Note 1 - Nature of Business
Computer Services, Inc. and Subsidiaries (the "Company") provides data processing services, supplies, equipment, forms and maintenance to financial institutions in the central United States.

Note 2 - Significant Accounting Policies
Basis of Presentation: The consolidated financial statements include the accounts of Computer Services, Inc. ("CSI") and its wholly-owned Subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements: The accompanying financial statements have been prepared in conformity with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 differ from those estimates.

Cash and Cash Equivalents: Cash and cash equivalents consist of highly liquid investments with maturities of 90 days or less.

Supplies: Supplies are valued at the lower of cost (first-in, first-out) or market.

Depreciation: Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Useful lives for buildings are 40 years, and useful lives for equipment range from three to ten years.

Amortization: Software costs are amortized using the straight-line method over three to five years.

Earnings per Common Share: Basic earnings per common share is based on net income available to common shareholders divided by the weighted average number of common shares considered to be outstanding during the period. The weighted average number of common shares outstanding were 2,175,814; 2,180,126; and 2,213,644 for the years ended February 28, 1999, 1998 and 1997, respectively. Diluted earnings per common share shows the dilutive effect of any additional potential common shares issuable under stock options. Incremental dilutive shares, calculated using the treasury stock method, were 18,086; 16,275; and 38,763 for the years ended February 28, 1999, 1998 and 1997, respectively. Earnings and dividends per common share are restated for all stock splits and stock dividends.

Income Taxes: The Company records income tax expense based on the amount of taxes due on its tax return plus deferred taxes computed based on the expected future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities, using enacted tax rates.

Temporary differences between financial statements and tax returns are accumulated depreciation and amortization, employee benefit costs and certain accrued expenses.

Financial Instruments: The fair value approximates the carrying value for all financial instruments.

Note 3 - Land Under Development Held for Resale
The cost of land under development held for resale primarily represents costs associated with the development of an office park in Paducah, Kentucky. These costs will be allocated to each lot based upon each lot's proportionate share of salable acreage. At February 28, 1999 and 1998, the development project is substantially complete and any future associated costs will not be material.

Note 4 - Income Taxes
The provision for income taxes is as follows for the years ended February 28, 1999, 1998 and 1997:



Note 5 - Long-Term Debt
The Company has a $10,000,000 commercial revolving line of credit secured by building and improvements. Interest is payable monthly based on the interest rate option, defined in the agreement, selected by management. The interest rate options defined in the agreement are based on prevailing market rates. Outstanding borrowings on the line of credit are due May 1, 2000. There was There were no outstanding borrowings on the line at February 28, 1999.

Total interest expense was $194,000 and $35,000 for the years ended February 28, 1999 and 1998, respectively.

Note 6 - Common Stock
The Company maintains a Stock Option Plan for certain key employees. The Company adopted a new stock option plan during the year ended February 28, 1998. Under this plan, the Company has reserved 600,000 shares of common stock for grant. During the year ended February 28, 1999, the Plan was amended to increase the reserved shares of common stock for grant to 630,000. The exercise price for shares under these options is not less than fair market value of the Company's common stock as of the date of the grant. The options are exercisable in three equal annual installments beginning two years from date of grant and expire, if not exercised, within ten years.

Under the former Stock Option Plan, 800,000 shares had been reserved for grant, of which 220,400 were granted. No shares remain available for grant under the former plan. There are 74,202 options granted under the former plan which remain outstanding. The provisions of the old plan were substantially the same as the new plan.

The following is a summary of changes in stock options outstanding:



Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standard No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model. The weighted average assumptions for options granted during 1998 and 1997 (no options granted during 1999) and the resulting estimated weighted average fair values per share used in computing pro forma disclosures are as follows:



For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options' vesting period on a straight-line basis.

The Company's pro forma information for 1999, 1998 and 1997 is as follows:



Future pro forma net income will be negatively impacted should the Company choose to grant additional options.

Note 7 - Employee Benefits
The Company maintains qualified defined contribution plans which cover substantially all employees. Contributions to the plan are funded annually and totaled $1,851,000, $1,667,000 and $1,572,000 in 1999, 1998 and 1997, respectively.

Other liabilities include deferred executive compensation of $798,000 and $762,000 at February 28, 1999 and 1998, respectively.

Note 8 - Commitments
The Company's operations include noncancelable operating leases relating principally to office space.

At February 28, 1999, the Company is committed under lease agreements for approximate annual rental payments as follows:



Rent expense under operating leases was $1,203,000, $1,026,000 and $942,000 in 1999, 1998 and 1997, respectively.

Note 9 - Acquisition
On April 30, 1998, the Company acquired Computer Bank, Inc. ("CBI"), a Texas based community bank processor. The acquisition, accounted for using the purchase method, provided $1,000,000 in cash and $1,001,000 in common stock (38,500 shares) to CBI shareholders in exchange for 100% of the outstanding shares of CBI stock. The assets purchased are stated at fair market value and there are no contingent terms associated with the purchase. The following summarizes the assets purchased and liabilities assumed: