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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 and diluted earnings per common share are computed under a new accounting standard effective beginning with the quarter ended February 28, 1998. All prior earnings per common share amounts have been restated to be comparable. 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 2,076,310; 2,108,232 and 2,073,873 for the years ended February 28, 1998 and 1997 and February 29, 1996, 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 15,500; 36,917 and 41,574 for the years ended February 28, 1998 and 1997 and February 29, 1996, respectively. Earnings and dividends per common share are restated for all stock splits. 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 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, 1998 and 1997, 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, 1998 and 1997 and February 29, 1996:
Deferred tax assets and (liabilities) consisted of the following at February 28, 1998 and 1997:
NOTE 5 LONG-TERM DEBT The Company has a $6,000,000 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 of $1,800,000 on the line of credit are due May 1, 1999. At February 28, 1997, the Company had an available $10,000,000 construction loan for its new corporate facility in Paducah, Kentucky. There were no outstanding borrowings against this loan at February 28, 1997. This loan was converted into the commercial revolving line of credit described above during the year ended February 28, 1998. Total interest expense was $34,786 for the year ended February 28, 1998. 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. 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 74,400 options granted under the former plan which remain outstanding. The provisions of the former plan were substantially the same as the new plan. The following is a summary of changes in stock options outstanding:
Options granted in 1998 may be exercised at $26.00 per share. Options granted before 1998 may be exercised between $9.13 and $35.50 per share. Pro forma information regarding net income and earnings per share is required by SFAS 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 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 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 $1,667,240, $1,572,166 and $1,471,500 in 1998, 1997 and 1996, respectively. Other liabilities include deferred executive compensation of $761,800 and $725,500 in 1998 and 1997, respectively. NOTE 8 COMMITMENTS Leases: The Company's operations include noncancelable operating leases relating principally to office space. At February 28, 1998, the Company is committed under lease agreements for annual rental payments as follows:
Rent expense under operating leases was $1,026,086, $941,853 and $1,471,500 in 1998, 1997 and 1996, respectively. Capital Commitments: Construction-in-progress on the balance sheet at February 28, 1997 represents costs associated with the construction of a new corporate facility in Paducah, Kentucky. The facility was completed during 1998. NOTE 9 SUBSEQUENT EVENT On January 30, 1998, CSI executed a letter of intent to acquire Computer Bank, Inc. ("CBI"), a Texas based community bank processor. The Company expects to consumate the merger on or about April 30, 1998. It is anticipated that the acquisition, which will be accounted for using the purchase method, will provide 50% cash and 50% CSI common stock to CBI shareholders in exchange for 100% of the outstanding shares of CBI stock. |
