QuickLinks -- Click here to rapidly navigate through this document

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

FORM 10-Q

(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

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 3, 2002

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 of registrant as specified in its charter)

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

Registrant had 9,~~348~~519,~~104~~923 shares of common stock, $.01 par value, outstanding as of ~~June~~September 1112, 2002.

SUCCESSORIES, INC.
INDEX TO FORM 10-Q

			~~Page Number~~	Page Number
PART I.	~~FINANCIAL INFORMATION~~	FINANCIAL INFORMATION
	~~Item 1.~~	~~Financial~~Item ~~Statements~~1.	Financial Statements
		~~Consolidated Balance Sheets~~	3Consolidated Balance Sheets	3
		~~Consolidated Statements of Operations and Comprehensive Loss~~	4Consolidated Statements of Operations and Comprehensive Loss	4
		~~Consolidated Statement of Stockholders' Equity~~	5Consolidated Statement of Stockholders' Equity	5
		~~Consolidated Statements of Cash Flows~~	6Consolidated Statements of Cash Flows	6
		~~Notes to Consolidated Financial Statements~~	7Notes to Consolidated Financial Statements	7
	~~Item 2.~~	~~Management's~~Item ~~Discussion and Analysis of Financial Condition and Results of Operations~~2.	13Management's Discussion and Analysis of Financial Condition and Results of Operations	14
	~~Item 3.~~	~~Quantitative~~Item ~~and Qualitative Disclosures About Market Risk~~3.	17Quantitative and Qualitative Disclosures About Market Risk	20
PART II.	~~OTHER INFORMATION~~	OTHER INFORMATION
	~~Item 1.~~	~~Legal~~Item ~~Proceedings~~1.	18Legal Proceedings	21
	Item 6.	Exhibits and Reports on Form 8-K	19
		Item 4.	Submission of Matters to a Vote of Security Holders	22
SIGNATURES			20
		Item 6.	Exhibits and Reports on Form 8-K	22
INDEX TO EXHIBITS
SIGNATURES AND CERTIFICATIONS				23
INDEX TO EXHIBITS

PART I. FINANCIAL INFORMATION

SUCCESSORIES, INC. ~~Consolidated Balance Sheets~~

		May 4, 2002			February 2, 2002
		(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents	$	505,000		$	602,000
	Accounts and notes receivable, net		2,129,000			2,445,000
	Inventories, net		5,349,000			5,005,000
	Prepaid catalog expenses		1,507,000			1,683,000
	Other prepaid expenses		812,000			857,000
Total current assets			10,302,000			10,592,000
Restricted cash			250,000			250,000
Property and equipment, net			3,477,000			3,914,000
Notes receivable			—			17,000
Deferred financing costs and debt discount, net			149,000			181,000
Intangibles and other assets, net			851,000			1,007,000
TOTAL ASSETS		$	15,029,000		$	15,961,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Revolving credit loan	$	1,258,000		$	1,483,000
	Accounts payable		2,074,000			1,488,000
	Accrued expenses and deferred income taxes		1,523,000			1,761,000
Total current liabilities			4,855,000			4,732,000
Minority interest			10,000			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; 9,313,884 shares issued and outstanding, respectively		93,000			93,000
	Common stock warrants		2,324,000			2,324,000
	Notes receivable from stockholders		(118,000	)		(118,000	)
	Additional paid-in capital		33,321,000			33,321,000
	Accumulated deficit		(25,398,000	)		(24,380,000	)
	Accumulated other comprehensive loss		(64,000	)		(64,000	)
Total stockholders' equity			10,164,000			11,182,000
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	15,029,000		$	15,961,000

Consolidated Balance Sheets

		August 3, 2002			February 2, 2002
		(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents	$	597,000		$	602,000
	Accounts and notes receivable, net		1,640,000			2,445,000
	Inventories, net		4,703,000			5,005,000
	Prepaid catalog expenses		1,132,000			1,683,000
	Other prepaid expenses		873,000			857,000

Total current assets			8,945,000			10,592,000
Restricted cash			250,000			250,000
Property and equipment, net			2,531,000			3,914,000
Notes receivable			—			17,000
Deferred financing costs and debt discount, net			107,000			181,000
Intangibles and other assets, net			738,000			1,007,000

TOTAL ASSETS		$	12,571,000		$	15,961,000

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Revolving credit loan	$	1,055,000		$	1,483,000
	Accounts payable		2,137,000			1,488,000
	Accrued expenses and deferred income taxes		1,428,000			1,761,000

Total current liabilities			4,620,000			4,732,000
Minority interest			—			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; 9,487,578 and 9,313,884 shares issued and outstanding, respectively		95,000			93,000
	Common stock warrants		2,324,000			2,324,000
	Notes receivable from stockholders		(130,000	)		(118,000	)
	Additional paid-in capital		33,453,000			33,321,000
	Accumulated deficit		(27,733,000	)		(24,380,000	)
	Accumulated other comprehensive loss		(64,000	)		(64,000	)

Total stockholders' equity			7,951,000			11,182,000

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	12,571,000		$	15,961,000

The accompanying notes are an integral part of these statements.

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

		Three Months Ended
		May 4, 2002			May 5, 2001
Net product sales		$	10,076,000		$	11,086,000
Cost of goods sold			4,808,000			5,200,000
Gross profit on product sales			5,268,000			5,886,000
Fees, royalties and other income			188,000			226,000
Gross margin			5,456,000			6,112,000
Operating expenses			6,456,000			7,365,000
Loss from operations			(1,000,000	)		(1,253,000	)
Other income (expense):
	Interest expense		(74,000	)		(80,000	)
	Minority interests in subsidiaries		(10,000	)		(24,000	)
	Interest income		14,000			16,000
	Other, net		1,000			(2,000	)
Total other expense			(69,000	)		(90,000	)
Loss before income tax and extraordinary item			(1,069,000	)		(1,343,000	)
Income tax expense (benefit)			(106,000	)		—
Loss before extraordinary item			(963,000	)		(1,343,000	)
Extraordinary loss on early extinguishment of debt			—			219,000
Net loss		$	(963,000	)	$	(1,562,000	)
Dividend to preferred shareholders			55,000			55,000
Loss available to common stockholders		$	(1,018,000	)	$	(1,617,000	)
Foreign currency translation adjustment			—			4,000
Comprehensive loss		$	(963,000	)	$	(1,566,000	)
Loss per share (basic and diluted):
	Loss before extraordinary item	$	(0.11	)	$	(0.15	)
	Net loss	$	(0.11	)	$	(0.18	)

Consolidated Statements of Operations and
Comprehensive Loss

(Unaudited)

		Three Months Ended						Six Months Ended
		August 3, 2002			August 4, 2001			August 3, 2002			August 4, 2001
Net product sales		$	7,163,000		$	8,058,000		$	15,688,000		$	17,561,000
Cost of goods sold			3,630,000			4,051,000			7,808,000			8,617,000

Gross profit on product sales			3,533,000			4,007,000			7,880,000			8,944,000
Fees, royalties and other income			228,000			283,000			416,000			509,000

Gross margin			3,761,000			4,290,000			8,296,000			9,453,000
Operating expenses			4,894,000			5,453,000			10,000,000			11,531,000

Loss from continuing operations before other expense and income tax			(1,133,000	)		(1,163,000	)		(1,704,000	)		(2,078,000	)

Other income (expense):
	Interest expense		(63,000	)		(64,000	)		(137,000	)		(144,000	)
	Minority interests in subsidiaries		8,000			(25,000	)		(2,000	)		(49,000	)
	Interest income		10,000			9,000			24,000			25,000
	Other, net		6,000			9,000			8,000			7,000

Total other expense			(39,000	)		(71,000	)		(107,000	)		(161,000	)

Loss from continuing operations before income tax			(1,172,000	)		(1,234,000	)		(1,811,000	)		(2,239,000	)
Income tax expense (benefit)			—			700,000			(106,000	)		700,000

Loss from continuing operations			(1,172,000	)		(1,934,000	)		(1,705,000	)		(2,939,000	)
Loss from discontinued operations, net of tax			(1,108,000	)		(899,000	)		(1,538,000	)		(1,237,000	)

Loss before extraordinary item			(2,280,000	)		(2,833,000	)		(3,243,000	)		(4,176,000	)
Extraordinary loss on early extinguishment of debt			—			—			—			219,000

Net loss		$	(2,280,000	)	$	(2,833,000	)	$	(3,243,000	)	$	(4,395,000	)

Dividend to preferred shareholders			55,000			55,000			110,000			110,000

Loss available to common stockholders		$	(2,335,000	)	$	(2,888,000	)	$	(3,353,000	)	$	(4,505,000	)

Foreign currency translation adjustment		$	—		$	(5,000	)	$	—			(9,000	)

Comprehensive loss		$	(2,335,000	)	$	(2,838,000	)	$	(3,353,000	)	$	(4,404,000	)

Loss per share (basic and diluted):
	Loss from continuing operations	$	(0.13	)	$	(0.21	)	$	(0.19	)	$	(0.33	)

	Loss from discontinued operations	$	(0.12	)	$	(0.10	)	$	(0.17	)	$	(0.13	)

	Extraordinary loss on early extinguishment of debt	$	—		$	—		$	—		$	(0.03	)

	Net loss	$	(0.25	)	$	(0.31	)	$	(0.36	)	$	(0.49	)

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 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		—		—	—		—		—		—			—		(963,000	)		—			(963,000	)
Preferred stock transactions:
	Preferred stock dividends	—		—	—		—		—		—			—		(55,000	)		—			(55,000	)
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

Consolidated Statement Of Stockholders' Equity

(Unaudited)

	Convertible Preferred Stock
				Common Stock					Notes Receivable From Stockholders								Accumulated Other Comprehensive Loss
				Common Stock			Common Stock Warrants					Additional Paid-In Capital		Accumulated Deficit						Total Stockholders' Equity
	Shares	Amount		Shares	Amount		Common Stock Warrants					Additional Paid-In Capital		Accumulated Deficit						Total Stockholders' Equity
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	—		—	—		—		—		—			—		(3,243,000	)		—			(3,243,000	)
Notes receivable issued June 6, 2002	—		—	—		—		—		(12,000	)		—		—			—			(12,000	)
Common Stock transactions: Common Stock issued in conjunction with board of director Fees	—		—	34,220		—		—		—			25,000		—			—			25,000
Preferred stock transactions: Preferred stock dividends	—		—	139,474		2,000		— —		—			107,000		(110,000	)		—			(1,000	)

Balance at August 3, 2002	604,759	$	6,000	9,487,578	$	95,000	$	2,324,000	$	(130,000	)		33,453,000	$	(27,733,000	)	$	(64,000	)	$	7,951,000

The accompanying notes are an integral part of these statements.

SUCCESSORIES, INC. ~~Consolidated Statements of Cash Flows (Unaudited)~~

			Three Months Ended
			May 4, 2002			May 5, 2001
Cash flows from operating activities:
	Net loss			(963,000	)	$	(1,562,000	)
	Adjustments to reconcile net loss to net cash from operating activities:
		Depreciation and amortization		611,000			712,000
		Amortization of debt discount		32,000			32,000
		Minority interests in subsidiaries		10,000			24,000
		Extraordinary loss on early extinguishment of debt		—			219,000
				(310,000	)		(575,000	)
Changes in operating assets and liabilities:
	Accounts and notes receivable			315,000			553,000
	Inventories			(344,000	)		889,000
	Prepaid catalog expenses			176,000			(177,000	)
	Other prepaid expenses			45,000			(140,000	)
	Accounts payable			586,000			527,000
	Accrued expenses			(293,000	)		(803,000	)
	Other assets			92,000			(107,000	)
Net cash provided by operating activities				267,000			167,000
Cash flows from investing activities:
	Proceeds from notes receivable issued in connection with sale of property and equipment			19,000			29,000
	Purchase of property and equipment			(15,000	)		(98,000	)
Net cash provided by (used in) investing activities				4,000			(69,000	)
Cash flows from financing activities:
	Proceeds from sale of common stock			—			8,000
	Net (repayments) borrowings on revolving credit loan			(225,000	)		2,106,000
	Repayments of long-term debt			—			(3,591,000	)
	Distributions to joint venture partners			(143,000	)		(107,000	)
	Proceeds from notes receivable issued to stockholders			—			30,000
Net cash used in financing activities				(368,000	)		(1,554,000	)
Net decrease in cash				(97,000	)		(1,456,000	)
Cash and cash equivalents, beginning of period				602,000			2,468,000
Cash and cash equivalents, end of period			$	505,000		$	1,012,000

Consolidated Statements of Cash Flows

(Unaudited)

			Six Months Ended
			August 3, 2002			August 4, 2001
Cash flows from operating activities:
	Net loss		$	(3,243,000	)	$	(4,395,000	)
	Adjustments to reconcile net loss to net cash from operating activities:
		Depreciation and amortization		1,038,000			1,139,000
		Amortization of debt discount		75,000			64,000
		Minority interests in subsidiaries		2,000			49,000
		Deferred income tax asset—valuation allowance		—			700,000
		Loss from discontinuing operations		1,538,000			1,237,000
		Extraordinary loss on early extinguishment of debt		—			219,000

				(590,000	)		(987,000	)
Changes in operating assets and liabilities:
	Accounts and notes receivable			781,000			1,151,000
	Inventories			96,000			790,000
	Prepaid catalog expenses			552,000			593,000
	Other prepaid expenses			(64,000	)		(141,000	)
	Accounts payable			574,000			245,000
	Accrued expenses			(254,000	)		(725,000	)
	Other assets			(93,000	)		(243,000	)

Net cash provided by operating activities				1,002,000			683,000

Cash flows from investing activities:
	Proceeds from notes receivable issued in connection with sale of property and equipment			25,000			40,000
	Purchase of property and equipment			(22,000	)		(148,000	)

Net cash provided by (used in) investing activities				3,000			(108,000	)

Cash flows from financing activities:
	Proceeds from sale of common stock			—			16,000
	Net (repayments) borrowings on revolving credit loan			(428,000	)		1,525,000
	Repayments of long-term debt			—			(3,593,000	)
	Distributions to joint venture partners			(83,000	)		(160,000	)
	Notes receivable issued to stockholders			(12,000	)		—
	Proceeds from notes receivable issued to stockholders			—			30,000

Net cash used in financing activities				(523,000	)		(2,182,000	)

Net cash provided by (used in) continuing operations				482,000			(1,607,000	)
Net cash used in discontinuing operations				(487,000	)		(206,000	)

Net decrease in cash				(5,000	)		(1,813,000	)
Cash and cash equivalents, beginning of period				602,000			2,468,000

Cash and cash equivalents, end of period			$	597,000		$	655,000

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, 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)—See Note 3 "Discontinued Operations", 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.

The Company's fiscal year ends on the Saturday closest to January 31. References to the three and six months ended ~~May~~August 43, 2002, and ~~May~~August 54, 2001, refer to the thirteen and twenty-six weeks ended on the dates indicated.

~~The~~Certain prior year amounts have been reclassified to conform with the current year presentation. The results of operations for the ~~three~~six months ended ~~May~~August 43, 2002 are not necessarily indicative of the results to be expected for the full year. These financial statements 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 2, 2002.

NOTE 3.: ~~INVENTORIES~~DISCONTINUED OPERATIONS

~~Inventories~~On ~~are~~May 7, ~~comprised~~2002 in the process of reviewing its strategic options, the ~~following:~~Company decided to take immediate steps to develop and implement a plan to close all of its 100% owned retail stores. The 100% owned retail store segment, which has not been as profitable as the other segments in the past few years, reported a loss of $1,903,000 for the year-ended February 2, 2002 and is projected to have a loss in the current fiscal year.

	May 4, 2002			February 2, 2002
Finished goods	$	4,026,000		$	3,825,000
Raw Materials		1,895,000			1,763,000
		5,921,000			5,588,000
Less: reserve for obsolescence		(572,000	)		(583,000	)
	$	5,349,000		$	5,005,000

As a result, in the second quarter ended August 3, 2002, the Company started negotiating early lease terminations and evaluating asset impairment charges related to the 100% owned retail stores. The results of operations and costs associated with the Company's plans to close the 100% owned retail stores have been reflected as discontinued operations in the accompanying consolidated financial statements.

~~NOTE~~ During the 4second quarter ended August 3, 2002, the Company recorded $722,000 in disposal costs as a result of lease termination contracts entered to-date for four stores and asset impairment charges for certain stores with negative cash flow projections anticipated through store closing date. ~~DEBT~~

On 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 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

Loss ~~facility~~from ~~expires~~discontinued inoperations ~~June 2003, and all borrowings under the facility are secured by substantially all the assets of the Company. The interest rate on the revolving credit loan borrowing~~ is ~~prime~~ ~~plus~~comprised ~~2.0%. Interest is payable monthly. The interest rate on the outstanding revolving credit loan was 6.8% at May 4, 2002. As~~ of ~~May 4, 2002, available borrowings on~~ the ~~revolving credit~~following: ~~loan were $2,287,000.~~

On June 13, 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, 2002. In addition, the amendment adjusted borrowing base and the revolver limits, prospectively. Subsequent to June 13, 2002, the borrowing base is limited to 80% of eligible receivables plus 45% of eligible inventory. Effective June 13, 2002, the maximum revolving credit loan is limited to $3,500,000 through October 31, 2002 and $3,000,000 thereafter. In connection 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 gross sales price, in the event that the Company is sold.

	Three Months Ended
	August 3, 2002			August 4, 2001
Operating (loss)		(386,000	)		(599,000	)
Asset impairment charges		602,000			—
Lease termination costs		120,000			—
Income tax expense		—			300,000

(Loss) from discontinued operations	$	(1,108,000	)	$	(899,000	)

	Six Months Ended
	August 3, 2002			August 4, 2001
Operating (loss)		(816,000	)		(937,000	)
Asset impairment charges		602,000			—
Lease termination costs		120,000			—
Income tax expense		—			300,000

(Loss) from discontinued operations	$	(1,538,000	)	$	(1,237,000	)

As of August 3, 2002 and February 2, 2002, the assets of discontinued operations were $794,000 and $1,815,000, and the liabilities were $699,000 and $706,000, respectively. The assets and liabilities of the discontinued operations have been included in the accompanying consolidated balance sheet.

The Company is currently in the process of pursuing early lease terminations at the remaining 10 stores whose leases extend beyond the current fiscal year and costs associated will be dependent upon the terms and conditions of lease terminations to be negotiated with the landlords. The Company has adopted the provisions of FASB No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," in the second quarter 2002. Under FASB No. 146, the exit costs are recorded when incurred rather than at the date of a commitment to a disposal plan. The additional disposal costs to be incurred are estimated to be approximately $764,000 for early lease terminations and other store closing related expenses. Actual lease termination costs will be determined by the lease termination agreements negotiated with the landlords and could vary significantly if the Company cannot terminate lease agreements before their scheduled maturity. The Company is targeting to complete its plans to close all of its 100% owned retail stores by the end of the current fiscal year 2002.

NOTE 4. INVENTORIES

Inventories are comprised of the following:

	August 3, 2002			February 2, 2002
Finished goods—retail 100% owned stores	$	414,000		$	678,000
Finished goods—corporate		2,954,000			3,147,000
Raw Materials—corporate		2,010,000			1,763,000

		5,378,000			5,588,000
Less: reserve for obsolescence		(675,000	)		(583,000	)

	$	4,703,000		$	5,005,000

NOTE 5. DEBT

On 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. The revolving credit loan provides for maximum borrowings of $3,500.000 through October 31, 2002 and $3,000,000 thereafter and the borrowing base is limited to 80% of eligible receivables plus 45% of eligible inventory. A commitment fee of 0.25% is payable on the daily unused amount of the maximum revolving credit. The facility expires in June 2003, and all borrowings under the facility are secured by substantially all the assets of the Company. The interest rate on the revolving credit loan borrowing is prime plus 2.0%. Interest is payable monthly. The interest rate on the outstanding revolving credit loan was 6.75% at August 3, 2002. As of August 3, 2002, available borrowings on the revolving credit loan were $2,253,000.

On June 13, 2002, the Company obtained an amendment to the credit facility to be adjusted and modify certain financial covenants, which were retroactive to the first quarter ended May 4, 2002. In addition, the amendment adjusted the borrowing base and the revolver limits, prospectively. In connection with the above mentioned amendment, the Company agrees to provide the bank the option to exchange the stock warrants previously issued to the bank in exchange for a success fee equal to 2% of the gross sales price, in the event that the Company is sold.

In the prior year first quarter 2001, the Company pre-paid the entire outstanding Bank term loan and fixed rate loan balance in the amount 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 the early debt extinguishment in the prior year quarter ended May 5, 2001. The extraordinary loss represents the write-off of the unamortized debt discount associated with the term loan and fixed rate loan.

The credit facility agreement contains, among other provisions, requirements for maintaining certain earnings levels and financial ratios, limits on capital expenditures and additional indebtedness, and use of proceeds from certain equity offerings.

At ~~May~~August 43, 2002, the Company was in compliance with the debt covenant requirements of the credit facility agreement.

~~The~~On ~~weighted~~September 11, ~~average~~2002, ~~interest~~the ~~rates~~Company onobtained ~~cash~~approval ~~interest~~to ~~expense~~extend ~~for~~the step down in maximum borrowings ~~outstanding~~from as$3,500,000 ofto ~~May~~$3,000,000 on the revolving credit loan from October 431, 2002 ~~and~~to ~~May~~January 51, ~~2001~~2003. ~~were~~The ~~6.8%~~Company ~~and~~requested ~~8.6~~the above extension to provide for adequate revolving credit loan availability for the payout of projected lease termination costs related to the 100% Company owned retail stores, ~~respectively~~see Note 3 for further information.

~~NOTE~~ The weighted 5average interest rates on cash interest expense for borrowings outstanding as of August 3, 2002 and August 4, 2001 were 6.8% ~~SUPPLEMENTAL~~and ~~CASH~~8.9%, ~~FLOW~~respectively. ~~INFORMATION~~

NOTE 6. SUPPLEMENTAL CASH FLOW INFORMATION

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

		Three Months Ended
		Six Months Ended
		May 4, 2002		May 5, 2001
		August 3, 2002		August 4, 2001
Cash paid during the period for:
	Income taxes	$	1,000	$	87,000
	Interest		3263,000		4880,000
Non-cash investing and financing Activities:
	Preferred stock dividends	$	55110,000	$	55110,000
	Board of Director Fees		25,000		—

NOTE 67. LOSS PER SHARE

The computations of basic and diluted loss per share are as follows:

		Three Months Ended						Six Months Ended
		May 4, 2002			May 5, 2001
		August 3, 2002			August 4, 2001			August 3, 2002			August 4, 2001
Numerator for loss before extraordinary item per share:
Numerator for loss from continuing operations per share:
	Loss before extraordinary item	$	(963,000	)	$	(1,343,000	)
	Loss from continuing operations	$	(1,172,000	)	$	(1,934,000	)	$	(1,705,000	)	$	(2,939,000	)
	Less: Preferred stock dividends		(55,000	)		(55,000	)
	Preferred stock dividends		(55,000	)		(55,000	)		(110,000	)		(110,000	)
	Numerator for loss before extraordinary item per share	$	(1,018,000	)	$	(1,398,000	)
	Numerator for loss from continuing operations per share	$	(1,227,000	)	$	(1,989,000	)	$	(1,815,000	)	$	(3,049,000	)
Numerator for net loss per share:
Numerator for loss from discontinued operations per share		$	(1,108,000	)	$	(899,000	)	$	(1,538,000	)	$	(1,237,000	)
	Net loss	$	(963,000	)	$	(1,562,000	)
Numerator for extraordinary loss on early extinguishment of debt per share		$	—		$	—		$	—		$	(219,000	)
	Less: Preferred stock dividends		(55,000	)		(55,000	)
Numerator for net loss per share:
	Numerator for net loss per share	$	(1,018,000	)	$	(1,617,000	)
	Net loss	$	(2,280,000	)	$	(2,833,000	)	$	(3,243,000	)	$	(4,395,000	)
Denominator for loss per share:
	Preferred stock dividends		(55,000	)		(55,000	)		(110,000	)		(110,000	)
	Weighted average common stock shares		9,313,884			9,183,826
	Numerator for net loss per share	$	(2,335,000	)	$	(2,888,000	)	$	(3,353,000	)	$	(4,505,000	)
Basic and diluted loss per share:
Denominator for loss per share:
	Loss before extraordinary item	$	(0.11	)	$	(0.15	)
	Weighted average common stock shares		9,370,261			9,214,899			9,414,825			9,223,924
	Net loss	$	(0.11	)	$	(0.18	)
Basic and diluted loss per share:
	Loss from continuing operations	$	(0.13	)	$	(0.21	)	$	(0.19	)	$	(0.33	)
	Loss from discontinued operations	$	(0.12	)	$	(0.10	)	$	(0.17	)	$	(0.13	)
	Extraordinary loss on early extinguishment of debt	$	—		$	—		$	—		$	(0.03	)
	Net loss	$	(0.25	)	$	(0.31	)	$	(0.36	)	$	(0.49	)

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.

NOTE 78. 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 telemarketing), retail (Company-owned stores), wholesale and sales to franchisees 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—See Note 3 "Discontinued Operations," Sales to Franchisees and other segments (Direct ~~Marketing—Golf, Wholesale and Contract Framing). At the end of the first quarter in fiscal 2002, the Company discontinued contract framing services for third party products.~~

910

Marketing—Golf, Wholesale, Contract Framing and Joint Venture retail stores). 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.

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 corporate related items not allocated to reportable segments.

		Net Sales	~~Net Sales~~		Segment Profit (Loss)	~~Segment Profit (Loss)~~		Total Assets	~~Total Assets~~		Capital Expenditures	~~Capital Expenditures~~		Depreciation and Amortization	~~Depreciation and Amortization~~
Three Months Ended May 4, 2002:
Three Months Ended August 3, 2002:
Direct Marketing Successories		$	$6,165,000	~~7,328,000~~	$	$436,000	~~838,000~~	$	$6,390,000	~~3,062,000~~	$	$3,000	~~9,000~~	$	$67,000	~~66,000~~
Retail Company-owned stores				1,949,000			(415,000	)		1,951,000			2,000			102,000
Sales to Franchisees			528,000			7,000			601,000			—			3,000
Sales to Franchisees				586,000			20,000			583,000			—			3,000
Other segments			470,000			32,000			628,000			5,000			12,000
Other segments				213,000			70,000			94,000			—			—
Corporate			—			(1,647,000	)		4,158,000			1,000			437,000
Corporate				—			(1,476,000	)		9,425,000			4,000			440,000
CONTINUING OPERATIONS		$	7,163,000		$	(1,172,000	)	$	11,777,000		$	9,000		$	519,000
CONSOLIDATED			$	10,076,000			(963,000	)	$	15,115,000		$	15,000		$	611,000
Retail 100% owned stores		$	1,382,000		$	(1,108,000	)	$	794,000		$	1,000		$	694,000
Three Months Ended May 5, 2001:
Three Months Ended August 4, 2001:
Direct Marketing Successories		$	$6,268,000	~~7,672,000~~	$	$360,000	~~530,000~~	$	$7,685,000	~~4,134,000~~	$	$32,000	~~15,000~~	$	$67,000	~~67,000~~
Retail Company-owned stores				2,106,000			(280,000	)		3,289,000			—			146,000
Sales to Franchisees			999,000			30,000			962,000			—			3,000
Sales to Franchisees				927,000			38,000			1,168,000			—			3,000
Other segments			791,000			91,000			954,000			—			14,000
Other segments				381,000			71,000			347,000			—			—
Corporate			—			(2,415,000	)		10,077,000			18,000			478,000
Corporate				—			(1,921,000	)		16,481,000			83,000			496,000
CONTINUING OPERATIONS		$	8,058,000		$	(1,934,000	)	$	19,678,000		$	50,000		$	562,000
	CONSOLIDATED		$	11,086,000		$	(1,562,000	)	$	25,419,000		$	98,000		$	712,000
Retail 100% owned stores		$	1,635,000		$	(899,000	)	$	2,136,000		$	31,000		$	378,000
Six Months Ended August 3, 2002:
Direct Marketing Successories		$	13,493,000		$	1,274,000		$	6,390,000		$	12,000		$	133,000
Sales to Franchisees			1,114,000			27,000			601,000			—			6,000
Other segments			1,081,000			127,000			628,000			5,000			20,000
Corporate			—			(3,133,000	)		4,158,000			5,000			879,000
CONTINUING OPERATIONS		$	15,688,000		$	(1,705,000	)	$	11,777,000		$	22,000		$	1,038,000
Retail 100% owned stores		$	2,933,000		$	(1,538,000	)	$	794,000		$	3,000		$	788,000
Six Months Ended August 4, 2001:
Direct Marketing Successories		$	13,940,000		$	890,000		$	7,685,000		$	47,000		$	134,000
Sales to Franchisees			1,926,000			68,000			962,000			—			3,000
Other segments			1,695,000			269,000			954,000			—			28,000
Corporate			—			(4,385,000	)		10,077,000			101,000			974,000
CONTINUING OPERATIONS		$	17,561,000		$	(3,158,000	)	$	19,678,000		$	148,000		$	1,139,000
Retail 100% owned store		$	3,218,000		$	(1,237,000	)	$	2,136,000		$	31,000		$	513,000

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 assets of the discontinued operations of the retail 100% owned stores have been included in the accompanying consolidated balance sheet.

The following table presents the details for "Corporate":

	Three Months Ended					Six Months Ended
	May 4, 2002			May 5, 2001
	August 3, 2002			August 4, 2001		August 3, 2002			August 4, 2001
Corporate administrative expenses	$	1,~~073~~171,000		$	1,~~116~~166,000		2,253,000		$	2,331,000
Unallocated depreciation and amortization expense		~~440~~437,000			~~496~~478,000		879,000			974,000
Other expenses		6939,000			9071,000		107,000			161,000
Income tax expense (benefit)		~~(106,000~~—	)		—700,000		(106,000	)		700,000
Extraordinary loss on early debt extinguishment		—			~~219,000~~—		—			219,000
	$	1,~~476~~647,000		$	12,~~921~~415,000	$	3,133,000		$	4,385,000

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, casualty and directors and officers insurance.

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~~six months ended ~~May~~August 43, 2002 and ~~May~~August 54, 2001, net product sales by product categories were as follows:

	Three Months Ended
	Six Months Ended
	May 4, 2002		May 5, 2001
	Augusts 3, 2002		Augusts 4, 2001
Wall décor	4243.2	%	4342.8	%
Desktop accessories	18.9	%	2021.1	%
Books and stationery	1918.7	%	18.8	%
Personalized gifts and awards	2119.2	%	1716.2	%
Other	—		21.1	%

NOTE 89. NEW ACCOUNTING ~~PRONOUNCEMENT~~PRONOUNCEMENTS

OnDuring the ~~February~~second quarter ended August 3, 2002, the Company adopted FASB No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets"." The ~~provisions~~ provisions of ~~FAS~~FASB No. 144 ~~will~~were be applied to the Company's plan to close all of its 100% owned retail stores. inThe operations of the ~~second~~Company's ~~quarter~~100% owned retail stores can be distinguished from the rest of ~~2002~~the entity and will be eliminated from the ongoing operations of the Company. Accordingly, the operations of the 100% owned retail stores, net of applicable income tax effect, have been presented as discontinued operations and prior period statements of operations have been reclassified accordingly. (See Note 3 for further information).

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

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.

FASB No. 145 is effective for fiscal years beginning after May 14, 2002 unless adopted earlier. FASB 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. FASB 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 FASB 145 provides guidance regarding the trucking industry's deregulation that occurred in 1980. The Company has not yet adopted FASB 145 and adoption of it is not expected to have a material impact on the Company's results of operations or financial condition. The adoption of FASB 145 will result in increasing the loss from continuing operations by $219,000, which was previously classified as an extraordinary item for the six months ended August 4, 2001.

In June 2002, FASB No. 146 "Accounting for Costs Associated with Exit or Disposal Activities," was issued. FASB No. 146 covers accounting for costs associated with exit or long-lived asset disposal activities, such as restructurings, consolidation or closing of facilities, lease termination cost, and employee relocation or severance cost. FASB No. 146 replaces Emerging Issues Task Force (EITF) 94-3, and is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Early application is encouraged. One of the provisions of FASB No. 146 changes the timing of when companies recognize costs associated with exit or disposal activities, so that the costs would generally be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. The Company adopted FASB No. 146 in the second quarter of fiscal 2002. See Note 3 for a discussion of the discontinuance of the Company's 100% owned retail operations.

NOTE 10. 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 currently assisting with the sale of the Company. No assurance can be given that the sale of the Company shall be effected. If the sale of the Company does not occur, the management of the Company shall take steps to restructure and further reduce its expenses, pursue an equity infusion and seek expanded lines of credit from the existing or new lenders. No assurance can be given that any restructuring plans undertaken by management will be successful, or that the Company will be able to secure additional capital or borrowings on terms acceptable to it, or at all.

The Company will continue its primary focus on sales growth in the direct marketing channel, support of its current franchisees and evaluating wholesale business opportunities. In the process of reviewing its strategic options, the Company decided on May 7, 2002 to take immediate steps to develop and implement a plan to close all of its 100% owned retail stores, (See Note 3 for further information). 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.

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 designs, manufactures and markets a diverse range of motivational and self-improvement products, 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-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 (100% Company-owned stores), sales to franchisees and wholesale distribution. Although the Company utilizes multiple distribution channels for its products, the Company's products have similar purposes and uses in each channel of distribution. The profitability varies among products and distribution channels. The Company utilizes its facilities interchangeably for each distribution channel. Furthermore, the marketing channels are directed at a single customer base located primarily in North America. In addition, ~~the~~starting in fiscal 2000, the Company generated revenue from providing framing services to outside corporate businesses on a contract fee basis. 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.

~~For~~Due to the ~~three~~continuing ~~months~~soft ~~ended~~economic ~~May 4,~~climate ~~2002~~and the substantial loss before income taxes and ~~May~~ extraordinary items of $5,712,000 sustained in fiscal 2001, ~~net~~the ~~product~~Company ~~sales~~retained ~~for~~the professional services of Duff & Phelps, LLC, an investment banking and financial advisory firm. Duff & Phelps is assisting with the ~~various~~sale ~~distribution~~of ~~channels~~the Company. No assurance can be given that the sale of the Company shall be effected. If the sale of the Company does not occur, asthe amanagement ~~percentage~~of the Company shall take steps to restructure and further reduce its expenses, pursue an equity infusion and seek expanded lines of ~~total~~credit ~~net~~from ~~product~~the ~~sales~~existing or new lenders. No assurance can be given that any restructuring plans undertaken by management will be successful, ~~were~~or asthat the Company ~~follows:~~will be able to secure additional capital or borrowings on terms acceptable to it, or at all.

	Three Months Ended
	May 4, 2002		May 5, 2001
Direct marketing—Successories	72.7	%	69.2	%
Retail Company-owned stores	19.3	%	19.0	%
Sales to franchisees	5.8	%	8.4	%
Other channels	2.2	%	3.4	%

The Company will continue its primary focus on sales growth in the direct marketing channel, support of its current franchisees and evaluating wholesale business opportunities. In the process of reviewing its strategic options, the Company decided on May 7, 2002 to take immediate steps to develop and implement a plan to close all of its 100% owned retail stores (See Note 3 in the accompanying financial statements for further information). The results of operations and costs incurred to-date associated with the Company's plan to close the 100% owned retail stores have been reflected as discontinued operations in the accompanying consolidated financial statements.

For the three and six months ended August 3, 2002 and August 4, 2001, net product sales for the various distribution channels, as a percentage of total net product sales, were as follows:

	Three Months Ended				Six Months Ended
	August 3, 2002		August 4, 2001		August 3, 2002		August 4, 2001
Direct marketing—Successories	72.2	%	64.7	%	72.5	%	67.1	%
Retail 100% Company-owned stores	16.2	%	16.9	%	15.6	%	15.5	%
Sales to franchisees	6.2	%	10.3	%	6.0	%	9.3	%
Other channels	5.4	%	8.1	%	5.9	%	8.1	%

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 wholesale prices.

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 table sets forth the results of operations for the three months ended May 4, 2002 and May 5, 2001:

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

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%.

The Company's customers are 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. As a result, starting in the second quarter 2001, the Company started to focus its efforts on refining its catalog circulation strategy and aggressively targeting opportunities in niche markets. In the first quarter 2002, the Company reduced 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

~~can~~RESULTS beOF 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. OPERATIONS

~~Gross margin decreased in the current year first quarter 2002 to $5,456,000 from $6,112,000 in prior year first quarter 2001.~~ The ~~decrease~~following intable ~~gross~~sets ~~margin~~forth ~~can~~the beresults ~~primarily~~of ~~attributed~~operations ~~to decline~~for ~~in net sales from year to year. To encourage consumer spending,~~ the ~~Company~~three ~~continues~~months ~~to provide promotional~~ and ~~permanent~~six ~~discounting~~months ofended ~~various products. The gross profit~~August 3, ~~as 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 ~~higher fixed production costs due to lower sales volume~~August 4, ~~which~~2001: ~~were significantly offset by lower material costs.~~

Operating expenses decreased in the current year first quarter 2002 to $6,456,000 from $7,365,000 in the prior year first quarter 2001. The decrease in operating expenses from year to year of $909,000 is primarily in catalog advertising costs due to reduced and refined catalog circulation, variable operating expenses as a result of lower sales volume, and corporate payroll expenses related to workforce reductions instituted in the prior year third quarter 2001. 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.

	Three Months Ended
	August 3, 2002					August 4, 2001					Increase (Decrease)
	Amount			%		Amount			%		Amount			%
	(Dollars in thousands)
Net product sales	$	7,163		100.0	%	$	8,058		100.0	%	$	(895	)	(11.1	)
Cost of goods sold		3,630		50.7			4,051		50.3			(421	)	(10.4	)

Gross profit on product sales		3,533		49.3			4,007		49.7			(474	)	(11.8	)
Fees, royalties and other income		228		3.2			283		3.5			(55	)	(19.4	)

Gross margin		3,761		52.5			4,290		53.2			(529	)	(12.3	)
Operating expenses		4,894		68.3			5,453		67.7			(559	)	(10.3	)

Loss from continuing operations before other expenses and taxes		(1,133	)	(15.8	)		(1,163	)	(14.5	)		30		2.6
Interest and other expenses		39		0.5			71		0.9			(32	)	(45.1	)

Loss from continuing operations before income taxes		(1,172	)	(16.3	)		(1,234	)	15.4			62		5.0
Income tax expense (benefit)		—		—			700		8.7			(700	)	(100.0	)

Loss from continuing operations		(1,172	)	(16.3	)		(1,934	)	(24.1	)		762		39.4
Loss from discontinued operations		(1,108	)	(15.5	)		(899	)	(11.1	)		209		(23.2	)

Net loss	$	(2,280	)	(31.8	)	$	(2,833	)	(35.2	)	$	553		19.5

In the current year first quarter 2002, the Company recorded an income tax benefit of $106,000 related to income tax refund claims approved and received from amended state returns.

	Six Months Ended
	August 3, 2002					August 4, 2001					Increase (Decrease)
	Amount			%		Amount			%		Amount			%
Net product sales	$	15,688		100.0	%	$	17,561		100.0	%	$	(1,873	)	(10.7	)
Cost of goods sold		7,808		49.8			8,617		49.1			(809	)	(9.4	)

Gross profit on product sales		7,880		50.2			8,944		50.9			(1,064	)	(11.9	)
Fees, royalties and other income		416		2.7			509		2.9			(93	)	(18.3	)

Gross margin		8,296		52.9			9,453		53.8			(1,157	)	(12.2	)
Operating expenses		10,000		63.7			11,531		65.7			(1,531	)	(13.3	)

Loss from continuing operations before other expenses and taxes		(1,704	)	(10.8	)		(2,078	)	(11.9	)		374		18.0
Interest and other expenses		107		0.7			161		0.9			(54	)	33.5	)

Loss from continuing operations before income taxes		(1,811	)	(11.5	)		(2,239	)	(12.8	)		428		19.1
Income tax expense (benefit)		(106	)	(0.7	)		700		3.9			(806	)	(115.1	)

Loss from continuing operations		(1,705	)	(10.8	)		(2,939	)	(16.7	)		1,234		41.9
Loss from discontinued operations		(1,538	)	(6.7	)		(1,237	)	(7.1	)		(301	)	(24.3	)

Loss before extraordinary item		(3,243	)	(17.5	)		(4,176	)	(23.8	)		933		22.3
Extraordinary loss		—		—			(219	)	(1.2	)		219		100.0

Net loss	$	(3,243	)	(17.5	)	$	(4,395	)	(25.0	)	$	1,152		26.2

Three Months Ended August 3, 2002 (Second Quarter 2002), Compared To Three Months Ended August 4, 2001 (Second Quarter 2001)

Net product sales were $7,163,000 in the current year second quarter ended August 3, 2002, compared to $8,058,000 for the corresponding second quarter ended August 4, 2001. The $895,000 or 11.1% decrease in net sales was comprised of direct marketing Successories of $103,000 or 1.6%, sales to franchisees of $471,000 or 47.1%, and other channels of $321,000 or 40.6%. The net sales and operations of the retail 100% owned stores are reported separately as discontinued operations on the accompanying consolidated statements of operations and comprehensive loss.

The Company's direct marketing Successories sales in the second quarter 2002 were comparable to prior year second quarter 2001. The Company continues to evaluate the most effective prospect catalog circulation strategy in the current business environment, aggressively target opportunities in niche markets and focus on increasing customer re-buy rates. The Company increased it's overall circulation in the current year second quarter 2002 by 10%, which was primarily in the customer catalog circulation. The refined catalog circulation strategy undertaken by the Company has positively impacted the operating results of the direct marketing Successories channel. The decrease in sales to franchisees can be primarily attributed to 16 fewer stores in operation in the current year in comparison to prior year. 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, and one fewer joint venture retail store in operation in the current year.

Gross margin decreased in the current year second quarter 2002 to $3,761,000 from $4,290,000 in the prior year second quarter 2001. The decrease in gross margin can be attributed to a decline in net sales from year to year. In addition, the gross profit, as a percentage of net sales, decreased as a result of a permanent price reduction for wall décor and various other products initiated in the second quarter 2002 to encourage consumer spending in light of the current business environment. The lower sales volume in the current year has not significantly impacted the product costs per unit due to various manufacturing cost reduction efforts undertaken by the Company.

Operating expenses decreased in the current year second quarter 2002 to $4,894,000 from $5,453,000 in the prior year second quarter 2001. The decrease in operating expenses from year to year of $559,000 is primarily in catalog advertising costs due to refined catalog circulation, corporate payroll expenses related to workforce reductions initiated in the third quarter 2001 and the second quarter 2002, and variable operating expenses as a result of lower sales volume. In the second quarter 2002, the Company instituted a workforce reduction which is expected to provide annualized payroll expense savings of approximately $1,000,000. The severance costs associated with the above mentioned workforce reduction of approximately $93,000 has been recorded in the second quarter 2002.

In the prior year second quarter 2001, the Company recorded an income tax expense of $700,000 to increase the valuation allowance associated with the deferred tax asset balance. As a result of the challenging economic environment, the Company's management determined that the valuation allowance should be increased due to reduced likelihood of whether 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 second quarter 2002, the Company decided to take immediate steps to close all of its 100% owned retail stores and as a result has started to negotiate early lease terminations with the various landlords. In accordance with FASB No. 144, the Company has reflected separately the results of operations of the 100% owned retail stores as discontinued operations. During the second quarter 2002, the Company recorded $722,000 in disposal costs related to lease termination contracts entered to-date for four stores and asset impairment charges for certain stores with negative cash flow projections anticipated through store closing date. The Company is currently in the process of pursuing early lease terminations at the remaining ten stores whose leases extend beyond the current fiscal year. Actual lease termination costs will be determined by the lease termination agreements negotiated with

the landlords and could vary significantly if the Company cannot terminate lease agreements before their scheduled maturity.

The net loss was $2,280,000 in the current year second quarter 2002, compared to $2,833,000 in the corresponding prior year second quarter 2001. The loss from continuing operations improved from the prior year, in spite of lower sales volume, as a result of streamlining operating expenses.

Six Months Ended August 3, 2002 (Year-To-Date 2002), Compared To Six Months Ended August 4, 2001 (Year-To-Date 2001)

Net product sales were $15,688,000 year-to-date for the six months ended August 3, 2002, compared to $17,561,000 for the corresponding six months ended August 2, 2001. The $1,873,000 or 10.7% decrease in net sales was comprised of direct marketing Successories of $447,000 or 3.2%, sales to franchisees of $812,000 or 42.1%, and other channels of $614,000 or 36.2%. The net sales and operations of the 100% owned retail stores are reported separately as discontinued operations on the accompanying consolidated statements of operations and comprehensive loss.

The decrease in direct marketing Successories channel net sales in the current year were in part due to the refined catalog circulation strategy undertaken by the Company. In comparison to prior year, the company to-date in the current year reduced the prospect catalog circulation due to lower response rates experienced in 2001 and increased customer catalog circulation as a result of targeting opportunities in niche markets. The refined catalog circulation strategy resulted in an overall catalog circulation decrease of 16% in the current year, but a positive impact to the operating profit of the direct market Successories channel as a result of improved return on catalog advertising costs. The Company has started to experience better response rates than prior year for prospect catalogs and as a result plans to increase circulation for the remainder of the current fiscal year 2002 in comparison to the prior year. Internet sales, which are included in the direct marketing Successories channel, increased by 20.2% from year to year. Internet sales represented 26.4% of the total direct marketing sales in the current year and were 21.3% in the prior year. Internet continues to be a significant marketing and sales opportunity for the Company. The decrease in sales to franchisees can be primarily attributed to 16 fewer stores in operation in the current year in comparison to prior year. The decrease in net sales in the other channels from year to year can be primarily attributed to the Company's decision made in the first quarter 2002 to discontinue contract framing services for third party products, and two fewer joint venture retail stores in operation in the current year.

Gross margin decreased in the current year to $8,296,000 from $9,453,000 in prior year. The decrease in gross margin can be primarily attributed to a decline in net sales from year to year. To encourage consumer spending, the Company continues to provide promotional and permanent discounting of various products. The gross profit, as a percentage of net sales, in the current year in comparison to the prior year was negatively impacted by additional discounting provided to customers. The lower sales volume in the current year has not significantly impacted the product costs per unit due to various manufacturing cost reduction efforts undertaken by the Company.

Operating expenses decreased in the current year to $10,000,000 from $11,531,000 in the prior year. The decrease in operating expenses from year to year of $1,531,000 is primarily in catalog advertising costs due to reduced and refined catalog circulation, variable operating expenses as a result of lower sales volume, and corporate payroll expenses related to workforce reductions instituted in the third quarter 2001 and the second quarter 2002.

In the current year first quarter 2002, the Company recorded an income tax benefit of $106,000 related to income tax refund claims approved and received from amended state returns. In the prior year second quarter 2001, the Company recorded an income tax expense of $700,000 to increase the valuation allowance associated with the deferred tax asset balance. As a result of the challenging

economic environment, the Company's management determined that the valuation allowance should be increased due to the reduced likelihood of whether 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 prior 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 Company's bank, the Company recorded an additional expense to write-off the unamortized debt discount associated with the term loan and fixed rate loan.

In the current year ~~first quarter 2002,~~ the Company had a net loss of $~~963~~3,243,000, in comparison to a net loss of $14,~~562~~395,000 in the prior year ~~first quarter 2001~~. The improved operating results, in ~~the~~spite ~~light~~ of lower sales volume, can be attributed to the Company's efforts to streamline operating expenses and utilization of cost -effective marketing strategies to improve the operating results of the Company. The Company's operating results from continuing operations improved 19.1%, even though, net sales declined by 10.7%.

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 $~~267~~1,002,000 for the ~~three~~six months ended ~~May~~August 43, 2002 ~~(first quarter 2002)~~, compared to $~~167~~683,000 for the ~~three~~six months ended ~~May~~August 54, 2001 ~~(first quarter 2001)~~. The ~~increase~~improvement in cash ~~flow~~flows infrom ~~the~~operating ~~first~~activities ~~quarter 2002 in comparison to the first quarter 2001~~ can be attributed primarily to a decrease in net loss from continuing operations, ~~and~~net ~~changes~~of inthe ~~prepaid~~change ~~catalog expenses and accrued expenses balances offset by changes~~ in ~~inventory~~asset and ~~accounts~~liability ~~receivable~~ balances.

Investing activities provided cash of $43,000 infor the ~~first~~six ~~quarter~~months ended August 3, 2002, compared to used cash of $69108,000 infor the ~~first~~six ~~quarter~~months ended August 2, 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 activities used cash of $~~368~~523,000 infor the ~~first~~six ~~quarter~~months ended August 3, 2002, ~~and~~compared to $12,~~554~~182,000 infor the ~~first~~six ~~quarter~~months ended August 2, 2001. ~~Scheduled~~Planned debt repayments on the term note and net repayments on the revolving credit loan were the principal uses of cash. Proceeds from net borrowings on the revolving credit loan were the primary source of cash. In the prior year first quarter 2001, the 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 position. The above noted loans had payment terms through June 2003.

15 On June 13, 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, 2002. In addition, the amendment adjusted the borrowing base and the revolver limits, prospectively. In connection with the above mentioned amendment, the Company agrees to provide the bank the option to exchange the stock warrants previously issued to the bank in exchange for a success fee equal to 2% of the gross sales price, in the event that the Company is sold. At August 3, 2002, the Company was in compliance with the debt covenants of the credit facility agreement.

loan were the principal uses of cash. Proceeds from net borrowings on the revolving credit loan were the primary source of cash. In the prior year first quarter 2001, the 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 position. The above noted loans had payment terms through June 2003. 18

On ~~June~~September 1311, 2002, the Company obtained anapproval ~~amendment~~ to extend the ~~credit~~step ~~facility~~down toin ~~adjust~~maximum ~~and~~borrowings ~~modify~~from ~~certain~~$3,500,000 ~~financial~~to ~~covenants~~$3,000,000 ~~which~~on ~~were retroactive to~~ the ~~first~~revolving ~~quarter~~credit ~~ended~~loan from ~~May~~October 431, 2002. Atto ~~May~~January 41, ~~2002,~~2003. ~~the~~The Company ~~was~~requested inthe ~~compliance~~above ~~with~~extension ~~the~~to ~~debt~~provide ~~covenants~~for ofadequate ~~the~~revolving credit ~~facility~~loan ~~agreement.~~availability ~~See~~for ~~footnote~~the 4payout inof ~~the~~projected ~~notes~~lease termination costs related to the 100% Company-owned retail stores, See Note 3 in the accompanying financial statements for further information.

The Company believes that internally generated funds and the credit facility will be sufficient to meet its current operating needs, including funds required to close all of the 100% owned retail stores, fund debt service and make anticipated capital expenditures.

Subsequent to the current fiscal year-end and in the absence of a sale of the Company, the Company shall take steps to meet its liquidity needs through restructuring and further reduction of its expenses, pursuit of a cash equity infusion, looking into expanded lines of credit from existing or new lenders. The current revolving credit facility expires June 2003. No assurance can be given that any restructuring plans undertaken by management, in the event the Company is not sold, will be successful, or that the Company will be able to secure additional capital or borrowings on terms acceptable to it, or at all.

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 during the period from October through January. The effects of seasonality are greater in the Company's retail operations and sales to franchisees than the other segments of its business, the impact of which will diminish going-forward as the Company closes all of its 100% owned retail stores and with fewer franchisee stores in operation. Most operating expenses are 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 generally 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~~ 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 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 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 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 consider other risks

1619

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, sale of the Company, and successfully exit the retail channel (100% Company-owned stores). 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 on this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is subject to market risk associated with adverse changes in interest rates and foreign currency exchange rates, but does not hold any market risk sensitive instruments for trading purposes. The Company uses variable rate debt, as described in Note 35 of the Notes to Consolidated Financial Statements. At ~~May~~August 43, 2002, principal exposed to interest rate risk is limited to $1,~~258~~055,000 in variable rate debt. The variable rate debt level varies periodically and the maximum ~~borrowings~~borrowing ~~available~~allowed at ~~May~~August 43, 2002 was $3,~~545~~308,000. The impact of a 1% change in interest rates on the variable rate debt is approximately $1310,000. 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 operations annual sales are approximately $2,~~500~~000,000.

1720

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

OnThe ~~September 25,~~Company ~~2001~~was ~~the~~named ~~Company~~as ~~filed~~ a ~~complaint~~defendant ~~against TGMK Group, Inc., TMK Group, Inc. and Terry Keenan. ("Defendants")~~ in ~~the~~a ~~United States~~case ~~District~~filed ~~Court~~by ofBrandon ~~the~~Shopping ~~Northern~~Center ~~District of Illinois in Cook County~~Partners, LTD ~~Chicago, Illinois~~ (~~Case No. 01C7405~~"Plaintiff"). ~~The~~Brandon ~~Company~~Shopping ~~alleged~~Center ~~that: Defendants executed franchise agreements~~Partners, LTD ~~including~~v ~~personal~~Celex ~~guarantees~~Group, ~~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 marksInc. ~~The relief sought by the Company includes:~~ (~~i) a~~now ~~temporary restraining order~~Successories, ~~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~~Inc.) an ~~order directing Defendants to render an accounting to the Company of the gross sales by Defendants under the infringing marks;~~ (~~iv) an~~Case ~~award of three times the damages to the Company's goodwill and intellectual property resulting from Defendants infringing use of the Company's name and marks; (v)~~No. an02 ~~award of punitive damages from Defendants of at least $500,000; (vi~~06414) an ~~award~~was ~~from~~filed ~~Defendants~~in ~~of attorneys'~~the ~~fees,~~Circuit ~~expenses~~Court ~~and costs; (vii) an award~~ of the ~~full~~Thirteenth ~~amount~~Judicial ~~due~~Circuit ~~from~~in ~~Defendants under the franchise agreements~~ and ~~the~~for ~~promissory~~Hillsborough ~~notes of at least $480~~County,~~350~~ asFlorida ~~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~~July 1011, ~~2001. On or about January 31,~~ 2002~~, the Defendants filed an answer to the complaint and a counterclaim~~. InPlaintiff ~~the~~alleged ~~counterclaim, Defendants claim~~ that the Company~~: (i) breached~~ entered into a ~~duty~~lease ofagreement ~~good~~with ~~faith~~Plaintiff and ~~fair~~was ~~dealing,~~in ~~and~~default ~~breached~~under the ~~asset~~lease ~~purchase~~ agreement ~~between~~due ~~the parties; (ii) had a duty~~ to ~~correct~~failure ~~and supplement historical sales information which it knew~~ to bepay ~~false~~rent. orPlaintiff ~~inaccurate;~~ sought (~~iii~~i) ~~violated~~eviction ~~the Consumer Fraud and Deceptive Business Practices Act by fraud and misrepresentation; (iv) engaged in a prohibited practice~~ of ~~selling~~ ~~an unregistered franchise~~Company; ~~and~~ (vii) ~~converted~~compensatory ~~fixtures~~damages, ~~inventory~~including ~~and~~unpaid ~~product~~rent of ~~the Defendants~~$17,201.95 ~~Defendants~~and ~~seek~~accelerated ~~the~~rent, ~~following relief: (i) recission of the asset purchase~~ and ~~franchise~~ ~~agreements;~~prejudgment ~~(ii) compensatory~~interest ~~damages in excess of $1,000,000;~~ (iii) ~~treble damages~~costs; (iv) ~~attorneys~~attorney's fees ~~and costs~~; and (v) ~~such~~all other ~~further~~charges ~~and different relief as the Court deems just and appropriate~~owed. OnThe ~~February 22,~~parties ~~2002,~~settled the ~~Company~~matter ~~moved~~by toentering ~~compel~~into ~~arbitration~~a Termination of ~~Defendants'~~Lease ~~counterclaims~~Agreement ~~and~~dated ~~affirmative defenses. On March~~August 721, 2002~~, Defendants responded to the Company's motion and the Company replied to the response on March 18, 2002~~. ~~The Motion was fully briefed on March 20, 2002. On April 8, 2002, the Court granted the Company's motion to compel arbitration and included all pending claims before the Court.~~

OnThe ~~March 12,~~Company ~~2002,~~was ~~the~~named ~~Company~~as ~~filed~~a defendant in a ~~complaint~~case ~~against~~filed ~~Sloan~~by ~~Enterprises,~~Pyramid ~~L.C.,~~Company Jof Buffalo ("Plaintiff"). ~~Sloan~~Pyramid ~~Cownie~~Company ~~and~~of ~~Mindy~~Buffalo ~~Cownie~~v Successories, Inc. (Index No. 2002-8509) was filed in the ~~Circuit~~State ~~Court~~ of ~~The~~New ~~Eighteenth~~York ~~Judicial~~Supreme ~~Circuit~~Court in ~~DuPage~~ the County, ~~Wheaton,~~of ~~Illinois~~Erie ~~(Case~~on ~~No.~~August ~~2002L000261)~~15, 2002. ~~The~~Plaintiff ~~Company~~alleges ~~alleged~~ that: ~~Defendants~~the ~~executed~~Company ~~franchise~~entered ~~agreements,~~into ~~including~~a ~~personal~~lease ~~guarantees,~~agreement with toPlaintiff ~~operate~~and ~~Successories~~was ~~stores~~ in ~~Iowa~~ ~~and~~default ~~Nebraska;~~under ~~and~~the ~~breached~~lease ~~the~~agreement ~~franchise~~due ~~agreements~~to byfailure ~~non-payment~~to ofpay ~~monies~~rent. ~~due~~Plaintiff seeks the ~~Company~~sum of $9,415.27 ~~The~~as ~~Company~~and ~~sought:~~for ~~(i) $85,956~~past ~~plus~~due ~~interest~~rents; ~~(ii) attorneys'~~all ~~fees, expenses~~rents ~~and~~that ~~costs~~may accrue; and ~~(iii)~~ such other and further ~~and different~~ relief as ~~the~~seems ~~Court deems~~ just and ~~appropriate.~~proper Onto ~~June 10,~~the ~~2002,~~Court. ~~the~~The Company ~~received~~has asince ~~default~~paid ~~judgment~~all ~~against~~past due rents and the ~~defendants~~ parties are involved in settlement negotiations.

~~Except~~The asCompany ~~noted~~was ~~above,~~named ~~there~~as ~~are~~a nodefendant ~~other~~in ~~material~~a ~~pending~~case ~~legal~~filed ~~proceedings~~by ~~against~~EKLECCO ~~the~~L.L.C. ~~Company~~("Plaintiff"). ~~The~~EKLECCO ~~Company~~L.L.C. ~~is,~~v ~~however~~Successories, Inc. at(Index ~~times~~No. 2002-5591) ~~involved~~was filed in ~~routine~~the State ~~litigation~~of ~~arising~~New York Supreme Court in the ~~ordinary course~~County of ~~its~~Erie ~~business~~on ~~and~~August 14, ~~while~~2002. ~~the~~Plaintiff ~~results~~alleges ofthat ~~such~~the ~~proceedings~~Company ~~cannot~~entered beinto ~~predicted~~a lease agreement with ~~certainty,~~Plaintiff ~~the~~and ~~Company~~was ~~believes~~in ~~that~~default under the ~~final~~lease agreement ~~outcome~~due to failure to pay rent. Plaintiff seeks the sum of $11,513.47 as and for past due rents; all rents that may accrue; and such ~~matters~~other ~~will~~and ~~not~~further ~~have~~relief aas ~~material~~seems ~~adverse effect~~just onand proper to the Court. The Company's ~~consolidated~~has ~~financial~~since ~~position~~paid orall ~~results~~past ofdue ~~operations~~rents and the parties are involved in settlement negotiations.

18 The Company was named as a defendant in a case filed by Pyramid Crossgates Company ("Plaintiff"). Pyramid Crossgates Company v Successories, Inc. (Index No. 2002-5653) was filed in the State of New York Supreme Court in the County of Erie on August 14, 2002. Plaintiff alleges that the Company entered into a lese agreement with Plaintiff and was in default under the lease agreement due to failure to pay rent. Plaintiff seeks the sum of $10,992.96 as and for past due rents; all rents that may accrue; and such other and further relief as seems just and proper to the Court. The Company has since paid all past due rents and the parties are involved in settlement negotiations.

The Company was named as a defendant in a case filed by Scottsdale Fashion Square Partnership ("Plaintiff"). Scottsdale Fashion Square Partnership v Celex Group, Inc. (now Successories, Inc.) (No. CV2002-016540) was filed in the Superior Court of the State of Arizona in the County of Maricopa. Plaintiff alleges that the Company entered into a lease agreement with Plaintiff and is in default under the lease agreement due to failure to pay rent. Plaintiff seeks an order for immediate possession of the premises and all fixtures, trade fixtures, and tenant improvements; 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 at the rate of 18% per annum; all rents that accrue with interest at the rate of 18% per annum, late charges at the rate of 5%, plus applicable rental tax thereon at the rate of 1.9%, court costs with interest thereon at the rate of 10% per annum; and such other further relief as the Court deems just and proper.

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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company held its annual meeting of shareholders on July 25, 2002, and the following matters were voted on at the meeting.

1.: The election of the following Class I directors, who will serve for a term to end at the annual meeting of shareholders in the year 2004 or until their successors are elected and qualified:

		For		Abstain
Howard I. Berstein		8,298,624		293,280
Larry A. Hodges		8,381,969		209,935

2.: The ratification of the appointment of Crowe, Chizek and Company, LLP as independent accountants for the fiscal year ending February 1, 2003, was approved by the following vote: For 8,325,271; Against, 235,866; and Abstain 30,767.
3.: The transaction of other business that may have properly come before the annual shareholders meeting was approved by the following vote: For 7,766,047; Against, 768,422; and Abstain, 57,435.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(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 August 3, 2002

~~(a) See Index to Exhibits immediately following the Signatures page.~~ 22

(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: June 17, 2002		By:	/s/ GARY J. ROVANSEK Gary J. Rovansek President, Chief Executive Officer and Director (Principal Executive Officer)
Date: September 16, 2002	By:	/s/ Gary J. Rovansek Gary J. Rovansek President, Chief Executive Officer and Director (Principal Executive 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)
Date: September 16, 2002	By:	/s/ John C. Carroll John C. Carroll Senior Vice President, Chief Financial Officer and Chief Operating Officer (Principal Financial and Accounting Officer)

2023

CERTIFICATIONS

I, Gary J. Rovansek, certify that:

1.: I have reviewed this quarterly report on Form 10-Q of Successories, Inc.;
2.: Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.: Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: September 16, 2002
/s/ GARY J. ROVANSEK
Gary J. Rovansek Director, President and Chief Executive Officer

I, John C. Carroll, certify that:

1.: I have reviewed this quarterly report on Form 10-Q of Successories, Inc.;
2.: Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; and
3.: Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report.

Date: September 16, 2002
/s/ JOHN C. CARROLL John C. Carroll Senior Vice President, Chief Operating and Financial Officer

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, 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 March 1, 1996(14)*
10.8(b	)	Amendment to Employment Agreement with Arnold M. Anderson dated March 1, 1996(14)*
10.8(c)		Amendment to Employment Agreement with Arnold M. Anderson dated January 14, 1997(14)*
10.8(c	)	Amendment to Employment Agreement with Arnold M. Anderson dated January 14, 1997(14)*
10.8(d)		Addendum to Employment Agreement with Arnold M. Anderson dated February 16, 2000(14)*
10.8(d	)	Addendum to Employment Agreement with Arnold M. Anderson dated February 16, 2000(14)*
10.8(e)		Amendment to Employment Agreement with Arnold M. Anderson dated October 1, 2001(20)*
10.8(e	)	Amendment to Employment Agreement with Arnold M. Anderson dated October 1, 2001(20)*
10.9		Employment Agreement with Michael H. McKee dated June 1, 1999(11)*
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)
10.11		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)

10.12		First Amendment to Credit Agreement between the Company and The Provident Bank dated as of July 16, 1997(6)
10.13		Lease Agreement between LaSalle National Trust, N.A. as Trustee under Trust No. 120358 and Celex Group, Inc.(7)
10.14		Second Amendment to Credit Agreement between the Company and The Provident Bank dated as of May 14, 1998(7)
10.15		Third Amendment to Credit Agreement between the Company and The Provident Bank dated as of September 1, 1998(8)
10.16		Employment Agreement with Gary Rovansek dated October 29, 1998(8)
10.17		Fourth Amendment to Credit Agreement between the Company and The Provident Bank dated as of April 28, 1999(10)
10.18		Warrants to Purchase Common Stock of the Company granted to Provident Financial Group, Inc. dated as of April 29, 1999(10)
10.19		Preferred Stock Purchase Agreement, dated as of May 28, 1999, by and among the Company and the investors(9)
10.20		Registration Rights 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)
10.22		Amendment No. 1 to the Registration Rights Agreement, dated as of October 18, 1999, by and among the Company and the investors(12)
10.23		Fifth Amendment to Credit Agreement between the Company and The Provident Bank dated as of April 6, 2000(15)
10.24		Sixth Amendment to Credit Agreement between the Company and The Provident Bank dated as of August 28, 2000(16)
10.25		Joint Venture Agreement with Celebrating Excellence of Minnesota, Inc. and related documents(18)
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)
10.29		Ninth Amendment to Credit Agreement between the Company and the Provident Bank dated as of June 13, 2002 (filed herewith)
10.30		Retention Agreement with Gary J. Rovansek dated August 20, 2002 (filed herewith)
10.31		Retention Agreement with John C. Carroll dated August 20, 2002 (filed herewith)
10.32		Retention Agreement with John F. Halpin dated August 20, 2002 (filed herewith)
10.33		Retention Agreement with Michael McKee dated August 20, 2002 (filed herewith)
10.34		Retention Agreement with Gregory J. Nowak dated August 20, 2002 (filed herewith)
21.1		Subsidiaries of the Registrant (filed herewith)
99.1		Certification of Chief Executive Officer (filed herewith)

99.2

Certification of Chief Financial Officer (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

QuickLinks

PART I. FINANCIAL INFORMATION
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

CERTIFICATIONS

INDEX TO EXHIBITS

Filing Compare · SUCCESSORIES INC