AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 28, 2003

WASHINGTON, D.C. 20549

(MARK ONE)

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

06902

(ZIP CODE)

(203) 324-5466

(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

NOT APPLICABLE

(TITLE OF CLASS)

(TITLE OF CLASS)

Indicate by check mark whether 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 [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

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

Yes [] No [X]

As of March 28, 2003, the aggregate market value of the Common Stock outstanding and held by nonaffiliates (without admitting that any person whose shares are not included in such calculation is an affiliate) was approximately $3.3 million and the aggregate market value of the Series I Preferred Stock outstanding and held by nonaffiliates (without admitting that any person whose shares are not included in such calculation is an affiliate) was approximately $5.9 million. In each case, the market value of outstanding securities was based on the closing price of such securities as reported by the Nasdaq SmallCap Stock Market.

As of March 28, 2003, 17,031,687 shares of Common Stock, 1,046,716 shares of Series I Preferred Stock, and 10,984,971 shares of Series J Preferred Stock were outstanding.

The Exhibit index is located on page 42 of this filing.

Part III incorporates certain information by reference to registrant's Proxy Statement for its 2003 Annual Meeting of Shareholders.

FORM 10-K CROSS REFERENCE INDEX

COMPANY OVERVIEW

The Aristotle Corporation ("Aristotle" or together with its subsidiaries, the "Company"), founded in 1986, and headquartered in Stamford, CT, is a holding company which, through its subsidiaries, is a leading manufacturer and global distributor of educational, health, and agricultural products.

Prior to June 17, 2002, Aristotle was a holding company which, through its subsidiaries, Simulaids, Inc. ("Simulaids") and Safe Passage International, Inc. ("Safe Passage"), conducted business in two segments, the medical education and training products market and the computer-based training market. On June 17, 2002, Aristotle merged (the "Merger") with Nasco International, Inc. ("Nasco"), an indirect subsidiary of Geneve Corporation ("Geneve"), a privately-held diversified financial services company. Pursuant to the Merger, the separate corporate existence of Nasco ceased and Aristotle was the surviving entity. Immediately following the Merger, Aristotle's business was comprised of the operations of the Nasco group of companies, Simulaids and Safe Passage. Due to the relative sizes of the parties and conditions to the Merger, the transaction was accounted for as a reverse acquisition using the purchase method of accounting under accounting principles generally accepted in the United State s of America. Accordingly, for accounting and reporting purposes, Nasco is deemed to be the acquiring company and financial information reported for periods prior to the Merger is that of Nasco. In applying purchase accounting to the Merger, the assets and liabilities of Aristotle were adjusted to their fair market values at June 17, 2002. This included recognition of a significant deferred tax asset of approximately $30.7 million, which was principally attributable to Aristotle's Federal net operating tax loss carryforwards. As a result of such recognition, Aristotle's pre-merger goodwill and long-term assets of $8.3 million were reduced to zero and negative goodwill of $20.2 million was recognized as an extraordinary gain at the acquisition date.

Nasco, founded in 1941, is a leading manufacturer and global catalog-distribution company serving the education, health, and agriculture markets. A selection of over 80,000 items is offered, primarily through catalogs carrying the brand of Nasco, as well as those bearing the brands of Triarco, Summit Learning, Hubbard Scientific, Scott Resources, and Spectrum Educational Supplies. Products include educational materials and supplies for substantially all K-12 curricula, molded plastics, biological materials, and items for the agriculture, senior care, and food industries. Nasco, together with Simulaids, also offers simulation kits and manikins used for training in cardiopulmonary resuscitation, and the fire and emergency rescue and patient care fields. The Summit Learning, Hubbard Scientific and Scott Resources brands were acquired in March 2001 in connection with Nasco's acquisition of American Educational Products, LLC. ("AMEP"). In April 2001, Nasco acquired Sp ectrum Educational Supplies, Ltd. ("Spectrum"). The Company markets proprietary product lines throughout all of its catalogs that provide exclusive distribution rights. The proprietary product lines are developed internally through the Company's research and development efforts and externally through licensing rights from third parties. Proprietary products account for a material portion of the Company's sales.

Safe Passage develops and licenses computer based training products to the government and industry clients. On December 31, 2002, Aristotle sold its 80% ownership interest in Safe Passage in exchange for certain contingent payments, if any. The contingent payments, if any, are payable through 2008 and are based upon the financial performance of Safe Passage. The business and activities of Safe Passage were not material to the operations of the Company.

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Factors that contribute to the expansion of the education sector include:

The traditional school model of lectures, workbooks, written assignments, and text memorization has been criticized for failing to engage students, as opposed to methods that emphasize active learning techniques. The prevailing inclination among educators to use manipulatives, models, or other hands-on tools places the Company within a particularly favorable segment of the already well-positioned education industry.

The Company believes that American school systems have shown a clear trend toward decentralization, which enables school teachers and administrators at the school to make many of the key decisions regarding instruction methods and school purchases. In prior years, larger government agencies usually made these decisions for entire school districts or states. Under the new structure, teachers have the ability to choose the curricular materials that they need to teach effectively. Site-based management is forcing the industry to rethink its sales and marketing strategies in order to address the added challenge and increased cost of delivering goods and services to an increasingly decentralized marketplace. In terms of purchasing methods, direct mail ordering by catalog, as well as the internet, is on the rise among administrators in charge of budgets as purchasing mechanisms.

The industry is also highly fragmented with a substantial number of direct marketers of supplemental educational supplies, many of which are family- or employee-owned businesses that operate in a single geographic region. The Company believes the increasing demand for single-source suppliers, prompt order fulfillment, and competitive pricing, along with the related need for suppliers to invest in automated inventory and electronic ordering systems, are fostering consolidation within the industry. Increased purchasing at the school and classroom levels, which increases individual schools' and teachers' roles in educational supply procurement decisions, is also driving this trend.

The Company's extensive selection of products and vendors allows it to offer an extensive selection of products for each product line. The Company believes that by having available to school teachers and administrators all of the items they need in one place, the inclination to search other sources is reduced. This "one stop shopping" approach is the Company's hallmark.

Moreover, the Company seeks to be competitive with its catalog prices rather than offering large discounts to single customers. With many products, two or more choices are offered in order to give customers a lower price point with a product that will meet their budget yet perform to required standards.

In addition to its business in the school supply market, the Company, though its Nasco Life/Form(R) and Simulaids product lines, sells manikins and simulation kits used for training in cardiopulmonary resuscitation and the emergency rescue and patient care fields. The Company's primary customers for its health care training products are fire and emergency medical departments, and nursing and medical schools.

The Company offers a wide variety of products, both proprietary products and products manufactured by others, primarily through catalogs distributed to customers throughout the United States and internationally. The Company also sells products through distributors.

The health and medical education teaching aids industry is highly competitive. The Company competes for customers with numerous manufacturers of well-known brands of teaching products. The principal competitive factors in the health and medical education teaching aids market are quality, price and design of products, engineering, and customer service. Although some of the Company's competitors have greater financial and other resources, and are, therefore, able to expend more resources than the Company in areas such as marketing and business development, the Company believes that it is aggressively marketing its products and competing in an effective and competitive manner.

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The Company markets products to farmers and ranchers to assist in animal livestock production and products for other segments of the agricultural industry. With its extensive farm catalog offering, the Company is well positioned to supply the market with the type of small hand tools and equipment needed.

In addition, the Company provides sterile sampling bags and containers worldwide under the Whirl-Pak(R) trademark. The product line is primarily sold in the food industry, including water treatment facilities. The product lines provide a stable vehicle for the containment and transporting of food and water samples to laboratories without threat of sample contamination.

In the senior care industry, the Company offers a broad product selection of activities used by nursing home and senior care facilities to support therapy programs.

Although the commercial segment currently accounts for approximately 18% of the Company's net sales, management believes that the agricultural lines of business within this segment will have a decreased impact on the Company's net sales in the future.

Key members of the Company's management team develop and execute multiple action plans to continue its steady growth in revenues and earnings. These action plans are continuously monitored by senior management to assess the progress in achieving the planned goals. The principal action plans are as follows:

            .. Continue strategic evaluation and execution of complementary acquisitions in existing market segments.

              .. expansion into the Canadian educational markets through Spectrum by supplementing existing Canadian catalogs with 

                Nasco product lines,

                .. expansion of the Canadian catalog publications into new curricula, and

                .. energize the research and development efforts of the recently acquired businesses to develop and market competitive

                     proprietary products.

The Company markets the following product lines through its catalogs and its proprietary website, www.eNASCO.com:

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The Company markets products primarily through catalogs. Additionally, many of the Company's products are available for sale on its website. After a sector is identified, research is conducted by sales and marketing personnel to identify needed products. The Company often hires consultants or sales directors from the niche served. There is a continuous search by catalog teams for new, improved, and unique products. Catalog teams pursue sales growth goals through efforts to present more than 3,200 catalog pages with broad selections of popular and new products at competitive catalog prices and choices of similar types of products with different price points, qualities, or features. If the Company is unable to find products to meet a specified demand, it has the option of attempting to manufacture the product in its own plants or contract manufacturing under a private label.

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The Company attempts to time the distribution of catalogs to meet the peak buying period and mails the catalogs to the individuals whom the Company believes make the buying decision. The Company's experience indicates that the actual user of the materials usually makes the buying decision, except for those items that are a part of school bid requests. The Company's mailing concentrates on putting the catalog in the hands of these decision makers. The Company's bid request goal is also competitively priced. The Company issues most major catalogs annually to over three million potential customers. The Company relies mainly on its 38 different catalogs as its "sales staff," which relieves the need for expensive sales calls on customers.

In recent years, the Company has expanded its efforts in international markets outside of North America, primarily in the health care and agricultural product lines. While these international sales still only represent less than 7% of total net sales, the acceptance of product lines by international markets has been a significant growth contributor to these particular product lines.

Orders are received via mail, phone, fax, or internet. The Company aims to exceed customer expectations based on customers' directions. The Company's business is transacted by open order and purchase orders. The Company ships many orders the same day received and most orders are shipped within three days. Sale terms are typically net 30 days and orders are normally filled within 14 days.

Although the educational products market has historically been extremely stable, it is inherently seasonal. There are wide variations in sales from season to season and as a result, accounts receivable, inventories, and accounts payable also vary. The summer months are the most active as educational institutions restock their supplemental materials for the upcoming school year.

Substantial portions of the products distributed by the Company are purchased from manufacturers and distributors worldwide. The purchasing group is in contact with over 5,000 vendors to insure awareness of new products, timely delivery, and competitive pricing. With its broad range of vendors, including alternative product sources, the Company does not maintain fulfillment contractual agreements for purchase quantity commitments. To broaden its product mix to meet specific customer needs, the Company operates manufacturing facilities that produce proprietary items. Sales of proprietary products generally result in a higher profit margin and enable the Company to sell the products wholesale in the U.S. and foreign markets where the Company often develops distribution relationships.

All catalogs are annually reviewed for revision. Vendors often review catalog pages and make suggestions for the following year's offering. Alternate vendors are reviewed on a continuous basis.

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Catalog preparation is also handled in Fort Atkinson. A staff of 35 graphic artists and editors work with Macintosh desktop publishing systems to complete all production work in-house, with the exception of printing.

The Company leases 1,000 square feet of executive office space in Stamford, Connecticut. ..

The Company's primary distribution center is located in Fort Atkinson, Wisconsin. The 220,000 square foot owned distribution center is the headquarters for all Nasco international marketing efforts. A graphics arts center houses the creative staff and equipment for the maintenance of the catalog pages. The Company also leases space for plastics and biological production to support the catalog product lines. The Company leases approximately 300,000 square feet of adjacent warehouse space and 40,000 square feet of office space. The Company currently occupies 70,000 square feet of the warehouse space, and leases the office space and remaining warehouse space to a third party. The subtenant will surrender additional portions of the warehouse over the course of the next two years. This facility affords the Company the necessary expansion capacity for the foreseeable future. The facility was purchased in 2001 and continues to be owned by a limited liability company ("Owner"), the sole membership interest of which is held by Nasco Holdings, Inc ("NHI"), a wholly-owned subsidiary of Geneve, the Company's majority stockholder. It is contemplated that in 2003, the Company will purchase the facility from the Owner at the adjusted cost of approximately $4.2 million. In connection with that purchase, the Company will assume the Owner's obligation under an outstanding mortgage in the amount of approximately $3.6 million, and pay the balance of the purchase price in cash from its working capital. The contemplated transaction was negotiated at arm's length between the Owner and the Company and will be completed on terms no less favorable to the Company than could have been obtained from an unaffiliated party.

To service the western United States, the Company owns and operates a 68,000 square foot distribution center in Modesto, California. This distribution center services all Nasco catalogs for customers in the 12 western states.

The Company operates its Triarco arts and crafts catalog operation, along with three other independent catalogs, from a 28,000 square foot leased facility in Plymouth, Minnesota. Approximately 4,000 square feet of this facility is utilized as office space with the remaining space subleased to a third party on a short-term basis.

The Company also maintains an educational materials catalog distribution center in Fort Collins, Colorado from an 18,000 square foot owned facility. From this location and a 37,000 square foot leased facility in northern Wisconsin, the Company's AMEP business unit services math and science teachers and distributors worldwide. Light manufacturing operations are situated at both of these locations, producing proprietary items.

A 40,000 square foot leased facility north of Toronto, Ontario currently operates as a distribution center of math, science, and technology teaching aids and materials sold by the Spectrum group of companies via catalog mailings to schools throughout Canada. The Company's lease on this facility expires on December 31, 2003. On February 28, 2003, the Company purchased an 83,000 square foot facility, located near Toronto, Canada, for approximately $2.5 million. This facility, which contains both warehouse and office space, will be the main distribution and operations location for the Company's Spectrum operations in Canada. This facility is subject to a mortgage and the Company anticipates that certain of the space at this facility will be subleased to third parties in the near term. The Company believes that its operations in Canada will continue to expand and that it will eventually utilize all of the space at this new facility. The Company anticipates occupying this facility by the thir d quarter of 2003.

The Company owns two buildings comprising approximately 72,800 square feet of office and manufacturing space in Woodstock, NY. The Company produces manikins and simulation kits used for training in the health care field at this location for its Simulaids operations.

The Company is not a party to any material legal proceedings.

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No matters were submitted to a vote of the Company's security holders during the fourth quarter of the year ended December 31, 2002.

The Company's Common Stock is traded on the Nasdaq SmallCap Market under the symbol "ARTL." The table below sets forth the high and low sale prices per share of Common Stock during the fiscal quarters indicated.

* On June 17, 2002, the Company issued, as a stock dividend, one share of Series I Preferred Stock, valued at $6.00 per share, on each share of the Company's Common Stock outstanding on June 10, 2002. Following this stock dividend, separate trading markets existed for the Company's Common Stock and Series I Preferred Stock.

Since the issuance of the Company's Series I Preferred Stock on June 17, 2002, the Company's Series I Preferred Stock has traded on the Nasdaq SmallCap Market under the symbol "ARTLP." The table below sets forth the high and low sale prices per share of Series I Preferred Stock during the fiscal quarters indicated.

As of March 28, 2003, there were approximately 2,200 holders of record of the Company's Common Stock and, according to the Company's estimates, approximately 1,500 additional beneficial stockholders. There were approximately 4,300 holders of record of the Company's Series I Preferred Stock.

The Company has not paid any cash dividends on its Common Stock since its inception and does not intend to pay any cash dividends on its Common Stock in the foreseeable future.

On September 30, 2002, the Company paid a cash dividend of $.19 and $.21 per share, respectively, on its outstanding shares of Series I Preferred Stock and Series J Preferred Stock. The dividends paid by the Company on September 30, 2002 represented the pro-rata dividend from June 17, 2002, the date of issuance of the Series I Preferred Stock and the Series J Preferred Stock, through September 30, 2002.

On February 27, 2003, the Company announced that it had declared a cash dividend of $.33 and $.36 per share, respectively, on its outstanding shares of Series I Preferred Stock and Series J Preferred Stock. Such dividends are payable on March 31, 2003, to holders of record on March 14, 2003.

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Dividends on the Company's Series I Preferred Stock and Series J Preferred Stock are payable on March 31 and September 30, if and when declared by the Company's Board of Directors.

On June 17, 2002, in connection with the Merger, the Company issued shares of its Series J $6.00 non-convertible, non-voting cumulative 12% preferred stock, par value $.01 per share ("Series J Preferred Stock") to NHI. In addition, following the Series I Preferred Stock dividend paid on the Company's Common Stock, on the Merger date, Geneve exchanged its shares of Series I Preferred Stock for an identical number of shares of Series J Preferred Stock. The shares of Series J Preferred Stock were issued in reliance upon an exemption from the registration requirements of the Securities Act of 1933, as amended ("Securities Act") as a private placement of securities under Section 4(2) of the Securities Act. No underwriter was involved in the issuance of the Series J Preferred Stock or the exchange of the Series I Preferred Stock for the Series J Preferred Stock.

The following table summarizes the Company's Equity Compensation Plans as of December 31, 2002:

(1) Includes 55,900 shares of the Company's Common Stock and 55,900 shares of the Company's Series I Preferred Stock to be issued upon the exercise of outstanding options granted pursuant to the Company's 1997 Employee and Director Stock Plan ("1997 Plan"). Options granted under the 1997 Plan are exercisable for one share of Common Stock and one share of Series I Preferred Stock. The Company does not currently intend to grant any additional options under the 1997 Plan.

(2) Options granted under the 2002 Employee, Director, and Consultant Stock Plan are exercisable for one share of the Company's Common Stock.

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Due to the relative sizes of the parties and conditions to the Merger, the transaction was accounted for as a reverse acquisition using the purchase method of accounting under accounting rules generally accepted in the United States of America. As a result, for accounting and reporting purposes, Nasco is deemed to be the acquiring company, and the selected consolidated financial data set forth below for periods prior to June 17, 2002 (the date of the Merger) represents the historical information for Nasco. For periods following the Merger, the financial data set forth below represents the results for the Company as a consolidated entity. The following are selected consolidated financial data for the Company for the fiscal years ended December 31, 2002, 2001, 2000, 1999, and 1998. This consolidated financial data includes AMEP for the fiscal years ended December 31, 2002 and 2001, and for the period from March 1, 2000 to December 31, 2000; Spectrum for the fiscal year ended December 31, 2002 and for the period from April 1, 2001 to December 31, 2001; and Simulaids and Safe Passage only for the period from the date of Merger to December 31, 2002. The selected consolidated financial data presented below should be read in conjunction with the Consolidated Financial Statements of the Company, together with the Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.

SELECTED CONSOLIDATED FINANCIAL DATA

(AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA)

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This discussion and analysis of financial condition and results of operations reviews and compares the results of operations of the Company (after giving effect to the Merger), on a consolidated basis, for the fiscal years ended December 31, 2002, 2001, and 2000. This discussion and analysis of financial condition and results of operations have been derived from, and should be read in conjunction with, the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained elsewhere in this report on Form 10-K.

Net sales increased 2.4% to $165.9 million in 2002 from $162.0 million in 2001. The growth in net sales is positively impacted by the acquisition of Spectrum in April 2001, and the inclusion of net sales of Simulaids and Safe Passage from the Merger date. Spectrum contributed $8.9 million in net sales in 2002, compared to $5.4 million from its acquisition date to December 31, 2001. Simulaids and Safe Passage contributed $4.7 million from the Merger date to December 31, 2002, compared to none in the fiscal year 2001. Excluding the net sales from Spectrum, Simulaids, and Safe Passage, net sales decreased 2.7% from 2001. Net sales in the educational segment, totaling $138.1 million, increased 1.6% in 2002 from $136.0 million in 2001. Excluding the net sales from Spectrum and Simulaids, educational net sales decreased $6.4 million, or 4.9%. The commercial segment recorded net sales of $30.4 million in 2002, increasing 2.9% versus the prior year. Commercial sales in 2 002, excluding net sales from Spectrum and Safe Passage, decreased by $.2 million to $29.2 million. The lack of growth in net sales reflects the downturn in the U.S. economy as well as budgetary uncertainty in the U.S. education sector.

Gross profit increased 4.2% to $58.9 million in 2002 from $56.5 million in 2001. Gross profit margin increased to 35.5% in 2002 from 34.9% in 2001. In connection with the Merger and in accordance with the purchase method of accounting under accounting principles generally accepted in the United States of America, certain inventories were valued at fair value, which was $.9 million greater than their historical cost. This purchase accounting adjustment was expensed in its entirety during 2002 as the associated inventories were sold, and was therefore included in cost of sales in the 2002 Consolidated Statements of Earnings. Spectrum produced $3.5 million in gross profit in 2002, compared to $2.2 million in 2001. Simulaids and Safe Passage, subsequent to the Merger, generated $2.8 million in incremental gross profit in 2002. Excluding the gross profit realized from Spectrum, Simulaids, and Safe Passage, the gross profit margin would be 35.2% in 2002, compared to the 2001 gross profit ma rgin of 34.7%. The educational segment yielded a gross profit margin of 38.4% in 2002, improving on the 2001 gross profit margin of 36.5%. Excluding the incremental Spectrum and Simulaids gross profit and expenses related to purchase accounting, education gross profit margin increased in 2002 to 38.7% compared to 36.4% in 2001. The increase in educational gross profit margin is caused by improved purchasing efforts to reduce merchandise costs. Large customer tenders through quote sales, which generally carry lower margins than those resulting from standard catalog pricing, had minimal impact on the change in educational gross profit margin from 2001 to 2002. The commercial gross profit margin, excluding the Spectrum and Safe Passage business, was 36.8% in 2002, remaining consistent with the 2001 gross profit margin of 36.7%.

In 2002, inflationary impact on costs of materials was approximately 1%. Due to the limited increase in the cost of merchandise, aggregate price increases to customers were limited to less than 3%.

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Selling and administrative expenses increased 5.1% in 2002, compared to 2001, to $40.6 million. Excluding Spectrum, Simulaids, and Safe Passage, selling and administrative expenses decreased by $.2 million, or .7%. Expenses included in this total include advertising and catalog costs, warehouse and shipping activities, customer service and general administrative functions. Total advertising and catalog costs, primarily catalog production and delivery costs, decreased $.2 or 2.4% in 2002 compared to 2001. This decrease is attributed technological efficiencies in catalog production through capital expenditures in state of the art graphic design equipment programs. Group health care costs increased by 23.6% to $2.5 million in 2002, a rate of growth which the Company believes is consistent with healthcare costs nationwide. Wage rates increased by approximately 2% in 2002. In the second quarter of 2002, the Company adopted a change in accounting principles to recognize t he fair value of stock options granted on or after January 1, 2002 as an expense on its Consolidated Statement of Earnings. In 2002, the Company recorded $.3 million in compensation expense related to grants of stock options to certain employees and directors.

In the third quarter of 2002, the Company recorded $.4 million in expense in connection with severance arrangements with former executive officers. The Company has no further expenses under these arrangements.

During 2001, AMEP incurred certain, non-recurring costs classified as special charges in the accompanying Consolidated Statement of Earnings. These costs include approximately $.3 million related to the redemption of AMEP stock options held by AMEP employees, $.2 million related to the satisfaction of AMEP employment agreements, and $.1 million of various legal, accounting, and regulatory fees incurred by AMEP as a result of the AMEP acquisition. The special charges are reported as a reduction to earnings from operations.

Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets ("SFAS 142") and no longer amortizes goodwill as a reduction to earnings. In the fiscal year 2001, goodwill amortization amounted to $.5 million.

Prior to the Merger, the Company paid a management fee to NHI. Under the terms of the management agreement, NHI provided to the Company specified legal, tax, and other corporate services. In 2002, through the Merger date, the management fee paid to NHI was $.9 million, compared to $1.6 million in 2001. The Company will not be obligated to pay a management fee to NHI or any other related party during 2003.

Interest expense decreased to $1.8 million in 2002, compared to $3.2 million in 2001. The decrease in interest expense is due to the decline in the average interest rate on the Company's debt and the reduction in debt of $8.4 million. At December 31, 2001, the Company's credit agreements assessed interest at an annual average rate of 4.1%. The applicable interest rate declined throughout 2002, to 3.3% by December 31, 2002. The average annual rate of interest on the debt was 4.1% in 2002, compared to 6.1% in 2001.

The income tax provision for the year ended December 31, 2002 was $6.6 million compared to a provision amounting to $5.8 million for the year ended December 31, 2001. These tax provisions reflect effective tax rates of 39.6% and 40.3% for 2002 and 2001, respectively. The decrease in the effective tax rate from 2001 to 2002 is primarily due to non-deductible goodwill amortization. The difference between the Federal statutory income tax rate of 35% and the effective income tax rate results principally from Canadian and state income taxes. At December 31, 2002, the balance sheet contains a net deferred tax asset of $29.0 million, net of a valuation allowance of $12.3 million. Substantially all of the net deferred tax asset relates to Federal net operating tax loss carryforwards, which were recognized in applying purchase accounting to the Merger. Approximately $3.5 million of the income tax provision for 2002 related to the utilization of these Federal net operating tax loss carryforward s subsequent to the Merger. Although the reported earnings for 2002 are shown after-tax, approximately $3.5 million of cash from post-merger operations was retained in the Company as a result of the utilization of these Federal net operating tax loss carryforwards. The Company anticipates that the utilization of the available Federal net operating tax loss carryforwards to offset future Federal taxable income will result in the Company not having to use its cash resources to pay Federal income taxes for approximately the next four years.

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Net sales increased 12.6% to $162.0 million in 2001 from $143.8 million in 2000. The acquisition of Spectrum, effective April 2001, contributed $5.4 million to this sales growth. The increase is also attributed to internal growth through catalog enhancements and product development. Excluding the sales from the Spectrum acquisition, educational sales increased $11.5 million, or 9.7%. Commercial sales in 2001 increased by $1.7 million to $29.6 million, reflecting growth of 5.9%.

Gross profit increased 12.9% to $56.5 million in 2001 from $50.0 million in 2000. Sales originating from the Spectrum acquisition generated $2.2 million in gross profit. Gross profit margin increased to 34.9% in 2001 from 34.8% in 2000. Excluding the gross profit generated by Spectrum, educational gross profit margin declined in 2001 to 36.4% compared to 36.6% in 2000. A decrease in the educational segment's gross profit margin occurs during certain periods of the year when the Company captures large customer tenders through quote sales, which generally carry lower margins than those resulting from standard catalog pricing. Comprising 28.6% of 2001 educational sales, 2001 quote gross profit margins averaged 31.7%. In 2000, quote gross profit margins averaged 31.2% while comprising 28.1% of 2000 educational sales. The commercial gross profit margin averaged 36.7% in 2001, remaining consistent with the 2000 average gross profit margin.

Selling and administrative expenses increased 15.3% in 2001, compared to 2000, to $38.7 million. Spectrum's expenses increased overall 2001 selling and administrative expenses by $1.7 million. Excluding Spectrum, selling and administrative expenses increased by 10.4%. Expenses included in this total include advertising and catalog costs, warehouse and shipping activities, customer service, and general administrative functions. Advertising costs, primarily catalog production and delivery costs, increased $1.2 million or 13.8% in 2001 compared to 2000. This increase is attributed to postal rate increases implemented in early 2001, an increase of 5.0% in the number of catalog pages produced, and a 3.6% increase in the quantity of catalogs distributed, excluding recently acquired AMEP and Spectrum catalogs. Group health care costs increased by 24.3% to $2.0 million in 2001, increasing at a rate substantially greater than revenues or other operating expenses. Wage rates increased by approxi mately 4% in 2001.

During 2001, AMEP incurred certain costs classified as special charges in the accompanying Consolidated Statement of Earnings. These non-recurring costs include approximately $.3 million related to the redemption of AMEP stock options held by AMEP employees, $.2 million related to the satisfaction of AMEP employment agreements, and $.1 million of various legal, accounting and regulatory fees incurred by AMEP as a result of the AMEP acquisition. The special charges are reported as a reduction to earnings from operations.

Each year, the Company pays a management fee to its parent, NHI. Under the terms of the management agreement, NHI provides to the Company specified legal, tax and other corporate services. In 2001, the management fee paid to NHI was $1.6 million, compared to $1.5 million in 2000.

Interest expense increased to $3.2 million in 2001, compared to $2.8 million in 2000. The increase in interest expense is due to a $20.0 million increase in debt in May 2001. The increase in debt was used to fund the Spectrum acquisition, and to complete the acquisition of AMEP. The effect of the additional debt on interest expense in 2001 was offset by the decline in the interest rate of the credit agreement. At January 1, 2001, the credit agreement assessed interest at an annual rate of 8.6%. The applicable interest rate declined throughout 2001, to 4.1% by December 31, 2001. The average annual rate of interest on debt was 6.1% in 2001, compared to 8.4% in 2000.

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The income tax provision for the year ended December 31, 2001 was $5.8 million compared to $5.2 million for the year ended December 31, 2000. These tax provisions reflect effective tax rates of 40.3% and 39.6% for 2001 and 2000, respectively. The increase in the effective tax rate from 2000 to 2001 is primarily due to non-deductible goodwill amortization. The difference between the Federal statutory income tax rate of 35% and the effective income tax rate results principally from state income taxes.

At December 31, 2002, the Company had working capital of $44.9 million, increasing from $32.5 million at December 31, 2001. Cash and cash equivalents increased $6.8 million in 2002, ending the year at $11.3 million. This increase in cash and cash equivalents is primarily due to the following activities:

. The Company generated cash of $15.1 million from operations during the year ended December 31, 2002.

. During 2002, cash generated from operations was principally the result of earnings less extraordinary gain of $20.2 plus deferred income taxes of $3.4 million and depreciation of $1.7 million.

. The Company generated $2.7 million due to investing activities for the year ended December 31, 2002 and applied $11.7 million for the year ended December 31, 2001. In 2002, the investing activity included the acquisition of $3.3 million of cash in the Merger with Nasco. Capital expenditures to replace and upgrade existing capital equipment and install new equipment and fixtures to provide additional operating efficiencies totaled $1.4 million and $1.3 million in 2002 and 2001, respectively.

. Financing activities used $11.0 million in the year ended December 31, 2002. The debt payments of $8.4 million were to service principal payments on the Company's primary credit facility, mortgage, existing capital leases, and other seller notes payable incurred by AMEP in connection with previous acquisitions. The Company paid preferred stock dividends of $2.5 million in 2002.

The Company's current credit facility, with an outstanding balance of $36.0 million at December 31, 2002, is supported by variable rate promissory notes due in scheduled reductions of $4.5 million on each September 30 and December 31, with a final installment of $500,000 due in March 2006. The credit facility is collateralized by certain property, plant, and equipment, certain accounts receivable, shares of certain of the Company's subsidiaries capital stock outstanding, and ownership interests of certain of the Company's limited liability subsidiaries. This debt carries a variable rate of interest that is based on LIBOR rates and is adjusted from time to time within a one to six month term based on LIBOR rates in effect at the dates of rate adjustment. At December 31, 2002, the weighted average interest rate on this debt was 3.3%. The credit facility currently has a committed LIBOR rate of interest (including applicable margins) of less than 3.3% which is effective until March 31, 2003. < /P>

Also in 2002, the Company renewed a $2.5 million secured bank line of credit for working capital purposes, of which no amount was outstanding at December 31, 2002. No draws were made against the facility during the year. The Company anticipates that the line of credit, which expires on June 16, 2003, will be renewed for another one-year term. The line of credit is also collateralized by certain property, plant, and equipment, certain accounts receivable, shares of certain of the Company's subsidiaries' capital stock outstanding, and ownership interests of certain of the Company's limited liability subsidiaries.

On February 28, 2003, the Company purchased an office and warehouse facility located near Toronto, Canada, for approximately $2.5 million for its Spectrum operations. On March 21, 2003, a subsidiary of the Company closed on a mortgage on that facility for approximately $1.7 million. The mortgage carries interest at 6.5% per annum and is payable in monthly principal and interest installments over ten years.

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Minimum capital commitments for the next five years are comprised of the following components (in thousands):

Capital expenditures in fiscal year 2003 are expected to be approximately $4.6 million, of which $2.5 million relates to the Company's recent purchase of the Spectrum facility near Toronto, Canada. The largest remaining items include computer hardware and software, production molds, and distribution equipment.

Capital resources in the future are expected to be used for the development of catalogs and product lines, and to acquire additional businesses. The Company anticipates that there will be sufficient financial resources to meet projected working capital and other cash requirements for at least the next twelve months.

The Company is subject to seasonal influences with peak levels occurring in the second and third quarters of the fiscal year primarily due to increased educational shipments coinciding with the Fall start of new school years. As a result, the Company recognizes approximately 75% of the annual net earnings in the second and third quarters of its fiscal year. Inventory levels increase in March through June in anticipation of the peak shipping season. The majority of shipments are made between June and August and the majority of cash receipts are collected from August through October.

Quarterly results may also be materially affected by the timing of acquisitions, the timing and magnitude of costs related to such acquisitions, variations in costs of products sold, the mix of products sold, and general economic conditions. Results for any quarter are not indicative of the results for any subsequent fiscal quarter or for a full fiscal year.

Inflation has had and is expected to have only a minor effect on the Company's operating results and its sources of liquidity.

See Note 16 to the Consolidated Financial Statements for certain unaudited consolidated quarterly financial data for 2002 and 2001.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America ("GAAP"). The preparation of the Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and notes thereto. Actual results could differ from those estimates. A summary of all the Company's significant accounting policies can be found in Note 2 of the Notes to the Consolidated Financial Statements included in Item 8 of this Form 10K. The Company believes the following accounting policies affect the more significant judgments and estimates used in the preparation of the Consolidated Financial Statements:

Revenues - Customarily applying FOB-shipping point terms, the Company recognizes revenue upon shipment of products to its customer, which corresponds to the time when risk of ownership transfers. The point of shipment is typically from one of the distribution centers or, on occasion, a vendor's location as a drop shipment. All drop shipment sales are recorded at gross selling price. An allowance is provided for estimated future returns.

Prepaid Catalog Costs and Amortization - The Company accumulates all direct costs incurred in the development, production and circulation of catalogs on the Consolidated Balance Sheet until the related catalog is mailed, at which time they are am