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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

(Mark One)
ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 4, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-22834

/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended November 3, 2001

/ / 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 of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 90 days. Yes ~~/x/~~ ý No ~~/ /~~o

Registrant had 9,~~313~~348,~~884~~104 shares of common stock, $.01 par value, outstanding as of ~~December~~June 711, ~~2001~~2002.

SUCCESSORIES, INC.
INDEX TO FORM 10-Q

			Page Number	~~Page Number~~
PART I.	FINANCIAL INFORMATION	~~FINANCIAL INFORMATION~~
	Item 1.	~~Item~~Financial 1.Statements	~~Financial Statements~~
		Consolidated Balance Sheets	~~Consolidated Balance Sheets~~3	3
		Consolidated Statements of Operations and Comprehensive Loss	~~Consolidated Statements of Operations and Comprehensive Loss~~4	4
		Consolidated Statement of Stockholders' Equity	~~Consolidated Statement of Stockholders' Equity~~5	5
		Consolidated Statements of Cash Flows	~~Consolidated Statements of Cash Flows~~6	6
		Notes to Consolidated Financial Statements	~~Notes to Consolidated Financial Statements~~7	7
	Item 2.	~~Item~~Management's 2.Discussion and Analysis of Financial Condition and Results of Operations	~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~13	14
	Item 3.	~~Item~~Quantitative 3.and Qualitative Disclosures About Market Risk	~~Quantitative and Qualitative Disclosures About Market Risk~~17	19
PART II.	OTHER INFORMATION	~~OTHER INFORMATION~~
	Item 1.	~~Item~~Legal 1.Proceedings	~~Legal Proceedings~~18	20
	Item 6.	~~Item~~Exhibits 6.and Reports on Form 8-K	~~Exhibits and Reports on Form 8-K~~19	21
SIGNATURES			20	22
INDEX TO EXHIBITS

PART I. FINANCIAL INFORMATION

SUCCESSORIES, INC.

Consolidated Balance Sheets

		November 3, 2001			February 3, 2001
		May 4, 2002			February 2, 2002
		(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents	$	~~572~~505,000		$	2602,~~468,~~000
	Accounts and notes receivable, net		2,~~761~~129,000			32,~~515~~445,000
	Inventories, net		65,~~067~~349,000			75,~~056~~005,000
	Prepaid catalog expenses		1,~~785~~507,000			1,~~908~~683,000
	Deferred income taxes and other prepaid expenses		503,000			568,000
	Other prepaid expenses		812,000			857,000
Total current assets			1110,~~688~~302,000			1510,~~515~~592,000
Restricted cash			250,000			250,000
Property and equipment, net			43,~~367~~477,000			63,~~350~~914,000
Notes receivable			~~156,000~~—			~~252~~17,000
Deferred financing costs and debt discount, net			~~213~~149,000			~~528~~181,000
Deferred income taxes, net			3,626,000			4,626,000
Intangibles and other assets, net			851,000			1,007,000
Intangibles and other assets, net			998,000			1,270,000
TOTAL ASSETS		$	15,029,000		$	15,961,000
TOTAL ASSETS		$	21,298,000		$	28,791,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Current portion of long-term debt	$	1,922,000		$	3,597,000
	Revolving credit loan	$	1,258,000		$	1,483,000
	Accounts payable		12,~~993~~074,000			~~865~~1,488,000
	Accrued expenses and deferred income taxes		1,~~504~~523,000			21,~~216~~761,000
Total current liabilities			54,~~419~~855,000			64,~~678~~732,000
Long-term debt, net of current portion			—			13,000
Minority interest			10,000			47,000
Total liabilities			5,419,000			6,691,000
Minority interest			4,000			101,000
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; 9,313,884 and 9,181,196 shares issued and outstanding, respectively		93,000			92,000
	Common stock, $.01 par value; 20,000,000 shares authorized; 9,313,884 shares issued and outstanding, respectively		93,000			93,000
	Common stock warrants		2,324,000			2,324,000
	Notes receivable from stockholders		(118,000	)		(~~148~~118,000	)
	Additional paid-in capital		33,321,000			33,~~136~~321,000
	Accumulated deficit		(1925,~~687~~398,000	)		(1324,~~356~~380,000	)
	Accumulated other comprehensive loss		(64,000	)		(5564,000	)
Total stockholders' equity			1510,~~875~~164,000			2111,~~999~~182,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	2115,~~298~~029,000		$	2815,~~791~~961,000

The accompanying notes are an integral part of these statements.

SUCCESSORIES, INC. Consolidated Statements of Operations and Comprehensive ~~Income (~~Loss) (Unaudited)

		Three Months Ended						~~Nine Months Ended~~
		November 3, 2001			October 28, 2000			November 3, 2001			October 28, 2000
		May 4, 2002			May 5, 2001
Net product sales		$	910,~~882~~076,000		$	1311,~~098~~086,000		$	~~30,661,000~~		$	~~37,625,000~~
Cost of goods sold			54,~~176~~808,000			65,~~520~~200,000			~~15,088,000~~			~~17,392,000~~
Gross profit on product sales			45,~~706~~268,000			65,~~578~~886,000			~~15,573,000~~			~~20,233,000~~
Fees, royalties and other income			~~286~~188,000			~~343~~226,000			~~795,000~~			~~833,000~~
Gross margin			45,~~992~~456,000			6,~~921~~112,000			~~16,368,000~~			~~21,066,000~~
Operating expenses			6,~~672~~456,000			67,~~113~~365,000			~~21,063,000~~			~~20,218,000~~
(Loss) income from operations			(1,680,000	)		808,000			(4,695,000	)		848,000
Loss from operations			(1,000,000	)		(1,253,000	)
Other income (expense):
	Interest expense		(6274,000	)		(~~442~~80,000	)		~~(206,000~~	)		~~(1,000,000~~	)
	Minority interests in subsidiaries		(6010,000	)		(5124,000	)		~~(110,000~~	)		~~(161,000~~	)
	Interest income		2014,000			716,000			~~45,000~~			~~19,000~~
	Other, net		111,000			10(2,000	)		~~19,000~~			~~(7,000~~	)
Total other expense			(9169,000	)		(~~476~~90,000	)		~~(252,000~~	)		~~(1,149,000~~	)
(Loss) income before income tax and extraordinary item			(1,771,000	)		332,000			(4,947,000	)		(301,000	)
Loss before income tax and extraordinary item			(1,069,000	)		(1,343,000	)
Income tax			—			—			1,000,000			—
Income tax expense (benefit)			(106,000	)		—
(Loss) income before extraordinary item			(1,771,000	)		332,000			(5,947,000	)		(301,000	)
Loss before extraordinary item			(963,000	)		(1,343,000	)
Extraordinary loss on early extinguishment of debt			—			—219,000			~~219,000~~			—
Net (loss) income		$	(1,771,000	)	$	332,000		$	(6,166,000	)	$	(301,000	)
Net loss		$	(963,000	)	$	(1,562,000	)
Dividend to preferred shareholders			55,000			55,000			~~165,000~~			~~165,000~~
(Loss) income available to common stockholders		$	(1,826,000	)	$	277,000		$	(6,331,000	)	$	(466,000	)
Loss available to common stockholders		$	(1,018,000	)	$	(1,617,000	)
Foreign currency translation adjustment		$	—		$	34,000		$	~~(9,000~~	)	$	~~2,000~~
Comprehensive (loss) income		$	(1,771,000	)	$	335,000		$	(6,175,000	)	$	(299,000	)
Comprehensive loss		$	(963,000	)	$	(1,566,000	)
Loss per share (basic and diluted):
	(Loss) income before extraordinary item	$	(0.20	)	$	0.04		$	(0.66	)	$	(0.06	)
	Loss before extraordinary item	$	(0.11	)	$	(0.15	)
	Net (loss) income	$	(0.20	)	$	0.04		$	(0.69	)	$	(0.06	)
	Net loss	$	(0.11	)	$	(0.18	)

The accompanying notes are an integral part of these statements.

SUCCESSORIES, INC.

Consolidated Statement Of Stockholders' Equity

(Unaudited)

		Convertible Preferred Stock
					Common Stock					Notes Receivable From Stockholders								Accumulated Other Comprehensive Loss
								Common Stock Warrants					Additional Paid-In Capital		Accumulated Deficit						Total Stockholders' Equity
		Shares	Amount		Shares	Amount
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	)	$	(55,000	)	$	21,999,000
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	)	$	(64,000	)	$	11,182,000
Net loss		—		—	—		—		—		—			—		(6963,~~166,~~000	)		—			(6963,~~166,~~000	)
Foreign currency translation adjustment		—		—	—		—		—		—			—		—			(9,000	)		(9,000	)
Notes receivable payments		—		—	—		—		—		30,000			—		—			—			30,000
Common stock transactions:
	Sales of common shares	—		—	18,691		—		—		—			22,000		—			—			22,000
	Preferred stock dividend issued as common stock	—		—	113,997		1,000		—		—			163,000		—			—			164,000
Preferred stock transactions:
	Preferred stock dividends	—		—	—		—		—		—			—		(~~165~~55,000	)		—			(~~165~~55,000	)
Balance at November 3, 2001		604,759	$	6,000	9,313,884	$	93,000	$	2,324,000	$	(118,000	)	$	33,321,000	$	(19,687,000	)	$	(64,000	)	$	15,875,000
Balance at May 4, 2002		604,759	$	6,000	9,313,884	$	93,000	$	2,324,000	$	(118,000	)	$	33,321,000	$	(25,398,000	)	$	(64,000	)	$	10,164,000

The accompanying notes are an integral part of these statements.

SUCCESSORIES, INC.

Consolidated Statements of Cash Flows

(Unaudited)

			Nine Months Ended
			Three Months Ended
			November 3, 2001			October 28, 2000
			May 4, 2002			May 5, 2001
Cash flows from operating activities:
	Net loss		$	(6963,~~166,~~000	)	$	(~~301~~1,562,000	)
	Adjustments to reconcile net loss to net cash from operating activities:
		Depreciation and amortization		2611,~~699,~~000			2712,~~145,~~000
		Amortization of debt discount		9632,000			~~423~~32,000
		Minority interests in subsidiaries		~~110~~10,000			~~161~~24,000
		Extraordinary loss on early extinguishment of debt		~~219,000~~—			—219,000
		Deferred income tax asset — valuation allowance		1,000,000			—
				(310,000	)		(575,000	)
				(2,042,000	)		2,428,000
Changes in operating assets and liabilities:
	Changes in operating assets and liabilities:
	Accounts and notes receivable			315,000			553,000
		Accounts and notes receivable		794,000			(1,321,000	)
	Inventories			(344,000	)		889,000
		Inventories		989,000			(234,000	)
	Prepaid catalog expenses			176,000			(177,000	)
		Prepaid catalog expenses		123,000			(231,000	)
	Other prepaid expenses			45,000			(140,000	)
		Other prepaid expenses		65,000			(70,000	)
	Accounts payable			586,000			527,000
		Accounts payable		1,128,000			(794,000	)
	Accrued expenses			(293,000	)		(803,000	)
		Accrued expenses		(713,000	)		538,000
	Other assets			92,000			(107,000	)
		Other assets		(197,000	)		(354,000	)
Net cash provided by operating activities				267,000			167,000
Net cash provided by (used in) operating activities				147,000			(38,000	)
Cash flows from investing activities:
	Proceeds from notes receivable issued in connection with sale of property and equipment			5519,000			7729,000
	Reduction in restricted cash			—			50,000
	Purchase of property and equipment			(15,000	)		(98,000	)
	Purchase of property and equipment			(256,000	)		(293,000	)
Net cash provided by (used in) investing activities				4,000			(69,000	)
Net cash (used in) investing activities				(201,000	)		(166,000	)
Cash flows from financing activities:
	Proceeds from sale of common stock			~~22,000~~—			38,~~993,~~000
	Net borrowings (repayments) on revolving credit loan			1,922,000			(1,886,000	)
	Net (repayments) borrowings on revolving credit loan			(225,000	)		2,106,000
	Repayments of long-term debt			~~(3,610,000~~—	)		(13,~~875~~591,000	)
	Distributions to joint venture partners			(~~206~~143,000	)		(~~251~~107,000	)
	Proceeds from notes receivable issued to stockholders			~~30,000~~—			130,000
Net cash used in financing activities				(1368,~~842,~~000	)		(181,554,000	)
Net decrease in cash				(197,~~896,~~000	)		(~~222~~1,456,000	)
Cash and cash equivalents, beginning of period				2602,~~468,~~000			~~939~~2,468,000
Cash and cash equivalents, end of period			$	~~572~~505,000		$	~~717~~1,012,000

The accompanying notes are an integral part of these statements.

SUCCESSORIES, INC.

Notes To Consolidated Financial Statements

(Unaudited)

NOTE 1. DESCRIPTION OF THE BUSINESS

Successories, Inc. and its subsidiaries (collectively the "Company") design, manufacture, and market a diverse range of motivational and self-improvement products, ~~many~~most of which are the Company's own proprietary designs. The Company considers itself a single line of business with products that are marketed primarily under the Successories trade name through direct marketing (catalog, electronic commerce and telemarketing), retail (Company-owned stores), sales to franchisees and wholesale distribution channels. The Company operates a chain of Successories retail stores located in the United States and Canada. The Company also operates a franchising program whereby franchisees are granted the right to market the Company's products under the Successories trademark.

NOTE 2. BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared, without audit, in accordance with generally accepted accounting principles for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring matters) considered necessary for a fair presentation have been included. ~~Certain prior year amounts have been reclassified to conform with the current year presentation.~~

The Company's fiscal year ends on the Saturday closest to January 31. References to the three ~~and nine~~ months ended ~~November~~May 34, ~~2001~~2002, and ~~October~~May 285, ~~2000~~2001, refer to the thirteen ~~and thirty-nine~~ weeks ended on the dates indicated.

The results of operations for the ~~nine~~three months ended ~~November~~May 34, ~~2001~~2002 are not necessarily indicative of the results to be expected for the full year. These financial statements ~~should~~ should be read in conjunction with the Company's financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 32, ~~2001~~ 2002.

NOTE 3. INVENTORIES

Inventories are comprised of the following:

	November 3, 2001			February 3, 2001
	May 4, 2002			February 2, 2002
Finished goods	$	4,~~000~~026,000		$	53,~~461~~825,000
Raw Materials		21,~~521~~895,000			21,~~092~~763,000
		6,521,000			7,553,000
		5,921,000			5,588,000
Less: reserve for obsolescence		(~~454~~572,000	)		(~~497~~583,000	)
	$	65,~~067~~349,000		$	75,~~056~~005,000

NOTE 4. DEBT

~~Debt~~ On ~~consists~~June 20, 1997, the Company entered into a credit facility agreement with The Provident Bank (the "Bank"), amended most recently on June 13, 2002, the credit facility was comprised of a revolving credit loan, term loan and fixed rate loan. During the ~~following:~~first quarter ended May 4, 2002, the revolving credit loan provided for maximum borrowings of $4 million, and the borrowing base was limited to 85% of eligible receivables plus the lesser of 57% of eligible inventory or $3,000,000, as defined. A commitment fee of 0.25% is payable on the daily unused amount of the maximum revolving credit. The

		November 3, 2001			February 3, 2001
Bank borrowings:
	Term loan	$	—		$	3,090,000
	Revolving credit loan		1,922,000			—
	Fixed rate loan		—			500,000
	Capital lease obligations		—			20,000
			1,922,000			3,610,000
Less: current portion			(1,922,000	)		(3,597,000	)
Long-term debt		$	—		$	13,000

On ~~June 20, 1997, the Company entered into a credit~~ facility agreement with The Provident Bank (the "Bank"), amended most recently on December 3, 2001, which is comprised of a revolving credit loan, term loan and fixed rate loan. Prior to September 4, 2001, the revolving credit loan provided for maximum borrowings of $9 million for each succeeding July 1 through December 31, and at all other times of $6 million. Subsequent to September 4, 2001, the revolving credit loan provides for maximum borrowings of $6 million through December 31, 2001 and each succeeding July 1 through December 31, and at all other times of $5 million. In addition, subsequent to September 4, 2001, the borrowing base is further reduced by $1,000,000 for the rolling 12-month period at fiscal quarter-ends with EBITDA equal or less than $4,000,000. Borrowings under the revolving credit loan are limited to 85% of eligible receivables plus 57% of eligible inventory, as defined. Subsequent to December 3, 2001, the borrowings under the revolving credit loan are limited to 85% of eligible receivables plus the lesser of 57% of eligible inventory or $3,000,000, as defined. A commitment fee of 0.25% is payable on the daily unused amount of the maximum revolving credit commitment. The facility expires in June 2003, and all borrowings under the facility are secured by substantially all the assets of the Company. The interest ~~rates~~ rate on the ~~term loan and~~ revolving credit loan ~~borrowings~~borrowing ~~generally fluctuate based on the margin ratio, as defined, from a minimum of~~ is prime plus 02.~~50% to a maximum of prime plus 3.00% on the term loan, and a minimum of prime less~~ 0~~.25~~% ~~to a maximum of prime plus 0~~.~~75%~~ ~~on the revolving credit loan. The fixed rate loan bears interest at 12%.~~ Interest is payable monthly. The interest rate on the outstanding revolving credit loan was 56.758% at ~~November~~May 34, ~~2001~~2002. ~~Subsequent to December 3, 2001, the interest rate on the revolving credit loan is prime plus 2.00%.~~ As of ~~November~~ May 34, ~~2001~~2002, available borrowings on the revolving credit loan were $32,~~078~~287,000.

On ~~September~~June 413, ~~2001~~2002, the Company obtained an amendment to the credit facility to adjust and modify certain financial covenants which were retroactive to the first quarter ended May 4, ~~reduce~~2002. ~~applicable~~In ~~interest~~addition, ~~rate~~the onamendment adjusted borrowing base and the revolver ~~and~~limits, prospectively. Subsequent to June 13, 2002, the borrowing base is limited to 80% of eligible ~~commitment~~receivables ~~fee~~plus on45% of eligible inventory. Effective June 13, 2002, the ~~unused~~maximum ~~revolver~~revolving credit loan is limited to $3,500,000 through October 31, 2002 and ~~amend~~$3,000,000 ~~certain~~thereafter. ~~other~~In connection ~~terms~~with the above mentioned amendment, the Company agrees to exchange the stock warrants previously issued to the bank in exchange for a success fee equal to 2% of the ~~quarter~~gross ~~ended~~sales ~~August 4~~price, ~~2001~~in the ~~and~~event ~~prospectively~~that the Company is sold.

On In ~~December 3,~~the prior year first quarter 2001, the Company ~~obtained~~pre-paid anthe ~~amendment~~entire tooutstanding Bank term loan and fixed rate loan balance in the ~~credit~~amount ~~facility~~of $3,590,000. The above noted loans had payment terms through June 2003. The Company recorded an extraordinary loss of $219,000 related to ~~waive~~the ~~certain~~early ~~financial~~debt ~~covenants~~extinguishment ~~for~~in the prior year quarter ended ~~November~~May 35, 2001. ~~In addition,~~ ~~the~~The ~~amendment~~extraordinary ~~included~~loss anrepresents ~~adjustment~~the towrite-off of the ~~interest~~unamortized ~~rate~~debt ondiscount associated with the ~~revolver~~term loan and ~~the~~fixed ~~borrowing~~rate ~~base, prospectively~~loan.

In The ~~February 2001,~~credit ~~the~~facility ~~Company~~agreement ~~pre-paid~~contains, ~~the~~among ~~entire~~other ~~outstanding Bank term loan and fixed rate loan balance in the amount of $3~~provisions,~~590,000.~~ ~~The~~requirements ~~above~~for ~~noted~~maintaining ~~loans~~certain ~~had payment~~earnings ~~terms~~levels ~~through~~and ~~June 2003.~~financial ~~The Company recorded an extraordinary loss of $219~~ratios,~~000~~ ~~related~~limits toon ~~the~~capital ~~early~~expenditures ~~debt~~and ~~extinguishment in the current year quarter ended May 5~~additional indebtedness, ~~2001.~~and ~~The extraordinary~~use ~~loss represents the write-off~~ of ~~the~~proceeds ~~unamortized~~from ~~debt~~certain ~~discount~~equity ~~associated with the term loan and fixed rate loan~~offerings.

8 At May 4, 2002, the Company was in compliance with the debt covenant requirements of the credit facility agreement.

The weighted ~~credit~~average ~~facility~~interest ~~agreement~~rates ~~contains,~~on ~~among~~cash ~~other~~interest ~~provisions,~~expense ~~requirements~~ for ~~maintaining~~borrowings ~~certain~~outstanding ~~earnings~~as ~~levels~~of ~~and financial ratios~~May 4, ~~limits~~2002 ~~on capital expenditures~~ and ~~additional~~ ~~indebtedness, and use of proceeds from certain equity offerings. As noted above, on December~~May 35, 2001, ~~the~~were ~~Company~~6.8% ~~obtained~~and ~~an amendment to the credit facility to waive certain of said financial covenants for the quarter ended November 3~~8.6%, ~~2001~~respectively.

~~The weighted~~NOTE ~~average interest rates on cash interest expense for borrowings outstanding as of November 3, 2001 and October 28, 2000 were 8~~5.7% ~~and~~SUPPLEMENTAL ~~10.7%,~~CASH ~~respectively.~~FLOW INFORMATION

NOTE 5. IMPAIRMENT CHARGE

Pursuant to SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," the Company evaluated the realizability of assets related to certain under performing company owned retail stores because the anticipated cash flows from these retail locations did not support the net book value of the productive assets. In addition, the Company discontinued the planned implementation of a warehouse management enhancement project due to lower than anticipated production volumes. As a result, the Company recorded impairment charges of approximately $530,000 in the third quarter ended November 3, 2001.

NOTE 6. INCOME TAXES

During the quarter ended August 4, 2001, based on the current economic slow-down, the management of the Company determined that the valuation allowance associated with the deferred tax asset should be increased due to the reduced likelihood of whether all the benefits of net operating loss (NOL) carryforwards would be fully utilized before they expire. In the quarter ended August 4, 2001, the Company recognized an income tax expense of $1,000,000 to increase the valuation allowance associated with the deferred tax asset. At November 3, 2001, the deferred tax asset balance (net of valuation allowance) was $3,873,000.

Realization of the net deferred tax asset is largely dependent upon the Company generating sufficient taxable income prior to the expiration of the net operating loss carryforwards. However, the amount of such realization could change in the near term if estimates of future taxable income during the carryforward period are increased or decreased. To the extent the net operating loss carryforwards and existing deductible temporary differences are not offset by existing taxable temporary differences reversing within the carryforward period, the remaining loss carryforwards are expected to be realized by achieving future profitable operations. The realization of the net deferred tax asset is not assured, however, management believes that it is more likely than not that the net deferred tax asset will be realized.

NOTE 7. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental disclosures to the statements of cash flows are as follows:

		Nine Months Ended
		Three Months Ended
		November 3, 2001		October 28, 2000
		May 4, 2002		May 5, 2001
Cash paid during the period for:
	Income taxes	$	871,000	$	2787,000
	Interest		~~120~~32,000		~~577~~48,000
Non-cash investing and financing activities:
Non-cash investing and financing Activities:
	Preferred stock dividends	$	~~164~~55,000	$	~~115~~55,000
	Revaluation of stock warrants		—		33,000

NOTE 86. (LOSS) ~~INCOME~~ PER SHARE

The computations of basic and diluted (loss) ~~income~~ per share ~~were~~are as follows:

		Three Months Ended						~~Nine Months Ended~~
		November 3, 2001			October 28, 2000			November 3, 2001			October 28, 2000
		May 4, 2002			May 5, 2001
Numerator for (loss) income before extraordinary item per share:
Numerator for loss before extraordinary item per share:
	(Loss) income before extraordinary item	$	(1,771,000	)	$	332,000		$	(5,947,000	)	$	(301,000	)
	Loss before extraordinary item	$	(963,000	)	$	(1,343,000	)
	Less: Preferred stock dividend		(55,000	)		(55,000	)		(165,000	)		(165,000	)
	Less: Preferred stock dividends		(55,000	)		(55,000	)
	Numerator for (loss) income before extraordinary item per share — basic	$	(1,826,000	)	$	277,000		$	(6,112,000	)	$	(466,000	)
	Numerator for loss before extraordinary item per share	$	(1,018,000	)	$	(1,398,000	)
	Numerator for (loss) income before extraordinary item per share — diluted	$	(1,826,000	)*	$	332,000		$	(6,112,000	)*	$	(466,000	)*
Numerator for net loss per share:
Numerator for net (loss) income per share:
	Net loss	$	(963,000	)	$	(1,562,000	)
	Net (loss) income	$	(1,771,000	)	$	332,000		$	(6,166,000	)	$	(301,000	)
	Less: Preferred stock dividends		(55,000	)		(55,000	)
	Less: Preferred stock dividends		(55,000	)		(55,000	)		(165,000	)		(165,000	)
	Numerator for net loss per share	$	(1,018,000	)	$	(1,617,000	)
	Numerator for net (loss) income per share — basic	$	(1,826,000	)	$	277,000		$	(6,331,000	)	$	(466,000	)
Denominator for loss per share:
	Numerator for net (loss) income per share — diluted	$	(1,826,000	)*	$	332,000		$	(6,331,000	)*	$	(466,000	)*
	Weighted average common stock shares		9,313,884			9,183,826
Denominator for (loss) income per share:
Basic and diluted loss per share:
	Weighted average common stock shares		9,252,812			7,577,000			9,241,355			7,658,000
	Loss before extraordinary item	$	(0.11	)	$	(0.15	)
	Weighted average common stock shares after assumed conversions—diluted		9,252,812	*		8,726,000			9,241,355	*		7,658,000	*
	Net loss	$	(0.11	)	$	(0.18	)
Basic and diluted (loss) income per share:
	(Loss) income before extraordinary item	$	(0.20	)	$	0.04		$	(0.66	)	$	(0.06	)
	Net (loss) income	$	(0.20	)	$	0.04		$	(0.69	)	$	(0.06	)

Stock options, warrants, and convertible preferred stock were not included in the computation of the diluted loss per share, due to their antidilutive effect on the loss per share.

* TheNOTE ~~diluted~~7. ~~(loss)~~SEGMENT ~~income~~AND ~~per~~RELATED ~~share did not assume the conversion of applicable stock options and warrants nor the conversion of preferred stock, due to their anti-dilutive effect on the (loss) income per share.~~ INFORMATION

NOTE 9. SEGMENT AND RELATED INFORMATION

The Company has adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." This Statement establishes standards for the way public business enterprises report information about operating segments in annual financial statements and in interim financial reports issued to shareholders.

The Company's reportable segments are the various distribution channels used to market its products. The Company's products have similar purposes and uses in each channel of distribution, but profitability varies among the channels. The Company considers itself a single line of business with products that are marketed through direct marketing (catalog, electronic commerce ~~and~~ and telemarketing), retail (Company-owned stores), wholesale and sales to franchisees ~~and other~~ channels. In addition, the Company generates revenue from providing framing services to outside corporate businesses on a contract fee basis. The Company has four reportable segments—Direct Marketing—Successories, Retail Company-owned stores, Sales to Franchisees and other segments (Direct Marketing—Golf, Wholesale and Contract ~~framing~~Framing). At the end of the first quarter in fiscal 2002, the Company discontinued contract framing services for third party products.

The accounting policies of the reportable segments are the same as those described in Note 2 of Notes to Consolidated Financial Statements in the Company's 10-K. The Company evaluates the performance of its operating segments based on income (loss) before other income (expense), income taxes and extraordinary item.

Summarized financial information concerning the Company's reportable segments is shown in the following table. The "Corporate" row includes ~~general~~ corporate related items not allocated to reportable segments.

		Net Sales		Segment Profit (Loss)			Total Assets		Capital Expenditures		Depreciation and Amortization
Three Months Ended November 3, 2001:
Three Months Ended May 4, 2002:
Direct Marketing Successories		$	67,~~473~~328,000	$	~~765~~838,000		$	83,~~273~~062,000	$	69,000	$	6766,000
Retail Company-owned stores			1,~~819~~949,000		(~~936~~415,000	)		21,~~568~~951,000		292,000		~~503~~102,000
Sales to Franchisees			1586,~~348,~~000		~~104~~20,000			1583,~~122,~~000		—		3,000
Other segments			~~242~~213,000		~~(11~~70,000	)		~~287~~94,000		—		—
Corporate			—		(1,~~693~~476,000	)		9,~~048~~425,000		424,000		~~474~~440,000
CONSOLIDATED	~~CONSOLIDATED~~	$	910,~~882~~076,000	$	(1963,~~771,~~000	)	$	2115,~~298~~115,000	$	7715,000	$	1611,~~047,~~000
Three Months Ended October 28, 2000:
Three Months Ended May 5, 2001:
Direct Marketing Successories		$	7,~~877~~672,000	$	1530,~~652,~~000		$	34,~~522~~134,000	$	—15,000	$	7267,000
Retail Company-owned stores			2,~~298~~106,000		(~~153~~280,000	)		3,~~903~~289,000		~~6,000~~—		~~169~~146,000
Sales to Franchisees			2927,~~496,~~000		~~695~~38,000			21,~~741~~168,000		—		83,000
Other segments			~~427~~381,000		~~186~~71,000			~~282~~347,000		—		—
Corporate			—		(21,~~048~~921,000	)		1916,~~355~~481,000		~~113~~83,000		~~521~~496,000
	CONSOLIDATED	$	1311,~~098~~086,000	$	~~332~~(1,562,000	)	$	2925,~~803~~419,000	$	~~119~~98,000	$	~~770~~712,000

Nine Months Ended November 3, 2001:
Direct Marketing Successories		$	20,413,000	$	1,656,000		$	8,273,000	$	53,000	$	201,000
Retail Company-owned stores			6,055,000		(1,752,000	)		2,568,000		60,000		1,025,000
Sales to Franchisees			3,274,000		172,000			1,122,000		—		7,000
Other segments			919,000		92,000			287,000		—		—
Corporate			—		(6,334,000	)		9,048,000		143,000		1,466,000
	CONSOLIDATED	$	30,661,000	$	(6,166,000	)	$	21,298,000	$	256,000	$	2,699,000
Nine Months Ended October 28, 2000:
Direct Marketing Successories		$	24,061,000	$	3,893,000		$	3,522,000	$	—	$	216,000
Retail Company-owned stores			7,249,000		36,000			3,903,000		8,000		540,000
Sales to Franchisees			4,836,000		1,131,000			2,741,000		—		23,000
Other segments			1,479,000		500,000			282,000		—		—
Corporate			—		(5,861,000	)		19,355,000		285,000		1,366,000
	CONSOLIDATED	$	37,625,000	$	(301,000	)	$	29,803,000	$	293,000	$	2,145,000

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

The following table presents the details for "Corporate":

	Three Months Ended					~~Nine Months Ended~~
	November 3, 2001			October 28, 2000		November 3, 2001		October 28, 2000
	May 4, 2002			May 5, 2001
Corporate expenses	$	1,128,000		$	1,051,000	$	3,397,000	$	3,346,000
Corporate administrative expenses	$	1,073,000		$	1,116,000
Unallocated depreciation and amortization expense		~~474~~440,000			~~521~~496,000		~~1,466,000~~		~~1,366,000~~
Other expenses		9169,000			~~476~~90,000		~~252,000~~		~~1,149,000~~
Income tax expense		—			—		1,000,000		—
Income tax expense (benefit)		(106,000	)		—
Extraordinary loss on early debt extinguishment		—			—219,000		~~219,000~~		—
	$	1,~~693~~476,000		$	21,~~048~~921,000	$	~~6,334,000~~	$	~~5,861,000~~

Corporate administrative expenses are primarily charges for those functions not specifically attributable to any specific segment; these functions include the product development, merchandising, information systems, accounting, legal, human resource and executive departments. Included in the expenses associated with these functions are payroll and related costs, professional fees, information system maintenance costs, office occupancy costs, and property and casualty insurance. 10

The Company's operations are principally in North America. No single foreign country or geographic area is significant to the consolidated operations. Long-lived assets are all located in North America.

The Company's products include distinctive lines of wall decor, desktop accessories, books and stationery, personalized gifts and awards. In addition, the Company sells other motivational products supplied by third parties.

For the three months ended May 4, 2002 and May 5, 2001, net product sales by product categories were as follows:

	Three Months Ended
	May 4, 2002		May 5, 2001
Wall décor	42	%	43	%
Desktop accessories	18	%	20	%
Books and stationery	19	%	18	%
Personalized gifts and awards	21	%	17	%
Other	—		2	%

NOTE 8. NEW ACCOUNTING PRONOUNCEMENT

On February 3, 2002, the Company adopted FASB No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets". The provisions of FAS No. 144 will be applied to the Company's plan to close all of its 100% owned retail stores in the second quarter of 2002.

In May 2002, the Financial Accounting Standards Board issued FASB No. 145 "Recision of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections:" FAS No. 145 is effective for fiscal years beginning after May 14, 2002 unless adopted earlier.

FAS 145 requires the stringent criteria of Accounting Principles Board No. 30 to be applied to debt extinguishments. Prior debt extinguishments that do not qualify will be reclassified as ordinary. FAS 145 also amends the requirements for certain lease modifications which result in a change in classification of the lease from a capital lease to an operating lease. In addition FAS 145 provides guidance regarding the trucking industry's deregulation that occurred in 1980. The adoption of FAS 145 is not expected to have a material impact on the Company's results of operations or financial condition.

NOTE 9. MANAGEMENT PLANS

Due to the continuing soft economic climate and the substantial loss before income taxes and extraordinary items of $5,712,000 sustained in fiscal 2001, the Company retained the professional services of Duff & Phelps, LLC, an investment banking and financial advisory firm. Duff & Phelps is assisting the Company in identifying and assessing strategic alternatives, which are currently focussed on pursuing the sale of the Company. No assurance can be given that the sale of the Company shall be effected.

The Company will continue its primary focus on sales growth in the direct marketing channel and support of its current franchisees. In the process of reviewing its strategic options, the Company decided on May 7, 2002 to take immediate steps to develop a plan to close all of its 100% owned retail stores. As a result, in the second quarter 2002, the Company will identify the stores to be closed, evaluate the associated asset impairment charges and report the operating results from the respective stores as discontinued operations.

At the end of the first quarter in fiscal 2002, the Company discontinued contract-framing services for third party products. Any future contract framing services shall be limited primarily to large and multiple unit production runs. Net sales and operating results for contract framing were not material.

The Company's management continues to evaluate its operating expenses due to the softness in sales. In the current year second quarter 2002, the Company instituted further workforce reduction which is expected to provide annualized payroll savings of approximately $1,100,000. The severance costs associated with the above mentioned workforce reduction of approximately $93,000 will be recorded in the second quarter 2002.

For the nine months ended November 3, 2001 and October 28, 2000, net product sales by product categories were as follows:

	Nine Months Ended
	November 3, 2001		October 28, 2000
Wall décor	43.4	%	46.8	%
Desktop accessories	21.2	%	21.1	%
Books and stationery	19.1	%	17.3	%
Personalized gifts and awards	15.5	%	13.3	%
Other	0.8	%	1.5	%

NOTE 10. NEW ACCOUNTING PRONOUNCEMENTS

In July 2001, the Financial Accounting Standards Board issued FASB Statement No. 143, "Accounting for Asset Retirement Obligations." FAS No. 143 will become effective for the Company in 2003. The adoption of FAS No. 143 is not expected to have a material impact on the Company's results of operations and financial condition.

In August 2001, the Financial Accounting Standards Board issued FASB no. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." FAS No. 144 will become effective for the Company on February 4, 2002. The adoption of FAS No. 144 is not expected to have a material impact on the Company's results of operations and financial condition.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto included elsewhere in this Report.

Successories ~~(the "Company")~~ designs, manufactures and markets a diverse range of motivational and self-improvement products, ~~many~~most of which are the Company's own proprietary designs. The Company's products include distinctive lines of wall decor, desktop accessories, books and stationery, and personalized gifts and awards. In ~~addition, the Company sells other motivational products supplied by third parties. In~~-house designers create proprietary art work and designs that can be used in conjunction with a wide variety of products. The Company will also customize products to fulfill customers' special needs.

The Company's products are marketed primarily under its Successories trade name through direct marketing (catalog, electronic commerce and telemarketing), retail channel (Company-owned stores), sales to franchisees and ~~other~~wholesale ~~channels~~distribution. Although the Company utilizes multiple distribution channels for its products, the Company's ~~products~~ products have similar purposes and uses in each channel of distribution. The profitability varies among products and distribution channels. The Company utilizes its ~~corporate~~facilities ~~facility~~ interchangeably for each distribution channel. Furthermore, the marketing channels are directed at a single customer base located primarily in North America. In addition, the Company ~~generates~~generated revenue from providing framing services to outside corporate businesses on a contract fee basis.

For the three ~~and nine~~ months ended ~~November~~May 34, ~~2001~~2002 and ~~October~~May 285, ~~2000~~2001, net product sales for the various distribution channels, as a percentage of total net product sales, were as follows:

	Three Months Ended				~~Nine Months Ended~~
	November 3, 2001		October 28, 2000		November 3, 2001		October 28, 2000
	May 4, 2002		May 5, 2001
Direct marketing—Successories	6572.57	%	6069.12	%	~~66.6~~	%	~~63.9~~	%
Retail Company-owned stores	1819.43	%	1719.50	%	~~19.7~~	%	~~19.3~~	%
Sales to franchisees	135.68	%	198.04	%	~~10.7~~	%	~~12.8~~	%
Other channels	2.52	%	3.4	%	~~3.0~~	%	~~4.0~~	%

The gross profit margins for direct marketing and retail channels vary due to differences in product mix and volume discounts based on order size. The gross profit margin for sales to the franchisees is lower than the direct marketing and retail channels since these sales are generally made at awholesale ~~significant discount from retail price~~prices.

14 Due to the continuing soft economic climate and the substantial loss before income taxes and extraordinary items of $5,712,000 sustained in fiscal 2001, the Company retained the professional services of Duff & Phelps, LLC, an investment banking and financial advisory firm. Duff & Phelps is assisting the Company in identifying and assessing strategic alternatives, which are currently focussed on pursuing the sale of the Company. No assurance can be given that the sale of the Company shall be effected.

The Company will continue its primary focus on sales growth in the direct marketing channel and support of its current franchisees. In the process of reviewing its strategic options, the Company decided on May 7, 2002, to take immediate steps to develop a plan to close all of its 100% owned retail stores. As a result, in the second quarter 2002, the Company will identify the stores to be closed, evaluate the associated asset impairment charges and report the operating results from the respective stores as discontinued operations. The cost of store closures will be dependent upon the terms and conditions of lease termination to be negotiated with landlords.

At the end of the first quarter in fiscal 2002, the Company discontinued contract framing services for third party products. Any future contract framing services shall be limited primarily to large and multiple unit production runs. Net sales and operating results for contract framing were not material.

RESULTS OF OPERATIONS

The following ~~tables~~table ~~set~~sets forth the results of operations for the three months ~~and six months~~ ended ~~November~~May 34, ~~2001~~2002 and ~~October~~May 285, ~~2000.~~2001:

(Dollars in thousands)

	Three Months Ended
	May 4, 2002					May 5, 2001					Increase (Decrease)
	Amount			%		Amount			%		Amount			%
	(Dollars in thousands)
Net product sales	$	10,076		100.0		$	11,086		100.0		$	(1,010	)	(9.1	)
Cost of goods sold		4,808		47.7			5,200		46.9			(392	)	(7.5	)

Gross profit on product sales		5,268		52.3			5,886		53.1			(618	)	(10.5	)
Fees, royalties and other income		188		1.9			226		2.0			(38	)	(16.8	)

Gross margin		5,456		54.2			6,112		55.1			(656	)	(10.7	)
Operating expenses		6,456		64.1			7,365		66.4			(909	)	(12.3	)

Loss from operations		(1,000	)	(9.9	)		(1,253	)	(11.3	)		253		20.2
Interest and other expenses		69		0.7			90		0.8			(21	)	(23.3	)

Loss before income taxes		(1,069	)	(10.6	)		(1,343	)	(12.1	)		274		20.4
Income tax expense (benefit)		(106	)	(1.1	)		—		—			(106	)	(100.0	)

Loss before extraordinary item		(963	)	(9.5	)		(1,343	)	(12.1	)		380		28.3
Extraordinary loss		—		—			219		2.0			(219	)	(100.0	)

Net loss	$	(963	)	(9.5	)	$	(1,562	)	(14.1	)	$	599		38.3

	Three Months Ended								Increase (Decrease)
	November 3, 2001					October 28, 2000
	Amount			%		Amount		%	Amount			%
Net product sales	$	9,882		100.0		$	13,098	100.0	$	(3,216	)	(24.6	)
Cost of goods sold		5,176		52.4			6,520	49.8		(1,344	)	(20.6	)
Gross profit on product sales		4,706		47.6			6,578	50.2		(1,872	)	(28.5	)
Fees, royalties and other income		286		2.9			343	2.6		(57	)	(16.6	)
Gross margin		4,992		50.5			6,921	52.8		(1,929	)	(27.9	)
Operating expenses		6,672		67.5			6,113	46.7		559		9.1
(Loss) income from operations		(1,680	)	(17.0	)		808	6.1		(2,488	)	(307.9	)
Interest and other expenses		91		0.9			476	3.6		(385	)	(80.9	)
(Loss) income before income taxes		(1,771	)	(17.9	)		332	2.5		(2,103	)	(633.4	)
Income tax expense		—		—			—	—		—		—
(Loss) income before extraordinary item		(1,771	)	(17.9	)		332	2.5		(2,103	)	(633.4	)
Extraordinary loss		—		—			—	—		—		—
Net (loss) income	$	(1,771	)	(17.9	)	$	332	2.5	$	(2,103	)	(633.4	)

Three Months Ended May 4, 2002 (First Quarter 2002), Compared To Three Months Ended May 5 2001 (First Quarter 2001)

	Nine Months Ended										Increase (Decrease)
	November 3, 2001					October 28, 2000
	Amount			%		Amount			%		Amount			%
Net product sales	$	30,661		100.0		$	37,625		100.0		$	(6,964	)	(18.5	)
Cost of goods sold		15,088		49.2			17,392		46.2			(2,304	)	(13.3	)
Gross profit on product sales		15,573		50.8			20,233		53.8			(4,660	)	(23.0	)
Fees, royalties and other income		795		2.6			833		2.2			(38	)	(4.6	)
Gross margin		16,368		53.4			21,066		56.0			(4,698	)	(22.3	)
Operating expenses		21,063		68.7			20,218		53.7			845		4.2
(Loss) income from operations		(4,695	)	(15.3	)		848		2.3			(5,543	)	(653.7	)
Interest and other expenses		252		0.8			1,149		3.1			(897	)	(78.1	)
Loss before income taxes		(4,947	)	(16.1	)		(301	)	(0.8	)		(4,646	)	1,543.5
Income tax expense		1,000		3.3			—		—			1,000		100.0
Loss before extraordinary item		(5,947	)	(19.4	)		(301	)	(0.8	)		(5,646	)	1,875.7
Extraordinary loss		219		0.7			—		—			219		100.0
Net loss	$	(6,166	)	(20.1	)	$	(301	)	(0.8	)	$	(5,865	)	1,948.5

Net product sales were $10,076,000 in the current year first quarter ended May 4, 2002, compared to $11,086,000 for the corresponding first quarter ended May 5, 2001. The $1,010,000 or 9.1% decrease in net sales was comprised of direct marketing Successories of $344,000 or 4.5%, retail Company-owned stores of $157,000 or 7.5%, sales to franchisees of $341,000 or 36.8%, and other channels of $168,000 or 44.1%.

~~Three~~ The Company's ~~Months~~customers ~~Ended~~are ~~November 3~~predominantly mid to large size businesses, which appear to remain cautious with their discretionary spending. The Company started experiencing lower response rates from prospect catalog circulation in direct marketing Successories channel in the first quarter 2001. ~~(Third~~As ~~Quarter~~a result, starting in the second quarter 2001), ~~Compared~~the ToCompany ~~Three~~started ~~Months~~to ~~Ended~~focus ~~October 28~~its efforts on refining its catalog circulation strategy and aggressively targeting opportunities in niche markets. In the first quarter 2002, ~~2000~~the ~~(Third~~Company ~~Quarter~~reduced ~~2000)~~its catalog circulation by 40% which was primarily in prospect catalogs. The decrease in direct marketing net sales in the first quarter 2002 was in part due to the refined catalog circulation strategy which, however, had a positive impact to the operating profit for the channel as a result of improved return on catalog advertising costs. Internet sales, which are included in the direct marketing Successories channel, increased by 20.4% from year to year. Internet sales represented 26.9% of the total direct marketing sales in the first quarter 2002 and were 21.4% in the prior year first quarter 2001. Internet continues to be a significant marketing and sales opportunity for the Company. The comparable store sales in retail Company-owned stores decreased by 15.2% in the current year first quarter in comparison to prior year first quarter. The decrease in sales to franchisees

Net product sales were $9,882,000 in the current year third quarter ended November 3, 2001, compared to $13,098,000 for the corresponding third quarter ended October 28, 2000 in the prior year. The $3,216,000 or 24.6% decrease in net sales was comprised of direct marketing Successories of 14

15 can be primarily attributed to 16 fewer stores in operation in the current year first quarter in comparison to prior year first quarter. The decrease in net sales in the other channels from year to year can be primarily attributed to the Company's decision made in first quarter 2002 to discontinue contract framing services for third party products.

Gross margin decreased in the current year first quarter 2002 to $15,~~404~~456,000 orfrom ~~17.8%~~$6,112,000 ~~retail~~in ~~Company-owned~~prior ~~stores~~year offirst ~~$479,000~~quarter or2001. 20The decrease in gross margin can be primarily attributed to decline in net sales from year to year.8% To encourage consumer spending, ~~sales~~the Company continues to ~~franchisees~~provide promotional and permanent discounting of $1various products. The gross profit,~~148,000~~ oras ~~46.0%~~a percentage of net sales, for the first quarter 2002 in comparison to first quarter 2001 was negatively impacted by additional discounting provided to customers and ~~other~~higher ~~channels~~fixed ofproduction ~~$185~~costs due to lower sales volume,~~000~~ orwhich 43were significantly offset by lower material costs.~~3%.~~

As Operating expenses decreased in the ~~first~~current ~~and~~year ~~second~~first ~~quarters,~~quarter ~~the~~2002 ~~decrease~~to in$6,456,000 ~~net~~from ~~product~~$7,365,000 ~~sales experienced~~ in the ~~third~~prior ~~quarter~~year ~~can~~first bequarter ~~primarily attributed to the weak economy~~2001. The ~~Company's~~decrease ~~customers~~in ~~are predominantly~~operating ~~mid~~expenses tofrom ~~large~~year ~~size businesses who appear~~ to year ~~remain cautious with their spending in light~~ of ~~the current economic conditions. In addition~~$909,000 ~~direct~~is ~~marketing Successories~~primarily ~~sales~~ in ~~the~~catalog ~~third quarter~~advertising ofcosts ~~this~~due ~~year~~to ~~were~~reduced ~~further~~and ~~impacted~~refined ~~by a planned reduction in prospect~~ catalog circulation, invariable ~~the~~operating ~~light~~expenses ~~of lower response rates being experienced~~ as a result of ~~the~~lower ~~current business environment. The Company's direct marketing efforts continue to focus on aggressively targeting opportunities in niche markets and refining marketing strategies focussed on increasing~~ sales ~~from the existing customer base. Internet sales~~volume, ~~which~~and ~~are~~corporate ~~included~~payroll ~~in the direct marketing Successories channel, continue to grow from year to~~expenses ~~year—increased~~related to ~~25.4%~~workforce ofreductions ~~the~~instituted ~~total direct marketing sales~~ in the ~~current year from 15.5% in the~~ prior year. Inthird ~~addition~~quarter ~~to the already weak economy, the events of September 11,~~ 2001. ~~further~~The ~~impacted sales negatively in the retail~~ Company~~-owned~~'s ~~and~~management ~~franchised~~continues ~~stores~~to inevaluate ~~the third~~its ~~quarter~~operating inexpenses ~~comparison~~due to the ~~first~~softness ~~and second quarter. The comparable store sales~~ in ~~retail Company-owned stores decreased by 23~~sales.9% inIn the current year second ~~third~~ quarter in2002, ~~comparison to~~ the ~~prior year.~~Company ~~The~~instituted ~~decrease~~further inworkforce ~~sales~~reduction towhich ~~franchisees~~is ~~can~~expected ~~also be attributed~~ to 8provide ~~fewer~~annualized ~~stores~~payroll insavings ~~operation~~of ~~and~~approximately ~~decline~~$1,100,000. inThe ~~advanced~~severance ~~holiday~~costs ~~season~~associated ~~inventory~~with ~~purchases in~~ the above ~~current~~mentioned ~~year~~workforce ~~third~~reduction ~~quarter.~~of ~~In addition~~approximately to$93,000 ~~purchasing~~will abe ~~franchise~~recorded ~~store~~in ~~during~~ the ~~current~~second ~~year third~~ quarter, ~~the Company terminated the franchise agreements for 6 franchise locations~~2002. ~~Of these 6 franchise locations, 4 locations have been closed and 2 locations have been reopened as Company-owned stores.~~

~~Gross~~ In ~~margin decreased in~~ the current year ~~third~~first quarter ~~to $4~~2002,~~992,000~~ ~~from $6,921,000 in~~ the ~~prior~~Company ~~year.~~recorded ~~The~~an ~~decrease~~income intax ~~gross~~benefit ~~margin~~of ~~can~~$106,000 berelated ~~attributed~~ to ~~the~~income ~~decline~~tax inrefund ~~net~~claims ~~product sales~~approved and ~~gross~~received ~~profit percentage in the current year. The decline in gross profit percentage can be attributed to change in product sales mix and higher fixed production costs per unit resulting~~ from ~~lower~~ ~~sales~~amended ~~volume~~state ~~being generated through the manufacturing facility in the current year~~returns.

~~Operating~~ In ~~expenses increased in~~ the ~~current~~prior year ~~third~~first quarter ~~to $6~~2001,~~672,000~~ ~~from $6,113,000 in~~ the ~~prior~~Company ~~year.~~recorded ~~The~~an ~~variable~~extraordinary ~~operating~~loss ~~expenses~~of ~~decreased~~$219,000 ~~from~~related ~~year~~ to ~~year~~early ~~with~~debt ~~the decline in net product sales~~extinguishment. ~~However,~~As ~~operating expenses other than variable increased as~~ a result of ~~$932,000~~pre-payment inof ~~additional charges being recognized in~~ the ~~current~~term ~~year third quarter. These charges~~loan ~~were~~and ~~primarily~~fixed ~~related~~rate toloan ~~asset~~with ~~impairment~~the ~~write-downs for two under-performing~~ Company~~-owned~~'s ~~retail stores~~bank, ~~obligations~~the ~~due from~~Company ~~franchisees,~~recorded ~~discontinuance~~an ofadditional aexpense ~~warehouse management system enhancement project due~~ to ~~lower~~write-off ~~than~~the ~~anticipated~~unamortized ~~production~~debt ~~volumes~~discount ~~and~~associated ~~severance~~with ~~payments related to~~ the ~~reduction~~term inloan ~~workforce instituted~~and ~~during~~fixed ~~the~~rate ~~third quarter~~loan.

~~During~~ In the current year ~~third~~first quarter 2002, the Company ~~generated~~had a net loss of $1963,~~771,~~000 in comparison to a net ~~income~~loss of $~~332~~1,562,000 in the prior year first quarter 2001. The ~~net~~improved ~~loss~~operating results, ~~incurred~~ in the ~~current year~~light of lower sales volume, can be ~~primarily~~ attributed to the ~~decrease~~Company's inefforts ~~gross~~to ~~margin~~streamline ~~from~~operating ~~decline~~expenses inand ~~net~~utilization ~~product~~of ~~sales~~cost ~~and~~effective ~~additional~~marketing ~~charges~~strategies ~~recorded~~to inimprove the operating results ~~expenses in the current year as a result~~ of the ~~continuing~~ ~~business economic slow-down~~Company.

Nine Months Ended November 3, 2001 (Year-To-Date 2001), Compared To Nine Months Ended October 28, 2000 (Year-To-Date 2000)

Net product sales were $30,661,000 in the current year to-date through November 3, 2001, compared to $37,625,000 for the corresponding year to-date through October 28, 2000 in the prior year. The $6,964,000 or 18.5% decrease in net sales was comprised of direct marketing Successories of $3,648,000 or 15.2%, retail Company-owned stores of $1,194,000 or 16.5%, sales to franchisees of $1,562,000 or 32.3%, and other channels of $560,000 or 37.8%.

In the current year, the decrease in net product sales across the channels can be primarily attributed to the continuing economic slow-down. In addition, direct marketing Successories sales starting in the second quarter of this year were further impacted by a planned reduction in prospect catalog circulation in light of lower response rates experienced as a result of the current business environment. The Company's direct marketing efforts continue to focus on aggressively targeting opportunities in niche markets and refining marketing strategies focussed on increasing sales from the existing customer base. The comparable store sales in retail Company-owned stores decreased by 16.1% in the current year in comparison to the prior year. The total number of retail Company-owned stores in operation in the current year were 27, compared to the 24 in operation in the prior year. The sales to franchisees were also impacted by fewer stores in operation in the current year—43 in the current year versus 51 in the prior year. The decrease in sales from other channels is primarily due to loss of sales in contract framing compared to the prior year. A major contract framing customer is no longer in business.

Operating expenses increased in the current year to $21,063,000 from $20,218,000 in the prior year. The increase in operating expenses can be attributed to additional charges recognized in the current year second and third quarter of $1,326,000. The additional charges related to bad debt reserves for franchisee related receivables, write-off of the net book value of fixed assets pertaining to five Company-owned store leases expiring prior to the end of the fiscal year and two under-performing Company-owned stores, acceleration of goodwill amortization for Company-owned retail stores from a useful life of 15 years to the end of the current lease term, discontinuance of a warehouse management system enhancement project due to lower than anticipated production volumes and severance payments related to the reduction in workforce instituted during the third quarter. The variable operating expenses decreased from year to year with the decline in net product sales.

In the current year second quarter 2001, the Company recorded an income tax expense of $1,000,000 to increase the valuation allowance associated with the deferred tax asset balance. As a result of the current challenging economic environment, the Company's management increased the valuation allowance due to the reduced likelihood that all the benefits of the deferred tax asset related to the net operating loss (NOL) carryforwards would be fully utilized before they expire.

In the current year first quarter 2001, the Company recorded an extraordinary loss of $219,000 related to early debt extinguishment. As a result of pre-payment of the term loan and fixed rate loan with the bank, the Company had to record an additional expense to write-off the unamortized debt discount associated with the term loan and fixed rate loan.

The net loss of $6,166,000 in the current year was significantly higher than the net loss of $301,000 in the prior year. The increase in net loss in the current year can be primarily attributed to the decline in gross margin and additional charges recorded to operating expenses as a result of decline in sales volume due to economic downturn, income tax expense recorded to increase the valuation allowance associated with the deferred tax asset and extraordinary loss recorded for the early extinguishment of debt, offset by a decrease in interest expense due to lower outstanding debt balance.

LIQUIDITY AND CAPITAL RESOURCES

The Company's ongoing cash requirements are for working capital, capital expenditures and debt service. The Company expects to rely on cash generated from its operations, supplemented by borrowings available on the revolving credit loan, to fund its cash requirements.

Operating activities provided cash of $~~147~~267,000 infor the ~~current~~three ~~year nine~~ months ended ~~November~~May 34, ~~2001~~2002 (first quarter 2002), compared to ~~cash used of~~ $38167,000 infor the ~~prior~~three ~~year corresponding nine~~ months ended ~~October~~May 285, ~~2000~~2001 (first quarter 2001). The increase in cash ~~inflow~~flow ~~from~~in ~~operating~~the ~~activities~~first quarter 2002 in comparison to the first quarter 2001 can be ~~primarily~~ attributed to a decrease in ~~accounts~~loss ~~receivable~~from operations, and ~~inventory,~~changes in prepaid catalog expenses and accrued expenses balances offset by ~~decrease~~changes in ~~cash inflow~~inventory ~~from~~and ~~operating~~accounts ~~results~~receivable balances.

17 Investing activities provided cash of $4,000 in the first quarter 2002, compared to used cash of $69,000 in the first quarter 2001. The principal use of cash in investing activities is capital expenditures and the source of cash is proceeds from sales of property and equipment. The Company's current credit facility limits capital expenditures to $1 million for the fiscal year.

Financing ~~The~~activities ~~decrease~~used incash ~~accounts~~of ~~receivable~~$368,000 ~~and~~in ~~inventory~~the ~~can~~first bequarter ~~attributed~~2002 toand ~~decline~~$1,554,000 in ~~sales~~the ~~levels~~first ~~and~~quarter ~~improved~~2001. ~~management~~Scheduled ofdebt ~~assets~~repayments inon the ~~current~~term ~~year.~~note and net repayments on the revolving credit

Investing activities used cash of $201,000 in the current year nine months ended November 3, 2001, compared to $166,000 in the corresponding nine months ended October 28, 2000. The principal use of cash in investing activities is capital expenditures and the source of cash is proceeds from sales of property and equipment. 15

~~Financing~~ activities used cash of $1,842,000 in the current year nine months ended November 3, 2001, compared to $18,000 in the corresponding nine months ended October 28, 2000. Scheduled debt repayments on the term note and net repayments on the revolving credit loan ~~are~~were the principal uses of cash. Proceeds from net borrowings on the revolving credit loan ~~are~~were the primary source of cash. AsIn ~~planned, in~~ the ~~current~~prior year first quarter 2001, the ~~company~~Company prepaid its term loan and fixed rate loan with the bank, as planned in an effort to strengthen the Company's balance sheet and debt to equity ~~leverage~~position. The above noted loans had payment terms through June 2003. ~~In the prior year, the company generated proceeds from the common stock rights offering in October 2000, which in turn were used to pay-down the term and fixed loan in 2001.~~

~~The~~ On ~~credit~~June 13, ~~facility~~2002, ~~agreement~~the ~~contains,~~Company ~~among~~obtained ~~other~~an ~~provisions,~~amendment ~~requirements~~to ~~for~~the ~~maintaining~~credit ~~certain~~facility ~~earnings~~to ~~levels~~adjust and ~~financial~~modify ~~ratios,~~certain ~~limits~~financial oncovenants ~~capital~~which ~~expenditures~~were ~~and additional~~retroactive ~~indebtedness,~~to ~~and~~the ~~use~~first ofquarter ~~proceeds~~ended May 4, ~~from certain equity offerings~~2002. OnAt ~~December~~May 34, ~~2001~~2002, the Company ~~obtained~~was anin ~~amendment~~compliance towith the ~~credit~~debt ~~facility to waive certain financial~~ covenants ~~for~~ of the ~~quarter~~credit ~~ended~~facility ~~November 3, 2001~~agreement. InSee ~~addition,~~footnote ~~the~~4 ~~amendment~~in ~~included~~the annotes ~~adjustment~~ to the ~~interest~~financial ~~rate~~statements onfor ~~the revolver and the borrowing base, prospectively~~further information.

The Company believes that internally generated funds and the credit facility will be sufficient to meet its current operating needs, ~~fund~~including ~~debt~~funds ~~service~~required ~~and~~to ~~make~~close ~~anticipated~~all ~~capital~~of the 100% ~~expenditures.~~owned Atretail ~~November 3~~stores, ~~2001~~fund ~~the~~debt ~~available~~service ~~borrowings~~and onmake ~~the~~anticipated ~~revolving~~capital ~~credit loan were $3,078,000~~expenditures.

SEASONALITY

The Company's business is subject to seasonal variations in demand. Historically, a significant portion of the Company's sales and net income have been ~~realized~~ realized during the period from October through January. The effects of seasonality are greater in the Company's retail operations than the other segments of its business. Most operating expenses are ~~incurred~~ incurred evenly throughout the year, although some selling and administrative expenses are variable depending on sales, and direct marketing catalog advertising expenses as a percentage of sales are higher in the first calendar quarter due to more prospecting. The Company's quarterly operating results may also vary depending upon such factors as catalog mailings and the timing of new product introductions and promotions by the Company. The Company's cash requirements generally reach a seasonal peak in the second half of the fiscal year to finance increased inventory levels needed to meet the third and fourth quarter sales demand.

INFLATION

The Company does not believe that inflation has had a material impact on its operations.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q report contains forward-looking statements which the Company believes are within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be deemed to include, among other things, statements relating to anticipated financial performance, the management team, management's long-term performance goals, channels, programs to reduce costs and enhance asset utilization, banking arrangement and terms, realization of deferred tax assets, as well as statements relating to the Company's ~~costs~~operational and ~~enhance~~growth ~~asset~~strategies. ~~utilization~~Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be accurate, and actual results could differ materially from those addressed in forward-looking statements contained in this Form 10-Q report. Potential risks and uncertainties include such factors as the financial strength of the economy, and the retail and catalog industries in general, changes in consumer confidence, the level of consumer spending on motivational-type products, the competitive pricing environment within the markets that the Company distributes its products, the level of the Company's ~~generation~~success in continuing to control costs and the Company's ability to increase certain margins through economies of scale. Additional risks and uncertainties include the Company's ability to develop and introduce successful new products, generate funds sufficient to meet its current operating and capital needs, identify, pursue or realize any benefit from any strategic alternatives that may be considered, including the potential sale of the Company, and successfully exit the retail channel (100% Company-owned stores). Investors are also directed to ~~fund~~consider other risks

1816

~~anticipated capital expenditures, realization of deferred tax assets, as well as statements relating to the Company's operational~~ and growth strategies. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be accurate, and actual results could differ materially from those addressed in forward-looking statements contained in this Form 10-Q. Potential risks and uncertainties ~~include~~discussed ~~such factors as the financial strength of the economy, and the retail and catalog industries~~ in ~~general, changes in consumer confidence,~~ the ~~level of consumer spending on motivational-type products, the competitive pricing environment within the markets that the~~ Company ~~distributes its products, the level of the Company~~'s success in continuing to control costs and the Company's ability to increase certain margins through economics of scale. An additional risk and uncertainty is the Company's development and introduction of successful new products. Investors are also directed to consider other risks and uncertainties discussed in the Company's public announcements, reports to shareholders and documents 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 be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company undertakes no obligation to update or revise any forward-looking statements to reflect events or circumstances that may arise after the date ofon this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk associated with adverse changes in interest ~~rate~~rates and foreign currency exchange rates, but does not hold any market risk sensitive instruments for trading purposes. The Company uses ~~both fixed and~~ variable rate debt, as described in Note 3 of the Notes to Consolidated Financial Statements. ~~Principal~~At May 4, 2002, principal exposed to interest rate risk is limited to $1,~~922~~258,000 in variable rate debt. The variable rate debt level varies periodically and the maximum borrowings available at May 4, 2002 was $3,545,000. The impact of a 1% change in interest rates on the variable rate debt is approximately $1913,000. The Company's exposure to foreign currency exchange rate risk relates primarily to the financial position and results of operations in Canada. The Company's exposure to foreign currency exchange rate risk is difficult to estimate due to factors such as balance sheet accounts, and the existing economic uncertainty and future economic conditions in the international marketplace. The Company does not expect significant impact from foreign currency exchange rate risk. The Company's Canadian ~~operation~~operations annual sales ~~range~~are ~~around~~approximately $2,~~000~~500,000.

1917

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~The~~ On ~~Company~~September 25, is2001 ~~currently~~the ~~one~~Company offiled ~~two~~a ~~named~~complaint ~~defendants~~against inTGMK aGroup, Inc., ~~case~~TMK ~~filed~~Group, Inc. byand ~~Tower~~Terry ~~City~~Keenan. ~~Properties LTD~~ ("~~Plaintiff~~Defendants"). ~~Tower~~in ~~City~~the ~~Properties LTD v~~United ~~Getting~~States ~~The~~District ~~Edge~~Court ~~Company~~of ~~and~~the ~~Celex~~Northern ~~Group, Inc.~~District ~~(now~~of ~~Successories~~Illinois in Cook County, ~~Inc.)~~ Chicago, Illinois (Case No. ~~CV-435521~~ 01C7405). ~~was~~The ~~filed~~Company inalleged ~~the~~that: ~~Common~~Defendants ~~Pleas~~executed ~~Court~~franchise ofagreements, ~~Cuyahoga~~including personal ~~County~~guarantees, ~~Cleveland,~~to ~~Ohio~~operate ~~on April~~Successories stores in Illinois; Mr. ~~13,~~Keenan ~~2001~~executed ~~with~~promissory notes to the order of the Company; ~~being~~Defendants ~~served~~breached inthe ~~July~~franchise agreements and promissory notes by non-payment of ~~2001.~~monies ~~Plaintiff~~due ~~alleges~~the ~~that:~~Company; ~~Getting~~and Defendants are infringing on the Company's federally registered trademarks and service marks. The ~~Edge~~relief sought by the Company ~~entered~~includes: (i) a ~~into~~temporary restraining order, a ~~lease~~preliminary ~~agreement~~injunction ~~with~~and ~~Plaintiff;~~a ~~Getting~~permanent ~~The~~injunction ~~Edge~~prohibiting, ~~Company~~enjoining isand/or inrestraining Defendants from infringing on the Company's intellectual ~~default~~property; (ii) an order directing Defendants to eliminate all advertising under the ~~lease~~Successories ~~agreement~~name ~~due~~or the Company's intellectual property; (iii) an order directing Defendants to render ~~failure~~an accounting to ~~pay~~the ~~rent~~Company of the gross sales by Defendants under the infringing marks; ~~and~~(iv) an ~~Company~~award ~~guaranteed~~of ~~Getting~~three ~~The~~times ~~Edge~~the damages to the Company's ~~performance~~goodwill and intellectual property resulting from Defendants infringing use of the ~~lease~~Company's ~~terms~~name and ~~obligations.~~marks; ~~Plaintiff~~(v) an ~~seeks~~award of punitive damages from Defendants of at least $500,000; (ivi) ~~compensatory~~an award from Defendants of ~~damages~~attorneys' fees, expenses and costs; (vii) an award of the full amount due from Defendants under the franchise agreements and the promissory notes of at least $73480,~~779.52~~350 as of September 25, ~~April~~2001; and (viii) 2such other further and different relief as the Court deems just and appropriate. A preliminary injunction against the Defendants became effective on October 10, 2001. On or about January 31, ~~plus~~2002, ~~further~~the ~~rent~~Defendants ~~that~~filed ~~accrues~~an ~~prior~~answer to the ~~trial~~complaint and a counterclaim. In the counterclaim, Defendants claim that the Company: (i) breached a duty of good faith and fair dealing, and breached the asset purchase agreement between the parties; (ii) ~~pre-judgment~~had a duty to correct and ~~post-judgment~~supplement ~~interest~~historical sales information which it knew to be false or inaccurate; (iii) violated the Consumer Fraud and Deceptive Business Practices Act by fraud and misrepresentation; (iv) engaged in a prohibited practice of selling ~~10%~~an ~~per~~unregistered ~~annum~~franchise; and (v) converted fixtures, inventory and product of the Defendants. Defendants seek the following relief: (i) recission of the asset purchase and franchise agreements; (ii) compensatory damages in excess of $1,000,000; (iii) ~~costs~~treble damages; (iv) ~~attorney~~attorneys's fees and costs; and (v) such other ~~and~~ further and different relief as the Court ~~may~~deems ~~deem~~ just and ~~equitable~~appropriate. ~~The~~On February 22, 2002, the Company ~~believes~~moved itto ~~has~~compel aarbitration ~~meritorious~~of ~~defense~~Defendants' counterclaims and ~~intends~~affirmative todefenses. On March 7, 2002, ~~vigorously~~Defendants ~~defend~~responded ~~itself.~~to ~~The~~the Company's ~~disputes~~motion ~~being~~and athe ~~Guarantor~~Company ~~and~~replied ~~has~~to ~~filed~~the ~~its~~response ~~answer~~on March 18, ~~Affirmative~~2002. ~~Defense~~The ~~and~~Motion awas ~~Third-Party~~fully ~~Complaint~~briefed ~~against~~on ~~Getting~~March 20, ~~The~~2002. ~~Edge~~On ~~Company.~~April 8, A2002, ~~pre-trial~~the Court ~~court~~granted ~~appearance~~the ~~date~~Company's ofmotion ~~February 28,~~to ~~2002~~compel ~~has~~arbitration ~~been~~and ~~set~~included all pending claims before the Court.

In On ~~a related matter~~March 12, ~~on August 29~~2002, ~~2001~~ the Company filed a complaint against ~~Getting~~Sloan ~~The~~Enterprises, ~~Edge~~L.C., ~~Company~~J. ~~and~~Sloan ~~Victor~~Cownie S.and ~~Voinovich,~~Mindy ~~Sr.~~Cownie ~~("Defendants")~~ in the ~~United~~Circuit ~~States District~~ Court of ~~the~~The ~~Northern~~Eighteenth ~~District~~Judicial ofCircuit ~~Illinois~~ in DuPage ~~Cook~~ County, ~~Chicago~~Wheaton, Illinois (Case No. ~~01 C 6745~~2002L000261). The Company ~~alleges~~alleged that: Defendants executed franchise agreements, including personal guarantees, to operate ~~three (3)~~ Successories stores in Iowa ~~Ohio;~~and ~~Mr. Voinovich executed a promissory note to the order of the Company~~Nebraska; ~~Defendants~~and breached the franchise agreements ~~and promissory note~~ by non-payment of monies due the Company~~; and Defendants are infringing on the Company's federally registered trademarks and service marks~~. The ~~relief~~Company sought ~~by the Company includes~~: (i) ~~a temporary restraining order~~$85,956 aplus ~~preliminary injunction and a permanent injunction prohibiting, enjoining and/or restraining Defendants from infringing on the Company's intellectual property~~interest; (ii) ~~an order directing Defendants to eliminate all advertising under the Successories name or the Company~~attorneys's intellectual property; (iii) an order directing Defendants to render an accounting to the Company of the gross sales by Defendants under the infringing marks; (iv) an award of three times the damages to the Company's goodwill and intellectual property resulting from Defendant's infringing use of the Company's name and marks; (v) an award of punitive damages from Defendant's of at least $500,000; (vi) an award from Defendants of attorney's fees, expenses and costs; ~~(vii) an award of the full amount due from Defendants under the franchise agreements~~ and ~~the promissory note of at least $209,495.44 as of August 27, 2001; and~~ (~~viii~~iii) such other further and different relief as the Court deems just and appropriate. AOn ~~preliminary~~June 10, ~~injunction~~2002, ~~against~~ the ~~Defendants~~Company ~~became~~received ~~effective~~a ~~on November 2,~~default ~~2001~~judgment against the defendants.

On September 25, 2001 the Company filed a complaint against TGMK Group, Inc., TMK Group, Inc. and Terry Keenan. ("Defendants") in the United States District Court of the Northern District of Illinois in Cook County, Chicago, Illinois (Case No. 01C7405). The Company alleges that: Defendants executed franchise agreements, including personal guarantees, to operate Successories stores in Illinois; Mr. Keenan executed promissory notes to the order of the Company; Defendants breached the franchise agreements and promissory notes by non-payment of monies due the Company; and Defendants are infringing on the Company's federally registered trademarks and service marks. The relief sought by the Company includes: (i) a temporary restraining order, a preliminary injunction and a permanent injunction prohibiting, enjoining and/or restraining Defendants from infringing on the Company's intellectual property; (ii) an order directing Defendants to eliminate all advertising under the Successories name or the Company's intellectual property; (iii) an order directing Defendants to render an accounting to the Company of the gross sales by Defendants under the infringing marks; (iv) an award of three times the damages to the Company's goodwill and intellectual property resulting from Defendant's infringing use of the Company's name and marks; (v) an award of punitive damages

from Defendant's of at least $500,000; (vi) an award from Defendants of attorney's fees, expenses and costs; (vii) an award of the full amount due from Defendants under the franchise agreements and the promissory notes of at least $480,350.73 as of September 25, 2001; and (viii) such other further and different relief as the Court deems just and appropriate. A preliminary injunction against the Defendants became effective on October 10, 2001.

On October 24, 2001 the Company filed a complaint against Successories of Missouri, Inc. and Chad Everett in the Circuit Court of The Eighteenth Judicial Circuit in DuPage County, Wheaton, Illinois (Case No. 01AR002620). The Company alleges that: Successories of Missouri executed a promissory note to the order of the Company; Successories of Missouri has failed to make payments on the Note; and Chad Everett guaranteed Successories of Missouri's performance on the note. The Company seeks $23,577.69 and other amounts that become due and owing. A court ordered arbitration date of February 20, 2002 has been set.

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

21 (a) See Index to Exhibits immediately following the Signatures page.

(b) No reports on Form 8-k have been filed during the three months end May 4, 2002

SIGNATURES

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

	~~SUCCESSORIES, INC. (Registrant)~~	SUCCESSORIES, INC. (Registrant)
Date: December 17, 2001	By:	/s/ GARY J. ROVANSEK Gary J. Rovansek President, Chief Executive Officer and Director (Principal Executive Officer)
Date: June 17, 2002		By:	/s/ GARY J. ROVANSEK Gary J. Rovansek President, Chief Executive Officer and Director (Principal Executive Officer)
Date: December 17, 2001	By:	/s/ JOHN C. CARROLL John C. Carroll Senior Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)
Date: June 17, 2002		By:	/s/ JOHN C. CARROLL John C. Carroll Senior Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)

2220

INDEX TO EXHIBITS

Exhibit No.		Description
3.1		Articles of Incorporation of Registrant—Amended and Restated as of October 28, 1999 (14)
3.3		By-laws of Registrant (11)
3.4		Amended and Restated Certificate of Designation of Series A and Series B Convertible Preferred Stock (12)
4.1		Specimen Common Stock Certificate (11)
4.2		Specimen Series A Convertible Preferred Stock Certificate (13)
4.3		Specimen Series B Convertible Preferred Stock Certificate (13)
10.1		Form of Franchising Agreement (11)
10.2		Stock Option Instrument for Arnold M. Anderson dated November 19, 1991 (1)
10.3		Successories, Inc. Amended and Restated Stock Option Plan (17)
10.4		Joint Venture Agreement with Morrison DFW, Inc. and related documents (3)
10.5		Indemnification Agreement dated April 7, 1999 between the Company and Arnold M. Anderson (10)
		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, Lawrence A. Hodges, and Leslie Nathanson Juris.
		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		Form of Subordinated Note, Common Stock Purchase Warrant and Subordination Agreement relating to issuance of $1,500,000 Subordinated Notes and Warrants to purchase 120,000 shares of the Company's Common Stock (4)
10.7		Common Stock Option Agreement granted to Arnold M. Anderson and Incentive Stock Option Agreement granted to Arnold M. Anderson (4)*
10.8	(a)	Employment Agreement with Arnold M. Anderson dated March 1, 1996 (5)
10.8(a)		Employment Agreement with Arnold M. Anderson dated March 1, 1996(5)*
10.8	(b)	Amendment to Employment Agreement with Arnold M. Anderson dated January 14, 1997 (14)
10.8(b)		Amendment to Employment Agreement with Arnold M. Anderson dated March 1, 1996(14)*
10.8	(c)	Addendum to Employment Agreement with Arnold M. Anderson dated February 16, 2000 (14)
10.8(c)		Amendment to Employment Agreement with Arnold M. Anderson dated January 14, 1997(14)*
10.9		Employment Agreement with Michael H. McKee dated June 1, 1999 (11)
10.8(d)		Addendum to Employment Agreement with Arnold M. Anderson dated February 16, 2000(14)*
10.10		Form of Subordinated Note Extensions, Stock Options and Subordination Agreement relating to the extension of $100,000 of Subordinated Notes, and options to purchase 10,000 shares of the Company's Common Stock (2)
10.8(e)		Amendment to Employment Agreement with Arnold M. Anderson dated October 1, 2001(20)*
10.11		Credit Agreement between the Company and The Provident Bank dated as of June 20, 1997 (6)
10.9		Employment Agreement with Michael H. McKee dated June 1, 1999(11)*
10.12		First Amendment to Credit Agreement between the Company and The Provident Bank dated as of July 16, 1997 (6)
10.10		Form of Subordinated Note Extensions, Stock Options and Subordination Agreement relating to the extension of $100,000 of Subordinated Notes, and options to purchase 10,000 shares of the Company's Common Stock(2)
10.13		Lease Agreement between LaSalle National Trust, N.A. as Trustee under Trust No. 120358 and Celex Group, Inc. (7)
10.11		Credit Agreement between the Company and The Provident Bank dated as of June 20, 1997(6)
10.12		First Amendment to Credit Agreement between the Company and The Provident Bank dated as of July 16, 1997(6)

10.14		Second Amendment to Credit Agreement between the Company and The Provident Bank dated as of May 14, 1998 (7)
10.13		Lease Agreement between LaSalle National Trust, N.A. as Trustee under Trust No. 120358 and Celex Group, Inc.(7)
10.15		Third Amendment to Credit Agreement between the Company and The Provident Bank dated as of September 1, 1998 (8)
10.14		Second Amendment to Credit Agreement between the Company and The Provident Bank dated as of May 14, 1998(7)
10.16		Employment Agreement with Gary Rovansek dated October 29, 1998 (8)
10.15		Third Amendment to Credit Agreement between the Company and The Provident Bank dated as of September 1, 1998(8)
10.17		Fourth Amendment to Credit Agreement between the Company and The Provident Bank dated as of April 28, 1999 (10)
10.16		Employment Agreement with Gary Rovansek dated October 29, 1998(8)
10.18		Warrants to Purchase Common Stock of the Company granted to Provident Financial Group, Inc. dated as of April 29, 1999 (10)
10.17		Fourth Amendment to Credit Agreement between the Company and The Provident Bank dated as of April 28, 1999(10)
10.19		Preferred Stock Purchase Agreement, dated as of May 28, 1999, by and among the Company and the investors (9)
10.18		Warrants to Purchase Common Stock of the Company granted to Provident Financial Group, Inc. dated as of April 29, 1999(10)
10.20		Registration Rights Agreement, dated as of May 28, 1999, by and among the Company and the investors (9)
10.19		Preferred Stock Purchase Agreement, dated as of May 28, 1999, by and among the Company and the investors(9)
10.21		Preferred Stock Purchase Agreement, dated as of October 18, 1999, by and among the Company and the investors (12)
10.20		Registration Rights Agreement, dated as of May 28, 1999, by and among the Company and the investors(9)
10.22		Amendment No. 1 to the Registration Rights Agreement, dated as of October 18, 1999, by and among the Company and the investors (12)
10.21		Preferred Stock Purchase Agreement, dated as of October 18, 1999, by and among the Company and the investors(12)
10.23		Fifth Amendment to Credit Agreement between the Company and The Provident Bank dated as of April 6, 2000 (15)
10.22		Amendment No. 1 to the Registration Rights Agreement, dated as of October 18, 1999, by and among the Company and the investors(12)
10.24		Sixth Amendment to Credit Agreement between the Company and The Provident Bank dated as of August 28, 2000 (16)
10.23		Fifth Amendment to Credit Agreement between the Company and The Provident Bank dated as of April 6, 2000(15)
10.25		Joint Venture Agreement with Celebrating Excellence of Minnesota, Inc. and related documents (17)
10.24		Sixth Amendment to Credit Agreement between the Company and The Provident Bank dated as of August 28, 2000(16)
10.26		Seventh Amendment to Credit Agreement between the Company and The Provident Bank dated as of September 4, 2001 (filed herewith)
10.25		Joint Venture Agreement with Celebrating Excellence of Minnesota, Inc. and related documents(18)
10.27		Retainer Agreement between the Company and Jack Miller dated April 17,2001 (filed herewith)
10.26		Seventh Amendment to Credit Agreement between the Company and The Provident Bank dated as of September 4, 2001(19)
10.27		Retainer Agreement between the Company and Jack Miller dated April 17, 2001(19)
10.28		Eighth Amendment to Credit Agreement between the Company and The Provident Bank dated as of December 3, 2001(20)
21.1		Subsidiaries of the Registrant (filed herewith)

*: Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit.
(1): Previously filed with the Company's Registration Statement on Form SB-2, No. 33-67530C filed on August 17, 1993, and incorporated herein by reference.
(2): Previously filed with the Company's Registration Statement of Form S-3, No. 333-19313, filed on January 6, 1997 and incorporated herein by reference.
(3): Previously filed with the Company's Annual Report on Form 10-K for the year ended April 30, 1994, and incorporated herein by reference.
(4): Previously filed with the Company's Annual Report on Form 10-K for the year ended February 3, 1996, and incorporated herein by reference.

(5): Previously filed with the Company's Form 10-Q Report for the quarter ended August 3, 1996, and incorporated herein by reference.
(6): Previously filed with the Company's Form 10-Q Report for the quarter ended November 1, 1997, and incorporated herein by reference.
(7): Previously filed with the Company's Form 10-Q Report for the quarter ended May 2, 1998, and incorporated herein by reference.
(8): Previously filed with the Company's Form 10-Q Report for the quarter ended October 31, 1998, and incorporated herein by reference.
(9): 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.
(10): Previously filed with the Company's Form 10-Q Report for the quarter ended May 1, 1999, and incorporated herein by reference.
(11): Previously filed with the Company's Form 10-Q Report for the quarter ended July 31, 1999, and incorporated herein by reference.
(12): 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.
(13): Previously filed with the Company's Form 10-Q Report for the Quarter ended October 30, 1999, and incorporated herein by reference.
(14): Previously filed with the Company's Annual Report on form 10-K for the year ended January 29, 2000, and incorporated herein by reference.
(15): Previously filed with the Company's Form 10-Q Report for the Quarter ended April 29, 2000, and incorporated herein by reference.
(16): Previously filed with the Company's Form 10-Q Report for the Quarter ended October 28, 2000, and incorporated herein by reference.
(17): Previously filed with the Company's Proxy Statement Schedule 14A filed on May 31, 2001, and incorporated herein by reference.
(18): Previously filed with the Company's annual report on Form 10-K for the year ended February 3, 2001, and incorporated herein by reference.
(19): Previously filed with the Company's Form 10-Q Report for the Quarter ended November 3, 2001, and incorporated herein by reference.
(20): Previously filed with the Company's Form 10-K Report for the year ended February 2, 2002, and incorporated herein by reference

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SUCCESSORIES, INC. INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION
SUCCESSORIES, INC. Consolidated Balance Sheets
SUCCESSORIES, INC. Consolidated Statements of Operations and Comprehensive Loss (Unaudited)
SUCCESSORIES, INC. Consolidated Statement Of Stockholders' Equity (Unaudited)
SUCCESSORIES, INC. Consolidated Statements of Cash Flows (Unaudited)
SUCCESSORIES, INC. Notes To Consolidated Financial Statements (Unaudited)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES
INDEX TO EXHIBITS

Filing Compare · SUCCESSORIES INC