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The following is an excerpt from a 8-K/A SEC Filing, filed by TALX CORP on 6/25/2002.
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TALX CORP - 8-K/A - 20020625 - NOTES_TO_FINANCIAL_STATEMENT

Notes to Financial Statements
December 31, 2001, 2000, and 1999

(1) DESCRIPTION OF BUSINESS

James E. Frick, Inc. (the Company) is a consulting company specializing in reducing costs for client companies. Their core product, unemployment compensation cost control, is complimented with unemployment tax planning services, multistate tax audits and related services, software consulting solutions, and other employer business services. The Company's customers range in size from the very large (serving approximately one-third of the Fortune 500 Companies) to small employers with less than 200 employees. The customer base is dispersed throughout the United States and includes a broad cross section of industries.

The Company is 100% owned by The Frick Company Employee Stock Ownership Plan (the ESOP).

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could vary from the estimates that were used.

(b) CASH AND CASH EQUIVALENTS

The Company considers short-term securities purchased with an original maturity of three months or less to be cash equivalents.

(c) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation and amortization are computed using both straight-line and accelerated methods over the estimated useful lives. Maintenance and repairs are charged to expense as incurred. The estimated useful lives of property and equipment are as follows:

Computer equipment                     5-7 years
Software                               3-5 years
Equipment                                7 years
Furniture and fixtures              7 - 10 years
Leasehold improvements              5 - 11 years

The Company capitalizes certain internal and external costs incurred to develop internal-use computer software during the applications development stage. Such costs include payroll and payroll-related costs for employees directly associated with and who devote time to internal-use computer software projects.

(d) LEASES

Operating leases with scheduled base rent increases over the term of the lease are charged to expense on the straight-line method over the term of the lease. The Company records a deferred credit to reflect the excess of rent expense over cash payments since the inception of the lease.

(Continued)

F-9

JAMES E. FRICK, INC.
Notes to Financial Statements
December 31, 2001, 2000, and 1999

(e) REVENUE RECOGNITION

The Company recognizes revenue for services straight-line over the life of the contract. Transaction fees are recorded as the services are provided. Revenue which is contingent upon achieving certain performance criteria is recognized when those criteria are met. Deferred revenue represents payments received or billings rendered for services to be performed in future periods. Unbilled accounts receivable represent revenues earned in excess of amounts billed.

(f) STOCK-BASED COMPENSATION

The Company applies the intrinsic value-based method of accounting for employee stock options. Compensation cost is recognized over the vesting period based on the difference, if any, on the date of grant between the fair value of the Company's stock and the amount an employee must pay to acquire the stock.

(g) INCOME TAXES

The company has elected, by unanimous consent of its stockholders, to be taxed under the provisions of Subchapter S of the Internal Revenue Code and similar provisions of state income tax laws. Under those provisions, the Company will not be subject to Federal and state corporate income taxes on its taxable income. Instead, the stockholders will be liable for individual Federal and state income taxes on their respective shares of the Company's taxable income. The Company may incur built-in gains tax on the unrealized value of certain appreciated assets measured as of the effective date of the election, payable upon disposition, or realization.

(3) INVESTMENTS IN TRADING SECURITIES

Trading securities are recorded at fair value with unrealized gains and losses included in income. The fair value of substantially all securities is determined by quoted market prices. Book value approximates fair value for all securities. The basis of cost used in determining realized gains and losses is specific identification.

The Company held no investments in trading securities at December 31, 2001. Investments in trading securities at December 31, 2000 were as follows:

                                 (in thousands)
Cost                             $         350
Net unrealized losses                       33
                                 -------------
              Fair value         $         317
                                 =============

(Continued)

F-10

JAMES E. FRICK, INC.
Notes to Financial Statements
December 31, 2001, 2000, and 1999

(4) PROPERTY AND EQUIPMENT

Property and equipment consist of:

                                                          2001            2000
                                                        --------       ---------
                                                               (in thousands)
Computer equipment                                      $  5,267          5,107
Software                                                   5,315          4,942
Equipment                                                  1,626          1,043
Furniture and fixtures                                       445            394
Leasehold improvements                                       378            308
                                                        --------       --------
                                                          13,031         11,794

Accumulated depreciation and amortization                 (5,935)        (4,996)
                                                        --------       --------

                                                        $  7,096          6,798
                                                        ========       ========

Depreciation and amortization expense totaled approximately $2.0 million, $1.3 million, and $993,000 for the years ended December 31, 2001, 2000, and 1999, respectively.

(5) FINANCING

(a) LINE OF CREDIT

The Company has a line of credit agreement with a bank, which provides for borrowings of up to $1.5 million through April 15, 2002. Interest is payable monthly at the prime rate. The line balance must be repaid in full for at least 30 consecutive days of every quarter. The outstanding borrowings at December 31, 2000 were $950,000. There were no outstanding borrowings at December 31, 2001. The line is secured by accounts receivable and property and equipment of the Company.

The bank financing agreement contains restrictive covenants regarding minimum net worth, limitations on capital spending and additional borrowing. The Company was in compliance with all debt covenants as of December 31, 2001.

(b) TERM NOTE

During March 2001, the Company entered into a term note with a bank having an aggregate principal amount of $350,000 and which is secured by various assets of the Company. The note matures on March 27, 2004, and bears interest at an annual rate equal to the prime rate announced by the bank. The Company makes monthly principal payments of $9,028 on this note.

(Continued)

F-11

JAMES E. FRICK, INC.
Notes to Financial Statements
December 31, 2001, 2000, and 1999

(C) CAPITAL LEASES

The Company leases office and computer equipment under capital leases expiring at various dates through March 1, 2005. The leases call for monthly lease payments totaling approximately $15,500. The following is a schedule of future minimum lease payments under the capital leases together with the present value of the net minimum lease payments as of December 31, 2001:

                                                                               AMOUNT
                                                                           --------------
                                                                           (in thousands)
Year:
    2002                                                                      $      186
    2003                                                                             186
    2004                                                                              41
    2005                                                                               3
                                                                              ----------
          Total minimum lease payments                                               416

Less amount representing estimated executory costs (such as maintenance),
 including profit thereon, included in total minimum lease payments                   46
                                                                              ----------
          Net minimum lease payments                                                 370

Less amount representing interest (at rates ranging from 3.6% to 7.4%)                25
                                                                              ----------
          Present value of minimum lease payments                                    345

Less current maturities of capital lease obligations                                 153
                                                                              ----------
          Capital lease obligations, less current maturities                  $      192
                                                                              ==========

Office and computer equipment acquired under capital leases in the amount of approximately $739,000 is included in property and equipment at December 31, 2001 and 2000. The accumulated amortization on the office and computer equipment amounted to approximately $422,000 and $283,000 at December 31, 2001 and 2000, respectively.

(6) CONCENTRATION OF CREDIT RISK

The Company places its temporary cash investments with financial institutions. However, at times such investments may be in excess of the FDIC insurance limit.

(7) EMPLOYEE BENEFIT PLANS

(a) PROFIT SHARING AND EMPLOYEE STOCK OWNERSHIP PLAN

The Company has a profit sharing and employee stock ownership plan which covers substantially all employees. The Company's contributions to the Plan are made at the discretion of the board of directors, certain members of which are also the Plan's trustees, with the contribution not to exceed 15% of total eligible compensation of the participants for a given year. The Company made cash contributions of $600,000 for each of the years ended December 31, 2001, 2000, and 1999.

(Continued)

F-12

JAMES E. FRICK, INC.
Notes to Financial Statements
December 31, 2001, 2000, and 1999

(b) 401(K) PLAN

The Company has a 401(k) retirement benefit plan (the Plan), which covers substantially all employees. The Company's contributions to the Plan are made at the discretion of the board of directors. Participants may contribute to their individual accounts an amount not to exceed the maximum set by the Internal Revenue Code. The Company made matching contributions to the Plan of approximately $299,000, $292,000, and $263,000 for the years ended December 31, 2001, 2000, and 1999, respectively

(c) INCENTIVE BONUS PLAN

The Company has an incentive bonus plan, which provides for bonuses to key executives, management staff, and employees. Additionally, the Company has certain incentive bonus arrangements with its sales representatives and provides holiday bonuses to its employees. The aggregate total of such bonuses was approximately $1.4 million, $1.5 million, and $1.2 million, for the years ended December 31, 2001, 2000, and 1999, respectively. Accrued incentive compensation of approximately $802,000 and $690,000 is included in accrued compensation and payroll expenses at December 31, 2001 and 2000 respectively.

(8) COMMITMENT

The Company has a long-term contract for telephone services. At December 31, 2001, the Company was committed to pay future minimum service fees of $150,000 during 2002.

(9) OPERATING LEASES

The Company has lease agreements for office facilities, which expire in August 2006. These obligations provide for payment of utilities and certain other expenses, contain escalation clauses, and contain renewal options. The aggregate lease payments have been allocated over the lease period. Under the terms of the lease, the Company is liable for its proportionate share of operating costs in excess of the base amount. Rent of approximately $416,000 and $389,000 is deferred at December 31, 2001 and 2000 respectively. Additionally, the Company leases equipment and other office space under operating leases of various terms.

Rent expense for all operating leases totaled approximately $1.8 million, $1.6 million, and $1.5 million for the years ended December 31, 2001, 2000, and 1999, respectively.

Future minimum rental commitments under noncancelable operating lease arrangements are as follows:

                                     AMOUNT
                               --------------------
                                 (in thousands)

Year:
    2002                       $          1,896
    2003                                  1,816
    2004                                  1,832
    2005                                  2,084
    2006                                  1,412
                               --------------------

         Total                 $          9,040
                               ====================

(Continued)

F-13

JAMES E. FRICK, INC.
Notes to Financial Statements
December 31, 2001, 2000, and 1999

(10) STOCK OPTIONS

The Company grants certain key employees options to purchase shares of Company common stock on terms and conditions prescribed in each stock option agreement.

Stock option activity for the three years ended December 31, 2001 is as follows:

                                                                                                  WEIGHTED
                                                                                                  AVERAGE
                                                                         OPTIONS              EXERCISE PRICE
                                                                       ------------         -----------------
Outstanding at December 31, 1998                                           198,500            $     19.86
Granted                                                                     23,000                  31.25
Cancelled                                                                  (14,000)                 16.69
Reissued                                                                    14,000                  16.69
                                                                       ------------
Outstanding at December 31, 1999                                           221,500                  21.04
Granted                                                                         --                  --
Cancelled                                                                  (14,000)                 16.69
Reissued                                                                    14,000                  16.69
                                                                       ------------

Outstanding at December 31, 2000                                           221,500                  21.04
Granted                                                                         --                  --
Cancelled                                                                  (16,000)                 18.15
Reissued                                                                    14,000                  16.69
                                                                       ------------
Outstanding at December 31, 2001                                           219,500                  20.97
                                                                       ============

A summary of the Company's stock options outstanding at December 31, 2001 is as follows:

                                   NUMBER OF OPTIONS
  EXERCISE PRICE            OUTSTANDING            EXERCISABLE
-------------------    -------------------    -------------------
 $    16.69                     140,000                140,000
      27.43                      57,000                 35,400
      31.25                      22,500                 10,500
                       -------------------    -------------------
                                219,500                185,900
                       ===================    ===================

In November 1992 the Company issued 140,000 options, which vested 20% per year. Beginning in 1998, 10% of these options expire each March 31 until March 31, 2007. The options issued in September 1999 vest 20% per year and expire 90 days after termination of employment. All other options will remain exercisable until termination or so long as the Company is taxed as an S corporation. No options have been exercised.

(Continued)

F-14

JAMES E. FRICK, INC.
Notes to Financial Statements
December 31, 2001, 2000, and 1999

During 2001, 2000, and 1999, the Company replaced 10% of each of the option grants made in November 1992, which expired March 31, with fully vested exercisable options to purchase the same number of shares, at the same price, so long as the Company is taxed as an S Corporation. As a result, the Company recognized compensation expense of approximately $340,000, $273,000, and $204,000, in 2001, 2000, and 1999, respectively. The expense is included in accrued compensation and payroll expenses.

There was no compensation cost charged against income in connection with the granting of new options for the years ended December 31, 2001, 2000, and 1999. The Company applies the intrinsic method in accounting for its stock based compensation. Had the Company applied the fair value method, the Company's net income for the years ended December 31, 2001, 2000, and 1999 would have been approximately $2.0 million, $1.6 million, and $1.2 million, respectively. The fair value of the new options granted has been estimated at the date of grant using the Black-Scholes option pricing module (excluding a volatility assumption), assuming an expected life of eight years, risk-free interest rate of 5.2% and no dividend yield.

(11) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid during the year for interest totaled approximately $65,000, $53,000, and $40,000 for the years ended December 31, 2001, 2000, and 1999, respectively.

(12) SUBSEQUENT EVENTS

On March 27, 2002, the Company entered into an agreement with TALX Corporation for the sale of all the Company's outstanding shares of stock. The total purchase price was approximately $80 million. In conjunction with the sale, the Company canceled the revolving credit agreement and repaid in full the term note.

F-15

THE UNEMPLOYMENT COST MANAGEMENT SERVICES BUSINESS OF
GATES, McDONALD & COMPANY

Financial Statements

December 31, 2001, 2000, and 1999

(With Independent Auditors' Report Thereon)

F-16

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