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
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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
=============
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(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
======== ========
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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
==========
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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
====================
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(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
============
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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
=================== ===================
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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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