.  Thecurrent credit facility expires on June 1, 2003, but the bank has agreed toextend the term of the credit facility to June 30, 2003.  The bank has not given indication that theyintend to renew the credit facility agreement. The Company continues discussions with various financing sources forfunding alternatives to its current credit facility, and to date has not beenable to secure alternate financing.  TheCompany is currently in discussions with two banks to obtain a credit facilityin the event the pending merger transaction with S.I. Acquisition LLC closes.  In each case, the banks are requiring a personalguarantee or pledge of assets from the Company’s Chairman of the Board, JackMiller.  In the event the mergertransaction does not close and the Company is unable to secure additional bankborrowings or alternative sources of capital, the Company will have liquidityissues that raise substantial doubt about the Company’s ability to continue tooperate as a going concern and may consider filing for protection under theUnited States bankruptcy laws.  Thefinancial statements do not include any adjustments relating to therecoverability and classification of asset carrying amounts or the amount andclassification of liabilities that might result should the Company be unable tocontinue to operate as a going concern.

 

See Note 7 in the Notes to the Consolidated FinancialStatements in Part IV of this document for the current terms under the creditfacility agreement with The Provident Bank.

 

The Company believes thatinternally generated funds and the credit facility with The Provident Bank willbe sufficient to meet its current operating needs, fund debt service andanticipated capital expenditures through June 30, 2003.  At February 1, 2003, the availableborrowings on the revolving credit loan were $1,460,000.

 

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**Seasonality**

 

The Company’s business issubject to seasonal variations in demand. Historically, a significant portion of the Company’s sales and netincome have been realized during the period from October through January.  The effects of seasonality are greater inthe Company’s retail operations and sales to franchisees than the othersegments of its business.  Mostoperating expenses are incurred evenly throughout the year, although someselling and administrative expenses are variable depending on sales, and directmarketing catalog advertising expenses as a percentage of sales are higher inthe first calendar quarter due to more prospecting.  The Company’s operating results may also vary depending upon suchfactors as catalog mailings, and the timing of new product introductions andpromotions by the Company.  TheCompany’s cash requirements generally reach a seasonal peak in the second halfof the fiscal year to finance increased inventory levels needed to meet thethird and fourth quarter sales demand.

 

**Inflation**

 

The Company does notbelieve that inflation has had a material impact on its operations during thelast fiscal year.

 

**Disclosure Regarding Forward-LookingStatements**

 

This Form 10-K report contains forward-lookingstatements which the Company believes are within the meaning of Section 27A ofthe Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  Such forward-looking statementsmay be deemed to include, among other things, statements relating toanticipated financial performance, the management team, management’s long-termperformance goals, channels, programs to reduce costs and enhance assetutilization, banking arrangement and terms, realization of deferred tax assets,filing for protection under the United States bankruptcy laws, as well asstatements relating to the Company’s operational and growth strategies.  Although the Company believes that theexpectations reflected in such forward-looking statements are reasonable, itcan give no assurance that such expectations will prove to be accurate, andactual results could differ materially from those addressed in forward-lookingstatements contained in this Form 10-K report. Potential risks and uncertainties include such factors as the financialstrength of the economy, and the retail and catalog industries in general,changes in consumer confidence, the level of consumer spending onmotivational-type products, the competitive pricing environment within themarkets that the Company distributes its products, the level of the Company’ssuccess in continuing to control costs and the Company’s ability to increasecertain margins through economies of scale. Additional risks and uncertainties include the Company’s ability todevelop and introduce successful new products, generate funds or obtain outsidesources of capital sufficient to meet its current operating and capital needs,as well as consummate the proposed merger. Investors are also directed to consider other risks and uncertaintiesdiscussed in the Company’s public announcements, reports to shareholders anddocuments filed by the Company with the Securities and Exchange Commission,including but not limited to Reports on Forms 10-K, 8-K and 10-Q.  These risks and uncertainties should beconsidered in evaluating forward-looking statements and undue reliance shouldnot be placed on such statements.  TheCompany undertakes no obligation to update or revise any forward-lookingstatements to reflect events or circumstances that may arise after the date onthis report.

 

**Item7A.  Quantitative****andQualitative Disclosure About Market Risk**

 

The Company is subject tomarket risk associated with adverse changes in interest rates and foreigncurrency exchange rates, but does not hold any market risk sensitive instrumentsfor trading purposes.  The Company usesvariable rate debt, as described in Note 7 of the Notes to ConsolidatedFinancial Statements included herein. At February 1, 2003, principal exposed to interest rate risk is limitedto $1,131,000 in variable rate debt. The variable rate debt level varies periodically and the maximumborrowings available under the credit facility at February 1, 2003 was$2,591,000.  The impact of 1% change ininterest rates on the variable rate debt is approximately $11,000.  The Company’s exposure to foreign currencyexchange rate risk relates primarily to the financial position and results ofoperations in Canada.  The Company’sexposure to foreign currency exchange rate risk is difficult to estimate due tofactors such as balance sheet accounts, and the existing economic uncertaintyand future economic conditions in the international marketplace.  The Company does not expect significantimpact from foreign currency exchange rate risk.  The Company’s Canadian operations annual sales are approximately$2,000,000.

 

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**Item8.  Financial Statements****andSupplementary Data**

 

See the Index toFinancial Statements and Financial Statement Schedules on page F-1.  Such Financial Statements and Schedules areincorporated herein by reference.

 

**Item 9. Changes in and Disagreements****with Accountants on Accounting and FinancialDisclosure**

 

None

 

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**PART III**

 

**Item 10.****                  Directors andExecutive****Officers of theRegistrant**

 

The names, ages and certain background information ofthe persons serving as the Board of Directors and Executive Officers of theCompany are set forth below.

 
| **Directors and  Executive Officers:** |   | **Age** |   | **Director  Term  Expires** |   | **Director  Since** |   | **Principal Occupation for Last Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|----------------------------------------|--------|---------|--------|-----------------------------|--------|---------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Arnold M. Anderson                     |   | 58      |   | 2004                        |   | 1990                |   | Director since  October 1999; prior thereto Director and Chairman of the Board since  November 1998; prior thereto, Chairman of the Board, Director and Chief  Executive Officer since June 1998; prior thereto, Chairman of the Board  and Director of the Company since May 1997; prior thereto, Chief  Executive Officer, Chairman of the Board and Director since June 1995;  prior thereto, Chief Executive Officer, President, Chairman of the Board and  Director of the Company and its predecessor since October 1990; prior  thereto, Chairman and President of the predecessors to the Company’s  subsidiaries. |
|                                   |   |    |   |                        |   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| John C. Carroll                        |   | 54      |   | N/A                         |   | N/A                 |   | Interim President and  Chief Executive Officer, Chief Operating Officer and Chief Financial Officer  since February 2003; prior thereto, Senior Vice President, Chief Operating  Officer and Chief Financial Officer since April 2001; prior thereto, Senior  Vice President and Chief Financial Officer since April 2000; prior thereto,  Vice President  Finance and Operations  of D&B Auto Radio, Inc. (remanufacturer and distributor of after-market  automotive electronics) since November 1993.                                                                                                                                             |
|                                   |   |    |   |                        |   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Howard I.  Bernstein(2)(3)             |   | 73      |   | 2005                        |   | 1999                |   | Director and President  of Howard I. Bernstein, LTD, a consulting firm specializing in finance,  mergers and acquisitions, since 1987.   Director of J. H. Chapman Group, LTD. and J. H. Chapman  Group, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                   |   |    |   |                        |   |                |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| Larry A. Hodges(2)(5)                  |   | 54      |   | 2005                        |   | 2000                |   | President and Chief  Executive Officer of Mrs. Fields Original Cookies, Inc., a premium  snack-food provider, since March 1994, and a Director since  April 1993.  Director of  Ameristar Casinos, Inc. and Coinstar, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                |

 

17

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| Donald J. Hoff                     |   | 55     |   | N/A    |   | N/A    |   | Vice President of  Marketing/Merchandising/ Advertising since February 2003; prior to that,  Director of Marketing Communications for Harcourt Supplemental Publishing  (publisher of supplemental materials for the pre-K through 8 education  market) since July 2002;  prior to  that, Director of Marketing for Comark, Inc. (A privately held reseller of  computer  hardware, software and  services to businesses, government and education) since November 1991. |
|------------------------------------|--------|--------|--------|--------|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                               |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Michael H. McKee                   |   | 49     |   | N/A    |   | N/A    |   | Senior Vice President  and Creative Director since October 1999; prior thereto, Senior Vice  President and Creative Director, and Director since October 1990; prior  thereto, Creative Director of Product Development and Advertising for the  Subsidiaries.                                                                                                                                                                                                                     |
|                               |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Jack Miller(1)(4)                  |   | 74     |   | 2004   |   | 1999   |   | Chairman of the Board  of the Company since October 1999; prior thereto, Founder, President and  Chief Executive Officer of Quill Corporation from June 1956 to  January 31, 2000.                                                                                                                                                                                                                                                                                  |
|                               |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| R. Scott  Morrison, Jr.(3)(4) |   | 63     |   | 2003   |   | 1999   |   | Real estate developer  and owner, operator and investor in various hotel products and real estate  entities since 1988.  Co-founder of  and an investor in the Extended Stay America national hotel chain.                                                                                                                                                                                                                                                                    |
|                               |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Leslie Nathanson  Juris(2)(5)      |   | 56     |   | 2003   |   | 2000   |   | Founding partner of RNW  Consulting, Inc., a consulting firm specializing in implementing strategy and  managing complex organizational change.   Prior to January 1, 1999, managing director of RNW Consulting,  Inc., a position held for more than the past five years.                                                                                                                                                                                               |
|                               |   |   |   |   |   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Gregory J. Nowak                   |   | 42     |   | N/A    |   | N/A    |   | Vice President, General  Counsel and Corporate Secretary since October 1998; prior thereto, Vice  President and Associate Counsel of Scudder Kemper Investments, Inc.  (investment manager) since 1995.                                                                                                                                                                                                                                                                            |

 

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(1)                                  Memberof the Executive Committee.

(2)                                  Memberof the Audit Committee.

(3)                                  Memberof the Compensation and Stock Option Committee.

(4)                                  Memberof the Director Nominating Committee.

(5)                                  Memberof the Special Committee

 

18

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**SECTION 16(a) BENEFICIAL OWNERSHIPREPORTING COMPLIANCE**

 

Section 16 of the Securities Exchange Act of 1934requires the Company's directors, its executive officers, and any personsholding more than 10% of the Company's Common Stock to report their initialownership of the Company's Common Stock and any subsequent changes in thatownership to the Securities and Exchange Commission.  Specific due dates for these reports have been established, andthe Company is required to disclose any failure to file such reports by theapplicable due dates during the fiscal year ended February 1, 2003.  To the best of the Company's knowledge, allof these filing requirements were timely satisfied.

 

**Item11.****                  ExecutiveCompensation**

 

**COMPENSATIONAND OTHER TRANSACTIONS WITH MANAGEMENT**

 

**SummaryCompensation Table**

 

The following table includes, for each of the fiscalyears ended February 1, 2003, February 2, 2002 and February 3, 2001,individual compensation for services to the Company and its subsidiaries paidor awarded to, or earned by: (i) the Chief Executive Officer of theCompany at February 1, 2003; and (ii) the four most highlycompensated executive officers of the Company (collectively, the “NamedExecutive Officers”) who served as such during the fiscal year endedFebruary 1, 2003.  The fiscal yearended February 3, 2001 had 53 weeks compared to 52 weeks for the fiscalyears ended February 1, 2003 and February 2, 2002.

 
| **Name and Principal Positions** |   | **Year**       |   | **Annual  Compensation**             |   | **Long Term  Compensation  Awards**       |   |                             |   |
|----------------------------------|--------|----------------|--------|--------------------------------------|--------|-------------------------------------------|--------|----------------------------------|--------|
| **Salary ($)**                   |   | **Bonus  ($)** |   | **Other  Annual  Compensation  ($)** |   | **Securities  Underlying  Options  (#)*** |   | **All Other  Compensation  ($)** |   |
| Gary J.  Rovansek           |   | 2003           | (1)    | 225,000                              |   | —                                    |   | —                           |   | — |   | 2,200 | (3) |
| President and  Chief Executive   |   | 2002           |   | 238,462                              | (2)    | —                                    |   | —                           |   | — |   | 2,425 | (3) |
| Officer                          |   | 2001           |   | 229,328                              |   | 45,224                                    |   | —                           |   | 55,000 | (4) | 2,660 | (3) |
|                             |   |           |   |                                 |   |                                      |   |                             |   |   |   |   |   |
| Arnold  M. Anderson              |   | 2003           |   | 141,346                              | (5)    | —                                    |   | —                           |   | — |   | 1,413 | (8) |
| Founder  and                     |   | 2002           |   | 200,481                              | (6)    | —                                    |   | —                           |   | — |   | 1,875 | (8) |
| Chairman  Emeritus               |   | 2001           |   | 229,328                              |   | 45,224                                    |   | —                           |   | 5,000 | (7) | 12,100 | (8) |
|                             |   |           |   |                                 |   |                                      |   |                             |   |   |   |   |   |
| Michael  H. McKee                |   | 2003           |   | 223,076                              | (9)    | —                                    |   | —                           |   | — |   | 231 | (10) |
| Senior Vice  President           |   | 2002           |   | 200,000                              |   | —                                    |   | —                           |   | — |   | 615 | (10) |
| and  Creative  Director          |   | 2001           |   | 193,077                              |   | 30,224                                    |   | —                           |   | 5,000 | (7) | 6,200 | (10) |
|                             |   |           |   |                                 |   |                                      |   |                             |   |   |   |   |   |
| John  C. Carroll                 |   | 2003           | (11)   | 175,000                              |   | —                                    |   | —                           |   | — |   | 2,100 | (14) |
| Senior Vice  President,          |   | 2002           |   | 175,000                              |   | —                                    |   | —                           |   | — |   | 1,050 | (14) |
| Chief  Operating  and            |   | 2001           |   | 134,981                              | (12)   | 31,396                                    |   | —                           |   | 35,000 | (13) | — |   |
| Chief  Financial  Officer        |   |           |   |                                 |   |                                      |   |                             |   |   |   |   |   |
|                             |   |           |   |                                 |   |                                      |   |                             |   |   |   |   |   |
| John  F. Halpin                  |   | 2003           | (15)   | 145,000                              |   | —                                    |   | —                           |   | — |   | 1,665 | (14) |
| Senior  Vice  President,         |   | 2002           |   | 145,000                              |   | —                                    |   | —                           |   | — |   | 1,515 | (14) |
| Direct  Marketing                |   | 2001           |   | 137,789                              |   | 26,999                                    |   | —                           |   | 5,000 | (7) | 1,585 | (14) |
| Division                         |   |           |   |                                 |   |                                      |   |                             |   |   |   |   |   |

 

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*                                         Optionawards earned in a particular fiscal year were actually granted in thesubsequent fiscal year.

(1)                                  Mr.Rovansek resigned from the Company effective February 13, 2003.

(2)                                  Mr.Rovansek, on a temporary basis, voluntarily reduced his per annum salary by$25,000 effective August 13, 2001.

(3)                                  Representsmatching contributions to the Company’s 401(k) plan for the benefit of theexecutive officer of $2,200, $1,865 and $2,100 for 2003, 2002 and 2001respectively; and club membership fees of $0, $560 and $560 for 2003, 2002 and2001, respectively.

(4)                                  Includesoptions to purchase 25,000 shares of Common Stock each granted on July 25,2000 and March 30, 2001, and options to purchase 5,000 shares of CommonStock granted on April 5, 2001, pursuant to the Company’s Stock OptionPlan; such options vest and become exercisable in five cumulative annual

 

19

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increments of 20% of theinitial grant, commencing July 25, 2001, March 30, 2002 andApril 1, 2002, respectively, and expiring July 25, 2010,March 30, 2011 and April 1, 2011, respectively.

(5)                                  Mr. Anderson’sbase salary was reduced to $125,000 effective October 1, 2002.

(6)                                  Mr. Anderson’sbase salary was reduced to $150,000 effective October 1, 2001.  Includes vacation accrual pay-out of$25,761.

(7)                                  Representsoptions granted on April 5, 2001 pursuant to the Company’s Stock OptionPlan; such options vest and become exercisable in five cumulative annualincrements of 20% of the initial grant, commencing April 1, 2002 andexpiring on April 1, 2011.

(8)                                  Represents(i) forgiveness of $10,000 in principal on a Second Amended and RestatedPromissory Note dated December 9, 1999 for 2001, and (ii) matchingcontributions to the Company’s 401(k) plan for the benefit of the executiveofficer of $1,413, $1,875 and $2,100 for 2003, 2002 and 2001, respectively.

(9)                                  Includesvacation accrual pay out of $23,076.

(10)                            Represents(i) forgiveness of $5000 in principal on an Amended and RestatedPromissory Note dated December 9, 1999 for 2001, and (ii) matchingcontributions to the Company’s 401(k) plan made by the Company for the benefitof the executive officer of $231, $615 and $1,200 for 2003, 2002 and 2001,respectively.

(11)                            Mr.Carroll was appointed the additional title of Interim President and ChiefExecutive Officer on February 13, 2003.

(12)                            Representsamounts paid to Mr. Carroll since he became employed by the Company onApril 6, 2000.

(13)                            Representsoptions to purchase 30,000 shares granted April 6, 2000 pursuant to theCompany’s Stock Option Plan; such options vest and become exercisable in fivecumulative annual increments of 20% of the initial grant, commencingApril 6, 2001 and expiring April 6, 2010; and 5,000 options grantedApril 5, 2001; such options vest and become exercisable in five annualincrements of 20% of the initial grant, commencing April 1, 2002 andexpiring April 1, 2011.

(14)                            Representsmatching contributions to the Company’s 401(k) plan made by the Company for thebenefit of the executive officer.

(15)                            Mr.Halpin's employment was terminated on February 21, 2003.

 

**OptionGrants in Last Fiscal Year**

** **

No options were grantedto the Named Executive Officers during the fiscal year ended February 1,2003.

 

**AggregatedOption Exercises in Last Fiscal Year and Fiscal Year-End Option Value**

 
|                   |   | **Shares  Acquired  on  Exercise  (#)** |   | **Value  Realized  ($)** |   | **Number of  Securities  Underlying Unexercised  Options at  February 1, 2003 (#)** |   | **Value of  Unexercised  In-the-Money  Options at  February 1, 2003($)(1)** |   |
|------------------------|--------|-----------------------------------------|--------|--------------------------|--------|------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|
| **Exercisable**        |   | **Unexercisable**                       |   | **Exercisable**          |   | **Unexercisable**                                                                        |   |
| Gary J.  Rovansek |   | —                                  |   | —                   |   | 116,000                                                                                  |   | 39,000                                                                           |   | — |   | — |   |
| Arnold  M. Anderson    |   | —                                  |   | —                   |   | 276,000                                                                                  |   | 4,000                                                                            |   | — |   | — |   |
| Michael  H. McKee      |   | —                                  |   | —                   |   | 144,500                                                                                  |   | 38,000                                                                           |   | — |   | — |   |
| John  C. Carroll       |   | —                                  |   | —                   |   | 13,000                                                                                   |   | 22,000                                                                           |   | — |   | — |   |
| John  F. Halpin        |   | —                                  |   | —                   |   | 46,142                                                                                   |   | 11,000                                                                           |   | — |   | — |   |

 

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(1)                                  Valueis based on the difference between the exercise price and fair market value atJanuary 31, 2003, the last day during the fiscal year for which market pricesare available ($0.15 per share as quoted on the Over The Counter BulletinBoard), multiplied by the number of shares underlying the option.

 

**DirectorCompensation**

 

Each non-employee director receives cash compensationin the amount of $1,000 plus travel-related expenses for each meeting attendedin person and $500 for each meeting attended via telephone.  In addition, each non-employee directorreceives an annual grant of shares of the Company’s Common Stock pursuant toits Stock Option Plan equal in value to a total of $20,000, paid in quarterly installments,at a price equal to the trailing 10-day average closing price of the Company’sCommon Stock prior to the end of the quarter for which such shares areissued.  In addition, non-employeedirectors receive $500 plus reimbursement for travel-related expenses forattending each meeting of committees of the Board on which they serve.

 

20

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**EmploymentAgreements**

 

In March 1996, the Company entered into an employmentagreement with Arnold M. Anderson which provided that he would receive aminimum base salary of $200,000 per year annually for three years plus theopportunity to earn a bonus each year. Effective December 6, 1998, Mr. Anderson’s base salaryincreased to $225,000.  In addition, theemployment agreement provided that commencing in the fiscal year endedFebruary 1, 1997, Mr. Anderson and the Board of Directors shall agreeeach fiscal year upon the specific performance standards and criteria thatwould be used to determine how the bonus is actually earned and shall agree uponthe amount of the actual bonus opportunity for such fiscal year.  In October 2001, the Company enteredinto a new three year employment agreement with Mr. Anderson which providesthat he will receive an annual base salary of $150,000 in year one and $125,000in each of years two and three. Mr. Anderson is not entitled to any bonus, stock options or paidvacation under the agreement.

 

The employment agreement for Mr. Andersenprovides that there shall be no extensions of the term of employment.  Under the terms of the agreement, if theCompany terminates the employment of Mr. Anderson, other than for “justcause,” or if Mr. Anderson terminates his employment for “good reason,”the Company shall pay to Mr. Anderson the remainder of his base salary duringthe remainder of his term of employment. “Just cause” includes (a) an act of fraud or dishonesty by theemployee; (b) a felony committed by the employee; (c) a materialbreach or threatened breach by the employee of any provision of the employmentagreement that has not been cured; (d) failure by employee, after a noticeto cure, to make timely on his promissory note with the Company; and(e) any activity engaged in by the employee to commit or incur anyliability on behalf of the Company and such activity is not specificallyallowed under the employment agreement. “Good reason” shall mean (a) a reduction in employee’s minimum basesalary or (b) a material reduction in employee’s benefits or a materialbreach of the Company’s obligations under the employment agreement.

 

In October 1998, the Company entered into anemployment agreement with Gary J. Rovansek which provided that he wouldreceive a minimum base salary of $225,000 per year annually for three yearsplus the opportunity to earn a bonus each year.  Effective February 1, 2001, Mr. Rovansek’s base salaryincreased to $250,000. Mr. Rovansek, on a temporary basis, voluntarily reduced his perannum salary by $25,000 to $225,000 effective August 13, 2001.  In addition, the employment agreementprovided that within 30 days after the commencement of each fiscal year,Mr. Rovansek and the Board of Directors shall agree upon the specificperformance standards and criteria that will be used to determine how the bonusis actually earned and shall agree upon the amount of the actual bonusopportunity for such fiscal year. Pursuant to the agreed upon formula, Mr. Rovansek received no bonusfor the fiscal year ended February 1, 2003.

 

The Company notified Mr. Rovansek on November 21, 2002that the Company would not renew the employment agreement, which was scheduledto terminate in November, 2003.  InFebruary, 2003, the Company and Gary J. Rovansek entered into a separationagreement and general release effective February 13, 2003, the date Mr.Rovansek resigned from his employment with the Company in all capacities.  Except to the extent specifically referencedtherein, the separation agreement superseded the employment agreement and achange in control agreement previously entered into by the parties.  Pursuant to this separation agreement, Mr.Rovansek received a lump sum (subject to withholding for applicable taxes and401(k) and medical and dental insurance contributions) equal to $240,720.80,which constituted the sum of Mr. Rovansek’s regular base salary through November30, 2003, plus payment for accrued but unused vacation.  Further, upon the earlier of a (i) change incontrol (as defined in that change in control agreement dated August 20, 2002between the Company and Mr. Rovansek) or (ii) November 30, 2003, the Companyshall pay Mr. Rovansek $96,428.  Theterm “change in control” means any transaction or series or combination oftransactions whereby, directly or indirectly, control of, or a materialinterest in, the Company or any material portion of its businesses or assets istransferred for consideration, including, without limitation, a sale orexchange of capital stock or assets, a merger or consolidation, a tender orexchange offer, a leveraged buy-out, the formation of a joint venture, minorityinvestment or partnership, or any similar transaction.

 

In June 1999, the Company entered into anemployment agreement with Michael H. McKee, which provided that Mr. McKeewill receive a minimum base salary of $150,000 per year annually for threeyears plus the opportunity to earn a bonus each year.  Effective April 18, 2000, Mr. McKee’s base salaryincreased to $200,000.  In addition, theemployment agreement provides that Mr. McKee shall be eligible toparticipate in the bonus plans made available generally to the Chief ExecutiveOfficer, Chief Operating Officer and senior executives of the Company.  Pursuant to the agreed upon formula,Mr. McKee received no bonus for the fiscal year ended February 1,2003.

 

The employment agreement for Mr. McKee provides thatunless either party, at least one year prior to the conclusion of the term ofemployment, provides written notice to the other party of that party’sintention not to renew the employment agreement, the term of employment isautomatically extended for one additional year.  There is no limit on the number of extensions of the term ofemployment.  Pursuant to this noticeprovision, the Company informed Mr. McKee that his employment agreement,which currently expires on June 1, 2003, will not be extended.  Under the terms of the agreement, if theCompany terminates the employment of the officer, other than for “just cause,”or if the officer terminates his employment for “good reason,” the Companyshall pay to Mr. McKee the remainder of his base salary during the remainderof his term of employment, or for a period of 24 months, whichever isless.  “Just cause” includes (a) anact of fraud or dishonesty by the employee; (b) a felony committed by

 

21

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the employee; and (c) a material breach by the employee of hisemployment agreement.  “Good reason”includes (a) the assignment to the employee of duties inconsistent withhis position; (b) a reduction in his minimum base salary or benefits orbreach of the Company’s obligations under the employment agreement;(c) subsequent to a change in control, the failure by the Company toobtain from its successor the assumption of the employment agreement; and(d) subsequent to a change in control, any purported termination of the officer’semployment not effected pursuant to the notice provisions of the agreement.

 

In August 2002, the Company and Mr. McKee entered intoa change in control agreement, which provides that Mr. McKee shall receive$150,000 within five days of a change in control as defined therein.  The $150,000 amount shall be reduced by (i)any debt owed to the Company by Mr. McKee and (ii) any third party debt owed byMr. McKee which the Company has granted. This agreement is effective until the later of (i) June 1, 2003 or (ii) thedate of a change in control provided, the negotiations for such change incontrol began before June 1, 2003.  (Theterm change in control has the same meaning as in the former change of controlagreement between the Company and Mr. Rovansek, please see definition above).

 

 

**Compensationand Stock Option Committee Interlocks and Insider Participation**

 

On April 6, 1993, the Company established aCompensation Committee of the Board for purposes of making certain executivecompensation decisions.  On May 21,1996, the Stock Option Committee was combined with the Compensation Committeeto form the Compensation and Stock Option Committee.  Messrs. Bernstein and Morrison are members of theCompensation and Stock Option Committee. At the request of the Compensation and Stock Option Committee, thePresident of the Company has and will confer with the Committee and makerecommendations for the salaries and bonuses of the executive officers.  No relationship exists between the Companyand any member of the Compensation and Stock Option Committee requiringdisclosure under this section for the Company's last fiscal year.

 

22

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**Item 12.****                  SecurityOwnership****of Certain Beneficial Owners and Management**

 

**EQUITYCOMPENSATION PLAN INFORMATION**

 
|                                                        |   | **Number of  Securities to be  issued upon exercise of  outstanding options,  warrants and rights** |   | **Weighted-Average  exercise price of  outstanding options,  warrants and rights** |   | **Number of  Securities  Remaining Available for  Future Issuance Under  Equity Compensation  Plans (excluding securities  reflected in column (a))** |   |
|-------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Plan  Category                                              |   | (a)                                                                                                 |   | (b)                                                                                |   | (c)                                                                                                                                                   |   |
| Equity  Compensation Plans Approved by Security Holders     |   | 1,278,460                                                                                           |   | $ 4.71                                                                             |   | 1,079,215                                                                                                                                             |   |
| Equity  Compensation Plans not Approved by Security Holders |   | 645,464                                                                                             |   | 2.62                                                                               |   | N/A                                                                                                                                                   |   |
| Total                                                       |   | 1,923,924                                                                                           |   | 4.01                                                                               |   | N/A                                                                                                                                                   |   |

 

**SECURITYOWNERSHIP**

 

As of February 28, 2003, Successories had an aggregateof 11,059,580 outstanding voting securities consisting of 9,910,984 shares ofcommon stock, 503,092 shares of Series A convertible preferred stock, par value$.01 per share, which are convertible into 503,092 shares of common stock, and101,667 shares of Series B convertible preferred stock, par value $.01 pershare, which are convertible into 645,504 shares of common stock.  The following table sets forth informationof all persons known to be the beneficial owner of more than 5% of Successoriesoutstanding voting securities as of February 28, 2003.

 
| **Beneficial Owner**    |   | **Number of  Shares Owned and  Nature of Beneficial  Ownership(1)** |   | **Percent of  Class** |   |
|-------------------------|--------|---------------------------------------------------------------------|--------|-----------------------|--------|
| Jack  Miller            |   | 3,954,577                                                           | (2)(6) | 35.7                  | %      |
| Arnold  M. Anderson     |   | 705,890                                                             | (3)    | 6.2                   | %      |
| Corbin  & Company   |   | 1,063,850                                                           | (4)    | 9.6                   | %      |
| R.  Scott Morrison, Jr. |   | 612,541                                                             | (5)    | 5.5                   | %      |

 

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(1)                                  Natureof beneficial ownership is direct unless otherwise indicated by footnote.  Beneficial ownership as shown in the tablearises from sole voting and investment power unless otherwise indicated byfootnote.  Unless otherwise indicated,share references are to Successories common stock.

 

(2)                                  S.I.Acquisition LLC, of which Jack Miller is indirectly the sole manager, owns (i)2,799,565 shares; (ii) 503,092 shares of Series A convertible preferred stock,par value $.01 per share, of Successories, which as of February 28, 2003 areconvertible Into 503,092 shares of Successories common stock; and (iii) 100,000shares of Series B convertible preferred stock, par value $.01 per share, ofSuccessories, which as of February 28, 2003 are convertible into 634,920 sharesof Successories common stock.  Includes17,000 shares subject to immediately exercisable options.  The address of The Jack Miller LimitedPartnership #1 is 485 Half Day Road, Suite 200, Buffalo Grove, Illinois 60089.

 

(3)                                  Includes277,000 shares subject to immediately exercisable options; 80,290 shares heldby Peggy Anderson (his spouse); 133,600 shares held in trust by Peggy Andersonas trustee, as to which Mr. Anderson has sole voting and investment power; and2,400 shares held in the name of his son, Blayke Anderson.  Mr. Anderson’s address is c/o Successories,Inc., 2520 Diehl Road, Aurora, Illinois 60504.

 

(4)                                  Accordingto a Schedule 13G/A dated December 31, 2002 and filed with the Securities andExchange Commission (the “SEC”), Corbin & Company, a registered investmentadvisor, had shared voting and shared dispositive power over 1,063,850shares.  The address of Corbin &Company is 6300 Ridglea Place, Suite 1111, Fort Worth, Texas 76116.

 

23

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(5)                                  Includes355,025 shares held in trust by Mr. Morrison as trustee, as to which Mr.Morrison has sole voting and investment power; 165,516 shares held by Mr.Morrison as trustee for a family limited partnership; 75,000 shares held inTrust by Norma A. Morrison (his spouse) and 17,000 shares subject toimmediately exercisable options. Mr. Morrison’s address is c/o MorrisonProperties, 243 N.E. Fifth Avenue, Delray Beach, Florida 33483.

 

(6)                                  OnFebruary 13, 2003, the Company entered into a definitive merger agreementwith S.I. Acquisition LLC, an Illinois limited liability company formedprincipally for the benefit of Jack Miller, the Company's Chairman, members ofhis family and Howard I. Bernstein, a director of the Company.  See "Certain Relationships and RelatedTransactions."

 

The following table sets forth, as of February 28, 2003,information with respect to the shares of our common stock beneficially ownedby: (i) each director; (ii) the Interim Chief Executive Officer; (iii) theother most highly compensated executive officers; and (iv) all directors andexecutive officers as a group.

 
| **Beneficial Owner**                                                 |   | **Number of  Shares Owned and  Nature of Beneficial  Ownership(1)** |   | **Percent of  Class** |   |
|----------------------------------------------------------------------|--------|---------------------------------------------------------------------|--------|-----------------------|--------|
| Arnold  M. Anderson                                                  |   | 705,890                                                             | (2)    | 6.2                   | %      |
| Howard  I. Bernstein                                                 |   | 13,000                                                              | (3)    | *                     |   |
| John  C. Carroll                                                     |   | 20,000                                                              | (4)    | *                     |   |
| Larry  A. Hodges                                                     |   | 73,516                                                              | (5)    | *                     |   |
| Donald  J. Hoff                                                      |   | 0                                                                   |   | *                     |   |
| Leslie  Nathanson Juris                                              |   | 78,516                                                              | (6)    | *                     |   |
| Michael  H. McKee                                                    |   | 183,092                                                             | (7)    | 1.6                   | %      |
| Jack  Miller                                                         |   | 3,954,577                                                           | (8)    | 35.7                  | %      |
| R.  Scott Morrison, Jr.                                              |   | 612,541                                                             | (9)    | 5.5                   | %      |
| All  of the directors and executive officers as a group (11 persons) |   | 5,641,132                                                           | (10)   | 49.1                  | %      |

 

----

*                                         Percentagerepresents less than 1%.

 

(1)                                  Natureof beneficial ownership is direct unless otherwise indicated by footnote.  Beneficial ownership as shown in the tablearises from sole voting and investment power unless otherwise indicated byfootnote.

 

(2)                                  Seenote 3 to the previous security ownership table.

 

(3)                                  Comprisedof 13,000 shares owned by the Howard I. Bernstein Declaration of Trust dated4/28/87 subject to immediately exercisable options.  Excludes 82,474 shares of series A convertible preferred stock,par value $0.01 per share of Successories and 152,378 shares of Successoriescommon stock, all of which shares were contributed by the Howard I. BernsteinDeclaration of Trust dated 4/28/87 to S.I. Acquisition LLC.

 

(4)                                  Includes20,000 shares subject to immediately exercisable options.

 

(5)                                  Includes13,000 shares subject to immediately exercisable options.

 

(6)                                  Includes60,516 shares held by Leslie Nathanson Juris; 5,000 shares held in trust byLeslie Nathanson Juris and 13,000 shares subject to immediately exercisableoptions.

 

(7)                                  Includes8,844 shares held by Michael H. McKee; 25,918 shares held by Michael McKee andCassandra McKee (his spouse) as joint tenants; 330 shares held by CassandraMcKee; 500 shares held by Cassandra McKee as custodian and 147,500 sharessubject to immediately exercisable options.

 

(8)                                  Seenotes 2 and 6 to the previous security ownership table.

 

(9)                                  Seenote 5 to the previous security ownership table.

 

(10)                            Includes541,500 shares subject to options exercisable within 60 days.

 

24

----

 

**Item 13.****                  CertainRelationships****and Related Transactions**

 

All transactions between the Company and its officers,directors, and principal shareholders are required to be approved by a majorityof the independent and disinterested non-employee directors of the Company’sBoard and must be on terms no less favorable to the Company than could beobtained from unaffiliated third parties.

 

During the fiscal yearended February 3, 2001, Michael H. McKee, an officer of the Company,executed a $140,000 Promissory Note on behalf of LaSalle Bank NationalAssociation.  The Company guaranteedpayment of the indebtedness to LaSalle Bank National Association.  The guarantee includes the payment of(a) all principal, (b) all interest, (c) all late charges,(d) all loan fees and loan charges, and (e) all collection costs andexpenses relating to the promissory note or any collateral for the promissorynote.  The current principal balance onthis Promissory Note is $102,000.

 

On December 9, 1999, Mr. McKee executed anAmended and Restated Promissory Note to the Company in the principal amount of$25,000 plus interest due on June 30, 2003, and payable in annualinstallments, provided that the payment of the principal in such annualinstallments shall be forgiven if the Company meets specified annual targetearnings.  Mr. McKee’s Amended andRestated Promissory Note replaced a Promissory Note executed to the Companydated June 5, 1997.  No amount ofprincipal due under the note in fiscal 2002 was forgiven.  The current principal balance on thisAmended and Restated Promissory Note is $15,000.

 

On December 9, 1999, Mr. Anderson, anofficer and director of the Company, executed a Second Amended and RestatedPromissory Note to the Company in the principal amount of $107,625 plusinterest due on June 30, 2003, and payable in annual installments,provided that the payment of the principal in such annual installments shall beforgiven if the Company meets specified annual target earnings.  Mr. Anderson’s Second Amended andRestated Promissory Note replaces an Amended and Restated Promissory Noteexecuted to the Company dated September 3, 1998, and is secured by a pledgeof certain shares of common stock of the Company held byMr. Anderson.  No amount ofprincipal due under the note in fiscal 2002 was forgiven.  The current principal balance on this secondAmended and Restated Promissory is $87,625.

 

On February 13,2003, the Company entered into a definitive merger agreement with S.I.Acquisition LLC, an Illinois limited liability company formed principally forthe benefit of Jack Miller, the Company's Chairman, members of his family andHoward I. Bernstein, a director of the Company.  A special committee comprised solely of independent directors ofthe Company was formed to analyze, consider and negotiate the terms of themerger and to make a recommendation to the entire board of directors as towhether or not to adopt the merger agreement. Except for shares owned by S.I. Acquisition LLC and shares subject tovalidly asserted dissenters' rights, upon completion of the merger, eachoutstanding share of common stock will be converted into the right to receive$0.30 in cash, and each outstanding share of Series B convertible preferredstock will be converted into the right to receive $15.00 plus all accrued andunpaid dividends in cash.  After carefulconsideration, each director of the board, the disinterested directors and thespecial committee of independent directors unanimously approved the mergeragreement and recommended that the shareholders of the Company vote for theadoption of the merger agreement and approval of the merger.

 

**Item 14.****                  Controls****and Procedures**

 

Within 90 days prior to the date of filing this annualreport, the Company’s Chief Executive Officer (Interim) and Chief FinancialOfficer carried out an evaluation under his supervision, with the participationof other members of management as he deemed appropriate, of the effectivenessof the design and the operation of the Company’s disclosure controls andprocedures as contemplated by Exchange Act Rule 13a-15.  Based upon, and as of the date of thatevaluation, the Chief Executive Officer Interim and Chief Financial Officerconcluded that the Company’s disclosure controls and procedures are effective,in all material respects, in timely alerting him to material informationrelating to the Company (and its consolidated subsidiaries) required to beincluded in the periodic reports the Company is required to file and submit tothe SEC under the Exchange Act.

 

There have been no significant changes to theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date that the internal controls were mostrecently evaluated.  There were nosignificant deficiencies or material weaknesses identified in that evaluationand, therefore, no corrective actions were taken.

 

 

25

----

**PART IV**

 

**Item 15.****                  Exhibits****, Financial Statement Schedules, and Reports on Form8-K**

 
| (a)    | 1.                                                                                                                                                                                                                       | See Index to Financial Statements and Financial  Statement Schedules on page F-1. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------|
|   | 2.                                                                                                                                                                                                                       | See Index to Financial  Statements and Financial Statement Schedules on page F-1  |
|   | 3.                                                                                                                                                                                                                       | See Index to Exhibits  immediately following the Signature page.                  |
|   |                                                                                                                                                                                                                     |                                                                              |
| (b)    | On February 18, 2003,  the Company filed form 8-K, Item 5 – Other Events, with the Securities and  Exchange Commission to report an agreement and plan of merger with S.I.  Acquisition LLC dated February 13, 2003 |
|   |                                                                                                                                                                                                                     |                                                                              |
| (c)    | See Index to Financial  Statements and Financial Statement Schedules on page F-1.                                                                                                                                        |

 

 

26

----

 

**Indexto Financial Statements****and Financial Statement Schedules**

 
| (1)    | Financial Statements:                                 |
|--------|-------------------------------------------------------|
|   |                                                  |
|   | Reports of  Independent Accountants                   |
|   | Consolidated Balance Sheets                           |
|   | Consolidated  Statements of Operations                |
|   | Consolidated  Statements of Stockholders’ Equity |
|   | Consolidated  Statements of Cash Flows                |
|   | Notes  to Consolidated Financial Statements           |
|   |                                                  |
| (2)    | Financial Statement  Schedule:                        |
|   | Schedule II - Valuation and  Qualifying Accounts      |

 

All other financial schedules called for underRegulation S-X are not submitted because they are not applicable, or notrequired, or because the required information is not material or is included inthe consolidated financial statements or notes thereto.

 

F-1

----

 

**REPORT OF INDEPENDENT ACCOUNTANTS**

 

To the Board of Directorsand the Stockholders of

   Successories,Inc.

 

We have audited theaccompanying consolidated balance sheets of Successories, Inc. (an Illinoiscorporation) as of February 1, 2003 and February 2, 2002, and the relatedconsolidated statements of operations, stockholders’ equity and cash flows foreach of the three fiscal years in the period ended February 1, 2003.  Our audits also included the financialstatement schedules listed in the Index at Item 8, Financial Statements andSupplementary Data – page F-26.  Thesefinancial statements and the financial statement schedules are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements and financial statement schedules based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, thefinancial statements referred to above present fairly, in all materialrespects, the financial position of Successories, Inc. as of February 1, 2003and February 2, 2002, and the results of its operations and its cash flows foreach of the three fiscal years in the period ended February 1, 2003, inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, suchfinancial statement schedules, when considered in relation to the basic consolidatedfinancial statements taken as a whole, present fairly in all material respectsthe information set forth therein.

 

The accompanyingfinancial statements have been prepared assuming that the Company will continueas a going concern.  As discussed inNote 20 to the financial statements, the Company has suffered recurring lossesfrom operations and has liquidity issues that raise substantial doubt about itsability to continue as a going concern. Management’s plans in regard to these matters are also described in Note20.  The financial statements do notinclude any adjustments that might result from the outcome of this uncertainty.

 
|                                      | Crowe Chizek and Company LLC |
|-------------------------------------------|------------------------------|
| Oak Brook, Illinois                       |                         |
| April 2, 2003, except  for Note 7 as |                         |
| to  which the date is April 25, 2003      |                         |

 

F-2

----

 

**SUCCESSORIES,INC.**

**CONSOLIDATED BALANCE SHEETS**

 
|                                                                                                                                                                                                            |   | **February  1, 2003** |       | **February  2, 2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|------------|-----------------------|--------|
| ASSETS                                                                                                                                                                                                          |   |                  |       |                  |   |
| Current  assets:                                                                                                                                                                                                |   |                  |       |                  |   |
| Cash  and cash equivalents                                                                                                                                                                                      |   | $                     | 589,000    |                  | $      | 602,000 |   |
| Accounts  and notes receivable, net                                                                                                                                                                             |   | 1,913,000             |       | 2,445,000             |   |
| Inventories,  net                                                                                                                                                                                               |   | 3,278,000             |       | 5,005,000             |   |
| Prepaid  catalog expenses                                                                                                                                                                                       |   | 1,320,000             |       | 1,683,000             |   |
| Other  prepaid expenses                                                                                                                                                                                         |   | 665,000               |       | 857,000               |   |
| Total  current assets                                                                                                                                                                                           |   | 7,765,000             |       | 10,592,000            |   |
| Restricted  cash                                                                                                                                                                                                |   | 250,000               |       | 250,000               |   |
| Property  and equipment, net                                                                                                                                                                                    |   | 1,993,000             |       | 3,914,000             |   |
| Notes  receivable                                                                                                                                                                                               |   | —                |       | 17,000                |   |
| Deferred  financing costs and debt discount, net                                                                                                                                                                |   | 43,000                |       | 181,000               |   |
| Intangibles  and other assets, net                                                                                                                                                                              |   | 674,000               |       | 1,007,000             |   |
| TOTAL  ASSETS                                                                                                                                                                                                   |   | $                     | 10,725,000 |                  | $      | 15,961,000 |   |
|                                                                                                                                                                                                            |   |                  |       |                  |   |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                  |   |                  |       |                  |   |
| Current  liabilities:                                                                                                                                                                                           |   |                  |       |                  |   |
| Revolving  line of credit                                                                                                                                                                                       |   | $                     | 1,131,000  |                  | $      | 1,483,000 |   |
| Accounts  payable                                                                                                                                                                                               |   | 1,792,000             |       | 1,488,000             |   |
| Accrued  expenses and deferred income taxes                                                                                                                                                                     |   | 1,692,000             |       | 1,761,000             |   |
| Total  current liabilities                                                                                                                                                                                      |   | 4,615,000             |       | 4,732,000             |   |
| Minority  interest                                                                                                                                                                                              |   | 6,000                 |       | 47,000                |   |
|                                                                                                                                                                                                            |   |                  |       |                  |   |
| Stockholders’  equity:                                                                                                                                                                                     |   |                  |       |                  |   |
| Convertible  preferred stock, $.01 par value; 1,000,000 shares authorized; 503,092 of  Series A and 101,667 of Series B shares issued and outstanding; liquidation  value $.01 per share plus accrued dividends |   | 6,000                 |       | 6,000                 |   |
| Common  stock, $.01 par value; 20,000,000 shares authorized 9,750,729 and 9,313,884  shares issued and outstanding, respectively                                                                                |   | 98,000                |       | 93,000                |   |
| Common  stock warrants                                                                                                                                                                                          |   | 2,324,000             |       | 2,324,000             |   |
| Notes  receivable from stockholders                                                                                                                                                                             |   | (115,000              | )          | (118,000              | )      |
| Additional  paid-in capital                                                                                                                                                                                     |   | 33,556,000            |       | 33,321,000            |   |
| Accumulated  deficit                                                                                                                                                                                            |   | (29,701,000           | )          | (24,380,000           | )      |
| Accumulated  other comprehensive loss                                                                                                                                                                           |   | (64,000               | )          | (64,000               | )      |
| Total  stockholders’ equity                                                                                                                                                                                |   | 6,104,000             |       | 11,182,000            |   |
|                                                                                                                                                                                                            |   |                  |       |                  |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                |   | $                     | 10,725,000 |                  | $      | 15,961,000 |   |

 

The accompanying notes are an integral part of these statements.

 

F-3

----

 

**SUCCESSORIES,INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

 
|                                                                              |   | **Year Ended  February 1, 2003** |       | **Year Ended  February 2, 2002** |       | **Year Ended  February 3, 2001** |       |
|-----------------------------------------------------------------------------------|--------|----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| Net  product sales                                                                |   | $                                | 32,134,000 |                             | $          | 34,996,000                       |       | $ | 44,830,000 |   |
| Cost  of goods sold                                                               |   | 15,774,000                       |       | 18,048,000                       |       | 21,226,000                       |       |
|                                                                              |   |                             |       |                             |       |                             |       |
| Gross  profit on product sales                                                    |   | 16,360,000                       |       | 16,948,000                       |       | 23,604,000                       |       |
|                                                                              |   |                             |       |                             |       |                             |       |
| Fees,  royalties and other income                                                 |   | 969,000                          |       | 1,059,000                        |       | 1,288,000                        |       |
|                                                                              |   |                             |       |                             |       |                             |       |
| Gross  margin                                                                     |   | 17,329,000                       |       | 18,007,000                       |       | 24,892,000                       |       |
|                                                                              |   |                             |       |                             |       |                             |       |
| Operating  expenses                                                               |   | 19,487,000                       |       | 21,379,000                       |       | 22,648,000                       |       |
|                                                                              |   |                             |       |                             |       |                             |       |
| **(Loss) income from continuing operations before other  expense and income tax** |   | **(2,158,000**                   | **)**      | **(3,372,000**                   | **)**      | **2,244,000**                    | ** ** |
| Other  income (expense):                                                          |   |                             |       |                             |       |                             |       |
| Interest  expense                                                                 |   | (242,000                         | )          | (269,000                         | )          | (1,382,000                       | )          |
| Minority  interests in subsidiaries                                               |   | (50,000                          | )          | (159,000                         | )          | (356,000                         | )          |
| Interest  income                                                                  |   | 57,000                           |       | 108,000                          |       | 40,000                           |       |
| Other,  net                                                                       |   | 14,000                           |       | 19,000                           |       | (27,000                          | )          |
|                                                                              |   |                             |       |                             |       |                             |       |
| Total  other expense                                                              |   | (221,000                         | )          | (301,000                         | )          | (1,725,000                       | )          |
|                                                                              |   |                             |       |                             |       |                             |       |
| (Loss)  income from continuing operations before income tax                       |   | (2,379,000                       | )          | (3,673,000                       | )          | 519,000                          |       |
|                                                                              |   |                             |       |                             |       |                             |       |
| Income  tax  (benefit) expense                                               |   | (102,000                         | )          | 4,873,000                        |       | 301,000                          |       |
|                                                                              |   |                             |       |                             |       |                             |       |
| (Loss)  income from continuing operations                                         |   | (2,277,000                       | )          | (8,546,000                       | )          | 218,000                          |       |
| (Loss)  income from discontinued operations                                       |   | (2,826,000                       | )          | (2,039,000                       | )          | 212,000                          |       |
| (Loss)  income before extraordinary item                                          |   | (5,103,000                       | )          | (10,585,000                      | )          | 430,000                          |       |
| Extraordinary  loss on early extinguishment of debt                               |   | —                           |       | (219,000                         | )          | —                           |       |
| **Net (loss) income**                                                             |   | **(5,103,000**                   | **)**      | **(10,804,000**                  | **)**      | **430,000**                      | ** ** |
|                                                                              |   |                             |       |                             |       |                             |       |
| Dividend  to preferred shareholders                                               |   | (218,000                         | )          | (220,000                         | )          | (223,000                         | )          |
|                                                                              |   |                             |       |                             |       |                             |       |
| (Loss)  income available to common stockholders                                   |   | $                                | (5,321,000 | )                                | $          | (11,024,000                      | )          | $ | 207,000 |   |
| Foreign  currency translation adjustment                                          |   | —                           |       | (9,000                           | )          | 9,000                            |       |
|                                                                              |   |                             |       |                             |       |                             |       |
| Comprehensive  (loss) income                                                      |   | $                                | (5,103,000 | )                                | $          | (10,813,000                      | )          | $ | 439,000 |   |
|                                                                              |   |                             |       |                             |       |                             |       |
| **(Loss)  income per share (basic and diluted):**                                 |   |                             | ** ** |                             | ** ** |                             | ** ** |
| (Loss)  income from continuing operations                                         |   | $                                | (0.26      | )                                | $          | (0.95                            | )          | $ | 0.00 |   |
| (Loss)  income from discontinued operations                                       |   | $                                | (0.30      | )                                | $          | (0.22                            | )          | $ | 0.03 |   |
| Extraordinary  loss on early extinguishment of debt                               |   | $                                | —     |                             | $          | (0.02                            | )          | — |   |
| Net  (loss) income                                                                |   | $                                | (0.56      | )                                | $          | (1.19                            | )          | $ | 0.03 |   |

 

The accompanying notes are an integral part of these statements.

 

F-4

----

 

**SUCCESSORIES,INC.**

**CONSOLIDATED STATEMENTS****OF STOCKHOLDERS’ EQUITY**

 
|                                                                  |   |                             |              |       |   |       |      |       |   | **Common  Stock  Warrants** |   | **Notes  Receivable  From  Stockholders** |      | **Additional  Paid-In  Capital** |   | **Accumulated  Deficit** |   |
|-----------------------------------------------------------------------|--------|----------------------------------|-------------------|------------|--------|------------|-----------|------------|--------|-----------------------------|--------|-------------------------------------------|-----------|----------------------------------|--------|--------------------------|--------|
|                                                                  |   | **Convertible  Preferred Stock** |              |       |   |       |      |       |   |                        |   |
|                                                                  |   |                             | **Common  Stock** |       |   |       |      |       |
|                                                                  |   | **Shares**                       |              | **Amount** |   | **Shares** |      | **Amount** |   |                        |   |                                      |      |
|                                                                  |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Balance at January 29, 2000                                           |   | 604,759                          |              | $          | 6,000  |       | 6,933,213 |       | $      | 69,000                      |   | $                                         | 2,291,000 |                             | $      | (165,000                 | )      | $ | 28,840,000 |   | $ | (13,563,000 | ) |
|                                                                  |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Net income                                                            |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | —                                    |      | —                           |   | 430,000                  |   |
| Foreign currency translation adjustment                               |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | —                                    |      | —                           |   | —                   |   |
| Stock warrants revaluation                                            |   | —                           |              | —     |   | —     |      | —     |   | 33,000                      |   | —                                    |      | —                           |   | —                   |   |
| Notes receivable payments and write-offs                              |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | 17,000                                    |      | —                           |   | —                   |   |
| Common stock transactions:                                            |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Sales of common shares                                                |   | —                           |              | —     |   | 2,066,206  |      | 21,000     |   | —                      |   | —                                    |      | 3,976,000                        |   | —                   |   |
| Common stock issued in lieu of preferred stock  dividends             |   | —                           |              | —     |   | 181,777    |      | 2,000      |   | —                      |   | —                                    |      | 320,000                          |   | —                   |   |
| Preferred stock transactions:                                         |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Preferred stock dividends                                             |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | —                                    |      | —                           |   | (223,000                 | )      |
|                                                                  |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Balance at February 3, 2001                                           |   | 604,759                          |              | $          | 6,000  |       | 9,181,196 |       | $      | 92,000                      |   | $                                         | 2,324,000 |                             | $      | (148,000                 | )      | $ | 33,136,000 |   | $ | (13,356,000 | ) |
|                                                                  |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Net loss                                                              |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | —                                    |      | —                           |   | (10,804,000              | )      |
| Foreign currency translation adjustment                               |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | —                                    |      | —                           |   | —                   |   |
| Notes receivable payments and write-offs                              |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | 30,000                                    |      | —                           |   | —                   |   |
| Common stock transactions:                                            |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Sales of common shares                                                |   | —                           |              | —     |   | 18,691     |      | —     |   | —                      |   | —                                    |      | 22,000                           |   | —                   |   |
| Common stock issued in lieu of preferred stock  dividends             |   | —                           |              | —     |   | 113,997    |      | 1,000      |   | —                      |   | —                                    |      | 163,000                          |   | —                   |   |
| Preferred stock transactions:                                         |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Preferred stock dividends                                             |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | —                                    |      | —                           |   | (220,000                 | )      |
|                                                                  |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Balance at February 2, 2002                                           |   | 604,759                          |              | $          | 6,000  |       | 9,313,884 |       | $      | 93,000                      |   | $                                         | 2,324,000 |                             | $      | (118,000                 | )      | $ | 33,321,000 |   | $ | (24,380,000 | ) |
|                                                                  |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Net loss                                                              |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | —                                    |      | —                           |   | (5,103,000               | )      |
| Note receivable issued June 6, 2002                                   |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | (12,000                                   | )         | —                           |   | —                   |   |
| Notes receivable payments                                             |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | 15,000                                    |      | —                           |   | —                   |   |
| Common stock transactions:                                            |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Common stock issued in conjunctionwith Board of  Directors’ fees |   | —                           |              | —     |   | 142,325    |      | 2,000      |   | —                      |   | —                                    |      | 74,000                           |   | —                   |   |
| Common stock issued in lieu of preferred stock  dividends             |   | —                           |              | —     |   | 294,520    |      | 3,000      |   | —                      |   | —                                    |      | 161,000                          |   | —                   |   |
| Preferred stock transactions:                                         |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Preferred stock dividends                                             |   | —                           |              | —     |   | —     |      | —     |   | —                      |   | —                                    |      | —                           |   | (218,000                 | )      |
|                                                                  |   |                             |              |       |   |       |      |       |   |                        |   |                                      |      |                             |   |                     |   |
| Balance at February 1, 2003                                           |   | 604,759                          |              | $          | 6,000  |       | 9,750,729 |       | $      | 98,000                      |   | $                                         | 2,324,000 |                             | $      | (115,000                 | )      | $ | 33,556,000 |   | $ | (29,701,000 | ) |

 

The accompanying notes are an integral part of these statements.

 

F-5

----

 

**SUCCESSORIES,INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 
|                                                                   |   | **Accumulated  Other  Comprehensive  Loss** |    | **Total  Stockholders’  Equity** |   |
|------------------------------------------------------------------------|--------|---------------------------------------------|---------|---------------------------------------|--------|
|                                                                   |   |                                        |    |                                  |   |
| Balance  at January 29, 2000                                           |   | $                                           | (64,000 | )                                     | $      | 17,414,000 |   |
|                                                                   |   |                                        |    |                                  |   |
| Net  income                                                            |   | —                                      |    | 430,000                               |   |
| Foreign  currency translation adjustment                               |   | 9,000                                       |    | 9,000                                 |   |
| Stock  warrants revaluation                                            |   | —                                      |    | 33,000                                |   |
| Notes  receivable payments and writeoffs                               |   | —                                      |    | 17,000                                |   |
| Common  stock transactions:                                            |   |                                        |    |                                  |   |
| Sales  of common shares                                                |   | —                                      |    | 3,997,000                             |   |
| Common  stock issued in lieu of preferred stock dividends              |   | —                                      |    | 322,000                               |   |
| Preferred  stock transactions:                                         |   |                                        |    |                                  |   |
| Preferred  stock dividends                                             |   | —                                      |    | (223,000                              | )      |
|                                                                   |   |                                        |    |                                  |   |
| Balance  at February 3, 2001                                           |   | $                                           | (55,000 | )                                     | $      | 21,999,000 |   |
|                                                                   |   |                                        |    |                                  |   |
| Net  loss                                                              |   | —                                      |    | (10,804,000                           | )      |
| Foreign  currency translation adjustment                               |   | (9,000                                      | )       | (9,000                                | )      |
| Notes  receivable payments and writeoffs                               |   | —                                      |    | 30,000                                |   |
| Common  stock transactions:                                            |   |                                        |    |                                  |   |
| Sales  of common shares                                                |   | —                                      |    | 22,000                                |   |
| Common  stock issued in lieu of preferred stock dividends              |   | —                                      |    | 164,000                               |   |
| Preferred  stock transactions:                                         |   |                                        |    |                                  |   |
| Preferred  stock dividends                                             |   | —                                      |    | (220,000                              | )      |
|                                                                   |   |                                        |    |                                  |   |
| Balance  at February 2, 2002                                           |   | $                                           | (64,000 | )                                     | $      | 11,182,000 |   |
|                                                                   |   |                                        |    |                                  |   |
| Net  loss                                                              |   | —                                      |    | (5,103,000                            | )      |
| Note  receivable issued June 6, 2002                                   |   | —                                      |    | (12,000                               | )      |
| Notes  receivable payments                                             |   | —                                      |    | 15,000                                |   |
| Common  stock transactions:                                            |   |                                        |    |                                  |   |
| Common  stock issued in conjunction with Board of Directors’ fees |   | —                                      |    | 76,000                                |   |
| Common  stock issued in lieu of preferred stock dividends              |   | —                                      |    | 164,000                               |   |
| Preferred  stock transactions:                                         |   |                                        |    |                                  |   |
| Preferred  stock dividends                                             |   | —                                      |    | (218,000                              | )      |
|                                                                   |   |                                        |    |                                  |   |
| Balance  at February 1, 2003                                           |   | $                                           | (64,000 | )                                     | $      | 6,104,000 |   |

 

The accompanying notes are an integral part of these statements.                                     

 

F-6

----

 

**SUCCESSORIES,INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 
|                                                                                      |   | **Year Ended  February 1, 2003** |       | **Year Ended  February 2, 2002** |      | **Year Ended  February 3, 2001** |      |
|-------------------------------------------------------------------------------------------|--------|----------------------------------|------------|---------------------------------------|-----------|----------------------------------|-----------|
| Cash  flows from operating activities:                                                    |   |                             |       |                                  |      |                             |      |
| Net  (loss) income                                                                        |   | $                                | (5,103,000 | )                                     | $         | (10,804,000                      | )         | $ | 430,000 |   |
| Adjustments  to reconcile net (loss) income to net cash provided by operating activities: |   |                             |       |                                  |      |                             |      |
| Depreciation  and amortization                                                            |   | 1,782,000                        |       | 2,245,000                             |      | 2,277,000                        |      |
| Deferred  income tax                                                                      |   | —                           |       | 4,873,000                             |      | 326,000                          |      |
| Amortization  of debt discount                                                            |   | 139,000                          |       | 128,000                               |      | 790,000                          |      |
| Minority  interests in subsidiaries                                                       |   | 50,000                           |       | 159,000                               |      | 356,000                          |      |
| Board  of Directors’ Fees                                                            |   | 100,000                          |       | —                                |      | —                           |      |
| (Loss)  income from discontinued operations                                               |   | 2,826,000                        |       | 2,039,000                             |      | (212,000                         | )         |
| Extraordinary  Loss on early extinguishment of debt                                       |   | —                           |       | 219,000                               |      | —                           |      |
|                                                                                      |   | (206,000                         | )          | (1,141,000                            | )         | 3,967,000                        |      |
| Changes  in operating assets and liabilities:                                             |   |                             |       |                                  |      |                             |      |
| Accounts  and notes receivable                                                            |   | 488,000                          |       | 1,246,000                             |      | (188,000                         | )         |
| Inventories                                                                               |   | 1,106,000                        |       | 1,799,000                             |      | 732,000                          |      |
| Prepaid  catalog expenses                                                                 |   | 364,000                          |       | 225,000                               |      | (369,000                         | )         |
| Other  prepaid expenses                                                                   |   | (114,000                         | )          | (267,000                              | )         | (98,000                          | )         |
| Accounts  payable                                                                         |   | 557,000                          |       | 370,000                               |      | (2,905,000                       | )         |
| Accrued  expenses                                                                         |   | 203,000                          |       | (915,000                              | )         | 525,000                          |      |
| Other  assets                                                                             |   | (291,000                         | )          | (388,000                              | )         | (403,000                         | )         |
| Net  cash provided by operating activities                                                |   | 2,107,000                        |       | 929,000                               |      | 1,261,000                        |      |
|                                                                                      |   |                             |       |                                  |      |                             |      |
| Cash  flows from investing activities:                                                    |   |                             |       |                                  |      |                             |      |
| Proceeds  from notes receivable issued in connection with sale of property and  equipment |   | 39,000                           |       | 58,000                                |      | 141,000                          |      |
| Reduction  in restricted cash                                                             |   | —                           |       | —                                |      | 50,000                           |      |
| Purchases  of property and equipment                                                      |   | (44,000                          | )          | (269,000                              | )         | (528,000                         | )         |
| Net  cash used in investing activities                                                    |   | (5,000                           | )          | (211,000                              | )         | (337,000                         | )         |
|                                                                                      |   |                             |       |                                  |      |                             |      |
| Cash  flows from financing activities:                                                    |   |                             |       |                                  |      |                             |      |
| Proceeds  from issuing common stock                                                       |   | —                           |       | 22,000                                |      | 3,997,000                        |      |
| Preferred  stock dividends                                                                |   | (55,000                          | )          | (55,000                               | )         | —                           |      |
| Notes  receivable issued to stockholders                                                  |   | (13,000                          | )          | —                                |      | —                           |      |
| Proceeds  from notes receivable issued to stockholders                                    |   | 15,000                           |       | 30,000                                |      | 2,000                            |      |
| Net  (repayments) borrowings on revolving credit loan                                     |   | (352,000                         | )          | 1,483,000                             |      | (2,119,000                       | )         |
| Repayments  of long-term debt                                                             |   | —                           |       | (3,610,000                            | )         | (1,876,000                       | )         |
| Distributions  to joint venture partners                                                  |   | (117,000                         | )          | (212,000                              | )         | (302,000                         | )         |
| Net  cash used in financing activities                                                    |   | (522,000                         | )          | (2,342,000                            | )         | (298,000                         | )         |
|                                                                                      |   |                             |       |                                  |      |                             |      |
| Net  cash provided by (used in) continuing operations                                     |   | 1,580,000                        |       | (1,624,000                            | )         | 626,000                          |      |
| Net  cash provided by (used in) discontinued operations                                   |   | (1,593,000                       | )          | (242,000                              | )         | 903,000                          |      |
|                                                                                      |   |                             |       |                                  |      |                             |      |
| Net  (decrease) increase in cash                                                          |   | (13,000                          | )          | (1,866,000                            | )         | 1,529,000                        |      |
|                                                                                      |   |                             |       |                                  |      |                             |      |
| Cash  and cash equivalents, beginning of period                                           |   | $                                | 602,000    |                                  | 2,468,000 |                             | 939,000   |   |
|                                                                                      |   |                             |       |                                  |      |                             |      |
| Cash  and cash equivalents, end of period                                                 |   | $                                | 589,000    |                                  | 602,000   |                             | 2,468,000 |   |
|                                                                                           |        |                                  |            |                                       |           |                                  |           |  |  |  |

 

The accompanying notes are an integral part of these statements.

 

F-7

----

 

**SUCCESSORIES,INC.**

**NOTES TO CONSOLIDATED****FINANCIAL STATEMENTS**

 

**NOTE 1.  DESCRIPTION OF THE BUSINESS**

 

Successories, Inc. andits subsidiaries (collectively the “Company”) design, manufacture, and market adiverse range of motivational and self-improvement products, many of which arethe Company’s own proprietary designs. The Company considers itself a single line of business with productsthat are marketed primarily under the *Successories*trade name through directmarketing (catalog, electronic commerce and telemarketing), retail (100%Company-owned stores) - See Note 3 to the Consolidated Financial Statements“Discontinued Operations,” sales to franchisees and wholesale distributionchannels.  The Company operates twojoint venture retail stores in the United States.  The Company also operates a franchising program wherebyfranchisees are granted the right to market the Company’s products under the *Successories*trademark.

 

The franchisee purchasesfor resale Company manufactured products or products from others that aresubject to Company approval.  Due to theproprietary nature of most of the Company’s products, the Company is the onlyavailable source for many products sold by franchisees.  The franchise agreements have an initialterm of five years with a renewal option for three additional successive termsof five years each.  Franchisees pay aroyalty to the Company of 2% of franchised retail stores gross sales.  The Company temporarily suspended the 2%royalty fee from July 2002 through January 2003 in order to assist thefranchisees in weathering the current difficult retail and economicclimate.  At February 1, 2003 there weretwo joint venture retail stores and 23 franchised retail stores.  At February 2, 2002 there were 24Company-owned retail stores (including joint venture retail stores) and 35franchised retail stores.

 

**NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Fiscal Year End*

 

The Company’s fiscal yearends on the Saturday closest to January 31. The year ended February 1, 2003 consisted of 52 weeks.  The year ended February 2, 2002 consisted of52 weeks.  The year ended February 3,2001 consisted of 53 weeks.

 

*Principles of Consolidation*

 

The consolidatedfinancial statements include the accounts of Successories, Inc. and all of itssubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation.  Thefinancial results of franchised stores have not been reflected in the Company’sconsolidated financial statements.

 

*Restricted Cash*

 

Restricted cash consistsof a certificate of deposit in conjunction with the standby letter of credit,see Note 17 for further information. The maturity of the certificate of deposit is twelve months and statedat cost, which approximates fair value.

 

*Revenue Recognition*

 

Net product sales includeretail, direct marketing, franchise and wholesale activities.  Retail sales at the Company-owned stores arerecognized at the point of sale, net of returns and allowances.  Direct marketing, franchise and wholesalesales are recognized at the time orders are shipped to customers, net ofreturns and allowances.  The Company’sagreements generally require franchisees and licensees to remit continuingroyalty and licensing fees on gross revenues derived from proprietary productsales.  The Company recognizes thesefees as revenue when actually earned.

 

F-8

----

 

*Accounts and Notes Receivable*

 

A portion of theCompany’s sales are made through the extension of credit.  Accounts receivable from credit sales aregenerally unsecured.  Notes receivableare primarily from franchisees, and are generally supported by a personalguarantee. The payments on the promissory notes started in July 1998 andcontinue through March 2005. The interest rates on the promissory notes rangefrom 7% to 12%.  The allowance fordoubtful accounts is estimated by management and is based on specificinformation about customer accounts, past loss experience and general economicconditions.  An account is charged bymanagement when deemed uncollectable although collection efforts may continue.

 

*Inventories*

 

Inventories are stated atthe lower of cost or market.  Cost isdetermined using the first-in, first-out method and includes material, laborand overhead costs.

 

*Prepaid Catalog Expenses*

 

Prepaid catalog expensesconsist primarily of unamortized mail order catalog expenses for the Company’sproducts.  The cost of such directresponse advertising is charged to expense over the period that the relatedcatalog sales are expected, not to exceed twelve months.  The amortization period is based upon theCompany’s historical patterns of catalog response.  All other advertising costs are expensed as incurred.

 

Catalog relatedadvertising expense was $7,816,000, $8,398,000 and $8,706,000 for the yearsended February 1, 2003, February 2, 2002 and February 3, 2001, respectively,which is included in operating expenses on the accompanying consolidatedstatements of operations.

 

*Property and Equipment*

 

Property and equipmentare recorded at cost.  Depreciation isprovided for on a straight-line basis over the estimated useful lives of therelated assets, ranging from 3 to 10 years. Leasehold improvements are amortized on a straight-line basis over thelesser of the useful life of the improvement or the term of the lease.  Major renewals and betterments arecapitalized, and maintenance and repair costs are charged to expense asincurred.  Gains or losses resultingfrom sales or retirements are recorded as incurred, at which time related costsand accumulated depreciation are written-off.

 

Depreciation expense was$1,968,000, $2,639,000 and $2,129,000 for the years ended February 1, 2003,February 2, 2002 and February 3, 2001, respectively, which is included in costof goods sold, discontinued operations and operating expenses in theaccompanying consolidated statements of operations.

 

*Deferred Financing Costs and DebtDiscount*

 

Costs incurred inconnection with obtaining financing are capitalized and amortized over the termof the related debt.  In addition, stockwarrants issued in conjunction with the credit facility were assigned a fairvalue using the Black-Scholes option pricing model and are being amortized overthe term of the related debt. Amortization expense was $139,000, $128,000 and $790,000 for the yearsended February 1, 2003, February 2, 2002 and February 3, 2001, respectively,which is included in interest expense in the accompanying consolidatedstatements of operations.

 

F-9

----

 

*Intangible Assets*

 

Intangible assets consistof new product development costs, distribution rights, and goodwill. Newproduct development costs consist of external costs incurred in development ofproducts and includes licensing costs, which are amortized over the shorter of3 years or the term of the licensing agreement.  Goodwill relates to certain 100% Company-owned stores, whichrepresents the cost of purchased businesses in excess of the fair value of netassets acquired.  The Company reviewsthe realizability of the intangible assets whenever events or changes incircumstances indicate that the carrying amount may not be recoverable.  During the year ended February 1, 2003, theCompany decided to close all of its 100% Company-owned retail stores.  As a result, the Company recorded animpairment charge of $101,000 to write off the value of goodwill related to100% Company-owned retail stores.  Thenet book value of goodwill was $0 and $121,000 at February 1, 2003 and February2, 2002, respectively.  Accumulatedamortization amounted to $860,000 and $5,006,000 at February 1, 2003 and February2, 2002, respectively.  Amortizationexpense was $690,000, $768,000 and $711,000 for the years ended February 1,2003, February 2, 2002 and February 3, 2001, respectively.

 

*Accounts Payable*

 

Checks issued in excessof the bank balance of approximately $606,000 and $163,000, are included inaccounts payable as of February 1, 2003 and February 2, 2002, respectively.

 

*Income Taxes*

 

The Company provides fordeferred income taxes under the asset and liability method of accounting.  This method requires the recognition ofdeferred income taxes based on the future tax consequences of temporarydifferences between the financial statement carrying amounts and the tax basesof existing assets and liabilities, by applying enacted statutory tax ratesexpected to apply to taxable income in the years in which those temporarydifferences are expected to be recovered or settled.

 

*Store Opening and Closing Costs*

 

Costs associated with theopening of new stores are expensed as incurred.  Estimated costs associated with the closing of under-performingCompany-owned stores are recognized when they are incurred.

 

*Stock-Based Compensation*

 

The Company accounts forstock-based compensation with employees in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,”under which no compensation cost for stock options is recognized for stockoption awards granted at or above fair market value.  The Company complies with the disclosure provisions of Statementof Financial Accounting Standards No. 123, “Accounting for Stock-BasedCompensation” (SFAS 123) and Statement of Financial Accounting Standards No.148 “Accounting for Stock Based Compensation Transition and Disclosure.”

 

The Company accounts forstock-based compensation arrangements with non-employees in accordance withSFAS 123. SFAS 123 established accounting and disclosure requirements using afair value-based method of accounting for stock-based employee compensationplans.  Under the fair value-basedmethod, compensation cost is measured at the grant date based on the value ofthe award, which is calculated using an option pricing model, and is recognizedover the service period which is usually the vesting period.

 

F-10

----

 

The following tableillustrates the effect on net income (loss) and earnings (loss) per share ifexpense was measured using the fair value recognition provisions describedabove:

 
|                                                                 |   | **Fiscal  Year Ended** |       |
|----------------------------------------------------------------------|--------|------------------------|------------|
|                                                                 |   | **February  1,  2003** |       | **February  2,  2002** |   | **February  3,  2001** |   |
|                                                                 |   |                   |       |   |   |   |   |
| Net  income (loss)                                                   |   |                   |       |   |   |   |   |
| As  reported                                                         |   | $                      | (5,103,000 | ) | $ | (10,804,000 | ) | $ | 430,000 |   |
| Pro  forma                                                           |   | (5,214,000             | )          | (11,065,000 | ) | 35,000 |   |
|                                                                 |   |                   |       |   |   |   |   |
| Basic  and diluted (loss) income per share before extraordinary item |   |                   |       |   |   |   |   |
| As  reported                                                         |   | (0.56                  | )          | (1.17 | ) | 0.03 |   |
| Pro  forma                                                           |   | (0.57                  | )          | (1.17 | ) | — |   |
|                                                                 |   |                   |       |   |   |   |   |
| Basic  and diluted net (loss) income per share                       |   |                   |       |   |   |   |   |
| As  reported                                                         |   | (0.56                  | )          | (1.19 | ) | 0.03 |   |
| Pro  forma                                                           |   | (0.57                  | )          | (1.20 | ) | — |   |
|                                                                      |        |                        |            |  |  |  |  |  |  |  |

 

The fair value of eachoption grant was estimated on the date of grant using the Black-Scholes optionpricing model with the following weighted-average assumptions:

 
|                   |   | **Fiscal  Year Ended** |   |
|------------------------|--------|------------------------|--------|
|                   |   | **February  1,  2003** |   | **February  2,  2002** |   | **February  3,  2001** |   |
|                   |   |                   |   |   |   |   |   |
| Stock  Options         |   |                   |   |   |   |   |   |
|                   |   |                   |   |   |   |   |   |
| Dividend  Yield        |   | —                 |   | — |   | — |   |
| Volatility             |   | —                 |   | 93.7 | % | 71.0 | % |
| Risk-Free  Interest    |   | —                 |   | 5.0 | % | 6.1 | % |
| Expected  term (years) |   | —                 |   | 10 |   | 10 |   |
|                   |   |                   |   |   |   |   |   |
| Stock  Warrants        |   |                   |   |   |   |   |   |
|                   |   |                   |   |   |   |   |   |
| Dividend  Yield        |   | —                 |   | — |   | — |   |
| Volatility             |   | —                 |   | — |   | 68.4 | % |
| Risk-Free  Interest    |   | —                 |   | — |   | 6.5 | % |
| Expected  term (years) |   | —                 |   | — |   | 5.3 |   |

 

The weighted average fairvalue of options granted in the three years ended February 1, 2003 were $0,$1.79 and $1.55 per share, respectively. The pro forma effects of applying SFAS 123 are not indicative of futureamounts.

 

*Income (Loss) Per Share*

 

The Company computesincome (loss) per share in accordance with Statement of Financial AccountingStandards No. 128, “Earnings Per Share.” Basic income (loss) per share is computed by dividing the net income(loss) available to common stockholders by the weighted average number ofcommon shares outstanding.  Dilutedincome (loss) per share is similar to basic income (loss) per

 

F-11

----

 

share except the diluted computation gives effect toall dilutive potential common shares that were outstanding during the period.

 

*Comprehensive Income (Loss)*

 

The Company reportscomprehensive income (loss) in accordance with Statement of FinancialAccounting Standards No. 130, “Reporting Comprehensive Income” (SFAS 130),which establishes rules for the reporting and display of comprehensive income(loss) and its components.

 

*Foreign Currency Translation*

 

One of the Company’ssubsidiaries has operations in Canada. The assets and liabilities of this subsidiary are reported in localcurrency and translated at the current exchange rate in effect at the balancesheet date, with gains or losses resulting from such translation included instockholders’ equity.  Revenues and expensesare translated at the average exchange rate in effect at the time theunderlying transaction occurred, with gains or losses resulting from suchtranslation included in stockholder’s equity. Realized currency gains or losses on transactions are included in theresults of operations.

 

*Financial Instruments*

 

The carrying amounts forcurrent assets and current liabilities approximate their fair value due totheir short-term maturity periods.

 

*Use of Estimates*

 

The preparation of thefinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

The valuation of thedeferred taxes is a significant estimate.

 

*Reclassifications*

 

Certain prior yearamounts have been reclassified to conform with the current yearpresentation.  

 

**NOTE 3.  DISCONTINUED OPERATIONS**

 

On May 7, 2002 in theprocess of reviewing its strategic options, the Company decided to takeimmediate steps to develop and implement a plan to close all of its 100% ownedretail stores.  The 100% owned retailstore segment, which has not been as profitable as the other segments in thepast few years, reported an operating loss of $(2,826,000) and $(2,039,000) forthe years ended February 1, 2003 and February 2, 2002, respectively.

 

As a result, in thesecond quarter ended August 3, 2002, the Company started negotiating earlylease terminations and evaluating asset impairment charges related to the 100%owned retail stores.  At February 1,2003, all the 100% Company-owned retail stores were closed.  The results of operations and costsassociated with the Company’s closing the 100% owned retail stores have beenreflected as discontinued operations in the accompanying consolidated financialstatements.

 

(Loss) income fromdiscontinued operations is comprised of the following:

 

F-12

----

 

 
|                                        |   | **Fiscal  Year Ended** |       |
|---------------------------------------------|--------|------------------------|------------|
|                                        |   | **February  1,  2003** |       | **February  2,  2002** |   | **February  3,  2001** |   |
| Net  sales                                  |   | $                      | 5,197,000  |   | $ | 7,325,000 |   | $ | 8,500,000 |   |
| Operating  (loss) income                    |   | $                      | (1,278,000 | ) | $ | (1,509,000 | ) | $ | 212,000 |   |
| Asset  impairment charges                   |   | 607,000                |       | 530,000 |   | — |   |
| Lease  termination costs                    |   | 941,000                |       | — |   | — |   |
| (Loss)  income from discontinued operations |   | $                      | (2,826,000 | ) | $ | (2,039,000 | ) | $ | 212,000 |   |

 

As of February 1, 2003and February 2, 2002, the assets of discontinued operations were $5,000 and$1,891,000, and the liabilities were $79,000 and $706,000, respectively.  The assets and liabilities of thediscontinued operations have been included in the accompanying consolidatedbalance sheet.

 

**NOTE 4.  ACCOUNTS AND NOTES RECEIVABLE**

 

Accounts and notesreceivable consist of the following:

 
|                                                    |   | **February  1,  2003** |      | **February  2,  2002** |   |
|---------------------------------------------------------|--------|------------------------|-----------|------------------------|--------|
| Accounts  receivable                                    |   | $                      | 2,238,000 |                   | $      | 2,651,000 |   |
| Notes  receivable                                       |   | 157,000                |      | 262,000                |   |
|                                                    |   | 2,395,000              |      | 2,913,000              |   |
| Less  allowance for doubtful accounts and sales returns |   | (482,000               | )         | (451,000               | )      |
|                                                    |   | 1,913,000              |      | 2,462,000              |   |
| Less  current portion                                   |   | (1,913,000             | )         | (2,445,000             | )      |
| Noncurrent  portion                                     |   | $                      | —    |                   | $      | 17,000 |   |

 

**NOTE 5.  INVENTORIES**

 

Inventories arecomprised of the following:

 
|                           |   | **February  1,  2003** |      | **February  2,  2002** |   |
|--------------------------------|--------|------------------------|-----------|------------------------|--------|
| Finished  goods                |   | $                      | 2,400,000 |                   | $      | 3,825,000 |   |
| Raw  materials                 |   | 1,285,000              |      | 1,763,000              |   |
|                           |   | 3,685,000              |      | 5,588,000              |   |
| Less  reserve for obsolescence |   | (407,000               | )         | (583,000               | )      |
|                           |   | $                      | 3,278,000 |                   | $      | 5,005,000 |   |

 

**NOTE 6.  PROPERTY AND EQUIPMENT**

 

Property andequipment consists of the following:

 
|                                            |   | **February  1,  2003** |      | **February  2,  2002** |   |
|-------------------------------------------------|--------|------------------------|-----------|------------------------|--------|
| Leasehold  improvements                         |   | $                      | 3,741,000 |                   | $      | 5,589,000 |   |
| Machinery  and equipment                        |   | 5,291,000              |      | 5,422,000              |   |
| Furniture  and fixtures                         |   | 2,219,000              |      | 2,531,000              |   |
| Construction  in progress                       |   | —                 |      | 25,000                 |   |
|                                            |   | 11,251,000             |      | 13,567,000             |   |
| Less  accumulated depreciation and amortization |   | (9,258,000             | )         | (9,653,000             | )      |
|                                            |   | $                      | 1,993,000 |                   | $      | 3,914,000 |   |

 

F-13

----

 

**NOTE 7.  DEBT**

 

On June 20, 1997, theCompany entered into a credit facility agreement with The Provident Bank (the“Bank”), amended most recently on April 25, 2003, which is comprised of arevolving credit loan, term loan and fixed rate loan.  In conjunction with the credit facility agreement, warrants topurchase 150,000 shares of the Company’s common stock were issued to the bankas part of this agreement.  Initiallythese warrants had exercise prices ranging from $6.19 to $9.73 and expirationdates in June 2001; however, the exercise prices were subsequently adjusted to$2.00 and the expiration dates were extended to June 2005.  The revolving credit loan provides formaximum borrowings of $3,500,000 through January 1, 2003 and $3,000,000thereafter, and the borrowing base is limited to 80% of eligible receivablesplus 45% of eligible inventory. A commitment fee of 0.25% is payable on thedaily unused amount of the maximum revolving credit commitment.  The facility expires on June 1, 2003, andall borrowings under the facility are secured by substantially all the assetsof the Company. The interest rate on the revolving credit loan is prime plus2.00%.  Interest is payable monthly.  The interest rate on the outstandingrevolving credit loan was 6.25% at February 1, 2003.  Amounts outstanding under the revolving credit loan were$1,131,000 and $1,483,000 at February 1, 2003 and February 2, 2002,respectively.  As of February 1, 2003,available borrowings on the revolving credit loan were $1,460,000.  No amounts were outstanding under the termloan or fixed rate loan at February 1, 2003 or February 2, 2002.

 

On April 25, 2003, theCompany obtained an amendment to the credit facility to extend the creditfacility expiration from June 1, 2003 to June 30, 2003.  The bank has not given indication that theyintend to renew the agreement.  See Note20 for further information on Management Plans.

 

During the year endedFebruary 2, 2002, the Company pre-paid the entire outstanding Bank term loanand fixed rate loan balance in the amount of $3,590,000.  The above noted loans had payment termsthrough June 2003.  The company recordedan extraordinary loss of $219,000 related to the early debt extinguishment inthe current year.  The extraordinaryloss represents the write-off of the unamortized debt discount associated withthe term and fixed rate loan.

 

The credit facilityagreement contains, among other provisions, requirements for maintainingcertain earnings levels and financial ratios, limits on capital expendituresand additional indebtedness, and use of proceeds from certain equityofferings.  As of February 1, 2003, theCompany was in compliance with all the debt covenant requirements of the creditfacility agreement.

 

The weighted averageinterest rates on borrowings outstanding as of February 1, 2003 and February 2,2002 were 7.8% and 7.04%, respectively.

 

**NOTE 8.  COMMON STOCK**

 

During the year endedFebruary 3, 2001, on October 3, 2000, the Company issued 2,041,581 shares ofcommon stock to its existing stockholders at a price of $2.00 per share,pursuant to the rights offering as described in the form S-3 registrationstatement filed with the Securities and Exchange Commission on August 23,2000.  The net proceeds of the offeringwere $3,956,000.  The Company used thenet proceeds from the offering to make a partial prepayment on the term loan inthe amount of $375,000 and the remaining funds were used to pay-down therevolver.

 

The above noted offeringincludes proceeds from the sale of common stock to the Company’s Chairman ofthe Board of Directors, directors and executive officers, in an aggregateamount of $3,544,000.

 

**NOTE 9.  CONVERTIBLE PREFERRED STOCK**

 

During the year endedJanuary 29, 2000, the Company authorized and issued 503,092 shares of Series A convertiblepreferred stock to a group of investors, pursuant to Regulation D of theSecurities Act of 1933.  The Series Apreferred stock has a par value of $0.01 per share and a purchase price of$2.425 per share.  On October 18, 1999,the Company authorized and issued 101,667 shares of Series B convertiblepreferred stock to a group of investors, pursuant to Regulation D of theSecurities Act of 1933.  The Series Bpreferred stock has a par value of $0.01 per share and a purchase price of $15per share.  The total proceeds of$2,745,000 from the sale of 

 

F-14

----

 

Series A and Series B preferred stock is comprised of $1,975,000 fromthe Company’s Chairman of the Board of Directors, a director and an executive officer,and $770,000 from outside investors. Dividends on the preferred stock accrue and are payable annually ineither cash or common stock, at the Company’s or majority of the preferredstockholders discretion, at the rate of 8% per annum, commencing on the date ofissuance. Accrued and unpaid dividends shall be paid on (1) April 30, July 31,October 31 and January 31 of each year commencing on July 31, 2000 for Series Apreferred stock and October 31, 2000 for Series B preferred stock, to theholders of record as they appear on the books and records of the Company 10days preceding each payment date, and (2) the date certificates representingcommon stock of the Company are required to be delivered following anyconversion of Series A and Series B convertible preferred stock. Holders of thepreferred stock have the right to convert their shares, in whole or in part,into the Company’s common stock.  Eachpreferred share of Series A and Series B may be converted, at any time at theoption of the holder thereof, into a certain number of the Company’s commonstock as is determined by dividing the stated value of Series A and Series Bpreferred stock by the applicable conversion price.  The conversion price initially shall mean, with respect to theSeries A preferred stock, an amount equal to $2.425 per share and, with respectto the Series B preferred stock, an amount equal to $2.3625 per share; providedthat each such initial conversion price shall be subject to adjustment per thestated terms in the agreement.  Theabove mentioned issuance of preferred stock also has certain other rightsincluding pre-emptive rights, voting rights, board representation, registrationrights and liquidation preference.  Atany time commencing one year after the date of issuance of the preferred stock,the holders of a majority of the preferred stock may require the Company tofile a registration statement covering the conversion of such preferred stockto common stock.

 

During the year endedFebruary 3, 2001, the shareholders of the Series A and Series B convertiblepreferred stock consented to waive any adjustment to the conversion priceresulting from the common stock rights offering in October 2000.  For further information on the common stockoffering, see Note 8.

 

**NOTE 10.  IMPAIRMENTCHARGE**

 

Pursuant to SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets, the Companyevaluated the realizability of assets related to company owned retail storesand estimated the fair value based on the anticipated cash flows from theseretail locations.  In addition, theCompany discontinued the planned implementation of a warehouse managementenhancement project due to lower than anticipated production volumes.  As a result, the Company recorded impairmentcharges of approximately $607,000 and $530,000 in the fiscal year endedFebruary 1, 2003 and February 2, 2002, which is included in the operatingexpenses and loss from discontinued operations in the accompanying consolidatedstatements of operations.

 

**NOTE 11.  INCOME TAXES**

 

The provision forincome taxes consists of the following:

 
|                                 |   | **Year Ended  February 1,  2003** |     | **Year Ended  February 2,  2002** |   | **Year Ended  February 3,  2001** |   |
|--------------------------------------|--------|-----------------------------------|----------|-----------------------------------|--------|-----------------------------------|--------|
| Current:                             |   |                              |     |                              |   |                              |   |
| Federal                              |   | $                                 | —   |                              | $      | —                            |   | $ | 30,000 |   |
| State                                |   | (102,000                          | )        | —                            |   | 30,000                            |   |
| Deferred                             |   | (1,795,000                        | )        | (2,101,000                        | )      | 241,000                           |   |
| Deferred  – Valuation allowance |   | 1,795,000                         |     | 6,974,000                         |   | —                            |   |
|                                 |   | $                                 | (102,000 | )                                 | $      | 4,873,000                         |   | $ | 301,000 |   |

 

A reconciliationbetween the federal statutory rate and the Company’s effective tax rate is asfollows:

 
|                                     |   | **Year Ended  February 1,  2003** |   | **Year Ended  February 2,  2002** |   | **Year Ended  February 3,  2001** |   |
|------------------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
| Federal statutory rate                   |   | (34.0                             | )%     | 34.0                              | %      | 34.0                              | %      |
| State  taxes, net of federal tax benefit |   | (3.0                              | )      | 5.0                               |   | 5.0                               |   |
| Valuation  allowance and other, net      |   | 35.0                              |   | 46.3                              |   | 2.2                               |   |
|                                     |   | (2.0                              | )%     | 85.3                              | %      | 41.2                              | %      |

 

F-15

----

 

Deferred income taxesresult from temporary differences in the recognition of revenues and expensefor financial and income tax reporting purposes.  The components of the net deferred tax asset are comprised of thefollowing:

 
|                                                     |   | **February  1,  2003** |    | **February  2,  2002** |   |
|----------------------------------------------------------|--------|------------------------|---------|------------------------|--------|
| Deferred income tax assets (liabilities), current:       |   |                   |    |                   |   |
| Accounts  receivable                                     |   | $                      | 188,000 |                   | $      | 176,000 |   |
| Inventories                                              |   | 151,000                |    | 202,000                |   |
| Prepaid  advertising and new product development         |   | (705,000               | )       | (886,000               | )      |
| Other,  primarily accruals                               |   | 190,000                |    | 196,000                |   |
|                                                     |   | (176,000               | )       | (312,000               | )      |
| Deferred  income tax assets (liabilities), non-current:  |   |                   |    |                   |   |
| Depreciation  and amortization                           |   | 848,000                |    | 1,514,000              |   |
| Loss  carryforwards                                      |   | 11,073,000             |    | 8,748,000              |   |
| Valuation  allowance                                     |   | (11,745,000            | )       | (9,950,000             | )      |
|                                                     |   | 176,000                |    | 312,000                |   |
| Deferred  income taxes assets (liabilities) – total |   | $                      | —  |                   | $      | — |   |

 

During the yearended February 1, 2003 and February 2, 2002, based on the Company’s financialperformance in the past few years and the challenging economic environment thathas negatively impacted the Company’s operating results, the Company’smanagement determined that the valuation allowance associated with the deferredtax asset should be increased.  The valuationallowance was increased to fully reserve for the deferred tax asset due to thereduced likelihood of whether all the benefits of net operating loss (NOL)carryforwards and other temporary differences would be fully utilized beforethey expire.  For the year endedFebruary 1, 2003 and February 2, 2002, the Company recognized an income taxexpense of $0 and $4,873,000, respectively, to increase the valuation allowanceassociated with the deferred tax asset.

 

Realization of the netdeferred tax asset is largely dependent upon the Company generating sufficienttaxable income prior to the expiration of the net operating loss carryforwards.

 

The Company hasapproximately $28,390,000 of tax net operating loss carryforwards as ofFebruary 1, 2003, which are available to reduce future taxable income andexpire as follows:

 

| 2010  |   | $         | 10,560,000 |   |
|-------|--------|-----------|------------|--------|
| 2011  |   | 1,496,000 |       |
| 2019  |   | 4,401,000 |       |
| 2020  |   | 914,000   |       |
| 2022  |   | 4,471,000 |       |
| 2023  |   | 6,548,000 |       |
| Total |   | $         | 28,390,000 |   |

 

F-16

----

 

**NOTE 12.  (LOSS)INCOME PER SHARE**

 

Effective January31, 1998, the Company adopted Statement of Financial Accounting Standards No.128, “Earnings Per Share.”  Thecomputations of basic and diluted (loss) income per share are as follows:

 
|                                                                     |   | **Year Ended  February 1, 2003** |       | **Year Ended  February 2, 2002** |   | **Year Ended  February 3, 2001** |   |
|--------------------------------------------------------------------------|--------|----------------------------------|------------|----------------------------------|--------|----------------------------------|--------|
| **Numerator  for (loss) income from continuing operations per share:**   |   |                             |       |                             |   |                             |   |
| (Loss)  income from continuing operations                                |   | $                                | (2,277,000 | )                                | $      | (8,546,000                       | )      | $ | 218,000 |   |
| Preferred  stock dividends                                               |   | (218,000                         | )          | (220,000                         | )      | (223,000                         | )      |
|                                                                     |   |                             |       |                             |   |                             |   |
| Numerator  for loss from continuing operations per share                 |   | $                                | (2,495,000 | )                                | $      | (8,766,000                       | )      | $ | (5,000 | ) |
|                                                                     |   |                             |       |                             |   |                             |   |
| **Numerator  for (loss) income from discontinued operations per share**  |   | $                                | (2,826,000 | )                                | $      | (2,039,000                       | )      | $ | 212,000 |   |
|                                                                     |   |                             |       |                             |   |                             |   |
| **Numerator  for extraordinary loss on****early extinguishment of debt** |   | $                                | —     |                             | $      | (219,000                         | )      | $ | — |   |
| **Numerator  for net (loss) income per share:**                          |   |                             |       |                             |   |                             |   |
| Net  (loss) income                                                       |   | $                                | (5,103,000 | )                                | $      | (10,804,000                      | )      | $ | 430,000 |   |
| Preferred  stock dividends                                               |   | (218,000                         | )          | (220,000                         | )      | (223,000                         | )      |
|                                                                     |   |                             |       |                             |   |                             |   |
| Numerator  for net (loss) income per share                               |   | $                                | (5,321,000 | )                                | $      | (11,024,000                      | )      | $ | 207,000 |   |
|                                                                     |   |                             |       |                             |   |                             |   |
| **Denominator  for loss per share:**                                     |   |                             |       |                             |   |                             |   |
| Weighted  average common stock shares                                    |   | 9,490,127                        |       | 9,241,355                        |   | 7,664,215                        |   |
| **Basic  and diluted loss per share:**                                   |   |                             |       |                             |   |                             |   |
| (Loss)  income from continuing operations                                |   | $                                | (0.26      | )                                | $      | (0.95                            | )      | $ | 0.00 |   |
| (Loss)  income from discontinued operations                              |   | $                                | (0.30      | )                                | $      | (0.22                            | )      | $ | 0.03 |   |
| Extraordinary  loss on early  Extinguishment of debt                     |   | $                                | —     |                             | $      | (0.02                            | )      | $ | — |   |
| Net  (loss) income                                                       |   | $                                | (0.56      | )                                | $      | (1.19                            | )      | $ | 0.03 |   |

 

The dilutedcomputations for the years ended February 1, 2003, February 2, 2002 andFebruary 3, 2001, did not assume the exercise of stock options and warrants,nor the conversion of preferred stock due to their antidilutive effect on(loss) income per share.  At February 1,2003, there were options to purchase 1,401,460 shares of stock, warrants topurchase 522,464 shares of stock and preferred stock convertible into 1,148,595shares of stock outstanding.  See Note15 for further information on stock options and warrants, and Note 9 fordetails on convertible preferred stock.

 

**NOTE 13.  SEGMENT ANDRELATED INFORMATION**

 

The Company has adoptedSFAS No. 131, “Disclosures About Segments of an Enterprise and RelatedInformation.”  This Statementestablishes standards for the way public business enterprises reportinformation about operating segments in annual financial statements and ininterim financial reports issued to shareholders.

 

The Company’s reportablesegments are the various distribution channels used to market its products. TheCompany’s products have similar purposes and uses in each channel ofdistribution, but profitability varies among the channels. The Companyconsiders itself a single line of business with products that are marketedthrough direct marketing (catalog, electronic commerce and telemarketing),retail (100% Company- owned stores) - See Note 3 to the Consolidated FinancialStatements “Discontinued Operations,” wholesale, sales to franchisees channelsand joint venture retail stores.  Inaddition, the Company generates revenue from providing framing services tooutside corporate businesses on a contract fee basis.  The Company has four reportable segments – Direct Marketing -

 

F-17

----

 

Successories, Retail Company-owned stores - See Note 3 to theConsolidated Financial Statements “Discontinued Operations,” Sales toFranchisees, and other segments (Wholesale, Contract Framing and Joint VentureRetail Stores).

 

The accounting policiesof the reportable segments are the same as those described in Note 2 of Notesto Consolidated Financial Statements. The Company evaluates the performance ofits operating segments based on income (loss) before other income (expense),income taxes and extraordinary items.

 

Summarized financialinformation concerning the Company’s reportable segments is shown in thefollowing table.  Certain prior yearamounts have been reclassified to conform with the current year presentationfor the discontinued operations.  The“Corporate” row includes corporate related items not allocated to reportablesegments.

 
|                                   |   | **Net  Sales** |       | **Segment  Profit (Loss)** |   | **Total  Assets** |   | **Capital  Expenditures** |       | **Depreciation  and Amortization** |   |
|----------------------------------------|--------|----------------|------------|----------------------------|--------|-------------------|--------|---------------------------|------------|------------------------------------|--------|
|                                   |   |           |       |                       |   |              |   |                      |       |                               |   |
| **Year  Ended February 1, 2003:**      |   |           |       |                       |   |              |   |                      |       |                               |   |
| Direct  Marketing Successories         |   | $              | 27,261,000 |                       | $      | 2,967,000         |   | $                         | 2,579,000  |                               | $      | 12,000 |   | $ | 268,000 |   |
| Sales  to Franchisees                  |   | 2,569,000      |       | 227,000                    |   | 518,000           |   | —                    |       | 11,000                             |   |
| Other  Segments                        |   | 2,304,000      |       | 496,000                    |   | 757,000           |   | 8,000                     |       | 36,000                             |   |
| Corporate                              |   | —         |       | (5,967,000                 | )      | 6,866,000         |   | 24,000                    |       | 1,467,000                          |   |
| CONTINUING  OPERATIONS                 |   | $              | 32,134,000 |                       | $      | (2,277,000        | )      | $                         | 10,720,000 |                               | $      | 44,000 |   | $ | 1,782,000 |   |
| Retail  100% owned Stores              |   | $              | 5,197,000  |                       | $      | (2,826,000        | )      | $                         | 5,000      |                               | $      | 3,000 |   | $ | 876,000 |   |
|                                   |   |           |       |                       |   |              |   |                      |       |                               |   |
| **Year  Ended February 2, 2002:**      |   |           |       |                       |   |              |   |                      |       |                               |   |
| Direct  Marketing Successories         |   | $              | 27,433,000 |                       | $      | 2,339,000         |   | $                         | 7,160,000  |                               | $      | 78,000 |   | $ | 266,000 |   |
| Sales  to Franchisees                  |   | 4,201,000      |       | 310,000                    |   | 938,000           |   | —                    |       | 10,000                             |   |
| Other  Segments                        |   | 3,362,000      |       | 198,000                    |   | 581,000           |   | —                    |       | 46,000                             |   |
| Corporate                              |   | —         |       | (11,393,000                | )      | 5,391,000         |   | 191,000                   |       | 1,923,000                          |   |
| CONTINUING  OPERATIONS                 |   | $              | 34,996,000 |                       | $      | (8,546,000        | )      | $                         | 14,070,000 |                               | $      | 269,000 |   | $ | 2,245,000 |   |
| Retail  100% owned Stores              |   | $              | 7,325,000  |                       | $      | (2,039,000        | )      | $                         | 1,891,000  |                               | $      | 60,000 |   | $ | 1,162,000 |   |
|                                   |   |           |       |                       |   |              |   |                      |       |                               |   |
| **Year  Ended February 3, 2001:** |   |           |       |                       |   |              |   |                      |       |                               |   |
| Direct  Marketing Successories         |   | $              | 33,620,000 |                       | $      | 5,895,000         |   | $                         | 4,035,000  |                               | $      | 139,000 |   | $ | 287,000 |   |
| Sales  to Franchisees                  |   | 6,466,000      |       | 1,487,000                  |   | 1,370,000         |   | —                    |       | 29,000                             |   |
| Other  Segments                        |   | 4,744,000      |       | 1,111,000                  |   | 1,339,000         |   | 2,000                     |       | 99,000                             |   |
| Corporate                              |   | —         |       | (8,275,000                 | )      | 19,307,000        |   | 387,000                   |       | 1,862,000                          |   |
| CONTINUING  OPERATIONS                 |   | $              | 44,830,000 |                       | $      | 218,000           |   | $                         | 26,051,000 |                               | $      | 528,000 |   | $ | 2,277,000 |   |
| Retail  100% owned Stores              |   | $              | 8,500,000  |                       | $      | 212,000           |   | $                         | 2,740,000  |                               | $      | 18,000 |   | $ | 563,000 |   |

 

The Company utilizes itsfacilities and majority of its assets interchangeably among each distributionchannel.  Assets that relate specificallyto a reportable segment have been included in the above table. Assetsidentified to the reportable segments are primarily cash, receivables,inventory, prepaid catalogs, property and equipment, and intangibles.

 

The following tablepresents the details for Corporate:

 
|                                               |   | **Year Ended  February 1,  2003** |      | **Year Ended  February 2,  2002** |   | **Year Ended  February 3,  2001** |   |
|----------------------------------------------------|--------|-----------------------------------|-----------|-----------------------------------|--------|-----------------------------------|--------|
|                                               |   |                              |      |                              |   |                              |   |
| Corporate  administrative expenses                 |   | $                                 | 4,381,000 |                              | $      | 4,077,000                         |   | $ | 4,387,000 |   |
| Unallocated  depreciation and amortization expense |   | 1,467,000                         |      | 1,923,000                         |   | 1,862,000                         |   |
| Interest  expense and other                        |   | 221,000                           |      | 301,000                           |   | 1,725,000                         |   |
| Income  tax expense (benefit)                      |   | (102,000                          | )         | 4,873,000                         |   | 301,000                           |   |
| Extraordinary  loss on early debt extinguishment   |   | —                            |      | 219,000                           |   | —                            |   |
|                                               |   | $                                 | 5,967,000 |                              | $      | 11,393,000                        |   | $ | 8,275,000 |   |

 

F-18

----

 

Corporateadministrative expenses are primarily charges for those functions notspecifically attributable to any specific segment; these functions include theproduct development, merchandising, information systems, accounting, legal,human resource and executive departments. Included in the expenses associated with these functions are payroll andrelated costs, professional fees, information system maintenance costs, officeoccupancy costs, and property and casualty insurance.

 

The Company’soperations are principally in North America. No single foreign country orgeographic area is significant to the consolidated operations.  Long-lived assets are all located in NorthAmerica.

 

The Company’sproducts include distinctive lines of wall decor, desktop accessories, booksand stationery, personalized gifts and awards. In addition, the Company sellsother motivational products supplied by third parties.

 

For the fiscalyears ended February 1, 2003, February 2, 2002 and February 3, 2001 net productsales by product categories were as follows:

 
|                           |   | **Year Ended  February 1,  2003** |   | **Year Ended  February 2,  2002** |   | **Year Ended  February 3,  2001** |   |
|--------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|-----------------------------------|--------|
|                           |   |                              |   |                              |   |                              |   |
| Wall  Décor               |   | 42                                | %      | 45                                | %      | 44                                | %      |
| Desktop  accessories           |   | 20                                | %      | 17                                | %      | 23                                | %      |
| Books  and stationery          |   | 13                                | %      | 13                                | %      | 18                                | %      |
| Personalized  gifts and awards |   | 19                                | %      | 19                                | %      | 14                                | %      |
| Other                          |   | 6                                 | %      | 6                                 | %      | 1                                 | %      |

 

For the above notedyears, no single customer or group under common control represented 10% or moreof the Company’s sales.

 

**NOTE 14.  SUPPLEMENTALCASH FLOW INFORMATION**

 

Supplemental disclosuresto the consolidated statements of cash flows are as follows:

 
|                                         |   | **Year Ended  February 1,  2003** |    | **Year Ended  February 2,  2002** |   | **Year Ended  February 3,  2001** |   |
|----------------------------------------------|--------|-----------------------------------|---------|-----------------------------------|--------|-----------------------------------|--------|
| Cash  paid during the year for:              |   |                              |    |                              |   |                              |   |
| Income  taxes                                |   | $                                 | 4,000   |                              | $      | 95,000                            |   | $ | 41,000 |   |
| Interest                                     |   | 102,000                           |    | 139,000                           |   | 755,000                           |   |
|                                         |   |                              |    |                              |   |                              |   |
| Noncash  investing and financing activities: |   |                              |    |                              |   |                              |   |
| Preferred  stock dividends                   |   | $                                 | 164,000 |                              | $      | 164,000                           |   | $ | 322,000 |   |

 

**NOTE 15.  OPTIONS ANDWARRANTS**

 

The Company has astock option plan (the “Option Plan”) which provides for the grant of stockoptions to directors, executive officers and other employees of theCompany.  On July 24, 2001, the numberof the Company’s common stock shares available for grant under the Option Planincreased from 1,700,000 to 2,500,000 shares. The number of options to be granted or issued and the terms thereof areapproved by the Compensation Committee of the Company’s Board of Directors,

 

F-19

----

 

which is comprised of non-employee directors.  The exercise price of the options is equal to the fair marketvalue of the common stock on the date of grant.  Options granted under the Option Plan generally vest after threeto five years and expire ten years from the date of grant.

 

A summary of thestatus of the Option Plan as of February 1, 2003, February 2, 2002 and February3, 2001, and changes during the periods then ended are as follows:

 
|                                            |   | **Fiscal  Year Ended  February 1, 2003** |   | **Fiscal  Year Ended  February 2, 2002** |   | **Fiscal  Year Ended  February 3, 2001** |      |
|-------------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|--------|------------------------------------------|-----------|
|                                            |   | **Shares**                               |   | **Weighted  Average  Ex. Price**         |   | **Shares**                               |      | **Weighted  Average  Ex. Price** |   | **Shares** |   | **Weighted  Average  Ex. Price** |   |
|                                            |   |                                     |   |                                     |   |                                     |      |   |   |   |   |   |   |
| Outstanding,  beg. of year                      |   | 1,305,460                                |   | $                                        | 4.67   |                                     | 1,134,460 |   | $ | 5.03 |   | 1,097,460 |   | $ | 5.27 |   |
| Converted  under plan                           |   | —                                   |   | —                                   |   | 75,000                                   |      | 2.87 |   | — |   | — |   |
| Granted                                         |   | —                                   |   | —                                   |   | 177,250                                  |      | 1.94 |   | 85,000 |   | 1.92 |   |
| Exercised                                       |   | —                                   |   | —                                   |   | —                                   |      | — |   | — |   | — |   |
| Forfeited                                       |   | (27,000                                  | )      | (2.51                                    | )      | (6,250                                   | )         | (4.04 | ) | (48,000 | ) | (5.05 | ) |
| Expired/canceled                                |   | —                                   |   | —                                   |   | —                                   |      | — |   | — |   | — |   |
| Outstanding,  end of year                       |   | 1,278,460                                |   | 4.71                                     |   | 1,305,460                                |      | 4.67 |   | 1,134,460 |   | 5.03 |   |
| Exercisable,  end of year                       |   | 1,142,660                                |   | 5.00                                     |   | 1,060,818                                |      | 5.17 |   | 918,976 |   | 5.47 |   |
| Weighted-average  fair value of options granted |   |                                     |   | —                                   |   |                                     |      | 1.79 |   |   |   | 1.55 |   |
|                                                 |        |                                          |        |                                          |        |                                          |           |  |  |  |  |  |  |  |  |  |

 

The following tablesummarizes information about options and warrants outstanding at February 1,2003:

 
|                                       |   | **Outstanding**         |   | **Exercisable**                                  |   |
|--------------------------------------------|--------|-------------------------|--------|--------------------------------------------------|--------|
|                                       |   | **Number  Outstanding** |   | **Weighted  Average  Contractual  Life (Years)** |   | **Weighted  Average  Exercise  Price** |   | **Number  Exercisable** |   | **Weighted  Average  Exercise  Price** |   |
| **Range  of exercise prices for options:** |   |                    |   |                                             |   |   |   |   |   |   |   |
| $1.70  – 2.55                         |   | 261,000                 |   | 7.2                                              |   | $ | 1.99 |   | 171,200 |   | $ | 2.00 |   |
|  2.62  – 3.25                    |   | 193,000                 |   | 6.1                                              |   | 2.89 |   | 147,000 |   | 2.91 |   |
|  5.33  – 8.00                    |   | 802,460                 |   | 1.8                                              |   | 5.82 |   | 802,460 |   | 5.82 |   |
|  8.25  – 9.00                    |   | 7,000                   |   | 3.0                                              |   | 8.79 |   | 7,000 |   | 8.79 |   |
| 14.66                                      |   | 15,000                  |   | 1.8                                              |   | 14.66 |   | 15,000 |   | 14.66 |   |
|                                       |   | 1,278,460               |   |                                             |   |   |   | 1,142,660 |   |   |   |
|                                            |        |                         |        |                                                  |        |  |  |  |  |  |  |  |  |

 

The Company had anon-compensatory Employee Stock Purchase Plan which expired in September2001.  The Company intends that theStock Purchase Plan qualify as an “employee stock purchase plan” under Section423 of the Internal Revenue Code. Generally, the Stock Purchase Plan provides for qualifying employees toelect to have a percentage of their compensation used to purchase shares of theCompany’s common stock.  Sharespurchased under the Stock Purchase Plan totaled 0, 18,691 and 24,625 for theyears ended February 1, 2003, February 2, 2002 and February 3, 2001,respectively.

 

The Company has alsoissued stock warrants in connection with certain financing transactions.  Such warrants generally vest immediately andexpire five to eight years from the date of issuance.  As of February 1, 2003, warrants for 522,464 shares to purchasecommon stock of the Company were outstanding and exercisable.  These warrants have a weighted averageexercise price of $2.00 and a weighted average remaining contractual life of2.5 years.

 

The Company measurescompensation cost for its stock plans in accordance with Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees.”  Accordingly, no compensation has beenrecognized for the Company’s stock plans in the consolidated financialstatements.

 

In addition, the Companyhas issued 123,000 non-qualified options to certain employees, directors andformer directors.  These options have aweighted average contractual life of 1.4 years

 

 

F-20

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and a weighted average exercise price of $5.25.  Currently, 110,600 of the non-qualified optionsare exercisable with a weighted average exercise price of $5.60.

 

During the year endedFebruary 1, 2003, each of the five non-employee directors received anannual grant of shares of the Company's common stock pursuant to its StockOption Plan equal in value to a total of $20,000, paid in quarterlyinstallments, at a price equal to the trailing 10-day average closing price ofthe Company's common stock prior to the end of the quarter for which suchshares are issued.  At February 1,2003, the shares for the fourth quarter were outstanding.

 

**NOTE 16.  401(k) PLAN**

 

The Company has a 401(k)Retirement Savings Plan in which all full-time employees who have completed oneyear of service are eligible to participate. Enrollment is open on the January 1st, April 1st, July 1st, or October1st immediately following one year of service. The Company matches 20% of each employee’s contribution, up to a maximumof 6% of base salary.  The Company’scontributions to the 401(k) Plan were $42,000, $54,000, and $51,000, for theyears ended February 1, 2003, February 2, 2002 and February 3, 2001,respectively.

 

**NOTE 17.  COMMITMENTSAND CONTINGENCIES**

 

*Operating Leases*

 

The Company leases itscorporate office and manufacturing/warehouse space under the terms of a lease agreementwhich expires in July 2009.  The Companyis responsible for all taxes, maintenance, insurance and operatingexpenses.  The lease provides for threerenewal options of five years each.

 

The two joint ventureretail store locations are leased under agreements which expire January, 2005and November, 2009.  The leases containrenewal options and escalation clauses and generally provide that the Companypay its proportionate share of the taxes, maintenance and insurance costs.  In addition, leases require contingentpayments based on sales.

 

The future minimum rentalpayments for all operating leases with noncancelable terms in excess of oneyear as of February 1, 2003, are as follows:

 
|                 |   | **Office and  Warehouse** |      | **Joint  Venture  Locations** |   | **Total** |   |
|----------------------|--------|---------------------------|-----------|-------------------------------|--------|-----------|--------|
| Fiscal  year ending: |   |                      |      |                          |   |      |   |
| January  31, 2004    |   | $                         | 790,000   |                          | $      | 136,000   |   | $ | 926,000 |   |
| January  29, 2005    |   | 811,000                   |      | 140,000                       |   | 951,000   |   |
| January  28, 2006    |   | 831,000                   |      | 66,000                        |   | 897,000   |   |
| February  3, 2007    |   | 851,000                   |      | 72,000                        |   | 923,000   |   |
| February  2, 2008    |   | 873,000                   |      | 74,000                        |   | 947,000   |   |
| Thereafter           |   | 1,196,000                 |      | 142,000                       |   | 1,338,000 |   |
|                 |   | $                         | 5,352,000 |                          | $      | 630,000   |   | $ | 5,982,000 |   |

 

Rental expense for alloperating leases was $2,019,000, $2,369,000 and $2,164,000, for the years endedFebruary 1, 2003, February 2, 2002 and February 3, 2001, respectively.

 

In addition, the Companyis a guarantor on two of the franchised retail store location leases.

 

*Employment Agreements*

 

The Company hasemployment agreements with certain key officers.  The agreements provide for aggregate annual salaries of $325,000,and contain confidentiality and noncompetition provisions.  The agreements expire from 2003 through2004.

 

 

F-21

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*Promissory Note*

 

During the fiscal yearended February 3, 2001, Michael McKee, an officer of the Company, executed a$140,000 Promissory Note on behalf of LaSalle Bank National Association.  The Company guaranteed payment of theindebtedness to LaSalle Bank National Association.  The indebtedness includes (a) all principal, (b) all interest,(c) all late charges, (d) all loan fees and loan charges, and (e) allcollection costs and expenses relating to the promissory note or to anycollateral for the promissory note.

 

*Letter of Credit*

 

The Company has a standbyletter of credit outstanding in the amount of $250,000 that is secured by acertificate of deposit.  The letter ofcredit serves as security for the lease of the Company’s corporate office andmanufacturing/warehouse facility.

 

*Duff & Phelps Agreement*

 

On May 3, 2002, the Companyexecuted an engagement letter with Duff & Phelps, LLC.  Under the engagement letter, Duff &Phelps would act as the Company’s exclusive financial advisor in connectionwith the proposed sale of the Company. In consideration for the services to be rendered, the Company paid Duff& Phelps a consulting fee of $50,000. In addition, the Company has agreed to pay a transaction fee upon theclosing of a sale equal to 3.5% of the consideration (as defined in the engagementletter) involved in the sale, which fee shall not be less than $400,000.  Duff & Phelps shall credit theconsulting fee against the transaction fee. The Company has also agreed to reimburse Duff & Phelps for itsreasonable out-of-pocket expenses, including the fees of its legal counsel, andto indemnify Duff & Phelps against certain liabilities, includingliabilities under the federal securities laws, relating to, arising out of, orin connection with its engagement.

 

*Legal Matters*

 

The Company was named asa defendant in a case filed by Pyramid Company of Buffalo (“Plaintiff”). PyramidCompany ofBuffalo v Successories, Inc. (Index No. 2002-8509) wasfiled in the State of New York Supreme Court in the County of Erie on August15, 2002.  Plaintiff alleged that theCompany entered into a lease agreement with Plaintiff and was in default underthe lease agreement due to failure to pay rent.  Plaintiff sought the sum of $9,415.27 as and for past due rents;all rents that may accrue; and such other and further relief as seems just andproper to the Court.  The partiessettled the matter by entering into a Termination and Release Agreement datedJanuary 31, 2003

 

The Company was named asa defendant in a case filed by EKLECCO L.L.C. (“Plaintiff”). EKLECCO L.L.C.v Successories, Inc. (Index No. 2002-5591) was filed in the State of NewYork Supreme Court in the County of Erie on August 14, 2002.  Plaintiff alleged that the Company enteredinto a lease agreement with Plaintiff and was in default under the lease agreementdue to failure to pay rent.  Plaintiffsought the sum of $11,513.47 as and for past due rents; all rents that mayaccrue; and such other and further relief as seems just and proper to theCourt. The parties settled the matter by entering into a Termination andRelease Agreement dated January 31, 2003

 

The Company was named asa defendant in a case filed by Pyramid Crossgates Company (“Plaintiff”).  Pyramid Crossgates Company vSuccessories, Inc. (Index No. 2002-5653) was filed in the State of New YorkSupreme Court in the County of Erie on August 14, 2002.  Plaintiff alleged that the Company enteredinto a lease agreement with Plaintiff and was in default under the leaseagreement due to failure to pay rent.  Plaintiffsought the sum of $10,992.96 as and for past due rents; all rents that mayaccrue; and such other and further relief as seems just and proper to theCourt. The parties settled the matter by entering into a Termination andRelease Agreement dated January 31, 2003

 

The Company was named asa defendant in a case filed by Scottsdale Fashion Square Partnership(“Plaintiff”).  Scottsdale FashionSquare Partnership v Celex Group, Inc. (now Successories, Inc.) (No.CV2002-

 

 

F-22

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016540) was filed in the Superior Court of the State of Arizona in theCounty of Maricopa.  Plaintiff allegedthat the Company entered into a lease agreement with Plaintiff and was indefault under the lease agreement due to failure to pay rent.  Plaintiff sought an order for immediatepossession of the premises and all fixtures, trade fixtures, and tenantimprovements; a writ of restitution; the sum of $17,231.46 for unpaid rent,accrued interest and late charges; interest on unpaid rent and late charges atthe rate of 18% per annum; all rents that accrue with interest at the rate of18% per annum, late charges at the rate of 5%, plus applicable rental taxthereon at the rate of 1.9%, court costs with interest thereon at the rate of10% per annum; and such other further relief as the Court deemed just and proper.  The parties settled the matter by enteringinto a Mutual Release and Cancellation of Lease Agreement dated November 8,2002.

 

Except as noted above,there are no other material pending legal proceedings against the Company.  The Company is, however, at times involvedin routine litigation arising in the ordinary course of its business and, whilethe results of such proceedings cannot be predicted with certainty, the Companybelieves that the final outcome of such matters will not have a material adverseeffect on the Company’s consolidated financial position or results ofoperations.

 

**NOTE 18.  NEW ACCOUNTING PRONOUNCEMENTS**

 

During the second quarterended August 3, 2002, the Company adopted FASB No. 144 “Accounting for theImpairment or Disposal of Long-Live Assets.” The provisions of FASB No. 144 were applied to the Company’s plan toclose all of its 100% owned retail stores. The operations of the Company’s 100% owned retail stores can bedistinguished from the rest of the entity and will be eliminated from theongoing operations of the Company. Accordingly, the operations of the 100% owned retail stores, net ofapplicable income tax effect have been presented as discontinued operations andprior period statements of operations have been reclassified accordingly.  (See Note 3 to the Consolidated FinancialStatements for further information).

 

In May 2002, theFinancial Accounting Standards Board issued FASB No. 145 “Recision of FASBStatements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and TechnicalCorrections,” FASB No. 145 is effective for fiscal years beginning after May14, 2002 unless adopted earlier.  FASB145 requires the stringent criteria of Accounting Principles Board No. 30 to beapplied to debt extinguishments.  Priordebt extinguishments that do not qualify will be reclassified as ordinary. FASBNo. 145 also amends the requirements for certain lease modifications whichresult in a change in classification of the lease from a capital lease to anoperating lease.  In addition FASB No.145 provides guidance regarding the trucking industry’s deregulation thatoccurred in 1980.  The Company has notyet adopted FASB No. 145.  The adoptionof FASB No. 145 will result in increasing the loss from continuing operationsby $219,000, which was previously classified as an extraordinary item for theyear ended February 2, 2002.

 

In June 2002, FASB No.146 “Accounting for Costs Associated with Exit or Disposal Activities,” wasissued.  FASB No. 146 covers accountingfor costs associated with exit or long-lived asset disposal activities, such asrestructurings , consolidation or closing of facilities, lease terminationcost, and employee relocation or severance cost. FASB No. 146 replaces EmergingIssues Task Force (EITF) 94-3, and is to be applied prospectively to exit ordisposal activities initiated after December 31, 2002.  Early application is encouraged.  One of the provisions of FASB No. 146changes the timing of when companies recognize costs associated with exit ordisposal activities, so that the costs would generally be recognized when theyare incurred rather than at the date of a commitment to an exit or disposalplan.  The Company adopted FASB No. 146in the second quarter of fiscal 2002. See Note 3 to the Consolidated Financial Statements for a discussion ofthe discontinuance of the Company’s 100% owned retail operations.

 

On October 3, 2002, FASBNo. 147, “Acquisitions of Certain Financial Institutions” was issued. FASB No.147 covers accounting for purchase transactions and intangible assets offinancial institutions. FASB No. 147 is effective on October 1, 2003.  The adoption of FASB No. 147 did not to havea material impact on the Company’s results of operations or financialcondition.

 

F-23

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In December 2002, FASBNo. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure,”was issued.  This statement amends FASBStatement 123, “Accounting for Stock-Based Compensation” to provide alternativemethods of transition for a voluntary change to the fair value based method ofaccounting for stock-based employee compensation. This statement also amendsthe disclosure requirements of Statement 123 to require more prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results (See Notes 2 and 16). SFAS 148 is effective for fiscal years ending after December 15,2002.  Statement 123 required prospectiveapplication of the fair value recognition provisions to new awards grantedafter the beginning of the period of adoption. Statement 148 allows this prospective treatment for changes to fairvalue recognition in fiscal years beginning before December 16, 2003, andpermits two additional transition methods for entities that adopt thepreferable method of accounting for stock-based employee compensation: themodified prospective method (recognize stock-based employee compensation costfrom the beginning of the fiscal year in which FAS 123 is first applied as ifthe fair value method had been used for all awards, modifications orsettlements for fiscal years beginning after December 15, 1994) and theretroactive restatement method (restate all periods presented to reflectretroactive adoption of the provisions of FAS 123 for all awards granted,modified or settled for fiscal years beginning after December 15, 1994).   The prospective method prescribed in FAS123 will not be allowed for fiscal years beginning after December 16,2003.  The Company has opted to continueaccounting for its stock options under the intrinsic value method prescribed inAPB Opinion No. 25 for the year ended February 1, 2003, with a tabular disclosureof proforma information as if the fair value method had been adopted, asdisplayed in Note 2 to the Consolidated Financial Statements.

 

**NOTE 19.  QUARTERLY FINANCIAL DATA (UNAUDITED)**

 
|                                           |   | **(dollars  in thousands, except for share data)** |   |
|------------------------------------------------|--------|----------------------------------------------------|--------|
| **Year Ended February 1, 2003 (Fiscal 2002):** |   | **First Qtr.**                                     |   | **Second  Qtr.** |   | **Third Qtr.** |   | **Fourth  Qtr.** |   |
| Net  sales                                     |   | $                                                  | 8,526  |   | $ | 7,163 |   | $ | 7,914 |   | $ | 8,531 |   |
| Gross  margin                                  |   | 4,536                                              |   | 3,761 |   | 4,279 |   | 4,753 |   |
| Loss  from continuing operations               |   | (532                                               | )      | (1,172 | ) | (315 | ) | (258 | ) |
| Loss  from discontinued operations             |   | (431                                               | )      | (1,108 | ) | (675 | ) | (612 | ) |
| Net  loss                                      |   | (963                                               | )      | (2,280 | ) | (990 | ) | (870 | ) |
| Net  loss per share:                           |   |                                               |   |   |   |   |   |   |   |
| Basic  and diluted                             |   | (0.11                                              | )      | (0.25 | ) | (0.11 | ) | (0.09 | ) |
|                                                |        |                                                    |        |  |  |  |  |  |  |  |  |  |  |

 
| **Year Ended February 2, 2002 (Fiscal 2001):** |   | **First Qtr.** |   | **Second  Qtr.** |   | **Third Qtr.** |   | **Fourth  Qtr.** |   |
|------------------------------------------------|--------|----------------|--------|-----------------------|--------|----------------|--------|------------------|--------|
| Net  sales                                     |   | $              | 9,503  |                  | $      | 8,058          |   | $                | 8,487  |   | $ | 8,948 |   |
| Gross  margin                                  |   | 5,164          |   | 4,290                 |   | 4,192          |   | 4,361            |   |
| Loss  from continuing operations               |   | (1,004         | )      | (2,234                | )      | (813           | )      | (4,495           | )      |
| Loss  from discontinuing operations            |   | (339           | )      | (599                  | )      | (958           | )      | (143             | )      |
| Net  loss                                      |   | (1,562         | )      | (2,833                | )      | (1,771         | )      | (4,638           | )      |
| Net  loss per share:                           |   |           |   |                  |   |           |   |             |   |
| Basic  and diluted                             |   | (0.18          | )      | (0.31                 | )      | (0.20          | )      | (0.50            | )      |
|                                                |        |                |        |                       |        |                |        |                  |        |  |  |  |  |

 

Operating results includean income tax expense charge of $1,000,000 in the second quarter fiscal 2001and $3,873,000 in the fourth quarter fiscal 2001, to record an increase in thevaluation allowance to fully reserve for the deferred tax asset balance.  The total income tax expense charge of$4,873,000 was allocated to continuing operations.

 

**NOTE 20.  MANAGEMENT PLANS**

 

Due to the continuingsoft economic climate and the substantial loss before income taxes andextraordinary items of $5,712,000 sustained in fiscal 2001, the Companyretained the professional services of Duff & Phelps, LLC, an investmentbanking and financial advisory firm to assist with the sale of theCompany.  As a result, on 

 

 

F-24

----

 

February 13, 2003, the Company announced that it had entered into adefinitive merger agreement with S.I. Acquisition LLC, an Illinois limitedliability company formed principally for the benefit of Jack Miller, theCompany’s Chairman, members of his family and Howard I. Bernstein, a BoardMember of the Company.  The mergeragreement provides that, at the closing of merger, each outstanding share ofthe Company’s common stock will convert into the right to receive $0.30, andeach outstanding share of the Company’s Series B preferred stock will convertinto the right to receive $15 (the stated value of each share of Series Bpreferred stock ) plus all accrued and unpaid dividends in cash (other thanCompany Series B convertible preferred stock owned by S.I. Acquisition).  As a result of the merger, the Company willbecome a privately held company and its common stock will no longer be quotedon the OTCBB.  Accordingly upon closing,the registration of the Company’s common stock under the Securities ExchangeAct of 1934, as amended, will terminate. After the merger, the Company will continue to operate from itsheadquarters in Aurora, Illinois.  TheCompany may terminate the merger agreement if it receives an acquisitionproposal that is superior to the current transaction.  Upon such termination, the Company would reimburse S.I.Acquisition for its expenses, not to exceed $150,000.  The closing of the merger is subject to various conditions,including shareholder approval.  TheCompany will solicit shareholder approval by means of a proxy statement.  Preliminary proxy materials were filed withthe Securities and Exchange Commission (SEC) on March 7, 2003.  The Company is in the process of respondingto comments from the SEC and anticipates filing and mailing definitive proxymaterials to shareholders in the second quarter of 2003.  There can be no assurance that the mergerwill be consummated.

 

The Company will continueits primary focus on sales growth in the direct marketing channel, support ofits current franchisees and joint venture retail stores, and servicing itscurrent wholesale business customers. The current credit facility agreement expires on June 1, 2003, but the bankhas agreed to extend the term of the credit facility to June 30, 2003. The bankhas not given indication that they intend to renew the credit facilityagreement.  The Company continuesdiscussions with various financing sources for funding alternatives to itscurrent credit facility, and to date has not been able to secure alternatefinancing.  The Company is currently indiscussions with two banks to obtain a credit facility in the event the pendingmerger transaction with S.I. Acquisition LLC closes.  In each case, the banks are requiring a personal guarantee orpledge of assets from the Company’s Chairman of the Board, Jack Miller.  The Company’s recurring losses from operationsand liquidity issues raise substantial doubt about its ability to continue as agoing concern.  The financial statementsdo not include any adjustments relating to the recoverability andclassification of asset carrying amounts or the amount and classification ofliabilities that might result should the Company be unable to continue as agoing concern.

 

F-25

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**SUCCESSORIES,INC.**

**SCHEDULE II – VALUATION****AND QUALIFYING ACCOUNTS**

 
| **Description**                   |   | **Balance at  beginning of  Period** |    | **Charged  to costs  and  Expenses** |   | **(1)  Deductions** |   | **Balance  at end of  Period** |     |
|-----------------------------------|--------|--------------------------------------|---------|--------------------------------------|--------|---------------------|--------|--------------------------------|----------|
| February  1, 2003                 |   |                                 |    |                                 |   |                |   |                           |     |
| Allowance  for doubtful accounts  |   | $                                    | 326,000 |                                 | $      | 240,000             |   | $                              | (188,000 | ) | $ | 378,000 |   |
| Reserve  for sales returns        |   | 125,000                              |    | 352,000                              |   | (373,000            | )      | 104,000                        |     |
| Reserve  for obsolescence         |   | 583,000                              |    | —                               |   | (176,000            | )      | 407,000                        |     |
| Deferred  tax valuation allowance |   | 9,950,000                            |    | 1,795,000                            |   | —              |   | 11,745,000                     |     |
|                              |   |                                 |    |                                 |   |                |   |                           |     |
| February  2, 2002                 |   |                                 |    |                                 |   |                |   |                           |     |
| Allowance  for doubtful accounts  |   | $                                    | 469,000 |                                 | $      | 355,000             |   | $                              | (498,000 | ) | $ | 326,000 |   |
| Reserve  for sales returns        |   | 114,000                              |    | 556,000                              |   | (545,000            | )      | 125,000                        |     |
| Reserve  for obsolescence         |   | 497,000                              |    | 342,000                              |   | (256,000            | )      | 583,000                        |     |
| Deferred  tax valuation allowance |   | 2,976,000                            |    | 6,974,000                            |   | —              |   | 9,950,000                      |     |
|                              |   |                                 |    |                                 |   |                |   |                           |     |
| February  3, 2001                 |   |                                 |    |                                 |   |                |   |                           |     |
| Allowance  for doubtful accounts  |   | $                                    | 374,000 |                                 | $      | 528,000             |   | $                              | (433,000 | ) | $ | 469,000 |   |
| Reserve  for sales returns        |   | 175,000                              |    | 583,000                              |   | (644,000            | )      | 114,000                        |     |
| Reserve  for obsolescence         |   | 324,000                              |    | 215,000                              |   | (42,000             | )      | 497,000                        |     |
| Deferred  tax valuation allowance |   | 2,976,000                            |    | —                               |   | —              |   | 2,976,000                      |     |

 

----

(1)  Write-offs, net of recoveries

 

 

F-26

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|   |             | SUCCESSORIES, INC. |
|--------|------------------|--------------------|
|   |             |               |
| Date:  | May 1, 2003 | By:                | /s/ Jack Miller |   |
|   |             |               | Jack Miller*Chairman  of the Board of Directors* |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has been signedbelow by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**                                                                                                                                                                                             |   | **Date**    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------|
|                                                                                                                                                                                                      |   |        |
| /s/ Jack Miller                                                                                                                                                                                           |   | May 1, 2003 |
| Jack Miller*Chairman  of the Board of Directors*                                                                                                                                                          |   |        |
|                                                                                                                                                                                                      |   |        |
| /s/ John C.  Carroll                                                                                                                                                                                      |   | May 1, 2003 |
| John C. Carroll*Interim  President and Chief Executive Officer  (Interim Principal Executive Officer)  Chief Financial Officer and Chief Operating Officer  (Principal Financial and Accounting Officer)* |   |        |
|                                                                                                                                                                                                      |   |        |
| /s/ Arnold M.  Anderson                                                                                                                                                                                   |   | May 1, 2003 |
| Arnold M.  Anderson*Director*                                                                                                                                                                             |   |        |
|                                                                                                                                                                                                      |   |        |
| /s/ Howard I.  Bernstein                                                                                                                                                                                  |   | May 1, 2003 |
| Howard I.  Bernstein*Director*                                                                                                                                                                            |   |        |
|                                                                                                                                                                                                      |   |        |
| /s/ Larry A.  Hodges                                                                                                                                                                                      |   | May 1, 2003 |
| Larry A. Hodges*Director*                                                                                                                                                                                 |   |        |
|                                                                                                                                                                                                      |   |        |
| /s/ Leslie  Nathanson Juris                                                                                                                                                                               |   | May 1, 2003 |
| Leslie Nathanson  Juris*Director*                                                                                                                                                                         |   |        |

 

28

----

 

**CERTIFICATION**

 

I, John C. Carroll,Interim President and Chief Executive Officer (Interim Principal ExecutiveOfficer) Chief Financial and Chief Operating Officer (Principal Financial andAccounting Officer) of Successories, Inc., certify that:

 

1.               I have reviewedthis annual report on Form 10-K of Successories, Inc.;

 

2.               Based on myknowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.               Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.               The registrant’sother officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.             The registrant’s otherofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.               The registrant’sother officers and I have indicated in this annual report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 
| Date: May 1, 2003 | /s/ JOHN C. CARROLL                                                                                                                                                                               |   |
|------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                   |                                                                                                                                                                                              |
|                   | John C. Carroll  Interim President and Chief Executive Officer  (Interim Principal Executive Officer)  Chief Financial, and Chief Operating Officer  (Principal Financial and Accounting Officer) |

 

29

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**INDEX TO EXHIBITS**

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                                                                      |
|-----------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 2.1             |   | Agreement and Plan of  Merger by and between S.I. Acquisition LLC and the Registrant, dated as of  February 13, 2003 (21)                                                                                                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 3.1             |   | Articles of  Incorporation of Registrant - Amended and Restated as of  October 28, 1999 (12)                                                                                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 3.2             |   | By-laws of Registrant  (9)                                                                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 3.3             |   | Amendment No.1 to  By-Laws of Registrant (21)                                                                                                                                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 3.4             |   | Amended and Restated  Certificate of Designation of Series A and Series B Convertible Preferred  Stock (10)                                                                                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 4.1             |   | Specimen Common Stock  Certificate (9)                                                                                                                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 4.2             |   | Specimen Series A  Convertible Preferred Stock Certificate (11)                                                                                                                                                                                                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 4.3             |   | Specimen Series B  Convertible Preferred Stock Certificate (11)                                                                                                                                                                                                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.1            |   | Form of Franchising  Agreement (9)                                                                                                                                                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.3            |   | Successories, Inc.  Amended and Restated Stock Option Plan (15)                                                                                                                                                                                                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.4            |   | Joint Venture Agreement  with Morrison DFW, Inc. and related documents (1)                                                                                                                                                                                                                                                                           |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.5            |   | Indemnification  Agreement dated April 7, 1999 between the Company and Arnold M. Anderson (8)                                                                                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
|            |   | Indemnification  Agreements in the form filed were also entered into by the Messrs. Seamas T.  Coyle, Timothy C. Dillon, C. Joseph LaBonte, Steven B. Larrick, Michael H.  McKee, Mervyn C. Phillips, Jr., Guy E. Snyder, Gary J. Rovansek, R. Scott  Morrison, Jr., Jack Miller, Howard I. Bernstein, Larry A. Hodges, and Leslie  Nathanson Juris. |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.6            |   | Common Stock Option  Agreement granted to Arnold M. Anderson and Incentive Stock Option Agreement  granted to Arnold M. Anderson (2) *                                                                                                                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.7 (a)        |   | Employment Agreement  with Arnold M. Anderson dated March 1, 1996 (3) *                                                                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.7 (b)        |   | Amendment to Employment  Agreement with Arnold M. Anderson dated March 1, 1996 (12) *                                                                                                                                                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.7 (c)        |   | Amendment to Employment  Agreement with Arnold M. Anderson dated January 14, 1997 (12) *                                                                                                                                                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.7 (d)        |   | Addendum to Employment  Agreement with Arnold M. Anderson dated February 16, 2000 (12) *                                                                                                                                                                                                                                                             |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.7 (e)        |   | Amendment to Employment  Agreement with Arnold M. Anderson dated October 1, 2001 (18) *                                                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.8            |   | Employment Agreement  with Michael H. McKee dated June 1, 1999 (9) *                                                                                                                                                                                                                                                                                 |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.9            |   | Credit Agreement  between the Company and The Provident Bank dated as of June 20, 1997 (4)                                                                                                                                                                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.11           |   | First Amendment to  Credit Agreement between the Company and The Provident Bank dated as of July  16, 1997 (4)                                                                                                                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.12           |   | Lease Agreement between  LaSalle National Trust, N.A. as Trustee under Trust No. 120358 and Celex  Group, Inc. (5)                                                                                                                                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                                                                 |
| 10.13           |   | Second Amendment to  Credit Agreement between the Company and The Provident Bank dated as of May  14, 1998 (5)                                                                                                                                                                                                                                  |

 

----

 
| 10.14  |   | Third Amendment to  Credit Agreement between the Company and The Provident Bank dated as of  September 1, 1998 (6)                         |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                       |
| 10.15  |   | Employment Agreement  with Gary Rovansek dated October 29, 1998 (6)*                                                                       |
|   |   |                                                                                                                                       |
| 10.16  |   | Fourth Amendment to  Credit Agreement between the Company and The Provident Bank dated as of April  28, 1999 (8)                      |
|   |   |                                                                                                                                       |
| 10.17  |   | Warrants to Purchase  Common Stock of the Company granted to Provident Financial Group, Inc. dated  as of April 29, 1999 (8)     |
|   |   |                                                                                                                                       |
| 10.18  |   | Preferred Stock  Purchase Agreement, dated as of May 28, 1999, by and among the Company and  the investors (7)                        |
|   |   |                                                                                                                                       |
| 10.19  |   | Registration Rights  Agreement, dated as of May 28, 1999, by and among the Company and the  investors (7)                             |
|   |   |                                                                                                                                       |
| 10.20  |   | Preferred Stock  Purchase Agreement, dated as of October 18, 1999, by and among the Company  and the investors (10)                   |
|   |   |                                                                                                                                       |
| 10.21  |   | Amendment No. 1 to the  Registration Rights Agreement, dated as of October 18, 1999, by and among the  Company and the investors (10) |
|   |   |                                                                                                                                       |
| 10.22  |   | Fifth Amendment to  Credit Agreement between the Company and The Provident Bank dated as of April  6, 2000 (13)                       |
|   |   |                                                                                                                                       |
| 10.23  |   | Sixth Amendment to  Credit Agreement between the Company and The Provident Bank dated as of  August 28, 2000 (14)                     |
|   |   |                                                                                                                                       |
| 10.24  |   | Joint Venture Agreement  with Celebrating Excellence of Minnesota, Inc. and related documents (16)                                         |
|   |   |                                                                                                                                       |
| 10.25  |   | Seventh Amendment to  Credit Agreement between the Company and The Provident Bank dated as of  September 4, 2001 (17)                 |
|   |   |                                                                                                                                       |
| 10.26  |   | Eighth Amendment to  Credit Agreement between the Company and The Provident Bank dated as of  December 3, 2001 (18)                   |
|   |   |                                                                                                                                       |
| 10.26  |   | Ninth Amendment to  Credit Agreement between the Company and the Provident Bank dated as of June  13, 2002 (19)                       |
|   |   |                                                                                                                                       |
| 10.27  |   | Retention Agreement  with Gary J. Rovansek dated August 20, 2002 (19)*                                                                     |
|   |   |                                                                                                                                       |
| 10.28  |   | Retention Agreement  with John C. Carroll dated August 20, 2002 (19)*                                                                      |
|   |   |                                                                                                                                       |
| 10.29  |   | Retention Agreement  with John F. Halpin dated August 20, 2002 (19)*                                                                       |
|   |   |                                                                                                                                       |
| 10.30  |   | Retention Agreement  with Michael McKee dated August 20, 2002 (19)*                                                                        |
|   |   |                                                                                                                                       |
| 10.31  |   | Retention Agreement  with Gregory J. Nowak dated August 20, 2002 (19)*                                                                     |
|   |   |                                                                                                                                       |
| 10.32  |   | Tenth Amendment to  Credit Agreement between the Company and the Provident Bank dated as of  September 11, 2002 (20)             |

 

----

 
| 10.33  |   | Retention Agreement  with James W. Brintnall dated December 5, 2002 (20)*                                                            |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                 |
| 10.34  |   | Eleventh Amendment to  Credit Agreement between the Company and The Provident Bank dated as of  April 25, 2003 (filed herewith) |
|   |   |                                                                                                                                 |
| 21.1   |   | Subsidiaries of the  Registrant (filed herewith)                                                                                     |
|   |   |                                                                                                                                 |
| 23.1   |   | Consent of Crowe Chizek  and Company LLC (filed herewith)                                                                            |
|   |   |                                                                                                                                 |
| 99.1   |   | Certification of Chief  Executive Officer (Interim) and Chief Financial Officer (filed herewith)                                     |

 

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* Denotes managementcontract or compensatory plan or arrangement required to be filed as anexhibit.

 
| (1)    | Previously filed with  the Company’s Annual Report on Form 10-K for the year ended April 30, 1994,  and incorporated herein by reference.                                   |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                             |
| (2)    | Previously filed with  the Company’s Annual Report on Form 10-K for the year ended February 3, 1996,  and incorporated herein by reference.                                 |
|   |                                                                                                                                                                             |
| (3)    | Previously filed with the  Company’s Form 10-Q Report for the quarter ended August 3, 1996, and  incorporated herein by reference.                                          |
|   |                                                                                                                                                                             |
| (4)    | Previously filed with  the Company’s Form 10-Q Report for the quarter ended November 1, 1997, and  incorporated herein by reference.                                        |
|   |                                                                                                                                                                             |
| (5)    | Previously filed with  the Company’s Form 10-Q Report for the quarter ended May 2, 1998, and  incorporated herein by reference.                                             |
|   |                                                                                                                                                                             |
| (6)    | Previously filed with  the Company’s Form 10-Q Report for the quarter ended October 31, 1998, and  incorporated herein by reference.                                        |
|   |                                                                                                                                                                             |
| (7)    | Previously filed with  the Company’s Current Report on Form 8-K filed on June 10, 1999, reporting  date of event June 7, 1999, and incorporated herein by reference.        |
|   |                                                                                                                                                                             |
| (8)    | Previously filed with  the Company’s Form 10-Q Report for the quarter ended May 1, 1999, and  incorporated herein by reference.                                             |
|   |                                                                                                                                                                             |
| (9)    | Previously filed with  the Company’s Form 10-Q Report for the quarter ended July 31, 1999, and  incorporated herein by reference.                                           |
|   |                                                                                                                                                                             |
| (10)   | Previously filed with  the Company’s Current Report on Form 8-K filed on November 4, 1999, reporting  date of event October 18, 1999, and incorporated herein by reference. |
|   |                                                                                                                                                                             |
| (11)   | Previously filed with  the Company’s Form 10-Q Report for the Quarter ended October 30, 1999, and  incorporated herein by reference.                                        |
|   |                                                                                                                                                                             |
| (12)   | Previously filed with  the Company’s Annual Report on form 10-K for the year ended January 29, 2000,  and incorporated herein by reference.                                 |
|   |                                                                                                                                                                             |
| (13)   | Previously filed with  the Company’s Form 10-Q Report for the Quarter ended April 29, 2000, and  incorporated herein by reference.                                          |
|   |                                                                                                                                                                             |
| (14)   | Previously filed with  the Company’s Form 10-Q Report for the Quarter ended October 28, 2000, and  incorporated herein by reference.                                        |
|   |                                                                                                                                                                             |
| (15)   | Previously filed with  the Company’s Proxy Statement Schedule 14A filed on May 31, 2001, and  incorporated herein by reference.                                             |
|   |                                                                                                                                                                             |
| (16)   | Previously filed with  the Company’s annual report on Form 10-K for the year ended February 3, 2001,  and incorporated herein by reference.                                 |

 

----

 
| (17)   | Previously filed with  the Company’s Form 10-Q Report for the Quarter ended November 3, 2001, and  incorporated herein by reference. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                      |
| (18)   | Previously filed with  the Company’s Form 10-K Report for the year ended February 2, 2002, and  incorporated herein by reference     |
|   |                                                                                                                                      |
| (19)   | Previously filed with  the Company’s Form 10-Q Report for the quarter ended August 3, 2002, and  incorporated herein by reference    |
|   |                                                                                                                                      |
| (20)   | Previously filed with  the Company’s Form 10-Q Report for the quarter ended November 2, 2002, and  incorporated herein by reference  |
|   |                                                                                                                                      |
| (21)   | Previously filed with  the Company's Current Report on Form 8-K dated February 13, 2003 and  incorporated herein by reference.       |

 

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